Grupo Aeroportuario del Sureste's (ASR) CEO Adolfo Castro on Q2 2016 Results - Earnings Call Transcript

| About: Grupo Aeroportuario (ASR)

Grupo Aeroportuario del Sureste, S.A.B. de C.V. (NYSE:ASR)

Q2 2016 Earnings Conference Call

July 21, 2016 10:00 AM ET

Executives

Adolfo Castro – Chief Executive Officer

Analysts

Pablo Barroso – Credit Suisse

Mauricio Martinez – GBM

Marcio Prado – Goldman Sachs

Ravi Jain – HSBC

Stephen Trent – Citi

Francisco Suarez – Scotiabank

Operator

Good day ladies and gentlemen and welcome to the ASUR Second Quarter 2016 Results Conference Call. My name is Linda and I’ll be your operator today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of today’s conference. [Operator Instructions] As a reminder, today’s call is being recorded.

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

Adolfo Castro

Thank you, and good morning, everybody. Thank you for joining us today on our conference call to discuss our second quarter 2016 results.

Allow me to remind you that certain statements made during the course of our discussion today may constitute forward-looking statements, which are based on current management expectations and beliefs and are subject to a number of risks and uncertainties that could cause actual results to differ materially, including factors that may be beyond our company’s control. For an explanation of these risks, please refer to our filings with the Securities and Exchange Commission and the Mexican Stock Exchange.

Moving on to the results, I will start briefly reviewing the operations in San Juan, Puerto Rico International airport and then the results for the quarter. Passenger traffic at San Juan, Puerto Rico airport was up 4.3% year-on-year reaching 2.3 million passengers this quarter. Significantly above over the 2.5% increase reported in the previous quarter as well as the 0.9% achieved in 2015.

The remodeled Terminal C at San Juan International Puerto Rico airport has expanded our commercial offerings and created more attractive layout for our passengers resulting in a more efficient traffic flow. This quarter we were able to achieve passenger growth in our Terminal D to Terminal C. And have concluded the original project established three years ago.

We are pleased to report that we have met the original scenarios of our remodeling program for the Puerto Rico airport on time and on budget. These had two main objectives, to increase commercial revenue per passenger and to lower operational cost, we were starting to achieve.

Consolidated results for the quarter benefited from MXN58.17 million equity gains from our participation in Aerostar. And stockholders' equity was impacted by MXN143.13 million gain due to the translation effect of Aerostar U.S. dollar denominated financials against the Mexican peso.

Looking to our Mexican operations, the Mexican international passenger traffic growth continued to decelerate this quarter. As we faced more difficult comparisons following the strong performance achieved last year. Total traffic was up 5.4% and totaling 3.9 million passengers. Remember that second quarter traffic was negatively impacted by the entire Holy Week taking place in the first quarter, while international traffic is seasonally much higher in the first quarter of the year.

As anticipated the domestic traffic growth slowed down to 5.7% year-on-year reaching 3.1 million passengers, it is still a record for the second quarter. The most of our ASUR's airport contributed to this growth driven by a more affordable air fares together with greater airline capacity and connectivity throughout Mexico.

On the other hand Minatitlan and Villahermosa remain affected by the same conditions facing the old teams. International traffic was 5.1% year-on-year, reaching a record high of 3.9 million passengers for our second quarter. The depreciation of the Mexican peso against the U.S. dollar continues to support positive traffic dynamics, although this lowered growth rates than the last year.

Passenger traffic between Mexico, Canada and the United States represented 87.9% of the total, down from 88.7% a year ago. We saw a strong passenger traffic from Mexico and the U.S. partially offset by a weaker performance in traffic from Canada reflecting a more challenging economic environment there.

Now moving on to the income statement, total revenues excluding construction services rose 15.7% year-on-year. Commercial revenues per passenger were off 18.9% over second quarter last year reaching MXN97.8 which itself below the record high of MXN99.35 just last quarter where the total traffic was 3.7 higher than this quarter. So we are seeing improvement in commercial revenues despite having traffic clearance.

The expansion of Terminal 3 in Cancun airport last December, which decongested Terminal 2 making it significantly more efficient and allowing us to offer better shopping experience, one of the key drivers behind this performance. Commercial revenues also benefited from a continued effort from our concessions.

Looking at the P&L operating costs and expenditures excluding construction costs rose 4.5% year-on-year principally reflecting higher costs of services mainly resulting from the opening of Terminal 3 expansion. EBITDA was up 18.4% year-on-year to MXN1.34 billionas we continued to leverage our highly fixed cost base.

Excluding the impact of construction risk raised revenue, note that adjusted EBITDA margin increased 107 basis points to 71.82% from 70.76% in second quarter of 2015. Moving on to capital expenditures, we remain on track with our plans, we invested MXN240 million this quarter, in line with our Master Development Plans which was mainly allocated to the construction of Terminal 4. Let me rephrase with in details. Terminal 4 will have around 67,000 square meters about the same size of Terminal 3 prior to the recent expansion.

