Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. (OMAB) Q4 2019 Earnings Report, Transcript and Summary

Greetings! And welcome to the Grupo Aeroportuario del Centro Norte, OMA Fourth Quarter 2019 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. Please note this conference is being recorded.I would now like to turn the conference to your host, Emmanuel Camacho. Thank you. You may begin.

Thank you, Devin. Good morning everyone. Thank you for standing by and welcome to OMA's fourth quarter 2019 earnings conference call.Ricardo Dueñas, OMA's Chief Executive Officer; and Ruffo Pérez Pliego, Chief Financial Officer, will be joining this morning and will discuss OMA's fourth quarter 2019 results.Please be reminded that certain statements made during the course of our discussion today may constitute forward-looking statements, which are based on current management expectations and beliefs and are subject to a number of risks and uncertainties that could cause actual results to differ materially, including factors that may be beyond our control.I will now turn the call over to Ricardo Dueñas. Ricardo Dueñas: Thank you, and good morning to everyone. I will review of our fourth quarter operational performance.OMA delivered another solid financial and operating performance in the fourth quarter of 2019 and record results for the full year. Adjusted EBITDA grew 15.2% in the quarter and adjusted EBITDA margin reached 73.2%, largely as a result of the increase in both aeronautical and non-aeronautical revenues, as well as cost cut and efficiencies.For the full year, OMA generated record levels of revenue and adjusted EBITDA, as well as adjusted EBITDA margin of 73.5%. One of the keys to our performance besides additional passenger traffic was keeping a tight rein on costs and expenses.For the full year cost of airport services and G&A decreased 2.3% with decreases in basic services, payroll and contracted services. The main initiatives that contributed most to savings during the year were our electricity contract with our renewable energy supplier, which became fully operational in first quarter of 2019 and allows for the supply of over 55% of our conception. Also, corporate overhead reductions implemented in 2018 and with full effect in 2019 and improved controls of third party contracts.Our cash flow generation was strong with 12 month cash flow from operations reaching MXN 3.7 billion. This enabled us to fund our master development program and strategic investments, as well as the payment of our dividend, our funds from operations. OMA has now delivered 40 consecutive quarters of growth in aeronautical and non-aeronautical revenues and 34 quarters of adjusted EBITDA growth.Passenger traffic reached 5.9 million passengers in the fourth quarter, up 7.6%. Seven airline increased passenger volumes. The largest contributions to growth came from VivaAerobus and Volaris.Total available seats increased 8%. On our five most important routes in terms of passenger contribution, Monterrey to Mexico City, Monterrey to Cancún, Monterrey to Guadalajara, Culiacán to Tijuana and Chihuahua to Mexico City; the total available seats grew a combined 2% versus fourth quarter of 2018. For the full year these same routes increased a combined 5% versus 2018. Additionally, 22 routes were opened in the quarter, while six closed.On the commercial front, we implemented 24 initiatives in the quarter, including Car Rental, Bank Service and Restaurants among others. Commercial revenue grew 10.2% and the occupancy rate for commercial space in our terminals was 97.2%. Diversification activities delivered a solid performance with revenue growth of 7%, driven primarily by higher revenues from OMA Cargo and the Industrial Park.Recently we singed three lease contracts at the Monterey Industrial Park with expected analyzed revenues of approximately $830,000. We expect this contract to start generating revenues in the third and fourth quarter of this year.Total investment in the quarter, including MDB investments, major maintenance and strategic investments were MXN 491 million. Our projects on the way include the expansion of the public area in the Monterrey Airport Terminal A, expansion of Terminal C in Monterrey, expansion and remodeling of the Tampico terminal building, modernization of the Zihuatanejo terminal building, a new passenger terminal building in Reynosa and work on runways, taxiways and aviation platforms in several airports.I am pleased to announce that during the fourth quarter of ’19 we