Corporación América Airports - Q4 2023

Transcript

Operator (participant)

Good morning and welcome to the Corporación América Airports First Quarter 2023 conference call. A slide presentation accompanies today's webcast and is available in the Investor section of the Corporación América Airports website. As a reminder, all participants are in the listen-only mode. There will be an opportunity to ask questions at the end of the presentation. At this time, I would like to turn the call over to Patricio Iñaki Esnaola, Head of Investor Relations. Patricio, please go ahead.

Patricio Iñaki Esnaola (Head of Investor Relations)

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, and Jorge Arruda, our Chief Financial Officer. 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. Also, please note that throughout this call, we will be discussing comparable figures excluding the contribution from the friendly termination of the Natal concession. We are also excluding the non-cash hyperinflation adjustment in Argentina resulting from the application of IFRS Rule IAS 29.

In this respect, we note that the great majority of Argentine revenues are linked to the U.S. dollar, while approximately half of costs are in Argentine pesos, resulting in a natural hedge against currency devaluation. I will now turn the call over to our CEO, Martín Eurnekian.

Martín Antranik Eurnekian (CEO)

Thank you, Iñaki. Hello, everyone, and welcome to our Fourth Quarter 2023 earnings call. We appreciate you joining us today and look forward to providing additional perspective on our strong finish to the year. I will start with some overall comments on our Fourth Quarter and full year 2023 performance, and Jorge will provide additional details on his financial review before we open the call up for questions. I'm delighted to share that we delivered the greatest results in Q4, marking a strong conclusion to an outstanding year. We closed 2023 delivering year-on-year passenger traffic growth in the low teens during Q4 and up in the mid-20s for full year, with over 81 million passengers traveling across our airports while advancing on our strategic goals.

As previously reported, a key milestone in the quarter was the successful conclusion of the friendly termination process of the Natal Airport Concession Agreement, which benefited Adjusted EBITDA by $166.5 million. The net amount to CAAP totaled BRL 465 million. On a comparable basis, excluding the non-cash accounting impacts from the application of IAS 29, we delivered revenue growth in the high teens with sustained expansion in revenue per passengers. When also excluding the contribution from the friendly termination of the Natal concession, Adjusted EBITDA increased in the high 20s. Our positive performance was underpinned by strong momentum across all geographic regions, reflecting our unwavering commitment to efficient execution and our ability to leverage the ongoing recovery in travel demand. Our robust balance sheet and healthy maturity profile underscore our commitment to financial strength.

Please turn to slide 4, as I would like to share a bit more about the business fundamentals underpinning the strong top-line performance we achieved in 2023. Starting with passenger traffic, our airports benefited from the ongoing recovery in travel demand, evident through the higher load factors and the gradual reintroduction of flight routes and frequencies across all the countries in which we operate. Some of the new flights inaugurated in the quarter include Ezeiza-JFK, Ezeiza-Santo Domingo, Salta-Lima, and Montevideo-Bariloche, among others. Notably, total traffic for the quarter continued to recover, reaching 99% of pre-pandemic levels, with international passengers exceeding fourth quarter of 2019 levels by 7%. Traffic in Argentina and Uruguay exceeded pre-pandemic levels for the first time, while Armenia and Ecuador continued to surpass 2019 levels. Now, moving on to some color by country.

Armenia remains the leader in the ongoing recovery, exceeding pre-pandemic levels for the seventh consecutive quarter. Year-on-year, traffic increased 17% and was up 60% versus fourth quarter 2019, supported by the introduction of new carriers and an increase in flight frequencies at the airport. We are encouraged that this strong performance persisted through February this year, with passenger traffic 85.1% above February 2019. Traffic volumes in Argentina increased 19% year-on-year and was 10% above fourth quarter of 2019 levels, surpassing pre-pandemic levels for the first time. Domestic passenger traffic, which also benefited from PreViaje, the government initiative launched in October to support local tourism, grew 18% year-on-year and surpassed fourth quarter of 2019 levels by 15%. International traffic was up 20% year-on-year, recovering to 99% of fourth quarter of 2019 levels, up from 89% in the previous quarter.

We note that while domestic traffic comprises 70% of total traffic in the country, above 90% of passenger use fees are generated by international traffic and fully linked to the U.S. dollar. Next, Ecuador, where we saw a solid performance across both domestic and international traffic, while increased frequencies in both domestic and international routes contributed to 5% year-on-year growth in total volumes. Above pre-pandemic levels, domestic traffic in the fourth quarter was affected by the exit of a local carrier. The positive performance continued in February, with total traffic 3% above February 2019. Uruguay surpassed pre-pandemic levels for the first time, fueled by the addition of new routes and frequencies. Year-on-year, traffic was up 24%, and the strong performance continued in the first two months of the year.

