Grupo Aeromexico SAB de CV (AERO) 2017 Q1 法說會逐字稿

Good morning, and welcome to Grupo Aeromexico's First Quarter 2017 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. 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. This call is being recorded. I would like to now turn the call 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 first quarter 2017 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 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 the call over to our CEO, Andres.

Good morning, ladies and gentlemen, and thank you, Jonathan. It is a pleasure to share with you our results for the first quarter of 2017. Aeromexico reported a MXN533 million operating profit on total revenues of MXN14.2 billion. This is a 3.8% operating margin, representing our 28th consecutive quarter of positive EBIT results. Our EBITDAR reached MXN3.6 billion, an increase of 16.4% versus Q1 2016. These financial results benefit net of deferred taxes of MXN561 million from a non-monetary transaction to develop our new Aeromexico head office, location here in Mexico City. Ricardo will comment in more detail on the benefits of this transaction.

This quarter was very challenging for the Mexican aviation industry. We saw extreme foreign exchange volatility and significant increases in fuel prices. The peso depreciated 12.5% against the US dollar in the first quarter compared to the same period last year, reaching a low of MXN22 to the dollar before recovering to MXN18.7 towards the end of the quarter. Fuel prices in dollar terms increased approximately 55%, while fuel prices in pesos increased 64.4%. In addition to this volatility, the peak season of Easter break came in April this year versus March last year, and also last year have the benefit of being a leap year with one more day of operating -- one more day of operations in February of 2016.

The bright spot however has been the Mexican economy, which has remained stable. The global economic indicator grew 2.3% in the first two months of 2017. Our diversified network and hub-and-spoke business model have continued to show resilience through these challenging environment. During the first quarter of the year, we saw softness in trans-border VFR and leisure markets and we saw pressure in domestic yields. However, this was partially offset by healthy demand on other medium and long-haul international routes. In terms of unit revenue performance, revenue per ASK increased by 8.9% during the quarter, support the increased yields of 0.5% and increased load factor of 1.7 points.

Other revenues increased MXN739 million compared to the same period of 2016 representing continued improvements in our ancillary revenues as our new co-branded card partnerships with Santander and American Express continue to gain traction with our customers. This has been further supported by higher ancillary revenues from additional services such as AM Plus, upgrades and preferred seating.

Turning to our cost base, cost per ASK in pesos increased 18% primarily as a result of continuing peso depreciation and increase in fuel prices. However, cost per ASK in dollars excluding fuel decreased by 3.6%, mainly driven by operational efficiencies, highlighting Grupo Aeromexico's ongoing focus on optimizing unit costs.

With regard to our partnership with Delta, we are delighted that on March 10, Delta completed its tender offer for an additional 32% of the outstanding capital stock of Grupo Aeromexico. After this transaction, Delta now owns directly and indirectly 49% of Aeromexico's outstanding shares. Additionally, I am delighted to say that our joint corporation agreement with Delta, we expect it to be launched as early as next week, having both fully complied with the conditions for obtaining antitrust immunity. This historic agreement will establish the first trans-border profit sharing partnership between Mexico and the United States, expanding competition and benefiting customers of both airlines. The agreement will allow Aeromexico and Delta to coordinate efforts to enhance the travel experience with expanded destinations and frequencies, improved connecting schedules and offering seamless operations.

For example, next Monday, May 1, we will be collocated with Delta in Terminal 4 at JFK, offering our passengers a high-quality product and greater choice of frequencies. We look forward to updating during the near future on the synergies we are expecting to deliver.

Moving to our network, during 2017, we will be starting services to Seoul, San Jose, California, Detroit and Calgary, as well as increasing frequencies to Heathrow, Tokyo, Amsterdam all of them to daily services and we will be serving Madrid double daily, plus Shanghai from three to five services per week. In this context, we received one Dreamliner 787-9 during the first Q of 2017, one more in this Q2, and we will be receiving a third one in the 4Q of this year.

In terms of capacity, ASKs increased 7.9% during the first quarter of 2017. And as we have said before, we are firm believers in capacity discipline. In this context and based on the current market outlook, we have made the decision to retire our last six Embraer-145s earlier than originally planned, once again demonstrating Aeromexico's discipline in managing capacity.

In last quarter's conference call, we said that we would reduce our Embraer-145 fleet from 12 to six. These six aircrafts are incremental to what we previously stated. Thus, we will not be operating any Embraer-145 by next month. Furthermore, this will deliver operational efficiencies as we move to a single-family fleet of Embraer-170s and Embraer-190s.

