Controladora Vuela Compania de Aviacion SAB de CV (VLRS) 2014 Q4 法說會逐字稿

Good morning, everyone. Thank you for standing by and welcome to Volaris' Fourth Quarter 2014 Financial Results Conference Call. All lines are in listen-only mode. Following today's prepared remarks, we will open the call for questions and answers. Instructions will be provided at that time. Please note that this event is being recorded. I would now like to turn the call over to Mr. Andres Pliego, Volaris' Investor Relations Manager, please go ahead, sir.

Thank you. Good morning everyone and thanks for attending. On this call with us is Enrique Beltranena, Chief Executive Officer, Fernando Suarez, Chief Financial Officer and Holger Blankenstein, Chief Commercial Officer. They will be discussing our fourth quarter and year-end 2014 results published yesterday. And afterwards, we'll take you questions. This call is for investors and analysts only. Before we begin, please let me remind everyone that some of the statements we'll 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 company’s actual results to differ materially from its expectations for reasons described in the company's filings with the U.S. Securities and Exchange Commission. Furthermore, Volaris undertakes no obligation to publicly update or revise any forward-looking statements. For our opening remarks, I will turn it over to our Chief Executive Officer, Enrique Beltranena.

Thank you very much Andres and good morning to everyone. Thank you for joining us. I will begin with an overview of our business and I would like to present the main operating highlights that drove our financial results for the quarter, then I will share some insight on the status of some recent events before turning it over to Fernando for an overview of our financials.

Let me start. In short, we had an amazing December that drove the strong fourth quarter results. As a result of our capacity discipline continuing non-ticket revenue growth and our focused on cost control Volaris produced fourth quarter adjusted EBITDA margin of 31%, a 16 percentage points improvement over prior year. Net margin reached 18%, 21 percentage points better than last year. Our 2014 fourth quarter results were even better than our historically stronger third quarter performance, reflecting a sequential improvement of market conditions. For the full-year adjusted EBITDA margin reached 22% slightly above 2013. Net margin reached 4% for the full year and 2 percentage point increase compared to 2013.

In 2014 Volaris continued to refine its ultra-low-cost carrier model with the following results. First, TRASM improved as a result of several factors, but most important because of a solid structural growth in non-ticket revenues of 81% in the fourth quarter year-over-year. Our improved network is more diversified and has a less sensible and resilient structure with higher international capacity increasing the natural hedge to exchange rate volatility.

We expanded our market penetration in key markets like Guadalajara to International and Monterrey Domestic for managing domestic capacity with lots of discipline. We increased passenger traffic by 13% in the quarter. We increased load factor to 82%, 5 percentage points above fourth quarter of 2013. And we achieved the highest passenger per the departure number in the Mexican industry in the quarter. It is 48% better than the industry average. We maintain our historically high aircraft utilization of more than 12 hours a day. We maintain fleet age of four years by replacing older A319s with higher seat density A320s, and we maintain the lower unit cost in the Americas.

All of these elements represent a substantial turnaround of our operating and financial results achieved during the second half of 2014. During 2014, we transported 9.8 million passengers, which is an increase of 10% year-over-year, in particular, October and November performing in line with the sequential improvement that we reported in the third quarter. But in addition, December was a very strong month. The improved demand environment in the Mexican market enable us to transport nearly 1 million passengers in December alone, which was 13% year-over-year. While Volaris only focuses on profitability, we also view our improving market share as a very strong validation of the power of our ultra-low-cost carrier business model and customer preferences for low fares.

During the year, Volaris has expanded its market share among Mexican carriers to 23%. In December alone, our domestic market share was 25% in terms of segment passenger; already a fourth of the market. Nine years ago, I remember when we started operations, the domestic and international passenger markets were somewhere around 22 million and 26 million passengers, respectively. At the end of 2014, total domestic market in terms of segment passengers grew 8% for 2014, up to 32.9 million segment passengers and the total international market in terms of segment passengers grew 9.2% to 33.6 million segment passengers despite market rationalization, where 11 brand operators in this period of almost 10 years disappeared trying to make it.

