Grupo Aeroportuario del Pacifico SAB de CV (PAC) 2013 Q3 法說會逐字稿

Good day everyone, and welcome to the GAP conference call. This conference is being recorded. For opening remarks and introductions, I will now turn the call over to Maria Barona of i-advize Corporate Communications.

Good morning and welcome to Grupo Aeroportuario del Pacifico's third quarter conference call. Today from the Company we have Mr. Fernando Bosque, Chief Executive Officer; Mr. Raul Revuelta, Chief Financial Officer; and Mr. Miguel Aliaga, Institutional Relations Officer.

Please be advised that forward-looking statements made today during this conference call do not account for future economic circumstances, industry conditions, the Company's future performance or financial results. As such, these statements are based on several assumptions and factors that could change causing actual results to materially differ from the current expectations.

For a complete note on forward-looking results, please refer to the quarterly report which we 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, and good morning. Your interest in GAP is always appreciated. Before I begin, I do want to mention that Mr. [Tomas Ramirez] was named our new Chief Commercial Officer replacing Raul Revuelta who was appointed CFO.

Tomas was previously commercial development senior manager at GAP and has been since 2007. He has an extensive background not only at the Company where he worked under Raul, but also in the aeronautical and retail sector. In our view, this is the perfect combination of experience for the job.

We are very excited for his new role at the Company and we will be counting on him to continue the greatest triumph we have made in GAP's non-aeronautical business.

As the year winds down, we are very happy to review the continuation of the positive traffic evolution during the fourth quarter. In three quarter we saw a 12% increase in domestic passenger traffic and a 10% increase in international passenger traffic reflecting over 600,000 additional passenger this quarter alone.

It is no surprise that 85% of this number or over 500,000 passengers moved in GAP's main three airports, Guadalajara, Tijuana, and Los Cabos as these are the largest and most important (inaudible) in terms of traffic and size. Guadalajara's passenger traffic rose over 10% for the third quarter, Tijuana over 17%, and Los Cabos over 18%.

Annually, as well these three airport had a growth performance for GAP with 1,600,000 passenger total increase or 1,236,000 passenger for the year. The airline that report this drop include Volaris, VivaAerobus, and Interjet.

As you can see the press release on page 2, Interjet introduced three new routes, VivaAerobus two new routes, and Volaris five new routes as well as an internal frequency from Guadalajara to Puebla. The new routes were all domestic, but note that international traffic also grew by the large international carriers such as American Airlines and Alaska.

AeroMexico's percentage in Grupo continued to deteriorate; this quarter losing 4 percentage points compared to the other airlines. That is not to say that AeroMexico is experiencing any challenges that we know. We believe that this model function of the growth strategy not being reflected in those particular airports.

Looking ahead to the end of the year, we have projected traffic of 4.5% to 5.5%. As you can see, we are (inaudible) surpassing those figure. At September 30, total traffic was 7.8%, so unless there is an outstanding occurrence, we are looking more in the 8% figure for the year-end.

I will let Raul Revuelta, our CFO, go into the financial details for the quarter, but I do want to mention that the EBITDA of the third quarter grow 6%, which was in the line with guidance and EBITDA margin was 67.5% also in-line with the higher end of our guidance.

This is important because GAP has tried to be as solid and transparent [make sure] that is top mind of the investment community. This figure illustrate our ability as a Company to really understand a market in which we operate and to translate our experience and knowledge into concrete results. In other words we consider GAP a sound investment choice, and as a management team we are clear where the Company is today and where it's going tomorrow.

GAP's operation continued to expand. As I have mentioned, we are constantly focused on expanding the Company, improving the operation both for our tenant as well as the passenger so that we can maximize the profitability of the operation.

In Guadalajara we have expanded the capacity of the runways and terminals in response to the new fleet as well as the additional number of domestic passengers. In Tijuana, the cross-border project is well underway. Thus we are working on adapting the existing airport to accommodate the expected passenger flow that will come from the link in the Tijuana to the city of San Diego.

As we mentioned in second quarter, the estimated start date for this project was June and that's what's happened. We (inaudible) in June and we expect to complete construction activities in May 2014 allowing us to be ready to connect successfully to the (inaudible) on the San Diego side.

As a result, the new complete rate would be operational at the end of May next year or beginning 2015. The Los Cabos terminals two and three will be fully operational beginning December of this year. As we previously discussed, terminal two was in fact update with the additional of over 3,000 meter of space, many of it commercial.

This will mean important increases in commercial potential from one of our most profitable airports. So the full impact of the subsequent impact on commercial revenue will be felt next year when the full use of these terminal is underway. Other airports in the Group that are also undergoing improvement as we had planned include airports of La Paz, Mexicali, Morelia, Guanajuato, and Manzanillo.

