Avianca Holdings SA (NYSE:AVH) Q3 2018 Results Conference Call November 15, 2018 9:00 AM ET
Luca Pfeifer - Investor Relations
Hernán Rincón - Chief Executive Officer
Roberto Held - Senior Vice President of Finance
Gerardo Grajales - Executive Vice President
Jairo Agudelo - Valores Bancolombia
Matt Fallon - Deutsche Bank
Ricardo Sandoval - Davivienda Corredores
Alberto Valerio - UBS
Greetings, and welcome to the Avianca Holdings Third Quarter 2018 Earnings Results Conference Call [Operator Instructions]. As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Luca Pfeifer, Investor Relations Officer for Avianca Holdings. Thank you. Mr. Pfeifer, you may begin.
Good morning, everybody, and welcome. My name is Luca Pfeifer, Investor Relations Officer for Avianca Holdings. It is our pleasure this morning to review our business results for the third quarter 2018. As on prior occasions, we will be simultaneously translating our earnings results from English to Spanish.
Joining me on the call today is our CEO, Hernán Rincón and our Senior Vice President of Finance, Roberto Held; as well as our Executive Vice President, Gerardo Grajales. Hernán will go over the most relevant aspects occurred throughout the third quarter 2018. Furthermore, Roberto will review the financial results for the quarter. In addition, Gerardo will provide additional insight into Avianca's other business units. We will conclude with a brief summary and finally open the floor for question and answers.
At this point, I turn it over to our CEO, Hernán Rincón.
Well, thank you, Luca, and good morning to all. Thank you all for joining this morning. We always look forward to this conversation with you.
But before we go into the details of the numbers and the financials for the Q3, let me give you some backdrop and some framework for how we saw the quarter evolving. First of all, as you guys know, we have experienced a lot of FX volatility in Latin America, actually around the world. And that has clearly had an impact on our operations, especially in countries such as Brazil and Argentina where the volatility was very drastic and we saw significant depreciation of the local currencies.
In addition to that, we saw a continued high price for jet fuel, which has had an important impact on the financials support the airlines. In Colombia and other countries, we have seen infrastructure disruptions basically in airports that has also presented a few challenges. And finally, I'd say headwind, we finally closed a quarter without the impact of that the ACDAC or pilot strike that we had last year. And as you know that happened a year ago, but the impact of that strike linger around for whole year. Finally, we have recovered from that, and I will give you more details in a moment.
Colombia specifically that was affected primarily by the illegal air pilot strike we have fully recovered our operations. We’re now at a 100% capacity and that includes not only what we were doing before the strike but also the plans that we have for this year. So we fully cover up with our growth plans. And we have seen a nice recovery in the domestic market and we’ve seen a loss factor of 85% in Columbia itself. We stopped using the wet leases, which was a good solution for a few routes. As you may remember, we had good leases to New York and Madrid from several cities in Columbia. And although, it was a good service, it was not exactly what our customers were used to and we have some complaints from them about the quality of the aircraft and some other service. So that’s behind that as well.
We have seen overall very good passenger revenue growth of 13% against last year, which when you see 30% against the backdrop of the FX volatility is pretty nice, it's not bad. We had ASK growth of 6.7 on RPKs of 6.8, so above continual trend to always grow RPKs above ASKs. This quarter has been the fifth consecutive quarter where we have seen yield increase you and us have discovered this subject now for several quarters. A couple years ago, you kept asking us when this is going to happen, when will yield be claim begin increasing. And now I’m happy to report that for the fifth consecutive quarter, we have yield increase and this quarter of about 6% over last year and we are very happy with that.
We also saw decrease in adjusted cash ex-fuel of 5.1%, so both trends yield CASK ex-fuel going in the right direction, and the led us to an adjusted EBIT margin of about 7%. We saw a strong demand trend in North America and Europe that partially offset the issues that I mentioned before in South America and Caribbean due to FX volatility. And successful for Europe, we have seen record growth factor of 90%, so very nice and healthy for us. Other achievements beyond financial, in September, Avianca was again included in the Dow Jones Sustainability Index, and this is the second consecutive year in which we do that and we’re happy with that. And for the second consecutive year, we again were awarded the recognition of the best airline in South America by Skytracks. So that is the public passenger, travelers stating that we are indeed the best airline in South America.
