Grupo Aeromexico SAB de CV (AERO) 2018 Q3 法說會逐字稿

Good morning, and welcome to Grupo Aeroméxico's Third 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 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 third 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 insights into our quarterly performance and results, and Ricardo will then address our revenue, costs and cash flow performance. There'll be an opportunity for questions at the end of the call.

So now I will turn the call over to our CEO, Andrés Conesa.

Good morning, ladies and gentlemen, and thank you, Jonathan. This has been one of the most challenging quarters for Aeroméxico and the Mexican aviation industry since 2008. While Aeroméxico delivered an operating profit of MXN 235 million during the third quarter, which is our 34th consecutive quarter with positive EBIT results, the company delivered a net loss of MXN 617 million.

Furthermore, with significant overcapacity in the marketplace, fuel prices are up $80 per barrel and inflation running at more than 5%, the operating environment remains complicated. The Mexican economy, too, is showing signs of weak performance, with the Mexican Global Economic Activity Indicator, IGAE, increasing by 2% year-on-year from January to July 2018 but at the same time, contracting 0.2% when comparing the second quarter with the first quarter of 2018, signaling some softness in economic activity.

As a result, we have made the decision to take immediate action, restructuring our fleet network to confront this reality, demonstrating, as we always have, a rational and disciplined approach to growth for the airline. Thus, the company will retire from operation 3 Embraer-170s and 2 Boeing 737-700s. We got have recorded the aircraft under consideration depending on company financial performance.

We have taken the decision to make the following network changes. We are suspending services from Mexico City to Boston, Washington and Portland; and services from Monterrey to Las Vegas, Tijuana and Veracruz; and finally, from Guadalajara to San Jose, California and Cancún. These changes in imply that ASK growth will remain flat in 2019 compared to 2018.

Tied to this, we will also be launching a cost optimization program, working with all key [integrators] to identify ways of further optimizing the Aeroméxico cost base. The airline will continue to focus on investing where our customer get real value. Our customer satisfaction scores showed that Aeroméxico is the carrier of choice. Year-on-year, working a Net Promoter Score increase of approximately 12%, thanks to our outstanding operation and performance and our service excellence culture.

During 2018 so far, that means as of yesterday, we have delivered 211 ran-perfect days. These are days without 0 cancellations in our whole network. We have also improved significantly our on-time departure indicator versus last year. Now in the middle of October, we are positioned for a record year of operational performance.

You may remember that during the first quarter of 2018, we rolled out our branded fare approach across Mexico, the United States and Canada, offering our customers more choice and a variety of price points. Thanks to the success of this launch, during September, we rolled it out across our entire network, offering our customers even more choice.

Aeroméxico carried almost 22 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.

In terms of unit revenue performance, revenue per ASK in pesos increased by 7.4% during the quarter, supported by average [seat] yields of almost 7% and a material increase in ancillary revenues due to our strategy of offering additional personalization and segmentation services such as upgrades and preferred seating.

From January to September of 2018, we increased our ancillary revenues from MXN 206 to MXN 238 per passenger, representing a 15.3% increase year-on-year.

Turning to our cost base, fuel price in pesos -- in peso terms increased by over 45% compared to the same period of last year, which negatively impacted our total operating cost by close to MXN 2 million. Our cost per ASK in pesos increased 15%, mainly driven by these higher fuel prices, but also by Mexican peso depreciation and by inflation running at more than 5% as of September 2018. Cost per ASK in pesos, excluding fuel, increased 7.8% during the quarter. In dollar terms, our cost per ASK was -- were lower by 1%, reflecting our ongoing focus on converting our cost base.

During the third quarter of 2018, we also took delivery of our fourth 737 MAX, but we kept to continue enhancing our current proposition across our network. We have 1 more MAX scheduled to join the fleet before the end of 2018.

For the rest of this year, we will continue to manage our capacity with great discipline. During this -- by this next fourth quarter of the year, capacity is expected to grow between 3% and 4% compared to the fourth quarter of 2017. We, therefore, are reducing our growth forecast for the entire year to a number between 8% and 8.5% growth.

