Grupo Aeroportuario del Centro Norte SAB de CV (OMAB) 2014 Q3 法說會逐字稿

Good day, everyone, and welcome to the OMA third quarter 2014 earnings results conference call. Today's conference is being recorded. At this time, I'd like to turn the call over to Jose Luis Guerrero, Chief Financial Officer. Please go ahead, sir.

Thank you. Good morning. Welcome to OMA's third quarter 2014 earnings conference call. My name is Jose Luis Guerrero, 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.

OMA had another excellent quarter. Our results verified the perspective we provided at our mid-management event last month. We appreciate the fact that so many of you were able to attend. (inaudible) in a dynamic expansion phase, and we are experiencing robust growth in passenger volumes. As we work together with the airlines to develop new routes and to strengthen Monterrey's position as a regional hub.

We were able to convert this volume and deliver strong performance from our aeronautical and commercial activities. We also continued to develop our diversification initiatives with good results. Our cost controls are effective, and as a result, we have solid increases in operating income and adjusted EBITDA. Our adjusted EBITDA margin in the third quarter was a record.

Finally, we are again raising our outlook for the full year of 2014, based on the performance of the first nine months and the outlook for the passenger traffic through the end of the year. After making some comments on each of these points, we will open the call up to your questions.

In terms of third quarter operational development, the number of flight operations rose 8% in the quarter to more than 86,000 operations. These reflect the addition of new routes and new frequencies by our airline clients on both domestic and international routes. Passenger traffic volumes increased 9.2%, with equal growth rates of domestic and international traffic. Ten airports registered growth in total traffic during the quarter. This marks 14 quarters in a row of increasing passenger traffic for OMA.

The increased volume came mostly from Volaris, VivaAerobus, Aeromar, TAR, Magnicharters. Most of the 14 main schedule airlines we serve increased passenger volumes. OMA continues to work effectively with the airlines to grow traffic in our airports. Five airlines opened 16 domestic routes in the quarter, while six routes closed. In addition, two international routes opened, including our first intercontinental route, Monterrey to Tokyo, operated by AeroMexico. From January to September, OMA's airports had a net increase of 31 new routes.

This third quarter, Volaris continued strengthening its regional hub in Monterrey and its position in our airports by adding another eight new routes in our airports.

On the commercial front, we opened seven new retail restaurant car rentals and hotel information services in our airports. And the lease occupancy rate is 96.5%.

Looking at our diversification activities, the NH T2 hotel had another great quarter. Room rates increased 6% year over year, and the occupancy rate was 82%. OMA Carga had an excellent quarter, with revenues up to 22%. Construction of the Monterrey Airport Hotel and Industrial Park continues to be on track for start of operations early in 2015.

Turning to our third quarter financial results, OMA recorded a double-digit growth in revenues, operating income, and adjusted EBITDA, and strong cash flow generation. The sum of aeronautical and non-aeronautical revenues grew 11.6%. Aeronautical revenues increased 12.8%, principally because of the growth in passenger volume. Aeronautical revenue per passenger was MXN174.2. Non-aeronautical revenues increased 8.1%. The areas with the largest contributions to growth were the NH Terminal 2 Hotel, up 13%; OMA Carga, up 22%; checked baggage screen, up 16%; parking, up 13%; and restaurants, up 10%. Non-aeronautical revenue per passenger was MXN56.5.

The cost of airport operations increased only 1.2%. OMA defines this as a cost of services plus G&A, excluding the hotel construction costs, depreciation and amortization, and the major maintenance provision, as well as concession taxes and technical assistance fee, items that grow as revenues increase.

This cost performance was the result of cost control initiatives and the stabilization of the maintenance expense for the checked baggage screening. Minor maintenance decreased 8.5%, and contracted services decreased 1.8%. This increase is largely offset 5.2% increase in payroll expenses and higher insurance costs.

Overall operating costs and expenses increased 6.9% in the quarter. OMA's third quarter adjusted EBITDA increased 23% to MXN545 million. The adjusted EBITDA margin was 59.8%, up 550 basis points. The significant increase in EBITDA margins is a function of the positive operating leverage characteristics of our business. Further, increases in pass traffic volumes could result in additional margin expansion.

Taxes were MXN110 million. The increase compared to third quarter of last year was principally as a result of higher taxable base and higher deferred income taxes, reflecting the effect of the [rate] deal on the single rate corporate tax, or IETU, as part of last year's fiscal reform.

