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

Greetings. Welcome to the Grupo Aeroportuario del Centro Norte OMA Second Quarter 2024 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. I will now turn the conference over to your host, Emmanuel Camacho. You may begin.

Thank you, Yosemite. Hello, everyone. Welcome to OMA Second Quarter 2024 and its conference goal. 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-Pierro. 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'll turn the call over to Ricardo Doveñas for his opening remarks.

Thank you, Manuel. Hello, everyone, and thank you for joining us today. This morning, I will review our operational performance and financial results. Then I will briefly comment on recent CapEx milestones occurred during the quarter. And finally, we will be pleased to answer some questions. In the second quarter of 2024, almost passenger traffic reached 6.5 million, a decrease of 2.4% versus the second quarter of last year. Domestic passenger decreased 4.3%. Excluding Acapulco, where tourist infrastructure continues to recover from the impact of Hurricane Otis in October 23, our domestic passenger traffic declined by 3.1%. This was primarily due to the Pratt & Whitney engine recall affecting the fleet of Mexican low-cost carriers. The most impacted airports were Monterey and Culiacan, particularly on routes such as Monterey to Cancun and Mexico City and Culiacan to Mexicali and Tijuana. Despite a 10% decline in our routes to the Mexico City International Airport during the quarter, mainly due to the reduction in movements per hour announced by the Mexican government at the beginning of the year, our connectivity to the Mexico City metropolitan area, including also Toluca and Santa Lucia airports, increased by 2.8%. This demonstrates that demand for flights to Mexico City remains robust, with airlines responding by adding capacity to these alternate airports. There has been a clear trend towards maintaining capacity within the Mexico City airport system while also utilizing available capacity to enhance international coverage connectivity to the U.S., strengthening existing routes and introducing new ones. International passenger traffic achieved a strong performance in the second quarter with a 12% increase compared to the second quarter of last year. This road was primarily driven by the Monterey Airport, with significant increase on routes to Atlanta, Las Vegas, Toronto, and Orlando. These routes, along with Mazatlán to Los Angeles route, accounted for approximately 60% of international passenger traffic increase during the quarter. Additionally, in the first half of the year, we launched six new international routes, four of which were based on the Monterey Airport further strengthening our international connectivity. Moving on to an almost financial performance. Aeronautical revenue decreased by 2.5%, primarily driven by the performance of our domestic passenger traffic. Aeronautical revenue per passenger remained flat compared to the second quarter of last year. Despite the decline in passenger traffic, non-aeronautical revenues grew by 13.8%, underscoring the successful execution and consolidation of several strategic projects throughout the year. Commercial revenues increased 12% compared to the second quarter of last year, primarily driven by VIP lounges and parking revenues, along with several other categories. VIP lounges saw significant benefits this quarter due to higher access rates and the effect of the previously opened lounges in Reynosa, Tampico, and Durango. In addition, leases of third-party lounges in Monterey were renewed under improved terms. Parking revenues increased primarily due to an overall optimization of tariffs across our 13 airports. Revenue from restaurants, car rentals, and retail grew driven by the contribution of commercial spaces opened during the previous quarters. Finally, duty-free revenue increased due to our strategy of relocating international flights among terminals in Monterey, boosting passenger exposure to commercial spaces and increased revenues per passenger. The occupancy rate of commercial space stood at 95.3% at the end of the quarter. On the diversification front, revenues increased 27%. OMA Cargo contributed most of this quarter's growth with an increase of 35%, mainly due to higher revenues from ground and air cargo operations in Monterey. In addition, during May, we began operations with our new client, Lufthansa Cargo, which did not operate previously in Monterey, offering air cargo transport services with an initial frequency of one flight per week between Mexico City, Monterey, and Frankfurt. This new route is part of our strategy to establish our airport as a key logistics hub. In addition, we will soon begin expansion of our Alma Cargo Monterey warehouse capacity by almost 50%, allowing us to capitalize on nearshoring opportunities. Hotel services grew by 16%, mainly as a result of an increase in operations in both hotels. In the second quarter of this year, occupancy rate of our Terminal 2 NH was 85%, while Hilton Garden Inn Hotel had an occupancy rate of 79%. Additionally, we recorded a double-digit increase in average room rate per night on both hotels. Moving on to capital expenditure front, I would like to highlight that during the quarter, we achieved a significant milestone in our long-term infrastructure development at the Monterey Airport. As part of our expansion and remodeling project, we successfully inaugurated the Terminal 8 East Public Area expansion. Covering over 6,000 square meters, this new area features double documentation counters, commercial outlets, airport services, and other facilities. These enhancements contribute to improving our services and increasing airport capacity. This completion marked the third phase of our initial expansion project following the early openings of the West Public Area of Terminal A and the Wing 1 building. As a result of these initiatives, Monterey's current terminal capacity has grown to 13.9 million passengers annually. Additionally, during the quarter, we invested 816 million pesos in MDP investments, major maintenance, and strategic projects. Notably, we are actively working on expanding and remodeling terminal buildings in Monterey, Ciudad Juarez, Torreon, Culiacan, Durango, and Mazatlan. These projects reflect our commitment to enhancing airport facilities and services for passengers and stakeholders. I would now like to turn the call over to Rufo Perez-Pierro, who will discuss our financial highlights of the quarter.

