Good morning, and welcome to GAP's Second Quarter 2024 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 conference over to GAP's Investor Relations team. Please go ahead.

Thank you, and welcome to the Grupo Aeroportuario del Pacífico second quarter 2024 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 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. At this point, I'd like to turn the call over to Mr. Revuelta for his opening remarks. Please begin, sir.

Thank you, Maria, and thank you to our audience for joining us today. As always, we appreciate your continued support and interest in GAP. I will briefly review operational and financial figures before taking your questions. During this quarter, the total number of passengers reached 15.3 million, which was a 3.9% decrease compared to 2023. The continued passenger traffic deceleration was due to the preventive inspection carried out on the A320neo and A321neo airplane engines. This is a process that began in September of last year and is expected to continue for the remainder of this year into 2025. Despite this setback, we have continued to expand the strength of our network. During the second quarter, we added three international and two domestic routes, bringing the total number of routes added to our network to 13 just during the first half of this year. We anticipate adding around 11 international routes during the second half of the year, including the recently resumed Tijuana to Beijing route, which will start on July 12. These efforts are aligned with our air development and strategy. As you are probably aware, last Friday morning on July 19, air travel all over the world experienced disruption related to a Microsoft outage for a customer of the 365 app, which includes many major airlines. While GAP's systems are perhaps not directly impacted, as a result of the airline system outages, we faced 274 delays and 23 cancellations in our Mexican network. Moving on to the financial performance. We experienced a significant revenue decrease for aeronautical and non-aeronautical services of MXN213 million, or 3.3% lower compared to last year. Lower aeronautical revenues were attributed to the decline in passenger traffic and reaches only 95% of the maximum tariffs. However, there was an almost 11% increase in commercial revenues, driven mainly by the food and beverage, car rentals and VIP lounges. A little further detail of these commercial revenues I just mentioned, in terms of the car rental increase, these were mainly driven by the new bidding process carried out in Guadalajara and Los Cabos. Food and beverage stood out at the Guadalajara airports, mainly due to the opening of the new tariff and layout renovation that resulted in a better brand mix. Furthermore, the priority pass fee for the use of the VIP lounges increased, leading to a rise in the business line, specifically in the Guadalajara and Los Cabos airports, which experienced the best performance related to our VIP lounge revenues. On July 9, we opened a second VIP lounge at the Vallarta airport. This will help us more adequately meet the high demand at this airport. Additionally, the hotel at the Vallarta airport during this quarter generated MXN18.6 million with an occupancy rate of 51% as of June. We expect to close this year with approximately 62% occupancy. New commercial opportunities and partnerships to drive further commercial revenue growth are always top of mind for us, and we will continue exploring options. Regarding the acquisition of the cargo company GWTC, we expect to begin to consolidate the results starting in the third quarter of 2024. In 2023, GWTC generated revenue above MXN1 billion with an EBITDA margin of around 40% and no financial debt. On the other hand, the purchase price allocation will be done in the second half of the year. As for the cost of service, it increased by MXN179 million or 17.3%, mainly due to the higher operational expenses such as employee costs, security, insurance, and maintenance. While these rising costs do present challenges, they also indicate our continued dedication to upholding high service standards and operational excellence. Despite enforcing strict cost controls, we anticipate higher expenses related to expansion and inflationary effects to continue. EBITDA decreased MXN378.7 million or 8.3% as a result of the higher costs and slightly lower revenues. Looking ahead, we remain committed to driving growth and delivering value to our stakeholders. Our focus will continue to be on enhancing operational efficiency while at the same time optimizing our services to meet the evolving needs of our customers. Moving on to the balance sheet, cash and cash equivalents decreased by 15.7%, reaching MXN12.6 billion. On the debt front, this figure reached MXN41.8 billion. We continue to maintain healthy leverage levels, reaching a net debt-to-EBITDA ratio of 1.7 times for the trailing 12 months, thereby complying with all our debt covenants. CapEx continued to follow the committed Master Development Programs, reaching approximately MXN3.1 billion in the first half of the year. This positions us well to comply with the current and challenging MDP goals we have in place. I want to mention that yesterday we opened the second runway at the Guadalajara Airport, which was one of the key projects for this contingent. This second runway will provide us with the capacity to have between 50% to 70% additional operations in the long term and give us more flexibility to continue developing risk and connectivity throughout the region. This is another important step in meeting the growing needs of this airport, as I mentioned before. Regarding distributions, GAP has paid the first portion of the capital reduction for a total of MXN3.5 billion per the resolution made at our extraordinary shareholders' meeting. The second portion will be paid later this year. Now just an update on the Turks and Caicos airport bidding process. As you know, we are committed to exploring new markets and revenue streams in an effort to further diversify our network. Therefore, as we announced before, we were prequalified to bid for the Turks and Caicos airports, which focus on international leisure traffic that handled 1.4 million passengers in 2023. Most of the revenues come from the aeronautical side, but there is room for improvements in terms of non-aeronautical activity. At this point in the bidding process, we are analyzing capital investment needs. The criteria for the evaluation of the airports will be 70% for the technical proposal, an investment plan, and 30% for financial evaluation based on proposed revenue share. The tender submission deadline is October 23, 2024, and the process is expected to conclude in December of this year. Before I finish, I want to provide revised guidance for 2024. Passenger traffic and aeronautical revenue remain as was originally stated at the beginning of the year, whereas non-aeronautical revenues are updated with the performance of the commercial activities and the consolidation of GWTC. On the other hand, the EBITDA and EBITDA margin considering the aforementioned issues and the capitalization of the percentage of the concession fee to be paid over Mexican airports due to the recent change in law. With that, I conclude my comments and ask the operator to open the call for your questions.

