Earnings Call Transcript - PAC Q3 2023

Operator, Operator

Good morning, and welcome to GAP's Conference Call. All lines have been placed on mute to prevent any background noise. After the presentation, we will open the floor for questions. It is now my pleasure to turn the conference over to GAP's Investor Relations team. Please go ahead.

Maria Barona, Investor Relations

Thank you, and welcome to Grupo Aeroportuario del Pacifico's Third Quarter 2023 Conference Call. Presenting for 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, company 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 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.

Raul Revuelta, CEO

Thank you, Maria, and thank you to everyone who took the time to join us today. Let's begin by addressing the recent events. We know that the last week has been tough on the market, given the decision made by the Mexican government. Today, I would like to clarify these changes during this presentation and answer all the questions regarding this news. First, I will start with the financial results and then I will go deeper into the regulation. Then recap GAP's operational and financial performance for the third quarter of 2022, and then the recent events prior to taking questions. For the period, GAP exported 16.2 million passengers throughout the 14 airports, representing a 10.8% increase. Together with the solid results we experienced during the first half of this year, these results keep us on track to reach our annual growth guidance. Aeronautical revenues increased by 8.2%. In GAP's Mexican airport, there was no increase in the produce price index excluding petroleum, which led to zero inflation, increasing the maximum tariff approved. In addition, the nearly 16% appreciation of the Mexican peso over the U.S. dollar negatively impacted the consolidation of the two Jamaican airports during the third quarter '23, therefore affecting our overall increase in revenue. As a result, there was a decline in the consolidated aeronautical revenue per passenger. Non-aeronautical revenue grew by 14%. Most of the increase was attributed to the opening of the new spaces in the airport of Guadalajara, Montego Bay, and Los Cabos. Passengers traffic growth and the renegotiation of tenant contracts also contributed to this increase. It is remarkable that despite the nearly 16% peso appreciation during the quarter, which affected 39% of commercial revenue, non-aeronautical revenue per passenger increased by 3%. On that note, I want to mention that just this past week at the Guadalajara airport we opened a terrace, an upscale rooftop space featuring well-known restaurants and bars. Also at this airport, the mixed-use building is nearly complete and is expected to be fully operational during the first quarter of 2024. EBITDA reaches Ps. 4.3 billion for the quarter, rising 4.5% with an EBITDA margin of 67.5%. This increase was not aligned with the passenger traffic growth because of the almost nonexistent inflation in the maximum tariff and the appreciation of the peso, which impacted total revenues growth figures. In addition, cost increases were related to concession taxes, mainly in Jamaica, where we saw a recovery in passenger traffic, specifically in Montego Bay. If you recall, the concession fee in Montego Bay is variable based on the excess earnings about the project scenario that was established at the beginning of the concession. We have been below this project scenario with the pandemic, hence we haven't reflected additional concession fees in the past years. However, we are now seeing a recovery in Montego Bay and thus higher concession fees. Furthermore, inflation has caused higher costs of services and has affected the hiring of additional personnel and changes in labor law. Additionally, the minimum wage increase has affected not only the figures for salaries but also personal contracts such as janitorial, security, and maintenance. Moving now to the CapEx, this continues to be carried out in accordance with the master development program, along with commercial investment. During the quarter, we deployed Ps. 2 billion, which were mainly allocated to the Guadalajara and Puerto Vallarta airports. We have also continued with the acquisition process for the land reserved in the Guadalajara airport. In recent events, this past September, Pratt & Whitney, a world leader in aircraft engines, announced preventive accelerated inspections of the Airbus 320 and Airbus 321neo engines. It is expected around 700 engines worldwide will undergo inspections from 2023 to 2026. These inspections are mandated by the FAA after a specific number of cycles depending on the engine time. Currently, the FAA has only issued the first service instruction for the initial batch of engines. It is estimated that this will take from 250 to 300 days for P&W to remove and expect the engines to be returned to operations. While it represents 32% of our total passenger traffic, it was announced in the conference call that from the current 126 aircraft fleet, they have 22 Airbus 321neo and 55 A320neo that may be temporarily affected. The visibility is limited, but GAP estimates that most of the impacts will be felt in 2024 and 2025. Visitation is still evolving. We will keep you updated once more information is available. On the other hand, on October 19, the Mexican House of Representatives presented a bill regarding the Mexican federal duties laws changing the concession fee from 5% to 9%. This bill was passed by the Mexican Senate yesterday, going into effect on January 1, 2024. The amount paid in excess over the 5% of the aeronautical revenue during 2024 will be included in the reference value for 2025. For the 2025-2029 MDP period, the new concession tax over aeronautical revenues will be included in our operational costs and will be recovered through the joint maximum tariff. On October 4, we received a notification from the Civil Aviation Agency modifying the rules of tariff regulations that have been in place since 1999. After two weeks of analysis, on October 19, the authority announced the amended rules, clarifying the methodology for determining the joint maximum tariff and defining the scope regarding supervision of compliance by the authorities. The full text of the new rules was disclosed in our press release on that same day and can be found on our website under Press Releases. I just want to briefly review some of the main changes in the rules for tariff regulation. First of all, changes in the discount rate going from cost of capital to weighted average cost of capital. We believe that this reflects the company's capital balance sheet position, as well as the leverage strategy followed in recent years. Secondly, a clawback over 3% excess in workload units for the 12 airports project. The trigger for the calculation will be when the aggregate workload units of the period exceed 3% of the real workload units projection established in the MDP. In that case, we will have to calculate the excess revenue generated offset by the concession fee paid for those revenues. The result will be subtracted from the reference value of the next tariff. It is important to mention that this will be reviewed for the workload units of the 2025 to 2029 period and will be applicable in the 2030 reference balance. Third, the change in the terminal value. In the formal rules, we projected the net cash flow from the year '16 to the end of the concession period. Now, the terminal value will begin in year six until the end of the concession period. It is important to note that GAP's joined maximum tariffs for 2023 and 2024, as well as the MDP, will remain the same. Before we move to Q&A, I would like to confirm our guidance figure for 2023 published in the second quarter of 2023. I just want to underscore our confidence in the underlying fundamentals of our business and our commitment to our shareholders. Thank you for your attention. I will ask the operator to open the floor for your questions.

