Grupo Aeroportuario del Centro Norte, S.A.B. de C.V.
Q4 2020 Earnings Call Transcript

Published: 16 Feb 2021

[Operator:]

Good morning. My name is Emma, and I will be your conference operator. All lines have been placed on mute to prevent any background noise. This is OMA’s Fourth Quarter 2020 Conference Call. There will be a question-and-answer session after the speakers’ opening remarks and instructions will be given at that time. If you did not receive the report, please contact OMA’s IR department and they will e-mail it to you. Please note that this call is for investors and analysts only and questions from the media will not be taken, nor should the call be recorded on.

[Emmanuel Camacho:]

Thank you, Emma. Good morning, everyone. Thank you for standing by and welcome to OMA’s fourth quarter 2020 earnings conference call. Ricardo Dueñas, OMA’s CEO; and Ruffo Pérez Pliego, CFO, will be joining this morning and will discuss OMA’s fourth quarter 2020 results. 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 maybe beyond our control, which includes the impact of COVID-19. I will now turn the call over to Ricardo Dueñas.

[Ricardo Dueñas:]

Thank you, Emmanuel. Good morning to everyone and thank you for joining us today. I hope that all of you, your families are safe and healthy. Today we look back at an abnormal year 2020, in which COVID-19 impacted significantly our traffic levels and results of operations. In 2020, we served the 11 million passengers in all our airports. This is equivalent to the number of passengers handled in our Monterrey Airport alone during 2019. I am proud to say that our actions taken to mitigate the impact of COVID-19 resulted in resilient and remarkable results for the year even with half the passengers we were used to handle. In order to cope with the pandemic effects, in 2020 we implemented initiatives to optimize the utilization of our terminal buildings through temporary partial closures, as well as to reduce cleaning and security costs and electricity consumption. We also reduced headcount across various levels of the organization. As a result, even with passenger traffic declining 52%, we reach an adjusted EBITDA of MXN2.5 billion, implying a margin of 62%. Additionally, during the year, we implemented a number of standards regarding safe travel for the benefit of our employees, customers and passengers in order to increase their confidence when visiting our airports. All of our airports were granted the safe travel certification given by the World Travel and Tourism Council, and our Monterrey Airport was granted the airport health accreditation from Airport Council International. Turning to our fourth quarter, while our overall results were stronger than during the second and third quarters, we started experiencing a slowdown in our passenger recovery in December. We attribute this to the uncertainties related to a second wave of contagions from COVID-19 and the increased health alert levels in most regions of the country towards the end of 2020 and early 2021, including Guadalajara and Mexico City.

[Ruffo Pérez Pliego:]

Thank you, Ricardo. Good morning, everyone. I will briefly review our financial results and then we will open the call for our questions. Turning to OMA’s fourth quarter financial results. Aeronautical revenues decreased 36.3%, driven by the 44.5% increase in passenger traffic. Non-aero revenues decreased 35.1% with commercial revenues having the largest impact. Commercial revenues decreased 37.7% and the categories with largest impact were parking, restaurants and retail. Parking revenues declined 53%. The decrease is mostly driven by slower traffic recovery in the Monterrey Airport relative to the average of other airports. Restaurants and retail decreased 37.2% or 38.8%, respectively, due to a decrease in the fixed rents and participation on sales, as well as some discounts that were applied during the quarter. Diversification activities decreased 33.3%, mostly driven by lower revenues from hotel services. Total Aeronautical and non-aeronautical revenues were MXN1226 million. Construction revenue increased 13.9%. As you know, this is a non-cash item that is required under applicable accounting standards. It is equal to construction cost of improvements to construction assets, so it has no impact on earnings. The cost of airport services and G&A expense decreased 17.7%. During the quarter our payroll decreased 4.5% as a result of reduction of headcount during the third quarter. We recorded savings on electricity and subcontracted services, as we have maintained a strict cost control, despite the sequential increase in the level of passengers. Additionally, minor maintenance costs decreased 18.6% as a consequence of deferrals of non-essential works. As a result, OMA’s fourth quarter adjusted EBITDA was MXN853 million and the adjusted EBITDA margin was 69.6%. During the quarter, we recorded an increase in the major maintenance provision of 55% to MXN208 million. This reflects the approval of the major maintenance projects in the new MDP that was approved by the aeronautical authorities in November. The recording of this provision also had an impact in deferred taxes, which reduce the effective tax rate for the quarter. The effective tax rate for future quarters is expected to go back to normalize levels of around 30%. During the quarter, our financing expense was MXN270 million and consolidated net income was MXN239 million. The cash generating from operating activities in the third quarter amounted to MXN602 million, mainly due to a lower operational result. Cash at the end of the quarter stood at MXN3 billion.

