Grupo Aeromexico SAB de CV (AERO) 2018 Q1 法說會逐字稿

Good morning, and welcome to Grupo Aeroméxico's First Quarter 2018 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 now like to turn the conference over to Mr. Jonathan Wallden, Senior Vice President of Financial Planning and Investor Relations. Please go ahead.

Thank you. Good morning, and thanks for joining us for our first quarter 2018 results presentation. Speaking on the call today are Aeroméxico's 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 will turn the call 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 first quarter of 2018. Aeroméxico reported an operating profit of MXN 24 million on total revenues of MXN 16.3 billion. This marks our 32nd consecutive quarter of positive EBIT results. Our EBITDAR reached MXN 3 billion.

During the quarter, we have opted new International Financial Reporting Standards, IFRS, number 9, financial instruments and IFRS number 15, revenue from contracts with customers. This simply reclassifies costs and revenues between account lines and has no impact on our reported EBIT. Ricardo will comment in more detail on the impacts related to the adoption of these new financial standards.

This was a challenging quarter for the Mexican aviation industry, with significant increases in fuel prices and continuing increased transborder competitions related to Open Skies. Fuel prices in dollar terms increased approximately 23%, reaching almost $70 per barrel by the end of the quarter. Fuel prices in pesos increased 14.5%. The Mexican economy continued to show resilience. Yesterday, the IMF issued its 2 full-year guidance for the Mexican economy, with forecast GDP growth of 2.3% for 2018.

Our diversified network and hub-and-spoke business model have continued to show their ability in this tough environment.

During the first quarter of the year, in spite of increased competition, we continued to see increased domestic yields. Additionally, we have seen healthy demand for our medium and long-haul international routes, with capacity growing at double-digit rates.

In terms of unit revenue performance, revenue per ASK in pesos increased by 0.2% in the quarter. This is despite a 7.8% average appreciation of the Mexican peso to the U.S. dollar.

Our RASK in U.S. dollars increased by 8.7%, supported by increased international yields of 2.5% in dollar terms, and an increased load factor of 1.9 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 the first quarter of 2018, we have increased our ancillary revenues per passenger from MXN 183 per pax to MXN 231 per pax, representing a 26% increase year-on-year.

During February of 2018, we launched branded fares, offering a broader portfolio of products to our passengers. We now offer a variety of fares that meet the needs of each one of our customers. Our branded fares products have been well received in the market, which has allowed us to better segment the business. It is still early to make a full evaluation, but preliminary results look promising. Aeroméxico carried more than 21 million passengers across the last 12-month period, reflecting the depth and breadth of our network and the value that we're able to bring to the Mexican economy.

During 2018, we plan to continue enhancing our connecting proposition, expanding frequencies in our domestic network to our expanding international network, and optimizing our Monterrey hub as part of our joint collaboration agreement with Delta, with new services from Monterrey to Detroit, Orlando, Veracruz and Merida. Additionally, we have increased frequencies from Mexico City to Lima and Bogota from 2 to 3 services per day. With regard to new destinations, I am delighted to confirm that starting this October, we will commence services to Barcelona, Spain.

During the first quarter of 2018, we took delivery of the first 2 of our 60 Boeing 737 MAX aircraft, to continue enhancing our true proposition across our network. We have 3 more scheduled to join the fleet before the end of 2018. We also completed the phase out of our Boeing 777s. So since March of this year, all of our long-haul flights are being operated with Dreamliners.

Turning to our cost base. Cost per ASK in pesos during the quarter decreased 2.4%. This, despite increase in fuel costs. Cost per ASK in pesos, excluding fuel, decreased by 6.7% during the quarter, highlighting Grupo Aeroméxico's ongoing focus on optimizing unit costs.

In terms of capacity, ASKs increased 15% during the first quarter of 2018. This compared to the same period of 2017, with international capacity growing at almost 26%. Domestically, during the quarter, we've reduced capacity by 5.2%, demonstrating our discipline, which concurrently supported us in delivering increased domestic yields.

In spite of the ASK growth, total operations were down by 2.6%, this is again compared to the same period of 2017, reflecting Aeroméxico's upgauging strategy with larger aircrafts flying longer sectors. Average stage length increased by approximately 13% versus last year.

The international capacity growth has been driven by our increase in intercontinental flying, which continues to perform well.

For 2018, we will continue to manage our capacity with strict discipline. We maintain our growth forecast for the year at high single-digit growth. This growth results primarily from the carryover of 2018 for wide-body aircraft and the transborder capacity that we added last year. We continue to expect minimal domestic capacity growth in the range of 3% to 5%. Moreover, it is important to highlight that this growth results from our upgauging strategy, as our number of shells in the fleet is expected to increase by only 1 shell, from 131 to 132 aircraft by the end of this year.

