Grupo Aeromexico SAB de CV (AERO) 2018 Q2 法說會逐字稿

Good morning, and welcome to Grupo Aeroméxico's Second Quarter 2018 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 the 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 2018 results presentation. Speaking on the call today, are Aeroméxico's CEO Andrés Conesa; and CFO, Ricardo Sanchez Baker. As per usual, Andrés will open the call providing insights into our quarterly performance and results and Ricardo will then address our revenue, costs and cash flow performance. There will be an opportunity for questions at the end of the call. So now, I will turn 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 2018. Aeroméxico reported an operating profit of MXN 651 million on total revenues of MXN 17.3 billion. This marks our 33rd consecutive quarter of positive EBIT results. Our EBITDAR reached MXN 3.8 billion.

This was a challenging quarter for the Mexican aviation industry with significant increases in fuel prices, a depreciating peso and inflation at 4.6%, which put pressure on our cost base. Fuel prices in peso terms increased by over 48% compared to the same period of last year.

The Mexican economy continued to show resilience. Earlier this month, the IMF issued its updated 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.

In terms of unit revenue performance, revenue per ASK in pesos increased by 9% during the quarter, supported by average increased yields of almost 8% and a material increase in ancillary revenues due to our strategy of offering additional personalization and segmentation services, such as soft drinks and preferred seats.

During the second quarter of 2018, we increased our ancillary revenues from MXN 206 to MXN 244 per passenger, representing an 18.4% increase year-on-year.

During February of this year, we launched branded fares, offering a variety of fares that meet the needs of each one of our customers. Our branded fares growth has been well received in the market, which has allowed us to better segment the business. Aeroméxico carried more than 21 million passengers across the last 12 months, reflecting the depth and breadth of our network and the value that we are able to bring to the Mexican economy.

Since January, we have continued 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. From a transborder perspective, during this year, we have launched new services from Monterrey to Detroit and to Orlando, from Mexico City to San Jose, California and from Guadalajara to Salt Lake City as well from Bajio to Detroit. We have also strengthened our domestic network, with services from Monterrey to Veracruz and Merida. Additionally, we have increased frequencies from Mexico City to Lima and to Bogotá from 2 to 3 services per day.

During the second quarter of 2018, we took delivery of the third of our 60 Boeing 737 MAXs. And these will have to continue enhancing our travel proposition across our network. We have 2 more scheduled to join the fleet before the end of 2018. We also completed the phaseout of our Boeing 777s. So since March of this year, all of our long-haul flights are being operated with Dreamliners, offering our customers a world-class experience.

Turning to our cost base, our cost per ASK in pesos increased 7.8% during the quarter, mainly driven by higher fuel prices. The Mexican peso depreciation and the higher inflation rate, again, reached almost 5% as of June 2018. Cost per ASKs in pesos, excluding fuel, increased by 4.3% during the quarter. In terms of capacity, ASKs increased 9.3% during the second quarter of this year, compared to the same period of 2017, with international capacity growing at 13%.

Domestically, during the quarter, we increased capacity by only 2%, demonstrating our capacity discipline, which concurrently supported us in delivering increased domestic yields. The international capacity growth has been driven by our increasing intercontinental flying, which continues to perform well. For 2018, we will continue to manage our capacity with strict discipline. During the second half of the year, capacity is expected to grow between 5% and 6% compared to the same period of 2017. We therefore maintain our growth forecast for the year of high single-digit growth.

We continue to expect minimal domestic capacity growth in a range of between 2% and 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 grow by only 1 from 131 to 132 aircraft by the end of this year.

With regard to 2019, we are actively reviewing our operating plans and as of today, anticipate mid-single-digit ASK capacity growth. From an operational perspective, we continue our drive focusing on what our customers truly value, which is operational excellence. I am very proud to announce that during 2018, so far, we have delivered 139 days with 100% completion factor. That is 100% of the planned flights operating on the day. Recently, for example, we achieved our run of 33rd -- 33, sorry, consecutive days with 100% operational reliability. This means that we operated 20,000 flights in a row without a single cancellation.

