Grupo Aeroportuario del Sureste SAB de CV (ASR) 2006 Q2 法說會逐字稿

Good morning. My name is Judy, and I will be your conference operator today. At this time, I would like to welcome everyone to the ASUR second quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the call over to Mr. Adolfo Castro, Chief Financial Officer. Sir, you may begin your conference.

Thank you Judy. Good morning, this is Adolfo Castro, Chief Financial Officer of Sureste. Welcome to the discussion of our results for the Second Quarter of 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 currents expectations and beliefs, and are subject to a number of risks and uncertainties that could cause actual result to differ materially, including risks that may be beyond our company's control. For these risks, please refer to ASUR's filings with the Securities and Exchange Commission and the Mexican Stock Exchange.

During the quarter, we continued working with our insurance companies, in order to calculate the total damage on the costs for - of the labor involved in the repairs to the structure of our Cancun and Cozumel airports. In the case of Cozumel, the adjustment - the adjustment with the insurance company was concluded with a total claim of 17 million pesos. In the case of Cancun airport, we estimate that we - it will be concluded during this week, with a claim of approximately $170 million - 170 million pesos.

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 this year. In terms of the impact that the hurricane had on passenger traffic from October 25, 2005 to June 30, 2006 - traffic fell 24% at Cancun Airport and 54% at Cozumel, compared with the same period one year before.

As a result of this, we expect that the negative impact from Wilma on passenger traffic will persist most of the year 2006, and we cannot estimate what the final impact of - on our financial results for the year will be. We are working now to reconstruct Terminal 1, and it will be partially operating - operational starting December 1st, in order to ensure the necessary capacity for our winter season. We are pleased to report that we are moving ahead with the expansion of Cancun Airport, and that the construction of Terminal 3 and the second runway are under way.

Let me discuss the results for the second quarter. The numbers are in yesterday's press release, so I won't go into these in too much - in too much detail. As you have seen, Hurricane Wilma hit Cancun and Cozumel in October of last year, continues to impact passenger traffic. In fact total passenger traffic for the quarter fell 4.05% year-over-year, with domestic passenger traffic up by 9.18%, and international passenger traffic down by 11.19%.

However this was an improvement from the 17% decline in total traffic, seen in the first quarter of 2006, and was largely supported by the continual increase in domestic passenger traffic - a trend that we have seen since the beginning of the year. The passenger traffic decrease for the second quarter at Cancun and Cozumel Airports, was 6.9%, with the - compared with 24.6% traffic for the first quarter this year. This quarter, domestic passenger traffic represented almost 40% of the total for the quarter, compared with 35% in the same period last year. We believe this is also a temporary effect resulting from the Hurricane Wilma.

Total passenger traffic fell year-over-year 2.3%, 4.7% and 5.2% for the months of April, May and June respectively. International passenger traffic accounted for 60% of the total traffic for the quarter, compared with 65% in the same period last year. Passenger traffic to and from Mexico, Canada and the United States represented 88.2% of the total passenger traffic for the quarter, below the 88.6% for the second quarter of 2005.

Total revenues declined 2.84% year-over-year, mainly owing to declining revenues from both aeronautical and non-aeronautical services, which continued to suffer as a result of last year's hurricane.

Commercial revenues per passenger for the quarter remained flat year-over-year at 35.4 pesos, while total commercial revenues fell 4.28% to 131.9 million pesos, in line with the decline in passengers for the period.

We felt some diminishing effect in the duty-free revenues, due to the change in the mix of passengers. At the end of the quarter, we announced the decision of signing different agreements with our current food and beverage concessioner, [Meda]. The agreements were the following - first, an increase in concession fee, effective for the current operation. Second, this company will operate the restaurant that we have had as a direct operations since May, 2004; a new agreement for the food and beverage operation for the new Terminal 3. And also it's important to say, that during the third quarter, we will be also negotiating the new agreements for Terminal 3 on the other business lines.

