Grupo Aeroportuario del Centro Norte, S.A.B. de C.V.
Q1 2018 Earnings Call Transcript

Published: 19 Apr 2018

[Operator:]

Please standby. Good day. And welcome to the Grupo Aeroportuario del Centro Norte OMA First Quarter 2018 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Ruffo Pérez, Chief Financial Officer. Please go ahead, sir.

[Ruffo Pérez Pliego:]

Thank you, Jim. Good morning. Welcome to OMA's first quarter 2018 earnings conference call. My name is Ruffo Pérez Pliego, and I’m honored to have been appointed OMA's Chief Financial Officer at the beginning of April. I look forward to the opportunity to meet many of you in the coming weeks and months, and to continue the close engagement that OMA has with our investors and analysts. Joining me this morning is Emmanuel Camacho from Investor Relations. The English version of the earnings release had the wrong time for the conference call. We apologize for the inconvenience that caused. This morning, I will briefly review our operational and financial results, and then we will open the call for your questions. OMA delivered another record performance in the first quarter of 2018. Adjusted EBITDA grew 23% over 1Q'17 and we recorded the highest quarterly adjusted EBITDA margin in our history of 67.9%, an increase of 350 basis points year-over-year. OMA has now delivered 33 consecutive quarters of growth in aeronautical and non-aeronautical revenues, and 27 quarters of adjusted EBITDA growth. Passenger traffic reached 4.9 million passengers in the first quarter, up 8% year-over-year. 12 airlines increased passenger volumes in the quarter. The largest contribution to growth came from VivaAerobus, with Aeroméxico, Volaris, Calafia and Interjet making also significant contributions to passenger growth. 21 new routes opened in the quarter, Interjet and TAR added the most routes, with six routes each. Total available seats increased 5.8% in the quarter. As we noted in the earnings release, 29 net new routes at our airports have been opened over the past two quarters. This cost offset the effect of the policies on the slot assignments at the Mexico City International Airport that occurred in the first half of 2017. Air traffic development remained -- remains a priority for OMA and we expect that the airlines continue to open additional routes during the year. On the commercial front, we had 10 initiatives implemented in the quarter, including car rental, hotel promotion, advertising and banking services. Our commercial revenues grew 14% year-over-year due to the initiatives implemented, as well as passenger traffic growth. The occupancy rate for commercial space in our terminals was 98% during the quarter. Diversification activities delivered a solid performance with revenue growth of 6%. OMA Carga continues double-digit growth, largely because of services for ground cargo and the opening of the new cargo warehouse in Monterrey last year. The total volume of freight handled by OMA Carga was increased by 26% in the first quarter. The Monterrey Industrial Park continues to develop and we signed a lease for a sixth warehouse that will start generating revenues this August. Turning to OMA's first quarter financial results, aeronautical revenues increased 19% due to passenger volume growth and tariff increases implemented in January of 2018. In accordance with the maximum rates authorized, domestic passenger charges increased by a weighted average of 9.4% and international passenger charges rose a weighted average of 6.3%. Other aeronautical service charges also increased by a weighted average of 6.3%. Aeronautical revenue per passenger rose 10% in the quarter. Non-aeronautical revenues increased 11%, with commercial revenues making the largest contribution to growth as they increased 14%. The best performing categories were car rental, restaurants, parking and retail. Car rental revenues rose almost 60% due to the opening or relocation of 21 spaces over the past six months and improved contractual terms. Restaurant revenue rose 42%, mostly as a result of an improved offering at the Monterrey Airport. This offering includes concepts such as tea and coffee, [guest rehab], Chilli’s, among other brands. Parking revenue grew 12% reflecting adding -- added capacity in the Monterrey Airport. Retail store revenue grew 22% as a result of higher passenger traffic and increased expense per passenger. Last quarter, we informed the termination of our advertising agreement and then we would be looking for a new operator. As a result, advertising revenue decreased Ps. 14 million in the quarter. In 1Q '18 advertising sales were primarily generated internally through direct negotiations. We expect to enter a new advertising contract by the end of the second quarter. Diversification activities grew 6%, mostly driven by the OMA Carga logistics business and the Industrial Park. Complementary services grew 17%, primarily due to the increased operations related to airline services, additional passenger traffic and inflation adjustments in rates. Construction revenue rose 32% and reflects the investments under the Master Development Plan. This is a non-cash item that is required under IFRIC 12 and it is equal to construction costs of improvements to concession assets. So it has no effect on the earnings. Our strict cost control efforts made an important contribution to results in the quarter. The cost of airport services and G&A expense increased only 1.7%. Lower maintenance expense and the reduction in other costs and expenses largely offset a 7% increase in payroll, increased spending on third-party services and higher utility rates. OMA's first quarter adjusted EBITDA increased 23% to Ps. 1.1 billion. The adjusted EBITDA margin in the quarter was 67.9%, up 350 basis points. As mentioned earlier, this is the highest quarterly EBITDA margin in OMA's history. As a result of all these factors, consolidated net income rose 44% to Ps. 610 million in the quarter. Our cash flow generation from operations was also strong. Total cash from operating activities rose 26% to Ps. 843 million. This principally reflects the strong operating performance of the company. The Master Development Plan is advancing on schedule. Total investments were Ps. 423 million in the first quarter. Major projects underway include, new passenger terminal buildings in Acapulco and Reynosa, expansion and remodeling of the Chihuahua and San Luis Potosi terminal buildings, expansion of the boarding area at Terminal B in Monterrey Airport, construction of a remote commercial aviation platform in the Monterrey Airport, and open taxiways and platforms in several airports. The new Acapulco terminal had soft opening on April 17th, operating certain domestic flights and it is expected to be fully operational by the end of this month. The new terminal is a state-of-the-art building and will facilitate airline operations, improved passenger experience and provide a more attractive commercial offering. We hope that the new terminal will help Acapulco reclaim its position as one of Mexico's leading tourist destinations over time. The new Reynosa terminal, as well as the Chihuahua and San Luis Potosi terminal expansions are scheduled to be completed in the fourth quarter of 2018. These projects will also help OMA provide better services to airlines, improve the passenger experience and increase our leasable commercial space. In addition to the projects I already mentioned, OMA began the expansion of the [inaudible] terminal in the first quarter of this year. This concludes our prepared remarks. We will now be happy to answer your questions. Jim, if you can please open the call to questions.