[Operator:]

Thank you. Our first question comes from the line of Alejandro Zamacona. Please state your company name and ask your question. Thank you.

[Alejandro Zamacona:]

Yeah. Thank you. This is Alejandro Zamacona from Credit Suisse. Ricardo, Ruffo and Emmanuel thank you for your call. My first question is on the commercial business and the discounts we have been seeing in the Max contracts. So what can we expect for 2021? Is it fair to say, you will continue to run these kinds of discounts to simulate demand based in traffic decline? And my second question is on the airport fees. You understand that since last week, we’re now charging a failure fees. So relative to the maximum tariffs, how close you are now with these recent increase and if there is some additional fees in some airports? Thank you.

[Ricardo Dueñas:]

Thank you. Thank you, Alejandro, for your question. For the first part, we don’t have a policy for this year. We will see how things evolve with traffic. So far the only discounts that we’ll be granting to our tenants were the ones we have mentioned in the past from July to December, which was variable on passenger traffic. But we -- so far, we hadn’t planned to extend that for the first quarter of this year. But as the epidemic evolves, we will evaluate. And for airport feasts, our plan has been to pass -- to make the pass-through to the maximum tariff in one year. You’re correct, we implemented the first increase a week ago, the beginning of this month and we will implement the second increase somewhere around January next year to reach the 100% maximum rate.

[Alejandro Zamacona:]

So, could we expect another similar increase in airport fees, similar to what we saw last week?

[Ricardo Dueñas:]

Not for this year. You will experience it probably somewhere in January next year.

[Alejandro Zamacona:]

Okay. But the increase for next year would be similar to increase…

[Ricardo Dueñas:]

Yes.

[Ruffo Pérez Pliego:]

Yes. It will be around, yeah, half of the increase was this year, half of the increase will be in January, one year pass-through.

[Alejandro Zamacona:]

And that applies speaking over, I mean, general terms for all airports, right?

[Ricardo Dueñas:]

Correct.

[Alejandro Zamacona:]

Thank you.

[Ricardo Dueñas:]

Thank you, Alejandro.

[Operator:]

Thank you. Our next question comes from Mauricio Martinez. Please state your company name and ask your question.

[Mauricio Martinez:]

Hi. Good morning. This is Mauricio from GBM. My question -- I have two questions. Thanks firstly for taking my question. My first question is regarding the debt refinancing. I would like to know if you expect the current interest rates levels to weight your financial costs, comparing with the current debt that the bond is maturing in June and maybe you can give us any color on the -- which level should be comfortable for you in terms of net debt-to-EBITDA going forward? That would be my first question. And the second question is on the costs reductions that we saw this quarter, we saw impressive cost cutting results. How sustainable do you expect these cost reductions to be in the next quarters and as the traffic level starts to recover, do you expect these cost levels to maintain? That would be my two questions? Thank you.

[Ricardo Dueñas:]

Thank you, Mauricio. I’ll answer the first part. For the bond issuance, the specific terms of the bond are still being analyzed, but we would expect an insurance of about MXN3 -- MXN3.5 million -- billion, MXN3,500 million of which MXN3,000 would be used to refinance the bond and MXN500 million to fund the additional CapEx under the MDP. We expect interest rates to be very similar to the ones we currently have.

[Ruffo Pérez Pliego:]

And regarding the second question on sustainability of our cost reduction measures, in the first quarter of this year, we will be having annual reviews on some of our contracts such as cleaning, security and labor contracts. So certainly you should expect at least an inflationary increase in many of those line items. However, saw -- in terms of headcount, we believe the level of headcount should be maintained irrespective of traffic recovery expected in the -- in 2021 relative to 2020. And regarding electricity, certainly, in terms of zero watt consumption last year on an annual basis our consumption was reduced around 33% year relative to 2029 -- 2019. But some of that consumption will be lost when traffic recovers. But we have made a lot of investments in substituting, for example, LED lights in many of our airports, in runways and in terminal lighting. So we should get back to the 2019 levels anytime soon.

[Mauricio Martinez:]

Wonderful. Thanks. Thanks for your -- I think it was very clear. Thanks.

