Corporacion America Airports SA

Good morning and welcome to Corporación American Airport's first quarter 2021 earnings conference call. A slide presentation accompanies today's webcast and is available in the investor section of Corporación America Airport's investor relations website. As a reminder, all participants will be in listen-only mode. There'll be an opportunity to ask questions at the end of the presentation. At this time, I would like to turn the call over to Ximena Albanese of Investor Relations.

Go ahead. Thank you. Good morning, everyone, and thank you for joining us today. Speaking during today's call will be Martín Ormequian, our Chief Executive Officer, and Jorge Ruda, our Chief Financial Officer. Both will be available for the Q&A session. Before we proceed, I would like to make the following safe harbor statement. Today's call will contain forward-looking statements, and I refer you to the forward-looking statement section of our earnings release and recent filings with the SEC. We assume no obligation to update or revise any forward-looking statements to reflect new or changed events or circumstances. Note that for comparison purposes and for a better understanding of the underlying performance presentation today, we will be discussing results excluding hyperinflation accounting in Argentina, which became effective in July 2018. Additional information in connection with the application of Bull IAS 29 can be found in our EIRMIS report. Now, let me turn the call over to our CEO, Martino Mechian.

Thank you, Ximena. Hello, everyone, and welcome to today's call. It's been over a year since the beginning of the pandemic, and we are very proud of the way the company managed this unprecedented crisis. During the quarter, we began to navigate the second wave of this health crisis in some of our countries of operations, which reflected in passenger traffic dynamics. However, we are encouraged with the positive trends we are seeing in the US and some countries in Europe, where the vaccine rollout is more advanced. And as I will shortly discuss, While we have already started to see some of these positive trends in our operations, we are not losing sight of the challenges we still have ahead in our markets. The significant impact of the pandemic on air travel resulted in a 62% year-on-year decline in passenger traffic for the quarter, reaching a total of nearly 7 million passengers in the first quarter of 2021, almost a third of the pre-pandemic levels recorded in the first quarter 2019. This mainly reflects the impact of the beginning of the second wave in Latin America, which resulted in travel restrictions and lower demand that negatively impacted traffic. By contrast, Armenia saw a significant pickup in traffic. Despite the challenges faced by the pandemic, we are optimistic with the advance we are seeing in the pace of vaccination in Uruguay and Italy, while vaccinations in Brazil are starting to pick up. Argentina lags behind, but we expect to start seeing a catch-up later in the year as more vaccines become available. Turning to our financial results, our top-line ex-IPRC trade was down 57% year-on-year in the quarter to slightly over $110 million, also nearly a third of first quarter 2019 levels. Despite the severe impact of the pandemic in travel demand, our sustained focus on cost controls and cash preservation allowed us to achieve a positive comparable adjusted EBITDA of $14 million in the first quarter of 2021, excluding one-time fees, representing a margin of 12%. This is an $18 million improvement from the previous quarter, when excluding the economic compensations obtained in Brazil and Italy at year-end. Results in the first quarter of 2021 were also better than comparable losses of nearly $20 million and $33 million posted in the second and third quarters of last year, respectively. We are confident in the potential of our business, and we continue working towards reaching pre-pandemic adjusted EBITDA levels while at the same time building a leaner and stronger company that will allow us to deliver profitable growth once demand returns. Finally, following the successful technical extension in Argentina and full economic re-equilibrium for 2020 in Brazil, we are actively seeking to restore value by also pursuing economic re-equilibrium in other operations, and I will discuss this in more detail shortly. More details on our first quarter results can be found on our earnings report file yesterday and the exhibits of these presentations, both of which are available on our website. Please turn to slide four. As you can see on this page, the yellow boxes depict countries where commercial operations are subject to travel restrictions. This is the case for most countries of operations, with the exception of Ecuador and Armenia, which generally allow commercial operations. In Argentina, passenger traffic posted a significant sequential recovery during the summer season. This was even despite that in late December, the government re-enacted a ban on entry for all foreigners until May 21st, in light of the new COVID-19 strain. Even despite the COVID cases, towards the end of March, the government also introduced restrictions of 2,000 daily international arriving passengers. In addition, flights from the UK, Chile, and Mexico were banned. Passenger traffic in Italy declined sequentially, reflecting travel restrictions reestablished by the government in Q4 2020 and the closing of Florence Airport between February and early April to allow passengers the execution of primary works. While commercial operations remain open, restrictions apply for travelers coming from or that transited certain countries. A green COVID-19 passport is expected to be implemented soon, which will drive higher mobility within the European Union. In Uruguay, traffic level remains low. Borders remain closed to non-resident foreigners with certain exemptions and requirements apply upon entry. In Brazil, following a good performance in January, the recovery in passenger traffic decelerated in February, reaching a low towards the end of March, reflecting a spike in COVID cases throughout the country. Traffic hit a low in April but is already showing signs of recovery this month as the sanitary situation improves. Domestic travel is not restricted while the main requirement for non-resident foreigners entering the country is a negative PCR test. In Armenia, traffic continues to increase sequentially since air travel restrictions were terminated last September. More recently, traffic is also