Controladora Vuela Compania de Aviacion SAB de CV (VLRS) 2015 Q1 法說會逐字稿

Good morning, everyone. Thank you for standing by and welcome to Volaris' first quarter 2015 financial results conference call. (Operator Instructions) Please note 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, operator. Good morning, everyone, and thanks for attending. On this call, we have Enrique Beltranena, Chief Executive Officer; Fernando Suarez, Chief Financial Officer; and Holger Blankenstein, Chief Commercial Officer. They will be discussing our first quarter 2015 results published this morning; and afterwards, we'll take your questions. This call is for investors and analysts only.

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 U.S. Securities and Exchange Commission. Furthermore, Volaris undertakes no obligation to publicly update or revise any forward-looking statement.

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

Good morning, everyone; and thank you for joining us. I will begin with an overview of our business and 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 a more detailed view of our financial results.

In short, we had a very strong first quarter. Our efforts in capacity discipline and diversification of network, non-ticket revenues, cost initiatives and seamless execution resulted in a first quarter adjusted EBITDAR and EBIT margins of 32% and 9% respectively, the former a record for the Company and a margin improvement of 26 percentage points compared to the first quarter of 2014. These results continue to reflect the quarter-over-quarter sequential improvement of market.

This year, within the first quarter, we had stronger-than-expected high seasons in the year-end holiday return traffic in January and in the Holy Week vacation period in March, which allowed us to expand our ASMs and increase passenger traffic. It is important to understand that, first, the comparable period basis last year was a very depressed one due to several factors. Second, we continue to diversify our network and manage capacity in a disciplined way, efforts which are paying off. And third, non-ticket revenues continued growing and performing well.

We attribute two-thirds of the quarter's operating margin increase to the Company's performance improvement and management execution and a third to tailwinds of lower fuel prices, net of exchange rate pressures. I want to be emphatically clear that Volaris' focus is to construct a profitable and diversified network regardless of fuel and exchange rate tail- or headwinds.

We continue with our network strategy and our ultra-low-cost carrier model philosophy with the following results for the quarter. TRASM improved 22%, mainly as a result of solid growth in non-ticket revenues of 65% year-over-year. Non-ticket revenues per passenger reached MXN337. We maintained capacity discipline in the domestic market with an ASM increase of only 4% and grew international ASMs by 31%. Passengers increased 16%. We performed at a load factor of 80% despite new market openings and ramp-up of routes.

We reached fleet age of 4.5 years and replacing older A319s with newer high-density A320s. We maintained the lowest unit cost ex-fuel in the Americas at $0.051, a 7% decrease in US dollar terms.

After opening 38 routes last year that we continue to develop and mature in the current year, we launched for sale five new routes in the first quarter, out of which two are international and three are domestic within our core of visiting friends and relatives point-to-point market focus.

We have continued with the operational excellence that distinguishes us, including achieving an on-time performance of 84% during the quarter, block time day utilization above 12 hours and maintenance aircraft reliability of 99.7%. We received one additional A320 Sharklet-equipped aircraft during the quarter and our fleet has reached now 51 aircraft: 33 A320s and 18 A319s. We expect to receive two A321s during the second quarter and continue working on the seat retrofit program of our A320s from 174 to 179 seats.

Before passing it to Fernando, who will review in further detail the financial performance of the period, I would like to share some perspective on how the second quarter is shaping up in an improving market environment, but still with some important uncertainties. First, consumer sentiment is still fragile and announced public expenditure cuts may affect consumer demand for the quarter and for the rest of the year. Industry capacity growth for the quarter as currently published appears to be rational. Nevertheless, industry pricing environment remains very fragile. We continue to see a better travel demand environment, driven by an improving Northern Mexico business environment on our cross-border traffic, but this is offset by seasonal effects.

Our capacity growth for the second quarter will remain focused on international market in a range of 33% to 34% ASM growth and disciplined in domestic market in the range of only 5% to 6% ASM growth, resulting in a blended network ASM growth of 12% to 13% range for this second quarter.

I just want to remind you that Volaris' total international market share in terms of passengers is only 4.5%, which means we're departing from a low base.