During May of 2018, we celebrated our joint collaboration agreement first-year anniversary. We continue to embed our working practices with Delta and remain on track to deliver MXN 200 million of synergies across a 5-year period, supporting the company and in its aim of delivering a sustainable double-digit operating margin. Our teams are actively engaged with their Delta counterparts to continue developing our working relationship.

To wrap up on the second quarter of 2018, I would like to take this opportunity to thank all my colleagues at Aeroméxico for their commitment in achieving this robust set of results in what has been a challenging quarter.

Before finalizing, I want to mention that today, you will have seen that with regard to Club Premier, Aeroméxico's loyalty program, Aeroméxico made a nonbinding proposal for the acquisition of the shares currently held by Aimia in PLM. Aeroméxico's strategic plan is saying that consolidating the airline as Mexico's and Latin America's premium revenue carrier. An attractive loyalty program constitutes a fundamental building block of this strategy. In our view, PLM has to focus on enhancing loyalty to Aeroméxico among club premium members. As such, we have informed Aimia that Aeroméxico will not be expanding its contract with PLM beyond its current expiration date and that given the long-term intention of Aeroméxico to take full control of its loyalty program, Aeroméxico does not consider an IPO with PLM as an acceptable option. For this reason, it is our view that the best long-term solution for all stakeholders is for Aeroméxico to acquire the equity stake currently held by Aimia.

Finally, I would like to take this opportunity to say that we're looking forward to working with the new Mexican government as it takes office next December. There are significant opportunities for us to work together to deliver real value for our customers for the industry and for the broader Mexican economy.

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 challenging economic environment, characterized by higher fuel prices, a depreciating peso and relatively high inflation rate, we delivered an operating profit of MXN 651 million, representing a margin of 3.8%. As Andrés mentioned, this is our 33rd consecutive quarter of positive operating profit. Our EBITDAR reached MXN 3.8 billion with an EBITDAR margin of 21.7%.

With respect to our top line, during the quarter, we achieved revenues of MXN 17.3 billion, a 19.1% year-on-year increase. These increases in revenues were mainly due to an 18.3% increase in passenger ticket revenue, with domestic passenger ticket revenue increasing by 14.2% and international passenger ticket revenue increasing by 21.5%. Also an 18.5% 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 16.5% increase in cargo revenue, mainly driven by the 787's extra cargo capacity. Finally, we realized a 74.9% increase in other revenues, driven by ground handling and maintenance services to third-parties and increased commissions on interline and franchise sales.

From a cost perspective, fuel prices, a depreciating peso and relatively high Mexican inflation created headwinds for our cost base for the quarter. With regard to fuel, market fuel prices in pesos increased 48.1% compared to the second quarter of 2017. For the company, however, the average blended economic fuel price per liter in pesos, including hedging benefits, increased 21.8%.

During the quarter, we registered a MXN 939 million benefit associated with profits from the unwinding of our 2018 fuel hedge position. It is important to mention that we maintain our hedging positions for 2019 using call options equivalent to 50% of the company's estimated fuel consumption. Second quarter fuel expenses, including hedging benefits, amounted to MXN 4.4 billion, a 30.3% year-on-year increase, driven by higher peso-denominated fuel prices and expansion of the operation.

With respect to exchange rate, during the second quarter, the Mexican peso depreciated on average 4.6% against the U.S. dollar, with respect to the same period of 2017. This had a negative impact on several operating costs, including aircraft leases, maintenance, reservations, communication and traffic. From an inflation perspective, inflation ran at almost 4.7% for the 12 months to June, with pressures versus last year being felt primarily in salaries and related costs, with inflation-linked increases, and to a lesser extent, in our selling and administrative cost lines. 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 cost in dollars per ASK, excluding fuel, decreased by 0.3%.

During the quarter, net income amounted to MXN 112 million. We registered a positive foreign exchange rate impact of MXN 272 million as the peso depreciated by 8.6% by the end of the second quarter compared to quarter 1 period. And the functional currency adjustment exceeded the impact of exchange rate-related operating adjustments.

