Grupo Aeroportuario del Centro Norte (OMAB) Q1 2016 Results - Earnings Call Transcript

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Grupo Aeroportuario del Centro Norte S.A.B. de C.V. (NASDAQ:OMAB)

Q1 2016 Earnings Conference Call

April 26, 2016 11:00 AM ET

Executives

Vicsaly Torres - CFO

Analysts

Bernardo Velez - GBM

Ravi Jain - HSBC

Magdalena Santana - Citigroup

Pedro Balcao - Santander

Steven Iveson - Explora Investments

Operator

Good day and welcome to the OMA First Quarter 2016 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 first quarter 2016 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 Franco, as well as our Chief Accounting Officer, Jesús Villagómez.

OMA had another strong performance in the first quarter, continuing the strong growth on profitability path we have been on for the past five years. I will quickly review our operational performance and financial results and then we will be pleased to answer your questions.

Turning to our first quarter operational performance, we continue to demonstrate the strong momentum in all areas of the business. Passenger traffic grew 10% in the quarter to MXN4.2 million. Domestic traffic rose 12% and international traffic increased 1%. 11 of our 13 airports grew their passenger traffic. The first quarter marks the 20th quarter in a row of growth in passenger traffic. Passenger traffic volumes continue to increase as result of the expansion of the airlines, opening of new routes and increasing load factors. During the quarter, 11 of the 16 main schedule airlines that operate in our airports increased passenger volumes with the largest contribution to growth from Volaris, VivaAerobus, TAR and Interjet.

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 as longer standing and strategic goals. We have five new routes openings in the quarter, four domestic and one international, while two domestic and three international routes closed. So while we had zero net route openings in the quarter, we continue to benefit from the large number of new routes in 2016.

On the commercial front, we have five new openings in the quarter, including a VIP lounge in Culiacan, a retailer in Acapulco and advertising initiatives in Monterrey. The commercial lease occupancy rate was 97%. The most important factor in our commercial result was the growth in advertising revenues as services at the beginning of the contract with a new advertisement services provider. Parking, retail and restaurants also contributed at our commercial revenue growth.

Our diversification activities also had a strong performance. The Monterrey airport Hilton Garden Inn hotel made the biggest contribution to incremental revenues, generating MXN19 million in the quarter. The occupancy rate reached 73% and the average room rate was MXN1,782 per night in its second of operations. The NH Terminal 2 Hotel in OMA Carga also had a strong quarter. At the Monterrey Industrial Park, construction work on the recent warehouses continues, and both are on schedule for going into services in the second half of 2016.

Turning to OMA's first quarter financial results, OMA was able to compare this positive operational development into double-digit revenues growth and as a result of our effective cost control, OMA also recorded double-digit increases in operating income, adjusted EBITDA and net income. Aeronautical revenues increased 20%, principally because of the growth in passenger volumes and aircraft operations. Aeronautical revenues reached MXN194 per passenger, up 9%. The increase in the first quarter does not include the effect of the rate increases authorized by the city last year. The tariff increases will be implemented during the second quarter and later in 2016.

Non-aeronautical revenues also increased 20% and non-aeronautical revenues per passenger was, MXN71, up 9%. Commercial activities revenue grew 8%, the line items with the largest contribution to growth were, advertising, up 44%, parking, up 6%, and retail, up 7%. Diversification activities grew 47%, mostly because of the Hilton Garden Inn. Complementary services grew 16%, primarily as a result of checked baggage screening services. The cost of airport services and G&A expenses decreased 4.2% in the first quarter. This was principally because of a reduction in minor maintenance compared to 1Q15.

In addition, it should be noted that payroll expenses decreased 1.4%, reflecting our continuing initiatives to control costs and expenses. Hotel costs and expenses increased principally because of the opening of the Hilton Garden Inn. Concession tax and the technical assistance fee increases were a result of the strong financial results of the Company. Total operating cost and expenses decreased 10% in the quarter. The principal factor was the low level of construction expense in the quarter, as we are only now just ramping up the capital spending for the new Master Development Plan or MDP.

Excluding the construction cost, all other operating cost and expenses increased just 5%. As a result of all these factors, OMA's first quarter adjusted EBITDA increased 32% to MXN705 million. The adjusted EBITDA margin in first quarter 2016 increased 572 basis points to a new record of 63.8%. The first quarter marks 19 consecutive quarters of adjusted EBITDA growth. Over the same time frame, our revenues performance and focus on cost control have enabled OMA to expand adjusted EBITDA margins from a four-quarter moving average of 40% to 60%.

