Grupo Aeroportuario del Pacifico SAB de CV (PAC) 2017 Q4 法說會逐字稿

Good morning, everyone. Thank you for standing by, and welcome to the GAP fourth-quarter 2017 financial results conference call. (Operator Instructions). Please note that this event is being recorded.

At this point, I would now like to turn the call over to Maria Barona of i-advize Corporate Communications. Please go ahead.

Good morning and welcome to Grupo Aeroportuario del Pacifico's fourth-quarter conference call. The Company will 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 their current expectations. For a complete note on forward-looking statements, please refer to the quarterly report issued last Thursday.

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

Good morning, everyone. Thank you for joining us for our fourth-quarter results conference call. Now, I will move to the results and the discussion. 2017 was another year for the book, as we reached the best year in our history. [By best] perhaps the most outstanding item was reaching an EBITDA of MXN7.7 billion, which is [normally] double of EBITDA that we have just three years ago in 2014. This is important to mention that we achieved big traffic figures, fueled by high [per seat] capacity offered by Viva, Interjet, Volaris, and Southwest, and to demand from the passengers, as evidenced by the high load factors.

Additionally, traffic performance as well as revenue were in line with the update guidance issued in July 2017. At this point, we continue to see a strong airline activity with increased movement at our major airports and active demand for the non-aeronautical business, particularly VIP lounges, food and beverage, and retail. I will go into these [folders] in a few moments.

First let me begin with traffic activity. Total traffic for the fourth quarter increased by 10%. This was particularly driven by the consolidation of new routes launched during 2017 as well as growth of a locals Mexican [covered] throughout the main high density market. The Montego Bay airport also experienced extraordinary growth, increasing 13% during the quarter, mainly driven by the new routes to the United States and Europe throughout 2017.

Domestically, traffic rose by 11%. That is over 584,000 new passengers during the quarter. Nearly two-thirds of this growth came from the Guadalajara airport, followed by Guanajuato and Mexicali.

Internationally, traffic grow by 9%, or by over 364,000 additional passengers. A significant portion of this [growth] stemmed from Montego Bay as well as Tijuana, which also considered growth cross-border uses at Los Cabos and Puerto Vallarta.

In terms of network expansion, 21 new routes were launched at our airports during the fourth quarter. Volaris expanded Morelia operations with four new routes, two of which were to California; and connected Tijuana with new countries in Central America, mainly Guatemala and El Salvador. Interjet and Aeromexico, respectively, opened three and two international routes. We also broke new ground by connecting the cities of Puerto Vallarta and Helsinki, thereby further expanding connection to Europe.

Domestically, VivaAerobus connected Puerto Vallarta and Puebla, and added service from Guadalajara and Tijuana. There was an important increase in frequencies by Viva and Interjet. And in commercial passenger load factor that is worth mentioning of 2.4 percentage points, growing from 78.8% in the fourth quarter 2016 to 81.1% in fourth quarter 2017. This load factor increase is a phenomenon that is not only [according] in our efforts of Mexico and Montego Bay; it is also occurring globally.

Meanwhile, the effect of lower oil prices which result in more economic [effort] added to an industry-wide strategy of more efficient fleets today with higher capacity. However, during this quarter, fuel cost volatility affect the commercial strategies deployed by the airlines.

Traffic figures for the whole year also is produce a good performance with increases of approximately 11% for domestic traffic and 12% for the international. This growth was primarily driven by performance improvement at our largest Mexican airports -- Guadalajara, Tijuana, Los Cabos, and Puerto Vallarta -- which represents 79% of the total passenger increase for 2017.

The passenger increase came mainly from the locals Mexican carrier, Volaris, with 1.6 million passengers; VivaAerobus, with 859,000; and Interjet, with 504,000, representing over 70% of the total increase. Additionally, Southwest Airlines drove in 352,000 passengers, which is equivalent 8% of the total increase.

In terms of the individual airport performance, I'll start with Guadalajara, which continued to be the main driver of [GAP's] traffic growth. At these airports, we saw the addition of 348,000 passengers during the fourth quarter of this year. This was mainly from domestic traffic, which was 18% higher than in the last quarter of 2016.

International traffic decreased by 2.5% due to the reduction of frequency to and from the United States, mainly from Volaris, who changed their network structure to add in more capacity on the domestic side with over 45,000 fewer international seats during the fourth quarter of 2017.

