speaker
Operator

Welcome to the Grupo Aeroportuero del Centro Norte OMA second quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. A 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. Please note this conference is being recorded. I'll now turn the conference over to your host, Emmanuel Camacho. You may begin.

speaker
Emmanuel Camacho

Thank you, Jamali, and hello, everyone. Welcome to almost second quarter to 2023, our next conference call. Participating today are CEO Ricardo Duenas and CFO Rufo Perez-Piego. We'll 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 breaks and uncertainties that could cause actual results to differ materially, including factors that may be beyond our control. And with that, I will turn the call over to Ricardo Reyes for his opening remarks.

speaker
Ricardo Reyes

Thank you, Manuel. Hello, everyone, and thank you for joining us today. This morning, I will briefly comment on several events and milestones occurred during the quarter. Then I will review our operational performance and financial results. And finally, we will be pleased to answer your questions. Today, I am pleased to announce that last Tuesday, we released our 2022 sustainability report. This report is a testament to our commitment to transparency, accountability, and our unwavering dedication to environmental, social, and governance principles. We are proud of the progress we have made in our sustainability journey, and we're committed to driving positive change in the years to come. The 2022 Sustainability Report is built upon global reporting initiative and the Sustainability Accounting Standards Board frameworks. This framework has guided us in creating a comprehensive and accurate portrayal of our sustainable practices and progress over the years. One of the essential aspects of this report is the re-evaluation of materiality, where we conducted a thorough analysis to identify the most critical issues that affect our stakeholders and our business. We have identified and addressed 15 material topics that reflect the core sustainability challenge and opportunities we face as an organization. By focusing on these areas, we can drive meaningful change and create a positive impact to our stakeholders. Some significant achievements showcased in the 2022 sustainability report include the substantial reduction in our carbon footprint during last year. Last year, 95% of our energy consumption was sourced from renewables, resulting in a 48% reduction in our total scope one and two carbon emission versus 2021. Additionally, we have made remarkable strides in reducing our water consumption. We managed to reduce water usage by 17% in 2022, despite a 29% increase in passenger traffic as compared to 2021. As we embrace sustainability, we recognize that this is an ongoing commitment to responsible business practices. We understand that there is still much work to be done, and we remain committed in our determination to promote sustainability sustainable mobility. In addition, alongside the release of our 2022 sustainability report, we also published our green bond progress report pursuant to ALMA's green bond framework. This report provides information about allocation of proceeds and the impact of projects financed with the one billion peso green bond issued in 2021. As of January 31st, 2023, we have contracted 719 million pesos in eligible green projects. These initiatives, which include our solar panels are already in operation, are projected to reduce over 15,000 megawatt hour in energy consumption annually. And our two new water treatment plants in San Luis Potosi and Chihuahua airports will allow us to treat an additional 24,000 cubic meters of water per year. I invite you all to explore this report in detail. Both documents provide comprehensive insights into our sustainable practices, achievements, and ongoing initiatives. We welcome the opportunity to engage in meaningful discussions with all of you about our sustainability efforts. Moving on to recent CAPEX development, as part of our efforts to enhance the services and capacity of the Monterey Airport, on June 20, 2023, we started operations of the Wing 1 building. which is part of the airport's expansion and remodeling project. This new wing serves passengers traveling through Terminal C, has an area of 5.6 thousand square meters, seven boarding gates, and an annual capacity of 1.4 million passengers. As we continue developing the Monterey Airport, we look forward to welcoming more passengers to experience the enhanced facilities and services offered by our expanded airport. Regarding growth of our industrial park in Monterey, during the quarter, we started the construction of two new industrial warehouses of 14,000 square meters and 10,000 square meters, respectively. These warehouses are expected to start generating revenues in the second quarter of next year. In addition, since the end of 2022, we have been engaged in the construction of two additional warehouses. Once these four warehouses are fully operational, total leased area will grow by 56% to 116,000 square meters, representing 83% of the total leasable space in the industrial park. As another highlight of the quarter, in Terminal 2 NH Collection Hotel at the Mexico City Airport, we successfully finished the remodeling. All 287 rooms underwent a full transformation, along with public areas and the restaurant of the hotel. creating an enhanced experience for our guests, which should translate into solid occupancy factor in subsequent years. Finally, in line with our strategy to improve passenger experience in our airports, we have successfully opened another OMA premium lounge in Tampico Airport. With this addition, we now directly operate a total of 10 lounges in eight of our airports. In addition, we are in the process to start operations of new lounges in our Durango, Reynosa, and Cihuatanejo airports. Turning to our main second quarter 2023 results, OMA delivered solid financial and operating results in the second quarter of this year. Adjusted EBITDA grew 25% in the quarter to 2.3 billion pesos, and adjusted EBITDA margin reached 78.6%, setting a new record high, largely as a result of the increase in both aeronautical and non-aeronautical revenues and our successful cost control strategy. In the second quarter, OMA's passenger traffic reached 6.6 million, an increase of 13% versus the second quarter of last year. During the quarter, our Monterey Airport delivered an outstanding passenger traffic performance, contributing with 544,000 additional passengers in the second quarter of 23 versus second quarter of last year, equivalent to 73% of OMA's total passenger growth in the quarter. The top five destinations driving the airport's growth in the quarter were Toluca, Cancun, Querétaro, Felipe Ángeles, and Houston, which collectively accounted for half of the airport's overall growth. Besides Monterey, the airport of Ciudad Juarez, Acapulco, and Mazatlán also contributed most to passenger growth. And the routes from this airport were the strongest traffic growth compared to the second quarter of last year, where the Ciudad Juarez to Guadalajara and Cancun routes. Acapulco to Felipe Angeles and Guadalajara routes, and Mazatlán to Mexico City and Tijuana routes. On aggregate, these six routes added 130,000 additional passengers, equal to 17% of OMA's total passenger increase in the quarter. Primarily as a result of the strong passenger traffic performance, our aeronautical revenues grew by 26% in the quarter to 2.3 billion pesos. On the commercial front, Revenues increased 23% compared to the second quarter of last year, driven by parking, car rentals, restaurants, and VIP lounges. Occupancy rates for commercial space stood at 94.3% at the end of the quarter. Diversification revenues increased 5%. Our hotel services contributed most to this growth. In the second quarter of 2023, occupancy rate at our Terminal 2 NH collection hotel increased 420 basis points, to 84.7%, reflecting the successful completion of a remodeling project, while the Hilton Garden Inn had an occupancy rate of 76.2%, 90 basis points higher. On the capital expenditure front, total investments in the quarter, including MDP investments, major maintenance, and strategic investments, were 184 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 Ciudad Juarez, Culiacan, and Durango Terminal buildings. The reconfiguration of the Massaplan Terminal building, major rehabilitations and reconfiguration of platforms and taxiways in several airports, and construction of four industrial warehouses. I would now like to turn the call over to Rufo Perez Pliego, who will discuss our financial highlights for the quarter.

