Grupo Aeroportuario del Pacífico, S.A.B. de C.V. (GAPB) Earnings Call Transcript & Summary

Good morning and welcome to GAP's conference call. [Operator Instructions] It is now my pleasure to turn the call over to GAP's Investor Relations team. Please go ahead.

Thank you and welcome to Grupo Aeroportuario del Pacifico Second Quarter 2023 Conference Call. Presenting from the Company today we welcome Mr. Raul Revuelta GAP's Chief Executive Officer and Mr. Saul Villarreal Chief Financial Officer. Please be advised that forward looking statements may be made during this conference call. They do not account for future economic circumstances, industry conditions, company performance or financial results as such statements are 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 that was issued by the company. At this point, I'd like to turn the call over to Mr. Raul Revuelta for his opening remarks. Please begin, sir.

Thank you, Maria. We appreciate everyone who joined our call today to review GAP's second quarter of 2023. During the period GAP transported nearly 16 million travelers throughout our network of 14 airports. This represents a 12% increase compared to 2022, which added to the first quarter put us above our original traffic growth guidance for the year. Edwards opener during the quarter falls domestic and probably international. Los Cabos led the way with 3 new routes followed by Puerto Vallarta with 2 Guadalajara, Mexicali and Montego Bay with one each. Guadalajara also worth mentioning has accelerated profit growth during the quarter with an 18% increase. This was related to domestic market growth of 19%, mainly due to the new routes to Monterrey and Puerto Vallarta, as well as higher load factors from Viva Aerobus [indiscernible]. International profit benefited from an increase in frequencies in key US markets such as New York and California routes to Los Angeles, San Jose and Oakland. As a result, international traffic grew by 17% during the second quarter. Tijuana continues to be one of our main traffic generators boosted by the Cross Border Xpress, which has captured 32% of the airport's total traffic. The binational terminal continues to be a fundamental part of the airport's growth as well as other factors such as the nearshoring effect of the richest nations with the [indiscernible] performance of their passenger traffic at this location. The growth trend of Puerto Vallarta, Los Cabos is very similar given a strong domestic market fueled by the increasing load factors and frequency. In terms of international passengers in Los Cabos we opened a 2 new routes to Dallas and Houston, as well as the seasonal Iberojet route to Madrid. Puerto Vallarta, open air routes to Guadalajara and Volaris and to Los Angeles via JetBlue. We expect to share with you great news regarding passenger development for the whole network. During the coming months, we anticipate more than 40 new domestic routes in July operated by Volaris and Viva Aerobus. Now moving on to our aeronautical revenues. This line item increased by 14%, driven by passenger traffic throughout GAP network. In the case of our Mexican airports, the increase was offset by the annual increase in the producer price index, excluding petroleum, which has led to no inflation increase in maximum tariff approved in our Mexican airports. As such, we were able to reach 99% compliance of our maximum tariff. In addition, the consolidation of our Jamaican airports had a negative impact due to the appreciation of the Mexican peso by almost 12% over the US dollar that has affected the revenue increase. Just to remind you, the 2 Jamaican airports represent 15% of the total aeronautical revenues. At this point let's take a look at Non-aeronautical revenues, which reflected an outstanding performance growing by 18%. This resulted in a 10% increase in Non-aeronautical revenue per passenger. Most of the increase was attributable to the opening of newer spaces at the Guadalajara Montego Bay and Los Cabos airports. The increase was also due to the passenger traffic recovery and the renegotiation of contracts conditioned with the tenant. It is worth mentioning that despite of nearly 12% appreciation of the Pesos which affected 20% of total revenues, Non-aeronautical revenues increased above the passenger traffic increase. In terms of business units, food and beverage increased by 27%. This outstanding performance was mostly in Los Cabos, Puerto Vallarta, Guadalajara and Montego Bay Airports. [indiscernible] newer spaces were incorporated at the Guadalajara and Montego Bay Airports. Additionally, for the upcoming months, we are working on the opening of the rest of the