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Grupo Aeroportuario Del Pacifico, S.A. de C.V. (PAC) Q2 2019 Earnings Call Transcript

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Grupo Aeroportuario Del Pacifico, S.A. de C.V.  (NYSE: PAC)
Q2 2019 Earnings Call
Jul. 26, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to GAP's Second 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.

Maria Barona -- Investor Relations

Thank you. I'm pleased to welcome you to Grupo Aeroportuario del Pacifico's Second Quarter 2019 Conference Call. Today from the company, we have Mr. Raul Revuelta, GAP's Chief Executive Officer; and Mr. Saul 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 materially differ from the current expectations.

For a complete note on forward-looking statements please refer to the quarterly report issued yesterday. Please note that unless stated otherwise, all comparisons in this call will be versus GAP's results for the comparable period of 2018.

At this point, I'd like to turn the call over to Mr. Raul Revuelta for his opening remarks. Please go ahead, sir.

Raul Revuelta Musalem -- Chief Executive Officer

Thank you, Maria, and thank you, everyone, who took the time to join us here today. On behalf of our team, I want to express my appreciation for your interest. Today, I will briefly review GAP's operational performance and financial results for the second quarter of 2019 prior to taking your questions.

During the quarter under discussion GAP transported our 12 million passengers throughout our 13 airports. This amount represents a 9.8% increase, which along with the solid results we experienced during the first quarter of the year put us on a track toward reaching our traffic growth guidance for the full year.

Regarding the expansion of our network there were 18 routes opening during the quarter. 11 of them are domestic and seven international. Puerto Vallarta led the way with five new routes followed by Guadalajara, Los Cabos and Tijuana with three new frequencies each.

If we look at the individual airports that contributed most for the traffic growth, we can begin with Tijuana, which continued to be our main traffic generator this year increased 18% during the quarter and considerable amount of the growth came from the recent expansion of Viva Aerobus and Volaris, which added more than 110,00 and 285,000 new passengers, respectively.

During the past quarter the Cross Border Xpress captured 32% of the airport total traffic, which represents an addition of 5%. As such the binational terminal continues to be a fundamental part behind the growth of the Tijuana airport.

Guadalajara experienced an accelerated traffic pace during the quarter with 5% growth. International was benefited from an increasing frequency to key US markets such as Las Vegas, Chicago, Seattle and San Francisco. As a result, international traffic grew by 9% during the second quarter.

On the other hand, domestic traffic grew by 4% as a consequence of the new routes to the cities of Durango, Los Mochis and Queretaro as well as to the higher load factor from Viva Aerobus and Volaris. Moving on the Guanajuato airport. This airport continues to experience double-digit growth. We have total traffic increase of 22%, which is the largest percentage increase among our top six airports. Voralis and Viva Aerobus were the main promoters of this growth as these airlines experienced a significant increase in the number of passengers transport.

Moving on to Los Cabos. Load factor grew 7% during 2019. In terms of the specific market performance, international traffic rose at modest 4% during the second quarter. We saw several different factors affecting -- US basic carriers such as the landing of the 737 MAX aircraft. On the other hand, domestic traffic grew by 19% and for the first time ever, the airport opened a direct flight to Hermosillo with a new route by Viva Aerobus.

In Puerto Vallarta, the growth on this [Technical Issues] to that of Los Cabos with a strong domestic market fueled by the expansion of the local low-cost carrier together with a modest international traffic growth from the US based carriers.

As for the Montego Bay airport, the growth pace at this destination leveled off during the second quarter of the year -- and now a very positive result with a 5% traffic growth. This came mainly from the US market. Now let's continue with the non-aeronautical revenue where we once again witnessed an outstanding performance with increase of MXN165 million or 21%. This resulted in a 10% higher non-aeronautical revenue per passenger, which was mainly due to the performance of the recent expansions in the commercial areas at Guadalajara, Tijuana, Guanajuato airports.

In terms of the business units the strongest performance include food and beverage. This business unit increased by over MXN35 million or 40%. Its outstanding performance was mainly due to the offer in Tijuana, Guadalajara airports, which began operations during the first half of 2019. Duty Free increased by MXN19 million or 17%.

