Grupo Aeroportuario del Centro Norte SAB de CV (OMAB) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thanks for standing by. Welcome to the Grupo Aeroportuario Del Centro Norte OMA third quarter conference call. During today's presentation, the lines will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions).

I would now like to turn the call over to Jose Luis Guerrero. Please go ahead.

Thank you. Good morning. Welcome to OMA's third 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 third quarter. Then I will briefly review the financial results, and discuss the 2012 outlook, which we're again revising upwards. We will then open the call up to questions.

Unless otherwise indicated, all numbers refer to the third quarter results, and other comparisons are versus the third 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 risk to high fuel prices. [While] I decided one plane to its fleet in the third quarter, and Aeromexico received two Embraers 190, two Boeing 737-800, and two Embraers 170.

Passenger traffic volumes increased 9.1%. With domestic traffic increasing 9.3%, and international traffic increasing 7.8%, nine of our airlines have increases in passenger volumes. And this is the sixth quarter in a row of increasing passenger traffic for OMA.

It is important to note that international traffic is now sharing in the recovery of traffic volumes. Third quarter international traffic of 437,000 passengers is the highest third-quarter traffic since the third quarter of 2008.

In terms of route development and connectivity, we opened two domestic routes, and two international routes during the quarter. This included Monterrey-Cuernavaca from VivaAerobus, Monterrey-Morelia from AeromexicoConnect, Monterrey-Chicago from AeromexicoConnect, and Culiacan-Los Angeles from Volaris.

On the commercial front, our occupancy rate increased to 95% compared to 92% in the third quarter of 2011. The amount of commercial space in our airports also continues to increase. The Culiacan terminal expansion and reconfiguration, which is one of our largest investment projects for the year, has been completed, and is now open. This expansion added more than 230 square meters of new commercial space, while also greatly improving passenger flow and comfort.

OMA Carga continues to grow, delivering increases in both import and export revenues. As a result of new customers, new lines of business such as ground transit, using bonded warehouses, and new solutions to integrate freight logistics.

In terms of diversification activities, the NH Terminal 2 Hotel continues to do well. Room rates rose 6% year-over-year, and we kept our occupancy above 80%. We have also signed leases for 72% of the leasable area for the first stage of the cargo and logistics hub in Monterrey. By the end of the third quarter, 19 logistic tenants were operating in the cargo city building.

Turning to our third-quarter financial results, I would like to highlight double-digit revenue growth, a strong increase in adjusted EBITDA and net income, and very strong cash flow generation. The sum of our aeronautical and non-aeronautical revenues grew 17.5%. Aeronautical revenues increased 17.4%, primarily driven by the 9.1% growth in passenger traffic.

Non-aeronautical revenues increased 17.7%. And eight of the nine non-aeronautical line items increased revenues. The areas with the largest contribution to growth were parking, up 10.4%, the NH Terminal 2 Hotel, up 8.9%, and OMA Carga, up 33.8%. The category other services in the report include the additional revenues from the start of the check-baggage screening service. Non-aeronautical revenue per passenger was MXN51, up 7.9%. Excluding the hotel, non-aeronautical revenue per passenger was MXN39.2, up 10.6%.

The third quarter of 2012 marks 18 quarters in a row, or 4.5 years, where non-aeronautical revenues per passenger increased. The mix of revenues, not including construction revenues, was 77% aeronautical and 23% non-aeronautical.

Total operating costs on expenses increased 7.3% in the quarter. Principally, because of increases in the concession taxes, based on revenues, the technical assistance fee, based on EBITDA, and depreciation and amortization charges as a natural effect under IFRS. The cost of airport operations increased 5%, which is the cost of services plus G&A, excluding the hotel, construction costs, and the maintenance provision.

The increase is principally the result of inflation, and the start of operations of the check-baggage screening earlier this year, which increased our insurance premiums and payroll costs. The result is that our third quarter adjusted EBITDA grew 25.4% to MXN424 million. The adjusted EBITDA margin was 56%, an increase of 360 basis points over third quarter 2011. This is the highest EBITDA margin since the third quarter of 2007.

Comprehensive financial expense decreased significantly due to an exchange gain from the appreciation of the peso. The tax provision was 33% of pre-taxed income, up from 30% last year. The increase effective rate is a result principally of the fact that OMA has used the tax loss carry-forwards of the Monterrey airport. And this airport is now generating taxable income.

As a result of the strong growth in operating income, and the decrease in comprehensive financial costs, net income rose 56.9%, reaching MXN218 million. Our cash flow generation has been particularly strong. Cash flow from operating activities generated cash of MXN347 million in the third quarter 2012, more than two times the prior year period.

In the first nine months of 2012, operating activities generated cash of MXN807 million, compared to MXN469 million last year. The increases were principally because of the increase in revenues, and improved working capital management.

During the third quarter, OMA had CapEx of MXN130 million, and MXN433 million in the first nine months of 2012. The earnings report details where these amounts were distributed in the cash flow statement.

