Pacific Airport Group Q1 FY2023 Earnings Call

Good morning, and welcome to GAP's Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' presentation, we will open the floor for questions, and at that time, instructions will be given if you would like to ask any 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 2023 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 forward-looking statements, please refer to the quarterly report that was issued previously. At this point, I would like to turn the call over to Mr. Revuelta for his opening remarks. Please go ahead, sir.

Thank you, Maria. Hello, everyone, and welcome. This year has started strong, and we delivered a great performance across key operational and financial metrics. The number of passengers this quarter was almost 16 million, an increase of nearly 24% compared to 2022. Supporting this passenger traffic growth was the solid demand experienced at the Montego Bay, Guadalajara, and Puerto Vallarta airports, as well as the greatest number of routes and frequencies across our network. Note that for comparison purposes, when we look at January and February of 2022, the impact of the Omicron variant affected passenger traffic, which was not the case in 2023. As a result, aeronautical revenues increased by 31%, driven by passenger traffic recovery throughout GAP's network, as well as the maximum tariff increases that fulfilled almost 99% of the maximum tariff in our Mexican airports. It is important to note that the benefit of the Jamaican airport consolidation is not fully reflected here due to the effect of appreciation of the Mexican peso by 9% against the US dollar, which impacts the increase in revenues. Jamaican airports represented a 15% total increase in aeronautical revenues. Non-aeronautical revenues rose by 26%, with most of the increase coming from food and beverage, retail operations, leasing of space, and duty-free. As we have mentioned in previous calls, we renegotiated the terms of several contracts, resulting in a more favorable financial condition for the company. The only business line that continues to lag is advertising, with a decrease of 24% compared to 2019. However, compared to 2022, it increased by 74%. There are several strategies that we are working on to reach and surpass 2019 revenue, including further development of digital advertising, using the ample airport spaces to enhance brand experience, as well as the use of marketing showrooms. As we mentioned before, the appreciation of the Mexican peso is affecting the non-aeronautical revenues in contracts that are denominated in US dollars. EBITDA reached MXN4.7 billion for the quarter, with an EBITDA margin of around 72%. This was the result of outstanding passenger traffic recovery, higher tariffs, and solid commercial revenues, which were partially offset by the 28% increase in cost of service. We have worked hard to maintain our cost control policy, but we are facing changes in labor laws that not only affect overall salary costs but also the contracts involving personnel such as janitorial, security, and maintenance. We expect higher costs further down the line in accordance with airfield terminal expansion in addition to inflationary effects. In financial performance, cash and cash equivalents increased by almost 12%, reaching a total of MXN18.9 billion. The debt figure reached MXN40.4 billion in the first quarter due to the drawdown of MXN6.4 billion. This included a credit facility from CD Dynamics of MXN1 billion, as well as the issuance of another two tranches of labor debt bonds in the Mexican market for a total of MXN5.4 billion. The proceeds will be allocated toward mandatory CapEx for this year, and a portion will be used to pay the bond maturing in June of MXN6.2 billion. These were our third and fourth labor bonds, which are sustainability-linked bonds, evidence of our commitment to sustainability and specifically directed towards reducing carbon emissions. We look forward to further updating the market on our ESG initiatives and continue integrating this philosophy into our operational infrastructure projects. In accordance with these figures, we continue to maintain healthy leverage levels, reaching a net debt to EBITDA ratio of 1.3 times for the trailing 12 months, thus complying with all our debt covenants. CapEx continued to be carried out in accordance with the committed Master Development Program, as well as the commercial investments. The deployment has been and will be our biggest challenge in the five-year period due to the size of the investment and cost increases resulting from higher inflation. We have made the highest investment for a single quarter since the beginning of our committed concession, reaching a total of MXN2.9 billion. Moving on to another topic, I want to mention that our ordinary and extraordinary shareholder meeting took place last week, where a dividend payment of MXN14.84 per outstanding share was approved. At the meeting, the creation of a sustainability committee was also approved, which puts us on the right track to fulfill our Strategy Sustainability Plan 2030. Regarding the ratification or designation of the persons that will serve as independent members of the company Board of Directors designated by the Series B, as well as the designation of the Independent Member of the Nomination and Compensation Committee, both points were withdrawn, as mentioned in the shareholders meeting. In order to have a new ordinary shareholder meeting that will be held on May 22, that was announced yesterday. Moving on, in the first quarter of 2023, we discussed an initiative presented to the Mexican Congress to reform various federal laws enacted by the Mexican President. This will provide, among other things, additional capacity for the Mexican government to revoke concessions and permits. It also provides a mechanism to speed up private property expropriation by the state. It is not clear whether Congress will pass this bill, and if it does pass, what impact it will have on the Mexican economy and the company's operations. This could violate fundamental rights established in the constitution and international treaties, such as the right to equality, the guarantee of judicial activity of the law, and the freedom of trade. We will keep an eye on the deal and inform any relevant updates to our shareholders. To conclude, back in March, we carried out a very successful GAP Day at the New York Stock Exchange. I want to give a special thanks to all the analysts and investors that attended, as well as our team who put it together. It was a great opportunity for us to catch up with all our colleagues, and we aim to do the next one at one of our airport locations. At this point, that is for my remarks. I will ask the operator to please open the floor for your questions.