From an operational perspective, we continue our drive focusing on what our customers truly value, operational excellence. During the first quarter of 2018, we have delivered 44 days with 100% completion factor, that is 100% of the planned operations of the day, with 99.6% of our flights operating as planned.

In addition, during the first quarter of 2018, we had 67 fewer cancellations compared to the same period of 2017. This means that around 6,600 passengers reached their destination as planned compared to the same period of 2017. From an on-time perspective, Grupo Aeroméxico was the lead carrier operating from Mexico City International Airport, in on-time departures, in all of the first quarter of 2018. This, we were able to achieve more than a 15-point difference in on-time performance versus our nearest competitor.

We continue to embed our new working practices with Delta and have solid plans in place to deliver MXN 200 million of synergies across a 5-year period, supporting the company's 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 the first quarter of 2018, I would like to take this opportunity to thank all of my colleagues at Aeroméxico for their commitment in achieving this broader set of results in what has been a challenging quarter.

This concludes my remarks. I would now like to handover to Ricardo, who will provide more detail on the financial results for the first 3 months of the year.

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, we delivered an operating profit of MXN 24 million. As Andrés mentioned, this is our 32nd consecutive quarter of positive operating profits. Our EBITDAR reached MXN 3 billion with an EBITDAR margin of 18.5%. As you may remember, during the first quarter of 2017, we have registered a nonrecurring benefit of MXN 872 million, related to a nonmonetized transaction, for the development of the site of Aeroméxico's new headquarters in Mexico City.

Adjusting for this transaction, EBITDAR grew 12.7% year-on-year. During the quarter, Aeroméxico has adopted 2 new IFRS standards; IFRS 9, financial instruments; and IFRS 15, revenue from contracts with customers. IFRS 9 has no material impact on the company's financial reporting. IFRS 15 has some impact, mainly on revenue presentation. In particular, IFRS 15 impacts our revenue presentation by increasing the value of the passenger revenue account line due to values for classifications from dollar income account line. So it has the reclassification of income from -- on used tickets, like breakage and income for complimentary services, like excess baggage and other passenger charges.

This has been partially offset by the reclassification of passenger compensation payments, previously recognized as an operating expense, and now registered as a negative passenger revenue, and a reclassification of the cost per kilometer of Aeroméxico's frequent flyer program, previously recognized in other income and now registered in passenger revenue.

Due to the adoption of IFRS 15, our financials for the first quarter of 2017 have been restated to allow comparison between periods. It is important to mention, and as Andres already stressed it, that there's no material impact on EBIT account.

With respect to our top line, during the quarter, we achieved revenues of MXN 16.3 billion, a 15.4% year-on-year increase. These increases in revenues were mainly due to a 13.1% increase in passenger ticket revenue, with domestic passenger ticket revenue increasing by 6.1% and international ticket revenue increasing by 18.2%, also a 41.3% increase in ancillary passenger revenue. This was driven by higher ancillary revenues from additional personalized services, such as upgrades and preferred seating. Additionally, we delivered a 10.7% -- 20.7% increase in cargo revenues, mainly driven by the Boeing 787 extra cargo capacity.

Finally, we realized a 38.8% increase in other revenues not associated with passenger revenue, such as ground handling services to third parties, maintenance services to third parties and VIP lounging.

From a cost perspective, the fuel price and exchange rates had contrasting impacts on our cost structure for the quarter. On the one hand, fuel prices in Mexican pesos increased by 14.5%. We estimate that fuel prices in pesos had a negative impact on expenses of MXN 586 million during the first quarter versus the same period of 2017.

We have continued to implement our fuel-hedging policy with around 50% of the fuel requirements hedged, using call spreads with a strike price starting at $1.78 per gallon. During the quarter, we raised MXN 9 million of benefits from mark-to-market net valuations of our fuel-hedging portfolio.

On the other hand, during the first quarter of 2018, the Mexican peso appreciated on average 7.8% against the U.S. dollar with respect to the same period of 2017. This had a positive impact on several operating costs, including aircraft leases, maintenance, reservations, communications and such.

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 our ex-fuel cost base. Our first quarter total cost in pesos per ASK, excluding fuel, decreased by 6.7%. This is important if we consider that annual inflation remains about 5%.

During the quarter, net losses amounted to MXN 722 million. We registered a negative foreign exchange rate impact of MXN 72 million, as the peso appreciated by 7% by the end of the first quarter, and that functional currency adjustments exceeded the impact of exchange-related operating adjustments.

Our net cash flow from operating activities was negative MXN 1.3 billion. This was partially due to the timing of Easter and the associated delay in the collection of BSPs, the banks settlement plans, sales from travel agencies and also paid cargo revenues that moved to the first business day of April.

