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Edited Transcript of AEROMEX*.MX earnings conference call or presentation 22-Apr-20 3:00pm GMT

Q1 2020 Grupo Aeromexico SAB de CV Earnings Call

Mexico D.F. Apr 28, 2020 (Thomson StreetEvents) -- Edited Transcript of Grupo Aeromexico SAB de CV earnings conference call or presentation Wednesday, April 22, 2020 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrés Conesa Labastida

Grupo Aeroméxico, S.A.B. de C.V. - CEO & Director

* Jonathan Wallden

Grupo Aeroméxico, S.A.B. de C.V. - Senior VP of Financial Planning & IR

* Nicolas Ferri

Grupo Aeroméxico, S.A.B. de C.V. - Executive VP & Chief Commercial Officer

* Ricardo Javier Sánchez Baker

Grupo Aeroméxico, S.A.B. de C.V. - CFO

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Conference Call Participants

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* Mauricio Martinez Vallejo

GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst

* Michael John Linenberg

Deutsche Bank AG, Research Division - MD and Senior Company Research Analyst

* Nicolas Fabiancic;Jefferies;Investment Banking Analyst

* Pablo Monsivais Mendoza

Barclays Bank PLC, Research Division - Assistant VP & Lead Research Analyst

* Ruben López Romero

Santander Investment Securities Inc., Research Division - Research Analyst

* Victor Mizusaki

Banco Bradesco BBI S.A., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning. And welcome to the Grupo Aeromexico's First Quarter 2020 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 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.

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Jonathan Wallden, Grupo Aeroméxico, S.A.B. de C.V. - Senior VP of Financial Planning & IR [2]

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Good morning. And thanks for joining us for our first quarter 2020 results presentation. Speaking on the call today are Aeromexico's CEO, Andrés Conesa; and CFO, Ricardo Sánchez Baker. Nicholas Ferri, our Chief Commercial Officer, will accompany us in our questions and answers section. Andrés will open the call providing insight into our quarterly performance and results, and Ricardo will then address our cash position and revenue and cost performance. There will be an opportunity for questions at the end of the call. So now I would like to turn over to our CEO, Andrés Conesa.

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Andrés Conesa Labastida, Grupo Aeroméxico, S.A.B. de C.V. - CEO & Director [3]

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Good morning, ladies and gentlemen, and thank you, Jonathan. I will start by thanking each and every member of the Aeromexico family for their contributions to Aeromexico in what has been one of the most challenging quarters the industry has ever faced. I want to thank you for the contribution you are making directly to our cash position with significant employee cost reductions. And I also want to thank you for going above and beyond in terms of how you have supported the airline through this contingency. So whether you work in operations, commercial, e-commerce, IT, HR, legal or finance, thank you very much.

I know that many people have been affected in some way by this virus. Whether it's you personally, a friend or family member, my thoughts are with you and your loved ones as well. We still have a long way to go and a lot to do to make sure the airline exits the coronavirus pandemic stronger and with the ability to fly higher. But we have acted fast, and we continue to work hard to make sure we get there. I believe we recognized the seriousness of the COVID-19 quickly, and we immediately started negotiations with all of our key stakeholders from our labor groups to our lessors and suppliers. We have reached agreement with all labor groups, unionized and nonunionized, which will deliver more than 50% reduction in our fixed employee costs. We have also activated a voluntary unpaid leave program for up to 90 days.

Additionally, we have reached agreements with aircraft and engine lessors, which will reduce our lease cash outflows during the second quarter. We have also agreed with key suppliers to defer payments across the upcoming quarters, adding a further reduction to Aeromexico's cash outflow. Finally, we have postponed all nonessential CapEx and discretionary expenditure.

On top of these initiatives, we are working constructively with the Mexican government on measures to strengthen our liquidity. This includes multiple options such as extending terms of payments of jet fuel and airport services to credit lines from Mexico's development banks. Ricardo will provide more detail on additional opportunities we're exploring to generate liquidity.

I would like to take this opportunity to thank our lessors and other suppliers who have fully engaged with the airline to support us. It is at times like this that we are able to benefit from the long-term strategic relationships we have developed across many years. And finally, I would like to thank Delta for their ongoing support. They have been with us every step of the way as we identify opportunities and initiatives to optimize cash for Aeromexico.

