Controladora Vuela Compania de Aviacion SAB de CV (VLRS) 2016 Q2 法說會逐字稿

Good morning everyone and thank you for standing by. Welcome to Volaris' second-quarter 2016 financial results conference call. (Operator Instructions) Following the Company's prepared remarks, we will open the floor for questions and answers. (Operator Instructions) Please note that this event is being recorded. At this point, I would now like to turn the conference call over to Mr. Andres Pliego, Volaris' Financial Planning and Investor Relations Director. Please go ahead, sir.

Good morning everyone, and thank you for joining the call. With me today we have Enrique Beltranena, CEO; Fernando Suarez, CFO; and Holger Blankenstein, CCO. They will be discussing the Company's second-quarter 2016 results as were announced today. Afterwards, we will move on to questions. Please note that this call is for investors and analysts only. Any questions from the media will be taken on an individual basis.

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.

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

Thank you Andres. Good morning and welcome to everyone participating on the call today. Volaris continues delivering a strong financial and operational performance, driving improvements in revenues and operating metrics as well as to profitability despite exchange rate pressures and a seasonally weaker quarter. Adjusted EBITDAR for the second quarter increased 42% year over year with an adjusted EBITDAR margin of 35%, a 4 percentage point increase year over year in line with guidance given in our prior earnings call.

Volaris' ability to increase total revenue per available seat mile or RASM resulted in a 5% unit revenue growth year over year, hence demonstrating that we can combine high growth with unit revenue expansion. We keep on stimulating demand with our low base fares and switching bus passengers to air travel. In addition, total non-ticket revenues increased 35% -- 35% year over year. We operated at a load factor of 86% delivered by -- from an RPM and ASM growth of 24% and 19% year over year respectively. This reflects the Company's expert focus on continuing our growth and a network diversification strategy despite not having the benefit of the Holy and the Easter weeks during this year's second quarter.

Volaris plays an increasing role as a key market player, being attributable for over two-thirds of the Mexico's passenger volume growth primarily because demand stimulation of our bus switching campaign. The Mexican DGAC statistics reflected solid market demand with overall passenger volume growth for Mexican carriers of 9% year over year during April and May.

Volaris passenger volume for the quarter increased 26% year over year, transporting 3.6 million passengers. The average aircraft utilization in our network was of 12.5 hours for the quarter. In addition, we added eight new routes, six domestic and two international in line with our point-to-point strategy. We continue our push towards growing non-ticket revenues. Many of our ancillary products are maturing and we have also improved our commission-based revenues and travel commerce platform.

We also continued to refine our dynamic pricing strategy in the ancillary products that we started at the end of 2015. We have rolled out our new website focused on driving conversion especially on ancillary products. In addition, our new website adjusts to any screen-size, be it mobile, tablet, or desktop.

On the cost side, we continue with a best-in-class unit cost structure. Our cost per available seat mile, CASM, ex-fuel was $0.45 equivalent for the quarter. We expect to continue further efficiencies through our updating program and new aircraft engine technology and we remain the lowest cost operator in the Americas.

In sum, we are very satisfied with Volaris' solid financial and operating performance which were the result of various actions and initiatives we have executed throughout the year. Our ambassadors, as we commonly refer to our employees, again were key in achieving such performance and we would like to extend our gratitude to them.

On the regulatory front, the Mexican Senate has ratified the US-Mexico bilateral agreement amendment, and we expect exchange of diplomatic notes to take place shortly in order for the agreement to enter into force. We're looking forward to the growth opportunities the bilateral agreement amendment may offer for Volaris.

Our Central American strategy continues to progress. The Costa Rican AOC certification process is in the fourth out of five phases which includes the table talk exercises under local and US authority certification on the maintenance program and operations. We'll share with you any recent developments on the Costa Rican AOC process in due course as soon as they become available.

Our ultra-low-cost carrier model has been very successful and resilient, resilient in Mexico and in the US. We believe it can successfully work in other markets and we plan to continue diversifying our geographies.

Fernando will now review the financial results in detail for the period. So Fernando, please go ahead.

