Grupo Aeroportuario del Sureste SAB de CV (ASR) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ASUR Third Quarter 2017 Results Conference Call.

My name is Shannon, and I will be your operator.

(Operator Instructions) As a reminder, today's call is being recorded.

For opening remarks and introductions, I'd like to turn this call over to Mr. Adolfo Castro, Chief Executive Officer.

Please go ahead, sir.

Thank you, Shannon, and good morning, everybody.

Thank you for joining us on our conference call to discuss our third quarter results.

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 current management's expectations and beliefs and are subject to a number of risks and uncertainties that could cause actual results to differ materially, including those factors that may be beyond our company's control.

For an explanation of these risks, please refer to our filings with the Securities and Exchange Commission and the Mexican Stock Exchange.

As announced yesterday, we concluded the acquisition of the controlling stake of approximately 92.42% in Airplan for a purchase price of approximately MXN 3.7 million -- MXN 3.7 billion.

The acquisition was financed through a MXN 4 billion syndicated loan facility, contracted with BBVA Bancomer and Grupo Financiero BBVA Bancomer.

In 2016, the 6 airports operated by Airplan in Colombia, including the international airport in Medellín, the second business -- busiest in Colombia, had a total of 10.4 million passengers.

This represented 37% of the 28.4 million that traveled through our Mexican airports last year.

We expect to consolidate results from these operations into ASUR's financial statements as of October 19.

The acquisition process of Oriente, the other airport group in Colombia we seek to acquire, is delayed, and we have not yet received all necessary regulatory approvals required to close this transaction.

The fourth, we have agreed with the sellers to make conventionally reasonably efforts to obtain the pending approvals, and, if successful, to negotiate in good faith the purchase price.

Remember, our original agreement contemplated a total purchase price for Airplan and Oriente of approximately MXN 4.9 billion or $262 million, subject to a series of price adjustments.

You can find more information of these transactions in the Information Bulletin filed yesterday in Mexico and with the Securities and Exchange Commission.

Now moving on a review for our operation.

September was an eventful month in terms of climactic events, with 3 major hurricanes affecting our passenger traffic.

Nevertheless, we delivered a good set of results this quarter, given the circumstances and despite the challenges facing Puerto Rico with Hurricane Maria.

The dedication of our team in Puerto Rico allowed us to resume operations just 24 hours after a Category 5 hurricane passed over the island.

Note that in Mexico City Airport, which represents around 61% of our domestic traffic, had to be closed for almost 2 days in September due to a major flooding and the earthquake in Mexico City.

Total passenger traffic reached almost 10 million in the quarter, with growth slowing to 4.9% year-on-year, as the strong growth in Mexico, up 8%, was affected by a weaker performance in Puerto Rico posting a decline of over 5%.

Operations at San Juan, Puerto Rico Airport suspended -- were suspended on September 19 and resumed on a limited basis on September 21, starting with 10 flights a day, increasing progressively to 41 daily flights at the end of the month compared with the daily average of 70 flights in 2016.

Today, we are almost back to 70 average daily flights, but with a lower factor in terms of arrivals.

While we are currently evaluating damages to airport infrastructure to assess reconstruction costs and receiving insurance approvals, note that our airport infrastructure is insured against material damages, with a maximum deductible of MXN 10 million.

Terminal B was affected and is closed.

However, this does not represent a reduction in traffic as we are in the low season and we expect to resume operations before higher demand materialize.

Traffic in Mexico was mainly driven by international traffic up over 9%, while domestic traffic was up almost 7%.

Cancun continues to report healthy growth over 9%, with positive contributions from the majority of ASUR's airport.

Minatitlán, however, continue to face the challenging oil industry environment and will be affected even more by the reduction in the slots to domestic airlines in Mexico City Airport.

Traffic between Mexico, Canada and the United States represented 85.8% of the total traffic.

Now moving on the P&L for the quarter.