Operator, Operator

Thank you. At this time, we will open the floor for your questions. We'll take our first question from Guilherme Mendes with JPMorgan. Please go ahead. Your line is open.

Guilherme Mendes, Analyst

Good morning, Raul, Saul. Thanks for taking my questions. I have two questions. The first one is related to the GTF engine situation. I know there's still a lot of moving parts and uncertainty, but what is your best estimate for the potential impacts on traffic in 2024 and 2025? And the second question is regarding the MDP changes, so the changes on the regulatory front. If you see any room for any kind of legal measures against the changes. And just a clarification in terms of the MDP negotiation, if the base case is due to have it completed before the Presidential election or more towards the end of next year? Thank you.

Raul Revuelta, CEO

Thank you, Guilherme. This is Raul. Regarding the engines, it's currently difficult to provide a specific figure as the situation is still evolving. In a couple of months, we expect to have better clarity on what to anticipate. At this point, our initial assessment suggests that the total passenger numbers for GAP could be affected by a decrease of approximately 5% to 7%. This impact could improve significantly if the number of planes returns to regular operation or if there are no issues with the engine batch for those planes. However, it is challenging to make definitive statements right now. We're particularly interested in significant numbers for some of our routes, considering factors like lower capacity in certain areas where additional space is available, which may lessen the impact. Additionally, we need to consider that in January, the Mexico City airport will have a capacity cut announced by the Federal government, which may lead to a redistribution of some operations, potentially resulting in some aircraft rotations shifting from Mexico City Airport to other airports in the country. Overall, our current view indicates that the impact could be around 5% to 7%, but there is still much information that remains unclear at this time.

