Grupo Aeromexico SAB de CV (AERO) 2017 Q4 法說會逐字稿

Good morning, and welcome to Grupo Aeroméxico's Fourth Quarter 2017 Earnings Results Conference Call. Before proceeding, I'd 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 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 thank you for joining us for our fourth quarter 2017 results presentation. Speaking on the call today are Aeroméxico CEO, Andrés Conesa; and CFO, Ricardo Sánchez Baker. As per usual, Andrés 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 would like to hand over the call 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 fourth quarter of 2017. Aeroméxico reported an operating profit of MXN 802 million on total revenues of MXN 16.8 billion. This is a 4.8% operating margin, which marks our 31st consecutive quarter of positive EBIT results. Our EBITDAR reached MXN 3.8 billion, an increase of 2% versus the fourth quarter of 2016.

For the full year, we delivered a MXN 3.1 billion operating profit on total revenues of MXN 61.5 billion, resulting in a 5.1% operating margin. Our EBITDAR reached MXN 14.8 billion, an increase of 8% versus last year with an EBITDAR margin of 24.1%. We were able to achieve these results, despite of significant cost pressures, generated by an increasing peso fuel prices of 16.3% and the earthquakes that hit Mexico in September, which have negative impacts on our traffic numbers for a number of weeks into the fourth quarter. In terms of unit revenue performance for the quarter, revenue per ASK in dollars increased by 1.5%, with an increased load factor of 0.6 percentage points.

For the full year, revenue per ASK was flat with an increased load factor of 1.2 percentage points. This was achieved by a significant increase in ancillary revenues due to our strategy of offering additional personalization and segmentation services, such as upgrades, AM Plus and preferred seating.

During 2017, we have increased our ancillary revenues per passenger from MXN 150 per passenger to MXN 211 per passenger, this represents a 41% increase for the year.

During the quarter, our diversified network hub-and-spoke business model have continued to show resilience. In this quarter, we continue to see softness in transborder VFR markets. However, this was partially offset by healthy demand on other medium and noncore international routes, as well as improving conditions on the domestic market. I am delighted to say that, during 2017, we have increased our frequencies to London, 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. We also commenced services to Seoul, and as part of our partnership with Delta, we launched Seattle, Portland, San Jose, California, and Salt Lake City, while enhancing our connecting proposition from Mexican cities to Delta hubs, with new routes such as Mexico-Detroit, Monterey-LA, Bajio to Atlanta, Merida-Atlanta, Monterey-Atlanta, Queretaro-Atlanta and Bajio-Los Angeles. These additional services mean that Aeromexico carried more than 20 million passengers across the 12-month period, reflecting the depth and breadth of our network and the value that we are able to bring to the Mexican economy.

2018 represents an important landmark for Aeroméxico from a fleet perspective as we complete our fleet simplification strategy with the redelivery of the last of our 777 aircraft. This leaves Aeroméxico with 3 aircraft families, bringing efficiencies, include training, maintenance, inventory and fleet productivity. So starting in March, all of our wide-body flying is done exclusively on our Dreamliners, the 787-8 and the 787-9. I'm also delighted to announce that this Friday, in a couple of days, we are taking delivery of our first 737 Max with 5 scheduled deliveries for the year of the order that we placed of 60 planes back in 2012.

