Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. (OMAB) Q2 2021 Earnings Report, Transcript and Summary

Greetings, and welcome to the Grupo Aeroportuario del Centro Norte Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Emmanuel Camacho, Investor Relations Officer. Thank you, sir. You may begin.

Thank you, Christine. Good morning, everyone. Thank you for standing by, and welcome to OMA’s second quarter 2021 earnings conference call. Ricardo Duenas, OMA’s Chief Executive Officer; Ruffo Perez Pliego, Chief Financial Officer, will be joining us this morning and we will discuss OMA’s second quarter 2021 results.

Thank you, Emmanuel, and good morning, everyone, and thank you for joining us today. I hope all of you and your families are safe and healthy. This morning, we will review the evolution of our business as well as our second quarter performance. During the quarter, our total passenger traffic continued to show clear signs of recovery with a sequential increase of 50% compared to the first quarter of this year. This performance was mainly the result of higher mobility levels throughout the country in accordance with the epidemiological traffic alert system. The airports that contributed the most to our passenger traffic recovery in volume terms were Mazatlan, which delivered growth as compared to the second quarter of 2019, Durango, Reynosa, Zihuatanejo, Culiacan. Additionally, vaccination rollout programs in Mexico and the United States allowed for gradual increased levels of passengers during the quarter, particularly on the international side, which stood at 98.5 of the international passengers in second quarter of 2019. The international passenger recovery is primarily driven by destinations such as Houston, San Antonio and Dallas. In July, the level of COVID-19 cases had begun to increase again as well as epidemiological alert levels in the country. Currently, of the nice states where OMA has operations one state is in red status, three in orange, four in yellow, and one in green. We are confident that our passenger traffic will continue to evolve positively in the following months as the pace of vaccination rollout in Mexico and the U.S. makes progress and economic activity continues to improve. It is worth highlighting that in Q2 2021, three new routes opened: Monterrey-McAllen, Monterrey-Harlingen, and Puerto Vallarta; and seven origin-destination routes that were suspended will start operations. For the third quarter of 2021, we have confirmed the opening of 13 origin-destination routes, most of which are brand new. Finally, at the end of June, a total of 131 origin-destination routes were in operation compared to 140 at the end of December 2020, and 183 routes in operation at the end of December 2019.

Thank you, Ricardo. Good morning, everyone. I will visit with you our financial results and then we’ll open the call for your questions. Turning to OMA’s second quarter financial results. Aeronautical revenues increased 778% relative to 2Q 2020 driven by 6.80% increase in passenger traffic. Non-aero revenues increased 107% with commercial revenues having the largest contribution. Commercial revenues increased 88%. The categories with the largest variations were parking, restaurants, car rentals, and retail.

Thank you. We will now be conducting a question-and-answer session. Our first question comes from the line of Alan Macias with Bank of America. Please proceed with your question.

Hi, good morning and thank you for the call. Just a question on margins and adjusted EBITDA margin, what is your expectation going forward. And if you’re seeing any acceleration in costs or in cost pressures in any item in particular. Thank you.

Thank you, Alan for your question. We have our – during the quarter we have kept a very strict control on costs. We think – we believe most – some of them are going to be – we’ve been able to keep them going forward. We expect for the whole year to be slightly above 70% EBITDA, EBITDA margin.

Does that complete your question?

Yes, thank you.

Our next question comes from the line of Guilherme Mendes with JPMorgan. Please proceed with your question.

Hi, Ricardo, Ruffo, Emmanuel, thanks for taking my question. I have two questions actually. The first one is a follow-up on the traffic recovery you guys mentioned on the opening remarks. Just wonder if you could provide more color on how do you see traffic recover, when do you expect to be back to 2019 levels? And how do you see the risk related to the increased number of cases of COVID-19 in Mexico? And the second question is related to the commercial segment. What are your expectations in terms of revenues per-passenger basis. Thank you.

With respect to your first question we’re expecting total packs this year to be around 17 million packs. That would be about 26% below 2019 levels. We are seeing a strong performance in the summer, irrespective of the increase in health alert levels. This as we have mentioned in previous calls continues to be driven primarily by VFR and domestic leisure travel. However, we would expect toward the end of the year a pickup in corporate travel driven by the improvement in economic conditions. At this time, we think we will reach the 2019 levels around early 2023.

Thank you.

And sorry, what was your question with respect to COVID?

Yes, in terms of how do you see the risks regarding the increasing number of cases of COVID in Mexico, do you see an impact now in third quarter and the end of the year?

We are seeing increased alert levels from the health authorities. However, we do expect that there will not be strict confinement measures such as the ones that we saw last year. So we will – we expect to continue to see increased mobility over the next few months. The vaccination program in Mexico is underway. It’s picking up speed. So we believe that the improvement in the vaccination coverage will allow us to continue having traffic recovery for the next months, and we do not foresee any such conditions as the ones we experienced last year.

