Grupo Aeroportuario del Centro Norte SAB de CV
BMV:OMAB
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Grupo Aeroportuario del Centro Norte SAB de CV
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Good day, and welcome to the OMA Fourth Quarter 2017 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Emmanuel Camacho, Head of Investor Relations and Financial Planning. Please go ahead.
Thank you. Good morning. Welcome to OMA's Fourth Quarter 2017 Earnings Conference Call. Joining me this morning is our Chief Accounting Officer, Jesús Villagómez. This morning, I will briefly review our operational performance and financial results. Then, we will be pleased to answer your questions. OMA delivered record financial and operating results in the fourth quarter of 2017 and record results for the full year. Adjusted EBITDA grew 14% in the quarter, and OMA recorded the highest quarterly adjusted EBITDA margin in our history, 67.5%, largely as a result of our cost controls and our initiatives to increase aeronautical and non-aeronautical revenues. For the full year, OMA generated the highest levels of revenue, EBITDA and net income in our history, with double-digit growth in all these categories. The full year adjusted EBITDA margin reached 66%, which is also a record. Our cash flow generation was strong with 12-month cash flow from operations reaching MXN 2.9 billion. This enabled us to fund our Master Development Program for the year and strategic investments out of funds from operations and cash balances, pay our dividends and still end the year with MXN 2.2 billion in cash.
Our performance is consistent. OMA has now delivered 32 consecutive quarters of growth in aeronautical and non-aeronautical revenues, and 26 quarters of adjusted EBITDA growth. Passenger traffic reached 5 million passengers in the fourth quarter and was a record 19.7 million for the full year. Eight airlines increased passenger volumes in the fourth quarter, with the main contributions to growth from VivaAerobus, Calafia Airlines and United. 19 new routes open in the quarter and 6 closed, while total available seats decreased 2.1%. Total passenger traffic increased 1.8%, slightly above the rate in the third quarter. Full year traffic increased to 4.8%. The principal drivers of traffic volumes were similar to those we outlined in October's conference call. The effect of airline route consolidation, the new policies for slot assignments at the Mexico City International Airport and the retirement by Aeroméxico of its Embraer 145 fleet partially offset the expansion of low-cost carriers and its continued development of traffic in Monterrey, and some of our medium-size airports. VivaAerobus, Volaris and Interjet opened 19 routes in the fourth quarter in Monterrey, Culiacán, Chihuahua and San Luis Potosí. 14 of these only started in December, so they had a limited effect on fourth quarter traffic volumes.
We begin the year with improved traffic momentum. As we reported 2 weeks ago, January passenger traffic increased 4.6%, which reflects more fully the benefit of these route openings. On the commercial front, we have 29 initiatives opened in the quarter, including car rental, restaurants, retail stores and new OMA Premium Lounge in Terminal C of the Monterrey Airport. This gives us 5 premium lounges operating in 4 airports. Also, we are focused on improving and increasing the restaurant and retail offerings in all of our airports. We have added new brands in new locations for recognized brands, such as Krispy Kreme, Maria Bonita, Fly by Wings, [ CENAGAS ] and Cinnabon. The commercial occupancy rate was 99% during the quarter. Diversification activities delivered a solid performance with revenue growth of 7%. The NH Collection Terminal 2 Hotel in Mexico City had an occupancy rate of 89%, its highest ever. And the Hilton Garden Inn hotel in Monterrey reached 77% occupancy. OMA Carga continues double-digit growth, largely because of services for ground cargo and the opening of the new freight terminal in Monterrey earlier in the year. The total volume of freight handled increased by 39% in the fourth quarter. At the Monterrey Industrial Park, we signed 2 new leases for our 5,000 square meter and a 4,200 square meter warehouses. This means we have 5 signed warehouses and another 1 that is in the commercialization phase.
