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Edited Transcript of ASURB.MX earnings conference call or presentation 21-Apr-17 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Grupo Aeroportuario del Sureste SAB de CV Earnings Call

Mexico Apr 24, 2017 (Thomson StreetEvents) -- Edited Transcript of Grupo Aeroportuario del Sureste SAB de CV earnings conference call or presentation Friday, April 21, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adolfo Castro Rivas

Grupo Aeroportuario del Sureste, S. A. B. de C. V. - CEO

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Conference Call Participants

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* Alexandre Pfrimer Falcao

HSBC, Research Division - SVP

* Andrew West

* Augusto Akihito Ensiki

HSBC, Research Division - Latin America Analyst

* Pablo Monsivais

Barclays PLC, Research Division - Assistant VP and Lead Research Analyst

* Pablo Zaldivar

GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst

* Rusty Johnson

* Stephen Trent

Citigroup Inc, Research Division - Director

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the ASUR First Quarter 2017 Results Conference Call. My name is Kyle, and I'll be your operator. (Operator Instructions) As a reminder, today's call is being recorded.

For opening remarks and introductions, I'd like to turn this call over to Mr. Adolfo Castro, Chief Executive Officer. Please go ahead.

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Adolfo Castro Rivas, Grupo Aeroportuario del Sureste, S. A. B. de C. V. - CEO [2]

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Thank you, Kyle, and good morning, everybody. Thank you very much for being here with us on our conference call to discuss our first quarter 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's 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 with the Securities and Exchange Commission and the Mexican Stock Exchange.

I will start today's call briefly discussing our recently announced international expansion and afterwards, I will provide a review of the results for the quarter.

As announced on April 10, we agreed to acquire a controlling stake in 2 airports in Colombia -- in 2 airport operators in Colombia, Airplan and Aeropuertos de Oriente, for a combined aggregate price of $262 million. We expect to fund this transaction with a combination of cash on hand and financing. After closing, ASUR will own approximately 92.42% of Airplan and 97.26% of Oriente. Closing remains subject to a number of customary conditions, including regulatory approval by the Colombian authorities.

In 2016, these airports served a total of 15.6 million passengers, equivalent to 51% of the total 28.4 million passengers that traveled through our Mexican airport last year. The majority of the traffic at these airports is domestic. Airplan has concessions to operate airports in Medellín, Montería, Carepa, Quibdó and Corozal, serving 10.4 million passengers in 2016. This includes international airport in Medellín, the second busiest in Colombia.

Oriente, in turn, served 5.2 million passengers last year through its concessions to operate international airports in Santa Marta as well as airports in Riohacha, Valledupar, Cúcuta, Bucaramanga and Barrancabermeja.

The terms of the concessions vary according to the amount of revenues that they will generate in the future, with Airplan expiring between 2032 and 2048 and Oriente between 2033 and 2049.

Results from these operations will be consolidated into ASUR's financial statements. While there is not too much detail I can discuss at this moment, transparency is at the core of ASUR and we look forward to providing in-depth information of these operations once the transaction is closed, which we will -- which we expect will take place by the end of the second quarter of this year. These companies are private and we have confidential agreements.

We remain focused on building value for our shareholders by taking care -- by taking a cautious but firm expansion, selectively investing in high potential airport operations while leveraging our balance sheet to optimize our capital structure and drive growth.

Now moving on to results. We started the year with a solid quarter. Total passenger traffic increased by more than 8% year-on-year, reaching a record of 7.8 million passengers. Note that this quarter, we faced more difficult comps as last year the impact of Holy Week on passenger traffic began on March 18, while this year it started on April 7.

Traffic continues to benefit from the peso depreciation, both driving high traffic from the U.S. as well as [ stealing ] domestic passengers who are [ primarily traveling ] within Mexico, given the weaker peso.

As in the fourth quarter, growth was primarily driven by domestic traffic, which was up 12% year-on-year, reaching nearly 3.1 million passengers. Traffic was strong across most airports, with Cancun logging a 15% increase. Minatitlán continued to face a challenging oil industry.