And also just to add to the point, we haven’t seen any – we’ve been tracking the numbers weekly and we haven’t seen any effect so far. The trend that we have seen for the last few months remains. So we haven’t seen any evidence in the data that supports any negative impact so far.

Okay, perfect. Thank you, guys. And just a follow-up on the commercial segment. How do you see revenues on a per-passenger basis, as we already saw an increase now in the second quarter?

Well, commercial revenues, we expect also to continue improving. Our most important line item in commercial revenues is car parking. We already saw in the second quarter a stronger performance than in previous months from car parking and we expect as travel continues to improve, to benefit from those line items. And in the case of restaurants, retail, tenant – car rentals, we did have general discounts that were implemented in the second half of last year and we gradually phased discounts out during the second quarter of this year. So we would expect less impact from those discounts going forward and that would help us get improved results from the fixed rents portion. And also as passengers continue to increase, we should also see a pickup in the participation on sales that we get from most of our commercial contracts. So we should expect a bit of an acceleration in commercial revenues over the second half.

Okay, perfect. Thank you, guys. Have a great day.

Thank you.

Our next question comes from the line of Javier Gayol with GBM. Please proceed with your question.

Hi, Ricardo, Ruffo, and Emmanuel, thank you for taking my questions. My first question would be related to the capital structure of the company. We see, as you mentioned, currently even with depressed numbers in the EBITDA front, we see a very comfortable net debt to EBITDA ratio. Is management comfortable at this decision or would you be seeking additional debt to the balance sheet on the short-term? That will be my first question.

Thank you, Javier for your question. Yes, as you mentioned that our debt levels are a very comfortable position as you know, at MXN4.5 billion. So far, we plan to remain there. There’s – we believe there is room to improvement, but we will be analyzing as time moves on.

And also in the second half of the year we should expect the dividends. It was delegated to the Board of Directors the decision of when and how the dividend will be paid. As you remember that would amount upto MXN2 billion. So at some point in late 3Q or 4Q we should see also that distribution being made. So that would increase slightly the net debt to EBITDA level.

That’s very helpful, thank you guys. And my second question is a follow-up regarding the commercial revenue part of the business. And I just – I was wondering, are you guys doing any new strategies in the commercial front to improve that revenue mix from commercial revenues at the airports? And is this something that we should expect from the capital deployment into the airports that you guys mentioned in Zihuatanejo and Tampico and so on. Is this part of the strategy to increase the commercial front of the business?

Yes, it is part of the strategy. There will be new square footage commercial space for example in the Tampico terminal, it will be about to open. Culiacan, Juarez, the new airport Monterrey, we would expect in the short term new square footage so we expect more commercial space there. So far, we have an 85% occupancy rate. We believe by the end of the year we will be above 90% occupancy. We also have been more aggressive in negotiating our contract with the discounts that we mentioned earlier. There was a trade-off. And since we decreased – those discounts were accompanied by an increase in the percent of revenue share that we have. So yes we continue working on strategies as well as new – we’ll continue evaluating from diversification and commercial activities.

Thank you. Thank you very much for the color.

Our next question comes from the line of Alejandro Zamacona with Credit Suisse. Please proceed with your question.

Hi everyone, thank you for the call. Just a follow-up question on the EBITDA margins. So, we noted that for this quarter you reached an all-times high margin. So I am curious to hear your thoughts around to what extent we can continue to see a margin expansion? Where can we see normalized margin expansion and I know that you already mentioned you expect a full year margin for 2021 above 70%. But going more on the medium term, what be margin that we can say a normalized margin? And also if this margin expansion may be boosted not only by the eventual traffic recovery and the further potential increase in your sweet spots from a further cost control. Thank you.

Hi, Alejandro. So, certainly this quarter we posted a very strong number in terms of profitability. I think in the following quarters we will see a slight decline relative to Q2 in terms of margin. There are some contracts that we negotiated during the COVID crisis that will be up for renewal in the next few months. So we will not expect to see such good terms in those contracts with third parties, for example, in cleaning or security. So we'll see some pressure on those type of costs. And so we would not expect to see further margin expansion in the near term relative to these levels that we are seeing at this time.

Okay, thank you, Ruffo. And then if I may just one other question. On the maintenance cost since the beginning of COVID we have seen significant decreases. So is it fair to expect a catch-up in the upcoming quarters after doing the minimum required I guess maintenance during COVID?

Yes. So I think we as – passengers on airports facilities have a greater utilization. We will be seeing increased maintenance expenses. Last year from our view, we were able to close certain areas of terminals and in that way reduce the usage of some equipment. But now basically all terminals are fully opened for their schedules itineraries. We are -- see a pickup in minor maintenance expense over the next quarters. I mean, this quarter relative to last year, you already saw an increase in maintenance, still below the 2019 levels. But yes probably over the next few quarters we will trend toward the 2019 levels.

Okay, Ruffo. Thank you so much.

Our next question comes from the line of Gabriel Himelfarb with Scotiabank. Please proceed with your question.