Guadalajara airport and upscale rooftop food and beverage space which we expect to be completed in November. At this point that project is 80% above. Convenience stores revenue increased by 71%. To expand our business and we opened a 3 convenience stores during the last 6 months in Los Cabos and we recovered one more in Guadalajara. Just the thrift stores in Los Cabos represent 20% of the total income from this business line. And it's worth mentioning that one of the stores at the international terminal has the highest revenue for the network stores. This brings the total number of convenience stores in our network to 29. Duty free increased by 9%. The increase below passenger traffic rose by nearly due to the Mexican peso appreciation as all the revenues from this business are in dollars. It was also affected by the temporary closing of the Walk-thru duty free store in Guadalajara due to the construction projects that are in progress at the terminal. Other categories by 71%. New client catchment throughout increase which put us on track to recovery following the COVID effect. VIP lounges increases by 14%, mainly due to the lounges at our tourist destination that continues to that the business line. In addition, Guadalajara currently modernized remodeling the international VIP lounge and we are also reconfiguring some spaces international VIP lounge in Los Cabos due to the higher than expected demand throughout 2023. We expect both construction projects to conclude next year. Moving on to the EBITDA results. Despite the 12% appreciation of the peso and the almost new inflation in the quarter, EBITDA reached Ps. 4.5 billion for the quarter with an EBITDA margin of 17.4%. This was led by the passenger traffic recovery and solid commercial revenues and was partially offset by the 15% increase in the cost of service. As we have previously discussed, despite our best efforts to comply with our cost control policy, we have had to deal with inflation, the hiring of additional personnel, changes in labor law and minimum wage increases. These factors have affected not only salaries but also the terms that are linked to personnel such as janitorial security and maintenance. We expect higher costs further down the line due to the higher side and terminal expansion in addition to the inflationary effects. Moving on to the CapEx, it continued to be carried out in accordance with the master development program along with commercial investment. During this first 6 months we have deployed for Ps. 5.6 billion, which was allocated mainly to the Guadalajara, Puerto Vallarta, Tijuana and Los Cabos airports. Just to remind you that GAP the second version of the of this year dividend for Ps. 3.71 on July 13th per the resolution made at our annual shareholders meeting. Before I conclude my presentation, I would like to announce that the results -- the revised guidance figures for the 2023 versus 2022. For the traffic, we expect an increase for 10% to 12% for the aeronautical revenue and increased between 13% to 15%. For the Non-aeronautical revenue, we spotted an increase between 16% to 18% for a total revenue increase from 14% to 16%. EBITDA between 12% or 14% and EBITDA margins from 70% plus or -1%. CapEx overall for all the year to Ps. 11.9 billion. Passenger traffic projection is based on the consolidation of routes developed to date. It also includes increasing load factors and airline class frequencies and seat availability with information that is currently public. Total revenues have been adjusted based on expected changes in traffic performance, applicable passenger fees, a decrease in purchase price index excluding petroleum and a Mexican peso appreciation. This is in addition to the opening of new spaces as well as the negotiation of contract terms in commercial agreements as well as the development of other business lines operated directly by the company. Decrease in the cost of services reflects the operating requirements needed to meet the airports services demands. In addition to that, it reflects infrastructure expansion and service quality improvements added to higher inflation, minimum wage increases and additional personnel required for operations, maintenance, security and cleaning. CapEx reflects committed investments in GAP airports for the master development program and investment in commercial spaces. The process of acquiring land is moving really quickly hence we are adding Ps. 1.7 billion to the original guidance, amounting to a total of Ps. 3 billion for the land acquisition at the Guadalajara Airport. At this point, that is for my remarks. I will ask the Operator to offer the floor for your questions.

