Controladora Vuela Compania de Aviacion SAB de CV (VLRS) 2016 Q1 法說會逐字稿

Good morning, everyone. Thank you for standing by. Welcome to Volaris' First Quarter 2016 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. Instructions will be given at that time.

Please note that this event is being recorded. Thank you. I would now like to turn the conference over to Mr. Andres Pliego, Volaris' Financial Planning and Investor Relations Director. Sir, please go ahead.

Thank you. 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 first quarter 2016 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 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 U.S. Securities and Exchange Commission. Furthermore, Volaris undertakes no obligation to publicly update or revise any forward-looking statements.

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

Thank you, Andres. Good morning, everyone. I want to thank those of you that made it to our first Investor Day last month in [Europe]. We hope it was productive use of your time to review our business and what our flight plan is for the future.

Let me now go over some of the highlights of our financial and operations performance. We achieved a record profitability in the first quarter of 2016. Our adjusted EBITDAR expanded by 81% year over year, achieving an adjusted EBITDAR margin of 42%. We expanded earnings per share by 96% year over year, reaching MXN0.59 per Series A shares or $0.34 per ADS.

The strong demand environment is reflected in the Mexican DGAC statistics. An overall passenger volume growth for Mexican carriers of 15% year over year in January and February. Domestic passenger volume increased 13%, while international passenger volume increased 22% for Mexican carriers.

Volaris contributed 57% out of that 15% overall passenger volume growth. We have actively stimulated demand with our low base fares and our bus switching campaign while diversifying our network and growing our non-ticket revenues.

The first quarter of 2016 was benefited by a strong seasonality effect which included a Holy and Easter weeks occurring in the same first [quarter as a difference] versus last year. Load factor was strong at 85%, which is [9 percentage] points above our main competitor. Our RPM and ASMs grew 36% and 28% year over year respectively.

Our non-ticket revenues per passenger reached MXN372, an increase of 10% year over year and 4% quarter over quarter. This combination resulted in an improved total revenue per available seat mile, TRASM, of 8% year over year. We particularly increased average aircraft utilization from 12.1 hours in the first quarter of 2015 to 13.3 hours in 2016, a record level for the first quarter. It is important to highlight that we observed a very strong demand during the high season of the Holy and Easter weeks, as I already mentioned, so the capacity responded to it.

Our passenger volume grew 37% year over year with 3.4 million passengers transported. We also launched four new routes in the first quarter which are in line with our point-to-point expansion plan. From a unit cost standpoint, our best-in-class cost per available seat mile, excluding fuel, was $0.049. Our solid financial and operating results could not have been achieved without our employees, our ambassadors as we call each other, who are the Company's most important asset. Thank you all for the hard work.

Now, let me pass it 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 record financial performance during the first quarter. Total operating revenues for the first quarter reached MXN5.2 billion, a 38% increase compared to the same period last year. During the first quarter, non-ticket revenues reached MXN1.3 billion, an increase of 51% year over year. Non-ticket revenues now represent 25% of total operating revenues. US dollar denominated revenues represented a third of the total operating revenues for the quarter. This mix of dollar denominated revenues helps us construct a better natural hedge against exchange rate volatility for our business.

On the cost side, CASM was MXN0.112, a 1% year-over-year decrease, mainly driven by a 26% reduction in fuel prices, offsetting the exchange rate devaluation of 21%.

For the quarter fuel costs represented 23% of total operating expenses, 7 percentage points lower than in the first quarter of 2015. The total average blended economic fuel cost per gallon for the first quarter was $1.27, which includes the call option premiums of $0.06. We remain active in fuel risk management.

Looking forward for calendar 2016 and 2017 we have purchased call options to hedge approximately 60% and 50% of the expected jet fuel consumption at an average price of $1.97 and $1.52 per gallon respectively. We already started hedging the first half of 2018.

Adjusted EBITDAR in the first quarter was MXN2.2 billion, a 42% adjusted EBITDAR margin. Operating profit reached MXN836 million for the quarter, a 16% operating margin. Net income for the quarter was MXN602 million, a 12% net margin.

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 March 31, we registered MXN6.4 billion in unrestricted cash. We maintained a negative net debt or a net cash position of MXN5.3 billion.

