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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Greetings. Welcome to OMA's Third Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to Emmanuel Camacho, Investor Relations Officer. Thank you. You may begin.
Thank you, Sherry. Good morning, everyone. I'd like to welcome you all to OMA's Third 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's 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 will 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, we will review the evolution of our business and our third-quarter performance. Before we begin, I would like to comment on an important update on the OMA shareholding structure. During the quarter, we were informed by Fintech advisory that certain affiliates of Fintech had entered into a share purchase agreement with a subsidiary of Vinci Airports for the direct acquisition of 29.99% of Series B and BB shares of OMA. This transaction will make Vinci Airports our largest shareholder. Vinci Airports' investment in OMA represents an endorsement of the extraordinary performance we have delivered in the past and a confirmation of the potential of OMA's assets. We are excited to be welcoming the world's leading private airport operator and together create additional value by combining Vinci's global network and expertise with OMA's long-term strategy and prospects. We will not further comment on this transaction here closing, which is expected to occur in December 2022. I will now review our third-quarter operational performance. In the third quarter, OMA's passenger traffic surpassed 2019 levels for the first quarter since the beginning of the pandemic. Total passenger traffic reached $6.3 million, an increase of 2% versus the third quarter of '19. Domestic and international passenger traffic increased by 1.8% and 3.7%, respectively, versus the same quarter of 2019. Our strong passenger traffic performance was guided by the continued improvement on the business travel segment in our main routes. The Monterrey to Mexico City route, which is our most relevant route, was already at the same level of the third quarter of '19. Additionally, other important business routes, such as Monterrey to Guadalajara and Sudad, Juares to Mexico City, delivered important growth levels versus the third quarter of '19, with an increase of 12% and 34%, respectively. As a result of the strong passenger traffic performance and the increase in our aeronautical tariffs in the first quarter of '22, our aero revenue grew 27% in the quarter versus the third quarter of '21 billion to MXN 1.9 billion. On the commercial front, the occupancy rate for commercial space in our terminals closed at 93% at the end of the quarter versus an 89% by the end of the second quarter of '22. Strong demand for commercial spaces was mainly guided by an additional 1,000 square meters occupied for the food and beverage and retail segments in our Monterrey and Tampico airports. Commercial revenues increased 34% compared to the third quarter of '21, driven by parking, car rentals, restaurants, retail, and VIP lounges. Diversification revenues increased 35%. Our hotel services and OMA Carga contributed the most to this growth. In the third quarter of 2022, the occupancy rate of our Terminal 2 NH Collection Hotel was 79%, while the Hilton Garden Inn Hotel had an occupancy rate of 77%. OMA Cargo had another set of strong results as revenues increased 35% versus the third quarter of '21, mainly driven by revenues from handling, storage, and custody of ground and airport and import cargo. As a result of OMA Cargo's continued strong performance during the quarter, we decided to increase the capacity of our ground cargo operation facilities at Monterrey Airport. The expansion project entails an additional operating area of approximately 1,100 square meters, an increase of 70%, and is expected to be fully operational for the first quarter of 2023.
On the capital expenditures front, total investments in the quarter, including MDP investments, major maintenance, and strategic investments, was MXN 839 million. During the quarter, we continued to work on the following major projects: expansion and remodeling of the Monterrey Airport Terminal A building as well as Hubauares and Culiacan terminal buildings; reconfiguration of the Mazatlan terminal building; modernization of Siuatanejo terminal building; major rehabilitation of platform and taxiways in several airports and platform reconfiguration at the Monterrey Airport. 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 third-quarter financial results. Aeronautical revenues increased 27% relative to 3Q '21, driven by a 23% increase in passenger traffic and an increase in iron apical tariffs implemented in the first quarter of this year. Non-iron revenues increased 28%. Commercial revenues increased 34%, and the categories with the highest growth were car parking, car rentals, restaurants, retails, and VIP lounges. Car parking revenues increased 58% due to higher penetration in our Chihuahua, Monterrey, and Culiacan airports as a result of higher business dynamism in those airports. Car rentals, restaurants, and retail increased 34%, 23%, and 34%, respectively, mainly due to higher revenue sharing and the opening of new commercial space. VIP lounges increased 57%, due primarily to the recognition of revenues as a direct operation as well as an increase in the number of users of the premium omarimium lounges. Diversification activities increased 35%, reflecting strong hotel and OMA Carga performances. Total aeronautical and non-aeronautical revenues were MXN 2.5 billion in the quarter and grew 27% relative to the third quarter of 2012. Construction revenues increased 56% as a result of increased MDP investments. The cost of airport services and G&A expense increased 16% relative to the third quarter of '21, mainly due to an increase in payroll expense as a result of increased headcount, higher salaries versus last year and provisions, including statutory profit sharing.