Finally, operating margin for the quarter fell 40.89% from the 43.64% in 2000 - in the second quarter, 2005 - mainly as a result of lower revenues. On a sequential basis however, operating margin improved by 396 basis points, from 36.93 in the first quarter 2005. Net income increased by 4.58% to 173.3 million pesos. During the quarter, we made capital investments of 266 million pesos. Now let me open the floor for questions. Operator, please go ahead.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Nick Sebrell from Morgan Stanley.

Hi, good morning. Two questions. First, I'd like to ask about the costs, what kind of changes in costs can we expect as Terminal 1 reconstruction is completed, and as Terminal 3 becomes operational? So that's a cost question. And the second one - if you could just give us an update on commercial revenue opportunities? I'm talking about the effort to improve shopping and related consumer experiences. You just mentioned the negotiation of the concession and beverage contracts for third quarter '06 in the new terminal, and I was wondering what kind of revenue growth we might expect from that, or if you can put it some - in some other terms to help us out? Thanks.

Hi Nick. Well in terms of operational costs from Terminal 1 and Terminal 3 - in the case of terminal one you have this operation last year, so you can compare, in my opinion, what, the same amount that we had last year. In the case of Terminal 3, of course there is going to be an increase. I don't have exact figures to provide you. But what I can say to you is that the size of Terminal 3 is around 40,000 square meters. Just to give you an idea today, without Terminal 1, we should be around 50,000. And terminal one is around 20,000 square meters. So I think that with this, you can more or less give you an idea of what could be the incremental costs once these terminals are in operation again.

Commercial revenues - opportunities - well, first of all it was very good news. The agreement that we have with our current concessioner Meda because we were able to increase the current concession fee for food and beverage, so that was very good news and it's - it is effective immediately.

Today we are trying to negotiate the other business lines with the other operators. During this - the third quarter we will be announcing those results. What I can say to you is that we are still working very hard in order to improve the commercial revenues per passenger. We still believe that we can do this better. We also believe that once Terminal 3 is in operation, we can see some kind of impact because this terminal has been designed from nothing, from scratch, thinking about the passenger traffic and thinking about the necessities that the customer has. So what I expect is an increase comparing with the operation that we have today. That's what I can say to you.

Okay, thanks. And just to confirm, you said there are 50,000 square meters in Terminals 1 and 2 and 20,000 of that is Terminal One?

No. It's 50 - 70,000 in total, if you include terminals one and two. 50,000 for the Terminal 2 and 20,000 for Terminal 1.

Got it. Thanks.

The next question comes from Docalo Fernández from the Santander.

Docalo Fernández: Hi, good morning Adolfo. Another question for you upon cost. Did labor ease [Inaudible - accent] of cost [Inaudible - accent] sustainable going forward and [Inaudible - accent] all the impact of insurance, security measures, the baggage claiming and all the costs related to that?

Hi, good morning Gonzalo. It's not easy to give you a right - a very clear answer. But the cost of services that you are seeing right now, of course are including the operation of the 100% whole baggage screening. Of course, as you know, we have bought this equipment last year, and it is operational since the beginning of this year. So I believe that the maintenance that we are paying today is almost nothing compared to what we should be paying next year.

In terms of personnel, of course all of the personnel has been hired and they are working today, so you can - you are seeing the effects of this in our numbers. And the only thing that I can say to you is that the maintenance for this equipment next year is going to be more of what you can see right now. Also it's important to mention that once Terminal 3 is in operation, we will have an increase in costs by the additional 40,000 square meters that we will have to clean, secure and maintain. Apart from this, it's I would say, more or less sustainable.

Okay. Thank you Adolfo.

The next question comes from [Mary Carmen Negrite], from BBVA.

Hi Adolfo. Good morning everyone. Two questions. First - can you share any first results about the low cost carriers? And secondly, is there any new news regarding the Riviera Maya airport? Thank you.

Okay, in the case of low cost drivers - of course we have some of them operating in our airports. You know that one of them, the first one - [Clique] Mexicana, is, it's almost one year old and they have been operating in Cancun since the beginning. Also, I have to say that we have [Inter Jets] and [Boléres], and another one. I can see some kind of effect in the case of Vera Cruz Airport and also in the case of Huatulco Airport.

