Controladora Vuela Compania de Aviacion SAB de CV (VLRS) 2014 Q2 法說會逐字稿

Good morning, everyone. Thank you for standing by, and welcome to Volaris' second-quarter 2014 financial results conference call. All lines are in a listen-only mode. Following the Company's prepared remarks, we will open the call for questions and answers. Instructions will be provided at that time. Please note this call is being recorded.

I would now like to turn the conference call over to Mr. Andres Pliego, Volaris' Investor Relations Manager. Mr. Pliego, the floor is yours, sir.

Thank you. Good day, everyone, and thanks for joining us today. On this call, you will hear from Enrique Beltranena, Chief Executive Officer; and Fernando Suarez, Chief Financial Officer. Also joining us is Holger Blankenstein, Chief Commercial Officer.

Before we begin, please let me remind everyone that some of the statements we will make on this call will constitute forward-looking statements within the meaning of applicable securities laws. Forward-looking statements are subject to a number of factors that could cause the Company's actual results to differ materially from its expectations for reasons described in the Company's filings with the US Securities and Exchange Commission. Furthermore, Volaris undertakes no obligation to publicly update or revise any forward-looking statements.

For our opening remarks, I will hand over to our Chief Executive Officer, Enrique Beltranena.

Thank you, everybody. Thanks, Andres, and good morning. Let me start with reporting the second quarter of 2014.

In the second quarter of 2014, the fair and demand environment showed early signs of stabilization, and then gradual recovery from the challenging fourth-quarter 2013 and the first quarter of this year 2014 market conditions. The Volaris team turned around our key performance indicators throughout the most difficult months of the last years, resulting in an improvement compared to the first quarter.

We consciously managed available seat mile capacities, both in terms of quantity and quality. Volaris delivered the monthly sequential improvement in total unit revenues. Capacity growth was controlled and redeployed where needed. Such improvement is uncommon in the aviation industry in such short timeframe. We are cautiously encouraged by the recent trends, and we continue to see evidence of improvement in the economic environment and in our business performance going forward, as a result of the tweaking of the available seat miles.

Improving but still fragile environment in the second quarter continued to be weighted down by new and higher consumption and income taxes, as well as higher airport fees. For example, value-added tax increased in border cities in January 1, where Volaris is a leading player. And it affected us in a disproportionate manner, given that 40% of our ASMs are based in such cities.

The Mexico City Airport increased passenger fees domestic and international by 38% and 74%, respectively. Nevertheless, because of the fare erosion, passenger growth continued in the range of 12%, and the broader economic environment started showing some positive signs of recovery. Economic activity indicator increased 1.4% in May, and employment has grown strongly. Dual exports grew 8% year-over-year, the highest improvement since November in 2011.

Remittances from the US have started to grow year-over-year. Important structural reforms have also advanced, with political and telecom reforms having been passed into law. And energy reform is around the corner, which is returning confidence to the business environment after a period of more than 18 months of uncertainty.

Up in skies negotiations between Mexican and the US authorities are ongoing. Volaris's preliminary perception of this move is independently neutral to our business in the short-term and can create an opportunity in the long-term. When managing our daily operations, the entire team remains very focused on accomplishing our medium and long-term value creation, growth and financial objectives, executing and continuously improving our Volaris Hotel Locust carrier mode.

For example, we are consciously managing ASM capacity both in terms of quantity and quality. We delivered the monthly sequential improvement in total unit revenues. The gap narrowed versus 2013 from minus 18% in the first quarter to minus 5% in the second quarter. Capacity growth was controlled and redeployed where needed. We saw a rebound in average fares sequentially from February to June each month, despite higher consumption taxes that impacted our customer days and the weak demand.

Non-ticket revenues continued to expand, with 44% -- let me repeat that number -- 44% growth year-over-year in the second quarter. Non-ticket revenues per passengers have now reached a record level of MXN275 per passenger. Based on our internal service, we see increasing customer acceptance of the bundled services model, which included a new [value] policy and introduction of the new You Decide ancillary bundles.