Passenger traffic in Italy was up 16% year-on-year, with international traffic again ahead of pre-pandemic levels, while domestic traffic was at 88% of fourth quarter of 2019 levels. Florence Airport continued to operate above pre-pandemic levels, while some destinations have not yet resumed at Pisa Airport. Traffic at both airports was also impacted by a one-day strike in November. Solid performance continued throughout the first months of the year, with total traffic 3% above pre-pandemic levels in February. Lastly, traffic in Brazil decelerated to 85% of pre-pandemic levels versus 94% in the previous quarter, as market dynamics remained impacted by financial and aircraft constraints at some local airlines, together with the rising ticket prices, which affected travel demand. This challenging environment in the industry continued in the first two months of the year. Moving on to cargo on slide 5.

We are encouraged by the ongoing recovery in our cargo business. Cargo volumes and revenues increased by 10% year-over-year. This solid performance in volumes was driven by strong year-over-year contributions from Argentina, Ecuador, and Uruguay, coupled with sustained recovery in the other geographies. Notably, cargo revenues exceeded pre-pandemic levels across all countries of operations except Italy, that is still recovering. I will now hand off the call to Jorge, who will review our financial results. Please go ahead.

Jorge Arruda (CFO)

Thank you, Martín, and good day, everyone. I'd like to begin by addressing the 131 Argentine peso devaluation that took place in late December. Due to the application of IFRS Rule IAS 29, we recorded a non-cash accounting impact on our reported results. Please recall that the great majority of our revenues from our operations in Argentina are linked to the U.S. dollars, while approximately half of our costs are in Argentine pesos, thus providing us with a natural hedge against currency devaluation. Therefore, as Iñaki mentioned initially, for better and proper understanding our performance, we will present and discuss our results, excluding the impact of Rule IAS 29 in Argentina and the contribution from the friendly termination of the Natal concession, given the one-off nature of this event. Let's start with our top line on slide 6.

Total revenues ex IFRIC 12 increased 19% year-on-year, well above 13% passenger traffic growth and surpassing pre-pandemic levels by 37%. The strong momentum we saw throughout the year continued into the fourth quarter in both the aeronautical and commercial segments. Importantly, the indemnification payment we received from the friendly termination of the Natal concession agreement was not recorded under the net revenue lines. Aeronautical revenues were up 23% year-on-year and surpassed pre-pandemic levels by 22%, mainly supported by tariff increases and the sustained recovery in passenger traffic. Argentina, Armenia, Uruguay, and Ecuador delivered stronger aeronautical revenue growth year-on-year and also when compared to the fourth quarter in 2019. Commercial revenues, which accounted for 47% of total revenues in the quarter, were up 17% year-on-year and 59%.

This strong performance, when compared to the fourth quarter of 2019 levels, was mainly driven by solid growth in cargo and duty-free revenues in Argentina and higher fuel-related revenues in Armenia. Up to the peso devaluation that took place in mid-December, duty-free revenues in Argentina were unusually high, as this business line benefits from favorable official exchange rates. In summary, our revenue per passenger in the fourth quarter of 2023 increased to $19.2, up 5% year-on-year and nearly 40% compared to the fourth quarter of 2019. Turning to slide 7. Total costs and expenses ex IFRIC 12 and ex IAS 29 and ex Natal increased 14% year-on-year following the growth of our business, but nonetheless remain well below the 19% revenue growth. Compared to 2019, total costs and expenses ex IFRIC 12 were up 7%.

This was mainly explained by higher fuel costs in Armenia due to the increased fuel sales, while in Argentina, we experienced higher salaries as the local inflation rate was above average currency depreciation. This is evidence we achieved a linear cost structure when compared to pre-COVID. Moving on to profitability on slide 8. As reported, Adjusted EBITDA included the following two impacts. First, a $166.5 million positive contribution from the friendly termination of the Natal Airport Concession Agreement. And second, a $29 million negative impact from the hyperinflation account in Argentina following the devaluation of the Argentine peso in late December. Excluding these two impacts, Adjusted EBITDA ex IFRIC 12 totaled $161 million, up 29% year-on-year and well above the 13% growth in passenger traffic. When compared to pre-pandemic Adjusted EBITDA, ex IFRIC 12 was up 71%.

