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Edited Transcript of OMAB.MX earnings conference call or presentation 12-Feb-19 4:00pm GMT

Q4 2018 Grupo Aeroportuario del Centro Norte SAB de CV Earnings Call

Apr 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Grupo Aeroportuario del Centro Norte SAB de CV earnings conference call or presentation Tuesday, February 12, 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 Duenas

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

* Bruno Amorim

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Lucas T. Barbosa

Morgan Stanley, Research Division - Research Associate

* Manuela Echavarría Cuartas

* Mauricio Martinez Vallejo

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

* Rogério Araújo

UBS Investment Bank, Research Division - Director and Equity Research Analyst

* Ruben López Romero

Santander Investment Securities Inc., Research Division - Research Analyst

* Samuel Campos Alves

Banco BTG Pactual S.A., Research Division - Research Analyst

* Stephen Trent

Citigroup Inc, Research Division - Director

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Presentation

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Operator [1]

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Greetings, and welcome to Grupo Aeroportuario del Centro Norte, OMA Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Emmanuel Camacho, Investor Relations Officer. Please go ahead, sir.

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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. Good morning, everyone. Thank you for standing by, and welcome to OMA's fourth quarter 2018 earnings conference call.

We have today, Ricardo Duenas, OMA's Chief Executive Officer; and Ruffo Pérez Pliego, Chief Financial Officer. They will be discussing OMA's fourth quarter 2018 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 Duenas.

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Ricardo Duenas, 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. I'm very pleased to be here with you this morning, and it's a great honor for me to take part of this new challenge as OMA's CEO. We've worked very hard to ensure continued success of OMA development in the coming years, and I look forward to meeting and speaking with all of you.

I will start by briefly reviewing our fourth quarter operational results. OMA delivered record financial results and operating results in the fourth quarter of 2018 and record results for the full year. Adjusted EBITDA grew 22% in the quarter, and adjusted EBITDA margin reached 70%, largely as a result of our cost-cutting initiatives and our actions to increase both aeronautical and non-aeronautical revenues.

For the full year, OMA generated the highest levels of revenue, adjusted EBITDA and net income in our history with double-digit growth in all these categories. OMA also recorded the highest full year adjusted EBITDA margin in our history, 70%. One of the keys to our performance besides additional passenger traffic was to keep a tight rein on cost and expenses through the implementation of cost-cutting initiatives in 2018 aimed at reducing overhead expenses.

For the full year, cost of airport services and G&A decreased 2.5%, with decreases in most line items. 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 divestments as well as a payment of our dividend out of funds from operations. OMA have now delivered 36 consecutive quarters of growth in aeronautical and non-aeronautical revenues and 30 quarters of adjusted EBITDA growth.

Passenger traffic reached 5.3 million passengers in the fourth quarter. That is up 10.4%. 10 airlines increased passenger volumes. The largest contributions to growth came from VivaAerobus and Volaris. Total available seats increased 9.6%, as airlines have deployed more capacity and increased frequencies, particularly on the highest volume routes.

On our single highest volume route, Monterrey to Mexico City, total available seats grew 15% compared to the fourth quarter of 2017. On 4 other high volume routes in the quarter; Monterrey-Cancún; Monterrey-Guadalajara; Culiacán-Tijuana; and Chihuahua-Mexico City, the total available seats also grew a combined 15% versus the fourth quarter of 2017. Additionally, airlines opened 17 routes in the quarter, while six closed.

On the commercial front, we implemented 40 (sic) [14] initiatives in the quarter, including a new advertising service contract as well as new food and beverage outlets primarily. Commercial revenue grew 13% and the occupancy rate for commercial space in our terminals was 99%.

Diversification activities delivered a solid performance with revenue growth of 7%. The Monterrey Industrial Park continues to develop with six leased warehouses generating revenue.

Total investments in the quarter, including the Master Development Plan investments, major maintenance and strategic investments, were MXN 342 million. Major projects underway include a new passenger terminal building in Reynosa, expansion and remodeling of the Chihuahua and San Luis Potosí terminal buildings, construction of remote commercial aviation platforms in Monterrey and work on runways, taxiways and aviation platforms in several airports.

The Chihuahua and Reynosa terminal project are scheduled to be completed in the second and third quarter of 2019, respectively. This passenger terminal projects will enable OMA to provide better services to our airline clients, improve the passenger experience and increase our leasable commercial space. We expect that these investments will help OMA continue on our path of higher aeronautical and non-aeronautical revenues.

I would now like to turn the call over to Ruffo Pérez Pliego, 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 up the call...