Also, as we prepare to going to the 2019 where we will celebrate 100 years of continuous non-interrupted service in Latin America, and we’re very happy and proud of that record. We’re positioning in the company to perhaps just slow down a little bit in our top line growth in capacity, and in frequency, and route and concentrate a little bit more on our profitability, our cash flow and deleverage in the Company. And to do that, we have just launched an internal plan that includes multiple actions I’m going to highlight only a few here. We’re reviewing our fleet backlog with our vendors. We aim to defer up to 50 narrow-body aircraft and we’re at the same time, reassessing the stages of an additional 50 aircraft.
Our objective there is to delay the arrival of those airlines overtime to have it in a more orderly fashion, and not all at the same time that it was originally planned. We have also begun negotiations with strategic partners and lessors and in some cases to extend our aircraft leases and bring down the bond repayments, both having a great impact on our financials. We are also taking a second look or a third look in some cases at all our CapEx intensive project to decide which one we’re going to do first and do it again in a more orderly fashion.
We are reviewing on a daily basis, our network, try to optimize that. We have begun to cancel some less profitable routes and we’re deploying fleet capacity to all the routes. And we have begun evaluating divesting in some non-core business units that we have accumulated over the years that were probably important to the Company several years ago, but I know they're strategic right now. And finally, we will begin today a rightsizing of Avianca organizational structure and the target is to reduce labor costs by 15, also to improve transparency of our financial statements to the market. In Q1 of next we will begin segment reporting, so that you and the market can seek more closely and in more detail the airline business, the loyalty business and the cargo business in a separate way. And that will be below transparency to the market hopefully also more accurate valuations of our company.
So that's a summery for our first quarter. Again to close and before I turn it back to Luca, an okay quarter, it wasn’t great, wasn’t too bad. We saw growth, especially when I see it in the context of the macroeconomic environments we’re pleased how we were able to react to the market challenges and continues to grow the Company and continue to increase yields, and to continue to decrease CASK-ex fuel and to continue to improve on our EBITDA margins.
With that, over back to Luca.
Thank you very much Hernán for you summary of third quarter. With no further ado, I will turn it over to Roberto Otero, who will give us more insights with regards to the financial numbers of the third quarter.
Good morning, everybody on the call. So I wanted to touch base regarding the fleet plan that was already highlighted by Hernán in his initial comments. So for the quarter, we have incorporation of A320neos fleet, as well as 1787-8 during this month. So I want to highlight that the incorporation of 787 was financed by JOLCO, a UK expert agency financing transaction and is the first one in LATAM to be developed among this type of transaction. We returned two aircrafts, one A319 and one A320 in that top of 190 aircrafts for the whole organization.
In line with that with the comment of Hernán, we’re at this point of time, working together with our vendors regarding the order and we are targeting to develop up to 50 aircrafts in the coming years, as well as reassessing the status of additional 50 aircrafts. We should be having hopefully in the short-term some additional news regarding that, and we should be announcing further developments once they are concluded.
Moving towards our performance. So our performance during this quarter was solid -- was a good quarter in terms of our applications ASK. We had growth of 6.8% in terms of RPKs versus growth of 6.7% in ASKs. It's worth to mention a strong performance of our network and towards North America and Europe with load factors close to 85%. As you can see, we have been having a strong load factor throughout the year, reaching 83.5% for the first nine months, and this has been a very strong quarter versus previous quarters in terms of load factor. Yields are also performing on the positive side for fifth consecutive quarter of yields increase as it was mentioned by Hernán as well. And this is based on a strong average fair that we have been able to a market, our strong performance as well of RPKs. And we have been able also to manage the volatility and price and increased price of fuel throughout this past month.
In terms of revenues, we reached $1.2 billion for the quarter that’s an increase of 3.2% versus last year's third quarter. This is the strongest third quarter ever for the company. This is based on past revenue increase of 13.1, an increase of 3.3% in the passenger line. And this has been also positive towards the market that we have faced, and you remember that during this quarter, we had elections in several of the countries where we have operations, Mexico, Brazil and Columbia mainly, and that brought volatility in addition to the volatility of oil price. So it was a good quarter and we feel that we are on the right track for the company.
