Grupo Aeromexico SAB de CV (AERO) 2019 Q4 法說會逐字稿

Good morning, and welcome to Grupo Aeromexico's Fourth Quarter 2019 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. 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 in 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, sir.

Thank you. Good morning, and thanks for joining us for our fourth quarter 2019 results presentation. Speaking on the call today are Aeromexico's CEO, Andres Conesa; CFO, Ricardo Sánchez Baker; and Chief Commercial Officer, Nicholas Ferri.

As per usual, Andres 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 to our CEO, Andrés.

Good morning, ladies and gentlemen, and thank you, Jonathan. The fourth quarter of 2019 delivered a robust set of financial results, complemented by strong operational performance. We delivered improvements at both a unit revenue and cost level in spite of the grounding of the MAX.

At the end of 2019, we have 6 Boeing 737 MAX grounded here in Mexico City, and as of January 2020, an additional 9 planes, which have been produced but have not been delivered due to the grounding of the aircraft.

In December 2019, we reached a partial compensation agreement with Boeing to mitigate the financial impact arising from the temporary grounding of the plane, which happened since March 2019. The details of this agreement with Boeing are confidential, and therefore, I am not able to go into more detail other than to say that we believe the outcome which was fair for both parties. The reported financial results reflect certain elements of this agreement. Other elements under the same agreement will be accounted for over time as a reduction in the cost of aircraft, which is expected to decrease depreciation expenses going forward.

The agreement covers the operational delays up to a certain date beyond which we would be entitled to sit again with Boeing and negotiate further compensation. We remain in constant communication with Boeing as well as the national and international aeronautical regulatory authorities and are looking forward to the aircraft reinitiating operations once it has been recertified. Our expected date for reentry to service of the plane stands today at September 2020, in line with several other carriers.

For the fourth quarter 2019, Aeromexico delivered an operating profit of MXN 1.7 billion with an operating margin of 10.1%. This is an improvement of MXN 2.7 billion year-on-year and a 15 points -- percentage point improvement in operating margin. Our EBITDAR also strengthened, totaling MXN 4.7 billion, which is a MXN 2.3 billion year-on-year improvement for an EBITDA margin of 27.2%, a 14.3 percentage points improvement versus the last quarter of 2018.

Our diversified network and hub-and-spoke business model have continued to perform robustly. We have continued to roll out our Branded Fares product across our entire network. Our enhanced segmentation drove our revenue per ASK and yield increased in dollars of 0.9% and 1.2%, respectively, during the quarter.

In the market, we continue to see aggressive capacity growth, particularly from domestic LCCs, who collectively grew capacity over 15% in spite of a softening economic environment.

GDP growth expectations for Mexico have recovered compared to 2019 with a 1% year-over-year growth projection for 2020 GDP versus a flat GDP growth during 2019. This is according to the most recent world economic outlook from the IMF.

Turning to our cost base, for the quarter, year-on-year per -- cost per ASK in dollars decreased 8.4%. Cost per ASK, excluding fuel, was lowered by 8.2% during the quarter, highlighting Grupo Aeromexico's ongoing focus on optimizing unit costs.

Our continued focus on customer satisfaction is also delivering enhanced results. By the end of 2019, our Net Promoter Score, NPS, has continued to improve year-over-year, reaching an annual historical high of 36.9%.

Our digital transformation continues to enhance our product proposition by offering more interaction points across the traveler journey and we are already seeing the benefits of these investments.

During 2019, 1.3 million customers downloaded our Aeromexico App. This improves our customer experience through personalization, reduces waiting and processing times in airports as well as increasing [off-sales] and cross-sells with our passengers. We are proud of these results and very much look forward to enhancing our digital environment further. From an operational perspective, we continue our drive, focusing on what our customers truly value, which is operational excellence.

I am proud to announce that during 2019, we were able to deliver 270 days with 100% completion factor and 54 days during fourth quarter of 2019, that is 100% of the planned flights operating on the day.

