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

Greetings, and welcome to the Grupo Aeroportuario del Centro Norte OMA third quarter 2024 earnings conference call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero from your telephone keypad. As a reminder, this conference is being recorded. At this time, it is now my pleasure to introduce Emmanuel Camacho, Investor Relations Officer. Thank you. You may now begin. Thank you, Rob, and good morning, everyone.

Welcome to UMass Third Quarter 2024 Hearing Needs Conference Call. Joining this morning, our CEO, Ricardo Reyes, 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 with different material, including factors that may be beyond our control. I'll now turn the call over to Ricardo Dueñas for his opening remarks.

Thank you, Emmanuel. Hello, everyone. We appreciate your presence on this call today. First, I will highlight our operational performance, financial results, and Catholic development. Finally, we'll be pleased to answer some questions. During the third quarter, OMA passenger traffic reached 7 million, a decrease of 5.3% in the third quarter of last year. This decree was mainly related to the Pratt & Whitney engine recall, which continues to have an impact on the fleet of the Mexican low-cost carriers. On the domestic front, passenger traffic declined by 7.4%, excluding Acapulco, where the destination continues to recover from the impact of hurricane Otis in October 23. Passenger traffic decreased by 5.8%. The most impacted airports, excluding Acapulco, were Monterey, Culiacan, and Ciudad Juarez, which together accounted for 80% of the total domestic capacity decline during before. Despite this reduction, higher occupancy factors have partially mitigated the impact. On average, these three airports saw a 2.7 percentage point increase in load factors, indicating that underlying domestic and demand remains strong, despite seat capacity being constrained by the ongoing engine revision. In contrast, international passenger traffic reached a historical quarter record level of 0.9 million passengers, an 11% increase as compared to the third quarter of last year. This growth was primarily driven by the Monterey Airport. We saw significant growth on routes to Orlando, Las Vegas, Miami, Atlanta, and Chicago. These five routes accounted for approximately 60% of the total increase in international passenger traffic during the quarter. Additionally, during the quarter, we launched four new international routes, all based at Monterey Airport, further enhancing our international connectivity. We're also expecting the start of operations for more than 10 new routes from Monterey to various destinations in both Mexico and the U.S., set to be launched by the end of this year and early 2025. Moving on to ALMA's financial performance. The sum of aeronautical and non-aeronautical revenues achieved a record performance of 3.2 billion pesos, mainly guided by the positive performance over non-aeronautical revenues. Despite a 5.3% decline in total passengers, non-aeronautical revenues increased by 19% as a result of our successful execution and the consolidation of several strategic commercial and diversification projects throughout the year. Commercial revenues grew 17% compared to the third quarter of last year, primarily driven by restaurants, VIP lounges, and parking revenues, along with several other categories. Commercial revenue per passenger rose by 24%, reaching 51 pesos per passenger in the third quarter. Revenues from restaurants, retail, and car rental grew, driven by the contribution of commercial spaces opened during the previous quarters. VIP lounges growth is attributable to higher access rates and leases renewal of third parties. Diversification revenues increased 27%. OMA Cargo contributed most of this quarter growth with an increase of 32%, mainly due to higher revenues from ground and air cargo operations in Monterey. Hotel services grew by 25%, mainly due to a double-digit increase in average room rate per night on both hotels, as well as higher occupancy rates. Moving on to the capital expenditures front, during the quarter we invested 581 million pesos in MDP investment, major maintenance, and strategic projects. In September 24th, we inaugurated the expansion and remodeling project of the terminal building at Durango International Airport. The project involved the construction over 800 square meters and the renovation of 3,000 square meters. Within this investment, Durango Airport will have the capacity to handle up to 760,000 passengers annually. 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 to everyone. I will briefly review our financial results, and then we will open the call for your questions. Aeronautical revenues decreased 3.4% relative to the third quarter of last year, driven primarily by the lower passenger traffic, with a 7.4% decrease in domestic passenger traffic, partially offset by a 10.8% growth in international passengers. Non-iron revenues increased 18.9%, commercial revenues increased 17%, and the categories with the highest growth were restaurants, VIP lounges, parking, and retail. Diversification activities increased 26.7%, mainly due to strong performances of omacarga and of household services. Total ILO and non-ILO revenues grew 1.4%, reaching 3.2 billion pesos in the quarter. The cost of services and G&A expense increased 6.1% compared to the third quarter of last year, as the company has made efforts to contain its cost base despite inflationary pressures on external services and purchases. Concession tax increased 73% to 262.3 million pesos as a result of the rate increase from 5% to 9% applied to revenues generated by OMAS airport concessions pursuant to the Mexican federal duties law. 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 the maximum tariff. In the third quarter of 2024, This 4% surplus of concession tax over aeronautical revenues amounted to 101 million pesos, equivalent to 3.1% of the sum of OMAS aeronautical and non-aeronautical revenues. This surplus is included in the 262 million pesos recorded as concession tax expense for the quarter. Major maintenance provision was 75 million pesos as compared to 95 million last year. OMAS third quarter adjusted EBITDA reached 2.4 billion pesos, and the adjusted EBITDA margin was 75.4%. Excluding the surplus of concession tax and its impacts on OMAS financial results, in the third quarter of 2024, adjusted EBITDA would have been 2.6 billion pesos with a margin of 78.4%. Our financing expense amounted to 272 million pesos, practically unchanged relative to the third quarter of last year. Consolidated net income was 1.4 billion pesos in the quarter, which decreased 2.1% as compared to the third quarter of 2023. Turning to our cash position, cash generated from operating activities in the third quarter amounted to 1.8 billion pesos, and cash at the end of the quarter stood at 2.4 billion pesos. As of September 3rd, Total debt amounted to 10.9 billion pesos, and we ended the quarter with a healthy net debt to adjusted EBITDA ratio of 0.95 times. This concludes our prepared remarks. Rob, please open the call for questions.

Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment, please, while we poll for questions.

Thank you. Thank you.

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

Good morning, Ricardo, Rufo, and Manuel. Thanks for taking my question, and congrats on the results. A couple, if I may, can you give us a sense on, you know, whether we stand regarding the, you know, the grounded aircraft coming back into the market? I don't know if you have already seen these coming through, and how do you see them, you know, leading to better supply there? And second, if I may, related to your NDP question, We saw Yata this morning citing concerns over airport fees and limited visibility into the process. So can you just remind us how airlines get involved in the process? And if there's any detail that you can share regarding your MDP negotiation, I know it's early, but specifically if you see any large CapEx projects that you envision in Monterrey, that can lead to a similar setup as we saw with Azul and GAP.

So those will be my two questions. Thank you, everyone. Hi, Rodolfo.

This is Rufo. So yes, we were based on seats published under the systems. We're seeing an increased in seat capacity starting in November and December, mainly in the Monterrey Airport. There are several new routes confirmed by both Volaris and Aeromexico. We shall see what the impact is, but yes, we are expecting a stronger first quarter based on the capacity announcements by these airlines primarily.

And on the MDP side, Well, we're still working. It's a bit early to have some numbers. What I can tell you is that we're working very closely with the team. We're also working very closely with Vinci to come up with a very optimized CapEx that will not sacrifice, obviously, quality or security, and it's able to cope with the projections of traffic, but will be an optimized CapEx system. going forward uh during this process uh you you have to consult with all the different stakeholders uh not only airlines but every authorities as well and everyone that has a say within the airport so we're consolidating all those comments and we will have more visibility into where we are during the first quarter of next year all right thank you

Our next questions are from the line of Fernando Recchia with BTG.

Please proceed with your questions.

Hello, Ricardo, Rufo, Emanuel. Thank you for taking my question. Two questions on our side as well. So the first, could you provide any update regarding the new airport in Monterey? If you could provide any color if the government has decided if this airport will be uh change it for commercial aviation and also if you have any caller if this is the case how will be the capacity of this airport would be very helpful and and second uh kind of related with uh the previous one but uh maybe if you could uh provide us an outlook for traffic for next year um i mean you already mentioned about the aircraft grounding but Any caller you could give us regarding traffic for 2025 would be very helpful. Thank you.

