Grupo Aeroportuario del Pacifico SAB de CV (PAC) 2012 Q2 法說會逐字稿

Good morning. My name is Crystal and I will be your conference operator today. At this time, I would like to welcome everyone to the GAP second-quarter 2012 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

Thank you. I would now like to turn the conference over to Maria Barona of i-advize Corporate Communications. Ms. Barona, please go ahead.

Thank you and good morning to our conference call audience today. From Grupo Aeroportuario del Pacifico, 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 do not account for future economic circumstances, industry conditions, the Company's future performance or financial results. For a complete note on forward-looking results, please refer to the quarterly report issued yesterday.

At this point, I'd like to turn the call over to Mr. Bosque for his remarks. Mr. Bosque, please begin, sir.

Thank you, Maria and good morning, everyone. Thank you all for joining us for GAP's second quarter conference call. I am very pleased to be able to report another solid quarter and the achievement so far this year of our guidance goals.

At June, EBITDA has reached MXN1.4 billion or 67.6% margin. Aeronautical revenues increased 11% and non-aeronautical revenues increase of 24%. These increases exceed the Company's target. We expect that given the performance so far for the first half of the year and barring any unexpected circumstances, we are on the road towards successfully reaching our expected growth for the entire year.

GAP has benefited from a very positive 8% growth in domestic traffic. Raul will illustrate in full detail, but I just want to mention that while most of the domestic passenger traffic increases took place in Tijuana, Guadalajara and Los Cabos as will be expected being some of the most important airports in the Group in terms of size.

We also saw significant growth in Hermosillo, Puerto Vallarta and Guanajuato. This is because several of the airlines have been ramping up their frequencies to Mexico City on Monterrey from some of the cities in the central region of the country. Therefore, airlines such as Aeromexico Connect, Volaris and Interjet just to name a few, have seen increasing demand from central Mexico and therefore, we are also seeing disarray of traffic numbers.

On the international level, this figure actually fell just over 1%, mainly in Guadalajara where it was impacted by the substitution effect of the new international services operate now from some of our airports. We continue to see steady growth in the Los Cabos traffic, however, as well as an interesting growth from their [Los Mochis] airport of over 12%. Morelia and Aguascalientes also grew 54% and 66% respectively.

Growth in central Mexico was mainly due to the opening of new frequencies at airports such as Aguascalientes and Guanajuato due to the growing popularity of these as tourist destination for a period. In terms of new the projects, GAP completed Terminal 2 at the Los Cabos airport, where the Company has invested approximately MXN750 million, expanding their space in 35,000 square meters to provide comfort for passengers, as well as new commercial areas.

This facility will increase space, quality and operational efficiency to international passengers in the new space, which includes a new food and beverage court, new shopping areas among others. We expect to be fully operational in November 2012. Negotiation will conclude to ensure that these areas are not only novel and profitable, but that they also have high quality and high demand offering that will impress the passengers with new standing options.

The new commercial area in Los Cabos are managed by world-class operator, such as [Andeasa], World Duty Free Group, Aria, Starbucks and other brands which we expect will trigger nearly 50% of the commercial revenue growth based on our estimates. In Puerto Vallarta, we also completed expansion of the terminal, adding over 6,000 square meters, including food and beverage commercial areas and VIP common use lounges, but also more comfortable areas around the four new gates with aerobridges.

Also, there was a reconfiguration of the grand transportation area to accommodate taxi services as well as the expansion of the parking lot area. As with Los Cabos, this new terminal will begin full operation during the winter season of November of this year. Moving to Tijuana, we moved a few steps closer to obtaining the needed concession to begin on the bi-national gateway in that airport. Last stage of the process is currently in talks with the Ministry of Communication and Transportation.

We are basically waiting for them to approve the concession for the bridge that will link the Tijuana airport to the US side. [Alte Grand Tour] is a third-party that will operate the commercial building in this part. In the coming quarters, we expect to announce any updates regarding the process of this expecting project. Eventually, we believe that this project will attract additional passengers to Tijuana.

