Grupo Aeroportuario del Sureste, S.A.B. de C.V. (ASR) CEO Adolfo Castro on Q4 2019 Results – Earnings Call Transcript

Grupo Aeroportuario del Sureste, S.A.B. de C.V. (ASR) CEO…

Grupo Aeroportuario del Sureste, S.A.B. de C.V. (NYSE:ASR) Q4 2019 Earnings Conference Call February 25, 2020 10:00 AM ET

Company Participants

Adolfo Castro – Chief Executive Officer

Conference Call Participants

Mauricio Martinez – GBM

Alejandro Zamacona – Credit Suisse

Rodolfo Ramos – Bradesco BBI

Stephen Trent – Citi

Gabriel Himelfarb – Scotiabank

Alan Macias – Bank of America

Andy Jones – AMP Capital

Operator

Good day, ladies and gentlemen and welcome to ASUR Fourth Quarter 2019 Results Conference Call. My name is Lauren, and I’ll be your operator. At this time, all participants are in a 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 this call over to Mr. Adolfo Castro, Chief Executive Officer. Please go ahead.

Adolfo Castro

Thank you, Lauren and good morning, everybody. Thank you for joining us on our conference call to discuss ASUR’s fourth quarter 2019 financial and operating results. 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 current management expectations and beliefs and are subject to a number of risks and uncertainties that could cause actual results to differ materially, including factors that may be beyond our company’s control. For an explanation of these risks, please refer to our filings with the Securities and Exchange Commission and the Mexican Stock Exchange.

As you read news from around world these days, it is clear that many economies of the countries are facing various interruptions, challenges and uncertainties. Those were pleased to report solid results during the fourth quarter and full year. Our diverse portfolio of airports is driving our group financial results, which show a 6.3% increase in revenues is being construction in the quarter, driven by strong performance in Puerto Rico followed by Colombia.

Now let me walk you through some of the specifics for the quarter. Total passenger traffic accelerated to 7.1% year-over-year and the quarter up from 4.1% year-over-year growth in the prior quarter. With 14 million passenger travelling across our airports, this post the double charter for the year nearly to 56 million, a 6.5% increase from 2018 levels.

The group performance during the quarter was due to increased passenger traffic year-over-year in our operating key markets which I follow now discussion in more detail. Starting with Mexico, which accounted for 60% of total traffic in the quarter was up nearly 3.6% year-over-year, driven mainly by domestic traffic which drove to 4.7%, while it was denoted with servicing traffic was improving the international traffic of slightly over 2.3% year-over-year compared to a similar degree in the prior quarter.

International traffic was affected during the quarter at the bankruptcy of Thomas Cook and XL Airways significantly impacted traffic from Europe, while the traffic from US remained stable. For the full year, Canada posted as a 10% year-over-year increase in traffic, followed by the South America traffic that was up 8% and Europe 3%, more than offsetting the 4% decline in the US traffic.

As we entered 2020, we anticipate that the negative of weaker traffic from Europe will continue to wait on international traffic for the year. During the second half of the 2020 we expect to see an improvement from the negative impact of capacity from the 737 MAX with the US traffic improving year-over-year.

Moving on to Puerto Rico, which accounted for the 17% of total traffic was our strongest performing market in the quarter. Traffic growth accelerated to 18% year-over-year from 6% in the prior quarter, with traffic recovering from the levels of [indiscernible] Hurricane Maria in Puerto Rico in September 2017. This was mainly driven by domestic traffic which rose 19% doubling international traffic growth. We expect domestic traffic growth to normalize throughout the year.

Finally in Colombia, traffic was roughly, [gliding] [ph] over 9% year-over-year this accelerating gliding from the 14% growth rate experienced in the third quarter and accounted for 23% of ASUR’s total traffic in the quarter and the traffic was – domestic traffic growth was up 9% year-over-year with international traffic increasing 11%.

