Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. (OMAB) Q1 2023 Earnings Report, Transcript and Summary

Greetings, and welcome to the Grupo Aeroportuario del Centro Norte OMA First Quarter 2023 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Emmanuel Camacho, Investor Relations Officer. Thank you, Emmanuel. You may begin.

[Technical Difficulty] and CFO, Ruffo Perez Pliego. Please be reminded that certain statements made during the course of our discussion today may contribute 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. With that, I'll turn the call over to Ricardo Duenas for his opening remarks.

Thank you, Emmanuel. Good morning, everyone. This morning, I will briefly comment on several events occurred during the quarter. Then I will review our operational performance and financial results. And finally, we will be pleased to answer your questions. Last Friday, we held our 2023 Annual Shareholders Meeting, where shareholders approved among other matters, the declaration and payment of an ordinary cash dividend to shareholders of MXN 2.3 billion in 2 installments, the first one of MXN 1.8 billion no later than June 30, and the second one, MXN 500 million, no better than September 30. In addition, on March 10, we successfully completed our MXN 3.2 billion issuance in long-term sustainability linked notes in the Mexican market. Pursuant to the framework of the notes, we have set an ambitious carbon footprint reduction target. Proceeds were used to amortize our OMA 13 notes for MXN 1.5 billion and to repay MXN 1.2 billion in short-term loans. The remaining MXN 500 million will be used for general corporate purposes, including the funding of future investments. Moving on to our main first quarter of 2023 results. OMA delivered solid financial and operating results in the first quarter of this year. Adjusted EBITDA grew 41% in the quarter to MXN 2 billion, and adjusted EBITDA margin reached 77.5%, largely as a result of the increase in both aero and non-aero revenues. In the first quarter, OMA passenger traffic reached 6 million, an increase of 30% versus the first quarter of last year. The airport that led passenger traffic growth during the quarter were Monterrey, Ciudad Juarez, Chihuahua and Culiacan. And the route with the strongest traffic growth compared to the first quarter of last year, most of them considered mainly business routes where the Monterrey to Mexico City, Guadalajara, Santa Lucia, Toluca and Cancun routes, and the Ciudad Juarez to Guadalajara route. On aggregate, these 6 routes added 470,000 additional passengers in the quarter, an increase of 42% versus the first quarter of last year. Primarily as a result of the strong passenger traffic performance, our Aero revenue grew 40% in the quarter to MXN 2 billion. On the commercial front, revenues increased 36% compared to the first quarter of last year, driven by parking, restaurants, retail and car rentals. Occupancy rate for commercial space stood at 93.6% at the end of the quarter. Diversification revenues increased 22%. Our hotel services and OMA Cargo contributed most to this growth. In the first quarter of this year, occupancy rate at our Terminal 2 NH Collection Hotel was 80.3%, while the Hilton Garden Inn Hotel had an occupancy rate of 73.4% signaling a further recovery of business travel. OMA Cargo revenues increased 14%, mainly driven by the handling of air and ground import cargo. On the capital investment -- on the capital expenditure front, total investment in the quarter, including MDP investments, major maintenance and strategic investments were MXN 757 million. 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 the Ciudad Juarez, Culiacan and Durango terminal buildings, reconfiguration of the Mazatlán terminal building, and major rehabilitation and reconfiguration of platforms and taxiways was in several airports. 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 to everyone. I will briefly review our financial results, and then we will open the call for your questions. Turning to OMA's first quarter financial results. Analytical revenues increased 40% relative to the first quarter of 2022, driven primarily by the 29% increase in passenger traffic. Non-aero revenues increased 25.7% with commercial revenues increasing 35.5%. The categories with the highest growth were our parking, restaurants, retail and car rentals. Parking revenues increased 58% due to increased penetration in the Monterrey, Chihuahua and Reynosa airports as well as higher turnover in short-term space in most of our airports. Increased activity in our parking revenues is the result of an overall higher business dynamism at our airports. Restaurants, retail and car rentals rose 49%, 43% and 20%, respectively, due to higher revenue sharing and the impact of the different initiatives that were implemented throughout 2020. Diversification activities increased 21.5%, reflecting strong hotel revenue growth and to a lesser extent, continued OMA Carga. Total aero and non-aero revenues grew 36% to MXN 2.6 billion in the quarter. Construction revenues amounted to $664 million as a result of the higher MDP investment [indiscernible] execution. The cost of airport services and G&A expense increased 14.9% relative to the first quarter of 2022 and before an increase in payroll expense result primarily of increased headcount and higher labor costs versus last year. Other increases came at the minor maintenance and contracted services line items, which grew overall, due to overall higher activity in our airports as well as inflationary adjustments. Major maintenance provision was MXN 77 million as compared to MXN 82 million in the first quarter of 2022. OMA's strong quarter adjusted EBITDA reached MXN 2.0 billion and the adjusted EBITDA margin reached 77.5%. Our financing expense was MXN 229 million, mainly due to a higher interest expenses result of additional debt issuances and the higher cost of debt. Our consolidated net income was $1.1 billion in the quarter, which presented an increase of 43.5% relative to 1Q '22. Turning to our cash position. Cash generated from operating activities in the first quarter amounted to MXN 1.3 billion and cash at the end of the quarter stood at MXN 2.8 billion, which already reflects the payment of a special dividend of MXN 1.45 billion made during the month of March. At the end of the quarter, total debt amounted to MXN 10.7 billion, and we have a healthy net debt to adjusted EBITDA ratio of 1.1x. This concludes our prepared remarks. Allisa, please open the call for questions.

