Grupo Aeroportuario del Centro Norte SAB de CV (OMAB) 2014 Q1 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 first quarter 2014 earnings results conference call. (Operator Instructions). This conference is being recorded today, April 30, 2014.

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

Thank you. And good morning. Welcome to OMA's first quarter 2014 earnings conference call. My name is Jose Luis Garrero, OMA's Chief Financial Officer.

Joining me this morning is the IR team, made up by Vicsaly Torres, our Investor Relations Officer, Emmanuel Camacho and Diana Perez.

We will review the major business developments and our results for the quarter, and then open the call up to questions.

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

In terms of first quarter operational development, passenger traffic volumes increased 6.8%; domestic traffic grew 7.2%; and international traffic rose 5.2%. 10 of the 16 main airlines we serve increased passenger volumes, led by Aeromexico, Volaris and Delta.

All 13 airports registered growth in total traffic during the quarter. This marks 12 quarters in a row of increasing passenger traffic for OMA. Most importantly, we have 19 domestic routes open, while only two closed. Volaris opened 11 routes that used Monterrey as a hub. In addition, the new airline, TAR, opened up eight routes.

The traffic performance and the route openings reinforce our outlook for the full year. And we will continue to work together with the airlines to grow traffic in our airports.

On the commercial front, we opened 30 commercial establishments and services, and our lease occupancy rate is over 96%.

OMA Carga continues to grow, particularly in our ground transit links with Dallas, Chicago, Los Angeles, and Mexico City. Please note that OMA Carga's growth performance is a reflection of the mix of air cargo and ground transit operations, and not just air cargo volumes.

The NH Terminal 2 hotel had another excellent quarter. Room rates increased 26% year over year, and the occupancy rate was 75%.

With respect to our new diversification businesses, construction work continues on the hotel, and the industrial park, in the Monterrey Airport.

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

The sum of aeronautical and non-aeronautical revenues grew 9.2%. Aeronautical revenues increased 7.9%, principally because of the growth in passenger volumes.

Non-aeronautical revenues increased 12.7%. The areas with the largest contributions to growth were NH 2 Hotel revenues, up 18%; parking up 14%; checked baggage screening up 29%; restaurants up 21%; and OMA Carga up 22%.

The parking business benefited from the new promotional initiative, and the opening of a new long term parking lot for the Monterrey Terminal B.

Checked baggage screening reflects the fact that contracts were signed with all the airlines for this service, in August 2013.

Restaurants benefited from the opening of new restaurants in our airports in the last nine months of 2013, and increased participation.

Non-aeronautical revenue per passenger was MXN64; up 5.5%. Excluding the hotel, non-aeronautical revenue per passenger was MX49.3; up 4%.

The first quarter of 2014 marks 24 quarters in a row where non-aeronautical revenues per passenger increased. The mix of revenues, not including construction revenues, was 73% aeronautical, and 27% non-aeronautical, from less than 19% at the time of the IPO in 2006.

The cost of airport operations increased 16.6%. 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 three line items: minor maintenance, payroll, and other costs, and expenses.

Minor maintenance increased largely as a result of maintenance contracts, for preventive maintenance of the baggage screening equipment, that were non-existent in the first quarter of 2013.

Payroll rose because of inflation adjustments, an increase in the provision for employee bonuses, hiring, and an increase in the provision of statutory employee profit sharing.

Other costs and expenses rose because of some one-off expenses, including studies related to the functioning and improvement of our infrastructure, and software licenses.

Total operating costs and expenses increased 9% in the quarter.

Let me point out that the major maintenance provision was basically unchanged, year over year. In the fourth quarter of last year, there was an increase in the major maintenance provision, as we updated the assumptions, and made a present revaluation of the provision. Upon further review with OMA's auditors, it was determined that these one-time adjustments were sufficient.

The ongoing maintenance provision is expected to continue to be at the levels of the first quarter, or approximately MXN42 million per quarter.

OMA's first quarter adjusted EBITDA increased 3% to MXN404 million. The adjusted EBITDA margin was 52.8%.

Taxes were MXN38 million. The decrease compared to first quarter 2013 was principally from the repeal of the single rate corporate tax, IETU, as part of last year's fiscal reform.

