Grupo Aeromexico - Earnings Call - Q2 2024

Transcript

Operator (participant)

Good afternoon and welcome to Aeromexico's second quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. There will be a question-and-answer session following management's presentation, with instructions given at that time. For the webcast participants, you may submit questions at any time during the call using the Ask a Question section on the webcast, which will be answered during the Q&A portion of the call. As a reminder, today's conference is being recorded. Now, I'd like to turn the call over to Ms. Lucero Medina, Head of Investor Relations. Ms. Medina, please go ahead.

Lucero Medina (Head of Investor Relations)

Good afternoon, and thank you for joining us. We are conducting this call to present our second quarter 2024 results as part of the commitments from our successful restructuring process. The company has used the U.S. dollar as the presentation currency for its consolidated financial statements, which is also the functional currency of the group. All figures are expressed in U.S. dollars unless otherwise indicated. Reference is made to the confidentiality provision set forth in Section 2J of the Registration Rights Agreement entered into on March 17, 2022, by and among Grupo Aeromexico and the holders. All information disclosed during the call and included in the secure site is considered confidential and shall be subject to such confidentiality provision. Speaking on the call today are Andrés Conesa, our Chief Executive Officer, Ricardo Sánchez Baker, our Chief Financial Officer, and Aaron Murray, our Chief Commercial Officer.

Our CEO will open the call, providing insight into the company's performance and results, and Ricardo, our CFO, will then address our quarterly revenue, costs, and cash flow performance. There will be an opportunity for questions at the end of the call. Please note that we are not providing guidance nor forward-looking statements regarding future events, market, or economic trends for Aeromexico's future financial performance. The Q&A session following Ricardo's comments will be limited to these quarterly results. Due to applicable regulations, we are unable to provide any insight or address any topics beyond the historical aspects of our quarterly results. Now, I'll turn the call over to Andrés.

Andrés Conesa (CEO)

Thank you, Lucero, and good afternoon, everyone. We appreciate you joining us today. I am pleased and proud to share with you that throughout the first half of the year, our team has consistently delivered industry-leading operational and financial results. Our differentiated service to our customer continues to be the foundation for our record-breaking financial results. As reported by Cirium, Aeromexico was ranked as the world's top on-time performance airline in February, April, and May, and achieved second place in June. This positions us among the top performers in five out of six months in the first half of the year. We deeply appreciate the exceptional dedication of our team members and take great pride in being recognized as Mexico's most reliable airline. Moving into second quarter results, we transported 6.4 million passengers, which represents a 6.1% increase compared to the second quarter of 2023.

Our load factor increased by almost two percentage points from 84.4 to 86.3 between the second quarter of 2023 and the second quarter of 2024. We moved 20% more passengers in international markets. Our passengers to the Caribbean increased by more than 40% year-over-year, while operations to the U.S. and Europe increased by 31% and 25%, respectively, versus the second quarter of last year. In this second quarter, our total ASKs increased by 11% as compared to last year's second quarter. We increased our international ASKs by 17% and our domestic ASKs by 2%. Our positive trend continues and is clearly consolidating the remarkable results that we have achieved for over the past 18 months. The solid operational performance allows us to book record-breaking financial results during the second quarter. EBITDA was $427 million, with a 31% margin.

This represents a $87 million improvement compared to the second quarter of last year. Operating income amounted to $276 million, with a 20% margin, which represents an $85 million improvement as compared to the second quarter of last year. All these figures are historic records for the company for a second quarter. Also, last quarter, we received a new Boeing 787-9 aircraft. With this, we now operate 21 Boeing 787s and 145 total aircraft, with a fleet average of 8.5 years as of June 30, 2024. As our 19th anniversary gets closer, we are delighted to celebrate while maintaining an outstanding performance. We are committed to safety, reliability, and efficiency, and to offer valuable experiences to our customers and enhance our financial results. I will now hand the call over to Ricardo to discuss the financials. Thank you very much.

