Grupo Aeroportuario del Pacifico SAB de CV (PAC) 2014 Q2 法說會逐字稿

Presentation

Good morning. My name is Austin Pucket and I will be your conference operator. At this time, I would like to welcome everyone to the GAP second quarter 2014 earnings conference call. (Operator Instructions) And I would now turn the conference call over to Maria Barona of i-advize Corporate Communications. Ma'am, please go ahead.

Welcome to Grupo Aeroportuario del Pacifico's second quarter 2014 conference call. Today from the Company, we have Mr. Fernando Bosque, Chief Executive Officer, Mr. Raul Revuelta, Chief Financial Officer. Mr. Miguel Aliaga, Institutional Relations Officer, will not be joining us today.

Please be advised that forward-looking statements may be made during this conference call. These do not account for future economic circumstances, industry conditions, the company's future performance or financial results.

As such, 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 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.

Good day, everyone, and thank you for your interest today. The second quarter of 2014 was a continuation of the solid results GAP has been experiencing in recent periods, generating higher than expected revenue and passenger traffic for the consolidated first half period of 2014. As such, we will be revising our EBITDA guidance slightly upward. Let me review.

GAP continues to experience positive growth across the various cycles with a 9% increase in domestic traffic and nearly 19% increase in international for a total growth of 12% in the second quarter and similar levels within the first six months of 2014.

If you take a look at the second quarter report on page 2, we highlight the new rules that (inaudible) during the period. Aeromexico, Interjet, TAR, [Tonjon], VivaAerobus and Volaris all upped their frequencies, reaching a total of 49 new domestic routes and four new international ones. Most of the growth in for Aeromexico, which alone accounted for 16 of the new domestic flights.

In terms of the larger airports, they meet again with Puerto Vallarta, which rose by 20% or approximately 120,000 passengers in terms of the total traffic within the quarter. This airport continues to recover some of the international routes that were discontinued by various carriers, as well as the list of new ones due to increased interest in the tourists in this tourist destination.

We believe that this marks the clear indication that this airport is in a full recovery process and will once again rise to be one of the preferred to this destination in the country as it was in years ago.

Let me touch briefly on the joint marketing effort by federal, state, local tourist authorities, as well as hotel operators association in the area. Providing economic resources and involvement to promote both destinations, Los Cabos and Vallarta (inaudible).

We conducted a similar exercise in the Los Cabos area when the airports and the local tourist boards joined their forces to increase traffic for the area a few years ago. That -- what we learned in Los Cabos applied to Puerto Vallarta and to a certain degree we believe that we actually made a difference in the tourist flow in the region.

The fruits of our labor in all of these joint market efforts can be seen in the total traffic table. Both Puerto Vallarta and Los Cabos experienced significant increases in total traffic during the first six months of the year of approximately 2,000 passengers each. This is a dramatic number for any period and I mentioned, we attribute it to our collaboration effort that has after many months yielded positive results.

Moving onto the Los Cabos International Airport, this operation grew by 14.5% or 134,000 passengers during the second quarter as this airport continued to experience important international passenger traffic increases.

On the improvement side, we completed the commercial layout of terminal 2 in addition to the expansion (inaudible) already completed at the beginning of the year, which we facilitate (inaudible) that will take place this coming October. At that point, international passengers will move to full use of terminal 2, leaving terminal 1 only for domestic flights. This will lead to more (inaudible) use in terminal 2, which will in turn improve both equality of services as well as a significant impact on sales in retail areas.

In summary, we are encouraged by these results and we look forward to continuing to find ways to fully develop this tourist destination in the future.

Tijuana continued to rise in the ranks of passenger traffic, mostly on the domestic side with a 9% increase in total traffic for the quarter and cumulative increase of 12%. Revenues on the other hand are growing at the strong 15 pace.

Just a brief update of the cross border project, the development on the Mexican side and close to completion. The facade was built (inaudible) model building which has been named California's Gate. At this point, this bridge is prepared to receive the infrastructure section that will be installed before the completion of 2014.

