Grupo Aeroportuario del Pacifico SAB de CV (PAC) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the GAP first-quarter 2012 earnings conference call. All lines have been placed on mute to prevent any background noise.

Thank you. I'll now turn the call over to Maria Barona of i-advize Corporate Communications. Please go ahead.

Thank you and good morning to our conference call audience today.

From Grupo Aeroportuario del Pacifico, today we have Mr. Fernando Bosque, Chief Executive Officer; Mr. Rodrigo Guzman, Chief Financial Officer; Mr. Miguel Aliaga, Investor Relations Officer; and Mr. Raul Revuelta, Chief Commercial Officer.

Please be advised that forward-looking statements made today may constitute future economic circumstances, industry conditions, the Company's future performance or financial results. For a complete note on forward-looking statements, please refer to the quarterly report issued yesterday.

At this point, I would like to turn the call over to Mr. Bosque for his remarks. Please begin, sir.

Thank you, Maria and good morning everyone. Thank you all for joining us for GAP's first quarter conference call. My comments would be brief given that our last call was just two months ago. Despite that, we have some important developments that I would like to review such as our strong traffic numbers, important international events at our airports, and certain commercial developments.

First, on GAP traffic, as you have witnessed in recent months, traffic figures continued to gain momentum. We have re-energized by the fact. For the first quarter alone, total passengers growth was 5.6%, mainly driven by strong domestic traffic, which increased by over 154,000 passengers. If you read the quarterly report in the operating results section, you can see that domestic traffic benefited from many new frequencies by the airlines as well as the introduction of several routes mostly in the Guadalajara, Hermosillo, and Los Cabos airports. However, traffic rose in 9 out of our 12 airports.

International traffic also led by the Guadalajara and Los Cabos airports also benefited by the re-initiation of routes and the opening of new routes by many of the international airlines such as United/Continental, US Airways, Copa, and Aeromexico, but also some of the smaller regional airlines. For example Sunwing, Volaris and Air Transat.

We continue improving main indicators as are revenues, EBITDA value and margins, all of which show increases above our guidance issued in January. And we expect a lot more activity in 2012 as we work closely with air carriers to expand their frequencies at our airport. Already this year, several events have taken place involving GAP's airports.

Tianguis Turistico, a travel and tourist expo which broke attendance record in March with over 1,000 attendees. This event took place in the cities of Guadalajara and Puerto Vallarta and brought in expert from airlines and tour operators such as Apple Vacation, Travelocity, Air Canada, Alaska Airlines, Transat among others. Also in March, the Pope visited the City of Guanajuato, an airport where we saw average growth during the first quarter of over 12%.

The World Economic Forum, which took place just days ago on April 16 to 18 in the City of Puerto Vallarta. Also this year, Mr. Calderon, the President of Mexico, is presiding over G-20. So it is a very important event for the country that will be placed in June, G-20 will meet in Los Cabos, Baja California Sur.

Finally, in November, the members of the Latin American and Caribbean, the Airport Council International all will meet in the City of Puerto Vallarta. That conference includes participation of the majority of the airports in the region on a global level.

In terms of commercial development, and Raul will expand fully on this later on, but I just want to mention that the VIP lounges initiative is actively moving ahead. GAP commonly operates 2 VIP lounges in Los Cabos, 1 in Guadalajara and Puerto Vallarta.

Also during 2012, we also expect to launch new VIP in the airports of the Hermosillo and Tijuana. The first stage of this initiative is to receive the broad base of priority passengers. The second stage will be to receive business passenger from airlines that don't have business lounge. Finally, in the third stage, GAP will offer local passengers the ability to purchase annual memberships for full use of the lounges around.

On April 17, we issued a resolution for the Company shareholders meeting. Among the resolution, shareholders approved the Company's financial statement, a dividend payment of MXN1.1 billion, 8 of the 11 board members were renewed. The Chairman of the Board and the Chairman of the Audit Committee were appointed among other important decisions. Perhaps most noteworthy for GAP, given the prior shareholder dispute, is that the meeting ran smoothly with a [call on] apparently 73%. Unfortunately, the extraordinary shareholders meeting could not take place, because we did not rate 75% forward. So, the Board will announce a new date for this meeting when it becomes available.

