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Edited Transcript of OMAB.MX earnings conference call or presentation 18-Oct-19 4:00pm GMT

Q3 2019 Grupo Aeroportuario del Centro Norte SAB de CV Earnings Call

Oct 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Grupo Aeroportuario del Centro Norte SAB de CV earnings conference call or presentation Friday, October 18, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Luis Emmanuel Camacho Thierry

Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. - IR Officer

* Ricardo Dueñas Espriu

Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. - CEO

* Ruffo Pérez Pliego del Castillo

Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. - CFO

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Conference Call Participants

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* Alan Macias

BofA Merrill Lynch, Research Division - Analyst

* Alejandro Zamacona Urquiza

Crédit Suisse AG, Research Division - Research Analyst

* Armando Rodriguez

Signum Research - Stock Market Analysis Manager

* Mauricio Martinez Vallejo

GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst

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Presentation

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Operator [1]

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Greetings and welcome to the Grupo Aeroportuario del Centro Norte OMA Third Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Emmanuel Camacho, Investor Relations Officer. Thank you. Mr. Camacho, you may begin.

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Luis Emmanuel Camacho Thierry, Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. - IR Officer [2]

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Thank you, Doug. Good morning, everyone. Thank you for standing by, and welcome to OMA's Third Quarter 2019 Earnings Conference Call. We have today Ricardo Dueñas, OMA's Chief Executive Officer; and Ruffo Pérez Pliego, Chief Financial Officer. They will discuss OMA's third quarter 2019 results announced yesterday.

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.

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Ricardo Dueñas Espriu, Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. - CEO [3]

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Thank you, Emmanuel. Good morning, everyone, and thank you for joining us today. This morning, I will review our third quarter operational performance.

OMA delivered another solid financial and operating performance in the third quarter of 2019. Adjusted EBITDA grew 14.5% in the quarter, and adjusted EBITDA margin reached 74.1%, an all-time high, largely as a result of the increase in both aeronautical and non-aeronautical revenues, which grew as the consequences of the performance of revenues and passenger traffic during the quarter as well as cost efficiencies.

The cost control initiatives implemented mainly aimed at reducing overhead expenses continued to be key to our performance during the third quarter, resulting in a decrease of 2% in cost of airport services and G&A.

Our cash flow generation was strong, with 9-month cash flow from operations reaching MXN 2.8 billion. This enabled us to fund our Master Development Program, strategic investments, and the cash dividend paid to shareholders out of funds from operations.

OMA has now delivered 39 consecutive quarters of growth in aeronautical and non-aeronautical revenues and 33 quarters of adjusted EBITDA growth. Passenger traffic reached 6.1 million passengers in the third quarter, up 6.9%. Nine airlines increased passenger volumes, the largest contributions to growth came from Volaris and VivaAerobus. Total available seats increased 6.8% as airlines deployed more capacity and increased frequencies mainly on regional routes during the quarter.

On our 5 routes that contributed most to growth in the quarter: Acapulco-Mexico City; Culiacán-Mexico City; Culiacán-Tijuana; Zacatecas-Mexico City; and Ciudad Juárez-Bajio, the total available seats grew a combined 31% versus the third quarter of 2018. Additionally, 2 routes were open in the quarter, while one closed.

On the commercial front, we implemented 21 initiatives in the quarter, including restaurants, bank services and hotel promotion, among others. Commercial revenue grew 12.3%, and the occupancy rate for commercial space in our terminals was 99%. Diversification activities delivered a solid performance, with revenue growth of 9.7% driven primarily by increases in OMA Carga and hotel services.

Total investment in the quarter, including MDP investments, major maintenance and strategic investments were MXN 357 million. Capital expenditures have accelerated in the quarter mainly due to our major projects underway, which include 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 and a modernization of the Zihuatanejo terminal building; a new passenger terminal building in Reynosa; and works on runways, taxiways and aviation platforms in several airports.