Hi, thanks for the call. Just two quick questions, first about the routes that were closed, could you give us a bit of color which routes were closed or why were closed? And the second is about maximum rate, do you think this year you're going to -- you will be able to reach maximum rates or you're going to wait till next year? Thanks.

Thank you. Gabriel for your question. I'll start by your second part. We expect to end this year with -- or complying with the maximum rate of around 95% and we expect by the beginning of next year to reach the 100% maximum rate recovery. We mentioned since last year that we planned a year of pass-through for the full rates to materialize. As for your first question, yes, there were many routes that were closed. A lot of them were related to Interjet, which as you know disappeared. And AeroMexico as well that has been consolidating most of their traffic in the Mexico City airport. So the strategy that Aeromexico has been following has been to recover some of this loss that Interjet left open in Mexico City airport, so they have been consolidating their airports there. But as we move on in our conversation with them, we expect to recover the regional traffic that we had with them.

Okay, thank you.

Our next question comes from the line of with GBM. Please proceed with your question.

Good morning. Thank you for the call. My question is on international traffic as it is already at pre-pandemic levels. Is it is being related to back to vaccine route in the U.S. or what do you believe to be the driver in this front.

You're correct, Nowki it has been very vaccine-related. Some of the new routes that we opened for example was the McAllen route and that is we believe a vaccine route, but also there is a Harlingen one, San Antonio, Houston. Some of them we think they will remain. During the quarter, we had a peak for example, at some point in one month we were almost 20% above pre-pandemic levels. So far we almost for the quarter were flat. We expect international traffic to be solid for the rest of the year. Not all of it is vaccine-related, some of it is and some we believe it will remain.

Okay, thank you very much.

Our next question comes from the line of Pablo Monsivais with Barclays. Please proceed with your question.

Hi guys. Can I have a follow up of previous questions from the commercial revenues? Is still traffic is 20% down on the pre-pandemic level, but can you just explain to us how are you seeing commercial spending per passenger on the ground. Have you seen a change in pattern because of a lower corporate travel, or have you seen just people spending less? How are things behaving you at Monterrey Airport mainly? Thank you.

So, in the case of Monterrey Airport and this probably explains why the performance – the variable performance we have had in the different line items is that recovery has been in the past few months, at least in the case of Monterrey primarily being driven by Viva Aerobus. Viva Aerobus is as you know – that the main – the only user of Terminal C. And whereas in Terminal A and Terminal B were airlines such as Aeromexico or in the case of Volaris and Interjet it used to operate in Terminal A. Those terminals have not recovered to the levels that Terminal C has recovered. In terms of square footage of commercial spaces, Terminal C is the one with the least amount of space. So we, in an effort to balance out our performance throughout the terminals, we started in July to move certain operations of Viva Aerobus from Terminal C into Terminal A. And we think that given the greater commercial exposures that those passengers will have in Terminal A will allow us to have a better performance of commercial revenue in the Monterrey Airport. And also we moved certain operations of Aeromar for example from Terminal A to Terminal B where Aeromexico and Delta operate also as an effort to improve the best traffic in that terminal. So we are making efforts to have a more balanced traffic in our Monterrey terminals and this should help our performance in commercial revenue to in Monterrey. Also, we had experienced in the previous months some vacancies. During the quarter we had some 470 square meters being vacated. We do expect to bottom out in this – in the second quarter in terms of occupancy. So, we should see improvements in occupancy in the next following quarters and that will also help us improve the commercial revenue per generating.

Does that complete your question?

From our side, yes.

Our next question comes from the line of Andressa Varotto with UBS. Please proceed with your question.

Hi, good morning. Thank you for taking my question. So my question is on the diversification revenues. So, how are you seeing hotels services revenues ramp up in the pandemic? When do you expect it reach a normal level? And you’re also seeing very strong numbers in the . If you could also talk about which initiatives the company has been implementing to capture that? And also...

Sorry Andressa, we didn’t get your – could you please repeat the question? The line isn’t great.

Okay, sorry. So my question is on diversification revenues. So on the hotel services, when do you see a normalization of the business? And also if you have other initiatives to increase your diversification revenues? That’s it.

Thank you. Diversification, yes we’re continuously evaluating new projects. For the hotels, the NH Hotel that we have in the Mexico City Airport has been recovering faster than the Hilton, that’s mainly due by the composition of our – of the customers. Most of the NIH are crew members of airlines. So that has been recovering faster. The profile of the Hilton customer are mostly business driven, Hilton Honors tourists, that haven’t recovered as fast. It’s hard to say a number when we expect that will normalize. We believe they will normalize somewhere by mid next, mid, or third quarter, fourth quarter of next year.

Thank you.

Thank you. We have no further questions at this time. I would now like to turn the floor back over to management for closing comments.

I want to thank all of you again for participating in this call. Ruffo, Emmanuel and I are always available to answer your questions. And we hope to see you soon. Thank you and have a good day.

Ladies and gentlemen this does conclude today’s teleconference. You may disconnect your lines at this. Thank you for your participation. And have a wonderful day.