Now turning to the financial results for the quarter. Consolidated revenues excluding construction were up slightly 6% year-on-year to MXN 3.8 billion. Mexico accounted 68% of revenues ex-construction, Puerto Rico near in the 20% and Colombia close to 1%. Puerto Rico delivered the service growth in this quarter up 15%, followed by Colombia with 9% and Mexico up 4%.

Aeronautical revenues increased 8% year-on-year, with Mexico up nearly 5%, Puerto Rico show a 23% increase in aeronautical revenues and Colombia was just 3%. Commercial revenues were up slightly over 3% year-on-year reached MXN 1.3 billion in the quarter on a per passenger basis, commercial revenues were down 3% to MXN 92.3 impacted by the changing passenger needs, particularly the drop-in times in European traffic in Mexico.

Now, I will – review commercial revenues for ‘20. Starting with Mexico was represented 70% of ASUR’s commercial revenues. Commercial revenues increased low single-digits below the traffic growth. On a per passenger basis, commercial traffic declined 2.5% to MXN 108.8 despite the opening of seven new commercial spaces over the last 12 months.

[technical difficulty] partially reflects 60 basis points mix shift to domestic traffic from the National experienced in the quarter and 10% decrease in the European traffic particularly in duty-free employment, since that is lower during the revenues also reflect the impact from peso appreciation when we saw difficult accounts in advertising revenue as the year ago quarter benefited from a recovering account payables of MXN 37 million.

Next, Puerto Rico, which accounted which also posted the tough commercial revenues growth up nearly 2% despite the 18% increase in passenger traffic and opening of 16 new commercial spaces in the year. Well advertising revenues continued to show strong performance this quarter along with retail operations and transport operations which saw declines in duty-free and car rental operations. On a per passenger basis, commercial revenue declined 14% to MXN 105. As a result of higher needs of flights during the night hours.

Finally, Colombia again posted the strong commercial revenues up 27% year-on-year and 17% on a per passenger basis reached MXN 41. We opened additional new commercial stores during the quarter for a total of 36 new stores up in during 2019. We also saw sustained strong growth revenue across most designs, particularly retail, car rental, parking lot revenues. This quarter also be the full impact from duty-free operations that was due last September.

Moving on to profitability. EBITDA growth this quarter was impacted by non-recurring insurance recovery of MXN 134 million in fourth quarter 2018 in connection with Hurricane Maria. The Colombian recovery EBITDA have increased 5% to MXN 2.4 billion versus a reported decline of 1% year-on-year.

Ex-IFRIC 12 and without taking into account the insurance recovery, in fourth quarter 2018, adjusted EBITDA margins declined 19 basis points to 63.7% this quarter from the 64.6% in the year ago quarter. [technical difficulty] due to a 22% increase in operating costs and expenses, excluding construction. This quarter has – fourth quarter 2019 results included certain items that were benefit to the cost for a total MXN 281 million.

Of these, MXN 108 million were reported in Mexico, in connection with a tax refund at Cancun Airport and a reversal of provision ban that of MXN 78 million in Puerto Rico related to reduction in valuation of maintenance reserve as per IFRIC 12 and MXN 95 million in Colombia due to a reversal of bad debt provision a high provision for the future replacement of fixed assets as per IFRS 12. A detailed explanation of these items can be found in the release published yesterday.

Fourth quarter 2018 also benefited from several items, including an asset tax refund with the valuation of the maintenance reserves as per IFRIC among others, including these specific items operating costs and expenses excluding construction at fourth quarter 2019 having increased 3% year-on-year below the 6% year-on-year increase in revenues excluding construction.

By regions starting Mexico well our operations EBITDA went down 0.5% year-on-year and the margin excluding IFRIC 12 declined 299 basis points. However, it’s clear that a reversal of provision for uncollectible accounts and the asset tax refund benefited fourth quarter 2018 results, for a total of MXN 108 million adjusted EBITDA margin would have increased 70 basis points to 70.3% from 69% in fourth quarter 2018.

