Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. (OMAB) Q2 2020 Earnings Report, Transcript and Summary

Greetings, and welcome to the Grupo Aeroportuario del Centro Norte, OMA, Second Quarter 2020 Earnings Call. [Operator Instructions]. I would now like to turn the conference over to your host, Sr. Emmanuel Camacho, Investor Relations Officer for Grupo Aeroportuario del Centro Norte. Please go ahead, sir.

Thank you, Melissa. Good morning, everyone. Thank you for standing by, and welcome to OMA's Second Quarter 2020 Earnings Conference Call. Ricardo Dueñas, Chief Executive Officer; and Ruffo Pérez Pliego, Chief Financial Officer, will be joining us this morning and will discuss OMA's second quarter 2020 results. 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, which include the impact of COVID-19. I will now turn the call over to Ricardo Dueñas. Ricardo Dueñas: Thank you, Emmanuel. Good morning, everyone, and thank you for joining us today. I hope that you, your family and your friends are safe and healthy. This morning, I will review the evolution of our business during the current difficult scenario caused by COVID-19 and its impact on our results during the second quarter. Our second quarter has been the most challenging quarter in OMA's history, with passenger traffic declining 90% as a consequence of lower demand and the measures implemented in Mexico and globally in order to counter the spread of COVID-19. This decrease in the number of passengers resulted in major declines in our revenue regeneration as well as in our overall results in the quarter. Mexico's Ministry of Health issued a decree on March 31 suspending all nonessential activities in the country through April 30, which was later extended through May 30. As airport operations are considered an essential activity, they remain operational during this time. Beginning in June, the Mexican authorities established a traffic like system by region, which determines their level of health alert and the type of activities authorized to operate. As a consequence, since June, the reactivation level and the type of economic activities allowed are different in each of the states where we operate. As a result of the gradual reactivation, passenger levels have begun to recover. The number of passengers from July 1 to the 20th decreased approximately 73% relative to the same period in 2019. This compares to declines of 85% in June and 93% in May. We expect passenger traffic to increase as more regions in Mexico decrease their epidemiological risk levels and travel restrictions are lifted. As of today, Mexico has not issued any restrictions on our air travel. However, if the government issues restrictions to our operations or if current measures to counter the spread are extended, we may experience a significant additional decrease in our passenger traffic. In terms of health and safety protocols, we maintain a close and continuous communication with aeronautical and health authorities in order to adopt all measures to protect our passengers and our personnel working in our airports. We have implemented a number of standards regarding safe travel for the benefit of our customers, passengers and employees. Additionally, we're in compliance with current measures established by health authorities in Mexico and recommendations from organizations like Airport Council International. These protocols include, for example, the implementation of sanitary filters; limited access to terminal buildings, where only passengers are allowed to access; mandatory use of masks and use of infrared thermometers and antibacterial gel dispensers among others. On the cost and expense side, we continued to optimize the utilization of our terminal buildings. This allowed us to reduce temporarily our cleaning and security costs as well as electricity consumption. Additionally, during the quarter, our minor maintenance costs decreased as we deferred nonessential works. At June 30, our cash position was MXN3.1 billion, which will allow us to meet all of our investment, our operating obligations, and we do not expect to raise any debt this year. On the Master Development Program side, during the months of April and May, all construction works were suspended as directed by the Mexican Health Authorities. Construction and major maintenance works were gradually resumed during June. As a result of these delays caused by COVID-19, we're in discussions with AFAC to allow for additional months to comply with the 2020 investment program. On June 30, we submitted our investment proposal for our 2021-2025 Master Development Program to the Civil Aviation Agency. Our total estimated investment required for the next 5 years are approximately MXN11.8 billion of December 2019. The revision process with AFAC is expected to be concluded by December of this year. Finally, I would like to thank all shareholders who voted at our shareholders' meeting where the cancellation of 3.7 million shares held in treasury was approved. Turning to OMA's second quarter operational results. Total passenger traffic reached 583,000 passengers in the second quarter, down 90.2% compared to the second quarter of 2019. The quarter began with a significant decrease in capacity offered from airlines as a result of lower demand. In mid-March, we had 162 routes in operation. By early May, only 77 routes were in operation. As of last week, we had 114 in operation, showing a clear recovery relative to May levels. The routes that experienced the greatest impact on total passenger traffic during the quarter due to the reduction of frequencies or suspension of flights for Monterrey on its Mexico City, Cancún, Guadalajara routes; Chihuahua on its Mexico route; and Culiacán on its Tijuana route. The decrease in passenger traffic and the significant reduction in revenues during the quarter resulted in adjusted EBITDA of MXN25 million and an adjusted EBITDA margin of 7.3%. On the commercial front, revenues decreased 57.8%, with the largest impact on parking, where revenues decreased in line with passenger traffic reductions across the airports. And restaurants, car rentals and retail, which decreased as most revenues were generated from fixed or minimum rents. Occupancy rate for commercial space in our Terminal was 93.7% at the end of the quarter. Diversification activities delivered a revenue decrease of 57.3%, mainly due to lower revenues from hotel services. During the second quarter of 2020, the occupancy rate of our Terminal 2 NH Collection Hotel was 13%, while the Hilton Garden Inn Hotel in Monterrey Airport remained closed from April 6 to July 6. Total investment in the quarter, including MDP investments, major maintenance and strategic investments were MXN376 million. Our major projects underway include: expansion and remodeling of the Monterrey Airport Terminal A, expansion of Terminal C in Monterrey, expansion and remodeling of the Tampico Terminal building, modernization of the Zihuatanejo Terminal building and works on runways, taxiways and aviation platforms in several airports. I would now like to turn the call over to Ruffo Pérez, who will discuss our financial highlights for the quarter. Ruffo Pérez Pliego: Thank you, Ricardo. Good morning, everyone. I will briefly review our financial results, and then we will open the call for your questions. Turning to OMA's second quarter financial results. Aeronautical revenues decreased 89.7%, driven by the 90% decrease in passenger traffic. Non-aero revenues decreased 57.5%, with commercial revenues having the largest impact. Commercial revenues declined 57.8%, and the categories with the largest impact were parking, restaurants, car rentals and retail. Parking revenues declined 89% due to reductions in both short and long-stay operations. While restaurants, car rentals and retail decreased 62%, 51% and 55%, respectively, because most revenue was generated from fixed and minimum rents. Diversification activities decreased 57.3%, mostly driven by lower revenues from the hotel services. As a result, total aeronautical and non-aeronautical revenues were MXN347 million. Construction revenue increased 33.5%. This is a noncash item that is required under applicable accounting standards. It is equal to construction cost of improvements to concessioned assets, so it has no impact on earnings. The cost of airport services and G&A expense decreased 16.1%. During the quarter, our minor maintenance costs decreased 54% as a consequence of deferrals of nonessential works. Additionally, we recorded savings on subcontracted services and electricity, mainly due to temporary reductions in operational areas across all of our terminal buildings. OMA's second quarter adjusted EBITDA was MXN25 million, and the EBITDA margin was 7.3%. During the quarter, our financing expense was MXN90 million, and the net loss recorded was MXN181 million. Cash used by operating activities in the second quarter amounted to MXN414 million, mainly due to lower operational income and higher working capital requirements. Cash at the end of the quarter stood at MXN3.1 billion. This concludes our prepared remarks. Melissa, please open the call for questions.

