Grupo Aeroportuario del Sureste SAB de CV (ASR) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the First Quarter 2008 Grupo Aeroportuario del Sureste Conference Call. My name is Sylvana and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of this conference.

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I would now like to turn the presentation over to your host for today's conference, Mr. Adolfo Castro, Chief Financial Officer. Please proceed.

Thank you, Sylvana. Good morning, everybody. This is Adolfo Castro, Chief Financial Officer of ASUR. Welcome to this discussion of our results for the first quarter 2008. Allow me to remind you that certain statements made here in 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 cause actual results to differ materially, including risks that may be beyond our company's control. For an explanation of these risks, please refer to ASUR's filings with the Securities and Exchange Commission and Mexican Stock Exchange.

Before discussing the results, I want to briefly comment on the recent changes in Mexican accounting standards, which became effective at the beginning of the year. The main changes relate to inflation accounting, which is not applicable as we are not in an inflationary environment.

In fact, inflationary accounting will only apply during periods in which the cumulative inflation rate of the previous three years equals or exceeds 26%. As a result of this change, results for the first quarter 2008 are expressed in nominal pesos, while comparative figures for periods are expressed in constant pesos as of December 31, 2007.

But the most recent relevant change is that we are not determining the monetary position. Also, keep in mind that the cash flow figures presented for the first quarter 2008 may not be directly comparable with the cash flow figures presented for the first quarter 2007, because the new Mexican accounting standards have established different methodologies for the preparation of this statement.

Now moving onto the results, we are pleased to report another strong quarter, with passenger traffic growth of 18.17%. Domestic passenger traffic was up by 27.39% and international traffic rose by 13.27%. It is important to say that Holy Week and Easter Weeks fell in March during the year 2008 and in April during the year 2007.

And these, of course, will have an impact of the traffic for the second quarter of the year. Total passenger traffic growth for the quarter at Cancun and Cozumel airports was up by 16.97%. Traffic continues to benefit from overall strong demand and the new routes operated by local carriers at several of our airports.

Total passenger traffic growth year-over-year by 15.7% in January, 20% in February and 18.7% in March. International passenger traffic accounted for 62.6% of total traffic of the quarter, down from the 65.4% during the first quarter 2007. Domestic traffic continues to outpace international traffic, again driven by the new carriers in Mexico. Passenger traffic between Mexico, Canada and the United States represented 19.2% of the total traffic.

Total revenues rose by 23.98% this quarter, mainly driven by the 44.8% increase in non-aeronautical revenues. Commercial revenues were up by 51.52% this quarter, above the 18.66% growth reported in the previous quarter. Revenues from direct operations rose 56.47% during the quarter, mainly reflecting the opening of Terminal 3 at Cancun Airport.

Commercial revenues per passenger rose 28.29% to MXN45.94. Excluding the impact of the discontinuation of the direct commercial operations, revenue per passenger rose 27.49% year-over-year to MXN38.26. This is a strong improvement from figures reported in previous quarter.

Operating costs and expenses for the first quarter increased 15.62% year-over-year, primarily as a result of an increase in cost of services reflecting the higher energy, maintenance and cleaning costs resulting from the [operation] of Terminal 3. Higher depreciation and amortization was also contributing to the increase. Operating profit for the quarter was up 33.7% to MXN433.8 million. As a result of all of this, EBITDA margin improved this quarter to 67.02% this quarter from 64.68 in first quarter 2007 and 57.08% in fourth quarter 2007.

In terms of taxes, this quarter we saw a decline in deferred income taxes, which mainly resulted from the elimination as of December 31, 2007, of the deferred income tax provision for the airport subsidiaries that are expected to pay IETU tax. During the quarter, we paid MXN16.5 million in IETU, compared with the MXN23.6 million in nominal terms [Navy] asset tax for the first quarter 2007.

As a result of the new tax law in Mexico that introduces the new flat tax rate known as IETU, which substituted the asset tax known as IMPAC, and in accordance with the Mexican financial reporting standards, during the fourth quarter 2007, the Company evaluated its deferred assets and liabilities.

We resulted in the creation of the deferred IETU provision of MXN706.6 million. During the first quarter, this IETU deferred tax position was increased by MXN4.9 million due to the increases in fixed assets for the quarter. Finally, during the quarter we made investments of MXN111.88 million mainly on the second runway of Cancun Airport. Now let me open the floor for questions. Please, Sylvana, go ahead.

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And the first question comes from the line of Esteban Polidura from Merrill Lynch. You may proceed.

Thank you. Good morning, Adolfo. Congratulations on your results. Two questions, if I may. First, do we have an estimate about the incremental traffic gained due to the Holy Week effect? And second one, tourism recovery is much stronger in the Mayan Riviera than in other Mexican beach destinations. So my question is, why do you think this is happening and do you expect this to continue throughout the year?