Finally, the reconfiguring of the (inaudible) will begin shortly. We are expecting to begin work after January and have (inaudible) full operational of March. Again this trend will be positive impact to our commercial revenue in 2014 and beyond that we can look forward to which bring me to another branch of the Puerto Vallarta airport.

You may have noticed this under recent events in our press release that we mentioned that (inaudible) dispute where a class action suit was brought against the government, and GAP (inaudible) land rights or property used for the Puerto Vallarta airport. This is a similar case to what we have seen in Tijuana, Guadalajara, and is the case of many other airports in Mexico.

What happens is that the concession the GAP has with the federal government include the these land areas; therefore the case is really for the Ministry of Transportation and Communication to settle these with the community that (inaudible) in the form of some kind of concession and compensation. We don't know at this time, I believe that this will have an economic impact on GAP and we will keep you posted of any resolution in this matter that is come to light.

And to close, I just want to mention that there are no update at this time regarding the capital reduction on the dispute regarding the Company's bylaw. The dispute will be going to the Supreme Court in a short time and we are hoping that better solution will be reached prior to airfield shareholders meeting. As always we will keep you informed in a timely manner.

Thank you for your attention. At this point, I will turn the call over to Raul Revuelta for his comments. Raul, please go ahead.

Thank you, Fernando. Good morning everyone. I will briefly review the financial highlights for this quarter. Total revenues for the period increased over 4.6%, mainly due to a 9% increase in aeronautical currency revenue and a 9.7% increase in non-aeronautical services revenue, also an increase of 26.2% on improvement to concession assets.

Fernando went into non-aeronautical and aeronautical revenue increases in detail, so I will move on to total operating expenses, which increased 2% compared to the third quarter 2012.

During the quarter, cost of services increased more than 21% compared to the same quarter last year, mainly due to the higher professional operating expenses related to the Company (inaudible) and the analysis of the new business, as well as a higher maintenance cost from the completion of (inaudible) terminal building, platform, runways, and security equipment, and higher [services] security and insurance cost.

Cost of improvement to the concession assets during the period decreased 26% and was based on the construction improvements commitment made in the Company's Master Development Program for each period with no cash impact.

Compared to the same quarter last year we are happy to say that operating margin increased [locally] 15 basis points from 42% to almost 45%. The nominal value for operating income increased just about 8%.

EBITDA margin increased 80 basis points from 60.6% in the third quarter 2012 to 61.4% in third quarter 2013. Financial expenses for the period decreased MXN15.1 million from an expense of MXN18.9 million in the same quarter last year to an expense of [MXN3.8 million] in the current year.

As a result, net income and comprehensive income increased almost 1% versus the same quarter last year. Net income before taxes increased MXN60.4 million from MXN524.4 million in three quarter 2012 to MXN585.2 million in this quarter.

Finally income tax, going from MXN56.1 million in the third quarter 2012 to MXN120.8 million in this quarter, an increase of MXN64.7 million and was also an increase of the current income tax in MXN17.8 million as well as an increase on the [deferred] income tax benefit MXN46.9 million from third quarter 2012 to this quarter.

Thanks for your attention. I will now turn the call over to Miguel Aliaga for our review of our guidance.

Thank you very much, Raul. Miguel Aliaga, Institutional Relations Officer. I would like to update some guidance for you for the current year.

In terms of traffic, roughly an increase of 8%; aeronautical revenues an increase of 6% to 7%; non-aeronautical revenues an increase of 13% to 15% with an increase in commercial revenues of 13% to 14.5%. As a result a total revenue increase of 7% to 8.5%.

In terms of cost of services, we expect an increase of 9% to 10%; an EBITDA margin of 66.5% to 67.5%, with no changes; increase in EBITDA of 6% to 8.5%; a cash tax of 30%. And finally the CapEx has no changes of MXN655 million.

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

(Operator Instructions) Neal Dihora, Morningstar.

Just two questions. One, the traffic at Tijuana looked very strong. I wonder if you could talk about whether there was anything one time or anything just as ongoing increases with airline routes and stuff.

And the other question was this other opportunities that you guys talked about, just wondering if you could extrapolate and talk more about what those are. Are they different airports in different countries, airports in Mexico, or anything else?

This is Fernando, the CEO of the Company. Around the question of the evolution on the plan of Tijuana, of course the increase that we are experiencing will continue. The question is the movement of the passengers in the (inaudible) between Mexico and Guadalajara to Tijuana is one of the most successful areas of improvement in traffic -- aeronautical traffic in the country.