In the case of Cancun, even though that they have been flying to our airport, it's very hard to say something about this right now, because of the hotel rooms that are not available. So in my opinion, the effect in Cancun is not the same as the one that we can see in Vera Cruz.

In the case of the Riviera Maya airport, I don't have any particular news right now. What I can say to you is what I have heard from the authorities. The last thing that I have heard is that they were ready with a project of around $150 million for this airport to be constructed near Tulum. You know that the Mexican President at the end of last year said publicly that they will be making a bidding process for this project during January of this year. Of course we are in July - they have not done this bidding process. And this is probably a personal opinion - it's going to be very hard to have a bidding process in the following months. You know the situation here in Mexico due to the elections and blah, blah, blah - and they will have to leave the power December the first. So, it's going to verily - it's going be very hard again to see a bidding process for the rest of the year. Of course, this can happen tomorrow or one week after, or two months after.

Okay great. Thank you.

The next question comes from Alan Matiez from Citigroup.

Good morning Adolfo. I have two questions. One centers on if you pay [per dial] in the tax, [per dial] tax in your airports, and if you foresee if the law will be changed and airports will have to pay for them? That's the first one.

Hey Alan, good morning. Well, we are not paying tax - property tax. We have three trials right now on their way. We have won another three. So basically our point of view here is the following - we are not the owners of the land, and because of this we will not have to pay the asset tax. If someone has to pay the asset tax, is the - that is the owner of the land.

This is a long story. This comes from the former President when they decided to change one of the articles in the law, it was the 115. And with each change in law, they gave some kind of freedom to the municipalities. And they have tried to charge those per dial, or asset tax since the beginning of this company. Again what we have done is to preserve or defend our rights in the courts. We have final rulings in some of the airports, and of course the most important is Cancun. And we are still on the process in some others. But again, I don't see this as a major threat in our company.

Finally, if they, if someone rules against us and we have to pay this asset tax in the future, that will be in my opinion, a change in law and then we will be able to claim against the [SCT] an increase in the maximum rate. That is what I can say to you.

Thank you. My second question centers around the anti-trust law, the new anti-trust law, and if you had heard or foresee in the case that if a second airport does appear and a bid process does occur, would you be - will you not be able to bid for it because of the anti-trust law? Have you seen anything of this?

Well, I cannot say if we are going to be able or not to participate in that. The company's position is that we want to participate. You're right in the sense that there's an article. It's the article [DC3] of the [competence] law that says that they have a say in the case of a bidding process. But for the moment, I cannot say something more.

Thank you.

You're welcome.

[OPERATOR INSTRUCTIONS]. Your next question comes from the line of [Marcelo Telles] with Credit Suisse.

Hi. Good morning, Adolfo.

Adolfo Castro. Hi. Good morning, Marcelo.

Adolfo, I have two questions, actually. The first one, I mean, it has [inaudible - accent], there's low recovery in Cozumel. I was wondering if you could give some color in terms of the pace of recovery in Cozumel since it seems that traffic continues to be significantly down, just to have an update in terms of the infrastructure of the city. And the other question is regarding the new U.S./Mexico bilateral agreement, if you see any potential for addition of new routes from airlines towards Cancun?

Okay. The loan recovery process in Cozumel, it's slow. Yes, it's true. Basically, this problem is related to two main hotels that are still closed. One of them will be open shortly. Also, I have to say that the ports are still destroyed and you can go back and see some numbers from September 11 and you will see that the recovery process in Cozumel is always - is lower compared with the one in Cancun. That's what I can say to you. I'm going to be there, next week, and I will bring you fresh information if I can. But that's what I can say to you.

In the case of the new bilateral agreement, this is not new. This has been in the news over the last, I would say, three, four months or maybe five months. This is - the opportunity here is because Cancun has - well, the bilateral agreement, the original bilateral agreement says that you just can have two scheduled airlines for a pair of [CDs]. That means that you cannot have more than two flying, let's say, from New York to Cancun and Cancun to New York. I have to say that most of the CDs from the States to Cancun were completed, so they have these two scheduled carriers.

