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

Good day, ladies and gentlemen, and welcome to ASUR's second quarter 2021 results conference call. My name is Sandy, and I'll be your operator. At this time, all participants are in listen-only mode. We will conduct a question and answer session towards the end of today's conference. If you would like to ask a question, please press star followed by one. If you want to withdraw your question at any time, please press star followed by two. If you're using a speakerphone, please lift the handset before making a 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, sir.

Thank you, Sandy, and good morning, everyone. Thank you for joining us. Our conference call to discuss ASUR's second quarter 2021 and financial and operating results. I hope that all of you and your families remain 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 differ materially, including factors that may be beyond our company's control, including the impact from COVID-19. For an explanation of this risk, please refer to our filings with the U.S. Security and Exchange Commission and the Mexican Stock Exchange. Passenger traffic trends continue to show sustained improvements across the board, with a total of almost 12 million passengers traveling to our airport during the quarter, although it is 14% below pre-pandemic levels of COVID-19. It represents an increase of over 13 times when compared with the same quarter last year. Puerto Rico posted the strongest recovery, with passenger traffic exceeding the second quarter 19 levels by 10%, driven by a high teen increase in domestic traffic, which more than upset a weaker international performance. Domestic traffic in Mexico and Colombia also contributed to show better trends. although still below pre-pandemic levels, down 12% and 30% respectively versus second quarter 19. Encouragingly, Cancun Airport practically reached the same domestic travel levels that we posted in the second quarter 19. While showing improvement on the back of successful vaccination process in the U.S., recovery in international traffic continues to rise. Mexico delivered the fastest recovery with international traffic nearly 20% below the level reaching second quarter 19, followed by Colombia and Puerto Rico, which posed drops in the mid-20s and high 50s, respectively, when compared against second quarter 19. Looking at our monthly traffic, since March, traffic has started to pick up again. driven the gradual rollout of vaccination campaign in Mexico and further busted by higher travel demand typical during the summer season. On the downside, traffic was negatively impacted by travel restrictions, mainly in Canada, which extended travel bans to the U.S. and the Caribbean until the end of August. Also impacting traffic are negative COVID testing and self-quarantine requirements in the U.S. for passengers returning to their country. Next, as we look ahead at emerging travel trends, remember that operations of the majority of the airlines serving the four regions we usually work with, namely the U.S., Canada, Europe, and Latin America, resume at the end of last year. In terms of international traffic, we expect that the accelerated pace of the vaccination rollout in the U.S. with 57% of the population with at least one dose will continue to translate in a gradual recovery of international traffic in our Mexican operations, particularly during the summer season in the Mayan Riviera that serves tourism, travel, and an improved outlook once the winter season arrives. In the near term, however, we expect domestic traffic to continue with a slow recovery as countries gradually advance in their vaccination campaigns. Restrictions are lifted and economies slower recovery. By contrast, we expect that the business travel will take more time to recover. which could be the case for airports like Mérida, Veracruz, and Villahermosa in Mexico, and Rio Negro in Colombia. We also remain cautiously optimistic about global travel demand and expect traffic to reach the 12-month record that we achieved in February 2020 within 8 to 16 months from now. Now let's move on the highlights of ASUR's financial performance. More details can be found in the press release issued yesterday after market closed. Our strong balance sheet has allowed us to navigate the current traffic travel environment as well as ramp up operations as the mine continues to gradually recover. Azure's financial position remains strong with cash and cash equivalents of 7.8 billion pesos at the end of the quarter, up 51% from December 2021. All countries of operation contributed to this higher cash position. Reporting increases 2.1 billion in Mexico and half a billion pesos in Puerto Rico. Colombia contributed nearly 6 million pesos in cash compared with the use of cash in the first quarter. We closed the quarter with a total financial debt of $13.7 billion, down 3% from the end of the year 2020. Net debt to last 12 months in the year was 0.9 times, while interest cover ratio was five times. Our maturity profile remains healthy with only 3% of the debt maturing before the end of the year and