Grupo Aeroportuario del Centro Norte SAB de CV (OMAB) 2016 Q2 法說會逐字稿

Good day and welcome to the OMA second quarter 2016 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 second quarter 2016 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 Franco, as well as our Chief Accounting Officer, [Jesus Villagomez].

OMA had another strong performance in the second quarter, continuing the strong growth and profitability path we have been on for the past five years and we set a new record for adjusted EBITDA generation. I will quickly review our operational performance and financial results, update our outlook for 2016 and then we will be pleased to answer your questions.

Turning to our second quarter operational performance, we continued to demonstrate a strong momentum in all areas of the business. Passenger traffic grew 9% in the quarter to 4.5 million led by domestic traffic growth. 10 of our 13 airports grew passenger traffic. Passenger traffic has grown for 21 quarters in a row. The growth reflects the expansion of the airlines, new route openings and increasing load factors.

During the quarter, 10 of the 16 [main] scheduled airlines in our airports increased passenger volumes with the largest contribution to growth from Volaris, VivaAerobus, TAR and American Airlines. 11 new routes opened in the quarter, nine domestic and two international, while two international routes closed.

For the first six months of the year, we had 16 route openings of which four are from or to the Monterrey airport. Volaris has opened 12 routes; TAR added five routes; VivaAerobus, three; Aeromexico, two; and Sunwing added one seasonal route. We have already seen an additional eight routes opening in July of which two are international. We believe that we could continue to see additional new routes opening in the final five months of the year based on the indication we have received from the airlines.

For OMA, the most important benefit of the route openings are a 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 strategic goals.

On the commercial front, we had 13 new openings in the quarter including five retail stores in the Acapulco, Culiacan and Monterrey airports.

In Zihuatanejo we opened two new car rental operations and a restaurant as part of the renewal of this important tourist destination. The commercial lease occupancy rate in our 13 airports was steady at 97%. The most important factor in our commercial results was the growth in advertising revenues as a result of the contract with a new advertising service provider at the beginning of the year. Retail, car rentals and restaurants also contributed significantly as a result of the higher traffic volumes and participation revenues.

Our diversification activities also had a strong performance. The Monterrey airport Hilton Garden Inn hotel made the biggest contribution to incremental revenues, generating MXN22 million in the quarter. The occupancy rate reached 77% and the average room rate was MXN1,964 per night. I am proud to say that with a 77% occupancy rate in its third full quarter of operation, the Hilton Garden Inn is ramping up faster than the NH Hotel did at a similar point in its first year.

OMA Carga generated a 19% increase in revenues, largely because of the growing ground transport services. We expect the positive trend in this business to continue and we are building new ground transportation facilities that will approximately double our capacity. Construction is scheduled to be finished next month.

At the Monterrey Industrial Park, the first warehouse was put into services and this started generating revenues in May. The second warehouse was completed this July and will begin to contribute to results in the third quarter. Construction has begun at the third and the fourth spec warehouses and we are in the leasing process for both of them. Their construction is scheduled to be completed at the end of 2016 and early 2017 respectively.

Turning to OMA's second quarter financial results. OMA converted this positive operational development into strong double-digit revenues growth and as a result of our effective cost control we also recorded double-digit increases in operating income, adjusted EBITDA and net income, which rose 61%. Aeronautical revenues increased 27% as a result of higher volumes and increased rates.

During the quarter OMA implemented rate increases based on the new maximum rates authorized last December.

Domestic and international passenger charges increased by an average of 7% and 6% respectively, effective May 1. Airport services charges increased 4% on average in line with the non-oil producer price index. The actual increases for passenger charges and its service were based on market condition in the individual airports and are less than the total maximum rate increases authorized by the SCT.

The depreciation of the peso against the dollar also benefitted international passenger charges. As a result of these factors, aeronautical revenues reached MXN210 per passenger, up 17%. Non-aeronautical revenues also increased 25% and non-aeronautical revenue per passenger was MXN74, up 15%.

Commercial activities revenues grew 19%. The line items with the largest contribution to growth were advertising, up 30%; restaurants, up 32%; car rentals, up 37%; and retail, up 27%. Diversification activities grew 40%, mostly because of hotel services and specifically the new Hilton Garden Inn. Complementary services grew 15%, primarily as a result of checked baggage screening services and access rights.

I should note that we categorize the concept of other services to allocate it among aeronautical, commercial and diversification activities. For comparative purposes, we have reformulated 2015 numbers. This formulation does not affect total revenue. The cost of airport services and G&A expense increased 12% in the quarter. This was principally because of the timing of minor maintenance compared to 2015.

Over the first six months the increase in cost of airport services and G&A expense was 4.2%. Hotel costs and expenses increased principally because of the opening of the Hilton Garden Inn.