In Puerto Rico, EBTIDA declined 27% year-on-year to MXN 400 million where the margin is clearly IFRIC 12 declined to 54% in fourth quarter 2019 compared to the 84% in the fourth quarter of 2018. However, excluded a non-recurring insurance recovery last year, this year would have decreased 3% year-over-year.

Finally, Colombia reported 167% year-on-year increase in EBITDA with adjusted EBITDA margin excluding IFRIC expanding to 38 from – in the year ago quarter. Fourth quarter 2019 results benefited from high maintenance provision versus the same period in 2018 and the impact of the change in how we calculate depreciation.

Moving to the [technical difficulty] however excluding the benefit from [technical difficulty] items [technical difficulty] as well as [technical difficulty] gained [technical difficulty].

Now looking at the balance sheet. Net debt was around 24% during the year to MXN 7.5 billion with a net debt of last 12 months EBITDA of 0.7 times and interest coverage ratio of 10.8 times. What remain for bigger to making the required investment to held position as for our long-term goal and success.

To that end, we invested about MXN 1.7 billion during fourth quarter 2019, of these, our MXN 1.5 billion were allocated to domestic revenue program in Mexico. In particular, the expansion of Rionegro airport, advantage for the current new banks that going to list according [indiscernible] and the breakup structure than the new bond [technical difficulty] initially invested MXN 138 million in Puerto Rico for a major maintenance work for taxiways. MXN 70 million in Colombia to finalize the current one terminal at the Rionegro airport. Those commuting company works at these contracts.

During the full year, we made capital investments of MXN 2.6 billion, of which, MXN 2 billion were allocated to Mexico in a program of an airport in Mexico nearly MXN 380 million in Puerto Rico and MXN 176 million were invested in Colombia.

Looking into 2020, our master development in Mexico co-investments of approximately 5.6 billion investments a more relevant project this year are the continuation of the parallel taxiway of the second one we have Cancun airport and the gain of the total expansion of Terminal 4.

We plan to conclude the Phase I of the expansion of the major terminals and within the second phase this year, the second and third phases of these airports are expected to be concluded in 2021. And we have consistently stated we take a long-term view of our details and we continue to be well positioned for the long-term growth.

This concludes my prepared remarks. Laruen, please open the floor for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We’ll take our first question from Mauricio Martinez with GBM.

Mauricio Martinez

Good morning, Adolfo, thanks for taking my question. My first question will be on commercial – on the commercial revenues front in Mexico and Colombia. So, you know in March you said that deceleration are dropping in commercial revenues in Mexico comes from a tension with mix in passengers, so maybe if you elaborate a little bit more there. And also what are your expectations now than the well – starting for 2020 for these brackets in Mexico and Colombia? That will be great.

Adolfo Castro

Hi, good morning Mauricio. As we have said before, the passenger mix we are expecting the possibility or the potential in the commercial revenues per passenger for the case of Mexico. During the year if you see our passenger mix 48% more domestic truncating and now, more than 50% is domestic. Also we had an impact here at the fourth quarter due to the bankruptcy of Thomas Cook and XL Airways which had an – a significant impact on our traffic from Europe with the decline of 10%.

As I have said during the initial remarks, one of the specs for the year is the continuation of the effect from the European traffic and probably a slight improvement in the case of the US traffic. The combined effect of these two things will deal have some pressure on our commercial revenues with the passenger during the first – at least during the first half of the year. Well I believe we will see a better second half.

Mauricio Martinez

Perfect, thanks. And if I may have a second question on the – on Colombia. Well, first, the how commercial revenue stood from the going ahead, there and also on the CapEx front, we view and well now that that you finished the committed investments there. What should we expect in terms of CapEx in Colombia?

Adolfo Castro

Okay. In the case of commercial revenues, you are seeing very positive numbers despite the huge growth in passenger traffic we saw last year. What I believe for the future is that, we will continue improving those in terms of commercial revenues per passenger. It is important to say that we show an 11% Colombian peso depreciation of the Mexican peso.

