Controladora Vuela Compania de Aviacion SAB de CV (VLRS) 2015 Q4 法說會逐字稿

Good morning and welcome to Volaris' Fourth Quarter 2015 Conference Call. All lines have been placed on mute to prevent any background noise. After this presentation, we will open the floor for questions (Operator Instructions).

Thank you. It is now my pleasure to turn the call over to Andres Pliego of Volaris. Sir, you may begin.

Thank you operator. Good morning, everyone and thank you for joining us today. With me today are Enrique Beltranena, CEO; Fernando Suarez, CFO; and Holger Blankenstein, CCO. They will be discussing our fourth quarter and full-year 2015 results published today. 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 that we will make on this call would 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.

It's now my pleasure to turn the call over to our CEO, Enrique Beltranena.

Thank you, Andres, and good morning to everyone. Let me start with some of the highlights of our financial performance and then give you guys more color on the market environment.

The fourth quarter of 2015 continued demonstrated a strong demand environment, which we have actively stimulated with our low base fares and our vast-reaching campaign, while diversifying our network and growing our non-ticket revenues. This has resulted in strong profitability for the quarter and the full year, as well as continued to strengthen our balance sheet.

For the fourth quarter, our adjusted EBITDAR and operating profit expanded by 52% and 73% versus 2014 respectively. For the full year, our adjusted EBITDAR more than doubled. Volaris, as an emerging market airline, is reaping the benefits of the Mexican air travel market growth. During 2015, we saw an improvement in economic environment in Mexico. More disposable income for the Mexican consumer is good for us and strong foreign remittances also support our visiting friends and relatives market. Consumer demand was healthy as seen in the retail sector and the inflation environment was stable despite the exchange rate volatility. All of these macroeconomic backdrop supported our business for the year.

The total Mexican passenger volume for the year grew 12%, in line with high historical GDP multiply. Non-oil GDP in Mexico is estimated to have grown between 3% to 4% in the year, driving such passenger volume growth. This GDP multiplier is common among emerging and under-penetrated air travel markets. Over a third of the domestic market volume growth in Mexico for the year is attributed to Volaris' market penetration.

We operated our diversified point-to-point network structure in 2015 and have sustained 82% load factor. Producing such growth is a function of an effectively executed bus switching campaign, a point-to-point network, a low base fare approach, complemented by a strong ancillary revenue strategy. We increased capacity during the fourth quarter in order to respond to the solid demand growth.

Our network wide available seat miles grew 25% with a skew towards international markets, which was 35% higher compared to the same quarter last year. At the beginning of 2015, we started conservative with our growth expectations, given the challenging market conditions prevalent at the time. As both the Mexican economy and demand to the US remained strong during the year, we continuously, cautiously managed capacity in light of the strong market demand through our fleet flexibility.

Our core market is the visiting friends and relative customer, which gave us the unique opportunity to increase utilization through the red-eye flights from 12.4 hours in 2014 to 12.7 hours in 2015. Our passenger volume grew [22%] for the full year with almost 12 million passengers transported.

During 2015, we operated 22 new routes, which are performing as expected and in-line with our point-to-point expansion plan. We consider this a healthy capacity growth, since it is mostly driven by adding frequencies, up-gauging and connecting existing airports, which has driven higher utilization for the fleet.

We're focused on improving our total unit revenue and achieving this by offering low base fares, stimulating demand and growing non-ticket revenues. Load factor for the quarter remained stable at 83% while average base fare only increased 1%, and non-ticket revenue per passenger increased 14% year-over-year.

TRASM for the quarter increased 3%. Unbundling continues being a key component of our business model. For this reason, in the long-term, we are focused on building total yield rather than just base fare yield. We also achieved efficiencies in our unit cost during the quarter, which in dollar terms decreased 3% year-over-year to [$4.09] excluding fuel. Thanks to our ultra-low cost model, Volaris is growing profitable and generating shareholder value.

With respect to our fleet, we closed the year with 56 aircrafts, including 18 A319s, 36 A320s and two A321s. We operated a fully retrofitted A320 fleet with the highest density supporting our higher gauge strategy, in particular at the Mexico City airport. And Volaris has now, one of the youngest fleets in the Americas with an average age of 4.6 years.

Summing up, all of the financial and operating results could not have been achieved without our most important asset, which is our human capital. Our employees, or ambassadors as we call each other, executed seamlessly during the year and we are very thankful for it.