Consolidated net income increased 14% to MXN258 million.

Our cash flow generation also continues to be strong. Cash flow from operating activities generated cash of MXN211 million in the first three months.

First quarter investment expenditures, including master development plan, and strategic investments, were MXN139 million. The most important investments for the quarter included the hotel and industrial park in Monterrey; plus major maintenance on runways, taxiways and [maintenance] in a number of airports.

OMA's cash balance was MXN1,533 million; flat as compared to the end of 2013.

OMA's Annual Shareholders Meeting on April 201, 2014, approved a capital reimbursement to shareholders of MXN3 per share, totaling MXN1,200 million. This is the same amount that was paid in 2013.

The capital reimbursement is scheduled to be paid in four instalments, before the end of May, July, September and November of this year.

We expect that a good part of our investment requirement this year and next will be financed through debt issuance.

In conclusion, the first quarter was another period of strong and consistent results. All OMA'S business areas in aeronautical operations, commercial activities and diversification are performing well.

We are generating strong results, and creating tangible value for our shareholders.

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

(Operator Instructions). Bernardo Velez, GBM.

Just a question regarding the increasing minor maintenance for the quarter. How much would you say it came from a one-time effect, and how margins would have behaved without this?

Sure. So minor maintenance had a strong increase, compared to last quarter -- to last year's first quarter. The main reason is because in the first quarter of 2013, we did not have the maintenance contract signed for the baggage screening machines. So those contracts came in place after the first quarter.

And now, we do have, in this first quarter, those -- that cost. And that is about -- if I'm not wrong, about MXN7 million of that contract, that is reflected in the minor maintenance. So part of the growth and most -- the greatest part of the growth in the minor maintenance comes from the baggage screening maintenance.

There is -- if you look at the fourth quarter of last year, the minor maintenance is very similar to the first quarter. We do not expect all of the four quarters of this year to be as high as this first one.

We did have to move some of the maintenance that we were expecting in future quarters to this first quarter, because of certain maintenance requirements. But we -- the overall -- the year outlook for minor maintenance could be something similar to that of last year.

Okay, perfect. And could you give us a little bit more insight regarding the, let's say, poor performance in Monterrey's traffic?

Sure. So Monterrey's traffic growth, in general, OMA's traffic growth has been quite strong. It was very strong in the first two months.

In the third month of March, as you know, we had the comparison versus last year, when we had -- in the first quarter of last year, we had the Easter holidays. So there was a strong effect -- positive affecting last year. And that's why the first quarter passenger traffic results are a bit lower.

We are definitely seeing an increase in economic activity in the Monterrey Airport. So we hope that, that helps us to continue to grow in the next quarters.

But that's -- so my answer would be, there is a strong effect of the Easter holidays in the first quarter of last year that affected Monterrey in this first quarter.

Okay. Thank you so much.

Ana Reynal, Santander.

My question has to do with the increase in payroll this quarter. What can we expect, going forward?

I'm sorry, could you repeat your question?

About the increase in payroll this quarter, 10% increase. What can we expect for the next quarters, because you said it had something to do with bonuses, profit sharing, and inflation adjustment? I'm guessing, inflation adjustment, we're going to see in the next three quarters, but what about the other part of the increase?

Sure. Usually, every year, we increase payroll by 5%; that is a general policy in -- for OMA. There have been -- we had 10 new positions in the Company, in the past 12 months. If you look at the year results, the 20-F that we recently issued, there is an increase of about 33 employees.

That doesn't mean that those 33 are new working spots for -- in OMA. There are only 10 new spaces -- 10 new places in OMA. And the rest, the 23, were just the usual turnaround and hiring that, in the course of December of last year, we have not yet hired.

So that is part of the effect. And the other part of the reserves that we create, so that we can have homogeneous quarters in terms of payroll, we do have -- we do create reserves for bonus payments, for vacations, for [IETU] distribution.

Okay. So is it fair to assume that, this year, payroll is going to grow by 10%?

I'm not sure where the payroll at the end of this year will be, comparing to last year. We do have that effect of the 33 new employees; that only 10 of those are new places, but the others were old. So it will depend on when they left the Company, and the comparison versus last year.

