Grupo Aeromexico SAB de CV (AERO) 2015 Q3 法說會逐字稿

Good morning, and welcome to Grupo Aeromexico's third-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 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.

At this time, all participants are in a listen-only mode, and this call is being recorded.

I would now like to turn the conference over to Mr. Jonathan Wallden, Senior Vice President of Financial Planning and Investor Relations. Please go ahead.

Good morning, everyone, and thanks for joining us for our third-quarter 2015 results presentation. Speaking on the call from Mexico today are Aeromexico's CEO, Andres Conesa, and our CFO, Ricardo Sanchez Baker.

Andres will open the call, providing insight into our quarterly performance and results, and Ricardo will then address our revenue, cost and cash flow performance. There will be an opportunity for questions at the end of the call.

So, now, I will turn to our CEO, Andres Conesa.

Good morning, ladies and gentlemen, and thank you, Jonathan. It is a pleasure to share with all of you our results for the third Q of 2015. This quarter has been characterized by mixed market conditions -- specifically, continued low fuel prices, and marginal improvement in the Mexican macroeconomic environment, and partially offset by weakening in the Mexican peso, as well as some softening in South American macroeconomic indicators.

In this context, the Mexican peso has depreciated 25% against the US dollar in the third quarter compared to the same period of last year. This has been partially compensated by the slight improvement in performance of the Mexican economy, with economic activity growing at 2.4% across the first 8 months of this year.

During this quarter, we achieved an operating margin of 9.1%, which represents our best third quarter since 2011. With this result, we have achieved our 22nd consecutive quarter of operating profit.

Regarding return on invested capital -- ROIC -- at the end of the third quarter of this year we achieved an 11.7% ROIC, which is 1.3 percentage points higher than our position as at the end of 2014, and materially higher than our long-term cost of capital.

In terms of capacity, available seat kilometers increased 9.6%. This was mainly driven by international capacity, which grew 12.5% with respect to the same period of last year. Domestic capacity grew 4.6%.

We expect moderate available seat kilometer growth to continue during the fourth quarter as a result of our continued capacity discipline.

Capacity growth during the second half of the year is anticipated to be materially lower than during the first half.

During the quarter, we retired our last of our 767s. With this, we concluded an important era in the airline's history, as we bid farewell to an aircraft which we have been operating since 1991.

Of course, the retirement of the 767 is an important part of our strategy, as we replace our legacy aircraft with state-of-the-art technology, as represented by our fleet of 787s.

These new additions and enlarged capacity of the fleet, deliver a superior customer experience and optimize operating costs, as well as supporting Aeromexico in its vision of being Mexico's premium network carrier, enhancing the Mexico brand across the world.

By the end of this year, we will have received our final 787-8 aircraft, and from 2016 onwards we will commence our programmed schedule of sister 787-9 deliveries.

Our customers increasingly recognize Mexico City Airport as a key hub for the Americas, and I am delighted to say that now Aeromexico offers flights to more destinations from its hub than any other carrier in Latin America. Aeromexico currently operates 76 destinations from Mexico City, increasing to 77 before the end of the year with the addition of another direct service to Vancouver.

Having a strong hub airport is critical for the country, and critical for its hub -- for its [coverage] (inaudible) Aeromexico, in order to optimize value for the Mexican economy.

Based on the OAG megahubs connectivity index, released earlier this month, Mexico City is now the 9th most connected airport in the world, having the highest ratio of possible scheduled connections to the number of destinations served by the airport. This is the result of Aeromexico's efforts.

In the last 10 months alone, we have added 5 new international destinations from Mexico City. This is Boston, Managua, Medellin, Panama and Toronto. And as mentioned before, in December we will add our 6th new destination, Vancouver, which is the third Canadian city we fly. From a domestic perspective, we have also added service nonstop from Mexico City to Queretaro and Cozumel.

Our network has also strengthened as we have also increased frequencies on international routes, such as, for example, Mexico City to Guatemala City, the 4th-daily frequency; between Mexico City and London, from 3 to 5 weekly frequencies; and between Mexico City and Shanghai, our 3rd weekly frequency. As we have mentioned before, improving our network connectivity is a key pillar of our strategy.