We expect a very positive growth momentum to continue. We have decided to restructure our cargo business focusing only on value courier and general carrier. We improved our carrier unit costs; hence improved profitability. Load factors remains strong at 82% for the quarter. We continue to see healthy market demand in domestic and the US to Mexico markets, particularly driven by bus traveler switchers.

Let me quote on a recognized Mexican poster called Mitoskey: The percentage of Mexicans that travel by air grew from 22.6% in September 2011 to 26.3% in October 2013, and price selection continues to be the most important deciding factor for the consumers. Despite the minimum for monthly sequential rebound in ticket prices, we continue to successfully build our market, and to position Volaris to take advantage of the strong fundamental drivers of growth in our target markets.

In Tijuana and Guadalajara, our competitors have been more disciplined with capacity in the last quarter. We will continue to see surplus of capacity in some of the market until supply and demand comes back into balance. As part of our capacity discipline in the second quarter, we had a 1% capacity increase compared to the fourth quarter of 2013, taking into consideration the new capacity allocated into the new market.

While we are building our market, we remain able to respond quickly to both opportunities and challenges, and improve the overall vitality of the new Volaris network. The Mexican Civil Aviation Authority, the DGAC, reported an overall passenger increase for the Mexican carriers of 12% from the first five months of 2014, reflecting underlying demand growth and progress in switching both passengers to air travel. Our Volaris Hotel Locust carrier model is an important beneficiary of such strong demand for generation.

33% of the total market passenger volume growth in the first five months of 2014 is attributed to Volaris and its low pricing levels. Market share is 23% in both domestic and international markets. We remain the second-largest operator among the Mexican American carriers according to the Mexican Civil Aviation Authority. We grew faster in Mexico to the US markets -- 25% in the second quarter compared to 2013, as we have seen a by far more robust environment in the international market.

We have continued to diversify our domestic network with a fixed base [monetary], where in the first, we have open seven city origin and destinations. Recently, we announced another six-city first, to be opened in the following quarter. We are not new to domestic, and international destinations and routes such as Mexico City, Vera Moser, and Chihuahua to Limberg. And we are already selling what Guadalajara to Portland in Oregon.

In addition, we managed to secure our slot allocation in Mexico City Airport for the high season. Slot control in Mexico City International Airport is also helping the market to improve pricing because of the limitation of capacity in that airport.

All these actions have resulted in the stabilization of the TRASM, the Total Revenue per Available Seat Mile, erosion we unfortunately have experienced, and are consistent with our point-to-point base switching, and visiting friends and relatives core business model. On the cost side, we are lowering our cost per available seat mile, excluding fuel, in 1.5% during the second quarter, and we will continue driving costs down by replacing the A319s with A320s; by outsourcing programs at the airports; preparing our retrofit plan for the A320s to increase density, without affecting our labor contracts and without any effect on that.

Given the market environment, we continue to intensively manage capacity. And in the third quarter, we expect an increase in ASMs of 10% to 12% year-over-year, broken down between 19% to 21% international and 7% to 9% domestic. Our second half of the year is historically a stronger half than the first. We are still on target with our full-year guidance of 11% to 13% capacity growth range.

With these ideas in mind, I would like to hand it over to Fernando to give you guys some details of the numbers of the second quarter. Please, Fernando.

Thank you, Enrique. And thanks to all of you for joining the call today. We had a very challenging start to the year, but see the trends slightly improving. Let me take you through some of the highlights of this second quarter demonstrating the progress we've made and how our Volaris ULCC model is paying off.

For the second quarter, Volaris's total operating revenues were MXN3.3 billion, an increase of 9% due to a seasonally stronger second-quarter and non-ticket revenues growth. Volaris booked 2.4 million passengers in the second quarter. This equates to a 15% growth year-over-year. Volaris's traffic, measured in terms of Revenue Passenger Miles, or RPMs, increased 14% in the second quarter.

Non-ticket revenues increased 44%, reaching MXN656 million. Non-ticket revenues per passenger increased 26%, reaching MXN275 or $21, a record figure here at Volaris, and an important step forward in achieving our product on bundling strategy. Non-ticket revenues, excluding cargo from passenger, increased 46%.

