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Edited Transcript of AEROMEX*.MX earnings conference call or presentation 23-Oct-19 3:00pm GMT

Q3 2019 Grupo Aeromexico SAB de CV Earnings Call

Mexico D.F. Oct 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Grupo Aeromexico SAB de CV earnings conference call or presentation Wednesday, October 23, 2019 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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* Joshua Milberg

Morgan Stanley, Research Division - Equity Analyst

* Michael John Linenberg

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

* Ruben López Romero

Santander Investment Securities Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to Grupo Aeromexico's Third 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. 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 third quarter 2019 results presentation. Speaking on the call today are Aeromexico's CEO, Andrés Conesa; and CFO, Ricardo Sánchez Baker. Additionally, Nicolas Ferri, our Chief Commercial Officer, is with us to answer any questions you may have.

As per usual, Andrés will open the call providing insights into our quarterly performance and results, and Ricardo will then address our revenue, cost and cash flow performance. There will be an opportunity for questions at the end of the call.

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

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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. The third quarter of 2019 delivered an encouraging set of results with growth performance during the peak season. The third quarter saw improvements at both unit revenue and unit cost level in spite of the grounding of the MAX. In this context, Aeromexico delivered an operating profit of MXN 1.3 billion with an operating margin of 7%. This is an improvement of MXN 1 billion pesos year-on-year and a 5.7 percentage points improvement in operating margin. Our EBITDAR also strengthened during the third quarter of this year, totaling MXN 4.4 billion, a 27.8% year-on-year improvement from an EBITDAR margin of 23.8%. It is a 5.1 percentage points improvement versus the third quarter of 2018.

Total passenger revenue increased by MXN 358 million compared to the third quarter of last year. This again is a very positive result considering the lower seat production due to the MAX grounding. This was made possible by a series of organizational changes that strengthened the commercial team by better segmenting our business using more effectively our Branded Fares products and by adjusting our network, reducing frequency south of the border and adding capacity in domestic markets. As a result of these efforts, we were able to register a revenue per ASK and yield increase of 4.1% and 5.6%, respectively, during the quarter compared to the same period of last year.

In according the market conditions, we continue to see aggressive capacity growth, particularly from domestic low-cost carriers, who collectively grew capacity at over 15% in spite of a softening economic environment. Growth expectations for the Mexican economy have been revised downward to 0.4% in the most recent World Economic Outlook published by the IMF. The company is continue to assess the financial impact of both the grounding of the 737 MAX aircraft in its fleet and the current and expected future delays in the delivery of additional 737 MAX aircraft. Our expected date for reentry to service of the 737 MAX stands today at mid-January of 2020.

Turning to our cost base. Cost per ASK in pesos during the quarter decreased 1.4%. Cost per ASKs excluding fuel in dollars was 1.3% lower than the same quarter of last year. This highlights Grupo Aeromexico's ongoing focus on optimizing unit costs. Our continued focus on customer satisfaction is also delivering enhanced results. For September of 2019, our Net Promoter Score has continued to improve year-over-year and reach an historical high, thanks to our outstanding operational performance and our service excellence culture. Additionally, we have been recognized as Global Latin American airline with 5 stars in the APEX survey. This award is particularly relevant as it is the customers who rank the airline service standard, products and customer experience. I want to congratulate our operations and customer service team for delivering the best travel experience in Latin America.

From an operational perspective, we continue our drive focusing on what our customers truly value: operational excellence. I am proud to announce that during the third quarter of 2019, we delivered 79 days with 100% completion factor. That is 100% of the planned flights operating underway. Recently we achieved a run of 18 consecutive days with 100% operational reliability, equating to more than 10,000 flights in a row operating as planned without any cancellations. As Mexico's only airline focused on delivering a differentiated service, Aeromexico will continue to focus on 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.

We continue rolling out free messaging onboard our 737-800 fleet, and we have completed the rollout on our 787 fleet. Up to the third quarter of 2019, free messaging on our fleet has increased our take rate from 2% to 20%, thereby increasing the opportunities to optimize additional revenue streams. Capacity during the third quarter decreased by 3.3% compared to the same period of 2018. Again, this is primarily due to the grounding of the 737 MAX aircraft. We are reviewing our total capacity growth forecast for the year to down 3% to 4% as a whole for the entire year. With respect to next year, 2020, at this point in time we are not able to provide any capacity guidance as this will depend on the return to service of the MAX and the new delivery calendar that we need to work with Boeing after the ungrounding takes place. So to wrap up for this quarter, I would like to take this opportunity to thank all of my colleagues at Aeromexico for their commitment in achieving this impressive set of results.

