Grupo Aeroportuario del Pacifico SAB de CV (PAC) 2017 Q1 法說會逐字稿

Good afternoon. My name is Katie and I'll be your conference operator today. At this time, I would like to welcome everyone to GAP First Quarter Earnings Conference Call. (Operator Instructions) Thank you for your attention.

I would now like to turn the call over to Maria Barona of i-advize Corporate Communications. Ma'am, please go ahead.

Thank you and welcome to Grupo Aeroportuario del Pacifico's first 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 call. These do not account for future economic circumstances, industry conditions, the Company's future 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 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.

Thank you, Maria. Good day everyone and thank you for your participation here today as we discuss GAP's results for the first quarter 2017. Let me begin by saying a special thank you to all those investor and analyst who attended our Annual GAP Day event in Mexico City. The event was a great opportunity to see everyone and to answer some of your questions.

Traffic performance remained within our expectation during the first quarter. Total passengers traffic grew by over a million passenger or 11%. This was due to the expansion of the Mexican airlines both in the domestic, as well as the international markets. GAP's four main Mexican airports contributed to 90% of the total passenger traffic growth for the quarter.

As was mentioned in the report, starting this quarter, we are reporting passengers who use Cross Border Xpress as international. The rationale behind this way of showing passengers who travel in Tijuana airport through the new facility, really cross the border. So we qualify them as international.

Domestically, traffic rose by 11%. That is over 100,000 passengers during the first quarter, driven mainly by the 18% growth in Guadalajara. Internationally, growth was 12% or over more than 500,000 passengers, of which 182,000 were users of the Cross Border facility in the Tijuana airport.

We also had a record winter season in the Puerto Vallarta and Los Cabos airport, where we reached the highest international traffic levels in our history. There were two outstanding items affecting the first quarter that I want to mention. The first was the leap year effect which, for comparison purpose, means that 112,000 passengers less than the previous year. The second was the Easter holiday, which also, for comparison purpose, sold at approximately 230,000 passengers, which were the additional passengers generated by the holiday season taking place during the first quarter of 2016. The combined effect will be 3.4% in the statistic figures.

The airline expansion that I just mentioned continued to be active, with robust activity in the new routes for the quarter. Some of the new domestic routes include Aeromar with three new routes from Guadalajara to Mochis, Puerto Vallarta and Culiacan; also Hermosillo to Culiacan. Aerocalafia entered the Guadalajara to Puerto Vallarta market with a new weekly frequencies. Aeromexico began service between Tijuana and Morelia with five weekly frequencies. TAR Aerolineas expanded its Guanajuato network to Zihuatanejo.

International routes also saw a lot of activity. For the first time in history, a direct service was launched from Oakland to Puerto Vallarta and to Los Cabos with Southwest. Norwegian airlines began seasonal winter-flights from Milwaukee to Puerto Vallarta and Volaris launched the Guadalajara to Miami and Milwaukee services. These new routes are expected to add 50,000 seats to the monthly seat offered at our airports.

Moving on to the individual airport, I just want to mention some of the highlights; starting with Los Cabos, while domestic and international traffic continued to grow in the double-digits, on the domestic side, Volaris increased its seat offer by more than 50,000 seats. This was result of the fleet renovation as well as additional frequencies to Mexico City and Tijuana.

As far as international traffic, Southwest experienced the largest number of additional seats during the first quarter, increasing its seat offer by 60,000 seats, due to the new daily flight from Oakland and a twice-daily flight from Los Angeles. In Puerto Vallarta, currently the total room inventory at this destination is over 20,000 rooms.

In all the categories, which is really the base supporting this traffic growth. As with Los Cabos, Puerto Vallarta also show Southwest come in as the faster growing (inaudible) in this airport during the first quarter, with an additional 35,000 seats, closely followed by American and Frontier who also increased their seat offering by 28,000 and [90,000] seats respectively.

And now to Guadalajara, domestic traffic remains the main engine behind the passenger traffic increasing, as was mentioned before, 18% during the first quarter, while international traffic grew 6%. We believe that the reason behind this enormous growth is that this airport has become one of the leading option for Mexican airlines that seek new market outside congested Mexico City airport.

Volaris continue to dominate the Guadalajara market with more than 45% of the total market share. However, if we look at VivaAerobus and Interjet, these competitors also continued to enhance their presence in Guadalajara. For instance, VivaAerobus grow by 43% during the first quarter of the year, while Interjet grew by nearly 17%. So these are strong figures that reflect they're very active market. It is worth mentioning that it is the domestic airlines that are expanding market share versus the international ones on this airport.