Contracted services grew due to overall higher activity in our airports, and materials and supplies grew as we recorded direct costs from the operation of the OMA premium lounges. Peso maintenance provision was MXN 51 million compared to MXN 165 million in the third quarter of '21. OMA's third-quarter adjusted EBITDA was MXN 1.9 billion, and the adjusted EBITDA margin reached 76.5%. Our financing expense was MXN 219 million, mainly due to higher interest expense as a result of additional debt issuance and higher cost of debt, as well as the noncash implied interest on the major maintenance provision. Consolidated net income was MXN 1.1 billion, an increase of 36% relative to the third quarter of 2021. Turning to our cash position. Cash generated from operating activities in the third quarter amounted to MXN 1.6 billion, and cash at the end of the quarter stood at MXN 2.1 billion. During the quarter, we paid the second MXN $500 million at installments of the PLN 2.3 billion of dividend that was approved in the 2022 Annual Shareholders Meeting. At the end of the quarter, total debt amounted to MXN 9.2 billion, and our net debt to adjusted EBITDA ratio stood at 1.1x. This concludes our prepared remarks. Operator, please open the call for questions.
[Operator Instructions] Our first question is from Alejandro Sania with Credit Suisse.
A quick question on the tariffs. So during 2022, we have seen a slight increase so far in terms of the aeronautical revenue per working unit. So is it fair that in 2023, you will be able to implement a maximum tariff increase beyond inflation and mid-the last 13% real increase in the MDP negotiation?
Certainly, beginning of this year, we implemented approximately 11% increase in other tariffs throughout our airports. We do not expect this year to get to the maximum recovery. In fact, we should be around the same level of last year, around 92%. For next year, we are targeting increases. We still have yet to define what the level of increases will be, and we'll take into consideration the expected inflation for next year as well as the overall situation of the industry.
And then my second question, if I may. In terms of the margins, just a question regarding how sustainable do you believe this high 70s margin is achievable for the long term.
Thank you, Alejandro. Yes, we think 76, something close to 76% margin is sustainable in the long term -- in the medium term.
Our next question is from Juan Ponce with Bradesco.
I have a question on Monterrey. We saw in your most recent traffic report north of 5% above 3 dynamic levels. In your view, what were the main drivers in September and going forward? And if we are showing actually moving the needle? And do you think these drivers will be sustained next year a little potential slowdown?
Thank you. Yes. So yes, we think they're sustainable 2 things that have helped us in our favor is business traffic has been recovering. As you know, it was a traffic that was lagging VFR and leisure traffic. So we're starting to see more denims in that sector. Also, the near-shoring effect has had some positive effects in our airports. You can see that by looking at some of the traffic, for example, in Juarez, where we're already much higher than traffic that we used to have in 2019.
Our next question is from Filipe Nielsen with Citi.
So I have 2 questions on my side, I'd like to know what are the impacts you're seeing from the Mexico City Airport to shuffle into your airports. Is it good or bad, like hubs in Monterrey, less business travel from the [indiscernible], et cetera? How are you seeing that? And the second question is, what are your thoughts on new projects? And if you have any intentions on expanding outside Mexico or even getting new projects inside Mexico, I would like to hear a little on that.
Sure. In terms of the new airport effect, it's still too early in the process. What we know is the government has been very clear about trying to decentralize traffic from Mexico City. That is an opportunity for private airport groups like OMA. When we see that trend in which a lot of the traffic will start to bypass Mexico City, we believe Monterrey is strategically located across the United States to take advantage of the situation. During the quarter, we opened new routes to Santa Lucia Airport to Toluca. So we think a shift might be -- might happen, but it's going to be -- it's not going to be an immediate effect. As to new projects, well, we are executing the MDP plan. We're in year 2 of the plan. Our main works are Monterrey, Culiacan, and Cidade, major terminals. And as for expansion abroad, we're always looking at potential opportunity to expand. So far, we don't have any concrete transaction in the table. We're always open to listen to opportunities. We were participating, as you know, in the Varvatos privatization process, but it was -- our understanding is that it was recently canceled.
And if I may, I just have one follow-up on the tariffs. Do you -- you said that you're expecting increases for the next year. Do you see any probability of this rolling off due to large tariff increases that you've seen last year or not?
We're still working internally what that should be, and that will be also an effect of what are the inflation expectations that we're seeing next year. But it's too early in that budget process.
Our next question is from Juan Macedo with GBM.
