Grupo Aeroportuario del Centro Norte SAB de CV (OMAB) 2014 Q4 法說會逐字稿

Good day and welcome to the Grupo Aeroportuario del Centro Norte OMA Fourth Quarter 2014 Earnings Results Conference Call. Today's conference is being recorded. At this time I'd like to turn the conference over to Jose Luis Guerrero, Chief Financial Officer. Please go ahead.

Thank you and good morning. Welcome to OMA's fourth quarter 2013 earnings conference call. My name is Jose Luis Guerrero; I am the Chief Financial Officer. Joining me this morning is [RI team] our Investor Relations officer (inaudible).

OMA had another excellent quarter and 2014 was a record year all around. We reach for 14.7 million passengers which surpasses the previous peak before the financial crisis. And our revenues, operating income and adjusted EBITDA were also full year records. Net income was not a record only because of the benefit we've received in 2013 from the repeal of the IETU tax.

Passenger traffic volumes continue to grow as a result of the expansion of the airlines and the opening of new routes and increase in connectivity of our airports. OMA had a net increase in 46 routes in 2014, including a net route deletion in the fourth quarter. We're able to convert this volume growth and deliver strong performance from our aeronautical and commercial activities. We also continue to develop our diversification initiatives with good results. As a result of our effective cost controls, we also reported solid increases in operating income and adjusted EBITDA. After making some comments on each of these points, I will discuss our 2015 outlook and then we will open up the call to questions.

In terms of our fourth quarter operational developments, the number of flight operations rose 7% in the quarter to more than 87,000 operations. This reflects the addition of new routes and new frequencies by our airline clients on both domestic and international groups. Passenger traffic volumes increased 14.3% with roughly equal growth of domestic and international traffic. 11 airports increased traffic during the quarter. This marks 15 quarters in a row of growing passenger traffic for OMA. The increased volume came predominantly from Volaris, VivaAerobus, Interjet, Aeromexico, TAR, Aeromar, Delta and US Airways. 14 of the 15 main schedule airlines we serve increased passenger volumes.

OMA continues to work effectively with airlines to grow traffic in our airports. Four airlines opened 11 domestic routes in the quarter, or six routes closed. In addition, five airlines started flying a total of eight new international routes including Monterrey-New York.

On the commercial front, we opened 33 new commercial initiatives including passenger services, hotel promotion, advertising, restaurants and retail establishment plus a VIP lounge. The commercial lease occupancy rate is 96%.

Looking at our diversification activities, the NH Terminal 2 Hotel had another good quarter. Room rates increased 2% year-over-year and the occupancy rate was 81%. Construction of the Monterrey Airport Hotel & Industrial Park continues to be on track for start-up operations in the first half of 2015.

Turning to our fourth quarter financial results. OMA recorded double-digit growth in revenues, operating income and adjusted EBITDA and a strong cash flow of generation. Aeronautical revenues increased 13.9%, principally because of the growth in passenger volume. Aeronautical revenue per passenger was MXN165. Non-aeronautical revenues increased 14.7%. The areas with the largest contribution to growth were advertising, up 26%; parking, up 19%; check baggage screening, up 17%; the NH Terminal 2 Hotel revenues, up 6%; retailers up 17%; and restaurants up 21%. Non-aeronautical revenues per passenger MXN63.5. The growth in parking reflects a new service model and promotions in Monterrey, and rate increases in several airports.

Advertising was principally due to because of continued expansion of non-traditional advertising, such as the giant screens we now having eight airports and direct sale of advertising space. We also launched our master premium passenger service product in the fourth quarter. Masterkey is a loyalty program that provides discounts and exclusive services to passengers for an annual membership fee. These new business generated MXN2 million in revenues in its first quarter of operations.

The cost of airport services increased 6.7% in the fourth quarter. OMA defines this as the cost of services plus G&A excluding the hotel, construction cost, depreciation and amortization, and the major maintenance provision, as well as concession taxes and technical assistance, items that grow as revenues increase. The largest part of the increase resulted from payroll expense. For the full-year cost of airport services increased 5.6%, slightly above Mexican inflation. This was achieved as a result of lower maintenance expenditures and very low increases in outsourced services (inaudible) which were partially offset by the increases in payroll and other expenses. The latter includes some provisions for legal expenses related to our labor issues and provision for doubtful accounts. Total operating costs and expenses decreased 10.5% in the quarter, an increase of 1.6% in the full year. OMA's fourth quarter adjusted EBITDA increased 14% to MXN483 million; the adjusted EBITDA margin was actually 53.8%.