Consolidated revenues excluding construction services were up 46% year-on-year, with Aerostar represent 22% of these.

Aeronautical revenues remained a strong 50% year-on-year, driven by traffic growth and the inclusion of Aerostar.

We reported robust commercial revenue growth, up 45%, with Aerostar representing 12% of consolidated commercial revenues.

Reflecting our focus on driving commercial revenues.

Consolidated commercial revenues for passenger rose 5% to MXN 99.5, reaching MXN 101 in Mexico, up 6% year-on-year.

Looking ahead, we expect to achieve further growth following the opening of Terminal 4 at Cancun Airport.

Operating costs and expenses ex construction costs rose 68% year-on-year, with Aerostar contributing with 24% of these totals.

In Mexico, cost ex construction rose 14% mainly due to the higher cost of services as in the previous quarter.

This reflects increasing energy costs as the cost per kilowatt hour increased by 21.6% year-on-year, along with higher maintenance expenses, higher cost from sales related to the 11% increase in commercial revenues from direct operations.

And also, we recorded additional costs in connection with acquisitions we are making and other projects.

Higher costs also reflecting the hiring of employees for Terminal 4 as they are trained in preparation for the opening this quarter.

Consolidated EBITDA was up 40% year-on-year, increased to MXN 1.9 billion, with Aerostar contributing 18% of the EBITDA.

Adjusted EBITDA margin, which excludes construction revenue and costs, contracted 335 basis points to 68%, reflecting the lower comparative EBITDA margin of Aerostar.

Note, however, that year-on-year, EBITDA margin at Aerostar improved by over 550 basis points.

EBITDA at our Mexican operations remain strong, up 14% year-on-year, with adjusted EBITDA margin stable at 71%.

In terms of CapEx, as we invested a total of MXN 313 million in the quarter.

Of these, MXN 287 million were allocated to our Mexican operations, mainly in the construction of Terminal 4 that is on track to open by the year-end.

While MXN 26 million were invested at San Juan, Puerto Rico Airport.

Moving on the balance sheet.

We closed the quarter with a healthy balance sheet, with a net debt to last 12 months EBITDA ratio of 1x compared with 0.1x at the close of third quarter 2016.

Talking to that increase to almost MXN 15 billion in the quarter from MXN 4 billion in second quarter 2016, mainly reflecting the debt held at Aerostar, along with a MXN 4 billion loan at Cancun Airport to finance the acquisition of the Colombian airports.

Note that 72% of our debt is denominated in U.S. dollars.

Before reviewing our standalone results, please note that to comply with Securities and Exchange Commission regulations, I will not be discussing the standalone financial performance of Aerostar prior to the previous in which this subsidiary was consolidated into ASUR's financial results.

That is before June 1, 2017.

For this reason, we have not included in our third quarter results any financial information for Aerostar standalone results for the 9 months period ended September 30, 2016, and 2017.

These same criteria will apply to the standalone financial information of Airplan before the date of acquisition.

We will start consolidating these results into our financial statements starting October 19, 2017.

Moving ahead, revenues at LMM Airport for the quarter declined 1%, driven by a lower non-aeronautical revenues, while aeronautical revenues remained practically flat despite the 5.5% decline in passenger traffic.

Commercial revenues per passenger for the quarter rose 3% to MXN 95.9.

Operating costs were down 11% year-on-year, mainly reflecting lower cost in services resulting from a decline of 13.6% in energy consumption, along with the lower amortization and depreciation.

Finally, Aerostar posted a 10% year-on-year increase in EBITDA, reaching MXN 349 million, reflecting higher operating leverage and the completion of the remodeling plan last year.

EBITDA margin expanded by 558 basis points to 56.1% in third quarter 2017.

Note that sequentially, EBITDA margin has -- margin was seasonally lower, as, in the second half of the year, margins tend to be lower.

This year, in particular, results of the -- in the second half will be impacted by the aftermath of Hurricane Maria.

