Grupo Aeroportuario del Centro Norte (OMAB) Q2 2016 Results - Earnings Call Transcript

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

Q2 2016 Earnings Conference Call

July 26, 2016 11:00 ET

Executives

Vicsaly Torres - CFO

Analysts

Pablo Barroso - Credit Suisse

Mauricio Martinez - GBM

Ricardo Alves - Morgan Stanley

Operator

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

Vicsaly Torres

Thank you. Good morning. Welcome to OMA's Second 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 second quarter, continuing the strong growth on profitability path we have been on for the past five years and we set a new record for adjusted EBITDA generation. I will quickly review our operational performance and financial results, update our outlook for 2016 and then we will be pleased to answer your questions.

Turning to our second quarter operational performance, we continue to demonstrate the strong momentum in all areas of the business. Passenger traffic grew 9% in the quarter to MXN4.5 million, led by domestic traffic growth. 10 of our 15 airports grew passenger traffic. Passenger traffic has grown for 21 quarters in a row. The growth reflects the expansion of the airlines, new route openings and increasing load factors.

During the quarter, 10 of the 16 main schedule airlines in our airports increased passenger volumes with the largest contribution to growth from Volaris, VivaAerobus, TAR and American Airlines. 11 new routes opened in the quarter: nine domestic and two international, while two international routes closed. For the first six months of the year, we had 16 route opening, of which four are to the Monterrey Airport. Volaris has opened 12 routes, TAR added five routes, VivaAerobus three, Aeromexico two and Sunwing added one seasonal route.

We have already seen an additional eight-route open in July, of which two are international. We believe that we could continue to see additional new routes open in the final five months of the year based on the indication we have received from the airlines. Moreover, the most important benefits of the route openings are a deeper regional route network in a substantial broadening of our international destinations. Establishing Monterrey as a regional hub and increasing the connectivity of all our airports are long and standing in strategic growth.

On the commercial front, we had 13 new openings in the quarter, including five retailer stores in the Acapulco, Culiacan and Monterrey airports. In Zihuatanejo, we opened two new car rental operations and a restaurant as part of the renewal of this important tourist destination. The commercial lease occupancy rate in our 13 airports was studied at 97%. The most important factor in our commercial results was the growth in advertising revenues. As a result of the contract with the new advertisement service provider at the beginning of the year; retail, car rentals and restaurants also contribute significantly as a result of a higher traffic volumes in participation revenue.

Our diversification activities also had a strong performance. The Monterrey airport Hilton Garden Inn Hotel made the biggest contribution to incremental revenues, generating MXN22 million in the quarter. Their occupancy rate reached 77% and the average room rate was MXN1,964 per night. I am proud to say that with our 77% occupancy rate in its full quarter operation, the Hilton Garden Inn is ramping up faster than the NH Hotel did as a similar point in its first year. OMA Carga generates a 19% increase in revenues, largely because of the growing ground transport services. We expect the positive trend in this business to continue and we are building new ground transportation facilities that will approximately double our capacity. Construction is scheduled to be finished next month.

At the Monterrey Industrial Park, the first warehouse was falling to services and started generating revenues in May. The second warehouse was completed this July and will begin to contribute to results in the third quarter. Construction has begun and the third and the fourth warehouses and we are in the leasing process for both of them. Their construction is scheduled to be completed at the end of 2016 and early 2017 respectively.

Turning to OMA's second quarter financial results; OMA compared with this positive operational development into a strong double-digit revenues growth and as a result of our effective cost control, we also recorded double-digit increases in operating income, adjusted EBITDA and net income, which rose 61%. Aeronautical revenues increased 27% as a result of higher volumes and increased rates. During the quarter, OMA implemented rate increases based on the new maximum rate out to rise last December; domestic and international passenger charges increased by an average of 7% and 6% respectively, effective May 1.