Our cash flow generation remains strong with positive net cash flow from operating activities of MXN 4.6 billion. Our cash balances at the end of the quarter amounted to MXN 14.9 billion, representing cash-to-revenue ratio of 22.4%. Also in spite of the challenging economic environment, our leverage has remained stable with adjusted net debt to EBITDA of 5.2x, in line with previous quarters.

We closed the second quarter with 133 operating aircraft, including 61 Embraer jets of the Embraer 170-190 family as well as 55 Boeing narrow-body aircraft, including 2 brand-new 737 MAX 8s and 17 wide-body aircraft, comprising 9 787-8s and 8 787-9s.

As Andrés mentioned, we are now operating our wide-body [seat of forma] Dreamliner aircraft and have moved from 5 aircraft families at the beginning of the second quarter of last year to only 3 families today. The Embraer 170-190 family, the Boeing 737 family and the Boeing 787 family. This will bring efficiencies in many areas including crew training, maintenance, inventory and fleet productivity.

During 2018, we will continue to demonstrate capacity discipline while pursuing our upgauging strategy. We expect to close this year with 132 aircraft, only 1 aircraft above last year. We expect our fleet to include 61 Embraer jets from the Embraer family as well as 54 Boeing narrow-body aircraft, including 5 new 737 MAX and 17 Dreamliners. Also as Andrés mentioned, we recently celebrated the first anniversary of our joint collaboration agreement with Delta. We will be investing MXN 10 million during 2018 to align our products with Delta, offering our transborder passengers the best customer service possible. We are focused on investment -- on investing for our customers deliver the right value. This concludes my remarks. Thank you, once again, for joining us on today's call. And now we would like to answer any questions that you may have.

(Operator Instructions) Our first question comes from the line of Mike Linenberg with Deutsche Bank.

Two questions here. Andrés, can you just -- your comments around your bid for the stake of PLM that you don't own, that's held by an Aimia, did you mention that you were ending a service contract with them or -- I mean, I know that's separate, I just -- I want -- I didn't hear the whole thing.

So what we mentioned in the press release and in my remarks is that it is our intention not to extend the contracts that we have, when they are due -- not before -- when we have the obligation by contract, but then we will not renew them.

I see. That's not the -- isn't there a contract that you have that runs out through like 2025 or 2030? Is that the one you're referring to? Or is there something else that's sooner?

There are different contracts. One is associated between PLM and Aimia. And one does indeed run to 2030, that one, but the other contracts regarding the credit cards, for example, expire before that.

Okay. That's a helpful clarification.

It's different timing, yes.

Okay. Okay. Perfect. And then just my second question, and we heard this from some of the U.S. carriers that talked about demand to some of the beach markets. They called out Cancún as coming under pressure, where the volumes were still decent but the fares that they were getting for those volumes were a bit lower. And they attributed that to some of the headlines that have been out. I realize some of these negative headlines, this has been ongoing for probably more than a year, so it's an ongoing issue. But I did get the sense that maybe it's become more pronounced recently to the extent that they're actually considering scaling back some of their supply to the Mexican beach destinations. And again, this is from the U.S. carriers. Anything that you're seeing on that front, either confirming and/or maybe capacity adjustments by yourselves in response to the same issue?

Yes. Well, as in -- clearly, in our results, the yield development and the revenue per ASK development has been very, very positive. However, in this context, one of the few area of weakness, not always in terms of price environment, is the transborder market. After the Open Skies, we -- and we discussed this in the past, there has been a surge in capacity in the transborder market, particularly in the beach markets in Mexico. So in my point of view, I think it has to do more with excess capacity in those markets rather than travel alerts, not because we -- in terms of volume, they are solid, we see also higher occupancy rates in the hotels. So it has to do more, again, with too much capacity in those markets in our view rather than anything else.

Our next question comes from the line of Ruben López with Santander Bank.

Andrés, my first question is also on pricing, but on the domestic market. You had a double-digit increase in domestic yields, which is a huge acceleration versus what we saw in prior quarters. Of course, this has to be with the capacity discipline, but still it seems that you have been able to increase yields without sacrificing load factor. So can you give us more color on the numbers you're seeing in terms of pricing? And my second question is on hedges. You had a relevant benefit in this quarter given the hedging -- unwinding of hedging positions, just wanted to know if we already saw most of the benefit on this quarter? Or we could see similar impact for the upcoming quarters?

