Grupo Aeroportuario del Sureste, S. A. B. de C. V. (ASR) Q2 2020 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to ASUR's Second Quarter 2020 Results Conference Call. My name is Hannah and I'll be your operator. [Operator Instructions] Now I would like to turn this call over to Mr. Adolfo Castro, Chief Executive Officer. Please go ahead, sir.

Thank you, Hannah, and good morning everyone. Thank you for joining us on the conference call to discuss ASUR's second quarter financial and operating results. I hope each of you and your families have managed to stay healthy and safe since our previous earnings call. As a reminder, please note that certain statements made during the course of our discussion today may constitute forward-looking statements which are based on our current management expectations and beliefs and are subject to a number of risk and uncertainties that could cause actual results to differ materially, including factors that may be beyond our company's control including the impact from COVID-19. For an explanation of these risks, please refer to our filings with the US Securities and Exchange Commission and the Mexican Stock Exchange. As anticipated, results this quarter were significantly impacted by Covid-19 pandemic which disrupted global travel trends starting mid-March. However, we closed the quarter with a strong balance sheet which I will discuss each in more detail shortly. Starting with related traffic conditions worldwide, since mid-March various governments mandated flight restrictions have been claimed to help prevent the spread of Covid-19 virus. Consequently, airlines across the world continue to operate with several limited capacity and few people are booking flights either due to government restrictions or act of concern for their and their family's health. At ASUR airports, Mexico and Puerto Rico have remained open to date although operating with significantly more fewer flights and much lower passenger traffic. At the same time due to government restrictions only essential commercial spaces in Puerto Rico are open to the public, affected our non-aeronautical revenue in this market. Restrictions have been higher in Colombia where the government suspended domestic and international commercial air travel since the third week of March. With international flights expected to resume on September 1st. In terms of domestic traffic on July the 1st, Columbia government launched a pilot run program for flight between cities with low levels of contagious. Under this program, each local municipality has the authority to restart domestic bound flights as long as their counterpart in the other municipality is also an agreement to resume these flights. Given the complexity of this process, our six airports in Colombia have not restarted operations. All of these factors resulted in a 94% declining passenger traffic during the second quarter, with decreases of nearly 100% in Colombia, 94% in Mexico and 86% in Puerto Rico. All three countries reported declines both in domestic and international passengers. On accumulated basis, passenger traffic was done almost 51% year-on-year during the first six months of the year. In addition, starting March certain airlines, as well as sub commercial tenants have that operate at our airports begun asking us for assistance either through discounts on payments or to ASUR or by an extension of the payment terms. Beginning in June, we initiated some initiatives to support the recovery process. As a reminder, most of the commercial agreements with our tenants include a minimum guarantee payment per passenger, so in those cases if no passengers are returning, tenants do not have to pay rent. In addition, while three ASUR's main airline customers at Mexico, Avianca Holdings and LATAM Airlines Group, recently filed for Chapter 11 bankruptcy protection in the United States. These companies have continued to make regular payments as allowed by the relevant courts. As such, we believe as we have sufficient liquidity to meet its obligations and continue to railing normally. Let me now quickly go to the steps we have been taking so far to mitigate the various risks related to COVID-19. Starting with health and safety, in accordance with the guidance of the relevant health authorities, health and safety protocols remain effective for both employees and passengers at our airports. In addition to preventive measure such as wearing face mask, in case sanitizing practice continues. On the expense front, while our cost structure is largely fixed, we've rapidly implemented cost reduction measures across ASUR's operation to reduce cash burn where possible with personnel and utilities representing the highest share of expenses. We mainly focus on lowering maintenance and energy costs. For example, in Mexico, we temporarily closed terminals two and three at Cancun airport in mid-April. In July, we reopened terminal 2 and now operating terminals 4 and 2 to ensure social distancing in support of the current passenger levels. We also shutdown one of the airports to runways. We take similar steps across our operations if necessary. Now moving on to ASUR's financial position. Although ASUR's performance continues to be impacted by a very weak travel demand, we're still operating from the position of financial strength with ample liquidity and very low principal payments to be paid in the near-term. In other words, we continue to meet all financial obligations and we will be able to effectively ramp up our operations when travel demands picks up. I would like to note that even though the second quarter was ASUR's worst quarter ever, we saw a slight improvement in traffic performance in May comparison with April and June comparison with May. We close the third quarter with cash and cash equivalents of MXN 7.1 billion, up 15% from the MXN 6.2 billion at the end of the year. Mexico contributed slightly over MXN 650 million to the increase in our cash position while Puerto Rico and Colombia contributed nearly MXN 330 million and MXN 49 million respectively. Total debt at the quarter