With these numbers, 2019 has been one of our best operational performance years of the last decade, despite not having the MAX flying.

During 2019, we achieved a run of 69 consecutive days with 100% operational reliability, that is close to 40,000 flights in a row, operating as planned without any cancellation.

During 2019, Aeromexico carried almost 21 million passengers, reflecting the depth and breadth of our network and the value that we're able to bring to the Mexican economy. We expect to continue enhancing our network during 2020, and I am pleased that as we move into the first quarter of this year, we're already seeing benefits of our business strategy and our commitment to capacity discipline.

Capacity during the fourth quarter was lower 4.9 percentage points compared to 2018. Again, this is primarily due to the grounding of the 737 MAX. From a full year perspective, capacity was down 3.4% compared to the full year of 2018. For 2020, based on the expected entry to service date of the MAX, again, which we expect in September, we are forecasting capacity growth for the full year to be flat to marginally positive. We will provide a further update on the outlook as we obtain more information about our -- the 737 return to service.

In 2019, we completed rolling out Free Messaging on board in our 737-800 fleet, and we have completed the rollout on our 787 fleet. Up to the fourth quarter of last year, Free Messaging on our fleet has increased our take rate from 2% to 25%, thereby increasing the opportunities to optimize additional revenue streams. Also, during 2020, we continue to focus on delivering a differentiated service, investing where our customers get real value with strategic CapEx allocation to enhance our customer experience, whether that be from a hard product or personalized customer service perspective.

To support our strategy, we successfully concluded the offering of senior unsecured notes for USD 400 million earlier this month. Proceeds will be used for liability management purposes, CapEx investment, including fleet and general corporate purposes. This issuance was -- which was already subscribed by almost 3x, reflects the confidence of international investors in Aeromexico. This is a great achievement for us as a company, as it is the first time in decades that our Mexican airline has -- have access to international unsecured bond market. So I want to use this opportunity to congratulate all of our team in delivering this important milestone.

To wrap up, on the fourth quarter end of 2019, I would like now to thank my colleagues here at Aeromexico for their commitment in achieving this great set of results in a complex environment.

This concludes my remarks, and I would now like to hand over to Ricardo, who will provide more detail on the financial results for the 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 an encouraging quarter in which Aeromexico delivered enhanced EBITDAR and operating profits, resulting both from an increased revenue per ASK and a reduced cost per ASK.

EBITDAR amounted to MXN 4.7 billion for the quarter, representing a MXN 2.3 billion improvement versus the same period of 2018, a 14.3 percentage point improvement. Aeromexico delivered a robust operating profit of MXN 1.7 billion, representing a 10.1% operating margin for the fourth quarter of 2019. This represents an improvement of MXN 2.7 billion and a 15 percentage point increase in operating margin year-on-year. We also delivered improved cost performance due to our strict control policy as well as the decreasing capacity, the exchange rate appreciation and the partial impact of the Boeing compensation agreement.

Our cost per ASK in dollars decreased by 8.4% year-on-year during the fourth quarter. Cost per ASK, excluding fuel in dollars decreased by 8.2%.

During the quarter, the company recorded net MXN 194 million of exchange rate-related gains due to our MXN 2.7 appreciation against the U.S. dollar. This net effect includes functional currency adjustments and the impact of exchange rate-related operating adjustments.

During the fourth quarter, the company registered MXN 498 million in interest cash payments. Additionally, the company registered MXN 968 million year-on-year increase in net financing costs due to the mark-to-market valuation of interest rate hedging and accounting-related items associated with IFRS 16.

In the last quarter of 2019, we adjusted our effective tax rate to 29% from a preliminary number of 35%. This adjust resulted from a better financial performance during the fourth quarter of 2019, including the foreign exchange gain realized in the fourth quarter, which offset prior losses.

