Grupo Aeroportuario del Centro Norte S.A.B. de C.V.

Greetings and welcome to the Grupo Aeroportuario del Centro Norte OMA first quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Emmanuel Camacho, Investor Relations Officer. Thank you, Emmanuel. You may begin.

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. With that, I'll turn the call over to Ricardo Lozano for his opening remarks.

Thank you, Manuel. Good morning, everyone. This morning, I will briefly comment on several events occurred during the quarter. Then I will review our operational performance and financial results. And finally, we will be pleased to answer your questions. Last Friday, we held our 2023 annual shareholders meeting, where shareholders approved, among other matters, the declaration and payment of an ordinary cash dividend to shareholders of 2.3 billion pesos in two installments. The first one of 1.8 billion pesos no later than June 30th. And the second one, 500 million pesos no later than September 30th. In addition, on March 10th, we successfully completed our 3.2 billion peso issuance in long-term sustainability linked notes in the Mexican market. Pursuant to the framework of the notes, we have set an ambitious carbon footprint reduction target. Proceeds were used to amortize our OMA 13 notes for 1.5 billion pesos and to repay 1.2 billion pesos in short-term loans. The remaining 500 million will be used for general corporate purposes, including the funding of future investments. Moving on to our main first quarter of 2023 results. OMA delivered solid financial and operating results in the first quarter of this year. Adjusted EBITDA grew 41% in the quarter to 2 billion pesos, and adjusted EBITDA margin reached 77.5%, largely as a result of the increase in both aero and non-aero revenues. In the first quarter, OMA passenger traffic reached 6 million, an increase of 30% versus the first quarter of last year. The airports that led passenger traffic growth during the quarter were Monterey, Ciudad Juarez, Chihuahua, and Culiacan. And the routes with the strongest traffic growth compared to the first quarter of last year, most of them considered mainly business routes, were the Monterey to Mexico City, Guadalajara, Santa Lucia, Toluca, and Cancun routes, and the Ciudad Juarez to Guadalajara route. On aggregate, these six routes added 470,000 additional passengers in the quarter, an increase of 42% versus the first quarter of last year. Primarily, as a result of the strong passenger traffic performance, our aero revenue grew 40% in the quarter to 2 billion pesos. On the commercial front, revenues increased 36% compared to the first quarter of last year, driven by parking, restaurants, retail, and car rentals. Occupancy rate for commercial space stood at 93.6% at the end of the quarter. Diversification revenues increased 22%. Our hotel services and Oma Cargo contributed most to this growth. In the first quarter of this year, occupancy rate at our Terminal 2 NHA Collection Hotel was 80.3%. While the Hilton Garden Inn Hotel had an occupancy rate of 73.4%, signaling a further recovery of business travel. Poma cargo revenues increased 14%, mainly driven by the handling of air and ground import cargo. On the capital expenditure front, total investments in the quarter, including MDP investments, major maintenance, and strategic investments, were 757 million pesos. During the quarter, some of the most relevant projects we are working on are the expansion and remodeling of the Monterey Airport Terminal A building, as well as the Ciudad Juarez, Culiacan, and Durango terminal buildings, reconfiguration of the Mazatlán Terminal building, and major rehabilitation and reconfiguration of platforms and taxiways in several airports. I would now like to turn the call over to Rufo Perez-Piego, who will discuss our financial highlights for the quarter.