From the combined efforts of our staff and suppliers, we estimate that our fixed cost base will reduce from around $110 million per month of cash outlays to approximately $50 million per month, so more than half in terms of savings. Aeromexico closed the quarter with $563 million of cash, so we are in a good position to withstand this contingency period. However, we want to make sure we are conservative in our cash management to keep a comfortable cash position as the environment starts to improve.

Our efforts expand far beyond the airline industry. We are doing our outmost to help our country by joining efforts with the Mexican government and dedicating aircraft for cargo operations to import critical medical supplies and equipment. We have also chartered aircraft to bring home fellow Mexicans who have been stuck abroad.

Turning to our first quarter 2020 financial results, Aeromexico delivered an operating loss of MXN 1.8 billion with a negative operating margin of 12.7%. These results were entirely driven by a significantly weaker March as the COVID-19 pandemic affected us ahead of other domestic competitors based on our global network. However, we see that as a positive as we were able to act ahead of them and start our adjustment package earlier. EBITDAR amounted to MXN 1.5 billion for an EBITDAR margin of 10.7%. While our load factors dropped by 6 percentage points from 82% to 76%, the company delivered a yield increase of 0.9%. RASK for the quarter was lowered by 5.3%.

From a cost base perspective, our cost per ASK came under pressure as capacity was lower with additional pressure from peso depreciation versus the dollar. The company benefited from lower fuel prices, which resulted in a reduction of 1.1% in our dollar cost per ASK. Cost per ASK, excluding fuel, increased by 8.5%. Capacity during the first quarter decreased by 9.1% compared to 2019. Domestic capacity was down 4.9%, while international capacity was down by 10.8%. This is primarily driven, again, by the COVID-19 pandemic.

As we look to the second quarter, we are anticipating approximately 80% reduction, 8-0, in our capacity offering based on the current demand outlook with our quarter 3 outlook at between 30% and 50% of planned capacity. We will provide an update for our fourth quarter, the outlook for that quarter, on our next conference call.

Things are evolving quickly, and we're moving fast. We promise to keep in close contact with our customers, suppliers and investors and we are committed to ensure we provide transparency with regard to our results and outlook. To wrap up, over the past years, we have worked tirelessly to transform Aeromexico into a financially stronger line by strengthening our balance sheet, diversifying our revenue streams, maintaining strict cost controls and enhancing our operational reliability. Every profit for the last 10 years has been reinvested in the airline, and the assets acquired with these savings will help us to emerge stronger from this crisis. We are entering the second quarter with a robust cash balance, and we have a strong pipeline of initiatives to generate additional liquidity. We have faced adverse scenarios before. And even though these are unique times, we have confidence that we're pursuing the right strategy to weather this storm. We are also working constructively with the Mexican government on measures to strengthen liquidity. We are competing with carriers that have received support from their respective governments, and Mexican government support will ensure that Mexico's flagship carrier is able to compete on a level playing field, protecting as well as generating employment and supporting economic development for every part of Mexico into the future.

This concludes my remarks. I would now like to hand over to Ricardo, who will provide details on the financial results of this quarter. Thank you for your support. And Ricardo, please go ahead.

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Ricardo Javier Sánchez Baker, Grupo Aeroméxico, S.A.B. de C.V. - CFO [4]

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Thank you, Andrés. Good morning, everyone, and thank you for joining us today. The quarter began with the company issuing its first senior unsecured notes in the international markets for $400 million. We originally planned the use of proceeds as follows: 1/3 for refinancing debt, 1/3 for strengthening the balance sheet and 1/3 for new fleet. With the advent of COVID-19, we have prudently decided to postpone new fleet decisions indefinitely to protect our cash position.

As Andrés mentioned, we acted rapidly as it became apparent that COVID-19 was going to have material implications. We moved swiftly to reduce our cash expenses associated with fixed costs. And before the end of March, we have already reached agreements with several labor groups, and we have agreements in principle with multiple aircraft and engine lessors, airport groups as well and other suppliers. As Andrés mentioned, these negotiations have allowed us to reduce our fixed cash outflow from around $110 million to approximately $50 million per month, including interest payments.

We closed the March quarter with $563 million of cash. And while we feel we entered the crisis with a healthy cash position, we are being very conservative in how we manage our cash balances moving forward as we think the recovery will be gradual. We expect we will have very limited ability to generate revenue during the second quarter, and then our revenues will ramp up gradually during the rest of 2020. However, we do not expect demand to return to historical levels until well into 2021.