[Operator:]

Thank you. Our next question comes from Rodolfo Ramos. Please state your company name and ask your question. Thank you.

[Rodolfo Ramos:]

Hi. Good morning, gentlemen. My name is Rodolfo Ramos from Bradesco BBI. Most of my questions have been answered to this point. But just maybe, if you can elaborate a little bit on the -- on this restatement or these modifications to previous statements that will be very much appreciated? Thank you.

[Ruffo Pérez Pliego:]

Sure. As Ricardo mentioned during the call, those were non-foreign substantial changes, specifically to the ex VIR al files that have been filed with a CNVB and the Bolsa and many other changes, if not most, refer to making cross references to certain sections of the same file. So it’s basically that. There is no change in any financial numbers, and certainly, there is no substantial change at all.

[Rodolfo Ramos:]

Yeah. Thank you and congratulations on the results.

[Ricardo Dueñas:]

Thank you.

[Ruffo Pérez Pliego:]

Thank you.

[Operator:]

Our next question comes from Murya . Please state your full name and company name and ask your question. Thank you.

[Unidentified Analyst:]

Hi. Good morning. Do you listen?

[Ricardo Dueñas:]

Yes.

[Ruffo Pérez Pliego:]

Yes.

[Unidentified Analyst:]

Okay. Thank you. I am actually Murya from Sumatat . I have two questions. The first one is related to the tender offer from Fintech, because I was reviewing the amendment filings with the Securities Exchange Commission, and it says that, even in you -- in your report as, the ban allows assembler said that, they probably had comply all the element -- regulatory elements in the first week or the last week of January or first week of February, if I correct. So I was wondering you can give us more cover about if it’s still ongoing or it’s going to be on hold? And the second one is regarding to, what are your expectations for passenger traffic recovery, not only for 2021, I mean, what are your explanation to be at the same level before the pandemic, because many analysts says that probably is going to take more time that we will expect? Thank you.

[Ricardo Dueñas:]

Thank you. Thank you, Murya, for your question. Regarding the first part, the tender offer, our information is the same that we reported on December. Our understanding as that -- is that they were going through the regulatory approvals. But if this goes through, we expect no relevant changes in OMA operations where decision making. Before the transaction, Fintech had indirect control of OMA through ICA and SETA. So the sale to SETA shares to Fintech is mainly an administrative matter. But the information we currently have is the one we mentioned in December.

[Unidentified Analyst:]

Okay.

[Ricardo Dueñas:]

And for the second part.

[Ruffo Pérez Pliego:]

For this year, certainly, we experienced a slowdown in recovery levels in January, as has already been reported. We do expect traffic to pick up towards the second half of the year once health alert levels are further reduced and the vaccination program is fully rolled out. We expect traffic this year to be between 35% to 30% lower than 2019 and more longer term vision is that we would expect traffic to reach 2019 levels towards the end of 2022 or beginning of 2023.

[Unidentified Analyst:]

Okay. Thank you so much. It was really helpful.

[Ruffo Pérez Pliego:]

Thank you.

[Operator:]

Thank you. Our next question comes from Stephen Trent. Please state your company name before asking your question. Thank you.

[Steve Trent:]

Hi. Good morning. This is Steve Trent from Citi. Can you hear me?

[Ricardo Dueñas:]

Yes. We can.

[Steve Trent:]

Okay. Thanks very much guys. I was just curious if you could maybe provide some longer term color on what OMA might be thinking about outside investments. So it seems, for example, that airport in Tulum might or might not be coming out of nowhere again and tenders here and there in the Caribbean Basin. In the past, you guys have maybe talked about minority stakes in some of these projects and just curious to get your thoughts going forward.

[Ricardo Dueñas:]

Yes. Hi, Trent. Thank you for your question. No. For the Tulum airport, there’s not much information. That’s the formation that we have. I mean, our information is from the regular press, which the government has mentioned, they have the intention to build Tulum airport that will have joint military and commercial operations. But that’s what so far we know. It’s not of interest of OMA to get involved in that airport and I believe it’s not the intention of the government to have private operators in that airport.

[Steve Trent:]

And then more broadly in the Caribbean Basin or Central America any interest at all or?

[Ricardo Dueñas:]

Yes. Yes. Again, we mentioned in the past, we were involved in the Barbados Airport process. We are currently the part of the pre-qualified bidders for the concession process. However, the process has been delayed and we understand it will resume after April this year.