International traffic was up 6% year-on-year, reaching over 4.7 million passengers, mainly driven by a similar increase in traffic at Cancun Airport supported by an attractive exchange rate as I just mentioned. Passenger traffic between Mexico, Canada and the United States represented 88.22% of the total traffic compared with the 88 -- 87.9% a year ago.

Total revenues for the quarter, excluding construction revenues, rose 23% year-on-year. Commercial revenues were up 28%, with commercial revenues per passenger up 19% to a record of MXN 118. Beyond this [ seasonal ] increase, we expect to see additional pickup in commercial revenues per passenger once we open Terminal 4 at Cancun Airport in the fourth quarter of this year.

Operating costs and expenses, excluding construction costs, were up 14% year-on-year, but remained fairly unchanged sequentially. This was mainly due to the higher cost of services reflecting higher energy charge and a 16% increase in revenues from direct commercial operations. Looking ahead, we expect costs to increase in the third quarter as we prepare for the opening of Terminal 4 [ slated ] for the fourth quarter of the year.

[ EBITDA ] was up 25% year-on-year, reaching MXN 1.8 billion. Excluding revenues -- excluding construction revenues and costs, adjusted EBITDA margin increased by over 150 basis points to 74.7% as we continue to leverage our fixed cost base.

Our participation in Aerostar resulted in a gain of MXN 68.8 million, up 38% year-on-year, as we continue to drive commercial revenue growth even despite the soft traffic, which was down by 2% year-on-year, reaching MXN 2.3 million.

Shareholders' equity in the quarter was impacted by a MXN 236 million loss from translation effect of Aerostar's financial statements, which are denominated in U.S. dollars, compared with a loss of MXN 3 million in the first quarter 2016 due to depreciation of the Mexican peso by 8.85% against the U.S. dollar during the first quarter of this year.

Moving into -- onto capital expenditures, we invested MXN 84 million in the quarter mainly in the construction of Terminal 4, which remains on track to open in the fourth quarter of this year.

Let me also highlight our strong balance sheet, closing the quarter with a cash position of MXN 4.5 billion and a total debt of MXN 4 billion.

Before opening the floor for questions, let me note that this coming Wednesday, we will be holding our General Annual Ordinary Shareholders' Meeting. Among other items, the agenda includes a proposal by the Board of Directors to pay an ordinary cash dividend from written earnings in the amount of MXN 6.15 per share.

Now, let me open the floor for questions. Please, Kyle, go ahead.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we will take our first question from Pablo Zaldivar with GBM.

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Pablo Zaldivar, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [2]

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I was just wondering if you could give us a little bit of insight regarding the non-aeronautical revenues seen during this quarter. We saw a really strong uptick when measured on a per passenger basis. And we were just wondering what were the main drivers that delivered these figures and what should we expect going forward?

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Adolfo Castro Rivas, Grupo Aeroportuario del Sureste, S. A. B. de C. V. - CEO [3]

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In the case of non-aeronautical revenues, as you have seen in the documents, the most important activities were Duty Free and basically food and beverage. It was an extraordinary quarter. The results were excellent. Going forward, please take note that the first quarter is always higher than the second one in [ receivings ] per passenger. So please try to see the seasonality in the case of commercial revenues per passenger.

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Pablo Zaldivar, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [4]

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Okay. And another question, I was just wondering if you could give us some insight on the Colombian airports that you're looking to purchase. Regarding the concession, how does it work there? Regarding -- how do you pay the government? And what is regulated and unregulated? Is it similar to the Mexican concessions? Or is it under a different scheme?

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Adolfo Castro Rivas, Grupo Aeroportuario del Sureste, S. A. B. de C. V. - CEO [5]

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Pablo, for the moment, I cannot give you more details of the ones that are in the documents we have released. The only thing that I will say with respect to your question is that, of course, every country has its own particular regulatory regime. In the case of Colombia, it's not exactly as it is in the case of Mexico.

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Operator [6]

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We'll take our next question from Rusty Johnson with Harding.

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Rusty Johnson, [7]

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I was wondering if you could expand a bit on the impacts of these terminal changes. Like you mentioned, major efficiency pickups and traffic flow leading to commercial revenues on 3 and 4. We know they're opening, but I don't know how to gauge their size and magnitude, whether it's a volume uplift, obviously 4 is, but maybe talk a little bit about the impact of these 2 changes in Cancun, please.

