Grupo Aeroportuario del Sureste, S. A. B. de C. V.

Good day, ladies and gentlemen, and welcome to ASUR's first quarter 2021 results conference call. My name is Christina, and I'll be your operator. At this time, all participants are in listen-only mode. We will conduct a question and answer session toward the end of today's conference. If you would like to ask a question, please press star followed by one. You may withdraw your question at any time by pressing star followed by two. If you are using a speakerphone, please lift the handset before making your selection. As a reminder, today's call is being recorded. Now I'd like to turn this call over to Mr. Adolfo Castro, Chief Executive Officer. Please go ahead.

Thank you, Christina, and good morning, everyone. Thank you for joining us on our conference call to discuss ASUR's first quarter 2021 and financial and operating results. I hope that all of you and your families are managing to stay healthy and safe. As a reminder, please note that certain statements made during the course of our discussion today may constitute forward-looking statements, which are based on current management expectations and beliefs and are subject to a number of risks and uncertainties that could cause actual results to different materials. including factors that may be beyond our company's control, including the impact from COVID-19. For an explanation of these risks, please refer to our filings with the U.S. Securities and Exchange Commission and the Mexican Stock Exchange. Before starting the discussion of our results for the quarter, as expected earlier this month, we concluded the extraordinary maximum target revision for our master dependent plan for our Mexican operations. The revision resulted in a reduction of around 2.65 billion Mexican pesos from the original 10.9 billion Mexican pesos as of December 2016. Committed investments for the current five-year period ending 2023. We also held our annual shareholders meeting yesterday, which, among other items, shareholders approved, setting aside all remaining accumulated net profits for the fiscal year 2020, as well as setting aside 5% to increase the legal reserve. To the source, shares referred to the reserve. On the governance front, I wish you to welcome Mrs. Leanne Staden and Mrs. Diana Chavez as new independent members of the board of directors whose nominations were approved at yesterday's shareholders meeting. Mrs. Staden brings over 20 years of experience of financial markets. She was managing director at Merrill Lynch and member of its flagship New York international offices. Prior expertise includes positions at Bankers Trust and Deutsche Bank. She's also on the board of trustees of the University of Southern California. Ms. Chavez brings to Azure extensive expertise in advancing the agenda of corporate governance and sustainability. She is the Executive Director and Chairperson of the Board of CIPAL, a private sector century promoting research for the implementation of the United Nations Sustainability Goals and Initiatives in Colombia. She is also the Chair of the Board of Trustees of UNITAR, the United Nations Institute for Training and Research in Geneva. In addition, independent director, Mrs. Barbara Gansalagüera, who until now was a member of the Nominations and Compensation Committee, was appointed to chair this committee. With these two new board appointments, our board is now composed of a total of 11 members, seven of which are independent. Additionally, we have increased our female participation at the board level and our nominations and compensations committee is now headed by an independent board member. These advances underscore our commitment to further enhancing ESG. We look forward to providing more updates on this front in our 2020 sustainability report that we expect to publish within the next 30 days. Now, moving on the travel environment across our airports, commercial travel in Colombia resumed last September, while our airports in Mexico and Puerto Rico have remained open throughout the pandemic. Traffic in the first three months of the year continued to recover observed since last June, down 32% year-over-year to 5.1 million passengers, compared with drops of 50 and 70% in the fourth and third quarters of last year. By country, traffic was down 36% in Mexico, 20% in Puerto Rico, and 30% in Colombia. Domestic traffic continued to pose better trends. In Mexico and Puerto Rico, domestic traffic was down year-over-year in the mid-high teens, with traffic in Colombia declining in the high 20s. This compared with the year-over-year declines in international traffic of nearly 50% in Mexico and Colombia, and 70% in Puerto Rico. Looking at our monthly traffic, traffic recovers in Mexico.

Please stand by. Please go ahead.

