Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. (OMAB) Q4 2014 Earnings Report, Transcript and Summary

Good day and welcome to the Grupo Aeroportuario del Centro Nort OMA Fourth Quarter 2014 Earnings Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to José Luis Guerrero Cortés, Chief Financial Officer. Please go ahead. José Luis Guerrero Cortés: Thank you and good morning. Welcome to OMA’s fourth quarter 2014 earnings conference call. My name is José Luis Guerrero, OMA’s Chief Financial Officer. Joining me this morning is IR team, Sally Torres [ph], our Investor Relations Officer and Manuel Perez [ph]. We had another incident quarter and 2014 was a record year all around. We reached 14.7 million passengers which surpasses the previous peak before the financial crisis and our revenues operating income and adjusted EBITDA were also full year record. Net income was not a record only cost as a benefit we will receive in 2013 from the repeal of the year two tax. Passenger traffic volumes continue to grow. As a result of the expansion of the airline and the opening of new routes and increase in connectivity of our airports. OMA had a net increase in 46 routes in 2014 including a net 13 route edition in the fourth quarter. We're able to convert these volume growth and deliver strong performance from our airline clients [ph] and commercial activities. We also continue to develop our diversification initiatives with good results. As a result of our effective cost controls, we also reported solid increases in operating income and adjusted EBITDA. After making some comments on each of these points, I will discuss our 2015 outlook and then we will open up the call to questions. In terms of our fourth quarter operational developments, the number of flight operations rose 7% in the quarter to more than 87,000 operations. These reflects the addition of new routes and new frequencies by our airline clients [ph] on both domestic and international routes. Passenger traffic volumes increased 14.3% reflects the equal growth of domestic and international traffic. The 11 airports increased traffic during the quarter. This marks 15 quarters in the growth of growing passenger traffic for OMA. The increased volume came predominantly from Volaris, VivaAerobus, Interjet, Aeroméxico, TAR, Aeromar, Delta, and US Airways. 14 of the 15 main scheduled airlines we served increased passenger volumes. OMA continues to grow effectively with the airlines to grow traffic in our airports. Four airlines opened 11 domestic routes in the quarter while six routes closed. In addition, five airlines started flying a total of eight new international routes including Monterrey, New York. On the commercial front, we opened 33 new commercial initiatives including passenger service, services hotel promotion, advertising restaurants and legal [ph] establishments plus a VIP lounge. The commercial lease occupancy rate is 96%. Looking at our diversification activities, the NH Terminal 2 Hotel had another good quarter. Room rate increased 2% year-over-year and the occupancy rate was 81%.Construction of the Monterrey plus hotel and industrial continues to be intact for start of operations in the first half of 2015. Turning to our fourth quarter financial results, OMA recorded double-digit growth in revenues operating income and adjusted EBITDA and a strong cash flow of generation. Aeronautical revenues increased 13.9% principally because of the growth in passenger volume. Aeronautical revenue per passenger was a Ps. 165. Non-aeronautical revenues increased 14.7% in the areas with the largest contribution to grow where advertising up 26%, parking up 19%, check baggage screening of 17%, the NH Terminal 2 Hotel revenues up 6%, retailers up 17% and restaurants up 21%. Non-aeronautical revenue per passenger was Ps. 63.5. The growth in parking reflects a new service model and promotions in Monterrey and rate increases in several airports. Advertising rose principally because of continued expansion of non-traditional advertising such as the giant screens we now have in eight airports and by red [ph] sale of advertising space. We also launched our master premium passenger service product in the fourth quarter. Masterkey