In terms of EBITDAR, we saw a decrease of our EBITDAR versus last year. This has been mainly due to effect of fuel, some remains of wet leases that we have to carry for some months of the third quarter. But we have also been delivering important efficiencies towards the operation towards the optimization of our fleet, optimization of our network and that drives also the CASK-ex fuel with an improvement of almost 5.1% for the quarter on an adjusted basis. As you know, fuel increase 34% for the quarter and that also has an impact on CASK, put also the volatility has some effect on that ratio. So we have been working on delivering more efficiencies, we have been also covering the operation and we will see moving forward that we will have a stronger performance on that line versus last year.
On the adjusted numbers, again, we see our performance in CASK, financial views on [Technical Difficulty] payments, our hedging continues to be in line with the previous quarters and we continue to be delivering that line that will cap and we will also protect us on any volatility regarding fuel. And that has driven the CASK-ex fuel grow in addition to other optimizations that we have delivered for the company to a level of 5.1 for the quarter.
EBIT reaches 7%, reaching totaling $86 million for the quarter and an EBITDAR 18.6% versus 23% of last year's third quarter. So we are resuming, as I was saying, our operations fully for the remaining part of the year and we will continue to capture the efficiency that we have delivered last year. So we will have strong performance moving forward as we have seen in the most recent numbers.
Moving towards the performance of our markets. We continue to see a strong load factors, especially in our home markets to Europe with a level of almost of 89%, home markets to North America and the domestic market as well a strong performance above 85%. We've seen from reductions on our markets to Brazil and Argentina due to the current economical conditions and that also had an impact on some of the regions, flights in the regions towards Central America and the Caribbean, but it has been also compensated by a fair performance of our markets in the domestic operation.
So I will now pass the -- in terms of our market share, we have now reached almost 54% of our market share in the domestic market and we continue to be strong in our markets towards North America, towards Europe and in the intra home markets we are very well positioned in terms of market share.
Now, I will switch to Gerardo, who would want the business unit's results of third quarter.
Thank you, Roberto. This was another good quarter for our business unit. Regarding cargo we have managed to improve yields as a result of our strategy aimed to offset fuel prices increases in the periods. We have also improved our connectivity, signing inter-line agreements with Asia and Middle-East and European cargo operators.
Our total cargo revenues in the period grew by 6.4% when compared to year's same quarter despite our capacity production of close to 4.4% in the period. RPKs also were down basically and our strategy was to focus more in profitability and trying to recover the fuel price increases and therefore, some volumes were affected in the quarter. We took the opportunity of this low quarter for us to perform some heavy checks on some of our A320 freighters and that's why the capacity was down also during the quarter.
In terms of our capacity reduction during the quarter, we managed to continue being the leaders in Columbia and being the third largest carrier out of Miami, which is our main half for cargo operations in which we sometimes during the year became the second largest operator in that market basically. Regarding loyalty our gross billings grew more than 17% in Q3 boosted by more co-branded credit card that grew 7.1%, allowing us to do more billings. Today, the loyalty program count is more than 8.6 million members, which represents an increase of 14.5% over last year. We have continued our penetration through our commercial correlation, and now count with more than 433 commercial partners in which members can redeem and accrue miles in those stores -- in more than 1,400 retail stores.
With that, I have to say that the contribution to the profitability of the company has been strong and we will continue doing so during the last quarter of the year.
With that, back to Roberto.
So we remain in our flight line the one we shared with you on the last call. We perceive that we will continue to be in the range of the EBIT guidance that we have expressed to you in the range of 6% to 8%.
We remain continue in our load factor that we have seen throughout the year above 84% that will be in the range that we have expressed recently, and we will continue to be also prudent in terms of our ASKs throughout the remaining part of the year. That will lead us to the guidance in the range of 8% to 10%, allowing to the passenger growth or something to have in the range of 5% to 7%.
In summary, we have been seeing that the fundamentals that we have placed throughout the last months and efficiency that we have captured since last year there, we feel that we are again resuming our operations as planned. We had a strong performance of revenues. We have been able to transfer the volatility in price and to our passengers. We have been able to recover part of the operation that was partially reduced during the first part of the year.