In terms of unit revenue performance, both yield and revenue per ASK increased by 0.1% and 1.2% respectively during the quarter. Our ancillary revenues increased by 15.1% compared to the same period of last year, reflecting our strategy to optimize total RASK.

Turning to our cost base, cost per ASK in pesos decreased 2.9%, while cost per ASK in dollars for decreased 22.6%, highlighting Grupo Aeromexico's ongoing focus on optimizing unit costs.

We have a strong pipeline of cost reduction initiatives that will continue to improve efficiency. Both the incorporation of a new, modern fleet, and our enhanced labor productivity agreements, will contribute to optimizing our cost per ASK.

We are continually reinforcing Aeromexico's position as Mexico's premium carrier through disciplined capacity growth, innovation in our products, and continued improvement in customer service. We will continue to invest selectively where we believe we can deliver the greatest returns, with e-commerce being a particular focus.

By offering improved customer choice, including fare and seat selection, upgrades, AM Plus, among other services, we will expand opportunities to drive additional ancillary revenues and improve our cost per ASK.

We want to make sure we are able to offer these additional choices to our passengers at all touch points -- website, kiosks, mobile apps, et cetera.

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 next year. This joint venture offers closer cooperation between Aeromexico and Delta, allowing us to align network and schedule, enhancing our customer proposition with increased frequencies and network expansion.

This concludes my remarks. I would now like to hand 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, Andres. Good morning, everyone, and thanks for joining us today. We delivered a strong third quarter, with our highest operating profit since 2011, and our third-highest operating profit of all time.

Beginning with our top line, we achieved revenues of MXN12.4 billion, an 11% year-on-year increase. This increase was mainly due to an 11.1% increase in passenger revenues, a 15.1% increase in [other] ancillary revenues, mainly related to passenger upgrade sales and increased number of administrative fees and other complementary products, as well as increases in excess baggage and cargo revenues.

This is the 8th consecutive quarter in which we have had a year-on-year increase in cargo revenues, driven by improvements in our commercial strategy and customer service, as well the Boeing 787's extra cargo capacity. These increases in revenues were partially offset by a 56.8% decrease in charter revenue compared to the third quarter of 2014, a period during which the base reflects increased revenues associated with the 2014 Brazil World Cup.

Our international passenger revenue amounted to 56% of revenues, contributing to creating a better hedge against exchange rate (inaudible) pressures, which is increasingly important in light of continued exchange rate volatility.

Two main macroeconomic factors have impacted our cost structure again this quarter -- fuel prices, and exchange rates. Fuel prices fell compared to the third quarter of 2014, resulting in a 24.1% reduction in our total fuel costs for the quarter.

The benefit 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 25.4% against the US dollar during the third quarter of 2015.

We are well-positioned to capture the benefits of market-fueled price reductions, thanks to our hedging policy, with close to 16% of the next year's fuel requirements hedged, using a mix of call and call spread options reductions, with a strike price commencing at $2.13 per gallon.

This strategy has allowed us to immediately benefit from the increasing fuel prices -- from the decreasing fuel prices, sorry, keeping any mark-to-market loss capped to the value of the premiums paid.

Secondly, regarding exchange rate, the Mexican peso depreciation mentioned before increased several operating costs such as aircraft leases, maintenance and expenses, reservation expenses, and communication and traffic expenses, among others.

We estimate that during the third quarter of 2015, the average exchange rate -- the position contributed to a year-on-year increase in the order of MXN1 billion in operating costs, excluding fuel. Including fuel, the total negative foreign exchange impact for the quarter was around MXN1.5 billion.

With a depreciating peso, it has been critical to continue our focus on managing our cost base. During the third quarter, we continued to obtain positive results on the costs side. Our third-quarter total cost per ASK, expressed in dollars, decreased by 22.6% versus the same period in 2014, while our cost per ASK in dollars excluding fuel decreased by 11.1%.

