Grupo Aeroportuario del Centro Norte SAB de CV (OMAB) 2017 Q2 法說會逐字稿

Good day, and welcome to the OMA Second Quarter 2017 Earnings Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Emmanuel Camacho, Investor Relations Officer. Please go ahead, sir.

Thank you. Good morning. Welcome OMA's Second Quarter 2017 Earnings Conference Call. My name is Emmanuel Camacho, OMA's IR Officer. I am filling in for our CFO, Vicsaly Torres, who is out on maternity leave.

Vicsaly sends her greetings and expects to be back at work in mid-October. I am sure she's listening to the call.

Joining me this morning are Paul Rivero and Laury Franco from the IR team; and our Chief Accounting Officer, Jesús Villagómez.

This morning, I will review our operational performance and financial results and give an update on the execution of our Master Development Program, especially the new terminal expansions. Then, we will be pleased to answer your questions.

OMA delivered another solid performance in the second quarter of 2017. The sum of aeronautical and non-aeronautical revenues, adjusted EBITDA and net income each grew at double-digit rates. We ended the quarter with MXN 1.9 billion in cash after paying the dividend of MXN 1.6 billion in May.

In addition, we have already contracted 69% of the planned projects for 2017 under the Master Development Program, and our performance has been consistent. OMA has delivered 30 consecutive quarters of growth in aeronautical and non-aeronautical revenues and 24 quarters of adjusted EBITDA growth.

Passenger traffic grew 8.3% in the second quarter to 4.9 million passengers. 9 of our 13 airports grew passenger traffic. Passenger traffic growth is also consistent. We've increased traffic 25 quarters in a row. 7 airlines increased passenger volumes in the second quarter, with the largest contributions to growth from VivaAerobus, Interjet and Magnicharters.

Airlines are continuing to consolidate their route networks, adding capacity with larger airplanes and increasing load factors even as they close routes that are not meeting expectations.

Total available fleets increased 4.4 in the second quarter. Airlines opened 8 new routes in the quarter and closed 12.

On July 1, Aeroméxico opened a Monterrey to Seoul, Korea route. This, of course, reflects the increasing Korean business presence in the state of Nuevo Leon, including the opening of the Kia Motors plant, a few kilometers from the airport last year.

Our diversification activities delivered another strong performance with revenue growth of 13%. The NH Collection Terminal 2 hotel in Mexico City had an occupancy rate of 87%, while the average room rate increased 5%.

The Monterrey Airport Hilton Garden Inn occupancy rate was 73%, and the average room rate increased by 3%.

OMA Carga continues rapid growth, largely because of services from ground cargo and the opening of the new freight terminal in Monterrey. The total volume of freight handled increased by 13% in the second quarter.

At the Monterrey Industrial Park, 2 operating warehouses are generating revenues, and we just signed an agreement for the third 5,000 square meter warehouse. This is a 3.5-year agreement with expected annual revenues of $300,000 per year starting in the fourth quarter. The fourth warehouse is in the commercialization phase.

In addition, the client for warehouse #2 requested an increase from the current 5,000 square meters to 8,200 square meters. The additional revenues will start in the first quarter of 2018.

On the commercial front, we have 16 initiatives opened in the quarter, including financial services, communication, retail and hotel promotion. The commercial occupancy rate was 97%. The best performing areas were retailers, restaurants and car rental, each with double-digit growth rates.

On the other hand, advertising revenues were down. Part of this resulted from the changeover in advertising features to fewer, larger, all-digital displays. We are also discussing with the providers some contractual terms they are not meeting.

Turning to OMA's second quarter financial results. OMA converted these positive operational developments into double-digit revenue growth, and because of our effective cost controls, we also recorded double-digit increases in operating income and adjusted EBITDA. Net income increased 14%. Aeronautical revenues increased 13% because of higher passenger volumes and specific rate adjustments in the second quarter. Aeronautical revenue per passenger rose 4%. Non-aeronautical revenues rose 7%, and growth of diversification revenues was a key contributor. Diversification activities grew 13%, divided between growth in the hotel business and the OMA Carga freight logistics business.

Complementary services grew 8% mostly because of rate increases from checked baggage claim services. Commercial revenues only grew 2%, where solid growth in retailers and restaurants and car rental were largely offset by a 17% decrease in advertising revenue.

