Grupo Aeroportuario del Pacifico's (PAC) CEO Fernando Bosque on Q2 2016 Results - Earnings Call Transcript

| About: Grupo Aeroportuario (PAC)

Grupo Aeroportuario del Pacifico (NYSE:PAC)

Q2 2016 Earnings Conference Call

July 29, 2016, 11:00 ET

Executives

Maria Barona - MD, i-advize Corporate Communications

Rafael Echevarne - CEO, MBJ Airports Ltd.

Fernando Bosque - CEO

Saul Villarreal - CFO

Analysts

Mauricio Martinez - GBM

Augusto Ensiki - HSBC Global Research

Pablo Barroso - Credit Suisse

Ulises Argote - Santander

Operator

My name is Josh and I will be your conference operator today. At this time, I would like to welcome everyone to the GAP's second quarter 2016 earnings conference call. All lines have been placed on mute to prevent any background noise. Thank you. I'll now turn the call over to Maria Barona of i-advize Corporate Communications. Ma'am, please go ahead.

Maria Barona

Thank you and welcome to Grupo Aeroportuario del Pacifico's second quarter conference call. Today from the Company we have Mr. Fernando Bosque, Chief Executive Officer; and Mr. Saul Villarreal, Chief Financial Officer. Please be advised that forward-looking statements may be made during this conference call. They 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 which was issued yesterday.

At this point, I'd like to turn the call over to Mr. Bosque for his opening remarks. Mr. Bosque, please begin, sir.

Fernando Bosque

Good morning, everyone. We appreciate your participation here today and we look forward to discussing our results with you. Thank you for joining. I want to start my discussion with a review of our operating highlights before moving on to the commercial and financial discussion. For the second quarter, we continue to see passenger traffic growth at GAP with an increase of approximately 1.1 million passengers mainly driven by higher traffic in Tijuana, Guadalajara, Los Cabos and Puerto Vallarta in that order which jointly represent 80% of the increase. It is worth mentioning that 33% and 16% of this increase was respectively contributed by Volaris and Aeromexico.

The domestic segment helps to draw a portion of the rise during the period with 876,000 additional passengers followed by 258,000 additional international passengers. Several factors drove this growth as we have discussed in previous quarter, the most important being global oil price which led to significant reduction in airline operating cost thereby causing lower ticket prices.

Additionally there was an increase in the load factor, moving from 81.6% in June 2015 to 85.3% in June 2016. There were ongoing expansions to the various Mexican airline fleets, especially Volaris and VivaAerobus. Finally a strong U.S. dollar have made domestic destination more attractive and affordable for tourists from U.S. Tijuana was the airport that contributed the most to this amazing performance. Passengers all over Mexico have chosen Tijuana as the preferred favorite to Southern California as a result of this convenient location as well as the popularization of Cross Border Xpress.

Not only are we seeing a large number of travelers from Mexico using this facility, but the popularity with Southern California resident is greatly increasing as well as you can see from our numbers. The most important advantage of this binational facility is that it offer a choice of over 30 unique destination in Mexico that otherwise would be expensive and difficult to reach. During December 2015 the cross-border facility reached 12% market penetration. However, in June it has already reached 20% market penetration over the total passenger transport in Tijuana airport, the highest number in this seven months of operation and growing.

Aside from Tijuana early -- all other airports in our networks post double-digit traffic growth specifically Los Cabos, Guadalajara and Puerto Vallarta have been more representative. Ten new routes opened during the second quarter of the year. These were Volaris launch Guadalajara-Reynosa, Puerto Vallarta-Toluca and Mexicali-Culiacan routes. TAR connected La Paz with Ciudad Juarez. Aeromexico began flying to Chihuahua and Los Cabos from Tijuana as well as the Guadalajara-Cancun route.

Interjet opened the Guadalajara-Las Vegas route this past April. VivaAerobus entered the Guadalajara Chihuahua market during June. And finally Thomson opened the Dublin-Montego Bay route this past June.

During the coming months we also expect other new services to begin, some of which were already announced for the rest of the year. Both the domestic and international markets will benefit from the following new services during the next months - Guadalajara- Merida by Aeromexico, Guadalajara-Culiacan and Guadalajara-Puerto Vallarta by VivaAerobus, Puerto Vallarta-Montreal by Air Canada, Puerto Vallarta- [indiscernible], Seattle, Austin and San Francisco from Guadalajara by Volaris. These new routes are expected to add 45,000 seats to the monthly seat offered at our airport.

