Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. (OMAB) Q3 2022 Earnings Report, Transcript and Summary

Greetings, welcome to OMA’s Third Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to Emmanuel Camacho, Investor Relations Officer. Thank you. You may begin.

Thank you, Sherry. Good morning, everyone. I would like to welcome to OMA's Third Quarter 2022 Earnings Conference Call. 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 will turn the call over to Ricardo Duenas for his opening remarks.

Thank you Emmanuel. Good morning everyone. We appreciate you joining us today. This morning we will review the evolution of our business and our third quarter performance. Before we begin, I would like to comment on an important update on all my shareholding structure. During the quarter we were informed by FinTech advisory that certain affiliates of FinTech had entered into a share purchase agreement with a subsidiary of VINCI airports for the direct acquisition of 29.99% of Series B and BB shares of OMA. This transaction will make VINCI airports our largest shareholder. VINCI airports investment in OMA represents an endorsement of the extraordinary performance we have delivered in the past and a confirmation of the potential of OMA's assets. We're excited to be welcoming the world's leading private airport operator, and together create additional value by combining VINCI’s global network and expertise with OMA’s long term strategy and prospects. We will not further comment on this transaction ahead of the closing which is expected to occur in December 2022. I will now review our third quarter operational performance. In third quarter OMA’s passenger traffic surpassed 2019 levels for the first quarter since the beginning of the pandemic. Total passenger traffic reached 6.3 million, an increase of 2% versus three quarter of 2019. Domestic and international passenger traffic increased by 1.8% and 3.7%, respectively, versus the same quarter of 2019. Our strong passenger traffic performance was guided by the continued improvement on the business travel segment in our main routes. The Monterrey to Mexico City route, which is our most relevant route was already at the same level of third quarter of 2019. Additionally, other important business routes such as Monterrey to Guadalajara, and Ciudad Juárez to Mexico City delivered important growth levels versus third quarter of 2019, with an increase of 12% and 34%, respectively. As a result of the strong passenger traffic performance and the increasing aeronautical tariffs in first quarter of 2022 or aero revenue grew 27% in the quarter, versus the third quarter of 2021 to MXN1.9 billion. On the commercial front, occupancy rate for commercial space in our terminals closed at 93% at the end of the quarter versus an 89% by the end of the second quarter of 2022. Strong demand for commercial spaces was mainly guided by an additional 1000 square meters occupied for the food and beverage and retail segments in our Monterrey and Tampico airports. Commercial revenues increased 34% compared to third quarter of 2021 driven by parking car rentals, restaurants, retail and VIP lounges. Diversification revenues increased 35%. Our hotel services and OMA Carga contributed most to this growth. In the third quarter of 2022, occupancy rate at our Terminal 2 NH Collection hotel was 79% while the Hilton Garden Inn hotel had an occupancy rate of 77%. OMA Carga had another set of strong results as revenues increased 35% versus the third quarter of 2021, mainly driven by revenues from handling, storage and custody of ground and airport and import cargo. As a result of OMA Carga’s continued strong performance during the quarter, we decided to increase capacity of our ground cargo operation facilities and Monterrey Airport. The expansion project entails an additional operating area of approximately 1100 square meters, an increase of 70% and is expected to be fully operational by the first quarter of 2023. On the capital expenditures front, total investments in the quarter including MDP investments, major maintenance and strategic investments was MXN839 million. During the quarter, we continue to work on the following major projects; expansion and re-modeling of the Monterrey airport Terminal A building as well Ciudad Juárez and Culiacán terminal buildings. Reconfiguration of the Mazatlán terminal building, Modernization of Zihuatanejo terminal building, major rehabilitation of platform and taxiways in several airports and platform reconfiguration at the Monterrey airport. And with that, I will now turn the call over to Ruffo Perez Pliego for more detail on our financial highlights for the quarter.

