OMAB

Business Context and Reporting Period

Company: Central North Airport Group (Grupo Aeroportuario del Centro Norte, S.A.B. de C.V.)
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2013
Accounting Basis: International Financial Reporting Standards (IFRS)
Primary Currency: Mexican Pesos (MXN)

The Company operates, maintains, and develops 13 airports in Mexico under 50-year concessions granted by the Mexican government. Operations are concentrated in the central and northern regions, serving metropolitan, tourist, regional, and border destinations. The Company also holds a 90% interest in a hotel and commercial space at Mexico City International Airport (Terminal 2 NH Hotel).

Key Financial Metrics (Year Ended Dec 31, 2013)

Note: USD amounts translated at Ps. 13.0652 = US$1.00 (Dec 31, 2013 rate).

• Revenue Mix: Aeronautical services (66.4%), Non-aeronautical services (23.3%), Construction services (10.3%).
• Operating Margin: 35.4% (down from 36.9% in 2012).
• Net Margin: 35.1% (up from 26.1% in 2012, driven by tax reform benefits).
• Passenger Traffic: 13.3 million terminal passengers (5.5% increase YoY).

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 8.8% to Ps. 3.42 billion. Aeronautical revenues grew 6.5% driven by a 5.5% increase in passenger traffic. Non-aeronautical revenues grew 15.6%, significantly boosted by baggage-screening services (up 149.3%) and hotel services (up 11.4%).
• Profitability Surge: Net income increased 46.7% to Ps. 1.20 billion. This was primarily due to a negative effective tax rate of 12.6% in 2013 (vs. 26.0% in 2012) resulting from the repeal of the Business Flat Tax and the recognition of deferred tax assets.
• Cost Increases: Operating costs rose 11.5%. The major maintenance provision increased 60.3% to Ps. 263 million due to updated estimates for baggage-screening equipment maintenance and infrastructure restoration.
• Cash Flow: Operating cash flow decreased 20.2% to Ps. 1.01 billion, despite higher net income, largely due to working capital changes and the timing of tax payments.

Guidance, Outlook, Risks, and Unusual Items

Management Commentary and Outlook

• Strategic Focus: Management continues to focus on maximizing aeronautical revenues through route optimization and increasing non-aeronautical revenues via commercial diversification (e.g., new Hilton Garden Inn at Monterrey, expected Q1 2015).
• Regulatory Environment: Maximum rates for aeronautical services are set for the 2011-2015 period. Renegotiation for the 2016-2020 period is expected in 2015. The Company aims to collect 99.1% of authorized maximum rates.

Risks and Contingencies

• Regulatory Risk: A significant portion of revenue is subject to price regulation. Changes in the Mexican Airport Law or Competition Law could impact profitability. A new independent regulatory agency is proposed.
• Customer Concentration: Top three airline customers (Grupo Aeroméxico, VivaAerobus, Interjet) accounted for 65.1% of aeronautical revenues in 2013.
• Security and Crime: High crime rates and drug trafficking in certain regions (e.g., Chihuahua, Nuevo León) pose risks to passenger traffic and operations.
• Competition: Potential competition from new government-granted concessions (e.g., Bocoyna airport near Chihuahua) and existing airports (Aeropuerto del Norte near Monterrey).
• Legal Proceedings: Outstanding receivables from the bankrupt Grupo Mexicana (approx. Ps. 146 million) remain fully reserved and unrecovered.

Unusual Items

• Tax Reform Impact: The 2013 Mexican tax reform eliminated the Business Flat Tax, resulting in a Ps. 337 million deferred tax asset recognition and a significant reduction in the effective tax rate.
• Natural Disasters: Hurricane Manuel (Sept 2013) caused Ps. 51.6 million in estimated damages at Acapulco and operational disruptions, though the financial impact was deemed immaterial.

Investor Verification Checklist

• Tax Rate Sustainability: Verify the long-term sustainability of the 12.6% effective tax rate given the one-time impact of the Business Flat Tax repeal.
• Regulatory Rate Setting: Monitor the 2015 renegotiation of maximum aeronautical rates for the 2016-2020 period and potential efficiency adjustments.
• Airline Solvency: Assess the financial health of major airline customers (Aeroméxico, VivaAerobus, Interjet) given their high concentration in revenue.
• Security Environment: Evaluate the impact of crime and security warnings in key operating regions (Chihuahua, Nuevo León) on passenger traffic trends.
• Capital Expenditure Compliance: Confirm adherence to Master Development Program investment obligations to avoid regulatory sanctions.
• Recovery of Bad Debts: Track any potential recovery of the Ps. 146 million receivable from Grupo Mexicana.