end was MXN 15.5 billion, up of 13% from year end 2019. This was mainly due to the depreciation of the peso against the US dollar and a drawdown of $10 million from a commitment line of credit to support CapEx projects under construction at the LMM airport in Puerto Rico. We have a healthy debt maturity profile with principal payments of only MXN 388 million or 2.5% of ASUR's total debt maturing in the second half of the year. Also note that only about MXN 830 million in principal payments or slightly over 5% of total debt matures in 2021. The majority of our debt 54% is then denominated in U.S dollars which is at the Star subsidiary in Puerto Rico where nearly 26% of remaining debt is denominated in Mexican peso and 20% in Colombian peso. In summary, ASUR maintain a solid balance sheet with net debt to last 12 months EBITDA at 1.1x at the close of second quarter 2020, compared with the 7.7x reported at the close of first quarter, mainly reflecting weaker EBITDA as a result of the impact of COVID-19. I would like to emphasize once again that the current crisis affecting ASUR's performance is not the best. We have succeeded in navigating and overcoming orders over the past two decades. From the impact of 9/11 to the 2008 financial crisis and the H1N1 flu. In all cases passenger traffic eventually recovered. In fact, between 2000 and through 2019, Mexico's annual traffic increase at a compound annual growth rate of 6% to historical high over 34 million passengers in January this year. And following each crisis we quickly resume delivery consistent profits for our shareholders. Of course, the situation we are passing through is worst ever. While travel demand is expected to remain depressed for the foreseeable future, ASUR's maintains a strong balance sheet and we continue to manage cash and expenses properly. Now let me touch upon the other key highlights of the second quarter results. And more details can be found in the press release issued yesterday evening. Revenue ex construction were down 77% year-on-year, driven by a similar decline in aeronautical and non-aeronautical revenues. Puerto Rico was the main contributor to revenues accounting for nearly 51% of the revenues this quarter, followed by Mexico with a share of almost 34% and lastly Colombia representing 5% of the total, reflecting a strict travel bans in that country. Consolidated commercial revenues for passengers were slightly over MXN 350 compared to nearly MXN 100 per passenger in the same period last year. However, the increase mainly reflects the sharp contraction in our passenger traffic supported by basically few commercial spaces with fixed rents per square meter. On the expense front, operating cost and expenses excluding construction costs were down 24% year-over-year. We scaled back airport operations and maintenance and as energy consumption decreased mostly in Mexico and Colombia. Mexico posted a 34% declining cost reflecting lower maintenance and energy expenses along with a lower cost of sales related to directly operated convenience stores. The income and concession fees both variable costs also decline during the period. The lower costs were partially offset by high provisions of top two collection accounts that we booked. Given the impact of low demand levels for it are having on our commercial clients. Cost in Colombia were down 41% mostly the result of savings in maintenance, energy and security expenses, as well as lower professional fees. By contrast cost in Puerto Rico were up nearly 6% year-on-year year mainly resulting from the FX conversion impact, which more than offset declines in cost of services and concession fees. In dollar terms, total costs in Puerto Rico were down 17% year-on-year. Moving on to profitability, reported consolidated EBITDA was down 98% year-on-year to MXN 51 million impacted by the COVID-19 pandemic. Both periods benefited from insurance recoveries related to Hurricane Maria. In the second quarter 2020, this amounted to MXN 35 million where last year the amount was nearly MXN 163 million. Excluding these recoveries, consolidated EBITDA would have declined 99% year-over-year to MXN 16 million. EBITDA of MXN 203 million in Puerto Rico was offset by the EBITDA losses of 140 in Mexico and in 47 Colombia. Ex-IFRIC 12 and excluding the insurance record in both quarters adjusted EBITDA margin declined to [2.8%] this quarter from 65.4 in the same quarter last year. In terms of capital allocation with main capital contribute -- capital expenditures of MXN 616 million in the second quarter. Of this amount 77 was invested in Mexico to continue executing phase one expansion of the Merina airport terminals. Remember that for the full year of our master development plan in Mexico calls for investments of approximately MXN 5.3 billion. During the first half of the year, we invested a total of MXN 714 million in this country. And we remain on schedule with building the parallel taxiway to the second runway at Cancun airport. And with the beginning of the first expansion phase of terminal 4. We also expect to conclude phase one of various terminals expansion and start the second phase this year. That said there were disruptions at each of these development projects due to the stay-at-home orders in Mexico and we have kept the government apprised to the related delays. CapEx in Puerto Rico total MXN 128 million this quarter, mainly reflecting some major maintenance repairs in taxis. Finally, we invested slightly over MXN 1 million related to major maintenance in Colombia as our CapEx commitment for that operation was concluded last year. Looking ahead, we only expect to invest in major maintenance in Colombia. I would like to conclude by reiterating that ASUR continues to upgrade from a position of financial strength and that we are carefully managing cash, while calibrating variable costs to align them as best as we can with the current demand conditions in order to successfully navigate the current crisis. We remain confident that we can. That ends my prepared remarks. Hannah, please open the line for questions.