I will take our first question from Guilherme Mendes with JPMorgan. Please go ahead. Your line is open.

Good morning, Raul, Saul. Thanks for taking my question. First question is on the MDP negotiation. What is the latest there post-elections, if there are any changes on when you expect it to be announced? Is it more towards the end of the year or could it potentially be announced in the near term? And if the assumptions that you guys mentioned on the previous calls and on the Investor Day are still valid in terms of tariffs and CapEx? And just one follow-up on the commercial side. The upward revision on the guidance, is it only related to GWTC, or is there something else that has been surprising to the upside? Thank you.

Guilherme, this is Raul. In terms of the MDP negotiation, we are, I would say, in the same timeline that we expect. We are trying to close the new MDP with this administration. In that way, we expect to have the authorization of the MDP in September of this year. For the moment, we are not seeing any kind of change on that, and we are aligned with the government to try to get the authorization in this administration.

Guilherme, this is Saul. Regarding your questions about the new guidance, yes, it is only GWTC. As we mentioned last year, we have MXN1 billion of revenues with a 40% EBITDA margin, and we are expecting to improve a little the EBITDA margin for this year. But in the end, it is already included in the guidance. Also, as we mentioned, the commercial performance, and also the capitalization of the 4% of the concession fee for the Mexican airports, that was noted in the guidance release in January this year. So those are the only three issues that were included in this new guidance.

Very clear. Thank you both. Just one follow-up on the MDP. If the assumptions that you guys mentioned about the zero to mid-single-digit increase on tariffs and around MXN110 CapEx per passenger, if that is the base case? Or is there something different?

Guilherme, we are in the process of that. As you may know, we released our proposal to the authorities in June. We are now reviewing with them additional investments. We are refining different assumptions. That is the challenging part of the process. Right now, we are at that. We cannot provide more information. But probably it will be a little bit higher, the CapEx, because we have additional requests from the authority that we have to analyze and define. So for now, we cannot release more detail, but it is close to what we have released and announced in that update.

Very clear. Thank you both.

Our next question comes from Rodolfo Ramos with Bradesco BBI. Please go ahead.

Thank you, everybody. Thanks for taking my question. A couple from my side. The first one is, it doesn't seem that the airport is a big priority for the upcoming administration, but I wanted to get your thoughts on the new team that was announced for the Ministry of Transportation. If you have any thoughts there or if you have approached members of the new elected President's team? And secondly, I wanted to get your thoughts on the Mexico City bottlenecks and how they impact your business. How can you benefit from those to strengthen Guadalajara? How much traffic can encompass from the geographical area of influence from Mexico City, potentially bypassing the bottleneck caused by the slot restrictions? Thanks.