Moving on to the individual airport, I just want to mention some of the projects we have been focused during the second quarter as we well what we're expecting to the rest of the 2016 in terms of the projects.

Starting with the seat evolution, the total number of seats offered by -- at our airports during the second quarter of the year reached 10.9 million which is an increase of 11% or 1.1 million seats compared to the second quarter of last year. In Guadalajara, all of the domestic airlines increased the capacity during the second quarter of the year. With its large restriction on Mexico City airport, Guadalajara has become the preferred airport for Mexican airline to increase frequencies and open new routes. The airport is on track to surpass the 11 million passengers barrier this year for the first time in the history.

At Tijuana, as I mentioned it before, the airport is the largest contributor in the Group to passenger growth within the second quarter of the year. Among the 10 most important airports in Mexico, Tijuana is the one with the highest percentage of growth. This is the result of a mix of different factors. First of all the Cross Border Xpress facility has transformed the way people cross the Tijuana-San Diego border, allowing more than half a million passengers to travel between Mexico and the U.S. so far during 2016.

However, Cross Border Xpress is not only the reason for our growth in Tijuana. As I just mentioned, the airport offers a competitive cross-advantage to passengers willing to take the advantage of the second largest domestic airport in Mexico. Airlines are bullish on this advantage as well and during the first half of the year Volaris increased volume by 33%, Aeromexico 15.5% volume and Interjet 10.9%.

Finally VivaAerobus, new in this market, transport 148,000 passengers. In Los Cabos, there was an impressive increase in load factor during the second quarter. Load factor reached 88%, higher than the 81% achieved during 2015. The newly opened hotels and the new infrastructure has helped the destination recover in an outstanding manner. It is expected that this will be Los Cabos' best year ever in terms of passenger traffic.

Speaking of new hotels, there are 3,812 additional rooms in process of being built for the following 24 months. 496 of them will be opened before this coming winter season. 2,621 of them will be opening in 2017, including brands as Ritz-Carlton, Le Blanc, Solaris, Hyatt and Montage. And in 2018 Four Seasons, La Valencia and Casablanca are expected to add an additional 695 rooms.

Moving on to Puerto Vallarta, traffic growth has been very balanced in both domestic and international markets. The destination has a healthy hotel offerings with more than 20,000 rooms available for all different budgets. This has helped load factor reach 87 during 2016. One of the highest in all of the Mexican leisure destination. Also as it has been on the news Grupo Vidanta is currently building the world's first Cirque du Soleil entertaining park which is expected to be opened no later than June 2018.

This development will provide an excellent opportunity to promote traffic in the winter season and create additional awareness and presence of Vallarta, Nayarit in the media regarding the various benefit of this destination. Moving onto our Bajio region airport, both the Aguascalientes and Guanajuato airports keep growing at a solid pace. The most important contributor to this growth is the domestic market which increased by 19% and 18% respectively. On the other hand international traffic has begun to grow at a slower pace but it continued to reach record levels.

Finally, the Montego Bay airport, with the end of the winter season approaching the regular schedule passenger have replaced charter passenger as the main source of traffic growth during the second quarter. There is an ongoing expansion of the American low-cost carrier at the airport with increasing frequency by Southwest and Spirit during 2016, helping those load factor in Montego Bay. Also worth mentioning is the fact that the Jamaican government presently approved the first legislation to, as we see potential opportunities for new resort investment for the following 36 months in addition to the current pipeline of 2,251 rooms in the construction process.

Now, in terms of the commercial highlights, the main part of the non-aeronautical revenue, we have been facing challenges to increase commercial revenue [indiscernible] in a high-growth traffic environment, especially of -- at our leisure destination which tend to concentrate a vast majority of flies within a short periods of stay.

Puerto Vallarta's commercial revenue per passenger grows 8.2% and Los Cabos grew 17.5% during the first half of 2016. We see Puerto Vallarta to be the biggest opportunity in the near time, in terms of commercial will improve its ground transportation services. Currently we're looking into this and presently run an open-bidding process for a two years contract for car rental companies. The result was an immediate 37% increase in network revenue. The same process was run in Los Cabos and we hope to announce positive result for this business until in the coming months. Guadalajara and Tijuana increased commercial revenue by MXN34 and MXN35 million respectively during the first half due to the extraordinary performance of the passenger traffic growth.