[Operator Instructions] We'll go first to Alejandro Zamacona with Credit Suisse.

Thank you. Hello, Adolfo. Thank you for the call. Our first question is on the renegotiation of the MDP process. So on that context how many times are you expecting for this renegotiation? And what would be the expected CapEx for this renegotiation or the expected outcome for this renegotiation.

Alejandro. Hi, good morning. Well, you may know the only way to revise our maximum tariff in an extraordinary way on the great conditions is once the Mexican GDP drops by more than 5% during the last 12-months. I estimate that will occur during this year and once the final number is published by the official authorities, we will be able to file our request to the authorities. Having said that what I expect is that we will be able to file that on the first quarter next year. How much time it will take, I really don't know. There is no timeline for that, but I would expect at least three months. So during the second quarter of next year we would be able to know more or less what was the outcome of the negotiation process. In terms of the numbers, of course, today we cannot give you a precise or an accurate number of how much the CapEx will be reduced because the CapEx is not reduced because we want, it's basically reduced as a result of the low demand. So once we know the outcome of the low demand for this year, we will be able to make the necessary calculations to see which projects are no longer needed because of this low demand and those are going to be the ones that will have to be postponed, it's not cancelled, it's postponed or deferred until the demand is there again. So one year from now we will be able more or less to tell you the outcome of that process.

Okay. So I guess it's just a delay on CapEx rather than reduction on the total amount you are willing to negotiate, right?

Okay. Let me explain again. So let's talk about the expansion today of terminal 4, okay. That expansion is needed or was needed because the demand was growing. There are certain standards that we have to comply in accordance with our concession packet. So a certain amount of square meters of terminal every peak hour passenger traffic. So if the passenger traffic demand decreases that work is not necessary or for the moment is not necessary and we will have to find the point in the future where these will have to be made. But that is the origin of this process to review what is needed and what is not in accordance with the demand we have. So once we know what was the effect on the demand and because of this situation we will be able to calculate these numbers again and to say if this is going to be the one year, two years or three years.

