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

Good day, ladies and gentlemen, and welcome to ASRU's second quarter 2022 results conference call. My name is Anna, and I'll be your operator. At this time, all participants are in a 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 1. If you would want to withdraw your question at any time, please press star followed by 2. If you are 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 the call over to Mr. Aldofo Castro, Chief Executive Officer. Please go ahead, sir.

Thank you, Anna, and good morning, everyone. Before we get started covering the highlights from the quarter and then taking your questions, let me remind you that certain statements made during the call may constitute forward-looking statements which are based on current management expectations and beliefs and are subject to several risks and uncertainties that may cause actual results to differ materially, including factors that may be beyond our company's control, including the impact from COVID-19. As usual, Additional details about our quarterly results can be found in our press release which was issued yesterday after market closed and is available on our website investor relations section. Now moving on to a review of passenger traffic and travel demand during the quarter. Total traffic was over 39% year-on-year and exceeded second quarter 19 levels by 19% to a record of 16.7 million passengers in the quarter. We continue to see steady growth throughout the quarter across the three geographies. Now looking at recovery trend by region against pre-pandemic levels of second quarter 19, once again, Colombia posted the strongest recovery up 43% with domestic traveling, increasing in the low 40s and international travel in the low 50s. Puerto Rico saw a 15% increase in traffic, mainly driven by domestic traffic that was up in the high teens, although relatively flat sequentially. In turn, international travel continued its gradual recovery, reaching 88% of the second quarter 2019 levels. Traffic in Mexico surpassed second quarter 19 levels by nearly 13%, with international travel up in the high teens despite higher airfares, driven by a strong leisure travel demand from all key regions, with the exception of Canada, which remains at 57% of the last 12 months, 2019. This has been more than upset by strong U.S. traffic, while last 12 months European tourism is just 8% below pre-pandemic levels. Looking ahead, staying with Mexico, we expect traffic from Canada to resume during the winter season, mainly November through April next year. While we expect to see a steady performance from the U.S. and Europe, we also anticipate domestic travel to continue its gradual recovery. As I have mentioned before, business travel is expected to continue to lack leisure. As a result, we believe that traffic at Veracruz, Minatitlan, and Villahermosa airports, which this quarter were on average 7% below second quarter 2019 levels, will continue to recover at a slower pace. In Puerto Rico, we are seeing domestic traffic trending to normalize after a very strong performance over the last several quarters. Lastly, traffic in Colombia remains surprisingly strong, and we expect this to continue throughout the year, driven by addition of routes and investments in tourism, which have driven a structural shift in demand. Traffic trends remain solid, underscored by pent-up demand. We believe that if any, this acceleration resulting from the increasingly inflationary global macro environment could be mitigated with the recovery expected to come from some markets like Canada. Now turning to the P&L, starting with our top line, note that all reference to revenues cost exclude construction revenues and that all comparisons are against pre-pandemic levels of second quarter 19. Revenues increased in the mid-40s reaching 5.7 billion pesos, a record high for any given quarter. This good performance was driven by growth in both aeronautical and non-aeronautical revenues. All geographies posted sustained revenue growth, with Mexico counting for 70% of the total revenues in the quarter, Puerto Rico 17%, and Colombia 12%. Commercial revenues were up 44%, driven mainly by passenger traffic growth, with increases of 39% in Mexico, 60% in Puerto Rico, and nearly 41% in Colombia. Commercial revenues per passenger amounted nearly 120 pesos above the 100 pesos reported in the second quarter 19, and is likely above the level achieved in the prior quarter. By geography, commercial revenues in the quarter were in the range of 143 to 149 pesos in Mexico and Puerto Rico. In Colombia, commercial revenues per passenger reached 40 pesos, fairly in line with second quarter 2019 levels. Note that 12 months level more than doubled those achieved over the same period of 2019. In terms of traffic mix, the share of domestic passenger remains at 2019 levels. What we'll