Grupo Aeroportuario del Centro Norte SAB de CV (OMAB) 2013 Q4 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, Fourth 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 opened for questions.

(Operator instructions)

This conference is being recorded today, February 25, 2014. I would now like to turn the conference over to our host, Jose Luis Guerrero. Please go ahead, sir.

Thank you, and good morning. Welcome to OMA's fourth quarter 2013 earnings conference call.

My name is Jose Luis Guerrero. I'm the Chief Financial Officer. Joining me this morning is the IR team made up of (Inaudible) Suarez, our Investor Relations Officer, and Manuel Camacho [and Anna Faze].

I will start with an overview of the major business developments in the fourth quarter, and then turn to our outlook for 2014. We will then open the call for questions.

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

We exceeded our earnings guidance for the year, and we generated a record amount of net income. In terms of the fourth quarter operational developments, passenger traffic volumes increased 6.9%. Domestic traffic grew 8%. And international traffic wasn't changed.

Nine of the 15 main airlines we serve increased passenger volumes, led by Aeromexico, Volaris and Interjet.

All 13 airports registered growth in total traffic during the quarter. This is the eleventh quarter in a row of increased passenger traffic for OMA.

We had eight new domestic routes, plus two new international routes and zero route closures. For the full year of 2013, we had a net increase of 22 routes in our airports. This expands our connectivity and further develops Monterrey as a regional hub.

On the commercial front, we opened 27 commercial establishments and services in our airports. And our list of potential rate is over 95%.

OMA Carga continues to grow, particularly in our ground transit links with Dallas, Chicago, Los Angeles and Mexico City. The cargo business also benefited from a temporary diversion of third party flights to our customs warehouse in Monterrey for 36 days, which increased ground transit operations.

Please note that OMA Carga's [fourth] performance is a reflection of the mix of air cargo and ground transit operations, and not only of air cargo volumes.

The NH Terminal 2 Hotel had another excellent quarter. The occupancy rate was just under 80%, while room rates increased 20% year-over-year.

In November, we opened three new conference rooms of 436 square meters in total. And we designed a configuration of the lobby and other areas. The total reconfigured area, including the new conference rooms, amounted to 1,125 square meters. Together with the dedicated parking in the Terminal 2 garage we took over in the third quarter last year, we expect to be able to significantly boost the conferring and events businesses at the Hotel.

With respect to our new diversification businesses, during the fourth quarter we broke ground for the Hotel Monterrey airport, which is expected to go into operation in the first quarter of 2015. We also continued with urbanization works for the industrial park in the same airport.

Our first 5,000 square meter warehouse is expected to be finished in the fourth quarter of this year.

Turning to our fourth quarter financial results, OMA recorded solid revenue growth, increases in adjusted EBITDA, adjusted EBITDA margin, net income and strong cash flow generation.

The sum of aeronautical and non-aeronautical revenues grew 6%. Aeronautical revenues increased 4.6%, principally because of the growth in passenger volumes. At the same time, we granted some short-term incentive credits to airlines for domestic traffic development.

Non-aeronautical revenues increased 9.8%. The areas with the largest contributions to growth were the NH Terminal 2 Hotel up 15%, OMA Carga revenues up 58%, checked baggage screening revenues up 37%, car rental revenues up 25%, and retail lease revenues up 15%. Non-aeronautical revenue for passenger was MXN63.3, up 2.8%.

Excluding the hotel, non-aeronautical revenue per passenger was MXN49.5, up 1.6%

The fourth quarter of 2013 marks 23 quarters in a row where non-aeronautical revenues per passenger increased. The mix of revenues, not including construction revenues was 72% aeronautical and 28% non-aeronautical, from less than 19% at the same time of the IPO in 2006.

The cost of airport operations increased 6.6%. This is the cost of services plus G&A, excluding the Hotel, construction costs and the major maintenance provision.

The increase was principally the result of higher payroll expense because of new hires, employee bonuses, [occasional] provisions and [inpatient] adjustments, and other costs and expenses related to lower cancellation of excess provision for doubtful accounts.

