Earnings Call Transcript - PAC Q2 2025

Operator, Operator

Good day, everyone, and welcome to GAP's conference call. Now it's my pleasure to turn the call over to GAP's Investor Relations team. Please go ahead.

Maria Barona, Investor Relations

Thank you, and welcome to GAP's Second Quarter 2025 Conference Call. Prior to introducing GAP's management team, I would like to take a few moments to read the forward-looking statements as described in the financial disclosing statements. Please be advised that the information shared today may include forward-looking statements. These may not account for future economic circumstances, industry conditions, the company's future performance or financial results. As such, any information discussed is 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. Thank you so much for your attention. I'd like to present our speakers today. Mr. Raul Revuelta, Chief Executive Officer; and Mr. Saul Villarreal, Chief Financial Officer. At this time, I will turn the call over to Mr. Revuelta for his opening remarks. Please begin.

Raul Revuelta Musalem, CEO

Good morning, everyone, and thank you for joining us today. I'm pleased to be able to share with you GAP's key operational and financial highlights for the second quarter of this year. Overall, it was a solid quarter marked by a continued growth in revenue, EBITDA, and net income. This was achieved despite ongoing headwinds due to macroeconomic issues and FX volatility. Let me begin with a discussion of total passenger traffic. We reached 15.8 million, representing a 4.1% increase if we compare it to the same quarter of 2024. It is also important to mention that 8 new routes were added this quarter, 7 domestic and 1 international, which brings us to 21 total new routes so far this year. As we've mentioned, we are still expecting to announce additional routes and frequencies during the second half of 2025. In this regard, we have already announced additional frequencies and new international routes starting in November to Canada, including services from Guadalajara to Montreal, Toronto, and Calgary, from Puerto Vallarta to Toronto, Ottawa, and Kingston, and from Montego Bay to Halifax and Ottawa. Canada continues to be an increasingly relevant market for leisure and VFR, especially during the winter season. These new routes will not only expand our network but also enhance our ability to capture seasonal demand and strengthen our position in key international markets. That said, market conditions changed rapidly, as you know, with uncertainties when looking ahead at the upcoming traffic trends. Thus, we will closely watch any changes as they occur and make adjustments as needed. Mainly our concerns include restricted U.S. migration and enforcement policies under the current administration, which tends to discourage travel among the BFR international passenger base. By our estimates, the segment represents approximately 38% of GAP's international traffic. As a result, what we see is that a portion of these travelers may opt not to travel outside the U.S. in order to avoid any potential complications with their immigration status. We believe this could impact international traffic, specifically on the U.S. to Mexico routes. But overall, we expect to maintain our initial annual guidance despite the challenges announced. Having said that, revenue generation, excluding IFRIC-12, grew by 30.6% year-over-year, reaching MXN 8.2 billion, driven by a 26.4% increase in aeronautical revenues and 41.8% increase on non-aeronautical revenues. Excluding the acquisition of the cargo facility, it represents a solid 14% increase. This strong top-line performance was mainly supported by the implementation of tariffs that took effect in March 2025. The continued Peso depreciation, which averaged around 13.6% versus the second quarter of '24, as well as a 41% increase in total passenger traffic across our 14 airports. On the non-aeronautical side, commercial performance was solid. Revenues from business lines operated directly by GAP increased by 113%, driven by the consolidation of the cargo and bonded warehouse business. Third-party operated businesses also grew by 10.7% with significant contributions from food and beverage, retail, duty-free, ground transportation, and timeshares. EBITDA increased by 31.1%, reaching MXN 5.5 billion, with an EBITDA margin of 67.1% excluding IFRIC-12. As we discussed in previous quarters, the margin reflects the operating cost integration of the new business, such as the bonded warehouse business and the hotel, which, while contributing positively in absolute terms, have lower individual margins. The cost increase during the quarter reflects the impact of higher operational expenses. Additionally, maintenance expenses increased by 57.3% related to airfield improvements, the opening of new operational areas, as well as operations with jet bridges and the Airbus fleet that were previously managed by third parties but must now be operated directly by GAP due to new regulations. Despite the higher pressure on the cost of services, our focus remains on controlling costs while ensuring that service quality across our airports remains top rate. Operating income increased by 30.4% and net income by 17.9%, reflecting GAP's solid underlying fundamentals. Turning to our financial position. As of June 30, we held MXN 9.7 billion in cash and cash equivalents. During the quarter, we paid MXN 2.5 billion in GAP's 21 bond, the first tranche of dividends approved in the last shareholders meeting, and additionally, we secured an MXN 3.4 billion credit facility from Banamex. These funds were used to consolidate short-term debt with Banamex and BBVA into a 5-year loan. We continue to actively manage liabilities and maintain a healthy balance sheet with a net debt-to-EBITDA ratio of 1.8x. Let me now touch briefly on CapEx. During the first half of 2025, GAP executed capital investments of about MXN 12.8 billion in line with our annual plans of MXN 13.3 billion. This quarter, the investments were mainly focused on the international key projects with early-stage construction activities already underway. This includes works on both airside infrastructure and commercial areas. Looking ahead, we remain cautiously optimistic while peso volatility and U.S. macroeconomic conditions may impact discretionary travel. We are confident that our diversified portfolio and resilient domestic markets position us well to finish the year strong. I would like to mention that during our shareholders meeting held last April, a dividend of MXN 16.84 per share was approved for payment throughout 2025. The first tranche was already distributed in May with the remainder scheduled for the second half of the year, reinforcing our commitment to delivering value to shareholders while supporting growth through our disciplined investment. We are focused on continuing to execute our investment plan while prudently navigating traffic and maintaining the operational and financial excellence that we are known for. We are confident that our diversified revenue base and solid financial position will support the creation of long-term value for shareholders moving forward. Before concluding, I wish to mention that as we informed during the previous conference call, we continue to pursue strategic expansion opportunities. As such, the outcome of the Turks and Caicos tender process has not yet been announced, and we are ready for that. We also continue to evaluate our participation in the potential acquisition of CCR Airport assets. Thank you again for your time. Operator, please open the line for questions.

