Controladora Vuela Compania de Aviacion SAB de CV (VLRS) 2015 Q3 法說會逐字稿

Good morning, everyone. Thank you for standing by and welcome to Volaris' Third Quarter 2015 Financial Results Conference Call. All lines are in a listen-only mode. Following the Company's prepared remarks, we will open the call for question and answer. (Operator Instructions) Please note that this event is being recorded. Thank you.

I would now like to turn the call over to Mr. Andres Pliego, Volaris' Investor Relations Manager. Sir, please go ahead.

Thank you. Good morning everyone and thank you for joining us today. It's now my pleasure to introduce Enrique Beltranena, CEO; Fernando Suarez, CFO; and Holger Blankenstein, CCO. They will be discussing our third 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 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 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.

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

Thank you Andres and good morning everyone. Let me start with some of the highlights of our financial performance for the third quarter.

Total operating revenues for the third quarter of 2015 grew 31% year-over-year. Adjusted EBITDAR and net income margin continued to expand and reached 41% and 22% respectively. As a result of the strong demand, our total operating revenues increased 31% year-over-year. To respond to the increasing demand, we added capacity during the summer.

International ASMs and network wide ASMs grew 44% and 24% respectively, compared to the same quarter last year. Load factor remained at 83%, while total revenue per available seat mile grew 5.4% and yield grew 3.4% in the quarter. An important contributor to the total revenue growth was our non-ticket revenue, which on a per-passenger basis continued growing at 13.2%. It is important to understand that long-term, the Company is focused in building total yield rather than base fare yield.

The highlight of the quarter was also our unit cost, which achieved a record level of $0.043 excluding fuel. This is in line with best-in-class low cost operators of the world. Volaris is an emerging market airline. In the past 49 months the Mexican air passenger market has shown a strong correlation to GDP growth, moving at 2 to 4 times the GDP growth rate for the same period. This trend is common among emerging and unpenetrated markets.

We continue to see an improved macroeconomic environment, with more disposable income. One example, our foreign remittances which are a good proxy for our visiting friends and relatives market that grew on a US dollar basis, 12% and 13% year-over-year in the months of July and August respectively.

Now we have been investing for several quarters in a commercial campaign to switch passengers from buses to air transportation. As more passengers switch from bus to air travel and recognize our ultra-low cost carrier model, our campaign is clearly paying off with a higher demand for our services, requiring us to add more and more capacity in many point-to-point markets.

During July and August combined, total market growth as per the DGAC statistics, was 14% including domestic and international. The domestic market in total grew 14%, while international market grew 31%. Volaris reacted positively to this very strong market demand due to its flexible fleet utilization, which went from 12.5 hours in the third quarter of last year to 13.1 hours during the third quarter of this year, mainly by increasing utilization in regular flights suitable for our visiting friends and relatives customers. In parallel, passenger volume grew 27% during the quarter for the Company.

During the past nine months, 21 new routes were announced, which are performing as expected and in line with our point-to-point expansion plans. We consider this as healthy capacity growth, since it is partially driven by upgauging and higher utilization. Thanks to our ultra-low cost model, Volaris is growing profitably and generating shareholder value. We see our positive results as a product of not only lower fuel prices, but also as a product of important performance improvements.

I'd like to share some details about our commercial and our operational achievements. A, we are focused on offering low fares, which is the main elements that passengers consider when buying an airline ticket. In the first semester, our average fare was 47% lower than our main competitor. B, we continue producing healthy yields, 3% higher than in the third quarter of 2014, while also increasing our non-ticket revenues. C, non-ticket revenues continues to grow. This quarter, we implemented more improvements to the dynamic pricing techniques, as well as a new travel insurance product. We're also working on our new payment options, such as deferred payments for a fee. Going forward, the more we collect in non-ticket revenues, the lower our base fares could be.