With regard to ASK growth, we continue to forecast high single-digit growth. Most of it will be coming from our growth in 787 capacity, as we continue to experience strong demand for the long-haul and we anticipate full-year ASK growth of about 25% in this area. However, domestic ASK growth, on the other hand due to the reduction in the 145s, is being trimmed from over 6% to a new estimate of between 4% and 5%. I would like to take this opportunity to thank all of my colleagues at Aeromexico for their commitment in achieving these set of results, particularly in the current context of the challenging economic environment. 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. In a challenging economic environment characterized by exchange rate volatility and higher fuel prices, we were able to deliver an operating profit of MXN533 million. This result was supported by a non-recurring benefit of MXN561 million, net of deferred taxes related to a non-monetary transaction for the development of the site of Aeromexico's new headquarters in Mexico City. Aeromexico has entered into an agreement with our renowned Mexican real estate group to develop Aeromexico's existing site. We will retain our real estate position in a proportion of a newly developed property. This non-monetary transaction has produced a profit for Aeromexico due to the fact that the fair value of the new asset is higher than the book value of the current property. Excluding this non-recurrent item, the operating result for the quarter would have been a loss of MXN340 million.

Moving to our topline, we achieved revenues of MXN14.2 billion, a 17.5% increase year-on-year. This increase was mainly due to a 12.6% increase in passenger revenues, a 27.9% increase in cargo revenues. And it is important to mention that this is now the 14th 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 as the Boeing 787s' cargo capacity. Also, we had a MXN739 million increase equivalent to almost 200% in other commercial revenues, driven by higher ancillary revenues from additional services such as upgrades and preferred seating and revenues from our co-brand cards with Santander and American Express. These increases were partially offset by a decrease of MXN189 million in charter revenue, as the Company continues focusing on its core scheduled business.

From a cost perspective, as mentioned before, two macroeconomic factors impacted our cost structure again this quarter, exchange rates and fuel prices. The Mexican peso depreciated 12.5% against the US dollar. We have a significant negative impact on several operating costs such as aircraft leases and maintenance, as well as other expenses such as reservations, communications and traffic. We estimate that during the first quarter of 2017 exchange rate depreciation contributed to a year-on-year increase in operating costs excluding fuel of approximately MXN724 million. Including fuel, the exchange rate depreciation contributed to a year-on-year increase in costs in the order of MXN1.1 billion.

Secondly, fuel prices in Mexican pesos increased by almost 65% compared to the first quarter of last year, reflecting both the exchange rate depreciation and the increase of 55% in fuel prices in dollars. [This price] increase in fuel prices had a negative impact of MXN1.4 billion on our fuel expenses in the quarter versus last year.

We have continued to implement our hedging policy with around 50% of fuel requirement hedged, using a mix of call and call spread, with a strike price starting at $1.75 per gallon. With a depreciating peso, it has been critical to continue our focus on managing our cost base and during the first quarter, we continued to obtain positive results on the [ex-fuel] cost side. Our first quarter total cost per ASK expressed in dollars increased by approximately 4.9% versus last year, while our cost per ASK in dollars excluding fuel decreased by 3.6%.

Also the peso depreciated significantly year-on-year. The peso closed the first quarter at a more appreciated level versus last year. As a result, Grupo Aeromexico registered a positive foreign exchange impact of MXN312 million during the quarter.

First quarter net loss was MXN258 million, equivalent to a negative 1.8% margin. (technical difficulty) in the P&L, our balance sheet was impacted by Mexican peso depreciation, as both our asset base and our liabilities were revalued at the new peso-dollar exchange rate. As a result, our net to EBITDA ratio remained stable at 5.3 times despite a significant growth of 16.4% in EBITDAR.

Our cash balances at the end of the quarter amounted to MXN9.1 billion, representing a cash to revenue ratio of 16.2%. In dollars, our cash balances amounted to $485 million a figure in line with $489 million reported at the end of last year.

Regarding fleet, we closed this first quarter with 133 operating aircrafts, including 12 Embraer-145s and 52 Embraer jets of the 170, 190 family. Also, we had 53 Boeing narrow-body aircrafts and 16 Boeing wide-body aircrafts, comprising three 777s and 13 Boeing 787s. As Andres mentioned, in line with our commitment to maintain capacity discipline, we will ground all of our Embraer-145 fleets. Any fleet decisions rising from opportunities from the JCA with Delta, this would take our fleet by year end to 124 aircrafts.

