Grupo Aeroportuario del Centro Norte SAB de CV (OMAB) 2013 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Grupo Aeroportuario Del Centro Norte on their Third Quarter 2013 Earnings Conference Call.

During today's presentation the lines 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 call over to Jose Luis Guerrero. Please go ahead.

Thank you and good morning. Welcome to OMA third quarter 2013 earnings conference call. My name is Jose Luis Guerrero. I'm the Chief Financial Officer. Joining me this morning is Israel Magana, our Investor Relations Officer, and [Ixtani Torres], our Corporate Treasurer.

I will start with an overview of the major business developments in the third quarter. We will then open the call up to questions.

OMA had another solid quarter with good performance from our aeronautical activities, commercial activities and diversification initiatives.

Turning to our third quarter operational developments, passenger traffic volumes increased 5%, with domestic traffic growing 6.1%, and international traffic decreasing 2.7%. Eight of the 15 airlines we serve increased passenger volumes. And this is the tenth quarter in a row of increasing passenger traffic for OMA.

The airlines with the fastest growth in traffic at OMA reports in the third quarter were Aeromexico, Polaris and Interjet. We have nine new domestic routes open, while two domestic and four international routes closed.

As you know, the domestic airlines are making major seat expansion and renewals. Aeromexico added five planes to their fleet and retired one, to close the quarter with 116 planes. As of today, two Dreamliners, the 787, have arrived. And they expect one more by the end of this year.

Polaris made its IPO in this quarter, disclosing an existing fleet of 43 planes. Viva Aerobus announced last week an order of 52 planes, including 40 Airbuses 320, with deliveries over the next eight years. The first delivery is scheduled to take place in early 2014 and will replace its existing 737 fleet.

Interjet added two Sequoia 100 planes to their fleet to reach 41 planes for the country. On the commercial front we opened 21 retail end services in our airports. And our lease occupancy rate was 95%.

OMA cargo continues to grow, particularly in our grand transit links with Dallas, Chicago, Los Angeles and Mexico City. And have an 18% increase in revenue in the third quarter. Please note that because of the mix of air and ground operations, the decrease in air cargo volumes has not affected OMA Carga's growth performance.

The NH Terminal Two Hotel had another excellent quarter, with occupancy rate at 85.4%, the highest we have ever had. And room rates increased 18% year-over-year.

We took over the management of 150 parking lot spaces in the Terminal Two Garage during the quarter. Having this parking enables us to offer discounted rates to companies that are using our conferencing facilities and it's boosting our conference business at the hotel.

Subsequently, we have started an expansion of our conference facilities with a total area expansion of 1,200 square meters and a conference area of 460 square meters.

During the third quarter we broke ground on the industrial park in Monterrey, starting the first phase of the project with urbanization works. We also moved forward with planning for the Monterrey Terminal Hotel. The Company expects to break ground in this last quarter.

These three commercial initiatives, the NH conference facilities, the Monterrey industrial park and the Monterrey hotel are all included in our budget for strategic investment.

I think the response to the effect of Hurricane Manuel in September demonstrates many of OMA's operational strength. As you recall, the unprecedented rainfall that accompanied Manuel caused massive flooding, landslides and road closures in western Mexico, particularly in the state of Guerrero.

On September 16, the lagoon next to the Acapulco airport broke its banks and the access roads and parking lots were under water. There were many tourists in Acapulco and other parts of Guerrero stranded and unable to travel by car, bus or air.

Working closely with the authorities and airlines, OMA was able to reopen the airport on September 17, using a temporary terminal. We then started an air bridge operation. The four-day air bridge operation from September, carried a total of 24,177 passengers from Acapulco. And a similar operation in Zihuatanejo airport carried 4,651 passengers.

OMA waived all airline and passenger fees during the course of the air bridge operation. We were able to reopen the Acapulco terminal building on September 21. And we have had normal operations ever since.

The Culiacan airport had to close briefly on September 19 because visibility was below the minimum levels. Mazatlan and Zihuatanejo continue to operate normally. We did not incur any material effects from the storm. Insurance will recover most of the physical damage that we suffered, which was limited to Acapulco.

Turning to our third quarter financial results, OMA records that solid revenue growth increases in adjusted EBITDA and net income, and a strong cash flow generation.

The sum of aeronautical and non-aeronautical revenues grew 7.6%. Aeronautical revenues increased 4.6%, principally because of the growth in passenger volume. Non-aeronautical revenues increased 17.5%. And seven of the nine non-aeronautical line items grew.

