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

Good morning, and welcome to GAP's conference call. All lines have been placed on mute to prevent any background noise. After the 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 conference over to GAP's investor relations team. Please go ahead.

Thank you, and welcome to the first quarter 2024 conference call for Grupo Aeroportuario del Pacífico. Presenting from the company today, we welcome Mr. Raul Revuelta, CAF 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 cause actual results to materially differ from the current expectations. For a complete note on forward-looking statements, please refer to the quarterly report issued earlier this week. At this point, I'd like to turn the call over to Mr. Revuelta for his opening remarks. Please begin, sir.

Thank you, and good morning. As always, it is a pleasure to be reviewing another query with you. We appreciate your taking the time to join us today. I'm going to briefly review operational and financial figures before taking your questions. During this quarter, the total number of passengers reached nearly 16 million, which was almost flat compared to the first Q2023. As many of you are aware, we have experienced a slight deceleration in passenger traffic since the fourth quarter of 2020 due to the preventive inspections of the Pratt & Whitney engines. These inspections will continue throughout 2024. As of today, Volaris, the airline that handles most of our passenger traffic, has the highest number of grounded aircraft. As 2024 progresses, we will continue to monitor the availability of seats and passenger traffic trends in order to keep the market updated of any changes. Despite the slowdown of the domestic market, the international market has been growing in double digits. As we look ahead to the rest of the year, we will expand our market beyond the U.S. and Canada with the new routes to Europe and Asia. As of today, we expect to initiate at least 11 new international routes during 2024, nine of them to North America and two of them to Europe, which includes Frankfurt to Los Cabos and back to Puerto Vallarta. Moving on to financial performance, On the top line, total revenue remained almost flat compared to the first Q23. Aeronautical revenues decreased by 1.3%, mainly due to this cost to passenger charges that are in place at nine of the 12 airports in Mexico. As a result, we reached 97% of the maximum tariffs approved, while in the first quarter of 23, it was 99% of the maximum tariffs. Despite this, Northern Articles revenue continued strong, achieving a 15.2% increase to reach 1.7 billion pesos. For the first time in the history of the company, we have reached 109 pesos per passenger. As we have previously discussed, we renovated several of the tenant contracts, which resulted in more than positive financial conditions for the company. The main revenue generated for commercial revenues was the additional capacity at the airport with expansion in terms of square meters. This includes the new terrace with a huge food and beverage area in Guadalajara, which is surrounded by a top restaurant and offers stunning view of the runway. Those of you who attended the Gap Day had the opportunity to walk through this new area. There are several other strategies of the commercial side that are being worked in addition to large sale areas. This includes new business lines such as the mixed-use building, which can also be found in the Guadalajara Airport, with the opening of a new hotel in March of 2044. On the expensive side, this increases by 10.3% compared to the first Q23. While we remain focused on the maintaining of street cost control, the current changes in labor load affect all major coastlines. The salary costs have been greatly impacted as well as other major personnel contracts such as cleaning, security, and maintenance. Down the line, we do a step higher cost that correlates with the airside and terminal expansion in addition to an inflationary effect. Regarding the concession fee in Mexico, which is the amount that concession holders such as GAP must pay for the use of federal airports, you may remember that in January these fees increased from 5 to 9%. In accordance with the new rules for tariff regulation, the payment made over those included in the last tariff review will be added to the reference value during the next review of the maximum tariff. However, this only applies for the regulated revenues. In language D, The 4% difference paid over the analytical revenue in the first quarter of 24 was recognized as an intangible asset under the YES 38 and will begin its amortization in January 2025 and will continue until the end of the concession period. The amount recognized as an intangible asset in the airport concession during the first quarter of 24 was 175.5 million pesos On the other hand, the 4% additional payment over the non-revenue was recognized as an expense. As a result, EBITDA reached 4.6 billion pesos with an EBITDA margin of 69.8%. This differed from our guidance released in January, mainly due to the recognition of the intangible assets I just mentioned. On the debt front, total debt reached 4.5%. billion pesos in the first quarter of 24. In March, we issued another two tranches of label debt bonds of the Mexican market for a total of 3 billion pesos. The proceeds were used to pay down the GAS-19 bond matured in March for the same issue amount. These were on the fifth and sixth label funds that are sustainability linked and direct towards reducing carbon emissions. Thus further demonstration our commitment to enhancing sustainability and at the company. We look forward to continue to update the market of these initiatives and we will continue integrating this philosophy into our operations and infrastructure projects. Following with these figures, we continue to maintain healthy leverage levels, reaching a net debt to EBITDA ratio of 1.7 times for a trailing 12 months. Thus complete with all our debt Moving on to the CAPEX during the query, CAPEX has to be capital expense to reaching approximately 1.4 billion pesos. This position is well to comply with the challenging master development program that is in place. Before I conclude, I want to mention that our ordinary and extraordinary shareholders meeting will take place tomorrow, and we will be proposing a capital reduction of 13.86 pesos per outstanding share. I would like to express my gratitude to all who attended our Gap Day at Guadalajara Airport on April 10th. It was a great event where we were able to tour the newly expanded commercial and passenger area, the airport fire station, and even stay at the new Hilton Garden Inn Hotel that is just steps away from the main entrance of the airport. I hope that all who were able to join us left with a sense of all the hard work and commitment we have for our market and for the growth of our company. With that, I would like to open the floor for questions.

