Grupo Aeroportuario del Centro Norte Q1 2024 Earnings Call Transcript

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April 25, 2024

There are 10 speakers on the call.

Operator

Greetings. Welcome to the Grupo Aerofuture Del Centro Norte OMA First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. I will now turn the conference over to your host, Emmanuel Camacho of Investor Relations.

Operator

You may begin.

Speaker 1

Thank you, Xemeli, and hello, everyone. Welcome to OMA's Q1 2024 Airline's conference call. We're delighted to have you join us today as we discuss our company's performance and financial results for the past quarter. Participating today are CEO, Ricardo Duenas and CFO, Rufo Perez Guevo. 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.

Speaker 1

And with that, I'll turn the call over to Ricardo Unas for his opening remarks.

Speaker 2

You, Manuel. Good morning, everyone. We appreciate your presence in this call today. This morning, Ruffo and I will review our quarterly operational financial results, and then we'll be pleased to answer your questions. In the Q1, OMA's passenger traffic reached 5,900,000, a decrease of 1.5% versus the Q1 of last year.

Speaker 2

Excluding the Acapulco airport, where hotel infrastructure continues to be affected by the impact of Hurricane Otis that hit in October 2023, terminal passenger traffic in our other 12 airports increased by an aggregate of 0.9% during the quarter. Excluding Acapulco, OMA experienced a decline traffic of 1.2% in the quarter, driven by lower domestic seat capacity, which declined by 9.1%. The main airports affected were Culiacan and Ciudad Juarez airports, notably on routes such as Culiacan to Tijuana and Ciudad Juarez to Mexico City. International passenger traffic recorded a strong performance with a 10% increase compared to the Q1 of last year, driven by airlines expanding capacity and international routes. During the quarter, international seat capacity grew by 7.1%.

Speaker 2

This international growth was primarily led by the Monterrey Airport, which saw a 14% rise in international passenger traffic. The routes with the highest increase from Monterrey were to Atlanta, Toronto, Las Vegas, Bogota and Dallas. These routes along with San Luis Potosi to Houston and Cihuatanejo and Zacatecas to Dallas routes contributed at the to approximately 80% of the international passenger traffic increase during the quarter. Furthermore, in the Q1, we launched 4 new international routes, 3 of which were based at the Monterrey Airport. In terms of airline participation, Viva De Rugo represented 48% of our total traffic during the quarter, With a notable 16% increase in terminal passenger numbers compared to the Q1 of 2023, while Volaris, which accounted for 20% of our total traffic, experienced a 24% decrease during the quarter, largely due to the Pratt and Whitney engine recall affecting their fleet.

Speaker 2

Moving on to Moab's 1st quarter financial highlights. Aeronautical revenues increased 5.3% and aeronautical revenue per passenger rose 7% in the quarter. Commercial revenues increased 12% as compared to the Q1 of last year, driven by car rentals, restaurants and parking. The car rental and restaurant line item benefited from the opening and consolidation of new businesses units across our airports during the past quarters. Occupancy rate for commercial space stood at 95.3% at the end of the quarter.

Speaker 2

On the diversification front, revenues increased 21%. Hotel services contributed most to this growth, mainly as a result of an increase in operation in both hotels. In the Q1, occupancy rate at our Terminal 2 NH was 89%, while the Hilton Garden Inn Hotel had an occupancy rate of 77%. OMA Cargo increased 2%, mainly as a result of an increase in revenue related to import cargo services. OMA's Q1 adjusted EBITDA increased by 3% to COP 2,000,000,000 and the adjusted EBITDA margin was 74.6%.

Speaker 2

For comparative purposes with the Q1 of last year, we exclude the surplus of the concession tax over our nautical revenues, resulting from the rate increase from 5% to 9% for this concept pursuant to the Mexican Federal Duties Law, which amounted to $86,300,000 and was recorded as a concession tax expense in the quarter, along with its impact on OMA's financial results. Our adjusted EBITDA would have been $2,127,000 with a margin of 77.7%. On the capital expenditures front, total investments in the quarter, including MDP investment, major maintenance and strategic investments were COP1.1 billion. 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 Juarez, Torreon, Culiacan and Durango terminal buildings reconfiguration of the Mazatlan Terminal Building major rehabilitation and reconfiguration of platform and taxiways in several airports and construction of 4 industrial warehouses. Lastly, I want to mention that tomorrow we will hold our 2024 Annual Shareholders Meeting.

Speaker 2

Shareholder will vote on several matters, including the declaration and payment of a MXN 4,250,000,000 cash dividend. We extend our sincere gratitude to our shareholders for their invaluable participation and unwavering commitment to our company. I would now like to turn the call over to Ruffo Perez Pliego, who will discuss our financial highlights for the quarter.

Speaker 3

Thank you, Ricardo. Good morning, everyone. I will briefly review our financial results for the quarter, and then we will open the call for your questions. Aeronautical revenues increased 5.3% relative to the Q1 of 2023, driven primarily by higher aeronautical yields as well as the increase in international passenger traffic. Non aero revenues increased 13.3%.

Speaker 3

Commercial revenues increased 11.6%. The categories with the highest growth were car rental, restaurants and parking. Car rentals rose 25.4%, mainly due to an increase in revenue as a result of the consolidation of initiatives implemented in past quarters. Restaurants increased 18.6% due to an increase in fixed rents as well as the consolidation of initiatives also implemented in previous quarters. Parking increased 8.3%, driven by an increase in average tariffs in our airports, as well as higher penetration in the Ciudad Juarez, Chihuahua and Monterrey airports.

Speaker 3

Diversification activities increased 20.6%, mainly due to higher revenues from hotel services as occupancy levels increased in both hotels. Total aeronautical and non aeronautical revenues were 7.2 percent to MXN2.7 billion in

Speaker 1

the quarter.

Speaker 3

Construction revenues amounted to MXN1.01 million in 1Q 2024 as an increase of 53% as a result of higher MDP investment execution. The cost of services and G and A expense had a 6.4% growth versus the Q1 of 2023, primarily driven by 6.5% increase in payroll and a 16.5% growth in contracted services as a result of overall inflationary increases and the effect of minimum wage increases. Additionally, our cost of hotel services grew by 20.7% due to the increase in operations in both hotels. Concession tax increased 87 percent to MXN 223 1,000,000 as a result of a change in the rate from 5% to 9% applied on revenues generated by airport concessions. Under the tariff regulation basis effective October 2023, payments made to the government related to aeronautical revenues in excess of those included in the most recent tariff revision will be added to the reference value to be used in the next maximum tariff revision.

Speaker 3

Therefore, starting in January 2026, these excess concession tax payments will begin to be recovered through the maximum tariffs. In the Q1 of 2024, the 4 percent surplus of the concession tax on the aeronautical revenues amounted to $86,300,000 equivalent to 3.1 of the sum of our aeronautical and non aeronautical revenues. This surplus is included in the MXN 223 1,000,000 recorded as concession tax expense for the quarter. Excluding this amount, our adjusted EBITDA would have been MXN2. MXN12 1,000,000,000 with a margin of 77.7%.

Speaker 3

We continue to analyze alternative accounting treatments of the recoverable amount of the excess concession tax. However, until the final decision is made, we decided to record it as an expense. Major maintenance provision was Ps. 71,000,000 compared to Ps.77,000,000 in the Q1 of 2023. Our EBITDA was Ps.

Speaker 3

2,000,000,000 and the adjusted EBITDA margin was 74.6%. Our financing expense was COP276 1,000,000 mainly due to a higher interest expense as a result of an increase in financing costs and the variation in the present value of the major maintenance provision. Consolidated net income was MXN1.1 billion in the quarter, which was flat relative to last year. Turning to our cash position. Cash generated from operating activities in the first quarter amounted to MXN1.5 billion and cash at the end of the quarter stood at MXN3.4 billion.

Speaker 3

At the end of the quarter, total debt amounted to MXN10.7 billion, and we ended the quarter with a healthy net debt to adjusted EBITDA ratio of 0.8 times. This concludes our prepared remarks. Shmali, please open the call for your questions.

Operator

Thank you. At this time, we will be conducting a question and answer session. Our first question comes from the line of Guilherme Mendez with JPMorgan. Please proceed with your question.

Speaker 4

Thank you. Thanks for taking my question. Hi, Ricardo, Rufe, Emmanuel. My question my first question is regarding the traffic outlook. Ricardo, you called on the last conference call, you mentioned about an expectations of having a flattish traffic performance in 2024 when compared to last year.

Speaker 4

Is this still the case? I mean how should we think about traffic performance going forward given the latest assessment on the aircraft groundings? And the second question also related to this, it's on Acapulco specifically. We continue to see a bit perform naturally, but how should we think about the pace of recovery going forward? Thank you.

Speaker 2

Thank you, Guilherme. We're monitoring very closely traffic. It's really depending on how the Pratt and Whitney engine issue evolves. We're looking right now the year in terms of traffic somewhere in the mid to low negative single digit. As for Acapulco, we're currently seeing we're operating around 50% of the capacity that we were handling pre OTIS.

Speaker 2

We're also monitoring theirs very closely and it will depend on the recovery of the city.