And the volume is not only seasonally. This will continue -- our projection for the next year will continue increasing. And linked with this point is the project, the cross-border project that connects the facility initially to the other country.

Both countries could be -- use this facility to reduce time because currently passenger need to go to the area of San Diego or from San Diego to Tijuana it take time in the area of the immigration and custom.

So with this facility they will reduce time. So the airport Tijuana could be experienced more interest for airlines in order to provide a transportation solution for the people who is living there in San Diego and beyond there to handle this, and the same in both sides. So our expectation for the opening of this facility at the end of next year, of January 2015, will trigger an extra increase in the volume of traffic.

Bernardo Velez, GBM.

First I'd like to know regarding your expansion plans, how many can we expect an increase in square footage in terms of commercial spaces and will this new terminal openings and expansions, will they mean assigning bonus as we saw in the same quarter last year?

Are you talking about what airports, Los Cabos airport?

Yes, and --

Los Cabos airport, okay.

-- with (multiple speakers) mainly?

Okay. So we will -- at this time we are in the end of the works to open an expansion of the terminal 2 in Los Cabos. The question was that increase in the our passenger yields in this terminal require more space, more for commercial, more for comfort of passengers.

So in last May it was initiate the project to interlay the old terminal 3, the charter terminal which are important for configuration of an update to provide this space to passengers and simultaneously to increase the commercial areas, same problem that we have in terminal 2, but doubling the offer.

So that will need to move in the next year another portion of the passenger that currently is using terminal 1, that is the passenger is using the [Continental United] that will move also to this area, to the terminal 2 linked into terminal 3. So that is the reason because we are doing this expansion we need this commercial area for the passengers. That is in the case of Los Cabos.

And so the expectation for 2014 will be to increase commercial, increase sales, and of course our portion of this mix. In the case of Guadalajara, the expansion that we are doing now is an expansion of the international side and also the domestic. Domestic at this time is receiving, the Guadalajara airport, the passenger flying we started making contact that before was in terminal 2.

This terminal 2 is what (inaudible) with the use for commercial spaces. So one time that we move this portion of the passenger to terminal 1, that require also to provide more space and we are doing reconfiguration of the commercial areas.

In the international side terminal 1 also, we are expecting an important increase and because we are doing a huge expansion of the ramp area so we will have more planes during the -- in the first time in the morning when passengers.

So the opening of this area will start in next December with the duration haul, and in three months for March 2014 we will have completely opened a new area. That include new commercial facilities and that will provide of course more comfortable passenger and also increase in the sales.

There are also good news for Tijuana is the [growth] that we are looking in Tijuana and project for the expansion of more passenger for the cross-border facility also require more commercial spaces. So recently it was opened, it launched in Tijuana airport and new shops and new food and beverage facilities, and that will continue.

So the expansion in these three airports as you know is the main of our increase in traffic (inaudible) for next year and beyond, an important increase in commercial.

Okay, perfect. And you mentioned you are analyzing new businesses. Will you explain more on that?

Can you repeat the question please?

Yes, you mentioned in your press release that part of the increase in expenses from the -- you were analyzing some new businesses. Are you probably thinking about other opportunities in the country or outside, or maybe other airports, or can you explain further on this?

Yes, this is Raul. In the last month we were looking to some additional opportunities on expansion on the airports on the international side. So we keep looking for a good opportunity that could be created value for the value of the Company. And we are still (inaudible) efforts to attempt it and especially what we are revealing our expenses was (inaudible) for the acquisition of some airports in Latin America.

So I mean it was reviewed on the document and the return for those investment was not good enough for the Company.

[Neal] (sic), relating to your question about international expansion, let me provide more color for everybody. At this time we have not in our focus any of international expansion or business. Three-four months ago was very (inaudible) opportunity to analyze.

So that was not possible because there was a sale of some of this business for another group. And that -- the reason it (inaudible) the profitability related to our view of the aeronautical and airport business.

So after that we are coming back inside to our business, to our airports, and to looking how to improve commercial opportunities.

With more insight in the -- about -- to the opportunity to recover the [octane] facility we have in Guadalajara to transform in a good business and also doing a new expansion in car park facilities in the expansion of the Company's store in different airports, the VIP lounges expansion, and that is the area that we are more concentrate.

So at this time we are not thinking outside of Mexico, outside of our network opportunities. We are concentrating our business in our terminals.

Okay perfect, that was very helpful. And if I could, just one more question. You mentioned increasing expenses in legal fees, but you mentioned no update regarding the dispute with Grupo Mexico. So could you comment on that, like why would there be increases in expenses if there have been no advances on the matter?