[Operator:]

Certainly. [Operator Instructions] We'll take our first question from Ricardo Alves from Morgan Stanley.

[Ricardo Alves:]

Hello, gentlemen. Thanks for the time. Two questions on my end. First one, on traffic, I mean, you had traffic going up 8% pretty solid in the first quarter of a very tough base, can you talk a little bit more about what you expect in the coming quarters, so we're going to have a relatively easier base of comparison in the second half? And also on traffic, if you could give a little bit more feedback on what you're seeing in terms of new routes going forward, because, I think, we saw a different trend from the fourth quarter of '17 into the first quarter of '18 with Interjet much more aggressive than Vivo, for example, at least in the short-term on a quarter-over-quarter basis. So any color on that would be much appreciated? The second question would be on the commercial side. You -- I apologize, but I joined a little bit late, I think, I got the -- I got in when you're talking about advertising. So just to make sure I understood correctly, if you expect to sign a new contract by the end of the second quarter. If that's the case and if that is true, when do you expect that advertising to pick up fast. Those would be my questions? Thank you.

[Ruffo Pérez Pliego:]

Okay. Thanks, Ricardo. With respect to traffic in 1Q '18, I think it reflects the strong efforts of the company for route development and to develop air traffic. We expect that for the full year traffic will be similar to that achieved in the first quarter, even though in the second half of the year some of the cancellations will reach its 12 months and will not be longer in the basis of comparison. There are still scales of the airlines yet to be published. We expect new routes to be opened, but for the time being we're maintaining around an 8% growth for the total year. And with respect to the commercial side, yes, we expect to sign a new advertising contract with the operator by the end of the second quarter and we will expect to see a pickup in revenues relative to what we internally are generating by the third quarter of this year.

