Grupo Aeroportuario del Centro Norte, S.A.B. de C.V.
Q2 2015 Earnings Call Transcript

Published: 23 Jul 2015

[Operator:]

Good day. And welcome to the OMA Second Quarter 2015 Earnings Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Jose Luis Guerrero, Chief Financial Officer. Please go ahead, sir.

[Jose Luis Guerrero:]

Thank you, Jamie. Good morning. Welcome to OMA’s second quarter 2015 earnings conference call. My name is Jose Luis Guerrero, OMA’s Chief Financial Officer. Joining me this morning is the IR team made up by Vicsaly Torres, Emmanuel Camacho and Manuel de Leon as well as our Chief Accounting Officer [indiscernible]. Before we being with OMA’s results, I would like to say that this will be my last conference call with you. I will be returning to OMA’s Corporate parent Empresas ICA to take a senior position there. Over the past six years, I have enjoyed opportunity to [indiscernible] and I appreciate the relationships that we have developed both business and personal. The Board has appointed Vicsaly Torres to be to OMA’s new CFO effective July 27. I am sure that most of you know her well. Vicsaly will provide strong leadership for the finance and administration area inside OMA and build relationships with our OMA’s external stakeholders including shareholders, bond holders, financial institutions and rating agencies. OMA had excellent result for the second quarter, our presentation this morning will be in three parts. Vicsaly will provide an operational overview, I will review our financial results and finally, we will discuss the upward revision in guidance that was included in the earnings report after that we will be pleased to answer your questions. Now I would like to turn the call over to Vicsaly Torres.

[Vicsaly Torres:]

Thank you, Jose Luis, and good morning to everyone. I am honored to have been selected to become CFO and I look forward to getting OMA’s relationship with the financial community. Turning to our operational performance, we continue to demonstrate a strong momentum in all areas of the business, passenger traffic grew 17% in the quarter to $4.2 million with roughly equal growth in domestic and international passengers, 12-month passenger traffic reached 15.9 million passengers a new record. And the second quarter marked the 17-quarter in a row of growth in passenger traffic. All 13 airports grew total passenger traffic. Passenger traffic volumes continue to increase as a result of the expansion of the airlines and the opening of new routes through our last year and in the first half of 2015. The number of flight operation rose 2% in the quarter to more than 85,000. For OMA the most important consequences of the route openings are; different regional route network and a substantial broadening of our international destination. Establishing Monterrey as a regional hub and increasing the connectivity of our airports as long as standing a strategic goal. Airlines at OMA 13 airports are clearly [sighting] [ph] 93 domestic routes and 53 international routes. Ten of the 16 main scheduled airlines that operate in our airports increase passenger volumes with the largest contribution to grow from Interjet, Volaris, and Grupo Aeroméxico. We have two new routes open in the quarter, one domestic and one international. In the second half of 2015, we expect to see a number of additional domestic routes principally from TAR and Volaris as well as additional frequencies, but on existing routes as airlines continue to expand their fleets. On the commercial front we opened 14 new advertising passenger service, hotel promotion, banking services, restaurant and retail establishment in the quarter. The commercial lease occupancy rate remains constant at 96% all but one of our commercial line items grew in the second quarter. The largest percentage increase came from passenger services, thanks to the last year of initiative such as interactive models OMA-TV and the multi-sensory hallway in Monterrey and others. Parking made the largest contribution in term of incremental revenues and as a result of the mix of additional passenger traffic and higher rates. Our diversification activities also had a strong quarter OMA Carga more than double its revenue as a result of initiatives to attract ground cargo business and the optimization of our choice. We also had a temporary increase in air freight because of a special tie-up with one of our main client to provide additional cargo handling services. Truck freight accounted for 25% of cargo revenues in the second quarter up from 18% in the prior year period. The NH Terminal 2 hotel average room rate increased by 8% year-over-year and the occupancy rate was 79%. The Monterrey Industrial Park is maturing. During the second quarter, we signed a letter of intent with our client to lease the first 5,000 square meter warehouse in the park and to build a 6000 square meter expansion for a total of 11,000 square meters. We also expect to start building a second warehouse later this year to continue with the promotion, marketing and development of this business. The Monterrey Airport Hilton Garden Inn Hotel will start its pre-operating stays by the end of this month with the training of workers and verification of all functional areas. We expect that the 134 room hotel will open in August. This finish the review of operating development. As a final note, I want to thank Jose Luis for all his contribution to OMA over the past six year including managing the company’s finance during the financial crisis and leading OMA’s equity and best capital market transaction. He has been a good colleague and a good friend to this time. Now, I will return the call to Jose Luis.