And if you could tell us what can we expect from these fees going forward if the matter heats up? I think probably you will be spending a little bit more on that.

Of course, remember, lawyers in Mexico saying that this case is so expensive. If you want to win a lawsuit, you need to look for the best of the lawyers and pay for that.

During this quarter we spent around MXN13 million, around $1 million, but of course during the next quarter, the last quarter of the year, probably during the first of the next year, we will continue spending money in this area.

Of course that is not for the entire life of the Company. It is during the period that we need to resolve some important issue for all the stakeholders. That is the position related to the bylaws.

If you have not clear how will be the future of the bylaws, you cannot deliver any other activity for stakeholders. I think this is the reason because we are concentrating these points.

During all the effort defending the bylaws, (inaudible) is the only that we have as the relation between the shareholders and the management of the Company, and that we of course continue. The same one we have some kind of difficulties with the physical things or any other, we have to use the [associates of the Company] to have the best defense.

And the other areas I think is -- Raul could be explain more about some one-time expenses that affect impact in the EBITDA of the third quarter.

Yes.

It is something that is important everybody to understand it.

It's important to mention what happens when each (inaudible). In terms of the revenue we have an impact of the one-time fees, assignment fees that we receive for the opening of the terminal 2, for the assignment fee of basically terminal 2 at Los Cabos one year ago.

These in some way have an impact, an important impact on the commercial revenues and of course of the total revenues. And in terms of the operating cost, we have of course the one-time impact of the additional fees for review potential opportunities for expansion on international airports.

And of course an additional cost for the openings of additional convenience stores, VIP lounges, advertising, and the other directly operated business lines that we are growing in our Group. Of course we expect that the expenses that come from the directly-operated business lines will continue growing on the coming months of course always accompanied by an increase, an important increase on their commercial revenues.

So what is important to know as all the business lines directly operated by GAP have a really healthy EBITDA margin and we expect to continue on that line in the future as well for (inaudible).

Okay perfect. Thanks so much for your time.

[Ana Renault], Santander.

Maintenance costs have increased significantly more than operating revenue for the past four quarters. Could you elaborate on this and is this something you expect to continue going forward?

Yes, this is Raul. Maintenance has some increases. As you know, our Master Development Plans are deemed for five years. We are getting into the last year of the master plan. And for the last year of the master plan, we almost -- all the infrastructure in our route of airports half are really developed or the additional square meters of the development for the period.

That give us an continuous increase on the maintenance. The maintenance for the airports mainly directly the arrears from the (inaudible). So as you can see all this year, we are increasing our maintenance expenses mainly due to the operating of new infrastructure that happens one year ago in almost all our airports.

I mean, the new terminal at La Cabos, expansion of Puerto Vallarta, the expansion of Guadalajara, and other expansions, mostly in terms of -- for square meters. But mainly what is important to remember is there is our direct relation from the maintenance expenses to the number of square meters on the terminals.

Okay, thank you. And just to confirm, you were looking at opportunities abroad which was what made cost go higher, but you are not anymore, you are focusing on your terminals now?

Of course, yes.

Yes, mainly on terminals, yes.

Terminal and especially we have in our construction and concentrating how to obtain more revenue, how to develop a business [directly] by us or using third parties.

Okay, thank you.

Stephen Trent, Citi.

This is Kevin Kaznica, filling in for Stephen Trent. So how are you seeing the mix of traffic growth going forward with some domestic airlines ordering planes, but international LCCs like your airlines and others adding flights, do you see most of the growth coming from the domestic side or from the international side?

So Stephen (sic), it's Fernando. Let me explain, the last news that was appeared in the newspaper during the current week is important. The project that initially was -- its expansion in this field was more concentrated in Interjet and Volaris and some kind of [substitution] in the case of AeroMexico, now it's coming more importantly by [Revarbos]. Revarbos were reported to increase in the next four or five years the fleet up to 52 planes with more capacity, 200 seat for each plane will clear a new panorama for the country.

At this time we are looking with our external and -- expert to try to understand how will be the evolution, how will be the distribution of this capacity between our network and also how will be the operation that we will have in the case of (inaudible) Mexico airport.

That will of course change, will change the resolution in the total country. We say that these three main airlines when they consolidate will lead to more competition in terms of tariff, prices, and that also will trigger a new increase in demand.

And also considering that the economy in Mexico now is not in the same place as last two years, I think is the deficit in the offer of right prices for the seats in the planes. It provides the opportunity for the country to take an increase in the place of the more than 5% within the next two-three years.