In this context of uncertainty surrounding the evolution of passenger demand, the Aeromexico management team has been laser-focused on identifying additional initiatives that could help optimize Aeromexico's cash position. We are working on an extensive list of initiatives to obtain additional liquidity, including sale and leaseback transactions of our own aircraft, raising additional financing through eTAs and working with some of our long-term business partners, among others. We estimate that the implementation of these initiatives could provide more than $400 million of additional liquidity.

In several of these initiatives, we have made significant progress, and we will provide further updates as and when appropriate to do so. The company's aim is to ensure we have flexibility to take actions rapidly to strengthen the company's liquidity across the short, medium and long term.

On our recovery, we will be able to benefit from the low fuel price environment. As we have mentioned before, Aeromexico uses a structure of call spread options. All costs associated with our 2020 pension program were paid for during 2019. Consequently, there is no cash outflow associated with our hedging in 2020. We are simply able to take advantage of the lower price of fuel.

With regard to our first quarter financial results, from a P&L perspective, we delivered a positive EBITDAR of MXN 1.5 billion, equating to an EBITDAR margin of 10.7%, and an operating loss of MXN 1.8 billion with a negative margin of 12.7%, both of these negatively impacted by the COVID pandemic. As demand reduced and we shrank the operation, so both revenue and costs came under pressure, leading to a reduced RASK of 5.3% and nonfuel CASK increase of 8.5%. Also, our overall CASK in U.S. dollars was favorable versus last year by 1.1%, thanks to the reducing fuel prices.

Our cash flow generation for the first quarter remained strong. Our cash generated from operating activities amounted to MXN 3.2 billion. With this, our cash position reached MXN 13.3 billion, equivalent to $563 million. In this context, our cash balances at the end of the quarter represented a cash to last 12-month revenue ratio of 19.9%.

We are also working to adjust our fleet to the new market environment. During the quarter, we were delivered 6 aircraft to resource. We closed the first quarter of 2020 with a fleet of 119 aircraft, including 19 Boeing 787s, 44 Boeing 737s and 56 Embraer aircraft. This is 6 aircraft below what we have at the end of 2019. We expect that by the end of the year, our total fleet can be at least an aircraft lower than at the end of 2019.

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.

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Questions and Answers

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Operator [1]

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

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Michael John Linenberg, Deutsche Bank AG, Research Division - MD and Senior Company Research Analyst [2]

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I have a few questions here. If we -- I want to just go over and just clarify that it looks like -- it sounds like you've been able to get your cash burn down to something on the order of about $50 million a month, so we're looking at something that's a little bit less than $2 million per day. Is that right? And then that's currently what we're seeing in the month of April? Or maybe that's for the quarter? If you could just clarify that.

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Andrés Conesa Labastida, Grupo Aeroméxico, S.A.B. de C.V. - CEO & Director [3]

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Yes. Let me make a comment and then ask Ricardo to help. As we mentioned during the call, we started working with everybody in March, early March, where we're starting to see softness more, particularly in the Asian groups. We start to sit down with lessors, with airport groups, with labor groups, with everybody. So we finished everything by the end of March. So what you see is our results for March do not include not every -- all the efforts that we did. You will see them starting in April. And for the second Q, as both of us mentioned, we expect that, again, to reduce the cash outlays from $110 million to $50 million. So yes, it's less than $2 million per month, and that will be reflected entirely in every month of the second quarter. Ricardo, you want to add?

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Ricardo Javier Sánchez Baker, Grupo Aeroméxico, S.A.B. de C.V. - CFO [4]

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Just to add to Andrés' comment. I mean, the $50 million are associated to the fixed cost structure. So if we operate more, and we have definitely operated at around 20% of our capacity in April, then expenses will be a little bit higher, but we will be capturing revenue associated to those operations. So the $50 million are associated only to the fixed cost structure. Imagine a scenario where we don't have any operations, what would be the cash burn at that point, and that values at $50 million. If we operate, so we will have cash associated to those operations.

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Andrés Conesa Labastida, Grupo Aeroméxico, S.A.B. de C.V. - CEO & Director [5]

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And also, let me add, I think it's coming in to this point because the ASK path that we mentioned where we are expecting an 80% reduction in the second Q and between 30% and 50% reduction in the third Q has to do with itinerary service, right, with regular passenger service. We are doing lots of charters. For example, for the -- for May, we are expecting to operate at least 16 wide-body charters per week, which is more or less the limit that we can do. Most of the demand for charters is to China to bring medical equipment. So as we do more operations like charters, as Ricardo mentioned, we will see at least some additional costs, but those will generate important additional cash revenue, which will help us navigate through the second quarter better.

