Grupo Aeroportuario del Sureste, S. A. B. de C. V. (NYSE:ASR) Q2 2022 Earnings Conference Call July 26, 2022 10:00 AM ET
Company Participants
Adolfo Castro – Chief Executive Officer
Conference Call Participants
Alejandro Zamacona – Credit Suites
Lucila Gomez – Compass Group
Stephen Trent – Citi
Rodolfo Ramos – Bradesco BBI
Anton Mortenkotter – GBM
Pablo Monsivais – Barclays
Gabriel Himelfarb – Scotiabank
Guilherme Mendes – JPMorgan
Operator
Good day, ladies and gentlemen, and welcome to ASUR’s Second Quarter 2022 Results Conference Call. My name is Anna and I’ll be your operator. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of today’s conference. [Operator Instructions] As a reminder, today’s call is being recorded.
Now I’d like to turn the call over to Mr. Adolfo Castro, Chief Executive Officer. Please go ahead sir.
Adolfo Castro
Thank you Anna, and good morning, everyone. Before we get started covering the highlights from the quarter and then taking your questions. Let me remind you that certain statements made during the call may constitute forward-looking statements, which are based on current management expectations and beliefs and the subject to several risks and uncertainties that may cause actual results to differ materially, including factors that may be beyond our company’s control, including the impact from COVID-19. As usual, additional details about our quarterly results can be found in our press release, which was issued yesterday after market close and is available on our website Investor Relations section.
Now moving on to a review of passenger traffic and travel demand during the quarter. Total traffic was over 39% year-on-year and exceeded second quarter2019 levels by 19% to a record of 16.7 million passengers in the quarter. We continue to see steady growth throughout the quarter across the three geographies.
Now looking at a recovery trend by region against pre-pandemic levels of the second quarter 2019, once again Colombia posted the strongest recovery, up 43% with domestic traveling, increasing in the low 40s and international travel in the low 50s. Puerto Rico saw a 15% increase in traffic, mainly driven by domestic traffic that was up in the high teens, although relatively flat sequentially. In turn international travel continues its gradual recovery reaching 88% of the second quarter 2019 levels.
Traffic in Mexico surpassed second quarter 2019 levels by nearly 13%. With international travel up in the high teens despite higher air fares driven by strong leisure travel demand from all key regions with the exception of Canada, which remains at 57% of the last 12 months 2019. This has been more than offset by strong US traffic while the last 12 months European tourism is just 8% below pre-pandemic levels.
Looking ahead staying with Mexico, we expect traffic from Canada to resume during the winter season mainly in November through April next year, while we expect to see a steady performance from the US and Europe. We also anticipate domestic travel to continue its gradual recovery. As I have mentioned before, business travel is expected to continue to lag leisure. As a result we believe that traffic at Veracruz, Minatitlán and Villahermosa airports, which this quarter were on average 7% below second quarter 2019 levels will continue to recover at a slower pace. In Puerto Rico, we are seeing domestic traffic trending to normalize after a very strong performance over the last several quarters.
Lastly traffic in Colombia remained surprisingly strong and we expect this to continue throughout the year, driven by addition of grounds and investments in tourism, which have driven a structural shift in demand.
Traffic trend remains solid underscored by pent-up demand. We believe that if any disaster acceleration resulting from the increasingly inflationary global macro environment could be mitigated with the recovery expected to come from some markets like Canada.
Now turning to the P&L starting with our top line. Note that all reference to revenues costs exclude construction revenues and that all comparisons are against pre-pandemic levels of second quarter 2019. Revenues increased in the mid-40s reaching MXN5.7 billion, a record high for any given quarter. This good performance was driven by growth in both aeronautical and non- aeronautical revenues.
All geographies posted sustained revenue growth with Mexico accounting for 70% of the total revenues in the quarter; Puerto Rico 17% and Colombia 12%.
Commercial revenues were up 44% driven mainly by passenger traffic growth with increases of 39% in Mexico, 60% in Puerto Rico and nearly 41% in Colombia. Commercial revenues per passenger amounted nearly MXN120 above MXN100 reported in the second quarter 2019, and is slightly above the level achieved in the prior quarter. By geography, commercial revenues in the quarter were in the range of MXN143 to MXN149 in Mexico and Puerto Rico.
