Grupo Aeroportuario del Sureste SAB de CV (ASR) 2006 Q1 法說會逐字稿

My name is Dennis and I will be your conference operator today. At this time, I would like to welcome everyone to the ASUR first quarter earnings conference call. [OPERATOR INSTRUCTIONS] I will now turn the call over to Mr. Adolfo Castro, Chief Financial Officer.

This is Adolfo Castro, Chief Financial Officer of ASUR. Welcome to the discussion of our results for the first quarter 2006. Allow me to remind you that certain statements made during the course of our discussion today may constitute forward-looking statements which are based on management's current basis and beliefs and are subject to a number of risks and uncertainties that could cause actual results to differ materially including risks that may be beyond our company's control. For these risks, please refer to our ASUR's filings with the Securities and Exchange Commission and the Mexican Stock Exchange.

This quarter, I will start with a quick update on the effect of Hurricane Wilma as well as the progress we are making in terms of the expansion of our operations in Cancun Airport. During the quarter, we continued working with insurance companies in order to calculate the total damage and the cost of labor involved in the repair to the structure of our Cancan and Cozumel Airports. This has been estimated at 271 million pesos, that is around $25 million. At the same time, last February we renewed our insurance policies. As expected, given the magnitude of the events that impacted Cancun and most of Mexico during the year 2005, we saw a sixfold increase in the insurance premium of the policy that covers the company against the damage from the hurricane.

The premium is in the region of $2.5 million. In relation to the [total] recovery process in Cancun, as you may have seen in our monthly passenger traffic releases, we maintain our view that there will be a full recovery by the end of the year. Positive news in Cancun is that the work on repairing the beach has concluded and we can now again say that Cancun has a beach. This was a major concern for us due to the fact that this is one of the most important attractions in the area.

In terms of the impact of - that the hurricane had on passenger traffic, from October 25, 2005 to March 31, 2006, traffic fell 38% at Cancun Airport and 69% at Cozumel compared with what we had between October 25, 2004 to March 31, 2005. As a result of this, we expect that the negative impact from Wilma on passenger traffic will persist during most of the year 2006. And we cannot estimate what will be the final impact on our financial results for the year will be.

Given the physical damage to Cancun's Terminal 1, which was 20% of our terminal capacity, we are working to ensure the necessary airport capacity to support operations for our winter season. In terms of expansion of Cancun Airport, we are pleased to report that the construction of Terminal 3 and second runway is underway. Let me disclose the results for the first quarter. Again, I won't spend too much time on this as the numbers are in yesterday's press release.

Total passenger traffic for the quarter fell 17% year over year with domestic passenger traffic up 4% and international traffic down 26.4%. This was the result of the Hurricane Wilma that hit Cancun and Cozumel in October last year. However, this was an improvement from the 33% decline seen in the fourth quarter 2005 and was largely supported by domestic passenger traffic. You have seen that the passenger mix for the quarter has changed. Domestic passenger traffic represents 38.3% of the total of the quarter compared with 13.5% in the same period of last year.

Total passenger traffic fell, year over year, 23.5%, 16.7% and 11.9% for the months of January, February and March respectively. International passenger traffic accounted for 61.7% of the total traffic of the quarter compared with 69.5% in the same period last year. Passenger traffic to and from Mexico, Canada and the United States represented 89.6% of the total passenger traffic for the quarter, below the 90% for the first quarter 2005.

Total revenues declined 17.44% year over year, mainly owing the declining revenues from both our aeronautical and non-aeronautical services as a result of the lower passenger traffic and a reduction in commercial revenues, both of which were results of the hurricane. Commercial revenues per passenger for the quarter rose year over year by 7.45% to 34.75 pesos. Total commission of revenues fell 10.94 to 117.8 million as a result of the declining in revenues from food and beverage, retail and other service operations, although this decline was partially offset by an increase in parking revenues.

Finally, operating margin for the quarter fell 36.93% from 47.96% in the first quarter 2005, mainly as a result of the lower revenues. Net income declined by 41.97% to 129.6 million pesos. During the quarter, we made capital investments of 151.3 million pesos. Today, we will have our shareholders meeting and the main points of the agenda are the proposal for a dividend payment of .682 pesos per share; the amendment of our bylaws to adjust them in accordance with a new securities law in Mexico; appointment or - and ratification of the members of the board of directors and the statutory auditors and their alternatives; appointment of the members of the audit committee in compliance with the securities - with the new Mexican Securities Market Law. I will keep you apprised on the results from our shareholders meeting. Now, let me open the floor for questions. Dennis, go ahead, please.

