Grupo Aeroportuario del Centro Norte, S.A.B. de C.V.
Q4 2015 Earnings Call Transcript

Published: 2 Mar 2016

[Operator:]

Good day and welcome to the OMA Fourth Quarter 2015 Earnings 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 fourth 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, Manuel de Leon and Laury Franc as well as our Chief Accounting Officer, [indiscernible]. OMA has excellent results in the fourth quarter, giving us record operating and financial performance for the full year 2015. 12-month passenger traffic reached a new record of 16.9 million passengers. We set annual record for full year adjusted EBITDA and adjusted EBITDA margin. Our cash flow generation is stronger than ever and net income reached Ps. 1,237 million, up 20% from 2014. I will our operational performance and financial results and then discuss the new Master Development Plan approved in December for the next 5-year period and provide our outlook for 2016. After that, we will be pleased to answer your questions. Turning to our fourth quarter operational performance, we continue to demonstrate a strong momentum in all areas of the business. Passenger traffic grew 11% in the quarter to Ps. 4.4 million. Domestic traffic rose 12% and international traffic increased 10%. 12 of our 13 airports grew their passenger traffic. The fourth quarter marks the 19th quarter in a row of growth in passenger traffic. Passenger traffic volumes continued to increase as a result of the expansion of the airlines, opening of new routes and increasing load factors. For OMA, the most important benefits of the route openings are a deeper regional route network and a substantial broadening of our international destinations. Establishing Monterrey as a regional hub and increasing the connectivity of all of our airports are longstanding and strategic goals. Airlines at OMA’s 13 airports are currently flying at a total of 111 domestic routes and 56 international routes. During the quarter, 12 of the 16 main scheduled airlines that operate in our airports increased passenger volumes, with the largest contribution to growth from Volaris, Interjet, VivaAerobus and TAR. We had 20 new routes opened in of the quarter, 16 domestic and 4 international and no routes were closed. For 2015 as a whole, we had 31 new routes signed up and only 17 closings. On the commercial front, we opened 21 new openings in the quarter related to passenger services, bank services, advertising, restaurant and retail. The commercial list of currency rate was 97%, 9 of our 11 commercial line items during the fourth quarter. Parking made the largest contribution to incremental revenues and grew as a result of the mix of the additional passenger traffic and optimization in our rates. Other important contributor were restaurants, retail and car rentals. The decrease in advertising revenues resulted from our decision to terminate our all advertising contracts during the quarter. We have signed an agreement with a new operator on their more favorable terms for OMA. Our diversification activities also had a strong performance. The 134-room Monterrey Airport Hilton Garden Inn Hotel completed its first full quarter of operations. The average occupancy rates reached 54%, with an average room rate of Ps. 1,685 per night. As a result, the Hilton Garden Inn Hotel generated Ps. 14 million in revenues, which was our business plan. The hotel is also off to a good start in the food and beverage department, including the rental of meeting room and conference space, one of the attractions for our hotel located inside the airport perimeter. The NH Terminal 2 Hotel also had an outstanding quarter, with increases in both average room rates and occupancy levels. Some of this was the result of the Formula One race in Mexico City in November. For the Monterrey Industrial Park in the fourth quarter and first part of 2016, we completed negotiations and signed the first two leasing contracts. Volaris will take the first already built warehouse plus a 2,400 square meters expansion that is currently under construction. The second lease will take a new 5,000 square meter warehouse that is also currently under construction. OMA Carga made the largest contribution to increase diversification revenue. It’s more than doubled revenues as a result of initiatives to attract ground cargo business and optimize tariff. Both truck freight and air cargo operations increased in the quarter. Turning to OMA’s, our fourth quarter financial results, OMA was able to convert this positive 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 25% principally because of the growth in passenger volumes and the exchange rate effect on international passenger charge. Aeronautical revenue reached Ps. 185 per passenger. Non-aeronautical revenues increased 32% and non-aeronautical revenues per passenger, was Ps. 76, up 19%. Commercial activity revenue grew 7%. The line items with the largest contribution to growth were parking, up 18%; restaurant, up 24%; retail, up 18%; car rental, up 17%; and passenger services, up 47%. These increases more than offset of the temporary reduction in advertising revenues from the change in the operator. Diversification activities grew 56%, mostly because of OMA Carga and the Hilton Garden Inn, which I already mentioned. Complimentary services grew 70%, primarily as a result of checked baggage and screening services. The cost of