(technical difficulty)

Turning to OMA's fourth quarter financial results. Aeronautical revenues increased 20% mainly because of passenger volume growth. Aeronautical revenue per passenger increased 9% in the quarter. Non-aeronautical revenues increased 10% with commercial revenues making the largest contribution to growth. Commercial revenues increased 13% and the best-performing categories were car parking, VIP lounges and car rental.

Car parking revenue was up mostly because of additional capacity in the Monterrey, Chihuahua and Reynosa airports as well as passenger volume growth. VIP lounge revenues grew 73%, largely as a result of the opening of three new lounges during 2018, including our brand-new VIP lounge in Terminal B of the Monterrey airport, that opened in November. Car rental revenues rose 16% because of their leasing of 23 new rental locals throughout 2018 as well as improved contractual terms.

Diversification activities grew 7%, mostly driven by revenues of the Industrial Park. Complementary services increased 10% with the main factors being additional passenger traffic as well as inflationary adjustment in rates. As a result, total aeronautical and non-aeronautical revenues reached MXN 1.7 billion.

Construction revenue decreased 32%. This is noncash item that is required under applicable accounting standards. It is equal to construction cost improvements to concession assets, so it has no effect on earnings.

OMA's initiative to reduce costs implemented throughout the year were also a major contributor to our results in the fourth quarter. The cost of airport services and G&A expense increased 4%.

As mentioned earlier by Ricardo, throughout the year, OMA took action to reduce overhead expenses, particularly at the corporate level. The results in this quarter was a 32% reduction in minor maintenance and 18% decrease in materials and supplies and 2% reduction in subcontracted services. All these reductions were offset by an increase in payroll expense, which grew mainly because of severance payments incurred in the quarter as well as an adjustment to the retirement labor liability. Utilities also grew as a result of higher electricity tariffs, which increased over 40% in the quarter.

OMA's fourth quarter adjusted EBITDA increased 22% to MXN 1.2 billion and the adjusted EBITDA margin was 70%, up 238 basis points. As a result of all these factors, consolidated net income rose 31% to MXN 819 million.

Our cash flow generation from operations was also strong. Total cash from operating activities increased 26% to MXN 3.7 billion in 2018. This principally reflects the strong operating performance of the company.

Before I open the call up for questions, let me reiterate the achievements for the quarter. Double-digit revenue growth based on steady growth in passenger traffic as a result of increased capacity in our main routes; sustained levels of adjusted EBITDA and adjusted EBITDA margin; and solid cash flow generation with a strong cash flow -- financial position.

This concludes our prepared remarks. Diego, 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 Alan Macias with Bank of America.

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

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Just two questions. One, if you can provide us some color with your meetings with the new government officials, what is your impression of these meetings, if you have had any? And the second question is, next year, you'll be negotiating your new Master Development Program. And if you can just give us an indication, if you're going to seek to increase the capacity in the Monterrey airport, if you're waiting to gain more traffic from the Mexico City saturated airport?

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

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Well, for the two questions, yes, we've been in contact with the new administration. The conversations have been very good. I think we have felt a continuation in the conversations we had with the previous administration. We're currently working -- as you know, we are preparing for the 5-year plan by the end of 2021. We're still in the process of beginning a preparation for that. So we're still on the preliminary works to approach that negotiation. Now to Ruffo, if you would like to add something.

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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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No. As you mentioned, Ricardo, the day-to-day dialogue with the authorities has been quite positive. And I believe that we're aligned with the strategy of the government of decentralizing Mexico City and strengthening the regional airports network. And OMA is very well positioned to take advantage of this opportunity that's opening up for us.

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Operator [5]

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Our next question comes from Mauricio Martinez with GBM.

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Mauricio Martinez Vallejo, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [6]

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I would like to ask on the non-aeronautical front. We have seen flat figures in last year on a per passenger basis. So I was wondering if you can share with us what should be the demand driver there for this incoming year in terms of commercial [basis?] How it should help, and your expectations for the advertising business?

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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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In the case of non-aeronautical revenues, as you know, we have two main sources of revenues: One being the commercial revenues and other being the diversification revenues. Diversification revenues have their own dynamics. They do not necessarily relate specifically to the passenger volume growth or the spend per passenger. So we have in that business now reached maturity in the Hilton Hotel Airport. And we have seen or experienced a slight decline in the capacity ratio of the NH2 Hotel, mostly because of less overnight stays from cruise -- airline cruise. We're in the process of discussing with airlines new agreements for this year, and we expect the occupancy ratio to go back up in the Hotel NH2 terminal. With respect to commercial revenues, which are -- in relation to car parking, the terminal concessions, we expect to maintain in real terms the same pax per -- commercial revenues per pax. We're in the process as you know of inventing a new advertising contract with an operator that also operates in our airports as well as in some subway stations in different cities of Mexico. And we expect to get revenues of around MXN 80 million to MXN 90 million of total advertising revenues this year.

