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

Greetings and welcome to Grupo Aeroportuario del Centro Norte AMA fourth 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 a 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. You may begin.

Thank you, Doug, and hello, everyone. Welcome to OMA's fourth quarter 2023 earnings conference call. We're delighted to have you join us today as we discuss our company's performance and financial results for the past quarter. Participating today are CEO Ricardo Duenas and CFO Rufo Perez-Piego. 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. And with that, I'll turn the call over to Ricardo Buenas for his opening remarks.

Thank you, Emmanuel. Good morning, everyone. We appreciate your presence on this call today. This morning, Rufo and I will review our annual operational and financial results, and then we will be pleased to answer your questions. I will start by discussing our full year 2023 highlights, and then I will move on to our main fourth quarter results. OMA achieved another exceptional financial and operational performance, setting new records for the full year 2023. We achieved record breaking results in passenger traffic revenues adjusted EBITDA with an impressive adjusted EBITDA margin of 78.4% and then consolidated net income. Our full year performance was propelled by a robust increase in both aeronautical and non-aeronautical revenues underpinned by our successful cost control strategy. During 2023, the airport that contributed most to the growth of passenger traffic was Monterey, which grew by almost 22% during the year. The performance of passenger traffic from Monterey to the metropolitan area of Mexico City, including Mexico City, IFA, and Toluca airports is notable. During the year, traffic in the market represented 15% of our total passenger traffic and grew collectively by almost 600,000 passengers, an increase of 18% as compared to 2022. It is also important to highlight the positive performance on routes from Monterey to Queretaro, Cancun, Guadalajara, Houston, and Tijuana, which collectively add almost 700,000 passengers in the year and grew by 19%. As a result of our performance, 12-month passenger traffic stood at a new record level of 26.8 million passengers, which represents a 15% growth as compared to 2022. Regarding our financial performance, aeronautical and non-aeronautical revenues reached again record levels in 2023, growing 27% at 18%, respectively, versus 2022. As a result, our adjusted EBITDA for the year was 9.1 billion pesos, an increase of 28%. And we set a new record of our adjusted EBITDA margin at 78.4%. Consolidated net income for the year reached a record of 5 billion pesos and increased by 28% compared to 2022. In reviewing the significant events of the past year, it is clear that we face both challenges and opportunities. We have remained consistent in our commitment to transparency, sustainability, and operational excellence, reflecting our dedication to generating long-term shareholder value. Throughout 2023, we achieved notable milestones, including the opening in June of Wing 1 in the Monterey Airport as part of the major expansion project to enhance our capacity to serve passengers and accommodate growth in the airport. We also made significant investments in improving and expanding our diversification activities, such as the completion of the remodeling of the NH Terminal 2 Hotel at Mexico City Airport, and the construction of six industrial warehouses at our industrial park in Monterey, of which we have completed two. In addition, we opened three new OMA premium lounges facilities at Tampico, Reynosa, and Durango airports. Furthermore, in 2023, we effectively managed regulatory adjustments as shown by our proactive approach and respond to changes in our basis for tariff regulation. Despite challenges such as Hurricane Otis that impacted Acapulco Airport, we demonstrated agility and determination, ensuring minimal disruption to our operations. As we move forward, we remain focused on delivering value to our shareholders while maintaining our commitment to sustainability and operational excellence. We are aware of the challenges posed by the capacity reductions in aircraft due to the Pratt & Whitney engine recall program affecting two of the most relevant Mexican airlines. However, opportunities persist, particularly in terms of nearshoring in northern Mexico and the potential for increased commercial revenue per passenger. I will now move on to our fourth quarter performance. OMA delivered another strong financial operational performance in the quarter of 2023, in the fourth quarter of 2023. Adjusted EBITDA grew 16% in the quarter to 2.3 billion pesos, and adjusted EBITDA margin reached 77.7%, largely as a result of the increase in both aeronautical and non-aeronautical revenues, as well as our continuous cost efficiencies. In the fourth quarter, OMAS passenger traffic reached 6.8 million, an increase of 5.2% versus the fourth quarter of 22. It is worth noting that excluding Acapulco, passenger growth in the quarter was 7.1%. Outstanding results in the quarter were guided by the performance in Monterey, which contributed with 96% of all mass total passenger growth as compared to the fourth quarter of 22. The routes from Monterey that experienced the highest growth in terms of passenger volume were to Queretaro, Guanajuato, Tijuana, Mexicali, Tapachula, Toluca, and Cancun. which collectively accounted to 47% of the traffic growth during the quarter and grew by 20%. Primarily as a result of the strong passenger traffic performance, our aeronautical revenues grew by 13% in the quarter to 2.2 billion pesos. Commercial revenues increased 14% as compared to the fourth quarter of 22, driven by restaurants, parking, and VIP lounges. The restaurant light items benefit from the opening of new food and beverage shops across our airports, as we have sought to optimize and increase the revenues from leased commercial space, as well as from participation of sales. Additionally, as part of our strategy to directly operate and renovate our existing OMA preview lounge facilities, we have also increased the number of lounges available at our airports. In the fourth quarter of 23, revenues benefit from three openings that occur during the year. Today, we operate 12 lounges in 10 of our airports. Occupancy rate for commercial space stood at 95% at the end of the quarter. On the diversification front, revenues increased 15%. Omicron contributed most to this growth, mainly as a result of an increase in the number of tonnage handled particularly for service related to storage and custody in both ground and air import cargo. In the fourth quarter of 23, occupancy rate at our Terminal 2 NH was 92%, while the Hilton Garden Inn Hotel had an occupancy rate of 68%. Regarding the industrial park in Monterey, we have initiated the construction of two new warehouses for 6,000 and 9,000 square meters respectively. These warehouses are projected to begin generating revenues in the second half of 24. With the addition of these warehouses, the leased area will expand to approximately 131,000 square meters, representing 95% of the total leasable capacity of the industrial park. On the capital expenditure front, total investments in the quarter, including MPP investments, major maintenance, strategic investments were 1 billion pesos. During the quarter, some of the most relevant projects we're working on are the expansion and remodeling of the Monterey Airport Terminal A building, as well as the Ciudad Juarez, Torreón, Culiacán, and Durango terminal buildings. Reconfiguration of the Mazatlan terminal buildings. Major rehabilitation and reconfiguration of platforms and taxiways in several airports. And construction of four industrial warehouses. Finally, I'm delighted to share that we have achieved airport carbon accreditation level 2 certification in our 13 airports. This achievement signifies not only our commitment to reducing our carbon footprint, but also aligning with global sustainability goals and maintaining a role as leader in the aviation industry efforts to combat climate change. I would now like to turn the call over to Rufo Perez-Pelé, who will discuss our financial highlights for the quarter.