The most important investments for the quarter and the year have been for the expansion and reconfiguration of the Culiacan terminal building, the rehabilitation of the Torreon airport runway, the expansion of Terminal C at the Monterrey airport, and the installation of a solar-powered generation project at the Zacatecas airport.

The Company has financed most of its CapEx with debt. As a result, we borrowed an additional MXN150 million from our revolving credit line in the third quarter. Cash balances rose MXN420 million in the third quarter alone to reach MXN788 million as of September 30th.

I would like to remind you that OMA paid a capital reduction to shareholders of MXN500 million, or MXN1.25 per share, on June 4th. This payment, which was 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 nine months of 2012 is enabling us to once again revise our full-year outlook upwards. We now estimate that passenger traffic growth in 2012 will be between 6 point and 7 points, 5%. The sum of aeronautical and non-aeronautical revenues is suspected to increase between 11% and 14%. The adjusted EBITDA margin is expected to be in the range of 52% to 54%.

Capital expenditures under the master development plan were approximately be MXN600 million to MXN700 million. This amount is expected to be financed by additional ban debt of approximately MXN150 million to MXN300 million in the fourth quarter 2012.

OMA expects that our debt coverage ratio, net debt to adjusted EBITDA, will be in the range of 0.7% to 0.9% for the full year. OMA's providing this outlook based on internal estimate. A number of factors could have a significant effect on the estimate of traffic, revenue growth, adjusted EBITDA, and CapEx. This includes changes in airline expansion plans, ticket prices, and other factors affecting traffic volumes, evolution of commercial and diversification projects, and economic conditions, among others. OMA can provide no assurance that the Company would achieve these results.

Finally, we will be holding our annual Meet Management event on November 15th in Culiacan, where you will be able to meet OMA's management, see the newly-remodeled and expanded terminal building, and go into more depth on our operational and business initiatives. We will be sending the event details to you shortly. This concludes our remarks. We will now be happy to answer your questions. Operator, please open the call to questions.

Yes, thank you. (Operator Instructions). And your first question comes from the line of Stephen Trent with Citi. Please go ahead.

Hi. Good morning, everybody. And thanks for taking my question. I'm curious, I know it's a little early to talk about 2013, and your broad outlook there.

But as we are here moving through the fourth quarter, what are your general thoughts as to, you know, what we could see in terms of potential growth, traffic growth next year, maybe something in line with this year? Or are you more bullish, or maybe we kind of see a more modest figure? And if we're at a point where you're not ready to comment on that, I understand. I just thought I'd try.

Thank you, Stephen. Regarding the outlook for 2013, we haven't issued the outlook for next year. But I can tell you that we are looking at a very positive scenario for Mexico as a country. The possible reforms that are -- some of them are taking place right now.

One has already been passed, and a couple others are probably coming up in the near future, will definitely mean that Mexico can be much more productive, and therefore, increase its projection in GDP growth, which will definitely be benefit for all OMA's passenger traffic. So we're now looking at a positive 2013 scenario for GDP growth in Mexico. And therefore, we expect to have an interesting number for OMA's passenger growth as well.

I would like to comment that we have also seen the airlines, as you know, adding more capacity, when Mexicana, Mexicana and Aviasca left the market, there is about more than 100 planes that still have not been replaced in the country. And this means that there is -- the number of seats available in Mexico is far lower than what used to be three years ago.

So it could be interesting as the current airlines keep adding more capacity to the existing routes, and open new routes. Then therefore, that could be an interesting scenario for OMA as a whole in the next year.

Great. Thanks, Jose Luis. And just one other thing I noticed on your cost and operating expenses, that you had a line that says, Others, which showed a very sharp decrease here. And I didn't see an explanation for that in the release. And I was wondering if you might be able to give us a little more color on that.

Absolutely. So regarding the benefit in the reduction of cost in this quarter compared to last year -- last year's quarter, in the third quarter of 2011, we had, for example, MXN4 million of what we call small investments, and these are just minor master development planning investments that are not capitalized. For example, radios for the operation personnel in our airports. So this is MXN4 million that were accounted in last year's quarter that were not recurrent.

Also, we have MXN6 million of studies from last year that did not occur this year. These were studies primarily in lieu for the authorities' requirements, and where we want to take OMA in terms of all the regulations and the -- providing a great service at airports.

And the other one is MXN4 million retirement provision, an adjustment that we did last year that did not let's say this year. So that's in general why we have some costs last year that were not recurring necessarily to the -- to these, third quarter 2012.

Okay, great. I'll let someone else ask their question. Thanks very much.

Thank you.

Thank you. And our next question comes from the line of Augusto Ensiki with Morgan Stanley. Please go ahead.

Hi. Good morning, gentlemen. Just a couple questions relating to your revise guidance. I mean, the shift from 2.5%, 3.5%, to now 6% to 7.5% traffic growth. Can you tell us a little bit more about what was the biggest upside surprise that came about for this change? And also, the same for your change in your margin guidance, to the new -- to the new range to 54%. You know, what's the biggest cost surprise, or is it just purely revenue that's driving that increase in margin? Thank you.

