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

Good morning and welcome to GAP's fourth quarter 2023 conference call. Thank you for joining us. Please note that all lines have been placed on mute to prevent any background noise during the presentation. At this time, I am pleased to turn the call over to GAP so that the presentation may begin. Please go ahead.

Thank you and welcome to the call. I am pleased to have from the company today Mr. Raul Revuelta, Chief Executive Officer, and Mr. Saul Villarreal, Chief Financial Officer. Any forward-looking statements made during this conference call do not account for future economic circumstances, industry conditions, company performance, or financial results. Please keep in mind that any statements or assumptions made are based on current factors and information that could materially change, causing results to differ from current expectations. For a complete note on forward-looking statements, please refer to the quarterly report issued earlier this week. Thank you all for your attention. Mr. Zabuelta, please begin with your opening remarks.

Hello, everyone, and thank you for your attendance today. As we reflect on the year 2023, we reached the highest EBITDA level in the history of the company, even though we faced several challenges. In the end of the overcame them, the year started at a varying currency rate as we reached historic levels in terms of passenger traffic numbers, revenues, and expansion for airport areas. However, the positive start was offset by two main macroeconomic factors. One was the exchange rate rotation, and second was the low inflation rate applicable to maximum tariffs. To begin, depreciation of Mexican pesos impacted the American airport revenue, which are in US dollars. Depreciation also affected certain commercial revenues in Mexico, as well as international passenger fees. In total, this affected around 20% of our total consular revenue. At the same time, the national producer Price Index Exclusive Petroleum, which is adjusted to update trust tariffs in Mexico, remained mainly flat throughout the year. The standard firmed up below a 1% increase for the previous year, compared to inflation rates of around 6% during 2020-plus. Costs substantially increased during 2023, despite our greatest effort to remain within strict budget parameters. Mainly, we saw cost increases regarding maintenance, personnel, cleaning, and electricity. And with passengers traffic at a record 64 million passengers, we had a higher spending to maintain the quality level of service than higher number of passengers. In addition, the consumer price index in real terms has been sustainably increasing, Together with the higher minimum wage and changes in labor level, consequently, we are facing a growing challenge concerning costs, thus directly impacting our profits. By the end of 2023, we faced various challenges, starting with the passive traffic deceleration due to the problem with the preventive engine inspections. In addition, the major challenge we faced as well due to the regulatory changes and concession fee adjustments, which affected our market value. Nevertheless, we have prioritized this issue and have engaged in strategic negotiations with other relevant regulatory bodies to navigate these changes and preserve shareholders' value to the best of our ability. It is important to mention that despite these considerable headwinds, we achieved remarkable milestones in 2023. Adjusted evidence reaches another record of 17.7 billion pesos, up 9.7% compared to 2022. Commercially, 2023 was a groundbreaking year and one which we reached the highest commercial revenue in our history. Our strategic focus in the area of food and beverage, parking, retail and expansion projects is evidence of our commitment to improve the passenger experience and continue sustainable growth. We are constantly working to recognize market trends, adapt to them, and make them our own. Currently, we have several expansion projects