In commercial — in Colombia, commercial revenues per passenger reached MXN40, early in line with second quarter 2019 levels. Not that 12 months level more than double those achieved over the same period of 2019. In terms of traffic mix, the share of domestic passenger remains at 2019 levels, but we’ll continue to see growth in the US and the share of higher spending Europeans back to pre-pandemic levels, the number of Canadian travels remain at 56% of 2019 levels.
Now moving on to cost, total operating expenses increased by high single-digit, excluding MXN175 million expense reimbursement in Puerto Rico. Operating costs and expenses would have increased 18%. Nonetheless, this was significantly lower than the 45% growth in revenues. In Mexico, costs were up 27%, but still below the 48% increase in revenues. This reflects higher technical assistance and concession fees, resulting from higher revenues and EBITDA, together with higher cost of services including the cost of sales from directly operated stores that continue to see strong activity. Puerto Rico in turn benefited from MXN175 million expense reinvestment under the American Rescue Plan Act. Excluding this benefit, cost would have increased 10%, while revenues were up 33%. Finally, cost in Colombia declined 26% while revenues were up 37%.
In summary, the significant efficiency measures during the pandemic levels have allowed us to maintain the costs that are on our control at 95% of the second quarter 2019 levels and 79% on a per passenger basis, even with higher revenue levels than in the second quarter of 2019. These numbers include total cost minus construction depreciation and amortization technical and concession fees. We achieved record high profitability this quarter with consolidated adjusted EBITDA up 47% to MXN4 billion.
Passenger traffic growth increased commercial revenues per passenger, high tariffs and operating leverage contributed to this performance. Mexico lead this growth with adjusted EBITDA of 57% to MXN3 billion. Puerto Rico in turn posted a 7% increase in EBITDA to MXN580 million, while profitability in Colombia continued to recover with EBITDA up 62% reaching just over MXN400 million. Adjusted EBITDA margin ex IFRIC 12 increased 100 basis points, nearly to 71% this quarter.
By geographical region, adjusted EBITDA margin improved over 4% points in Mexico and Colombia to nearly 76% and 58% respectively. While the margin in Puerto Rico was close to 59% this quarter compared with 73% in the second quarter of 2019. All in all, we delivered a solid set of results with traffic and revenues at record high levels. These together with operating leverage have contributed to more than doubling net majority income to MXN2.6 billion in the quarter, up from MXN1.2 billion in the second quarter 2021 and MXN1.4 billion in the second quarter 2019.
Turning now to capital investments. We invested nearly MXN440 million during the quarter of which 79% was allocated to Mexico 20% to Puerto Rico and 1% to Colombia. In Mexico, we completed the expansion of the Tapachula terminal as anticipated. We also remain on track with the expansion of the Terminal building in Merida, with the third phase of the project to be completed by year end.
At Cancun Airport, we are making the steady headway to finalize by the year end the first phase of the terminal four expansion, which consists of adding to boarding gates in the international front. On Puerto Rico, we continued to advance with the remodeling of Terminal B and major maintenance referred to runways and taxes.
Now a few comments on the balance sheet, we maintained a robust financial position with cash and cash equivalents of MXN 7.3 billion at the quarter end. These follows the dividend payment of MXN 4.5 billion paid last June as we returned additional value to our shareholders.
In turn, net debt last 12 months EBITDA was just 0.4 times at June 30, with interest coverage at 10.5 times only less than 1% of our debt maturities in the second half of the year, with the next major maturity taking place in 2025. Finally, accounts receivables were particularly flat year-on-year.
Before moving into the quick Q&A portion of the call, a quick recap. We welcomed a record number of passengers during the second quarter surpassing second quarter 2019 levels, with a most growth across our markets that was driven by a strong pent-up demand. Although, Canadian traffic remained low versus pre-pandemic levels, despite the higher in the US traffic. This was particularly strong with European traffic has nearly recovered.
We expect Canadian traffic to normalize this winter season, which would help offset any potential is lower than in the traffic that could cause eventually arise from the still inflationary environment across the world.