The areas with the largest contribution to growth were the additional revenues from the start of the check baggage screening service, which is included in other revenues. The NH Terminal Two Hotel, up 14.5%, and car rental up 45.3%.

Non-aeronautical revenues per passenger was MXN57.1, up 11.8%. Excluding the hotel, non-aeronautical revenues per passenger was MXN44.2, up 12.7%.

The third quarter of 2013 marks 22 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 the 18% at the time of the IPO in 2006.

The cost of the airport operations, which is the cost of services plus G&A, excluding the hotel, construction costs and the maintenance provision, increased 13.8%.

The increase was principally because of higher payroll because of employee bonus provisions, minor mentoring expenditures related to the check baggage screening, self-contracted professional services and other costs and expenses related to the airport [magazine] and software licenses.

The Zacatecas pilot solar project continues to have positive outcomes. For the first nine months of the year, the solar installations produced .26 megawatts, or 42% of the electricity requirement of the Zacatecas airport.

Total operating costs and expenses increased 10.7% in the quarter principally because of higher levels of construction costs, recognizing accordance with IFRS, and higher amortization and depreciation charges.

The result is that our third quarter adjusted EBITDA grew 4.4% to MXN444 million. The adjusted EBITDA margin was 54.3%.

The tax provision decreased 12.1% because of a combination of factors. One of the factors was the fiscal deconsolidation of OMA in the accounts of Empresas ICA. While ICA continues to consolidate OMA for financial reporting, it no longer consolidates OMA for tax purposes, consequently, of the secondary offering of shares in July 2013, in accordance with the relevant tax laws.

As a result, the third quarter results reflect the settlement of various tax credits and various liabilities between ICA and OMA. The movements include a payment of MXN144 million to ICA, settling a liability with the Company, and shown in the cash flow statement. A tax credit of MXN163 million for income tax on dividends on the balance sheet, and a credit for income taxes of MXN15 million on the income statement.

Consolidated net income rose 4.4%, 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 a cash flow of MXN720 million in the first nine months of 2013, including the payment to ICA. Third quarter CapEx was MXN127 million.

The most important investments for the quarter included expansion of the commercial aviation platform, taxiway, a new commercial aviation zone at the San Luis Potosi Airport, the rehabilitation of the runways in Ciudad Juarez and Torreon airports, and the design, procurement and installation of the passenger jetways in Tampico and Ciudad Juarez airports.

OMA paid MXN200 million for the second installment of the capital reduction payment approved by the annual shareholders meeting, and a third payment of MXN200 million will take place today. At September 30, 2013 OMA's cash balance was MXN226 million.

OMA's results are clearly in line with the full year guidance we provided earlier in the year. Management expects that full year results will be on the high side of our estimate, particularly with respect to adjusted EBITDA, while passenger traffic and revenue could be in line.

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

Thank you. (Operator instructions). One moment, please. And our first question comes from the line of [Eduardo Calto] with Morgan Stanley. Please go ahead.

Hi. Good morning, Jose. Good morning, Israel. I have two questions, guys. The first one on the aeronautical revenues. You grew passengers but your total flight operations declined. That was the main reason for the decline on the aeronautical revenues per passengers in the third quarter? I know there is also the hurricane impact. If you could comment a little bit why your aeronautical revenues per passenger declined a little bit on the third Q?

Sure. Thank you, Eduardo. And so there are a couple of factors why the aeronautical revenues decline -- or they grew smaller than the growth of passengers.

One, as you mentioned was the small non-recognition of tariffs for Acapulco. So we had about total 27,000 passengers that traveled, both in Acapulco and Zihuatanejo, where we did not charge tariffs or airport fees. That was about, roughly, MXN2 million [off the deck].

The other factor is that inflation is lower than what we had expected. And therefore, the revenues have to be adjusted, not to surpass the maximum tariff that we are allowed to charge. And, as you mentioned -- yes. The declining of operations also affected, although most of the operations were general aviation, the ones that are causing the operations to decline. But those are the three most important effects.

And do you expect this lower flight -- because I think this is because the airlines they are up-gauging the aircraft or -- I don't know -- the load factors are high.

Why do you think the passenger traffic is growing but the flight operations are declining, Jose?