Thank you, Rodolfo, this is Raul. I would say that at first glance, what we are seeing with the new government or the new minister has been announced is someone from the construction sector. I would say is clearly someone with a well-recognized career in terms of the development of infrastructure in Mexico City. For the moment, we are focused on maintaining relationships with today’s administration because we are currently negotiating the MDP. As soon as we have the results from that negotiation, we will begin having closer meetings with the new administration. But in general terms, I can tell you that today, we are really focused on the MDP. On the other hand, regarding how important airports will be for the new administration, I would say that at the moment, the only infrastructure plans that we have already heard are more focused on trains and passenger trains rather than anything related to airports. So, I'm not entirely clear on the complete plan for the development of infrastructure around the country, specifically about the airports. However, in general terms, at least what we are hearing appears to be more related to passenger trains rather than airports. In terms of what is happening in Mexico City and the potential bottleneck, first of all, it is difficult to analyze the short-term impact because there is currently a lack of enough seats due to issues with the engines. So, it's not clear what the future impact could be. However, in general terms, what we have experienced in the last few years is an increase in the strength of Guadalajara airport as a hub. In the last two years, we opened direct routes to Canada, Spain, and Colombia for the first time. So, in general terms, we see Guadalajara continuing to strengthen its capabilities to be a more important hub. The outlook for the coming years will depend, for sure, on the economies in central Mexico and specifically in Jalisco, Guanajuato, and Aguascalientes. Overall, the performance of the area, combined with the fleet allocation decisions by specific airlines such as Volaris in Guadalajara, will continue to strengthen the hub capabilities of the Guadalajara airport.

Okay. Thank you, Raul.

Thank you.

Our next question comes from Jens Spiess with Morgan Stanley. Please go ahead.

Yes, hello. Congratulations, and thank you for taking the time for the questions. I just, very briefly, on the EBITDA guidance you already alluded to, I mean, it's quite impressive that the step change that would represent versus the first half growth, which I think is closer to minus 5% and your guidance is implying that in the second half of the year, EBITDA would grow at around 5%, if I'm not mistaken. The new acquisition, I think will account for around 3% of consolidated EBITDA. So how do we get from the minus 5% current run rate to the plus 5% in the second half of the year?

Sorry, Jens, sorry to interrupt. The sound is not very good. It is cutting off. So I don't know if you can write down the questions in the webcast, please. Because it sounds not very good...

Okay. Perfect. Is it better? Okay, I'll turn it back on.

Our next question comes from Fernanda Recchia with BTG. Please go ahead.

Hello, can you hear me?

Yes, perfect.

Perfect. Two from our side. The first, thinking on the commercial revenue as well, it’s been impressive, the top-line growth that you're targeting for this year. Regarding next year, could you comment if you think this growth is sustainable? How should we think about the commercial revenues per passenger going forward? And second, on capital allocation, could you give us some color if we should expect other airports to be under analysis? You already mentioned the one that you were selected as a preferred bidder, but thinking on other airports? And also, if we could expect other deals like the GWTC that you just announced? Thank you.

Thank you, Fernanda. This is Raul. In terms of the commercial revenue, we think that the growth trend will be sustainable in the long term. In the coming year, we will see the opening of some additional areas, particularly in terms of the results of some areas that have just opened this year. So, in general terms, we believe that the double-digit growth trend on commercial revenues will continue in the coming years, closely related to traffic performance. One of the key factors to really understand the long-term growth of commercial revenue is related to the recovery of the fleet that is currently grounded due to engine problems. As soon as we begin to see the fleet returning, we think the results on commercial revenues could improve even more. In terms of other opportunities, as we have mentioned, we are deeply diving into the Turks and Caicos opportunity. But we are always reviewing any kind of airport investment opportunities in the region. At the moment, the only airport in our pipeline is the Turks and Caicos opportunity. Regarding acquisitions similar to GWTC, I would say that our new business officer is continuously looking for different possibilities aligned with the kind of profit that GAP needs for value accretion. But this is an ongoing process in our business.

Thank you. Our next question comes from Jay Singh with Citi. Please go ahead.

Thank you for taking my question. It's Jay dialing in for Stephen Trent. I guess you already answered my question on the Turks and Caicos situation, but I also want to ask, do you have a strong preference for the dual-tool regulatory structure? Or would you also consider a single-tool or inflation-based model? Thank you.

Thank you, Jay. In general terms, the service model for Turks and Caicos in terms of regulatory model includes an inflationary review for the next 30 years. You have some commitments on CapEx that occur at the initial stage of your original proposal. In the future, there's no review of marker plans or tariffs. All the tariffs will only be reviewed in terms of inflation for that specific model.

Yes. And I would add only that the upside or potential upside in this airport is in the commercial revenue and also in the cost of operation that will have some efficiencies.

Yes. I just want to add to what Saul was saying that we are really comfortable with our knowledge in the Caribbean market due to our experience with tour operators in Jamaica. We think we could be very competitive in this bidding process, given all the operational experience we already have in the region.

Our next question comes from Gabriel Himelfarb with Scotiabank. Please go ahead.

