Controladora Vuela Compania de Aviacion SAB de CV (VLRS) 2015 Q2 法說會逐字稿

Good morning, everyone. Thank you for standing by, and welcome to Volaris' Second Quarter 2015 Financial Results Conference Call. All lines have been placed 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. Also, please note this event is being recorded. Thank you, 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 joining us today. I would like to introduce Enrique Beltranena, CEO; Fernando Suarez, CFO; and Holger Blankenstein, CCO. They will be discussing our second quarter 2015 results published yesterday. Afterwards, they will take your questions. Please note that 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 the Company's actual results to differ materially from expectations for reasons described in the Company's filings with the US Securities and Exchange Commission. Furthermore, Volaris takes no obligation to publicly update or revise any forward-looking statement.

For our opening remarks, I will turn it over to our CEO, Enrique Beltranena.

Good morning, everyone. Total operating revenues for the second quarter of 2015 grew 24% year-over-year, adjusted EBITDAR and EBIT margins continued to expand and reached 31% and 9% respectively. We continue to see a strong growth of non-ticket revenues per passenger, which increased to a level of MXN339 or $22 per passenger. While CASM, expressed on a dollar basis, increased by 19%. CASM, excluding fuel, was at a record low of $0.049. In addition, total available seat miles increased by 14%. International capacity increased by a solid 35% while we continue with a conservative approach in domestic capacity with a growth of 7%, while the market grew up almost 10%. We also achieved an improvement in load factors, network wide 1.3 percentage points and a TRASM growth of 9%. The quarterly achievements are the reflection of our hard work to become a market leader in the local segment and a continued long-term growth trend in the Mexican air travel market during the recent years. It is worthwhile noting that in the past 46 months, the Mexican air passenger market grew at a rate around 10%, which was two to four times higher than Mexico's GDP growth rate for the same period; a behavior similar to an emerging market under stimulation by low fares. Despite a successful positioning of Volaris in the industry and the continued growth in demand, we remain very conscious of our capacity visit. During this quarter, we met passenger demand growth by adding capacity opportunistically in existing routes. Many of Volaris' markets are requiring more capacity as we see a consolidation of our ultra-low-cost carrier model with passengers increasingly switching from bus to air travel thereby stimulating demand for our services. During the first half of 2015, we announced another 15 routes on top of the 38 routes that we launched in 2014, all of this driven by a strong demand. These additions are in line with our point-to-point and our visiting friends and relatives expansion plan announced during our IPO. We also recently launched new routes to Central America and the Caribbean destinations, Guatemala, Costa Rica and Puerto Rico. Today, Volaris has a total of 45 international routes and 93 domestic routes totaling more than 138 routes making us the Mexican Airlines with the largest number of routes in Mexico and to the US. Volaris is growing profits out, thanks to our focused ultra-low-cost model and generating shareholder value independently of our lower fuel price. Today, A, we generate the highest margins in the Mexican market; B, we continue to be at the forefront of the industry unit cost advantage, our CASM ex-fuel is 39% below our main competitor; C, in our case, we produced yields that were 2% higher than in the second quarter of 2014 and cooperate with further growth on non-ticket revenue; D, low fares continue to be the first thing that passengers consider when looking to purchase an airline ticket. Volaris is focused on offering low base fares, 48% below our main competitor; E, non-ticket revenues continue growing during this quarter, increasing 48% year-over-year. Non-ticket revenues reached 24% of total operating revenues during the period, but we aren't done yet with the non-ticket revenue growth. For example, this quarter, we refined the ancillary combos and we implemented new commission-based products in the booking flow. In addition, we have implemented new a la carte ancillary products. We also see improved performance of the cobranded credit cards. Going forward, the more we collect in non-ticket, the lower our base fares may be, but we'll continue focusing on our TRASM equation. With respect to our fleet of 53 aircraft, we grew the quarter with 33 A320s, 18 A319s and our first two new A321s with more than 220 seats. During the second quarter, we completed our retrofit program adjusting the seat density of our A320s to 179 seats. We continued to be there and with a most modern and youngest fleet in America, with an average age of 4.3 years. High asset utilization of reliability continued to be our hallmark with a block time daily utilization of 12.5 hours and maintenance aircraft reliability of 99.7%. Summarize our achievement during this quarter, we can say that about half of the quarter's operating margin increased through results yielding from our network diversification, performance improvement and management execution. The other half is coming from tailwinds from lower fuel costs despite the FX headwinds. Once again, I would like to highlight that Volaris is committed to expanding our profitability, that's our most important priority, profitability of our ultra-low-cost model and keeping our ex-operational excellence. Volaris' EBITDAR margin is in line with the best-in-class global ultra-low-cost carriers. Now, let me pass it over to Fernando who will review the financial performance in detail for the periods in further. Fernando, please go ahead.