With respect to our fleet, we closed the quarter with 55 aircraft, including 35 A320s, 18 A319s and our first two A321s. We operated a fully retrofitted fleet with a higher seat density supporting our higher gauge strategy, in particular for the Mexico City Airport. Volaris continues to have the most modern and youngest fleet in Mexico with an average age of 4.4 years.

Now, I will pass this over to Fernando, who will review in further detail the financial performance of the period. Fernando, please go ahead.

Thank you, Enrique. Now, let me expand on our financial performance during the third quarter.

As noted, passenger demand in the quarter was strong and Volaris responded by adding capacity where market demand required it. Total operating revenues for the third quarter reached MXN5.2 billion, a 31% increase compared to the same period last year. During the third quarter, non-ticket revenues reached MXN1.1 billion, an increase of 43%. US dollar denominated revenues represented 35% of total operating revenues for this quarter. This growth in our dollar-denominated revenues continues to construct a better natural hedge against exchange rate volatility for our business.

On the cost side, CASM reached MXN1.07, an 8.1% decrease during the quarter, mainly driven by an effect on total cost of 27% reduction in fuel prices, helping to offset the exchange rate devaluation of 25%. We also achieved further labor productivity with 57 employees per aircraft.

CASM ex-fuel expressed in dollar terms was a record low of $0.043, in line with best-in-class low cost carriers worldwide. We continue to dilute our fixed costs as a result of both growing capacity and greater economies of scale, together with further fleet upgauge, a younger fleet, Sharklet-equipped aircraft and better lease terms.

The efficient operation of our diversified point-to-point network reinforces our cost reduction initiatives and improves our overall performance. For the quarter, fuel cost represented 31% of total operating expenses, 9 percentage points lower than in the third quarter of 2014.

The total average blended economic fuel cost per gallon for the third quarter was $1.68 per gallon. We have remained active in our fuel risk management program. For the third quarter, we hedged 45% of our consumption through jet fuel call options at an average price of $2.07 per gallon. Looking forward for the fourth quarter of 2015, full 2016 and first half of 2017, we have purchased call options to hedge 50%, 60% and 22% of the expected jet fuel consumption at an average price of $2.07, $1.97, and $1.81 per gallon respectively.

Adjusted EBITDAR in the quarter was MXN2.1 billion, representing an adjusted EBITDAR margin of 41%, which is 13 percentage points higher than last year.

Operating profits reached MXN1.1 billion. Operating margin was 21%, up 12 percentage points compared to the third quarter of 2014. Below the operating line, we recorded an FX gain of MXN556 million, resulting from a depreciation of the Mexican peso on our balance sheets, net monetary US dollar asset position.

Net income for the quarter was MXN1.1 billion, representing a debt margin of 22%. Earnings per share were MXN1.14 for Series A shares and $0.67 per ADS. During the third quarter, we generated strong cash flow, MXN243 million, cash flow from operating activities, resulting in a net increase of MXN380 million in total net cash.

Our solid balance sheet and liquidity position has provided us financial flexibility to continue our strong growth and a very comfortable financing profile. As of September 30, we recorded MXN4.4 billion in unrestricted cash, representing 26% of the last 12 months operating revenues. We maintained a negative net debt or a net cash position of MXN3 billion.

During the third quarter, Volaris incurred capital expenditures of MXN262 million. Our pre-delivery payment requirements 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 agreements. During the quarter, we have also paid PDP Financing for our 2017 and 2018 NEO order delivers.

Now, I'd like to summarize our achievements during this quarter. About half of the quarter's operating margin increase can be attributed to our network diversification efforts, performance improvements and management execution, and not purely from tailwinds of lower fuel costs.

Notwithstanding the strong passenger market demand, Volaris remains conscious of our capacity discipline. As a result, we will place capacity accordingly, while managing utilization. We anticipate that the year-end high season is going to be as strong as our previous high seasons.