[OPERATOR INSTRUCTIONS] Your first question is from the line of Vanesa Quiroga with Credit Suisse.

Yes, good morning, Adolfo. My question is with regards to the amended U.S. and bilateral agreement between Mexico and the U.S. and if any route has been added because of the amended law - amended agreement. Thank you.

Hi. Good morning, Vanesa. Yes, this is important. Last year, the Mexican government has agreed with the United States to extend their bilateral agreement. That means in the past they had just two routes for each one of their pairs of [CDs]. That means two airlines in each one of -- pairs of CDs between Mexico and the United States. They had increased these up to three carriers in some destinations here in Mexico. Among them, Cancun is the most important for us and, yes, it's important for us because we think that we will receive additional flights or additional carriers from these pairs of CDs. I have to say that most of the CDs that we have in the case of Cancun where we're operating with two carriers, so there were full intents of the bilateral - the old bilateral agreement. Of course, this is not going to be something that can achieve from day to night. We think that we can see the effects of this probably at the end of this year.

Okay. And just another question. Is there any - in your view - is there any possibility that any of the local carriers that will come into operations during the following 12 months, more or less, will have Cancun as the hub airport?

I don't know what you mean --

[inaudible - cross talk] any other of your airports, sorry.

Well, today, you know that the local carriers, some of them are in operation today. And basically, I would say that the first routes that they are taking are Mexico - Mexico City-Guadalajara, Mexico City-Monterrey and Mexico City-Cancun. So, today we have local carriers operating in our airports. I don't believe that one of them is going to make their maintenance base or the base of operations in Cancun. It's, in my opinion, very far from the center of the country, so that's why I don't believe that they're going to do that.

Okay. Thank you.

You're welcome.

[OPERATOR INSTRUCTIONS] Mr. Castro, your next question is from the line of Gonzalo Fernandez with Santander.

Hi, Adolfo. Two quick questions. The cost of the insuance premium was - I didn't hear it quite well. The proportional effect was already registered in the first quarter or we are going to see the effect starting in the second quarter. And the second is if you can tell us again your estimated CapEx for the year and if you are going to finance everything with internal resources or do you think you could issue some from that?

Hi, good morning, Gonzalo. Let me talk about the insurance cost because the original cost was around $400,000. The new cost for us is around $2.5 million. That means more than six times what it was before. This, of course, is the result of the hurricane season that we had last year, not just in the case of Mexico, but also in the case of the Gulf of Mexico. We can remember Katrina. We can remember Wilma, Emily, Stan over the last year, just in region. So this is something that we have expected and I remember myself mentioning that over the last quarter in its release.

The effect -- of course, you have seen a portion of the effect because the renewal was as from the end of February. So the case of March is that we are now operating with a new cost of this insurance premium. You have not seen the full effect because the insurance premium was not over the entire quarter. But that will happen next quarter. In the case of the CapEx figures for the year, you can see those in the work base, there's a presentation. But the amount that we are estimating for this year is around $113 million. Of course, that will depend on the exchange rate.

Okay. And the plans to issue any [debt] or --

As of today, we believe that we are going to be able to cover that with our internal resources.

Okay. Thank you Adolfo.

Your next question comes from the line of [Rupert Grant] with [Findlay Park] Partners.

Hi, Adolfo. Good effort, good quarter in a difficult environment. I was wondering, could you update us on what's happening with the possible second airport in the main Riviera?

Okay. Hi, good morning, Rupert. Well, the second airport is something that has been done there over the last two years and a half. We have been able to stop this project up to now. The latest news that I have on this is the Mexican president, Vicente Fox, on December 13 last year expressed publicly that they will be making a bidding process for this airport during the month of January. During the month of March this year, the undersecretary of communications and transport, Mr. Aaron Dychter, had expressly said that they will be making a bidding process during the month of March this year. We are, in April, and as of today nothing has happened.