Nonetheless, today we are seeing healthy traffic trends supported by a strong pent-up demand. Also, gratifying was our record profitability this quarter, thanks to the effective efficiency measures and expenses control that drove our cost levels well below pre-pandemic levels, operating leverage kick in the strongly on the traffic growth. I will leave there.
Operator, please open the floor for questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] We’ll now take a question from Alejandro Zamacona with Credit Suites.
Alejandro Zamacona
Thank you, Adolfo. Thank you for the call. And a quick question on the cost of services. We have seen a strong cost control even despite the documentation. So in this context, what could we expect going forward, especially what you just mentioned concerning the high inflation environment? When we look at the cost of service the work in the units even excluding the investments for this quarter close to about MXN 64 in 2019 was roughly MXN 70. So just wondering, if you can give us some color on what can we expect in this?
Adolfo Castro
Alejandro, thank you and good morning. Yes. We have been facing a very difficult times with a high inflationary in all the geographies. As you can – as you have seen that is the case of Puerto Rico, with a very strong increase in the cost side. In the Mexico side, we have been able to manage some of these increases. Of course going forward, we will see some additional impact if these level of inflation continues. The best case in terms of control has been Colombia, where things are or have been better than expected.
Alejandro Zamacona
Okay, Adolfo. Thank you. And then my second question if I may on the entity, I know, it’s early, but I believe you will start to negotiate the project in this year. So can you give any color on the expected plans for this negotiation? Thank you.
Adolfo Castro
And as you know we are working to construct that proposal that we have to deliver by the year and to the government. So today we cannot say anything about it yet.
Alejandro Zamacona
Okay. Thank you, Adolfo.
Adolfo Castro
You’re welcome.
Operator
Our next question comes from Lucila Gomez with Compass Group.
Lucila Gomez
Hi. Good morning. My question is more about the inflation effects during this quarter. And I believe that there were a contract that were going to be adjusted to inflation during this quarter. Have you placed any problem so far with the tenants?
Adolfo Castro
No. If you’re talking about contracts in terms of the cost side, which is not the tenant, some of them have been adjusted and they are adjusted. Normally we have annual contracts and when they mature. So those are adjusted with inflation. So far we have done that as of today. So, no major things are going in front.
Lucila Gomez
Perfect. Thank you.
Operator
We’ll take our next question from Stephen Trent with Citi.
Stephen Trent
Good morning, Adolfo, and thanks very much for taking my question. I have two for you. The first, I know that the Federal Aviation Administration did lower Mexico to category to aviation safety rating. And in that regard, can you tell us whether there are any specific items that ASUR may or may not have to change or is this something that really doesn’t affect you and it’s all happening in the eyes of the regulator.
Adolfo Castro
Hello, Stephen. Good morning. Thank you for your question. A year ago when this happened if you remember we published a 6-K where we basically said that 0.5% of our traffic in 2019 one from the United States was in domestic carriers. For the year 2020, it was 0.3%. Why is all of this is because what we have in destination airports basically Cancun is a destination Airport. So the people is coming from the US to Mexico. And basically they are coming in US airlines. They are not coming in domestic airlines. So that is why we do not see and we do not have a major impact from this category to situation.
Stephen Trent
And as my follow-up question we have seen in the US and places like one in Heathrow what have you difficulties in airports and ground staff. Is it fair to say that’s not the case with any of your airports, you guys feel good about your throughput of ground staff at various installations inside and outside Mexico?
Adolfo Castro
Well, that’s a good question. When this happened in Europe basically is because they basically fired 50% or 60% of their people and once the traffic came back again. They were not able, and they have not been able to recover all the people that was fired. In our case since day one, we decided to not fire anyone in the company because of this COVID-19 situation. So today we have no problems when the traffic has returned. So, we are working without the difficulty that you are seeing in the case of the European airports.
Stephen Trent
Okay. Very helpful. I’ll let someone else the question. Thanks, Adolfo.
Operator
We’ll take our next question from Rodolfo Ramos with Bradesco BBI.