Even with this issue of the extraordinary meeting, we were really happy to report this good news and look forward to many more successful shareholder meetings. Our new Board met for the first time last Thursday to approve the financial reports that today are being discussed.

In terms of the financial results, which Rodrigo will discuss in detail in just a few moment, I just want to mention that this is the first quarter in which GAP reports in accordance with International Financial Reporting Standards. As such, the comparable first-quarter 2011 figures were just to reflect these changes and to make the first-quarter 2012 figure comparable with 2011. We included Appendix E in the report outlining the exact transition calculation for 2011.

Finally, I want to thank all of you who participated in this year's GAP Day event which took place in Tijuana this year. We had excellent participation, the highest that we have ever had for any annual day held in one of our airports. We look forward to doing it again next year.

That is all from me. Thank you for your attention. And now I will turn the call over to Mr. Raul Revuelta, GAP's Commercial Officer. Raul, please go ahead.

Good morning, everyone. I am pleased to have the opportunity to discuss in more detail the traffic awareness that's mentioned by Mr. Bosque. First, I will present a more detailed traffic analysis and then I will review the commercial business.

During the first quarter of 2012, GAP has 5.6% more total passengers reflecting an increase of 284,000 passengers compared to the same quarter of 2011. This increase was mainly caused by the domestic and international passengers' traffic that growth of 5.1% and 6.3% respectively.

I would like to emphasize the important growth of two of our main airports during this quarter, Guadalajara and the Los Cabos airports, driven mainly by Volaris, Aeromexico, and Interjet. I am pleased to announce that in the first-quarter 2012, these two airports experienced the second best quarter in GAP history due to increasing traffic and new routes on purpose while Guadalajara in particular got the best first quarter in terms of number of international passengers.

Now, regard to non-aeronautical revenues increased 20.7% or MXN40.5 million during this quarter in comparison with the first quarter of 2011. And commercial revenues grew 13% or MXN24.6 million mainly caused by commercial development projects.

Advertising (inaudible) 2011 GAP began directly operating advertising at all of our airports, with the only exception being Terminal 2 at Los Cabos airport, increasing revenues by 52% or MXN5.3 million in this quarter.

Revenue from parking lots rose 12% or MXN4.8 million compared to the first-quarter 2011 as a consequence of the new parking fee structure from last year, also from the growth of total passengers in [Guadalajara]. Also car rental grew 15% or MXN5 million as a result of the new companies in Peurto Vallarta, Los Cabos, and Guadalajara airports established by the end of 2011.

Duty free food and beverage revenue increased 20% or MXN3.5 million and 13% or MXN2.3 million respectively. These increases were a result of renegotiation surge in contract and to additional 200 square meters of the new food court area at Guadalajara. We are foreseeing that the rest of the year will be full of opportunities and potential for development of new business. We at GAP are working very hard to provide the best possible results. So, I would like to take this opportunity to share with you our main strategies for the coming month.

On the aeronautical side, we estimate that during the next months of 2012, airlines will continue switching strategies and opening new routes, for example, Volaris noted that it will operate new routes such as Aguascalientes-Cancun, Guadalajara-Cancun, Guadalajara-Los Cabos, Peurto Vallarta-Mexico, Guadalajara-Chihuahua, Guadalajara-Los Mochis, Guadalajara-Monterrey, Guadalajara-La Paz, [Tijuana] -Colima, Guanajuato-Mexico during the months of April and May.

In other words, we expect to start on operation to Los Cabos next June as well. In terms of non-aeronautical revenues, this year we are focusing our efforts on commercial developments on the brand new Caribbean, Los Cabos with the most important international brands in the Airport industry. We are in the bidding process to select new operators for duty free and beverage shops as well as to share the retail outlets. These strategies are designed specifically to improve the passengers' experience by creating a more modern and innovative emerge at the new terminal that we hope will improve sales per passenger.