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Michael John Linenberg, Deutsche Bank AG, Research Division - MD and Senior Company Research Analyst [6]

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Okay. That's very impressive that you've been able to get your fixed cost down to less than $2 million a day. And presumably, when you do start to ramp up, that the revenue will come close, if not entirely offset, the increased variable cost. So you'll still be at, as you start to ramp, you'll still be probably around that $2 million a day and then hopefully as you ramp through the year, that, that number should lessen. So that's very impressive.

Two more quick questions here. Unencumbered assets, if we had to look at spare parts, aircraft, maybe even your stake in your loyalty program, where you have 51%. As you think about unencumbered assets and maybe potential sources and uses, et cetera, how -- what's a good number for maybe assets that you have -- that you could potentially pledge? Do you -- did you -- would you have that, maybe even a rough number on the value of assets that you could potentially pledge for additional financing?

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Ricardo Javier Sánchez Baker, Grupo Aeroméxico, S.A.B. de C.V. - CFO [7]

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Yes. I mean, we have certain assets that are unencumbered, as you mentioned. Some aircraft that are unencumbered, but we have also aircraft that have -- important as equity associated to them. We have a financing, definitely we can see it as claim. But in most of these financings has been repaid, and that's why we think the sale and leasebacks can be a good opportunity because it would allow us to sell the plane, pay the debt and bring substantial liquidity. So when you take into account the different assets that we have and the equity on these aircraft that still have some financing, that's what we mean -- that we think that these initiatives can bring about $400 million of additional revenue.

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Michael John Linenberg, Deutsche Bank AG, Research Division - MD and Senior Company Research Analyst [8]

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Okay. Okay. And that's important. That's the $400 million number, which is good. Just one last question, and this -- sorry.

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Andrés Conesa Labastida, Grupo Aeroméxico, S.A.B. de C.V. - CEO & Director [9]

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I'll just complement one thing that Ricardo mentioned. I mean, as I mentioned in my remarks, we have been saving every single penny that we generated during the last 10 years. So on top of a solid cash position, starting not this crisis of pandemic as we are reporting more than $560 million in cash. We are the only airline in the domestic market where we have assets. Other airlines, all their entire fleet is leased. So we have our own aircraft. We have the loyalty program. We have other things, and these lines of defense going forward are really important. So that's why we refer that we are in a relatively strong position, probably the strongest one in the domestic market. And also one of the strongest one in the international arena.

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Michael John Linenberg, Deutsche Bank AG, Research Division - MD and Senior Company Research Analyst [10]

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Yes. No, those are good points. And then this is a technical question for Ricardo. But when I look at your cash total, you do include the restricted cash, and I did see that, that was up MXN 600 million from the previous quarter. Is that restricted cash? Is that tied to -- well, I was going to say credit card holdback, but I don't think they actually have credit card holdbacks in Mexico. So is it -- is that -- what is that tied to? And why has that restricted cash grown? And how sort of readily available, I guess, is that restricted cash?

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Ricardo Javier Sánchez Baker, Grupo Aeroméxico, S.A.B. de C.V. - CFO [11]

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Yes. Thanks, Mike. As I mentioned, in that figure, we don't have any credit card holdback, and there are no credit card holdbacks in Mexico. This restricted cash is associated mainly to the financing structures that we have done. So for example, when we do a financing structure that has receivables as collateral, and we have a few of them, we have to create reserves, like cash reserves for several months of amortization plus interest. So a big part of this cash collateral is really associated to these facilities. We have, for example, a bond issued in the Mexican market. That is Cebures. That's how it's called. That has a collateral, some credit card receivables. And then we have associated with that certain cash reserves. We have also another facility that we did with receivables from the other credit card holder. And with that, also, we have like 6 months of amortizations and interest of cash reserves. So most of these are associated to that. Then we have a few of them in a few amounts of money that are associated to cash reserve for other facilities that might be associated to the terms of credits and things like that. The increase versus the previous, I would say, in pesos, a lot of it reflects the exchange rate movement because these are valued at the end of the quarter exchange rate, and exchange rate depreciated more than 20% versus last year. So that's a huge increase. But basically, the amount has remained stable, and we expect that it will go down. But I think the important point of this restricted cash is that in the end, this is going to be used to amortize this financial liability that we have.