underway as part of our strategic growth initiative. These include new layouts in the Guadalajara, Los Cabos, and Puerto Vallarta airports, as well as the additional mixed-use building. That includes a hotel, commercial spaces, and corporate office in the wildcard airport. Furthermore, we conclude the year with a strong balance sheet, reaching 10 billion pesos in cash at the end of the year, as well as a comfortable debt maturity profit, with a net debt to EBITDA ratio to 1.7 times. During 2023, we raised funds for capital expenses mainly aimed at the airport expansion and infrastructure improvement, as well as for refinancing of the debt maturity. A maturity payment of 3 billion pesos will be due during the first quarter of 2024, corresponding to the GAP-19 bond certificate, which will be refinanced through sustainable linked bond issuance in the coming weeks. Throughout 2023, we continue to focus on our long-term planetary sustainability strategy. The terminal processor building at the Tijuana airport obtained a gold LEED certification, which was the first time one of our airports was granted with this distinction. We also participate in the Edge Certification for Gender Equality and hosted our first ever gala to benefit our educational foundation, Fundación GAL. And during the year, we raised around 9.3 million pesos to benefit our schools. In line with that, we extend our education program to the high school grades in Guadalajara under our Tech of Monterey program, committing to provide excellent education to our students. Moving ahead in our 2025 guidance, we anticipate a 3% to 5% slowdown in passenger traffic across our airport network due to the challenge brought on by the review of the P&W engines. We base these figures in our view of the aircraft that is scheduled to grounded due to the accelerated preventive inspection, as well as the flight frequency and seat offerings on the various airlines. This decrease in passenger traffic will directly lead to lower aeronautical revenues. Thus, we foresee a decrease from 2% to 4% versus 2023. However, on a more positive note, non-aeronautical revenues are expected to grow from 12% to 14%. Despite the passenger traffic decrease, we are considering the development of additional business areas, such as the start of operations of the mixed-use building in Guadalajara. The building includes a hotel, corporate office, and commercial spaces. This is in addition to the opening of around 1,100 parking spots. The tariffs in Guadalajara additional commercial spaces in Los Cabos and in Puerto Vallarta, and the changes in the terms of the existing contract. We expect a 65% dividend margin plus or minus 1%. Debt contractions comes mainly from a higher concession fees in Mexican airports, from 5% to 9%, beginning January 2024, plus labor costs increase in Mexico of around 20% and a 40% for Jamaica. In terms of CAPEX, we expect to reach around 9 billion pesos in the coming year, Along with the annual committed investment in Mexico of 3.8 billion pesos, we are also allocating 1.5 billion pesos for the commercial projects, including the final phase of the mixed-use building in Guadalajara, parking lot expansions, and the opening of additional business lines operated directly by GAN. Additionally, we will purchase additional land in Guadalajara to be allocated to our future expansions which will cost approximately 1.5 billion pesos. We also have around 700 million of CAPEX deployed in 2023, but that will be paid in 2024. Lastly, we plan to invest around 1.5 billion pesos in the projects related to the Jamaican airports. I would like to conclude by emphasizing that despite the challenge, we remain and sustained growth, ensuring our continued success and value creation for all stakeholders. We at GAAP remain confident that the underlying fundamentals of our business remain strong. With this, I want to thank you all for your attention. We are now ready to answer your questions. Operator, please open the line for questions.

