Earnings Call Transcript - PAC Q1 2020

Operator, Operator

Good morning, and welcome to GAP's First Quarter 2020 Conference Call. All lines have been placed on mute to prevent any background noise. After the presentation, we will open the floor for questions. And at that time instructions will be given if you would like to ask a question. It is now my pleasure to turn the call over to Maria Barona of i-advize Corporate Communications. Please go ahead.

Maria Barona, Corporate Communications

Thank you, and welcome to Grupo Aeroportuario del Pacífico's first quarter 2020 conference call. Today, from the company, 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 issued yesterday. Please note that unless stated otherwise all comparisons in this call are versus GAP's results for the comparable period of 2019. At this point, I would like to turn the call over to Mr. Revuelta for his opening remarks.

Raul Revuelta, CEO

Thank you, Maria, and thank you to everyone who took the time to join us for today's conference call. I hope you and your family are healthy and safe during these challenging times. Today, I will tell you about addressing the impact of the COVID outbreak on our operations. After that, I will discuss some of the initiatives we are taking to protect both passengers and employees. I will also discuss the measures we have to implement to lessen the financial and operational impact of the pandemic on our business. And then, I will briefly review financial highlights for the first quarter of the year. As you all know, this pandemic is an extraordinary situation and one that is evolving rapidly. As such, we must remain flexible and open to making changes to our operations, taking on new measures, and listening to others. Like any other health crisis in the past, the aviation industries are hit. In the past, we have seen that it could have taken longer than other industries to recover due to the fear of traveling and bringing large groups of people or family together. But at GAP, we are committed to doing our part to not only lessen the spread and protect employees and passengers, but ground operations are moving more closely to ensure that we're following the proper protocols and guidelines for the proper health output. I see this stand now as a company, and as an industry, we have no clear picture of the severity and the length of the pandemic. However, we are trying to mitigate the impact as much as we can. Potential scenarios from aviation consultants and some financial experts seem to indicate that we are unlikely to reinitiate normal traffic operations before the third quarter of 2020. And while there is a lot of data and predictions in the market, those specific factors could delay our traffic recovery. As a result of the effect of COVID, the International Monetary Fund estimated GDP reduction of minus 6.6% for Mexico and minus 5.9% for the US in 2020, which is our main international destination. High unemployment will be one of the most detrimental variables affecting the medium and long-term recovery of this occurrence. According to the Mexican health authorities, the peak of infection will likely occur by early May. The restarting of operations will be delayed more than expected. Mobility restrictions are in place until the end of May in both countries. These impacts may delay our air travel spending for both business and leisure travelers based on two factors, disposable income and travel confidence. And while business travelers are expected to return more rapidly, they are not expected to come back at the same rates as before. Airlines have significantly lower capacity, some even are scrapping older planes; they are also expected to slowly bring back some of their current grounded planes, and in turn slowing down or rejecting delivery of new aircraft they had on orders. Prior to the pandemic, 2020 was shaping out to be one of the strongest years ever. If we look at the first quarter results, you can still see the positive traffic trend that we have been experiencing until the 15 days before the quarter ended, when the pandemic really began to affect GAP. Thus, for the first quarter, we transported 11.7 million passengers throughout our 14 airports; this amount represents a total decrease of minus 1.4% year-over-year. In terms of the performance of individual airports, Guadalajara traffic decreased 3.1% during this quarter. The most affected domestic routes were Monterey and Tijuana, which both showed a decrease of more than 65%. The international route from Guadalajara to Los Angeles, Atlanta, and San Francisco registered the most significant decrease. Tijuana is one of the few airports in our network that demonstrated growth during the first quarter, with a 4.2% increase. CBX continues to be an essential component of our airport growth with 32% market share and 5% growth during the first quarter of 2020. Flights from Tijuana to Guadalajara, to Aguascalientes, and to Mexico City experienced significant declines in terms of passengers and aviation moving during this quarter. In Los Cabos and in Puerto Vallarta, international traffic later declined due to