Moving to our bottom line, third quarter operating profit reached MXN1.1 billion, a 96.8% increase compared to the operating profit registered during the third quarter of 2014.

Operating margin reached 9.1%, 4.4 percentage points above the EBIT margin recorded in the third quarter of last year. As Andres, mentioned, this represents 22 consecutive quarters of positive EBIT results.

During the quarter, Grupo Aeromexico registered a positive foreign exchange impact of MXN392 million, based on reevaluation of US dollar-denominated assets. This is due to the fact that we use the US dollar as our functional currency, while the peso is just for registration and reporting.

In addition, the Company reported a negative impact of MXN123 million due to mark-to-market of its fuel hedging positions.

Third quarter net income reached MXN737 million with a 5.9% margin, comparing favorably with the 1.8% margin achieved during the third quarter of 2014.

Year over year, our balance sheet also continues to improve. Despite the negative impact of exchange rate depreciation on our debt, our strengthened financial performance allowed us to decrease our adjusted financial net-debt-to-EBITDA ratio, which includes capitalized [leases], to 4.7 times, below the 5.2 times registered at the end of 2014.

Cash flow generation also remained strong. During the first 9 months of the year, net generation of cash resources derived from operating activities amounted to MXN3.9 billion.

During the first 9 months of 2015, we have invested approximately MXN2.5 billion in aircraft and other equipment, excluding major maintenance. Of this total, approximately MXN1.6 billion has been financed with our operating cash flow.

To complement Andres' point on return on invested capital, this is one of the key metrics that we use to manage Aeromexico's financial performance across the medium term. And while the 11.7% is a healthy return on invested capital, the management team will retain its focus on driving performance through this metric.

Moving to our fleet plan for this year, during the quarter we returned seven aircraft, including two 676s, three 737-700s, and two Embraer 145s. And we added four aircraft to our fleet -- three 737-800s and one Embraer-170. These fleet movements are consistent with our fleet plan previously announced, which is focused on improving our product while reducing our costs.

We expect to close 2015 with 123 operating aircraft, including 61 Embraer aircraft, 50 Boeing narrow-body aircraft, and 12 Boeing wide-body aircraft, comprising four 777s and eight 787-8s.

2015 has seen a high volume of deliveries and redeliveries of aircraft. We expect this to moderate during 2016, with only three to four aircraft redeliveries.

This concludes my remarks. Thank you once again for joining us on today's call, and we would like now to answer any questions that you may have. Thanks.

(Operator Instructions). Michael Linenberg, Deutsche Bank.

It's actually Richa Talwar, filling in for Mike. So, my first question is for Andres. I know you briefly touched upon this, but I wanted to ask more about US/Mexico open skies. The last update we got was that the Mexican Senate was preparing to sign off on that legislation.

So, we were curious if a date had been finalized, or if you had an update around when we could expect approval and ultimately see you launch your planned JV with Delta.

Hi. Yes. Thank you. Yes. Here, the process in Mexico -- let me just highlight that in -- from the US side, it's basically the DOT who has the -- is in the driver's seat. Because they negotiate together with the State Department, and have the authority to approve a potential JV.

In the Mexican side, it's [purview] of the federal government, the SCT, who negotiates a bilateral. We have the Senate, who needs to approve it; and, as well, we have the antitrust authority, the COFECE, who needs to approve the potential JV.

Where we are today is that the deal was initialized and signed at the end of last year, in November. Now, it needs to be submitted to the Mexican Senate. [No?] So, this is the old -- the new bilateral agreement between Mexico and the US. And also, the COFECE needs to consider our application -- the one that we submitted in May of this year, between Aeromexico and Delta. We have provided to the COFECE all the necessary information.

So, we are working on the two tracks. First, as a country, on approving the bilateral; and then giving the necessary information to our authorities to level the playing field that we have in Mexico vis a vis other countries.

Because, as you know, these antitrust immunities -- JV agreements are very common in the world. We have more than 80 examples of those. In fact, some of them already operate in Mexico. There have been ATIs already approved by our antitrust authorities. For example, the case between British, Iberia and American Airlines; or between Delta, KLM and Air France.