speaker
Rufo Perez Pliego

Thank you, Ricardo, and good morning, everyone. I will briefly review our financial results for the quarter, and then we'll open the call for your questions. Turning to OMA's second quarter financial results. Iron article revenues increased 25.8% relative to the second quarter of 2022, driven primarily by the 13% increase in passenger traffic and high revenue per passenger. Non-iron revenues increased 15.7%. with commercial revenues increasing 23%, and the categories with highest growth were parking, car rentals, restaurants, and VIP lounges. Parking increased 21% as a result of an increase in passengers and higher penetration in the Monterey, Chihuahua, and Reynosa airports, as well as higher turnover in short-term state parking across all airports. Car rentals and restaurants rose 36% and 30% respectively, mainly due to higher revenue sharing and the impact of the opening of new spaces and improved contractual conditions. DMP lounges increased 44% as a result of the increase in passenger traffic and the opening of the Tampico Lounge in May, as well as the Ciudad Juarez Lounge opened in November of 2022. Diversification activities increased 4.5% as a strong hotel revenue growth was partially offset by epic climbing on Macabre. which was affected by decreased operations from our clients in the ground import cargo activity. Total aero and non-aero revenues grew 23.4% to 2.9 billion pesos in the quarter. Construction revenues amounted to 710 million pesos in Q23, an increase of 27% as a result of higher MVP investment execution. The cost of airport services and G&A expense increased 11.2% relative to the second quarter of 2022, mainly due to higher payroll costs and an increase in the number of parking and OMA VIP launch staff. Other increases came at the minor maintenance and other cost and expenses line items, which grew due to overall higher activity in our airports, as well as inflationary effects. Major maintenance provision was 82 million pesos as compared to 298 million pesos in 2Q22. HOMA's second quarter adjusted EBITDA was 2.3 billion pesos, and the adjusted EBITDA margin was 78.5%. Our financing expense was 282 million pesos, mainly due to a higher interest expense as a result of additional debt issuance and higher average cost of debts. Consolidated net income was 1.3 billion pesos in the quarter, an increase of 37% versus 2Q22. Turning to our cash position. Cash generated from operating at 50% in the second quarter amounted to 1.7 billion pesos, and cash at the end of the quarter stood at 2 billion pesos. On June 22nd, we made the payment for the first installment of the ordinary dividend of 1.8 billion pesos in accordance with the resolutions of our shareholders' meeting in April. The remaining 500 million will be paid no later than September 30, 2023, and we will provide you with a timely update on the matter. At the end of the quarter, total debt amounted to 10.8 billion pesos, and we ended the quarter with a healthy net debt to adjusted EBITDA ratio of 1.1 times. This concludes our prepared remarks. Smiley, please open the call for your questions.

