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

Greetings and welcome to the OMA Third Quarter 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce Emmanuel Camacho in Vestor Relations. Thank you. You may begin.

Thank you, Doug. Hello, everyone, and welcome to OMA's Third Quarter 2023 Early Needs Conference Call. Participating today are CEO Ricardo Duenas and CFO Rufo Pesceo. 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 recent uncertainties that could cause actual results to differ materially, including factors that may be beyond our control. With that, I will turn it over to Ricardo Duenas for his opening remarks.

Thank you, Emmanuel. Good morning, everyone. We appreciate your presence on this call today. I will begin by discussing the impact that Hurricane Otis had in our Acapulco Airport, and then we'll comment on recent developments in the regulatory landscape of our airport concessions. Afterward, we will move on to our quarterly results. On the night of October 25, Hurricane Otis struck Acapulco, Acapulco City with category 5 intensity. The hurricane caused some damage to the terminal building of the Acapulco Airport. However, the airport remains operational and is currently focused on humanitarian operations. We are working closely with local and federal authorities to fully restore the regular operations of the airport, which we expect to be relatively soon. In 2022, Acapulco contributed with .6% of our total passenger traffic and .4% of OMA's total aeronautical and non-aeronautical revenues. Regarding recent regulatory changes, on October 4, 2023, the Civil Aviation Agency, an autonomous body under Ministry of Communication and Transportation, notified us about immediate modification established in Annex 7 of the tariff regulation basis of our airport concessions. Over the two weeks that followed, we conducted a thorough review of this new guidelines and engaged in close and constructive communication with the ministry and the AFEC to clarify certain points. During these interactions, the Mexican government was open to dialogue, leading to agreements finally reflected in the modified basis that we received on October 19. And subsequently made public to the market. We don't expect significant impact from this. Another matter that I would like to mention concerns the concession tax. On October 25, the Senate approved the new 2025 Federal Duties Law. This law includes provisions to increase the concession tax from 5 to 9% based on airport revenues effective January 24. It is worth mentioning that under new tariff regulation, the increase in the concession tax affecting the 24 and 25 period will be recognized in the next tariff negotiation of 26 to 30 period through the reference value. It is also essential to understand that the concession tax is part of the calculation variables for determining maximum tariff. This new basis did not change as relative to the original basis. After all these events, we anticipate that OMA will uphold its commitment to adaptability, resilience, and the sustained and successful track record of its financial and operational results. Turning to our main third quarter of this year results. OMA continued to deliver solid financial and operating results during the third quarter. Adjusted EBITDA grew 33% in the quarter to 2.5 billion pesos. And adjusted EBITDA margin reached .4% largely as a result of the increase in both aeronautical and non-aeronautical revenues on our successful cost control strategy. In the third quarter, OMA's passenger traffic reached a record number of 7.4 million, an increase of 19% versus the third quarter of last year. Outstanding results were guided by the performance in Monterey, which accounted for 62% of OMA's total passenger growth as compared to the third quarter of last year. The main destinations of road traffic growth were Tutoluca, Querétaro, Cancun, Santa Lucia, and Mexico City. Most of them considered business routes. On aggregate, these five routes added 255,000 additional passengers in the quarter, an increase of 17% versus the third quarter of last year. Primarily, as a result of the storm passenger traffic performance, aeronautical revenue grew by 31% in the quarter to 2.5 billion pesos. On the commercial front, revenues increased 24% compared to third quarter of last year, driven by restaurants, parking, car rentals, and VIP lounges. Occupancy rate for commercial space stood at .7% at the end of the quarter. Diversification revenues increased 8%. Our hotel services contributed most to this growth. In the second quarter of this year, occupancy rate at our terminal 2NH was 86.3%, while the Hilton Garden Inn Hotel had an occupancy rate of 73.3%. On the capital expenditures front, total investment in the quarter, including MDP investments, major maintenance, and strategic investments, were 964 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, Torreón, Culiacán, and Durango terminal buildings, reconfiguration of the Massa Plan terminal building, major rehabilitation 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 Pérez Plleu, who will discuss our financial highlights of the quarter.

