Grupo Aeroportuario del Centro Norte SAB de CV

BMV:OMAB

Earnings Call Transcript 2024-Q3

[Operator]

Greetings, and welcome to the Grupo Aeroportuario del Centro Norte, OMA, Third Quarter 2024 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded.

At this time, it is now my pleasure to introduce Emmanuel Camacho, Investor Relations Officer. Thank you. You may now begin.

[Emmanuel Camacho, executive]

Thank you, Rob, and good morning, everyone. Welcome to OMA's Third Quarter 2024 Earnings Conference Call. Joining this morning 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 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.

I'll now turn the call over to Ricardo Duenas for his opening remarks.

[Ricardo Duenas, executive]

Thank you, Emmanuel. Hello, everyone. We appreciate your presence on this call today. First, I will highlight our operational performance, financial results, and CapEx development. Finally, we'll be pleased to answer some questions. During the third quarter, OMA passenger traffic reached 7 million, a decrease of 5.3% versus the third quarter of last year.

This decrease was mainly related to the Pratt & Whitney engine recall, which continues to have an impact on the fleet of the Mexican low-cost carriers. On the domestic front, passenger traffic declined by 7.4%, excluding Acapulco, where the destination continues to recover from the impact of Hurricane Otis in October 23, '23. Passenger traffic decreased by 5.8%. The most impacted airports, excluding Acapulco were Monterrey, Culiacán and Ciudad Juárez, which together accounted for 80% of the total domestic capacity decline during the quarter.

Despite this reduction, higher occupancy factors have partially mitigated the impact. On average, these 3 airports saw a 2.7 percentage point increase in load factors, indicating that underlying domestic and demand remains strong, despite seat capacity being constrained by the ongoing engine revision. In contrast, international passenger traffic reached a historical quarter record level of 0.9 million passengers, an 11% increase as compared to the third quarter of last year. This growth was primarily driven by the Monterrey Airport. We saw significant growth on routes to Orlando, Las Vegas, Miami, Atlanta and Chicago. These 5 routes accounted for approximately 60% of the total increase in international passenger traffic during the quarter.

Additionally, during the quarter, we launched 4 new international routes, all based at Monterrey Airport, further enhancing our international connectivity. We're also expecting the start of operations of more than 10 new routes from Monterrey to various destinations in both Mexico and the U.S. set to be launched by the end of this year and early '25. Moving on to OMA's financial performance. The sum of aeronautical and non-aeronautical revenues achieved a record performance of MXN 3.2 billion, mainly guided by the positive performance of our non-aero revenues. Despite a 5.3% decline in total passengers, non-aeronautical revenues increased by 19% as a result of our successful execution and the consolidation of several strategic commercial and diversification projects throughout the year. Commercial revenues grew 17% compared to the third quarter of last year, primarily driven by restaurants, VIP lounges and parking revenues, along with several other categories.

Commercial revenue per passenger rose by 24%, reaching MXN [ 61 ] per passenger in the third quarter. Revenues from restaurants, retail and car rental grew driven by the contribution of commercial spaces opened during the previous quarters. VIP lounges growth is attributable to higher active rates and lease renewal of third parties. Diversification revenues increased 27%. OMA Carga contributed most of this quarter growth with an increase of 32%, mainly due to higher revenues from ground and air cargo operations in Monterrey. Hotel services grew by 25%, mainly due to a double-digit increase in average room rate per night on both hotels as well as higher occupancy rates.

Moving on to the capital expenditures front. During the quarter, we invested MXN 581 million in MDP investment, major maintenance and strategic projects. In September '24, we inaugurated the expansion and remodeling project of the terminal building at Durango International Airport. The project involved the construction of over 800 square meters and the renovation of 3,000 square meters. Within this investment, Durango Airport will have the capacity to handle up to 760,000 passengers annually.

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 to everyone. I will briefly review our financial results, and then we will open the call for your questions. Aeronautical revenues decreased 3.4% relative to the third quarter of last year, driven primarily by the lower passenger traffic with a 7.4% decrease in domestic passenger traffic, partially offset by a 10.8% growth in international passengers.

