Grupo Aeroportuario del Centro Norte SAB de CV (OMAB) 2024 Q1 法說會逐字稿

Greetings. Welcome to the Grupo Aeroportuario del Centro Norte OMA first-quarter 2024 earnings conference call. (Operator Instructions)

I will now turn the conference over to your host, Emmanuel Camacho of Investor Relations. You may begin.

Thank you, Shameli. Hello, everyone. Welcome to OMA's first-quarter 2024 earnings conference call. We're delighted to have you join us today as we discuss our company's performance and financial results for the past quarter. Participating today are CEO, Ricardo Duenas; and CFO, Ruffo Perez Pliego.

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.

And with that, I'll turn the call over to Ricardo Duenas for his opening remarks.

Thank you, Emmanuel. Good morning, everyone. We appreciate your presence in this call today. This morning, Ruffo and I will review our quarterly operational financial results, and then we'll be pleased to answer your questions.

In the first quarter, OMA's passenger traffic reached 5.9 million, a decrease of 1.5% versus the first quarter of last year. Excluding the Acapulco Airport where hotel infrastructure continues to be affected by the impact of Hurricane Otis that hit in October 2023, terminal passenger traffic in our other 12 airports increased by an aggregate of 0.9% during the quarter. Excluding Acapulco, OMA experienced a decline in domestic traffic of 1.2% in the quarter, driven by lower domestic seat capacity, which declined by 9.1%. The main airports affected were Culiacán and Ciudad Juárez Airports, notably on routes such as Culiacán to Tijuana, and Ciudad Juárez to Mexico City.

International passenger traffic recorded a strong performance with a 10% increase compared to the first quarter of last year, driven by airlines expanding capacity in international routes. During the quarter, international seat capacity grew by 7.1%.

This international growth was primarily led by the Monterrey Airport, which saw a 14% rise in international passenger traffic. The routes with the highest increase from Monterrey were to Atlanta, Toronto, Las Vegas, Bogotá, and Dallas. These routes, along with San Luis Potosí to Houston, and Zihuatanejo and Zacatecas to Dallas routes contributed to approximately 80% of the international passenger traffic increase during the quarter. Furthermore, in the first quarter, we launched four new international routes, three of which were based at the Monterrey Airport.

In terms of airline participation, VivaAerobus represented 48% of our total traffic during the quarter with a notable 16% increase in terminal passenger numbers compared to the first quarter of '23, while [Volaris], which accounted for 20% of our total traffic, experienced a 24% decrease during the quarter, largely due to the Pratt & Whitney engine recall affecting their fleet.

Moving on to OMA's first-quarter financial highlights. Aeronautical revenues increased 5.3% and aeronautical revenue per passenger rose 7% in the quarter. Commercial revenues increased 12% as compared to the first quarter of last year, driven by car rentals, restaurants, and parking. The car rental and restaurant line item benefited from the opening and consolidation of new businesses -- units across our airports during the past quarters. Occupancy rate for commercial space stood at 95.3% at the end of the quarter.

On the diversification front, revenues increased 21%. Hotel services contributed most to this growth, mainly as a result of an increase in operation in both hotels. In the first quarter, occupancy rate at our Terminal 2 NH was 89%, while the Hilton Garden Inn hotel had an occupancy rate of 77%. OMA cargo increased 2%, mainly as a result of an increase in revenue related to import cargo services.

OMA's first-quarter adjusted EBITDA increased by 3% to MXN2 billion, and the adjusted EBITDA margin was 74.6%. For comparative purposes with the first quarter of last year, we exclude the surplus of the concession tax over aeronautical revenues, resulting from the rate increase from 5% to 9% for this concept pursuant to the Mexican Federal Duties Law, which amounted to MXN86.3 million and was recorded as a concession tax expense in the quarter, along with its impact on OMA's financial results. Our adjusted EBITDA would have been MXN2.127 million (sic – see press release, "MXN2.127 billion") with a margin of 77.7%.

On the capital expenditure front, total investments in the quarter, including MDP investments, major maintenance, and strategic investments were MXN1.1 billion. During the quarter, some of the most relevant projects we are working on are the expansion and remodeling of the Monterrey Airport Terminal A building as well as Juárez, Torreón, Culiacan and Durango terminal buildings, reconfiguration of the Mazatlán terminal building, major rehabilitation and reconfiguration of platform and taxi ways in several airports and construction of four industrial warehouses.

