Grupo Aeroportuario del Centro Norte SAB de CV

BMV:OMAB

Earnings Call Analysis

OMA's Adjusted EBITDA and Traffic Highlights for Q2 2024

Grupo Aeroportuario del Centro Norte (OMA) experienced a mixed quarter in Q2 2024. Passenger traffic dropped 2.4%, mainly due to lower domestic travel affected by an engine recall, although international traffic rose by 12%. Despite the dip in passenger numbers, non-aeronautical revenues jumped by 13.8%, driven by growth in VIP lounges, parking, and commercial spaces. Aeronautical revenue fell by 2.5%. OMA's adjusted EBITDA stood at MXN 2.2 billion with a margin of 73.3%, slightly impacted by an increased concession tax. Net income grew modestly by 1.5%, reaching MXN 1.3 billion. The company maintains a strong cash position and a healthy net debt to adjusted EBITDA ratio of 1x.

Passenger Traffic Patterns and Challenges

In the second quarter of 2024, Grupo Aeroportuario del Centro Norte (OMA) reported a decline in passenger traffic, with a total of 6.5 million passengers, down 2.4% compared to the same quarter last year. Domestic passenger traffic specifically fell by 4.3%. This decline was primarily attributed to the Pratt & Whitney engine recall affecting low-cost carriers, impacting routes like Monterrey to Cancun and Mexico City. However, international traffic showed a robust 12% increase, driven largely by Monterrey Airport's expansion of routes to major U.S. cities, indicating a strong recovery in international travel interests.

Financial Highlights: Revenue and Profitability

OMA's overall financial performance reflected resilience despite the traffic challenges. Aeronautical revenues dipped 2.5%, while non-aeronautical revenues surged by 13.8%. This growth was notably strong in commercial activities such as VIP lounges and parking services, which recorded a 12% increase. The overall revenue from both aeronautical and non-aeronautical operations modestly grew 1.1%, totaling MXN 2.9 billion. OMA's adjusted EBITDA reached MXN 2.2 billion, translating to a solid adjusted margin of 73.3%. Excluding concession taxes, this margin would have been 76.3%.

Cost Challenges and Tax Implications

The company faced cost pressures, with general and administrative expenses rising by 16.5%, largely due to the expansion of operational areas and increased costs in utilities and services. Moreover, there was a hefty increase in concession taxes—up 71% to MXN 239.3 million—resulting from a rise in the tax rate from 5% to 9%. This significant hike will be an ongoing concern until the next maximum tariff revision in January 2026, as the excess paid in concession taxes will be factored into future tariffs.

Future Growth and Strategic Expansion Plans

Looking ahead, OMA is optimistic regarding non-aeronautical revenue growth, targeting ongoing diversification efforts and expansion projects. Notably, OMA Cargo experienced a 35% revenue growth, buoyed by new operations with Lufthansa Cargo and enhancements in their logistics capabilities. Furthermore, substantial investments into infrastructure—including MXN 816 million this quarter—will improve capacity at Monterrey Airport and other key locations, essential for harnessing near-shoring logistics opportunities. These strategic initiatives position OMA to withstand current market challenges while exploring new growth avenues.

Dividend Payments and Financial Health

As of June 30, 2024, OMA reported a cash balance of MXN 1.6 billion, alongside generating MXN 1 billion from operating activities during the quarter. This financial stability allowed the company to proceed with dividend payments declared in the prior shareholder meeting. The company maintained a healthy net debt to adjusted EBITDA ratio of 1x, indicating robust financial health amidst increasing operational expenses and leverage.

Sector Insights and Market Position

Despite the turbulence caused by the engine recall and the challenges in domestic passenger flows, OMA remains a prominent player with strategic advantages in the Mexican airport sector. Demand for services remains strong, particularly in international reaches, reflecting the ongoing recovery and expansion in travel. The continued optimization and enhancement of commercial spaces, with a commercial occupancy rate of 95.3%, coupled with strategic partnerships in the cargo sector, further solidify the company's growth trajectory, reinforcing its market position.

Guidance and Projections

Looking forward, management anticipates a continuation of low single-digit declines in traffic for the upcoming months due to ongoing impacts from the Pratt & Whitney situation. However, the solid growth in international passenger traffic, combined with targeted efforts in non-aeronautical revenue generation and infrastructure enhancements, should create a resilient performance outlook for the latter half of the year.