airport services and G&A expense increased 11% in the fourth quarter, less than half as fast as revenues. Much of the increase reflects higher water bills because of an increase in water consumption generated by higher passenger traffic volumes. Hotel costs and expenses increasing was generated principally by the opening of the Hilton Garden Inn. Concession tax and the technical assistance fee increasing are result of the strong financial results of the company. Total operating costs and expenses decreased 4% in the quarter. The principal factor was a credit to the major maintenance provision as a result of the definition of the new MDP. Excluding these, total operating costs and expenses increased 9% in the quarter. As a result of all these factors, OMA’s fourth quarter adjusted EBITDA increased 40% to Ps. 651 million. The adjusted EBITDA margin grew to 57.2%, up 531 basis points. Financing expenses decreased to Ps. 57 million from Ps. 88 million in the fourth quarter 2014. This was principally as a result of a credit in devaluation of decreasing value of the major maintenance provision and less exposure to U.S. dollar. Taxes were Ps. 156 million with an effective tax rate of 28%. As a result, consolidated net income rose 39% to Ps. 396 million. Four quarter investment expenditures were Ps. 196 million, including master development programs and strategic investments. Investment in the quarter included works for the new Acapulco terminal building, modernization and expansion work at the Mazatlán airport, Zihuatanejo terminal building expansion and the implementation of the SAP enterprise resource management system across the company. Our cash flow generation also continued to grow strong. Cash flow from operating activities generated cash of Ps. 2,064 million for the full year, up 29% as compared to 2014. Within our record results, one of the principal developments of the quarter was the approval of our master development programs and the maximum rates for the next 5 years through 2020. To continue to develop our airports in terms of efficiency, capacity expansion, modernization and maintenance in accordance with the highest national international operational standards, we have committed Ps. 4.4 billion of December 31, 2014 that will be distributed as follows; 40% will go to terminal expansion and remodeling, including expansion work in Monterrey, Acapulco, Chihuahua, Reynosa, San Luis Potosí and Zihuatanejo airports, 20% to major maintenance, 15% to security, safety and IT equipment, 10% to operational, infrastructure expansion including Monterrey, Culiacán, Durango airports and the remaining 50% will go to ICAO certification and other minor works. Our investment commitment represents an increase in growth terms of approximately 36% compared to the 2011, 2015 MDP. As a result of the master development plan negotiation, the maximum tariff was rise in all of our airports. Finally, OMA is pleased to provide our outlook for 2016. OMA estimates that total passenger traffic growth for 2016 will be between 6% and 8%. This reflects our prudent outlook based on the more difficult comps we would face in 2016 as well as the uncertain economic environment. Our traffic growth rate is roughly 2x to 3x the expected growth in Mexican GDP and assumes a consolidation by the airlines of their recent routes and fleet expansions, with its lower capacity growth than the last couple of years. The growth in aeronautical revenues is estimated to be between 22% and 25% and non-aeronautical revenues are expected to increase between 13% and 15%. The adjusted EBITDA margin is expected to be between 60% and 62%. In other words, we expect to keep EBITDA margins similar to the record levels achieved last year or to increase them somewhat, reflecting the positive operating leverage that we now have. The effective tax rate is expected to be between 27% and 30%. Master development plan investments are expected to be in the range of Ps. 1,500 million to Ps. 1,700 million, principally for increases in passenger terminal and aircraft platform capacity and acquisition of operating and security equipment. The most important projects for 2016 includes; Continued work on the new Acapulco terminal building, Beginning of construction of the new Reynosa terminal building, which we expect to finish in 2017, Expansion work in the terminal of Chihuahua airport, also expected to be finished in 2017, Revamping of terminal building in Zihuatanejo airport; Commercial platform expansion in Monterrey and Culiacán airport, And fire fighting and rescue building expansion in Acapulco and San Luis Potosí. In addition, ascertaining investments, principally for warehouses construction to continue developing the industrial park at Monterrey airport and other diversification projects are expected to be in the range of Ps. 150 million to Ps. 250 million. OMA is providing this outlook based on internal estimates. A number of factors will have a significant effect on these estimates. This includes changes in airline expansion plans, ticket price and other factors affecting traffic volumes, the evolution of commercial and diversification projects and economic condition, including oil prices, among others. OMA can provide no assurance that the company will achieve these results. This completes our prepared remarks. We will now be happy to answer your questions. Operator, please open the call to questions.