Total operating Revenues per Available Seat Mile, or TRASM, decreased to [MXN1.132] or $0.087 -- a 5% decrease year-over-year. Operating expensables per available seat mile, or CASM, excluding fuel, decreased 1.5%, reaching MXN0.704 or $0.054, reflecting Volaris's sharp focus on cost control. Total CASM for the second quarter was MXN1.164 or $0.089, a 0.8% increase compared to the second quarter, driven by a higher economic fuel cost per gallon and higher average exchange rate during the quarter.

Continuing with our strategy to further reduce unit costs, Volaris has taken deliveries of larger, Sharklet-equipped A320 aircraft. During the second quarter, Volaris received two new Sharklet-equipped A320s, bringing our seat mix of A320 to A319s to a 65%/35% split. As of June 30, the Company's fleet was comprised of 48 aircraft. That is, 29 A320s and 19 A319s, with an average age of 4.1 years.

Adjusted EBITDAR was MXN595 million with a net loss of MXN75 million, or MXN0.07 per share and $0.06 per ADS. Our balance sheet remains strong and liquidity is good. As of June 30, Volaris had MXN2.1 billion in unrestricted cash and cash equivalents, representing 16% of last 12 month revenues. The Company recorded negative net debt or a positive net cash position of MXN1.3 billion, and total equity was MXN3.5 billion.

Volaris was net cash flow from operating activities neutral during the second quarter. We incurred in MXN215 million of CapEx, which included previous repayments for future deliveries of aircraft net of refunds of MXN89 million, and acquisitions of other assets of MXN126 million. On the fleet financing side, we concluded our RFP process for our 14 remaining A320 seals deliveries in 2015 and 2016. We executed LOIs and obtained necessary corporate approvals for operating leases, which takes care of our aircraft financing needs for such years.

On the risk management side, we continue to hedge our fuel costs in the short-term. As of today, we have already hedged via jet fuel swaps 19% and 12% of our expected fuel consumption for the third and fourth quarter, respectively. We have proven that Volaris can manage throughout difficult periods and continue to create value in the face of challenges. Over the longer term, the growth of the Mexican air travel market should continue to present opportunities for us.

Now I'll ask Enrique to make his concluding remarks before we open the line for questions.

Thank you, Fernando. In closing, I'd like to thank all of you in the financial community who have taken the time to discuss with us in detail over the past months the ways we are building our market and our business for the long-term. I would like to underline the last part of that Fernando just read.

We are creating more value for the shareholders in the face of very difficult challenges, and the Company and the management was able to turn around the situation. Thanks again. And please, operator, will you open the line for questions?

(Operator Instructions). Duane Pfennigwerth, Evercore.

This is Jeff Heisenberg in for Duane today. Question -- what new ancillary offerings are not fully reflected in your 2Q run rate? And where do you see this headed longer-term versus the $21 level?

We continue to see good growth rates in ancillary revenues. We achieved good acceptance of our baggage and baggage policy and our carry-on charges, as well as some of the bundles -- new ancillary bundles that we are offering on our website. Going forward, we expect the growth rate to keep up, and we expect ancillaries well beyond $20 in the future.

Okay. And maybe if I could follow up with a question on -- can you offer your thoughts on the likelihood of potential consolidation in the Mexico airline industry?

Yes, Duane. This is Enrique. Thanks for your questions. We keep on planning and managing our business on a standalone basis, and we are executing our business plan accordingly.

Okay. Well, thank you for taking the questions.

Mike Linenberg, Deutsche Bank.

This is actually Catherine O'Brien filling in for Mike. Congrats on the quarter, and just wanted to see -- are you continuing to see sequential improvements in total unit revenue as we move through the September quarter? And do you think you might see a year-over-year growth in the September quarter? Or is that still too aggressive, just given the market conditions?

We are cautiously optimistic about total revenue per available seat mile. It's probably too early to tell whether we have growth for the next quarter. We do see a slightly better fare environment, but total revenue per available seat mile continues to be under pressure, due to the market conditions.