We will continue to grow non-ticket revenues, although year-over-year percentage comparisons will be less favorable because of a higher comparison basis. We remain concerned about exchange rate volatility despite the fuel price tailwinds and our increasing US dollar-denominated revenue base from our international operations.

Having said this, I would like to pass it over to Fernando. So please go ahead with the financial result details.

Thank you, Enrique. Now, let me expand on our financial performance during the first quarter of 2015. Our operating revenues for the first quarter were MXN3.8 billion, a 36% increase compared to the same period last year. This is a result of an improved domestic market environment, growth in the international market and strong non-ticket revenue growth, validating the change in trend observed since the third quarter of 2014. Our US dollar-denominated revenue from international operations already represents 31% of total revenue for the quarter, continuing to build our natural hedge.

During the first quarter, our non-ticket revenues reached MXN846 million, a growth of 65% compared to the first quarter of 2014. On a non-ticket revenue per passenger basis, we reached MXN337, a year-over-year growth of 42%. If we were to exclude cargo, non-ticket revenues per passenger increased by 53% in the first quarter. Non-ticket revenues reached 22.5% of total operating revenues during the period, up from 18.5% in the same period of the prior year.

As Enrique mentioned, TRASM in the first quarter was 22% higher year-over-year, partially driven by yield and RASM increases of 18% and 17% respectively. On the cost side, CASM was MXN1.125, a decrease of 5.5% during the quarter, driven by lower fuel prices and efficiencies in salaries and benefits by reaching 56 employees per aircraft and further savings in landing, takeoff, and navigation expenses. Fuel costs represented 31% of total operating expenses for the quarter, 8 percentage points lower than in the first quarter of 2014. We also observed efficiencies in fuel burn, reaching 700 gallons per block hour.

As an ultra-low-cost carrier, we continue to be best positioned to benefit from lower fuel prices. We started to benefit from such declining jet fuel prices since the fourth quarter of 2014 and would expect to continue so in the present year.

We have continued to remain active in our fuel risk management program. For the first quarter of 2015, we hedged 29% of our consumption through jet fuel swaps and call options at an average price of $2.53 per gallon. The total average blended economic fuel cost per gallon for the first quarter was $1.96. For the remaining three quarters of 2015 and full 2016, we have primarily purchased call options to hedge 45% and 38% of the expected jet fuel consumption at an average price of $2.09 and $1.97 per gallon, respectively.

Adjusted EBITDAR in the first quarter was MXN1.2 billion with a record 32% margin. EBIT reached MXN346 million. Operating margin was 9.2%, up 26.8 percentage points compared to the first quarter of 2014. Net income for the quarter was MXN306 million, representing a net margin of 8.1%. On an earnings per share basis, we earned MXN0.30 per Series A share and $0.20 per ADS.

During the first quarter, Volaris generated MXN949 million in cash from operating activities and MXN862 million in total net cash. We continued to strengthen our balance sheet and maintain a good liquidity position. Volaris had MXN3.2 billion in unrestricted cash as of March 31, representing 21% of last 12-month revenues and a record cash balance at the Company. We continued with a negative net debt or a net cash position of MXN1.9 billion.

During the first quarter of 2015, Volaris incurred in capital expenditures of MXN50 million which included acquisitions of rotable spare parts, furniture and equipment of MXN61 million, partially offset by reimbursements of net pre-delivery payments by an amount of MXN11 million.

Looking further into 2015, we expect to end the year with 55 aircraft, including our first two A321s. We have secured our lease and PDP financings of all of our 2015 and 2016 deliveries and have started to work on the 2017 deliveries financing alternatives.

Our ASM capacity guidance for full year continues to be in the 10% to 12% range; broken down 2% to 4% domestic and 33% to 36% international, reflecting cautious capacity management. Specifically, on margin guidance for the second quarter, and as Enrique mentioned earlier, within an improving market environment, but still with important uncertainties, we would note the following. We expect to perform at adjusted EBITDAR margin in line with the average of the 10 research analysts' estimates that we follow, which is currently around 30%.