Our cash balances at the end of the quarter amounted to MXN 9.4 billion, representing cash-to-revenue ratio of 14.7%.

We closed the first quarter with 130 operating aircraft, including 60 Embraer jets of the Embraer-170, 190 family as well as 54 Boeing narrow-body aircraft, including our brand-new Boeing 737 MAX. We also had 16 Boeing wide-body aircraft comprising 9 Boeing 787-8s and 7 Boeing 787-9s. As Andrés mentioned, we have now completed our wide-body fleet-simplification strategy as the phasing out of our 777 aircraft was completed in February of this year.

As a result, we moved from 5 aircraft families at the beginning of the first quarter of last year to only 3 families by the end of first quarter of the year, only the Embraer-170, 190 family, the Boeing 737 family and the Boeing 787 family.

This will bring efficiencies in many areas, including training, maintenance, inventory and fleet productivity.

During 2018, we will continue to demonstrate capacity discipline while pursuing our upgauging strategy.

We expect to close 2018 with 132 aircraft, only 1 aircraft above 2017. In particular, our fleet will include 61 Embraer's jets from their 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 on today's call. And we would now like to answer any questions that you may have. Thanks.

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

Andrés and Ricardo, I guess 2 questions here. Where -- so you gave us what your -- the cash balances were at the end of the quarter. And then, Ricardo, you talked about because of the holidays, the delay, where were your cash balances then in the beginning of April? Can you provide us with that latest number?

Yes, Mike. A little bit higher than that number. It is important to mention a couple of factors to know that. As you might remember, and we have mentioned that in the past is that in last year, we did a preponing strategy for -- we basically covered all our financial needs for 2018. So really, we are expecting that this year, the cash to revenue ratio is going to be lower than what we had at the end of last year, reflecting that -- the other element is the first quarter is usually the weakest quarter in terms of seasonal cash flow, but we did face these impacts on the calendar because the last 2 business days of March, Thursday and Friday, were holidays here in Mexico. So we could not collect the travel agencies sales, and we could not collect the credit card payments. We would take into account this together with another impact that we had that is related to VAT refunds. Usually, in Mexico, we recover every month the VAT, that we paid in the previous months. But in the first quarter, usually these refunds are low. So the refunds have not really started in the first quarter, and we are really receiving them starting in April. So when you consider all these effects, our cash balances in March, really were, affected by the calendar elements close to MXN 1 billion. That is mostly the impact of these 2 calendar days that were not business days.

Okay, great. And then just my second question to Andrés. You talked about your domestic yields were up. And obviously, you're being very disciplined on the domestic capacity front. We've heard from other competitors that the pricing backdrop in certain markets continues to be intense. So the question is, are you not seeing the enhanced pricing in different markets because of how your network is structured, where you have a large part of your network in Mexico City? Is that the case? And sort of a part 2 this question is that if you were to the rank different -- if you look at your different market segments, it would seem like your intercontinental performance or profitability is the strongest, domestic is second. And it seems like that the transborder market, the U.S. -Mexico transborder market is probably, from a profitability perspective, probably ranks third. Is that a fair way to look at it?

Mike, yes, it is a fair way to look at. I think our group performance on the -- on our domestic network reflects the discipline that we have been following, not only in this quarter, but in the past 3 years. Our ASK -- domestic ASK growth has been well below what our competitors have been adding in the domestic market. So what we have done is we have basically reshaped our network, adding more and more seats in the international market, and letting the domestic. In particular, in the first quarter of this year, domestic ASK growth was negative 5%. So that is what has helped improve our yields. I was looking at some numbers yesterday. And even after this behavior, which has been improving, if you look at the past 5 years, the increasing domestic prices, the inflation in the airline industry in Mexico is well below average inflation. For example, if you take since 2013, the average ticket price in Mexico has increased 6% with accumulative inflation in this period of around 24%. Obviously, fuel prices are up. The exchange rate has depreciated. So the stress on the domestic network has been significant. And we are correcting it, again, by being more disciplined in the domestic market. How you characterize the behavior of the network is correct. The transborder -- the transpacific, the transatlantic, South America, Canada has been performing well. And the transborder market, after Open Skies with all the added capacity that has been in the neighborhood of 10% since Open Skies started, has put pressure on yields as well. So this is what we're seeing. Our network is very much diversified. And that's the strength of Aeroméxico. That's our business model which -- and again, we have a diversified portfolio, which has scale, again, as I stressed, to achieve now 8 consecutive years every quarter of positive EBIT.

(Operator Instructions) Our next question is from Pablo Abraham with Actinver.

Just a quick question regarding your 787 fleet. Could you confirm to us that all the airplanes are powered by General Electric engines? Or do you have some Rolls-Royce powered airplanes because of the recent news about the ETOPS problem?

