Pacific Airport Group Q4 FY2021 Earnings Call

Good morning and welcome to GAP's Fourth Quarter 2021 Conference Call. All lines have been placed on mute to prevent any background noise. After the presentation, we will open the floor for questions, and at that time instructions will be given if you would like to ask a question. It is now my pleasure to turn the call over to GAP's Investor Relations team. Please go ahead.

Thank you, and welcome to Grupo Aeroportuario del Pacífico's fourth quarter 2021 conference call. Presenting from the company today, we have Mr. Raul Revuelta, Chief Executive Officer; and Mr. Saul Villarreal, Chief Financial Officer. Please be advised that forward-looking statements may be made during this call. These do not account for future economic circumstances, industry conditions, the company's future performance or financial results. As such, statements made are based on several assumptions and factors that could cause actual results to materially differ from current expectations. For a complete note on forward-looking statements, please refer to the quarterly report issued on Tuesday. Thank you. At this point, I will turn the call over to Mr. Revuelta for his opening remarks. Please go ahead, sir.

Thank you, Maria. Good morning, everyone, and welcome to today's call. 2021 was one of the more significant years in GAP's trajectory. Not only did we navigate through one of the most challenging periods in the industry, we did it while achieving the best result in the history of GAP. Traffic across our operations continued to recover during the last quarter of this year, reaching almost 43 million passengers in 2021, which is 57% up compared to 2020 and down only 12% versus 2019. For the second year in a row, GAP was the largest airport operator in Mexico with a traffic decrease of only 9%, representing around 32% of the total market. This performance was mainly driven by the outstanding growth experienced at the Tijuana and Los Cabos airports. The Guadalajara airport has had a slow recovery mainly due to the business travel market. It is important to note that the Guadalajara to Mexico City route is the one that has faced the most challenging recovery of all our routes, in addition to routes to other metropolitan airports, such as Guanajuato and Hermosillo. The passenger traffic at our Jamaican airports also remained fairly impacted during 2021, due to governmental travel restrictions related to the COVID-19 virus. Our aim is to mitigate this impact, therefore, we continue working closely with governments to secure additional routes. Evidence of this is that during the fourth quarter, GAP launched 12 new international routes and four domestic ones. We are happy to announce that during December of 2021, for the first time in the history of Guadalajara, we opened a direct route to Europe; the Guadalajara to Madrid route with three frequencies per week. GAP also announced that looking forward to 2022, we will be opening new routes to Europe, including Puerto Vallarta to Manchester, Puerto Vallarta to Gatwick, and Los Cabos to Madrid. Moving onto revenue performance, excluding IFRIC, during 2021, revenue increased about 9% compared to 2019, which totals MXN15.6 billion in 2021. Aeronautical revenues increased by 13% versus 2019, driven mainly by the recovery in passenger traffic as well as an increase in maximum tariffs. On the commercial side, we continue supporting our tenants with discounts over the minimal rental fee, which we discussed in previous calls. These discounts are now more through back fees, as passenger traffic at most of our rural airports has recovered to about 2019 levels. What this means is that we see the end of the discount programs in the near future, which will signify that we will be returning to the revenue share fees according to our tenant contracts. Additional spaces and the renegotiation of past due contracts had offset commercial revenue decline by only 2%, which is minimal compared to 2019. Food and beverage revenue and duty-free stores accounted for most of the recovery, both surpassing 2019 levels. This was offset by the lagging revenue from VIP lounges and advertising, which have been impacted since the beginning of the pandemic and have been struggling to retain their COVID levels. In 2021, EBITDA was MXN10.9 billion, which was the result of various factors, including outstanding passenger traffic recovery, tariff increases, and higher spending per passenger in the commercial area. This was partially offset by an increase in the cost of services, mainly due to the full consolidation of