I'm sure that everybody will be aware of the bidding process at the same time because this should be an international and open bidding process if that is the case. I cannot say that it will not appear or that this will appear tomorrow or next week or two months or six months or one year from now. That's what I know. You know that this is a direct threat to our main airport, which is Cancun Airport. That's what I can say for now.

Okay, that's fine. Are you planning to bid in that process?

Well, of course we will try and we will intend to bid. Of course that will depend on the conditions of the bidding process. We really don't know what those conditions are going to be. And of course, there is always the possibility that someone says that we should not be participating and this someone is [inaudible - accent] commissioner here in Mexico. I cannot assure to you that we will participate. We will try and we will intend to participate.

Okay, thank you very much.

[OPERATOR INSTRUCTIONS]. Your next question is from the line [Alan Mackus] with Citigroup.

Hi, Adolfo.

Hi, Alan.

If you -- I have two questions, one on CapEx if you can give us a break down between maintenance and expansion CapEx. And second question will be on the baggage [curbing] costs, if we can -- going forward is it going to be the same levels as we saw in this first quarter? Thank you.

Okay, in terms of the CapEx, the $113 million U.S. that I just mentioned are basically the result of the second runway and the expansion of the terminal capacity in Cancun. This is premier three project. In terms of maintenance, of course every year we do major maintenance in each one of the airports. I cannot give you an exact breakdown for this, because the level of major maintenance in each one of the airports is not the same every year. Let me give you a clear example. Every 10 years more or less, we should refurbish the runway of an airport no matter what -- if you have 1 million passengers of 10 million passengers. So the major maintenance of the runways are not done exactly in the same year or I cannot say that every year we are doing major maintenance in one runway.

So, what I can say is basically the 113 million is the result of Terminal 3 and the second runway. In terms of call baggage screening, the cost that you are seeing in the first quarter this year, in my opinion, is what you will see for the rest of the year. Why? Because we started the operation of this project the first day of January this year and also keep in mind that some of this cost was expanded at the end of last year because we had to hire some people and train these people to be ready for the first day of January this year. So, in terms of what you saw this first quarter is what you are going to see for the rest of the year in that specific project.

Thank you.

Your next question is a follow-up question from line of Rupert Grant with Findlay Park Partners.

Hi, Adolfo. Can you tell me when do you think you'll complete the building of Terminal 3 and will you reconstruct Terminal 1 or will you leave that unreconstructed for the time being?

Okay, we are working today to see how are we going to reconstruct Terminal 1. I'm not so sure that we will reconstruct the whole terminal, because as I mentioned before, this terminal building is not what it should be and the hurricane gave us a reason --

Yes.

You remember last year when I said the first to construct a new terminal building instead of patching these old Terminal 1. So, we are basically working today to secure the capacity - - enough capacity to support our winter season. That means probably some expansion in Terminal 2 and the possibility of operating partially Terminal 3. When are we going to preclude Terminal 3 in concurrence with original plan, that means 18 months - - 18 to 24-months is starting from December 9, 2005. We strongly believe and we are doing all the efforts that we can in order to start operation of these terminal buildings before that.

Okay. And assuming you don't reconstruct Terminal 1, what percentage increase in capacity will you have by adding --

Well, Terminal 1 represented 20% of our terminal capacity during the year 2004. If we see our capacity today it's true that we are operating at 80% of the capacity that we had before the hurricane. That's why that I said that we are working today in order to increase this capacity. There are some bottlenecks in Terminal 2, which are basically checking counters and boarding gates and immigration. We have the expanded the area for immigration. We are working to expand aircraft boarding gates and we are working to expand the checking counters area.

Yes. And on 2004's capacity, what percentage of your total capacity Terminal 3 represent once it's built?

Well, that will depend on how the people want to land at the airport, but if we use the current shape that we have, Terminal 3 should be for more or less 6 million passengers. During the year 2004, we were able to manage 10 million passengers.

Okay, that's fantastic. Thank you very much.

You're welcome.

Your next question is also a follow-up question from the line of Gonzalo Fernandez with Santander.

Hi, Adolfo. In -- one question, in as you mentioned if you recover -- if traffic recovers to the levels previous to the hurricane and without terminal number one, do you think you could recover some capacity constraints by the end of the year. And at this point, I know you're not really able to accommodate the new local carriers, except the additional counters and [inaudible - accent] Cancun.