Now, let me pass it over to Fernando, who will review in further detail the financial performance of the period. So, Fernando, please go ahead.

Thank you, Enrique. Now, let me expand on our financial performance during the fourth quarter. As noted, passenger demand in the quarter was strong and Volaris responded by adding capacity, where market demand required it.

Operating revenues for the fourth quarter reached MXN5.1 billion, a 29% increase compared to the same period last year. During the fourth quarter, non-ticket revenues reached MXN1.2 billion, an increase of 42% year-over-year. US dollar-denominated revenues represented approximately 35% of total operating revenues for the quarter. This makes our dollar-denominated revenues continues to construct a better natural hedge against exchange rate volatility for our business.

Again, our best hedge against exchange rate volatility is to further diversify our international network. On the cost side, CASM reached MXN1.15, a 1.4% decrease during the quarter, mainly driven by an effect of 26% reduction in fuel prices, helping to offset the exchange rate devaluation of 21%. We also achieved further labor productivity, with 58 employees per aircraft. CASM ex-fuel for the quarter expressed in dollar terms, was [$0.049], 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 speed up-gauge, a younger fleet, sharklet-equipped aircraft and better lease terms. For the quarter, fuel costs represent 27% of total operating expenses, 10 percentage points lower than in the fourth quarter 2014. The total average blended economic fuel cost per gallon for the fourth quarter was $1.52 per gallon.

We have remained active in our fuel risk management program. For the fourth quarter, we hedged 50% of our consumption through jet fuel call options at an average price of $2.07 per gallon. Looking forward, for calendar 2016 and 2017, we have purchased call options to hedge approximately 60% and 45% of the expected jet fuel consumption at an average price of $1.97 and $1.52 per gallon respectively.

Adjusted EBITDAR in the fourth quarter was MXN1.9 billion, representing an adjusted EBITDAR margin of 37%, which is 6 percentage points higher than last year. Operating profit reached MXN736 for the quarter. Operating margin was 14%, up 4 percentage points compared to the fourth quarter of 2014. Below the operating line, we booked an FX gain of MXN178 million in the quarter, resulting from a depreciation of the Mexican Peso on our balance sheet, net monetary US dollar asset position.

Net income for the quarter was MXN638 million (sic - see press release, MXN654 million) representing a net margin of 13%. Earnings per share were MXN0.63 for Series A shares and $0.37 per ADS. During the quarter, we generated strong cash flow with MXN930 million cash flow from operating activities, resulting in a net increase of MXN750 million in total net cash.

Our solid balance sheet and liquidity position has provided us financial flexibility to continue with our strong growth and a very comfortable financing profile. As of December 31, we recorded MXN5.2 billion in unrestricted cash, representing 28% of the last 12 month's operating revenues. We maintained a negative net debt or a net cash position of MXN3.6 billion.

During the quarter, Volaris incurred capital expenditures of MXN356 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 2016 aircraft deliveries are also financed by way of executed sale leaseback agreements. We have also paid PDP financing for our 2017 and 2018 Airbus new engine option or NEO order deliveries.

Bottom-line, the Company produced a full-year pre-tax adjusted return on invested capital or ROIC of 22%. Volaris remains cautious of our capacity discipline. As a result, we will place capacity accordingly, while managing utilization. Based on the current trends, we could expect to continue operating in a strong demand market environment in 2016, similar to what we saw in 2015.

On capacity guidance, for the full year, we have a contractual seat growth of 18%, which may result in a similar ASM growth to the one we achieved in 2015. Capacity growth in the first quarter will be higher because of the Holy and Easter weeks, which this year, falls fully in the first quarter and a low comparative base year-over-year; most of it from catch-up growth from capacity additions placed in the second half of 2015. We expect such first quarter capacity to be approximately between 25% and 28% growth in ASMs with an even breakdown between domestic and international.

On margin guidance for the first quarter, we note that the current adjusted EBITDAR margin [speak] consensus based on the 10 analysts that we follow is at 33%, which we feel confident to deliver.

Now, I'll ask Enrique to make his closing remarks before we open the line to 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. I wish to thank all of Volaris' ambassadors, who contribute daily to the performance of the Company. I think it's also important to say that I would like to thank everybody that invested in the Company in last year.

And before moving on to the Q&A session, I would like to personally invite you all to our Investors Day in New York City on March 15 at the New York Stock Exchange. We hope that you have already received invitation, but if not, please reach out to Andres Pliego and Diana for the details.