We mainly attribute this to the US dollar and Mexican peso exchange rate, which favors domestic travel over international travel, considering the strength of the dollar. However, domestic traffic offset this affect, growing in the double digits during the quarter. For example, routes to and from Guadalajara and Mexico City is [has presented] the largest increase with 51,000 new passengers. This was followed by Hermosillo and Cancun with 35,000 and 32,000 additional passengers, respectively.

Now onto Tijuana. For the first time, the story of this airport, Tijuana, opened there a route to and from Central America. With Volaris [it has taken] flight to and from Guatemala and San Salvador. Volaris Group added 81,000 new passengers followed by VivaAerobus, which has the renewed its focus on this airport, with 54,000 additional passengers. Routes to Guadalajara, Guanajuato, and Culiacan represent nearly 1% of the total number of the new passengers for the quarter.

Finally, I should highlight that we welcomed the arrival of Hainan Airlines to Tijuana. As they become the first Chinese airline in travel history to launch a [direct] flight to Tijuana. Starting March 31, Hainan will operate three weekly frequencies between Tijuana and Beijing with a Boeing 787.

In terms of the number of CBX users at the Tijuana airport, 29% of the Tijuana's total passengers used the bridge during the three-month period. This was a 23% increase compared to the figure report for the fourth-quarter 2016, and was mainly attributable to the outstanding services network linking the country and California; and via the bridge for the remarkable passenger traffic growth at this airport.

Moving on to the Los Cabos airport, we had total traffic growth of nearly 16% during full-year 2017. Los Cabos was (inaudible) GAP's best-performing airport. During the fourth quarter, international traffic remained the main source of the new passengers for the airport, with an increase of 9% or 70,000 passengers. However, domestic traffic experienced 14% growth, the equivalent to 46,000 additional passengers. This increase come mainly from the added seats in the Guadalajara route from VivaAerobus and Volaris.

In Puerto Vallarta, international traffic rose by 63,000 passengers or 9% during the fourth quarter. American Airlines represent most of the new passengers, with 20,000 additional passenger, remaining the largest operator in Puerto Vallarta. Meanwhile, domestic traffic grew by 14% with VivaAerobus adding 22,000 passengers. This number marked 56 months of consecutive growth for the Puerto Vallarta airport.

Montego Bay experienced outstanding growth of 13% during the quarter. This was mainly driven by the additional loading capacity at this destination. Traffic at Montego Bay also rose due to the [analyzed trade] to this location, which was an alternative to other Caribbean travel destination impacted by storms earlier this year.

Southwest, for example, add 78,000 new seats versus the last quarter of the previous year, which represented all of the seat growth in Montego Bay. Most of the new passengers were from the Fort Lauderdale, Toronto and Charlotte areas.

In terms of commercial revenue per passenger, we are seeing a continued and slight increase affecting the fourth quarter, mainly due to the temporary closing of various commercial area due to the works underway. The main airports affected were Guadalajara, Tijuana, and Hermosillo. On is a positive note, however, we note that once these areas are fully operating and [they are] now completing 2018, commercial revenue figures will strength once again and will surpass previous ones.

Despite the project underway I just mention, commercial activity grows slightly above expectation, mainly as a result of the high-growth traffic [employment]. Commercial revenue at our main airport of Puerto Vallarta, Cabos, and Montego Bay grow in 2017 by 21%, 18%, and 13%, respectively. And in the metropolitan cities of Guadalajara and Tijuana, commercial revenue rose by 14% for these compared to 2016. These increases were driven by food and beverage, duty free, car rental, and VIP lounges.

Please note that VIP lounges represent a significant portion of this growth, with 519,000 passengers using the VIP lounges by year-end. That this 38% increase compared to 2016. As such, we expect to continue opening VIP lounges. As we have been mentioning in past conversations with new launches during 2018 in the airports of Hermosillo, Vallarta, La Paz, and Morelia. [As an airport] continue growing food and beverage revenue, which represent 10% of the total commercial revenue during the fourth quarter.

We introduced a new commercial food option in Guanajuato airport for our users. This new option supported over 40% revenue growth for this business unit. Also, Vallarta and Aguascalientes revenue increased by 16% and 19%, respectively, resulting from passenger growth at each airport.

During 2018, expansion and commercial bids at Guadalajara and Tijuana will be the most important commercial strategy for the Company. In Guadalajara, we already built out 739 square meters of retail space, and will bid out another 1,249 square meters dedicate to food and beverage. Presented in this time of our good [met] markets and will include fine dining, casual dining, and fast food option offered by one of our top clients.

