Grupo Aeroportuario del Centro Norte, S.A.B. de C.V.
Q2 2017 Earnings Call Transcript

Published: 24 Jul 2017

[Operator:]

Good day, and welcome to the OMA Second Quarter 2017 Earnings Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Mr. Emmanuel Camacho, Investor Relations Officer. Please go ahead, sir.

[Emmanuel Camacho:]

Thank you. Good morning. Welcome to OMA’s second Quarter 2017 earnings conference call. My name is Emmanuel Camacho, OMA’s IR officer. I’m filling in for our CFO, Vicsaly Torres, who is on maternal leave. [indiscernible] greetings and expect to be back at work in Mid-October and sure she would make it into 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 expansion, then we will be pleased to answer your questions. OMA delivered another strong 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 rate. We ended the quarter with Ps. 1.9 billion in cash after paying the dividend of Ps. 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 have 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 4.5 million passengers. 9 of our 13 airports grew passenger traffic. Passenger traffic growth is also consistent with increased traffic 25 quarters in a row. Seven airlines increased passenger volumes in the second quarter, with the largest contributions to growth from VivaAerobus, Interjet and Magnicharter. Airlines are continuing to consolidate their routes network, adding capacity with larger airplanes and increasing load factor even as very close routes that are not made in expectations. Total available fleets increased 4.4 in the second quarter, airlines opened eight new routes in the quarter and closed 12. On July 1, Aeroméxico opened in Monterrey to Korea routes. This, of course, reflects the increasing Korean business presence in the state of New Orleans, including the opening of the Kia Motors plant, a few kilometers from the airport last year. Our diversification activity delivered delivered another strong performance, with revenue growth of 13%. 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, two 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 commercial inflation phase. In addition, the clients for warehouse number two reported an increase from the current 5,000 square meter to 8,200 square meter. The additional revenues will fall in the first quarter of 2018. On the commercial front, we have 16 initiatives opened in the quarter, including financial services, communication, retail and wholesale promotion. The commercial occupancy rate was 97%. The best performing areas were retailers, restaurants and car rental, each with double-digit growth rate. On the other hand, advertising revenues were down. Part of this resulted from a change over in advertising picture to clearer larger all digital display. We are also discussing with providers from contractual trends, 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 revenues 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 logistic business. Complementary services grew 8%, mostly because of rate increases for checked baggage screening services. Commercial revenues only grew 2%, with solid growth in retailers, restaurants and car rental were largely offset by a 17% decrease in advertising revenues. Non-aeronautical revenues per passenger decreased 1%, principally because of the slow growth in commercial revenue. The cost of airport services and G&A expense decreased 1%. Payroll cost increases were held to 1% and contracted services increased only 4%. These were offset by decreases in minor maintenance and other cost and expense. Those expenses were high last year, as a result of baggage screening maintenance in the SAP system implementation. The largest expense increase was based for basic utilities and this reflects electricity rate increases that this has imposed gradually through July 2016, and have amounted to 47% at the end of the second quarter of 2017, as well as higher water rate from interconnection with Monterrey water system. Because of our high investment commitment on the Master Development Programs in the current five-year period, 2016-2020, the construction costs line item increased expense. This is a non-cash 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 Ps. 936 million. The adjusted EBITDA margin in the quarter increased 2.6 to 7 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 position held in U.S. dollar. The effective tax rate was 27%. As a result of these factors, consolidated net income rose 14% to Ps. 510 million in the second quarter. Our cash flow from – our cash flow generation from operation was also strong. Total cash from operating activities rose 70% to Ps. 1.4 billion. This reflects the operating performance plus the reduction in accounts receivable. Receivables were equal to 34 days’ revenues at the end of June. For the quarter, our total investments were Ps. 331 million. We have contracted 69% of the scheduled MDP projects for 2017. The most important MDP projects underway include

[Operator:]

[Operator Instructions] And we’ll take from Ms. Natalia Zamora with GBM. Please go ahead.

[Natalia Zamora:]

Hi, thank you for taking my questions. My first question is regarding revenues per passenger. This quarter we saw 4% growth and we were wondering why sales and the growth are produced by investment for both? Also, do you expect to increase these tariffs again during this year, and when do you expect the result? And my second question would be, if you can elaborate what is going on in commercial activities, as it seems like many of these different revenues were lagging? So it would be very helpful if you could give us any insight that we provide?

[Emmanuel Camacho:]

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 adjustments for the maximum tariffs that we’re 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 got 93.7% of the amounts that we’re entitled to earn under the maximum tariff regulations. 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’re evaluating – we will have to increase tariffs this year, again, of course, assuming now we have – we’re 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 the – for 2017, which is, as I commented, 96% – 95%, 96%, sorry, in aeronautical revenue compliance. And through question, in commercial revenues that maybe lagging, as I noted in the conference, practically our occupancy levels have been very high, 97% are very high factor, which is we are optimizing the commercial agreements with tenants in the airports. But there’s a certain constraint to grow if we don’t build additional infrastructure, which is what we’re doing very strongly in this five-year trend MDP investment period. We will expand, as I noted these four projects, and we have other projects in 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.