And what portion of these increase in traffic will come to our airport, our plan is the expansion of Guadalajara airport in terms of ramp tarmac and as a terminal we will (inaudible) some of this capacity in coming from these three airlines will use our airport mainly and increasing the connectivity and increasing for that reason our volume of passenger sales and EBITDA.

That is our vision, but we need to check, talking with the expert and also looking exactly how is it based of the fleet that is coming for Mexico.

In the international side, our expectation is some of the current airlines, it is clear in the case of Volaris is continue opened new international routes. And also the next -- in less than two year, we will look in the Houston Hobby, new base for Southwest that will connect -- link a lot of Mexican destination with this airport and I think that will be one of the winners of this strategy.

And Interject is now also thinking that all the Atlantic coast in the state will be very important for its expansion. And I think Guadalajara will be one of the candidates and of course continue the days of Los Cabos that currently we have a huge expectation that a new alliance and more fleet of not only Mexican, it would be more from the state and (inaudible) will come here.

In the case of Vallarta, all the communities, the tourist communities will have huge effort to bring more traffic. I think in these cases also, will be not domestic, will be more the international. Now, that is the color that could be provided you as you can --

(Operator Instructions) Eduardo Couto, Morgan Stanley.

Can you comment about this issue with the farmers in Puerto Vallarta; if this is something relevant or that it could have a meaningful impact for the Company or not?

That is a permanent question in this country, Eduardo. It is not only for airport, it's in many -- over (inaudible) in the highways, and remember also what happened two years ago in Mexico city for the expansion of the airport.

Of course that is something that was not completely resolved in any area. The original land in some of the airports in the country was -- before was -- the owner was the farmers of the -- and the (inaudible) that they use in Mexico. And probably during the period of time the land was occupied by the authorities to transform in the facilities for the population was not completely resolved a legal issue.

So with the time, the expectation on this -- the heritage of the (inaudible), thinking that they could be obtained again more compensation, a compensation updated to this time. So they are still in the case of Vallarta that the land, completely all the land including the construction of the airport was not completely takeover by legal way.

So they are asking to the minister of transport, the undersecretary of transport to resolve the question stating more on the -- of course we have on legal construction with the government. So any kind of compensation will be paid for us, will be paid by the authorities.

And that is the same question that we have also in Guadalajara, in Tijuana, and many other airports outside of GAP. For Gap, that will not have any kind of economic impact in our construction.

And also in Tijuana --

In the end it's the government paying if there is something to pay.

Of course.

And a lot of it is illegal. And also talk to Fernando, these are payment that we usually say, well, it will be also impossible to think about closing operations of our airport long. First the authority will pay or will arrange something with the (inaudible), then to start operation for the most important communications of the country, right.

Yes, it's impossible at this time and in 2013 and 2014, an airport as Guadalajara, Vallarta, Tijuana could be again transformed in land for the farmers, that is not possible. So usually the way is to pay a compensation during the construction in another land, so doing something that could be -- satisfy the demands of the (inaudible).

Bernardo Velez, GBM.

Just a quick follow-up. When you mentioned that you were going to focus all of your efforts in (inaudible), you mentioned a hotel in Vallarta if I'm not mistaken. Could you comment if this is the hotel base currently operating in the airport, but it's -- if I'm not mistaken, it is in yours, or if you are thinking about probably constructing another one?

Fernando; that is true. The hotel that we have now in the airport is in operation. That wasn't all construction. That was done before GAP appeared as a operator at the airport. But with time, that was expired, and the construction will return to the airport operator.

So that will require an important investment to transform this hotel facility in a modern and with more capacity and with new opportunities to provide extra services that currently are not in the airport.

So it's -- so it goes to airport, to the terminal, I mentioned less than 50 meters in front and with -- (inaudible) is to look how to connect, link it, the terminal building with (inaudible) provide premium facility for some of the passengers. And the way to manage that could be directly by the airport operator or looking partner specialized in auto business.

That is the plan and the first is recover the facilities and after that prepare the transformation of the [future]. Basically we will try to do the main investment and how to manage that, that will be a second question to resolve (inaudible).

Okay, perfect. So you don't have any updates regarding -- I don't know if it's probably a trial that you will have to invest something like that?

At this time we have -- the winner of the legal dispute was clear in our favor. Now we are in the process to recover the facility and that is another legal aspect.

In Mexico it's not easy resolve that in short time. And I think our fight is coming in from the beginning, practically six to seven years ago. And we expect that in 2014 we will have the possession of this facility, and so to start to transform.

At this time we have no other questions. I will now turn it back over to Mr. Bosque.

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

Ladies and gentlemen, that concludes today's presentation. You may disconnect your phone lines and have a wonderful weekend.