continue to see growth in the US and the share of higher spending Europeans back to pre-pandemic levels, the number of Canadian travelers remain at 56% of 2019 levels. Now moving on to Of course, total operating expenses increased by high single digit, excluding 175 million pesos expense reimbursement in Puerto Rico, operating costs and expenses would have increased 18%. Nonetheless, this was significantly lower than the 45% growth in revenues. In Mexico, costs were up 27% but still below the 48% increase in revenues. This reflects higher technical assistance and concession fees, resulting from higher revenues and EBDA, together with higher cost of services, including the cost of sales from directly operated stores that continue to see a strong activity. Puerto Rico in turn benefited from 175 million pesos expense for investment, under the American Rescue Plan Act. Excluding these benefits, costs would have increased 10% while revenues were up 33%. Finally, costs in Colombia declined 26% while revenues were up 37%. In summary, the significant efficiency measures during the pandemic level have allowed us to maintain the costs that are on our control at 95% of the second quarter 19 levels and 79% on a per passenger basis, even with higher revenue levels than in the second quarter 19. These numbers includes total cost minus construction, depreciation and amortization, technical and concessions fees. We achieved record high profitability this quarter with consolidated adjusted EVDA up 47% to 4 billion pesos. Passenger traffic growth increased commercial revenues per passenger, higher tariffs, and operating leverage contributed to this performance. Mexico lead this growth with adjusted EVDA up 57% to 3 billion pesos. Puerto Rico in turn posted a 7% increase in EVDA to 580 million pesos, while profitability in Colombia continued to recover with EBDA up 62%, reaching just over 400 million pesos. Adjusted EBDA margin XE3-12 increased 100 basis points nearly to 71% this quarter. By geographical region, adjusted EBDA margin improved over 4% points in Mexico and Colombia. to nearly 76% and 58% respectively, while the margin in Puerto Rico was close to 59% this quarter compared with the 73% in the second quarter of 2019. All in all, we delivered a solid set of results with traffic and revenues at record high levels. These, together with operating leverage, have contributed to more than doubling net majority income to 2.6 billion pesos in the quarter, up from 1.2 billion in the second quarter 21 and 1.4 billion in the second quarter 19. Turning now to capital investments, we invested nearly 440 million pesos during the quarter, of which 79% was allocated to Mexico, 20% to Puerto Rico, and 1% to Colombia. In Mexico, we completed the expansion of the Tapachula Terminal as anticipated. We also remain on track with the expansion of the terminal building in Merida, with the third phase of the project to be completed by the year end. At Cancun Airport, we are making the steady headway to finalize by the year end the first phase of the Terminal 4 expansion, which consists of adding two boarding gates in the international front. In Puerto Rico, we continue to advance with the remodeling of Terminal D and major maintenance repaired to runways and taxis. Now a few comments on the balance sheet. We maintain a robust financial position with cash and cash equivalents of 7.3 billion pesos at the quarter end. This follows the dividend payment of 4.5 billion pesos paid last June as we return additional value to our shareholders. In turn, net debt last 12 months EBITDA was just 0.4 times at June 30, with interest coverage at 10.5 times. Only less than 1% of our death matures in the second half of the year, with the next major maturity taking place in 2025. Finally, account receivables were practically flat year-on-year. Before moving into the quick Q&A portion of the call, a quick recap. We welcome a record number of passengers in the second quarter, surpassing second quarter's 2019 levels. with robust growth across our markets that was driven by a strong pent-up demand. Although Canadian traffic remained low versus pre-pandemic levels, despite the higher fares in the US traffic, this was particularly strong, with European traffic has nearly recovered. We expect Canadian traffic to normalize this winter season which would help offset any potential slowdown in the traffic that could cause eventually a rise from the still inflationary environment across the world. Nonetheless, today we're seeing healthy traffic trends supported by a strong pent-up demand. Also gratifying was our record profitability this quarter. thanks to the effective efficiency measures and expenses control that drove our cost levels well below pre-pandemic levels, offering leverage kick in the strongly on the traffic growth. I will leave the operator please open the floor for question.

