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

Good day, ladies and gentlemen, and welcome to Assure's fourth quarter 2022 results conference call. My name's Colin, and I'll be your conference operator. At this time, I'd like to welcome all participants, or at this time, all participants are in listen-only mode. We'll conduct a question and answer session towards the end of today's conference. If you'd 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 for making a selection. As a reminder, today's call is being recorded. I would now like to turn the conference over to Mr. Adolfo Castro, the Chief Executive Officer. Please go ahead.

Thank you, Colin. And good morning, everyone. Before I begin discussing our results, let me remind you that certain statements made during this call may constitute forward-looking statements which are based on current management expectations and beliefs and are subject to several risks and uncertainties that could cause actual results to differ materially, including factors that may be beyond our company's control. As usual, additional details about our quarterly results can be found in our press release. which was issued yesterday after markets closed, and is available in our website in the Best of Relations section. Following my presentation, it will be available for Q&A. Now onto the results. We closed the year with another strong quarter, reporting record high passenger traffic revenues and EVTA. We are pleased to continue seeking an uptick in passenger flying. travel demand remains strong with a record of 17.6 million passengers taking the skies and passing through our airports. An 80% year-on-year increase and nearly 26% higher when we compare with full quarter 2019. For the full year, a total 66.3 million passengers travel through our airports. Our three geographies contributed to this solid performance. Now taking a look at by country of operations compared against four quarter 2019. Colombia again posted the strongest recovery, maintaining a steady 37% increase in traffic with domestic travel expanding in the low 30s and international travel in the high 60s. On the cautious side, we do not expect this strong level to continue over the coming months, as VAT in Colombia was raised to 19 from 5% effective this year and may have an impact on traffic trends. Traffic in Mexico rose 26% during the quarter, driven by growth across all airports. International traffic increased in the high 20s, while growth in domestic lagged, slightly increasing in the mid-20s. This overall robust performance was driven by travel demand above 2019 across all the regions, with the exception of Canada, which remains at 77% of 2019 levels. Going forward, travel from Canada is likely to return to winter season levels during the first quarter of this year, while traffic from the United States and Europe is expected to continue boasting a steady growth. In turn, Domestic corporate travel is expected to continue lagging leisure travel. As anticipated in our prior call, traffic at Mérida Airport recovered this quarter, beating 2019 levels, while we continue to expect Veracruz, Minatitlan, and Villahermosa airports to fully recover this year. Lastly, in Puerto Rico, increased by a single digit. domestic travel was up over 10%, partially offset by nearly 1% decline in international travel. In sum, we forecast good traffic demand over the winter season, with recoveries expected in certain remaining regions, such as Canada, in the first quarter, helping to compensate for any possible slowdown caused by inflationary global environment. Now, turning to a review of a source income statement, As a reminder, all reference to revenues and costs exclude construction revenues. Starting with our top-line results, revenue were up 23% year-on-year to a record of 5.9 billion pesos and up nearly 54% when we compare to pre-pandemic levels of fall quarter 2019. This strong performance was driven by both aeronautical and non-aeronautical revenues across our three geographies. Mexico accounted 74% of total revenues, Puerto Rico 15%, and Colombia 11%. Commercial revenues maintained their solid trend, up 50% against Fogwater 2019, and in the mid-teens, year-on-year reflecting increases of 16% in Mexico, 14% in Colombia, and 7% in Puerto Rico. On a per-passenger basis, commercial revenues contracted by a low single digit normalizing to nearly 112 pesos, but above the 92 pesos posted in FOCWATER 2019. By region, commercial revenues per passenger were in the range of 137 to 147 pesos in Mexico and Puerto Rico, up 25% and 39% from FOCWATER 2019 levels. Of note, these figures include the effect of the strong Mexican peso. Our results in Colombia were impacted more by the currency depreciation declining 11% in Mexico peso terms. By contrast, commercial revenues per passenger increased 18% when measured in the local currency, driven by the opening of 38 commercial spaces over the past 12 months. The share of domestic travel over the total traffic remains steady at 65% when compared with fall quarter 2019. Moving down to the P&L, total operating expenses increase in the mid-teens, but