Saul Villarreal, CFO

Okay, hi Guilherme, this is Saul. So in terms of the MDP changes, we don't see any potential legal claim. In the coming months, we will see what the effects are. Regarding the MDP negotiation, I think it's more certainty, more clarity about some of the calculations in terms of the discount rate. I think it's good for the market to have this certainty. And it's very early to know what could be the effect. We know that the election will be in the same year. We did not expect any change in terms of the review with the government. We believe that this is the basis for the MDP review for 2025-'29. By the end of September, we will have the change of the government. And probably in the last quarter of 2024, we will have or we should have the new MDP and the new tariffs.

Guilherme Mendes, Analyst

That's super clear. Thank you, Raul and Saul.

Operator, Operator

Our next question comes from Alberto Valerio with UBS. Please go ahead.

Alberto Valerio, Analyst

Hi, Raul and Saul and all the team. Thank you for taking my questions. My question is regarding the discount rate. When moving to cost of equity to WACC, we usually see a decrease. And if you take the methodology that the government just reported to us, we would see this change. However, for the old regulatory framework, we used to have Mexican 10-year bonds plus a spread that we estimate close to 4%. And with this new regulatory framework, even working below the cost of equity, this would be higher than the previous one. My question is, this doesn't make sense with the announcement of tariff cuts. Where could I be wrong here? What could I be missing on these new discount rates for the new regulatory framework? Thank you.

Raul Revuelta, CEO

Thank you, Alberto. It's challenging to assess the immediate impact for us because we are still over a year away from knowing the specific rates that will come into play, as well as the inflation and various other factors that are currently fluctuating. An interesting point you raised is regarding the cost of capital in the new formula; the government has incorporated different bond maturities ranging from five to thirty years. I believe this approach will enhance the accuracy of the cost of capital calculation, ultimately reflecting the long-term capital costs for companies in Mexico. This clarification related to the cost of capital and the various maturities that will be considered for the UMS is noteworthy. However, determining the exact impact is complicated due to the numerous variables at play, and we still have more than a year until we review the calculations and maximum tariffs.

Alberto Valerio, Analyst

Fantastic. If I could follow up regarding CapEx. Previously, we discussed maintaining the same CapEx per passenger close to Ps. 40 billion for the next MDP. Should we consider this same reference value, or is there a need to adjust it based on your thoughts from six months ago?

Raul Revuelta, CEO

One of the aspects we are currently observing is the potential impact of the Airbus 320 and 321 engines. At this moment, it is uncertain how significant this impact will be or how long it will last, and this uncertainty extends beyond 2025 and into 2026. Hence, it's quite challenging to predict the additional capacity we will be able to introduce. We are actively reviewing all our quality services and capacity to determine the potential capital expenditure for the upcoming years. It’s crucial to note that some of the capital expenditure included in the new master plan has already been paid for, specifically referring to the Guadalajara land reserve, which is already accounted for on our balance sheet but will be reflected in the maximum tariff for the next period. Overall, I would suggest that the capital expenditure per passenger may be similar to what we experienced in the past. However, it is important to understand that the costs associated with the Guadalajara land reserve have already been settled and will not impact the company's future cash flows, despite being part of the new master plan.

Alberto Valerio, Analyst

Thank you very much for the detailed answer.

Operator, Operator

Thank you. We will take our next question from Pablo Monsivais with Barclays. Please go ahead.

Pablo Monsivais, Analyst

Hi, thank you for taking my question. This is a follow-up to the previous inquiry. Since you're transitioning from a WACC to a cost of equity, and given your low debt ratio, can we understand this as essentially reverting to a cost of equity calculation? That's my first question. Secondly, how do you feel about this agreement in general? Are you comfortable with the rules in place, or is there anything you find concerning? Additionally, do you have any reservations regarding the government's ability to estimate the growth variable in the terminal value calculation, or what's your overall perspective on that? Thank you.

