© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Greetings, and welcome to the Grupo Aeroportuario del Centro Norte Conference Call. [Operator Instructions]
As a reminder, this conference is being recorded.
I would now like to turn the conference over to our host, Ruffo Pérez Pliego, Chief Financial Officer. Thank you. You may begin.
Thank you, Diego, and good morning, everyone. Welcome to OMA's Third Quarter 2018 Earnings Conference Call.
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.
Joining me today is Emmanuel Camacho from Investor Relations. This morning, I will briefly review our operational and financial results. And then, we will open the call for your questions.
OMA delivered another solid performance in the third quarter of 2018 with a strong passenger traffic growth and effective cost reduction initiatives applied throughout the year.
Adjusted EBITDA grew 24% year-over-year, and adjusted EBITDA margin reached 71.4%.
One of the keys to our performance, besides additional passenger traffic, has been the implementation of effective cost control initiatives throughout 2018. Cost of airport services and G&A decreased 6.8% in the quarter, with decreases in most line items.
OMA has now delivered 35 consecutive quarters of growth in aeronautical and non-aeronautical revenues and 29 quarters of adjusted EBITDA growth.
Passenger traffic reached $5.8 million passengers in the third quarter, up 11%. 7 airlines increased passenger volumes. The largest contributions to growth came from VivaAerobus, Aeroméxico and Volaris. Total available seats increased 12.5%, as airlines have deployed more capacity on certain routes and increased frequencies, particularly on the highest volume routes. On our single highest volume routes, Monterrey to Mexico City, total available seats grew 21% compared to 3Q '17. On 4 other high volume routes: Monterrey-Cancún; Monterrey-Guadalajara; Chihuahua-Mexico City; and Culiacán-Tijuana, the total available seats also grew a combined 21% versus 3Q '17. These more than compensated for the fact that airlines opened fewer routes than they closed. During the quarter, 3 new routes were opened, while 4 were closed.
We expect that airlines will continue to increase seat capacity in our airports as new aircraft go into service. For example, we have confirmed the opening of 11 new routes for the remainder of 4Q '18, including Monterrey-Toluca, Zacatecas-Mexico City and Culiacán-Mexico City, among other routes.
On the commercial front, we implemented 38 initiatives in the quarter, particularly in car rental, retail, restaurants and passenger services. The occupancy rate for commercial space in our terminals was 99%.
Diversification activities delivered solid performance with revenue growth of 10%. Total volume of freight handled by OMA Carga increased 5% in Q3, and revenues grew 10%, largely because of ground cargo services. The Monterrey Industrial Park continues to develop with 6 warehouses in operation.
Turning to OMA's third quarter financial results. Aeronautical revenues increased 17%, mainly because of passenger volume growth. Aeronautical revenue per passenger rose 5% in the quarter. Non-aeronautical revenues rose 14% with commercial revenues making the largest contributions to growth.
Commercial revenues increased 18%. The best-performing categories were car parking, car rental, VIP lounges and restaurants.
Parking revenue was up mostly because of additional capacity at the Monterrey Airport and passenger traffic growth.
Car rental revenues rose 47% because of the lease of approximately 35 new rental locales since 4Q '17 on improved contractual terms.
Restaurant revenues rose 15% as a result of improved offering, particularly at the Monterrey Airport.
Advertising revenues were down because of the termination of the contract with the previous advertising operator, as we have informed in previous quarters. In October of this year, OMA signed a new agreement with an advertising operator, and we expect to have normalized advertising revenues by early 2019.
Diversification activities grew 10%, mostly driven by the OMA Carga logistic business. Complementary services grew 9% with the main factors being additional passenger traffic as well as inflation adjustment in rates.
Total aeronautical and non-aeronautical revenues reached MXN 1.8 billion.
Construction revenue decreased 45%. This is a noncash item that is required on applicable accounting standards. It is equal to construction cost of improvements to concessioned assets, so it has no effect on earnings.
OMA's initiatives to reduce cost that have been implemented throughout the year were also a major contributed -- contributor to our results in the third quarter. The cost of airport services and G&A expense decreased 7%. Throughout the year, OMA has taken action to reduce overhead expenses, particularly at the corporate level. The results of this quarter was an 8% reduction in payroll expenses and 9% reduction in contracted services, principally for professional fees, and an 11% reduction for minor maintenance and 33% decrease in materials and supplies line items. All these reductions offset the increase in basic services, which grew as a consequence of higher electricity tariffs of approximately 40% year-over-year.
OMA's third quarter adjusted EBITDA increased 24% to MXN 1.3 billion. And the adjusted EBITDA margin was 71.4%, up 460 basis points. Primarily as a result of all these factors, consolidated net income rose 25% to MXN 725 million.
