Grupo Aeroportuario del Centro Norte SAB de CV (OMAB) 2015 Q4 法說會逐字稿

Good day and welcome to the OMA Fourth Quarter 2015 Earnings 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 fourth 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, Manuel de Leon and Laury Franc, as well as our Chief Accounting Officer, [Jesus Villagomez].

OMA had excellent results in the fourth quarter, giving us record operating and financial performance for the full-year 2015. 12 month passenger traffic reached a new record of 16.9 million passengers. We set a new record for full-year adjusted EBITDA and adjusted EBITDA margin. Our cash flow generation is stronger than ever and net income reached MXN1,237 million, up 20% from 2014. I will review our operational performance and financial results and then discuss the new Master Development Plan approved in December for the next five-year period and provide our outlook for 2016. After that, we will be pleased to answer your question.

Turning to our fourth quarter operational performance, we continued to demonstrate a strong momentum in all areas of the business. Passenger traffic grew 11% in the quarter to 4.4 million. Domestic traffic rose 12% and international traffic increased 10%. 12 of our 13 airports grew their passenger traffic. The fourth quarter marks the 19 quarter in a row of growth in passenger traffic. Passenger traffic volumes continue to increase as a result of the expansion of the airline, opening of new routes and increasing load factor.

For OMA, the most important benefits of the route openings are our deeper regional route network and a substantial broadening of our international destinations. Establishing Monterrey as a regional hub and increasing the connectivity of all our airports are longstanding and strategic goals. Airlines at almost 13 airports are currently flying a total 111 domestic routes and 56 international routes.

During the quarter, 12 of the 16 main scheduled airlines that operate in our airports increased passenger volume, with the largest contribution to growth from Volaris, Interjet, VivaAerobus, and TAR. We had 20 new routes opened in the quarter, 16 domestic and four international and no routes were closed. For 2015 as a whole, we had 31 new routes starting up and only 17 closing.

On the commercial front, we opened 21 new openings in the quarter related to passenger services, bank services, advertising, restaurant and retail. The commercial lease occupancy rate was 97%. 9 of our 11 commercial line items grew in fourth quarter. Parking made the largest contribution to incremental revenues and grew as a result of the mix of is additional passenger traffic and optimization in our rate. Other important contributors were restaurants, retail and car rentals. The decrease in advertising revenues resulted from our decision to terminate our all advertising contract during the quarter. We have signed an agreement with a new operator under more favorable terms for OMA.

Our diversification activities also had a strong performance. The 134-room Monterrey Airport Hilton Garden Inn Hotel completed its first full quarter of operation. The average occupancy rate reached 54%, with an average room rate of MXN1,685 per night. As a result, the Hilton Garden Inn Hotel generated MXN14 million in revenues, which was our business plan.

The hotel is also off to a good start in the food and beverage department, including the rental of meeting room and comprehensive base, one of the attraction for our hotel located inside the airport perimeter.

The NH Terminal 2 hotel also had an outstanding quarter with increases in both average room rates and occupancy levels. Some of this was the result of the Formula One Race in Mexico City in November. For the Monterrey Industrial Park in the fourth quarter and first part of 2016, we completed negotiation and signed a first total leasing contract. Volaris will take the first already built warehouse plus a 2,400 square meter expansion that is currently under construction. Then secondly, it will take a new 5,000 square meter warehouse that is also currently under construction.

OMA Carga made the largest contribution to increase diversification revenue. It's more than double revenues as the result of initiatives to attract ground cargo business and optimize tariff. Both Truck freight and air cargo operations increased in the quarter.

Turning to OMA's our fourth quarter financial results. OMA was able to convert this positive operational development into double-digit revenue growth. And as a result of our effective cost control, OMA also recorded double-digit increases in operating income, adjusted EBITDA, net income and cash flow from operation.

Aeronautical revenues increased 25%, principally because of the growth in passenger volumes and the exchange rate effect on international passenger charge. Aeronautical revenue reached MXN185 per passenger. Non-aeronautical revenues increased 32% and non-aeronautical revenue per passenger was MXN0.76, up 19%. Commercial activity revenue grew 7%. The line items with the largest contribution to growth were parking up 18%, restaurant up 24%, retail up 18%, car rental up 17% and passenger services up 47%. These increases more than offset the temporary reduction in advertising revenues from the change in the operator.

Diversification activities grew 56% mostly because of OMA Carga and the Hilton Garden Inn which I already mentioned.

Complementary services grew 70%, primarily as a result of checked baggage and screening services. The cost of airport services and G&A expense increased 11% in the fourth quarter, less than half as fast as revenue. Much of the increase reflects higher water bills because of an increase in water consumption generated by higher passenger traffic volume.

Hotel cost and expenses increasing was generated principally by the opening of the Hilton Garden Inn. Concession tax and the technical assistance fee increasing are a result of the strong financial results of the Company.

Total operating costs and expenses decreased 4% in the quarter. The principal factor was a credit to the major maintenance provision as a result of the destination of the new MDP. Excluding this, total operating costs and expenses increased 9% in the quarter.

