Good morning and welcome to GAP's Third Quarter 2022 Conference Call. All lines have been placed on mute to prevent any background noise. After the presentation, we will open the floor for questions, and at that time instructions will be given if you would like to ask a question.

It is now my pleasure to turn the call over to GAP's Investor Relations team. Please go ahead..

Thank you, and welcome to the Grupo Aeroportuario del Pacífico's third quarter 2022 conference call. Presenting from the company today, 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.

These 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 the forward-looking statements, please refer to the quarterly report. At this point, I'd like to turn the call over to Mr. Revuelta for his opening remarks. Please go ahead sir..

Thank you, Maria and thanks to everyone, who took their time to join us here today. I will start with a brief review of GAP operational performance and financial results for the third quarter of 2022.

Prior to taking your questions, passenger traffic across our airports continued to perform positively, reaching 41 million passengers for the first nine months of the year, an increase of almost 15% compared to 2019. This puts us on solid footing to surpass the annual growth objective that we established in our guidance.

Tijuana, yet again was the best performing airport in terms of traffic, growing by 42% during the quarter compared to the 2019. Tijuana's traffic increase was mainly fueled by the Cross Border Xpress, we had passenger traffic penetration of 34%.

Tijuana has also gained market share from the Los Angeles area, mainly on the routes to Guadalajara, Mexico City, Morelia and Mexican beaches destinations such as Los Cabos, Cancun, Puerto Vallarta et cetera.

Puerto Vallarta and Los Cabos, which are our main beach airports continues to benefit from higher traffic, mainly driven by the domestic market and are respective 42% and 32% increase during this quarter.

Also during this period, we opened other routes from Los Cabos to Madrid, Los Cabos to Toluca and Los Carlos to Santa Lucia as well as the Puerto Vallarta to Toluca and Puerto Vallarta to Santa Lucia.

We expect to develop additional routes to these three destinations and during the upcoming winter season, we will see the Canadian market actively increase as is typical for the season. There has been a less positive performance of the Guadalajara airport, mainly reflecting the slow recovery of the business travel market.

However, during this quarter, we saw a positive trend comparing to 2019. We continue our efforts to make Guadalajara a hub. As such geographically we initiated the routes from Guadalajara to Bogota, Colombia, operated by deliverables.

With this addition, Guadalajara now have three international routes outside of the U.S., these being Madrid, Panama and Bogota. Moving onto Montego Bay, this surplus continued as lull, but still recovering in third quarter, which is the first positive recovery following the impact from the pandemic. We are 3.2% increase compared to 2019.

In total, during the quarter 15 new routes and one international route were added. Looking ahead for quarter, in addition to the new Guadalajara-Bogota route, we expect to open two other international routes from Puerto Vallarta to Toronto and to Vancouver, operated by Flair Airlines.

As a result of the passenger traffic performance, a higher passengers fee, aeronautical revenue increased by almost MXN2 billion or about 74% during the quarter compared to 2019. For the nine months period, aeronautical revenues increased by almost MXN5 billion or about 62% compared to 2019.

Non-aeronautical revenues rose by 14% this quarter compared to 2019. For the nine months period, the revenues increased by 36%, most of it from food and beverage, retail operations as well as duty-free.

I just want to mention that the best-performing non-aeronautical revenues were food and beverage and retail operations particularly in Guadalajara, Los Cabos and Tijuana airports, while duty-free was the highest-performing segment in the Los Cabos and Montego Bay airport.

This revenue performance was partially offset by a 46% increase in the cost of service during the quarter by 2019 and a cumulative increase of 34%.

Personnel expenses increased by 74% during the quarter, mainly due to the hiring of additional staff required for the new areas as well of the change in labor law, now GAP directly hires personnel for the VIP lounges and convenience stores, when formally these were subcontracted.

Safety, security and insurance increased by 38% for the quarter, mainly due to more security staff related to the opening of the new terminal processor billing, and other new operational area as well as due to the salary increases.

With new openings have also impacted energy and water consumptions, thus leading to 31% increase higher utility cost for the quarter. [indiscernible] on our 14 airports have solar panels as we are currently generating 13% of total energy consumption. The price per kilowatt was [indiscernible] compared to 2019.

Looking ahead, we do expect higher cost given the terminal expansion and inflationary effect. As a result, EBITDA reached MXN4 billion for the quarter, we had EBITDA margin of around 71%. For the nine-month period, EBITDA reached almost MXN12 billion, with an EBITDA margin of around 72%.

