Grupo Aeroportuario del Pacifico SAB de CV (PAC) 2016 Q4 法說會逐字稿

Good morning, my name is Brandon and I will be your conference operator. At this time, I'd like to welcome everyone to the Grupo Aeroportuario del Pacifico earnings conference call. All lines have been placed on mute to prevent any background noise. There will be a question-and-answer session after the speakers' opening remarks and instructions will be given at that time. Thank you, I will now turn the call over to Maria Barona with i-advize, please go ahead.

Thank you and good morning everyone. Welcome to Grupo Aeroportuario del Pacifico's fourth quarter conference call. Today from the company, we have Mr. Fernando Bosque, Chief Executive Officer and Mr. Saul Villarreal, Chief Financial Officer.

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 performance or financial results. As such, statements made 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 last Monday -- last Friday actually. At this time, I'd like to turn the call over to Mr. Bosque for his opening remarks. Mr. Bosque, please begin sir.

Good morning, everyone. Thank you for joining us for our fourth quarter results conference call. As usual, 2016 has been an outstanding year for GAP. We are continuing to see bullish airline activity, increased movement in our major airports, unmatched demand for our non-aeronautical business such as retail, ground transportation, VIP lounges, and other. I will discuss that further in a few moments.

Let me begin with the traffic activity for the periods under discussion. The fourth quarter of 2016 was a very solid period for the Company and in which we continued to see very strong passenger traffic figures with total traffic increase of nearly 17% for the total network of airports mainly the increased activities coming from the Guadalajara, Tijuana, Los Cabos, and Puerto Vallarta airports, which rose in traffic across the board.

Domestically, traffic rose by 20% for the quarter and 22% for the year driven mainly by the large airports I just mentioned. Internationally, we saw 11% growth for the quarter and annual growth of nearly 10%. Again, it was GAP's four main airports that drove the increases there.

We continued to see active new route development.

For the quarter, three new domestic routes were recently introduced. These were VivaAerobus launched the Guanajuato to Cancun route and the Tijuana to Monterrey route. Volaris also launched a Tijuana to Toluca route. There were also several new international routes, including new routes by Aeromar from Hermosillo to Tucson, Air Canada launched three new weekly frequencies from Puerto Vallarta to Montreal, to Los Angeles from Puerto Vallarta and Los Cabos, American, Southwest, and Delta launched new routes and Sunwing, Delta, and Neos Spa launched new routes to and from Montego Bay to Boston, Sault Ste. Marie, and Verona, Italy. It is important to mention that these new routes are expected to add 25,000 seats on the monthly seat offer of our airports.

Moving on to the individual airports, some of the progress had been focused and include Los Cabos and Puerto Vallarta, we saw the benefit of the new bilateral aviation agreement between the United States and Mexico. Because of this new agreement, Southwest and Delta Air Lines were able to enter the Los Angeles market, which was limited to only three airlines in the past. As a result, the volume of seats in this market increased by more than 60% by the end of the last quarter. The domestic market grow around 30% during this quarter also affected by the higher domestic traffic we have seen as a result of the weaker peso. In Puerto Vallarta, Southwest and American Airlines entered the Los Angeles Puerto Vallarta market, both with daily flights. The main airlines supporting the 13% traffic growth in Vallarta during the fourth quarter of 2016 were Volaris and Southwest, which rose by 49% and 45% respectively.

Moving on to Guadalajara, the low-cost airlines, that's Volaris and VivaAerobus continue their expansion program at the airport. For instance, VivaAerobus grew 53% during the fourth quarter of the year as a result of the new services to Chihuahua and Culiacan as well as the additional frequencies in the rest of the network. On the other hand, international traffic grew around 16% during the fourth quarter mainly driven by the visiting friends and relative market.

Moving on to Tijuana, during the fourth quarter, the airport's total traffic reached 1.7 million passengers, which is a record high to the airport. This airport has benefited from the cross-border facility. Travelers headed to and from Southern California for example use the Tijuana airport due to the price and flight availability and added to that, there is the benefit of connectivity with the cross-border bridge.

Moving on to GAP's airport in the Bajio region, growth rates for international traffic have reached a point of maturity especially as the automotive industry expansion rate flattens out. Domestic traffic on the other hand continued to grow at a very healthy rate due to the added flight to leisure destination such as Cancun and Puerto Vallarta as well as the addition of seats to the Tijuana routes.

Finally, the Montego Bay airport experienced a 6% growth in the last quarter of the year. The US market has continued expanding into the destination with new routes at -- as the new service to Boston by Delta. The Canadian market continued recovering after the economic crisis of 2015 while the European charter market has its best year in the story, this as a result of the expansion of the [TUE -- the AE Group] into the Caribbean.