Thank you, Ricardo, and good morning, everyone. I will briefly review our financial results, and then we will open the call for your questions. Aeronautical revenues decreased 2.5% relative to the second quarter of 2023, driven primarily by lower passenger traffic, with a 4.3% decrease in domestic passenger traffic, partially offset by a 12.4% growth in international passenger traffic. Non-aero revenues increased 13.8%, Commercial revenues increased 11.9%, with the categories with the highest growth being VIP lounges, parking, and restaurants. Diversification activities increased 26.5%, mainly due to higher revenues from Omacara and hotel services. As a result, total aeronautical and non-aeronautical revenues grew 1.1% to 2.9 billion pesos in the quarter. Construction revenues amounted to 556 million pesos in the second quarter, a decrease of 22% as a result of lower MVPF investment execution speed. The cost of services and G&A expense increased 16.5% compared to 2Q23. The rise is primarily due to the expansion of the new operational areas in previous quarters, primarily in the Monterey Airport, coupled with higher unit costs. Consequently, Several of our cost and expenses, such as electricity, contracted services, and maintenance, have increased as compared to the same period of last year. Concession tax increased 71% to $239.3 million as a result of the rate increase from 5% to 9% applied on the revenues generated by OMAS airport concessions. Under the tariff regulation basis effective as of October 20, 2023, Payments made to the government related to aeronautical revenues in excess of those included in the most recent tariff revision will be added to the reference value to be used in the next maximum tariff revision. Therefore, starting January 2026, these excess concession tax amounts paid will begin to be recovered through maximum tariffs. In the second quarter of 2024, The 4% surplus of concession tax over ideological revenues amounted to 92.9 million pesos, equivalent to 3.2% of the sum of almost idle and unidle revenues. This surplus is included in the 239.3 million recorded as concession tax expense for the quarter. Major maintenance provision was 43 million pesos as compared to 82 million in the second quarter of last year. The decrease is the result of the variation in the present value of the major maintenance provision caused by an increase in discount rates for its calculation. OMA's second quarter adjusted DBTA was 2.2 billion pesos, and the adjusted margin was 73.3 percent. Excluding the 92.9 million pesos surplus of concession tax and its impact on financial results, our adjusted DBTA would have been 2.3 billion pesos. with a margin of 76.3%. For the six months ended on June 30, 2024, adjusted TBTA would have been 4.4 billion pesos with a margin of 77.0%. Our financing expense amounted to 134 million pesos. This figure includes the effect resulting from changes in the present value of the major maintenance provision due to an increase in the discount rates used for its calculation. Consolidated net income was 1.3 billion pesos in the quarter, which increased by 1.5 percent as compared to the second quarter of last year. Turning to our cash position, cash generated from operating activities in the second quarter amounted to 1 billion pesos, and cash at the end of the quarter stood at 1.6 billion pesos. During the quarter, we paid the first installment of the dividend declared in our previous shareholder meeting. At June 30, 2024, total debt amounted to 10.9 billion pesos, and we ended the quarter with a healthy debt to adjust the DBDA ratio of one times. This concludes our prepared remarks. Shmali, please open the call for questions.

Thank you. At this time, we'll 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 key. Our first question comes from the line of Pablo Lucalde with Santander, Mexico. Please proceed with your question.

Hello, Matin. Congrats on the results. I was wondering if you can provide your expectations for traffic for the second half of the year in Mexico. We have seen slightly better expectations from local carriers, but I want to see your thoughts for traffic for the second half.