The main increase in our commercial revenue would be a reflect during the first quarter in retail and during the second quarter for food and beverage. The main purpose of the [bid endorsed] to commercial areas was to have the best commercial offer available in our airports. We also want to include the top brand operators in Guadalajara in Tijuana so as to continue to enhance the customer experience.

Back to the works in progress that I mentioned, Guadalajara was one of the airport which experienced temporarily closed doors as a result of the expansion. The good news is that part of this [Phase west reception] delivered in December 2017. And the rest will be put on service during the second quarter of the current year, bringing an expected commercial area increase of approximately 25%. With this improvement, we expect to rise commercial revenue per passenger by at least 15% for 2018.

Regarding the hotel project that was announced in the third quarter of last year, we are reviewing the final phase of the operational [win] and that will be operational at the end of the year.

Moving on the Tijuana airport, during 2017 the commercial revenue at this airport grew by 14%, driven by mainly the contribution of CBX by ground transportation and VIP lounges. At this airport, we are expanding the size of the terminal area in one of the most ambitious improvement project ever in our history. During the first quarter of 2018, we would put one of the largest bid offer for the Tijuana airport. The bid is aimed at offering new commercial choices for retail and food and beverage. This will be delivered by phases and should be operational by the second half of the year.

The basic concept is to present users with a new casual line offer and expand the fast food option in the food and beverage segment; as well as have prestige brand at [by level] in the specialty retail segment, including jewelry, electronic, edible gifts, among others. We believe that the Tijuana renovation will greatly enhance the comfort and experience of all users of this airport.

Now moving on CapEx for the last quarter of the last year. In Mexicali, airport was complete: a 1,300 square meter expansion, increasing the terminal [building's surface] by 29%. This include the addition of two new boarding gates, bringing the total number boarding the carriers from [2 to 4] gates. We complete the expansion of the baggage claim area, including the installation of a new carousel, to bring the total number of carousels to three. And we complete the renovation of 1,600 square meters in the check-in and ambulatory areas.

In La Paz airport, continued the terminal building expansion and renovation. I'll mention the terminal building surface in 1,000 square meters. We also began the renovation of a security checkpoint, [press] room and the commercial area. This expansion and renovation is expect to conclude in the second quarter of the current year.

In the Guanajuato airport, continue the terminal building works to increase the terminal building's surface by 3,200 square meters. It is expect to conclude in the next three months.

In Guadalajara, we have terminal building expansion and renovation which continue with works in progress that will increase the number of boarding gates; these during the second quarter. There be an additional 3,300 meters and six boarding gates.

And in Los Cabos, in December, was complete the expansion of our [personally] 1,000 square meters in the immigration area, including the installation of 20 automatic regulatory control units. During 2017, we also completed an airport expansion, adding four remote boarding position as well as renovation of the runway and taxiway. As for Los Cabos, we initiated terminal building expansion and renovation. This project is expect to conclude during the third quarter of 2019.

In Tijuana, the addition of a terminal building expansion renovation underway. We complete a new check-in area for Cross Border Xpress passengers, with 12 check-in counters and a new security checkpoint, including the installation of two additional security lines with x-ray equipment and waiting areas. We complete the installation of a new baggage handling system during renovation of the baggage claim area, including the installation of four new carousels, and recommissioning four new airport buses.

The expansion and renovation will conclude in the third quarter of 2018 and will increase the terminal building surface by 12,000 square meters. During this quarter, we completed the airport expansion, adding four remote boarding position, thereby increasing the remote boarding position by 50%. We also completed the renovation of taxiway A.

To summarize, we want to highlight that with all this expansion, some of them concluding in 2018, our general goal is to [ride] the level of support and experience for all of our passengers, which is always our main priority for GAP. Additionally, we seek to strength and increase commercial revenue as well as provide enough capacity to [others] to see the increase in demand of services we expect for 2018 and 2019.

Regarding the Grupo Mexico situation, just an update of what we know. Currently, this group has a 12.8% position in GAP as per [sec fill-in] in January 2018. There is no further news about. And any legal proceeding with this company, I will keep you informed as we have further details.

Moving on to the key financial highlight, I would like to start with our operating results. During the fourth-quarter 2017, we reported a total revenue increase of 11% in pesos, broken down as [follow]. The aeronautical revenue increased by MXN236 million or 12%, mainly due to the passenger traffic increase inflection and the appreciation of the peso, as was the case of Montego Bay airport revenue.