Thank you, Ricardo. Good morning, everyone. I will briefly review our financial reports for the quarter, and then we will open the call for your questions. Turning to OMA's third quarter financial results. Aeronautical revenues increased 31% relative to the third quarter of 22, driven primarily by the .6% increase in passenger traffic and higher revenue per passenger. Non-airport revenues increased 17.6%. Commercial revenues increased 23.6%. The categories with the largest growth were restaurants, parking, car rentals, and VIP lodges. Restaurants and car rentals rose 40% and 28% respectively, mainly due to higher revenue sharing and the impact of the opening of new spaces and improved contractual conditions on renewals. Parking increased .4% as a result of an increase in passengers and higher penetration rates in Chihuahuas, Chihuahua, Culiacan, Monterrey, and Reynosa airports. VIP lodges increased .5% as a result of the increase in passenger traffic and the opening of the Reynosa lounge in August 2023, as well as the Tampico lounge in May 2023 and Chihuahuas in November 2022. Diversification activities increased 8.3%. A strong hotel revenue growth was partially offset by a decline in OMA cargo, which was affected by a decline in revenues related to our ground import cargo. Total aeronautical and non-aeronautical revenues grew .9% to 3.2 billion pesos in the quarter. Construction revenues amounted to 719 million pesos in the third quarter, an increase of 10% as a result of higher MVP investment execution. The cost of airport services and DNA expense increased 2.8%, relative to the third quarter of last year, mainly due to an increase in manual maintenance, contract service, and basic services costs as a result of higher activity in our airports and inflationary effects. Major maintenance provision was 95 million pesos compared to 51 million pesos in 2Q22. OMA's third quarter adjusted EBITDA was 2.5 billion pesos, and the adjusted EBITDA margin was 79.4%. Our financing expense was 272 million pesos, mainly due to a higher interest expense as a result of additional debt issuance and the higher cost of debt. Consolidated net income was 1.3 billion pesos in the quarter, an increase of 28% versus 3Q22. Turning to our cash position. Cash generated from operating activities in the third quarter amounted to 1.3 billion pesos, and cash at the end of the quarter stood at 2 billion pesos. On September 20th, we made a payment for the second installment of the Ordinary Debit amounting to 500 million pesos, in accordance with the resolutions of our shareholders' meetings in April. At the end of the quarter, total debt amounted to 10.7 billion pesos, and we ended the quarter with a healthy net debt to adjusted EBITDA ratio of 1.0 times. This concludes our prepared remarks. Y'all, please open the call for your questions.

Thank you. Ladies and gentlemen, at this time, we'll be conducting a question and answer session. If you'd like to ask a question, you may press star one on your telephone keypad. The confirmation tunnel indicating line is in the question queue. You may press star two 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 key. Our first question comes from the line of Pablo Montesavayas with Barclays. Please proceed with your question.

Hi. Good morning. Ricardo Rufo de Manuel. Thanks for taking my question. I have two questions. The first one is if you have done a quick calculation of what would be your discount rate under these new rules and how does it compare to the previous discount rate on the previous rules? And the second question is about what the media has been published on the 10% decrease of the TUA. Can you please confirm whether the decrease in the TUA is in any way related to the new tariff methodology? Thank you.

Hi, Pablo. This is Rufo. I will answer your first question. The components for the calculation of the discount rate used in the maximum tariff are now clearly stated and less subjective to interpretation. As you know, before the discount rate was based on the yield of Mexican government bonds plus a premium that was to be defined by the ministry. And now the new basis established clearly the variables to be used to determine the discount rate. Based on our calculations, we do not assess a significant impact on the discount rate as a result of the changes that were made in the new tariff basis.

And regarding your second part, Pablo, the discounts are totally unrelated from the new basis. They are unrelated to the aforementioned new regulatory guidelines. There are other agreements we have made with regulatory bodies. These agreements entail a general 10% extraordinary discount in real terms for on passenger charges on TUA starting November and December of 23, applicable to 10 of our airports. After application of this discount in 23, we expect to apply annual inflation adjustments on TUA. Other aeronautical tariffs in addition to a TUA are not subject to the discounts. It is also important to mention that as a result of the discount package previously mentioned and unrelated to the changes in the annex, we will have an MDP capex referral for 24 months. This MDP capex referral amounts to 1.2 billion in the aggregate. And that's a percentage of the original capex commitment represents about 25% in 24 and 13% in 25. These deferments do not compromise the operations, quality, and safety standards of our airports.

Thank you very much, Raekir. Welcome.

Our next question comes from the line of Guillermo Jimenez with JP Morgan. Please proceed with your question.

Good morning, Ricardo, Rufo, and Manuel. Thanks for taking my question. I have two as well. The first one is on margins. And congrats on the very strong margins reported during the third quarter. The question is, how should we think about margins going forward, especially thinking in terms of the increase in the concession fees, and if that will be fully compensated on the aeronautical part of the business? And the second question is regarding to the impacts brought by the hurricane. If you can provide a little bit more color in terms of what should be the actual impact thinking on fourth quarter numbers and potentially early 2024 numbers as well, maybe in terms of traffic or in terms of revenues impact. Thank you.