Finally, current traffic levels have posted actively in the VIP lounge network attracting a total of 153,000 users during the first half compared to 113,000 users during the same period of 2015. As a result this has been the fastest-growing business unit during 2016 with [indiscernible] 66% revenue increase. We expect that during the third quarter GAP will open an additional VIP lounge at the Guanajuato Airport as well as a new and larger facilities in Hermosillo and Puerto Vallarta in order to handle additional demand towards the end of the year.

CapEx continue in accordance to the committed Master Development Program. The improvement include expansion and remodeling of the airport terminal buildings in Guadalajara and Tijuana, Hermosillo and Puerto Vallarta Airport and runway improvement in Guanajuato, Los Cabos, Aguascalientes, Morelia and Mexicali. Regarding the Grupo Mexico situation that we know at this point is that they [indiscernible] 14.9% after the sale of almost 6 million shares as of their report filed with the SEC in April 2016. This information is publicly available on the system. Additionally, we do not have further news about any legal proceedings with this Company and will keep you informed as we know more.

With regards to dividends, GAP will be using payment for the first portion of this year in the amount of MXN2.28 per standing share before August 31, 2016, as per the resolution made at our annual shareholders meeting. This payment will be announced shortly.

Thank you so much for your attention. I will now turn the call over to Saul for the financial part of the presentation.

Saul Villarreal

Thank you, Fernando. Good morning everyone. I just want to mention that consolidated results for the first half of 2016 discussed today are in accordance with IFRS and figures may not be directly comparable with information for the first half of 2015. If you would like to review the pro forma consolidated results, please refer to report released yesterday.

During the second quarter aeronautical services revenues increased by MXN266 million or about 19% mainly due to 21% higher revenues from the Mexican airports as a result of increases in passenger traffic and passenger fees. In the Montego Bay airport, revenues increased by MXN90 million, also generated by the increase in passenger traffic. For the six-month period aeronautical revenues increased MXN860 million or 34%. These figures accounts for the passenger traffic and fee increase in the Mexican airport as well as a consolidation of the Montego Bay airport.

Non-aeronautical services increased by MXN93 million or 19% compared to the second quarter 2015 due to the Mexican Airport which contribute an increase of MXN71 million driven mainly by the higher revenue from business operated by third parties as well as revenues from business operated directly by the Company.

Additionally, the Montego Bay airport report an increase in revenues of MXN22 million compared to second quarter 2015. Non-aeronautical services for the first six months includes high revenues from third party operations at the Mexican airports as well as the Montego Bay airport consolidation figures.

Total operating cost during second quarter 2016 increased by MXN390 million or 35% compared to second quarter 2015. This was due to the increases from the Mexican airports of MXN288 million and MXN73 million from Montego Bay. For the six months, total operating cost rose by MXN994 million or 50% primarily due to the consolidation of the Montego Bay airport beginning April 1, 2015. Cost of services increased by MXN10 million or 3% compared to second quarter 2015 composed primarily of the 14% higher employee cost and 10% higher maintenance cost. Other operating expenses in second 2016 decreased by 18% mainly due to a decrease in professional fees and provisions in the reserve for doubtful accounts. This was offset by an increase in convenience store suppliers and VIP lounges.

In the six months cost of services for the Mexican Airport increased by MXN29 million or 4% due to the 9% higher employee cost and 10% higher maintenance cost. Additionally other operating expenses for first half 2016 decreased 6% for the same reasons as in the quarterly figures. The operating margin for the quarter decreased by 310 basis points to 45%. However, excluding IFRIC 12 effects the operating margin increased from 54.2% to 54.3% in second quarter 2016. For the accumulated of six-month period, operating margin was 46%, 40 basis points higher than the previous year, with the IFRIC 12 it was 55%.

EBITDA margin decreased by 470 basis points to 57% in second quarter in 2016. EBITDA margin however excluding the effect of IFRIC 12 decreased by 80 basis points to 69%. For the six months EBITDA margin decreased by 30 basis points to 58% in first half 2016. EBITDA margin excluding the effect of IFRIC 12 increased by 400 basis points, nearly 70% in first half 2016.

The financial cost experienced higher net loss of MXN199 million in second quarter 2016 mainly comprising a foreign exchange rate loss of MXN182 million derived from the loan obtained in connection with the acquisition of DCA. The foreign exchange loss for second quarter 2016 was offset by a positive comprehensive income generated by the currency translation effect which increased by MNX286 million compared to second quarter 2015. The financial cost increased MXN241 in first half 2016. In terms of the balance sheet the Company report an increase of MXN2.6 billion in assets compared to June 2015 while total liabilities at June 2016 increased by MXN2.6 billion compared to June 2015.