Rodolfo Ramos
Thank you. Good morning, Adolfo. Thanks for taking my question. I have one follow-up to your initial remarks that was on the pent-up demand. Just wanted to clarify in the case of Canada and Europe, how much of the percentage is back from 2019 levels? And if you can tell us how much does it represent from the total international Mexican traffic?
Adolfo Castro
Rodolfo, hi, good morning. In the case of the European traffic last 12 months passenger traffic compared with last 12 months 2019. Europe is 92%. So we are below 8% of the pre-pandemic levels. In the case of Canada, it’s 56%. Why Canada has not come back in that sense because normally the Canadian traffic has a very strong seasonality, which is November through April. So if you remember the last season, the last November to April, it was lost because of Omicron. So that’s why we’ve been saying that we will see the – or we’re expecting to see the recovery up to these winter season. So in the case of Canada, the other 44% that is pending to be recovered will be – also be recovered in the next winter season.
Rodolfo Ramos
Okay. And just to 2019 to put in perspective is this pent-up demand. How many million passengers would this represent as you have to book on to look at how much you represent?
Adolfo Castro
Yes. In the case of Canadians the maximum that they had in 2019 was 2.7 million passengers. In the case of Europe in 2019 was 2.1 million.
Rodolfo Ramos
Okay. Thank you. And just a follow-up is that you encounter my follow-up. Just wanted to get your thoughts on the Mexico City system. We’ve seen a lot of news around slot restrictions and airlines trying to move to Toluca and then Felipe Ángeles, given how important it is for your system. What are your thoughts there as far as it being an opportunity or a bottleneck for developing domestic traffic?
Adolfo Castro
Well, the good news there is that we have a new complimentary airport, which is the Felipe Ángeles. The other good news is that some of the airlines that were extremely reluctant to operate in Toluca, there are back again. So in that sense what we are seeing is that we have additional capacity from these two airports. And of course, flights there will start growing as we speak and I’m expecting to see a very nice level of traffic in those within the next two years.
Rodolfo Ramos
Thank you very much.
Adolfo Castro
You’re welcome.
Operator
We’ll take our next question from Anton Mortenkotter with GBM.
Anton Mortenkotter
Hello, Adolfo. Thank you for taking my question. Also congrats on your results. I have two quick questions. One is related to the non-aeronautical revenues. I just was wondering if you could provide some color regarding how is that from behaving with your tendency in the sense of how much of the revenues you’re getting are come from the fixed part of your rental and how much of it is valuable given that you already return to pre-pandemic traffic levels?
Adolfo Castro
Good morning. In the case of the fixed and variable things, if you remember in the second quarter 2020, we saw a huge increase in the case of Colombia. That was because we should – well, the passengers were almost zero. And we had a fixed revenue and the amount on a per passenger basis jump up to MXN4,600 and something.
In case of Colombia is the one that has more fixed revenues per passenger. It’s not the case in Mexico, it’s not the case in Puerto Rico. So, that is why you are seeing this number coming down from the MXN4,600 something to the 39 points something during the quarter.
So, the fixed amount or the fixed revenues are less important ones that traffic has come back to the case of Colombia today is 33% more than what we had or what we saw in the case of 2019. So, most of the revenues in the case of Mexico and Puerto Rico are coming from the variable side. And in the Colombia side is now — I don’t want to say level, but basically the fixed amounts are less important than they were before during the pandemic levels.
Anton Mortenkotter
Okay. Thank you. That’s pretty clear. And also my another question is kind of a follow-up from Stephen’s question. As you mentioned a lot of your traffic is serviced by international careers. So, I was wondering through your conversations with these international careers what are the thoughts on increasing capacity at your airport? What are the thinking how much fleet are they ordering or how are you seeing those dynamics?
Adolfo Castro
Well, too many — it’s too many airlines that are flying to Mexico from the US. And basically what is driven the capacity is basically the load factor and the load factor they have it’s very nice today. So, that is why they have been increasing the seats also to Mexico. And that is why you see this increase in — this very nice increase from the US traffic.
Anton Mortenkotter
And have they mentioned like maybe any specifics on trying to increase like 10% of capacity on Europe or something like that?