the strong international passenger position with minus 10.3% and minus 13.6% respectively. It is not surprising that the US and Canadian market had the most significant impact on this decline, especially as international travel bans were put in place. On the other hand, the domestic markets grew during the first quarter. In Jamaica, Montego Bay airport reached minus 15.3% passenger traffic as a result of flight cancellations by leading airlines including American Airlines, Delta, WestJet, JetBlue, and more. I want to talk a little about some of the initiatives we have developed in airports to provide for passengers and employee safety, and we have a special mention of the business. Regarding our flight initiative, we have implemented additional protocols to protect the health and well-being of our passengers and employees. Most of our employees are working from home; however, for the essential staff that is still working on location, we have provided protective equipment. We have also put in place specific measures to ensure isolations between shifts. Our second initiative is on cost controls. Approximately 85% of our cost of service is fixed; therefore, we are temporarily closing airport areas that are not essential in order to reduce utilities, maintenance, security, and cleaning services; always offering quality standards to provide excellent service to our passengers. We have also put employees on a hiring freeze and have made significant cuts to non-critical activities and professional services. We expect that these measures will contribute to a decrease in the cost of service to around 40% for the month that our airports are operating at minimum passenger traffic levels. Our third initiative is a preservation of liquidity. We've concluded the first quarter with MXN10.9 billion in cash and equivalents. In April, the company drew down on credit lines for MXN1 billion, which will be used for corporate purposes. GAP also has access to pre-approved credit lines for MXN2.5 billion in the bank if needed. We are currently analyzing the best options to finance the company further if that becomes the case. The bond in cash bound is around MXN500 million, and we are considering capital expenditures. Moving on to the balance sheet; at the end of 2019, short-term debt reached MXN2.2 billion, and this debt was already paid in this quarter. Additionally, in February, we issued debt in Mexico for MXN3 billion. The total debt as of March 31 was MXN18.3 billion, which represents our net debt EBITDA ratio of MXN0.73. Now, as I mentioned in order to preserve liquidity, we suspended all shareholder distributions. We have also paused mandatory capital in business as we have begun discussions with the Mexican and Jamaican authorities in order to request deferrals for business commitments under the master development program for the year 2020 to the six months in 2021. At this time, we are at the beginning of this process, I will be providing updates as they come. It is important to mention that around MXN600 million was already invested during the first quarter of the year, including expansion and maintenance CapEx. It is clear that if the Mexican GDP decreases by 6% or more, GAP will have the option of reopening their MDP and tariff determination, based on maximum size considerations. Jamaica has another provision and GAP may delay the business of MDP whenever it deems necessary. Let's move on to the airlines and how GAP is trying to help our most important clients. In order to give them some relief, GAP raised payments for landing, parking, and overnight aircraft charges to no less for the month of April and May. Additionally, we will run discounts in payments to some of our clients and tenants in order to help them preserve liquidity until they resume operational activity. In order to support our tenants, we have offered them discounts off the minimum rental fee; we believe that partnering with them during times of crisis will strengthen our relationships and build goodwill. We want to assist them so they are better prepared to ramp up operations. I just want to mention that we are confident in the underlying fundamentals of our business, and we believe that once the operating environment returns to more stable levels, we will be in a better position to return to the previous scenario we were operating in. We are confident in our diversified network that will help us recover additional traffic. Now to conclude with a brief recap of the first quarter results. EBITDA grew 13%, reaching MXN2.8 billion, and our EBITDA margin was 68.2%. Total Revenue rose by 17%, mostly driven by strong traffic performance in the first two months of the year and the application of new tariffs approved in December 2019 since January 1, 2020. As a result of the actual performance of commercial activities, customer service increased by 12%, driven mainly by an increase in security and maintenance expenses; mainly due to the addition of square meters in internal greener buildings and higher energy prices in Kingston. That concludes my remarks, and now I ask the operator to please open the floor for questions.