On the US side, which is managed and operated by GAP's partners, after six years of planning, design and endless permits and approval, the cross border project officially programmed at the beginning of this month. The name of the US portion is Cross Border Express. And I just want to clarify that GAP will only be in charge of the Mexico side of the project, not the US side. We estimate the integration of both locations to take place prior to the 2015 winter season.

I just want to mention that this is a long awaited project that is coming to fruition. And it had generated significant (inaudible) by local and international media on both sides due to the nature of the project. The newspaper (inaudible), a great example of private investment, creating much needed public infrastructure to facilitate safe, secure travel and trade. The breach is expected to over 2.4 million passengers on an annual basis.

We are very proud of heading (inaudible) at this point and are looking here to a very interesting and very perfect (inaudible) with enormous potential.

Finally, that brings me to the Guadalajara Airport where total traffic rose 10% from 16% increasing international traffic and 7% in domestic. If we look at the six month period for 2014, this airport has experienced 11% growth, representing over 400,000 additional passengers so far this year.

What we are saying is that the Guadalajara Airport is currently in a state of transformation from an external perspective with significant traffic increases, as well as internally due to the recent expansion and update we have made.

The first of these is in the ramp expansion. Currently there are 49 positions for planes within the peak hours. This is 15% more than we had in the comparable period 2013.

Of these 49 positions, only 80% have already committed, giving us a very nice cushion for capacity growth. At least in medium-term, as there is no more space to receive and park planes in order to best meet current needs.

The opening of the new passenger facilities will take place in October and will include new commercial areas, asecond VIP lounge and additional food and various shops. In terms of gates, in October announced as part of our investment plan, we will add a higher number of gates to accommodate growing passenger traffic at this airport. At that time, the number of gates will increase by 40%.

As you can see, there is great progress being made in the commercial business at GAP main airport. This brings me to overall commercial revenue, which rose 23% this quarter, mainly due to the revenue from business line managed directly by GAP, which represent a 26% increase as well as an important revenue from baggage inspection and third party operated businesses. I will let Raul explain this part in his presentation.

As of June 30, over 83,000 VIPs visited our lounges, representing growth of over 69%, 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 around during second quarter 2013. And in the fourth quarter we will add the second VIP lounge in Guadalajara. In summary, the VIP areas are enjoying wide acceptance and continue representing an important growth area for GAP.

Moving onto CapEx, we are at the end of the five-year period, which will bring us to a fulfillment of our master development program. In second quarter 2014, we made a small investment of MXN299 million mainly for the update in the Guadalajara and Tijuana airports. Some weeks ago we presented the master development program for the 2015-2019 five year period. This begins the process with the authorities that we aim to understand, negotiate and approve our CapEx plan for the coming years.

Finally, I want to mention that following the general assembly held in April, GAP distributed MXN3.1 billion in dividends and equity reduction, returning to [each shareholder] a total of MXN5.87 per share. This is evidence once again of GAP's capacity and solvency and its continuing ability to provide returns to its shareholders.

And as a result of the increases in passenger traffic and revenue that we experienced in the first half of this year, added to the airline expectation for the new flight and frequencies for the remainder of the year, we are now looking at a slight increase in full-year EBITDA above 10%, thereby generating an EBITDA margin for the full-year above 68%. Previously this figure was 66% to 67%, so a rise up to 2 percent points.

That is all I have for the time being. I believe that we are well on our way as a Company to achieve the objective we set out at the beginning of the year in terms of traffic and revenue. We look forward to what this year will bring.

I will turn the call over to Raul for his comments. Raul, please go ahead.

Thank you, Fernando. Good morning, everyone. I will briefly review the financial highlights for the second quarter of 2014.

Total revenues for the period increased over 11.4%, mainly due to a 13.7% increase in aeronautical revenue, a 22.6% increase in non-aeronautical revenue and was upset by a decrease of 34.4% on revenues for improvement to concession assets.

