Grupo Aeroportuario del Centro Norte SAB de CV (OMAB) 2017 Q3 法說會逐字稿

Good day, and welcome to the OMA Third Quarter 2017 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.

Good morning. Welcome to OMA's Third Quarter 2017 Earnings Conference Call. Joining me this morning, are Mauricio Valencia, OMA's Planning Manager and our Chief Accounting Officer, Jesús Villagómez.

This morning, I will briefly review our operational performance and financial results. Then, we will be pleased to answer your questions. OMA delivered solid financial results in the third quarter of 2017. The sum of aeronautical and non-aeronautical revenues and adjusted EBITDA each grew 10%, and net income grew almost 20%. We ended the quarter with MXN 2.2 billion in cash. Our performance is consistent. OMA has delivered 31 consecutive quarter of growth in aeronautical and non-aeronautical revenues and 25 quarters of adjusted EBITDA growth. Passenger traffic reached 5.2 million passengers, which is a new record for quarterly passenger traffic. Eight airlines increased passenger volumes in Q3, with the largest contribution to growth from VivaAerobus, Delta and United. Nine new routes opened in the quarter and 5 closed, while total available seats decreased 1.5%. However, the rate of passenger traffic growth slowed to 1.3%, or a net increase of 66,000 passengers. There are 4 factors that contribute to the overall evolution of traffic in the quarter. First, there was solid growth on traffic to and from the regional hub airports, including Monterrey. The 8 routes that contribute most to traffic growth at OMA, where all flight to and from regional hubs including routes like Monterrey-Cancún and Culiacan-Guadalajara. Growth on new routes opening in 2017 and on existing routes contribute an increase of approximately 320,000 passengers compared to 3Q '16. About 25% of this increase came from new routes and the balance from existing routes. Second, airline route consolidation has been going on all the year. And it accelerated with the new slot restriction at the Mexico City's international airport starting in April, but with significant effect since July. The result was reduction of frequencies and cancellation of some routes. This affected most of the routes between our airports and Mexico City, particularly from the smaller airports. We estimate frequency reductions and route cancellation reduce traffic by approximately 157,000 passengers. Third, the retirement by Aeroméxico of its ERJ145 fleet resulted in cancellation of 19 routes in the early part of 2017. This reduced third quarter traffic by an estimate 88,000 passengers.

And finally, the 2 earthquakes in September plus the 4 Hurricanes disrupt travel to Mexico City, Houston, Miami and several other destinations. It also temporally affected operation in the Acapulco, Tampico airports. These natural disasters reduced traffic by an estimate 8,000 passengers. OMA expects that these factors aside from the natural disasters will continue to influence traffic volumes for the rest of the year. On the positive side, we are expecting to increase the number of new routes in the current quarter, as a result of our initiative to increase connectivity. We have been working with various airlines on 12 potential new routes. As of today, 8 of these have been confirmed, and will open before year-end. These new routes will help us to offset the negative factors.

On the commercial front, we had 17 initiatives opened in the quarter, including communications, restaurants, advertising, car rentals, retail and a new OMA premium lounge in Chihuahua. OMA continues developing our premium strategy, with more lounges opening. Last week, we also opened a new premium lounge in Terminal C of the Monterrey airport. OMA now has 5 premium lounges in 4 airports, Monterrey, Culiacán, Mazatlán and Chihuahua. And we expect to open more in the coming quarters. 93% of our current clients are priority pass members and the rest are passengers who acquire an annual OMA premium lounge membership or pay the daily rate. Also, we are focused on improving and increasing the restaurant and retail offerings in all of our airports. We have added recognized brands such as Chili's, Gastrohub, The Urban Corner, Fly by Wings, [Quadra] and[indiscernible]. The commercial occupancy rate was 98% during the quarter.

Diversification activities delivered a solid performance with revenue growth of 9%. The NH Collection Terminal 2 Hotel in Mexico City had an occupancy rate of 83%, which includes the effect of the temporary closing after the earthquake. The average room rate increased 1%. The Monterrey airport Hilton Garden Inn occupancy rate was 77%, and the average room rate of MXN 1,915 was 5% below 3Q '16 due to the Mexican peso appreciation. OMA Carga continues double-digit growth, largely because of service-of-ground cargo and the opening of the new freight terminal in Monterrey earlier in the year. The total volume of freight handled increased by 16% in Q3. At the Monterrey Industrial Park, we signed our lease for the third warehouse, so it will start generating revenues during 4Q '17. This new contract is for 3.5 years. And its total value is for $932,000. The fourth warehouse is in the commercialization phase. We also began construction of our fifth 5,000 square meters warehouse that will be completed in 1Q '18, and are expanding the second warehouse at the client's request.

