Grupo Aeroportuario del Pacifico SAB de CV (PAC) 2014 Q4 法說會逐字稿

Good morning. My name is Josh and I will be your conference operator. At this time, I would like to welcome everyone to the GAP fourth 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.

Hello and welcome to Grupo Aeroportuario del Pacifico's fourth quarter conference call. Today from the company we have Mr. Fernando Bosque, Chief Executive Officer, Mr. Miguel Aliaga, Institutional Relations Officer, and recently appointed as Chief Financial Officer, Mr. Saul Villarreal.

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

As such, the statements are based on several assumptions and factors that could change, causing actual results to materially differ from these current expectations. For a complete note on forward-looking statements, please refer to the quarterly report issued last Friday.

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

Good day, everyone. Thank you for your attention today and for your interest in GAP. We are very pleased to be addressing you in this quarter, as we close yet another successful year at GAP.

Let's start with the quarterly review, which was more on the flat side and where we had a total terminal passenger increase within the fourth quarter of 4,600 passengers, a nearly flat 0.1% increase compared to the same period of 2013.

Total passenger traffic growth during the fourth quarter came mainly from the airports of Puerto Vallarta, 22.8%; Guadalajara, 3.6%; and Guanajuato, 24.6%. This was due to the domestic passenger traffic increase of only 80,100 passengers, which was offset by the international passenger traffic decrease of 75,600 passengers.

Now, the lower international figures were of course due to the residual effect Hurricane Odile on the Los Cabos International Airport. This situation resulted in the suspension of international commercial flights on September 15 until they [restarted] on October 8, representing a total decrease for this quarter of 269,600 passengers.

However, part of the traffic that was lost was transferred to the Puerto Vallarta Airport, which was fully functioning the entire tire and thus benefitted with an increase of 152,100 passengers to the period.

As we mentioned in the press release that was issued following the hurricane, local and federal governments worked with us to ensure the prompt reopening of normal commercial flight operations at the airport in order to limit impact.

As such, since the reopening of the airport growth has been consistent, with passenger traffic going from a dramatic 66.2% decline in October to a decline of just 10.5% by December. This is an average weekly rate improvement of 7.7%.

Since this reopening, the Los Cabos International Airport has been processing all passengers, both domestic and international, at terminal two, which was previously only for international flights. This is a large terminal that is able to accommodate the passengers for a temporary timeframe. In the interim, however, we have been restoring and refurbishing the domestic terminal, which is set to reopen in March.

Thus, we are saying it's of great interest on tourism in the area. And while some other hotels are still under reconstruction, the majority will be available at the end of March to take on guests at 100% capacity once again.

If you drive through the city, you can see that there are a few parts of the city that are still in reconstruction. But, the expectation is for most of the work to be done by March of 2015.

For the most part, I will say that Los Cabos is back, if not better than it used to be. So, please do not hesitate to plan your vacation in this beautiful destination.

Now moving on, if you follow with me on page two of the quarterly report, you will see that we had a significant amount of activity in terms of the new routes. Domestically we have seven new routes, mostly from Volaris, representing 24 new weekly frequencies, while internationally 18 new routes representing 31 new weekly frequencies.

This is a great amount to report in only one quarter, and we are quite pleased with that. In Guadalajara, the international area expansion has been already concluded.

In terms of Tijuana, as we mentioned in the previous quarter, the core for the project was completed on the Mexican side, including the bridge backbone that will link both California in the US and the Baja California state in Mexico.

We expect that by October 2015 the US part of the project could be completed and ready for operation, a very exciting prospect for GAP, but also a shot in the arm for Tijuana, which is a city with great potential due to its prime location and proximity to the San Diego and Los Angeles catchment areas.

On January 2nd, the master development program investment for 2015/2019 was announced, as well as the maximum target for the same period. This CapEx program represents an increase of more than 60% of our investment made within 2010/2014 period and is the largest investment amount committed to date.

Status adjustment will reflect the 2% compound average increase. This shows the important contribution of the investment in our main airport. So, at this point, we are heavily involved in the main projects that will greatly improve our facilities to meet passenger expectations, mainly in the Guadalajara, Tijuana, Los Cabos, and in Manzanillo airports, as we outlined in the press release we issued in January.

I am going to also point out that recently the Mexican civil aviation authority notified us that GAP has fulfilled all master development plan duties related to 2010/2014 period.

Looking at our revenue figures, it is evident that Odile did impact us where aeronautical and commercial were materially affected and reduced our expected figures by around MXN80 million.