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Operator [12]

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Our next question is from Mauricio Martinez.

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Mauricio Martinez Vallejo, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [13]

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Well, I have 2 from my side. The first one is maybe you can elaborate more on the agreements that you reach with lessors? And how long this sort of agreement could last going forward? And my second question is more on the -- well, kind of a follow-up from the previous one. We can elaborate more on the options that you have to increase liquidity regarding the sale and leaseback and if there are some other source of liquidity that we could expect, maybe some support from Delta or if there is any additional compensation from the MAX grounding. That will be my 2 questions.

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Ricardo Javier Sánchez Baker, Grupo Aeroméxico, S.A.B. de C.V. - CFO [14]

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Okay, Mauricio. Regarding the agreements with lessors, we have requested to the lessors and also to other main suppliers, is particularly released in terms of cash flow for the second quarter of this year. That's when we think that our ability to generate revenues will be substantially diminished. And that's when we think we have to be very careful with our cash flow. But we have requested is basically relief, some deferrals of this rent payments for the second quarter. And then we will repay that in the future, starting in July for different periods. Now we have these negotiations that have been done with many lessors, and we have received support really from basically all of them. So that is part of what we mentioned that will help us to reduce cash in the following months because this is money that we will repay in the future gradually as the recovery starts.

In terms of other options, yes, we have the sale and leaseback that we described before. We have several groups of assets that are important, that are attractive to leasing company. But we are also working, for example, with DCA to bring additional liquidity lines to the company. Particularly, we are working with Ex-Im Bank for our credit guarantee facility that could be around $80 million. That's something that is progressing well. We have received support from Ex-Im Bank in many occasions, and we expect that positive support as well this time. And we are working also with additional European credit agencies that could bring at least another $30 million to $50 million. So that's another group of initiatives that we're working on to bring liquidity.

About Boeing, as you know, and we informed the last time, the agreement that we have covered until the last day of March. So starting April 1, we need to sit again with them regarding the compensation due to the MAX grounding, and we're doing that. We do not have any update, any additional news on when we'll expect the plane to fly. But as we informed before, we have that before the crisis original schedule to return by the first day of September of this year. So that's where we stand today. We haven't made any changes. If there is something new, we'll let you know.

And then finally, sorry, as you know, as part of the tariffs package, the support that all the airlines received in the U.S., one of the conditions is that it limits their ability to provide support to partners like us. So we value a lot of support of Delta. We're doing, in these transactions that we mentioned, for example, sale and leaseback of some of the assets. We're working together, but we are not expecting or relying on additional liquidity support from Delta.

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Mauricio Martinez Vallejo, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [15]

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Perfect. So just to double check. So we are going to sit again with Boeing in this month to -- for the second compensation package?

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Andrés Conesa Labastida, Grupo Aeroméxico, S.A.B. de C.V. - CEO & Director [16]

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Yes, yes. I mean, for example, the plane is allowed to fly back in September, then we will have around 5 months of compensation that we need to sit with Boeing and arrange that package. That potential compensation, which will be there, we do not have that quantified, but that's not included in the numbers that we mentioned. That will be on top of what was described in this quarter.

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Operator [17]

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Our next question is from Ruben Lopez from Santander Bank.

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Ruben López Romero, Santander Investment Securities Inc., Research Division - Research Analyst [18]

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I have a couple of questions here. The first one is a follow-up on the cash burn. You mentioned that you are in touch with the government related to get to service costs, discounting tariffs and others. So first, if you could elaborate on these initiatives. And second, if the $20 million (sic) [$50 million] cash burn that you mentioned already considered this? Or it could be additional cuts to the cash burn? That's my first one.

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Ricardo Javier Sánchez Baker, Grupo Aeroméxico, S.A.B. de C.V. - CFO [19]

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So in terms of the government initiative, yes, we are discussing to extend payment terms for certain services that are provided by them like navigation rights and also other services that are available in Mexico City Airport. And we also purchased part of our fuel with ASA, the government fuel provider. We have also other suppliers that are private suppliers, where we have already extended terms, and we are still working with ASA to extend the payment terms for fuel. That is something that can give us also some additional room on our liquidity. As -- but we need to see where we finish on the negotiations to be able to be active.

I think this liquidity will be important, particularly as we go into the future and particularly, on the ramp-up because that's when we will start using again these services. Right now, with a limited amount of operations, that liquidity release can be relatively small compared to what we have already mentioned with other initiatives, but it's material for the future.