Sure. Thank you. For the current game, it's too early to assess the amount of the impact. What we can say is that the runway, the platform, the taxiways are in perfect state. The terminal has suffered some damages, however, it is operational. It's important to remind you that Acapulco represents only 3.4 percent of the total revenues of the company. We still have intermittent communication with Acapulco, and we will know the impact of the damages in the next coming days. And regarding to margins, we expect the next year some around 4 percent impact as a result of the concession tax increase. However, this concession tax increase, the amount of 24 and 25 will be recognized as reference value for the next MDP negotiation in 26.

Thanks. Just one quick follow up on the margins. In addition to the concession fees, do you expect any potential inflationary pressures that should alone drop your margins from the current 75, 76 levels? So in addition to the concession fees, is there any other impact that should bring margins down?

I mean, we're still finalizing our budgets for next year. We'll have to, obviously we're incorporating the increase in the concession tax, which will trim close to 4 percent points of margin. And with respect to other inflationary pressures, I think that they could be compensated with inflationary increases in our tariffs.

OK, thank you.

Our next question comes from the line of Rodolfo Ramos with Bradesco BBI. Please proceed with your question.

Thank you, Ricardo Rufo and Manuel for taking my question. Just a clarification on the previous one before I go into a couple of questions that I have. So the hit you're expecting on the concession sheet, you're expecting it to be reflected now in the upcoming MDP, but will it be a kind of a backward looking adjustment or is it just going forward? You'll be able to compensate that to the tariffs. So just that quick follow up first.

No, just for the next two years, for the next two years, that amount will be recognized in the reference value for the next negotiation. And going forward, that will be reflected as a NOPEX expense as it has been in the past.

OK, so it is backward looking. OK, thank you. And just another follow up on the regulatory side. I mean, perhaps it's difficult to say precisely, but just wanted to get a sense of, of how do you see these regulatory changes, particularly on the cap of excess surplus, you know, this 3% cap? Not sure if you're able to quantify or just give us an idea of how much revenues or income this has generated over the last maybe 20 years, you know, you have the concession. So yeah, that'd be my first one. Any color there would be helpful.

I think the new basis, whether thanks to a strap established is to have a more precise traffic vector when we negotiate tariffs with them. So starting starting in the negotiation of 2031, what will happen is there will be a look back for the five, the previous five year period. So in our case, it would be the 26 to 2030 period. And according to that, to the traffic, actually to the revenues from that five year plan, everything that was collected in excess of 3% will be recognized, will be carried forward for the reference value for the next negotiation. In the past, just to give you some in the past four MVP negotiations, two of them, we have been above the negotiated traffic, two times we have been below the negotiated traffic. So there's not necessarily certainty, we will always be above the negotiated traffic. And I think that this annex tries to give more clarity and more transparency as to the traffic vector that we will negotiate on our tariff revisions.

Perfect, very clear. And just one on the business, just your second question. I don't know if you can share your traffic growth expectation for next year. I mean, how and how much are you factoring in for an impact from the Patent Whitney, engine recall, Acapulco, of course, is still early, but just wanted to get a sense of how you're seeing it going into 2024.

But I think for the rest of the year, Pablo, I think it's already incorporated the Patent Whitney issue. We've been working closely with airlines, also with the manufacturers. There's still not much clarity as to what will be the impact on the maintenance schedule of next year. So we're waiting to hear and what will be the impact there.

Thank you. Thank you.

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

Hi, Ricardo, Rulfo, Emmanuel, Hope, everybody who works at OMA and Acapulco Airport, it's time to face. My question is related to the regulatory framework. I think it's hard for us to understand that we have a very few changes on the regulatory framework and put this together as the government's speech of decreasing tariffs by 10 to 15 percent. If you have a similar capex, similar discount rates and tariffs decreasing by 10 to 15 percent, can we assume that it will be harder from now on to get maximum tariffs? It will be running close to 90 percent or something else? Thank you.

So, yes, as you mentioned, there are little modifications to the tariffs. I think the main change is that clarity and takes away some subjectivity before, relative to the previous basis. And with respect to reaching maximum tariffs, I think it's going to be in the case of our existing MVP cycle, which as you know, ends in 2025, we probably are going to be around 97 percent for this year and perhaps a similar percentage the following years. And for the next tariff review, I mean, based on the traffic vector, I mean, obviously, our goal would be to reach the 100 percent level in the following ordinary tariff review.

I see. Thank you very much.

Our next question comes from the line of Bruno Marino with Goldman Sachs. Please proceed with your question.