This, among other improvements in which we are working on a day-to-day basis, make our airports a more interesting option, not only for the passenger who travels to and from our cities, but for the world-class commercial operators, the airlines as well as the transfer agents and various car rental companies who lease space in our terminals, are non-important revenue generators and partners for GAP.

Just in the beginning of June, for example, we announced that AirTran, a subsidiary of Southwest Airlines, recently began operation of flights from Orange County, California to Los Cabos. Also recently, Spirit announced its first operation with GAP. Beginning in November, Spirit will have two daily services between San Diego and Dallas to Los Cabos. That shows the growing interest for Los Cabos as a high-end tourist destination.

In the cost reduction strategies during the second half of 2012, we expect to consolidate certain strategies we had started in the middle of 2011, in order to reorganize the way in which we have been working the checkpoints of our airports and in certain services we have been providing through our airlines or passenger planes, consolidation that will represent important cost reduction for the last quarter of the year and going forward.

Looking at the big picture, the overall market environment, whose stability is crucial for GAP's well-being and continued growth, we are in what we can fortunately describe as a stable market environment post-election. Expected changes in government, we don't expect any major changes in legislation that will affect GAP or any of the airport operators.

Furthermore, in terms of the GDP and the stability of the interest rate and inflation in relation to the peso value, we are also hopefully optimistic that this factor, as well as many will continue in good levels and will positively impact our industry in short to medium term. Finally, as per the release issued this morning, GAP's Board approved the date of the extraordinary shareholders meeting for September 25, 2012.

On the agenda is the approval of the distribution of a special dividend for MXN870 million via capital reduction in order to improve GAP's capital efficiency. This translates into a shareholder dividend of $1.2 per ADR before September 30. That means an additional 3.2% yield at current share prices.

That is all for me. Thank you for your attention. I will now 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 GAP's traffic and revenue facts as mentioned by Mr. Bosque.

First, I will present a more detailed traffic analysis and then I will review the commercial business. During the second quarter of 2012, GAP had 5% more total passengers, reflecting an increase of 247,000 passengers compared to the same quarter of 2011. This increase was mainly caused by the domestic passengers' traffic growth of 10.4%, compensated with international passengers' traffic decrease of 1.1%.

I would like to emphasize that the important growth of domestic passengers at two of our main airports during this quarter, the Guadalajara and the Tijuana airports, driven mainly by Volaris, Aeromexico and Interjet.

For instance, during the second quarter, several new routes began operation such as Aguascalientes-Cancun, Guanajuato-Cancun, Guadalajara-Los Cabos, Puerto Vallarta-Mexico, Guadalajara-Chihuahua, Guadalajara-Los Mochis, Guadalajara-Monterrey, Guadalajara-Puebla, Tijuana-Colima and Guanajuato - Mexico by Volaris and Manzanillo - Mexico from Aeromexico.

On the international side, I should mention that the increase of international passengers at the Guadalajara airport was mainly caused by a drop in the number of seats offered to several California destinations by Volaris. We expect that the [unexpected] demand in this particular market will be absorbed by the Tijuana airport due to its proximity to the area.

Now, regarding non-aeronautical revenues, this grew 24% or MXN47 million during the second quarter in comparison with the second quarter of 2011. And commercial revenue grew 15% or MXN29 million, mainly caused by commercial development such as advertising. Beginning in June of 2011, GAP began directly operating all advertising at our airports, the only exception being Terminal 2 at Los Cabos. Thus, revenue rose by 70% or MXN7 million in this quarter.

Revenue from parking lots rose 11% or MXN5 million compared to the second-quarter 2011, resulting from a combination of increase in total passengers, as well as the new passenger structure implemented at the beginning of 2012. Additionally, we have implemented new marketing strategies, such as promotional packages in order to encourage longer stays in the parking lots.

VIP lounge increased 195% or MXN3 million, more with regards of the opening of the three lounges, one in Los Cabos and one in Guadalajara and Puerto Vallarta in 2012, in comparison to the only VIP lounge opened in August 2011 in Los Cabos. It is important to mention that the lounges are fully managed and operated by GAP.

