Pacific Airport Group Q4 FY2022 Earnings Call

Thank you. Good morning everybody. And thank you for joining us today during 2022. I’m happy to report that GAP hit previous records on all firms, making this year the magnificent one in our trajectory. Total revenues were up by 57% compared to 2019, supported by continued passenger traffic growth and a strong commercial revenue increase. Throughout the year, we transported almost 57 million passengers, a 60.4% increase over 2019. With this figure, GAP was positioned as the largest airport operator in Mexico for the third consecutive year, representing approximately 31% of the total market. This performance was mainly driven by the growth of the Tijuana, Los Cabos, and Puerto Vallarta airports, which was outstanding. Likewise, Guadalajara finally seen a return to 2019 levels. In Jamaica, passenger traffic also showed strong signs of recovery compared to 2019. If you recall, passenger traffic numbers were deeply impacted by the COVID-related government-imposed travel restrictions, which were very severe and delayed the recovery in that country. We continue to work closely with airlines, seeking to secure additional routes and frequencies. During the first quarter, GAP added 12 new international routes and four domestic routes. On February 15th, the airline Aeromar announced the suspension of operations for financial reasons and their difficulty in closing the agreements to operate in the long term under viable conditions. Aeromar operated only in the airports of Guadalajara, Puerto Vallarta, and Aguascalientes without specific routes, representing 0.23% of total passenger traffic at our Mexican airports. Moving on to our revenue performance, excluding IFRS 12, during 2022 we reached revenue of MXN 22.5 billion. Aeronautical revenues increased by almost 65% versus 2019 rather than merely by passenger traffic growth, as well as increased maximum tariff inflation. On the other hand, commercial revenue increased by almost 30% compared to 2019. This was due to the additional commercial spaces in Montego Bay, Los Cabos, and Guadalajara in addition to the renegotiation of overdue contracts under better conditions for GAP compared to the previous graph. Additionally, revenues from food and beverage and retail stores accounted for the most growth. With respect to business lines operated directly by Los Cabos, they increased by 35% due to higher revenues from passenger and community stores. However, this was offset by weak advertising revenues, which were initially impacted at the beginning of the pandemic; it had a struggle to regain pre-COVID 2019 revenue. In 2022, it was MXN 16.1 billion, a result of various factors, including outstanding factors causing recovery, tariff increases, and higher commercial spending. This was partially offset by the higher cost of service, mainly related to the opening of the new terminal processor building in Tijuana, the new commercial space in the Los Cabos Airport, as well as the new VIP lounges. Personal expenses arose due to the increase of headcount, mainly related to the larger number of operations. The effect of inflation and minimum wage also impacted maintenance, janitorial, and security costs. Despite the challenges in 2022, we were able to successfully reach the highest EBITDA margin in the history of GAP. Net comprehensive income increased by MXN 2.2 billion compared to 2021 or 34%. This increase was below the net income increase of 52%. It was originated by the currency translation effect resulting from the devaluation of Jamaican airports then eliminated in US dollars due to the 6% appreciation of the peso. On the other hand, the effective tax rate increased from 23% in 2021 to 25% in 2022. It was the reverse, mainly from the effect of high inflation over the net financial liability position, which increases the taxable income for 2022. On the balance sheet front, cash and cash equivalents stood at MXN 12.4 billion at the end of the year, while total assets were MXN 34.3 billion. Thus, according to these figures, we continued on our healthy leverage level with a net debt to EBITDA ratio of 1.4 times. Moving on to CapEx, the construction of the second terminal will continue in Vallarta Airport in addition to the construction of a new commercial mixed-use building that includes a hotel with 180 rooms, corporate office, and commercial spaces. We expect that this building will be completed by the end of 2023, and we look forward to sharing those updates with you in future communications. In Tijuana, the construction of the first phase of the terminal processor building concluded, initiating operations in May of 2022. This new building completed a renewal of the potential success of this airport as it will achieve several objectives. For one, it will raise the airport capacity to work on additional flights, routes, and frequencies. It will also expand our ability to better serve international markets by complementing the right functionality of the cross-border bridge. Additionally, we are expecting to reopen all routes from China at the end of this year. Los Cabos will continue expansion of the international terminal building that will last about 20,000 square meters. In Puerto Vallarta, we began the construction of the second terminal building oriented towards the net-zero energy concept. Now according to our guidance for 2023, we expect sustainable passenger growth across our network of airports. This is based on our view of airline flight frequency and seats offerings. Despite high passenger traffic levels at the beginning of the year, we believe this will adjust throughout the year to deal with an expected 6% to 8% increase compared to last year. This correlated with an increase in revenue in both our aeronautical and non-aeronautical sectors. Aeronautical revenues are expected to increase from 12% to 14% due to passenger traffic increase and inflation, which have already been factored in from January. Non-aeronautical revenues are expected to grow from 13% to 15% considering passenger traffic growth, inflation, and the development of additional business plans, such as the offering of seven community stores and one additional VIP lounge, as well as changing existing contracts. On the EBITDA margin side, we expect a 70% margin close or less than 1%, which is mainly due to the opening of new operational areas that will require more janitorial, security, and maintenance services. In addition to the recent minimum wage increase in Mexico, as well as the new changes in labor laws. The CapEx we expect to deploy is MXN 10.2 billion, of which 75% is related to committed CapEx and 25% is related to commercial investments. Aside from the committed CapEx in Mexico for this year, which amounts to MXN 4.5 billion, we are also taking into account the purchase of land for future expansion in Guadalajara. This will be for about MXN 1.2 billion, as well as around MXN 1 billion for CapEx that was deployed in 2022 but will be paid until 2023. We also include about MXN 1 billion for various investments in Jamaica. CapEx has been limited as a result of our waiver agreement with the authorities until we complete our renovation of the capital development program. However, some investments must be made and cannot wait any longer. On the commercial side, this includes the last phase of the construction of a mixed-use building as well as the expansion of the parking lot and the opening of additional business lines that are operated by us. With this, I would like to thank you for all of your attention. We are now ready to take your questions. Operator, please open the lines for questions.