Now moving to Tijuana, following the rally of the past two year, which conclude in a 59% increase from the first quarter 2015 to the current quarter, this airport continue -- shows steadily growth. This makes Tijuana the fastest growing airports among the top 10 airports in Mexico. The main factor contributing to this outstanding performance were of course the CBX facility, as well as the peso depreciation, economic attraction of the region, and capacity increases at several airlines.

However, since March 2017, international operation were cancelled; Oakland by Volaris and Shanghai by Aeromexico, giving the opportunity to the airport to develop a new drop-off area exclusively for the CBX passenger, as well as international passengers. During the last quarter of the year, Tijuana airport will restart having international operation, such as, a new flight from Tijuana to Beijing by Hainan Airlines, first time flying this airline in our network.

In the Bajio regions, both Aguascalientes and Guanajuato have benefited from the higher domestic seat offer that is available. In Aguascalientes, for example, domestic traffic grew by 12%, mainly resulting from the capacity increases for the Cancun and Tijuana routes by Volaris. International traffic remained stable, with 3% growth.

At Guanajuato, it is a similar situation. Domestic traffic grew by 21% as a result of the new Cancun service by VivaAerobus, as well as to the adding capacity at both the Monterrey and Tijuana routes. Finally, international traffic remained stable with 4% growth.

And to conclude this April review, Montego Bay continued growing at a conservative yet steady pace. Passenger traffic grew by 2.3% in the first quarter, due to the 1% increase in average load factor as well as additional capacity in certain key markets. [Shangwin] contributed to the largest amount of additional passenger during the quarter with 16,000 new passengers that represents a 22% increase compared to the first quarter last year. In terms of the US carrier, Delta continued to demonstrate solid increases, growing by 6% in the quarter, making Delta the US based carrier with the largest growth for the period.

Now, in terms of the commercial revenue, this has grossed above our expectations, due to the higher traffic, especially at some of the leisure destination and metropolitan areas. For instance, commercial revenue grew 25% driven mainly by Puerto Vallarta, Los Cabos and Guadalajara airport with growth of 35%, 29%, 24% respectively during the first quarter.

Food and beverage operation grew 43% driven mainly by the renewal of the new terms in some of our leasing agreements. On the other hand, retail operation increased 32%, mainly due to the new commercial spaces in Guadalajara and Los Cabos, and the leasing of our market store, which represent an increase of MXN8 million in the business line, driven by the change of our strategy. The depreciation of the peso dropped some of the increases across the other business lines. Saul will discuss that effect shortly.

Looking ahead a little bit to the rest of the year, the plan is to undergo major renovation at Guadalajara and Tijuana in order to expand the commercial areas by 20%. Therefore, some commercial spaces have been affected by temporary closures for the time being, but the projects are expected to conclude in the second half of the next year. The works set to literally strengthen the [total space] as well as the range of the services offered and through this improved layout, we hope to achieve a good combination to result in higher sales per passenger and more beneficial contract with retailers.

Finally, the current traffic levels have pushed VIP launch activity at [1,314,000] users compared to 80,000 users through the same period of the last year. In this quarter, we reached the milestone of 1 million passengers in our VIP launch network from the beginning of the activity that the VIP business continued to grow in 2017 with a remarkable 65% revenue increase. GAP also plans to add new and larger facilities in Hermosillo and Puerto Vallarta during the first half of the current year in order to serve additional demand.

Moving on to CapEx, GAP continues working in various improvement across the airport as per the master development program. Our goal is to improve capacity and the quality of our airports in order to offer the passengers and clients a good experience at our facilities. During the first quarter, in the airport of Guanajuato, GAP conclude the construction of our new [Tier 3] pathway, which increased airfield capacity by 45%. In January of this year, we also began the remodeling and expansion of the terminal building capacity at that airport. This work will conclude in June 2018.

In Guadalajara, we continued the work of the expansion by 15,000 square meters of Terminal 1 that included the construction of our new four lane security checkpoint to be completed by December, current year. At Tijuana International Airport, we are currently growing the terminal building by 25,000 square meters to finish at the end of the first quarter of next year. This include expanding and reopening the departure lounge and baggage claim areas. By June 2017, we expect to finalize the (inaudible) expansion creating four new aircraft stands.

