Grupo Aeroportuario Del Pacifico, S.A. B. de C.V.

Good morning, and welcome to GAP's conference call. The lines have been placed on mute to prevent any background noise. After the speaker's presentation, we will open the floor for questions, and at that time, instructions will be given if you would like to ask a question. It is now my pleasure to turn the call over to GAP's investor relations team. Please go ahead.

Thank you, and welcome to the Lupo a lo Portuario del Pacifico's first quarter 2023 conference call. Presenting from the company today, we welcome Mr. Raul Revuelta, GAP's Chief Executive Officer, and Mr. Saúl Villarreal, Chief Financial Officer. Please be advised that forward-looking statements may be made during this conference call. These do not account for future economic circumstances, industry conditions, the company's future performance, or financial results. As such, Statements made are based on several assumptions and factors that could change, causing actual results to materially differ from the current expectations. For a complete note on forward-looking statements, please refer to the quarterly report that was issued previously. At this point, I would like to turn the call over to Mr. Pobleta for his opening remarks. Please go ahead, sir.

Thank you, Maria. Hello, everyone, and welcome. This year is a factor of a strong and we deliver a great performance across key operational and financial metrics. The number of passengers this quarter was almost 16 million passengers, an increase of nearly 24% compared to 2022. Supporting this passenger traffic growth was the solid demand experienced at the Montego Bay, Guadalajara, and Puerto Vallarta airports, as well as the greater number of routes and frequencies across our network. Note that, for a comparison purpose, when we look at January and February of 2022, the impact of the Omicron variant did affect passenger traffic, which was not the case in 2023. As a result, aeronautical revenues increased by 31%, driven by a passenger traffic recovery throughout GAPS network, as well as the maximum tariff increases, which fulfilled almost 99% of the maximum tariff in our Mexican airports. It is important to note that the benefit of the American airport consolidation is not fully reflected here because of the fact of operations of Mexican pesos of 9% over the U.S. dollar, which impact the increase in revenues. The American airport represented 15% total increase in aeronautical revenues. Non-aeronautical revenues rose by 26%. Most of the increase came from futon barriers, retail operations, leasing of space, and As we have mentioned in the previous calls, we renegotiated the terms of several contracts, which resulted in financial conditions that were more positive for the company. The only business line that continues to lag is advertising, with a minus 24% versus 2019. However, compared to 2022, it increased 74%. There are several strategies that we are working on to reach and surpass 2019 revenue including the further development of digital advertising, using the actual airport spaces to enhance brand experience, as well as the use of marketing showrooms. As we mentioned before, the appreciation of Mexico pesos is affecting the non-analytical revenues in the contracts that are denominated in U.S. dollars. EBITDA reached 4.7 billion pesos for the quarry, with an EBITDA margin of around 72%. This was the result of the outstanding passenger traffic recovery, higher tariffs, and solid commercial wares that were partially offset by the 28% increase in cost of service. We have worked hard to maintain our cost control policy, but we are facing the changes in the labor load that not only affects the overall cost for salaries, but also the contracts that that involves personnel, such as janitorial, security, and maintenance. Also, we expect some higher costs further down the line in accordance with the air-side thermal expansion in addition to the inflationary effects. In financial performance, cash and key cash equivalents increased by almost 12%, reaching a total of 18.9 billion pesos. The debt figure reached 40.4 billion pesos in the first quarter due to the drawdown of 6.4 billion pesos. This included a credit facility from Citi Banamex of one billion as well as the issuance of another two tranches of label debt bonds in the Mexican market for a total of 5.4 billion pesos. The proceeds will be allocated toward mandatory capex for this year and a portion will be used to pay the bond during June of 6,200 million pesos. These were our third and fourth labeled bonds that are sustainability-linked bonds, evidence of our commitment to sustainability and specifically directed toward reducing carbon emissions. We look forward to further updating this market on our ESG initiatives and continue integrating this philosophy into our operation and infrastructure projects. In accordance with these figures, We continue to maintain healthy leverage level, reaching a net debt-to-earns ratio of 1.3 times for the 12 months, thus complying with all our debt covenants. CABEX continues to be carried out in accordance with the community and master development progress, as well as the commercial investments. The deployment has been and will be our biggest challenge in the five-year period because of the size of the investment and cost increase due to a higher inflation. We have made the highest investment for a single quarter since the beginning of our concession, reaching a total of 2.9 billion pesos. Moving on to another topic, I want to mention that our Ordinary and Extraordinary Shareholding meeting took place last week, where a dividend payment of 14.84 pesos per outstanding share was approved. At the meeting, the creation of a sustainability committee was also approved, which put us in the right track to fulfill our strategy, the Strategic Sustainability Plan 2030. Regarding the ratification or designation of the persons that will serve as independent members of the Company Board of Directors, designated by the Series B, as well as the designation of the independent member of the Nomination and Compensation Committee, Both points were withdrawn, as mentioned, shareholders meeting. In order to have a new ordinary shareholder meeting, that will be held on May 22. That was announced yesterday. Moving on, in the first quarter of 23, we discussed an initiative presented to the Mexican Congress to reform various federal laws enacted by the Mexican president. This rule provides, among others, additional capacity for the Mexican government to revoke concessions and permits. It also provides a mechanism to speed up private property expropriations by this state. It is unclear whether the Congress will pass this bill, and if it passes, the impact it could have on the Mexican economy and the company operations. This rule violates fundamental rights established in the Constitution, and international treaties, such as the right to equality, the warranty of no retroactivity of the law, and the freedom of trade. We will keep an eye on the bill and inform any relevant updates to our shareholders. To conclude, back in March we carried out a very successful GAP Day at the New York Stock Exchange. I want to give a special thanks to all the analysts and investors that attended. as well as to our team who put it together. It was a great opportunity for us to catch up with our colleagues, and we aim to do the next one at one of our airport locations. At this point, that is for my remarks. I will ask the operator to please open the floor for your questions.