Non-aeronautical revenues per passenger decreased 1% principally because of the slow growth in commercial revenues.

The cost of airport services and G&A expense decreased 1%. Favorable cost increases were held to 1%, and contracted services increased only 4%. These were offset by decreases in minor maintenance and other costs and expenses. Those expenses were high last year as a result of baggage screening maintenance and the SAP systems implementation.

The largest expense increase was for basic utilities, and this reflects electricity rate increases that CSP has imposed gradually since July 2016 and have amounted to 47% at the end of the second quarter of 2017 as well as higher water rates from interconnection with the Monterrey municipal water system.

Because of our high investment commitment under Master Development Program in the current 5-year period, 2016-2020, the construction costs line item increased 6x. This is a noncash expense required by IFRIC 12 and is equal to construction revenue so it has no effect on earnings.

OMA's second quarter adjusted EBITDA increased 16% to MXN 936 million. The adjusted EBITDA margin in the quarter increased 2.57 percentage points to 65.1%. The operating gains were partially offset by increased financial expense and increased taxes. Financing expense increased mostly because of FX losses on bank positions held in U.S. dollars. The effective tax rate was 27%. As a result of these factors, consolidated net income rose 14% to MXN 510 million in the second quarter.

Our cash flow from -- our cash flow generation from operations was also strong. Total cash from operating activities rose 70% to MXN 1.4 billion. This reflects the operating performance plus the reduction in accounts receivable. Receivables were equal to 34 days revenue at the end of June.

For the quarter, our total investments were MXN 331 million. We have contracted 69% of the scheduled MDP projects for 2017. The most important MDP projects underway include: new terminal -- new passenger terminal buildings in Acapulco and Reynosa, expansion and remodeling of the Chihuahua and San Luis Potosí terminal buildings; construction of our remote commercial aviation platform in Monterrey; and expansion of the regional flight boarding area at Terminal B in Monterrey.

Given the importance of executing our Master Development Program as part of our overall business plan this year, I want to provide some additional colors on the projects underway. Right now we have 4 major passenger terminal projects. We are constructing new terminals in Acapulco and Reynosa to replace the existing obsolete buildings, and we are making major expansions to the Chihuahua and San Luis Potosí terminal buildings while remodeling the older areas.

The Acapulco terminal project has a cost of MXN 547 million. The project is currently 50% completed and is on schedule. The new terminal structure is mostly completed, and we have started putting the covering on the structure. The new terminal is expected to become operational at the end of the first quarter of 2018.

The new Reynosa terminal has a cost of MXN 302 million. It started at the end of 2016 and is scheduled for completion in the fourth quarter of 2018. The roadwork has been completed, and we are in the process of erecting the main concrete support pillars for the building. The project as a whole is 16% completed and is also on schedule.

The San Luis Potosí expansion project has a cost of MXN 351 million, and will triple the size of the terminal building. The slabs had been poured and the roof bins placed on the structure. The project has encountered some delays and has a 13% advance, and we now expect completion in the first quarter of 2019.

Finally, the Chihuahua terminal expansion is well underway with a cost of MXN 308 million, which will increase the terminal size by 60%. Some facilities have been relocated and new electrical substation built. Work has started on the new structure. The project is scheduled to be completed in the fourth quarter of 2018 and is 18% completed.

Not only would these projects provide the basis for sustained growth of passenger traffic in these airports and greatly improve the passenger experience, they would provide a new source of growth from commercial revenue. As I noted, we are currently at 97% commercial space occupancy, which is actually more than is optimal for having a healthy rotation of tenants. These 4 airport expansion projects will increase the commercial area available for these -- in these airports by an average of 44%, and that's almost 1,600 square meters to almost total commercial space.

Overall, including all our other MDP investments as well as these 4 terminal projects, our MDP program is in line with our expectations.

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

(Operator Instructions) And we'll Natalia Zamora with GBM.

My First question is regarding aeronautical revenues per passenger. This quarter we saw a 4% growth and we are wondering why it's still a bit closer to the Producer Price Index performance? Also, do you expect to increase these tariffs again during this year? And when do you expect to do so? And my second question would be if you can elaborate on what is going in commercial activities? As it seems like many of these different revenues are lagging. So it would be very helpful if you could give us any insight on the reason why.

