Pacific Airport Group Q2 FY2023 Earnings Call

Good morning, and welcome to GAP's Conference Call. It's now my pleasure to turn the call over to GAP's Investor Relations team. Please go ahead.

Thank you, and welcome to Grupo Aeroportuario del Pacifico Second Quarter 2023 Conference Call. Presenting from the Company today, we welcome Mr. Raul Revuelta, Chief Executive Officer; and Mr. Saul Villarreal, Chief Financial Officer. Please be advised that forward-looking statements may be made during this 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. This could cause 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 by the company. 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. We appreciate everyone who joined our call today to review GAP's second quarter of 2023. During the period, GAP transported nearly 16 million travelers throughout our network of 14 airports. This represents a 12% increase compared to 2022, which combined with the first quarter puts us above our original traffic growth guidance for the year. Edwards opened during the quarter for domestic and international routes, leading the way with three new routes, followed by Puerto Vallarta with two, while Lara Mexican and Montego added one. Lara also experienced accelerated profit growth during the quarter, with an 18% increase. This was related to domestic market growth of 19%, mainly due to the new routes to Montego Bay and Puerto Vallarta, as well as higher load factors from key routes. International traffic benefited from an increase in frequencies in key U.S. markets such as New York and California, particularly with routes to Los Angeles, San Jose, and Oakland. As a result, international traffic grew by 17% during the second quarter. The quarter continues to be one of our main traffic generators, boosted by the gross border express, which has captured 32% of the airport's total traffic. The international terminal continues to be a fundamental part of the airport’s growth, fueled by other factors such as nearshoring effects in major destinations which enhanced their performance. The growth trend at Aeroportuario del Pacifico is very similar, given a strong domestic market driven by increasing load factors and frequency. In terms of international passengers, we opened two new routes to Dallas and Houston, as well as the seasonal jet route to Madrid. We expect to share with you great news regarding passenger development for the whole network in the coming months, where we anticipate more than 14 new domestic routes in July operated by additional airlines. Now, moving on to the aeronautical revenues. This line increased by 14%, driven by passenger traffic across our network. In the case of our Mexican airports, the increase was offset by a rise in the produce price index excluding petroleum, which led to no inflation increase in the maximum tariff approval in our Mexican airports. As such, we were able to achieve 99% compliance with our maximum tariff. Additionally, the consolidation of our Jamaican airports had a negative impact due to the appreciation of the Mexican peso by almost 12% against the U.S. dollar, which affected revenue growth. Just to remind you, the two Jamaican airports represent 15% of the total aeronautical revenues. At this point, let's take a look at non-aeronautical revenues, which showed outstanding performance growing by 18%. This resulted in a 10% increase in non-aeronautical revenue capacity. Most of the increase was attributable to the opening of new spaces at the Guadalajara, Montego Bay, and Los Cabos airports. The increase was also due to the recovery of passenger traffic and the renegotiation of contract conditions with tenants. Despite the nearly 12% appreciation of the peso, which affected 20% of total revenues, non-aeronautical revenues increased above the pace of passenger traffic growth. In terms of business units, food and beverage revenues increased by 27%, primarily in Los Cabos, Puerto Vallarta, and Montego Bay Airports. Consequently, new spaces were incorporated at the Guadalajara and Montego Bay Airports. Additionally, for the upcoming months, we are working on the opening of a new food and beverage area at the Guadalajara Airport, with completion expected in November. Currently, that project is 80% complete. Convenient store revenues increased about 71%. To expand our business line, we opened three convenience stores during the last six months in Los Cabos and reopened one more in Guadalajara. The three stores in Los Cabos represent 20% of the total income from this business line, and it is worth mentioning that one of these stores at the international terminal has higher revenue compared to network stores. This brings the total number of convenience stores in our network to 29. Duty-free revenues increased by 9%, trailing below passenger traffic growth primarily due to the Mexican compensation. All revenues from this business are in dollars and were also affected by the temporary closing of the walkthrough duty-free store in Guadalajara due to ongoing construction projects at the terminal. After-tax revenues increased by 71%. VIP lounge revenues increased by 14%, primarily due to the lounges at our tourist destinations driving this business line. Furthermore, we are currently remodeling the international VIP lounge and reconfiguring some inspection areas in the international terminal in Los Cabos, due to higher than expected demand throughout 2023, with expectations for completion next year. Moving on to EBITDA results, despite the 12% appreciation of the peso and minimal inflation impacts during the quarter, EBITDA reached MXN 4.5 billion for the quarter with an EBITDA margin of 17.4%. This was led by passenger traffic recovery and solid commercial revenues, partially offset by a 15% increase in the cost of services. As previously discussed, despite our best efforts to comply with our cost contract policy, we have had to address inflation, the hiring of additional personnel, changes in labor law, and minimum wage increases. These factors have affected not only salaries but also the costs related to personnel such as janitorial, security, and maintenance. We expect higher costs further down the line due to the expansion of facilities in addition to inflationary effects. Our CapEx continues to be carried out in accordance with the master development program, along with commercial investments. During these first six months, we have deployed MXN 5.6 billion which has been allocated mainly to the Guadalajara and Puerto Vallarta areas. Just to remind you, GAP distributed the second portion of this year’s dividend amounting to MXN 3.71 on July 13th as per the resolution made at our Annual Shareholders Meeting. Before I conclude my presentation, I would like to announce the revised guidance figures for 2023 versus 2022. For capacity, we expect an increase of 10% to 12%. For aeronautical revenue, we foresee an increase between 13% to 15%. For non-aeronautical revenue, we anticipate an increase between 16% to 18%, and our total revenue is projected to increase from 14% to 16%. EBITDA is expected to grow between 12% to 14% with an EBITDA margin of 70% to plus or minus 1%. The overall CapEx for the year is projected at MXN 11.9 billion. Our passenger traffic projections are based on the consolidation of risks developed to date. It also includes increasing load factors and airline capacity based on publicly available information. Total revenues have been adjusted considering expected changes in traffic performance, applicable passenger fares, a decrease in the product price index excluding petroleum, and a Mexican peso appreciation. This also accounts for the opening of new spaces and the negotiation of contract terms in commercial agreements as well as the development of other business lines operated directly by the company. Decreasing the cost of services reflects the operational requirements needed to meet airport service demands. In addition to that, it reflects infrastructure expansion and service quality improvements, alongside higher inflation, minimum wage increases, and additional personnel required for operations, maintenance, security, and cleaning. CapEx reflects committed investments in GAP's Master Development Program and investments in commercial spaces. The process of acquiring land is progressing rapidly; hence, we are adding MXN 1.7 billion to the original guidance, amounting to a total of MXN 3 billion for land acquisition at the Guadalajara airport. That concludes my remarks; I will now ask the operator to open the floor for questions.

