Grupo Aeroportuario del Centro Norte SAB de CV (OMAB) 2015 Q3 法說會逐字稿

Good day and welcome to the OMA Third Quarter 2015 Earnings Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Vicsaly Torres, Chief Financial Officer. Please go ahead.

Thank you. Good morning. Welcome to OMA's third quarter 2015 earnings conference call. My name is Vicsaly Torres, OMA's Chief Financial Officer. Joining me this morning is the IR team, made up by Emmanuel Camacho and Manuel de Leon as well as our Chief Accounting Officer, [Jesus Villagomez].

OMA had excellent results in the third quarter. We set a new record for 12-month passenger traffic. We set a new record for adjusted EBITDA margin and our cash flow generation is stronger than ever. I will review our operational performance and financial results and then discuss the latest upward revision in guidance. After that, we will be pleased to answer your questions.

Turning to our operational performance, we continued to demonstrate a strong momentum in all areas of the business. Passenger traffic grew 16% in the quarter to MXN4.6 million. Domestic traffic rose 15% and international traffic increased 23%.

All 13 airports grew passenger traffic. 12-month passenger traffic reached 16 million passengers, a new record and the third quarter marks the 18th quarter in a row of growth in passenger traffic. Passenger traffic volumes continue to increase as a result of the expansion of the airlines and the opening of new routes last year and in the first nine months of 2015.

For OMA, the most important benefits of the route opening are a bigger regional route network and a substantial broadening of our international destinations. Establishing Monterrey as a regional hub and increasing the connectivity of our airports are longstanding and strategic goals.

Airlines at OMA's 13 airports are currently flying 89 domestic routes and 29 international routes. 10 of the 16 main scheduled airlines that operate in our airports increased passenger volumes with the largest contribution to growth from Interjet, Volaris, VivaAerobus and Grupo Aeromexico. We had three new domestic routes open in the quarter, all by TAR. At the same time, five domestic routes and two international routes closed.

On the commercial front, we opened 12 new advertising, passenger service, hotel promotion, banking services, restaurants and retail establishment in the quarter. The commercial lease occupancy rate increased to 98%.

Nine of our 11 commercial line items grew in the third quarter. The largest percentage increase came from passenger services, up 59%. Thanks to the launch last year of initiatives such as interactive module, OMA TV and a multi-sensory hallway in Monterrey among others. Parking made the largest contribution to incremental revenues and grew as a result of the mix of additional passenger traffic and optimization in our rates.

Our diversification activities also had a strong quarter. The 134 room Monterrey Airport Hilton Garden Inn Hotel opened at the end of August. In its first 35 days of operations, the hotel had an occupancy rate of 34% and an average room rate MXN1,551 per night.

As a result, the Hilton Garden Inn Hotel generated MXN3 million in revenues, in line with our business plan. The hotel is also (inaudible) in terms of renting out meetings room and conference space which is one of the attraction of a hotel located inside the airport perimeter.

We continue marketing the Monterrey Industrial Park with warehouse and we have signed a letter of intent with a potential client to develop [our built suite] of second warehouse. The terms and conditions are being evaluated and no final agreement has been reached.

OMA Carga made the largest contribution to increase diversification revenues. It more than doubled revenues as a result of initiatives to attract ground cargo business and optimize tariffs. Truck freights accounted for 45% of cargo revenues in the third quarter, up from 33% in the prior year period.

Turning to OMA's third quarter financial results. OMA was able to convert these positive operational developments into double digit revenue growth. And as a result of our expected cost control, OMA also recorded double digit increases in operating income, adjusted EBITDA, net income and cash flow from operations.

Aeronautical revenues increased 16% principally because of growth in passenger volumes and the exchange rate effect on international passenger charges. Aeronautical revenue reached MXN175 per passenger. Non-aeronautical revenues increased 30% and non-aeronautical revenue was MXN61 per passenger, up 12%. Commercial activities revenue grew 26%. The line items with the largest contribution to growth where parking, up 27%; advertising, up 29%; retail, up 26%; restaurants, up 25% and car rental, up 28%.

