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Edited Transcript of GAPB.MX earnings conference call or presentation 25-Oct-19 3:00pm GMT

Q3 2019 Grupo Aeroportuario del Pacifico SAB de CV Earnings Call

Guadalajara Nov 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Grupo Aeroportuario del Pacifico SAB de CV earnings conference call or presentation Friday, October 25, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Raul Revuelta Musalem

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

* Saúl Villarreal García

Grupo Aeroportuario del Pacífico, S.A.B. de C.V. - CFO

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Conference Call Participants

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* Alejandro Zamacona Urquiza

Crédit Suisse AG, Research Division - Research Analyst

* Andressa Varotto

UBS Investment Bank, Research Division - Associate Analyst

* Fernando Sanchez Leon-Orantes

Banco Bradesco BBI S.A., Research Division - Research Analyst

* Marcos Barreto Guerrero

Citigroup Inc, Research Division - Research Analyst

* Ruben López Romero

Santander Investment Securities Inc., Research Division - Research Analyst

* Maria Barona

i-advize Corporate Communications Inc. - Co-Founder and MD

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Presentation

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Operator [1]

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Good morning, and welcome to GAP's Third Quarter 2019 Conference Call. (Operator Instructions) It is now my pleasure to turn the call over to Maria Barona of i-advize Corporate Communications. Please go ahead.

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Maria Barona, i-advize Corporate Communications Inc. - Co-Founder and MD [2]

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Thank you, and welcome to the Grupo Aeroportuario del Pacífico's Third Quarter 2019 Conference Call. Today from the company, we have Mr. Raul Revuelta, GAP's Chief Executive Officer; and Mr. Saúl Villarreal, Chief Financial Officer.

Please be advised that forward-looking statements may be made during this conference call. These do not account for future economic circumstances, industry conditions, the company's future performance or financial results. As such, statements made are based on several assumptions and factors that could change, causing actual results to differ materially from the current expectations. For a complete note on forward-looking statements, please refer to the quarterly report issued previously.

Please note that unless stated otherwise, all comparisons in this call will be made versus GAP's results for the comparable period of 2018.

At this point, I would like to turn the call over to Mr. Revuelta for his opening remarks. Please begin, sir.

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Raul Revuelta Musalem, Grupo Aeroportuario del Pacífico, S.A.B. de C.V. - CEO [3]

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Thank you, Maria, and thank you, everyone who took the time to join us here today. On behalf our team, I want to express my appreciation for your interest in GAP.

Today, I will briefly review of operational performance and financial results for the third quarter 2019 prior to taking your questions.

During this quarter, GAP transported over 11.8 million passengers throughout our 13 airports. This amount represents a 7.3% increase, which, along with the solid results we experienced during the first half of the year, put us on a target to reach our revised annual growth objective.

The next [style], we are look at traffic growth contribution from some of our main airports. The quarter yet again was the best performing in terms of international traffic growing by 14% during the third quarter. Mainly, if you look by the consolidation of the South California market to Volaris and the rapid expansion of Viva Aerobus. Between these 2 airlines, there were 230,000 [fleet sizing] during the quarter under discussion, representing an increase of 62% for Viva Aerobus and 22% for Volaris.

The Cross Border Xpress reached a 32% market share of this airport total air traffic, which represent a 30% growth compared to the third quarter of 2018.

Our second topper in terms of total passenger growth was Guanajuato, which manifest from a strong increase in domestic demand, particularly the reroutes to the border city of Tijuana and Guadalajara, the largest contributor to the quarter of domestic passenger growth, and they rose by 23,000 and 22,000 passengers, respectively.

International traffic remained solid growing by 5% for the period, well ahead of experience at 3% of total traffic growth during the third quarter. International traffic was the main contributor increasing by 11% during the past quarter. The highest number of additional international travelers came from the technohubs that Dallas-Fort Worth and Houston, which represents a combined 31,000 extra passengers.

This was due to the extra frequencies added by American Airlines [temporize]. This airport also saw the only regional route added this quarter, which was the Guadalajara to San Salvador route by Volaris.

Moving to the major airports, Los Cabos led the way with the most [well] during the quarter. We are seeing a strong appetite for this destination above Mexican travelers with domestic traffic growth of 23% during the third quarter, which was possible due to the [delivery] of the routes from Tijuana and Hermosillo as well as an additional frequency to Mexico City by Interjet, Viva Aerobus and Volaris.

