Grupo Aeroportuario del Centro Norte, S.A.B. de C.V.
Q4 2021 Earnings Call Transcript

Published: 23 Feb 2022

[Operator:]

Greetings, and welcome to the Grupo Aeroportuario del Centro Norte OMA Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note that this conference is being recorded. I will now turn the conference over to our host, Emmanuel Camacho, Investor Relations Officer. Thank you. You may begin.

[Luis Emmanuel Camacho Thierry:]

Thank you. Good morning, everyone. Welcome to OMA’s fourth quarter 2021 earnings conference call. Participating today our CEO, Ricardo Dueñas; and CFO, Ruffo Pérez Pliego. Please be reminded that certain statements made during the course of our discussion today may constitute forward-looking statements, which are based on current management expectations and beliefs 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, which include the impact of COVID-19. I will now turn the call over to Ricardo Dueñas for his opening remarks.

[Ricardo Dueñas Espriu:]

Thank you, Emmanuel. Good morning, everyone. We appreciate who joining us today. Let me begin by saying that I am pleased to deliver strong results for the quarter, notably, our passenger traffic performance. Our ability to expand revenue generation across all of our business units on our cost disciplines have resulted in remarkable results worth highlighting in this call. I will first describe our full year 2021 highlights, and then I will move on to our main full quarter 2021 results. Our 2021 results reflect a year of strong and consistent recovery in our operational and financial funds. In the year, our passenger traffic grew 63% to 18 million in all our airports as compared to 2020, and stood at 22% below 2019 levels. Notwithstanding our adjusted EBITDA was Ps.5 billion, only 8% below 2019 with a record-high annual adjusted EBITDA margin of 73.7%. I am proud of OMA’s ability to have delivered outstanding financial results each quarter, outperforming our own expectations, despite still prevailing unprecedented challenges worldwide. In 2021, we benefit mostly from different domestic leisure markets as well as regional VFR related destinations. For example, our Monterrey to Cancún route was 6% above 2019 levels. It is important for me to highlight that by second half of 2021, we observed improved destination in business routes. To give you an example, our Monterrey to Mexico route went from a minus 50% in the first quarter of 2021 to a minus 20% in fourth quarter 2021 versus the same quarters in 2019, and Chihuahua and Ciudad Juárez routes to Mexico City are already above 2019 levels. On the commercial front, our revenues performed well. A higher number of passengers served in our airports a lot us to increase parking revenues by 72% versus 2020. In terms of commercial spaces, we benefited from improved sales performance of our tenants with revenue share from tenants growing 76% versus the previous year. Importantly, our financial performance coupled with clear skies ahead a lot to make significant dividend distributions in December 2021 and January 2022, which are aligned to our objective of optimizing our capital structure. The cumulative distributions on December and January amount over Ps.6.3 billion and represent a yield of approximately 12%. Turning to our fourth quarter total passenger traffic reached 5.4 million during the quarter, which was 5% above our third quarter performance. In absolute terms, Monterrey, Mazatlán, and Culiacán were the main contributors. As compared to the fourth quarter of 2019, full passenger traffic stood at 90%. The airports have that passenger traffic recovery was Ciudad Juárez, Mazatlán and Reynosa. In terms of route performance versus the fourth quarter of 2019 those are experienced the greatest traffic growth in volume terms during the quarter were Monterrey on its Cancún and Villahermosa route; Ciudad Juárez on its Mexico City route; and Mazatlán on its Tijuana route. Finally, in January 2022, our passenger traffic recovery level decelerated due to uncertainty caused by Omicron variant and the rise in positive cases at the beginning of the year. We expect passenger traffic to rebound during the following weeks as contagion levels continue to recite. From February 1 to 20th of this year, passenger traffic has increased 13% versus the same year of 2019 and has improved in percentage terms week after week. Turning to our fourth quarter operational results, our passenger traffic performance during the quarter coupled with revenue expansion of our different business units on our cost discipline allowed us to deliver strong operating results. Adjusted EBITDA increased 9% versus the fourth quarter of 2019 to Ps.1.5 billion with a margin of 75%. On the commercial front, revenues increased 57% compared to the fourth quarter of 2020. Parking revenue doubled versus 2020, and we observed higher penetration levels in long stays mainly in Monterrey, Ciudad Juárez and Chihuahua. This reaffirms the higher dynamism observed in the business travelers second . In addition, restaurants, retail and advertising also contributed most of the growth. Occupancy rate for commercial space in our terminals was 87% at the end of the quarter compared to 85% in the third quarter, reflecting a steady recovery path. Diversification revenue increased 53%. Our hotel services on OMA Carga contributed mostly to this growth. During the fourth quarter of 2021, the occupancy rate at our Terminal 2 NH Collection Hotel was 78.3%, while the Hilton Garden Inn Hotel at Monterrey airport was 60.1%. OMA Carga had another outstanding quarterly performance with an increasing tonnage handled of 26%, resulting in a revenue increase of 20% versus fourth quarter of 2020. Revenues from handling and custody of ground import cargo drove the increase in revenues. On the capital expenditure front, total investments in the quarter including MDP investments, major maintenance and strategic investments were Ps.752 million. We continue with a major expansion and remodeling of the Monterrey Airport Terminal A, we expect to open an expanded land side area in the spring of about 9,000 square meters. Additionally, we’re working on the following major projects