Okay. Thank you and my second question, if I may, it's on the aeronautical business for Puerto Rico. So is there any possibility for airlines to renegotiate the fix payment contract?

Well, the contract has been written and the contract can be renegotiated of course in accordance with the contract. But I do not see any chance for now to see that regulation process.

We'll go next to Mauricio Martínez from GBM. Mauricio Martínez: Hi. Good morning and also thank you for taking my question. My question is kind of a follow up Alejandro topic. Do you expect to, well knowing that you already have some delays in CapEx deployment probably for this year? What is the amount that you expect to deploy for that MXN 5 billion that you committed in the current master development plan? And if you expect to need a federal pushing it forward for the next year?

Mauricio. Hi, good morning. I do not have yet a final figure that I can share with you at the moment. It's clear that there were around three months where there were no construction in the country. And there was a decree issued by the government where they said that all cement, steel and glass in the country had to be used in their programs in their works. So because of that we were not able to continue the process of our expansions. You cannot construct or you cannot expand the building without these elements. So we're in that process and I do not have a figure yet. Mauricio Martínez: But the chance is that maybe it would be lower than that those MXN 5 billion.

Well, the chances that these MXN 5.3 billion is it's lower -- are very high. Mauricio Martínez: Perfect and maybe ask a second question, if I may. Regarding the accounts receivables, we practically, we didn't see any change, if it's not a reduced -- reduction from the previous quarter. Maybe if you can give us a more color on that how negotiations would be especially with the payments of the airport, how was that negotiation? And if you can give us a color on the shape of your tenants going forward?

Okay. As I said in the initial remarks, most of the commercial contracts have a clause where they have to pay the higher amount of a minimum currency payment per passenger or a percentage of sales. Because of the low traffic, of course, they were not selling too much it's clear. But in that case what applies is the minimum payment per passenger. So as I said here in the initial remarks if there is no passengers, they do not have to pay rent because sales are zero. And the minimum warranty payment the passenger is or have to, will have to be multiplied by the amount of passengers. So in that sense we have not been renegotiating or negotiating with all the commercial tenants. So in most of the cases, the adjustment is automatically. It is clear that some are suffering a lot and some of them are not paying, but the cases that they are not paying is because they are working in some other airports where they have to pay a fixed rent. And of course let's say they are using the money from here to put it there. In some cases, we are renegotiating with some commercial tenants but in some others basically the adjustment is made automatically.

We'll go next to Rodolfo Ramos with Bradesco BBI.

Thank you and good morning. Also thank you for taking my question. My first one is on traffic. I was wondering if you can give us a little bit of color of how are you seeing traffic so far. If you have the number handy up until the 20th of the month. Whether -- how are you seeing the decline progress? And the follow-up on the previous question on Puerto Rico, I mean, a renegotiation of the contract is not on the card at the moment, but have you seen or do you expect any airlines to stop serving Puerto Rico which would then preclude them from making that payment or how do you see the stability of these revenues going forward? Thank you.

Rodolfo. Hi, good morning. In the case of the traffic, the only thing that I can say to you is that as I said during the remarks, May was better than April, June was better than May and July, I believe, it's going to be better than May. But nevertheless the amount of traffic we're seeing today is extremely low. This situation is not going to recuperate fast. What we have seen in the past going back 2008 with the financial crisis plus destroying flu effect flows the bankruptcy of airlines here in Mexico. It took us 36 months to go back to the previous levels. This could be worse if the vaccine is not been found or a cure is not being found, no. We have seen recent developments in terms of the vaccine, that's a very positive news. So I believe the vaccine is going to be ready by the end of this year. So in that sense maybe we can see some recuperation process next year. But of course the final recuperation process is not going to be there until more or less a cure is been found. So I don't believe that the world will go back to normal just with vaccine. In terms of Puerto Rico, this is not the first time. You can go back and see what has happened during the hurricane Maria in September 2013. There was a sharply -- sharp decline in passenger traffic and of course you can trace the comparison between analytical revenues and these sharp declines. So that's what we are experiencing today as well. And I don't see any difference from that.