Moving on to the balance sheet, cash and cash equivalents increased by 77% compared to September 2019, reaching a total MXN16 billion.

On September 26, we issue a MXN2.8 billion in sustainability-linked bond to refinance the bonds certificates under the ticker symbol GAP 17due in November of this year and to fund investments committed under the Master Development Program for 2022. This issuance is GAP versus Sustainability-Linked bond certificate.

Further evidence of our commitment to sustainability and especially our goal for reducing gas emissions. We look forward to updating you on these initiatives and to continuing to integrate sustainability into our operational infrastructure.

With this issuance, we reached almost MXN34 billion in debt and we continue to be at healthy leverage levels, which is our net debt to EBITDA ratio for the trailing 12 months of 1.2 times comparing with all our debt covenants.

CapEx continue in accordance with the committed Master Development Program, at the present has been and will be our biggest challenge this year because of the size of investment and inflation levels. We began the construction of the second terminal in Puerto Vallarta, which is expected to be finalized at the end of 2024.

Additionally, the second Guadalajara runway is still in progress as well as the mixed use building and other commercial areas, which are - which at this point have reached at 70% progress rate. We had an expected conclusion date in 2023. In Tijuana, we are currently standing and rehabilitating the aprons, which could allow us to serve more flights.

This temporary is undergoing in the Los Cabos airport. In Montego Bay, we completed the commercial area expansion, adding new food and beverage areas and expanding the duty-free. Before I conclude, I want to remind you that we will hold our infrastructure side visit from November 8 to November 10.

We will tour the Guadalajara, Los Cabos and Tijuana airports to showcase the constructions that are currently in process as well as the future growth expectations. We hope you join us. Please contact our Investor Relation teams for more information.

And with that, I conclude my comments and I ask the operator to please open the call for your questions..

[Operator Instructions] We'll take our first question from Rodolfo Ramos with Bradesco BBI. Please go ahead, your line is open..

Thank you. Thank you for taking my question. Good morning. A couple of questions.

My first one is on your expectations for Tijuana, the long-term drivers continue to be there, I just wanted to see if you foresee growth moderating perhaps in the short to medium term, especially as airlines continue to try to pass through some of the cost pressures that they're seeing? And the second part of this question, what are the next milestones for your international handling passenger facility in Tijuana? Thank you..

Thank you Rodolfo. This is Raul. I will say like the main drivers of Tijuana is still there. I mean the first one for sure the Mexico Maritimes market that has wheeled really fully at service from CBX. The second part is Mexican going for somewhat business or leisure to South California area.

In that part, we are beginning - after the pandemic, we saw in some way a decrease of that market, because as you remember the cross border were closed for Mexican or in other words, it was only opened for U.S. citizens or during the pandemic. So we are beginning to see real interesting recovery in markets of Mexico to Tijuana, Guadalajara to Tijuana.

Under third part related with the market of - mainly U.S. citizen going into Mexican destinations at beaches, we are still seeing a really great room to growth over there and we will begin to see more and more frequencies with our great load factors happening there.

But in terms of the market, I would like to add that for sure the coming months could be challenging for airlines for sure by the additional pressure from the cost of oil - the fuel, but also we are seeing that there are new planes are landing into the country mainly from Volaris and Viva Aerobus.

Some of these planes will not be allowed to be in U.S. markets due to the fact of Mexico still on the second category for FAA.

So in that way we also see some kind of temporary off site for additional growth in Tijuana due to the fact that some of the markets, mainly to South California will be covered through Tijuana rather to direct flights to for instance additional frequencies to Los Angeles market for instance.

So for sure, we see that it will come months with additional pressure from a possible economic recession and also the cost of the fuel, but also we have in the other hand, additional fee that will be on the - on the airport in a really short term.

So we explore to see room for growth in Tijuana and also we will look really closely what could happen in the Tijuana economy due to the fact of the nearshoring leasing the last quarters we are seeing a complete growth in the real estate for the - mainly in these existing stores, mainly that are used for nearshoring.

So that is an additional fact that we are following, but today we do have all the complete view of the possible impact on traffic for the future, but we see in some way positive that Tijuana area, we have some additional to it on their economy, the nearshoring continues to grow on the - not on that area.