Taxes were a credit of MXN7 million. The increase in cash taxes as because of as a result of higher pre-tax income was offset by reductions in deferred taxes. The very large tax credit in fourth quarter of 2013 was principally as a result of the repeal of the single rate corporate tax for IETU as part of the government's fiscal reform. Consolidated net income was MXN284 million, below the 2013 level as a result of IETU repeal. Fourth quarter investment expenditures included Master Development Plan and then strategic investments were MXN252 million. The most important investment expenditures for the quarter included expansion and refurbishing of the master planned airports terminal building plus major maintenance on runways, taxiways and aprons in a number of airports and a Hotel and Industrial Park in Monterrey. Our cash flow generation also continues to be strong. Cash flow from operating activities generated cash of MXN1,504 million in the full year of 2014. OMA's cash balance was MXN2,808 million as of December 31.

Turning to our outlook for the current year, management expects the expansion of the industry and growth of our business to endeavor in 2015. The earnings are continuing to expand although we do not expect the same kind of route expansion as occurred in 2014. The upgrading of the fleet if adding available seats and lower oil prices, of course for the airline profitability. OMA estimates that total passenger traffic growth for 2015 will be between 6% and 8%. The growth in aeronautical revenues is estimated to be between 7% and 9% and growth in non-aeronautical revenues is expected to be 13% and 16%. The adjusted EBITDA margin is expected to be between 53% and 55%. Two diversification projects in Monterrey are expected to start operations during 2015, the Hilton Garden Inn and the first phase of the Industrial Park, which includes urbanization works and the first 5,000 m2 warehouse. Master Development Plan investments are expected to be in the range of MXN500 million to MXN700 million, net of the recognition of land purchases made in prior years for MXN131 million. In addition, strategic investments principally for diversification projects, are expected to be in the range of MXN100 to 200 million.

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. 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 oil prices, among others. OMA can provide no assurance that the Company will achieve these results.

In conclusion, the fourth quarter of 2014 marked the end of an excellent year. Traffic and revenue growth are strong. Aeronautical, commercial and diversification initiatives are all outperforming well. Cost controls are keeping expenses in line and strengthening EBITDA and cash flow generation. We're confident that these trends will continue in 2015.

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

(Operator Instructions). Santiago Perez Teuffer, Credit Suisse. Bernardo Velez, GBM.

Thanks for taking the time for the questions. I was wondering and I was looking for, if you could comment on the one-offs special in terms of expenses for this quarter and I was wondering if you could comment a little bit more on the performance in other expenses that I think were increasing around 40%?

Sure. Bernardo, thank you for your question. So, in terms of expenses, we see, for example, payroll increasing in the quarter at 2%. Although in the year, it's increasing at 6.3%. In terms of payroll, we had increased the reserves in the fourth quarter for the bonus paying for management. So there is that worth of MXN6 million increase in the reserve. Without this effect, the quarter for payroll expenses would have been at 6.9%. In other expenses, we have also increased our litigations reserve. So that was a MXN9 million increase in the reserve. So, without these effects, the other expenses in the quarter would have increased 19%. And we have also a reclassification of some expenses that we were considering as minor maintenance and that will continue in the other expenses and those were a charge of MXN40 million in the quarter in other expenses.

Okay, perfect. You mentioned a MXN9 million increase in litigation reverse. What are you looking at in terms of court decisions or judicial procedures?

Yes. The most important part of those MXN9 million are MXN8 million with profit that we have with the Profeco in the Chihuahua airport and this is for the flooding that we had back in 2013 I believe when the airport received a tremendous amount of rain and unfortunately all of the runway was flooded and the terminal. And so Profeco is slowing of the airport of Chihuahua for the expenses that the passengers had to incur or the losses that they had to incur with some flight cancellations. We are in this legal process. We are trying to protect the assets of OMA and the expected cost if we lose is around MXN8 million. So that's the most important part of the increase. The other MXN1 million in litigation reserve is primarily for processes with ex-employees.

Okay. And -- sorry.

Go ahead.

So I was trying to ask or I was wondering if you could comment on the, I think, the operating income at the hotel at the Mexico City airport, presented a 50% decline year-over-year. Could you comment on also in increases in expenses in the hotel?

Absolutely. So that was going to be my other comments. So in terms of the hotel, the expenses related to the commissions that we paid to the travel agencies that are [2009] were being registered as an interest expense in the income statement of the hotel. And so we reclassified MXN8 million in the year of these expenses that were usually charged on a lower line in interest charges and in the fourth quarter are now being considered as part of the expenses of the operating the hotel. So this is an MXN8 million effect in the year and about a MXN6 million reclassification from January to September that was -- that affected the fourth quarter results.