[Jose Luis Guerrero:]

Thank you, Vicsaly. I will now review our second quarter financial results. OMA was able to convert this profitable operational development into double-digit revenue growth and as a result of our effective cost control that as cost growth well below revenue growth OMA also recorded double-digit in operating income, adjusted EBITDA, net income and cash flow from operations. Aeronautical revenues increased 18%, principally because of the growth in passenger volumes and the exchange rate effect on international passenger charges. Aeronautical revenue reached Ps. 180 per passenger. Non-aeronautical revenues increased 30%. Commercial activity revenue grew 31%, the line items with the largest contributions to growth were parking, up 31%; advertising up 43%; restaurants up 30%; retail up 22%; car rental up 24% and passenger services up 175%. Advertising benefited from a payment of extending an existing contract for six month through the end of 2015 and passenger services was boosted by the new services as Vicsaly mentioned. Diversification activities grew 33% with the most significant growth coming from OMA Carga as a result of increases in tariffs and our initiatives in that area. Complimentary services increased 21% primarily as a result of checked baggage screening and lease of space. Non-aeronautical revenues was Ps. 0.53 per passenger up 12%. The cost of airport services and G&A expense increased only a third of that as revenues. The increase was 6% in the second quarter much of the increase reflects expenses related to minor works on the domestic development program and is included in other expenses. These expenses increases were partially offset by the decreases in utility payment and materials and supplies. Total operating cost and expenses increased 23% in the quarter, the principal increases were for the major maintenance provision considering the long-term view for serving the value of the infrastructure, construction cost which is non-cash accounting entry, concession taxes and the technical assistance fee. The technical assistance fee is 3.5% of EBITDA and 4% in late June, so the effects of the quarter’s results was minimum. As a result OMA’s second quarter adjusted EBITDA increased 29% to Ps. 590 million. The adjusted EBITDA margin was 58.2% up 375 basis points. Financing expense increased Ps. 61 million from Ps. 39 million in the second quarter 2014. This was a result of the bonds taken last year and an exchange loss. Taxes were Ps. 140 million, with an effective tax rate of 29.2%. OMA expects the full year effective tax rate to be approximately equal to the second quarter level. As a result, consolidated net income rose 29% to Ps. 277 million. Second quarter investment expenditures including Master Development program and the strategic investments were Ps. 195 million. Investment expenditures for the quarter included additional modernization and expansion work at the Mazatlán airport, the Zihuatanejo Terminal building expansion, the hotel and industrial parking Monterrey and the works at the new Acapulco Terminal building. We are starting some preliminary work for the new Master Development Plan are underway. We expect to communicate in terms of the new MDP by the end of this year. Our cash flow generation also continues to be strong. Cash flow from operating activities generated cash of Ps. 961 million in the first six months of 2015 then Ps. 1200 million capital reduction was paid to shareholders in May as a result cash balances came down from December 31 levels. As of June 30, total cash was Ps. 2032 million. In light of the growth in passenger traffic volumes during the first half of the year and taking into account the maturation of the new routes that operate in the group’s airports, OMA is updating its full year outlook for 2015. OMA estimates the total passenger traffic growth for 2015 will be between 10% and 12%, previously we estimated 6% to 8%. The growth in our multiple revenues is estimated to be between 13% and 15% up from the range of 7% to 9%. Non-aeronautical revenues are expected to increase between 18% and 20% up from the previous range of 13% to 16%. The adjusted EBITDA margin is expected to be between 53% and 58% an increase on the previous estimate of 53% to 55%. Master Development Plan investments are expected to be in the range of Ps. 500 million to Ps.700 million unchanged and thus the recognition of plan purchases made in five years. This amount is Ps. 131 million for 2015. In addition to strategic investments principally for diversification projects are expected to be Ps. 100 million and Ps. 200 million also unchanged. OMA is providing this outlook based on internal estimates a number of factors could have a significant effect on the estimates of traffic, revenue growth, adjusted EBITDA and cost. This includes changes in airline expansion plans, ticket prices another factors affecting traffic volumes. The evolution of commercial and diversification projects and economic conditions including oil price among others. OMA can provide no assurance that the company will achieve these results. This concludes our prepared remarks. We will now be happy to answer your question. Operator, please open the call for questions.

