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Greetings. Welcome to the Grupo Aeroportuario del Centro Norte OMA First Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Emmanuel Camacho, Investor Relations Officer. You may begin.
Thank you, Shimade. Good morning, everyone, and welcome to OMA's first quarter 2022 earnings conference call. Participating today are CEO, Ricardo Duenas; and CFO, Ruffo Perez Pliego. 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. I will now turn the call over to Ricardo Duenas for his opening remarks.
Thank you, Emmanuel. Good morning, everyone. We appreciate you joining us today. This morning, I will review the evolution of our business and our first quarter performance. But first, let me begin by highlighting several milestone and events. Last Friday, we held our 2022 Annual Shareholders Meeting, where shareholders approved, among other matters, the declaration and payment of a cash dividend to shareholders of MXN 2.3 billion in 2 instalments. The first one of MXN 1.8 billion, no later than May 31. And the second one of MXN 500 million, no later than July 31. In addition, on March 31, we successfully completed our MXN 4 billion issuance in long-term sustainability linked notes in the Mexican market and I am pleased to announce that we have become the first airport operator to place a sustainability linked bond or SLB in the Americas and the second worldwide. As part of our SLB framework, we set an ambitious target to reduce our carbon footprint by decreasing OMA's greenhouse gas emission per passenger in 58% by December 31, 2025. We have positive expectations about passenger traffic growth in the coming years, coupled with an important level of additional square meters from a infrastructure project in development, which will translate into higher energy costs and operational requirements. So we are working our best to create a more sustainable operation in our airports. Proceeds from the SLB were used to pay MXN 2.7 billion in short-term loans and the remaining will be used to fund MDP investments and for the corporate uses. Finally, as a commercial milestone during the quarter, we transitioned to a direct operation of OMA Premium Lounges, which will allow us to improve customer experience significantly and generate additional revenues. Currently, we operate 8 lounges in 3 Monterrey terminals as well as our Acapulco, Culiacan, Chihuahua, Mazatlan and San Luis Potosi airports, and we expect to open 4 additional lounges in Reynosa, Zihuatanejo, Ciudad Juarez and Tampico in 2022. Turning to our main first quarter of 2022 results. We start off the year with a challenging passenger traffic recovery scenario as a result of the Omicron variant and the rise in positive cases. However, the effect of Omicron on passenger performance vanished rapidly, which allowed us to get back on track. During the quarter, total passenger traffic reached 4.6 million, 52% above the first quarter of '21. As compared to the first quarter of 2019, total passenger traffic stood at 90%. During the quarter, the route that experienced the greater traffic growth in volume terms versus the first quarter of 2021 were Monterrey on its Mexico City and Guadalajara routes and Chihuahua, Ciudad Juarez, Acapulco on the Mexico City routes. All of them considered mainly business routes, which reaffirms our expectations of increased activity and better performance from the Business Travel segment. Turning to our first quarter operational results. We're able to deliver positive results in the quarter. Our revenue expansion and our operational efficiency translated into an adjusted EBITDA increase of 74% versus first quarter of '21 and a margin of 75%. On the commercial front, revenues increased 62% compared to the first quarter of '21. Parking revenues increased 76% versus 2021 and we observed higher penetration levels in long stays, mainly in Monterrey, Ciudad Juarez and Reynosa. In addition, car rentals, restaurants and retail also contributed most to growth together with VIP Lounges. Occupancy rate for commercial space in our terminals was 87.7% at the end of the quarter. Diversification revenues increased 38%, our hotel services and OMA Carga contributed most to this growth. During the first quarter of 2022, the occupancy rate on our Terminal 2 NH Collection Hotel was 74%, while the Hilton Garden Inn Hotel at the Monterrey Airport had an occupancy rate above 60%. OMA Cargo revenues increased 50% versus the first quarter of '21. Revenues from handling, storage and custody of ground import cargo drove the increase in revenues. On the capital expenditure front, total investments in the quarter including MDP investments, major maintenance and strategic investments were MXN 430 million. During the quarter, we started preliminary works for the expansion and remodeling projects in the Culiacan Airport and continue to work on the following major projects: Expansion and remodeling of the Monterrey Airport Terminal 8; expansion and remodeling of the Ciudad Juarez terminal building; reconfiguration of the Master Plan Terminal building; platform reconfiguration at the Monterrey Airport; and modernization of the