Thank you, Adolfo. And just if I may squeeze in last one, we saw [Indiscernible] going back to let's say a maximum red alert in terms of COVID, Cancun, the services sector seems to continue operating as they have been since the middle of June. I was wondering if there's anything to update on that front and whether you're seeing any businesses or sectors in particular follow this federal directive. Thank you.

Well, yes, what is red is the south of the state is not the case in Cancun, Cancun, it's still orange. So Cancun is still in normal operation. When I'm saying south of the state is basically south [Indiscernible]

We'll go next to [Roberto Versioni] with Citi.

Hello, Adolfo. Thanks for the call. Just a quick question. What are your thoughts on the development of the Mayan train? And just another one, I know, you mentioned this already but could you give me some more color on international traffic things. Are the infection rates are arising in Mexico? And you think this could push back the timetable on normalization. Thank you.

Hi. Good morning. Well, in the case of the Mayan train, what I understand is it's a project that is ongoing. In the case of the Cancun airport where it has been announced last week it's a light train that goes from the city to the airport connecting also with the Mayan train. And basically what I understand is that this project is on ongoing. In terms of the international traffic, today we're just having international traffic to and from the United States and there is some flights, few flights from Canada. In the case of the United States which is the most important for us today, there's a very low factor in that sense. So still we have some flights with a very low factor because of lower demand. And that of course will depend of how the situation evolves in the United States. United States, it's a very large country, not -- we cannot say the same in terms of what is happening today in New York or in comparison with California. California, so they have subsided their cases in New York. New Jersey is basically controlled and in terms of proportion of the traffic, New York is more important for us than what California is. So in that sense I'm not so afraid of that situation. Of course, we really don't know what can happen there, if there's a another rebound could affect our traffic for this network.

We'll go next to Alan Macias with Bank of America.

Hi. Good morning, Adolfo. Just one question on traffic in Colombia and what you're seeing there regarding the pandemic. I understand that domestic flights can it reinitiate? Just can you give us further color. Thank you.

Alan. Hi, good morning. Well, the process as I mentioned during the remarks is now more complicated that what it was in the past because now even though that the federal government has said that the municipalities can approve this, it has been very complicated to find two measures or the pair of series of these two measures to approve the case. And the most important ones the case of Bogota, and majority of Bogota, it's very reluctant to open the airport again. So in that sense I don't know what will be the outcome but I still believe that for some time the airports in Colombia will be closed.

We'll go next to Pablo Monsiváis with Barclays. Pablo Monsiváis: Hi, Adolfo. Good morning. Thanks for taking my question. I have one question. Do you mind sharing your opinion on the status of Mexican airlines? Because we have integrated that they just received fresh capital from private investors. And on the other hand, Mexico is going to a restructuring process, so that might likely mean that they will reduce its capacity overall. What are your thoughts in the medium term of the impact of this? Thank you.

Hi. Good morning, Pablo. Well, the most important example is to go back again to these periods of June 2008 up to August 2010. If you see our presentation in page 17, you can find the history of these. More than 50% of the aircrafts were lost during this period. So around eight or nine airlines in Mexico went bankrupt. So of course there was an impact on our passenger traffic. There was an impact, an important impact I would say three months, four months from August to December 2010 when the large one which was [Indiscernible], the largest one bankrupt. The situation today is different in terms of the offer because what is low is the demand. There is no demand so even though that we can say that in the case we lose some of these airlines because of the situation, the problem is not how many planes they will have. So the problem is how many people they would like to travel and be transported with them. So today I don't see too much trouble in the reduced capacity. The reduced capacity, it's the result of the low demand. What is important to recover is the demand.

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.

Thank you, Hannah. And thank you again for participating in our second quarter results conference. On behalf of ASUR, we wish you a good day and please stay safe. Goodbye.

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.