These were offset, in part, by a reduction in minor maintenance related to the timing of work during the year and lower electrical usage. The electricity savings reflect the land management programs, mainly the Zacatecas pilot project and the solar project, and the installation of LED lighting in some airports.

After one year of operations of the Zacatecas pilot solar project, produced approximately 40% of the airport's total energy consumption and generated savings of about 40% of the total airport energy.

Total operating costs and expenses increased 12.7%, principally because of an increase in the major maintenance provision. We reassessed the major maintenance requirements, considering the useful life of the assets, and in some cases, future master development plans. A portion of the increased provision reflects increased material costs in 2009 cost base.

We expect that the future major maintenance will be factored in the next two maximum rate agreements with the government.

OMA's fourth quarter adjusted EBITDA increased 10.4% to MXN424 million, reflecting the efforts of the Company to increase its cash flow generation. The adjusted EBITDA margin was 53.9%.

Taxes were a credit of MXN287 million in the quarter, principally from the re-estimation of deferred taxes resulting from the repeal of the single-rate corporate tax, or IETU, as part of the fiscal reform.

Consolidated net income increased 99% to MXN465 million. This was a record level of net income for a quarter. Our cash flow generation also continues to be strong. Cash flow from operating activities generated cash of MXN1,021 million in the full year. Fourth quarter CapEx was MXN237 million.

The most important investment for the quarter included the remodeling and expansion of the Terminal building in Mazatlan, plus major maintenance on runways, taxiways and aprons in a number of airports.

During the quarter, OMA paid MXN600 million for the third, fourth and fifth installments of the capital reduction payments approved by the annual shareholders meeting in April 2013.

At December 31, 2013, OMA's cash balance was MXN1,534 million, or MXN382 million above the level at the end of 2012.

We would like to note that, for the second time, the Mazatlan airport was awarded the Airport Service Quality Prize in the category of Best Regional Airport in Latin America and the Caribbean, with less than 2 million passengers per year. The prize is awarded by the International -- Airports Council International.

OMA's full-year results exceeded our guidance. Traffic grew 5.5% for the year. And the sum of aeronautical and non-aeronautical revenues grew 8.7%, led by a 15.6%increase in non-aeronautical revenues.

Adjusted EBITDA increased 10.8%. And we generated an adjusted EBITDA margin of 54.6%. Our return on equity for the year was 17.9%. We declared and paid distributions to shareholders in the form of capital reduction of MXN1,200 million, or MXN3 per share.

As we look to 2014, we expect that the current favorable trends will continue to benefit our results. The stronger outlook for Mexican economic growth, as the result of the passage of the structural reforms and the U.S. economic recovery provide a favorable environment for traffic volumes.

In addition, the airlines have significant expansion plans. Aeromexico added four new airplanes to its fleet during the quarter, and expects to have more efficient aircraft mix by the end of 2014, with additional state-of-the-art airplanes to replace current fleet and expand its operations.

Volaris announced earlier this month that they are establishing a base in Monterrey, and added eight daily routes to its three existing routes. Three of the new routes will be going to other OMA airports -- Chihuahua, Culiacan and Ciudad Juarez. Volaris is expecting that the new base in Monterrey will grow its operations in the airport by 105%. Volaris also expects to add another five planes to their fleet this year.

VivaAerobus' expansion plans includes ordering 52 new air buses to replace their current fleet, and to add capacity to 2021. They received their first of the new planes this month.

Interjet will base at least two of their new support regional jets in Monterrey. And have announced plans for six new routes at our airports in the first half of the year, and two more in the second half.

Aeromar announced an addition of one plane, a Bombardier TRJ 200 to its fleet in January, bringing their fleet up to 19 planes.

The new entrant in the domestic airline market is TAR, T-A-R, whose operational base is the Queretaro airport. TAR is currently in certification for three planes, with commercial operations planned to begin in March. TAR expects to start operating [eight groups] in our airports, including Monterrey, Durango, Tamaulipas, Acapulco and Zihuatanejo.