However, revenue increased 2.2% compared to the same period 2013, supported by the business line operated directly by GAP, that during the fourth quarter rose 8.4%.

It is worth mentioning that convenience store sales continued to post significant growth, 156.6% quarter-over-quarter. We went from four stores in 2013 to 12 stores in 2014, and this tendency is expected to continue during 2015.

The company also took the initiative to review the expenditure program in order to fulfill shareholders' commitment of achieving annual EBITDA targets at the end of the year. This was MXN432 million above the previous year, reaching a record margin of 70% without improvement to consistent assets, whereas our net income decreased slightly by MXN3.7 million.

Related to our shareholders, in December we issued a press release announcing that Abertis had sold its GAP stake in Corporacion Mexicana de Aeropuertos, the Mexican shareholders' half of AMP. This represented no change in the company's operation. It was just a new organizational structure that needed to be reported.

And that brings me to the company bylaws. At this point, there is nothing new to report as it pertains to the Supreme Court decision. However, we are optimistic that we will obtain a final resolution in a few months.

Following, I would like to introduce to you Mr. Saul Villarreal as Chief Financial Officer, recently appointed by our Board of Directors. We are very happy to have him continue with the company in his new position. Saul will be presenting the numbers today and he will be in attendance at GAP Day, where he will be leading the financial company presentation. Saul, please continue.

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

The sum of aeronautical and non-aeronautical revenues increased 2.2%, offset by a decrease of 42.9% on revenues for improvements to concession assets. As a result, total revenues declined 0.5% quarter-over-quarter.

It is important to mention that in spite of the impact of Hurricane Odile, revenues increased less than what we had projected prior to the hurricane. However, they did increase.

In terms of the total operating expenses, they decreased MXN54.4 million, or 7.6% compared to fourth quarter 2013 due to the following. During the quarter, cost of services declined 7.5%, or MXN23.1 million, mainly due to the 48.4% lower figure for professional service fees. Note that the fees paid in fourth quarter 2013 in connection with the trial with Grupo Mexico were higher than in fourth quarter 2014.

In addition, there was a decrease in provisions for doubtful accounts for MXN11.1 million due to the recovery of certain clients which were reserved previously, as well as a 14.8% decline in energy costs in Los Cabos due to the impact of Hurricane Odile. These were waived by the government in order to help business regain their footing following the disaster.

This decline in cost of services was partially offset by a 21.4% increase in maintenance costs, mainly performed at checked baggage inspection equipment platforms in runways, and a 3.7% increase in safety, security, and insurance costs, among others.

Meanwhile, cost of improvements to concession assets decreased by MXN36.4 million, or 42.9%, during fourth quarter 2014. As a result, EBITDA increased 640 basis points from 63.0% in fourth quarter 2013 to 69.4% in fourth quarter 2014. An EBITDA margin excluding the effect of IFRIC 12 increased from 67.3% in same quarter 2013 to 72% in fourth quarter 2014.

In terms of financial expenses, these decreased by MXN18.4 million on an income of MXN8.8 million in fourth quarter 2013 to an expense of MXN9.6 million in fourth quarter 2014. This effect was mainly due to a decline in net interest income from a decrease in average in cash and cash equivalents during fourth quarter 2014.

Lastly, net income and comprehensive income in fourth quarter 2014 decreased by MXN268.5 million, or 30%, compared to fourth quarter 2013, primarily as a result of 111.6% increase in total income tax.

Deferred taxes went from a benefit of MXN[400.5] million in fourth quarter 2013 to a benefit of MXN139.6 million in fourth quarter 2014, a lower figure that was mainly derived from the 2014 fiscal reform that was approved at the end of 2013 and become effective on the first day of 2014, raising the income tax rate from a 28% to a 30%.

Therefore, the company had a one-time benefit of MXN207.4 million in deferred income tax in 2013, aside from the fact that the deferred income tax benefit for fourth quarter 2013 was higher than fourth quarter 2014 due to the inflation for that period, among other effects.

On the other hand, earnings before income taxes in fourth quarter 2014 were 4.6% higher than in fourth quarter 2013.

To conclude the relevant events for the quarter, on February 20 we completed the issuance of MXN26 million long term bonds certificates on the Mexican market at a nominal value of MXN100 each, for a total value of MXN2.6 billion, a main portion of MXN1.5 billion on which interest will be payable every 182 days at a fixed rate of 7.08% at the tender maturity, with a principal payment made at maturity on February 7, 2025.

There was a second portion for a total value of MXN1.1 billion, on which interest will be payable every 28 days at a variable rate of TIIE-28 plus 24 basis points. The maturity of these certificates will be five years, and the principal payment will be made at maturity on February 14, 2020.