This concludes my remarks. And I would now like to hand over to Ricardo, who will provide more detail on the financial results of this quarter. Thank you, 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. As Andrés mentioned, this has been an encouraging quarter, in which Aeromexico delivered both enhanced revenue per ASK and reduced cost per ASK. Aeromexico delivered a robust operating profit of MXN 1.3 billion, representing a 7% operating margin for the third quarter of 2019. This represents an improvement of MXN 1 billion and a 5.7 percentage point increase in operating margin year-on-year.

EBITDAR for the quarter improved too, reaching MXN 4.4 billion representing a MXN 948 million increase versus the same period of 2018, a 5.1 percentage point improvement. We delivered improved cost performance, with our cost per ASK reducing in spite of reduced capacity compared to last year. Our cost per ASK in pesos decreased by 1.5% year-on-year during the third quarter. Cost per ASK in U.S. dollars, excluding fuel, decreased by 1.3%. This highlights our ongoing focus on optimizing unit costs.

Grupo Aeromexico reported a net income of MXN 65 million for the third quarter of the year, a net margin of 0.4%, an improvement of MXN 682 million compared to the same period of 2018. During the quarter, the company recorded net MXN 62 million of exchange rate-related losses due to a 2.7% Mexican peso depreciation against the U.S. dollar. This net effect includes the functional currency adjustment and the impact of exchange rate-related operating adjustments. During the third quarter, the company registered MXN 502 million in interest cash payments, MXN 13 million below the same period of last year. The company registered a MXN 764 million year-on-year variance in financing costs due to the mark-to-market valuation of interest rate hedging and accounting-related items associated with IFRS 16.

Turning to our cash position. Our cash flow generation remains strong. We generated MXN 1.8 billion of net cash coming from operating activities during the third quarter of 2019. Net cash flow used in investment activities amounted to MXN 1.1 billion and an additional MXN 3.3 billion was used in financing activities. In the first 9 months of the year, we have reduced our gross financial debt by more than $140 million. In addition, cash flow reflected the seasonal effects of air traffic liability, as in June our passengers tend to purchase their tickets ahead of their summer travel. In this context, our cash balances at the end of the quarter represented a cash-to-12-month-revenue ratio of 11%. Also at the end of the third quarter, our leverage measured as adjusted net debt-to-EBITDA stood at 4.5x, an improvement compared to the 4.9x reported in the previous quarter.

From a fleet perspective, we continue assessing the financial impact of both the grounding of the 737 MAX aircraft and the delays in the delivery of additional 737 MAX. We expected to have 12 MAX aircraft by the end of the third quarter of 2019. At the end of September, we had a total operating fleet of 121 aircraft. For the full year 2019, we maintain our guidance of an ASK contraction between 3% and 4% compared to 2018. With respect to 2020, as Andrés mentioned, our growth plan will be highly dependent on the timing of reentry to service of our MAX aircraft and that redelivery schedule with Boeing. We expect to have more information about these in the following weeks.

This concludes my remarks. Thank you once again for joining us on today's call, and thank you for your confidence. 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 Michael Linenberg, 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 just a couple quick questions here. Have you at all put out an estimate of the impact of the MAX for 2019? Do you have either a rough estimate or have you put a number out there or maybe you've come out and said that it's impacted your margins by a point or 2 or 3? Any color on that front or anything that you've formalized.

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

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Michael, no, we haven't provided any estimate. We continue to -- not to assess the impact. And again, the fact that it wasn't able to fly during the high season of the summer and now we will not be able to fly it as well in the high season of December, well, that increases the impact because, again, this is very seasonal. So we continue to update every day. And when we're ready, probably closer to the end of the year as we expect the ungrounding to take place, we will provide more details on that.

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Michael John Linenberg, Deutsche Bank AG, Research Division - MD and Senior Company Research Analyst [4]

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Okay. So that's fair. And then 2 other sort of quick ones here. Maybe this is more to Ricardo. When you look at your cash on hand, it is 11% of your last 12 months of revenue, your trailing 12 months. What do you think is the right number? Is 11% the right number? Do you -- if you could wave a magic wand would the right number be 15%, 20%? It is on the lower side relative to other carriers, but then I know that you do have maybe other sources of liquidity, which may be the reason why you're closer to 11%. Can you just elaborate on that?