We're planning a productive event where you will hear from the management crew, more color on our operations. Thank you very much for taking the time to be with us today. Thanks for all your support during 2015 and we would like now to proceed on to your questions.

Operator, please open the line for them.

(Operator Instructions) Duane Pfennigwerth, Evercore ISI.

Wonder if you could comment on what drove the increase in ancillary revenue from the third quarter to the fourth quarter? And as we think about 2016, what initiatives do you have on the table that have not fully contributed or not fully run rate in that fourth quarter level?

Hey, Duane, good morning, this is Holger. In the fourth quarter, we were particularly successful in dynamically pricing some of the products related to baggage in the winter season and we also launched a couple of new products in the quarter such as the fast pass moving through security and rental car sales on board. We see continued demand stimulation as we unbundle our product and we also see that the absolute strategy is providing economic incentives to drive lower cost behavior.

With regards your question of what's next, ancillary revenue continues to be a cornerstone of our commercial strategy. And as we move into 2016, we have a roadmap of new initiatives going forward and those include new products, improving some of the existing products, and also completing the way we distribute ancillaries throughout the travel value chain. Just as a reminder for everybody, we are focusing ancillary growth in three avenues.

One is to continue the dynamic pricing, applying prudent revenue management techniques to ancillary items. The second is to improve the presence of our ancillary products by capturing a larger portion of our total travel budget, and thirdly offering more products. And I have quite a substantial pipeline of products in development that are going to be rolled out during 2016.

That's great, Holger, appreciate that. How would you characterize the competitive environment now versus maybe a quarter or two ago, and I wonder if you could separate that commentary between what you're seeing in the domestic market versus what you're seeing internationally both from Mexican carriers as well as US carriers?

Sure Duane. Let me start out by saying that the demand for air service throughout the year, both in the domestic and the international market has been quite strong and Volaris has been in the strategy of diversifying its network and we now have more than 143 [vaults]in operation.

Many of our markets, especially in the US markets, are demanding more capacity. As we are seeing that, our bus switching strategy is paying off and our ultra-low-cost model of unbundling fares is increasingly successful. So, we've been adding capacity, as you saw in our traffic reports, mainly to the US markets, which has been very resilient, because we have a very strong VFR core customer segment that is very resilient to exchange rate changes.

In the domestic market, we also see relatively strong demand, especially due to demand stimulation in some of the beach markets, as demand is shifting to domestic beaches as the exchange rates -- as the US become a little bit more expensive for some of the Mexican consumers.

I appreciate that commentary on demand. I guess if you could add, just as a follow-up, any color you have on the competitive environment, and if you've seen any change there in either international or domestic? And thanks for taking the questions.

Duane, the competitive environment is relatively stable. Right now, we're not seeing any major changes in the competitor's perspective.

Michael Linenberg, Deutsche Bank.

Good morning gentlemen. This is actually Catherine O'Brien filling in for Mike. First, I just want to know how do you notice changes in demand in any of your markets with economies impacted by the oil industry either in Mexico or in Texas and then maybe just as filler to that question, if you've noticed any change in demand related to the Zika?

The exchange rate volatility has not affected any of our markets. We see a lot of resiliency in our markets and that's because we are very much focused on our core VFR market. As you see, one of our main indicators to measure VFR demand is the growth in remittances from the US to Mexico. And that indicator has been very, very resilient, very, very strong over the last couple of months, and that is reflected in the strong demand for our VFR core market.

The oil price decline has not had an impact on our markets. They were very much focused on the West Coast of the US. We have only three routes in Texas and those service the VFR demand to Guadalajara. So no, we have not seen any impact of the oil price declined in the Texas economy.

To your second question, to the Zika, again we have not seen any effect of the Zika virus to our demand. Volaris is currently operating flights to and from Central America as normal and in alignment with relevant hygiene and safety protocols issued by the corresponding aviation authorities. Volaris maintains constant communication with authorities to be sure we take the appropriate precautionary measures, and no, we have not seen any effect on demand.

And then if I could just maybe ask kind of a follow-up to Duane's question. Would you say that right now your ancillary revenue per passenger growth is being driven more by improvements in your dynamic pricing capabilities or the introduction of new products? And then, regarding those new products, has there been any that stood out performing better than expected and perhaps given you new ideas in the pipeline?

Well, we have those three avenues of growth; it's products, it's pricing and it's presence. I would say, in the fourth quarter, it was probably more driven by dynamic pricing because of the high season, because of strong extra baggage sales in the high season, which we've been able to take advantage of very nicely in this high season.