Thank you, Enrique. Now, let me expand on our financial performance during the second quarter of 2015. Our operating revenue for the second quarter was MXN4.1 billion, a 23.9% increase compared to the same period last year. As a result of our emphasis on a successful international network expansion, our US dollar denominated revenues already represents 30% of total operating revenues for this quarter. Continuing to build a natural hedge to exchange rate volatility for our business. During the second quarter, our non-ticket revenues reached MXN977 million, a growth of 48.3% compared to the second quarter of 2014. On a non-ticket revenue per passenger basis, we reached MXN339, up 23.2% year-over-year. TRASM in the second quarter was 8.7% higher year-over-year, partially driven by yield and RASM increases of 1.7% and 3.4% respectively in conjunction with growing non-ticket revenues. On the cost side, CASM was MXN112.5, a 3.3% decrease during the quarter, driven by lower fuel prices and efficiencies in salaries and benefits which helped to offset exchange rate pressures. We also achieved further labor productivity reaching 55 employees per aircraft. CASM ex-fuel expressed in dollars was a record low of $0.049. As we continue to grow, capacity has become diluted to our unit cost. This is a result of greater economies of scale, a young fleet, further fleet up-gauging to A320s and A321s, more [short-lived] equipped aircraft, higher seat density and better lease terms. The optimization and diversification of our network is not only supporting our cost reduction initiatives, but contributing to our improved performance overall, more point-to-point joining the dots approach strengthens further economies of scale, in our focused city resulting in unit cost decline.

We also observed efficiencies in fuel burn, reaching 708 gallons per block hour, one of the best fuel burn indicators for an A320 fleet worldwide. Fuel costs represent 32% of operating expense for the quarter, 7 percentage points lower than in the second quarter of 2014. The total average blended economic fuel cost per gallon for the second quarter was $1.99 per gallon. We have continued to remain active in our fuel risk management program. For the second quarter, we hedged 44% of our consumption, primarily through jet fuel call options at an average price of $2.15 per gallon. For the remaining half of 2015, full 2016 and the first half of 2017, we have purchased call options to hedge 47%, 54%, and 7% of the expected jet fuel consumption at an average price of $2.07, $1.99 and $1.91 per gallon respectively.

On the other hand, the Mexican peso depreciation has impacted our results. Again, our best hedge against the exchange rate volatility is to further expand our international network, which we have been accelerating. Adjusted EBITDAR for the second quarter was MXN1.3 billion, representing a margin of 31%, which is 13 percentage points higher than last year. Operating profit reached MXN349 million. Operating margin was 9%, up 11 percentage points compared to the second quarter of 2014. Below the operating line, we recorded MXN146 million exchange rate gain resulting from a depreciation of the Mexican peso on our balance sheet, net monetary US dollar asset position. Conversely, if the Mexican peso were to re-evaluate, we would [boke] an exchange rate loss. Net income for the quarter was MXN351 million, representing a net margin of 9%. On an earnings-per-share basis, we earned MXN0.35 per Series A share and $0.22 per ADS. During the second quarter, we generated strong cash flow with MXN947 million generated in cash from operating activities, resulting in a net increase of MXN872 million in total net cash. We continue to strengthen our balance sheet and maintain a good liquidity position enabling us to have the national flexibility to continue our growth. We recorded MXN4 billion in unrestricted cash as of June 30, representing 25.5% of the last four months' revenues and a record cash balance for the Company. We maintained a negative net debt or a net cash position of MXN2.6 billion. During the second quarter, Volaris incurred capital expenditures of MXN281 million. Our pre-delivery requirement for the remainder of the year and next year are fully financed with our revolving PDP line of credit. All 2015 and 2016 aircraft deliveries are also financed by way of executed sale leaseback agreement.

Moving onto guidance. We are carefully placing capacity where market demand is requiring by increasing seat density and aircraft utilization when supported by demand. Traffic to the US remains robust and we will maintain our projected growth rate in the international markets for the rest of the year. Based on strong demand in the domestic market, we are increasing our guidance to an ASM growth rate of 5% to 7% for the full year. We now expect this will result in a full year ASM growth rate for the entire network of approximately 12% to 15%. We remain very flexible on our network and fleet, and will continue to be disciplined in our capacity management adjusting our growth rate based on market demand. Now, I'll ask Enrique to make his concluding remarks before we open the line for questions.