We'll take our first question from Rodolfo Ramos with Bradesco BBI. Please go ahead.

Thank you for taking my question, and good morning. Just a couple on my side. The first one is on traffic. You had a strong start of the year, running at a rate higher than you guided in your Investor Day. So, just wanted to see how are you looking out for the rest of the year and what kind of upside you see as the comparable base starts getting tougher? And then my second question was just a follow-up on your comments on this reform, just to make sure, I mean by looking at the tax, it seems that this wouldn't apply to new concessions. So, just wanted to confirm what is your view, and do you foresee this impacting your next year's MDP negotiation? Also, if you see this reform that was presented earlier when the cabotage invest was removed, whether you see this actually coming through and Mexico regaining category one as a result? Thank you.

Thank you, Rodolfo. This is Raul. On the first question related to traffic, yes, we are having a really strong beginning in the first quarter. It is important to take into account that, for comparison, the basis will be tougher in the coming months. We are still being really positive in terms of traditional feeds that we're going to see on the market. We still see growth in our airports that will be a little bit below double-digit, but we still see important growth. For some airports, such as Guadalajara, we expect the first half of the year will perform really well based on additional seats, but also considering the base of comparison. On the other hand, we have Tijuana, where we see robust demand, but we are beginning to see a tougher comparison base, that will, in some way, move the growth of that airport more toward lower double-digit percentages rather than the higher double-digits we have seen in the past months or years for Tijuana. Another factor to monitor is whether a recession will occur in the Mexican economy or the US economy. Today, we don’t have complete data to understand if this will happen or if it will be a soft landing, but we need to keep an eye on what will happen in the second half of this year. Regarding the reform presented by the Mexican President to Congress, I would say that in terms of Mexican law, the retroactivity of the law is not allowed. In theory, if this change in the law applies to new concessions, it is important to note that to contest the retroactivity of a law, you need to litigate it. It does not happen automatically. So, it’s difficult to determine the potential impact of these reforms because, first, it has not been discussed yet. Second, the ordinary period of Congress will end at the last day of April, and the next period will start in September. This gives us enough time to discuss with the Congress and better understand this reform in the coming months. Personally, I believe we have enough time to understand and then act on anything that might affect the concession. It is hard to gauge whether this might impact the next MDP negotiation, but the first example of this possible impact will arise during the negotiation process this year. Lastly, regarding cabotage, we have seen it removed in the last version of the law. For sure, it was important for regaining category one, but this will depend on how the Mexican government implements various processes related to this law. We still anticipate that the category one approval will happen between the third and fourth quarters of this year. However, we don’t foresee any additional services or routes being enabled until next year, as airlines need at least six months to implement new planes for a new market. As a result, we will begin to see positive results in additional seats or capacity from Mexican airlines in the first half of the coming year.