The concession tax increase is a function of the strong financial results of the Company while the technical assistance fee decreased because of the reduction in the rate agreed last year.

Total operating costs and expenses increased 4.4% in the quarter (sic - see press release, "3.6%"). As a result of all these factors, OMA's second quarter adjusted EBITDA increased 37% to MXN808 million. This is the highest quarterly adjusted EBITDA in OMA's history. The adjusted EBITDA margin increased 478 basis points to 62.5%.

The second quarter marks 20 consecutive quarters of adjusted EBITDA growth. Over the same time frame, our revenue performance and focus on cost controls have enabled OMA to expand adjusted EBITDA margin from a four-quarter moving average of 40% to more than 60%.

Operating income increased 47% to MXN660 million. Financing expense decreased to MXN32 million from MXN61 million in second quarter 2015 as a result of exchange rate effect. Taxes were MXN183 million with an effective tax rate of 29%. As a result of all these factors, consolidated net income rose 61% to MXN446 million.

Second quarter investment expenditures were MXN142 million, mostly for strategic investments, including the warehouses in the Monterrey Industrial Park. Since we are at the beginning of the new MDP investment cycle, investment under MDP were only MXN83 million during the first half of 2016. Major projects have been put out to bid, a number of contracts have been awarded, and we expect to make significant investment expenditures on this project in the second half of the year.

As we announced on July 13, we've begun construction of the new Acapulco terminal building with a 1.3 million passenger capacity. This state-of-the-art facility will replace the existing building which is one of the oldest operating terminals in Mexico. The expected investment is MXN550 million and this is scheduled to be completed in 20 months. The new terminal will be an attractive gateway to the Acapulco tourist region, be much more efficient to operate, have a greatly expanded commercial offering and provide a much better passenger experience.

In addition to the Acapulco terminal, the most important MDP projects for 2016 include beginning of construction of the new Reynosa terminal building, expansion work in the terminal of the Chihuahua airport, expansion of the terminal building in San Luis Potosi, remodeling of the terminal building in Zihuatanejo, commercial platform expansion in the Monterrey and Culiacan airports, and emergency services building expansion in the Acapulco and San Luis Potosi airports. These investments are expected to be funded through cash generated by operations and cash balances.

Our cash flow generation continued to be strong. Operating activities generated cash of MXN897 million in the first six months of 2016, compared to MXN961 million in the same period of 2015.

The reduction was principally because of the higher level of accounts receivables and an increase in tax paid. Accounts receivables remained high due to the stabilization period effect of the transition to the new SAP platform and the billing process which took place in the first quarter. This is not attributable to our clients and we expect a normalization by the third quarter.

I'll now turn to my second topic, our outlook for the year. As a result of the increase in traffic volumes in the first six months of 2016 above the levels expected and taking into account the optimization of specific aeronautical tariffs at the Group's airport, OMA is revising its outlook for 2016. OMA estimates that total passenger traffic growth for 2016 will be between 8% and 10%, up from 6% to 8%. The growth in aeronautical revenues is estimated to be between 24% and 26%, compared to 22% to 24% previously. Non-aeronautical revenues are expected to increase between 17% and 18%, up from 13% to 15%.

The adjusted EBITDA margin is expected to be between 61% and 63% as compared to the range of 60% to 62% we estimated previously. Estimated MDP investment expenditures for 2016 are unchanged and are expected to be in the range of MXN1,500 million to MXN1,700 million. The strategic investments principally for diversification projects are expected to be in the range of MXN150 million to MXN250 million, also unchanged.

OMA is providing this outlook based on internal estimates and the usual disclaimers apply. A number of factors could have a significant effect on these estimates. This includes changes in airline expansion plans, ticket prices and other factors 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 these results.

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

(Operator Instructions) Pablo Barroso, Credit Suisse.

Good morning team and congratulations on the results. I have a couple of questions here. Could you give us more coloring on the industrial parks? When will the second park start generating revenues and how many parks will you be operating next year?

And my second question is regarding maintenance expenditures in the first half. We've seen almost no maintenance expense in the expenditures. Should we expect them to accelerate in the second half? Thank you.

Thank you, Pablo. Let me answer your first question about the industrial parks. At the Monterrey Industrial Park, the first warehouse was put into service and it started generating revenues in May, generating MXN1 million in second quarter 2016. The second warehouse was completed this July and will begin contributing to results in the third quarter. Construction work has begun on the third and fourth spec warehouses, and we are in the leasing process for both of them. Their construction is scheduled to be completed at the end of 2016 and early 2017 respectively.

Okay. And in terms of revenues, what should we expect on a normalized basis, because this quarter was just MXN1 million because it started operating in May, right?