I would like to highlight the significant growth of non-aeronautical revenue, derived from business directly operated by GAP, which increased 25.9% in the second quarter. I would like to emphasize the relevant growth of advertising revenues, which rose 33.6% or MXN7.2 million during the quarter. Convenience store sales was 126.9% or MXN5 million due to the new stores that began operations in Puerto Vallarta, Los Cabos and Aguascalientes reports.

Also, the traditional commercial business operated by third parties showed a double-digit growth of 10.6% in 2Q'14, supported by a relevant growth of leasing office spaces of 16.7% or MXN3.8 million. Food and beverage that grew 12.1% or MXN3.3 million on 2Q'14. As a result, non-aeronautical revenue for passengers grew 10.1% in the 2Q'14 from MXN52.4 to MXN57.7 per passenger.

In terms of the total operating expenses, this increased MXN11.5 million, so 1.6% compared to 2Q'13 due to the following. During the quarter, cost of services increased 12.5%, or MXN34.4 million, mainly due to an increase of MXN17.8 million in other operating expenses, including provision for (inaudible) accounts of MXN4.4 million, an increase of MXN9.1 million in professional services fees, as well as MXN2.3 million in supplies for convenience stores. This in addition to the increase of 16% in security and insurance costs, as well as MXN6.8 million increasing employee costs (inaudible) due to the expenses that grossed MXN4.4 million.

The cost of services for (inaudible) period an increase of 0.8%, went from MXN46.5 per passengers to MXN46.9 per passenger. Cost of improvements to concession assets during the period decreased MXN40.8 or 34.4% as a majority of project works was already taking place.

EBITDA nominal value increased 17.5% in 2Q'14, with an EBITDA margin, excluding the effect of IFRIC 12, increased from 67.5% in 2Q'13, to 68.3% in 2Q'14. Both nominal value and EBITDA margin are historical records for a second quarter in the Company.

In terms of financial expenses, this decreased MXN11.5 million for an expense of MXN17.6 million in 2Q'13 to an expense of MXN6.1 million in this quarter. This decrease was mainly due to our net interest expenses decline of MXN38.3 million from an expense of MXN44.3 million in 2Q'13 to MXN6 million in 2Q'14, driven by lower results from the investment in Pemex bonds during 2Q'13 and a lower interest expenses on bank loans in 2Q'14 as compared to the same quarter of the previous year. This benefit was partially offset by a MXN26.8 million net exchange rate loss while in 2Q'13 the exchange rate gain was MXN26.7 million. This quarter the exchange rate loss was equal to MXN0.1 million pesos.

As a result, net income and comparison income increased by MXN83.4 million or 24% compared to last year. Furthermore, income taxes increased MXN24.3 million while different income taxes increased MXN37.2 million. That is from an expense of MXN32.4 million in the last year to an expense of MXN69.6 million in this period.

And with that, I conclude my comments and ask the operator to please open the floor for your questions.

(Operator Instructions) Ana Renault, Santander.

Could you please elaborate? In your new guidance, what is the passenger and the operating revenue growth estimate now?

Of course we are looking now and possibly for the month over above the guidance that given in January. It's not clear at this time how will be the last quarter of the year because we haven't at this time all the information from the airlines. There are some changes in the last moment. So of course we will move above 10% to the 1 to 2 percentage points more, so moving up to 12%. That is the first thing. And in terms of traffic, traffic now we are moving between 8% to 9%.

Of course, as Fernando mentioned, on the EBITDA we are split 10% to 12% and in terms of the EBITDA margin we expect to be close to 68%. Right now we (inaudible).

Neal Dihora, Morningstar.

Just two quick questions. One, the Guadalajara hotel, when do you think you'll make a decision on yes or no? And then two, in Vallarta, should we expect like big CapEx like what you did in Los Cabos since you believe traffic is returning?

Starting with (inaudible) of the hotel in Guadalajara, we are expecting to receive the asset that currently is in operation. This is a long legal dispute with the current operator. And we are expecting that the current year we will receive the asset and starting that process to review and to prepare a project to build within the next period of time, two, three years at minimum.

So no news. Positive note is that we will receive the asset. And the other side is a long time that we will take to prepare the project at minimum to be two, three years.

