Grupo Aeroportuario del Centro Norte SAB de CV (OMAB) 2016 Q3 法說會逐字稿

Good day and welcome to the OMA's Third Quarter 2016 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Vicsaly Torres, Chief Financial Officer. Please go ahead.

Good morning. Welcome to OMA's third quarter 2016 earnings conference call. 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 third quarter, continuing the strong growth and profitability path we have been on for the past five years and we set new records for adjusted EBITDA generation and adjusted EBITDA margin. I will quickly review our operational performance and financial results, discuss the change in composition of our strategic investor SETA and say a few words on our Investor Day event in November. Then, we will be pleased to answer your questions.

Turning to our third quarter operational performance, we continue to demonstrate a strong momentum in all areas of the business. Passenger traffic grew 12% in the quarter to MXN5.1 million led by domestic traffic growth; 11 of our 13 airports grew passenger traffic. Passenger traffic has grown for 22 quarters in a row. The growth reflects the expansion of the airlines, new route openings, additional frequencies and increasing load factors.

During the quarter, 7 of the 16 main scheduled airlines in our airports increased passenger volumes, with the largest contribution to growth from the VivaAerobus, Volaris, Aeromexico and TAR.

Twelve new routes opened in the quarter, 10 domestic and two international, while three domestic and one international route closed. For the first nine months of the year, we had 28 route openings of which six are to or from Monterrey; Volaris has opened 12 routes; TAR added 10; VivaAerobus, three; Aeromexico, two; and Sunwing added one seasonal route. We believe that we could continue to see additional new routes open in the fourth quarter based on indications we have received from the airlines. These route openings provides OMA 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 seven new openings in the quarter, including four retailer stores in the Acapulco, Ciudad Juarez, Monterrey and Torreon airports. The commercial lease occupancy rate in our 13 airports was 95.5%. The most important factors in our commercial results were the growth in revenues from restaurants, parking, retail stores and car rentals, principally from the increase in traffic and higher participation revenues from some lines of business.

Our diversification activities had an even strong performance growing by 29%. The Monterrey airport Hilton Garden Inn Hotel made the biggest contribution to incremental revenues, generating MXN18 million in the quarter. The occupancy rate was 70% and the average room rent was MXN2,017 per night, almost as much as the NH Collection Hotel in Mexico series Terminal 2.

OMA Carga generated a 16% increase in revenues, largely because of growing ground cargo services. Our new 1,650 square meter facility to serve cargo transporter by ground is ready to start operations in the fourth quarter and will significantly increase our freight processing capacity. We are in the process of receiving the official certification we need to start operations.

At the Monterrey Industrial Park, the second warehouse opened in the third quarter. Construction began on the third and fourth 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. The (inaudible) warehouses has a total area of approximately 25,400 square meters.

Turning to OMA's third quarter financial results; OMA converted this positive operational development into a strong double-digit revenue 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 48%. Aeronautical revenues increased 32% as a result of higher passenger volumes and the rate increases that were implemented in the second quarter. The strong dollar also benefited international passenger charges.

Aeronautical revenues per passenger reached MXN206, up 18%. Based on current trends, we expect that overall OMA will reach in average around 93% or 94% of the maximum rates allowed on our new MDP in 2016.

Non-aeronautical revenues also increased 18% and non-aeronautical revenues per passenger was MXN66, up 6%.

Commercial activity revenues grew 11%. The line items with the largest contribution to growth were restaurant, up 23%; parking, up 8%; retail, up 21%; and car rentals, up 24%.

Diversification activities grew 29%, principally because of the launch of the Hilton Garden Inn, which marked their first anniversary of its opening, in August.

Complementary services grew 22%, primarily as a result of checked baggage screening services.

I should note that we re-categorized the previous line item, other services to allocated amount on commercial, diversification and complementary activities. For comparative purposes, we have reformulated 2015 numbers. This formulation does not affect total revenues or costs. The cost of our airport services and G&A expenses increased 8% in the quarter, [well below] the growth in associated revenues. Hotel costs and expenses increased principally because of the operation of the Hilton Garden Inn. The startup operation of the Industrial Park is also reflected in our cost.

