Controladora Vuela Compania de Aviacion SAB de CV (VLRS) 2016 Q3 法說會逐字稿

Good morning everyone, thank you for standing by and welcome to the Volaris' third-quarter 2016 financial results conference call. (Operator Instructions) Please note that this event is being recorded. At this point I would now like to turn the 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 third-quarter 2016 results announced today. Afterwards we will move on to your 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 applicable securities laws. Forward-looking statements are subject to a number of factors that could cause 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, Mr. Enrique Beltranena.

Thank you, Andres. Good morning and welcome to everyone joining us the call today. Let me begin summarizing the solid results achieved by Volaris during the third quarter with the following key indicators. 88% record load factor, 43% non-ticket revenue growth year on year. 21% increase in non-ticket revenue per passenger. 19% passenger volume growth. 15% increase in TRASM at the record level of MXN155, 40% EBITDAR margin and 21% last 12 months adjusted pre-tax ROIC.

As you can see, these numbers really speak for themselves. But let me go into further details on our performance for the quarter and further growth opportunities. During the quarter Volaris transported 4 million passengers. RPMs and ASMs grew 18% and 12% year over year respectively. The Company's ASM growth was comprised of 6% in additional frequencies, 2% joining or 66 existing stations and 4% from new destinations further diversifying our network.

We have continued at our airports to increase the number of seats per aircraft. Not only do we have 10 additional aircraft compared to last year, but also we have an average of six more seats per aircraft, up to 174 seats per aircraft flown. The average aircraft utilization in our network was of 13 hours for the quarter. In addition we continue expanding our footprint by adding five new international routes in line with our point-to-point strategy.

The Mexican DGAC statistics continue to report in a 61 consecutive month of solid market demand. During the third quarter domestic market grew 13% and international 16%. Volaris represented 36% of that growth, proving that it is one of the main driving forces of the Mexico airline industry. Our bus switching program continue to further stimulate passenger demands. In this regard, during the third quarter we implemented a number of initiatives. We launched a marketing road show campaign targeting bus passengers. And we also deployed new signage displays in airports where we have a presence to facilitate the travel experience of our passengers.

We also continued implementing our low fares communication strategy. Offered prepaid cards and continue with our geo-fencing features. All our initiatives targeted an increasing in passenger traffic from current bus users.

Non-ticket revenue generation has been strong with new products such as an additional third party insurance service. For example, home, weather and personal items coverage. As well as the new offering of a standby ticket fee to (inaudible). Additionally, in order to increase product penetration we have expanded our (inaudible 0:12:22.3) portfolio on mobile channels. For example, Tijuana cross-border expressed facility, parking and the likes. But added new features such as instant credit card approval in the booking pass.

Furthermore, we continue to tap into customer analytics in order to fine-tune our dynamic pricing an increased reach for commission-based revenues. Now I would like to take a minute to give credit to our technical and operations team at Volaris for the sustained growth with excellent operational indicators that they have achieved for the Company.

This quarter schedule completion aircraft and maintenance were all above 99%, demonstrating world class operation. Thanks to all the team.

In sum, we continue to work throughout all the different areas of the Company to guarantee the further construct of resilience of our ultra-low-cost carrier model. During the third quarter we became the first A320neo certified aircraft operator in North America.

The new aircraft will bring us more than 15% fuel burn efficiency per seat. We also renegotiated our MRO contracts for heavy checks providing us access to best-class service levels qualifications in the region as well as competitive rates. We are in the process of obtaining our Costa Rican operations concession. And as we speak, the local authorities are holding a public audience on that matter.

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

Thank you very much, Enrique. I look forward for elaborating upon our financial performance for the period.

Total operating revenues for the third quarter reached MXN6.7 billion, up 29% compared to the same period last year. During the quarter non-ticket revenues reached MXN1.5 billion, an increase of 43% year over year. US dollar denominated collection was approximately 40%, partially helping us to insulate the Company from exchange rate pressures.

Moving on to costs, CASM was equal to MXN131 for the quarter, a 23% year-over-year increase mainly during by the average exchange rate depreciation of 14% and the economic fuel price increase of 8%. The FX increase impacted dollar denominated cost line items such as fuel, aircraft and engine rent expenses and certain traffic and maintenance costs. However, measured in dollar terms, CASM for the third quarter only increased 7% to $6.7.