Certainly. At this time, if you would like to ask a question, please press star 1 now on your telephone keypad. To withdraw yourself from the queue, you may press the pound key. Once again, to ask a question, press star 1 now on your telephone keypad. We'll take our first question from Juan Ponce of Bradesco BBI.

Hi, Gaptine. Thank you for taking my question. I have a question, two questions, actually, on traffic and And I'm the MDP. The first one on traffic, how are you seeing the airlines cope with this revision of Pratt & Whitney engines, at least in January, December? And also, what do you think is the impact of the slot reduction in Mexico City on your airports? And on the international side, are you seeing bookings strong from the U.S. and Mexico, or have you seen a moderation in this market? That's my first question. The second question would be on the NDP negotiation. I mean, I know you can't share a lot. It's still in progress. But is there any chance that it gets completed ahead of schedule because of the transition in administration? Thank you very much.

Thank you, Juan. This is Raul. I mean, in terms of the traffic, one of the things that we are seeing just for these changes on the available seats due to the inspections of engines is that airlines are looking for the more profitable routes. And what we are seeing in all our airports and in all the countries is in some way that they are moving some of the operations from domestic market to international markets. For instance, if you see Guadalajara Airport, for instance, on the international side, we are seeing a really remarkable increase on passengers on January that in a big part is related with better yields and for sure the I would say smarter allocation of the fleet of airlines taking account the lack of seats. The other part related with Mexico City Airport and the capacity for sure is an additional change that is an additional I would say ingredient or variable in all the things that are happening right now in the Mexican market. For sure, taking into account that some of the airlines are changing their biggest fleet or the fleet with the biggest number of seats, Mexico City Airport, and changing some of the fleet of other airports. But what we are seeing right now in the airports of CAP is for sure a decrease on the capacity and in the passenger's number for the routes that come or goes to Mexico City Airport. On the other hand, we are seeing really interesting trends on Guadalajara Airport related with international passengers. It is important to mention that for instance, Polaris has their more important hub for international passengers and specifically the ones related with California market, South California market from Guadalajara. So one of the things that we are seeing in Guadalajara is an increase on domestic passengers on connections to international flights in Guadalajara airport, mainly from Bolani. So that is one of the things that we are seeing. So when we talk about international markets, The ones related with VFR markets are growing really in a great pace on this first quarter of the year. Also, on leisure markets as Vallarta and Cabos, we are beginning to see that some of the new routes will come for the second and third quarry, and in the first quarry, we are seeing more flatter increase on passengers. But overall, I will remind you that, for instance, on the first month of the year in January, we saw a 5.3% increase on international passengers And it was really important to vote that Guadalajara Airport, in terms of international passengers, grew 20.5%. The last part of your question related with the master development plan and the negotiation of the PMD. For sure, the airport law is really clear. The authority has, until the last day of the year, to give an answer. We are working really together with the authority, we are working together with the airline to get their comments about our master plan, but we could not assure, and we will make our best effort trying to get as fast as possible the authorization, but we could not assure that the authority will take all the time that the airport laws give them to release the authorization. We are working really close with them, but we don't have a complete assurance about how quick that could be.

Thank you, Raul, for that detailed response.

We'll take our next question from Steven Trent of Citi.

Good morning, gentlemen, and thanks very much for taking my question. I was curious, given your experience with Jamaica, and I know you guys have a long knowledge in that market vis-à-vis your Spanish strategic investor, are you looking at any opportunities to invest outside of Mexico? Your competitor seems to be having a bit of trouble in the Dominican Republic. We'd just love to get your view on high-level opportunities ex-Mexico. Thank you.

Hi, Steve. This is Saul Villarreal. As you know, we are following opportunities and we attend different meetings and conferences looking for opportunities. Right now, we have We're in the middle of one process for one airport in Turks and Caicos Island. We were already pre-qualified as a bidder, so we will compete with another four other airport operators. That's the only active opportunity that we are now in the middle of, and we will be looking for other opportunities, we are really open to see and explore any kind of opportunity. Right now it's only one.

Okay. I appreciate that, Sewell. And just one other question. You know, just to help get our arms around the new Mexican airport regulation, you know, way that we read the text back in October is that the government was potentially going to be more interventionist in terms of looking at tariffs and responding to concerns about tariffs. Have you seen any increased communication from the government at this juncture or does it and I know it hasn't been that much time but or does it seem that you know, the amount of inquiries and communication that you receive from the SET is about the same as it was before. Thank you.

Thank you, Steve. This is Raul. I mean, in general, I would say that the communication with the SET is still the same as in the past. And talking about, I would say, the tariff, We, exactly as the same as the market, we could say that the FCT take for the first time the new amendment of the Annex 7 of tariff, and they apply it just as the formula is right in the case of FASUL. So I would say that we are not seeing any kind of additional intervention or or any kind of different change in the way that we communicate with the authority. But what is important to, in some way bold, is that on the first time that the new annex is in place, for the case of Atul, the authority applied it and obtained a contract. an important increase on tariffs that was related with just the full applied of the new formula. So I would say that that is the most important thing, that for the first time that the new formula is in use, the authority just respect it.

Okay. Appreciate that, Raul. Thank you.

Thank you, Steve.

We'll take our next question from Alberto Valerio of UBS.

Hi, thanks, Raul, Saul, for taking my question. I have two on my side. The first one about tariffs. We see a discount in November and December last year, 10% discount for all the three airports. Should we see these discounts removed from January on? And what should we expect in terms of tariffs for 2024? Inflation, taking inflation as a proxy would be okay. And my second question is about the NDP for the end of the year. We saw ASUR closing the gap of CAPEX per passenger to you guys and OMA to close to 100, 110 pesos per passenger on CAPEX. What should we expect for GAAP? Is there room to increase further the capex per passenger, or should we see the same ratio that we saw in the past MDP? Thank you very much.