The concession tax and technical assistance fee both increased as a function of the strong operational results of the Company. Total operating costs and expenses increased 14% in the quarter. As a result of all these factors, OMA's third quarter adjusted EBITDA increased 38%, to MXN931 million. This is the highest quarterly adjusted EBITDA in OMA's history. The adjusted EBITDA margin increased 479 basis points to 66.8%, also a new record.

The third quarter marked 22nd consecutive quarters of adjusted EBITDA growth. Over the same timeframe, our revenue performance and focus on cost control have enabled OMA to expand adjusted EBITDA margins from a four-quarter moving average of 44% to more than 62%. Operating income increased 48% to MXN801 million. Financing expense increased to MXN102 million because of the higher exchange rate losses. Taxes were MXN212 million, with an effective tax rate of 30%. As a result of all these factors, consolidated net income rose 59% to MXN487 million.

Third quarter investment expenditure were MXN134 million, mostly for MDP investments. Through the first nine months, our MDP-related investments totalized MXN213 million. As 2016 is the first year of the new Master Development Program, much of the activity has been in planning, formulating tenders, evaluating proposals, and awarding contracts. Through September 30, we have contracted 73% of the scheduled MDP projects for 2016. And we anticipate that we will have close to 100% contracted by year-end. We also expect that the investment amounts recognized in our financial statements will increase significantly in the fourth quarter of 2016 and the first quarter of next year as project execution accelerates.

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

Operating activities generated cash of MXN1,585 million in the first nine months of 2016, 5% above the same period of 2015. As of September 30, our cash and cash equivalents totaled MXN2,611 million.

My second topic is the change in the ownership composition of the strategic partner, SETA. In early October, Groupe ADP informed ICA, announced of their decision to exercise their option to convert their 25.5% shareholding in SETA into OMA B shares, and to sell those shares in a private placement. The shares sale for 4.2% of OMA B shares was completed on October 10. After this transaction, SETA announced 12.4% participation in OMA, all in the form of Series BB shares, and continues to exercise its right as the strategic shareholder of OMA, the only thing that has changed in the composition of its ownership with ICA now holding a 100% of SETA. ICA's direct and indirect shareholding in OMA is 14.3% and is unchanged. SETA will continue to provide services to us in accordance with the Technology Transfer and Technical Assistance Agreement. It is expected though ADP will continue to provide some services to OMA through SETA. And ADP (inaudible) senior management team will continue to be part of the OMA's management team for the foreseeable future.

Finally, I want to remind you that we would be hosting our Investor Day event in November to mark the 10th anniversary of our IPO. The event will take place on November 30 at [de Bolsa] in Mexico City, with the participation of all members of senior management. The event will provide us the opportunity to go into more details on many aspects of our operations. Registration for the event is open now. We hope to see you there and please contact us if you have any question about the event.

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.

Congratulations on the strong results. I have two questions regarding diversification business. The first one is, now that the second Industrial Park is operating, could you give us more color in terms of revenues and EBITDA margin for the last quarter and next year? And my second question is regarding Monterrey's Hilton Garden Inn hotel. We saw a decrease in the occupancy rate for the quarter compared to the first half of the year. What should we expect for the last quarter and for the next year? Thank you.

Yes, about the Industrial Park, 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 has begun contributing to results in the third quarter. Both warehouses generated MXN1.4 million in the third quarter. Construction work has begun on the third and fourth 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. About that two contracts that we have already, one of the first warehouse that we leased is a contract for three years and four months and the value of the contract -- the total value of the contract for all the periods is around $1.2 million. And the second one is a contract for a period of 3.5 years. And the total value of the contract is a little bit more than $700,000, the total value of the contract.

As I mentioned, we are finishing the construction of two more warehouses, and we are in the process to commercialize them.

In terms of EBITDA margins for this business specifically, our estimation is that when the business get maturity, the EBITDA margins will be around 45%, 50%. That is our estimation.

Just a quick follow-up, Vicsaly. When should we expect turnaround in the EBITDA, right now your publishing negative numbers.

Yes, exactly when we estimate we are going to be in the breakdown is your question?

No, like right now you are posting a negative numbers in the EBITDA. Should we expect positive numbers for the fourth quarter or should they continue on negative round?

It's possible that we continue this year in a negative number, but in 2017, be in positive numbers.

Should I repeat Monterrey's Hilton Garden Inn hotel question?

