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

Good day, ladies and gentlemen, and welcome to a SOAR's first quarter 2023 results conference call. My name is Paul, 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 toward the end of today's conference. If you'd like to ask a question, please press star 1. If you want to withdraw your question at any time, please press star 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 this call over to Mr. Adolfo Castro, Chief Executive Officer. Please go ahead, sir.

Thank you, Paul, and good morning, everyone. Before I begin discussing ourselves, let me remind you that certain statements made here in this call may constitute forward-looking statements, which are based on good management expectations and beliefs. and are subject to a federal risk and uncertainty that would 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 market closed, and is available on our website in investor relations sector. Following my presentation, I will be available for Q&A. Before getting into the discussion of the quarterly financial results, I want to note that our latest sustainability report is available on our website, and we invite you to read all of it. Last year, during the first quarter conference call, we laid out the seven key strategic objectives for the company to implement in their short-term and medium-term. Two notable advances made last year towards achieving these goals include The formation of the Sustainability Committee. This committee has three members and will support the board directors in making decisions focused on environmental, social, and governance matters, and incorporate them into the company's long-term strategy. Furthermore, the company will support the organization in integrating sustainability and corporate social responsibility at the highest level of the corporate governance in the company. The committee held its first meeting earlier this year. We also made progress with respect to reducing greenhouse gas emissions in 2022. We began installing solar panels at the airports of Cancun, Merida, and Oaxaca. We'll generate 900,000 kilowatt hours annually in each airport. We are already seeing benefits with the reduction in greenhouse emissions. One of our objectives for the next year is to expand this project to other airports in the group. As we continue to make progress to get closer to achieving our goals, we will provide you updates at the appropriate time. Now, moving to a review of our original and financial results together with some color and travel demand in the quarter. Note that all comparisons are year-over-year unless otherwise noted. We are pleased to report record high passenger traffic revenues and EBDA in the first quarter of the year But we are more cautious for the remaining of the year, given the easy comes from Omicron during the first two months of 2022 and the negative effects of the personal suspension of two Colombian airlines during the quarter. We deliver sustained growth in the number of passengers traveling to our airports, up 19% and reaching a record of nearly 18 million. Mexico boasts the fastest growth traffic up 23%, reflecting increases across all of our airports. Domestic travel was up in the high 20s, with traffic up at pre-pandemic levels, while we expect that to fully recover this year. In turn, international traffic was up in the high teens, mainly driven by steady demand from the United States and Europe, and an uptick in Canada, which recovered pre-pandemic levels during the first quarter. These all regions that we operate within have recovered 12 months pre-pandemic levels. Puerto Rico followed with traffic up 22% with domestic traffic up in the high teens and internationally up by nearly 50%. Lastly, total passenger traffic in Colombia increased 9% with domestic traffic slowing to the middle, single digits, and international passengers to the high 30s. As anticipated, this slower growth reflects in the freeze in VAT from 5% to 19%, which is impacting traffic trends and the suspension of operations of Viva Colombia at the end of February and new trial during March. These airlines represented 17.4% and 1.9% of 2022 passenger traffic in Colombia, respectively. On a consolidated basis, the share of domestic traffic over total traffic is still at 59.3% of total traffic compared with 60.1% in the first quarter 2022. Now moving to the PNL. As a reminder, all reference to revenues and costs exclude construction revenues. Before, beginning with our key financial figures, revenues increased 22% reaching all-time high of 6.3 billion pesos. This robust performance is attributed to the solid growth in both aeronautical and non-aeronautical revenues across our three geographic regions. Mexico represented 75% of total revenues, while Puerto Rico accounted for 15%, and Colombia contributed 10%. Commercial revenues continue to show an upward trend, increasing by 20% overall, with Mexico up 23%, Puerto Rico 18%, and Colombia 13%. On a per-passenger basis, commercial revenues increased to 123% from nearly 121 pesos in the