Thank you, Ricardo, and good morning, everyone. I will briefly review our financial results in the quarter, and then we will open the call for your questions. Turning to OMA's fourth quarter financial results. Aeronautical revenues increased 13.4% relative to 4Q22, driven primarily by the 5.2% increase in passenger traffic and high revenue per passenger. Non-aero revenues increased 13.9%. with commercial revenues increasing 14.3%, and the categories with the highest growth were restaurants, car parking, VIP lounges, and retail. Restaurants rose 38%, mainly due to the opening of spaces that Ricardo mentioned earlier, in the Monterey and Tampico airports, as well as higher revenue sharing. Parking increased 10.4% as a result of an increase in passengers and higher penetration in Monterey, Culiacan, San Luis Potosi, and Torreon airports. VIP lounges increased 25.6% as a result of the increase in passenger traffic and the opening of the Durango Lounge during the quarter, as well as the Tampico Lounge opened in May of 2023 and the Reynosa one opened in August of 2023. Diversification activities increased 14.9%, mainly due to higher revenues from Omacarga and hotel services. Total aeronautical and non-aeronautical revenues grew 13.5% to 2.9 billion pesos in the quarter. Construction revenues amounted to 805 million pesos in the fourth quarter, a decrease of 27% relative to the same quarter of last year as a result of lower MDP investments in the quarter. The cost of airport services and G&A expense remained flat relative to the fourth quarter of 2022. We had the decline in payroll, which decreased 10 percent, which was offset by an increase in other costs and expenses, as a result primarily of higher information technology expenses in the quarter. Also, contracted services grew 13.7 percent due to the beginning of operations of Wing 1 in the Monterey airport and higher unit costs charged by third-party service suppliers for cleaning and other services. Major maintenance provision was 95 million pesos as compared to 41 million pesos last year. OMA's fourth quarter adjusted EBITDA was 2.3 billion pesos and the adjusted EBITDA margin reached 77.7%. Our financing expense was 224 million pesos mainly due to a higher interest expense as a result of additional debt issuance in 2023 and the higher average cost of debt. Consolidated net income was 1.3 billion pesos in the quarter, an increase of 11% versus for Q22. Turning to our cash position, cash generated from operating activities in the fourth quarter amounted to 1.7 billion pesos, and cash at the end of the quarter stood at 2.6 billion pesos. 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-adjustability ratio of 0.9 times. This concludes our prepared remarks. Doug, please open the call for your questions. Thank you.

Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you'd like to ask a question, you may 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 the 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 Rudolfo Ramos with Bradesco BBI. Please proceed with your question.

Thank you. Good morning, Ricardo, Rufo, and Mariana. Thanks for taking my questions. Two questions on my side. The first one is more of a conceptual one. I'm just trying to understand. you know, what to expect from your NDP negotiation with this new tariff regulation, and now having seen how ASUS NDP concluded, I mean, do you expect that in, given your circumstances and your situation, that a similar CAPEX increase would have to happen for you to see a tariff adjustment of that magnitude? And whether you, you know, you see the CAPEX needs in your airports, you know, in the current airport infrastructure, that you currently have. So that's my first question. I have a second one. I don't know if I should pose both or... Yeah, please. Go ahead. Okay. The second one is on this private Monterrey Northern airport, and the military intentions to operate commercial operations there. So we had a conversation with the operations staff there, and they believe they can receive large, narrow-body aircraft, and that the approach routes don't necessarily conflict with your airport. We will certainly need investments on the terminal building side and a lot of infrastructure investment. But what is your view on this, and how could it impact your Monterrey airport And if, you know, given the timeline, you know, I don't know if this is something that perhaps will happen this year, but do you see you incorporating this in your, you know, the potential impact of this on your NDP? Thank you.

Starting with your, the second part of the question, there's nothing official that hasn't been an announcement. Most of the headlines, actually one headline at the end of the year was in the context of Mexicana. But there's no official announcement of a new airport being constructed. As you know, the Aeropuerto del Norte has been there for decades. It has been for private operations. It was taken now by Sedena. They would have to extend the runway. They would have to build a new terminal. They would have to buy, acquire additional land. We don't, there's no budget allocation for an airport at this point in time. So we will be monitoring the situation, but there's nothing official on that front. Now, the regulatory model allows you to obviously adjust your tariffs accordingly to the traffic that you would eventually loss so that financial returns remain the same. But it's too early to assess. And regarding the MVP, we're still working. As you know, we're presenting our MVP at the end of next year, so we have still two years' work ahead. We're looking for an optimized CapEx. We're looking for efficiencies. The fact that Benji is working very closely with us is going to help us have a very optimized MVP. But we're still working on it. It's too early to give some indication of where we believe it's going to end.

Thank you. I appreciate it.

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

Good morning, Ricardo, Rufo, Emanuel. Thanks for taking my question. My first question is on the traffic front. So taking into account the Brett and Whitney impact on the low-cost carriers in Mexico, what is your current base case for traffic performance domestically, internationally during 2024? And the second question is kind of related to the previous one in terms of tariffs. So we saw the discounts implemented during the fourth quarter. And the understanding is that there shouldn't be any price increase in real terms until the next MDP. Just wanted to make clear that it is the case, or if you have room to get closer to the 100% level of your current MDP before 2025. Thank you.

Hi, Guillaume. This is Rufo. With respect to tariffs in 10-hour airports, in the passenger charge, we implemented discounts starting November the 1st for November and December. In January, we applied inflationary increases to all of our tariffs, including those that were discounted. And we'll also apply inflationary increases in January of 2025. And then we'll have to see what the impact is of the MVP negotiation, and we'll have to adjust our targets accordingly based on that outcome. With respect to traffic performance for 2024, yes, two of our main airlines are subject to the recalls of Pratt & Whitney. I think based on what we know at this time and we have a little visibility of what the recall calendar is going to be for the rest of the year, at this time we would be expecting a flattish traffic as compared to last year.