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

Thank you, Fernando. We continue to rely on our team and their hard work to expand our networks and strengthen our revenue strategy and focus on delivering tangible results towards shareholder value creation. Our pre-tax lease adjusted return on investment capital or ROIC for the last 12 months as of the end of the first quarter was 17%.

Thanks for your attention. And at this point, we can move on to your questions. Operator, please proceed to the Q&A session.

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

Hi, thanks for the time. Congratulations on this margin recovery. Wanted to ask you about the seasonality of your business and I appreciate certainly the guidance that you've given for the second quarter from a margin perspective. But historically, the first quarter is a seasonal low point, well below the second quarter and well below the full year. I wonder if you could give us any reasons why that may have changed and one of the things we were thinking about is the seasonal shaping you've done with your capacity where you're up much more in the seasonally stronger months and maybe flat or even down in the seasonally weaker months. Is the business less seasonal going forward as you see it?

I think part of it, yes, Duane. I think what is important to consider is that the first quarter included almost 15 days or 20 days of high season from the Christmas season and almost 20 days from the Semana Santa or the Holy Week. That's not happening in the second quarter, okay. So the second quarter is basically empty of high-season periods, which creates a change. So, I think having the Semana Santa this year in the first quarter is improving our results.

Other than that, I think, we are concerned about, in general, the consumer sentiment; and we are concerned about some pricing effects that we started seeing in the market, specifically in the regional jet market and in the Monterrey market.

Can you articulate a little bit on the regional jet market and the Monterrey market? Is that a pricing change that you've seen or is that a concern you have that you maybe haven't seen yet?

Duane, this is Holger. We've seen some more proportional activities in the shorter stage length market flying out of Mexico City by all competitors. So we have seeing some pricing sensitivity there. That's what we would characterize.

And then the Monterrey market has seen a lot of capacity additions by all competitors as well, which is adding some pricing pressures in the Monterrey-specific market. Other than that, the yield environment continues with its positive trend.

Okay, thanks. And then, you announced a couple routes to Central America, I believe starting in June and maybe you could just remind us of how you see the relative growth opportunity for international outside the US, to places like Central America. Thanks for taking the questions.

Yes, Duane. Volaris just announced the launch of two routes. One is from Guadalajara to Guatemala and the other one is from Cancun to Guatemala. And that is within our core point-to-point VFR traffic philosophy. It represents a relatively small part of our capacity, which is currently at eight weekly flights out of a total of 1,600 weekly flights. As we move forward, we do see opportunities in Central America and we continue to analyze the most attractive new markets in Central America. But our focus will continue to remain in the trans-border traffic to the US.

Okay. Thank you.

Thanks to you, Duane.

Michael Linenberg, Deutsche Bank.

Yes. Just, actually two questions here. One, just the news out that Delta and Aeromexico are going to seek to put in place an antitrust immunized joint venture assuming that the Open Skies agreement gets approved. What's your thoughts on that? Is that something that you think ultimately Volaris -- maybe today it doesn't make sense for Volaris to pursue; but if other carriers team up with big international carriers, it's something that you have to do? Enrique, what are your thoughts on that?

Look, I always was saying that we are a low-cost model; and as a result, we have very low fares and it's very difficult to share part of our fares in a code share agreement unless it is a humongous size in terms of volume code share agreement. So we have not been thinking or we are not doing anything and we don't have anything on the table in relationship with doing something in terms of code share or teaming up with any other airline at this point.

Okay, good. And then, just my second question, just the retrofitting on the A320s going from 174 to 179, when is that completed?

And as you go through that exercise, are you able to sell the full 179 seats on the aircraft that have been retrofitted or is that something that because of the complexity and the fact that the wrong airplane could show up at the time of departure that you sort of refrain from doing that until the entire fleet is finished? I'm just trying to get a sense of maybe if there's some money being left on the table here.

Michael, hi, this is Fernando.

Hi, Fernando.

In terms of A320 retrofit program, we have already retrofitted 15 A320s, 279 seats and we expect (technical difficulty) program by summertime. And I'll pass it on to Holger to comment on the rest of your question.

Michael, we have put on sale the entire capacity of the retrofitted 179 A320s, 179-seater A320s starting April.

Okay.

