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Grupo Aeroportuario del Sureste, SAB de CV (NYSE:ASR)
Q2 2020 Earnings Call
Jul 23, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to ASUR's Second Quarter 2020 Results Conference Call. My name is Hanna, 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 toward 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 -- Chief Executive Officer

Thank you Hanna, and good morning everybody. Thank you for joining us our conference call to discuss ASUR's second quarter 2020 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 current management's expectations and beliefs and are subject to a number of risks and uncertainties that could cause actual results to differ materially, including factors that will 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 these in more detail shortly. Starting with related traffic conditions worldwide, since mid-March various governments mandated flight restrictions have in place to help prevent the spread of COVID-19 virus.

Consequently, airlines across the world continued to operate with severe limited capacity and people are booking flights, either due to government restrictions or out of concern for their and their families' health. At ASUR's airports, Mexico and Puerto Rico have remained open to date, although operating with significant fewer flights and much lower passenger traffic. At the same time due to government restrictions only essential commercial space in Puerto Rico are open to the public and affected our non-aeronautical revenue in this market.

Restrictions have been higher in Colombia where the government's has banned the domestic and international commercial air travel since the third week of March. With international flights expected to resume on September 1, in terms of domestic traffic on July 1 Colombia government launched a pilot program for flights between TDs with low levels of contagion. Under this program each local municipality have the authority to restart domestic bound flights, as long as their counterparts in the other municipality is also in agreement to resume the strikes.

Given the complexity of this process, our six airports in Colombia have not restarted operations. All of these factors resulted in a 94% decline in 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 a cumulative basis, passenger traffic went down almost 51% year-on-year during the first 6 months of the year.

In addition, starting March, certain airlines as well as some commercial tenants that operate on our airports begun asking us for assistance either through these kinds of payments or to a store 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 to the passenger, so in those cases if no passengers, our tenants, do not have to pay back.

In addition, three of ASUR's main airline customers Aeromexico, 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 operating normally. Let me now quickly go through the steps we have been taken so far to mitigate the value risk related to COVID-19.

Starting with health and safety; in accordance with the guidelines of the relevant health authorities, health and safety protocols remain impacted for both employees and passengers at our airports. In addition to preventive measures such as wearing face mask, and hand sanitizing practice continues. On the expense front while our cost structure is largely weak to speak, 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 focused on lowering maintenance and energy cost, for example, in Mexico, we temporarily closed Terminal 2 and 3 at Cancun airport in mid-April. In July, we reopened Terminal 2 and now operating Terminals 4 to ensure social distancing in support of the current passenger levels. We also shutted down one of the airport's runways, we take similar steps across our operations as necessary. Now moving on to ASUR's financial position. Although ASUR's performance continued to be impacted by a very weak travel demand, we are still operating from a position of financial strength with ample liquidity and very low principal payments to be paid in the near term.

In other words, we continued to meet all financial obligations, and we will be able to effectively ramp up our operations when travel demand 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 closed the quarter with cash and cash equivalents of MXN7.1 billion of 15% from the MXN6.2 billion at the end of the year. Mexico contributed to slightly over MXN650 million to the increase in our cash position while Puerto Rico and Colombia contribute nearly MXN330 million of MXN49 million respectively. Total debt at the quarter and was MXN15.5 billion, up 13% from year-end 2019. This was mainly due to the appreciation of the peso/US dollar and a drawdown of $10 million from a commitment line of credit to support CapEx projects under construction at LMM airport in Puerto Rico.

We have a healthy debt maturity profile with principal payments of only MXN388 million or 2.5% of ASUR's total debt maturing in the second half of the year. Also note that only MXN813 million and principal payments or slightly over 5% of total debt matures in 2021. The majority of our debt 54% has been denominated in US dollars, which is at the Aerostar subsidiary in Puerto Rico where nearly 26% remaining debt is denominated in Mexican pesos and 20% in Colombian pesos.

