Grupo Aeroportuario del Centro Norte SAB de CV
BMV:OMAB
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Grupo Aeroportuario del Centro Norte SAB de CV
Earnings Call Analysis
Q3-2023 Analysis
Grupo Aeroportuario del Centro Norte SAB de CV
Despite Hurricane Otis causing damage to Acapulco Airport, the resilience of OMA shone through as they navigated this instance of severe weather without significant impact on their overall performance. Known for accounting for 3.6% of their total passenger traffic and 3.4% of their revenues, the Acapulco Airport's operational capacity remained intact, ensuring continued service and thereby protecting a meaningful segment of OMA's business.
OMA also adeptly handled unexpected regulatory modifications, successfully collaborating with government bodies to mitigate adverse effects from changes in the tariff regulation of their airport concessions. Furthermore, they've poised themselves to effectively tackle an increase in concession tax from 5% to 9%, anticipating its recognition in future tariff negotiations, proving their tactical approach in managing fiscal policy shifts.
The third quarter saw OMA deliver remarkable financial and operating results, with a 33% growth in adjusted EBITDA reaching MXN 2.5 billion, and boasting a robust adjusted EBITDA margin of 79.4%. Fuelled by a record 7.4 million passenger traffic, which grew by 19%, OMA witnessed a boon in their aeronautical revenue by 31% to MXN 2.5 billion. The growth cascaded to their non-aeronautical pursuits as well, with a significant increase in commercial revenues by 24% and diversification revenues by 8%.
OMA continued to demonstrate its commitment to sustainable growth and future readiness by channeling MXN 964 million into various capital expenditure projects, such as the expansion and remodeling of the Monterrey Airport Terminal, further cementing its operational capabilities and anticipating future demands.
With a measured approach towards its finances, OMA achieved a net debt to adjusted EBITDA ratio of 1.0x on a total debt of MXN 10.7 billion, maintaining healthy liquidity with MXN 2 billion cash on hand at the quarter's end. The alignment between their debts, earnings, and cash flow illustrates OMA's financial robustness and readiness to embark on future ventures while servicing their existing obligations.
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Greetings, and welcome to the OMA Third Quarter Conference Call. [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.
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 Pérez Pliego. Please are 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 done our control.
And with that, I'll turn the call over to Ricardo lines for his opening remarks.
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 9th 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% our total passenger traffic and 3.4% of OMA's total aeronautical and non-aeronautical revenues. Regarding recent regulatory changes, on October 4, 2023, the Civil Aviation Agency and 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 2 weeks that followed, we conducted a thorough review of these 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 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. 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 MXN 2.5 billion, and adjusted EBITDA margin reached 79.4% and 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 approved traffic growth were to Toluca, Queretaro, Cancun, Santa Lucia and Mexico City. Most of them consider business routes. On aggregate, these 5 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 MXN 2.5 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 MXN 964 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, Torreón, Culiacan and Durango terminal buildings. Reconfiguration of the Mazatlán 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 Ruffo Perez del Castillo, who will discuss our financial highlights of the quarter.
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, Monterrey and Reynosa Airports. VIP lounges increased 31.5% as a result of the increase in passenger traffic and the opening of the Reynosa lounge in August 2023 as well as the Tampico launch in May 2023 and Ciudad Juarez in November 2022. Diversification activities increased 8.3% as 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 MXN 3.2 billion in the quarter.
Construction revenues amounted to MXN 719 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, contract service and basic services caused as a result of higher activity in our airports and inflationary effects. Major maintenance provision was MXN 95 million compared to MXN 51 million in 2Q, '22. Almost third quarter adjusted EBITDA was MXN 2.5 billion and the adjusted EBITDA margin was 79.4%. Our financing expense was MXN 272 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 MXN 1.3 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 MXN 1.3 billion, and cash at the end of the quarter stood at MXN 2 billion. On September 20, we made the payment for the second installment of the ordinary dividend amounting to MXN 500 million. In accord with the resolutions of our shareholder meetings in April. At the end of the quarter, total debt amounted to MXN 10.7 billion, 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 Instructions] Our first question comes from the line of Pablo Monsivais with Barclays.
Ricardo, Ruffo, Emmanuel. I have 2 questions. The first 1 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 this increase in the TUA is in any way related to the new tariff methodology?