In addition, we expect to review contracts with our current clients in advertising, retails, and car rentals. The new terminal we have 800 square meters of duty free, 700 square meters of food and beverage, 600 square meters of specialty retail, and almost 500 square meters in VIP lounge. We expect to improve commercial revenues with the introduction of (inaudible) area in Peurto Vallarta and Tijuana, which are based on marketing stories that (inaudible) of our passengers. Also, we expect to really sign the retail offering and commercial layout at Tijuana and Hermosillo Airports, also bringing the well known brands that are in the market to those servers.

We continue converting current contracts where we stand out with (inaudible)to a single operator format in order to create economies of scales at the airports with more than 1 million passengers, where we will continue expanding our advertising business with inclusion of new areas in our inventory built expansion of Tijuana and Peurto Vallarta. We are still storing existing sales channels operated by airlines and car rentals to promote products such as parking lots and access to VIP lounge.

Thank you again for your attention. And now Rodrigo Guzman, our CFO, will review the financial highlights.

Thank you, Raul. Good morning everyone. This is Rodrigo Guzman, GAP's Chief Financial Officer. First of all, it's important to remark that in the first-quarter 2012, GAP's report reflect the adoption of International Financial Reporting Standards. Thus, for filling the requirement issued by the SEC in the United States and by the CNBV in Mexico. That comes previously at the Mexican financial reporting standards, only the year, only the financial information is reported under MEX NIF and we include a reconciliation note to US GAAP.

With the IFRS adoption as of January 1, 2012, GAP will only report to the markets information on their IFRS. In June 1, 2004, the Mexican board for research and development of financial reporting standards is independent organism, which still cover the role and the responsibility of issuing accounting standards in Mexico.

Since then MEX NIF has been converged to IFRS, which is why there are almost no differences in aeronautical and non-aeronautical revenue. Revenues cost for improvement to concession assets and cost of services due to adoption of IFRS. The unique difference between cost of service under MEX NIF and IFRS are in employee cost due to first, in accordance with MEX NIFs, the Company recognized among other items adding addition to seniority premiums, the termination benefit from severance payments at the end of the work relationship.

While under IFRS, it wasn't related as it was not complied with its requirements. Second, according to MEX NIF, current employee profit sharing is presented within other expenses while on the IFRS it's considered to be an employee benefit and is allocated in the cost of service, as part of employee cost in the consolidated statement of comprehensive income. Also MEX NIF requires the Company to determine and account for differed employee profit-sharing while on the IFRS doesn't exist.

The difference of (inaudible) item is 0.3% lower on the IFRS versus MEX NIF affecting the EBITDA by less than 0.05% with no impact in EBITDA margins. We expect that these slight differences will be the same in the future. Also on the IFRS, there are some differences versus MEX NIF impacting the comprehensive financial results.

The differences are first, in interest expense under IFRS as of the date of the adoption, the interest expense for qualifying assets is capitalized net of interest income while on the MEX NIF only the interest expenses is capitalized. Under embedded derivatives in the lease agreement, under MEX NIF, the Company recognized embedded derivatives generated by lease agreements of commercial spaces located at the airport terminal. While according to IRFS, as the US dollar is commonly used for this type of lease agreement. The Company did not recognize embedded derivatives.

The difference as previously mentioned will affect the value of the assets in the balance sheet as well as respecting depreciation and amortization affect in the comprehensive financial results in the P&L. In the case of depreciation and amortization, the fact is to reduce the cost and then to increase the earnings before interest and taxes. While in the case of the comprehensive financial results, the fact is to reduce the revenue for interest, then reducing the earnings before taxes. The combination of the lot of differences makes a neutral effect during the last term of qualifying assets on earnings before taxes.

The most significant between MEX NIF and IFRS is related with the discretionary effects from 1999 to December 31, 2007 in improvement to concession assets, airport concessions, right to use airport facilities, other acquired rights, and other intangible assets, and also in the value of the current stock and in the legal reserve.

In the transition to IFRS, the Company recognized assets at the historical costs and eliminates the inflation on the value of the common stock and on the legal reserve recognized in order to put MEX NIF through December 31, 2007. These effects were eliminated as they do not comply with IRFS requirements which now list, among other factors, that in order to recognize the inflations in the financial information, the cumulative inflation in a three-year period needs to approach or exceed 100%.