Thank you, Ricardo, and good morning to everyone. I will briefly review our financial results, and then we'll open the call for your questions. Turning to OMAD's first quarter financial results. Aeronautical revenues increased 40% relative to the first quarter of 2022, driven primarily by the 29.9% increase in passenger traffic. Sun aero revenues increased 25.7%, with commercial revenues increasing 35.5%. The categories with the highest growth were Our parking, restaurants, retail, and car rentals. Parking revenues increased 58% due to increased penetration in the Monterey, Chihuahua, and Reynosa airports, as well as higher turnover in short-term stays in most of our airports. The increased activity in our parking revenues is the result of an overall higher business dynamism at our airports. Restaurants, retail, and car rentals rose 49%, 43%, and 20% respectively. Due to higher revenue sharing and the impact of the different initiatives that were implemented throughout 2008, diversification activities increased 31.5%, reflecting strong hotel revenue growth, and to a lesser extent, continued home cargo growth. Total aero and non-aero revenues grew 36% to 2.6 billion pesos in the quarter. Construction revenues amounted to $664 million, as a result of the higher MVP investment execution. The cost of airport services and G&A expense increased 14.9% relative to the first quarter of 2022, mainly due to an increase in payroll expenses results primarily of increased headcount and higher labor costs versus last year. Other increases came at the minor maintenance and contracted services line items, which grew overall due to overall higher activity in our airports as well as inflationary adjustments. Major maintenance provision was 77 million pesos as compared to 82 million pesos in the first quarter of 2022. OMA's fourth quarter adjusted VDA reached 2.0 billion pesos, and the adjusted VDA margin reached 77.5%. Our financing expense was 229 million pesos, mainly due to a higher interest expense as a result of additional debt issuances and a higher cost of debts. Our consolidated income was 1.1 billion in the quarter, which reflects an increase of 43.5% relative to 1922. Turning to our cash position, cash generated from operating activities in the first quarter amounted to 1.3 billion pesos, and cash at the end of the quarter stood at 2.8 billion pesos, which already reflects the payment of the special dividend of 1.45 billion pesos made during the month of March. At the end of the quarter, total debt amounted to 10.7 billion pesos, and we have a healthy net debt to adjust the DBDA ratio of 1.1 times. This concludes our prepared remarks. Alicia, please open the call for questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Thank you. Our first question comes from Carlos Perry Longe with BOA. Please proceed with your question.

Thank you. Good morning, gentlemen. Congratulations on the strong results. Two questions, if I may. First one is related to passenger traffic. Very strong, obviously, on the quarter. If you could give us some idea of your expectations for the remainder of the year. It looks like business traveling is coming back strongly. What should we expect in terms of the remainder of the year? That would be the first. And the second is related to margins. Again, a very solid expansion there. If you could provide some color as to whether that is sustainable or you expect some headwinds over the remainder of the year in terms of additional costs. Thank you.

Thank you. Thank you, Carlos. Yes, passenger traffic, remember that we're comparing to the first quarter of last year when we had the Omicron variant, COVID. So we had an easier pump base. Obviously, it's going to become more challenging as the year moves along. But we're comfortable that something in the high single digits, it's achievable. And then in terms of margin, we believe we're consistent, as mentioned before, between 76% and 77%. percent even that margin is attainable.

Perfect. Thank you.

Thank you. Our next question comes from Josh Milberg with Morgan Stanley. Please proceed with your question.

Hey, everyone. Thank you for the call. I was hoping you could give your perspective on the outlook for return to Category 1 later this year just with the latest legislative developments and Also, if you could just give a little bit of your take on what that could mean for OMA on the international side in terms of route additions by Mexican carriers to U.S. destinations from Monterey or your other airports, thinking about next year. And then related to that, I just wanted to ask if you think, you know, eventually a postponement of that return could actually help OMA in in that it might compel the local carriers to direct more of their fleet capacity to the domestic market where you guys obviously have more exposure. That's my first question.

Well, yes, Category 1, as you know, this week, one of the prerequisites to go back to Category 1 is the approval of the airport and air law. It's going to be, it's already approved in the deputy's chamber. It's going to the Senate. It's going to be approved either today and tomorrow.

Yeah, with respect to, And then, I mean, so we would expect a return to Category 1 towards the end of the year once the FAA conducts its audits. In terms of new route development, as you know, Category 1 does affect Mexican carriers, but it has not affected U.S. carriers. So in the past couple of years, we have seen New airlines coming into our airports from the U.S. to serve the demand of international travel. So I do not think that the return to Category 1 for OMA will have a significant impact, nor a delay in the obtention of this regaining of the Category 1.

Okay, that's great. And then my second question was just if you could give a kind of high-level view You know, this news around the bill that's out there that could give the government, you know, an inability to revoke concessions. Just your kind of high level view again on, you know, what risk that presents or if that's really just noise and not something that we should be concerned about.