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Adolfo Castro Rivas, Grupo Aeroportuario del Sureste, S. A. B. de C. V. - CEO [8]

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Well, as you have seen last year in the first quarter, what happened when we increased or expanded the Terminal 3, the expansion of Terminal 3 at the moment, it was just [ to pressure ] space. So basically, it was an increase in the check-in area and also the opening of 6 boarding gates. So in reality, we didn't expand the commercial space, but the benefit of that was that we were able to move some passengers from Terminal 2 to Terminal 3. Terminal 2 was pretty congested and, of course, the service -- or not the service, the passenger flow and the commercial offering in Terminal 2 is not in the same way as it is in Terminal 3. So when we moved these people from Terminal 2 to Terminal 3, they had a better experience and because of this, they spend more.

This Terminal 3 was constructed in the year 2007. It was opened second quarter 2007. So once we open Terminal 4, which we will expect to open in the fourth quarter this year, we believe that this will improve our commercial revenues per passenger because we basically are applying everything that we have learned from 2006 up to 2016. So that's why I'm saying that we should expect a pickup on commercial revenues per passenger once this is open.

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Operator [9]

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And we'll take our next question from Alexandre Falcao with HSBC.

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Alexandre Pfrimer Falcao, HSBC, Research Division - SVP [10]

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Adolfo, I have 2 questions. First one is we saw a massive margin pickup, 150 -- 160 bps on margin gain. Just wondering, we know that a part of it has to do with higher commercial revenues, but how sustainable is that going forward? And in terms of number of stores, we saw a difference from first half of the year to second half of the year of around 9 stores. Is that a carryover then that's probably going to impact second half of this year as well? Or it's probably going to be mitigated going forward?

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Adolfo Castro Rivas, Grupo Aeroportuario del Sureste, S. A. B. de C. V. - CEO [11]

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Okay. In the case of the margins, be careful with our costs as from the third quarter this year. As I have said during the initial remarks, we expect a cost increase once we reach third quarter because in the third quarter, we will be hiring people to be trained for the opening of Terminal 4 during the fourth quarter. So the margin is the result of revenues and costs. So the only thing that I can say is that the costs should increase in the future and revenues should depend on the passenger traffic. In the case of the additional spaces we have opened and if this is sustainable, I would say, yes, I believe we have found a new level in the case of commercial revenues per passenger. As I have said before, be careful on the seasonality. The passengers we receive in the first quarter are not the same as the ones we receive in the second quarter. A very clear example will be in second quarter, we receive more families, so father, mother and children. And they, of course, on a per passenger basis, they do not spend the same. So take consideration of that for the future.

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Alexandre Pfrimer Falcao, HSBC, Research Division - SVP [12]

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Okay. If I can make a quick follow-up. You -- it's clear that the next round of the Master Development Plan, since you're opening 4, you don't have a huge demand for CapEx. That's probably behind the rationale of the acquisition in Colombia. But still, even factor that in, you're probably going to post a very decent free cash flow generation. Can we expect, after this acquisition, that everything that is not -- that is excess of cash will be directed to dividends? In the past, that's exactly what you guys did when you didn't have a big CapEx cycle. Can we expect all this cash flow generation to go into dividends?

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Adolfo Castro Rivas, Grupo Aeroportuario del Sureste, S. A. B. de C. V. - CEO [13]

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Okay. Many, many questions in one. So in the future -- for the future MDP, yes, I believe the major works have been concluded or will be concluded with this current MDP. One of the main questions we have today is we will have or not to expand terminal -- or to do the first expansion of Terminal 4 within the next MDP. Apart from these, what I believe the airport of Merida will have an important expansion in the future. Going into your question of cash flow, our intention, of course, with the case of Colombia is to fund these with leverage. So we will take leverage once we receive the approval from the government to go ahead with the operation. And yes, of course, in the future, as it has been in the past, if we do not have or we have -- not able to found a place to locate the money, of course, we will have to send it back to shareholders.

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Operator [14]

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We'll take our next question from Stephen Trent with Citi.