Airport services charges increased 4% on average in line with a non-oil producer price index. The actual increases for passenger charges and its service were based on market foundation in the individual airports and are less than the total maximum rate increases authorized by the FCT. The depreciation of the peso against the dollar also benefits international passenger charges. As a result of these factors, aeronautical revenues reached MXN210 per passenger, up 17%. Non-aeronautical revenues also increased 25% and non-aeronautical revenue per passenger was MXN74, up 15%. Commercial activities revenues grew 19%. The line items with the largest contribution to growth were advertising, up 30%, restaurant, up 32%, car rental, up 37% and retail, up 27%. Diversification activities grew 40%, mostly because of hotel services, specifically, the New Hilton Garden Inn. Complementary services grew 15%, primarily as a result of checked baggage screening services and access route.

I should note that we categorized the concept of other services to allocate these amounts: aeronautical, commercial and diversification activities. For comparative purposes, we have reformulated 2015 numbers. These are formulations of net expected total revenue. The costs of airport services and G&A expense increased 12% in the quarter. This was principally because of the timing of minor maintenance compared to 2015. Over the six months, increasing costs of airport services and G&A expense was 4.2%. Hotel costs and expenses increased principally because of the opening of the Hilton Garden Inn.

The concession tax increased as a function of the strong financial results of the Company while the technical assistance decreased because of the reduction in the rate over last year. Total operating cost and expenses increased 4% in the quarter. As a result of all these factors, OMA's second quarter adjusted EBITDA increased 37%, to MXN808 million. This is the highest quarter early adjusted EBITDA in OMA's history. The adjusted EBITDA margin increased 478 basis points, to 62.5%. The second quarter marks 20 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 more than 60%.

Operating income increased 47% to MXN660 million. Financing expenses decreased to MXN32 million from MXN61 million in second quarter 2015, as a result of exchange rate effects. Taxes were MXN183 million, with an effective tax rate of 29%. As a result of all these factors, consolidated net income rose 61% to MXN446 million. Second quarter investment expenditures were MXN142 million, mostly for strategic investments, including the warehouses in the Monterrey Industrial Park. Since we are at the beginning of the new MDP investment cycle, investment under the MDP were only MXN83 million during the first half of 2016. Major projects have been put-off to be bid and number of contracts having been awarded, and we expect to make significant investments and expenditures on this project in the second half of the year.

As we announced on July 13, we have begun construction of the new Acapulco terminal building with a 1.3-million-passenger capacity. This state-of-the-art facility will replace the existing building, which is one of the oldest operating terminals in Mexico. The expected investment is MXN550 million, and it is scheduled to be completed in 20 months. The new terminal will be an attractive gateway to the Acapulco tourist region, be much more efficient to operate, have upgraded standard commercial offerings, and provide a much better passenger experience.

In addition to the Acapulco terminal, the most important MDP projects for 2016 include beginning of construction of the new Reynosa Terminal building, expansion work in the terminal of the Chihuahua airport, expansion of the terminal building in the San Luis Potosi, remodeling of the terminal building in Zihuatanejo, commercial platform expansion in the Monterrey and Culiacan airports, and emergency services building expansion in the Acapulco and San Luis Potosi airports. These investments are expected to be funded through cash generated by operations and cash balances.

Our cash flow generation continues to be strong. Alternating activities generated cash flow of MXN890 million in the first six months of 2016, compared to MXN961 million in the same period of 2015. The reduction was principally because of a higher level of accounts receivables and increasing taxes paid. Account receivables remained high due to the stabilization period effect of the transition to new SAP platform and the billing process, which took place in the first quarter. This is not attributable to our clients, and we expect normalization by the third quarter.

I'll now turn to our second topic; our outlook for the year. As a result of the increasing traffic volumes in the first six months of 2016 above the levels expected, and taking into account the optimization of the specific aeronautical tide at the group's airports, OMA is revising its outlook for 2016. OMA estimates that total passenger traffic growth for 2016 will be between 8% and 10%, up from 6% to 8%. The growth in aeronautical revenue is estimated to be between 24% and 26%, compared to 22% to 24% previously.