Hi, thanks for the call. Just a quick follow-up question. Can you give us a bit of color about how Pratt & Whitney's engines have been affecting the network and the traffic? I mean, Volaris has shown a decrease in traffic. And also, what are your expectations on the new acquisitions regarding GWTC? What's the expected revenue payout you're expecting to receive? Thank you.

Thank you, Gabriel. As you know, the impact of the engine problems began in September of last year. We think that in 2024, the worst impact will occur in the third quarter when we will face the full effect of all the fleet grounded due to the engine issues. After that, in the fourth quarter, we expect to have easier year-over-year comparisons. Additionally, there are specific additional claims coming in primarily from Volaris and Viva Aerobus that will help add capacity. We believe that gradually throughout 2025, we will see a recovery, primarily regarding the fleets of Volaris and Viva Aerobus. We think that at least for all of 2025, we will continue to be affected, and we expect a full return to capacity by mid-2026. Again, it depends on the timeline and delivery of the repaired engines from Pratt & Whitney. However, we expect that in the first half of 2026, we will recover full capacity at our airports. Regarding GWTC?

In terms of GWTC? Yes. Hi, Gabriel. This is Saul. Regarding GWTC, we expect revenues to be above 2023 by around 10%. Obviously, we are now taking control of this new asset, and reviewing the potential growth of this business. For now, our estimate is around 10% above 2023 in terms of revenues.

Okay, thank you.

Our next question comes from Andressa Varotto with UBS. Please go ahead.

Hi, good morning. So Raul, thank you for taking my question. I have two quick ones here on our side. First one, on traffic as well. Right now, we see that capacity is being restricted by the impact of P&W engineering inspections, but we are also increasingly seeing worldwide concerns about weaker demand. Do you have any insights on that? I know it’s probably harder to tell right now which could be the impact of demand considering the capacity constraints. And my second question is regarding costs, since you're seeing strong cost expansion in the quarter. So what can we expect in the coming quarters regarding costs?

In terms of traffic, Andressa, as you perfectly stated, the capacity constraint due to Pratt & Whitney is clearly in the market. However, we have limited transparency regarding the specific timeline for the recovery, which is a moving target. Additionally, both airlines announced that deliveries in the coming years will not be lower than the original expectations, which may place further pressure on the capacity of major airlines like Volaris and Viva Aerobus. Generally, we expect to continue seeing some constraints on capacity next year, but there may still be opportunities for growth in specific routes due to load factors. We are already seeing different airlines starting new routes on our network, such as American Airlines, which for the first time is operating at Tijuana airport, and Alaska Airlines has announced a new route from La Paz to Los Angeles. We also expect further announcements from Aeromexico regarding different international routes from our airports, suggesting that the international market is likely to see some increases in capacity in the coming years. The domestic market will likely face more pressure regarding capacity constraints for at least the coming year. In general terms, I perceive some room for growth coming from new routes and load factors, particularly as we compare against easier year-over-year comparisons. However, the overall market remains uncertain.

Yes, Andressa, this is Saul. Regarding your questions about costs, as we have explained already, we are facing additional pressures not just from labor laws in Mexico but also in Jamaica. We are experiencing pressures on costs due to inflation. Additionally, as we expand and open more areas in Guadalajara Airport, costs will naturally increase. The operation of the second runway also implies higher operating costs. Keep in mind that the EBITDA margin in the hotel is around 35%, which is different from our typical margins. This results in margin dilution alongside maintenance costs and rising electricity tariffs in Mexico and Jamaica. Therefore, we have pressure on all fronts regarding operations. We expect to normalize costs as we move through the year, finalize the tariff negotiations, and when the revenue from our airport expansions begins to materialize. This quarter represents an extraordinary scenario, which we do not expect to be the regular quarter moving forward. The results should normalize by next year.

Perfect. Thank you very much.

Your next question comes from Andreas Carrera with GBM. Please go ahead.

Can you clarify how GWTC will be consolidated in the financial statements? And will it be on the left side of the American economy or on an American plane?

Andreas, this is Alejandra. I apologize, but your line is not really clear. Could you try to repeat it, so we can understand better?

Yes.

Or write the question in the webcast?

Thanks. Can you hear me now?

It's better.

We'll move next with Pablo Monsivais with Barclays. Please go ahead.

Hi. Thanks for taking my question. Just a follow-up to previous questions. What is your take on Volaris updated guidance on capacity? Have you talked to them, and if so, have they provided you with some insights on what could be the impact for the routes that Volaris is operating with you? Because it seems that they are more optimistic for capacity in the second half of the year? Thank you.