Thank you very much, Enrique. I look forward on expanding upon our financial performance for the period. Total operating revenues for the second quarter reached MXN5.1 billion, an improvement of 25% compared to the same period last year. During the second quarter, non-ticket revenues reached MXN1.3 billion, an increase of 35% year over year. Non-ticket revenues now represent 26% of total operating revenues for the Company. US dollar-denominated revenues represent approximately 30% of total operating revenue, helping partially insulate us from exchange rate devaluation pressures.

Moving on to costs, CASM was MXN0.119 for the quarter, a 6% year over year increase, mainly driven by the average exchange rate devaluation of 18%. This impacted dollar-denominated cost line items such as fuel, aircraft, and engine rent expenses, and certain traffic and maintenance costs. When looking at CASM in dollar terms, CASM for the second quarter decreased 13% down to $0.063. It is important to note that we do not get a one-to-one US dollar fuel price reduction benefit because of the devaluation of the exchange rate. The total average blended economic fuel cost per gallon for the second quarter was $1.50 per gallon, which includes the call option premiums recognition of $0.08 per gallon.

For the quarter, fuel costs represented 29% of total operating expenses. In order to offset the cost pressures deriving from exchange rate and fuel price volatility, the Company continues to invest importantly on its fleet plan by way of upgauge and access to a new aircraft engine technology. During the second quarter, we incorporated two additional A321s with 230 seat configuration, and we expect to incorporate six additional A321s for the rest of the year. We estimate that the unit cost reduction of the A321 is approximately 10% versus the A320. Last year we completed our retrofit program, adjusting the seat density of our A320s from 174 up to 180 seats.

At the end of the second quarter, we had an average of 171 seats per aircraft and 51% of our seats were in charter-equipped aircraft. Additionally, we plan to incorporate our first two A320neo aircraft soon, bringing the expected additional fuel burn savings of approximately 16% according to the manufacturer.

We remain active in terms of fuel risk management. Looking forward for calendar year 2016 and 2017, we have purchased call options to hedge approximately 55% and 50% of the expected jet fuel consumption at an average price of $1.99 per gallon, and $1.51 per gallon respectively. We have also hedged 37% of the first half of 2018 at an average price of $1.67 per gallon.

Adjusted EBITDAR in the second quarter was MXN1.8 billion, equal to 35% adjusted EBITDAR margin, spot on with our given guidance and a 4 percentage point increase year over year. Operating profit was MXN388 million for the quarter, representing an 8% operating margin. Despite FX headwinds above the operating income line, we have been active in managing our balance sheet by holding higher US dollar net asset position that enables us to offset such pressures at the bottom line. We booked an FX gain of MXN923 million during the quarter resulting from the depreciation of the Mexican peso on our balance sheet's monetary US dollar net asset position. We currently hold MXN11.2 billion in net monetary US dollar asset position.

Net income for the quarter was MXN935 million with a net margin of 18%, an increase of 10 percentage points compared to the same period last year. Earnings per series A share were MXN0.92 and $0.49 per ADS.

On the balance sheet, we continued to build financial strength with a cash liquidity position that provides us flexibility to continue with good growth rates and a comfortable financing profile. As of June 30th, Volaris registered MXN6.9 billion in unrestricted cash representing 34% of the last 12 months operating revenues. We maintained negative net debt or a net cash position of MXN6.1 billion.

During the quarter we generated MXN194 million in operating cash flow. Our high mix cash balance and equivalents in US dollars generated a net foreign exchange effect of MXN409 million. These combined effects together with financing and investing activities resulted in a total net cash increase of MXN564 million. With a cash flow generation and EBITDAR expansion, we have been reducing leverage, achieving a ratio of 3.2 times adjusted net debt to EBITDAR.

Our pre-delivery payment requirements for the remainder of the year and next year's deliveries are fully financed with our revolving PDP line of credit. All 2016 aircraft deliveries are also financed by way of executed sale lease-back agreements. We have also committed PDP financing for our 2017 and 2018 Airbus deliveries.

On the fleet side, we ended the quarter with 64 aircraft comprised of 18 A319s, 42 A320s, and 4 A321s. We continue to have the youngest and most efficient fleet in Mexico, and one of the youngest in the Americas with an average age of 4.5 years.