Turning to OMA's third quarter financial results. OMA converted these positive operational developments into 10% revenue growth, 9% growth in operating income and 10% growth in adjusted EBITDA. Net income increased 19%. Aeronautical revenues increased 10% because of higher passenger volumes and a specific rate adjustment in the second quarter of the year. Most of the growth came from domestic passenger charges. Higher rates for international passenger charges were partially offset by the appreciation of the peso during Q3. Aeronautical revenue per passenger rose 9%. Non-aeronautical revenues also rose 9%, with commercial revenues making the largest contribution to growth. Commercial revenues increased 10%. The best-performing areas were restaurants, car rental and retailers, each with double-digit growth rates. The increases were principally the result of new openings in each line over the past 12 months. Advertising revenues also grew 7%, as the new all-digital fixtures are put into service and made a solid contribution to the total increase in commercial revenues. Diversification activities grew 9% mainly from growth in the OMA Carga freight logistics business, their hotels and additional contribution from the industrial park, which more than doubled revenues year-over-year. Complementary services grew 5% mainly because of new leases of spaces to airlines and their revenues coming from the baggage screening service. Non-aeronautical revenue per passenger grew 7% and reached MXN 70.8 per passenger. The cost of airports services and G&A's expense increased 5%. The variation resulted from increased payrolls, minor maintenance and a utilities expense, which were partially offset by decreases in contracted services and insurance premiums. Because of our high investment commitment under Master Development Programs in the current 5-year period 2016, 2020, the major maintenance provision increased and the construction costs line item more than tripled, both our noncash expenses. The construction cost recognition is required by IFRIC 12 and is equal to construction revenue, so it has no effect on earnings. OMA's third quarter adjusted EBITDA increased 10% to MXN 1,023 million. The adjusted EBITDA margin in the quarter was 66.8%, unchanged from the prior year. Financing expense decreased in Q3 as a result of a smaller exchange loss, while tax expense rose only 2%. The effective tax rate was 27%. As a result of these factors, consolidated net income rose 19% to MXN 580 million in the third quarter. Our cash flow generation from operation was also strong. Total cash from operating activities rose 45% to MXN 2.3 billion. This reflects the operating performance plus the reduction in accounts receivables. Receivables were equal to 37 days revenues at the end of September. For the quarter, our total investments were MXN 450 million. We have contracted 84% of the scheduled MDP projects for 2017. The most important MDP projects underway include: new passenger terminal building in Acapulco and Reynosa; expansion and remodeling of the Chihuahua and San Luis Potosí terminal buildings; construction of a remote commercial aviation platform in Monterrey; and expansion of the regional flight boarding area in Terminal B in Monterrey. Overall, including all our other MDP investments and the 4 big terminal projects. Our MDP program is advancing 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) We'll go first to Natalia Zamora of GBM.

I have 2 questions. The first one is regarding the maximum tariff. I would like to know if you expect to increase them during the rest of the year. And could you provide an estimate of how it would look like by year-end in terms of the ones allowed by the SCT? And my second question is about the cancellation of routes. Do you have an estimation of how many net reductions could we expect for the fourth quarter?

Thank you, Natalia. Thank you for your questions. Regarding maximum tariff? Maximum tariff we're negotiating in 2015 for the 5-year period 2016-2020. The maximum tariff only are adjusted year by year by the efficiency factor and for the inflation. The tariff that we adjust year by year as a specific tariff of the aeronautical services. The objective is with this adjustment in the specific tariffs to reach the maximum tariff negotiated for each airport. That is my answer. I don't know if your question -- if we are considering more increases in a specific tariff during the next years, the answer is yes. As I said before, our objective is to reach 100% of the maximum tariff in each airport during the following years before the 5-year period ends. And -- I'm sorry?

Yes. So if I recall correctly, in 2016, the maximum tariff reached about 93.7% of the allowed by the SCT. Do you have an estimate of that number? How it would look like for 2017?

Yes. Our expecting -- [expectance] for this percentage is around 95% of the maximum tariff in average for all of our airports. Between 94% and 95%. And regarding your second question about the cancelation routes. During these 9 months of the year, we have had several cancellations of routes due to different factors. As I mentioned in my remarks, the load restriction in the Mexico City airport is affecting us. Also, Aeroméxico is changing their Embraer 145 fleet to bigger aircraft. And that effect is affect mostly our smaller airports. But in the next quarter, we are negotiating with airlines and trying to offset these effects with more openings. We have 12 potential new routes for next quarter. Some of these routes are very important for us, because some are international routes, for example, Zihuatanejo-Chicago, Acapulco-Los Angeles. So we are positive in this situation that we can offset the negative effects for closing routes during the past quarter, in this fourth quarter. And at the end, the traffic evolution [indiscernible] be positive.