Sure.

Regarding the new airport of the North, as you know, the only thing that happened was that it changed. Now the military is operating it. At the moment, the Ministry of Communication and Transportation haven't mentioned anything about the intention of building a new airport there. Even if they did, there's a lot of infrastructure that would have to be considered before that would happen. But at this point, that project is not something that we see happening in the short run.

And with respect to your second question, Ferrada,

For this year, we're expecting somewhat better performance than what we have year-to-date, so below the 3% mark. That's our target for the year. Next year, we're expecting an increase between the low to mid-single digits.

Perfect. Thank you so much. Our next question is from the line of Jen Stace with Morgan Stanley.

Please proceed with your question.

Hello, yes, I have two questions. One relates to the next MDP cycle. If you could give any guidance of like the capex levels you're foreseeing. I know it's very early and difficult to anticipate, but just like broad, like capex per capita in the next cycle versus this cycle. and also if there are any particular assets beyond Monterrey that you see like attractiveness to invest at the moment. And the second question is relating also to traffic. I mean, you already mentioned the fourth quarter scheduling data and for the full year of next year, but we're seeing quite strong numbers for scheduled flights in the first quarter of next year. That number you just mentioned seems actually a bit low. Are you not seeing the same?

Sure.

The first part, the NDP, as we mentioned, it's still early to have some numbers. We're still working internally. As we mentioned, we're working on an optimized CapEx. that will not sacrifice, obviously, quality, safety, and it's able to cope with the projections of traffic, but will be a very optimized CapEx, and we're working very closely with Benji to have the best in kind technology and optimized CapEx. In terms of new assets, we don't have any concrete thing at the moment, but we're always looking for opportunities to expand our footprint outside of Mexico. And in terms of traffic...

Yes, we're seeing large increases in the seat capacity.

I think we are conservative in the load factors that those new routes will be generating. So based on first quarter performance, we would have to adjust or validate our forecast. But yes, right now we are not assuming the same load factors. that we're seeing right now, applies to the new capacity.

And also, we think we've already reached the bottom of the Pratt & Whitney incident, but there's still a lot of uncertainty of the pace of recovery, at least from our side.

All right. Fair enough. Okay. Thank you. Our next question comes from the line of Jay Singh with Citi.

Please proceed with your question.

Thanks for taking my question. I think most of my other ones were already answered, but the one I have is, how do you think the pace of nearshoring-related growth continues going into 2025? Thank you. Okay.

Yeah, thank you for your question, Jay.

Yes, our expectation is that nearshoring will continue. We expect that not only in terms of our business traffic, but also in the cargo operations that we've seen that activity happening in near and land cargo, as well as their industrial parks. So, yes, we're expecting that activity to continue and to reflect in our numbers.

Okay, yes, okay, thank you.

The next question is from the line of Federico Galassi with TRG. Please proceed with your questions.

Hi, guys. Good morning. Congrats for the results. I have two questions. The first one is the non-aeronautical side. The first one is the trend of revenue growth continues to be accelerating. It looks like that. The question is, is this sustainable? Because in some lines, you have the highest revenues in your history. So the first one is, how do you see that? This is more related with all the change in particular in the Monterey airport. That is the first question. And the second one, you announced four international new routes, three are regulars. How do you see this one in the next months, if you want, in particular for the international new lines? New routes.

Hi, Federico.

So, yes, on the non-IDO side, since Bansi acquisition, this has been an area of big focus of the company. Different categories have performed real well. I would just summarize in the case of food and beverage, for example, we did a number of tenders over the previous quarters. And as the leases on those tenders start to get reflected and the opening of new outlets related to those tenders are opened, we're seeing a big up in income per passenger as well as in total revenues, despite the passenger decline. In the case of parking, it's mostly related to tariff adjustments. And in the case of VIP lounges, it's a combination of new VIP lounges that were opened in 2023, and now we're seeing the full year or full quarter effect of those ones. For example, we don't continue to see a positive trend. We just finished the Cihuatanejo project, VIP, so in the next quarter, for example, that would also start contributing as well, and also improved lease terms with third-party VIP operators and in the access rates that we have in the OMA lounges that we manage ourselves. In the case of international routes, yes, we see a clear trend by the to focus on international capacity. Even with the new seat capacity and the new planes coming online, we continue to expect a strong performance of the international passengers above those of the domestic market. So we expect the trend to continue. And it's part of the strategy of positioning Monterey as a connectivity hub. So we're working with airlines to continue that trend.