Okay. Thank you.

Stephen Trent, Citigroup.

This is Kevin Kaznica in place of Stephen Trent. My first question is, when should we expect the minor maintenance initiatives to normalize, or will they ever normalize? I guess the -- I think the maintenance for the checked baggage equipment (inaudible) or is that just going to continue on at that level?

There is a MXN7 million effect in this first quarter. And that will be an ongoing MXN7 million effect. Because we didn't have -- in the first quarter, we didn't have the minor -- in the first quarter of last quarter of last year, we did not have the baggage screening maintenance contract. And that is, more or less, about MXN7 million.

Okay. And there was also a big year-over-year increase in other expenses, in the cost services. We were just curious if you could give us more color what that was?

Sure. In total, the cost and services plus G&A grew 16.5%. We have, as I mentioned -- the most important sources of this growth are, first, minor maintenance; and second, payroll.

We do have -- in other costs, we do have some studies that are not necessarily ongoing. They're sometimes yearly studies or two-year studies. And these include sustainability projects that we have, or the certification of our airports under the International Civil Aviation Organization standards. Those are certain studies that do take place in certain quarters, and they go into the other segment.

I guess, I must have missed the earlier -- the first two parts of that early on the call.

I guess, just one more question. How should we think of OMA's normalized working capital cycle, going forward, like a normalized working capital cycle, I guess?

Sure. So in terms of our receivables, we did see a slight increase in our receivables of about 25% from our clients. And as you know, the revenues increased, the business increased a little bit. So I would say one-third of that increase in our receivables comes from the growth of the Company.

There is another part that, when we adopted the digital invoice in Mexico, there is a new requirement to have all of the invoices be done in -- electronically. So there was -- for Aeromexico, we have a small requirement from Aeromexico to include the invoice number in the electronic invoices.

So that took us a couple of weeks of working with our IT team. And that had a small delay in the invoices sent to Aeromexico. And that's why we had a slight increase in the receivables for OMA. And that's part of the effect that you're seeing in the working capital.

Understood. Okay, very helpful, thank you.

But that has been normalized with Aeromexico. Today, all of our aeronautical clients are up to date.

Okay. So that would just be for this quarter. Thank you.

Thank you, [sir].

(Operator Instructions). Neal Dihora, Morningstar.

Two unrelated questions. One, the rate increase at the NH T2 hotel of 25%, is that -- do you expect that to be a new base for this year? It looked like utilization actually -- or the occupancy actually held up pretty well, had a pretty big increase in rates.

And the other question was, I don't know if you've given timing, or maybe you could update timing on the openings of Monterrey's hotel and the industrial park that you guys have planned. Thanks.

Sure. Thank you, Neal, for your questions. Regarding the first question of the increases in the rate in the NH hotel. Yes, that's, as you mentioned, we had a strong increase in rate. We're seeing that the -- our clients really like the hotel, and we were still able to have a strong occupation of 75%.

So despite the negative decline in occupation from -- up to 80% last year, now we're down to 75%, the hotels in the area had similar occupation rates.

So this, basically, is proving that our clients are still willing to pay a little bit more, because we do have a great service at the hotel. It is a great hotel to spend one night, if you need to catch a plane early in the morning; it's right next to the entrance to the security points for the airport.

And we have certain services that also passengers and guests really like. For example, you can have your bags checked by one of our employees. They will take them to Aeromexico, and they will do your check-in process. So basically, you wake up in the morning, have breakfast, and they already give you your boarding pass at the hotel.

So those type of services have allowed us to really have constant guests at the hotel. And that's why we have been able to also increase our tariffs.

In terms of the -- when we expect to inaugurate the industrial park in Monterrey and the hotel, we expect the hotel to be ready by the first quarter of next year, 2015. As you know, this is a joint venture with Grupo Hotelero Sante Fe, and it's going to be the Hilton Garden Inn [run] at Monterrey.

And the industrial park, we should see the inauguration of these -- the first warehouse of this industrial park probably by the end of this year, or maybe also by the first quarter of next year.

