Pacific Airport Group Q1 FY2022 Earnings Call

Good morning and welcome to GAP's First Quarter 2022 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 the Grupo Aeroportuario del Pacifico's first quarter 2022 conference call. Presenting from the company today, we welcome Mr. Raul Revuelta, GAP Chief Executive Officer; and Mr. Saul Villarreal, Chief Financial Officer. Please be advised that forward-looking statements may be made during this conference 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 change causing actual results to materially differ from the current expectations. For a complete note on the forward-looking statements, please refer to the quarterly report issued earlier this week. At this point, I'd like to turn the call over to Mr. Raul Revuelta for his opening remarks. Please begin, sir.

Thank you, Maria. Good morning, everyone, and thank you for joining us today. GAP experienced solid results during the first quarter of 2022, reflecting the recovery that has been prevailing throughout the Mexican travel industry. We reached almost 30 million passengers and recovered almost 70% compared to 2021, an increase of 6% versus 2019. This outstanding result was mainly driven by growth in Tijuana and Los Cabos, our strongest performing airports in 2021. Notably, Guadalajara also did well and for the first time since the pandemic, experienced positive passenger traffic numbers during March, evidence of the strengthening business crowded market. The results show that Aeronautica revenues increased by 47% compared to 2019 driven by the recovery in passenger traffic throughout GAP's network as well as an increase in the maximum tariff, reaching 97% of the appropriate maximum tariff. Moving on, the commercial revenues rose by 33% compared to 2019. Most of the increase came from food and beverage, retail operations, as well as duty-free. The tenant discounts that we have discussed previously are still in place. However, given the recovery in passenger traffic, most tenants are paying the revenue share. As we mentioned in the previous call, we wanted to set the terms of several contracts, which resulted in financial conditions that were more positive for the company. In addition, we opened more square meters, both reflected in the total increase of 87% in total commercial revenues compared to 2021. The only business segment that continues to lag is advertising, with a decrease of 48% versus 2019. However, we are working on several strategies to mitigate this impact, including the development of digital advertising and using actual airplane spaces to enhance brand experience, for instance, the use of marketing showrooms. EBITDA reached MXN3.7 billion for the quarter with an EBITDA margin of around 74%. This was the result of the outstanding recovery in passenger traffic, a higher maximum tariff, and solid commercial revenues, which were partially offset by a 26% increase in costs of service compared to 2019, or a 15% increase excluding the consolidation of Kingston Airport since this airport did not enter our portfolio until October 2019. We have worked hard to maintain our cost control policy, but we do expect some higher costs in accordance with our expansions and inflationary effects. Moving on to financial performance, cash and cash equivalents increased by 15%, reaching a total of MXN15.9 billion. This figure includes issues of another tranche of debt bonds in the Mexican market for a total of MXN5 billion. A portion of these proceeds was used to pay the GAAP 17 bond that was due in March 2022, for MXN1.5 billion. The remaining portion will be allocated towards mandatory CapEx for this year, as well as other commercial investments. It is important to mention that the rating agencies, specifically S&P, gave this bond a AAA rating on a local scale, due to GAP's solid results and strong fundamentals. In accordance with these figures, we continue with healthy levels, reaching a net debt to EBITDA ratio for trailing 12 months of 1.1 times, complying with all our debt covenants. Moving on to CapEx in Tijuana, the construction of the terminal processing building has progressed as planned. If you update our GAAP Day 2022 event, you will be able to see the first half of an almost finished project. A lot of work has been finalized, and we are scheduled for the official opening in May 2022. This new building will add around 40,000 square meters and will greatly expand our ability to better serve international markets, complementing the great functionality of the cross-border bridge. In the airport, we continue with the construction of the second runway, as well as a new mixed-use commercial building. We expect that this building will be completed during 2023, and we look forward to sharing those updates with you in future communications. The international terminal building in Los Cabos is also undergoing continuous expansion, adding around 20,000 additional square meters, which also includes commercial spaces. I want to mention that the construction project has reached a 50% completion rate. Additionally, we are currently working on the design for the second terminal building in the port, which is already in the first stage of construction. To conclude, I want to mention that our ordinary and external shareholder meetings took place last week, and another proposal in the end was successfully approved with an accrual of 82.9% for the ordinary shareholders meeting and 86% for the external shareholders meeting. As I mentioned, we had a very successful GAAP Day at the new terminal processing building in Tijuana. I just want to say a special thank you to all those who attended, as well as our team who put it together. At this point, that's it for my remarks. I will ask the operator to please open the floor for your questions.

