Good morning, and welcome to GAP's Third Quarter 2019 Conference Call. All lines have been placed on mute to prevent any background noise. After the presentation, we will open the floor for questions.

And at that time instructions will be given, if you would like to ask a question.It is now my pleasure to turn the call over to Maria Barona of i-advize Corporate Communications. Please go ahead..

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. 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 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..

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

Today, I will briefly review the 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.Let's start with outlook, our traffic growth contribution from some of our main airports.

This quarter yet again was the best performing in terms of additional 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 two 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 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-Forth Worth and Houston, which represents a combined 31,000 extra passengers. This was due to the extra frequencies added By American Airlines passengers.

This airport also saw the only additional 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 wells during the quarter.

We are seeing a strong appetite for this destination about Mexican travelers with domestic traffic growth of 23% during the third quarter, which was possible due to the recently open routes from Tijuana and Hermosillo, as well as an additional frequency to Mexico City by Interjet, Viva Aerobus and Volaris.

International traffic was channelized clung to 2% during the quarter, which was mainly due to the 737 MAX aircraft.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 aircraft with Southwest.

During the third quarter the Mexico City contributed the most additional traffic to the airport with 14,000 extra passengers as traffic increased across all the six centers apply 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 aircraft with Sunwing and WestJet.

Nevertheless, the nine-month 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 MXN159 million or 20% during the third quarter.

This resulted a 12% high non-aeronautical revenues per passenger, which was primarily 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 MXN31 million or 49% within the third quarter of 2019.

This outstanding performance was mainly due to the Tijuana, Guadalajara airports which is 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 is now complete and internally operating.

New commercial offering also initiated operations in Manzanillo, Aguascalientes, and Puerto Vallarta airports.Car rental unit increased MXN22 million or 29% during the quarter.

Throughout this year, GAP 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 forging and changing the passenger experience.Revenues from the aero market stores operated directly by us increased by MXN16 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.VIP lounge operated directly by GAP increased by MXN13 million or 23%.

During the third quarter of 2019, 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 risk side 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 front.

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 in a bidding process for the procurement and the commission of equipment.To conclude, I have a quick review of the financial results. For the third quarter, EBITDA grew by 12% reaching MXN2.4 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-and-balance 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 from the two new VIP lounges and seven convenience stores that opened in the third quarter and due to a result of duffel accounts for the regional area and in Calafia, which represent the 0.9% of the total profit our business.Before we move off the Q&A, I want to mention that on October 10th, 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 MXN1.9 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?.

Thank you. [Operator Instructions] And your first question comes from Alejandro Zamacona with Credit Suisse. Your line is now open..

Hello Raul. Thanks for the call.

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?.

Hi, Alejandro good morning. Thank you for your question. We are working 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..

Okay.

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

Yes correct, correct..

Okay. And in terms of CapEx, I mean you already announced at the Investor Day around MXN20 billion.

Is that still the expectations?.

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

Okay. Thank you..

Welcome..

And your next question comes from Ruben López with Santander. Your line is now open..

Hi, good morning. Thanks for the call. Just a follow-up on the MDP. Is it finally 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 the regulator? That's my first one. Thank you..

Thank you Ruben for 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 until the 31 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 I will say that runs smoothly and in a really technique way really following the -- our concession contract..

Okay, perfect. Thank you. 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? Thank you..

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

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 4Q?.

Perfect. First, talking about the 4Q, I will say that we are just -- in a couple of weeks we'll 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 area.

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 four 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 real important offer in terms of -- on the commercial..

Thank you..

And your next question comes from Andressa Varotto with UBS. Your line is open..

Hi. Thank you very much for taking my question. Just to follow up on the previous MDP questions. I'd 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. Thank you very much..

Hey. 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 3% to 5% of tariff increase.

So everything is as we said..

Thank you very much..

And your next question comes from Marcos Barreto with Citi. Your line is now open..

Hi, Raul and Saul. Thank you for the call and for taking my question. I have three 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 is my first question. Thank you..

Marcos, sorry, the sound is not very good.

Can you please repeat your question?.

Sure.

Can you hear me now?.

Yes. Much better..

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?.

Well, there are two 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 IR of the aeronautical revenues. So in that sense -- in that way, we believe that could be the adjusting our IR.

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 five 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..

Okay. Thank you very much for that color.

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

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 again who knows?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 really 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 Cancun that will have more direct flights and more robust growth when we compare it with Mexico City area..

That's great color. Thank you very much. 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?.

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..

And also it's important to mention that in the case of Kingston, the most important part of the traffic come from international passengers..

Correct..

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 Saul 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 costs will be one of the most important key factors for the profitability of the Kingston project..

Okay. Thank you, very much and have a nice weekend. Thank you..

And our next question comes from Fernando Sanchez with Bradesco. Your line is now open..

Hi, good morning and congratulations on the results. My question is on international traffic. Despite the solid increase, two of the more touristy destinations on Cabo 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? Thank you..

Thank you, Fernando. I will say that the biggest part right now, are affecting the international buffers on Cabo and Vallarta are mainly two 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, 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 passed from half only one left 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 where we 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 fact from -- mainly from Southwest..

Perfect. Very clear, thank you..

[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..

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

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