This increase was mainly due to the opening of two new Duty Free stores at Los Cabos airports arrival zone and the other a last-minute concept store in Guadalajara in the second quarter of 2019. We expect to redesign another Duty Free store also at the arrival zone of the Los Cabos airport during the third quarter '19.

VIP lounge increased by MXN15 million or 28%. During the second quarter of 2019 the number of users rose as a result of higher market penetration especially in the international lounges. As a part of the current year commercial strategy to boost commercial revenues for the business we operate directly. We opened two new lounges, and also we are currently redesigning and expanding the VIP lounges at the airports of Guanajuato, Guadalajara, Los Cabos and Tijuana.

Additionally, a new lounge is expected during the fourth quarter of 2019 at the Mexicali airport. Revenues of the higher market and store increased by MXN15 million or 55%. Also given the growth strategy we've had in place for the business operated by us.

During the first six months of 2019, we opened seven new stores. Three in Tijuana, one in Guanajuato, two in Mexicali, another one in Puerto Vallarta. We also added 31 new vending machines this year throughout the airports of Guanajuato, Guadalajara, Hermosillo, La Paz, Puerto Vallarta, Los Cabos and Morelia.

To conclude, a quick review of the financial results. As a result of the above, aeronautical and non-aeronautical revenue rose by 13% in the second quarter of 2019 and 13% in the first half also. Cost of service for the second quarter increased by 16% composed primarily for a 38% higher maintenance cost. 28% increase in other operating expenses and 19% higher utility cost.

Maintenance expenses increased mainly as a result of the rehabilitation work in the air site operational areas as well as an increase in maintenance expenses in the check-in baggage area in most of our airports due to the higher cost for major repairs in this equipment. In the other hand, the terminal expansions in Tijuana, Guadalajara, Guanajuato, La Paz, Hermosillo and Mexicali added operational capacity in these airports. But with this, we had to hire additional cleaning services, air conditioning services, mechanical equipment servicing among others.

Other operating expenses increased in sales cost for the new two VIP lounges and seven convenience stores that have recently opened and due to the reserve of doubtful accounts. In terms of the increasing utility costs, this was mainly effect by a higher electricity expenses.

As we have said in the previous results, the expansion had generated additional consumption in some of our airports. In spite of we have continued with the control of our energy consumption, which have maintained at nearly flat year-after-year. The energy price have risen significantly resulting in increase in the cost of our airports.

For the second quarter, EBITDA grew by 13%, reaching MXN2.4 billion and EBITDA margin 68.8% excluding the effect of the IFRIC 12. Total revenue rose by 13% mostly driven by traffic performance and the increasing tariff due to inflation and the consolidation of the recently opened commercial space.

For the six months period, EBITDA grew by 12.6%, reaching MXN4.9 billion and EBITDA margin of 69.7% excluding the effect of IFRIC 12. Despite increase in cost of services, the nominal value of EBITDA increased by 13% on a annual basis, which is in accordance with our 2019 guidance figures.

Before we move on the Q&A, I want to mention that this past June 28, we present our final draft for the Master Development Program for the period of 2020 to 2024 period of the Mexican Civil Aviation Authority. We are waiting for approval and the limit to obtain this is December 31, 2019.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] And we'll take our first question of the day from Alejandro Zamacona with Credit Suisse. Please go ahead.

Alejandro Zamacona -- Credit Suisse -- Analyst

Hi, everyone. Thank you for the call and thank you for taking my questions. My first question is on the energy cost. We have seen some of your competitors doing some initiatives to reduce the unitary energy cost. So, could you please share what actions are you taking there? And when could we expect to see any progress?

Raul Revuelta Musalem -- Chief Executive Officer

Yes. Thank you. We are right now working in a project for solar panels and solar generation is mainly in our parking lots area. We are expecting to begin the construction of these projects in the first of our airports on the first half of the year on the coming year of 2020. So, we will begin to see some reduction on the cost of the energy. On the coming year we think that we're going to have a positive effect from these different projects on the last quarter of the coming year.