[Ruffo Pérez Pliego:]

Thank you, Ricardo. Good morning, everyone. I will briefly review our financial results then we will open the call for your questions. Turning to OMA’s fourth quarter financial results, aeronautical revenues increased 69% relative to 4Q 2020, driven by 62% increase in passenger traffic. Non-aero revenues increased 56% with commercial revenues being the largest contributor. Commercial revenues increased 57%, and the categories with the highest growth were parking, restaurants, retail and advertising. Parking revenues increased 102% due to increased penetration in the Monterrey, Ciudad Juárez and Chihuahua airports. Restaurants, retail and advertising increased 52%, 65% and 93% respectively, mainly due to the end of discounts granted during previous quarters, as well as higher revenues from revenue sharing. Diversification activities increased 53%. Total aeronautical and non-aeronautical revenues were Ps.2.0 billion in the quarter and grew 66% versus last quarter of last year. Construction revenues increased 64% as a result of increased MDP investments. The cost of airport services and G&A expense increased 24% relative to the fourth quarter of 2020 mainly due to an 18% growth in payroll expense, which is a result of changes in labor regulation in Mexico during the year, and higher expenditures in electricity, materials and all our line items as a result of the overall higher activity in our airports. Nonetheless, it’s worth highlighting that our cost of airport service and G&A expense was only 2% higher than that of the fourth quarter of 2019. OMA’s fourth quarter adjusted EBITDA reached Ps.1.5 billion, and the adjusted EBITDA margin was 75%. Our financing expense was Ps.30 million, which was largely benefited from an exchange gain as compared to an FX loss in 4Q 2020. As a result, consolidated net income was Ps.1 billion. OMA’s financial position remains strong. Cash generated from operating activities in the fourth quarter amounted to Ps.1.3 billion and cash at the end of the quarter stood at Ps.6 billion. During the quarter, we paid a Ps.2 billion dividend. Total debt amounted to Ps.7.7 billion, which includes short-term loans of Ps.2.7 billion. Our net debt to adjusted EBITDA ratio stood at 0.4 times at the end of the quarter. This concludes our prepared remarks. Operator, please open the call for questions.

[Operator:]

Thank you. At this time, we will be conducting a question-and-answer session. Our first question comes from Alejandro Zamacona with Credit Suisse. Please state your question.

[Alejandro Zamacona:]

Yeah. Thank you. Hi, Ricardo, Ruffo, Emmanuel, thank you for taking my questions. A quick question on the aeronautical tariffs, just can you confirm that you have already incorporated the higher fares for 2022 amid the MDP negotiation, which I understand what that was partially implemented in 2021? And so, since then – since when they are being charged? And what would we expect for margins? Thank you.

