Grupo Aeroportuario del Centro Norte SAB de CV (OMAB) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Grupo Aeroportuario Del Centro Norte OMA second quarter 2013 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator instructions)

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

Good morning. Welcome to OMA's second quarter 2013 earnings conference call. My name is Jose Luis Guerrero, OMA's Chief Financial Officer.

We saw many of you during our recent road show. I want to thank everyone who participated in our meetings. I will start with an overview of the major business developments in the second quarter. We will then open the call up to questions.

OMA had another strong quarter, with good performance from our aeronautical activities, commercial activities, and our diversification initiatives. Turning to our second quarter operational developments, passenger traffic volumes increased 5.6%, with domestic traffic growing 6.2%, and international traffic up 1.5%. Nine of the 15 airlines we serve increased passenger volumes. And this is the ninth quarter in a row of increasing passenger traffic for OMA.

We have 7 new domestic routes open, and one new international route. Aeromexico retired 5 aircraft under lease agreements, another 2 under operating leases, and now has 112 planes in operation, while Volaris has 43 planes, Interjet 37, and Viva Aerobus 19. As our air passenger traffic has rebounded, there has been an important recomposition of traffic at our airports.

Since 2009, for example, Monterrey's international traffic, passenger traffic has increased 44%, and in the past six months, it grew 7.7%. This reflects, among other things, the strong economic recovery that is taking place in the manufacturing sector. Foreign direct investment in the state of Napoleon reached a record of $2.8 billion in 2012.

This strong performance continues to underpin our decisions to invest in the Monterrey Industrial Park, the expansion of the low cost carrier terminal in Terminal C last year, the new low cost carrier maintenance hangar, among others.

As we announced yesterday, we also signed a joint venture agreement with Grupo Hotelero Santa Fe, to build and operate a 130-room Hilton Garden Inn Hotel in the Monterrey Airport, with a full range of services serving Monterrey Airport business travelers. The hotel will be located between Terminals A and Terminals B. We expect the hotel to start operations by the end of 2014.

Second, the airports in other cities that are heavily involved in manufacturing and foreign trade have also shown a strong growth, including Chihuahua, Culiacan, Tampico and Reynosa.

Third, there are strong signs of recovery at our touristic airports -- in particular, Acapulco passenger traffic was up 9.1% in the second quarter, and Mazatlan traffic was up 13%. We are optimistic that as tourists return to these great destinations, word of mouth will help sustain the positive momentum.

On the commercial front, we opened 24 retail and services stores in our airports, and our lease occupancy rate was 94%. The NH Terminal 2 Hotel had another great quarter. The occupancy rate was 83.7%, the second highest ever, and room rates increased 14% year over year.

OMA Carga continues to grow, particularly in our grand transit links with Dallas, Chicago, Los Angeles and Mexico City, and had a 33% increase in revenue in the second quarter.

Turning to our second quarter financial results, OMA recorded solid revenue growth, strong increases in adjusted EBITDA and net income, and strong cash flow generation. The sum of aeronautical and non-aeronautical revenues grew 11.1%. Aeronautical revenues increased 9.7%, principally as a result of the growth in passenger volumes and inflation.

Non-aeronautical revenues increased 15.7%, and 7 of the 9 non-aeronautical line items grew. The areas with the largest contribution to growth were the additional revenues from the start of a checked baggage cleaning services, which is included in Other Revenues; OMA Carga, up 33%; the NH Terminal 2 Hotel, up 10.4%; and retail and other leases up 9.7%.

Non-aeronautical revenue per passenger was MXN58.8, up 9.6%. Excluding the hotel, non-aeronautical per passenger was MXN45.7, up 11.1%.

The second quarter of 2013 marks 21 quarters in a row where non-aeronautical revenues per passenger increased. The mix of revenues, not including construction revenues, was 75% aeronautical, and 25% non-aeronautical, compared to 18% at the time of the IPO in 2006.

The cost of airport operations, which is a cost of services plus G&A, excluding the hotel, construction costs, and the maintenance provision, increased 14.1%. The increase was principally because of increase in minor maintenance expenditures, and an increase in payroll due to an increase in the state of Napoleon payroll tax from 2% to 3%.

One of the expense line items that was stable is basically (inaudible). I would like to note that our private project for generating solar power in Zacatecas is proving to be very positive. For the first six months of the year, the solar installation produced 196 megawatts hour, or 49% of the electricity requirements of the Zacatecas airport.

We reported an increase in Other Income due to the sale of land in the Monterrey Airport. That is not going to be used for the second runway, or for diversification projects.

