Grupo Aeromexico SAB de CV (AERO) 2016 Q4 法說會逐字稿

Good morning and welcome to Grupo Aeromexico's fourth quarter 2016 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 future financial performance of the Company. These statements are based on the current beliefs and expectations of management and the Company. 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 listen-only mode. 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 and thanks for joining us for our fourth quarter 2016 results presentation. Speaking on the call today are Aeromexico's CEO, Andres Conesa; and CFO, Ricardo Sanchez Baker. As per usual, Andres will open the call providing insight into 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 over to our CEO, Andres.

Thank you. Good morning, ladies and gentlemen, thank you Jonathan -- for introduction. It is a pleasure to share with you our results for the 4Q of 2016. Aeromexico reported a MXN1.1 billion operating profits on total revenues of MXN15 billion. This is a 7.1% operating margin. This represents our 27 consecutive quarter of positive EBIT results.

Our EBITDA reached MXN3.7 billion, an increase of 15.3% versus 4Q 2015. I would like to take this opportunity to thank all of my colleagues at Aeromexico for their commitment in achieving these robust set of results, particularly in the current context of financial volatility. As in previous quarters, quarter four of 2016, has been characterized by challenging economic conditions. Specifically, relative stability in Mexican economic growth took place, concurrently with weakening of the Mexican peso, particularly following the US presidential elections and increasing fuel prices.

The peso depreciated 18.5% against the US dollar in the 4Q compared to the same period of last year of 2015. While fuel prices in dollars increased 7.6%, in pesos they increased 27.4%. The Mexican economy, meanwhile, remained stable with GDP growth of 2.3% during 2016. In terms of capacity, ASK increased 8.0% during 4Q and 7.4% during the whole year of 2016.

In terms of unit revenue performance, revenue per ASK increased by 10.6% during the quarter, supported by increase yields of 5.4% and an increase load factor of 1.7 points. This is the first year in Aeromexico's history with a load factor above 80% for the year. Other revenues increased 75.9% compared to the same period of 2015, mainly due to improvements in our ancillary revenues as our new cobranded card partnership with Santander, continues to gain traction with our customers. The launch of the program has been highly successful with card issuance surpassing significantly our expectations. Additionally, we renew our partnership with American Express last September, strengthening our customer value proposition. This has been further supported by higher ancillary revenues from additional services such as (inaudible) Clubs of great and preferred seating.

Turning to our cost base, cost per ASK in pesos increased 10.9% primarily as a result of continuing peso depreciation and increase in fuel prices. While cost per ASK in dollars decreased 6.4%, mainly driven by operational efficiencies, 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. The incorporation of our new modern fleet operational efficiencies and our enhanced labor productivity agreements will continue, going to contribute to optimizing our cost per ASK. In this context, we received three Dreamliner 787-9s during the 4Q of 2016, including Aeromexico's flagship 787-9 aircraft named Quetzalcoatl. These aircrafts represents a best-of-Mexico as a combination of our rich history and heritage and state-of-the-art technology with the maximum comfort. Two more 787-9s are expected to join the fleet during 2017. These aircrafts, which will enhance connectivity from Mexico to the rest of the world and provide an outstanding service that all Mexicans can be proud of.

From a regulatory perspective, on December 21, 2016, we accepted conditions issued by the US DoT, granting of antitrust immunity and allowing the airlines to establish a joint cooperation agreement. These historic agreements, we will establish the first transborder profit sharing partnership between Mexico and the US, expanding competition and benefiting customers of both airlines. The agreement will allow Aeromexico and Delta to coordinate the efforts to enhance the travel experience with expanded destinations and frequencies, the improved connecting schedules and seamless operations. The collaboration will also improve the experience underground, allowing the airlines to collocate and invest in airport facilities by improving gates and lounges. The airlines will also increase joint sales and marketing initiatives. With regard to Delta's proposed investments to acquire up to 49% of Grupo Aeromexico stock. I am pleased to say that yesterday, the Board of Aeromexico following review by the Audit Committee and based on independent analysis provided by Morgan Stanley formally approved that MXN53 per share represent fair value for Aeromexico stock and Board members confirmed their expectation to participate in the tender offering. Competition of the cash tender offer is subject to certain conditions. Including acceptance of the offer by holders of at least 25% of the outstanding shares of Grupo Aeromexico and receipt of conferences approval in Mexico. The tender offer process closes next March 10, 2017.

