Grupo Aeroportuario del Centro Norte SAB de CV (OMAB) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Grupo Aeropuertario del Centro Norte, OMA, first quarter 2012 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is also being recorded today, Friday, April 27, 2012.

I would now like to turn the call over to our host for today, Mr. Jose Luis Guerrero. Please go ahead, sir.

Thank you, and good morning. Welcome to OMA's first quarter 2012 earnings conference call. My name is Jose Luis Guerrero, OMA's Chief Financial Officer. Joining me this morning is Israel Magana, our Investor Relations Officer.

Unless otherwise indicated, all numbers refer to the first-quarter results, and their comparisons are versus the first quarter of 2011.

I will start with an overview of some of the major business developments in the first quarter. Then, I will briefly review the first quarter financial results. And, we will open the call up for questions.

OMA continues to be very encouraged by the [times] of recovery of the air traffic industry in Mexico. All the indicators continue to be positive regarding the development in air passenger traffic. While rising fuel prices are a risk, today the airlines have not made any changes in their expansion plans. On the contrary, they give every indication of continuing to move forward.

VivaAerobus received one plane in the quarter and has plans to receive more of them in 2012. Aeromexico added two Embraer 190 jets to its fleet in the quarter and will continue to increase capacity. Interjet reached its 37th plane during the first quarter and will receive its first Sukhoi regional jet before the end of 2012.

Passenger traffic volumes increased 8%, with domestic traffic increasing 10%. 7 of our airlines had increases in passenger volumes, and this is the 4th quarter in a row of increasing passenger traffic for OMA.

We expect to see additional route openings and additional frequencies in the second quarter. Among the routes we expect for the second quarter are Monterrey-San Jose, Costa Rica from TACA; Chihuahua-Guadalajara and Monterrey-Guadalajara from Volaris; and, Torreon-Ciudad Juarez from Interjet.

Our business initiatives are prospering and showing positive results. In terms of route development and connectivity, we opened 4 national routes and 2 international routes during the quarter. 3 of the 6 new routes were opened from Monterrey airport, strengthening our strategy of developing a hub in Monterrey.

On the commercial front, the just completed expansion of Terminal C in Monterrey added 800 square meters of commercial space, and the total area is 93% leased out. Overall, 92% of our commercial spaces in the 13 airports is leased out.

We continue to add more domestic and international brand-name tenants. In January, for example, we opened a branch of the well-known Mexico City steakhouse, La Mansion, in Monterrey's Terminal B. Given the mix of business executives who travel through Monterrey, we are very positive about the potential of this operation.

One of the big projects for this year is the expansion and reconfiguration of the Culiacan terminal. This is our second busiest airport, and we are increasing the total terminal building area by 3,100 square meters, or about 25%. The expansion will improve the movement of passengers through security, increase the boarding lounge and commercial area by more than 60%, upgrade the air conditioning, and generally improve the travel experience. We expect the terminal expansion to be completed in October.

OMA Carga is growing, showing growth both in import and export volumes.

In terms of diversification activities, the NH Terminal 2 hotel continues to do well. Given the quality of its rooms and services, we have been able to keep the hotel about 80% occupancy for six quarters in a row, and also raise room rates. As a matter of fact, our strategy will be to focus on rates rather than occupancy in the next months.

The ground floor level of the strip mall in Monterrey is now 50% leased.

We have all the signed leases for 48% of the leasable area of the first stage of the cargo logistics hub in Monterrey. We started operations with our first tenants in February. Demand has been growing, and once the two anchors, DHL and FedEx, start operations, we expect that it will speed up.

Finally, we have started installation of a pilot solar power plant at the Zacatecas airport. The solar array is estimated to generate 300,000 kWh per year of electricity, which is about one-half of Zacatecas' requirement. There are two key [entry] requirements for economical solar power, lots of level land and lots of sunshine. Most of our airports have both. If this pilot project meets our expectations, we will expand to other airports.

All of these business initiatives translate into strong increases in revenue, adjusted EBITDA and EBITDA margins, and net income.

Looking at our first quarter financial results, the sum of our aeronautical and non-aeronautical revenues grew [20%].

Aeronautical revenues increased 22%. This reflects the growth in traffic and the increase in passengers carried last year. Year over year, passenger charges increased an average of 20%. All tariffs for aeronautical services increased in line with inflation.

Non-aeronautical revenues increased 12%, and reflect the business initiatives I have already mentioned -- increasing the commercial offering, expanding OMA Carga, and the NH Terminal 2 Hotel.

The commercial line item that increased the most was parking, as a result of higher utilization of our airport parking lots. All the commercial line items increased except for advertising, as the market is saturated with election season. Advertising companies prefer to wait until third quarter of this year.

Non-aeronautical revenue per passenger was MXN52.50, up 4%. Excluding the hotel, non-aeronautical revenue per passenger was MXN39.00, up 3%. The first quarter of 2012 marked 16 quarters in a row where non-aeronautical revenues per passenger increased.

The mix of revenues not including construction revenues was 76% aeronautical and 24% non-aeronautical.