the Kingston airport, considering that there were only 13 airports, and in other words, in 2019, the increase in the cost of service will be only 3.6%. The cost of service also rose due to the opening of new commercial spaces in Los Cabos airport as well as the new VIP lounge. The personnel headcount also increased as a result of the size of the construction projects we've planned to execute in 2021 and the following years, as well as the minimum wage increase in Mexico affecting direct fixed costs for maintenance, janitorial, and security services. In line with changing revenue, the tight cost control measures implemented during 2020 were rather relaxed in 2021 in accordance with the passenger traffic recovery experienced in each airport in order to maintain service quality as traffic resumes. It is important to mention that EBITDA figures represent an 11% increase compared to 2019, reaching an EBITDA margin of 69.7%, despite the limited recovery of total passengers. On the balance sheet front, cash and cash equivalents reached MXN13.3 billion at the end of this year. Debt at the end of this year totaled MXN27.9 billion. According to these figures, we continue with a healthy level, maintaining a net debt-EBITDA ratio of 1.3 times. There is a maturity payment of MXN1.5 billion due in the first quarter of 2022, corresponding to the GAP 17th bond certificate, and this will be refinanced through a bond issuance in the coming weeks. Moving on to CapEx, at the Guadalajara airport, we continued with the construction of the second runway as well as the new mixed-use commercial building, which will include 180 hotel rooms, corporate offices, and commercial spaces. We expect that this building will be completed during 2023, and we look forward to sharing those updates with you in future communications. In Tijuana, the construction of the terminal processor building progressed, and we expect that it will be finalized towards the end of March this year, with operations starting in April 2022. These new buildings are projects that will add around 40,000 square meters. We will completely renew the viability and success of the airport, as we have seen over the past years. Not only will it raise the capacity to welcome more flights, routes, and frequencies, but it will also expand our ability to service international markets, complementing the great functionality of the cross-border bridge. Los Cabos will continue to expand the international terminal building, adding around 20,000 additional square meters, which will also include commercial spaces. The construction project has reached 50% progress. Additionally, we are currently working on the design of a second terminal building in Puerto Vallarta, which we expect to initiate construction during the third quarter of 2022. Moving on to ESG, we are proud to announce that GAP was included in the Bloomberg Gender Equality Index. This referring index measures gender equality across five pillars: female leadership & talent pipeline, equal pay & gender pay parity, inclusive culture, anti-sexual harassment policies, and pro-women initiatives. The index includes 418 companies around the world, with only 10 companies from Mexico included. Regarding the GAP Foundation, I just want to mention that during 2021, we operated 12 community centers, one at each Mexican airport, where employees and their communities had access to elementary, middle, and high school as well as to technical training courses, enhancing their professional skills and knowledge. These tools provided through the Foundation surpass the benefits for better opportunities in the future. During 2021, we provided training and education to over 80,000 students. Regarding GAP schools during 2021, we operated the first middle school and continued the operation of three elementary schools, serving over 1,000 full-time students. For GAP, there is much to look forward to. We know that challenges are always on the horizon in the industry, but we are confident that the future is built here. Together with our team, our partners, the airlines, and the passengers. Thank you all for your support and attention. I will ask the operator to please open the floor for your questions.

And we will take our first question from Guilherme Mendes with JPMorgan. Please go ahead. Your line is open.

I have two questions. Actually, the first one is on traffic performance. What are your expectations regarding traffic, especially now post the Omicron situation? And the second one regarding the Jamaican operations, how is the discussion on a potential rebalance evolving? Thanks.