In summary, ASUR maintained a solid balance sheet with no net debt to last 12 months EBITDA at 1.1 times at the close of second quarter 2020 compared with 0.7 times reported at the close of the first quarter, mainly reflecting weaker EBITDA as a result of the impact COVID-19. I would like to emphasize once again that the current crisis affecting ASUR's performance is not the best. We have succeeded navigating and overcoming all this 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 through 2019, Mexico's annual traffic increased at a compound annual growth rate of 6% to a historical high over 34 million passengers in January this year.

And following each crisis, we [Indecipherable] 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 prudently. Now, let me touch upon the other key highlights of the second quarter results. More details can be found in the press release issued yesterday evening. Revenues ex-construction were down 77% year on year, driven by a similar declines in our non-aeronautical revenues. Puerto Rico was the main contributor to revenues accounting for nearly 61% of the revenues this quarter, followed by Mexico with a share of almost 30% and actually Colombia, representing 5% of the total reflecting a strict travel bans in that country.

Consolidated commission revenues for passenger were slightly over MXN350 compared to nearly MXN100 per passenger in the same period last year. However, the increase mainly reflects the sharp contraction with passenger traffic supported by basically few commercial spaces with fixed rent per square meter. On the expense front operating cost and expenses excluding construction costs were down 24% year-on-year, we scaled back [indecipherable] maintenance and energy consumption -- mostly in Mexico and Colombia.

Mexico, posted a 34% decline in costs, 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 cost, also declined during the period. The lower costs were partially offset by high provisions -- full collection accounts that we booked, given the impact low demand levels are having on our commercial clients. Across Colombia we're 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 mainly result resulting from the FX conversion impact, which more than offset declines in cost of services and concession fees. In dollar terms, total cost in Puerto Rico were down 17% year-on-year. Moving onto profitability reported consolidated EBITDA was down 98% year-on-year to MXN51 million impacted by the COVID-19 pandemic.

Both periods benefited from insurance recoveries related to Hurricane Maria yet in the second quarter 2020. This amounted to nearly -- the amount of nearly MXN163 million. Excluding these recoveries consolidated EBITDA would have declined 99% year-over-year to MXN16 million. EPA of MXN203 million in Puerto Rico was offset by the EBITDA losses of MXN140 million Mexico and MXN47 million in Colombia. [Indecipherable] and excluding the insurance recovery in both quarters adjusted EBITDA margin declined to 1.8% this quarter from 65.4% in the same quarter last year.

In terms of capital allocation with main capital expenditures of MXN660 million in the second quarter. Of this amount, MXN77 million was invested in Mexico to continue executing Phase 1 expansion of the Merino airport terminals. Remember that for the full year of our [Indecipherable] plan in Mexico goes for investments of approximately MXN5.3 billion.

During the first half of the year, we invested a total of MXN714 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 port. We also expect to conclude Phase 1 of various terminals, 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 totaled MXN138 million this quarter, mainly reflecting some major maintenance repairs and taxes. Finally, we invested slightly over MXN1 million related to major maintenance in Colombia as our CapEx commitments for that operation was concluded that year.

Looking ahead, we only expect to invest in major maintenance in Colombia. I would like to conclude by repeating that ASUR continues to operate from a position of financial strength and that we are carefully managing cash while calibrating variable cost then as best as we can with the current demand conditions, in order to successfully navigate the credit crisis.

We remain confident that we can.

That ends my prepared remarks. Hannah, please open the line for questions.

Questions and Answers:

Operator

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

Alejandro Zamacona -- Credit Suisse -- Analyst

Thank you. Hello Adolfo. Thank you for the call. Our first question is on the renegotiation of the NPV process. So on that context, how many time are you expecting for this renegotiation and what would be the expected CapEx for this renegotiation or the expected outcome for these in the current situation?

Adolfo Castro -- Chief Executive Officer

Alejandro, hi good morning. Well, as you many know, the only way to revise our maximum tariff in an extraordinary way on the great conditions is once the Mexican GDP dropped by more than 5% during the last 12 months. I estimate that, that will occur during this year and once the final number is published by the official authorities, we will be able to file -- I would 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 3 months. So, during the second quarter of next year, we will be able to know more or less what will be 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 to basically reduce 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 these low demand, and those are going to be the ones that will have to be postponed, if not canceled lease -- postpone or deferred until the demand is there again. So, one year from now, we will be able to more or less to tell you the outcome of that process.