Okay, perfect. And my last question is regarding the -- your MDP commitments for the year, if I'm correct, for 2014, you had MDP commitments of around MXN800 million, and for 2015, you have close to MXN400 million, that is, I mean, well below your guidance for MDP commitments. I was wondering if you could comment on the CapEx that you guys are probably delaying on to 2015 and probably onto the next MDP.

Sure. So the investments in 2014 were a total of MXN689 million. As you know, we have usually three months to finish CapEx investments in a year. So as a little bit of the final payments of the 2014 Master Development Plans are actually taking place during the first quarter of 2015, we have also invested less, probably less than expected in strategic investments outside the Master Development Plan during 2014. We have two flagship projects in 2014 for strategic investments, which are the Hotel and the Industrial Park. So some of those -- that part of those investments are taking place in 2015 as we are finishing up with the construction of both of those projects. So -- and we also have the land recognition in every year in these past three years from 2013 to 2015. So that is roughly about MXN130 million for 2015 CapEx and it was a similar number for 2014 that needs to be considered as part of the total amount of Master Development Plan commitment. That is not -- you won't see that after cash flow going out because that is recognition of that time that we acquired in previous years.

Okay. That was pretty helpful. Thanks again for your help Jose Luis.

Thank you.

(Operator Instructions) Ravi Jain, HSBC.

I had two quick questions. The first thing is on Monterrey. So, if I was to look at the main drivers of the significant increase in Monterrey traffic. Is it more on the expanding industrial production and economic activity in Mexico or is it mainly driven by let's say lack of capacity in Mexico City and Monterrey is becoming the next hub for other smaller cities within Mexico, which is a bigger driver in that sense?

And my second question is around the MDP program for the next five years. I mean of course, we don't have a specific guidance, but if you can just give us your expectations as to what do you expect for the next five years in terms of the extent of the CapEx based on the traffic that you've seen in the last couple of years?

Sure. Thank you Ravi for your questions. So we're seeing extraordinary growth in passenger traffic in Monterrey as you mentioned. If you look at the December numbers and also January, we saw in December growth above 20% both in domestic and international traffic in the Monterrey. January came very strong as well. So that is primarily the effect of the growth that we're seeing in the entire state of Nuevo Leon, the industrial growth and the foreign direct investments. So we have, for example, currently a construction of our very large automobile manufacturing facility by the IKEA Company. So, they are investing around $2 billion in this facility and that means that there are many other providers of the services that are also opening up shops in Monterrey. So that is, I think the economic growth and industrial growth in Monterrey are the main triggers for our passenger growth. We are also, the effect also comes from all the units that we opened in 2014 that many of them are in Monterrey. So in April of 2014, we started operations of the hub in Monterrey for Aeromexico and that was a project that we have been working with the airline for many years and we finally were able to convince them that they open more routes starting from Monterrey. And so the idea behind this is to collect many regional flights, so that they can connect in Monterrey and then go to other destinations, primarily the central part of the US. We also were able to work with Volaris for them to have more operations in Monterrey, as you know they were more focused in the region of Guadalajara and Mexico City. And now they have much more operations in Monterrey and we have other very important airlines Interjet and VivaAerobus having larger operations as well in Monterrey and opening new routes. And so those are the most, I would say, significant reasons why Monterrey is growing.

Turning to your other question regarding the Master Development Plan for the next five years, as you know, right now, we're working with the DGAC, defining traffic forecasts for all of the airports in the next five years. So that is the most important part of the next five-year plan is defining where we think traffic is going to be at each of the airports because from that we derive what the CapEx and maintenance expenses will be at each one of those places. So we are expecting that the total CapEx for the next five-year plans should be higher than the current five-year plan. We are not sure by how much, but it should be an increase from our current five-year plan.

That's helpful. If I may just one follow-up last question on the traffic growth. So your guidance for 2015 is between 6% and 8%. I mean if I look at the acceleration of traffic growth in, let's say, the last four to five months in 2014, that would imply, let's say, a very strong first half of this year. So I'm just trying to think whether there is an upside risk to that guidance or will second half be really, let's say, low single digit because of the very strong comp that we'll see. I'm just trying to reconcile where there is, let's say, a more risk to the downside or the upside in terms of traffic growth?