Yes. Hello, Pablo. We remain with the same projection we had in the previous call, which we believe we're going to be in the low single-digit decrease in traffic as a result of the private Whitney issue.

Okay, perfect. Thanks.

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

Good morning, Ricardo, Rufo, and Manuel. Congratulations on the impressive growth on the non-aeronautical business side. A couple questions on my side. First one is I wanted to get a sense of how do you look at the potential for non-aeronautical revenue per passenger, more in the medium to long term. I mean, your structure is unique in the sense that, you know, you have the industrial business, the cargo, the hotel, which might make it more difficult to draw comparisons there. But what kind of benchmarking have you done with perhaps other airports, advances, portfolio? Just to get a sense of the current, you know, 114 pesos per passenger, no narrow can go from this level. So that's the first one. And then second, it was interesting, your comments around the metropolitan area. You know, the Mexico City slot restriction has been something that has been a concern for us, these bottlenecks. So how relevant, my question is, how relevant do you think Toluca can be to serve as an alternative to Felipe Angeles and the, you know, the IECMN. Thank you.

Sure. This is Rufo. So in terms of non-iron revenue, the way we view it is we separate what's commercial to other diversification activities. On the commercial side, we're around a 58 peso per passenger. revenue. I think that's sustainable for the next six months, and that's consistent with our expectations for full year. And going forward, we would expect that number to increase at least with inflation and be maintained in real terms. As for other diversification activities, their performance does not necessarily relate to passenger growth. So obviously right now we are with 85% occupancy ratio in the NH Hotel as well as the 79% occupancy ratio in Hilton in the Monterey Airport. They are basically at full capacity in the main business days of the week. So we would expect some improvement in tariff going forward, but they would not be correlated to passenger growth. And Omacargo also continues to perform very strongly. We saw very good first cap results, which we think they are consistent with what we would expect for the second half of the year, but also the revenues would not be correlated to passengers. So, therefore, we don't necessarily have this 114 pesos per passenger target for the upcoming quarters or years ahead.

And just to point out, we're having some strategic initiatives within OMA. We have a lot of our energy in the non-aeronautical revenues, where, for example, cargo, we're expanding our warehouses by 50%. We're looking to expand also our industrial park. We brought a management team in place to revamp all the non-aero side, so we have good expectations there. Our objective is to capitalize on all the nearshoring activity that we're seeing in most of our airports. And relating to Toluca and IFA, I mean, I think the government has been clear they want to have a metropolitan system of airports composed of the Mexico City Airport, Toluca, and Santa Lucia. We believe that the excess traffic will go mostly to Santa Lucia instead of Toluca. The government has very clear that that's their strategy. So we believe that most of the excess will go more to Santa Lucia than to Toluca.

And just to complement that, regarding the second quarter of 2024, the IFA represented 5.4% of total all-mass passenger traffic, while Toluca represented 1.6% of total second-quarter traffic.

Thank you, everyone, and congrats again.

Thank you. Our next question comes from the line of Jens Wyss with Morgan Stanley. Please proceed with your question.

Yes, hello, Brody. Two questions. I saw that you cited the Monterey-Cancun route as being one of the main drivers of the traffic decrease in Monterey. What's the reason behind that? Did the airlines reduce frequencies or is it lower load factors? I was surprised to see this. You already mentioned that you are looking into expanding capacity maybe at the industrial park. What's the current capacity utilization you're having at that park? In other words, would you be able to sustain these high growth rates before investing in new capacity?

So, regarding the first question, yes, the Monterey-Cancun saw a decline in traffic in the second quarter.

It's primarily related to a cut of capacity by some of the carriers operating that route. That was one of the routes that was most affected by the Pratt & Whitney issue. As the engine recall effect fades and is behind us, we would expect this to be one of the roads with the quickest recoveries. And regarding the second question, can you repeat your second question, please?

Oh, yes. On the industrial part, I mean, what's approximately the capacity utilization you have there? just to assess for how long you could have these high growth rates before you invest in additional capacity.

So we're currently working either on expanding a couple of existing warehouses and building also a couple of newer houses. Once those four projects are completed, basically the park would be around 98% of its buildable area So these warehouses would expect to be generating revenue towards the last, some of them in the second half of the year, and the other ones in the fourth quarter of this year. So after middle of 2025, if we want to have still growth in this business line item, We would need to invest in additional infrastructure, in additional spaces in the Monterey Airport.