year before. The regional commercial revenues were in the range of 145 to 147 in Mexico and Puerto Rico. Of note, these figures include the effect of the struck Mexican peso, which appreciated 36.23% versus the U.S. dollar and the Colombian peso since the end of the first quarter last year through the first quarter of the year. Commercial revenues per passenger in Colombia were up in the low single digits in Mexican pesos, impacted by the currency depreciation that increased 37.8% in local currency, reflecting the opening of 29 commercial spaces over the past 12 months. Moving to cost, total comparable operating expenses were up 12% below the 22% revenue growth in the quarter. Note that comparable costs exclude the threat of the 196 million pesos expense recovery in the first quarter of 2022 resulting from the application of the CRASA Act in Puerto Rico. Expenses in Mexico increased in the low 20s, below the 26% revenue close. Higher costs were primarily due to personnel, energy, and maintenance, along with increased technical assistance and concession fees in line with the higher EBDAs. We have worked hard to maintain our cost control policy, but the 20% increase in the minimum wage had a negative impact on clean and security contracts. In Puerto Rico, comparable costs were relatively stable as a reduction in the maintenance reserve more than offset higher cost of services. Cost in Colombia was generally flat compared to a high single visit increase in revenues. Solid passenger traffic growth together with higher commercial revenues and increased operating leverage resulted in another quarter of pre-call carry EBDA reaching 4.5 billion pesos of 23% and adjusted EBDA margin of nearly 72% of 90 basis points from the year-ago quarter. Again, this quarter, we delivered high profitability in our three regions of operation. Mexico posted a high increase in EBITDA of over 28% to 3.6 billion pesos. In Puerto Rico, EBITDA was up 4% to 520 million pesos, while Colombia EBITDA rose 12% to over 415 million pesos. By geography, adjusted India margin includes 80 basis points in Mexico to nearly 77%, and by 150 basis points in Colombia to just over 63%. In turn, Puerto Rico posted a 260 basis points decline in adjusted India margin to nearly 55%. To recap, we delivered yet another strong quarter, characterized by a record break traffic, and revenues. The combined effect of these achievements and our operating leverage led to an increase of 15% in net majority income, reaching $2.5 billion for the quarter. In terms of the balance sheet, we maintain a robust cash position of $15 billion and a well-balanced debt profile. Account receivables were up 44%, mainly reflecting the high passenger traffic across our airport network, as well as a surge in Puerto Rico from the recognition of other revenues disclosed in the fourth quarter of 2022. We anticipate collecting these receivables within the first half of 2023. To a lesser extent, Viva Colombia and Ultra Air outstanding receivables to assume were a combined sum of 22 million pesos. Capital investments during the quarter were 143 million pesos, of which nearly 50% was allocated to Mexico, 47 to Puerto Rico, and 6 million pesos were invested in Colombia. Before we move to the Q&A portion of the call, some brief closing remarks. We are pleased to have started the year with a strong note. Nevertheless, as we think about the remaining of 2023, the year over the year comes will not be easy as we experienced in the first quarter. As I mentioned earlier, two of the Colombian airlines have recently suspended operations. Meanwhile, we will continue to look for ways to further improve our cost of structure and drive margin improvements. Our balance sheet is healthy and we will continue to invest to support future growth. Separately, on the news front, at the end of the quarter, Mexico sent to the Mexican Congress a bill to reform 23 laws. The bill was to provide, among other things, additional funds for the Mexican government to modify or to revoke license, authorizations, and permits. And it's not clear whether the Congress will pass this bill, and if it passes, the impact it may have on the Mexican economy and the country's operation. We believe this bill will be discussed by the Mexican Crown Congress during the third quarter of this year. In conclusion, with a keen focus on providing value to our shareholders, our Board of Directors has proposed an ordinary net cash dividend of 9.93 pesos per share, payable in May, and an extraordinary net cash dividend of 10 pesos per share, payable in November, for each of the ordinary B and BB shares. Equivalent to a combined total of nearly 6 billion pesos in dividend payments. These, among other items, will be boarded by our shareholders at our annual general meeting held this Wednesday. This is my presentation. Please open the floor for questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset. One moment, please, while we poll for questions. Thank you. Our first question is from Guillerme Mendez with JP Morgan. Please proceed with your question.