And talking about the CapEx or capacity of Vallarta, we have not [programmed] the expansion of Vallarta (inaudible) during 2000 -- last two, three years. And we have enough capacity to attend the recovery that we are experiencing now. Of course, the Vallarta Airport in 2007-2008 experienced more traffic than we have now. However, between 2007 to 2014, we are doing a lot of investment, increasing the capacity and transforming also the commercial IS. So we have not put in enough concern about the capacity of this airport.

For the next five years, the CapEx program for this airport will be minimum because we are ready to receive more traffic that we have entered in Cabos, for example.

Bernardo Velez, GBM.

Just a couple of questions. First, what's to come from your directly operated businesses, meaning what do you believe the growth in these [bracket] should come from in this next few years? Or what additional strategies have you been thinking about?

In terms of the (inaudible) business operated by GAP, we expect that the main business like that will grow for the coming years will be the convenience stores. Today we are covering Los Cabos, Puerto Vallarta and Aguascalientes which are our convenience stores with the (inaudible) market, the brand of GAP. In the next quarter, we will have the (inaudible) Hermosillo and Bajillo for our market. So what we are expecting in the coming two years is to have a full coverage of convenience stores in all our net of airports. So I could say that the growth that will come from the direct operating business like GAP will be mainly driven by the convenience stores' business line.

And (inaudible) talking about (inaudible), I was mentioning my percentage and it's the VIP business. The VIP business will be increased dramatically in Guadalajara. One time that the new VIP lounge will be open.

Following the closing of an AmEx closing that was two months ago. So we are taking this portion of the market to (inaudible) and offer him to the uses of American Express card. And that also with more passengers. Remember in the current periods, six months we are moving 85,000 passengers in this business. We will move at the end of the year very close to 200,000. And for the next year we'll be also experiencing an important increase. So that is the other page of our business operation.

Also moving to the advertising, we are in the process to implement new investment to prepare for the digital advertising that is the way that is taking in the world, the advertising. So that will happen during the rest of the year and for the next year we'll experience a (inaudible) important increase. That is a way to put more revenue in the side of the -- of our business.

And in which of GAP airports do you believe there's enough business passenger traffic in order to open new VIP lounges?

All the -- currently as you know, we have this facility in the main airports. We need to have enough volume of traffic and also the kind of the passenger and the (inaudible) and the (inaudible) operation. And very close in the next two, three months we'll be open also on a small new version of the VIP lounges in Aguascalientes, a small airport, but however, is attending a special kind of passengers. And Japan for the investment that there are in this region and also we are looking at the opportunity in [Brazil]. So the expansion is depending how is the evolution of the traffic.

And (inaudible) in number or purpose, but in the fact of the facilities, the VIP lounges, and the number of VIP lounges that are at airports. As an example, as Fernando mentioned, in Guadalajara today we have only one VIP lounge operated by GAP on the international side of the airport. And for the coming months, we will open the domestic VIP lounge area. So of course we expect that the businessmen that day by day are flying through Guadalajara, (inaudible) are really important among those additional passengers that will pass through our VIP lounges.

So not just the opportunities to build our additional VIP lounges in Aguascalientes or [Brazil], but expansion that will come from Guadalajara and domestic carrier will be really relevant for this business line.

And another question is regarding should we think of GAP or have you been thinking about maybe leveraging some of your corporate structure in order to finance your BBVA debt and paying a little bit more or reimburse larger dividends to shareholders?

Currently the (inaudible) of our debt you know is very low because we are at the end of a CapEx program for this period of five years. However, for the next five year period we will increase the total amount to be invested. So we will take more money from the market. Also we will (inaudible) to a portion of the debt that we have now from the banks and we will (inaudible) to another formula, looking also to reduce the portion of the resources that is coming from the shareholders, taking more from the market and producing the equity to return the money to the shareholders.

However, if it appears opportunities to do new investment, we will move to the way of the project finance, looking especially to the financing for each of the new projects that will start. Of course in the five years in this period, the composition of the resources for the Company, the capital structure will be changed dramatically (inaudible).