Since 1998, when the Company was incorporated until December 31, 2011, the cumulative inflation over a three-year period has not reached or exceed 100%. This difference generates a very aggressive impact on, first, the balance sheet, because the net effect of the elimination of inflation in the value of the assets and in the value of the common stock and legal reserve isn't counted as a retainer earnings increasing it in MXN3.6 billion at the end of March 2012 from MEX NIF to IFRS. This accounting additional return of earnings is not corresponding either by cash or via cumulative net income that already pay taxes or CUFIN. Therefore, if shareholders decide to pay that amount on dividends, the tax impact will be an aggressive 60% of the dividend amount.

On the P&L, the asset value for accounting purposes is reduced and consequently the depreciation and amortization is reduced generating a higher net income that also is not corresponded by cash or via cumulative net income that already pay taxes. Also as the Mexican tax law established, the value of the assets and common stock for tax purposes will continue to be updated for inflation creating a higher difference between the value of the assets for accounting purposes and the value for tax purposes than the ones that was generated under the MEX NIF producing then an increase in different income taxes in the assets on the balance sheet and in the income statement.

For that, reducing the effective tax rate of the high proposition under (inaudible) in MEX NIF. It's important to mention that the effects related with dividends will continue being calculated under MEX NIF related with taxes. With that said, the results of the quarter, the sum of aeronautical and non-aeronautical revenues increased MXN119.3 million or 12.3% in the first-quarter 2012. The increase in the sum of aeronautical and non-aeronautical revenues was led by the 4.4% increase in passenger charges from April 2011 and 5.6% in passenger traffic, which produced an increase in aeronautical revenues of MXN78.8 million, while the non-aeronautical revenues increased MXN40.5 million due to the reason previously explained by Raul and the starting of operations from the baggage screening system since October 2011.

Cost of services increased MXN37.7 million mainly from a MXN16.6 million increase in other operating costs due to an increase in professional fees related to legal proceedings.

Commissions related to advertising revenues that during the first-quarter '11 did not exist and an increase in the reserve for doubtful accounts. MXN9.5 million in security and insurance costs as a result of the contracting of carry-on baggage inspection personnel that previously was contracted directly by the Company and personnel to provide checked baggage inspection service employee costs.

MXN5.7 million in employee cost mainly related with the severance payment to the carry-on checked baggage employees that were integrated into third-party security contracts. And MXN5.4 million in service cost mainly as a result of starting of the checked baggage screening system since October 2011. As a result of the increase in the sum of aeronautical and non-aeronautical revenues, government concession taxes increased MXN5.8 million or 12%, while because of the high increase in aeronautical and non-aeronautical revenues and the cost of service in nominal value, the technical assistance fee increased MXN3.8 million or 11%.

There was generated an EBITDA increase of MXN72 million or 11%, while the EBITDA margin excluding the effects of IFRIC 12 declined 80 basis points from 68% in the first-quarter 2011 to 67% in the first-quarter 2012.

Finally, net income in the first-quarter 2012 declined MXN7.7 million or 1.8% compared to than the first-quarter 2011 mainly due to the increase in income taxes expenses of MXN33 million and despite an increase of MXN25 million in income before taxes.

Thanks for your attention. I will now turn the call over to Miguel Aliaga for final comments.

Thank you very much, Rodrigo. This is Miguel Aliaga, Investor Relations Officer. In terms of guidance, I want to reiterate our figures for 2012. Profit is estimated to increase between 3% to 4%.

In terms of aeronautical revenues, we expect an increase of 8% to 9%. Non-aeronautical or commercial revenues expected at 6.5% to 8% growth; total revenues at an increase of 7.5% to 9.5%; cost of services, an increase of 9% to 12%; EBITDA margin of 65.3% to 66.3%; EBITDA with an increase of 6% to 8.5%; finally, the total CapEx on MXN880 million. These have not changed from the ones we reported in the previous conference call.

