Grupo Aeroportuario del Centro Norte, S.A.B. de C.V.
Q4 2016 Earnings Call Transcript

Published: 28 Feb 2017

[Operator:]

Good day and welcome to the OMA Fourth Quarter 2016 Earnings Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Vicsaly Torres. Please go ahead.

[Vicsaly Torres:]

Good morning. Welcome to OMA’s fourth quarter 2016 earnings conference call. Joining me this morning are Emmanuel Camacho, and Laury Franco from the IR team, as well as our Chief Accounting Officer, Jesús Villagómez. I also want to introduce Paul Rivero, who joined us at the end of last year as the newest member of our IR team. This morning, I will review our operational performance and financial results; secondly, provide an update on the execution of Master Development Program; and finally, discuss our outlook for 2017. Then, we will be pleased to answer your questions. OMA delivered another strong performance in the fourth quarter and for the full year 2016. For the full year, we set records for passenger traffic, revenues, adjusted EBITDA, adjusted EBITDA margins and consolidated net income. We ended the year with more than Ps. 3,000 million in cash and our investment program for 2017 will be completely funded out of our cash balances and expected operating cash flow generation. Turning to our fourth quarter operational performance. We continued to demonstrate the strong momentum in all areas of the business. Passenger traffic grew 12.5% in the quarter to 4.9 million passengers, led by domestic traffic growth. 11 of our 15 airports grew passenger traffic. Passenger traffic has now grown for 23 quarters in a row. The growth reflects the expansion of the airlines, new route openings, addition of frequencies, and increasing load factors. During the quarter, 9 of the 14 main scheduled airlines in our airports increased passenger volumes with the largest contribution to growth from VivaAerobus, Volaris, Aeroméxico and TAR. 13 new routes opened in the quarter, nine domestic and four international. Our three domestic routes closed. For the full year 2016, we had 41 route openings and 12 closing for a net of 29 route openings. Of the 41 routes, 12 are tour [ph] from the Monterrey hub, Volaris opened 15 routes, TAR added 16, VivaAerobus 5 Aeroméxico 5 and Sunwing 2 routes. On the commercial front, we had 21 new initiatives opened in the quarter including 9 car rental establishment in five airports, 6 retailer stores and 3 restaurants. The commercial lease occupancy rate was 95.2%. The most important factors in our commercial results were the growth in revenues from retail stores, restaurants and car rentals, principally for the increasing traffic and higher participation revenues from some lines of business. Our diversification activities also delivered strong performance. The NH Collection Terminal 2 Hotel in Mexico City had a room occupancy rate of 79% while the average room rate increased almost 10%. The Monterrey airport Hilton Garden Inn had an occupancy rate of 72% and increased average room rate for 22%. Both hotels are well-positioned with room and occupancy rates well above the average for their respective markets. OMA Carga continued rapid growth, largely because of ground cargo services. The total volume of freight handled increased by 20%. At the Monterrey Industrial Park, two operating warehouses are generating revenues and another just completed construction. Turning to OMA’s fourth quarter financial results. OMA converted this positive operational development into a strong double-digit revenue growth. And because of our effective cost controls, we also recorded double-digit increases in operating income, adjusted EBITDA and net income, which rose 44%. Aeronautical revenues increased 31% because of higher passenger volumes and the rate increases that were implemented in the second quarter. The strong dollar also benefited international passenger charges. Aeronautical revenues per passenger reached Ps. 214, up 16%. In terms of compliance with the maximum rates, we ended the year on average at about 94% of the maximum. Non-aeronautical revenues also rose 17% and non-aeronautical revenues per passenger was Ps. 73, up 4%. Commercial revenues grew 19%. Retail stores, restaurants and car rentals made the largest contribution to growth. The growth reflects higher passenger volumes and increase participation revenue. In particular, we are required to by calculate [ph] but not yet invoice participation revenues in our results in accordance with IFRS. The fourth quarter 2016 commercial revenues include a provision of Ps. 11 million for participation, principally in the three lines item I mentioned. This was partially offset by a decrease in advertising because of reduced participation revenues. In addition, parking revenues grew more is slowly than traffic, because of the configuration of some of our parking areas that temporarily reduced capacity and higher competition, particularly at the Monterrey and Chihuahua airports. Diversification activities grew 22%, divided between growth in the hotel business and continued growth of our OMA Carga freight logistics services business. Complementary services grew 7%, primarily because of checked baggage screening services. I remind you that in 2016, we categorized the previous line item, other services to allocated amount on commercial, diversification and complementary activities. For comparative purposes, we reformulated to the 2015 numbers; this reformulation does not affect total revenues. The cost of airport services and G&A expense increased 17% in the quarter below the growing associated revenue. Payroll expense was basically flat. New contracts for security and cleaning services made the largest contributions to increased cost. In addition, other costs and expenses rose because of additional expenses related to the new SAP system installation and operations. Total operating cost and expenses increased 30% in the quarter. This was principally the result of the major