Grupo Aeroportuario del Centro Norte, S.A.B. de C.V.
Q3 2015 Earnings Call Transcript

Published: 27 Oct 2015

[Operator:]

Good day and welcome to the OMA Third Quarter 2015 Earnings Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Vicsaly Torres, Chief Financial Officer. Please go ahead.

[Vicsaly Torres:]

Thank you. Good morning. Welcome to OMA’s third quarter 2015 earnings conference call. My name is Vicsaly Torres, OMA’s Chief Financial Officer. Joining me this morning is the IR team made up by Emmanuel Camacho and Manuel de Leon as well as our Chief Accounting Officer [Jesús Villagómez]. OMA had excellent result in the third quarter. We set a new record for 12 month passenger traffic. We set a new record for adjusted EBITDA margin and our cash flow generation is stronger than ever. I would review our operational performance and financial results, and then discuss the latest revision in guidance. After that, we will be pleased to answer your questions. Turning to our operational performance. We continued to demonstrate a strong momentum in all areas of the business. Passenger traffic grew 16% in the quarter to 4.6 million. Domestic traffic rose 15% and international traffic increased 23%. All 13 airports grew passenger traffic. 12 months passenger traffic reached 16 million passengers, a new record. And the third quarter marks the 18th quarter in a row of growth in passenger traffic. Passenger traffic volumes continue to increase our result of expansion of the airline and the opening of new routes last year and in the first nine months of 2015. For OMA the most important benefits of the route opening are our deeper regional route network and a substantial broadening of our international destinations. Establishing Monterrey as a regional hub and increasing the connectivity of our airports, our longstanding and strategic goals. Airlines at all 13 airports are currently flying 89 domestic routes and 29 international routes. 10 of the 16 scheduled airlines that operate in our airports increased passenger volumes, with the largest contribution to growth from Interjet, Volaris, VivaAerobus, and Grupo Aeromexico. We’ve had three new domestic routes open in the quarter, all by TAR; at the same time, five domestic routes and two international routes growth. On the commercial front, we opened 12 new advertising; passenger service, hotel promotions, banking services, restaurants, and retail establishment in the quarter. The commercial lease occupancy rate increased to 98%. Nine of our 11 commercial line items, during the third quarter, the largest percentage increase came from passenger services, up 59%. Thanks to the launch last year of initiatives such as interactive models OMA-TV and the multi-sensory hallway in Monterrey and on others. Parking made the largest contribution to incremental revenues, and grew as a result of the mix of additional passenger traffic and optimization in our rates. Our diversification activities also had a strong quarter, 134-room Monterrey Airport Hilton Garden Inn Hotel opened at the end of the August. In its first 35 days of operations, the hotel had an occupancy rate of 34% and an average room rate Ps. 1,551 per night. As a result, the Hilton Garden Inn Hotel generated Ps. 3 million in revenues in line with our business plan. The hotel is also up to our good starting extent of renting out near influence and comprehensive base, which is one of the attraction of our hotel located inside the airport parameters. We continue marketing the Monterrey Industrial Park with warehouse, and we have signed a letter of intent with our potential client to develop our built to suit second warehouse. The terms and conditions are being evaluated and now finale agreements have been reached. OMA Carga made the legit contribution to increase diversification in revenues. It more than double revenues as a result of initiatives to attract -- ramp cargo business and optimize tariffs. Truck freight accounted for 45% of cargo revenues in the third quarter, up from 33% in the prior year period. Turning to OMA’s third 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, OMA also recorded double-digit increases in operating income, adjusted EBITDA, net income and cash flow from operations. Aeronautical revenues increased 16%, principally because of growth in passenger volumes and the exchange rate effect on international passenger charges. Aeronautical revenue reached Ps. 175 per passenger. Non-aeronautical revenues increased 30% and non-aeronautical revenue was Ps. 61 per passenger, up 12%. Commercial activity revenues grew 26%, the line items with the largest