[Operator:]

[Operator Instructions] And we’ll take our first question comes from Stephen Trent with Citi.

[Kevin Kaznica:]

Hi, good morning. This is actually Kevin Kaznica stepping in for Stephen so good - great quarter and we just kind of had a couple more positive questions, so what is the status of the Hilton Garden Inn in Monterrey? I know you kind of - you touched on it in the call. And I guess looking in the future do you have any other plans to do other hotel projects?

[Vicsaly Torres:]

Kevin, I couldn’t hear your first question.

[Kevin Kaznica:]

I’m sorry. I just - do you have any update from - on the status of the Hilton Garden Inn Hotel in Monterrey and do you have any plans to do other hotel projects in the future?

[Vicsaly Torres:]

Sure, the Hilton Garden Inn Hotel will start pre-operating phase by the end of this month. And we expect that this hotel will open during August, in the middle of August, okay. And with respect to your second question about other plans to new hotel in all of our airports, we are analyzing different projects in some of our airports is interesting a hotel for example in Culiacán or in Acapulco, but at this moment we don’t have any specific project for specific airport just we are evaluating different projects to diversify.

[Kevin Kaznica:]

Okay. Great. And just to clarify when you say open by the middle of August for the Monterrey Garden Inn, is that going to fully operational?

[Vicsaly Torres:]

Yes.

[Kevin Kaznica:]

Okay. And then on just if could just squeeze one more question. Now considering that OMA just made a big capital reduction cap to shareholders that Jose Luis just mentioned, so we consider a redemption of regular dividend payouts next year?

[Vicsaly Torres:]

Yes, thank you. Yes, we are expecting to return to pay dividends going forward. And this and the amount of the dividend will depend on our cash position at that moment, the fiscal situation and the negotiation of the new Master Development Plan because we need to know of our obligation in terms of Master Development Plan.

[Kevin Kaznica:]

Okay. Okay. Very helpful. Thank you very much.

[Vicsaly Torres:]

You are welcome.

[Operator:]

And we will take our next question from Ravi Jain with HSBC.

[Ravi Jain:]

Hi, good morning. Thank you for the call. I had two quick questions. The first one is, we have been seeing some news about airlines trying to cut their international routes including Monterrey, Ciudad Juárez et cetera. And specifically [VEO Airbus] [ph] was the one which cut some routes. Do you expect the international competition to get fierce once - I mean especially next year once the open skies agreement comes to force and could it affect international traffic in that sense at your airports? And my second question is, could you give us an update of your expectation for the MDP negotiation, the last time we have been discussing that you still expected a positive tariff revision. I just wanted to see if this huge tariff traffic increase has changed that expectation right now?

[Vicsaly Torres:]

Sure. Thank you, Ravi, for your questions. With respect to international passenger traffic, the biggest factor is coming from Monterrey airport basically. And here we are seeing - in Monterrey we are seeing a direct investment is coming to the [Nova Lyon] [ph] stake. And this direct foreign investment is coming more from Asia, Koreans, actually the Korean car manufacturer that is KIA is coming to Nova Lyon. And their plan will be closer than the airport - the Monterrey airport. And if you know - you see the numbers in international passenger Monterrey is the second, basically is for that. We have had three opening in terms of international routes during this year. The effect is more coming towards international routes that we open last year - mostly in the second semester of last year. And with respect to your second question about our expectation in our Master Development Plan negotiation and maximum tariff. In terms of CapEx, we are estimating an increase between 40% and 50% in terms of the amount of the CapEx that the government is going to require during the next five year period. If you see current Master Development Plan in present Bali is around Ps. 3.5 billion. So our estimation is an increase of 40% or 50% increase based on this - in this amount. And in terms of maximum tariff with this level of CapEx, our expectation is to have an increasing in a single digit in the medium range.

[Ravi Jain:]

Thank you. That’s really helpful.

[Vicsaly Torres:]

You are welcome, Ravi.

[Operator:]

[Operator Instructions] And we will take our next question from Renata Stuhlberger with Goldman Sachs.

[Renata Stuhlberger:]

Hi, guys. Congratulations on the results. So my question is basically regarding the number of routes opened this quarter, so we saw actually a net closure of routes especially the net openings saw in 2Q 2014. So I was just wondering what your traffic expectations in 2016 based on this data?

