Grupo Aeroportuario del Pacifico SAB de CV (PAC) 2014 Q1 法說會逐字稿

Good morning. My name is Chantel and I will be your conference operator.

At this time, I would like to welcome everyone to the GAP First quarter 2014 earnings conference call.

(Operator Instructions)

I will now turn the call over to Maria Barona of i-advize Corporate Communications. Please go ahead.

Good morning and welcome to Grupo Aeroportuario del Pacifico's first quarter 2014 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 may be made during this conference call and they do not account for future economic circumstances, industry conditions, the company's future performance or financial results.

As such, these forward-looking 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 statements, please refer to the quarterly report which was issued yesterday.

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

Hello, everyone. It is good to speak with you again to discuss first quarter results this time. Thank you again to all of you who joined us on GAP Day 2014 in New York. It was a pleasure to see you and we appreciate your interest in the company.

The first quarter marks the beginning of the new year and we are very pleased with the results. We reached record numbers in terms of profit, revenues, financial net earnings, EBITDA, as well as net income.

To begin, we experienced a 12% increase in the total number of terminal passengers. Most of the uptick was in the four main airports of Guadalajara, Tijuana, Los Cabos and Puerto Vallarta, which represent 80% of the traffic growth for the period.

For the month of March, we reached historic record traffic in the airports of Aguascalientes, La Paz, Guadalajara and Los Cabos. Domestically, there were several new routes headed from Guadalajara, Puerto Vallarta and Los Cabos [Bayar], Volaris and Interjet. In some cases, the airlines have added as much as seven weekly frequencies from these cities to other destinations in the country.

Internationally, we saw a lot of activity from charter flights, specifically Frontier Airlines flight come in from the Midwestern United States to the cities of Puerto Vallarta and Los Cabos. For Puerto Vallarta, specifically, most of the increase was from the international side, most likely in response to a higher number of vacationers from the U.S. who are seeking sunny areas.

We cannot discount the fact that the area is experiencing renaissances and the local governments, as we have mentioned, have been very active in promoting tourists in the area. Likewise, local developers and hotels have also been busy updating hotels and building new ones to accommodate the growing tourist interest.

However, if you review the traffic tables on pages three and four of the press release, there was also an important increase in the number of total passengers in the smaller airports. For example, the Aguascalientes Airport experienced an increase of over 22%, mainly stemming from domestic flow. Likewise, Guanajuato and La Paz also grew by over 18%.

It is worth mentioning that while we are bullish to traffic for the rest of the year, we must point out that as the year progresses, the comparables will tend to level off. As you recall, traffic rebounded significantly in the second half of 2013, so when we arrive to the second half of 2014, the comparables would be more challenging.

That said, the number of available seats continue to grow. We continue to invest significantly in the significant growth of the airports and commercial continued to be an important and profitable area [of this]. Commercial revenue increased 15% over the quarter, an increase of MXN14 million, with the highest growth coming from those businesses that are managed directly by GAP.

Across the board, every single business unit, [from parking or to the convenience store] experienced an increase. The most significant increases were in the time shares, convenience store, parking, and food and beverage, so this was a very good start to the year, commercially as well.

Moving onto the VIP lounges, in the first quarter 2014, we served over [39,000] VIPs at our lounges, representing growth versus first quarter last year of over 62%; another record figure. Most of the guests, as can be expected, are in the Los Cabos VIP lounge, but this quarter we added a Tijuana lounge that was not in operation in the first quarter 2013.

In terms of the CAP EX for GAP, the company invested MXN146.1 million. As you recall, most of the CAP EX is spent at the beginning of the (inaudible). As you are perhaps aware, in June of this year, the master development program negotiations will begin and will be concluded in December. We will keep you posted on this when they are concluded.

However, our goal is to maintain profitability while implementing a plan that masterminds the long-term growth of our company. These are the goals that we will be trying to reach as we move into the negotiation.

The company's shareholder meeting took place last Wednesday and it was a very successful event. We had great shareholder participation, with a high number of the minority shareholders present, reaching [current] of 94.5% at the ordinary meeting and 81.4% at the extraordinary meeting and we were able to approve all the items of the agenda.