Moving to our network during 2016, we started four international destinations; Amsterdam, Austin, Denver and Santo Domingo. And during 2017, we plan to start services to Seoul, Detroit, Calgary and San Jose, California. With regard to our growth plans, recognizing that consensus estimates for 2017 Mexican GDP growth now stand at about 1.6% as compared to 2.6% a few months ago. And in the context of our weakening peso, we have proactively made a decision to -- plan capacity growth, retiring 6 Embraer 145 aircraft earlier than originally planned.

The impact of this change is 2017 growth in seats offered will be reduced from 7% to roughly 4%. With regard to ASK growth, we continue to see strong demand for long-haul flying and those we anticipate ASK growth of about 25% in this segment. On top of these, we are expecting growth in demand for our combined product offering with Delta with expected capacity growth to North America of 10%.

Domestically, we are planning ASK growth of between 4% and 6% depending on the evolution of demand during the year. Overall, we are expecting slightly below 10% growth in ASK, mainly driven, again, by the arrival of additional wide-body aircrafts into the fleet plus our JV with Delta. We will also continue to expand our product portfolio for ancillary products through new partnerships and commercial offers.

We will continue investing selectively where we believe we can deliver the greatest returns with eCommerce being a particular focus. During 2016, we launched our new technological ecosystem, including a new website, new kiosks and later this year, we will be launching our new app. Additionally, this month of February in line with our US competitors, we have started charging for the first back in our transborder flights. Through these multiple platform environment, we will be offering improved customer choice, including fair on seat selection, upgrades, AM plus among other services. This will provide Aeromexico with the opportunity to continue improving our customer experience, while driving additional ancillary revenues and reusing our cost per ASK. 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 robust fourth quarter with an operating profit of MXN1.1 billion, a 6% improvement compared to the fourth quarter of 2015. These occurred in a challenging environment context of exchange rate depreciation and higher fuel prices. Highly absolute operating profit improved versus last year. The exchange rate depreciation has pressured our costs and thanks to the approximate natural hedge that we have built over the years, our revenues have increased in tandem. As our revenue base in place, however, it has become more difficult for us to continue with our margin expansion.

Operating margin for quarter four reached 7.1%, 0.9 percentage points below the fourth quarter of 2015. And as Andres mentioned, this is our 27th consecutive quarter of operating profit. Beginning with our top line, we achieved revenues of MXN15 billion and 19.5% year-on-year increase. This increase was mainly due to our 16.7% increase in passenger revenues, a 21.2% increase in cargo revenues, this is now the 13th consecutive quarter in which we have had a year-on-year increase in cargo revenues, mainly driven by improvements in our commercial strategy and customer service as well as Boeing 787 extra cargo capacity. Finally, we have serve 75.9% increase in other revenues driven by higher ancillary revenues from additional services such as upgrades and preferred seating and revenues from our core branded programs with Santander and American Express. These increases were partially offset by a decrease of 78.7% in charter revenue, as the Company focuses more on its core scheduled business.

Our international passenger revenue amounted to 56.5% of passenger revenues creating a better hedge against exchange rate depreciations which is increasingly important in the light of continued exchange rate volatility. Our domestic passenger revenue amounted to 43.5% of passenger revenues. Revenue per ASK increased by 10.6% compared to the fourth quarter of 2015, reflecting the increased attractiveness of Aeromexico's global network and connecting proposition as Mexico's only full service carrier. As Andres mentioned, both load factors and yields increased compared to the same period of 2015.

As mentioned before two macroeconomic factors impacted our cost structure again this quarter, exchange rates and fuel prices. The Mexican peso depreciated 18.5% against the US dollar. This had a significant negative impact on several operating costs such as aircraft leases and maintenance as well as other expenses such as reservation, communications and traffic. We estimate that during the fourth quarter of 2016, exchange rate depreciation contributed to a year-over-year increase in the order of MXN980 million in operating costs, excluding fuel.