Thank you, Guilherme. Let me begin with our expectations for this year in terms of traffic. First of all, it's important to remember that at least the first quarter and part of the second quarter will have some very easy comps, so we will see a great increase in passengers when we compare with 2021. After that, we're going to see a gradual line of recovery. I would say that we are seeing double-digit growth in traffic. At the end of the day, it is still difficult to think if all the impacts of COVID we have seen are already in the past. So this is something that could continue. We expect that gradually business travelers will come back to the airports, that we will return to exhibitions, and resume travel to different cities in a more normal way. From the information we have today, we expect to close the year with our record year of international passengers for GAP and also anticipate the full recovery of almost all our airports. In the case of Jamaica, it will certainly depend on the timing and the policies that the Jamaican government fully opens for operations on the island. We hope that gradually, as the policies against COVID in Jamaica unfold, we will reopen the market. Therefore, we also expect a gradual recovery in our Jamaican airports, and we are in discussions regarding any additional impact COVID could bring to the market. But to conclude, I would say that in general terms, we expect the majority of our airports will achieve record years, with a robust recovery continuing in the leisure business, while we still see a weaker recovery on business travel for at least the first half of this year.

Okay, very clear. Thanks. Just one quick clarification. In Jamaica, are you still discussing a rebalance with the government?

Yes, Guilherme. Let me try to explain. Thank you for your question. Yes, we continue talking with authorities about the rebalancing proposal we submitted in November 2020. However, they have been facing some problems confirming the specialist team that will be negotiating this rebalancing. As you may know, we have two independent discussions about Montego Bay and Kingston. We are pushing and trying to meet to discuss, but we have yet to start. We have a couple of meetings next month, and we will try to push for a speedy process, as we obviously need to have certainty about the rebalancing proposal.

We'll take our next question from Pablo Monsivais with Barclays. Please go ahead.

Thanks for taking my question. I just have a quick one. In terms of the maximum allowed tariff, how close are you to reaching 100%? And what is your view on how inflation is evolving? I don't know if you can shed some light on that. Thank you.

Hi, Pablo. Thank you for your question. Yes, you're right. We haven't reached 100% of the tariff. 2021 had high inflation related to the tariffs, making it impossible for us to attain that 100%. We are expecting for 2022 to be closer to 100% compared to previous years, but it’s complicated as we adjust our specific tariffs twice a year. In '21, we couldn't adjust adequately. For 2022, we are expecting to reach around 97% to 96% of the maximum tariff—that's our target. It depends on inflation and the exchange rate, which are important factors in the formula for setting the maximum tariff.

Saul, if I may, for modeling purposes, how much and when are you increasing the tariff this year?

Hi, Pablo. I can tell you that the first increase occurred at all our airports on January 1st. We will have an additional increase for just two hours in the case of Vallarta, Cabos, Tijuana, and Guadalajara that will be in place in May of this year.

And do you have a sense of the magnitude of increases that you are expecting throughout?

Well, the magnitude, Pablo, is that we manage the tariff adjustment for specific tariffs according to each airport. So at the end, our target is to reach 96% to 97% of the maximum tariff. We adjust the tariff for the airlines, and the personnel charges both and it depends on the specifics of each airport. We cannot give a specific percentage as we make separate adjustments depending on each airport.

Yes, but it's important to note that it will be at least at the production inflation rate index level. So, the increase for each one of our tariffs will account for that level. I would say in some specific cases, depending on our forecasting on the dollar exchange rate, it may be slightly higher or lower. But in all our tariffs, you will see increases that we are accounting for the production inflation index.

We will take our next question from Alan Macias with Bank of America. Please go ahead.

Just one question on dividend payments, what can you really expect for this year? And any comments you might have on dividend policy? Thank you.

Hi, Alan. Thanks for your question. Yes, we are ready to make the proposal to the Board of Directors. We are going to release the agenda for the General Shareholders' Meeting for this year, and we will release it next week. Then we will continue with our policy from previous years; as you know, GAP is one of the highest dividend-paying companies in Mexico. So we will continue with that trend, and once we release the agenda, you will see our dividend proposal. The general comment is that we will maintain our previous policy.

We'll take our next question from Gabriel Himelfarb with Scotiabank. Please go ahead.

Congratulations on the results. Can you give us a bit of color about Tijuana connectivity? Do you think that Tijuana could add more exposure to international routes to, for example, Asian destinations and become a bridge point from Asia to the U.S.?