Thank you, Adelto. First, in terms of the discounts, for this year of 2024, what you're going to see is 6% of discount in nine of our airports. that will continue is related with the package of discounts that we have for airlines, and we used to have it, but now we have made it more public, I will say that. But what we do not see is a discount of 6% in nine of our airports in terms of the passenger's fee. It is important to mention that the rest of our tariff will increase in terms of the consumer inflation, and these new changes will be applied from March 15th. That implies the rest of our tariffs in Mexico. In terms of the capex for the next MDP, I would say that we are in line with our historical capex, and we are around 100 pesos around 100 pesos per passenger. So our view today of the master plan for the coming period will be around that figure.

Very clear. Can I consider these airports, the top Paris airports with the most expensive Paris airports, those ones that will remain with discounts?

Hi, Alberto. This is Saul. We don't have the most expensive airport so far, and we are not expecting to have with the new tariff review that we will conclude at the end of the year. We do not expect to have the most expensive airports, I think in terms of maximum tariff or in terms of passenger charges.

No, pardon me. I expressed myself wrongly. I was talking about inside within your iPods, the iPods of GATT, those ones that will remain with discounts should be the most expensive tariffs because you have different tariffs among your iPods, right? So those ones with the highest tariffs inside GATT should be those ones with discounts that we will keep for this year?

Yeah, in terms of the discounts, I mean, Nine of the airports will not have the 6% of the discount in the passenger seat, and the only ones that will not have any kind of discount will be Mexicali, Morelia, and Manzanillo.

Perfect. That's it. Thank you very much for the clarification.

You're welcome.

We'll take our next question from Pablo Monsevalle of Barclays.

Hi, thanks for taking my question. Kind of a follow-up on one previous question. In summary, what is your expectations on how close you expect to be this year relative to your maximum target? So you're expecting to be 97, 96, having in mind all the discounts that you are talking about. Thank you.

Hi, Paulo. This is Saul. It's fairly early to know. Obviously, the discounts offered in positive charges will affect the fulfilling of the maximum tariff. It will depend also in terms of inflation regarding the tariffs, which is the producer's price index less petroleum. We have a range of fulfilling between 94% to 97% for this year.

Depends a lot also, Pablo, this is Saúl. As Saúl mentioned, for sure the inflation, but also the exchange rate for international passengers. And in the other part that is important that also give us a biggest fulfillment is in the case where the domestic market a growth in a slower pace than the international market, we could get a better fulfillment because as you remember, the passenger fees for international market are higher than the domestic market. So we are really early in the year to have like all these macroeconomic trends in the blend. So for the moment, we are seeing this, the rates that Saul mentioned, but I mean, we should be really keep an eye really close to these macro trends to see if the fulfillment could be higher than we expected.

Just sort of a follow-up, can you tell us what is your inflation expectations that you are incorporating in the specific tariffs that are not from DUA?

Yes, Pablo, the inflation applicable for specific tariffs is, as Raul explained, is consumer price index is 4%. For the maximum tariff that we are expecting is 1.5%. Okay.

Awesome. Thank you very much.

And once again, to ask a question, please press star 1 now on your telephone keypad. One moment while we queue. We'll take our next question from Juan Miquezo of GBM.

Hi, guys. Thanks for taking my question. My first question is regarding capital allocation. You mentioned in your report that you would propose an extraordinary capital reimbursement. Should we see this as an annual dividend or is there room for an extraordinary dividend? And also on buybacks, are you planning a new buyback for 2024?

Hi, Juan. This is Saul. As we announced in our purchase list, the Board of Directors approved a payment of 13.86 pesos per Sunday share as a capital reduction in favor of our shareholders. It will be submitted to the approval of the extraordinary General Shareholders' Meeting that will be held in April 2024.

Yeah, should we see this as an annual dividend or is there maybe another dividend?

No, that for now is the only amount approved by the board of directors and that's the only payment to be distributed to the shareholders.

All right, thank you. And just one quick question. We saw a decrease along with . Has this been part of any of your conversations in any way so far?

Well, we couldn't understand you. Can you repeat the question, please?