Okay. Okay, perfect. So it would be a net addition of routes?

No. We think -- I think, in last quarter we mentioned at the end, we will have a negative net goods, more cancellation than openings. But with a traffic evolution -- a positive traffic evolution.

We will go next to [Francisco Rodriguez] of GBM.

I'm interested on your accounts receivables, especially on the aeronautical receivables. Is there any chance that you could give us a general overview of your policies and whether you have seen your -- the way you're charging airlines, the way you're providing credit changing in the recent past?

Thank you, Francisco. Yes, we have been able to reduce our receivables. This situation allows you with a -- we increased the receivables last year. But this year we have done a very good job. In terms of our policy, we have credit for the main airlines, excluding Interjet. Interjet is in prepayment situations. The rest of the airlines: Aeroméxico, Volaris, VivaAerobus has credit. Our policy is 60 days maximum. And now we have a very healthy receivables. We don't see any problem or difficult situation to recover these receivables.

We will go next to Marco Montañez of Vector.

My question is about the committed investment for the period 2016 and to 2020. The Master Development Plan establishes around MXN 5 billion for this period. But the investment realized last year amounted to around MXN 5 million, if I'm correct. Do you have any forecast for the investments to be realized in this year and the next years in order to fulfill the MXN 5 billion plan?

Welcome, Marco. Yes, this 3 first years of the 5-year period is very high years in terms of investments. As you said, MXN 1.5 billion was the commitment for 2016 and similar amount for 2017. And we are very positive to comply with this project. At this moment we are in 84% contracted the project of 2017. 100% of the projects of 2016 are contracted and it's in under construction. The same as 2017. The thing here is in terms of cash flow, as we pay based on the process -- the advancing process of the construction, the payments is delaying. This year, we are paying projects of 2016. Next year, we'll pay projects of 2017. But at the end, we will comply with our commitment in the period. As you know, we have 3 months after the year-end to prove to the government that we have contracted all the projects that we are commitment.

(Operator Instructions) We'll go next of Stephen Trent of Citi.

My question, just 2 for me if I may, Vicsaly. The first is helpful commentary about the reduced frequencies at -- out of Benito Juarez international airport. Have you seen any of this flow getting rerouted to Toluca, for example, so that's something for instance that the SCT had hinted that it had wanted to do and just wondering if you're seeing anything spill over into that airport?

Thank you, Stephen. In third quarter and in the fourth quarter we will see the negative effect for this load restriction in Mexico City airport. But in the following months or quarters, we think that we will see the effect that you are saying, more frequencies or new routes from Toluca, basically because it is one of the airport that makes sense for passengers to take a flight. But at this moment, we are not seeing that effect. We think that effect -- we will see that effect in the following [indiscernible] months, when the airlines release with their routes. They know about what -- how many aircraft they are going to have available. And then, they try to open routes from Toluca, for example.

Okay. Very helpful. And just the second question. I think you mentioned something about receivables associated with Interjet. And I was wondering if I can trouble you to just repeat what you said. I only caught part of the comment.

Okay. Yes, in terms of the Interjet, Interjet is in our prepayment system. Interjet has no credit with us at this moment.

We'll go next to Ricardo Alves of Morgan Stanley.

Vicsaly, just a very quick one from me on the industrial park. I know it's still pretty small, but it's been increasing quite fast. The EBITDA was relatively stable for the past few quarters, but dropped a little bit in the third quarter. So just wondering what could explain volatility in this business, just to think about the forecast on a going-forward basis? And also, since you might have 4 to 5 over the next 12, 18 months, should we be thinking about EBITDA going up to the MXN 20 million level already by the end of '18 or -- on an annualized basis?

Thank you, Ricardo. Yes, as you said, the industrial park is now a small business for us. The volatilities for -- we are adding -- we need to have some more code when new areas are opening. Now, we have more warehouse leased. As I mentioned in my remarks, we already signed the third contract. It's a contract for 3 years and 6 months. And for this reason, also we decided to invest in another warehouse. So now we are under construction phase for the fifth warehouse. We have 3 contract lease, and we will have 2 warehouse ready to be leased. And in terms of the resource of this company, as we opened in new areas, the cost increased. But it's very punctual, the results. At the end, we -- our estimate is that this business mature little by little and getting better results.

At this time we have no further questions. I would like to turn the call back over to our speaker for any additional or closing comments.

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 question, and we hope to see you soon at our offices in Monterrey. Thank you, and have a good day.

That does conclude our conference for today. We thank you for your participation.