Thank you, Fernando. Before concluding, as an evidence of our commitment to generate shareholder value, I want to highlight our main financial metric is pretax lease adjusted return on investment capital or ROIC for the last 12 months of 19%. We believe we will have the right business model in the right market with a solid management team that is working diligently to deliver results. Before concluding, I would like to thank all the Volaris ambassadors. Without their dedication and hard work, these solid second quarter results would have been impossible to achieve. Thank you for your attention. We would now like to proceed onto your questions. Operator, please open the line for the questions.

Thank you. (Operator Instructions). Duane Pfennigwerth, Evercore ISI.

Hi, guys, good morning.

Hi, Duane, how are you doing? Welcome to the call.

Thank you. Wonder if you could talk a little bit about the success you're having with service to secondary markets in the US, how much of your international growth is the secondary markets where you may not have direct competition, and has the success changed your thought process about where to grow?

Hi, Duane, this is Holger. Let me tell you a little bit more about our network expansion, what we've done is obviously focused a lot on the international growth, mainly to the US. And the growth year-on-year in the second quarter was 35.8% for the international markets and the overwhelming majority was coming from the US. Bear in mind that we also launched Guatemala service in this quarter, and out of that growth, 13 percentage points come from US existing routes that we already operate. And most of those existing routes are Guadalajara routes, which expanded 20% during the quarter. And then the remaining growth, 23 percentage points come from new routes into the US, most importantly our routes from Guadalajara to Portland, Reno, Orlando, Fort Lauderdale and so on, but also Mexico, we opened some new routes from Mexico and our VFR niche routes. We opened some new VFR niches mostly from the Bay area down to some of the VFR markets in Mexico. I hope I gave you some color on where we are focusing our growth.

That's great, Holger. But I guess within that opportunity set in the US, any qualitative commentary you could give about, maybe more secondary markets like Portland, we may not have had a directly competitive set of carriers serving the market?

Duane, what I can tell you is that we are very happy with our US markets, in general we've seen significant demand growth both in the niche markets that you mentioned and in our overall markets, and demand has not been affected by the exchange rate, for example. So, in general, both niche markets and existing capacity from Guadalajara is doing really well. Going forward, we do see additional opportunities in more of the US niche markets both from Guadalajara and from other locations in Mexico going to the US.

Maybe, to give you, I mean -- yes, those routes are doing very well, they are performing very well, but they do not represent more than 10% of (inaudible).

Okay, that's helpful. And then I might just stay here with Holger. Just very simply, what are the components of your ancillary revenue that you feel have not hit maturity yet, and thanks for taking the questions?

Well, we are exploring three avenues of ancillary revenue growth. Let me highlight a couple of those. First of all, we are applying proven revenue management techniques to some of the ancillary products. That is a process that we started this year and we believe that there is quite a lot of opportunity in that area. Secondly, we are capturing a larger portion of the overall travel budget. In the second quarter, we successfully launched some commission-based products like selling hotels and rented cars directly in the booking flow and that's a process that again started in the second quarter and I think there is still opportunities going forward. And then finally, thirdly, we are offering more products. We started with some new a la carte products as Enrique mentioned or we do have a long list of new products that we'd like to bring to the market for the remainder of 2015 and even through 2016. So those are the three components of growth going forward for the ancillary revenues.

Okay. Thanks, guys.

Thank you.

Michael Linenberg , Deutsche Bank.

Hi, good morning. Just on following up on Duane on some of the market development. I was curious about how the new JFK launch has gone, I think you started that just a few weeks ago and I know it's less than daily. In addition, a lot of these routes that are out of Guadalajara, you have built up a pretty sizable presence in Guadalajara. How much traffic is actually connecting in Guadalajara onto the US flights, or is it mostly point-to-point?

Michael, thanks for your question. This is Holger again. Let me first comment on Guadalajara JFK. We are operating that obviously from Guadalajara because Mexico City has taken up by the bilateral and the way we launched JFK, I think, is a very good example of how we think about the US market. It's a non-daily flight, a very much focused on the VFR niche and we utilize the aircraft very well overnight. It's a red-eye flight, which helps us increase the utilization of our entire fleet. Many of our US markets operate that way, and our bookings for that market have been really, really solid. Regarding connectivity; effectively, yes, in Guadalajara, we have a large US presence with over 20 markets that we service from Guadalajara. However, our network is built on a point-to-point methodology. So, we do connect people in Guadalajara, but it's not a primary focus of our business. Overall, connecting traffic is about -- is in the low-single digit overall.

