Grupo Aeroportuario del Centro Norte SAB de CV (OMAB) 2015 Q2 法說會逐字稿

Good day and welcome to the OMA second quarter 2015 earnings results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jose Luis Guerrero, Chief Financial Officer. Please go ahead, sir.

Thank you, Jamie. Good morning. Welcome to OMA's second quarter 2015 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, Emmanuel Camacho and Manuel de Leon as well as our Chief Accounting Officer, [Jesus y Leons].

Before we begin with OMA's results, I would like to say that this will be my last conference call with you. I will be returning to OMA's corporate parent, Empresas ICA, to take a senior position there. Over the past six years, I have enjoyed the opportunity to (technical difficulty) and I appreciate the relationships that we have developed both business and personal.

The Board has appointed Vicsaly Torres to be OMA's new CFO effective July 27. I am sure that most of you know her well. Vicsaly will provide strong leadership for the finance and administration area inside OMA and maintain and build relationships with all of OMA's external stakeholders including shareholders, bond holders, financial institutions and rating agencies.

OMA had excellent results for the second quarter. Our presentation this morning will be in three parts. Vicsaly will provide an operational overview, I will review our financial results and finally, we will discuss the upward revision in guidance that was included in the earnings report. After that, we will be pleased to answer your questions.

Now I would like to turn the call over to Vicsaly Torres.

Thank you, Jose Luis, and good morning to everyone. I'm honored to have been selected to become CFO and I look forward to deeping OMA's relationship with the financial community.

Turning to our operational performance, we continue to demonstrate a strong momentum in all areas of the business. Passenger traffic grew 17% in the quarter to 4.2 million with roughly equal growth in domestic and international passengers. Twelve months passenger traffic reached 15.9 million passengers, a new record, and the second quarter marks the 17th quarter in a row of growth in passenger traffic.

All 13 airports grew total passenger traffic. Passenger traffic volumes continue to increase, a result of the expansion of the airlines and the opening of new routes throughout last year and in the first half of 2015. The number of flight operations rose 2% in the quarter to more than 85,000. For OMA, the most important consequences of the route openings are 80 provisional route networks and a substantial broadening of our international destinations.

Establishing Monterrey as a regional hub and increasing the connectivity of our airports are longstanding strategic goals. Airlines at OMA's 13 airports are currently flying 93 domestic routes and 53 international routes. Ten of the 16 main scheduled airlines that operate in our airports increased passenger volumes, with the largest contribution to growth from Interjet, Volaris and Grupo Aeromexico.

We had two new routes open in the quarter, one domestic and one international. In the second half of 2015, we expect to see a number of additional domestic routes principally from TAR and Volaris as well as additional frequencies on existing routes as airlines continue to expand their fleets.

On the commercial front, we opened 14 new advertising, passenger service, hotel promotion, banking services, restaurants and retail establishment in the quarter. The commercial lease occupancy rate remained constant at 96%. All but one of our commercial line items grew in the second quarter. The largest percentage increase came from passenger services, thanks to the launch late last year of initiatives such as interactive modules, OMA TV and the multi-sensory hallway in Monterrey among others. Parking made the largest contribution in term of incremental revenues and grew as a result of the mix of additional passenger traffic and higher rates.

Our diversification activities also had a strong quarter. OMA Carga more than doubled its revenues as a result of initiatives to attract ground cargo business and optimization of our tariffs. We also had a temporary increase in air freight because of a special project with one of our main clients to provide additional cargo handling services.

Truck freight accounted for 25% of cargo revenues in the second quarter, up from 18% in the prior year period. The NH Terminal 2 hotel average room rate increased by 8% year-over-year and the occupancy rate was 79%.

The Monterrey Industrial Park is maturing. During the second quarter, we signed a letter of intent with our client to lease the first 5,000 square meter warehouse in the park and to build a 6,000 square meter expansion for a total of 11,000 square meters. We also expect to start building a second warehouse later this year to continue with the promotion, marketing and development of this business.

The Monterrey Airport Hilton Garden Inn Hotel will start its pre-operating phase by the end of this month with the training of workers and verification of all functional areas. We expect that the 134 room hotel will open in August. This finishes the review of operating developments.

As a final note, I want to thank Jose Luis for all his contribution to OMA over the past six year including managing the Company's finance during the financial crisis and leading OMA's equity and debt capital market transactions with banks. He has been a good colleague and a good friend through these times.

Now, I will return the call to Jose Luis.

Thank you, Vicsaly. I will now review our second quarter financial results. OMA was able to convert its positive operational development into double-digit revenue growth and as a result of our effective cost controls and cash cost growth well below revenue growth, OMA also recorded double-digit increases in operating income, adjusted EBITDA, net income and cash flow from operations.

Aeronautical revenues increased 18%, principally because of the growth in passenger volumes and the exchange rate effect on international passenger charges. Aeronautical revenue reached MXN180 per passenger. Non-aeronautical revenues increased 30%. Commercial activity revenue grew 31%. The line items with the largest contributions to growth were parking, up 31%; advertising up 43%; restaurants up 30%; retail up 22%; car rental up 24%; and passenger services up 125%.