As a result of all these factors, OMA's fourth quarter adjusted EBITDA increased 30% to MXN651 million. The adjusted EBITDA margin reached 57.2%, up 531 basis points. Financing expenses decreased to MXN57 million from MXN88 million in fourth quarter 2014. This was principally as a result of a credit in the valuation of decreasing value of the major maintenance provision and less exposure to US dollar.

Taxes were MXN156 million with an effective tax rate of 28%. As a result, consolidated net income rose 39% to MXN396 million.

Fourth quarter investment expenditures were MXN196 million, including market development programs and a strategic investment. Investment in the quarter included works for the new Acapulco terminal building, modernization and expansion work at the Mazatlan Airport, the Zihuatanejo Terminal Building expansion and the implementation of the SAP enterprise resource management system across the Company.

Our cash flow generation also continued to be strong. Cash flow from operating activities generated cash of MXN2,064 million for the full year, up 29% as compared to 2014.

Beyond our record results, one of the principal developments of the quarter was the approval of our master development programs and maximum rights for the next five years to 2020. To continue to develop our airports in terms of efficiency, capacity expansion, modernization and maintenance in accordance with the highest national, international operated operational standards, we have committed MXN4.4 billion of December 31, 2014, that will be distributed as follows. 40% will go to terminal expansion and remodeling, including expansion work in Monterrey, Acapulco, Chihuahua, Reynosa, San Luis Potosi and Zihuatanejo airports. 20% to major maintenance, 15% to security, safety and IT equipment, 10% to operational infrastructure expansion including Monterrey, Culiacan and Durango airports, and the remaining 50% will go to Itau certification and other minor works.

Our investment commitment represents an increase in real terms of approximately 36% compared to the 2011-2015 MDP. As a result of the Master Development Plan negotiation, the maximum tariff was right in all of our airports.

Finally, OMA is pleased to provide our outlook for 2016. OMA estimates that total passenger traffic growth for 2016 will be between 6% and 8%. This reflects our prudent outlook based on the more difficult comps we will face in 2016 as well as the uncertain economic environment. Our traffic growth rate is roughly two to three times the expected growth in Mexican GDP and assumes a consolidation by the airlines of their recent rules and fleet expansion with slower capacity growth than the last couple of years.

The growing aeronautical revenues is estimated to be between 22% and 24%, and non-aeronautical revenues are expected to increase between 13% and 15%. The adjusted EBITDA margin is expected to be between 60% and 62%. In other words, we expect to keep EBITDA margins similar to the record levels achieved last year or to increase them somewhat, reflecting the positive operating leverage that we now have.

The effective tax rate is expected to be between 27% and 30%. Market development plan investments are expected to be in the range of MXN1,500 million to MXN1,700 million, principally for increases in passenger terminal and aircraft platform capacity and acquisition of operating and security equipment.

The most important projects for 2016 include, continue work on the new Acapulco Terminal building, beginning of construction of the new Reynosa terminal building which we expect to finish in 2017, expansion work in the Terminal of Chihuahua Airport also expected to be finished in 2017, revamping of terminal building in Zihuatanejo Airport, commercial platform expansion in Monterrey and Culiacan Airports, and firefighting and rescue building expansion in Acapulco and San Luis Potosi Airports. In addition, ascertaining investments, principally for warehouses construction to continue developing the Industrial Parks at Monterrey Airport and other diversification projects are expected to be in the range of MXN150 million to MXN250 million.

OMA is providing this outlook based on internal estimates. A number of factors could have a significant effect on this estimate. This includes changes in airline expansion plans, ticket price and other factor affecting traffic volume. The evolution of commercial and diversification projects and economic condition including oil prices among others.

OMA can provide no assurance that the Company will achieve this result.

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

Thank you. (Operator Instructions) Pablo Zaldivar, GBM.

Hello, Vicsaly, good morning, thank you for taking our questions. I would just like to go back to the expected CapEx in diversification projects. What are you expecting in terms of the warehouses to be built during the year? Do you have an estimate of how many new warehouses or how is that MXN150 million to MXN250 million estimate estimation split?

Thank you, Pablo. Yes, well, as I mentioned in the prepared remarks, we already signed two contracts to lease a warehouse. One warehouse is already built, but we have to do an expansion in this warehouse. And the second contract, we need to build this warehouse. So this year, at least we will have one more warehouse and an expansion of the first warehouse that we already have built. But we continue developing and commercialize the part with our partner. So we are expecting to have at least one more warehouse in addition for the two contracts. This is in terms of the industry acquired. Also this year, we have another investment, a strategic investment related to the OMA Cargo Services. We will invest in a new warehouse for this business. It's specialized for ground cargo. So this is other strategic investment that is included in this amount that I've mentioned.

Okay. Thank you. That's helpful. And in terms of the warehouses that you have signed the agreement, I don't know if you could give us a little bit more color on what is the expected revenue or profitability expected from those contracts in terms of square meter or per warehouse. I don't know if you could just give us a little bit of colour on how the revenue should work from those warehouses that you have already signed on agreement?

