GRUPO AEROPORTUARIO DEL CENTRO NORTE, S.A.B. DE C.V. (OMAB) Q1 2021 Earnings Call Transcript

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GRUPO AEROPORTUARIO DEL CENTRO NORTE, S.A.B. DE C.V. (OMAB -0.70%)
Q1 2021 Earnings Call
Apr 28, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the Grupo Aeroportuario del Centro Norte First Quarter 2021 Earnings Conference Call. [Operator Instructions]

I will now turn the conference over to your host Emmanuel Camacho. You may begin.

Emmanuel Camacho -- Investor Relations

Thank you. We, good morning, everyone. Thank you for standing by and welcome to OMA's first quarter 2021 earnings conference call. Ricardo Duenas, OMA's CEO; Ruffo Perez Pliego, CFO, will be joining this morning and will discuss OMA's first quarter 2021 results. 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 maybe beyond our control, which includes the impact of COVID-19.

I will now turn the call over to Ricardo Duenas.

Ricardo Duenas Espriu -- Chief Executive Officer

Thank you, Emmanuel. Good morning, everyone and thank you for joining us today. I hope that all of you and your families are safe and healthy. This morning, I will review the evolution of our business as well as our first quarter performance. But before starting our discussion, I would like to highlight a couple of recent milestones and events. First of all, on April 16 we successfully completed our MXN3.5 billion issuance in the Mexican market through two tranches issued jointly. One of these tranches was placed as Green Bond and I'm proud to say that we have become the first airport operator to place a Green Bond in the Mexican market and the only one with an outstanding Green Bond in Latin America. The majority of proceeds from the Green Bond will be used on solar energy projects and energy efficiency projects throughout our airports as well as other projects that reduce energy consumption.

Proceeds from the second tranche were used to prepay on April 19, MXN3 billion of our long-term notes issued in 2014. Additionally on April 21st, we held our 2021 Annual Shareholders Meeting, where shareholders approved among other matters the declaration and payment of cash dividend to shareholders up to MXN2 billion and delegated to the Board of Directors and the power to determine the amount to be paid out which will come from any accumulated earnings as well as the date or dates and forms of payment. The declaration of this dividend will become effective as of the date the board makes it determination. Turning to our passenger performance during the first quarter. In January and February the recovery trend that we had experienced as June of last year came to a pause. Events such as the second wave of contagions after the year-end holidays. The suspension of flights from Canada since January 26 and the requirement on negative COVID-19 test by the US of incoming travelers had an impact in air travel.

In February, the level of contagions began to receive an epidemiological alert level in the country decreased as well. In March, passenger traffic showed clear signs of faster recovery with a sequential increase of 53.4% as compared to February, 2021. Currently of the nine states where OMA has operations, one state is in orange status, seven states are in yellow and one is in green. We expect passenger traffic to continue its recovery path in the following months as contagion levels decreased and the health alert levels in the state where we operate and those of our main destinations allow for an increased mobility and economic activity. At the end of March, a total of 128 orange destination routes were in operation compared to the 140 at the end of December 2020 and 183 routes in operation at the end of December 2019. On the cost and expense side, our actions taken in previous quarters resulted in an important decline in cost of airport services and general and administrative expenses of 11%, mainly driven by lower security and cleaning cost, major maintenance and payroll expense.

At March 31, our cash position was MXN3.2 billion. We believe that our cash position along with cash generated from operations will allow us to meet our investment and operating obligations for this year. Turning to our first quarter operational results. Total passenger traffic reached 3 million in the quarter resulting in a decline of 38% versus the first quarter of 2020. The best performing airports which have the lowest decline in passengers in percentage terms compared to the first quarter of 2020, were Culiacan, Ciudad Juarez and Reynosa, Chihuahua and Mazatlan. From the route perspective the routes that experienced the greatest negative impact and total passenger during the quarter due to the reduction of capacity are Monterrey and Culiacan under Mexico City routes and Monterrey on its' Guadalajara route.

Adjusted EBITDA reached MXN808 million in the quarter with a solid margin of 67.9%. On the commercial front, revenues decreased 38% with the largest impact on parking, restaurant, car rentals and retail. Occupancy rate for commercial space in our terminals was 87% at the end of the quarter. During the quarter, we continued to support our tenants through a new discount program based on passenger traffic performance. Diversification revenues decreased 15% mainly due to lower revenues from hotel services. During the first quarter of 2021, the occupancy rate of our Terminal II NH Collection Hotel was 53% while the Hilton Garden Inn hotel at the Monterrey Airport had an occupancy rate of 34% during the quarter. OMA Carga delivered an outstanding performance during the quarter. with an increasing tonnage handle of 27% which resulted in a revenue increase of 30%. Air import cargo operations contributed most of this growth in the quarter.

