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

Good day, ladies and gentlemen, and welcome to Assure's first quarter 2024 results conference call. My name is Sherry and I will 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 one. If you want to withdraw your question at any time, please press star followed by two. If you're using speakerphone, Please lift the handset before making a selection. As a reminder, today's call is being recorded. Now I would like to turn the call over to Mr. Adolfo Castro, Chief Executive Officer. Please go ahead, sir.

Thank you, Sherry. 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 market closed and is available on our website in the Vector Relations section. Following my presentation, I will be available for Q&A. Moving on to the review of Azul's operational and financial performance for the quarter. As usual, all comparison discussed will be year-on-year unless specified otherwise. We saw record high passenger traffic in the quarter at 18.6 million travelers, up 4% year-on-year. This good performance was mainly driven by increases of 4% in Mexico, 12% in Puerto Rico, which more than offset the low single-digit decline in Colombia. By region, Puerto Rico again stood at the region with the strongest traffic growth, with traffic up nearly 12% driven by a double-digit increase in both domestic and international traffic. Traffic in Mexico was up nearly 4% as high single-digit growth in international and passengers driven mainly by traffic to and from the United States and Canada. More than offset the loss in the decline in domestic travel. In addition to the impact from the initial effects of the traffic engine problem we have experienced in the last quarters, domestic traffic was also affected by the reduction in air traffic movements at Mexico City Airport starting January the 8th this year. Recall this airport accounted for 45% of ASUS domestic traffic in 2023, and we expect this to continue negatively impacting domestic traffic this year. Lastly, in Colombia, traffic had started to recover with year-on-year declines motivated, down only 2% in the quarter, driven by easier comes in domestic traffic following the suspension of two local airlines in February of last year, that accounted 20% of all traffic in Colombia in 2022, and 19% increase in international travel. We expect the recovery in traffic in Colombia to continue through the remaining of the year, as Avianca and LATAM continue to recover some of the lost routes, which march already posting a 9% growth in total traffic in Colombia. Now turning to the P&L, as a reminder, All reference to revenues and costs exclude construction and cost of revenues. Total revenues increased 14% to just over 7 billion pesos in the first quarter. Mexico and Colombia stood out with growth in the mid-teens, while Puerto Rico delivered low single-digit revenue growth impacted by stronger pesos despite the double-digit traffic growth. Mexico, which accounted for 76% of total revenues, posted a 16% increase in its stock line. This was mainly explained by growth in aeronautical services in the mid-20s, while non-aeronautical revenues increased low single visit. Revenues in Puerto Rico, which accounted for 14% of the total, increased nearly 2% at 10% growth in non-aeronautical revenues, was partially offset by a 5% reduction in aeronautical revenues, reflecting the strong peso. Lastly, Colombia, which represented 10% of the revenues, posted a mid-teen increase in top line, reflecting a good performance in both aeronautical and non-aeronautical revenues, which benefited from the international traffic growth and the strong Colombian peso. Executing our strategy of expanding our commercial offering over the past 12 months, we opened 17 new commercial spaces in Mexico, 6 in Puerto Rico, 22 in Colombia. Commercial revenues were up nearly 5%, slightly above passenger traffic growth, mainly driven by increases of 10% in Mexico, while Puerto Rico and Colombia posted increases of 10% and 14% respectively. On a per passenger basis, commercial revenues increased 2% year-on-year to nearly 125 pesos. This performance was mainly driven by growth in the high teams in Colombia, again, reflecting a strong FX, which more than offset low single digits in Mexico and Puerto Rico. On the cost front, Consolidated expenses increased nearly by 14%, generally in line with revenue growth in the quarter. This was mainly driven by Mexico, which reported a higher concession fee due to increases by 80% established by the Mexican government and 20% increase in minimum wages, both effective during the first. Partially upset by the 50% reduction in terminal assistance fee. Consolidated EVDA increased 13% year-on-year to 5.1 billion pesos in the quarter, while the adjusted dividend margin, which excludes construction, was 71.4% compared with a 71.9% in the year-over-quarter. All regions contributed to EVDA growth. Mexico remains the main driver of profitability, with EVDA increasing 15%. followed by Colombia with an increase of nearly 11%, and Puerto Rico just over 1%. Moving on to the balance sheet, we closed the quarter with a strong cash and cash equivalent position of nearly 17 billion pesos, up 21% from the same quarter last year. Total debt declined 4% from the year end 2023, reflecting the position of the Mexican and Colombian pesos and the payment of principal amounts of outstanding debt in Mexico. In turn, the leverage ratio was negative 0.3 times. Tomorrow, April 24th, the annual shareholders' meeting is being held, for which we have proposed the distribution of an ordinary cash dividend of 10 pesos for 1926. The shared table in May and an Extraordinary Cash Dividend of $10 per share, payable this June. Lastly, last week we published our 2023 Sustainability Report, the 12-year report, and the Circular Unite, and encourage you to read them, all of which can be found on our website. Wrapping up, first quarter 2024 delivered solid results, even as we faced the ongoing issues with the Kraft and Whitney engines and the capacity reduction of Mexico City Airport. Our new performance reflects increased traffic through our airports along with improved passenger experience we are delivering. These trends bode well for the remaining of the year. We are committed to support our growth potential and enhancing the passenger experience through the investment in capacity in our commercial offerings. Importantly, our financial position is healthy and our capital and patient priorities are balanced between investing for growth and returning cash to shareholders. We send my prepared remarks. Sherry, please open the floor for questions.