And in Hermosillo, the terminal expansion is nearly complete. Here, we have [tripped] the boarding launch capacity and have completed the runway improvement, the apron expansion works to add two stand position and are going to put in service in June, current year; that about cover the scope of our projects now.

Finally, I want to explain about the last Tuesday we held GAP's general ordinary and all shareholders meeting, as well as the extraordinary meeting, in which one of the items the shareholders approved are dividend payment as well as the capital stock reduction for a total amount of MXN4.7 billion. The capital reduction of MXN3.33 per outstanding shares will be paid on or before the end of May 2017.

The dividend payment will be paid in two tranches, MXN2.86 per outstanding share before August current year and the same amount for outstanding share to be distributed before December of the current year. Likewise, all the issues discussed in the ordinary shareholder meeting were approved. Members and Chair of the Board of Directors were ratified.

Please consult the full disclosure of the resolution released yesterday. And at last, because there are some questions about that, there are no further news about the legal proceeding related to Groupo Mexico. As we know, currently [stake in] GAP is about 14.9%. We keep you informed as we know more.

I will turn the call over to Saul for his part of the presentation.

Thank you, Fernando. Good morning, everyone. This quarter, we report an increase in aeronautical and non-aeronautical revenues of MXN533 million, or 23% with the following breakdown. Aeronautical revenues increased MXN379 million or 22%. This was mainly due to the 23% higher revenues from the Mexican airports, due to the higher passenger traffic as well as higher tariff due to the inflation.

Additionally, Montego Bay revenues increased by MXN56 million or 17% due to the 13% average peso depreciation and the 2% passenger traffic increase. Non-aeronautical revenues, GAP strategy is to continue growing non-aeronautical revenue per passenger, which increased in this period 14%, from MXN64 in the first quarter 2016 to MXN73 in this quarter.

During first quarter 2017, non-aeronautical revenue increased [MXN164 million] or 27%. MXN128 million of this increase was from the Mexican airports, which was driven by higher revenues from third parties, which jointly increased MXN93 million, due to the increase in passenger traffic, new tenants in our leasing agreements, as well as the peso depreciation versus the dollar in our leasing agreements denominated in this currency.

The main growth was driven by food and beverage, retail, car rental, duty-free, financial services and timeshare. Our revenues denominated in US dollar increased 15%. However, the average depreciation of the peso in this quarter provides an additional 16% growth in revenue. In the other hand, revenues from business lines operate directly by us rose MXN19 million or [40%] mainly in the VIP launches in advertising.

This positive effect was offset by the decrease of convenience store revenues in MXN4 million or 12%, due to the change of strategy to our mix operation and structure, since October 2016. However, the EBITDA margin in this business line have improved, passing from 40% in first quarter in 2016 to 60% in the first quarter of 2017. As such, our strategy change is in line with our expectation, as Fernando mentioned before.

Montego Bay airport report a revenue increase of MXN56 million compared to first quarter of 2016, driven by the peso depreciation of 13% average. In terms of the total operating cost, this increased by MXN44 million or 3% compared to first quarter of 2016. The main increase was in the cost of services of 19% increase, driven by our Mexican airport which increased 20% in total. Due to the higher maintenance cost, personal expenses, utilities and security.

The cost of service per passenger increased from MXN45 during the first quarter of 2016 to MXN48 in this quarter. This increase was mainly driven by the Montego Bay airport, which went from MXN47 in fiscal year 2016 to MXN97 per passenger in this quarter as a result of the peso depreciation. Cost of service per passenger in Mexico increased from MXN40 to MXN42 per passenger.

As we discussed in our previous conference call, during this year, cost of services will rise because the Company wants to replace the missing capacity compared to the larger increase in passenger traffic that we had in the last two years. Therefore, the cost of service per passenger will be higher during the coming quarters. As a result, our EBITDA grew MXN385 million in first quarter 17, or 24%, excluding the effects of IFRIC 12.

On the other hand, EBITDA margin for the quarter rose by 30 basis points, excluding the effect of IFRIC 12, shifting from 70.4% in the first quarter of 2016 to 70.7% in this quarter. The EBITDA margin in the first quarter for the Mexican airports was 73.4% and for the Montego Bay airport was 53.7%. EBITDA per passenger increased from MXN179 to MXN199, driven mainly by the increase in aeronautical and non-aeronautical revenues.