Consolidated net income was MXN271 million, an increase of 18.9%. Our cash flow generation also continues to be strong. Cash from operating activities generated cash of MXN1,175 million in the first nine months of 2014. This quarter investments expenditures including master development plan and strategic investments were MXN148 million.

The most important investment expenditures for the quarter included a hotel and industrial park in Monterrey, the expansion and refurbishing of the Mazatlan Airport terminal building, plus major maintenance on runways, taxiways, and aprons in a number of our airports.

Cash from financing activities was MXN140 million, including repayment of the MXN1,300 million (inaudible) and payments on the final MXN800 million of the capital reimbursement improved by our shareholders' meeting. OMA's cash balance was MXN2,601 million as of September 30th.

As a result of the growth in passenger traffic volumes during the first nine months and taking into account expansion plans of airline clients OMA is again increasing our -- its outlook for the full year. OMA estimates that total passenger traffic growth for 2014 will be between 8% and 10%. Previously, we estimated 6% to 8%. The growth in the sum of aeronautical and non-aeronautical revenues is estimated to be between 10% and 12%. Previously, we estimated 9% to 11%.

The adjusted EBITDA margin is suspected to be between 54% and 56%. Previously, we estimated 52% and 54%. Master development plan investments are expected to be range of MXN600 million to MXN700 million.(sic-see press release �MXN600 million to MXN750 million�) This is unchanged and does not include the recognition of land purchases made in prior years in the amounts of MXN178 million for 2014. In addition, strategic investments principally for diversification projects are expected to be between MXN250 million and MXN300 million.

OMA is providing this outlook based on internal estimates. A number of factors could have a significant effect on the estimates to traffic, revenue growth, adjusted EBITDA, and CAPEX. These include changes in airline expansion plans, ticket prices, and other factors affecting traffic volumes, the evolution of commercial and diversification projects, and economic conditions, including all prices, among others. OMA can provide no assurance that the company will achieve these results.

In conclusion, the third quarter was another period of strong and consistent results. Traffic and revenue growth are strong. Aeronautical activities, commercial activities, and diversification initiatives are all performing well, cost controls and keeping expenses in line and strengthening EBITDA and cash flow generation.

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 we'll take our first question today from Santiago Perez Teuffer with Credit Suisse.

Hi, Jose Luis and team. And congratulations a lot on this strong set of results. I have a question regarding margins. Could you go through this very strong margin increase? Other than Acapulco, we were unable to identify significant margin increases per asset, so this would be very helpful. And a second question is if you see these margin levels sustainable, I mean, your guidance for next year? I mean, how are you thinking about next year in terms of profitability? Thank you.

Sure. Thank you, Santiago, for your question.

So the -- we have (technical difficulty) strong traffic growth, so margins pretty much improved in all of our airports, probably (technical difficulty) only one that didn't have a stronger EBITDA growth. Because even Acapulco, where we reported a decrease in traffic, this was actually an effect of the 10 days that we had to operate to help last year for the -- for the closing of the airport and the trouble that Acapulco had in September with the incredible amounts of rain that we had.

So if you take that effect out of the comparison, traffic in Acapulco actually grew. So we're seeing all of the airports doing better in margin. Of course, Monterrey is the most important airport from OMA. And in terms of amounts of EBITDA generation, that's where the greatest participation came from.

OK.

The -- yes, go ahead?

Great, Jose Luis. I just -- in terms of -- so I can clarify this -- taking your numbers from the [value] reported on the third quarter last year and the ones that you reported this year, I get a deterioration of around 300 basis points in Monterrey's margins on non-adjusted. So how do you recommend us to think about this, if the performance was actually better in margins? Was there an adjustment on those numbers or...

No, so there are -- there are other things that need to be taken in to account. So, for example, last year, we had (technical difficulty) affecting Acapulco. We got prepayments of the insurance costs that we have from that year. And we got [a segment] this year, so that is the benefit we see in this -- in this quarter that we didn't have in the previous quarter.

OK. And then going forward, what level of margins are you thinking for 2015?

For 2015, we haven't given guidance. But we hope to be able to deliver strong margins.

Perfect. Thanks a lot. And congratulations on the results.

Thank you.

And we'll take our next question from [Ana Sinzer] with Credit Suisse.

Oh, hi, Jose Luis. And congratulations on the results. Regarding the Monterrey transition, do you believe it's already at its full potential? Or are you still expecting more growth derived from new route.