Going forward, we are going to be focusing more on our new products. We have a long list of ideas that we are going to try during 2016. And for products that have stood out, I would like to mention the baggage in the high season clearly and very successful on-board sales. We've constantly added products to our on-board menu and that has had a nice impact on ancillary revenues.

Renato Salomone, Itau.

Holger mentioned that core VFR passenger is more resilient to exchange rates and that has been key, we can clearly see that through the results. But if you guys could elaborate more on that, as we see further volatility in the first quarter, how could that affect new bus switching? So, I understand that existing VFR passengers, they are more resilient and here the remittances help a lot, but could that be a problem for future bus switching?

Renato, maybe, I just want to remind you that most of the bus switching that we do is within Mexico, in the northern part of the country. So, that's pretty much driven by a peso kind of traffic, okay or specified kind of fares, okay. That's the first part.

The second part, which I think it's important to consider in the further bus switching is, a lot of it is happening much more because of capacity added in adding point-to-point connections, which is part of the network strategy and continues being the most important part of the network strategy. So that part, I don't think it's going to be effective. I mean it's a matter of giving them, offering them product and that offer, putting it at the right price and that gets the revenues, okay. So, I don't think the further expansion or the further switching of it will be affected, it's going to be much more a fact of adding capacity.

Perfect. And also, to Fernando, on the cost side besides the fact that the positive impact that we'll see on the cost side from capacity growth, can you share with us some initiatives that you have to offset the pressure on dollar-denominated costs?

Of course, Renato. Obviously, we have an important organic growth, seat wise, that helps dilute fixed costs substantially with a combination of new aircraft and more seats per aircraft as well. So, on a unit cost basis, that's a virtuous effect there.

On the other hand, we do get pressure because of exchange rate on certain cost items such as rentals, our maintenance, and now more and more traffic cost derived from our increasing US operation. So, we focus on maintaining the cost control across the company. We have a wide set of initiatives to control costs, in particular, traffic cost is what we can have more influence upon and be more active upon, because other cost items are much more given, for example, rentals and fuel consumption.

So, there is a lot of focus on cost initiatives on the traffic side. And as well, back to the fuel costs, as we continue to obtain more sharklet-equipped aircraft and we up-gauge from A319s to A320s and even into A321s, we should also see improvements there on the fuel consumption per ASM.

Stephen Trent, Citi

If I may start, once again, with a follow-up to Duane and the lady from Mike Linenberg's team, I apologize, I don't remember the name. When we think about this adjustment to the bilateral agreement to the US and Mexico, have you seen any action at all from carriers on either side of the border, wanting to establish new flights or has this piece of the story been pretty quiet and pretty stable. As I understand, it's only five specific US airports that are going to be affected?

Yes, Stephen. Well, the new bilateral agreement has not been ratified by the Senate, the Mexican Senate yet. So, no additional routes have been -- us or by any of the competitors and they cannot be yet until the Senate ratifies that agreement. Having said that, as you mentioned, only some routes from Mexico City are going to be affected for us, and we are evaluating whether to launch service in some of those markets that are currently restricted by the bilateral, but you will see more action once the Senate has ratified that agreement.

And just one other question if I may, looking at the carriers, very strong ability in terms of operating cash flow, [has they suggest] that you're thinking over the medium-to-long term with respect to eventually declaring a cash dividend?

Stephen, we'd rather invest our cash and continuing to grow the business by way of opening new routes and bringing new aircrafts. We think it is better return for our shareholders at this stage than paying a dividend. So we're more focused on growth.

Rogerio Araujo, UBS.

If you could confirm just Volaris' net seat addition expected for 2016. I think I've heard you saying something an ASM growth in line with 2015, if it is going to be close to 20%, if this number is right. And also how capacity constraints in Mexico City airport could represent a bottleneck for air liners growth in 2016? And also which airports you expect to grow more because of this bottleneck? That's my questions, thank you.

Let me take the first question, Rogerio. In terms of gross aircraft deliveries into our fleet in 2016, we have a total of 18 aircrafts entering the fleet. However, we do have six pre-deliveries. So, it's a net of 12 aircrafts. In terms of the Mexico City airport, so far, I mean, we saw an incremental capacity in December and January at the Mexico City [AICM] operation and obviously we saw also a growth of passengers. We're expecting that start stopping, okay. And we have assumed a growth in Mexico City, which is only mainly as a result of larger gauge, okay.