Thank you, Christina. Sorry for this inconvenience. Looking at our monthly traffic, traffic recovery in Mexico slowed down in January and February on the back of higher COVID cases and health alert levels were established in several areas of Mexico. Traffic was also impacted by travel restrictions, mainly in Canada, which banned travel to U.S., Mexico, and the Caribbean until the end of April, and now extended up to June, as well as negative COVID testing and self-quarantine requirements in the U.S. for passengers returning to the country. March saw a recovery with a total traffic of 11%. reflecting easier comps and mainly driven by Puerto Rico and Colombia, while traffic in Mexico was relatively flat. The external result in the vaccination process in the U.S. has been positive on these figures. Looking ahead at travel trends while operating, while operations with airlines across the four regions we usually work with, the U.S., Canada, Europe, and Latin America, Presumed in the fourth quarter last year, passenger traffic remains impacted by weak demand. In near term, domestic traffic is expected to continue to drive the recovery, while international traffic should become more relevant in the medium term. As pent-up demand drives traffic, a critical mass of vaccination is achieved. We expect this to be partially mitigated in Mexico by the slower recovery of the economy, which has been hit hardly by the pandemic. In short, we remain optimistic about long-term global travel demands and expect traffic to return our last 12 months record, achieving February 2020 within 10 to 18 months from now. Now let's move to Astruz financial performance for the quarter. More details can be found in the pre-release issued yesterday after markets closed. Despite this challenging environment, we maintain a highly liquid and a strong balance sheet that allows to navigate the current choppy travel environment and wrap up operations when demand accelerates. Cash and cash equivalents at the quarter increased 11% to 5.7 billion pesos from year-end levels. Increasing cash of over 600 million pesos in Mexico and nearly 7 million in Puerto Rico were partially offset by a 64 million pesos cash decline in Colombia. Debt at the year-end was relatively flat from the year-end 2020 levels at 13.7 billion pesos, while net debt to last 12 months EBDA was 2.1 times, and interest cover ratio was 2.9 times. We also benefit from low near-term principal payments, with just over 5% of our total debt maturing in the next nine months of the year. In terms of the currency exposure, 52% of ASUR's debt is denominated in U.S. dollars and held as Arestar subsidiary in Puerto Rico. The remaining 29% is denominated in Mexican pesos, with 19% in Colombian pesos. Now, a brief update on account receivables. Aeromexico, Avianca Holdings, and LATAM Airlines Group that filed for Chapter 11 bankruptcy protection in the United States continue to make regular payments. At the same time, nearly 75 million pesos in account receivables from Interjet with these operations mid-December were fully provisioned in fourth quarter 2020. Interjet accounted for 5% of our revenues in 2020. Year-on-year accounts receivables were down in Mexico and Colombia, but increasing the high teams in Puerto Rico. Now, moving to the P&L, revenues of construction were down 36% year-on-year to 2.7 billion pesos. As assumed, non-aeronautical revenues declined in the mid-30s, while aeronautical revenues showed a slight better performance declining in the high 20s. Mexico counted for 64% of the total ex-construction revenues, while Puerto Rico and Colombia represented nearly 26% and 2% respectively. On a sequential basis, revenues ex-construction were up 11%. Excluding revenues from construction services, which are deducted as a cost under IFRS accounting standards, total revenues would have declined 36.2% year-on-year to $2.439.8 million, excluding revenues from construction services.

Please stand by.