[Operator Instructions]. And we will take our first question from Guilherme Mendes with JPMorgan.

First question is a follow up to the comments on the guidance. If I may just provide a little bit more color of what is behind the traffic update. I understand the load factors and the additional capacity from the airlines just wanting to pick your brains on which regions are performing better if the domestic, if international or maybe some surprise on Jamaica going forward. And on the CapEx, if it's only related to the land acquisition in Guadalajara or something else just to make it clear. And the second question is related to the expected upgrades to Category 1 of the Mexico Aviation Agency. So what is the latest on that and what is companies expectations in terms of the timing for it?

First I will go into the traffic performance. We are seeing a really interesting growth on profit in some airports, some airlines, as Volaris has announced new routes as could be Mexicali or Guanajuato and even Tijuana. We are seeing a real interesting moment or boosting on the domestic traffic, for instance, in the leisure destination as Puerto Vallarta and Cabos. For sure in some routes and some regions that will be more, I would say affected or more in line with the Nearshoring as could be Tijuana, Mexicali or even [indiscernible] or Guadalajara. We expect that begin to see more domestic traffic happening because if this trend continues we are seeing better wages, better salaries, that kind of employment in the region, that will bring more money to the pockets of the people around this area. So we're going to see more traffic, for instance, on leisure and domestic traffic flying from Guanajuato to Los Cabos or to Vallarta. This kind of traffic we expect to increase due to the fact of better employment in the in the area. That is a really first part. The other one that is not completely clear is how much of this addition of how many of these additional frequencies that Volaris or Viva Aerobus has opening on the last month will be fully operating in the future as soon as the Category 1 could be recovered. In other words -- in other way both Volaris and Viva Aerobus have received new planes have increased their fleet, but they could not put a fly on internet on US market that planes. So they are pulling that capacity for the moment on domestic markets. But one of the things that we're going to see change in some way is as soon as the Category 1 is recovery for Mexico, we're going to see some kind of shift from some specific domestic markets to international markets due to the fact that Volaris or Viva Aerobus could often or could use cutoff frequencies on the future for the US market. Going to the category I would say that is the last visit of the US authorities to Mexico to review the -- all the progress on the different observations to the Mexican authority. I think that we are in the line and we are in the last part of this long process. We expect that the -- for the fourth quarter of this year the Category could be recovered. But again, we are talking about public information and how the authorities are communicating on all the progress in this process. For the last related to the CapEx in the general change on the CapEx, we are just adding above our original plans, some acquisitions of land for the Guadalajara airport. We are preparing the long term reserve of the airport that will allow us to have a possible third terminal number 3 on the future and even if the demand is there, the third runway for the airport. But the specific or the most important part is that our biggest asset, we are preserving the value for the future acquiring reserve for a maximum capacity growth in the coming years and in the long term.

We'll take our next question from Rodolfo Ramos with Bradesco BBI.

I have a couple, if I may. The first one is when you think about this faster recovery in traffic that you've seen, how does this -- how do you think of the main variables that you will be discussing with regulators this and mostly next year as part of your development plan and also having in mind the investment requirements that you'll need to accommodate that higher passenger growth. And then the second one is you talked a little bit about the impacts of the Mexican peso appreciation on your commercial revenues. Can you talk us through your thought process on how it can impact your business side on the aeronautical revenues?

Thank you, Rodolfo. This is Raul. I mean, for sure the increase of passengers when you put on projections will be some additional pressure for a possible decrease on the maximum target. But on the other hand, when you bring this kind of boost of traffic, you will need an airport additional CapEx and additional expenses for given -- for the correct quality service at the airport or to comply with the quality standards of the -- of our concession. In that way we are seeing the next negotiation of the master plan completely based in the methodology and the regulatory framework that we have. We will see an important amount of CapEx just to catch up the needs that the airport had to face in terms of the new passenger growth. Another important key factor that we must understand is that the changes of the fleet, not only the number of planes that Volaris and Viva was bringing to the market will affect not just the total amount of traffic in the future, but also are affecting the peak hour of our terminal airports, of our terminal buildings. This is important to understand because the airports and the terminal buildings are defined in terms of peak hours. And these peak hours are changing really fast, even faster than the growth of the total or the absolute amount of passengers. And let me go a little deep on that. For instance, when we design an area for a gate for a plane, we say, okay, we would need 150 seats. We need a toilet area with this amount of places. We need this amount of perimeter around the gate. In the past, for instance, with the 320s, we used to have an average of plane seats of 150, 170, even 180 seats per plane. What is happening with the new 321 of Viva and Volaris is that our peak hour is changing really fast. So in the past we used to receive in the same gate and 150 places of intercept and we are in the same route in the same hour, in the same gate. Today we are receiving an 321 of 20 and 45 seats from Viva -- from Volaris. So that is a complete change in how we design our terminals and for sure for the coming years will need to bring additional investments for growing our terminals. So in general terms, I would say that is what we are expecting in terms of the master plan and also about the impacts on commercial revenue.