[Steve Trent:]

Okay. Very helpful. Let me leave it there. Thank you.

[Ricardo Dueñas:]

Thank you, Stephen.

[Operator:]

Very much. Our next question comes from the telephone line ending 811. Please state your full name and your company name before asking your question. Thank you. You may need to unmute yourself before asking your question. From a telephone line, you can unmute yourself by pressing * 6. Okay, we’ll come back to the question from the phone line later. And we’ll now take a question from Alan Massey. Alan, please state your company name and ask your question. Thank you.

[Ricardo Dueñas:]

We cannot hear you, Alan?

[Alan Macias:]

Can you hear me now?

[Ricardo Dueñas:]

Yes.

[Alan Macias:]

My question is quickly on business traffic. If you can tell us what percentage 2020 represented versus 2019 and what are you looking there in terms of recovery for the business traffic? Thank you.

[Ricardo Dueñas:]

We don’t have a specific figure of how much relative traffic changed year-over-year. Certainly, we know that one of our most affected routes last year was the Mexico to Monterrey route, which is our main route in the OMA system and the traffic in that route is primarily business related. We still see that the leisure destinations and some VFR markets, specifically, like from our Culiacán Airport are recovering faster than our Monterrey Airport. We would expect the business traffic starts to recover more quickly towards the end of the year, once the economic activity is ramped up in the country overall and travel restrictions from international companies are lifted. We do know that a lot of corporates in the Monterrey -- that have operations in Monterrey are now not taking place because of restrictions to corporate travel from international companies. But once those companies lift those restrictions, we should see also a pickup in traveling in Monterrey Airport.

[Alan Macias:]

Thank you. And just last question, do you have a percentage of traffic coming from Canada. What percentage represents of your total traffic? Thank you.

[Ricardo Dueñas:]

Sure. In 2019, it was 0.9% of our total traffic. In 2020 it was 1.1% of our total consolidated traffic. However, for the airports of Zihuatanejo and Mazatlán, Canadian traffic represented about 15% and 9%, respectively, last year. So that is one of the reasons why the numbers reported from these two airports in January traffic were lower than expected because of the reduction of Canadian travel.

[Alan Macias:]

Great. Thank you.

[Operator:]

Thank you. Our next question comes from Gabriel Himelfarb. Please state your company name before asking your question. Thank you.

[Gabriel Himelfarb:]

Hi. Thanks for the call. It’s Gabriel from Scotiabank. Just a quick question, have you seen or do you think that you might that either capacity coming from international carriers might be allocated into more frequent routes or even in new route origination? Thanks.

[Ricardo Dueñas:]

I think, at this time, carriers both international and domestic are working towards rebuilding their networks that were already in place prior to COVID. So we should expect to recover those first, those routes that had been in operation prior to the pandemic and afterwards new routes that were not in operation before the pandemic and that behavior is both applicable for international, as well as domestic carriers.

[Gabriel Himelfarb:]

Okay. Thanks.

[Operator:]

Thank you. We will now return to the question from the phone line ending 811. Please state your full name and company name before asking your question. Remember that you may need to unmute yourself from your phone line by pressing * 6.

[Unidentified Analyst:]

Hello.

[Ricardo Dueñas:]

Yeah. We can hear you.

[Operator:]

We can hear you.

[Unidentified Analyst:]

Can you hear me?

[Ricardo Dueñas:]

Yes. We can.

[Unidentified Analyst:]

Okay. Just one quick question, thinking that corporate passenger that market can be reduced structurally going forward. Are you right now thinking about any potential changes on your commercial strategy for Monterrey, because you have perhaps less corporate passengers and more VFR or how should we think about no bigger revenue per passenger in Monterrey by 2022 or 2023 if you have reduction in corporate travelers? Thank you.

[Ricardo Dueñas:]

Thank you for the question. I think it’s important to remember that, most of the business travel of the Monterrey Airport or in OMA in general is mostly industrial business related. We expect that kind of business traffic not have the same impact us as other kind of business traffic. Monterrey for the near-term has been focused on a big percentage for low cost carriers. We expect that trend -- and we expect that trend to continue. Ruffo, do you have anything else to add there?

[Ruffo Pérez Pliego:]

No. No. I think at this time is very speculative to try to assess the structural change if any in our passenger type in Monterrey. But we will -- what Ricardo said about our traffic being more industrial than purely corporate or consultant type of traffic. So that you recover as the economy picks up as well and the benefits from the new TMAC agreement are also being felt more evidently.