Earnings Call Transcript 2024-Q2

[Operator]

Greetings. Welcome to the Grupo Aeroportuario del Centro Norte OMA Second Quarter 2024 Earnings Conference Call. [Operator Instructions]

I will now turn the conference over to your host, Emmanuel Camacho, you may begin.

[Emmanuel Camacho, executive]

Thank you. Hello, everyone. Welcome to OMA's Second 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 Perez del.

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's 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.

[Ricardo Duenas, executive]

Thank you, Emmanuel. Hello, everyone, and thank you for joining us today. This morning, I will review our operational performance and financial results, then I will briefly comment on recent CapEx milestones occurred during the quarter, and finally, we will be pleased to answer some questions.

In the second quarter of 2024, OMA's passenger traffic reached 6.5 million, a decrease of 2.4% versus the second quarter of last year. [indiscernible] passenger decreased 4.3%, excluding Acapulco, where tourist infrastructure continues to recover from the impact of Hurricane Otis in October '23, our domestic passenger traffic declined by 3.1%. This was primarily due to the Pratt & Whitney engine recall affecting the fleet of Mexican low-cost carriers. The most impacted airports were Monterrey and Culiacan, particularly on routes such as Monterrey to Cancun and Mexico City, and Culiacan to Mexicali and Tijuana.

Despite a 10% decline in our routes to the Mexico City International Airport during the quarter, mainly due to the reduction of movements per hour announced by the Mexican government at the beginning of the year, our connectivity to the Mexico City metropolitan area, including also Toluca and Santa Lucia airport increased by 2.8%. This demonstrates that demand for flights to Mexico City remains robust with airlines responding by adding capacity to these alternate airports. There has been a clear trend towards maintaining capacity within the Mexico City airport system, while also utilizing available capacity to enhance international coverage connectivity to the U.S., strengthening existing routes and introducing new ones.

International passenger traffic achieved a strong performance in the second quarter with a 12% increase compared to the second quarter of last year. This growth was primarily driven by the Monterrey Airport with significant increase on routes to Atlanta, Las Vegas, Toronto and Orlando. These routes, along with Mazatlan to Los Angeles route accounted for approximately 60% of the international passenger traffic increased during the quarter. Additionally, in the first half of the year, we launched 6 new international routes, 4 of which were based on the Monterrey Airport, further strengthening our international connectivity.

Moving on to OMA's financial performance. Aeronautical revenue decreased by 2.5%, primarily driven by the performance of our domestic passenger traffic. Aeronautical revenue per passenger remained flat compared to the second quarter of last year. Despite the decline in passenger traffic, non-aeronautical revenues grew by 13.8%, underscoring the successful execution and consolidation of several strategic projects throughout the year. Commercial revenues increased 12% compared to the second quarter of last year, primarily driven by VIP lounges and parking revenues, along with several other categories. VIP lounges saw significant benefits this quarter due to higher access rates and the effect of the previously opened lounges in Reynosa, Tampico and Durango. In addition, leases of third-party lounges in Monterrey were renewed under improved terms. Parking revenues increased primarily due to an overall optimization of tariffs across our 13 airports. Revenue from restaurants, car rentals and retail grew, driven by the contribution of commercial spaces opened during the previous quarters. Finally, duty-free revenue increased due to our strategy of relocating international flights among terminals in Monterrey, boosting passenger exposure to commercial spaces and increased revenues per passenger. The occupancy rate of commercial space stood at 95.3% at the end of the quarter.

On the diversification front, revenues increased 27%. OMA Cargo contributed most of this quarter's growth with an increase of 35%, mainly due to higher revenues from ground and air cargo operations in Monterrey. In addition, during May, we began operations with our new client, Lufthansa Cargo, which did not operate previously in Monterrey, offering air cargo transport services with an initial frequency of one flight per week between Mexico City, Monterrey and Frankfurt. This renewed route is part of our strategy to establish our airport as a key logistics hub. In addition, we will soon begin expansion of our OMA Cargo Monterrey warehouse capacity by almost 50%, allowing us to capitalize on near-shoring opportunities. Hotel Services grew by 16%, mainly as a result of an increase in operations in both hotels. In the second quarter of this year, occupancy rate of our Terminal 2 NH was 85% while Hilton Garden Inn Hotel had an occupancy rate of 79%. Additionally, we reported a double-digit increase in average room rate per night on both hotels.

