Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. (NASDAQ:OMAB) Q3 2023 Earnings Call Transcript

Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. (NASDAQ:OMAB) Q3 2023 Earnings Call Transcript October 30, 2023

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. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Emmanuel Camacho, Investor Relations. Thank you. You may begin.

Emmanuel Camacho: Thank you, Doug. Hello, everyone, and welcome to OMA’s Third Quarter 2023 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’ll turn the call over to Ricardo Duenas for his opening remarks.

Ricardo Duenas: 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. On the night of October 25, Hurricane Otis struck 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. Regarding recent regulatory changes, on October 4th, 2023, the Civil Aviation Agency, an autonomous body under Ministry of Communication and Transportation notified us about immediate modification established in Annex 7 of the tariff regulation basis of our airport concessions. Over the two weeks that followed, we conducted a thorough review of this new guidelines and engaged in closed and constructive communication with the Ministry and the AFAC 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 19th and subsequently made public to the market.

We don’t expect significant impact on 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. 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 ’24 and ’25 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 is part of the calculation variables for determining maximum tariff. This new basis did not change this 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 record of its financial and operational results.

Turning to our main third quarter of this year results. OMA continued to deliver solid financial and operating results during the third quarter. Adjusted EBITDA grew 33% in the quarter to MXN2.5 billion and adjusted EBITDA margin reached 79.4% largely as a result of the increase in both aeronautical and non-aeronautical revenues on our successful cost control strategy. In the third quarter, OMA’s passenger traffic reached a record number of 7.4 million, an increase of 19% versus the third quarter 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 third quarter of last year. The main destinations at road traffic growth were Toluca, Queretaro, Cancun, Santa Lucia and Mexico City.

Most of them consider business routes. On aggregate, these five routes added 255,000 additional passengers in the quarter, an increase of 17% versus the third quarter of last year. Primarily as a result of the star passenger traffic performance, our aeronautical revenue grew by 31% in the quarter to MXN2.5 billion. On the commercial front, revenues increased 24% compared to third quarter 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%. Our hotel services contributed most to this growth. In the second quarter of this year, occupancy rate of our Terminal 2 NH was 86.3%, while the Hilton Garden Inn Hotel had an occupancy rate of 73.3%.

On the capital expenditure front, total investment in the quarter, including MDP investments, major maintenance and strategic investments were MXN964 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 Ciudad 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 four industrial warehouses. I would now like to turn the call over to Ruffo Perez Pliego, who will discuss our financial highlights of the quarter.

Ruffo Perez Pliego: 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. Turning to OMA’s third quarter financial results. Aeronautical revenues increased 31% relative to the third quarter of ’22, driven primarily by the 18.6% increase in passenger traffic and higher revenue per passenger. Non-aero revenues increased 17.6%. Commercial revenues increased 23.6%. The categories with the largest growth were restaurants, parking, car rentals and VIP lounges. Restaurants and car rentals rose 40% and 28% respectively, mainly due to higher revenue sharing and the impact of the opening 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 in Ciudad Juarez, Chihuahua, Culiacan, Monterey and Reynosa Airports. VIP lounges increased 31.5% as a result of an increase in passenger traffic and the opening of the Reynosa lounge in August 2023 as well as the Tampico lounge in May 2023 and Ciudad Juarez in November 2022. Diversification activities increased 8.3%, a strong hotel revenue growth was partially offset by a decline in OMA Carga which was affected by a decline in revenues related to our ground import cargo. Total aeronautical and non-aeronautical revenues grew 27.9% to MXN3.2 billion in the quarter. Construction revenues amounted to MXN719 million in the third quarter, an increase of 10% as a result of higher MDP investment execution.

The cost of airport services and G&A expense increased 2.8% relative to the third quarter of last year, mainly due to an increase in minor maintenance, contracted service and basic services costs as a result of higher activity in our airports and inflationary effects. Major maintenance provision was MXN95 million compared to MXN51 million in 2Q’22. OMA’s third quarter adjusted EBITDA was MXN2.5 billion and the adjusted EBITDA margin was 79.4%. Our financing expense was MXN272 million, mainly due to a higher interest expense as a result of additional debt issuance and the higher cost of debt. Consolidated net income was MXN1.3 billion in the quarter, an increase of 28% versus 3Q’22. Turning to our cash position. Cash generated from operating activities in the third quarter amounted to MXN1.3 billion and cash at the end of the quarter stood at MXN2 billion.