During the quarter, we generated MXN1.3 billion cash flow from operating activities, resulting in an increase of MXN1.2 billion in total net cash. With the cash flow generation and EBITDAR expansion, we have been deleveraging the balance sheet, obtaining a ratio of 3.0 times adjusted net debt to EBITDAR.

During the first quarter Volaris obtained positive cash flow from investing activities of MXN435 million, which included reimbursements of aircraft pre-delivery payments of MXN446 million and net acquisition of aircraft, rotable spare parts, furniture and equipment, and intangible assets for MXN11 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 pre-deliveries are also financed by way of executed sale leaseback agreements. We also have committed PDP financing for our 2017 and 2018 Airbus deliveries.

With respect to our fleet, we closed the quarter with 59 aircrafts, including 18 A319s, 39 A320s and two A321s. We continue to have the youngest fleet in Mexico and one of the youngest in the Americas. Moving on to guidance, we expect to continue offering in a strong demand market environment in 2016.

On capacity guidance for the second quarter and full year, we expect an ASM growth range from 17% to 19% for both periods. On margin guidance for the second quarter, taking into account a seasonably weaker second quarter, we expect to perform in line with the current analyst consensus of 35% adjusted EBITDAR margin. Second quarter aircraft and engine rent expense is expected to be approximately $74 million. With this in mind, we expect to achieve a high single-digit operating margin for the second quarter. We also feel confident to deliver the full year analyst consensus, adjusted EBITDAR margin of 38%.

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

Thanks, Fernando. I would like to conclude by stating that we'd remain focused on the strong execution of our strategy in order to generate shareholder value. Bottom line, the Company has produced in the last 12 months a pre-tax adjusted ROIC of 23%. We continue to see growth opportunities in the market that are derived from the flexing of the bilateral agreement and further opportunities in Central America. Our Costa Rican AOC process continues on track.

I wish to thank you all of 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 will like now to proceed on to your questions. Operator, please open the line for questions.

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

Good results here. I have a couple of questions. One, with respect to your utilization to go from 12.1 hours to 13.1 hours is very impressive. And I was curious how much of that is being accomplished by flying red eyes and would you happen to know offhand what percent of your 59 aircrafts are actually in the fleet or are actually in the air through the night to bring up utilization?

Most of it is done through it and 18% of the fleet is doing night flights.

And then my second question --

And there are 40 incorporated, Michael, out there. The 59 aircrafts are already all working and certified and incorporated into certificate of operation.

Okay, good. So, every night you'll have maybe a dozen airplanes that are flying through the night time which helps the utilization.

Right.

And then my second question is, I remember and maybe you mentioned this at the Investor Day that through the year you are going to have to start re-delivering some of the airplanes, some of the aircraft that come off lease or unless maybe you've extended some of those leases. And so I'm curious are those going to be some cost items that we're going to have to anticipate as we move through the year as you bring airplanes up to sort of their full service lives before they're handed back to the lessors? So is that an additional cost, and if that is did that show up in maintenance? Does it show up in rent expense? Any color on that would be great. Thank you.

It was mentioned by Fernando. I will ask Fernando to repeat because we are giving the exact number for the quarter-end, Michael, okay?

Correct, Michael. Re-delivery costs, we recognize them through contingent rent, when it is probable and estimable both on meeting the specific re-delivery conditions. And in that sense, we expect to book for what would be the second quarter a total rent amount that includes contingent rent of $74 million. We have four re-deliveries in the rest of the year and three more in 2017. So, we originally said that we would have six in the year, but we have been extending two leases out of those six.

Okay. So, that $74 million includes the contingent [number]. Perfect. So, you've answered my question. Thank you.

Correct. $74 million does include the contingent rent amount.

That's perfect. Okay. Thank you.

It goes into the rental line, Michael.

Okay. Thank you, Enrique.

Duane Pfennigwerth, Evercore ISI.

Just a follow-up on Mike's question there. How much is the re-delivery expense in that $74 million in the 2Q effectively kind of a non-recurring number?

Yes. Duane, within that $74 million for the second quarter, approximately $10 million is what we call contingent rent.

And any sense for that $10 million run rate going forward as we think about third and fourth quarter or should that be for the year?