We remain confident on our initiatives towards the CapEx fuel that we have been seeing, especially in the quarter a reduction of 5.1 versus last year. We continue to have a strong performance in terms of our yield and a strong quarter again this time adjusted EBIT margins at a level 7% for this quarter. And this has been also good performance in terms of load factor as we have been expressing throughout this presentation. So the fundamentals are there. We foresee that Avianca is prepared to face this challenging environment and we are confident to deliver our strong quarter in the remaining part of the year.
So I will turn back to Hernán for some remarks or. Luca?
Thank you very much Roberto. With that we turn again our presentation. We would like now to open the floor for question and answer session.
Thank you. We will now be conducting a question-and-answer session [Operator Instructions]. Our first question comes from the line of Jairo Agudelo with Valores Bancolombia. Please proceed with your question.
I have two questions, one is regarding the performance of yields. You said in the conference that we have seen so far this year a positive recovery in terms of fuel. You were trying to pass through the increasing prices to customers. Now that we are seeing a share decline in oil prices, but also that's compensated by depreciation of Colombian FX. What can we expect in terms of yields in the coming quarters or moving to 2019? And my second question is in relation to the information that Hernán said that you are planning to be base some of the non-core units you have in Avianca. Maybe can you give us a little bit of more color of maybe mix units as you think be best maybe you have a timeline for 2019 or any additional information you can give us on that side. Thank you.
Yes. In terms of yields, we have seen and in regards to the oil price, we have seen very rapid decrease with the past days but we still need to review what’s going to happen in that market in the coming weeks and months. Therefore, we have been placing our strategy towards hedging and we have been also working towards our pricing units to new standard, market conditions to address that point. So we will be attendant to what's happening on that market. As you saw yesterday it went up again couple of -- fixed the price of oil. And so we will keep on monitoring that and we will be adjusting our operations towards that condition.
Let me just add Jairo, a comment on decreasing oil prices our plan does not include a significant decline in oil prices for us to continue to improve our performance. I think that's the best assumption that we can make if on top of our improved performance, we see additional decreases in fuel prices, it will be more than welcome for sure. But we are not counting on that as part of our plan. On the second question regarding non-core assets, we're reviewing them all, to be very candid, all of them, all of the ones that I noted is absolutely and Gerardo will comment on what we're doing so far in the moment.
But what we decided to do is we decided that there are three core businesses that we need to continue to nurture and grow are, for the airline, the loyalty business and the cargo business. And every other business that we have been into for whatever reason from the past, we're reviewing. It doesn’t mean that we need to divest from all of them, that's not what I'm trying to say. What I'm trying to say is we're reviewing all of them and decided one by one which ones are likely to be divested. And I'll let Gerardo comment on the progress that we have made already.
As Hernán has highlighted, I mean the most important business units that we have in the portfolio are the loyalty and the cargo business. Those two account for 70% of the total revenue generated in those business units out of the $1.2 billion that we are going to invoice this year those represent 70% plus. So the other ones are small, let’s put it that way, and we went to focus on the three verticals that Hernánmentioned. And therefore, we are analyzing those partnerships in which we have either 50% participation and the partner runs the business, so the natural buyers will be those partners. In those businesses, we have small airplanes original carriers flying Cessna Caravans in Central America, Nicaragua and Costa Rica, for instance. So those are the type of investments we are planning now to divest. We’re talking to the partner, which is the natural buyer in those cases. And the plan is to try to complete those sales to the first quarter of 2019 basically.
Thank you. Our next question comes from the line of Matt Fallon with Deutsche Bank. Please proceed with your question.
Is there anything other than accounting changes driving the decline in other revenue in cargo or is this purely IFRS15 issue?
It’s a matter of IFRS and some adjustments that we made regarding some compensations and agreements that we have with Rolls Royce at this point.
And as a follow-up, IFRS 16 had positive impact on the balance sheet itself. Can you please quantify that?
Can you repeat again the question?
IFRS 16, will that have a positive impact on the balance sheet? And if so, can you please quantify that?
We’re still evaluating. You understand IFRS starts next year, so we will disclose the effects once we have them fully identified.
Thank you. Our next question comes from the line of Ricardo with Davivienda Corredores. Please proceed with your question.
