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Edited Transcript of ASURB.MX earnings conference call or presentation 24-Oct-19 2:00pm GMT

Q3 2019 Grupo Aeroportuario del Sureste SAB de CV Earnings Call

Mexico Oct 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Grupo Aeroportuario del Sureste SAB de CV earnings conference call or presentation Thursday, October 24, 2019 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, Director of Finance, Chief Financial & Strategic Planning Officer

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Conference Call Participants

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* Alan Macias

BofA Merrill Lynch, Research Division - Analyst

* Alberto Valerio

UBS Investment Bank, Research Division - Associate Director & LatAm Transportation Equity Research Associate

* Alejandro Zamacona Urquiza

Crédit Suisse AG, Research Division - Research Analyst

* Joshua Milberg

Morgan Stanley, Research Division - Equity Analyst

* Marcos Barreto Guerrero

Citigroup Inc, Research Division - Research Analyst

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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

Third Quarter 2019 Results Conference Call. My name is

John, and I will be your operator. (Operator

Instructions] As a reminder, today's call is being

recorded.

Now I'd like to turn the call over to Mr. Adolfo

Castro, Chief Executive Officer. Please go ahead, sir.

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Adolfo Castro Rivas, Grupo Aeroportuario del Sureste, S. A. B. de C. V. - CEO, Director of Finance, Chief Financial & Strategic Planning Officer [2]

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Thank you, John, and good morning, everybody. Thank you

for joining us on our conference call to discuss ASUR's

third quarter 2019 financial and operating results. As

a reminder, please note 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 U.S. Securities and

Exchange Commission and the Mexican Stock Exchange.

Overall, our solid, consistent momentum continued into

the third quarter, and we're pleased with our results.

We continue to invest in the business and change

customer experience and the impact to our efforts.

We're balancing our investments to both drive results

in the short term and position our business for

sustained long-term performance.

During the quarter, total revenue grew by 11.5%,

supported by a strong growth in Colombia, to a lesser

extent, in Puerto Rico, along with a steady performance

in Mexico.

Moving to a discussion about the traffic. Total traffic

increased 4.1% year-over-year, reaching 14 million

passengers. Performance of the market, however, was

mixed. Starting with Mexico, our largest market, which

accounted for 63% of total traffic in the quarter,

passenger traffic was relatively flat year-on-year.

Domestic traffic was up nearly 3%, offsetting the 2.5%

decline in international traffic. The decline in

international traffic was mainly due to the continued

weak U.S. traffic, which was down by 8% year-on-year in

the quarter. As mentioned in the prior calls, we expect

these trends to continue for the remainder of the year.

By contrast, we are seeing sustained positive trends

from other regions. For example, traffic from Europe

and South America, up 4% and 9.5%, respectively.

Passenger traffic in Puerto Rico, which accounted for

18% of total traffic, increased nearly 6% year-on-year.

Domestic traffic up over 7%, offsetting the 5% decline

in international traffic. We continue to see a recovery

in domestic air travel in Puerto Rico. After 24 months,

as from when Hurricane Maria hit the island, we almost

recovered pre-hurricane traffic levels.

Finally, Colombia was the strongest performing market,

up 14% year-on-year and accounting for 24% of ASUR's

total traffic in the quarter. Domestic traffic

increased nearly 16%, while international traffic down

-- accelerated to 21%. This good performance was mainly

driven by managing international effort where we added

16 grounds in the quarter, in addition to the 2 new

direct flights to Mexico City and Cancún added in the

previous quarter.

Medellín Airport is also benefiting from flights being

diverted from the highly congested Bogotá Airport. Our

5 other airports in Colombia also posted solid traffic

growth figures.

Now I will review ASUR's second (sic) [third] quarter

financial results. Consolidated revenues, ex

construction, increased nearly 8% year-on-year to MXN

3.9 billion. Mexico accounted 64% of revenues; Puerto

Rico, nearly 20%; and Colombia, 12%. Colombia posted

the strongest top line growth, up 20%; Puerto Rico, up

12%; and Mexico increasing 4.6%.

Aeronautical revenues were up 6% year-on-year, with an

increase of nearly 4% in Mexico. Aeronautical revenues

in Puerto Rico were up 6%, while Colombia reported a

14% gain driven by the strong traffic growth.

Commercial revenues posted a strong performance, up 12%

year-on-year to MXN 1.4 billion as we continued to

drive improvements across our commercial offerings.