And at this time, if you would like to ask a question, please press the star and 1 on your touch-down phone. You may withdraw your question by pressing the pound key. Once again, to ask a question, please press the star and one on your touch-down phone. Now we'll take our first question from Rodolfo Ramos with Bradesco BBI. Please go ahead.

Thank you for taking that question, and good morning. Just a couple on my side. The first one is on traffic. I mean, you've had a strong start of the year, and you're running at a rate higher than you got in your investor day. So I just wanted to see, you know, how are you looking out for the rest of the year and what kind of upside you're seeing, you know, also as a comparable basis. It starts getting tougher, potentially, the next of the year. And then my second question was just a follow-up on your comments on this reform, on two reforms that are actually being discussed. One is the one you mentioned. I just wanted to make sure, I mean, by looking at the text, it seems that this would only apply to new concessions. So I just wanted to confirm the values of you. And if you foresee, I mean, this is something that shouldn't impact on your next year's MVP negotiations. I just wanted to see if that could be the case. And as a second part of this question, if you see this, and the reform that was presented earlier where the capitas or the non-freedom was removed, whether you see this actually coming through and Mexico regaining category one as a result.

Thank you. Thank you, Robert. On the first question related with the traffic, yes, we are having a really strong beginning on the first wire. It is important to take into account that the comparison basis will be tougher in the coming months. We are still being really positive in terms of additional feeds that we're going to see on the market. We are still seeing a number that will be a little bit below the double digit, but we still see growth, important growth in our airports. But in terms of, again, the base of comparison, we have some airports as Guadalajara that are going to have great, the first half of the years will be really a great performer just based on additional seats for sure. but also taking account the base of comparison. On the other hand, we have, for example, Juana, that we are seeing additional fees, we are seeing robust demand, but we're going to begin to see tougher comparison base that will in some way begin to move the growth of that airport more to, I would say, lower double digits rather than the higher double digits that we have seen in the past months or even years for the case of Tijuana. The other part that we must keep an eye on is if a recession will come in place somewhere in the Mexican economy or the U.S. economy. Today, we don't have I would say complete data to understand if this is going to happen or if it's going to be a soft landing or how it's going to be that. We need to really keep an eye on what could happen in the second half of the year. In terms of the reform, the bill that was presented by the Mexican president to the Congress, I would say that in terms of the Mexican law, the retroactivity of the law is not allowed. Saying in other words, in theory, this change of the law will not apply to new concessions. But it's important to know that the retroactivity of a law, you need to fight it with a judge. It's nothing that happens in an automatic way. You need to ask for or litigate for that retroactivity. It's difficult going further in which could be the impact or not of these reforms because FIRST has not discussed it yet. Second really important information is that the ordinary period of the Congress will end in the last day of April, and the next period of the Congress is going to be in September. I would say that there's going to be enough time to discuss with the congressmen, to discuss to understand in a much better way this reform I would say in the coming months. So in my personal view, we have enough time to first understand and to second, try to act in any point that in some way could affect the confession. It's difficult to understand and to know if this could have some or not impact in the next MDP negotiation. I will say that the first