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

Good day, ladies and gentlemen, and welcome to SOAR's fourth quarter 2023 results conference call. My name is Doug, 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'd like to ask a question, please press star 1. If you'd like 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 the call over to Mr. Adolfo Castro, Chief Executive Officer. Please go ahead, sir.

Thank you, Doug. 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 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 markets closed. and is available on our website Investor Relations Sector. Following my presentation, I will be available for Q&A. Before getting into discussion of the quarterly results, let me start today's call with a recap of recent developments. A significant milestone for the quarter was the December 2023 approval of the 2024-2028 Mass Development Plan for our Mexican efforts. This approval occurred under the government's new regulations and increase of the concession fee to 9% from the 5% of total gross revenues starting from January 3rd of this year. Some key highlights of the new NBP include the efficiency factor used to analyze the maximum tax increase from 0.7 to 0.8 in the prior NBP. The methodology to calculate the discount rate is now based on weighted average cost per capita compared to cost of equity before. The new MDP 2024-2028 also calls for a total capex commitment of $28.5 billion measured in December 2022 terms for the five-year period. Of these five-year capex, 75% equivalent to 21 billion pesos, or approximately $1.4 billion, will be invested at Kenton Airport, 70% of which will be allocated to expansion works. Key projects include the second phase of expansion of the International Terminal 4, which includes additional four boarding gates that have been delayed due to the pandemic. and new roads connecting the terminals to the Niger train. We also plan to rebuild and expand Terminal 1, as well to expand airport roads. These investments support a new growth phase for Cancun in the years ahead. The remaining 25% will be allocated across our eight smaller airports in Mexico, with approximately 7% allocated to Oaxaca, where we plan to reconstruct dropped and expanded terminal building. Finally, minor terminal expansions at four of the other airports. For 2024, we plan to invest a total of 3.5 billion pesos, 73% of which will be invested in Cancun. Also note that the new MVP revalues the impact of the recent opening of the Tulum airport. We ended the year with a 98.2% maximum tax compliance, PASSENGER FEE DISCOUNT GRANTED DURING NOVEMBER AND DECEMBER AS A RESULT OF THE AGREEMENT REACHED WITH THE MEXICAN GOVERNMENT. DURING THE QUARTER, WE CONCLUDE NEGOTIATIONS WITH OUR STRATEGIC PARTNER, ITA, BY TWITCH. STARTING JANUARY 2024, THE TECHNICAL ASSISTANCE FEES HAVE BEEN REDUCED TO 2.5% FROM 5% OF THE EVDA GENERATED BY MEXICAN OPERATIONS. On December 21st of last year, the Supreme Court of Justice rejected the appeal filed by the Aeropuerto Internacional Bávaro against judgment that suspended the permit to start construction previously issued by the Civil Aviation Institute. More recently, on January the 5th, the President of the Dominican Republic issued a decree canceling the previous decree issued by the previous president, which had approved the establishment of Bávaro International Airport. On January 19th, an appeal for constitutional review was brought before the Constitutional Court against the Supreme Court of Justice, notified on December last year. On the Sustainability Front, during the fourth quarter, we completed the installation of solar panels in the airports of Tapachula and Baturco. will generate a combined output of 1.5 million kilowatt hours in the first year of operation. These, in addition to the solar panel projects already completed in the airports of Cancun, Merida, and Oaxaca, will generate a total of nearly 632,000 kilowatt hours of solar energy during the fourth quarter. As part of our continued sustainability efforts, our airports in Mexico renewed their certification at level two under the Airport Carbon Accreditation Program. This program is organized by the Airport Council International to provide a framework for measuring, reducing, and compensating carbon emissions. Also in the fourth quarter, we became signatories of the Science-Based Targets Initiative with the goal of establishing a roadmap to achieve zero emissions by 2050. Among the community projects ASUR is involved in, we provided support to promote ecological tourism activities in the Himalayan speaking rural communities in the northern region of the state of Yucatán. Locals are provided with training and equipment to supplement their income from traditional fishing activities. By close of 2023, 49 years starts with approximately 100 economic dependents. We're provided with training and we intend to scale up these activities to additional communities in 2024. We plan to publish our 2023 annual sustainability report next month and encourage you to read it. Let's review our source operation and financial performance for the quarter. As usual, all comparison discussed will be .

Mr. Castro, are you there? One moment, ladies and gentlemen. It appears that we have lost Mr. Castro. I'm going to try and reconnect. Rejoining Adolfo Castro.

