Grupo Aeroportuario del Pacifico SAB de CV (PAC) 2018 Q1 法說會逐字稿

Good morning and welcome to GAP's first-quarter 2017 conference call. (Operator Instructions)

It is now my pleasure to turn the call over to Maria Barona of i-advize Corporate Communications. Please go ahead.

Thank you and welcome to the Grupo Aeroportuario del Pacifico first-quarter 2018 conference call. Today from the Company we are pleased to have Mr. Raúl Revuelta, Chief Executive Officer; Mr. Saúl 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 future performance, or financial results. As such, statements made are based on several assumptions and factors that could lead to change, causing actual results to materially differ from the current expectations. For a complete note on forward-looking statements, please refer to the quarterly report issued yesterday.

At this point, I'd like to turn the call over to Mr. Raúl Revuelta for his opening remarks. Welcome back, sir.

Thank you, Maria. Good morning, everyone. Thank you for joining us today. I am very pleased to be here with you as GAP's new CEO. It's a great honor for me, and I will work very hard to ensure that GAP's success story will continue in the coming years. I look forward to speaking with you [all of you] and look forward to working with the team here at GAP.

I will start by saying that overall, this was a solid quarter for GAP. Traffic was the main driver, as a result of the outstanding performance of our many airports due to the Easter week holiday, which took place in March. Whereas during 2017, it took place in April.

Additionally, the volume of seats offered by low-cost carriers throughout our network continues to steadily increase. [Linking] the higher load factor, this is reflected in the stronger operating levels as well as the strong passenger traffic numbers.

On the flipside, we did feel the impact of the exchange rate with the appreciation of the Mexican peso during this quarter by another [almost] 8% versus the US dollar. This appreciation affected non-aeronautical revenues at our Mexican airports, particularly in terms of food and beverage, retail operations, duty-free stores, timeshare spaces, and VIP lounges.

I might also add that aeronautical and non-aeronautical revenues from Montego Bay airport were also affected due to a weaker dollar. The good news is EBITDA increased by nearly 12% to reach a 71.7% margin for this quarter.

Let me begin with our traffic results. [Passenger] traffic for the period under discussions rose by 13% and this was partially driven by the inclusion of new seats to our network.

Relative to the low-cost Mexican carriers in the high-density markets, higher commercial passenger load factors, and the effect of the Easter holiday, traffic at the Montego Bay airport increased by 7% during the quarter, mainly driven by a number of new seats offered [at toddler] as well as very stable [PL] low-cost and charter carriers.

In the Mexican airports, traffic rose by 17%; that is over 857,000 new passengers during the quarter. More than half of these [row] came from Guadalajara and Tijuana. Internationally, traffic grew by 9% or by over 430,000 additional passengers. A significant portion of this growth came in from Tijuana, which also considered a cross-border user, as well as from Guadalajara, Montego Bay, and Puerto Vallarta.

In terms of the network development, we were very active with the opening of six domestic and eight international new routes. As we mentioned in our monthly reports, Hainan Airlines, a major Chinese carrier, launched the first direct site between Asia and Latin America from Beijing to Tijuana. There is more detail on the new 22 frequencies added this quarter on page 3 of the quarterly report.

Guadalajara contributed most to the outstanding passenger traffic performance, followed by Tijuana, Los Cabos, and Puerto Vallarta. Generally, these airports represent 70% of the total passengers increase. Most of this traffic was from the Mexican low-cost carriers: Morelia with 466,000 additional passengers, [Piva la Good] with 289,000 passengers, and Interjet with 250,000 represented over 75% of the total increase.

In terms of the seats, the total number of seats offered at our airports during the first quarter reached nearly 30 million, an 11.5% increase compared to the first quarter of 2017.

The commercial passenger load factor grew 1.1%, from 79.4% in the first quarter of 2017 to [80.5]% in the first quarter of 2018. In terms of the commercial revenue per passenger, during the first quarter, this figure was lower than traffic growth as a result of two important negative effects in some airports: the impact of the exchange rate as well as expansion and renovation that are currently underway.

I would also like to point out that US dollar commercial revenue increased by [$]1.4 million or 8%. However, due to the conversion to pesos, it was only 3%. In terms of exchange rate impact, the most affected airports were Montego Bay, Los Cabos, Puerto Vallarta, and Guadalajara, as they have a significant amount of transaction [and user].

In terms of the most affected business units, duty-free currently represents 13% of non-aeronautical revenues and was highly affected. For example, comparing the first quarter of 2017, duty-free fell 1%. However, the revenue in dollars actually increased by 7.6% during the quarter.