The mix of the issuance will have an average annual gross of 5.58% for 2015, following the company's strategy to finance most of its investments and to have a better capital structure from now on.

The proceeds from the issuance will be allocated first for the full repayment of the company's outstanding bank debt for MXN1.7 billion, while the remainder will be allocated to finance the investments set forth in the company's master development program for 2015.

Miguel Aliaga, our IRO, will continue from here.

Thank you, Saul. I just want to briefly mention our 2015 guidance that was issued on January 12th, which is an estimate as of now and subject to change.

In traffic, an increase of 5% to 7%; aeronautical revenue, an increase of 11% to 12%; non-aeronautical revenues, an increase of 14% to 15%; for a total revenue with an increase of 12% to 13% without improvements to concession assets; EBITDA margin of 68% to 69%; and EBITDA growth expected to be 10% to 12%.

For those of you that will be accompanying us at GAP Day this March, we will be visiting the airport and witnessing firsthand the new and improved areas, including retail areas and check-in areas. The events will actually take place in the new VIP areas, so you will be seeing those.

Additionally, we will be dining in the renovated food and beverage courts. There is a lot to see, and we are looking forward to showing it to you. We hope you can join us at GAP Day 2015.

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

Thank you. (Operator instructions.) Ana Zinser, Credit Suisse.

Good morning, Fernando, Miguel, and Saul. Congratulations on the results. I have two questions. My first question is regarding the expansion we saw in the adjusted -- the EBITDA margin. Do you expect this trend to continue in 2015? And also, is the investment needed for Los Cabos reconstruction included in the recently approved MDP? Thank you.

Thank you, Ana. Thank you for the congratulations. Welcome for us and for everybody, all the shareholders.

Of course, during the last quarter of the year, the increase in the EBITDA margin moving more to the side of the 70%s, and also we will continue -- that is my expectation, that with the work and the targets that we are putting in front of us, we will try to stay in the range that was mentioned by Miguel in the range of the 68% to 69% EBITDA margin.

However, we need to consider that also there are impacts in the accounting consideration when we will continue receiving the compensation from the insurance company related to Los Cabos.

So, that is something that we have to see in the next -- during this quarter. And at the end, it could be present initially during this quarter and in a variation more positive. That depends how will be the amount that we will recover during this quarter and also how will be the total amount that we are using in the reconstruction of some of the assets.

So, summarizing, our expectation was put on the guidance. However, during every quarter could be a deviation. And a portion of that is dependent on how will be the impact of the insurance compensation.

And related to the process to the full recovery of the destination, Los Cabos is in the very good situation now. As mentioned, it's not complete, all the infrastructure of the hotels and the city. But, we are ready now to reopen terminal one, and that will move in a very positive way the commercial side.

The total claim that we have put on the insurance company is in the range of MXN300 million. Only a small portion was recovered during 2014, and so also we are involved in the -- complete the claim. That is dependent on how is the real value of the substitution of some of the equipment.

And that is the reason, because at this time we have not concluded completely the final amount. Today we have recovered exactly MXN100 million in our bank account.

Thank you very much.

Stephen Trent, Citi.

Thank you. Good morning, Fernando and Miguel. And good morning to you as well, Saul. Welcome and thanks for taking my questions; just two for me, if I may. The first is any color on how we should think about your effective cash tax rate going forward?

Thank you, Trent. That will be answered by Saul. You're welcome.

That will be 30% as in 2014.

This is Miguel Aliaga. Just supporting the answer from Saul, yes, on the P&L as always -- now, you know that there is still this discrepancy between the deferred tax that is generating a lot of noise. But, as Fernando or Saul mentioned in their speeches is the 30%, the real cash tax that we are paying.

Yes.

In the P&L, we will still have the effect until the tax authority proceeds some here, but now still we will have this issue with showing a lower tax rate. But, the real that we pay is the 30%.

That is -- Stephen, the impact is because last year was reflected in the taxation the changes that was approved by the federal government for the future.

Initially the taxation was, for 2015 and beyond, 28%, but with the changes in the fiscal strategy of the government, moved to the 30%. So, that permit to review last year the composition of how will be the calculation of the taxes for the future, triggering in the last quarter and important, because the fiscal was changed in November last year.

So, in the last quarter of 2014 was an important change in the expected taxes for the future. So, I think that was the main reason, because it's very important the differences between one quarter and the total year in the deferred taxes, as deferred taxes will not change if the fiscal policy of the government will not change for the future.