So if you avoid those in colonial answers, you cannot be the 11% to the compartments. In terms of the CapEx, what I have said during the initial remarks is that, once we completed the terminal as to the number of airport, it concludes the committed CapEx for the case of this country. So for the future, what we should expect is basically that your maintenance CapEx.

Mauricio Martinez

Perfect, thanks you very much, Adolfo.

Adolfo Castro

You’re welcome.

Operator

Our next question comes from Alejandro Zamacona with Credit Suisse.

Alejandro Zamacona

Hi, Adolfo. Thanks for the call. And just a follow-up question on commercial revenues per passenger this time in Puerto Rico, we saw a 14% decline on a per passenger basis. So could you please give more color on what was behind that drop?

Adolfo Castro

Yes, of course, during the fourth quarter we saw a very important increasing passenger traffic, but a lot of these traffic is traffic that we received at night. And of course, passengers are not [technical difficulty] at those times of the peak. So what need to be is to try to find how to improve sales, it means with these passengers are down a percent from 15% of our total passenger in the quarter. It’s hard to say how we will be able to convince them to buy, because as I said before the flight times are very difficult in that situation.

Alejandro Zamacona

And just to have a context, previously to that 15% of passengers flying during the night, but what was that number before this change?

Adolfo Castro

It was around 6%.

Alejandro Zamacona

Okay, thank you.

Adolfo Castro

You’re welcome.

Operator

Our next question comes from Rodolfo Ramos with Bradesco BBI.

Rodolfo Ramos

Good morning, Adolfo and thank you for taking my question. My question is regarding cost. I mean what – can you talk a little bit about your expectation, you saw very, very limited growth this fourth quarter in terms of cost in Mexico. Can you talk a little bit about your expectations for cost in Mexico and perhaps, you know, how this CapEx plan that you have, how could that push that upwards? Thank you.

Adolfo Castro

Hi, Rodolfo. Good morning. Well in the case of cost, if you really hold up and you will see that there was no major impact in cost at the quarter and I do not expect energy prices during the year.

In terms of what will be the impact of the new CapEx in terms of cost, at once, it is completed, I would say, we probably will see some slight growth in cost for the case of Merida Airport once the terminal – that once the Phase I of the terminal expansion is completed, which I believe will be completed during the month of July. But in general, this will be a very, very minor effect in Europe and Mexico. So, we do not expect any major surprises through the whole year.

Rodolfo Ramos

Okay. And if I may, a follow-up. Can you – I don’t know if I missed that, but can you remind us on Puerto Rico, what are your – what is your expected CapEx for this year?

Adolfo Castro

We do not have any guidance in terms of the amount, but basically what we’re doing today is major maintenance rebuilds that’s the in fact the way and we have some minor 20 in the remodeling for each of terminal but that’s it.

Rodolfo Ramos

Yeah. Thank you, Adolfo.

Adolfo Castro

You’re welcome.

Operator

[Operator Instructions] Our next question comes from Stephen Trent with Citi.

Stephen Trent

Good morning, Adolfo and thanks for taking my questions. I have two for you. First off, when we think about coronavirus and some of the major network that are rooted in capacity out of Asia, any indication whether you’ve seen any of that capacity come into your airports?

Adolfo Castro

Hi, Steve, good morning. We do not have any direct flight from Asia. Most of the people that comes from Asia basically connect in LA. So we do not – we have not seen any impact from this.

Stephen Trent

Appreciate and I probably didn’t phrase my question very well, but I was curious if you see any of the US airlines for example, you know, taking some of their transpacific capacity out of that market and sending it you know, US to Mexico, have you may be seen any trends like that at all or haven’t?

Adolfo Castro

These are two different markets, people that travel from the US to China, you know, people that travels some of the weekend to Cancun. So, once again, I do not see any impact from this.

Stephen Trent

Okay. Appreciate that. And just one other from me, was there any major maintenance that’s occurring in Puerto Rico was any of that at all related to any minor damage from the earthquakes that occurred earlier this year?