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 bases 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.
And regarding your second point, Pablo, the discounts are totally unrelated from the new basis. There as 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 MNX 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.
Next question comes from the line of Guilherme Mendes with JPMorgan.
I have 2 as well. The first 1 is on margins. It's -- 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 revenue impact?
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 taxi ways 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.
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?
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 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.
Our next question comes from the line of Rodolfo Ramos with Bradesco BBI.
Just a clarification on the previous 1 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.
Just for the next 2 years -- 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 in the past.
Okay. So it is backward looking. 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 and particularly on the cap of excess surplus, this 3% cap. I'm not sure if you're able to quantify or 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?
I think the new basis what they are trying to establish is to have a more precise traffic vector when we negotiate tariffs with them. So starting in the negotiation of 2031, what will happen is there will be a look back for the -- the previous 5-year period. So in our case, it would be the '26 to 2030 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. In the past, just to give you some -- in the past, 4 MDP 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 or we will always be above the negotiated traffic. And I think that this [indiscernible] traffic that gives more clarity and more transparency as to the traffic vector that we will negotiate on our tariff revisions.
Perfect. Very clear. And just more on the business and just your second question. I don't know if you can share your traffic growth expectation for next year. I mean, how -- and how much are you factoring in for an impact from the patent with the engine recall, Acapulco, of 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, the -- I think it's already incorporated the patent with the issue. We've been working closely with airlines also with the manufacturers. 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?
Our next question comes from the line of Alberto Valerio with UBS.
Hope everybody who works at OMA and Acapulco airport is fine today. My question is related to the regulatory framework. It's hard to us to understand that we have a very few changes on the regulatory framework and put this together is the government speech of decrease in tariffs by 10% to 15%. If you have a similar CapEx similar discount rates and tariffs decreasing by 10% to 15%. Can we assume that will be harder from now on to get maximum tariffs. It will be running close to 90% or is it something else?
So yes, as you mentioned, there are a little more dedication to the tariffs. I think the main changes that we get clarity and takes away some subjectivity before relative to the previous basis. And with respect to reaching maximum tariffs, I mean I think it's going to be -- in the case of our existing MDP cycle, which, as you know, ends in 2025, we probably are going to be around 97% for this year and perhaps a similar percentage the following years. And for the next tariff review, I mean, based on the traffic vector, I mean, obviously, our goal would be to reach the 100% level in the following ordinary tariff review.
Our next question comes from the line of Bruno Amorim with Goldman Sachs.
Actually, I have 2. The first 1 is a clarification on the reduction of TUA. I understood that you mentioned that you're going to lower TUA 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 in TUA, 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 TUA which, I guess, accounts for the majority of your revenue, and if you expect no changes to your tariffs in the MDP 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, I'd like to have your help to better understand the big picture around the new set of rules for the MDP. 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. So we are talking about higher concession fee, lower tariffs the expiry date of the contracts have not changed, and it will be good. You have some confirmation from your side, if you are not discussing to extend the concession. On the CapEx as well, the feedback from your peers is that the CapEx plan for the MDP will likely not change as a result of the new regulation. So if you 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? What are we missing here?
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 into the reference value. There will be many variables that will be moving from now to the '26 negotiation, and this concession tax 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 will be the percentage compliance given that these TUA discounts could have some impact on traffic as well. Luis, do you want to add something?
Well, in preparation for the next MDP 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 its utilization before increasing the size of the terminals for investing in additional infrastructure. So that's something that we'll be working closely in the next couple of years as well.
And if I may, just 1 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 still grow next year? Or directionally, what do you think can happen given the extent of the exposure of the 2 main low-cost carriers in the country? Any guidelines you could provide at this point in time?
It's -- as you said, it's difficult to assess right now what will be the impact with the Pratt and Whitney engine issue. But what I can tell you is we are expecting some small growth in the aero side of the business for next year.
Our next question comes from the line of Juan Mercado with GBM.
Congrats on the results. My question is regarding the change in the [indiscernible] rate of return calculation from focus on equity returns towards WACC kind of calculation. Do you expect to change your capital structure given this change -- are you evaluating this? Or are you comfortable with the current structure?
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.
Our next question comes from the line of Jay Singh with Citi.
My first one is, would OMA ever consider investing in airports outside of Mexico?