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Ricardo Javier Sánchez Baker, Grupo Aeroméxico, S.A.B. de C.V. - CFO [5]

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Yes. Thank you, Mike. As you mentioned, 11% perhaps is the lowest number that we have had in several quarters. We feel very comfortable with this number, as you mentioned. What we want to have is a cost-to-revenue ratio that gives us a comfortable position, but at the same time that is not too high so that the return on invested capital can be affected. What we have tried to do is to get other sources of funding that could provide liquidity in case we need, and that's what we have been working. And the idea is that together with these two things, the cash that we have on hand plus these other sources of revenue or other sources of funding, we can get closer to a 15%. But we feel comfortable with the 11% and definitely -- but we don't want this to have a very high cash balance that would affect the return on invested capital.

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Andrés Conesa Labastida, Grupo Aeroméxico, S.A.B. de C.V. - CEO & Director [6]

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The other thing just to add -- sorry -- Mike, is that it's important to take into account the level of the air traffic liability. As Ricardo mentioned, today we know that the ATL is declining in the quarter from high 50s to low 40s in terms of number of days. So it's more healthy to have a lower ATL because that allows you to improve yields going forward. And this is a balance that all the 3 here, Nicolas, Ricardo and myself, try to find the right balance everyday.

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Michael John Linenberg, Deutsche Bank AG, Research Division - MD and Senior Company Research Analyst [7]

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That's a good point. And then just one quick one on just the split in when we look at peso-denominated revenue versus non-peso-denominated revenue. The reason I'm asking this is, over the past several years you have grown your international at a far quicker rate, and the domestic portion is now a bit smaller. And as I think about your costs, the percent that are in dollars, you probably have a better match between peso costs and peso revenue. Do you have the split on sort of a rough number on your revenue, which -- the amount of revenue, like in this quarter, that you generated in pesos versus non-peso revenue?

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Ricardo Javier Sánchez Baker, Grupo Aeroméxico, S.A.B. de C.V. - CFO [8]

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Yes. On the revenue side, close to 2/3 of our revenue now are referenced to the U.S. dollar, and on the cost side a little bit more than that, but we are very close to have a natural hedge, as we mentioned. Since we have a positive operating margin, that probably creates the natural hedge. So that we feel very comfortable on that. It has been taking several years to develop this natural protection. And today, we feel comfortable that if there are fluctuations on exchange rate, both revenues and costs in dollars move in tandem, and we are protected.

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Operator [9]

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Our next question is from Ruben López, Santander.

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Ruben López Romero, Santander Investment Securities Inc., Research Division - Research Analyst [10]

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Congrats on the results. So my question is on yields. We saw a strong recovery. So we wanted to get more color of what changed this quarter that led to this strong recovery in yields, especially in the domestic markets where yields were up I think more than double digits. So just wanted to have your thoughts around that.

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Nicolas Ferri, Grupo Aeroméxico, S.A.B. de C.V. - Executive VP & Chief Commercial Officer [11]

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Thanks, Ruben. This is Nicolas. Yes, indeed, domestic yields were up significantly this year, in the 12% range this quarter, I should say, 12% range; international about 4%. We think that's a combination of factors, a lot of which both Andrés and Ricardo have already covered. What I would add is maybe a little color on initial stages of our changes to demand management and really a laser focus on our renewed efforts around the premium revenue here in Mexico. So I think you can expect we're certainly seeing that moving forward as well. We think that's exactly where we want to go, and we're excited about the numbers we saw this quarter. But it's really just the initial stages of a refreshed approach on our customers, how we sell to them and additional personalization.

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Ruben López Romero, Santander Investment Securities Inc., Research Division - Research Analyst [12]

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Okay. So it would be fair to expect going forward probably the same mid-single-digit growth in terms of yields. Is that fair?

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Nicolas Ferri, Grupo Aeroméxico, S.A.B. de C.V. - Executive VP & Chief Commercial Officer [13]

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We're not giving guidance on yields themselves. What I can tell you is that we're looking at the fourth quarter with the same amount of optimism that we saw in Q3, but that's probably as far as I could go.

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Andrés Conesa Labastida, Grupo Aeroméxico, S.A.B. de C.V. - CEO & Director [14]

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Also just to complement what Nicolas mentioned, one important thing is that because of this double-digit growth capacity of the low-cost carriers in Mexico, you see the level of ticket prices in Mexico today is still below last year. So even after this recovery of the third Q, we are below last year. So that gives you room to improve going forward.

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Operator [15]

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(Operator Instructions) Our next question is from Josh Milberg, Morgan Stanley.