benefiting from the opening of Russian borders to foreigners. Finally, in Ecuador, traffic was relatively unchanged sequentially. There are no restrictions to domestic nor international travel, subject to certain requirements upon arrival. On page five, we show preliminary monthly passenger traffic and cargo trends since April 2020. January continued the recovery trend experience since May 2020 aided by the summer season in Latin America. But in February, we began to experience the impact of the second COVID-19 wave with progressive contractions in traffic. Traffic in March and April was down 71% and 76% respectively, when compared to the respective pre-pandemic month of 2019. We expect to see improvements starting in May as COVID cases decline and the vaccination rollout advance across our markets. Although performance in cargo operations has shown some volatility since the beginning of the year, it remains strong. Importantly, revenues from archival terminals in Argentina and Uruguay play an active role in mitigating lower income from passenger traffic in those two countries. Turning to slide six, over the years, passenger traffic across our 52 airports increased consistently until we hit a low of 25 million passengers in 2020, impacted by the COVID-19 pandemic, as shown in the chart on the left. As you can see on the right chart, the recovery has been mainly driven by domestic traffic. By contrast, international traffic has been more impacted by higher restrictions and travel bans. Now turning to slide seven. We are pleased to report that our strategic initiatives of cost control and gas cost preservation continue to show good results. In the first quarter of 2021 marked the fourth consecutive quarter posting significant cost savings ranging between the mid-40s to the low 50s. Actually, cash operating costs declined this quarter by 43% year-on-year, equivalent to savings of $60 million, reaching a total of $80 million in the quarter. Remember, this excludes concession fees and construction costs. Key savings this quarter include $16 million in salaries, reduction of $13 million in both maintenance costs and SG&A, while other expenses declined by $27 million. Currency depreciation in the main markets also contributed to these savings. While we remain committed to keeping stringent cost controls as the year progresses, We would expect to see some increases in labor, maintenance, and other operating costs as traffic recovers over time and government support declines. Please turn to slide eight. We also remain fully focused on advancing in the process of obtaining economic re-equilibrium of concession agreements across our operations. Starting with Argentina. As provided under the 10-year extension agreement of our AAP-1000 concession obtained last December, on March 15th, international passenger fees were effectively increased by 11% to $57. In Brazil, we are working on two fronts. First, following the $36 million economic compensation obtained last December for the impact of COVID-19 on our Brasilia and Natal airports covered in 2020, our next step is to soon file our request for the long-term re-equilibrium for Brasilia. Second, in relation with the return of our Natal concession, we expect the government to carry out the anticipated tender in the fourth quarter of 2021. Thereafter, we expect to resolve the mental concession and receive the corresponding indemnification payment during the first half of 2022. In Ecuador, the negotiations to obtain economic compensation for the Guayaquil airport concession are moving along and are well advanced at this stage. We are also keeping active discussions with the government of Uruguay and Armenia. Our concession agreement with Armenia includes a contractual internal rate of return of 20% in US dollars. Finally, in Italy, following the successful 10 million euro grant and the two-year extension of the concession achieved in 2020, we expect this concession to benefit from the 500 million euro fund established by the Italian state budget law to support the Italian airport sector this year. Moving on to our debt and liquidity on slide nine. We ended the quarter with $256 million in cash and equivalents and $71 million in treasury wills and time deposits for a total liquidity of $327 million at the end of March. Earlier this week, we refinanced $40 million in principal payments in our Argentine operations. Our net debt to last 12 months adjusted EBITDA ratio remains above historical levels, solely driven by the impact of the pandemic on adjusted EBITDA. Net debt remains unchanged at $1.1 billion. A reminder, we are not subject to debt governance at the consolidated levels. Importantly, our financial discipline and strict focus on cost control allowed us to deliver the second quarter with positive operating cash flow across most of our countries of operations. Before that, we were operating cash flow break-even in Argentina and Uruguay since the second quarter of 2020, and in Ecuador, in Armenia, since the third quarter of 2020. Now, to wrap up, please turn to slide 10. Since the onset of the pandemic, we have made significant strides in the successful execution of our COVID-19 mitigation strategic plan and remain dedicated to continue the consistent execution of this plan, which includes, first, finalizing the economic equilibrium processes to restore the value of our business. Second, continuing to preserve liquidity and strengthen our balance sheet. And finally, We are also dedicated to keeping a lean structure across our operations and maintaining a tight control on costs as the level of activity progressively increases. In terms of passenger volume dynamics, we observed a pickup in traffic in Brazil, Armenia, and Ecuador, primarily driven by a faster pace in the rollout of the vaccination program and better sanitary conditions. Italy should also benefit from the rollout of the vaccination campaign, warmer weather, and lower restrictions during the summer season. We expect overall better trends as the vaccination campaign begins to pick up in Argentina and travel restrictions are progressively lifted in the year both in Argentina and Uruguay. Long term, we are confident people's desire to travel remains unchanged. This, together with strong pent-up demand, should contribute to drive sustained traffic growth. Finally, I wish to thank our teams for their hard work and commitment to executing our strategic plan to protect the company's financial position and ensure the highest standards of health and safety for our passengers and employees.