And at this time, if you would like to ask a question, please press the star and 1 on your telephone keypad. You may withdraw your question at any time by pressing the pound key. Once again, to ask a question, please press the star and 1 on your telephone keypad. We'll take our first question from Rodolfo Ramos with Bradesco BPI. Please go ahead.

Good morning, everybody. Thank you for taking my questions, and congratulations on the results. One question on my side, and it's a two-part question, and just wanted to get a sense of, you know, how your MDP negotiations are going through, are coming along with the authorities. You know, if you can comment on the tariff side and also on the CAPEX side. And on the CAPEX, I just want to understand, I mean, you have airports that are well above, you know, the 10 million passenger threshold per year. You also have Cabo that is close to 10 million. So I just wanted to see, you know, it seems like the new... The new name of the game is the CAPEX side. We saw that in ASURUS MDP. So just wanted to get a sense of what your CAPEX needs could be going forward if you see any major projects at these main three airports that could help you out in this negotiation. So that would be my question. Thank you.

Thank you, Robert. As we have talked, I mean, we are still working with authorities. We have, I mean, present the first draft of our master plan and we are just in the process of the visits with the authority or the physical visits of all the airports and review of all the different investments that we are proposing to the authority. As we have said in the last conference calls, we are expecting an increase of the maximum tariffs around 5% to 0% to 5%. But what is important to have in mind is, I mean, we could not assure completely which will be the result. We need to see how mainly the discount rate will change in the coming months. in the coming months, and after that we could have the number. As you remember, in terms of the airport load, the authority has until the last day of the year, December 31, to have an authorization. We are working with them, trying to make as fast as possible this authorization, and we are working just on that. In terms of the CAPEX that we are expecting, we are maintaining the same level of investment per passenger that we have in this period of master plan. That is around 110 pesos per passenger. We are expecting to have the same level of investment per passenger to have in mind Some of the efforts that should need some additional stages or additional terminals or big investments or in some way for attend the increase of passengers will be Tijuana. For sure in Guadalajara we are proposing to the authority a completely new brand terminal, the terminal two for the airport. For the case of Cabos, we also know that we need to expand our terminal building on the second terminal building, the international terminal building, and the terminal one, that is the domestic terminal building in Cabo. And for the case of Vallarta, as you know, on this master plan, we are developing the second terminal of Puerto Vallarta. We will continue the expansion of that on part of the coming year, but will not be included as an additional investment for the new master plan. So in general terms of concluding, the biggest investment that we will see on our bigger airports will be expansion of Terminal Tijuana, a new terminal in Guadalajara, and expansions on Terminal 2 and 1 on Los Cabos. For sure, for other airports, we'll have some expansions, but the main expansions, talking about terminal buildings, will be on those airports.

Thank you, Raul. And just a follow-up on that, and you mentioned that they have, authorities have, until the last day of this year, so I'm assuming that you will be concluding your negotiations with the next administration. Is that correct?

At the moment, we could not assure it's going to be with this administration or the coming administration. We are working on all the technical approach of the master plan. Just think for a second that a master plan is documents that, for the case of GAP, will be around 2,000 pages with a lot of blueprints and a lot of technical work. So for sure, we are working today with the technicians of the FAQ. And at the end of the day, we will try to close this negotiation as soon as possible. But today, I could not assure it's going to be with this administration or the coming administration. What's for sure, it's in the table that we are working on how all the technical approach and studies for the capacity and the new investments on the master plan, and we will have it in the table of authority, and we will expect the correct timing for the authorization.