Advertising benefited from a payment for extending an existing contract for six months through the end of 2015 and passenger services was boosted by the new services that Vicsaly mentioned. Diversification activities grew 33% with the most significant growth coming from OMA Carga as a result of increases in tariffs and our initiatives in that area.

Complementary services increased 21% primarily as a result of checked baggage screening and lease of space to airlines. Non-aeronautical revenue was MXN63 per passenger, up 12%.

The cost of airport services and G&A expense increased only a third as fast as revenues. The increase was 6% in the second quarter. Much of the increase reflects expenses related to minor works under the Master Development program and is included in other expense. These expense increases were partially offset by the decreases in utility payments and materials and supplies.

Overall operating cost and expenses increased 23% in the quarter. The principal increases were for the major maintenance provision considering the long-term view for preserving the value of the infrastructure, construction cost which is non-cash accounting entry, concession taxes and the technical assistance fees. The technical assistance fees decreased from 5% of EBITDA to 4% in late June, so the effect of the quarter's results was minimum.

As a result, OMA's second quarter adjusted EBITDA increased 29% to MXN590 million. The adjusted EBITDA margin was 58.2%, up 375 basis points.

Financing expense increased to MXN61 million from MXN39 million in the second quarter 2014. This was a result of the bonds [rating] last year and an exchange loss. Taxes were MXN114 million, with an effective tax rate of 29.2%. OMA expects the full year effective tax rate to be approximately equal to the second quarter level. As a result, consolidated net income rose 29% to MXN277 million.

Second quarter investment expenditures including Master Development program and the strategic investments were MXN195 million. Investment expenditures for the quarter included additional modernization and expansion work at the Mazatlan airport, the Zihuatanejo Terminal building expansion, the hotel and industrial park in Monterrey and works at the new Acapulco Terminal building. The studies and preliminary work for the new Master Development Plan are underway. We expect to communicate the terms of the new MDP by the end of this year.

Our cash flow generation also continues to be strong. Cash flow from operating activities generated cash of MXN961 million in the first six months of 2015. The MXN1,200 million capital reduction was paid to shareholders in May. As a result, cash balances came down from December 31 levels. As of June 30, total cash was MXN2,032 million.

In light of the growth in passenger traffic volumes during the first half of the year and taking into account the maturation of the new routes that operate in the Group's airports, OMA is updating its full year outlook for 2015.

OMA estimates that total passenger traffic growth for 2015 will be between 10% and 12%. Previously we estimated 6% to 8%. The growth in aeronautical revenues is estimated to be between 13% and 15%, up from the range of 7% to 9%. Non-aeronautical revenues are expected to increase between 18% and 20%, up from the previous range of 13% to 16%. The adjusted EBITDA margin is expected to be between 56% and 58%, an increase from the previous estimate of 53% to 55%.

Master Development Plan investments are expected to be in the range of MXN500 million to MXN700 million, unchanged, net the recognition of land purchases made in prior years. This amount is MXN131 million for 2015. In addition, strategic investments, principally for diversification projects, are expected to be MXN100 million and MXN200 million, also unchanged.

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.

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

(Operator Instructions) Stephen Trent, Citi.

This is actually Kevin Kaznica stepping in for Stephen. So, great quarter and we just kind of had a couple more positive questions. So, what is the status of the Hilton Garden Inn in Monterrey? I know you touched on it in the call. And I guess, looking in the future, do you have any other plans to do other hotel projects?

Excuse me; I couldn't hear your first question.

Do you have any update on the status of the Hilton Garden Inn Hotel in Monterrey and do you have any plans to do other hotel projects in the future?

Sure, the Hilton Garden Inn Hotel will start its pre-operating phase by the end of this month and we expect that this hotel will open in the middle of August.

With respect to your second question about other plans to a new hotel in other airports, we are analyzing different projects in some of our airports. It's interesting, a hotel for example in Culiacan or in Zacatecas but at this moment we don't have any specific project for a specific airport. We are evaluating different projects to diversify.

Okay, great. And just to clarify, when you say open by the middle of August for the Monterrey Garden Inn, is that going to be fully operational?

Yes.

Okay. Then if I could just squeeze in one more question, now considering that OMA just made a big capital reduction payout to shareholders that Jose Luis just mentioned, should we consider a resumption of regular dividend payouts next year?

Yes, we are expecting to return to pay dividends going forward and the amount of the dividend will depend on our cash position at that moment, the fiscal situation and the negotiation of the new Master Development Plan because we need to know our obligation in terms of Master Development Plan and OpEx.

Okay. Okay, very helpful. Thank you very much.

Ravi Jain, HSBC.

I had two quick questions. The first one is, we have been seeing some news about airlines trying to cut their international routes including Monterrey, Guadalajara et cetera and specifically VivaAerobus was the one which cut some routes. Do you expect the international competition to get fierce once -- especially next year once the Open Skies agreements comes to force and then could it affect international traffic in that sense at your airports?