Yes, exactly. In the second half of the year you will see revenues from the first warehouse and the second warehouse because the second warehouse will generate revenues since August.

Okay. Thank you, Vicsaly.

And your second question is about a minor maintenance cost, right?

Yes, exactly. No, minor maintenance expenditures, in terms of CapEx, maintenance CapEx.

Major maintenance then?

Yes.

Okay, major maintenance. Major maintenance, it's related to the MDP project. MDP includes major maintenance. So as we are in the beginning of this cycle of this five-year period, we are planning all the projects.

So, yes, we are thinking that this line will be more aggressive -- the expenditure for this line will be more aggressive in the second half of the year because we are putting into work these projects. As the major maintenance level recorded in our results, we expect it to maintain it in the same level for the year. If you look at the balance sheet, the level of the provision will be remain the same, at the same level, MXN600 million approximately.

Okay, well thank you, Vicsaly and congratulations on the results.

Thank you, Pablo.

Mauricio Martinez, GBM.

Thank you for taking my question and congratulations on the result. Can I have a follow-up question from the previous one about the industrial park? I was wondering if you can share with us the third and fourth contract; what is the size that we should expect for?

And also I am curious about Ciudad Juarez traffic as we witnessed a strong growth during the year? Could you give us any insight about the main driver for this increase and if you expect such levels to continue for the remaining of the year?

Thank you, Mauricio. Okay, let me give you more following on industrial park. The third and the fourth warehouses, we don't have contracts for those warehouses. We are in the building process. These two warehouses are spec warehouses, one is for 5,000 square meters and the second one is for 10,000 square meters. We are in the process to get a contract.

We have different clients. We give them the economical proposal and we are expecting if they are interested in the warehouses. But now we are in that process to commercialize them. And we expect that these two new warehouses will generate revenues next year in 2017.

Great. And about Ciudad Juarez?

For your second question, as you mentioned Ciudad Juarez is having a very good traffic volume. Basically, we are seeing a very economic activity reaction in the city, a lot of maquiladoras are coming into the city from the US to produce different products -- to export those products. Ciudad Juarez, we expect to increase routes into Ciudad Juarez in the year, so growth should continue in the second half of 2016.

We are not confirmed what are those routes but if you look in July, for example, that is -- these routes will have effect in the second half of the year. A key TAR airline opened routes to Ciudad Juarez; to Puerto Vallarta, I think, it's PPE -- Puerto Penasco in July 21. So we will see a positive effect for that route and we are expecting -- we are working with airlines to try to open more routes from and to the Juarez airport.

Great. Thank you, Vicsaly and congratulations again.

Thank you, Mauricio. You are welcome.

(Operator Instructions) Ricardo Alves, Morgan Stanley.

I had just two questions. The first one is kind of a follow-up with the very last question on Ciudad Juarez. So indeed I mean, we saw your traffic up 9% this quarter, 9% year over year and other smaller airports clearly driving this growth, outpacing Monterrey.

So, my question was indeed if you could provide a little bit more color on Ciudad Juarez which you already did, but also if you could give a little bit more of your -- a little bit more information on Culiacan as well and Chihuahua because we've been seeing for a while now strong performance in those two airports. So, maybe a little bit more perspective on those and what we could expect going forward.

And then the second question would be a very quick one, your new EBITDA margin guidance, the midpoint, I think it's 62%. So far this year, in the first half of the year you had 63%. So just if you could give a little bit of color on why you're expecting this somewhat small contraction of profitability going forward. That's it. Again, thank you.

Thank you, Ricardo. Okay, regarding traffic in other regional airport, Chihuahua, for example. In Chihuahua, in the second quarter were opened three routes: Chihuahua-Tijuana, Chihuahua-Mexico City, Chihuahua-Guadalajara, two for VivaAerobus and one for Aeromexico. In July also were opened other routes from Chihuahua to Hermosillo, operated by TAR.

So, we also are seeing economic activity reaction basically in different places that are located, our airports. And Chihuahua state is one of the states that are benefitted by the economic activity reaction. We are seeing also increases in load factors and some increases in frequencies. Basically we attribute this growth for the economic activity in the city.

In case of Chihuahua city, aerospace industry is growing. So, it's more important for us and we are seeing different openings that give us a positive expectation for this airport.

Other regional airports that are growing mainly in domestic passengers are Culiacan; Durango, but Durango is very small, but it's growing a lot in terms of domestic passengers; Torreon. So we are seeing in regional airports economic activity reactions that are helping us in domestic passenger volumes.

And for your second question about margins, we estimate that adjusted EBITDA margin can be in a range between 61% and 63% in 2016. We expect that margins will be in a similar range going forward.