[Operator Instructions]. Our first question comes from Carlos Peyrelongue with BoA.

Congratulations on the strong results. Two questions, if I may. First one is related to passenger traffic, very strong, obviously, on the quarter. If you could give us some idea of your expectations for the remainder of the year. It looks like business traveling is coming back strongly. What should we expect in terms of the remainder of the year? That would be the first. And the second is related to margins. Again, a very solid expansion there. If you could provide some color as to whether that is sustainable or you expect some headwinds over the remainder of the year in terms of additional costs?

Yes. Passenger traffic, remember that we're comparing to the first quarter of last year when we have the Omicron variant COVID. So we had an easier comp base. Obviously, it's going to become more challenging as the year moves along. But we're comfortable that something in the high single digits is achievable. And then in terms of margin, we believe we're consistent, as mentioned before, between 76% and 77% EBITDA margin is attainable.

Our next question comes from Josh Milberg with Morgan Stanley.

I was hoping you could give your perspective on the outlook for return to Category 1 later this year, just with the latest legislative developments? And also, if you could just give a little bit of your take on what that could mean for OMA on the international side in terms of route additions by Mexican carriers to U.S. destinations from Monterrey or your other airports thinking about next year? And then related to that, I just wanted to ask if you think eventually a postponement of that return could actually help OMA in that it might compel the local carriers to direct more of their fleet capacity to the domestic market where you guys obviously have more exposure? That's my first question.

Sure. Well, yes, Category 1, as you know, this week, one of the prerequisites to call back to Category 1 is that the approval of the airport law is going to be -- it's already approved in the Deputies Chamber, it's going to the Senate. It's going to be approved either today and tomorrow.

Yes, with respect to -- and then -- I mean -- so we would expect a return to Category 1 towards the end of the year once the FAA conducts its audit. In terms of new route development, as you know, Category 1 does affect messaging couriers, but it has not affected U.S. carriers. So in the past couple of years, we have seen new airlines coming into our airports from the U.S. to serve the demand of international travel. So I do not think that [indiscernible] turn to Category 1 [indiscernible] OMA will have a significant impact or a delay in the obtention of this regaining of the Category 1.

Okay. That's great. And then my second question was just if you could give a kind of high-level view on this news around the bill that's out there that could give the government an ability to revoke concessions, just your kind of high-level view again on what risk that presents or if that's really just noise and not something that we should be concerned about?

I mean I think it's too early to anticipate. We know the bill is not going to be discussed in this period. It's going to move towards the end of the year. The next period is going to be September to December. We believe it's going to be discussed there. We need to wait what's going to be the final language of that bill. So it's really still too early to say what impact it could have, not in airports, but in every business that has any permit or concession regarding the government.

Our next question comes from Guilherme Mendes with JPMorgan.

First question is related to the MDP maximum tariff after the recent increase that we saw in the beginning of the year. How far are you from the maximum level? And if you do expect to achieve the maximum level by early next year? And the second question is in terms of capital allocation. You already saw the dividend announced for this year wherein OMA continues to operate with a low leverage. So how should we think about the capital allocation going forward, if you can expect some additional dividends or buybacks or potentially some M&A activities outside Mexico?

So with respect to maximum tariff recovery last year, we were slightly lower than 90% mark. I think that for this year, we're targeting to be around 95% for the full year. And with respect to capital allocation, we in this year already [indiscernible] paid a special dividend of MXN 1.45 billion. As Ricardo mentioned, dividend was approved by shareholders last Friday in total of MXN 2.3 billion. So the total distribution to shareholders would be this year of MXN 3.75 billion. And as cash flow generation permits, I mean, in future years, I mean, we'll see what the level of dividends are. But our -- we do not expect to have an increase in leverage with respect to current levels.

Our next question comes from Rodolfo Ramos with Bradesco BBI.

I have a couple. The first one is on your non-aeronautical revenue per passenger. We're still above those levels that we saw before the pandemic struck. So I just wanted to see whether you have a normalized target that you're looking at, especially as traffic continues to recover? So that would be my first question. And then my second question is, can you remind us -- I'm not sure if you have that information, but what would be the requirement or restrictions for a foreign company to acquire all of OMA's shares? I don't know if there's something in the regulation or something else that could make that more difficult.