We will now begin the question-and-answer session. To ask a question, you may press star then 1 on your touchstone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question is from Ian Safino from Oppenheimer. Go ahead.

Hi. Good morning, guys. This is Mark Don for Ian. Thanks for taking our questions. Just on the request for the long-term economic re-equilibrium for Brasilia, can you give a sense of the process and the timeline there? After you file, when should we expect a response, and what sort of milestones should we be on lookout for? Thank you.

Hi, Ian. Hi, Ian. This is George. How are you? Very good. Hello? Just to make sure you understood the question, you were requesting in connection with Natal, right?

The question was in regards to Brazil, yeah. I guess like the timeline and the milestones we should be looking out for as you filed the request for long-term economic re-equilibrium.

Okay, brilliant. So we expect to formally file the long-term equilibrium request this week. And we have been, since actually the beginning of the year really, having very active discussions with the regulator in particular and with the government in general. And it's going to be an ongoing discussion. we expect to have a general agreement with them around the amounts and the mechanics, et cetera, by September, October, and finalize the process before year-end. This is our objective. There is not a timetable set in stone, but that's what we're working towards with. In terms of headlines, we expect very little, to be honest, because this is a private discussion, and we do not expect any press release either by ourselves or the government in the meantime until the process is much more advanced.

Okay, great. That's very, very helpful. And then just, if I may, a second question. And by the way, yes. Oh, no, go ahead.

I'm sorry, just to finalize, Ian. And by the way, I mean, there are a bunch of operators here in Brazil, as you may know. And, you know, all of them are basically in the same stage as we are. Some filed last week. Others, you know, are about to file, et cetera. And there is a lot of discussion directly with the related food, the airport association. So it's a very intense topic at the moment in Brazil.

Okay, guys. Thank you so much, George. And I guess just to follow up, you guys continue to do very well on the cost control side. Can you give a sense of, number one, how much more costs can be taken out if we continue to see COVID volatility? And number two, how much of these costs are permanent once operations normalize? You know, any better sense you guys have now versus, call it like, you know, six or eight months ago? Thank you.