Okay. Very clear, Raul. Thank you very much.

We'll take our next question from Fernanda Recchia with BTG Pactual. Please go ahead.

Hi, good morning, everyone, and thank you for taking my question. I have two on my side. The first one is actually a follow-up on the previous question regarding traffic trends. If I understood correctly, looking for a common Q, we'll still see supportive traffic trends, which should actually surpass your guidance of increasing by 6% or 8% on a year-over-year basis because if we look at Q1, you already are on 6% for the year. So just wanted to understand what has been the main drivers of better than expected traffic? Is there any nearshoring trend that has been bringing some positive news on traffic? And second, on Jamaica, I just wanted to hear an update regarding the rebalancing. How is the litigation going and when do you expect to have a resolution? Thank you.

Thank you, Fernanda. This is Raul. Yes, as you remember, our guidance was built based on the number of seats published for airlines and the slots authorized by the airports at the time we established the guidance. For this first quarter, we had some easy comparisons in some airports at Montego Bay, Kingston, and Guadalajara. Therefore, it's early to increase our guidance, but we will recalculate all the numbers at the half of the year, see the trend in the additional slots and seats, and then move forward with that information to adjust our guidance if needed. For now, we still think the total number of passengers at the end of the year will be around the 6% to 8% range for the full year.

Hi, Fernanda. This is Saul. Regarding your question about the rebalancing process in Jamaica, we are working with the team designated by the government, and we are planning to close by the end of June. As mentioned in previous calls, any adjustment in the Laurentian lawsuit should have cabinet approval, which is different from Mexico. So, it represents a huge effort to socialize and revise the figures in order to gain cabinet approval, and today I can't announce more.

Just to revisit a part of Fernanda's question, we are seeing some nearshoring effects on traffic, but it’s still too early to quantify that. What we are observing in some of our airports, particularly in Guadalajara, Bajio, Aguascalientes, and Tijuana, is real estate growth in industrial parks, which may indicate the first signs of the nearshoring effect in the coming years. However, it remains early to determine the magnitude of that effect on passenger traffic.

Great. Thank you. Have a nice day.

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

Hi. Thank you for taking my questions. I'd like to go deeper and see how the pass-through entity, which I remember we always had revisions and in the peak reached positive tariffs, and we have never seen tariffs drop. For this next round of discussions, we have seen the press in Mexico pushing a bit for tariffs, and I would say also the government, with this movement of the reform view. How do you see the next MDP negotiations going? Will we see similar amounts of CapEx or even higher for the next one? Additionally, do you foresee tariff increases for the next revision in the next rounds? And considering the current government, should GAP take care of that for next year or the next one? Thank you.

Thank you, Alberto. Regarding the Master Development Plan renegotiation, first, in terms of CapEx, we will review our last Master Plans. We want to see that the number of CapEx per passenger is almost in the same level. We need to account for some one-time CapEx, such as the second runway of Guadalajara. In general terms, we expect the master plan to be aligned with government investments per passenger seen in the past. We will see an increase in CapEx in absolute numbers because on the last negotiation we began with 48 million passengers. If everything continues on the same trend, we are going to be around 60 million passengers for Mexico at the end of the five-year period. That increase may necessitate deploying additional CapEx to maintain the quality of service included in the concession. Therefore, we will see a Master Plan with higher CapEx than the current one. In terms of tariffs, it's difficult to project now. As we mentioned in our GAP Day management presentation, we are leaning towards a flat to minus 5% decrease in tariffs. Again, we need to understand discount rates, how the market moves, the number of passengers, and forecast for the upcoming year. It's early to predict, but we think the negotiation will revolve around flat to minus 5% for now. Typically, negotiations happen in June, when you first file with the authority and run until the end of December, taking about six months to finalize. Next year, the government will transition at the end of September. So, timing will be tight for us to close the master plan with the current government. It's worth noting that master plans have been negotiated with all previous governments, and discussions have followed a technical framework. For now, we believe the process will continue in the same way with either this government or the new one, as the technical staff will remain in place.