Operator, Operator

Our first question comes from Stephen Trent from Citigroup.

Stephen Trent, Analyst

I appreciate the color on the potential inorganic opportunities with Turks and Caicos and CCR. When you look at the broader environment, is there a lot else out there? I recall Barbados was pushing to do something and that seems to have stopped. Or do you see these opportunities as relatively rare in terms of what else you might be able to buy?

Raul Revuelta Musalem, CEO

Thank you, Stephen. The airport assets we are pursuing are always those that have potential future growth in passengers, but also, let me say, the correct level of possible profitability on the asset. In that way, I would say that there are some different opportunities throughout Latin America and the Caribbean, but not necessarily all of these opportunities will have the right return that we are looking for. I would close by saying that the correct assets would not be abundant as we see in the market; in other words, today, we are analyzing some of the rare assets that could have the right return for GAP.

Stephen Trent, Analyst

Great stuff. That's very helpful, Raul. I appreciate that. Just one quick follow-up question. And apologies if I missed it. I recall that there was some opportunity for you to do something with a hotel at the Guadalajara airport. If you could just refresh my memory on where things stand with that potential?

Raul Revuelta Musalem, CEO

Thank you, Stephen. The hotel in Guadalajara is doing quite well. I mean, we have completed our first year of operation in the first week of April. Let me say that we are achieving really interesting levels of tariffs on one hand averaging around MXN 2,500, and also, we are reaching an occupancy rate of around 80%. So for our first year, I would say that it's a really great start for the operation of our first hotel.

Operator, Operator

Our next question comes from Pablo Monsivais of Barclays.

Pablo Monsivais Mendoza, Analyst

My first one is about the tariffs. As of now, how much of the authorized tariff increase have you already incorporated? And what should we expect in terms of further adjustments going forward?

Saul Villarreal Garcia, CFO

Pablo, this is Saul. As we mentioned in the previous conference calls, we are observing the market trend, and we will implement the increases in different stages. The first one was already implemented last March. We expect to have another adjustment in January '26. We are analyzing the possibility of having another one during 2025, but it's complicated to say now and it's challenging to predict because there’s a decreasing trend in traffic, and we are awaiting to see what the trend is considering the immigration actions from the U.S. government, which could imply a slight decrease in terms of the VFR market to our airport. So we will analyze it, but what is pretty certain is that we will have a second adjustment at the beginning of '26.

