Good day, ladies and gentlemen and welcome to the ASUR Third Quarter 2015 Results Conference Call. My name is Aaron and I will be your operator. 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 would like to turn the call over to Mr. Adolfo Castro, Chief Executive Officer. Please go ahead, sir..

the consistently strong passenger traffic growth we have seen through 2015 and the continuous effort of our concessionaires to increase commercial revenues across all the airports.

Looking ahead, the expansion of Terminal 3 is on track and will contribute to increase the capacity of Cancun Airport, which should help the company in maintaining commercial revenue growth. Operating cost and expenses, excluding construction cost, were up by 11.3% year-on-year, well below the 24.6% increase in revenues.

As a result, EBITDA rose 29.9% year-on-year to MXN1.1 billion as we continued to leverage our highly fixed cost base. Excluding the impact from construction revenue, adjusted EBITDA margin increased 290 basis points to 70.5% from 67.6% in the third quarter of 2015.

The 7.8% depreciation of the peso, however, resulted in a non-cash foreign exchange loss of MXN85.7 million this quarter. This was more than twice the 3.6% depreciation of the peso in the third quarter 2014.

Moving on to capital expenditures, we invested MXN658.5 million this quarter, principally, in the expansion of Terminal 3 and the length of operations for the starting of the construction of Terminal 4. The expansion of Terminal 3 is on track and should be completed in December.

Remember that our word here has focused on expanding the checking area, as well as the boarding gates. So, while we are not increasing commercial space, it will allow to decongest Terminal 2 which is running at full capacity and will give us the ability to move passengers to Terminal 3.

In Terminal 3, these passengers will experience an improved layout and a better commercial offer. In turn, we expect this expansion to contribute to higher commercial value for passengers.

Year-to-date, we have invested a total MXN1.2 billion in capital expenditures and remain on track to meet the MXN3 billion CapEx for the year for our massive Germany plan. As usual, we are maintaining healthy balance with cash and cash equivalents of MXN3.5 billion on September 30, 2015, up from MXN2.9 billion at the start of the year.

In addition, bank debt totaled MXN3.6 billion at the close of this quarter. Now, Aaron, let me open the floor for questions. Go ahead, please..

Absolutely. [Operator Instructions] And we will take our first call from Ricardo Alves with Morgan Stanley..

Hi, Adolfo. Good morning and thanks for your time. My first question is on Cancun, I mean, the performance was pretty remarkable, the 70% EBITDA margin from 65% or so in the first half, 500 bps year-over-year. So, I mean, traffic is strong. We get the top line strength, but we are a little bit intrigued with the margin expansion in that airport.

So, the question is what’s going on in the third Q that was so different from the first and the second quarter? Because, I mean, traffic growth in the third quarter was not that far from what we saw in the second quarter and in the first quarter, but margins were much higher or maybe just the stronger U.S. dollar boost in expanding.

So, any color you could give on Cancun’s performance that will be very helpful? And then my second and last question would be kind of a follow-up, right, given the Cancun’s performance, when you look at the ASUR’s consolidated EBITDA margin, it actually gives the impression that we might – we actually saw some profitability deterioration in the other airports.

So, just wondering if there was anything relevant to comment on the other airports in terms of profitability? Again, thanks so much..

Okay, thank you. Well, basically, the improved profitability in the case of Cancun is coming from the increase in commercial revenues per passenger. So as you have seen, we have been improving quarter-by-quarter in the case of commercial revenue per passenger. We are showing you the highest ever work for the quarter.

And that of course improves the profitability in the case of Cancun, I would say, is the most important thing. In the case of the other airports, it’s important to mention that probably, we normally don’t talk too much about expansions there.

But remember that we have expanded Veracruz, Villahermosa and Huatulco and currently, we are in expansion, a small expansion in the case of Mérida Airport. And always these brings additional cost once their infrastructure is ready. And that is probably why you are seeing a decrease in the profitability in the other airports..

Okay.

And on Cancún, the current level of non-aeronautical revenue per passenger, you think that’s sustainable for – at least for the coming quarters, is that the message?.

Exactly, that’s true..

Okay. Thanks Adolfo..

You’re welcome..

And we will go next to Ravi Jain with HSBC..

Good morning Adolfo.

So I think the only line that we saw soft in the total earnings was the net income from Puerto Rico, could you give us a better color, was it some one-offs, was it some seasonal or what led to a slightly softer result from Puerto Rico?.