Great. Very helpful. Thank you very much, and congrats on the results.

Thank you, and we will move next with Stephen Trent with Citi. Please go ahead.

Good morning, everybody, and thanks for taking my questions. The first, if you could, excuse me, I'm sorry, if you could give us some indication on the Jamaican airports, you know, and the timing of the regulatory reviews and what chance you see that maybe authorities could possibly extend those concessions you know, when the review is done.

Hi, Steve. This is Saul. Thank you for your question. We have been working very well with the authorities. Indeed, in the gap day, we had the Minister of Transportation in Jamaica, and the communication and the relationship is very good. We have been working, and we have a final proposal However, we haven't achieved the final document signed to be applied. So we have good news, but we cannot disclose yet because it's not possible because we don't have the official document from the authorities of Jamaica. But we feel very comfortable with both results in the negotiations for both airports. We are fine for now, but we cannot disclose yet the result of the negotiation.

Okay. I appreciate the color, Saul. Thank you. And just to follow up with something you mentioned in the prepared remarks, I believe you mentioned nine new routes to North America and two new routes to Europe, if I'm not mistaken. And just one, if I got that right, and two, what potential you might see for new Asian routes?

Yeah, this is Raul. I mean, the turn of Asia, what we are expecting for the end of the year is the operation of, we are not sure today if it's going to be two or going to be one destination to China from Tijuana. We're really close to have some Some announcement, but what we are expecting for the end of the year is at least one direct flight from China to Tijuana.

Okay, perfect. Thanks, Raul. Appreciate that.

Thank you. And we will move next with Guillermo Mendez with JP Morgan. Please go ahead.

Thank you and good morning, Raul, Saúl, and Alejandra. Thanks for taking my question. My first question is on the guidance. Raul, you mentioned in the beginning about the effect of how the concession fee was accounted. So clearly there was some upside on the EBITDA margin report on the first quarter. But just wondering if you see some kind of upside for your four-year guidance, if you should expect any kind of changes from here. And the second question is regarding the bidding process for the Turks and Caicos airport. You mentioned the fourth quarter earnings that you were participating in the process. Just wondering if there's any kind of updates on this. Thank you very much.

Hi, Guillermo. This is Saul. For your first question, we have, as you said, we have to revise our guidance, but we want to wait for a new idea of the Pratt & Whitney engines. review and be monitoring the traffic trend in the following months. We expect if we have more visibility until the end of the year, we will release a new guidance, but we want to wait until the second quarter in order to update it. Regarding to Xiptecos, we don't have any advance yet. We don't have any update from the authorities. attending any kind of meetings with the government that we have any other than just what we released that we were selected as a leader.

Okay, very clear. I think so.

Thank you, Gilebra. We will move next with Alejandro Fuchs with Itaú Group.

Please go ahead. Hello, Raúl, Saúl, Alejandro, team. Thank you for the space for questions and congratulations on the results. Very quickly, two ones from my side. The first one is on aeronautical revenue. They were flat year-over-year, as Raúl was mentioning. even though you mentioned that the TUA was still down for nine airports. So I wanted to get a sense on how the aeronautical revenue is flat year-over-year with flat passengers also performance with the lower TUA. If you're charging maybe a higher percentage of the maximum tariff, maybe you wanted to understand that correctly and then have a follow-up. Thank you.

Hi, Alex. Well, regarding the TUA, we already applied the discounts. As we mentioned, we are applying for nine airports the 6% discount over the TUA. We have different factors as inflation and exchange rate in order to fulfill the maximum tariff. But we are expecting until the end of the year to be close to 97%, 98% of the maximum tariff. We are expecting acceleration or appreciation of the exchange rate. If that happens, it will be benefit for the fulfillment of the maximum tariff. We have another issue regarding the international passenger traffic, which is in US dollar, it's higher tariffs. That provides a higher amount. and more possibility to reach the 100% of the maximum type. But for now, our best approach is 97% at the end of the year.

Thank you. That was very clear. So maybe just a quick follow-up. I wanted to see if I got this very clear, but on the concession tax, the $715 million that you paid this quarter, I wanted to make sure that This includes the 4% increase, even though this is going as an intangible asset as well. So we did see this through the P&L, and it's included in the EBITDA. I got cut off a little bit on what Raul was explaining, so maybe you could re-explain for me. That would be very helpful. Thank you.