Just to clarify, the hotel is 85% and 15%, is that the split on the industrial? I think the park was 51%/49%, is that right?

That is correct. So the hotel is 85% OMA; 15% Grupo Hotelero Sante Fe. And industrial park is 51% OMA and 49% our partner, which is VYNMSA. They are a strong partner -- they're strong industrial park developers in the [northern] state.

Thanks a lot for all the details. Appreciate it.

Thank you, Neal.

Alexis Koumoudos, Skyline Capital Management.

Just a bit of clarification on the tax rate. You mentioned that you experienced a lower tax rate, as a result of fiscal reform last year. Is that the kind of rate that we should expect, going forward?

Thank you, Alexis, for your question. So as you know, with the fiscal reform in Mexico, we cancelled the IETU tax. And so we have two entities in OMA paying income tax, which are in Monterrey Airport, and the Group. So this is the income tax, that we're reporting, comes from those entities.

The rest of the airports, the rest of the 12 airports, still have losses. And, therefore, in the past, they were paying IETU, and now they're not paying IETU, and they still have losses. So we're not paying income tax in those airports. So that's part of the benefit that we're seeing.

We did have a first quarter with the -- with a cash tax rate of about 19%, and an effective tax rate of about 12%. Those levels should increase a little bit in the year. So we probably will see an effective tax rate of about 20%/22% in this year.

Okay, thanks. That's great.

Jean Bruny, BBVA.

Just have one question -- well, a couple of questions. The first one is on the hotel. We've seen the occupancy rate dropping to 75%. Just want to know if it's due to macro environment, or it's something that could be long term?

And the second question is on the investment made by the government on the airport to rebuild in Mexico City. What's your view on the project, the first take? That would be all. Thanks.

Sure. In terms of the hotel, yes, we did have an occupancy rate of 75% in this quarter. It's lower than the -- compared to the 79% or 80% that we used to have in previous quarters.

We did increase the tariffs by 25%. Nevertheless, we're still seeing our clients return to the hotel, and being very happy with the service that we provide.

The hotels in the area, they also had an average similar to 75%. There were a couple of hotels with a better occupancy rate. But we have the second highest rate in the area, and near the airport. We're only below the Hilton Hotel inside Terminal 1.

So we are -- we have a great product, and our guests are willing to pay for that slight increase. It's still on a very -- it's still on a good level in terms of pricing, considering that these are business passengers, and that the service that we provide is of high quality; and that you don't need to spend time travelling to another terminal, or to -- or taking a taxi to a hotel that is going to -- the taxi is going to be expensive, or it's going to take you half an hour to get there.

So our guests really appreciate the service that we provide, and the fact that we are right next to the boarding gate.

In terms of the new airport in Mexico City, we don't have much information, apart from what has been publicly said in the press. So I believe they're, right now, going through a contest to choose the architect of the new airport. And so that's as much as we know, at the moment.

Thank you very much.

You're welcome.

(Operator Instructions). Rodrigo Echagaray, Scotiabank.

A quick question. Is it fair to assume that the new hires for the year are related to the new projects that are coming through next year, the new industrial park and the new hotel in Monterrey?

Thank you, Rodrigo, for your question. No, the 10 new hires were taken in different areas, pretty much, non-related to the hotel or the industrial park.

Our partners in the -- both in the hotel and the industrial park -- so the hotel, for example, will be run by Hilton Garden Inn. So they will be responsible for the hiring and the managing of the personnel, just like we have in the NH hotel in Mexico City.

And in terms of the industrial park, we already have a team that includes a director and a manager that we have had for the past two to three years. So far, that team has not grown. And for the short term, probably as well, our partner will -- VYNMSA will help us out with certain management topics in that project.

So, no, the 10 new hires that we had in the year are not related to these two projects.

All right, fair enough. Thank you, Jose Luis.

(Operator Instructions). And I am showing no further questions. Please continue.

Thank you. On behalf of OMA, I want to thank all of you again for your participation in this call. Vicsaly, Diana, Emmanuel 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. If you would like to listen to a replay of today's conference call, please dial 18 77 870 5176 or 18 58 384 5517. We'd like to thank you for your participation, and you may now disconnect.