I would like to know how much in terms of CapEx means the deferral of the 50 airplanes you’re planning to do, especially for the year 2020 and 2022. We can see you had the more a stronger incorporation of the fleet. Thank you.
Two comments regarding that our strategy towards CapEx, as you highlighted, is also linked through the leverage strategy and cash generation for the coming years. Once we have ended our conversations and once we have finalized all the proper documentation, we will disclose the impact and the effect of that. But as you may understand when we talk about 50 deferrals and also reassessing 50, that’s a very important number to have effect on our financials.
It is material.
So we will disclose that information once we have finalized all the proper agreements.
[Operator Instructions] Our next question comes from the line of Alberto Valerio with UBS. Please proceed with your question
I would like to know if you see some improvement on the Brazil and Argentina environment for extent yields. Thanks.
We haven’t seen any specific material recovery yet. It’s a matter of fact when you look at in U.S. dollars of course our revenue has declined materially and droughts from those countries. And even in local currency, which is a strong sign that things have not recovered, things don’t look very good yet. So if even if you isolate the FX change and look in local currency, it has been a very important impact on demand in those two countries. So we haven't seen any recovery yet even.
When you saw the real come down from the 4, 4.1 to 3.6 to 3.7 even when that happened, we haven't seen an important rebound of demand of international drought. We are not counting on a very strong recovery for us to budget next fiscal year. We are assuming that the conditions will continue to be tough in those two countries for some time to come. And again, if things improve we'll be happy to celebrate but we'll be prepared for worst.
And just a follow-up, I saw that Avianca has, like you said, little bit of this in Brazil, especially international market in Brazil. I see a lot of increasing competition and Avianca I think leave a little bit Brazil, which is now I saw in the release the politic environment more stabilized. Would you come back to Brazil and increase the capacity in the accounts?
Sooner as the demand increases, we'll be happy to increase our frequency. As an example, we went from three to two daily frequencies from Bogota and Sao Paulo recently, because there was no demand at all to sustain three, but we will be happy to go back to three as soon as the demand comes back. But we are not counting on that to have the strong fiscal years '19.
Thank you. There are no further questions at this time. I would like to turn the call back over to management for any closing remarks.
Well, thank you all for participating again and for your questions. Let me make some closing comments. First, the challenging macroeconomic environment has been here. And as I said before, we are assuming that it will stay this way for the foreseeable future. And if things improve, we will take that as a windfall and we will celebrate. Having said that, we have kept our yield, recovery and improvement for five consecutive quarters and we'll continue to work on that as it’s one of the core aspects of our financial improvement.
Guidance for 2018 was already mentioned briefly by Roberto, but I will mention it again. Passengers were seeing 5% to 7% growth, ASKs 8% to 10%, a load of factor in the 81% to 83% and adjusted EBIT in the 6% to 8% range. So we're going to essentially in the sense that we've been telling you for some time and we have been proud that we have enable to sustain that guidance even when we have faced strong economic and FX and oil prices headwinds.
And as I said before, perhaps the most important message of today is the movement of our business model for one of growth to one of profitable growth. We will continue to grow in the years to come, not at the place that we have been doing it recently. Some of you may remember that Avianca had 30 aircrafts years ago and we have under a 90 day, that's rapid growth. We will not continue at that rapid growth, we are going to turn that down significantly and we'll make sure careful growth in capacity and concentrating our efforts on improving our service, retaining the loyalty of our customer, growing the cargo business simultaneously and overall, improving the performance of the Company, cash flow and the leveraging. We are well poised to that in Q4 and we're positioned to that in fiscal year '19.
Let me close on a sad note that Gerardo Grajales, our Executive Vice President, has been with the company for over 16 years, has made a personal decision to look that no opportunities elsewhere and he has decided to leave the Company beginning in Q1 of next year. So I take this opportunity to thank Gerardo for his contributions. As many of you remember, he was the CFO for many, many years, so he had a lot of contact with all of you. So I turn over to Gerardo for final parting words.
It’s been a pleasure dealing with you guys with market and with Avianca since 2002. It's been a long, long story here that I hope is going to continue in the following 100 year as Hernán has highlighted. Thank you all for being in this call and hope to see you soon.
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.