Our guidance for domestic full year ASM growth is between 9% to 11%, while international ASM growth remains in the 33% to 36% range. This will result in a full year ASM growth rate for the entire network of approximately 15% to 18%. Lastly, on margin guidance for the fourth quarter, we expect to achieve an adjusted EBITDAR margin in line with the 11 analysts that we follow, which is currently at 33%, resulting in a full year adjusted EBITDAR margin of 33%.

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

Thank you Fernando. I would like to conclude by stating that we remain focused on the strong execution of our strategy in order to generate shareholder value. Summing up our financial performance of the recent quarters, we achieved a pre-tax risk-adjusted return on invested capital or ROIC for the last 12 months of 21%. Finally, with these results, we all thank god for all these benefits. I wish to thank also all the Volaris ambassadors who contribute daily to the performance of the Company.

Thank you very much for taking the time to be with us today and we'd like now to proceed on to your questions. Operator, please open the line for questions.

Thank you. At this time, we'll open the floor for your questions. (Operator Instructions) Michael Linenberg, Deutsche Bank.

Two questions here, gentlemen. I want to go back to -- you mentioned that 35% of your revenues are denominated in US dollars and I wanted to get a feel for the point-of-sale, how much of a percent of that 35% is originating in the United States versus how much is originating in Mexico? Do you have those numbers or that split?

Hi, Mike. This is Holger. Our split is pretty much even. We have about 50% point-of-sale in the US and 50% here in Mexico. However, all our US itineraries are priced in US dollars, whether you buy them in Mexico or in the United States.

And then maybe this is a question for Fernando. That number has moved up, that percentage, which is great. Where is your cost though when we look at operating costs that are denominated in US dollars? Just given the currency weakness, I would think that your aircraft ownership, which is priced in dollars, like rentals that that has become a larger percentage, that that has grown as well relative to other cost items, because of the depreciation of the peso. Have we seen that move up from, say, 60% to 65% maybe 70%? What's that split, US dollar denominated cost?

Yes, Mike. It's about 60% of the operating cost base is dollar denominated or dollar linked. Fuel has gone down as a percentage with the decline in fuel prices. However, you're right that rental costs are dollar denominated and these have gone up as a percentage as well. But as a whole, we are in and around 60% of total cost.

Duane Pfennigwerth, Evercore ISI.

I wonder if you had any initial thoughts on your 2016 capacity growth and in that vein, what average gauge would look like next year versus this year?

Yes, Duane. We have a contractual seat growth for next year in the fleet in the teens. Although, we're still working on the details of our 2016 plan, which we will share with you as soon as practical.

Okay. And any sense within that seat growth, what the sort of average gauge? I assume you're still getting an upgauging lift in 2016 versus this year.

Yes Duane, that's correct. We expect next year to have more seats for departure as we operate more A321s.

I appreciate that. And then just with respect to your non-fuel unit cost progression, as we think about that into next year, given some more upgauging and some capacity growth. In a stable FX scenario, can you just remind us what the long-term goal of the Company is from a non-fuel unit cost scenario and of course we're hoping for a stable FX scenario, that might be a hypothetical at this point, but how should we be thinking about the trend in your non-fuel costs from these levels assuming FX does not change?

Well, you're right Duane. It all depends on how exchange rate behaves on the non-fuel costs, but we continue to see efficiencies across the Company in terms of fleet and so forth, that help eventually long-term non-fuel unit cost to be in control and potentially go down.

Stephen Trent, Citi.

In terms of your -- what you mentioned on the domestic market, and forgive me if I missed this in your opening statements, but I also seem to have read in your release that you've seen some yield improvement in the domestic market and in that regard. Could you give us some color as to maybe what are the main competitive dynamics that you saw in 3Q?

We saw the three elements of revenue growing very well. I mean, we were able to maintain the load factor while we grew up the ASMs. Our TRASM grew up 5.4% and yield based on base fare grew 3.4% in the quarter. Clearly, the non-ticket revenues keep on growing on a per passenger basis at 13.2%. Nevertheless, I mentioned that it is important to understand that long-term the Company is focused in building total yield rather than base fare yield.