Hi Adolfo, good morning and thank you for taking my question. I have two questions. The first one is related to the regulatory noise that I just mentioned regarding the concession bill sent by AMLA to Congress. The question is if you see any kind of risk for your upcoming MDP negotiation. I understand there's still a lot of doubts and we haven't seen the full definition of it, but what's your best guess on how this could potentially impact the sector as a whole? And the second question is regarding to Colombia. As you mentioned, you have two less players operating on the region. How do you see the competitive environment in the region and the potential impact on traffic going forward? Thank you.

Good morning. Well, the deal is not a concession deal. The deal is affecting all the entities that have received from the government a license, a permit, an approval, or an authorization, or a concession. It's not just for concession. Also, this bill has some other things. It is not just to strengthen the power of the Mexican government in concessions. I'm not expert on laws or legal matters. You can read the 2018 report and you will see what my lawyers say about these documents. In the case of Colombia, yesterday at night there was a communication from the Ministry of Transport where they are approving the marriage between Viva Colombia and Avianca under certain conditions. This may help in order that these airlines can restart operations. Also, I received a notification from Ultra Air that they want to restart operations, and this may improve the situation in Colombia because what I believe is that currently Avianca and LATAM does not have the possibility to absorb all the passengers, these airlines, left into the tail. I hope that these two things will improve and we will see information, I would say, over the next week.

Okay. Thank you very much. Have a nice day, Adolfo. You're welcome.

Thank you. Our next question is from Rodolfo Ramos with Bradesco BBI. Please proceed with your question.

Thank you, and good morning, Adolfo. A couple questions from my side as well. The first one is if you can share a little bit on your expectations for international traffic, particularly coming from the U.S. I don't know if you have any visibility as to bookings or anything. We were looking at air travel searches from the U.S. towards Cancun, and it looked like they're a bit off from what we saw at this time of the year last year. So I just wanted to get your thoughts there. And I have a second question, a follow-up on the first one.

Okay. Rob, okay, good morning. We do not have too much or additional information of the one you have. Of course, we have the bookings up to the end of the season, of the winter season that ends almost at the end of April. What I expect is more stable growth In the case of the U.S., the important point will be the summer. In the case of the U.S., and domestic. And towards the end of the year, again, the Colombian traffic.

Okay, thank you. And a follow-up on the previous question. On your MDP, I mean, I don't know if there's anything you can share as to the progress of your MDP. I mean, you mentioned that this... This reform doesn't contaminate, so to speak, the process, but just wanted to get your, you know, any initial comments that you can make regarding perhaps tariff expectations or any projects in terms of CAPEX, just anything for us to have visibility at this time where, you know, kind of like the regulatory concerns are a little bit more, you know, heightened. Thank you. Wonderful.

Well, the only thing that I can say about the MDP is that the first half of the year, normally the authority pays a visit to each one of the airports basically to check two things. One is what we call the inventory, what is the real status of every single piece of the infrastructure at the airport. And the second one is to review each one of the projects we have proposed to them. What I can say to you is that these program of visits have started as they are at the airports as we speak. So when the second half of the year is when the government starts checking the passenger traffic, this can great and final calculations.

Thank you. You're welcome.

Thank you. Our next question is from Alberto Valerio with UBS. Please proceed with your question.

Thank you for taking my question. I would like to do another follow-up on the NDP. You are the only one to provide a capex for the following five years of the current NDP. And if you're not mistaken, in 2018, you provided a 10 billion capex Can you still use that data to make sense or not make sense anymore? And another point is that CAPEX that is postponed from the extraordinary in 2021, if you could also add this extra CAPEX to your planned CAPEX or planned CAPEX back in 2018. And just to complement that, Do you think that the spread between, the spread above the 10-year bond or Mexican bond could be close to what we got in 2018, close to 1% or do you think can be higher for the next period, the NDP? Thank you.

Hello. Your line is going, I couldn't hear well your question, but let me say that In the case of the 2 billion passengers that were postponed from the previous capex, of course, those will be considered in the current MVP numbers. And also, in the case of the situation of these postponements, it's due to the fact of the new passenger traffic forecast. So the project can't postpone because if we do not reach the levels of passenger traffic that is required to make the project, the government is or take the decision to postpone those projects in order not to affect the maximum rate. I know that you have some other questions, but I couldn't hear.