I am pleased to announce that during the quarter, we inaugurated the expansion and remodeling of both the Chihuahua and San Luis Potosí terminal buildings. We had a combined investment of over MXN 700 million in the project and expanded more than 14,000 square meters in additional terminal space as well as almost 10,000 in remodeled areas. In addition, the new Reynosa terminal project is scheduled to be completed and inaugurated in January. We expect that this investment will help OMA contribute on our path of higher aeronautical and non-aeronautical revenues.

I would now like to turn the call over to Ruffo Pérez Pliego, our CFO, who will discuss our financial highlights for the quarter.

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Ruffo Pérez Pliego del Castillo, Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. - CFO [4]

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Thank you, Ricardo. Good morning, everyone. I will briefly review our financial results, and then we will open the call for your questions.

Turning to OMA's third quarter financial results. Aeronautical revenues increased 10% driven by the 6.9% growth in passengers. Aeronautical revenue per passenger rose 2.9% in the quarter. Non-aeronautical revenues rose 11.2%, with commercial revenues making the largest contribution to growth. Commercial revenues increased 12.3%, the best performing categories were car parking, restaurants, VIP lounges and car rental. Parking revenue was up mostly because of the higher volume of operations and an increased average ticket, mainly in the Monterrey, Chihuahua and Ciudad Juárez airports.

Restaurant revenues grew 18% as a result of higher revenues from royalties in Ciudad Juárez, Chihuahua, Monterrey and Culiacán airports as well as the beginning of operations on restaurants in our renewed commercial spaces in Monterrey, Chihuahua and Acapulco.

VIP lounges grew 43% due to a higher volume of users as well as the openings in Terminal C and Terminal B of the Monterrey airport, San Luis Potosí and Acapulco airports. Car rental revenues rose 10% because of the listing of 7 new rental locales during 2019 and improved contractual terms. As a result, commercial revenues per passenger increased 5.1% to 35 -- MXN 38.5.

Diversification activities grew 9.7% mostly driven by OMA Carga and hotel services. Total aeronautical and non-aeronautical revenues reached MXN 2 billion. Construction revenue increased 3.2%, this is a noncash 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.

OMA's initiatives to control overhead expenses implemented throughout 2018 continued to contribute to our results in the third quarter. The cost of airport services and G&A expense decreased 2.0%. During this quarter, we had a lower cost of basic services such as electricity, water as well as in insurance and professional fees primarily. The impact of implementation of IFRS 16 resulted in the reduction of rent expense in 3Q '19 relative to 3Q '18 of MXN 9.1 million, including cost of hotel services.

OMA's third quarter adjusted EBITDA increased 14.5% to MXN 1.4 billion and the adjusted EBITDA margin was 74.1%, up 274 basis points. Primarily as a result of all these factors, consolidated net income rose 18.2% to MXN 858 million.

Our cash flow generation from operations was also strong. Total cash from operating activities rose 0.4% to MXN 2.8 billion during the quarter. This principally reflects the strong operating performance of the company as well as increased cash taxes paid over the quarter.

Our cash flow generation -- this concludes our prepared remarks. Doug, please open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Alan Macias from Bank of America.

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Alan Macias, BofA Merrill Lynch, Research Division - Analyst [2]

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Just on margins, what are your expectations for next year? Is the 74% EBITDA margin sustainable? And if you could just give us color on why insurance costs have decreased significantly during the quarter and year-to-date.

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Ricardo Dueñas Espriu, Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. - CEO [3]

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Sure. The third quarter margin was quite high. We believe that in the fourth quarter, we should reflect some inflationary catch-up in overall cost, which would offset some savings generated in utilities and insurance. However, we believe margins around 73% for the full year should be achievable. On the insurance front, we conducted a competitive process that allowed us to reduce the insurance fees by an important margin.

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Operator [4]

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Our next question comes from the line of Mauricio Martinez from GBM.

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Mauricio Martinez Vallejo, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [5]

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Congratulations for the great results. It caught my eye, the deceleration of flat openings during this quarter, so maybe you can share with us your thoughts on these. And how are you seeing the capacity allocation from airlines for next quarters? And if you're still expecting the 6% traffic growth for this year, that will be my question.