Food and beverage, car rental and duty free revenues increased 15% or MXN3 million, 14% or MXN3 million and 11% or MXN2 million respectively. These increases were the result of renegotiations in starting contracts and to an additional 200 square meters on the new food court area at Guadalajara. The rest of this year looks very positive, given the process we have in motion.

I would like to share with you our main strategies for the upcoming months. On the aeronautical side, Volaris has announced that it will operate a new route, Guanajuato-Chicago, beginning in September. Interjet will start operations in Manzanillo beginning with our route from Manzanillo to Vancouver in November. Spirit Airlines will announce the opening of the routes Los Cabos-San Diego-Los Cabos during the month of November.

In terms of non-aeronautical revenues, this year we are focusing our efforts on commercial developments of the new Los Cabos terminal that was a [physical design] to improve the passengers' experience by creating a more modern and innovative image with the most important international brands on the airport industry such as.

First, Aldeasa will operate 800 square meters of walkthrough duty-free shopping. And we are set to increase the revenue on duty-free spending per passenger on this airport by approximately 130% for 2013. Additionally, [Grupo Arias] will operate the food and beverage courts into a four-window food area that includes Carl's Jr and Subway, (inaudible) as well as a cash-on-dining restaurant.

We expect to increase our food and beverage revenue per passenger at Los Cabos in approximately 20%. The new terminal will have 800 square meters of duty-free area, 700 square meters of food and beverage areas, and 600 square meters of specialty retail, and almost 500 square meters used for the VIP lounge. With all these new contracts, we expect to increase the commercial revenue per passenger at Los Cabos airport by approximately 40% for 2013.

As for the other airports, we expect to improve commercial revenue with the introduction of redesigned food and beverages area in Puerto Vallarta and Tijuana. Also, we expect to redesign the retail offerings and commercial layout of the Tijuana and Los Mochis airports; also bringing to these airports the well-known brands that are in the demand. We will continue expanding our advertising units with the inclusion of the new areas in our inventory due to the expansion of the Tijuana and Puerto Vallarta airports.

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. I am very pleased to be with you this morning. The first half of 2012, in particularly the second quarter, has been a very good period for GAP. The Company has been able to cope, manage and deal with the global economical environment, and its performance is reflected in the results we are announcing this morning.

For the quarter, the sum of aeronautical and non-aeronautical revenues for the second quarter increased MXN129 million or 14%, which was affected by a decline of MXN116 million in revenues for improvements to concession assets and a decrease in committed investments for 2012, which will be 43% lower than the investments made in 2011. As a result, total revenue for the quarter rose MXN13 million or 1%.

In 2011, we had the highest annual amount of total committed investments pursuant to the Company's 2010-2014 Master Development Program. So when we compare those fees to 2012, we reflect declines in revenue cuts for improvements to concession assets. However, it is important to note that those revenues and costs do not have a cash impact or any impact on the Company's operating results.

Aeronautical revenues increased MXN81 million or 11% as a result of the 5% increase in the number of passengers that pay passenger charges, as well as an increase of 6% on our specific targets in June due to an inflation maximum price adjustment of 6% in the June 2011-June 2012 period. Aeronautical revenues per workload units grew 5% from MXN140 to MXN147 per workload units.

Non-aeronautical revenues increased 24%, primarily due to revenue increase in other tax and services, using of commercial spaces, car parking fees, VIP lounges, food and beverage, car rental companies, duty-free stores and time share developers; together with revenue for checked baggage inspection services. Variations of that will be explained in detail by Raul.

Aeronautical revenues per passenger grew 18% from MXN40 to MXN47 per passenger. Cost of services declined MXN9 million or 3%, and as per workload units, it declined 8% from MXN48 to MXN44 mainly as a result of a decline in MXN40 million in the other operating costs, mainly because in the second-quarter '11, we incurred costs for the (inaudible) process, which is now takes place in the 2Q 2012 and because of better performance in the recovery of account receivables during the quarter and during the first half of 2012, when compared with 2012.