example of this possible impact gonna happen in the groups that are in the middle of the negotiation on this year. And lastly, in the relation with the cabotage, Yes, yesterday it was removed in the last version on the change of the law of airports and civil aviation. For sure it was something really important, forget the Category 1, but it will be a part of it. The Mexican government had to implement different process related to this law In our personal view, we continue to see that the Category 1 is going to happen in some moment between the third and fourth quarter of this year, around that. We don't see any kind of, I would say, additional services or additional routes. even with the recovery of the category one in the last half of the year because the airlines need at least six months to plan and put the planes to get into a new market. We're going to begin to see possible results in terms of additional seats or additional capacity put into the U.S. from the Mexican airlines on the first half of the coming year.

Okay, very clear. Thank you very much.

Let's take our next question from Fernanda Regia with BTG Pactual. Please go ahead.

Hi, good morning everyone, and thank you for taking my question. I have two on my side. The first one is actually a follow-up from the previous question regarding traffic trends. So if I understood correctly, looking for coming Q, we still see supportive traffic trends, which should actually lead you to your guidance that you provide of increasing by 6% or 8% on a year-over-year basis. Because if we look at Q1, you already is on 6% for the year, so just wanted to understand what has been the main drivers of better-than-expected traffic, if there is any near-showing trend that has been bringing some positive news on traffic. And second, on Jamaica, I just wanted to hear an update regarding the rebalancing. How is the discussion, and when do you expect to have a resolution? Thank you.

Thank you, Fernanda and Raul. Yes, we know, as you remember, of our guidance. It's all were built from the number of seats that were published for deadlines and the slots that we, in some way, were authorized by the reports at the moment that we put in place the guidance. For sure, in this moment, for this first quarter, we have, I would say, some kind of easy comparisons in some airports, as Montego Bay, as Kingston, as even Guadalajara Airport. So I would say that it's early to think and move our guidance. But for sure, at the half of the year, we will recalculate all the numbers, see the trend on the number of additional slots, additional seats, the time of the delivery of fleet, and then we could move forward with that information to, in some way, indicate that we will need to change our guidance. For the moment, we are still thinking that the guidance is gonna be I mean, the total passenger number at the end of the year is going to be around that, between six or even eight, between six to eight on total passengers for the full year. Yes. Hi, Fernando. This is Saul. Regarding the question with the rebalancing process in Jamaica, We are working with the team designated by the government and we are planning to close by the end of June. This is the best estimation. As we have mentioned before in some calls, any kind of adjustment in the revalancing results should have the approval from the cabinet. different than in Mexico, so it represents a huge effort to socialize and revise deeper the figures in order to have the approval from the cabinet. It could take a couple of months more. Just revealing a part of the password to Fernandez, we have some kind of nearshoring effect today on the traffic. It's really early to understand that. What we are seeing in some of our airports or around of our airports is a really high dynamic real estate on the industrial parks in Guadalajara, in Bajio, in Aguascalientes, and in Tijuana. I would say that are the first sites of what could be the new showing effect on coming years. Again, it's really early to understand the size of the set and if we are beginning to see some parts of that in some way in the past years.

Thank you. Great. Thank you. Have a nice day.

Next question from Alberto Valeria with UBS. Please go ahead.