Before I end my presentation I would like to announce the new guidance figures for the remainder of 2016, it was released yesterday too. The traffic will be 13% and aeronautical revenues will be 18% roughly. Non-aeronautical revenue will be about 20% increase. Total revenues will increase around 19%. Our EBITDA will be increasing around 19% and our EBITDA margin will be in the range of 68%. Our CapEx is in line with the first guidance that we issued in January, it will be around MXN2.7 billion.

And with that I conclude my comments and ask the operator to please open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. And we have our first question coming from Mauricio Martinez from GBM. Please go ahead.

Mauricio Martinez

I was wondering if you can give us more color about the main drivers for your traffic expectations you announced yesterday and more specifically your expectation about Tijuana's traffic during the second half of the year. And my second question will be about advertising income as we saw practically flat performance this quarter, maybe if you can share your thoughts about this performance and what are you expecting going forward for this brand?

Fernando Bosque

About the Tijuana issue, it's not easy to give total color how will be the reaction in the second half of the year. Of course now we have [indiscernible] about projected capacity in terms of seats. And however it could be changed in the last part of the last quarter of the year. Our view during this quarter that is coming, the third, is to continue with the same pace of growth that was seen over the current quarter. That is because when you compare with the previous year, the strong increase in the capacity of this airport appear in the last quarter.

So third quarter could be showing the same behavior that was during the second one and the last one behavior could be growth in the pace lower than now we're looking to be below of course of 20%, to be in between the 15% and 20%. And Saul, could you answer the second question of Mauricio please?

Saul Villarreal

Yes. Mauricio, our revenues in the line of advertising is a little delayed because we have some negotiations with our clients in that line. However, we believe that at the end of the year will be normalized at the level of our revenue of around MXN142 million. So it will be recovered in the second half of the year.

Fernando Bosque

It's true that the pace of the growth of the digital advertising is not running in the same pace that was in the plan before. But this phenomenon also is happening in other airports, in Europe also the advertising, the spend for advertising is lower than it was initially shared.

Operator

[Operator Instructions]. Our next question comes from Augusto Ensiki from HSBC Global Research.

Augusto Ensiki

Just really quickly on the new routes that were opened this quarter, are there any incentives or discounts associated with them? And then secondly, were there any routes that were closed? I didn't see that in the release.

Fernando Bosque

Could you please repeat again, Augusto, about what is your question about the routes?

Augusto Ensiki

I was just wondering if there is any incentives or discounts for the airlines related to the new routes that were open, whether it's in a lower fees or something. And then secondly if there were any routes that were closed during the quarter?

Fernando Bosque

There was during the second quarter an important discount for passengers, to us the tariff that was for passengers gradually used in many of our airports during the second quarter. And now as we we'll start 1st of August during another three months, August, September and October, important discount in the -- for the domestic and for the international. It's in around 15% to 30% depending on the airport. And that is something that we will announce and the airlines is in the application to that reduction.

So that could have some support, economic support for airlines. The other kind of economic support dedicated to the airlines is the -- is part of the general policy that we're doing along of the year, there are no changes during these next quarters.

Augusto Ensiki

And were there any routes closed -- that was very clear, thank you for the clarification. And were there any routes that were closed during the second quarter?

Fernando Bosque

No, no. Saul, I don't remember now that there are new closed any routes, important routes--

Saul Villarreal

No, you are correct, Fernando, there are no any routes that we have closed. We have routes opening and we don't have any closed.

Operator

Our next question comes from Pablo Barroso from Credit Suisse.

Pablo Barroso

Just a quick question, could you provide us any color regarding amusement park in Puerto Vallarta. What impact in terms of passenger do you see and when it should be finished?

Fernando Bosque

Vallarta, as I mentioned in my presentation, is one of the destination that is growing during the last two years continually. The load factor was very high, that show that it could be possible to increase frequencies or to increase the caliber of the aircraft to provide more capacity to the destination. And, however at this time our expectation is that we will continue growing at same pace that was during the second quarter. Vallarta will experience most important increase one time that will be opened the dramatic part that I mentioned, but that we have another two-and-a-half years to know that.

The growing in terms of rooms, of hotel capacity continue growing, there are more rooms that will be opened next year. However, for the end of the year I think it's fair we're in record figures and the increase will follow as mentioned as was seen during the second quarter.

Pablo Barroso

And one quick follow up. Is there any runway constrain in Puerto Vallarta or do you see any runway constrain in 2017 or 2018?