Zihuatanejo terminal building. Finally, we have finished installing solar panels in our 13 airports and by the end of the second quarter of this year, we will be fully operational. Our solar panels are expected to generate over 20% of our energy consumption for the remaining quarters. And with that, I will now turn the call over to Ruffo Perez Pliego for more detail on our financial highlights for 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. Turning to OMA's first quarter financial results. Aeronautical revenues increased 60% relative to the first quarter of '21, driven by the 52% increase in passenger traffic. Non-aeronautical revenues increased 52%, with commercial revenues increasing 62%, and the categories to the highest growth were parking, car rentals, restaurants, retail and VIP lounges. Parking revenues increased 76% due to increase in operations at Monterrey, Juarez and Reynosa airports. Car rentals, restaurants and retail increased 62%, 76%, and 71% respectively, mainly due to higher revenues from the revenue shared and the opening of new projects. VIP Lounges increased due primarily to the recognition of revenues as a direct operation, as well as an increase in the number of users of the OMA Premium VIP lounges. Diversification revenues increased 38%. As a result, total aeronautical and non-aeronautical revenues were MXN 1.9 billion in the quarter, and grew 58% versus the first quarter of '21. Construction revenues increased 13% as a result of our MDP investments. The cost of airport services and G&A expense increased 9% relative to the first quarter of 2021, mainly due to a 20% growth in payroll expense, which is a result of the effects of the changes in labor regulation in Mexico 2021, and the incorporation of new business lines such as the operation of the OMA VIP Lounges. Contracted services and basic services grew due to the overall higher activity in our airports, while materials and supplies also reported growth as we reported direct costs from the operation of the OMA Premium Lounges. OMA's first quarter adjusted EBITDA reached MXN 1.4 billion, and the adjusted EBITDA volume was 75%. Our financing expense was MXN 165 million, mainly due to higher interest expense as a result of an increase in the average outstanding debt of OMA, and an exchange loss recorded. Consolidated net income was MXN 753 million, 81% above that of 1Q'21. Turning to our cash position. Cash generated from the operating activities in the quarter amounted to MXN 717 million and cash at the end of the quarter stood at MXN 3.3 billion. During the quarter, we recognized the following relevant transactions: We paid a special dividend of MXN 4.3 billion in January; we issued a MXN 4.0 billion sustainability-linked notes in the Mexican market in March and we also prepaid MXN 2.7 billion of short-term loans in March. At the end of the quarter, total debt amounted to MXN 9.2 billion and our net debt to adjusted EBITDA ratio stood at 1.0 times. This concludes our prepared remarks. Shimade, please open the call for questions.
[Operator Instructions] Our first question comes from Javier Gayol with GBM.
Congratulations on the results to the OMA team. I have 2 questions. The first one is regarding the maximum tariffs. It's a 2-part question. First, when are you guys projecting you might be charging the full maximum tariff? And then the second part of that question is, how are the airlines reading the tariffs increases? Have you seen any push back from them? Are you having to lower tariffs or have to negotiate with them to bring in more routes into your airports? That will be my first question.
Thank you, Javier. For the first one, what we will reach -- we're expecting to reach the maximum tariff somewhere in the first quarter of next year. As with the airlines, we have been working very well with them and we're currently working out -- searching for new opportunities for routes.
Okay. Great. And my second question is regarding the balance sheet of the company and the recent issuance -- and congratulations on that. But still the leverage ratio of OMA, even though compared to other Mexican airports is at one time and it could be reasonable. Other international -- other international concessionaries have much higher leverage. So my question is, are you guys comfortable with the current level of leverage, or could you look into increase the leverage in the company?
Thank you, Javier. You're right, it's low level compared to other airports and it will depend on the use of proceeds. So if we were to find opportunities to expand abroad, then I would -- there will probably be a corresponding increase in some healthy level of leverage.
Our next question comes from the line of Alejandro Zamacona with Credit Suisse.
2 questions from our side. The first one on the cost control. So we have seen several quarters with this same trend delivering operating leverage. So I was wondering if it's fair to assume that OMA has become more efficient in terms of costs, considering these efficiencies as structural? Or if once the traffic is fully recovered, we should expect uptrend in costs, mostly assuming the higher inflation that we have seen recently?