contributions to grow, where parking up 27%; advertising up 29%; retail up 26%; restaurants up 25%; and car rental up 28%. Diversification activities grew to 37% mostly because of OMA Carga which I already mentioned. Complimentary services increased 27% primarily as a result of checked baggage screening and lease of space through airlines. We also added a new line item for services that we will launch at the end of the last year and that are know by their English name, CUSS and CUTE. CUSS stands for common use of service and our passenger checking cues that serve multiple airlines. CUTE stands for common use terminal equipment. These allow airlines to share terminals to access the [repository] systems. Right now CUSS and CUTE, are installed in Monterrey Terminal A and are used by Volaris, Interjet, American Airlines and United. The cost of airport services and G&A expense increased 6.6% in the third quarter, only one third of processed revenues. Much of the increase reflect expenses related to minor maintenance, as well as minor work under our master development programs, which are included in other expense. These expense increases were partially offset by the increases in utility payments and materials and supplies. Total operating cost and expenses increased 10% in the quarter, the principle increases were for the major maintenance provision considering the long term view for serving the value of the infrastructure and concession tax as a result of the increased EBITDA. The technical assistance decreased 5% as a result of the full effect of the reduction of fee under the amendment to the technical assistance agreement. As a result of all these factors, OMA’s third quarter adjusted EBITDA increased 23% to Ps. 673 million. The adjusted EBITDA margin reached a new record of 62.4%, 210 basis points. Financing expenses increased to Ps. 82 million from Ps. 68 million in third quarter of ‘14. This was principally as a result of the depreciation of the peso. Taxes were Ps. 153 million with an effective tax rate of 33%. The increase in the effective tax rate was due to higher revenues as well as a higher amortization of tax losses in airports. OMA expects the full year effective tax rate to be approximately 30%. As a result, company rated net income rose 13% to Ps 306 million. Third quarter investments expenditure were Ps. 154 million including master development programs and strategic investments. Investment in the quarter included modernization and expansion work at the Master Plan airport, the Zihuatanejo terminal and the building expansion, the hotel in Monterrey and work for the new Acapulco terminal building. The study and preliminary work for the new Master Development Plan are continuing. We and DGAC have finished visiting and evaluating current infrastructure in each of our airport in order to refine the new Master Development Plan for the next five year period. We expect to communicate the terms of the new MDP by the end of the year. Our cash flow generation also continued to strong. Cash flow from operating activities generated cash of Ps. 1,512 million in the first nine months of 2015, up 29% year-over-year. In light of the growth in passenger traffic volumes and taking account the maturation of the new routes that operate in the group’s airports, OMA is updating our full year outlook for 2015. OMA estimates the total passenger traffic growth for 2015 will be between 13% and 15%, up from 10% to 12%. The growth in aeronautical revenues is estimated to be between 16% and 18%, previously we estimated 13% to 15%. Non-aeronautical revenues are expected to increase between 23% and 26% compared to the previous estimate of 18% to 20%. The Adjusted EBITDA margin is expected to be between 57% and 60%, up from the previous estimate of 56% to 58%. Our CapEx estimates are unchanged. MDP’s investments are expected to be Ps. 500 million to Ps. 700 million. The strategic investments, principally for diversification projects and new business opportunities are expected to be in the range of Ps. 100 million to 200 million. OMA is providing this outlook based on internal estimates. A number of factors could have a significant effect on this estimate. These include changes in airlines expansion plans, ticket prices and other factors affecting traffic volumes, the evolution of commercial and diversification projects, and economic conditions including oil prices, 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 questions. Operator, please open the call for questions.

[Operator:]

Thank you. [Operator Instructions]. Our first question comes from Marco Montañez with Vector.