[Ricardo Dueñas:]

And if anything, most of the -- for the non-aero revenues, what I believe will have the most impact in the next few years will be the new square footage for the new terminal. We mentioned before we’re building the new Terminal A, which will include a lot of new area for potential non-aeronautical revenue.

[Unidentified Analyst:]

Okay. Thank you. And can if I follow up, how do you think, like, then your investment in the hotels that you have in Monterrey and Mexico City, how do you think they will perform going forward because of this?

[Ruffo Pérez Pliego:]

We have seen the NH hotel performing better than the Hilton Monterrey Airport. Main reason is rather diversified base of clients. In the case of the NH you have cruise, you will have passenger staying overnight for connecting flights. You will -- it’s the middle of the city, so you also have some clients that are -- use the hotel location for further visits to Mexico City. In the case of Monterrey, the main -- in 2019 the travel -- the client base for the Hilton Hotel was mostly International Hilton Awards program clients. Since that segment has declined significantly over the year. Now the hotel is also looking for domestic type of travelers and groups and we are in the process of marketing the services of the hotel to those new segments. So, but in any case, we would expect yet to see the NH to outperform the Hilton Garden this year in terms of occupancy.

[Ricardo Dueñas:]

And for new projects we’re constantly evaluating other airports to see if there’s potential for a new airport. So far we don’t have any concrete about project going forward.

[Unidentified Analyst:]

Perfect. Thank you very much.

[Ricardo Dueñas:]

Thank you.

[Operator:]

Thank you. Our next question comes from Guil Mendes. Please state your company name and then go ahead with your question. Thank you.

[Guilherme Mendes:]

Hi, gentlemen, and good afternoon. Here is Guilherme Mendes with JPMorgan. I have two questions. The first one is actually the follow up when you mention about the traffic recovery that you expect to be back to ‘19 levels by the end of 2022, beginning of 2023. I am just wondering, I mean, how do you see the potential mix on your air traffic and meaning that if you could potentially see more leisure traffic when compared to the mix you had before the pandemic? And the second question is regarding your dividend policies, I recall, I think, the last call you mentioned that you’ll be evaluating the dividend policy again by the beginning of 2021. Just want to double check if you have any updates on that? Thank you

[Ricardo Dueñas:]

Well, in terms of the dividend policy. We still have our evaluating how the year is going to look like. But, I mean, we still do not have had our Board meetings. That would be probably announced by late March prior to the Annual Shareholder meeting, which is expected to take place towards the end of April.

[Ruffo Pérez Pliego:]

And the traffic recovery.

[Ricardo Dueñas:]

And could you repeat, Guilherme, your question about the traffic recovery?

[Guilherme Mendes:]

Yeah. Sure. It’s -- when you mentioned about traffic getting back to 2019 levels by the end of 2022. I was just wondering if how do you see the mix of air traffic coming to your airports, if you could potentially see more VFR and leisure routes when compared to the pre-pandemic levels.

[Ruffo Pérez Pliego:]

Of leisure, we only have three airports options that are leisure, like, Acapulco, Zihuatanejo and Mazatlán? Certainly, we would expect strong recovery, especially in the next winter season, the one that starts December of this year and ends in April of next year, for the Canadian and West Coast market in Zihuatanejo and Mazatlán. And we probably see the rate of growth in Culiacán performing better than in Monterrey and Culiacán is primarily VFR traffic. But given the size of our Monterrey Airport, certainly the recovery in absolute terms will have to be driven by business travel, domestic travel as well in our industrial airports, such as Monterrey, San Luis, Chihuahua, Juárez, et cetera?

[Ruffo Pérez Pliego:]

I think, once we returned to business as usual, I would expect the mix to be very similar to the one that we had pre-pandemic, I think what will be different is the path of recovery, some segments are recovering faster than others. For example, we know domestic travel recovering faster than international, VFR and leisure is also recovering faster than business. But once we returned to business as usual, you should expect somewhere the similar mix that we had before.

[Guilherme Mendes:]

No. That’s very clear. Thank you.

[Ricardo Dueñas:]

Thank you.

[Operator:]

Thank you. We have not received any further questions at this point. So that concludes our question-and-answer session. Thank you. I would now like to hand the call back over to Ricardo Dueñas for some closing remarks.

[Ricardo Dueñas:]

I just want to thank all of you again for your participation in this call. 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.

[Operator:]

That concludes today’s call. You may now disconnect.