Total operating costs and expenses increased 12.7% in the quarter, principally because of a higher level of construction costs recognized in accordance with IFRS, increases in concession taxes based on the revenue growth, the technical assistance fee based on EBITDA, and higher depreciation and amortization charges.

The result is that our second quarter adjusted EBITDA grew 14.6% to MXN405 million. The adjusted EBITDA margin was 53.2%, up 160 basis points. This is the eighth quarter in a row of EBITDA margin expansion.

The tax provision decreased because of the application of expense provisions. Consolidated net income rose 34%, principally because of operating income growth, and the lower tax provision.

Our cash flow generation also continues to be strong. Cash flow from operating activities generated cash of MXN543 million in the first six months of 2013.

Second quarter CapEx was MXN145 million. The most important investments for the quarter included construction of a maintenance hangar for low cost carriers in Monterrey, roadway improvements in the Monterrey Airport, and a new perimeter security wall in Acapulco.

I want to remind you that our ongoing master development plan CapEx requirements over the 2013-2015 period are reduced by the SCT's agreement to recognize one-third of the value of the land we purchased for a second runway back in 2007 and 2008. For 2013, the investment recognition represents MXN174 million.

During the second quarter, OMA paid MXN400 million for the first installments of the capital reimbursement approved by the annual shareholders meeting, and the second payment of MXN200 million will take place on July 13th.

At June 30, 2013, OMA's cash balance was MXN2.094 billion.

Finally, I would like to note that the recently completed secondary offering of 69 million shares, or 17.25% of the total OMA shares, sold by Aeroinvest, represent a substantial increase in our public float, reaching 58.5% post-transaction. We think that this could result in an increase in the liquidity of OMA stock. We are already seeing almost twice as much liquidity since the transaction took place.

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

Thank you, sir. (Operator instructions) Our first question is from the line of Eduardo Couto with Morgan Stanley. Please go ahead.

Hi, good morning, guys, and congratulations on the results. My first question is regarding the margins. OMA reported, you know, strong margins in the first and second quarter. If I'm not wrong, the EBITDA margin is running at almost 55%. And the guidance for the year ranged between 50% to 52%, if I'm not wrong.

So can we expect maybe margins for the year to be above the guidance, or are you expecting a meaningful decline in the second half? If you could give us more color on the margins for the full year, that would be helpful.

Sure. Thank you, Eduardo. So, as you have correctly said, the original guidance of EBITDA, adjusted EBITDA margin, was between 50.5% and 52%. We're definitely seeing a strong first semester, and today, and throughout the year, we could be on the upper side of the guidance that we gave.

Nevertheless, we had a strong second semester last year in terms of passenger growth, so we're currently seeing -- not a -- such a -- probably not such a strong increase in the second semester in terms of passenger traffic. We'll see how each one of the months takes place.

So, so far, we're probably on the upper part of the guidance. We might be able to pass it by a little bit, but so far, we're not changing the guidance.

It would also depend on when the new planes that the airlines announced that are going to be arriving, so the -- for example, Aeromexico yesterday announced that they issued some bond, 12-year bond to finance 3 of their Boeing 737s, 800s, the Dreamliners. So as soon as these planes arrive, they are going to give more flexibility to the other regional planes that they have, and hopefully our -- we're going to start seeing some of those in our airports.

They also have the Dreamliner -- I mean, the Embraer 190s, that 10 of them should be -- have already been arriving to replace the 145s, so those can also help the second semester in our year.

Also, as you know, Interject expects to start getting one Sukhoi every month starting in July, and so this could add 6 more planes for Interjet, and they also have an order for other 40 Boeings, and that should also start arriving soon. And Volaris also has strong plans as well. They also announced another 40 planes, also Boeings. So that's very good news for us.

As soon as these planes arrive, we could be on the -- on a better projection in terms of EBITDA margin. We might be able to change the guidance in the third quarter.

Okay, makes sense. And just one other question, guys, regarding another point that called my attention in the results, which was the non-aeronautical revenues per passenger. That continued to grow very strongly. And then when we look ahead, we still have this -- the industrial park in Monterrey, and also now the hotel.

Do you have an idea of what sort of impact this -- that these new projects in Monterrey could have for commercial revenues or non-aeronautical revenues per passenger? Can you guys sustain a -- at least a high single digit growth maybe next year, and the year after that?

So far, what we have been seeing at the airports is a double digit growth in the non-aeronautical revenues. And so, that's something that really helped us back in 2010, for example, was the NH Terminal 2 Hotel. That started operations in 2009, but it was really 2010 when we started seeing a good amount of revenues.