Alejandro, this is Ruffo. So yes, the company has been working in the past few years to fulfill culture of cost discipline at all levels and we're seeing the fruits of those airports over previous years. Right now, in the quarter, we were just 10% is all the traffic of the first quarter of 2019, so we can assume that we are now operating at -- I mean, pre-pandemic levels basically, and the costs that we are seeing should keep increasing slightly given the higher volume of traffic, but we do expect to continue to benefit from operational leverage. What you would be seeing on a quarterly basis comparison through the third quarter of this year, would be in the same line item that you saw in the first quarter, like payroll, because of today's comparison with last year. And we also continue to see some increases in contracted services, such as cleaning and security, where we have, even with the larger amounts of our operation, increased the size of the [indiscernible] certain services at most of our airports. But I think that we are in the right set-up in terms of [ our construction that we can manage ], I think, today [indiscernible]
And just to add onto his point, we definitely believe we have become more efficient and we think that the current levels of profitability are sustainable...
Okay. I need to fix my line, [ away from ] [indiscernible] a lot of background noise.
[ A lot of -- are you able to hear ] -- can you hear us now correctly?
Yes. Yes. Ruffo, so I'm sorry, so just to conclude the question that -- I mean, you are looking up some -- you're expecting some trends, upward trends in the costs but you are also looking for some efficiencies in the costs going forward. That's right?
So we will continue to manage from operational leverage. But when you compare to the first -- the second quarter of 2021 and probably the third quarter of 2021, you will continue to see the increases in payroll expense basically because of the basis of comparison rather than by a future increase in our cost. And in terms of subcontracted services such as cleaning and security, yes, given the additional capacity of volume that we're handling, we will see some increases going forward. But definitely the level of cost we are operating that, it's very efficient. And we do not expect to see significant increases to handle the amount of traffic that we're expecting for the rest of the year.
Our next question comes from the line of Guilherme Mendes with JPMorgan.
The first question is related to traffic. On the last conference call, you mentioned about reaching to pre-pandemic levels by the third quarter and reaching full year figures dropping around 3% to 5% when compared to '19 levels. Just wanted to double-check if that's still the base case? And the second question is in terms of -- is a follow-up question is in terms of the capital allocation, as you guys mentioned leverage is still pretty low. So thinking in terms of what could be potential capital allocation opportunities if growth opportunities outside the Barbados ones, or even increasing dividends in the future. What can you talk about in terms of capital allocation?
So in terms of traffic, we're slightly more optimistic than in the previous call. We are now expecting passengers to be close to 23 million for the end of the year. What we're seeing in April is, we are very, very close to the April 2019 levels. So probably by May and June, we may hopefully be surpassing the levels of those amounts in 2021. And -- sorry with adjusted to May and June of 2019. And with respect to capital allocation, as Ricardo mentioned, unless we find the right uses of proceeds, it's going to be difficult to continue increasing leverage to comparable levels of international airports. At this time, we are pre-qualified in the Barbados process. We heard from the IFC with organizing the process that it could get restarted by May. So we'll be looking into it once the process and the rules become public. But at this time, they have not announced any update on the time line. And with respect to increasing dividends, going forward, it will depend on -- continue to increasing our net income, so we can generate sufficient COFINS, the tax -- net income to be able to distribute dividends in a tax efficient manner.
Our next question comes from the line of Rodolfo Ramos with Bradesco BBI.
My question is a follow-up on the expense one. So just to clarify the -- so the level of expenses that you reported in the first quarter, would that be a good base for us to go off on an inflation basis going forward, or how do you see that for the rest of the year?
I would say, yes, for most line items and perhaps in the case of subcontracted services could grow slightly greater than inflation because of the passenger volume effect. But on the rest of the line items, such as payroll, insurance, et cetera, I think it's fairly reflective of what we are expecting for the rest of the year.
And just a 2-parter here on traffic. Can you talk a little bit about the dynamics that you're seeing in these routes that you mentioned in your earlier remarks, in your opening remarks about Monterrey, Mexico City, Monterrey Guadalajara. How do you see this in the short term? And a second part of this question is how do you see Santa Lucia feeding into your system, particularly Monterrey, how are you seeing that route going forward? I mean, does this type of passenger bode well with your network or how would you -- how should we think about that?
Thank you, Rodolfo. I think that what's interesting to point out is that if you look at the route of Monterrey, Mexico, the quarter -- the variation versus the first quarter of '21 was 70%. That compares, for example, to Monterrey-Cancun, which was only 10%. Now the first route that I mentioned, it's about purely a business travel, business passenger, and the latter one is tourism. So we're seeing more dynamism in the business passenger segment. Same thing, if you look at, for example, Monterrey-Guadalajara, the increase was 92% compared to, for example, Culiacan-Tijuana, which is a VFR kind of traffic, which is 15%. So we're finally seeing a recovery in the business segment. That was the point that we mentioned earlier. And as of Santa Lucia, they're operating right now 6 routes. There's only 1 operated by Viva to Monterrey, so it's too early to say, what the impact would be. What we do know is that it's an opportunity for them to develop Monterrey as a potential hub.