Operator, Operator

Thank you. We will now open the floor for your questions. We will first take questions from the conference call, followed by questions from the webcast. Our first question comes from Mauricio Martinez with GTM. Please go ahead.

Mauricio Martinez, Analyst

Hello, good morning Raul and Saul. Thanks for taking my question. My first question is on the cost front. I just wanted to confirm if the monthly burn rate that you said was MXN500 million; I just want to confirm that number.

Raul Revuelta, CEO

Hi, Mauricio. Thank you for your call and the question. The number is correct; it corresponds to the cost of operation for the 14 airports, including financial costs and taxes.

Mauricio Martinez, Analyst

And this is already considering the cost while the initiatives are in place for cost containment?

Raul Revuelta, CEO

Yes, it is including a new vision of the cost of operation.

Mauricio Martinez, Analyst

Great. And also, regarding the rents and the minimum guaranteed rent; maybe if you can give us more color on the agreements that you have reached with your tenants? And how much do you think is this - the minimum guarantee rents would be over the thean revenues for this quarter?

Saul Villarreal, CFO

Okay. Hi Mauricio, this is Saul. In terms of the commercial revenues, we offer the tenants depending on the different business lines; discounts for April and May that go from a 50% discount to even 75%, it depends on the kind of business lines; and some of them are more affected by the lack of international passengers. So, in terms of how we are seeing the future today, it is really difficult to have a clear view about what's going to happen, and what cannot be the final impact on the upcoming years for the market. Saying that, we've seen that in some cases we should renegotiate some of the commercial contracts because at the end of the day, we will probably have a completely different market, at least for the coming year. Today, we just offered these two months of discounts, but for sure, depending on the performance of traffic for the coming months, the discounts could take longer or we may need to renegotiate some of the contracts.

Mauricio Martinez, Analyst

Perfect. Very clear, thanks.

Operator, Operator

And our next question comes from Alejandro Zamacona with Credit Suisse. Please go ahead. Your line is open.

Alejandro Zamacona, Analyst

Hello, Raul. Congratulations for the growth, and two questions from our side. The first one is on the potential deferral of investments. And, I - what has been the first reaction of the government? I know that they requested only consider a detailed outlook, but we want to confirm that we will not - we are not going to modify the investment plan. And also, if they are saying the possibility to reopen the negotiation; do you see any chance for a reduction of the whole MDP? That's my first question.

Raul Revuelta, CEO

Thank you, Alejandro. In terms of deferrals for investments, the Mexican government has declared an emergency that does not allow us to construct at this time. For the moment, this emergency declaration goes until May 31. So, in practical terms, we will raise more than 80 days on the construction of our investments. Due to the fact that it is a force majeure, we are asking for the delaying of this investment for the coming year. In terms of the possible review of our master plan, as you perfectly know, we have one of the clauses in our concession agreement saying that in the case that the GDP of Mexico decreases for more than 5% in the last 12 months, we have the option for review of the master plan. It means that we should review everything: their forecasting of passengers, their forecasting of OpEx, their forecasting of CapEx; so it will be a completely new review or a new master plan. As we are seeing in the market, it seems likely that in the third quarter or even the fourth quarter of the year, we will be in the assumption of a 5% deceleration of the GDP. So in that case, we will be ready to file our request for the review of the master plan.

Alejandro Zamacona, Analyst

Okay, thank you. My second question is regarding the discounts. There are multiple discounts; I just want to confirm that these discounts do not apply for passenger fee insurance or the tours, right?

Saul Villarreal, CFO

Yes, that's correct. It's only for aeronautical services and long-term parking. As you know, everywhere, not only in Mexico but around the world, there's a lot of older fleets that are stuck in the ground. So we give these special discounts for all long-term parking for the airplanes.

Alejandro Zamacona, Analyst

Okay. On the non-aeronautical side, those 50% to 70% discounts that you just mentioned; so would it be fair to say that the minimum annual guarantees contracts are not really applying in this time for the commercial expenses you're bearing in the terminals that have been built?

Raul Revuelta, CEO

I think that these discounts would apply for April, May, and maybe a part of June. But again, it will be really difficult to say how it would look for the entire year. Just - it's very likely that we will face a completely different market in the coming months. So, I would say that we will keep - we are flexible in our contracts with the idea of giving, in some cases, relief to our tenants. Because at the end of the day, as you know, part of the philosophy of GAP is that we want tenants that are making business, because if those tenants are able to make a profit, GAP will also perform well. Therefore, we believe this is the time to provide some relief and support, and be ready to face the new reality.

Alejandro Zamacona, Analyst

Okay. Thank you very much.

Raul Revuelta, CEO

Thank you.

Operator, Operator

And our next question comes from Pablo with Barclays. Please go ahead.

Unidentified Analyst, Analyst

Hi, Raul, Saul, and team. Thanks for taking my questions. I have two quick questions. I know this is too early to tell, but regarding your terminal processing facility in Tijuana, what are your initial views on that project? Are you delaying this process with US authorities or how are you seeing this? And my second question is just considering 2019, what is the percentage of your non-aeronautical revenue that could be considered fixed? Thanks.

