Grupo Aeroportuario del Centro Norte SAB de CV (OMAB) 2012 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Grupo Aeroportuario Del Centro Norte OMA Fourth Quarter 2012 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Later, we'll conduct a question-and-answer session.

(Operator Instructions)

At this time, I would like to turn the conference over to Jose Luis Guerrero. Please go ahead, sir.

Thank you. Good morning. Welcome to our OMA fourth quarter 2012 earnings conference call. My name is Jose Luis Guerrero. I'm a Chief Financial Officer. Joining me this morning is Israel Magana, our Investor Relations Officer.

I will start with an overview of the major business developments in the fourth quarter. Then I will briefly review the financial results for the quarter and for the full year. We will then open the call up to questions.

OMA had a solid quarter and a solid year, with strong performance from our three lines of business, aeronautical activities, commercial activities, and our diversification initiatives. We exceeded or met our guidance for the year.

The fourth quarter and the beginning of 2013 were also marked by business developments that will benefit OMA going forward. I want to highlight three of these developments.

First, we reached an agreement on the recovery of costs for checked baggage screening. The cost of maintenance for the equipment will be included in our maximum rate agreement and the SCT authorized rate increase to reflect this. The rest of the operating costs will be recovered through services fees charged to the airlines.

Second, we signed the joint venture with a company, VNYMSA, for the development of 28 hectares of land inside the Monterrey airport as an industrial park, groundbreaking scheduled for March, and the first leasable space is expected to be completed by the end of this year. In December, we also opened a new gas station in the Monterrey airport. With industrial park, the gas station, stage one of [Carbocity], and the strip mall, our development of the real estate at the Monterrey airport is well underway.

Third, we reached an agreement with the SET to substitute a portion of the amount that we had already invested in land purchases for a second runway in Monterrey for master development plan investments in 2013, 2014, and 2015. This would not affect the amount of the master development plan, but would reduce our expected cash outlays this year and through 2015.

Turning to our fourth quarter operational developments, passenger traffic increased 6.8%, with domestic traffic growing 7.6% and international traffic up 2.2%. Nine of our airlines increased passenger volumes, and this is the seventh quarter in a row of increasing passenger traffic for OMA.

In terms of route development and connectivity, we opened four international routes during the quarter, all from Monterrey, Interjet's flying to Havana and San Antonio, United's flying to Chicago, and AeromexicoConnect's flying to Laredo.

As some of you may know (inaudible) airline carrier [Aereolinear] TAR, or Transportes Aereos Regionales, has received its concession from the SET, and it's suspected to start operations from its base in Queretaro around midyear. TAR may start with routes to Monterrey, Acapulco, and Zihuatanejo as part of their initial launch. [Viva de Bus] announced plans to add three planes to their fleet for 2013 and to replace one existing plane.

On the commercial front, our lease occupancy rate increased to 95%, compared to 92% in the fourth quarter 2011. For the full year, our 13 airports added 173 new retail, advertising, restaurants, passenger service, car rental, timeshare, and hotel marketing operations and communication services. [OMA Cara] continues to grow, delivering increases in both important -- import and export revenues as a result of new customers, new lines of business, such as ground transit used in bonded warehouses, and new solutions to integrate freight logistics.

During the year, new round transit links were opened with Dallas, Chicago, Los Angeles, and Mexico City. The NH Terminal Two Hotel continues to perform strongly. Room rates rose 6% year over year. And we kept our occupancy rate at about 80%, the highest of Mexico City's airport hotel market.

We reached agreement with a Mexico City airport to operate the top floor of the parking garage inside terminal two, adjacent to the hotel. We will be able to offer parking discounts on rates for hotel guests and other users of the NH Hotel. We expect that this will asset in further developing the use of the hotel's meeting and banquet facilities.

We have also signed leases for 98% of the leasable area for the first stage of the [Carba] and logistics hub in Monterrey. By the end of the year, 2012, 20 logistics tenants were operating in the Carba City building, and one airline was leasing temporary space.

Turning to our fourth quarter financial results, OMA recorded solid revenue growth, strong increase in adjusted EBITDA and net income, and very strong cash flow. The sum of our aeronautical and non-aeronautical revenues grew 7.4%. Aeronautical revenues increased 3.3%, as a result of the growth in passenger volumes. Non-aeronautical revenues increased 20.7%, and seven of the nine non-aeronautical (inaudible) grew.

