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Edited Transcript of ASURB.MX earnings conference call or presentation 23-Jul-19 2:00pm GMT

Q2 2019 Grupo Aeroportuario del Sureste SAB de CV Earnings Call

Mexico Jul 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Grupo Aeroportuario del Sureste SAB de CV earnings conference call or presentation Tuesday, July 23, 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

* Alejandro Zamacona Urquiza

Crédit Suisse AG, Research Division - Research Analyst

* Joshua Milberg

Morgan Stanley, Research Division - Equity Analyst

* Lucas Laghi

Citigroup Inc, Research Division - Research Associate

* Mauricio Martinez Vallejo

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

* Rodolfo Ramos

Banco Bradesco BBI S.A. - Strategist and Head of Mexico Research

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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's Second Quarter 2019 Results Conference Call. My name is Christian, and I'll 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.

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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, Christian, and good morning, everyone. Thank you for joining us on our conference call to discuss ASUR's second 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 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 Mexican Stock Exchange.

As I normally do, I will begin with a review of our quarterly performance with changes in passenger traffic at ASUR's 16 airports. Total traffic increased 7% year-over-year to 14 million passengers. In Mexico, ASUR's largest market, our passenger traffic growth nearly 5%, accounting for 62% of total traffic with domestic traffic up just over 9% while international traffic growth remained by only 1%. Year-over-year growth in our domestic traffic partly benefited from Holy Week in Mexico, which is this year probably in April versus March last year.

U.S. traffic remained weak declining 285 basis points year-on-year in the quarter as this trend is expected to continue for the rest of the year. This is something that we are seeing across Mexico not just Cancun. Traffic coming from other regions is growing well with some regions like Europe up 7.3% performing above what we expected.

In Puerto Rico, our total passenger traffic grew 6%, while domestic and international traffic increased 5 -- 5.5% and just over 11%, respectively. International traffic remained high as last year traffic was still impacted by the aftermath, Hurricane Maria, in September 2017.

In Puerto Rico, passenger accounted for 17% of our total traffic in the first quarter. Passenger traffic in Colombia accounted for 22% of ASUR's total traffic in the second quarter, up from 15% in second quarter 2018. Domestic traffic increased just over 14%, while international traffic grows nearly 19%.

Now I will review ASUR's second quarter financial results. Excluding construction revenues, ASUR's consolidated revenues increased 7% year-on-year to MXN 3.9 billion. Mexico accounted for 70% of these revenues, while Puerto Rico contributed 18% and Colombia 12%.

Aeronautical revenues were up 7% year-on-year with an increase of nearly 8% in Mexico and growth of 2% in Puerto Rico and nearly 10% in Colombia, both on strong traffic gains. Commercial revenues near traffic growth increasing 7% to MXN 1.5 billion in the second quarter as supported by the enhancement to our commercial offering.

In Mexico, which represented 73% of ASUR's commercial revenues, these revenues grew 4.5%, mostly due to the opening of additional commercial spaces. Further, this growth came despite the 200 basis point shift in our operation in our passenger mix, with domestic traffic accounting for 49% of total traffic compared to the 47% in last year's quarter.

Puerto Rico, Colombia, our commercial revenues grew 11% and 21%, respectively. In addition to the federal tax traffic comps in Puerto Rico, we have opened 12 new commercial spaces at LMM Airport during the last 12 months. In Colombia, we have opened 31 new commercial spaces during this period in addition to the 15% increase in passenger traffic, drove commercial revenues back.

Our passenger commercial revenues were flat at MXN 99.7. In Mexico, commercial revenues per passenger remained practically unchanged at MXN 115.4 affected by the 200-basis-point shift in passenger mix to domestic traffic as I just noted. In Puerto Rico, commercial revenues per passengers rose 4% to MXN 114.4 as we continue to see a strong growth in ground transportation and advertising revenues.

And in Colombia, commercial revenues per passenger increased 5% to a record of MXN 40.6 as we continue to drive commercial revenue growth across these airports. This was mostly due to the 31 new retail spaces opened over the last 12 months. Strong revenue growth from parking lot operation, which we took over, over the last quarter, has also contributed to the good performance in Colombia

Duty-free operations, the approval finally came last week. So the store should be open very soon. We currently have ASUR's profitability in the second quarter, consolidated EBITDA increased 16% year-over-year to MXN 2.7 billion. With our margins expanding 675 basis points to 67.5%. Our EBITDA increased 7% in Mexico and 60% in Puerto Rico, which benefited again from higher revenues as well as a MXN 263-million insurance claim recovery related to Hurricane Maria.