Financing expenses decreased to MXN70 million from MXN88 million in first quarter 2015. This was principally as a result of lower change losses. Taxes were MXN150 million with an effective tax rate of 29%. As a result, consolidated net income rose 45% to MXN374 million. First quarter investment expenditure were MXN69 million, principally for strategic investment in constructing the warehouses in the Industrial Park in Monterrey. Since we are at the very beginning of the new MDP investment cycle, investment under the MDP were only MXN26 million during Q1. We expect that the pace of CapEx will pick up very significantly over the coming quarters.

As I mentioned the last quarter, the most important MDP project for 2016 include, continued work on the new Acapulco Terminal building, including a start of major construction, 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 the Monterrey and Culiacan airport and firefighters building expansion in the Acapulco and San Luis Potosi airports.

The investments of this year are expected to be funded through source generated by operations and the cash balance. Our cash flow generation also continue to be strong although it was below the level of 1Q 2015, cash flow from operating activities generated cash of MXN337 million in the third quarter compared to MXN501 million in the first quarter of 2015. The reduction was principally because of a higher level of accounts receivables, higher recoverable taxes and a lower level of account payables. Account receivables increased, mainly as a result of the transition to new SAP platform and the billing processes were in the stabilization period and that's attributable to our clients.

This concludes our prepared remarks. We will now be happy to answer your questions. Operator, please open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Bernardo Velez with GBM.

Bernardo Velez

I was wondering how fast have you been implementing the new tariffs and what is the completion rate as a percentage of the new maximum tariffs during the quarter and what should we expect in the next few quarters?

Vicsaly Torres

During April, we increased airport services fees based on the average of Mexican producer and consumer price indices. And during May, we will address passenger charges. This is our plan in terms of how we are going to increase our specific I don't know how to call, tariff. Our expectation this year is that it's probably, we don't reach 100% of our maximum tariff this year but our goal is to reach that 99.9% of our maximum tariff from the second year of the period to the five year of the period and I think your second question is why increase the, I don't know how to call, revenues, a lot this quarter. And basically the difference is that in the first quarter of 2015, we did a provision to give incentive to airlines to promote the traffic in our airports for MXN50 million. So that is the difference.

Bernardo Velez

Thank you. I was wondering if you could give us a bit more color in probably one offs you may have had during the quarter, and if not, could you give us some light on what happened to minor maintenance?

Vicsaly Torres

About major or minor maintenance?

Bernardo Velez

Minor maintenance, yes.

Vicsaly Torres

Minor? Okay. This quarter, as I mentioned in my speech, in the first quarter of the first year of the period, we prepare all the effective projects for the old price of the new Master Development Plan. And that include minor maintenance. During the first quarter, we prepared all the plans and the amount that is lower in this first quarter is because we are planning the minor maintenance that we are going to do during the year. And you will see during the rest of the year higher amounts of minor maintenance, basically for the seasonality. We also had a one off in advertising that includes payments from our former and our current services provider, although we also had higher increases in the year as compared to last year that is in case of the advertising revenues.

Bernardo Velez

And if I can just squeeze one more in, I was wondering if you could share your expectations regarding the new terminal in Acapulco and especially in terms of enhanced revenues, enhanced commercial revenues and more an efficient cost base?

Vicsaly Torres

First place of this former building has been demolished and they expect that the project is being developed in order to launch the bidding process. The independent engineer has been selected we respect to start the project during the coming months. And in terms of commercial revenues, only I can say that 10% of the total is base of the building, its commercial area. But the commercial team is working and together with the Master Development Plan to try to put the commercial areas between the floors of the passengers. This increases the commercial revenues per passengers and this 10% of the total space of the terminal building is because only the governments permit this percentage in commercial areas when it's an investment included in the Master Development Plan. And in terms of cost efficiency, well this building would be very efficiency, basically, we are building a new terminal in Acapulco for this reason and for safety reasons in terms of that then , all building, the current building is building below the sea level and also it's a very, very old building and need a lot of major maintenance. So building a new terminal in the medium term, we are expecting cost efficiency.

Operator

[Operator Instructions] And we go next to Ravi Jain with HSBC.