[Operator:]

Thank you. [Operator Instructions] We will take our first question from Pablo Zaldivar from GBM.

[Pablo Zaldivar:]

Hello, Vicsaly, good morning. Thank you for taking our questions. I would just like to go back to the expected CapEx in diversification projects, what are you expecting in terms of the warehouses to be built during the year, do you have an estimate of how many new warehouses or how is that Ps. 150 million to Ps. 250 million estimation split?

[Vicsaly Torres:]

Thank you, Pablo. Yes. Well, as I mentioned in the prepared remarks, we already signed two contracts to lease a warehouse. One warehouse is already built, but we have to do an expansion in this warehouse. And the second contract we need to build this warehouse. So this year, at least we will have one more warehouse and an expansion of the first warehouse that we already have built. But we continue developing and commercializing the park with our partners. So we are expecting to have at least one more warehouse in addition for the two contracts. This is in terms of the industrial park. Also, this year we have another investment, strategic investment related to the OMA Cargo Services. We will invest in a new warehouse for this business, specialized for ground cargo. So this is other investment that is included in this amount that I have mentioned.

[Pablo Zaldivar:]

Okay. Thank you. That’s helpful. And in terms of the warehouses that you have signed the agreements, I don’t know if you could give us a little bit more color on what is the expected revenue or profitability expected from those contracts in terms of square meters or per warehouse, I don’t know if you could just give us a little bit of color on how is – the revenue should work from those warehouses that you have already signed an agreement.

[Vicsaly Torres:]

Sure. Basically, one of the agreements that we signed is for 42 months. And the other, the second one is for 40 months. Basically, we are one of the first contract is around $1 million per year. Annually, these revenues – we are generating revenues annually. And it seems like the second one is similar. It’s a little bit more because the period is four months more than the first contract.

[Pablo Zaldivar:]

Okay. Thank you. And do you have on expected date to finish the warehouse that is under construction, I don’t know by the first half of the year or when are you expecting to finish that warehouse?

[Vicsaly Torres:]

Yes, four of them, we are expecting to receive revenues in May and June, so at the end of the first semester and the beginning of the second semester of the year.

[Pablo Zaldivar:]

Okay, thank you very much. That’s very helpful.

[Operator:]

We will take our next question from Alexandre Falcao with HSBC.

[Alexandre Falcao:]

Good morning. I have two questions. First, just wanted to – if you could explain how are you going to be able to expand EBITDA margins from the 58% level to 60%, 62% that you are guiding for 2016? That’s the first question. And the second one is on passengers, there is – or in revenues, non-aeronautical revenues, there has been a huge increase there. Just wanted to see if you can guide and walk us through what can be done from now on or we are reaching a point of exhaustion here or expect people to spend more in your airports? Thank you.

[Vicsaly Torres:]

Thank you, Alexandre. Answering your first question regarding the EBITDA margin expansion, as you know, we estimate that adjusted EBITDA margin can be in the range between 60% and 62% as you mentioned. This is because in this year, we have a significant event in revenues due to increases in tariffs as a result of the negotiation of the Master Development Plan. So basically, the cost structure in airports is classified fixed. So, almost 100% of these additional revenues is coming down to the margins. That is the reason that we are expecting an increase in our margins. And answering your second question about the non-aeronautical revenues increase, in this quarter, we saw a specific effect in non-aeronautical revenues. In 2015, we recorded cost recoveries, a reduction of cost of services. However, in previous years, our audited financial statements presented cost recovery as a non-aeronautical revenue, revenue in line items. To be consistent with the audited financials, our fourth quarter results present cost recovery for the entire year as additional non-aeronautical revenue in the other revenues line items. But at the same time, our cost of services got increased in the same amount. This change does not have effect on our results neither on our margins, but it’s important to say this because it’s a little bit changed in this fourth quarter versus the three quarters of 2015.