Speaker 4

Got it. Thank you very much.

Operator

Thank you. Our next question comes from the line of Alejandro Fusch with Aetol. Please proceed with your question.

Speaker 5

Thank you, Ricardo, Ricardo Ruth, you for the call and congrats on the results. I have 2 quick ones from my side. First, looking at the release, I was curious to see that the national tour was up 5% year over year. I was wondering how we can relate this in context of last year's tour, which for the last few months of the year was 10% down, right? Even if we put inflation, how do we get to the plus 5% on the national tour?

Speaker 5

That's the first question. And then the second one on the non aeronautical revenue per passenger, it was up 15% year over year. I believe it is a very good result. Congratulations on that. Maybe I was wondering if you can share with us a little bit more color on the different strategies that you've been implementing the last few quarters and maybe if DimSuite is also adding to this strong performance, anything that you could comment and if we should expect to continue to see strong performance on the non iron ore particle side going forward?

Speaker 5

Thank you.

Speaker 3

Hi, Alejandro. With respect to the iron ore yield, it has to do with the basis of comparison. As you point out, in at the end of last year, we started to have a 10% reduction in to us in certain airports. We did some inflationary increases in January of this year and we also plan to do them in January of next year. But last year, our tariff base was adjusted until the end of March.

Speaker 3

So that's why you see the benefit of the basis of comparison primarily. And with respect to commercial initiatives, yes, we have been working very closely with Vansy since they become major shareholder of the company. Part of the strategy is to develop extra aeronautical revenues. We have been aggressive in renegotiating packages of spaces in the food and beverage and retail segments And also as new outlets become available given the expansions that we are finishing primarily in the Monterrey airport, we expect the strong performance

Operator

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

Speaker 1

Hi. Thank you for the call.

Speaker 6

I just have one question on the technical assistance,

Speaker 1

I guess, expense. Is that what we saw in the Q1? Should we continue to expect going forward

Speaker 6

at those levels? Thank you.

Speaker 3

Hi, Alan. Yes, technical assistance fee has not been modified. Currently, it stands at 3% of the revenues sorry, of the EBITDA generated by the airport concessions. So there is no modification in that respect. Going forward, it will depend on the level of EBITDA generated by the airport concessions.

Speaker 3

And whether it goes up or down, it depends on the airport's performances.

Speaker 1

Great. Thank you.

Operator

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

Speaker 7

Thank you. Congratulations on the results, team. I have a couple. On the traffic side, thinking more a little bit more long term, medium term, how do you see the slot reduction or like these bottlenecks that we've seen in Mexico City impacting your system given that how important the Mexico City metropolitan area is for the Monterrey airport. So that would be my first question.

Speaker 7

And then second, I don't know if you've heard any additional news around the Alenay airport in Monterrey. I think the transfer of operations to the military should have happened or is about to happen any day now. Obviously, the military is not in a good place struggling with Mexicana, Felipe Angelis, but how likely do you think it is for them to start commercial operations and how could that impact? Thank you.

Speaker 2

Thank you, Rodolfo. In terms of slot reduction in Mexico City, what we're expecting is traffic what the government is expecting is traffic for the Mexico City airport to shift into either Santa Lucia and probably Toluca, mostly Santa Lucia. So what we're expecting medium term, long term is that traffic will start either shifting to the other alternative airports like Santa Lucia, not 100%, but the rest will find a way around the network of airports. So that's what we believe that we are part of that solution and traffic will start at some point that excess traffic that it's not moving to other airports to bypass the airport of Mexico City. So we're not expecting a medium term impact.

Speaker 2

Traffic, it's challenging this year because of the Pratt and Whitney issue. But other than that, aside from that, near shoring is still there. Fundamentals are still there. So we're bullish on traffic going forward.

Speaker 7

So like network, just a follow-up there. Just network development, do you think it's going to be more key like providing point to point Monterrey to other smaller cities. Did I get that correct?

Speaker 1

Yes. Yes, I

Speaker 2

think that's fair to say.

Speaker 7

Okay.

Speaker 2

And in terms of the airport in the north, at this point, there's no we haven't had there's no official announcement besides what we heard in December. We don't know there's a lot of investment that the military would have to do. Monterey Airport doesn't have a capacity constraint. So the technical need, it would have to be would have to be analyzed. But at this point, there's we don't see that project right now, it's in action.

Speaker 2

Thank

Operator

you. Thank you. Our next question comes from the line of Fernanda Riquia with BTG Pactual. Please proceed with your question.

Speaker 8

Hello. Thank you for taking my question. 2 from our side. The first, I wanted to get updates on the MDP negotiation. I know we are a bit far from the time line for it.