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Ruben López Romero, Santander Investment Securities Inc., Research Division - Research Analyst [20]

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Sure. Okay. Perfect, pretty clear. And my second one is on competition. There have been some airlines related to the total financial situation of one of your Mexican competitors. Do you have any color here that you could share with us?

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Andrés Conesa Labastida, Grupo Aeroméxico, S.A.B. de C.V. - CEO & Director [21]

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Let me make a brief comment and then ask Nicolas if he wants to share additional thoughts. I think in this type of crisis, the airlines that are arrive stronger to the crisis emerged stronger for it. And the ones who arrive in a weaker position, usually tend to not to be weaker during the crisis. So I think this, as it will happen in other parts of the world, I think these type of events will lead to consolidation, no? Either through bankruptcies or M&As or however you want to look. So I think the composition of the Mexican industry will be completely different once this crisis is over versus how we started, okay? So right now, based on the information that we have, we are doing most of the flying -- even though it's very low compared to what we have originally planned. We're doing most of the flying, both in Mexico and connecting Mexico to some parts of the world. Let me ask Nicolas if he wants to add something.

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Nicolas Ferri, Grupo Aeroméxico, S.A.B. de C.V. - Executive VP & Chief Commercial Officer [22]

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Sure. Thanks, Andrés. Ruben, I will add a couple of maybe facts here, numbers, to Andrés' point. Today, with Aeromexico's heavily reduced schedule, we're flying approximately 60% -- 64%, to be precise, of the Mexico domestic operations out of the Mexico City International Airport. We -- while we have reduced some service and pulled out of a number of cities, we are by far the airline providing the most coverage in the domestic market. We are, as a result of our newly, continuously evolving schedule have adjusted heavily per day of weeks. So to give you a perspective, we fly 36 round trips on a Tuesday, but we go up to 80 on a Friday, as an example. These are just domestic round trips. So we -- and quite honestly as well, we're seeing, while not a deal on anything close to what we'd like them to be, but load factor is hovering in the 50% plus in the domestic market. So we think we're doing -- making the right moves. We're seeing customers respond even in this difficult times. So we feel reasonably good about our own trajectory, and Andrés already covered the trajectory of some of our domestic competitors.

One other thing that I think I'd like to point out is the level of agility with which we're making these decisions. From the beginning of this crisis early in March, our mantra was we will operate flights that cover cash. We do not want to be out there operating flights that do not cover costs. And that has been how we build these schedules. As you would imagine, it's a little easier to do in international flying than it is in domestic given the size of the network. But we feel very comfortable that we have stayed true to that and that is forming not only our network decisions, but, more importantly, the cash numbers that Ricardo and Andrés had covered.

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Operator [23]

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Our next question is from Victor Mizusaki from Bradesco BBI.

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Victor Mizusaki, Banco Bradesco BBI S.A., Research Division - Research Analyst [24]

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We saw some news showing the new seat configuration for the 737 and the Embraer aircraft with respect to the minimum distance between passengers. So for example, in the case of the Embraer aircraft, basically, you have one passenger in each window. So I'd like to know if you can comment how these new seat configuration can basically affect your profitability? And the second question, thinking about how domestic and the international demand will recover after the COVID-19. So is there any plan to change your fleet plan?

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Andrés Conesa Labastida, Grupo Aeroméxico, S.A.B. de C.V. - CEO & Director [25]

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Victor, yes. I mean I think it's too soon to answer, not to have an answer for both questions. What we're doing, as we mentioned, we are blocking the center seat to comply with minimum distance rules. So also in the boarding process, it's taking a little bit more time because we're giving more space between every client to avoid that. How much that will continue? I think it will depend a lot on how things emerge after the crisis, no? Whether there will be further restrictions for us. The most important item in the agenda is obviously safety and the health of our employees and our clients. So profitability, it's behind that. So we need to do that going forward and for a few months or whatever and keep the middle seat block because of health reasons. We will go ahead and do it. There is nothing more important than that. But again, it's an open question that today, we do not have an answer. We are implementing it, and we will as long as it is needed.

In terms of our fleet composition, what we expect, everything else constant, and as Ricardo mentioned, we redeliver a few planes in the first Q. Very likely, we will end the year with less planes than in 2019. However, if there is consolidation in the industry and reconfiguration of the market, there will be room to recover part of that capacity. And that, again, it's too soon to say this can be really fast or it can extend well into 2021. So we'll keep you posted and hopefully have more color and more answers in the next conference call that we have with second Q results of 2020.