Yes, Alex. The concession tax is mandatory to be paid to the government. It pays every two months, so we will pay the first two months of the year, but we have to make a provision for March. What is in the financial statement, in the income statement, is only the concession tax at 9% for the non-aeronautical revenues and 5% for the aeronautical revenues. The difference is it is recognized as a concession asset, as an intangible asset, as Raul explained, and as we disclosed in the truth list, it was recognized according to the international standards. So we will be amortization of this asset during the period of concession. So just to be clear, it is a cash flow for the 9% full. But the recognition in the income statement is 9% for the non-aeronautical and 5% for the aeronautical. Just for 2024, in 2025, everything will be a 9%.

Thank you very much for your time. Thank you.

Thank you. We'll move next with Pablo Monsivais with Barclays. Please go ahead.

Hi, thanks for taking my question. Just a quick one on the cost side. You have mentioned that the labor law is impacting your costs, and that has been the case for this year. Do you see any extra pressures or headcount increase that could put pressure on your cost side for the year?

Thank you. Hi, Pablo. just for the operation of the hotel. As you know, in the gap day, we have another business unit, and we need the headcount for the full operation. Obviously, the pressure from the labor law is clear, not only in Mexican airports. For Jamaican airports, we have an increase, significant increase for the minimum wages, around 40%. is not relevant because the participation of the Jamaican airports in the total EBITDA, but at the end is relevant for the cost expense increase. We want to be clear that the idea that we will follow as a company, as management, is to maintain the cost control. We are not going to hire an additional headcount. just for the hotel, and in case we open additional business lines or more units, we will add additional headcounts. If not, we are not going to hire additional headcounts.

Perfect. Very clear. Thank you very much.

Thank you. We will move next with Gabriel Schimelfarb with Scotiabank. Please go ahead. Gabriel Humelfarb with Scotiabank. Your line is open.

Hi, good morning. Thanks for the call. Just a bit of an update about the issue of the Pratt & Whitney. Have you seen, do you think that for these years, for the last quarter's capacity could be limited due to the the engine failures, the engine maintenance. We saw about the Volaris that yesterday said that most of the peak of the capacity will be on the third and the fourth quarter. So do you see that this could affect the passenger traffic for the last two quarters of this year? Thank you.

Thank you, Gabriel. This is Raul. I mean, when we present our original guidance, We consider around 200 days for the period of maintenance of each one of the grounded planes. As you mentioned, Volaris just said on the conference yesterday that they are expecting the worst part of this peak on decrease on capacity for the Terra and Folkwire. We are in the same page. Our guidance expects that the worst part of this supply crisis will happen on summer. And after that, I would say that gradually, mainly in November and December, we will begin to see some of the comeback of the first plane that were grounded on September of the last year. So I will say that in general terms, we stayed the same number that we originally presented in our guidance. And in that moment, we considered that the worst part of the decrease of ground displays would be on the third and part of the fourth quarter.

Okay, and do you think that this supply shock could be somehow, can be used for the next MDP for the passengers, like compensated if the passengers decrease for the next MDP?

The point here, Gabriel, is that in general terms, as we have mentioned, this is a supply side crisis. So as soon as the fleet recover and fly again, we will have a recovery like in a hockey stick because the demand is still there. So this is something that will not change the trends on the long term. And in that point, we are not considering to change our needs of CAPEX, of our expected, our forecasting for the long-term in terms of passengers in our airport. So what we are saying is we expect a recovery during 2025 of the traffic, and for the long-term and mid-term, the increase on traffic will be really, we are optimistic that will be strong, and in that way, Our master plan reflects the needs of that demand on the new capacity that we are expected to deploy in our airports.

Okay, thank you very much.

Thank you. Our next question comes from Antoine Morton-Koeger with GBM. Please go ahead.

Hello, guys. Thank you for taking my question. I'm looking to understand if the increase in non-idle per packs was driven by the improvements in the commercial areas of your airport, or maybe if it had some relationship to real estate investment. So I was wondering if this quarter's non-idle revenues had some contribution from the mixed-use facilities and the hotel, thinking maybe some advance payments from the mall or something similar?

Hi, Anton. This is Saul. Well, the increase of revenues per passenger, I think you're referring for aeronautical and non-aeronautical, which indeed is around 2%. It is basically because the increase in the non-aero. You are right. It's part of the new revenues, the new contracts that there are in the Guadalajara, the new a commercial retail and food and beverage area that was opened. The hotel was opened around March 36, so it's not relevant in the figures, but it is the new areas and retail, the renovation of the contract, the renewal of the contracts, also the opening of some commercial retail in Montego Bay. At the end, the commercial revenue showed an extraordinary increase in this quarter, around 15%. But the passing year, it was around 2% in total for non-aeronautical and aeronautical revenues. If we are talking about aeronautical revenues, we had a decrease of around 1.5%. So it is because, as we mentioned, the discounts into the two of us are passing charges in nine of our Mexican airports.