In terms of the commercial revenue, this have grown above our expectations due to the high growth traffic environment especially at some of the leisure destinations. For instance, in the Puerto Vallarta, Los Cabos, and Montego Bay airports, commercial revenue grew 23%, 32%, and 8% respectively during 2016. Retail, food and beverage, and duty-free are the commercial lines with a best performance increasing 28%, 22%, and 16% in the Puerto Vallarta airport and more than 100%, 20% and 31% in the Los Cabos airport. Guadalajara and Tijuana experienced higher commercial revenue of MXN75 million and MXN73 million respectively due to the extraordinary passenger traffic growth.

For 2017, the plan is to undergo major renovation at these airports to expand the commercial areas by 20%. These projects are expected to conclude at the end of 2018 that will greatly strengthen the mix of products and services offered.

Finally, current traffic levels have boosted VIP lounge activity attracting 380,000 users compared to the 260,000 users for the same period of the last year. In this area, the domestic departures VIP lounge at the Guadalajara airport has been awarded as the Priority Pass Latin America & Caribbean Region Lounge of the Year 2016. This award places the lounge at the top of the Priority Pass program with only 14 other regional lounges. So we are very proud of this accomplishment. As a result, the VIP business has been the fastest-growing unit during 2016 with a remarkable 72% revenue increase. GAP will add new and larger facilities in Hermosillo and Puerto Vallarta during the first half of 2017 in order to manage additional demand.

CapEx continues in accordance with the committed Master Development Program. During the last quarter, GAP concluded the integration of terminal 1 and 2 in the Guadalajara airport with a 4,000 square meter expansion. For 2017, we will also expand in terminal 1 and adding a new security checkpoint, which are expected to conclude during December 2017.

In Tijuana, one of our fastest growing airports, we are expanding the terminal building by 18,000 square meters, enlarging and broadening departure lounges and baggage claim areas. We will also complete the runway renovation by the end of the year. Just to give you an example of the magnitude of the work, Guadalajara will see an additional square footage of 50% of the current space and Tijuana 57% of the current space. In Guanajuato, the expansion of the terminal building by 1,800 square meters will conclude in June 2018, runway improvements will begin in March 2017 with an expected termination date of July. Hermosillo will see the expansion of the terminal building adding 2,500 square meters as well as the improvement of our runway and expansion, which are expected to conclude in April 2017. All these projects will allow us to increase infrastructure and commercial capacity as well as serve the growing passenger and airline demand in a manner that is high-quality and top service.

With reference for expansion abroad, the Company considered a bidding process of four Brazilian airports. Based on the conclusion of the analysis, we decided not to participate in the bidding process. I will now turn the call over to Saul for the financial part of the presentation.

Thank you, Fernando. Good morning, everyone. Moving on to some key financial highlights that complement what Fernando discussed before, I would like to start with our operating results. In the fourth quarter, we report an increase in total revenues of MXN548 million or 27% over 2015 with the following breakdown: aeronautical revenues increased by MXN410 million or 27%. This was mainly due to the 28% higher revenues from the Mexican airports because of increases in passenger traffic as well as tariffs because of the inflation. Additionally, in Montego Bay, revenues increased by MXN57 million or 25% due to the 18% depreciation of the peso against the dollar and 6% increase in passenger traffic.

Non-aeronautical revenues increased by MXN138 million or 29%, MXN115 million of this increase was from the Mexican airports, which was driven by the higher revenues from third parties such as retail operations, ground transportation, car rental, and food and beverage, which jointly increased by MXN81 million. Moreover, revenues from business lines operated directly by us rose by MXN7 million mainly in advertising and VIP lounges. Montego Bay airport report a revenue increase of MXN23 million compared to fourth quarter 2015 driven by the previously mentioned 18% depreciation of the peso.

Turning now to the operating costs, in fourth quarter 2016, this increased by MXN305 million, 29% compared to fourth quarter 2015 mainly resulting from increases in cost of improvements to concession assets of MXN146 million, cost of services MXN63 million, concession taxes of MXN23 million, and depreciation and amortization of MXN29 million among others.

The EBITDA grew MXN450 million in fourth quarter 2016 or 34% excluding the effects of IFRIC 12 and excluding the gain in fair value of the acquisition of DCA in 2015. On the other hand, EBITDA margin for the fourth quarter rose by 200 basis points excluding the effects of IFRIC 12, shifting from 67.7% in fourth quarter 2015 to 69.7% in fourth quarter 2016. It is important to mention that for 2017, we expect an EBITDA margin contraction as comparable in 2016. Due to the increases in terms of the labor force with the hiring over 200 people, increasing cost of maintenance, security, cleaning as well as higher electricity and fuel cost as our objective remains to offering users the highest service quality and comfort levels in our airports. Some of these costs will be one-time. Therefore, we will expect to reach the EBITDA margin levels similar to 2016 for the year 2018.

