Grupo Aeromexico SAB de CV (AERO) 2015 Q1 法說會逐字稿

Good morning and welcome to Grupo Aeromexico's First Quarter 2015 Results Conference Call. Just a reminder, that today's call is being recorded. Before proceeding, I would like to mention that certain comments made during this conference may constitute forward-looking statements regarding future events or future financial performance of the Company.

These statements are based on the current beliefs and expectations of management and the Company regarding future events and future financial performance. Forward-looking statements are based on management's current assumptions and on the information currently available and do not guarantee the Company's performance.

The timing of certain events and actual results may differ materially from those projected by forward-looking statements due to a number of factors, including but not limited to those inherent to our industry as well as commercial, economic and other risks and uncertainties.

And at this time, all participants are in a listen-only mode. And it is my pleasure to turn the conference over to Mr. Andres Conesa Aeromexico's Chief Executive Officer. Please go ahead, sir.

Thank you, operator. Good morning everyone and thanks for joining us in our first quarter 2015 results conference call. With me today are Ricardo Sanchez Baker, our CFO; and Jonathan Wallden, Senior Vice President of Financial Planning and Investor Relations. So let me begin by providing the context for our results for the first quarter of this year. As per initial indications on our last quarter's call, 2015 has begun with a better although still fragile start than the first quarter of 2014.

Characterized by more rational capacity expansion within the Mexican airline industry. So let me share some specific examples. Starting with the Mexican (technical difficulty) which is a proxy for GDP reported year-on-year growth of 2.4% during the first two months of this year. Although not in line with expectations, this compares positively to the 1.3% year-on-year increase in the same period of last year. While higher economic growth is encouraging, it remains uneven and fragile with some sectors such as the construction performing well, while others such as mining and petrochemicals are suffering as a result of a recent slumping oil prices.

During the (technical difficulty) some tailwinds tends to lower fuel costs. Fuel prices in dollars decreased 48.9%. However, several cost items are nominated in US dollars were negatively affected by the exchange rate depreciation of the Mexican peso of almost 13%. Fuel costs measured in pesos declined 33%.

During the first quarter, we achieved revenue of MXN10.7 billion, our 20th consecutive quarter of positive operating profit. We have 400 basis point margin improvements. Ricardo will later comment on our financial results in more detail, but this is an achievement that I wanted to take a moment to highlight.

Now I like to briefly discuss the main factors that influenced our first quarter results. From a domestic perspective over the last few months, we have experienced more rational capacity expansion in the industry with approximately 4% increase in the Mexican domestic market. Aeromexico domestic capacity measured in ASKs increased by 3.4% year-on-year.

From an international perspective ASKs increased by 15.2% as we (technical difficulty) offerings and expand our network. Over the past 18 months, we have incorporated seven new Dreamliner, 787-8 aircraft into our fleet with our sixth and seventh aircraft entering service during the first quarter of this year.

From an Aeromexico's perspective, international market capacity growth during the first quarter was primarily due to the additional seats that these larger aircraft provide and as expected this increasing capacity generated some short-term pressure on yields, particularly as the number of currencies have weakened against the US dollar.

But as previously discussed yields have been rather improving as these additional capacities have served and our new product becomes more widely recognized by the market. We expect this trend to continue during 2015. First quarter year-on-year passenger revenue per ASK was flat. This represents a positive result in the context of total ASK capacity growth of 10.7% compared to the first Q of last year.

I now like to update you on Aeromexico's network expansion during the first quarter as well as our plans for the rest of this year. One of the key elements of our strategy to consolidate Aeromexico's presence in Central America and to improve our service offering in Latin Americas. Having expanded our service offering from Mexico City to Managua at the tail-end of 2014, we have now added service between Mexico City and Medellin, Colombia, with a total of 450 flights increasing to daily flights within the next month.

Additionally, affective May of this year we will be offering daily flights between Mexico City and Panama. This increases our network to a total of 16 destinations in South America, which improves connectivity within Aeromexico domestic and international network.

We also continue strengthening our service to the US and Canada. In Canada starting next week, we are adding a daily flight between Mexico City and Toronto. Effective June of this year, we will be launching our New Mexico City to Boston service with six weekly flights.

We have also increased frequencies to London's Heathrow Airport from three to four weekly flights in April of this year and will increase to five starting in June. Since last year, these routes have been served with our Boeing-787 Dreamliner. Additionally, we have increased our services to Shanghai increasing from two to three flights per week.