Non-aeronautical revenues are expected to increase between 17% and 19%, up from 13% to 15%. The adjusted EDITBA margin is expected to be between 61% and 63%, as compared to the range of 60% to 62% we estimated previously. Estimated MDP investment expenditures for 2016 are unchanged and are expected to be in the range of MXN1,500 million to MXN1,700 million, also unchanged. Strategic investments, principally for diversification projects are expected to be in the range of MXN150 million to MXN250 million, also unchanged.

OMA is providing this outlook based on internal estimates and the usual disclaimers apply. A number of factors could have a significant effect on these estimates. This includes changes in airline expansion plans, ticket prices and other factors affecting traffic volume, 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 to questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we do have our first question from Pablo Barroso from Credit Suisse. Please go ahead.

Pablo Barroso

Hi, good morning to you, and congratulations on the results. I have a couple of questions here. Can you give us more colouring on the industrial parks? When will the second park start generating revenue and how many will you be opening next year? And my second question is regarding maintenance expenditures in the first half. We've seen almost no maintenance expenditures. Should we expect them to accelerate in the second half? Thank you.

Vicsaly Torres

Thank you, Pablo. Let me answer your first question about the industrial parks. At the Monterrey Industrial Park, the first warehouse was put into service and it started generating revenues in May, generating MXN1 million in the second quarter 2016. The second warehouse was completed in July and will begin contributing to results in the third quarter. Construction work has begun on the third and fourth warehouses, and we are in the leasing process for both of them. Their construction is scheduled to be completed at the end of 2016, and early 2017, we start to lease.

Pablo Barroso

Okay. In terms of revenues, what should we expect on a normalized basis? This quarter was MXN1 million because it started in May, right?

Vicsaly Torres

Yes, exactly. In the second part -- second half of the year, we will see revenues from the first warehouse and the second warehouse because the second warehouse will generate revenues in August.

Pablo Barroso

Okay, thank you, Vicsaly.

Vicsaly Torres

And your second question is about minor maintenance tasks, right?

Pablo Barroso

Yes, exactly -- minor only. Minor maintenance expenditures in terms of maintenance, maintenance CapEx.

Vicsaly Torres

Major maintenance then?

Pablo Barroso

Yes.

Vicsaly Torres

Okay, major maintenance. Major maintenance; it's related to the MDP projects. MDP includes major maintenance so as we are in the beginning of this cycle of this five-year period, we are planning all the projects. Yes, we are thinking that we are at this line, we'll be more aggressive, the expenditure for this line will be more aggressive in the second half of the year because we are putting into work these projects.

Pablo Barroso

Okay.

Vicsaly Torres

As major maintenance level recorded in our results, we are steady to maintain it in the same level for the year. If you look up the balance sheet, the level of the provision will be remained the same at the same level, quarter million.

Pablo Barroso

Okay. Well, thank you, Vicsaly and congratulations on the results.

Vicsaly Torres

Thank you, Pablo.

Operator

And we will take our next question from Mauricio Martinez from GBM. Please go ahead.

Mauricio Martinez

Good morning, Vicsaly. Thank you for taking my question and congratulations at the result. Can I have a follow-up question from the previous one about the industrial park? I was wondering if you can share with us the third and fourth contract. What is the size that we should expect for and also I'm curious about Ciudad Juarez traffic? Is it witness to a strong growth at the end of the year? Could you give us any insight about the main driver for this increase and if you expect such levels to continue for the remainder of the year?

Vicsaly Torres

Thank you, Mauricio. Okay, let me give you more follow on industrial park. The third and the fourth warehouses, we don't have contract for those warehouses. We are in the building process. These two warehouses are set [ph] warehouses; one is for 5,000 square meters and the second one is for 10,000 square meters. We are in the process to get a contract. We have different clients, we give them the economical proposal and we are expecting they are interested in the warehouses. But now we are in the process to commercialize them and we expect that these two new warehouses will generate revenues next year in 2017.

Mauricio Martinez

Great. And about Ciudad Juarez?