In terms of what you're seeing in the international expansion, a very strong performance on the US routes. At this relatively early stage, any color as to how happy you are on some of those Central American routes that you launched fairly recently?

Yes, Stephen, we are continuing to expand internationally, especially in the US, that continues to be our main driver of growth as we build our US dollar revenues. Central America currently represents a very small part of our capacity. We're talking about approximately 20 weekly flights out of a total of 1,800 weekly flights. So, it is still a very small portion of our revenues and those routes are currently in ramp up. Remember we're flying to Guatemala; San Jose, Costa Rica; and Puerto Rico.

And just one last question if I may. With this so-called open skies between the Mexico and the US, do I understand it correctly that the routes that are going to be impacted are routes that are already saturated and any view as to whether some of the Mexico-US routes where Volaris has a high market share are going to be impacted?

No. I think, today we do have, mainly Mexico City and some of the beach points saturated in terms of the bilaterals. Once that's open, we are expecting higher US capacity to be introduced into those city pairs. It is important to remind you that Volaris is much more of a point-to-point airline and we do have a lot of capacity in the secondary cities, which today are open and plenty of those routes have two, three, four and five more carriers operating and I think it's important to understand that in those cities with Volaris, despite them being open today, Volaris has basically no competition or very few competition, okay.

I think that if the bilateral is open, Volaris is confident that this agreement will boost the market growth and will have a positive impact of Mexico's tourism, coming from an overall increase of passengers visiting the country, okay. That's why for Volaris the dialog between Mexico and the US authorities has been key and it's important that they reach this agreement and that this agreement is confirmed by the Senate before year-end or in the first months of next year.

Okay, very helpful. I appreciate the color, guys. And I'll let someone else ask a question.

Renato Salomone, Itau BBA.

Hi. So we've seen a strong growth in remittances recently, which certainly affects the VFR traveler. Can you share with us, if you've seen a change in behavior, either domestically or internationally or both for your customer as remittances have picked up?

Let me pick the first part and I'll let Holger pick the second part. Renato, thanks for your question. Clearly, I mean the additional growth of the remittances, especially in the months of July and August, which I mentioned, it was 12% and 13%, is by far higher during that seasonality. And I think we need to understand that Volaris web page works basically as a remittance system when it comes for tickets.

That's why our -- despite our ASMs are somewhere around 32%, 33% of the total capacity placed in the US, our revenues are 35%, 36% in US dollars. So we get more revenues than ASMs in terms of dollars. So, yes, there is an impact. When it comes to demand, I will let Holger to speak about that how the US routes performed for visiting friends and relatives during the summer.

Yes, Renato. Yes, we have seen some changes in travel behavior. We see more price-sensitive customers travel to and from the US. And especially, they are also very happy to buy our ancillary products, they spend quite a lot on extras and they don't use the bus anymore, they prefer to fly. And I think that's very much in line with our ultra-low-cost model. We've been very successful in growing volumes between the US and Mexico.

Great. And if may ask a follow-up question to Stephen's point about so-called open skies. We've seen more flights being added by Southwest and JetBlue to Mexico. Do you expect that once we have the more flexibility in the bilateral agreement being implemented that US carriers will focus more on the beaches or there will be competition going also into Volaris typical routes as well?

Look, as Enrique mentioned, currently we see the US carriers very much focused on the southbound leisure segment. We've seen airlines add capacity to Cancun, Los Cabos, Puerto Vallarta specifically. We will remain vigilant in their expansion. But as Enrique mentioned, currently, our markets are already open for competition. And we have seen very healthy competition in our markets already. So, currently we continue to observe the competition, but they seem to be focused on more of the leisure segment.

Maybe it is important to add also that today we do have some city pairs where we do have Mexican heritage population like Houston, for example, or New York that it will be open for us and it will be available for us to be operating.

Victor Mizusaki, Bradesco BBI.