And the first question comes from Guilherme Mendes with JPMorgan. Your line is now open.

Hi guys. Good morning Raul, Saul. I have two questions. The first question is regarding the margins. My question is how sustainable do you see margins going forward? You just mentioned about cost pressures going forward, but what can we expect in terms of the margins over the coming quarters? And the second question is in terms of traffic performance, what is the outlook for traffic in 2022? Thanks.

Guilherme, this is Raul. In general terms, I will say that with all the pressure that we will have on costs, for one, the inflation that is happening around the world and, on the second part, the additional square meters that we are adding to our portfolio with the expansion of Tijuana airport, for instance, we will for sure have some additional pressure on our costs. So I would say that margins realigning with that 70% to 72% will be something that could be sustainable over time. Again, we are in what I would describe as a shaky moment when it comes to inflation. So I would say that could be one area of pressure for this year. Regarding the outlook for traffic in 2022, we are expecting a range of 14% to 20% increase. Again, we also talk about this guidance, assuming that there are no other additional problems with the pandemic or issues with the delivery of planes or additional fleets for the Mexican airlines. But we are aligned on that guidance for traffic.

Very clear Raul. Thanks.

And the next question comes from Alejandro Zamacona with Credit Suisse. Your line is now open.

Hi Raul. Thank you for taking my questions. Two questions on that. So is it fair to assume that the MXN10.5 billion R&D revenue MXN13.4 in some way is a catch-up for the dividend and how should we interpret that going forward?

Yes. Hi Alex, this is Raul Revuelta. As we have mentioned before in previous quarters, we will try to normalize our dividend payments. We just recently announced that the shareholders meeting approved the payment of MXN14.4 per share for this year. Indeed, we plan to make these payments in two tranches during the year, but it's fair to see the normalization of the dividend similar to what we had before the pandemic. So 2020 was the only year that we didn't pay any dividends, but we are committed to continue normalizing for the coming years.

Okay, thank you Raul. And then my question, if I may, in terms of labor costs, do you have any plans for hiring new staff in the upcoming quarters due to the terminal expansions? This could be a potential impact on costs. Just curious about that point?

Yes. Alejandro, this is Raul. Just as we've discussed in different conference calls, it is important to remember that all airports work with some economies of scale. Costs typically rise before passenger numbers because when we put in place a new facility, it is designed to accommodate an increased passenger capacity for at least five to six years. So I will say that, as we put into operation the different terminals, we will see slight jumps in costs. The first will happen in the coming weeks with the operation of the new Tijuana Airport terminal. We are increasing more than 80% the total square meters of the airport with this new facility. Therefore, yes, we will see a jump in costs, including maintenance, additional services, security, energy consumption, and insurance costs for a new building. So I would say that we will indeed see some kind of increase in operational costs, particularly with Tijuana in May and also with the expansion of Terminal 2 in Los Cabos. For this year, these will be the only two facilities that we will begin to operate, which could impact our operational costs. These are the primary effects that we expect to observe in the coming months, and we understand that in such scenarios, there will be additional pressures for sure. We will try to mitigate these impacts as much as possible through negotiations with our various contractors. However, the reality is that this is part of a global trend.

Okay, thank you very much.

And the next question comes from Juan with GBM. Your line is now open.

Hi, thanks for the call and congrats on the report. My question is regarding CapEx. We saw a slightly weak deployment for the quarter, considering your guidance for the year. Could you give us some color on a possible timeline you have for the full deployment of CapEx?

Hi, Juan. Yes, the first quarter of the year is complicated because we have to conclude some projects, but as we advance in the year, we will deploy CapEx at a higher level and pace, not only for the mandatory CapEx, which is the MDP, but also for the commercial projects. We have several projects like the second runway in Guadalajara, which is already underway, and the construction of the mixed-use building in Guadalajara. We are also finalizing the CapEx for the Tijuana Airport and the expansion of the Los Cabos Terminal 2. So CapEx deployment will accelerate in the coming months. We are confident about reaching the level of CapEx that we've announced in our guidance.