Before opening the floor for questions, let me mention that we are working on our master development plan proposal, which we -- will be presented to the government by the year-end.

This completes my prepared remarks.

And now I will open the floor for questions.

Shannon, please go ahead.

(Operator Instructions) First question comes from Leandro Fontanesi with Bradesco.

On my side, if you could provide some clarification on Airplan financials?

So the first question that I have is regarding the cost.

So there's a big fluctuation if we compare the costs, both in terms of cost of services and SG&A in 2016 compared to the first half of 2017.

So if you could provide some color and if there is any nonrecurring cost that we should consider in our analysis?

And the second point, in the -- if we consider the revenue from construction, the cost from construction, you had close to MXN 520 million of profit related to construction.

So as you consolidate Airplan starting October and going forward, is it fair to assume that your revenue for construction and cost will be matched as you do it for ASUR and will no longer have this profit in construction?

Leandro, as I said during the initial remarks, I cannot comment on results previous to our acquisition.

Nevertheless, you're absolutely right.

The numbers we presented in the pro forma have an MXN 800 million expense in administration during the second half of the year that is making the difference.

Also, in the case of construction profit, you're absolutely right.

There is some construction profit that is not normal in the case of ASUR, where we basically present the same revenue -- the same figure for costs as it is for revenue.

In terms of construction in the case of Airplan, this should be a nonrecurrent situation because most of the construction has to be done during this year and the year after.

That's what I can share with you.

Okay.

And if I may, one more question.

It's -- so you plan to open the Terminal 4 for Cancun in the first quarter -- in the fourth quarter, should we expect any impact in terms of margins as you ramp up this new terminal in the following quarters?

That's a good question, Leandro.

As I have said before, our cost to operate Terminal 4 is also presented here in our third quarter results.

Because as I said in the initial remarks, we started hiring people to be trained and to be ready for the opening of Terminal 4. I would say, Terminal 4 opening should occur before this month is over.

So we're expecting this to be open the last day of this month of October.

Going forward, of course, our cost will increase as a result of this opening.

Just to give you an idea of the size of this building, this building is able to operate between 8 million to 9 million passengers, which is what Monterrey itself is operating.

In other way to see this, this will increase the capacity of Cancun Airport by almost 40%.

So this is a major building.

It's another 70,000 square meters plus 120,000 in terms of the apron, plus another 115,000 in terms of the runway, the connecting -- the connector between the 2 runways.

So yes, you will see an increase in our costs as from the third quarter because of this new build.

That should be in operation on the last day of October.

Next question comes from Stephen Trent with Citi.

Just a few quick ones from me.

I think you mentioned San Juan is up to 70 daily flights if I heard you correctly.

And any color as to what is normal peak hour, air traffic movement to that airport?

As I said before, more or less today, we are operating the same as what we were operating last year.

The difference we have today is the load factor in arrivals that is not the same, it's lower than how it was a year ago.

Okay, got it.

Very helpful.

And in terms of the Colombian initiative here, can you refresh my memory as to the regulation there?

Is it a periodic mandatory regulatory review as it is in Mexico?

And if so, any color on what the calendar is for that?

Yes, good question.

No, we have a completely different regulatory regime there.

There is no review of the master development plan every 5 years as we have in Mexico.

The way that it is there is that we have a commitment today of certain works that we have to do.

Those numbers are being presented in the document we filed with the Securities and Exchange Commission and the Mexican Stock Exchange.

There is no review.

Nevertheless, this can be reviewed by the parties.

I would say that today, this company has around 20 amendments of its original documents.

So they have reviewed this 20 times.

But we still have to be doing an agreement between the parties.

So the document as it is today states certain words that have to be done by the company.

In terms of rates, the company is the one that fixes the rates for the regulated activities, so those (inaudible) activities.

So we don't have anything to say of that.

The other major difference is the term of agreement.

As I said during the first press release published in April, they move -- the term of the agreement is moving.

