Grupo Aeromexico SAB de CV (AERO) 2017 Q2 法說會逐字稿

Good morning, and welcome to Grupo Aeromexico's Second 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. (Operator Instructions) 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 second quarter 2017 results presentation. Speaking on the call today are Aeromexico's CEO, Andrés Conesa; and CFO, Ricardo Sánchez Baker. As per usual, Andrés will open the call providing insights 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 over to our CEO, Andrés.

Good morning, ladies and gentlemen, and thank you, Jonathan. It is a pleasure to share with you our results for the second quarter of 2017. Aeromexico reported a MXN 461 million operating profit on total revenues of MXN 14.5 billion. This is a 3.2% operating margin, representing a margin expansion of 0.1 points compared to Q2 of 2016. It represents our 29th consecutive quarter of positive EBIT results. Our EBITDAR reached MXN 3.3 billion, an increase of 14.6% versus second Q 2016. We were able to achieve this improvement despite the significant gross pressures generated by an increase in fuel prices in pesos of 18%, and the depreciation of the peso of 2.4% against the U.S. dollar. The Mexican economy has remained stable, the global economic indicator (inaudible) grew 2.4% in the period January, April 2017. Our diversified network and hub-and-spoke business model have continued to show resilience. During the second quarter, we continue to see softness in transborder VFR markets and we saw pressure on international 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 4.5% with an increased load factor of 2.7 percentage points, which was partially offset by decreased yields of 2.1%. Other revenues increased MXN 533 million compared to the same period of 2016, representing continued improvements in our ancillary revenues, as our co-branded card partnerships with Santander and American Express continued to gain traction with our customers. This has been further supported by higher ancillary revenues from additional personalization and segmentation services such as AM Plus, upgrades and preferred seating.

Turning to our cost base. Cost per ASK in pesos increased 4.4%, primarily as a result of increasing fuel prices and continuing peso depreciation. However, cost per ASK in dollars excluding fuel, decreased by 0.3%, 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 May 8 we started our joint corporation agreement. This historic agreement has established the first transborder profit sharing partnership between Mexico and the United States, expanding competition and benefiting the 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. Already, we have announced that during the third and fourth quarters of this year, we will be launching nonstop flights from Atlanta to Merida, Monterrey, Leon and Guadalajara, as well as direct flights from Mexico City to Portland and Seattle. Since May 1, we have been co-located with Delta in terminal 4 at JFK, offering our passengers a high-quality product and a greater choice of frequencies.

Moving to our network, I am delighted to say that during 2Q we increased our frequencies to Heathrow, Tokyo, and Amsterdam to daily services and Madrid to double daily, plus Shanghai from 3 to 5 services per week, making us a more compelling proposition for all of our frequent travelers. This increase in frequency has been supported by the arrival of our latest 787-9 and we will be receiving one more 787-9 during the 4Q of this year.

Also during the second quarter, we started flying to San Jose, California, Detroit and Calgary, and from July, we started our 3 times a week service to Seoul in Korea. This additional services mean that for the first time in our history, Aeromexico has carried more than 20 million passengers across a 12-month period, reflecting the depth and breadth of our network and the value that we are able to bring to investors and to the Mexican economy. In terms of capacity, ASKs increased 12.4% during the second quarter of 2017 compared to the same period of 2016 with international capacity growing at 17.4% and domestic capacity growing at 2.8%. The international capacity growth has been driven by our increased intercontinental flying, which continues to perform well. In the context of increased opportunities thanks to our Delta JV, we will be adding 4 E190s to our fleet in the final quarter of the year to operate in the transborder market. As a result, we are slightly upgrading our forecast ASK growth for 2017 from high-single digit to low-double digit. As we have said before, most of our growth will be coming from increased 787 capacity, as we continue to experience strong demand for long-haul flying and growth in transborder markets. Domestic ASK growth on the other hand is anticipated to finish the year with capacity growth between 2% and 4%. In terms of seats, our capacity is estimated to grow only between 2% to 3% for the full year, reflecting our continued focus on delivering capacity discipline. I would like to take this opportunity to thank all of my colleagues at Aeromexico for their commitment in achieving these set of results. We have an exciting future working even more closely with our partner Delta. And finally I would like to confirm that we will be holding our Investor Day on September 26 in New York. At the event, we are looking forward to sharing with you our vision for the company, including planned synergies as a result of our deepening relationship with Delta, plus our long-term outlook. 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, Andrés. Good morning, everyone, and thanks for joining us today. In a mixed economic environment characterized by higher fuel prices and depreciation in the Mexican peso, we delivered an operating profit of MXN 461 million, representing a margin of 3.2%, a slight margin expansion compared to last year. As Andrés mentioned, this is our 29th consecutive quarter of operating profit.