Among the approvals were the financials for 2013 period, several committee reports, as well as MXN3.1 billion total distribution; MXN3.1 billion total distribution, representing a more than 7% dividend yield. We also ratified the board of directors with only two changes, ensuring the continuity of the board; a group that has successfully led the company through many challenges. We are very pleased with the contribution to the company and thank them, all of their leadership and guidance.

Thank you for your attention. As I mentioned, we are very excited to begin the year with record results, a strong board of directors who are ready to take on the challenges to come along with us, as well as the market that is showing signs of continued momentum.

We realize that the Grupo Mexico dispute is still pending and we are confident that the Mexican Supreme Court will uphold a fair market in Mexico. We are also confident in the results the company has continued to show under the current leadership. There is no doubt that GAP is positioned for continued success for many years to come.

We 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 the first quarter of 2014.

Total revenues for the period increased over 10%, mainly due to a 12.5% increase in aeronautical services revenue and 20.5% increase in non-aeronautical services revenue and decreases of 34.4% of the improvement to concession assets.

I would like to highlight the relevant growth of non-aeronautical revenue, derived from business directly operated by GAP that increased 20% in the first quarter, of MXN16.5 million. In terms of the total operating expenses on the first quarter 2014; this declined MXN28.2 million, or 2.6%, compared to the first quarter 2013, due to the following.

During the quarter, cost of services increased 3.3%, or MXN8.5 million, mainly due to an increase of MXN7.7 million in other operating expenses derived from provision for doubtful accounts for MXN4 million, as well as MXN2.6 million in supplies for convenience stores, in addition to an increase of 13.4% in security and insurance costs, or MXN[5.4] million, increasing maintenance required for terminal buildings, including equipment platforms for our runways and an 11.4% increase in utility costs.

Cost of improvements to concession assets during the period decreased 34.4%. EBITDA nominal value increased 18.3% in the first quarter, with an EBITDA margin, excluding the effect of IFRIC 12, increased from 69.9% in the first quarter 2013, to 72.2% in the first quarter of 2014. Both EBITDA margin and nominal value are historical first quarter maximums for the company. As a result, net income and comprehensive income in the quarter 2014 increased by MXN112.3 million, or 20.9%, compared to the first quarter of 2013.

Furthermore, income taxes increased MXN70.5 million, while deferred income tax went from a benefit of MXN130.8 million in the first quarter of 2013, to MXN112.2 million in the first quarter 2014, resulting in an expense increase of MXN18.6 million for the quarter.

Thank you for your attention. At this point, we can move onto the question-and-answer session.

Thank you very much. Ladies and gentlemen, at this time we would like to open the floor for questions. If you would like to ask a question, you may press star 1 on your touchtone phones now. Questions will be taken in the order in which they are received.

If at any time you would like to remove yourself from the questioning queue, you may press star 2.

Once again, as a quick reminder, if you would like to ask a question, please press star 1 on your touchtone phone now.

Bernardo Velez, GBM.

Hi, good morning. Thanks for taking my call.

A couple of questions, actually; first, what kind of strategies have GAP implemented in order to incentivize traffic and how have these strategies affected your receivables, mainly?

Thank you, Bernardo. The strategies that we are following for the increased traffic is the same that we are implementing during the last three years. The first thing is to know better the market to have continued approach to the airlines, showing how was the opportunity of the market (inaudible) and during the last seven years, and also showing how is the [deal] that they could be obtained, flying to our destination.

Also, we are using some incentives to the airlines concerning how is the capacity to complement during the first year, or the first two seasons, [in] the start of the operation. In the beginning of any operation, there are some risks that we are trying to offset to the airlines and that is mainly the way that we are looking.

They are in agreement with the airlines, and Canaero is the association of airlines in Mexico. That includes all kinds of compensation when they are opening a new service or when they are increasing the frequencies of the capacity of a link.

Okay, so is it fair to say that the increase; the -- I think its 420% quarter-over-quarter increase in receivables could be mainly attributable to new routes or new services?