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Victor Mizusaki, Banco Bradesco BBI S.A., Research Division - Research Analyst [26]

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Okay, okay. Just a follow-up here. One of you mentioned $50 million of cash burn per month in the second quarter. Is this including potential losses, for example, why you need to fly with the Embraer with the seat configuration? And if you think about this $50 million also in the second half, given that you said that you basically deferred the payments -- these payments, the $50 million would go to how much for the second half?

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Andrés Conesa Labastida, Grupo Aeroméxico, S.A.B. de C.V. - CEO & Director [27]

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Yes. We are stretching as much as possible the model. So for example, in this $50 million of monthly borrowing, down from $110 million, we are expecting for the second Q capacity to be down 80%, okay? So if capacity and revenue is better than that, cash burn will be lower because even though we will have, Ricardo mentioned, more expenses, we will have also additional revenue because we are being very, very disciplined in, as Nicolas mentioned, every flight that we make needs to be cash positive. If it isn't, we just consolidate flight and fly less. So far, what we are seeing in April because of the additional charters that we're doing, and we will pursue further opportunities on the charter, particularly with our wide-body that we have, the plane, the expertise, the experience to fly and catch as many charters as we can, and that will help support and take pressure out of the cash burn for the second Q.

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Operator [28]

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(Operator Instructions) Our next question is from Pablo Monsivais from Barclays.

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Pablo Monsivais Mendoza, Barclays Bank PLC, Research Division - Assistant VP & Lead Research Analyst [29]

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I have 2 on my side. The first one is, what are you assuming for a recovery? Do you expect things go back to normal by 2021? Do you have any GDP estimates or something so we can see a recovery by then? And my second question is a bit more technical. Can you please provide more detail on the increase of current liabilities? How much is from some suppliers? How much is deferred revenues?

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Andrés Conesa Labastida, Grupo Aeroméxico, S.A.B. de C.V. - CEO & Director [30]

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Pablo, we didn't want to provide any guidance for the third Q because there is lots of uncertainty, lots of volatility. We feel that the worst quarter will be the next quarter, the second Q, where we will have capacity down. Again, as we have mentioned, 80%. Because if you look at the first key numbers, January and February were kind of normal and March has already impact of the COVID. But definitely, the impact on April is larger than the impact on March. So second Q, we expect that to be the weakest of the year. Again, we're ready. We're prepared with all the actions that we have described in that call to emerge strong for this very difficult 3 months that we have ahead. We are expecting a change in trend for the third Q, but still very conservative. The capacity will be down or we will produce between 30% and 50% of the capacity of the third Q. And again, given this uncertainty, we do not want to provide any guidance for the third Q. This can change in either way very, very fast, so we'll make sure to provide that for the next call. There will be a contraction in the Mexican economy. Of course, you've seen the estimates. They go from minus 4 to minus 10. Hopefully, as you know, the Central Bank already acted yesterday. The government is also providing some relief. We are asking, as we have mentioned, engaging constructive conversations with the government. And hopefully, we will have some positive news on there not only for our industry, but that they are able to support other industries.

Let me make it clear, we are not asking for any rescue. We are not asking, as it has been mentioned in the past that the government is rescuing companies. We need support. We need liquidity support because financial markets are distorted. It's very difficult to put a price on the renewals of debt in this very uncertain conditions. And that's why we need the support. For example, in the agenda that we have with the relevant banks, and we are asking them for some guarantees to extend our debt payments. We are providing guarantees to them. They are covered. We are not going to -- not to ask the government for any type of subsidy or something close. We are covering them because we have the assets. We have the ability to exit this in a strong way. But we need that given -- that, again, the relative prices in the financial markets are all over the place, and it's very difficult to price any debt issuance in the public markets, as Ricardo mentioned, with commercial paper or the short-term commercial paper or Cebures.

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Pablo Monsivais Mendoza, Barclays Bank PLC, Research Division - Assistant VP & Lead Research Analyst [31]

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Perfect. And on the accounts payable part of my question, do you have any more detail?