In addition to an improving demand environment in the fourth quarter, various strategic initiatives contributed to generating revenue gains for Volaris. At the end of 2014, our network was a very different and more defensive network than at the end of 2013. Within our point-to-point network and VFR market, we proactively redeployed capacity during 2014, expanding and diversifying the network with more than 95 routes, where we either launched new capacity, or we grew capacity on existing routes. In 2014, we opened 36 routes, including five new destinations to the United States, reaching 18 total US destinations. We also reduced capacity more than 45 routes, all while becoming more resilient where our business has been strong.

In the domestic market, we readjusted our capacity expansion plans to meet the challenges of a very competitive market. Despite lower fuel prices, we'll continue to remain very disciplined in capacity and more disciplined in pricing during 2015. We will also continue to further diversify and strengthen our network. If we needed, we have enough flexibility to either contract or expand capacity growth as supply and demand conditions indicate. We've started to see some improvement in the domestic revenue environment in Mexico. For example, our review of today's published inventories suggest capacity into one of domestic market themselves for the first quarter of 2015, is down 10% in ASMs on the year-over-year basis.

Similarly, we can see now that Guadalajara capacity is down 4% in ASMs year-over-year. Based on the results for the fourth quarter and going into the first quarter, we are seeing that the supply and demand for aircraft seat is realigning and the deferred environment is starting to improve. As a result, Volaris' load factor has remained stable at 82.2% for the quarter and 82.8% for the full year. And we'll continue to be cautious with our capacity deployment, but I'm pleased to note that Volaris now offers more domestic routes than any order Mexican carrier.

After a year of operating with our reservation system Navitaire, we recognize that the system has helped building our ancillary revenue platform. With structural strengthened our product suite and have added many new ancillary revenue initiatives. This includes the successful launch of ancillary bundles, higher uptake in seat selection and important increase in our V-Club memberships as we reached more than a 100,000 memberships and over 250,000 members. In a scenario where fuel costs could potentially go back up, the margin growth already built in by our non-ticket revenue per passenger strategy will be even more important. We do not have a conflict of interest in going after bus passengers. Therefore, we continue implementing a very successful bus switching company.

In the fourth quarter for example, we did an allocation on trial plant, which went viral. We gave away 20,000 tickets targeting bus customers, which produced a viral impact in more than 20 million people, and for example, we did get 8.4 million views in Twitter. There we became a trending topic. For the full year in 2014, our cost per available seat mile in US dollars increased 11% compared to 2013, maintaining our commitment to keep unit costs at the lowest level in the Americas. Our US dollar cost per available seat mile in the month of December was already $0.046 without [due]. Despite Mexican peso depreciation versus US dollar, which have impacted our unit costs expressed in pesos, on the revenue side, we continue to build our natural hedges as US dollar denominated revenues reached 34% in December alone. A number of operational accomplishments in the fourth quarter include achieving an on-time performance of 85%. Block time daily utilization about 12 hours in December alone, almost 13 hours, and maintenance aircraft reliability of 99.7% during the quarter.

So now let me turn the call over to Fernando Suarez, our CFO who will review the financial performance of the period. Fernando, please go ahead.

Thank you, Enrique. Now let me expand on our financial performance during the fourth quarter of 2014. For Volaris International AFMs had a 14% growth during the quarter and 17% for the full year, while domestic ASMs showed stable growth quarter-over-quarter and 6% increase year-over-year. This resulted in a total 3% ASM growth for the quarter and 8.5% for the year, reflecting disciplined capacity management. Total operating revenues for the fourth quarter were MXN4 billion, a 24% increase compared to the same period last year. This is the result of an improved domestic market environment, growth in the international market, capacity discipline and strong non-ticket revenue growth validating a change in trend observed since the third quarter.

During the fourth quarter, our non-ticket revenues reached MXN818 million, a growth of 81% compared to the fourth quarter of 2013. On a non-ticket revenue per passenger basis, we reached a record of MXN313 million, a growth of 61%. If we were to exclude cargo, non-ticket revenues per passenger increased by 86% in the fourth quarter. Non-ticket revenues reached 21% of total operating revenues during the period, up from 14% in the same period of the prior-year. Other initiatives we implemented during the quarter, which have contributed to making our operations more efficient including a new iOS mobile application, which was launched in December, helped us to facilitate managing promotions and offering discounts to our customer base.