[Marco Montañez:]

Hi. Good morning Vicsaly and congratulations on the results and thank you for taking the question. Well you already mentioned something about the industrial park at the Monterrey airport. But could you give us an update about the contracts that you have signed until now if there is any, and any information about the potential tenants or sectors interested to sell there? And finally, when do you expect to generate first revenues coming from this project? Thank you.

[Vicsaly Torres:]

Thank you Marco. Good morning. Well about the industrial park, we already have the first warehouse and we are trying to commercialize this warehouse. We have some clients interested in this warehouse but at this moment we don’t have a contract with some clients. But also we have now Letter of Intent for other client but this client is interested in [build this] warehouse. So if we signed a contract and we -- because we have already there [indiscernible] conditions, periods, everything. And there’s special need of the clients to build the warehouse. So if we sign a contract could be possible that we are going to invest in that second warehouse, but this warehouse is a business [ph] warehouse. When we are going to expecting get revenues for Industrial Park? We are at the tension [ph] is to have revenues in next year, in the first quarter of next year.

[Marco Montañez:]

Okay, thank you so much Vicsaly.

[Vicsaly Torres:]

You’re welcome Marco.

[Operator:]

Our next question comes from Pablo Zaldivar with GBM.

[Pablo Zaldivar:]

I just have a couple of question, and the first one will be in regard with the traffic increases, we have been witnessing throughout the year. We have been seeing strong growth. What are your expectations in terms of already seats available for the next year from airlines and the trend that you’re expecting in general for the next quarter and the next year?

[Vicsaly Torres:]

Thank you, Pablo. Sure. Let me give you some ideas in terms of traffic. Some positive for us is that all of our airports it’s growing in traffic, mainly in domestic traffic. But also in terms of international traffic, we are having very good results, mainly in Monterrey that is either in our airport. This effort is growing 30% in international passengers. And this is a very-very good sign for us in terms of what is happening in next year. In terms of routes, this year has not been very good year in terms of opening routes. We are having some closing. This is a situation that is come on, because last year we have a very strong year in terms of opening. So in this year, we are seeing a consolidation of the routes. But in terms of what is our expectation for the next year in terms of routes, or in terms -- currently in this year, we are expecting to close the year with a positive number in terms of opening routes between 10 and 15 routes near routes. We are expecting good fourth quarter for this year, and we are working with the airlines to try to have more openings. In the quarter, we have three new routes from TAR, the regional airlines, that has started operation last year; obviously within our routes from Durango to Puerto Vallarta, Mazatlán to Guadalajara, Mazatlan to La Paz. And also as we mentioned in the report I mean in the call, we also have some cancellations in, as I mentioned, the cancellation is for the consolidation of the risk. Going forward for next year, we are expecting mid or high single digit growth. We are working a lot with the airlines to try to convince them to open new routes in our airports. We are waiting for a day which is more planes, so we are trying to attract those planes into our airports.

[Operator:]

[Operator Instructions] We’ll take our next question from Stephen Trent with Citi.

[Kevin Kaznica:]

Good morning, Vicsaly, and thank you for taking questions. This is actually Kevin Kaznica, stepping in for Steve. And I guess coming back to your comment on your MDP CapEx guidance. Do you have any kind of updates on anything else regarding the MDP review? I know you said you guys would tell us more information maybe by the end of the year. But I think earlier, you’ve mentioned higher CapEx and higher tariffs in prior earnings calls. But it seems like your view has changed a little bit. Would that be accurate?

[Vicsaly Torres:]

Our expectation in terms of investment in terms of market development plan, as I mentioned in previous calls, we are expecting increase in the month of the investment we are expecting between 30% and 40% increase in the amount. In present value the current master development plan is Ps. 3.5 billion so we are expecting for the new master development plan around Ps. 4 billion and Ps. 4.5 billion in total for the five year period. And in terms of tariffs, with this amount investment, our expectation is having to get an increase in single mid -- single-digit mid range between 4% and 7% increase. 7% would be a very, very positive result, a more conservative or more probable is a 4% increase. But at the end of the year, we are going to release the results, a new Master Development Plan in the result in terms of tariffs.

