Earnings Call Transcript - PAC Q4 2023

Operator, Operator

Good morning, and welcome to GAP's Fourth Quarter 2023 Conference Call. Thank you for joining us. Please note, that all lines have been placed on mute to prevent any background noise during the presentation. At this time, I am pleased to turn the call over to GAP, so that the presentation may begin. Please go ahead.

Maria Barona, Moderator

Thank you, and welcome to the Call. I'm pleased to have from the company today, Mr. Raul Revuelta, Chief Executive Officer; and Mr. Saul Villareal, Chief Financial Officer. Any forward-looking statements made during this conference call do not account for future economic circumstances, industry conditions, company performance or financial results. Please keep in mind that any statements or assumptions made are based on current factors and information that could materially change causing results to differ from current expectations. For a complete note on forward-looking statements, please refer to the quarterly report issued earlier this week. Thank you all for your attention. Mr. Revuelta, please begin with your opening remarks.

Raul Revuelta, CEO

Hello, everyone, and thank you for your attendance today. As we reflect on the year 2023, we reached the highest EBITDA level in the history of the company even though we faced several challenges. In the end, the year started at varying currency rates as we reached historic levels in passenger traffic numbers, revenues, and the expansion of airport areas. However, the positive targets were offset by significant macroeconomic factors. One was the currency rate fluctuation and the second was a low inflation rate applicable to maximum tariffs. To begin, the appreciation of the Mexican peso impacted the American airports' revenue, which is in U.S. dollars. This appreciation also affected certain commercial revenues in Mexico as well as international passenger fleets. In total, we have had around 20% of our total consolidated revenue impacted. At the same time, the National Passenger Price Index, excluding petroleum, which is used to update tariffs in Mexico, remained mainly flat throughout the year, staying below a 1% increase from the previous year, compared to the official rates of around 6% during 2022. Cash substantially increased during '23 despite our greatest effort to remain within strict budget parameters, primarily without cost increases regarding maintenance, personnel, cleaning, and electricity, all while passenger traffic reached a record 64 million passengers. We had higher expenses to maintain the quality level for the higher number of passengers. Additionally, the consumer price index in real terms has been sustainably increasing, together with a higher minimum wage and changes in labor laws, consequently creating growing challenges concerning costs which directly impact our profits. By the end of 2023, we faced various challenges starting with the deceleration in passenger traffic due to the Pratt & Whitney preventive engine inspections. Furthermore, we faced considerable challenges due to regulatory changes and concession fee adjustments that affected our market value. Nevertheless, we have tackled these issues and have engaged in strategic negotiations with relevant regulatory bodies to navigate these changes and preserve shareholder value to the best of our ability. It is important to mention that despite these considerable headwinds, we achieved remarkable milestones during 2023. Adjusted EBITDA reached another record of MXN17.7 billion, up 9.7% compared to 2022. Commercially, 2023 was a groundbreaking year where we reached the highest commercial revenue in our history. Our strategic focus in the area of food and beverage, parking, retail, and expansion projects is evidence of our commitment to improving the passenger experience and continued sustainable growth. We are constantly working to recognize market trends, adapt to them, and make them our own. Currently, we have several expansion projects underway as part of our strategic growth initiatives. This includes developments at Guadalajara, Los Cabos, and Puerto Vallarta airports, as well as the additional mixed-use building that includes a hotel, commercial spaces, and corporate offices at the Guadalajara airport. Furthermore, we concluded the year with a strong balance sheet, reaching MXN10 billion cash at the end of this year, as well as having a comfortable debt maturity profile with a net debt-to-EBITDA ratio of 1.7 times. During 2023, we allocated funds for capital expenditures mainly at the airport expansion and infrastructure improvement as well as for refinancing of the debt maturity. A maturity payment of MXN3 billion will be due during the first quarter of 2024, corresponding to the GAP-19 bond certificate, which is being refinanced into a sustainable-linked bond issuance in the coming weeks. Throughout 2023, we continued to focus on our long-term 2024 sustainability strategy. The terminal processing building at the Tijuana airport obtained a gold lead certification, the first time one of our airports has been granted such certification. We also participated in the EDGE certification for gender equality and hosted our first-ever gala to benefit our foundation, raising around MXN9.3 million to benefit our schools. In line with that, we extended our education program to the high school rates in Guadalajara under our education initiative, committing to provide excellent education to our students. Moving ahead to our 2024 guidance, we anticipate a 3% to 5% slowdown in passenger traffic across our airport network due to the challenged growth stemming from the review of the P&W engine. We base figures on our view of the aircraft that is scheduled to be grounded due to accelerated preventive inspections, as well as the flight frequency and fleet offerings from various airlines. This decrease in passenger traffic will directly lead to lower aeronautical revenues, thus, we foresee a decrease between 2% to 4% versus 2023. However, on a more positive note, non-aeronautical revenues are expected to grow from 12% to 14%. This decrease in passenger traffic leads us to consider the development of additional business areas, such as the operation of the mixed-use building in Guadalajara. This building includes a hotel, corporate offices, and commercial space, in addition to the opening of around 1,100 parking spots. We expect changes in tariffs at Guadalajara and additional commercial spaces in Los Cabos and Puerto Vallarta, along with adjustments in the terms of existing contracts. We expect a 65% EBITDA margin, plus or minus 1%, with contraction mainly due to a higher concession fee increase in Mexican airports from 5% to 9% beginning January 2024, plus labor cost increases in Mexico of around 20% and about 40% for Jamaica. In terms of CapEx, we expect to reach around MXN9 billion in the coming year. Along with the annual committed investment in Mexico of MXN3.8 billion, we are also allocating MXN1.5 billion for commercial projects, including the final phase of the mixed-use building in Guadalajara, parking expansions, and the onboarding of additional business lines operated directly by GAP. Additionally, we will purchase land in Guadalajara for future expansions, which will cost approximately MXN1.5 billion. We also have around MXN700 million of CapEx deployed in 2023 that will be paid in 2024. Lastly, we plan to invest around MXN1.5 billion in projects related to the Jamaican airports. I would like to conclude by emphasizing that despite the challenges, we remain steadfast in our commitment to manage regulatory changes and sustain growth, ensuring our continued success and value creation for all stakeholders. We at GAP remain confident that the underlying fundamentals of our business remain strong. With this, I want to thank you all for your attention. We are now ready to answer your questions. Operator, please open the line for questions.