Non-aero revenues increased 18.9%. Commercial revenues increased 17% and the categories with the highest growth were restaurants, VIP lounges, parking and retail. Diversification activities increased 26.7%, mainly due to strong performances of OMA Carga and hotel services. Total aero and non-aeronautical revenues grew 1.4%, reaching MXN 3.2 billion in the quarter.

The cost of services and G&A expenses increased 6.1% compared to the third quarter of last year as the company has made efforts to contain its cost base despite inflationary pressures on external services and purchases. Concession tax increased 73% to MXN 262.3 million as a result of the rate increase from 5% to 9% applied to revenues generated by OMA's airport concessions pursuant to the Mexican Federal duties law.

Under the tariff 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 success position tax amounts paid will begin to be recovered through the maximum tariff.

In the third quarter of 2024, this 4% surplus of concession tax over aeronautical revenues amounted to MXN 101 million, equivalent to 3.1% of the sum of OMA's aeronautical and non-aeronautical revenues. This surplus is included in the MXN 262 million recorded as concession tax expense for the quarter.

Major maintenance provision was MXN 75 million as compared to MXN 95 million last year. OMA's third quarter adjusted EBITDA reached MXN 2.4 billion and the adjusted EBITDA margin was 75.4%. Excluding the surplus of concession tax and its impacts on OMA's financial results, in the third quarter of 2024, adjusted EBITDA would have been MXN 2.6 billion with a margin of 78.4%.

Our financing expense amounted to MXN 272 million, practically unchanged relative to the third quarter of last year. Consolidated net income was MXN 1.4 billion in the quarter, which decreased 2.1% as compared to the third quarter of 2023. Turning to our cash position. Cash generated from operating activities in the third quarter amounted to MXN [ 1.8 ] billion, and cash at the end of the quarter stood at MXN 2.4 billion.

As of September 30, total debt amounted to MXN 10.9 billion, and we ended the quarter with a healthy net debt to adjusted EBITDA ratio of 0.95x.

This concludes our prepared remarks. Rob, please open the call for questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Rodolfo Ramos with Bradesco BBI.

[Rodolfo Ramos, analyst]

Congrats on the results. A couple, if I may. Can you give us a sense on where we stand regarding the ground and aircraft coming back into the market? I don't know if you have already seen these coming through? And how do you see them leading to better supply there?

And second, if I may, related to your MDP, we saw IATA this morning citing concerns over airport fees and limited visibility into the process. So can you just remind us how airlines get involved in the process? And if there's any detail that you can share regarding your MDP negotiation, I know it's early, but specifically, if you see any large CapEx projects that you envision in Monterrey that can lead to a similar setup as we saw with ASUR and GAP. So those will be my 2 questions.

[Ruffo Pérez del Castillo, executive]

This is Ruffo. So yes, we were -- based on seats published under the systems, we're seeing an increase in seat capacity starting in November and December, mainly in the Monterrey Airport. There are several new routes confirmed by both Volaris and Aeromexico. We shall see what the impact is. But yes, we are expecting a stronger first quarter based on the capacity announcements by these airlines primarily.

[Ricardo Duenas, executive]

And on the MVP side, we're still working. It's a bit early to have some numbers. What I can tell you is that -- we are working very closely with the team. We're also working very closely with [ VINCI ] to come up with a very optimized CapEx that will not sacrifice obviously quality or security and it's able to cope with the projections of traffic, but we'll be an optimized CapEx going forward. During this process, you have to consult with all the different stakeholders not only airlines, but every authorities as well and everyone that has a say within the airport, so we're consolidating all those comments, and we will have more visibility into where we are during the first quarter of next year.

[Operator]

Our next questions are from the line of Fernanda Recchia with BTG.

[Fernanda Recchia, analyst]

Two questions on our side as well. So the first, could you provide any update regarding the new airport in Monterrey? If you could provide any color if the government has decided if this airport will be changed for commercial aviation? And also, if you have any color, if this is the case, how will be the capacity of this airport would be very helpful.

And second, kind of related with the previous one, but maybe if you could provide us an outlook for traffic for next year. I mean, you already mentioned about the aircraft grounding, but any color you could give us regarding traffic for 2025 would be very helpful.

