Grupo Aeromexico SAB de CV (AERO) 2015 Q2 法說會逐字稿

Good morning and welcome to Grupo AeroMexico's Second Quarter 2015 Earnings Results Conference Call. Before proceeding, I would like to mention that certain comments made during the conference call may constitute forward-looking statements regarding future events or the future financial performance of the Company. These statements are based on the current beliefs and expectations of management and the Company regarding future events or 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 (Technical Difficulty) those inherent to our industry, as well as commercial, economic and other risks and uncertainties.

At this time, all participants are in a listen-only mode. This call is being recorded. I would now like to turn the conference over to Mr. Andres Conesa, AeroMexico's Chief Executive Officer. Please go ahead.

Thank you, operator. Good morning everyone and thanks for joining us on our second quarter 2015 results conference call. With me today are Ricardo Sanchez Baker, our CFO, and Jonathan Wallden, SVP of Financial Planning and Investor Relations.

Let me begin by providing the context for our results for the second quarter of this year. As per initial indications on last quarter's call, 2015 has continued with a better, although still fragile, economic performance compared to the same period of 2014.

Starting with the Mexican economy. The IGAE, which is a proxy for GDP growth, reported year-on-year growth of 2.5% during the January-April 2015 period. Although not in line with expectations, this compares positively to the 1.6% 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 construction, financial services, real estate and food and beverages performing well, while others such as mining and petrochemicals are suffering as a result of the recent slump in oil prices.

During the quarter, we experienced some tailwinds, thanks to lower fuel costs. Fuel prices in dollars decreased 35%, however, we also saw a depreciation of the Mexican peso of 18%. The depreciation negatively affected several cost items denominated in US dollars and partially mitigated the positive impact on fuel prices. The fuel price in pesos decreased 23%.

During the second quarter, we achieved revenue of MXN11.3 billion and delivered our 21st consecutive quarter of operating profit, with a 140 basis point margin improvement compared to the second quarter of last year. 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'd like to briefly discuss the main factors that influenced our second quarter results. Quarter two represents a period in which the most capacity will be added in 2015 relative to 2014. From a domestic perspective, ASKs increased 9.4% year-on-year and from an international perspective, ASKs increased by 17.5%, as we continue to strengthen our product offering and expand our network.

As mentioned previously, we expect lower ASK growth in 2015 compared to 2014. Our full-year guidance remains that capacity, measured in ASKs, will increase by around 10.5%, primarily driven by growth in our international capacity of between 11% and 13%, with domestic capacity growing at around 6%. Therefore, capacity will tend to slow down in the second half of the year.

Over the past 18 months, we have incorporated seven new 787 aircraft into our fleet. From an (inaudible) perspective, international market capacity growth during the second quarter was primarily driven by the additional seats that these larger aircraft provide, and as expected, the change in capacity mix with greater international ASK growth has led to some dilution of yield, particularly as a number of currencies have weakened against the US dollar. As these additional capacities are served and our new product becomes more widely recognized by the market, yields should stabilize. Aeromexico capacity growth results from up-gauging our existing fleet and operating new aircraft with lower unit operating costs. We continue to consolidate our position at our hubs in Mexico City and Monterrey through the use of more efficient and larger aircraft.

With regard to revenue performance, both revenue per ASK and yield, have reduced by [5% and 7.1%] respectively. While increased capacity has contributed to these downward pressure, depreciation in the Mexican peso, Japanese yen and the euro versus the US dollar of roughly 20% compared to last year has been an important factor in this [increase]. With [over] 70% of revenues generated from these geographies, the market was not able to sustain rapid increases in local currencies to offset the fluctuations in foreign exchange. As capacity growth has stabilized and demand remains strong, we have been able to see in July some pickup in yields versus the second quarter.

I'd now like to update you on Aeromexico's network expansion during the second quarter, as well as our plans for the rest of 2015. One of the key elements of our strategy is to consolidate Aeromexico's presence in Central America and to improve our service offering in Latin America. Having expanded our service offering from Mexico City to Managua at the end of last year, we have now [valid] service between Mexico City and Medellin in Colombia increasing to daily flights during the second quarter. During the same period, we also started daily flights between Mexico and Panama City. This increases our network to a total of 15 destinations in Central and South America, which improves connectivity within Aeromexico's domestic and international networks. We also continue strengthening our service to the US and Canada.

In Canada, in May of this year, we added our daily flights between Mexico City and Toronto and effective June of this year, we launched our New Mexico City to Boston service with six flights per week. We have also increased frequencies to London Heathrow Airport from three to five weekly flights by the end of June of this year. Since April of last year, this route has been served entirely with our 787s.

Finally, I am delighted to announce that December this year we will start flying to Vancouver with our daily 737 service, bringing our total number of Canadian destinations served to three. With the arrival of our sixth and seventh 787s, we are now also able to offer our passengers the opportunity to fly (inaudible) aircraft to new destinations, including Buenos Aires, Santiago (Chile), and LA.

I am proud to 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 630 daily flights, connecting a network of over 80 destinations in 20 countries 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 [has resulted in an] increase in total connecting passengers from 26% in 2013 to 34% in June of this year.

With regard to our planned joint venture with our US strategic partner, Delta Air Lines, our application for antitrust immunity remains in the process of regulatory approval with the US and Mexican authorities. Subject to this approval, we hope to start our new joint venture in 2016. As we have said in the past, regulatory approval will pave the way for a closer cooperation between Aeromexico and Delta, allowing us to align network and schedule, while simultaneously providing an enhanced customer proposition with increased frequencies and network offering.

Turning to our cost base, we remain fully committed to contain costs. We have a strong pipeline of cost reduction initiatives that will continue to improve efficiency. Incorporation of a new modern fleet, plus enhanced productivity labor agreements will both contribute to optimizing our cost per ASK. 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.

Aeromexico remains disciplined in its capacity growth plans, despite the lower fuel price environment. While other carriers may have accelerated their capacity growth, I'd like to reiterate the message that this will not be the case for Aeromexico, 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'll continue to drive savings to the bottom line with revenue growth and yield preservation, regardless of fuel prices. We are committed (Technical Difficulty)

The speakers are connected, they will restart.

Yes, thank you, good morning everybody, sorry for the inconvenience. This is Ricardo, I will restart quickly my part. I was talking about our topline, which achieved MXN11.3 billion in the second quarter of 2015. This was an 8.9% year-on-year increase. This increase was mainly due to a 9.8% increase in the (Technical Difficulty)

This is the Conferencing Center. We are experiencing an interruption in today's conference. Please stand by, we'll resolve the situation.

The speakers have rejoined.

Hello, this is Andres and Ricardo. Again, sorry the inconvenience. We don't know what's happening with the line. What we are going to do is we're going to take Ricardo's remarks and put it in our Web page. So we can start now with Q&A to save some time. Please, any questions, we'll be happy to entertain them. Thank you.

(Operator Instructions) Michael Linenberg, Deutsche Bank.

A couple questions here. First, I want to just touch on the currency. The Mexican peso has weakened even further since quarter-end and I'd like to just discuss where it impacts you. If we start with CapEx, for example, a lot of the aircraft that you're taking delivery of, these were deals that were structured a few years ago, maybe in a more favorable currency environment. And I was just curious if you had actually hedged at the time that you made the purchase, or if you haven't, does the change in the weakening of the Mexican peso versus the dollar, does it give you some pause about how quickly you want to grow your fleet? Your thoughts on that.

Well, let me mention some things and then Ricardo can jump in. At the start of the year, based on our projections for 2015, we were expecting that we will have a natural hedge on foreign currency. What has happened is that the depreciation of the peso has been so sudden and fast that as I mentioned in my remarks, the pass through of yields has not been one-to-one and it's been gradual. So, as the year moves on, we think that we could -- and I stress that as well and we are seeing already that in July that we will be able to increase that pass-through from the depreciation of the peso to the international routes and that will provide us with a better leverage going forward.

[These are fixed], as you see in the P&L, mainly the parts of rents and depreciation that are linked to the strategy of fleet, because as you ride more aircraft, you have more depreciation and also those leased aircrafts are part of the rents. If you look at the EBITDAR margins, there was a very significant expansion of more than 400 basis points. The impact of that depreciation on rents and leases is what brought the EBIT margins, you know, the difference versus last year is not as significant as on the EBITDAR. We have those assets that are valued in dollars. So, if you look at the balance sheet, we have a very significant expansion of our assets, of the value of our assets. Some of that debt is in dollars, of the aircraft that we have acquired. Well, some of the debt as well is in pesos, some aircraft that we bought in the past were financed in pesos. So we are fine. We're not thinking of changing any of our fleet plan, based on the depreciation of the currency, but definitely as I stressed in my remarks as well, we are going to be more cautious and we are looking for next year, if the increasing capacity is even lower than what we did in 2015. That will be part of it, but it's again linked to the exchange rate, plus the other elements that are happening in the market.

Just to complement Andres, as Andres mentioned, what we have done in several transactions at the time of buying the aircraft, we have financed this through debt in Mexican pesos. Right now 40% of our debt is documented in pesos and that provides a lot of coverage against these situations. As Andres mentioned, what we see that, that going forward we should go back to have a natural hedge. (Technical Difficulty)

(Technical Difficulty) and what would happen if the US Congress does not reauthorize that agency?

Well, as you know, we did a couple of transactions with Exim Bank earlier this year to finance 787-8s, the 787-8s that we received. We don't have anything in the pipeline for the rest of the year and the first delivery that we will have would be two 787-9s in the fourth quarter of 2016. But we are evaluating, of course, our several financing sources, Even if Exim Bank is reauthorized, we think that it makes sense for us to evaluate other potential financing sources to diversify our sources of funding and these possibilities, I mean, include many other financing structures that we are currently looking at very carefully. And in principle, in fact, our financial plan does not consider Exim Bank for these positions in 2016, it might be a possibility, but we are trying to see if we can diversify our sources of funding.

(Operator Instructions) Marco Montanez, Vector.

Two questions, if I may. In a follow-up to the previous question, according to my estimates, and correct me if I'm wrong please, the domestic yield decreased around 6.6% compared to the second quarter of 2014 and the load factor in this segment remained practically unchanged compared to the same quarter of the last year. Could you share with us what's your perspective of the performance of the load factor going forward?

And the second one, what are your expectations for the effective tax rate for the rest of the year and for the full year also? Thank you very much in advance.

Thank you, Marco. Let me take the first question. Yes, both, the numbers that you estimate are roughly in line with what we see. As I mentioned before, the domestic yield we see, in the high summer season, an improvement versus what we saw in the second quarter. And in terms of load factors, domestic load factors, we are seeing better numbers as the year goes on. In fact, as of July, we see a significant improvement in terms of load factors in the domestic market versus July of last year and versus June. And this tendency going forward into August seems to be that it will stay. Now moving to the effective tax rate, Ricardo?

Yes, thank you, Marco. Well, we anticipate or we are estimating that the effective tax rate for the full year will be around 25%. So more or less what we have for the cumulative first six months is around those lines and we expect the effective tax rate to remain at that level of around 25%.

And again, just to complement what I mentioned before, as in the initial remarks, we stress that the connectivity has increased from 26% to 34% in our network. That's part of a [part] that this continues and we continue to strengthen the network. It gives you an additional base to improve domestic load factors, because we have not only the local markets solely within Mexico, but we also have many connecting passengers international to domestic that are helping us to strengthen our position in the country.

Ricardo Alves, Morgan Stanley.

The majority of the capacity additions have been allocated to international market, as you mentioned. Could you give a little bit more details on your network and route expansion internationally? How that is looking in the second half? And also if you could comment a little bit on the yield environment internationally, where is this pressure on yields in international market coming from? And my second question is with regard to cargo, but let me see your comments on international first.

For example, in the second Q, ASK growth in international market was around 17%. For the third Q, it will be roughly between 11% and 12% and in the second half, it will be slightly higher than 10%. So it will moderate in terms of yields, but we are seeing actually sales in local currency in the different markets that we fly, like in Europe, like in Asia or South America, the performance was not bad in local currency, but as we translate that into US dollars is where we saw the pressure, as obviously local sales [getting] into international routes, based, you know, sale here in Mexico in the local markets. So that's where most of the yield pressure came.