There was some noise. Yeah, it was a lot of noise. Yeah, we saw a decrease along with the NDP. Have you been in talks of this option in any way?

Thank you, Juan. Right now, as you know, we have an agreement with our strategic parent. For the moment, we will continue with the agreement that we have. But for sure we will continue evaluating which are the best options for the company. But for the moment I could tell you that we are evaluating the options for the company.

We'll move next to Isabella Salazar. with GBM.

Hello. Thank you for taking my question. I was wondering if you could give us some details about the Jamaican concession regarding the economic rebalancing. Has it already been done? And also in terms of commercial projects, how are these contributing to the overall results or when did they start contributing? Thank you.

Hi, this is Saul. Well, we are continuing with conversations with Jamaican authorities. We have a verbal agreement, but the process in Jamaica is very long. They will have to pass through the parliament for different approvals. So we wait. We are expecting to have this rebalancing process to conclude at the end of this year. They announced that probably in the second half of this year. The second half could be from July to December. We don't have any certainty about this. We will have to wait to see if it's possible to pass through these approvals, pass through the Parliament. Regarding your second question about commercial projects, as we mentioned, we will have the opening of a mixed-use building in Guadalajara, which is very interesting, integrating the hotel, 180 rooms of a hotel, corporate offices, and a retail area, commercial area, integrated to the airport, to the terminal. and to the parking lot. We are also opening additional spaces, spots in the parking lot. That will be ready and it will start in April 1st. On the other hand, we already have the terrace in the Guadalajara airport, which is a very nice and very large area of commercial food and beverage that will contribute with the commercial revenue increase. As we announced in our guidance, even though that increase is expected in terms of passengers, we will have a relevant increase in terms of commercial revenues.

Just about the timing of these openings, as I would mention, the hotel, the mixed-use building will begin operation on April 1st. Then the parking lots, we're going to have some opening in Guadalajara. We have an opening in the summer and a second stage for the end of the year. At the end of the year, we will have at least 11,000 additional spots for Guadalajara. That means an increase of almost 100% of spots. For sure, that will give us an important boost on the parking lot's revenue, mainly for the coming year. but it is really something important to have in mind. And the last, in terms of the terrace, today we have an important number of food and beverage companies that are already operating. We did all the area, all the different spots are already begin to build, around 70%. of the spaces are already operating from this January, but the area of all the new commercial layout of Guadalajara Airport will be fully put in place and fully deployed for August of this year. For that moment, we will begin to see in our revenues all the full or the full additional revenues that will come from that additional layout. But I would say that what we are expecting for the coming months is that the trend that we have for the last quarter of the year, that was an increase of commercial revenues in a high double-digit, will continue for the next quarters, and as we say on the call, our guidance for the full year of the non-iron optical revenues will be to close with an increase of revenue from 12 to 14 percent.

Perfect. Thank you much for your answers.

We'll take our next question from Federico Galassi of TSG.

Hello, guys. Saúl, Raúl, Alex, congrats for the results. Just a question. The first one is related, continue with the commercial revenues. In the line of car rentals, you have a big increase. This is a number, if you want, that should maintain. There is more room to grow here. And this is a fair question.

Thank you, Federico. I mean, for sure we have a really interesting growth on commercial revenue in the line of the car rentals. And while due mainly to the bidding process of Los Cabos Airport, but I will tell you that for this year also we have the – A possible excellent news that we are expecting an increase also related with the bidding process for Guadalajara Airport. So at the end of the year, we are expecting for that specific line that double digit growth will continue for this 2024.

Great, thanks. And the second question is more related to the COGS side. in particular, in the cost of employees and maintenance. That's, again, a big jump year over year, and in particular, if we see, again, revenues. What can we expect for this year, in particular, with the increase in minimum wage since January? There are people of the government talking about an increase, a change in the labor hours. How's your view on these two topics?