In the financial cost, we increased by MXN212 million in fourth quarter 2016 mainly comprising a foreign exchange rate loss of MXN246 million. This was derived from the bank debt for the position of DCA and the 18% [position] of the peso versus dollars. This effect was offset by MXN34 million interest income, net of interest expense.

In terms of debt, 44% is dollar denominated. The remaining 56% is denominated in pesos, related to the long-term debt securities used for the [CapEx] financing in Mexico. In 2016, we contracted interest rate hedges for LIBOR and TA rate. The TA rate hedge with a floor of 4.74% in a collar between 5.75% and 6.75% for an amount of MXN2.2 million as nominal in a 48-month period of coverage. LIBOR rate hedge has a floor of 45 basis points and a collar between 1.75% and 2.75% for amount of $191 million for a 60-month period.

On the balance sheet, as of December 31, 2016, the Company report an increase in assets of approximately MXN4.5 billion mainly driven by upturns in cash and cash equivalents, improvements to concession assets and accounts receivables. On the liabilities, this growth of MXN4.3 billion increase was primarily due to the bond placement in the Mexican debt market for CapEx financing and increases in accounts payable.

That concludes my remarks and now I ask to the operator to please open the floor for your questions.

Thank you. At this time, we will open the floor for questions. (Operator Instructions) Pablo Zaldivar, GBM Investments.

My first question is regarding the cost of service. We saw a significant increase in terms of -- in a per-passenger basis compared to the first three quarters of the year. Does this reflect what you were saying on your remarks about higher payroll expenses and higher energy costs?

Yes. Thank you, Pablo for your question. As you know, the main part of our maintenance is in the last part of the year, trying to recover the quality and comfort in our airports. For 2017, we are expecting in that line, to continue growing the expenses in maintenance, cleaning, energy, and we will try to control the costs, trying to provide the same level of comfort. So you are correct, in this quarter was the high level, but it will be in the -- all along this year in 2017.

Okay, thank you. And my second question is regarding the convenience stores that you previously managed directly. Should we expect the convenience stores that you still operate directly to be outsourced maybe this year or in the near future?

Thank you, Pablo. It's Fernando. Let me explain why it was changed the strategy with this business line. Of course, we are involved in the airport business, however retail is a very specific activity that requires to take care more about prices, product, and how to control this strategy on a daily basis. So the decision taken last year was to move gradually this activity from our control to a specialized company. That of course reduced the total sales in this sector, of course, because before we reduced the total sales, but however, we are keeping the EBITDA margin in this line. The company who will -- that currently is managing the business in Guadalajara, Cabos, and [Macizo], another minor airport is specialized in these activities and they are very high level of portion of their sales and keeping the level of our EBITDA margin and increasing the volume of sales because they have more knowledge about the range of the product and also how to manage the relation with the clients.

The idea is one [type] of a half of a year pass and knowing how is the performance of this activity and we note during the last quarter of the previous year the performance was very high. We expect to continue passing through the some of the other airport activities in aero market to this company, but this is depending the speed to pass through the operator could be taking two years. So, every new opening will be passed to the operator and now the main activity that we have is in Vallarta and in terms of volume. So we will probably keep this at least during the next two quarters.

Marco Montanez, Vector Capital.

Congratulations on the results. Considering the recent announcements from both Volaris and AeroMexico regarding the decreasing of the growth expectations of the capacity for this year, your guidance remains unchanged or could we expect some adjustment in the near-term? That will be great, thank you.

Thank you, Marco. Of course, it's difficult in the beginning of the year have a complete clear image of how will be the strategy that will follow in the second half of the year by some of the airlines, it's not easy. So in our beginning of the year, our expectation, and that is the guidance in the range of about around 10% continue at this time.

Our feeling is that during the first quarter the traffic will continue in the pace that we are looking in January and very closely in February and also what happened during April, the Easter holidays will be in April.

So, we have to wait until the second quarter to review -- if it's necessary to review the guidance. It is clear that the capacity in terms of seats of the four domestic airlines is growing especially in the case of Viva and Volaris, they need to put the seats in the market and the strategy I think is they will flow in increasing frequencies in the same services that they have and it is possible that [they deal] something the load factor], however our expectation is very, very positive.

In the case of AeroMexico, that is our second carrier, however, we know that they are more focusing in international services and more increase with putting the fleet with more seats in Mexico City. So for us, it's not the main changes will come from the Viva and Volaris with increase of the capacity and the fleet.

(Operator Instructions) Ulises Argote, Santander.

Just one question, in terms of your EBITDA margin guidance, you do say that you expect a contraction versus 2016. Can you share with us the expectation that you have for margins in the Mexican operations and in Montego Bay. Thanks.

