Grupo Aeroportuario del Sureste SAB de CV (ASR) 2006 Q3 法說會逐字稿

Good morning. My name is Thea and I will be the conference operator today.

At this time I would like to welcome everyone to the Asur Third Quarter 2006 Earnings Conference Call.

[Operator Instructions]

I would now like to turn the conference over to Adolfo Castro, CFO. Sir, please go ahead.

Thank you Thea. Good morning everybody, this is Adolfo Castro, Chief Financial Officer of Asur. Welcome to the discussion of our results for the third 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 expectations and beliefs and are subject to a number of risks and uncertainties that could cost actual results to differ materially including risks that may be beyond our company's control. For these risks please refer to Asur's filing with the Securities and Exchange Commission and the Mexican Stock Exchange.

During the third quarter, together with our insurance companies, we conclude the calculation of the total damage in total repairs to the structure of our Cancun Airport and fill the claim by approximately 117 million pesos.

As of September 30th, 2006 there is still around 5,000 hotel rooms to be repaired that were damaged by the hurricane Wilma. Nevertheless, we continue to maintain our view that there will be a full recovery by the end of this year.

We're actively working on repairing and expanding capacity of Cancun International Airport in order to be ready to serve passengers who will be visiting Mexico's Caribbean coast during this year, winter season - winter vacation season.

Repairs at terminal 1 are moving along. As I have mentioned before, we expect to partially restore operations in December 2006.

Once terminal 1 partially restarts operation, and together with the capacity of extension made on terminal 2, the total terminal capacity for the airport of Cancun will be equivalent to the one that we had before hurricane Wilma.

The construction process for terminal 3 is progressing well and we expect it will be in operation during the second half of next year. And for now, we can estimate that the second runway could be operational during 2008.

Let me now to discuss the results for the third quarter. The numbers are in yesterday's press release so I wont go into this too much in too much detail.

This quarter we saw the first positive passenger traffic numbers since the event. With a total passenger traffic for the quarter up 2.29% year over year. This improvement continues to be largely supported by the positive trend in domestic traffic, which we have seen since the beginning of this year. In fact, domestic passenger traffic was up 6.57% and international traffic down by 0.90%.

Passenger traffic for the third quarter at Cancun and Cozumel Airports was up by 2.1% compared with the declines of 6.9% in the second quarter and 24.6% in the first quarter of this year.

It is also valid to mention that during the third quarter last year we have had the impact of hurricane Emily that affected the Riviera Maya region, damaging around 5,000 hotel rooms.

This quarter we also had the negative effect on passenger traffic of the 132 flights that were cancelled in Huatulco during August and September as a result of the public demonstrations that started last May. As a result, total passenger traffic at Huatulco Airport declined by 16.68% year over year.

Protestors have threatened to close the airport and block regional highways. And on August 24th the United States Department issued an advisory regarding to travel Huatulco.

As we mentioned on the release, at this moment we are unable to predict whether or how the conflict will be resolved. Or how the ongoing demonstrations may effect our operations.

Total passenger traffic, year over year, fell by 2.38%, 4.97% and 8.91% for the months of July, August, and September respectively for traffic - for passengers to and from the United States.

International passenger traffic accounted for 56 of the total traffic for the quarter. Still below of the 57.3% for the third quarter 2005.

Passenger traffic to and from Mexico - to and from Mexico, Canada and the United States represented 85.5% of the total passenger traffic. Still below to the 86.1% for the third quarter in 2005.

Total revenues declined 0.96% year over year. Mainly as a result of the declining commercial revenues by 22.12%.

Commercial revenues for passenger for the quarter decreased by 14.96%. This was mainly the result of the decrease by 57.36% of revenues related to duty free business line.

It is important to mention that during the third quarter, 2005, this business line recorded 32.5 million pesos from the extraordinary payment of duty free to Mexico and Aviacsa. Excluding this impact, duty free services would have increased by 5.23%.

Also notice that duty free revenues were also negatively affected during this quarter as a result of additional international security measures and the decrease in international passengers.

Finally, our EBITDA margin for the quarter fell 55.38% from the 61.68% in third quarter 2005. Mainly as a result of lower revenues and a 13.15% increase in operating expenses. This is mostly due to additional costs associated with implementation of new baggage and screening procedures and higher insurance premiums.

And from the first day of July this year, we initiated the operation of the whole baggage screening for domestic passengers. Going forward, we do not expect expenses to decrease. On the contrary, expenses on absolute terms will rise as a result of the opening of the terminal 3 at Cancun Airport and maintenance expense resulted from the equipment that was installed as from the first day of January this year.

The comprehensive financing costs for the quarter was an expense of 17.8 million pesos. Compared with a revenue of 24.4 million pesos of the third quarter last year.