Raul Revuelta, CEO

Thank you, Pablo. I want to start with the G factor for the terminal value. As you know, the G factor has been consistent throughout the duration of our concessions, and previously, it was calculated based on the average of the last five years leading up to the start of the terminal value calculation. In the past, this was straightforward, as the authority used that average traffic growth directly. In this new approach, the yield remains similar regarding the terminal value, as it still relies on average growth projections for traffic, but it will have a more significant impact than before since it will now consider data from year six up to the end of the concession. Reflecting on how G was calculated in the past and accepted by the government, I don't anticipate any changes that could negatively affect us. The new rules clearly outline how to calculate G. However, we do need to gain a clearer understanding of how to normalize the CapEx for the long term concerning the terminal value. This aspect is somewhat complex, and we will need to figure out how the authority intends to implement it. Fortunately, we have some time to clarify this over the next few months before we enter negotiations regarding the maximum tariff.

Saul Villarreal, CFO

Yes, this is Saul. Regarding the cost of equity or WACC, we believe that the changes reflect our balance sheet's composition. There is a significant difference between the cost of equity and WACC. However, it's complex to assert whether we can revert to the cost of equity calculation. The foundation is quite clear, and as management, we need to evaluate the optimal balance of our debt and overall capital structure to determine the best strategy for the upcoming tariff review, while also aiming to secure a fair return for our investors concerning our MDP and the new regulatory framework.

Pablo Monsivais, Analyst

Thank you very much.

Operator, Operator

Our next question comes from Bruno Amorim with Goldman Sachs. Please go ahead.

Bruno Amorim, Analyst

Thank you. Good morning everybody. So I have two questions, the first one on the new regulatory framework for the calculation of the tariffs as of the MDP. I'd like to ask you some help to understand the big picture because, you correct me if I'm wrong, but it seems that those changes, they point to lower tariffs. The concession fee will increase. The concession is not being extended. And CapEx, at the end of the day, is a function of traffic, so it's not being changed. So if you have lower tariffs, higher concession fee, and other variables are not changing, is it fair to say the return on the regulated side of the business is coming down or is there any offset that I'm not aware of? And the second question is on the parallel discussion for the short-term reduction in the TUA, which has been in the press over the past few days. What's the basis for that, for that revision in TUA outside of the MDP? What could be the offset to keep the contract balanced? Those are my two questions. Thank you very much.

Raul Revuelta, CEO

Thank you, Bruno. Today, it's difficult to say what's going to be the final result of the calculation because at the end of the day, we have moving parts on the demand, moving parts on the rates. So I would say that it's difficult today to say what's going to be the direct impact on the new calculation. In general terms, I will say that the biggest change in all these regulatory frameworks is the weight of the calculation from cost of capital to WACC. So over there, depending on the structure of the cost of debt of the company for the future, it will or not offset the possible impacts on the calculation of the WACC. But again, it's really difficult to say today a number or say by itself that it's going to be a decrease in tariff. We need to run the numbers. We need to understand the new characteristics of the market to understand specifically what is going to be the size of our CapEx. And after that, we could have a more correct number that will happen in the coming months. It is important to say in terms of the change in the concession fee. It is important to notice that the regulation, the new regulation is still having the two for pass-through the tariff, at least the cost of the concession fee that is implied by the aeronautical revenue. So I would say that the effect of the concession fee on the aeronautical revenues in the next modification of the maximum tariff would be neutral, just as part of the concession fee.