[Operator Instructions]. Our first question comes from the line of Alejandro Zamacona with Crédit Suisse.

Our first question is on the MDP negotiation process. So in terms of the discount rate, what are your expectations in this first draft that you already delivered? And what's the initial expected outcome in terms of passenger rates? Ricardo Dueñas: Thank you for your question. First question, we believe the rates will be around 13%. We think around 13% is justifiable. The CapEx was submitted, it's of MXN11.8 billion. And regarding where we expect tariffs, I mean, we're still early in the process, but we believe something slightly positive is reasonable.

Okay. The discount rate is in real terms, right? 13% in real terms, right? Ricardo Dueñas: Correct.

Okay. And the second question, if I may, it's on the commercial business. So could you please remind us the discounts granted for this second quarter, the discount over the minimum annual guarantee contracts? And what are -- or what could we expect for the third and fourth quarter if this discount could continue to be granted to tenants? Ricardo Dueñas: Right now, it really -- the discounts really depend on the type of store, the type of airports and the type of contract that we have with each of them. But overall, for the second quarter, the total discount was around 20% of our commercial revenues, excluding parking. So far, we're in conversations with our clients as we move on.

Okay. So it's fair to expect that discount of 20% could continue in this third and fourth quarter? Ruffo Pérez Pliego: I think, yes, it's reasonable to assume some type of discount in the third quarter, and we will see in the fourth quarter how traffic is evolving and make a decision. But we're providing some short-term relief only to tenants. We are not entering into long-term contract renegotiations at this time.

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

My question is on the passengers front. You mentioned in your press release, a certain degree of recovery in July -- in the first half of July. Maybe if you can give us some color on which are those routes that are coming faster? And what are the type of passengers that are coming back to the plane? And also, if you can give us any sense on the Monterrey-Mexico City's route, which is, I believe, your most important route. What is the evolution there and your expectations? Ruffo Pérez Pliego: Mauricio, as we mentioned during the call, we had some suspended routes that appeared through April until early May. And gradually, these routes that we operated previously are now being operated again by the airlines. The main routes recovering are the high-density routes from Monterrey to larger cities, such as Cancún and Mexico City. In the summer, particularly in the second half of July and August, some new routes to Acapulco and Zihuatanejo and some tourist destinations are also being reopened. But the initial recovery that we have seen is those routes to larger metropolitan areas so far. Ricardo Dueñas: We believe the traffic that will recover first, it's the visiting friends and relatives component. We would expect domestic to pick up first, domestic business travel and tourism travel. And the latest, we believe would be international tourism travel.