Thank you, Ricardo. And good morning, everyone. I will briefly review our financial results and then we will open the call for your questions. Turning to OMA’s third quarter financial results. Aeronautical revenues increased 27% relative to 3Q 2021, driven by a 23% increase in passenger traffic and an increase in non-aeronautical tariffs implemented in the first quarter of this year. Non aero revenues increased 28%. Commercial revenues increased 34% and the categories with the highest growth were car parking, car rentals, restaurants, retails, and VIP lounges. Car parking revenues increased 58% due to higher penetration in our Chihuahua, Monterrey and Culiacán, airports as a result of higher business dynamism in those airports. Car rentals, restaurants and retail increased 34%, 23% and 24% respectively, mainly due to higher revenue sharing and the opening of new commercial space. VIP lounges increased 57% due primarily to the recognition of revenues as a direct operation, as well as an increase in the number of users of the premium OMA premium lounges. Diversification activities increased 35% reflecting strong hotel and OMA Carga performances. Total Aeronautical and non-Aeronautical revenues were MXN2.5 billion in the quarter and grew 27% relative to the third quarter of 2021. Construction revenues increased 56% as a result of increased MDP investments. The cost of airport services and G&A expense increase 16% relative to the third quarter of 2021, mainly due to an increase in payroll expense as a result of increased headcount, higher salaries versus last year and provisions including statutory profit sharing. Contracted services grew due to overall higher activity in our airports and materials and supplies grew as we recorded direct costs from the operation of the OMA premium lounges. Major maintenance provision was MXN51 million compared to MXN165 million in the third quarter of 2021. Almost third quarter adjusted EBITDA was MXN1.9 billion and the adjusted EBITDA margin reached 76.5%. Our financing expense was MXN290 million, mainly due to higher interest expense as a result of additional debt issuance, and higher cost of debt as well as the non-cash implied interest on the major maintenance provision. Consolidated net income was MXN1.1 billion, an increase of 36% relative to the third quarter of 2021. Turning to our cash position, cash generated from operating activities in the third quarter amounted to MXN1.6 billion, and cash at the end of the quarter stood at MXN2.1 billion. During the quarter, we paid the second MXN500 million installment of the MXN2.3 billion dividend that was approved in the 2022 annual shareholders meeting. At the end of the quarter, total debt amounted to MXN9.2 billion and our net debt to adjusted EBITDA ratio stood at 1.1 times. This concludes our prepared remarks. Operator, please open the call for questions.

Thank you.[Operator Instructions] Our first question is from Alejandro Zamacona with Crédit Suisse. Please proceed

Thank you Ricardo and Emmanuel. Quick question on the tariffs. So during 2022 we have seen a slight increase. So far [Indiscernible] aeronautical revenue for working. So as you said that in 2023 you will be able to implement a maximum a tariff increase beyond inflation amid the last 30% will increase the MDP negotiation.

Hi, Alejandro this is Ruffo. Certainly, beginning of this year, we implemented approximately 11% increase in our salaries throughout our boards. We do not expect this year to get to the maximum recovery. In fact, we should be around the same level of last year around 92%. For next year, we are targeting increases, we still have yet to define what the level of increases will be and will take into consideration the expected inflation for next year as well as the overall situation of the industry.

Okay, thank you. And then my second question, if I may, in terms of the margins. Just a question regarding how sustainable do you believe this high 70s margins is achievable for long term?

Thank you, Alejandro. Yes. We think 76% something close to 76% margin is sustainable in the long term in the medium term.

Good. Thank you.

Our next question is from Juan Ponce with Bradesco. Please proceed.

Good morning, everyone. I have a question on Monterrey. We saw in your most recent traffic report north of 5% above the pandemic levels. In your view, what were the main drivers in September and going forward and you are showing actually moving the needle? And do you think these drivers will be sustained the next year amid a potential slowdown? Thank you very much.

Thank you. Yes, so we yes, we think they're sustainable. Two things that have helped us in our favorite business traffic has been recovering. As it was a traffic that was landing BFR and leisure traffic. So we're starting to see more than them as in that sector. Also, the near shoring effect has had some positive effects in our airports, you can see that by looking at some of the traffic, for example, in Juárez, were already much higher than traffic that we used to have in 2019.

Okay, great, thanks.

Our next question is from Philip [ph] Nielsen with Citi. Please proceed.

Hi, good morning, everyone, or afternoon. So I have two questions on my side. And thanks for taking my questions. I'd like to know, what are the impacts you're seeing from the Mexico City airports reshuffle into your airports. Is that good or bad? Like hubs in Monterrey less business, travel from Benito Juárez, etcetera. How are you seeing that? And the second question is what are your thoughts on new projects? And if you have any intentions on expanding outside Mexico or, or even getting new projects inside Mexico, we'd like to hear an update on that.

In terms of the new airport effect, it's still too early in the process. What we know is the government has been very clear about trying to decentralize traffic from Mexico City. That is an opportunity for private airport groups like OMA. When we see that our trend in which a lot of the traffic will start to bypass Mexico City. We believe Monterrey is strategically located across the United States to take advantage of this situation. During the quarter, we opened new routes to Santa Lucia airport to Toluca. So we think a shift might be might happen, but it's going to be a it's -- it's not going to be immediate effect. As to new projects, while we are executing the MDP plan, we're in year two of the plan. Our main works are Monterrey Culiacán and Ciudad Juárez, major terminals. And as for expansion abroad, we're always looking at potential opportunities to expand. So far, we don't have any concrete transaction in the table, we're always open to listen to opportunities. We were participating, as you know, in the Barbados privatization process, but it was our understanding is that it was it was recently cancelled.

Okay, great. And if I may, I just have one follow up. One follow up on the tariffs. You said that you're expecting increases for next year. Do you see any probably for a reason to have this rolling off due to too large tariff increases that you you've seen last year? Or not?

We're still working internally what that should be. And that will be also an effect of what are the inflation expectations that we're seeing next year? It's too early in the in that budgeting process.

Okay, great. Thank you. Thank you very much.

Our next question is from Juan Macedo with GBM. Please proceed.