Thank you, Doug. Let's review Azusa's operational and financial performance for the quarter. As usual, all comparison will be year-on-year unless specified otherwise. Starting with traffic, we saw nearly 18 million passengers traveling across our airport network, the highest level for a fourth quarter. Even as the growth rate decelerated to 1%, this brought total traffic for the year to a total record of high over 70 million passengers. with an annual increase of 10% in Mexico, 18% in Puerto Rico, and partially offset by a decline of nearly 10% in Colombia. Looking at the quarterly performance by region, Puerto Rico delivered the strongest growth, with traffic up nearly 13%, driven by a solid performance in both domestic and international traffic. In Mexico, traffic increased 4%, supported by a low single-digit growth in domestic and international passengers. Traffic to and from the United States and Canada remained a key growth engine, while domestic traffic has experienced the initial effects of Pratt & Whitney engine trouble. Also not working, as from January 8th, the Mexico City airport reduced its air traffic movements per hour to 43 from 52. This airport accounted for 45% of the domestic passenger traffic in 2023, and those is also expected to negatively impact domestic traffic this year. Additionally, the strength of the Mexican Peso has been impacting resource for the quarter. Lastly, Colombia posted a 13% decline in traffic, and domestic travel remained impacted by the suspension of two local airlines in February of last year. partially offset by a 2% increase in international travel. The growth of these two airlines accounted for 20% of our traffic in Colombia in 2022. Avianca and LATAM Airlines have been absorbing some of that traffic. Starting this March, we expect to start seeing a recovery of traffic growth in Colombia. Now turning to the P&L. As a reminder, all reference to revenues and cost exclude construction and cost revenues. Total revenues increased nearly 5% to just over 6 billion pesos in the fourth quarter, as growth in Mexico and Colombia was partially offset by a weaker performance in Puerto Rico due to the exchange rate. Mexico, which accounted for 74% of the revenues, posted a 6% increase in the top line, driven by need to see high single-digit growth with aeronautical services up 5% and non-aeronautical services increasing 7%, mainly reflecting higher passenger traffic. Puerto Rico, which accounted for 14% of total revenues, reported a 1% decline in revenues mainly due to the 4% decrease in aeronautical revenues, partially offset by a 2% increase in commercial revenues. Lastly, Colombia, which represented 11% of revenues, posted a mid-single-digit top-line increase, supported by the growth of 3% in aeronautical revenues and 8% in non-aeronautical services. Reflecting our sustained focus on expanding our commercial offering across our airport network, commercial revenues were up 70%, above the 1% increase in passenger traffic. both up 8%, together with a 3% growth in Puerto Rico. On a per-passenger basis, commercial revenues reached 119 pesos, up 6% on a consolidated basis. And per country, in Mexico and Colombia, commercial revenues per passenger increased 4% and 20% respectively, while Puerto Rico decreased nearly 9%. In local currency, Puerto Rico and Colombia posted increases in commercial revenues of 15.2 and 1.2, and in commercial revenues per passenger of approximately 2.4 and 19.1, respectively. These increases partially reflect our initiatives to continue enhancing Passenger travel experience. These include the opening of 65 new commercial spaces across our airport network during the last 12 months. Of these, 17 were open in Mexico, 4 in Puerto Rico, and 44 in Colombia. Comparable consolidated EVA excluding other non-recruiting income in the year-ago quarter increased 1% to 4.1 billion pesos. Recall that the fourth quarter 2022 results included a one-time other income of 300 million pesos in Puerto Rico in connection with a federal judgment in connection with the right to charge a fee for each gallon of aviation fuel dispatched at the airport between 2013 and 2021. Mexico remains the main driver of profitability, with EVDA up 4% for Puerto Rico with 1% comparable increase. By contrast, Colombia posted a 23% drop in EVDA, impacted by the softer passenger traffic. In turn, comparable adjusted EVDA margin, which excludes construction as well as the other non-recurring income in the fourth quarter 2022, was nearly 68 versus a comparable of 70% margin in the fourth quarter of 2022. Last, moving on to the balance sheet, we'll close the year with a strong cash position of nearly 16 billion pesos and a negative leverage ratio of 0.2 times. Wrapping up, we'll finish 2023 on a very short note, which we believe put us on a solid path going into 2024 and 2025. Our long-term opportunities supported by our ongoing investments to further enhance the travel experience of passenger traveling to our airports continue to expand our commercial offerings and extend capacity to support future growth while maintaining a balanced use of cash. This ends my presentation. Doc, please open the floor for questions.