Adjusted EBITDA margin ex IFRIC 12 expanded 3.3 percentage points to 40.5% year-on-year and 7 percentage points against pre-pandemic levels, with strong momentum in most territories. Turning to slide 9. We closed the year with a total liquidity position of $458 million, up $6 million when compared to year-end 2022. Noteworthy, all of our operating subsidiaries reported positive cash flow from operating activities for the sixth consecutive quarter, while we reduced our gross indebtedness by $132 million-$1.3 billion at year-end. It is also important to mention that total liquidity as of December 2023 does not include the BRL 465 million net indemnification payment received from the friendly termination of the Natal concession, as funds were pledged to BNDES. As of today, this pledge has been fully released. Moving on to debt and maturity profile on slide 10.

Total debt at quarter-end was $1.3 billion, while our net debt decreased to $963 million from $1.1 billion at year-end 2022. We closed the year with a robust balance sheet and healthy debt profile, with no significant maturities during the year. Consistent with our last quarter, as a result of the continued growth of our Adjusted EBITDA and lower debt levels, our net leverage ratio decreased further to 1.4 times from 2.4 times at December 2022. Wrapping up, we remain committed to a solid financial position. I will now hand the call to Martín, who will provide closing remarks and discuss our views for the year.

Martín Antranik Eurnekian (CEO)

Now, to conclude today's presentation, please turn to slide 12. I am pleased with our quarter and annual results. We delivered revenue growth above passenger traffic, an increase in revenue per passenger, and strong growth in EBITDA, up 29% versus the fourth quarter of 2022 and 71% versus pre-pandemic levels. Advancing on our commercial strategy, we signed agreements for two new real estate projects at Brasília Airport as we seek to further enhance commercial revenues and improve the passenger experience. The successful completion of the friendly termination process of the Natal concession agreement is evidence of our commitment to achieving significant milestones and creating value. Looking ahead over the next four to five years, we plan to expand our airport in Armenia and the two airports in Italy, following the approval from the respective local authorities.

On travel dynamics, we maintain a cautiously optimistic outlook on passenger traffic across our airport network. In Argentina, a concession we have successfully managed through various cycles and challenges over the past 25 years, we are cautiously monitoring macro conditions. Nevertheless, the government's proposed Open skies policy would allow more companies to operate domestic and international flights. Thank you for your continued interest in CAP. This ends our prepared remarks. We are ready to take your questions. Operator, please open the line for questions.

Operator (participant)

Thank you. Ladies and gentlemen, if you do have any questions at this time, please press star followed by one on your touchstone phone. You will then hear a three-tone prompt acknowledging your request. If you would like to withdraw from the question queue, simply press star followed by two. And if you're using a speakerphone, we ask that you please lift your handset before pressing any keys. Please go ahead and press star one now if you have any questions. And your first question will be from Alejandro Demichelis at Jefferies. Please go ahead.

Alejandro Demichelis. (Managing Director and Senior Equity Analyst)

Yes. Good morning, gentlemen. Congratulations on your results. A couple of questions, if I may. The first one is, Martín, you mentioned the open skies policy from the Argentine government. How do you see that kind of working, benefiting CAP, and what do you expect in terms of the timeline? And then the second question is, you also mentioned the expansion or potential expansion in Italy, in Armenia, the situation in Nigeria. Could you give us a bit of a timeline of the process of these three airports, please?

Martín Antranik Eurnekian (CEO)

Sure. Thank you for your questions, Alejandro. First, regarding open skies, our view and taking some studies made by different organizations, but mainly ACI, the Airport Council International, we see previous experience in different countries where the open skies policies, if implemented correctly, brought a lot of growth and extra growth for an important period of time. So in general, we see it as a positive move to give freedom to the airlines to operate. Then the details of the implementation, of course, are not public or open yet. And of course, as always, the details are important in each policy decision that the government takes. So we're expecting, we're waiting to understand how that is going to be implemented, to have a real understanding and opinion on it. But in broad terms, we believe that open skies are positive for the market.

In the question regarding Italy, we are advancing on the CapEx for Pisa Airport, which should start very soon. Regarding the most important CapEx deployment there, which would be Florence Airport, according to the government timeline, we should receive the environmental approval by mid of the year. With that positive approval, we should start the CapEx program by the end of this year regarding Italy. Regarding Armenia, we are in constant negotiations with the government. There is not an official timeline where we need to finish or the government has expected to be finished. But we definitely expect to have news on it, hopefully positive news on it before the end of the year.

Alejandro Demichelis. (Managing Director and Senior Equity Analyst)

That's great. Thank you.

Martín Antranik Eurnekian (CEO)

I hope this answers your question.

Jorge Arruda (CFO)

I'm sorry. In Nigeria, just to finish.

Martín Antranik Eurnekian (CEO)

Regarding Nigeria, we are waiting from the government to be able to move ahead and sign the contracts that have already been discussed and drafted. We have not received the final approval of those by the government and a signature date. We are still waiting for that.

Alejandro Demichelis. (Managing Director and Senior Equity Analyst)

Okay. That's great. Thank you.