The total average blended economic fuel cost per gallon for the third quarter was $1.65 which includes the recognition of a call option premium of $9 per gallon. For the quarter, fuel costs represented 28% of total operating expenses. In order to offset cost pressures from exchange rate and fuel price volatility the Company continued making significant investments on its fleet by way of up-gauge and incorporating new aircraft and engine technology to our fleet.

During the third quarter we incorporated two additional A321s with 230 seat configuration and we expect to incorporate four additional A321s during the rest of the year. We estimate that the unit cost reduction of A321 is approximately 10% versus the A320. At the end of the third quarter Volaris' fleet had an average of 174 seats per aircraft and 53% of the seats were in sharklet-equipped aircraft, on track to continue improving fuel burn in our fleet.

We remain active in terms of fuel risk management. Looking forward for the fourth quarter and calendar 2017 we have purchased call options to hedge approximately 52% 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 32% of the first three quarters of 2018 at an average price of $1.64 per gallon. Adjusted EBITDAR in the third quarter was MXN2.7 billion, equal to a 40% adjusted EBITDAR margin. Operating profit was MXN1 billion for the quarter, representing a 15% operating margin.

Despite FX headwinds above the operating income line we have been active in managing our balance sheet by holding a higher US dollar net asset position enabling us to offset FX pressures at the bottom line. During the quarter we booked an FX gain of MXN382 million which resulted from the depreciation of the Mexican peso on our balance sheets, monitory US dollar net asset position. If the peso were to appreciate we would need to give part of these gains back.

Net income for the quarter was MXN1 billion with a net margin of 15%, earnings per series A share were MXN1 and $0.51 per ADS. On the balance sheet we continue to build financial strength with a cash liquidity position that provides us with flexibility to grow at healthy rates and maintain a comfortable financing profile.

As of September 30th Volaris registered MXN7 billion in unrestricted cash, representing 32% of the last 12 months operating revenues. We maintained negative net debt or a net cash position of MXN6 billion. During the quarter our high mix cash balance and in US dollars generated a net foreign exchange effect of MXN209 million.

This together with operating, financing and investing activities resulted in a net cash increase of MXN63 million. With a cash flow generation and EBITDAR expansion we achieved a ratio of 3.4 times adjusted net debt to EBITDAR, this being the lowest leverage among Mexican carriers.

All our 2017 and 2018 pre-delivery payment requirements are fully financed with our revolving PDP line of credit. On the fleet side we ended the quarter with 65 aircraft comprised of 16 A319s, 42 A320s, 6 A321s and 1 A320neo, our first of many NEOs coming. We continue to have the youngest fleet and most efficient in Mexico and one of the youngest in the Americas with an average age of 4.5 years.

Moving on to fourth quarter capacity guidance, we expect to continue operating in a strong market demand environment. We regards to ASMs we are providing full-year guidance of 18% to 19% growth which also implies fourth quarter growth of 18% to 19% as well.

Regarding profitability guidance for the fourth quarter we are expecting an adjusted EBITDAR margin of mid to high 30s percent assuming current spot exchange rate and fuel prices. We foresee an aircraft and engine rent expense amount of $78 million in the fourth quarter, which includes contingent rents from expected redelivery costs.

Now I'll pass it over to Enrique for closing remarks.

Thank you, Fernando. Once again thank you to the management and our ambassadors for the daily efforts. Our ultra-low-cost carrier model has been very successful and resilient in Mexico and in the US. We believe that our model can work successful in other markets and we plan to continue diversifying our geographic footprint.

Thank you for your attention. Operator, help me out and we are ready to take the questions that the analysts have.

Thank you very much. Ladies and gentlemen, at this time we would like to open the floor for questions. (Operator Instructions)

Duane Pfennigwerth, Evercore Partners.

Good morning guys, we'll have to figure out a day for you to report where there is no potential distractions from your results here. Can you quantify the magnitude this year of your least returned expense, what that total expense of redelivery was in 2016?

Yes, Duane, in particular for the third quarter the contingent rent from redelivery expenses was $19 million, and this is due to the fact that we had three redeliveries in the third quarter. However in the fourth quarter we will only have one redelivery, so that amount should be below what we posted in the third quarter.