started a major expansion project at the Monterrey International Airport. We expect to invest MXN 4.2 billion between 2019 and 2025, of which MXN 500 million correspond to our current MDP commitments.Major highlights of this project include a Phase 1 consisting of the expansion of the public and checking areas of Terminal A and the construction of wing number one. As a result, total terminal space will increase in over 15,000 square meters, approximately 25% greater than existing terminal space.Certain areas of Phase 1 will become operational by the end of 2021 and is expected to be fully operational by 2022. A Phase 2 consisting of the construction of Wing 2, representing new terminal space of an additional 16,000 square meters.Phase 2 is expected to be completed by 2024. After this expansion, the Monterrey airport will have an annual capacity of 16.5 million passengers, up from 11.6 million passengers currently; strengthening its allies and most important connection center in the Northern Mexico.Finally, I would like to point out we have started the process for the 2021, 2025 master development program negotiation. In the first two months of the year we will be presenting the investment plans for each airport to our airline customers in order to receive their feedback in upcoming weeks.Next steps will be submit the master development program by June, to the civil aviation agency. We expect the negotiation process with the authority to take place in the third and fourth quarters of 2020.I would now like to turn the call over to Ruffo, who will discuss our financial highlights for the quarter. Ruffo Pérez Pliego: Thank you, Ricardo. Good morning, everyone. I will briefly review our financial results, then we will open the call for questions.Turning to OMA's fourth quarter financial results; aeronautical revenues increased 10%, driven by the 7.6% growth in passengers. Aeronautical revenue per passenger rose 2.2% in the quarter. Non-aeronautical revenues increased 9.8% with commercial revenues making the largest contribution to growth.Commercial revenues increased 10.2%. The best performing categories were car parking, restaurants, car rental and VIP lounges. Parking revenue was up mostly because of growth in number of users and an increase in long-stay operations, mainly in the Monterrey, Ciudad Juárez and Chihuahua airports.Restaurant revenue grew 18% due to the start of operations of new restaurants in airports with new and/or renewed commercial areas along 2019, such as Chihuahua and San Luis Potosí; as well as renewals with better contractual terms in several airports.Car rental revenues rose 11% as a result of the implementation of 15 initiatives during 2019. VIP lounges grew 30%, derived from a higher penetration rate and passenger traffic growth. As a result, commercial revenues per passenger increased 2.4% to MXN 40 as compared to the same quarter of last year.Diversification revenues grew 7.0%, mostly driven by OMA Carga revenues from the Industrial Park. Total aeronautical and non-aeronautical revenues reached MXN 2 billion. Construction revenue increased 24.7%. This is a non-cash item that is required under applicable accounting standards. It is equal to construction cost of improvements to concession assets, so it has no effect on earnings.Fourth quarter results continue to reflect our efforts to control overhead expenses, because airport services and G&A expense decreased 3.4%. During this quarter payroll decreased 9% as we cut lower cost of basic services such as electricity and water, which contributed most to this quarter’s performance, the impact of implementation of IFRS 16 and the reduction in rent expense during 4Q ‘19 versus 4Q ‘18 of MXN 9.1 million, including cost of hotel services.OMA's fourth third quarter adjusted EBITDA increased 15.2% to MXN 1.4 billion, and the adjusted EBITDA margin was 73.2%, up 330 basis points.During the quarter our financing expense was MXN 118 million. We recorded an exchange loss of 64 million, mainly as a result of our cash position nominated in U.S. dollars.At the end of December 2019, the cash in American dollars amounted to $79 million. Primarily as a result of the above mentioned, consolidated income decreased 7.1% to MXN 761 million.Total cash from operating activities rose 0.1% to MXN 3.7 billion during 2019. This principally reflects an increase in working capital needs, as well as the strong operating performance of the company.This concludes our prepared remarks. Devin, please open the call for questions.