[Ricardo Alves:]

Got it. That's very helpful. And is there anything specific that you guys could comment on the car rental side that was very strong and I'll stop here? Thank you again.

[Ruffo Pérez Pliego:]

Sure. In car rental what we have done is open new car rental booths in the airport, as well as relocate them to facilitate the passenger flow. So that has resulted in increased rentals, as well as better contractual terms with the tenants, primarily at the [inaudible] airport.

[Ricardo Alves:]

Very helpful. I appreciate that.

[Operator:]

Moving on we will take our next question from Rogerio Araujo from UBS.

[Rogerio Araujo:]

Yeah. Hi. Good morning. Thanks very much for the opportunity. I have a couple of questions. First of all, I'd like to do a follow-up on the latest question on car rental. Is there any overlap today that some that are closing and some others are opening. So do we see any overlap there that is going to end at some point in the short-term? Then I can follow-up with my other questions? Thank you.

[Ruffo Pérez Pliego:]

No. I think the car rental revenue we expect it to be sustainable, so there is no overlap of old contract that will expire overlapping with new contract. So we believe these are sustainable numbers going forward.

[Rogerio Araujo:]

Okay. Thank you. And so my two questions, first is in minor maintenance, there was a significant reduction in this line. I would like to know if this is sustainable and how is the recurring level going forward? And my second question is on the Industrial Park, we saw a huge pickup in the revenue side, but also we saw cost is increasing a lot. So the EBITDA actually decreased on a year-over-year basis. I would like to know what has happened exactly on the cost side, if we could expect to see EBITDA picking up at some point and also you signed another contract that is going to start up, if I'm not mistaken in the second -- in the beginning of the second half of the year. So what do you expect for industrials both in terms of revenue and the cost side in the upcoming quarters? Thank you.

[Ruffo Pérez Pliego:]

Sure. In terms of minor maintenance expenses, we expect that year-over-year we will have a slight reduction relative for full year, I mean, relative to 2017, most of that reduction was achieved in the first quarter. So from 2Q to 4Q we'll be seeing similar levels to those in the comparable quarters of previous years. In the case of the Industrial Park, the increase in costs primarily reflects the upfront fee that we pay to the brokers, when the lease is signed and in the first quarter two leases were signed, so that's why you see a pickup in that line. This is a one-time expense during the life of the contract. So we should see a positive EBITDA in the upcoming quarters and for the full year. And in terms of new warehouses being leased, we have a sixth warehouse that was signed and will start to be generating revenues by August, and we probably think that we will sign in the upcoming months another lease, so we'll have seven warehouses operational by the end of the year.

[Rogerio Araujo:]

Okay. Thank you. If I could one last question, how close are you from the aeronautical tariff cap right now, we saw some increase in January? Thank you.

[Ruffo Pérez Pliego:]

Yeah. For 2017, we were about at 95% over the maximum rate authorized. For this year with the increases that we have we believe we're going to be close to 98% or 99% of the authorized rate.

[Rogerio Araujo:]

Okay. Thank you very much and congratulations on the results.

[Ruffo Pérez Pliego:]

Thank you very much.

[Operator:]

Moving on we'll take our next question from Stephen Trent from Citi.

[Stephen Trent:]

Good morning, gentlemen, and thanks for taking my question. And like Ricardo, I actually dial in a few minutes late, so sorry if I missed. First off, welcome to Ruffo Pérez Pliego and it's great that you guys hired a CFO. In terms of questions, I was curious, now that we're looking at oil prices getting to the $70 handle per barrel. Have you guys noticed any differences in activity in Northern Mexico with respect to the shale oil activity?

[Ruffo Pérez Pliego:]

Have we seen any -- can you repeat the question, please?