On the commercial side, growth will come from promotional services, such as advertising, that do not require floor space, and from optimizing the mix of tenants since we are essentially at full occupancy in our terminals, as well as passenger services, development through a proven strategy.

The NH Terminal 2 Hotel, OMA Carga, and some land leases to third parties will be the major drivers of diversification revenues. The big diversification projects, the industrial park and the Monterrey Hotel are expected to make revenue contributions starting in 2015.

Some of our growth initiatives may have lower margins than our existing operations. Therefore, it is possible that our margins may decrease somewhat from current levels.

OMA expects that passenger traffic will increase approximately 4% to 6% in 2014. The sum of aeronautical and non-aeronautical revenues is expected to increase approximately 8% to 10%. The adjusted EBITDA margin is expected to be in the range of 51% to 53%.

Master Development Plan investments are expected to be in the range of MXN600 million to MXN750 million. This CapEx includes MXN263 million already considered in the Major Maintenance Provision and EBIT net of MXN178 million, a recognition of previous land purchases. In addition, strategic investments are expected to be in the range of MXN250 million and MXN450 million, principally for diversification projects.

OMA is providing this outlook based on internal estimates. A number of factors could have a significant effect on the estimates of traffic, revenue growth, adjusted EBITDA and CapEx. This includes changes in airline expansion plans, ticket prices and other factors affecting traffic volumes, the evolution of commercial and diversification projects and economic conditions, including oil prices, among others.

OMA can provide no assurance that the Company will achieve these results. This concludes our prepared remarks. We will now be happy to answer your questions. Operator, please open the call to questions.

Thank you. (Operator instructions). And our first question is from the line of Ana Reynal from Santander. Please go ahead.

Hi. Good morning. And thanks for the call. My question is regarding your adjusted EBITDA margin guidance -- 160 basis points to 360 basis points year-over-year contraction in 2014. Are you considering something other than the effect of diversification projects?

Because it seems that it is a very large effect considering how young these projects are and the relative weight they should have on the consolidated results.

Thank you, Ana. Regarding the guidance that we gave for the adjusted EBITDA margin in 2014, which is between 51% and 53%, there are a couple of factors for that guidance. One is, obviously, the growth in revenues and the growth in costs and expenses.

There are a couple of projects that we're considering next year. For example, we are certifying -- we're paying for the right to certify the airports of San Luis Potosi and Torreon under the ICAO, which is the International Civil Aviation Organization. So this adds a little bit to the expenses.

We are spending a little bit more -- since last year, we didn't have all the baggage screening machines in operation. This year, 2014, we are considering the full expense of this maintenance.

Also, the electricity tariffs increase on average about higher than 10%. And that's what we have seen in the previous years. And that's what we're expecting also for next year.

We have an important increase in expense in the minor maintenance at the airports. And we're also spending a little bit more in security personnel at the airports.

Okay. Perfect. Thank you.

You're welcome. And just to clarify, as well -- so when we -- for example, when we opened the NH Terminal 2 Hotel, we saw, in effect, a reduction in the EBITDA margin of the consolidated results of about 1%. Today, the Hotel has a great EBITDA margin, close to 50%. But it took a couple of years to get to that level.

So the two new projects that we're -- the two new March real estate projects, that are led under the diversification initiative, are the hotel in Monterrey and the industrial park in Monterrey, as well.

Both of those projects will be under construction for 2014. So we will not necessarily see that effect of EBITDA margin until 2015 because most of the expenses and investments of the hotel and industrial park are capitalized. So we will see that effect coming in 2015.

Okay. Perfect. Thank you.

Thank you. And our next question is from the line of Bernardo Velez with GBM. Please go ahead.

Hi. Good morning. And thanks for taking my call, Jose Luis. You mentioned MXN250 million to MXN450 million in diversification investments. Would you say these investments will only apply to the industrial park and the hotel in Monterrey?