For the rest of the year, we have limited financial commitments, with only one more 787-9 being delivered in late fourth quarter of this year. We are evaluating different financing opportunities to source this aircraft and we expect to reach a final agreement early in the second half of this year.

Finally, as Andres mentioned with regard to our partnership with Delta, once antitrust immunity is in place, we will be focused on exploring opportunities for driving synergies between the airlines and we look forward to providing details of these and their impact on Aeromexico's financial performance in the near future. 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.

(Operator Instructions) Michael Linenberg, Deutsche Bank.

Hi, this is actually Matt on for Mike. Thanks for taking my question. Do you think the Mexican domestic market is over-supplied, and if so, do you think you need to reassess your capacity plans?

Thank you, Matt. Yes, we've been saying that now for many quarters. I think it's not sustainable that our ASK growth has been on an average between say 12% and 14% in the domestic market with the economy growing 2%. So, definitely, we think there is too much capacity, and we have been very disciplined. If you look at our domestic ASK growth in the past quarters, it has been in the low single digits and as I mentioned in the call with the running of the additional six 145, we are downgrading our growth in the domestic market for the year from 6% to a figure between 4% and 5%.

Thank you. I have one more follow-up to that. Have you seen any discernible impact on northbound traffic from Mexico to the US given increased political uncertainties surrounding the new administration as well as weakness in the peso?

Yes, particularly in the first quarter we saw -- regarding uncertainty in immigration policy in US we saw some softness, particularly on VFR traffic traveling southbound. And also because of that and all these uncertainties surrounding what's going to happen the peso felt the heat. So we saw softness on leisure traffic northbound because it became more expensive for Mexicans to travel abroad, but it was offset by more flows southbound because now on the other side it's cheaper also for US travelers to come to Mexico. So, what I would say just to as a general comment, VFR was soft, however, business traffic remained steady, and leisure, again because of the combination of probably lower flows north or better flow south, it remained as well stable during the quarter.

Ravi Jain, HSBC.

So, I have a quick question on the domestic market. How you're seeing the competitive landscape now, let's say, in the second quarter and going forward given the increased leverage let's say from one of your main competitors, has that improved in the second quarter or are you seeing continued aggressive competitive landscape? Thank you.

We see little bit better -- a better scenario, little bit, still probably instead of -- what we are expecting instead of seeing low double-digit growth as I mentioned between 12% and 14% probably for the Q2 and ahead where we will see high single-digit growth. So, yes, it's a correction, but still we think it's still too high based on the dynamism of the Mexican economy. So again, we will continue to focus on capacity discipline. I can share with you that we are going to -- finishing April, was a solid month. We saw good traffic growth for April better than what we saw for the Q1 and still obvious it is too early to say what will be the summer. But again, we will continue working and building our bookings to have a solid summer versus last year.

Mauricio Martinez, GBM.

My question will be kind of a follow-up for the previous ones, but in terms of yields, do you think this quarter should be the worst in terms of the performance in yields and if you expect them to improve for the remaining of the year and considering how competitors are behaving at the moment? That will be my first question.

Always Q1 is the softness in all of the four quarters in the year -- it is softer. So, yes, only by seasonality, yields should improve going forward at least in the next -- in the second and the third, because of this slight correction in the domestic market that can improve a little bit as well. We are reporting very solid number for total revenue per ASK and it's a combination because, yes, yields were low but we were able to offset that with our very good performance on ancillary revenues.

So if you look at total revenue per ASK up 8.9%, now that includes as well our efforts to increase load factors, which we expect this trend improvements in load factors versus last year to continue in April, produces positive results in terms of total revenue per ASK. So, yes, that will happen also as the peso (inaudible), which is overall, it's good for the Company. Now we are better off with a slightly stronger peso than what we saw for the first quarter, but that has an impact on yields measured in pesos on the international routes. So, it will be a combination of how again the exchange rate behaves for the Q2. It's very difficult to predict. Today, we are back again above MXN19 per dollar and last week we were probably closer to MXN18.20, MXN18.30. So, we are again looking at it very carefully and committed unwilling to react very fast, not to guarantee the stability and the sustainability of our business model.

And you just mentioned about the ancillary revenues, actually that was my second -- that would be my question. How sustainable you see the currency that you reported this quarter? We just saw that $11 per passenger in terms of ancillary revenue, do you think that will be sustainable onwards?