In the financial cost, it was increased by MXN247 million in the first quarter of 2017, mainly due to a 9% appreciation of the Mexican peso against the US dollar, representing a gain in the foreign exchange rate of MXN281 million for GAP. However, this effect was offset by a net foreign exchange loss due to the currency translation effect of MXN582 million, compared with the comprehensive income in the first quarter of 2016.

Moreover, financial cost increase due to the higher interest expense, derived from an increase in interest rate and the bond that we issued of MXN1.5 billion in July 2016. It is worth mentioning that the Company successfully completed the issuance of MXN15 million long-term bond certificates under the ticker symbol GAP17, at a variable rate of TIIE-28 plus 49 basis points in April 6, in this month.

This issuance will be allocated to continue financing CapEx through 2017. With this issuance and plan of the Company for this year, the net debt to EBITDA ratio that we are expecting at the end of the year will be 1.0 times, which is below the level of 3 times that S&P and Moody's looks for the downgrades.

Despite our net income increased by MXN594 million or 62%, our comprehensive income increased only by MXN12 million or 1% compared to first quarter of 2016. This effect was generated by the exchange rate loss in the currency translation of MXN582 million. The exchange rate loss was due to the consolidation of MBJ, our subsidiary with provisional currency in US dollars and at the end, the appreciation of the peso in 10%, the exchange rate moved from MXN20.62 at December 31, 2016 to MXN18.82 at March 31, 2017.

With that, I conclude my remarks and now I ask to the operator to please open the floor for your questions.

(Operator Instructions) Pablo Zaldivar, GBM.

Good morning, Fernando and Saul. Thank you for taking my question. My first question would be regarding the cost of service. As Saul mentioned, it went from MXN45 to MXN48 per passenger during the quarter and you mentioned that they should be higher going forward. So approximately, what level should we be seeing in the following quarters?

Thank you, Pablo for your question. Well, it depends of the level of traffic that we will be expecting. We will see if our expectations complies at the end of the year, the cost per passenger -- cost of service per passenger will be around MXN45 roughly.

Okay, thank you. And regarding the Kingston Airport in Jamaica that you mentioned the you're looking into it. Is there any updates or when could we start seeing some information about the process? Thank you.

Saul please, you could -- answer the question.

Yes, Pablo. We are looking for this project. We are in middle of the RFQ process. Next week, we will have to present the pre-qualification of the company. And all the process is all long into the year. Probably, at the end of December, we would see the results of this process. For us, as we explained before, it's very important to have this asset as part of our portfolio. We will be looking pretty closely of the process.

Okay, thank you. That's very helpful.

Alexandre Falcao, HSBC.

Good afternoon, guys. My question is, first on Tijuana. Just want to know if there is any bottleneck of operations? We notice that the traffic is well ahead of what you guys expected, just wanted to know if there is any CapEx that is going to be required there since it's going extremely well.

And second on, just trying to anticipate, I know it's far but, trying to anticipate the MDP, do you think that for the next cycle is there any significant CapEx to be done or it's going to be a light cycle in terms of investments and how are you guys preparing for that if that's the case? Thank you.

Thank you for the question. Here is Fernando to answer about how is the capacity of the terminal and how is evolution with this very impressive increase in the number of passengers and also working in the -- doing the works and with the passenger using the terminal, is a very difficult situation. And the level of the quality during this period of time remain in the continued reduction, because the limitation for the use of some of the spaces, and also the inconvenience of the works.

However, we're advancing very well. The transformation of the terminal that have very old layout to a more wide, more light, more better quality will be complete, as I mentioned in my presentation, next year or April approximately. However, during the first half of the current year we are doing an important expansion to provide extra capacity for the increase in the percent that is coming and going through CBX. That will be put on service approximately in August and provide extra capacity.

So the works that we will conclude next year with permit to attend -- to address the need of capacity and to take enough time to complete the (inaudible) of that is, as you know, the master plan will end in December 2019. So now, we are preparing and the new project expansion that will be for the next period beginning in 2020.

And probably, we will have a more detailed information about the project in the next six months. Now, we are working very hard to understand how will be the best way to develop the terminal facilities to address the future demand that we are expecting.

Okay, thank you. Just on, more broadly on the MDP, not only on Tijuana, you think in the other efforts as well, you guys are going to have need for heavy investment cycle as well that's what I'm understanding, right?