Moving on to capacity guidance, for the second half of 2016, we expect to operate in a strong market demand environment and see a healthy booking curve. ASM-wise we are maintaining our full-year guidance of 17% to 19% growth, in line with the demand environment and growth rates for an emerging and under-penetrated air travel market. We had a higher growth in the first half due to a lower comparison base. Specifically for the third quarter, we expect an 11% to 13% ASM growth.

On profitability guidance for the third quarter, we're expecting an adjusted EBITDAR margin in the high 30s, assuming current spot exchange rate and fuel prices. Third quarter aircraft and engine rent expenses are expected to be approximately $77 million, which includes contingent rent from the redelivery expenses.

Now before passing it back to Enrique for closing remarks, we would also like to note that as a result of the increased share trading volume and liquidity of our local series A shares, Volaris joined the Mexican Bolsa IPC 35 composite index, and we thank our investors for that.

Thank you Fernando. Well, as you can observe, Volaris reported a very strong quarter today despite exchange rate pressures and a seasonally weaker quarter. This was a direct result of rigorous work and execution across the Company, service to our customers, and focus on value creation for our shareholders. All in, the Company produced the last 12 months pre-tax adjusted ROIC of 22%.

I think our ultra-low-cost carrier model has been very successful and resilient in Mexico and the US. We believe it can successfully work in other markets and we plan to continue diversifying our geographies. Once again I wish to thank our management team for its dedication and of course our ambassadors whose daily efforts make Volaris one of the most dynamic companies in the airline sector around the world. I also want to thank you, my direct management team, who is doing an amazing job.

Thank you for your attention. Operator, we are ready to open the call for questions.

Thank you. Ladies and gentlemen, at this time the floor is open for your questions. (Operator Instructions) Duane Pfennigwerth, Evercore ISI.

With respect to your capacity guidance, 12% midpoint in the third quarter, can you give us a sense for how you're thinking about the fourth quarter and maybe initial expectations for 2017 as well?

Duane, we are maintaining our full-year growth rates of 17% to 19% and again the range for the third quarter is 11% to 13%. If we were to break it down between international and domestic, we would see a skew towards international in the third quarter ASM growth. In terms of 2017, we're still working on developing the plan.

Okay. Can you talk about the ancillary revenue items that may not have fully contributed here in the third quarter? What are the initiatives that you're working on that might incrementally contribute beyond the second quarter?

This is Holger. Well, ancillary revenue generation continues to be the cornerstone of our commercial strategy and we have grouped the initiatives in three different categories. First we continue to have a long list of products that we are going to roll out and that we have rolled out in the past. We are improving the distribution channels, I think a testament to that is our new website which is very much focused on converting ancillary products.

And third, we're doing a lot on the pricing of the ancillaries. So we've significantly improved the way we price ancillaries, pre-purchase, during the purchase, after the purchase and at the airport. I think those would be the three elements of the ancillary. And we have a lot of maturing products that customers continue to accept better as they understand how the ultra-low-cost model works, be it carry-on baggage, checked baggage, the insurance products, the credit card, and our Volaris club. So all of these products are maturing very nicely.

In terms of the long list of new products, could you give us a general idea of what those types of services might be?

Yes. We're currently very much focused on commission-based products, so we're moving ahead in our credit card program, we're moving ahead in travel commerce, so hotels, rented cars, transport options for our customers, the cross-border bridge in Tijuana we're charging as a commission product. So there's a lot of things on the travel side that we're working on.

Okay. And can you give us an update on the competitive environment, how you're seeing trends in the domestic market and also in the international market in the second half of the year?

We do see a continued strong demand both domestically and internationally. Definitely the bilateral agreement that is about to be ratified and come in force will definitely bring additional momentum to the market. The fare and yield environment both in the international and the domestic market have been quite stable. We do see some growth of low-cost -- US low-cost carriers, but that growth is very much focused on the beach destinations in Mexico. So overall a relatively positive picture despite FX pressures.

Okay. Thank you.

Thank you, Duane.

Stephen Trent, Citi.

Gentlemen, I just was curious when I think about the second quarter, were there any cost items that you might characterize as one-offs or quasi non-recurring just to get my thoughts around the operations?

Yes, Steve. In terms of the second quarter, we did experience an increased contingent rent within the aircraft and engine rental. We expect to have some of it still in the third quarter within the $77 million total rent amount that we gave guidance upon for the third quarter. But that should decrease in the fourth quarter, it should be a smaller number than that.