No. It's not for that. I mean MXN4 million in receivables is the adding of plenty of different clients. I mean, but what is more important to both is that we have, for the case of the airlines, for example, almost MXN400 million on cash as a warranty for the operation, so the receivables, at least for the moment, it's not an issue for the company.

And I would like to have a little update regarding the shareholders meeting that you have previously planned in order to discuss the technical assistance agreement. I think when the whole issue started [taking] a bit more noise, you mentioned that GAP was planning to call for another shareholders meeting in a timely fashion in order to discuss this issue.

Bernardo, the situation at this time is in the court. So during the period of time that the court is taking a decision about how [was] the meeting in December; December 3rd, not permit to go again to a call. So we are waiting to receive our resolution about that in order to take or propose to the board of directors any other strategy or to call for a general assembly or a special assembly or any other.

But now we (inaudible) provide the information to the market and you have in our website the report; the analysis that was performed by Oliver Wyman. And the conclusion of this report is clear for us, and also was clear for the board of directors in the last meeting that they acknowledge that the convenience to continue with the technical service agreement in order to continue receiving the benefit of the knowledge that (inaudible) is providing to the company.

And one clear show of that is the results of this quarter [and the] (inaudible) of the last year, and also will be very clear when we will continue and showing the performance within the current year.

Just to be clear, if a resolution isn't reached in the next, say three to four months, GAP wouldn't be calling for a shareholders meeting in order to discuss this issue and that we could expect the technical assistance agreement to be automatically renewed in the same terms as last time; right?

There are a period of time that is 60 days before the end of the current time of the contract to communicate to the AMP if they will continue providing this service. But, however, at this time, we cannot say because [it's] expecting to receive resolution from the court before to do any kind of a statement about that.

And could we continue to expect a resolution from the Supreme Court in the whole issue with Grupo Mexico in the next one or two months? I think that was your previous guidance; right?

It's very difficult to know how will be the time that the Supreme Court will take to resolve about this question. And in the two months ago, our expectation was that they will take four months, but now we have not any new information. We have no news about that and it's very difficult to know. It's very closed, the Supreme Court to provide information about that.

And lastly, do you have a date for the equity reduction recently approved?

The general assembly approved the proposal to do the distribution before end of November; the same for the second tranche of the dividend payment and for the first tranche of the dividend will be before end of May. However, the management of the company will try to pay as soon as possible in each of the cases, as soon as we have clear how will be the right moment to pay. But of course, the announcement will be before we do the payment, so everybody will know with enough time when will be the payment.

That was really helpful. Thank you.

Thank you, Bernardo.

Thank you.

Neal Dihora, Morningstar.

Yes, good morning. Very nice results in the quarter.

I had two general questions; one on your direct operations for commercial activities was around 29% or 30% of total commercial sales. Is there any limit or target that you have for where you want those sales to be? I mean, can they go to 50% over the next five years or is there something limiting that?

And the other one was I think you guys said that you can repurchase up to MXN400 million of the stock. Is there any sort of target or timeframe around that number? Thanks.

Thank you, Neal. Of course it's a very good result for the beginning of the year. It is very interesting how is a company who managed airports is changing when you have the economy that is not growing in the same pace that we are growing.

But [inside the operation], commercial activity that we are doing now is focused in four main areas, as you know. It's car park, VIP lounges, convenience store and advertising; these four activities and also we have other minor activities that we will continue growing to be [continued] during the next two or three years, is depending on how [is the pace] that we are [doing] to open new shops and also new VIP lounges.

We are in this, doing our work to have good performance for the next year and it's very difficult to reach the level that you mentioned; 50% of the total commercial or total [non-aeronautical], because there are some areas that is probably impressive in how is their performance. We are talking about duty-free, talking [of] food and beverage, talking about (inaudible), talking about rent-a-car.

So it's very dynamic sectors, but of course the level of our commercial activity in that operation will continue growing in a very high pace, especially 2014 and 2015. And [one time that] we will consolidate these activities could be we will move in the range of a one-third/two-third. That could be a nice figure, because don't forget that the VIP is -- sorry; the duty-free and rent-a-car and food and beverage continue growing.