Saul Villarreal, CFO

Yes. Hi, Bruno, this is Saul. Regarding the recent short-term reduction of TUA that has been reported, I want to clarify that this is something we do annually and is a typical benefit we offer to the market. It's not an exception. Currently, there may be some additional considerations surrounding this, but we regularly provide these types of incentives to the market. Discounts in TUA or aeronautical services occur frequently. This time, it was part of our review with the authorities, but this practice is a routine part of our operations. So, while it is indeed a discount, it is something we implement every year. It is not unusual, but it has gained more attention currently.

Raul Revuelta, CEO

And I mean, to be clear about the TUA reduction. One of the things that has been announced in the coming days is that we will have a discount of TUA of 10% in nine of our airports during November and December, then we will review inflation in all our tariffs, not only TUA, and we will keep with the new tariff a discount of 10% in nine of our airports. In general terms, that is a promotion that we will put in place for the coming year from 2024. And it is important, again, really important to say that these promotions or discounts on TUA are not affecting or changing the rules on the maximum tariff, because the maximum tariff is still in place, is still exactly the same as negotiated and announced by the government four years ago.

Bruno Amorim, Analyst

So just to make sure that we got it. So you're saying it doesn't change the maximum tariff, but you're going to charge a lower TUA by 10% in some airports. So is it fair to say in those specific airports, the tariff or the revenues per passenger will be roughly 10% below the maximum tariffs going forward?

Raul Revuelta, CEO

Not necessarily, because the maximum tariff comprises a variety of services. Within those services, there are additional offerings. Importantly, two key factors that significantly influence how we calculate the maximum tariff are inflation and exchange rates. For the upcoming year, we will be announcing that we will reduce the TUA by 10% at nine of our airports. This reduction will occur after considering the inflation review and applies specifically to that tariff. It does not directly indicate a 10% decrease in the total aeronautical revenues.

Saul Villarreal, CFO

Yes. And just to add something on that is that the effect of inflation that was almost nonexistent during the year has for the maximum tariff has more of a higher effect than the discount in TUA. And also, the appreciation of the peso is affecting the revenue and represents obviously an impact in the revenues, but it doesn't affect directly to the fulfilling of our maximum tariff. So it's fair to say and it's just to let you know that the discounts in TUA have an effect on the maximum tariff, but it's not full. So it would be part of the fulfilling of the maximum tariff during 2023 and the fulfilling of the maximum tariff for 2024.

Bruno Amorim, Analyst

How much of the regulated tariff is the TUA or the regulated revenues roughly? It's the majority, right?

Raul Revuelta, CEO

Of our aeronautical revenues, it represents around 85% of our total aeronautical revenues.

Bruno Amorim, Analyst

Okay. So if you lower the TUA by 10%, you lower your revenues on the regulated side by 8.5%. Can there be an offset like increasing tariffs for the airlines?

Raul Revuelta, CEO

There will be some kind of offset since the inflation for all tariffs included in the TUA will be implemented in the first month of the year. This will apply to the maximum tariff for the basket. It is crucial to understand the potential impacts of the exchange rate between pesos and dollars and inflation. Therefore, this does not represent a complete one-to-one pass-through from the discount. It won't have a direct effect on aeronautical revenues. It is influenced by the mix of the basket. What we have announced is a 10% discount on the TUA for nine of our 12 airports.

Bruno Amorim, Analyst

Thank you very much. I have other questions, but I'll let others ask. Thank you.

Operator, Operator

We'll take our next question from Jay Singh with Citi. Please go ahead.

Jay Singh, Analyst

Hey, thanks for taking my question. My first one is how much traffic flow are you guys seeing from the New Mexicana Airlines? Or are they actually selling tickets? And as a follow-up, how much damage have you seen in Cabos because of Hurricane Norma?

Saul Villarreal, CFO

Hi, Jay, this is Saul. We did not know exactly what could be the effect and the benefit in Cabos because of the hurricane. But we believe that, obviously the destination, tourist destinations will be benefited by this diversion of the tourism.