With regard to our hubs, we have begun a daily Monterrey, Miami flight, further strengthening our presence and connectivity in Monterrey our secondary main hub. Miami is our ninth international destination from Monterrey resulting in a total of 25 domestic and international destinations served from this city. In parallel, we continue to consolidate our position at Mexico City, our main hub through the use of more efficient and larger aircraft. With the arrival of our six and seven 787s we have also been able to offer our passengers the (technical difficulty) aircraft to new destinations including Buenos Aires, Santiago, Chile and (inaudible).

Based on the success of the 787 we have recently signed a long-term lease agreement for a 787-9 with their lease from the first quarter of 2017. (technical difficulty) point out that during the past few years, Aeromexico has been able to add more international capacity than any other airline in Mexico offering more than 600 daily flights connecting a network of over 80 destinations throughout Europe, Asia and the Americas.

These network related strategies have resulted in an increase in the connectivity of our total network offering our customers more options, which translate to our total percentage of connecting passengers, increasing from 26% in 2013 to 31% in March of this year.

With regard to our plan JV with Delta, you may have seen that we can applied for antitrust immunity during March and this application is in the process of regulatory approval with the US and Mexican authorities. We hope to receive approval towards the end of this year, allowing us to commence our new joint venture with Delta in early 2016.

As we have said in the past, regulatory approval will pave the way for closer cooperation between Aeromexico and our US strategic partner Delta allowing us to align network and schedule simultaneously providing an enhanced customer proposition with increased frequencies and network offering.

Capacity control also remains a priority for 2015 and we will continue to maintain disciplined growth despite fuel price decreases. As we have (technical difficulty) for 2015, we expect a lower ASK growth rate than in 2014. Aeromexico's capacity growth results from upgauging our existing fleet and operating new aircraft with lower unit operating costs.

As indicated previously, we expect total capacity to increase between 8.5% to 10.5% with a higher growth rate in international market of 11% to 13% due mainly to the replacement of 767s with our new Dreamliners which have 28% more seats.

In the domestic market, growth will come from aircraft upgauging which will be in the conservative range of 4% to 6%. Turning to our cost base, we remain fully committed to containing costs. We have strong pipeline of cost reduction initiatives that will continue to improve efficiency. The incorporation of a modern fleet plus enhanced productivity agreements will both contribute to optimizing our cost per ASK.

While the financial community have been concerned that lower fuel prices might lead to excessive capacity growth, I'd like to reiterate the message that this is not Aeromexico's plan as we believe that growth due to volatile fuel prices can only lead to industry deterioration across the medium term. With our cost initiatives in place, we will continue to drive savings to the bottom line with strong revenue growth and yield preservations regardless of fuel price.

We are committed to continuously driving quality revenue and improving Aeromexico's performance this year. We will continue to invest selectively where we believe we can deliver the greatest returns with e-commerce being a particular focus for 2015. By offering improved customer choice we will expand opportunities to drive additional ancillary revenues and improve our cost per ASK.

We expect to see that momentum build through 2015 to further reinforce Aeromexico's position as Mexico's premium carrier.

Finally as you will by now be aware, it is with mixed emotions that I wanted to comment that Eduardo Tricio has decided to step down as Aeromexico's Chairman of the Board. Eduardo joined the Board in 2007 and leaves a legacy of improved labor relations and enhanced operational performance, as well as the largest aircraft order in Mexican navigation history. Eduardo will continue on the Board as a Director and as a member of the Executive Committee.

I am also delighted to confirm the appointment of Javier Arrigunaga as Chairman of Aeromexico's Board of Directors. Javier has a distinguished career in the banking industry of Grupo Financiero Banamex and an Executive of the Mexican Banking Association. Javier has been a member of Aeromexico's Board since 2007. The Executive Management Team and myself are looking forward to working with Javier into the future.

I would now like to hand you over to Ricardo who will provide more detail on the financial results of this quarter. Thank you for your confidence and Ricardo please go ahead.

Thank you all for joining us on today's call. Beginning with our top line as Andres mentioned we achieved revenues of MXN10.7 billion in the first quarter of 2015, a 9.2% year-on-year increase. This increase was mainly due to a 9.6% increase in passenger revenues and 87.8% increase in charter revenues mainly related to an increased number of charter flights from US tour operators to leisure destinations as well as a 20.8% and 26.4% rise in cargo and excess baggage revenues respectively.