Operator, Operator

Certainly. We'll take our first question from Juan Ponce of Bradesco BBI.

Juan Ponce, Analyst

Hi, good afternoon. Thank you for taking my question. I have a question – two questions actually on traffic and on the MDP. The first one on traffic. How are you seeing the airline scope with this revision of the Pratt & Whitney engine at least in January, December? And also, what do you think is the impact from the slot reduction in Mexico City on your airports? And on the international side, are you seeing bookings strong from the U.S. and Mexico? Or have you seen a moderation in this market? That's my first question. The second question would be on the MDP negotiation. I mean I know you can't share a lot, but it's still in progress, but is there any chance that it gets completed ahead of schedule because of the transition in administration? Thank you very much.

Raul Revuelta, CEO

Thank you, Juan. This is Raul. I mean in terms of the traffic, one of the things that we are seeingjust for these changes on the available seats due to the inspections of engines is that the airlines are looking for the more profitable routes. And what we are seeing in all our airports and in all the countries is in some way that they are moving some operations from the domestic market to international markets. For instance, as you see Guadalajara airport, on the international side, we are seeing a really remarkable increase in passengers in January that, in large part, is related to better yields. For sure, the airlines are being smarter in their allocation of the fleet to take account the lack of seats. The other part related to Mexico City Airport and the capacity for sure is an additional change that is evident in all that is happening right now in the Mexican market. For sure, taking into account that some airlines are adjusting their biggest fleet, the fleet with a bigger number of seats, Mexico City Airport and changes in the fleet at other airports are being felt. But what we are seeing right now in the airports of GAP is a decrease in capacity and the number of passengers for the routes that come close to Mexico City Airport. On the other hand, we are seeing really interesting trends on the Guadalajara airport related to international passengers. It is important to mention that for instance, Vallarta has become the most important hub for international passengers, specifically for those related to the California markets, from Guadalajara. So when we talk about international markets, the ones related to VFR markets are growing at a great pace this first quarter of the year, also on leisure markets such as Los Cabos, where we are beginning to see that new routes will come for the second and third quarter. In January, we saw a 5.3% increase in international passengers, with Guadalajara Airport seeing a growth of 20.5%. In terms of the master development plan and the negotiation of the MDP, the airport laws are really clear; the authority has until the last day of the year to give an answer. We are working closely together with the authorities and the airlines to gather feedback regarding our master plan. However, we cannot and will not assure that the authority will take less time than what is stipulated in the airport laws to release the authorization. We are working closely with them, but we don’t have assurance about how quickly that could be.

Juan Ponce, Analyst

Thank you, Raul, for the detailed response.

Operator, Operator

We'll take our next question from Stephen Trent of Citi.