[Stephen Trent:]

Yeah. Sure. So several quarters ago you guys had mentioned that you were seeing a pickup in travel in some of these areas of Northern Mexico associated with the energy industry consultants looking at potential shale oil job sites. So my question is with crude oil close to $70 a barrel again. Have you noticed any pickup in activity or has that segment not played a role in your traffic flow?

[Ruffo Pérez Pliego:]

We have not seen a correlation between increased economic activity in the North of Mexico related to an increase in oil prices, probably the effect will have to be seen over a longer time period.

[Stephen Trent:]

Okay. That's helpful. And my second question pertains to the Industrial Park in Monterrey that's been so successful. I mean depending on what happens with elections on July 1st, is it conceivable that OMA could consider launching similar Industrial Parks around some of its other airports?

[Ruffo Pérez Pliego:]

Well, we have land reserves both in Monterrey, as well as in other airports. I think we will have to see what the returns of that venture would be and make sure that it's good use of our excess cash. So right now we are not planning to develop Industrial Parks in other airports and we are focused on filling out the available land that we have targeted for the first Industrial Parking in within the airport in Monterrey.

[Stephen Trent:]

Okay. That's very helpful. I'll let someone else to ask a question. Thank you.

[Ruffo Pérez Pliego:]

Thank you, Stephen.

[Operator:]

[Operator Instructions] Moving on we will take our next question from Natalia Zamora from GBM.

[Natalia Zamora:]

Hi. Good morning. Could you please elaborate on the main reason behind the cost of services per passenger dropping to a level below Ps. 49 and do you expect this to be sustainable for the rest of year or will there be anything specific that could move it up or down? And my second question would be that in yesterday's conference call for Aeroméxico’s results, management said they expect to strengthen their hub in Monterrey. Could you please give some color on your expectation regarding this and in terms of timing and any additional information or detail and are you working together to achieve this? Thank you.

[Ruffo Pérez Pliego:]

Natalia, could you repeat your first question. There was some noise when you were speaking your first question.

[Natalia Zamora:]

Yes. It's about the cost of service per passenger. It dropped to a level before Ps. 49 per passenger. So I was wondering if you expect this to be a sustainable level for the rest of the year and/or it wouldn't be sustainable, do you expect anything specific to move it up or down?

[Emmanuel Camacho:]

Just checking out it is -- is it non-aeronautical or construction per passenger, sorry for that.

[Natalia Zamora:]

No, no, no. Cost of services per passenger.

[Ruffo Pérez Pliego:]

Cost of services.

[Emmanuel Camacho:]

Cost of services.

[Ruffo Pérez Pliego:]

Okay.

[Natalia Zamora:]

Yes.

[Ruffo Pérez Pliego:]

Yeah. I think that cost of services is going to be stable around these levels. We as mentioned during the call have strict cost cutting and control procedures in place and we have some objectives to increase margins. The first quarter margin increased significantly relative to previous year and we will try to find new opportunities to operate more efficiently. So, certainly, it's a level that we can think we can have as a reference point. And regarding your second question, certainly, we believe that Monterrey Airport provides a lot of facilities for air traffic to several airlines, not only Aeroméxico, but also the other domestic airlines that are operating in our airport and given the congestion of Mexico City Airport, certainly, having regional hubs make sense for airlines. So, yes, we are working with variety of airlines to try to continue to develop our Monterrey Airport as a connection point.

[Natalia Zamora:]

Okay. And do you have any specific expectations regarding this. What it would entail and any specific timing for this…

[Emmanuel Camacho:]

No, no, not this…

[Natalia Zamora:]

… for Aeroméxico.

[Emmanuel Camacho:]

It's something that we first need to evaluate with the airline and see what's their expectation in terms of fleet arrivals and renovations and also what are the routes they would be planning to operate. So, at this time, we are not yet in a position to disclose the specific timing of any plans for hub.

[Natalia Zamora:]

Okay. Great. Thank you. Very helpful. Thank you.

[Ruffo Pérez Pliego:]

Thank you, Natalia.