(technical difficulty) 38.8% decrease in other operating revenues from the first quarter of 2014, a period during which the base reflects increased revenues from commissions associated to travel packages to Brazil World Cup and from unused ticket revenues related to changes in passenger consumption patterns during the first quarter of 2014.

These negative effects were partially offset by increases in other ancillary revenues such as (inaudible) in line with our strategy to enhance our customer offering.

This is the sixth consecutive quarter in which we have had a year-on-year increase in cargo revenues. This was driven by improvements in our commercial strategy and customer service as well as the 787's extra capacity in cargo. For the second consecutive quarter and due to our disciplined approach to capacity and a more favorable pricing environment average yield increased by 2.8% year-on-year in the first quarter of 2015.

Passenger revenue per ASK was essentially flat year-on-year, while total quarterly revenue per ASK decreased 1.3%. I will like to highlight the fact that this is the fourth consecutive quarter in which our international passenger revenues are higher than our domestic passenger revenues building a natural hedge against exchange rate fluctuations -- become increasingly important in light of the continued volatility in exchange rates. On the expenditure side, the macroeconomic factors again impacted our cost structure this quarter. To begin, fuel prices fell significantly compared to the first quarter of 2014 resulting in a 27.7% reduction in our total fuel cost for the quarter. We are well positioned to capture the benefits of market fuel price reductions, thanks to our hedging policy we're 50% over the next year fuel requirement hedge using our mix of call and call spread options.

As of March 31 of 2015, Aeromexico have hedging in place for April 20 -- from April 2015 to September 2016 of 263 million gallons at the spread commencing at $2.13 per gallon. This allows us to immediately benefit from the decrease in fuel prices keeping any mark-to-market loss capped to the value of the premiums paid.

(inaudible) obtained from lower fuel prices is not fully proportional to the reduction in international market fuel prices due to the fact that the Mexican peso depreciated 12.8% against the US dollar during the first quarter of 2015. In addition there is a time lag in updating fuel price in certain markets to which we operate. These two factors partially offset the cost reduction.

During the quarter, effective fuel price per liter decreased 33% compared to the first quarter of [2015]. Secondly, the Mexican peso depreciation against the US dollar mentioned before increased some operating cost such as aircraft maintenance expenses, reservation expenses and communication and traffic expenses among others. We estimate that during the first quarter of 2015, the 12.8% average exchange rate depreciation contributed to our year-on-year increase in the order of MXN550 million in additional operating cost, excluding fuel.

It is also important to note that we remain conservative in managing our capacity, especially in the domestic market. First quarter domestic ASKs increased by 3.4%, in-line with a 3.1% growth registered during the first quarter of 2014 while international ASKs increased 15.2% mainly due to our fleet upgauging strategy.

Our first quarter total cost per ASK expressed in dollar decreased by 16% year-on-year, while our CASK in dollars excluding fuel decreased by 1.7%. Moving on to our bottom line, first quarter operating profit reached MXN526 million, a number six times higher than the operating profit registered during the first quarter of 2014.

Operating margin reached 4.9%, four percentage points greater than the same period of last year. These represents 20 consecutive quarters of positive EBIT results. During the quarter, Grupo Aeromexico registered a positive foreign exchange impact of [MXN16 million] due to exchange rate depreciation. This is due to the Company using US dollar as its functional currency while the Mexican peso is used for registration and reporting.

First quarter net income reached 1.7% margin, which compares favorably with the negative 0.9% net margin reached during the first quarter of 2014.

As for the balance sheet, our financial net debt including leases to adjusted EBITDA ratio reached 4.9 times. This is lower than the five times that we recorded at the end of last year. We estimate that Mexican peso depreciation had a negative impact of MXN3.3 billion on our financial debt raising our financial net debt to adjusted debt -- to adjusted EBITDA. Adjust for this impact our financial net debt to adjusted EBITDA ratio will have been approximately 4.5 times.

During the first quarter of 2015 cash flow generation remained strong. Net generation of cash resources derived from operating activities amounted to MXN1.9 billion resulting from operating cash generation of MXN884 million and positive working capital fluctuations of MXN1 billion.

Cash generated from operating activities has been invested in the acquisition of aircraft in line with our strategy of moving to a more balanced portfolio of leased versus owned aircraft. Additionally, the Company continues to invest in airport infrastructure development including the connecting passenger proposition and developing e-commerce functionality.