Okay. Thank you, Natalia. Of course, so revenue -- aeronautical revenues per passenger have been growing as a consequence of the increase in specific tariffs that we performed this year. These increases were mainly to meet the expectations in terms of the inflation adjustment for the maximum tariffs that we are allowed to make every year and also to increase the rate in which we can collect aeronautical revenues to 95% to 97% -- between 95% and 96%, which if you compare that with last year, we've got 93.7% of the amount that we are entitled to earn under the maximum tariff regulation. So basically, the growth on a per passenger level is a consequence of these factors. And as to the question of the increase in tariffs, we are evaluating -- we will have to increase tariffs this year again. Of course, as you may know, we have -- we are entitled to increase tariffs twice a year, every six months. So we still have an opportunity to adjust our specific tariffs in passenger charges and airport services in order for us to get to the expectations that we have for 2017, which is, as I commented, 96% -- 95% to 96%, sorry, in aeronautical revenue compliance. And to your question, the commercial revenues that may be lagging, as I noted in the conference, practically, our occupancy levels have been very high, 97% is a very high factor, which means we are optimizing the commercial agreement with tenants in the airports. But there is a certain constraint to grow if we don't build additional infrastructure, which is what we are doing very strongly in these 5-year term MDP investment period. We will expand, as I noted, these 4 projects, and we have other projects in the pipeline that should benefit the upper and the commercial spaces that will, of course, generate more revenues or an expansion in commercial revenues in the following years.

Okay, perfect. And well, regarding the tariffs, the increase in tariffs would be in the third quarter or the fourth quarter?

They should be in the fourth quarter if we do them.

Our next question today comes from Pedro Balcão with Santander.

It's Pedro Balcão from Santander here. It's really a follow-up on the tariffs. If we look at the quarter-on-quarter performance of the aeronautical revenues, they seem to increase less than traffic. That would imply actually falling tariffs. I understood that, actually, tariffs had increase quarter-on-quarter. Can you give us some light on that, please?

Yes, of course. Pedro, thank you for your question. The specific tariffs, passenger charges and airport services charges increased in April and this is, of course, as I mentioned, to get closer to the maximum tariffs in all of the airports and adjust by inflation for the year as expected. So the specific tariffs, the passenger charges increased by an average -- by a weighted average of approximately 6.5% and the airport services tariffs increase approximately 4.5%, which is an average of the Producer Price Index and the Consumer Price Index that the adjustments that we did in April. So if you take a look at the revenues from January to June, you will see how the aeronautical revenues grow almost 19% as a consequence of the increases in this year. And of course, partially because of -- or thanks to increases in the -- that we did in the second quarter of 2016 that are still generating some additional revenues for the second quarter because of timing.

But is it correct to say that aeronautical revenues grew less than traffic in the second quarter quarter-on-quarter? If I may help you, on my numbers, they do grow less than the traffic in the second quarter quarter-on-quarter. And I have a hard time consolidating that with an increase in tariff. If there was an increase in tariff, then shouldn't I expect aeronautical revenues to increase in excess of the traffic growth?

Well, if you take a look at it on a per passenger level, of course, we are growing less than passenger traffic, but the expectation is for the entire year and not for the quarter only. So by the end of the year, the expectation is to be growing as expected. And we should be growing more on the -- on a per passenger level and, of course, on meeting the inflation and the expectations on the effects of passenger traffic and the increase in tariffs to get to the 95%, 96% expectation.

One more question, if I may, regarding commercial revenues. You refer to the fact that advertising was falling 17%, I understood that. My question was regarding parking. Parking was up only 4%, again, versus a traffic growth of 8.3%. Can you explain a little bit why parking grows less than traffic? And less than traffic plus inflation? And also, can we expect commercial revenues to grow at the same rate as traffic somewhere in the future?