[Operator:]

Moving on we will take our next question from Ramon Obeso from Scotia Bank.

[Ramon Obeso:]

Hi. Good morning and thank you for the call. My question is related to hotel services. We saw a small increase in revenues from this activity and a decrease in average room rate for both the NH Hotel and the Hilton Garden Hotel. So I would wonder if you could give us more color on this and what should we expect for the rest of the year?

[Ruffo Pérez Pliego:]

Sure. I think in 1Q we had basically two effects. In the case of Hilton Hotel in Monterrey our tariffs are dollar denominated and in the first quarter of 2017 the dollar was at higher level than in 1Q of 2018. So that explains much of the difference in the increase in -- in the small increase in revenues that the hotel generated. In the case of the NH Hotel in Terminal 2, it's a hotel that it's very business oriented and certainly, the Holy week at the end of March had an effect in both occupancy, as well as we had to implement some tariff promotions to attract more, more tourists to that hotel. And also, there were some maintenance works performed during the first quarter, which reduced the number of available rooms that we could sold per night. Going forward, in the case of the Hilton Hotel to the extent that peso continues to appreciate relative to the dollar, we might see some softness in the revenues that will be compensated by the increase in occupancy rates that we are experiencing. So we'll have to evaluate whether a tariff increase will be sustainable but at the time we are not yet in that position and in the case of the NH 2 Hotel, we do expect better results in the upcoming quarters.

[Operator:]

[Operator Instructions] Moving on we will take our next question from Leandro Fontanesi from Bradesco.

[Leandro Fontanesi:]

Hi. Thanks for taking my question. The first one is regarding the discussions over the New Mexico City Airport. If you're considering any alternative to continue growing without meeting, let's say, Mexico City Airport with additional capacity, so what sort of alternatives do you consider? And the second point is just a follow-up on the aeronautical tariffs, if with this 10% increase you are already at 98%, 99% of maximum tariff? Thank you.

[Ruffo Pérez Pliego:]

Yes. Regarding the second question, yes, with the increase implemented in January in tariffs, we are at about 98%, 99% of the maximum rates authorized. So that is correct. And regarding your first question on the Mexico City Airport, I mean, as all of you know, the underlying demand -- of traffic demand, air travel demand is there, and certain, I mean, certainly airlines will have to continue to adjust their models to continue growing in spite of the restrictions into Mexico City. The development of point-to-point routes by airlines is something that we have been seeing over the past few years, and also as mentioned in a previous question, the development of regional hubs is something that should also be considered as part of the growth that airlines will need to have in order to fulfill the demand of air travel in Mexico. So we are working with airlines on both fronts developing point-to-point routes and also showing how the Monterrey Airport could serve as a regional hub for their operations.

[Leandro Fontanesi:]

Sure. Thanks for the call. And just on the aeronautical tariffs, when we compare with the last two years, where you were at 94%, 95%, what has changed that has allowed you to increase your tariffs, is it the higher demand?

[Ruffo Pérez Pliego:]

Well, Leandro, the maximum rates for these five-year investment program were authorized there was a significant increase relative to the prior levels of tariffs. So the strategy of the company was to increase gradually over a period of time those tariffs to reach the maximum rate and that this is, let's say, the last big increase that we would be implementing to reach the maximum rates going forward it's just going to be the inflationary adjustment as authorized by under the concession agreement for this year -- this five-year period. But, I mean, coming back to your question basically we spread the large increase over three years and this is the last year of those three years.

[Leandro Fontanesi:]

Okay. Perfect. Thank you very much.

[Operator:]

And at this time, it appears there are no further questions. I'd like to turn the conference back over to our speakers for any additional or closing remarks.

[Ruffo Pérez Pliego:]

Thank you, Jim. I want to thank all of you for your participation in this call. Emmanuel Camacho and I are always available to answer your questions, and we hope to see you soon at our offices in Monterrey. Thank you all and have a good day.

[Operator:]

Again, that will conclude today's conference. We do thank you for your participation. You may now disconnect.