A decline in MXN4 million in employee costs, as a result of a delay in 2012 for the purchase of uniforms and security equipment. In 2011, these were acquired in May. And in 2012, these are expected to take place in July. An increase of MXN8 million in security and insurance costs, and MXN4 million in services costs, mainly due to the start of the baggage clearance services in October 2011.

Cost of improvements to concession assets declined MXN116 million for the recent period explained. Concession tax increased MXN6 million or 13% as a result of the increase in 14% in the sum of aeronautical and non-aeronautical revenues, while the technical assistance fees increased MXN6 million or 20%, as a result of a high proportional increase in revenues than in costs.

EBITDA increased MXN125 million or 21%, implying that 97% of the growth in the sum of aeronautical and non-aeronautical revenues went to EBITDA. Excluding the effects of IFRIC 12, the EBITDA margin increased 390 basis points from 64% in the 2Q '11 to 68% in 2Q '12, while it increased 970 basis points from 40% in 2011 to 59% in 2012 when IFRIC 12 was included.

EBITDA per workload units increased 15%, going from MXN114 to MXN151 per workload units. Net depreciation and amortization expenses increased MXN17 million or 9% due to the fulfillment of Master Development Programs during 2011 and 2012. Total operating costs in 2012 declined MXN95 million or 12%.

Operating margin grew MXN108 million or 26%, representing 84% of the revenue growth that generates cash. Excluding the effects of IFRIC 12, the Company's operating margin increased 470 basis points from 45% in 2011 to 50% in 2012, while the increase, including IFRIC 12 was 850 basis points from 35% in 2Q '11 to 43% in 2Q '12.

The finance income increased by MXN27 million in 2Q '12 with respect to 2Q '11, mainly due to the effects of 1% depreciation of the peso versus the dollar during 2011, compared to a 6% depreciation in 2012, thus generating a MXN31 million benefit when compared with 2011. Net income in 2Q '12 rose MXN133 million or 61% compared to second quarter of '11.

The growth in net income represented 103% of the growth in the sum of aeronautical and non-aeronautical revenues. It is important to remember that margins and financial ratios that include revenues from improvements to concession assets, IFRIC 12, may not be comparable to margins and financial ratios that are calculated only with results that have a cash impact.

Therefore, although operating and EBITDA margins vary often, including the effects of IFRIC 12, the nominal results of operating income and EBITDA were not affected. The results clearly mention generating the effects during the second quarter of 2012 that for each incremental peso spent for the cost of services, the Company generates MXN8 towards the sum of aeronautical and non-aeronautical revenues.

Finally, I want to remark that we continue with our financial strategies taking them into markets to finance our Market Development Programs in the main airports, except Tijuana international airport, representing roughly 85% of our total Market Development Programs committed package. I just want to add to what Fernando said about the extraordinary shareholders meeting.

This will mean for the shareholder a total view for the year of around 7% at current prices. And for the Company, a change in the capital structure needed to reduce the common stock value in 3.6%, including also the weighted average cost of capital.

Thank you 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.

Our guidance figure remains unchanged and interest follows. Estimated traffic increase of between 3% to 4%. Aeronautical revenue is expected to grow between 8% to 9%; non-aeronautical revenue between 5% to 7%; and total revenues between 7.5% to 8.5%. And estimated cost increase is expected between 9% to 12%; weighted estimated EBITDA margin of between 65.3% to 66.3%; and an EBITDA growth between 6% to 8.5%.

The expected cash back rate is of 28%. And finally, the CapEx or expected investment of MXN880 million for the year. As Fernando and Rodrigo mentioned regarding the current shareholders meeting coming up on September 25, I just want to bring your attention to the fact that a 75% quorum is required for the current shareholders meeting to actually take place. In the meetings held in April, we reached only 72.94%, just shy of the required 75%.

