Pacific Airport Group Q3 FY2022 Earnings Call

Good morning and welcome to GAP's Third 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 Pacífico's third quarter 2022 conference call. Presenting from the company today, we welcome Mr. Raul Revuelta, GAP's 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. At this point, I'd like to turn the call over to Mr. Revuelta for his opening remarks. Please go ahead, sir.

Thank you, Maria, and thanks to everyone who took their time to join us here today. I will start with a brief review of GAP operational performance and financial results for the third quarter of 2022. Prior to taking your questions, passenger traffic across our airports continued to perform positively, reaching 41 million passengers for the first nine months of the year, an increase of almost 15% compared to 2019. This puts us on solid footing to surpass the annual growth objective that we established in our guidance. Tijuana, yet again, was the best performing airport in terms of traffic, growing by 42% during the quarter compared to 2019. Tijuana's traffic increase was mainly fueled by the Cross Border Xpress, we had passenger traffic penetration of 34%. Tijuana has also gained market share from the Los Angeles area, mainly on the routes to Guadalajara, Mexico City, Morelia, and Mexican beach destinations such as Los Cabos, Cancun, and Puerto Vallarta. Puerto Vallarta and Los Cabos, which are our main beach airports, continue to benefit from higher traffic, mainly driven by the domestic market and a respective 42% and 32% increase during this quarter. Also, during this period, we opened other routes from Los Cabos to Madrid, Los Cabos to Toluca, and Los Carlos to Santa Lucia, as well as the Puerto Vallarta to Toluca and Puerto Vallarta to Santa Lucia. We expect to develop additional routes to these three destinations, and during the upcoming winter season, we will see the Canadian market actively increase, as is typical for the season. There has been a less positive performance of the Guadalajara airport, mainly reflecting the slow recovery of the business travel market. However, during this quarter, we saw a positive trend comparing to 2019. We continue our efforts to make Guadalajara a hub. As such, geographically, we initiated the routes from Guadalajara to Bogota, Colombia, operated by deliverables. With this addition, Guadalajara now has three international routes outside of the U.S., these being Madrid, Panama, and Bogota. Moving onto Montego Bay, this surplus continued as lull, but still recovering in the third quarter, which is the first positive recovery following the impact from the pandemic. We are 3.2% increase compared to 2019. In total, during the quarter, 15 new routes and one international route were added. Looking ahead for the quarter, in addition to the new Guadalajara-Bogota route, we expect to open two other international routes from Puerto Vallarta to Toronto and to Vancouver, operated by Flair Airlines. As a result of the passenger traffic performance, a higher passenger fee, aeronautical revenue increased by almost MXN2 billion or about 74% during the quarter compared to 2019. For the nine-month period, aeronautical revenues increased by almost MXN5 billion or about 62% compared to 2019. Non-aeronautical revenues rose by 14% this quarter compared to 2019. For the nine-month period, the revenues increased by 36%, most of it from food and beverage, retail operations, as well as duty-free. I just want to mention that the best-performing non-aeronautical revenues were food and beverage and retail operations, particularly in Guadalajara, Los Cabos, and Tijuana airports, while duty-free was the highest-performing segment in the Los Cabos and Montego Bay airport. This revenue performance was partially offset by a 46% increase in the cost of service during the quarter compared to 2019 and a cumulative increase of 34%. Personnel expenses increased by 74% during the quarter, mainly due to the hiring of additional staff required for the new areas as well as the change in labor law; now GAP directly hires personnel for the VIP lounges and convenience stores, whereas previously these were subcontracted. Safety, security, and insurance increased by 38% for the quarter, mainly due to more security staff related to the opening of the new terminal processor building, and other new operational areas, as well as due to the salary increases. With new openings, we have also impacted energy and water consumption, thus leading to a 31% increase in higher utility costs for the quarter. Solar panels on our 14 airports are currently generating 13% of total energy consumption. The price per kilowatt was lower compared to 2019. Looking ahead, we do expect higher costs given the terminal expansion and inflationary effects. As a result, EBITDA reached MXN4 billion for the quarter, with an EBITDA margin of around 71%. For the nine-month period, EBITDA reached almost MXN12 billion, with an EBITDA margin of around 72%. Moving on to the balance sheet, cash and cash equivalents increased by 77% compared to September 2019, reaching a total of MXN16 billion. On September 26, we issued MXN2.8 billion in sustainability-linked bonds to refinance the bonds certificates under the ticker symbol GAP 17 due in November of this year and to fund investments committed under the Master Development Program for 2022. This issuance is GAP's Sustainability-Linked bond certificate and further evidence of our commitment to sustainability, especially our goal for reducing gas emissions. We look forward to updating you on these initiatives and continuing to integrate sustainability into our operational infrastructure. With this issuance, we reached almost MXN34 billion in debt and we continue to be at healthy leverage levels, which is our net debt to EBITDA ratio for the trailing 12 months of 1.2 times comparing with all our debt covenants. CapEx continues in accordance with the committed Master Development Program. At present, it has been and will be our biggest challenge this year because of the size of investment and inflation levels. We began the construction of the second terminal in Puerto Vallarta, which is expected to be finalized at the end of 2024. Additionally, the second Guadalajara runway is still in progress, as well as the mixed-use building and other commercial areas, which have reached a 70% progress rate. We expect the conclusion date in 2023. In Tijuana, we are currently refurbishing the aprons, which could allow us to serve more flights. This temporary is undergoing in the Los Cabos airport. In Montego Bay, we completed the commercial area expansion, adding new food and beverage areas and expanding the duty-free. Before I conclude, I want to remind you that we will hold our infrastructure side visit from November 8 to November 10. We will tour the Guadalajara, Los Cabos, and Tijuana airports to showcase the constructions that are currently in process, as well as the future growth expectations. We hope you join us. Please contact our Investor Relation teams for more information. And with that, I conclude my comments, and I ask the operator to please open the call for your questions.