I mean, I think it's too early to anticipate. We know the bill is not going to be discussed in this period. It's going to move towards the end of the year. The next period is going to be September to December. We believe it's going to be discussed there. We need to wait what's going to be the final language of that bill. So it's really still too early to say what impact it could have, not in airports, but in every country. business that has any permit or concession regarding government.

Okay, fair enough. Thank you for the detailed responses.

Thank you. Our next question comes from Gilherme Mendez with JP Morgan. Please proceed with your question.

Hi, everyone. Ricardo Rufo. Thanks for taking my question. The first question is related to the MDP maximum tariff after the recent increase that we saw in the beginning of the year. How far are you from the maximum level and if you do expect to achieve the maximum level by early next year? And the second question is in terms of capital allocation. We already saw the dividends announced for this year, but OMA continues to operate at a low leverage. So how should we think about capital allocation going forward if you can expect some additional dividends or buybacks or potentially some M&A activities outside Mexico? Thank you.

So with respect to maximum tariff recovery last year, we were slightly below the 90% mark. I think that for this year, we're targeting to be around 95%. for the full year. And with respect to capital allocation, we in this year already approved and paid a special dividend of 1.45 billion. As Ricardo mentioned, the dividend was approved by shareholders last Friday in the total of 2.3 billion. So the total distribution to shareholders would be this year of 3.75 billion. And as cash flow generation permits, I mean, in future years, I mean, we'll see what the level of dividends are, but we do not expect to have an increase in leverage with respect to current levels.

Super clear. Thank you.

Thank you. Our next question comes from Rodolfo Ramos with Beresco BBI. Please proceed with your question.

Good morning and good afternoon, everyone. Thanks for taking my question. I have a couple. The first one is on your non-aeronautical revenue per passenger. We're still above those levels that we saw before the pandemic struck. So I just wanted to see whether you have a normalized target that you're looking at, especially as traffic continues to recover. So that would be my first question. And then my second question is, can you remind us, I'm not sure if you have that information, but what would be the requirements or restrictions for a foreign company to acquire all of OMAS shares? I know there's something in the regulation or something else that could make that more difficult. Thank you.

With respect to commercial revenue, sorry, non-idle per-pax levels, we see it separately, but it's purely commercial to what is non-idle. As you know, all of the hotel, cargo, and other diversification activities do not have a specific relationship to passengers. So as passengers increase going forward, it will not necessarily have an impact in the total non-idle revenue. But on the commercial revenue per pax level, we do expect to continue to see increases. We have made refurbishments and reconfigurations of the terminals in recent years. And we expect, for example, this year to open new outlets in the areas that are going to be inaugurated in the Monterey Airport and the Ciudad Juarez Airport. So that will continue to provide a boost to our commercial revenues per packs in the next quarters. And with respect to restrictions, yes, I believe the law establishes that in order for a foreign company to acquire more than 50% or 51% of the shares of a concessionaire, certain special permits need to be obtained by the Foreign Investment Commission. So that would be a process that would need to be carried out with that authority.

And just an extra here, if I may squeeze it in. You know, you've been, you know, now with Vansi for a full quarter operating. Just wanted to get your Just kind of informal feedback on how's that coming, you know, in different commercial areas working together or, you know, any synergies that you've seen over the quarter and how's that working out? Thanks.

Yeah, it has been very positive. There's a lot of synergies where they have been adding value. Obviously, we're leveraging a lot of their platform in terms of terminal design, non-aero revenues. relationship with airlines, route development. Our DNAs in both companies are very similar, so it has been a relatively easy integration.

Great.

Thank you for the call.

Thank you. Our next question comes from Alberto Valerio with UBS. Please proceed with your question.

Hi, good afternoon. Good morning, Mexico. Thank you for taking my questions. I would like to know about tariffs. We just see an increase, a real increase in this quarter. And we also see some pressure from the press for the tariffs in the airport recently. So I'm wondering... How can we expect further increase? You just mentioned you are at 95% of maximum tariffs. The competitor is close to 99%. So I'm wondering whether we could expect some real increase during this year or next, or if we should take this more stable in real terms. Thank you very much.