For the second question, in the case of the facilities of Tijuana, the next milestone really important to be fully operating the International area of the terminal building.

Today, we are working in what we call the Phase 2 that was related of - an expansion of the - of the International area, arrive International area that will be ready to operate in May of the coming year. From that moment, we expect to bring some international routes to the airport.

We have mentioned in the past, we are seeing that the first International operations in Cabos - in Tijuana will be the coming back of the - of the route of Shanghai to Tijuana, where we had an airlines and also we are seeing the markets of Central America that will be for the next summer operating on that - on that new facilities..

And just a follow-up if I may. Thank you Raul for that. On the category ratings, so you would expect if Mexico does recover category 1, as it is expected now with the [indiscernible] leadership and the updated budget to happen in the first quarter of next year.

I don't know if you agree with that, but - is it safe to assume that once we have category 2, you will start serving other U.S.

domestic destinations? I don't know if commercially that's complicated or is this a market that you are - perhaps I don't know Phoenix - people that want to go to Southern California from Texas or other states in the U.S.?.

For sure. I mean, one that will be a clear opportunity as soon as we have - we recover the category will be for instance the Tijuana-Auckland.

As you remember, when you see the Mexico - next the Mexican Americas or the any touch of Mexicans in South California and California in general terms, we have really successfully cover this South California area.

But the second part or the second area would most Mexican area that is the one of the North area of California mainly the of Auckland and even Fresno in that area. So one of the points that we for sure feel like a great opportunities.

We have a for direct flight from Tijuana to Auckland arriving to Tijuana to have - you know all these 29 destination - domestic destination for in some way fit all the different domestic market.

So we really see that in the long term or the medium term, we will see Tijuana acting more like a hop for some different opportunities in the market, that's for sure. It's also related to the biggest U.S.

market drop of Dallas or Phoenix, but also all the operations that could the Auckland that will fit the Mexican market from Tijuana and the rest of the country..

Great. Thank you, Raul..

We'll take our next question from Alejandro Zamacona with Credit Suisse. Please go ahead..

Thank you. Hello Raul. Thank you for taking my questions. My first question is from the guidance for 2022. So looking at the results here today, it seems that the expectations in the guidelines will be somewhat conservative.

Do you have any thoughts for the fourth quarter or any updated estimates for those - of that initial guidance?.

Hi Alej, this is Raul. Thank you for your questions. You are correct. We are looking that we will be looking at the highest of our numbers, provide guidance submitted. But we do not expect to update it. It will be in the range that we already provided..

Okay. Thank you.

And then my second question, if I may on the cost of service, do you have any expectations going forward? I mean probably talking about 2023, but any expectations for this high inflationary environment or to what - to what extent we can see the cost of services on a unitary increasing considering all these expansions that you're planning?.

Okay. Alej. Well, everybody is concerned about inflation the effect in all of our - in our costs. We have to consider that we have another kind of issues in addition to that to the inflation effect. We do expect a pressure to our margins for 2023.

Not only because the inflation, also because you have full operation of the new terminal processor building in Tijuana for instance. We do have another expansion open and operating in Los Cabos.

We will continue opening in different additional expansions in Guadalajara and another airports probably since in the case of Montego Bay that we did, a full expansion of the food and beverage area, we will have additional area to maintain. The cost related to the suspension and besides the head down, we have significant increase.

So we have another effect related to the cost, whereas what we can tell is that EBITDA margins will continue in the range historically from that of 69%, 70%, 71%. So we - what we can expect is to maintain the same - the significant margins..

Okay. That's useful. Thank you..

Our next question from Pablo Monsivais with Barclays. Please go ahead..

Hi, Good morning. Thanks for taking my question. I have a quick one on Jamaica. Can you please provide some outlook on the - what is your expectation of traffic for 2023 considering that perhaps travellers from Europe is going to be in the soft side and also if you can provide some update on the case? Thank you..

Hi Pablo, this is Raul. In the case of Jamaica, personally, we - with Montego Bay - the Montego Bay just in this third quarter begin to see really positive trend. So there we see that the U.S. and Canadian market will continue their expansion or their recovery for the coming year for sure.

We are seeing in some ways with some caution mainly the market of Europe market that could be the British market from Montego Bay that could be - maybe not recovery as we originally expect.

