Grupo Aeroportuario del Centro Norte SAB de CV (OMAB) 2012 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Grupo Aeroportuario del Centro Norte, OMA, second quarter 2012 earnings results 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 being recorded today, July 26, 2012.

I would now like to turn the conference over to our host, Jose Luis Guerrero. Please go ahead, sir.

Good morning. Welcome to OMA's second 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.

I will start with an overview of some of the major business developments in the second quarter. Then, I will briefly review the financial results and discuss our 2012 outlook, which we have revised upwards. We will then open the call up to questions.

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

Operationally, OMA had another solid quarter, with strong performance from our three lines of business -- aeronautical activities, commercial activities, and our diversification initiatives.

The airlines continue to be in expansion mode, despite the risks to global growth and high fuel prices. Interjet and Volaris added two planes each to their fleets in the second quarter of 2012.

As you may have seen, Aeromexico announced yesterday its agreement to purchase 90 Boeing 737 Max-8 and 10 787-9s as part of the complete modernization of their fleet. Delivery of the Dreamliners will start next year, and the 737s will start in 2018.

Passenger traffic volumes increased 4%, with domestic traffic increasing 4.5% and international traffic increasing 3%. 6 of our airlines had increases in passenger volumes, and this is the fifth quarter in a row of increasing passenger traffic for OMA.

In terms of route development and connectivity, we opened 3 domestic routes and 1 international route during the quarter. These include Monterrey-San Jose, Costa Rica from TACA; Chihuahua-Guadalajara and Monterrey-Guadalajara from Volaris; and Reynosa-Tampico-Poza Rica-Villahermosa from Aeromar.

On the commercial front, our occupancy rates remain steady at 92%, even as the amount of space continues to increase. Year over year, the most significant increase was the additional 800 square meters in Monterrey Terminal C that became available in the first quarter of this year. The Culiacan terminal expansion and reconfiguration, which is one of our largest investment projects for the year, is on track for completion in October. This will add more than 230 square meters of new commercial space.

Our alternative advertising initiative is one of the areas that delivered significant benefits to our commercial revenues in the second quarter. For example, in Monterrey airport, we added alternative advertising outside Terminal C and inside Terminal A. We also covered the bins at the security checkpoints with advertising, eliminating the cost of the bins and obtaining an increase in the advertising revenues. We also added Xbox entertainment zones in our airports and 50 [wide toppins] in our 15 terminals.

The checked baggage screening also started operations in April, contributing to non-aeronautical revenue in the quarter. I would note that we're still negotiating with some airlines on the terms and conditions for this service. So, it is still in the start-up phase.

OMA Carga continues to grow, delivering increases in both import and export revenues as a result of our new customers, new business, and new solutions to integrate flight logistics.

In terms of diversification activities, the NH Terminal 2 hotel continues to do well. As I mentioned last quarter, we're focusing on raising room rates to reflect the quality of the hotel compared to others in the airport market, even if it means giving up a few points of occupancy in the short term. The average room rate increased 16%, and second quarter revenues grew 13%.

The ground floor level of the street mall in Monterrey is now 66% leased. The build-out of the food court area has been finished and will start operations this third quarter. We are close to reaching agreement for a tenant for the second floor.

We have also signed leases for 66% of the leasable area for the first stage of the Cargo City and logistics hub in Monterrey. By the end of the second quarter, 11 logistics tenants had started operations in the Cargo City building.

The Zacatecas solar panel project has started construction and will become operational before the end of the year, with an installed capacity of 0.2 megawatts.

Looking at our second quarter financial results, the sum of aeronautical and non-aeronautical revenues grew 16%.

Aeronautical revenues increased 15%. This reflects the growth in traffic and the increase in passenger tariffs last October. Year over year, passenger charges increased an average of 7.7%, while tariffs for aeronautical services increased an average of 5.3%.

Non-aeronautical revenues increased 17%, and all the 10 non-aeronautical line items increased revenues.

The areas with the largest contribution to growth were the ones I already mentioned -- the NH Terminal 2 hotel, publicity, and OMA Carga, as well as parking.

Non-aeronautical revenue per passenger was MXN52.50, up 4%. Excluding the hotel, non-aeronautical revenue per passenger was MXN41.10, up 13%. The second quarter of 2012 marks 17 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 decreased 6% in the quarter, principally because the construction costs decreased.