Hi, Alberto. So, yes, as we were mentioning, we were targeting around a 95% recovery this year. Next year, I mean, we shall see what the impacts are with respect to inflation. There are some factors that do affect or benefit the recovery of maximum tariff, which include, for example, the FX rate or the growth, the different growth in different airports that have different levels of charges. So I think that towards the end of the year, we'll make a decision towards any further adjustments. But at this time, we're thinking of this 95% recovery for the year.

Okay. And in terms of CAPEX, if I may do one more, what do you expect to do this year in terms of full CAPEX? And if you are looking abroad, Mexico, IPOTS for a potential expansion in the future? That's my two questions.

Thank you. So full CAPEX execution, and this includes both investments in concession assets as well as major maintenance execution. should be around the 3.5 billion level. And with respect to potential M&A activity, I think that any expansion outside Mexico will be first analyzed by Vinci Airports and not necessarily to be performed through OMA.

Fantastic. Makes sense. Thank you very much.

Thank you. Our next question comes from Bruno Morin with Goldman Sachs. Please proceed with your question.

Thank you. I actually have three questions for you. The first one on the outlook on the regulatory side, the question is actually unrelated with the potential changes in regulation. I just wanted to understand where do we stand vis-à-vis the prior forecast made at the time of the last revision uh, correct me if I'm wrong, but, uh, I guess your last revision happened at the end of 2020, uh, during the pandemic. So traffic levels were pretty much depressed, saw a sharp rebound over the past couple of years. So, um, the question is, where do we stand now? Because this is what was the forecast at that moment for traffic in early 2023. Is the company running above in line or, uh, or below? And also, could you please confirm if at the moment when you had, you know, the revision in MGP at the end of 2020, the level of interest rates that were used as a proxy for risk-free and then for the calculation of the allowed return reflected, you know, kind of the 10-year rates at that moment, which, if I'm not mistaken, will well be where we are today. So that's kind of the first question. On nearshoring, can you share with us evidence of impact on your traffic or inactivity around your main airport coming from nearshoring? Do you think it's already materially impacting traffic? Should we expect more impact going forward? And then the third question is just a clarification. Can you please let us know why? you have not been able to run closer to the maximum tires. Why not run closer to 100%? What prevents the company from being, let's say, more in line with the ceiling in terms of the tires? Thank you so much.

Bruno, So I'll go through your questions, not necessarily in the order you presented them, but with respect to nearshoring evidence, I mean, we have seen some news. There was a big announcement of a major electric vehicle manufacturer that will have a investment in the Monterey area. and some other announcements by other foreign companies to establish presence around the Monterey area. So right now, that is a type of evidence that it's being given publicly, obviously, as time passes, and that investment starts, announced investment starts to translate into direct foreign investment. I mean, we'll probably be able to present more hard data on that. But what we do see is an increase primarily in our Monterey and Ciudad Juarez routes. As you know, Monterey had the best performing growth in the quarter in our network. And we do believe that a lot of that is linked to the renewed interest in Monterey as a major industrial and manufacturing center. And we have seen that since the pandemic, Ciudad Juarez has positioned itself as as a very strong destination for maquiladoras and other type of industrial businesses. And we, that's one of the reasons we are growing our terminal capacity in Ciudad Juarez to attend that demand. So that's with respect to New York shoring. With respect to the MVP negotiation, Still early in the process. We have not started to see what the potential impacts of the different variables that affect the calculation will be. We have to submit a definitive plan to the authority in the middle of 2025, and at the end of 2025 reach a new investment program and tariff outlook for the next five years. So right, the current levels of interest rates to us are not, will not be impactful. The interest rate formula takes the 24-month average before June of 2025, so we'll see what the average is over that timeframe, which has not yet started. And in the case of our maximum tariff, Most of the reason, it's twofold. I think the larger than expected inflation that we had in 2021 and 2022 obviously make us get farther away from the 99% goal. And also we had different passenger mix in some of our airports. that do impact the aggregate calculations. So I think that that is primarily the impact that we have had in trying to get closer to the 100% mark in the recovery of tariff.

Thank you very much. And just a very quick follow up, you know, if you look at traffic now at the beginning of 2023, Is it below, above, or in line with the traffic course that you and the regulator agreed on at the end of 2020?