is a loyalty program that provides discounts and exclusive services to passengers for an annual membership fee. These new business generated Ps. 2 million in revenues in its first quarter of operations. The cost of airport services increased 6.7% in the fourth quarter. OMA defined fees as a cost of services plus G&A excluding the hotel construction cost depreciation and amortization and a major maintenance provision as well as concession taxes and technical assistance fee, items that grow as revenues increased. The largest part of the increase resulted from favorable expense. For the full year, cost of airport services increased 5.6% slightly above mix penetration. These was achieved as a result of lower maintenance expenditures and very low increases in outsourced services and [indiscernible] which were partially offset by the increases in payroll and other expenses. The later include some provisions for legal expenses related to our labor issues and provisions for doubtful accounts. Total operating costs and expenses decreased 10.5% in the quarter an increase of 1.6% in the full year. OMA's fourth quarter adjusted EBITDA increased 14% to Ps. 483 million. The adjusted EBITDA margin was 53.8%. Factors were a credit of Ps. 7 million. The increase in cash taxes as a result of higher pretax income was offset by reductions in deferred taxes. The very large tax credit in fourth quarter of 2013 was principally as a result of the rebuild of the single rate corporate tax for year two as part of the government's fiscal requirement. Consolidated net income was Ps. 284 million below the 2013 level as a result of the year three repeal. Fourth quarter investment expenditures include investment development plan and strategic investments were Ps. 252 million. The most important investment expenditures for the quarter included expansion and refurbishing of the Masterplan Airport terminal building plus measurements on runways, taxiways and aprons in a number of airports and hotel and industrial park in Monterrey. Our cash flow generation also continues to be strong. Cash flow from operating activity generated a cash of Ps. 1504 million in the full year of 2015. OMA's cash balance was Ps. 2808 million as of December 31st. Turning to our outlook for the current year. Management expects the expansion of the industry and growth of our business to endure in 2015. The airlines are continuing to expand although we do not expect the same kind of good expansion as occurred in 2014. The upgrading of fleet is adding available cheap and low oil prices of course help airline profitability. OMA estimates that total passenger traffic growth for 2015 will be between 6% and 8%. The growth in aeronautical revenues is estimated to be between 7% and 9% and growth in non-aeronautical revenues is expected to be 13% and 16%. The adjusted EBITDA margin is expected to be between 53% and 55%. Two diversification projects in Monterrey are expected to start operations during 2015: The Hilton Garden Inn and the first phase of the Industrial Park, which includes urbanization [ph] works and the first 5,000 square meter warehouse. Master Development Plan investments are expected to be in the range of Ps. 500 million to Ps. 700 million, net of the recognition of land purchases made in prior years for Ps. 131 million. In addition, strategic investments, principally for diversification projects are expected to be in the range of Ps. 100 million to Ps. 200 million. OMA is providing this outlook based on internal estimates. A number of factors could have a significant effect on the estimate of traffic, revenue growth, adjusted EBITDA, and CapEx. These include changes in airline 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. In conclusion the fourth quarter of 2014 marked at the end of an excellent year. Traffic and revenue growth were strong. Aeronautical commercial and diversification initiatives are all performing well. Cost controls are keeping expenses in line and strengthening EBITDA and cash flow generation. We’re confident that these trends will continue in 2015. This concludes our prepared remarks. We will now be happy to answer your questions. Operator, please open the call for questions.

