Corporacion America Airports SA

Good morning and welcome to the Corporacion America Airports third quarter 2021 earnings conference call. A slide presentation accompanies today's webcast and is available in the investor section of Corporacion America Airports investor relations website. As a reminder, all participants will be in a listen only mode. There will be an opportunity to ask questions at the end of the presentation. Please also note this event is being recorded. At this time, I would now like to turn the call over to Patricio Iñaki-Esnaola, Head of Investor Relations. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining us today. Speaking during today's call will be Martín Ornequian, our Chief Executive Officer, and Jorge Arruda, our Chief Financial Officer. 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 statement to reflect new or changed events or circumstances. Note that for comparison purposes and for a better understanding of the underlying performance in our 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 Rule IAS 29 can be found in our earnings report. Now, let me turn the call over to our CEO, Martin Ornagian.

Thank you, Iñaki. Hello, everyone, and welcome to today's call. I am pleased to report that the initiatives we have been focusing on since the start of this health crisis contributed again this quarter to deliver a significantly better business and financial performance while further enhancing the equity value of our business. Traffic across our operations continued to recover during the quarter, reaching 10.5 million passengers, up 90% on a sequential basis. Compared to pre-pandemic levels, traffic reached 46% of the nearly 23 million passengers reported in the third quarter of 2019. This better performance was mainly driven by the sustained recovery observed in Armenia, Brazil, Ecuador, and Italy. By contrast, Argentina and Uruguay remain heavily impacted by severe government travel restrictions to contain the spread of the COVID-19 virus during the quarter. However, borders in these two countries were fully open starting November 1st, on the back of the advanced rollout of the vaccination campaigns and warmer weather as we approach the summer season in Latin America. At the same time, cargo activity remained strong, reaching 82% of pre-pandemic levels, contributing to partially mitigate softer traffic volumes. Again, this quarter, Uruguay and Italy outpaced 2019 cargo volume levels. These positive trends follow through our financial results, with revenues ex-hypric more than doubling year on year to nearly $170 million and up 38% sequentially, reaching 55% of the third quarter of 2019 levels. The successful cost reduction program implemented at the onset of the pandemic Together with our continued focus on strict expense controls and cash preservation also contributed to higher profitability. Comparable adjusted EBITDA improved to $38 million from the $7 million reported in the prior quarter and the $19 million loss reported in the third quarter of 2020. Importantly, we achieved positive adjusted EBITDA in all countries of operations with the exception of Peru. We have also achieved two important milestones of our strategy. First, we've taken important steps to strengthen the company's liquidity position and improve the debt profile. Between September and November in Argentina and Uruguay, we refinanced a combined $425 million in existing debt. We also obtained new funding for a total of $179 million in these two countries. Second, we obtained a 20-year extension of our Carrasco International Airport concession in Uruguay, which also included the addition of six regional airports. This not only reinforces our leadership position in Uruguay, but also creates value and strengthens our business. Jorge will go over this advance in more detail shortly. Moving on to slide four. Governments continue to gradually lower travel bans across most markets. While commercial operations were allowed across our airports, total traffic for the quarter was still impacted by high restrictions for international travel in Argentina, Uruguay, and Italy. Beginning this month, both Argentina and Uruguay opened their borders to international travel with certain requirements as reflected by the green boxes on this slide. By contrast, Italy increased travel restrictions for certain countries given a spike in COVID cases after the summer season. Looking at performance and restrictions by country during the third quarter. Starting with Argentina, domestic traffic remained open throughout the quarter while borders remained closed to foreigners through October 31st. the daily quota for international arriving passengers established by the government to contain the spread of the virus remained capped at 1,700 for almost the entire quarter, causing passenger traffic to be 70% below the third quarter of 2019 levels. Despite improving 38 times year on year, with 78% of the population with at least one dose and 59% fully vaccinated and improved sanitary conditions since November 1st, borders are open to all fully vaccinated passengers who also present a negative PCR test. While Uruguay posted a traffic increase of over four times year-on-year, this was still 75% below third quarter of 2019 levels impacted by the closure of borders to non-resident foreigners. Starting November, borders reopened to all foreigners presenting a full vaccination certificate and a negative COVID test. Passage near traffic in Italy was up over 85% year-on-year, reaching 50% of the third quarter of 2019 levels and posting a significant sequential improvement boosted by the summer season, with domestic traffic reaching nearly 86% of pre-pandemic levels. In Brazil, traffic more than doubled year on year as health conditions improved, reaching 74% of the passenger levels of the corresponding quarter in 2019. Domestic travel is not restricted, while international travel is now fully open, only subject to presenting a negative COVID test prior to boarding. Traffic in Armenia continued to post has strong performance, up nearly nine times year-on-year, reaching over 84% of the third quarter of 2019 levels, benefiting from the opening of the Russian borders to foreigners earlier in the year. Lastly, Ecuador maintained the growth trend with passenger traffic improving 4.1 times year-on-year and reaching 67% of the third quarter of 2019 levels. supported mainly by travel to the U.S. and Panama, which is actually above 2019 traffic levels. Domestic and international travel are not subject to any restrictions, although certain requirements apply for international passengers upon arrival. Taking a deeper look at passenger traffic trends on slide 5, the recovery that started last May on the back of advances in the vaccination rollout and lower travel restrictions continued throughout the quarter. Traffic in July, August, and September improved to 40%, 47%, and 52% of the traffic levels achieved in the respective months of 2019. By country of operations, Armenia delivered the fastest recovery against pre-pandemic levels. Brazil and Ecuador posted a significant rebound, while Italy benefited from the boost in demand during the summer season. By contrast, Argentina and Uruguay, which remained affected by the prolonged government restrictions in place through October, showed the slowest recovery, although posting a consistent pickup month over month. The recovery continued into October with passenger traffic reaching 58% of the corresponding month of 2019. This momentum is anticipated to strengthen in our main LATAM markets as we enter the summer season on the back of the recently relaxed travel ban, better sanitary conditions and pent-up demand. Now, turning to slide six, cargo operations continued the recovery trend across the board with volumes reaching 81 percent of third quarter of 2019 levels. This good performance was driven by the majority of our countries of operation. Uruguay and Italy stand out this quarter, with volumes exceeding the levels achieved in the third quarter of 2019, when Argentina and Ecuador reached 80% of pre-pandemic levels. I will now hand off the call to Jorge, who will review our financial results. Please, Jorge, go ahead.

