Corporación América Airports S.A. (CAAP) Q2 2020 Earnings Report, Transcript and Summary

Good morning. Welcome to the Second Quarter Earnings Release and Investor Call for Corporación América Airports. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Gimena Albanesi, Investor Relations Manager. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining us today. Speaking during today's call will be Martín Eurnekian, our Chief Executive Officer. Also with us today are Raúl Francos, our Chief Financial Officer and Jorge Arruda, Head of Finance and M&A. All will be available for the Q&A session. Before we proceed, I would like to make the following Safe Harbor statement. Today's call will contain forward-looking statements, and I refer you to the Forward-Looking Statements section of our earnings release and recent filings with the SEC. We assume no obligation to update or revise any forward-looking statements to reflect new or changed events or circumstances. Note that for comparison purposes and for a better understanding of the underlying performance in our presentation today, we will be discussing results, excluding hyperinflation accounting in Argentina, which became effective in July 2018. Additional information in connection with the application of rule IAS 29 can found in our earnings report. Now let me turn the call over to our CEO, Martín Eurnekian. Martín Eurnekian: Thank you, Gimena. Hello, everyone, and welcome to today’s call. I hope you and your families are healthy and safe. This has been the toughest quarter in our history, and in the travel industry worldwide. Passenger traffic declined to unprecedented low levels, impacted by travel restrictions to contain the outbreak of Covid-19, together with the sharp drop in overall levels. We have been rapidly executing on the strategic plan established to mitigate the impact of this health crisis and made significant progress on our four key objectives. First, we established measures to secure the health and well-being of our employees and passengers and implemented safety protocols across our airport networks. Second, we exceeded our cost reduction goals and lowered our cash operating costs by 50% year-on-year. Importantly, these efforts allowed us to significantly reduce our operating cash burn, reaching break-even levels in Argentina and Uruguay. Third, we refinanced a significant portion of our principal and interest payments and we remain focused on further strengthening our financial position. I will discuss that more – in more detail shortly. Finally, we obtained the referral of the concession fee payments in Brazil and Italy and certain government support in Argentina and Italy to cover a portion of our operating expenses. We continue working with regulatory bodies and governments across our concessions to obtain compensation for the impact of this crisis. Now, turning to a brief overview of our second quarter results; passenger traffic plummeted 98% year-on-year impacted by the COVID-19 pandemic. This had a significant impact on our top-line with revenues Ex-IFRIC12 down 83% year-on-year in the quarter. Despite our cost reduction initiatives, we reported an adjusted EBITDA loss of $33 million, which compares to adjusted EBITDA of $113 million in the same quarter last year. We made capital investments of $33 million in the second quarter, which included a carryover from the first quarter and certain mandatory CapEx. Note that since April, we have suspended non-essential CapEx to preserve cash. We closed the quarter with cash and equivalents of $180 million and $50 million in dividends and time deposits for a total liquidity position of $230 million and we continue to work on protecting and enhancing our liquidity. More details in terms of second quarter 2020 results can be found in our earnings report and the exhibits of this presentation. On Slide 4, you can the status of each of our operations following the travel restrictions that were established by governments across our countries of operations to contain the spread of the virus. The situation is volatile as governments worldwide adjust travel bans based on the evolution of the sanitary situation. In Argentina, borders remain closed and commercial operations have not yet resumed with our airports only operating cargo, repatriation and some special flights. In Italy, commercial operations restarted in the first week of June with restrictions for travelers coming from certain countries. Currently, 23 airlines are operating serving 12 domestic and 49 international destinations. Uruguay restarted air travel in the first of July with three airlines serving two international destinations, as well as some special flights, although borders remain closed to non-resident foreigners, with certain exemptions. In Brazil, all incoming foreigner travelers were banned from entering the country from March 30. However, since the end of July, this restriction was removed. Commercial operations never stopped although operating at significant lower levels than 2019. We have observed an improvement in passenger traffic since June. Thirdly, four airlines are operating at Brazil airport serving 34 domestic destinations, while international travel is scheduled to start in September. In Armenia, restrictions on the entry of foreigners were lifted last week, although air travel still banned with the exception of repatriation and special flights. Finally, commercial operations in Ecuador restarted during the first week of June, although certain requirements apply and activity remains subdued. Overall, travel remains very weak across the board with traffic showing very slight increases as we show on the following slide. On the left side of Page 5, we show preliminary passenger traffic within April and July. Total traffic hit a low in April showing a very tepid recovery in June and July improving slightly over prior months. While commercial operations have reopened in Italy, Ecuador and Uruguay, Argentina is still operating under a regime of repatriation and special flights. In Brazil, although travel remains weak, we have seen a slight sequential improvement over the past two months. On the right-side of the slide, you can see the most recent monthly cargo trends. June and July showed a very slight improvement declining 53% year-on-year compared with the 56% drop experienced in April. Please turn to Slide 6. We continue to make significant progress on the action plan established at the start of the crisis. Beginning with expenses, the execution of our cost reduction plan allowed us to achieve a 51% year-on-year reduction in cash operating costs and expenses beating our goal of achieving a 43% reduction this quarter. Note, this excludes concession fees and construction costs. While we expect to continue benefiting from these efficiencies in the coming quarters, we