And do you have an estimate or I don't know, of leverage multiple that can share with us?

The leverage, as we have acknowledged, very reduced, up to the end of the year when we will obtain the approval of the head port authority or the (spoken in Spanish) we will take a decision about how will be the composition. But in any case, we will respect how is the limit that usually the markets set. Currently we are below one time EBITDA, half of the EBITDA approximately. And we will respect (inaudible), not exceed the limit of the 2 to 3 times EBITDA. At the end of the period of the five, six years next.

Stephen Trent, Citigroup.

This is Kevin Kaznica in place of Stephen Trent. I just had a couple of quick questions. Do you have any color on ICT's consideration or granting a fifth freedom traffic right to foreign affairs through Toluca?

That is an (inaudible) that was recommended some years ago by us to the (inaudible) authority because the limitation of the fleet that was available in the country. So one way to increase services for the population of Mexico could be put in more fleets coming from the neighbors, coming from the airlines that you see in operation in the state. That was a recommendation, but however, during the last two years, the three main, the four main airlines in Mexico decided to increase the fleet. They are receiving the planes and is attending very well the demand of the country, but also there are some (inaudible) cities, some regions that is not completely full attended.

And that is the opportunity by the (inaudible) authority to specifically in this (inaudible), knowing all the country, to permit some specific solution that is increasing the number of the airlines appointed to develop traffic between two cities. That is the case of Cabos and Cancun and Mexico City currently. And also the opportunity to connect flights -- international flights coming into one of the points of domestic and continue to secondary points in Mexico. That could provide an extra capacity to the system.

So my opinion is that it's positive that probably will come, but only in specific routes, in a specific area of cities. And will be benefit for all the airport operators. Of course for GAP, but also for the others.

So basically you're saying the majority of I guess demand has been on that by the increase in domestic carriers and any kind of (inaudible) traffic right consideration would be granted in a very limited case? Is that --?

That will be new for the country. The reaction from all the domestic airlines will be put competition and have to provoke changes in the strategies. That will be the main destination and what will be the important capacity to put in this -- in some of these routes. But is difficult to know and that is a sign that we are talking anytime that you are putting a new operation, a new service, you have some risk and the reaction of the markets and the reaction of the competition affect inertly to changing strategy. But we are looking this in the competition between Mexico, Volaris and VivaAerobus when they move in from one airport to other to move the planes.

And do you have any plans to kind of pitch the same idea in like Tijuana or other installations? Or is it just focused on Toluca?

Tijuana will experience it in (inaudible) for all the lines. Of course, we'll bring passengers that are currently using airports in the south of Los Angeles to San Diego. And to be not only Mexican, the operators could be -- take interest and to provide or combine services to Tijuana to increase.

It's difficult to know up to we have opened this facility. Our expectation is to increase immediately to 10% in two years extra over the organic trough that we are looking in, in this area. Moving more quickly to over 5 million passengers in the next two, three years. That is our expectation. And that is part of the idea of the reconfiguration of the facility of this airport preparing to receive this capacity, more planes and ready to attend more in the big time hours, the passengers.

Also, I guess talking about the SCT and you did mention the message about a new plan you submitted, I guess a proposal. So is there any update on that or do you just have to wait to hear back from them and expect something by the end of the year?

That is a concern for everybody and looking (inaudible) in last December with (inaudible), we are also looking, that is changes in the operation and the growth of the traffic and also the CapEx. That is remember in the current period we are concluding 3.3 billion and for the next five years, we are increasing this amount in more than 40% to 50%. So what is your feeling, Raul, about the impact and the current increasing traffic during the last tranche of the five years' period for the next?

I mean it's going to be difficult. I would be of course the SCT will review the projections and will try to in some way put some additional passengers for our forecast for the moment that right now is happening in terms of new fleet and really high competition in some of the routes and (inaudible) that creates additional demands in some worlds.