Okay, perfect. So there are 2 main reasons why parking is growing at this level. The first one is that not all of the passenger traffic uses the parking area. We should consider that 50% -- 60% of the passenger traffic in the airports are the ones that could be using parking as we consider that this 50% is passengers leaving the airport -- I mean, departing passengers, sorry. So this has an effect of halving the growth of the passenger traffic. That's one factor. And the other one is that our parking spaces principally in Monterrey and Chihuahua are operating at practically full capacity. And that is why we have plans and we are already working to develop additional spaces, especially for long-term parking in Monterrey and also in Chihuahua. So Monterrey, even though we have a lot of competition, a lot of competitors, there are 3 big companies competing against us. We are running at practically full capacity in the long-term parking. So that is why we are expanding -- we have expansion projects for the following year that should also help the parking line item to grow going forward. And as your second question on commercial revenues per passenger, it is difficult to say if we can grow in these levels, mainly because we have -- not all of the initiatives in the commercial activities, and I'm excluding diversification and complementary, I'm only focusing commercial. The advertising is not linked to passenger traffic. The -- or directly linked. And the commercial tenants have also a fixed amount or a minimum guaranteed fee that we collect from them that is not linked to passenger traffic. So we collect the amounts. They will not be growing in the same levels as passenger traffic growth. But of course, with other line items such as parking, with the characteristics that I just mentioned and other line items specifically attributable to the passenger traffic, first of all, the royalties collected in the tenants, should be growing in these levels. So it is difficult to say if we will be able to meet that expectation. That's not one of the specific metrics that we have, and we are focusing on developing the non-aeronautical activities as a whole considering also the diversification activities, which tend to generate additional revenues and help with the objective of maximizing the non-aeronautical activities in the group.

Our next question today comes from Magdalena Santana with Citibank.

I have 3 main questions. The first one is, like, what potentials are you seeing to adding industrial parks at other airports? As you know, the last time Vicsaly mentioned that you were analyzing towards an industrial park in Chihuahua terminal. What I really want to know, what potential are you seeing there and in other places to adding industrial parks?

Of course, thank you, Magdalena. As Vicsaly mentioned in the previous call, we are evaluating the potential -- i.e. potential industrial park in Chihuahua. It's not a reality yet. It's not -- the decision has not been made as we are waiting for -- we are, yes, waiting to see what the effects on a potential effect on -- how that could affect the economy in Mexico and, of course, the industrial activity in the state of Chihuahua. So right now I would tell you that this project is passed, but it's the second or the -- yes, the second option that we have for development of an industrial park other than the one that we have in Monterrey. In other airports, we still don't have any color on that. But as soon as we have more color on that potential industrial park in other airports, we will announce it.

Okay, but I have another question. Have you seen any pickup in Europe and investment in Northern Mexico? Any instance where investments of U.S. companies has trailed off?

Not specially. We are not seeing a high level of development. For example, if we take a look at our industrial park, there are some projects with some clients that have been paused because of the activity -- industrial activity reasons, and it has changed a little bit our estimations on the development of the park. So as I mentioned before, we are ready to have an agreement with -- for the third warehouse. But the commercialization, I would say, it has become -- I wouldn't like to say tougher, but more challenging because of this factor. But of course, we continue to work to develop the industrial park and get the client that we need to continue to build additional warehouses in the next years.

Okay, okay. And I have my last question. In the domestic routes that got canceled this month by some airlines, were those routes where the airlines have launched new service that have previously been operated by (inaudible) those companies? Do you know that? I'm not sure about that.

I'm sorry, could you please repeat your question?

Sure. Of the domestic routes that got canceled this month, were those routes where the airlines have launched new services that have previously been operated by interested (inaudible) companies? I guess Volaris canceled, like, at least 5 routes, right? I checked your release and it was mentioned there.

Okay. So flights canceled around -- yes, around latest routes in regional destinations, but the let me get back to you on that. I don't have the specifics right now.

Our next question today comes from Leandro Fontanesi with Bradesco BBI.

Just wondering a little bit your commercial revenue. So you have the midterm challenge to reach 30% revenues from your aeronautical revenues, right? And you mentioned that you have these activities that should boost the commercial revenue going forward. But just trying to understand, you have all these expansions and renovations, but if I'm not mistaken, most of them will happen in the second half of 2018 and beginning of 2019. So is it fair to assume that this boost in commercial revenue that will bring you closer to this 30% will happen from the second half to 2018 onwards? Or do you think that there are some relevant things happening in the short term that could also happen on the commercial revenue side?