Sure, so Monterrey, as you know, as a city is one of the most important cities in Mexico and a very industrial one. For example, with the recent announcement of Kia setting up a very large facility there, a very large plant. That will benefit also a lot of the supplier companies that are also based in Monterrey.

And so trafficking in Monterrey should continue to grow. And I believe that the airlines are seeing this, and that's why they are adding so many planes to Monterrey. So the demand is there. And the demand is expected to grow, as well. And the supply of seats is also -- we're also seeing it. So we think that Monterrey should continue to have good results going into next year, as well.

But are you still expecting more routes, for example, from AeroMexico to move to Monterrey? Or do you think that it's already captured?

So, for example, we have a couple of important routes that are expected to be open this year. And one of them, for example, is the Monterrey-New York route. So that is one of -- one example of new routes that will be open in this year. That could allow us to continue to grow.

OK, thank you very much. And just one last question. Is the Monterrey-Tokyo route sold as a direct route, meaning that you capture [the 2S] or [are the seats sold as] Mexico?

So the Monterrey-Narita route is a route that starts in Mexico City, stops in Monterrey for refueling and to get more passengers. And so those passengers that get into the plane at Monterrey, those are the ones that pay to us.

The benefit of having connecting flights is obviously to have those passengers -- provide them a better service, instead of them having to fly from Monterrey to Mexico City to fly all the way up again to Narita so that they can save that time. And also for those who want to do something more with their time while they're at the Monterrey Airport, so they can shop in our stores or have a nice dinner at our restaurants.

Thank you very much, Jose Luis.

And we'll take our next question from Bernardo Velez of GBM.

Hi, good morning, guys. Congrats on the results. I was wondering if you could give us some more color regarding one-offs, in terms of expenses or probably [easy comes], meaning should we expect now single-digit growth in terms of costs and expenses going forward?

So we are -- some expenses are hard to estimate or to control. For example, electricity charges have been increasing in the past double-digits, obviously, 10% and 12%. We have been able to do many things to reduce the consumption of electricity, and even though we have added more space in our airports, yet the [tiers] continue to go up every year at that pace. It is hard for us to -- sometimes to keep some line items at single-digit.

Others that we can control, we will do a great effort. Sometimes with minor maintenance, there are things that occur at the airport that need to be taken care of. And so there we could see sometimes some spikes in terms of minor maintenance. But all of the administrators at the airports are doing their best job to keep the conditions of the airports at the level of best practices without spending incredible amounts of money.

OK, thanks so much. And I was wondering if you could walk us through your CAPEX seasonality. I believe you're still far behind your planned MDP investments, right?

Yes, so in terms of what we already have higher what our contracts schedule, we are in line with the contract plan. The payments of those works, as you will mention, they have not -- all of them are not being paid for. So we would probably see a very -- a stronger cash flow towards CAPEX in the fourth quarter and in the first quarter, since as you probably know we have three more months every year to comply with the regulations, with investment requirements. So we will see probably an increase in cash flow towards master development plan investments during this fourth quarter and the first quarter of next year.

OK, got it. Thanks so much, guys.

(Operator Instructions). We'll go next to Stephen Trent with Citi.

Good morning, Jose Luis and everyone. And thanks for taking my question. Just two from me at this point. I know that, you know, you have capital reduction payouts to shareholders. That program has, you know, been running for a while. Could you refresh our memories as to, you know, let's say, this program returns in 2015, you know, how much firepower you have for more capital reduction payouts?

Sure. So the biggest constraints in capital reductions is the capital account at the entity. So at Grupo Aeroportuario del Centro Norte as an entity, the amount of capital that we have in that company, that would be the first level of constraint towards paying more reimbursements of capital.

We still have sufficient amounts in that -- in that line for us to pay again next year. We don't know what amounts we're going to pay. As you know, this is something that is proposed from the board meeting to the shareholders' meeting, to be included in the agenda. And it's the shareholders' meeting that will vote towards reimbursement of capital for next year.

But that will occur in April of next year. So we still have to finish this year, see how the company did look at 2015, look at what are the project coming up in the pipeline. And that information is the information that the board uses in order to propose any specific amount for next year.

This year, we have finished our payment of the reimbursement of capital. So we're not going to see another payment in the fourth quarter of this year.

OK, very helpful. And then in terms of the -- you gave some helpful color on the, you know, route additions of various airlines, you know, in Monterrey and other airports. What are you broadly thinking and seeing, you know, in terms of 2015, you know, if we could see perhaps a level of traffic growth that's maybe somewhere in the ballpark, you know, to what we've seen this year or what you guys are expecting?