[Kevin Kaznica:]

Okay, great, great, because I was actually confusing with the MDP investments this year and then what we would be looking for the next plan. Sorry about that. But do you have any thoughts on 2016 traffic growth expectations?

[Vicsaly Torres:]

Yes, we have not released our new guidance for 2016 but as I mentioned to Pablo -- to answer Pablo’s question, and our expectation is that the passenger traffic to grow in medium range or high range single-digit.

[Kevin Kaznica:]

Okay, okay. Very helpful. Great. And I guess my last question would be, how do you view the sustainability of the growth of carriers such as Interjet and TAR? I know you’ve mentioned TAR earlier. I think it’s the last question.

[Vicsaly Torres:]

You’re questioning how is sustainable this growth in the coming year?

[Kevin Kaznica:]

Yes, how sustainable do you see there growth?

[Vicsaly Torres:]

Okay, well. If there -- TAR is a new airline, it’s a regional airline, it’s expanding in our airports. They have expansion plans in terms of airplanes. They have airplanes, it’s Embraer 145, it’s 56 approximately and they are opening a route, a intraregional route that other airlines are not flying. So that’s very important for us because they are developing a new traffic, regional traffic. And we are negotiating to structure routes openings with them. We are very close with them to working to try to structure their capacity expansion in the following years. With Interjet, Interjet continues to strengthen in our airports where it has been more moderate as compared to Volaris, Aeroméxico and TAR. But we are very positive with their airlines. With the expansion in terms of aircraft, they are expecting to receive a new airline. We know that [indiscernible] rules accelerated their planned intent to replace their fleets. They are thinking to finish this process next year. So the aircraft that they are going to receive in the following year, so to present ‘17 to -- and going forward is to have more capacity. So we are very positive in terms of the traffic growth. It’s probably or it’s sustainability at least one or two years and if the Mexican economy continues to be healthy, if the economy is growing less or a high digit but if this is growing it’s sustainable that the traffic, passenger traffic growth is sustainable.

[Kevin Kaznica:]

Okay, great. Thank you very much for the color.

[Operator:]

[Operator Instructions]. We have a question from Ricardo Alves with Morgan Stanley.

[Ricardo Alves:]

Hi Vicsaly, thanks for the call. Two quick questions. The first one on your non-aeronautical revenues in Monterrey was really strong partially because of the traffic obviously but we did see a big increase again after the second quarter and the third quarter again a big move in terms of non-aero in Monterrey on a per passenger basis. So basically what you are seeing here in Monterrey that is driving is non-aero per passenger growth, it was almost 20% growth this quarter if I am not mistaken on the per passenger basis. And so what’s driving that, what you guys are doing in Monterrey to drive that and if that should continue in the next couple of quarters? Second question very quickly on the new hotel in Monterrey, the average rate of I believe Ps. 1,600 per room. It seems a little bit higher than what we expected. So I was just wondering what’s going on there in, if there is a number that we can use going forward? Thank you.

[Vicsaly Torres:]

Thank you Ricardo for your questions. Non-aeronautical revenues, mainly in Monterrey, basically in Monterrey, we are having a high increase in terms of traffic and that is the main reason for the increase in non-aeronautical revenues. More sales for our stores and restaurants mean more participation for us in terms -- for our commercial space. Also the new hotel in Monterrey is having a very good result. This hotel is starting operations at very-very high, I don’t know, it’s like was a very-very good point. We are attending passengers for example from -- that is driving to Japan, the route to Japan is in the three again basically. So, passengers got to out of sales as leap [ph], some ours and then it takes with their flight. So, we are having a very good success in the hotel. OMA Carga also is having a very good increase, so very high increases in revenues. We are attracting more cargo, ground cargo. We also have some presence in air cargo but mainly the increases that are as a result for the ground cargo. So we are putting our effort in this business, in this line, to expand their operations. We want to expand the capacity of this business to get more or to have the ability to receive more cargo. As a result, not only commercial revenues are enhancing this indicator but also diversification and complementary activities in Monterrey basically.