Total rent amount for the third and fourth quarter should be in the neighborhood of $72 to $74 million as well, the total rent amount.

If we just take a longer-term view and thinking about a stable currency, how should we think about your cost structure ignoring FX for a second, which is hard to do, but how should we think about your cost structure into 2017 and beyond?

Well, that's a tough question for us to answer given our sensitivity to both fuel and FX. So, we really --

Sorry, non-fuel. I mean if we think about the cost structure of Volaris on a non-fuel basis, on a currency stable basis given the upgauging that you have et cetera, how should we think about that?

Putting FX and fuel aside, you should expect to see certain benefits on unit costs as we continue to upgauge the fleet from A319s into A320s and more recently into A321s. So, we would expect under those circumstances to continue seeing benefits on unit costs. And in addition to the entry of the new engine option or (inaudible).

I think what is important, Duane, is we are confirming the view for everybody on the total results of the year, okay. So it's important that you guys, yes, take the cost of the re-deliveries into your consideration, okay, at the amounts that we just mentioned, that Fernando mentioned that he is confirming consensus for the year.

That's correct. We are confident that we will be able to achieve analyst consensus EBITDAR margin full year that we currently know is at 38%.

Okay. I appreciate that. And then just lastly, would you be able to quantify maybe historically how much an Easter shift is worth to the first quarter? How much we should be thinking about taking away from the second quarter and thanks for taking the questions.

So, Duane, this year Easter obviously fell into the first quarter and what we typically see is that some years it's in the first quarter and some years it's in the second quarter. So it's very hard to put a very specific number on that. Last year, for example, the first two days of Easter were in the first quarter and then the bulk of it was in the second quarter. But definitely, this year it's rather atypical because we have two high seasons in the first quarter, January and the Easter and Holy weeks, both fully in the first quarter.

Okay. You wouldn't want to care to put some numbers on that what that could be worth in terms of points RASM.

It's very difficult, Duane. I would not like to do it.

Okay. Thanks for the time.

You are welcome. Thanks for your questions.

Renato Salomone, Itau.

Thanks for taking my question and congratulations on the results. First, those two aircrafts that you extended the leases, are they A319s or A320s? And also for how many years did you extend them?

Yes, Renato, they are A320s that we are extending and we're extending around two to three years those lease terms. And that is already embedded -- that extension within our capacity guidance of 17% to 19% goal for the second quarter and for full year.

Okay. And with the strong deleveraging we're seeing, it's unavoidable to go back to the question of dividends and/or financial leases. So, with the first new from Volaris' own backlog arriving in 2017, if I'm not mistaken, this becomes more relevant. So, is there a reference level for leverage or cash that we can take into consideration when evaluating these decisions?

Well, Renato, as you well point out, we do have our first new delivery out of our book in 2017. We expect to get two newer aircrafts stated before the end of this year, but those are coming from lessor order books. And we're running the analysis in terms of buy versus lease to see what makes sense for us on the 2017 new deliveries. At this stage we have [not a] strong opinion on year one. We'll see what financing terms are offered to Volaris.

And dividends?

We do not foresee any dividend policy at this stage. Right now we consider that our best use of cash is to reinvest in the business and grow the business and bring aircraft and open new routes.

Rogerio Araujo, UBS.

Thank you for taking the questions and congratulations on the results. I have two questions. First on your capacity growth guidance if it continues 18% as was stated in last quarter or if it increases after all this expansion and demand you saw in the first Q? The second question is regarding the non-operating income, which came in at MXN195 million this quarter. If this is linked to reimbursements or if not what this is about? That's my two questions. Thank you.

Thank you, [Renato]. I'll take the first part of the question, Holger here, regarding ASM growth. So our full-year guidance is ASM growth between 17% and 19%. And what we've seen in the first quarter due to seasonality we've seen higher growth than we expect for the full year. Demand for air service has been strong in the first quarter due to the seasonality effect and many of our markets have been demanding more capacity. So, you've seen quite significant ASM growth on the year-on-year comparison for the first quarter. Remember also Rogerio that this is mostly catch-up growth for the first quarter of last year where growth has been relatively slow. As we move throughout the year, we expect AMS growth to taper off somewhat to get to an average growth rate of 17% to 19%.