Okay, great. Thanks for the call and congrats on the results.

And the next question comes from Bruno Amorim with Goldman Sachs. Your line is now open.

Thank you for taking my question. I have a question on your traffic growth guidance for the year. If we just multiply your first quarter traffic by four, as a way to simplify the forecast for the full year, this implies a 17% growth year on year, which is pretty much in the midpoint of your guided range. To the extent that there could be additional growth during the year, don't you think the guidance is kind of conservative? Is it a fair assumption to make? Thank you very much.

Yeah, for sure. We are cautious in our guidance because let's consider for a second that some changes with the pandemic are happening. In Mexico, for instance, the biggest airline in terms of domestic traffic had to stop operations due to the pandemic. We know that Mexico has been experiencing a lack of domestic airline capacity. We are aware that the demand is there, but we see that the load factors of different airlines indicate that some routes are getting to really high load factors. In essence, the fleet that the airlines have announced will definitely give us some additional boost or even provide a better result in traffic, but it ultimately depends on airlines' capacity to introduce additional fleet. Another major question everyone in the market is considering is related to new planes. Some parts globally, like titanium components, are being prioritized elsewhere, which leads to shortages. So, in summary, while we see risks regarding additional fleets, I can say that if the Mexican airlines fulfill their original plans, we could be more optimistic about the guidance or see results beyond our current outlook. However, as always, we have to conservatively factor in different risks on the horizon. If these risks do not materialize, we could definitely see a more positive outcome by year-end.

Thank you very much, very clear. If I may just a follow-up question, interest rates, the 10-year rates in Mexico are on the rise. They are now near multiyear highs and are an important component of the tariff adjustment process every five years. Do you think, let's assume for simplicity’s sake that the 10-year rates remain near 9%. Is it straightforward for you to see that being reflected in the allowed return during the MDP process, or is there some subjectivity around that?

Hi Bruno, this is Raul. Yes, you're right. The interest rates are higher right now and this depends on the moment of the review of the MDP in the new tariff approval. I can confirm that we will consider the new rates at that moment, which is a favorable position for us. We currently have 78% of our interest rates fixed, with an average cost of financing around 7%, which is favorable under the current circumstances. In terms of the tariff negotiation, we will consider the past 24 months of the average interest rates. This implies that if we are in the middle of the negotiation, we will take into account a higher levels of rates. So you are correct.

Thank you very much.

And the next question comes from Filipe Nielsen with Citibank. Your line is now open.

Hello, and thank you for taking my question. I have two questions from my side. The first one is regarding traffic recovery. How do you see Jamaican traffic recovery in the coming quarters versus Mexico recovery? And how do you see it building up, like stealing some tourism traffic from South Mexico? And how do you see this tourism in Jamaica building up compared to Mexican tourism?

Okay. Thank you. Talking about the recovery of the traffic in Jamaica, let's remember that the Jamaican authorities have been more aggressive in how they managed COVID. Last year, they completely closed the island at some point. What is also important to remember is that the peak season for travelers to Jamaica runs from November to March. So, some of the restrictions put in place by the Jamaican government affected winter travelers last year. I will say that we are really positive about the results that Jamaica will see in the next winter season this coming November. We see that the most significant change in our leisure destination is happening with the expansion of hotel rooms in Montego Bay. There are many new hotel developments taking place in that area. So, we are very optimistic about the medium and long term future of Jamaica due to new hotel attractions. Regarding Mexico, we are also seeing a tremendous construction boom in hotel capacity in places like Barata. For example, the delayed project of a prominent hotel group will open its first stage in November of this year. Additionally, in Los Cabos, there’s a big boom in real estate that suggests a bright future. We are seeing substantial growth in hotel availability in places like Cabos, Puerto Vallarta, and Manzanillo. This is a very positive sign regarding tourism in Mexico, and as this growth is combined with broader global trends indicating a shift towards closer vacation destinations, we expect that the US will be a market that will accelerate leisure destinations in areas like Cabos, Vallarta, and Montego Bay.