International traffic declined 2% during the quarter, which was mainly due to the 737 MAX effect. Also, Puerto Vallarta continues to follow the same traffic we have at Los Cabos, with a strong domestic growth and a large international traffic decline, which was mainly due to the 737 MAX effect with Southwest.

During the third quarter, the Mexico City route contributed the most additional traffic to the airport with 14,000 extra passengers. And traffic increased as a result of (inaudible) that fly that route.

In terms of specific airlines, Volaris continuous to lead the way as a result of the new routes to the Bajio region of Mexico.

In Jamaica, Montego Bay saw a 2% increase in the number of passengers for the quarter, mainly due to the maturity of their operating routes of 737 MAX [effect] with Southwest -- Southwest and WestJet. Nevertheless, the [aeronautical] traffic growth remains a 6% increase.

Let's move on the non-aeronautical revenues, which, once again, experienced an outstanding performance with an increase of MXN 159 million or 20% during the third quarter. This resulted in a 12% high non-aeronautical revenues per passenger, which was merely due to the referenced commercial area of expansions throughout the Guadalajara, Tijuana, Aguascalientes and Guanajuato airport.

Let's take a look at the business units. The strongest performance include total revenues rose by over MXN 31 million or 49% within the third quarter of 2019. This outstanding performance was mainly due to the Tijuana, Guadalajara airports, which experienced the opening of newly expanded food and beverage offering during the first half of the year. Additionally, the commercial offering in Tijuana and Guadalajara airports is now complete and internally operating. New commercial offering also initiates operations in Manzanillo, Aguascalientes and Puerto Vallarta airports.

Car rental unit increased MXN 22 million or 29% during the quarter. Throughout this year, we have launched this in the airports of Guanajuato, Morelia and Guadalajara to bring you the best brands and operators in order to obtain the most beneficial contractor while furthering and changing the passenger experience.

Revenues from the aero market stores operated directly by us increased by MXN 16 million or 60%. This was mainly due to the 2019 growth, especially for capital operated business, opening one new store in Tijuana, an improvement in Manzanillo and another one in Morelia.

Yet the launch, operated directly by GAP, increased by MXN 13 million or 23%.

During the third quarter of '19, the number of users rose as a result of higher market penetration, especially the international launch of the Los Cabos airport. Additionally, we are currently working in the -- on the redesign and expansion of the VIP lounge projects at the airports of Guanajuato, Guadalajara, Los Cabos and Tijuana.

Regarding CapEx, just to highlight a few of the relevant works included in the new master plan 2020, 2020 forward. In 2019, we will be planning the design and work for the expansion and refurbishment at all of our airports. This year, we expect to begin the design process of a new terminal building in Puerto Vallarta and Guadalajara airports as well as a new runway at Guadalajara. Additionally, we are on a bidding process for the procurement and acquisition of equipment.

To conclude, I have a quick review of the financial results.

For the third quarter, EBITDA grew by 12%, reaching MXN 2.4 billion and an EBITDA margin of 69.5%, excluding the effect of IFRIC 12. We experienced an increase of 7% in the cost of service. We are looking at 12% higher maintenance costs and a 12% increase in other operating expenses.

Maintenance expenses was as a result of the rehabilitation work in the aero side operational areas as well as higher maintenance expenses from the check-in baggage area at most of our airports, additional cleaning service -- air conditioning services and mechanical equipment services among others.

Other operating expenses came from the sales cost for the 2 new VIP lounges and 7 convenience stores that opened in the third quarter and due to a result of doubtful accounts for the regional area and in Calafia, which represent the 0.9% of the total profit of our network.

Before we move over to Q&A, I want to mention that on October 10, GAP took control and initiated operations to Norman Manley International Airport in Kingston, Jamaica. As a result, on the following day, we released our revised annual 2019 guidance, which includes the following expectations: traffic growth between 7% to 9%, aeronautical revenue between 11% to 13%, non-aeronautical revenues around 19% to 21%, total revenues around 13% to 15%, EBITDA growth between 11% to 13%, EBITDA margin around 67% to 69% and a total CapEx around MXN 1.9 billion.

This new guidance reflects our expectations for the Kingston operation as well as adjusted expectations for the Mexican operations.