Hi, good morning Ravi. We have to think that – the first one is of course the closure of Terminal C, as that is affecting commercial revenues. And the second one has to do with something that was inside the contract fees. Day 1, which is a travel promotion funds.

This is the money that we have to pay to promote the tourism activities in the island and these travel promotion funds, let’s say from expenditure perspective, the start of this year.

The total of the travel promotions are on the $6 million, which should be paid in the following way $3 million this year; $2 million next year; and $1 million the year after. So that’s probably – I don’t want to say one-time event because it’s 3 years, but its one-time event 3 years. So probably, that is why you are seeing the softness over there..

Great. And then the only other question I had was, you are I mean again not talking at specific numbers, but looking at the trend we have been talking that these traffic numbers in Mexico are not sustainable at these levels and things like that.

As you head into 2016, are you looking at still, let’s say much better than historic mid single-digit growth rates, given that now you have open skies with the U.S., which is going to medium event, but do you still see let’s say, somewhere between a high single-digit number to a low double-digit number next year as well or do you see that going back to historical mid single-digit numbers there?.

As I have said in the remarks, I will be more cautious next year in comparison of what we are seeing this year. This year has been an extraordinary case. One of the most important aspects that we are seeing today is the devaluation of the peso against the dollar, which is boosting the U.S. traffic. I really don’t know what to say about the situation.

Probably, this will continue next year at least for the first half of the year. The other situation is Mexico City Airport, we believe that they have reached the limit or not because that will affect or should affect domestic traffic. So I would say, we will – what we expect is a strong 2016, but of course not as strong as 2015 has been..

Perfect. Thank you so much. I will get back in the line. Thank you..

Thank you..

And we will go next to Pablo Zaldivar with GBM..

Hello, good morning. Thank you for taking my question. I would like to start, we have been seeing steady growth rates in aeronautical revenues per passenger. And we believe they have been supported by the local currency depreciation.

So would you expect a slight decrease in the last quarter to comply with the maximum tariffs set by the government?.

Aeronautical revenues are not as strong because of the depreciation of peso against the dollar. Remember that the maximum rate is set in pesos. So probably, the effect that you are seeing is the effect of the inflation.

Remember that the way that we adjust our maximum rates is using the PPI excluding petroleum instead of the PPIs – sorry, the price product – the price consumer index PCI. And the PPI, excluding petroleum has been stronger than in comparison with the consumers. So that is probably the effect. I will recommend you see that, Pablo..

Okay. Thank you.

So the trend should continue as it has been throughout the year, right?.

What – the regulated revenue should increase, passenger traffic flows, PPI minus 0.75% efficiency factor..

Okay, thank you.

And the other question, could you give us a little more color on Cancun’s Terminal 4 construction, what do you expect in terms of deadlines and the expected impact on the airport?.

Yes. In the case of Terminal 4, as I said during the remarks, we have begun our physical construction in the case of the preparation of the land. After that, we will have to contract like they call the foundation and the structure of the building. And then we will proceed with the equipment and the finishing of the building.

What I expect is this terminal building to be completed in 2017..

Okay. Thank you very much for taking my questions..

You’re welcome..

[Operator Instructions] And we will go next to Steve Trent with Citi..

Good morning Adolfo and thank you very much for taking my questions.

Just two or three for me, the first is following up on the gentleman from HSBC on San Juan, I appreciate, you may not be able to give us more color, but what are you seeing with respect to anything you can mention about taxation there or utility costs, certainly with Puerto Rico having some economic issues at the moment, that’s my first question?.

Okay. In the case of San Juan and the case of taxes, what we saw was an increase in their value added taxes, it’s not exactly the same value added tax that we have in Mexico. It’s a slight difference. But, let’s say the sales tax, okay. It was increased from 7% to 11%. We have not seen a significant impact on the financials because of these.

And in the case of the utility costs, that is something that is very expensive there. Basically, the case of energy, just to give you one number, we have to pay it on one, three times what we pay in Mexico per kilowatt hour. In the future, what I believe is that this company will have to be more efficient.

And what I expect is a reduction in the cost of energy for this airport. I do not expect a larger price, even that they have economic problems. I believe that at the end, this will manage a more efficient company and more efficiency for the operation of the plants there..

Okay, great. I appreciate that. The second question if I may, relates to your commercial revenue per passenger. On a direct operations basis, it’s been going down, even in local currency terms. And I can appreciate your comments about Terminal 3 opening, improving the efficiency of Cancun. But this advertising piece of commercial seems to be the booster.