Turning to OMA's fourth quarter financial results. OMA's fourth quarter revenue increased 5%. Aeronautical revenues increased 3% because of passenger volumes and specific rate adjustments in the second quarter of 2017. Most of the growth came from the
[Technical Difficulty]
Please stand by. This is the operator. The conference will resume momentarily. Thank you for your patience.
Mr. Camacho, you're live with your audience.
Okay. Thank you. I'm sorry for the interruption. So I will continue. On the commercial front, we have 29 initiatives opened in the quarter, including car rental, restaurants, retail stores and a new OMA Premium Lounge in Terminal C of the Monterrey Airport. This gives us 5 premium lounges operating in 4 airports. Also, we're focused on improving and increasing the restaurant and retail offerings in all of our airports. We have added new brands in new locations for recognized brands, such as Krispy Kreme, Maria Bonita, Fly by Wings, [ CENAGAS ] and Cinnabon. The commercial occupancy rate was 99% during the quarter. Diversification activities delivered a solid performance with revenue growth of 7%. The NH Collection Terminal 2 Hotel in Mexico City had an occupancy rate of 89%, its highest ever. And the Hilton Garden Inn in Monterrey reached 77% occupancy. OMA Carga continues double-digit growth, largely because of services for ground cargo and the opening of the new freight terminal in Monterrey earlier in the year. The total volume of freight handled increased by 39% in the fourth quarter. At the Monterrey Industrial Park, we signed 2 new leases for a 5,000 square meter and a 4,200 square meter warehouses. This means, we have 5 signed warehouses and another 1 that is in the commercialization phase.
Turning to OMA's fourth quarter financial results. OMA's fourth quarter revenue increased 5%. Aeronautical revenues increased 3% because of passenger volumes and the specific rate adjustments in the second quarter of 2017. Most of the growth came from the domestic passenger charges. OMA provided some short-term incentives for route development in the quarter, which reduced the growth rate of domestic passenger charges by about 1.3 percentage points. Higher rates for international passenger charges were offset by the appreciation of the peso during the fourth quarter, resulting in the decrease in that line item. Aeronautical revenue per passenger rose 2%, non-aeronautical revenues rose 8% with commercial revenues making the largest contributions to growth. Commercial revenues increased 9%. The best-performing areas were parking, restaurants and car rental. Restaurants and car rental each increased more than 20% as a result of new leases and profit participations. Parking revenue growth reflects new capacity in the Monterrey and Chihuahua airports. Revenue from retail stores was affected by differences in the timing of the accounting provisions for the recognition of revenue participations between 2016 and 2017. The underlying business continues to grow at healthy rates. OMA terminated the advertising contract with the provider at the beginning of December because of nonperformance. We are pursuing our claims against the provider. OMA is in the process of bidding out the advertising contract, and we expect to have a new provider in place by the start of the second quarter.
Diversification activities grew 9%, mostly from growth in the OMA Carga freight logistics business, the hotels, and an additional contribution from the industrial park. Complementary services grew 8%, mostly because of new leases for terminal space to airlines and revenues from baggage screening. Non-aeronautical revenues per passenger grew 6% and reached MXN 78 per passenger. Because of our investment commitment on our massive development programs in the current 5-year period, 2016-2020, the construction revenue line item more than doubled. This is a noncash item that is required by IFRIC 12. It is equal to construction revenue -- construction costs, sorry, of improvements to concession assets, so it has no effect on earnings.
Our strict policies on cost controls made an important contribution to results in the quarter. The cost of airport services and G&A expense decreased 14.1%. In particular, payroll expense in subcontracted services increased only 0.3% and 2.7%, respectively. And minor maintenance decreased 16.9%. This was partially offset by utility rate increases. The line item, other expenses, decreased principally because of one-off licensing and contractor payments in the 2016 period, from the implementation of the SAP enterprise management system. OMA's fourth quarter adjusted EBITDA increased 14% to MXN 1 billion. Adjusted EBITDA margin in the quarter was 67.5%, an increase of 5.3 percentage points from the prior year, and the highest quarterly EBITDA margin in OMA's history.