Thank you. Our next question comes from Andresa Ferrodo with UBS. Please go ahead.

Hi, good morning. Thank you for taking my question. I just have a follow-up here on the non-aeronautical side. You mentioned both all the new projects that the company has been working for in the last few years and also the renegotiation of contracts with tenants. So I just wanted to know if you could break down how much each of these factors are contributing today for the non-aeronautical side and what is their expectation going forward about the contribution of these two factors. Thank you very much.

Thank you. This is Raul. I mean, in general terms, the non-aeronautical revenues was growing on the quarry mainly for the expansion of some areas in our terminals was related with the food and beverage in Guadalajara and some special areas or additional areas of retail also in Guadalajara. But in general terms, I will say that in this quarry, what we have seen is an increase in some business lines as could be the food and beverage Because in the last year, we were negotiating contracts, for instance, in Los Cabos, in Guadalajara, in Cabo, and in Tijuana. So what we are seeing right now is a reflect of some new conditions, mainly in food and beverage, in retail. But also, we have seen the effect, an interesting effect of the revenues that comes from the business directly operated by GAP as could be the parking lots that increase even without flat environment of passengers. That is important to say because one of the revenues that are more or have a direct correlation with the number of passengers are the parking lots. So through a new tariff strategy, we obtained positive numbers on the parking lots, even with a flat number of passengers, in terms of total passengers in their part. So what is coming, for sure with new conditions on some of our biggest contracts, what we are expecting as soon as the traffic recovers on the coming years, will be a robust increase in terms of revenues because as soon as the consumption of the passengers arrives, we already have the correct layouts, the correct contracts, and the correct brands to bring the best possible results to the company. So for sure, on the 25th, for instance, as soon as we have the traffic coming back to the airports, we will continue with our robust growth. But for the 24th, as we mentioned on our guidance, we are expecting to increase the NOIRO revenues from 12% to 14%, and we think that we are aligned with that original guidance.

Perfect. Thank you very much. And she just could provide an update on the operation of the hotel and the commercial space that you're doing with Alahara.

Can you repeat? I lost you for a second.

Sorry, so I just wanted to know if the hotel and the commercial space are already operating and at which stage. Thank you.

Yes, we just began the operations on the last week of March. So we are just working on some of the new areas of Guadalajara, mainly all the hotels. and we will begin to recognize the revenues coming from the hotel just in the second quarter of the year. On what we call the mixed use building, we expect that for the third quarter of the year we will begin to have recognition of revenue related with new tenants of the office building. And also on the third quarter we will have full recognition of revenue related with the new food and beverage methanin area on the building, on the mixed-use building.

Perfect. Thank you very much. Have a good day.

Thank you. And we will now take the webcast questions. I will turn the call over to management.

Thank you. We have one question from Bernardo Malpica from Santander. The increasing international passengers compensated for the fall in domestic passengers. Did you see any top line benefit coming from this change in mix?

Yes, Bernardo. I mean, in general terms, the change of the mix, when we talk about air revenues, bring us additional, I would say, tariff. For instance, the two ice related to dollars, but in general terms, I would say that depends on the exchange rate. But in general terms, I would be that it's positive, the change on the mix, because also the no IRO business, you could get some consumption from the duty-free, for instance, that in case of the domestic traffic, you could not have it. So I would say that in general terms, it's positive, and it could have some additional benefit for the top line.

Thank you, Raul. And the last one is from Areli Vileda from INVEX. I would like to understand the amendment over the legislation related to the concession rights. If the government recognized a double charge, How did it affect you?

Hi, Arely. This is Saul. At the beginning, when the amendment and the change to the 5% to 9%, there was a confusion. But at the end, it was clarified in the legislation. So we do not expect any double charge. There is any possibility to have a double charge.

Thank you. And those are the only questions that we have. We have other ones that are already answered with the Q&A. So thank you.

Thank you. Thank you. And we show no further questions over the phone at this time. I will turn the call back to Mr. Revuelta for closing remarks.

Thank you once again for joining us today for our first Quad Results Conference. Our team is available to address any questions you may have. Have a great day. Thank you.

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