Grupo Aeroportuario del Centro Norte SAB de CV (OMAB) 2016 Q4 法說會逐字稿

Good day and welcome to the OMA Fourth 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. Pease go ahead.

Good morning. Welcome OMA's fourth quarter 2016 earnings conference call. Joining me this morning are Emmanuel Camacho and Laury Franco from the IR team as well as our Chief Accounting Officer, Jesus Villagomez. I also want to introduce Paul Rivero, who [joined] us at the end of last year as a newest member of our IR team. This morning, I will review our operational performance and financial results. Secondly, provide an update on the execution of our master development program and finally, discuss our outlook for 2017. Then we will be pleased to answer your question.

OMA delivered another strong performance in the fourth quarter and for the full year 2016. For the full year, we set records for passenger traffic revenues, adjusted EBITDA, adjusted EBITDA margin and consolidated net income. We ended the year with more than MXN3,000 million in cash and our investment program for 2017 will be completely funded out of our cash balances and expected operating cash flow generation.

Turning to our fourth quarter operational performance. We continue to demonstrate the strong momentum in all areas of the business. Passenger traffic grew 12.5% in the quarter to 4.9 million passengers, led by domestic traffic growth, 11 of our 13 airports grew passenger traffic. Passenger traffic has now grown for 23 quarters in a row. The growth reflects the expansion of the airlines, new [route] openings, additional frequencies and increasing load factors,

During the quarter, nine of the 14 [main] casual airlines in our airports increased passenger volumes with the largest contribution to growth from VivaAerobus, Volaris , Aeromexico and TAR. To 13 new routes [opened in] the quarter, nine domestic and four international, while three domestic route [crossed]. For the full year 2016, we have 41 route openings and 12 closings. For a net of [29] route openings, of the 41 routes 12 are to (inaudible) from the Monterey hub, Volaris opened it team votes, [TAR] added 16, VivaAerobus five, Aeromexico five and Sunwing two routes. On the commercial front, we had 21 initiatives open it in the quarter. Including nine car rental establishment in five airports, six retailer stores and three restaurants. The commercial lease occupancy rate was 95.2%. The most important factors in our commercial results where the growth in revenues from retail stores, restaurants and car rentals principally for the increase in traffic and higher participation revenues from some lines of business. Our diversification activities also delivered strong performance. The NH Collection Terminal 2 Hotel in Mexico City had a room occupancy rate of 29%, while the average room rate increased almost 10%. The Monterrey airport (inaudible) had an occupancy rate of 72% and increase the average room rate for 22.1%. In-bond hotel are well positioned, with room and occupancy rates well above the average for the respective markets. OMA Carga continued rapid growth, largely because of ground cargo services. The total volume of freight handle increases by 20%. At the Monterrey Industrial Park, two operating warehouses are generating revenues and another two just completed construction.

Turning to OMA's fourth quarter financial results. OMA converted this positive operational developments into a strong double-digit revenue growth, and because of our effective cost controls, we also recorded double-digit increases in operating income, adjusted EBITDA and net income, which rose 44%.

Aeronautical revenues increased 31% because of higher passenger volumes and the rate increases that were implemented in the second quarter. The strong dollar also benefited international passenger charges. Aeronautical revenue per passenger reached MXN240, [MXN14] up 16%. In terms of compliance with the maximum rate, we ended the year on average at about 95% of the maximum. Non-aeronautical revenues also rose 17%. And non-aeronautical revenue per passenger was MXN73 pesos, up 4%.

Commercial revenue grew 19%, retailer stores, restaurants and car rentals made the larger contribution to growth. The growth reflects higher passenger's volumes and increased participation revenues. In particular, we are required (inaudible) but not yet (inaudible) participation revenues in our accordance with IFRS. The fourth quarter 2016 commercial revenues include a provision of MXN11 million for participation, principally in the three lines item I mentioned this was partially offset by a decrease in advertising because of reduced participation revenues. In addition, parking revenues grew more slowly than traffic because of the reconfiguration of some of our parking areas that temporarily reduce capacity and higher competition, particularly are the Monterrey and (inaudible) airports.

Diversification activities grew 22% divided between growth in the hotel business and continued growth of our OMA Carga freight service business. Complementary services grew 7%, primarily because of checked baggage screening services. I remind you that in 2016, we re-categorized the previous line item, other services to allocated among commercial, diversification and complementary activities. While compared to purposes we have reformulated [to-date] 2015 numbers, due to formulation does not affect total revenues.

The cost of airport services and G&A expense increased 70% in the quarter, below the growth in associated revenues. Payroll expense were basically flat. New contracts for security and cleaning services made the largest contributions to increased costs. In addition, other cost and expenses rose because of additional expenses related to the new SAP system installation and operations.