We'll take our first question from Rodolfo Ramos with Bradesco BBI. Please go ahead, your line is open.

Thank you. Thank you for taking my question. Good morning. A couple of questions. My first one is on your expectations for Tijuana; the long-term drivers continue to be there. I just wanted to see if you foresee growth moderating perhaps in the short to medium term, especially as airlines continue to try to pass through some of the cost pressures that they're seeing? And the second part of this question, what are the next milestones for your international handling passenger facility in Tijuana? Thank you.

Thank you, Rodolfo. This is Raul. I will say that the main drivers of Tijuana are still there. I mean the first one, for sure, is the Mexico Maritimes market that has really fully opened service from CBX. The second part is Mexicans going for business or leisure to the Southern California area. After the pandemic, we saw somewhat of a decrease in that market, because, as you remember, the cross border was closed for Mexicans; in other words, it was only opened for U.S. citizens during the pandemic. So we are beginning to see real interesting recovery in the markets of Mexico to Tijuana and Guadalajara to Tijuana. The third part related to the market, mainly U.S. citizens going into Mexican beach destinations, we are still seeing great room for growth over there and we will begin to see more and more frequencies with our great load factors happening there. In terms of the market, I would like to add that for sure the coming months could be challenging for airlines due to additional pressure from fuel costs, but we are also seeing that new aircraft are being introduced into the country mainly from Volaris and Viva Aerobus. Some of these planes will not be allowed to fly in U.S. markets as Mexico is still in the second category for FAA. So in that way, we also see some temporary opportunities for additional growth in Tijuana due to the fact that some of the markets, mainly to Southern California, will be covered through Tijuana rather than direct flights to additional frequencies to the Los Angeles market. For sure, we see that the coming months will bring challenges due to a possible economic recession and also the cost of fuel, but we have additional flow that will benefit the airport in the short term. So we expect to see room for growth in Tijuana, and we will closely monitor what could happen in the Tijuana economy due to the fact of the nearshoring; in recent quarters, we are seeing significant growth in real estate for the existing stores mainly that are used for nearshoring. For the second question, regarding the facilities of Tijuana, the next milestone is to fully operate the international area of the terminal building. Today, we are working on what we call Phase 2, which relates to an expansion of the international arriving area that will be ready to operate in May of the coming year. From that moment, we expect to bring some international routes to the airport. As we mentioned in the past, we are seeing that the first international operations in Tijuana will be the return of the route to Shanghai, as well as Central American markets operating by next summer on those new facilities.

And just a follow-up, if I may. Thank you, Raul, for that. On the category ratings, so you would expect if Mexico does recover category 1, as it is expected now with the new leadership and the updated budget to happen in the first quarter of next year. Do you agree with that, and is it safe to assume that once we have category 2, you will start serving other U.S. domestic destinations? I don't know if commercially that's complicated or is this a market that you are looking at—perhaps Phoenix, people that want to go to Southern California from Texas or other states in the U.S.?