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. Our first question is from Alejandro Fox with Atalu. Please proceed.

Yes. Hello, Adolfo. Thank you for the call and the space for questions, and congratulations on the results. Two quick questions from my end. Firstly, from Mexico, I was a little bit surprised to see administrative costs and cost of service increasing 2% and 10%. Can you walk us through some of the initiatives that explain and the companies taking this cost control that you guys are having? That's the first one. And then the second one is very quickly on Punta Cana. There was no mention in the release about the current situation with the government of the Dominican Republic. We wanted to know if you can give us a brief update of where we are or any color is appreciated. Thank you. Thank you, Alejandro. Well, In terms of cost control, the most important thing was the reduction of the 50% strategic fee. That is basically offsetting the increase in the concession fees of the quarter. In terms of other costs, of course, as you are mentioning, administrative costs of 2%, this has to do mainly with some efforts we have done in terms of insurance costs. And the other negative effect was the 20% increase in minimum wage that affects basically security and cleaning. That's what I can say for the moment. In the case of the Dominican Republic, we do not see any updates. So the last update was the decree issued by the president on January the 5th canceling the previous decree issued by the previous president that approved the construction of the airport. We have presented all of the procedures and those are ongoing. And once we know something from them, we will let you know.

Okay, thank you.

You're welcome.

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

Thank you. Good morning, Adolfo. Two questions on my side. And I'm wondering a bit on your comment about the headwinds that you're seeing in Mexico City with the slot reductions there. I mean, how viable do you think it is for Felipe Angeles and even Toluca, which we have seen picking up to absorb and develop some of the traffic? I personally haven't had a good experience flying in and out of Felipe Angeles, but would like to get your thoughts on how these metropolitan airports might help you out there. And then I have a second question on capacity.

Okay. In the case of Mexico City Airport, as I have said in the initial remarks, there was a restriction in capacity, so there was a reduction from 52 to 43 air traffic movements per hour. That's a 70% decrease in terms of capacity. Basically, this reduction has been applied to domestic carriers, not to international. And I can say for the quarter, Mexico City Airport has lost more or less, compared with last year, almost a million passengers. In terms of Santa Lucia, I would say that not all the passengers that are not able to fly from Mexico City due to the lack of operations are willing to go to Santa Lucia, and in that sense, In terms of Toluca, Toluca is basically the same as it was last year. So Toluca partly has been capped in terms of no more frequencies or no more operations, probably from the government.

Thank you. And my second question was on... on your CAPEX program. I mean, as you embark on this historic CAPEX program, do you expect any disruptions to your commercial revenues per passenger as you roll out some of these projects? What could be the impact in between, if any?

I don't see any disruption in terms of the commercial revenues because of the construction or because of expansions. In terms of the CAPEX, basically today we are preparing the projects in order to make the bidding process to find the contractor. So that's why you are seeing a very small amount during the test quarter. But I don't see any disruption. The two of the three main expansions we will have are those related to Terminal 4, the expansion and reconstruction of Terminal 1, and the expansion of the terminal in Oaxaca. And all of them are outside the operating area. So we will be able to construct without affecting the operation of the aircraft.

