Q2 2024 Corporacion America Airports SA Earnings Call

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Participants Patricio Esnaola; Head of Investor Relations; Corporacion America Airports SA

Martin Eurnekian; Chief Executive Officer, Director; Corporacion America Airports SA

Jorge Arruda; Chief Financial Officer; Corporacion America Airports SA

Alejandro Demichelis; Analyst; Jefferies

Jay Singh; Analyst; Citi

Fernanda Recchia; Analyst; BTG

Presentation Operator

Good morning, and welcome to the Corporacion America Airports, second quarter 2024 conference call. A slide presentation accompanies today's webcast and is available in the Investors section of the company's website. (Operator Instructions) At this time, I would like to turn the conference over to Patricio Esnaola, Head of Investor Relations. Please go ahead.

Patricio Esnaola

Thank you. Good morning, everyone, and thank you for joining us today. Speaking during today's call, will be Martin 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. Please note that throughout this call all references to revenues, cost, adjusted EBITDA and margin will refer to figures excluding IPO costs. I will now turn the call over to our CEO, Martin Eurnekian.

Martin Eurnekian

Thank you, Inaki. Hello, everyone, and welcome to our second quarter 2024 earnings call. I will begin today's presentation with some key highlights from our second quarter performance. After that, I will turn it over to Jorge for a more detailed financial review, and then we will open the floor for questions. Our business is supported by having a diversified geographic portfolio by operating in a variety of countries globally, we were able to mitigate weaker domestic traffic in Argentina impacted by the challenging macro backdrop in the country as well as aircraft constraints in Brazil, which resulted in less number of flights. As a result, revenues remain resilient despite the mid-single digit year-on-year decline in traffic when adjusting for the discontinuation of the Natal airport concession earlier in the year, revenues per passenger ex IP 12 expanded 9% year-over-year, outpacing revenue growth, underscoring our ability to adapt to challenging market dynamics, and Jorge will discuss this more in detail shortly. EBITDA [ex EPIC] was declining 9% year-over-year, largely due to the macroeconomic challenges that Argentina is facing which affected our domestic traffic and operational costs. Moreover, duty-free sales were lower this year as last year's figures were artificially high due to the gap between the official FX rate and the Para one. By contrast, our robust results in Italy and Uruguay emphasized the strength and resilience of our operations in those markets. Furthermore, our strong backlog generation and solid balance sheet with a record low leverage ratio demonstrate our commitment to sustaining financial stability while maintaining the flexibility needed to support growth initiatives. Now moving on to page 4 for a review of passenger traffic trends. Total passenger traffic in the quarter was negatively impacted by weak demand from domestic travel in Argentina as the market was challenging for reasons I just mentioned. By contrast international traffic in Argentina continued to perform well, further supported by continued expansion in traffic in Italy and in Uruguay on a comparable basis. And excluding that airport concession, we exited in February. As previously disclosed, passenger traffic declined 5% year on year, driven by a 15% contraction in domestic traffic, mainly driven by Argentina, while international traffic increased 8% in the period. Now discussing year-on-year trends by country of operations. In Italy, we saw steady passenger traffic growth, up 14% year-on-year. This positive performance was mainly due to a 17% rise in international traffic and mid-single digit growth in domestic traffic. This positive trend continued into July, benefiting from the summer season, with traffic growing 5.5% versus the same month of last year. In Uruguay, the opening of new routes and frequencies by just months and Sky Airlines in May contributed to the 11% increase in traffic in the quarter. This positive trend extended into July with traffic growing 15% year on year. In Argentina, international traffic was up 9% in the quarter, driven by the resumption of more routes and frequencies. This very good performance, however, was more than offset by a contraction of 19% in domestic traffic. In addition to facing difficult comps as last year's travel benefited from the Australia government incentives to boost local tourism. Domestic traffic was also impacted by the temporary suspension of several routes and flight cancellations as their recessionary environment down demand for travel. As a reminder, while domestic traffic comprises around two-thirds of total traffic in the country, over 90% of passenger use fees are generated by international traffic. And then I fully need to US dollars. In July, we saw improved performance with international traffic growing 14% and domestic traffic declining 12%. Traffic in Armenia remained largely flat, declining in the low single digits as the market continues to face very strong comps versus last year. In July, total traffic decreased by 2% year-on-year. In Ecuador, total traffic declined by mid-single digits. International traffic growth of 4% was more than offset by a decline of 13% in domestic travel following the exit of a local airline in October last year, the trend continued into July with total traffic decline 5% year-on-year. In Ecuador. As mentioned, traffic flow continues to be significantly impacted by financial and documentation in one of the local airlines, causing a lack of supply. This dynamic resulted in a 3% decline in passenger traffic when excluding Natal airport in July, we saw an improved performance with transit passenger traffic growing 15% and domestic traffic decreasing 5%. Excluding Natal. Turning to slide 5, cargo volumes continued the sustained recovery trend increasing in the mid-single digits year-on-year, Argentina, Ecuador and Armenia, which accounted for over 70% of cargo volumes to remain the main driver behind this good performance, while Italy and Uruguay posted slight declines. However, despite the volume growth, cargo revenues declined 13% year-on-year, primarily due to lower revenues in Argentina. This again was caused by a reduction in the number of days that cargo remains stored. I will now hand over the call to Jorge, who will review our financial results. Please go ahead.