speaker
Operator

Thank you. At this time, we will 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. Our first question comes from the line of Rodolfo Ramos with Redesco BBI. Please proceed with your question.

speaker
Rodolfo Ramos

Good morning, Ricardo, Rufo, and Manuel. Thanks for taking my questions and congratulations on the strong results there. Two questions here, if I may. The first one is can you remind us what is your expectation for traffic growth this year And can you frame for us the kind of discussions that you're having with airlines and their appetite? It seems like when you look at the routes opening, it seems to be all the non-touristic destinations. Just wanted to get your take there on business outperforming leisure potentially within your network. So that would be my first question. And second question, you know, when you think of the different projects that you're currently developing in Monterrey you know, as part of your MVP and also other terminal expansions at other airports. I mean, how do you see your cost structure growing in the next two years, you know, focusing on the projects that are probably going to hit this or next year? So how do you see cost growing in the next two years until your next MVP in 2025? Thank you.

speaker
Ricardo Reyes

Thank you, Rodolfo. On first part of the question, in terms of traffic growth, we expect something close to 26 million passengers per year is achievable. And you're right, during the quarter, we opened eight new routes, most of them from Airbus and Viva Airbus, Viva Airbus from Mexicali and Bogota. The rest in Airbus, mostly business traffic. As you know, business traffic was lagging during COVID. But now that we're starting to seeing increased nearshoring activity, we're starting to see a strong pickup in business traffic, and that's being reflected in our numbers.

speaker
Rufo Perez Pliego

Hi, Rodolfo. And with respect to your second question on costs, certainly we are going to see a slight pickup on some of the fixed costs that we have as a result of the openings. We opened a substantial facility in Monterey at the end of the quarter. We are also making good progress with expansions in the Durango and the Ciudad Juarez airports. But, I mean, we should see a slight growth in cost above inflation as a result of these expansions.

speaker
Gabriel

Thank you.

speaker
Operator

Our next question comes from the line up. Peter Mendez with JP Morgan.

speaker
Peter Mendez

Good morning and afternoon, everyone. Ricardo, Rufio, Emanuel. Thank you for taking my question. Two questions. The first one is a follow-up to the previous questions. You mentioned about the traffic for this year. Just wondering what's your expectations for traffic in the longer term, think of the near-term discussions and investments in Monterey. And I know your MDP is still far away, but what kind of traffic increase maybe we could expect for the upcoming years? And the second question is related to cash distribution, capital allocation. So what kind of deep end slash buybacks should we expect on the verge of these additional investments on the commercial front? Thank you.

speaker
Ricardo Reyes

For the first part, it's important to remember that during the first half of this year, we're comparing to a slightly lower base from last year when we have the Omicron variant. So, we expect growth to start normalizing a bit going forward. It's hard to tell what will be the projections, but we expect some sort of normalization, and we also expect business traffic to have a better performance than the one we've seen in the last couple of years.

speaker
Rufo Perez Pliego

And with respect to cash distributions, as you know, this year we had an extraordinary dividend paid in March, and the ordinary dividend that was declared in the April shareholders' meeting, 500 million of which are still pending to be paid. We have yet to define what the cash distributions are going to be for next year, and that's something that we need to propose to shareholders.

speaker
Peter Mendez

Okay, super clear.

speaker
Gabriel

Thank you very much.