Adolfo Castro

Good question. The earthquake basically one from the south of the islands, San Juan, Puerto Rico is exactly like the Northeast of the islands. So if we think about it, we didn’t have any impact at all in San Juan, Puerto Rico because of the earthquakes.

Stephen Trent

Okay, that’s very helpful. I’ll leave it there. And thanks, Adolfo.

Adolfo Castro

You’re welcome.

Operator

[Operator Instructions] We’ll take our next question from Gabriel Himelfarb with Scotiabank.

Gabriel Himelfarb

Hi, good morning. Thanks for the call. My question is about the commercial revenue. We’re seeing in the year your result of that like a decline in Mexico’s revenue from duty-free and banking and currency exchange services. Can you give a bit of color of what’s the like the trend and what’s happening in this sector? Thanks.

Adolfo Castro

Hi, Gabriel and good morning. As I have said during the remarks, the FX that we’re seeing is because of the passenger needs so more domestic like international. And that’s exactly what you’re seeing, international are the ones that buy duty-free, and also the ones that have the FX exchange. So it’s the two main lines that are more effective than those because of this.

Gabriel Himelfarb

Okay, thanks.

Operator

[Operator Instructions] We’ll take our next question from Alan Macias with Bank of America.

Alan Macias

Hi, Adolfo. Good morning. Just one quick question. At this point, do you have any insight into the Sargassum season? Will it be lower or higher versus last year? Any insight into that? Thank you.

Adolfo Castro

Well, when what I have seen those are the reports and there’s one from the one university in South Florida is that we’re seeing a lot less Sargassum in comparison with the previous year. So my expectation here is less of that, but it will be simply at lower than it has in the past.

Alan Macias

Thank you, Adolfo.

Adolfo Castro

You’re welcome.

Operator

[Operator Instructions] Our next question comes from Andy Jones with AMP Capital.

Andy Jones

Good morning and thanks for taken the question. Can you comment on the degree of guaranteed revenues that we got a minimum guaranteed in some of the duty-free and the foreign exchange contract that we have with money at the gate further downside list there? And secondly, how you are currently think about dividends? Thanks.

Adolfo Castro

Sorry, but I cannot hear you very well.

Andy Jones

Sorry. My first question was around the level of minimum guarantees within some of the commercial contracts, I refer on the protection or mitigation for the downside from further declines. And secondly, how you are thinking about the dividend policy at the moment?

Adolfo Castro

Okay. So in the case of minimum guarantee payment with passengers almost all the contracts we have in the case of Mexico have been numbered as a protection. Today, in the case of duty-free which are the most important activity in terms of revenue. They are not anymore minimal guarantee payment the passengers are there still in the construction fee payment.

So you second question, is what?

Andy Jones

The second question is around what are your current thoughts on the dividend policy, given the results of the year, but can I just follow-up on the second one that, can you comment on how far from the minimum guaranteed levels we might be in that duty-free contract?

Adolfo Castro

I don’t –

Andy Jones

In what way –

Adolfo Castro

No, no I don’t remember exactly how far we are from the minimum guarantee payment per passenger, but should be where, let’s say, not charging them that amount. In the case of dividend policy, we do not have a weekend dividend policy, and with a view these are the year depending on the result of the year, the tax position we have and the investment projects we have in front.

Remember, as I have said during the initial remarks, that we have MXN 5.3 billion to invest in Mexico is huge it’s the highest ever for almost 20 years and nevertheless, we will propose I think monthly through the Board of Directors in terms of dividend payment.

Andy Jones

Okay, thank you very much.

Adolfo Castro

You’re welcome.

Operator

[Operator Instructions] Thank you. And 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, Lauren. And thank you again for everybody for participating in our fourth quarter results conference call on behalf of ASUR, we wish you a good day. Goodbye.

Operator

That does conclude today’s conference. We thank you for your participation. You may now disconnect.

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