And in terms of the report [challenging] of the stock, as you know, for the moment, we have in treasury something like MXN36 million of stocks for this year. The general assembly gave us an additional MXN400 million as a repurchase fund. We expect in the coming months that we could have some action or trying to go into the market to buy additional stocks with this MXN400 million fund for repurchasing. We expect that in the coming year we will try to execute, depending on the market, this amount of money.

Of course, depends on how the market could react, how could be the volatility of the stock and, of course, the idea for the management is not to be in some way a market-maker, so we will not like to have some kind of distortion on the price of the stocks. So we're going to be really careful of the buyback of any stock for the company.

Yes, Neal, we have an important portion of the stock in the company that permit [to] better distribution to the shareholders and we will get these shares in our balance sheet [to] we need to use this money or this stock for any other strategy.

So they could be used only in looking to improve the distribution to the shareholders and also the time will depend on how is evolution of the stock and also how would be the end of the resolution of the Grupo Mexico issue, because they will have to put in the market in excess of the 10% of the shares, so that is something that will be evolving during the next 12, 24 months.

Okay, thanks. That was very helpful.

Thank you.

Ravi Jain, HSBC.

Hi, good afternoon. I just had a couple of questions.

One is what impact do you think in the rest of the year do you expect from the weaker consumer spending that we're seeing, especially in other sectors, like retail in Mexico? Or do you think that the lower prices of the airlines will continue the solid growth of passengers that we have seen in the first quarter?

And secondly, do you think that the change in the [rate] for luxury buses has had a meaningful impact on air traffic?

Hi, Ravi. In the first point of your comment, currently [you are] looking the evolution of the traffic, the demand for tickets for the airlines is not following the same pace that you have in the economy of the country. That is because there are a lack of capacity and the need to transportation for the population. Mexico is a big country. The population is distributed [along of the] country and need to use this transportation system.

Currently the aviation is providing [based on] 2% of the total needs of transportation, so there are huge margin to increase this activity and that is the reason because the airlines is putting in operation more planes. Of course, the new beginnings to this sector could be to spend less money in the airports. Of course, but there are some of the activities that will continue.

For example, it is necessary to arrive to the airport and [that means] using different transportation modes. Also, you need to consume food and beverage in the airport; you have two or more hours waiting in the terminal and everybody consumes something that they need. Also, in the areas of retail, [especially retail] that is our company's history; just the kind of a product that this new population coming to the sector is consuming and that is a phenomenon.

As you know, in Mexico, you have the phenomenon of the company store that is Oxxo and many others that is the main source of consume of product that is [normal element that this] population needs. So we are not looking [risk] to reduce the spend to hurt; we are looking, that is, on increasing the volume of the sales, as we are looking in Guadalajara and Tijuana. That is the more representative [source] of our growth.

Sorry, I [don't] remember, Ravi, your second question. That was related to the --.

It was related to the [rate] on the buses; basically, do you think that has had a meaningful impact on air traffic? Do you think people are actually moving from luxury buses to air because of the increase in [rate]?

[Due to traffic].

[That could possibly].

I mean, it's important to know for the traffic and for the industry. Of course, as Fernando said, the industry, the airplane industry and the traffic really are a tiny part of the total number of movement of people around the country. Of course, the buses are the biggest way to move in the country.

As the airlines in Mexico get additional seats and continue bringing efficiency cost and low fares, we will see that some of the passengers could be switched from the bus to the airplane. But of course, it's important to know that the market of buses will be, in a big part, will be not -- the airplanes will be not competitive against the buses, just for the size of the travel.

On that idea, we see an upside for bringing some additional passengers from the buses to the plane on their long haul or their long distance travels on bus, but of course, in the short area, would be pretty difficult to get some kind of competition between the bus and the plane. So in overall, we see that there's a huge potential on the Mexican market. We see that it's enough room for growing the coming years for the airlines.

But of course, the oil price and the economy performance would be two key issues to determine how the future and the sustainable growth for the industry that we could see for the coming years.