Diversification activities grew 37%, mostly because of OMA Carga, which I already mentioned. Complementary services increased 27% primarily as a result of checked baggage screening and leases of space to airlines. We also added a new line item from services that we launched at the end of the last year and that are known by their English name CUS and CUTE.

CUS stands for Common Use of Service and our passenger check-in kiosk that serve multiple airlines. CUTE stands for Common Use Terminal Equipment which allows airlines to share terminals to access the [repository] systems. Right now, CUS and CUTE are installed in Monterrey Terminal A and are used by Volaris, Interjet, American Airlines and United.

The cost of airport services and G&A expense increased 6.6% in the third quarter, only one-third [of processed revenues]. Much of the increase reflects expenses related to minor maintenance as well as minor work under our master development program, which are included in other expense. These expense increases were partially offset by the increases in utility payments and materials and supplies.

Total operating cost and expenses increased 10% in the quarter. The principal increases were for the major maintenance provisions considering the long-term view for prescribing the value of the infrastructure and concession tax as a result of the increased EBITDA. The technical assistance fee decreased 5%, as a result of the full effect of the reduction of the fee under the amendment to the technical assistance agreement.

As a result of all these factors, OMA's third quarter adjusted EBITDA increased 23% to MXN673 million. The adjusted EBITDA margin reached a new record of 62.4%, up 210 basis points. Financing expenses increased to MXN82 million from MXN68 million in third quarter 2014. This was principally as result of the depreciation of the pesos.

Taxes were MXN153 million, with an effective tax rate of 33%. The increase in the effective tax rate was due to higher revenues as well as a higher amortization of tax losses in airport. OMA expects the full year effective tax rate to be approximately 30%. As a result, consolidated net income rose 13% to MXN306 million.

Third quarter investment expenditure was MXN154 million, including master development programs and strategic investments. Investment in the quarter included modernization and expansion work at the Master Plan airport, the Zihuatanejo terminal building expansion, the hotel in Monterrey and works for the new Acapulco terminal building.

The studies and preliminary work for the new master development plan are continuing. We and the DGAC have finished visiting and evaluating current infrastructure in each of our airports in order to refine the new master development plan for the next five year period.

We expect to communicate the terms of the new MDP by the end of the year.

Our cash flow generation also continues to be strong. Cash flow from operating activities generated cash of MXN1,512 million in the first nine months of 2015, up 29% year-over-year. In light of the growth in passenger traffic volumes, and taking into account the maturation of the new routes that operate in the Group's airport, OMA is updating our full year outlook for 2015.

OMA estimates that total passenger traffic growth for 2015 will be between 13% and 15%, up from 10% to 12%. The growth in aeronautical revenues is estimated to be between 16% and 18%, previously we estimated 13% to 15%. Non-aeronautical revenues are expected to increase between 23% and 26% compared to the previous estimate of 18% to 20%.

The adjusted EBITDA margin is expected to be between 57% and 60%, up from the previous estimate of 56% to 58%. Our CapEx estimates are unchanged. MDP's investment are expected to be MXN500 million to MXN700 million. The strategic investments principally for diversification projects and new business opportunities are expected to be MXN100 million to MXN200 million. OMA is providing this outlook based on internal estimates. A number of factors could have a significant effect on these estimates. These include changes in airlines expansion plan, ticket prices and other factors affecting traffic volumes, the evolution of commercial and diversification project and economic condition including oil prices among others. OMA can provide no such assurance that the Company will achieve these results.

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

Thank you. (Operator Instructions) Marco Montanez, Vector.

Good morning, Vicsaly and congratulations on the results. Thank you for taking my question. You already mentioned something about the industrial park at the Monterrey airport, but could you give us an update about the contracts that you have signed until now, if there is any? And any information about the potential tenants or sectors interested to sell there? And finally, when do you expect to generate the first revenues coming from this project?

Thank you, Marco. Good morning. Well, about the industrial park, we already have the first warehouse and we are trying to commercialize this warehouse. We have some clients interested in this warehouse, but at this moment, we don't have a contract with some client. But also, we have now a letter of intent for other clients, but this client is interested in [business suite] warehouse.