Stephen Trent, Analyst

Good morning, gentlemen, and thanks very much for taking my question. I was curious, given your experience with Jamaica, I know you guys have a long-standing knowledge in that market from your strategic investor. Are you looking at any opportunities to invest outside of Mexico? Your competitor seems to be having a bit of trouble in the Dominican Republic. Would just love to get your view on high-level opportunities outside Mexico?

Saul Villarreal, CFO

Hi, Steve, this is Saul Villareal. As you know, we are following opportunities. We have been in different meetings and conferences looking for opportunities right now. We are in the middle of one process for an airport in the Turks and Caicos Islands. We were already prequalified as a bidder. So we will compete with other airport operators. That's the only active opportunity that we have at the moment, and we will be looking for other opportunities. We are really open to seeing and exploring any kind of opportunity. Right now, it's only one.

Stephen Trent, Analyst

Okay. Appreciate that. And just one other question. Just to help get our arms around the new Mexican airport regulation, the way that we read the text back in October is that the government might be potentially more interventionist in terms of looking at tariffs and responding to concerns about them. Have you seen any increased communication from the government at this juncture? Or does it seem that the amount of inquiries and communication you received from the SCT is about the same as it was before?

Raul Revuelta, CEO

Thank you, Steve. This is Raul. I mean, in general terms, I would say that the communication with the SCT has remained the same as in the past. And talking about tariffs, we could say that, similar to the market, the SCT proceeded for the first time with the new amendment of the annex tariffs, applying them based on the established growth formula. So I would say that we are not seeing any kind of additional intervention or changes in the way that we communicate with the authority. However, it is important to note that this amendment has resulted in a significant increase in tariffs, which reflects the complete application of the new formula.

Stephen Trent, Analyst

Okay, appreciate it. Everyone, thank you.

Raul Revuelta, CEO

Thank you, Steve.

Operator, Operator

We'll take our next question from Alberto Valerio of UBS.

Alberto Valerio, Analyst

Hi, thanks, Raul, Saul for taking my question. I have two on my side. The first one about tariffs. We see a discount in November and December last year, 10% for the three airports. Should we see those discounts removed from January on? And what do you expect in terms of tariffs for 2024, with inflation as a proxy being okay?

Raul Revuelta, CEO

Thank you, Alberto. First, in terms of the discounts for this year of 2024, what you will see is a 6% discount in nine of our airports that will continue related to the package of discounts we have for airlines. We've made this more public. Additionally, most of our other tariffs will increase in line with inflation and these new changes will be applied from March 15, including the rest of the tariffs in Mexico.

Alberto Valerio, Analyst

Very clear. Can I consider these airports, the top tariff airports with the most expensive tariffs, those ones that will remain with discount?

Saul Villarreal, CFO

Hi, Alberto, this is Saul. We don't have the most expensive airports so far, and we are not expecting to have any with the new tariff review that we will conclude at the end of the year. So we do not anticipate having the most expensive airport. I think in terms of maximum tariff or in terms of passenger charges.

Alberto Valerio, Analyst

No, pardon me. I expressed myself wrongly. I was talking about the GAP airports; those ones that will remain with the discount should be the ones with the highest tariffs among your airports, right?

Raul Revuelta, CEO

Yes. In terms of the discount, we are applying a 6% discount in the passenger fee across nine of our airports, with the exception of Mexicali, Morelia, and Manzanillo.

Alberto Valerio, Analyst

Perfect. That’s it. Thank you very much for the clarification.

Raul Revuelta, CEO

Yeah, you’re welcome.

Operator, Operator

We'll take our next question from Pablo Monsivais of Barclays.

Pablo Monsivais, Analyst

Hi, thanks for taking my question. Kind of a follow-up on a previous question. In summary, what are your expectations on how close you expect to be this year relative to your maximum tariff? Are you expecting to be at 97-96 considering all the discounts that are you talking about? Thank you.

Saul Villarreal, CFO

Hi, Pablo. This is Saul. It's fairly early to know. Obviously, the discounts offered in passenger charges will affect reaching the maximum tariff. It will also depend on circulation regarding tariffs, which is the producer price index less petroleum. We have a range of forecasts between 94% to 97% for this year.

Raul Revuelta, CEO

So it depends a lot, as Saul mentioned, on inflation, but also on the exchange rate for international passengers. Additionally, if the domestic market closes at a lower pace than the international market, we could have a better fulfillment because the passenger rates for the international market are higher than for the domestic market. So we need to really keep an eye on these macroeconomic trends to see if fulfillment could exceed our expectations.