[Ricardo Dueñas Espriu:]

Yes, thank you. Thank you, Alejandro. So yes, as everyone remembers, we were approving around 13% increase in real tariffs. We said we were going to increase them in 2 tranches. We implemented the one last year in January, it was executed in February, and that was for 10%. This year would at the same thing, it we increase them by a slightly above 11%, we did that a couple of weeks ago and we’ll start being executed this month. And for how much we will be reaching the maximum tariffs, it would really depend on what will be the inflation for this year.

[Alejandro Zamacona:]

Okay, Ricardo, thank you. And in that same line, so assuming these higher tariffs, what can we expect for margins for this year after reaching the open type margins that we saw in the last 3 quarters? Are you remember that in the last conference call, you mentioned that margins around 75% could be sustained, but what – those – these would mean that the higher tariffs could be offset by a catch-up in cost? Or what am I missing here?

[Ricardo Dueñas Espriu:]

No. We believe that 75% that we’ve mentioned is sustainable going forward.

[Operator:]

Thank you. Our next question comes from Guilherme Mendes with JPMorgan. Please state your question.

[Guilherme Mendes:]

Hey, Ricardo, Ruffo and Emmanuel. Thanks for taking my question. I have 2 questions. The first one is in terms of traffic. I recall on the last calls you mentioned about being back to 2019 figures by early 2023. Just wanted to double check if that’s still the case, if Omicron impacted your expectations by means? And the second question in terms of capital allocation, how should we think your dividend policy going forward especially consider your low leverage numbers? Thanks.

[Ricardo Dueñas Espriu:]

Thank you, Guilherme. Yes, we expect passenger traffic to be from 3% to 5% below 2019 levels for this year. However, we expect by the third quarter of this year passenger traffic to be above that on the same quarter of 2019. And as for the dividend we expect to maintain our Ps.2 billion dividend – ordinary dividend that we’ve maintained in the past.

[Guilherme Mendes:]

Got it. Thanks.

[Operator:]

Our next question comes from Javier Gayol with GBM. Please state your question.

[Javier Gayol:]

Hi, Ricardo, Ruffo, and Emmanuel, thanks for taking my questions. It’s a follow-up question to the previous one in regarding the capital allocation, and you mentioned during your remarks that you’re seeking to optimize the capital structure of the company. And I was wondering in terms of leverage and given the changes that you made to your bylaws, which level of net debt to EBITDA, let’s say, or any other net debt that you might have? Could you be feel comfortable with closing 2022 with?

[Ruffo Pérez Pliego:]

Sure. Hi, Javier. This is Ruffo. So the numbers of year-end 2021 that reflects the Ps.4.3 billion dividend that was paid in the middle of January. So in addition to our base case expectation of maintaining the same ordinary dividend of Ps.2 billion as Ricardo mentioned. We would estimate that by the end of this year, we would end up around 1 time net debt-to-EBITDA, I’m proudly speaking around the summer, in June, at around 1.2 times adjusted EBITDA.

[Javier Gayol:]

Okay. So what this means that you’re not seeking to or looking into increasing debt for the company, basically that Ps.1.5 billion you mentioned is basically just incorporating the – what has happened over 2022, right?

[Ruffo Pérez Pliego:]

That is correct. I think it depends on use of proceeds of financial leverage without any acquisition insights, I think it’s going to be harder to continue to increase leverage.

[Javier Gayol:]

Thank you. Thank you very much for that report, and congratulations on the great year.

[Ruffo Pérez Pliego:]

Thank you.

[Operator:]

Our next question comes from Rodolfo Ramos with Bradesco. Please state your question. Thank you.

[Rodolfo Ramos:]

Good morning, gentlemen. Thanks for taking my question. My question is a follow-up on the traffic one. And it was encouraging to hear that that Monterrey, Mexico route is already down from 50% to 20% below pre-pandemic levels. But I just want to get a little bit more color of what you’ve seen January, February, we saw that also GAP announced and resuming the Monterrey route. So I just wondering how you seeing these other legacy business routes like Monterrey, Guadalajara, perhaps so far this year, and any color that you can provide on new routes? And then I have a follow-up on tariffs question. Thank you.