The non-aeronautical revenue increased by MXN45 million or 7%, driven mainly by increases in revenue from business operate directly by 13%, an increase of 6% in business line operate by third parties.

Please recall that we have to probably close or limited some of the terminal for expansion and renovations. However, when the areas are fully operating, we expect an increase in the commercial revenue figure for this year, as you can see in our guidance expectation.

Turning now to the operation cost in the fourth quarter, this increased by MXN216 million or 16% compared to the last quarter of 2016, mainly resulting from cost of service increases of MXN152 million or 31%. As we discussed in our previous conference call, our main objective is to offer users the highest level of service, quality, and comfort levels of our airports.

For this reason, (technical difficulty) 2017 we had over 200 employees; and we increased maintenance by 84%, mostly at the Puerto Vallarta, Los Cabos, Tijuana, and Guadalajara airports. Security and cleaning services also increased in order to provide better quality services.

These added costs were reflect in our financials for the quarter, increasing our cost of service per passenger in the fourth-quarter 2016 from MXN52 to MXN62 in the fourth quarter of 2017. These cost increases were in line with our expectation, which are in accordance with the guidance we have provide in July 2017.

Despite the increase in cost of service, the nominal value of our EBITDA increased 17% on an annual basis, causing the annual EBITDA margin to increase from 69.8% in 2016 to 69.9% in 2017, which was better than expected. In our 2018 guidance figure, we expect to raise our EBITDA by 11%. And if we [compete to cover] the bidding process for the Kingston airport. We have just learned that this process has been delayed until May. Therefore, the selection of the winning bidder will be publicly announced in June of this year. GAP will of course deliver a top proposal in hopes of obtaining this concession of the Kingston airport.

Before I move on to the Q&A question, I would like to quickly review the 2018 guidance figures outlined in the press release issued on January 2016. Traffic, 8%. Aeronautical revenue, 12%. Non-aeronautical revenue, 16%. Total revenue, 13%. EBITDA, 11%. All these figures, plus or less 1%. And EBITDA margin, 69%, plus or less 1% of this. The CapEx will be in the range of MXN2.6 billion.

That concludes my remarks. Thank you for your attention. And now ask the operator to please open the floor for your questions.

(Operator Instructions). Mauricio Martinez, GBM.

My question would be in regards of the maintenance expense. And I understood that these expenses has been awaited for improvement, the experience and the projects that you will have. But I was wondering if you can give us any color, if these MXN300 million that we saw this quarter would be sustainable for next quarters, or if is this going to go down to more normalized levels? Thanks.

Good morning, Mauricio. This is Saul Villarreal. Thank you for your question. Yes, the maintenance expense was increased in a higher percentage due to mainly the improvement that we have done in the services, in the quality of services. As we mentioned in the previous calls, we have a pressure because level of traffic and some of our airports. So for this year, 2017, we were focused in cleaning and in the cost of the contracts or maintenance. And we have a higher level of comfort for our passengers.

Additionally, we have to consider that we have some expansions in some airports, like Guadalajara, that we had some additional areas. So at the end, this level of growth won't be at the same level in the following quarters. So it will be a peak for this quarter, but it will be normalized for the later quarters.

Mauricio, it's Fernando. Let me to complete the answer, because you are asking about is sustainable, this increase. Of course during 2017, 2018, and 2019, the total increase in the surface of our facilities will be in the range of 30,000 square meters. And expanding the facilities and the equipment will require of course to continue to the maintenance. Also the increase in the line to review -- to check passengers in the security area; and the increase in the staff during 2017 was around 200 more staff. So that mean that this cost will be continue during the next period. And also in the second half of the year, we will have some increase also in our cost.

And the fact the maintenance and the operational cost will be distributed between 2017 and 2018. I think it's up to the end of 2018, the beginning of the next year, will be consolidate the total increase in the cost that required the new and expanded facilities.

Perfect. Very helpful, thank you.

Leandro Fontanesi, Bradesco.

I have two questions. The first one is Volaris/Aeromexico. They said on their conference calls that they reduced a little bit their capacity growth for 2018. So I know that you maintained your guidance for 2018 in terms of traffic, but just wanted to check if these revisions on capacity growth change your view for the short term and the midterm.

And the second question is -- I know it's too far from the next [NVP], but I was just wondering if you could share with us any initial expectations with regards to what could be your next tariff, if you [plan] it, or it could see some increase. Thank you.