It is worth mentioning, however, that in Guadalajara Los Cabos, there are bids underway for the allocation of new duty-free contracts. The new formats could represent strong duty-free sales during the rest of the year.

In terms of the retail operations, dollar revenue rose by 9% during the quarter. However, due to the impact of the peso appreciation, this business line declined by 2% during first quarter 2018.

Revenues from timeshare operations decreased by 12%. Two factors affect this business unit. The first was the peso appreciation. And the second effect was that in the first quarter of 2017, we received a one-time fee for some timeshares agreement and we did not receive these fees in 2018.

In terms of the expansions and renovations underway, commercial revenues have been temporarily affected at Guanajuato, Hermosillo, Guadalajara, and Tijuana airports. In Guadalajara, for example, retail spaces in Concourse E successfully opened. However, the commercial areas in Concourse C, D, and F won't be fully operating until the end of the second quarter. This was also the case in Guanajuato, as it pertains to the duty-free and duty-paid space.

The Tijuana terminal expansion continues and will be completed during the third quarter of 2018. As a result, commercial revenues growth at this airport is expected to remain (inaudible) for now. Once the work is complete and the new commercial areas are launched, however, we expect a jump in sales. Additionally, are doing commercial bids for the retail and the food and beverage areas in order to reach more profitable commercial terms.

It is important to mention that non-aeronautical revenues from Tijuana and Guadalajara represent 33% of our total non-aeronautical revenue, making them the most important commercial contributor in the group.

Just to finalize, during the first quarter of 2018, we also experienced a negative effect to other commercial revenues that represent a 30% decrease. It was mainly due to the agreement with Otay Tijuana Venture, the CBX operator of the US side, which we signed in 2015.

The agreement established that this company must pay to Tijuana airport a fixed fee for every passenger using the CBX as a compensation for the reduction in non-aeronautical services revenue, so parking, taxi, bus, retail, car rental, and money exchange services. According to our agreement, this compensation will stop once the Tijuana airport reach a maximum level of a passengers established with the CBX operator.

We reached this limit in December 2017. Thus, beginning in January 2018, the Company no longer receives this revenue, which represents MXN10.7 million in the first quarter 2017. As you know, CBX does outstanding traffic growth at the Tijuana airport, generating accumulated growth of about 60% in the last 2 years. Therefore, we consider that the threshold is more than fair, given the overall benefit of CBX to the Tijuana air operation.

In terms of the works underway at each of the airports, at Guadalajara airport, as we mentioned, we are remodeling and expanding of the terminal building continues. We are expecting to place into six new remote boarding gates and an exclusive food court that's over 1,300 square meters.

At Los Cabos, in February 2018, we began the expansion of the international terminal building. The remodel will consist of around 11,000 square meters with a 6,000-square-meter expansion, developing new commercial office and putting in service 10 new remote boarding gates.

In addition, we will install a new boarding bridge that will significantly reduce the number of foot passengers and speed up load. This is expected to be complete by August 2019.

Tijuana, with remodeling and expansion of the terminal building underway. In the first quarter 2018, we also put into operation a remote boarding lodge and additional services for our passengers, which include new bathrooms and commercial areas. Work will also be finished by the end of the year.

In Guanajuato, the terminal building is almost complete and is expected to be open by June 2018. In the first quarter 2018, we put in service the main expansion of the boarding lodge, with more than 1,500 square meters.

At La Paz, the terminal building is also being worked on. Once complete in June 2018, the [volume on trial] will be 70% larger, the bag [scan] area will expand by 35%, and there will be two new boarding gates.

To conclude as a quick review of our financial results. Total revenue rose by nearly 8% for the quarter, representing MXN240 million. It was mainly due to the traffic growth. However, the [fuel] was also significantly impacted by the peso appreciation, as I have already mentioned.

The sum of our aeronautical and non-aeronautical services revenue increased by approximately MXN292 million, a bit just over 10%. If we pare down the operations, revenue from the Mexican airports increased by 16% or MXN277 million versus the first quarter 2018. This line will get very [14] increase in passengers traffic added to the higher passenger fees as a result of inflation.

Montego Bay revenues logically declined by MXN1 million, mainly due to the 8% peso appreciation. And it is important to note, however, that dollar revenues generated in Montego Bay rose by 8%, mainly due to the 7% of passenger traffic increase as well as the adjustment to passenger tariffs in line with inflation.