Moving on to capital expenditure front, I would like to highlight that during the quarter, we achieved a significant milestone in our long-term infrastructure development at the Monterrey Airport. As part of our expansion and remodeling project, we successfully inaugurated the Terminal A East public area expansion. Covering over 6,000 square meters, this new area features double documentation counters, commercial outlets, airport services and other facilities. These enhancements contribute to improving our services and increasing airport capacity. This completion marks the third phase of our initial expansion project following the early openings of the West public area of [indiscernible] and the Wing 1 building. As a result of these initiatives, Monterrey's current terminal capacity has grown to 13.9 million passengers annually.

Additionally, during the quarter, we invested MXN 816 million in MDP investments, major maintenance and strategic projects. Notably, we are actively working on expanding and remodeling terminal buildings in Monterrey, Ciudad Juarez, Torreon, Culiacan, Durango and Mazatlan. These projects reflect our commitment to enhancing airport facilities and services for passengers and stakeholders.

I would now like to turn the call over to Ruffo Perez del who will discuss our financial highlights of the quarter.

[Ruffo Pérez del Castillo, executive]

Thank you, Ricardo, and good morning, everyone. I will briefly review our financial results, and then we will open the call for your questions. Aeronautical revenues decreased 2.5% relative to the second quarter of 2023, driven primarily by lower passenger traffic with a 4.3% decrease in domestic passenger traffic partially offset by a 12.4% growth in international passenger traffic. Non-aeronautical revenues increased 13.8%, commercial revenues increased 11.9% with the categories with the highest growth being VIP lounges, parking and restaurants. Diversification activities increased 26.5%, mainly due to higher revenues [indiscernible] and hotel services. As a result, total aeronautical and non-aeronautical revenues grew 1.1% to MXN 2.9 billion in the quarter.

Construction revenues amounted to MXN 556 million in the second quarter, a decrease of 22% as a result of lower EBITDA investment execution speed. The cost of services and G&A expense increased 16.5% compared to 2Q '23. The rise is primarily due to the expansion of the new operational areas in previous quarters, primarily in the Monterrey Airport coupled with higher unit costs. Consequently, several of our cost and expenses such as electricity, contracted services and maintenance have increased as compared to the same period of last year.

Concession tax increased 71% to MXN 239.3 million as a result of the rate increase from 5% to 9% applied on the revenues generated by OMA's airport concessions. Under the current regulation basis effective as of October 20, 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 January 2026, this excess concession tax amounts paid will begin to be recovered through maximum tariffs. In the second quarter of 2024, the 4% surplus of concession tax over aeronautical revenues amounted to MXN 92.9 million, equivalent to 3.2% of the sum of OMA's aeronautical and non-aeronautical revenues. This is included in the MXN 239.3 million recorded as concession tax expense for the quarter. Major maintenance provision was MXN 43 million as compared to MXN 82 million in the second quarter of last year. The decrease is the result of the variation in the present value of the major maintenance provision caused by an increase in discount rates for its calculation.

OMA's second quarter adjusted EBITDA was MXN 2.2 billion and the adjusted margin was 73.3%. Excluding the MXN 92.9 million concession tax and its impact on financial results, our adjusted EBITDA would have been MXN 2.3 billion with a margin of 76.3%. For the 6 months ended on June 30, 2024, adjusted EBITDA would have been MXN 4.4 billion with a margin of 77.0%.

Our financing expense amounted to MXN 834 million. This figure includes the effects resulting from changes in the present value of the major maintenance provision due to an increase in the discount rates used for its calculation. Consolidated net income was MXN 1.3 billion in the quarter, which increased by 1.5% as compared to the second quarter of last year.

Turning to our cash position. Cash generated from operating activities in the second quarter amounted to MXN 1 billion, and cash at the end of the quarter stood at MXN 1.6 billion. During the quarter, we paid the first installment of the dividend declared in our previous shareholder meeting. At June 30, 2024, total debt amounted to MXN 10.9 billion, and we ended the quarter with a healthy net debt to adjusted EBITDA ratio of 1x.

This concludes our prepared remarks. Please open the call for the questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Pablo Ricalde with Santander Mexico.

[Pablo Ricalde, analyst]

I was just wondering if you can provide your expectations for traffic for the second half of the year in Mexico. We have seen slightly better expectations from low-cost carriers, but I want to see your thoughts for traffic for the second half.

[Ricardo Duenas, executive]

Yes. Pablo, we remain with the same projection we had on the previous call, which we believe we're going to be in the low single-digit decrease in traffic as a result of the Pratt & Whitney issue.