This revised tax effective rate did not represent the cash outflow, since it reflected our deferred tax asset adjustments. Grupo Aeromexico reported a net loss of MXN 57 million for the fourth quarter of 2019.

For the full year, we generated an operating profit of MXN 2.8 billion, for a 4% operating margin, an improvement of MXN 2.8 billion versus last year.

EBITDAR was MXN 15 billion with a margin of 21.4%, an improvement of MXN 2.4 billion and 14.6 percentage points compared to 2018.

Our cash flow generation remained strong. We generated MXN 4.3 billion of net cash from operating activities during the fourth quarter of 2019. For the year, net cash flow from operating activities amounted to more than MXN 11.1 billion. Net cash flow used in investment activities amounted to MXN 4.7 billion, while MXN 7.2 billion were used in financing activities, including MXN 6.3 billion for leases and MXN 918 million in financial debt.

In this context, our cash balances at the end of the quarter represented a cash to 12-month revenue ratio of 13.2%. Also, at the end of the fourth quarter, our leverage, measured as adjusted net debt-to-EBITDAR stood at 3.6x, improving from 4.6x at year-end 2018, both figures measured under IFRS 16.

As Andrés mentioned, we successfully accessed the international capital markets with a USD 400 million senior unsecured notes issuance earlier this year. The offering follows our successful roadshow target in major cities in the United States and Europe, and was around 3x oversubscribed. Proceeds from the offering will be used in roughly 3 equal parts, to pay short-term debt and extend the expiration of our debt portfolio from 3.9 years to 4.5 years. Capital expenditures associated to fleet and general corporate purposes, mainly strengthening our cash to revenue position. We are proud of this achievement, as it reflects the confidence of international markets in Aeromexico.

Regarding fleet, we closed 2019 with a fleet of 125 aircrafts, including 19 Boeing 787s, 50 Boring 737s and 56 Embraer aircrafts.

In terms of full year 2020 capacity growth, we expect to be between 0% and 2% for the full year. Our growth plan will be partially dependent on the timing of the return to service of the MAX aircraft and the agreed delivery scheduled with Boeing.

Meanwhile, we continue to tactically explore opportunities for rightsizing our 2020 fleet.

This concludes my remarks. Thank you, once again, for joining us on today's call. Andrés, Nicolas and I would now like to answer any questions that you may have.

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

I just -- I have a few here. Andrés, you mentioned that as you look out into the March quarter of 2020, you talked about the business strategy and capacity discipline as having some influence on what you were seeing with respect to your revenue trends in the March quarter. Can you elaborate? I mean, your unit revenue -- or RASK was up in the fourth quarter in dollar terms. So are you saying that we're seeing a continuation of that trend? Or maybe an acceleration of that trend in March Q of 2020?

Let me make some comments, maybe Nicolas also want to add on that. Yes, I mean, as we will learn to live better now, I guess, without the MAX, because you know what happened. Last year, it's not only the MAX being delayed for so long, for a year, but what happened is that every month, we've had to adjust to change. And this time around, not given the recent Boeing's position in the sense that they were expecting the aircraft back around the summer, that is allowing us to adjust better because now we have a 6-month window instead of having 1- or 2-month window. So we are working on that, and that should help to continue seeing an improvement on RASK in dollars. RASK, we like to see in dollars because 70% of our ASKs are international ASKs, and only 30% are domestic. So any movement in the exchange rate has an important impact when we measure the RASK in pesos. So we feel that the better -- the best way to see how we're doing is RASK in dollars, and we are, again, making effort every day to improve that against a combination of both yields and those factors.

Nicolas, do you want to add something?

Sure, Andrés. Thank you. Very, very briefly from an operating fleet perspective, you are going to see slight contraction still in Q1. We have, maybe to elaborate on Andrés' point, we have taken significant steps in terms of strengthening the quality of our scheduled offering in Mexico, and international as well, but particularly in domestic, by flying to the right places at the right time as well. And that, we are convinced, in addition to Premium Loyalty and Branded Fares and all the things that have been discussed before, will have a positive impact on RASK. So I'm not giving you guidance, but I'm telling you, I think we'll see continuation of what we've seen so far, and that in itself is actually very positive.