My question is regarding the increase in payroll. Could you give us some detail on that increase? Was it related to last year's outsourcing low? And do you expect more comments soon?
Yes. So this was partially due to that effect. I think that at this time, it has stabilized. We do have certain openings of new VIP lounges in the upcoming couple of quarters. So headcount will continue to increase slightly. But in terms of amount, I think that it has stabilized.
And a second question, if I could ask you to give us some color on the storage expansion in the Monterrey terminal? What impact do you expect from this expansion?
Well, we are -- as Ricardo mentioned, increasing our warehouse -- one of the warehouses that we have in Monterrey, the [indiscernible]. As you know, OMA Carga continues to post double-digit growth, and it's already well above the 2019 levels. We do see this trend maintaining in the next few years. So we are anticipating additional -- I mean, so this expansion will allow us to capture that underlying demand that we see in that market. So we should continue to expect double-digit growth in OMA Carga for the foreseeable future.
Our next question is from Gabriel Himelfarb with Scotiabank.
Just a quick question about the MDP. Do you expect the planned level of the MDP could be modified to inflation as construction materials are increasing, and maybe payrolls might not increase and labor cost is increasing?
So as per the regulation, the commitment of investments in the 5-year period from 2021 to 2025 is in real terms. As you may remember, when we announced the MDP negotiation results, we committed to a roughly MXN 12 billion expressed in pesos of December 2019, with a cumulative inflation from December 2019 to September of this year. The total MDP commitment has increased to PHP 16 billion. So that is the amount expressed in real terms with peso purchasing power as of today. To just add up and add a little bit. So MDP is inflation protected because it's adjusted annually by inflation. And in case you see inflation in some certain aspects that are higher or above that level, there's always opportunities to value engineer some of those projects.
Our next question is from [ Edson Maria with Sumika ].
I have 2 of them. The first one is related to new routes. This third quarter other companies and international carriers of the new routes. So for the end of 2022, are you expecting opening more routes between Mexico or the parts of the U.S. [indiscernible] question? The second one is related to construction costs. This quarter, construction costs increased 56%. So I was wondering if this is related to the MDP or it's only because of you already paying about another operational cost.
So the construction -- turning on your second question, the construction truck that you see in the P&L equals the construction revenues. So they have a net effect of 0 EBITDA or operating income. And what they reflect is the higher execution of MDP investments relative to last year. And with respect to new routes that we're expecting, some of the carriers that have announced already additional frequencies start and capacity starting in December to markets such as Guanajuato, Guadalajara, Queretaro, and in the international front, we have some recovery of the Canadian markets that went primarily to Mazatlan, which last year was not as a strong season as it usually has been. So we are expecting a further increase in the charter flights from Canada to our Mazatlan airports this winter season that's starting basically tomorrow, starting in November. And we see additional frequencies to capacity to markets such as Detroit and Los Angeles as well on the last quarter. So all this should bode well for a strong quarter and for OMA.
Our next question is from Alberto Valerio with UBS.
I would like to ask about the cycle of the demand, where we are now. At the moment, we saw [indiscernible] the first time above the repayment level at this quarter. And I'm wondering whether the category downgrade that Mexico had [indiscernible].
Alberto, can you repeat your question? The line is not great.
My question is about the cycle of the demand where we are at this moment. So if you are in the top of the cycle or if you are in the middle of the cycle, you just see OMA recovering traffic to pre-pandemic level at this quarter? And my second one is the category one in Mexico as related to that, if we had granite categories for safety in Mexico, we may see some aircraft going away from Mexico and that to the U.S. routes impact the domestic traffic in Mexico. This is my question on the demand.
Well, let me take the second part. So regarding Category 2, there was news during the weekend public officials for Mexico went to meet the FAA personnel in the United States. There was a public release this weekend. They say that the meeting was very good that in January, the FAA is going to send a group to Mexico to review the process and where we are. And the expectation, apparently from the information that we have, is that we could return to category run somewhere to Category 1, somewhere around the first quarter of next year. That is going to be very important. It's going to have an impact in Mexican carriers, which right now, they don't have an opportunity to increase new routes to the United States or in those existing ones to increase frequencies. The other part was?
So in terms of demand outlook for the next few months, I mean, we do expect some economic deceleration in the U.S. that could affect overall demand. However, as Jigar mentioned, we see a strong near-showing effect as well as the recovery of the business routes that have been lagging the other type of markets like BFR or insurers that have recovered faster. So we think that it will even out, and we'll continue to see some positive growth over the next quarters.
We have reached the end of our question-and-answer session. I would like to turn the conference back over to Riccardo for closing comments.
Thank you all for your participation today. 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.
Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.