also expect to see some increases in certain cost lines such as maintenance and payments as we start reopening our airports and government support programs gradually decline. As you can see on Slide 7, we are advancing on the renegotiation of concession fees with regulatory bodies and to obtain government support in the context of this unprecedented crisis. During the quarter, we obtained the deferral of the semi-annual fee payments in Brazil and Italy and this – I disclosed on our previous earnings call. Conversations with the regulators in Uruguay and Ecuador remain ongoing. Since our last call, we also obtained a government grant in Italy for a total of EUR 20 million that we spread over a two year period. In Argentina, the government granted the extension of its assistance to cover a portion of May, June and July salaries representing a monthly relief of approximately $1 million. The government could eventually further extend this assistance. Keeping a long-term view, we also made progress in connection with the review of re-equilibrium of the concession agreements across our operations. Remember, we have different types of concession frameworks. Starting with concessions with guaranteed returns, which include Argentina, Italy and Armenia, in Italy, we operate and dual deal concession subsequent to quarter end, the regulator granted a two-year extension to all airport concessions in the country. In Argentina and Armenia, we operate under single deal schemes where a certain return shall be achieved over the life of the concession. In terms of our concession contracts in Brazil and Ecuador contemplate force majeure clauses. In early July, we filed a formal request with the Brazilian regulator in connection with the economic re-equilibrium for the Brasilia and Natal concessions. In Ecuador, we had already filed a request to obtain an economic compensation under the Guayaquil concession. Finally, in Uruguay, we started the process to request a compensation to mitigate the severe impact of Covid-19. As I mentioned in the past, we are in the initial stages of these processes, which require going through a ministry regulatory challenge. We will continue to provide updates as they become available. Turning to Slide 8. During the quarter, we also executed on our strategy of strengthening our debt profile. As discussed in the prior call, during the second quarter of 2020, we successfully deferred a total of $126 million of principal and interest payments in connections with our notes and loan facilities in Argentina and Uruguay. Importantly, this refinancing was achieved with very high levels of participations from our bond holders ranging between 86% and 93%. Subsequent to quarter end, we also secured additional financing in Argentina and we advanced on the negotiation of a new facility in Italy. Starting with Argentina, on August 20, we successfully closed a $40 million link local bond at a 0% interest rate with a two year maturity. Next, in Italy, a pool of financial institutions approved a EUR 85 million loan transaction guaranteed by the Italian Public Export Credit Insurance Agency with a 6 year term and a 2 year grace period. More detail on these transactions is shown on this slide and our earnings reports. Now, moving on to our balance sheet and liquidity on Slide 9. We ended the second quarter with $180 million in cash and equivalents and $50 million in treasury bills and time deposits resulting in a total liquidity position of $230 million, compared to $271 million as of the end of the first quarter of 2020. Additionally, total debt declined by $20 million sequentially to $1.1 billion at the end of the quarter. As a reminder, all of our debt is held at the subsidiary level. Net debt to last 12 months adjusted EBITDA ratio increased to 5.3 times from 2.9 times in the first quarter, reflecting the negative impact of COVID-19 on profitability. As mentioned in our previous earnings call, we successfully renegotiated our debt maintenance covenants under our debt held in our subsidiaries in Argentina and Uruguay, both until November 2021. In addition, last July, we also obtained the waiver of our debt maintenance covenants in Armenia. Finally, our subsidiary in Italy is in advanced negotiations with bond holders to obtain a waiver for its debt leverage ratio covenant in connection with its EUR 60 million notes due 2024. As a result of our strong cost reduction, and cash preservation initiatives, we significantly reduced our operating cash burn reaching cash breakeven levels in Argentina and Uruguay. Please turn to Slide 10. As I noted earlier, ensuring the maximum health and safety of our passengers and employees is of the utmost important for us. With this mind, over the past months, we have been working with the aviation industry, regulators and infectious disease experts to develop and establish customized protocols to ensure the maximum health standards across our company. This includes, sanitization and social distance measures, screening and biocontrol procedures for all passengers traveling through our airports, as well as leveraging digital solutions. We believe this is crucial in moving towards reactivating the travel industry, sustaining the continuity of operations and regaining consumer confidence to travel by air. Today, all of our airports have been adapted to meet this new requirement and limit the risk of infections. In airports where we are already operating commercial flights, these protocols have been approved by their respective regulatory agencies and health authorities. Turning to Slide 11. During this challenging times, we have also been working diligently to supporting the communities we serve in the fight against COVID-19. This includes working together with airlines and regulatory authorities across our operations subsidizing cargo charges for sanitary supplies and donations of sanitary materials, providing assistance in repatriation flights, as well as supporting charitable organizations in the supplies of food for vulnerable communities. Now, to wrap up, turn to Slide 12. We have taken immediate actions since the start of this crisis and are consistently executing against the extensive action plans as I just discussed. I want to thank the whole company for the efforts they are making to navigate this challenging environment and continue to achieve the goals we have established in the first quarter. Looking ahead, we maintain our conservative outlook for the near-term. Visibility today remains low with recovery subject to the widespread availability of medical treatments or vaccines, progressive lifting of government restrictions, sustained government assistance, regain consumer confidence to travel and overall improved economic conditions. We are now ready to take questions. Operator, please open the line for questions.