[Natalia Zamora:]

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

[Emmanuel Camacho:]

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

[Natalia Zamora:]

Okay, perfect. Thank you.

[Emmanuel Camacho:]

Thank you.

[Operator:]

Our next question today comes from [indiscernible] with Santander.

[Unidentified Analyst:]

Yes, good morning. It’s [indiscernible] from Santander. Here really a follow-up on the tariffs. If we look at quarter-on-quarter performance of the aeronautical revenues, they seem to increase less than traffic, that would actual fall in tariffs. I understood that actually tariffs had increased quarter-on-quarter. Can you give us some light on that, please?

[Emmanuel Camacho:]

Yes, of course. Hi, [indiscernible], 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, taking all of the airports, and not just 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 increased approximately 4.5%, which is an average of the per user price index and the consumer price index, that that’s the adjustments that we gave 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.

[Unidentified Analyst:]

Thanks, Emmanuel. But is it correct to say that aeronautical revenues grew less than traffic in the second quarter, quarter-on-quarter?

[Emmanuel Camacho:]

Okay.

[Unidentified Analyst:]

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 conciliating that, we’ve been increasing tariff. If there was an increase in tariff then shouldn’t I expect aeronautical revenues to increase in excess of the traffic growth?

[Jesús Villagómez:]

Well, if you take a look at on – if you take a look at it on – per passenger level, of course, we are growing less than passenger traffic. But the expectation is for the entire year, 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 upper passenger level, and of course, on meeting the inflation and the expectations on the FX, the passenger traffic and the increase in tariffs earnings to get to the 95%, 96% expectation.

[Unidentified Analyst:]

Thank you, Emmanuel. One more question, if I may, regarding commercial revenues. You referred to the fact that advertising was falling 17%, I understood that. My question was regarding parking. Parking was up only 4%, again, versus the 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? Thank you.

[Emmanuel Camacho:]

Okay, perfect. So there are three main reasons why parking is growing in this level. The first one is that, not all the – not all of the passenger traffic uses the parking area. We should consider that 50% of the passenger traffic in the airports are the ones that could be used in parking, as we consider that this 50% is passenger – passengers leaving the airport – the parking passenger, sorry. So this has an effect of half of 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 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, if there are three big companies compete against us, we are running at a practical full capacity in the long-term parking. So that is why we are expanding. We have expansion projects for the following years that should also help the parking line item to grow going forward. And to your second question on commercial revenues per passenger, it is difficult to say if looking all in these levels, mainly because we have not all of the initiatives in the commercial activity and mainly excluding diversification be complementary and only subsequent on commercial. The advertising is not linked to passenger traffic – the – or they’re directly linked. In the commercial, tenants have also a fixed amount or a minimum dangle seats that we collect from them, that is not linked to passenger traffic. So we collect that amount, they will not be growing in the same levels of passenger traffic growth. But of course, with other line items, it’s tightened with the characteristics that I just mentioned, and other line items specifically attributable to the passenger traffic portion a little bit, the royalties collected tenants should be going in these levels. So it is difficult to say, 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 diversification activities, which tend to generate additional revenues and help with the objective of maximizing the non-aeronautical activities in the growth.

[Unidentified Analyst:]

Thank you very much, Emmanuel.

[Emmanuel Camacho:]

Thank you, [indiscernible]

[Operator:]

Our next question today comes from Magdalena Santana with Citibank.

[Magdalena Santana:]

Hi, guys, good morning. How are you? I have three main questions. And the first one is like, what potential that you’ve seen to adding little both at other airport? I think that the last time Vicsaly mentioned that you were on and I think to add an industrial parking to our terminal. But I really want to know what potential are you seeing there and in our places two additional industrial parks?

[Jesús Villagómez:]

Of course, thank you, Magdalena. Hi. As Vicsaly mentioned in the previous call, we are evaluating the potential – a potential industrial parking Chihuahua. It’s not as we already yet. It’s not – the decision has not been made. As we are waiting for, we are – yes, waiting to see what the effect on a potential victim that could effect the economy in Mexico, and of course, the lots of activity in the state of Chihuahua. So right now, I would tell you that this project is past. But it’s the second or the – or, 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 low color in that potential industrial parking and other airports, we will announce it.

[Magdalena Santana:]

Okay both. Well, I have another question. Have you seen any pickup in European investments in Northern Mexico? any federal investments of USA’s company has trailer – have trailed off?

[Emmanuel Camacho:]

Not specially. We are not in a high levels of development. For example, we would take a look at our industrial park, and there are some projects, where some clients that have been popped because of the activity – industrial activity recent. And it has changed a little bit our estimations on the development of the park. So, as I mentioned before, we already 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 through develop the industrial park and get the clients that we need to continue to be an additional warehouses in the next year.