Congratulations on your 3Q numbers. I have two questions here. So, why don't we take a look on your 3Q numbers, we saw, I mean, a very good combination of high profitability and high growth. So, I'd like to understand how these, I mean, results can affect your growth plans. I mean, if you are thinking to accelerate growth and if we think about medium to long-term about a higher level of profitability, I mean, talk about, it is sustainable in the medium to long-term?

And my second question, you are now generating cash, as Fernando mentioned, you already secured your -- I mean, you [acquired] financing for the next deliveries. So would it make sense to start to pay dividends?

Well, let me have Holger start with the first question and then I'll ask Fernando to answer the second question. Although we don't think it's time to pay dividends.

Okay, Victor, let me answer your question in two parts. For this year, I'd like to reiterate the guidance that we gave in terms of capacity. For the total year, we see a capacity increase of 15% to 18%, which is higher than the previous guidance that we gave in the last call. For the fourth quarter specifically, we expect capacity to increase 22% to 25%.

Longer terms, and the way we see our business model playing out is that we are increasingly successful in switching bus customers to our low fare air product so that we do see continued stimulation of demand and our ultra-low-cost model paying off -- all our commercial efforts paying off very nicely. So we do see double-digit seat growth for next year as per our seat plan. I'll hand over to Fernando to answer the rest of your questions.

Victor, regarding the cash generation and the payment of dividend, at this stage, we think it's a better use of our cash to invest in opening new routes and bringing aircraft than to pay dividends, that's our current position.

And Fernando, thinking about, let's say growth --

It is important to say that, I mean cash goes up because of the seats and the level of cash goes up, then in the third quarter and in the first couple of months you burn some cash. So the cash levels in the first couple of months may go down to 27%, 28% of last 12 months operating revenues.

I mean if you think about, let's say, now we are talking about net cash and you have the opportunity to use this cash to finance your growth plan. In this case, would you prefer to grow organically or would you make acquisitions?

Our plan so far is to grow organically. We strongly think that the visiting friends and relatives will open with some city pairs that we can keep on growing, especially in the US and Central America and Canada. But we are as we always said, we keep on planning based on that, but we're open if there is a good opportunity to do something in terms of consolidation, if there is a window of opportunity which to date doesn't exist. I said does not exist.

Rogerio Araujo, UBS.

I have two questions. The first one regarding yields. I want to -- if you could give some color on the yields after the holiday seasons. If you could expect it to continue growing on an yearly basis, because we saw a huge growth in demand and together with these year-over-year expansion in yields as well, if you could consider that this will be the case going forward as well and how is yields reacting in October this year and even if you could give some color on the 4Q?

Also my second question is regarding the line guarantee deposits in the assets. It has been increasing significantly in the past several quarters. If you could give some color on why this line is increasing that much and what we should expect for the coming quarters? That'll be great. Thank you.

I'm going to take the first part of your question and then pass it over to Fernando. The way we think about yield is not just the base fare yield as traditionally is thought of, but as total yield. So, our business model we believe is much more resilient in this environment. We continue to generate and stimulate demand by lowering our base yield and increasing our total yield. For the first nine months of 2015 and especially for the summer, we are not observing any base fare yield decline or total yield decline. To the contrary, we've been able to increase our yields, both base fare and total yields.

Looking forward to the fourth quarter, October is very much in line with our plans. We see robustness in our markets in terms of base fare and total yield, and then for November and December, again, the booking curves currently look relatively healthy, but it's a little bit too early to say how December and the high season is going to be shaping up.

I would basically add to the comment that Holger did right now that this is important to understand that with the levels of demand we are having, it's kind of easy to maintain the yields or raise the base yields. Going forward, it is important to say that if we want to maintain the demand and we want to maintain the elasticity on pricing, the base fare should go down in at least 1% to 2% and then the ancillaries keep on compensating the effect.