approximately 26% next year. With regards to account receivables, we continue to receive payments from the three airlines, Armexico, Avianca Holdings, and LATAM Airlines Group that filed for Chapter 11 bankruptcy protection in the United States. On a sequential basis, account receivables increased 26%, mainly driven by a 61% increase in Mexico, reflecting revenue growth. In contrast, account receivables in Puerto Rico and Colombia declined 16% and 5% respectively. Turning to the P&L revenue, sex construction increased 324% to 3.9 billion pesos year-on-year and were just 4% below pre-pandemic levels of second quarter 19, driven by declines of nearly 5% in revenues from non-aeronautical services and 4% from aeronautical services. Mexico accounted 68% of total ex-construction revenues, while Puerto Rico and Colombia represented 23.9% respectively. On a sequential basis, revenues ex-construction increased a robust 43%. On a per-passenger basis, commercial revenues reached nearly 119 pesos, up from 99 pesos posted in the same quarter of 2019. It's still distorted by the sharp reduction in passenger traffic. Continuing down to the P&L operating expenses, ex-construction costs increased 31% year-over-year, mainly driven by higher activity levels in Mexico. However, consolidated costs were down 8% when compared to the second quarter's 19 levels, and slightly exceeded the decline in revenues in that period. In Mexico, costs were up 64% year-on-year, mostly due to the higher technical assistance and concession fees on the back of higher revenues and EBDA. Higher cost of services also contributed to this increase, mainly reflecting the reopening of terminals 2 and 3 at Cancun Airport, which were closed in the second quarter of 2020, compared to the second quarter of 2019. Operating costs and expenses at construction increased 8.2%. By contrast, in Puerto Rico declined 4% year-on-year, benefiting from the reimbursement this quarter related to the cancellation of a security contract with the Municipality of Carolina, together with a reimbursement from TSA in connection with offering security, as required by the U.S. government. COMPs also benefited from the cost reduction in the second quarter of 2021, as a result of favorable FX translation impact and from a higher provision for bad debt in the second quarter of 2020 in connection with the COVID-19 pandemic. Note that a total of $8.2 million remain available on the U.S. TRSAC grant as funds were not deployed to reform the expenses this quarter. Finally, expenses in Colombia were up 29% year-on-year, mostly reflecting increases in concession fees to a lesser extent in cost of services resulting from higher traffic levels. Consolidated EVDA increased to $2.5 billion this quarter from $51 million in a year-ago quarter, which was fully impacted by restrictions worldwide to control the pandemic. When compared to the pre-pandemic performance, EVDA was only 3% below comparable to the second quarter 19 levels, which exclude the non-recurring insurance recovering in that quarter. All countries of operation reported EVDA gains, with Mexico contributing 1.8 billion, Puerto Rico over a half billion pesos, and Colombia 157 million pesos. Exit week 12, the adjusted median margin improved to 65% in the second quarter 21, up from 6% in the first quarter of the year and 53% in the second quarter 19, when excluding the insurance recovery that benefited that quarter. With regards to CapEx, we invested just over 460 million pesos in the quarter, the lion's share of which was allocated to Mexico. while $60 million were invested in LLM Airport in Puerto Rico. In Mexico, we remain on schedule with expansion of terminal building in Merida and the construction of the parallel taxiway of the second runway at Cancun Airport and the start in the first phase of expansion of Terminal 4. While in Puerto Rico, we are undertaking major maintenance repairs to runways and taxiways. To summarize my remarks, Azur's maintained a solid balance sheet that is enabling us to ramp up operations as our markets recover and long-term. We're confident in our ability to continue rebuilding our passenger base based on the encouraging growth trends we are seeing and supported by our attractive airport network. In the meantime, we continue presently managing cash and variable costs while travel demand remains affected by the pandemic. On the dividend front, as previously announced, last month our Board of Directors approved a payment date, October the 1st, 2021, for an ordinary net cash dividend of 8.21 pesos per share that have been approved at our 2020 Annual General Meeting. Finally, before opening the call for questions, we recently published our 2020 Sustainability Report, which is housed on our website. We welcome you to read it and learn about our recent progress and initiatives on ESG points. We remain committed to further enhancing our ESG strategy and performance, among other objectives For our next sustainability report, we intend to add the SASB framework to complement our reporting under the GRE framework. That concludes my remarks for today. Sandy, please open the lines for questions.