And we'll take our first question from Guilherme Mendes with JP Morgan. Your line is open.

Good morning everyone and thank you for taking my question. First question is a follow-up to the comments on the guidance. If you may just provide a little bit more color on what is behind the traffic update. I understand those factors and the additional capacity from the airlines. Just wanting to pick your brains on which regions are performing better; if domestic, if international, or maybe some surprise on Jamaica going forward. And only CapEx; if it's only related to the land acquisition in Guadalajara or something else. Just to make it clear. And the second question is related to the expected upgrades to category one of the Mexico Aviation Agency. So, what is the latest on that and what is the company's expectations in terms of the timing for it? Thank you.

First, I'll go into the traffic performance. We are seeing a really interesting growth in traffic at some airports, some airlines have also opened new routes, particularly in Guanajuato and Tijuana. We're seeing a really interesting moment with boosting domestic traffic, for instance, in the leisure destinations and particularly in Puerto Vallarta. There is also certain routes and regions that will be more affected or more aligned with nearshoring, such as Tijuana. We expect to see more domestic traffic as this trend continues, especially due to improved wages and employment levels in the area, which will increase disposable income among the local population. Therefore, we expect to see an uptick in leisure and domestic traffic, specifically flying from Montego Bay and Puerto Vallarta. Regarding the category one recovery, there remains some uncertainty about how many of these additional frequencies opened recently will be fully operational in the future, as soon as category one is restored for Mexico. Airlines have received new planes and increased their fleet sizes, but they haven't yet been able to utilize those in the U.S. market, so they're currently utilizing that capacity for domestic markets. We anticipate, as soon as category one is recovered for Mexico, some transition from specific domestic markets to the international market as they open new frequencies for the U.S. market. I believe the last visit by Guanajuato authorities reviewed the progress related to observations made by the Mexican authority. We are at the tail end of this prolonged process, and we expect that by the fourth quarter of this year, category one could be recovered; however, we are reliant on public information and the authorities’ communication regarding this process. Regarding CapEx, in addition to the land acquisitions for Guadalajara airport, we are preparing for long-term reserves for maximum capacity growth in the future, including development for a potential third terminal.

I'll take our next question from Rodolfo Ramos with Bradesco BBI.