This was the result of a 98 - 97.8% increase in the Mexican inflation index. An average of 28% decrease in the rate of [septis]. Appreciation of the Mexican peso by $0.26.

Results for the quarter were also impacted by ancillary charges related to the final adjustment of insurance payments resulting from hurricane Wilma. The cost of a minor accident occurred in Minatitlan Airport and a labor dispute initiated some time ago that we lost on a final ruling.

Net income fell by 52.74% to 82.8 million pesos. During the quarter we made capital investments of 280 million pesos.

Now let me open the floor for questions. Operator please go ahead.

[Operator Instructions]

The first question is from Nick Sebrell with Morgan Stanley.

Good morning Adolfo, how are you doing?

Fine and you?

Good. Just a couple questions. I wondered if you could review - I k now you spoke a little bit about it, but tell us a little more, total room supply, what the outlook is for year end, where we're going to be in Cancun in terms of hotel rooms relative to a year ago. If you have an expectation or if the tourist association has an expectation.

And then, to continue on with how terminal 1, the repairs and the completion of opening that up again might affect your traffic.

Okay. In the case of hotel rooms in Cancun, and I am not talking about Bolivia I might add, I'm talking about Cancun.

Today, what I think is that there are 5,000 hotel rooms out of service. If we see the entire region, including the Riviera Maya. Last year as a result of hurricane Emily, we have the same amount of hotel rooms out of service. So we can say today that we have, more or less, in the region the same amount of hotel rooms that we had last year.

Talking about the recovery process in the case of Cancun. Today, you know that this is the low season for the year. So there is not too much incentives to open your hotel right now.

What I think is that they are going to be making a huge effort to be able to open the rest of these 5,000 hotel rooms by the year-end. What I expect is that at the end of the year we will have, more or less, the same amount of rooms that we had before the hurricane Wilma.

In terms of the repairs in terminal 1, we are almost done down there. What I expect is that no later than first of December this year, we will be in operation in terminal 1. What does - this will mean in terms of passenger traffic? I would say that the importance of this terminal is that we will be able to secure, or to insure, the necessary terminal capacity for the winter season. You know that the high season for us starts the second half of December and finalized later on April. So we have to be ready for these passengers that will come to Cancun in this winter season.

You know, as I have said before, terminal 3 is not going to be ready for this winter season. So terminal 3 is going to be ready for the second half of next year, so we have to insure the necessary capacity or to serve the passengers that come to the region.

Okay. And just in numbers, the maximum capacity of Cancun, just to remind me, will change from what to what with the terminal?

Well, it will not - well, for the moment - and let me explain myself. Before the hurricane Wilma - and this is round figures. We have a terminal capacity of around, lets say 10 million passengers, divided in 8 million for terminal 2 and 2 million for terminal 1.

As a result of Wilma we lost terminal 1 and because of this we started working very hard to expand capacity in terminal 2.

Today, I can say that we can easily manager 9 million in the case of terminal 2 and we will be able to manage around 1.5, 1.2 million in terminal 1. So capacity is as it was before the hurricane Wilma.

In the case of terminal 3, what we expect is that this terminal will be able to manage between 5 to 6 million passengers.

Thank you.

You're welcome.

Your next question is from Gonzalo Fernandez with Santander.

[inaudible] Adolfo and everyone. One question, I noticed that the kickbacks per region, the debt rate increased significantly this quarter. I don't know if it's a particular for this and what kind of touch rate do you expect that we may, going forward.

And second, in all the groups are trying to - well, have a win, some bigger procedures with authorities in order to change the calculation of the asset tax of the airport concession. Are you doing some deep thinking now in order to lower the tax rate?

Gonzalo, I'm sorry but I couldn't hear your first question. Your line was cutting.

The first question is the increase in the tax rate this quarter. There's some explanation for that. And what kind of tax range rate are you expecting going forward?

Okay. That's a very good question. Yes, we had an increase in the tax rate for this quarter as a result of an extra [inaudible], I would say extraordinary event. Let me explain myself.

Last year, at the end of last year, and as a result of the destruction of Terminal 1 we decided to write off terminal 1 during December last year. Due to the fact that we had to reconstruct this because of the lack of capacity. During this quarter we are turning back the record that we have done in December last year. As a result of this we are seeing a negative effect in the deferred taxes of the quarter. So we have the tax rates, the tax rate for the moment is higher than normal.

What I expect as a tax rate in a normalized world is a 29, 28%. I do not expect something more apart from the thing that I was mentioning.

In terms of legal procedures against authorities. Normally Asur does not disclose - or does not create expectations in some issues that we do not have certainty that we will win. Today, having this kind of trends is a coining year. Nobody really knows what will happen. You can win some of those because somebody made a mistake. Or you will be losing those by the same reason.