To wrap up on the third quarter of 2018, I wanted to reflect on the Durango aircraft accident last July 31. As you know, we lost an Embraer 190 aircraft, thankfully, without any loss of life. It was without doubt, a truly humbling experience of (inaudible) and compassion and professionalism of [Aeroméxico] colleagues as they work with other passengers, the authorities and each other to overcome this very difficult situation. The preliminary report of the authorities attributed weather as the primary cause of the accident, and we will continue to cooperate fully with them as they conclude their investigation.

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 thank you for joining us today. As Andrés mentioned, this has been the most challenging year in the Mexican aviation industry since 2008, as characterized by overcapacity, high fuel prices, high depreciating peso and relatively high inflation rates. As a result of these challenging conditions, we delivered an operating profit of MXN 235 million, representing a margin of 1.3%. Our EBITDAR reached MXN 3.4 billion with an EBITDAR margin of 18.7%.

In terms of capacity, ASK increased 6.5% during the third quarter compared to the same period of 2017, with international capacity growing at 6.4%. Our international capacity growth has been driven by our increased intercontinental flight. Domestically, during the quarter, we increased capacity by 6.8%.

With respect to our top line, during the quarter, we achieved revenues of MXN 18.2 billion, a 14.4% year-on-year increase. These increases in revenues were mainly due to a 14% increase in passenger ticket revenue, with domestic passenger ticket revenue increasing by 10% and international passenger ticket revenue increasing by 16.8%. Additionally, we benefited from a 27.5% increase in ancillary revenue, resulting from additional personalization, such as upgrades and seat selection.

From a cost perspective, fuel price increases and the depreciating peso and relatively high Mexican inflation created headwinds for our cost base for the quarter. With regard to fuel, third quarter fuel expenses amounted to MXN 5.6 billion, a 53% year-on-year increase, driven by a 45.7% increase in the peso marketing price, there was a capacity increase of 6.5%. 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.

With respect to exchange rate, the Mexican peso depreciated, on average, 6.7% 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, communications and traffic.

From an inflation perspective, inflation ran at 5% for the 12 months to September, with pressures versus last year being felt primarily in salaries and related costs, with inflation-linked increase.

It has been critical to continue our focus on managing our cost base. And during the third quarter, we continued to obtain positive results on our ex-fuel cost base. Our third quarter total cost in dollars per ASK, excluding fuel, decreased by 1%.

As Andrés mentioned, during the quarter, Aeroméxico was also impacted by the loss of our Embraer 190 aircraft. The company has a comprehensive insurance program to cover any financial impact resulted from the incident. More importantly, we are grateful that there were no human casualties.

During the quarter, net losses amounted to MXN 617 million. We registered MXN 305 million of exchange-related losses as the functional currency negative adjustments were higher than the positive impact of exchange rate-related operating adjustments. The Mexican peso strengthened versus the U.S. dollar during the third quarter, moving from 19.87 at the end of June to 18.72 at the end of September.

Our cash balances at the end of the quarter amounted to MXN 11.2 billion, representing a cash-to-revenue ratio of 16.2%, a figure similar to the one registered last year.

The reduction in cash balances with respect to June mainly reflect the seasonal effects on air traffic liability. As in June, our customers pay to conserve their tickets for their summer traveling in advance. And also, the reduction in financial liabilities.

This was an intrinsic part of our cash balance for 2018 as we proactively manage the uncertainties surrounding the Mexican elections by performing much of our (inaudible) cash requirement before the end of June.

As a result of the challenging economic environment and softer EBITDAR results, our measure adjusted net debt to EBITDA now stands at 5.6 times.

We closed the third quarter with 130 operating aircraft, including 60 Embraer jets, of course, the E-170-190 family as well as 53 Boeing narrow-body aircraft, including 4 brand-new Boeing 737 MAX, and also, 17 Boeing wide-body aircraft comprising 9 Boeing 787-8s and 8 787-9s.