Great.

Thank you, Laura. Our next question is from Galer Mendez with J.P. Morgan. Please proceed.

Adolfo, good morning. Thanks for taking my question. First question is regarding the MDP tariffs. I recall on the last conference call you mentioned about starting the MDP tariff increase in April. Just wondering if you were able to do so and how you're tracking on this price increase. And the second question, if you could please comment about the traffic outlook and especially think about the breakdown between international passengers and domestic. Thank you.

Okay. In the case of the MDP, as you know, there was an adjustment approved by the government at the end of last year. It was December 13 when we disclosed that. We immediately started our internal procedures to adjust our intrinsic rates, so the rates of the products. And those are going to be adjusted as from the 1st of April this year. So, the first quarter does not affect any increase in tariffs and in visit tariffs so far. In terms of the traffic outlook, well, you know, the traffic movement situation and the restriction of Mexico City will impact in a significant way the domestic traffic. Probably, you can consider a small decrease by the year, In the domestic traffic, we are hoping to be supported by the international traffic as it has been for the first quarter, basically with U.S. and Canada. Of course, a challenge moment is going to be the summer because Canada does not travel in summer. So the only engine or the only support should have to come from the U.S.

Okay, that's clear. Thank you. Have a good day.

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

Hi. Thank you for taking my question. My question is more on the bottom line. Against our projections and also year-over-year, we would see a higher financial results. I would like to know if you have any non-recurring events on this line for us. Thank you.

Sorry, but your sound is really bad. I cannot understand your question, Alberto.

I'll try again. Just if you have any non-recurring events on financial results.

I cannot hear you.

I believe it was any more current events on the financial results.

Sorry?

Any more current events on the financial results.

Well, the exchange rate is going to be extremely important for us. You have seen some adjustments during the last two weeks. And that has to do with international traffic in our case, as you have seen for the first quarter. If you see the growth in aeronautical revenues for the first quarter, that probably won't surprise to you, but that has to come with a difference between the 6.8 and the 6.2 million passengers in terms of international passengers in the first quarter. So the change rate is crucial.

Gracias.

Our next question is from Anton Mortencotter with GBM. Please proceed.

Hi, Adolfo. Thank you for the call and congrats on the results. I have two quick questions. One is related to trade receivables. Just wondering what was the dynamics of seeing this quarter and why did that increase so much? And the second one is regarding capital allocation. understanding even when accounting for the high capex commitments for this year and also for the already announced dividends, the net cash position seems to be set to continue increasing during the year. Could we expect an additional announcement on a dividend or is there anything that's been thought about on that front? Thank you.

Hi. In the case of trade receivables for the quarter, you can see a very nice adjustment or a decrease in the case of Puerto Rico that has to do with the recuperation of the result of the trial we had there, the 2% of the fuel flowage. In terms of Mexico, that has to do with the normal operation, and the same in the case of Colombia. In terms of capital allocation, we ended the quarter with 17 billion pesos. The dividends that are proposed for tomorrow's shareholders meeting will be, roughly speaking, 6.6, 6.7. So then we have to see the capex. But as I said in the initial remarks, we're trying to be, on one side, very supportive on the growth. As you know, we have a 29 billion pesos cap for the next five years. But on the other side, we are paying these extraordinary dividends this year, which is almost the same as it was last year.

Thank you.

Our next question is from Juan Mercedo with GBM. Please proceed.

Hi, Adelto. Thanks for the call and congrats on the results. My first question would be a follow-up on a previous question regarding tariffs. You mentioned that the first quarter there wasn't an adjustment for the new max tariff. Do you mean by this that there was only a partial adjustment or was there none at all? There were no adjustments on the first quarter. All right. That's very clear. Thank you. And just an additional question. You mentioned that on the 1st of April you would do this adjustment. Is this for the 100% of the maximum tariff or at what level should we expect this? Well, of course, it's not 300. It will have to be less than that. The most, again, critical point will be the situation of the exchange rate. As I mentioned, more than 50% of the traffic is international and those pay in U.S. dollars.

Yeah.