But in general terms, I would say that Canadian market will have a great recovery or we are expecting that at least for the first quarter of the year, we are going to really positive trend on that - on that specific market. So in general terms, we will see that the next year, we will have a full recovery in terms of the absolute number of passengers.

For sure, we expect that we would now be really close to double-digit growth on that - on end digit. For the case of the Kingston, the main market of Kingston is [indiscernible] mainly from routes in Miami and New York.

We are expecting that the - all the full offer of seats that we used to have purely to the pandemic period, we expect them in the coming year will be completely recovering in terms of those specific markets.

For sure, we wouldn't have some kind of pullback from British markets that also, we are seeing some kind of a slow performance for the coming year. But in general terms, we see that Kingston will be really close to recovering their passengers clearly to 2019 at the end of 2023, that will be my general view.

And in terms of the - on the tariffs, we continue with the - with our review with the Government of Jamaica. They have the scheduled for finished the renegotiation of tariff. We expect that for March of the coming years, we're going to have a news about the new tariffs on those airports..

Perfect. Thank you very much..

We'll take our next question from Filipe Nielsen with Citi. Please go ahead..

Hi everyone. So, thanks for taking my questions. So I have two questions on my side. The first one is a follow-up on the category related on the Mexican market.

So I just wanted to have your thoughts regarding, how do you expect this timeline for this upgrade to happen? And the second question would be, if you foresee any opportunities for expanding through acquisitions and new options and not only expanding your current airports built? That would be my two questions. Thank you..

Thank you, Felipe. For the first question, in terms of the category 1, the Mexican government just had a change in their leadership of the Civil Aviation Authority, which just happened last week. One of their main goals is trying to recovery as fast as possible the category.

At least what the Mexican government is saying that they expect to recover on the first quarter of the coming year.

We feel that just taking account the new budget includes the new federal government budget includes increases on expenses for the Federal Aviation Authority and also with this change of the leadership, we see that the - that could be - could happen.

At least in our world view, the latest time for the recovery of the category would be the summer of '23, before the plans of the Mexican Government happens.

But at least in our personal view, the largest stand will be to - on the summer of '23, but if everything - all the plans of the Government happens in the time, that they expect that will happen in the first quarter of the coming year. I will pass - for the second question, I will pass to Saul..

Thanks, Raul. Thanks you Filipe. Yes - we are analyzing some opportunities for acquisitions. As we have mentioned before that were in the process of the pre-qualification for the Barbados Airport. However, the government suspended the process for now, we will now if they are going to continue with this in the following months or years.

So we are open to see any kind of opportunities. In a couple of weeks, we will participate in the global airport development where there are - it is a forum where there are some opportunities to invest in expanding in all over the world for airports. So after this Congress, we will see if there is any other opportunity.

For now we are only waiting for that Congress..

Great. Thank you very much, guys..

Our next question from Gabriel Himelfarb with Scotiabank. Please go ahead..

Hi, good morning. Thanks for the call. Just a question. Can you give us a bit of color about maximum tariffs that you will be able to reach the maximum tariff this year and do you think that next year maybe this inflation increase tariffs for 2022? Thank you..

Hi Gabriel. This is Saul. Thanks for your question. It is complicated. In terms of the maximum tariff, we have reached a level of 97% of the maximum tariff. So far we are expecting - trying to reach the 100% at the end of the year in the fourth quarter, but it is complicated.

As you know we increase two times this specific tariffs during the year in a way that the inflation is higher, we have a gap in the current tariff of the specific tariff versus the maximum tariff updated.

So it depends on the level of inflation for this year and obviously for next year, we will try to adjust the specific tariff that with the objective to reach the 100% of the maximum tariff. So it's a fact that we had inflation to the tariff, yes we are expecting that. This is part of our business, our CapEx, our MVP the list is need to be updated.

The inflation also, the effects that we are suffering in terms of OpEx, the effects also, the profitability of the company. So we have to pass through the inflation to the tariffs, absolutely..

Okay.

Do expect that for next year, for example, the first half or second half do you see inflation could materialize into tariffs?.

Yes. What we do is, we've just decided at the beginning of this year and then we analyze we have an expectation of inflation and expectation of exchange rate for international tariffs. So what we did is we've updated tariffs at the beginning of the year when we look at the trend of the market in terms of these effects.

And once we have more liquidity, we are able to make another adjustment. According to the law, we have only two chances to adjust the tariffs. So these increase at the beginning of the year and then we will look these in the second half, probably August, September, October, it depends on the trend of the inflation and exchange rates..