Thank you, Martin, and good day to everyone. Starting with our top line on slide seven, Aeronautical revenues increased over two times year over year in the quarter, reaching 39% of pre-pandemic levels. Compared to the second quarter of this year, aeronautical revenues increased 65%, reflecting improved operations across all segments, particularly in Italy and Armenia. Commercial revenues reached 70% of 2019 levels. Notably, cargo revenues increased by 10% versus 2019 levels, mainly driven by tariff adjustments in Argentina. Now moving on to expenses on slide 8, we continue to benefit from our strict cost reduction program implemented at the onset of the crisis. When compared to 2019, cash operating costs declined this quarter by 43%, or 34% excluding a non-cash $23.1 million one-time debt charge recorded in the third quarter of 2019. Remember, this excludes concession fees and construction costs. As we gradually return to normal operations, we anticipate seeing some increases in certain cost lines as traffic and operations continue to recover. However, we also expect to continue benefiting from the efficiencies of a linear operation. Recovery in revenue above cost increases led by a positive comparable adjusted EBITDA of $38 million, up from $7 million recorded in the prior quarter, and from a loss of $19 million in the same quarter of last year. Importantly, this quarter, we achieved positive adjusted EBITDA in all countries of operations except Peru, while delivering adjusted EBITDA margins above 2019 levels in Ecuador and Armenia. Now turning to slide number nine, we continue to make significant strides in the process of obtaining economic re-equilibrium of our concession agreements. Following the successful negotiation in Argentina and Ecuador, We recently signed an agreement with the government of Uruguay to amend the existing Porta del Sur concession. This includes the extension of the concession for an additional 20 years from 2033 to 2053, the addition of six regional airports, and a CAPEX plan of US$67 million to be deployed by 2028. We also remain in active discussions with the government of Armenia and Brazil. In Brazil, we expect to soon receive a compensation for 2021 and are monitoring the market to define the strategy in connection with the long-term re-equilibrium for 2022 and beyond. We are also focusing on advancing determination of the concession agreement for Natal Airport and collecting the corresponding indemnification payments. Turning to slide 10, Following the successful execution of the debt refinancing 2020, over the past weeks, we consummated a series of transactions that further strengthened our balance sheet. In Argentina, we have concluded the following transactions. Last September, we issued $30.5 million linked bond in the local market at an annual interest rate of 4% and a two-year maturity. In October, we issued 10-year notes for an aggregate principal amount of 209 million U.S. dollars to repurchase and exchange 24.61% of the total original principal amount of the 2017 notes and 66.83% of the original principal amount of the 2020 notes with a four-year grace period. In November, we raised 126 million U.S. dollars of new money in two tranches, 64 million dollars in additional 10-year notes and $62 million in new senior secure notes due 2028 with a three-year grace period. We also refinanced $95 million in bank loans extending the final maturity of these loans until November 2024 from February 2023 with a 15-month grace period. In Uruguay, this month we completed an exchange offer of an aggregate principal amount of 194 million U.S. dollars in outstanding principal amount of the 2015 and 2020 notes due 2032. For new notes due 2034 with a grace period until May 2025. We also raised 52.9 million U.S. dollars of new money with the issuance of additional notes also due 2034. As a result of all of the foregoing, we reduced total debt service payments in our bond transaction by $75 million in Argentina and $28 million in Uruguay in each case for the next three years. Moving on to total indemnities and liquidity on slide 11, we ended the quarter with a total liquidity position of $297 million, while our total debt remains stable at $1.3 billion. Our net debt to last 12 months adjusted EBITDA ratio remains above historical level, but improving sequentially, reflecting the recovery in adjusted EBITDA. Net debt has remained fairly stable over the past quarters. Our subsidiaries remain in compliance with their debt covenants, and remember that CAP itself has no direct indebtedness. Finally, we deliver four consecutive quarters of positive operating cash flow across most of our segments, which is a testament of the financial discipline we have been keeping since the beginning of the pandemic. I will now hand back the call to Martin, who will present our closing remarks on slide number 12.