Yes, I will do your second question. As to the performance of the Hilton Garden Inn hotel, we are confident that we can continue to increase our revenues in the hotel. Now that it has reached maturity levels in occupancy and tariff, our next steps are optimization of the tariff and sustainability of our occupancy levels, as we have done it in the NH Hotel in Mexico City. In terms of margins, the Hilton Garden Inn in Monterrey now is in a positive number. In a cumulative basis, it is around 35%.

Yes, but I -- just want to follow-up, if I may. For next year, should we expect occupancy rate to be like this quarter at 70% or should we expect it to be like 75% or 80%.

It's a very good question. We think the range in terms of occupancy rate for this hotel will be between 70% to 75%. We are not thinking that this hotel could reach more than 80% as NH Hotel in some quarters reached. And the reason is because in Monterrey, there is less critical mass and it's very specific, the occupancy rate between Monday and Friday is very high, but in weekends it is very low.

Okay. Thank you Vicsaly. That was very helpful.

Mauricio Martinez, GBM.

Congratulation on results. I know that you just commented on CapEx, but just to confirm, so is it correct to expect that the remaining CapEx out of the MXN1.3 billion that you committed on the MDP should be deployed in the fourth quarter or it will be also for the first quarter of the next year?

This year is a very high year in terms of CapEx; the commitment is very high, more than MXN1.4 billion for the whole year. In terms of contracted work for the year, we are at 73% according to the schedule. The higher cash flow from investment activities will be seen in the fourth quarter and during 2017. As I mentioned in my remarks, as this year is the first year of the five-year period, we started the (inaudible) and the contracted process for all the projects. So, in terms of cash flow, if your question is about the cash flow, it's possible that in the fourth quarter, you will see an acceleration in the payment for the (inaudible) that have already contracted. And the work now are starting, and we are going to continue to see payments during 2017.

Very helpful, Vicsaly. Thank you.

(Operator Instructions) Stephen Trent, Citi.

Just one or two from me. The first is on SETA itself. I know that SETA had the sale, does this mean that OMA's relationship with Aeroports de Paris is completely cut off? Is there still any relationship via a Technical Assistance Agreement? And as a related question, if OMA decides to look at overseas airports, is it possible that you would still partner with ADP?

SETA will continue to provide services to us in accordance with the Technology Transfer and Technical Assistance Agreement, and ADP will continue to provide some services to OMA through SETA. It's important to clarify that the obligation to give technical assistance is -- the obligation is for SETA because SETA -- the Technical Assistance Contract is between SETA and OMA. SETA is through their investors before ICA and ADP, provide technical assistance. Now, the technical assistance will be provided through contracts for services with ADP and also for its investor, that is ICA. So, the relation will remain the same and actually the member of the directors that was appointed by SETA, and that person is coming from ADP, will continue in the [work] at least for the next shareholders meeting next year.

Very helpful. And related to that question, just curious, if OMA decides to look at overseas airport opportunities, if it's possible that you'd partner with ADP and also looking at the domestic airport space, any view on the Mexican government's plans to auction new airports, does that seem like an opportunity or a risk for you guys or does it -- is it not really important?

We are very active to look for opportunities in terms of airport concession, and now, as always, we will see ADP as a partner and it's possible in the next -- future we can work with them to look for opportunities in terms of airport concession.

And any color or comment on the Mexican government's plans to privatize more airports?

At this moment, no. We don't have any new news, but we are waiting for something and if something is coming up, we are going to analyze and we are going to [there], I'm sure.

Rogerio Araujo, UBS.

I have two questions. The first is on the average tariff that increased by 18%. So, my question is regarding the break down from this expansion, how much can be expanded by the Mexico peso depreciation. And also, if the revenue [cat] is set Mexican peso and if it has to be adjusted downwards in fourth quarter or not? So, these are my first questions. Thank you.

Just to clarify, your question is about the increases in tariff that we did in the second quarter, and how much we can increase more the tariff next year or I don't understand very good your question.

Actually, how much of your aeronautical revenues is charged in US dollars? And also you have [cat] on the revenue, right, on the tariff, every year. So, my question is this [cat] set in Mexico Peso or it also considered part of the revenue in US dollars?

