Earnings Call Transcript - OMAB Q1 2024

Operator, Operator

Greetings, and welcome to Grupo Aeroportuario del Centro Norte OMA's First Quarter 2024 Earnings Conference Call. All participants are currently in a listen-only mode. A question-and-answer session will take place after the formal presentation. I will now hand the conference over to your host, Emmanuel Camacho of Investor Relations. You may begin.

Emmanuel Camacho, Investor Relations

Thank you, Shimali. Hello, everyone. Welcome to OMA's First Quarter 2024 Earnings 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 Ruffo 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, not 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 for his opening remarks.

Ricardo Duenas, CEO

Thank you, Emmanuel. 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 will be pleased to answer your questions. In the first quarter, OMA's passenger traffic reached 5.9 million, a decrease of 1.5% versus the first quarter of last year. 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 twelve airports increased by an aggregate of 0.9% during the quarter. Excluding Acapulco, OMA experienced a decline in domestic traffic of 1.2% in the quarter, driven by lower domestic seat capacity which declined by 9.1%. The main airports affected were Culiacán and Ciudad Juárez airports, notably on routes such as Culiacán to Tijuana and Ciudad Juárez to Mexico City. International passenger traffic recorded a strong performance, with a 10% increase compared to the first quarter of last year, driven by airlines expanding capacity and international routes. During the quarter, international seat capacity grew by 7.1%. This international growth was primarily led by the Monterey Airport, which saw a 14% rise in international passenger traffic. The routes with the highest increase from Monterey were to Atlanta, Toronto, Las Vegas, Bogotá, and Dallas. These routes, along with San Luis Potosito, Houston, and Zihuatanejo and Zacatecas to Dallas, contributed to approximately 80% of the international passenger traffic increase during the quarter. Furthermore, in the first quarter, we launched four new international routes, three of which were based at the Monterey Airport. In terms of airline participation, VivaAerobus represented 48% of our total traffic during the quarter, with a notable 16% increase in terminal passenger numbers compared to the first quarter of 2023, while Volaris, which accounted for 20% of our total traffic, experienced a 24% decrease during the quarter, largely due to the Pratt & Whitney engine recall affecting their fleet. Moving on to OMA's first quarter financial highlights, aeronautical revenues increased by 5.3%. Aeronautical revenue per passenger rose 7% in the quarter. Commercial revenues increased 12% as compared to the first quarter 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 business units across our airports during the past quarters. Occupancy rates for commercial space stood at 95.3% at the end of the quarter. On the diversification front, revenues increased 21%. Hotel services contributed most to this growth, mainly as a result of an increase in operations in both hotels. In the first quarter, the occupancy rate at our terminal 2NH was 89%, while the Hilton Garden Inn Hotel had an occupancy rate of 77%. OMA cargo increased 2%, mainly as a result of an increasing revenue related to import cargo services. OMA's first quarter adjusted EBITDA increased by 3%, to Ps. 2 billion, and the adjusted EBITDA margin was 74.6%. For comparative purposes with the first quarter of last year, we exclude the surplus of the concession tax over aeronautical revenues, resulting from the rate increase from 5% to 9% for this concept pursuant to the Mexican Federal Duties Law, which amounted to Ps. 86.3 million 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 Ps. 2.127 billion 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 Ps. 1.1 billion. During the quarter, some of the most relevant projects we are working on are the expansion and remodeling of the Monterey airport terminal A building, as well as the Juarez, Torreón, Culiacán, and Durango Terminal Buildings. Reconfiguration of the master plan Terminal building, major rehabilitation and reconfiguration of platform and taxiways in several airports and construction of four industrial warehouses. Lastly, I want to mention that tomorrow we will hold our 2024 annual shareholders meeting. Shareholders will vote on several matters including the declaration and payment of a Ps. 4.25 billion 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.