This new concession represents a strategic decision to allocate GAP's positions in Jamaica and the strength of development and growth of both international airports.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from Alejandro Zamacona with Crédit Suisse.

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Alejandro Zamacona Urquiza, Crédit Suisse AG, Research Division - Research Analyst [2]

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And just, I guess, an obligated question in terms of the MDP, do you know -- do you have an update in terms of your tariffs expectations and timing of the final announcement?

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Raul Revuelta Musalem, Grupo Aeroportuario del Pacífico, S.A.B. de C.V. - CEO [3]

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Alejandro, thank you for your question. We are working in -- with the authority in order to have the final determination. We are very pleased with this negotiation, the process. The regulatory framework has been respected. So we have been very positive in the process. So we believe that everything goes as we expect probably at the end -- at the middle of November, we will be having good news. For now, we maintain our guidance with respect to the tariff expectations that is around between 3% to 5% increase, is what we have so far, but we are in the closing period.

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Alejandro Zamacona Urquiza, Crédit Suisse AG, Research Division - Research Analyst [4]

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Okay. So it's 3% to 5% in real terms, right?

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Raul Revuelta Musalem, Grupo Aeroportuario del Pacífico, S.A.B. de C.V. - CEO [5]

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Yes, that's correct, correct.

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Alejandro Zamacona Urquiza, Crédit Suisse AG, Research Division - Research Analyst [6]

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Okay. And in terms of CapEx, I mean, you already announced at the Investor Day around MXN 20 billion. Is that still the expectations?

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Raul Revuelta Musalem, Grupo Aeroportuario del Pacífico, S.A.B. de C.V. - CEO [7]

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We are still in the same amounts on CapEx also, around the same numbers.

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Operator [8]

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And your next question comes from Ruben López with Santander.

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Ruben López Romero, Santander Investment Securities Inc., Research Division - Research Analyst [9]

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Just a follow-up on the MDP. Is the final part of the process as productive as it was at the beginning? Or have you started to find any items where you have found some more complications to deal with, with the regulator? That's my first one.

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Raul Revuelta Musalem, Grupo Aeroportuario del Pacífico, S.A.B. de C.V. - CEO [10]

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Thank you, Ruben, for your -- the question. I will say that in general terms, all the process has been really -- I mean, smoothly and respecting all the methodology of our regulation system. So I really don't see any difference from any other master plan review. As everybody remembers, the authority has until the 31st of December to have the final decision around the master plan, but I'm not seeing anything different than other reviews in the past. We are just following all our targets and market plan methodology. So everything, I will say, that runs smoothly and in a really technique way, really following the -- our concession contract.

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Ruben López Romero, Santander Investment Securities Inc., Research Division - Research Analyst [11]

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Okay, perfect. And the second one is on commercial areas. These new terminals and expansions, do you have any number that you could share with us in terms of contribution of new commercial areas?

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Raul Revuelta Musalem, Grupo Aeroportuario del Pacífico, S.A.B. de C.V. - CEO [12]

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Sorry, well, in terms of the new master plans or the areas that are already on operations?

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Ruben López Romero, Santander Investment Securities Inc., Research Division - Research Analyst [13]

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In general, the new master plan. And then at the beginning of the year in the investor relations day -- sorry, in the GAP Day, you mentioned that this year, commercial areas would increase close to 14%. So you also -- any update on there? How much of this percentage already is operating? And how much will we see in the fourth Q?

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Raul Revuelta Musalem, Grupo Aeroportuario del Pacífico, S.A.B. de C.V. - CEO [14]

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Perfect. First, talking about the fourth Q, I will say that we are just in a couple of weeks, we will be opening a new commercial area on Los Cabos airport expansion. This is already in operations, but we are just in a couple of weeks to begin operation of a new commercial area that includes retail and food and beverage. Also, we have, I mean, smaller expansions, but they are just to begin operations over in Aguascalientes and Morelia airports. That also includes commercial areas.

The last part of Guadalajara expansion already began its operations in the 3Q. So in terms of this year, I will say that with the expansion of -- or the -- putting an operation of Los Cabos, Morelia, and Aguascalientes, we will be done with all the original plans for the year.

In terms of the new master plan, as we talked and we mentioned on different calls, we will have completely brand-new terminals of Guadalajara, Puerto Vallarta, a big expansion on Cabo and a really important expansion for our professional center on Tijuana. These 4 terminals will have, I will say, big opportunities for develop additional commercial areas due to the fact that the additional square meters that we want to have there will allow us to put in place a really important offer in terms of -- on the commercial.