[Operator Instructions] Our next question comes from the line of Gabriel Himelfarb with Scotiabank.
Just 2 quick follow-up questions. The first one, do you think or do you plan to open more routes from your network towards Santa Lucia and maybe probably in future to [ Leon ] airport? And the second, can you give us a bit of color about the business travel specifically on the industrial related business travel, what you call [ BUTS ], and about what we -- and the business travel related to corporate travel because -- what are the trends what you're seeing or you plan for this year as office start coming -- people started coming back to the office, to conferences and stage show?
I'll take the first one. No, at the moment, we don't have plans to, for new routes for Santa Lucia to Leon. And I didn't hear the second one, did you get it?
If I heard correctly, you're asking for what are the trends regarding the industrial type of travel as opposed to other type of travel?
Yes.
So yes, we continue to see, I mean that as a core market for us. When we talk about business travel, it's not only the high executive, consultant, banker type. But we do rely lot on the industrial type of traffic for [indiscernible] and the factories and car and steel plants that are located nearby our airports. So yes, we do see that traffic continue to performing well and as you kind of mentioned in the first quarter, most of our routes that drove the increase of passengers in the quarter were business related routes. And we do expect that trend to continue in the next few quarters for our airports.
Our next question comes from the line of Alan Macias with Bank of America.
Just a follow-up question on the hub -- Monterrey becoming the hub. What measures are you taking to make that happen? And if you have seen any opportunities in changing your traffic mix, more tourism traffic or do you see this just an opportunity to capture traffic that Mexico City airports cannot handle?
Sure. Thank you, Alan. It's an ongoing process. We're having the conversation with the airlines. I think the opportunity comes from trying to move all that traffic that today doesn't have to go through Mexico City, having it through the Monterrey airport and that the conversation we were having at the moment, we want to explore also the geographical advantages that Monterrey have close to the border of the U.S. as well.
Just one further question. Any updates you can provide or any insight into Mexico's Aviation Safety rating, the Mexico efforts to recover the category 1? Any news you have heard about that?
I think we have the same as you probably all have what we heard from the authorities that they're expecting to reach level 1 again by the third quarter of this year.
Our next question comes from the line of Juan Macedo with GBM.
I was wondering about the VIP Lounges you have started to operate. Could you give us some more color on the economics of the project? For instance, if you have the levels of IRR that you are expecting, it would be great to know.
We adjusted the operations directly. We expect to have a margin on around 70% through that line of business. We have currently across our project to modernize all the lounges in our airports and to be able to provide a much better product than we used to have. As for IRR levels, I think we would have to come back to you probably on that one.
Well, the previous contract expired.
Yes.
So I mean, we're investing in renewing, but there is no per se a large investment being made. So it's basically profitability levels reaching into the target.
So before we used to have -- we used to receive only 50% of the revenue from the Lounges. The third-party operator used to have the other half. So now, we are having 100% of the revenues, but we are adding a certain operating costs and the margin would be around 70%. So overall, you would see an increase in total EBITDA in our figures.
That's great color and congrats on the report.
And our next question comes from the line of Alejandro Zamacona with Credit Suisse.
Sorry for jumping in again. Just an additional question on the commercial business. Can you remind us what's the current status of the discounts on the minimum annual guarantee contracts?
So since late 2Q of last year, we stopped granting discounts. So basically, for the third quarter of '21 through today, we are not granting any more discounts in relation to COVID pandemic or any other type of support to tenants. And with respect to how much is fixed rent versus variable, in the first quarter of 2022, out of our commercial revenue, excluding parking, around 65% of the revenue was derived from fixed rents and 35% was derived from variable. As a point of comparison, in the first quarter of 2021, also excluding parking, 72% of the commercial revenue was fixed and 28% was variable.
And we have reached the end of the question-and-answer session. I'll now turn the call over to Ricardo Duenas Espriu, Chief Executive Officer, for closing remarks.
We want to thank all of you again for participating in this call. Ruffo, Emmanuel and I are always available to answer your questions and we hope to see you soon. Thank you and have a good day.
This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.