Pablo Monsivais, Analyst

Okay. And just sort of a follow-up. Can you tell us what your inflation expectations are that you're incorporating in the specific tariffs that are not from Tijuana?

Saul Villarreal, CFO

As Pablo, the applicable inflation for specific tariffs is, as Raul explained, the consumer price index is 4%, while the maximum tariff we expect is 1.5%.

Pablo Monsivais, Analyst

Okay. Thank you very much.

Operator, Operator

We'll take our next question from Juan Macedo of GBM.

Juan Macedo, Analyst

Hi, guys. Thanks for taking my question. My first question is regarding capital allocation. You mentioned in the report that you will propose extraordinary capital reimbursement. Should we see this as an annual dividend? Or is there any room for ordinary dividend? And also, are you seeing any buyback for 2024?

Saul Villarreal, CFO

Hi, Juan, this is Saul. As we announced in our press release, the board of directors approved a payment of MXN13.86 per share as a capital reduction in favor of our shareholders. This will be submitted for approval at the Extraordinary General Shareholders' Meeting that will be held in April 2024.

Juan Macedo, Analyst

Yeah. Should we see this as the annual dividend? Or is there maybe another period?

Saul Villarreal, CFO

No, for now, it's the only amount approved by the board of directors, and that's the only payment distributed to the shareholders.

Juan Macedo, Analyst

All right. That's very clear. Thank you. And just one quick question. We saw a slow decrease in technical occupancy along with the MDP. Have you been in talks on this option in any way so far?

Maria Barona, Moderator

Juan, we couldn't understand you. Can you repeat the question, please?

Juan Macedo, Analyst

Yeah, we saw a decrease in technical occupancy, along with the MDP. Have you been in talks on this option in any way?

Raul Revuelta, CEO

Thank you, Juan. I mean, right now, as you know, we have an agreement with our strategic client. For the moment, we will continue with that agreement that we have. But for sure, we will continue evaluating the best options for the company. However, currently, we are evaluating the option for the company.

Juan Macedo, Analyst

Thanks for the – sorry.

Operator, Operator

We'll move next to Isabela Salazar with GBM.

Isabela Salazar, Analyst

Hello, thank you for taking my question. I was wondering if you could give us some details about the Jamaican concession regarding the economic rebalancing. Has it already been done? And also in terms of commercial projects, are these contributing to the overall results? Or when did they start contributing? Thank you.

Saul Villarreal, CFO

Hi, Isabela, this is Saul. We are continuing conversations with Jamaican authorities. We have a verbal agreement, but the process in Jamaica is very long. They will have to go through parliament for different approvals. We are expecting this rebalancing process to conclude by the end of this year. They indicated that the second half of this year could be from July to December. Therefore, we don’t have certainty about this, so we will have to wait to see if it’s possible to pass through these approvals in parliament. Regarding your second question about commercial projects, as we mentioned, we will open the mixed-use building in Guadalajara, integrating a hotel with 180 rooms, corporate offices, and a retail area connected to the airport terminal and parking lot. This will start in April. We already have a large commercial area in Guadalajara airport that is contributing to commercial revenue increases. Despite the anticipated decrease in passengers, we expect a significant increase in commercial revenues.

Raul Revuelta, CEO

Regarding the timing of these openings, as I mentioned, the hotel within the mixed-use building will become operational on April 1, and parking lots will be partially opened during summer, with the second stage at the end of the year, adding nearly 11,000 spots to Guadalajara, meaning an increase of almost 100%. This will provide an important boost to our parking lot revenue primarily for the next year. Additionally, we have a significant number of food and beverage companies that are already operating. Most areas in the airport are operational since January. However, the new commercial layout at Guadalajara Airport will be fully implemented by August of this year. We expect to see a significant impact on our revenues by that time, particularly given the strong double-digit increase in commercial revenues we saw in the last quarter of the year, and we expect this trend to continue for the upcoming quarter. Our guidance for full-year non-aeronautical revenues is to close the year with an increase in revenue between 12% to 14%.

Isabela Salazar, Analyst

Perfect. Thank you so much for your answers.

Operator, Operator

We'll take our next question from Federico Galassi of TSG.

Unidentified Analyst, Analyst

Hello, guys, Saul, Raul. Congrats on the results. Just two questions. The first one is related to commercial revenues. In the line of car rental, you have seen an increase. This is a number, if you want, that should maintain. Is there more room to grow here? And this is my first question.