Vicsaly Torres

Yes. And for your second question; as you mentioned Ciudad Juarez is having very good traffic volumes. Basically, we are seeing a very economic-activity reaction in the city. A lot of Maquiladoras are coming into the city from the U.S. to produce different products to export those products. Ciudad Juarez, why we expected to increase route in Ciudad Juarez in the year, so growth should continue in the second half of 2016. We are not confirmed what those routes, but if you look in July for example, this route will have an effect in the second half of the year. TAR Airlines open a route at Ciudad Juarez to Puerto Vallarta, I think. It's PPE? Puerto Peñasco in July 21. We will see a positive effect for that route and we are working with airlines to open more routes from and to Ciudad Juarez airports.

Mauricio Martinez

Great. Thank you, Vicsaly and congratulations again.

Vicsaly Torres

Thank you, Marizio, you're welcome.

Operator

[Operator instructions] And we'll take our next question from Ricardo Alves from Morgan Stanley.

Ricardo Alves

Hi, Vicsaly and everyone. Good morning. Had just two questions. The first one is kind of a follow-up with the very last question on Ciudad Juarez. Indeed, we saw your traffic up 9% this quarter and 9% year-over-year. Other smaller airports clearly driving this growth outpacing Monterrey; so my question was indeed to -- if you could provide a little bit more color on Ciudad Juarez which you already did, but also if you could give a little bit more information on Culiacan as well and Chihuahua because we've been seeing for a while now strong performance in those two airports. Maybe a little bit more perspective on those and why we could expect going forward?

And then the second question would be a quick one. Your new EBITDA margin guidance, the mid-point I think it's 62%. So far this year, in the first half of the year, you had 63%. If you could give a little bit of color on why you're expecting this somewhat small contraction of profitability going forward? That's it. Again, thank you.

Vicsaly Torres

Thank you, Ricardo. Okay, regarding traffic in other regional airport. For example in Chihuahua, in the second quarter were open at three routes: Chihuahua Tijuana, Chihuahua Mexico City, Chihuahua Guadalajara, two for VivaAerobus and one for Aeromexico. In July also, were open other routes from Chihuahua to Hermosillio, operated by TAR. So we also are seeing economic activity reaction basically in different places that are located our airports. Chihuahua is in one of the states that are benefit by the economic activity reaction. Reacting also increases in load factors and some increases in frequencies. Basically, we attribute this growth for the economic activity in the city. In case of Chihuahua City, our special [ph] industry is growing so it's more important for us and we are seeing different openings that give us positive expectation for this airport. Other regional airports that are growing mainly in domestic passengers are Culiacan, Durango -- but Durango is very small, but it's growing a lot in terms of domestic passengers; Torreon. So we are seeing in regional airports and economic activity reactions that are happening in the domestic passenger volume.

And for your second question about margins, we estimate that adjusted EBITDA margin can be in a range between 61% and 63% in 2016. We expect that margins will be in a similar range going forward and it's important to mention that we are having increases in revenues and we are trying to control our cost and expenses that increases in revenues going down to the margins. That's why we review our guidance in terms of margins and increased the range. Going forward, our goal as a management of the company is trying to improve this margin. But it's more difficult to control costs, even if we are expanding our infrastructure. So at least we expect that to maintain our margins in this level going forward and try to capture these increases in revenues into our margins and don't increase our cost structure.

Ricardo Alves

Thank you. That was very clear.

Vicsaly Torres

You're welcome.

Operator

And we'll take our next question from Steven Churns [ph] from Citi. Please go ahead.

Unidentified Analyst

Hi, Vicsaly, good morning and thanks for taking my questions. Actually, some of them have already been answered, but two follow-ups; I wasn't sure if I heard you correctly. And I think you mentioned that the tariffs for this year, that you put through most of the tariff increases but not all of them. And I was wondering if that was accurate, one, and two, if you see room to reach specific arrangements with any of the airlines, which I believe back in 2007 or so, you had a deal with Airbus, a tariff discount in exchange for more traffic volume. So any color there would be appreciated.