Sure, Augusto. Thank you for your questions. We are in the guidance. The outlook that we're seeing for this year, we're definitely seeing a recovery in the existing routes that we have. Primarily, it's interesting, because you see operations remaining in similar figures to last year. There is not necessarily an interesting growth in the number of operations in our airports.

But you do see a large increase in the number of passengers that have been traveling. So that means that the airlines are trying to be more efficient in their routes. And therefore, they're increasing the usage in the existing routes. Sometimes they're taking away a couple of things, but then they're increasing the capacity in other of the existing routes.

So we're seeing in terms of passenger growth, it's, I guess, a recovery of the economic situation in Mexico. Mexico has been growing now for the past couple of years. The companies, and the people were a little bit reluctant to start spending right after the crisis, and Mexico started to recover. So now we're seeing more spending by both tourism and business people that are looking to fly more often to visit their companies.

In terms of the guidance for EBITDA, adjusted EBITDA margin, is primarily the effect of revenue growth, both in our aeronautical services, and also in the commercial services. We have been pushing forward all the commercial opportunities that include better publicity, better commercial spaces. We're maximizing our usage of commercial spaces in our airports. And so that has helped us increase our revenues, and therefore, the margin.

Great. One last question. Is any update as to the commercial space, you have it that Terminal 2 in Mexico City?

Not at the moment. With the probability of a new airport in Mexico City, we are being very careful on developing something large in the Terminal 2 of Mexico City. If -- we're also considering doing probably something smaller. In the prior -- in the previous year, two years, there was a lot of caution by the possible tenants to enter into the Mexico City airport in Terminal 2 to provide retail or commercial spaces.

But now, given the outlook, we could look at interesting -- we're looking for short-term commercial spaces that could go in line with a hotel. For example, having maybe a restaurant right next to a hotel, in the third floor of the Mexico City Terminal 2 airport, and other services that could go in line with a hotel, but not necessarily developing the entire commercial area that we have.

Great. Thank you very much.

You're welcome.

Thank you. Our next question comes from the line of Pablo Abraham with BBVA. Please go ahead.

Hello, Jose Luis. Congrats for the results. I was wondering if you could give us an update about theVivaAerobus plan. I think it's the only Mexican carrier that hasn't announced major aircraft order in the last quarters. Thanks.

Absolutely. So VivaAerobus has pretty much doubled its number of planes in the past 18 months. They started 2011 with 11 planes. Today there are, if I'm not wrong, there are 18 planes, and they're looking to probably add a couple more by the end of this year, or the beginning of the next year.

So that is great news for VivaAerobus. They're growing strong with us in the Terminal C of Monterrey. So we -- they do have plans to add more capacity, maybe not necessarily with a large letter of intent going into the future, but they are definitely have a plan to continue growing in Mexico.

OK. Thank you very much.

You're welcome.

Thank you. (Operator Instructions). Our next question comes from the line of Neal Dihora with Morningstar. Please go ahead.

Thanks. Just a couple of questions. I guess one, the capital expenditure guidance. I think on your last release, you had said it was going to be MXN840 million, and now you're looking for MXN600 million to MXN700 million. So I guess, are you shifting some of those into next year?

And then on the second one, can you give us the baggage revenue for the second quarter? I know you sputtered out last time, but this time it's in other. Thanks.

Sure. Regarding the -- thanks for your question, Neal. Regarding the CapEx guidance for this year, we have decreased the guidance in terms of the actual -- the actual flow of payments for the master development plan, CapEx. Nevertheless, we are -- our projection is that we will finish 100% of the physical work at our airports, but then the invoices come a couple of weeks later, and we have sometimes between one and three months to pay these invoices.

So for this year, that's why we're reducing in terms of cash from MXN800 million to possibly MXN600 million to MXN700 million. And regarding your -- just with the CapEx guidance, we have -- we have the authority to have the first three months of every year to finish the payments of the previous year. So some of the actual payments can go into the first quarter of next year, and still be in line with the regulation.

And regarding the baggage revenue, we could see, we're at the moment in negotiations with the airlines, and with the authorities. We could probably have a standard guidance from the authorities on how we could charge these services. The three airport groups have different ways of charging, and different ways of recovering the cost.

So we're currently in touch with the government to probably have one way of doing this. So at the moment, I cannot give you a guidance on what would be the revenues for the baggage service. But I can tell you that the -- at least we should recover the cost that we have for operating this service.

Just a follow-up on that, the baggage thing. Is there going to be a mandate, a requirement from the government of Mexico that all airlines basically utilize whichever screening mechanism the airports are providing?

It could be. It's possible. We haven't seen one at the moment. So maybe we could see a mandate like that coming up. That's something that we're currently talking with the government with the support of the (inaudible) and the other two airport groups.

Okay, thanks.

You're welcome.

Thank you. And at this time, I'm not showing any further questions. You may continue with any closing remarks.

Thank you. On behalf of OMA, I want to thank you all 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, such as the Meet Management in Culiacan. Thank you, and have a good day.

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