Total investments including MDP investments, major maintenance and strategic investments were MXN360 million in the quarter. Some of our major projects on the way include the expansion of remodeling of Monterrey Airport terminal A expansion and remodeling of Tampico terminal building, expansion and remodeling of the Ciudad Juarez terminal building. Modernization of the Zihuatanejo terminal building and works on runway, taxi ways and aviation platforms in several airports.

I would now like to turn the call over to Ruffo Perez Pliego who will discuss our financial highlights for the quarter.

Ruffo Perez Pliego -- Chief Financial Officer

Thank you, Ricardo. Good morning, everyone. I will briefly review our financial results and then we'll open the call for your questions. Turning to OMA's first quarter financial results. Aeronautical revenues decreased 31.6% driven by the 37.8% decline in passenger traffic. Non-aero revenues decreased 27.8% with commercial revenues having the largest impact. Commercial revenues decreased 37.8%-with the largest impact were parking, restaurants, car rentals and retail. Parking revenues declined 43% and the decrease is mostly driven by a slower recovery in the Monterrey Airport routed to the other airports.

Restaurants, car rentals and retail decreased 45.5%, 30.6% and 44.4% respectively due to the decrease minimum fixed rents and participations on sales. Diversification activities decreased 15.8% mostly driven by lower revenues from hotel services which were partially offset by an increase in revenues of OMA Carga and the industrial park of 29.9% and 40.2% respectively. Total aeronautical and non-aeronautical revenues were MXN1,190 million. Construction revenues increased 62%. This is a non-cash item that is required under applicable accounting standards. It has no impact on earnings. The cost of airport services and G&A expense decreased 11%. During the quarter we recorded savings on subcontracted services and payroll expenses mainly as a result of the initiatives in momentum to reduce cost during 2020.

Additionally, minor maintenance cost decreased 28% as a consequence of deferrals of non-essential works. OMA's first quarter adjusted EBITDA reached MXN808 million and adjusted EBITDA margin was 67.9%. During the quarter, we recorded an increase in the major maintenance provision of 63.8% to MXN78 million. This reflects increased future major maintenance works under the new MDP that was approved by the authorities last year. During the quarter, our financing expense was MXN33 million and consolidated net income was MXN416 million.

Cash generated from operating activities in the first quarter amounted to MXN736 million and cash at the end of the quarter reached MXN3.2 billion. As mentioned before, following the issuance of MXN3.5 billion five and seven-year debt securities. OMA prepays the OMA14 bonds with reasonable amount of MXN3 billion. As a result, the maturity profile of OMA's debt was extended within significant maturity due until March 2023 and the amount of MXN1.5 billion.

This concludes our prepared remarks. Sonali please open the call for questions.

Questions and Answers:

Operator

[Operator Instructions] our first question is from Alan Garcia with Bank of America. Please proceed with your question.

Alan Garcia -- Bank of America -- Analyst

Good morning and thank you for the call. Just two quick questions. I guess the first one is, if you can tell us what percentage of your maximum terms you reached during the quarter and what percentage do you expect to reach during the year? That would be my two questions. Thank you.

Ricardo Duenas Espriu -- Chief Executive Officer

We expect that for the full year the maximum time of recovery will be around 95% an average for OMA's airports. In the first quarter, it was a slightly lower than that. Even the increase in tariff that leads momentum occurred in the middle of February so basically you have half of the quarter with the effect of tariff increase to passengers and to airlines and we'll see that impact going forward for the quarter. So that's why overall for the year, it would be better than the first quarter. Just to mention that, tariff increase that we implemented was about half of the tariff increase awareness last year under the MDP revision. So we'll expect to reach close to 99% recovery of the maximum tariff toward the first quarter of 2022 when we pass through the other half of the increase.

Alan Garcia -- Bank of America -- Analyst

Thank you.

Operator

And our next question is from Alejandro Zamacona with Credit Suisse. Please proceed with your question.

Alejandro Zamacona -- Credit Suisse -- Analyst

Hi, Ricardo high approval.