Thank you for taking my questions. Actually, I have two. The first one is a clarification on the reduction of TUA. I understood that you mentioned that you're going to lower TUA in 10 airports, and that would be offset by capex postponement. Is it fair to say that from an NPV perspective, you're looking to recover 100 percent of the reduction in TUA through this postponement in capex so that the value of the company will not be impaired? And also, in that same topic, if you lower the TUA, which I guess accounts for the majority of your revenues, and if you expect no changes to your tariffs in the MDP as a result of the ongoing discussions, this means that you are going to going forward run below the maximum tariff. So that's the first question. And the second question is, actually, I'd like to have your help to better understand the big picture around the new set of rules for the MDP. We are talking about higher concession fee, which, as you have argued, argues for higher tariffs, all else equal. But at the same time, it seems that the agenda of the government is to lower tariffs, not to increase tariffs. So we are talking about higher concession fee, lower tariffs. The expiry date of the contracts have not changed, and it would be good to have some confirmation from your side if you are now discussing to extend the concession. On the capex as well, the feedback from your peers is that the capex plan for the MDP will likely not change as a result of the new regulations. So if you have the same expiry date, same capex, more concession fee, and you have lower tariffs in the next MDP, how come the returns on the regulated part of the business will not be lower? What are we missing here? Thank you very much.

Just to clarify, there's no extension of the concession has been discussed. During this conversation. It's too early to say what will happen on the next negotiation. We're still two years away. Obviously, the concession tax will get factor into the reference value. There will be many variables that will be moving from now to the 26th negotiation, and this concession tax will be just one of them as many variables are moving. For the next year maximum tariff compliance, we're looking to it's difficult to assess what will be the percentage compliance, given that this to discounts could have some impact on traffic as well. Would you want to add something?

Well, and in preparation for the next MDP cycle, obviously, we'll have to look into how to be more efficient and how to make our investments and to extract the most value out of the infrastructure that currently it's in place to maximize its utilization before increasing the size of the terminals for investing in additional infrastructure. That's something that we'll be working closely in the next couple of years as well.

Thank you. If I may just one follow up question on the potential impacts from the grounding of aircraft as a result of the issue with the engines from Pratt & Whitney. Even though you mentioned you are not ready to provide a forecast for traffic next year, are we talking about negative traffic variation or can traffic still grow next year directionally? What do you think can happen given the extent of the exposure of the two main local carriers in the country? Any guideline you could provide at this point in time?

As you said, it's difficult to assess right now what will be the impact with the Pratt & Whitney engine issue, but what I can tell you is we are expecting some small growth in the aero side of the business for next year. Thank you.

Our next question comes from the line of Juan Mercado with GBM. Please receive your question.

Thank you. Hi. Thanks for taking my question and congrats on the results. My question is regarding the change in the -of-year rate of return calculation from focus on equity returns towards a WACA calculation. Do you expect to change your capital structure given this change? Are you evaluating this or are you comfortable with the current structure?

We're still evaluating. We believe in the case of OMAA, the impact of changing from return on equity to the WACA, it will be relatively small given that our amount of leverage at the moment is currently low. It's currently low. So I believe we would expect to remain most in line with what you have seen in the last couple of years.

Right. Thank you.

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

Hey, thanks for answering my question. My first one is would OMAA ever consider investing in airports outside of Mexico?

We're always open to understanding, to looking at opportunities. We don't have at the moment any concrete transaction in the pipeline, but we're always open for opportunities outside.

As a follow-up, besides the concession fee hike, until the end of 2025, do you guys see any other regulatory changes coming in?

We don't expect any more changes from our conversations with the government, both from the Treasury and the Communication and Transportation. They have mentioned that this has been the end of these modifications in the regulatory process.

All right. Thanks so much.

Our next question comes from the line of Edson McGuria with Summa Capital. Please receive your question.

Hi. Good afternoon. Thank you for taking that. My question, I have the only one related to cost of services. This quarter increase 22%. Could you give us a little bit more color that would happen specifically? Thank you.

Most of the increases is related to maintenance and utilities expense. We have increased areas and expanded the terminals in the last year or so. With the increase of volume of passengers, we have seen a greater growth in maintenance. Sometimes there is some timing issues, but the accumulated expense for the nine months is reflective of the full year cost of maintenance.

Okay. Thank you so much.

Our next question comes from the line of Gabriel Kamloff-Arb with Scotiabank. Please proceed with your question. Gabriel, your line is live. Sorry.

Can you hear me now?

Yes.