Perfect, Rufus. Many thanks. Thank you. Our next question comes from the line of Felipe Nielsen with Citi.

Please proceed with your question.

Hi guys, thanks for taking my question and the first one was already answered. I'll keep only on the second one. To what extent do you see the government's new airline or new foreign airlines starting to service your airport installations and how do you see that impacting your traffic going forward? Thank you.

Hi, Felipe. At this time, the impact has been marginal. There are destinations served by Mexicana planes to Acapulco, Monterey, and one other destination. And the traffic impact last, it started operating in the 26th of December, so last quarter there were probably less than 500 passengers in total. And the month of January and February, the numbers are still not significant. But based on their plans for growth and acquisition of new planes, it could become a relevant player down the road. But at this time, it's little contribution to our operations.

Great. Thank you.

Our next question comes from the line of Andressa Verado with UBS. Please proceed with your question.

Hi. Good morning, everyone. Thank you for taking my question. So, my first question is just a follow-up on the tariff. So, you mentioned that you've implemented fully already the the two are discounts in the first quarter. So just trying to understand if the tariffs that we saw in the first quarter already considers this discount for the whole quarter. And we can assume just inflation from there. And my second question is regarding margins. I think that the company continues to show positive efficiency gains and cost control. What will be your margin expectations for 2024? Thank you.

Regarding the tariff, the discounts were implemented in November and December and in January on the level of the discounted tariffs we applied the inflationary increases.

The discounts were in 10 or 13 airports. So it was a 10% discount. You take away the three airports around an 8.9% for the whole OMA, and we added inflation starting January 1st.

And regarding margin, I think based on our current expectation of traffic and the inflationary increases that the caliber just showed, mentioned that applied starting January, and the cost inflation pressures as well. We don't see an expansion opportunity for next year, and obviously there will also be an impact related to the increased concession tax.

Our next question comes from the line of Pablo Ricaldi with Santander. Please proceed with your question.

Hello, everybody. Congrats on the results. I have two questions. The first one is on dividends. I don't know if you can provide some color on what are you expecting for dividends this year. And the second one is on labor costs. We saw a sharp decrease in labor costs. I know there was a provision last year, but just to understand how should we see labor costs going forward.

Hi, Pablo.

So with respect to dividends, we are still assessing the right amount considering the capacity and traffic outlook for the year. We still don't have a proposal, but that should be presented fairly soon at the end of March when we call for the shareholders' meeting for April. And with respect to labor costs, the levels that you see in the fourth quarter are reflective of the current levels that we are incurring. And on top of that, you'll have to add wage adjustments for 2024. Okay.

Perfect. Thanks. And congrats. Thank you.

Our next question comes from the line of Isabella Salazar with GBM.

Please proceed with your question. Hello.

Thank you for taking my question.

I actually have two. The first one is I was wondering if you could shed some light on which efforts you applied to 10% to a discount. And from this discount, What is the current percentage of the maximum tariff that you are charging derived from that? And the second question is, if you have any new initiatives regarding your commercial segment, as in new projects in the horizon or anything new?

Can you repeat, is that your first question? We were not able to hear completely. Hello?

It looks like we lost her. So the next question comes from the line of Gabrielle with Scotiabank. Please proceed with your question.

Hi, good morning. Quick question. I think it's a follow-up question. About the... Gabrielle, we...

We cannot hear you clearly. Would it be possible if you can get closer to the microphone?

Can you hear me well?

No. No.

We lost Gabriel. Our next question comes from the line of Fernanda. Rexia with BTG Petrol. Please proceed with your question.

Hello, Ricardo, Rufo, and Manuel. Thank you for taking my question. My question is more regarding the ASM airport. We know that there have been some changes in terms of the laws of the airlines. Also, there were some changes regarding the passenger fee. So just wondering how do you see all these changes that have been going on at the airport impacting your airport? That's it from my side. Thank you.

Which airport are you talking about, Fernanda?

The Mexico City International Airport.