[Operator]

Our next question comes from the line of Rodolfo Ramos with [indiscernible].

[Unknown Analyst]

A couple of questions on my side. First one is, I wanted to get a sense of how do you look at the potential for non-aeronautical revenue per passenger in more the medium to long term, I mean, your structure is unique in the sense that you have the industrial business, the cargo, the hotel, which might make it more difficult to draw comparisons there. But what kind of benchmarking have you done with perhaps other airports that advance these portfolio? Just to get a sense of the current MXN 114 per passenger in non-aeronautical can go from this level.

So that's the first one and then second, it was interesting, your comments around the metropolitan area, the Mexico City, the [indiscernible] restriction has been something that has been a concern for us and this bottleneck. My question is, how relevant do you think Toluca can be to serve as an alternative to Felipe Angeles and the [indiscernible].

[Ruffo Pérez del Castillo, executive]

This is Ruffo. So in terms of non-aero revenue, the way we view it is we separate what's commercial to other diversification activities. On the commercial side, we were around the MXN 58 per passenger revenue, I think that's sustainable for the next 6 months, and that's consistent with our expectations for full year and going forward, we would expect that number to increase at least with inflation and be maintained in real terms.

As for other diversification activities, there are -- performance does not necessarily relate to passenger growth. So obviously, right now, we are with 85% capacity occupancy ratio in the [indiscernible] Hotel as well as the 79% occupancy ratio in Hilton in the Monterrey Airport. They are basically at full capacity in the main business days of the week, so we would expect some improvement in tariffs going forward, but they would not be correlated to passenger growth. And [indiscernible] also continues to perform very strongly. We saw a very good first half results, which we think they are consistent with what we would expect for the second half of the year, but also the revenues would not be correlated to passengers. So therefore, we don't necessarily have this MXN 114 per passenger target for the upcoming quarters or years as a target.

[Ricardo Duenas, executive]

And just to point out, we're having some strategic initiatives with [indiscernible]. We have a lot of our energy in the non-aeronautical revenues, where, for example, cargo, we're expanding our warehouses by 50%. We're looking to expand also our industrial park. We brought a management team in place to revamp all the non-aero side. So we have good expectation there. We want to -- our objective is to capitalize on all the new-shoring activity that we're seeing in most of our airports. And relating to Toluca and [indiscernible], I mean, I think the government has been clear they want to have a metropolitan system of airports composed of the Mexico City airport, Toluca and Santa Lucia, we believe that the excess traffic will go mostly to Santa Lucia instead of Toluca. The government is very clear that that's their strategy. So we believe most of the excess will go more to Santa Lucia than to Toluca.

[Ruffo Pérez del Castillo, executive]

And just to complement that, Ricardo, regarding the second quarter of 2024, the [indiscernible] represented 5.4% of total mass passenger traffic, while Toluca represented 1.6% of total second quarter traffic.

[Operator]

Our next question comes from the line of [indiscernible] with Morgan Stanley.

[Unknown Analyst]

Two questions. I saw that you cited the Monterrey-Cancun route as being one of the main drivers of the traffic decrease in Monterrey. What's the reason behind that? Did the airlines reduce frequencies? Or is it lower load factors, maybe you could get a bit more color on that [indiscernible]. And you already mentioned that you are looking into expanding capacity maybe at the industrial park. What's the current capacity, roughly the capacity utilization you're having at that park, in other words, would you be able to sustain these high growth rates before investing in new capacity?

[Ruffo Pérez del Castillo, executive]

So regarding the first question, yes, the Monterrey-Cancun saw a decline in traffic in the second quarter, it's primarily related to a cut of capacity by some of the carriers operating that route. That was one of the routes that was most affected by the Pratt & Whitney issue. As the engine recall effect fades and is behind us, we don't expect this to be one of the routes with the quickest recoveries. And regarding the second question, can you repeat your second question, please?

[Unknown Analyst]

Yes. On the industrial part, I mean what's approximately the capacity utilization you have there, just to assess so how long you could have these high growth rates before you invest in additional industrial capacity?

[Ruffo Pérez del Castillo, executive]

Yes. So we're currently working on -- either on expanding a couple of existing warehouses and building also a couple of new warehouses. Once those 4 projects are completed, basically, the part would be around 98% of its buildable area built. So these warehouses would expect to be generating revenue towards the last -- some of them in the second half of the year and the other ones in the fourth quarter of this year. So after middle of 2025, if we were to have still growth in this business line item, we would need to invest in additional infrastructure in additional spaces in the Monterrey airport.