Can I try again? It's better now? It's really cold. I can follow up with you. Thank you very much, Adolf. Okay, you're welcome.

Thank you. Our next question is from Juan Macedo with GBM. Please proceed with your question.

Hi, Adolfo. Thanks for the call and congrats on the results. I have two questions. My first question is regarding the commercial segment. We saw great results in United Revenues per passenger on Colombian concessions, despite the Mexican peso appreciation. Could you give us some color on that dynamic? Is it due to commercial expansions, or does it come from passenger behavior?

Well, this is coming from what we have done there. As I mentioned in the remarks, we have opened 29 spaces in the case of Colombia. And those are producing well results. Of course, as I mentioned during the initial remarks, probably we are not seeing the full effect of these in Mexican peso figures because of the acquisition of the Mexican peso versus the Colombian peso, that it was 36% over the last 12 months. So if you put all of these on the top of the number we have presented in the report, you will see that the results in Colombia are very good.

Yeah, agreed. Thank you. And my second question is regarding tariffs.

Could you give us some detail on when and how the tariff increment implementations go during the quarter?

Well, remember that the tariff or the level of how much we reach of the maximum rate is measured once a year in a calendar year. So last year we end up around 96%. I do believe with the current expectation of inflation this year, probably we will be at 98% this year. Great. Thanks for the color. You're welcome.

Thank you. Our next question is from Bruno Amorim with Goldman Sachs. Please proceed with your question.

Hi. Good morning, Adolfo. Thank you for taking my question. It's a follow-up on MGP as well. I know you cannot comment on the outcomes, of course, but maybe you can help us understand where do we stand in terms of traffic, the need for CapEx, and then cost of capital, right? The first question would be, you know, is it fair to say that traffic is now above what was initially expected when you and the regulators agreed on the extraordinary revision during the pandemic given the sharp recovery in traffic? The second question would be, you know, is there spare capacity to accommodate this additional demand without the need for higher capex or all else held constant should this eventually stronger than initially expected traffic rebound drive higher than initially expected capex? And the The last question would be on cost of capital. At the moment when you have reset the tariff and the CAPEX plan during the pandemic, has the regulator adjusted the cost of capital as well or not? I'm asking this because at that moment in time, 10-year rates in Mexico were well below the current level. So this could have an implication for the direction of the tariffs as well. Thank you.

Hello, Bruno. In the case of traffic, yes. In some cases, traffic is higher than expected in comparison with what we presented in our extraordinary maximum traffic provision. Remember that we did that in the sense 421, but that's for some airports. For some others, it is not. So in total, I would say probably it's higher, but just a bit In terms of high CapEx, what I can say to you is that the important projects will come in the case of Cancun Airport. We are talking about terminal expansion. Remember that the most important portion of the 2 billion that was postponed in CapEx was the expansion of port holding gates in the case of Cancun Terminal 4. And, of course, those are going to be included in the new MDP. In terms of the cost of capital, that will be measured, as I said, during the third and fourth quarter of this year. Remember that the government uses the last 24 months of the Mexican paper issued in the international markets long time. So we will be able to answer your question up to the third or fourth quarter of this year.

Yeah, but just a follow-up on the cost of capital. When you and the regulator agreed on the extraordinary revision during the pandemic, has the allowed return been adjusted at the moment in time, reflecting the cost of capital at that time, or not?

It was adjusted, yes. Okay. Thank you very much. You're welcome.

Thank you. Our next question is from Felipe Nielsen with Citi. Please proceed with your question.

Hello. Good morning or afternoon, and thanks for taking my questions. So I have two questions on my side. The first one is, with the NDP review on the horizon, how should we think about the technical assistance fee? And if you think that it's reasonable to consider that fee, given that Azure is much more experienced versus back in 1998? And the second question is, now that we are in the halfway mark of the 50-year concessions, do you think that it's fair to assume that Azure could have some sort of opinion to renew its concessions, or if it's too early to say, maybe some call on those two points. Thank you.