Importantly, this was achieved despite the low single-

digits total passenger growth. On a passenger basis,

commercial revenues were up 7% year-on-year, reaching

MXN 99.2.

Now talking -- taking a deeper look at our commercial

revenue performance by region, starting with Mexico,

which represented 69% of ASUR's commercial revenues.

Despite the weak traffic, we delivered 6% increase in

commercial revenues, which also expanded by the same

amount on a per passenger basis to MXN 114.3. The

opening of revenue commercial spaces over the past 12

months contributed to this performance. Note, this was

also achieved despite the 140 basis points mix shift to

domestic traffic experienced in the quarter. Note,

domestic traffic accounted for 55% of the total traffic

compared to the 53.6% in the same quarter last year.

Next, looking at Puerto Rico, which posted a nearly 22%

increase in commercial revenues. In addition to the

solid traffic growth is good performance after the

opening of 30 new commercial spaces over the last 12

months. And this performance across most commercial

(inaudible). In particularly, we saw robust growth

in advertising, car rental and retail revenues. On a

per passenger basis, commercial revenues were up nearly

15%, reaching MXN 124.2. This was mainly off a better

performance from the new advertising concessionary,

partially offset by a small decrease in parking.

Finally, Colombia posted a strong performance with

commercial revenues up an impressive 34% and 21% on a

per passenger basis. This good performance reflects the

30 commercial stores that we have opened over the past

12 months.

Additionally, we saw a much stronger revenue growth

across most business lines, particularly parking, car

rentals and retail operations, which more than doubled.

In terms of Duty Free operations with the ground

operations on September, the revenue resulted from the

full operation, which will be reflected in our next

earnings release.

Consolidated EBITDA increased 9% year-on-year to MXN

2.5 billion in the quarter. Adjusted EBITDA margin,

excluding IFRIC 12, expanded 60 basis points year-on-

year, reaching 64% in the quarter. By region, starting

with Mexico, the largest country of operations, EBITDA

was up by 5% year-on-year. And the margin, excluding

IFRIC 12, expanded 34 basis points to 70.5% as we

manage expenses and drive efficiencies across our

airports, which helped to offset softer traffic growth.

Moving to Puerto Rico. EBITDA was up nearly 12% year-

on-year, with adjusted EBITDA margin, excluding IFRIC

12, flat at 48.7%.

Lastly, Colombia delivered a strong performance as we

continued to drive solid growth in passenger traffic

and commercial revenues while efficiently managing

operating costs. This was evidenced in nearly 35%

increase year-on-year in EBITDA, while the margin

expansion, excluding IFRIC 12, was 200 -- 590 basis

points, reaching a 53.4% in the quarter.

Looking at the bottom line, we delivered a 33% year-

on-year increase in majority net income, reaching MXN

1.3 billion, reflecting the better EBITDA I just

mentioned as well as the lower interest expenses and

the FX gain versus FX loss in the same period of the

prior year.

Turning now to the balance sheet. We keep our healthy

balance sheet, with net debt down 10% year-on-year to

MXN 14 billion. Our debt (inaudible) remains

strong, [leaving] the quarter with a net debt of the

last 12 months EBITDA at 0.8x and interest coverage of

10.3x.

Modernizing our network is key to growing our business.

And this quarter, we made capital investments of close

to MXN 450 million. Of these, nearly MXN 340 million

related to investments in connection with the master

development program in Mexico, in particular, the

terminal expansion in Merida. We also invested over MXN

60 million in Puerto Rico for major maintenance to one

(inaudible) at LMM Airport and close to MXN 47

million to complete the current expansion project at

(inaudible) Airport.

Over the first 9 months of the year, we invested nearly

MXN 890 million, of which over MXN 540 million have

been allocated to the master development program of our

airports in Mexico. And we're on track to comply our

MXN 2 billion investment commitment for the 2019. As is

usual, during the first year of every 5-year period

would be a lower ramp-up in terms of CapEx spend and we

hire contractors, et cetera, until we can move ahead

and speed up with the construction process.

This completes my prepared remarks. John, please open

the floor for questions. John?

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will now move to our first

question from Josh Milberg of Morgan Stanley.

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Joshua Milberg, Morgan Stanley, Research Division - Equity Analyst [2]

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My first question is if you could just update us on

your expectations for how your aero fee per passenger

could evolve in the quarters ahead. And also, by when

you might fully pass through the MVP adjustment that

was announced last year? We've noticed that the tariff

has been -- that the aero fee has been pretty stable

this year.