Yes. We've made a big improvement on that front. If you look probably two years ago, ancillaries per pax were at MXN100. Today, based on what you mentioned, we are at close to MXN200. Still we are below of where we want. If you look for example, Volaris has ancillaries per pax of close to MXN300. It's (technical difficulty) business model, but we feel there is some room to grow between this MXN200 and MXN300. So we will continue with our initiatives to see how we can strengthen ancillary revenues.

Ricardo Alves, Morgan Stanley.

Just a quick one on -- actually a follow-up on capacity. And actually the first point on my question would be just to make sure I understood correctly, you said 4% to 5% domestic, but just to make sure I got the number for the international as well. So if you could go through that again. And the second point is that -- looking at industry data, I mean, we already see going forward a major shift in line with what you said. I mean, much more capacity on the international side as opposed to the domestic. So maybe just if you could give a little bit more color on the trend that we're going to see in the next several months. I mean, if I'm not mistaken, you had capacity growing 10% or so in the domestic part of your business. So maybe I was talking about some quarters where you actually going to cut capacity in the domestic market year-over-year. So just a little bit more color on the trend going forward in the next couple of quarters. Thank you.

Yes. You're right, what we mentioned is, our capacity for (inaudible) 2017 complete versus 2016 our expectation is that in the domestic market ASK will grow between 4% and 5% down from 6%, which was our guide in our past call. In international, we will see low double digits for the international as a whole. But this is mainly driven by our wide-body expansion. So for wide-bodies, ASK growth including all of our fleet, the 777s and 787s, we are expecting ASK growth of 25%. So that means that for the rest of the network, which include Central South America, US and Canada, then you will see probably high single digits or very low double digits, so around say between 9% and 11%, in those international markets. So, growth is driven by wide bodies and we will remain committed to maintaining where we are seeing the most pressure as we stressed in the call on the additional over-capacity that has been in the domestic market for many quarters. Let me stress, as Ricardo mentioned just one point, we cannot get this cost with Delta [our plans] because we haven't formally receive ATI. We expect that to happen next week, as we finalize the contracts with those airlines that were granted the slots by the DOT.

So after we (technical difficulty) once having the ATI, we will re-evaluate our network to the US, that's precisely what we're looking forward. So in our next call we can update you about what will be our plans for the transborder market after we have jointly designed once we have ATI.

(Operator Instructions) Michael Linenberg, Deutsche Bank.

Hi, this is actually Catherine O'Brien in for Mike. I just have one follow-up on the change of domestic capacity. I appreciate that you definitely made some nice move to better right-size that, but is there -- if things don't pick up further in the Mexican domestic or even slowdown, is there room to pull out more capacity or grounding these E-145s kind of the end of your bandwidth?

No, no, no. We have more room to grow. As you know, we are very focused on managing those type of risks. So what we have done is, we have these staggered lease contracts. So if we see continued softness and there is no room to grow, we are prepared to [reduce] not only the regional fleet, but also our mainline fleet. So, we believe we cannot be over-exposed in terms of additional capacity to the market. As we see things today, we think that's enough, by grounding those 12 145s well ahead of what we were thinking before the start of the year. But again if things do not turn out as we think, we will not hesitate to cut capacity again.

Pablo Zaldivar, GBM.

I just have a quick question regarding the headquarters that you announced remodeling during the quarter. Should we expect any type of cash inflow because again during this quarter was [non cash], should anything be reflected in terms of cash flow going forward or in terms of CapEx?

Thank you, Pablo. This is Ricardo. No. This is really a non-cash, non-monetary transaction. Really, what we are doing is we are exchanging assets. We are contributing the current property and the real state developer will actually build a new property in this current -- in this height and then we will come back to the new building. So really we are exchanging assets and given the exchange we had to make a fair value evaluation of the value of the new asset. And this value was higher than the book value that we currently have and that's what generated the profit. There is not going to be any cash involved. It's not really a sale; it's very important. No, we are not selling the asset or the building. We are just exchanging it for a better asset that's really the transaction we are doing.

And also to complement what Ricardo just mentioned, there is no cash flow even as we move temporarily to our new [location]. As part of the deal, we will receive that space. So we will not be paying rents as the new site is built. So it's definitely zero cash for us, zero outflows.

(Operator Instructions) And there are no more questions in the queue, and I'll turn it over to Andres.

Well, if there are no further questions, we would like to thank you for attending the call. Again, we will continue to work very hard to improve our results going forward. We look forward to see you in the next call or if it's something important before and don't hesitate to call us if you need additional information. Thank you very much, and have a great day. Bye.

Thank you. That does conclude today's teleconference. Thank you everyone for your participation, you may disconnect your lines at this time and have a great day.