In Colombia, our EBITDA increased 29% mostly due to the strong increases in passenger traffic and commercial revenues. On a comparable basis, excluding the onetime insurance recovery gains, consolidated EBITDA was having increased just over 9% year-on-year and nearly 12% in Puerto Rico. ASUR's consolidated adjusted EBITDA margin, which excludes the effect of IFRIC 12, increases 540 basis points year-on-year to 69.5%. Comparable consolidated EBITDA also have increased 130 basis points to 65.4%.

Mexico's adjusted EBITDA margin was slightly down 5 basis points to 71.4%, mainly reflecting a 6% increase in operating cost and expenses. Energy costs continued to rise in Mexico for the quarter. The cost per kilowatt hour was 24 more in comparison with the second quarter 2018, better than the 52 reported in previous quarter.

In Puerto Rico, our adjusted EBITDA margin increased 73.3% from 48.2% in second quarter 2018, mostly due to the insurance recovery I have noted. Comparable adjusted EBITDA margin in Puerto Rico would have increased 310 basis points to 51.8%. Colombia's adjusted EBITDA margin expanded to 67 basis points to 52.8%, on lower operating costs and expenses, which decreased nearly 10% as well as the higher revenues.

Moving to our bottom line. ASUR recorded second quarter majority net income increased 31.3% to MXN 1.4 billion.

Moving onto the balance sheet. Total debt was down 2.4% to MXN 14.1 billion. At the end of the second quarter, the ratio, net debt-to-last 12 months EBITDA was essentially flat at 0.9x. Cash and cash equivalents increased 6% year-on-year to MXN 4.8 billion. This quarter, we also paid ordinary and extraordinary cash dividends totaling MXN 10 per share equivalent to MXN 3 billion. Our main capital investments during the second quarter totaled MXN 171 million. Of these amounts MXN 54 million was for the modernization of ASUR's Mexican airports on our master development plan for the country.

In Puerto Rico, we invested MXN 58 million during the quarter related to major maintenance at 11 airports. A similar amount was also spent by Airplan which wholly owned subsidiary in Colombia for the target project. This concludes my remarks.

Christian, please open the floor for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will now take our first question from Lucas Laghi from Citibank.

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Lucas Laghi, Citigroup Inc, Research Division - Research Associate [2]

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I like if you would have any ballpark estimate regarding the depreciation and amortization without the accounting changing for Colombia?

And second question if you'd have any indication of advanced bookings in either Quintana Roo or San Juan, which would indicate some traffic flow impact from Sargassum or Puerto Rico political tension or maybe other factors?

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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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Well, as I should have mentioned we have changed our way to depreciate or amortize the concession in the case of Colombia. I do not have, right now, what will be the difference if we choose the old procedure.

In the case of your question about the traffic or the effect in the traffic because of Sargassum and the case of the situation today in Puerto Rico, again, I do not have any number to provide you.

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Lucas Laghi, Citigroup Inc, Research Division - Research Associate [4]

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Okay. But at least some indication about, on another front, about international traffic flow. Maybe, I don't know -- maybe some impact that you are already seeing?

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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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Well, as I mentioned during my remarks that the problem we are seeing in the case of Mexico is the international traffic, and this, basically, due to the traffic to and from the United States, and as I already mentioned, I believe this trend will continue for the rest of the year. And it's not just for the case of Cancun. It's also for the case of the entire country.

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Operator [6]

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We will now take our next question from Alan Macias from Bank of America.

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Alan Macias, BofA Merrill Lynch, Research Division - Analyst [7]

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Just one question on traffic in Colombia. It remained strong. Can you give us any insight for the traffic drivers in Colombia?

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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 [8]

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So basically what we are seeing is, of course, a better traffic because of the current economic conditions. Also, we are seeing some kind of effect because of congestion in the case of Bogotá airport, so some of the operations have been diverted to Medellín.

And finally, the case of new routes we have opened with them that is the case of one direct flight -- daily direct flight from Mexico City to Medellín and also from Cancun to Medellín, both in the case of turnover.

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Operator [9]

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We will now take our next question from Alejandro Zamacona from Crédit Suisse.

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Alejandro Zamacona Urquiza, Crédit Suisse AG, Research Division - Research Analyst [10]

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Just one question from our side. We understand that -- well, the question is regarding CapEx. We understand that the commitment from the MDP for the 2019 was MXN 2.1 billion, and during the first half of 2019, we saw investments in Mexico by only MXN 200 million. So the question would be, what can we expect for the following quarters? And if there is any specific reason for the significant difference?

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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 [11]

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Thank you for the comment. So as you mentioned, the commitment we have for the MDP for this year is nearly MXN 2 billion, and we have to comply with that commitment, and we expect to comply with that.