In the case that moves instead to the -- below that figure, could be also required to another adjustment.

Okay, very thorough and very helpful. Appreciate that. Just one other question and I'll let someone else ask the question. After Hurricane Odile hit Los Cabos in September, has that led you to maybe adjust your thinking in terms of insurance? And has that had any impact on what premiums you pay at your airports?

Thank you. That was an important issue that we have discussed with the insurance company and our advisor about the insurance policies. And the conclusion was that our insurance is fine.

It's very difficult to complete the coverage putting also the loss of revenues because the only coverage that could be covered is only during the period that you have closed the airport after the impact of the weather. So, it's not possible to cover or to guarantee the total revenue.

As I had mentioned in my presentation, the destination was affected not only in the airport. It was affected to the others. So, when you are losing passengers because there are not other capacity, that is impossible to cover by the insurance policies.

So, the only change that was prepared now for the future is only to include the loss of revenues only related to the period of time that the airport cannot continue in operation. And that is something that could be covered also other airports in our network. It's a minimal increase in our insurance policy, and will cover a minimum portion.

If that portion was covered before, probably this MXN80 million that I mentioned during the period of time that -- the last quarter also was not recovered, because the big portion of this MXN80 million was because there are not enough capacity in the destination.

The amount only could be recovered by our policy in this condition will be only during the 15, 18 days that was closed, the airport. At this period of time, the total passengers could be showed to the insurance company could be in the range of the 100,000. So, a minimum coverage, but of course we are putting this in our policy.

Okay, very thorough and very, very helpful. Thanks, guys. I'll let someone else ask a question.

Thank you.

(Operator instructions.) Renata Stuhlberger, Goldman Sachs.

Thank you and good morning, everyone. I have two questions here on my side. The first one is regarding GAP and Volaris. So, we see that Volaris announced a major expansion plan for 2015, mainly on the international side. And I was wondering if you could comment a little bit on how do you see this affecting your new routes. Thank you.

Thank you, Renata. That is very interesting, some changes during the last 12 months in all the domestic airlines' coverage has changed, that they need to move more to international destinations because it's a market that provides better yield for airlines.

So, Volaris started three months ago very clearly. That was beginning November, more or less, October/November, planning to increase the international network. That was clear during December and January when the different new services, international service, was opened.

And the information that we are looking in our statistics is the load factor is going very well. And that trigger, that our Guadalajara airport is the main base for Volaris, is providing expansion and better international connectivity, doing more attractive our airport.

So, it's very positive. This strategy will put more opportunities for the people that is living in the areas -- in the catchment area of Guadalajara mainly.

And also, in the other airports of our network also is appearing not only Volaris, other airlines. Legacy airlines is improving a lot connectivity, frequencies, caliber of the planes in the central area of Mexico. That is Aguascalientes, Morelia, and mainly Guanajuato Bajio.

I think it's that policy this strategy will follow, because some of the restrictions that also there are in Mexico City International Airport. So, I think it's good, and in the current year we will look how is the effect of this increase in the international side of our main airports.

Perfect. Any color that you have on the open skies as an impact for you?

Renata, open sky will impact next year and beyond. For 2015, nothing to say. And that is because before to put in operation this new agreement required the approval of bodies in state and Mexico.

Some of the airlines is taking a position now use the benefit of that new regulation. And our expectation, that will be part of the strategy that is in the beginning now by Volaris and also Aeromexico.

To put more color for the future, if you are asking me about 2016 and beyond, I think some opportunities will open for air tariffs from the state that could be touched in some of our airports in Mexico to continue on other international destinations in the third countries. That is an opportunity that the new agreement will permit.

It does not mean that is (inaudible), but means that could offer more international connectivity, especially in Guadalajara, and the other changes could be effected to the cargo.

Now we are looking at a very, very important increase in the cargo movement in Guadalajara airport, increases in double digit. That was stated last year with the ASEAN connection that we have with two airlines.

And that will also increase the number of units of traffic in Guadalajara and put in more in geographically in the brand of Guadalajara as a second issue of cargo for Asia and also for North America and Europe.

That's great, guys. Thank you very much for the color, and congratulations on the results.

You're welcome, Renata. Thank you.

Pablo [Balthazar], GBM.

Hello. Good morning, everyone. I have a couple of questions. The first one would be could you give us any guidance on a traffic breakdown for this year in your major airports, like traffic growth or anything you can help us with?

Hi, Pablo. Let me look at my information about that. I will mention something. First is in general we are thinking that the main increase will come in the case of Cabos, of course. Cabos was lost in the range of more than 300,000 passengers last year in the last quarter. So, our expectation is that we will recover it this year and also something more. So, that is an important increase.