Oh, yep. So, you know, starting in January of this year, Hourly operations were reduced from 53 to 42 per hour, and that has caused airlines to seek alternative routes. The Mexico City airport announced that they had shown a decline of 11 percent in the January numbers. Actually, in the routes for For OMA, it's about a 9% decline in the month of January. And if you include the effects, the growth of Toluca and IFA, the total metropolitan market for January was about a 2% reduction in January just. So most of the reduction in the capacity of Mexico City is being captured either by Toluca and the IFA. And we also should expect, although it's difficult to measure it, some traffic that will be diverted to our Monterey hub as well.

You're also starting to see an increase in load factors in the Mexico City airport.

Thank you. It's clear. And if I may, just to follow up on the traffic projections, you mentioned that you're expecting a Scottish figure for this year. But just wondering, how do you see the normalization of Acapulco figures? When should we expect the airport to become positive in terms of growth trends?

We're currently at Acapulco. We're operating around 50% of the levels of pre-pandemic. The recovery really is going to depend on the recovery of the city, which is slightly out of our control. The airport is already fully operational. There's still some work in the next couple of months, but we're already expecting some international flights coming in May and in June. But recovery, we will have to see how the recovery of the city behaves.

Our next question comes from the line of Federico Galassi with TRG. Please proceed with your question.

Hi, guys. Congrats for the results. Again, two questions, quick question more related with Monterey. The first one is you continue to have a... at least with the numbers of November, December, and January, well above the media of the other airports in Mexico.

We lost you also, Perico. I can't hear you. Hello? Perico, could you repeat your question?

You can... How do you view... Can you hear me now?

Yes, now we can hear you.

Okay, perfect, perfect. Thank you. Now, your view in Monterrey Airport after the numbers that you issued in December and January, for the rest of the year in particular, with the situation of Viva, when we see the international traffic continue to grow at double digits,

So I think the Monterey for 2024 will continue to be the driver of our results. Certainly we see a lot of the effects of the nearshoring investment as underlying demand supporting long-term growth. Certainly in the short run, capacity will have to take into consideration impacts that may be the result of the PNW recall, but we do believe that Monterey will continue to be above average the rest of our airports for this year.

Okay, and the second question, and again, in Monterey, after all the new space that you are increasing, the commercial space that you're increasing for this year, and the change in cargo in particular, What do you expect for this year in the commercial side, again, in Monterrey in particular?

So in the commercial side, we'll see the benefits of the new spaces that are associated to the Wing 1, which was opened in June. So this year will have full year effect on those new outlets. And also, as part of our commercial strategy, and not only generally for OMA, not just for Monterey, we are doing tenders of outlets that come to expiration and we negotiate them in better commercial terms or with better proportion of participation of sales. So, we are confident that the commercial revenue per pax will continue to grow this year. And particularly in the case of Monterey, we'll see the benefits of the new areas that we are still under construction, probably starting to reflect until mid-2025 or beginning of 26.

And in Carga, you finish all the change, the remodellation that you did? And it's working in place? In Carga, we are... That is the reason of the result? Mm-hmm.

We are expanding the expansion of one of the bonded warehouses in Monterey. We have developed for this year a plan to target aggressively new clients and new cargo airlines to get to Monterey. So, yes, we are confident that Monterey will also have growth in Omacarga. not to the levels of the previous years, but still in the positive side.

Okay, great. Again, thank you and congrats for the results.

Thank you.

Our next question comes from the line of Isabella Salazar with GBM.

Please proceed with your question.

Hello, can you hear me? I'm so sorry, my call fell through.

Yes, we can hear you.

Perfect.

Okay, so my question is, if you could please shed some light on which reports you applied the 10% blood discount introduced in November, and from that discount, what is the current percentage of the maximum tariff that you are charging derived from that?

Sure. So, All of the airports had the decline except for three airports, and those three airports were Masclansi, Huatanejo, and Zacatecas. And for the full year of 2023, we ended at 97.5% of maximum tariff compliance for the Guadalajara. Perfect. Thank you.

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

We would like to thank everyone for participating today in today's call. We appreciate your insightful questions, engagement, and continued support. Rufo, Emanuel, and I are always available if you have any further inquiries or require additional information. Thank you once again. Have a great 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.