Grupo Aeromexico SAB de CV (AERO) 2011 Q2 法說會逐字稿

Good morning. My name is Ashley and I'll be your conference operator today. At this time, I would like to welcome everyone to the Aeromexico earnings announcement conference call. (Operator instructions) Mr. Conesa, you may begin.

Good morning, good afternoon, good evening to all of you that accepted our invitation to Grupo Aeromexico's second quarter conference call. My name is Paulina Alatorre and I am very happy to be your host today. Presenting the second quarter of 2011 results today we have our CEO Mr. Andres Conesa Labastida, our CFO Mr. Ricardo Sanchez Baker, and our SVP Financial Planning Mr. Carlos Doormann.

We'll begin with a brief review of our results and then we'll be happy to answer any questions you may have. Let me now introduce Mr. Andres Conesa.

Hello and good morning and good afternoon to all of your. And thank you for joining in this conference call.

I would like to start this call by highlighting some of the most relevant achievements of the quarter. Once again in this quarter we're posting 15-year record levels in revenue, EBITDAR, operating profit, and net profit. Notwithstanding a market environment characterized by a 48% increase in jet fuel prices year-over-year and a slender passenger traffic increase in the Mexican market.

We reached MXN534 million of net income. This is MXN585 million above 2010 with an EBITDAR of MXN1.75 billion, which represents a 76% increase. Our EBIT margin was 10.4%, a very positive result, especially in light of (inaudible) latest estimates of 2% global industry margins.

For total revenues, these grew by 43% while the unit cost or cost per ASK decrease by 4%. Our cash balance condition closed at MXN4.9 billion, which is MXN4,903 million as a result of higher operating income and the proceeds of the IPO we did in April, which strengthens our ability to face unexpected contingencies should they arise.

This enhanced cash position also helped us reduce our net financial debt so at the end of June it closed with a negative balance of MXN2.768 billion. This is more than MXN5 billion lower than the debt that we have at the same point of last year.

Stockholder's equity at the end of June was MXN3.835 billion. This is more than MXN7 billion better than the amount we reached at the last day of June of 2010.

During this past quarter, a few relevant events took place. We made the transition of our observation and optimization systems to the SABRE platform. This important investment brings many benefits, such as an enhanced optimization between supply and demand, a potential improvement of flight revenue, a customized travel experience for passengers, and an improved onboard service.

In the last months we continued with our expansion plan and in April we started operations in the Guadalajara-Sacramento route. In June we started flying to Huatulco in Oaxaca. And in July we added six new routes -- Monterrey-Brownsville, Mexico City-Guatemala, Cancun-Miami, Monterrey-Leon, Monterrey-Chicago, and Guadalajara-San Francisco.

During the second quarter of 2011, Grupo Aeromexico took delivery of six aircraft as part of its fleet plan for 2011. Three of these airplanes replaced aircraft that were returned upon conclusion of their respective leasing contracts. At the end of June 2011, Grupo Aeromexico had a fleet of 100 airplanes, two more than at the end of the first quarter and seven more than at the end of the second quarter of last year.

The addition of these planes to our fleet, coupled with increased daily utilization from 10.3 hours to 11.4 hours allow us to increased our available trip kilometers by 25% over the second quarter of last year. But it is important to highlight that in spite of the significant increase in ASKs in production, our load factor jumped to 79%. This is 4.4 percentage points higher than the load factor of the second quarter of 2010.

Now I will turn it over to Ricardo Sanchez Baker, our CFO, for a more detailed explanation on our financial results for the quarter. Thank you.

Thank you, Andres, and thank you all for joining in this call. Let us start with revenue. As Andres mentioned, during the quarter our revenue reached MXN8.6 billion, a growth of 43.1% year-over-year. We saw significant increases in most revenue items. Passenger revenue grew, 46%, cargo revenue grew 92%, excess baggage charges 18%, and other operating revenue grew 29%.

Most of the increase in passenger revenue, around 80%, or slightly more than 80%, was driven by volume as our passengers transported increased 36%. And the rest of the growth was due to yield. Yield increased 8.4%. Looking at revenue per ASK, this indicator increased 14%.

In terms of the geographic source of our passenger revenue, 41% of these resulted from international operations and 59% came from the Mexico operations.

As we have highlighted in our previous reports, one important driver of our increasing revenue is related to the restructuring of our cargo business. This has allowed for increasing cargo revenues of 92%. In particular in this quarter, total cargo revenues amounted to MXN227 million. That's MXN118 million above what we saw in 2010.