Perfect. And a second question, if I may. There have been any sort of cash flow disruption given the Aeroméxico Chapter 11 process, and Interjet financial, well -- struggling? Ruffo Pérez Pliego: In the case of Aeroméxico, all of our receivables with Aeroméxico are current. They have been complying with other payment terms that we had on with them even after the Chapter 11 filing. So at this time, Aeroméxico is current on the receivables. In the case of Interjet, we had a very small exposure to them because they have been operating under prepayment for quite a while with us now. So in the case of Interjet, the operation in the second quarter from them was very small. They had around a 95% decline in traffic with our airports. So right now, the operations and the contribution of Interjet to our total operations is quite minimal.

Our next question comes from the line of Rodolfo Ramos with Bradesco BBI.

My first question is on your maturities that you have up in coming next year. If you can tell us what your plans are there, that would be great. Ricardo Dueñas: Yes. We have a MXN3 billion tranche under our local bonds coming due in June of 2021. The course of this year will be preparing for a refinancing of that tranche. But we will think of tapping the market once the MDP process and the tariff region is concluded. And afterwards, we will go to the market to refinance our long-term bonds.

Okay. And just a follow-up on the sanitary measures. You mentioned that Nuevo León is still on the maximum level of alert. I mean, do you expect, if we do see an improvement to a gradual lifting of restrictions, mean do you expect this to become evident on your airport? Or how is the -- you're feeling locally of these measures and how they will impact air travel demand? Ricardo Dueñas: The decision of if it's red light, orange light, it's revised on a quarterly basis by the authorities. It used to be weekly, now it is quarterly, -- it is bi-weekly. We believe as soon as some of these restrictions are lifted, it would really depend. We're working very closely with the authorities to establish the safety protocols as well as with airlines. And I guess we'll see. So far, July, we've seen a pickup. The decrease is about 73% compared to 85% last month and 95% the month previous to that. So we will start to see if confidence starts coming back to passengers.

Perfect. And just a final one, if I may. And if it's too soon, perhaps we can follow-up offline. But any thoughts on what the pension reform that was announced yesterday could mean for your payroll expenditures? I mean, any kind of first thoughts that you could share, I'd really appreciate. Ricardo Dueñas: Thank you, Rodolfo. It's a bit too early to say. The initiative was only put through the Congress, I think, today or yesterday. So it's too early to say. Happy to discuss that as we move along.

Our next question comes from the line of Marcos Burrito [ph], private investor.

First, I wanted to know do you think that the SEC or the Ministry of Health would consider COVID-19 a reason to adjust clauses in concession contracts or to see any regulatory relief? Ricardo Dueñas: I mean, based on the concession -- the terms of concessions, it's -- if there's a fall of more than 5% in traffic, the MDPs could be subject to revision. In our case, we're already at the table with the ministry, so that really doesn't apply to us. As for other, any changes, we don't foresee any changes in the coming future.

Okay. My next question would be regarding international traffic flow. What is the status on flights coming from Colombia, Panama, the European Union? Do you see some risk that rising infection rates in Mexico could push back the timetable on the normalization of these traffic flows? Ricardo Dueñas: Right now, we don't have any direct flights to Europe or to Colombia. So obviously, we are indirectly affected by some of our connecting passengers that use any other hubs. In the case of Panama, yes, it suspended flights from the past few months. And I think the Panama is expected to open in August. However, the traffic out of Panama in our airports in Monterrey airport is minimum.

Okay. And my last question is any thoughts or updated opinion on the government's development of Santa Lucia Airport? Ricardo Dueñas: Yes. So far, the -- I mean, the project is moving along, and they have been very -- the government has been very clear that this project will be finished by 2022. And it will work in conjunction with the Mexico City International Airport and the Toluca Airport as a system of 3 airports.

[Operator Instructions] Our next question comes from the line of Andressa Varotto with UBS.

I just have one from my side and it is, how are you treating the pandemic impact on traffic assumptions for the MDP project? Ricardo Dueñas: Could you repeat your question, Andressa?

Yes, sure. How are you treating the pandemic impact on traffic assumptions on the MDP project? Ricardo Dueñas: Well, if you recall, during the last call, we had an initial estimate of CapEx of around MXN15 billion. That was based on our pre-COVID expected traffic for the next few years. We did adjust our expected traffic in the next 5 years following the COVID evolution. And that's resulted in lower needs for expansion. So right now, our MDP is around MXN11.8 billion. And the reduction is primarily the result of the lower traffic projection from COVID.

Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Sr. Dueñas for any final comments. Ricardo Dueñas: I want to thank you -- all of you again for your participation in this call. Ruffo Pérez Pliego, Emmanuel Camacho and I are always available to answer your questions, and we hope to see you soon. Thank you, and have a good day.

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