Ravi Jain

I had a quick question on the commercial revenue per passenger, excluding the diversification activities. So when you look at that, this quarter was relatively flat year-over-year. Just wanted to get your thoughts on how you see that evolving in the next few quarters?

Vicsaly Torres

Yes, you are right. Basically, in our expectation, the increases in non-aeronautical revenues will be coming from the diversification activities. That is our focus now. In terms of commercial activities, we are seeing that in the medium, during the five-year period, we will see some jump when we finish the re-modulation and expansion of the terminals that we have that is included that are included in the Master Development Plan during the five-year period.

Ravi Jain

And other quick question was on traffic, how are you seeing. Are you seeing some upside to the expectation that most of the airports have today given pretty strong number that Volaris is kind of putting out and we know that Airbus has pretty strong plans as well, do you see the traffic kind of the growth being stronger than you expected or you still think that it could be between mid and high-single-digits for this year?

Vicsaly Torres

Well, we did have a sound first quarter in terms of traffic and in terms of financials, which we think is consistent with our outlook for the year, which is based on our conservative but realistic estimate of our expected performance. Our goal is to always meet or exceed our guidance. We are working together with airlines to try to get more openings in terms of growth. As the year progresses, we may adjust our guidance as circumstances changes, but today our expectation is the same, it's ranged between 6% and 8%.

Ravi Jain

One last thing if I may, just more on a longer-term strategy for OMA. Do you think that there is either a case, or let's say, any interest for OMA to go out of Mexico to look at airports outside Mexico, is that among one of the options for OMA?

Vicsaly Torres

Basically, right now we are not in any specific projects or analyzing specific projects. Also, we are very actively to evaluate different opportunities. Our focus is in Latin America and South America, the valuation of opportunities in Mexico and Brazil part of our diversification strategy. But right now, we are not in a specific project or in a bidding process.

Operator

We'll go next to Pedro Balcao with Santander.

Pedro Balcao

My question is really a follow-up from a previous question on traffic. Specifically, I wanted to have some color on how important do you think was the Easter impact on the March numbers? That was the first one. And second, what do you think is behind what is apparently some deceleration in terms of international traffic and particularly in Monterrey? Thank you.

Vicsaly Torres

Well, we know that the airlines have a very aggressive expansion plans in terms of fleet. But these aircrafts are coming or arriving into Mexico in a very slow time. One or two aircraft per airlines, only we know that CAR, their plans is having around five or six planes more this year. But these planes are very small planes, only 50 seats each one. We are seeing strong growth coming from Volaris and also coming from TIR, because they are more aggressive in terms of opening routes that other airlines are not flying. This quarter, for example, we saw stabilization in terms of international passengers, mainly in Monterrey as you mentioned. And international passenger was one of the factor or the growth driver in 2015. So in this 2016, we are not seeing that growth in the international passengers. So that's why we are more conservative in that side.

And in terms of you mentioned the deceleration in passenger traffic, we are, we think that traffic will have a very tough comparison, a very high base comparison, so that's why we are not seeing a double-digit growth in traffic during the rest of the year.

Pedro Balcao

And specifically about the potential positive impact in March from the fact that Easter took place earlier, how big do you think that impact could have been?

Vicsaly Torres

Although we had a benefit in March due to Easter, it was not significant for our traffic which is why we did not disclose this information, because in our airports are more business passengers. Only when where we have impact is in the tourist destination, but it's not that, those airports not represent much of our traffic.

Operator

[Operator Instructions] And we go next to Magdalena Santana with Citi.

Magdalena Santana

Hi, this is Magdalena Santana from Steve Trent's team and I have four questions. The first one is, that we noticed that four plants to, planning to build a plant to, is on San Luis Potosi and are you aware of any other foreign companies that are expanding operations in northern Mexico? And also looking at OMA's land bank per airport, do you see other opportunities to do hotel, industrial park or other commercial initiatives at airports aside from Monterrey? And also what could be the particular impact of the adjustment to the USA, Mexico bilateral agreements and how should we think of the timing?

Vicsaly Torres

Answer to your first question about the San Luis Potosi terminal expansion, basically these expansions are in the terminal and this because San Luis Potosi is growing a lot of, grew a lot during the last two years and need some expansion in the area of the, in the boarding gate. That is why we include an expansion of that terminal in the core and Master Development Plan and answering your second question, continuing for this question about some foreign companies, we know that BMW is coming into Mexico and they, especially in San Luis Potosi that is the only one that I know. But this is not a factor to expand the terminal.