Charter flights was only item on the revenue side, but that decreased in the quarter. We saw a contraction of 17% versus the prior year and this is due mainly because last year we had important special operations associated with the World Cup that (technical difficulty) in South Africa and we did not have these operations this year.

Now turning to the expenditure side, the cost per ASK as Andres mentioned, excluding fuel costs, decreased by 4% in nominal terms. In real terms this decrease is in the order of 7.1%. This reflects of course the strict expense controlled policies that we have.

We faced a very complicated environment regarding fuel prices as this increased by 48%, but we are getting back to our hedging policy. We had a benefit of MXN55 million during the quarter and we did -- we look at overall cost per ASK, we saw an increase of 5.2% in nominal terms despite the big increase in fuel prices. In real terms, this cost per ASK increased only 1.8%.

Looking at wages and salaries they increased 8.9%. However when we look at and we take into account that the ASKs grew 25% unit costs decreased 13% year-over-year.

Our selling and administrative expenses reflected the important growth that we have in sales because these expenses grew by 36%. But when we consider that the overall revenue grew more than 40%, these expenses are as a proportion of total revenue shrunk from 10.1% to 9.6%.

Other operating expenses rose 38%. This includes maintenance, traffic, and (technical difficulty) services, reflecting the (inaudible) increase operations and the increase in the passengers that we transport.

Finally on the cost side, talking about leasing costs, this increased by MXN48 million compared to last year. This is because of the additional planes that came into our fleet. We had a net of three additional aircraft in the quarter and seven more compared to the second quarter of 2010. This increase however, was partially offset by a lower exchange rate, as the leasing contracts are US denominated.

Looking at the bottom line, we reached, as Andres mentioned, a 15-year quarter high (technical difficulty) net income. In EBITDAR we had our MXN1.75 billion with a margin of 20.4%. Operating profit climbed to MXN898 million with a 10.4% margin. This is a 7.7 percentage points over last year. And lastly, net income increased by MXN585 million to reach MXN534 million. That represented a margin of 6.2%. As we have mentioned before, we believe this was a very good achievement, despite the 48% increase in fuel and fuel costs.

Finally, I would like to make some comments on some balance sheet items. As Andres mentioned, our restricted cash and cash equivalents position amounted to MXN4.9 billion, reflecting both the continued positive financial performance and the proceeds that we obtained from the IPO that took place in April.

The evolution of our debt balance was also favorable. Financial debt closed at MXN2.1 billion. That's MXN517 million less than what we had at the end of June of last year. Net financial debt that includes the cash position that we have has a negative amount of MXN2.7 billion. That is a decrease of MXN5 billion compared to last year. And we feel very comfortable that this gives us a very solid foundation for growth in the next few years.

When we look at net adjusted debt, including also our leases, compared to EBITDA, this amounted to 2.5 times. So this a very favorable indicator we think.

Finally, looking at the stockholder's equity, this amounted to MXN3.8 billion, MXN7 billion above what we had in June of last year.

With this, I conclude our comments on the financial results. And now we can take any questions or comments that you may have. Thanks.

We can now start with the question and answer session. If you any questions, please let us know.

(Operator instructions) Michael Linenberg.

I have a couple questions here. When we look at the results, the tax rate for the quarter look it came in around 16%. What, Ricardo, what tax rate should we assume? At least book tax rate should we assume for going forward or for the rest of the year?

Yes, well that's a good question, Mike. As you know, I mean the way we have our operation, thinking in terms of current taxes, because we have fiscal losses in previous years, we don't expect actually to have current affecting taxes, no?

We have -- when you look at the group, we have in Aeromexico, that's the mainland carrier, no? We operate on the income tax, but we have these fiscal losses, so we don't expect to pay there. Aeromexico (inaudible) on the other side is on the year to tax, but because of the investments that we are doing with the additional aircraft, we don't expect to have a significant amount of (inaudible) taxes. On the current tax side, it's basically -- it's very close to (inaudible) I would say, no?

The impact that we might have is related more to deferred taxes. As you know, last year we recognized an important asset, no, as associated with theses fiscal losses. And as we amortize some of these fiscal losses, we might need to capture some of these assets, no?

What we have been seeing in this year, looking at the different numbers that (inaudible) placed, no, in the deferred tax, is that the evolution of the different components on the asset side of deferred taxes and on the liability tax has been positive, no? And so far the impact, no, that we have had of canceling these assets has been lower, no? But it is something that we have to monitor very closely going forward, no? I mean on that is side one.