And, Ravi, also, think about in our network in GAP that we have the mainstream is moving, Tijuana-Guadalajara corridor. Tijuana-Guadalajara corridor in bus takes more than 10 hours, so it is not something that would be compete with the -- I think they are more value to fly with the tariff that now is offering to the main airlines.

But similarly, to travel to the international destination, to the U.S. is, from the medium sized airports that we have in the middle of the country, Aguascalientes, [Vajillo], Morelia is growing very fast, because it's the [competitivity] of the tariff that the airline is offering. And in this case, we are talking not only [local carriers]; we are talking also American Airlines, United, and Delta is offering a very competitive tariff.

And of course, in the case of the tourist destination; that is Cabos and Vallarta is not [impacted]. The buses is not competing when we are talking about international passengers.

And my last question is basically, as you mentioned, on the tourist; on more on the tourist airports. I mean we have seen also a strong traffic trend in most of the tourist airports in Mexico and what do you think is the main driver of this?

Is it that occupancy levels in the hotels have been pretty low and they've been kind of getting back normalized levels? And do you think that this trend of strong tourism is sustainable? What do you think is the main driver of this?

Hi, this Raul. There's two different explanations and difference well, for Los Cabos; Los Cabos hotel industry are growing. They're still building additional rooms on the market. I mean, right now this is a market that it's bringing additional airplane seats and new airlines are beginning operation on Los Cabos.

For example, just in the last 24 months, we have the beginning of operations of Virgin America, of Southwest; we have additional seats from Frontier, from American, so right now, Los Cabos is a great moment and it's more for an increase of rooms and the destination is still growing in terms of [keys] for that place there's new hotels in construction right now.

For the case of Vallarta, the last three years, there was an important decrease of number of tourists on the destination. For this first quarter, after almost three years of decrease in the number of passengers, we see an important recovery of tourist destination, mainly from people flying from Canada and United States that are coming again to the market. It's important to notice the additional airport of the Ministry of Tourists; [federal tourists] and the efforts from the tourist [secretariats] from the State of Jalisco [managed] to bring back these people to the destination.

So what we are seeing in Vallarta; it's on a strong recovery. Then the number of rooms is still on the same rate as the past years, but the efforts with marketing and additional support for [their lands] are bringing back the tourists to Puerto Vallarta.

Thank you very much. That's very helpful.

Thank you, Ravi.

Thank you.

Stephen Trent, Citi.

Mr. Trent, go ahead.

Hi, good morning guys. This is Kevin standing in for Steve. Most of the questions were answered, but I just wanted to clear up; did you say that you have had any update on the Supreme Court review of your dispute with [Grupo] Mexico over your technical assistance fee or was that just something that we're still waiting for?

Kevin, this is Miguel Aliaga.

Fernando mentioned, because this is still on the courts, we cannot continue with the process. And of course, as Fernando mentioned before also, this is the technical assistance fee [has] also consulting [terms] finally develops is something that is very common in many concessions worldwide, even (inaudible) renewing it automatically, for example.

And again, [know] this finally has proven that most of the results come from the support on the concession holder, for example; no? But again, we cannot move ahead if still this is in the courts. That's the idea; no?

And, Kevin, this is Fernando. Kevin, this is Fernando. Have a look to the analysis that was included in our website and the information show you how is the impact on how is the performance.

Of course, the fee that is paid to AMP is similar that you have in many different sectors that manage infrastructure, and specifically in the airports in the world. It is a portion of this is covered technically in the tariff. The tariff includes the cost of this portion. And another portion is the incentive to develop the commercial activities.

So it is very well balanced and also the performance that was shown by the company with this [other] contract is very profitable. And at this time as was mentioned, it's not possible to call up to receive the resolution that is in the court about how [the] events [happened in] December 3rd.

Now I guess I have one quick final question. What do you guys see occurring with the airports in Mexico City? Do you see a new airport or just an expansion of Benito Juarez?