Perfect. Land, right? Expansion of land, right?

Thank you. Thank you. Thank you. Our next question comes from the line of Stephen Trent with Citi. Please proceed with your question.

Good morning, everybody, and thanks for taking my question. Just one from me. I noticed your competitors have done a couple of overseas projects and invested in airports outside of Mexico. Are you guys considering doing anything along those lines? And if so, is this something that you could do jointly with Vinci, or is nothing like that being anticipated at the time? Thank you.

Hi, Stephen. We're always looking for opportunities to expand internationally. Obviously, that would have to be a joint decision with Vinci. But we're currently not working in any tender bidding process internationally.

Okay. Appreciate that. Thank you. Thank you. Our next question comes from the line of Isabella Salazar with GBM. Please proceed with your question.

Hello, and thank you for taking my question. I was wondering if you could tell me how close you are to reaching your maximum tariff this year?

Yes. Thank you, Zabela. Yeah, we're close to 99.3 percent compliance with maximum tariff at this point.

Thank you.

Thank you. Our next question comes from the line of Andres Aguirre with GBM. Please proceed with your question.

Hi. Thanks for the call, and congrats on the results. commercial growth Sorry, Andres, could you repeat? Your line is cutting. Could you please repeat it, your question? Yes, sorry about that. We observe a good commercial growth dynamic this quarter. Is it primarily related to traffic mix or deployment of commercial strategies?

I think the increase in commercial revenues is more related to our overall strategy.

Obviously, you saw an increase in duty-free that has obviously a component of benefit from higher international passengers than last year. But overall, the increases that you see in food and beverage and restaurants and car parking is part of our overall strategy to improve our commercial revenues as a whole.

Thank you.

Thank you. Our next question comes from the line of Andressa Verado, who is a private investor. Please proceed with your question.

Hi. Good morning. Thank you for taking my question. So I have a follow-up here on the maximum tariff question. So you mentioned that you are close to a 99.2% compliance, right? So just wondering how does this take into consideration the discounts that were agreed with government last year? Do you have any updates on that? And if you have plans to increase tariffs further before your next MDP revision? Thank you.

So the compliance ratio that we mentioned, it's already after giving effect to all discounts that were agreed upon last year and the inflationary increase at the beginning of this year. Next year, we would just expect an inflationary increase in our identical tariffs.

Perfect. Thank you.

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. Just one question. At this point in time, can you give us an idea of the level of capex you would be expecting for the next master development plan if it's the same level as the previous? or higher or lower. Thank you.

All right. Hi, Alan. We're still in early stages of the MVP. We're working very closely with the Vinci team to have a very optimized CapEx. But it's too early to have some numbers. But what I can tell you is going to be a very optimized CapEx.

Thank you. Thank you. Our next question comes from the line of Anton Morton-Cotty with DBM. Please proceed with your question.

Hello, guys. Thank you for the call. My question is a bit of a follow-up on Andrea's question related to the commercial revenues per passenger. If you could share some color, have you seen any significant impact on this metric due to having a higher share of international passengers? or maybe some distortion due to the commercial revenues in Acapulco, given that you have now lower passengers, or is this not significant? Thank you.

I think the impact of Acapulco is immediate. As you remember, Acapulco accounted for approximately 3.5% of our total traffic, and even though it's obviously a touristy market, which is brought to maybe higher expenditures, especially the international side. The international component of Acapulco was very small as compared to the duty-free revenues, for example, that we have in Monterey or Mazatlan. So I wouldn't think that the mix of passengers right now, except for the duty-free line item, is driven by the international passenger growth. For example, parking revenues increased, and it's primarily domestic traffic in that line item. A lot of the VIP, sorry, food and beverage and retail outlets don't necessarily attack the international market, but mostly the domestic markets. So I would think that the increase in commercial revenues is driven by overall strategy and does not depend on international traffic growth.

Perfect. Thank you.

Thank you. And we have reached the end of the question and answer session. And I will now turn the call over to Ricardo, who will close in remarks.

Yes, we would like to thank everyone for participating in today's call. Rufo, Manuel, and I are always available to answer your questions, and we hope to see you soon. Thank you once again, and have a great day. This concludes today's conference, and you may disconnect your lines at this time.

Thank you for your participation.