Fantastic. Very clear.

Thank you, Alberto.

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

Hi guys, good morning, or afternoon. Thanks for taking my questions. I have two questions on my side. The first would be, what are you seeing in terms of hotel and resort operation expansion in your regions? How do you see the level of activity in terms of hotels and resorts expanding? The second would be if you see any opportunities for establishing industrial parks at or near your operations, given more intense manufacturing activities? Thank you.

Hi, Filipe. Well, what we have seen close to our operations at our airports is that the economy in Mexico is improving due to nearshoring, the automotive industry, and the various activities in Guadalajara related to what we call Silicon Valley due to the number of companies involved in that sector. Therefore, we remain positive about future growth in business passengers. We haven't recovered the levels we had in Guadalajara yet, but we believe that in general, the activity will expand in the following years. Of course, nearshoring is likely to boost passenger traffic, and it is worth noting that this trend in nearshoring and increased industrial park activity is evident in five of our 12 airports in Mexico, which is significant.

This is Raul, Filipe. Let me complement Saul's answer. It’s crucial for our investors and analysts outside Mexico to understand that the growth of the Mexican GDP is very different between regions. In central Mexico, particularly in Bajio and Jalisco where Guadalajara is located, GDP growth has been almost double that of the national average for over 25 to 30 years. We are witnessing significant expansion in industrial parks, real estate, and new foreign investment mainly due to nearshoring. We remain very positive about this trend. It is essential to keep track of what happens with state GDP and employment creation in the various regions. For instance, Jalisco was the number one state for new employment creation in the last half of 2022. This dynamic is changing rapidly in Mexico and varies significantly by region. Regarding your second question about establishing industrial parks near our constructions, we are always open to reviewing various opportunities. However, we maintain a disciplined approach to ensure that any investments create value for our company. We continue to evaluate new opportunities for potential real estate and industrial park development at some of our airports, ensuring they align with our investment focus.

Great. Thank you very much, guys. Very clear.

And we'll take our next question from Anton Mortenkotter with GBM. Please go ahead.

Hello, guys. Thank you for taking my question, and congrats on your results. I was wondering if you could provide a breakdown on the MXN3 billion CapEx deployment during the quarter? And if you could share your expectations regarding your investments on the commercial front, are the same as you shared recently, or is there anything changing in that regard?

Thank you, Anton. This is Raul. Let me start with the CapEx deployed during the quarter. The main developments that we are currently undertaking include the second runway in Guadalajara, which is on track for operation by the end of the year. Additionally, we are currently building the second terminal in Vallarta, which represents a significant investment for the company. The third major project in progress this quarter involves land acquisition for future reserves at Guadalajara airport. In that regard, I believe we have invested approximately MXN1.4 billion in the Guadalajara airport for either land or significant ongoing infrastructure. This quarter saw our highest historical investment at nearly MXN3 billion. Significant land reserve acquired is very important for future growth at Guadalajara airport. Regarding the second part of your question, I didn’t catch it well. Could you please repeat it?

Just to understand if your expectations regarding the deliveries of your commercial diversification activities have changed or if everything is going as expected?

Well, Anton, we continue to adhere to our plan. We are developing additional commercial areas in Guadalajara. We expect these operations to commence around summer this year. We also completed the expansion of commercial areas in Los Cabos airport. Additionally, a hotel development in Guadalajara will be ready for operation in the first quarter of 2024. Generally speaking, our strategy for non-aeronautical revenues remains unchanged, focusing on expanding our square footage and enhancing passenger experience, as that's the best way to boost non-aeronautical revenue. We're working hard to maximize efficiency in areas directly operated by GAP, such as convenience stores, VIP lounges, and parking lots. Overall, we remain committed to developing our non-aeronautical revenues by exploring various business lines, continuing to seek opportunities for enhancing passenger experiences.