So if we sign the contract, because we are evaluating the terms and conditions, period everything and the special needs of the client to build the warehouse. So if we sign a contract, it could be possible that we are going to invest in a second warehouse, but this warehouse is a [business suite] warehouse. When we are going to expecting -- get revenues for industrial park, our expectation is to have revenues in the next year, in the first quarter of next year.

Pablo Zaldivar, GBM.

I just have a couple of questions, the first one will be in regard with traffic increases we have been witnessing throughout the year. We have been seeing this strong growth, what are your expectations in terms of already seats available for the next year from airlines and the trend you're expecting in general for the next quarter and the next year? .

Let me give you some idea in terms of traffic. Some positive for us is that all of our airports is growing in traffic, mainly in domestic traffic but also in terms of international traffic, we are having very good results mainly in Monterrey that is a leader in our airport. This airport is growing 30% in international passengers and this is a very, very good time of us in terms of what is happening in the next year.

In terms of routes, this year has not been very good year in terms of opening routes. We are having some closings. This is a situation that is common because last year, we had a very strong year in terms of opening.

So, in this year, we are seeing a consolidation of the routes but in terms of what is our expectation for the next year in terms of routes or in terms of -- certainly, in this year, we are expecting to close the year with a positive number in terms of opening routes between 10 and 15 new routes. We are expecting a good fourth quarter for this year and we are working with airlines to try to have more openings.

In the quarter, we have three newer routes from TAR, the regional airlines that has started operation last year. Obviously [Bajio route] from Durango to Puerto Vallarta, Mazatlan to Guadalajara, Mazatlan to La Paz and also as we mentioned in the report and in the call, we also had some cancellations. And as I mentioned, the cancellation is for the consolidation of the route.

Going forward, for next year, we are expecting mid or high single digit growth. We are working a lot with the airlines to try to convince them to obtain new routes in our airports. We are waiting for a day we receive more planes. So we are trying to attracting those planes into our airports.

(Operator Instructions) Stephen Trent, Citi.

This is actually Kevin Kaznica stepping in for Steve. And I guess going back to your comments on your MDP CapEx guidance, do you have any kind of updates on anything else regarding MDP review. I know you said you guys would tell us more information maybe by the end of the year but I think earlier you mentioned higher CapEx and higher tariffs in prior earnings calls, but it seems like your view has changed a little bit, would that be accurate?

Yes, our expectation in terms of investment in terms of Master Development Plan, as I mentioned in previous calls, we are expecting an increase in the amount of the investment. We are expecting between 30% and 40% increase in the amount. In present value, the current Master Development Plan is MXN3.5 billion. So, we are expecting for the new Master Development Plans around MXN4 billion and MXN4.5 billion in total for the five year period.

And in terms of tariff, with this amount of investment, out expectation is having to get an increase in single digit mid range between 4% and 7% increase, 7% would be a very, very positive result, a more conservative or more probable is 4% increase. But at the end of the year, we are going to release the results, a new Master development plan in the results in terms of tariffs.

Great. So I was actually confusing with the MDP investments this year and then what we would be looking at for the next plan? Sorry about that. But do you have any thoughts on our 2016 traffic growth expectations?

Yes. Well, we have not related our new guidance for 2016. But as I mentioned to Pablo, to answer Pablo question, our expectation is that the passenger traffic could grow in medium range or high range single-digit.

Okay, very helpful. Great, and I guess my last question would be, how do you view the sustainability about the growth of carriers such as Interjet and TAR, I know you mentioned TAR earlier, I think in the last question.

Your question is how is sustainable this growth in the following year --

Yes, how sustainable do you see their growth?

Okay, TAR is a new airline, it's a regional airline, it's expanding in airports. They have expansion plans in terms of airplanes. They have airplanes, it's Embraer 145, its 50 seats approximately and they are opening routes, intraregional routes that other airlines are not flying. So that's very important for us because they are developing a new regional traffic. And we are negotiating to capture routes openings with them. We are very close with them to working to try to capture their capacity expansion in the following years.

With Interject, Interjet continue to strengthen in our airports but it has been more moderate as compared to Volaris, Aeromexico and TAR but we are very positive with their airlines, with the expansion, in terms of aircraft, they are expecting to receive a new airline. We know that divide of routes accelerated their planned intend to replace their fleet. They are thinking to finish this process next year. So, the aircraft that they are going to receive in the following year, so 2017 and going forward is to have more capacity.

