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Grupo Aeroportuario Del Pacifico, S.A. de C.V. (NYSE:PAC)
Q2 2020 Earnings Call
Aug 13, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to GAP's Second Quarter 2020 Conference Call. [Operator Instructions]

It is now my pleasure to turn the call over to Maria Barona of i-advize Corporate Communications. Please go ahead.

Maria Barona -- Investor Relations

Thank you and welcome to the Grupo Aeroportuario del Pacifico's second quarter 2020 conference call. Today from the company, we welcome Mr. Raul Revuelta, Gap's Chief Executive Officer; and Mr. Saul Villarreal, Chief Financial Officer.

Please be advised that forward-looking statements may be made during this conference call. They do not account for future economic circumstances, industry conditions, the company's future performance or financial results. As such statements made are based on several assumptions and factors that could change causing actual results to materially differ from the current expectations. For a complete note on forward-looking statements, please refer to the quarterly report issued yesterday. Please note that unless stated otherwise, all comparisons in this call will be versus Gap's results for the comparable period of 2019.

At this point, I would like to turn the call over to Mr. Revuelta for his opening remarks. Please begin sir.

Raul Revuelta -- Chief Executive Officer

Thank you all, and good morning. I hope you are staying safe and healthy. Today, as we reflect on the second quarter figures of 2020, we see this severe impact that COVID-19 has had in our company and our industry. This quarter, GAP has witnessed a passenger's traffic decrease of 86% as well as a total revenue decrease of 75% and a net loss of MXN582 million, the largest decrease in our history. Our efforts remain focused on ensuring the well-being of our passengers and our employees, further reducing cost and helping our liquidity, and most importantly, supporting the airlines and our tenants for the long run ahead. As such, restarting passengers' confidence for traveling is one of our main pillars as we take this road to recovery.

I want to discuss some of the health and safety actions we have instituted for employees and passengers to reach this goal. To begin, we are concentrating all our efforts in the sanitation and cleaning throughout the areas used for -- on the main airport's operations area. Cleaning crews have been assigned especially for disinfecting common used spaces, and additional waste containers have been installed exclusively for sanitary waste. The entrance seating were reconfigured to ensure proper social distancing and we offer the signage reminding users about proper distancing. This signage, which was posted on inspection points, counters, boarding gates, ATMs, mechanical borders, immigration and customer area has -- encourage passengers to use mask and wash their hands frequently, including other recommendations from the health authorities. Our efforts obtained us the Safe Travel certification from the World Travel & Tourist Council for all of our airports in Mexico.

GAP is also working with TecSalud, a program of the Tec de Monterrey University for biosecurity review of all our procedures. In terms of our financial position, our top priority has been to protect liquidity. As such, reducing our cash burn continues to be a focus and signs around 85% of our cost of service are fixed. The major first became improving our cash burn is our cost performance. This means lower net operating cash resulting in a cash burn of only MXN947 million during the second quarter, lower than the forecast of approximately MXN500 million per month. The temporary pressure of non-priority areas help us to reduce our energy consumption as well as significant installation maintenance, security and cleaning expenses. These savings in airport services were obtained through flexible contracts, which allow us to manage them in accordance with the current mix.

During the month of May and June, we're already beginning to see the results of these initiatives, leading to a 15% decrease in the cost of service in Mexico and 35% decrease in Montego Bay. During this period, we also slashed non-critical activities and professional services. For the next quarter, we expect to achieve a similar year-over-year reduction in operating expenses, even with a sequential increase in passenger traffic.

In terms of employee costs, during the third quarter, we will launch an early retirement program as an option for employees, which could contribute to lower cash burn in the long-term. Our balance sheet has remained strong during the pandemic. We have raised MXN4.2 billion in the Mexican debt market to better position us to meet the capital expense commitment for this year and part of the 2021. Combined with funds received through two credit lines of MXN1 billion each, we ended June quarter with a cash balance of MXN15.7 billion, 55% -- 57% in Mexican pesos and 43% in US dollars. This amount was higher than expected due to recovery of some accounts receivable that were not readily forecast. Even with non-improvements in our cash burn rate and reserving the MXN4.2 billion for capex, this equates to 23 months of liquidity to cover operational expenses, taking in account the refinancing of the short-term debt maturities. This is more than enough to address operating expenses and [Indecipherable] impairment. However, if we need it, we also have the option to raise various additional debt.

We closed the quarter with total debt of MXN24.6 billion, of which 23% of total debt is US dollar denominated. Coming due next year, we have some maturity payments of $181 million, divided in two tranches due in January and February, and MXN2.5 billion due in July. We will analyze the cash position at the end of this year in order to define if we're -- we'll refinance both loans or only the US dollar denominated debt. We expect the ratios, the net-debt-to-EBITDA ratios stood at 1.13 times at the close of the second quarter. As I have mentioned before, to preserve liquidity during this crisis, we postponed the majority of non-mandatory capital investments. Thus, we will continue only with the projects that began in the first quarter of the year and also those that imply cost savings or boost commercial revenues, specifically ongoing construction works in VIP lounges, parking lots and solar panels over the carports.