Total operating costs and expenses increased only 1.3% in the quarter. Because OMA made the transition to IFRS accounting in 2011, expense figures in both periods include the maintenance provision. So, this is really an apples-to-apples comparison.

When we isolate the cost of airport operations, which is the cost of services plus G&A excluding the hotel, construction costs which are non- cash items, and the maintenance provision, also non-cash, these remain operating costs and expenses increased 9%, largely because of higher electricity rates.

The result is that our fourth quarter adjusted EBITDA reached MXN350 million, growing 29%. The adjusted EBITDA margin was 55.3%, an increase of 400 bps. This is the highest adjusted EBITDA margin since the recession hit.

Comprehensive financial income was MXN8 million, as comparable to a cost of MXN16 million last year. Net interest expense dropped because of the refinancing of our debt last year, which lowered interest rates significantly. The appreciation of the peso in the first quarter resulted in an exchange gain and devaluation of our dollar-denominated debt.

As a result of this strong growth in operating income and the improvement in non-operating items, net income rose 59%, reaching MXN184 million.

Finally, I would like to remind you that the shareholders meeting last week approved making a capital reduction to shareholders of MXN500 million, or MXN1.25 per share, which we'll be paying you by July.

This payment which is [in the of a] dividend represents a 25% increase over the 2010 dividend. This increase is a mark of the confidence that the management team and the board of directors have in the future performance of OMA.

This concludes our prepared remarks. We will now be happy to answer your questions. Operator, could you please open the call for questions?

Absolutely. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) And, our first question comes from the line of Nicolai Sebrell with Morgan Stanley. Please go ahead.

Hi. Good morning. Thanks for taking my question. I was wondering if you could discuss a little bit more about the expansion plans, particularly of VivaAerobus? How did they plan to grow, if you can disclose that, this year? And, the new plane, you said they were taking one new plane? Or, they took two new planes in the first quarter? And, then, you mentioned something in the second quarter, and I apologize I couldn't write it all down. So, what are the plane counts? And, then, these planes, are they 737-300s? Or, have they decided to use more modern equipment? And, that's my first question.

My second question has to do, if you could give more detail on the cargo revenue? You mentioned that it's growing on both import and export. How does that change your revenue outlook for the year? Or, what's the expected contribution from cargo, if you could you detail exactly how that works? Thanks.

Thank you. Thank you, Nicolai. And, so, regarding the expansion plans of Viva, Viva has been very aggressive in capturing the market that Mexicana left behind. It has been growing steadily with us at OMA. They added one new plane in the first quarter of this year, and they have plans to keep on adding maybe a couple of more planes this year. Not sure the type of planes that they are adding, if they are 737-200s, and if that is their continuous, if they are going to have those planes in the future.

Regarding cargo revenue, cargo, it is a line item in the Company that is growing substantially. They as you know represent a fraction of our non-aeronautical revenues. So, they continue, they are continuing to grow.

OK. Thanks. That's helpful. And, if you don't mind a follow-up, on the solar power item. What is the CapEx that you're spending on that? I assume since it's a pilot project, it's not a lot. But, let's say, you expand it to all your airports, what might that mean? And, what kind of solar power? I assume it's solar cells? Or, is it something else?

Thank you. So, we're, right now, testing two technologies in our pilot project. This is a small pilot project in the airport of Zacatecas. Total investment for this project is $800,000. So, we're testing both the efficiency of the two technologies that we have implemented. These are photovoltaic solar panels. So, if the technologies work, we could consider going forward if they make economic sense. So, as you know, solar energy requires a high level of investment, but given that we are in a region with very high levels of solar radiation, this could actually work in terms of economic.

The other very important factor regarding electricity in Mexico is that tariffs have been increasing double digit every year for the past couple of years. So, if that trend continues, then this type of project could definitely make sense. And, it could make sense for further expansion.

OK. Thanks. Out of curiosity, are there any of your airports where solar might not make sense, in terms of weather and environment?

Not really. And, we could, one way of providing solar energy to all of the airports is that we could have one large project, for example in the airport of Chihuahua, and then sell the energy to all of the other airports. So, we do not necessarily need to have solar panels in all of our airports. We could have one large solar project and that could provide electricity throughout Mexico. As you know, in Mexico, the cost of transferring the electricity are very low when you generate them with renewable energy.

OK. Thank you.

You're welcome.

Thank you. And, our next question comes from the line of Luis Willard with GBM. Please go ahead.

Thank you. Good morning, Jose Luis, Israel. Just a couple of questions. With all that you have mentioned, in terms of airlines not halting expansion and the additional equipment that is entering into the network, do you reiterate your 2% to 3% growth guidance for 2012? And, the next question is, what's the total, with the expansion of Terminal C, what would be the total area in Monterrey, the leasable area in Monterrey? And, my third question is, if the CapEx or the investment for this solar panel project is not part of the development, the MDP, right?

Sure. Could you repeat your last question regarding the solar power?

Yes. Is it part of the MDP? I mean, the investment that is considering there?