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Adolfo Castro Rivas, Grupo Aeroportuario del Sureste, S. A. B. de C. V. - CEO, Director of Finance, Chief Financial & Strategic Planning Officer [3]

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Thank you for the question. Well, it is important to

say that when you see this aero fee, you need to have

also a portion from the non-aero fee that is also

regulated. So one thing is the related revenues, and a

different thing is aero fee. So we published our

maximum park rates at the beginning of this -- at the

end of July last year. So with those, you can

guesstimate what the regulated revenue is going to be,

and then on top of this, you can have commercial

revenue, or in other words, (inaudible), exclude

commercial revenues from aero and non-aero and then

make the check with the maximum bid. Basically, we're

working at the almost highest level of maximum bid

today. So, I don't see why you have a difference.

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Joshua Milberg, Morgan Stanley, Research Division - Equity Analyst [4]

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Okay. So you're saying that there really shouldn't be

more upside from here. You've really sort of fully

passed through now your -- the fees and you're pretty

close to the cap.

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Adolfo Castro Rivas, Grupo Aeroportuario del Sureste, S. A. B. de C. V. - CEO, Director of Finance, Chief Financial & Strategic Planning Officer [5]

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Yes, absolutely.

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Joshua Milberg, Morgan Stanley, Research Division - Equity Analyst [6]

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Okay. That's very helpful. And then my second question

is just on the non-aero side. As you noted in your

preliminary comments, you guys did a good deal better

this period despite the shift in traffic to smaller

airports and also a lower relevance of international

traffic. And I was just going to ask if you could

please talk a little more about the improvement in the

home market relative to what we saw in the second

quarter. Is the story there just that there was a big

ramp-up of commercial space?

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Adolfo Castro Rivas, Grupo Aeroportuario del Sureste, S. A. B. de C. V. - CEO, Director of Finance, Chief Financial & Strategic Planning Officer [7]

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No, it's not just because of the ramp-up of commercial

space. It's also because of better performance in the

business lines. You can see Duty Free. You can see FX

or change currencies is also down because of the

passenger shift mix, but Duty Free was a better

performance. Also, in some other lines, you can see an

improvement. This has resulted from the effort that we

have been making with the concessions.

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Operator [8]

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We will now move on to our next question from Alan

Macias of Bank of America.

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Alan Macias, BofA Merrill Lynch, Research Division - Analyst [9]

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Just a question on commercial revenue in Colombia and

in Puerto Rico. If you can provide some color if you

have additional space that you plan to open in the

coming quarters and just if you can provide color on

the advertising revenues in Puerto Rico, which grew

strongly in the quarter.

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Adolfo Castro Rivas, Grupo Aeroportuario del Sureste, S. A. B. de C. V. - CEO, Director of Finance, Chief Financial & Strategic Planning Officer [10]

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Well, in terms of the spaces, the terminal space is

exactly the same. So we do not have additional space in

any of the 3 regions we are managing today. And the

future expansion in terminal buildings will be -- or

will come from Merida Airport then. The first expansion

in the case of Cancún because of Terminal 4. But for

the moment, the terminal buildings are exactly the

same. So in some cases, we have been able to open new

additional units, as you have seen in the reports.

In terms of additional units, the most important ones

are today in Colombia and then in Puerto Rico. In the

future, of course, we will continue trying to improve

our offering to passenger traffic and probably even see

some additional units in the future. I believe that for

the fourth quarter, the most important thing to look at

could be the result of the Duty Free in Colombia that

we finally opened. I have to say with 9 -- almost a

year delay, 11 -- 10 months delay. So let's see how

this evolves during the fourth quarter and to see if

this works better.

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Operator [11]

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We will now move on to our next question from Alejandro

Zamacona from Crédit Suisse.

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Alejandro Zamacona Urquiza, Crédit Suisse AG, Research Division - Research Analyst [12]

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So my first question is a specific question for

commercial revenues in Cancún. I mean we have been

looking at a frequent increase in Cancún. So after the

Terminal 4 inauguration, what's your sense in terms of

further improvement in -- on a passenger basis?

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Adolfo Castro Rivas, Grupo Aeroportuario del Sureste, S. A. B. de C. V. - CEO, Director of Finance, Chief Financial & Strategic Planning Officer [13]

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Well, Alejandro, thank you for your question. As I have

said during the initial remarks, despite the shift in

passenger mix that we have today, 140 basis points more

than what we had in the previous quarter and the -- in

the same quarter previous year in terms of domestic

versus international. International has the opportunity

to buy Duty Free and also the currency exchange.