If we include the fuel, the exchange rate depreciation contributed to a year-on-year increase cost in the order MXN1.5 billion. Secondly, fuel prices in Mexican pesos increased by 27.4% compared to the fourth quarter of 2015, reflecting both the exchange rate depreciation and the increase of 7.6% in fuel prices in dollars. We have continued to implement our hedging policy with around 50% of fuel requirements hedged using a mix of call and call spreads with a strike price starting at $1.75 per gallon. The positive impact of this hedging policy has been reflected in Grupo Aeromexico's financial results. Since the Company benefit from reductions in market prices last year while maintaining the maximum loss of the hedging policy, capital volume of the premiums paid for set options.

We are depreciating peso. It has been critical to continue our focus on managing our cost base and during the fourth quarter, we continue to obtain positive results on the cost side. Our fourth quarter total cost per ASK expressed in dollars decreased by approximately 6.4% versus the same period of 2015. While our cost per ASK in dollars, excluding fuel, decreased by 9.8%. During the quarter, Aeromexico raised a negative foreign exchange impact of MXN189 million due to a negative exchange rate impact on operational adjustments being greater than the benefits of functional currency adjustments. This is because that the US dollar is our functional currency, while the peso is used for registration and reporting.

We also reported a positive impact of MXN112 million pesos, due to the mark-to-market gains on our fuel hedging positions. With these fourth quarter net income reached to MXN259 million that given into 1.7% margin. As was the case in the P&L, our balance sheet also was impacted by the Mexican peso depreciation. As growth, our asset base and our liabilities were revalued at the new peso-dollar exchange rate. As a result, our net debt to EBITDA ratio reached 5.2 times, 0.3 points above the 4.9 times reported at the end of last year. At constant exchange rate, however, this ratio is estimated at 4.7 times, representing ongoing structural improvements in Aeromexico's balance sheet. Cash flow generation also remained strong. During the fourth quarter, net generation of cash resources that are from operating activities amounted to MXN9.6 billion. Our cash balances at the end of the year amounted to MXN10 billion representing cash to revenue ratio of 18.9%. We closed the fourth quarter with 133 operating aircrafts, including 65 Embraer aircrafts, 53 Boeing narrow-body aircrafts and 15 wide-body aircrafts, comprising three Boeing 777s and 12 Boeing 787s.

We continue to pursue our strategy of upgrading our fleet and in spite of reducing the total number of operating aircrafts to 131 during 2017, we will still be operating roughly 4% more seats to the market by the end of this year. As Andres mentioned, we have received three new 787-9 during 2016 and we'd plan to operate two more during 2017, one of which was already received in January. Incorporation of this aircraft is particularly significant as they represent the first additions from [Douglas] replaced with Boeing in [2012]. Three of these aircraft were financed through our Japanese Operating Lease with Call Option structure with Aeromexico becoming the first airline in Latin America to use these funding serves for wide-body fleet. These agreements represents an important step in the diversification of Aeromexico's financing portfolio. And with this we have secured financing for half of our 2013 model book of wide-body aircrafts.

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

Thank you. The floor is now over for questions. No press questions will be taken. (Operator Instructions).

Michael Linenberg, Deutsche Bank.

Hey, good morning, Andres, Ricardo. Couple of questions here. When or maybe you've already started operating and antitrust demonized agreement with Delta. Is that up and running right now, are you operating with the antitrust immunity or at what point do you actually start that and when do those joint venture numbers show up in the numbers, is this 2017 event?

Hi, Michael, how are you? Yes, it is 2017 event. Our plan is to start of second quarter [08/31] that's the idea. We already have all the authorization. But to have operating with ATI, we need to give the 14 slots that were final remedies both by in (inaudible) in Mexico and by the DoT in the US. This week, we are starting with the first eight of (inaudible) and then the other six pending the show consorter of DoT which we expect in the next few days, which will tell us who will be eligible not to get those slots. We will go ahead, deliver those slots to be on time and start on April 1.

So just so I know, so you'll be able to start and you'll be able to operate with Delta and ATI JV after you've handed over those slots, I know, from the US side, it's going to take more than a year for the required slots to be divested. I think it's actually happening in two different phases. So you'll be able to actually operate that agreement before all the slots have been handed out?

Yes, we will, the course who went to slots, they are telling us when they want to start and we need to sign the relevant documents to make sure that they have those slots to the route they want to fly after they going to start. That's what we need to comply with and we expect that to be ready again in the next few weeks, even if they fly later, so that we can start the JV right away.