[Ricardo Duenas, executive]

Sure. Regarding the new airport of the Norte, as you know, the only thing that happened was that it changed -- now the military is operating it. At the moment, the Ministry of Communication and Transportation haven't mentioned anything about the intention of building a new airport there. Even if they did, there's a lot of infrastructure that would have to be considered before that would happen. But at this point, that project is not something that we see happening in the short run.

[Ruffo Pérez del Castillo, executive]

And with respect to your second question, Fernanda, for this year, we're expecting somewhat better performance than what we have year-to-date. So below the 3% mark, that's our target for the year. Next year, we're expecting an increase between the low to mid-single digits.

[Operator]

Our next question is from the line of Jens Spiess with Morgan Stanley.

[Jens Spiess, analyst]

I have 2 questions. One relates to the next MDP cycle. If you could give any guidance of like the CapEx levels you're foreseeing. I know it's very early and difficult to anticipate, but just like broad like CapEx per capita, in the next cycle versus this cycle? And also, if there are any particular assets beyond Monterrey that you see like attractiveness to invest at the moment?

And the second question is relating also to traffic. I mean you already mentioned the fourth quarter scheduling data and for the full year of next year. But we're seeing quite strong numbers for scheduled flights in the first quarter of next year. So that number you just mentioned seems actually a bit low. Are you not seeing the same?

[Ricardo Duenas, executive]

Sure. The first part, the MDP, as we mentioned, still early to have some numbers. We're still working internally. As we mentioned, we're working on an optimized CapEx that will not sacrifice, obviously, quality, safety and it's able to cope with the projections of traffic, but will be a very optimized CapEx, and we're working very closely with VINCI to have the best-in-kind technology and optimize CapEx. In terms of new assets, we don't have any concrete things at the moment, but we're always looking for opportunities to expand our footprint outside of Mexico. And in terms of traffic?

[Emmanuel Camacho, executive]

Yes. We're seeing large increases in the seat capacity. I think we are conservative in the load factors that those new routes will be generating. So we -- based on first quarter performance, we would have to adjust or validate our forecast. But yes, right now, we are not assuming the same load factors that we're seeing right now apply to the new capacity.

[Ricardo Duenas, executive]

And also, we think we already reached the bottom of the Pratt & Whitney incident, but there's still a lot of uncertainty of the pace of recovery, at least from our side.

[Operator]

Our next question comes from the line of Jay Singh with Citi.

[Unknown Analyst]

I guess most of my other ones were already answered, but the one I have is, how do you think the pace of near-shoring-related growth continues going into 2025?

[Ricardo Duenas, executive]

Yes. Thank you for your question, Jay. Yes, our expectation is that near-shoring will continue. We expect that not only in terms of business -- our business traffic, but also in the cargo operations that we've seen that activity happening in air and land cargo as well as their industrial parks. So yes, we're expecting that activity to continue and to reflect in our numbers.

[Operator]

The next question is from the line of Federico Galassi with TRG.

[Federico Galassi, analyst]

I have 2 questions. The first one in the non-aeronautical side. The first one is the trend of revenue growth continues to be accelerating, looks like that. The question is, this is sustainable because in some lines, you have the higher revenues in your history. So the first one is, how do you see that? This is more related with all the change, in particular in the Monterrey Airport. That is the first question. And the second one, you announced 4 international new routes, 3 are regular. Do you see -- how do you see this one in the next months, if you want, in particular, for the international new lines -- new routes?

[Emmanuel Camacho, executive]

Federico, so yes, on the [ non-IATA ] side, since VINCI acquisition, this has been an area of a big focus of the company. Different categories have performed really well. I would just summarize in the case of food and beverage, for example, we did a number of tenders over the previous quarters. And as the leases on those tenders start to get reflected and the opening of new outlets related to those tenders are opened, we're seeing a pickup in income per passenger as well as in total revenues despite the passenger decline.

In the case of parking, it's mostly related to tariff adjustments. And in the case of VIP lounges, it's a combination of new VIP lounges that were opened in 2023. And now we're seeing the full year or full quarter effect of those ones. For example, we will continue to see a positive trend. We just finished the [indiscernible] VIP. So in the next quarter, for example, that would also start contributing as well and also improved lease terms with third-party VIP operators and in the access rates that we have in the OMA lounges that we manage ourselves.