Answering your second question about other business, other industrial park in other cities, well, we are focused to commercialize our first industrial park in Monterrey, but also our partners in this business is interested in analyzing Chihuahua was another target for other industrial park. So that is further a project that could be, analyzing during this year but it's not a fact yet and your third question is about the bilateral agreement, and about this, we still expect to see benefits from the new agreement in the medium to long-term, a current restriction in both limitations to flight to and from the United States and Mexico and U.S. carriers can be benefited with additional route alternative.

However, they are already using their current sweeping over routes and should be willing to try for new markets with their fleet or add capacity. We see this agreement as a positive long-term benefit because airlines interest in expanding their routes between Mexico and the U.S. Besides adding routes, we'll be adding connectivity between both countries and the whole Mexican systems would be benefited.

Magdalena Santana

I have another question. Whether there is some push for regulators to reclassify parking lot revenue from commercial to regulated revenues?

Vicsaly Torres

We don't know about this. Since the concession beginning, parking coming from, revenues coming from parking has been non-regulated revenues. Only we have to notice to the regulator the type, but it's not a, I don't know how to call, services.

Operator

At this time we have no further questions in queue. So I turn the call back over to our speakers for any additional or closing, I do apologize, we do have another question in queue from Steven Iveson with Explora Investments.

Steven Iveson

I was wondering about the guidance for EBITDA margin. I mean you had already achieved an EBITDA margin, which is far higher than what you have been guiding for 2016, and that's before including any tariff readjustment from the MDP. I was wondering if your guidance for the year might not be too conservative, if you are not willing to reconsider that by this time.

Vicsaly Torres

Yes, as you mentioned, we did have a strong first quarter in terms of margins. We achieved our own guidance, but in the first quarter also, the cost is starting -- we are starting to plan all the plan in terms of maintenance, in terms of utilities, different tasks. So that's why, it's almost always the first quarter have a very high margin. In the rest of the year, our expectation is that our margin will be between in the range that we gave between 60% to 62%, and if the year promises we may adjust our guidance, but we think in terms of margin, we are in that range.

Steven Iveson

Okay. Also with other tax increase, I understand that no readjustment according to MDP has been done so far and that you are going to achieve 100% of the target by 2017. What does that mean in terms of 2015 your average tariff will be what percentage of their maximum tariff allowed?

Vicsaly Torres

Okay. Just to give you an idea, last period, in the first year of the period, we got 94% in consolidated basis in average of the maximum tariff. So in our expectation, this figure will be the same, we will be able to reach around 94%, 95% or 96% of our maximum tariff and then with additional increases in tariff at the end of 2016 and in 2017 to try to get 100% of our maximum tariff, to reach that 100% and continue getting that 100% during the rest of the years in the period.

Steven Iveson

And why can't suggest a raise to the maximum if there are, would you face any issues with the airlines, why not go to the maximum tariff at once?

Vicsaly Torres

Well, it's also political and social issue. Because for example, just to give you an idea, in Monterrey, we got around 9% or 11% increases in maximum tariff and we can share that increase in more traffic because Monterrey share more than 8 million passengers. So we can share that increases. But in case of Durango or Zacatecas, that only serve around 300,000 passengers. If we increase a 100% or we try to get that 100% in one shot, to try to get a 100% of the maximum tariff, the passenger charges would be necessary to increase more than MXN100 or MXN150. So that means or that could limit the demand in those small airports. So that's why in the first year we try to get to reach 100% of the maximum tariff in the airports that serve more passengers like Monterrey or Culiacan, Chihuahua where in the smaller airports, we are more conservative, we increase little by little the tariffs.

Steven Iveson

Okay. So in Monterrey, you could reach it by the end of the year, then?

Vicsaly Torres

Exactly, yes, in Monterrey, our expectation is to reach around 98%, 99% of the maximum tariff in the first year in 2016 because also Monterrey generate more cash, so it's more benefit for us increase tariffs in this airport than in Durango or San Luis for example.

Steven Iveson

Okay. So again, so when do you plan to reach a 100% in Monterrey by 2000?

Vicsaly Torres

We are going to increase the tariffs in all of our airports. We bid in April only for aeronautical services and in May, we are going to increases in passenger charges in all of our airports.

Operator

And we have no more questions at this time. So I turn the call 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. Emmanuel, 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

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

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