The cost of airport operations increased 11%, which is cost of services plus G&A, excluding the hotel construction costs and the maintenance provision. The increase is principally the result of the start of operations of checked baggage screening which increased our insuring costs and payroll.

The result is that our second quarter adjusted EBITDA reached MXN353 million, growing 19%. The adjusted EBITDA margin was 51.6%, an increase of 150 bps over second quarter 2011. However, margin decreased as compared to first quarter of this year, principally because of the start-up costs of the checked baggage screening.

Comprehensive financial expense was unchanged year over year. Lower interest expense from the refinancing of debt last year was offset by an increase in exchange loss from the devaluation of the peso.

The tax provision was 32% of pretax income, up from 30% last year. The increase in effective rate is the result principally of the fact that OMA has used a tax loss carryforward of the Monterrey airport, and this airport is now generating taxable income.

As a result of this strong growth in operating income, net income rose 23%, reaching MXN160 million.

I would like to remind you that OMA paid capital reduction to shareholders of MXN500 million, or MXN1.50 per share, on June 4. This payment, which is in lieu of a dividend, represented 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.

OMA's strong performance in the first six months of 2012 is enabling us to revise our full-year outlook upwards. We now estimate that passenger traffic growth in 2012 will be between 3.5% and 4.5%. The sum of aeronautical and non-aeronautical revenues is expected to increase between 10% and 13%. The adjusted EBITDA margin is expected to be in the range of 48.5% to 51%. Capital expenditures under the Master Development Plan will be approximately MXN840 million.

OMA is providing this outlook based on internal estimates. A number of factors could have a significant effect on the estimates of traffic, revenue growth, adjusted EBITDA, and CapEx. These include changes in airline expansion plans, ticket prices and other factors affecting traffic volumes, the evolution of commercial and diversification projects, and economic conditions, among others. OMA can provide no assurance that the Company will achieve these results.

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

Thank you. We will now begin the question-and-answer session. (Operator Instructions) And, our first question comes from the line of Stephen Trent with Citi. Please go ahead.

Hi. Good morning, all. Just two questions for me. When you think about, let's say, the, you know, your medium-term outlook, you know, to what extent do you believe OMA will be taking a look at potential airport opportunities outside of Mexico?

And, my second question, and I actually asked this on another airport's call the other day, you know, what are your thoughts with respect to the possibility of seeing a competing airport or, excuse me, a new airport in the Mexico City area? And, that's it for me.

Thank you, Stephen. Regarding your first question on the airport opportunities that we're seeing outside of Mexico, we have been actively looking at opportunities outside of Mexico. There are several countries that are looking to improve their infrastructure, It is well known that Brazil is one of these countries. They have actually already given the concessions for four airports. We are in the outlook for the upcoming bids.

We're looking for opportunities between 1 million passengers and up to 10 million passengers a year. That is the area of expertise of OMA. We're also looking at opportunities to provide technical assistance outside of Mexico. And, there could also be some opportunities in the region that we're actively looking at.

Regarding your second question of a new airport in Mexico City, this is a project that has been studied for many years by the government. There have been some initiatives to do it in the past. It is known that it is, the new airport is necessary. There is also spare capacity at the Toluca airport, which some of the airlines could use. But, it is true that the capacity of the Mexico City airport has reached its saturation point, at least when we talk about runway capacity.

The Mexico City airport has two runways but, since they are very close, one to each other, then they cannot operate simultaneously. So, it is -- it will definitely benefit, I believe, the entire network of air traffic in Mexico if we had a larger airport in Mexico City.

OK. Great. I appreciate the color. I will let someone else ask a question. Thank you.

Thank you. (Operator Instructions) And, our next question comes from the line of Fernando Abdalla with J.P. Morgan. Please go ahead.

Hi. Good morning, everyone. Just a question on margins. You continue to guide margins between 48.5% to 51% this year. But, when we look to the first-half margin, it was close to 53.5%. So, I was wondering if the expected decrease in margins for the second half is something just because of seasonality? Or, if you are expecting any other impact on cost that we need to be aware? Thanks.

Thank you. So, we are expecting to see our adjusted EBITDA margin between the 48.5% and 51%. And, the reason for this is that -- there are two main reasons. One is that we're looking at diversification projects that will definitely increase the amount of our adjusted EBITDA, but will not necessarily increase the adjusted EBITDA margin. And, this is because there are very few opportunities, business opportunities, that will allow us to achieve an EBITDA margin above 50%.