Therefore, it was not valid due to a lack of quorum. We encourage you, the shareholders and the brokers who they represent, to participate in this shareholders meeting so that we may achieve quorum and successfully execute the meeting that will decide the special dividend approval, among other important decisions. The result is a high return on investment for all shareholders.

Thank you for your attention. Operator, we may proceed with Q&A.

(Operator Instructions) [Eugenio Amador], [Banobras].

Thank you for the call and congratulations on the positive results. My question is regarding the Grupo Mexico and Pacifico -- Grupo Aeroportuario del Pacifico productivity, if there is any new news on new developments. Also, when can we expect to have a clear outlook regarding the productivity? And a follow-up question on that is, is there any information regarding any transactions in the [BBC] regarding Grupo Mexico?

Thank you for your question. At this time, now, we have not any news about when Grupo Mexico will share the additional participation in the Company over the 10% that we have in by laws. The last information was when they announced they retired, they returned their offer, and now we are waiting to know how would be the next step. And they are not any -- we don't have any new information about other transaction.

Thank you.

[Christie Colio], Goldman Sachs.

You've done a very good job increasing the commercial revenues. Given the expected changes in layout and advertising activities still to come, what can we expect for the remainder of 2012, given you have actually surpassed guidance? And should we continue to see the strong growth base going forward?

We see that we will continue to grow in the same trend that we already have in this first half of this year. So we are foreseeing that our business (inaudible) is clearly managed as the VIP lounges or the advertising. We will still grow for the next month in very interesting terms. So we'll see our growth for this year with double-digit growth in our commercial revenues.

Okay, thank you.

(Operator Instructions) Nicolai Sebrell, Morgan Stanley.

Wanted to follow-up just a little bit on the commercial trend question. You said double-digits for the rest of the year, which I think it'd be difficult not to meet that. But if you think about the changes that you're implementing, the new commercial spaces, et cetera, do you see kind of a step change?

Because I think that's what we've seen so far this year, that we've seen a step change from previously, you know you're running at MXN190 some million pesos in non-aeronautical per quarter, and you're running at 240, 250 per quarter.

Can we see a step change as we go into next year up from that, or should I think if of it differently? So that's the first question. The second question is, just as you said in your comments, you had a big MDP over the last -- over this five year period for the tariff.

Given that MDP and given that traffic obviously did not turn out as we had hoped in the last several years, the most recent recovery notwithstanding, it seems to me that you might have a lot of capacity maybe and in the next go-around the CapEx should be much lower, or might it not be like that? Is there a reason why? Maybe capacity does need to be added and CapEx will be -- need to be -- continue to be at a relatively healthy level. Thanks.

Hi Nicolai, Raul Revuelta. In terms of the commercial revenue that we see for the coming years, the next year we're going to have a real interesting change in the revenue per passenger due to the new terminal at Los Cabos. So -- and we are seeing that our new business lines, as the VIP, as the advertising lines, will have a very important consolidation for the further years.

So we are seeing that as soon as all the old contracts could be ended in the next years, we consider that these commercial changes will take place in other airports. We'll be having some old contracts that come in primarily from the privatization. So we lent the totality of these old contracts with a condition that they are not from the market. We expect to end all these contracts in the next 24 months for all our airports.

Understood. And Raul, do those contracts tend to be clustered around certain months? Are they all in the beginning of the year or are they pretty spread out? And are most of the contracts dollar based or in some way indexed to dollars, or are they all in pesos?

A big part of these old contracts will end in the next 12 months. Something like 50% of the contracts will end in the next 12 to 15 months, and then rest in the next -- in the 15 to the 24 months. In terms of all the currency, just like the 20% of these old contracts came in from dollars.

Right. And new contracts tend to be in dollars or pesos?

Right now --

-- or in some sort of combo?

For example, for duty free, it depends on the airport. Always on the tourist airport, most of the sales come from dollars. We put our contracts in dollars. For domestic markets, we put our contracts in pesos.

Got it.