Thank you, Pablo. This is Raul. Yes, we are in daily communication with Volaris about their operations. For sure, in the long term, the coming year will show that capacity has not fully recovered, but we do see some interesting adjustments by Volaris in their routes. They are adapting and improving the utilization of their fleet, which includes more flight hours. Their operating metrics are expected to improve in the last quarter of the year due to these adjustments. In general terms, what I can say is that Volaris has made strategic moves to prioritize the densest and highest-demand routes. This gives us a more positive outlook for the last quarter of the year concerning traffic. However, until the P&W engine issue is completely resolved, we will continue experiencing a lack of capacity, leading to overall decreased capacity in our airports for the coming year. But we are feeling more optimistic about the second half of the year regarding Volaris specifically.

Perfect. Thank you.

Our next question comes from Alan Macias with Bank of America. Please go ahead.

Hi. Good morning and thank you for the call. Can you provide a long-term sustainable EBITDA margin target that you might be looking at? Thank you.

Alan, this is Saul. This year will be complicated. As you know, we are facing several challenges, including discounts in passenger charges, various cost issues, and a decrease in passenger traffic. However, for 2025, once we have new tariff structures in place, we anticipate being close to a normalized EBITDA margin of around 68%, less 1%. That will be our target.

And now I will turn the call over to management to take the webcast questions.

Thank you, Nikki. The first question we have is from Bernardo Martica from Santander. He's asking if aeronautical revenues fell 7.7% while traffic fell 4.1%. Why was the fall in aeronautical revenues worse than traffic? Is it a mix, discounts?

The first part is related for sure with a mix of factors. The first one is the fulfillment of the maximum tariff, which is related to discounts primarily. In general terms, we achieved a fulfillment of 95% of the maximum tariff, which explains the difference between the growth of aeronautical revenues and passenger traffic. Furthermore, both Puerto Vallarta and Los Cabos Airports have the highest maximum tariff in our network, and both of these airports have seen no increase. So in general terms, it's a mix between the composition of the maximum tariff in our portfolio and the 95% fulfillment of that maximum tariff.

Thank you, Raul. Then we have another question from David Cruise from Grupo Bal. Regarding the purchase of Guadalajara WTC, how do you expect that this will change the estimate of results for 2024?

David, this is Saul. Well, it is already included the expected revenue and EBITDA for this new asset. As we mentioned, it will be consolidated and integrated into our figures starting on July 1. So it is already included in the guidance. We expect total revenues to be around 10% above the revenues in 2023.

Thank you, Saul. The third question is from Alina Sur from Capitola. Will GAP pay concession fees and technical assistance fees over GWTC revenues?

Thank you. GAP will not pay additional concession or technical assistance fees over GWTC revenues. However, it is essential to keep in mind that GWTC is a concession; therefore, they already pay a concession fee to the authority. GAP will not pay additional concession fees, but GWTC will incur its existing concession fees.

Thank you, Raul. Now we have a question from Gens Pace from Morgan Stanley. My question was related to your new EBITDA growth guidance, which implies a roughly 5% year-over-year growth in the second half of 2024 versus minus 5% in the first half of 2024. The new acquisition adds around 2% of EBITDA growth, right? What other variables do you see improving in the second half versus the first half that we need to consider?

Hi Gens, this is Saul. We don't have any major changes. The consolidation of GWTC is essential since it will be integrated into our figures. This was not included during the first half in the results of the company. We don't have any other issues besides the effect of the capitalization of the 4%, which was already included in the first half. I would say that probably the effect on the increase in the commercial revenues was included in the new revised guidance.

Thank you, Saul. Then we have Alina Sur from Capitola. The midpoint of your guidance implies a growth of 5% year-over-year on EBITDA in the second half of the year. How exactly will this shift occur, given the decreasing tariff impacts year-over-year?

Hi Alina, this is Saul. Basically, this is due to the consolidation of the new cargo company, GWTC, which will represent around MXN300 million of EBITDA that will be integrated into the company’s figures. That's the primary reason. The commercial performance also contributes to this, but it's primarily the main reason for this increase.

Thank you, Saul. The last question is from Mauricio Buitrago from AM Advisors. When do you expect to see the full benefit in revenues from the expansion in Guadalajara?

Thank you, Mauricio. We have already opened some of the new commercial areas at Guadalajara airport. To put it this way, by August 2024, we anticipate that 100% of the new commercial spaces will be operational. Hence, from that point, we will have a full year of operation for all the new concepts starting in August 2025.

Perfect. Thank you, Raul. With this, we conclude the webcast questions. I will turn the call over to Nikki.

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

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