maintenance provision and construction costs, both of which reflect the increased in concessioned assets under the new Master Development Programs and do not represent cash only. OMA’s fourth quarter adjusted EBITDA increased 35% to PS. 879 million. This marks 20 consecutive quarters of adjusted EBITDA growth. The adjusted EBITDA margin in the quarter increased 378 basis points to 62.2% and the EBITDA margin for the full year reached 63.8%. Operating income increased 19% to PS. 730 million. Financing income was a net positive PS. 42 million compared to an expense of PS. 93 million in the fourth quarter 2015. The variation was principally as a result of updating of the major maintenance provision which was recorded in interest income. Taxes were Ps. 203 million with an effective tax rate of 26%. As a result of these factors, consolidated net income rose 44% to PS. 567 million in the fourth quarter. Net income for the year reached Ps. 1,877. These are new records for consolidated net income both for the quarter and the full year. My second topic is our progress in carrying out our Master Development Program. Our investment expenditure for meeting our MDP commitments reached Ps. 220 million in the fourth quarter. For the year, our MDP investments totaled Ps. 434 million. By December 31st, we had contracted a 100% of the scheduled MDP projects for 2016. The most important MDP projects underway include construction of new passenger terminal building in Acapulco and Reyonsa airports; expansion and remodeling for the Chihuahua, San Luis Potosí, and Zihuatanejo terminal buildings. Commercial platform expansion in Monterrey and Culiacán and emergency services building expansion in Acapulco and San Luis Potosí. These are continuing multiyear projects. We also expect to begin work in 2017 on the expansion and remodeling work of Monterrey Terminal A and the Tampico terminal building. Finally, I want to update you on management’s perspective for 2017, given the uncertain economic and international environment that all Mexican companies face. In terms of the market, we may not repeat the double-digit growth seen in the last three years, but we expect to see Monterrey traffic grow this year. The air transport industry in Mexico has its own dynamic, which has enabled passenger traffic volumes to grow at approximately 5.2 times Mexican GDP growth over the past five years. Fleet expansion and renewal by the domestic airlines, the strong size competition, expansion of regional route networks and increased conversion of intercity bus passengers to air travels are all factors that have benefited passengers and the industry, and we expect them to continue even if the economy slows. As we reported, January traffic grew 14% and some of our 15 airports recorded increases. Two new routes were opened Zihuatanejo-Chicago and Zihuatanejo-Milwaukee. We are seeing that our airline clients are continuing to add new planes and increase the number of available seats. So, we are promoting new routes opportunities with the airlines for 2017. And we believe some of these are likely to be realized. For example, Aeroméxico will start flying the Monterrey-Seoul route in May, serving the growing Korean business community in land. At this same time, we can see an operating consolidation in terms of domestic routes, which will generate some closing in the coming months, even as passenger traffic continues to grow. As most of you know, the double-digit increase in retail gasoline prices in Mexico in January government subsidy has become a major political issue. However, jet fuel is regulated and airlines have long paid market price for fuel. As a result, the retail gasoline price does not affect airline costs and can even increase the relatively attractiveness of flying by air compared to long distance bust or car travel. OMA has also filed to increase tariffs in April, as we are below our maximum tariffs. We expect to increase our domestic and international passenger charges between 4% and 6%. We will also increase aeronautical services fees by the average of the Consumer and Producer Price Index Mexico in 2016 or about 6.5%. This could allow our aeronautical revenues to increase at the rate of traffic growth. Commercial revenue growth will be in line with passenger traffic. As commercial space is fully leased, a new space will be not become available until 2018 when some of the terminal construction projects are completed. Diversification revenues will also have a positive performance, largely because OMA Carga continues to expand. In opened up the new in-bond warehouse in the Monterrey airport which doubles the handling capacity and get the year off to a good start. Regarding the Industrial Park, we will see the positive effect this year from the full year operation of the first two warehouses leased in May and June 2016. Also, construction of third and fourth warehouses was complete in last month and we are in the leasing process. We started the year in a very strong financial position, operating activity generated cash of more than Ps. 2 billion in 2016 and our cash balance totaled more than Ps. 3 billion at the end of the last year. Our MDP investment commitment for 2017 is approximately Ps. 1.3 billion. We estimate the cash investment requirement for the year to be in the range of Ps. 1.7 billion to Ps. 2 billion depending on the rate of project execution. We expect to fund this investment entirely from cash generated by operation and use of cash balances. Cash will also go in part to pay dividend to be declared at the Annual Shareholders’ Meeting in April. This is our perspective as of today. We are in constant contact with our airlines clients and we will adjust our plans quickly if we see any material change in market conditions. As we get better visibility, we may able to provide more specific guidance. This concludes our prepared remarks. We will now be happy to answer your questions. Operator, please open the call to questions.