During the rest of 2018 and 2019, we will continue to demonstrate capacity discipline. As of this date, we are taking immediate action to optimize the size and shape of the airline. We still do work on operational [targets] of our fleet and are considering new changes to further play in difficult market environment. We will also be launching a cost optimization program, and we'll be getting more focused for investing only for our customers [nationwide.] This will allow us to enhance financial performance as we move into 2019.

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. Thank you.

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

I guess, 2 questions here. We just -- we got off the United call, and they talked about weakness in Mexico, specifically Cancún, in the third quarter. But they then -- as they talked about the fourth quarter, they said that they thought that their Latin America RASM was actually starting to recover, and they called out some of the news that we've seen in currency. But they also called out a strengthening of demand for business travel to Mexico. And I'm just wondering if it's something that you're seeing and maybe it's tied to the presidency or the President officially starting, I think, what, in the fourth quarter, anything on that, whether Cancún or business traffic that you can talk about, the trends that you're seeing, would be great.

I mean, looking at the -- if you look at the transborder market between Mexico and the U.S., it has been, in relative terms, soft. That's how I would characterize it because, as you know, after the bilateral, there was significant additional capacity going into the market. Some of that capacity is airlines having -- scaling back, including us. In fact, what we just announced, most of the adjustment is in the transborder market. So hopefully, we expect by taking these changes that our performance in the market will improve. If you separate business versus leisure, I would agree, meaning that business is relatively better, business-type market, than leisure market. So yes, we saw recently softness to the business, particularly Cancún, and those business markets are performing relatively better. But the transborder market as a whole is, I mean, relatively soft.

Okay, good. And then just my second question. The capacity growth for this year, which I think you said was 8% to 8.5%, it's been modified lower. Have you -- at this point, I realize it's early, but as you budget 2019, what sort of capacity growth are you planning for next year at this point? Any sort of -- even a rough number would be good. And if you had it domestic versus international, that would be great.

For 2018, for the fourth quarter, we're expecting ASK capacity growth of around 3.5%. This will mean that for the year, for 2018 together. That's why we expect ASK growth to be around 8% -- between 8% and 8.5% because we grew more in the first 3 quarters. For 2019, we are expecting capacity to be flat. We will see no growth. In the previous guidance that we gave in the last call, we were expecting high single digits. Now with the new revision, with this adjustment, it's flat. And it will be -- we still are making the final decision. But there will not be a significant difference between international and domestic capacity. Probably international will grow a little bit because we have an addition of 787 joining the fleet in the summer of next year. But that was -- it will be -- again, everything is on the neighborhood of flat, both domestic and international.

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

One of my questions was already answered. But the other one is on branded fares. Now that you expanded this strategy to more markets, can you share with us your initial thoughts on how are users reacting to this strategy?

I mean, we launched in all the network only a few -- a couple of weeks ago, in mid-September. So it's too early to give you some highlights of where -- how we are doing in branded fares in the rest of the network but the behavior of the adjustment by implementing branded fares at the beginning of this year has been positive. It's had some impact on ancillary revenues because part of those ancillaries now are reflected in the fares, as before, you buy fares that include type of [main] changes, date changes, those types of attributes. Then we receive less money for that, right? So that's why going forward, as we have more periods of observation, one key project in ancillary is you need to take into account is structural change that's happening by introducing branded fares.

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

So I was wondering, now that you are looking for a flat performance in 2019, how many aircraft issued then in that year? And then you're ending this quarter with 130. How many aircraft do you expect for 2019?