Thank you for the answer. And then I have a second question if I may. Do you see any new projects aside from Barbados that you are very interested in, and how are the negotiations or studies for new airports in the future?

For the moment, the only project we are looking at is Barbados. We are being very careful and disciplined regarding all our strategies. So at this time, I would say that the only project we are examining is Barbados.

Great. Thanks very much.

And the next question comes from Lucila Gomez with Compass Group. Your line is now open.

Hi, thank you for taking my question. So I have two questions. My first one would be, do you feel confident in the current maximum tariff that you have in place, and are you looking forward in the coming months or quarters to reach 100%? My other question would be, on the commercial side, do you currently have any discounts to help increase, for example, the restaurants and stores to assist them during the pandemic, or are you no longer providing discounts on rent?

Hi Lucila, this is Raul Revuelta. Thank you for your questions. Yes, we feel confident about the maximum tariff. Right now we are at 97% fulfillment. We made some adjustments to passenger charges from April for some of our larger airports in Mexico. So we believe that if we continue this trend and if passenger traffic continues to grow, we will reach the maximum tariff level. We have to consider the exchange rate, which has a favorable effect on this fulfillment, as well as the impact of inflation. Higher inflation makes it more complicated to reach the 100% maximum tariff, so it depends on these external factors. But for now, we feel confident about reaching 100%. In terms of commercial aspects, we have been providing some discounts according to our incentive program to support our tenants in our airports. However, due to our recovering passenger traffic, the impact of these discounts is becoming minimal. We do not expect to continue providing those discounts as most of our clients are already paying the royalty fee, which is higher than the minimum rental. Thus, the significance of the discounts is now quite irrelevant.

Perfect. Thank you.

The next question comes from Pablo Monsivais with Barclays. Your line is not open.

Hi, thanks for taking my question. I have a quick one. I recall that you said at the beginning of the call that you renegotiated some commercial contracts at your airport. Can you please give us some color on what your expectations are regarding non-revenue per passenger growth? We have seen an improvement over the past few quarters, but I want to know if there's a chance we could see that number increasing, say, 5% or 10% or if it will just be flat or following inflation. More detail on that would be great. Thank you.

Thank you, Pablo. I would say that there are two large segments helping us improve our commercial revenues. The first is definitely passenger numbers; the volume is critical. If we see a better recovery in international passengers in Vallarta, Cabos, and Montego, we should see an additional jump in commercial revenues. The second factor relates to our US locations. As you know, Cabos has one of the highest commercial revenue per passenger figures in Mexico. As we finalize the new building expansions in Cabos timed for November or the new passenger system in Cabos, we will see additional results. Lastly, with respect to the contracts, we are particularly active in Vallarta where we are negotiating short-term contracts that will allow us to benefit from the passenger recovery over the next two and a half years before the new terminal building comes operational in the last quarter of 2024. So I am optimistic that we can maintain or even increase our performance in terms of commercial revenue per passenger. Our figure is currently MXN85 per passenger for the first quarter, and I believe we will continue on this growth trajectory by the end of the year.

Perfect. Thank you very much.

And you have a follow-up question from Guilherme Mendes with JPMorgan. Your line is not open.

Hi, everybody. Quick follow-up question about Jamaica. How has the negotiation regarding potential rebalancing on the contract been?

Hi Guilherme, we have been working with the Jamaican government regarding this. The authorities are hiring some advisors to initiate negotiations. Our perception is that we will finalize this by the end of the year. We have a very good relationship with the government, but it is important that the negotiation is led by a specialized team comprising different ministers from the government. Thus, we need to wait until this team is fully integrated and the advisors are ready to commence negotiations. Our best estimate is to begin in June and hopefully finalize by year-end.

Okay. Very clear. Thanks.

And there are no further questions over the phone at this time. And at this time, I would like to hand the call over to the team for any closing remarks.

Thank you everyone again for joining us today for our first quarter results conference. We want to remind you that we are always open and available to answer any questions. On behalf of GAP, we wish you a great day.

Thank you. And this does conclude today's call. Thank you for your participation. You may now disconnect.