Corporación América Airports S.A. (NYSE:CAAP) Q3 2024 Earnings Call Transcript

Corporación América Airports S.A. (NYSE:CAAP) Q3 2024 Earnings Call Transcript November 21, 2024

Operator: Good morning, and welcome to the Coronation America Airport’s third-quarter 2024 conference call. A slide presentation accompanies today’s webcast and is available in the Investors section of the company’s website. As a reminder, all participants are in 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 Patzio Enaki Asenola, Head of Investor Relations. Aditio, please go ahead.

Patzio Enaki Asenola: Thank you. Good morning, everyone, and thank you for joining us today. Speaking during today’s call will be Martina Brechyan, our Chief Executive Officer, and Jorge Rula, 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, costs, adjusted EBITDA, and margin refer to figures excluding IFRIC 12. I will now turn the call over to our CEO, Martin Ormican.

Martin Ormican: Good day, and thank you for joining us today. Let me start today’s presentation by sharing some key highlights from our third-quarter results. Following that, Jorge will provide a more in-depth financial review, and afterwards, we will open the floor for your questions. Our diverse geographic portfolio once again played a critical role in balancing our results this quarter. Solid performances in other countries partially mitigated weaker results in Argentina, where the macroeconomic environment and specific dynamics put pressure on year-over-year comparisons. Revenues, excluding IFRIC 12, were down approximately 4% year-over-year, broadly in line with lower passenger volumes, while revenue per passenger held steady at $19, demonstrating our resilience in navigating challenging market conditions.

Adjusted EBITDA for the quarter declined in the mid-teens year-over-year, primarily due to the ongoing macroeconomic challenges in Argentina, which continued to pressure domestic traffic and increase operational costs. Duty-free sales were again lower this quarter as last year’s results benefited from the significant disparity in official and parallel FX rates. Nevertheless, we saw positive contributions from our operations in Uruguay, Brazil, and Italy, highlighting the resilience of our portfolio. Importantly, our strong cash flow and solid balance sheet, with net leverage remaining at record lows, underscore our commitment to financial stability while providing the flexibility to pursue growth opportunities. Now, let me touch on three recent trends: A 124% increase in the domestic passenger tariffs in Argentina was approved and became effective November 1.

This will support our local operations going forward. Our Argentine subsidiary, AA2000, approved an $80 million dividend distribution. We completed the acquisition of an additional 2.1% economic interest in AA2000 for $30.9 million from affiliated entities, consolidating CAP’s economic interest in AA2000 while the Argentine government retains its 15% stake. The outperformance during the most recent quarter reflects the ongoing successful execution of our long-term strategy. We will continue to be disciplined and balanced with our deployment of capital as we prioritize investment in the business to support long-term growth. Jorge will provide further details on our financials shortly. Turning to page four for the review of passenger traffic declines: Overall, total passenger traffic declined 4% year-over-year, or 1.5% when excluding Natal Airport, which we exited in February as part of a friendly termination agreement with the Brazilian government.

Q&A Session

This decline was primarily driven by soft demand for travel in Argentina, reflecting the current challenging macro environment in the country. By contrast, international traffic in Argentina remained a bright spot, supported by additional routes and flight frequencies. We also continue to see positive momentum in Uruguay, Italy, and Brazil. Let us take a closer look at some key year-over-year trends by region: In Italy, passenger traffic grew 6%, led by a 7% growth in international traffic, while domestic traffic was up by low single digits. This performance extended into October, with passenger traffic growing 6.1% versus the same month in 2023. Uruguay continued its strong recovery, with passenger numbers up 15%, driven by new routes and additional frequencies introduced by JetSmart and Sky in the prior quarter.

Looking ahead, Sky and LATAM Airlines announced the resumption of routes to Rio de Janeiro and Santiago, Chile, for the summer season. American Airlines will resume its Montevideo-Miami route in November, adding further connectivity to Uruguay. In Brazil, traffic saw recovery this quarter, up 6% when excluding Natal Airport, even while domestic traffic remained affected by aircraft constraints. This performance extended into October, with passenger traffic (excluding Natal) growing a strong 12% versus the same month in 2023. In Argentina, total passenger traffic was down 6%, reflecting an 11% decline in domestic traffic, which remains impacted by the ongoing recession and tough comparisons to last year’s Previaje Program, which boosted domestic travel but was not repeated this year.

By contrast, we continue to see a positive trend in international traffic, up nearly 10%, driven by the continued return of routes and increased flight frequencies. For example, Aerolineas Argentinas launched new routes to Rio de Janeiro and Punta Cana, while carriers including Gol, Copa, and Avianca added frequencies on several routes. We also saw solid performance in key tourist destinations such as Bariloche, Iguazu, and Mendoza, which helped offset some of the domestic weakness. In October, international traffic continued to perform well, growing 7% year-on-year. Traffic in Armenia declined in the low single digits, following very strong traffic last year on the back of the entrance of new airlines and frequencies. In October, total traffic decreased by 2.4% compared to the same month last year.