So, most of the initiatives that we're looking at have a lower EBITDA margin than the average of our airports. But, we believe that these initiatives will definitely increase the EBITDA amount that we generate at the Company.

And, the other main reason for this is that we have started the baggage screening project. This has required a large amount of expenses and, unfortunately, not all the airlines are, have accepted the terms. So, we have the most important airline in Mexico still hasn't signed with us. And, we are not being able to provide the service to them, but we do have the expenses. So, we hope that that can be resolved in the near future.

OK. Thank you.

And, our next question comes from the line of Bernardo Velez with GBM. Please go ahead.

Hello. Good morning, Jose Luis, Israel. I would like to ask you if you could give us a little bit more color on the revised CapEx, especially how and where are you expecting to invest such figure, as you have only achieved like 13% of the figure for the year?

Thank you. So, regarding the revised CapEx, the MXN840 million CapEx, it's Master Development Plan CapEx. So, as you know, 2011 was the first year of CapEx -- the first year of the five-year plan regarding the negotiation with the government. So, when you have your first year, you have to -- you get the new plan. You have the new plan in December of 2010. So, once you get it approved, you have to very quickly start doing the bid for contractors to come and help us do all the constructions. And, so, this happens in the first quarter of that five-year plan.

So, there was a natural delay of some projects that occurred in the first quarter of this year. So, that increased a little bit the master development projects that actually occurred in the first quarter of 2012. And, we also have some projects from 2013 actually taking place in 2012.

So, as I mentioned, this is a five-year negotiation. We'll look at what are the necessities at all of our airports, and we are constantly talking to the DGAC to see what are the priorities in investment, and sometimes some of those priorities have to be moved, in advance in the schedule.

OK. Great. Thank you.

And, our next question comes from the line of Vivian Salomon with Itau. Please go ahead.

Hi. Good morning. Congratulations on the results. I just have two questions here. The first one is, how sustainable to do you see traffic at the Monterrey airport for the second half of the year, and going forward? Is it the level that we should be looking forward to?

And, my second question has to do with the commercial strategy. I mean, you posted impressive results for the first half of the year. What can we expect in terms of on your diversification strategy for the second half? I mean, going forward, what else can we be expecting coming from the commercial side?

Thank you, Vivian. So, regarding the traffic in Monterrey, as you know, traffic increased 6.5% in the quarter at the Monterrey airport, and we have an accumulated six months of 6.8% of traffic increase at the Monterrey airport. This is definitely an outstanding result for Monterrey.

We're seeing a lot of investment in Monterrey. Companies are growing. There is new developments being built and, also, in terms of logistic parks and real estate. So, we're seeing Monterrey picking up because of this and also because of last year was not necessarily the best six months for Monterrey traffic.

We are -- we hope we could sustain this growth at the Monterrey airport. I think it's going to be a little bit difficult. I think it should be a couple of hundred basis points lower than what we have seen this first six months. But, I guess we'll have to wait and see what actually happens in Monterrey.

Regarding your second question of commercial initiatives, I think that we have done a great work in terms of finding new opportunities. There is definitely much more to do. The commercial team is very highly motivated, and they're looking at new opportunities. For example, all of this increase in revenues in all the commercial opportunities was not something that came particularly as easy. They have done a lot of things. For example, in terms of publicity, we're adding definitely more publicity spaces, not only inside of our terminals but also outside.

We have giant credit cards at the Monterrey airport that everyone who drives by, they can see them. Also, in the touristic airports, we have huge Corona bottles representing a beach and the sun and the experience of being a tourist in those airports. So, there is a lot that these teams are doing, and that's why we have been growing. So, I hope that we can definitely sustain that growth going forward.

There is -- obviously, the Mexico City hotel in the Terminal 2 has helped in this growth. We have seen a new competitor in the Terminal 1 of the Mexico City airport and, nevertheless, we have been able to keep growing the revenues. So, I think we can -- we hope to look forward at strong growth in terms of commercial revenues.

Great. Thank you.

Thank you. (Operator Instructions) And, I am showing no further questions. Please continue.

Thank you. On behalf of OMA, I want to thank you, all of you, again for your 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.

Ladies and gentlemen, this concludes the Grupo Aeroportuario del Centro Norte, OMA, second quarter 2012 earnings results conference call. If you would like to listen to a replay of today's conference call, please dial 1-877-870-5176, or 1-858-384-5517. We thank you for your participation. You may now disconnect.