Of course, as you are looking, how is the traffic evolution, is the [problem] with the -- to address passenger needs with the capacity that was projected four years ago, with the evolution is not enough. But it is not only Tijuana, so is Guadalajara, is Vallarta, is Cabos, is (inaudible). Some of these airport is now in the process to provide extra capacity and also over and above the amount that was committed with the authorities for the current period of investment.

So, this is a typical thing that's happened. Sometime the traffic is running faster and another time in the cycle, it is going less (inaudible). So sometimes you have some limitation in the capacity and you have to do more investment and quickly. And that is a situation in general that we are living now not only in our network in GAP also all the airport has is the same, the same situation.

As was mentioned, during the GAP Day, Mexico is, including the last four years is receiving an explosion of the increase in the need of transportation using the air transport system. And some of the airports is receiving strong pressure to increase capacity and you know that in the other group of airports, especially Mexico City. But also other airports is doing a strong and large investment to increase capacity.

Lucia Tamez, Signum Research.

Hi, thank you for taking my questions. I have just like three questions. And the first one is regarding the operations in Tijuana. I understand this is the first comparable quarter in terms of the operation of the CBX, and actually I was shocked to see 71.8% growth in Tijuana international passengers. So do you guys see the same behavior in the upcoming quarters?

Hello, it's Fernando. Thank you for the question. Our expectation for the entire year will show an important increase in the total traffic used in cross-border facility. Last year it was around MXN1.3 million. Our expectation for the current year will move in the range of -- close to MXN1.9 million. So that mean that every quarter we will address important increases.

Would you say it's as important as this one, like around 70% or do you expect it to be less?

So I'm saying that during the first quarter 2016 was the beginning of the operation, remember that was December. So the first quarter was not an important volume of passengers, it was more than 241,000. However, at the time that we advance into second and third quarter, the traffic, the passenger using the facility was continue increasing. So to mention year-by-year, the evolution of the traffic will be in the range of [1.3] last year, up to [1.9] for the current year. So next quarter, I think it will continue in the same pace of the increase.

Okay, thank you very much. My second question is about; do you have any particular reason for Los Cabos to grow 24.2% on domestic traffic considering that its comparison basis was really high? I mean because in 2016 the first quarter the holidays was in March and this year we had it on April. So do you have any extraordinary events happening or why did we saw this regular figures in Los Cabos domestic traffic?

Of course these are not regular figures. The supply of capacity to the destination in other routes was very impressive during the last two years and we'll continue during the next. Secondly, the marketing campaign by the Federal Government to promote the domestic citizens to fly and to go to vacation, not only to another countries, to visit many different nice destination in Mexico.

That is one of the reason, because Los Cabos currently is a new destination for local people. That is the reason. But also some influence is coming from the Tijuana CBX, some of the visitor instead to fly from the area of the South California to Los Cabos have the option to take their plane and crossing Tijuana, and that is seen as a domestic passengers.

And lastly, you mentioned on your comment that Tijuana -- that you're opening the Tijuana/Beijing route. So is this the hub you were talking about in the previous quarters that you are going to inaugurate?

Yes. So, there are new airlines, Hainan Airlines is looking last year the opportunity to offer services using Tijuana as a first destination to distribute traffic to Mexico and also to the California State. And now, we are in the transformation of the terminal, as I mentioned before. So the closing of the international fly during the two quarters would permit to transform, to develop one of new facility in the same site to the terminal.

And at the end of this work, that will be September-October, we will reinitiate international operation. And the first one that we will use will be Hainan with this new destination. They also now is asking to open a second destination origin to fly to Tijuana from another different city in China.

But however, after we conclude all the transformation of the terminal, we can -- to promote quickly the expansion of international routes. So we have to be patient to go to the market and to offer openly this capacity, because now we haven't this special area for international passengers.

Miguel Escobedo, Noriega y Escobedo.

Fernando, I would like to congratulate you for the extremely good results you presented for this quarter. However, there is one point, which is being bothering me for a number of years. As you may remember, Grupo Mexico stopped the payment of a reduction of capital and then -- but it still remained positive in the past.

I suggested at that time, that we should turn back to resolution of the stockholders meeting, so that GAP could recuperate the dividend and the reduction in capital, and then redistribute it subsequently. Nothing has been done, the [demand has been] sitting on a large amount of money which has been subject to devaluations and I feel that if we don't change our policy about this matter we will just continue to lose it.