Regarding the business commission on the MDP, we faced some delays in the construction works committed for this year. This is primarily due to the corona mobility restrictions and the beginning of the pandemic. It is important to keep in mind that the Mexican concession agreement specified that if the Mexican average or GDP were to reach a minus 5% or more in the last 12 months, that has the right to request the reopening and rebalance of the entire MDP and tariff determination, thus reviewing the assumptions considering the maximum tariff.

Regarding the GDP expectation issued by the Mexican Central Bank Mexico, at the beginning of this month, the GDP will be decreasing more than 5% in the last 12 months. So in this sense, I wanted to publish the official data. We will be able formally to begin this discussion. Our team is currently analyzing which projects must stay under the current MDP and which ones could be delayed to the next one in accordance with the new capacity needs and worldwide passenger traffic trends.

In the case of Jamaica, we will not need to wait for a specific figure. The contract allows revision in the presence of force majeure. As such, communication with the Jamaican government has already begun, and we request about a rebalance and delays in the bank mandatory capex. We will be providing on this as they become available.

In order to support our tenants, we established an incentive plan which excludes discounts up to 100% over the minimal rental fee for the months of April and May. For the month of June, the discounts were up to 60%. And from July to December, we will analyze on a case-by-case basis. However, the revenue share will continue applying throughout the year. These discounts apply similarly in our whole network. It is worth mentioning that to apply these discounts, the tenants must be up to date with payments.

Regarding the airlines, GAP grant payments to all the airlines to the operational charges. For example, landing, parking and overnight aircraft charges and moreover the aeronautical services for the months of April, May and June. Additionally, we grant payment deferrals to the Mexican airlines to their outstanding balance as of March to help them with their liquidity throughout these difficult times. We analyzed our accounts receivable and decide to recognize a provision for total accounts of MXN87 million. It is important to mention that in the second quarter, our traffic was carried out mainly by Volaris with a passenger share of 60%; VivaAerobus with 15%; and Aeromexico with a 12%. And now we are seeing American Airlines in fourth place with 5%, leaving Interjet in the eighth place with less than 1%.

On a final note, I just want to mention that it's impressive to see passengers start to return. We have known from the beginning of the pandemic that the recovery will be slow and we also have to be aware that a new outbreak could potentially distraught traffic at our airports once again. As a company, as an industry, we still don't have a clear picture of the severity and length of the pandemic. We believe that once the proper treatment is available and the pandemic controlled, the aeronautical industry will return stronger. In the meantime, we remain confident in the underlying fundamental of our business. I'm very proud of how quickly we, as a team, have act and taken decisions to preserve our company and protect our passengers and employees during this crisis.

Thank you. I'd now ask the operator to please open the floor for your questions.

Questions and Answers:

Operator

And at this time, we will open the floor for your questions. First we will take the questions from the conference call and then the webcast questions. [Operator Instructions] And the first question comes from Alan Macias with Bank of America. Your line is now open.

Alan Macias -- Bank of America Merrill Lynch -- Analyst

Hi. Good morning everybody and Raul. Just one clarification on the renegotiation of the capex of a five-year master developer -- development plan. Can you just go over when you expect these negotiations to begin? Thank you.

Raul Revuelta -- Chief Executive Officer

Thank you, Alan. Our understanding of the concession agreement is that after 12 months of decrease of minus 5% or of at least minus 5% in GDP, we could file the -- we could file for the review of the master development plan for sure for the tariff. We expect that this could happen in the third quarter of the year, and we would work with the authority for obtain a result during the last quarter of the year or the first quarter of the coming year.

Alan Macias -- Bank of America Merrill Lynch -- Analyst

Thank you. Very helpful.

Raul Revuelta -- Chief Executive Officer

Thank you, Alan.

Operator

Thank you. And the next question comes from Diego Gaxiola with Credit Suisse. Your line is now open.

Diego Gaxiola -- Credit Suisse -- Analyst

Hi. Good morning, Raul and Saul. Thank you taking my questions. On the commercial revenue side, especially for third-party businesses, could you give us a little bit more color on the minimum annual guarantee rents in terms of how much of the pre-COVID revenue would be covered by it? Approximately, how much of a discount is being offered to tenants going forward? And lastly, if all of the contracts are subject to it? Thank you.