Pablo, thank you for asking the question. Yes, all of our 787s are GE powered. So we are very happy with the decision we made a few years ago. Because it makes a big difference with the recent change in ETOPS for the Rolls-Royce engines, particularly to Asia. Now the ability of a 787 with Rolls flying nonstop between Mexico City, for example, and Narita in Tokyo is hindered. So we are in great shape. And we're very happy to see the great performance of the plane and of the engines.

Our next question is from Mauricio Martinez with GBM.

My question is kind of a follow-up of the first one made, regarding the shape of the transborder market with the U.S. I mean, if you can give us any color and update from a quarter ago of what are you seeing from your competitors' stance? And if you are seeing more rationality on capacity there? And if this -- and if you are already seeing any improvement on yields there?

Mauricio, yes. After it happened and we -- we've mentioned this in previous conference calls. When Open Skies happen between any 2 borders or any 2 regions, you'll see an immediate increase in capacity and spike. And then, as quarters evolve, you'll see some of the airlines actually going back. We are already seeing that. We are seeing, in the past few weeks, some signs of discipline, some scale back of operations. We, for example, have reduced a little bit some of our flying, not to the transborder market as well, it's not -- we're not exempt. Our flights -- the flights that we added last year, like Seattle, Portland, are behaving well. The additional capacity that we added to some of Delta hubs, like for example from Bajio, from Queretaro, from Merida are now performing better. It was a tough start, again, because it was not just as Open Skies kick in. So we are being more disciplined. We are seeing that in the rest of -- for other competitors. So our expectation is, as time goes by, probably for the second half of this year, this will improve. The other thing is that with NAFTA, again, the negotiations taking place, obviously that is now a small degree of uncertainty. But certainly, it has an impact on traffic between the 2 countries. I think, as this uncertainty disappear, we are positive on how NAFTA 2.0 will end. That also should help in strengthening the volume between Mexico and the U.S.

Great. And my question -- my second question would be regarding the announcements of the new routes to Barcelona and additional frequency to Madrid at big season. I was wondering if you can elaborate a little bit on that regarding the -- from where is this additional capacity is coming. I mean because -- and my understanding is that your fleet will be the same in terms of wide-bodies for the whole year versus 2017. So if you can give us any color on this would be very helpful.

No, thank you, (inaudible) it's important to note. One of the benefits of having an homogeneous fleet, less types of aircraft, is that it has more productivity. So for example, last year we had 13 787s and 4 777s. So that's 17 aircraft. To date, we have the same 17 aircraft, as you mentioned, but all of them are 787s. So our productivity and having more efficient group planning, all the maintenance of the fleet gives us the equivalent of 1 additional aircraft. So we -- it's like, we have been -- now in this summer, we will operate 18 shells versus 17, even though we still have the 17 because of utilization of productivity. This is what allows to adding the Madrid additional flying that we're moving again to close to 20 per week for some weeks in the summer. Barcelona will be funded by canceling the fifth Shanghai frequency. We've had issues with flights. We have been trying for the last 18 months, 2 years, to get 1 slot in Shanghai because the fifth one was given in the same day as the fourth frequency. So one day of the week we have 2 flights, and that fifth flight was not performing very well. In fact, it was not performing at all. So we canceled that flight. And with by canceling that gives us the ability to add 2 frequencies to Barcelona, for example. So this is how we are able to expand, add capacity without adding new aircraft.

Our next question is from Gilberto Garcia with Barclays.

Your press release mentions a fairly wide range in your coverage level for fuel hedges. Can you provide us some color on what sort of coverage should we expect for the next couple of quarters?

Thank you, Gilberto. Yes, I mean, what we do, we use call spreads. So really, we have a strike price, as we mentioned at the start, $1.78 per gallon. And then we have a cap that goes to a higher level. So really, we work with this call spreads, no. Usually, I would say the difference between the strike price now and the cap of the call spread is around maybe 40%. So that's how we try to cover. And that any difference in the price above this is capped. We will take the risk again, thinking that overall, when we see a huge spike in prices, we will require to do other adjustments, not only have the cover hedged in terms of call spreads.

And the rationale we work on that, as Ricardo mentioned, for example, if oil prices go above $100, now the best way to proceed is to reduce capacity, as we did back in the past. So even if you have a financial instrument that can offset the impact of that, we feel that the best way to proceed, because we are an airline, we are not a fun, is to reduce capacity. And this is what we will do.

(Operator Instructions)

At this time, I would like to turn the call back to Andrés Conesa, Grupo Aeroméxico's CEO.

Well, thanks again for attending the call, if there are no further questions. Anything else that you want to touch base, please, Jonathan will be giving the effort from our side, and send us any questions that you may have. Thank you very much, and looking forward to see you in the next conference call. Bye.

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