Yes. Thank you Raul. Rodolfo, this is Saul Villarreal. Well, the main effect in the commercial is the exchange rate. Absolutely the appreciation of the peso is affecting only in our commercial revenues in Mexico is around 12%. With the consolidation of Jamaican airports, the total effect is over the 20% of the total revenues. It means that we should be growing 12% more of the 20% of that revenue. So what we are expecting is that according to macroeconomics, to have an stabilization of the exchange rate around 1700, 1750 and that will impact our budget that's why our guidance -- our total revenue is not growing at the same pace of the traffic growth. That is in general how will be the effect in the commercial and the consolidation of the Jamaican airport. Talking about aeronautical revenues, let me tell you that the produce price index in Mexico is almost flat. If we compare the last 12 months of June 2022, the inflation was 9%. If we look at the inflation of the produce price index in last 12 month of June 23rd is 0.9. So it's a bit different affecting also the effect of the -- in the aero revenues. In general just the effect of a change rate in the aero revenues is the consolidation of the Jamaican airports. In the other hand, for Mexican airports we have a fulfillment of 99% of maximum tariff which benefits in the total and offset the decrease even due to the inflation and due to the change rate that's generally.

We'll take our next question from Anton Mortenkotter with GBM.

Congratulations on your results. I have just some follow ups on the CapEx front. Just to better understand the increase in the land acquisition, how much land was it and is this -- is all of this related to the Guadalajara airport so it falls under the MVP? Just trying to understand if it has been already talked with the authorities and will fall apart as an advanced investment on the MVP commitments or how it will be treated.

Thank you, Anton. This is Raul. Yes it was for sure it was. Previously we received the previous authorization of the authority. This goal will be an advance of the new master plan and we already received the authorization. We are talking of an acquisition of the total acquisition going to be close to 150 hectares for the airport and we are just expecting to finalize the total acquisition of all these lands for the end of this year or merely the first month of the coming year. But the most important part here is that all these land acquisition is part of the master plan is already we already have the authorization of the authority. And it is also important to say that this land acquisition ends with an historical problem with the support with around the airport that is some remember we were in the middle of legal processes for the last 25 years with that zero. So one of the points that is also important is that we are not only acquiring the reserve for the future, but also we are finalizing all these legal matters and legal issues with the we support in Guadalajara.

And just another one on the if you could provide some breakdown on the CapEx deployed during the quarter and mostly on the commercial front.

Well, Hi Anthony. This is Saul. Well, as we have talked in previous conference calls, we have a very ambitious program of commercial investments. during the year. We will have the main investment in the construction of the mixed use building in Guadalajara, which is a very important project with 180 rooms of a hotel. We have more than 5000m² of offices and we have a commercial retail. We also have the expansion of the parking lot in Guadalajara with more than 2000 spaces just in this phase. And we have the expansion in other airports in terms of parking lots. So we have -- also we are opening additional business lines or business spaces for convenience stores and we are in the expansion of VIP lounges. So all this amount will be around Ps. 2.3 billion during the year, including some activities in commercial areas in Montego Bay that we are also adding a space and we are also adding a rehabilitation of some commercial areas. So that's in general the commercial and also just have in mind that the MVP in Mexico will be around Ps. 5.6 billion during the year. It is the peak of our investment of our master development program and we will do investments in Jamaica for around Ps. 1 billion and for land will be around Ps. 3 billion if we consider the full project that if you remember in the -- at the beginning of the year we announced in the guidance the acquisition of land for around Ps. 1.2 billion and now we are almost Ps. 1.8 billion of additional land.

We will take our next question from Pablo Monsivais with Barclays.

I'm sorry if I -- if you answered this already, but I just wanted to have an update on the NDP agreement with Jamaica. Is there any update on that?

Hey, Pablo, this is Saul. Well, we have almost an agreement. We are ready to receive from the authorities a notification. We are in the middle of the final conversation just to try to have the formalization of the changes in the concession agreements is not yet official so we cannot announce it yet. But as soon as we have the formal notification from the authorities, we will announce that. But we have almost the final stage of this process.

In a couple of weeks, even one month and a half, where half the official the final response for the Jamaican authority and so we will have made it public. Yes, correct.

Great. And if I can squeeze one more question on the terminal processing facility. As of now, can we -- I mean our operations already normalized. I mean, the increase in fixed expenses are already diluted with the additional passengers or there is still some catch up processor. I mean what is currently the normalization timeframe for this? Are we already there or we're still a few quarters away from that?