Total operating costs and expenses increased [40%] in the quarter. This was principally as a result of the major maintenance provision and construction cost [borrow] of which reflect the increases investments in concession in assets under the new Master Development Program and do not represent cash only. OMA's fourth quarter adjusted EBITDA increased 35% to MXN879 million. This marks [22] consecutive quarters of adjusted EBITDA growth. The adjusted EBITDA margin in the quarter increased 378 basis points to 62.2% and the EBITDA margin for the full year reached 63.8%. Operating income increased [19%] to MXN730 million. Financing income was a net positive MXN42 million compared to an expense of MXN93 million pesos in fourth quarter 2015, the variation was principally as a result of an updating of the major maintenance provision, which was recorded in interest income. Taxes were MXN203 million, with an effective tax rate of 26%. As a result of these factors, consolidated net income rose 44% to MXN567 million in the fourth quarter. Net income for the year reached MXN1,877 million. This our new record for consolidated net income both for the quarter and the full year.

My second topic, it's our progress in carrying out our Master Development Program. Our investment expenditure for meeting our MDP commitments reached MXN220 million in the fourth quarter. For the year our MDP investments totaled MXN434 million by December 31st, we had contract a 100% of the schedule MDP project for 2016. The most important and the pre-projects underway include, construction of new passenger terminal building in Acapulco, by (inaudible). Expansion and remodeling work for the Chihuahua, San Luis Potosi and [Zihuatanejo] terminal building. Commercial platform expansion in Monterrey, Culiacan and emergency services building expansion in [Culiacan] San Luis Potosi. These are continuing multi-year projects. We also expect to begin work in 2017 on the expansion and remodeling work of Monterrey terminal A and Tampico terminal building.

Finally, I want to update you on management's perspective for 2017. Given the uncertain economic and international environment that all Mexican companies [say]. In terms of the market, we may not repeat the double-digit growth seen in the last three years, but we expect to see moderate traffic growth this year. The transport industry in Mexico has its own dynamic, which has enabled passenger traffic volumes to growth at approximately 5.2 times Mexican GDP growth over the past five years. Fleet expansion and renewal by the domestic airlines (inaudible) strong price competition, expansion of regional route networks and increase conversion of [intercity] bus passengers [throughout] travel are all factors that has benefited passengers on and the industry. And we expect them to continue even if the economies [loss].

As we reported, January traffic grew 14% and 12 of our 13 airports recorded increases, two new routes were [opened] (inaudible) Chicago and (inaudible). We are seeing that our airlines [clients] are [continuing] to add new plains and increase number of available seats. So we are promoting new business opportunities with airlines for 2017. And we believe some of these are likely to be realized. For example, at Mexico we'll start flying the Monterey- Torreon route in May, serving the growing OEM business community in our land. At the same time, we can see an operating consolidation in terms of domestic routes which will generate some closing in the coming months. Even as passenger traffic continue to grow.

As most of you know that double-digit increase in retail gasoline prices in Mexico in January Mexican government subsidiaries has become a major political issue. However jet fuel this regulated and airlines have long paid market prices for fuel. As a result, the retail gasoline price does not affect airline cost and could even increase the relative attractiveness of flying by air compared to long distance but or car travel. OMA has also filed to increase tariffs in April, as we are below our maximum rate. We expect to increase our domestic and international passenger charges between 4% and 6%. We will also increase aeronautical services fees by the average of the consumer and producer price index for 2016, or above 6.5%. This will allow our aeronautical revenues to increase at a rate of overall traffic growth.

Commercial revenue growth will be in line with passenger traffic, as commercial spaces full and US space will not become available until 2018. When some of the terminal construction projects are completed. Diversification revenues who also have a positive performance, largely because OMA Carga continue to expand. In February, we open up the new in-bond warehouse in the Monterrey Airport which doubled freight handling capacity and gets the year off to a good start. Regarding the industrial part, we'll see the positive effect this year from full-year operation of the first two warehouses leased in May and June, 2016. Also construction of the third and fourth warehouses was completed last month, and we are in the leasing process.

We have started the year in a very strong financial position. Operating activities generated cash more than MXN2 billion in 2016. And our cash balance total more than MXN3 billion at the end of last year. Our MDP investment commitments for 2017 is approximately MXN1.3 billion. We estimate the cash investment requirements for the year to be in the range of MXN1.7 billion to MXN2 billion, depending on the rate of projects execution. We expect to perform this investment entirely from cash generated by operations and use of cash balances. Cash will also grow in part to pay dividends to be declared at the Annual Shareholders' Meeting in April.