Thank you. Again, to the audience, it is star then 1 for questions. And again, please make sure your mute function is turned off or the handset is picked up before pressing the corresponding digits. Our first question comes from Alejandro Samacona at Credit Suisse.

Hi, Adolfo. Thank you for the call. My first question is on the airport fees increase. So, immediately extraordinary recent and detailed renegotiation. The maximum airport fees increase by probably 17% in real terms. We noticed that some airlines in Mexico have already updated the airport fees at some airports for us all. That was from since July 16th. So could you please confirm by how much airport fees are increasing and when should we expect fees to reach the maximum fees? Thank you.

Alejandro, hi, good morning. Well, what are you talking about is the result of our external maximum direct review process. That was approved basically at the beginning of April. So as you are mentioning, 17% was approved. And of course, Towards the year, we're increasing our rates to be able to reach that 17% increase. But, of course, what I can tell you is that this year we are not going to reach the maximum compliance level. We're going to be below in comparison of our previous. results in previous years due to the time it takes to increase our rates on the first place, and second is because we received the approval in April, as I mentioned. So what we expect is next year to be able to comply with the maximum tariff compliance.

Okay, so my second question is on the accounts received at all. So I know that you, in the remarks, you mentioned a 60% increase, which is basically for Mexico, right? But my question here is, is this increase from $760 million in the first quarter of 2021, up to 1.2 billion pesos in the second quarter. It's all related to Aeromexico, or what can you comment about that? Thank you, Alberto.

I would say, in general, all the airlines are paying on time, with the exception, of course, of VTJ, as I mentioned, that amount has been reset. The increase that you're seeing in Mexico is the result of an increase in the cell size, not in the lack of . Okay.

Thank you, Adolfo. You're welcome.

The next question comes from Guilherme Mendez at JP Morgan.

Hi, Adolfo. Good morning, and thanks for taking my question. I have two questions, actually. The first one is on the airline's front. To start to double check if there is any significant impact related to the downgrade of the Mexican Aviation Agency by the FAA. And the second question is, what is the latest on the Tulum airport? Thank you.

Good morning. In terms of the downgrades, we do not see any impacts whatsoever. And we do not expect any impact from these because most of our passenger traffic that travels to the U.S. basically travels in a U.S. airline. As I mentioned, during last year, 0.2% of our passenger traffic travels to the U.S. in a domestic airline. In terms of Tulum airport, I do not have more details than what you have in terms of what it has been said by the president of the country that he wants to construct a new airport in Tulum. That will be operated by the army. That's all what we say, all what we know.

Okay, very clear. Thanks, Adolfo. You will do.

The next question comes from Rodolfo Ramos at Bradesco BBI.

Good morning. Thanks for taking my question. I have two questions. The first one is on your traffic that you've seen so far.

Mexico started to go through this third wave of COVID-19, and the state of Quintana Roo was acutely impacted, and this started towards the end of June, beginning of July, so not yet captured by your traffic reports, monthly reports. So I wanted to see, you know, how have you seen this development impacting appetite for travel to Cancun?

Well, as you are mentioning, this third wave is securing To be honest, I would say it's not the third wave in Mexico. It's the first wave in Mexico because in reality, we have not been able ever to control the pandemic like it was controlling Europe and Asia. So I would say it's the first. You are right. We are today at the highest ever in terms of people that got sick, unfortunately. In terms of hospitalizations and fatalities, we are below as we were before. This means that vaccines are working and working well. And I do not expect major impact or major effect as we show here in terms of the same numbers. It is true that restrictions can be again enforced, but I do not expect those to be as strong as they were last year.

Thank you. And my second question is on your commercial revenue side. As you mentioned during your initial remarks, it's still quite distorted by the movement of volatility in traffic flow. But what do you think is a reasonable target for you? I mean, considering your expansion of different commercial sites, should we look at the 100 pesos per passenger level that we saw back in 2019? I mean, how do you think this could evolve in the following months, especially as you approach this pre-pandemic level of traffic?