Leandro, thank you for your question. (inaudible) an objective of the management to increase the participation of non-aeronautical revenues. The medium-term expectation, and I would say, is more towards 2020, 2021, is to have a bigger participation than the one we already have now, which is 25%, 26% in non-aeronautical revenues. And this is not only by commercial activity but also by diversification activities. So in the commercial side, as you just mentioned, the expectation is to boost the aeronautical revenues by offering more spaces for advertising and for commercial -- general commercial offer. And of course, what I just -- what I mentioned before, the development of additional space in parking should increase the commercial activities in the following years. But also, the developments in the diversification activities with the construction of other projects such as, for example, the ones that we already have, hotels and industrial park, not this year, but I'm talking about the middle term. This type of revenues generate a big difference in the participation of non-aeronautical activity as a total of our revenues. So it is a mid-term expectation, and it should be helped by these 2 initiatives. And of course, as you mentioned, the commercial activities should be increased once we are -- once these projects are fully operational. So that means, as you mentioned, 2018 -- late 2018 and 2019.

Okay, makes sense. And do you have, for example, a varied increase in non-aeronautical revenue. So from 25% to 30%, how much do you expect to get from diversification? And how -- what percentage from commercial (inaudible)? Do you have this sort of breakdown?

Well, right now, the diversification activity represents around 30% -- 35% of the non-aeronautical revenues. And the intention is to increase the participation of the diversification to a point in which we reach at least 50% in the participation of this -- of the total non-aeronautical revenues. That is easily achievable through the implementation of our new projects. For example, if we added a new hotel with MXN 100 million, that could be easily feasible in the non-aeronautical activities. And of course, that's another objective that we have -- not to reach a specific number but to generate more revenues from the diversification activities and make these activities more and more important as we develop additional projects.

Our next question today comes from Ramon Obeso with Scotiabank.

I just have a follow-up question on commercial revenues. What levels of non-aeronautical revenues per passenger should we expect after the expansions and new terminals have been completed?

Ramon, thank you for your question. This is a very good question, and it's also a difficult one because we need to measure a lot of things, not only the areas available for the commercial activities, but also what we can develop in these areas. I mean, the attractiveness of the spaces, how much we will collect at each of the spaces developed, et cetera. So right now I wouldn't be able to give you an estimation of how much we would expect to grow once these activities develop. But the objective, of course, is to optimize all of the spaces to get as much as we can from the commercial activities as they are limited in space. So we will do our best to generate as much revenue -- most revenues as we can for this and, of course, this should reflect in the (inaudible).

(Operator Instructions) Our next question today comes from Rogério Araújo with UBS.

So we saw OMA growing less than the peers all this year, but it seems that in the past couple of months, this difference has intensified in both the domestic and international flights. So my -- I would like to hear the company's view on why OMA's airports has been growing less? So if it's related to the airline's mix or to the mix of tourism destinations, or some specifics of the economics of the region? And what do you expect for the future as well in terms of how much OMA's airports grow in comparison with other players? It would be great to hear your view on that. This is my first question. I can do the following next.

Okay. Thank you, Rogério. So there are 2 factors. One of them is the characteristics of the airlines and what they are pursuing. They have been canceling several international routes specifically in our airports, but they have been replacing the international routes with domestic routes that may be more profitable in terms of growth factors. So one of the things here is capacity constraints that they may have and the consolidation basis they're experiencing, and right now they are looking for more profitable route openings. So that's one factor. The other one in our specific case in OMA is that we are -- the characteristics of our airports lead us to have mostly -- to be more exposed to domestic passenger traffic. So there is a minimum portion of international passenger traffic, mainly in Monterrey and other tourist destinations. For example, Mazatlán or Zihuatanejo. So the development of international activity -- international routes is not as strong as other airport groups and we are mainly exposed to the opening of domestic routes. So that's the other factor why we don't expect the international side to generate more and more participation as we tend to have more -- much more openings -- many more openings, sorry, in the domestic side.

Okay. And the second question is regarding the SAP implementation last year. Are you able to quantify how much were the one-off expenses in the second quarter of '16 related to the SAP implementation?

Thank you. Well we have not, but I can give you an answer on that -- the specifics of the other expenses that increased as a consequence of the SAP implementation system. So it was mainly as a consequence of this, so that's why we are experiencing the decreases in this line item. But I can -- we will -- we can check that and get back to you on that.

That concludes today's question-and-answer session. I turn the conference back over to Mr. Camacho for any additional or closing remarks.

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

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect.