Grupo Aeroportuario del Centro Norte Q3 2023 Earnings Call Transcript

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Provided by Quartr
October 30, 2023

There are 6 speakers on the call.

Operator

Greetings, and welcome to the OMA Third Quarter Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Emmanuel Camacho, Investor Relations.

Operator

Thank you. You may begin.

Speaker 1

Thank you, Doug. Hello, everyone, and welcome to OMA's Q3 2020 Prerelease Conference Call. Participating today are CEO Ricardo Buenas 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. With that, I will turn the call over to Ricardo Enos for his opening remarks.

Speaker 2

Thank you, Emmanuel. Good morning, everyone. We appreciate your presence on this call today. I will begin By discussing the impact that Hurricane Otis had in our Acapulco airport and then we'll comment on recent developments in the regulatory landscape of our airport concessions. Afterwards, we will move on to our quarterly results.

Speaker 2

On the night of October 25, Hurricane Otis struck Acapulco, Acapulco City with Category 5 intensity. The hurricane caused some damage to the terminal building of the Acapulco Airport. However, the airport remains operational and is currently focused on humanitarian operations. We are working closely with local and federal authorities To fully restore the regular operations of the airport, which we expect to be relatively soon. In 2022, Acapulco contributed with 3.6% of our total passenger traffic and 3.4% of OMA's Total aeronautical and non aeronautical revenues.

Speaker 2

Regarding recent regulatory changes, on October 4, 2023, the Civil Aviation Agency, an autonomous body under Ministry of Communication and Transportation, notified us about immediate modification And engaged in close and constructive communication with the ministry and the AFEC to clarify certain points. During these interactions, the Mexican government was open to dialogue, leading to agreements finally reflected in the modified basis that we received on October 19 and subsequently made public to the market. We don't expect significant impact from this. Another matter that I would like to mention concerns the concession tax. On October 25, the Senate approved the new 2025 federal duties law.

Speaker 2

This law includes provisions to increase the concession tax from 5% to 9% based on airport revenues effective January 24. It is worth mentioning that under new tariff regulation, the increase in the concession tax affecting the 2024 period Will be recognized in the next tariff negotiation of 26 to 30 period through the reference value. It is also essential to understand that the concession tax It's part of the calculation variables for determining maximum tariff. This new basis did not change as relative to the original basis. After all these events, we anticipate that OMA will uphold its commitment to adaptability, resilience and the sustained and successful track Turning to our main Q3 of this year results.

Speaker 2

OMA continued to deliver solid financial and operating results during the Q3. Adjusted EBITDA grew 30% in the quarter To ARS 2,500,000,000 and adjusted EBITDA margin reached 79.4%, largely as a result of the increase in both aeronautical and non Our nautical revenues and our successful cost control strategy. In the Q3, OMA's passenger traffic Reached a record number of $7,400,000 an increase of 19% versus the Q3 of last year. Outstanding results were guided by the performance in Monterrey, which accounted for 62% of OMA's total passenger growth as compared to the Q3 of last year. The main destinations that drove traffic growth were to Toluca, Queretaro, Cancun, Santa Lucia and Mexico City, most of them considered business routes.

Speaker 2

On aggregate, these 5 routes added 255,000 additional passengers in the quarter, an increase of 17% versus the Q3 of last year. Primarily as a result of the strong passenger traffic performance, our aeronautical Revenue grew by 31% in the quarter to ARS 2,500,000,000. On the commercial front, Revenues increased 24% compared to Q3 of last year, driven by restaurants, parking, car rentals and VIP lounges. Occupancy rate for commercial space stood at 94.7% at the end of the quarter. Diversification revenues increased 8%.

Speaker 2

Our hotel services contributed most to this growth. In the Q2 of this year, occupancy rate at our Terminal 2 NH was 86.3%, While the Hilton Garden Inn Hotel had an occupancy rate of 73.3%. On the capital expenditures front, total investment in the quarter, including MVP Investments, major maintenance and strategic investments We're ARS964 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 Hilar Juarez, Torreon, Culiacan and Durango terminal buildings Reconfiguration of the Mazatlan Terminal building major rehabilitation and reconfiguration of platforms and taxiways in several airports And construction of 4 industrial warehouses. I would now like to turn the call over to Rufo Perez Pio, who will discuss

Speaker 1

Thank you, Ricardo, and good morning, everyone. I will quickly review our financial Q4, And then we will open the call for your questions. Turning to OMA's 3rd quarter financial results. Aeronautical revenues increased 31% relative to the Q3 of 2022, driven primarily by the 18.6% increase in passenger traffic And higher revenue per passenger. Non annual revenues increased 17.6%.

Speaker 1

Commercial revenues increased 23.6%. The categories with the largest growth were restaurants, parking, car rentals and VIP lodges. Restaurants and car rentals rose 20% 28%, respectively, mainly due to higher revenue shareings and the impact of the openings of new spaces And improved contractual conditions on renewals. Parking increased 16.4% as a result of an increase in passengers and higher penetration rates PFE launches increased 31.5% as a result of the increase in passenger traffic and the opening of the Reynosa launch in August 2023 As well as the Tampico launch in May 2023 and Chia Quades in November 20 30. Diversification activities increased 8.3% A strong hotel revenue growth was partially offset by a decline in OMA cargo, which was affected by a decline in revenues related to our Around import cargo.

Speaker 1

Total aerogelico and non aerogelastic revenues grew 27.9 percent To ARS 3,200,000,000 in the quarter. Construction revenues amounted to ARS 719,000,000 in the 3rd quarter, An increase of 10% as a result of higher NDT investment execution. The cost of airport services and G and A expense Increased 2.8% relative to the Q3 of last year, mainly due to an increase in manual maintenance, contract service and basic services Cost as a result of higher activity in our efforts and inflationary effects. Area maintenance provision was ARS 95,000,000 compared to ARS 51,000,000 in 2Q 'twenty two. Almost the Q3 adjusted EBITDA ARS 2,500,000,000 and the adjusted EBITDA margin was 79.4%.

Speaker 1

All financing expense was ARS272,000,000 mainly due to a higher interest expense as a result of additional debt issuance and the higher cost of debt. Consolidated net income was MXN1.8 billion in the quarter, an increase of 28% versus 3Q 'twenty two. Turning to our cash position. Cash generated from operating activities in the 3rd quarter amounted to MXN 1,300,000,000, And cash at the end of the quarter stood at MXN2 1,000,000,000. On September 20, we made a payment for the 2nd installment of the ordinary dividends amounting to MXN500 1,000,000.

Speaker 1

In accordance with the resolutions of our shareholder meetings in April. At the end of the quarter, Total debt amounted to MXN 10,700,000, and we ended the quarter with a healthy net debt to adjusted EBITDA ratio of 1.0x. This concludes our prepared remarks. Now, please open the call for your questions.

Operator

Thank you. Our first question comes from the line of Pablo Manos Avalles with Barclays. Please proceed with your question.

Speaker 3

Hi, good morning. Ricardo Rufe, Nemanor.

Speaker 2

I have two questions. The first

Speaker 3

one is, if you have done a quick calculation of what could be your discount rate under these new rules and how does it compares to the previous discount rate on the previous rules? And the second question is about what the media has been published on the 10% decrease of the TUWA. Can you please confirm whether this increase in the TUWA

Speaker 1

This is Ruffo. I will answer your first Question. The components for the calculation of the discount rates used in the Maximum tariffs are now clearly stated and less objective to interpretation. As you know, before the discount rate was Based on the yield of Mexican government bonds plus a premium that was to be defined by the ministry and now the new rate is established clearly the variables to be used Based on our calculations, we do not assess a significant impact on the discount rate as a result The changes that were made in the military basis.

Speaker 2

And regarding your second part, Pablo, the discounts are totally unrelated from the new basis. There are unrelated to the aforementioned net new regulatory guidelines, there are other agreements we have made with regulatory bodies. These agreements entail a general 10% extraordinary discount in real terms for passenger charges in Tua Starting November December of 'twenty three, applicable to 10 of our airports. After application This discount in 'twenty three, we expect to apply annual inflation adjustments on Tua. Other aeronautical tariffs in addition to Tua Are not subject to the discounts.

Speaker 2

It is also important to mention that as a result of the discount package previously mentioned And unrelated to the changes in the annex, we will have an MDP CapEx referral for 24 months. This MDP CapEx deferral amounts to $1,200,000,000 in the aggregate and as a percentage of the original CapEx Commitment represents about 25% in 2024 and 13% in 2025. These deferments do not compromise the operations, quality Welcome.

Operator

Our next question comes from the line of Guillermo Mendez with JPMorgan. Please proceed with your question.

Speaker 2

Good morning, Ricardo, Rufe, Emmanuel. Thanks for taking

Speaker 4

my question. I have 2 as well. The first one is on margins. It's And congrats on the very strong margins reported during the Q3. The question is how should we think about margins going forward, Especially thinking in terms of the increase in the concession fees and if that will be fully compensated on the iron and alcohol part of the business.

Speaker 4

And the second question is regarding to the impacts brought by the hurricane. If you can provide a little bit more color in terms of what should be the actual impact Thinking on 4th quarter numbers and potentially year 20 24 numbers as well, I mean, in terms of traffic or in terms of revenues impact. Thank you.

Speaker 2

Sure. Thank you. For the hurricane, it's too early to assess the amount The impact, what we can say is that the runway, the platform, the taxiways Are in perfect state. The terminal has suffered some damages. However, it is operational.

Speaker 2

It's important to remind you that Acapulco represents only 3.4% of the total revenues of the company. We still have intermittent communication with Acapulco, and we will know the impact of the damages in the next coming days. And regarding the margins, we expect in the next year some Around 4% impact is a result of the concession tax increase. However, this concession tax increase The amount for 2024 and 2025 will be recognized as reference value for the next MDP Negotiation in 'twenty six.

Speaker 4

Thanks. Just one quick follow-up on the margins. In addition to the concession fees, Do you expect any potential inflationary pressures that should alone drop your margins from the current 75%, 76% levels? So in addition to the expense, is there any other impact that should bring margins down?

Speaker 1

I mean, we're still finalizing our budgets for next year. We'll have So obviously, we're incorporating the increase in the concession tax, which will trim Close to 4 percentage points of margin. And with respect to other inflationary pressures, I think that They could be compensated with inflationary increases in our tariffs.

Speaker 2

Okay. Thank you.

Operator

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

Speaker 2

Thank you, Ricardo, Ruffo and Manavio for taking my questions. Just a clarification on the previous one before I answer a couple of questions that I have. So the hit you're expecting on the concession fee, you're expecting it to be reflected now in an upcoming MVP. So will it be kind of a backward looking adjustment? Or is it just going forward, you'll be able to compensate that through the tariff?

Speaker 2

So just a quick follow-up first. Just for the next 2 years, that amount will be recognized in the reference value For the next negotiation and going forward, that will be reflected as an OpEx expense as it has been on the past. Okay. And just another follow-up on the regulatory side. I mean, Perhaps it's difficult to say precisely, but just wanted to get a sense of how do you see these regulatory changes, This has generated over the last maybe 20 years, you have the concession.

Speaker 2

So yes, that would be my first one. Any color there I think the new base weather tanks to STRAP establishes to have a more precise Traffic vector when we negotiate tariffs with them. So starting in the negotiation of 2,031, what will happen, there will be a look back for the previous 5 year period. So in our case, It would be the 26th to 2,030 period. And according to that, to the traffic actually to the revenues From that 5 year plan, everything that was collected in excess of 3% will be recognized, will be carried forward For the reference value for the next negotiation.

Speaker 2

In the past, just to give you some in the past, four NBP negotiations, 2 of them, we have been above the negotiated traffic. 2 times, we have been below the negotiated traffic. So There's not necessarily certainty that we will always be above the negotiated traffic. And I think that this Amex strategy gives more clarity and more transparency As to the traffic vector that we will negotiate on our current provisions. Perfect.

Speaker 2

Very clear. And just more on the business, just second question. I don't know if you can share your traffic growth for next year, I mean, how and how much are you factoring in for an impact from the patent Whitney, And you didn't recall Acapulco golf course is still early, but just wanted to get a sense of how you're seeing things going into 2024. I think for the rest of the year, Pablo, I think it's already incorporated the Pratt and Whitney issue. We've been working closely with airlines, also with the manufacturers.

Speaker 2

There's still not much clarity as to what will be the impact on the maintenance schedule of next year. So we're waiting to hear And what will be the impact there? Thank you.

Operator

Our next question comes from the line of Alberto Villarreal with UBS. Please proceed with your question.

Speaker 2

Hi, Ricardo, Gufu, and Manuel. Hope everybody who works at My question is related to the regulatory framework. It's hard for us to understand that we have a very few changes On the regulatory framework and put this together is the government's pitch of decreasing tariffs by 10% to 15%. If you have similar CapEx, similar discount rates and tariffs decreasing by 10% to 15%, can we assume That would be harder from now on to get maximum tariffs. It would be running close to 90% or it's something else?

Speaker 2

Thank you.

Speaker 1

So yes, as you mentioned, there are A little modifications to the tariffs. I think the main change is that it has clarity and takes away some sensitivity Before, reference to the previous basis. And with respect to reaching maximum tariffs, I think it's going to be in the case of our existing NBT cycle, which as you know, ends in 20 25, We probably are going to be around 97% for this year and perhaps 16% the following years. And for the next tariff review, I mean, based on the traffic sector, I mean, obviously, our goal would be to reach the 100% level In the following only our staff review.

Speaker 2

I see. Thank you very much.

Operator

Our next question comes from the line of Bruno Marino with Goldman Sachs. Please proceed with your question.

Speaker 2

Thank you for taking my questions. Actually, I have 2. The first one is a clarification on the Reduction of TUWA, I understood that you mentioned that you're going to lower TUWA in 10 airports, And that would be offset by CapEx postponement. Is it fair to say that from an NPV perspective, You're looking to recover 100% of the reduction into or through this postponement In CapEx, so that the value of the company will not be impaired. And also, in that same topic, if you lower the 2, Which I guess accounts for the majority of the revenues.

Speaker 2

And if you expect no changes to your tariffs in the MVP as a result of the ongoing discussions, This means that you are going to going forward run below the maximum tariff. So that's the first question. And the second question is Actually, I'd like to have your help to better understand the big picture around the new set of rules for the MDT. We are talking about higher concession fee, which as you have argued, argues for Higher tariffs, all else equal. But at the same time, it seems that the agenda of the government is to lower tariffs, not to increase tariffs.

Speaker 2

So we are talking about higher concession fee, lower tariffs. The expiry date of the contracts have not changed, and it will be good to have some confirmation from your side if you are now discussing to extend the concession. On the CapEx as well, the feedback from your peers is that the CapEx plan for the MVP will likely not change as a result of the new regulation. So you should have the same expiry date, Same CapEx, more concession fee and you have lower tariffs in the next MDP. How come the returns on the regulated part of the business will not be lower?

Speaker 2

What are we missing here? Thank you very much. Just to clarify, there's no extension of the concession has been discussed During this conversation, it's too early to say what will happen on the next negotiation. We're still 2 years away. Obviously, the concession tax will get factored To the reference value, there will be many variables that will be moving from now to the 'twenty six negotiation.

Speaker 2

And this taxes will be just one of them as many variables are moving. For the next year, maximum tariff compliance, We're looking to it's still difficult to assess what would be the percentage compliance given that these two Discounts could have some impact on traffic as well.

Speaker 4

Wilfred, do you want to add something?

Speaker 1

Well, and in preparation for the next NBP cycle, obviously, we'll have to look into how to be more efficient and how To make our investments and to extract the most value out of the infrastructure that currently is in place To maximize the utilization before increasing the size of the terminals for investing in additional infrastructure. So that's something we'll be Working close in the next couple of years as well. Thank you. And if

Speaker 2

I may, just one follow-up question on the Potential impact from the grounding of aircraft as a result of the issue with the engines from Pratt and Whitney. Even though You mentioned you are not ready to provide a forecast for traffic next year. Are we talking about negative traffic variation or can traffic to grow next year? Actually, what do you think can happen given the extent of the exposure of the 2 main low cost carriers in the country? Any guideline you could provide at this point in time?

Speaker 2

As you said, it's difficult to assess right now, what will be the impact with the with the engine issue? But what I can tell you is we are expecting Some small growth

Speaker 4

in the aero side of the business for next year.

Speaker 2

Thank you.

Operator

Our next question comes from the line of Juan Mercado with GBM. Please proceed with your question. Hi. Thanks for taking my question and congrats on the results. My question is regarding the change in the end of this rate of return calculation.

Operator

So my book is on equity returns towards what kind of calculation.

Speaker 2

Do you expect to change your capital structure given this change?

Operator

Are you evaluating this? Or are you comfortable with the current structure?

Speaker 2

We're still evaluating. We believe In the case of OMA, the impact of changing from return on equity to the WACC, it will be relatively small, Given that our amount of leverage at the moment is currently low, it's currently low. So I believe we would Expect to remain most in line with what we do have seen in the last couple of years.

Operator

Our next question comes from the line of Jay Singh with Citi. Please proceed with your question.

Speaker 1

Thanks for asking my answering my question. My first one is, would OMA ever consider investing in airports outside of Mexico?

Speaker 2

We're always open to understanding or to looking at opportunities. But we don't have, At the moment, any concrete transaction in the pipeline, we're always opening to for opportunities outside.

Speaker 1

Okay. And as a follow-up, besides the concession fee hike, until the end of 2025, do you guys see any other regulatory changes coming in?

Speaker 2

We don't expect it was hard to say, but we don't expect any more changes from our conversations with the government, Both from the treasury and the communication and transportation, may I mention that this has been the end of these modifications in the regulatory process. Great. Thank you much.

Operator

Our next question comes from the line of Edson Maguire with Suma Capital, please proceed with your question.

Speaker 1

Hi, good afternoon. Thank you for taking my question. I have only one Related to cost of services, this quarter increased 22%. So could you give us a little bit more color that would happen specifically? Thank you.

Speaker 1

So most of the increase is related to maintenance and utilities expense. We have increased areas in and expanded the terminals in the last year or so. And with the increase Of volume of passengers, we have seen a greater growth in maintenance. Sometimes there is some timing issues, but I mean the accumulated Expense for the 9 months is reflective of the full I mean, if you annualize, it would be reflective of the full year cost of maintenance. Okay.

Speaker 1

That's okay. Thank you so much.

Operator

Our next question comes from the line of Gabriel Amla Farrab with Scotiabank. Please proceed with your questions. Gabriel, your line is live.

Speaker 2

Sorry, can you hear me now? Yes.

Speaker 1

Hi. Thanks for the call. Just a

Speaker 2

quick follow-up question. Considering that the 10% decrease on Tua, the increase on the concession fee and The change in the methodology for the discount rate will be somehow offset or considered for the next NBP. And also, the concession fees, my understanding, it also considers the non regulated portion of the business. How will this Fortunately, this impact will be offset by tariffs. Thank you.

Speaker 2

And also, if you can Clarify again

Speaker 1

the

Speaker 2

CapEx movement for the next

Speaker 1

So in the next review, certainly, the increasing the transition tax and the rate of 9% will be Incorporated into the calculation. Now the discount of the 10% to is something that only affects This period, so it will not be part of the variables to be used in the negotiation of the next Maximum tariff in 2026. Now with respect to the CapEx return, in the aggregate, It's MXN 1,200,000,000. So September 2023 purchasing power. And that's around 8 90,000,000 for 2024, And the remainder around €400,000,000 for 2025, which represents roughly 25% of the original CapEx commitment in 2,003,004 and 13% in 2025.

Speaker 2

Okay. Thank you. And in the case of the concession fee, it does affect The commercial or the non regulated portion of the business and how can will you be able to offset it? Only through Increasing tariffs and for the next NBP, is there any other leeway you can negotiate here?

Speaker 1

So this hasn't changed from the previous basis. The formula for operational cost to determine the maximum tariff is Just incorporates expenses related to the regulated side of the business. So yes, Commercial revenues would be subject to the increase in the duag in the commission tax, And we will have to see how to adjust our rates to recover some of these increases. I think that's always been the case.