I believe that not only the small shareholders were affected but that the big shareholders difficult to get their money before it (inaudible). So there might be a conflict of interest there.

Hello Miguel, I appreciate your question. I know that many overtime has you asked about that. It is clear that this problem of the pertained in [Esthaval] and important amount of capital that is owned by the shareholders. However retaining value is a problem that our lawyer is working very hard. Now it's moving into the five years we're in the beginning of this problem and we expect that, that will be resolved shortly. I expect, I hope that all the difficulties that there are in the legal proceedings in Mexico will be overpassed by our lawyers.

There are not any reason with real fundament to retain this money. However, the legal procedures will need to take more time to obtain -- to get. The money will be finally distributed to the shareholders. But this money is not under control of GAP. Our lawyer is working in favor of the shareholder but the money is retained by Esthaval and they cannot too order the distribution of this money to conclude completely all the legal procedures that was opened and put against Grupo Mexico.

I'm sorry Fernando, I find your answer unsatisfactory. I agree with you that the money is not in the hands of GAP, but what is the hands of GAP is to take the resolution and (technical difficulty) setting aside the original decision of paying the dividend and the reduction of capital. If that happens, GAP has the right to recuperate the money (inaudible) and you can then decide what to do with it subsequently, I wouldn't be surprised with your lawyer, but keeping this thing going, so they could collect high fees for the work they're doing. I understand these are difficult but I'm fed up with what is being done.

Miguel, I will take note of your recommendation and that is not the first time that you're saying that. I would talk with lawyers and my shareholders and my Board of Director to look if we could do something more than we are doing up to now.

I can assure you, you can. I am a lawyer myself and I know what is being done.

Okay. Could we talk about this personally during the next week, Miguel?

Thank you very much.

Pablo Barroso, Credit Suisse.

Just a quick question, regarding your tax interest rate, you paid like roughly 15%. Should we expect this along the year and for 2018 or should we normalize into 25%, 27% or 30%? Thank you.

Hello Pablo, thank you for your question. The rate of the current tax, we considered that cash tax of around 30%. The reduction of the corporate -- which is the corporate tax -- the reduction in this month is just that deferred tax that was derived from the inflation that we have in the first quarter. So it was a net effect in this quarter that will be normalized in the coming quarters. But at the end, the cash tax will be around 3% and the net tax rate will be around [20%]. It will depend of the result. It will depend of the inflation for the deferred tax effect.

Thank you, Saul. That was very helpful and congratulation on the results.

Magdalena Santana, Citi.

I just have two questions. The first one is, aside from what you mentioned on Jamaica, are you looking at overseas airport opportunities? And the second one was related to Grupo Mexico. And I want to know -- I know that [Aeromexico] ownership technically remains above the 10% limit that is stipulated by the company's by-laws. What I want to know what is a influence of Grupo Mexico on the Board of Director. So if you can please describe the current relationship between GAP and Grupo Mexico? That will be very helpful for me.

Thank you for the question, it's Fernando. About the interest in foreign air opportunities, of course that is something that we are doing currently continuously, any airport trends in the area that we have analyzed and looking if it could be match with the financial performance and economic benefit of our shareholders that was -- during the last year was looking at different opportunities.

And at the moment we are -- as Saul mentioned, we are preparing now our application to be qualified to present on our proposal in Kingston Airport in Jamaica. But of course, there are some time opportunities. Our area of interest is this continent to the south and avoiding to go to vendors in Asia or Europe, because it is very low [agile] and very competitive. So comparing with the performance that we are taking in Mexico has not changed or the value of the shareholders to participate in this process.

Related to Grupo Mexico, to mention that Grupo Mexico has appointed member of the Board of Director, that is part of the by-laws of the company, when you have 10% of the shares of the company, have the right to appoint one of the member. That was happening from the beginning of the portion of more than 10% of our stake in -- I think was in seven years ago.

So Grupo Mexico rectified in the -- two days ago in the General Ordinary Assembly the appointment of the -- to ratify the same member that was before. Mr. Alfredo Casar participate in all the meeting of the Board and contribute with questions, ideas and have normal relation as we have with any other shareholders.

However, remain questions that was completely clarified by the Supreme Court of the nation with related to the value on the by-laws on the 10% limit that there are in by-laws is something that is not under discussion, it's only under the process today proceed to the divest of the extra or that is close to 5% of the shares that they have in both of a limit that they are in the by-laws.