Ricardo Sánchez Baker (CFO)

Thank you, Andrés, and good afternoon, everyone. I want to echo Andrés in expressing pride for the outstanding performance of all the Aeromexico team. Congratulations for a fantastic quarter. Let's aim for even higher goals in the following quarters. As Andrés mentioned, in the second quarter, we increased our ASMs by 11% and reached $0.157 of revenue per ASM. This represented an increase of 9% in our RASM, which demonstrates our ability to expand unit revenues on top of a significant volume growth. Our total revenue during the second quarter increased by 21% from $1.1 billion in the second quarter of 2023 to $1.4 billion in 2024. Domestic and international passenger revenue increased by 21%. Domestic ASMs increased by 2% with a $0.163 RASM, while international ASMs increased by 17% with a $0.103 RASM.

Total operating expenses in the second quarter amounted to $1.1 billion, a 16% increase as compared to the second quarter of last year. Our total cost per ASM in the second quarter was $0.126, while our costs, excluding fuel, were $0.089. Our non-fuel CASM increased by 5.7%, mainly as a result of higher labor costs driven by the Mexican peso appreciation against the U.S. dollar and inflationary pressures. EBITDA reached $427 million with a 31% margin. This is an $87 million increase as compared to the second quarter of last year and the highest quarterly EBITDA in our history. EBIT for the second quarter was $276 million with a 20% margin, an increase of $85 million and 3 percentage points as compared to the second quarter of last year. EBIT also marks our highest quarterly record to date.

Net financing costs for the quarter decreased by 87% as compared to the same period of 2023, mainly driven by a foreign exchange gain, higher interest income related to increased cash levels, and lower interest expenses due to debt repayments and the repurchase and cancellation of senior secured notes in 2023. Net income for the second quarter amounted to $242 million as compared to $28 million in the second quarter of last year. This is a $214 million improvement year-over-year. Our cash flow generation continued to be strong. As of June of 2024, we have generated $788 million of net cash from operating activities. Operating cash generation has allowed us to reduce our leverage and invest in product improvements. During the second quarter, the company amortized more than $45 million of financial debt.

As a result, the total adjusted net debt to EBITDA stood at 1.3 times compared to 1.7 times at the end of 2023. Aeromexico's cash position as of June 30th of 2024 amounted to $1.1 billion. Amortization of financial debt since the emergence of Chapter 11 in March 2022 has totaled approximately $685 million at the end of the second quarter of 2024. Regarding our fleet, we finished the quarter with 145 operating aircraft, including 21 Boeing 787s, 87 Boeing 737s, of which 53 are MAX aircraft and 37 Embraer 190s. With this, I conclude my remarks. Thank you very much for joining our call, and we can now move forward to the Q&A section.

Operator (participant)

Thank you. At this time, we'll be conducting a question-and-answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions.

Ricardo Sánchez Baker (CFO)

As we wait for questions, we received some online, which we will discuss. A couple of questions have to do with the impact of the IT outage, the CrowdStrike problem that the industry suffered a few weeks ago. We didn't suffer any impact at all. We didn't have any cancellations nor delays. Our IT team worked overnight as the problem started, and we continued to fly all the scheduled flights that we have for that day and going forward. So we didn't have any impact. Then there is a question about the impact of peso volatility. I will make some remarks and ask Aaron to comment. As you know, the peso has depreciated since the election in Mexico, around 10%. It actually was above 20 pesos per dollar. Today, it's back below 19.

So basically, as the peso has been moving, say, in this band between 18.50 and 19.50 to 20, we are fine. As we have stressed in previous calls, we have a natural hedge on the exchange rate. So it doesn't affect the P&L. Obviously, if the peso depreciates strongly or appreciates strongly, it could have an impact on demand. In this band that we are seeing, we haven't experienced any impact on demand. We are not seeing any type of slowdown because of the peso depreciation, and we are monitoring it, obviously, in real time by the day. And Aaron, I don't know if you want to make any additional comments.

Aaron Murray (Chief Commercial Officer)

Yeah. From a domestic Mexico perspective, we obviously price and sell in pesos. And so we're seeing really strong demand fundamentals. When we report in U.S. dollars, there's obviously that conversion, but really strong demand both on volume and yield side domestically. International, we price mostly in dollars, and so there's a natural conversion. And so that becomes a little bit more expensive in pesos. And as you worry a little bit about what that will do with demand, we have not seen any impact, as you can see, by our load factors despite our capacity growth. So the demand fundamentals are there, and we'll stay on top of it.