Alejandro Zamacona -- Credit Suisse -- Analyst

And Raul just one clarification. It's just for parking or it's for all airport consumption?

Raul Revuelta Musalem -- Chief Executive Officer

We will go for, I mean, we are beginning just on the parking lots, but for putting in context for some of the airports, I will say, that just the parking areas we will cover almost 85% or 82% of the total energy needs of the airport. The only airports that we will not fulfill completely the need of energy will be in the big four airports, but we think that we will gradually achieve additional areas for solar panels. And in the coming years our plans for the next two years will have at least the 65% to 70% of the total energy covered by alternative energy sources.

Alejandro Zamacona -- Credit Suisse -- Analyst

Okay, thank you. And just a second question if I may. On Montego Bay and Kingston, I don't know, if you have any progress or expectations from the tariff negotiation with this year? Thank you.

Raul Revuelta Musalem -- Chief Executive Officer

Thank you, Alex. We are still waiting for the answer of the Jamaican authority. We expect that in the next month. All this new tariff program will be authorized by the government. So, we're still waiting and still working with them.

Alejandro Zamacona -- Credit Suisse -- Analyst

Okay, thank you.

Operator

Thank you. And we'll move next to Mauricio Martinez with GBM. Please go ahead.

Mauricio Martinez -- GBM -- Analyst

Hi. Good morning, Raul. Thank you for taking my question. My question is regarding the aeronautical revenues in Mexico as this quarter was practically flat on an pre-tax basis. So, should we expect higher than inflation increments in the second half of the year. That will be my first question.

Saul Villarreal Garcia -- Chief Financial Officer

Good morning, Mauricio. Thank you for your question. Yes, the flat growth in the air revenue is due to the inflation. During this period we have some deflation. So, that implies a lower level of air revenues. We indeed are projecting a higher level in our guidance. We are expecting around 3% of inflation for our tariff. However so far it's less than 1%. So, we have that effect that we do not have any control.

Mauricio Martinez -- GBM -- Analyst

Great, thank you. And my second question would be on the Master Development plan for, I mean, if there has been any update or any change from your previous guidance that you share in your Investors Day or if these are just the same?

Raul Revuelta Musalem -- Chief Executive Officer

Hi, Mauricio. This is Raul. We are still factoring the same, in the same line that in the GAP Day we share with the investors. For sure while on this specific time for really a specific review for the authority on each one of our airports that is the, I mean, the natural way that the master plan happens, but we're still in line with the numbers that we share with all the investors on the Gap Day.

Mauricio Martinez -- GBM -- Analyst

Perfect. Thank you. Very helpful.

Operator

Thank you. And we'll move next to Marcos Barreto with Citi. Please go ahead.

Marcos Barreto -- Citi -- Analyst

Hi, everyone. Thank you for taking my questions. I'm going to apologize, I had some trouble dialing in. I don't know if you already clarified this, but what was the cost recovery item that fell into non-aeronautical revenue and how was it that accounted for? That's my first question. Thank you.

Saul Villarreal Garcia -- Chief Financial Officer

Thank you, Marcos. We had an increase in the recovery of revenues due to the higher cost in consumption of electricity and the cost of the operation of equipments. It is only 22% in the quarter because the higher cost of electricity mainly, but also the cost of operation of this equipments. As you know, we don't have any margin in this line. This is only the recovery of the expenses that we burn in the operation.

Marcos Barreto -- Citi -- Analyst

Okay. Very clear. Thank you very much. Then my second question, Raul, people had already asked about the MDP. I just want to know if you have had any feedback from airlines and other parties on the proposed MDP?

Raul Revuelta Musalem -- Chief Executive Officer

Yes, Marcos. I mean in terms of the law, the first half of the year, I mean, from January to June of this year all the airlines have the opportunity to talk about their master plans in the local committees of operations in each one of our airports. For sure, we received a lot of comments from the airlines. We accept and we incorporate some of the comments to our final draft that we just delivered to the authority at the end of June. But, yes, the Mexican regulation and the airports' laws include a period of six months to get all the communications and all the recommendation from the airlines due to the -- for the master plan.