Moving to our top line. We achieved revenues of MXN 14.5 billion, a 17.5% year-on-year increase. This increase was mainly due to a 13.9% increase in passenger revenues, a 29.3% increase in cargo revenues. It is important to mention that this is now the 15th 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 787's extra cargo capacity.

We also had a MXN 533 million increase equivalent to almost 75% in other revenues, driven by higher ancillary revenues from additional personalization services, such as upgrades, preferred seating and revenues from our co-brand programs with Santander and American Express. These increases were partially offset by a decrease of MXN 100 million in charter revenue, as the company continues to focus on its core scheduled business.

From a cost perspective, we think 2 macroeconomic factors mentioned before, fuel prices and exchange rates, impacted our cost structure again this quarter. Fuel prices in Mexican pesos increased by 18% compared to the second quarter of last year. This peso increase in fuel prices had a negative impact of MXN 508 million on our fuel expenses in the quarter versus last year. The Mexican peso depreciated 2.4% against the U.S. dollar. This had a negative impact on several operating costs, such as aircraft leases and maintenance, as well as other expenses such as reservations and communications and traffic. We estimate that during the second quarter of this year, exchange rate depreciation contributed to our year-on-year increase in operating costs excluding fuel of the order of MXN 154 million. Including fuel, the exchange rate depreciation contributed to our year-on-year increase in costs in the order of MXN 231 million. We have continued to implement our hedging policies with around 50% of fuel requirement hedged, using our mix of call and call spreads, with the strike price starting at $1.35 per gallon. Also with a depreciating peso, it has been critical to continue our focus on managing our cost base and during the second quarter, we continued to obtain positive results on our ex-fuel cost base.

Our second quarter total costs per ASK in dollars, excluding fuel, decreased 0.3%. Also the peso depreciated, on average, year-on-year, with peso closed the second quarter at a more appreciated level we expected the close of the first quarter of the year. It closed at 18.14 pesos per dollar versus 18.73 last quarter. As a result, Grupo Aeromexico registered a negative foreign exchange rate impact of MXN 954 million for the quarter. This is because a negative adjustment from the functional currency effect, which mainly reflects the revaluation of assets was higher than the positive adjustment on depreciational affect, which mainly reflected the revaluation of financial liabilities in dollars. Lastly, due to these effects we recorded a second quarter net loss of MXN 528 million.

This foreign exchange loss also triggered a revaluation of our balance sheet in figures in pesos, and as a consequence, of our tax deferred -- of our deferred tax estimates.

As a result, we recorded a benefit of MXN 644 million in deferred tax provisions. Our cash flow generation remains strong with MXN 2.3 billion of net cash generated from operating activities. Our cash balances at the end of the quarter amounted to MXN 8.7 billion, representing a cash to revenue ratio of 14.9%. During the year, we have made progress in our long-term objective of reducing our adjusted net debt-to-EBITDAR ratio. Our financial debt expressed in dollars has been reduced to $72 million in the first 6 months of the year. In pesos, considering also the foreign exchange effects, our financial debt has decreased by more than MXN 1.3 billion. In this context, and supported by significant growth of almost 15% in EBITDAR, our net debt-to-EBITDAR ratio improved from 5.3x at the end of March 2017 to 5.1x at the end of the June quarter.