Again, now moving to the P&L, revenues ex-construction were down 36% year-on-year to 2.7 billion pesos. As assumed non-aeronautical revenues declined in the mid-30s, while aeronautical revenues showed slightly better performance declining in the high 20s. Mexico accounted for 64% of total ex-construction revenues, while Puerto Rico and Colombia represented nearly 26% and 2% respectively. On a sequential basis, revenues of construction were up 11%. Excluding revenues from construction services, which are deducted as a cost under IFRS accounting standards, total revenues would have declined 36% year-on-year to $2,439.8 million. Excluding revenues from construction sales, Mexico accounted for 66.5% of total revenues, while Puerto Rico and Colombia represented 24.7% and 8.8% respectively. On a per-passenger basis, commercial revenues were nearly 108 pesos up from the 116 pesos achieved in first quarter 2020, reflecting the sharp reduction in passenger traffic together with the reduction of international traffic passenger means. Moving down to the P&L, cost reductions achieved across our operations contributed to a 21% year-on-year decline in consolidated costs. In Mexico, costs declined nearly 10% year-on-year, mainly due to lower technical and concession fees, as well as lower costs of sales from directly operated convenience stores, given the lower levels of activities. Savings in energy maintenance costs also contributed to lower costs. Although, since October, we have been operating with all of our terminals at Cancun Airport. Excluding a 29.4 million tax refund at Medina Airport in first quarter 20, cost in Mexico would have declined 13% year on year. In Puerto Rico, costs excluding construction were down nearly 230 million pesos, or 41%. A total of 187 million pesos, equivalent to $11.2 million, were reimbursed through the U.S. CARES Act. A total of $9.3 million remained available under the grant. We obtained savings of 26 million pesos in energy, security, and maintenance costs. On a comparable basis, and excluding the 124 million pesos from the insurance recovery in connection with Hurricane Maria in the first quarter of 2020, costs have declined close to 52 year-on-year. Finally, in Colombia, expenses declined nearly 15% largely due to lower concession fees due to the impact of the pandemic on the revenue base. Lower cost of services also contributed to lower costs. Continuing down to the P&L, consolidated EBITDA declined 42% year-on-year to 1.3 billion pesos impacted by COVID-19. All country of operations continue to report EBITDA gains, lead by Mexico with 1.1 billion pesos, 156 million in Puerto Rico, and 110 million pesos in Colombia. Exit week 12, the adjusted EBITDA margin was 58.8 in the first quarter of 2021 and declined when compared with 69.9 in the first quarter of 2020. However, the margin improved from 54.6 in the fourth quarter and 44.6 in the third quarter of last year. Moving on to CAPEX, we made capital expenditures of nearly 360 million pesos during the quarter. Of these, over 90% was invested in Mexico, 9% in Puerto Rico, and maintenance CAPEX in Colombia. In Mexico, we remained on schedule initiating the construction of the parallel taxiway to the second runway at Cancun Airport and starting the first expansion of phase four of of the first phase of Terminal 4. While in Puerto Rico, we are undertaking major maintenance repairs to runways and taxis. In summary, Azure maintains a solid balance sheet, and we have a solid track record of prudently managing cash and variable costs to effectively navigate the pandemic. We're also confident in the long-term recovery of our passenger base, supported by our attractive airport network. That ends my prepared remarks.

Thank you. Again, to the audience, it is star, then one for questions. And again, please make sure your mute function is turned off or the handset is picked up before pressing the corresponding digits. We ask that you please limit yourself to two questions, and you may re-queue with any additional questions. Again, that is star, then one for questions.

That is my prepared remarks for today. Cristina, please open the lines for questions.

Thank you. And we'll take our first question from Alejandro Zamacona with Credit Suisse.

Hello, Adolfo. Thank you for the call. Thank you for taking my questions. My first question is on the Paris Act in Puerto Rico. So I understand that you have received most of the reimbursement, including the initial amount. I mean, there are still remaining around $4 million, if I am not incorrect. So my question here is, is there any potential for a new round of reimbursement, or if you are combining any conversations with the authorities around this topic?

Alejandro, good morning. The original 34.4 million is, there is a remaining balance of 9 million as of today, and there is an additional 10 million for the second act on that respect.

Okay, thank you. And my second question, if I may, It's on the new maximum output tires. So can you give any update on where you are standing right now and when can we expect new tires to be fully implemented?

Well, the tires itself are applicable as from the first day of this year. Remember that the tires are for the year, not on a monthly basis. So they are in fact, in place as from January 1st this year. What I believe, of course, is due to the increase we have been approved, we're not going to be able to reach the 100% of maximum rated this year because we cannot implement increases in our specific rates in a very or in an immediate way.