It's moving in accordance of the moment when the company recuperates their regulated assets, and that is why the committee is the one that is in charge of the regulated rate.

So if I don't remember wrong, the period we mentioned for this specific company was, as from the year 2033 up to the year 2048.

So it has a minimum and it has a maximum.

And between this period of minimum and maximum, the concession will be over once the company recuperates fully their regulated assets.

Very helpful, Adolfo.

And in that, is there any -- I guess, one, is there any chance to renew once it expires?

And two, on Airplan, just a follow-up from the gentlemen from Bradesco's question, any view as to why Airplan's equity capital base is so low?

Or if there's something going on with [tamed] earnings?

And I'll leave it there.

Okay.

In terms of the possibility of renewing the case of the expiration, the contract doesn't say anything about it.

I believe we don't have the same chance, as it is, in writing in the case of Mexico.

So that is what I can say for the moment.

In terms of the equity, yes, you're absolutely right.

This company presents a completely different level of debt in comparison with what we have in Mexico.

Comment in terms of the debt they have there, I can say that -- what I can see is it is being negotiated in good terms from a financial perspective.

Next question comes from Natalia Zamora with GBM.

My question is, could you provide an estimate on how much will maintenance work, regarding the damage to the airport in Puerto Rico, will amount you?

Well, we do not have yet an official number of the real damage that we suffered in Puerto Rico because of the Hurricane Maria.

The best guess I have today to share with you is close to $60 million.

Of course, as I said during the initial remarks, we are insured and the maximum deductible for a catastrophic event is $10 million.

Next question comes from Marco Montañez is with the VECTOR.

Two questions, if I may.

The first one, could you share with us the implied transaction multiple of the acquisition of Airplan?

And the second, have you got an estimate for the committed investments for Airplan in the next years?

Well, you have -- in terms of your second question, you have the numbers in the document we presented.

In terms of the first one, it's hard to say an exact number because many people have different views on this.

But something between 5 to 6 could be -- could be the number.

Next question comes from Pedro Pascoal with JPMorgan.

I guess, the answer is probably no.

But could we see you sort of engaging in more expansions or M&A activities?

We still lack the bidding documents, but the Brazilian government already announced new airport destinations.

Maybe on a standalone basis or with a partner, could you see you guys showing some interest?

Or do you think that's for the moment?

Well, we have seen -- we're analyzing those opportunities.

This will have to be shared with my board during our next session.

Particularly, the board has not been very happy with the investments there after what we saw during the first round of the privatization process.

I don't know what the outcome is going to be, but I'm not too optimistic about it.

Next question comes from Gilberto Garcia with Barclays.

You had a fairly significant decrease in accounts receivable.

Are you restricting credit to any of your airline customers?

The reduction you are seeing is because of the seasonality.

We do not have -- changed anything in relation with our policy -- our credit policy to customers.

So everything, I would say, is normal.

In terms of that, my final comment will be that all the airlines are paying us on time.

So we do not have any trouble there.

I'll take our next question from Luis Prieto with Nau Securities.

Luis Prieto.

I have 2 very short clarification questions.

The first one is regarding the damage reconstruction work you mentioned in Puerto Rico.

You said between $50 million or $60 million?

And regarding the $10 million, I wanted to clarify whether that's the maximum coverage of your policy, or that is the excess above which the policy covers your expenses?

And my second question is, you talked about submission of your proposal for the new MDP by the end of the year.

When would the government come back to you?

And what sort of steps and when would we have a final decision?

Yes.

To be clear on the $60 million and the $10 million, $60 million is the best guess in terms of a number for the reconstruction process.

So that is, for the moment, our best guess of how much we will have to spend to reconstruct the damages at the infrastructure of San Juan, Puerto Rico because of Hurricane Maria.

In terms of the $10 million, that is the maximum deductible in the case of a catastrophic event.

I believe that we will not reach the $10 million, but of course, I cannot share with you an exact or precise or accurate number of how much this will cost to the company.