[Operator Instructions] Our first question is from Ian Zaffino from Oppenheimer. Go ahead.

Hi, good morning guys. This is Mark on for Ian. Thanks for taking our question. So, it looks like you guys did a great job on the OpEx front achieving 51% cost reduction year-over-year. So just wanted to get a sense of, are there any additional room to move cost from here and mitigate the cash burn? And then, how much of the cost reduction would you think is permanent going forward? Thank you. Martín Eurnekian: Hello, Ian. Thank you for your question. This is Martín Eurnekian. Well, we have worked very hard on cost reductions, but this is a permanent goal of all subsidiaries and they are constantly working to improve the situation. Many of them are implementing new schemes and methodologies to go through next year budgets to be able to go deeper into the cost cutting and also to make those cuts permanent, as you said. But, everything will depend on the situation going forward. Once reopened, we will probably have some more costs related to the reopening, and at the same time, if the reopenings does not come with a very fast infection passengers, there might be some cost associated to that, as well. And also, we will have to monitor the government assistance that we are receiving and if that changes, we will have to adjust accordingly. Thank you for your question.

Okay. Great. That’s very helpful. And then, just a quick follow-up. Are there any updates on the negotiations for the Argentinean concession? Any insight on progress there with the government would be very helpful. Thank you. Martín Eurnekian: Well, as you know, the concession framework in Argentina provides for an economical review on the concession. So, of course, we are in discussions with the government on how to move ahead according to everything that’s going on. But the conversations are progressing, but we will have to see until we have any clear news on how this will develop. And most probably, will be when there is a certain clarity on the reopening of flights in Argentina, as well.

Okay. That’s fair. Thank you guys, very much.

[Operator Instructions] Our next question is from Chris Dechiario from Marathon Asset Management. Go ahead.

Yes. Hi. Good morning. Thanks for the call and thanks for taking the questions. So, I just – mainly a question I guess really for now is just on the debt maturity profile. You have obviously done a great job in pushing out maturities and amortizations and getting waivers and it’s been difficult that I am sure, and you made excellent progress on that. But I was just curious, I mean, you still have this sort of $73 million in 2020, $280 million in 2021, $252 million in 2022, just sort of how are you looking at these sort of near term, let’s say in 2021, these near-term maturities that you still have existing and sort of what’s the plan for getting through those maturities?

Hi. This is Jorge. Thank you very much for your question. As you pointed out, we have the – in my view a very good job in extending the debt profile, would it be exchange offers in Argentina, in Uruguay, we are in the final process of extending the debt profile in Armenia, in Italy, we also extend maturity on debt. We obtained the approval to obtain a new loan of EUR 85 million as we reported with the guarantee from SACE, which is the export agency in – export and insurance agency in Italy. We obtained the extensions in Brazil from, primarily BNDES, which has the lion share of our – which holds the lion share of our investments. And we expect to further extend it. So, with that, and based on our current forecast, we are in a comfortable position. As you pointed out this – that will have to start being amortized and paid late in the first half of the year. And again, with the current forecast, we are in a comfortable position. We have a cash balance as we reported and we think that that again gives us – or puts us in a position that we are in a comfortable position. Parts of our debt in Argentina and in Uruguay are held by local investors in instruments that are much – and in case needed. So, the combination of the extension, the current forecast, the cash balance, and the close relationship we have with the local investors put us in a comfortable position.

Great. Thank you.

This concludes our question and answer session. I would now like to turn the conference back over to Martín Eurnekian for closing remarks. Martín Eurnekian: I would like to thank everybody for joining us today. We really appreciate your interest in our company. We look forward to providing updates on our business initiatives as they become available. In the meantime, the team remains available to answer any questions that you may have. Thank you everybody and bye, bye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.