We closed the second quarter with 125 operating aircraft, including 54 Embraer jets of the E170, 190 family, as well as 54 Boeing narrow-body aircraft and 17 wide-body aircraft comprising 3 Boeing 777s and 14 Boeing 787s. We plan to close the year with the same number of wide-body aircraft, but as a result of our JV with Delta I would plan to add 4 additional E190 starfleet by year-end, taking our fleet to 129 aircraft. Also for the rest of the year, we have limited financial commitments, with only one more 787-9 being delivered in late fourth quarter. We are evaluating different financing opportunities to source this aircraft and we expect to reach a final agreement and in the second half of the year. Finally, as Andrés mentioned, with respect to our Delta partnership, now that we have ATI, both airlines are working hard to identify opportunities for synergies and sharing best practices. We look forward to talking about the customer benefits and the financial impact of the synergies at our Investor Day in September 26 in New York City. For further details, please contact our Investor Relations Department. 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) Our first question comes from Mike Linenberg with Deutsche Bank.

Couple of questions. So we were just listening to the United Call and they had strong unit revenue performance in Latin America and they highlighted U.S. to Mexico beach destinations, but they did indicate that, that was partially offset by weakness that they were seeing US-Mexico from a corporate side. And I'm just curious about what you're seeing out of the U.S. and whether or not because of your relationship with Delta, you may not be seeing as weak of a corporate demand to Mexico for traffic originating in the U.S. If you could comment on that, that would be great.

Michael, yes, we are seeing roughly the same. We see stronger support from yields in the beach markets and weaker performance in those corporate markets now and BFI. That's one of the benefits of having the JV with Delta is that a -- now we were -- our presence was not as strong in the beach market versus the corporate, so now we will have a more balanced portfolio and we will have more stable performance revenue per ASK in the transborder market versus before. So -- but really, the story is very similar to what United described.

Okay, great. Then can you just update us on that first bag fee where I think every airline U.S, Canada, Mexico, carriers from those countries, were introducing the bag fee, then the government came out and said it was illegal and they were going to fine them. Is it still being collected? Or is it under appeal? Can you just talk about that process and what's going on there?

It's still being collected based on -- there was a change in legislation recently and that was approved by the Mexican Congress. And based on our reading of that legislation I'm talking to the regulatory body, to the SET and the DTAC, we think that given that we have bilateral agreements with the U.S. and Canada, which supports free tariffs and the capacity of each carrier to set up now, its own policy on that sense. That to the U.S. and Canada, we can continue and we are continuing charging for the first bags. And that we are able to differentiate and avoid charging the cost to whoever, and we have in some corporate markets people who don't check bags and then obviously that gives them a better product now having the ability of not to pay for that. In the new legislation, clearly now for the domestic market, we cannot charge for the first bags. So that was a point that was made again with the changes. So we do not expect to start charging for the first bag in our domestic networks, but we will continue in the U.S. and Canada. And again, just to reinforce, in South America -- Central and South America, Europe and Asia, we continue also to provide the first bag included in the price of the tickets where in all of these routes.

Okay, great. And then just one last one if I can ask on capacity. I missed it. I think that you said that your domestic for the year, I think you were saying it was 2% to 3%, and then you had an international number and then you had a full-year number? Can you just...

Yes. For the full year, in the last call we mentioned that we were expecting to have ASK growth in the high-single digits between 9% and 10%. Now we are updating that and we expect for the full year in the low-double digits, say between 10% and 11%, but this is mainly because of what we are going to fly more long-haul wide-body markets in -- and that's -- I mentioned in elsewhere, where we are adding 481-90s to the JV with Delta. So that's new from the last quarter. But in the domestic market we are staying with our outlook of growth of between 2% and 4% in capacity for the full year.

Our next question comes from Mauricio Martinez with GBM.

I have two questions. The first one would be regarding the recent challenges faced by (inaudible) in Canada. Are you planning any kind of offering or a spinoff of P&L similar to what was done with miles a few years ago?

Mauricio, no, we've analyzed this point in the past couple of years. We've been thinking all of our possibility and we basically have ruled out any possibility of doing a spinoff of our P&L problems. So we think it's very important for us, it's key, loyalty, it's a very important part of our business model. So we will continue to make sure that we have full control of our loyalty -- the loyalty aspect of the value proposition we offer. So it's basically ruled out in any spinoff of P&L.

Great. And my second question would be regarding your JV with Delta, and specifically on international yields, which suffered decrease this quarter. Does this have anything to with any benefit from JV? Or choose to these benefits in second half of the year?