The most important element that will certainly decrease the asset is the fact that we are using the fiscal losses, no? But the other important element might be the evolution of air traffic liability, no? That's an important element there.

On the liability side we have of course (inaudible) that we can do on our property and equipment, and also issues related to, for example, the maintenance. But (inaudible) in advance was in the financial results are recognized gradually.

So far I would say we have been analyzing the evolution of these components and the cancellation of the deferred tax has been probably less than what we anticipated before. It's very difficult to say going forward, no? But we hope that we will be able to keep it in a low proportion.

So then your cash taxes are going to be close to zero, which is good it seems like for this for the time being. But on a book basis, do we just -- because we are trying to come up with an EPS number, do we just use the 16% as a book tax rate? Or do we just start with 32% and see how well you're able to bring that down based on differences?

Yes, I mean I think probably something in the middle would be reasonable, no?

Okay.

Yes.

That's fair. That's helpful. And then --

It's difficult to say, yes.

Okay, yeah. No, it is tough. My next question is just what we should be looking for regarding capacity growth or ASK growth in the third quarter. I mean you were up almost 30% on a consolidated basis, 27% in the second quarter. Does that growth rate moderate as we get into the third quarter?

Yes, I think as you know, Mexicana stopped flying in August, so that's when we started increasing our capacity more intensively. So the base of comparison is higher since starting from August. So what you can expect is that we are going to move from growth rates of ASKs of between 25% and 30% to growth rates maybe between and 15% and 20%, around 16% and 17% between August and December and going forward. Okay? Because again we are adding capacity with we are receiving additional planes between and the end of the year. But the base of last year is higher between August and December.

And then if I could just squeeze in one more question. When we look at your unit revenue or RASK, you were up 14% in the June quarter and year-to-date you're running up 12%. So we definitely saw some acceleration from the March quarter to the June quarter. As we think about going into September and maybe what you're seeing with bookings, how are revenue trends shaping up? I mean is 14% going to be the high point for the year? And then as we move to the second half I think comps get a little bit more difficult. I mean is that how we should think about it?

Well, I mean we were working with -- in [comparing] RASK of around MXN1, between MXN1.00 and MXN1.05 during the first half of last year. Then income per ASK increased as much to MXN1.16 around October of last year. And then it came down and we have remained as where we are today around MXN1.11, MXN1.12. So we think that we can remain around those levels, which are similar to today, but probably will be in terms of income periods, okay, slightly lower than what they were last year.

One important difference is the exchange rate has been stronger because it was more depreciated by the end of last year, so the appreciation of the peso reduced it in [comparing] to ASK measured in pesos, and that's how we are reporting.

Nick [Abro].

If you could first talk a little bit about the fleet plan that you have right now. And if there's any opportunity for expansion given very rapid growth on the traffic side. And related to that, is there any potential interest on your part in the re-engined 737?

Also on the capacity question, do you see opportunity more on adding more domestic or international or business or tourism? I mean we've seen your -- at least my observation is that recent additions have been predominantly on business routes, Mexico City and between other business cities. But is that what we're likely to see ahead? And then I have a follow-up after that.

In terms of capacity, we are expecting this year to receive in terms of narrow bodies around four additional narrow bodies and one wide body between today and at of this year. And for next year we're working, as you know, we have some delivered from Embraer. We are receiving -- of the planes that we are buying we are receiving four of them this year and the other six were distributed between 2012, 2013, and as much as 2014. And we are working with them and see if we can move that ahead and bring those positions as soon as next year. We're working with Embraer on that.

And also next year we are receiving the first three 737s new that we are buying from Boeing directly as a package of the 10 planes that we ordered around a couple of years ago.

In terms of the 737, the new engine, we just learned about the new Boeing decision of going for a new engine instead of building a new plane. Just early this week after the announcement of the package that American Airlines is buying from Boeing and Airbus. So we are just receiving some information about the plane. We are going to go ahead and look at it and compare it with the other options that we have available in the market and see what's better for us going forward.

But again one that we can guarantee is that by the second part of this decade, we definitely need to look for these options of new -- of narrow bodies with new engines because we expect those prices to remain at these levels and the different in fuel consumption is between 10% and 15% of these new engines against the ones (inaudible) claims that we have today, no, and on the industry.