Yes. One point is the one that you mentioned -- the efficiencies of the airlines. They are moving to larger planes. For example, we're seeing the [Ember] for 100 passengers replace the ones with smaller capacity, the 70-passenger [Ember] for Aeromexico. And that has helped to have more passengers with less operations.

And the other factor is the number of operations from general aviation has declined.

Okay. And just a final point on the Monterrey airport. You know, the traffic there has been relatively weak. I think it grew only, like, 2% on the third quarter. How do you see the traffic in Monterrey going forward? Do you think this is going to recover? What is the trend there?

Right. So before this quarter, Monterrey was the airport leading the traffic growth at OMA, both in the international front and in the domestic front. Yes, in this third quarter we're seeing smaller growth in Monterrey. I believe part of it has to do that the third quarter has the months of summer. And most of the travelers in the Monterrey airport are business passengers.

And the good news for Monterrey is that they have achieved their record in (inaudible) direct investments. As of July of this year, they reached $3 billion, when last year the record was $2.6 illion.

So we're seeing investments continue to grow in Monterrey. And we should continue to see an increase in passenger traffic in Monterrey, hopefully, in the following quarters.

Okay. Thank you, guys. Congratulations on the third quarter numbers.

Thank you.

Thank you. Our next question comes from the line Anna Reynal with Santander. Please go ahead.

Hello. Good morning. Thank you for taking my question. Could you please elaborate on how much of the contraction in adjusted EBITDA margin was due to one-off? And how much or what are the items that we can expect to carry on?

Sure. So basically we have recognition of employee bonus that were having as a reserve in every quarter this year. So that will be a one-off effect that you're seeing this quarter that will not continue in the next year.

That is, I guess, one of the few effects that are one time effects. The rest are some works that we are doing. We're having maintenance works as well in this quarter. That also grew the costs we are recognizing this year as well. It's the first year when we are operating at all of the airports the baggage screening machines. So we didn't have that effect this year. So hopefully next year we still have it.

But compared to this year, we should not see that difference in the growth costs in that line item. So those are the factors that are making more changes in this year.

Thank you.

Thank you. Our next question comes from the line Marco Montanez with Vector. Please go ahead.

Hi. Thank you. Hi, Jose Luis. And thank you for taking my question. Regarding the deconsolidation of OMA from ICA, in the release there mentions some effects (inaudible) the cash flow, the MXN120 million payment is already reflected.

I mean, the question is for the future. Will there be additional charges in the next periods regarding the consolidation having effects in the cash? And thinking in the dividend policy will be a material effect for this deconsolidation? That would be very helpful. Thank you.

Sure. Thank you, Hector. So in this quarter we are reflecting all of the effects of the deconsolidation of ICA. So we're recognizing an increase in taxes receivable by MXN156 million. We're also paying ICA MXN103 million in cash. This has to do with the dividend (inaudible) taxes that we paid from 2000 -- that we had from 2008 to 2012.

As you know, under the Mexican fiscal laws, from 2008 to 2012 we consolidated the fiscal results under [INECA]. And so we saw the effects of not consolidating with them anymore since they sold 17% of their shares that they had from OMA in July of this year. So we should not see any further effects.

Once we receive the credit from the authorities for the MXN156 million, we should see a benefit in taxes of MXN4 million. That's the minimum amount that should take place next year.

Okay. Great. And regarding the dividend policy, do you think any changes for the next payment, or something like that?

We haven't. So as you know, it is the general board meeting and the general assembly, which they evaluate the results of the Company. And they decide on how much the dividend for next year should be. And that will take place in April 2014.

We're not expecting any changes in our dividend policy. And therefore, we are not considering any changes.

Okay. Great. Thank you, Jose Luis. And congratulations on the results.

Thank you.

Thank you. Our next question comes from the line Bernardo Velez with GBN. Please go ahead.

Hi. Good morning. Thanks for taking my call. First, I'd like to ask you regarding just a follow-up on ICA's fiscal deconsolidation. This payment of MXN144 million, was this response to a fiscal liability? Or is it like a payment for construction, probably?

No. This is a fiscal liability that we had with them. This is part of the deconsolidation of OMA from the fiscal accounts of ICA.

As you know, from -- we started consolidating fiscally with ICA since 2008. During those years we paid dividends. So this is part of the taxes from the dividends that created this fiscal liability with them. And that's why we're paying them MXN103 million. On the other side we're getting tax receivables that were registered in the balance account.