Ricardo Duenas Espriu -- Chief Executive Officer

Hi. Emmanuel.

Alejandro Zamacona -- Credit Suisse -- Analyst

Thank you for the call. I guess my first question is, what the latest on the potential tender offer from Fintech [Phonetic]. I understand that this is an external topic to OMA. But I also understand the best part is committing at OMA. Most of us-the offer to give their opinion to the Board. So any color around this would be very useful.

Ricardo Duenas Espriu -- Chief Executive Officer

Thank you, Alejandro, for your question. We don't have any additional information other from the one what we published on December last year. The one that mentioned that Fintech [Phonetic] have the intention of acquiring up to 40% that's an additional 25%. But since then we don't have any additional information at the moment.

Alejandro Zamacona -- Credit Suisse -- Analyst

Okay, Ricardo. Thank you. Just my second question, if I may. On the domestic airlines, I understand that Interjet was a relevant airline for OMA's traffic. So the airline has stated their intention to use part operations although they are also starting Chapter 11 process. Have you had any discussions with the airline to restart operations in the near future? Thank you.

Ricardo Duenas Espriu -- Chief Executive Officer

Thank you, Alejandro. Yes, its true Interjet mentioned yesterday that they're going to Chapter 11. We don't believe there's any impact for OMA. First of all, they stopped having operations in December last year. They didn't have any route that was covered only by themselves. So the impact has been-the seats that they've been releasing, the competition has absorbed them really rather quickly. So even though Interjet has an exposure in OMA around 11%. It hasn't been material because the other airlines have captured all that seats available. And the second part is, we didn't have any economic exposure to Interjets.

Alejandro Zamacona -- Credit Suisse -- Analyst

Okay, thank you.

Operator

Our next question is from Pablo Monsivais with Barclays. Please proceed with your question.

Pablo Monsivais -- Barclays -- Analyst

Hi, good morning guys. Thanks for taking my question. I just want to pick your brain on the announcement of Volaris and Aeromexico. It's split expansion going forward. We're seeing that the Mexican market has recovered quite strongly. Have you talked to Aeromexico or Volaris already on the expansion plans and how active have you been with this airline team, trying to open your routes and/or what type of market are you seeing they can work with you to use that new fleet that is entering the market? Thank you.

Ricardo Duenas Espriu -- Chief Executive Officer

Sure. We have continuous dialog with many airlines in Mexico during Volaris and Aeromexico. Certainly in our airports the recovery has been driven primarily by divided rules. Whereas to Volaris and Aeromexico. So we work on these separate planes. We have not yet discussed any specific routes where they can deploy, this capacity. But certainly it's positive for our airport route that they have excess capacity going forward which does have to deploy somehow. So we'll expect a faster recovery in the second half of the year of these two airlines. Whereas-they've been doing since the pandemic started with-but this time we have not yet identified specific routes where they can increase their offerings.

Pablo Monsivais -- Barclays -- Analyst

Perfect. Thank you very much.

Operator

Our next question is from Edson merger with [Phonetic]. Please proceed with your question.

Edson merger -- Analyst

I have a couple of them. But seasonally as regarding on the-your expectations about the recovery. Last quarter you mentioned that you expected this recovery to 2022. But since that even airlines in and a couple of minutes ago volumes I mentioned that they're expected to 2023 or maybe 2024. So I was wondering if you can give us more color about that and the second one is regarding your construction cost. Are we going to see an increase during 2021 or more likely like we have seen in this quarter? Thank you.

Ricardo Duenas Espriu -- Chief Executive Officer

With the second part of your question on construction works. More or less around MXN300 million per year slightly higher perhaps is going to be major maintenance works which does not go through the construction income or cost. So in order to reach our MXN2.5 billion commitment more or less for the full year construction cost will have to amount around MXN2 billion. So for the next quarter you'll have to see an increase so that we are closer to that MXN2 billion mark of construction income and construction works.

Regarding the recovery traffic. I think that our best case is that we would reach pre-pandemic levels around 2023. We actually think there might be upside to this timing because of our larger exposure to domestic travel as opposed to international traffic. But I think it's a visual [Phonetic] expectation to believe that 2023 we would be reaching the pre-pandemic levels.

Edson merger -- Analyst

Okay, really helpful. Thank you so much.

Operator

And our next question is from Andressa Varotto with UBS. Please proceed with your question.