And one question, so we'll continue, but one question, you have two new flights, Tokyo and Seoul. This is more related with the lack of capacity of the Mexico airport is something that you are looking for to expand, but obviously it looks like this is more short in theme, but how is your approach of that? And again, is this more related to the lack of capacity of Mexico Airport?

I would say domestic capacity has been the one that has been moved away from Mexico City Airport towards Toluca and the Santa Lucia AIFA Airport with international slots being preserved primarily. That's our view there. So I think that it's most related to catchment area demand in the Monterey area itself.

Okay.

And in diversified revenues, You have a jump in the last two quarters in Omacarga. This is more related to new contracts. It's more space that you have in your airport. And the second one is there is another jump in industrial services. You have more industrial parks or you are increasing your capacity in industrial parks?

So the footprint of the industrial park has not changed. But what has changed is that we... build a number of warehouses in 2023 and 2024 that are now generating rents as compared to last year. So that's one of the reasons. And there is also an FX rate effect. 99% of the rents in the industrial park are denominated in US dollars. So that also benefited. We're currently in construction of two warehouses, And once those warehouses are finished, the park would be 98%. The available land for development would be about 98% occupied. So we are in the process of seeing how to expand within the Monterey perimeter, the industrial park. So we continue to see strong performance there as well.

And in terms of cargo, it's a mix of everything you said. We have worked throughout this year improving most of the processes that we have in land and air cargo. So it's a combination of having more efficient processes, increasing the business that we're bringing from the existing clients, as well as landing new accounts. As an example, it's Lufthansa that we landed during this last quarter.

Okay, guys. Thank you so much. And again, congrats for the results, in particular, in the commercial side.

Thank you.

Our next questions are from the line of Isabella Salazar with GBM.

Please proceed with your questions.

Hello. Thank you for taking my question. This one is is along the lines of the question previously asked regarding the commercial revenues. I was wondering if you're expecting to continue to see double-digit growth in this side of revenues, and also if the higher commercial revenues per passenger have something to do with having more international passengers and the last quarter.

Thank you. Hi, Isabella.

So in terms of the level of commercial revenue per passenger, I think at least for the next few quarters, it would stabilize around the current levels of 60 pesos. So the growth rates would not necessarily be as high as they were in 3Q compared to the previous quarter. But yes, in absolute terms, on a per-pax basis, we do expect this to be sustainable. Yes, there is some benefit of maybe higher purchasing power or willingness to spend of international passengers. But in the case of the main categories that we saw increases, which are parking, food and beverage, We are not necessarily related to specific international passengers, so I think it's an improvement in the overall income per passenger in general as opposed to just the international contributions.

Perfect. Thank you. Our next question is from the line of Entresa Verotto from UBS.

Please proceed with your questions.

Hi, thank you for taking my question. So my first question is on the island of Ontario. Remember that last year, the government came to us, right? So we want to know what you guys think, right?

Sorry, Andresa, your line, we're not, we cannot hear you very well. There's a lot of noise in the background.

Can you hear me better now?

Yeah, primarily yes.

Okay, so my question is about the tool discounts that you implemented last year. What do you expect for the next year?

Sure.

For next year, as was part of the agreement with the government within the October negotiation of last year, was to have an inflationary adjustment as of the first day of January. And at the moment, we are operating at a 99% compliance with the maximum tariff.

Thank you.

And my second question would be on U.S. elections and potential changes to nearshoring or US-MTA agreement, if you have anything that you're tracking on these two things.

Thank you.

I mean, it's...