We only have less than 40% of our ASMs in Mexico City. And a lot of our growth has come from our point-to-point and connecting the dots rather than doing Mexico City, which is part of advantage of Volaris.

Just to remind everybody that Volaris is very well positioned to further up-gauge in Mexico City. We have already incorporated two A321s, which are operating high-density markets from Mexico City currently and we will incorporate an additional eight A321s in 2016, which will support our growth to up-gauging from Mexico City.

Okay, that's great. And if you could just tell which airports in Mexico do you expect to grow more, your routes, of course if you can say this, would be great, thank you.

Well, we continue to be very much focused on our core cities, which is Tijuana, Guadalajara, Cancun, Monterrey and Mexico City. And as Enrique mentioned, our strategy is to join existing airports that we operate through new routes that have no competition, only bus competition and to increase frequencies in existing routes.

And, Rogerio, to complement your first question on 18 deliveries and six returns, that should be very much in-line with the 18% seat growth that we have contractually and that is our current thinking in terms of ASM capacity as well for the full year.

(Operator Instructions) Helane Becker, Cowen & Company

So, I have two questions. The first question is with respect to the financing you're getting on the new aircraft. Can you just talk about how that compares to the financing you were getting maybe a year ago and then maybe prior to your IPO? Are you seeing lease rates come down or just some words of wisdom on that would be helpful?

Yes Helane, we have seen an improvement in our financing terms. Bear in mind that at this stage we have only done operating leases. We have not purchased any aircraft or owned it under the ownership, and in that sense, yes, we have seen lease terms and lease rate factors in particular go down. And in general, as Volaris has continued to improve its credit metrics and credit worthiness post IPO, we've seen, in general, better terms and conditions under such leases.

Okay. And then my other question is with respect to your thoughts about expansion south from Mexico and north to the United States, are you still focused mostly on Northern expansion? And I'm hearing that airport charges in Latin America are kind of increasing and maybe getting a little expensive and I'm just wondering what you're seeing and what your thoughts are? Thanks

I'll take the first part of your question and pass it over to Fernando on the airport costs. Regarding to Central America and the Caribbean, currently it continues to be a small part of our capacity. As you might recall, Volaris has routes to Guatemala, Costa Rica and Puerto Rico. And we are evaluating some capacity additions to Central America. However, our main focus remains our core VFR franchise, which we plan to expand in 2016 to the US.

And on airport costs in Central America, Helane, we're currently only operating in Guatemala and San Jose, Costa Rica. And in that sense, no major change in terms of airport costs that we are foreseeing at this stage.

(Operator Instructions) Leandro Fontanesi, Bradesco.

So, just coming back to the matter regarding your cash position. So, you mentioned that you do see space for additional growth, but -- I mean today you have almost 30% of your last 12 months revenues. So, you probably have some excess cash that you could use. So, what's preventing you from growing more right now, so just to understand?

Yes, in that sense, you do know well that we are in 28% LTM revenue cash position. It has to do with having an orderly growth. We are growing 18% seats for this year, we would expect to be growing in that level. So we want to also be very cautious about how we go about growth. We cannot just accelerate growth indiscriminately. We wanted to be profitable growth and that's why we're being very cautious about it.

I think Leandro, it is very important to consider the rate that we've been growing in the past years. I mean this Company growing 20%, 20%-something year-over-year, it becomes exponentially, okay. And the bigger we are, that ratio should go down just because as a percentage from the base, it is an important growth. Growing 18% this year over the growth that we had last year is a humungous growth. From the operational perspective, need to manage the business.

And for example, do you consider acquisitions in this sector?

As we always said, we are driving the business based on our capacity and our growth. But if there is some opportunity, we are open to take a look to it.

And just the last one. So regarding your fuel hedges, so if I'm not mistaken I have around 60% of your 2016 consumption hedged and we have been seeing oil prices falling a lot. So, do you consider changing these going forward, meaning that would you consider hedging less of your fuel exposure?

No, we maintain the same philosophy on risk management with respect to fuel. We continue to hedge in and around 50%. As noted, we have hedged [50%] of calendar 2016 and have already hedged 45% of calendar 2017. The difference here is that we're getting a better price. As fuel prices go down, we are able to lock in more attractive levels, but we continue with the same philosophy regarding fuel hedging.

Okay. Thank you very much to everybody. It was a great pleasure to have you on the line and hear about your questions. I hope I see you guys on March 15 in New York. Thank you very much.

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