Andressa Varotto -- UBS -- Analyst

Hi, good morning. Thank you very much for taking my question. I just have a follow-up on the traffic questions. In March, you saw better traffic levels than in the first month of the year. If you could tell us like if there was already some recovery of-are you seeing some recovery of Carga [Phonetic] expected or not yet? And my second question is, actually regarding from recent news in the Mexico FAA [Phonetic] about potential downward of Mexico by the FAA to Category two. So just like have a clarification on that. It is like more procedural nature or I mean there is a potential negative impact expected there. Thank you.

Ricardo Duenas Espriu -- Chief Executive Officer

So the language-little bit noisy. But to recover, your first question. It's regarding the corporate travel recovery.

Andressa Varotto -- UBS -- Analyst

Yes, if you already started to see that in March there was a more positive rebounding traffic than in the first month of the year.

Ricardo Duenas Espriu -- Chief Executive Officer

Not yet. March; certainly there was a benefit of having the Easter falling in the last week of March and the first of week of April. So for example in the case of our Monterrey Airport. The route that experienced growth was the Monterrey and Cancun route. Whereas the Monterrey in Mexico City continues to have significant declines year-on-year. So we have seen the recovery in domestic leisure routes. We have seen recoveries in far routes such as for example Culiacan-Tijuana or Chihuahua-Tijuana. But the corporate travel has yet to recover. We would expect the corporate demand of nature which is to a large extent what we call it a blue collar corporate travel being more linked to the recovery of industrial production and clear GDP growth. But right now leisure and VFR is what's driving the recovery.

Emmanuel Camacho -- Investor Relations

And as for our expectations for the FAA audit, it is in process right now. It is a sensitive issue for the industry. Actually this morning, the Director of FAA came out saying that he is very confident that we won't lose Category one. So we stick to that and we think we're positive that we're going to come out from this audit in good terms.

Andressa Varotto -- UBS -- Analyst

That's great. Thank you very much.

Operator

Our next question is from Gabriel Himelfarb with Scotiabank. Please proceed with your question.

Gabriel Himelfarb -- Scotiabank -- Analyst

Hi, good morning thing from the for the call. Just a quick question. Can you give us a bit of color about support that you've been giving to tenants and how they have been affecting your commercial revenues? Thanks.

Ricardo Duenas Espriu -- Chief Executive Officer

Sure. We have a broad of products [Phonetic] in the second half of last year, discounts based on the consumers decline of traffic in the OMA airports. We entered into the discussions with tenants in January, February and perhaps it was until March when we reached an agreement that made for tenant not for certainly all to extend that program. However the terms of the program now have a lower percentage decline than the previous program invested year and it would be our expectation to take out these support programs over the second quarter of this year. If we haven't had the discounts in the first quarter, our commercial revenues would have probably been in about 7% higher than we reported.

Gabriel Himelfarb -- Scotiabank -- Analyst

Okay, thank you.

Operator

[Operator Instructions] and our next question is from Juan Paz with Bradesco. Please proceed with your question.

Juan Paz -- Bradesco -- Analyst

Thanks for taking my question which more on the legislative side. The Mexican Congress recently passed a bill that will prohibit outsourcing and in sourcing except for what qualifies as specialized labor. What do you think is the potential impact on operating expenses, if any?

Ricardo Duenas Espriu -- Chief Executive Officer

Thank you, Juan for the question. We have been working on it and it's still work in progress. We know that some of our services that we have currently have to lay like cleaning and security will still be considered outsourcing. We're still working on the analysis. But we believe the impact on the cost side on OMA will be non-material.

Juan Paz -- Bradesco -- Analyst

Okay, perfect.

Operator

And we have reached the end of our question-and-answer session. I'll now turn the call over to Ricardo Duenas for closing remarks.

Ricardo Duenas Espriu -- Chief Executive Officer

I 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 very much and have a good day.

Operator

[Operator Closing Remarks]

Duration: 27 minutes

Call participants:

Emmanuel Camacho -- Investor Relations

Ricardo Duenas Espriu -- Chief Executive Officer

Ruffo Perez Pliego -- Chief Financial Officer

Alan Garcia -- Bank of America -- Analyst

Alejandro Zamacona -- Credit Suisse -- Analyst

Pablo Monsivais -- Barclays -- Analyst

Edson merger -- Analyst

Andressa Varotto -- UBS -- Analyst

Gabriel Himelfarb -- Scotiabank -- Analyst

Juan Paz -- Bradesco -- Analyst

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