Raul Revuelta, CEO

But yes, but for the case of Norma, I mean saying about what I will say is the case of Otis of the impact of Hurricane of Acapulco, I mean it's terrible a huge destruction there. For sure, some of the passengers would move to other leisure destinations. But for the case of Norma affected a couple of days ago in La Paz and in Los Cabos, we don't have major impact on the infrastructure. We only have a closure of the airports for one day. We are seeing a really quick recovery on traffic, on Cabos and in La Paz. So we don't see really major impacts on traffic because it will only reflect a couple of days of closing, but not just only that.

Operator, Operator

Thank you. Our next question comes from Anton Mortenkotter with GBM. Please go ahead. Your line is open.

Ernst Anton Mortenkotter, Analyst

Yes, hi. Thanks for taking my question. I just have two quick questions. One is regarding your investments on the commercial front. Given the higher concession fee that will certainly pressure some of your cash flows, do you expect to continue at the same pace that you've been having? I mean, I know most of the projects are almost done, but do you expect this to have an effect? And also, are you considering buybacks?

Raul Revuelta, CEO

Thank you, Anton. Regarding commercial capital expenditures, we recognize the need for significant efficiency to support major projects. We have observed very quick recovery rates on these investments. We will definitely factor in the potential impact of the 9% on our business cases. As long as the returns on investments exceed our company’s weighted average cost of capital and add value, we will proceed with the capital expenditures. However, we must consider our business plan, commercial strategies, and specific plans for any new capital projects before making decisions. If the returns do not align with investor expectations, we will refrain from proceeding with that additional capital expenditure. As for share buybacks, we are actively evaluating that option. It's vital to understand that new weighted average cost of capital rules could lead to different decisions. We are assessing what our new debt cost structure will be going forward. Therefore, at this moment, it’s crucial for the company to clarify our future leverage before we initiate any buyback programs.

Ernst Anton Mortenkotter, Analyst

That is pretty clear. Thank you.

Operator, Operator

Your next question comes from Pedro Balcao with Santander. Pedro, your line is open. Pedro, please check you're on mute. And we will move next with Juan Macedo with GBM. Please go ahead.

Juan Pablo Macedo Carrillo, Analyst

Hi, thanks for taking my question. My question is regarding the direct operation of the commercial business. Obviously, revenues in that segment have been growing, but also costs. Are you expecting costs to continue growing? Or are they at a normalized level now?

Raul Revuelta, CEO

Hi, Juan. Yes, they will be part of the cost of sales, particularly related to the revenues from our direct operations at GAP, including some of our business lines like convenience stores and VIP lounges. This cost is definitely linked to sales. As revenue continues to grow, we can expect a corresponding increase in the cost of sales and total costs. It's also worth noting that part of this cost arises from new openings and pre-operational expenses. As we increase our volumes in these directly operated businesses, we may secure better pricing, which could lead to improved margins for those specific operations. Overall, I would say that the costs associated with our directly operated businesses are still growing in line with revenue growth.

Juan Pablo Macedo Carrillo, Analyst

All right. Thanks for the clarity.

Operator, Operator

And we have a follow-up from Pablo Monsivais with Barclays. Please go ahead.

Pablo Monsivais, Analyst

Hello, hi. Can you hear me well?

Raul Revuelta, CEO

Yes, Pablo.

Pablo Monsivais, Analyst

Okay. One question that I wanted to follow-up on Bruno's question. Is the TUA that we're seeing in the press, the 10% decrease, is unrelated to these new rules that the government is setting? I mean, there are like two different things. You are offering discounts on the TUA, and the rules are a different thing. Can you please clarify that? Thank you.