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Operator [15]

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And your next question comes from Andressa Varotto with UBS.

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Andressa Varotto, UBS Investment Bank, Research Division - Associate Analyst [16]

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Just to follow up on the previous MDP questions, I would like to know, how are negotiations going regarding the IRR that you announced in GAP Day that you were expecting it to be around 13%? So I just would like to know about this specific topic.

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Saúl Villarreal García, Grupo Aeroportuario del Pacífico, S.A.B. de C.V. - CFO [17]

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Thank you, Andressa. Thank you so much for your question. Yes, we are in line with our expectation. About the 13% we announced in GAP Day, we continue with that. As I mentioned before, we are in the final stage of the negotiation. So far, we are in that range. So we are -- that's why we are expecting that 3% to 5% of tariff increase. So everything is as we said.

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Operator [18]

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And your next question comes from Marcos Barreto with Citi.

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Marcos Barreto Guerrero, Citigroup Inc, Research Division - Research Analyst [19]

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I have 3 of them. The first one would be considering airport regulatory returns declining around the world and interest rates in Mexico possibly on their way down, could you give us any color on what is the case for GAP maintaining or even increasing its returns? That's my first question.

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Saúl Villarreal García, Grupo Aeroportuario del Pacífico, S.A.B. de C.V. - CFO [20]

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Marcos, sorry, the sound is not very good. Can you please repeat your question?

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Marcos Barreto Guerrero, Citigroup Inc, Research Division - Research Analyst [21]

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Sure. Can you hear me now?

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Raul Revuelta Musalem, Grupo Aeroportuario del Pacífico, S.A.B. de C.V. - CEO [22]

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Yes, much better.

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Marcos Barreto Guerrero, Citigroup Inc, Research Division - Research Analyst [23]

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Okay. With airport regulatory returns declining around the world and interest rates in Mexico possibly on their way down, do you have any color on what is the case for GAP on maintaining or even increasing returns?

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Saúl Villarreal García, Grupo Aeroportuario del Pacífico, S.A.B. de C.V. - CFO [24]

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Well, there are 2 views about the interest rates. The first is the support that we consider for the tariff review, and it's implied in the discount rate, the IRR of the aeronautical revenues. So in that sense, in that way, we believe that could be adjusting our IRR. In any case, we are expecting the 13%. In the other hand, due to the level of CapEx that we have and the plans that we have for the new CapEx that will be 100% leveraged during the following 5 years. We are expecting higher returns or better returns because the interest rate will be lower. Our target, obviously, will have as lower as possible the interest rates, not only in pesos, but also in U.S. dollars.

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Marcos Barreto Guerrero, Citigroup Inc, Research Division - Research Analyst [25]

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Okay. My second question is, what is your expectation regarding the long-term connectivity in Mexico City?

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Raul Revuelta Musalem, Grupo Aeroportuario del Pacífico, S.A.B. de C.V. - CEO [26]

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Hi, Marcos. I will say that there's a lot of things happening right now in the Mexican market. Let's begin with an interesting that is happening. First, we developed a rule on Volaris. They are constructing their main strategy outside the Mexico City airports. In Volaris, it's mainly based on Tijuana and Guadalajara. And in the case of Viva Aerobus, a really important operation in Monterrey. But also, we have really robust growth on Tijuana and Guadalajara and Cancun also.

So my take of the things to understand what's going to happen on the coming years in Mexico City area of influence is what could happen with the opening of Santa Lucia and the use of Toluca Airport.

We are seeing -- we are following the news. It looks like Santa Lucia is on the way to the construction. We also know that their plans for trying to push additional traffic to Toluca Airport. These -- both news will give additional offer and additional space for -- additional slot in the metropolitan area of Mexico.

But what is real interesting, and is the part that I would like to quote, is that other airports on the -- on other big cities of Mexico, that could be Guadalajara, we are having more and more direct connections that are not passing through Mexico City airport. I mean, the performance of the economy of Calexico and Bajío area on the last 10 years has, in some ways, slowed part of the potential of the area and has been a traditional direct flight to different destinations from Guadalajara. So what we are seeing or at least our view today will be a more flattish growth on Mexico City airport or the metropolitan net of airports on the coming years. And other cities like Guadalajara, Tijuana, Monterrey or Cancún, that will have more direct flights and more robust growth when we compare it with Mexico City area.