Is it -- but Holger, as you build out that operation because of the slot constraints in Mexico City, my sense is that your Guadalajara operation is going to continue to grow, we should see that connectivity go up even if it's by accident and it's not intentional, my sense is that it would probably be a very effective way to get people from within Mexico to the US.

You may be right, Michael; this is Enrique, but remember that we also added more than 40 routes directly from Guadalajara and we kept on having routes direct, for example to Monterrey, 18 routes to Cancun, we have now more than 15 routes, okay. So, I guess you are probably right that we are much more focused on the point-to-point and growing the point-to-point, recognizing that there is some flow, and then on the other side, Mike, I mean the connecting process of the airports in Cancun and Guadalajara is really bad, okay. So, we understand that's [another growth] for us and we are focused on the point-to-point VFR carte.

Great. Thank you. Just one more, if you can just discuss the overall pricing environment. Earlier in the year, it seemed like that there was a bit more discounting, and then it seemed like things had stabilized, I think really latter part of the March quarter, early part of the June quarter. The fact that you're going to add more domestic capacity suggests to us that things have stabilized on pricing. Can you give us an update on how yields are looking?

Yes, Michael. In general, our strategy of diversifying and building our network domestically and internationally has worked really well. The peso-denominated yields have been relatively strong obviously because we have so much more international capacity than last year and the international markets continue to be robust in terms of demand despite our strong capacity addition and FX pressure. In the domestic markets, the yield environment for our markets has been quite stable, although we've seen some price softness in some of the short-haul regional markets mostly from Mexico City; but in general, we are adding capacity opportunistically where we see strong demand, especially where we are able to shift people from the buses to our airplanes, which is mostly in the Pacific Corridor and Northern Mexico area. In general, yield environment for our markets has been quite robust and stable in the domestic market and healthy in the US market.

Very good. Thank you, Holger.

Thank you.

(Operator Instructions) Stephen Trent, Citi.

Hi, good morning, gentlemen, and thank you very much for taking my questions.

Thank you very much, Steve, thanks for being here.

Pleasure, thank you. I was curious, gents, intrigued by the expansion into Central America. And I'm curious with respect to whether you see other airlines may be looking to do the same thing, may be not necessarily flights originating north of that region, but even flights originating from the other side, and what sort of competitive build-out are you seeing or should I say interest in the region from other players?

Yes. Look, we started operations with three routes, one from Guadalajara to Guatemala and two from Cancun to Guatemala and Puerto Rico is also within our core point-to-point VFR traffic philosophy, and then we later on announced Costa Rica with a service to Cancun and Guadalajara, which starts in September. I think the traffic between Mexico and Central America is something small and is very well-served by our competitors. So, it's something that we foresee as something that will start developing, but it's going to be slowly and it's going to develop while we keep on analyzing and stimulating the markets. We understand that some more players are looking at it which is okay, we're used to compete, but in general we think we would like to keep this whole thing smaller than everybody is thinking and that's the way we are thinking about it.

Okay. That's very helpful. And just one other question, just looking at, also related to expansion, some of your -- you announced some flights to Puerto Rico, any color with respect to the extent to which authorities in that region have maybe been trying to [lower] airlines, maybe slight availability or attractive landing fees given what it looks like some economic difficulty occurring in Puerto Rico?

This is Holger. Let me tell you a little bit more about Puerto Rico, we have four weekly flights, so it's a relatively small operation. The market -- the flight is geared towards Mexican wanting to get to north of Caribbean, and yes, every time we open certain markets, we engage with the local government and the airport authorities to see how we can make this flight work jointly.

Okay, very helpful. I'll let someone else ask a question. Thanks for your time, guys.

NA

(Operator Instructions) Helane Becker, Cowen.

Thanks very much, operator. Hi, guys. Thanks for the time. I think you said that your US dollar revenue was about 30%. Do you have a goal in mind for where you want that to be?

Helane, this is Fernando. You're right, it's currently 30% of revenue that comes from US operations. If we look at it on a collection basis, it's actually 36%, but we don't have a specific target for that; however, we do see that figure increasing as we continue to grow our international network.