Sure. So that is a very important question. So we hope that traffic continues to grow even in the -- during the fourth quarter of 2015. This would mean that we need to add more routes in this first quarter and the rest of the year. As you know we saw an extraordinary addition of net new routes in 2014, but that was a number of 46, that is extraordinary for any other year that we have seen. So we -- as you mentioned, we're going to see probably a very strong first half in terms of passenger growth and then we need to keep up with by adding more routes in 2015. I by no means think that we're going to achieve 45 new routes in 2015, but we hope to add a couple of more. So, yes, I -- we do expect a deceleration of last quarter in terms of passenger traffic and so that's why our guidance is between 6% and 8% passenger growth.

Okay, fair enough. Thank you so much Jose Luis.

Stephen Trent, Citigroup.

Thanks for taking my questions. Just one or two for me, looking at the -- you guys have the NH Hotel in Mexico City, you're launching Hilton Garden Inn in Monterrey, any thoughts or potential to at least partially participate in new hotel projects either in or near your airport facilities in Mazatlan or Zihuatanejo?

So for the moment, the team is focused primarily on finishing the works of the Hilton hotel and starting the operations in that hotel. Obviously, we're not operating it, but we think that looks for new initiatives right now is focused on both the new hotel in Monterrey and the Industrial Park. They do have the radar on for new opportunities in other airports. As you mentioned, some of them are harder to achieve because the airports are very far away from the city. So in the case of the airport of Zihuatanejo, I do not see any opportunities of OMA having a hotel in the medium term in the terminal of Zihuatanejo. So for the main -- for this short term and medium term, we are going to be focused on operating the Hilton hotel in Monterey. But we are looking for new opportunities in other airports.

And just one more question, Jose Luis. I know there is a local airline there, I'm not exactly allowed to cover, but they seem to have fairly recently switched on some Asia bound flights from doing a technical stuff from Mexico City during the technical stuff in Tier 1, they are the doing the technical stuff in Monterrey. And as that route continues to spool up and other routes like it, any early feedback in terms of how the airlines are doing out of Monterrey? I mean, certainly the traffic performance looks very strong, but any early feedback from them from the airlines themselves that you might be able to share?

Sure. So, as you know, opening new routes represents a risk for the airline and for the airport, it was supporting that new route. We try to work on the routes and open new routes that we believe are going to be successful. So, so far, we hope that the majority of the route that we opened that they can persist and survive in the near future, some of them might not be as profitable was expected and the airlines might choose to put their planes in two other destinations. But so far, I mean with the 46 net new routes that we opened in 2014, we feel comfortable and we hope that the majority of them will persist going forward.

In terms of the particularly with the, I mentioned it's the Aeromexico route that they've switched from Tijuana to Monterrey flying through Narita in Japan. And so this is a very important destination for Monterrey. Because now with the IKEA plan from North Korea that helps the connectivity for many people that are going to be working in Monterrey to now be able to connect through Japan.

Okay, that's very helpful. Let me leave it there. Thanks Jose Luis.

Ana Zinser, Credit Suisse.

Thank you for the call. Just one follow-up question on the hotel. Can you develop bit more on the margin contraction? Even after the reclassification of the commissions, we can see a cost, an increasing cost of about 20%. Can you develop a bit more on this front, please?

Sure. So the -- those are basically cost and expenses of the hotel, maybe some maintenance for the new areas that we opened. But we are -- the most important part of the reason, as you mentioned the reclassification of those expenses, and we hope that in the next year, the total costs and expenses are in line with revenue growth of the hotel.

Okay, thank you. And just to double check, do you expect both the Hilton Garden Inn and Monterrey Industrial Park to be fully operational by the first quarter of this year? And also --

No -- Yes?

No, no, it's okay. I can ask later.

Okay. So, regarding the question of when will the operations of the hotel and the Industrial Park start, we are expecting them to begin in this first half of the year. So probably in the second quarter of this year.

Okay, thank you. And just one last question. What do you expect for our major maintenance provision going forward?

So the major maintenance provision for going forward should be very similar to what we've had in the full year of 2014. We might have a little adjustments maybe, if we believe there are new projects coming up, et cetera, but the current major maintenance provision to date reflects what will be needed in the lifetime of all the assets that we have under the aeronautical services that we provide. So for now, we don't expect that provision to remain at the same level.

At this time we have one question remaining in the queue. (Operator Instructions). (inaudible), Goldman Sachs.

Congratulations for the release and the results. So I have basically two questions here. The first one with regard to your new businesses that you are opening this year, the new hotel and the Industrial Park. So what level of margin contraction can we expect for this year given the startup of these projects? And my second question is regarding dividends. Do you expect to continue to pay the same amount you've been paying over the last year, given the launch of the new or master development plan in the early 2016? And that's it from me. Thank you.