And as more retrofitted A320s come on stream online, we will sell 179 seats. So we're not leaving any.

Thank you.

Helane Becker, Cowen and Company.

Thanks very much, operator. Hi guys, thanks for the time. So I was seeing this morning that the Federal Economic Competition Commission in Mexico launched an investigation into claims of monopolistic practices between Mexican airlines. I kind of find it hard to believe that they think that might exist, but what are your thoughts about that?

Well, first of all, we don't have any relationship or we didn't have any contact in terms of what they are qualifying there. So, we clearly don't think it's something related to Volaris.

Great, okay.

We are not aware that Volaris is part of such an investigation.

Okay. That's good to know. And then, the other thing is, as you're looking out to your growth and the opportunities in North America. So in the first quarter, your traffic, I think was up something like 10% or so on an 11% increase in capacity. As you add the new service, could you just say what your point of sale is, Mexico versus US? Are you picking up some US share?

Helane, typically, our flights are sold about half in the US and half in Mexico for the trans-border traffic; and for the domestic traffic, we also have some sales in the US as some of our flights are similar to a remittance scheme where people buy in the US for relatives in Mexico for domestic flights. But it's very even. Sales are very even between the distribution point in the US and in Mexico.

And then, I don't know if you can do this, but is there any way to sort of say what share of the bus traffic you're picking up now and how that has increased? That was something we talked about before.

The last time we did an investigation of this, Helane, I mean we found out that it was between 5% to 6% of our traffic, that was the first time, that they were first timers. And then, between 22% to 34% of our traffic claims that they first quote bus fares, and then they make a decision if they take the aircraft. So I would say, bottom line, somewhere between a 5% to 6% to 34% of our traffic is coming from the busses.

Great. Okay. Well, thanks for your help. I appreciate it. Have a nice day.

Thank you, Helane.

Stephen Trent, Citi.

Hi, good day, everybody, and thanks for taking my questions. Just two or three for me. The first is apologies. I couldn't hear you so well when you mentioned your hedge positions. I think you said 45% hedged for 2Q and then, was it 38% hedged for the back half? That's struck at $2.45 a gallon. I was wondering if you could repeat that for me.

Of course, Stephen. For the remaining three quarters of 2015, we have 45% hedged of our consumption at a price of $2.09 per gallon; and for full 2016, we have 38% hedged at $1.97 per gallon, in the form of call options.

Okay, that's materially better than what I've written down, so I'm glad I asked you. Thank you for that.

And just two other quick ones if I may. One is, looking at this robust cash and equivalents position that you've built, any thoughts medium term with respect to potentially paying a cash dividend?

At this stage, we think it's a better use of our resources to invest in the business and grow and open new routes than considering a dividend program.

Okay, that's totally fair enough. And forgive me, just one last question, as we look over the next three or four months, appreciate your color on what 2Q is shaping up to be with I believe in Mexico is going to have some congressional and gubernatorial elections in June, if I'm not mistaken. Are you guys seeing anything in the tea leaves at this point that maybe candidate X is leading and that candidate has a particularly strong platform on airport traffic stimulation or improved tourism; or do you think conversely that there won't be much change out of upcoming elections?

I don't think there's going to be a major change as a result of elections. I don't see anyone really making a policy change or a major policy change.

Okay, very helpful. I'll let someone ask a question, but thanks very much, guys.

Thank you, Steve.

Renato Salomone, Itau.

Hi, good afternoon and congratulations for the results. My question is about non-ticket revenues. You guys continue to surprise us positively there. In the last quarter, in the call, we discussed that you mentioned that you launched besides the combos hotel packages and your improving retail on board and carry on and you had a big lineup of new products. Could you please comment on the maturing of the products that you had recently launched in the second half of last year and what, if there is anything public already of the lineup that you could share with us, of the new products that you have recently launched earlier in the year?

Yes, Renato, thank you for your question. As you say, we had a very good ancillary revenue, non-ticket revenue growth in the quarter. We do recognize that the growth in the first quarter was exceptionally strong and especially because we had easy comps versus last year. And the growth, as you mentioned, stems from improved ancillary bundles that we sell on our website, revenue management of some of the prices of ancillary revenues, and bag and seat fees. Those were the drivers of revenue growth, non-ticket growth in the quarter.