Saul Villarreal, CFO

Hi, Pablo, this is Saul. I just want to point out that the discounts in TUA happen almost every year. We do regularly as far as our incentives to the market, to the airlines. We provide a different kind of discounts, not only in TUA, we provide discounts when they open additional groups, when the airlines add additional frequencies. So it's part of the business that we have to take into consideration is the fulfilling of the maximum tariffs. That's our target. And as you know, we are in almost 99% of the fulfilling tariff that will be affecting us. There are other two effects, the exchange rate, the appreciation of the peso, and also the inflation applicable to the tariffs. So just to be clear, the discounts in TUA will be 10% for these two months of the year, November and December. And for 2024, there will be the discounts in TUA the same. But we will have to update all the specific tariffs, not only TUA's, all the specific tariffs for the full years with inflation. So at the end, and again just to try to point out, our target is to fill the 100% of the maximum target. Last year, we reached around 96% of the maximum target and what we are expecting at the end of this year around 98%, 97.5% and for 2024 we will see what will be the range, but probably we will be repeating that in that area, 98%, 99% of the maximum tariff.

Pablo Monsivais, Analyst

Okay. And just a follow-up on this. Like we have seen the share price at it dramatically move to the downside. What is the piece of information that the market or us, we're not understanding based on what we have here on the rules? What do you think is a key issue to close the gap and to understand what is the economic impact, the actual economic impact of these changes? Thank you.

Raul Revuelta, CEO

Pablo, I think that the main difference is the change in the discount rate from key to WACC, and that's the main part. Just to know what could be the effect is complicated to say now. We have to continue with our regular review with the reporting in terms of CapEx, in terms of the MDP, the different inputs, the OpEx, the discount rate everything. I think the effect on the share price is more the uncertainty about the basis were announced by the government and we didn't know exactly. But after different meetings and conversations, I think we have a regular basis that you can see is attached in our last week press release is fully explained there, and I think this, in terms of interpretation, is more the perception of the market than a real change. We will see what is the real effect in terms of return until next year when we are at the end of the year, the different inputs, the different rates, the composition, the capital structure of the balance sheet of the company. With all different assumptions, we will have more visibility on that. But for now, it's just to let you know where the new rules are to translate and it's in our press release. And you can go through and see all the main changes.

Pablo Monsivais, Analyst

Thank you.

Operator, Operator

Thank you. We will now take our webcast questions. I will turn the call over to management.

Maria Barona, Investor Relations

Thank you. We have several questions in the webcast. There are one of them that we have already answered, so I will skip those ones. So I will start with the question of Pablo Coloma from MetLife. Is it fair to assume that EBITDA margin will reduce by 4% with the new concession fee in 2024? Is 66% the new expected level of the company going forward?

Raul Revuelta, CEO

Thank you, Pablo. I would like to highlight that we are making significant efforts in cost management for the upcoming year. Currently, it’s not entirely clear what the impact on margins will be, as we are considering a few factors. We have some effects related to our engines, but we’re unsure of the extent of that impact. Additionally, there's a temporary effect on aeronautical revenue due to changes in the concession fee. We also have some revenue from Jamaica that isn't fully impacted by the new federal rights law changes. Therefore, it's too early for us to definitively assess the margin impact for the upcoming year. I assure you that as management, we are dedicated to maximizing our cost management efforts to maintain healthy margins for the company. Nonetheless, we're still in the early stages of understanding the full impact.

Maria Barona, Investor Relations

Thank you, Raul. And now I am going to move to Ana Cecilia Reyes. She is from Grupo Bal. She has some questions. Having a little more clarity on the regulation changes, did you plan to continue with the issue of the new bonds? And also, are there any changes on the dividend policy?

Raul Revuelta, CEO

I can say that we currently do not have clarity on the policy for the next master plan for 2025 to 2029. We need to analyze the numbers and understand the new tariffs, the upcoming capital expenditures, and then we will make decisions regarding our leverage and dividend policies. At this point, it's uncertain what our future policy will be. We need to comprehend the new tariffs associated with the next regulation and the maximum tariff review, as well as the size of capital expenditures and specifically in which year we will need to implement certain investments. Overall, I would say that we do not have the information necessary to determine our dividend and leverage policy for the 2025-2029 timeframe.