Adolfo Castro
No. I don’t have any specific number to share with you from the US.
Anton Mortenkotter
Okay, perfect. Thanks Adolfo.
Adolfo Castro
You’re welcome.
Operator
Your next question will come from Pablo Monsivais with Barclays.
Pablo Monsivais
Hi Adolfo. Thanks for taking my question. I just have a question on your outlook of the traffic on Colombia. It’s being very strong over the recent quarters. In your view, what should we expect going forward? Thank you.
Adolfo Castro
Well, Pablo as I said during the initial remarks we are extremely surprised of the traffic level we have seen in Colombia despite the fact that around 35% of this strategy is between Medellin and Bogota and this should be related to business structure. Why is these so strong? Several things. One is, of course, some issues in the case of Bogota. So, some of the airlines have decided started to start connecting in Medellin.
Secondly, the case that New Orleans have come to Medellin and they are starting very strong. And the third probably is the effect of a country that was closed completely for six months. So, I believe that this has created a lot of pent-up demand in the case of this country.
Pablo Monsivais
Okay. Thank you very much.
Adolfo Castro
You’re welcome.
Operator
We’ll now take our next question from Gabriel Himelfarb with Deutsche Bank.
Gabriel Himelfarb
Hi Adolfo, good morning. Just a quick question. Can you give us a bit of color on how the commercial discussions with Avianca and LATAM airlines [indiscernible]? And what do you expect in the coming months? And also about Mexico? Thank you.
Adolfo Castro
Well, in the case accounting accounts receivables, the only problem we have is the case of Interjet that they didn’t pays around MXN73 million and all of these have been reserved in the previous quarters. And that is the only real problem we have. The rest of the airlines are paying basically on time. So, I don’t have any problem with Avianca, LatAm, nor Mexico.
Gabriel Himelfarb
Okay. Thank you.
Adolfo Castro
You’re welcome.
Operator
[Operator Instructions] We’ll now take a question from Guilherme Mendes with JPMorgan.
Guilherme Mendes
Hi Adolfo, good morning, and thanks for taking my questions. Two questions actually. The first one, in terms of capital allocation, and considering your low leverage close to a net cash position. Would it make sense for you to accelerate the dividend payments going forward in addition to the one already approved it. And the second question is for a follow-up, related to costs and margins. Can you explore a little bit better, what are the main cost initiatives, they have been achieving, and if we should continue to expect margins above the 70% levels? Thank you.
Adolfo Castro
Well, in terms of digital payments, we just paid a dividend at the 1st of June and this happened this quarter, it was around MXN4.5 billion. And this was divided in two pieces, an ordinary dividend of MXN903 and extraordinary of MXN6. So, we just paid dividends. Going forward, we will review as we have done over the last 20-something years every year.
In terms of margins, again, I don’t like to talk about margins because, the cost and the revenue line dependent as we have seen during the pandemic period. So, if we see high traffic and we are able to control the cost as we have done today. Of course, margins should be expanded. That’s very simple.
Guilherme Mendes
Okay. Got it. Thank you.
Adolfo Castro
You’re welcome.
Operator
We’ll now take a follow-up from Anton Mortenkotter with GBM.
Anton Mortenkotter
Hi, Anton Mortenkotter again. I’m sorry, I don’t know if you mentioned it in the initial remarks. It’s just regarding the ARPA law. Are you expecting any more benefits going forward?
Adolfo Castro
Well, there is something pending. I don’t remember exactly the amount. It should not be so significant that it was in the past with [indiscernible], but not too much in front.
Anton Mortenkotter
Okay. Thank you, Adolfo.
Adolfo Castro
You’re welcome.
Operator
[Operator Instructions] And it appears there are no further telephone questions. So that concludes the question-and-answer portion of today’s conference call. I would like to turn it back over to Mr. Castro for closing remarks.
Adolfo Castro
Thank you, Anna, and thank you again for participating in our second quarter results conference call on behalf of ASUR. We wish you a good day. Goodbye.
Operator
Ladies and gentlemen, that concludes ASUR’s second quarter 2020 results conference call. We would like to thank you again for your participation. You may now disconnect.
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