We will end the year with -- including this 5 aircraft, with 131 aircraft, right? In the original plan before this adjustment, we were planning to grow one aircraft, 132. So minus this 5, it will be 127. It is important to highlight that we own these airplanes, and that's why the flexibility that we have today in the airline have significantly improved versus in the last 10 years. So first, we own most -- now a significant part of our fleet. We have a very solid cash position. We have lower debts. We have a JV with Delta. So today, significantly different. I mean, we are riding through this cycle in a much stronger position. By owning these aircraft, what we're expecting is that we are suspending some of these routes. We are not operating those aircraft, but we want to maintain the flexibility to sell them or to ground them. Let me also stress, and this is very important, that we have -- based on our order of MAXs from 2012, we have many MAXs being delivered in 2020. So we have all the flexibility looking forward in 2019 and 2020 either to stay in the levels of 130 more or less aircraft. We can even go down to 120 or even more by selling the ones that we own or we can be as large as 150. So we have all the flexibility, which is highly valuable in these difficult times. And depending on the financial results, how this adjustment that we're announcing materialize, we will take additional decisions. And these will mean either grounding additional aircraft, selling aircraft or if things turn out positive, getting back this capacity during the next year or 2020.

And talking about profitability now. Now that we've seen very strong unit revenues for the last 2 quarters or 3 quarters, what are your expectations in terms -- for the fourth quarter and next year in terms of unit revenues now that you're pulling out capacity? And also, many of your competitors have been doing so, so also, talking about profitability for this quarter and next one -- and next year, what are your expectations on that?

We're rewriting our budget, I mean, for the end of this year because we are making these adjustments and obviously for 2019. Even though we posted very positive revenue per ASK numbers, as you've seen in this quarter growing around 7%, it's not enough. I mean, with oil prices going up 45%, even with revenue growing per ASK at 7%, it's not enough. We've seen that there is a significant overcapacity in the domestic market, and that's why we are taking these actions. If you look, I'll say, over the last 5 years, the accumulated inflation on airline ticket is way below price inflation, CPI, well below the peso depreciation, well below the increasing fuel prices. So ticket prices are lagging because of this overcapacity. And it needs to be corrected, and that's why we are taking these responsible actions.

Perfect. And if I may, my third question would be regarding PLM. Maybe we've seen -- maybe you can give us an update on the bid that you made a quarter ago. And also, we've seen some deceleration on the nonconsolidated companies and the profit in that bracket. So maybe you can share with us some of your thoughts. Or what are the main drivers there that make that slowdown?

On PLM, as we reported in the previous call, we made an offer to buy from Aimia the 49% that they own, an offer that was rejected. We haven't made another offer. We think it's a fair offer. As you may have followed in the recent past, programs that are public are now going back -- or coalition-type of programs going back to the airline, not only the Air Canada, with Aimia, but also Multiplus, also Smiles. We think that is a trend. We would like to acquire this 49% at the rate price and

(technical difficulty)

Yes. If everybody can hear me, I'm sorry but we had a loss of power here in the office. So I'm sorry. I will continue with my answer. I was mentioning on the PLM question that we haven't yet made another offer, that our offer was rejected but that we think it was a fair offer. And we will continue to insist because our idea is to, again, have full control of our PLM program.

Our next question comes from the line of Marco Montañez from VECTOR.

Compared with the previous quarter, both domestic and international yields showed a slowdown. I was wondering if you could give us some more color about this and if you have any estimate for the next quarter. And the second one, could you share with us the CapEx requirements for the next year?

In terms of domestic and international yields, in peso terms, they are behaving very similar. They rose between 6% and 7%, more or less. In dollar terms, international yields are up around 1.7%, 1.8%. Now with the -- most of the adjustment that we're making with the 5 planes has to -- is in international market, particularly in the transborder market. So hopefully, that can improve to bring up a little bit more of the yield in dollar terms, which, again, are not reflecting the cost pressures that we're seeing related to higher fuel prices. Moving to CapEx for next year, let me pass the phone to Ricardo.

Yes. Thank you. And in terms of CapEx, we are expecting for next year, basically they are similar requirement compared to this year, that is roughly around $450 million, including aircraft that have already been financed, engine overhauls and nonaircraft CapEx. But [it's in a period], it's slightly lower impact.

(Operator Instructions)

If there are no further questions, we'd like to thank you for joining the call. We apologize for the loss of power. Thank you for being here, and we look forward for the 4Q conference call. Thanks, and let us know if you have any further questions. Goodbye.