During the first quarter of 2015 we announced the pricing of an offering of $195.8 million secured notes due in 2027 at an interest rate of 2.3%. This note is granted by the Export-Import Bank of the United States. We used the proceeds of the offering to refinance two Boeing 787-8 aircraft of which delivery was taken in December of 2014, and February 2015. This offering represents the second time that (technical difficulty) fleet through Exim Bank guaranteed bonds issued on international capital markets.

Moving on to our 2015 plan. We remain on track with adjustments that we announced on our last conference call. We will return three aircrafts on their operating leases, one 767, one 737-700 and one Embraer-145 and added five aircrafts to our fleet two 787-8s Dreamliners on the financial lease agreement and one 737-800, one Embraer-170 and one Embraer-190 on their operating lease agreements.

For the coming quarters we will continue the upgauging of our fleet in line with our strategy of consolidating existing markets. We therefore confirm our 8.5% to 10% ASK growth estimate that we announced with a growth rate of between 11% and 13% for the international segment and between 4% and 6% for the domestic market.

As mentioned in our previous call, we expect to end the year with 123 aircraft in operation versus 124 aircraft that we had at the end of 2014. That concludes my remarks. Thank you once again for joining our call and we now would like to answer any questions you may have. Thanks.

(Operator Instructions). Mike Linenberg, Deutsche Bank.

Hey, good morning everybody. I want to go back to just the connectivity at Mexico City and the fact that you're adding a decent amount of international service. Andres, I think you indicated that the connections have improved from 26% to 31% and I'm curious what percent, what's the split between international to domestic versus international to international?

So, for example, I'm sure that there's people who say fly from Bogota and connect to Mexico City and go onto Acapulco and Puerto Vallarta. But I'm trying to get a feel for the growth of connections such as Bogota connecting over Mexico City onto Los Angeles and I realize it's probably a smaller number, but how quickly, is that growing?

Yes, let me share some numbers with you at Mexico City Airport, for example as of in the first three months of this year, I mentioned that our connectivity is 31%. From that number 11% is domestic-domestic, 16% is domestic-international and 3.5% is international to international, that adds up to the 31%. Last year for example, if you take 2014 completely, the ratios are similar domestic-domestic (technical difficulty) international, international to international 2.5%. So what we are seeing is an improvement in the margin in connectivity international to international. And the numbers continue to build in domestic-domestic and domestic-international.

(Operator Instructions). Bernardo Velez.

Hi, good morning guys. Congratulations on the results. I was trying to get a grip on the whole demand and pricing environment in Mexico, I mean, as you probably saw in [Buenos Aires] the strong increase in the yields. So I was wondering to what would you attribute Aeromexico's let's say softer yield increase and if this has something to do with the strong working capital generation specifically in unearned revenues? And if you could also comment on the trend in pre-bookings or what we should expect during 2015?

Thank you, Bernardo. Yes, let me comment, if you divide across regions, what I can mention also for the first Q, we also saw a relatively better performance in our border markets. And in the US for example, that that's most of case are associated to those markets. In relative terms that performance was better than local markets and some other leisure markets in Mexico.

So that can explain part of the difference. The other aspect, if you're looking with our significant, the significant size of the network that we have, as I mentioned in my remarks, we have -- we added lots of capacity in our long-haul routes with our 787s that obviously as we consolidate with the routes put some pressure on yields largely effect, but we sell in some of these markets in local currencies, like for example, Japan or London. And local currencies depreciated vis-a-via against the dollar. So that also affected yields measured in dollars and (inaudible) into peso. So, those are two main things. I want to stress that also we see opportunities for example, we see that we have opportunities to grow in terms of non-passenger revenue. So we are analyzing what to do, part of what I mentioned of our e-commerce strategy is precisely directed to strengthen our non-passenger revenues where we see again significant areas of opportunity.

And related to the summer bookings, they are building nicely again probably we just finish, I mean, as you know the couple of -- two weeks to three weeks ago was Easter. So the main booking season for summer is (inaudible). So we will have more information by mid-May, probably the third week of May. But as of today, they are building nicely according to the capacity expansion that we mentioned in our remarks.

(Operator Instructions)

If there are no further questions, we thank you for joining the call. Let us know (inaudible) if you need additional information. And we look forward to see you in our next conference call. Thank you very much.

And once again ladies and gentlemen, that does conclude today's conference. And again, I'd like to thank everyone for joining us today.