The areas with the largest contributions to growth were the additional revenues from the start of the checked baggage screening service, which is included in other revenues, the NH Terminal Two Hotel, up 9.7%, on parking, up 7.3%. Non-aeronautical revenue per passenger was MXN61.6, up 13%. Excluding the hotel, non-aeronautical revenue per passenger was MXN48.7, up 16.1%. The fourth quarter of 2012 marks 19 quarters in a row for almost five years for non-aeronautical revenues for passenger increased.

The mix of revenues, not including construction revenues, was 73% aeronautical and 27% non-aeronautical, making this proportion the largest contribution of non-aeronautical revenues on record following OMA's strategy to diversify our sources of revenues.

The cost of airport operations, which is the cost of services plus general and administrative excluding the hotel, construction costs, and the maintenance provision increased 2.2%. It should be noted that the fourth quarter 2011, including some severance payments does affect the year-over-year comparisons. Total operating costs and expenses increased 11.9%.

In the quarter principally of a higher level of construction costs recognized in accordance with IFRS, increases in concession taxes, based on revenue growth, the technical assistance fee, based on EBITDA, and higher depreciation and amortization charges.

The result is that our fourth quarter adjusted EBITDA grew 11.8% to MXN382 million. The adjusted EBITDA margin was 51.5%, an increase of 200 basis points over fourth quarter '11. This the sixth quarter in a row of EBITDA margin expansion.

The tax provision grew because tax laws carry-forwards at the Monterrey airport have been amortized and, as a result of our reduction in the deferred income tax and deferred flat tax -- flat rate corporate tax, or IETU. Consolidated net income rose 10.9%, principally because of operating income growth.

Our cash flow generation has been particularly strong. Cash flow from operating activities generated cash of MXN356 million in the fourth quarter 2012 and MXN1,163 million for the full year. This is 92% above 2011 level. The increases were principally because of higher revenues and improved working capital management.

Fourth quarter CapEx was MXN168 million and MXN600 million for the full year. The most important investments for the quarter and the year were for the expansion and reconfiguration of the [Cullacan Terminal Building], the rehabilitation of the [Torreon Airport] runway, the expansion of Terminal C at the Monterrey airport, and the installation of solar power 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 lines in the fourth quarter. Cash balances rose MXN364 million in the fourth quarter to reach MXN1,152 million as of December 31st. For the full year, we recorded 14.7% growth in the sum of aeronautical and non-aeronautical revenues. Adjusted EBITDA increased 20.9%. Unadjusted EBITDA margin reached 53.6%. Consolidated net income reached MXN890 million, an increase of 33%. The return on equity was 12.8%.

While we finance essentially all of our CapEx with debt in 2012, net debt actually decreased by MXN98 million. The debt coverage ratio, net debt over adjusted EBITDA, was very healthy at 0.77 for the full year.

I am pleased to note that our 2012 results exceeded or met our outlook. Even though we raised our outlook estimates twice during the year, as is our practice, we expect to provide the 2013 outlook in April as part of our first quarter earnings.

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

Thank you. (Operator Instructions). Our first question is from the line of Vivian Salomon with Itau. Please go ahead.

Hi. Good morning, gentlemen. Thank you for the call. And just -- I wanted to make a question regarding the aeronautical revenue. And I have been -- the lower aeronautical revenue that were seen during the fourth quarter, is it something that we should expect going forward regarding the discounts and incentives that you're giving to airlines? Or how should we expect that this number would perform? And my second question is, are you going to provide guidance for 2013? Thank you.

Thank you, Vivian.

Regarding your first question, with the behavior of aeronautical growth compared to passenger growth, in the fourth quarter, we had the payment of several initiatives for -- of year initiatives with the airlines. These are actions to promote airline growth. So we have to wait until the fourth quarter to see which airline reached their goals and the goals that we established together with the airlines to promote new routes. And so this is where some of these payments occur.