Turning to our cost base. Cost per ASK in pesos, during the quarter, decreased 0.3%, despite increasing fuel costs. Cost per ASK, excluding fuel, decreased by 4.1% during the quarter, highlighting our ongoing focus on optimizing unit costs. In terms of capacity, ASKs increased 15.4% during the fourth quarter of 2017. This is compared to the same period of 2016 with international capacity growing at almost 30%. In spite of the ASK growth, total operations were down by 8.4% compared to the same period of 2016, reflecting Aeroméxico's upgauging strategy with larger aircraft flying longer sectors. Average stage length increased by approximately 18% versus last year. The international capacity growth has been driven by our increasing intercontinental flying, which continues to perform well. In the context of increased amount for our intercontinental traffic, plus, thanks to our JV with Delta, and increased customer demand, we finished 2017 with ASK growth of 12.8%, with international traffic growing up 20%. Domestically, for the full year, we reduced capacity by 1%, demonstrating our capacity discipline, which concurrently supported us in delivering increased domestic yields. For 2018, we will continue to manage our capacity with strict discipline. We are updating our growth forecast for the year from low double-digit capacity to high single-digit growth. This growth results primarily from the rollover of 2017 growth for wide-body aircraft and transborder capacity. We expect minimal domestic capacity growth in a range of 3% to 5%. Moreover, it is important to highlight that this growth results from our upguaging strategy, as our number of shells in the fleet is expected to grow only by 1 shell, from 131 to 132 planes. I am delighted to announce that we will be launching our new [branded] first, across the next few weeks, offering our passengers a wider choice of products that are tailored to their needs. This will allow us to better segment the business and optimize revenue by increasing the number of price points. From an operational perspective, as we continue our drive focusing on what our customers truly value, operational excellence, I am very happy to say that, during 2017, we delivered 146 days with 100% completion factor, that is 100% of the planned operations operating on the day. This means that around 71,000 more passengers reached their destinations as planned, compared to the same period of 2016. In addition, in October of 2017, we only had 3 cancellations in the whole month. We continue to embed our network, our working practice with Delta and have solid plans in place to deliver MXN 200 million of synergies across a 5-year period, supporting the company and its aim of delivering a sustainable double-digit operating margin. Everyone at Aeroméxico is keen to continue developing our working relationship with our partner Delta. So to wrap up on 2017, I would like to take this opportunity to thank all of my colleagues that Aeroméxico for their commitment in achieving this robust set of results in what has been a challenging year. The company faced several headwinds including material peso depreciation during the first quarter, ongoing softness in VFR markets and Mexico's strongest earthquake for more than 30 years and a full year average fuel price increase of almost 24%. This concludes my remarks. I would now like to hand it 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 challenging economic environment characterized by higher fuel prices and the aftermath of the 2 September earthquakes, we delivered an operating profit of MXN 802 million, representing a margin of 4.8%. As Andrés mentioned, this is our 31st consecutive quarter of positive operating profit. With respect to our top line, during the quarter, we achieved revenues of MXN 16.8 billion, a 12.1% year-on-year increase.

For the full year, we delivered revenue of MXN 61.5 billion, a 14% year-on-year increase.

Operating profits for the full year reached MXN 3.1 billion with an operating margin of 5.1%. The increases in revenues were mainly due to a 9.9% increase in passenger revenues for the quarter and 10.1% for the full year. Also, a 27.6% increase in cargo revenues during the quarter and around 30% during the full year, mainly driven by the Boeing 787's extra cargo capacity. Also, we observed a MXN 283 million increases in other revenues during the quarter, equivalent to 26% and a 77% increase for the full year. This was driven by higher ancillary revenues from additional personalized services, such as upgrades, preferred seating and revenues from our co-branded card programs with Santander and American Express. From a cost perspective, the fuel price and exchange rates have constructing effects on our cost of structure for the quarter and for the full year. On the one side, fuel prices in Mexican pesos increased by 16.3% for the quarter and 23.9% during 2017. We estimate that fuel prices in pesos had a negative impact on expenses of MXN 615 million during the fourth quarter versus the same period of 2016.

For the full year, fuel prices pressured our costs by around MXN 2.9 billion with respect to 2016. We have continued to implement our fuel hedging policy with around 50% of fuel requirements hedged. Using call spreads with a strike price starting at $1.78 per gallon. During the quarter, we realized MXN 207 million in hedging gains, resulting from this consistent application of our policy.