In the -- as we mentioned the guidance is between 5% to 7%, that meaning around 1.4 million, 1.5 million passengers more over previous year. The distribution is as usual. The first will be Cabos because recovery of Odile, and second one for the size of the airport is Guadalajara, taking a nice portion of that.

Other airport that will continue growing is Bajio. That continues in the range of a double digit, because all the new services that was opened during the last quarter will trigger more volume.

And finally Vallarta, that is in the largest stage of the consolidation. We are intending that in 2015 will recover the same figures as it was in 2007. That is the maximum amount of information that at this time could be provided you, Pablo.

Yes, Pablo. As you know, of course we have our internal figures, but, as you may know, it's -- on all 12 airports, for us to give accurate guidance on each one of the airports will be difficult.

Also, as Fernando mentions, we have some efforts that we know that will gain more traffic. But, I can tell you that even you and us will not get the accurate information if we get on our figures today, no?

Okay, perfect. Thank you very much.

Pablo, it's only two provide some color how is the effort, mainly how to beat the distribution. I think as important is how is the total increase that we are expecting.

And everybody have to understand that the main is coming from Cabos and secondly from the main effort at Guadalajara, Vallarta, and Aguascalientes -- sorry, and Bajio. That is the main information that could be disclosed or talked with you.

Okay. Thank you very much. And the other question I have is you mentioned that, due to the Los Cabos situation, you got support by the government in terms of electricity expense. Are you going to continue seeing any other support on expenses by the government in the Los Cabos area, or what is all done during 2014?

Saul will answer this question.

Pablo, we don't expect any additional concession for the government regarding the electricity or something else. I think the benefit was in the third and the fourth quarter, and it won't repeat in this year.

Okay. Thank you very much for all your help, guys. Thank you.

You're welcome.

(Operator instructions.) Neal Dihora, Morningstar.

Good morning. Thanks for taking the question. First, I guess if you could comment on the other expenses that I guess were an income of MXN38 million on the fourth quarter this year versus, say, MXN3.7 million last year. And then, you mentioned the hotels and maybe travel agents at Los Cabos. I guess I was wondering or hoping you could just maybe comment on what the capacity for hotel rooms are at Cabos maybe today or maybe when you're fully up and running and March of 2015. Thanks.

Hi, Neal. Thank you for the question. Of course, our expectation when last presented the situation of Cabos three months ago was the expectation that is in three months everybody will have ready the full capacity in the destination.

But, really what has happened is some of -- the main hotel, the more historic hotel in the place is preparing the facility in better condition. That means that it's doing all renew or doing expansion, and that means that they will end at the end of this quarter. And part of this hotel now is in the last stage of the increase of putting in the market this capacity.

And I think during February and March we are putting in the airport the maximum volume of passengers to be attended in order to cover around 80% of the occupancy in the available hotel rooms.

So, with that, we are looking that we are very close to the same volume of passengers that was managed in the last year in this period of time. And we are only expecting that the reopening of this facility could be in the range of 3,000, 4,000 rooms. It could be -- trigger again another expansion of the total passengers that we will be attending during the remaining part of the year.

Okay. That's very helpful. Thanks for the color. Just the other one was the other expense line item that went from MXN3.692 million in your statement to MXN38 million. I was just hoping you could comment on what that was. Why such a big difference?

Excuse me, you are talking about in the aeronautical side, or you are talking about more in the other expenses?

Yes, it's the other expense. I don't know -- I'm not really sure what's all in there. I guess it's not in the cost of service, but it's below the depreciation line.

No, it's -- let me explain to you that we have benefit of we are closing the year with -- substantially with the payment of the insurance company in part of the process to arrange the Odile disaster. And we received some payments from the insurance company that were recognized in our statements.

That's why you see that increase in the other expenses.

EBITDA, and that is the reason, because -- it's in other expenses, but it really is revenues. It's coming from the insurance company, that effect to the EBITDA, because it's above the EBITDA line.

And also, it will affect during the coming quarters because we are expecting to complete the -- receive the money from the insurance company. So, that is something that effects and required to do some adjustment in the accounting. And also to explain for everybody, when they are asking on how is the impact of these kind of things.

Yes.

Yes. Okay, thanks. Very clear.

Thank you, Neal.

(Operator instructions.) And at this time we have no further questions waiting to be answered. I'd like to turn the call over to Mr. Bosque for closing remarks.

Thank you so much for your attention today. Please contact us with any further questions or concerns you might have, and have a good day.

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