[Ricardo Alves:]

Just a follow up on the first one Vicsaly, sorry to interrupt you, do you more or less the terminal capacity utilization at Monterrey currently?

[Vicsaly Torres:]

We have three terminals in Monterrey, Terminal A, its capacity, the maximum capacity is 6 million passenger capacity and it’s currently at 50% capacity. The Terminal B is a terminal where aeronautical investors are operating and this terminal capacity is -- maximum capacity is 2 million, 2.5 million passengers and is operating at 60% of its capacity. And Terminal C its capacity is 2 million passengers and it’s almost currently -- it’s at 100% current.

[Ricardo Alves:]

And then the last one on the average room rate for the new hotel?

[Vicsaly Torres:]

The hotel, as I mentioned before we started with very successful in terms of occupancy. The occupancy rating average is around 35% and this is in line with our business line. Our expectation is that these hotels will reach occupancy rate of around 60%, is the average of the parameter of the hotel inside of the parameter of the airport. So, our expectation in terms of occupancy rate is that this call increase thereby narrows to reach 66%.

[Ricardo Alves:]

So the average room rate for the third quarter is a reasonable assumption for the next couple of quarters, or maybe reasonable to assume a slowdown in the average room rate?

[Vicsaly Torres:]

Well, our objective our goal is to increase. But we think that in this quarter was a very high average room rate because in our expectation was around Ps. 1,200. But if the hotel continue to be successful in terms of occupancy rate and if the average room rate in the quarter throughout the other hotels in the quarter, we could have a similar average room rate that in the third quarter.

[Operator:]

We’ll take our next question from Francisco Suarez with Scotiabank.

[Francisco Suarez:]

Hi Vicsaly, thank you for the call. Congrats on the results, and another question on the industry trends if I may? The overall -- do you have an idea of what might be the average load factor that the tariffs are having in your airport network? And secondly, any expectations of what may happen if the bilateral agreement goes through within the U.S. and Mexico, particularly in international traffic?

[Vicsaly Torres:]

Thank you Francisco. Okay. Regarding the load factor, I don’t know the specific load factor for each routes and for each airlines but we know that this load factor increased our load in the following -- in the current year and the reason of how we know that because in terms of operation they increased what is flat, the number is flat of operation. And in terms of passenger we have increased 50% in passenger. So the reason is high load factors.

[Francisco Suarez:]

Got it. And.

[Vicsaly Torres:]

And.

[Francisco Suarez:]

And what, okay. Sorry to interrupt you.

[Vicsaly Torres:]

I am going to the second question …

[Francisco Suarez:]

Yes.

[Vicsaly Torres:]

… if you want to …

[Francisco Suarez:]

Yes, yes.

[Vicsaly Torres:]

… say something, I will stop here?

[Francisco Suarez:]

No, no, no.

[Vicsaly Torres:]

Okay.

[Francisco Suarez:]

Thank you. Yes, yes, yes.

[Vicsaly Torres:]

Okay. And in terms of bilateral agreement, we know the negotiation was suspended to next year. And we are expecting the date for that because for us will be a very, very good or very positive for us, for airport because we would have more clients …

[Francisco Suarez:]

Yes.

[Vicsaly Torres:]

… more capacity in the local network. But at the same time, we think that these are risks for the Mexican airlines because they will have more competency and a very aggressive competency.

[Francisco Suarez:]

Yes, okay. But you don’t expect any disruption from -- in traffic and actually it could actually positive for the overall passenger traffic trends, is it? That would be perhaps.

[Vicsaly Torres:]

Yes, it is difficult to measure the impact but we think it will be a positive for us.

[Francisco Suarez:]

Okay. Thank you.