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Joshua Milberg, Morgan Stanley, Research Division - Equity Analyst [16]

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I just wanted to ask about this divergence in your growth that Mike alluded to, international versus domestic. I mean it has been striking, the degree to which you've pulled back capacity on the domestic side this year, and obviously that has a very high correlation to the situation with the MAX. But -- and I know you guys aren't providing guidance at this stage, but one thing I just wanted to ask was looking towards 2020, with the MAX ungrounding, do you expect to put substantial capacity back into the domestic market? Because it has appeared that this movement and the decision to sort of focus your growth on international has been very strategic in nature and has responded to how much the low-cost guys have been growing this year.

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Andrés Conesa Labastida, Grupo Aeroméxico, S.A.B. de C.V. - CEO & Director [17]

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Yes. Josh, thanks for the question. As you mentioned, probably, in our view, we think it was the right strategy to go and look more abroad than internally. And as you mentioned, the ratio of ASKs in international market probably increased from 50% a few years ago to 66%, even a little bit more recently. And we think that we probably went too much, and we reduced that trend as for the remainder of the year. So we are now -- recently, for example, that we stopped flying in places like Cali, like Guayaquil, like Punta Cana. We reduced frequencies for -- recently, for example, in Guatemala. So we were doing that and strengthening the domestic market, and that will be the trend for next year. So we will continue to fine tune. It's not obviously -- we're not going back to the 50-50, but again I think we went a little bit over. So the mix will be more in favor in the margin for the domestic market than the international market. And examples of that, we -- for next month -- for this month and starting the second part of this month and November, we increased, for example, our flying to Monterrey and Guadalajara from 16 daily to 19 daily. We also strengthened Aguascalientes, León, Carmen, Obregón, Tijuana, many key cities in Mexico. And we will continue doing that as you know we continue to lead particularly on the corporate market in Mexico.

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Joshua Milberg, Morgan Stanley, Research Division - Equity Analyst [18]

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Okay. That's very helpful. And then can you just elaborate a little bit on that and talk about the competitiveness that you have in the domestic market today?

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Andrés Conesa Labastida, Grupo Aeroméxico, S.A.B. de C.V. - CEO & Director [19]

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Yes.

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Joshua Milberg, Morgan Stanley, Research Division - Equity Analyst [20]

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How you see that? And also how -- and how you see the yield differential between -- your yield differential as compared to the low-cost guys?

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

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If you look at the last, say, 6 to 8 quarters, capacity in the domestic market has grown double digits. This is clearly unsustainable with an economy that last year grew 2% and this year will be flat. Also the outlook for next year is soft. So we feel that it's too much capacity, and that has put pressure on yields. That's why I mentioned before that given our discipline, we have been able to improve yields vis-à-vis our competitors. We will continue, it's our view, to be disciplined and not to have excess capacity growth. When the MAXs return, you will see a spiking in capacity, for sure, because we're expecting to fly 12 MAXs. Right now, we are not flying anything. We will have as we expect early January the 6. But all in, as Ricardo mentioned as well, we have not only the deliveries of 2019, but also the 2020 deliveries, so we have close to an additional 20 planes rejoining the fleet. So you will see that, but that's part of what happened with the MAX and not our planned program. So once we have that, we will brief you, see how we will accommodate the capacity. But again, by having this operational excellence, that's an edge of our -- vis-à-vis our competitors. We focus on the corporate clients. That is really, really important for them. So we are doing again in terms of NPS, in terms of -- because of the great operational reliability, we continue to have an edge on them, and we will continue to invest heavily on that to again strengthen our leadership position in the market.

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

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Josh, this is Nicolas. Just to build on what Andrés said on this same vein of perspective, just remember, Aeromexico is the only airline in the domestic market with a true first class cabin, with a true Aeromexico Plus, and -- meaning additional legroom in the front of the cabin -- with a true loyalty program, with real sales force coverage across the country, with global partnerships. So I think what you're seeing really is us focusing on our own strength and the market responding to that, staying, as Andrés said, true on course to who we really are, and that's starting to yield good results.

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Operator [23]

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We have reached the end of the question-and-answer session, and I will now turn the call back over to Andrés Conesa for closing remarks.

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Andrés Conesa Labastida, Grupo Aeroméxico, S.A.B. de C.V. - CEO & Director [24]

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Well, thank you for joining the call. Once again, we look forward to seeing you in the next call. Or if something important happens before, particularly with the MAX situation, we will keep you informed on that. So thank you, and please, any questions, Jonathan, Karen, they are all here in case you need them. Thank you and have a great day.

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Operator [25]

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