Hi, Federico. This is Saul. Obviously, we have faced a lot of pressure in terms of the increase in salaries, not only in our general airports in the middle of the country, but also in the board airports like Mexicali and Tijuana. The 20 percent increase in minimum wages is affecting, in general, the contributions, the social security . So, it also affects the security and cleaning that is related with the personal high-budget third-party suppliers, and it's also affecting in terms of maintenance. We will try to look for a cost control in all the year in 2024, but there are some effects that will be impossible to control. As you know, we try to maintain the cost per passenger very efficient, and we will try to maintain that, considering that for this year we are expecting a decrease in passenger traffic between minus three, minus five percent. It is an important point. It is complicated. It will be worse in case the change in labor law in terms of the reduced journal from 48 hours to 40 hours. That will represent around 20 to 25 percent increase in terms of headcount for the company. Right now we are facing trouble. certain troubles to hire people in all our airports, in all lines of the headcount. If that change passes, we will have several problems for hiring additional people.

the labor hours, if the project could go ahead, and what could be the impact for the operations?

The impact for operations? No, we do not estimate an impact of operations for this. What we will see is a significant increase in terms of cost.

Yes, the pressure is going to be the cost, not necessarily the operation. As I will say, there's a law or a change in a labor law in the table of the Congress related with the, today we have 48 hours labor week in Mexico. The proposal of the Congress is to bring it to 40 hours per week. If that happens, if that law, the change in labor law happens, for sure it will have an important impact in the number of the headcount of our airports that we will need for continual operations. But again, ISA is in some of the different changes that the congressman has in the table. We don't know, we don't have the assurance that this will happen or not, but for sure ISA, I would say, a change of the structural cost of the company, not just for GAP, but for all the companies in Mexico, if that law is approved by the Congress. We're going to keep an eye on how this law could move, but as Saúl says, there will not be impact on the operations, but for sure it will be additional pressure for our cost on the terms of personnel.

Perfect. Thank you so much, guys.

Thank you. At this time, I would be happy to turn the call over to Alejandra Soto.

Thank you, Leo. We have a question from Alex Fush in the webcast, and he's asking two different questions. What is the company's strategy to try to mitigate some of the pressures in salaries, if you can?

Yeah, thank you Alejandro. I mean, for sure we are, as you know, some of the DNAs of GAP has been to be really disciplined on the management of our cost. We are working to continue giving the best possible services to our passengers, and taking or bringing to the company additional technology that will give us the opportunity to bring additional efficiencies to the company and to the operations. So one of the big or the key points that we are trying to deploy on this year is that we'll not hire additional headcounts. with the exception of the new business lines directly operated by us, as could be the hotel. That would be, for sure, a first effort in some way to freeze the growing on headcount for the company. For sure, as soon as the passengers, after all these problems will continue to grow in the future, our idea will be to try to freeze all that headcount and in some way bring additional efficiencies to the company and for sure to the margins of the company. But the first idea and the way that we are working right now is to try to bring additional technology to the company, trying to avoid any additional increase on the headcount for the coming years.

Thank you, Raul. The second question from Alex Push also, if you can share your expectation for the tariff and the capex for this renegotiation of the MVP.

We will continue the same line that we have talked about in the past. We think that the negotiation will be zero to five percent. For sure, there are a lot of things moving in the middle. all the pressure on cost of salaries in some way should be necessary to reflect in the projections of the master plan. But also, we really need to have a fully understand what will happen in terms of the passengers, how in some way the full recovery of the market from the P&W engines problem I would say that we keep our original target of zero to five percent in terms of the increase of the maximum tariff for the company.

Thank you, Raul. This is the only question that we have at the webcast.

Very well. We'll return to a follow-up question from Juan Ponce of Bradesco BBI.

Thank you for the follow-up question. It's just on the 6% discounts in the nine airports. Just wanted to confirm, how long will these discounts be in place?

For all the 12 months of this year, Juan.

Gracias.

And there are no further questions at this time.

Thank you very much for your attention. Before I conclude, I want to mention that the Gap Day 2024 event is coming up and will be held at the Guadalajara Airport on February 10, 2024. We hope you can join us for a morning of management presentation and a guided tour for all our new innovations and expansions taking place in the airport. Please contact our investor relations team for more details. Thank you and have a wonderful day.

This does conclude GAP's fourth quarter 2023 conference call. You may now disconnect. And everyone, have a great day.