Thank you. Ladies and gentlemen, at this time, we'll be conducting a question-and-answer session. If you'd like to ask a question, you may 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 would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Juan Ponce with Bradesco BBI. Please proceed with your question.

Adolfo, good morning, everybody. Thanks for taking my question. So I have two questions, one on traffic and the other one on expenses. On traffic, how much of an impact are you seeing in domestic traffic from this Pratt & Whitney inspection schedule? We just saw Boladis say that they secured additional capacity to compensate for the impact. So what are you seeing on the ground? If you can quantify the impact that you're seeing for domestic traffic in Mexico, that would be great. And then my second question would be on operating expenses. We did see them go up more than expected this quarter. I just wanted to get some more color on where you're seeing the margin for this year. Thank you very much.

Good morning. Thank you for your question. Well, in the case of Captain Whitney, as I said in the initial remarks, we are seeing a weaker passenger traffic for the domestic side. How can we measure this? It's very clear when we see upward seats and when we see the increase in the load factor. It's very clear for me that Bolares has increased the load factor and they also have increased their rates And, of course, this is creating less amount of passengers in the case of domestic. That is not the case of Viva. So in the case of Viva, they were able to increase the upper seats and also the increase of passenger traffic, but they were not able to offset the decrease of Ulanes. The other thing that is extremely important from now on, from January 8th, is what I just mentioned, Ulanes. In the case of Mexico City, the case of Mexico City reducing their air traffic minutes per hour from 52 to 43. And, of course, that is having also an impact on our passenger traffic. These both things, I believe, will be seen during the first quarter of this year. In terms of expenses, well, the main effect, The main increase in expenses was coming from Colombia. And in that sense, it was due to the increase in salaries. We adjusted salaries, things that we were not doing or that we stopped doing because of the pandemic situation. So that is why the increase in the case of Colombia is so strong. But, of course, together with the passenger traffic decrease, the results in Colombia doesn't look well. What I hope is that this year, with the end of this situation with the two airlines, as from March, we will see different situations.

Got it. Very clear. Thank you.

Our next question comes from the line of Pablo. with Barclays. Please proceed with your question.

Hi, Adolfo. Thanks for taking my question. I have two on my side. The first one is if you can provide the amounts for each project that you have in Cancun, the Terminal 1 and the additional gates. And also my second question, I heard you say something about Dominican Republic, but if you can tell us again What's the update there? Thank you.

Well, in the case of the projects, as I said, $21 billion, it can cool down 70% of that expansion projects. Those expansion projects are the expansion of Terminal 4, which will add the four additional gates that were not completed during COVID. If you go back to March 23rd, THE DELAYING CAPACS OR THE PERFORMING CAPACS WERE NEARLY TWO BILLION PESOS. ALSO, IN THE CASE OF PENCUN, WE WILL RECONSTRUCT AND EXPAND TERMINAL ONE. THOSE ARE THE THREE NATURE PROJECTS IN TERMS OF TERMINAL EXPANSIONS CLOSED, THE ADDITIONAL CONNECTION TO THE MAGA TRAIN AND THE ROADS TO THE AIRPORT. IN THE CASE OF THE AIRPORTS IN THE WELCOME REPUBLIC, THE SITUATION IS that was a legal process that stopped the beginning of the construction. And that has been confirmed in December 16 last year. Also, on top of that, the president issued a decree canceling the previous decree that was issued by the previous president authorizing the airport. We have presented legal recourses for both things, and we will have to wait and see what is the outcome of these legal processes. But it's clear to me that the project has been put on hold at least for the next 12 months.

Okay. Thank you very much.

You're welcome.

Our next question comes from the line of Anton Mortenkotter with GBM. Please proceed with your question.

Hi, Adolfo. Thank you for taking my question and congrats on your results. I just have a quick one. Any thoughts about capital allocation, maybe an extraordinary dividend or maybe some buybacks now also considering the potential savings from the reduction in the technical assistance?

Well, it's two different things. One is the case of the capital allocation. We will review this once we have completed, we have finished the year and we will review the results and the current situation, the future capital tax and all of that. And we will make our proposal to both directors that will have meeting the first week of March and then to the shareholders' assembly. The case of the technical assistance fee, that it was in accordance of what we received from the Mexican government during the negotiation process. So basically, we were able to negotiate with ETA the adjustment in the fee by 50% reduction.

Sorry, just to know, see if I heard you right. So the reduction in the technical assistance fee was something that was also discussed with the Mexican authorities and incorporated in the MDP?