The result of these factors, consolidated net income rose 10% to MXN 625 million in the fourth quarter. The full year 2017 results were also very positive as I mentioned at the outset. Aeronautical and non-aeronautical revenues grew 11.5%, while adjusted EBITDA increased 15% with a record margin of 66%, up 2.2 percentage points from 2016. Full year cost performance was also effective. Total operating costs and G&A expense increased only 0.7%. Increases in payroll and contracted services were kept to 3%, which offset double-digit increases in utility rates. Our cash flow generation from operations was also strong. Total cash from operating activities rose 23% to MXN 2.9 billion in 2017. This reflects the operating performance plus the reduction in accounts receivable. Receivables were equal to 40 days revenues at the end of December.
Our market development plan is advancing on schedule. Total investments were MXN 590 million in the fourth quarter, bringing the full year total to MXN 1.7 billion. The most important MDP projects on the way include new passenger terminal buildings in Acapulco and Reynosa; expansion and remodeling of the Chihuahua and San Luis Potosí terminal buildings; construction of our remote commercial aviation platform in Monterrey and expansion of the regional flight boarding area of Terminal B in Monterrey. The new Acapulco terminal is expected to start operations in the second quarter of 2018. The regional aviation boarding area for Monterrey's Terminal B is scheduled for the third quarter. The new Reynosa terminal and the Chihuahua and San Luis Potosí terminal expansions are scheduled to be completed in the fourth quarter. These terminal projects will help OMA provide better services to our airline clients, improve the passenger experience and increase our leasable commercial space significantly. Sustainability is an important part of our business model. I should note that in October, OMA was selected as part of the newly launched Dow Jones Sustainability MILA Pacific Alliance Index, which includes the companies with the highest sustainability rankings in the 4 Latin American countries of the Pacific Alliance. We were also included in the Dow Jones Sustainability Index for Emerging Markets for the second consecutive year. We also continued to be part of the Mexican Bolsa benchmark IPC index for the third consecutive year and the IPC sustainability index for the seventh year.
The OMA management team believes we're starting 2018 in a favorable position. We expect the fundamentals of the air transport industry and OMA's business performance will continue to be sustained, even though there are macrolevel uncertainties that could affect all Mexican companies. Underlying demand for air transport continues to increase. Newer airline growth initiatives in our airports starting December are offsetting some of the factors that slowed passenger growth in the second half of 2017. Our airports also implemented new tariffs in early January. Domestic passenger charges increased our weighted average of 9.4%, international charges increased the weighted average of 6.3% and tariffs for airport services increased by 6.3%. The total MDP invest plan for this year is approximately MXN 1.4 billion. In addition to completing the 5 terminal projects I mentioned, we expect to start work on the expansion and remodeling of the Zihuatanejo and Tampico passenger terminals this year. We also plan to continue to make strategic investments in the development of the Monterrey Industrial Park. OMA expects that cash flow generation and existing cash balances will provide the resources needed for these investments, pay dividends commensurate with OMA's results and meet any other needs. This concludes our prepared remarks. We will now be happy to answer your questions. Operator, please open the call to questions.
[Operator Instructions] We'll go first to Leandro Fontanesi with Bradesco.
So I have 2 questions. The first one, if you could just go on a little bit more on the termination of the advertising contract. If you could comment how much funds you are trying to recover that the company owes you. And the second point is, if you could give us an update on the process for the new CFO, when you would expect to announce [indiscernible]?
Okay. Thank you, Leandro. So OMA revoked the advertising contract with the provider in December and it was because of nonperformance. Right now, we are pursuing claims against that provider. And we expect to have a new advertising provider, as I mentioned, by the beginning of the second quarter. The billing process has remained stable and the cancellation of the advertising provider involves nonperformance-related issues which have, of course, affected this line item. So it's more of a nonperformance-related situation.
And as to your second question on the CFO. The Board of Directors have been pursuing -- have been looking for the new CFO. And we expect the decision will be made soon and we will inform the markets when this happens.