Yes. Hi, Gabriel. This is Saul. I would say that in general terms, as everyone knows, Tijuana has excellent exposure to the domestic market. We have 34 direct routes from Tijuana, making us the second airport in Mexico with the most direct routes, just after Mexico City Airport. This gives us a key strength in seeing Tijuana become a more important hub. In the past, Tijuana already operated two routes to Asia, which are Tijuana to Shanghai and Tijuana to Beijing. One of the key factors that may develop the new terminal building in Tijuana is to enhance our product offerings and attract international passengers to the area. We are trying to bring international airlines to Tijuana airport, leveraging the market of South California to attract those routes. With the new terminal building, we will be able to attract additional international routes. We think that what will happen in the coming years will be a gradual composition of routes, starting with Central American markets, then some specific hubs in the South, like Panama. We are also expecting to see direct connections and direct routes to some of the biggest hubs in the U.S. and, subsequently, a recovery of flights we previously had to Asia. In general terms, we anticipate that these new facilities will provide us the chance to attract new passengers. International passengers connected to South California will find it easier to travel to Asia and Central and South America. This will be gradual, but the exciting news is that we will have the appropriate facilities to begin attracting these specific international routes, especially as we prepare for the Easter holiday period in Mexico.

Okay, thank you. And how much do you think of the demand you’re going to capture from, for example, the San Diego Airport or maybe a little bit operating in LA or San Francisco?

I would say that it's difficult to talk about a specific proportion that we could expect to attract from other airports. But I can mention that San Diego Airport is currently completely packed; they do not operate 24 hours a day, only until 11 PM. Therefore, we have a great opportunity to attract some additional passengers to our airport. Today, Tijuana serves as one of the most important gateways to attract the South California market traveling to various Mexican beaches, which is something we did not used to have in the past. Over the last three years, we have significantly improved our market share. So we have been successful in attracting travelers from Tijuana to Los Cabos, Vallarta, La Paz, and other Mexican beach destinations. We have observed a noteworthy decrease in traffic from San Diego Airport to various Mexican beaches. We can conclude that a significant part of our success is due to the product offerings we are implementing within the South California market. We have achieved solid performance through our competitive airports and airlines, providing compelling routes to Mexican beaches. The long-term strategy will be rather slow but effective, as we anticipate gradual increases in long-haul and international services to the airport.

And we will take our next question from Naoki Otsuka from GBM. Please go ahead.

Thank you for taking my question. Could you provide some insight on the commercial front, given that the company posted strong numbers?

Yes. From our commercial programs, a key part of the strategy is focused on transforming the different layouts in our airports. We are working on updating layouts in our airports to ensure a fresh experience for travelers. Specifically, we are completing the commercial layout for Terminal 2 at Los Cabos, which will help increase commercial revenue this year. Furthermore, we are also updating layouts at Guadalajara Airport, which will be ready by December. In general terms, our strategy consists first of inspecting and updating our layouts, introducing new brands, and maximizing our ticket offerings as much as possible. The second part of our strategy involves expanding the new high-potential areas we are developing alongside the growth of our terminal. For example, we are set to open a new food and beverage area in Guadalajara Airport by the end of the year. Also, at Los Cabos Airport in the coming year, we anticipate introducing a completely new commercial offering with new terminals, including a connection terminal in Tijuana within the next couple of months. Our commercial strategy revolves around these three pillars: enhancing consumption within the terminal, developing new spaces, and boosting revenue from businesses directly operated by GAP.

We'll take our next question from Filipe Nielsen with Citibank. Please go ahead.

Hi, everyone. Thanks for taking my questions. I have two questions. I'll start with the first one. Can you refresh our memory a little regarding the potential for interest in airports outside of Mexico and, aside from Barbados, do you see any other new interesting options in terms of South America, especially in Brazil?