Hi, Esteban, good morning. Thank you for your comments. I cannot say what is the real effect of the Holy Week and the Easter Week. But it is clear for me that during the second quarter 2008, we will not see -- or the comparable figures are going to be soft, due to this effect. We will have to wait and see what the final result for the month of April and I will recommend you to use March and April together in order to see what is really happening here.

In terms of the Mayan Riviera, you know that the best destination in Mexico is Cancun and the Mayan Riviera region, and that is probably why we have not been so affected by the U.S. economic recession and that is probably why this destination is better than others compared here in Mexico. That is what I can say to you.

Great, thank you.

And the next question comes from the line of Vanessa Quiroga from Credit Suisse. You may proceed.

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We will go to the next question from the line of Vivian Salomon from Santander. You may proceed.

Hi, good morning, Adolfo. I just have one question. Have you seen any impact in the cost of [tubes] in Mexican or international airlines? Has there been any cancellations or have you seen any problem affecting any airline, Mexican or international? Can you give us a bit of information on that? Thank you.

Yes, of course, Vivian. Yes, we have some -- well, if you remember during the last two, three weeks, there was some bankruptcies in U.S. airlines. I would say some of them were flying to Cancun and some of them will have, of course, an impact in the future. In the case of these airlines, we are not talking about major or important airlines. We are talking about basically charter airlines. And in this case, I would say that probably we will lose those passengers.

In the case of the Mexican airlines, we are seeing a slowdown in some of them due to the increases in the oil price. It is important to understand that if they don't increase the rates, they will be suffering and that is what is happening today.

Also I have to say that the efficiency in some of the Mexican airlines in terms of fuel consumption is not the best and probably the worse one is the case of Aviacsa. Aviacsa is using very old planes, let's say 25, 30 years old, that they are consuming a lot of fuel and that is probably why they are suffering more than any other.

Yes, I am concerned about the future of this specific airline and probably the case of [Avolar], which is another small airline. In the case of Aviacsa, they have represented gross around 4% during the last 12 months and this airline is important for us because they have a lot of frequencies in some of the smaller airports that we have in the southeast region of the country. Yes, that is what I can say to you.

Okay, perfect. Thank you.

And the next question comes from the line of Tomas Lajous from UBS. You may proceed.

Good morning, Adolfo, everyone, thank you for the call. I have two questions, if I may. The first one relates to traffic and it is really what kind of load factors are you seeing and particularly in Cancun, both from domestic and international companies? And do you expect those load factors to turn into cancellations now that pretty much all American airlines have said that they will be decreasing capacity?

Well, normally, there are some airlines that are just -- their flights very fast. One of them is American Airlines. I would say that the -- in general, load factors to Cancun airports are around 65% to 70% on average, which is, in my opinion, very good. In some other destinations, the factors are not the same and of course, if we see a huge increase in flights from different airlines, in come cases we can talk about 50% load factor and that, of course, may have an impact in the future if they don't want to lose money as of today.

Okay, fair enough. So basically, the load factor trend hasn't changed in Cancun so far, right?

Yes, that is right.

Okay. And the second question, if I may, it is related to margins. I think congratulations, the margin was very, very impressive this quarter at 67%. If I remember correctly, in the past couple of conference calls, the high margin we saw in the third quarter was driven by extraordinary fourth quarter was -- seems to be more normalized, but that was only at 57%.

So if you can comment on the margin this quarter -- 67%, operating costs writing only 13% with Terminal 3. And if you can comment whether this is sustainable or whether this is driven by any extraordinaries and what trends should we expect in terms of margins and or operating costs?

Okay. Again, margins in the case of ASUR, the depends basically, I would say, in terms of - or the principal effect is its revenues. The 67% is a result of a very nice quarter, of course, but remember that always the first quarter is the one that has the highest because of the amount of passengers compared with the other quarters.

The fourth quarter is always the lowest because we have low amounts of passengers. This has to do with the seasonality effects. I can tell you that probably March would be the double in terms of passenger traffic compared with September and that is why the margin, in this specific quarter, it's really, really high. Of course, what I am trying to say here is you will not see the same margins for the rest or the remaining of the quarters during this year.

In terms of costs, you will see in terms of absolute figures, you will see some increases during the year, basically because in the case of Terminal 3, we will have to start paying maintenance for some equipment that was installed last year and that we are at the end of the first year guarantee. So what I expect is that during the third quarter 2008, you will see a much higher number, but probably that is going to be the real number in terms of the full costs for the case of Terminal 3.

Okay, so comparing the full year of 2008 to the full year of 2007, we shouldn't extrapolate what happened in the first quarter and it should just be thinking that the increase in margin is moderate.