We're always open to understanding -- to looking at opportunities. We don't have, at the moment, any concrete transaction in the pipeline, but we're always opening to -- for opportunities outside.
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?
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. They have mentioned that this has been the end of this modifications in the regulatory process.
Our next question comes from the line of Edson Murguía with Summa Capital.
My question, I have only 1 related to cost of services this quarter increased 22%. So could you give us a little bit more color that what happened specifically?
So most of the increase is related to maintenance and utilities expense as 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.
Our next question comes from the line of Gabriel from with Scotiabank.
Yes. Just a quick follow-up question. Considering that the 10% decrease on 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 MDP? And also the concession fee to my understanding, it also considers the nonregulated portion of the business. How will this portion of this impact will be offset by tariffs. And also if you can clarify again the CapEx -- the CapEx movement for the next 2 years will be resulting from this amendment, I mean these regulatory changes?
So in the next review, certainly the increase in the concession tax and the rate of 9% will be incorporated into the calculation. Now the discount of the 10% TUA 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 tariff -- maximum tariff in 2026. Now with respect to the CapEx referral in the aggregate is MXN 1.2 billion. So September 2023 purchasing power. And that's around [ MXN 890 million ] for 2024 and -- and the remainder around MXN 400 million for 2025 which represents roughly 25% of the regional CapEx commitment in 2024 and 13% in 2025.
Okay. And in the case of the concession fee it does affect the commercial or the nonregulated portion of the business? And how can -- will you be able to offset it only through increasing tariffs for the next MDP? Or is there any other leeway you can negotiate there?
So -- and this hasn't changed from the previous basis. The formula for operational costs 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 [ TUA ] in the concession tax, and we will have to see how to adjust our rates to recover some of this increase.
As it has always been the case.
Our next question comes from the line of Fernanda Recchia with BTG Pactual.
Just a follow-up to understand a little bit further this towards discount . This 10% extraordinary discount, it was given just to avoid you to surpass the maximum amount of the rate? Or it was to make the airfares more competitive just because you mentioned that you expect to reach 97% of maximum rate this year. So the end, you're just low.
Could you repeat the first part? Could you repeat the first part, Fernanda? -- there was bad communication. Could you repeat it, please?
Yes. No, sure. I just wanted to understand the rationale of the government to up by this 10% of extraordinary discount. Was it just because if you don't apply it, we would probably surpass the maximum rate. Or it is a measure to incentivize to lower air tariffs. This is the first one. And then I make my second one.
I think it was hard to speak on the real, but I think that the rationale is trying to incentivize.
All right. No, because you mentioned that you're expecting to reach 97% 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?
Yes, we will be slightly above 97%. The reason is this for this year, it will only be 2 months and that 97% accounts for the whole year.
Right. And second, still on this topic. We know that this is a nearly 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 this 10% is in line with historical average?
We, from time to time, enter into agreements for new route openings and other strategies with airlines. But we haven't had general discounts such as these for many years.
Our next question comes from the line of Alan Macias with Bank of America.
I just have, I guess, 2 questions. And 1 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?
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 revenues.
And just 1 more question. On the engine recall impact, any impact you have seen as of October during October?
Yes. We have seen that [indiscernible] fees in databases such as [ OAT ] have been trending down over the last month or so. So yes, we do believe that what is reflected right now in the system is already incorporating what's known of the recall of brand leading engines at least for the winter season.
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 leases, trying to extend the life of some of their other aircraft. So let's -- in the last couple -- in the next 2 months, we will have more clarity what will be the real impact next year.
Our next question is a follow-up question from the line of Bruno Amorim with Goldman Sachs.
Yes. I just wanted to clarify 1 specific point. What leverage or what that specifically will be considered for the calculation of the cost of capital is the debt at the moment of the MDP discussion, is it a 5-year average? And also, to the extent that you might have corporate that or in the event that you invest abroad and you have that attached to it. Will they look just at the debt at the asset level in Mexico? Or will they look at OMA as a whole?
I think in the basis that we published, there are some debt to capital ratios that are averages that includes other airport groups as well. And it's only that related to assets in Mexico, and it excludes that is not funding operations in Mexico.
There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.
Thank you all for participating today. Ruffo, Emmanuel and I are always available to answer your questions, and we hope to see you soon. Thank you, and have a good day.
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.