Okay, Nicolai, this is Fernando, the CEO of the Company. Let me add something about how is our expectation for growing in the commercial side. As Raul mentioned, the main reason for increase is an end of the old contracts, but also change in the way that we are improving the pre-configuration of the airports. The investments that were planned during the current period of time will deliver in the future better performance for the committed sites.

And in the -- your second question related to the capacity of our terminal; of course, you'll remember in the top of the last old years, the total traffic in our Group was in the range of 24 million passengers. Now, after four years, we are after a huge amount of investments to prepare our terminals and to increase commercial areas and reconfiguration. We are only moving in the coming year 21 million passengers.

So we have enough capacity, remaining capacity to receive the changes in the market that we expect one time at the domestic airlines putting in service new aircrafts and more capacity. And that is one of the reasons because the configuration of our Group is more oriented to the domestic side. Two-thirds of our traffic is domestic. So we are expecting only that the airlines, Mexican airlines, will improve its capacity to deliver this volume of passengers.

Okay. So in short, Fernando, the capacity that you see going forward soon needs to be expanded, and so maybe a sharp drop in CapEx will not be the case?

Exactly.

Okay, thank you.

(Operator Instructions) Nicolai Sebrell, Morgan Stanley.

Yes, thanks. So a little bit about Puerto Vallarta. One of the things that struck me about that airport and the area is, of course, it's very beautiful, great for vacation. Is there a possibility of greatly expanding the appeal and the vacation leisure traffic to that airport, and turning it into something akin to Cancun?

And I'm ignorant to the geography, so could be that there's not opportunity to build any hotels or it's somehow restricted. But I look at Puerto Vallarta I see a kind of middle class, upper middle class vacation area. And it seems logical that you could maybe expand that greatly. Is that possible?

We're working on that, aren't we?

Yes, we're still working on that. With the tourist board, with the airlines, we are continually working for trying to attract the new routes and preferences to the airport. And of course, to show the new infrastructure that mainly in the sight of Riviera Nayarit, it's going on. So it's a continuous effort to show the airlines what is going on new developments on Vallarta. Well, we are working on that with the government, with Puerto Vallarta government and with the tourist board.

Okay. So there's nothing structural as in the geography of the area of limited beach space or something like that that would -- it's a work in progress in short?

Well, from one side, I think from Puerto Vallarta side, it's a boundary to mountains. Well, for the other side, for the side to Nayarit, there's plenty of space with really nice beaches. It's still work growing.

It's the largest bay of the country.

Thank you guys.

Classic destination but it's incompetent with many other destinations that they are fixed now in Caribbean and also in Pacific and many other destinations. That is one of the key issue that we have now competition.

Yes, sure enough. Thank you.

Manuel Escobedo, Noriega Escobedo.

Regarding the last question, I think that it is also interesting consider what possibilities are there to develop; the Tijuana airport, considering it as a supplement to the southern California communications.

Thank you, Miguel Escobedo. This is Fernando Bosque speaking. Of course, the Tijuana area will expect a growth for the next year. The improvement in the facility of the Tijuana airport will trigger more demand for traffic because it's a good distributor of the traffic to the California area.

The time that we are waiting to have available this cross-border to use those passengers could be for 2014. This time, because now we are in the process to obtain the concession, the permit, and working very hard with the other side, with the other vendors in order to have really to put in service the facility that would trigger an increase in traffic.

And of course, that could provoke some kind of changes in the composition of the traffic that will affect to San Diego airport, could be there some kind of limitation that could be used by airlines and by passengers in order to go to any of the places of Mexico. And also could be a good point in Tijuana to use that facility in order to reduce time to cross the border. So we are very excited thinking in how will be the next step in order to have available the cross-border facility.

Thank you very much.

Neal Dihora, Morningstar.

Questions; one, have you guys told us how many airports have baggage inspection facilities and the number of airlines that are signed on? And then the second one I guess is on your EBITDA margin guidance for the year. The first half, it's 67.5, I think if you add together the first two quarters. And last year, it was 66.3, but you get the benefit of the lower D&A from IFRS. And I guess I'm wondering what you see in the second half that gives you pause I guess for keeping the same EBITDA guidance. Thanks.