Looking ahead, we expect passenger dynamics to continue improving as we head into the summer season in South America, supported by lower traffic restrictions and pent-up demand. Airlines have also announced and increasing flights and destinations considering the expected higher tourism activity. While we are closely monitoring the rise in COVID-19 cases in some European countries, we remain vigilant of new virus strains as the situation remains fluid and the recovery is still nonlinear. Long term, we expect to see sustained traffic growth as the desire to travel remains unchanged. We have continued to successfully execute on our key objectives of the mitigation plan established at the onset of the pandemic. First, we have made great progress to date on advancing on the economic re-equilibrium processes across many of our concessions to restore the equity value of our business. Second, terminate the Natal Airport concession to allow the collection of the indemnification payment. Through the various debt management exercises recently completed, we have preserved liquidity and strengthened our balance sheet, which remains a key priority for us. And finally, we continue to carefully manage costs to ensure we can benefit from an efficient cost structure as activity continues to improve. Beyond advancing on our COVID-19 mitigation plan, we are looking ahead and seeking to develop additional value creation opportunities. In this respect, we have been introducing an agile operational model with various multidisciplinary teams. We recently created a data analytics team to gather and process data from our activities with a view to support our strategy to maximize revenues and client services. We also remain vigilant on new business opportunities to further strengthen our airport portfolio. I would like to take this opportunity to thank our teams for their continued commitment to the execution of our strategic initiatives, all their efforts and enthusiasm. Finally, our team and I are fully committed to maintaining open and proactive communications with the investment community as we continue our journey of building shareholder value. We look forward to meeting many of you as well as other shareholders, potential investors, and analysts in the coming months. With this, let me open the call for questions and answers.