But that, of course, is the maximum amount that the company will have to pay in terms of a catastrophic event.

In terms of the MDP, yes, we should deliver our proposal before the year is over.

And the government has 1 year to come back with us in terms of the approval for CapEx and the maximum rate.

And when they come back to you, that's the final decision?

There's no back and forth and in between with public documents?

It's your submission and they come back within a year, and that's it.

Well, of course, it's not just one meeting to decide all of this.

But on the public side, that will we know of?

No.

Well, basically, how this works is it's a very close cooperative process.

Because the first thing they have to review is the passenger traffic projection.

Then they will have to go and visit every single one of the airports we have to see the inventory of the airport.

Inventory in terms of the way -- the assets -- how the assets are to date.

Then they review every single project we present to them.

Normally, an MDP for the 9 airports should represent around 300 projects.

And finally, they make the calculations in accordance with the approval of the CapEx and the passenger traffic.

And this can rate to fix the proposal of the maximum rate.

Next question comes from Ricardo Alves with Morgan Stanley.

Actually, very quick questions.

One is actually a clarification.

You mentioned the 5x to 6x multiple.

It was not clear to me what kind of multiple you are talking about.

If you could clarify that, please?

And the other one, again, related to the Terminal 4. If you could talk a little bit more about the -- this transition period.

I mean, you're going to open the terminal now in -- by the end of October.

So maybe if you could give a little bit of color when you're planning to close the Terminal 1?

How can we see the mix of traffic between international and domestic in the new terminal?

Any kind of color on how you're going to be operating, how you're going to do the transition, that'll be helpful.

Well, in terms of the multiple, it's EBITDA terms.

In terms of Terminal 4, yes, we expect to open that the 31st of October this year.

Of course, we will not expect to open -- well, not to open, to expect to move or transfer all the airlines from Terminal 2 to Terminal 4 the same date.

So the outcome is to be able to move 14 airlines.

We will be moving them one by one, I would say, with a ramp-up during 3 weeks, more or less.

Then what we expect is to normalize the operation in Terminal 4. And probably during the first quarter next year, we will move the airlines that are operating in Terminal 1 today to Terminal 2.

(Operator Instructions) We next move to Josh Milberg with Morgan Stanley.

You just touched on this already, but I just wanted to get a little more clarity on the duration of Airplan.

In the document that you guys released last night, I think it indicates that this will depend on the sum of the revenues generated by the relevant airports.

And I was just hoping if you could give us an idea of what the revenue thresholds are?

Or what kind of growth you'd need to come out at the low end of that range, 2032?

Okay, Josh.

What I said is -- the term is variable in terms of when the company recuperates the regulated asset.

The company recuperates the regulated asset with the regulated returns -- sorry, the regulated revenues.

Regulated revenues are basically airport activities, okay?

So it's hard to say when these may be recovered because you have a lot of variables into the equation.

As you are mentioning, one of them, of course, has to do with the growth in passenger traffic.

The other one could be the U.S. dollar against the Colombian peso because of the international traffic.

And of course, most of the traffic we have in those airports, it's domestic, but a piece of that has to do with international traffic, where it's related to U.S. dollars.

And finally, of course, it has to do with inflation.

For the moment, what you can use is the lowest part of the thing, which could be 2032.

And of course, this will be adjusted in the case there is a review on the document, okay?

As I said before, this company has been able to review 20 times the document.

And the period has been extended because of this situation in the past.

But do you think it makes sense to be conservative just to assume 2032?

That's exactly what I'm saying with the current conditions.

(Operator Instructions) And so it appears there are no further questions, I'd like to turn it back to you for closing remarks.

Thank you, Shannon.

And thank you, everybody, for joining us today on this conference call for the third quarter results.

Have a great weekend.

Goodbye.

Thank you.

Ladies and gentlemen, that does conclude our conference call for today.

Have a great weekend.

You may now disconnect.