And then the other question I had was with respect to either US growth versus other international, should we think about a mix that you're going to think about in terms of one US city, then one non-US city -- that kind of thing or is it more opportunistic, how should we think about that growth as you fill out your network?

Helane, this is Holger. The Mexican-US market is the most important international market going out of Mexico, it accounts for about 80% of the capacity and demand. So, clearly our focus is going to remain in the US-Mexico market and we are going to eventually add capacity to Central America, but we're going to focus on our core, which is the US-Mexican VFR niche market and that's where we're going to see most of our growth going forward.

Okay, great. Thanks very much, I appreciate the help.

NA

Benjamin Theurer, Barclays.

Hi. Good morning everybody. I actually have two follow-up questions. So, on the US dollar base and that combined with the ancillary revenue. Do you have some part of the ancillary revenue also charged in US dollars, that would be question number one related to that. And then second, if I take a look at the trend where we've seen at least on a sequential basis in terms of non-ticket revenue on the ancillary side, so we've seen little bit of a slowdown and it seems like it has been a little more difficult lately to grow that on a quarter-over-quarter basis. So, with the initiatives you've mentioned, Holger, just a specific question for you. What's the level you think we can expect to see the non-ticket revenue on a per-passenger basis to be in, let's say, six months' time and about 12 months' time, just to get a little bit of a sense what do you expect from all those from the three initiatives you've mentioned earlier?

Benjamin. Thanks for your question, regarding your question on US dollar ancillaries, yes, all our US dollar -- US itineraries are based in US dollars, both the base fare and the ancillaries. So, yes, clearly we do see some exchange rate impact there. In terms of the opportunities going forward, I mentioned three avenues of growth. We would not like to give any specific forward guidance for this year in terms of ancillary revenue per pax; however, our comparison base versus last year is getting increasingly difficult. So growth rates will certainly taper off, but we do see more opportunities in ancillary revenues per pax going forward.

Is there a way that you can actually raise the dollar shares, for example, some of that part of what you mentioned the commission-based products, etc. If you were to have ancillary revenues based on such a commission, can you introduce, maybe there are some dollar commissions as well on domestic growth. So is this only something where you have dollar revenues if it's US itinerary?

The commissions specifically are on a percentage basis and they depend on where the itinerary is sold. However, as we grow our capacity in the US, our dollar-denominated ancillary share should also increase.

Okay. Perfect. So, right now it's more or less the same or is it actually a level higher than the other one or is that 30% figure you have mentioned already a blended figure?

That's already a blended figure, Benjamin.

Okay, perferct. Thank you.

I think the way you need to think about the ancillary is, they behave pretty much in same trend as their revenues -- the general revenues. And it's basically the same platform and the same way we manage the currency, one. And then the second thing is, we always said that down the road two, three years from now, we can be somewhere around with level of ancillary revenues which is somewhere around 35% -- $35 per passenger because we cannot charge the [first bar], which is the case of Spirit (inaudible).

Yes. I know. I know you had a little issue. Perfect. Thank you very much for following up on this.

(inaudible).

Hi. This is actually Renato Salomone, thanks for taking my question. If you could comment on the experience you've had so far with the two A321s in the fleet and if we could see a faster than expected mix shift between A320s and A321s going forward as a way to capture opportunities out of Mexico City and also to offset cost pressures arising from the peso devaluation?

Yes. The A320s, we are using them, both of them, which is only two aircrafts concentrated in the Mexican market and we are now flying them to Cancun, okay. We will bring another three A321s in 2016 and we'll keep on concentrated them in Mexico City. So, we can take advantage of it.

But is there any chance that you could accelerate this process to negotiate with (inaudible) to receive more A321s than you had originally expected?

Yes, there is a way, but we remain very conscious about capacity management.

Okay, thank you.

Thank you. At this time, we've reached the end of our allotted time for questions. I'd now like to turn the call back over to Mr. Enrique Beltranena for closing remarks.

Thank you very much to all the bankers, and thank you for your questions. We really appreciate it and the reports that are already reported in the last 24 hours. Before concluding, I just want to remind everybody [this rate] for the last 12 months is at 19% and again thank our ambassadors, and I want to repeat it, I mean, without their dedication and the hard work they do, these solid second quarter results would have been impossible to achieve. Thank you very much for your attention, and thanks for joining us in this call. Bye.

Thank you ladies and gentlemen for your participation on today's call. This concludes the teleconference, you may now disconnect.