Thank you, Leandro. Let me answer the first question. Of course that is our plan in the world. Airlines try to keep the level of offer of seats at the level that they could be managed [detail] on the revenue side. In the case of Mexico and in the case of the network of GAP, we know that Aeromexico has this policy. They are receiving at this time new planes, and the deployment of this fleet will not be in our network. They are more concentrating to increase in the international, long-haul, and also the connection in the hub -- in the main hub that they use in Mexico City.

In the case of Volaris, of course they are trying to reduce the capacity in some of their main network. However, we have another players, that is Viva; they have now 24 planes. And they will double this figure in three years in order to, in 2018, they will receive another six planes.

And also Interjet is moving out some of their capacity that they cannot to manage in Mexico City International Airport, and is moving partially to some of our airports, Guadalajara and others. And so in these two airlines, Viva and Interjet, is putting capacity in the same time that Volaris could be doing some reduction in the capacity in some of the more important network destinations.

In generally, did you have a look to the statistic, that was very clear: who is growing, and who is not growing in the same pace as before. That is related to your question, Volaris and Aeromexico.

Asking about some color for the master plan, just now we are starting. The work is to do during 2018, especially in the second and the third quarter; before to, at the end of the year, present some of the conclusion to our local operators; so in each airport, and also with the authorities.

And after that we will continue preparing the master plan in order to present -- to show, first, to our Board of Director and after that to the authorities, in the civil aviation authority and the Secretaría de Comunicaciones. So it's very early to say something about that. Of course, we know that during the last three, four years, the extra increase in the traffic in our networks consumed the majority of the extra capacity that was available before.

So probably the master plan will require an important -- (inaudible) important, two or three times more investment that we have to in the current, given that we are in the last stage of the [depending].

Bruno Amorim, Goldman Sachs.

My question has been actually answered. Thank you very much.

(Operator Instructions). Stephen Trent, Citi.

The first is with respect to M&A. You mentioned that you were taking a look -- and you had before that -- you were looking at Norman Manley International Airport in Jamaica. Any sense as to whether -- what other opportunities you may have looked at? Can you say whether, for example, you looked at the Colombian assets that your competitor just acquired? That's my first question.

Okay, Stephen. Kingston is under -- an asset that is in the focus of GAP. The reason is not for the size. It's more for -- because, for us, it's easier than any other operator because we know very well. We have a high level of knowledge of how we serve the country, the operations, the regulations that there are in this country, and also the good relations that we have with all the players that [they are in this higher].

The new agenda, the new calendar, move up to May; and now we have really to present under a very competitive proposal. Our interest is to get this concession and to manage with the same interest and efficiency that we are doing in Montego Bay. I assure that we would present the most competitive proposal of any other competitor that they are.

Okay, appreciate that. And my other question: just wanted to dig in a little bit about -- I think you'd mentioned something about some increases in some of your security costs. And there have been some incidents in Los Cabos in the last year. Have you seen any kind of increases related to that? Or is this something that the -- cost-wise, that you'd previously anticipated?

Stephen, our increase in security is more related to the increase in the line of check for the passengers. In order to avoid in the peak hours the passenger wait and lost time we can -- to pass through the security lines. And now the airport was [to per to a 10 eight] lines, so that is an important increase over the previous winter season. And it's in order to reduce time for passengers.

The security outside of airports is something that is concern by all the tourism industry; of course, also for the airport. And we know that they are, during some specific period of time before taking action by the authorities, was one of the reason that caused some cancellations.

I think it's now was over past this situation, and in the market it generally was clear. And probably when we will announce the second month of the year, you will see an important increase in the volume of passengers.

Okay. Appreciate that. I will let someone else ask a question. Thanks for the time.

(Operator Instructions). And there appear to be no further questions at this time. I would like to turn the floor back over to Mr. Fernando Bosque for any closing remarks.

Thank you. Before I conclude this call, I want to take this opportunity to thank everyone in this room and in the audience for this amazing experience I have had as GAP's CEO. This has been a wonderful opportunity, not only as far as my professional development, as we have made some wonderful memories here in the beautiful city of Guadalajara and many other cities in the great country.

With all the colleagues and friends we have met during my tenure here, it has been my honor to have been a part of this Company. I'm certain that we will continue to see great things happening at all the airports and in the future of GAP. So thank you, and have a good afternoon.

And this concludes today's conference call. You may now disconnect.