For the second quarter specifically, the ASM growth we are predicting is relatively close to the average of the year, 17% to 19%, and some of the ASM growth for the rest of the year is going to come through continued upgauging to A321 and A320, and adding frequency to existing routes.

And as to your second question on other operating income in the quarter is related to sale and leaseback gains out of three aircrafts that we obtained in the quarter.

Okay, great. If you permit me one more question, how much of the passengers in first Q was first flyer and how is this compared with last year? Thank you.

Our first-time flyers mostly from our bus switching campaign, Rogerio, is approximately 6% network wide. There hasn't been a big change of that number. And the other important number that we track is how many people considered taking the bus on this specific flight. And that number continues to be up to 30% in some of our markets. So, up to 30% of our passengers state that they first consider the bus when choosing the current trip.

Stephen Trent, Citi.

Just two for me. The first is just a follow-up on your capacity guidance growth, any color with respect to whether we can assume relatively stable average stage length that's embedded in that guidance?

Stephen, yes, stage length is going to be very stable, maybe declining just a little bit, but nothing worth mentioning.

Okay, great. Thank you, Holger. And just one other question and I'll let somebody else ask. Any sort of color on the competitive environment in Mexico? We've seen at least some new stories that there is one carrier out there that seems to be cozying up to Oneworld alliance members and any sort of movements that might have caught your attention recently?

Stephen, market demand in general continues to be very strong. So, the competitive environment is relatively stable. We have been following our strategy of diversifying our route network and opening many, many routes that have only bus competition. In terms of price and yield environment, we observe that it has been relatively stable given the high demand for seats in the market. So, there is nothing specific that we can report on the competitive environment.

Great. Thanks, Holger. And just to cheat and ask a third quick question. You mentioned during your NYSE day kind of over four dozen routes where you guys aren't servicing, but there is bus service and I can say still a pretty strong outlook in that potential.

Absolutely, Stephen. As a matter of fact, we just announced some new routes such as Durango-Los Angeles, Vallarta-Seattle, and (inaudible) which are specifically routes where there is bus competition and no air competition. So we continue following our strategy of stimulating demand in those niche markets.

Okay, super. Very helpful. I'll let someone else ask a question. Thanks, Holger, and thanks guys.

Ulises Argote, Santander.

Thanks for the call. Quick two questions. Can you comment a bit more on what is your strategy regarding the ASM growth for the rest of the year? And could you share with us apart from the Tijuana Airport in what other markets have you been increasing capacity and where do you look to increase capacity a bit more? And the second question, I don't know if you have any additional update on the bilateral agreement with the US? Thank you very much.

Okay, Ulises, let me take you through the ASM growth. For the entire year, we are giving guidance of 17% to 19%. In the first quarter it was significantly stronger due to seasonality effects and strong catch-up growth versus last year. For the second quarter, our ASM guidance growth is 17% to 19% and for the rest of the year it's going to be somewhat lower to reach 17% to 19% for the full year. How is that split? Mostly, growth is going to be somewhat higher in the Mexico to US markets than the domestic markets. That's what we can tell you about ASM growth for 2016.

On the approval of the bilateral last week the senate commission reviewing the bilateral, none is mostly approved the bilateral. So, we expect a full approval of the senate in the short term.

Helane Becker, Cowen & Company.

Thank you very much for the time. I just had one question. In the first quarter the maintenance expenses came in a little bit higher than we thought they would and I was just kind of wondering was there something in the quarter that you pulled maintenance forward or is this like the run rate and maybe I was just too low on my number?

Helane, nothing particular or extraordinary to report in the maintenance expense for the first quarter. It's just ordinary line maintenance that we experienced.

Okay. And then just on with your employees, is there any profit sharing or anything like that that they are requesting going forward that we should know about?

No, Helane, nothing to report there in that sense. We do have a very variable compensation scheme in the Company across different levels across the board, a series of incentive programs and so forth, but that's what we have to say at this stage.

Okay. Great. Thank you very much for your help.

Thank you. At this time, we have no further questions. I'd like to turn the call back over to Enrique Beltranena for closing remarks.

So, again thank you very much for your questions and your participation. We continue to seek this growth opportunities that we mentioned and continue performing. Thank you very much for everything. It was a great pleasure to have you today.

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