below the 20% revenue growth in the quarter. Costs in Mexico were up slightly, but below revenue growth, mainly driven by higher cost of energy, personal cost, and as well increasing dental assistance and concessions fee in line with the higher EVDA. Puerto Rico cost declined by the mid-single digit as a reduction in the maintenance reserve and savings in water consumption more than offset higher cost of services. Costs in Colombia were up nearly 12% reflecting the sustained pickup in business activity, higher cost of energy, concession fees, and cost of services. However, this was below the 20% year-on-year increase in revenues. When compared to pre-pandemic level for quarter 2019 levels, costs under our control increased in the low 20s and significantly below the 60% increase in revenues, reflecting the efficiency measure implemented over the past few years. As a reminder, cost under our control refers to total cost minus construction depreciation and amortization, together with the technical and concession fees. We achieved another quarter of record high EBDA reaching 4.4 billion pesos, up 38% year-on-year, and 82% from 2019 levels. This also translated to higher margins with adjusted EBDA margin reaching 75%, improving six percentage points year-on-year, and over 11 percentage points when compared to pre-pandemic full quarter 2019 levels. Again, this quarter's solid passenger traffic growth, along with increased commercial revenues and operating leverage, more than offset higher concession fees. Importantly, we achieve high profitability across our three regions of operations. EVDA in Mexico increased by 30% year-on-year to $3.2 billion, Pesos, Colombia, we saw an EBDA up 25% to nearly 420 million pesos. In Puerto Rico, EBDA increased nearly 5% year-on-year on a comparable basis. Note, this excludes the recognition of a non-recurrent of a revenues of 300.4 million, this quarter from a judgment ruling in favor of Aerostar in connection with the right to charge a fee for each gallon of aviation fuel that was dispatched at the airport during 2013 to 21. By geography, adjusted DVDM margin in Mexico was relatively stable at nearly 75%. In turn, Colombia and Puerto Rico continued to deliver year-over-year margin improvements, both up two percentage points to 63% and over 53%, respectively. Compared to pre-pandemic levels for quarter 2019, the adjusted dividend margin increased nearly half a percentage point in Mexico and 19 percentage points in Colombia, and was stable in Puerto Rico when excluding the one-time event this quarter. In summary, we deliver another robust quarter with traffic and revenues at record highs, which together with operating leverage resulted in a 27% increase in net majority income to 2.6 billion pesos in the quarter, up from 2 billion in full quarter 21 and 1.3 billion in full quarter 2019. Looking at the balance sheet, we maintain a strong cash position and healthy debt profile. We ended the quarter with just over 13 billion pesos in cash and cash equivalent. Net debt to last 12 months in DA and interest coverage stood at healthy levels of 0.1 times and 12.6 times. Account receivables were up 35% when compared to prior year, reflecting the higher passenger traffic across our airports. together with an increase in Puerto Rico in connection with a non-recurring revenue recognition I mentioned earlier, which we expect to collect during the first half of 2023. Lastly, we remain capital investments on nearly 1.5 billion pesos during the quarter, the majority of which was allocated to Mexico, slightly over 14% to Puerto Rico, and nearly 10 million were invested in Colombia. During the full year, capital expenditures total 2.3 billion pesos. For 2023, we are planning CapEx program of almost 1.2 billion pesos with funds expended mainly in Mexico and Puerto Rico. Before we move to the Q&A portion of the call, some brief closing remarks. We deliver extraordinary 22 results including a record passenger traffic revenue and EVDA. These results underscore the higher consumer demand for travel and our ability to consistently deliver strong profitability while investing for the future. Our balance sheet remains strong. With the same time, we remain mindful of maintaining our financial flexibility. We look to 2023, many uncertainties, remain in the macroeconomic weather from economic policies, consumer demand, inflation, supply chain, war, and geopolitics. And while Canadian traffic still lags over other markets, we're cautiously optimistic that we will see a pickup in the winter traffic and being able to recuperate 2019 levels during the first quarter of 2023. Our solid results throughout the year are a great testament of the quality of our team and consistent execution of our strategy. As I mentioned earlier, we will continue to invest in the business to fuel and sustain growth. With the underlying strength of the core business, and we are confident we have positioned ourselves for sustained profitable growth, a strong cash flow generation, and value creation for our shareholders. Operator, please call the floor. open and close the call for questions.