So I will let you know in the due course when we think that we have a good chance for something to be won.

That's very clear, Adolfo, thank you.

Your next question is from Gordon Lee with UBS.

Hi. Good morning Adolfo. A couple of questions. One, I was wondering if you could just tell us what your expecting for total CapEx in - well, I guess in the fourth quarter this year, '07 and '08, both the regulated CapEx and also whatever extraordinary CapEx might be associated with some of the investments that you discussed.

And the second point - second question is, if you wouldn't mind giving us a sense of what the increase in expenses we should expect from the roll out of terminal 3 next year. Thank you.

Hi, good morning Gordon. In terms of the total CapEx, as we have said, we have [math] development plan program that was amendment during the third quarter last year. And of course with that, the expectation for the year is $113 million US, more or less and we will - we believe, for the moment, that we will be very close to that amount.

In terms of increasing expenses of terminal 3. We're almost 9 months to the opening of terminal 3, I do not have, for the moment, an exact figure about what will be the incremental cost of this terminal 3. I know that you have been asking for this during the second quarter earnings release, but let me tell you, I do not have yet an accurate figure. I cannot estimate right now what will be the cost of additional energy.

We are today, calculating how much - or how many additional people we will require to start the operation of that terminal. What I can say to you is that this terminal will have, more or less, 50% additional terminal capacity to Cancun Airport. And I do not expect a 50% increase in expenses as a result of this.

You can try to make your own estimations. Today we have around - including terminal 1, around 76,000 square meters of terminal. This terminal will be 40,000 additional square meters. Of course I hope that these terminals will be more efficient of the ones that we have because the ones that we have are older and the design was not, basically the appropriate - let me try to give a very rough estimation and of course this is not a legal commitment and this is not an accurate number. It could be from 20% to 25% additional expense compared with the expense that we have today in the terminal 2 and terminal 1 in Cancun Airport.

Perfect. Thank you very much Adolfo.

You're welcome.

Your next question is from Vanesa Quiroga with Credit Suisse.

Hello Adolfo.

Good morning Vanesa.

I have a couple of questions. Good morning. I have a couple of questions. One is what is the operating expenses related to the baggage screening system? The ongoing expenses let say for every year?

And the second question would be, if you can give us an update on investments that you have been internally analyzing for Asur? Either in Mexico or outside Mexico. Thank you.

Okay. The expenses related to the operation of [cold] baggage claim, of course first of all is personnel. We're talking about 90 additional people that we have to hire. Also we're talking about a lot of energy. This equipment is in a high-energy consumer. And we're talking about also consumables. Consumables are used to make the tests of the explosives, detection. So this is the kind of additional expenses that we are having right now.

For the future, you will see additional expenses of the ones that we are having today like maintenance of the equipment. Remember that this project was around $40 million in terms of investment amount. So believe me this is a huge amount that we need to operate and we will need to maintain in the future.

In terms of investments that we are analyzing outside Mexico, for the moment I can say to you that we are not analyzing anything - that's what I can say to you.

Adolfo, can you tell us how much is your current operating expenses for the baggage screening system?

All of them. All of them and what I'm saying is, there will be more in the future. Remember that this equipment is new. Next year we will have to pay someone to maintain this equipment.

And in dollar terms?

Sorry?

For this year, what your in dollar terms? What - in this year what you are currently spending?

I cannot - I cannot understand your question. What - what are you asking?

To quantify the expenses, at least what you are having already?

Sorry but I cant - your line is cut.

To see the amount in purchase.

If you could quantify the - your expenses related to the baggage screening system. At least what you're having currently.

Okay. What you want is an amount?

Yes. Please.

I don't have that in - right now, but I can try to find out and I will let you know.

Okay. Thank you.

Your welcome.

[Operator Instructions]

And there is a follow up from Gonzalo Fernandez with Santan.

Hi Adolfo. Just one question. What is the status of the request you made to the communication industry to be in and operate the second in the Riviera Maya? And if you can expand a little in the reasoning behind this request.

Okay Gonzalo. We have a - we have requested these some time ago and we are requesting this in accordance with the article 12 of the airport law. Article 12, second point, which talks about complimentary airports.

In terms of the status, I cannot give you an answer, and exact answer because in these kind of things you really don't know, or there is no due date for this. So the ministry of communications and transport has not said yes and has not said no. Also have to mention that in the case of article 12, it's not something that you fill all the requirements and they are obliged to give you what you are asking. The law says very clear that they may grant concession under these circumstances.

Also, its important to say that in accordance with our concession period we will have to receive the approval from the federal competence commission, so its not just the ministry of communications and transport. Is also the federal competence commission?