Those are the two most important projects. This is the guidance. So there are other initiatives that we could consider, but the most important projects that we have in the pipeline and that are under construction today are the Monterrey Hotel -- as you know, this hotel is a 130-room hotel inside the Monterrey Airport, right in front of Terminal B and very close to Terminal A. And this will be a MXN160 million investment. And we are partners with Grupo Hotelero Santa Fe. They have 15% of the shares. So we are investing a total of MXN136 million for the Monterrey Hotel.

In terms of the industrial park, we are considering building a 5,000 square meter warehouse. And we're also going to include -- we are building today the urbanization work. The expected CapEx for that project is MXN45 million. And here, we have a participation of 51%. The other 49% is owned by [Ninfa] who are strong industrial park developers in Monterrey.

So those are our current projects. The other are other initiatives. But these are the most important ones and the ones that are already in construction.

Jose, MXN50 million for the hotel?

The total CapEx for the hotel should be around MXN160 million, of which OMA will pay the MXN136 million because OMA has 85% of the shares.

OK. Perfect. And regarding the maintenance provision and this, I could say, extraordinary effect, what could we expect on the expense regarding maintenance provision?

And you mentioned also adjustments for your MDP expectations going forward. And how much did these expectations really change?

Sure. Starting now, our accounting policy is that we recognize a provision for the major maintenance that we foresee in the future. So what we were doing before, it was to consider the major maintenance inside this five-year plan that we have already agreed with the government.

Our arbiters believe that we should, as we're getting very close to the end of this five-year plan, that we should start thinking of the future in terms of the useful life of these assets. So we're going further into the future, beyond this five-year plan. And so that means that we are considering in this major maintenance provision future maintenance that will occur beyond 2016.

So what we mean by we would expect to see these expenses as part of the maximum tariff in the future, in future maximum rate negotiations, is that since this is maintenance that will occur in future development plans, then it should be part of that negotiation. But, because of accounting policy, we have to recognize that reserve today.

Now, remember that this is primarily a non-cash reserve. So we have in the reserve about MXN260 million that will actually be used in 2014. And you can see that, in the balance sheet, we have the short term expense of the major maintenance, which is around MXN260 million in the short term.

Okay. Got it. So your MDP expectations for the next [incanyon] didn't change at all?

I'm sorry?

Your expectations for the next investments in the next five-year period didn't change at all, right?

That is correct. So this is the same scenario that we see. We just have to recognize, because of accounting recommendations, to recognize the future major maintenance that will occur in our airports that goes beyond this five-year term. (multiple speakers) as a maintenance cost but it's a non-cash cost today.

The only part that will be a real investment is the part that is in the short term major maintenance reserve that we have in our balance sheet.

Okay. I got it. Thanks so much, Jose Luis.

You're welcome.

Thank you. And our next question is from the line of Marco Montanez with Vector. Please go ahead.

Good morning, Jose Luis. And thank you for the call.

Could you give us more color about the weakness observed since last year in the international passenger (inaudible) in Monterrey Airport, please?

And eventually, would you be considering giving incentives to the airlines? Thank you very much in advance.

Sure. So what we found in Monterrey, we saw from one side -- we saw a great foreign direct investment coming into Monterrey. As you know, Nuevo Leon broke the record of [FTI] in 2012 with $2.7 billion. And then again in 2013. By July, they had already broken its record with $3 billion by July.

In terms of the international passengers in Monterrey for the year, we saw growth of 1.7% in the growth.

So, yes. Given that we're seeing strong FTI with the reforms at this stage, we should expect the economy, also, over the year to recover. And then we should see more improvements in the international passengers in Monterrey going forward.

Okay. Thank you so much.

You're welcome.

Thank you. And our next question is from the line of Stephen Trent with Citibank. Please go ahead.

Hi, all. Thanks for the call. This is Kevin from Steve Trent's team.

I guess my first question is have you heard anything lately regarding that new airport in Mexico City or an expansion of Austin to Juarez?

And I guess if the government expands later, how quickly could OMA resume its offer of developing a commercial area in terminals?

Sure. Your question is regarding the Mexico City expansion. Right?

Correct.