On the other side, during the fourth quarter of 2017, the Mexican peso appreciated on average 4.3% against the U.S. dollar. This, with respect to the same period of 2016. This had a positive impact on several operating costs, including aircraft leases, maintenance, reservations, communications and traffic. For the full year, we experienced an average 1.1% peso depreciation against the U.S. dollar. It has been critical to continue our focus on managing our cost base, and during the fourth quarter, we continued to obtain positive results. Our fourth quarter total cost per ASK in pesos, excluding fuel, decreased by 4.1%. During the quarter, net income amounted to MXN 465 million. We registered a positive foreign exchange rate impact of MXN 207 million, as a positive function on currency impact was larger than the negative foreign exchange operational impact. This is because, even for the peso appreciated by the end of 2017, compared to the end of 2016, the peso actually depreciated 8.1% with respect to the end of the third quarter of the year -- of last year, sorry, 2017. Our cash flow remained strong. We generated MXN 6.4 billion of net cash, generated from operating activities during 2017. With these, our cash balances at the end of the quarter amounted to MXN 11.9 billion, representing a cash-to-revenue ratio of 19.3%. During 2017, we executed $530 million of capital expenditures and we're expecting this around $475 million in 2018. Also, in 2017, we made progress in our long-term objective of reducing our adjusted net debt-to-EBITDA ratio. In this context, our net debt-to-EBITDA ratio improved from 5.18x at the end of 2016 to 5.08x at the end of 2017. We closed the fourth quarter with 131 operating aircraft, including 59 jets of the Embraer-170, 190 family as well as 54 Boeing narrow-body aircraft and 18 Boeing wide-body aircraft, comprising 3 Boeing 777s and 15 787s. As Andrés mentioned, during 2018, we will continue with our fleet simplification strategy by phasing out our 777 aircraft. As a result, we will move from 5 aircraft families that we had in the first quarter of 2017 to only 3 families by the end of this quarter. The Embraer-170 and 190 family, the Boeing 737 family and the Boeing 787 arch. These will bring many efficiencies in areas like route training, maintenance, inventory, purchasing, triple, DVD and many others. We will continue, in 2018, to the most great capacity discipline by pursuing our upguaging strategy. We expect 2018 to close with over 432 aircraft, only 1 aircraft above 2017. In particular, our fleet will include 61 Embraer jets from the 170, 190 family as well as 54 Boeing narrow-body aircraft, including 5 new 737 Max aircraft, and 17 Dreamliners. This concludes my remarks. Thank you, once again, for joining us today and we would now like to answer any questions that you may have.

(Operator Instructions) Our first question today is coming from Michael Linenberg from Deutsche Bank.

This is actually Matt on for Mike. So have you seen any incremental weakness or strength in the fare environment, either domestically or internationally?

No, in the first Q of this year, what we're seeing, as you know, we've described what happened in 2017 with higher fuel prices in pesos and the trend continuing to the first Q. In fact, we saw Brent oil prices above $70, back in January, now it's down to $65. It's been gradually improving, but in our view, still the (inaudible) environment does not reflect the new price of fuel. In our view, particularly, in the domestic market, given that -- and the most of the carriers here do not charge for fuel surcharges, still the yield is not consistent with this higher levels of fuel prices. In international the market is different, again, depending on the markets, but gradually, it's reflecting the new conditions where [older rates] operate.

Just as a follow-up, could you break out your capacity outlook for 2018 by domestic versus international growth and then just tell us how that trends to the year?

Sorry, the ASK growth?

Yes.

Yes. As I mentioned, in the previous conference call, we have given a guidance of low double-digit growth for 2018. We are updating that, reducing our capacity growth. So we are now aiming for high single digit, that means for the domestic markets, ASK growth of between 3% and 5%, and for international market, growth of around 16%. And this is consistent, again, with total ASK growth of around 8% to 9% for the year of the system.

Our next question today is coming from Mauricio Martinez from GBM.

My question would be regarding -- more specifically, the international yields. We saw them decreasing for practically the entire year, so maybe if you can give us more color on which ones are the main reasons and if you're seeing any changes for 2018? You already mentioned that there has been some softness in the VFR market, but probably if you can give us any comment regarding capacity on that market, that would be great.

Yes. As -- the most of the growth in 2017, went through the international market. In fact, as we highlighted, ASK growth in the domestic market was -- capacity actually was reduced 1%, so all the growth went to the international market. So we believe, our yield performance, considering all the growth that we did, and that was basically by upguaging, because again, I want to highlight and stress that the number of operations of the airline was lower an 8.4% versus 2016. So considering the additional growth in ASKs, the performance of our yields was not -- you need to adjust for that and was not that negative. We saw that improving along the year. And what I -- probably, I think it's important to highlight is that there is different behaviors across the different international regions, for example, Europe was solely, Asia has been positive, Central and South America as well, Canada, most of the pressure came in the U.S. market, with the bilateral that was opened when we have Open Skies, since the end of 2016, we saw a significant increase in capacity of the industry in the transborder market, and that put pressure on yields. That is gradually correcting, and we are seeing some adjustment on some of our competitors in either reducing frequencies or even canceling some routes and this is natural. You expect when -- when you have Open Skies, everybody wants to feel the new opportunity and as they realize that actually the business case was not as what they expected and it happens, they retract. So what we expect going forward is that this growth in the transborder market will moderate versus what happened in 2017. And again, that's where we saw most of the pressure on international yields in 2017.

