Grupo Aeroportuario del Sureste, S. A. B. de C. V. (ASR) Q3 2013 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the ASUR Third Quarter 2013 Results Conference Call. My name is Aaron, and I will be your operator. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. [Operator Instructions] As a reminder, today’s call is being recorded. For opening remarks and introductions, I’d like to turn the call over to Mr. Adolfo Castro, Chief Executive Officer. Please proceed, sir.

Thank you, Aaron, and good morning, everybody. Thank you for joining us today for the conference call to discuss our third quarter 2013 results. Allow me to remind you that certain statements made during the course of our discussion today may constitute forward-looking statements, which are based on current management expectations and beliefs and are subject to a number of risks and uncertainties that could cause actual results to differ materially, including factors that may be beyond our company’s control. For an explanation of these risks, please refer to our filings in the Securities and Exchange Commission and the Mexican Stock Exchange. On today’s call, I will start by providing an update on San Juan, Puerto Rico International Airport, and afterwards I will briefly review the results for the quarter. Passenger traffic at San Juan Airport remained unchanged quarter-to-quarter at 2.1 million passengers, reaching 5.0 million since February 28, 2013. On the financial front, on standard net income contribution for ASUR's 50% ownership stake for the quarter was a net gain of MXN 0.3 million. In terms of the work being done at Aerostar, we remain focused on repairing, cleaning and performing maintenance work of San Juan airport infrastructure. We also conclude that the preparation of work for the remodeling of San Juan airport, which we expect to begin next month and continue for approximately 3 years. Now in terms of our consolidated results, passenger traffic increased almost 11% year-on-year with domestic traffic up by 9% to 2.7 million passengers, an all-time high. Domestic traffic was particularly strong at Cancún, Veracruz, Merida, Minatitlan, Oaxaca and Villahermosa airports. Cancún continues to post strong growth, again achieving a record traffic of more than 1.5 million passengers for this quarter. And our modernization [ph] at smaller airports continues to improve, traffic remains affected by the link at domestic airlines with capacity. International traffic also performed as well, up by 12% year-on-year, reaching 2.6 million passengers, a record for our third quarter. The share of international traffic rose slightly to 48.7% of the total traffic. [indiscernible] 48.1% in the third quarter of 2012. Passenger traffic between Mexico, Canada and the United States represented 84.24% of the total traffic compared with 80.88% a year ago. Revenues were up by 7.2% as higher passenger traffic and the continued expansion in international revenues more than offset the 22.5% decline in construction revenues -- in construction service revenues. Commercial revenues per passenger increased 5.1% to MXN 71.45 year-on-year. And we remain focused on maximizing commercial revenue growth. As you can see for this year, EBITDA is getting harder to get [indiscernible] with the amount of passengers we are receiving. Operating costs and expenses declined 3.4% year-on-year reflecting a 22.5% reduction in construction costs. Excluding construction costs, operating costs and expenses would have increased 2%. We continued with our [indiscernible] operations in Terminal 1 at Cancun Airport, which should add some operating costs as from the fourth quarter. EBITDA was up by 15.4% with an EBITDA margin increase of around 489 basis points year-on-year to 61.5%. We invested MXN 130 million this quarter in connection with the expansion work in terminals of Huatulco, Oaxaca, Villahermosa and Veracruz airports. Work at Huatulco and Oaxaca have been planning to be completed [ph] this quarter, and we have also finalized the expenses at terminals at Villahermosa and Veracruz. In terms of our balance sheet, we closed the quarter with cash and cash equivalents of MXN 2.4 billion and a bank debt of MXN 2.9 billion. Now let me open the floor for questions. Please, Aaron, go ahead.

[Operator Instructions] And we’ll take our first question from Eduardo Couto with Morgan Stanley.

I have 2 questions, Adolfo. The first 1 regarding Puerto Rico. Now, when you look the equity income contribution now that you have been reporting, now in the first quarter it was, I think negative MXN 8 million, second quarter it was positive MXN 27 million, and this quarter it was breakeven. So, looking that it gives an impression that every time the Peso gets weaker you have a positive contribution and when the Peso gets stronger, the number is negative. So is there really, my question is, is there really an FX impact on this equity income contribution from Puerto Rico? That’s the first question.

Hi. Good morning, Eduardo. Thank you for your kind words. Yes, of course there's been an impact when you translate the U.S. dollar financial statement of Puerto Rico to peso. Of course, if the peso gets weaker, we get more pesos per dollar in terms of the financial statement. So that’s very clear that we will have an impact when you translate from one Puerto Rico airport operations to ASUR's financial statement. Also keep in mind that in the case of Puerto Rico, we hired that -- and you can see that in our balance sheet. We hired USD 218 million bank debt, that of course is in dollars, and on the assets side you have the relation of the stock and also you have the loan that we gave to San Juan, Puerto Rico [indiscernible] in consideration when you are making [indiscernible].