[Operator Instructions] We'll go next to Ramon Obeso with Scotiabank.
Could you give us more color on the short-term incentives you mentioned for the aeronautical revenues?
Yes. Of course. So every time we negotiate with airlines for the opening of new routes in the airports, we plan an incentive program. And if they meet the expectations in terms of the route opening and the passengers added to the -- to our operations, then we establish or we deliver those incentives. That's why in the fourth quarter, we have this specific effect in the -- with -- that involved additional incentive -- not additional, but involved the planned incentives delivered to the airlines.
[Operator Instructions] We will go next to Natalia Zamora with GBM.
We saw G&A swell almost 27% during the quarter. I was wondering if the expense is corresponding to SAP were now over and if the expenses of around MXN 150 million could now be considered a normal level for G&A in the future -- in future quarters?
Yes. Of course. So the effect was a one-off, as I mentioned. The SAP-related cost was the final -- was the final phase of this implementation. And going forward, we should expect that more consistent performance related to the cost of these systems and the operational route.
And we'll go next to Alberto Valerio
with Citibank.
I have 2, one for you. The first one would be around the -- no, it's on NAFTA. Do you have seen much negative impact on your industrial park? And the second one would be about the crude oil price has bounced, and have you seen the shale gas active in your regions as well? And the last one about the pick-up in drug cartel violence outside your region in Cancun and Los Cabos. What about your [ -- on those ] regions? Do you have an impact on that?
Okay. So regarding NAFTA, it is still difficult to assess any potential impact on this matter. We couldn't provide at this point any effect related to the negotiations. We think it's early to determine what impact it could have and what impact it is having now, if there are some -- if there is some activity related -- performing with more cautiousness. It is important to mention -- to remark, again, that we were able to sign 2 agreements in the industrial park during the fourth quarter. So we have not seen any delay or any adverse effect in this -- on this matter. So I think it's still early to determine the potential effect.
And if you could please repeat your second question. I didn't catch it very well. Sorry.
Sure. No problem. As the crude oil price has bounced, if you have seen some pickup on shale gas activity in your regions.
Well -- no. Assuming all the energy reforms were aimed at enhancing the oil operations, including the shale gas and it was an opportunity a few years ago. So the projects stopped or ended those years and we have not seen any bounce back in that sense, specifically in shale gas. And all of the performance of the passenger traffic in the airports is related to industry, more of an economic or other very specific effects.
And just the last one about the violence on drug cartels. Have you seen something increasing on those regions?
Not now. We have even -- we have seen -- well, last year, specifically, it was much calmer in security levels and these types of situations, in particular, in our airport. So it hasn't -- I would say that it has lowered compared to previous years.
And we'll go to Ricardo Alves with Morgan Stanley.
My question is more on the profitability outlook for this year. I mean, we have several issues contributing favorably for you guys over the next couple of months or actually the rest of the year, relatively healthy traffic trend; as you mentioned in the call, a much higher aeronautical fee or tariffs now with the January increase. Some nonrecurring cash cost that you also mentioned should not repeat going forward. So my question is, how your profitability, how your EBITDA margins could increase this year? I know you guys delivered a very respectable performance or a profitability improvement in 2017, something like 200 bps, if I'm not mistaken. So where your margins could go with all these positive developments that we talked about, where your profitability could go. Appreciate that.
Of course. Thank you, Ricardo. So we're proud of the sustained improvement that we have made on the increasing EBITDA margins. The increases in margins reflect the operating leverage and our effective strict cost control policies. We believe, of course, there is room for additional EBITDA margin expansions, as we continue to execute our business plan.
Mr. Camacho, we have no further questions in the queue. At this time, I'd like to turn the conference back to you for any additional or closing remarks.
Thank you. On behalf of OMA, I want to thank all of you again for your participation in this call. We're always available to answer your questions and hope to see you soon at our offices in Monterrey. Thank you, and have a good day.
And that does conclude today's conference. Thank you for your participation. And you may now disconnect.