[Ricardo Dueñas Espriu:]

Sure. Hi, Rodolfo. So in January, we saw a deceleration on – generally speaking in all of our markets, we attribute that to Omicron variant, which maybe – may people not flight as much as they have been doing towards the end of the year. And also we had some cancellations of flights resulting from lack of crews, which were subject to contagions and we’re not able to do so. In February, we signed on of those events, so for the first 20 days of February, we’re seeking – we’re looking towards improvements. And with respect to business routes, we do see improved performance over the coming weeks and months. I mean, we see that there are events, I mean, like trade fairs and conferences that are already planned specially for the summer for in-person events. And I think that is an indication that corporate travel is starting to pick-up towards the summer and the following months. So we would expect busier routes to have a much better performance than what we saw last year.

[Rodolfo Ramos:]

Thank you. And just a follow-up on the tariffs on the maximum tariff question. So you mentioned you implemented in an 11% increase this year. So taking that into account, how much would you be short, I mean, if you want to look at maybe as a percentage growth this year? How much short it would be to reach the maximum tariff this year, just to see what the upside on in terms of revenues could be?

[Ruffo Pérez Pliego:]

Yeah, so last year, for 2021, we ended up at around 92.1% recovery of the maximum tariff. Despite the 10% increase that we implemented in February, obviously, much of that was a result of unexpected inflation towards the end of the year, which as you all know, ended up at around 7.4% for the year. So that aims to lot of the nominal increase that we have plan for the year. As Ricardo mentioned, in the middle of February, we already implemented another 11% increase in passenger charges. And to the extent that inflation received towards mid-single-digits, I think that we can get to around 97% recovery for 2020.

[Rodolfo Ramos:]

Okay. Thank you very much.

[Operator:]

Our next question comes from Pablo Monsivais with Barclays. Please state your question.

[Pablo Monsivais:]

Hi, thanks for taking my question. Just a follow-up on the 75% EBITDA margin level that you mentioned. I wonder why do you think this unsustainable level considering the traffic, for example, in the fourth quarter, this is still 10% below pre-COVID. And I’m assuming that there should be some operating leverage in 2022, maybe are you expecting higher cost per passenger for some reason? Or why shouldn’t we expect slightly higher margin giving there’s still traffic is easier to recover? And also thinking that this kind of passenger thinking about the corporate passenger has higher commercial revenue per passenger protocol? So if you can provide some color would be appreciate it. Thank you.

[Ruffo Pérez Pliego:]

Sure. Thank you, Pablo. Yeah, we would expect margins to be slightly north of 75% for this year, which would be around a 200 basis point improvement relative to the overall margin achieved in 2021. So we do see some margin expansion. In terms of costs, yes, we’re experiencing inflation in some of our cost base, such as energy, labor and maintenance. So I mean there might be some slight margin expansion given the operational leverage. But we wouldn’t think it would be more than a couple of 200 basis points above the full year 2021 level.

[Pablo Monsivais:]

Okay, thank you.

[Operator:]

Our next question comes from . Please state your question.

[Unidentified Analyst:]

Hello, everyone. And thanks for taking my question. I have 2 questions on my side. The first one is, if you can refresh my memory a little regarding the interplay between oil prices and airport tariffs. If there’s any correlation, and what would be an index for us to look if there’s any? And I’ll do the next one following.

[Ricardo Dueñas Espriu:]

So in terms of a direct correlation between airport tariffs and oil prices, there’s no direct one under the contractual regulatory framework, our tariffs increase, the maximum charge that were allowed to charge can increase based on the national producer price index, excluding the oil components. So the increasing maximum target would not be linked to oil prices.

[Unidentified Analyst:]

Okay, thank you. And the second one is regarding maintenance provision. I’d like to hear a little why we see so much decline year-over-year at maintenance provision, especially when you have a pipeline of expenditures and the competitors also talking about increasing maintenance expenditures to help the customer experience?

[Ricardo Dueñas Espriu:]

Sure. Our maintenance provision actually for the full year increase around 30% from Ps.392 million to Ps.512 million. That reflects in our case, a greater amount of major maintenance, which primarily involves replacement of runways and taxiways, and works in pavement surfaces as part of our committed MDP investments for the 2022 to 2025 period.