Raul Revuelta Musalem, CEO

Yes. I mean, the main idea will be trying to close as close as possible to 90% fulfillment of this year. For sure, in the coming year, we are trying to implement a significant adjustment. Just as a reminder, it's important to mention that the fixed rate and the possible appreciation of the Peso in some way influence the fulfillment of the maximum tariff. So that is another variable to review really closely in the coming months.

Pablo Monsivais Mendoza, Analyst

Of course. And as kind of a follow-up to this, have you noticed that negotiations with airlines have been much more vocal or pushing back harder in terms of tariff increases, or has it been business as usual?

Raul Revuelta Musalem, CEO

I would say that nothing has changed in that regard; there's been nothing notably different in the market. It's not only in Mexico; it's an international trend that, in some way, airlines tend to be more vocal about any changes regarding airport tariffs. What I'm seeing, Pablo, is that it remains the same as in the past; I'm not noticing any changes in how vocal the airlines are about potential changes on tariffs.

Operator, Operator

Our next question comes from Fernanda Recchia from BTG.

Fernanda Recchia, Analyst

Two here from our side as well. The first, I just wanted to dive deeper on the traffic trends. Yesterday, Volaris mentioned stabilization in the softness of demand in the cross-border region by mid-Q2. Just wondering if you have seen the same trend and if we should anticipate an improvement in the second half of this year? And second, I just wanted to dive deeper on the inorganic growth that you mentioned. If you could share with us any timeline for the answers from Turks and Caicos and the CCR process. Also, I wanted to understand if you have an appetite for the whole portfolio of CCR or just the international airport?

Saul Villarreal Garcia, CFO

Thank you, Fernanda, this is Saul. In terms of the traffic trends, yes, we are seeing that after changes in migration policies under the Trump administration, we observed a decrease in the number of passengers on BFR routes. Saying that, I think that it is becoming clearer for our passengers about the possible policies, and they are likely to begin feeling more comfortable to fly in the coming months, especially as they know that the green cards are functioning as always and that they have not seen cancellations of green cards at the border and similar issues. I think we will follow this stabilizing trend. Additionally, it is essential to note that we continue to lack complete information about the grounding fleet of Volaris, mainly due to Pratt & Whitney engines. Therefore, one of the key factors to understand the trend in the coming months and the upcoming year will be when all these planes will resume service. In terms of the inorganic growth, we are currently anticipating results from the Turks and Caicos process, and we expect that we will get the final decision from the government during this year. Regarding the CCR case, we are still analyzing the portfolio, and at the moment, the way the company has presented the opportunity is as a whole, but we are currently examining each asset individually. As soon as we are ready to make a formal position or potential bid, the market will be informed. I would say that we are assessing all the different assets in the CCR portfolio.

Operator, Operator

Our next question comes from Guilherme Mendes of JPMorgan.

Guilherme G. Mendes, Analyst

The first one is a follow-up on the Motiva/CCRs portfolio. Do you think that assuming you buy the whole portfolio, would that require some kind of new equity injection, or would you be comfortable increasing your leverage for a period of time? And if that's the case, could dividends possibly be impacted? The second point relates to what Volaris mentioned yesterday on the conference call about unbundling the airport fees. Our understanding is that there will be no impact on GAP or any of the airport operators, but I just wanted to confirm this understanding.

Raul Revuelta Musalem, CEO

Thank you, Guilherme. In terms of the CCR portfolio, we are still in an analysis phase. However, I would say that we have a really healthy balance sheet, and the numbers we are working with regarding this potential transaction would not include an injection of capital. We believe we have enough space in our balance sheet. If that is the case, under the assumptions we have for this potential acquisition, we are not considering any kind of capital injection for this specific transaction. Regarding the separation of tariffs, it's something that, for instance, airlines have implemented for more than four years, and even Volaris has presented for some time now. It’s simply another flexible way for our passengers to acquire a ticket for flying. Thus, we really don't expect any major differences in traffic trends due to this possible change in how tickets are sold.

Operator, Operator

Next, we have Jens Spiess of Morgan Stanley.