So, what we want -- it's basically the same treatment. And given that they were already -- they're already in place, we feel that we have a good case in making sure that this is approved.

From the US side, to have the JV approved, you need a new bilateral. Then again, as I mentioned, it needs to be submitted into the -- submitted to the Senate and be approved here in Mexico.

Okay. So, do you still think all of that's going to be achieved this year, or are we probably going to see it happen early next year?

I don't know. I think it -- the chances are between the end of this year and the first quarter of next year.

Okay. Got it. Thank you. And then my second question is, your year-over-year yield and past performance was much better than what we saw in the June quarter. Curious to hear if those trends are continuing into the December quarter, given what you're seeing in forward bookings and business thus far in October.

And I guess, along those lines, is it reasonable to expect similar year-over-year margin improvement in the December quarter as in the September quarter? Or, is it just too early to tell?

Well, I think it's [what] (inaudible); but first, too early to tell. We were just turning the quarter. As you know, the third quarter is also the strongest of the year. We are seeing, what I can say, good volumes. Based on the bookings that we have for the 4Q, they are solid.

We do not have lots of visibility in terms of yields. But we will aim to be close to where we were in the third Q. We will try to make our best effort, and have our RASK performance similar to what we have in the third Q.

Okay. Perfect. Thank you.

Bernardo Velez, GBM.

Congratulations on the results. I was wondering if you could give us some color on the prebookings on the fourth Q, and a bit more on 2016, just to get a sense of how the yields or the demand environment should be behaving.

Thanks, Bernardo. As I just mentioned, we are seeing solid bookings. We -- for example, in the case of November, it's, I would say, significantly higher than November of last year in terms of volume.

Having good bookings at the start of the month gives you opportunity to improve your revenue management and achieve higher yields. Still, again, for the quarter, it's too early to say what will be the yield performance. No?

So, we're pretty confident that in terms of bookings we are solid, and that we probably will achieve higher load factors even with the growth in ASKs that we're seeing for the fourth Q. Yields -- too early. So, again, too early to say what will be the behavior of RASK for the quarter as a whole.

Okay. Perfect. And I was taking a look at your cash taxes paid. So, during the year you have only paid effectively, like, MXN5 million. So, could you give us some color on this? And I think it was some tax loss carryforwards. So, could you give us some color on what to expect, on to 2016 and even the years after?

Yes. Thank you, Bernardo. This is Ricardo. Yes. As you mentioned, in terms of the effective tax rate that we have in our panel, it's -- it has been around 25%. No? But, of this, most of it has been associated to deferred taxes. No?

As you mentioned, cash taxes has -- have been low. And as you mentioned correctly, that we have a -- tax loss carryforwards that come from previous years, that we still have for this year and perhaps for the next couple of years. No?

It really [quadrupled]. We have seen these that -- particularly, these exchange rate movements that have increased the value of our assets -- yet they might generate certain positive impacts on the P&L, but on the other side, they generate these deferred taxes that we have to raise. [You know?] So, that's the combination. I think the structure should be relatively similar, at least for next year. No?

Okay. Perfect. And lastly, could you give us a brief update on Club Premier, and especially in terms of the profitability during the quarter; and what type of growth and strategies should we expect, on to 2016?

As you know, we provide our share of results in our P&L, of -- we've not -- as we have stressed before, it's not consolidated. No? PLM. We do not provide specifics.

What we are thinking, and also we discussed at, I guess, the previous conference call, is to continue strengthening our relationship with PLM before even thinking of doing something different. Meaning, probably doing a spinoff still.

We are working on enhancing the agreement that we have with them, which is -- that's practically ready. And the other thing that we're doing -- we are also in the final stage of an RSP process that we did for our new co-branded card agreements that will be in place for the next 10 years. We will soon, in the next couple of months probably, make an announcement. So, we need to have that ready before thinking of doing something different.