Lastly, I want to mention that tomorrow, we will hold our 2024 Annual Shareholders Meeting. Shareholders will vote on several matters, including the declaration and payment of MXN4.25 billion cash dividend. We extend our sincere gratitude to our shareholders for their valuable participation and unwavering commitment to our company.

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

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

Aeronautical revenues increased 5.3% relative to the first quarter of '23, driven primarily by higher aeronautical yields as well as the increase in international passenger traffic. Non-aero revenues increased 13.3%. Commercial revenues increased 11.6%. The categories with the highest growth were car rentals, restaurants, and parking.

Car rentals rose 25.4%, mainly due to an increase in revenue as a result of the consolidation of initiatives implemented in past quarters. Restaurants increased 18.6% due to an increase in fixed rents as well as the consolidation of initiatives also implemented in previous quarters. Parking increased by 8.3%, driven by an increase in average tariffs in our airports as well as higher penetration in Ciudad Juárez, Chihuahua and Monterrey airports. Diversification activities increased 20.6%, mainly due to higher revenues from hotel services as occupancy levels increased in both hotels.

Total aeronautical and non-aeronautical revenues were 7.2% to MXN2.7 billion in the quarter. Construction revenues amounted to MXN1.01 million (sic – see press release, "MXN1.01 billion") in 1Q '24, an increase of 53% as a result of higher MDP investment execution.

The cost of services and G&A expense had a 6.4% growth versus the first quarter of '23, primarily driven by a 6.5% increase in payroll and a 16.5% growth in contracted services as a result of overall inflationary increases and the effect of minimum wage increases. Additionally, our cost of hotel services grew by 20.7% due to the increase in operations in both hotels.

Concession tax increased 87% to MXN223 million as a result of a change in the rate from 5% to 9% applied on revenues generated by airport concessions. Under the tariff regulation basis effective October 2023, payments made to the government related to aeronautical revenues in excess of those included in the most recent tariff revision, will be added to the reference value to be used in the next maximum tariff revision. Therefore, starting in January 2026, these success concession tax payments will begin to be recovered through the maximum tariffs.

In the first quarter of 2024, the 4% surplus of the concession tax on the aeronautical revenues amounted to MXN86.3 million, equivalent to 3.1% -- the sum of our aeronautical and non-aeronautical revenues. This surplus is included in the MXN223 million recorded as concession tax expense for the quarter. Excluding this amount, our adjusted EBITDA would have been MXN2.12 billion with a margin of 77.7%.

We continue to analyze alternative accounting treatments of the recoverable amount of the excess concession tax. However, until the final decision is made, we decided to record it as an expense. Major maintenance provision was MXN71 million compared to MXN77 million in the first quarter of '23.

Our EBITDA was MXN 2.0 billion, and the adjusted EBITDA margin was 74.6%. Our financing expense was MXN276 million, mainly due to a higher interest expense as a result of an increase in financing costs, and the variation in the present value of the major maintenance provision. Consolidated net income was MXN1.1 billion in the quarter, which was flat relative to last year.

Turning to our cash position. Cash generated from operating activities in the first quarter amounted to MXN1.5 billion [and] cash at the end of the quarter stood at MXN3.4 billion. At the end of the quarter, total debt amounted to MXN10.7 billion, and we ended the quarter with a healthy net debt to adjusted EBITDA ratio of 0.8 times.

This concludes our prepared remarks. Shemali, please open the call for questions.

Thank you. At this time, we will be conducting a question-and-answer session. (Operator Instructions)

Guilherme Mendes, JPMorgan.

Thank you. Thanks for taking my question. Hi, Ricardo, Ruffa, Emmanuel. My first question is regarding the traffic outlook. Ricardo, recalling on the last conference call, you mentioned about an expectations of having a flattish traffic performance in 2024 when compared to last year. Is this still the case? I mean, how should we think about traffic performance going forward, given the latest assessment on the aircraft groundings?