[Magdalena Santana:]

Okay. And I have my last question. In the domestic routes got canceled this month by some airlines, where those routes or the airlines have launched new service that had previously been operating by the interested bothcompanies? Do you know that? I’m not sure about that.

[Emmanuel Camacho:]

I’m sorry. Could you please repeat your question?

[Magdalena Santana:]

Sure. The domestic routes have cancelled this month, were those routes were the airlines have launched new services that had previously been operated very interested both companies? I guess, Volaris cancelled like, at least, five routes, right? I checked your release and can you just mention that?

[Emmanuel Camacho:]

Okay. So Volaris cancelled plans, yes, plan maybe routes in regional destinations. But let me get back to you on that, specifically right now.

[Magdalena Santana:]

Okay. Sure, sure. No problem. Thank you very much, Emmanuel.

[Emmanuel Camacho:]

Thank you, Magdalena.

[Operator:]

Our next question today comes from [indiscernible]

[Unidentified Analyst:]

Hi, good morning. Just following a little bit your commercial revenue. So you have the mid-term chance to reach 30% of revenues from non-aeronautical revenues, right? And you mentioned that, we have this activity that should boost to commercial revenue going forward. But just trying to understand, you have all these expansions and renovations, but if I’m not mistaking 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 we bring the quarter to these 30%, it will happen from the second-half of 2018 onwards, or do you think that there are some relevant things happening in the short-term that could also help in the commercial revenue side?

[Emmanuel Camacho:]

Hi, Alejandro, [ph] thank you for your questions. Of course, this tenant on objective of the management to increase the participation of non-aeronautical revenues. The medium-term expectations and I would say more towards 2020/2021 is to have a bigger participation than the one we already have now, which is 25%, 26% non-aeronautical revenues. And this is not only by commercial activity, but also by diversification activities. So in the commercial side that we just mentioned. The expectation is to boost the aeronautical revenues by offering more spaces for advertising and for commercial general commercial office. And of course, what I did – what I mentioned before, the development of additional spaces 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. These type of revenues generate 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 two initiatives. And of course, as you mentioned, that should – the commercial activities should be increased once these projects are fully operational. So that that means, as you mentioned, 2018 – late 2018 and 2019.

[Unidentified Analyst:]

Okay, make sense. Do you have an example of your increase in non-aeronautical revenue. So from 25% to 30%, how much do you expect to get from diversification, and help us what percentage from commercial activities? Do you have this sort of breakdown?

[Emmanuel Camacho:]

Well, the – right now the diversification activities represents around 30% to 35% of the non-aeronautical revenues. And the intention is to increase the participation of the diversification 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 project. For example, if we had a new hotel with Ps. 100 million, that could be easily feasible in the non-aeronautical activities. And of course, that’s another objective that we have not to rechase the specific number, but to generate more revenues from the diversification activities and make this activity more and more important as we develop additional projects.

[Unidentified Analyst:]

Okay. Thank you very much for your color.

[Emmanuel Camacho:]

Thank you, Alejandro.

[Operator:]

Our next question today comes from Ramon Obeso with Scotia Bank.

[Ramon Obeso:]

Hi, Emmanuel, good morning. Just have a follow-up question on commercial revenues. What levels of non-aeronautical revenues per passenger should we expect after the expansions on new terminals have been completed?

[Emmanuel Camacho:]

Hi, Ramon, thank you for your question. This is a very good question and it’s also a difficult one, because we need to make sure a lot of things, not only the area available for the commercial activities, but also what we can develop these areas, I mean, the attractiveness of space is, 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 on 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 we can from the commercial activities as they are leader in space. So we will do our best to generate as much revenue, and what we have – those revenues as we can for this, and of course, this should reflect in this space.

[Ramon Obeso:]

Okay. Thank you.

[Emmanuel Camacho:]

Thank you.

[Operator:]

[Operator Instructions] Our next question today comes from Rogério Araújo with UBS.

[Rogério Araújo:]

Hello, good morning, Emmanuel. Thanks very much for the opportunity. So we saw OMA growing less than the peers in – that all these 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 OMAs’ airports has been growing less? So if it’s related to the airline is mixed, or to the mix of service destinations or some specific even of the commence of the region. And what do you expect it 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. Thanks. This is my first question. I can do the following next?

[Emmanuel Camacho:]

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

[Rogério Araújo:]

Okay. Thank you. And the second question is regarding this SAP implementation last year. Are you able to quantify how much was the one-off expenses in the second quarter of 2016 related to the SAP implementation? Thank you.

[Emmanuel Camacho:]

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’re experiencing the decreases in this line item. But I can – we will – we can check that and get back to you on that.

[Rogério Araújo:]

Thank you very much.

[Operator:]

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

[Emmanuel Camacho:]

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

[Operator:]

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