Yes. So what we know so far is that the government is looking for the expansion of the system airport. This would probably mean two additional runways. That will be sufficiently placed further apart so that you can have some of the initial operations in the Mexico City airport. And that will help the airport to have pretty much double its capacity.

So, you know, today they handle about -- the capacity is around 25 million to 28 million passengers. So in two runways far away from each other, you can have some of the initial operations come, pretty much double the capacity of the airport.

Now, if they decide -- if they announce that project today, it will probably take them about five years to complete the first phase -- or maybe seven years to complete the first phase. OMA will be very happy to participate in the operations of that expansion or that new airport as a whole.

What we have heard so far is that the government is focusing today on the construction part and on the location of that airport. We haven't heard anything about that airport being able to be part of -- they are giving us a concession for operators.

Okay. Very helpful. Also, I guess I have another question. You were mentioning a lot of domestic airlines adding capacity around to your airports. But we were wondering if any -- are there any plans for international airlines to begin servicing, like (Inaudible) or (Inaudible)?

So, yes. The primary growth of our traffic is the domestic traffic. As you know, the majority of our passenger traffic today is domestic.

We have many airports that have international flights. And we hope that those flights also grow next year. We had very strong growth in some airports this year, including Ciudad Juarez, Culiacan, Chihuahua and Zacatecas. Those, of course, were the strongest growth. And so we believe that some opportunity could continue with very strong growth.

So in the quarter, you see Zihuatanejo with an increase of about 17% in international passengers. And so we hope that this continues going forward.

So you haven't heard of any international airlines planning to enter the market?

We have a strong team that is looking for opportunities both with the domestic and international airlines. And they do have plans for new routes with us.

Okay. Great. Thank you very much.

You're welcome.

Thank you. (Operator instructions). And our next question is from the line of Mauricio Sanchez with Credit Suisse. Please go ahead.

Good morning, Jose Luis. Thank you for taking my questions. Could you please explain a little bit further the IETU and ISR adjustments during the quarter?

And my second question is could you provide us with an estimate for the level of cash taxes you are expecting for this year? Thank you.

Sure. So regarding the IETU cancellation, as you know, part of the fiscal requirement was that the corporations should cancel the payments of IETU. So in 2014, we're not going to see any IETU payment in this year. So since we are no longer paying the IETU, we have to register -- at the end of 2013, we had to register the cancellation of the deferred IETU taxes. So that is -- and recreate the deferred ISR taxes as well.

So that is basically what happened. So if you look at the -- in all the companies, the ISR and the IETU payments in 2013 remain the same with or without the fiscal reform. It is just the calculation of the deferred taxes that changed.

So, going forward, we're not going to have IETU payments nor deferred IETU. We're only going to have ISR payments and deferred ISR. So that's what happened in the fourth quarter.

Thank you. Could you provide us with what you expect to -- well, the level of cash taxes you're expecting for 2014?

Sure. We haven't given that guidance. But I can tell you that Monterrey and the Group, they both pay ISR. The other airports -- or all of the airports, except for Monterrey, still have ISR credit. So we're going to be paying ISR from Monterrey and from the Group.

Thank you.

Thank you. And our final question is from the line of Ana Reynal with Santander. Please go ahead.

Thank you. Just a very quick question. If the Mexico City Airport is moved to the outskirts of the city, what happens with your NH Hotel?

We don't know yet. What we have in our contract is that we will be paid. Let's say, this existing terminal is completely shut down, we will be paid what is registered as an asset in our balance sheet. So all the initial assets that have not been depreciated will be paid to us. And it's likely that if a new airport is built, we could be able to have a hotel in the new airport. But that is some negotiations that have not started yet with the authorities.

Okay. Thank you.

You're welcome.

And I will turn the call back over to management for any closing remarks.

Thank you. On behalf of OMA, I want to thank all of you again for your participation in this call. [Xiana], (Inaudible), Manuel 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 our conference call for today. A replay will be available via the Company's website. We'd like to thank you for your participation. And you may now disconnect.