Thank you. Again, to the audience, it is start, then one for questions. And again, please make sure your mute function is turned off or the headset is picked up before pressing the corresponding digits. Your first question comes from Juan Ponce from Bradesco BBI. Please go ahead.

Hi, Adolfo. Good morning. Thank you for taking my question. The first one is on the MDP negotiation. I mean, on one hand, you have a higher traffic base with tariffs below the maximum rate. On the other, you have high inflation to pressure OPEX, CAPEX estimates. So my question is, how do you see the higher level of bond yields and the broader inflationary environment impacting the negotiations of a potential adjustment in maximum tariffs? And related to this, what are your thoughts on the new PACS estimate for the Tulum airport? I've seen in the news, it's like 5.5 million right now. I understand that you have included 3 million in the negotiation, but just wanted to confirm whether it will be updated with the new estimates or how do you see this play out? Thank you so much.

Hi, good morning. And thank you for your question. Well, in the case of the MDP, what I can say is we have delivered our proposal to the government at the end of last year, and we will be reviewing that document during the entire year. In terms of rates, I believe we're going to be discussing those towards the end of the year, let's say for quarter. So today we cannot say too much about it. In terms of the Tulum airport, I have not said that we have included three million.

Talk or listen until the host admits you to the meeting.

That number.

Hello? I hear you. There's music in the background.

Hello, can you hear me?

Yes, I can hear you now.

Well, I was saying I did not say that I have included $3 million in the case of Tulum Airport. We have made our estimate of how much these airports will have and how the effect is going to be in our airport of Cancun. But again, we will be discussing that towards... the second half of this year. So that's what I can say today, Juan.

Understood, Adolfo. Thank you so much. And just a follow-up on one of your comments. You said 1.2 billion in capex for 2023. Just wanted to confirm this.

Yes, that's around 700 in Mexico and the rest in Puerto Rico. Thank you so much, Adolfo.

You're welcome. Your next question comes from Alan Macias from Bank of America. Please go ahead.

Hi, good morning. Thank you for the call. Just a follow-up question on CAPEX. Any important CAPEX requirements that you see during your next master development plan term? And if you can just give us any guideline in terms of CAPEX levels for this period. Thank you.

Hi, Alan. Your line is not so well, but basically in terms of CAPEX for the next MDP, the most important expansion projects are, of course, in the case of Cancun Airport. Maybe some expansion in the case of Oaxaca Airport and no further expansion in the others. We will be able to discuss or to talk about these numbers once the government review the document and approve it. For the moment, I do not have any guidance to share with you. Thank you.

Your next question comes from Philippe Nielsen from Citigroup. Please go ahead.

Hi, guys. Thanks for taking my question. So I have two questions on my side. The first one would be if the company has any room for additional capacity in Colombia, and if you're seeing or there could be any airline using Colombia as a staging base for broader South America service. And the second one would be if you could give us any sense regarding plans to build new hotel infrastructure in Southeast Mexico or Puerto Rico. Thank you.