Our cash flow generation from operations was also strong. Total cash from operating activities rose 25% to MXN 2.8 billion in the 9 months of 2018. This principally reflects the strong operating performance of the company.
Total investment spending in the quarter, including MDP investments, major maintenance and strategic investments were to MXN 247 million. We completed and put into operation the new regional flight boarding area at Terminal B in the Monterrey Airport during the quarter. Other major projects underway include 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 the Monterrey Airport and work on runway, taxiways and aviation platforms in several of our airports. The San Luis Potosi terminal expansion project is now ready in its first phase since August 2018 and is scheduled to be 100% completed by the second quarter of 2019. The Reynosa and Chihuahua terminal projects are scheduled to be completed at the end of the first quarter of 2019. These passenger terminals 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.
Before I open the call for questions, let me reiterate the achievements of the quarter. Double-digit revenue growth based on solid growth in passenger traffic as a consequence of increased capacity in our main routes. Effective cost reduction initiatives. Sustained levels of adjusted EBITDA and adjusted EBITDA margin. And solid cash flow generation with a strong financial position.
This concludes our prepared remarks. Diego, please open the call for questions.
[Operator Instructions] Our first question comes from Natalia Zamora with GBM.
My first question will be for non-aeronautical revenues per passenger. Could you tell us when you'd expect these to resume stronger growth? And what are your expectations for the fourth quarter and maybe for 2019? And which would be the main drivers? And my second question is regarding costs. We've seen these decreasing for a year now, and I was wondering if you could talk what we could expect going forward, especially in payroll, contracted service and minor maintenance? And what we -- should we expect these decrease to -- we have seen, to continue or to begin increasing again and by how much?
Thanks, Natalia. In terms of non-aeronautical revenues per pax, we have seen growth throughout the year. That growth has been somewhat limited by the fact of the decrease in advertising revenues. As all of you know, we have operating -- operated in-house the commercialization of advertising spaces throughout the 9 months of 2018. With the new operator, we expect that -- a significant increase in commercial revenues, particularly starting early 2019. So we would expect an acceleration in commercial revenues per passenger in 2019, above the inflation rate. In terms of cost, we did make some adjustments to our corporate headcounts, particularly at the end of the first quarter and during the second quarter. So we expect the current levels to be showing improvements year-over-year until they catch up with the basis of comparison by 2Q of next year. And we expect to maintain the level of other line items. The one factor where we have little visibility is in electricity tariffs, as I mentioned during the call. We started to see an increase of about 40% in tariffs in the summer. And perhaps, we'll continue to see those year-over-year increases until the second quarter of 2019 relative to the same quarters of 2018.
Our next question comes from Ruben López with Santander Bank.
I have 2 questions. First of all, can you give us more color on the commercial initiatives you made in the quarter? Are you done with these initiatives? Or is it an ongoing process? And maybe if you can give us a sense of the contribution of these initiatives revenues. And then the second one is a follow-up. You have been doing a great job on cost-cutting initiatives. How many opportunities do you still see to keep expanding margins? I mean, you were about 71% this quarter. Where we could see these margins in the medium term?
Thank you, Ruben. In the case of commercial initiatives, most of the initiatives have been related to the openings of restaurants and retail outlets in certain new areas that we opened recently. So for example, even though, in the case for example of the Acapulco terminal is starting to operate around May of this year, some of the retail and food and beverage outlets kicked in until the second and third quarter of this year. And also we have seen a very strong performance of the car rental activities. A lot of the clients, particularly the large chains, now have VIP counters -- or, if you will, offices to serve their clients as opposed to individual counters, which were traditionally in our airports. And these large spaces have been leased at a premium, and they have been very successful throughout our airports. Going forward, most of the airports have now these improved offering of car rental, so we should not see those increases anymore. But as we mentioned, there are still pending openings in the Chihuahua, in the San Luis Potosi terminal projects that we are constructing that we have additional leasable space. So I think that that's, more or less, the main initiatives that we have focused on the commercial front. I think that the most important line item that will help next year results would be, as I mentioned, the advertising revenues and car rental, in -- not car rental, sorry, car parking should continue to have a very strong performance given the increased traffic in our airports. And the second question regarding cost-cutting initiatives, we continue to explore additional initiatives. I think that the most important ones have been implemented. So any margin expansion would rather come from operational leverage with increased passenger volume as opposed to further cost-cutting initiatives. And we do not expect significant margin expansion going forward above the current levels that we are seeing today.
Our next question comes from Samuel Alves with BTG Pactual.
My question is regarding your take on new Mexican City airport. I know it's pretty hard to predict what is going to happen at this point with the project. It seems a -- probably, a binary call at this point. But my question is more on the implications that OMA see depending on each scenario. I mean, do you believe that OMA's growth potential could be materially limited if the project is canceled? Or do you believe that the network could be rearranged in a certain way that could, at the end of the day, be an opportunity for the company?