Speaker 2

Okay. Thank you very much.

Operator

Our next question comes from the line of Fernanda Recchia with BTG Pactual, please proceed with your question.

Speaker 5

Hello. Thank you for taking my question. Just a follow-up to understand a little bit further this 2 hour discount. This 10% extraordinary discount,

Speaker 1

it was given just

Speaker 5

to avoid you to surpass the net It was given just to avoid you to surpass the maximum amount of the rate or it was to make the airfares more Just because you mentioned that you expect to reach 97% of maximum rate this year. So Yes. And you are just lowering

Operator

your Could you repeat the first part?

Speaker 2

Could you repeat the first part, Fernanda? There was bad communication. Could you repeat it, please?

Speaker 5

Yes. No, sure. Just wanted to understand the rationale of the government to apply this 10% of extraordinary discount. Was it just because if you don't acquire, we will probably surpass the maximum rate? Or it is a measure to incentivize to lower air tariffs.

Speaker 5

This is the first one, and then I'll make my second one.

Speaker 2

I think it was hard to speak on the rehab, but I think that the rationale is trying to incentivize.

Speaker 1

All

Speaker 5

right. Now because you mentioned that you're expecting to reach 90 7% of maximum rate. So in the end, it's just a 3% discount on your regulated revenues, right? Is it correct to make this assessment?

Speaker 2

Yes. It will be slightly above 97%. The reason is that for this year, it will only be 2 months, And that 97% accounts for the whole year.

Speaker 5

And second, still on this topic, we know that this is a yearly discount. Could you give us a sense of how much discount did you apply Last year, just for a reference, for us to see if the 10% is in line with historical average.

Speaker 1

We can take time answering to agreements for new route openings and other strategies With airlines, but we haven't had general discounts such as these for many years.

Speaker 5

Okay. Thank you.

Operator

Our next question comes from the line of Alan Macias with Bank of America. Please proceed with your question.

Speaker 1

Hi, good morning and thank you for the call. I just have, I guess, 2 questions. And one clarification, the TUA represents What percentage of Aeronautical revenue? And the second question would be on the expected higher CapEx for the Acapulco Airport. And would that be incorporated into the new master development program or before?

Speaker 2

On the second part, we've been in very close coordination with the government for Acapulco. We still don't know The size of the damage, we know that the core part for operating the airport is okay. Obviously, terminal has suffered some damages. On our last conversation with the government, they are very open to work closely to how can we Offset the impact from the hurricane in our CapEx. And for the Tua, it represents 89% of our aeronautical

Speaker 1

And just one more question on the engine recall impact. Any impact you have seen as of October during October? Yes. We have seen the scheduled seats in databases such as OAT have been Trending down over the last month or so. So yes, we do believe that what is It's reflected right now in the system, it's already incorporating what's known of the recall of

Speaker 2

We also we know that the airlines are taking a lot of measures to try to offset This impact, we know they are trying to extend visas, trying to extend the life of some of their other aircraft. So let it's in the last couple in the next 2 months, we will have more clarity, what will be the real impact next year. Thank

Operator

you. Our next question is a follow-up question from the line of Bruno Marino with Goldman Sachs.

Speaker 2

Yes. I just wanted to clarify one specific point. What leverage or what debt specifically will be considered for the calculation of the cost of capital to debt At the moment of the NBP discussion, is it a 5 year average? And also to the extent that you might have corporate debt or In the event that we invest abroad and you have debt attached to it, will they look just at the That's at the asset level in Mexico? Or will they look at OMA as a whole?

Speaker 2

Thank you very much.

Speaker 1

I think in the basis that we published, there are some debts To capital ratios that are averages that includes other airport groups as well. And it's only that relates to assets in Mexico, and it excludes That is not funding operations in Mexico.

Operator

There are no further questions in the queue. Like to hand the call back to management for closing remarks.

Speaker 2

Thank you all for participating today. Rupa, Manuela and I

Operator

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

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Grupo Aeroportuario del Centro Norte Q3 2023
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