I think the near-shoring activity we expected to happen, regardless of who wins the U.S. election, we're seeing an increased activity in business type of traffic. We're seeing an increase in activity also in the industrial parks, not only in sport footage, but in terms of pricing as well. And the same thing is happening in cargo, in land, near cargo, and we expect this to continue regardless of who wins the U.S.

election.

Our next question is from the line of Alan Macias with Bank of America. Please receive your questions.

Hi. Good morning. Thank you for the call. Just two questions. The first one, any indication that the capacity in the Mexico City airport will be increased in the near term? Have you seen any signals there? I guess the second question is regarding if you can share what your forecast for international traffic to be the share or the weight of it five years down the line. Thank you.

Sure. In terms of the capacity of Mexico City, as you know, the number of operations per hour was reduced from 52 to 42. to 42 operations per hour. There have been rumors running around of returning to that previous number, increasing them back to the low 50s, 52 operations per minute. However, there's no official announcement yet. However, there are some rumors. So that's all we know in that front. In terms of the share of international traffic, we currently are operating at 13% of our traffic is international. What we have seen throughout the year is as a result of the pattern with niche situation and the shortage of aircraft in the market, Most of the airlines have been shifting capacity out of domestic into the international market, looking for yield, and that's why we have seen a very important increase in international traffic. As the Brian Whitney situation starts to stabilize, we should expect domestic traffic to improve and probably international traffic to return to the previous growing trend.

Yeah, I'll get back to you on what we're expecting more or less five years down the road.

I don't have the number on top of my head right now. Thank you. Our next question is from the line of Guilherme Mendez with J.P.

Morgan. Please receive your question.

Hey, Ricardo, Rufo, Emanuel. Thanks for taking my question and congrats on the results. One quick question on the EBITDA margin. if this meets 70% levels that you guys have been operating, something sustainable in the longer term. And on top of the discussions on the commercial front and the possibility of increasing revenues per passenger going forward, is this something that could materially change your EBITDA margin levels going forward? Thank you.

So, yes, we believe that this...

It's having its adjusted EBDA ratio should be sustainable. And, I mean, we don't expect major variations from what it's currently right now.

Perfect. Thank you. Thank you. Our final question is from the line of Pablo Recalde with ETAL.

Please proceed with your questions.

Hi, good morning on my team. I have two questions. The first one is on the labor cost. I believe you renegotiated the labor contract this October. So I don't know if you can share the output of those negotiations or how should we expect the labor line for 2025. That's my first question. The other one, it's a follow-up on Federico's question on the aeronautical revenues. No, not revenue, sorry. We saw this huge increase in lines like for an average duty-free, and I believe most of those improvements are related to BINCHI being part of OMA. But how much is left on those lines to be renegotiated?

Let me talk about the first one.

The labor, the conversation with the union are still ongoing, so we're waiting to see results in the next quarter. month or so. So that's still a work in progress. No answer there yet.

And with respect to duty-free, it's mostly related to a reaccommodation of the flights that we are doing at the Monterey Airport. We're now trying to direct most of the international capacity through one of our terminals instead of two terminals. So it's going out of Terminal A as opposed to just Terminal C and Terminal A. So that has improved the exposure of passengers to the existing duty-free stores that we have. So that's an operational change that we did in previous quarters, and it's still being very good results.

But your question, how much is there left going forward? Yes, as a result of it, it's a mix of banshee coming in, trying to bring best practices from their experience and capitalizing on their experience. throughout their network of 70 airports. We have improved a lot of the processes. We have renegotiated a lot of the contracts. We're still working. We think there's some potential going forward. We're penciling in projections around similar non-air revenues per passenger going forward of 60, 62 pesos per passenger.

Perfect. Thanks, Ricardo, and congrats on the results.

Thank you, Paul. Thank you. At this time, we've reached the end of our question and answer session, and I'd like to turn the floor back to Ricardo Duenas for closing remarks.

We would like to thank everyone for participating in this 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. Thank you. This concludes today's conference.

We thank you for your participation. You may now disconnect your lines at this time.