Speaker 8

But considering on the moving parts that we saw at the beginning of this year with the 2 others come increasing concession fee, just wanted to get your latest view on the tariffs that you should get on the next MDP if you're expecting a flattish tariff as you were previously expecting or if you are now looking for a small tariff increase? And second, on margins, margins were pretty decent considering all these moving parts. As you are expecting now slightly lower traffic, do you still expect to keep these margins of 75% going forward? How should we look at it? Thank you.

Speaker 2

Yes, Fernanda, thank you for your question. You're right. We're still in an early stage of the MDP as we're we will have to submit that until June of next year. Right now, we're working on the projection, the traffic projections on the We're using all their expertise, their experience that they have. We're using all their expertise, their experience that they have.

Speaker 2

They're very good and very efficient at optimizing CapEx, which is what we are currently working on. So it's still early to say and have some guidance into where we think we would land on tariffs. And in terms of margins, I think something between 72%, 74% is fair to assume.

Speaker 8

Perfect. Thank

Speaker 2

you. Considering that the concession tax will be considered an expense.

Operator

Thank you. Our next question comes from the line of Pablo Recalde with Santander Mexico. Please proceed with your question.

Speaker 5

Hi, Ricardo. Thanks for maybe a follow-up on the concession fee. You didn't recognize it as an intangible asset because you are like still thinking on that or there's something because the accountant didn't approve that?

Speaker 3

Sorry, Pablo, can you repeat the last part of your question? I could probably hear it.

Speaker 5

Yes. Sorry about that. Maybe it's regarding the concession fee registered as an expense, is that an intangible asset? So just trying to understand the rationale behind that, if it was a matter of like an internal decision or it was a matter of the accountants?

Speaker 3

So we're still assessing alternative accounting treatments for this line item. We haven't reached a final decision. We're still in conversations with our auditors in this respect

Speaker 7

and would expect to have

Speaker 3

a resolution in the upcoming quarters. The way we reported was the more conservative approach and obviously this does not have any impact in the recoverability of the excess amount paid pursuant to the tariff basis, but that's still a discussion both internally and with our auditors.

Speaker 5

Okay, perfect. That makes sense.

Operator

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

Speaker 6

Hey, it's Jay Dowling in from Stephen Trent's team. Thanks for Just 2 on my end. The first thing I wanted to ask is, is it too early to say whether next administration will begin discussions to extend session contracts beyond 2,048 rather than approving large tariff increases every 5 years?

Speaker 2

Hi, Jay. We haven't had that conversation and it seems that it's too early to that type of conversation considering the year remaining on the concession.

Speaker 6

Okay. And my next question is any general high level view over what investors could expect regarding tariffs and CapEx for the next regulatory review?

Speaker 2

As we mentioned, it's still too early in the process. We are submitting the next MVP until June. So we're currently working in traffic CapEx projections. We're working with VINCI, our partners, to develop a very efficient and optimized leverage their international expertise.

Speaker 1

Sounds good. Thanks for the color.

Operator

Thank you. Our next question comes from the line of Gabriel Amelofar with Scotiabank. Please proceed with your question.

Speaker 9

Hi, good morning. Thanks for the call. Just a quick follow-up question about the concession fee. It's my understanding that the increase in the concession fee will be somehow offset in the new master development plan in 2026. But in the meantime, is there any offsetting mechanism to offset the impact on profitability to increase of the concession fee or it's just pure cost control?

Speaker 9

Thank you.

Speaker 3

So, irrespective of the accounting treatment, the cash flow benefit will come until the next tariff negotiation. Certainly, not only because of this accounting treatment that we did, but also to compensate for some of the passenger loss that we're experiencing. We continue to be very aggressive on our cost containment measures. We're always looking to optimize our expense base and that is part of the philosophy of running our company.

Speaker 9

Okay. So in the meantime, there's no kind of regulatory offset or even increasing a bit faster the maximum rate to 100% or something just pure cost control?

Speaker 3

Well, we our last year, we ended up at 97.5 percent of maximum tariff recovery this year, we are expecting to be above that. So in that sense, those are mitigant measures to compensate for the additional outflow of concession tax that we are experiencing.

Operator

Thank you. And we have reached the end of the question and answer session. And I'll now turn the call back over to Ricardo Duena for closing remarks. We would like

Speaker 2

to thank everyone for participating in today's call. We appreciate your insightful questions, engagement and continued support. Rufo, Manuela and I are always available should you have any further questions or require additional information. Thank you once again and have a great day.

Operator

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

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Grupo Aeroportuario del Centro Norte Q1 2024
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