Okay, maybe I can follow up with you offline. It would be helpful to know what that number was for the full year this year, to try and think about your margin profile excluding those. Secondly, can you give us an update --

I am calculating it, Duane. Give me a couple of minutes and I will have it, the answer for you.

All right, just as my second question, does the Company have a longer-term view on peso. What is the view that you're managing towards, call it over a three- to five-year basis? Do you feel like we've had some unreasonable depreciation here off late?

Duane, regarding exchange rate, what we can say is our best defense against currency volatility and potential depreciation is to have a diversified network with more and more international operations. Already 33% of our revenues come from the international operation, collection wise that is closer to 40%. And that's our best hedge on medium- to long-term basis against exchange rate volatility, having a diversified more and more international network.

Okay, that's great. And then along those lines, apologize if you mentioned it but can you give us an update on your efforts to launch an operation in Costa Rica?

Yes, okay. Look, as we announced during the call we are still in the process of obtaining our Costa Rican operation concession. The public audience on the matter is being held as we speak. And we are expecting a favorable result from the public audience. As a result of that we foresee ourselves having a certificate of operation maybe end of this month, beginning of the next month. Okay.

We're planning to start flying within Central America before year end and in 2017 we will only operate within Central America. From 2017 to 2020 we'll place between 18 and 22 aircrafts devoted to that region (inaudible) full potential our operation in Costa Rica to reach the size of our current Mexico to US operation.

And Duane to follow up on your contingent rent question, including the $19 million of contingent rent in the third quarter, full year we would expect to see contingent rent resulting from redeliveries in the neighborhood of $50 million equivalent.

And that's USD?

USD.

Michael Linenberg, Deutsche Bank.

Fernando, I just wanted to clarify. So, you said you returned three aircraft this quarter, this past quarter and you said it was MXN19 million or $19 million, the redelivery cost?

$19 million, Michael, and that is for redeliveries in the third quarter. We expect to have one redelivery in the fourth quarter. And next year we will have another three redeliveries that we start provisioning for redeliveries as well.

So it's roughly -- it's over $6 million an airplane, if I'm hearing that right?

It varies airplane to airplane because of the maintenance conditions. So it's hard to give an average per aircraft. It really depends on specifically on each aircraft.

Okay.

It depends a lot, Michael, on the LLPs, on the Light Limited Parts and the time remaining in the fuselage and other components. So it really depends from aircraft to aircraft. You cannot make a number of $6 million just like that. That's why we give you guys a specific amount to the rentals for every quarter, okay, because otherwise you cannot figure it out.

And then just my second question, I want to go back -- if I look at your unit cost, they were up 7% in dollar terms. So if we just move the impact of the depreciation of the peso and just focus on the dollar. Now, that 7% -- that still seems high relative to where your capacity growth was for the quarter which I believe was around 12% or so. Is that largely a function? I mean I know you called out the rent expense and maybe it's the redelivery costs. Are they the primary driver there that took that number up?

Well, it's mainly exchange rate pressures on rentals obviously, on fuel cost, but also on traffic cost in particular related to airport cost in the US. And we also had an increase in the CASM due to fuel price, 8% year on year average economic fuel cost per gallon increase. In conjunction with the contingent rents, that's what puts pressure on the costs across the board.

Okay. So on the US dollar one. Okay. And then I just wanted to see if I had anything else. You know what? I'm all set. Thank you.

I think Michael, something which is really important is despite the moves of exchange rate and the higher fuel cost that we had during the quarter the Company is still providing a very high EBITDA level, okay?

Yes, right.

And that's something really important. I mean, that means we have been able despite of those incremental costs to manage our profitability in a way which has been really aggressive.

Yes, no, no. You see it with the numbers and that was a good quarter. All right. Great. Thanks Enrique. Thanks Fernando.

Renato Salomone, Itau Unibanco.

Just to clarify, you said you plan to have 18 to 22 aircrafts deployed to the Costa Rican operation between 2018 and 2020, is that correct?

Between 2017 and 2020.

Okay. Can you give us some color on the profiles? If you could breakdown between VFR, leisure and business on how you read this market, the opportunities that you see this market? Or if you want to put in a different, how you deployed these aircraft?