Story continues

Jorge Arruda

Thank you, Martin. And good day, everyone. Let's start with our top line on Slide 6. Total revenues ex 12 were stable year on year despite the lower passenger traffic. As a result, core revenue growth was offset by the decline in the commercial segment, our multiple revenues were up 3% year on year, mainly driven by higher international passenger traffic in Italy, motorway in Argentina and tariffs increase in Uruguay and Ecuador. As a reminder, the majority of our multiple revenues net income is derived from the international traffic. Moreover, [aeronautical] revenue, Italy, delivered double digit year on year growth in the second quarter of 2024, benefiting from the consistent positive momentum in those geographies. Commercial revenues decreased 3% year on year, mainly impacted by lower cargo and duty-free revenues in Argentina and lower fuel revenues in Armenia as anticipated in our first quarter 2024 earnings call, the duty-free business in Argentina was impacted by the December 2022 because of devaluation. This was partially offset by higher revenues from VIP lounges, advertisement and rental space with strong performance in Italy while in Brazil. In summary, leverage on cap geographically diverse portfolio, our revenue per passenger ex 12 increased 9% to $20.1 this quarter, up from $18.5 in the second quarter of 2023. Turning to Slide 7. Total cost and expenses exited 12 increased 6% year on year, mainly reflecting inflationary pressures in Argentina as the local inflation rate was above currency devaluation. As a reminder, around 60% of total costs in Argentina are [peso] denominated. Regarding specific cost items. We experienced higher maintenance expenses together with higher services and fees. Importantly, we remain focused on keeping stringent cost controls in Argentina, consistent with our commitment to maintain a streamlined cost structure. Moving on to profitability on Slide 8. Adjusted EBITDA exited 12 was $126 million in 9% year on year decline, mainly explained by the performance we saw in Argentina. This was partially offset by another quarter of double-digit growth in adjusted EBITDA in both Italy and Uruguay. We are very encouraged by the ongoing momentum in these two countries and the corresponding financial performance, which include solid margin expansion during the quarter. Turning to slide 9, underpinned by our strong cash flow generation, we closed the quarter with a total liquidity position of $549 million, up $91 million when compared to year end 2023, with all of our operating subsidiaries reporting positive cash flow from operating activities during the first half of the year, except the quarter. Moving on to the debt and maturity profile on slide 10, our net leverage ratio stood at 1.1 times at quarter end, down from 1.4 times at year end and 1.2 times as of March 2024. The reduction in net leverage resulted from the amortization of scheduled principal payments, early redemptions in Argentina and Armenia as well as cash generation in Italy, we successfully refinanced all our outstanding debt into one single facility. This allowed us to extend the average life of our debt while raising additional funds of EUR60 million for CapEx program at Tucson airport. Wrapping up on my end, I would like to underscore the strength and resilience of our business. We achieved high single digit growth in revenues from our strong cash flow generation, and we continue to maintain a robust balance sheet and healthy debt profile. We are accomplishing all of this even as we continue to face some headwinds I mentioned earlier. I will now hand the call back to Martin, who will provide closing remarks and discuss our view for the remainder of the year.

Martin Eurnekian

Before opening the line for questions. Please turn to Slide 12. To wrap our prepared remarks, revenues remained resilient despite the mid-single digit decline in comparable traffic as our geographic diversification mitigated the challenging macro conditions in Argentina and ERGO contains in Brazil. We are also pleased to see revenue per passenger outpace revenue growth, underscoring our ability to adapt to changing market dynamics while EBITDA ex 12 declined solid cash flow generation further strengthened our balance sheet, we achieved another record low net leverage ratio, demonstrating our commitment to financial discipline. On the strategic growth front, we are actively negotiating a new $400 million CapEx plan with the Armenian government and seeking approval for the new master plan for Florence Airport in Italy. Additionally, we are assessing expansion projects across various geographies. In line we our strategic roadmap to pursue value creation. Looking ahead, on the operations front, we expect the positive dynamics in Uruguay and Italy to continue throughout the year. In Argentina, we expect domestic traffic to remain soft, impacted by the persisting recession although we are pleased to see slight better traffic figures in July. Moreover, Argentina has strengthened its regulatory framework through recent open skies bilateral agreements with Brazil, Chile, Ecuador, Peru, Uruguay, [Banna] Canada and Paraguay. These agreements are designed to enhance the flexibility and inject greater dynamism in the country's aeronautical activities. While in the financial front, we remain committed to delivering strong results while maintaining a healthy balance sheet and creating value for our shareholders. By doing so, we have the financial flexibility to support our growth initiatives. Thank you for your continued support and confidence in our company. This ends our prepared remarks. We are ready to take your questions. Operator, please open the line for questions.