speaker
Operator

Our next question comes from the line of Alberto Valerio with UBS. Please proceed with your question.

speaker
spk08

Hi, thank you for taking my questions. I have two on my side as well. About maintenance, major maintenance for the quarter. Would you like to know if there was any special item for this quarter to be decreased year over year and what should we expect for the remaining of the year? And the second one about tariffs, what percentage of maximal tariffs are you guys running? Should we expect any increase for the remainder of the year. Thank you very much.

speaker
Rufo Perez Pliego

Hi, Alberto. With respect to major maintenance, I think that if you take the semiannual amount, the community amount for the six months and annualizes, that will be our forecast for the year. The reason versus the decline of last year is that a lot projects included in that major maintenance provision, which, as you know, is a non-cash item, are close to being fully provisioned. And the going forward rate is going to be lower than what we were experiencing in previous years. And with respect to your second question, I think that we're targeting to end up above 95% levels of tariff compliance.

speaker
Operator

We also don't expect an increasing tariff for the remaining of the year. Fantastic. Thank you very much. Very clear. Our next question comes from the line of Jay Singh with Citi. Please proceed with your question.

speaker
Jay Singh

Thank you for taking my question. Can you provide any high-level color regarding what's driving such strong traffic goals from Acapulco at over, you know, 21% year over year? Thank you.

speaker
Rufo Perez Pliego

So, Acapulco, in terms of percentage points, was the highest growth in our network. I think it's, there are no new routes that were opened this quarter. So, it's mostly improved load factors in the existing routes that we have to Acapulco.

speaker
Ricardo Reyes

It's important just to keep in mind that with the saturation of the Mexico City Airport, what we have seen with most of the airlines as they're starting to add

speaker
Rufo Perez Pliego

uh higher capacity uh uh aircraft and uh and that's also impacting a lot of uh yeah that type of traffic yeah well one clarification is uh even though some of these routes were opened uh before uh last year they were not uh uh in in operation and uh we got about 19 000 passengers from the that are new and were not last year to Acapulco. So that explains half of the growth of during the quarter.

speaker
Jay Singh

No, that's super helpful. I also would like to know, you know, what caused the 4.9% drop in cargo unit volumes versus a year ago? Would you say that was due to more competition from, you know, third-party storage facilities? Or what would you say led to that?

speaker
Gabriel

You said in cargo? Yes. Yes. Yeah.

speaker
Tamaulipas

So, in cargo, it's all right.

speaker
Rufo Perez Pliego

Yeah. So, yeah, cargo units decreased 4.9% versus 2Q2022. This was mostly attributed to cargo at the Monterey airport. And we are seeing a deceleration on cargo activity. in these months.

speaker
Jay Singh

Thank you so much.

speaker
Ricardo Reyes

Also, just to keep in mind that the currency, the strong peso also has some effect in the level of exports.

speaker
Operator

Our next question comes from the line of Edson Morgia with Summer Cap. Please proceed with your question.

speaker
Summer Cap

Hi. Good afternoon. Thank you for taking my questions. I have two of them. The first one is related to the cost of hotel services. This quarter, they increased 24%. So, could you give us a little bit more code about the rationale for the increasing? And the second one is regarding just sustainable reports. You mentioned about the ACA that you got the Level 1 this first half of 2023, and you are pursuing Level 2. Could you give us a little bit more details about what will be new getting level two from the ACA? Thank you.

speaker
Rufo Perez Pliego

So, with respect to hotel costs, there has been a strong pickup in hotel activity, and that has resulted in some I would say in the line items of payroll and food and beverage consumables. And as we expect growth to continue in recovering in the two hotels, we should see at least for the rest of the year similar increases in the cost of hotels. And with respect to sustainability efforts, as you mentioned, we already have a, level one certification for the 13 airports of HOMA that were granted in February. We are already working towards the level two certification, which we would expect to get by the beginning of next year as well in all of our airports.

speaker
Summer Cap

Just a follow-up on this, but what are the differences? I mean, regarding .

speaker
Rufo Perez Pliego

With level one is basically you have to have like a carbon map and a diagnosis of your footprint. And in level two, you have to have specific KPIs for a long-term downward trend in those KPIs.

speaker
Summer Cap

Okay. Makes sense. Thank you so much.

speaker
Operator

Our next question comes from the line of Gabriel . please proceed with your question.