Thank you. [Operator Instructions] and we’ll take our first question from Santiago Perez [ph] from Credit Suisse. Sir your line is open. And we’ll go to our next question from Bernardo Villas with GBM.

Hi. Good morning José Luis. Thanks for taking the time for the questions. I was wondering and I was looking for, if you could comment on one-offs especially in terms of expenses for this quarter and I was wondering if you could comment a little bit more on the performance in other expenses that I think were increasing around 40%. José Luis Guerrero Cortés: Sure. Bernardo thank you for your questions. So in terms of expenses we see for example payroll increasing in the quarter at 2% although in the year it’s only increasing at 6.3%. In terms of payroll we had increased the reserve from the fourth quarter for the bonus payment for management so that was the 6 million increase in the reserve without this effect in quarter where payroll expenses would have been at 6.9%. In other expenses we have also increased our litigation reserve so that was a Ps. 9 million increase in the reserve. So without this effect, the other expenses in the quarter would have increased 19%. And we have also a reclassification of some expenses that we're considering as minor maintenance and now we're considering them as an our expenses and those were a charge of Ps. 40 million in the quarter in our expenses.

Okay perfect. You mentioned a 9 million increase in litigation reserve, what you are looking at in terms of core decisions are the judicial procedures. José Luis Guerrero Cortés: Yes the most important part of those Ps. 9 million are Ps. 8 million with profits that we have with the Perfecto in the Chihuahua airport and this is for the flooding that we had back in 2013 I believe from the airport received a tremendous amount of rain and unfortunately all of the runway was flooded on the terminal. And so the Perfecto is suing the airport of Chihuahua for the expenses that the passengers had to incur or the losses that they had to incur with the some flight cancellations. We are in this legal process we are trying to protect the assets of former and the expected cost if we lose this around Ps. 8 million. So that's the most important part of the increase. The other Ps. 1 million in litigation reserve is primarily for the processes with ex-employees.

Okay perfect. Sure. José Luis Guerrero Cortés: Go ahead.

So I was trying to ask or I was wondering if you could comment on the -- I think the operating income at the hotel -- at the Mexico City airport presented a 50% decline year-over-year, could you comment on also an increase in the expenses in the hotel? José Luis Guerrero Cortés: Absolutely so that was going to be my other comment. So in terms of the hotel, the expenses related to the commissions that we paid to the travel agencies that are '09 were being registered as an interest expense in the income statement of the hotel. And so we be classified Ps. 8 million in the year of these expenses that were usually charged on a lower line interest charges and in the fourth quarter are now being consider as part of the expenses of the operating the hotel. So this is an 8 million FX in the year and about a Ps. 6 million reclassification on January through September that affected the fourth quarter results.

Okay, perfect. And last or my last question is regarding the -- your MDP commitments for the year if I am correct for 2014 you had NDP commitments for Ps. 800 million and for 2015 you have close to 400 that is well below your guidance of MDP commitments. So I was wondering if you could comment on the CapEx that do you guys are probably delaying on to 2015 and probably onto the next MDP. José Luis Guerrero Cortés: Sure the investments in 2014 were a total of Ps. 619 million as we know we have usually three months to finish CapEx investments in the year. So as a little bit of the final payments Master Development Plan are actually taking place during the first quarter of 2015. We have also invested less probably less than expected in strategic investments outside the Master Development Plan during 2014. We have two flagship projects in 2014 for strategic investments which are the hotel and the industrial park. So some of those that part of those investments are taking place in 2015 as we are finishing up with the construction of both of those projects. So we think and we also have the land recognition in every year this past three years from 2013 to '15. So that is roughly about Ps. 130 million for 2015 CapEx and it was a similar number for 2015 that needs to be consider as part of those the total of Master Development Plan commitment. That is not as you one see as the cash flow going out because that is other commission of that plan that we acquired in previous years.

Okay that was really helpful. Thanks again for your help, Jose Luis. José Luis Guerrero Cortés: Thank you.

[Operator Instructions]. We'll go next to Ravi Jain [ph] with HSBC.