Sure. Basically, one of the agreements that we signed is for 42 months and the other, the second one is for 40 months. Basically, we are one of -- the first contract is around $1 million per year annually in revenues we are generated revenues annually and it's similar, the second one is similar, it's a little bit more for -- because the period is four months more than the first contract.

Okay. Thank you. And do you have an expected date to finish the warehouse that is under construction? I don't know by the first half of the year or when are you expecting to finish that warehouse?

Yes, both of them, we are expecting to receive revenues in May and June. So at the end of the first semester and the beginning of the second semester of the year.

Okay. Thank you very much. That's very helpful.

Alexandre Falcao, HSBC.

Good morning. I have two questions. First, just wanted to if you could explain how are you going to be able to expand EBITDA margins from the 58% level to 60%, 62% that you're guiding for 2016. That's the first question. And the second one is on passengers, there is -- or in revenues, non-aeronautical revenues, there has been a huge increase there. Just wanted to see if you can guide and walk us through what can be done from now on or we are reaching a point of exhaustion here or expect people to spend more in your airports. Thank you.

Thank you, Alexandre. Answering your first question regarding the EBITDA margin expansion, as you know, we estimate that adjusted EBITDA margin can be in a range between 60% and 62% as you mentioned. This is because in this year we have a significant event in revenue due to increases in tariff as the result of the negotiation of the Master Development Plan. So basically, the cost structure in airports is classified fixed. So almost 100% of this additional revenues is coming down to the margin. That is the reason that we are expecting an increase in our margin.

And answering your second question about the non-aeronautical revenues increase, in this quarter, we saw a specific effect in non-aeronautical revenues. In 2015 we recorded cost recoveries, a reduction of cost of services. However in previous year, our detailed financial statements presented cost recovery as a non-aeronautical revenue, revenue in line item. To be consistent with the audited financials, our fourth quarter results present cost recovery for the entire year as additional non-aeronautical revenue in the other revenues line item. But at the same time, our cost of services got increased in the same amount. This change does not have effect on our results needed on our margins. But it's important to say this because it's a little bit change in this fourth quarter versus the first three quarters of 2015.

Okay, perfect. And if I can just have a follow-up question on dividend distribution. Just wanted to know, one, what are your plans on that specifically? And if you can use part of your non-airport business, if they start generating some cash, to then try to distribute from there? Thank you.

Your question is related that if we can use the non-regulated business to pay more dividends or --?

Yes.

Okay.

Just wanted to know if you have more plan, because you have a fiscal limitations, you pay dividends, is there any around it?

Basically, we analyze as a whole, as an entire business, aeronautical and non-aeronautical, as a consolidated figure. The decision on dividends is made by the shareholders meeting based on recommendation of Board of Directors and the Management team. We are looking into the maximization of dividends based on OMA's financial and tax situation. We estimate we could pay in 2016, a dividend similar or slightly higher than our last couple reimbursements. Going forward GBM payments will depend on the tax and financial situation of the company although we estimate dividend amounts will be similar to recent years. And basically because we have adding more business into the Company, we have increased our efficiency and generated more cash flow.

[Pablo Bourassa], Credit Suisse.

My first question is regarding (inaudible) sell all of PB shares. What will be the process, will you have to call a shareholder meeting in order to prove or what will you follow?

If sell their position in these shares, they don't need to do nothing. They sell their position into the market. If they decide to sell their participation in our strategic shareholder, SETA, this operation must be approved by the communication and transportation ministry.

Okay. And my other question is a follow-up on Pablo Zaldivar's question. You mentioned that you have to make an additional investment on the warehouse, you have already and a new one. Could you give us an estimate of CapEx from the divisional on the new one please?

Yes, just to give you an idea, warehouse of 10,000 square meters require an investment around MXN50 million. In this case the warehouse that we are going to build is for 5,000 square meters. That is the warehouse that we already have a contract. It's 5,000 in square meters, so the investment is around MXN25 million. And the additional warehouse that we are expecting to build to have a warehouse in itself to commercialize. It will be for 10,000 square meters. So the investment is around MXN50 million, for this new additional warehouse.

Okay, thank you, Vicsaly. And last question, on the warehouse that you are planning an expansion, is it because you're changing it to build-to-suit or something like that or why the reason you're expanding it?

Yes. Our industrial-type model is a built-to-suit model, but we know that there is a lot of demand for warehouses at the moment, due to the -- because the airport is very close to the new plant of Kia Motors. So it's important to have at least one warehouse in stock. So that's why now we have two contracts. We are going to build the second warehouse and we are going to build the third warehouse to have one in stock for any client that wants the warehouse in a very short term.

Okay. Thank you, Vicsaly. That was very helpful.

You're welcome.

The conference calls ends at this point because of an equipment failure on the part of the call provider. OMA regrets any inconvenience, and invites you to address any addition questions to the Investor Relations team.