And then just a clarification on the capacity growth where you said that you were slowing capacity growth from 7% to 4%, now that just the March quarter because then you gave us the numbers, I think for the full year of 2017?

No. We are reducing the seat capacity growth instead of growing 7% in the number of seats where we've grown before by early delivering, redelivering six 145s. So, total capacity of the airline will grow 4%. But even then we will fly more intensively the planes and again because of this sub-gauge, also we will have higher statements, routes we plan totally ASK growth will be slightly below 10%. With this, I want to emphasize, it's mainly concentrated on the wide-bodies. Wide-body growth will be 25 and because of this JV with Delta, we feel that we can have capacity to North America around 10%, 11%, so that means that growth in the domestic market, we'll be only between 4% and 6% for the year for 2017.

And then just lastly, your CapEx, capital expenditures and that's probably for Ricardo, what your CapEx is for 2017?

Yes, Mike. Thank you. Good morning. We had in 2016 a total CapEx of around $660 million and we are expecting in 2017 to have something around $580 million. So it's a lower amount of CapEx compared to last year in around $80 million. That includes aircraft and other CapEx.

Ravi Jain, HSBC.

Hi, good morning. I just had a couple of quick questions, first one was on the costs, the CASK fuel in fourth quarter was pretty impressive given the depreciation of the peso. How should we look at cost for 2017, you have still are updating benefit here, you're looking at an efficiency plan. Could you give us some color on how we should look at let's say CASK ex-fuel for 2017. And the second question is on ancillary revenues, there were really up strong in 2016. And what do you expect for 2017, we know you charging for the baggage etcetera. But what are your thoughts outside that. Thank you so much.

Let me take the first ancillary revenues, if Ricardo can expand on the cost question. Yes, we grew significantly on ancillaries in 2016, mainly because we were starting from a very low base. We feel that there is still lots of room to growth. As we, again, the American Express new contract and also the new relationship Santander starts kicking in, because again the first one has been in place only since September and the other one just its first anniversary were held. Again, charging for the first bag in the transboarder market, it's an import element of our strategy. So that means that you can't expect solid growth rates of ancillary revenues in 2017. On top of that, we expect, what we've seen sort of 1Q, that volume of passengers is holding steady, and this ancillary revenues, as you know is more highly associated with the volume of passengers that you start put in the aircraft. Please, Ricardo, on the cost?

Yes, thank you Andres, Ravi, yes, we had a very good year. And as Andres mentioned, we have a strong pipeline of cost initiatives that will continue to take place in 2017. More importantly, the two main initiatives are of course associated to fleet and of course the new labor and the productivity of the new labor contracts, those two things will continue as we up-gauge our fleet and as we simplify our fleet, because we are gradually reducing the amount of different families of aircraft in our fleet. The idea is that by the end of this year, the 777s will be completely phased out from our fleet. So, in terms of the wide-body fleet, we will only operate a one family of aircraft, the 787-8 and 787-9 versions and this will allow us to have a lot of efficiency in terms of crew, also in terms of true productivity, but also in hotels and premium because sometimes now when we combine both type of aircrafts in a wide-body destination that increases the cost of premium.

Because some pilots have to wait for the type of aircraft they fly to come back to that destination. So, these are things that will be coming this year. We will continue to that -- we expect some pressure, of course, coming from the exchange rate depreciation on peso side. But we expect to continue gaining efficiency in dollar terms.

Let me just complement what Ricardo mentioned, if you look at Aeromexico 10 years ago, we used to have 8 different types of aircrafts --. By the end of this year, first year of 2018, we will only have 3 in Aeromexico Connect, we have only E-Jets, the AeroJets will be out of the Company and Aeromexico will have only 737s and 787s. With the 777 out of the fleet. So, these will, as Ricardo mentioned, simplify things a lot and will help us in reducing our cost per ASKs.

Thank you. That's very helpful. And one last one from me if I may, just some thoughts on how you're seeing domestic demand. I mean we have seen declining consumer confidence and rising interest rates and inflation. But if you can give us some color on how you are seeing domestic demand both corporate and leisure, that will be helpful? Thank you.