Yes.

Okay, thank you.

And the next question comes from the line of [Levon Von Reden] from [Hogy Capital]. You may proceed.

Good morning, Adolfo. I was actually going to ask that question. In terms of the additional costs that you expect for Terminal 3, do you have like an absolute number or an estimate as to what you think that those additional costs may be on a quarterly or annual basis?

No, I do not have an estimate. But let me again try to explain what I am talking about. We installed some elevators, electrical stairs, air conditioner, screening equipment. And these have or has one year guarantee in terms of maintenance. These one year is going to end during May this year, so as from June this year, we will have to spend this -- pay maintenance for this equipment. Normally, what I can tell you is that between 8% to 10% is the maintenance cost of this kind of equipment. So that is what I can say to you.

Okay. And you kind of gave an estimate as to the number of passengers from the U.S. and Canada. Do you have an estimate as to that same number of passengers roughly from Europe or other destinations, [either] Latin America?

Well, what I can say is that and that is my personal opinion, that we are not seeing an increase in the case of the European passengers as a result of the strong euro compared with the U.S. dollar. This is something that I am expecting for this summer and I hope that the European passengers will increase more than last year as a result of this effect. But as of today, we have not seen anything yet on that respect.

And in the case of Latin American passengers, my expectation is to see some passengers from Brazil and not from Argentina. So I would say a minor increase from Latin America.

And final question, I wanted to kind of think about, I guess, the entire Cancun area and what type of hotel construction is taking place in that area? I am assuming that right now, the hotel occupancy rates are fairly high and wanted to think about a correlation between the occupancy rates in Cancun and your ability to continue to grow?

Well, I don't have exactly how many hotel rooms are being constructed today. But I can tell you that the estimation could be between 6% to 8% of what is there. Kinds, you have all kinds of hotels in the region. The ones that are growing faster are all inclusive hotels.

Okay, thank you.

You are welcome.

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The next question comes from the line of [Alan Solis] from Credit Suisse. You may proceed.

Hi, this is Vanessa Quiroga with Credit Suisse. My question is regarding the airports, specific airports, Adolfo, which airports do you expect to be benefited by the greater number of working days in April? And then my second question would be about commercial revenues. Although they were strong year-over-year, in terms of the increase quarter on quarter, there was a decline. Do you see the same travelers spending less in Cancun? Those would be my questions. Thanks.

Okay, Vanessa. You are saying working days in April. I would say we are not going to be benefited for that and in the case of ASUR, it is exactly the opposite. You know that most of our airports are tourist destinations and we will not have holidays during this April. So my expectation is that you will see a negative effect in the case of April when you compare this with the year before.

If we -- if you -- your question is just to see in which airports, you will not see this impact. The only thing that I can say to you is that probably Veracruz and Merida are and a piece of Villahermosa are the ones that have some kind of business traveler. In the case of the commercial revenues per passenger, yes, you are absolutely right. The kind of passenger that we have during the first quarter, it is always different than the one we have in the fourth quarter.

So the spending behavior is completely different. I don't want to give exact details because we don't have those, but just to give you a very simple one, is spring breakers. Spring breakers are not exactly the same as probably business people that is traveling during the fourth quarter of the year.

So yes, it's clear that we are not seeing the same spending behavior and that the commercial revenue per passenger during this quarter was lower than what we have during the fourth quarter. It is also important to say that we have some appreciation of the peso and also that we have a huge amount of passengers during this first quarter and that may have an impact on the spending behavior too.

So do you not see it related to the U.S. consumer spending less at this point?

I would say this is normal for this quarter.

Okay, okay. And I have a third question regarding costs. I mean, they did go down on a quarter on quarter basis in absolute terms, so just wanted to see if in the fourth quarter, there are maintenance costs that you don't normally do in the first quarter? Thanks.

No, I am not saying that costs will go down. What I am saying is costs will go up quarter on quarter and what will go down is the revenue. And the revenue will go down because of the amount of passengers. If you see the numbers of these other, we were talking about more than -- close to -- more than five million passengers, and that is the highest ever. In the following quarters, we will not see that amount of passengers.

I see. But could you just be a bit more specific about what type of costs you have in the fourth quarter that you don't have in the first quarter, say, like maintenance or insurance? I mean, is this typical when you compare first quarter?

Maintenance, normally we do maintenance when the airport is in its slow pace or in its slow mode. This is the peak for us, since December 15th to the end of the Holy Week, this is the height for us. So we are not going to perform any major maintenance during this period of the year. So normally, those are made during the third and fourth quarter. And the problem of the second quarter normally in most of our airports is that we have some rain.

Okay, thank you.