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Ricardo Dueñas Espriu, Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. - CEO [6]

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Yes. For this quarter, there were 2 routes that opened, one was domestic, the other was international. One was opened by TAR, the other by Magnicharters. For the third quarter, we're expecting the...

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Ruffo Pérez Pliego del Castillo, Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. - CFO [7]

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Fourth.

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Ricardo Dueñas Espriu, Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. - CEO [8]

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For the fourth quarter, sorry, we already have confirmed 19 new routes. Out of those, 12 are domestic, 7 are international, 7 are permanent and 12 are seasonal routes. And that would put us compared to 2018 -- just to put it in perspective, 2018, there were 51 openings, 33 closings. Right now, we're already at the same net number of routes as last year.

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Mauricio Martinez Vallejo, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [9]

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And regarding traffic passenger growth?

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Ricardo Dueñas Espriu, Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. - CEO [10]

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I mean we believe a 7% -- some number around 7% will be achievable.

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Operator [11]

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Our next question comes from the line of Alejandro Zamacona from Credit Suisse.

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Alejandro Zamacona Urquiza, Crédit Suisse AG, Research Division - Research Analyst [12]

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Congratulations for the results. My first question is regarding the cost of -- I'm sorry, the MDP. I know it's probably early to discuss on this topic, but it would be interesting to know what's your initial expectations in terms of CapEx and tariff for the 5 years -- for the following 5 years. And if you did believe that the cost of -- the strong cost control could affect the negotiated tariff for the next MDP.

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Ricardo Dueñas Espriu, Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. - CEO [13]

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Alejandro, we're still working on the MDP plan for next year. What I can tell you so far is the CapEx will be slightly higher than the one for this 5-year plan in order to catch up with the strong traffic that we've seen in the last few years.

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Ruffo Pérez Pliego del Castillo, Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. - CFO [14]

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And regarding cost controls, Alejandro, I mean, please remember that not necessarily all the costs that we incurred were recognized by the DGAC in previous negotiations because they also established certain parameters on the reasonability of those costs. So now that we have more cost alignment to our other peers, I don't think it's going to have a significant impact or a negative impact in our discussions with DGAC given that it will be aligned to what other groups have in margins.

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Alejandro Zamacona Urquiza, Crédit Suisse AG, Research Division - Research Analyst [15]

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Okay. And do you have any expectations for tariffs?

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Ruffo Pérez Pliego del Castillo, Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. - CFO [16]

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I think we still are evaluating alternatives. We are closely following one of our competitors' process, and we'll have to see what's the result of that negotiation is before setting an expectation for ourselves.

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Operator [17]

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(Operator Instructions) Our next question comes from the line of Armando Rodriguez from Signum Research.

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Armando Rodriguez, Signum Research - Stock Market Analysis Manager [18]

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Well, my first question is on your balance sheet. Considering these results, you show us a net debt to adjusted EBITDA ratio below 0.3x, and well, considering your strategic investments, my question here is if these levels are sustainable or what we should expect in the following quarters.

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Ruffo Pérez Pliego del Castillo, Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. - CFO [19]

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Well, we will -- Armando, this is Ruffo. We are building cash balance in -- every quarter. It was mentioned in the earnings release that we repurchased about MXN 210 million worth of shares in the past couple of years. The dividend has remained fixed. And even with that share repurchase, our net cash flow increased in the quarter. Given the expected investments for the current MDP cycle, we will continue to build up cash and we will opportunistically acquire shares if possible.

And regarding net debt, we would like to have additional leverage. However, the level of dividends that we are able to pay depends on net fiscal tax earnings, and we build that account every -- with the growth of every year. So we do not have significant impact to increase the dividend, except for the growth in earnings in the current year.

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Operator [20]

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There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

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Ricardo Dueñas Espriu, Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. - CEO [21]

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I would -- just to thank all of you for participating in this call. As you know, we're always available to answer questions, and we hope to see you soon at our offices. Thank you, and have a good day.

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Operator [22]

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Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.