Hi Ulises, thank you for your question. Yes, the EBITDA margin contraction will be mainly in Mexico, some part of this will be in Montego Bay too, but it will be mainly in Mexico because the extraordinary growth in the traffic brings some stress in our airports and we need to provide the same level of quality and service for our passengers. So it will be for this year, it will be normalized for 2018. So we will come back the same level of EBITDA margins.

For Montego Bay, yes, it will be normalize the EBITDA level of the 51%, 52% of EBITDA margin. So in general terms, our expectation of EBITDA will be in the range of 68% according to our guidance.

Okay, thank you very much, that's really clear. And then if I just may have a follow-up too, are you currently sharing what is the penetration of CBX in terms of Tijuana's total travelers?

Yes, Ulises, it's Fernando. During the entire 2016, the total number of users of CBX was in the range of 1.4 million, very close to 1.4 million passengers, that was in the range of 24% of the total traffic. In January, the figure was higher, moving more than double volume of passengers using the CBX than in the previous January 2016 and the portion over the total traffic in January was above 27%.

(Operator Instructions) Magdalena Santana, Citi.

Congratulations for the results, I have three questions to ask you. If I understand correctly, you decide not to participate in the bidding process for the Brazilian airports. I don't know what about actions in other countries? Are you interested in there?

And my second question will be if you have any sort of color on Grupo Mexico current relationship with AMP after the Supreme Court had ruled against [himahico]. This has gone quiet, so what is the latest about related to this and what change in activity of USA companies have you noticed, if any, in places such as Tijuana and Bajio? Thanks a lot for your answers.

Thank you, Magdalena for the congratulations, thank you. There are no news, no any new news about Grupo Mexico and AMP. The situation is the same that in the last conference call, in the last quarter. There are no news. The last news as you remember was the Supreme Court, it was very clear that Grupo Mexico and any other shareholders cannot take more than 10% of the B series of their shares. So that is one of the question that you asked.

The other about Brazil, our analysis by the condition of this big process was that it's not the time for GAP because the profitability that could be received from this was not enough and also I think as we have many other business that we have to dedicate more funds and interest in Mexico. Brazil is a less competitive market in terms of how is the condition of the international bid process, how is the -- in this time for us, I think it's not the more convenient strategy to follow in Brazil. And your third point, could you repeat -- the third point is related to? Magdalena, please repeat (multiple speakers).

Yes, what changes in activity of USA companies have you noticed in places such as Tijuana and Bajio?

Okay, so the traffic between Bajio and Tijuana is very impressive, continues growing. I think talking with business people in the area of the Bajio, they continue completing their investment process in some different factories and could be possible that will be one-time that will be conclude this investment. We have to wait a period of time of consolidation and the capacity to export these industries not only to the States and Canada, also many other countries. Do you want to add (multiple speakers).

Just to complement what Fernando mentioned about our investment and expansions [both] of the country. We are analyzing right now some opportunity in Kingston that was opened a few weeks ago. So we will continue analyzing some other opportunities Magdalena and we will see if these kinds of opportunities could bring some value for our network that we already have as good as we expect.

(Operator Instructions) Lucia Tamez, Signum Research.

Congratulations on the results. I would only want to ask, how do you expect the traffic in Tijuana airport could be affected in relation with Mexico (technical difficulty) Cross Border Xpress with the new migratory issues within the two countries. Thank you.

Hi Lucia. I don't believe that could have a strong impact. The distribution traffic that there is from Tijuana to the entire country is very impressive, very important. The movement in both sides, to the Northeast mainly, in using the Cross Border is people that [isn't] going to do business or people that is traveling for the tourist purpose. And to the south, it's similar, it's a very important increase in the demand of traffic in Tijuana airport coming from people living in the area of San Diego. So I don't believe that they will reduce.

In the case of the other kind of person that is not using CBX is traveling to Tijuana for a different reason, I think it's people that is travelling is more families, is relatives and people that is looking to visit his relatives in the area of Los Angeles up to San Diego and that is because these have the right to cross the border using the passport. So it's not related to any irregular or informal travel into the States and the border is open for the people that have the documents and is [formal] people.

Okay. Thank you. That was very clear.

And Lucia, also it is important to mention how the very intensive economic activity and social and cultural activity in between both sides of the border, in between Tijuana and San Diego and it's very active and I don't believe that it could be the change of the regulation immigration is more affect to following a different from Mexican nationals or from the US.

Thank you. There are no further questions at this time. I'll turn it back to Mr. Bosque, please go ahead.

Thank you so much for your attention. Just a last note, I want to mention that we will be holding GAP Day 2017 in Mexico City on Wednesday, March 29 and you are all invited to attend. We hope you can join us for an afternoon and management presentation and getting to know our Company a little bit better. Please contact us for -- or contact our investor relations agency in New York, if you wish to participate in GAP Day. We will be sending out more details in the form of a press release later this week. Have a great day.

Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect your lines.