So, what is the net dollar exposure, Adolfo, would you say?

The net dollar exposure in this year’s balance sheet basically is breakeven because on the assets side you have the equity contribution, which reaching an 118 million plus the loan, which was 100 million, and [indiscernible] it’s almost the same amount. The problem is, that the net debt of the equity contribution does not grow to the P&L. That grows into the equity. So if you can see in the report that we presented a MXN 15 million to feed through equity because of the situation and the other aspect was in the P&L.

Okay. And just another question, Adolfo, regarding the Cancun Airport. Can you give us an update regarding the terminal capacity, the operations there, and the commercial revenues? Did you open the old terminal or your only operating with the 2 terminals?

As we speak, we are just operating Terminal 2 and Terminal 3. In the initial remarks, I said that we will be operating Terminal 1 as from the end of this month and that of course will generate some impact to the cost side for the fourth quarter. These terminals will have to give some kind of leads to Terminal 2 because of the strong base [indiscernible] of passenger traffic that we have seen during the last 2 years.

Okay. With the 3 terminals, your capacity would be how much?

It’s -- if you want a number, I would say at least 17 million passengers.

We will take our next question from Bernardo Velez with GBM.

My first question is regarding the MDP negotiations and Mexican tariffs. Could you give us an update on how are the negotiations going, and what can you expect on the new tariffs?

Well, what we can expect is that we will be announcing once we close the negotiations, and I expect this to happen at the end of December and probably the report will be the beginning of January. So that’s what I can share with you for the moment. We do not have any other comment.

Okay and -- in your annual report you mentioned an indicative investment for the next 5 years, and can we expect, can we still expect this amount or are you planning on making another major investments?

Well, this is probably something that we will have to relate together with that [indiscernible] because with the strong traffic growth that we are having today they collaborate. As I said in the previous conference calls, Terminal 4 is getting closer and closer because of the growth we are seeing. So that maybe -- it could be some regional CapEx for the first 5-year period.

Okay, thank you. And regarding the fiscal reform, have you been thinking about probably anticipating next year’s dividend payment?

Not for the moment.

[Operator Instructions] We will go next to Stephen Trent with Citi.

Hi, good morning, Adolfo, this is Kevin [indiscernible]. I'm Stephen Trent's team summer intern -- Now, I got 3 questions. The first 1, can you guys quantify how much of the year ago EBITDA growth resulted from 3Q ’12 like one-timers, related to due diligence consulting future contracts at Brazilian and Puerto Rican airport projects?

Well I don’t have the figures off the top my head, probably you refer to the finals [ph] of the third quarter. The one we are presenting today you will see that the amount is not really important even though that’s one of the reasons we are presenting as a result of the decreasing of our income and expenses. But this one is not significant.

Okay. Now my second question I guess would come from I guess the news about VivaAerobus placing a large aircraft order. Can you tell us whether they or one of the other American airlines announced any growth plans which involve any flights -- any more flights to any ASUR airport installations?

Well, you know that, well, I heard the announcement of VivaAerobus and [indiscernible] the others, [indiscernible] Basically, we have to remind that the capacity -- the airline capacity we have in June 2008 was around 307 airplanes, and today we are 1/3 below that amount of planes. So basically, all of these airlines are catching up of what we lost at the system some years ago. Of course, I see this as very positive because at the end of the day, this will allow more passengers to fly. It’s true that in some cases there were some passengers that were not able to fly because there was no capacity. Let me give you a clear example that you can see today the report we have presented and that’s the case of [indiscernible]. The question is [indiscernible] it's growing each quarter by 57% [ph]. The answer is very simple because someone if they said, adding another flight with that information and these gave the opportunities to other passengers to fly. So I see that as a positive news and of course this will in my opinion in the future incentivize the margins and lower price -- lower air ticket price.

And I guess for the last question, what is your thinking about potential airport tenders inside and outside of Mexico, like Mexico City, Central America or Colombia and other tenders in Mexico? Do you think ASUR would be sort of participating, and if you were, how should we think about your thoughts around what sort of -- it would be an effective IRR?

Well, today as we speak we are doing a project that I would say in the market there are some -- at the moment we just focus on one in terms of bidding processes and that’s the airport -- why do you have been short lifted -- and that’s the only one that we are participating in and in the future, of course, we will have to wait and see the new projects, and we will be analyzing those, and if they have their own merits, we will participate. I cannot give you an IRR because every single project has its own particularities. Every single project is designed with its own concession cycle or lease agreement and have to be evaluated in that way.

Okay, fair enough. Now, could you just, I guess I missed it. Could you repeat that Bolsa Airport project [ph]?