So if you look at the balance sheet, in the assets we have tax receivables increase by roughly MXN160 million. And so we should recover this amount early in the next year.

Okay. Perfect. And could you walk us through your expected significant terminal expansions for new projects that you could be thinking of?

Well today we're expanding the San Luis Potosi airport. It had reached its terminal capacity in the year. We recently expanded the Chihuahua airport as well.

So there is quite an interesting description of all the construction works that we're doing at the airports in our third quarter summary. For example, we're also adding to a jetway in Tampico and Ciudad Juarez. So you can see what we are doing in terms of construction at the airports in that section.

And for next year, how much can you expect for terminal expansions, especially on the commercial side?

In terms of the commercial side, we're not foreseeing any large expansions in the next year. Currently, we are expanding the NH hotel for a couple more conference centers. That is an investment of roughly about MXN11 million. As you know, our partner is [NHO] (inaudible) Spain, and they have 10% participation.

The Reynosa airport is reaching its terminal capacity at the moment. And that's another airport where we're going to see an expansion in the next following quarters. And there could be possibly room for a couple more commercial spaces, or better distribution of the commercial spaces in Reynosa.

Okay. Perfect. And lastly, with all these plane orders from the domestic carriers, why would we think that OMA will be able to attract a larger share in terms of passenger traffic from these plane orders and from its competitors? If you could say?

Thank you. That is a very interesting question. We see that OMA would certainly benefit from the domestic airlines adding more capacity. One is the signal that the airlines are doing quite well financially. And that they're looking at a market that today is not flying.

So, for example, we're still under the levels of our record in 2007. So as more planes arrive into the market, we're going to see more original routes. So the Interjet [Sequoias] -- they are smaller planes. They are going to be using them for regional routes that will definitely help.

We're seeing the new planes from Aeromexico. As you know, they are replacing their [Embers] for [Embers] with a little bit more capacity. So that will help also to have more passengers traveling in the regional routes.

And so the Dreamliners are also helping to use their shipping fleet for local purposes. The Dreamliners will be used for international routes.

And another point is that the Mexico City airport has reached its capacity. As you know, recently the federal government announced that they were reducing the number of possible operations from the Mexico City airport. So we could see a mix of effects in that sense.

So maybe some of the planes will move to the Taluca airport. But maybe other airlines would choose to place those planes in other routes that they think could be more efficient.

Okay. Perfect. Thank you very much for your time.

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

Good morning, guys. This is Kevin Kinsey filling in for Stephen Trent. I guess my first question is what are your thoughts on potentially participating in Mexico City airport vendor? Do you think, necessarily, partner with like Airports (Inaudible), for instance? (Inaudible), how do you think that (inaudible) assets in terminals (inaudible) the Juarez airport?

Thank you for your question. So the Mexico City airport [vendor] has not been announced yet. We will be definitely interested in analyzing that possibility. So at the moment, we're not sure yet how that will come. So we will look at that when the authorities announce that vendor, if it's announced at all.

And so what will happen with the existing terminal? We're also not sure yet what could happen to that. Maybe they could use the existing runway as an access road to the new airport.

The other terminal buildings -- maybe they can create some office buildings or use that land for other purposes. So we're not sure yet. What we are sure is that a new airport will take several years to be built. So we're seeing that in the short term.

Okay. Thank you. So would you necessarily think you would need to partner up if you did partake in that?

Well, probably yes. I think probably it would be very interesting to partner up with someone else for that airport.

Okay. Thank you. Now also, I guess other airports or some of your competitors have been looking at possible opportunities outside of Mexico maybe like the Caribbean, Lagarda and others. Is there any chance that your guys are looking at things like that -- projects like that?

Thank you. That's a very good question. So we're currently looking at the Baranquia airport. We are in the process of prequalification. And so the government should announce -- the Colombian government should announce in this quarter who made the short list. And so, hopefully, OMA will be able to be in that short list.

I'm sorry. Could you just repeat the name of that airport?

Sure. It's the Baranquia airport. It's in the city of Baranquia. And it's a port city, very industrious. And it has 2 million passengers a year.

(Inaudible). That's very helpful.

Thank you. (Operator instructions). And at this time, I'm not showing any further questions. I would like to turn the call back to Mr. Guerrero. Please go ahead.

Thank you. And on behalf of OMA, I want to thank all of you again for your participation in this call. Israel Magana, Ixani Torres, 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. That does conclude our conference call for today. Thanks for your participation. You may now disconnect.