Okay. Thank you very much..

[Operator Instructions] We will move next with Alan Macias with Bank of America. Please go ahead..

Hi. Good morning and thank you for the call. Just a follow-up question on the Canada traffic, can you remind us your exposure to this traffic? Thank you..

This is Raul. I mean it for the case of Canadian traffic, for first Vallarta is really close to the 20%, the case of Montego Bay is really close to 18% and for the case of Cabos is around 12%, mainly our position.

But in those markets as those specific beach market, we have not - on these - all these 2022, we just have received on the last month the first planes coming back to the market. So what we are expecting from 2023 is that we're going to again have all the effect of the feedback we used to have in those markets and we will have a great increase.

Talking about the comparison of 2022, where or the first half of 2022, where we did have seats under Canadian markets..

Great. Thank you. Great color. Thank you..

And we'll take our next question from Guilherme Mendes with JPMorgan. Please go ahead..

Hi Saul and Raul, good morning. Thanks for taking my question. A quick follow-up question in terms of traffic. You mentioned about Jamaica for next year, but do you have initial consolidated view of foot traffic starting '23 year-over-year basis? Thank you..

Hi Guilherme, this is Saul. Well, what we're expecting for Jamaica in terms of traffic at the end of this - of this year, 2022 that traffic is really recovering almost at the levels of 2019. We have a lot to recover in the aggregate for 2019 level.

For 2023, what we do expect is for Montego Bay to reach the level of 2019, absolutely with - explained the Canadian traffic, the effects on Europe and obviously the recovery from U.S. market will boost the recoveries for Montego Bay. In the case of Kingston, it is delayed a couple of year.

We do not expect to recover in 2023, probably 2024, but it will be delayed a little bit more because it's more of the AFR market that it could take a couple of years to have full recovery. For GAP in general, what we expect is just to reach the 100% of the 2019. For this year, we will be almost in that - in the level.

If we can say for at the end of this year in the overall, we will have - we will be above of the levels of 2019. And the growth for 2023 is slow - it's complicated to see how will be the trend in the overall for GAP for traffic. We cannot for now announce how will be the growth. but we can tell you that we are not expecting a double-digit.

It will be compensated as Raul already explained the effects on the - of the cost of fuel, the effects of the global economy could affect the general terms. So what we are foreseeing right now [indiscernible] probably, but it will depend on the - on the last quarter. And the first quarter of 2022 will be very, very important.

So for now it is our visibility that we have..

That's super clear. Thanks for taking my question..

We'll now take the webcast questions, I will turn the call over to management..

Thank you, Mickey. We have some questions from [Pablo Kolana from MetLife].

Are you planning to issue more debt since you didn't reach to the full amount plan last month?.

Thank you, Pablo, for your questions. [indiscernible] reached during this year probably in the first quarter next year, we plan another - another bond issue. As you know, we have been leveraging the full CapEx of the strategy and maintain the level of leverage that we have. So we will look for a new issuance mix in the first quarter of 2023..

Well, the second question from Pablo is, if we're going to have additional dividend payment or share buyback during 2022?.

Yes Pablo, we have another tranche of the dividend payment approved by the - by the shareholders meeting. We are planning to make their second tranche of the dividend in this quarter.

We are deciding this November or this December, as soon as we decide, we will make the payment of MXN7.20 per share, that represent around sort of MXN3.6 billion FFO payments. So we have - we have to fulfill instructions from the shareholders meeting.

And regarding the share buyback program, we already complete the program expected by the shareholders meeting, so we're not going to continue for now with this program..

Thank you, Saul.

And also [technical difficulty] as expected net debt-EBITDA ratio for the end of 2022?.

Well, so far in accordance to the debt that we had at the end of September, we have 1.2 times of net debt deterioration. But we are expecting once we make dividend payment plans, we remove the payment of the bond GAP 17, which will mature in the following weeks. The net debt EBITDA will be in the range 1.4 times, 1.5 times..

Thank you, Saul. That is all the questions we have..

And we show no further questions over the phone. I will turn the call over to Mr. Revuelta for any closing remarks..

Thank you everyone again for joining us today in our third quarter results conference. On behalf of GAP's team, we wish you a great day. Thank you..

This does conclude today's program. Thank you for your participation. You may now disconnect..