In the case of international routes, yes, we see a clear trend by the airlines to focus on international capacity. Even with the new seat capacity and the new planes coming online, we continue to expect a strong performance of the international passengers above those of the domestic market. So we expect the trend to continue. And it's part of the strategy of positioning Monterrey as a connectivity hub. So we're working with airlines to continue that trend.

[Federico Galassi, analyst]

And one question -- sorry, will continue. But one question, you have 2 new flights, Tokyo and Seoul. This is more related with the lack of capacity of [ Chihuahua ] Mexico Airport is something that you are looking for to expand, but obviously, it looks like this is more nearshoring team. But how is your approach of that? And again, is this more related to the lack of capacity of Mexico airport -- [ Chihuahua ] Mexico airport?

[Emmanuel Camacho, executive]

I would say domestic capacity has been the one that has been moved away from Mexico City airports towards Toluca and Santa Lucia AIFA airport with international slots being preserved primarily. That's our view there. So I think that it's most related to catchment area demand in the Monterrey area itself.

[Federico Galassi, analyst]

Okay. And in -- sorry, in diversified revenues, you have a jump in the last 2 quarters in OMA Carga. This is more related to new contracts. It's more space that you have in your airport. And the second one is there is another jump in Industrial Services. Do you have more industrial parks or you're increasing your capacity in industrial parks?

[Ruffo Pérez del Castillo, executive]

So the footprint of the industrial park has not changed, but what has changed is that we built a number of warehouses in 2023 and 2024 that are now generating rents as compared to last year. So that's one of the reasons. And there is also an FX rate effect. 99% of the rents in the industrial park are denominated in U.S. dollars. So that also benefited. We are currently in construction of 2 warehouses. And once those warehouses are finished, the park would be 98% -- the available land for development would be about 98% occupied. So we are in the process of seeing how to expand within the Monterrey perimeter -- airport perimeter, the industrial park. So we continue to see a strong performance there as well.

And in terms of cargo, it's a mix of everything you said. We have worked throughout this year, improving most of the processes that we have in land and air cargo. So it's a combination of having more efficient processes, increasing the business that we're bringing from the existing clients as well as landing new accounts. As an example is Lufthansa that we landed during this last quarter.

[Federico Galassi, analyst]

Okay. Congrats for the results, in particular in the commercial segment.

[Ricardo Duenas, executive]

Thank you.

[Operator]

Our next questions are from the line of Isabela Salazar with GBM.

[Isabela Salazar Leipen, analyst]

This one is along the lines of the question previously asked regarding the commercial revenues. I was wondering if you're expecting to continue to see double-digit growth in this side of revenues? And also if the higher commercial revenues per passenger have something to do with having more international passengers in the last quarter.

[Emmanuel Camacho, executive]

Isabela, so in terms of the level of commercial revenue per passenger, I think at least for the next few quarters, it would stabilize around the current levels of MXN 60. So the growth rates will not necessarily be as high as they were in 3Q compared to the previous quarter. But yes, in absolute terms on a per-tax basis, we do expect this data to be sustainable. Yes, there is some benefit of maybe higher purchasing power or willingness to spend of international passengers. But in the case of the main categories that we saw increases, which are parking, food and beverage, we are not necessarily related to specific international passengers. So I think it's an improvement in the overall income per passenger in general as opposed to just the international contribution.

[Operator]

Our next question is from the line of Andressa Varotto from UBS.

[Andressa Varotto, analyst]

So my first question is on the -- tariff. I remember that last year, the government...

[Ricardo Duenas, executive]

Sorry. Andressa, your line -- we're not -- we cannot hear you very well. There's a lot of noise in the background.

[Andressa Varotto, analyst]

Can you hear me better now?

[Ricardo Duenas, executive]

Primarily, yes.

[Andressa Varotto, analyst]

Okay. So my question is about the discounts that you implemented last year, if these are still in place and what you expect for the next year?

[Ricardo Duenas, executive]

Sure. For next year, as was part of the agreement with the government within the October negotiation of last year was to have an inflationary adjustment as of the first day of January. And at the moment, we are operating at a 99% compliance with the maximum tariff.

[Andressa Varotto, analyst]

And my second question would be on U.S. elections and potential changes to nearshoring or [ USMP ] agreement, if you have anything that you're tracking on these systems.