Terminal 4 has been designed specifically for international and domestic traffic and takes into account the lessons we have learnt over the past 10 years. Once we open Terminal 4 which we during the fourth quarter next year, we are planning to close Terminal 1 and move those passengers to Terminal 2.

In terms of our balance sheet we closed the quarter with cash and cash equivalents of MXN2.9 billion and bank debt of MXN3.7 billion. Now, note that in June in an ordinary cash dividend from a cumulative earning MXN5.6 per share, bringing the total dividend payment to MXN1.68 billion.

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We will take your first question from Pablo Barroso from Credit Suisse.

Pablo Barroso

Good morning, Adolfo and congratulations on the same results. I just have a couple of questions. Last quarter we witnessed a double-digit increase in cost of services mainly explained by the Terminal 3 expansion I believe. Should we witness this trend to see along the year. And my second question could you give us more color if you are looking into M&A may be something in the Caribbean or in Colombia.

Adolfo Castro

Hey Pablo, good morning. In the case of the cost of services, yes, we saw an impact from the Terminal 3 and this is what we can expect from now on. Because Terminal 3 is open we added 25,000 additions that we have to secure, maintain light, et cetera, so that is going to be there for the future. In terms of M&A yes, we are seeing some projects today I cannot disclose those to you right now. But of course, once we have more information or we are more advanced in those processes we will let you know.

Pablo Barroso

Thank you, Adolfo, it was very helpful.

Operator

We will hear from the next caller in the queue Mauricio Martinez from GBM.

Mauricio Martinez

Good morning Adolfo thank you for taking my questions. My question and congratulations on the results. My question is regarding non-aero revenue. We just trying to grow this quarter in line with the first one, I was wondering if you see sustainable such growth for the remaining of the year or if you see any possible slowdown?

Adolfo Castro

Hi, good morning. What we expect is these levels to be maintained, up to the moment we open Terminal 4, of course, you have to consider the seasonality of every quarter because we do not receive the same kind of passengers every quarter. So in other words – times in the case of the summer eases in the case of a third quarter or so. The kind of passenger we receive at our airports is different so please consider the case of the seasonality.

Mauricio Martinez

Perfect. Thank you very much.

Operator

We will move next to Marcio Prado with Goldman Sachs. Please go ahead.

Marcio Prado

Yes. Good morning, Adolfo. Thank you for the call. Two quick questions, one is on the relevant announcements, you mentioned at the end of the press release. If you could give us more color on the contract extension with Dufry for the operations, for the commercial operation at Cancun and Cozumel airport. It says that, this is a 10-year extension. Just wanted to understand if the previous contract was also of a 10-year tenure and also if you could give us some color on some aspect with regards to the development of Terminal 3 and 4 of the Commercial areas.

And second, it's only on the dividend paid in June, just wanted to understand if this is really is it only for the first six months of 2016 and if we should expect an additional part still being announced at the, as we close 2016 results? And any color on additional dividend plans from ASUR? Thank you.

Adolfo Castro

Hi, good morning. In the case of what you were mentioning the extension of the contract of Dufry. And the regional contract was a 10-year and that contract was to expire May 31, next year. So, these contract was made before we opened Terminal 3 in 2007. And we've decided to extend these contractors for, I would say nine years, because we signed this agreement with 10 years today but of course if the contract expires next year that is in reality a nine year extension. The only thing that I can say to you is that we're happy with the terms we've got in the contract and we are happy to work today with Dufry in the case of the construction of this base for Terminal 4. And now we have someone from to start this process.

In terms of Terminal 4 as I said is basically we are expecting to open that during the fourth quarter next year. We are more or less in time in terms of the construction process, if you've got to been to Cancun airport, you will be able to see this kind of a, beyond uniqueness being constructive and stacked. In terms of additional payments, we normally do not pay more than one dividend every year. In the past, it was the case in the year 2012, if I don't remember wrong or 2013 when the Mexican tax law [indiscernible] and we decided to pay the second payment at the end of the year but that wasn’t mainly reason why we paid twice.

Marcio Prado

Thank you. Thank you, Adolfo.

Operator

[Operator Instructions] We’ll hear next from Ravi Jain from HSBC.

Ravi Jain

Hi Adolfo, good morning. Just two quick questions from my end. First one is on the traffic trends that we saw in the first half as you mentioned the accounts were tougher and the first half is about 7% traffic growth. How do you see the back half of the year? Are you seeing relatively stable trends or are any positive momentum in relation to the U.S. Mexico agreement or even on the domestic front, if you can just give us your thoughts on the traffic.

And the second question is after the remodeling of the terminals at Puerto Rico, are there any other additional initiatives that we should expect and just how do we kind of expect the earning from Puerto Rico in the next few quarters. Thank you so much.

Adolfo Castro

Hi Ravi, good morning. In the case of the traffic as I had mentioned during the previous quarters, is that I'm seeing a more normalized traffic and so not the case that we saw last year with almost 13% growth. So on the one side you have tougher comparisons and on the other side and seeing some effects on world economics. And I mentioned one of them which is Canada the concentration the current economic situation there is I believe is one of the reasons why we're seeing a weak traffic from these region.