Question and Answer Session Operator

Thank you. (Operator Instructions) Alejandro Demichelis, Jefferies.

Alejandro Demichelis

Yes, good morning, guys. Thank you very much for taking my questions. Two questions, if I may, please. The first one, Martin, maybe you can update on how you see discussions we did different airlines regarding potential new routes into the country or higher frequencies. Now that is with the deregulation of the sector has now accelerated. And then the second question is maybe for Jorge is how you see the development of the cost base, particularly in Argentina for the rest of the year.

Martin Eurnekian

Thank you, Alessandro, for your question. And regarding the effects on traffic of the deregulation that the government is pursuing. And moreover, the team and the amount of bilateral agreements open the skies of Argentina to other countries, we are very very positive. There are some many studies demonstrating that in the short, medium and long term. This has a very big effect on the healthy growth in traffic numbers. So this is what we expect is probably not going to happen one day to the next because airlines have to understand and adapt and have the availability of aircraft to do this. But the amount of flexibility that this gives to regional and local airlines to touch on the Argentina market, we think is a very, very positive news, and that is not only short term use, but also for the medium and long term.

Alejandro Demichelis

Okay. Thank you.

Jorge Arruda

Okay. So on the cost front, and I guess your question was targeted to Argentina, we see the same trend into the third quarter and thereafter, softening in our bearing in mind that the first quarter we managed to withhold a price adjustment on suppliers and among other things in our cost structure in general. But a point in time we had to accept given the inflation environment and we saw the same scenario, we are seeing the same scenario to the third quarter and we expect thereafter to soften.

Alejandro Demichelis

That's very clear. Thank you.

Operator

(Operator Instructions) Jay Singh, Citi.

Jay Singh

Hey, thanks for taking my question. This is actually Stephen Trent here today. Since when my other questions have already been answered in closing, I want to ask was the sites from Nigeria and Armenia. What are the investment opportunities? Do you see and do any of them happen to be in conjunction with Dubai. Thanks.

Jorge Arruda

Hi. Thank you for your question. We have from a from in connection with opportunities that are public. We recently submitted a proposal for the London airport in Angola as part of the public tender being carried out by the government and our submitted prequalification documents in Saudi Arabia. However, there are a number of other situations. We are actively looking at that, we will be announcing if and when they become more concrete or official.

Jay Singh

Thanks so much.

Operator

Fernando Ricci, BTG.

Fernanda Recchia

Yes, hello. Thank you for taking my question. A year from our side to the first one on core margin. If you could please provide an update on the tariff discussion on Argentina on the domestic side, how is the negotiation for a rebalancing progressing? If you have any update on this matter. And second, if you could please provide an update on the master plan discussion on Italy, it will be very helpful. Thank you.

Martin Eurnekian

Thank you, Fernando, for your interest and your questions. Martin here. Well on the tariff in Argentina, we expect the domestic tariff to We adjusted soon because it's lagging behind the exchange rate. And but we have to also bear in mind that the and the board of the regulatory agency was strong not long ago by the government. And so we expect to see some adjustment time since the new authorities to go over to the actual announcement of the catching up of that, the domestic that it has to do in Argentina. We also expect a the rebalancing of the whole economic equilibrium of the concession to be done at some point, but by these new authorities and we are already late on that, but hopefully before the end of the year, we would have that exercise done. And this is what we expect at least for now. And regarding Italy, we are moving on a tight schedule and a back and forth with questions and documentation with the different agencies and the commission that I need to give the green light in terms of environmental approvals for a master plan to go ahead. We are working on the last round of questions with a deadline for October. And then we need to see if there is another round of questions or the agencies ready to wrap up the process with our replies. And but it's an active process and it's moving forward.

Fernanda Recchia

Thank you, Martin. Just to clarify what you're expecting for the end of this year is just the tariff rebalancing in Argentina or the rebalancing for the whole concession?

Martin Eurnekian

The rebalancing of the economic equilibrium of the concession will most probably be reflected in tariffs in Argentina, and that's what we expect by the end of the year. But prior to that, we expect the the regulatory agency to do require a catch-up on the domestic tariffs that are lagging behind due to devaluation in Argentina. And that has to happen in a shorter time than the required working calculations needed to do a rebalancing of the economic equilibrium, but we expect that to happen first.

Fernanda Recchia

Perfect. Thank you very much.

Martin Eurnekian

Thank you.

Operator

And there are no further questions at this, and I will turn the call back over to the presenters for closing remarks.

Martin Eurnekian

I'd like to thank everybody for your interest in our company and remind you that our Investor Relations team is always available to engage and answer your calls. Thank you very much and have a very nice rest of the day.

Operator

Ladies and gentlemen, this concludes your conference call for today. You may now disconnect. Thank you.

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