Well, we started the quarter -- sorry, the JV in May 8. So basically, the impact -- what we expect the positive impact, it was felt, but it wasn't felt under the complete quarter. And also, we just started to -- again to fine tune our network basically for the summer, everything was published. Also when we received the approval, there was basically no scope to make any changes. Now that we have ATI and that we're working together, we're thinking of modifying our network. And as I mentioned, for example, in our case we will be adding these 4 E190s to do this flying from cities like again Merida, Leon or Guadalajara to Delta hubs, particularly Atlanta. We are also adding Seattle to Portland flying. They are also making changes equivalent to our network so that we can offer a better product for our clients. And we hope that, that positive impact will be felt by the end of the year and obviously it will be there in 2018. And as I mentioned in the previous question, now we will have a more stable portfolio, because again our route network in the past before the JV was heavily concentrated in the corporate sector, not so much in the FRM beach markets. And now joining efforts with Delta we have -- the 2 of us, we have much more balanced portfolio, which again we feel to improve deals and also to reduce volatility on these variables.

Our next question comes from Gilberto Garcia with Barclays.

I have a follow-up question on the first bag fee. Did you see any impact on the introduction of the fee leading to passengers to choose lower base fare. Did this new fee have any negative impact on yields?

No, so far, no, we haven't seen that significant change in the mix of the different families first that we charge. When we started charging for the first bag, some of our competitors were already charging. So I guess some of the clients, the passengers were already used, and again, this is very common in the U.S., airlines charge for the first bag in the domestic market also in other countries. So it's not new, and I guess that's the reason why we do not see a significant change in behavior of the passengers and of clients in terms of a mix of yields on family first.

Our next question comes from Victor Mizusaki.

I have 2 questions here. And the first one a follow-up on the discussion about revenues with the first checked bags. Can you just disclose I mean how much money do you make in the second quarter revenue stream? And the second one related to the ERJ, the 145. It wasn't clear. Can we -- I don't know if you can quantify in terms of cash consolidation we can expect for the third quarter? And what's the plan here? Are we going to sell those aircraft?

On the money rates, we do not open on the ancillary front the revenue per the different items. So what I can tell you is that it's saving us as expected. We have many extensions as you know, for example, all of our business class cabins, if you are a member on some peer levels in Santander and American Express you do not pay. So you do not -- all the passengers that fly with us between U.S. and Canada pay for this. It's basically a relatively small proportion compared to the total number. In terms of the ERJs, I didn't understand the question clearly, but what I can say what we expect from them today we are -- they are parked, we are leaving the option to, if we cannot because we own them, not to fly, we are providing regular maintenance for that. So in case, which again today we do not expect but in the future if it makes sense to have them flying again, we will do it. Again, we do not think that it will be the case, but we have that option. And what we're doing right now is basically training some of the crews so that we are able to fly these additional E190s that we're bringing for the second half of the year from the ERJ fleet. So that's basically -- Ricardo I don’t know if you want...

Yes, thank you Andrés. To complement what Andrés said Victor, we have these 145s, we own them. Right now, we are in the process of evaluating if we -- we'll operate them again later in the year, not in Mexico City, but perhaps in other regions. In the meantime we are doing this preservation service that Andrés mentioned. Now regarding the potential financial impact since we own this aircraft and a lot of the value of this aircraft has been depreciated, we think the financial impact would be manageable and relatively small. But it also depends on the final decision about the aircraft, whether we would fly them again or not.

Okay. And just a last question. Can you comment a little bit about your forward booking?

The forward bookings look solid. We -- again, even though, particularly in these long-haul wide-body markets we increased capacity as I mentioned at the beginning of my remarks. We see good performance in terms of bookings both in Europe and in Asia. And overall in the rest of the network. So what I can -- I think the summer, the 6 weeks that we have remaining of the summer looks -- they look solid. And again we're preparing to adjust for the low seasons of September and early October, but things look pretty good.

(Operator Instructions)

If there are no further questions, we'd like to thank you for joining the call. And we look forward to, again to -- for the third Q call, but before that to see you in our Investor Day in New York on September 26. Jonathan, you want to add something?

No, just -- well, just to say, as Ricardo mentioned, if you don't have the necessary details of the 26th of September, then please make contact with myself or [Karren Oliver] with in the Investor Relations team. Thank you, for your time and I think...

Thank you and have a good day.

Goodbye.

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