Good morning. Thank you for taking my question. I have a couple, if I may. The first one is, when you think about the faster recovery traffic that you've seen, how do you think of the main variables that you will be discussing with regulators, and mostly next year as part of your development plan, and also having in mind the investment requirements that you'll need to accommodate that higher passenger growth? And then the second one is, you talked a little bit about the impacts of the Mexican peso appreciation on your commercial revenues. Can you talk us through your thought process on how it can impact your aeronautical revenues? Thank you.

Thank you, Rodolfo. For sure, the increase in passenger volumes will put additional pressure for a possible decrease in the maximum tariff. However, when you bring in such a boost in traffic, you will need additional CapEx to ensure high-quality service at the airport and to meet our concession quality standards. We are anticipating additional CapEx to address the needs of our airport, specifically concerning new passenger growth. Also critical to understand are the changes in the fleet, which not only affect the total amount of traffic but also the peak hours at our terminals. In the past, our terminals were designed for smaller planes, but now we are seeing an increase in larger aircraft, particularly the latest models from VIVA and Volaris, which changes our approach to terminal design and ultimately will necessitate further investments to expand our facilities to accommodate these changes. Overall, regarding the market plan and its impact on commercial revenue, we anticipate needing to address those changes diligently.

Yes. Thank you, Raul. Hi, Rodolfo. The main effect on commercial revenue is the exchange rate appreciation. The appreciation of the peso has impacted our commercial revenues in Mexico by around 12%. With the consolidation of Jamaica and airports, the total effect is over 20% of total revenues. This means our revenues should be growing 12% more than the 20% of the revenue. Therefore, according to macroeconomic trends, we expect stabilization of the exchange rate around 17 to 17.50, which will impact our budget. That is why our guidance indicates our total revenue is not growing at the same pace as the traffic growth. This is a general overview of the effects on commercial revenue, along with the impact of consolidating our operations with Jamaican airports. Talking about aeronautical revenues, the produce price index in Mexico is almost flat. If we compare the last 12 months to June 2022 with last June 2023, inflation has dropped from 9% to 0.9%. This leads to decreased revenue growth overall, as affected by exchange rates and the consolidation of Jamaican airports. On the other side, for Mexican airports, we've achieved 99% fulfillment of our maximum tariff, which benefits our overall performance and offsets decreases due to inflation and changes in the exchange rate.

Thank you, Saul.

We'll take our next question from Anton Mortenkotter with GBM. Your line is open.

Hello guys, congratulations on your results and thank you for taking my question. I have just some follow-ups on the CapEx front. First, how much land was acquired, and is it all related to the Guadalajara airport under the Master Development Plan? Just trying to understand if it has already been discussed with the authorities and whether it will serve as an advanced investment in the MDP commitments or how it will be treated?

We received prior authorization from the authorities for this land acquisition, which aligns with our master plan. We are discussing the acquisition of about 150 hectares for the airport, and we expect to finalize the total acquisition by the end of this year or early next year. It's important to note that this land acquisition also resolves an ongoing legal issue we faced for the past 25 years. Thus, we are not only securing future reserves but also addressing historical legal challenges related to the airport.

If you could provide some breakdown of the CapEx deployed during the quarter mostly on the commercial front.

As touched upon in previous calls, we have an ambitious commercial investment agenda this year. Our primary investment includes the construction of a mixed-use building in Guadalajara featuring 180 hotel rooms, over 5,000 square meters of office space, and commercial retail options. We are also expanding the parking lot in Guadalajara to accommodate more than 2,000 additional spaces, among other expansions for parking lots at our airports. We also plan to introduce more convenience stores and expand VIP lounges. In total, we estimate around MXN 2.3 billion will be allocated for these commercial activities, with our overall master development plan investments reaching MXN 5.6 billion this year. Additionally, investments in Jamaica will amount to around MXN 1 billion, and for land acquisition, we are looking at MXN 3 billion.

We will take our next question from Pablo Monsivais with Barclays. Your line is open.

Hi, thanks for taking my question. I apologize if you answered this already, but just wanted to get an update on the MDP agreement with Jamaica. Is there any update on that? Thank you.

Hey, Pablo. This is Raul. We are nearly at a point of agreement. We have received a notification from the authorities, and we are in the final conversations to formalize the changes in the concession agreement. It is not yet official, so we cannot announce it, but we are at the final stages of this process.

In a few weeks, or perhaps within a month and a half, we will have the official final response from the Jamaican authorities, and we'll make that public.

Yes, correct.

Great. And if I could squeeze in one more question regarding the terminal processing facility. Can we expect our operations to be normalized now, with fixed expenses becoming more diluted with the additional passengers, or do we still have some catch-up process? In other words, are we already normalized or still a few quarters away? Thank you.