Thank you for your questions. So as you very well mentioned, when we opened the NH Hotel in Mexico City, we saw a margin detraction of about 1% because of the operations of NH Hotel, particularly in the first year of operations. Even though we were able to grow, obviously the commercial revenues and the EBITDA grew by -- in its amount, the margin was not able to continue to increase. Nevertheless, seeing many of the new projects that we're seeing both in the aeronautical front and the commercial front, apart from the hotel and the Industrial Park, our guidance for next year for -- for this year 2015 in terms of EBITDA margin is between 53% and 55%, which is in a way in line with what we were able to achieve in 2014. So we might not see a construction -- contraction of EBITDA margin in the year because of these new two projects. And could you remind your second question, please?

Yes, it was regarding dividends, if you're going to pay the same amount you have been paying in the last years with the new Master Development Plan?

Sure. So for this year, as you know the dividends that we paid, which had been reinvestments of capital in the past three years, need to be approved by the Board of OMA and then the General Shareholders' Meeting that will take place in April. Yet, we expect that both of these, the Board and the General Shareholders' Meeting could approve MXN1.2 billion reimbursements of capital in the for 2015. As you can see in our balance we have enough cash to be able to do a payment like this and also to be able to pay for our CapEx interests and lead taxes that we need to pay as well. So that is the expectation. Going forward, we will see as you mention, how much cash we have available, what is the level of investment that we have, and what are the projects that we're seeing in the medium term.

That's perfect. Thank you.

Francisco Suarez, Scotiabank.

A question on your international passenger charges, I was surprised to see the reduction there. I don't know if you can actually comment and provide a little bit of color if that is something that we should be modeling for the year forward or is this something that we should be recovering a bit because it was kind of surprising for me.

Sure, Suarez. That's a very good question. So, as you know, we try to be very close to 100% charging our maximum target throughout the year. And if we are above that level in our airports, we usually make the adjustment in the tariffs of international traffic. So that is basically the reduction in that amounts comes from the [EBITDA] that we generate because of the excess in that we had in some of the airports.

Got it correctly. And also I was a little bit surprised to not see an improvement in your average revenue per passenger on commercial-related activities. I mean, the question here is that, is that something that is explained because of the current stages of these new projects that should be eventually enhanced in your overall commercial revenue stream going forward? Or are we facing any major constraints in terms of terminal capacity or anything that may actually explain why we haven't seen an improvement on that [failure]?

So if you look at the growth of the non-aeronautical/aeronautical revenue, they grew at 14.7% in the quarter. And the thing that we also had a very strong growth in passengers in the quarter. So that is, I mean it's been hard for us to be able to grow our commercial revenues faster than the growth in passenger traffic, passenger traffic grew also around 14%. So some initiatives like advertising, for example, those are contracts that are based on our expected traffic, but they do not switch-by if we are able to capture more traffic in the short-term. So that will be the main reason for that.

We do of course see a very direct correlation between traffic and passenger growth in the commercial revenues. Some of them are been to restaurant sales or also the shops that we have or the parking lots but the -- there are others that are not.

Got it, okay. Thank you. And lastly, finally, on the cost side of the equation, does any portion of the overall cost and expenses that increasing the quarter correlates to these initiatives that you are designing for this year, I mean in terms of our overall diversification efforts? I mean to what extent the hikes that we have seen in expenses and costs could be in a way one-offs and things should be coming better as the year progresses? And of course as the new businesses coming -- starting to bring you revenues going forward?

Sure. So for that question, I would recommend looking at the year result in costs and expenses for 2014. So in -- and there you'd keep an example in payroll, that payroll in the year increased 6.3%, which is basically inflation plus other particular much less minus. So the quarter in payroll increased 12% and that was primarily because of an increase in the reserve for the bonus payment for management. But in the year as you see a growth of 6% that's something that could be similar to what we could expect in 2015. The other one-off that we had in the quarter that we (inaudible) want to see again in next year are, for example, the increase in the litigation reserve by MXN9 million that happened in the fourth quarter. So those are basically, and of course the hotel also the reclassification of MXN8 million in the expenses, the full year expenses should be in that line item, should be similar plus an increase innovation plus the operational increases in the hotel for 2015. So those are basically the one-time effects that we saw in 2014.

Thank you for your answers. Take care.

You're welcome. Thank you.

And it appears there are no further questions at this time. Mr. Guerrero, I would like to turn the conference back to you for any additional or closing remarks.

Thank you. So 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 we hope to see you soon at our office in Monterrey. Thank you and have a good day.

This does conclude today's conference. Thank you for your participation. You may now disconnect.