Thank you, Ruben, yes, going to the first part of your question, in terms of pricing in the domestic market, I think it has to do with different factors. And the most important one is capacity discipline. I think that's key and that has helped. Second is, we've been enhancing our product. We have now a more homogenous product, as Ricardo mentioned, but we only have 3 different types of aircraft. So that helps us in producing a consistent product across the board. Our operational excellency scheme, this, for us and what we've seen the most important part for a client is to have good operational performance reliability. Now the worst thing that you can do to a customer is canceling the flight. So the fact that we have the best-in-class, not only the best in Mexico, I think we have one of the best in the world type of operations. That helps us also to improve our pricing. So it's a combination of these different factors. Moving to hedges before Ricardo can make a comment, just let me stress one part. In the past, we have been very, very consistent across the last 15 years to hedge. So every year, we all -- we have always hedged at least half of our consumption. Most of the time, we haven't used those hedges. No, they have been out of the money and we've reflected in our P&L the cost of those hedges. This time -- we prefer not to use it like a -- more like a life insurance. No, it's better not to use it. But given the surge in oil prices, they kicked in, they were in the money and we actually sold them in a very good time. So Ricardo will -- can provide more detail. What this basically, what we did is we unwinded all the hedging position for 2018. But as Ricardo explained, we continue to recover starting January 1 of 2019. And also the timing of this is important, because when oil prices go up, domestic and international yields do not reflect the new oil price environment immediately. So our strategy was to use those hedges right away, but -- and gradually increase rates to reflect the higher oil prices and the higher exchange rate. And now the pricing environment today is more in line with the level of oil prices of $73 than what it was 3 months before. So for the second half of the year, we have a better pricing environment than what we have at the end of the first Q and starting the second Q.

Yes. Thank you, Andrés. Just to complement, Ruben, we sold our position for 2018 and all -- let's say, we recorded all benefit in the second quarter. We have the position for 2019, and of course, we are evaluating all the time if there's an opportunity to get the benefit. Our position is really not a speculative position, it's really to hedge our risk. So in that sense, our first, I would say, approach would be to keep the position. I like to protect these rates, but if we see an opportunity in the market where really we can sell the portfolio and obtain benefit, that's something that we will do.

And just one final comment. As we have also mentioned in the past, one line of defense is the hedges, then you have to reflect some in domestic yields and international you've seen the yield environment. And finally, when oil prices creep up to certain levels, you need to reduce capacity and be more disciplined. That's why I might want to stress that for 2019, we are reducing our ASK growth this year from high single digits to mid-single digits in 2019. And that's really the best way to confirm a higher fuel price environment going forward.

Perfect. And just a quick follow-up on ASK guidance. Can you give us the breakdown on domestic and international growth for 2018 -- 2019, sorry?

We haven't yet finalized the plans for 2019. But it will be, again, probably more concentrated on the international side. So we expect probably growth in international in high single digits and growth in the domestic in low single digits, to provide, again, an overall growth of around 5% to 6%, which is mid-single digits.

Our next question comes from the line of Mauricio Martinez with GBM.

I have a few questions. My first one would be regarding the yields on international front, which are very strong yields. And so if you can share with us, which is the main driver there. And if this is related with some sort of recovering transborder market? And in the same line also, we saw in the local media news regarding closing of the Mérida-Atlanta route, so maybe if you can give us more color and the status of the expansion plan for the transborder market with Delta?