Okay, so what percentage do you believe you can reach in this year?

That will depend on the draft. That will depend on also on the passenger mix.

Okay. Thank you, Adolfo. You're welcome.

Go to our next question from Alan Macias with Bank of America.

Hi. Good morning, Adolfo. Just one question on dividends. Can you provide an update on dividend payments expected for this year?

Thank you. Alan, good morning. As you recall, in the last year, shareholders assembly, a dividend of 8 point something pesos was approved. But that payment, the date of the payment was subject to a board approval as from May 11th this year. So the board of directors is the one who will be saying when this dividend is going to be paid.

Thank you. You're welcome.

Take our next question from Guillermo Mendez with JP Morgan.

Yeah, thanks. Good morning, everyone. Hi, Adolfo. Thanks for taking my question. My first question is regarding Colombia and Puerto Rico. So we already got the MDP renegotiation in Mexico. And if I'm not mistaken, you have already under your contract some terms that will allow you to extend your contracts given the impacts from the pandemic. Just wondering, I mean, how fast this should come to be a reality? So getting a similar... a rebalance on both Colombia and Puerto Rico. And the second question is just to confirm that you mentioned that you do expect your top traffic levels to be back in a 10 to 18 months period. That's it. If that's the case, if that's valid, both for domestic and for international. Thank you.

Yeah. Hi, good morning. Well, in the case of Colombia, we do not have to do anything for the extension of the contract because it is adjusted automatically. Remember that when we recuperate our regulated investment plus the return, I would say the concession is over with a minimum period of 2032 and a maximum of 2048. We have said before the pandemic situation that our concession will be concluding in 2032. So, basically, the contract is adjusted automatically. And in the case of Puerto Rico, there is no any change on the contract, no? So, I don't know if this answers your question.

Yes, it does.

Okay. Your second question was?

In terms of the traffic recovery, you mentioned in your opening remarks that you do expect traffic to be back to record levels in 10 to 18 months. I just wanted to double check if that's correct. And if that's the case, if that's valid for both domestic and international.

Okay, our peak for the last 12 months passenger traffic, let's say the record was achieved in February 2020. So what I'm saying is we should be reaching We expect to reach that level 10 to 18 months from now.

Okay. Thank you. You're welcome.

Go to our next question from Juan Ponce with Bradesco.

Hi, Adolfo. Thank you for taking my question. We recently saw the new outsourcing law get passed in the Mexican Congress. What do you think is the impact on Azure? I mean, I understand that insourcing will also be prohibited. So do you think services such as security, cleaning will be qualified as specialized services? Thank you.

Hi, good morning. Well, we are analyzing this situation. Of course, it has been approved at both levels. at the deputies and senators chamber, but it has not been published. In the case of security and cleaning, we are analyzing these. We do not believe that this could be considered as insourcing. So the companies, I believe, will have to provide the services as they are providing today.

Okay, thank you very much. You're welcome.

We'll take our next question from Andresa Ferrado with CBS. Yes.

Hi, Adolfo. Good morning. Thank you for taking my question. I have just two quick questions. The first one is on the MDP extraordinary negotiation. So we saw that you published the capex figures for 2021 to 2023. But in 2020, we saw that Asur invested than it was originally expected in the previous and altered MDP. So I have this question on how was the 2020 CATEX treated in the negotiation? And my second question is on the traffic. We saw a very positive rebound in March. So if you could give some color of April and also the upcoming month ahead of the high season. Thank you.

You're welcome. So the CAPEX postponement of 2.1 billion pesos that was approved by the authorities in the third quarter last year was considered in the new figures we have presented. So I would say the numbers that you have to consider on your budget or your forecast are the ones we just published. So it is 3 point something billion pesos for this year. No, in the case of the traffic, yes, we saw a nice recovery process for the case of March. Of course, remember that the pandemic situation started in mid-March last year. So a portion of that is because of the pandemic of last year. Nevertheless, I'm still optimistic. in terms of what we are seeing in the successful U.S. vaccination process. So I hope that we will see the effects of these during the summer.