Hi. Thank you for taking my question. I'd like to go deeper on MDP. The past MDP, if I remember, we always had a revision on MDP with positive tariffs. We never see tariffs drop. And for this next round of MDP discussions, we have seen the press next to pushing a little bit for tariffs. And now we see also government with this movement of this reform bill that is in the Congress at this moment. How do you think the next NDP could do the negotiation? The first one surprised us for the large amount of capital. Do you think you can see the same amount of capital even higher for the next one? And can we also see that it can increase for the next NDP revision, the next rounds? And the last one, for OMA or absolutely this year with the current government, for next year, our gap should take the discussion with the current government or the next one? Thank you.

Thank you, Alberto. I mean, talking about the master development plan renegotiation, I will say that first, in terms of the CAPEX, we have, if you review our last master plans, you're going to see that the number of the CAPEX per passenger is almost, I would say, in the same level. I mean, you just need to abstract some one-time capex as to be the second runway of Guadalajara Airport. So, in general terms, we're going to see a master plan that's going to be with an investment in the same line of investment per passenger that we have seen in the past. For sure, the total number, we are going to see an increase on capex in absolute numbers because we are just doing quick numbers. On the last negotiation, we begin with 48 million passengers. If everything continues in the same trend, we're going to be around the 16 million passengers for the case of Mexico at the end of the five-year period. Just that increase measure the need to deploy additional CAPEX for maintain the quality service of the service and all the needs in terms of qualities of service that are included in the concession. a master plan that will be higher in capex than the one that is running right now. In terms of studies, I will say that today is difficult and it's early to talk about that, but as we mentioned in our cap day management presentation, we are more in the flat to minus 5% decrease on time. But again, certainly we need to understand which is going to be the discount rate, how it's going to be the market, how it's going to close the number of passengers, and how we look at the forecast for the coming year. I mean, it's early, but we think that the negotiation is going to be around that, from class to management. For the timing, All the years always happen the same. First, that is happening right now, then GAMP, and after that, OMAD. For the case of GAC, we will officially present the master plan to the authority in June of 2024. That will be with this administration. So we're going to have, I would say, the time really short or really tight to close the negotiation because in all the years, what normally happens is that the negotiation runs from June, when you make your first filing to the authority, until the end of December. You almost stay like six months. On the next year, the change on the government is going to happen on September 30, at the end of September. We're going to have enough time, but really tight times, trying to close the market plan with this over. Saying that, it is important to note that the market plans have been negotiated with all the different governments, central, left, right, and all have respect, completely respect the model and the discussion, the methodology and framework, and the discussion has been completely technical discussion. For the moment, we are still seeing that that's gonna be the way. With this government, or with the new government, the technical guys, we think that we'll continue in the Ministry of Communication and Transportation, so at least with the information that we have, we are not foreseeing any major changes in the way and methodology that the government has used in the past for the set of the master plan.

Fantastic. Very clear. Muchas gracias.

Thank you very much.

We'll take our next question from Philip Nielsen with Citi. Please go ahead.

Hi, guys. Good morning or afternoon, and thanks for taking my questions. So I have a few questions on the side. The first one would be what are you seeing in terms of hotel and resort operation expansion in your regions, like the regions that you operate, how do you see the level of activity in terms of hotels and resorts expanding, and the second one would be if you see any opportunities for establishing industrial parks at or near your concessions in Bahia or elsewhere, given more intense manufacturing activities?

