Grupo Aeroportuario del Centro Nort (ADR) (NASDAQ:OMAB)
Q1 2013 Earnings Call
April 29, 2013 11:00 AM ET
Luis Guerrero - CFO
Marco Montanez - Vector
Stephen Trent - Citi
Bernardo Villas - GBM
Ladies and gentlemen, thank you for standing by. Welcome to the Grupo Aeroportuario del Centro Nort OMA First Quarter 2013 Earnings Results Conference Call. During today's presentation the lines will in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions).
I would now like to turn the call over to host, Luis Guerrero. Please go ahead.
Good morning. Welcome to OMA’s first quarter 2013 earnings conference call. My name is Jose Luis Guerrero, OMA’s Chief Financial Officer. Joining me this morning is Israel Magana, our Investor Relations Officer. I will start with an overview of some of the major business developments in the first quarter. Then I will go over our outlook for 2013. We will then open the call up to questions.
OMA had another solid quarter with good performance from our aeronautical activities, commercial activities and our diversification initiatives. The first quarter was (inaudible) by business development that will benefit OMA going forward. I want to highlight one of these development.
The first quarter in the first time that we see the check the baggage screening service fully operational. While the service was partially operational last year, we have not yet reached an agreement with our airline clients on compensation.
That has now been done and as a reminder, OMA gets compensated for check baggage screening in two ways, the cost of maintenance for the equipment is included in our maximum rate agreement. The SEC authorized the rate increase last year to reflect this. The rest of the operating costs are recovered through service fees charged to the airlines. The check baggage screening service provides a better passenger experience as well as higher security.
Turning to our first quarter operational developments, passenger traffic volumes increased 4.6% with domestic traffic growing 5.1% and international traffic up 2.6%. Seven of our airlines increased passenger volumes and this is the eight quarter in a row of increasing passenger traffic for OMA.
In terms of route development and connectivity, we introduced to cover the Monterrey-Las Vegas route and AeromexicoConnect opened three new domestic routes. Aeromexico added one plane to each fleet and now has 116 planes in operations, while Volari has 43%, Interjet 37% and VivaAerobus, 18 planes.
On the commercial front, we opened 15 retail and services in our airports and our lease occupancy rate increased to 93%, compared to 92% in the first quarter of 2012. OMA Carga continues to grow, particularly in our Grand Transit (ph) links with Dallas, Chicago, Los Angeles, and Mexico City and had an increase of 40% in revenue in the first quarter. The NH Terminal 2 hotel had another good quarter. The occupancy rate was 81.4% and room rates increased 4% year over year.
Turning to our first quarter financial results, OMA recorded solid revenue growth with strong increases in adjusted EBITDA and net income and a strong cash flow generation. The sum of our aeronautical and non-aeronautical revenues grew 10.7%.
Aeronautical revenues increased 7.5%, principally as a result of the growth in passenger revenues. Non aeronautical revenues increased 20.9% and seven of the nine non aeronautical line items grew. The areas with the largest contribution to growth were the additional revenues from the startup of the check baggage screening service, which is included in other revenues, OMA Carga, up 40.5%, the NH Terminal 2 hotel up 5.3% and advertising up 15.4%. Non aeronautical revenue per passenger was 60.7 pesos, up 15.5%. Excluding the hotel, non-aeronautical revenue per passenger was 47.4 pesos, up 20.5%.
The first quarter of 2013 marks 20 quarters in a row or five years where non aeronautical revenues per passenger increased. The mix of revenues not including construction revenues was 74% aeronautical and 26% non-aeronautical, compared to 18% at the time of the IPO in 2006.
The cost of airport operations which is the cost of services plus G&A, excluding the hotel, construction costs and the maintenance provision increased 8.9%. The nine items that increased most were all related to the check baggage screening service. In addition we included, we incurred some maintenance expenses for work on several of our terminal buildings.
Total operational costs and expenses increased 10.3% in the quarter, principally because of the higher level of construction costs recognized in accordance with IFRS (ph), increases in concession factors based on revenue growth, the technical assistance fee based on EBITDA and higher depreciation and amortization type charges.
The result is that our first quarter adjusted EBITDA grew 12.1% to 393 million pesos. The adjusted EBITDA margin was 56%, up 70 basis points over a first quarter 2012. This is the seventh quarter in a row of EBITDA margin expansion. The tax provision decreased because of the application of expense provisions. Consolidated net income rose 22.9%, principally because of operating income growth, and a lower tax provision.
Our cash flow generation has been particularly strong. Cash flow from operating activities generated cash of 279 million pesos in the first quarter 2013 or 11.6% above the 2012 level. The increases were principally because of higher revenues and improved working capital management.
First quarter CapEx was a 124 million pesos. The most important investments for the quarter included re-moldering of the Chihuahua Airport, the C Terminal buildings and the platform work in Torreon, San Luis, Reynosa and Mazatlan airports.