So we are very positive in terms of the traffic growth, it's probably or is sustainable at least one or two year and if the Mexican economy continue to be healthy, if the economy is growing less or high digit but if this is growing, its sustainable, that passenger traffic growth is sustainable.

(Operator Instructions) Ricardo Alves, Morgan Stanley.

Two quick questions. The first one on your non-aeronautical revenues in Monterrey, was really strong partially because of the traffic obviously, but we did see a big increase again after the second quarter, in the third quarter again, a big move in terms of our non-aero in Monterrey on a per passenger basis.

So basically, what you're seeing here in Monterrey that is driving this non-aero per passenger growth, it was almost 20% growth this quarter, if I'm not mistaken on a per passenger basis. And so what's driving that? What you guys are doing in Monterrey to drive that and if that should continue in the next couple of quarters?

Second question, very quickly, on the new hotel in Monterrey. The average rate of, I believe [MXN1,600] per room, it seems a little bit higher than what we expected. So I just wonder what's going on there and if this is a number that we can use going forward?

Regarding non-aeronautical revenues mainly in Monterrey, basically, in Monterrey, we are having a high increase in terms of traffic and that is the main reason for the increase in non-aeronautical revenues, more sales for our stores and restaurants means more participation for us in terms -- for our commercial space. Also the new hotel in Monterrey is having a very good result. This hotel started operation at very, very high, I don't know, it's like was a very, very good point. We are attending passengers for example from -- that is flying to Japan, the route to Japan is at 3.00 AM basically. So, passengers go to our hotel and sleep some hours and then take their flight. So, we are having a very good success in the hotel.

OMA Carga also is having a very good increases, so very high increases in revenues. We are attracting more cargo, ground cargo. We also have some presence in air cargo but mainly the increases are as a result for the ground cargo. So we are putting our effort in this business, in this line, to expand their operations. We want to expand the capacity of this business to get more or to have the ability to receive more cargo. As a result, not only commercial revenues are enhancing this indicator but also diversification and complementary activities in Monterrey basically.

Okay, thanks, and you disclosed -- sorry, just a follow-up on the first one, Viscaly, sorry to interrupt you. Do you know more or less, the terminal capacity utilization at Monterrey, currently?

Yes, we have three terminals in Monterrey. Terminal A, its capacity, the maximum capacity is 6 million passenger capacity and it's currently at 50% capacity. The Terminal B is a terminal where Aeromexico and Delta are operating and this terminal capacity is, maximum capacity is 2 million, 2.5 million passengers and is operating at 60% of its capacity and Terminal C, its capacity is 2 million passengers and it is almost, currently, it's at 100% current.

Okay, thanks for that. And then the last one on the average room rate for the new hotel.

Yes, the hotel, well, as I mentioned before, we started with very successful in terms of occupancy. The occupancy rate in average is around 35% and this is in line with our business plan. Our expectation is that this hotel could reach occupancy rate around 60%, is the average of the perimeter of the hotel inside of the parameter of the airport. So, our expectation in terms of occupancy rate is that this could increase little by little to reach 60%.

Thanks, Vicsaly. So, the average room rate for the third quarter is a reasonable assumption for the next couple of quarters or may be reasonable to assume a slowdown in the average room rate?

Well, our objective, our goal is to increase it. But we think that in this quarter was a very high average room rate because in our expectation was around MXN1,200. But if the hotel continue to be successful in terms of occupancy rate and if the average room rate in the [quarter throughout the other hotels in the quarter], we could have a similar average room rate that in the third quarter.

Francisco Suarez, Scotiabank.

Hi, Vicsaly. Thanks for the call, congrats on the results and another question on the industry trends if I may. The overall, do you have an idea of what might be the average load factor that the carriers are having in your airport network?

And secondly, any expectations of what may happen if the bilateral agreement goes through between the US and Mexico, particularly in international traffic?

Thank you. Francisco. Okay, regarding load factors, I don't know the specific load factor for each routes and for each airlines but we know that this load factor increased a lot in the current year and the reason of how we know that because in terms of operation, the increase is flat, the number is flat of operation. And in terms of passenger, we are increased [50%] in passenger. So the reason is high load factors.