[Operator:]

Thank you. [Operator Instructions] And we’ll go first to Mauricio Martínez of GBM.

[Mauricio Martínez:]

Hi. Good morning, everyone, and thank you for taking my question. My first question is regarding the Terminal 2 hotel in Mexico City, as we saw slowdown revenue due to I think low occupancy rate which dropped like 500 basis points. What is the main reason for that drop and what level of occupancy rate are you expecting for 2017?

[Vicsaly Torres:]

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

[Mauricio Martínez:]

Okay. And my second question is on the cost-of-service front. As we did see an improvement on that line during the year, do you expect this performance to continue in 2017, or should we expect an increase? And if you can share with us your expectations for EBITDA margin?

[Vicsaly Torres:]

Okay. Cost of services increased in fourth quarter. Every year, it’s common having a higher cost of services in the fourth quarter because we finalize all our programs in terms maintenance, suppliers and everything. We put a lot of effort to control our cost, trying to increase our efficiency. I think it’s more controlled, [ph] these increases in cost of services in the fourth quarter.

[Mauricio Martínez:]

And any guidance for EBITDA margin, Vicsaly?

[Vicsaly Torres:]

For 2017, we don’t have specific guidance for that concept. We will try to increase our efficiency with -- because our target is at least maintain the margins. But if we can increase it, we will do it. We received in 2016 a big expansion in margins because we will have significant increases in traffic and significant increases in tariffs. But this year, the increases in tariffs will be more moderate and the traffic -- we don’t know specific number in terms of traffic. We are expecting increases in traffic, but we don’t know what is the number. So, if traffic continues to be strong with increases in tariffs, then we are going do it. If possible, we will have some expansion in margins.

[Operator:]

Next, we’ll go to Pablo Barroso of Credit Suisse.

[Pablo Barroso:]

Hello. Good morning. Congratulations on the results, Vicsaly. I have a couple of questions over here. There has been some, on the local news that ICA is starting the bankruptcy restructuring process. I just wanted to see what do you guys think, and if there is change in the control group performance; is there tag along right? That’s my first question. And my second question is regarding commercial revenues. We have been witnessing a really strong performance in Monterrey retail restaurants and car rentals as you mentioned before. Should we expect this along 2017, this growth trend or more consolidated trends? Thank you.

[Vicsaly Torres:]

Thank you, Pablo. Related to your first question about the strategic partners that is ICA basically. We don’t know a strategic plan. We know that the participation in services at the Aeroportuario [ph] that is our expectation further are guarantee loan. [Ph] So, that means when they declare Chapter 11 or the process, that participation is not included in the [indiscernible] by the suppliers. That is the only that I know and I think that is a question for ICA about their plans.

[Pablo Barroso:]

Could you just repeat the last past, that it’s not, I couldn’t hear you. Just a last part that it’s not -- I know it’s on the guarantee return to -- it has no guarantee return. It’s on guarantee to Fintech but could you repeat the last part?

[Vicsaly Torres:]

Yes. That means that that participation or ICA’s participation instead is not included in the all assets that are going to shared by the suppliers.

[Pablo Barroso:]

Okay.

[Vicsaly Torres:]

So, the participation is going be part of the payment for Fintech.

[Pablo Barroso:]

And regarding the commercial revenues?

[Vicsaly Torres:]

Yes. And the commercial revenues, as I mentioned in my remarks, in 2017, we are not expecting significant increases in commercial activities specifically. Because the expansion terminals will be completed in 2018. So in terms of commercial areas inside the terminals is because to increase more than the traffic increases. In terms of diversification activities, we have positive expectations in terms of OMA Carga because we’ve doubled the capacity this year for ground cargo activities. And also we will continue to commercialize the industrial [ph] part because we have two new warehouses built. So, we expect getting some contracts for those warehouses.