Great, and if you can give us some color on your expectations for your revenue management in terms of the JV with Delta for this year and how this would aid to your yields in that market, the transborder market, that also will be very helpful.

Yes, well, I mean, we have now the possibilities since last May, not with the authorization of the JV to work together. As I mentioned in our previous conference call, when we got the authorization in May, basically, for the rest of the year, most of the network was already defined. You have less flexibility to adjust. For 2018, we have practically full flexibility. So we're fine-tuning all of our network to make sure that everything connects perfectly that we have all the different, not only the capacity, but the price points of the 2 airlines identical. As I mentioned in my remarks, we are moving in the next few weeks towards branded fares in that market and this is what Delta has been doing successfully with other carriers in the U.S. So we believe that this will give us an edge in terms of -- a competitive edge against our competitors here in Mexico by offering tailor-made products so that people who only are looking for price points, do not basically value additional services, such as no miles, business class, those type of things, they will be able to get a very, very competitive fare and those who value the rest of the products, flexibility, again, miles, operates et cetera, they will be able to operate on their price, and this is some of the things that we have learned on our revenue management strategy as we work closer with them.

Mauricio, also to complement Andrés, one thing that we believe is important is that, that we should look more at revenue per ASK rather than only at yields, particularly, with this some bonding strategy and with the branded first initiative that Andrés mentioned, but you might expect this that yields might go down. But really the total revenue, given this additional clause that we are selling could increase, and that's actually what we observe for the full year 2017. Our total revenue per ASK increased 1.1% even though we have, basically, a flat exchange rate. So this is basically a result of a better segmentation process and it is something that we might expect to continue in 2018 in the sense that total revenue per ASK should be stronger, but integration between yields and ancillary revenues might be different.

Great, and when is this new program to be launched?

It will be launched in the next couple of weeks. We expect (inaudible) by the end of February, by early March.

Great, and my last question would be regarding the (inaudible) program. Has there been any change regarding the chance of an IPO of this business?

No, no, no. We continue with our strategy. For full service carrier like Aeroméxico, the royalty program is very important strategically, so no we are not thinking of doing an IPO. So again, actually what we would like is to have better link and better value associated with our royalty program to the airline. It has been working really well, and we're constantly updating and see what additional things we can do in the program to enhance loyalty towards Aeroméxico clients.

(Operator Instructions) Our next question today is coming from Leandro Fontanesi from Bradesco.

It's a quick question, with expectation that Delta will receive the Bombardier aircraft, does that mean that Aeroméxico has decided to move forward with its Embraer fleet? Or this is something that you'll still will revive in the future?

Yes, this issue of our regional fix strategy, we are updating and what's the best option for Aeroméxico by the day. As you mentioned, a window of opportunity opened recently, 3 months ago a tariff of 300% was imposed on many sales from Bombardier to the U.S. market, not so. And as you mentioned Delta was -- it's the most important client of Bombardier in the U.S. market, so that opens an opportunity for us to evaluate that plane. So basically what we have been doing is running a campaign not including the C series and the new Embraer, and analyzing all of our options. Recently, U.S. trade panel changed that 300% and Delta needs to make the decision, whether they will now, after this, take the plane or not, but that doesn't change our mindset, given that Delta, now, will be, for sure, operating the Bombardier, maybe this year, maybe next year, again that's their decision. And given also that they've ordered a new narrow-body, with Pratt & Whitney engines and all of the options that we have on both the regional fleet, the E2 and the C series have flattened weakening and there our pilots will have Pratt & Whitney, we are learning more and more about the performance of the engine, which -- that was basically, what we had being waiting for making that decision. So we continue to analyze it. We're working with our unions because we have also some scope clauses regarding the different aircraft that we can bring into the, either Aeroméxico or Aeroméxico Connect, and we will make a decision when it makes sense for us. And as long as it, again, adds positive value to the company and again, that can happen any time this year as we have been analyzing the different options now for quite a long time.

We've reached end of our question-and-answer session. I'd like to turn the floor back over to CEO, Andrés Conesa for any further or closing remarks.

Well, thank you for attending the call. If there are no further questions, we look forward to talking to you again after, in April after our first Q results. Thank you for your support and confidence and let us know you have any additional questions, Jonathan and the team will be happy to assist you. Thank you very much, and have a great day.

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