Jens Spiess, Analyst

I have basically two follow-ups on answers you already provided. One is on the question that Pablo asked regarding the maximum tariff. Based on our calculations, we estimate that you could increase tariffs by around 15% to 20%. Does that number seem reasonable to you? If so, we are in the ballpark? The second question is about BFR demand. Obviously, the situation remains quite fluid and uncertain. However, we are seeing quite strong capacity growth in the fourth quarter for you, with almost 10% of seat capacity being allocated according to schedules. That's quite strong. Are you seeing the same trends? Is the key variable load factors for the airlines? What are your thoughts on the fourth quarter and how much capacity is being allocated to your airports?

Raul Revuelta Musalem, CEO

Thank you, Jens. In terms of the maximum tariffs, we need to clearly understand in the coming months how the exchange rate of the dollar and inflation affecting the product price index will impact the final numbers regarding possible tariff adjustments for the coming year. I would say that for some of our airports, we will aim to achieve a double-digit increase in passenger fees. For others, it may just be inflation; this will depend on each airport. In general terms, I would say that’s what we are looking at. Regarding demand, when we see slot applications for the last quarter, we notice a double-digit increase in capacity for the airlines in Mexico airports. We remain optimistic about this situation. However, we must monitor the load factors of the airlines during that period. Ultimately, it will depend on how the Mexican economy performs at the end of the day. Additionally, any changes in U.S. migration policies could impact the BFR market. Overall, I would say that we continue to feel optimistic about the last quarter of this year, especially considering the additional capacity that various airlines are bringing to our airports, which assures us of maintaining a strong domestic market and leisure market, along with developing connections that were not previously established at our airports.

Jens Spiess, Analyst

That’s very clear. Just one more quick follow-up to the first question. As of the second quarter, are you at around 85% of the maximum tariffs that you're allowed to charge? Does that make sense for you?

Raul Revuelta Musalem, CEO

That depends on the mix of the airports, but as a general number, that is correct. Just remember that during the first six months of the year, we did not implement any tariff increase in January and February. So the next adjustments will differ from what we've seen earlier.

Operator, Operator

Next, we have Pablo Ricalde of Itau.

Pablo Ricalde Martinez, Analyst

This question is more for Saul because we have seen an increase in depreciation in the past couple of years. So I don't know how this affects your dividend policy or your need for leverage to fund your CapEx program? That's my first question. The other one is regarding the Madrid route. We have heard rumors that Iberia is planning to open a route from Guadalajara to Madrid. I don't know if you can confirm that.

Raul Revuelta Musalem, CEO

Pablo, that’s correct. The increase in depreciation is due to the capitalization of the assets, but we also need to consider the acquisition of the cargo bonded facility that is included in the first half of this year. That's why there's been a decrease in depreciation and amortization.

Pablo Ricalde Martinez, Analyst

But that should change how you're like to fund your CapEx program? Or should we continue to expect that most of the CapEx program will be funded with debt?

Raul Revuelta Musalem, CEO

We will continue in the same manner. Regarding Madrid-Guadalajara with Iberia, a couple of weeks ago, Iberia announced the initiation of operations for several routes in Latin America, including Monterrey, related to the operation of a new aircraft, the A321 large, which could connect Monterrey and other markets with smaller demand. Additionally, they announced a potential increase in opening a route from Guadalajara to Madrid. However, this has not yet been concluded, nor have negotiations been officially announced by Iberia.

Operator, Operator

Next, we have Jorge Vargas of GBM.

Jorge Vargas Cuadra, Analyst

With growing CapEx, higher concession fees, and the larger debt balance, how are you considering the sustainability of distributions in the medium term? Should we expect a more cautious dividend policy? My second question is, traffic at Montego Bay has continued to soften. Now that you have renegotiated that concession, are there any initiatives in place to reactivate growth and strengthen its connectivity?

Raul Revuelta Musalem, CEO

Jorge, this is Raul. The effect of the concession fee affects our EBITDA directly. Considering our CapEx investments and the base for our tariff increase related to our revenue increase, we believe that our distributions will continue at the same pace. The effect of the concession fee on our EBITDA is significant, but it is offset by the acquisition of the new cargo facility. Therefore, in general terms, I would say that an EBITDA margin will be around 66% to 67%. While we are experiencing some effects, we are optimistic about our future.