Of course, this is an opportunity because we can have more than two today. The new bilateral agreement is saying that they can have - that we can have three instead of two. This new bilateral agreement was for 12 CDs in the country, Cancun being one of them. It's not new routes. It's basically additional carriers flying into Cancun. But for the moment, I have not seen any dramatic changes during all of these five- to four-months period.

It enters - it's effective in September for Cancun, right? I don't know -- if I'm not mistaken. Is that correct?

Well, I believe that is in place right now.

Okay. But so you're currently not in negotiation with any airline to eventually be added to the Cancun airport?

Well, I don't have the details, but of course, our [route] department is working every single day, trying to attract more passengers. And of course they are in negotiations with many airlines. It's not just some of them.

Okay. That's fine. Thank you, Adolfo.

You're welcome.

Your next question comes from Dan McGoey with Deutsche Bank.

Good morning, Adolfo. My first question is regarding the commercial revenues, and specifically related to the agreement with [ContraladorMeta], I'm wondering how much of the commercial revenue from direct operations you will sacrifice or you will no longer recognize as that shifts over to being operated by Meta?

Dan, how are you? I don't have the exact number but we can consider that, more or less, half of that was coming from the restaurant. This new agreement is basically allowing Meta to start operation of this restaurant. Basically, I can say to you that we believe that that was the right decision. It was just one unit and it was taking a lot of energy from the commercial people down there in Cancun, so the offer that we have received from this concessioner was really good and that's why we have decided to send this back to them.

We're still having another one - another unit in the case of Merida Airport. This is not compared with the one that we have in Cancun in terms of size or in terms of revenues. But more or less, what I believe is that half of the direct commercial operations revenue will be related to this unit.

Okay, thanks. But presumably, there will also be a positive margin effect, right? Because presumably, the retail or the food and beverage that you were operating was lower margin, right?

If we see the direct commercial operation, the margin that this was giving us to us was very good. Of course, we cannot compare this margin with the concession fee because in the case of the concession fee, I would say you don't have a direct cause to the margin as infinite.

Right. Right. So, that offsets it somewhat.

Yes.

Okay. My other question was just to make sure I have the numbers that you gave out before right on the terminal space. If I understand correctly, Terminal 2 is 50,000 square meters, 10,000 of which is commercial. But, Terminal 3, I think you mentioned was 40,000 square meters. And I believe you've indicated that 2,000 of it will be allocated to commercial space. Is that accurate?

I don't think that is completely accurate in the case of the 10,000 and the 2,000 because in the case of the 10,000, I believe that that number includes some kind of corridors that cannot be [linked] directly. I don't think that the Terminal 3 will have one fifth of commission space compared with Terminal 2.

In the case of the 50,000, yes, it's accurate -- well, accurate from the top of my head. It could be 51,000, something like that.

Okay. I'm just wondering even if the gap is less, why such a smaller percentage of space allocated to commercial in the Terminal 3?

That's what I have said. I believe that the 10,000 is not accurate because again, I don't believe that we will have one fifth of the commercial space in the Terminal 3 compared with Terminal 2.

Okay. So, you think it should be more close to comparable with, let's say, the allocations of space in Terminal 2?

Absolutely.

Okay. So, I guess, can we use that as a statement about the potential upside of commercial revenue as that Terminal 3 opens up?

Well, again, Dan, the potential is not, in my opinion, on a per-square-meter basis. The potential is more on the way that we have designed the building and the way that we will operate that terminal. My opinion is that it's better to have a better service compared with having more square meters. And you have seen this since November 2001 or probably January 2002. It's very clear that, of course, we have added additional square meters, but the increase in the commercial revenue per passenger is more related to the things that we offer to the customer. The product that he's looking for at the right price with the right service, that's probably the most important. It's not the additional square meters. Of course, you will see more commercial revenues in the absolute figures, but what we want to see is more commercial revenues per passenger.

Got it. And final question - can you just give expected completion dates for Terminal 3 and also for the second runway?