I just want to mention that GAP will be participating in the next few months in the (inaudible) conference in New York and London and in the teleconference in New York as well as the Deutsche Bank Conference in Mexico. If you are an investor, please contact us regarding more information so that we may schedule a meeting. Thank you for your attention. Operator, we may proceed with Q&A.

(Operator Instructions). (Inaudible), Goldman Sachs.

Good morning gentlemen. If you allow me, I have two questions. The first one is linked to the IFRS changes. Given the revision after the concession assets (inaudible) cost, we should see lower D&A charges which positively impacts earnings. So, just to make it clear your previous explanation, do you expect increased dividend payment because of that or the tax differences between MEX NIF and IFRS you mentioned before will prevent you from changing payout ratios? And also on a brighter picture, will dividend payments still be funded partly through that as you mentioned in other occasions? That's my first question.

The first question is related with dividends and the impacts on the depreciation and amortization in the P&L. The issue here is that that's really eliminating inflation from the balance sheet. Of course amortization is going to be reduced when you compare MEX NIF with IFRS. The issue here is that that differences do not generate CUFIN or do not generate cash. That means that we will continue to pay dividends on a MEX NIF reference as the law -- as the Mexican corporate tax law obligate to that thing.

So, we expect to continue paying dividends taking in account the CUFIN, of course, the accumulating net income directly paid taxes, and the amount of CapEx we have. The thing, is we will continue to -- we expect to continue paying dividends and also to make reductions in equity, but for the investor means dividends in other words. The tax issue here in terms of reduction on equity, there is no taxation until the law is changed. So as the law remains in the same way, we expect to continue in the same line, I mean, make reductions of equity without paying any taxes.

Okay, that's clear. And basically dividend payments will still be funded partly through debt also. You still have this strategy in mind?

Yes, we have -- we continue with the same strategy in terms of reductions on equity or dividends. We continue to leverage the balance sheet and then try to pay dividends as high as we can.

Okay. And my second and last question would be on CapEx. You made almost half of the CapEx expected for the year in first Q. So, what should we expect going forward, would it be front loaded in the first half or should we just be seeing CapEx more dispersed in the coming quarters?

As you know, the revenues in cost for improvements to concession assets reflect exactly the quarterly CapEx. So, we expect to continue making -- doing that with CapEx in the same way as we did in the first quarter in the next quarters reaching the 100% of our PNB, our (inaudible) at the end of the year. We do not expect a peak of life of that CapEx. As we mentioned, our total CapEx for the year will be surrounding MXN880 million.

Okay, that's clear. Thank you.

(Operator Instructions). Nick Sebrell, Morgan Stanley.

Two questions, first, if you could comment on the status of the Grupo Mexico situation, what is their ownership position now. It seems like things have calmed down and I was wondering if there are any special core processes that are still ongoing, any comments you can make with respect to that will be helpful.

Second question, if you could give us an idea of the current depreciation level that we could expect over the forward quarters. Of course, IFRS means that we have a different depreciation and amortization rate than we used to and if you could just describe what we see this year, in other words, can we use first quarter as a base and then maybe how that will change in the future? And that's it.

Thank you, Nick. I am Fernando Bosque, Chief Executive Officer. I will answer the first question. From the credit to the Grupo Mexico, the question is they deterred that they have control currently 28.7% of the total sales of the company. As you know, that is over 10% limit we have in our bylaws. So, we have not any news about how would be the way that they will follow in order to sell the excess of the shares. We only could be talk about how is their regulation in our bylaws and that is the information that we have at this time. We do not -- we will keep any new communication, any new information for the shareholders.

Okay, so its 28.7%, that's 28.7% you said and there are no ongoing court cases or anything like that?

Currently officially it's 28.7%. The total numbers of the share that will be represented in the last general meeting was only the 56.1 billion shares. They will not use the power of -- to be represented in the Shareholders Meeting by the other 106 million shares. The total that was communicated is in total of 161.8. That is the total that we know by the different communication received. And that is equivalent 28.7%. Sorry, Nick?

Yes, thanks. And then second question regarding depreciation?