For sure. I mean, one clear opportunity as soon as we recover category 1 will be for instance the Tijuana-Auckland route. As you remember, when you consider the Mexicans in Southern California, we have been quite successful in covering this area. The second area would be the northern part of California, mainly the Auckland and even Fresno areas. We believe this will be a great opportunity. Additionally, we foresee direct flights from Tijuana to Auckland providing connections to all these 29 domestic destinations in some way, fitting the diverse domestic market. So we see that in the long term or medium term, Tijuana will function more as a hub for various opportunities, mainly related to the larger U.S. market drops in Dallas or Phoenix, while also considering the operations that could occur in Auckland, which will fit the Mexican market from Tijuana and the rest of the country.

Thank you. Hello Raul. Thank you for taking my questions. My first question is regarding the guidance for 2022. Looking at the results here today, it seems that the expectations in the guidance will be somewhat conservative. Do you have any thoughts for the fourth quarter or any updated estimates for that initial guidance?

Hi Alej, this is Raul. Thank you for your questions. You are correct. We are looking that we will be at the highest estimate of our guidance. But we do not expect to update it; it will remain in the range that we already provided.

Okay. Thank you. And then my second question, if I may, on the cost of service, do you have any expectations going forward? I mean probably talking about 2023, but any expectations for this high inflationary environment or to what extent we can see the cost of services on a unitary increasing considering all these expansions that you're planning?

Okay. Alej, everyone is concerned about the inflation effect on all of our costs. We have to consider that we have other issues in addition to the inflation effect. We expect pressure on our margins for 2023, not only from inflation but due to the full operation of the new terminal processor building in Tijuana, for instance. We have other expansions open and operating in Los Cabos, and will continue opening additional expansions in Guadalajara and other airports, probably including Montego Bay where we did a full expansion of the food and beverage area, which requires additional maintenance. The costs related to management and our operations will significantly increase as well. So what we can say is that EBITDA margins will continue to be historically in the range of 69%, 70%, or 71%. What we anticipate is to maintain significant margins.

Hi, good morning. Thanks for taking my question. I have a quick one on Jamaica. Can you please provide some outlook on your expectations for traffic for 2023 considering that perhaps travellers from Europe may be on the softer side? Additionally, can you provide some update on the case?

Hi Pablo, this is Raul. In the case of Jamaica, specifically for Montego Bay, we began to see really positive trends in this third quarter. Thus, we expect that the U.S. and Canadian market will continue their expansion or recovery for the coming year. However, we are somewhat cautious regarding the European market, particularly the British market from Montego Bay that may not recover as originally expected. In general terms, I would say that the Canadian market will likely experience great recovery or at least for the first quarter of the year, we are expecting really positive trends in that specific market. Overall, we anticipate that next year we will experience a full recovery in the absolute number of passengers, and for sure, we expect to be close to double-digit growth by the end of the year. Regarding Kingston, the main traffic for Kingston is mostly from Miami and New York. We expect that the full number of seats available will recover in the coming year.

Hi everyone. Thanks for taking my questions. I have two questions on my side. The first one is a follow-up on the category related to the Mexican market. I just wanted to have your thoughts regarding how you expect this timeline for this upgrade to happen. And the second question would be if you foresee opportunities for expanding through acquisitions and new options, not only expanding your current airports?

Thank you, Felipe. For the first question regarding category 1, the Mexican government just had a change in their leadership of the Civil Aviation Authority last week. One of their main goals is to recover as fast as possible the category. At least, what the Mexican government is saying is that they expect to regain it in the first quarter of the coming year. We feel that accounting for the new federal budget, which includes increases in expenses for the Federal Aviation Authority, we see that recovery could happen. From our view, the latest timeframe for the recovery of the category would be by summer 2023, contingent on the plans of the Mexican government. Regarding your second question, I will pass you to Saul.

Thanks, Raul. Thank you, Felipe. Yes, we are analyzing some opportunities for acquisitions. As we have mentioned before, we were in the process of pre-qualification for the Barbados Airport. However, the government has suspended that process for now. We will know in the coming months or years if they will continue with this process. We are open to examine any kind of opportunity. In a couple of weeks, we will participate in a global airport development forum where there are opportunities to invest in airport expansions worldwide. So after this Congress, we will evaluate if any other opportunities arise.

Hi, good morning. Thanks for the call. Just a question. Can you give us a bit of color about the maximum tariffs that you will be able to reach this year and do you think that next year, there may be inflation increases in tariffs?