Okay. Okay, thank you very Fernando. That was very helpful for me.

(Operator Instructions) Ulises Argote, Santander.

Just one quick question, given the EBITDA margin this quarter and I understand and what you said that the cost will go up throughout the year. But do you see any upside to that 67%, 69% guidance in EBITDA margin that you gave a couple of months back? Thank you.

Thank you Ulises. Yes, the EBITDA will be normalized. In this quarter, we saw an increase in the cost of services in long terms in cost of operations. It will continue growing in a higher pace. So at the end of the year, right now the view that we have and the expectation is to be in the range that we released in our guidance which is [68] more or less 1%.

So this quarter was good, because at the end of the -- in the last quarter, we will see an increase in the cost as you know, we own a cycle business and in general terms, the expenses are higher in the last quarter. And as I mentioned before, in the last quarter too, we are going to continue replacing the comfort and the level of service in all our airports. That represents an additional expenses in almost all the lines of the cost of service.

Okay, thank you very much. And so for 2018, should we expect to go once again to levels above that 70%?

Yes. We don't know exactly right now. It's pretty early to say, but it's fair to say too that some of the expenses that we are going to incur in this year will be one-time. So for the next year, probably we will recover the level of 2016. It will depend on the level of traffic, the rate, the commercial revenue, and many other factors.

Ulises, this is Fernando. Of course, we are looking this target of 70% to recover this level.

(inaudible), Scotiabank.

You mentioned in your remarks that one of the reasons for the strong growth in non-aeronautical revenues plus new terms in leasing agreements. Could you give us more color on this? And also, should we expect levels of MXN75 per passenger for the end of the year for non-aeronautical revenues? Thank you.

Thank you for your question. The new terms of commercial expense that we referred in this quarter is that, in general terms, in all the new spaces that we are opening in our airports, we have a better terms for the company. We are increasing the minimal rental payment and we are increasing the average of participation that these clients choose to pay according to the business line that they have.

So we have a better conditions now and we are receiving more revenues. We have car rentals, for instance, with a better conditions that we had before, and we are improving, in general terms, the conditions of our leasing agreements. So it is correct, we are improving that. But it's complicated to say that we will have an average revenue per passenger of MXN75.

Obviously, we have our target, but it's not of MXN75. It will be normalized according to the year. So we are working, obviously improving our commercial revenues, but MXN75 for this year at least will be complicate. We know that MXN73 is a very good rate, but we do not expect to have this at the end of the year, the full year.

(inaudible), the important improvement in the commercial performance is depending all of the expansion of some of the facilities in the terminals in Tijuana. Now, we're practically closed the majority of the commercial shops, retail and food and beverage. And in Guadalajara airport, the expansion of the terminal one in the domestic side also is in the process that is require to reduce part of the commercial share to get the new expansion.

So at the end of the coming year, could we recover a portion, important portion of this business, and next year will be the -- more shops and more retail activities opened at the end of the second quarter. So full year expansion of the commercial will be more clear for 2019. At this time, the figure in terms of the commercial revenue per passenger have to be high growth and we are looking now with the current layout, commercial layout.

Lucia Tamez, Signum Research.

Hi, just a quick follow-up on Los Cabos my earlier question. So you said the extraordinary figures we saw this quarter was due to continuous promotion of travelling throughout Mexico and the expansion of airline supply. So would you say in the following quarter we may see a higher growth rate regarding or did you, we are having the holiday season in this quarter and plus more supply from the airlines. So we would expect a higher growth rate.

Yes. In the second quarter of the year, looking that we have the Easter holidays in April and also the extra capacity in hotel room that was opened during the last year, and also in the beginning of the current, we'll provide more visitor to the destination. So the airport also in domestic and international will increase steadily. The figures, I think it take patience and wait one week to know the real information of April, that will be more interesting for everybody to have more clear figures to project the second quarter.

But, of course, the main, the strong situation in the Cabos is that the new capacity in hotel rooms, and we have prepared with the two terminals, and that's all to prepare and advancing the expansion of the terminal, international terminal.

(Operator Instructions) At this time I'm showing for no further questions in the queue. I'll now like to turn it back over to management for closing remarks.

So thank you so much for your attention. We are very excited with the outlook for the year underway and we welcome your interest. Thank you for joining us and have a good day.

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