Mauricio, yes, in -- the reasons for the pickup in international yields are pretty similar to the ones in the domestic market. So it has to do first with a consistent product. I mentioned the fact that we phased out all of our 777s, and now consistently in every wide-body, it's only Dreamliners. So we have a best-in-class product for Europe, for Asia, for South America and that has helped to strengthen our international yields. Also we have invested and that's also a reflection of the slight pickup in cost, we have invested in new products for the passenger, particularly in international market in terms of better entertainment, better food, and that also helps us reflect that in higher international yields. Operational excellence, again, is key, as part of that pickup. If -- following what I mentioned before, one area of weakness that we see is the transborder market, based, again, because of the capacity surge after the bilateral agreement. So in all international arena, probably the transborder market -- it's not terrible, but it's lagging, the Europes or the Canadas or the Central and South Americas. In terms of the Mérida-Atlanta route, as it happens, we have added additional routes after the JV with Delta. Some of them have worked very well, the ones that we continue to operate. Others that do not work well, as is the case with Mérida-Atlanta which, again, it didn't work. We have a policy of trying and that's our business, not to try as much routes as we can, but if in a period of, say, between 3 months and 6 months, the -- simply we cannot have a profitable route, we decide to close it. And that was the reason why we stopped flying it. However, we've added, again, new ones. As I mentioned, the ones in the call, in my remarks. Also one that I didn't mention that we just announced yesterday, Querétaro-Detroit. So we continue to see different options and those are mainly directed towards secondary cities in Mexico to Delta hubs. So Querétaro-Detroit is a great example of that type of program.

Great. Very helpful. And regarding the announcement from Aimia, now that the company has apparently rejected the proposal, are you considering to raise the offer?

Well, what I -- what we released this morning, it's a reflection of what we have been working with them. At the end, triggered by the Air Canada offer, which was disclosed yesterday, then if you look at Aimia, excluding Air Canada, most of it is PLM, and we have been discussing with them in the past the possibility of acquiring this 49% and this is what we reflected in the press release and in my remarks. We continue to engage with them. We are partners. We work with them in PLM and we have a very good relationship, but we feel that the best long-term solution for us and for them is for Aeroméxico to acquire their 49% in PLM, and this is what we will continue to engage with them and hopefully we'll have an agreement soon.

Our next question comes from the line of Victor Mizusaki with Bradesco.

I have just a question about your fleet plan. Late last year and early this year, there was a big discussion that maybe Aeroméxico could replace the fleet of E-jets. I'd like to know if you can give us an update of the current status here.

Victor, yes, we continue to analyze the possibility of modernizing our regional jet fleet. Today -- now, as it was highlighted by Ricardo, we only have a single family in Aeroméxico, because the E-175 and E-190 is the same carrier. So we have, again, a great consistent product there. However, we have now new options, both in Embraer and in Bombardier. So what we continue to analyze is either replacing that fleet either by these 2, by the C series of Bombardier or the other option that we have is to continue with our E-190 and E-170s, particularly with 190s to upgauge as there are, the number of slots, particularly in Mexico City is limited. So we put a pause on the program, because we just have the elections. There is, as you know, the discussion about the new airport, whether -- if it's going to continue; hopefully, we feel that Mexico needs a new infrastructure and hopefully the new airport continues to be built. But regarding those uncertainties, it's better to wait and see. Once we have clearance on that, then make a decision. And we continue to have these 3 options that I mentioned.

Okay. And just a last one here. I mean, we saw another airline with a big fleet of E-jets and they started to replace the entire fleet and they took a big loss. So is there any risk that we can see the same thing happened with Aeroméxico, depend on -- I mean, the residual val of these jets? I mean, is this a concern or you do not see this as a risk?

Can you please rephrase the question? Sorry, I didn't catch it.

Yes, my question here is if -- is there any risk in the residual val of the E-jets. I mean, if you'd started to replace those jets and then you need to sell, if there's a risk that maybe Aeroméxico, you take a loss with this fleet?

Most of those -- of the E-jets are leased. We own only a few, but Ricardo, can you...

Yes, we own 10 Embraer 190s. The idea, of course, any decision that we make is something that would take a few years. So the idea is that we will probably be replacing the aircraft, no -- and of course, we will start with all the leased aircraft and try to use or take advantage of the Embraer 190s as much as possible. So that is the basic scenario, and we will continue to focus on that. But it's very good to say at this point, no?

(Operator Instructions)

If there are no further questions, we thank you for attending the call. We look forward to seeing you in the -- in our next quarter, third Q. And as always, please be assured that we will continue working hard to strengthen the airline and improve our profitability going forward. Thank you very much, and see you soon.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.