Hello. In terms of the technical assistance, it's important to say that this is not for free. We have an agreement with ETA that they have to comply with. And also I have to say this is one of the most important moments where they have to deliver, which is the case of the MVP. In the case of the renewal of the concession, the contract says that it's for 50 years and it can be renewed. The contract doesn't say how, and I'm sure that I'm not going to be here in this company or maybe in this world when this will occur. So for the moment, I'm not concerned about the renewal because that will or should occur in 2048.

Great. Thank you very much for the call.

Thank you. Our next question is from Gabriel Himmelsor with Scotiabank. Please proceed with your question.

Hi, Adolfo. Thanks for the call. Just a follow-up question on the MDP. For modeling purposes, do you think it's appropriate we add a risk premium to the discount rate due to the current, you know, regulations that have been introduced that have been proposed in the Congress. And also, do you think we should consider additional capex or, for example, connecting the terminals with the Tren Maya or any tariff increase that could be allowed due to the Tulum airport? Thank you.

Well, in the case of the, the cost of capital or the discount rate. That has been defined as the work of the industry. So, of course, the process to calculate that is the Mexican paper issued in the national market last two months, average for the last 24 plus something. But again, that will be discussed during the third, fourth quarter of this year. In the case of what you are saying about the connection with the Mayatrin We're working today as we speak with the government to be able to connect the Maya train with the airport. And yes, that will be or should be considered in the next NDP.

Okay. And in the case of the Tulum airport, if the airport is approved, do you think the government could provide, well, allow you for higher tariffs that compensate the traffic draft?

It's not to allow the higher traffic. Remember that how we do the calculation is to forecast our passenger traffic in the future. And that, of course, includes all the effects, the economy, the tourism trends, hurricanes, to the airport, everything.

Okay, thank you. You're welcome.

Thank you. Our next question is from Francisco Suarez with Scotiabank. Please proceed with your question.

Hello. Good morning. Thank you for the call. A question on your sustainability report. I was noticing that you are doing a really good job in overall energy consumption in absolute and relative terms compared to 2019 figures, but I just noticed that in terms of water consumption and waste of non-hazardous waste, that is not the case. Can you explain a bit of why it might be happening and what is your overall strategy to cut the gross consumption of water in your terminals in Mexico? Thank you.

Absolutely. In the case of water, that's a good question because Our next MVP, or I would say the focus or the important focus of our next MVP is water, no? It's clear that we have not done yet most of the things that we can do there. Of course, what you are seeing in the numbers includes the water that we have to spend to construct the expansion of the buildings, no? So that is why probably you see some higher numbers in the case of Merida and some other airports. But we will see these improvement once we finish with those works.

Great. Thank you. And if I may, a follow-up on this, Adolfo. It is interesting because when we discuss about potential retrofits in other type of structures with companies, those are kind of a challenging in terms of the economics to do that. But under your industry, it seems that you are in a great position to put that on the MDP as well, to make a retrofit in the terminal, for instance, and with that cut your overall energy and water intensity in those buildings. Do you think that that might be a possibility? And if it's actually possible, correct what I'm saying, that perhaps if this type of capex is placed on the MDPs, as you're going to do that now in the next one, that is actually the way to make a profit out of those investments that in other industries seems to be more and more challenging.

Well, in the case of the energy industry, you will have to go back to a six-day or early release that we issued the 15th of December 2015. You will see that we were announcing that we signed an agreement with a company called SunPower to purchase energy from solar source. And that, at the moment, represented 100% of the energy consumption at the airport. Today, probably this is around 78% of the consumption because after that we opened Terminal 4 and all the reductions that we have been able to manage since then. We are waiting for these to be in place. The solar farm is waiting for the approval from the energy authorities here in Mexico. The solar farm is ready since the first quarter of last year. And once they get this approval, our increase in the case of solar energy will be extremely important.

But going back to my initial question, does retrofits to your existing buildings, the older terminals, can be put in the MDPs and with that not only cut your overall energy and water intensities but also earn a profit out of these investments?

I don't know. definition of your retrofit, but let me say, the most important consumption on energy we have is related to air conditioning. Of course, when we construct a new building, the new equipment will be more efficient in comparison with the others. And that's where we get these benefits of the new equipment, or When will we play those in the old buildings? And those, of course, are in the MVP.