[Unidentified Analyst:]

Thank you. Thank you very much.

[Ricardo Dueñas Espriu:]

Okay. And just to clarify, in the fourth quarter of 2020, we already have started to make provisions towards what was the new MDP plan approved by authority at the end of last year. So our last quarter of 2020 reflective the increasing provisions as a result of the new plan that was approved towards the end of last year.

[Unidentified Analyst:]

Okay, great. Thank you for the answer.

[Operator:]

Thanks. And our next question comes from . Go ahead, please.

[Unidentified Analyst:]

Hi, good morning. Thank you for taking my questions. Just 2 questions, if I may. I didn’t get it in specifically about the maintenance division, just trying to understand if there is maintaining provision is going to be a number that you are feeling comfortable with. Just to understand because I didn’t quite get it the explanation. The second question is, you are in on the routes, do you have a pipeline of other companies maybe onto establish international routes between Monterrey and other countries, and most probably, Europe, or Canada or something related that, it similar that I don’t expect it in the full quarter. Thank you.

[Ricardo Dueñas Espriu:]

So it sounds like on last question, we do have personal conversations with airlines to increase our international productivity in our airports, not only Monterrey, but also other important particularly the usual destinations that we have in the Pacific Coast. At this time, the more advanced leads that we have with existing airlines, such as Aeroméxico, Volaris and Daedalus to expand service into the U.S. But, I mean, we – as I mentioned constantly attend events and trade fairs, and have new leads to bring new airlines into our airports. And with respect to your first question, the connection was a bit noisy. So if you could repeat it, please?

[Unidentified Analyst:]

Sure. That was a follow-up the maintenance provision. So I was trying to understand in which level of maintenance provision are you comfortable, on average from 2019 to 2021, on average equates around Ps.400 million on average? So I will try to understand in which level of maintenance provisions are you comfortable with?

[Ricardo Dueñas Espriu:]

It’s probably what we are comfortable with, it’s our accounting standard that we need to make provisions for expected worth in in the next few years discounted at a certain discount rate. But I think that given our commitment investments in the MDP, the 2021 level is a good indicator for the next following few years.

[Unidentified Analyst:]

Okay. That’s helpful. And congratulations on the amazing results. Thank you.

[Operator:]

Thank you. Our next question comes from Gabrielle Himmelfarb with Scotiabank. Please state your question.

[Gabriel Himelfarb:]

Hi, good morning. Thanks for the call. Just a quick question about new route openings. Can you give us a bit of color about, you just think, do you believe it’s going to be new open this year for international destinations like, for example, Canada, so you’ll open to Canada. Do you think there’s more route openings this year or more demand coming from Canadian travelers? And second question about the new route opens from Monterrey to Madrid. Do you think that the network will start shifting from toward bypassing Mexico City airports, and creating new routes from other airports rather than Mexico city like Monterrey that could generate long-haul routes? Thank you.

[Ricardo Dueñas Espriu:]

Thank you. Hello, Gabriel. Yes. So for the first question, new routes. Yes, we will incorporate 11 origin destination routes. Out of those 11, 5 are brand new routes. Out of those, so far 5 are national and the rest are international. During the first half, we’re going to open those international are to Canada. So yes, we believe there’s still more room to improve to Canada. And as for your second question, we cannot speak on behalf of airlines, but it is definitely our intention to try to become an alternative for the saturation that we’re seeing in the metropolitan area of Mexico City. And so, yes, that’s conversation we’re having with the airlines trying to make regional hubs out of our other airports.

[Gabriel Himelfarb:]

Okay. Just – how many routes to Canada?

[Ricardo Dueñas Espriu:]

6 – No. Sorry. It’s 3 new routes so far as of today.

[Gabriel Himelfarb:]

Okay. Thank you. Thank you very much.

[Ricardo Dueñas Espriu:]

So out of those international ones, 3 are to Canada, 2 are to the U.S. and one to Cuba.

[Gabriel Himelfarb:]

Okay. Thank you.