I am going to pass to the second question. Do you want to say something (multiple speakers).

No, thank you.

And in terms of bilateral agreement we note the negotiation was suspended to next year and we are expecting the day for that because for us it would be a very, very good or very positive for us, for the airports, because we will have more clients, more capacity in the local network. But at the same time, we think that these are a risk for the Mexican airlines because they will have more [competition and very aggressive competition].

Okay, but [you don't] expect any disruption in traffic and actually it could actually be positive for your overall passenger traffic trends, isn't it? That would be perhaps (multiple speakers).

It's difficult to measure the impact, but we think it will be a positive for us to open the sky.

I'm sorry and lastly, last question if I may. We saw a major reduction in the overall cost per workload and of course, it have to do a lot with how the utilities are going down in Mexico but also in term of -- it actually talks very well of how much controlling your costs. So, do you think that the current trends are sustainable? In other words, does the margins that we're seeing at home at this moment are sustainable?

We are having a very strong cost control because our goal is to increase margins. We are adding some business, some commercial or diversification that have a margin that is lower than the airports margin. So we are putting a lot of effort to control cost to try that our margin increase or at least don't decrease. Going forward, we think that we can maintain our current levels, margin levels between [59%, 58% to 60%] EBITDA margin.

Perfect. Thank you very much. Congrats again.

You're welcome, Francisco.

Patrick Stockdale, Standard & Poor's.

First and foremost, congratulations on your third quarter results. I only had a simple question regarding the CUS and CUTE complementary activity and I just wanted to know if you could provide little bit more insight regarding this?

Yes, this is our new service, that is CUSS and CUTE, it's to help airlines and to help passengers for the check-in and for the airlines to aboard the planes, to accelerate the boarding process to the planes. This is our new services that we implemented in Terminal A in Monterrey.

Basically this kind of technology helps us to maximize the space in our terminals because these add us more capacity because we don't need a tech team from front desk that require more space. These are models or some like ATM but for the check-in for the passengers. And in the board gates, in the gates that is the other service that use the airlines and they don't need special software to aboard or to do the boarding process for the passengers. They can use this software that if you install in the position, in the gate, and they can use and they can get all the reports that they need and try to accelerate the boarding process in the gates. They can reduce the time in the position.

[Lucas Friar], Goldman Sachs.

This is actually Marcio Prado with Goldman Sachs. Just two quick questions on the results, on specific points on the results. Just wanted to understand like you mentioned in your press release, the conversion of 9 million shares for one of your controllers. I just wanted, if possible, if you could give us more color there. And if this is in anyhow connected to the technical assistance fee renegotiation that took place that was effective since June [2014] and just also if you could give some color on the tax rate, tax increased a little bit, tax rate, when compared to last year. This is related to last deferred tax that OMA has at this moment.

About your first question, the conversion is not related to the Technical Assistance Agreement. The depositary shares that were converted were converted at the initiative of Aeroports de Paris Management, that is part of our strategic partner and 9 million [certified total] BB shares were converted to B shares which represents 2.3% of OMA's equity capital.

ADPM has advised OMA that they do not have any near-term intention of selling shares. In fact, the converted shares are subject to one year lockup. However, they do want to be in a position in the future to realize the value in a portion of their investment based on market conditions.

The conversion now takes care of time consuming prior condition to any eventual share sales. This is that we can say about this conversion, basically the position of our (inaudible) doesn't change, they maintain 16.6% position in OMA. But the only change was inside the position now there are less BB shares than before.

And in terms of tax rate, we have an increase in the effective tax rate. It's due to higher net income -- higher revenues, higher net income and also in our airports, we are amortizing faster than we expected at the beginning of the year. We are amortizing the tax losses in our airports faster, so that's why the deferred assets decrease and increase our effective tax rate.

We have no further questions at this time. I'd like to turn the conference back to Vicsaly Torres for any additional or closing remarks.

On behalf of OMA, I want thank all of you again for your participation in this call. Emmanuel 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.

That does conclude today's conference. We thank you for your participation.