Thank you, Pablo. I mean, in terms of the report, the facilitator or professor building we for instance, I mean, we want to announce in the upcoming months the coming back on November. We expect in November that airlines will begin again international operations at Tijuana, where is a great news. One of the key parts that we need to begin to see some also additional international frequencies for routes happening in the terminal building on Tijuana, the new international terminal building on Tijuana is to have the Category 1 from the US government to the Mexican government because some of the routes that we have at the market is there to begin operations are also on the near area of Tijuana, but in the US market as could be Oakland, San Francisco, Las Vegas as the most important markets that are not served from Tijuana. But the key point here is going to be the terminal is completely ready for the operations of international flights. We are seeing the first plane coming on international again in November. And as soon as we have the category, we're going to see a more dynamic of new routes on the -- on international area of Tijuana. So I will say that for Tijuana and not only this particular building for all the area, we are really optimistic because the area is growing in terms of economy of employment. So the natural thing that we're going to see or the natural way to see Tijuana on coming in the mid term would be interesting growth because the population has more money in their in their pockets in this moment just or we are big impact happening already with you due to the fact of the new sharing in the area. So I think that is -- there will come great news from Tijuana airport on the mid term and long term for sure.

We will take our next question from Stephen Trent with Citi.

Just 2 quick ones from me. The first question is about your domestic traffic flow. Have you seen any disruption at all in your domestic connectivity with Mexico City metro area since authorities started pushing some traffic through Felipe Angeles Airport?

I will say this is not yet. We are seeing that the flight to the -- to Felipe Angeles is opening and is in the process of the ramp up for more openings. But what we are seeing if we see the complete markets of the Mexico metropolitan area, that is Felipe Angeles plus the Mexico City Airport, plus Toluca Airport. We put all together I will say that increasing the traffic is really low digit around 3% to 4%. And we'll see that at least for the moment we are seeing some kind of gradual shifting from Mexico City Airport to Felipe Angeles and even to Toluca. So in general terms, I would say that the area we need to see it like all the 3 airports and we are seeing that is aligned with this low digit growth in general terms.

And just one other very quick one, a little bit of a follow up to Rodolfo Ramos's question earlier. When you think about the totality of the movements in the Mexican peso against the dollar, you know, sort of any high level sensitivity as to what's the impact on Ebit margin for every 1% or 5% move in the peso against the dollar?

I will go through the [indiscernible]. First in terms of the revenue we are thinking -- we are talking about around 20% of our -- of the total revenue that in some way is impacted by the appreciation of the peso. In general terms, I will say that in the expenses side that in some way could offset some part the biggest part of the expenses in Mexico, taking out the Jamaica for sure. But at least for the for the case of the Mexican airports, the expenses are mainly in pesos. So we don't really have, you know, some kind of offset because one of the question that everybody failed, okay, is you have some kind of decrease on revenues due to the fixed rate or depreciation of the pesos. But you can in some way compensated with some savings in the for imports or some kind of things on our services. But the truth is that the airports are mainly business really high on efforts of personnel not only airport directly personnel GAP but also personnel from a security for maintenance for cleaning. So I would say that we are in the middle of a moment where we have a big impact coming from the reviews of the minimum wage in Mexico. With increase of some benefits on holidays, on [indiscernible] on Labor laws, these kind of things. So what we are seeing, at least on the coming at least part of this year and maybe the coming year is some pressure coming from the labor market in our expenses in pesos. For sure on the area of the revenues, it will depend a lot of what's going to happen with the central bank in Mexico and the rates. We will begin to see some kind of depreciation of the peso in the coming -- on coming months. But I will say that we are just in the middle of that sandwich that will some way give us some pressure to the margins.

I know. It's okay. We have 2 effects in revenues. One is the producer price index affecting aeronautical revenues in Mexico that is offset by the fulfilling of the maximum tariff at 99%, which is good. But in the other hand we have the appreciation of the peso of around 12%, affecting the 20% of the total revenues and astral set. In terms of expenses, we don't have a significant contracts denominated into dollars. I will say that around 99% of the total expenses in Mexico is denominated in pesos. So we don't have any compensated effect.

We will take our next question from Gabriel Himelfarb with Scotiabank.