Fernando Bosque

Currently the total passenger is just below 4 million passengers in Vallarta, similar figure that we have in Montego Bay and Cabos. The capacity of the runway of the airfield is there are no restrictions. The problem that we have in some of these airport is peak hours, a problem usually seen in all the tourist destination, hotel rotation usually is ended same days of the week, usually on Friday, Saturday and also the time is usually between 12:00 to 3:00 in the afternoon. That mean that a lot of concentration in the operations also in the terminal and puts on a level of saturation in the areas of immigration, custom and also in the run transportation areas. But however the capacity of these three airports including Vallarta of course is enough to attend the growth that will come with increase of the hotel capacity.

The next two-three months will be edited the new regulation, the civil aviation authority of Mexico that will commit to the airport administration to put more strong rules to manage the capacity of the slot. What happened usually the airlines especially in Cabos and Vallarta start back to the slot allocation. So that mean that they are arriving or departing at different times as was originally scheduled and that put the pressure over the capacity of airport. However, these two airports has enough capacity if we implement these new regulation approved by the civil aviation authority.

Operator

Our next question comes from Ulises Argote from Santander.

Ulises Argote

Real quick, just regarding your new guidance, do you have any breakdown regarding your expectations for EBITDA margin for Mexican airports and for Montego Bay separately?

Saul Villarreal

Yes, we have the break down. As you know the level of EBITDA margin in Montego Bay is lower than in Mexico. We're expecting at the end of 2016 around 51% of EBITDA margin in Montego Bay. Therefore our Mexican airports will be in the line of 71%.

Operator

[Operator Instructions]. Our next question comes from [indiscernible] from JPMorgan.

Unidentified Analyst

Quick one as a follow up. For Montego Bay I didn't get it, the margin you are expecting is 61% or 51%? And if you could give us more color on the traffic expectation for this airport would be great.

Fernando Bosque

I have with me the CEO of Montego Bay airport, Rafael Echevarne. I will ask him to give some color about expectation of the traffic for the second half of the year.

Rafael Echevarne

We expect the traffic to continue along the same lines of what we're seeing right now. As you very well know during the first half of the year, particularly February and March were not -- were slower than we expected, but now we're picking up again. We're -- the first figures that we have -- well, June actually ended up with 4% growth and 3% growth, sorry. We're back on track on our budget.

Looking into the future, as mentioned by the Chairman, we don't really see any cancellations in terms of routes in other words, on the contrary we actually are seeing the potential for new routes. We're, the government of Jamaica, the tourism board and ourselves, we're talking to a number of airlines and we actually are very encouraged by what we're seeing. So we're on track and yes, that's basically what it is, we're on track.

Fernando Bosque

Regarding your question about the EBITDA margin for Montego Bay, Federo, the EBITDA margin would be 51% roughly.

Operator

Our next question comes from [indiscernible] from Citigroup.

Unidentified Analyst

I just have two. The first one is what was the idea behind the change in your external auditor after 14 years with the same auditors? Should we now expect this change to be made more frequently? And the second one is on new projects, any sense as to whether GAP is interested in overseas airport opportunities, if so, where?

Fernando Bosque

Could you repeat the second one about the projects?

Unidentified Analyst

Sure. Yes. The second one was on new -- about new projects, any sense as to whether GAP is interested in overseas airport opportunities and where?

Fernando Bosque

Okay. I will answer your second question and Saul will answer your first about the auditors. Of course we're all the time looking any opportunity in our industry, of course mainly in Latin America. There are not many opportunities, but however we're looking of course how they are in new in Brazil or in any other country. At this time we're only looking figures, understanding the condition, understanding how is the expectation from the different governments. However we have not taken any decision about new investment in the region.

Saul Villarreal

Regarding your question of the rotation of our external auditor, Magdalena, it is change that is a recommendation of our corporate governance best practices. It was discussed with our audit committee and it was approved by our Board of Directors. It is something that happens in many of the public companies and we believe that is a very good practice. We were with Deloitte for 14 years, with any -- with a very good relationship indeed. We will still work in another project with Deloitte but not as an auditor. And KPMG is one of the best auditor firms. So we're very glad to, with this change and we will work hard because it will be the first year of the change.

Operator

Thank you. At this time we have no further questions. I like to turn the call back over to Mr. Bosque for any closing remarks.

Fernando Bosque

Thank you once again for your attention and your participation here today. As always it was a great pleasure to share with you our perspective of the results and we hope our comments were helpful to you. Have a happy rest of the day. Thank you.

Operator

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.

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