Cost of service increased 7%, in line with the higher traffic, resulting in the operating income increase of 17%. This brings me to the EBITDA, which rose by nearly 12% or MXN236 million versus the first quarter of 2017. The EBITDA margin increased slightly to 71.7% in the first quarter of 2018. This leaves us with a net income and comprehensive income increase of MXN53 million; that is 5% more than the first quarter of 2017.

We are reaffirming the guidance figures issued this past January. There is no change there. Additionally, I would like to tell you that at the ordinary and extraordinary shareholders meeting that took place this week, all the points were votes in favor. Therefore, we will start planning the [lituations] to our shareholders as per the resolution.

Thank you for your attention. We will now be pleased to take your questions. Operator?

(Operator Instructions) Mauricio Martinez, GBM.

Good morning, everyone. Thank you for taking my question and congratulations on the results. Just I was wondering if you can share with us your thoughts about the main drivers for the drop in the non-aeronautical revenues in airports like Cabos and Puerto Vallarta, as they showed lower revenues in dollar terms on a per passenger basis.

So maybe if you think that this is from a higher proportion of domestic passengers or if the holidays had anything to do? Or what should be the main driver for this performance?

Good morning, Mauricio. Thank you so much for your question. Well, as you mentioned, there is a decrease in the commercial revenue in these airports. The main effect comes from the appreciation of the peso. It was an 8% appreciation that affects directly because the majority of the commercial revenues in these airports are denominated in US dollars. So all the effect comes in there.

We are expecting, in the case of Cabos, to finalize -- we are in the middle -- we are starting with a construction and expansion of the Terminal 2. So when we finish, that we are expecting in the first quarter of 2019, we will see an increase in commercial orders, specifically for Cabos. And for Puerto Vallarta, there's only the effect of appreciation of the peso.

Great. And my last question would be regarding the cost of service per passenger. Just to understand -- we thought that the levels would be much higher this quarter. So just hoping if you can give us some more color on when do you think we should see cost of service increasing during this year, in line with what the guidance that you said of higher cost of service for the year?

Well, as you can see in our report, the cost of service is almost in line with the gains we have. We have a little decrease in the cost of services, mainly because the cost of energy decreased during this quarter. That came from some instance from the government in the tariffs, electric energy.

But in general for the cost of personal, we had the increase that we were expecting. Indeed, we have 206 more people in our headcount in the first quarter 2019. In the maintenance, we are in line with what we were expecting. The first quarter of the year all the time is a little bit slower because we advance in the maintenance in our airports, but it will normalize during the coming quarters.

Also, I mean, always this is in some way difficult to do any kind of maintenance to the terminal. Thinking that January, for instance, there are some of the -- at least the first weeks of January is one of the peak times for our passengers. So it's clearly difficult to think that we could efficiently work to get new routes on there.

But that is mainly some part of the explanation. But that's exactly as I would say. I mean, that will be normalized for the coming months.

Great, very helpful. Thank you.

[Marco Sibaretta], Citi.

Thanks for the call and taking my questions. I just wanted to see if you could update us on three things. The first one is technical assistance fee. We saw that one of your competitors reduced its assistance fee and another might do the same in its current MVP review. That's the first one. So what are your thoughts there?

The second one is is there any update regarding Grupo Mexico's stake? Have they made any new demands of the Board members? And the third one is what's the newest status on the Kingston, Jamaica auction? Thank you.

In terms of the technical fee, I would say that, at least in the view of GAP, we are still having a really -- I mean, as a Company, we feel that the assistance fee is something -- or the assistance contract is something that should continue for the coming years, at least from our perspective.

We are really -- we are feeling a big support for our operational partner. For example, all our operational systems come from the operator partners. And all the programs for capacitation and technical capacitation for our operational teams, for instance, happens with these operators.

So in all fairness, I would say that in our view, it's really clear that incentives from the strategic partner is aligned with the market. So again, for our view, we are seeing that this contract should continue in the coming years.

Yes, and just to add the idea of Raúl, there is a lot of -- we, for us, as management, we feel very supported by the strategic partner in general terms in the commercial strategy that they implement that we have. And we are focused on -- they drive the strategic decisions for the acquisitions, the acquisition of Montego Bay. And the success of this acquisition was due to all the assessment from the strategic partner.

Indeed, for us, all that -- the strategic vision of the Company in the cost control incremental commercial revenues in the regulatory side, everything is positive. So we don't know about the case of other competitors. But in our case, it is a good way to manage and to increase in that value for the Company. So I agree with Raúl: we believe that the [plink] service agreement will continue with our strategic partner.

Your second question was regarding the Grupo Mexico stake, right? Right now, the stake of Grupo Mexico has dropped from 8%. They have an excess of 2.8% that they have to sell. According to the resolution from the Supreme Court, they have to sell, but they don't have a timeline to do it. So we would see in the coming month if they decide to sell this excess of shares.