In terms of the type of additional (inaudible) that we are adding, we are adding more -- it depends on the season. For example, during the summer, we shift capacity from sort of like a business route towards more leisure. We are, for example, in Cancun adding as much as -- serving as much as 2,000 flights during the summer. This is on average 25 flights per day between Mexico City and Cancun. And we move away from some of business destinations like Monterrey, Guadalajara, Tijuana to add capacity to Cancun, Puerto Vallarta, or Los Cabos.

Going forward, we're going to start servicing in some new routes more business oriented in Mexico that were missing. For example, one is Colina, the other one is [Tampico], which is small cities that we're going to serve with regional jets. And we are planning to strengthen our frequencies in the network that we're serving. This is more or less the plan.

Internationally, one we're working to start service to Venezuela before the end of this year. We're just waiting for the permits and we think that it makes sense to fly there and to complete the strategy in South America.

And then as a follow-up, if you could discuss the recent union developments. Can we expect to see any more flexibility in the future from the other unions that you deal with?

Well, we have a very good agreement with the pilots' union for our to Aeromexico connect. Really we're very pleased with what we got because it's a multi-year plan that lasts all the way until 2015. So the next time we will sit with them to discuss the contract is in four more years.

We got lots of flexibility in terms of training that will produce productivity. And in savings. And we now have lots of certainty in terms of the costs of connect, which we already have for the pilots in Aeromexico. So this is very, very positive for the group going forward.

As we discussed in the previous conference call, we are still missing the (inaudible). We're working with the flight attendants' union and we are asking them for the new [entrants] to have the same condition as our competitors as we did with the pilots.

There is a change in the leadership of the union at the end of the week. There is a new secretary general that is taking office during the weekend. So we're planning to start working with them and hopefully we can reach an agreement on that front. And that's probably the last piece that we're missing before the end of this year.

Marco [Vincennes].

Two questions if I may. The first one, could you please give us some color about what is tried in the (inaudible) costs? The available seat excluding fuel costs. The implemented strategies are sustainable in the long-term.

And the second one, could you share with us some details about the performance of the (inaudible) in domestic and international segments? That would be great. Thank you.

Operating with a cost side there are of course several initiatives, no? But I would say two major elements are behind the reduction of the cost per ASK, no? One is the fact that we have been able to use more our fleet, no, as we have expressed in the past, no? We have been able to increase utilization (inaudible).

Introducing some of these markets, for example, that I just mentioned like Guadalajara, Sacramento, and all those using the planes (technical difficulty) utilization. And that in fact has allowed us also to decrease the cost per ASK.

A very important element is a negotiation with the pilots that took place in December of last year because that has allowed us to bring the utilization capacity without having any additional pilots. And that has added a lot of (inaudible) so also to our fleet.

The number of pilots in Aeromexico (technical difficulty) in 1,200 pilots. So 1,280 pilots compared to last year. So it's very much the same number. So that -- this has -- this capacity has decreased (inaudible) customers. There are other issues that happen (inaudible). We have this capacity and of course most of the initiative costs and infrastructure that we have remains the same so we have some gains because of economies of scale. No, but I will highlight the most important items I would think are utilization and the cost in terms of the pilots.

Going forward, utilization of course I think we have achieved early the level that we can do it (inaudible) be hired to see higher utilization in terms of the pilots' contract. Now what was have used is the first element of the negotiations, that this is (technical difficulty) of different pilots. As we grow we will be hiring pilots that will have the new contract and this will also try (inaudible) costs down. So we think that we have a room going forward to see the costs going south.

In terms of yields, as we discussed at the beginning of the call, according to what has happened in other -- in the rest of the world, we've been experiencing pressure from higher prices of jet fuel. Our fuel bill increased more than MXN1 billion, close to (technical difficulty). This is a combination of higher fuel consumption and higher prices. Even though we have this pressure of 60%, the yield is only 5% on average. There is a mix in terms of the domestic yield increase around 20% and international yield decline around 15%, driven by the stronger peso against other currencies.

So on average the mix is what gives us 5%, so out of the 43% in revenues, around 82% are explained by higher passengers, by more demand, and 18% by higher prices.

Brendan Selby.

Congratulations on a great quarter. The profit was actually higher than LAN (inaudible) airlines, which were -- are usually two global profit leaders. Unimaginable a year ago. So congratulations.