And regarding your second question on the guarantee deposits line, it's related to our fleet growth. As you know as we grow the fleet, we have to pay more security deposits and maintenance reserves on the fleet. And there is also an FX result there as well. As those security deposits and maintenance reserves are dollar denominated that's partially why you see also the increase on a peso basis. Looking forward for the fourth quarter, we expect to have one more aircraft in terms of deliveries, so we should be closing the fleet at 56 aircrafts for year-end 2015.

Okay, great. Thanks very much. Have a nice day.

Josh Milberg, Morgan Stanley.

Good day, everyone and thanks very much for the call. I just had a quick follow-up on the yield performance issue. Just hoping you could give some perspective on how yields performed if international and domestic traffic is separated? What I gathered from your strategy of maintaining yields lower or in fact reducing them, I mean is it, I'm imagining that it could be the case, that's what's maintaining yields or what's increasing yields is growth on the international side. So is there a major divergence between international and domestic yields?

Josh, thank you for your question. At this moment, we don't split up domestic and international yields. So we wouldn't like to comment on that.

Okay, fair enough. I guess, I just had one other question on more on the cost side. You had this, on the other operating income line, a gain of MXN82 million and I just wanted to understand what was behind that.

Yes, Josh. It's basically related to gain on sale and leaseback results of aircraft. Most of it is an exchange rate effect and the remainder is the cash effect, but it's primarily related to aircraft sale-leasebacks for the quarter.

Do you expect to have more of that income over in the fourth quarter and into 2016?

As we get deliveries every quarter, we expect to have some effect there. And again for the fourth quarter, we expect to have one delivery. So you should expect some type of effect in the fourth quarter as well, related to one aircraft; in the third quarter, we had two aircrafts.

(Operator Instructions) Helane Becker, Cowen & Company.

I just had a few questions. One of the comments that you made had to do with possible ancillary product of deferring payment for a fee. Would that be like you were offering your customers a credit card and taking an interest charge on that or can you just say how you're thinking about going about it or how we should think about that?

Yes, Helane. It's a very straightforward product. In Mexico, we have a lot of deferred payment plans that are offered by our -- the credit card companies, the banks. And we offer that on our websites. The bank takes the credit risk and we offer those plans on our website for a fee.

Okay, So the customer would theoretically be paying the bank interest and you a convenience fee, right. Is that how we should think about it?

That's exactly right. In parallel we also have a co-branded credit card that we've introduced about two years ago and that's another product we have, but it doesn't have anything to do with the deferred payment fee. It's more of a convenience fee for deferred payment plans.

Okay. All right. I just wanted to understand that and that shows up in ancillary products.

Yes.

Yes, okay. And then my other question is, I think non-ticket per passenger declined from the third quarter to the second quarter. Is that a seasonal change or should we expect that to continue?

No, that's mainly driven because of the huge volume we have, Helane. I mean, you need to understand that during this high season, we had so many VFRs and in a lot of cases they do purchase exactly what they want. I think it's driven by the volume of the high season. Nevertheless, it's still 13% higher than a year ago.

Of course, also what's your repeat business like, like once people try the product, I know when you were at The Wings Club, you were commenting that one of the things is to get people to at least try the product. Can you just talk about how repeat business is going?

What we saw in the last survey we did basically a year ago, Helane, is, we do have customers flying at least two to three times every year with us. That's all the information we have.

Okay, well, still that's good, right?

It's important, I mean, two to three times, when you have customers, when you have about 22% to 32% of customers that are basically switching from the buses, it's a really important number.

Right. That's what I was thinking.

I mean this Holger's switching campaign has been tremendously successful and I think that summer is basically revealing us that today the campaigns on the switching that we did in the previous quarters paid off tremendously.

Great. Awesome. Okay, well, thanks for your help on my questions. I appreciate it.

Thank you Helane for being with us every time. And I wish to thank again everybody on the line, everybody of the analysts for their questions. And I do want to finish again saying thank you to all Volaris ambassadors who contribute daily to the performance of the Company. Thank you very much to everybody and thank you very much for taking the time to be with us today.

Thank you, ladies and gentleman. This concludes today's teleconference. You may now disconnect.