Despite that, we have been working very hard with our

concessions to try to improve sales and to try to

understand the market better due to the passenger

shift. So yes, it's true that we have been able to

increase the commercial revenues per passenger, and I

believe that, always, we can do better. So we will

continue with these efforts in the future.

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Alejandro Zamacona Urquiza, Crédit Suisse AG, Research Division - Research Analyst [14]

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Okay. And my second question, if I may, is regarding

the CapEx plans based on the last MVP. So what's the

general status of expansions progress? Basically, the

project of Merida and the expansion in the Merida

Airport?

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Adolfo Castro Rivas, Grupo Aeroportuario del Sureste, S. A. B. de C. V. - CEO, Director of Finance, Chief Financial & Strategic Planning Officer [15]

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The project in Merida has initiated. Probably we had

some 30-day delay there because there was an important

event of the Nobel's waiting to -- into the airport,

and we had to wait until the event concluded to

initiate the works. But the works have been initiated,

and they're doing well.

For the next year, the most important project we have

is the [permanent] and taxi wait towards second

runway we have in the Cancún airport, and also the

beginning of the expansion of Terminal -- the first

expansion of Terminal 4. So we are right on track, as I

mentioned in the initial remarks, for the MXN 2 billion

CapEx for this year. Next year, it's more than MXN 5

billion, so it will be the highest ever for basically

these 3 projects.

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Operator [16]

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We will now move on to our next question from Alberto

Valerio of UBS.

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Alberto Valerio, UBS Investment Bank, Research Division - Associate Director & LatAm Transportation Equity Research Associate [17]

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Just one more about the commercial passenger in Cancún.

We saw that there was a slight deterioration in the mix

in Cancún, then you [outlined] the international

passenger. However, the commercial revenue per

passenger increased. And I'd like to know, I know that

you talked about the effects, if you have additional

color to provide towards how -- what drove this

improvement.

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Adolfo Castro Rivas, Grupo Aeroportuario del Sureste, S. A. B. de C. V. - CEO, Director of Finance, Chief Financial & Strategic Planning Officer [18]

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As I've said, one of the things that worked well during

the quarter was the line of Duty Free. This line of

Duty Free also includes duty paid for domestic

passengers. So we have in store there that includes

package, but basically, the products are like Duty Free

products. And this worked really well during the

quarter for the domestic. And then to try to recuperate

with the effect on the passenger mix is what we are

doing. And that's all in Cancún.

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Operator [19]

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We will now take our next question from Marcos Barreto

of Citi.

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Marcos Barreto Guerrero, Citigroup Inc, Research Division - Research Analyst [20]

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Just to follow up on the advertising revenue in Puerto

Rico, the 200%, if you could provide any color on what

were the drivers, how long the advertising contracts

last and who are the underlying customers.

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Adolfo Castro Rivas, Grupo Aeroportuario del Sureste, S. A. B. de C. V. - CEO, Director of Finance, Chief Financial & Strategic Planning Officer [21]

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Okay. In the case of advertising, we changed

concessionaire during the second quarter of this year.

When we recovered the airport almost 6 years ago, there

was a contract that was there in place in the long

term. So this is the first time we've changed

concessionaire in the case of advertising for the

airport in Puerto Rico. For the moment, the change is

just in the inside of the building, and next year, we

will be able to change the outside. So what we are

seeing today in terms of the numbers that we have

reported are the results of these new concessionaires

inside the building. I hope that it will do as well in

the case of the outside, and we will see that next

year.

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Marcos Barreto Guerrero, Citigroup Inc, Research Division - Research Analyst [22]

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Okay. And just on Colombia's EBITDA, when do they

expect to normalize -- the growth to normalize?

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Adolfo Castro Rivas, Grupo Aeroportuario del Sureste, S. A. B. de C. V. - CEO, Director of Finance, Chief Financial & Strategic Planning Officer [23]

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Well, when we took over, we said it's a 3-, 4-year

project to subtract between, let's say, low-hanging

fruit of the potential of the airport. So we're almost

2 years away from that moment. So there's a long way in

front of us now.

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Operator [24]

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We will now move on to our next question from [Eduardo

Alvizuri].

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Unidentified Analyst, [25]

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Regarding Puerto Rico, which showed positive operating

metrics, increasing non-aeronautical revenues, we

noticed operating costs increased the like, not

significantly. So the EBITDA margin was flat. Is this

part of the stabilization process? Or when can we

expect to see profitability improvements in Puerto

Rico?