My answer would be very speculative, because they are not open information; [transport] information provided by the authorities. I know is that there are a group of the -- special group working to develop a strategy to increase the capacity of the (inaudible) Mexico City Airport. That will move more in the side of engineering construction and to prepare this area. And the area is very close to the current airport, to be released to an increase in the capacity of the total system during the next five to ten years. So it's a long, long way to resolve the capacity restriction that we have in Mexico City.

Meanwhile, the point-to-point roads are growing, so for us, in some ways, like the lack of room in Mexico City Airport is giving us additional growth for some airports, as Guadalajara or Tijuana. So, there are different roads that are developing as a point-to-point road, instead of going to hop on the bus system through Mexico City.

So for the airport group, it, for the moment at least, give us additional [options] for increase our traffic.

[It could be see during] the first quarter of the current year, our increase in total volume of traffic in domestic is in the level of 11.5% increase; higher than any other groups of the country. So we are one of the beneficiaries of this restriction.

Good point. Thank you very much. That was [very useful].

Thank you, Kevin.

Thank you. Once again, to ask a question you may press star 1 on your touchtone phones now.

Jean Bruni, BBVA Bank.

Hi. Hello Fernando, Raul and Miguel; most of my questions have been answered, I just have a little one. It's concerning the service cost that you published in the first quarter, growing at only 3% compared to sales during more than 14 -- adjusted sales growing 14%. And part of this lower growth is coming employees that are actually down 12%. I just want to make sure it's like a one-off and the trend will be more normalized in the coming quarters, or is there something else behind these numbers? Thanks.

Thank you. Jean, the trend will be normalized in the coming quarters. For this quarter, this was an effect compared with the first quarter of 2013. On the first quarter of 2013, we made a restructure rate for our securities teams, mainly. So we paid compensations for the restructuring area, so for the coming quarters, this effect will be normalized.

And do you think you have some room to actually -- not now, obviously, but in coming quarters; to slightly improve your guidance of getting to a margin in the 66%, 67% range?

Jean, the question of the guidance is the four quarters of the year is not the same. It's a different profile.

Last year, during July to December was an important increase in the capacity offered to the customer in seats and that is the reason, because we have this very high increase in this first quarter. Along the year, we will attend to a reduction in this pace increase and moving to the guidance as last presented in January.

In the case of the commercial activity, we are looking the same figures. At this time we are doing our performance at the pace that was scheduled at the beginning of the year, in terms of when will be the opening of the new activities.

And finally, in the expenses, cost will continue in the pace that was announced in the guidance. Could be possible that during the year (inaudible) through prices in terms of more passengers, to be in the last quarter of the year. At this time, it's impossible to know exactly, because the airlines is not providing us more information and could be, in this case, under variation [in positive] for that.

But as for the economy of the country it's not evolving as was initially thought, in September-October [of last] year and also could be effect to the level of the use of the transportation use in the airports.

But at this time, Jean, we will continue with the guidance.

Thank you very much.

Thank you.

[Miguel Escobedo], private investor.

Good morning. My question regards --.

Good morning, Miguel.

Tijuana; there's an arrangement to make an exit to (inaudible). Has anything been done there and what are you expecting in the future?

About a cross-border facility in Tijuana Airport, Miguel; are you talking about that?

Correct. That is correct.

Yes, we are [doing our] construction work at the pace it was scheduled. At the end of June, we will have end our works, however, [without two] openings to the other side of the facility will be not possible to use this facility. And they will start in (inaudible) the construction works and they're saying they need 15 months to put in operation.

So we are saying more than the last quarter of the next year for the opening; our expectation that will be an important increase in the demand of traffic coming from the airport that the cities that they are between Los Angeles and San Diego that now is using another [fee] for airport. So the expectation for 2015 will be minimum increase for this reason and there will be more important increase for 2016 and 2017.

Thank you.

Miguel, thank you.

Thank you very much. Well, speakers, at this time, we have no further questions, so I'd like to turn the call back over to Mr. Bosque for closing remarks.

Thank you very much for your attendance. We will continue talking the next quarter.

Thank you very much. Ladies and gentlemen, at this time this conference has now concluded. You may disconnect your phone lines and have a great weekend. Thank you.