We will now begin the question and answer session. If you would like to ask a question, press star, then 1 on a touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. We ask that in the interest of time, limit yourself to one question and one follow-up, and re-queue if you would like to ask additional questions. We will pause momentarily to assemble the roster. And the first question comes from Bruno Amorim with Goldman Sachs. Please go ahead.

Thank you. Good morning, everybody. So I have two questions. The first one is on the Uruguay concession extension. You know, can you provide more color on what will be the traffic revenues, EBITDA or CAPEX contribution for Corporacion America from the new airports to be incorporated into the concession? And, and second, a more structural question, you know, looking past the COVID crisis, of course, we are going through a cyclical recovery. As you mentioned, traffic should continue to recover. But what should we expect from the company post the cyclical recovery? Should we expect a significant increase in dividend payments or rather a focus on investments in new concessions in the upcoming years? Thank you very much.

This is the operator. If you're speaking right now, your line may be muted on your end. We cannot hear you.

Thank you, Bruno, for your question. This is Martin. As far as I understood, your question was regarding our expected expectancy for traffic revenues of the new airports. The agreement we made with Uruguay, with the government, requires us to invest in these airports, bringing them up to certification levels to be able to bring in new traffic and to work on the development of this traffic, which today is almost nonexistent in terms of commercial traffic. It's all general aviation. So we have a plan in place to start working first in the investments and then on... on a traffic promotion plan, but this is a long-term plan. And Montevideo Airport is the one that's going to be supporting all of this with the additional extension of 20 years in the Montevideo Airport concession. I hope that answers your question.

And regarding... Is it possible to... I'm sorry to interrupt you. Is it possible to give an idea of how much you're going to invest in those airports?

Yes. It's on the press release. We plan to invest on a four-year plan, $67 million, which the first part is in the next three years, and then there's a small investment in 2028 to be made. But that's the amount of capex going to these six new airports.

Thank you.

And regarding your second question, we're still in a lookout mode to understand what the passenger dynamics are going to be in the next year and the next few years regarding the pandemic. confident that we are seeing the end of the pandemic, but we're still not reacting to it as if it's over because we still need to be confident enough to see consistent numbers growing and the feeling that the pandemic is behind us worldwide. But once we come back into normality, we are probably going to start looking for new opportunities in the market, as we are today. But as we always say, in an opportunistic manner, we're going to look for new opportunities for growing our business.

Thank you. And what about the outlook for dividends on the COVID crisis is hopefully behind us?

It's probably too early to say, but we're probably going back to our pre-COVID idea of a policy for dividends.

Thank you very much.

We currently have no one queued for questions. Again, if you would like to ask a question, press star then 1 to join the queue. We have a question from Roberta Versiani with Citibank. Please go ahead.

Hi, thanks for the call. Just a quick one. Could you give us more detail for when you expect the cost dynamic to normalize, how you expect it to be in the coming years? Thank you.

Can you please repeat the call? The sound is not perfect.

Oh, sorry. Do you hear me now? Can you hear me now?

Yes. Go ahead.

Okay. Sorry. Sorry for that. I just would like to understand what's your view for the cost dynamic in the coming quarters. When would you expect them to normalize? Just whatever detail you could give me would be very helpful. Thank you.

Sure. Well, during the pandemic, we worked really hard and really aggressively to reduce our costs. are going to remain once traffic levels go back to normal. But, of course, as traffic picks up, we are going to have higher OPEX due to the required dynamics of the traffic in the airports. But we definitely expect to come out of this pandemic with a better cost base than we entered it.

That's great. Thank you. We have no further questions, so this concludes our question and answer session. I'll turn the conference back over to Martin for any closing remarks.

I would like to thank everybody for joining us today. We really appreciate your interest in our company. 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. Again, thank you everybody and have a nice day.

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