Absolutely. So we'll take our first question from Guilherme Mendes with JPMorgan. Please go ahead.

Good morning, Raul, Saul. Thanks for taking my questions. Two questions actually. The first one is regarding the potential upgrade to your maximization interests you just want to hear your thoughts on the potential timing of it? And the second question is regarding the Jamaica contract for balance, what are the expectations in terms of timing? Thank you.

Hi, Guilherme, this is Raul. In terms of the category, I would say that the federal government has a schedule for recovery of the category in the first half of this year. We really don't have additional information on that. I believe what the authorities are saying is that they are working to meet their original schedule of May of this year for the recovery of the category. But we don't have, I mean, further information on that. Our personal view is that this could happen more in the third to fourth quarter of the year. But I mean, we need to have more information, or at least in our position, in our guidance, for instance, we are not considering at least for the numbers that we released in our guidance the recovery of the category.

Hi Guilherme, this is Saul. Regarding your second question, we are collaborating with the Jamaican government to reach an agreement. We have submitted a proposal, which they are currently reviewing with their advisors. They will present it to the cabinet, and then we will have another in-depth discussion about it. Our best estimate is that this could be concluded around May.

Very clear. Thank you both. So, maybe one quick follow-up on the rebalancing Jamaica, should we expect a reduction in CapEx or an increase in tariffs? What are likely to be the potential outcomes of the rebalance? Thank you.

It is a mix. We cannot share too much about this, but our aim is to balance the cash flows from every concession, including MBJ and Kingston. This involves achieving a balance between good prices and effective CapEx and OpEx. Therefore, it requires a comprehensive review of the model.

Super clear. Thank you.

Thank you. Good morning. Thanks for taking my question. I have a couple as well. The first one is on the cost side. When we look at the cost of services that you report in the fourth quarter, I mean, it tends to be heavy on the OpEx side. But just if you can elaborate, you mentioned some of the pressures that you're facing in your initial comments Raul, but if you can expand a little bit more on what you're expecting for cost of services, especially as you open these new areas in 2023? And the second one is on the dividend payment. If you can just take us a little bit through your thinking, I mean, I know that this is going to be later disclosed, but just how you think of the dividend, especially considering the CapEx commitments that you have going on this year, and if you can remind us what would be the lowest cash balance that you'd be comfortable with, just to put that dividend in perspective and frame it? Thank you.