Okay. And just a follow-up on the capacity growth of being flat to slightly positive for 2020. How does that compare domestic versus international? Are they similar? And how does -- what is the pacing of that through the year? Is it roughly similar through the quarters? Or is it more back-end loaded? How do we -- how should we think about that for modeling?

Probably, capacity will still be lower in the first 5 months of the year, given -- Nicolas mentioned, that we are expecting to operate with less aircrafts. But as starting the summer, we -- our projection is to have at least the same number of aircraft as we had last year, and with the MAXs back starting September, hopefully, sooner, if we can fly the plane sooner, we would see an increase in ASKs.

Regarding -- that's what we have to do along the year. Regarding the composition between domestic and international, we will try now to favor a little bit domestic since we have been, in the past, basically concentrating on international markets. So -- but it's not a big difference. If you look, say, if it's flat, it will be plus 1, plus 2 and minus 1, minus 2. So it will be relatively -- we will continue to see growth in our wide-bodies. We have one more share than what we had last year. And we are expecting a couple of more wide-bodies before the end of the year, so that our expectation is to close the total wide-body fleet at 21 planes in December.

Our next question comes from the line of Pablo Monsivais with Barclays.

I just have one quick question. And can you please shed more light on why do you have in peso terms fell year-on-year? And why is -- and what is the read-through of demand and competitive environment from this?

Pablo, Nicolas here. As Andrés said, we really do want to look at yield in dollar terms for all the reasons expressed below -- or expressed before. So I'd rather focus on the plus 1.2 yield growth FX adjusted, and I think I'd probably just like to leave it that.

And to complement, Pablo, what Nicolas just mentioned, we continue, as we described in the previous call, to see lots of pressure in the deal environment in the nondomestic markets. As I mentioned during my remarks, with capacity growing 15% and an economy that was flat last year, the only way to be able to fill those seats is by putting pressure on prices. So we continue to see that, and we continue to be of the view that we will see consolidation soon in the market because there is no way that we can -- this can continue going forward.

And on the international market, have you seen some pressure as well in terms of the competitive environment? Or kind of a weak demand because of the GDP? Or it's just domestic right now?

No. I will say, our wide-body operation internationally is doing very well. We have a great product. We have proved that it's much better than our competitors where we fly in Europe, in Central and South America, in Asia, even. So we -- and we will continue to invest in that because we think that's the key. We develop great talent, that makes all the difference. So on the narrow-body international, Central and South America has been a challenge, but more because probably, as I mentioned also in the previous call, we kind of overexpanded in the past, so we made some adjustments. As you know, we canceled a couple of cities in Colombia, we also canceled one, Republica Dominicana, we canceled Belize. So we did that because of poor performance, and that is paying back, that strategy. And on the transborder market, we are doing much better. If you look at how the market has corrected after Open Skies 3 years ago, when everybody entered, some of the operators have left, again, because they -- the reason is that they haven't done as expected. And we, together with Delta, are consolidating our position. So we saw a big improvement in the transborder market, but our idea in 2020 is to continue offering more options, more frequencies to where we serve together with Delta. Obviously, having the MAX back is very important for that strategy to consolidate.

Okay. And I just have one more question, if I may. It's regarding cost, you did an excellent job on lowering costs. And the salaries, for example, it was a huge improvement. And of course, maintenance expense. What can we expect going forward on this? Just a consistent effort at relatively the same level? Or a further improvement?