You broadly need to understand that we are in the middle of a high season quarter that has a month which is a very low season month. We just want to get to the low season month to see what the reaction of the entire environment is, so that's why we are still not giving any of you some guidance.

Okay, great. And the year-over-year growth in your non-cargo ancillary revenue was really impressive. Can you give some more details on what drove that? Like what would you say were the top three drivers of that growth? The bag fee or maybe the buy onboard? Any color would be really helpful.

Sure. We introduced new baggage policy early in the year, and that has been accepted well by customers. Customers are getting used to the carry-on charge that has driven a lot of the growth. On top of that, we are seeing very good uptake on our seat assignment charges. And finally, our membership-based product, the Volaris Club, is also seeing good uptake in memberships. So I would say those are the three elements of growth in the last quarter.

Okay, great. Thank you so much for the time.

(Operator Instructions). Eduardo Couto, Morgan Stanley.

Congratulations on the results. A couple of questions from my side. First on the non-ticket revenue, still -- just I would like to have a better color on how bad the cargo business was? Just to know if the economy really picks up and things improve on cargo, how much you can improve of that? So, if you can tell me how relevant the cargo business is for the ancillary revenues and how bad it was in the second Q?

Hi, this is Enrique Beltranena. Look, our cargo business, if you remember, it's a business which we traditionally have been seeing at something which is kind of gravy because of our delis, okay? We are totally focused on that now. We reduced the part that we were doing with the small cargo freighters. And, as a result of that, maybe the sales are not improving that much. They remain basically flat versus the previous months, but our profitability has improved more than 50%.

But do you see room for sales growth as well?

Not honestly. I think it's a line that will stay more or less that level, and I don't see us focusing that much on that. I mean, remember with the local carriers, we are probably one of the few that focuses on this. What we're trying to do is to do what we can within the belly space, but our focus has to be really to drive the local's carrier model. And that's where we are focused today to provide the shareholders and investors a better performance.

Okay, Enrique. Just another point on the fare side now. The fares improved quarter-on-quarter, right, but they are still down year-over-year. Can we expect to see fares up year-on-year at some point this year? Or how do you see fares progressing in the second half?

Well, we do see a slightly -- a slight recovery of the fare market, as you mentioned. But the fares continue to be under pressure, due to the general market environment, the new consumption taxes that were put into place, and the general sluggishness of the Mexican economy. So it's too early to tell how the year will turn out, but we are very encouraged by the improvement in fares over the last quarter.

I think what is important is that you guys have focused yourselves in not only looking at the base fare, but at the addition of the base fare for all the non-ticket revenue per passenger. If you look at those two numbers added together, the Company is getting to a better performance.

Okay. And just also a little bit related to fares, guys, the competition -- can you give us some color on the Adam Hipocontivo competition, especially on your main airports like Guadalajara, Tijuana? Do you think the Adam Hipo is still putting capacity with this new product? Or they are more stable? So, how is the competition?

Look, I think what I -- to be honest with you, I'm much more focused on what Volaris can do with its capacity within that area rather than being focused on Aeromexico, okay? So we continue to build and diversify our domestic network, and we deploy both to new markets within Mexico and to the international markets. We are very much focused on that while preserving our capacity in those areas, and trying to improve, in the mix, our performance in terms of base fare and ancillary revenues.

Okay. On the international side, I think you did -- you know the capacity additions that we have seen not only from Volaris but from other carriers on the international market, but they have been big, right? It's like 20-plus-percent of ASM growth. So aren't you a little bit concerned about all these additions to the international market that, you know, that maybe at some point the fares or the environment that, today, seems quite good for international flights, could get worse at some point?

Our network is based on a point-to-point network. So we are very much focused on markets that haven't been serviced before, that are in our BFR core. And they have seen quite strong performance in the last quarter and actually year-to-date. So we are going to continue to allocate capacity into profitable BFR niche markets in the US. And capacity expansion by other carriers have been mostly to other types of markets, like, for example, beach markets or business markets.

So you don't see incremental competition on the international side -- you haven't seen?

We -- in our markets, we have not seen incremental competition. We see that other carriers are diversifying their network to other overseas locations, and in other market segments.