Thank you, Rodolfo. This is Raul. I will start by discussing the cost of service. When we expand our infrastructure with additional square meters, we inevitably incur extra maintenance and security costs. Tijuana represents our largest investment that we have already launched, which certainly affected the results. Throughout 2023, we are also experiencing significant increases in additional square meters at Cabos and Vallarta airport. It's essential to remember that costs will generally precede revenues in these scenarios. As we onboard more partners, we expect to maximize our infrastructure use. In the coming years, we anticipate an increase in economies of scale at our terminals. However, during this expansion phase, we will face rising costs associated with opening new spaces. Additionally, significant aspects to monitor this year include wage-related expenses tied to salary adjustments due to the minimum wage review, which have already had an impact. As you recall, the outsourcing reform law enacted 13 months ago also affected us, and we expect more repercussions in 2023, linked to minimum wage adjustments and holiday reviews that will necessitate hiring additional staff. I would also like to address Montego Bay, where we have experienced increased concession fees. When comparing to 2021, these fees from Jamaica have risen significantly, with a 54% increase noted for 2022. Ultimately, the impacts of labor laws and concession fees will need to be taken into consideration.

Thank you. I would like to follow up on your mention of the price increase in January. What do you anticipate your maximum tariff compliance to be this year as a result of that price increase?

It will definitely depend on inflation, and we are also experiencing added pressure from the stronger peso. As you know, all international tours are related to dollars. However, we anticipate achieving around 97% to 98% fulfillment on the tariffs this year. It really hinges on inflation and changes in the dollar.

We’ll take our next question from Alberto Valerio with UBS. Please, go ahead.

Thank you for answering my questions, Saul and Raul. Congratulations on an outstanding year in 2022. I'd like to follow up and ask for a bit more insight into why you are anticipating higher operational expenses for the latter half of the year and into the next year. I also noticed a slight increase in the database.

Alberto, that didn't come through clearly. Could you please repeat the question? There's a lot of background noise on the line.

Okay. Sorry for that. Okay. It's better now?

Yes.

Yes. So, on the other operating expenses, for the Mexican I thought variations, if you could give a little bit more color, besides the weak demands in convenience stores that we had a little bit increase for the fourth quarter? If you could provide a little bit more color on design work through the preview of the year. The second one is about Jamaica, as well. I think you mentioned that, you increased in Jamaica and Montego Bay. And if there is something else that increased costs in Jamaica? And lastly, on the financial results, besides the interest rates, there are some …

Alberto?

… financial results?

Yeah. Alberto, sorry to interrupt you, it sounds very, very bad, as barely understanding your questions. Can you please add your questions into our webcast? Please? Write down your question.

Yeah. Sure.

We will take our next question from Anton Mortenkotter from GBM. Please go ahead.

Hello guys. Congrats on your results. And thank you for taking my question. I understand that you guys did a deployment of around 2 billion pesos for commercial projects during 2022. Do you expect to do something near that amount for 2023? Also, could you provide some upgrades, detailed breakdown of that deployment? I mean, how much has been expended for the mixed-use facilities? How much for the parking and all of that? Thank you for that.

Hi Anton, this is Saul. In 2022, we deployed around 1.5 billion pesos for commercial projects. For 2023, we expect to deploy around 2.5 billion. You are correct; we are making a significant investment in the mixed-use building. In Guadalajara, we are expanding the airport, including the parking lot. We are also making a large expansion at the Los Cabos airport concerning all commercial areas, and you will see better commercial revenue results for Cabos in 2024. We have been investing in commercial stores and VIP lounges as well. In our other medium-sized airports, we have invested in compact lots in some commercial areas. It’s important to note that in Montego Bay, we completed a considerable expansion of the commercial and retail areas. This is significant for both 2022 and 2023 as we plan to continue working on the mixed-use building in Guadalajara. Currently, we have 2,000 spaces in the Guadalajara parking lot, and by the end of 2023, we expect to have around 4,500 spaces. By the end of 2026, this will increase to approximately 10,000 spaces. We are focused on expanding all commercial areas, which is reflected in the commercial revenue we are reporting. Additionally, the payback period for commercial investments is around five to seven years, and we aim to achieve returns comparable to those we expect from aeronautical revenues, with a request for additional returns on all commercial projects. Overall, all our investments are linked to commercial revenues and are anticipated to generate better returns than aeronautical revenues.