Thank you. Hi, . Well, what we have seen close to our operations in our report It's clear that the economy in Mexico is improving due to the new shoring, due to the automotive industry, due to the different activity in Guadalajara related with what we call Silicon Valley because the number of companies related with this activity. So we are very positive in that side. We believe that the business passengers will continue growing. We haven't recovered the level we have had in Guadalajara, but we believe that, in general, the activity will be expanding in the following years. Obviously, the news sharing will be boosting the passenger traffic. It is important to mention that the increase of industrial park activity is growing in five of our 12 airports in Mexico, which is very important. This is Raul. Let me complement the answer of Raul. I think that it's really important, and more for all our investors and analysts outside Mexico, to perfectly understand that the growth of the Mexican GDP is really or completely different between regions. On the center of the country, where we have Bajio, Guanajuato, or Jalisco, the place where We have more than 25 years or 30 years that the GDP has been almost a double growth versus the national growth on the GDP. We are seeing on this area, and in Tijuana for sure, a great expansion in terms of industrial parks, real estate, additional new foreign investments that come mainly for the nearshoring. We're really continue really positive on that. We think that it's happening. One of the key factors to in some ways have a better understanding of what's going to happen in coming years and what are the trends is to continue receiving what is happening in terms of state GDP and the creation of new employment in the different regions. For instance, Jalisco, the state where is Guadalajara Airport, was in the last half of the year of 2022, it was the number one state in terms of creation of new employment. So I think that the dynamic of the economy in Mexico is changing really fast, but it's changing in a really different pace depending the areas of the country. In terms of the second question, if we have any opportunity to establish industrial power new to the concessions, I think that We will continue to see different opportunities. As always, we will analyze the opportunities, but one of the key parts to understand always this company is that we have a great discipline to only invest in opportunities that are creative for the value of the company. I will say that yes, we have reviewed different opportunities in some of our airports for thinking some kind of additional development of real estate industrial parks, but always it will pass through this review of how a creative value could be for the company. To conclude, yes, we will review different opportunities, but again, we will keep our discipline of investment to only bring opportunities that create value to our company.

Great. Thank you very much. Super clear.

We'll take our next question from Antoine. Morton Coder with JBM. Please go ahead.

Hello, guys. Thank you for taking my question, and congrats on your results. I was just wondering if you could provide a breakdown on the 3 billion capital deployment you did during the quarter, and if you could share your expectations on your investments on the commercial front are the same as you shared recently, or if there's anything that is moving on that path?

Thank you, Anton. This is Raul. I will begin with the – I mean, in terms of the CAPEX deployed during the quarter, let me begin with which are the main buildings or infrastructure that we are developing right now. We have the second railway of Guadalajara that is happening and is continuing their development and going to be ready for operation at the end of the year. But also we are right now building the second terminal of Bajasta that is also a really big and important investment for the company in size and for sure in the impact on CAPEX. And the third big project that happened on the quarry is related with the land acquisition for the future reserves of the Guadalajara airport. In that regard, I think we have invested around 1.4 billion pesos in the Guadalajara airport for land. We are investing mainly in Puerto Vallarta for the new terminal and the second runway in Guadalajara. These are the main projects. Indeed, in this quarter, we reached the highest level of investment historically in the company, with almost 3 billion pesos in one quarter. The most important thing is that the land reserve that we already acquired, which is very important for future growth in the Guadalajara Airport. And, Anton, regarding your second question, we couldn't hear very well. Can you repeat it, please?

Just to understand if the unfolding of your investments, I mean, your expectations on the deliveries of your commercial and diversification activities has changed, or is anything just going as expected?

No, Anton, we continue the same line. We are developing additional commercial areas in Guadalajara with the futon beverage area that is going to be checked into operations at the end of the summer of this year. Also, in terms of size, we just finished the increase of commercial areas in Los Cabos Airport. Also, for sure, we are developing the hotel in Guadalajara. that will be ready for operation of the first quarter of 2024. But in general terms, we continue the same line of the Northern Antarctica revenues, trying to bring additional square meters with better conditions and better experience for our passengers. That will be the best way to increase our Northern Antarctica For sure, we are working really hard to be more efficient as possible in the land that are directly operated by GAP as the convenience stores or the VIP lounges or the parking lots. But in general terms, I would say that we continue in the same line of the development of the commercial, the non-organic revenues in our airports. mainly in the same business line. But as I say, we're always going to try to review different opportunities, different experience for our passengers. And if the return is the correct one, it's going to be the kind of business line that we will bring to the company.

That's pretty clear. I mean, if I may, just a quick question. With the increase in tariffs you did during the quarter, what level of your maximum tariffs did you reach?

Almost 99.6, really close to 100%.

Perfect. Thank you, guys, a lot. Thank you.