Cargo volumes continued to show momentum, increasing 4.4% year-over-year, with Argentina, Brazil, and Armenia as strong contributors. Collectively, these regions accounted for 80% of total cargo volumes. Despite this volume growth, cargo revenues declined 12% year-over-year, largely due to lower revenues in Argentina caused by a reduction in the number of storage days for imported goods. I will now hand off the call to Jorge, who will review our financial results. Jorge, please go ahead.

Jorge Rula: Thank you, Martin, and good day, everyone. Let us start with our top-line performance on slide six. Total revenues, excluding IFRIC 12, decreased 4.2% year-on-year, in line with lower passenger traffic, while our revenue per passenger remained consistent at $19, capitalizing on our geographically diverse portfolio. Aeronautical revenues were down 1.5% year-on-year, mainly due to a one-time tariff compensation of $5.8 million received in Italy in the third quarter of last year. This was partially offset by the strong performance we saw in Uruguay, where we achieved a remarkable 22% increase in aeronautical revenues as we continue to leverage positive momentum in this country. Importantly, in Argentina, where aeronautical revenues remained fairly stable, we received approval for a 124% increase in domestic passenger tariffs, effective November 1.

Commercial revenues decreased 6.6% year-on-year, mainly impacted by lower cargo and duty-free revenues in Argentina and lower fuel revenues in Armenia. This was partially offset by higher revenues from VIP lounges, parking, catering, and advertising, with strong performance in Italy, Uruguay, and Ecuador. Moreover, in Brazil, we recently secured three new real estate agreements, providing further evidence of our objectives to enhance non-aeronautical revenues. Now turn to slide seven. Total costs and expenses, excluding IFRIC 12, increased 5% year-on-year, mainly reflecting inflationary pressures in Argentina’s operating expenses, as the labor compensation rate was above currency devaluation. As a reminder, approximately 60% of total costs in Argentina are denominated in pesos, which have been impacted by retroactive adjustments based on inflation rates that are greater than the current rate.

Importantly, we remain focused on maintaining strict cost controls, particularly in Argentina, where we continue to navigate challenging macro dynamics. However, we anticipate a more stable environment for the remainder of the year. Moving on to profitability on slide eight, adjusted EBITDA, excluding IFRIC 12, was $145 million, a 16% year-on-year decline, largely explained by the performance we saw in Argentina. This was partially offset by another quarter of double-digit growth in adjusted retail revenues and a positive contribution from Brazil, where we benefited from the reversal of a $2.1 million provision that had been set in the fourth quarter of last year related to the 2023 COVID economic compensation, which ultimately did not occur due to a change in methodology with the regulatory agencies.

We are very encouraged by the underlying performance of our operations in Italy, despite facing difficult comparisons this quarter due to the elimination of a one-time tariff compensation related to previous years. Turning to slide nine, supported by our robust cash flow generation, we closed the quarter with a total liquidity position of $605 million, up 32% when compared to year-end 2023. Furthermore, all of our operating subsidiaries reported positive cash flows from operating activities during the nine-month period. Along these lines, following the end of the quarter, AA2000, our Argentine subsidiary, approved a dividend distribution of $80 million, of which $68 million will be paid to CAP subsidiaries. Despite challenging macro dynamics in Argentina, we generated excess cash while maintaining healthy debt levels and meeting our capital expenditure commitments, providing evidence of the strength of our operations in Argentina.

Moving on to debt and maturity profile on slide ten, our net leverage ratio stood at 0.9 times at quarter-end. The reduction in net leverage resulted from the amortization of scheduled principal payments, early redemptions in Argentina and Armenia in the second quarter of 2024, as well as cash generation. Wrapping up on my end, while we faced some turbulence in the quarter, our business remains strong, supported by a robust balance sheet and a healthy debt profile, positioning us well to capitalize on future growth opportunities. As we move forward, we remain focused on managing costs and strengthening our commercial operations to drive sustainable growth and create value for our stakeholders. 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 Ormican: Thank you, Jorge. As we conclude, please turn to slide twelve for key takeaways before opening the call for questions. Geographic diversification helped partially mitigate softer results in Argentina due to the challenging macro environment. Notably, we experienced strong international traffic performance in Argentina, combined with overall traffic growth in Uruguay, Italy, and Brazil (excluding Natal). We remain focused on driving commercial revenue growth across our portfolio, leveraging opportunities in each of our markets. Specifically, construction is underway on a new covered parking facility at Carrasco Airport, which will add 180 additional parking spaces. In Argentina, we have introduced new parking-related services and initiatives, and work has commenced on expanding the duty-free area in the arrivals terminal of Ezeiza Airport to 1,100 square meters from 700 square meters.