[Operator]

Our next question comes from the line of Stephen Trent with Citi.

[Stephen Trent, analyst]

Just one from me. I noticed your competitors have done a couple of overseas projects and invested in airports outside of Mexico. Are you guys considering doing anything along those lines? And if so, is this something that you could do jointly with [indiscernible] or it is nothing like that being anticipated at the time?

[Ricardo Duenas, executive]

Stephen, we're always looking for opportunities to expand internationally. Obviously, that would have to be a joint decision with [indiscernible]. But we're currently not working in any tender or bidding process internationally.

[Operator]

Our next question comes from the line of Isabela Salazar with [indiscernible].

[Isabela Salazar Leipen, analyst]

I was wondering if you could tell me how close you are to reaching the maximum tariff this year?

[Ricardo Duenas, executive]

Thank you, Isabela. Yes, we're close to 99.3% compliance with maximum tariff at this point.

[Operator]

Our next question comes from the line of [indiscernible].

[Unknown Analyst]

[indiscernible] related to profit mix or deployment of commercial strategies. Additionally, considering the higher mix international passengers and commercial revenues in Acapulco, despite having your passengers, should this be impacting the per passenger commercial metrics?

[Ricardo Duenas, executive]

Could you repeat -- your line is cutting. Could you please repeat your question?

[Unknown Analyst]

Sorry about that. We observed a good commercial growth dynamics this quarter. Is it primarily related to traffic mix or deployment of commercial strategies?

[Ruffo Pérez del Castillo, executive]

No, I think the increase in commercial revenues is more related to our overall strategy, obviously you saw an increase in duty-free that has obviously a component of benefit from higher international passengers than last year. But overall, the increases that you see in food and beverage and restaurants and car parking is part of our overall strategy to improve our commercial revenues as well.

[Operator]

Our next question comes from the line of Andressa Varotto who is a private investor.

[Andressa Varotto, analyst]

So I have a follow-up here on the maximum tariff question. So you mentioned that you are close to 99.2% compliance, right? So just wondering how does this [indiscernible] to consideration the discounts that were agreed with government last year? If you have any update on that? And if you have plans to increase tariffs further before your next MDP revision?

[Ruffo Pérez del Castillo, executive]

So the compliance ratio that we mentioned, it's already [indiscernible] to discounts that were agreed upon last year and the inflationary increase at the beginning of this year. Next year, we would just expect an inflationary increase in our aeronautical tariffs.

[Operator]

Our next question comes from the line of Alan Macias, Bank of America.

[Alan Macias, analyst]

Just one question. At this point in time, can you give us an idea of the level of CapEx you would be expecting for the next master development plan, if it's the same level as the previous or higher or lower?

[Ricardo Duenas, executive]

It's -- we're still in early stages of the [indiscernible]. We're working very closely with [indiscernible] team to have a very optimized CapEx. But it's too early to have some numbers. But what I can tell you it is going to be a very optimized CapEx.

[Operator]

Our next question comes from the line of [indiscernible].

[Unknown Analyst]

My question is a bit of a follow-up on [indiscernible] question, related to the commercial revenues per passenger. If you could share some color. Have you seen any significant impact on this metric due to having a higher share of international passengers or maybe some distortion due to the commercial revenues in Acapulco, given that you have now lower passengers? Or is this not significant?

[Emmanuel Camacho, executive]

I think the impact of Acapulco is limited. As you remember, Acapulco accounted for approximately 3.5% of our total traffic. And even though it's obviously 2 recent markets, which is prone to maybe higher expenditures, especially in international side. The international component of Acapulco was very small as compared to the 53 revenues, for example, that we have in Monterrey or [indiscernible]. So I wouldn't think that the mix of passengers right now, except for the duty free line item, is driven by the international passenger growth. For example, parking revenues increased, and it's primarily domestic traffic in that line item. A lot of the food and beverage and retail outlets don't necessarily attack the international market, but mostly the domestic market. So I would think that the increase in commercial revenues is driven by overall strategy and does not depend on international traffic growth.

[Operator]

And we have reached the end of the question-and-answer session. And I will now turn the call over to Ricardo Duenas for closing remarks.

[Ricardo Duenas, executive]

Yes, we would like to thank everyone for participating in today's call. Ruffo, Emmanuel and I are always available to answer your questions, and we hope to see you soon. 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.