Thank you, Pablo. In terms of the quarter and our processing building, we expect operations to resume fully by November, with the new international operations at Tijuana ramping back up, which will be critical. The key point is that the terminal is fully prepared for international flights. We anticipate additional international frequencies from Tijuana in the future; we are seeing positive trends in the economy and employment in the area. So, looking ahead, we have a positive outlook for Tijuana’s growth in both the mid-term and long-term.

Great. Thank you, guys.

We will take our next question from Stephen Trent with Citi. Your line is now open.

Good morning, gentlemen, and thanks for taking the question. Just two quick ones from me. The first question is about your domestic traffic flow. Have you seen any disruption at all in your domestic connectivity with the Mexico City metro area since the authority started pushing some traffic to Felipe Angeles Airport?

This is Raul. Not yet. We see that flights to Felipe Angeles are opening, and it's a gradual ramp-up, but in general, for the complete Mexico metropolitan area comprising Felipe Angeles, Mexico City Airports, and Toluca Airport, we are looking at an increase in total traffic of around 3% to 4%. Overall, I would argue that it is too early to assess the long-term effects after the introduction of Felipe Angeles. Therefore, I see this as a gradual shift among the three airports in the area.

And just one other very quick one, a follow-up to Rodolfo Ramos's question earlier. When you consider the overall movements in the Mexican peso against the dollar, could you provide a high-level sensitivity regarding the impact on EBIT margin for every 1% or 5% movement in the peso against the dollar?

When it comes to revenue, approximately 20% of our overall revenue is impacted by the appreciation of the peso. In terms of expenses, which primarily occur in Mexico, this is further complicated by the fact that wages are generally tied to pesos. While there is some offsetting effect, the reality is that the majority of our expenses for personnel are incurred in pesos. Thus, we are currently experiencing some pressure derived from minimum wage reviews and labor conditions in Mexico. What we can look to identify going forward will depend significantly on the central bank in Mexico, and its parallel rate adjustments may affect how we navigate any depreciative trends in our revenue streams.

We have two effects influencing revenues: one is the produce price index impacting aeronautical revenues in Mexico. This is balanced by fulfilling 99% of the maximum tariff, which is favorable. However, the appreciation of the peso at around 12% affects 20% of our total revenue, as noted by Raul. On the expense side, we have no significant contracts nominated in U.S. dollars, meaning that 99% of our expenses occur in pesos. Consequently, we do not have any compensating effect.

I'll take our next question from Gabriel Himelfarb with Scotiabank. Your line is open.

Just a quick question about cargo. We saw that cargo units decreased year-over-year, so can you give us a bit of color on why it was a decrease? And can you provide us a bit of insight on how much capacity will be added to the Guadalajara airport once the planned investments are completed?

Thank you, Gabriel. The decrease in cargo units is primarily occurring at Guadalajara Airport. It is essential to note that the cargo industry can be divided into two categories: wet and dry cargo. Dry cargo, which mainly includes electronics, is seeing significant increases due to nearshoring and activity in the electronics and rail industry, while wet cargo, primarily fruits, vegetables, flowers, and meats, is decreasing. However, they cannot be mixed in the same aircraft hold. Thus, while the total volume of cargo at Guadalajara is decreasing, the value is increasing as flights are filled mainly with electronics, which yield higher dollar returns. This is likely a temporary situation until the airport has ositive developments. In terms of capacity, the addition of capacity during our master plan focused largely on the curbside, with operations from a second runway to increase our capacity by roughly 65% to 70% per hour. We are also expanding our airport's capacity for general aviation operations and adding new hangar areas. Additionally, we are looking at beginning construction of a second terminal by next year, which will become operational by 2026. Parking expansion will also contribute, as we expect to open 2,000 additional spots in December, greatly improving the passenger experience at the Guadalajara Airport, where we are currently operating at 100% load factors in the parking area.

Okay. And once the capacity is added, how long will it take to reach the full capacity until you have to add more capacity? For how much will that additional capacity be effective?

In theory, that depends on peak hours and the size of planes, so it’s not a straightforward answer. However, with our second runway and terminal fully operational, we will have capacity for around 37 to 40 million passengers per year. As demand grows, we expect to continue increasing our capacity in the coming years, but it’s important to factor in that with increased capacity comes additional operating expenses.

We will take our next question from Alberto Valerio with UBS. Your line is open.