OMAB continues to take advantage of a very favorable credit environment. In March, we placed 1500 million pesos in 10 year notes at a fixed rate of 6.74% and initiated a commercial paper program with an initial placement of a 100 million pesos at a rate of 4.17%.
The procedures of these notes will be used to pay higher cost bank debts and to finance our 2013 investment program. Subsequent to the quarter end, we repaid 300 million loan from Scotia Bank. At March 31, 2013, OMA's cash balance was 2,893 million pesos.
On April 16th, the annual shareholders meeting approved payment of a capital reimbursement of 1,200 million pesos in five installments; in lieu of dividends after dividend. We will make an initial extraordinary payment of 400 million pesos or 1 peso per share at the end of June. We will then make four quarterly payments of 200 million each or 0.50 pesos per share at the end of July, October, January and April.
Turning to our outlook for 2013, we expect another very solid year. OMA expects that 2013 passenger traffic will increase approximately 3.5% to 4.5% and expect that some of our Aeronautical and non-Aeronautical revenues will increase approximately 8% to 10%. The adjusted EBITDA margins for the full year is expected to be in the range of 50.5% to 52%. Total (inaudible) development planned CapEx during 2013 is expected to be in the range of 700 million pesos to 800 million pesos.
Investments for that diversification activities are expected to be in the range of 100 million pesos to 200 million pesos. OMA is providing this outlook based on internal estimates. A number of factors could have a significant effect on the estimates of traffic, revenue growth, adjusted EBITDA and CapEx.
This includes changes in airline expansion plans, ticket prices and other factors affecting traffic volumes, the evolution of commercial and diversification project, 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.
Yes, thank you. (Operator Instructions). And our first question comes from the line of Marco Montanez with Vector. Please go ahead.
Marco Montanez - Vector
Could you give more details about the drivers for the slowing down in the growth in traffic that you also seen for 2013. In particular, could you give more color about the non-aeronautical revenue estimates including diversification activities? On the other side, what’s driving the lower adjusted EBITDA margins for this year compared with the last year?
Sure, thank you for your question. Regarding the drivers for slowdown in passenger traffic growth compared to last year’s growth of 7%. First of all one is the comparison of last year was the strong year. This year it will all depend on when the airlines start bringing the new planes that they have forecasted.
As you know, Mexico has plans of around 110 new planes. Ten of them are Embraer 190s that will be replacing the 145. Some of them have already arrived. I believe three of them arrived this quarter, so they expecting more 190s to arrive. Also they were expecting 100 more planes obviously in the next year. One of them is the Dreamliner, which they could get this year in the second semester, one of those planes.
So, it will depend on when these planes arrive. Volaris and Interjet, they both have plans, very strong plans. For examples Interjet has an order of 60 planes. 20 of them are Sukhoi Superjets, the other ones are Airbus 320s and also Volaris has an order of 44 new Airbus 320s as well. So, there are very strong plans but it would depend on when they arrive.
So for these reasons we’re seeing growth expected to be between the ranges that I explained. Also we’re seeing the first quarter a little bit slower in terms of government spending compared to last year. So as new projects start to pick, we might see some more people flying in our airports.
Regarding the non-aeronautical outlook we are seeing strong growth for OMA. This quarter was quite solid in terms of non-aeronautical revenues. We are looking for new initiatives and new opportunities to successfully deliver the services that the passengers are looking for in our airports.
Today we have an application and OMA benefits from that application, we get payment for it. We then have to invest in the development of it and passengers can see at what time their flights are leaving or other services.
We have new ways of providing as well publicity in our airports in places that are not regular basis to provide publicity. And also the stores that we have, we are trying to have brands that are highly recognized by the passengers, brands that are also in-line with the passenger type that we have in our airports with their ability to spend and willingness to spend in our airports.
And could you remind me your last question. Was it regarding the adjusted EBITDA and the slowdown that you mentioned that we could see this year in terms of its growth? We are also considering that adjusted EBITDA will grow. Maybe the margin would not be as high as what we saw last year but we would definitely see an adjusted EBITDA margin growing this year, and also as an amount we could see the growth as well.
We have an important project, which is the check baggage screening service. This service has started operation last year but it is fully operational this year with all of the airlines. So we are going to be recovering the costs of maintenance through the maximum tariff, and the cost of operations through charges to the airlines. But it is still an important cost in the company and therefore the margins may not be as high as what we saw last year.
Marco Montanez - Vector
Another question, what effective tax rate are you expecting for this year?
The effective tax rates, we are still having benefits of some of the tax credits that we had in our airports since the beginning of their concession. Monterrey no longer has that tax benefit and that is why see a slight increase in the tax that we paid this year in the ESR (ph) tax and so we are going to see going forward maybe higher taxes from Monterrey but we are still having the benefit of the other airports that are still having those tax benefits in those airports. So we will probably see something below this 30% tax rate.