On September 20th, we made the payment for the second installment of the ordinary dividend amounting to MXN500 million. In accordance with the resolutions of our shareholder meetings in April. 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 1.0 times. This concludes our prepared remarks. Now, please open the call for your questions.

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Q&A Session

Operator: Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Pablo Monsivais with Barclays. Please proceed with your question.

Pablo Monsivais: Hi. Good morning, Ricardo, Ruffo and Emmanuel. Thanks for taking my question. I have two questions. The first one is if you have done a quick calculation of what could be your discount rate under these new rules? And how does it compare 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 TUA. Can you please confirm whether decrease in the TUA is in any way related to the new tariff methodology? Thank you.

Ruffo Perez Pliego: Hi, Pablo. This is Ruffo. I will answer your first question. The components for the calculation of the discount rate used in the maximum tariff are now clearly stated and less subjective 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 basis establish clearly the variables to be used to determine the discount rate. Based on our calculations, we do not assess a significant impact on the discount rate as a result of the changes that were made in the new tariff basis.

Ricardo Duenas: And regarding your second part, Pablo, the discounts are totally unrelated from the new basis. They are unrelated to the aforementioned 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 our passenger charges on TUA starting November and December of ’23, applicable to 10 of our airports. After application of discount this discount in ’23, we expect to apply annual inflation adjustments on TUA. Other aeronautical tariffs in addition to TUA are not subject to the discounts. 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 1.2 billion in the aggregate. And as a percentage of the original CapEx commitment represents about 25% in ’24 and 13% in ’25. These deferments do not compromise the operations, quality and safety standards of our airports.

Pablo Monsivais: Thank you very much. Very clear.

Ricardo Duenas: Welcome.

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

Guilherme Mendes: Good morning, Ricardo, Ruffo and Emmanuel. Thanks for taking my question. I have two as well. The first one is on margins and congrats on the very strong margins reported during the third quarter. The question is, how should we think about margins going forward, especially thinking in terms of the increase in the concession fees? And if it’s that will be fully compensated on the aeronautical part of the business and the second question is regarding to the impact brought by the hurricane. If you can provide a little bit more color in terms of what should be the actual impact thinking on fourth quarter numbers and potentially early 2024 numbers as well maybe in terms of traffic or in terms of revenues impact? Thank you.

Ricardo Duenas: Sure. Thank you. For the hurricane, it’s too early to assess the amount of 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. 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 to margins, we expect the next year some — around 4% impact as a result of the concession tax increase. However, this concession tax increase, the amount for ’24 and ’25 will be recognized as reference value for the next MDP negotiation in ’26.

Guilherme Mendes: 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 this, is there any other impact that should bring margins down?

Ruffo Perez Pliego: I mean, we’re still finalizing our budgets for next year. We’ll have to, obviously, we’re incorporating the increase in the concession tax, which will trim close to four percentage points of margin. And with respect to other inflationary pressures, I think, that they could be compensated with inflationary increases in our tariffs.

Guilherme Mendes: Okay. Thank you.

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

Rodolfo Ramos: Thank you, Ricardo, Ruffo and Emmanuel for taking my question. Just a clarification on the previous one before I go into a couple of questions I have. So the hit you’re expecting on the concession fee, you’re expecting it to be reflected now in an upcoming MDP, but will it be a kind of a backward-looking adjustment or is it just going forward you’ll be able to compensate that to the tariff. So just a quick follow-up first.

Ricardo Duenas: Just for the next two years, for the next two 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 in the past.

Rodolfo Ramos: Okay. So it is backward looking. Okay. Thank you. 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 and particularly on the cap of excess surplus, this 3% cap. I’m not sure if you’re able to quantify, just give us an idea of how much revenues or income this has generated over the last maybe 20 years, you’ve had the concession. So yes, that would be my first one. Any color there would be helpful?