I think the only important part -- and I think Holger stressed it very well at the beginning of this answer, is -- we are a point-to-point operation within visiting friends and relatives markets, okay? Expansion of our markets are markets that are not being used by the rest of the carriers. And if there has been some capacity deployment to international markets from other carriers, yes, it has been to the traditional markets like Mexico City, Guadalajara, Cancun, and Cabo, for example.

Okay. Okay, guys. Thanks Enrique, Fernando and Holger for your very clear answers.

Look at our expansion. I mean, we're talking about Denver Chihuahua. We're talking about Oregon. Okay? So very different kind of expansion related to what the traditional carriers are doing. So I'm not concerned about capacity in the markets where we are operating and where we are expanding.

Okay. Thank you, guys.

Renato Salomone, Itau.

Can you comment on the opportunities that have arisen from Navitaire from the implication of Navitaire? And if this strong improvement quarter-over-quarter from non-ticket revenues, if it already shows the implantation of or if that is something that we will see later on throughout the year? Thank you.

Renato, definitely the implementation of Navitaire -- the goal of the implementation of Navitaire was to have a platform to be able to sell more ancillary products. And the results of the last quarter show that this decision is paying off. We are able to sell more ancillaries on our website and in other distribution channels, as well as at the airport.

On the other hand, we are seeing a shift of our distribution towards the Web, which is also one of the benefits of the Navitaire implementation. We have a much better website with much more functionality.

Going forward, we will see additional improvements. For example, we are going to add some new products to our website, and we're going to revamp our mobile application. We're going to continue to revenue manage our ancillaries. And all of these improvements that we envision going forward, the basis for that is our new Navitaire reservation system. So we are pretty happy with it.

Thank you. And should we expect new ancillary categories for the rest of the year? Or more -- or new categories should be more of a 2015 story?

Oh, we are going to continue to implement new products on the website and in our distribution channels. We are implementing a new membership-based services. And then just general improvements of the ancillaries that we already have for sale.

Very clear. Thank you.

Oh, yes, there will be additional ancillaries.

Victor Mizusaki, UBS.

My first question is more of a kind of follow-up. Why don't we take a look on second-quarter results -- I mean, when we take a look on your earnings release, you're basically saying that you had the full rollout of the baggage policy announced, some additional fees. So, when we take a look on your third-quarter results, can we say that probably you see revenue -- ancillary revenue per passenger above MXP207?

And my second question, I mean, when we think about yields, then you have a high season the third quarter, can we say that you'll likely have these versus combination of higher ancillary revenues per passenger and the much better yields?

To be honest with you, I insist that I would like to be very cautiously optimistic on the next quarter. Okay? July is going very well, it's improving, but I don't want to say anything until we finish -- until we have much more clarity in September.

Okay. And Enrique, why don't we think about competition, I mean, even basically when we tracked down your total fare price or average fare price, and basically we can see it's going down, but as you mentioned in the beginning of this conference call, you're making more money with ancillary revenues. What's happening with your competitors, for example? Are they reducing capacity in this relative to your -- you have the full implementation of this strategy?

Yes. Look, we've seen several changes in the market. I mean, we have a carrier which is sliding small aircraft into smaller seating fares, which is something different and new. We have seen some of the latency carriers reducing some capacity in the traditional CT fares. We have seen US carriers expanding capacity into Mexico aggressively. So we have seen everything.

And I don't think it's really much linked to the fact that we are reducing the fares or not. I think it's much more something that is being managed at each of the carriers, depending on its own conditions. I cannot say that there is a real trend on anything, except for us, who has clearly a trend of maintaining base fares down and improving on ancillary revenues.

Okay, thank you.

Well, at this time, we see no further questions. We'll go ahead and conclude the question-and-answer session. I would now like to turn the conference back over to Mr. Andres Pliego for any closing remarks. Sir?

Thank you, everyone, for joining us today. And please, as always, feel free to follow-up with me with any additional questions or comments you may have.

And we thank you, Sir, and to the rest of the management team, for your time. The conference call has now concluded. We thank you all for attending today's presentation. At this time, you may disconnect your lines. Thank you and have a great day.