Additionally, at the City Airport, three new real estate contracts were signed, further enhancing our commercial offerings and elevating the passenger experience. We closed the quarter with a strong cash position and net leverage ratio at historical lows, despite the mid-teen decline in adjusted EBITDA, excluding IFRIC 12. Progress continues on key projects across our airport concessions, aiding further growth. Negotiations with the Armenian government on our proposed CapEx plans are progressing, and final approval for the Florence Airport master plan in Italy is expected by year-end. In Argentina, while the primary challenge has been the FX and inflation dynamic, as inflation continues to recede, we are optimistic that we will see a further reduction in the gap between inflation and devaluation in the coming months.

The recent domestic tariff increase provides a more favorable context to support post-revenue growth and operational resilience. Strong international passenger numbers in October further bolster our positive outlook for the remainder of the year. While we continue to closely monitor the situation in Argentina, we remain focused on delivering solid financial results, maintaining a healthy balance sheet, and creating sustainable value for our shareholders. This financial flexibility enables us to support ongoing growth initiatives across diverse geographies. Thank you for your continuous trust and support. This concludes our prepared remarks. We are now ready to take your questions. Operator, please open the line for questions.

Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you wish to decline from the polling process, please press star followed by two. If you are using a speakerphone, please lift the handset before pressing any keys.

Alejandro de Mejelles (Jefferies): Yes. Good morning, guys. Thank you very much for taking my questions. Three questions, please, if I may. The first one is, Martin, you mentioned you are monitoring the situation of Aerolineas Argentina. Could you please give us some indication of how you are seeing the potential impact if the government finally decided to close down Aerolineas and where can these things kind of go? The second question is maybe you can give us some kind of indication of what we can expect from the Florence airport agreement that you were talking about in terms of CapEx and timing of construction. And the third question is, last quarter, you indicated that you were making some progress on the review of the contract in Argentina. Maybe you can give us an update on where you are at the moment, please?

Martin Ormican: Hello, Alejandro. Thank you for your questions and your interest. Let me answer in order. To give you a sense of what Aerolineas means for CAP, about 6% of CAP revenues are coming from Aerolineas Argentina operations. In terms of the operation, we have integrated services—it’s 15%. Each situation is very different and very complicated, and this has a political context also to take into consideration beyond the economics of the situation. So if you continue to comment exactly on what can happen, I can give you an example on a different situation that reflects the resilience of this business and of the demand for travel. In 2012, we were operating Montevideo Airport when the national airline, which was more than twice as big as Aerolineas is for us, in that operation, stopped flying from one day to the next.

And of course, there was an impact for our company, and the recovery was sustained in the next two years. Even in the same year and the following year, despite the compliance of that operation, our EBITDA kept growing. So that reflects the resilience of this business. And I think that is a good example of a way to look at possibilities for what can happen. Although, again, the situation is very different, and I would rather not get into different scenarios for everything that we hear on the news. Regarding Florence, as we said in the presentation, we expect to finish the approval process, hopefully by the end of the year, for the environmental impact and the possibility to ask for the construction permits so we can begin construction. That will allow us to build a new runway, which, by the way, is going to be the first new runway in Italy for many, many years, even since the Second World War.

And that would mean that we will be able to increase the number of flights and destinations for Florence, which is a magnificent tourist destination. That would allow us to realize the potential of tourism in Florence by air, creating the possibility of growing at least twice what we have today as an airport there. In terms of timing, as well, we expect construction to take somewhere between two and three years for the whole project, which includes a new runway and a new terminal. As far as the contract in Argentina, last time we said we were expecting the government to conduct the revision of the economic equilibrium of the concession. We know that this is happening now. It is a little bit delayed, but it is happening. We are waiting for it to finish and for us to then be communicated by the regulator of the results.

Once we have that, we can work together with the regulator on the path ahead in terms of what we see in those results. But until it is not officially finished and we have the results, I would need to comment on what can be the path forward. But we are making progress.

Alejandro de Mejelles: That is very clear. Thank you.

Operator: Thank you. The next question comes from Fernanda Rascia at BTG. Please go ahead.