My first question is about the US next (inaudible) market. (Technical difficulty) this one I would -- we were -- when you were in Singapore last month. I just wanted some color of what kind of impact have you seen from Volaris, which has been adding a lot of capacity? (Technical difficulty) yield in addition to the stronger peso? And what you see going forward in terms of capacity to the US. You've increased (inaudible) by 50% (inaudible) since the last year. Do you continue to see room for additional growth to make up some of the void left by Mexicana, which hasn't been completely filled yet?

Thank you for your comments, you're very kind. In terms of the US-Mexico market, yes, I mean Volaris has been flying to the West Coast. Now they've asked for the -- for some routes that Mexicana used to fly, particularly they want to start service to LA from Mexico City and to Las Vegas as well from Mexico City.

We think that we have a very good product on both of the products, so that we are going to be able to defend ourselves pretty good. We are not planning to add new [seats] to our network in the US. What we're planning to do is to strengthen the position that we have in order to compete strongly with -- not only with Volaris, but also with some US carriers that are adding additional capacity to the Mexico-US market.

We have increased our market share between Mexico and the US. We used to have last year our market between 6% and 7% and today we have close to 12% market share. So while we (technical difficulty) continue working to keep up with that. And again, in this (technical difficulty) competition you can expect some pressure in terms of yield. But I'll save you flying west (technical difficulty).

(Inaudible) this year. I think that's a 767 and do you have an idea what could -- where those -- whether (technical difficulty). Are you still assuming 787 in 2013 and will there be any additional 767s before the 787s?

Yes, the new plane, the new wide bodies is a 767. We want to use this plane more as a spare to support the operations. So we're not going to fly that plane intensively. We want to use it again to cover stronger wide body products. This is the idea behind that plane.

We solved in our 767s the 300. We put winglets on those. We are already flying those planes with winglets. That has helped us increase cargo revenue and to reduce fuel consumption. They've been flying for only two months, but the results that we're seeing are very, very good.

And we have been (inaudible) by Boeing that our 787 positions are here for 2013. So we are expecting to receive the first plane in the summer of 2013 to start service in that year and we're working in our wide body strategy in the medium term, so hopefully we can have (inaudible) maintenance and everything done we can have some announcements going forward. But today we still have those five 787 (inaudible) in place, three for 2013, and two for 2014.

So when you're referring to working on the medium-term buyback time, you mean more (technical difficulty) 777 or do you mean more interim 767s?

Yes, definitely, I mean today we are going to close this year with 12 planes, eight 767s and four (technical difficulty). And Boeing for was -- for the second part of the decade as the 767 (inaudible), we are -- and as the market's slowing, we're working on the different (inaudible) to see what's better for us in terms of (inaudible) between 787, 777, and maybe other alternatives to the wide bodies as well.

(Operator instructions) Pablo (inaudible).

I had a question also regarding the deferred tax benefit. I was wondering how much was recognized from this item during the quarter and how much can I expect for full-year 2011? Thanks.

In the quarter in terms of taxes we had a -- we recognized an impact of MXN100 million. And this basically reflects provisions by, as we said, to the deferred tax, no? Going forward, it's very, as I explained, it is difficult to say, no, we need to evaluate a lot of (inaudible) that are moving. At the same time, certainly what we feel is that given the (inaudible) that we have had (inaudible) in the first half the calculation of this tax benefit that we had last year probably will be lower. But we are (inaudible) anticipated. But certainly we need to evaluate that at any moment in time how these things move.

I think that the third quarter will be critical because it's an important quarter where we have a lot of cooperation when we can definitely see what is the behavior of traffic liability because traffic liability tends to increase a lot in the second quarter by the end of June. People purchase tickets in advance before the holidays, their vacations. And after the summer this variable might go down and this will give us a good indication about how these different tax benefits will behave in the rest of the year. But so far, I mean in this quarter we had an impact of close to MXN100 million.

At this time there are no further questions.

Well, thank you for joining the call. Before passing for the last words to Paulina, I just want to thank you again for joining the call and let you know that as you know during the quarter we started publishing monthly indicators of the Company. We will continue to do that. So roughly you can expect between the 10th and the 15th of every month that we will be reporting traffic for the month, which we think it's important not to wait for three months before the information is due. And again thanks, and Paulina will give you final words. Thanks.

Thank you very much. On behalf of Grupo Aeromexico we thank you for joining us today. The investor relations team, Mr. Carlos Doorman and I, will be very happy to answer any additional questions you might have. We thank you for your time, and expect to hear from you soon. Thank you.

All right, thanks.

This concludes today's conference call. You may now disconnect.