Hi, thanks for the call and the results. My question is regarding the increase in payroll. Could you give us some detail on that decrease? Was it related to last year's outsourcing law? And do you expect more increments soon?

Hi, yes. Yes, it was partially due to that fact. I think that at this time, it has stabilized. We do have certain openings of new VIP lounges in the upcoming couple of quarters. So fed down will continue to increase it slightly. But in terms of amount, I think that that it has stabilized.

Okay, great. Second question, if I could ask you to give us some color on the storage expansion in the Monterrey terminal. What, what impact do you expect from this expansion?

Well, we are as Ricardo mentioned increasing our warehouse, one of the warehouses that we have in in Monterrey the [Indiscernible]. As you know, OMA Carga continues to post double digit growth, and it's already well above the 2019 levels. We do see the trend maintaining in the next few years. So we are anticipating additional expense. I mean, so this expansion will allow us to capture that underlying demand that we see in that market. So we should continue to expect double digit growth in OMA Carga for the foreseeable future.

Great. Thank you for the answers and congrats on the results.

Thank you.

Our next question is from Gabriel Himelfarb with Scotiabank. Please proceed.

Hi, good morning to everyone. And thanks for the call. Just a quick question about the MDP. Do you expect the planet level MDP could be modified to inflation as construction materials are increasing. Maybe payroll or my – increasing, labor cost is increasing. Thank you.

So as per the regulation, the commitment of investments in the five year period from 2021 to 2025 is in real terms. As you may remember, when we announced the MDP Association results, we committed to a roughly MXN12 billion expressed in pesos of 2000 December 2019. With a cumulative inflation from December 2019 to September of this year, the total MDP commitment has increased to MXN16 billion. So that is the amount expressed in real terms with pesos purchasing power as of today.

To just add up, and add a little bit. So MDP is inflation protected, because it's adjusted annually by inflation and, and in case you see inflation in some certain aspects that are higher or above that level, there's always opportunities to value engineer some of those projects.

Okay, thank you very much.

Our next question is from [Indiscernible]. Please proceed.

Hi, good morning. Thank you for taking my questions. I have two of them. The first one is related to two new routes this quarter of the company's EDA [Ph] and international carriers of the new launch. So for the end of 2022, are you expecting opening more routes between Mexico or other parts of the U.S? That will be my first question. The second one is related to construction costs. This quarter construction costs increased to 6%. So I was wondering, wondering this is related to the MDP or it's only because of your listing about another operational cost. Thank you.

So the construction on your second question, the construction costs that you see in the P&L equals the construction revenues. So they have a net effect of zero in that or operating income and what they reflect this is the higher execution of MDP investments relative to last year.

Okay, okay makes sense.

And with respect to new routes that we are expecting some of the carriers that have announced already additional frequencies start on capacity starting in December to markets such as Puerto [Ph] Guadalajara [Indiscernible] and in the international front, we have some recovery of the Canadian market that went to Mazatlán, which last year was not as strong season as it usually has been. So we are expecting a further increase in charter flights from Canada to our Mazatlán airports this winter season that's starting basically tomorrow, starting in November, and we see additional frequencies to capacity to markets such as Detroit and Los Angeles as well on the last quarter, so all these should, should bode well for a strong quarter and for OMA.

Okay, thank you so much.

Our next question is from Alberto Valerio with UBS. Please proceed.

Hi, Ruffo and Duenas, thank you for taking my questions. I'd like to ask about the cycle of the demand where we are now at the moment. We saw for the first time a board level as a [Indiscernible]

I'm sorry. Alberto, can you repeat, can repeat your question the line is not great?

Okay, no, no problem. My question is about the cycle of the demand where we are at this moment. So if you are in the top of the cycle or if you are the leader of the cycle, we just see OMA recovering traffic to pre pandemic levels at this quarter. And my second one is the category one in Mexico as it relates to that, if you had the categories for safety in Mexico, we may see some aircraft going away from Mexico and actually to the U.S. routes and infact the domestic traffic in Mexico is my question.

Let me take the second part. So regarding category two there was a there was news during the weekend, public officials from Mexico went to meet these FAA personnel in the United States. There was a public release this weekend. They say that the meeting was very good that in January the FAA is going to send a group to Mexico to review the process and where we are. And the expectation, apparently, from the information that we have is that we could return to category -- somewhere to category one, somewhere over around the first quarter of next year. That that that that is going to be very important, it's going to have an impact in Mexican carriers, which right now they don't have an opportunity to increase new routes to the United States or in those existing ones to increase frequencies.

So in terms of demand outlook for the next few months, I mean, we expect some economic deceleration in the U.S. that would affect overall demand. However, as Ricardo mentioned we see a strong, near strong effect as well as the recovery of the business routes that have been lagging the other type of markets, like BFR, or they sure have recovered faster. So we think that it will even out and we'll continue to see some positive growth over the next quarters.

Thanks so much.

Thank you.

Thank you.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Ricardo for closing comments.

Thank you all for your participation today. Ruffo 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 does conclude today's conference. You may disconnect your lines at this time and thank you for your participation.