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 one question and one follow-up. If you have any additional questions, we ask that you rejoin the queue to allow everyone an opportunity to signal. We'll now take a question from Alejandro Zamacona with Credit Suisse.

Thank you. Hi, Alejandro. Thank you for the call. And a quick question on the cost of service. We have seen a strong cost control, even despite the traffic normalization. So in this context, what could we expect going forward, especially what you just mentioned concerning the high inflation environment? When we look at the cost of service per working day unit, Well, Alejandro, thank you and good morning.

Yes, we have been facing very difficult times with the high inflationary in all the geographies. As you have seen, that is the case of Puerto Rico with a very strong increase in the cost side. In the Mexico side, we have been able to manage some of these increases. Of course, going forward, we will see some additional impact if this level of inflation continues. The best case in terms of control has been Colombia, where things are or have been better than expected.

Okay, thank you. And then my second question, if I may, on the NDP, I know it's early, but I believe you will start to notice the progress of the NDP. I'll give you the only color on the expected price for the end of the conversation. Thank you.

As you know, we are working to construct that proposal that we have to deliver by the year and to the government. So today we cannot say anything about it yet.

Okay. Thank you. You're welcome.

You're welcome.

Our next question comes from Lucila Gomez with Compass Group.

Hi, good morning. My question is more about the inflation effects during this quarter. I believe that there were contracts that were going to be adjusted to inflation during this quarter. Have you faced any problems so far with the tenants?

No, if you're talking about contracts in terms of the cost side, which is not the tenant, some of them have been adjusted and they are adjusted. Normally we have annual contracts and when they mature, so those are adjusted with inflation. So far we have done that as of today. So no major things are going in front.

Perfect. Thank you.

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

Good morning, Adolfo, and thanks very much for taking my question. I have two for you. The first, I know that the Federal Aviation Administration did lower Mexico to... category two aviation safety rating and in that regard and can you tell us whether there are any specific items that sewer may or may not have to change or is this something that really doesn't affect you and it's all happening in the eyes of the regulator hello steve good morning thank you for your question a year ago when this happened if you remember we published a

a 6K, where we basically said that 0.5% of our traffic in 2019 to and from the United States was in domestic carriers. For the year 2020, it was 0.3%. Why is all of this is because what we have is destination airports. Basically, Cancun is a destination airport. So the people is coming from the U.S. to Mexico, and basically they are coming in U.S. airlines. They're not coming in domestic airlines. So that is why we do not see and we do not have a major impact from these Category 2 situations.

Okay, that's helpful. As of my follow-up question, you know, we've seen in the U.S. and places like London, Heathrow, and what have you, you know, difficulties in airports and ground staff. You know, is it fair to say that's not the case with any of your airports? Do you guys feel good about your throughput of ground staff at your various installations inside and outside Mexico? Well, that's a good question.

Why this happened in Europe, basically, is because they basically fired 50 or 60 percent of their people. And once the traffic came back again, they were not able and they have not been able to recover all the people that was fired. In our case, since day one, we decided to not fire anyone in the company because of this COVID-19 situation. So today we have no problems when the traffic has returned. So we are working without the difficulties that you are seeing in the case of the European airports.

Okay, very helpful. I'll let someone else ask a question. Thanks, Adolfo.

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

Thank you. Good morning, Adolfo. Thanks for taking my question. I have one follow-up to your initial remarks, and that was on the 10th of the month. I just wanted to clarify, in the case of Canada and Europe, how much of the percentage is back from 2019 levels? And then you can tell us how much does it represent from your total international Mexican traffic.

Rodolfo, hi, good morning. In the case of the European traffic last 12 months, passenger traffic, compared with the last 12 months, 2019, Europe is 92%. So we are below 8% of the pre-pandemic levels. In the case of Canada, it's 56%. Why Canada has not come back in that sense? Because normally the Canadian traffic has a very strong seasonality, which is November through April. So if you remember the last season, the last November to April, It was lost because of Omicron. So that's why we've been saying that we're expecting to see the recovery up to this winter season. So in the case of Canada, the other 44% that is pending to be recovered will be or should be recovered in the next winter season.

And just to mention, to put in perspective this sense of demand, how many million passengers would this represent if you were to look at how much it represents?

Yes, in the case of Canadians, the maximum that they had in 2019 was 2.7 million passengers. In the case of Europe in 2019, it was 2.1 million.

Okay, thank you. And just a follow-up, if that didn't count as my follow-up, but just wanted to get your thoughts on the Mexico City system. You know, we've seen a lot of news around slot restrictions and airlines trying to move to Toluca and Felipe Angeles. You know, given how important it is for your for your system, what are your thoughts there as far as, you know, it being an opportunity or a bottleneck for developing domestic traffic?

Well, the good news there is that we have a new complementary airport, which is the Felipe Angeles, you know. The other good news is that some of the airlines that were extremely reluctant to operate in Toluca, they're back again. So in that sense, what we are seeing is that we have additional capacity from these two airports. And of course, flights there will start growing as we speak, and I'm expecting to see a very nice level of traffic in those within the next two years.

Thank you, Adolfo.

You're welcome.

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

Hello, Adolfo. Thank you for taking my question and also congrats on your results. I have two quick questions. One is related to the non-analytical revenues. I just was wondering if you could provide some color regarding how is that front behaving with your tenants in the sense of how much of the revenues you're getting come from the fixed part of your rental and how much of it is variable given that you already returned to pre-pandemic traffic levels?

Hi, good morning. In the case of the fixed and variable things, if you remember in the second quarter 2020, we saw a huge increase in the case of Colombia. That was because the passengers were almost zero and we had a fixed revenue and the amount on a per passenger basis jumped up to 4,600 and something pesos. The case of Colombia is the one that has more fixed revenues per passenger. It's not the case in Mexico, it's not the case in Puerto Rico. So that is why you are seeing this number coming down from the 4,600 and something to the 39 point something during the quarter, no? So the fixed amount or the fixed revenues are less important once the traffic has come back, no? The case of Colombia today is 33% more than what we had or what we saw in the case of 2019, no? So most of the revenues in the case of Mexico and Puerto Rico are coming from the variable side. And in the Colombia side is now, I don't want to say level, but basically the fixed amounts are less important than they were before during the pandemic level.