And it is important to mention that we are having increases in revenues and we are trying to control our costs and expenses to try to -- that increases in revenues going down to the margins. And that's why we review our guidance in terms of margins and increase the range. Going forward, our goal as a management of the Company is trying to improve this margin, but it's more difficult to control costs even if we are expanding our infrastructure.

So, at least we expect to maintain our margins in this level going forward and try to capture these increases in revenues into our margins and don't increase our cost structure.

Thank you. That was very clear.

Stephen Trent, Citi.

Good morning and thanks for taking my question. Actually some of them have already been answered, but two follow-ups. I wasn't sure if I heard you correctly and I think you mentioned that the tariffs for this year that you put through most of the tariff increases, but not all of them. And I was wondering if that was accurate, one.

And two, if you see room to reach specific arrangements with any of the airlines, which I believe back in 2007 or so you had a deal with VivaAerobus, a tariff discount in exchange for more traffic volume. So any color there would be appreciated.

Thank you. Well, in terms of tariff, we are allowed to adjust tariff twice a year. The first adjustment took place in April for aeronautical services, around a 4.3% increase and in May for passenger charges, around 7.4% increase in domestic passenger charge and 6.2% increases in international passenger charge in average.

It is our intention to optimize our tariff during the year in order for us to be able to obtain the maximum benefit from our regulated revenues. As you know, our regulated revenues depend on variables outside of our control such as inflation, passenger and air cargo volumes at the end of the year and exchange rate. Therefore should any of this variables change from our current perspective, we will need to evaluate our tariffs and consider whether to increase them or not so as to be able to optimize our targets for the year.

So we can do a second increase during this year, but we need to review in terms of all the factors that I mentioned before, if we are -- what close we are in terms of the maximum tariff and what is the gap between the regulated revenues and the maximum regulated that we are allowed to get.

In terms of discounts or incentives that you mentioned, you mentioned VivaAerobus, actually we are not giving incentives based on the passenger charge. The incentives that we provide to airlines is some discounts for aeronautical services, I mean, landing fees, the use of platform, the cost of aeronautical services, the other tariff for aeronautical services. And we have a specific program if airlines open a new route in some of our airports or if they increase frequencies in existing routes.

Okay. So new routes or if they increase frequencies. Very helpful, Vicsaly. Thank you. And just one other quick question.

Just curious, I know that there has been some unrest as that teachers' strike, I guess, which primarily seems to be impacting the state capital of Oaxaca from what I understand. As far as you can tell you're not really -- are you seeing anything at any OMA facilities related to this or it's still fairly quiet?

Thank you. We have not had an impact or event in our facilities, in our airports, but as you are mentioning it's a risk. Basically the most important problem is in the state of Oaxaca but we are, for example, in Guerrero it's also -- that problem could be a risk, but at this moment we have not had an event in our facilities.

Okay. Very helpful. I'll let someone else ask a question; thanks, Vicsaly.

(Operator Instructions) Marco Montanez, Vector Investments.

Congratulations on the results and thank you for the call. A follow-up in traffic. Could you share with us the increase in the number of seats in OMA airports and the load factor you've registered during the first half of this year?

And regarding the upward outlook in traffic, what is the expectation for the increase in seats and load factor also that you expect for the rest of the year? Thank you.

Thank you, Marco. We don't have that information in terms of what are the increases in fleets in our airports. We only know the new routes or the type of aircrafts that the airline is operating on that specific route. We know that load factors are increasing in our airports because our operations are not increasing as much as higher than traffic. So, that is only say that the load factors are increasing.

In terms of routes, that is an information that I can give you, in the first half of 2016 we have 16 openings, seven cancellations. So at the end we had nine net new routes and only in July eight new routes were opened; and it's confirmed another route in August for TAR from Torreon to Mazatlan. So, only for the third quarter -- in one month of third quarter, one month and a half, we have nine new routes in third quarter and we expect -- and we are working other routes with airlines to try to open more. In the second half of the year, we are expecting around 15 or 20 new routes in addition.

Okay, Vicsaly. Very helpful. Thank you so much.

Pablo Zaldivar, GBM.

Thank you for taking my question. Just a quick follow-up on the maximum tariffs. If I recall correctly, you were expecting to achieve up to 94% of the allowed maximum tariff for the year. Is this goal still in place or do you intend to implement the 100%?

Thank you, Pablo. It's difficult to reach 100% of the maximum tariff in the first year of the period, of the five-year period. And as you mentioned, our goal is to achieve this year around 94%, 95% of the maximum tariff in average for all of our airports.

Okay. Thank you very much. That would be all.

And there are no further questions at this time.

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

And that will conclude today's conference. We appreciate your participation. You may now disconnect.