Well, the Mexican authorities, in their new rules, they've reflected a deduction in the recognition of the technical assistance, and that is why we had to negotiate with ITA.

Okay, thank you.

You're welcome.

Our next question comes from the line of Angrasa Verato with UBS. Please proceed with your question.

Hi, Adolfo. Thank you for taking my question. I have two questions on my side. The first one is on how is the implementation of the new maximum tariffs going so far? If you can provide maybe a timeline that you are expecting to reach the maximum tariffs. And I have a question on Colombia, where we saw a passenger drop, but an expansion in both aeronautical tariffs and non-aeronautical revenue per passenger. So I just wanted to know what is driving that, and also if the strong cost of expansion in Colombia in the quarter, if it includes any non-recurring events. That is from my end. Thank you.

Okay. In the case of the new maximum rate, the increases that we saw from the OMPP, we have already started the process for that. It will take more or less four months, so I do believe that as from the month of April, the new rate Inclusive tariffs will be in place. So during the first quarter, you will see no increases, and the increases will come as from April. In the case of Colombia, no, we do not have any non-recurring. It is important to see Colombian numbers in Colombian pesos, and then you will be able to understand better the situation that is there. During the quarter, the Colombian peso appreciated against the Mexican peso And that was the first quarter over the last couple of years. So if we see what is happening there in Colombian pesos, let me go into the case of the passenger, the commercial revenue of the passenger. As I said before, in Colombian pesos, the increase was really important during the quarter. So I would recommend you to make the analysis in a comparable way. So, excluding the FX. Perfect.

Thank you very much.

Our next question comes from the line of Isabella Salazar with GBM. Please receive your question.

Hello. Thank you for taking my question. Regarding the technical assistance fee reduction, I understand that this is a very positive action. However, I was wondering if you could give us more color behind the rationale for the reduction because I would like to understand if it will result in some costs moving to the approved level or if it will be a direct saving.

Well, it depends on how you measure this. If you see the new maximum rate,

Well, those are the ones that are going to be in places from this year. If your forecast was considering for this year 5%, then you have, you can place a 2.5% instead of the 5, and then it will be for you a reduction or a saving.

Thank you.

Our next question comes from the line of Gabrielle Himmelfarb with Deutsche Bank. Please continue with your question. Gabrielle, your line is live.

Hi. Thanks for the call. Sorry, my line was in mute. Just a quick question about the dividend policy. planning to propose a higher dividend or keep the dividend stable? I know it's up to the board, but what's the strategy the company is seeking for the dividend for this year? Thank you.

Hi, Gabriel. Well, you know that we do not have a dividend policy in writing, that we review that thing every single year. And once I finish with you, I will... start referring that proposal for the boards and then to the shareholder's assembly. As I said before, our next board of directors will be the first week of March. So I do believe that the first week of March you will figure out what I have proposed and what they have accepted.

Okay, thank you. You're welcome.

As a reminder, ladies and gentlemen, it is Star 1 to ask a question. Our next question comes from the line of Jay Singh with Citibank. Please receive your question.

Thanks, guys. Just Jay Singh calling in from Stephen Trent's group. I just want to ask two questions on my end. First one is, what are you seeing on tourism bookings to southeastern Mexico? And my other one is, should the authorities block the airport project in the DR? Will ASUR be looking at any other overseas investments? And what seems to be going wrong with the process right now? Thank you.

Could you repeat your second question?

Sure. So should the deal or the airport project in the DR get blocked? Would ASUR be considering any other overseas investments? And if so, what seems to be going wrong with the process right now with the Dominican Republic?

Well, let me confess with the bookings world.

In the case of bookings, as I said in my initial remarks, we are seeing very good bookings from the U.S. and Canada. It's not the case of domestic with the problems we are having with the person with me and the case of Mexico City Airport. Just to say that during the month of January, we lost it in terms of domestic traffic to and from Mexico City, around 100,000. So that will have an impact. These 100,000 are not willing to go to Santa Lucia. Yes, Santa Lucia is growing, but not absorbing all of these passengers. In the case of Dominican Republic, as I said before, Until we get the final rulings on these legal procedures we have, we will not be able to start the construction of the airport. My expectation is that all of these at least will last the whole year.

Awesome. Thanks a lot.

There are no further questions in the queue. I'd like to hand the call back to Mr. Castro for closing remarks.

Thank you, Doug. And thank you all of you again for joining us today in this four quarter 2023 conference call. On behalf of us all, we wish you a good day and goodbye. Now you may disconnect.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.