Thank you, Samuel. As you mentioned in your question, it's really difficult to predict the future and what will come up with the current public consultation that is being taken place, as we speak. And we'd rather not speculate on the results of that exercise until official results are announced. However, in the short to medium term, irrespective of what happens with the construction of the new Mexico City airport, the existing airport is saturated. And that provides growth opportunity in the next few years to our airports, particularly in our larger airports, such as Monterrey, Chihuahua, Culiacán, Ciudad Juárez, where we have good connectivity and, already, a lot of routes in and out of these airports that could help the existing carriers use that connectivity to transport passengers from one point to another. So we are in constant talks with all of the airlines in Mexico to position our airports as alternative routing points to -- for their networks. And we expect that will continue to give us, in the next few years, incremental volume of passengers.
Our next question comes from Ricardo Alves with Morgan Stanley.
A couple of questions on my end. Going back to electricity tariffs, on basic services, we saw this big increase of 40%. I was wondering if you could go a little bit deeper on that number and explain how much of that is explained specifically, by the electricity side. And maybe a second part of that to question, if you could give us your particular view on that issue going forward? In the longer term, what's your view on electricity tariffs? Have you positioned yourself to, kind of, lock contracts a little bit? Or just a little of your view on that issue. And then my second question, a little more long term. Just a quick update on the -- I know it's early, but a little bit of your thoughts again on the Terminal A expansion in Monterrey. Just -- you should have a little bit more precise timing in 2020 when you should deliver. Any additional color that you have on that future project, much appreciated.
Sure. Thank you, Ricardo. In the case of electricity tariffs, we saw the spike of electricity tariffs starting July. From January to June, electricity tariffs were basically flat year-over-year. This increase in electricity tariffs derived from new charges that have been implemented as a result of the electricity reform in Mexico, which did not exist previously, particularly one thing that's called the capacity charge and another one that's called the distribution charge. However, these blended charges result in a 40% increase in overall traffic per kilowatt hour. Our consumption levels, given the initiatives that we have taken to reduce consumption in our terminals to have better equipment of air conditioning and replacement of lamps to LED technology and things like that, resulted in about, like, a 1% decrease year-over-year in terms of consumption of kilowatts. However, the increase in tariff, as I mentioned, was about 40%. We should continue to see these levels of electricity tariffs going forward. And it's unclear, once the existing projects that are being built enter in operation, I mean, in theory, tariffs would decline. But right now, there is a -- there are not a lot of options to contract electricity with -- at least in the short term. We are exploring alternatives, including own generation. But at this time, we have not yet taken the final decision on this matter. Regarding Terminal A...
Sorry to interrupt, but just to be clear if I got it right, but for now, not a lot of longer-term contracts on your end, right?
Yes, that is correct. We are exploring alternatives to enter into PPAs with potential suppliers. But none of those contracts will begin -- or could begin in the near future. Going to your second question regarding Terminal A expansion, Terminal A expansion in the landside of the terminal should begin by the end of this year. It's a major project that will increase significantly the space of the public area of Terminal A, and we should expect that coming in line by the first quarter of 2020.
Our next question comes from Stephen Trent with Citi.
Just 2 from me. Actually, a follow-up on the question from the gentleman from BTG. It’s just on the Mexico City airport. If you could refresh our memories kind of the contractual structure you have around the NH Hotel facility in that airport? And, kind of, what's your base case? And the second question actually, pertains to the domestic airlines in Mexico given perceived differences and the relative financial strength of some of those carriers. Has that led OMA to make special consideration for payment terms from any particular carriers? Or do they all have the same payment terms when they're -- when you guys are collecting your fees from them?
Sure. Stephen, in case of the NH Hotel, we have a long-term lease that ends in 2029 with the existing Mexico City Airport. The -- our base case, right now, is that this hotel would be in operation until the end of 2022 as a hotel inside an airport's terminal. And after that, it could become a hotel in the area where it is currently located what's -- without the operation of the airport next door. So we have -- and we have disclosed this in our financial statements. We have made impairment tests every year to make sure that the carrying value of the investment is not impaired by these assumptions. And we, as of the latest financial statements, do not believe that it has taken an impairment on the carrying value of these investments. Regarding domestic carriers, we are constantly monitoring the payment in time -- in due time by our clients. We typically have certain guarantees for the credit days that we provide to them. And this time, we do not have significant exposure to any carrier at all. And generally, the terms of payments are very similar among the carriers.
Our next question comes from Andres Nieto with Signum Research.
I just have a question about the increase in Torreón airport, and I don't know if you can give us some color about that. And also if you could tell us if you have, anywhere any constructions regarding the Master Development Plan from 2019 to 2023?