Raul Revuelta -- Chief Executive Officer

Thank you, Diego. I will tell you first about the discounts that we apply for the commercial revenues and for the tenants. Specific of what we see is on the months of April and May, we discount 100% of the minimum guarantee. Then for June, we have discounts around 60% of the minimum rents. And from July and until December, we are developing and negotiate with our tenants a way to give this discount. What we are talking with them is related with the number of passengers. We are working basis -- one-by-one basis negotiation with each one of our tenants. The idea will be trying to get a fair deal. At the end of the day, we know that the decrease in passengers is huge. In some way, the base of the business is completely modified, at least during this year. So we are working with them, with all the tenants, to get this fair deal that's going to be impacted through our rent per passenger for the rest of the year.

In terms of our business directly operated by GAP, it means the parking lots, the VIP lounges, the advertising and the FBO at Cabos and the convenience stores. We are then beginning gradually to open the different business depending on the airport and depending on the recovery of the market. I will say that each one of our business units will be open in the point that we could have a breakeven for that specific point. In that way, we are already operating all our parking lots in all the airports. Today, we are operating the VIP lounges at Tijuana, at Vallarta, at Guadalajara and Cabos for the moment. And in terms of the convenience stores, today, we are operating the half of the capacity in Tijuana, the half of the passenger capacity in Vallarta. We are operating Aguascalientes, Morelia and Guanajuato, but the main idea is that we are closely seeing the performance of the passengers. And in that way, we will open at the moment that we know that we could get breakeven for those units.

Diego Gaxiola -- Credit Suisse -- Analyst

Okay. Thank you, very clear. Just a quick follow-up, if I may. Regarding the dividend policy, is there any chance we can see that reinstated before 2021? Or what would be a good way to think of it going forward?

Saul Villarreal -- Chief Financial Officer

Hi, Diego. This is Saul Villarreal. Well, we will continue with the same dividend policy. But obviously, for the end of this year, we will have to be very careful with the management of the liquidity of the company. We don't have any estimation of the dividend for 2021 so far. So our main target is to maintain the liquidity of the company, keep the healthy of the operation of the airports to be ready for all our commitments. Next year, we have several maturities. Indeed, it will be around MXN6 billion of debt maturities, so we should be ready in case we cannot refinance these maturities. So far, we don't have any estimation for 2021. And I can tell you that it could be very, very complicated. It's not a confirmation. We have to wait for the end of the year and the results of the year. But so far, our main target is to preserve the cash for the operation and for our debt maturities and our commitments for 2021.

Diego Gaxiola -- Credit Suisse -- Analyst

Thank you very much, Saul.

Operator

And your next question comes from Mauricio Martinez with GBM. Your line is now open.

Mauricio Martinez -- GBM Grupo Bursatil Mexicano -- Analyst

Hi. Good morning, Saul and Raul. Thanks for taking my questions. I would like to ask about the cost-containment efforts that you are going through. Maybe, if you can give us more color on what do you expect? I mean, do you expect to maintain the cost basis that you got this quarter for the next quarters? Or if there is even more opportunities to reduce such cost bases? Or what are your thoughts on that? That would be my first question, please.

Saul Villarreal -- Chief Financial Officer

Hi, Mauricio. Thank you for your question. We have been working with our suppliers in order to adjust the level of service, maintenance, security, cleaning. So we adjust the -- and closed some areas of the airports in order to reduce the cost of energy, and we will continue with that trend. According to the evolution of the traffic, we will be opening certain areas but providing the quality of services according to our concession agreement. However, as part of our targets to continue with the cost control in our airports, we have to consider that due to the consolidation of the Kingston Airport, our cost of services had an increase even though we had a significant decrease for this quarter. We will try to maintain that at the same level or a little bit lower due to the trend of the passenger in the opening -- in the different areas of the airports according to the demand.

Mauricio Martinez -- GBM Grupo Bursatil Mexicano -- Analyst

Wonderful.

Raul Revuelta -- Chief Executive Officer

So I would add just important for the third quarter to consider that we will launch an early retirement program as an option for the employees. So on the quarter, we will have some kind of impact for those possible payments. But at the end of the day, we felt that this will contribute to a better structure for the coming quarters.

Mauricio Martinez -- GBM Grupo Bursatil Mexicano -- Analyst

Perfect. And on the passengers front, maybe if you can share with us the evolution that you're seeing in July and for August. I mean you mentioned how the share of the airlines was. But what are you seeing now? Is it that any of the airlines is increasing capacity for August besides Volaris that already announced the 70% for August? But how is the evolution that you are seeing in your airports regarding the capacity and the traffic overall?

Raul Revuelta -- Chief Executive Officer

Yes. We are seeing an increase on capacity, just I should say, from Volaris. As you remember, Volaris is the biggest airline in GAP's airports. We are seeing a positive trend also from VivaAerobus. I will say that in general terms, we are seeing a much better expectations in terms of seats for the third and fourth quarter of this year. But the thing here is how the demand will react. Up to this day, the part that is more difficult to forecast right now is, first, the confidence of the passengers. Second, the possible impact of additional outbreaks that could in some way take away additional possible travelers. So I would say that in terms of the offer, we are clearly seeing an increase of number of seats in our airports. But today, it's really difficult to talk about the demand and the visibility that we are seeing in terms of the reservation system is that with the number of seats that today are on sale and with the reservations that we are following, we see that this year could end with a minus 50% in terms of the -- of passengers for the full year.