Hi good morning. I had two quick questions so first thing is on Monterrey. So if I was to look at the main driver of the significant increase in Monterrey traffic. Is it more on the expanding industrial production and economic activity in Mexico or is it mainly driven by let's say lack of capacity in Mexico City and Monterrey is becoming the next hub for other smaller cities within the Mexico which is a bigger driver in that sense. And my second question is on the MDP program for the next five years. Of course we don't have a specific guidance, but if you can just give us your expectation as to what do you expect for the next five years in terms of the extent of the CapEx based on the traffic that you're seen in the last couple of years. José Luis Guerrero Cortés: Sure. Thank you Ravi for your questions. So we're seeing extraordinary growth in passenger traffic in Monterrey as you mentioned. If you look at the December numbers and also in January. We saw in December growth about 20% both in domestic and international traffic in Monterrey and January being very strong as well. So that is primarily the effect of the growth that we're seeing the entire state of [indiscernible] the industrial growth and the foreign direct investment. So we have for example currently a construction of a very large automobile manufacturing facility by the KIA Company. So they're investing around $2 billion in this facility and that means that there are many other providers of these service that are also opening up shops in Monterrey. So that is I think the economic growth and the industrial growth in Monterrey are the main triggers for the passenger growth. We're also, the effect also comes from all the new routes that we opened in 2014 that many of them are in Monterrey. So in April 2014 we started operations of hub in Monterrey for Aeromexico and that was a project that we have been working with the airline for many years and we finally waited to convince them that they open more routes starting from Monterrey. And so the idea behind this is to connect many regional flights so that they can connect in Monterrey and then go to other destinations primarily the central part of the US. We also waited through work with Volaris for them to have more operations in Monterrey as you know there were more focused in the region of Guadalajara and Mexico City and now they have much more operations in Monterrey and we have the other very important airlines Interjet and VivaAerobus having larger operations as well in Monterrey and opening new routes. And so those are the most I would say significant reasons why Monterrey is growing. Turning to your other questions regarding the Master Development Plan for the next five years. As you know right now we are working with the DGAC, the Defining Traffic Forecasts for all of the airports in the next five years so that is the most important part of the next five year planning defining where we think traffic is going to be in the airports because from that the direct what the CapEx and maintenance expenses will be at each one of those stages. So we are expecting that the total CapEx for the next five year plans should be higher than the current five year plan. We are not sure by how much but it should be an increase from our current five year plan.

Thank you. That's helpful. If I may just one follow-up last question on the traffic growth. Your guidance for 2015 is between 6% and 8%. I mean if I look at the acceleration of traffic growth and let's say the last four to five months in 2014 that would imply let's say a very strong first half of this year. so I'm just trying to think whether there is an upside risk to that guidance or will second half be really let’s say low single-digit because of the very strong comp that we will see. I am just trying to reconcile where there is let’s say more risk to the downside or the upside in terms of traffic growth? José Luis Guerrero Cortés: Sure, that is a very important question. So we hope that traffic continues to grow even in the fourth quarter of 2015. This would mean that we need to have more groups in this first quarter and the rest of the year. As we know we saw an extraordinary addition of net new routes in 2015 but that was a number of 46, that is extraordinary for any other year that we have seen so as you mentioned we are going to see probably a very strong first half in terms of passenger growth and then we need to keep up by adding more routes in 2015. By no means I think that we are going to achieve 45 net new routes in 2015 but we hope to add a couple of more so yes we do expect deceleration of the last quarter in terms of passenger traffic and so that’s why we are going into between 6% and 8% passenger growth.

Okay. Fair enough. Thank you so much Jose Luis.

And we'll go next to Stephen Trent with Citi.

Hi. Good morning everybody and thanks for taking my questions. Just one or two for me, I am looking at the -- you guys have NH Hotel in Mexico City, you're launching Hilton Garden Inn in Monterrey. Any thoughts or potential to at least partially participate in new hotel project either in or near your airport facilities in Mazatlán or Zihuatanejo. José Luis Guerrero Cortés: Thank you Stephen. So for the moment the team is focused primarily on finishing works of the Hilton Hotel and starting the operations in that hotel. Obviously we're not operating it but the team that looks for new initiatives right now is focused on both the new hotel in Monterrey and the industrial park. They do have the radar on for new opportunities in other airports as you mentioned some of them are harder to achieve because the airports are very far away from the city. So in the case of the airport of Zihuatanejo I do not see any opportunities or my having a hotel in the medium term in the terminal of Zihuatanejo. So for these short term and medium term we're going to be focused on operating the Hilton Hotel Monterrey but we are looking for new opportunities in other airports.