Just to try to break down the numbers a little bit. Would it be possible to get a rough amount of how much has been spent for the parking spaces, how much for the hotel, and how much for the mixed-use facilities?

Yes. Well, in general numbers in very, very general terms, regarding the mixed-use building, it's around MXN 1 billion. In the case of the expansion of Montego Bay in 2022, it was around US$40 million because it was a huge expansion. For the other is the beginning of the expansion of the parking lots and the commercial stores and the VIP lounges. For 2023, the main investment is to continue with and finalize the mixed-use building, which will be around MXN 100 million to conclude this building and also to continue with the expansion of the parking lot to finalize the 4,500 spaces in Guadalajara. We are also finalizing the investment of the expansion of the Los Cabos commercial spaces, which will be around MXN 600 million.

Okay. And I understand that the mixed building has roughly 30,000 square meters, right? The one where you already deployed MXN 1 billion and are expecting to deploy an additional MXN 800 million.

It will be around 50,000 square meters when you take into account the office building, the hotel building, and special areas in the middle of that. That will be around 50,000 square meters total for the complete project.

Hi. Thank you for taking my question. I have a quick question about the traffic you are predicting for 2023, 2024, and 2025 in the medium term. How do you anticipate your capital expenditures and increased capacity will be ready to accommodate the number of passengers that you likely didn't foresee when you negotiated your MDP? Should we begin to expect higher capital expenditures for those years? What is the balance between additional capacity and additional traffic? Thank you.

Thank you, Pablo. This is Raul. I want to start by discussing which areas of the airport need to increase capacity in the coming years. First, I will explain why this is part of our master plan and what will be included in future plans. Within this master plan, we are planning to open the second runway in Guadalajara by the end of this year, 2023. We are also starting construction on a new terminal building in Guadalajara, which is expected to be completed in 2026 and will be a key component of the new master plan. For Guadalajara, the new master plan will involve finishing both the new terminal building and a second terminal, along with significant maintenance on the first runway. The construction of the second runway will necessitate deep maintenance on the first runway as we initiate the new master plan. Now, turning to Tijuana, this master plan will finish the last segment of the new terminal building focusing on the facilities for baggage claim on the international side. This will complete the current master plan. In the upcoming year, we anticipate a significant increase in passenger numbers in Tijuana, and the expected demand will require us to significantly expand the terminal capacity. We are currently assessing the additional square meters and gates that will be necessary for next year. For Tijuana, it is essential to increase the terminal building capacity. Moving on to Los Cabos, in this master plan, we are completing a significant expansion of Terminal 2, which serves international flights. This expansion will increase the airport's overall capacity. Additionally, in the next master plan, we will focus on constructing a completely new terminal for domestic passengers, as we recognize the need for more capacity in that segment. In Puerto Vallarta, this master plan will see the completion of the new Terminal 2, which will provide substantial additional capacity for the airport. The subsequent master plan will involve a general refurbishment of Terminal 1 in Puerto Vallarta, which will not increase capacity but will enhance the existing terminal. For the remaining airports, in this master plan wrapping up in 2024, we have not added capacity for those facilities in Mexico. Therefore, it is likely that the upcoming master plan will also not include capacity increases for the other airports. Future capital expenditures will align with the same level per passenger as in previous plans. Currently, we don’t have a clear figure, but we have some estimates based on negotiations with the authorities. Overall, I have highlighted what our largest capacity increases will be in the coming years, and we expect to continue this trend.

We will move next with Gabriel Himelfarb from Scotiabank. Please go ahead.

Hi, thanks for the call. Just a quick question. Basically, we're seeing a strong increase in international traffic on Los Cabos and Puerto Vallarta, as well as Tijuana and Guadalajara. Can you give us a bit of color on how much this could be driven by Canadian traffic that is incorporating international traffic? Thanks.