In the fourth quarter TRASM was 21% higher year-on-year, driven by a solid growth in non-ticket revenues per passenger. On the cost side, CASM in dollar terms for the fourth quarter decreased 10% compared to the same period in 2013. CASM ex-fuel reached $0.051 in the fourth quarter and $0.049 for the full year, a decrease of 3% and 9%, respectively. In Mexican peso terms, CASM was MXN1.164, an increase of 1.5% during the quarter, pressured by a higher average exchange rate for the period.

In the fourth quarter fuel cost represented 36% of total operating expenses, 4 percentage points lower than in 2013, despite a pricing lag from our main fuel provider in Mexico. In the fourth quarter, Volaris experienced pressures in other US dollar denominated costs such as aircraft rents, International Airport costs, and maintenance expenses. However, Volaris managed to offset most of these increases with efficiencies in salaries and benefits costs, and landing, takeoff and navigation expenses.

As an ultra-low-cost carrier, we are best positioned to benefit from declining fuel prices. We have started to benefit from such declining jet fuel prices in the fourth quarter and would expect to continue so in the present quarter. Volaris has continued to remain active in its fuel risk management program. Fuel hedging activities are conducted with a combination of instruments, including Jet Fuel swaps and purchase of call options. In the fourth quarter we have hedged 26% of fuel consumption through Jet Fuel swaps. For the first quarter of 2015, we have hedged 29% of our expected consumption through Jet Fuel swaps and call options at an average price of $2.53 per gallon. For the remaining three quarters of the year and the first half of 2016, we have primarily purchased call options to hedge 43% and 7% of expected consumption at average prices of $2.08 per gallon and $1.79 per gallon, respectively.

In the fourth quarter, adjusted EBITDAR was MXN1.2 billion with a record 31% margin. EBIT reached MXN426 million, up 17 percentage points compared to the last quarter of 2013 to an 11% operating margin. Net income for the quarter reached MXN703 million, representing a net margin of 18%, an expansion of 21 percentage points relative to the fourth quarter 2013. On an earnings per share basis, we earned MXN0.69 per Series A shares and $0.47 per ADS. Committed to create shareholder value, our pre-tax lease adjusted return on invested capital or ROIC for the full year was 14%.

During the fourth quarter, Volaris generated MXN470 million in cash from operating activities and MXN342 million in total net cash. We continue to strengthen our balance sheet and maintain a good liquidity position. Volaris have MXN2.3 billion in unrestricted cash as of December 31, representing 16% of last 12-month revenues. The company continue to report negative net debt or a positive net cash position of MXN1 billion. During the fourth quarter 2014, Volaris incurred in capital expenditures of MXN372 million, which included pre-delivery payments for future deliveries of aircraft, net of refunds of MXN189 million. As of December 31, 2014, the company's fleet was comprised of 50 aircraft continuing with the up-gauge of more A320s than A319s, with an average age of four years. Volaris closed the year with the largest narrow-body fleet among Mexican airlines.

Looking into 2015, we expect to end the year with 55 aircraft, including our first two A321s. As we continue to plan for the year, our ASM capacity guidance for full year of 10% to 12% broken down 2% to 4% domestic, and 33% to 36% international, reflecting cautious capacity management in the domestic market and a strong expansion in the international market. For January and February of this quarter, we continue to see improvement in the market environment as continuous capacity discipline is driving stronger unit revenues on a year-on-year basis. We continue to enjoy the tailwinds of a lower fuel environment plus continuing growth in our ancillary revenues, which should drive improving financial performance on a year-over-year basis for the quarter.

For the full year, assuming rational capacity growth in the market, coupled with current fuel and exchange rate environment, we hope 2015 will result in continuing recovery of the Mexican aviation market.

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

Thank you, Fernando. You did a great job. I'd like to mention that the first half of 2014 was very challenging for Volaris. However, as we have shown in our turnaround for the second of the year, our team efforts and the hard work on the network and revenue strategy resulting in finding ways to demonstrate as we are already mentioned our commitment to generate value return for our shareholders. ROIC was 14% for the year. We continue to build solid foundations for strong and profitable growth in 2015.

Before finishing, I would like to thank you very much to the whole Volaris team, but most important, the management team for their efforts in these very challenging year. Thank you for your attention. At this point, I would like to move on to your questions. So, operator, please proceed to open the Q&A session.

We will now begin the question-and-answer session. (Operator Instructions). Duane Pfennigwerth, Evercore.