Alejandro Zamacona -- Credit Suisse -- Analyst

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

Adolfo Castro -- Chief Executive Officer

Okay. So, let me explain again. So, let's talk about the expansion today of terminal core, OK. That expansion was needed or was needed because the demand was growing. There are certain tenders that we have to comply in accordance with our concession package. So, certain amount of square meters of terminal, every peak hour passenger traffic. So, if the passenger traffic demand decreases, that work is not necessarily 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.

So that the origin of these process to review what is needed and what is not in accordance with the demand we have. So, once we know what is the effect on the demand, and because of the situation, we will be able to calculate these numbers again, and to say, if this is going to be deferred one year, 2 years or 3 years.

Alejandro Zamacona -- Credit Suisse -- Analyst

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 fixed payment contract?

Adolfo Castro -- Chief Executive Officer

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 negotiation process.

Alejandro Zamacona -- Credit Suisse -- Analyst

Okay, thank you Adolfo.

Adolfo Castro -- Chief Executive Officer

You're welcome.

Operator

We'll go next to Mauricio Martinez with GBM.

Mauricio Martinez -- GBM -- Analyst

Hi, good morning Adolfo thank you for taking my question. My question is kind of a follow-up on the best running topic, do you expect to -- 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 site given that you committed in the current-month development plan, and if you expect any deferral pushing it forward for the next year?

Adolfo Castro -- Chief Executive Officer

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, that were around three months where there were no construction in the country. And you know there was a decree issued by the government where they said that all cement, steel in class in the country, has to be used in their programs in their works. So, because of that we were not able to continue the process of our expansion. 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 Martinez -- GBM -- Analyst

But, the chances that maybe it will be lower than MXN5 billion?

Adolfo Castro -- Chief Executive Officer

Well, the chances that this MXN5.3 billion is lower are very high.

Mauricio Martinez -- GBM -- Analyst

Perfect. And maybe a second question if I may regarding the accounts receivables, we practically we didn't see any change -- if not reduce -- a reduction from the previous quarter. Maybe, if you can give us more color on that how reconciliations especially with the tenants at the airport -- how was that negotiation and if you can give us a color on the shape of your tenants going forward?

Adolfo Castro -- Chief Executive Officer

Okay. And as I said during the initial remarks, most of the commercial contracts have closed, where they have to pay the higher amount of -- a minimum guarantee payment per passenger or a percentage in sales. Because of the low traffic, of course, they were not selling too much, it's clear, know. But in that case what applies is the minimum payments to the passenger. So, as I said during the initial remarks, if there is no passengers, they do not have to pay rent because sales are zero, and the minimum guarantee payment to the passenger 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 cases the adjustment is automatically. It is clear that some or something -- 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 big rend 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 automatic.

Mauricio Martinez -- GBM -- Analyst

Perfect. Very helpful color, thank you.

Operator

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

Rodolfo Ramos -- Bradesco BBI -- Analyst

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 a follow-up on the, on the previous question on Puerto Rico and a renegotiation of the contract is not on the cards 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 Adolfo.

Adolfo Castro -- Chief Executive Officer

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. So, nevertheless, the amount of traffic, we are seeing today is extremely low. This situation is not going to recuperate fast. What we have seen in the PAT, going back to 2008 with the financial crisis loss, the swine flu effect plus the bankruptcy of airlines here Mexico, it took us 36 months to go back to the previous levels.

This could be worst, if the vaccine is not been found or a cure has not been found. We have seen recent developments in terms of the vaccine that's a very positive news while 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. Of course the final recuperation process is not going to be there until more or less a cure has 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 2017, there was a sharp decline in passenger traffic, and of course you can trace the comparison between aeronautical revenues and these sharp decline. So, that's what we are experiencing today as well and I don't see any difference from that.