Great. Thank you very much.

You're welcome.

As a reminder, if you would like to ask a question at this time, please press star 1. Again, that's star 1 for questions. We'll take our next question from Roberta Versiani with Citi.

Hi, Adolfo. Thanks for taking my question. Just one quick one on the MDP. In light of this recent tariff increase, how does Aldo expect to pass along all this higher pricing to the airlines? Could it be that volume-related discounts will be given to the airlines? How does it look like for this year with the situation still being complicated? Thank you.

As I have mentioned, it's not easy on this moment to increase our specific rates. And that is why I believe we're not going to reach the normal levels of maximum tariff compliance for this year. So we will have to see this very carefully. and we will be adjusting our rates in the future to recuperate our maximum tariff levels compliance in 2021. Okay.

Thanks, Adolfo.

You're welcome.

And again, if you would like to ask a question, please press star 1 at this time. Go to our next question from Alan Macias with Bank of America.

Thank you. Just a follow-up question on maximum tariffs. Have you increased tariffs as of April at any of the airports? And I guess, do you have more leeway to increase maximum tariffs for international traffic since the peso has been shrunk? Would that be accurate? Thank you.

Alain, no, we have not increased our rates in April. And to increase our rates, it requires a process that takes between three to four months. And as I said before, again, I do not expect to reach maximum tariff compliance at 100% this year as we used to. So, we believe that that will be or should be achieved in 2021. In the case of international traffic, yes, of course, the rates are higher due to the additional area we have to provide to them at the airports, which is the one that is related to migration and customs. All of that is in dollars. It's true. But at the end of the day, the maximum rate is in pesos.

Thank you. You're welcome.

We'll go to our next question from Gabriel Himmelfarb with Scotiabank.

Hi. Thanks for the call. Just a quick question. Do you think there's any risk this year as the climate becomes warmer about the sargassum in Cancun and near Rivera Maya? Thanks.

Gabriel, good morning. Yes, of course, we have this risk always. Sargasso is something that we cannot control, and of course we cannot predict because it's not seasonal nor cyclical. The season is starting with lower levels in comparison with the ones that we had in 2018, which was a very bad year for us. We'll have to wait and see what is the outcome.

Okay, thank you.

You're welcome.

We'll take a follow-up question from Juan Ponce with Verdesco.

Hi, Adolfo. Thank you so much for taking my question again. So I see Canada extended two major airlines in Canada extended suspension of flights to Mexico and the Caribbean until May 21st. Is May a big month for Canadian travelers, such as like in the first quarter?

No, it is not. Unfortunately, the high season for Canadians have passed that due to weather conditions. So I would say the additional extension as from April the 30th, it is not very important in terms of the impact in comparison with the one that we had in the first quarter.

Perfect. Thank you so much. You're welcome.

Follow-up from Guillermo Mendez with JP Morgan.

Yeah, thanks, Adolfo, for the follow-up question. The follow-up is on the non-earned and out-of-court revenues. Just wondering how is the relationship with the commercial tenants, if we should expect additional discounts on the airports? Thanks.

Well, I would say in general terms, the non-commercial revenues is working well, of course. Some of them have been facing trouble, probably not because of us, but because of other operations they have in some other airports where they contract the flat-transfer speedometer. So in the case of us, in general terms, Most of the contracts are adjusted automatically because the way that we collect from them. So I do not expect any major situation with them. Okay, that's clear. Thank you.

You're welcome.

As a reminder, if you'd like to ask a question, please press star 1 at this time. Again, that is star 1 for questions. There are no questions at this time. That concludes the question and answer portion of today's conference. I would like to turn the call back over to Mr. Castro for closing remarks.

Thank you, Christina, and thank you again for participating in our first quarter results conference. On behalf of ASUR, we wish you a good day and please stay safe. Goodbye.

Gentlemen, that concludes ASUR's first quarter 2021 results conference call. We would like to thank you again for your participation. You may now disconnect.