Why you are seeing a huge difference in terms of the first half of the year, that has to do with the process -- the normal process we have to follow in the first year of the 5-year period, which achieves to hire the people to make effective project then to proceed with the bidding process to kind of contractor then to the sign the contract, and then they can start constructing. So you will see a speed-up process during the second half of the year in order that we can comply with the MXN 2 billion process this year.

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Operator [12]

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(Operator Instructions) We will now take our next question from Mauricio Martinez from GBM.

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Mauricio Martinez Vallejo, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [13]

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My question is on the Puerto Rico funds about the insurance claims. How much do you expect to recover from that insurance? Or is -- this has been fully recovered already? That will be my first question.

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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 [14]

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Yes, Mauricio, I do not have the exact amount that has been approved by the insurance company. From the top of my head, probably it could be close to $40 million, $42 million. A portion of that has been paid last year and a portion is what you have seen during the report of this quarter.

Of course, these amounts will be paid once we are also advancing in the construction or the reconstruction process of the things that were damaged.

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Mauricio Martinez Vallejo, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [15]

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Great. And also, on Colombia, maybe if you can update -- give us an update about the commercial? If there is any new commercial spaces to be opened this year? And if there is any change in the negotiations with the previous manager of your parking lot in Rionegro?

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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 [16]

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Well, in the case of your second question, the parking lot in Rionegro, we are operating directly that space as from the first quarter this year.

And the second -- and the first question you raised, what we expect for the coming third quarter will be some additional -- the opening of additional food and beverage spaces, and as I mentioned, finally, the operation of the duty-free store at Rionegro.

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Operator [17]

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We will now take our next question from Rodolfo Ramos from Bradesco BBI.

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Rodolfo Ramos, Banco Bradesco BBI S.A. - Strategist and Head of Mexico Research [18]

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Just a quick question from our side. We saw cost of services decline in Puerto Rico and Colombia, mainly by these changes in your provision levels. Can you give us an indication of what to expect for this year on a more normalized level, perhaps some growth or on an absolute level?

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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 [19]

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Well, Rodolfo, what I see is that the current level is the one that is normalized, so it's clear that you saw one-off things in previous quarter, in the case of Colombia, additional expenses from legal fees or something like that. So what I -- the way that I see it is that this quarter is the normalized level. Of course, excluding -- I'm talking about in terms of the amount, not in terms of the comparison with the previous quarter.

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Operator [20]

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(Operator Instructions) We will now take our next question from (inaudible) from Morgan Stanley.

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Joshua Milberg, Morgan Stanley, Research Division - Equity Analyst [21]

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This is actually Josh Milberg from Morgan Stanley. My first question is on your domestic traffic in Mexico. It's been pretty resilient despite the capacity constraints in the Mexico City airport, and I just wanted to ask if you could provide some updated perspective on how much those constraints could eventually limit your domestic growth in the next several years? That's my first question.

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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 [22]

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Well, Josh, you know Mexico City airports represents around 60-something percent of our domestic traffic. As you have mentioned, this airport is congested or doesn't have more capacity for the future.

The spare part we have is the DeLuca airport. DeLuca airport, last year, round figures close to 700,000 passengers a year. It has, in my opinion, a capacity of around 9 million passengers a year without any investment. So that is a spare part we have for the future before the new project came in, in the equation.

As of today, the new project should be Santa Lucía because of the cancelation of the new Mexico City airport. What the country is saying is that Santa Lucía should be in operation '22, maybe '23. So from now until '23, or up to that moment, the only spare part we have is DeLuca airport with this additional 9 million capacity. That's what I can share with you.

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Joshua Milberg, Morgan Stanley, Research Division - Equity Analyst [23]

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Okay. Two related questions. I mean with respect to Santa Lucía, do you -- have you seen some meaningful evolution of that project in the last number of months? And then with respect to DeLuca, I mean, have you seen airlines in Mexico sort of moving to embrace it as a solution for the Mexico City capacity constraints?

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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 [24]

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In the case of Santa Lucía, I am fully aware that the government -- current government is working for the project. So I have seen some people from their side that have been working on sort of these projects.

And in the case of DeLuca, unfortunately, what I see right now is that the airline does not want to fly from there, so they do not want to increase the amount of passengers or the space that they're using that. But of course, going forward in the future, if they cannot grow in Mexico City, of course, at certain moment, they will have to start flying more from DeLuca because that is the only way to accommodate the growth for the metropolitan area in Mexico City.

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Operator [25]

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That concludes the question-and-answer session portion of today's conference. I would now like to turn the call back over to you, 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 [26]

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Thank you, Christian, and thank you again, everybody, for participating in our second quarter results call today. On behalf of everyone at ASUR, we wish you a good day. Goodbye.

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Operator [27]

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Ladies and gentlemen, that concludes ASUR's Second Quarter 2019 Earnings Conference Call. We would like to thank you again for your participation. You may now disconnect.