This is our perspective as of today. We are in constant contact with our airlines clients and we'll address our plans quickly if we see any material change in market conditions. As we get better visibility, we may able to provide more specific guidance. This concludes our prepared remarks. We'll now we happy to answer your questions. Operator, please open the call for questions.

(Operator Instructions) Mauricio Martinez, GBM.

My first question is regarding the Terminal 2 Hotel in Mexico City. As we said dropdown in revenues due to I think low occupancy rate which dropped like 500 basis points. What is the main reason for the drop and what level occupancy rate are you expecting for 2017?

Hello, Mauricio thank you for your question. Well your question is related to the hotel and the occupancy rate in the hotel. We have decrease on little bit occupancy rate, but average room rate increase in a big percentage. So we are rebalancing better average room rate and with the occupancy rate. We are maximizing our revenues with less occupancy rate, but higher room rates. Additionally in the fourth quarter, we did not have the same occupancy because Formula 1 benefitted of last year.

And my second question is on the customer service front, as we did see improvement on that plan at end of the year, do you expect these performance to continue in 2017 or do you expect an increase and if you can share with us your expectations for EBITDA margin?

Okay, cost of services increasing fourth quarter, every year it's common, having a higher cost of services in the fourth quarter because we finalize all our programs in terms of maintenance, suppliers everything. We put a lot of effort to control our cost [and] trying to increase our efficiency, I think [it's] more control, this increases in cost services in [fourth] quarter.

And in guidance for EBITDA margin, Vicsaly?

For 2017, we don't have a specific guidance for that concept. We will try increase our efficiency with -- because our target is, at least maintained the margins but if we can increases, we will do it. We will see in 2016, a big expansion in margins because we will have a significant increases in traffic and significant increases in tariff, but this year the increases in tariff will be more moderate and we don't know a specific number in terms of [traffic]. We expect [effect] increases in traffic, but we don't know what is the number. So, if traffic continue to be (inaudible) and with the increases in time that we are going to do it, to do, it's possible we will have some expansion market.

Perfect. Very helpful, Vicsaly. Thank you.

You're welcome, Mauricio.

Pablo Barroso, Credit Suisse.

Hello, good morning, congratulations on the results Vicsaly. How about couple questions over here. There has been some on the local news, that [you guys] starting the bankruptcy restructuring process. I just wanted to see, what do you guys think and if there is a change in the control group is OMA. Is there tag along rights. That's my first question. My second question, it's regarding commercial revenues. We have been witnessing a really strong performance in Monterrey retail restaurant and car rentals as you mentioned before. Should we expect these along 2017 or this growth trend or more this is an accelerated trends. Thank you.

Thank you, Paolo. Related to your first question about, strategic partner that is SETA because basically. We don't know how specific their plans. We know that their participation in services at the (inaudible) that is (inaudible) our current size alone. So that means when they declared chapter 11 or the process that participation does is not included in the walls that is shared by suppliers. That is the only that I know and I think that it's a question for (inaudible) about their plan.

Could you just repeat the last part, that it's not I couldn't here. Just last part that it's not, I know it's on the guarantee returns. There is no returns, it's guaranteed to (inaudible) but could you repeat the last part?

Yes, that means that participation SETA participation we said that is not included in the all assets are going to share by their supplier. So the participation is going to be part of the -- of the payments for (inaudible)

Okay. That's helpful. Thanks Vicsaly. And regarding the commercial revenues?

Yes, on the commercial revenues as I mentioned in my remarks in 2017. We are not expecting significant increases in commercial activities are specifically because they expansion terminals will be completed on 2018. In terms of commercial areas inside the terminals is difficult to increase more than the traffic increases, in terms of diversification activities, we have positive expectations in terms of OMA Carga because we've doubled the capacity this year for ground cargo activities. And also we will continue to commercialize they new (inaudible) because we have two new warehouses (inaudible) and so we expect getting some contract for those, what happens.

Okay. Well just one follow-up regarding the terminal expansion you will be deploying CapEx out of your Master Development Plan [49] will be to terminal expansion, right. So we could see more positive effect on 2018?

In terms of commercial revenues. Yes, because on the Master Development Program 10% of the total is spaces expand it could be commercial area.

Okay, perfect Vicsaly.

You're welcome Pablo.

Ramon Obeso, Scotia Bank.

Hi, Vicsaly and team. Thank you for the call. Two questions, the first one is could you give us some color on the MXN156 million in interest income related to the update of the maintenance provision, I think it's a non-cash item but I [would] like to confirm this with you and try to understand better what's behind us. And my second question is regarding industrial park. Could you share with us the price per square meter for the two facilities already in operation?