Also, you see an effect of inter and of exchange rates in the fourth quarter. Comparing one -- the fourth quarter of 2012 with the fourth quarter of 2011, there was an appreciation of the peso of about 7%, so as you know, our international tour is based on US dollars. So these accounts for part of the decrease in international tour revenues. So that was also an effect in the aeronautical revenues.

So going forward, I would say that we could see a similar behavior of the first three quarters of the year, so if -- if passenger continues -- passenger growth continues to grow, we will see stronger levels of aeronautical revenues.

We may have a similar effect again at the fourth quarter of 2013. But we still have to negotiate and to see -- and to talk with the airlines on what are the routes that are -- they -- we would like to help them promote and growth and open new frequencies. And with regards with the outlook for the year, we expect to give an outlook during the first quarter results of 2013, so these will be in April.

Okay, great. Thank you so much.

You're welcome.

Thank you. Our next question is from the line of Stephen Trent with Citi. Please go ahead.

Hi, yes. Good morning, everybody, and thanks for the time. Just a quick question for me. You mentioned in the release that you had a line item other cost decrease because of an adjustment in a pension provision and some of your miscellaneous expenses went down as a result. I was wondering if you could share with us, you know, what the exact change was and what would this line have been without the accounting change?

Sure. So there are two accounting changes. This is -- one of them is the age -- the mortality age expected for Mexico increased. It went above 70 years from -- we were around 60, 65 years. So this means that there was -- the provisions that you have to make for the workers that we have, there was an effect -- an after-tax effect of about MXN7 million that you can see in the balance sheets. In the equity, you will see an effect of MXN7 million, because of this effect, so it's below the net income line.

And we also have an effect on the provisions, also, for our employees as a cost. And this is because the discount rate on which our accountant calculate this provision was lower. It went from a 7% to a 6.5%, so therefore with a smaller discount rate, you have a larger net present value, and that's why we had to adjust this for the quarter.

Okay, got it. Thanks, Jose Luis. I'll leave it there.

Thank you. Our next question is from the line of Neal Dihora with Morningstar. Please go ahead.

Hey, good morning. Thanks. I guess two questions, one on the baggage inspection recoveries from airlines. Do you have to talk to each airline to get them to OK the payment of those expenses? And then, two, on the Monterrey MDP change or at least a substitution, would you have to redo it if there was need for another runway? I guess I'm just trying to understand if this is a timing thing or if this is a permanent kind of change. Thanks.

Thank you, Neal. Regarding your first question, of the baggage inspection services, this was a project that started in the last master development plan. As you may recall, we started investments for the baggage screening machines in 2009-2010. They were fully implemented by the beginning of 2012. And we started operations in 2012, as well.

So the investment of the baggage screening machines was included since the 2006-2010 master development plan in the maximum tariff. And then once the baggage screening machines were installed and the operation was about to begin, we negotiated with the SET that the maintenance for these baggage screening machines would be accounted in the maximum tariff, and they agreed, and we also came to an agreement with the airlines that the operating costs excluding the maintenance of the baggage screening machines would be paid by the airlines. And they all agreed upon this, and so now we're operating all of the baggage screening machines at our airports.

And this is a great benefit for the security of the passengers. These are baggage screening machines that detect explosives, and also for the convenience of the passengers. As you can recall, most of the airports in Mexico used to have a hand inspection before you had the checked -- you would check the -- your bags, and now the passenger just has to make the check-in and the bags are checked afterwards.

And regarding your second question, about the Monterrey second runway, we began acquiring land a couple of years ago, since 2008 and 2009, for the -- to have the land reserve necessary for a second runway. We have an investment during that period that today the government, the SET has recognized in the current master development plan, recognized one-fifth of that investment as part of the maximum tariff, and we have recently achieved an agreement with the SET that they would recognize an additional one-third of that investment throughout this master development plan.

So that means that we're advancing in the -- in securing Monterrey for its second runway. We would love to see a city with sufficient land for two runways. Yet the second runway is not necessary or the next, I would say, 15, 20, 25 years, depending on the traffic growth. Our current runway has enough capacity, so it is not an urgent matter. But it is important that we have the necessary land reserves to be able to acquire these lands -- to be able to acquire -- to build a second runway.

Okay, thanks. That's helpful.

Thank you. Our next question is from the line of [Luis Willard] with [DDM]. Please go ahead.