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Stephen Trent, Citigroup Inc, Research Division - Director [15]

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Some quick ones for you. The first is just wondering about your maximum tariff in 1Q '17. I noted that it was some 9 some odd percent above the max tariff you guys reported in the fourth quarter of last year. And on that basis, should we expect the tariff to go down this year in order to comply with the regulation?

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Adolfo Castro Rivas, Grupo Aeroportuario del Sureste, S. A. B. de C. V. - CEO [16]

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If you are talking about the revenue for the quarter or if you are talking about the MDP -- because when you are saying 9%, that is similar to the inflation we had for the first quarter last year -- for the first quarter year-over-year. So if your question is for the quarter, you remember that the maximum rate is adjusted with the PPI. The inflation in Mexico in the first quarter of this year was extremely high. It was extraordinary because of the fuel adjustment in terms of the energy [ phase ]. If you are asking about the previous MDP, we are working today as we speak in the draft of the document that we will have to present to the government at the end of this year. The things that I see differently from the previous MDPs, of course, the thing that I had mentioned in relation with expansions in terms of the CapEx. And the second one, of course, has to do with the rates and the country risk and all these rates are today higher than they were before.

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Stephen Trent, Citigroup Inc, Research Division - Director [17]

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Okay. Very helpful. Another question for you, Adolfo. When I think about the commercial revenue, I noticed that, on a per passenger basis, the commercial revenue for direct operations -- excuse me, commercial revenue per passenger from direct operations was up 7%, but then the indirect operations was up a lot. And could you remind me, the indirect operations is result of an advertising contract, if you could refresh my memory?

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Adolfo Castro Rivas, Grupo Aeroportuario del Sureste, S. A. B. de C. V. - CEO [18]

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So in the case of direct commercial operations, remember that we only consider the parking lot and the convenience stores. So what you are basically saying is that during the quarter, the non-direct commercial operations grew more than the direct commercial operations on a per passenger basis. That means that the other activities, like I said, Duty Free and food and beverage were really successful beyond the quarter and they were more successful than we were in our convenience stores and parking lots.

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Stephen Trent, Citigroup Inc, Research Division - Director [19]

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Okay. Got it. Got it. And then, finally, thinking about the regulation as we think about the MDP, is it too early to start thinking about allowable returns given your CapEx expectations, given long-term interest rates now lower than they were 5 years ago? Or is this something maybe we revisit by the middle of next year?

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Adolfo Castro Rivas, Grupo Aeroportuario del Sureste, S. A. B. de C. V. - CEO [20]

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Well, I believe it's too early to talk. My only recommendation will be try to see what is the behavior of the [ UMS ] long-term documents in the market and see how these rates are moving. And this will help you understand what we will be seeing in the end -- in the next MDP.

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Operator [21]

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We will take our next question from Pablo Monsivais with Barclays.

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Pablo Monsivais, Barclays PLC, Research Division - Assistant VP and Lead Research Analyst [22]

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I have a few questions and sorry, I know that you cannot disclose a lot of information on Colombia, but I just want to understand what was your main motivation to invest in the airports in Colombia? It was a matter of looking for higher penetration or to improve existing operations? Are you more profitable in the airports? And also my last question is regarding Puerto Rico. I mean, we saw a pretty good number in the quarter, but I want to understand a bit more. How was the commercial revenue per passenger in the quarter in Puerto Rico?

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Adolfo Castro Rivas, Grupo Aeroportuario del Sureste, S. A. B. de C. V. - CEO [23]

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Okay. In the first question you have raised, what is our motivation? We have [ dreamed in this move ] since the end of the year 2010. So we have been looking for places where to invest our money and basically what we really want is to grow with leverage. That is the main objective and, with this, to correct the equity structure we have.