Andrés Conesa (CEO)

There is a question about the fare environment today. Why don't you take this one before giving Ricardo the floor for the question?

Aaron Murray (Chief Commercial Officer)

Yeah, sounds good. Really strong fare environment domestically, as I mentioned, in pesos and international. With our capacity growth, yields are down a little bit over the strong performance last year, but still in a really good spot. We've maintained, despite our own capacity growth significantly international, we've seen a really strong yield environment across all regions.

Andrés Conesa (CEO)

Thank you, Aaron. There are a couple of questions that I will ask Ricardo to take over about the annual payments related to PLM and the CapEx, and there is also a question about the IPO, which what we can mention is that we, in the company, together with our advisors, are monitoring the market closely every day, and again, the timing of the IPO will depend on market conditions, so we will let you know about that, and please, Ricardo, if you can take this question.

Ricardo Sánchez Baker (CFO)

Yes. Thank you, Andrés. There's a question related to the annual payment related to PLM and if we anticipate any future annual payments related to this transaction. No, this is the last payment. As part of the agreement that we reached when we purchased back the whole loyalty program, no, we have a contingent value right associated to the performance of PLM. Since the performance has been very positive, we paid this earnout in the second quarter, but this is the final payment associated to the transaction. And now we own fully the program with no additional earnout coming later on. There's a question related to the seasonality of our cash flow generation and the view on the capital allocation for the rest of the year.

Yeah, I mean, in terms of our free cash flow, we expect, in general, as we have mentioned before, and we did last year, a little bit more of $400 million of free cash flow per year. If we think about how that is generated, usually the first half is a little bit stronger, given that a lot of cash flow comes into the company when our passengers buy their tickets for the summer. So a lot of that happens precisely during the second quarter. Then they fly during the summer. So therefore, the cash flow generation in the second half of the year is slightly lower. So if we think of our free cash flow generation of around $400 million last year, $250 million usually came from the first half and $150 million in the second half. That would be more or less the seasonality for cash flow generation.

In that sense, our capital program, our capital allocation program, is really distributed through the year. As mentioned before, last year, for example, we had a CapEx program of around $400 million. Of these, around $280 million are associated to maintenance CapEx, and the rest is different from maintenance investments. Thank you.

Andrés Conesa (CEO)

There is a question about ancillary revenues. Please, Aaron.

Aaron Murray (Chief Commercial Officer)

Yeah, so I can take that. From an accounting sort of ancillary reporting, I'll ask Ricardo to talk about that, but in terms of premium revenues, we obviously sell a lot of our revenue outside of just the base fares, and one of the things I've spoken to before that we really watch is what percentage of our revenue is sold above kind of your Main Cabin product. And before the pandemic, as we headed in there, that was about 24% of our total passenger revenue. This year, we're on pace or, sorry, in second quarter, we hit 41% of our total passenger revenue in sort of products above Main Cabin. The drivers of that are people now have the ability to purchase flexibility.

That was something that came out of the pandemic in terms of consumer behavior change, as well as just monetizing and upselling into our AM Plus Cabin and our Premier One and Premier Cabin. So we're seeing a lot more focus on buying premium products. Some of that is post-purchase, falls into ancillaries. Some of it falls into our passenger revenue as it's purchased through the booking flow, but really seeing nice progress as we sell premium revenues.

Andrés Conesa (CEO)

Thank you, Aaron. I believe there are no further questions. We can wait a moment if there are further questions from the people who are attending the call.

Operator (participant)

Thank you. As a reminder, if you'd like to ask a question, please press star one.

Andrés Conesa (CEO)

If there are no further questions, thank you for joining the call. We will keep you posted on the IPO as soon as we have news on that. Also, as I mentioned, we are not seeing any slowdown in demand. We are seeing a positive outlook for the summer, and we look forward to sharing with you the summer results for the third quarter in the next conference call. Thank you very much for joining, and we will keep you posted. Thank you.

Operator (participant)

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