[Operator:]

Our next question comes from Juan Ponce with Bradesco BBI. Please state your question.

[Juan Ponce:]

Hi. Thank you. Thank you for taking my question. I mean, just a clarification regarding the adjusted EBITDA margin expansion you’re expecting 2022, I don’t know if I heard 200 bps, but just wanted to make sure.

[Ruffo Pérez Pliego:]

Sure. Give me one second. For full year 2021 we have 73.7% margin. So – yes, probably not more than that would be the expansion as we would expect for 2022.

[Juan Ponce:]

Okay. Thank you very much.

[Operator:]

Our next question comes from Guilherme Mendes with JPMorgan. Please state your question.

[Guilherme Mendes:]

Hey, guys, thanks for the follow-up question. In terms of crew strategy, you guys, please make sure about the Barbados Airport. Just wanted to double check in what situations the current auction being, and if you guys may be interesting onto regions such as in Brazil? Thanks.

[Ricardo Dueñas Espriu:]

So the Barbados process has been placed on hold for quite a few months, and we continue to be interested in it. But at this time the government of Barbados hasn’t provided guidance on when and if the process would be restarted. And with respect to other regions, certainly we’re interested in Caribbean, South America, Central America. In the case of Brazil, given the structure of concessions, whereby it’s a group of several airports, some of them quite large, some of them very small. We have decided not to participate in those social processes.

[Guilherme Mendes:]

Okay, very clear. Thanks.

[Operator:]

Thank you. Our next question comes from . Please state your question.

[Unidentified Analyst:]

Hi. Good morning. Federico De Lazi from Loian. Thank you for the culture. A couple of question, Ruffo. The first one is just to check when you mentioned the increasing tariff; this 11% is in nominal terms or in real terms? The second question…

[Ruffo Pérez Pliego:]

It’s nominal terms.

[Unidentified Analyst:]

Nominal terms. Perfect.

[Ruffo Pérez Pliego:]

Nominal terms versus the tariffs into – of 2021.

[Unidentified Analyst:]

Perfect. Perfect. And the second one is commercial revenues, when I see the line you’re almost flat against 4Q of 2019, when your traffic’s minus 10%. Do you see – or do you have enough capacity to continue to increase commercial revenues even if you go to same level of 2019 in the third quarter of this year?

[Ruffo Pérez Pliego:]

Yeah, we see room to improve our commercial occupancy ratio at the end of the last year was around 87%, before the pandemic, it was well above that. Probably for the end of this year, we would expect to – for 2022 we expect to end around 92% or 93% occupancy ratios. So greater occupancy, improved passenger demand and the revenue sharing mechanisms that we have with tenants, I think we provide a good support to increase our commercial revenues.

[Ricardo Dueñas Espriu:]

And also see, if I may up, what you’re seeing and the reason you’re seeing same commercial revenues with less traffic also the result with some of the measures that we’ve taken in the last couple of years, I probably hadn’t been seen due to COVID pandemic. Some of these measures, for example is, we conducted some competitive process in the new commercial locations. We took direct operation of VIP lounges. We optimize some of the contracts by increasing the percentage revenue, et cetera.

[Unidentified Analyst:]

Okay. And the last question if I may. In industrial services, you in the fourth quarter in revenues against the third quarter. This is a new plan, and you never know you fell in the – that you learnt. How much of room do you have in the business to grow?

[Ricardo Dueñas Espriu:]

So yeah, some additional rents kick-in for fourth quarter as opposed to partial quarters that that was the case in the third quarter. We’re currently building one other industrial warehouse of around 10,000 square meters. And after that new construction which is currently being done, probably the park would be at around like 60% of its capacity. So there’s still some room to grow as well in the next couple of years.

[Unidentified Analyst:]

Okay. Thank you so much.

[Operator:]

Thank you. There are no further questions at this time. I’ll turn the call back to management for closing remarks. Thank you.

[Ricardo Dueñas Espriu:]

I want to thank all of you again 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 and have a good day.

[Operator:]

Thank you. This concludes today’s conference. All parties may disconnect. Have a great day.