Ruffo Perez Pliego, CFO

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 first quarter of 2023, driven primarily by higher aeronautical yields and the increase in international passenger traffic. Non-aeronautical revenues increased 13.3%. 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 from the consolidation of initiatives implemented in past quarters. Restaurants increased 18.6% due to an increase in fixed rent, 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 and higher penetration in the Ciudad Juarez, Chihuahua, and Monterrey airports. 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 up 7.2% to Ps. 2.7 billion in the quarter. Construction revenues amounted to Ps. 1.01 million in 1Q 24, an increase of 53% due to higher MVP investment execution. The cost of services and G&A expense had a 6.4% growth versus the first quarter of 2023, primarily driven by a 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 increased operations in both hotels. Concession tax increased 87% to Ps. 223 million 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. Therefore, starting in January 2026, these excess concession tax payments will begin to be recovered through the maximum tariffs. In the first quarter of 2024, the 4% surplus on the concession tax on the aeronautical revenues amounted to Ps. 86.3 million, equivalent to Ps. 3.1 of the sum of our aeronautical and non-aeronautical revenues. This surplus is included in the Ps. 223 million recorded as concession tax expense for the quarter. Excluding this amount, our adjusted EBITDA would have been Ps. 2.12 billion with a margin of 77.7%. We continue to analyze alternative accounting treatments for the recovery amount of the excess concession tax. However, until a final decision is made, we decided to record it as an expense. Major maintenance provision was Ps. 71 million compared to Ps. 77 million in the first quarter of 2023. Our EBITDA was Ps. 2.0 billion and the adjusted EBITDA margin was 74.6%. Our financing expense was Ps. 276 million, 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 Ps. 1.1 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 Ps. 1.5 billion and cash at the end of the quarter stood at Ps. 3.4 billion. At the end of the quarter, total debt amounted to Ps. 10.7 billion, and we ended the quarter with a healthy net debt to adjusted EBITDA ratio of 0.8 times. This concludes our prepared remarks. Shamali, please open the call for your questions.

Operator, Operator

Thank you. Our first question comes from Guilherme Mendes with JPMorgan. Please proceed with your question.

Guilherme Mendes, Analyst

Thank you. Thanks for taking my question. Hi, Ricardo, Ruffo, Emmanuel. My first question is regarding the traffic outlook. Ricardo, you mentioned in the last conference call about expectations of having a flattish traffic performance in 2024 when compared to last year. 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 how it performed naturally, but how should we think about the pace of recovery going forward? Thank you.

Ricardo Duenas, CEO

Thank you. Thank you, Guilherme. We're monitoring traffic very closely. It really depends on how the Pratt & Whitney engine issue evolves. We're looking right now for the year, in terms of traffic, somewhere in the mid-to-low negative single digit. As for Acapulco, we're currently operating around 50% of the capacity that we were handling pre-Otis. We're also monitoring this very closely, and it will depend on the recovery of the city.

Guilherme Mendes, Analyst

Got it. Thank you very much.

Operator, Operator

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

Unidentified Analyst, Analyst

Thank you. Hello, Ricardo, Ruffo, Emmanuel and team. Thank you for the call and congrats on the results. I have two quick ones from my side. First, looking at the release, I was curious to see that the national tour was up 5% year-on-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 considering inflation, how do we get to the plus 5% on the national tour? That's the first question. And then the second one, on the non-aeronautical revenue per passenger was up 15% year-over-year. I believe you had very good results. Congratulations on that. Maybe I was wondering if you can share with us a little more color on these different strategies that we've been implementing over the last few quarters, and maybe if VINCI is also adding to this strong performance, anything that you could comment. And should we expect to continue to see strong performance on the non-aeronautical side going forward? Thank you.

Ricardo Duenas, CEO

Hi, Alejandro. With respect to the aeronautical yield, it has to do with the basis of comparison. As you point out, at the end of last year, we started to see a 10% reduction in tours in certain airports. We implemented inflationary increases in January of this year, and we also plan to do this again in January of next year. However, last year our tariff base was adjusted until the end of March. So that's why you see the benefit of the basis of comparison, primarily. Regarding commercial initiatives, yes, we have worked very closely with VINCI since they became the 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 as new outlets become available given the expansions we are completing, especially at the Monterey airport, we expect strong performance to continue in the following quarters.

Unidentified Analyst, Analyst

Thank you very much.

Operator, Operator

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

Alan Macias, Analyst

Hi, thank you for the call. Just one question on the technical assistance expense. Should we continue to expect those levels going forward? Thank you.

Ricardo Duenas, CEO

Hi, Alan. Yes, the technical assistance fee has not been modified. Currently, it stands at 3% of the EBITDA generated by the airport concessions. There is no modification in that respect going forward; it will depend on the level of EBITDA generated by the airport concessions and whether it goes up or down, depending on the airport's performances.

Alan Macias, Analyst

Great. Thank you.

Operator, Operator

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

Rodolfo Ramos, Analyst

Thank you. Congratulations on the results, OMA team. I have a couple on the traffic side thinking a little bit more long term, medium term. How do you see this slot reduction or these bottlenecks that we've seen in Mexico City affecting your system, given how important the Mexico City metropolitan area is for the Monterey airport? So that would be my first question. And then second, I don't know if you've heard any additional news around the Aedene 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 a good place, struggling with Mexicana and Felipe Ángeles, but how likely do you think it is for them to start commercial operations, and how could that impact? Thank you.