All right, that's very clear. Thank you, Adolfo. You're welcome.

Our next question is from Fernanda Vecchia with BTG. Please proceed.

Hi, thank you, Adolfo, and congrats on the results. Two follow-up questions on our side. The first, regarding traffic outlook, you provided an outlook for Mexico. But could you comment a little bit more on Puerto Rico and Colombia? As you spoke on your initial remarks, Colombia is starting to see a normalization. How should we expect the traffic for the year-end? And Puerto Rico, do you expect a slowdown on the double-digit growth pace that they are posting? And my second question is on commercial revenues. As you mentioned on our initial remarks, it's reached close to 125 on a consolidated basis. How should we expect this indicator to move along the year? Do you expect, as you deploy more capital in Mexico, to increase the Mexico ratio? Thank you.

Well, in the case of the traffic for Puerto Rico and Colombia, both will be, in my opinion, normalized during the year. One that has to do with the bankruptcy of the two islands in February last year. In that sense, we saw the first quarter negative of 2%, but we see on a monthly basis we saw an increase of 9% for the month of March. So I hope What I'm expecting is to continue throughout the end of the year and then that we are able to recuperate what we have lost from these two islands. In the case of Puerto Rico, the normalization goes exactly the opposite because last year we had a very nice increase when the frontier got into the island and that's why we show a very high traffic last year, about 20s, which is not normal. In the first quarter, you saw the 12% increase, which is reducing from these 20s that we saw last year. The 2023 increase in Puerto Rico was 18%, no? So the normalization will be towards the second and third quarter to see a more normal growth in the case of Puerto Rico. In terms of commercial revenues, I have to say that today we're still struggling in the case of Mexico because two things. One has to do with exchange rate, of course, and the other one has to do with the lack of expansion. So commercial revenues from an operational perspective will continue to suffer. the situation in the case of Cancun density terminal 2 until we are able to expand the area that should occur at the end of 25.

Perfect. Thank you very much.

You're welcome.

Our next question is from Jay Singh with Citi. Please proceed.

Hey, thanks for taking my question. It's Jay Bellingen from Stephen Trent's team. The first question I want to ask, was it only in January you reduced the technical assistance fees or do you sort of do it in the subsequent quarter? You said January what? Where you reduced the technical assistance fee?

The technical assistance reduction is from the first external year and it will be 2.5 for the next five years.

All right, thanks. And my next question is that I know you already spoke a bit about Mexico City airport area, but do you have any further comments on competition from Tulum?

Well, in the case of Tulum, what we know, roughly speaking, the numbers that have been published by the government are around 40,000, 41,000, 42,000 for the month of December, January, and February. versus more than 3 million in the case of Cancun.

Thanks a lot.

Our next question is from Joao Friso with Goldman Sachs. Please proceed.

Hello, good morning. Thanks for taking my questions. I have two quick follow-ups. The first one is on the TARIC side, right? So if you could please help us reconcile what drove the increase quarter-on-quarter on passenger revenues in the first quarter. We saw a sharp increase. As you mentioned, you did not adjust for the MDP until April, so this is not the driver. So maybe was this a function of reducing the discounts you guys offered in the fourth quarter last year? Or maybe something else, if you could just help us reconcile that, it would be great. And my second follow-up is on Cancun Airport. Could you please just remind us what the expected capacity would be once the expansion is completed? Thank you very much.

Well, in the case of the target, you mentioned one of the effects we compared targets from the fourth quarter with the first quarter this year. Well, first of all, we didn't adjust tariffs during the first quarter. So we are tracking exactly the same as we were during the fourth quarter last year. Let me put that very clear. Of course, as you have mentioned, during the months of November and December, we have to give a 10% discount on the passenger fee, both international and domestic. But the other effect, and that's what I have mentioned in some remarks, is the proportion of domestic and international For this quarter, you can see the difference between $6.8 million in international versus $6.2 million last year. International traffic pays more due to the additional space we have to provide for customs and migration, and that is why you probably are seeing an increase. But in terms of the carriage of the specific products, there was no increase for the quarter. In terms of the capacity of Cancun, what we are going to increase is, as I had mentioned, we're going to reconstruct and expand Terminal 1. Terminal 1 should be more or less 3 to 4 million passengers on a yearly basis. Of course, the capacity has to do with the level of service. In the case of Terminal 4, we are in the process to expand four additional boarding gates, That will be more or less $37 million in addition. And finally, towards the end of the five-year period, we will add another eight to 10 aircraft stands, also in Terminal 4. And that should be more or less five to six million additional passengers on a yearly basis capacity. Super. Thank you very much.