Thank you. Good morning. A couple of quick questions. The first is, do you have any expected timeframe to get the remainder of the land, you know, compensated by SET?

And the second (inaudible) mentioned, just I didn't get it, if it was one-fifth of the -- of the investment. And my last question is, if you -- what's going to be the accounting treatment for this recognition, mostly regarding the concession value or something like that? Because I believe that the -- this land is not recognized under the tangible assets, right?

Thank you, Luis. So there is -- the timeframe to recover the rest of the land that we have invested in -- for the second runway, we are currently in talks with the -- with the SET. This could come in different ways, and so we're still negotiating with them on how this could -- we could recover this investment.

So regarding the one-third (inaudible) it's -- in this master development plan in -- when we came to an agreement for the 2011-2015 master development plan with the government -- so in December 2010, the SET agreed to recognize one-fifteenth -- this is one over one -- one-five -- of the land that we acquired. So this was the first step for the SET to recognize that we had made an investment, an important investment to satisfy the needs of the Monterrey airport in the future.

And then this year, they -- in -- at the end of 2012, they accepted the recognition of one additional third of that investment through the substitution of CapEx. So as the years -- these three next years go by, we'll be adding about 150 million each year of concessions land, so today this land is not part of the concession. As the years go by and as the CapEx is substituted for this recognition, then those -- that part of land will be recognized as part of a concession. So that is the accounting treatment that would take place.

So you will technically lose the property of that land, right?

Correct. The one-third of land that has been recognized, in the next three years, will become part of the concession assets.

Perfect. Thank you, Jose Luis.

Thank you.

Thank you. Our next question is from the line of [Augusto Insicci] with Morgan Stanley. Please go ahead.

Hi, good morning, gentlemen. Just a quick question -- and apologies of this has already been addressed -- in your release, in the [Da Nero] revenue, the other line, is that the -- is that the baggage screening operations? Because that's the one line that's increasing more than anything else.

Thank you, Augusto. Yes, so in the -- in the non-aeronautical revenues, we have a other line item, and that's where the services, the revenues from services of operating the baggage screening machines is registered. So that -- as I mentioned earlier, the maintenance costs of the baggage screening machines will be paid -- will be recovered through the [maximum tariff], but the operating costs won't be charged as a service to the airlines, and we would see that in other non-aeronautical revenues.

Okay, so then that line then -- I guess majority of that is this -- is the baggage screening, then, right?

Yes. That -- most of it is -- it is.

Okay. And then -- so then, I mean, is this a normal -- a normal level for a -- for a quarterly basis? I mean, is this -- I mean, looking forward to -- at these traffic levels, then this is the kind of revenue you'd expect from baggage screening, right? It's something that every passenger has to do regardless?

Yes, correct. More or less, you will see that level. It's linked to the passenger traffic, so if we have increases in passenger traffic, you will probably see growth or similar -- in proportion to that -- to that traffic.

Excellent. Thank you very much.

You're welcome.

Thank you. Our next question is from the line of [Catherine Gunn] with Wellington Management. Please go ahead.

Thanks. Just a quick question. Is the increase in maintenance expense, is that related to the baggage screening? And then going forward, should that revert to the lower level? So should we think of this as a one-off increase -- in that cost line?

Hello, Catherine. So the maintenance, we have a maintenance provision.

Sorry, I mean the maintenance in the operating expenses line.

No, that should be minor maintenance for the runways and terminals. Usually, most of the administrators wait until the rainy season in the year to start doing some important maintenance of their airports, that, say, paint the terminals or do other maintenance in the runways. So we see -- frequently see that a lot of this maintenance occurs in the last quarter.

So it was surprisingly low last year, rather than surprisingly high this year?

Correct.

Okay, thank you.

Thank you. (Operator Instructions). Our next question is from the line of [Bernardo Velez] with [GBN]. Please go ahead.

Hi, good morning. You mentioned 1.7 increase in the maximum tariff due to the baggage screening services. And my question goes -- you don't always charge the maximum tariffs in most of your airports. And how can we expect this increase to reflect? And when can we expect it?