And once again, it is 4 and 1 for your questions. While we wait, we will take the webcast questions. I will turn the call over to management. Thank you, Miguel.

We have two questions. The first one is from Rody Seymour from Brown Advisory. The first one is, is there an update on the FAA timeline to review the rating downgrade for Mexico?

As we said, we continue to think that it's going to be between the third and fourth quarter of this year, the upgrade, but we will begin to see impact on additional routes to our airports. from the Mexican airlines in the first half of the coming year.

Thank you, Raul. The next one, where could non-aeronautical revenues per passenger reach in the next five years?

Good question. For sure, we will try to expand as possible the ratio. will for sure depend on how big or how the amount of additional square meters that we could bring to the table in the next negotiation. For sure we're going to have the effect of the new Puerto Vallarta terminal building. That's going to be a great opportunity to reform all the experience in terms of commercial activities in the airport. I mean, the best way to understand that we have a great opportunity to expand that is when you compare the ratio of Los Cabos Airport and Puerto Vallarta Airport, you will have that we have a big gap to, in some way, to improve Puerto Vallarta Airport commercial revenues. It will come from Terminal 2. Also, the additional square meters from Guadalajara, the hotel, the new hangars, the new food and beverage area will give us a big boost on commercial revenue. Again, it's going to be a key factor to perfectly understand how it's going to be the increase on the square meters for the next period of five years. As a roughly number, we're going to be between 110 to 120 pesos. I mean, there's a lot of variables to see what will be the next five years, but it will be some number in that area.

Thank you, Raul. And then the last one that we have in the webcast is from Mauricio Buitrago from AM Advisors. Can you please repeat your guidance on EBITDA and CAPEX for this year, please?

The EBITDA will be growing in the range of 10% to 12% compared to 2022, and the EBITDA margin will be close to the 70%. In terms of CAPEX, our target is to reach 10.2 billion pesos at the end of the year.

Thank you. I believe that we can pass again the call to Nikki.

Thank you. And we are showing one more question over the phone. It comes from Guillermo Mendez with JP Morgan. Please go ahead.

Good morning, Salvador. Thanks for taking my question. A quick follow-up on the cost front. You mentioned about some pressure on costs going forward. And think about your epidemiology guidance that you just mentioned, about 70% compared to the 72% that you posted in the first quarter. So what kind of inflation pressure or what kind of cost factors do we see going forward. That's something we should already see on the second quarter or more towards the second half of the year.

Thank you. Hi, Guilherme. Well, there are several factors. We talk about the in terms of salaries. Yes, we will have additional headcount in 2023. We have also have to consider the change in low in terms of additional vacations or holidays For the employees, we have to consider the impact in the social contributions regarding the employees, the general effect, which affects also in terms of security, in terms of clearance, in terms of maintenance. In general terms, the change on loan will be affecting because you are right, there is something regarding the inflation. but we have also to consider the effect that we will have 100% operation the new terminals in Tijuana. We opened it last year in May, but was operating full by the last quarter of the year. For 2023, we will have the full operation. That implies additional cost. As we have mentioned before, every time we expand the terminals, we expand the air sites, we have to consider the new maintenance. In general terms, that's the reason that it will be affecting the EBITDA margin. Also, we have to consider the effect of NBJ in terms of the concession fees. We have a credit line regarding the additional concession fee that was applied in 2022 for There is no credit line, so we will have to pay for the additional construction fee. Those are the main effects. Obviously, we have different effects in each airport, but in general, that's the main reason.

Very clear. Thank you very much. Have a good day. Thank you.

We have a last question on the webcast from Arianna Catalan from Santander. Raul, when do you expect to deliver the second terminal in Puerto Vallarta?

We expect that we'll be ready for operations in December of 24. So any effect, for instance, in commercial revenues, we're going to be in 2025, because the idea is that we'll operate just the last weeks of December.

Thank you, Roland. There is not any additional questions, so we will go forward for the final remarks.

Thank you, everyone, again for joining us today. It's our first QR results conference. The team remains available to answer any questions that you may have. Please enjoy the rest of the day. Thank you very much.

And this does conclude today's program. Thank you for your participation. You may disconnect at any time.