The hotel in Monterrey is going to be half the size of the hotel that we have in Mexico City, so this is going to be a 130-room hotel. So it should also help to increase the non-aeronautical revenues. We should finish the construction by the end of 2014, so we could expect maybe a start of operations by the end of next year, or in the first quarter of 2015.

So it will depend on where the passengers are at that moment, to be able to give you any guidance in terms of what will be the non-aeronautical revenue per passenger, but we're definitely working on improving this indicator.

And there are many other initiatives that we can -- that we're looking at, for example. You also mentioned industrial park. That's also a project that we have today in -- at the Monterrey Airport. And we have many other initiatives, commercial initiatives that are still taking place, and that had helped us to continue to grow our revenues. So as long as we keep innovating, I think we can continue to grow our non-aeronautical revenues in low double digit numbers in the next couple of years.

Okay. Very clear, Jose. Thanks, and congratulations on the results.

Thank you.

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

Good afternoon, guys, and thanks for taking my questions. Two from me. One, a follow up on the Hilton Garden Inn project that you guys mentioned yesterday. When we think about the potential clientele you're targeting, and potential price point, let's say, I know it's half the size of the NH Hotel in Benito Juarez, but can we at least expect a similar mix in terms of margin and price point versus NH Hotel, or how are you thinking about it differently, if so?

Sure, thank you, Stephen. So, regarding the clientele for the Monterrey Airport, the -- as you know, the Monterrey Airport is -- most of the passengers are business passengers. So while we target our business passengers that would like to stay at the airport, that they have meetings, probably, near the airport in all of the industrial parks that we're seeing, today we -- there is a lot of hotels in the area. But I think we have an advantage of being inside the airport, with the benefit of being very close to your flight, and also in terms of the security. You also have much better security at the Monterrey Airport than in other places nearby. So we are focusing on a business clientele.

In terms of the price point, this will probably be lower at the moment than when we start than the Mexico City NH Hotel in Terminal 2, for a couple of reasons. One is that the Mexico City hotel has been through almost four years now, where we have been able to increase the rates, and people are returning to the hotel. They really like it. It's the only hotel inside Terminal 2.

And so -- and also, the willingness to pay, as well, at Monterrey, might not be as high as in Mexico City. So we're probably going to start with a lower price point in the Monterrey Airport.

In terms of the margins, I think that once the hotel matures in Monterrey, I think we could be at similar levels of margins with respect to the Mexico City hotel, which today has about a 40% EBITDA margin.

Great, thank you. And just one other question. You mentioned a 94-somewhat % occupancy rate in the retail areas of your airports. Any sense as to what extent the mix may have evolved over the past few years with respect to currency that you're generating, or the indexation from a foreign currency standpoint, that you're generating maybe less parking lots and more retail stores, or -- I'm not sure what the general color is there, as to how much of that flow is US dollar denominated.

Sure. So the -- most of our commercial opportunities are in terms of Mexican pesos. There are also the parking lots, and most of the contracts that we have are in pesos.

Okay, very helpful. Thanks again for the time.

You're welcome.

(Operator instructions) Our next question is from the line of Bernardo Velez with GBM. Please go ahead.

Hi, good afternoon. Thanks for taking my call. Just a couple of questions. Regarding the sale of land, if you could give us a bit more insight on this. Who are you selling to, and why are you selling it? And probably amount, or something, that you can provide us with

Sure. Thank you, Bernardo, for your question. So, as you know, we acquired a large amount of land in 2007 and 2008. The idea of acquiring land in the Monterrey Airport was because we were seeing the housing developments getting very close to the airport, and actually buying land right next to the perimeter where we operate. And so they had in mind to begin housing projects right next to the airport.

So knowing that we still had at that moment about 40 years, or 42 years of the concession left, and given the traffic projections at the time, we decided, in -- together with -- in talks with the authorities, the recommendation was that we acquire the land to protect the airport for -- from a second runway. And so we acquired about 50% of the land necessary to build a new runway at the moment.

And we also -- what we did was to work with the local authorities to change the usage of the land. So the rest of the land, that we have not already acquired, can be -- can only be used for agricultural purposes today. So we're -- we should not see any more housing developments getting right in the area where we're thinking a second runway in Monterrey could be.

And so the land that we sold this year was actually land that we acquired in addition to the land that was necessary for the second runway, and we acquired this land to be able to negotiate with possible sellers of land to us at that moment. So that, if they want -- if they really wanted some land in that area, that we could exchange the land that we acquired that was outside of the second runway projections. And so we could exchange.

So this is -- these were about 100 hectares that we recently sold. We still have a couple of more hundred hectares that we could sell in the future, but this was someone who came to us and asked us that they wanted to buy the land. So this land will not interfere with the second runway projections, and this was land that we had there, and we sold them, and we made a profit out of it.