So in the past, we have presented offers in the case of (inaudible) airport. Of course, we presented an offer in the case of Puerto Rico and we were able to acquire that airport. And that is why we have been basically looking for some other opportunities apart from the one that we have mentioned. In the case of Colombia, we're still looking as we speak, some other opportunities that I cannot share with you for the moment, but yes, we are still looking some other opportunities basically to correct the equity structure and basically to grow with leverage. In the case of Puerto Rico, your question is important because, as you know, we concluded during the second quarter last year our original concept, the one we started 4 years ago and basically, the first year, the first full year with the concept completed is going to be 2017. So this 38% year-on-year growth is the result of this. Of course, the increase in the number -- in the result is basically driven by the commercial revenues per passenger. So if you remember the objectives we had in Puerto Rico were basically 2: One, to increase commercial revenue per passenger; and the second one, to reduce operational costs. In the case of commercial revenue per passenger, I have to say that our statement 4 years ago was that these airports will have, in the future, more commercial revenues per passenger in comparison with Cancun. We have not yet reached this level, but we believe -- we still believe in that statement. So we're still working in the fine-tuning of this process of the commercial revenue per passenger there. So happy to see these results and keep an eye on the commercial revenues per passenger or the result of Puerto Rico for this year.

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Operator [24]

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Our next question comes from Andrew West with Harding Loevner.

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Andrew West, [25]

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Adolfo, can you provide some observations about the environment around Cancun in terms of where incremental new passenger volumes are coming from, are likely to come from? And also things like construction activity and hotel capacity?

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Adolfo Castro Rivas, Grupo Aeroportuario del Sureste, S. A. B. de C. V. - CEO [26]

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Of course. So in the case of the passenger traffic, of course, the huge growth we have seen since December last year has been domestic traffic. And at the moment, I said myself, why domestic traffic is growing like 20 something percent? The main question is, of course, the exchange rate. So people is traveling inside Mexico instead of going outside. That is the first thing. The second one was the question to see if this domestic traffic that was going to Cancun was really domestic or this traffic was connecting in Mexico coming from somewhere else. And I have to say to you that the connection of the traffic that comes -- that goes to Cancun from Mexico City is just 10% and it's exactly the same as it was in the previous years. So this additional growth is really coming from Mexicans living in Mexico. In the case of your second question, which was -- so what was your second question?

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Andrew West, [27]

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It was about stuff like hotel capacity, construction.

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Adolfo Castro Rivas, Grupo Aeroportuario del Sureste, S. A. B. de C. V. - CEO [28]

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Okay. Yes. In the case of hotel capacity, yes, there are some projects on the construction and there are some new hotels as we speak, but also it's important to say that we see something that it was not in the past, which is Airbnb. So you can get into the Internet and see this page. And there's a lot of properties today that are there to be leased. And these are properties that we cannot count, that we cannot say how many they are. And it's clear that this is an additional offer for the passenger. And this is growing in a significant way. But for the moment, I'm not really concerned about this hotel capacity [ as a summary ].

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Operator [29]

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We'll take our next question from Augusto Ensiki with HSBC.

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Augusto Akihito Ensiki, HSBC, Research Division - Latin America Analyst [30]

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Just a follow-up on Terminal 4. Can you comment on, when it does open, if how much of the commercial space is already contracted out? I mean, will there still be some store or some spaces that are not occupied? Or like say, how many spaces are and how many stores are already going to be opening when it does become operational in the fourth quarter?

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Adolfo Castro Rivas, Grupo Aeroportuario del Sureste, S. A. B. de C. V. - CEO [31]

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Augusto, as we speak, I would say that almost 100% of the space -- of the commercial space is being selected. Selected means that we have (inaudible) of the space. And, of course, from a legal perspective, of course, they are not paying us rent because we are not yet in operation. But I would say, day one, 100% of the commercial spaces are going to be in place.

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Augusto Akihito Ensiki, HSBC, Research Division - Latin America Analyst [32]

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Can you say how many additional stores that would represent?

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Adolfo Castro Rivas, Grupo Aeroportuario del Sureste, S. A. B. de C. V. - CEO [33]

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I don't have the number in the top of my head.

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Operator [34]

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(Operator Instructions) It appears we have no further questions at this time. I'll turn things back over to Mr. Castro for any closing remarks.

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Adolfo Castro Rivas, Grupo Aeroportuario del Sureste, S. A. B. de C. V. - CEO [35]

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Thank you, Kyle. And thank you, everybody, for joining us today on this conference call. Also, do not hesitate to contact me if there's any further question. Have a great day. Goodbye.

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Operator [36]

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That will conclude today's conference call. Thank you, everyone, for your participation. You may now disconnect.