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Adolfo Castro Rivas, Grupo Aeroportuario del Sureste, S. A. B. de C. V. - CEO, Director of Finance, Chief Financial & Strategic Planning Officer [26]

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Well, we have seen profitability improvement in Puerto

Rico for some quarters. In terms of -- if you exclude

the decrease in terms of the impact of the traffic that

was hit by the Hurricane Maria, so if you see the last

24 months in Puerto Rico, so if we go back to pre-

hurricane levels, you can see an improvement in

profitability in the sense of the following: First of

all, you need to understand that there was an increase

in the concession fee. (inaudible) it was 2.5

million (inaudible), now it's 5% of the revenues.

Down figures is 2.5 million today, around 6 million.

There was another important change during the 24

months, which was an additional reports from the U.S.

government in terms of additional security at the

airports. So that had an impact of around $2.5 million.

If we exclude these 2, we can see an improvement in the

profitability, basically, supported by a cost control

and excluding this element, of course, and the increase

in the commercial revenue per passenger. So going

forward, the comparables are going to be different and

we will see the results.

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Operator [27]

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(Operator Instructions) We will now move on to our next

question from [Roberto Plato] of (inaudible).

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Unidentified Analyst, [28]

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I was hoping you could compare and contrast the level

of sophistication and -- of the various retail

operations that you have, Cancún versus the newer

Puerto Rico and Medellín airports. And how much better

you think -- how much leg room there is still for the

operations in Puerto Rico and Medellín to get up to par

in terms of facilities and assortment and so forth.

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Adolfo Castro Rivas, Grupo Aeroportuario del Sureste, S. A. B. de C. V. - CEO, Director of Finance, Chief Financial & Strategic Planning Officer [29]

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Well, in terms of these, it's an endless story because

there is (inaudible) in terms of the passenger

expectations in terms of what we can find inside the

airport. Now, this is a key element into the operation.

We normally do surveys or meet their shoppers every

quarter to try to understand better what the passenger

wants. And I have to say, this is not the same

passenger we have some years ago. So the improvement

from time to time comes from this information, and we

have a completely different kinds of passengers in

Puerto Rico, Colombia and Cancún. So what we do is to

work with each region differently, but basically trying

to provide the best in terms of [product price] and

values for the passenger and also trying to reflect

what they are expecting from these buildings.

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Unidentified Analyst, [30]

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It's a very -- if I asked a follow-up question then on

that. If you would -- in the research that you're

conducting, do you have any data that you can share in

terms of either the satisfaction scoring by the

passenger that you captively have in those square

meters of where they're spending their money? One key

metric obviously is the pesos per passenger, but what

other measures do you have that you can share with us?

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Adolfo Castro Rivas, Grupo Aeroportuario del Sureste, S. A. B. de C. V. - CEO, Director of Finance, Chief Financial & Strategic Planning Officer [31]

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Well, there's a story (inaudible) that has been

made by a company called ASQ. This is part of AS --

ACI. In the world, ACI is an organization that

(inaudible) 180 airports in the world. So the

entity that they use to measure the party service at

the airports is ASQ. And in the case of ASQ, we have a

very good qualifications. Cancún Airport has been named

several times the best in Latin America.

I remember many years ago, in the year 2012, it was the

second best in the world in terms of the size of the

airport. So this is also what we do to try to see if

the quality of the service we are providing is adequate

or not. So I don't remember exactly the number right

now, but from these...

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Unidentified Analyst, [32]

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You know where the Puerto Rico are -- so where Puerto

Rico and Medellín would rank?

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Adolfo Castro Rivas, Grupo Aeroportuario del Sureste, S. A. B. de C. V. - CEO, Director of Finance, Chief Financial & Strategic Planning Officer [33]

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Yes, of course. Probably it's between 4.5, 4.6 on a

scale of 5 in the case of rating.

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Operator [34]

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(Operator Instructions) That concludes the question-

and-answer portion of today's conference call. I'd like

to turn it back over to Mr. Castro for closing remarks.

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Adolfo Castro Rivas, Grupo Aeroportuario del Sureste, S. A. B. de C. V. - CEO, Director of Finance, Chief Financial & Strategic Planning Officer [35]

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Thank you, John. And thank you again, everybody, for

participating on our third quarter results conference

call. On behalf of ASUR, we wish you a good day.

Goodbye.

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Operator [36]

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Ladies and gentlemen, that concludes ASUR Third Quarter

2019 Results Conference Call. We would like to thank

you again for your participation. You may now

disconnect.