Fernanda Rascia (BTG): Hello, Martin, Jorge, and team. Thank you for taking my questions. I have two from our side. The first, I would like to have some color on traffic trends going forward. Maybe if you could comment on Argentina—what you are looking for in 2025? We have seen international routes performing well, but domestic routes have been performing a little bit lower. So what should we anticipate for next year? And also, if you could comment regarding other regions, such as Uruguay, which has been performing strongly, and Brazil, which has Gol Airlines in Chapter 11 next year. So maybe it would be good to hear a little bit more on traffic trends by region. The second question is regarding the review of Argentina, but in the sense of the tariff negotiation. So just to be clear, the agreement that you got now is just related to 2024, and I was wondering if you still expect any further adjustment in domestic tariffs for next year?

Jorge Rula: Hi, Fernanda. How are you? Jorge here. Thank you very much for your question. Starting with traffic trends, we continue to see positive dynamics in Uruguay, Brazil, and Italy. Armenia has been on the sidelines in the past quarters, as you know. We think that there is a chance that we see some growth going forward, given new routes to Asia. On Ecuador, it is steady. In Argentina, we continue to see very positive dynamics on international, and not positive dynamics on domestic, as we have been seeing in the past several months. That was your first question. Your second question, just to clarify, regarding the domestic tariffs: The tariffs have been just adjusted to about $5.50 currently. Right now, we do not expect any further adjustments.

Fernanda Rascia: Thank you, Jorge.

Operator: Thank you. The next question comes from Jay Singh at Citi. Please go ahead.

Jay Singh (Citi): Hey, thanks for taking my questions. This is Jay dialing in for Steven Trent. The first thing I want to ask is, what opportunities do you see to increase the duration of your concession assets, maybe even with AA2000 or anywhere else across the region?

Martin Ormican: Hello, Jay. Would you mind repeating the question? I had trouble hearing you.

Jay Singh: Sure. What opportunities do you see to increase the duration of your concession assets, whether for AA2000 or other concessions across your regions?

Martin Ormican: Thank you for the clarification, Jay. As mentioned in the presentation, we are working on a CapEx proposal that will enable us to adjust the size and capacity of the airport in Armenia to current and future demand. This is a major investment for the size of the concession, and as we said, we are talking to the government to create the right environment for such an investment. We expect to close a positive negotiation with the government that will allow us to make that investment. One of the main levers we are discussing is extending the duration of the contract. However, until we finalize negotiations, it is difficult to confirm exact terms or timelines. For Argentina, any potential extension would depend on the results of the economic equilibrium review currently underway. Depending on the regulator’s findings, there may be opportunities to negotiate an extension as part of efforts to ensure the concession meets its regulated internal rate of return.

Jay Singh: Got it. Thanks so much. That is it for me.

Operator: Thank you. The next question comes from Marina Merchant at Lattan Securities. Please go ahead.

Marina Merchant (Lattan Securities): Hi, good morning, and thanks for taking my questions. I have two questions. The first one is regarding Argentina. In recent quarters, commercial revenues and domestic traffic have shown year-over-year declines as last year’s results were boosted by the favorable FX environment and the Previaje Program. Do you believe these figures are now at more normalized levels that could be sustained over time, rather than compared to last year’s performance? And the second question is about international traffic in Argentina. You mentioned earlier that you expect the positive trend to continue. Do you believe the improved international traffic could eventually offset the negative results from lower commercial revenues and weaker domestic performance?

Jorge Rula: Hello, Marina. Jorge here. Thank you for your questions. For the first one, you are absolutely right that the last few quarters we have been negatively impacted in Argentina. This has been due to several reasons: the decline in domestic passengers, the decline in cargo revenues, the decline in duty-free-related revenues, and the inflationary pressures on operational costs. Additionally, last year’s results were supported by the Previaje Program and the favorable FX rate, which created a very strong base of comparison. That said, with the recent adjustments in domestic tariffs and a better alignment between inflation and currency devaluation trends, we believe the figures we are seeing now are more representative of normalized levels that could be sustained, barring any major economic disruptions.

Regarding your second question on international traffic, we remain optimistic about this segment. As you mentioned, international routes have performed well, and we expect the positive trend to continue. Airlines are adding routes and increasing frequencies, and there is growing demand for travel to and from Argentina. While domestic traffic and commercial revenues may remain somewhat pressured, we believe the continued recovery in international traffic, supported by higher tariffs and other initiatives, has the potential to offset these challenges in the medium term.

Marina Merchant: Thank you, Jorge. That is very helpful.

Operator: Thank you. There are no further questions at this time. I will now turn the call back to Martin Ormican for closing remarks.

Martin Ormican: Thank you, everyone, for joining us today and for your interest in our company. As always, our team is available to answer any follow-up questions or provide additional information as needed. Thank you again, and have a great day.

Operator: Ladies and gentlemen, this concludes your conference for today. We thank you for participating and ask that you please disconnect your lines.