Let me try to explain. The net effect in our exchange rate result is practically nil, because our international passenger charges which are denominated in dollar, at the average of the last 30 days, offset variation generated by our debt in dollar, which as of September 30, represented 5% of our total debt. Regarding the second, our regulated revenues in 2016 due to the increase in maximum rate, a depreciation of the peso could benefit us in the sense that we could be closer to 100% of the amount we are entitled to earn under the maximum rate regulation system. And should tariffs such as passenger charges or airport services fees not increase as much as we need to earn a 100% of regulated revenues, the depreciation of the peso could help us get closer. Obviously, in this quarter or this year basically, the nine months of the year, we had a benefit for the depreciation of the peso in our regulated revenues.

So, my follow-up question to this is, is there any chance of you surpassing this 100%?

No. At this moment, no. As I mentioned in my remarks, our estimation for the end of the year is that we are going to get between 93%, 94% in average -- of the maximum tariffs in average in all of our airports.

My second question is regarding commercial revenues. Does OMA have new projects in site such as the hotels and the real estate businesses or in other words would we continue to see commercial revenues increasing in OMA through new businesses or now it's going to be more like organic growth going forward? Thank you.

Well, we will see, definitely, we will see a very strong performance in the diversification activities. We have very positive expectation in terms of OMA Carga. Obviously, continue to have good results with our hotels. But in terms of the commercial activities, for some projects, expansion projects or remodelation in some periods of the year, next year and in the following years, we will see some negative effect in some concepts. But, finally when we end the remodelation and the expansion we will see a positive effect, a big positive effect, because we could increase our commercial area inside the terminal. So, it's difficult to say something specific now, how much could affect the different projects included in the Master Development Plan, but at the same time, we are working a lot in terms to improve the commercial offer and to negotiate better economic condition in our current contract to have a good result in the commercial activities. We currently evaluate other business opportunities in terms of hotels, industrial parks, and other airport-related business as part of the diversification strategy. So far, the most important projects to develop are the Hilton Garden Inn and Industrial Park in Monterrey, at this moment.

Ramon Obeso, Scotiabank.

Just a follow-up question on CapEx, how much of the committed CapEx for this year has been executed so far and how much do you expect to spend in Q4?

The commitment for this year is MXN1.4 billion. We have started the new Acapulco terminal building and we also started construction of the new Reynosa terminal building and the new terminal building in San Luis Potosi, and I think in this fourth quarter, we are going to start the work in the terminal of Chihuahua airport. So in terms of us -- I tried to answer to Mauricio, in terms of cash flow, it's probably in this year the outcome could be less than MXN1.4 billion because the projects are just starting, and while the projects are in the process and pick some advances, we are going to pay those works. In as an estimation, it's probably, as a cash flow, the outcome could be around MXN500 million in the whole year and in 2017 we will see an acceleration in this cash flow.

Ulises Argote, Santander.

Real quick, just year-to-date passenger traffic growth stands close to 14%. Do you see any upside to your guidance on this sense, and also do you have any indication for 2017 traffic that you could share with us? Thanks.

Yes, as you mentioned, in September, the traffic performance was very strong, above -- 15%. In cumulative basis, the variation has been 10.3%, so we are in the high level of our range that we gave you in second quarter when we updated our guidance. We are not going to update this guidance. We think we are going to be in that range between 10% traffic growth. For 2017, we have not given guidance, but it probably could be between 6% and 7%. It's our estimation, that is a number that we have in our projection model. I hope it helped you. Just to reply on this, at this moment, for nine months in the year, we have had 26 new routes. And also, for this fourth quarter, we have five routes confirmed, so this is a very positive news to have a positive expectation for 2017.

Marco Montanez, Vector.

Congratulations on the results. Regarding the major maintenance provision, we saw almost 19% decrease in these concept. What could be expected in the short-term and medium-term in this line? That will be very helpful. Thank you.

We may see some variation within the quarters as a result of the planning and the execution of major maintenance works, which generate variation in our liability related to major maintenance. However, as in previous years, we recorded similar level in our major maintenance provision charge results for the period of around MXN220 million.

That concludes our question-and-answer session for today. I'd like to turn the conference back 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, Laury and I are always available to answer your questions, and we hope to see you soon at our offices in Monterrey. Thank you and have a good day.

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