Well, hi. Good morning, Philip. In the case of Colombia, One of the main problems we have, and I have been saying this for a while, is that the airport in Rio Negro is almost complete in terms of capacity. The government has authorized at the end of the fourth quarter additional works to expand the capacity of this terminal building. But of course, all of these works will last for a very few months, I would say probably two years, once those are completed. The reality of Colombia is that it is important to say that they need another terminal building, and this is something that we have been talking and discussing with the government over the last couple of years. We will let you know once we know more about this, you know, In the case of flights from Colombia to the United States, the most important situation of Colombia today is that they have been expanding flights to Mexico, and also there's one that is going to be to Puerto Rico if that's in progress, and some to the United States. But in the case of the United States, we're talking basically with more frequencies. to the places where they are flying today.

Thank you. And regarding the new hotel infrastructure in Mexico and Puerto Rico, do you have any color?

You are talking about the CAPEX program for this year?

Yeah, if you have any plans regarding building new infrastructure for hotels in those regions.

Well, in the case of the CAPEX of this year, we are basically completing the expansion in the case of Terminal 4 in Cancun. and we are basically refurbishing runways and taxiways in the case of Puerto Rico and the completion of the remodeling of Terminal D. Okay, that's super clear.

Thank you.

You're welcome. Your next question comes from Javier Galeol from Santander Asset Management. Please go ahead.

I don't know. Can you hear me? I don't know. There was a confusion there.

Hello, Javier. Good morning.

Good morning. So, first of all, thank you. Thank you for the call. Thank you for taking our questions. And congratulations on a great year for us all. My question is in terms of the cash balance that I think you imminently will have by the end of 2023. Can you give us how you're looking at it? Where are you guys comfortable in terms of leverage here? I know you privatize flexibility right now, and the markets are very volatile, but Just to understand, are you guys comfortable with the current cash position or the imminent cash position that you will have for the next year? Or should we expect more buybacks, dividends, or maybe M&A? Just understand, how are you looking at capital allocation for the cash that you most certainly have for 2023?

Well, thanks for your question. Yes, you're right. We're closing the quarter with 13 billion pesos in cash in hand. And apparently that is too much. Of course, we cannot forget what we have went through over the last couple of years, the case of COVID-19. But it's true that this is too much. And not just that, the CapEx program for this year, the 1.2 billion, of course, is very low when compared with other years. And I'm almost ready to present my proposal, my dividend proposal to the board and then to the shareholders assembly. So you will have to wait for that in the coming, I don't know, 30 months, 30 years, 30 days.

Super. Thank you all.

You're welcome. Your next question comes from Anton Morton-Cotter from GBM. Please go ahead.

Hi, Adolfo. Also congrats for your results. I just have a quick question. I understand, I mean, on a consolidated basis, the non-aridontal revenues per Pax decrease. I know that most of it comes from peso appreciation because actually in the domestic currency it increased a lot. But in some Mexican concessions, it did decrease. So I just wanted to understand what kind of dynamics are you seeing there or if you could provide some color or what's the mixture from the last revenues to pesos to better understand what's going on there. Thank you.

All right. Well, as I have said during the initial remarks, the effect of the superpeso has an impact on the commercial revenues. When you say non-aeronautical, remember that a portion of these is also regulated. So the best way to say this is total revenue excluding construction minus commercial revenue, that's regulated. But you're right. It was a decrease 24%. depreciation of the Colombian peso in the case of the Mexican peso, and around 5% in the case of the U.S. dollar had an impact on that number.

Okay. Thank you, Adolfo.

Your next question comes from Gabriel Hemilsar from Scotiabank. Please go ahead.

Hi, congrats on the results. Just a quick question, follow-up question about the MDP negotiation. Are you considering any charge impact based on the Tulum airport? And also, are you considering an additional capex on Merida's terminal, which I believe is capacity constraint? Thanks.