And the second question also related to this, it's on Acapulco specifically. We continue to see how it perform initially, but how should we think about the pace of recovery going forward? Thank you

Thank you. Thank you, Guilherme. We're monitoring very closely traffic. It's really depending on how the Pratt & Whitney engine issue evolves. We're looking right now for the for the year in terms of traffic somewhere in the mid- to low-negative-single digit.

As for Acapulco, we're currently seeing -- we're operating around 50% of the capacity that we were handling pre-OTIS. We're also monitoring this very closely, and it will depend on the recovery of the city.

Alejandro Fuchs, Itaú.

Thank you. Hello, Ricardo, Ruffa and Emmanuel and team. Thank you for the color and congrats on the results.

I have two quick ones from my side. First, looking at the release, I was curious to see that the national tour was up 5% year over year. I was wondering how we can relate this in context of last year's total which for the last few months of the year was 10% down. Even with inflation, how do we get to the plus-5% on the national tour? That's the first question.

And then the second one on the non-aeronautical revenue per passenger was up 15% year over year. It is a very good result. Congratulations on that. Maybe I was wondering if you can share with us a little bit more color on these different strategies that you've been implementing the last two quarters, and maybe if VINCI is also adding to the strong performance, anything that you could comment and if we should expect to continue to see strong performance on the non-aeronautical side going forward? Thank you

Hi, Alejandro. With respect to the aeronautical yield, it has to do with the basis of comparison. As you point out, at the end of last year, we started to have a 10% reduction in tours in certain airports. We did some inflationary increases in January of this year, and we also plan to do them in January of next year. But last year, our tariff base was adjusted until the end of March. So that's why you see the benefit of the basis of comparison primarily.

And with respect to commercial initiatives, yes, we have been working very closely with VINCI since they become a major shareholder of the company. Part of the strategy is to develop extra aeronautical revenues. We have been aggressive in renegotiating packages of spaces in the food and beverage and retail segments. And also as new outlets become available given the expansions that we are finishing, primarily in the Monterrey Airport, we expect the strong performance to continue in the next following quarters.

Alan Macias, Bank of America.

Hi. Thank you for the call. I just had one question on the technical assistance expense. Is that what we saw in the first quarter? Should we continue to we expect going forward, those levels? Thank you.

Hi, Alan. Yeah, technical assistance fee has not been modified. Currently, it stands at 3% of the revenues -- sorry -- of the EBITDA generated by the airport concessions. So there is no modification in that respect. Going forward, it will depend on the level of our EBITDA generated by the airport concessions and whether it goes up or down, it depends on the airport's performance.

Rodolfo Ramos, Bradesco BBI.

Thank you, and congratulations on the results, team. I have a couple. On the traffic side, thinking a little bit more long term, medium term, how do you see this slot reduction or like this bottlenecks that we've seen in Mexico City maybe impacting your system now given that how important the Mexico City metropolitan area is for the Monterrey Airport? So that is my first question.

And then second, I don't know if you've heard any additional news around D'alene airport in Monterrey. I think the transfer of operations to the military should have happened or is about to happen any day now. Obviously, the military is not a good place, struggling with Mexican and Felipe Ángeles. But how likely do you think it is for them to start the commercial operations and how could that impact? Thank you.

Thank you, Rodolfo. In terms of slot reduction in Mexico City, what we're expecting is traffic -- what the government is expecting is traffic from the Mexico City airport to shift into either Santa Lucia and probably to Lucas, mostly Santa Lucia. So what we're expecting medium term, long term is that traffic will start either shifting to the other alternative airports like Santa Lucia, not 100%, but the rest will find a way around the network of airports.

So that's where we believe that we are part of that solution and traffic will start at some point, that excess traffic that it's not moving to other airports to bypass the airport of Mexico City. So we're not expecting a medium-term impact. Traffic, it's challenging this year because of the Pratt & Whitney issue. But other than that, aside from that, nearshoring is still there. Fundamentals are still there. So we're bullish on traffic going forward.

So like network (multiple speakers) just network development, do you think it's going to be more key like providing point-to-point Monterrey to other smaller as the cities? Did I get that correct?

Yeah. I think that's fair to say. And in terms of the airport in the north, at this point, there's no -- we haven't had -- there's no official announcement besides what we heard in December. We don't know -- there's a lot of investment that the military would have to do. Monterrey Airport doesn't have a capacity constraint. So the technical need, it would have to be analyzed. But at this point, there's -- we don't see that project right now. It's in action.