[Vicsaly Torres:]

To open this kind.

[Francisco Suarez:]

I am sorry and lastly, last question if I may? We saw a major reduction in the overall cost per workload and it was -- of course it has to do a lot with how the utilities are going down in Mexico but also in terms of -- it actually does well, very well, how much you are controlling your costs. So do you think that the current trends are sustainable, I mean in other words, the margins that we are seeing at this moment are sustainable in your view?

[Vicsaly Torres:]

Well, yes we are having a very strong cost control because our goal is to concrete margins. We are adding some business, some commercial or [indiscernible] that have a margin that is lower than the airport margin. So we are putting a lot of effort to control cost to try that our margin increase or at least don’t decrease. Going forward, we think that we can maintain our current levels, margin levels between 59%, 58% to 60% EBITDA margin.

[Francisco Suarez:]

Perfect. Thank you very much. Congrats again.

[Vicsaly Torres:]

You are welcome Francisco.

[Operator:]

We will take our next question from Patrick Stockdale with Standard & Poor’s.

[Patrick Stockdale:]

Hello Vicsaly. First and foremost, congratulations on your third quarter results. I only had a simple question regarding the CUSS and CUTE complementary activity and I just wanted to know if you could provide a little bit more insight regarding this?

[Vicsaly Torres:]

Yes, this is a new service that is CUSS and CUTE, it’s for to help airlines and to help passengers for the checking and for the airlines to aboard the planes, to accelerate the boarding process to the planes. This is a new services that we implemented in Terminal A in Monterrey. Basically this kind of technology helps us to maximize the space in our terminals because these add a small capacity because we don’t need a tech team in front -- front desk, that require more space. These are models or some like ATM for the check in for the passengers. And in the board gates, in the gates that the other service that use the airlines. And they don’t need special software to aboard or to do the boarding process for the passengers. They can use this software that you can install in the position, in the gate, and they can use and they can get all the reports that they need and try to accelerate the boarding process in the gates. They can reduce the time in the position.

[Patrick Stockdale:]

Okay, thank you. I appreciate it.

[Vicsaly Torres:]

You’re welcome.

[Operator:]

We’ll take our next question from Lucas Spiro with Goldman Sachs.

[Unidentified Analyst:]

This is actually [Marshall Travis] Goldman Sachs. Thanks for the call. Just two quick questions on the results, on the specific points on the results; just wanted to understand like you mentioned in your press release the conversion of 9 million shares for one of your controllers. I just wanted, if possible, if you could give us more color there? And if this is in anyhow connected to the technical assistance fee renegotiation that took place that was effective since June ’14, and just also if you could give some color on the tax rate. Tax increased a little bit. The tax rate when compared to last year this is related to less deferred tax that OMA has at this moment? Thank you.

[Vicsaly Torres:]

Your first question, the conversion is not related to the technical assistance agreement. The double shares that were converted were converted at the initiative of Aéroports de Paris Management that is part of our partner. And 9 million 34% that will shared well converted to be shared, which represent 2.3% of OMA’s equity capital. ADPM has advised OMA that they do not have any near term intention of selling shares. In fact, the converted shares are subject to one year lockup. However, they do want to be in a position in the future to realize the valuing a portion of the investment based on market conditions. The conversion now takes care of time consuming prior condition to any event or shared sale. This is that we can say about this conversion basically that the position of our expected finance doesn’t change. They maintain the 16.6% position in OMA but the only change was inside the position. Now there are less double the shares than before. And in terms of the tax rate, we have an increase in the effective tax rate. It’s due to higher net income -- higher revenues, higher net income and also in our airports, we are amortizing back than we expected at the beginning of the year. We are amortizing the tax losses in our airports as fastest so that’s why the fare rates, assets decreased and increased our effective tax rate.

[Operator:]

We have no further questions at this time. I’d like to turn the conference back 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. Emanuel 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:]

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