Yes, what we have -- it’s in New York. It’s now at La Guardia Airport.

[Operator Instructions] And we will go next to Neal Dihora with Morningstar.

I guess I wanted to go back to San Juan. It looks like third quarter you had an operating loss at San Juan. Is that -- what I guess is that correct and two is there a lot of seasonality that is causing that? It looks like 2Q you had a large operating gain like -- that’s sort of my questions?

Okay, let me turn [indiscernible]. First we do not have [indiscernible] As you know, we just take over [indiscernible]. Second, it is important to understand that for the moment we have to work very hard on maintaining and basically upgrading the facility we have there. So it’s been a past some quarters and the new one and we can find some kind of a stability in terms of the result and that’s what I can say. Of course, the equation of the Mexican pesos and the dollar have an impact on the final number entered into the financial statements. But probably the most important term that I can say is, of course during the second quarter, the maintenance was not expected to turn like the one that we are having right now. So we are speeding up the process of maintaining this or upgrading this facility, and as I said in the initial remarks, from the month of November, we were beginning the process of [indiscernible] for a period of 3 years.

Just a followup. Is that -- so the work that you are going to start doing in November, it's going to last 3 years. Is that also considered maintenance or does that include capital investments?

You know what, I would say that is CapEx.

We will take our next question from Gabriel Cotellessa with Goldman Sachs.

A quick question on -- just to have your view on -- with the Mexico City international airports reaching full capacity, I am curious to hear from you what to be expected in your view from potential impact for your -- any kind of potential decrease on volumes going to Cancun or something like that?

You are welcome, Gabriel, thank you for the question. Yes, you are right, some months ago the Mexican government officially declared saturated this airport and basically they reduced the amount of operations per hour that these airports can handle. I don’t have an exact figure, but the number that I heard was from 88 -- 1 air traffic movements per hour to 61 air traffic movements per hour in the 8 hours on a daily basis that the airport is full and congested [ph]. That will represent [indiscernible] traveling in passengers that will have to be relocated [indiscernible] in terms of the time of the day airplanes will have to be relocated to some other airports, and of course the one that I believe will take the most important part of these so-called [indiscernible]. One person related to is that not all the passengers -- not all of these so-called [indiscernible] will be willing to fly from Tuluc [ph], so the possibility of losing some of them is very high. And of course, some of them will be or should be or will be willing to travel to Cancun.

We will take our next question from Ellen Lyerly with Deutsche Bank.

The question I had was hoping you could explain a little bit more, excellent results that we saw in revenue per passenger, which was up 5.1%, and put that in context with the second quarter where we saw that decline 1.3%. What’s changed in the quarter? Is that a one-off, or how should we look at that?

Well, what has changed in my opinion is the amount of passengers. Of course, we are at the record high but of course when you compare this with the previous quarter, it’s minimal. In other words, as you know, with Terminals 2 and 3 in Cancun were very congested during the second quarter and that is why we are opening Terminal 1 to keep some kind of relief to Terminal 2 in terms of amounts of passengers that pass through each terminal every single day. You cannot solve this in 1 -- you have lines in some of it with those -- just the outcome, it's for the people. So that’s probably one of the most important things that I can say in terms of the passengers and the combination of these with the commercial resident [ph]. If you remember in the first quarter, we had the same situation, and I gave a very clear indication why we have -- no one remember in terms of [indiscernible] per passenger against the previous year. And one of those was of course the exchange rate, the other one was and it is on the top of my head, we are changing the mix of passengers. So you have more than antics [ph] in comparison to the previous years and domestic of course did not have the [indiscernible]. So that’s the current situation, and that is why I have said in the initial remarks again that every day it’s getting harder and harder to get more commercial revenue on a per passenger basis with the amount of passengers we are receiving to date. In the future, as I have said before, that we expect this to [indiscernible].

So if you can repeat that last sentence, what you expect in the future as...

Sorry?

Again, follow the last sentence what you expect in the future, is what?

What we can expect in the future is to expand on the fleet [indiscernible] and to construct a new airport.

So, would it be fair then to assess in quarters we have lower growth or lower traffic, we can expect better retail upside?

On a per passenger basis, I would say, yes.

[Operator Instructions] And it appears there are no more questions in queue. I would like to turn the call back over to Mr. Castro for any additional or closing remarks.

Thank you, Aaron, and thank you, everybody, for joining us today on our conference call. I have to say that on November 27, in order to celebrate Air France and ASUR’s 18th and 15th anniversary, respectively, the networks will be honored to receive the first commercial landing of an A380 in Latin America. This [indiscernible] travel agency into this unique opportunity that is to conclude in Cancun [indiscernible]. And as always, do not hesitate to contact me if there is any further questions, and thank you all. Adieu and have a good day. Good bye.

This does conclude today’s conference. We thank you for your participation.