Saul Villarreal Garcia -- Chief Financial Officer

Yes, Raul, and if I can add something. It's very important to know that we present all the information for all airlines and all the stakeholders in the 12 airports of Mexico. So, we assure that all our projections in MDP were shared with all the stakeholders.

Marcos Barreto -- Citi -- Analyst

Okay. Thank you very much. I'll let someone ask. Thank you.

Operator

Thank you. And we'll move next to Rodolfo Ramos with Bradesco. Please go ahead.

Rodolfo Ramos -- Bradesco -- Analyst

Hi, everyone, and thanks for taking my question. Just a couple on my end and I apologize I dropped off the line if you have already discussed this. But on your MDP can you give us a little bit of or perhaps remind us what percent or what level of tariff increase you're targeting in real terms for this plan. And just if anything as far as the process goes compared to a previous MDP negotiations. If there's been anything different or that you would like to mention. And my second question is on your expenses. So, based on your comment, it seems like the higher growth, expense growth that we've been seeing is likely here to stay and it likely be more, you'd be waiting to dilute some of these costs as your traffic growth increases. Is that a correct characterization? Thank you.

Raul Revuelta Musalem -- Chief Executive Officer

I will begin with part of the Master Plan question. First, in terms of what we are seeing from the authority at the end of the day the people behind the authority remains mainly being the same guys, the same technician guys. So, for the moment, we are not seeing any difference from any of the master plan reviews of the past. The second part related with the -- what we have set for the master plan. Saul will you refresh us, which were the numbers that we made public on the Gap Day.

Saul Villarreal Garcia -- Chief Financial Officer

Yes. Sure. We are expecting a 3% to 5% in real terms. So, according to the projection of capex, according to the projection of traffic and according to the projection of the discount rate it's 3% to 5% around that.

And if I can move to your next question about the expenses. We have been doing some higher expenses in a higher maintenance in some of the equipments that we will be replaced in the next cycle of the master plans.

We have to consider that some of the equipment that we have now they are old.

And we have to expend a higher level of maintenance. In the other hand due to the opening of the expansions in different terminals of the airports, we have additional costs mainly in services because it's important that every time we have these expansions and at the end of the cycle every five years, at the end of the cycle, when we started with the opening of the new areas, we start having additional expenses.

It's also important to mention that in the air site, we have expend different kind of maintenance to our payments in the runway and also in the apron. So, we have been working in order to maintain the level of service that is required. So, that's why the increase of the level of expenses.

Rodolfo Ramos -- Bradesco -- Analyst

So some of these expenses would be under other operating expenses. Is that correct?

Saul Villarreal Garcia -- Chief Financial Officer

Mainly the expenses will be in the higher cost is in maintenance. Obviously, we have some costs in utilities. That's for the operation. Regarding the other operating expenses increase are due to the opening of two new VIP lounges and due to the opening of the seven convenience stores. So, the cost of the products that we provide in this business are in this line. So, that's why the increase.

Rodolfo Ramos -- Bradesco -- Analyst

Okay, perfect. Thank you very much. I appreciate the color.

Operator

Thank you. [Operator Instructions] And we have no further questions in the queue at this time. I'll return the floor back to our speakers.

Raul Revuelta Musalem -- Chief Executive Officer

Thank you again for your attention. I look forward to interacting with you in the near future. Thank you. Have a nice day.

Operator

[Operator Closing Remarks]

Raul Revuelta Musalem -- Chief Executive Officer

Thank you.

Duration: 26 minutes

Call participants:

Maria Barona -- Investor Relations

Raul Revuelta Musalem -- Chief Executive Officer

Alejandro Zamacona -- Credit Suisse -- Analyst

Mauricio Martinez -- GBM -- Analyst

Saul Villarreal Garcia -- Chief Financial Officer

Marcos Barreto -- Citi -- Analyst

Rodolfo Ramos -- Bradesco -- Analyst

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