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Ricardo Javier Sánchez Baker, Grupo Aeroméxico, S.A.B. de C.V. - CFO [32]

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On the accounts payable, we have -- as we have discussed, we have negotiated with suppliers and lessors. That's definitely going to move upwards. The process has started barely, I would say, in the third quarter. There is some impact mostly coming also from exchange because, as you know, the exchange rate depreciated and these are valued at the end of the quarter. But yes, definitely, since what we are agreeing is an extension in payment terms, that will be reflected in an increase in accounts pay.

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Operator [33]

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Our next question is from Nick Frank from Jefferies.

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Nicolas Fabiancic;Jefferies;Investment Banking Analyst, [34]

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This is Nicolas Fabiancic from Jefferies here. Thanks for the call, with the update on liquidity and all the initiatives you're taking, including deferral of some of the lease payments. Just one question on the newly issued bonds, to be very clear. Do you consider that liquidity is sufficient to cover the $14 million August coupon payment? Or is there any restructuring or exchange offer on the bonds being contemplated at this time?

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Ricardo Javier Sánchez Baker, Grupo Aeroméxico, S.A.B. de C.V. - CFO [35]

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We will pay. And I don't know -- those -- that's contemplated in our liquidity program to pay for the coupon of those bonds. Those we'll be paying in August completely.

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Operator [36]

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Our next question is from [Florencia Mayorga] from MetLife.

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Unidentified Analyst, [37]

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Just a follow-up regarding the savings on cash outflows. The $50 million, can you disclose how much is regarding to leases? And I estimate that regarding to personnel expense, it should be around $7 million or $8 million per month, but more information regarding leases? And also in your renegotiation of the contract with the lessors, are you also receiving some -- an option of higher interest rate or some point on that?

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Ricardo Javier Sánchez Baker, Grupo Aeroméxico, S.A.B. de C.V. - CFO [38]

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Yes. Thank you. Now on the $50 million, yes, it's composed basically on the fixed cost components as mentioned, thinking about the airlines operating basically no flights. So this, as you mentioned, we have interest payments of around $8 million. Then usually on a regular month, we spend around $30 million to $35 million of leases, in aircraft leases. That is substantially decreased with the support that we are receiving from lessors to a level that at least is, we estimate, below 25% of the commitment that we need to do. And, of course, on the labor side, we usually spend close to $40 million on labor, a little bit more. Part of it is associated to variable labor costs that automatically goes down if there are no operations because we don't have to rent. We don't have to pay for the hotels for the crew. We don't have extra time. But the other part is fixed. And you take into account both components. We don't have the variable part, and then the fixed part has been reduced by more than 50%, as Andrés explained. Then -- that's in substantial savings. And then we are left with some of the -- of course, the negotiations with airport groups where we have facilities. We have other facilities that we lease. And we have also obtained financing terms, basically provides additional reduction in our fixed cash outlet. And we are led with the small items like IT and things like that. So together, all this is what brings the figure to around $50 million.

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Operator [39]

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(Operator Instructions) Our next question is from Alexis [Antoine] from Stifel.

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Unidentified Analyst, [40]

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Just a quick question. I think I know the answer, but I'd like to hear from you guys. There's been some news where article suggesting you've hired the restructuring advisers. If you could comment on that. And secondly, your bonds are trading -- well they traded this morning at $0.24, $0.25 on the dollar. In terms of market cap, vis-à-vis the total principle, that's $100 million relative to your pretty sizable liquidity. There's a potentially huge opportunity for liability management exercises. So can you comment on that as well, please?

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Andrés Conesa Labastida, Grupo Aeroméxico, S.A.B. de C.V. - CEO & Director [41]

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Alexis, we haven't hired any restructuring adviser. In fact, Ricardo did an interview a couple of weeks ago because there was some notes in one of the media outlets. It's completely false. We haven't. I mean, as we have described in this call, we are doing everything internally all the adjustment, and we will emerge from this crisis stronger. So no, that is completely false. And as I mentioned before, we plan to pay the coupon that we have in August for the $400 million placement that we did in February, and we have no plans today to do any liability management with that bond.

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Operator [42]

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And we have reached the end of our question-and-answer session. I will now turn it back to Andrés for closing remarks.

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Andrés Conesa Labastida, Grupo Aeroméxico, S.A.B. de C.V. - CEO & Director [43]

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Well, thank you, everybody, for joining the call. Hope, again, you and your family are well. Take care of yourself. That's the most important thing. And if there is anything important, we'll let you know in the process. And if not, we look forward to be with you again with a better and stronger outlook in our next conference call. So thank you very much. Bye.

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Operator [44]

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