Well, as you have said, in the second quarter of 2019, we reached 99 pesos per passenger. We have seen nice results in some activities like cab rental, like ground transportation. We do not expect permanent effects after COVID-19 is over, if it's over. I believe that these 119 pesos that we are seeing today are still distorted because of lack of passengers. You can see that effect in the case of Colombia. I tried to compare how it was. a year ago when there was almost no passenger with the number you are seeing today. Nevertheless, we have seen nice results during this second quarter. We will have to wait and see what is the new level after COVID-19. But of course, I do not expect permanent effects on these activities.

Thank you, Adolfo.

You're welcome.

The next question comes from Pablo Monsives at Barclays.

Hi, Adolfo. Thanks for taking my question. Just wanted to hear from you. What's the current situation and your expectations for Colombia? Traffic has... has kind of recovered, but not quite much. And still, we have more optimistic expectations for the second half. But what are you seeing on the ground? Do you think that we can reach pre-pandemic levels in the first quarter of next year? Or what's your stake? Thank you.

Pablo, in the case of Colombia, we need to recall that Colombia was closed completely, the country completely, as from the third week of March up to the end of August last year. So in comparison terms with Mexico and Puerto Rico that never closed, of course, it's the latest one. That's the first comment. The second comment is most of the traffic in Colombia, I would say, is business traffic related to Medellín and Bogotá. What I said during the remarks is that business traffic will recover later in comparison with tourism traffic and VFR traffic. So VFR is the case of Puerto Rico. You can see that Puerto Rico is above pre-pandemic levels. And tourism is the case of Mexico, mostly. In my initial comments, I said, said that we will have to wait more time to see the recovery process in cases like Merida, Villahermosa, and Veracruz. And that is basically because of the business traffic. It will take more time. And I would say that my expectation is that we will have and we will see permanent effects on this activity around the world. We are not going to travel in the same way as we were before the pandemic in terms of business traffic. We will use technology. And, of course, budgets in companies are going to be restricted, and also the economic situation is not going to be the same for a while.

One follow-up, and let me dig into this. You said that you are expecting a permanent effect Do you have any fear on your mind, ballparking, I don't know, to expect a structural 20% decrease in corporate travel or 10%? What is your best estimate?

Well, it's hard to say again, but it will depend on the different regions and the economics of those regions. But... But you are right, between 10% to 20% could be the permanent effect. That doesn't mean that we are not going to reach the same numbers someday. What I'm trying to say is that business traffic will recover later than the other leisure and BFR, but also that the amount of people that will be traveling in business, for business, will not be the same as it was. The proportion is not going to be the same as it was, no? So if you were traveling, I don't know, 30 times a year, probably in the future you will travel 25, no? That's what I'm trying to say.

Perfect. Many thanks.

The next question comes from Javier Guillol at GBM.

Hi Adolfo, congratulations on the results and thank you for taking my questions. My question is related to capital allocation and cash generation. Your contract is generated around 7.5 billion in operating cash flow and if we add up to that, if we subtract the capex that you guys have plus the dividend we get to a number of around an excess cash of around, let's say, 3.5 to 3 billion pesos in our estimates. So I want you, and with a net debt to every dollar of 0.9, I wanted to understand how are you looking at Azure's potential capital allocation? Are you more inclined towards lowering debt? Are you inclined towards refinancing or increasing debt and maybe doing investments? If you could give us some color on the strategy from that front, that would be great for us.

Thank you. Well, in general terms, I would say it's too early to tell. What I want to say here is that, for me, the pandemic is not over. It's not over yet. I think that it will take... Two, three months to be able to say that the world has been able to control this. And in the meantime, as I said during the remarks, we have to be cautious, no? In terms of numbers, you saw the 2.5 billion pesos EVDA for the quarter. It's true, but also the date of the payment of the dividend was approved and was set for October 1st. And that is around 2.5 billion pesos. So for the moment, that's what we are trying to do, is to be cautious on one side, second, to approve the dividend, and third, in terms of new projects, new expansions, we will have to wait.