Okay, great. Thanks very much. And just one more question Jose Luis I know there is a local airline there not exactly larger cover but they seem to fairly recently switched on some Asia bound flights from doing a technical stuff for Mexico City doing the technical stuff in Tijuana to doing a technical stuff in Monterrey and as that route continues to spool up and other routes like it any early feedback in terms of how the airlines are doing out of Monterrey, I mean certainly the traffic performance looks very strong but any early feedback from them from the airline themselves that you might be able to share? José Luis Guerrero Cortés: Sure. As you know opening new routes represents a risk for the airline and for the airport it was supporting that new route. We tried to work on the routes and open new routes that we believe are going to be successful. So far we hope that the majority of the routes that we opened that they can perceive and survive in the near future. Some of them might not be profitable as expected and the airlines might choose to put their planes into other destinations. But so far I mean with the fully six minute net new routes that we open in 2014, we feel comfortable and we hope that the majority of them will proceed going forward. In terms of the particularly route that we mentioned is the Aeromexico route that they switch from Tijuana to Monterrey line to Narita, in Japan. So this is a very important destination for Monterrey because now with the clear plan from North Korea that helps the connectivity for many people that are going to be working in Monterrey to now be able to connect through Japan.

Okay. That’s very helpful. Let me leave it there. Thanks José Luis.

We’ll take our next question from Alejandro [ph] with Credit Suisse.

Jose Luis good morning [indiscernible]. Thank you for the call. Just want to know a question on the hotel, can you give a little bit more on the margin contraction even after the reclassification of the commission. We can see our cost -- an increasing cost of about 20% can you give a little bit more on this front, please? José Luis Guerrero Cortés: Sure. So those are basically cost and expenses of the hotel maybe some maintenance for the new areas that we opened but we are the most important part of that region as you mentioned reclassification of those expenses and we hope that in the next year, the total costs and expansions are in line with the revenue growth of the hotel.

Okay. Thank you and just as a whole check do you expect both the Hilton Garden Inn and the Monterrey industrial park to be fully operational by the first quarter of this year? And… no it's okay I can wait. José Luis Guerrero Cortés: Okay. So regarding to the question of when will the operations of the hotel and the industrial park start. We are expecting them to begin in this first half of the year so probably in the second quarter of this year.

Okay. Thank you. And just one last question what do you expect for major maintenance provision going forward? José Luis Guerrero Cortés: So the major maintenance provision for going forward should be very similar to what we have in the full year of 2014. We might have a little adjustments maybe if we believe there are new projects coming up etc. but the current major maintenance provision today reflects what will be needed in the lifetime of all the assets that we have under the aeronautical services that we provide. So for now we don’t expect that provision to remain at the same level.

Okay. Thank you.

At this time, we have one question remaining in the queue. [Operator Instructions] And we’ll take our next question from Renato Stilburger [ph] with Goldman Sachs.

Hi thank you and congratulations I believe in the results. So I have basically two questions here. The first one regards to your new businesses that you’re opening this year in the hotel and in the industrial park, so what level of margin contraction can we expect for this year given the startup of this project. And my second question is regarding dividends do you expect to continue to pay the same amount you have been paying over the last year given the launch of the new Master Development Plan in the early 2016? And that’s it from me thank you. José Luis Guerrero Cortés: Thank you for your questions. So as we very well mentioned when we open the NH Hotel in Mexico City we saw a margin detraction of about 1% because of the operations of the NH Hotel particularly in the first year of operations. Even though we were able to grow obviously the commercial revenues and the EBITDA grew by in its amount than margin was not able to continue to increase. Nevertheless seeing many of the new projects that we’re seeing both in the aeronautical front on the commercial front apart from the hotel and industrial park, our guidance for this year 2015 in terms of EBITDA margin is between 53% and 55% which is nowhere in line with what we were able to achieve in 2014. So we might not see a contraction of an EBITDA margin in the mid-year because of these new two projects. And could you remind me your second question please.