Hi. Thanks for the call. Just a quick follow-up question. Considering that the 10% decrease on TUA, the increase on the concession fee, and the change in the methodology for the discount rate will be somehow offset or considered for the next MDP. The concession fee, it's my understanding, it also considers the non-regulated portion of the Dubai tariffs. Thank you. Also, if you could clarify again the CAPEX movement for the next two years that will be resulting from these amendments, these regulatory changes. Thanks. Sure.

In the next review, certainly the increase in the concession tax and the rate of 9% will be incorporated into the calculation. Now, the discount of the 10% TUA is something that only affects this period, so it will not be part of the variables to be used in the negotiation of the next maximum tariff in 2026. Now, with respect to the CAPEX referral, in the aggregate, it's 1.2 billion pesos. September 2023 purchasing power. That's around 890 million for 2024, and the remainder around 400 million for 2025, which represents roughly 25% of the regional CAPEX commitment in 2024 and 13% in 2025.

Okay. Thank you. In the case of the concession fee, it does affect the commercial or the unregulated portion of the business, and how will you be able to offset it? Only through increasing tariffs and for the next MDP, or is there any other leeway you can negotiate there?

And this hasn't changed from the previous basis. The formula for operational cost to determine the maximum tariff just incorporates expenses related to the regulated side of the business. So, yes, commercial revenues would be subject to the increase in the due act, in the concession tax, and we will have to see how to adjust our rates to recover some of these increases. I think that's always been the case.

Okay. Thank you very much.

Our next question comes from the line of Fernanda Retia with BTG Pactual.

Please answer. Thank you for taking my question. Just a follow-up to understand a little bit further this TUA discount. This 10% extraordinary discount, it was given just to avoid you to surpass the maximum amount of the rate, or it was to make the airfares more competitive, just because you mentioned that you expect to reach 97% of maximum rate this year. So, and you're just lowly. Could you repeat the first

part? Could you repeat the first part, Fernanda? There was bad communication. Could you repeat it, please?

Yeah, no, sure. I just wanted to understand the rationale of the government to apply this 10% of the extraordinary discount. Was it just because if you don't apply, you would probably surpass the maximum rate, or it is a measure to incentivize to lower air tariffs. This is the first one. And then I make my second one.

I think it was hard to speak on the rehab, but I think that the rationale is trying to incentivize.

All right. No, because you mentioned that you're expecting to reach 97% of maximum rate. So, in the end, it's just a 3% discount on your regulated revenues, right? Is it correct to make this assessment?

Yes, it will be slightly above 97%. The reason is this for this year, it will only be two months, and that 97% accounts for the whole year.

Right. And second, still on this topic, we know that this is a nearly discount. Could you give us a sense of how much discount did you apply last year just for a reference for us to see if 10% is in line with historical average?

We, from time to time, enter into agreements for new route openings and other strategies with airlines, but we haven't had general discounts such as these for many years.

Okay. Thank you.

Our next question comes from the line of Alan Macias with Bank of America. Please proceed with your question.

Hi. Good morning, and thank you for the call. I just have, I guess, two questions. One clarification. The two represents what percentage of aeronautical revenue? And the second question would be on the expected higher CAPEX for the Acapulco airport. And would that be incorporated into the new master development program or before? Thank you.

On the second part, we've been in very close coordination with the government for Acapulco. We still don't know the size of the damage. We know that the core part for operating the airport, it's okay. Obviously, terminal has suffered some damages. On our last conversation with the government, they are very open to work closely to how can we offset the impact from the hurricane in our CAPEX. And for the two, it represents 89% of our aeronautical revenues.

And just one more question on the engine recall impact. Any impact you have seen as of October, during October? Thank you.

Yeah, we have seen that the scale sheets in databases such as OIG have been trending down over the last month or so. So yeah, we do believe that what is reflected right now in the system is already incorporating what's known of the recall of brown Whitney engines, at least for the winter season.

We know that the airlines are taking a lot of measures to try to offset this impact. We know they are trying to extend visas, trying to extend the life of some of their other aircraft. So in the next two months, we will have more clarity what will be the impact next year.

Thank you.

Our next question is a follow-up question from the line of Bruno Marino with Goldman Sachs. Please proceed with your question.

Yes, I just wanted to clarify one specific point. What leverage or what debt specifically will be considered for the calculation of the cost of the five-year average? Also, to the extent that you might have corporate debt or the event that you invest abroad and you have debt attached to it, will they look just at the debt at the asset level in Mexico or will they look at OMA as a whole? Thank you very much.

I think in the basis that we published, there are some debts to capital ratios that are averages that include other airport groups as well. And it's only debt related to assets in Mexico it excludes debt that is not funding operations in Mexico.

There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

Thank you all for participating today. Rufo, thank you and have a good day.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.