Okay, Gonzalo, if we do not do anything, yes, you are right, we will face capacity constraints during our winter season. That means December 15 up to March 2007. And that's why we are working and basically I can say that we will secure airport capacity in our airport for that season. So I do not expect to have that capacity constraint. That's why we are working on that.

Okay, thanks Adolfo.

Your next question is also a follow-up question from the line of Alan Mackus with Citigroup.

My question is regarding the new airport law and if you can just give us more color on what are the main differences with this new law and the previous law, if you consider this a good law and if its positive for food or not?

Okay on -- there's not yet a new airport law. The changes of the - - in the airport law are basically eight. These changes have been approved today - - well have been approved recently from the Senator's chamber. Today is the last day for the deputies to approve these changes. The basic changes are one, in relation with the whole baggage screening. The old law is saying that this is the responsibility -- this is an airline's responsibility. The new law says that this is an airport's responsibility.

The second one -- another one that could be important for us is the restriction that we have to take on who should be operating complimentary services in our airport. The new law basically is taking out this possibilities to us so that we cannot constrain how many airport operators we can have in our airports. I would say, basically, those are the main changes. The other ones are related to additional time or some processes that the [SEC] needs to take. That's what I can say. If you want to try to see if this is going to pass today on the deputy's chambers, this is -- today is an important day.

Thank you.

You're welcome.

[OPERATOR INSTRUCTIONS]. Your next question comes from the line of Daniel Parker with Bear Stearns.

Hi Adolfo, how are you?

Fine.

Good, good. Two questions, one is just wanted to ask you with the second airport in [Cantonero], has there been any documentation filed as to the -- in terms of pricing or technical specifications -- any information?

If -- could you repeat the question?

Yes, I mean, if they are saying they're "going ahead with the bidding process" my understanding it' getting delayed each month. But is there any documentation about the bidding process, about the airport itself.

No, not at all.

Are they required or going to publish some kind of documentation before the actual bidding begins or --

In my opinion they should be making public these -- all these bidding documents at the same time, I don't believe that they are going to do this in pieces.

So, when they -- I understand again, it's been dragged out. But when they say the bidding process will begin on whatever, January, February, March, April or now May perhaps, that will be -- there will be an initial review period to review the documentation and the bidding? Or are they going to go straight into the bidding immediately?

My opinion is that they will go directly to the bidding process.

Okay. I don't quite understand that logic, but okay. The second question was I saw that you had a rescue clause charge in the quarter and I was just wondering if that was related to either or prior termination of a rental or lease contract with one of your concessionaires?

That's true.

Could you just tell me who that was or if that was a one that's been ongoing arbitration from last year or if that's something new?

Okay, you know that we are still some of the old [audio skip] in Terminal 1 -- in Terminal 2 basically in the satellite building. I can say from the top of my mind that we have -- that we still have four in the case of the satellite building. And we have around 10 in the case of Terminal 1. In the case of the Terminal 1, I cannot say that those are in -- under the same conditions that we have on the terminal - on the satellite deal. Why? Because in the case of Terminal 1, those are going to do -- be busier during the year 2006. In the case of Terminal 1 most of these four agreements with this tenant are due and basically we are in the court to try to evict them.

So, I'm sorry let me just understand, you said there's effectively a total of 14 concessionaires that you're currently either in court or in arbitration with to terminate their contract and evict them.

Yes, but of course this 14 number comes from the top of my head.

Right, right I understand. And --

It could be 15 or 13.

And the actual payment in the first quarter was that part of this ongoing process or where you able to actually tear up a contract and evict someone, so to speak, out of the terminal?

No it was an agreement that [inaudible - background noise] evicted one of them.

Okay. Okay, great thank you.

[OPERATOR INSTRUCTIONS] And at this time there are no further questions. I'll now turn the call back over to Mr. Castro for any closing remarks.

Okay, thank YOU all of you. The closing remarks is basically that things are better than what we had expected for the first quarter. Of course we keep seeing the effects of the hurricane and we will see these Effects over the year. Today is an important day, we have our shareholderS assembly. You know that there is a dividend proposal there and also the changing bylaws in accordance with the new market -- in accordance with the new Mexican Securities Market Law. I will keep you posted on that. Thank you very much again. Bye.

Ladies and gentlemen, this does conclude the ASUR first quarter earnings conference call. You may now disconnect.