Raul Revuelta, CEO

In terms of the Tijuana project and the process of building; I mean, it is difficult to say how the new market will look like. Taking into account the past, I would say that the DFR market, the royalty market; it’s always the first one that comes back. So, we are seeing at the moment that the money that DFR is to send to Mexico will surely decrease in the coming months. However, we expect some recovery due to the fact that the financial and fiscal support of the US government will help them maintain employment. In that case, we expect DFR to be one of the first areas to recover, and we continue to think that Tijuana airport should leverage the South California market, trying to use its catchment area to attract passengers to Mexico. The second part of our assumption would be that the depreciation of the peso gives us some additional advantage concerning pricing for Tijuana airport. Overall, we believe the performance of Tijuana will be exciting, and it is one of the airports that will have the best and quickest recovery. Thus, we continue believing that the construction process will proceed as planned. We consider it a game-changer and that it will give us the chance to attract new markets that we currently do not have.

Unidentified Analyst, Analyst

Thank you. And my second question on the aeronautical revenue share?

Raul Revuelta, CEO

It is again difficult during a service period; even the aeronautical will also see a significant decrease. But in general terms, I would say that it will maintain itself quite close to what happened in the last 12 months. At the end of the day, it will be quite similar to one year ago in terms of share, whether aeronautical or non-aeronautical.

Unidentified Analyst, Analyst

And the non-aeronautical, the part that is fixed, what percentage is roughly?

Raul Revuelta, CEO

On the last year it was about 27%. I would say that is a rough estimate to understand how the non-aeronautical might perform.

Saul Villarreal, CFO

Just to complement, Raul, if you allow me, Pablo, about the 25%, 27% of our lease is talking about the non-aeronautical running. The percentage peak is around 80%; so it means that with the minimum guarantee that we charge to the tenants, it could guarantee the 80% of the non-aeronautical revenue. However, due to the circumstances and the discounts we will provide, as Raul already explained, we will probably see a decrease in this number. So, it's something that we will have to finalize because obviously, with a different size of the market, the level of the minimum guarantee should be adjusted.

Unidentified Analyst, Analyst

Perfect. Thank you very much. Very clear.

Operator, Operator

And we will take our question from Rogelio Varoho with UBS. Please go ahead.

Unidentified Analyst, Analyst

Hi, gentlemen. Thanks so much for the opportunity. A couple of follow-ups here. The first one is on the investments; we noticed that in the first quarter of 2020, about 10% of the MDP requirements for this year were concluded. So my question is, even if there is no guarantee the government will accept the delay of the investments, does any positive restrictions also imply that it is going to be very difficult to make the investments this year? So, regardless of the government decision, should we expect lower CapEx compared to what was expected to be the mandatory CapEx in the MDP? That's my first question. Thank you.

Saul Villarreal, CFO

Thank you. Yes, you're right. We have almost 10% of the CapEx scheduled for this year. However, we're really - we're in the middle of these talks with both governments, Mexican and Jamaica, and we will try to defer some of the investments. However, the problem is it is difficult to know now how much will be deferred according to this mobility restrictions in both countries, and how this situation will conclude. So, what we can expect is lower CapEx, absolutely. According to the formal communications with the governments, they are very receptive and willing to provide this deferral.

Unidentified Analyst, Analyst

Okay, very clear. Thank you. So my second question is regarding a provision that was made of MXN46 million for doubtful accounts; is this related to a Mexican airline?

Saul Villarreal, CFO

Yes. It is indeed related to a Mexican airline. It's not Interjet; they have been very committed with the payments, and they have no overdue dates with us. We are in the process of negotiating with different airlines regarding permits. But regarding the provision of these reserves, it pertains to another very small airline in Mexico, which is Calasia, which represents 1% of our passenger traffic, less than 1%, along with some other payments from commercial clients.

Unidentified Analyst, Analyst

Okay, very clear. Thanks so much.

Operator, Operator

And we'll go to our next question from Gabriel with Scotiabank. Please go ahead.

Unidentified Analyst, Analyst

Hi, thanks for the call. My question is related to the previous one. We saw in the balance sheet an increase in accounts receivable of about 48.5%; does it relate with carriers, like, for example, Interjet?

Raul Revuelta, CEO

Thank you, Gabriel. Yes, it is indeed related to Interjet and all the US airlines that we have in our portfolio. According to the payment program that we have with the airlines, they stopped payments in the last 15 days of March; therefore, we saw a significant increase in receivables. But all the airlines working within our network from the 14 airports have the same view; they stopped premiums until we know how long or how deep the situation will be. Right now, we are working with them regarding specific arrangements, and now we are sharing some deferrals in payments. Fortunately, the US airlines have firm financing from the US government; thus, they will be able to continue payments. However, for the Mexican airlines, they do not have credit lines or additional financing to support their forthcoming payments.