Yes. Yes. Perfect. Thank you, Adolfo. You're welcome. Congrats on the results.

Thanks. Thank you. Our next question is from Alan Macias with Bank of America. Please proceed with your question.

Hi, Adolfo, and thank you for the call. My question was answered, but could you just repeat your dividend payments that you mentioned? Thank you.

Yes, the annual general shareholders meeting is going to take place tomorrow. The proposal is $9.93 in an ordinary dividend to be paid on May, and the extraordinary $10 per share to be paid in November.

Thank you.

Thank you. Our next question is from Lucila Gomez with Compass Group. Please proceed with your question.

Hi. Good morning, Adam. So thank you for taking my question. Just a quick follow-up on the Cancun Airport after all these expansions. What is the annual capacity that the airport has right now in terms of traffic? What is your, where do you think you'll be reaching for this year?

Well, I highly see that. Building, of course, has to do with the level of service. It's very difficult to say what is the full capacity of a building in just a single number, because A restriction can be a security field. There's something that you can solve with, let's say, $100,000. But if you want just a single number, in the case of Cancun Airport, it could be today 31, 32 million passenger traffic a year. More than what we have today. So we are very close to... the capacity defined in terms of the level of service we want. So in other words, that doesn't mean that we cannot have more passengers. But of course, in some time of the day, in some days of the year, probably the level of service you will receive there is not appropriate.

Okay, so just as a follow-up, if you wanted to add more passengers, what would be the most it would allow you to reach at the moment?

Okay, in the MDP, the way we do is we draw our passenger traffic line for the next 15 years, and then we convert these to use per hour in each one of the pieces of the airport. And the standard is that we can have lack of capacity just 30 hours in a year. So that means if the 31st is the hour of the year, the 95th and 10th of capacity, we have to go to the next step. So to increase the security filter, to increase the voting gate, to increase the lecture stand, et cetera. That is how we construct the NDP.

Okay. Thank you, Adolfo.

You're welcome. Thank you. Our next question is from Fernanda Radia with APG. Please proceed with your question.

Hey, Adolfo. Good morning. Thank you for taking my questions. I have two on my side. The first one, we heard that this year should be the record in terms of sargassum. So I was just wondering if you could maybe provide us your thoughts on the potential impact this could have on Cancun's airport. And the second, we see that you are not cash as of Q1. I was wondering if you could provide us any thoughts regarding capital allocation besides dividend payment if you are thinking of further expanding your geographic footprint and if it does Which region would you be focused on?

Thank you. Thank you for your question. Well, I don't believe that this year is going to be the record year. I believe that 2018 will be the record year so far. But it's true that we are having and the hotel owners are doing an extraordinary work in the beaches every single day. In the case of cash, yes, $15 billion is a very good number. But as I mentioned, I will have to pay $6 billion of those $15 during the year. It's true that we have a low capex level this year, but we have to be prepared for next year.

Okay, thank you.

As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Thank you. Our next question is from Mauricio Butrago with AM Advisors. Please proceed with your question.

Hello, Adolfo. I have two quick questions. The first one is how the close-up operations of Viva Air in Colombia impact of your results in the quarter? And the second question is just if you can repeat the guidance of CAPEX and EBITDA for this year, please.

Hi, Mauricio. In the case of Viva Air, as I mentioned, they stopped operations at the end of February. So no passengers during March. And they represented 17.4% of our traffic in 2022. So the impact in the case of Colombia, you already saw that with March passenger traffic figure. It was an important adjustment in the case of the month of March in comparison of how it was in February. In terms of the... What we're expecting is round number 700 million pesos in the case of Mexico and around 20 million, 20-something million in the case of Puerto Rico and probably 10 million in the case of Colombia.

Perfect, Adolfo.

Thank you. You're welcome.

This concludes our question and answer session for today's conference call. I would now like to turn the conference over to Mr. Castro for any closing remarks.

Thank you, Paul. Thank you, all of you, again, for participating in the first quarter resource conference call. On behalf of us all, we wish you a good day. Goodbye.

Ladies and gentlemen, this concludes SOAR's first quarter 2023 results conference call. We would like to thank you again for your participation. You may now disconnect.