We are seeing -- I mean let me mention for example that point of sale Mexico obviously because of what happened with the exchange rate with the significant depreciation. We saw some softness in demand. For example, in some leisure destinations in the US at the end of last year, early this year, in some Contigo markets, not all of them, and also in some local markets. However, again, with -- how we restructure the network with JV with Delta. With the wide bodies demand holding steady, total demand for the system is holding well. In fact, as reported in January, we saw an expansion of load factor versus January of last year, including the increasing capacity and for February, we are expecting more or less the same trend to continue. The challenge in the domestic market more than volume is on [JV].

Mauricio Martinez, GBM.

Hi. Thank you for taking my question. Just a follow-up on your CapEx of $580 million for this year. Is this that you will receive one aircraft under this JOLCO agreement that we saw this quarter and that will be my first question.

Mauricio, thank you. Yes, we have as part of this CapEx plan, we have two JOLCOs incorporated or two financings at this time, it's very likely that over there might be a JOLCOs. One we already did as I mentioned before, we did it in January and we have two other positions, one in April and one in December, that one of them will refinance and perhaps another one will be left handed back. We have also PDP payments, and we have of course the type of CapEx. So, together these three components is what keeps us the $580 million.

And my second question would be on the redelivery aircraft, the earlier the redelivery aircraft that you have for this year, the six Embraer 145. Should we expect any increase in maintenance expenses, I mean like, one-off for this year.

No, not really, Mauricio. These aircrafts are aircraft that we have both in the last couple of years, so we have 12 owned 145 aircrafts, so we have 12 aircrafts of this type. We are deciding to ground six of them earlier not this year because of these demand conditions as Andres described. And we have other six that in case, what we feeling is high, we can have flexibility with them as well. But these aircrafts are already part of our of our asset base. So we will not have to face any extra revaluating cost.

(Operator Instructions) Victor Mizusaki, Bradesco.

Actually I have two questions, the first one, want to take a look on your yields, international yields in US dollars in Q4. We could say small drop on yearly bills and as you comment before, they leads to most of the capacity addition that you'll see this year, they'll come from the wide-bodies. So I don't know if you can comment a little bit what can expect for international routes this year?

Hi Victor. Well considering the capacity growth that we added in some of international markets, I think the yield development was positive. We are growing, I mean, not only in wide bodies, but again in some markets, particularly largely in the US have been in some Contigo markets double-digit growth rate.

So, deals hold well. In dollars, they were lower, but we were able to offset a significant part of a peso depreciation. On the 4Q, as you know, after November 8, the peso depreciated heavily and suddenly. So, it was really tough to pass through all the peso depreciation, not to the local prices. Not to deals -- international deals, but sold in a point of sale Mexico.

But again, as time goes by, we are able to reflect more and more, and also the fact that the JV with Delta even as you know, the spirit of this JV is metal neutrality. So, no matter who flies, if it is them or us, we share 50:50, the outcome of a flight. So, that will strengthen our point of sale US, so that will also help not to sustain international deals this year. So, we are modestly optimistic on that front for 2017.

Okay. And then two follow-up questions. I mean, referral regards to these JV, we will be able to fully, I mean, to consolidate 50% of the operation, or is it something that you cannot consolidate, what let's say proportional consolidation and the second question about the E-Jets. Can I assume that maybe you can verge some equity with the sale of those aircrafts?

Regarding the consideration, the way the JV will work is really a commercial agreement. So, we are not creating any new entity or such. So, there is no consolidation effect. The only thing that might happen at the end of the year is that we see what were the profits in the transboarder market that year and depending on how these profits were distributed, there might be kind of our settlement payment between the airlines. And that's only -- the only thing that will exist, but there is no other change or impact in accounting reports or such.

Okay and with regards to the E-Jets, is there are any equity that you can get to the sale of those aircraft or no?

Regarding E-Jets, we were keep telling that we will preserve them and if we decide to sell them or such we will need to compare that to the book value at the time, but at this point, really the impact can be really minimal in that case, because most of the aircraft has been completely depreciated. So we don't expect any impact on that side.

Thank you. I'll now turn the floor over to Andres Conesa.

I need to thank you for attending this call. We have very interesting times ahead. With the investment in Delta in the next few weeks and start of the JV at the start of the first of the Q2, so we will keep you posted. And again, make sure that we will put all of our effort to continue improving the results and make Aeromexico more sustainable going forward. So thank you very much and have a great day.

Thank you. This does conclude today's conference. We thank you for your participation. You may disconnect your lines at this time and have a great day.