Raul Revuelta, CEO

Thank you, Federico. I mean, for sure, we have seen really interesting growth in commercial revenue in the line of car rental. This was mainly due to the bidding process at Los Cabos airport. Additionally, we expect excellent news regarding the bidding process for our Guadalajara Airport. By the end of the year, we expect our double-digit growth to continue in 2024.

Unidentified Analyst, Analyst

Great. Thanks, Raul. And the second question is more related to the COGS side, in particular, in the cost of employees and maintenance that are remaining somewhat constant year-over-year, particularly when compared against revenues. What can we expect for this year specifically considering the increase in minimum wage in January? Are there any discussions about a change in labor hours? How are you viewing these two topics?

Saul Villarreal, CFO

Hi, Federico. This is Saul. Obviously, we have faced significant pressure regarding the increase in salaries, not only at our airports across the country but also at the border airports such as Mexicali and Tijuana. The 20% increase in minimum wages is impacting general contributions and social securities, as well as benefits for employees. This also translates to increased costs in security and cleaning services contracted from third-party suppliers, thus affecting maintenance as well. We aim to manage cost controls throughout 2024, but some effects will be unavoidable. We strive to maintain cost efficiency per passenger. For this year, we anticipate a decrease in passenger traffic of about 3% to 5%. This is a significant point. It's complicated. It will worsen if the proposed change to labor laws transitions the workweek from 48 hours to 40 hours, which would increase our headcount by roughly 20% to 25%. We're facing challenges in hiring staff across all our airports. Should that law pass, we could encounter various hiring difficulties.

Unidentified Analyst, Analyst

Okay. If the labor hours law goes ahead, could that have an impact on operations?

Saul Villarreal, CFO

In terms of operations, we do not estimate an operational impact from this, but we will see a significant increase in terms of costs.

Raul Revuelta, CEO

The pressure on costs is considerable, not necessarily operational. As Saul stated, there’s a law in Congress proposing to change the current labor week in Mexico from 48 to 40 hours. If this change occurs, it will have a significant impact on the number of employees required at our airports to maintain operations. We will continue monitoring how this law progresses. However, as Saul mentioned, there won’t be an operational impact but an increase in personnel costs.

Unidentified Analyst, Analyst

Thanks. Thank you so much, guys.

Raul Revuelta, CEO

Thank you.

Operator, Operator

At this time, I would be happy to turn the call over to Alejandra Soto.

Alejandra Soto, Moderator

Thank you. We have a question from the webcast, asking what is the company's strategy to counter the salary pressures if you can?

Raul Revuelta, CEO

Yeah. Thank you, Alejandro. I mean, for sure, we are, as you know, some of the DNA of GAP has been really disciplined in managing our costs. We are working to continue providing the best possible service to our passengers while introducing additional technology that will allow us to achieve efficiencies in our operations. One of the key points we are deploying this year is that we will not hire additional staff, except for the new business lines directly operated by us, such as hotels. This will be an effort to limit headcount growth. Once passenger numbers grow post the Pratt & Whitney engine issues, our focus will be on optimizing our workforce and enhancing efficiencies and profit margins. Our primary strategy is to implement technology that mitigates the need for additional hiring in the coming years.

Alejandra Soto, Moderator

And the second question relates to expectations for tariffs and CapEx regarding the renegotiation of the MDP.

Raul Revuelta, CEO

Well, I mean, we will continue on the same line we've discussed in the past, and continue to aim for zero to 5% increases. There are many factors in play: the pressure on salary costs will need to be reflected in the master plan, and we also need clarity on passenger tariffs and our strategy moving forward post the P&W engine issues. Thus, we maintain our target of zero to 5% increases for maximum tariffs.

Alejandra Soto, Moderator

Thank you, Raul. This is the only question we have from the webcast.

Operator, Operator

Very well, we'll return to a follow-up question from Juan Ponce of Bradesco BBI.

Juan Ponce, Analyst

Hi. Thank you for the follow-up question. Just on the 6% discount in nine airports. Just wanted to confirm for how long will these discounts be in place?

Raul Revuelta, CEO

For all the 12 months of this year, Juan.

Juan Ponce, Analyst

Gracias.

Operator, Operator

And there are no further questions at this time.

Raul Revuelta, CEO

Thank you very much for your attention. Before I conclude, I want to mention that the GAP 2024 event is coming up and will be held at the Guadalajara Airport on April 10, 2024. We hope you can join us for a morning of management presentations and insights into all our innovations and expansions taking place in the airport. Please contact our Investor Relations team for more details. Thank you. Have a wonderful day.

Operator, Operator

This does conclude GAP's fourth quarter 2023 conference call. You may now disconnect, and everyone, have a great day.