If we look forward towards this year and next, ancillary revenues will continue to be a cornerstone of our commercial strategy. We do have a long pipeline of products in development and we plan to roll those out in 2015. Travel commerce which means commission-related products that we sell on our website is going to be one cornerstone; and then, improving the on-board options for the customers is going to be the other cornerstone.

We do see continued upside potential for the ancillaries throughout 2015 and 2016. And as Enrique mentioned, the year-over-year percentage comparisons will be a little bit less favorable because we're going to increasingly have a higher comparison base.

Excellent. Thank you very much.

Thank you.

Bob McAdoo, Imperial Capital.

Just a couple quick questions. Thank you. If crude oil does not change going forward and we are at this level of crude oil, what kind of fuel price should we think about for the rest of the year?

Bob, this is Fernando. As we mentioned, we already have a percentage hedged for the rest of the year, that is 45% at $1.97 per gallon, that's the hedged portion and the rest will depend on market price.

Okay. I guess what I'm saying is if market prices don't -- and I understand that a lot of your hedges are in fact call options, so I was trying to see if we could get some help in terms of looking at if the market prices don't change from here, what kind of number should we be using going forward for our models? That's was what I was trying to get to.

That should be the number again given that they are call options, we've effectively locked in that number.

We typically do not give any assumptions in terms of fuel price. We in our forecasting use consensus of fuel price from our analyst numbers.

Okay. I just somehow I had it in my head that if it was a call, that was really protection to protect you if it went up; but if it didn't change, the call may have been above current market price. But I guess I misunderstood what you were saying.

In terms of Open Skies Treaty, could you remind us as to when that is supposedly going to become effective? And once it becomes effective, what kind of a process would be required before you could enter some markets that -- trans-border markets that already have the two players in them? How long would -- what kind of a delay might you see in that?

Okay, I just want to clarify and leave it very clear that there is no Open Skies being signed. Okay? What we are -- what will be signing is (technical difficulty).

Pardon the interruption, everybody. This is the operator, it looks like the speaker line is disconnected. We will pause momentarily while they dial back in. Thank you

Hello, everybody. This is the conference operator. We have reconnected our speaker line. Mr. McAdoo, if you could please repeat your question for the speakers, sir.

Sure. Whether it's called an Open -- whether it's actually an Open Skies Treaty or not, there was -- my understanding is there's a high probability that certain of the provisions that limit your ability to expand into markets where other people are already there was going to disappear sometime in 2016. I was curious as to when you think that might happen and what the delay might be once such a new regime is in place.

Okay. So, what I was answering you Bob is, this is not an Open Skies bilateral signature, okay, and by no means the bilateral is becoming an Open Skies. What we are signing in reality and what in essence we're doing is the elimination of the restriction of the number of carriers to operate within the third and the fourth regions, okay, and it's going to be in place on January 16, subject to the Senate approval.

And then, once that's in place, you probably -- it shouldn't take a long time -- there's not another administrative procedure that you know of that would delay your ability to actually move into some of those routes. So, we could think in the first half of 2016 that we could probably see more flexibility there in terms of some additional routes.

Typically, the way the approvals come out is, it enters in effect right away once the Senate approves it. We see both opportunities and threats when it becomes effective. For the market as a whole, not for large groups, we see increased competition in business routes, particularly among luggage carriers and southbound leisure routes, particularly from the US low-cost carriers. I think our VFR secondary cities focus will shield us at least at the beginning; and as a result of that, in the long term, we see it positive for Volaris.

Okay. Thank you very much. That's helpful.

Thank you very much, Bob. Sorry for the cut and sorry to everybody for the cut.

Thank you, sir. This concludes our question-and-answer session. I'd like to turn the conference back over to Enrique Beltranena for any closing remarks.

So thank you very much to everybody. I think this was a very interesting first quarter. Results are I think very good and we will keep on working in providing our shareholders these kind of results going forward. Thank you very much to everybody. And sorry, again, for the technical cut.

Thank you, sir. Today's conference has now concluded and we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.