[Ricardo Duenas, executive]

I think the -- Andressa, the near-shoring activity, we expect it to happen regardless of who wins the U.S. election. We're seeing an increased activity in business side of traffic. We're seeing an increase in activity also in the industrial parks, not only in square footage, but in terms of pricing as well. And the same thing is happening in cargo in land and air cargo, and we expect this to continue regardless of who wins the U.S. election.

[Operator]

Our next question is from the line of Alan Macias with Bank of America.

[Alan Macias, analyst]

Just 2 questions. The first one, an indication that the capacity in the Mexico City Airport will be increased in the near term. Have you seen any signals there? And I guess the second question is regarding if you can share what your forecast for international traffic to be the share or the weight of it 5 years down the line?

[Ruffo Pérez del Castillo, executive]

Sure. In terms of the capacity of Mexico City, as you know, the number of operations per hour was reduced from 52 to 42 -- to 42 operations per hour. There has been rumors running around or returning to that previous number, increasing them back to the low 50s, 52 operations per minute. However, there's no official announcement yet; however, there are some rumors. So that's all we know in that front. In terms of the share of international traffic, we currently are operating at 13% of our traffic, it's international. What we have seen throughout the year is as a result of the Pratt & Whitney situation and the shortage of aircraft in the market, most of the airlines have been shifting capacity out of domestic into the international market, looking for yield, and that's why we have seen a very important increase in international traffic. As the Pratt & Whitney situation starts to stabilize, we should expect domestic traffic to improve and probably international traffic to return to the previous growing trend.

[Emmanuel Camacho, executive]

Yes. I'll get back to you, on what we're expecting more or less 5 years down the road. I don't have the number on the top of my head right now.

[Operator]

Our next question is from the line of Guilherme Mendes with JPMorgan.

[Guilherme Mendes, analyst]

Congrats on the results. One quick question on the EBITDA margin. If this meets 70% levels that you guys have been operating something sustainable in the longer term? And on top of the discussions on the commercial front and the possibility of increasing revenues per passenger going forward. Is this something that could materially change your EBITDA margin levels going forward?

[Emmanuel Camacho, executive]

So yes, we believe that this mid-70s adjusted EBITDA ratio should be sustainable. And I mean, we don't expect major variations from what it's currently right now.

[Operator]

Our final question is from the line of Pablo Ricalde with [ Etail. ]

[Unknown Analyst]

I have 2 questions. The first one is on the labor cost. I believe you renegotiated the labor contract this October. So I don't know if you can share the output of those negotiations? Or how should we expect the labor line for 2025? That's my first question. The other one is a follow-up on Federico's question on the aeronautical revenues -- revenue, sorry. We saw this huge increase in lines like food and beverages, duty-free. And I believe most of those improvements are related to VINCI being part of OMA. But how much is left on those lines to be renegotiated?

[Ruffo Pérez del Castillo, executive]

Let me tackle, the first one, the labor, the conversation with the union are still ongoing. So we're waiting to see results in the next month or so. So there's -- we still -- that's still work in progress. No answer there yet.

[Emmanuel Camacho, executive]

With respect to duty-free, it's mostly related to a re-accommodation of the flights that we are doing at the Monterrey Airport. We're now trying to direct most of the international capacity through one of our terminals instead of 2 terminals. So it's going out of Terminal A as opposed to just Terminal C and Terminal A. So that has improved the exposure of passengers to the existing duty-free stores that we have. So that's an operational change that we did in previous quarters, and it's yielding very good results.

[Ricardo Duenas, executive]

But your question, how much is there left going forward? Yes, as a result of it, it's a mix of VINCI coming in, trying to bring best practices from their experience and capitalizing on their experience throughout their network of 70 airports. We have improved a lot of the processes. We have renegotiated a lot of the contracts. We're still working. We think there's some potential. Going forward, we're penciling in projections around similar non-aero revenues per passenger going forward of MXN 60, MXN 62 per passenger.

[Operator]

At this time, we've reached the end of our question-and-answer session, and I'd like to turn the floor back to Ricardo Duenas for closing remarks.

[Ricardo Duenas, executive]

We would like to thank everyone for participating in this 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]

Thank you. This concludes today's teleconference. We thank you for your participation. You may now disconnect your lines at this time.