speaker
Gabriel

Gabriel, are you there? Sorry, yeah, can you hear me now?

speaker
spk13

Yes, you can proceed. Okay, so yeah, thank you. Thanks for the call. Can you give us a bit of color on the new route opening For example, the Tamaulipas, Matamoros, Piedras Negras. Is that a thing about nearshoring and manufacturing facilities being built there, or is it more like a higher demand for regional cities? And also, the airline that operates such roads, is it a large airline, a small, a low-cost carrier, or how's the dynamics of those roads? Thank you. Thank you.

speaker
Tamaulipas

Thank you, Gabriel.

speaker
Ricardo Reyes

That's mostly related to the, it's a new airline called Aerus. It's, and they have smaller planes, Cessna planes. And it's going to be focused on more regional routes. So, out of the eight routes that we opened during the quarter, six of them are related to this new airline. And yes, it's regional activity, mostly related to near-flowing activity.

speaker
spk13

Okay, so it's like a like planes for about 20 passengers or something like that or bigger, a bit bigger, a bit lower?

speaker
Ricardo Reyes

No, no, you're right. It's around 20 passenger aircrafts.

speaker
Gabriel

Okay, thank you very much.

speaker
Operator

Welcome. Thank you. Our next question comes from the line of Fernanda Regia with BTG Actual. Please proceed with your question.

speaker
Fernanda Regia

hi thank you for taking my question i have two actually the first one uh if you could further explore the capacity expansion at your monterey airport uh when do you expect to reach uh the full capacity of this 1.4 million passenger how can we think of the incremental passenger and when do you expect to to reach 100 of capacity and the second i was curious to hear your opinion because As you comment, Mexican Airlines have been adding domestic capacity because of the restriction regarding the Category 1 status. I was wondering once Mexico recovers the Category 1, we can have some shift of traffic from domestic to international flow. And given that you are the most exposed to domestic routes, I wanted to hear your thoughts or maybe you could have some impact because of this capacity shift. Thank you.

speaker
Tamaulipas

Sure. Thank you, Fernanda. In terms of capacity, our goal for this phase of expansion is to increase

speaker
Ricardo Reyes

the current capacity of the airport by around 50%. Remember, this terminal was – the current terminal was for up to 12 million passengers. We're looking to expand to 16 million passengers. We're going to keep evolving as traffic continues to grow. Fortunately, we don't see in the near-term future any bottleneck either on the air side, meaning the runway, apron, or taxiway, or on the terminal side. we'll keep growing as demand expands, but the current phase that we're working on is to increase by 50%. So once we finish, we just finished this wing one that is connected to terminal C, we already expanding that wing to connect it to the current terminal A. Once that wing is connected to terminal A, we're going to use terminal C for cargo expansion project. Then we'll evolve to a second pier, which it will be the second wing. And then also another airside space, That's pretty much it. And in terms of category two, once we get back to category one, we expect that to happen somewhere by the end of this year. We expect it to don't have so much impact in our traffic. What we have seen in the last year, the last few months, it's all that capacity that hasn't been able to be – that hasn't been absorbed by local carriers, has been absorbed by foreign carriers. We believe that the growth that we're seeing in business routes is going to remain constant even when we shift to category one. So we don't expect any major shifts in our traffic projections as a result of the shift to category one.

speaker
Gabriel

And our next question.

speaker
Operator

Alright, next question comes from the line of Juan McDelta with GBM. Please proceed with your question.

speaker
Juan McDelta

Hi, thanks for taking my question and congrats on the results. My question is a quick follow up on the previous question on tariffs. I understand that you were at a 95% level of the maximum tariff allowed during the last quarter. Are you currently in that level? And if I understood well, you expect to maintain a 95% by year end, right?

speaker
Rufo Perez Pliego

Yes, that's correct. Due to seasonality factors and mix between airports during the year, it might shift. But overall, for the full year, yeah, we're targeting slightly above 95%. Great.

speaker
Juan McDelta

And currently, you're around that level, right?

speaker
Rufo Perez Pliego

Yes, we're around those levels, yeah.

speaker
Gabriel

Great. Thanks for the color and for the results. Thank you.

speaker
Operator

And we have reached the end of the question and answer session. I'll now turn the call back over to Ricardo and Joana for closed remarks.

speaker
Ricardo Reyes

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

speaker
Operator

This concludes today's conference. Thank you for your participation.

Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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