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Mauricio Martinez Vallejo, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [8]

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And if I may ask another question about the strong traffic that we've seen this year, how long this performance you think it will last? And if you can share any color on what you're expecting about available seats this year?

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Ruffo Pérez Pliego del Castillo, Grupo Aeroportuario del Centro Norte, S. A. B. de C. V. - CFO [9]

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Sure. I think that we still have a very good momentum in terms of new routes. As we announced a few days ago, during January, two routes were opened and we achieved a 6.2% increase in total traffic. In February, we have four new routes already in operation. So year-to-date, we have six new routes in operation. And we have confirmations from airlines for the first half of 2019 for a total of 20 new routes, out of which as I mentioned, six have already been opened. So we still see a strong momentum, and it's generally from the domestic airlines.

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Operator [10]

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Our next question comes from Alejandro Zamacona with Crédit Suisse.

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Alejandro Zamacona Urquiza, Crédit Suisse AG, Research Division - Research Analyst [11]

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And just one question. Regarding the cost of service and the recent cost reduction that we have seen in the last...

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Operator [12]

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It appears Mr. Zamacona's line has dropped. We'll move on to the next question. (Operator Instructions) Our next question comes from Rogério Araújo with UBS.

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Rogério Araújo, UBS Investment Bank, Research Division - Director and Equity Research Analyst [13]

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I have one question regarding aeronautical fares. So we saw a 9% increase year-over-year. And I want to know how far is OMA from reaching its regulatory cap?

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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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Sure. In 2018, our recovery rate was 97.8%. We have already implemented an increase in aeronautical fees starting this year. For this year, we would expect to be between 98% to 99% compliance.

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Rogério Araújo, UBS Investment Bank, Research Division - Director and Equity Research Analyst [15]

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Okay. So you're going to finish 2019, still 1 to 2 percentage points below the cap, is that the idea? And if it is the idea, if you could please give some color on why you continue to postpone this if this is related to the negotiation with the airline? Or if this is related to potential drop in maybe the demand if it increases, so what's the rationale behind still being 1 to 2 percentage points below the cap?

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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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Sure. In high volume airports, we are at 100% recovery rate. In certain border destination and as well as some of our leisure destinations, we are below 100%. And we think that the dynamics of those, if we were to increase the passenger charges to a level that would allow us to require a 100% recovery, the impact in ticket price paid by the passenger would be quite substantial. So we, in those specific destinations, have strategically decided to support the traffic volume of those destinations and not impact the full tariff that we would be entitled to charge.

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Rogério Araújo, UBS Investment Bank, Research Division - Director and Equity Research Analyst [17]

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Okay. That sounds good. Just a follow-up on growth expected for 2019, we're seeing OMA outperforming peers mainly on its higher exposure to VivaAerobus and Volaris combined. And so one of your peers already released a traffic guidance between, if I'm not mistaken, between 6% and 8% for this year. Do you have an expectation of reaching that level or even more than that? Can you tell what is your -- what is implied and what the airlines have being telling you?

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Ruffo Pérez Pliego del Castillo, Grupo Aeroportuario del Centro Norte, S. A. B. de C. V. - CFO [18]

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Sure. As you well mentioned, VivaAerobus and Volaris are the two airlines that contributed mostly to growth and we would expect that in 2019. That continues to be the case. Our overall traffic expectations for the year are between 6% to 7%. So I think it's in line with the number that the other peer mentioned. And based on the current confirmations of routes that we have, I think it's a reachable number.

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Operator [19]

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Our next question comes from Samuel Alves with BTG Pactual.

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Samuel Campos Alves, Banco BTG Pactual S.A., Research Division - Research Analyst [20]

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My question is regarding electricity costs, which have extended last year. How do you see these expenses looking forward? And if you see alternatives to reduce such costs?

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Ruffo Pérez Pliego del Castillo, Grupo Aeroportuario del Centro Norte, S. A. B. de C. V. - CFO [21]

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Electricity tariffs in Mexico generally for industries and services increased substantially last year. Our average tariff was 40% up as when you compare 4Q '18 versus 4Q '17. We, in the next few months, continue to expect that same level of tariffs. And we are in the process of evaluating alternatives as well as contracting with third parties, basically supply. But at this time, those alternatives are still being -- in evaluation.