And my second question is, could you give us an update of your expectation for the MDP negotiation? The last time we have been discussing that, you still expected a positive tariff revision. I just wanted to see if this huge tariff traffic increase has changed that expectation right now?

With respect to international passenger traffic, the biggest factor is coming from Monterrey airport basically. And here we are seeing -- in Monterrey, we are seeing a lot of anger. Direct investment is coming to the Nuevo Leon state. And this direct foreign investment is coming more from Asia, Koreans, actually the Korean car manufacturer that is Kia is coming to Nuevo Leon and their plant will be closer than the airport, the Monterrey airport. And if you see the numbers in international passengers in Monterrey, it is affected, and basically it is for that.

We have had three openings in terms of international routes during this year. The effect is more coming for the international routes that we opened last year, mostly in the second semester of last year.

And with respect to your second question of our expectation in our Master Development Plan negotiation and maximum tariff, in terms of CapEx, we are estimating an increase between 40% and 50% in terms of the amount of the CapEx that the government is going to require us during the next five-year period. If you see our current Master Development Plan in present value is around MXN3.5 billion. So, our estimation is an increase of 40% or 50% increase based on this -- in this amount. And in terms of maximum tariff with this level of CapEx, our expectation is to have an increase in a single-digit in the medium range.

Thank you; that's very helpful.

(Operator Instructions) Renata Stuhlberger, Goldman Sachs.

Congratulations on the results. So, my question is basically regarding the number of routes opened this quarter. So, we saw actually a net closure of routes versus the net openings saw in 2Q14. So I was just wondering what are your traffic expectations in 2016 based on this data?

In the second quarter, we only have two openings, one domestic and one international. And we are working with airlines to try to open more routes in the second semester. But, at this moment, we don't have a specific agreement.

So but -- and it is difficult to continue to grow double-digit -- high-double digit as the first semester. Because we have a very strong base, the comparison will be tough in the second semester of 2015. And going forward to 2016, if we can agree something with airlines to continue to grow more routes in the second semester, could we have a one-digit growth in the high range.

One-digit growth in high range, you said?

Yes, between 6% and 8%, yes, is our expectation, but at this moment, we don't have a guidance for 2016. But -- we think it's a good number in that range.

That's fine. Okay; thank you.

(Operator Instructions) Ricardo Alves, Morgan Stanley.

My question is regarding the new guidance. It indicates, in our view, a little -- some traffic and margin deceleration in the second half. I was wondering if you guys could comment a little bit on that, the trend for the second half and if July is already showing some signs of traffic deceleration.

Well, in terms of traffic, as I mentioned before, we are seeing a difficult comparison in the second half of 2015, in the second half of the year because we had a very strong second semester in 2014, that's why we are seeing a deceleration in the growth in terms of traffic.

And in terms of margins, if you see our costs and operating expenses, we have some reduction in some lines, and some of them are more for seasonality. For example, materials and supply, we are seeing a little bit increase in this line in the second semester. The same case of minor maintenance because every year is different, the time that we apply that maintenance in our airports.

And also is the opening (technical difficulty) the opening of the hotel. If you remember, when we opened the NH Hotel in 2009, our EBITDA margin was reduced around 1% and 2%. So that we are seeing the same effect when we open the Hilton Garden Inn in Monterrey airport.

Thank you; that's helpful. Would you mind commenting a little bit on the start up of the new hotel in Monterrey? I believe it open in July, right, how -- can you comment a little bit on occupancy?

Yes, we are starting the pre-operating phase in this hotel in this month July and we are expecting to start operation in August -- in the middle of August. And in terms of margins, when the hotel is mature and that period takes around six and eight months, we are expecting an EBITDA margin around 35% in that range.

That's helpful; thank you.

Pablo Zaldivar, GBM.

Could you give us a little bit more insight on the industrial park operations? You mentioned that you already have someone who is willing to lease the space, but could you give us a little bit more detail and, I don't know, some numbers?

Yes. In terms of -- as I mentioned in the conference, we signed a letter of intent with one client to lease the first warehouse that we built and that we -- was built in March this year. In terms of numbers, as we analyze this project it's by the total land. In terms of how many warehouse we can put in the entire park it's around 10 warehouses of 10,000 square meters, in that range, for the whole warehouses.

And we are expecting, in terms of CapEx for all these projects, we are expecting invest around MXN600 million in that range. It depends on when we are going to invest in the following warehouses. Actually, we had an approval for the Board of Director to invest in the second warehouses later this year. So, we are very happy for the demand in the park. So, in terms of revenues, we could see revenues beginning in the first quarter of 2016.

Okay. Perfect. Thank you; that was very helpful.

And it appears there are no further questions today. So, at this time, I will turn the conference back over to Vicsaly Torres for any additional or closing remarks.

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

Thank you for your participation. This does conclude today's call.