Ricardo Duenas, CEO

Thank you, Rodolfo. In terms of slot reduction in Mexico City, what we're expecting is that traffic will shift from the Mexico City airport to either Santa Lucia or another location. Medium-term, long-term, we believe that traffic will start shifting to other alternative airports like Santa Lucia, although not 100%, the rest will utilize the network of airports. So we're not expecting a medium-term impact on traffic. This year is challenging due to the Pratt & Whitney issue, but the fundamentals remain strong, and we are optimistic about traffic going forward.

Rodolfo Ramos, Analyst

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

Ricardo Duenas, CEO

Yes, yes, I think that's fair to say. And in terms of the airport in the north, at this point, we don't have any official announcement beyond what we heard in December. There's a significant amount of investment that the military would have to make. Since the Monterey airport doesn't have a capacity constraint, the technical need would have to be analyzed. Currently, we don't see that project in action.

Rodolfo Ramos, Analyst

Thank you.

Operator, Operator

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

Fernanda Recchia, Analyst

Hello. Thank you for taking my question. Two from our side. The first, I wanted to get updates on the MVP negotiation. I know we are a bit far from the timeline for it, but considering all the moving parts that we saw at the beginning of this year, with the two others coming in with increasing concession fees, just wanted to get your latest view on the tariff that you should expect on the next MDP. Are you expecting a flattish tariff as you were previously, or are you now looking for a small tariff increase? And second, on margins. Margins were pretty decent considering all these moving parts; as you are expecting lower traffic, do you still expect to keep these margins over 75% going forward? How should we look at it? Thank you.

Ricardo Duenas, CEO

Yes, Fernanda, thank you for your question. You're correct; we're still at an early stage of the MDP, as we will have to submit that until June of next year. Currently, we're working on the projection, the traffic projections on the CapEx needs that we will be looking at. We're working closely with VINCI for development. This next MDP utilizes all their expertise and experience to optimize CapEx, which is what we are focused on. It's still early to provide guidance on tariffs. In terms of margins, I think something between 72% and 74% is fair to assume.

Fernanda Recchia, Analyst

Perfect. Thank you.

Ricardo Duenas, CEO

Considering that the concession tax will be treated as an expense.

Operator, Operator

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

Pablo Ricalde, Analyst

Hi, Ricardo. Thanks for that question. Maybe a follow-up on the concession fee. You didn't recognize it as an intangible asset because you are deliberating on that, or is there something because the accountant did not approve that?

Ricardo Duenas, CEO

Sorry, Pablo, can you repeat the last part of your question? I couldn’t hear it.

Pablo Ricalde, Analyst

Yes. Sorry about that. Maybe it's regarding the concession fee being registered as an expense instead of an intangible asset. I'm trying to understand the rationale behind that, if it was a matter of an internal decision, or if it was based on the accountants' decision.

Ricardo Duenas, CEO

We are 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 and expect to have a resolution in the upcoming quarters. The way we reported it was the more conservative approach. This does not affect the recoverability of the excess amount paid pursuant to the tariff basis, but we are still discussing this both internally and with our auditors.

Pablo Ricalde, Analyst

Okay, perfect. That makes sense.

Operator, Operator

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

Jay Singh, Analyst

Hey, it's Jay dialing in from Steven Trent's team. Thanks for taking my question. Just two on my end. The first thing I want to ask is, is it too early to say whether the next administration will begin discussions to extend session contracts beyond 2048 rather than approving large tariff increases every five years?

Ricardo Duenas, CEO

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

Jay Singh, Analyst

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.

Ricardo Duenas, CEO

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

Jay Singh, Analyst

Sounds good. Thanks for the color.

Operator, Operator

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

Gabriel Himelfarb, Analyst

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

Ricardo Duenas, CEO

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

Gabriel Himelfarb, Analyst

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

Ricardo Duenas, CEO

Well, last year we finished at 97.5% of maximum tariff recovery. This year, we expect 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.

Gabriel Himelfarb, Analyst

Okay, thank you. Congrats on the results. Thank you.

Ricardo Duenas, CEO

Thank you, Gabriel.

Operator, Operator

Thank you. And we have reached the end of the question-and-answer session. I'll now turn the call back over to Ricardo Duenas for a closing remark.

Ricardo Duenas, CEO

We would like to thank everyone for participating in today's call. We appreciate your insightful questions, engagement, and continued support. Ruffo, Emmanuel, 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, Operator

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