Yeah it was regarding dividends if you’re going to pay the same amount you’ve been paying in the last years with the new Master Development Plan? José Luis Guerrero Cortés: Sure. So for this year as we know the dividends that we paid which have been reimbursements of capital in the past three years need to be approved by the board of OMA and then by the general shareholders meeting in that will take in April. Yet we expect that both of these the board and the general shareholders meeting. We could approve a Ps. 1.2 billion reimbursements of capital in the -- for 2015. As you can see now in our balance we have enough cash that to be able to do a payment like this and also to be able to pay for our CapEx interest the taxes that when we need to pay as well. So that is the expectations going forward we will see as you mentioned how much cash we have available, what is the level of investments that we have, what are the projects that we're seeing in the medium term.

That's perfect. Thank you.

And our next question will come from Francisco Suarez [ph] with Scotia Bank.

Hi good morning Jose Luis. Thank you for the call. A question on your international passenger targets I was surprised to see the reduction there I know if you can actually comment and provide a little bit of color if that is something that we should be modeling for the year forward or is this something that we -- that we should be covering a bit because it was kind of surprising for me. José Luis Guerrero Cortés: Sure and that's a very good question. So as you know we try to be very close to a 100% charge in our maximum tariff throughout the year. And if we are above that level in our reports we usually make the adjustments in the tariffs of international traffic. So that is basically the reduction that amount comes from the reserve that we generate because of the excess in that we had in some of the airports.

Got it great. And also I was a little bit surprised to see to not to see an improvement in your average revenue per passenger on commercial related activities. I mean the question here is that if that something that is explained because of the current stages of these new projects that should be eventually enhancing your overall commercial revenue stream going forward. or are we facing any major constraints in terms of terminal capacity or anything that may actually explained quite we haven't seen an improvement on that failure. José Luis Guerrero Cortés: So as you look at the growth of non-aeronautical revenue they grew at 14.7% in the quarter. And the thing that we also had a very strong growth in passengers in the quarter. So that is I mean it's been hard for us to be able to grow our commercial revenues faster than the growth in passenger traffic, passenger traffic grew also at around 14%. So some initiative like advertising for example those are contracts that are based on our expected traffic but they do not switch by if we are able to capture more traffic in the short term. So that will be the main reason for that. We do of course see a very direct correlation between traffic and passenger growth in the commercial revenues. Some of them are linked to restaurant sales or also the shops that we have for the parking lots but there are others that are not.

Got it. Okay thank you. And lastly from me, on the cost side of equation thus any portion of the overall cost and expenses of that increase in the quarter correlates to these initiatives that you are -- that's end for this year I mean in terms of your overall diversification efforts. I mean to what extent the hikes that we have seen expense and cost could be in the way one-offs and things should be going better as the year progresses and of course as a new businesses come and start to bring you wherever revenues going forward. José Luis Guerrero Cortés: Sure. So for that question I would recommend looking at the year, I would sell in cost and expenses for 2014. So there you would keep example in payroll that the payroll in the year increased 6.3% which is basically inflation plus other profitable much less --. So the quarter in payroll increased 12% and that was primarily because of an increase in the result for the bonus payment for management. But in the year as we see a growth of 6% that's something that could be similar to what we could expect in 2015. The other one-off that we had in the quarter that we remain the same we probably don't see again next year are for example the increasing the litigation reserve by Ps. 9 million that happened in the fourth quarter. And the -- so those are basically and of course the hotel also the reclassification of Ps. 8 million in the expenses, the full year expenses should be in that line item should be similar plus an increasing inflation plus the operational increases in the hotel for 2015. So those are basically the one-time FX that we saw in 2014.

Thank you for your answers. Take care. José Luis Guerrero Cortés: You're welcome. Thank you.

And it appears there are no further questions at this time, Mr. Guerrero, I would like to turn the conference back to you for any additional or closing remarks. José Luis Guerrero Cortés: Thank you. So on behalf of OMA, I want to thank all of you again for your participation in this call. With Charlie [ph] 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.

This does conclude today's conference. Thank you for your participation. You may now disconnect.