Yeah, that's a good question. Look, we do expect some of the cost savings to become permanent, if you will. But obviously, as traffic pick up, we, you know, some of the costs that we are currently not having will come back. without a doubt. You know, there are multiple examples. You know, one of them is security checkpoint. Obviously, we have less security checkpoint channels currently, but as traffic increases, we'll have to increase the number of security checkpoints to process passengers properly, and that obviously will increase costs. So we do expect... some of the savings to remain permanent. It's difficult to say how much, but we do expect some benefit out of costs going forward.

Okay, great. Thank you guys very much.

Okay, did I answer all your questions or is there anything pending on my side?

No, I think we hit all of the thank you guys.

Okay, good. Okay, good. Okay.

Our next question is from Nico Fabrianac from Jefferies. Go ahead.

Hi, guys. Thanks for the call and the outlook. Just a quick one on liquidity. We noted the $256 million in cash and the $40 million refinancing of the short-term bank debt at the Argentine subsidiary. Could you please give us some additional color on available liquidity, anything in credit lines? and progress on refinancing of the 2021-2022 maturities that you listed on page 8. Thank you.

Hi, this is Jorge again. Thanks for your question. We continue to have support from our lenders. We have refinanced the principal amount to do and pay both the syndicated loan facility in Argentina, as you already noted. We also obtained $10 million new loan from a local bank in Uruguay. We refinanced a smaller working capital facility in Brazil. We have been refinancing all the short-term debt that is coming due this year in Italy. So generally speaking, we have been having strong support from our lenders to navigate through the pandemic. and we are looking at our cash position, our liquidity on a constant basis and taking the necessary action. Therefore, we are confident that we are going to be able to continue to navigate smoothly throughout the pandemic until traffic starts to come back in a stronger way.

Perfect. Thanks very much.

Again, if you have a question, please press star, then 1. Our next question is from Roberta Versiani from Citibank. Go ahead.

Hi, good morning. Thanks for taking my question. Just two quick ones on my side first. Could you give us some color about how the Argentine government is providing incentives or help to the local airlines to strengthen the local market? You gave some color on the help to the airports, but if you could expand that a bit more, it would be helpful. And secondly, In some markets, we see air cargo has risen consistently while passenger volume has fell. Any view why this hasn't generally happened to corporates in America's markets? I'm just interested to understand this a bit better. Thank you.

Roberto, thank you for your question. This is Martin here. Regarding the government's priorities, as of today, the clear priority of the government is to transit the pandemic, putting health as the number one priority. And that's what motivated all of the decisions made by the government regarding our industry. And that's why we have so many restrictions as of today. So... In that sense, I think that until the second wave in Argentina is passed, we will not see strong reactions towards incentivizing the industry, at least until there's a clear path out of the health crisis that the country is going on right now. And we assume that that will happen within this year as the vaccination campaign takes off and more vaccines are available for Argentina. Regarding cargo, what I can tell you is most of our airports have a mixture of full cargo aircraft, and what is called belly cargo on passenger aircraft. And that second part is quite important in our operation. So when passenger aircraft stopped flying because of the restrictions, we lost some cargo offer, some availability there. And the good thing that happened is that the full cargo type of offer has increased. And that's why we did not see a proportional decline in cargo to what happened in the passenger market. So I think that's why you see the net effect into our cargo operations numbers that we share. So I think that's the effect that you should look for and what is making the net cargo operations that we had during the pandemic and as of today look like they look and the fact that they did not drop in the same way as passenger numbers did.

Okay, thank you. That's great. Thank you. Hello, if you have a question, please press star then one. This concludes our question and answer. I would like to turn the conference back over to Martin Euneckian for closing remarks.

I'd like to thank everybody for joining us today. We really appreciate your interest in our company, and we look forward to providing updates on our business initiatives as they become available. In the meantime, the team remains available to answer any questions that you may have. Thank you, everybody. Bye-bye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.