The question is, As we see some recovery worldwide in terms of travel, how have you guys seen the environment for new travel routes between your airports and some international places? Have you seen people more interested in coming to Cancun, increasing the routes? Is that a possibility that we should take into consideration?

Yeah, in the case of Cancun or in the case of Mexico, basically the problem we have today is travel bans. And of course that we are in the summer, let me be clear. So we think about Canadian traffic. Normally they travel from November up to April. They normally do not travel during the summer due to weather conditions. So today, even with this travel restriction, we will not see Canadians in Cancun, of course. But that's why I'm saying that we will expect a better outlook for the winter season. So I believe that this winter season... will be better for us, and we will be able to see all the regions contributing to the increase in traffic.

Thank you. Thank you, Adolfo. That was very helpful. Thank you for your call. Thank you.

The next question comes from Anton Mortenkotter at GBM.

Hi, Adolfo. Thank you for taking my question and congrats on your results. I just have two quick questions. One related to the CAPEX deployment. I mean, up to date, you've invested around 700 million out of the almost 3 billion pesos committed in your CAPEX plan for the year in your Mexican efforts. I was wondering if you could provide some more detail about the CAPEX deployment in the future quarters.

Of course, well, what I can say to you is that we have to comply with the $3 billion you are talking about. Of course, it's something more than $3 billion, but remember that our extraordinary maximum tariff revision was approved in April. In that sense, of course, there was an adjustment in the investment program, so we have more or less a three-month delay But do not worry, we will catch up on the second half of the year because we have to comply with the 3 point something billion pesos during 21.

Perfect, thank you. And just another question, this one's related to Cancun. I've seen some news and some papers from San Diego University about... the strong sightings of sargassum near the Riviera Maya is said to be one of the biggest or heaviest sargassum sightings in history. And although it hasn't reached Cancun beaches, it has reached surrounding cities. So I was wondering, do you see any negative impact from this?

Well, of course there's an impact.

This year, I would say... It's mild. It's mild in comparison with 2018. That was the strongest year for that. What I'm saying is mild is not because I'm happy with what I'm seeing, but it's something that we cannot do anything about in terms of this is nature and sarcasm will be there from time to time in the Caribbean Sea. In the case of 2018, I remember it was also in the U.S. It was all the flooding. It was flooded. It was full of sargassum. It has an impact, yes, but it's, I would say, mild, and of course, towards the end of the year, that will be diminishing.

Okay, perfect. Thank you.

You're welcome.

Once again, if you would like to ask a question, please press star one. The next question comes from Gabriel Hennesab at Scotiabank.

Hi, Aloko. Thanks for the call. Congratulations on the results. Just a quick follow-up question. It's about the dividend. Do you think, or what's your view on future dividends? Do you think dividends will work? traffic levels or financial performance could improve as you could continue to hold or increase dividends? Thanks.

Gabriel, hi. Good morning. Thank God I have to send my proposal for dividends during February next year. So I have some time to see what is the outcome of this year in terms of results, to see the real situation in terms of the pandemic, to see if that was over or not. So it's a long way from now until that moment. Okay, thank you. You're welcome.

The next question comes from Roberta Versiani at Citi.

Hi, Adolfo. Thank you for this call. I'm sorry if you mentioned this before, but could you give me some more color on the 285 million reversal of payments in Huatulco, for example? Why was it canceled and how should I think about this in accounting terms? Does it run through your income statement or how does it work? Thank you.

Hi, good morning. Well, basically we finally decided not to go further on these due to many, many circumstances. And in terms of accounting, basically it was a reduction in assets. increased assets and increasing cash.

Okay. And what was this going to be like? Was it going to be, if you can tell, of course, like something for a retail area or hotel for flight crew? I don't know. I was just wondering.

I couldn't understand your question.

Okay. Thank you.

Again, it is now one to ask a question. That concludes the question and answer session of today's conference. I would like to turn it back over to Mr. Castro for closing remarks.

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

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