Absolutely! [Operator Instructions] Our first question comes from the line of Alan Macias with Bank of America. Please go with your question.

Hi! Good morning and thank you for the call. Just one question on the level of adjusted EBITDA margin that you're expecting this year and if there is room for expansion and what would be the drivers for this and do you have a long term target for margin? Thank you. Ruffo Pérez Pliego: Sure, thank you. As you have noticed over the last three years, we have expanded significantly our EBITDA margins. We reached 73.5% in 2019. The objective is to maintain that level. Obviously we continue to identify ways to running our airports more efficiently and finding another cost cutting initiative. But at this time, our goal for this year is to maintain that level and going forward to push it slightly.

Thank you.

Our next question comes from one of Josh Milberg with Morgan Stanley. Please proceed with your question.

Good morning, everybody. Thank you for the call. You commented on some of the major projects in the pipeline, but I was hoping you could update us on your expectations for the overall level of investment in the next MVP and also what the likely tariff adjustment could be; if that's something that you're giving some level of disclosure on. Ricardo Dueñas: Sure Josh. We continue to work on the review of the MVP investment. At this time we expect to have a total investment for the five year period of between MXN 14 billion and MXN 15 billion. However, as we mentioned earlier in the call, we are presenting the plans to airlines and modifications may occur in the coming months. As for the tariffs, there is many variables involved and I believe it is still too early to say.

Okay, that’s very helpful. Has GAAPs outcome last year in any way shifted your expectations? I think the CapEx amount that you mentioned is a good deal higher than what you had talked about around mid-last year? Is that correct? Ricardo Dueñas: Yes, it is slightly higher. That has been the result of the projections that we have in traffic and we believe that the amount will be needed in the next few years.

Okay, that’s helpful. And then my second question was if you could just touch on the issue of the Mexico City airport capacity constrained. You guys in 2017 have the issue of a temporary shift in the rules for slot usage hurting your traffic and some analysis that we did recently show that there is very limited space for new flights today in the airport, such that it seemed as if you know most of the growth would have to come from up-guaging. So just wanted to get your perspective on that and you know to what extent you're seeing you know limited capacity in Mexico City as a potential constrain on your growth in the next several years. Ricardo Dueñas: I mean, as we all read, there's a saturation problem in the center of Mexico. The Mexico City airport is running at full capacity. The current government is currently in construction of the new airport in Santa Lucia that will work in conjunction with the Mexico City airport and Toluca airport. So we believe that there will be expansion in the mid to long term.In the short term, most of the growth in the Mexico City airport will be through larger planes and maybe a higher occupancy factor, but we believe that is an opportunity for our airports in Monterey, as airlines will start to look for alternatives for traffic in Mexico City. They will start developing we believe point-to-point routes and shifting some of the traffic to other airports such as Monterey, which is strategically located in the northern part of Mexico City. We have enough capacity to absorb that demand and much more.

Okay, that was very clear. Thank you.

Our next question comes from the line of Eduardo Alvizouri with GBM. Please state the question.

Hi guys, thank you for the call. My question is regarding the MVP. What are your expectations regarding the negotiations and the maximum tariff now that you're cost structure is much lower than five years ago. Thank you. Ricardo Dueñas: In terms of tariff level I think it’s still too early to say; there's a lot of variables involved. What we can tell you is we're working on a CapEx that will be between MXN 14 billion and MXN 15 billion. That would obviously vary as we advance in the conversations with airlines and the authorities, but at this point in the process, still too early to give some indication in tariffs.

Okay, thank you. Ruffo Pérez Pliego: Regarding the cost that we have achieved in recent years, we do not think it is going to be a major factor in the discussion. In previous MVP traditions, not all of the cost structures of OMA was recognized into the tariff. So I believe now what will be recognized is going to be closer to our actual operations.

Great! That’s helpful. Thank you.

Our next question comes from the line of Diego Gaxiola with Credit Suisse. Please go with your question.

Hi, good morning. Thank you for the call. My question is regarding the policy change for the long weekends. Do you have any estimate or color and the impact it might have on the traffic? Ruffo Pérez Pliego: Yes, there are three long weekends throughout the year in Mexico currently. As you know our airforce are not that exposed to leisure traffic and we believe the impact to be marginal.

Okay, thank you.

Our next question comes from the line of Steven Trent with Citi. Please go with your question.

Yes hi, thanks for taking my call. It’s actually Brian Roberts on for Steve. Can you tell me about the situation with your host airline? Have you had to take any special measures with any of them in order to ensure a timely payment? Ricardo Dueñas: Can you repeat the question? There was some noise in the line.

Yeah, sure. Just asking about the situation with your host airlines. Have you had to take any special measures with any of those carriers and work to ensure timely payments? Thank you. Ricardo Dueñas: Hi. We have different payment terms for different airlines. Some of them are on the prepayment of their operations and at this time we do not have any issues with any of them.

Okay, thank you.

Since there are no further questions left in the queue, I would like to turn the call back over to management for any closing remarks. Ricardo Dueñas: I want to thank you all again for participating in this call. Ruffo, Emmanuel and I are always available to answer your questions and we hope to see you soon at our offices. Thank you and have a good day!

This concludes todays teleconference. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day!