And in terms of Kingston, I mean, the Jamaica authorities inform us that the timetable for the bidding will change from May to June. So we are ready for that specific bidding process. I mean, we are ready just to put our offer for Jamaica.

And sorry, coming back with the question of Grupo Mexico and answering that, the new Board member, they ratify Mr. Alfredo Casar. So he will continue in the Board of Directors. He is very positive. He participate in the Board; very active and very positive.

So we don't see any conflict for now. We do not expect -- the results of the Company have been amazing. The outstanding results that we present in the last years that we are expecting in the coming years provides a safety that we will not have conflicts in the coming months.

Okay, thank you very much. I will let someone else ask. Thank you.

Leandro Fontanesi, Bradesco.

Thanks for the opportunity. I have two questions here. The first one is given the results that the airlines in Mexico have been posting where they have been showing some weakness in terms of profitability, how do you see that -- if you think that affects your long-term growth in terms of how the airlines could change their capacity growth forecast moving forward? And how you see this affecting the potential growth in passengers for you?

And the second point is, if I am not mistaken, you increased your aeronautical tariff by 2.3% year on year per passenger. And if you think you are going to be able to continue raising prices in the following quarters, considering, like I said, that the airlines in Mexico have been showing a low profitability. Thank you.

Thank you, Leandro. In terms of the Mexican airlines, for sure we are seeing a really competitive market. I mean, in the last month, we saw additional seats offered, additional slots coming, additional fleet coming for mainly Volaris, [Viza La Rosa], and (inaudible).

So these additional seats in the market for sure are casting a more competitive market that for sure in some way offset the deal that the companies could get. In some way, we are really confident that the economy continues growing in general terms. The tourists are still growing in Mexico. I mean, everything in the environment in general terms continues to be positive.

We are seeing that the demand will grow and it is additional offers that come to Mexico market will be perfectly take by the new demand. So we are seeing in general terms a temporary effect of these additional seats that come to the market.

For sure, we should continue with reviewing the markets really closely and let's see how this could end. At least for the moment, we are seeing really healthy occupancy rates on the planes. We are seeing that the airlines are reacting really in a fast way for changes. There are some of the less profitable routes. So we are really confident that the airlines will make the correct decisions that allocate their offer in their more profitable markets.

And your second question about the aeronautical tariffs. As you know, we have to update with inflation and update with the load factor. The load factor for this period would be 70 basis points. So we are expecting an increase in the maximum tariff versus the maximum tariff in the --

The efficiency impact.

The efficiency impact, sorry. So at the end, we are expecting a net increase in tariffs between 5% to 6%.

Perfect. Thank you very much.

(Operator Instructions) Ramon Obeso, Scotiabank.

Thank you for the call. Two questions, if I may. The first one -- if you could give us some additional color on how the expansion in Guadalajara is doing so far. And by when should we expect this expansion to be operating at full capacity in terms of commercial space?

And a second, if you are still comfortable with your guidance for non-aeronautical revenues to grow around 16% this year? Thank you.

Thank you, Ramon. In terms of Guadalajara, we think that at least a big part of the commercial area will be ready for operation at the end of the second quarter. That take us for the second question about our original guidance for non-aeronautical revenue.

I would say that we already have the results from different biddings, mainly related with food and beverage and duty-free for Guadalajara. And we are, I mean, really happy in terms of the results. So we think that the positive results that we have in terms of increase of a price per square meter will give us the additional boost for tackle the original projection that we have for the non-aeronautical revenue.

So in general terms for the Guadalajara, we expect to catch up the result that have in the first quarter as soon as we open the new area. And as a result of the new bidding and the new prices, we think that we could close really aligned with our original prediction.

Yes, in regard to your second question, if we feel comfortable with the growth in our non-aeronautical revenues for our guidance, we believe that this decrease due to the appreciation of the peso will be a temporary effect. That again, we will see a recovery of the change rate.

And at the end of the year with the expansion of in Guadalajara, in all the airports that we are almost finishing the works, we will have all the areas ready for the operation. So the answer is yes, the 16% that we estimate as commercial revenue, a non-aeronautical revenue increase will be 16%.

Okay, thank you very much. Very clear.

(Operator Instructions) There are no further questions at this time. I would like to turn the program back to Mr. Revuelta for any closing remarks.

Thank you again for your attention. I will look forward to interacting with you in the near future. Have a good afternoon.

This concludes today's program. Thank you for your participation. You may now disconnect.