Okay. Depreciation and amortization. As the mean value of the depreciation and amortization in our P&L is a concession value is the amortization and depreciation of the concession value and the rights to use airport facilities, yes, the pay that we have in the first quarter is roughly the same that we expect in the future. Perhaps it will be a little different as soon as we increase our CapEx in terms of the Master Development program, but the main value is going to remain quarter by quarter as it happens with the MEX NIF.

Right, it's clear. Thank you.

Neal Dihora, Morningstar.

I guess, all my questions are related to the baggage screening equipment, I think, I don't know if you guys have given the exact revenue amount in each quarter, but does MXN10 million to MXN12 million sound about right in the quarter? And then I guess the other question is how much total CapEx did you spend in fourth quarter and first quarter for baggage screening equipment? Thanks.

Okay. In terms of the CapEx, it is nothing. I mean, we do not do any CapEx except in the T4 in the (inaudible), but that this means roughly its MXN20 million. So, in terms of CapEx in baggage screening, we did it till the end of December 31, 2011, in terms of CapEx or baggage screening. In terms of revenue in the light item of baggage screening in the quarter, it was MXN12 million and -- but we don't know exactly what it's going to be in the future, because as you know that -- those revenues increase as we include additional airlines on the baggage screening. In this moment, we have only Volaris and some of the Canadian and the Americans. That means roughly 35% of our total traffic. So, we charge a specific charge per passenger. So, as we include more airlines in the system, we are going to increase the value of those revenues. We expect, of course, it depends if the airline sign the contract with the responsibility clause or not.

I guess as a follow-up on that, I mean, I know you guys outsource some of the actual screening stuff, is that -- is there a capacity issue if you signed up the rest of your customers or anything like that?

Yes, without any problem, I mean the system is prepared to receive all the airlines.

Okay, thank you very much.

Augusto Ensiki, Morgan Stanley.

Just one question regarding the change to IFRS, is there no non-cash maintenance provision line or has that been consolidated into one of the existing cost lines?

Yes, it's the same as in MEX NIF as I explained. The only difference in terms of EBITDA, it's lower than 0.05%.

That small line there? I am sorry. All right, in that case and then the second question regarding your guidance specifically for the non-aeronautical, are you expecting 6.5% to 8% growth? I mean, you had already above 20% growth in the first quarter. Do you see things getting more difficult for the non-aero side?

Basically, it's as we published in January -- in the first days of January, our guidance doesn't include any revenue related with baggage screening as that line was not predictable, but it depends and the amount of airline that we have in the baggage screening system. That's why we publish our guidance without baggage screening system. So, the increase at the level as we have right now also includes the baggage screening system, but also excluding that for year, we over-passed our guidance in the first quarter.

Right.

In terms of non-aeronautical revenue.

Okay. So, going forward, we still expect --?

And also as you can see the cost of service increased, our guidance says that we expect to grow 9% to 12%, because also it doesn't include the cost of the baggage screening system.

Okay. Okay, great, thank you very much.

(Operator Instructions). Vivian Salomon, Itau.

I just wanted to -- my questions have been answered, but is there any update from the NCT on the Tijuana cross-border facility, the 70-month time for it to be starting this year or when do you expect this project to come alive?

Thank you for the question. This is Fernando. The cross-border facility project will require more time to obtain the approval on the arrangement at local level in Mexico and also some other overall arrangement that we'll need to resolve with North American authorities. So, in order to start the operation with these new facilities, we are expecting that will be not before 2014.

Okay, thank you.

[Rayon Santos], Citigroup.

Basically all my questions have been answered, but I have one last question for you guys. Have there have been any slight disruptions as a result of the volcanic eruptions near Mexico City.

No, there's no disruption. Everything is working perfectly as scheduled.

Sounds good, sounds good. That's pretty much it. Thank you.

Okay.

(Operator Instructions). I am showing no further questions at this time. I will turn the floor back to Mr. Bosque for any closing remarks.

Okay, thank you all for your interest in GAP. We are looking forward to a successful 2012 and speaking with you again soon. Have a good day.

Thank you. This concludes today's GAP first-quarter 2012 earnings conference call. You may now disconnect and have a wonderful day.