OK. Thank you for your questions, Luis. Regarding the guidance, we are not changing our guidance today. We're seeing some upside factors as you mentioned with the passenger growth this quarter and with the airlines having more planes and, also, with some predictions on the growth of Mexico going maybe up to 3.5% in terms of GDP growth this year. So, we're not changing today our guidance. We could revise it for the second quarter when we give our results.

In terms of Terminal C, the total area in Monterrey, considering the three terminals, the total commercial area is 2,000 square meters. With the expansion of the Terminal C, that added another 800 meters. So, in total, it's 2,800 square meters of commercial space. So, this represents about more or less a 30% increase on Monterrey.

OK. And, the solar, the project of the solar panels? That is not a part of the MDP, right?

No. This is a strategic investment, and it is not part of the Master Development Plan.

OK. All right. Thank you.

Thank you. And, our next question comes from the line Stephen Trent with Citi. Please go ahead.

Hi. Good morning everybody. And, thanks for your time. I have one or two questions. I think my first question is, you know, when we think about Mexicana and Aviacsa's suspension of operations, and then we turn around and look at this year's fleet adds, certainly an element of this year's fleet add seems to be tilted towards lower gauge aircraft, with Interjet bringing on the Sukhoi's, Aeromexico Connect with the Embraer 190's, et cetera, any color, you know, in terms of what is still the gap between on the thinner routes to the smaller airports? What sort of hole is still left with respect to, you know, the dearth of airline capacity on the thin routes left by Mexicana and Aviacsa? Do you think that, for example, Interjet, Aeromexico, et cetera, are going to maybe help you recover 50%, 60%, 70% of what was left unserviced by Mexicana and Aviacsa? Or, something higher than that? And, I apologize, that was long-winded and, but let me leave it at that for now. That's my first question.

Thank you, Stephen. So, regarding your question, Aviacsa left the market in 2009, and Mexicana left the market in 2010. So, in these past two and one-half and one and one-half years, the current airlines have been able to close down the gap of what these two airlines left behind.

So, today, we're around a 55% recovery of the specific routes where these two airlines that left the market that we have available. So, going forward, definitely these new planes that are arriving and the growth that we are seeing, particularly with Interjet, we could see a recovery of that 40% or 45% that we still need to recover of what the two airlines that left the market left behind.

So, we are looking forward to see new openings of routes that are not operated that were successful at the moment with either Aviacsa or Mexicana. And, they still need to be considered by the current airlines.

OK. That's perfect. And, just one other question, if I may, and I apologize if you mentioned and I didn't hear you, but, you know, I recall that, you know, aside from NH hotels in Mexico City [that then] you guys putting some consideration into developing the commercial space in Benito Juarez airport and, you know, I'm just wondering where that stands now? And, what are your latest thoughts?

Thank you, Stephen. So, regarding the commercial space around the NH Hotel in Terminal 2 of the Mexico City airport, we're in continuous, continued negotiations with possible tenants. The economic downturn of the past years really scared possible clients, but now we could see many more interest going forward.

OK. That's great. Well, I'll let someone else ask a question. Thanks for the time, guys.

Thank you, Stephen.

Thank you. (Operator Instructions) And, we do have a follow-up question from the line of Nicolai Sebrell with Morgan Stanley. Please go ahead.

Hi. Thanks for taking my follow-up. Actually, I wanted to follow on Steve's question regarding the Terminal 2 commercial space. What's the size of that area? And, what might be the opportunity in terms of revenue? And, then also, has there been any change, or how do you see the revenue mix changing? I know, if I remember correctly, in your 20-Fs, you report revenue share between the major airlines. And, I was wondering, could you tell us how that might be changing this year? Thanks.

Thank you, Nicolai. So, regarding your second question is the revenue share between the airlines?

Right.

OK.

If I'm correct, you report percentages. And, I was wondering if there's any change from that, from what you had in your 20-F?

Excellent. So, regarding your first question in the commercial space. We have 2,000 square meters that we could develop with for commercial spaces. We're currently under as well with negotiations with the Mexico City airport to see if we can change part of where these spaces are located. And, maybe they can give us some other options. And, that will definitely impact on what could be the revenues of developing those areas.

So, really the price per square meter depends on where, what type of business it is, and whether they're going to be paying both the rent and the participation. So, it depends on the type of tenant.

And, regarding the revenue shares, today Aeromexico is the most important airline for us. And, now, Interjet has passed VivaAerobus in terms of their passengers and in terms of revenues. And, VivaAerobus is really close to Interjet now. And, then, it's Volaris.

Excellent. Thank you very much.

Thank you. And, there are no further questions in the queue at this time. Mr. Guerrero, please continue.

Thank you. On behalf of OMA, I want to thank all of you again for the participation in this call. Israel Magana and I are always available to answer your questions. And, hope to see you soon at our offices in Monterrey or in future events. Thank you, and have a good day.

Thank you. Ladies and gentlemen, this does conclude our conference call for today. Thank you again for your participation, and you may now disconnect.