Mauricio Martinez -- GBM Grupo Bursatil Mexicano -- Analyst

Perfect. Very clear. Raul, thank you.

Operator

And your next question comes from Marcos Barreto with Citi. Your line is now open.

Marcos Barreto -- Citi -- Analyst

Hi, Raul and Saul. Thank you for your call and for taking my question. So aside from Aeromexico, are there any other corporate airline tenants where you have to make special arrangements regarding receivable?

Saul Villarreal -- Chief Financial Officer

Hi, Marcos. We have had several arrangements with the airlines in order to support them in terms of cash flow. Obviously, the May -- the month of April, May and June were very tough. Right now, we have seen a recovery. And the airlines are especially -- are seeing this recovery. So these arrangements are to help them to maintain their liquidity, and they will be paying -- we'll be making monthly payments after this month. So with all the airlines, mainly the domestic airlines, we have done these kind of arrangements.

Marcos Barreto -- Citi -- Analyst

Okay. Thank you very much.

Operator

[Operator Instructions] The next question comes from Rodolfo Ramos with Bradesco BBI. Your line is now open.

Rodolfo Ramos -- Bradesco BBI -- Analyst

Good morning, gentlemen. Thank you for taking my question. It's a follow-up on one of the previous ones. I don't know if you can share with us the level of traffic performance that you've seen so far in July, that would be very helpful. Thank you.

Raul Revuelta -- Chief Executive Officer

Sorry. I was on mute, sorry. The level of traffic that we are seeing on July or the first days of July, we thought that's going to be -- the close of the month is going to read something around 63% to minus 60% as a group. What we are beginning to see is the good reaction of the additional seats of -- for the demand of travelers. For sure, it is always difficult to talk about -- for longer than just July, because at end of the day, there is -- are plenty of things that could affect the traffic demand on coming months. But I will say that for July, we thought that we could be around minus 60% to minus 64%.

Rodolfo Ramos -- Bradesco BBI -- Analyst

You said minus 60%, six zero, minus 64%?

Raul Revuelta -- Chief Executive Officer

That's correct.

Rodolfo Ramos -- Bradesco BBI -- Analyst

Okay. Thank you. And just another last one from my end. On your negotiations or your discussions with Jamaican authorities, are you thinking of delaying your capex commitments or those -- the maximum regulated charges coming to play? I mean, how should we look at this process of these conversations? Thank you.

Saul Villarreal -- Chief Financial Officer

Hi Rodolfo, this is Saul. We have been talking with the Jamaican authorities and the talks are very positive. They are very open to hear from our side a proposal about the -- of the model. We believe that deferring capex will be the solution, and we will try to present the capex program for the next year, delaying some of the projects and obviously trying to maintain the equipment which is needed due to -- we need to replace to maintain the [Technical Issues]

Rodolfo Ramos -- Bradesco BBI -- Analyst

Hello.

Operator

And I apologize, we are having some technical difficulties. We will have the speakers connected here shortly. Please standby the call will now resume.

Saul Villarreal -- Chief Financial Officer

Hello?

Operator

We can hear you.

Saul Villarreal -- Chief Financial Officer

Hi, Rodolfo. Sorry, Rodolfo. We -- the line was cut. We were talking about the negotiation or talks with the Jamaican authorities. I said that it has been very positive. And we believe that deferral of the capex will be enough to have this rebalance. We do not expect any adjustment in tariffs. The negotiation of the last year was good in terms of the increase. So -- and due to the circumstances, we do not expect any increase in tariff. We only believe that the rebalance will come from the capex deferral. Rodolfo?

Operator

Thank you. [Operator Instructions] And there are no further questions at this time in queue. I will now turn the call back to Mr. Revuelta for any closing remarks.

Raul Revuelta -- Chief Executive Officer

Thank you, everybody, for your interest in GAP, for your attendance on this conference call. Please keep safe, and thank you. Good morning.

Operator

[Operator Closing Remarks]

Duration: 32 minutes

Call participants:

Maria Barona -- Investor Relations

Raul Revuelta -- Chief Executive Officer

Saul Villarreal -- Chief Financial Officer

Alan Macias -- Bank of America Merrill Lynch -- Analyst

Diego Gaxiola -- Credit Suisse -- Analyst

Mauricio Martinez -- GBM Grupo Bursatil Mexicano -- Analyst

Marcos Barreto -- Citi -- Analyst

Rodolfo Ramos -- Bradesco BBI -- Analyst

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