[Alexandre Falcao:]

Okay, perfect. And if I can just have a follow-up question on dividend distribution, just wanted to know, what are your plans on that specifically? And if you can use part of your non-airport business, if we start generating cash – then try to distribute from there? Thank you.

[Vicsaly Torres:]

Your question is related that if we can use the non-regulated business to pay more dividends or...

[Alexandre Falcao:]

Yes, yes. Just wanted to know if you have more plan, because you have a fiscal...

[Vicsaly Torres:]

Limitations.

[Alexandre Falcao:]

Limitations, is there any around it?

[Vicsaly Torres:]

Basically, we analyze as a whole, as an entire business, aeronautical and non-aeronautical as a consolidated figures. The decision on dividends is made by the Shareholders Meeting based on recommendation of Board of Directors and the management team. We are looking into the maximization of dividends based on OMA’s financial and tax situation. We estimate we could pay in 2016 a dividend similar or slightly higher than our last couple of reimbursements. Going forward, dividend payments will depend on the tax and the financial situation of the company although we estimate dividend amounts will be similar to recent years. And basically, because we have adding more business into the company, we have increased our efficiency and generate more cash flow.

[Alexandre Falcao:]

Okay, perfect. Thank you.

[Vicsaly Torres:]

You are welcome.

[Operator:]

We will take our next question from Pablo [indiscernible] with Credit Suisse.

[Unidentified Analyst:]

Hi, good morning Vicsaly, Emmanuel, Manuel and Laury. I have a couple of questions. My first question is regarding ICA, ICA has made a decision to sell all of its PB shares, what will be the process? Will you have to call our shareholders meeting in order to prove it or what will you follow?

[Vicsaly Torres:]

Thank you, Pablo. If ICA sells their position in these shares, they don’t need to do nothing. They sell their position into the market. If they decide to sell their participation in the strategic shareholder, our strategic shareholder, SETA, this operation must be approved by the Communication and Transportation Ministry.

[Unidentified Analyst:]

Okay, okay. Thank you, Vicsaly. And my other question is a follow-up on Pablo Zaldivar’s question, you mentioned that you have to make an additional investment on the warehouse you have already and new one, could you give us an estimate of CapEx from the additional and the new one, please?

[Vicsaly Torres:]

Yes. Just to give you an idea, warehouse of 10,000 square meters with prior investment around Ps. 50 million. If there is – in this case, the warehouse that we are going to build is for 5,000 square meters that is the warehouse that we already have a contract. It’s 5,000 square meters. So, the investment is around Ps. 25 million. And the additional warehouse that we are expecting to build to have a warehouse in itself to commercialize will be for 10,000 square meters. So, the investment is around Ps. 50 million for this new additional warehouse.

[Unidentified Analyst:]

Okay. Thank you, Vicsaly. And last question, on the warehouse that you are planning on expansion, because you are changing it to build-to-suit or something like that or what’s the reason you are expending it?

[Vicsaly Torres:]

Yes, our industrial type model is a build-to-suit model, but we know that there is a lot of demand for warehouses at this moment due to the – because the airport is very close to the new plant of Kia Motors. So, it’s important to have at least one warehouse in the stock. So, that’s why now we have two contracts. We are going to build the second warehouse and we are going to build the third warehouse to have one in stock for any client that wanted the warehouse in a very short-term.

[Unidentified Analyst:]

Okay. Thank you, Vicsaly. That was very helpful.

[Vicsaly Torres:]

You are welcome.

[Operator:]

The conference call ends at this point. Because of an equipment failure on the part of the call provider, OMA regrets any inconvenience and invites you to address any additional questions to the Investor Relations team.