Looking at the US, our network behaved well. Actually, if you look only, for example, at the West Coast, we saw very positive numbers. So the US, it's holding steady, it's more the wide-body as a mix of the additional capacity, because of 787 and the pressure of the different exchange rates vis-a-vis the dollar, that's really what explains the behavior of yields in international yields. Now moving to cargo, I don't know what --

Yes, thanks for that.

Sorry, Ricardo. You're saying -- in terms of capacity additions, well, new markets for the second half of the year, we only have Vancouver, as Andres had mentioned? No. Basically the (inaudible) is we will continue upgrading some aircraft, but most of the capacity that we will add for the year is basically the capacity that we have today and that is -- we will just basically roll-over for the rest of the year. So it's mostly the upgrading that we produce in the first half and additional frequencies in certain markets that we have produced. But in terms of capacity additions, basically it's to use the same capacity in the second half and the new market is Vancouver.

And on the yield side, was wondering if there was something more -- there was also other than the FX effect, so that was clear. On the cargo, I mean it was another quarter of very strong growth, 20% growth on top of another 20% growth last year. If I am not mistaken, 6% of your passenger revenue a few years ago, the average for a few years ago, and now running at around 8%, closer to 10%. Is there a level you target for your cargo as a percentage of your passenger revenue in the longer term or maybe if you could -- if the answer is no, maybe if you could just elaborate a little bit on what's driving the growth here, if it's only the 787 additions or if there is anything else pushing your cargo revenue?

Yes, I think it's -- three elements are playing here. First, or the most important one is 787, because it provides more cargo capacity and as we replace the [76s] with the 787s. and we will continue to do that going forward, we are expecting to further strengthen our cargo revenue on that front. The second element is the exchange rate. Most of the cargo is priced in dollars. So as the Mexican peso depreciates, we have a positive effect on that part. And the third element is that we have been changing our cargo structure. I think we have a more efficient one, a better management team, which is helping us in improving the marketing of our cargo and we will continue to put all the efforts on that because it should continue to increase its weight into total revenue going forward.

Victor Mizusaki, Bradesco BBI.

Just a follow-up question on yields. I mean, you mentioned that in the third quarter, you'll likely see an improvement quarter-to-quarter, but third quarter we are talking about the high season. So what can we expect in terms of year-over-year, can we expect that it will also increase, I mean we will recover? And another question regarding to demand in the second half. I mean, if you do not see a strong demand, will you change your fleet plan for the coming years?

Yes. Well, first, in terms of yields, we are expecting an improvement, obviously, Q-on-Q, but for example, if yields decline around 6% year-on-year in the second quarter, we are seeing better combination of yields and load factors. Let me stress what we are expecting in terms of revenue per ASK. We saw a decline of around 6% in revenue per ASK in the quarter and what we've seen so far in July and August is we will be flattish compared to last year. That's what we are expecting to-date. September also plays a role in the quarter, it's too early to say what's going to happen in September, but again, July and August looks fine.

Then in terms of demand, if demand -- most of the explanation of the differences versus last year are associated to the exchange rate, to yields more than to volume. Demand has been strong, both locally and internationally. That doesn't mean that we are going to, again, (inaudible) person I want to stress again in the call that we will increase capacity next year. We will continue to be very, very, very disciplined in capacity. We are still preparing the budget for next year, but I can anticipate that it's not going to be a year of expansion. More likely than not probably a lower expansion than what we saw in 2015. And as we've shown in the past, if that market is not there, if demand is not there, we will not hesitate to reduce fleet and adjust to the conditions. What we think is the most important part of the airline is that you cannot be over-supply for a long period of time. So we will act, we do not think it's a case right now. We think the Mexican economy, even though it's not growing as expected, 3.5%, it will grow around 2.5%. So, we are fine on that front, but we will adjust and react immediately if things change.

And just to complement on this, we have in terms of our lease portfolio, 13 contract expirations next year. So, we have a lot of flexibility in our fleet plan to adjust to market conditions and that's why we continue to evaluate our final plan for next year, but we have a lot of flexibility to adjust if market conditions change.

(Operator Instructions)

Well, if there are no further questions, thank you. Thank you for joining the call. Sorry for the trouble in the line. And we look forward to have you again in the next conference call for the third quarter and provide you with good numbers for the summary. Thank you very much, goodbye.

That concludes today's conference. We thank you for your participation.