Can you repeat your second question, Andres?
Okay. Yes, sure. Can you give us some color on the increase in the Torreón airport if that is -- if it's just a tendency? Or do you expect to see further increase in that airport in the near future? And do you have another constructions left in order to fulfill the Master Development Plan?
Okay. Thank you, Andres. With respect to Torreón, Torreón is one of our smaller airports, so when you have increased capacity or additional flights or frequency from any single carrier, the percentage increases, but tends to be very high. We have, like, a 35% increase in seat capacity in the Torreón to Mexico City Airport, which was routed -- had already been operating. But now, there are additional frequencies and/or larger aircraft being operated into that same route. So that is mostly explaining the increase. This percentage increase should continue until the 12-month period-end of this new capacities deployed into the route. And with respect to MDP, where MDP goes from 2016 to the end of 2020, we should expect total investments in this year, 2018, of about MXN 1.2 billion to MXN 1.3 billion and then some reductions in 2019 and 2020 to complete our committed plan. And at this time, we have not yet developed our next 5-year period master plan, which we will have to negotiate with the grantor of the concession until 2020 to become in effect until 2021.
Our next question comes from Alberto Valerio with UBS.
[indiscernible]
Alberto, we cannot hear you at all.
Can you hear me now?
Yes.
Yes. Sorry. Two on my end. The first one is about the tariffs on aeronautic revenue. I would like to know that -- I see that there is an increase this year, but there is a deceleration in the third quarter in relation to the first half of the year. I would like to know if this trend will keep going.
Okay. Sure. That is explained primarily because of when increases of aeronautical tariffs kicked in 2017. In 2017, the increase in tariffs was implemented in April and May. So in the first half of the year, you have 3 or 4 months where you have low tariffs. And then the new tariffs of 2017 started in April and May. Whereas this year, we started to implement the increases during January, and all of them kicked in, in February. So you have a lower basis of comparison during the 1Q. When you compare the third quarter only gives you the normalized level of increase that we implemented this year.
Perfect. The second one will be about the Hurricane Willa. I saw that Volaris made some cancellations of flights and as a likely, there is impact on higher costs.
I think that there was some route -- flight cancellations as a result of these storms that hit early this week in Culiacán area, like Mazatlán and Culiacán. But there was no impact to our infrastructure. And we think that the flight cancellations impact will not be material.
[Operator Instructions] Our next question comes from Alan Macias with Bank of America Merrill Lynch.
Just a clarification. I understand that you did sign a 10-year renewal -- renewable energy contract for electricity cost. And just if you can give us an update on this?
Sure. The -- we do have some agreement to buy electricity from a supplier. The contract is subject to regulatory approval by the CRE, the Comisión Reguladora de Energía. And the CRE has not provided all of the permits required for the contract to begin. There is no established time light -- time line by the CRE to complete this process. So at the time, we do not have visibility on when all of the regulatory process could be finished. And given the changing government, it will probably be delayed quite a few months.
Our next question comes from Ian Simmons with Fiera Capital.
Two questions. First one, can you tell us how you are thinking about dividends at the moment given a still very strong balance sheet? What kind of payouts are we looking at for this year and the coming years?
Yes, Ian. In -- as we have reported, cash generated by operations has increased given the strong performance of the company. And we are able to fund all of our CapEx with internally generated cash flows. I think that the board will make a recommendation in April of next year for the shareholders to approve the annual dividend. We do not have a established policy of dividend yield. But I mean, if cash continues to accumulate, the board will have to make a recommendation in due time with respect to the dividend in the upcoming shareholder meeting.
Yes. But if we go back a few years, you had a period where you paid out above 100% of earnings. Is that a scenario that we could have again?
I am not in a position to speculate on what the board might decide or recommend to shareholders.
Okay, okay. And second question just on your comment that margins should be stable at the current levels. Can you just give a bit more detail on what lead you to that conclusion? Is it to do with mix, or you have more commercial revenues, which had lower margin offset by more dilution cost per passenger improvement on the other side?
I think that the -- it's -- the current levels of margins are sustainable. There might be possibilities to increase it depending on the levels of passenger traffic and where -- while we have seen decreases in certain line items of cost, such as, for example, payroll or supplies, we are seeing pressure on other fronts, such as utility services. So I think that there are possibilities to increase it marginally, but the large jump that we have seen this year of about 450 basis points in margin expansion will not be seen going forward once the 12-month period of these increases ends.
Ladies and gentlemen, there are no further questions at this time. I'll turn it back to management for closing remarks.
Thank you, Diego. I want to thank all of you again for your participation in this call. Emmanuel Camacho 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.
Thank you. This concludes today's teleconference. All parties may disconnect. Have a great day.