And your next question comes from the line of Mauricio Santos from GBM. You may proceed.

Adolfo, good morning. I just had one question. Are there any updates regarding the auction for the Mayan Riviera airport?

Mauricio, yes, there was a statement made by the Minister of Communications and Transport in Cancun as a result of the World Economic Forum for Latin America. This statement was made two weeks ago, I think. And the statement was that they would be making a bidding process at this airport during the second half of 2008. So again, they are moving the date.

Also, he has said that they will allow ASUR to participate. It has to be taken with careful because the one that has to say that or the important one from that respect is the antitrust commission, not just the Minister of Communications and Transport, and that is what we have as the latest statement.

Okay, thank you very much.

You are welcome.

And your next question comes from the line of [Roger Sachs] from Societe Generale. You may proceed.

Great, thanks. Adolfo, a question. With the potential of some of the LCCs in Mexico, maybe [Atimwork] will bankrupt here now, I am not quite sure, but with some of the difficulties as well. With the American carriers, how do you think your negotiations will go with the UN maximum tariff? Did this all get factored in?

I would say yes, of course. The negotiation for the maximum rate or during this process, the committee will have to see and review our passenger traffic proposal. And of course they will have to consider if someone goes to bankruptcy, what will happen in these specific cases? Let me go to the more clear example. In the case of Tapachula, which is one of the airports that we have, Aviacsa represents a lot of these airports, okay? Of course, this is not representative for the company in total. But for this specific airport, it is really important. So if we lose Aviacsa and if we between brackets lose those passengers, that will have a major impact on this small airport.

Right.

And that will have to be considered during the process.

When do negotiations actually start? Or have they begun?

Well, the negotiations start, in my opinion, the first day that we delivered the document to them, which was December 24th last year.

Okay.

And those will have to conclude before this year is over.

Okay. And if things change for the worse, i.e. if you have a couple of the LCCs just report kind of bad results that are going to stop operations, forcing potentially some price increases of some others, and again things deteriorate further in the U.S. for the airline carriers, do you revise your documentation that might show even different projections for passenger traffic?

No, we can -- let's say that we cannot or we will not be sending a new document unless something really dramatic occurs. But they will have to review what we have presented to them and they will have to adjust the projections in accordance with the latest information that they have.

Okay, very good. Thank you, Adolfo.

You are welcome.

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And we have a follow-up question from Levon Von Reden from Hogy Capital. You may proceed, sir.

Adolfo, have you done any work to kind of get some sense for price elasticity amongst the LCCs and the domestic traffic?

No, I don't have a study for that.

Any kind of color as to -- because one thing I guess we don't really get a lot of up here is exactly trying to get a sense of where the pricing is on some of the air flights. And as you kind of mentioned, you expect that they need to raise the price of the flights to kind of get the profitability they need.

Well in my opinion, what they have to do is increase the prices, yes, and that, of course, will have an impact on the demand. But I don't have a specific study of price elasticity.

Final question was, as it relates to the maximum tariff, is that a negotiation exclusively between yourself and SCT? Or does the competition commission have any ability to weigh in on that?

Well, I don't know if they can say something to the Minister of Communications and Transport. The procedure that is established in our concession package and also in the airport law doesn't say that they have to participate. It is a valid question because I know that some airlines, let's say, the users, have ten documents and opinions to the antitrust commission. So just because of these, they can try to say something to the SCT. But if we go back to the five year period, over five years ago, they didn't participate at all.

Okay. Thank you.

You are welcome.

And the next question comes from Nick Sebrell from Morgan Stanley. You may proceed.

Hi, this is actually Tatiana Feldman on behalf of Nick. Just wondering, this first quarter, we kind of saw on a per passenger basis aeronautical revenue kind of pop up to that same rate that we saw last year in the first quarter. Are we going to see a similar pattern then in the following quarters or do you guys think that this level is sustainable for the rest of the year? Thank you.

Okay, it could be the same pattern as last year. Remember that the maximum rate on a per passenger basis is revised on an annual basis and with the calendar of the year. So normally, what we intend to do is to be close or above this maximum rate amount during the first three quarters. And once we are very close to the end of the year, we try to adjust in order to be exactly in the maximum rate or a little bit below. Because we know that we cannot be above the maximum rate, otherwise we are going to be penalized, you know? So that is probably why you are seeing these kind of behavior during the quarters.

Thank you so much.

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And at this time, we don't have any further questions in the queue. I will turn the call over to Mr. Adolfo Castro for closing remarks.

Well thank you all of you and thank you for your attention and if you have any further questions on today, to call me or send me an e-mail. Thank you and have a good day. Bye.

Thank you, ladies and gentlemen. This concludes your presentation for today. You may now disconnect.