Thank you, Gabriel. This is Raul. Yes, as you say, there's a significant increase in the capacity of Canadian traffic because, as you remember, one year ago in 2022, in some way we lost the winter season by Vallarta and Cabos. Montego Bay Airport mainly experienced that. In this year, we are seeing a full recovery of capacity, or number of seats for the Canadian market. So for sure, that is helping us to have a much better increase in passenger numbers at those airports. But what is also important to know is that in 2022, different US carriers added capacity in Vallarta airports. We remember that in 2022 we were taking a lot of capacity from long-haul US airlines that could be shifted to other Mexican leisure destinations. One of the big questions for this 2023 was whether all that additional capacity would continue or not? The great news is that the answer is, for instance, for this winter season, from January to March, we're seeing an increase in the number of seats of US carriers also. Well, in some way that the great news for the leisure Mexican destination is that capacity is doing great, the yields are doing great, and the load factors are doing great. So, in general terms, we think that the leisure destinations, Cabos and Vallarta, are in an excellent position to continue their growth this year.

Okay, thank you. And just an additional question, do you think this capacity will start to normalize by next year?

I mean, it's difficult to have all the views of what's going to happen next year, but I will say that what is interesting is happening in Cabos and Vallarta is that today, there’s a really big amount of additional hotel rooms under construction in those areas. So, I will say that for instance, in the case of Vallarta, entered 2024, with the opening of the new complex of the Mayan Grupo Avante, the additional hotel rooms will greatly benefit the region, and we expect that at least the market could react to that additional offer of rooms, bringing additional seats to the market. In both airports, we are seeing significant expansion regarding rooms in Cabos and Vallarta. So, we feel optimistic about the growth in the offer of seats in those markets for the coming years.

Thank you. We have received a question from Alberto Valerio with UBS regarding the increase in other operating expenses. Raul Revuelta: Alberto, this is an important point because this slide includes information related to the operation of our convenience stores and our VIP lounges in the FBO terminal. Notably, the increase is due to the growth in these business lines. To put it in perspective, an increase of roughly MXN 100 million corresponds to approximately MXN 250 million in additional commercial revenues from these business lines. Additionally, we experienced a slight peak in uncollected accounts from Aramark, which we weren't able to collect during 2022. We anticipated this since 2022, given Aramark's bankruptcy, so we reserved those accounts as a reflection of this decline. And the other one is, can you just provide additional color on the operating expenses increase in MBJ? What were the main expenses that increased beside the concession fee that you have already mentioned?

The operating costs were almost in line with what we expected. Basically, it had an increase based on inflation around 8% U.S. inflation. But the more significant increase was the additional concession fee. If you recall, according to our transaction model in MBJ, we had to pay 45% of any revenue excess over a certain trigger to the authority. So that's why in the previous year, 2020-2021, we had a credit. Once we recovered past year traffic in 2022, we decreased that credit, and we had to make a provision for this additional concession fee that will be paid during 2023. But it's basically the main increase.

Yeah. And the other one is, is there anything that impacted the financial expenses line besides higher interest on debt?

Well, no. The main effect, obviously, is the level of debt as you know, our strategy is to leverage 100% our CapEx the commercial and committed CapEx, so that's the main reason and obviously, the interest rates that we have seen in the last year. So that's the main effect.

Thank you. We have now two questions from Bruno Amorim from Goldman Sachs. How do you expect the currently high 10-year bond yields to impact the cost of capital for MVP purposes? Should this drive higher tariffs or else hold constant?

It is important to remember that when we were negotiating the last master plan, there was a lot of noise in the market regarding the cancellation of the New Mexico City Airport. At that time, the yields on long-term debt of the Mexican government were similar to what we are seeing today. Therefore, we do not anticipate any additional pressure that would lead to an increase in yields affecting the discount rate for the next review. During that period, we experienced significant noise related to the cancellations in Mexico, particularly the New Mexico City Airport, but the levels of the different curves remain largely comparable. Thus, I do not foresee a significant increase in the discount rate going forward.

Okay. Thank you Raul. Also, Bruno asked in the prior MVP cycles in general for GAP and other operators, strong traffic leads to higher CapEx levels allowing for higher tariffs in real terms. Do you see any reason why this time the 2024 MDP tariff could eventually follow?