The answer - the answer could come in 30 days. Could come in 40 days. Could come in 60 days. Or could not come. I really don't have a due date for this. What I can say to you is that we have worked really hard on looking this complimentary airport.

Okay. Thank you Adolfo.

You're welcome.

The next question is from Jose Costa Buck with T. Rowe Price.

Yes, hi Adolfo. Follow up question on the operating expenses. Do you think, or do you expect that this high operating expenses would be recognized in future data provisions? Particularly this - related to the screening procedures?

Well, I can say to you today that those have been recognized in our maximum time. This project was considered in the year 2003 mass development plan program that we presented to the authorities and that was a truth. So what I can say to you is that those are that.

Also, it is important to say that you are - well, that during the quarter you are seeing a higher aeronautical revenue. This is the result of the beginning of collecting some revenues from this activity. As from the first day of July this year, we are making these collections for domestic passengers. Probably you didn't notice the revenue in the beginning of the year for international passengers because we were very close to maximum rate in the airports that it's a majority of passenger mix is international.

Today - or in July where we have initiated these 4 domestic passengers. You can see an important increase. Basically this is as a result of - or that we will be closer to the maximum rate compliance during this year as a result of these activities.

So, we are getting a revenue. We are getting also a higher expense. But all of these - and also the investment. But all of this was considered in the maximum time review that was completed during the year 2003.

Okay thanks. And just to clarify on the amount of this original cost. If I see year on year the incremental was 35 million Mexican pesos. Are you saying that pretty much all of this incremental are related to this new screening baggage procedures?

Yes, but not all of this, I can say to you that we have insurance - the higher insurance cost, insurance cost could represent about 8 million and some probably other minor items. But the major portion of this is of course related to baggage claim.

Okay. Thank you.

Thank you.

There is a follow up question from Nick Sebrell with Morgan Stanley.

Hi thanks for taking my follow up. I just wanted to ask another question regarding the second airport. 2 things actually.

One, we saw a lot of articles in the local news that apparently they somehow misunderstood that you - they had stated that they were awarded the new concession. I was wondering how that might have arose. Like how that happened. What is it that they heard or saw that might have indicated to them that they thought you had been awarded the concession?

And then the second is, what's the logic of the location of - that you proposed in Ciudad del Carmen instead of further south at Talou? That's it.

Okay Nick. In case of the first part of your question, there was apparently, because I cannot confirm, I was not there. There was a statement made by the Secretary of Tourism of the state saying that we have received the concession. Which was not the case and which was not truth. Also in my opinion she cannot say this because the only one that can grant concessions in this country is the Ministry of Communications and Transport.

In terms of the location, we have been talking about these with the state government and the federal government and we are proposing a location where we think that we can find some piece of land to make this project happen and also in terms of security reasons, we are putting some kind of distance between one airport and the other.

For the moment, and for the - we have reasons, I cannot disclose exactly the location that we are proposing to the state government and the federal government.

Okay. Thanks.

We are proposing something close to Talou.

Ah! Okay. Thank you.

[Operator Instructions]

And there is a question from [Rodrigo Ecquagari] with Snodgrass Research.

Hello, how are you doing. This is Rodrigo from Snodgrass Research Group.

Hi. Good morning Rodrigo.

Adolfo I have a question on the following; can you give us some clarity on how safety regulations are and will effect duty free sales in the near future?

Well of course I cannot talk about the future because this kind of things can pop up from late tonight.

Okay.

What I can talk about is happening now, what has happened during the quarter. You know that during the quarter there was some kind of problem between the UK and the United States and the TSA basically said that - or, make a new rule saying that there will be no liquids or gels inside the plane in the - in the carry on baggage. As a result of this, I can say to you that basically during, almost 2 weeks, there were no duty free sales.

After that, the TSA approved the possibility of receiving duty free products on board. For the moment I cannot say to you that this will not have an impact. I strongly believe that there are some passengers that doesn't like this kind of things and that they do not have the trust in the duty free company and because of this they don't want to buy something.

I hope that this of course will disappear in the future and everybody will be ready to - or willing to do this kind of purchase under this kind of rules. But I can say to you, that in accordance with my experience, these - this still has an impact in our duty free sales. The major impact of course during the quarter was related to these 2 weeks that we will not be able basically to sell this kind of products to people that were traveling internationally.

Right now, thank you Adolfo.

Good afternoon Rodrigo.

[Operator Instructions].

And at this time there are no further question. At this time I would like to turn the conference back over to Mr. Castro for any closing remarks.

Well, thank all of you and thank you for participating in this third quarter conference call. I hope that you will be in the fourth quarter conference call.

Thank you again. Have a good day. Bye.

Ladies and gentlemen, thank you for participating in today's Asur Third Quarter 2006 Earnings Conference Call. You may disconnect at this time.