Rodolfo Ramos -- Bradesco BBI -- Analyst

Thank you Adolfo. And just if I may squeeze in a last one. We saw Cancun Aero 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 is anything -- anything to update on that front and whether you're seeing any businesses or sectors in particular to follow these federal directive? Thank you.

Adolfo Castro -- Chief Executive Officer

Yes. What is right 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, it's basically South Tulum, and just too much.

Rodolfo Ramos -- Bradesco BBI -- Analyst

Okay. Thank you Adolfo.

Adolfo Castro -- Chief Executive Officer

You're welcome.

Operator

[Operator Instructions] We'll go next to Roberta Versiani with Citi.

Roberta Valadares Versiani -- Citi -- Analyst

Hello Adolfo thanks for the call. Just a quick question, what are your thoughts on the development of the Maya train. And just on other one, I know you mentioned this already, but could you give me some more color on international traffic? The infection rates are rising in Mexico and if you just could switch back the timetable on annualization. Thank you.

Adolfo Castro -- Chief Executive Officer

Hi, good morning. Well, in the case of the Maya train what I understand is, it's a project that is ongoing. In the case of the Cancun airport what it has been announced last week, it's a light train that goes from the city to the airport connecting also with the Maya train. And basically what I understand, is that this project is ongoing. In terms of the international traffic, but they were 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 is a very low factor in that sense. So, we have some flights with very low factor, because of lower demand and that of course will depend on 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 New York or in comparison with California. California today has succeeded the cases in New York, the majority 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 is another rebound -- could affect our traffic for the third quarter.

Roberta Valadares Versiani -- Citi -- Analyst

Great. Thank you Adolfo.

Adolfo Castro -- Chief Executive Officer

You're welcome.

Operator

[Operator Instructions] We'll go next to Alan Macias with Bank of America.

Alan Macias -- Bank of America -- Analyst

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 renegotiate, just can you give us some color. Thank you.

Adolfo Castro -- Chief Executive Officer

Alan hi, good morning. Well, the process as I mentioned during the remarks is now more complicated than what it was in the past, because now even though that the federal government has said that the municipality can approve these, it has been very complicated to find two majors or [Indecipherable] of these two majors to approve the case, and the most important one is the case of Bogota, and the major 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.

Alan Macias -- Bank of America -- Analyst

Thank you.

Adolfo Castro -- Chief Executive Officer

You're welcome.

Operator

We'll go next to Pablo Monsivais with Barclays.

Pablo Monsivais -- Barclays -- Analyst

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 today just receive fresh capital from private investors and on the other hand Aeromexico is going through a restructuring process, so that might lightly and meaning that they will reduce its capacity overall. What are your thoughts in the medium term of the impact of this. Thank you.

Adolfo Castro -- Chief Executive Officer

Hi. Good morning Pablo. Well, the most important example is to go back again to these period of June 2008 up to August 2010. If you see our presentation in Page 17, you can find the history of this. More than 50% of the aircrafts were lost during this period. So, around 8 or 9 airlines in Mexico bankrupt. So, of course, there was an impact on our passenger traffic -- there was an impact an important impact, I would say 3 months, 4 months from August to December 2010, when the large one, which was mainly or the largest one bankrupt. The situation today is different in terms of the over, 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 that 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 is the result of the low demand. What is important to recover is the demand

Pablo Monsivais -- Barclays -- Analyst

Okay, perfect. Thank you very much.

Adolfo Castro -- Chief Executive Officer

You're welcome.

Operator

[Operator Instructions] 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. [Operator Closing Remarks]

Duration: 37 minutes

Call participants:

Adolfo Castro -- Chief Executive Officer

Alejandro Zamacona -- Credit Suisse -- Analyst

Mauricio Martinez -- GBM -- Analyst

Rodolfo Ramos -- Bradesco BBI -- Analyst

Roberta Valadares Versiani -- Citi -- Analyst

Alan Macias -- Bank of America -- Analyst

Pablo Monsivais -- Barclays -- Analyst

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