So with respect to commercial revenue -- sorry, non-idle per pax levels, we see it separately, but this is purely commercial to what is non-aero. As you know, all of the hotel, cargo and other diversification of business do not have a specific relationship to passengers. So as passengers go -- increase going forward, it will not necessarily have an impact in the total non-aero revenue. But on the commercial revenue per pax level, we do expect to continue to see increases. We have made refurbishments and reconfigurations of the terminals in recent years. So we expect, for example, this year to open new outlets in the areas that are going to be inaugurated in the Monterrey Airport and the Ciudad Juarez Airport. So that will continue to provide a boost to our commercial revenues per pax in the next quarters. And with respect to restrictions, yes, I believe the law establishes that in order for a foreign company to acquire more than 50% of the -- or 51% of the shares of concessioner, certain special permits need to be obtained by the Foreign Investment Commission. So that would be a process that would need to be carried out with that authority.

And just a next query if I may squeeze it in. You've been now with VINCI for a full quarter operating. Just wanted to get your kind of informal feedback on how is that coming in different commercial areas working together? Or any synergies that you've seen over the quarter? And how is that working out?

Yes, it has been very positive. There's a lot of synergies where they have been adding value. Obviously, we're leveraging a lot of their platform in terms of terminal design, non-aero revenues, relationship with airlines, route development. Our DNAs in both companies are very similar. So it has been a relatively easy integration.

Our next question comes from Alberto Valerio with UBS.

I would like to know about tariffs. We just see an increase in this quarter and we also see some pressure from the press for the tariffs in the airports recently. So I mean, [indiscernible] how can we expect further increase? You just mentioned 95% of maximum tariffs, the competitor is close to 99%. So I'm wondering whether we could expect some real increase in year-on-end, so if we should take this more stable in real terms? Thank you very much.

Alberto, so yes, as we're mentioning, we were targeting around a 95% recovery this year. Next year, I mean, we will see what the impacts are with respect to inflation. There are some factors that do affect or benefit the recovery of maximum tariff, which include, for example, the FX rate movements or the growth, the different growth in different airports that have different levels of charges. So I think that towards the end of the year, we'll make a decision towards any further adjustments. So at this time, we're thinking of this 95% recovery for the year.

Okay. And in terms of CapEx recently, if I may do one more, what do you expect to do this year in terms of full CapEx? And if you are looking abroad Mexico airports for a potential expansion in the future. That's [indiscernible] question.

So full CapEx execution, and this includes both investments in concession of the assets as well as major maintenance execution should be around MXN 3.5 billion level. And with respect to potential M&A activity, I think that any expansion outside Mexico will be first analyzed by VINCI Airports and not necessarily to be performed through OMA.

Our next question comes from Bruno Amorim with Goldman Sachs.

I actually have three questions for you. The first one on the outlook on the regulatory side. The question is actually unrelated with the potential changes in regulation. Just wanted to understand where do we stand vis-a-vis the prior forecast made at the time of the last revision? Correct me if I'm wrong, but I guess your last revision happened at the end of 2020 during the pandemic, so traffic levels were pretty much depressed, saw a sharp rebound over the past couple of years. So, the question is where do we stand now? Because this what was the forecast at the moment for traffic in early 2023. Is the company running above in line or below? And also, could you please confirm if at the moment when you had the revision in MDP at the end of 2020, the level of rates -- interest rates that were used as a proxy for risk-free and then for the calculation of the allowed return reflected kind of the tenure rates at the moment, which, if I'm not mistaken, were well below where we are today? So that's kind of the first question. The second question on near-shoring. Can you share with us evidence of impact on your traffic or inactivity around your main airports coming from near-shoring? Do you think it's already material impacting traffic? Should we expect more impact going forward? And then the third question is just a clarification. Can you please let us know why you have not been able to run closer to the maximum tariffs. Why not running closer to 100%? What prevents the company from being, let's say, more in line with the feeling in terms of the tariffs?