Yes. We think the cost will continue to perform in a positive way. We have a strong pipeline of initiatives that will continue to help us on that front. Of course, the MAX would play a key role, but we think that upgauging, for example, in the fleet, that is a process that we have been doing and that we will continue. And of course, we will accelerate once the MAX is back. This is going to help us. We also have a lot of work going together with Delta. As you may remember, we have a lot of synergies in different areas working together with Delta, associated to fleet, associated to purchases here, and purchases including fuel or technical parts. So we are working very closely with the Delta team to find synergies, and that -- those synergies will continue to be reflected. And also, as you know, going forward with the enhanced productivity contracts that we have on the labor side, that as we grow, we are able to draw more on these more productive contracts. This will also help us to bring cost down. So a little bit -- these 3 big lines of work will support our cost performance in the following years.

Our next question comes from the line of Eduardo Alvizouri with GBM.

I just wanted to know if you could elaborate on how the Branded Fares is impacting ancillary revenues. And how should we expect this to improve RASK throughout the year? And what are your expectations for RASK performance over these years? And if you have any goals for the long term regarding this metric?

Eduardo, this is Nicolas. As mentioned, ancillary revenue really is our main tool to, particularly, in the domestic market, both system-wide, but if you focus on domestic, to really ensure that we have the right offer at the right time to the right customer. So we track that very, very carefully. As part of our ongoing developments, particularly in the digital space, what you're seeing is a lot of the attributes perhaps of the original Branded Fare offering being kind of moved onto a different fare site that we use and therefore become part of the fare as opposed to tracking it separately as the traditional ancillary view.

On an aggregate basis, what I would tell you is, we're very happy with the way things are going in this space, even when you normalize for the changes in fare attributes versus how we used to track for ancillary, it is positive on both fronts. So it is definitely a contributor to RASK. We don't break down the specific number, but I will tell you, it would be a very, very different story without the Branded Fare evolution that we have. I should add that we're completely aligned with Delta on this, and you can see probably a couple more tweaks moving forward in terms of how we continue positioning those Branded Fares products into domestic Mexico. I hope that answers the bulk of your question, let me know if it doesn't.

(Operator Instructions) Our next question comes from the line of Matthew Dever with Citi.

So I know you just completed a new bond issuance. I'm curious what your net leverage target that you're comfortable getting to is, and any timing with that. Also, whether or not that that includes or excludes operating leases?

As a part of IFRS 16, the methodology change starting in 2019, before as you know, this is -- we're capitalized at 7x. And this time around, we need to make sure and do include whatever is the times left on the contract, as part of the total liability of the company. So what you see for the 4Q, it's our earnings to growth total net debt-to-EBITDAR, which stands at 3.6. So it's a big, big improvement because, again, it's not only that, but we also -- as Ricardo said in the cash flow, in the 4Q and in the whole year, we paid down in nominal trends some debt. So we took into composition of a higher EBITDAR, less financial debt and also this change in leases.

Our idea -- our target is to have that around 3%. So we still have around 0.6 points of improvement. But again, looking back at where we were 3 years ago, when it was close to 5 -- between 5 and 6, it's a big, big change. So I don't know, Ricardo, if you want to complement on that?

No. No. I think that's covers it. As Andrés mentioned, our target is to reach 3x in the short to medium term.

Our next question is a follow-up from the line of Eduardo Alvizouri with GBM.

Just another quick question, could you give us an update on how is the status with Aimia? And what to expect regarding the Club Premier business?

Well, just as you might remember, a few months ago, we did an offer to Aimia and it was not accepted. So we have continued to work on the program, and basically, there has not been any new events related to that. We continue to work with Aimia on PLM, trying to strengthen the program, and that's how we expect it going forward. I think if something comes up, of course, we will let you know. But at this point, given that there was no interest in doing something, our approach has been to strengthen the program as much as possible. We believe that if the program is strengthened, that would be good for Aeromexico. It will be good also for Club Premier, and that's our target now.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Mr. Conesa for any final comments.

Thanks, again. Thanks for joining the call. We look forward now just in a couple of months with the first Q numbers. And please, any follow-up questions, let us know to Jonathan, the team or any one of us, and thank you again. Have a great day.

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