It's slightly above, but it's not significantly above.

Perfect. Thank you so much.

Thank you. Our next question comes from Lucy Gomez with Compass Group. Please proceed with your question.

Hi, good morning. Thank you for taking my question. It's just a quick follow-up on what you've been talking about, the maximum tariff. But I just want to ask, what was the year-over-year increase that you made this trimester in tariff?

Hi, Lucy. So the increase that we implemented in the first quarter of this year was in the double digit area.

Okay, thank you. And is it fair to assume that maybe moving forward on the next quarter we could see similar, maybe not double digits, but similar increases?

I think that will depend on how inflation behaves and how far away we're from the 100%. So that decision will be taken somewhere around the second half of this year.

Okay. Thank you.

Thank you. Our next question comes from Anton Mortecorto with GBN. Please proceed with your question.

Hi, guys. Thank you for the call and congrats on your results. I just have a quick follow-up on Rodolfo's question regarding Vinci's involvement in the company. Could you provide some more detail on any project initiative or an example to help us better understand how you're leveraging from Vinci's expertise and how it is expected to possibly impact the business?

Sure. I mean, just to give you a few examples in the design of our new terminals, they operate in 70 airports around the world. So they know what has worked in other countries, what hasn't worked. So there's a lot of information to leverage there. There's a lot of relationships that we can lever, for example, with potential suppliers. They have more purchasing power with a lot of them. We're able to get the benefit of that. They talk, since they have 70 airports around the world, they have conversations with basically every airline around the world or most airlines around the world. That's a great opportunity for us to have access to the right people. and try to bring some attention into OMA and potentially open some new routes. Same thing in non-aero business. They also have the knowledge and they have a team of specialized people in each field in their Paris headquarters, which is also very valuable to us. Another example is, for example, tendering processes. We're currently tendering some non-aero retail space. most of the retail companies competing for that space. They previously have relationships with them. They know and they give us a very higher, better negotiating power with them.

That's pretty clear. And just another one related to that. On the law reform, the ideological one, I mean, I understand there's no significant impact on you guys. Just wondering if there is any back operationally wise from the involvement of CETENA in the industry?

Well, the law does permit governments to both operate airlines and airports at the same time, which under the previous law was prohibited. So I believe that from a theoretical standpoint, yeah. some Serena or the Navy could operate airlines and airports at the same time. But in our airports, there is no additional activities or oversight contemplated by the Serena.

Super clear. Thank you.

Thank you. Our next question comes from Fernando Garcia with BTG. Please proceed with your question.

Hi, good morning, everyone. Thank you for taking my question. I have two on my side. The first one is still on tariff. When we compare Monterey Tua with other airports, Monterey has one of the highest tuas. And considering your speech regarding still increasing tariff along this year and your exposure to Viva, which is a neutral low-cost carrier, just wanted to understand if you are thinking of providing any kind of discount for airlines that have higher route frequencies in Monterey, or how do you think of this high exposure to Viva in this scenario of high tours? And my second one regarding Monterey Airport, just wondering if you have any plans maybe to anticipate the build of a new runaway in case your traffic remains performing strongly? Thank you.

So with respect to a potential second runway, In Monterey, yeah, it is contemplated in the final stages of the development of the airport, so post-2035. So it's nothing that we are currently, I mean, analyzing or starting to discuss, and certainly no works yet. will be done in the next few years in that regard. But, I mean, towards the latter part of the concession, yeah, depending on the traffic outlook, a second runway may be needed to continue supporting the growth of Monterey. And with respect to our Monterey Airport and our exposure to Viva, as you know, Viva has around a 40% market share in all of our It's the highest market share that we have, followed by Volaris and Aeromexico. And our incentive policy is general, so we cannot discriminate one airline versus others. And they are based on new routes, openings, and things like that. So no specific policy. with respect to an airline is contemplated.

Great. Thank you.

Thank you. There are no further questions at this time. I would like to turn the floor back over to Ricardo Duenas, Chief Executive Officer, for closing comments.

Thank you all for your participation today. Rufo, Manuel, and I are always available to answer your questions, and we hope to see you soon. Thank you and have a good one.

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