Vicsaly Torres

Thank you. Well, in terms of tariffs, we are allowed to adjust tariffs twice a year. The first adjustment took place in April for aeronautical services, around a 4.3% increase. And in May for passenger charges, around a 7.4% increase in domestic passenger charge and 6.2% increases in international passenger charges, in average. It is our intention to optimize our price during the year in order for us to be able to obtain the maximum benefit from our regulated revenues. As you know, our regulated revenues depend on variables outside of our control, such as inflation, passenger and/or cargo volumes at the end of the year, and exchange rate. Therefore, should any of these variables change from our current perspective, we will need to evaluate our prices and consider whether to increase them or not, so as to be able to optimize our targets for the year. So we can do a second increase during this year, but we need to review in terms of the other factors that I mentioned before.

If we are in terms of the maximum time [ph] and what is the gap between the regulated revenues and the maximum regulated that we are allowed to get. In terms of discounts or incentives, that you mentioned be very good, actually, we are not giving incentives based on the passenger charge. The incentives that we provide to airlines is some discounts for aeronautical services. I mean, landing fees, the use of platforms, the cost of aeronautical services, the charges for aeronautical services. And we have a specific program if airlines open a new route in some of our airports or if they increase frequencies in existing routes.

Unidentified Analyst

Okay, so new routes or increased frequencies. Very helpful, Vicsaly, thank you. And just one other quick question; just curious -- I know that there's been some unrest, there's a teacher strike, I guess, which primarily seems to be impacting the state capital of Oaxaca, from what I understand. As far as you can tell, you're not really -- are you seeing anything at any OMA facilities related to this, or it's still fairly quiet?

Vicsaly Torres

Thank you. We have not had impacts or events in our facilities, in our airports, but as you are mentioning, it's a risk. Basically, the most important problem is in the state of Oaxaca, but we are in for some in Guerrero, also, I stated that that problem could be a risk. But we have not had an event in our facility.

Unidentified Analyst

Okay, very helpful. I'll let someone else ask a question. Thanks, Vicsaly.

Vicsaly Torres

You're welcome.

Operator

[Operator Instructions] And we'll take our next question from Marco Monteñez [ph] from Victor Investments.

Unidentified Analyst

Good morning, Vicsaly, and congratulations on the results. Thank you for the call, a follow-up in traffic. Could you share with us the increase in the number of seats in OMA airports and the load factor you registered in the first half of the year? And regarding the outlook in traffic, what is the expectation for the increase in seats and load factor also, that you expect for the rest of the year? Thank you.

Vicsaly Torres

Thank you, Marco. We don't have that information in terms of what are the increases in seats in our airports. We only know the new routes or the type of aircraft that the airline is operating in that specific route. We know that load factors are increased in our airports because our operations are not increasing as much as higher than traffic. So that is only to say that the load factors are increasing. In terms of routes, that is information that I can give you. In the first half of 2016, we had 16 openings, 7 cancellations, so then we had 9 net new routes. And only in July, new routes were opened and it's confirmed another route in August for Tart [ph] from Guerrero to Mazatlán.

So only for the third quarter, in one month of the third quarter, one month and a half, we have nine new routes in the third quarter. And we expect -- we are working other routes with airlines to try to open more. In the second half of the year, we are expecting around 15 or 20 new routes, in addition.

Unidentified Analyst

Okay, Vicsaly, very helpful. Thank you so much.

Vicsaly Torres

You're welcome, Marco.

Operator

And we'll take our next question from Pablo Zaldovar [ph] from ZBM.

Unidentified Analyst

Hello, good morning. Thank you for taking my question, just a quick follow-up on the maximum tariffs. If I recall correctly, you were expecting to achieve up to 94% of the allowed maximum tariff for the year. Is this goal still in place or do you intend to implement the 100%?

Vicsaly Torres

Thank you, Pablo. It is difficult to reach 100% of the maximum tariff in the first year of the period, of the five-year period. And as you know -- as you mentioned, our goal is to achieve this year around 94%m 95% of the maximum tariff, in average, for all of our airports.

Unidentified Analyst

Okay, thank you very much. That will be all.

Vicsaly Torres

You're welcome, Pablo.

Operator

And there are no further questions at this time.

Vicsaly Torres

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

And that will conclude today's conference. We appreciate your participation. You may now disconnect.

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