So, based on that, and the impact that these two changes, the relationship between Aeromexico and PLM, and the new co-branded agreements have on agreements on PLM, then we will make the decision whether to do something structurally different.

Okay. Perfect. Thanks very much for your help, and congrats on the quarter.

(Operator Instructions). Leandro Fontanesi, Bradesco.

So, just to follow up on the yields -- so, trying to explore it a little bit more, if we divide the different segments of domestic and international, it seems to be a different performance. So, for example, domestic decreased 2% year-on-year yields. And at the same time, international increased 5%.

So, if you could comment the different environments that you're finding for domestic and international. And in international, if you could comment if this recovery was due to some of the routes that you pulled off, such as Rio de Janeiro; and also, if that's related to the effect that seems to be more stable in the third quarter of the year. Thank you.

Yes. Thank you, Leandro, for the question. Let me -- in terms of domestic, yes, as you mentioned, we had a quarter-on-quarter contraction, or based on the same quarter of last year, of 2%. This was better than the behavior that we saw in the first 6 months of the year.

So, we have seen larger contractions in domestic use. So, there was a marginal improvement, which -- we hope it continues for the 4Q.

We see very different behavior within Mexico. We see some regions that are growing strong, particularly those linked more to exports in the US, like the central north of Mexico. And we see other regions in Mexico, particularly on the south, that are soft.

The other thing is that capacity from other competitors in Mexico in -- has been significantly higher than what we anticipated. So, if that moderates going forward, then we will also see better yield environments in the remainder of the year and going into 2016.

Moving to international, again, it's a tale of two regions. We see a very softening South America. As you mentioned, you know, the canceling of Rio helped, because it was one of the worst-performing routes that we have. We see some softening in the area as well.

Europe and Asia were -- behave well. No? Not significantly strong, but better. And in the US, it -- the behavior has been -- I would qualify it as moderate. Point of sale in the US has been better. With the depreciation of the currency, it's very difficult to pass through all the impact, no, of the weakening peso in point of sale Mexico.

So, you see some yield contractions based in dollars with point of sale in Mexico, and better numbers when you do point of sale US. So, this is more or less in a nutshell what's going on.

What we've seen this year -- let me highlight. This appreciation of the dollar against basically every major currency in the world -- we haven't seen that before, and we are adjusting to this new environment. Which -- we expect that it will continue, at least going into 2016.

Got it. And just one second question. If we look at your main competitor, the yields are still 40% below. So, I know you guys have a different offering -- different business strategies. But to which extent do you think that this lower yield can limit your recovery -- I mean, your ability to continue recovering yields?

Yes. At the end, I think we should focus -- and that's what we do -- in RASK more than yield. It's the combination of having sustainable yields, and also sustainable load factors. No? And that combo will give you adequate RASK levels.

As you know very well, we have two different business models. So, the relative comps, no, are different. No? You cannot compare -- even though we compete in some markets, I think the relevant comp is, in some markets, against these airlines; but in others, against others.

And if you see, we have lower yields compared to other competitors in other regions. And there, our objective and our work and our responsibility is to try to maximize this RASK.

Thank you very much.

Hector Maya, Vector.

Thank you very much for taking my question. First -- so, I would like to know if you could give us an update regarding your growth estimation and capacity for the next year.

Hi, Hector. Yes. In terms of ASK growth for next year, we are still working on the program. But we are aiming for something, I would say, medium to high single-digit growth in ASKs. No? And most of it will be in international markets.

So, the behavior -- if you look, for example, in 2015, two-thirds of our ASKs are going international, and one-third domestic. So, you can more or less expect the same ratio for next year, based on the total growth of ASKs of medium to high single digits.

Thank you very much. That was very helpful.

Thank you. And this concludes today's question-and-answer session. I would like to turn the call back to Andres Conesa.

Yes. Well, thank you everybody. Thank you for joining the call, and we look forward to seeing you now for the results of the 4Q and 2015 in general, and that we will continue to working hard to strengthen, no, Aeromexico's position in the market. Thank you very much. Goodbye.

Thank you, ladies and gentlemen. This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.