Saul Villarreal Garcia, CFO

In the last year, we witnessed a decrease in the number of seats, not only in Montego Bay but across the entire Caribbean, particularly due to American Airlines scaling back operations from major hubs in New York and Miami. After the COVID emergence, the largest U.S. airlines increased leisure offers, resulting in a significant boost in traffic in the Caribbean. We have seen a rebalancing of some of these additional offers into leisure markets over the past year. However, we remain optimistic regarding MBJ in the coming years. Firstly, various announcements regarding additional hotels and rooms in the area will be pivotal. Additionally, the tourist ministry and the Tourist Board of Jamaica are actively working on initiatives to bring back tourists from different markets. We expect that after this decrease in seat numbers observed over the past year, we will witness growth in passenger numbers in the coming months and years.

Operator, Operator

Our next question comes from Abraham Fuentes of Santander.

Abraham Fuentes Salinas, Analyst

Two questions from my side. The first one, could you give us more color about the non-aeronautical revenue per passenger going forward? How much space is there to continue growing, or where can we expect normalization? The second question is regarding the U.S. Department of Transportation claiming that Mexico has engaged in anticompetitive behavior. Do you foresee any opportunity or risk in this regard?

Raul Revuelta Musalem, CEO

In terms of commercial revenue per passenger, for sure, Abraham, we've seen a significant increase due to the acquisition of JWC, the cargo facility. Additionally, we have experienced an important increase in cargo per passenger as we open new infrastructure, such as the expansions at Guadalajara, Tijuana, and Los Cabos. The next significant increase in commercial revenue per passenger will depend on the opening of new additional areas related to our new master plan. For example, in the new master plan, we will have a completely new Terminal 2 for Guadalajara, expected to be operational by the end of '28; at that moment, we anticipate a considerable increase in commercial revenue per passenger at that airport. Similarly, we expect that the new terminal building at Puerto Vallarta airport, which is expected to open in the first quarter of 2027, will also greatly enhance commercial revenues per passenger. Therefore, the new additional space created by these terminal expansions aligned with our master plan is crucial for future revenue improvements. Regarding the U.S. aviation policies, it is challenging to assess the situation given the various movements in the bilateral relations between the U.S. and Mexico. My perspective is that it is not just about aviation policy but involves a broader discussion about the relationship between our two countries. The timing of any additional authorizations for new slots in the U.S. for Mexican carriers will be critical. Currently, we are managing a significant part of the fleets of some Mexican airlines that are grounded due to issues with Pratt & Whitney engines. Therefore, I don't expect any short-term impact from the changes in the aviation policy on U.S. to Mexico routes in the immediate future. However, in the long term, it will depend on how this authorization process evolves, which could affect how easily Mexican carriers can open new routes to the U.S. Overall, I believe there may be greater concerns regarding the broader bilateral relationship than just the specific U.S. aviation policy.

Operator, Operator

Next, we have Alan Macias from Bank of America.

Alan Macias, Analyst

Just two questions or clarifications. I guess the exposure of GAP airports to the U.S. Mexican airlines, is that 38%? Is that the exposure? Also, on your guidance, I guess you are maintaining your guidance, right?

Raul Revuelta Musalem, CEO

Yes, we are seeing a possible impact on around 38% related to the BFR market because the leisure market is primarily operated by U.S. and Canadian carriers. Therefore, the BFR market may be the one most affected. It's also essential to remember that a couple of years ago when the U.S. government downgraded Mexico's aviation authority category, we saw significant growth in Tijuana's traffic, as passengers in the VFR market used the CBX bridge. The Tijuana airport could then connect to the Southern California area without needing additional services authorized for a Mexican carrier. That was an important factor in Tijuana airport surpassing Monterrey airport in traffic for a couple of years. So in some way, our portfolio might help us mitigate any potential slowdown of additional routes or services from Mexican carriers in the U.S.

Operator, Operator

We have no further questions at this time. Raul and Saul, back over to you for any additional or closing comments.

Raul Revuelta Musalem, CEO

Thank you once again for joining us today for our second quarter results conference. Please contact our Investor Relations team with any additional questions you may have. Have a great day, and thank you for your attention.

Operator, Operator

That concludes our meeting today. You may now disconnect.