Our next question comes from the line of Stephen Trent with Citi. Please go ahead.
Stephen Trent - Citi
Just two questions from me. The first is, I noticed in page three of your release that three domestic routes were opened and six were closed. I happened to notice that VivaAerobus seems to be responsible for at least a good chunk of the routes that are closing. And what’s your view as to what might be going on with that carrier?
Sure, as you know VivaAerobus is very active in our airports. We have seen very strong growth from their passenger traffic in this quarter and in past quarters. And so they open and close routes quite frequently. In this quarter, yes, what we see is that they are closing four routes and they are not opening any new ones. But the other routes that are existing should be in healthy conditions.
So for them, VivaAerobus needs a higher level of occupancy rate than the rest of the airlines, because they are charging lower tariffs. So they need to have their planes more with a higher occupancy. Therefore if their route is not reaching that level of occupancy that they need, they usually immediately close it. So that’s why we sees the close-ons in VivaAerobus but they have been growing passenger traffic with us and those two are a very strong airline today for us.
Stephen Trent - Citi
So the four routes they closed in the quarter, would you say this is average or above average or below average in terms of the number of routes they open and close on a periodic basis?
The traffic volumes have been growing. So I believe this is part their strategy of finding the most profitable routes that they can operate and putting their 18 planes in the best routes that they could find. So the airline is very strong today and they are doing well. So it is underlined that for us is very important and I believe this is part of their business plan of finding the routes that are more convenient and important for them.
Stephen Trent - Citi
And just one last question for me, I happened to notice on page 14 of your release in the cash flow statement, for the first quarter of 2012, you had net flow for operating activities of 250 million pesos but when I look back at your original 1/2/2012, release you reported. 300 million pesos in net operating cash flow and I was wondering what you changed from, if anything?
Yes, thank you Stephen and that’s something that we will mention also on the 20th that we are expecting to release today. What shall we request from our accounting firm to change a land investment that we paid in 2010 and the transaction took place in 2010 but the payment actually took place in 2011. We registered that operation as an operating activity in the cash flows and the recommendation from our accounting auditors was that we should change that to an investment activity. So, that’s why we’re seeing that reclassification of the cash flow.
(Operator Instruction). Our next question comes from the line of Bernardo Villas with GBM. Please go ahead.
Bernardo Villas - GBM
I was wondering regarding the gas station in Monterrey, if you could give us a bit more numbers on sales and EBITDA margin expense. And then are you considering these revenues as part of Monterrey’s non-aeronautical revenues?
The gas station started operating in December of 2012. So it’s been in operation for a little bit more than four months now. It’s doing quite well. We have a lot of clients coming into the gas station. It’s on the exit of the airport, basically on the exit of Terminal A and Terminal C. So, we are capturing the passengers that leave those terminals and its paying us rent. We do not operate it. It’s the company that operates that gas station is Sorsan (ph). So, we only receive the rent payments. So it’s doing well.
And it is an important project for our diversification initiatives in Monterrey. As you know we’re looking forward to grow our real estate projects that we have at the airport, this is one of them. The old corporate building that we use to have in the Monterrey Airport that is now almost fully leased.
We also have the Strathmore that has, basically the first floor also leased and we're remodeling the second floor to have office spaces up there and we also, as we announced signed agreement with VYNMSA which is one of the most important industrial park operators in the northern region, who helped us develop industrial park in Monterrey.
So the gas station; it’s a small project but it’s an important one for us because it’s our first gas station that we have in one of our airports and we look forward to developing more of these projects in other airports around us.
Bernardo Villas - GBM
And is this considered in Monterrey’s revenue?
Yes, that is correct.
Bernardo Villas - GBM
Okay and I was wondering if regarding the guidance, you just released the planned CapEx, 100 million to 200 (ph) million in diversification activities. What are you planning on investing?
Most of that investment will probably take place for the development of the first industrial park in Monterrey. The industrial park in Monterrey, the plan is to have 10 slots for an industrial warehouse. We are planning to develop the first one and also to organize the road to the access to the industrial park. That’s the part of the investment in new strategic project.
The other one could also be part of the hotel investments that could take place this year for the Monterrey airport. We haven’t announced yet who would be operator of that hotel but we are in talks with the hotel operators also maybe investors as well. So, that’s what we are considering as the most important part of the diversification or strategic CapEx.
Bernardo Villas - GBM
Okay and lastly, just to be clear, the 50.5% to 52% EBITDA margin, is it considering construction revenues?
No, this is the adjusted EBITDA margin.
(Operator instructions). And I'm not showing any further questions at this time, please continue with any closing remarks.
Thank you, on behalf of OMA I want to thank all of you again for your participation in this call. Israel Magana and I always available to answer your questions and hope to see you soon at our office in Monterrey or in future events. Thank you and have a good day.
Thank you. Ladies and gentlemen, that does conclude our conference call for today. Thank you for your participation. You may now disconnect.
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