So in summary what I expect from the second half of the year is more like the same numbers we are seeing during the first one. In the case of Puerto Rico, while we have concluded with the project that doesn't mean that it is over and that they so it means basically that this is the [indiscernible] of a new way of operating them with a better layout with more commercial and better commercial offer. So what we do from now on is basically that we call fine tuning which is start seeing, what is the real result of what our original proposal and to adjust it in accordance with what the passengers are expecting in terms of price, process and service.

So this is not the end, this is just the first day of course and this was an important month for all of us because finally we concluded what we designed originally three years ago. And as I said during the initial remarks, we concluded these on time and in budget.

Ravi Jain

Thank you. That's very helpful.

Adolfo Castro

Thank you.

Operator

[Operator Instructions] Stephen Trent from Citi, your line is open.

Stephen Trent

Hi, good morning, Adolfo. And just two questions from me. The first also related to M&A, but more looking at Puerto Rico, do you see any long-term potential that ASUR could buyout at least, some of Highstar’s stake in that asset? And then my second question is pertained to what I thought you had mentioned in the past plans for possible Airport hotel in Cancun and where that is now? Thanks.

Adolfo Castro

Hi Stephen, good morning. In the case of your question over M&A and the case of Highstar, I've to referenced these reforms and that they will have to sell these someday in the future, we have to adapt before. Once I'm ready to do this and we will foresee that as a possibility. In the case of the hotel, we have concluded with I would say first, the permits, second the business plans, and the design of the facility. And now we're in the process to get someone to invest on this project, what we intend to do there is basically to make a lease for the land, and then if they should construct these and operate that, and we will be receiving the payments from the lease of the land and that's it.

I don't believe that this is going to be a major income for the airport that is something significant. That we need discuss, the process is there and we are basically almost ready to conclude with this process, and they will have to start constructing this facility.

Stephen Trent

Okay. That's very helpful. Thanks, Adolfo. And just one last follow-up as you're going to open Terminals 4 and then close Terminal 1, is there any view as to what's going to happen at Terminal 1, some sort of recreation spot or something else.

Adolfo Castro

No, no. Terminal 1 will be closed and we'll be there as a spare part, as it was before we opened that in November 2013. So in reality Terminal 1 was closed basically since 2005 and we had to open that in November, 2013 as an emergency plan due to the huge growth in passenger traffic we experienced.

Stephen Trent

Understood. Well, I’ll let someone else ask a question and thanks for time Adolfo.

Adolfo Castro

Thank you.

Operator

We’ll hear next from Francisco Suarez from Scotiabank.

Francisco Suarez

Hi Adolfo, good morning. Congrats on the results and thanks for the call. A follow up on Puerto Rico, and thank you for the color provided at the beginning of the call. You already have a wonderful chapter on realized with San Juan Puerto Rico and of course the LIBOR plus 185 basis, it's okay, but, and I'm not sure if you see any potential refinancing at the moment that may actually provide more value for ASUR. I mean, and of course that the question here relates with these potential hidden value that is not that obvious in San Juan. Thank you.

Adolfo Castro

Hi Francisco, I don't believe we have conditions right now, we do what we are mentioning. One, of course, has to do where the current economic conditions there and the uncertainty on what is going to happen with the economic situation. And the second one, basically what we need to be sure is that, what we design is, it's going to work. So we are ready to start proving the new concept, meaning how these works. I would say the next 12 months will be crucial. So the only way to be able to refinance and prove that we constitute working is once we are able to provide the results and that's what we are trying to see for the next 12 months.

Francisco Suarez

So in other words, even though that you already finished the works there on schedule and on budget and you have the guarantee of the rest of the operation that are doing great. That is not enough to get a better cost. In other words, isn’t it? Is that the way that we should be understanding it?

Adolfo Castro

No, no, that's not exactly and one of the major risks of course was the construction, so the remodeling transit itself, okay. So because we were, we've given kind of an experience of constructing that. So I would say the first part which is constructing and remodeling it's over, so in [indiscernible].

They objective as I said during the conference call, is to reduce operational cost and to increase the commercial revenue per passenger, This is – let's say we've created infrastructure to achieve the results. So now, we have to achieve those and in the case of commercial revenues per passenger, once again, we need to make the fine-tuning and see that the new concept – new commercial concepts we have included there are working and that is what the passenger was expecting and see how this works.

Francisco Suarez

Got it. Thank you.

Adolfo Castro

You’re welcome.

Operator

And at this time we have no further callers in the queue. [Operator Instructions] And Mr. Castro at this time there are no additional callers in the queue. I will turn the conference back over to you for any additional or closing comments.

Adolfo Castro

So thank you and thank you everybody to be here with us for this second quarter results conference and have a great day. Good bye.

Operator

And it does conclude today’s teleconference. We thank you all for your participation.

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