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Marcos Barreto Guerrero, Citigroup Inc, Research Division - Research Analyst [27]

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That's great color. And just one last question and I'll let someone ask. Any view on what sort of commercial revenue potential exists for the Kingston airport related to Montego Bay?

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Saúl Villarreal García, Grupo Aeroportuario del Pacífico, S.A.B. de C.V. - CFO [28]

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Yes, Marcos. The commercial revenue in Kingston is very interesting, that there is a high potential opportunity to increase and improve our -- the current commercial revenue. We were planning to make a [cute] redesign of the commercial areas, adding some new offers, new branding, different strategies in order to increase the commercial revenue. So obviously, we will have to normalize to take over -- to take control, sorry, and take and improve the operation of the airport in the following years. Obviously, it will be -- it will take a couple of years to mature and to put in place and to take the full profitability of this airport.

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Raul Revuelta Musalem, Grupo Aeroportuario del Pacífico, S.A.B. de C.V. - CEO [29]

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And also it's important to mention that in the case of Kingston, the most important part of the traffic come from international passengers. So that gives us a chance for the sales of the Duty Free that you know that is really, really important. And in general terms, the tickets are bigger in terms of the commercial revenues, are biggest for the international passengers rather than the domestic. So as Saúl said, we expect to have dramatical change the layout of the airport in the coming months, but we also in parallel, need to work on stabilize the operational -- the operation, for sure, to reduce the costs on this airport. That as you'll remember, in terms of the ways that this concession works, we have a really important fee of the -- to the revenues, 62%. So the manners of the cost will be one of the most important key factors for the profitability of the Kingston project.

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Operator [30]

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And our next question comes from Fernando Sanchez with Bradesco.

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Fernando Sanchez Leon-Orantes, Banco Bradesco BBI S.A., Research Division - Research Analyst [31]

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My question is on international traffic. Despite the solid increase, 2 of the more touristy destinations Los Cabos and Puerto Vallarta saw a decline in traffic. So I was wondering if you could give us a little bit more color on what caused the decrease and if it has anything to do with violence and security?

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Raul Revuelta Musalem, Grupo Aeroportuario del Pacífico, S.A.B. de C.V. - CEO [32]

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Thank you, Fernando. I will say that the biggest part of it right now affecting the international passengers on Cabo and Vallarta are mainly 2 affects. The first that is the biggest one, is related with Southwest. Southwest in Los Cabos represent [9.7%], almost 10%, of the total passengers. And as you know, Southwest is also the biggest operators of the 737 MAX. So we are having an important effect that is affecting Cabos, Vallarta and even Montego Bay just for the effect of the 737.

But also, we have in Vallarta and Cabos a substitution effect of the South California with Tijuana. Due to the fact that CBX is capturing a big part or really relevant in market on South California, one of the things that we are seeing is that really big increase on the number of seats and passengers of Tijuana to the Mexican beaches, Tijuana to Cabos, Tijuana to Vallarta, even Huatulco, La Paz, Loreto, even almost all the Mexican beaches. And on the other hand, we are beginning to see a flattish or a decrease on some of the routes. For instance, the San Diego to Cabo and San Diego to Puerto Vallarta.

So one of the things that also are experienced is a switch from international passengers that came, for instance, from San Diego to Cabos or San Diego to Vallarta that are -- right now are reported as domestic passengers because they are flying from Tijuana to Vallarta and from Tijuana to Cabos.

For GAP, I would say, is an excellent news. I mean, we part from (inaudible), from [indiscernible,], only one less of the route to have both. I mean, in the past, we'd have only count the passengers in the route of San Diego-Vallarta. We only count the Vallarta passengers. Today, on this substitution, that is underway, we will have the double counting of passengers in Tijuana and in Vallarta. So that is part also of the effect, plus the biggest part from -- mainly from Southwest.

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Operator [33]

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(Operator Instructions) And at this time, we have no further questions from the audience. I will now turn the call back to Mr. Revuelta for any final remarks.

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Raul Revuelta Musalem, Grupo Aeroportuario del Pacífico, S.A.B. de C.V. - CEO [34]

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

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Operator [35]

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And this concludes today's call. Thank you for your participation. You may now disconnect.