Operator (participant)

Thank you. Next question will be from Fernanda Recchia at BTG Pactual. Please go ahead.

Fernanda Recchia (Executive Director and Senior Equity Research Analyst)

Hi. Thank you for taking my question. Two from our side. The first, still on the Milei administration, another policy that he has been discussing is regarding the privatization of Aerolíneas Argentinas. So I wanted to hear a little bit your thoughts on this and if you have any specific timeframe regarding this process, if you think it could happen still this year, it's something that could happen only next year. And second, on inorganic growth, apart from Armenia, you also mentioned that you are still looking for expansion projects in other regions. Just wanted to hear a bit on the target regions that you are looking and the features of the regions that you look. That is from my side. Thank you.

Martín Antranik Eurnekian (CEO)

Thank you, Fernanda. Martín here again. Thank you for your questions. Regarding Aerolíneas Argentinas' privatization, the only information we have is whatever has been said in the media. We do not know or there is not that we know of an open process regarding this. It'd be difficult to have any opinion regarding when and how it would be done. On our side, we are happy to work with any new owner of Aerolíneas Argentinas or the government, whatever the decision is on the future of Aerolíneas Argentinas. We're still waiting to understand exactly what the government process is going to be regarding the national airline. Regarding what we are looking for or the areas where we're looking for in terms of expansion, we have always said that we are going to be opportunistic, looking for accretive opportunities to add to our portfolio.

In that sense, we've been quite open in terms of regions. But as always, we would keep looking in the Americas and in Europe and in Africa now, whatever we find opportunities that, as I said, can be accretive to our portfolio. I think that answers your questions, right? Or am I missing something?

Fernanda Recchia (Executive Director and Senior Equity Research Analyst)

No, it answers. Thank you, Martín. Have a good day.

Martín Antranik Eurnekian (CEO)

Thank you, Fernanda. Have a good day.

Operator (participant)

Thank you. Next question will be from Jay Singh at Citi. Please go ahead.

Jay Singh (Equity Research Associate)

Hey. Thanks for taking my question. That's Jay from Steven Trent's team. Since my other question was answered, I'll just ask one here. Any possible rebalances on the Argentine concession? I just want to know how would the peso devaluation change rebalancing expectations considering the IRR is in the local currency? Thanks a lot.

Martín Antranik Eurnekian (CEO)

Thank you, Jay. The authorities for the regulator in Argentina have not been appointed yet. We are waiting to have these appointments to engage and to understand how to continue the process. But we definitely expect to see a revision of the economic equation of the concession agreement and therefore have some kind of adjustment. Also, the domestic tariffs that are adjusted once a year but have an indexation in U.S. dollars as well, we expect that also to be able to engage with the government and try to rebalance it given the big devaluation that happened in December in Argentina. But again, until we do not have the new authorities in place, we cannot really engage and understand the position of the new government in regard to these issues and on timing as well.

Jay Singh (Equity Research Associate)

Sounds good. Thank you.

Operator (participant)

Thank you. Once again, ladies and gentlemen, as a reminder, if you do have any questions, please press star followed by one on your touch-tone phone. And your next question will be from Marina Mertens at Latin Securities. Please go ahead.

Marina Mertens (Head of Corporate Debt Research Analyst)

Hi. Good morning. Thank you for taking my questions. One of them has already been answered. I have one regarding Argentina. Last year, we saw a significant increase in domestic traffic in part due to the government's incentive program and also higher duty-free sales due to the effects conditions. How do you see these trends? How do you expect these trends to continue or to change this year?

Martín Antranik Eurnekian (CEO)

Mertens, Martín Eurnekian again here. Thank you for your questions. On domestic traffic, it's still a little bit early to say regarding the trends of the market in the changing macroeconomic conditions. As far as we have seen in the observation systems that gives us a glimpse on the next 60-90 days, so far, we have not seen big shifts or change in tendencies. But I think it's early to see or to understand the impacts on the macroeconomic changes to the traffic in Argentina. Regarding duty-free, the incentive given by the FX arbit that we had last year has shrunk a lot. Therefore, we expect to see an impact on the sales, definitely.

Marina Mertens (Head of Corporate Debt Research Analyst)

Thank you.

Operator (participant)

Thank you. At this time, we have no other questions registered. I will turn the meeting back over to Martín Antranik Eurnekian.

Martín Antranik Eurnekian (CEO)

Well, I wanted to thank all the participants for their interest in Corporación América Airports and remind you that our investor relations team remains available for any further questions or engagement with the investors. Thanks again and have a really good day. Bye-bye.

Operator (participant)

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. At this time, we do ask that you please disconnect your lines.