This is Jeff Eisenberg in for Duane. Wondering what contributed to the strong sequential improvement, if you could talk about that on ancillary line and then how should we think about that going forward? In particular, is the fourth quarter a seasonally stronger or can it be expected sort of grow from here quarter by quarter throughout 2015?

Thank you for your question. This is Holger, Chief Commercial Officer. I'd like to highlight a couple of things on the non-ticket revenue in the fourth quarter. We launched a couple of new products like ancillary bundles, which is our premium and basic ancillary combo, and we also launched a couple of travel related products such as hotels and rental cars, where we earn a commission. And we expect to -- we saw some maturing of existing products that contributed to this significant growth. So new products, that I mentioned and existing products that are maturing. Excess bag continues to be our most important ancillary, which has also had a nice uptick in the fourth quarter.

And as we look forward to 2015, we are continuing to mature our product that we launched in 2014, such as retail on-board and carry-on bags. And we also continue to have a long pipeline of products and services that we are planning to roll out during 2015 such as travel commerce, and some other on-board options for the customer. We do recognize, however, that growth in the 4Q of 2014 was exceptionally strong. However ancillary revenues continues to be a cornerstone of our commercial strategy. So that answers your question.

Thanks for that. And then if I can follow up with, if you could talk about how much of the yield improvement in the quarter was driven by domestic Mexico versus international? I appreciate that. Thanks.

Well, in general, both markets had a solid yield recoveries driven by the capacity discipline in the domestic market and reasonable revenue management tactics by all players. However, in the international markets, we also saw yield improvements and as we grew into some of the new markets, we are able to ramp up the yields in some of the new markets internationally.

The next one operator, please.

Michael Linenberg, Deutsche Bank.

This is actually Catherine O'Brien filling in for Mike. First, I just wanted to congratulate you guys on such a great quarter. And then I just want to understand a little bit more about how much do you think the improvement in non-ticket revenue you would attribute to your new revenue management system, which allows for more dynamic pricing? And how much would you attribute to the addition of new products in your baggage policy change?

I think it's very difficult to establish the difference between the two numbers, but I think both things are happening.

Okay. That makes sense. And then also you mentioned that US dollar denominated revenue represented 29% of total revenues in December quarter, but I believe that the percentage of receipts from sales in US dollars are higher. Could you share that number with us? And how does that compare to your US dollar denominated costs?

Yes, Catherine. 29% of revenues in the fourth quarter came from the international operation. We mentioned in the call earlier that in December alone that figure is already close to 34%. When it comes to actual cash US dollar collection, that figure is above. It's closer to 40% -- almost 40% because of the factor remittance systems that we have -- we get more than a proportional share of a US dollar collection than Mexican peso.

Moving on to the cost side. Still about two-thirds of our cost structure is dollar denominated or dollar-linked. However, given that fuel has been decreasing as a percentage of total cost, that figure has gone slightly down. And as we grow our operations into the US and in the international market, we continue to build that natural hedge that protects us from exchange rate volatility.

If I could just sneak one more in. Just given your commentary on the yield environment international routes and the fact that you are expanding into international route system again this year, do you expect to continue to see these kind of yield improvements that we saw in December quarter, maybe not quite as high in a year-over-year basis, but in general, do you feel like just given the changing mix of the network, we could expect to see yields continue to grow, so long as the Mexican domestic market remain stable as it is today.

Well, as Fernando noted in his remarks, we expect capacity to continue to grow in the international market way above the domestic market; around 33% this year. So the average fare in the international market is higher. So overall, there will be a yield increase, but due driven by a higher international fare. We are -- we remain cautiously positive about the yield environment both in the domestic market and in the international market.

Operator, the next question please.

Stephen Trent, Citi.

This is Kevin Kaznica stepping in for Stephen Trent. A very useful color on the yields and also thank you for giving us some preliminary guidance for 2015. Now, I just wanted the circle back and that now full ASM for 2015, you said 8% to 12% and for international, 36% but I didn't catch the domestic.

Yes, Kevin. The full-year guidance is 10% to 12% ASM growth, broken down between domestic 2% to 4%, on the international 33% to 36% for full-year 2015.

And just I couldn't see in the press release, but you did kind of disclose, so of your Jet Fuel hedges and that kind of one little too fast for me to actually follow, if you could just circle back on that or you haven't place for like 1Q 2015, the rest of 2015, I think you said some -- you had some going out into 2016.

Of course. We also have it open in our investor presentation, but I will run it through you again. We have hedged 29% of expected consumption for the first quarter at a price of $2.53 per gallon. And then for the remaining three quarters of this year, we have 43% hedged at $2.08 per gallon, and we've already started to hedge the first half of 2016 with 7% at a price of $1.79 per gallon. And this is done primarily by way of purchase of call options for 2015 and 2016.

And then maybe I guess more on the fuel side, maybe taking a little deeper, have you observed any policy changes from PEMEX or from fuel distributors that could impact the price of domestic Jet Fuel carriers in the Mexico increased volatility via crack spreads like higher fees that are getting passed on to you guys or anything like that?

No, we have not seen that. It remains the same until today, and they have not announced anything.

And then finally, I guess just a very open-ended question, how do you guys feel about improving relationship between US and Cuba and could that positively impact your route flight strategy in the Caribbean, or that, I guess the general geographic area?

As we said on our road show, we are planning to open some Caribbean, Canada and Central American routes. It is a matter of time that we'll start tackling them. And we hope that it works pretty well. Since the relationship between the US and Cuba in reality has nothing to do with the commercial relationship between Mexico and Cuba, we don't have any comments on that.

Okay. Well, thank you very much for the color, and great quarter.

Helane, go ahead.

Helane Becker, Cowen and Company.

So here's one of my questions. I know that Open Skies between the US and Mexico take effect January 1. So as you think about your expansion, I know Aeromexico has said that they were going to expand more connecting routes over Mexico with their codeshare agreement with Delta. So, kind of, have you thought about a potential codeshare with US partner and how will -- have you thought about like Open Skies and the amount of expansion you'll be able to do in 2016?

Helane, specifically we have not done anything on codeshares. It is very difficult to make a codeshare when you have a ultra low cost carrier airline, okay. Because what you end up sharing because the fares been so low -- is very low, on per ticket basis, okay. And we are seeing the opening with very good eyes. Okay. And we think that there are some opportunities for us. Some specific markets like Houston to Mexico where we do they have two operators who are basically the same airline in both sides, one side in the US and in the other side in Mexico, okay. So we see opportunities there. And we on the other side, if you remember, we have more than 150 US, Central America, Canadian destinations that we want to achieve and we today only are operating in like 40% of them. So we clearly have a plan of expansion and continue expanding our network in a point-to-point system to the US.

And then just a different question related to fuel and non-fuel unit costs. So you did a great job in the fourth quarter of keeping them, of course, low there. How should we think about that for 2015?

Well, we continue with cost discipline definitely 10% to 12% ASM growth will clearly help unit costs as well with higher growth. And in addition to that, the up-gauge that we're obtaining from A320s fleet and our retrofit of the existing A320s to maximum density, that also helps dilute the fixed costs further and hence bring down unit costs.

Okay, great. Thanks very much for your time. Those are all my questions for now.

Thank you, Helane.

(Operator Instructions). Ana Reynal, Santander.

Congratulations on such a strong quarter. I just have one, first question. If Jet Fuel prices stick to where they are now, I'm computing already your hedges, what could we expect in terms of CASM fuel year-over-year in the first quarter of 2015?

Well, at this stage Ana, we're only giving capacity guidance for the year. We do have the sensitivity that we can share with you taking into consideration the hedges that we already have in place. Assuming all other things equal, that is fuel where it is and exchange rate, for every $0.10 change in the price per gallon, we can approximately expect a 100 basis point improvement in operating margin.

Ana, something you should take in account is, we do have a lag between the prices of --

Yes, right. Three weeks, right, as it reflects the change.

Four to five weeks. We only had the benefit of the oil I would say in the last couple weeks of November. And then the four weeks of December is still have a lag of about four to five weeks. So you should expect a lower fuel cost for the first quarter versus the last quarter.

Unfortunately, we have no more time for questions. I would like to turn back to Mr. Enrique Beltranena for closing remarks.

So thank you very much for your attention. Thank you very much for your support during this very, very difficult year. I am glad that here we are with the turnaround of the situation, with a margin expansion reaching adjusted EBITDAR margin of 31%, at an operating margin of 11%, which I think it's quite of an achievement. Thank you very much for your patience, and we are glad we're back here at this levels and that we are providing this level of results. Thank you to the team. Thank you to the Volaris family.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.