Our next question is from Pablo Rigelkart with Santana. Please proceed.

Hi, Adolfo. Media follow-up from Mexico. That international contribution within passengers, how should we think in terms of UID? Did you increase that year-over-year in UID terms?

In terms of international traffic, well, first of all, maximum rates are stated in Mexican pesos. So the effect of the international versus domestic, at the end, if we reach close to the 100, there is no difference. But the point is, during the quarter, compared with the quarter last year, international pay more pesos in comparison with the domestics. And that's why we were able to see a better regulated traffic capacity.

Okay. So, but it's like, if we only see in year-to-year terms, because we saw a short Mexico year-over-year, and besides that, the revenues grew almost 20% in that country.

Well, in that sense, again, if we see a domestic traffic decrease during the year, that could be offset by international traffic. That will help, of course, from this perspective. And that's why I was saying also the FX, the exchange rate, Mexico, versus dollar will be extremely important for the year, you know.

Okay.

Our next question is from Gabriel Himafarb with Scotiabank. Please proceed.

May I also congratulate the results? Just a quick follow-up question. In terms of new investments, are you seeing any new investments perhaps outside Mexico, maybe in the U.S. or in the Caribbean? Thank you.

For the moment, we do not have any project in front. Okay, thank you.

Congrats on the results. Thanks.

Our next question is from Arthur Sulado with APO Capital. Please proceed.

Hi, thank you. Thank you, Adolfo, and congratulations for the results. Just a quick question on my side. You announced at the end of last year the new MDP that will be valid from 2024 onwards. Just to know if you have any particular adjustments to the value of your concession on the balance sheet regarding this particular change in the way that the MDP is calculated. And if so, is this recognized in the balance sheet of the fourth quarter of 2023 or in the first quarter of 2024? Thank you.

No, the adjustments from the balance sheet are once we construct the EMVP. We do not have any adjustment because of the approval we received last year.

Thank you, very clear.

You're welcome.

As a reminder, if you would like to ask a question, it is the star button followed by the number one. Our next question is from Francisco Suarez with Scotiabank. Please proceed.

Hey, Adelto. Good morning. Thanks for the call and congrats on your results. The question that I have is on your projects related with water security. Just to confirm, the two airports that you're speaking about that are part of the MDP are Huatulco and Oaxaca, I guess. Is that correct? In terms of use of water? Yes, the water security improvements to all water-related projects that are part of the MDP.

Yes, we have some other projects in some airports related to water, but of course the most critical are the ones that you have mentioned, Oaxaca and Huatulco, because of, I would say, I don't want to say the lack of the water, There are some restrictions in both, and that's why we are working in those as we speak.

Got it. And with that regard, and noticing that you have committed on your science-based targets, two questions on that front. How far your ambition may go? Are you aiming to 1.5 degrees, or is it well below 2 degrees? And secondly, do you think that the current framework, the regulation framework, the NDP might be supportive to put investments that are consistent with these targets?

Well, of course, we are putting those, and those should be consistent on this quarter. Let me go back again to the most important initiative we have, which was signed on December 2015. The atom represented 100% of the energy we were consuming, and that contract was to receive energy from solar sources. The company that was in charge of this project has not been able yet to deliver the energy. The solar farm is ready or has been ready for the last two years, and they have not been able to be connected due to the government restrictions. So on that front, we're talking about, roughly speaking, $80 million. of what ours is nearly, that today could represent 80% of the energy we have or we are consuming. So that is the most critical thing we have because if they are not able to be connected, we will have to find out how to solve this situation In the case of the current MDP, as you have mentioned, there are some focus on energy, but the most important focus now is also water. Got it. Thanks. Congrats again. You're welcome.

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

Thank you, Sherry. And thank you all of you again for joining us today in this first quarter 2024 conference call. On behalf of us all, we wish you a good day and goodbye. Now you may disconnect.