Hi, Gabriel. Well, in the case of Mérida, let me start with your second question. In the case of Mérida, we have expanded the building, and today Mérida has much more capacity in comparison of what they had a year ago. So I don't see that Mérida airport is constrained. In terms of the question about Tulum, yes, of course, that will have an implication on the tariff of Cancun because of the passenger traffic that they will take. But that's a normal procedure. Remember that the maximum rate is calculated with the future passengers or the expected future passengers in all the airports, of course. If we're saying that Tulum will have some passengers, that is happening. or that is considered into our calculation.

Sure. Okay. But just if there's like a sort of rule of distance between airports, if it's like, I believe it's 110 kilometers far from another airport, it triggers the negotiation or the maximum type of negotiation or it can be admitted. It's like... more distance than the minimum required for a competing asset. I don't know if I explained well.

Yeah. Well, in the case of Tulum, the final location is 130 kilometers away from our airport. But some of the passengers that uses our airports today should be using Tulum airport. And that is why this number has been included in our proposal.

Okay. Okay, thank you very much. And congrats on the results.

Thank you. Your next question comes from Pablo Monsive from Barclays. Pablo, please go ahead.

Hi, Adolfo. Thanks for taking my question. I have two quick questions. The first one is on the cost of services for Puerto Rico. I want to check why there was a lower maintenance and what should we expect in the future. That's number one. And number two, it's a more broad question in terms of commercial revenues in Cancun and Puerto Rico. I remember that early when you bid for the concession, the objective was to close the gap to Cancun. How do you see commercial revenues in Puerto Rico reaching that goal a few years after that? Do you think there's still room for upside, or should we now expect a more steady state? Thank you.

In the case of cost of service of Puerto Rico, one of the important elements that I mentioned here in the initial remarks was the maintenance reserve, and we decreased that because we made some savings on the work that had to be performed. In the case of commercial revenues, in the case of Cancun, we are experiencing at some times of the day congestion. at the terminal buildings that are not allowing us to provide the right service. And of course, we are not really taking the potential of commercial revenue. So it's clear that today or this year, until we expand the terminal buildings, we're going to suffer or we're going to lose some opportunities there. Today, Puerto Rico has probably the same or slightly over commercial revenues per passenger in comparison with Cancun. Going forward, of course, we will or we should expect a steady growth. The low-hanging fruit is not there anymore. That's very clear, no? But, of course, this is an endless story, and we need to take advantage of the passengers we have. And at the end of the day, what we need to do is to convert flyers into buyers and keep taking these opportunities in both cases. Thank you very much.

You're welcome. Your next question comes from Julia Orsi from J.P. Morgan. Please go ahead.

Hi, Adolfo. Good morning. Thanks for your time. We have two questions on our side. So the first one is, what should we expect from EBITDA margins going forward? This quarter, EBITDA margins were pretty solid. And is this sustainable in the mid-term? And the second question is, what's your expectation on the FHAC upgrade to Category 1? Thank you.

Well, in the case of the EBITDA margin, Going forward, you will have to make your own calculations in terms of revenues and cost. What I can say to you is that we have seen or we start feeling the inflation in the case of the three airports. You have seen the numbers, and those have increased more than inflation to catch up some piece of what we have saved since 2019. If we see on real terms, our cost today in comparison to how it was in 2019 is lower than what it was in real terms. So we will see some effects. Just to give you an idea, in the case of energy, during the quarter, the cost of energy here in Mexico increased 8%. 8% for a quarter is a very strong number. And that, of course, will have an impact through the rest of the year.

Okay.

Your next question comes from Lucia Gomez from Compass Group. Please go ahead.

Hi, thank you for taking my question. Sorry, I got disconnected at the beginning, so I don't know if you've talked about this, but I just wanted to see if you could Give me your outlook for specifically the Mexican traffic moving forward. Are we going to start seeing a slowdown on these high traffic levels we've had, or do you think it's going to keep up at current levels?