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Operator [22]

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Our next question comes from Alejandro Zamacona with Crédit Suisse.

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Alejandro Zamacona Urquiza, Crédit Suisse AG, Research Division - Research Analyst [23]

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Sorry, sorry, the call was disconnected. My question was regarding the cost of service and the recent cost reduction that we have seen in the last quarters. So what can we expect going forward for this cost of service?

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Ruffo Pérez Pliego del Castillo, Grupo Aeroportuario del Centro Norte, S. A. B. de C. V. - CFO [24]

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I think for cost of services, I think, generally, we should expect increases in line with inflation. Obviously, we have some operational leverage, and there are a number of fixed costs and expenses. But it's going to be a challenge to continue to finding in the way we did this year opportunities for cost reduction. So I think the cost levels that we generally have will be maintained and increase in line with inflation over the next few months and quarters.

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Operator [25]

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Our next question comes from Bruno Amorim with Goldman Sachs.

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Bruno Amorim, Goldman Sachs Group Inc., Research Division - Equity Analyst [26]

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Just have a follow-up question on the expectations for traffic. I understand that you do foresee a positive outlook, but we have seen a severe deceleration in the past couple of months in traffic growth in Mexico overall. So just wondering if you could give us some color in your view on what was the driver behind this deceleration and why you believe we should see some acceleration in traffic growth going forward?

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Ruffo Pérez Pliego del Castillo, Grupo Aeroportuario del Centro Norte, S. A. B. de C. V. - CFO [27]

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Sure. In terms of overall full year expectations, as I mentioned, we expect to be in the range of 6% to 7%. So the result in January is in line with what we have in our budget. I don't think it's going to accelerate substantially, so rather it's going to be maintained along those levels. The impact in 4Q '18, we had a 10.4% increase in traffic growth. That in part has to be with a comparison base of 2017. If you remember, back into the fourth quarter of 2017, we were affected by the cancellation of slots in the Mexico City airport and it took airlines a few months to rearrange their networks and routes in our system. And we started to have an accelerated growth in the second half of 2018. So I think that's basically the reason why we're seeing a deceleration in our case. But we would expect the next few months to remain around the current levels of growth.

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Operator [28]

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Our next question comes from Stephen Trent with Citi.

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Stephen Trent, Citigroup Inc, Research Division - Director [29]

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Kind of a follow-up on Bruno's question, just a different way of looking at the traffic growth component. You gave a helpful color on route additions. And in recent quarters, you've also mentioned some route cancellations, maybe most of those coming from Interjet. As we go forward, do you expect the ratio of route additions to route cancellations to stabilize, or the additions to maybe overtake the percentage of cancellations on the domestic market?

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Ruffo Pérez Pliego del Castillo, Grupo Aeroportuario del Centro Norte, S. A. B. de C. V. - CFO [30]

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We do have about 20 new routes [concurrent] for first half of '19, 6 of them in operation. The cancellation that we have already incorporated in our expectations were already announced by some airlines at the end of last year as part of their network planning and their own dynamics. So I believe that we will continue to see greater number of openings than of closings.

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Stephen Trent, Citigroup Inc, Research Division - Director [31]

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Okay, very helpful. And when we think about all that's been going on, the amount of noise with the Mexico City airport projects, does OMA have a view with respect to which current alternatives might provide the clearest path to long-term growth, whether that's Santa Lucia or maybe this new airport potential in Hidalgo? Do you guys have a preferred path, let's say, in terms of what's going to sustain OMA's long-term growth?

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Ricardo Duenas, Grupo Aeroportuario del Centro Norte, S. A. B. de C. V. - CEO [32]

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Yes. Stephen. As you know this, the approach for this government solving the saturation problem in Mexico really has been a different approach. The approach that has been followed by this government is to use -- to strengthen the network of airports in the metropolitan area by constructing Santa Lucia, by remodeling the existing airport and by bringing additional traffic into Toluca. We believe from OMA's perspective, that we can do two things: On one hand, we can contribute to the solution to this problem by strengthening our own network of airports, increasing our investment in airports and bringing traffic. So we accomplish two things: One, we bring additional traffic into OMA airports to help saturate the problem, and we're also contributing to the solution for the Mexican government.

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Stephen Trent, Citigroup Inc, Research Division - Director [33]

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And if I may just ask one more quick one. I appreciate that by the way. And just one last from me. The NH Hotel property you have in the Benito Huarez airport now, any broad indication as to whether that could now get extended beyond 2029 or thereabouts, if I'm not mistaken?