Renato, it's very similar to what we do today, okay? So most of it is going to be these few friends and relatives, okay? We typically have a smaller portion of those same visiting friends and relatives that do some leisure, okay? And then business is going to be lower, okay?

Okay. And does Copa's announcement of Wingo, does it change in any way your strategy for Costa Rica?

I think with low-cost carrier more penetration for Central America will only benefit the consumers, okay, and giving the actual fair levels of Mexico to the US and Mexican within Mexico in the region. I am expecting similar elasticities on the Mexican market during our market penetration, okay? I would like you guys to remind everybody that Copa's average fare for the second quarter was $234 versus ours which was $58. And we have a unit cost advantage of more than 25% versus them. I think to change and improve yourselves is giving yourself a second chance, to be forced by others to change is like being discarded.

Stephen Trent, Citi.

My questions, well, several of them have already been answered but just a few follow ups. First, I didn't hear you so well when you mentioned the pre-tax return on invested capital. Could I trouble you to repeat the number you gave?

The number is 21% adjusted pre-tax return on invested capital last 12 months.

Okay, terrific. Thank you very much. And just going to have also a follow up to Renato's question. When we think about the Central America opportunity, is it still fair to say that we should definitely think of Costa Rica with related to potential fifth and sixth freedom air traffic rights?

Everything that we have planned in Costa Rica is based on third and fourth freedoms between Costa Rica and Central America. We haven't planned anything within fifth and sixth freedoms yet.

Yes. Okay, got it. Very helpful. Let me leave it there and then thanks again, gentlemen.

I think something really important for everybody because we don't want to make this thing of Costa Rica big, okay? It's only going to be 3% to 4% of total ASMs of the Company for next year, okay? So, I mean don't kick the ball outside of the field, okay?

Very helpful, Enrique. Thanks very much.

Helane Becker, Cowen Securities.

Just on the cash balance, I'm just kind of wondering, what's the right level of cash on the balance sheet for you guys? I mean, it's a big number and I'm wondering if you can better deploy that cash in either additional growth or buying more planes versus leasing more planes, buying aircraft off lease. I mean, can you just talk to me about how you think about capital deployment?

Of course, Helane. We think that our best use of excess cash is at this moment to reinvest it in the business and continue the growth and the opportunities where we foresee. So in that sense, we're very focused on bringing new aircraft, opening new routes and just growing the business rather than other uses of cash or alternatives.

Specifically for the fourth quarter we expect to purchase our first two spare engines. We do not have aircraft purchases or deliveries out of our order book until the third quarter of next year of A320neos. We are doing the analysis of buy versus lease. We're in no rush to make a decision. But that could potentially be a use of cash, purchase of aircraft. But we don't know yet. What we are seeing in short term is purchasing two spare engines. Given the size of our fleet and our fleet requirements it makes all of the sense of the world to start doing those type of asset purchases.

Okay. And then just a follow up question on, did you say or could you say what the forecast for Mexican economic growth is for the forecast for next year?

No, I can't answer that Helane. Sorry.

We'll follow up with you with research on that Helane. We understand it's in the neighborhood of 2% GDP growth, 2% and change, but we'll give you the precise figure and follow up.

Okay. Well. Well, listen. Thank you guys --

Maybe you can give us your view of the elections in the US and I give you that.

That's a fair question. I thank you. I don't know. I'm not a political forecaster. But thanks for asking. Have a good day. That was -- I just really wanted to get that cash thing answered. Thank you.

Thank you, Helane. Well, thank you very much to everybody. It was a great pleasure.

Gilberto Garcia, Barclays.

My question is about yield. You posted a surprisingly strong number, so I just want to get a sense of how relevant the FX was on this achievement.

Well, actually Gilberto this is Holger. Thanks for your question. Look, as we've said all along this year, the share and yield environment in both domestic and international markets have been pretty stable, actually very strong. And we continue to see very strong demand and that obviously drives yield in both markets, the domestic market and international. We also would like to highlight again that the new bilateral agreement will bring additional momentum and strengths to the demand side of the equation. So the yield, yes, part of it is driven by FX but most of it is driven by just a very strong demand environment.

Thank you very much.

Thank you everybody.

Thank you very much. Ladies and gentlemen, this conference has now concluded. Thank you for joining us and you may now disconnect your phone lines. Have a great rest of the week.