So I'll go through your questions not necessarily in the order you presented them, but with respect to near-shoring evidence, I mean we have seen some news. There was a big announcement of a major electric vehicle manufacturer that will have a significant investment in the Monterrey area and some other announcements by other foreign companies to establish presence around the Monterrey area. So right now, that is the type of areas that it's being given and publicly, obviously, as time passes and that investment starts -- announced investments start to translate into direct foreign investment, I mean we'll probably be able to present more hard data on that. But what we do see is an increase primarily in our Monterrey and Ciudad Juarez routes. As you know, Monterrey had the best-performing growth in the quarter in our network. And we do believe that a lot of that is linked to the renewed interest in Monterrey as a major industrial and manufacturing center. And we have seen that since the pandemic Ciudad Juarez has positioned itself as a very strong destination for Maquiladora and other type of industrial businesses. And we -- that's one of the reasons we are growing our terminal capacity in Ciudad Juarez to attend that demand. So that's with respect to near-shoring. With respect to the MDP negotiation, we are still early in the process. We have not started to see what the potential impacts of the different variables that affect the calculation will be, we have to submit a definitive plan to the authority in the middle of 2025. And at the end of 2025, reach a new investment program and tariff outlook for the next 5 years. So right, the current levels of interest rates to us are not -- will not be impactful. The interest rate formula takes the 24-month average before June 2025. So we'll see what the average is over that time frame, which has not yet started. And in the case of our maximum tariff, most of the reason is twofold. I think the larger than expected inflation that we had in 2021 and 2022, obviously, made us get further away from the 99% goal. And also, we had different passenger mix in some of our airports that do impact our calculation. So I think that is primarily the impact that we have had in trying to get closer to the 100% mark in the recovery of tariffs.

And just a very quick follow-up. If you look at traffic now at the beginning of 2023, is it below, above or in line with the traffic curve that you and the regulator agreed on at the end of 2020?

It's slightly above, but it's not significantly above, yes.

Our next question comes from with Compass Group.

It's just a quick follow-up on what you've been talking about the maximum tariff. But I just want to ask what was the year-over-year increase that you made this trimester in tariff.

The increase that we implemented in the first quarter of this year was in the double-digit area.

Okay. And do -- is it fair to assume that maybe moving forward on the next quarters, we could see similar, maybe not double digits but similar increases?

I think that will depend on how inflation behaves and how far away we are from the 100%. So that decision will be taking some work around the second half of this year.

Our next question comes from [indiscernible].

Congrats on your results. I just have a quick follow-up on Rodolfo's question regarding VINCI's involvement in the company. Could you provide some more detail on any project initially for an example, to help us better understand how you're leveraging from VINCI's expertise and how it is expected to possibly impact the business?

Sure. I mean just to give you a few examples in the design of our new terminals, they operated 70 airports around the world. So they know what has worked in other countries, what hasn't worked. So there's a lot of information to leverage there. There's a lot of relationships that we can lever, for example, with potential suppliers. They have more purchasing power with a lot of them, we are able to get on that -- to get the benefit of that. They talk -- since they have 70 airports around the world, they have conversations with basically every airline around the world or most airlines around the world. That's a great opportunity for us to have access to the right people and try to bring some attention into OMA and potentially open some new routes. Same thing in non-aero business. They also have the knowledge, and they have a team of specialized people in each field in their Paris headquarters, which is also very valuable to us. Another example is, for example, tendering processes, we're currently tendering some non-aero retail space. Most of the retail companies competing for those -- for that space, they previously have relationships with them, they know and they give us a very higher, better negotiating power with them.

That's pretty clear. And just another one related to that, on the low reform, the aeronautical one, I mean, I understand there's no significant impact on you guys. So just wondering if there is any impact operationally wise from the involvement of [indiscernible] in the industry?

Well, the law does permit government to both operate airlines and airports at the same time, which under the previous law was provisioned. So I believe that -- from a [indiscernible] standpoint, yes, some [indiscernible] or the Navy could operate airlines and airports at the same time, but in our airports, there are no additional activities or oversights contemplated by [indiscernible].

Our next question comes from Fernanda Recchia with BTG.

I have two on my side. The first one is still on tariff. When we compare Monterrey, Juarez and other airports, Monterrey has one of the highest to us. And considering your speech regarding still increase in tariff along this year and your exposure to Viva, which is a neutral low cost per year, just wanted to understand if you are thinking of providing any kind of discount for airlines that have higher route frequencies in Monterrey? Or how do you think of this high exposure to Viva in the scenario of high to us? And my second one, regarding Monterrey Airport. Just wondering if you have any plans maybe to anticipate the build of a new runway in case your traffic remains performing strongly?

So with respect to a potential second runway in Monterrey, yes, it is contemplated in the final stages of the development of the airport. So that's post 2035. So it's nothing that we are currently, I mean, analyzing or starting to discuss and certainly no works will be done in the next few years in that regard. But I mean, towards the latter part of the concession, yes, depending on the traffic outlook, a second runway may be needed to continue supporting the growth of Monterrey. And with respect to our Monterrey Airport and our exposure to Viva, as you know, Viva has around a 40% market share in all of our airports. It's the highest market share that we have followed by Volaris and AeroMexico. And our incentive policy is general, so we cannot discriminate one airline versus others. And they are based on new route openings and things like that. So no specific policy with respect to an airline [indiscernible] .

There are no further questions at this time. I would like to turn the floor back over to Ricardo Duenas, Chief Executive Officer, for closing comments.

Thank you all for your participation today. 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.

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