Unidentified Analyst, Analyst

Okay. Thank you.

Operator, Operator

And our next question comes from Ruben López with Santander. Please go ahead.

Ruben López, Analyst

Hi, Raul, Saul. Good morning, and thanks for the call. My question is from the debt profile; you clearly don't have any more amortization this year but in 2021, you have some amortizations coming up. So, first, I wanted to know if these amortizations are - most of them at the beginning of the year or do you still have 2021 to generate some cash to pay them towards the end of the year? I mean, you clearly have some space for leverage, but I mean, have you had any indication of potential demand for any issuance or do you have any Plan B should the markets not be available? Thanks.

Raul Revuelta, CEO

Thank you for the questions. Regarding the first one, yes, indeed we have some maturities in the beginning of 2021 which is from the debt we have from the acquisition of Montego Bay airport in 2015; it is with Scotiabank and BBVA. We have been in talks with them about the refinancing of these two bank loans. In any case, we are expecting to have enough resources to make the payment in case we don't have to continue with this refinancing risk. However, we don't foresee any problem in that line, but you are right, it is at the beginning of the year. We have another two maturities in July 2021, and we will try to follow the same strategy to refinance those. According to the level of leverage, we are trying to maintain financial health. Given the circumstances, we have a deferral of commitments for 2020, and if we negotiate the MDP in Mexico and Jamaica; the needs for investments will be lower, and we expect lower commitment to business in the coming years. Therefore, the level of leverage will be lower. For now, this is what we have in mind. Obviously, we want to continue with our strategy about financing 100% of CapEx. Additionally, we have in the pipeline, according to that, the issuance of bonds in the debt market in Mexico.

Ruben López, Analyst

Pretty clear. Thank you.

Operator, Operator

Thanks. We will now move on to the webcast question.

Saul Villarreal, CFO

Okay, thank you. We have a question from Marcos Barreto from Citi. The question is: what percentage of your traffic in Mexico comes from Interjet? The answer is: it is around 80%, and it was decreasing during the first quarter of this year. I don't know, Raul, if you want to complement something.

Raul Revuelta, CEO

The only important point to mention is that, yes, in February - the fact number for February before the pandemic was 7% of our market. But why it's important to know this is because the non-competitive routes used to be operated by Interjet. In other words, all the routes today or that used to be operated by Interjet in GAP's network have other airlines competing there. So, there was enough room in terms of many factors to absorb all the possible decrease in seating that could arise from Interjet's absence from the market.

Saul Villarreal, CFO

Okay. Next question is: approximately how many different airlines have flights to our airports in Mexico and Jamaica? I can tell Marcos that the number of airlines we have for commercial planes or flights in Mexico is around 25 airlines, and there are around 12 cargo airlines. In the case of Jamaica, it is around 12 airlines for commercial flights in regular service.

Unidentified Analyst, Analyst

I know this has been a long time but what is the role of Grupo Mexico in the Board of the company?

Raul Revuelta, CEO

Yes. I will say that today, Grupo Mexico has one member here, affecting, I mean, all the rest of the board members of GAP are acting for the interests of the company; so I would say that is really a normal standard position of Grupo Mexico in our day-to-day on the Board of Directors.

Saul Villarreal, CFO

Perfect. Next question: what is the level of monthly operating expenses that we are expecting after the cost control plan is fully implemented? I would say that we have different views. One is to operate at minimum levels, and based on the demand, we will have almost traffic levels again, and we think we will see a different operational scenario in the first quarter of 2021. What will be the operation in the second quarter with these two months of almost no passengers? Currently, during these months of lower passenger traffic, we expect a decrease of around 40% in the cost of operation, and we remain on track for April, May, and June. Obviously, we cannot assure that we will reach this amount, as we are in the middle of negotiations with our current suppliers and service providers, which is complicated to determine. Although we are close in some areas, the cost of energy will decrease, but we have to consider that it's complicated to assure; however, our target is to reach this 40%. After the situation, depending on the operating profits at different levels of growth, we expect the cost of operation on a regular basis to have a 10% to 15% decrease in operating costs; that is a very rough number we are identifying, but we will need to see what the recovery level of traffic looks like in the following months.

Operator, Operator

I would like to turn the program back to Mr. Revuelta for any closing remarks.

Raul Revuelta, CEO

Thank you, everyone for your time and interest in GAP. Please stay safe, have a great weekend, and good morning.

Operator, Operator

This concludes today's conference. You may disconnect your lines at any time, and have a great day.