[Vicsaly Torres:]

Thank you, Renata. Sure. In the second quarter, we only have three openings - two openings, one domestic and one international, I’m sorry. And we are working with airlines to try to open more routes in the second semester. But, at this moment we don’t have a specific agreement. So and it is difficult to continue to grow double digit - high double digit as the first semester because we have a very strong base, the comparison will be tough in the second semester of 2014 - 2015, I’m sorry. And going forward to 2016, we can agree something with the airlines to continue to grow more routes in the second semester, here we have a one-digit growth in high - in the high range.

[Renata Stuhlberger:]

One digit growth in high range you said?

[Vicsaly Torres:]

Yes. Between 6% and 8%. Yes, it’s our expectation, but at this moment we don’t have a guidance for 2016. But, it’s - we think it’s a good number in that range.

[Renata Stuhlberger:]

That’s fine. Okay. Thank you.

[Vicsaly Torres:]

You are welcome.

[Operator:]

Our next question comes from Ricardo Alves with Morgan Stanley.

[Ricardo Alves:]

Hi, everyone. I apologize, I just connected into the conference call, so if this has been asked I apologize for that. My question is regarding the new guidance, you didn’t indicate in our view a little some traffic in margin deceleration in the second half. I was wondering if you guys could comment a little bit on that the trend for the second half. And if July is already showing some signs of traffic deceleration.

[Vicsaly Torres:]

Thank you, Ricardo. Well, in terms of traffic as I mentioned before we are seeing a difficult comparison in the second half of 2015 - in the second half of the year because we have a very - we had a very strong second semester in 2014. That’s why we are seeing deceleration in the growth in terms of traffic. And in terms of margins, in - if you see our operating expenses, we have some reduction in some lines. And some of them are more for seasonality. For example, materials and supply, we are seeing a little bit increase in this line in the second semester. The same case of minor maintenance because every year this is different, the time of that we apply that maintenance in our airport. And also is opening - a reason is the opening of the hotel, if you remember, when we opened a NH Hotel in 2009, our EBITDA margin was just around 1% and 2%. So that we are seeing the same effect when we open the Hilton Garden in Monterey Airport.

[Ricardo Alves:]

Thank you. That’s helpful. And could you - would you mind commenting a little bit on the startup of the new hotel in Monterey, I believe it opened in July, right? How - can you comment a little bit of - sorry, go ahead.

[Vicsaly Torres:]

Yes. Sure. Sure, I’m sorry. Yes, we are studying the pre-operating phase in this hotel building in this month July. And we are expecting celebration in August - in the middle of August. And in terms of margins, when the hotel is mature and that period it takes around 6 and 8 months. We are expecting an EBITDA margin around 35% in that range.

[Ricardo Alves:]

That’s helpful. Thank you.

[Vicsaly Torres:]

You are welcome Ricardo.

[Operator:]

We will take our next question from Pablo Zaldivar with GBM.

[Pablo Zaldivar:]

Hello. Thank you for taking my question. Could you give us a little bit more insight on the industrial park operation? You mentioned that you already have someone who is willing to lease the space. But, could you give us a little bit more detail, I don’t know some numbers.

[Vicsaly Torres:]

Yes. In terms of - as I mentioned in the conference, we signed our letter of intent with one client to lease the warehouse that we built. And that we - was built in March this year. In terms of numbers, as we analyze this by the total land in terms of how many warehouse we can put in the entire park is around 10 warehouses in the - 10,000 square meters in that range for the whole warehouses. And we are expecting in terms of CapEx for all this project, we are expecting and based around Ps. 600 million in that range. It depends when we are going to invest in the following warehouses. Actually, we had an approval for the Board of Director to invest in the second warehouses later this year, so we are very happy for the demand in the park. So in terms of revenues, we could see revenues beginning in the first quarter of 2016.

[Pablo Zaldivar:]

Okay. Perfect break up.

[Vicsaly Torres:]

And in terms -

[Pablo Zaldivar:]

Sorry.

[Vicsaly Torres:]

You are welcome.

[Operator:]

And it appears there are no further questions today. So at this time, I will turn the conference back over to Vicsaly Torres for any additional or closing remarks.

[Vicsaly Torres:]

On behalf of OMA, I want to thank all of you again for your participation in this call. And Emmanuel, Manuel and I 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.

[Operator:]

Thank you for your participation. This does conclude today’s call.