Well, you know that we have announced these on December 9, 2005. And what we have said, then, was two years for these two projects. This is a personal opinion. What I believe is that we can be ready in the case of Terminal 3, probably during the second quarter, next year. And in the case of the runway, it could be probably after the fourth quarter 2007.

Great. Thanks very much.

Your next question comes from Rupert Brandt from Foreign and Colonial.

Hi, Adolfo. Can you tell me what percentage of the domestic traffic came from low-cost carriers in the second quarter versus the first quarter and also the second quarter, last year? And I'm from [Finley Park] these days. I don't know where the other name came from.

Well, believe me, I don't have the figure in my head, Rupert, and I'm sorry for that. But what I can say to you is that where we have seen a very nice increases in the case of Veracruz Airport. And in the case of Cancun, probably it should be more as the same. But, of course, this is not the right answer of what you are asking. I don't have the number.

I mean, very approximate. Do you have an approximation?

No, I prefer not to give you any wrong number.

No, sure, sure. Okay. Are you actually measuring it and you don't have the number available at this precise point? Or are you not actually actively measuring that?

Well, I'm not actively measuring that. It's - I would say it should be very small compared with the total [inaudible - accent].

Okay. Okay. Okay. The other thing is, can you tell me who owns Campeche Airport?

It's the federal government.

Is that an airport that you could potentially buy in the future? Or would you be interested?

I don't think so. It's a very small airport and if we talk about the airports that are still in the hands of the government inside my region, the only one that I can see some kind of attractiveness is the case of [Tookslai] Airport. It's also a new one. A new one in the sense that the DC3 have two airports and they opened a new one. But, this CD is around 0.5 million passengers, something I would say considerable, comparing with the others. Campeche should be an airport of, I don't know, probably 75,000.

Okay, it's that small. I was reading somewhere that they're building a brand new international airport, down there.

Well, if when - the difference between international and domestic is just that you have customs [inaudible - cross talk].

Yes, sure. Sure, sure. Okay, okay. That's fine. That's great. Thank you.

[OPERATOR INSTRUCTIONS]. Your next question is a follow up from DocaloDocalo Fernandez with Santander.

Adolfo, in considering the recovery traffic and the timing that you set for the opening of the new terminal, do you think you could have some capacity constraints probably by the end of the year or the first quarter if the traffic fully recovers?

Well, we will not face capacity problems. I hope that we will not face capacity problems because today, we are working basically to ensure the necessary capacity for our winter season, which is from December 15 up to the end of, more or less, Holy Week. That's why we are reconstructing Terminal 1 and we have expanded Terminal 2. Just to give you an idea, in the case of Terminal 2, we have opened 20 additional counters recently, and we will be operating four additional aircraft boarding gates. So we are expanding Terminal 2 and we will reconstruct Terminal 1.

It's not going to be a full reconstruction because you know that a piece of this was completely destroyed. So, I would say that, more or less, Terminal 1 is going to be at 66% of what it was. With this, we believe that we will have the necessary capacity for our winter season before Terminal 3 is in operation. And then, Terminal 3 will support the increase in the passenger traffic numbers.

Okay. Thank you very much, Adolfo.

Your next question is also a follow up from Alan Matiez with Citigroup.

Adolfo, just if you can give us more color on the promotion efforts on the side of hotels or the government for attracting the foreign tourists, again, for the winter season. If you see if that's a strong effort or not.

Alan, we have seen strong efforts from the federal government since the hurricane. Some of the actions that they have taken are basically the following - the first one was the recovery of the beaches. They paid for this. The second one was to provide tax advantages to someone that's constructed new hotels or spent money in the region. And the third one, of course, the promotional efforts made by the Industry of Tourism. It has been very active on this. He has been in meetings with tour operators in the United States, also in Europe. So, yes, I'm seeing them very active in these - in all of these efforts.

Thank you.

[OPERATOR INSTRUCTIONS]. At this time, there are no further questions.

Okay. Thank you, everybody.

Thank you for participating in today's conference call. You may disconnect at this time.