Sure, Ramon. About the increases in interest income by [relation] in fourth quarter 2016 is mainly due to an increase in the discount rate used to calculate the present value of the major maintenance provision and (inaudible) they generated a decrease in the liability, which was also recorded has (inaudible) in the income statement, in the interest income line item. Basically, that is the effect. And in terms of the industrial park , as you know we have two warehouse [left], the first warehouse of 7,400 square meters. The contract that we have that warehouse is a contract for three years and four months. The total value of the contract for the three years and four months is for $1.2 million. And the second warehouse is almost 5000 square meters warehouse and we have also a client there with a contract of three years and six month with a total value of $700,000. And last month, we finish the construction of two more warehouses. So this year, we could have new revenues for these two new warehouses. The contract that I had mentioned where started in May, the first one and in June the second.

(Operator Instructions) Ulises Argote, Santander.

Just to clarify with the tariff increases you will be doing in April. What is your expectation for tariffs in 2017 as a percentage of the maximum allowed tariffs. And then the second one, if you could provide an update on M&A opportunities you might be looking at. Thanks.

Thank you Ulises. Yes, in terms of increases in tariffs we expect to increase domestic passenger charges in average of 4%, 5%. And we also expect to increase around 6% in airport services which is the average Board of Mexico CPI and PPI from November 2015 to November 2016. We have filed with the DGAC and (inaudible) our rate proposals, which will take effect in April as I mentioned in my remarks. This increases will allow us to bring a maximum compliance to level between 95% and 96% approaching progressively to the level of [99%] and we will have a total of four or five airports with more than 99% are maximum for maximum tariff. And in terms of, could you repeat your second question? M&A opportunities right?

Yes, just an update on any M&A, you might be looking at?

Well, as you know, one of our pillars growth in diversification growth is new concession. We have a specific team analyzing different projects in the region, basically Latin America. We have analyzed different [price], but at this moment we don't have a specific, we are not in a specific project.

Okay, thank you very much.

You're welcome, Ulises. Thank you.

Hi, good morning, thanks for the questions. Firstly, just to clarify on that interest income that is one-time of MDP adjustment. So that's not related to debt or sorry to cash investments, correct?

Correct. It's one-time effect, this year in 2016 interest rate increases in US and in Mexico, we need to use [discount rate] to calculate the net present value based on the market condition interest rate, so we increased the discount rate and that is the effect. But it's only [one effect].

Okay, great thank you. And secondly, regarding, so you're bringing up the domestic passenger rate. Is there any similar move for international passengers or I guess the bigger question is are you offering incentives to get those new international routes that you mentioned?

The domestic and international increase will be between 4% and 5% both.

Okay, but -- there is no incentives in terms of for new routes?

Yes, we have an specific program, incentive programs to motivate the airlines to open new routes in our airports and increase the volume [operates] in our airport, but basically this year as we are defining that incentive program

Okay, thank you. And sorry, just one last follow-up, you said you didn't have any specific project at this time, but is the team looking at the upcoming airport concessions in Brazil. I think the [they're] coming to auction its next month.

Our team analyze all the [query] that they know, but in our perspective Brazil is no it was in best condition now. I don't think Brazil concession or we interest in Brazil might (inaudible).

I see thank you, very much.

Welcome.

Hi, Vicsaly congratulations on the results. I have two questions. Do you, what about the [ACT's] plan to privatize more airports in Mexico undue interest of any of that. Do you have any news related to that, have recent chatted about (inaudible) strategy plan for Monterrey, industrial park or other initiatives that you have in mind. Thank you.

Thank you, Marilyn. (inaudible) we don't, we don't know have new news about a new concession in Mexico, we are interested in any project in the region, mainly in Mexico when those airports or the process for those airports come up then we are going to analyze them. (inaudible) we don't have new news and in terms of the diversification projects or new initiatives our airports, we are making some studies, market studies in our airports to know what type of business, we can develop in each one. We know that there some potential in (inaudible) for Industrial park and we know that there is potential to develop a hotel in Tampico and to that part is airports, but at the moment, we don't have or we are in a preliminary phases analyzing the project and trying to find a partner for those projects. But it could be some potential project in the medium term.

Thank you, Vicsaly.

We welcome (inaudible).

There no further questions at this time. Ms. Torres, I would like to turn the conference back over to you for any additional or closing remarks.

Thank you. On behalf of OMA, I want to thank all of you again for your participation in this call. Emmanuel, Paul, 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 thus does conclude today's presentation. Thank you all for your participation.