Maria Barona, Investor Relations

Thank you, Raul. I am going to move to Alejandro Fuchs' questions. And he has two. The first one, the concession tax going to 9%. On the bill presented, it says that the tax is paid on gross sales as it was in the past. If I understood correctly on the remarks, you mentioned that it was on aeronautical revenue. Has that changed?

Saul Villarreal, CFO

Alejandro, it's basically the same calculation, the same methodology for applying this tax. The change is only about from 5% to 9%. That's the change. Everything is the same.

Maria Barona, Investor Relations

And the second one, you mentioned that higher cost concession tax will be passed through higher tariffs, if I understand correctly. But on the new law, that clause was taken. Could you please clarify this point as well?

Saul Villarreal, CFO

Yes. The maximum tariff includes the cost of the concession fees. In general terms, we will include this for the MDP for '25-'29. But for the year '24, because this new deal will be enacted on January 1, '24, we will include the excess of the payment over the aeronautical revenues on the next reference value that will be used for the calculation of the period '25-'29.

Maria Barona, Investor Relations

Thank you, Saul. Well, now I'm going to move to Marco Montanez from Vector. And he says, reviewing the formula to calculate the maximum tariff, it seems that the companies have the incentive to increase the leverage to increase the discount rate. What do you think? And which would be the equilibrium to increase the discount rate versus increase the leverage? Thank you.

Saul Villarreal, CFO

Hi, Marco. Well, it's some way to see it, but we will have to do a deeper analysis on that, what is the best balance for the company? Obviously, looking for the higher return for our investors. We have to think that moving from cost of equity to WACC is a huge difference, and we have to analyze the total effects into the discount rate. So it's something that we will go deeper in the following months, and we have, as Raul explained earlier, that we have almost a year to analyze and see what could be the real effect in terms of the discount rate.

Raul Revuelta, CEO

I'm just complimenting the elsewhere of Saul. Again, it's important to understand that the impact is not solely linked to the tariff itself. The new tariff that we might have between 2025 and 2029 requires us to consider the overall situation. This includes capital expenditures, leverage, and dividend policy. Once we gain clarity on these aspects, we will be able to determine the potential new policies for GAP. It's crucial to avoid isolating only the effect of the maximum tariff for the upcoming years and instead view it as a complete picture that includes capital expenditures, leverage, and dividends in various ways to comprehend the company's future policy.

Maria Barona, Investor Relations

Thank you. Kenton Moorhead from DWS. He is asking if this increase in tax from 5% to 9% includes aero and non-aero, correct? Both aero can be recovered, is that right?

Saul Villarreal, CFO

Hi, Kenton. That's correct. It's basically the same effect and calculation that we have before. It's just the change in terms of the percentage that should be applicable to the aero and non-aero revenues.

Maria Barona, Investor Relations

Yes, thank you, Saul. And Pablo Coloma from MetLife again here. What will apply with the sustained debt issuance? Will you come back to the market? Do you think that that cost could have increased with the new regulation?

Saul Villarreal, CFO

Well, as I was explaining, we will analyze that because the level of leverage is really important so far. We know that the study from the company last year was to leverage 100% of our CapEx. We have huge commitments in terms of CapEx for at the end of this year and for next year, and we have to finalize the new MDP to review and define. That is something that we will analyze in the following months and decide as soon as possible. But for now, it's something that we are analyzing.

Maria Barona, Investor Relations

Thank you. And the last one comes from Evan Kurtz from Lord Abbett. Is the WACC calculation based on net debt to total cap or gross debt to total cap?

Saul Villarreal, CFO

Hi, Evan, I'm sorry. This is the other total debt.

Maria Barona, Investor Relations

Perfect. So thank you, Saul. And with this, we will finish the webcast call. And I will return the work to Raul Revuelta for the final remarks.

Raul Revuelta, CEO

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

Operator, Operator

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