Fernando Recchia, BTG Pactual.

Hello. Thanks for taking my question. Two from our side. The first, I wanted to get the update on the MDP negotiation. I know we are a bit far from the timeline for it. But considering all the moving parts that we saw at the beginning of this year with the two others come increasing concession fee, just wanted to get your latest view on the tariff that you should get on the next MDP, if you're expecting a flattish tariff as you were previously expecting, or if you're now looking for a small tariff increase?

And second, on margins. Margins were pretty decent considering all these moving parts. As you are expecting now a slightly lower traffic, do you still expect to keep these margins over 75% going forward? How should we look at it? Thank you.

Yeah. Fernando, thank you for your question. You're right. We're still in an early stage of the MDP as we will have to submit that until June of next year. Right now, we're working on the projection -- the traffic projections, on the CapEx needs that we'll be looking forward.

We're working very closely with VINCI development this next MDP. We're using all their expertise, their experience that they have. They are very good and very efficient at optimizing CapEx, which is what we are currently working on.

So it's still early to say and have some guidance into where we think we would land on tariffs. And in terms of margins, I think something between 72%, 74%, it's fair to assume (multiple speakers) considering that the concession tax will be considered an expense.

Pablo Ricalde, Santander Mexico.

Hi, Ricardo. Thanks for the question. Maybe a follow-up on the concession fee. You didn't recognize it as an intangible asset because you are rethinking on that or because the accountant didn't approve that?

Sorry, Pablo, can you repeat the last part of your question? I could hardly hear it.

Sorry about that. Maybe regarding the concession fee that you shared as an expense instead of an [intangible] asset? So just trying to understand the rationale behind that -- if it was a matter of like an internal decision or it was a matter of the accountants?

So we're still assessing alternative accounting treatments for this line item. We haven't reached a final decision. We are still in conversations with our auditors in this respect and would expect to have a resolution in the upcoming quarters.

The way we reported it was the more conservative approach. And obviously, this does not have any impact in the recoverability of the excess amounts paid pursuant to the tariff basis. That's still a discussion both internally and with our auditors.

[Jay Singh], Citi.

It's Jay going in from Stephen Trent's team. Thanks for taking my question. Just two on my end. The first thing I wanted to ask is, is it too early to say where the next administration will begin discussions to extend session contract beyond 2040 rather than approving large tariffs increases every five years?

Hi, Jay, we haven't had that conversation, and it seems that it's too early to do that type of conversation considering the years remaining on the concession.

Okay. And my next question is, any general high-level view over what investors could expect regarding tariffs and CapEx for the next regulatory review?

As we mentioned now, it's still too early in the process. We are submitting the next MDP until June. So we're currently working in traffic and CapEx projections. So we're working with a with VINCI, our partners, to develop a very efficient and optimized CapEx, leverage their international expertise.

[Gabriel Himelfarb], Scotiabank.

Hi, good morning. Thanks for the call. Just a quick follow-up question about the concession fee. It's my understanding that the increase in the concession fee will be somehow opted in the new master development plan in 2026. But in the meantime, is there any offsetting mechanism too to offset the impact on profitability, the increase of the concession fee or it is just pure cost control? Thank you.

So irrespective of the accounting treatment, the cash flow benefit will come until the next tariff negotiation, certainly not only because of this accounting treatment that we did but also to compensate for some of the passenger loads that we're experiencing. We continue to be very aggressive on our cost containment measures. We're always looking to optimize our expense base, and that is part of the philosophy of running our company.

Okay. So in the meantime, there's no kind of regulatory offset or even increasing a bit faster to maximum grade to 100% or something just pure cost control?

Well, last year, we ended up at 97.5% of maximum tariff recovery. This year, we are expecting to be above that. So in that sense, those are mitigant measures to compensate for the additional outflow of concession tax that we are experiencing.

Thank you. And we have reached the end of the question-and-answer session, and I'll now turn the call back over to Ricardo Duenas for closing remarks.

We would like to thank everyone for participating in today's call. We appreciate your insightful questions, engagement and continued support. Ruffo, Emmanuel, and I are always available should you have any further questions or require additional information. Thank you once again, and have a great day.

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.