I have two on my side. The first one is if you could provide an update on how are the constructions of the mixed-use space in Guadalajara going, and when can we expect it to be operational? My second question is on the international traffic in leisure destinations. We are seeing Los Cabos and Puerto Vallarta in the last month more to flattish or slightly dropping. So, what is your view and what’s behind that?

First, regarding Guadalajara, we expect the mixed-use building to be operational by January of next year. The parking expansion project will be operational in December, and the major food and beverage expansion at Guadalajara airport is also expected to be operational in November, alongside the new hangar area nearing full operation in November. On Los Cabos and Puerto Vallarta, seeing flattened demand is natural following the significant increase in capacity observed compared to 2019. From May 2023 versus May 2019, we see a 37% increase in seat availability. This increase was primarily driven by strategic shifts among U.S. airlines during the pandemic. Thus, a period of stabilization concerning airline seat offerings during demand fluctuations is to be expected as new hotel openings and developments in these regions materialize over the next years.

We'll take our next question from Alan Macias with Bank of America. Your line is now open.

Just one question on your guidance and traffic guidance. I guess this implies that you're expecting single-digit year-on-year growth in the second half of this year. Can you help me understand the drivers behind this? Is it mainly due to a more challenging comparison, normalization of traffic, or are you expecting a decrease in GDP growth among other factors, such as a stronger peso making Mexico less attractive for U.S. tourism?

The first point is that the second half of the year poses a more challenging comparison against 2022. It’s important to remember that during the second half of 2022, we started seeing positive trends especially in Guadalajara. What we will see in the second half of this year will present tougher comparable performances in general. Furthermore, we anticipate some headwinds in the winter season particularly in Cabos and Puerto Vallarta as Mexico may begin to be more expensive compared to other Caribbean destinations. Another variable is that while we expect fleet increases from Viva and Volaris, these are anticipated more toward the end of the year rather than in summer, leading to mixed influences on our outlook; hence we project around 7% to 8% growth for the second half. That's the primary drivers I see at play here.

Yes. And in terms of GDP growth, we do not expect any acceleration or deceleration; rather, we expect that the first half of the year will maintain its performance level through the second half. As Raul explained, the impacts on traffic growth are not primarily driven by GDP figures but rather by last year's comparisons. While the stronger peso may make Mexico less attractive for U.S. tourists, we also see ongoing international passenger growth not solely attributable to currency but also due to the second home effect where many Americans have second homes across various destinations.

Conclusively, we do not anticipate any adverse effects from the stronger peso.

We'll take our next question from Stephen Trent with Citi. Your line is now open.

The last question was related to possible upside risks regarding traffic at our airports. We are observing that Mexico could recover category one based on public information aligning with the timeline shared by authorities. Additionally, Guadalajara is positioned well to benefit from nearshoring developments, which we view as a medium to long-term growth driver due to strong expansions within the electronics manufacturing industry in the region, supplemented by limited space availability in industrial parks. This trend will allow us to capitalize on ongoing traffic growth in Guadalajara.

There are two questions related to land acquisition in the webcast.

The first one is from Bruno Marine from Goldman. He's asking if this additional CapEx of land acquisition will be included in the MDP?

Yes, it was included as an authorization in advance for the upcoming master plan. We already received the required authorization for the land acquisition, and it will be factored into the calculation of our new master plan for future initiatives.

And the other one is from Roddy Seymour from Brown Advisory. Unless the land parcel acquisition falls into 2024, have there been any changes to the 2024 CapEx plans? Would you still expect a similar CapEx per passenger as previously expected in 2023? Is it likely for the next MDP as well?

Yes, the only significant change to our CapEx plan was the land acquisition, and we still expect similar levels of CapEx per passenger as outlined in previous forecasts.

I believe this is the last question in the webcast, so I will turn back the call to the operator.

And we'll take our final question on the line from Fernando Ricotta with BTG. Your line is open.

Very quick here on my end. Just wanted to hear the latest update regarding the intention to reform the federal laws. We know that Congress is expected to resume activities in September, so just wanted to hear your updated thoughts on this topic, and also if you expect this to bring some impact on your next MDP revision. Thank you.

Hi, Fernanda. We have not received any updates from the authorities concerning the proposed legislative initiatives announced last March. We will continue monitoring the situation closely and will provide updates as needed. For our next MDP revision, we do not foresee any impacts that would alter our approach to the regulatory framework concerning maximum tariff determinations. We have already observed performance metrics that will inform our ongoing evaluations.

We have no further questions on the line at this time. I will turn the program back over to our presenters for any additional or closing remarks.

Thank you, everyone, for joining us for our second results conference. The team remains available to answer any questions you may have. Please enjoy the rest of the day. Thank you very much.

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