[Pablo Barroso:]

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

[Vicsaly Torres:]

In terms of commercial revenues, yes. Because on the Master Development Programs, 10% of the total spaces expanded could be commercial area.

[Operator:]

And up next from Scotiabank we got to Ramón Obeso.

[Ramón Obeso:]

Hi, Vicsaly and team. Thank you for the call. Two questions. The first one is could you give us some color on the Ps. 156 million in interest income related to be update of the maintenance provision? I think it’s a non-cash item, but I would like to confirm this with you and try to understand better rewards behind this. And my second question is regarding industrial park, could you share with us the price per square meter for the two facilities already in operations?

[Vicsaly Torres:]

About the increases in interest income, variation in fourth quarter seen is mainly due to an increase in the discount rate used to calculate the present value of the major maintenance provision. The update [ph] generated a decrease in the liability, which was also recorded as a benefit in the income statement in the interest income line item, basically that is the effect. And in terms of industrial park, as you know, we have two warehouses leased. The first warehouse is warehouse of 7,400 square meters. The contract that we have on that warehouse is, our contract for three years and four months. The total value of the contract for the three years and four months is for $1.2 million. And the second warehouse is almost 5,000 square meters warehouse. We have also a client there with the contract of three years and six months with a total value of $700,000. And last month, we finished the construction of two more warehouses. So, this year, we could have new revenues for these two new warehouses. The contracts that I’ve mentioned were started in May, the first one; and in June, the second one.

[Operator:]

[Operator Instructions] And we’ll go next to Ulises Argote from Santander.

[Ulises Argote:]

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

[Vicsaly Torres:]

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

[Ulises Argote:]

Yes. Just an update on the M&A you might be looking at.

[Vicsaly Torres:]

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

[Operator:]

Our next question comes from Augusto Ensiki from HSBC.

[Augusto Ensiki:]

Hi. Good morning. Thanks for questions. Just to clarify on that interest income term; that is one-time of entity adjustments, so that’s not related to debt or to cash investments, correct?

[Vicsaly Torres:]

Correct. It’s one-time effect. This year in 2016, interest rate increased in U.S. and in Mexico. We need to use a discount rate to a calculate the net present value based on the market condition interest rate. So, we increased the discount rate and that is the effect, that it’s only effect.

[Augusto Ensiki:]

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

[Vicsaly Torres:]

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

[Augusto Ensiki:]

Okay. But, so, there is no incentives in terms of -- for new routes?

[Vicsaly Torres:]

Yes. We have not a specific program, incentive program to motivate airlines to operate new routes in our airports and increase the volume operate in our airports. But basically this year as we are defining that incentive program.

[Augusto Ensiki:]

And sorry, just one last follow-up. You said you didn’t have any specific projects at this time, but is the team looking at the upcoming airport concessions in Brazil, I think the coming option I guess next month?

[Vicsaly Torres:]

Our team analyzed all the projects that they know. But in our perspective, Brazil is no -- in the best condition now. And I don’t think Brazil concessions are interest -- we interest in Brazil market right now.

[Operator:]

We’ll take our next question from [indiscernible]

[Unidentified Analyst:]

Hi. Congratulations on the results. I have two questions. Do you -- what about the plans to privatize more airports in Mexico? Are you interested in any of that; do you have any news related to that? How you [indiscernible] OMA to receive a strategy plan for Monterey’s industrial park or other initiatives that you have in mind. Thank you?

[Vicsaly Torres:]

At this moment, we don’t know or we don’t have new news about new Mexico -- new construction in Mexico. We are interested in any project in the region and mainly in Mexico when those airports or the process for those airports come up there, we are going to analyze them. But we don’t have no new news. And in terms of the diversification projects or new initiatives in our airports, we are making some studies, market studies in our airports to know what type of business we can develop in each one. We know that there is some potential in Chihuahua for another industrial park. We know that there is potential to develop hotels in Tampico and Ciudad Juarez airports. But at this moment, we don’t have -- we are in a preliminary basis analyzing the projects, trying to find a partner for those projects, but could be some potential projects in the medium term.

[Operator:]

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

[Vicsaly Torres:]

Thank you. On behalf of OMA, I want to thank all of you again for your participation in this call. Emmanuel, Paul, Laury and I are always available to answer your question. And we hope to see you soon at our offices in Monterrey. Thank you and have a good day.

[Operator:]

And this does conclude today’s presentation. Thank you all for your participation.