Hi Filipe, thank you for your question. Yes, we continue in the process of pursuing the Barbados Airport; it is the only one for which we are already prequalified. We are awaiting the final RFP to bid for that airport, so that is on standby. Regarding Brazilian airports, there are currently three run by us within three different clusters; we have evaluated these clusters, and we are not interested thus far.

Okay, great. So you're not interested. Is there any specific reason for this lack of interest?

Yes, I would say first of all that we find ourselves in a highly competitive market regarding valuations for these deals. If we observe past results on bidding, the multiples of EBITDA for acquisitions have been significantly high. For GAP, we always want any acquisition to be accretive in value. So one of the key points we consider is whether the deal adds value for GAP. The second factor is related to our primary clients—the markets we serve. For instance, when we expanded into Jamaica, we ensured that the airlines operating there were already clients of GAP. We focus on retaining airlines like American, Delta, and others that operate in smaller markets. Therefore, we feel more comfortable pursuing airports that share similar markets with us or serve our existing clients. This increases our bargaining power for negotiating packages for new seats. In summary, for our international expansion, we lean towards opportunities that align with those two factors: the market type and the competitive dynamics of other bids that could result in costly acquisitions, thereby not creating value for the company.

Many thanks. Super clear. My second question pertains to tariffs. You mentioned that you are expecting to approach 100% of the maximum tariffs and those are related to inflation. I was curious whether you see any correlation between oil prices affecting the rise of tariffs and other aspects such as interest rates as well.

Yes, for sure. With the news unfolding in Ukraine yesterday, we are certainly cautious about what is to come regarding the product price index in Mexico. At the end of the day, all the news we are observing suggests that oil and gas prices will face an increase, leading to additional inflation, at least in the short term. Thus, we anticipate some significant inflation during this year, which will put pressure on our tariffs. The challenge we face is that according to our concession, we only have two opportunities to change tariffs, and we already used the first one in January. We anticipate that by mid-year, we may need to adjust our tariffs in line with inflation trends. On a positive note, we have some offsetting factors in our tariffs related to the exchange rate. For our maximum tariffs, when we see an increase in the dollar, all international passenger fees are assessed in dollars, while our concession mandates that we fulfill the maximum tariff calculations in pesos. Thus, any fluctuations with the dollar vs. peso will allow us to adhere to that maximum tariff more effectively. However, we are actively monitoring how recent developments will affect our previous assumptions.

We'll take our next question from Alejandro Zamacona with Credit Suisse. Please go ahead.

Hi, Saul. Sorry if you already discussed this, but I was disconnected a couple of times. So, I'm experiencing connection problems. Just a quick question: on the cost of service, to what extent do you believe it could continue to increase in 2022, or what could be a normalized cost of service per passenger going forward?

Thank you, Alejandro. We will continue adjusting the cost of service in line with improvements in passenger traffic. The best way to assess this is through our EBITDA margin; we expect to maintain the margin at 69% to 68%. We achieved an impressive margin this year—69.7%—after the challenges posed by the pandemic, and it was a very positive result. However, we cannot continue to push down costs indefinitely; we need to normalize maintenance, janitorial, and security services concerning headcount, as we will need to add more staff. There is a challenge regarding CapEx that needs to be addressed; it is essential to reinforce our workforce. Thus, while the cost control measures we implemented in 2020 were effective, we need to recognize that some level of cost increase will naturally occur as we enhance our operational services to passengers. We expect the cost of service to increase slightly, normalizing around an EBITDA margin range of 69 to 68.

And I will add, this is Raul, that as you know, our business relies heavily on economies of scale. Therefore, each time we open a new terminal or increase the size of that terminal, we may see an initial spike in the cost per passenger. However, as we start to capture additional passenger traffic, the cost per passenger will begin to decrease. So, in general terms, whenever we expand our facilities, there will inevitably be a rise in costs per passenger initially—but over time, as traffic increases, those costs will start to even out.