That's pretty clear. If I may, I just have a quick question about the increase in tariffs during the quarter—what level of your maximum tariff did you reach?

Almost 99.6%. Really close to 100%.

Perfect. Thank you, guys, a lot.

Thank you.

While we wait, we will take the webcast questions. I will turn the call over to management.

Thank you, Nikki. We have two questions. The first one is from Roddy Seymour from Brown Advisory. The first one is, is there an update on the FAA timeline for reviewing their rating downgrade for Mexico?

As we stated, we continue to see that the upgrade will happen between the third and fourth quarters of this year, and we will begin to see the impact on additional routes to our efforts from the Mexican airlines in the first half of the coming year.

Thank you, Raul. The next one is, where could non-aeronautical revenues per passenger reach in the next five years?

That's a good question. We will try to expand non-aeronautical revenues as much as possible, but it will depend significantly on how much additional square footage we can provide in the next negotiation. The new Puerto Vallarta terminal building will present a great opportunity to bolster commercial activity in the airport. We have a strong opportunity to enhance commercial revenues and, when compared to the ratios at Los Cabos airport and Puerto Vallarta airport, there's a significant gap that can be closed with the new terminal two. Furthermore, the extra square meters we will gain from Guadalajara with the new hotel, new hangers, and food/beverage area will positively impact our commercial room. It is essential to note that a key factor in understanding how much the non-aeronautical revenues can grow in the next five years is analyzing how many square meters will be available. Roughly speaking, we expect to be within the MXN110 to MXN120 range. However, numerous variables could influence the actual outcomes over the new five years.

Thank you, Raul. The last question we have from the webcast is from Mauricio Buitrago from AM Advisors. Can you please repeat your guidance on EBITDA and CapEx for this year, please?

Yes. Hi, Mauricio. The EBITDA will grow in the range of 10% to 12% compared to 2022, and the EBITDA margin will be close to 70%. In terms of CapEx, our target is to reach MXN10.2 billion at the end of the year.

Thank you, Saul. I believe that we can pass the call back to Nikki.

Thank you. We are showing one more question over the phone, which comes from Guilherme Mendes with JP Morgan. Please go ahead.

Good morning, Saul, Raul. Thanks for taking my question. A quick follow-up on the cost front. You mentioned some pressure on costs going forward. Considering your EBITDA margin guidance of around 70% compared to the 72% posted in the first quarter, what kind of inflation pressure or cost pressures could we expect? Is that something we should anticipate in the second quarter or more towards the second half of the year? Thank you.

Hi, Guilherme. There are several factors to consider. Regarding salaries, we will have an additional headcount in 2023. We must also consider changes in labor laws concerning extra vacations or holidays for employees, which impacts social contributions and overall security, clearance, and maintenance costs. In general, the change in labor law will affect us significantly. In addition to inflation impacts, we need to account for having full operational capabilities at the new terminal in Tijuana. That terminal opened last year in May, but it became fully operational in Q4 of 2022. Thus, for 2023, we will incur full operational costs. As noted earlier, every time we expand terminals, we will incur new maintenance expenses. Overall, these are the primary contributing factors that will affect the EBITDA margin. We must also consider the impact of MBJ regarding concession fees, as we have a credit line for the additional concession fee that was imposed in 2022. In 2023, there will be no credit lines, so we will have to pay the additional concession fees in full without any credits, which also affects costs.

Very clear. Thank you very much. Have a good day.

Thank you very much.

We have a last question on the webcast from Ariana Catalan from Santander. Raul, when do you expect to deliver the second terminal in Puerto Vallarta?

Hi, Ariana. We expect the new terminal to be ready for operations in December of 2024. Therefore, any effect on commercial revenue will be realized in 2025, as we anticipate operating it during the last weeks of December.

Thank you, Raul. There are no additional questions, so we will proceed with the final remarks.

Thank you, everyone, for joining us today for our first quarter results conference. The team remains available to answer any questions that you may have. Think of GAP for the rest of today. Thank you very much.

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