It is important to remember that the new maximum tariff cycle will start with a significantly larger volume of passenger and cargo traffic compared to previous forecasts. A lot of our infrastructure improvements have already taken place, such as the construction of a second runway in Guadalajara and new terminals in Vallarta. The anticipation regarding the tariff in the upcoming master plan suggests a trend towards either a decrease or neutral impact on the tariff. However, the key takeaway is that the basis for calculations relies on the number of passengers at the beginning of the forecasting period. In the years ahead, we can expect that the passenger volume will be substantially higher than what we calculated for the maximum tariff in 2019. Therefore, the outlook for the tariff in real terms under the upcoming master plan will likely be slightly negative or around neutral.

Thanks, Raul. We have a couple of questions from Pablo Coloma from MetLife. He is asking, can you give us color regarding your guidance for EBITDA margin for 2023 and the mid-term level you expect?

Yes, Pablo, that we released in our guidance is 70% of EBITDA margin, plus 1%. So we believe that historically, the EBITDA margin is around 69%, 60%, 70%. Like this year, in 2022, we have reached above 71%. It was a great year. But what we expect is to have around 70%. So historically, it has been below that. But in some way, we will have an average of 70%.

Thank you, Saul. And then the second question from Pablo. Can you give us some color on the impact that nearshoring is having on your operations? And what do you expect in the midterm?

Yes. I mean, we think that we are just at the beginning of the real potential that will bring for additional passengers to our airports about the nearshoring. We are really optimistic that we could see important results in the areas of Maquilas automotive areas that could be Guanajuato as Caliente and Jalisco or Guadalajara. We also are beginning to see a really positive impact or beginning of the new sharing impact on the case of Tijuana and Mexicali airports around the cities. We are seeing a lot of increases in warehouse factories and maquilas. At the moment, I could say that in Baja California, we are seeing a really dynamic economy that is, in some way, moving related to the new sharing. So in general terms, I would say that we are beginning to see some of the impact. It's not fully clear yet, but we are optimistic that in the coming years, we will begin to see more of that impact. For instance, a significant announcement of additional investments for the Caliente factory, which is great news for the Caliente airport, that is really related to business traffic and mainly generated from the automotive industry. I would say that we are just at the beginning of what could be a great, but gradual impact on the passengers related to the new sharing.

Thank you, Raul. We received a question from the webcast asking for a breakdown of the capital expenditures in 2022, as they appear quite high. Is there any change in the total amount with the MDT, and how do you anticipate recouping the additional capital expenditures? What is included in the capital expenditures for 2022?

Well, the CapEx in 2022, as we mentioned, we deployed around MXN 8.4 billion. It was MXN 6.9 billion related to the mandatory CapEx in Mexico and Jamaica, and MXN 1.5 billion in commercial investments. Related to your question that it seems very high, we have to consider that the commitment with the authorities is in 2017 numbers, and the inflation related from 2017 up to 2022, which was around 45%. We've had a huge pressure in terms of inflation in all of our mandatory investments, not only in Mexico but also in Jamaica. On the other hand, all the commercial investment that we expect is to yield a higher return compared to the investments related to aeronautical revenues or mandatory investments. So if we expect a return on extra CapEx, yes, we expect the return on extra CapEx and it should be better than established in the maximum tariffs. Connecting to your question, what is the CapEx for 2023? As we mentioned before, it is around MXN 10 billion, which is divided into MXN 7.5 billion related to the mandatory CapEx with the MDP in Mexico and Jamaica, and MXN 2.5 billion will be for commercial purposes. We have already explained about the mid-years, the expansion of the parking lot, the expansion of the VIP lounges, and the convenience stores. For different parts, we have a huge investment and expansion in commercial terms.

Thank you, Saul. This was the last question in the webcast, so operator.

Thank you. Thank you very much for your attention. Before I conclude, I would just want to mention that the GAP day 2023 will be held on March 16 in the New York Stock Exchange. We hope that you can join us for a morning of management presentations and more information on future projects and outlooks. Please contact our Investor Relations team for more information. Have a great day.

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