Okay. Thank you, Raul. That makes sense. My second question still follows up on the Jamaica situation. I understand you are in the lead process, but do you have any expectations regarding the potential outcomes of these negotiations concerning CapEx?

Well, Alejandro, our intention is to adjust our CapEx and operating expenses accordingly. We cannot request adjustments in tariffs as it's almost impossible to raise prices all while supporting our rebalancing proposal. Thus, our approach is to negotiate with the authorities to defer the CapEx program or delay the major projects until we reach post-pandemic passenger traffic levels, ideally before 2020. This is the primary objective, and, obviously, as negotiations unfold, we may consider other options. However, we need to initiate this process first. As mentioned earlier, we submitted our rebalancing proposal in November 2020, and we've been waiting for over 14 months for constructive dialogue with the government on this matter. In the coming weeks, we will be in Jamaica for different meetings with various government representatives to try to expedite these discussions.

Now we will take the webcast questions. I will now turn the call over to Alejandra Soto.

Thank you. We have some questions from the webcast. The first one is from Pablo from MetLife, and it says, "Could you give us some guidance on the CapEx that will be deployed during 2022, 2023 and 2024?"

Yes. Thank you, Pablo. We are committed to fulfilling 100% of our obligations to the Government of Mexico and the Government of Jamaica. In the case of Jamaica, we are in negotiation, but regardless, we are making significant investments in these airports for Montego Bay and Kingston. For Mexico, we have a considerable challenge this year in real terms; we expect to deploy around Ps 6 billion as part of the MDP, and we are undertaking significant investment projects in commercial sectors. As Raul mentioned, we are under construction for a mixed-use building, which will feature 180 hotel rooms, corporate offices, and commercial areas in Guadalajara Airport. We are currently funding projects at Los Cabos Airport, and these represent considerable investments for 2022. If we look ahead to the next three years—2022, 2023, and 2024—we project total investments of about Ps 15 billion. This will depend on inflation and the performance of commercial projects as well.

Thank you, Saul. The next question, also from Pablo, states: "Are you planning to incur more debt ahead, following your upcoming bond issuance in the next few weeks?"

Yes, Pablo, we are going to raise additional funds. Our plan is to maintain a specific leverage level. Of course, our financial strategy is aimed at leveraging 100% of our obligations, and we will refinance all our existing bonds as such. We will implement this strategy for upcoming maturities, having Ps 1.5 billion in bond debt maturity in March and an additional Ps 2.3 billion in maturities scheduled for November. We will finance all these obligations, maintaining the same leverage strategy.

Thank you. We have another question from Carlos, which asks: "What are your margin expectations going forward, given that traffic is nearing 2019 levels?"

Thank you, Carlos. We expect to see EBITDA margins remain in the same range—69% to 68%. 2021 was an exceptional year, considering pandemic conditions, achieving 69.7%, which stands as one of the highest EBITDA margins in the company's history. For the years ahead, we will continue observing similar margins. We do not anticipate exceeding 70%, as the future expansions will bring operational costs and additional headcount, leading to rising expenses. While we expect to increase commercial revenues and aeronautical revenues, these will correlate with the increased cost of services and operational expenses. To be candid, we expect to maintain margins in the range of 68% to 69% in good years.

Thank you, Saul. The other one was already answered regarding cost controls. So thank you.

Thank you.

Thanks a lot.

And now I would like to turn the floor back over to Mr. Raul Revuelta for any closing remarks.

Thank you very much for your attention. Before I conclude, I just want to mention that the GAP Day 2022 will be held this year in Tijuana. It will take place on March 24 at the Tijuana airport, where we will tour the new terminal processor building and the cross-border bridge. We hope you can join us for a morning of management presentations and more information about future projects and outlook. Please contact our Investor Relations team for more information. Thank you all. Have a nice day.

This does conclude today's program. Thank you for your participation. You may disconnect at any time.