Sure. So, I mean, this year we could grow even, you know, four times GDP growth in Mexico or three times GDP growth. So I'm not sure if next year we're going to be able to have those results. But the airlines still have very strong plans to continue to bring more planes into the market.

As you know, we are -- if you look at every route and frequency that we used to operate with Mexicana, we still have not recovered all of that specific traffic. We are finally getting close to -- we're probably going to finish this year with a number of total passengers higher than that we used to have in 2007. But it has taken us some time now to recover that.

But there are still opportunities out there for that -- where the demand is, that if the airline decides to put a route, I think it will be successful. So it's a matter of -- more of the capacity available in Mexico. So I think next year, we can continue to grow with good numbers, provided that the economy grows a little bit more and that the airlines are willing to continue to add more capacity.

OK, got it. And just one last question for me. As you guys are, you know, involved in projects like the, you know, Hilton Garden Inn, maybe some other commercial revenue-type greenfield projects, you know, to what extent does ICA -- Empresas ICA get a first look at maybe participating in any of that construction work?

So the -- it depends on the size of the project. Usually, Empresas ICA is not interested in small projects. So, for example, if someone is building a convenience store or a gas station, they're probably just paying rent for the space that they occupy at one of our airports, and that is the decision of that individual client to choose who they're going to ask what construction company you're going to choose.

For the larger projects where we have invested equity, so, for example, in the construction of the industrial park, ICA is not participating. And in the construction of the hotel, ICA participated in a couple of works, but I wouldn't say that they have more than half of the -- of the -- of the total construction. Probably much less.

So if you look at the construction works that ICA has done in the past years, they have only been about 10% to 12% of the total CAPEX at the -- at OMA airports have been done by ICA.

OK, that's really helpful. I'll let someone else ask a question. Thanks very much.

You're welcome.

And we'll take our next question from Neal Dihora with Morningstar.

Good morning. Thanks for taking the question. Just broadly, can you sort of give us your thoughts or help us think about the traffic trends to, you know, sort of the non-Mexico City international airports? I mean, do you think you've gotten a bump with their capacity issues? Or do you think you're actually being hurt by their capacity issues? Thanks.

So the effect of the Mexico City Airport is constrained today, actually creates a short-term benefit for us, so maybe an airline wants to open a new frequency at the Mexico City Airport, but the only slot available is on a schedule that is not convenient for the passengers. So the airline might choose to have a regional -- to put that plane in a regional frequency, a regional group servicing one of our airports instead, and that benefits us in the short term.

In the long term, and under a couple of studies that have been done regarding the Mexico City Airport, it shows how the entire network of airports would benefit if the Mexico City Airport was not at full capacity. So we are -- we're happy that there is a project going on to have a larger Mexico City Airport with sufficient capacity. I think that will benefit the entire network of airports in the long term.

So maybe just one follow-up. Once that new airport gets built in Mexico City or the expansion project, do you think there will be sort of maybe a couple years of maybe below trend growth at some of your airports? Or is that how you kind of see that going forward?

So I think it's hard to tell right now. I mean, it's -- the completion of the airport, it's in a medium term from now. I mean, it's more than probably five years or more. So it's hard to say right now what will be the condition of the airlines at that point.

But if the airlines decide to open a route today that is not from the Mexico City Airport, that it's a regional route, and if they are able to have the demand and passengers continue to flight, they -- I mean, the airline will probably just keep that frequency, if it's doing good, and add another plane to the Mexico City Airport once it's built.

Thank you very much. Appreciate it.

You're welcome.

And we'll take our next question from Ana Reynal with Santander.

Hi, Jose Luis. Thank you for the call. Do you have any update in the Barranquilla Airport bidding process? Are you still in? Maybe a ruling date?

Sure, for the Barranquilla Airport, we have decided not to participate. There were certain conditions at the airport that we believe played an important risk for OMA, and therefore, the margins looked small to us. And that's why we decided not to go forward.

OK, perfect. Thank you.

You're welcome.

And, sir, we have no further questions at this time. I'll turn the call back to you for any additional or closing remarks.

Thank you. On behalf of OMA, I want to thank all of you again for participation -- for your participation in this call. Vicsaly, Diana, Emmanuel and I are always available to answer your questions, and we hope to see you soon in our offices in Monterrey. Thank you, and have a good day.

Thank you. And that does conclude today's conference. Thank you for your participation.