Okay, so it isn't included in the joint venture with VYNMSA to develop the industrial parks, right?

Correct. This is not included in the VYNMSA project. The VYNMSA project, it's actually inside the land on the concession of the Monterrey Airport. The land that we sold is not part of the concession of the Monterrey Airport, and is not part of the land that we'll need -- that will be required for a second runway.

Okay, perfect. And second, could you give us a bit more insight on the new hotel deal, and what are your projections in terms of -- I mean, in terms of revenues, would you expect probably half of what Mexico City's hotel is generating?

So that is correct -- maybe a little bit less than half, since room rates will not necessarily be at the level of the Mexico City airport. We'll see how the market behaves. So as you know, there should be a ramp up period where we can see how the market responds to our opening tariffs, and see how that evolves.

So it is half the size in terms of rooms, but we might be lower than half in terms of revenues for the Monterrey Airport.

Okay, thanks. And lastly, I want to ask you, part of the non-aeronautical revenues in other airports that you disclose in your press release that we have seen a substantial increase in the last couple of quarters.

Sure. So there are -- in terms of non-aeronautical activities in other airports, apart from Monterrey, we're seeing some very interesting projects. So, for example, having brands that are easily recognizable by the passengers, so we have the success stories of having, for example, a Carl's Junior Hamburger place in Culiacan and Mazatlan, where actually people go to the airport to have lunch or dinner, and they're not even taking a flight. So those initiatives have really helped us to increase commercial revenues in other airports, also having publicity in areas where the passenger was usually not expecting to see publicity. We call it alternative publicity.

So these are two examples of things that we have been doing at the airports to increase our commercial revenues.

Okay, perfect. Thank you so much for the call.

You're welcome.

Our next question, and it's from the line of Pablo Abraham with BBVA. Please go ahead.

Yes, Jose. Congratulations for the results. Just a couple of questions. The first one is regarding the new hotel. And you are going to use the same operational scheme that in the (inaudible), are you -- that you have in Mexico City? And well, the second is, the (inaudible) will be divided in the same proportions, I guess? With the Grupo Hotelero Santa Fe?

Sure. So the -- in terms of the operational scheme, this is a little bit different. As you know, the Mexico City airport is owned and operated by the Mexican government. So in the case of the Monterrey Airport, the Monterrey Airport will be also getting revenue for the land where the hotel is operating, so they're basically renting the land where the hotel is going to be built and will operate.

And in addition to that, the -- as you mentioned, the 85% participation from OMA,15% participation from Grupo Hotelero Santa Fe, will also be the same in terms of the investment.

The other difference is that, as you know, in Mexico City, it's NH Hotels of Spain who operate the airport, and here it is Grupo Hotelier Santa Fe with the Hilton Gardens brand.

Okay, thanks. And one more question, regarding the situation in Chihuahua last weekend. Do you have any estimate of a possible impact in terms of damage, or possible new investments for this airport?

Yes. So, as you know, Pablo, last Friday, we saw very heavy rains at the Chihuahua Airport, and Chihuahua as a city, as a whole. So they -- the city captured about the entire yearly rain in just three days. So that was an enormous amount of water at a single moment. So the -- there was a lot of water that entered the airport. Fortunately, the runway was not flooded. Only the taxi ways were flooded a little bit, and the terminal building also had water.

There was an image that circulated in the news about the parking lot of the airport being flooded, but that was actually a competitor nearby, who -- unfortunately, they got about one meter of water in the parking lot. And so that really complicated -- with the cars, and they probably had a lot of losses.

So that -- that was not the case with the parking lot in [Arroma]. There was some water at the parking lot, but it was not flooded.

The administration of the Chihuahua Airport worked really hard that night, on Friday night. There were more than 10 planes, 10 flights cancelled that afternoon. But they were able to have the airport reopen at 5 am in the morning, the next morning. So they basically got all the water out of the first floor of the terminal, and they also were able to drain the water from the taxi ways. So that was a really strong work from the administration of the Chihuahua Airport.

We are not expecting any significant expenses from cleaning the airport. We are waiting for the final results of the -- at the Chihuahua Airport, if any of the machinery got any problems, but so far, we're not getting any of that information. So for example, the elevator, we're waiting for the technicians to come by and check it before we start operating it again. But so far, we didn't see any major expenses at the -- or costs, at the Chihuahua Airport.

Okay. Thank you very much.

At this time, I would like to turn it back to Jose Luis Guerrero for any closing remarks.

Well, 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, this concludes the Grupo Aeroportuario Del Centro Norte OMA second quarter 2013 earnings conference call. Thank you for your participation. You may now disconnect.