Well, Mexican traffic has been very strong, particularly in the case of leisure. It is not the case in the case of corporate travel, as I mentioned, in Veracruz, Villahermosa, and Minatitlan. What we expect is these airports to recover 2019 levels during this year. In the case of leisure, we expect this to continue. We are seeing a strong demand there. Of course, that will depend on the tourism activities during the summer. So far, if we see the first month of the year, the numbers have been very strong. Of course, I would say first quarter of this year is going to be strong because first quarter last year was affected by Omicron. So the important point during the year is going to be the summer. But again, I can say to you that we expect that it grows on the leisure track.

Perfect. Thank you.

You're welcome. Your next question comes from Regis Cardoso from Credit Suisse. Please go ahead.

Adolfo, thank you for taking my question. One question from my side with a broader, longer-term perspective. Thinking of your assets in Mexico, where do you think we are in terms of either investing further or, on the other hand, generating free cash flow to pay back? the concession reference value. As we approach the next MDPs, right, should we continue to invest further? Should we be thinking about, you know, does it make sense to allocate and if it frees up capital, right, does it make sense to allocate capital into assets that have a longer-term maturity, mixed-use buildings, industrial parking lots? I mean, what would be the use of cash? Or do you think it will, you know, revert to higher shareholder distributions in the future? Thank you.

Well, in the case of Mexico, we're still 20 years away from... 25 years away from the end of the concession. So we are... I would say in the middle of the 50-year period. Normally, we invest or we propose our investments in accordance with the demand we expect. That's what I was saying. The most important effect in terms of the proposal we have presented to the government is Cancun because we expect more traffic in the case of Cancun. In the other airports, basically, we do have the capacity for the future demand, so we do not perform major expansion works there with the exception of Oaxaca. So for the next MDP, if you want to say so, we're going to be, let's say, catching up in terms of that we have the capacity there with the exception of Cancun.

Understood. And probably as we enter sort of the second half of the concession period, I would assume at some point, you know, free cash generation from those concessions will increase. And, you know, in light of that 25-year remaining, does it make sense to, you know, invest in further, you know, mixed-use buildings? Or do you think the majority of that free cash flow would eventually become shareholder distributions?

Yes, I do agree with you because if we see the results for the first 25 years, basically most of the cash flow generation has been invested in the airports, with the exception of the dividend payment mostly has been invested there. And this trend should reverse towards the end of the concession.

Understood. Thank you, Adolfo. Congratulations on the results.

Thank you. Your next question comes from Francisco Suarez from Scotiabank. Please go ahead.

Thanks for the call, Adolfo. Congrats on the superb results. And thank you for your initial remarks. Those were very helpful on your overall outlook. Can you give us an indication what is also happening on room supply in the Riviera Maya Do you see further investments adding perhaps more to demand in addition to your remarks of what you said on trends on air travel from the U.S. and Canada?

Yes, thank you for your words. In the case of room supply, several comments. First is there has been a lot of Airbnbs that have been constructed over the past couple of years. And to be honest, I do not have visibility as I had in the past because in the past it was easy to see or to track hotel rooms. In the case of Airbnbs, we do not have a number of how many they are and how many rooms they have by unit. So you can see Airbnbs growth in what we call north of Cancun. That's one piece of the puzzle. The other piece is the case of Isla Mujeres that has been growing really fast over the last couple of years. So all of these north to our airport. In the case of Cancun, I was saying for many years that there was no more space in the hotel zone of Cancun, and now there's a project there for another 2,500 rooms. even that we say there's no space, there are some construction as we speak. Finally, in the Riviera Maya, the most important region in terms of growth, of course, is close to Tulum, and that should be taken by the new airport there.

Got you. Thank you so much. Congrats again. Thanks.

That concludes the question and answer portion of today's conference call. I would now like to turn the conference Back over to Mr. Castro for closing remarks.

Thank you, and thank you all of you again for participating in the fourth quarter results conference call. On behalf of ASUR, we wish you a good day. Goodbye.

Ladies and gentlemen, this concludes ASUR's fourth quarter 2022 results conference call. We'd like to thank you for your participation. You may now disconnect.