Thank you, Bernardo. So we were able in 2012 to charge an average of 99.2% of our market maximum tariff in all of our airports. So the management is focused on charging us as much as we can and recovering as much as we can of revenues to be able to recover the investments that are part of the master development plan.

So we are at the top levels of that maximum tariff. The 1.7% increase will -- has been authorized, so we will -- we will probably see an adjustment, an increase coming up in the -- in the next quarter, you will see that -- those improvements.

(inaudible)

So it's -- in April, you will see the benefit.

Oh, okay, perfect. Thank you.

Thank you. Our next question is a follow-up from the line of Neal Dihora with Morningstar. Please go ahead.

Okay, thanks. Just a follow-up on this -- I guess the aeronautical revenue in the quarter. You had mentioned that there was some things that you're doing to try to increase the airlines' route structures, I guess, into your airports. Can you just talk about like how many airlines you're doing that with or at least maybe how many destinations you're trying to do that with?

Thank you, Neal. So we have several actions to promote traffic growth. This is open to all of the airlines. So, for example, if we want to promote a route from Durango to Monterrey, we announce to all of the airlines, whoever wants to start the frequency in this airport with this destination, they will have a benefit, let's say, of 50% discount on aeronautical services and a smaller discount on other services, let's say (inaudible) discount.

And so that -- in that way, we share the risk with the airline to open a new route that could be riskier and that they might have other -- better opportunities. But when you give them an incentive, they're willing to try it out. And we have had many cases when the routes are great news and they actually surprise the airlines and they remain for a long period of time.

So another way to -- that we help promote new routes is with publicity. We have space at our airports to announce the new routes. And so that's another way that that we do it. So it's open to all the airlines and on the specific route that we want to promote.

So I guess just in the fourth quarter specifically, would the fact that revenues only went up 3% and traffic was up 7% -- and I know there was some foreign exchange issues there -- but would that mean that it was a success in the fourth quarter, meaning airlines did take you up on the offer to take the 50%, or whatever discount it was that you offered?

Correct. So these plans are usually year plans.

Okay.

So this is something that we work with each one of the airlines, and we talk about additional passengers from their existing passengers. And so we give them discounts on the -- on the growth, the additional growth that they bring to the table in a specific route. And so it happened in the fourth quarter, because we had to wait to see the actual results of the airlines throughout the year and compensate them for their growth.

Okay, so you actually started it earlier in the year and the payments came in the fourth quarter, and you think the payments are going to continue in the next three quarters, as well?

So it -- so that was the 2012 plan. 2013, it's a new year with different plans, different priorities from the airlines and from our airports. So it's a new plan that starts this year and that it's negotiated with all of the airlines.

Okay, thanks. That's very helpful.

You're welcome.

Thank you. Our next question is from the line of Edward Bonnu, a private investor. Please go ahead.

Yeah, good morning, folks. Question on the dividends. Prior to 2012, they seem to be on a quarterly basis. When do you plan on going back to an even flow like that? Or when do you plan on paying another dividend?

Thank you, Edward. The dividends are announced at the general board meeting in the -- the assembly, general assembly, which occurs in April. And there could be -- we could go back to the quarterly payments or they could decide to make it in a single payment.

So when we used to have quarter repayments, we used to pay them in July, October, January, and April. And in 2012, we pay them in a single month. So it will depend on what -- what is a decision at the -- at the assembly.

Okay, getting back to July 2012 payments, there was two payments that were pretty much in line with the previous quarters. And then you made a larger payment, like in June, that was like five times the volume or the peso amount of the previous payment. Is this going to be on balance like that, also?

So we -- so the payments that you saw that were -- that were MXN100 million -- so these were four quarterly payments, so in 2011, for the 2010 results, the shareholder meeting decided to decrease the dividend of MXN400 million paid quarterly. In 2012, for the 2011 results, the shareholders meeting decided of -- for a MXN500 million paid in a single installment. So that's -- in reality, it was an increase of less than 30%, because it went from MXN400 million to MXN500 million. And one of them was paid quarterly, and the other one was paid in a single installment.

Okay, very good. Thank you.

You're welcome.

Thank you. And I'm showing no additional questions. Please continue with any closing remarks.

Thank you. On behalf of OMA, I want to thank 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, that does conclude our conference for today. Thank you for your participation. You may now disconnect.