Okay.

Other than this increase in rent, nothing else extraordinary that we could point out. In general, we had FX pressure across the different cost line items that we were able to somewhat offset.

Okay. Very helpful, very helpful. And on the fuel hedges that you guys mentioned, apologies, I couldn't hear too well, I believe you said for next year 50% of the need and I didn't hear the strike price, and if I could trouble you for the strike price you mentioned, one; and two, if you could also comment on whether you're also using call options as a hedging strategy?

That is correct, Steve, we continue to utilize call options and I'll repeat the percentages for 2016-2017 and the first half of 2018. We have 55%, 50%, and 37% respectively for the next two years and the first-half 2018. In terms of average price of the strike price, it's $1.99 per gallon, $1.51 and $1.67 for these periods mentioned.

Okay. Super. That's very helpful. And just one last question if I may. What do you think about the Central America strategy and the fifth and sixth freedom traffic rights potential out of Central America, any color on what you're seeing in that market in terms of competitive movements? Is it primarily US LCCs doing point to point or how are you seeing the competitive market there?

Holger, could you help me out with that, with the first part and then I'll complement on it, okay?

Sure. Central America is a market that we see quite a lot of ultra-low-cost potential. Currently, there is -- the fare environment and the yield environment in Central America is quite high. We will give you more details on the project once we have the Costa Rican AOC process concluded. And Enrique mentioned in the call we are in the fourth out of five phases. However, as we also mentioned during Enrique's intervention, we see a potential size of the operation that is similar to what we currently operate into the US as full potential.

Okay. That's super. Thanks for that, Holger.

So in terms of dynamics, Steve, there's one new low-cost carrier which is in the process of certification. I mean it's already certified and it has been announcing the launch of its operations much more towards charter operations and that's (inaudible) Costa Rica.

Okay. That's very helpful, gentlemen. I'll let someone else ask a question, but thanks again for the time.

Helane Becker, Cowen & Company.

Can you say, Enrique, what percent of your passengers are first-time fliers?

Yes, I mean it's difficult because it's based on each station and specifically because of the travel traffic that we're managing, I mean, but what we think, we've been saying is between 18% and 34% of our travelers first check on bus fares and the other statistic that we manage based on the service is between 5% and 7% of our travelers are first-time travelers.

Okay. And that's been -- I think that's been fairly consistent, right? It's not increasing yet, is it?

It's not increasing, Helane, because of the numbers in the buses are so big. So in terms of percentages, sometimes it is difficult to determine. But what we see is -- and we were clear about that -- is that the growth of the market in Mexico, more than two-thirds of it is attributed to Volaris.

Okay. That's really helpful, thank you. And then just my follow-up question --

They're very clear that a lot of that traffic is coming from the bus shifting (inaudible).

Okay. And then my follow-up question is that, I think the US has been kind of the driver for RASM growth. Did that continue into the second quarter? And if so, should we expect that for the rest of the year?

Let me pass that to Holger.

Helane, we've managed to generate RASM growth in the domestic and the international market. Demand has been quite strong in both markets despite a significant ASM growth. So yes, the FX has helped us in travel growth in the international markets, but the domestic market is also quite strong.

Great. Okay. Thank you for your help. I appreciate the time.

Ulises Argote, Santander.

Quick question regarding the yields. We have seen competition increasing yields. With the FX at current levels, would it make sense for you to increase your yields? And I don't know if you can comment a bit on what can we expect in terms of the strategy this year going forward?

Could you explain what do you mean in terms of yield?

Yes, the yield that you are charging this quarter, it fell 1.5%. We have seen the competition increasing. So I don't know if you can elaborate a bit on what the strategy can be there?

Yes, but being -- with us being an ultra-low-cost carrier when we speak about yields, we speak about total yields. Are you asking about base fares or are you asking about total yields?

No, the base fares. Sorry.

So our strategy continues to be focused on total yield, so key RASM, and what you will see in subsequent quarters is that we will remain with our strategy of reducing our base fares and that is going to be offset by increases in absolute revenues and being a very load factor active airline. So we are all about stimulating demand to lower base fares and that is the strategy we will continue.