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Ruffo Pérez Pliego del Castillo, Grupo Aeroportuario del Centro Norte, S. A. B. de C. V. - CFO [34]

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Hi Stephen, this is Ruffo. The lease as you mentioned has a termination date in 2029. The lease does not provide for a preferential treatment for an extension. So that will be something that we'll have to see what are the terms and conditions expected in those -- at that time and see if it makes sense to extend it. But the contract does not have an automatic renewal clause.

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Operator [35]

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Our next question comes from Manuela Echavarría with Credicorp Capital.

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Manuela Echavarría Cuartas, [36]

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In the past, the company has announced its intention to develop hotels in other airports. I was wondering if you can give us more color about this project.

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Ricardo Duenas, Grupo Aeroportuario del Centro Norte, S. A. B. de C. V. - CEO [37]

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Well, at this point, we're evaluating investments in other airports. We're still conducting the appropriate studies to see and if some hotels in other airports are a viable. But we're still in the process of evaluation.

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Operator [38]

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Our next question comes from Ruben López with Santander Bank.

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Ruben López Romero, Santander Investment Securities Inc., Research Division - Research Analyst [39]

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Most of my questions were already answered. But just wanted to ask about the stronger increase -- strong increase in the net income, sorry. We saw a decrease on interest expense, despite keeping the same debt level, and we also saw an increase in net income. So I was wondering if there were some kind of refinancing. Or are these new levels of net interest expense sustainable and can translate into higher-than-expected net income and dividends going forward?

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Ruffo Pérez Pliego del Castillo, Grupo Aeroportuario del Centro Norte, S. A. B. de C. V. - CFO [40]

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Hi Ruben, this is Ruffo. We have accumulated a substantial cash balance. And we, I mean, you have seen in Mexico, generally interest rates go up. So we have benefited from that in our treasury position in recent months. And specifically, in the interest expense, we made about a MXN 20 million -- well, a credit, a MXN 20 million credit in the quarter, because the interest expense provision that we had was -- the balance was overstated by around MXN 20 million. So we reversed that provision in the fourth quarter. But that was about it. There are no plans for refinancing now. We have MXN 4.5 billion long-term debt in the Certificados Bursátiles at very attractive rates. Those are fixed rates below 7%. So we're not looking into refinance those long-term notes at this time.

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Operator [41]

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(Operator Instructions) Our next question comes from [Lucas Nani] with Morgan Stanley.

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Lucas T. Barbosa, Morgan Stanley, Research Division - Research Associate [42]

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It's actually Lucas Barbosa here. We saw high number in the payroll expenses this quarter, I just wanted to check if OMA had any nonrecurring this quarter, maybe severance payments and retirement liability issues? That's my first question.

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Ruffo Pérez Pliego del Castillo, Grupo Aeroportuario del Centro Norte, S. A. B. de C. V. - CFO [43]

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Sure, yes. Our increase in payroll expense which was about MXN 19 million in the quarter, around 70% of that was onetime items related to severance payment as well as to actuarial adjustments to the labor liability provision.

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Lucas T. Barbosa, Morgan Stanley, Research Division - Research Associate [44]

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Okay, that's very helpful. And my second question is regarding the Industrial Park. Do you see any new warehouse contracts entering this year? Is there anything close on the pipeline for entering?

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Ruffo Pérez Pliego del Castillo, Grupo Aeroportuario del Centro Norte, S. A. B. de C. V. - CFO [45]

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Yes, we do. We have jointly one warehouse that is built and it's being marketed. So we would expect new contracts to be in place in the next few months for that warehouse. We're also building a second warehouse or an expansion of -- actually an expansion of an existing warehouse which should be also completed in the next 3 or 4 months and that already has a tenant. And probably we will see another warehouse being leased by the end of the year. So in total, we would expect three additional warehouses to generate revenue by year-end in the Industrial Park.

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Operator [46]

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Ladies and gentlemen, there does appear we have no further request for questions. I will now turn the conference back to management for closing remarks.

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Ricardo Duenas, Grupo Aeroportuario del Centro Norte, S. A. B. de C. V. - CEO [47]

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Thank you all for your participation in this call. Ruffo and Emmanuel and I are always available to answer your questions. And we hope to see you in our office in Monterrey very soon. Thank you all, and have a good day.

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Operator [48]

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Thank you. This concludes today's conference. All parties may disconnect. Have a great day.