We have our baggage clearance systems I guess in 10 of our 12 airports. Right now, we have only international airlines and (inaudible) operating with baggage clearance system, and we continue to working with the domestic airlines to have them inside the system and in order to have all of them working in our airports, trying to avoid the revision by hand, or the review by hand.

In terms of EBITDA margin, the result of the first quarter is a result of many things. The first thing is only in June the inflation goes up almost 50% out of the total inflation of the year. That means that our maximum carriers grow in that value. And then the (inaudible) go up and then we can charge higher revenue than in the last year.

The second thing is in commercially talking, we started the operation of the advertising in May of the last year directly. So that means that from now and going forward, the comparisons are going to be harder for us, and the revenues -- the comparison between the last year and this year, the revenues are going to decline only because of the comparisons.

Also in the last quarter of the year, beginning in let's say September, we execute the higher proportion of our budget in terms of maintenance because in this period of time, it's very hard to do this because of the rains. So in the last quarter, the costs of service are going to increase a little bit. So that's why our guidance is at the level that it is, and that's why we believe that we are going to close at the same levels.

Of course, if something happens, if we see that in the next month, for example, or in August that things are good and we can give a little better figures in terms of costs, of course we are going to change our guidance in order to show the market what is that we are seeing.

Neal, let me chime in about the question of the baggage. Just now we are in conversation not only our Group, all the airport operations in Mexico, with the Ministry of Transport, and in order to introduce changes in the security regulations, in order to implement the use of that kind of facilities, in improving the comfort for passengers and taking less time to go to the documentation or the tickets, that is very important.

And we expect that that would be approved in the course of the current quarter. And in terms of the EBITDA as Rodrigo mentioned, you know we are very conservative and we are waiting to know how will be the total traffic of the current quarter. And after that we will take an initiative to review or not the guidance.

No, that's fair. Thanks, it's helpful.

(Operator Instructions) Stephen Trent, Citi.

Thanks for taking my questions. Just a follow-up from me with respect to some of the coastal airports such as Los Cabos and Puerto Vallarta and maybe Tijuana. As you're looking to expand traffic flow, any color to what degree you are targeting? And forgive me if you already said this, if you're targeting local traffic with the Mexican airlines increasing their fleets?

And to what extent you might be trying to attract long haul traffic, from the eastern seaboard, for example? The geography of some of your airports makes it a little difficult to launch direct flights. And if that's true, to what extent are the airports in question able to handle large aircraft, or should we expect to see people from the eastern seaboard still transiting through Mexico City? Thanks.

Thank you. For the follow-up, of course, we will still welcome for domestic airlines in terms of -- to still grow in the domestic market of Tijuana and (inaudible) all in the domestic market. But for the international market, it is important to mention that, for example, we foresee for Tijuana as soon as the cross-border to be implemented that we could get some additional flights to Asia, as you remember.

And now we have applied to Nayarit and one flight to Shanghai. We are foreseeing that we could attract the Korean flights to Seoul, for example. And we have the opportunity to have other additional flights that will serve the California market through Tijuana. For the case of Puerto Vallarta, as you mentioned, right now we have some restriction of equipment to fly directly from Europe from Vallarta.

But the good news that some of the airlines right now are receiving their Dreamliner from Boeing, and this fleet will achieve perfectly without any restrictions with direct flights from Europe to Vallarta and to Cabos. So we are foreseeing that in two years, for example, one to two years, we will begin hiring the first Dreamliner clients to Vallarta and to Cabos. And that will open completely a new market to Europe.

Okay, great. Thanks for the color.

(Operator Instructions) We have no further questions at this time. I'd now like to turn the conference over to Mr. Bosque for any closing remarks.

Thank you all for your interest in GAP. We look forward to speaking with you again soon. Have a good day.

Thank you for participating in today's conference call. You may now disconnect.