And I was wondering if you might be able to share with us who has this advertising contract and what’s the tender? And when does it come up for to be renegotiated, if you are allowed to mention?.

Of course, it is effectively opposite, Steve.

If you see the numbers, commercial revenue – commercial revenues from direct operations were almost exactly the same as they were in the same quarter last year, but if you see the note that is below the table, you will see that commercial revenues from direct operations in the case of advertising have been excluded as from May 30 this year.

That means that we are not including any advertising in that line anymore, because now we have signed a concession agreement. The concession agreement means that the revenue that we received from this company goes directly outside the direct commercial operations.

So, if you have seen the other note about advertising the increase that we have for the quarter was 16%. So, today, once we have the concession or we have signed a concession agreement with the company, that remains SSL and we have better revenue and we do not have direct cost.

So, I would say the concession agreement that we signed was a benefit instead of a negative for direct commercial operations..

Right. So, what I was referring to is in your piece direct – commercial revenue from direct ops per passenger, was down 14% in pesos. So, I was referring to the boost from advertising. The SSL, are you allowed to disclose the link to the contract or when it might come up to be renegotiated or.....

No, it begun in May 2015..

Okay, great. Well, I will get back in line as I will let someone else ask a question. Thanks, Adolfo..

Thank you..

And we will take a follow-up from Ravi Jain with HSBC..

Hi, Adolfo. Thank you for this. And I just wanted to follow-up on the domestic Mexican market and I am looking at the airlines margins are kind of still better off.

And do you think that there is some scope for passenger fares to come down, you used to come down, will that be able to continue to boost domestic traffic or is it still going to be just be because the economy is slightly better? We are seeing very strong retail sales in Brazil recently.

Is that the bigger driver or do you see that there is scope for fares to go down from here? Thank you..

Well, Ravi, what I expected is the following. First, I have to say that more or less, we have today the same kind of fleet we have in June 2008 for the case of domestic airlines. Probably in terms of seats, it’s a little bit higher, but not too much.

So, I still believe that we have demands higher than offer and that is why we see high prices in the case of domestic traveling. In the future, as the airlines have more capacity that’s there doing today, what I expected is a reduction in the cost of line domestic and that of course should boost the demand.

The situation on top of this is – and the question we have is, what will occur when the case of Mexico City Airport will be closed? 70% of my domestic traffic goes and comes from Mexico City. So, Mexico City Airport has been growing from 24 million to 34 million passengers last year and probably, this year, will be 36 million.

Are they going to be able to grow more or not? And if they cannot grow more, where does the growth in the future will have to come? And that is the question. The question is the only way is Toluca. So Toluca is it’s an airport that is 35 kilometers away from the city..

Right..

And if the people will shift from Mexico City to Toluca or not, so that is why I am concerned about the growth, the strong growth in domestic, we are seeing this year..

This is very helpful. Thank you, Adolfo..

You are welcome..

[Operator Instructions] And we will go next to Steve Trent with Citi..

Hi, Adolfo and thank you for taking my follow-up. Sorry to come on again. Just one other quick follow-up question, regarding the U.S.

Mexico bilateral agreement or at least pending bilateral agreements, can you refresh our memories as to which ASUR airports would be directly impacted in Phase 1?.

Yes. Well, first of all, a lot of people like to say that this is an open surprise with the U.S. I have to say very clear that it’s not. What basically this proposed agreement says is that they will liberate the amount of companies that can fly through there are cities.

The current agreement is two airlines or two companies, but there are cities, with the exception of 13 cities, this is tourism destinations mainly that can have three airlines per payroll seats. Being in Cancun, the most important airport in the country in terms of U.S. traffic and more urgent destinations to the U.S.

nation, I would say that in the case of Cancun today, we have five cities that today have three companies flying there from the United States.

But there is one – there is just one city, which is Chicago that there is an airline waiting to enter into this market and they cannot get in until this agreement is being ratified by the Congress and signed by the two countries.

So, the only effect that I see in the case of ASUR’s airports is that probably, we will have a fourth company coming from Chicago to Cancun. So, in general terms, I do not expect to have any major impact or significant impact because of this new bilateral agreement..

Okay, very helpful and thanks for taking my follow-up, Adolfo..

Thank you..

[Operator Instructions] And Mr. Castro, we have no questions holding at this time..

Okay, thank you, Aaron and thank you everybody for joining us today on the conference call. Also, do not hesitate to contact me if there is any further question and have a great day and nice weekend. Goodbye..

And this does conclude today’s conference. Everyone, we thank you for your participation and you may now disconnect..