Okay, very clear. Thanks.

Michael Linenberg, Deutsche Bank.

Hey, Enrique and team, I guess two questions here, and maybe Holger is the one who can answer this, I'm just curious given the weakness in the currency over the last year, just how travel patterns have shifted between the US and Mexico. And I just -- I'm curious about how the point of sales strength has changed, like are you just -- are you seeing a much bigger pick-up in traffic originating in the US to Mexico in your trans-border markets? Anything that you can give us, any numbers on that maybe how it shifted would be helpful.

Sure, Michael. Let me start with the VFR market. Remember that our core market is the VFR market and we've seen quite a lot of resiliency in the US VFR market. 33% of our total revenues are US dollar-denominated and there's quite a lot of resiliency in the VFR market. Point of sale here has remained quite similar, 50% in the US and 50% here in Mexico. In the leisure market, we've seen certain deceleration in the northbound -- Mexico to the US northbound leisure market and that has shifted quite a lot to Mexican leisure destinations and we are adjusting the capacity accordingly.

Okay. Good. And then my second question, and Holger, this may be a question for you as well. You mentioned earlier in the call that you announced or started eight new markets, I think two international and six domestic. And I'm just curious about the ramp-up.

Typically when you're a smaller carrier and you don't have a lot of cities that you serve, it may take longer to ramp up to maturity. But now you have a healthy density throughout your network and in some markets like Guadalajara you have maybe some of the highest -- you may have almost more presence than any other carrier and that's I believe the case in Tijuana.

So as you add new routes and including some of these routes that maybe previously had known service, some of the cross-border markets into the US for example, are you seeing a much faster ramp-up to maturity or to profitability? Is that showing up with the more recent launches? If you could go into detail in that, that'd be great.

So in general, let me tell you quickly, we've opened eight new routes in the domestic and international markets. And typically what we see in the domestic market ramp-ups are a little bit faster between six months and then in the international market ramp-ups are a little bit slower, 6 to 12 months. And yes, where we are strong, where we have a leading position obviously market entries are a little bit easier.

Okay, very good. Thank you.

And then maybe just to add, Michael. As we move into Central America and as we have the new AOC in Central America and Costa Rica specifically, well, our brand is not that penetrated in Costa Rica and in Central America. So we expect a little bit slower ramp-ups in those markets in Central America.

Okay, great. All right. Thanks, Holger.

Renato Salomone, Itau.

My first question is regarding the cash strategy. It's proven to be a wise and efficient strategy to hold more cash in dollars. Is it something that we can expect going forward? Is there something, some bands that the Board has had for you to work with? Can you give us some more color and what to expect going forward?

Renato, you're right, we hold most of our unrestricted cash in dollars and we intend to continue doing that. It does play a role in terms of FX hedge. And also it's not just on restricted cash, we have guarantee deposits such as fleet-related and maintenance reserves that are also dollar-denominated. So that also helps in having a very high net US dollar asset monetary position. So in that sense, we're comfortable with that.

Okay. And the next question is regarding salaries. This line has come for the past few quarters a bit higher than I had in my model and we saw since the fourth quarter bit of a decoupling with the ASM growth. How should we think of this line going forward? Is there some specific pressure in there that we need to take into account?

Renato, salaries basically are in line with our expectations. If you see a slight variation on the upside for that, it has -- it's related with variable compensation. Remember that we have a very variable compensation scheme. So as we hit targets for the Company, we do pay a little bit more in terms of variable compensation.

Perfect. Thank you.

At this time, there are --

I just remembered something important that -- for you to consider is as a difference with what is going on in the South -- South America, Mexico has been able despite a devaluation to control its inflation rate.

Certainly. Thank you.

At this time, we have no further questions. I will now turn it back over to Mr. Enrique Beltranena for closing comments.

So thank you very much to everybody. Thank you very much once again to the team and to the management team and ambassadors in general, the ambassadors that make Volaris a success in every day. I would also like to thank you very much our investors, and tell you guys that we're confident for our next quarter results and that we will keep on working creating the best performance with the low-cost carrier that we can. Thank you very much and have a great day.

Ladies and gentlemen, that concludes today's presentation. You may disconnect your phone lines and thank you for joining us this morning.