The thing is, and what is clearly important to know on this negotiation in terms of the forecast of passengers, would be that today are happening really important changes in number of seats (inaudible). For example, the Guadalajara-Tijuana road that has been really aggressive in terms of the competition from Aeromexico continue on Volaris. And part of this price were -- began with that road. For the moment both Aeromexico and Volaris have decreased the number of seats and we'll see that this price war that happened in some of the routes has already done, at least in some of our airports.

So what we could expect for the end of this year is that maybe some of this additional growth, the domestic market that comes from the price wars that the Mexican airlines had made, would diminish, would be lower so we expect that the (inaudible) we could change our forecast with the government and may it look that the coming years we'll have a more sustainable growth with no such huge peaks in terms of growth that the last 24 months. So what we see is that the end of the negotiation will depend at least or in a huge type will depend on the (inaudible) of the last quarter of this year.

And just one more and I'll jump back in the queue. Do you have any update on the GMexico's supreme court case?

No news, no. No news (inaudible). We are expecting to receive the resolution of the supreme court saying all the time that will be after the summer or around September. But we don't know -- we have no news. And our expectation is the same that it was before, will be in favor of the (inaudible) because that was the rules that was approved between and in the startup of the company's (inaudible) and after that in -- when it was, the Company was public, and so was acceptable by everybody.

To modify the condition of this (inaudible) requires a (inaudible) important minority of the shareholders. But we felt this change, we felt this change (inaudible) laws that will continue with the (inaudible) from the beginning. That is our expectation, that we will confirm the validity of the (inaudible) and as it happened in the current year, must be after (inaudible), looking that we are now in the -- very close to our gross -- between September, October, November, I don't know. But I believe that will be in the year. Will be before the end of the year because also will be changes in the supreme court composition.

Ravi Jain, HSBC.

Most of the questions are answered, but just a couple of follow-up questions. So in the scenario that GAP actually, the supreme court decides in the favor of GAP, what do you expect in terms of the next steps? In the sense do you expect a secondary offering that would probably be done or what is your expectation?

And my second question is basically in terms of traffic, of course 2014 has been a phenomenal year in terms of traffic. But when you start looking at 2015, in your view, because of course the comps starts getting tougher, what is your expectation as of today in terms of a little more longer-term 2015 traffic?

Santiago Perez Teuffer, Credit Suisse.

All of my questions were answered. Congratulations on these results.

(Operator Instructions)

(Inaudible) to be seeing what in terms of what's going to happen with the (inaudible).

Yes, I remember exactly. Our expectation, Ravi, is that the way that we have in the bylaws is to put in the market is ex a portion of the shares that they retain at this time has to be in the (inaudible) in the market. A secondary offer. So of course that will require some collaboration from the Company and we will completely open to provide all supports and facilities to do on a very successful put in the market of the success.

Stephen Trent, Citigroup.

I think the second half of his question was about traffic and I mean it's been phenomenal in 2014, but are you looking at tougher comps in 2015? Do you see having to adjust that down, expectations for traffic growth?

For the next year, for 2015 you are talking?

Yes, I guess that's what.

Yes, it's an important increase during 2014 and not mean that that next year will be again because you are doing a consolidation of this holding of capacity in the system. And only the increase will come mainly by the new fleet, new capacity that the airlines, the Mexican airlines will put on the market. So the (inaudible) of the fleet that is (inaudible) or continuing extra is giving us a range of between 4% to 6%. And that we are using this expectation, including how could be the bulk of the international, not only the domestic capacity. So in the rest of the 4% to 6%.

And I just wanted to review your guidance raise for the year. Now for maybe like up to 12%, that was for revenues? And then traffic, this is for 2014, between 8% to 9% now and then you (inaudible) at close to 58%?

We are moving EBITDA to 200 points more, so above 10% to 12%. And the passengers moving above 8% up to 9%. That is the range.

(Operator Instructions) At this time, we have no further questions in the queue. It is now my pleasure to turn it back over to Mr. Bosque for closing remarks.

Thank you so much for your attention today. Please contact us with any further question or concerns you all may have. Have a good day.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.