Okay, thank you. That's pretty clear. And also, my other question is kind of a follow-up from Stephen's question. As you mentioned, lots of your traffic is serviced by international carriers. So I was wondering, through your conversations with these international carriers, what are their thoughts on increasing capacity at your airport? What are they thinking? How much fleet are they ordering? Or how are you seeing those dynamics?

Well, it's too many airlines that are flying to Mexico from the U.S., and basically what is driven the capacity is basically the load factor, and the load factor they have, it's very nice today, so that is why they have been increasing the seats offered to Mexico, and that is why you see this very nice increase from the U.S. traffic.

And have they mentioned, like, maybe any specifics on trying to increase, like, 10% their capacity on your airport or something like that?

No, I don't have any specific number to share with you from the U.S.

Okay, perfect. Thank you, Adolfo.

You're welcome.

Our next question will come from Pablo Montade with Barclays.

Hi, Adolfo. Thanks for taking my question. I just have a question on your outlook of the traffic in Colombia. It's been very strong over the recent quarters. In your view, what should we expect? Thank you.

Well, Pablo, as I said during the initial remarks, we are extremely surprised of the traffic level we have seen in Colombia. Despite the fact that around 34% of this traffic is between Medellin and Bogota, and this should be related to business traffic. Why is this so strong? Several things. One is, of course, some issues in the case of Bogota, so some of the islands have decided to start connecting in Medellin. Second is the case that New Orleans have come to Medellin and they are starting very strong. And the third probably is the effect of a country that was closed completely for six months. So I believe that this has created a lot of pent-up demand in the case of this country.

Okay. Thank you very much.

You're welcome.

We'll now take our next question from Gabriel Himofabe with Deutsche Bank.

Hi, Adolfo, good morning. Just a quick question. Can you give us a bit of color on how the commercial discussions with Avianca and McDonnell Airlines about receivables and what do you expect in the coming months? And also about Aeromexico, thank you.

Well, in the case of accounting receivables, the only problem we have is the case of Interjet that They didn't pay us around 73 million pesos, and all of this has been reserved in the previous quarters. And that is the only real problem we have. The rest of the airlines are paying basically on time, so I don't have any problem with Avianca, LATAM, nor Aeromexico.

Okay, thank you. You're welcome.

And once again, that is star one, if you would like to ask a question. We'll now take a question from Gilherme Mendez with JP Morgan.

Hi, Adolfo. Good morning, and thanks for taking my questions. Two questions, actually. The first one in terms of capital allocation and considering our low leverage close to net cash position. Would it make sense for you to accelerate the different payments going forward in addition to the one already approved? And the second question is more a follow-up related to cost and margins. Can you explore a little bit better what are the main cost initiatives that have been achieving and if we should continue to expect margins above the 70% levels? Thank you.

Well, in terms of dividend payment, we just paid a dividend the 1st of June. And this happened this quarter. It was around 4.5 billion pesos. And this was divided in two pieces, an ordinary dividend of 9.03 and an extraordinary of 6 pesos. So we just paid dividends, you know. Going forward, we will review as we have done over the last 20-something years every year, you know. In terms of margins, again, I don't like to talk about margins because the costs and the revenue are independent as we have seen during the pandemic period. So if we see high traffic and we are able to control the cost as we have done today, of course, margins should be expanded. That's very simple.

Okay, got it. Thank you.

You're welcome.

We'll now take a follow-up from Anton Mortecutter with NGBM.

Hi, Adolfo, me again. I'm sorry, I don't know if you mentioned it in the initial remarks. It's just regarding the ARPA law. Are you expecting any more benefits going forward?

Well, there is something... I don't remember exactly the amount. It should not be so significant as it was in the past with the CURS Act. But not too much in front.

Okay, thank you, Adolfo.

You're welcome. And as a final reminder, that is star one if you would like to ask a question. And we'll pause for just a moment. And it appears there are no further telephone questions. So that concludes the question and answer portion of today's conference call. I would like to turn it back over to Mr. Castro for closing remarks.

Thank you, Anna, and thank you again for participating in our second quarter results conference call. On behalf of ASUL, we wish you a good day. Goodbye.

Ladies and gentlemen, that concludes ASUL's second quarter 2022 results conference call. We would like to thank you again for your participation.