Hi Gabriel. This is Saul. Thank you for your question. It is complicated. In terms of the maximum tariff, we have reached a level of 97% of the maximum tariff. So far, we are expecting to reach 100% at the end of the year in the fourth quarter, but it is complicated. As you know, we increased these specific tariffs twice during the year in line with rising inflation. We have a gap in the current specific tariff compared to the maximum updated tariff. It will depend on the inflation rate this year, and obviously for next year, we will plan to adjust the specific tariff in our efforts to reach 100% of the maximum tariff. Therefore, we do expect to pass through inflation to the tariffs, absolutely.

Okay. Do you expect that next year, for example, in the first half or second half, will inflation materialize into tariffs?

Yes. What we do is decide at the beginning of the year, and then analyze the expectations for inflation and exchange rates for international tariffs. Thus, we updated tariffs at the beginning of the year based on market trends. Once we have greater liquidity, we can make another adjustment. According to the law, we can only adjust tariffs twice a year. Therefore, we made the increase at the beginning of the year and will look for another adjustment in the second half, probably around August, September, or October, depending on inflation and exchange rate trends.

We will now hear from Alan Macias with Bank of America. Please proceed.

Hi. Good morning, and thank you for the call. Just a follow-up question on the Canada traffic—can you remind us your exposure to this traffic? Thank you.

This is Raul. For the case of Canadian traffic, for Puerto Vallarta, it is really close to 20%, for Montego Bay, about 18%, and for Los Cabos, around 12%. In those markets as specific beach markets, we have not received much Canadian traffic in 2022 until last month when we began seeing the first planes returning to the market. So what we expect from 2023 is to experience feedback we used to see in those markets and anticipate a significant increase in comparison to the first half of 2022, when we had reduced Canadian traffic.

Hi Saul and Raul, good morning. Thanks for taking my question. A quick follow-up on traffic—You mentioned about Jamaica for next year, but do you have an initial consolidated view of foot traffic starting '23 year-over-year basis?

Hi Guilherme, this is Saul. We expect for Jamaica, in terms of traffic at the end of this year, 2022, that traffic is really recovering almost at the levels of 2019. We have a lot to recover in aggregate for 2019 levels. For 2023, we expect Montego Bay to reach the 2019 level absolutely, with Canadian traffic, effects in Europe, and a recovery from the U.S. market boosting the results for Montego Bay. In the case of Kingston, recovery is delayed. We do not expect to reach those levels in 2023, but likely by 2024. The situation is more complicated for Kingston due to the primary reliance on the AFR markets that will take time to recover fully. For GAP in general, we expect to reach 100% of the 2019 levels. By the end of this year, we will be close to those levels. The growth for 2023 will be slow—it’s complicated to see how the overall trends will play out for GAP’s traffic. We cannot currently announce clear growth expectations, but we are not anticipating double-digit growth. However, we can say that the first quarter of 2023 will be very important for our visibility.

We'll take now the webcast questions; I will turn the call over to management.

Thank you, Mickey. We have some questions from Pablo Kolana from MetLife. Are you planning to issue more debt since you didn't reach the full amount planned last month?

Thank you, Pablo, for your questions. We plan to reach our issuance sometime during this year and likely in the first quarter of next year, we plan to issue another bond. As you know, we have been leveraging our full CapEx strategy to maintain the level of leverage we currently have. Thus, we will look for a new issuance mix in the first quarter of 2023.

The second question from Pablo is whether we are going to have additional dividend payments or share buyback during 2022?

Yes, Pablo, we have another tranche of the dividend payment approved by the shareholders' meeting. We are planning to execute the second tranche of the dividend this quarter. We will decide this in November or December; once we decide, we will make the payment of MXN7.20 per share, representing around MXN3.6 billion in FFO payments. We must fulfill the instructions from the shareholders' meeting. Regarding the share buyback program, we have already completed the program as expected by the shareholders' meeting, so we will not proceed with this program for now.

Thank you, Saul. Additionally, what is the expected net debt-EBITDA ratio for the end of 2022?

So far, in accordance with the debt we had at the end of September, we have a 1.2 times net debt-EBITDA ratio. However, we expect that once we make the dividend payment and remove the payment for the GAP 17 bond, which will mature in the following weeks, the net debt-EBITDA will range between 1.4 and 1.5 times.

Thank you, Saul. That is all the questions we have.

And we show no further questions over the phone. I will turn the call over to Mr. Revuelta for any closing remarks.

Thank you everyone again for joining us today in our third quarter results conference. On behalf of GAP's team, we wish you a great day. Thank you.

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