Welcome to the Sun Country Airlines Second Quarter 2023 Earnings Call. My name is Josh, and I will be your operator for today's call. At this time all participants are in a listen-only mode. After the speakers' presentation, there'll be a question-and-answer session. [Operator Instructions] Please be advised that Today's conference is being recorded. I would now like to turn the call over to Chris Allen, Director of Investor Relations. Mr. Allen, you may begin.

Thank you. I'm joined today by Jude Bricker, our Chief Executive Officer; Dave Davis, President, and Chief Financial Officer and a group of others to help answer questions. Before we began. I'd like to remind everyone that during this call, the company may make certain statements and constitute forward-looking statements. Our remarks today may include forward-looking statements which are based upon management's current beliefs, expectations, assumptions and are subject to risks and uncertainties. Actual results may differ materially, we encourage you to review the risk factors and cautionary statements outlined our earnings release and our most recent SEC filings. We assume no obligation to update any forward-looking statement. You can find our second quarter earnings press release on the Investor Relations portion at ir.suncountry.com. With that said, I'd like to turn the call over to Jude.

Thank you, Chris. Good morning, everyone. Our diversified business model is unique in the airline industry, due to the predictability of our charter and cargo businesses, we are able to deliver the most flexible schedule service capacity in the industry. The combination of our schedule, flexibility and low fixed cost model allow us to respond to both predictable leisure demand fluctuations, and exogenous industry shocks. We believe due to our structural advantages we will be able to reliably deliver the industry leading profitability throughout all cycles. We crossed a few milestones since our last call that I wanted to highlight. First Sun Country surpassed $1 billion in revenue for the 12 months ending in June, first for our 40-year-old company. In 2Q we carried over a million scheduled service passengers for the first time in any quarter. We regained our position as the top margin carrier among the 11 carriers for the 12 months ending in second quarter. Recall that we were the first into this pilot contract cycle. In July, we executed a record number of flights in a day, being able to deliver quality operations during peak days is a key priority for us as we execute our variable capacity model. This growth and performance is a testament to all our frontline employees that deliver for our customers every day. Consistent with the theme of the last several calls, we've remained in an environment where demand across all our segments is strong. As it's been a common topic around the industry, I wanted to give some color on the revenue environment for our scheduled business. Our second quarter scheduled service TRASM was up 10% year on year on ASM growth of 6% certainly very positive results. We expect to be able to accelerate scheduled service ASM growth into…

Thanks, Jude. Q2 was a historically strong quarter for Sun Country, despite it being among the seasonally weaker quarters for our business. Total revenue increased 19.2% year-over-year to $261.1 million, while earnings before taxes were $26.8 million, versus a loss of $4.8 million in Q2 of 2022. Adjusted op margin was 15.3% for the quarter. Revenue earnings and margin results were historically record highs for the second quarter. Revenue from our passenger business continued to stay strong and Q2, increasing 16.6% year-over-year to $227.9 million. Scheduled service plus ancillary sales generated $178.2 million in revenue, which was 16.8% higher than last year. This easily exceeded a 5.6% growth in scheduled service ASMs which driven by a 2.7% growth in total fare to $177 and a 2-point increase in load factor to 85.8%. Scheduled service TRASM grew 10.3% versus Q2 of last year. Since the second quarter of last year, we've seen a significant sustained increase in our scheduled service TRASM versus pre-COVID levels. We believe this is driven by the continued optimization of our network and changes in the public's demand for leisure travel. As Jude mentioned, during Q2 our scheduled service TRASM was a 43% versus 2019, and in Q3 of this year, we expect scheduled service TRASM to be up at least 35% versus Q3 of '19. We don't see any sign of scheduled service TRASM numbers returning to pre-COVID levels, rather they appear to be stabilizing at the higher levels we're now experiencing. Charter revenue in the second quarter grew by 16.1% to $49.6 million, unblock our growth of 23.9%. A portion of our charter revenue consists of reimbursement from customers for changes in fuel prices as we do not take fewer risks on our charter flying. Q2 fuel prices dropped by over 38% versus last year.…

Thank you. [Operator Instructions] Our first question comes from Duane Pfennigwerth with Evercore ISI. You may proceed.

Hey, good morning. Just on charter, can you talk a little bit and just remind us how fuel change by year-over-year impacts revenue trends in charter and also margins in charter.

So I think it's important to break out what charter includes. There's several track programs, we have a fleet of 60 aircraft, five of them are dedicated to track programs plus the VIP. So it's basically six aircraft. And those have absolutely passed through in fuel. We have a significant amount of ad hoc business that is predominantly sports programs. Again, that's 100% pass through. Sometimes however, we need to position aircraft at our costs. So there's a little bit of flying that we do and support those that has fuel at risk. And then there's the military business, which is 100% pass through. So it's effectively over 90% perfect pass through.

Yeah, I mean, think of it this way, Duane. So we negotiated charter contract in that charter contract is a reference price. Okay, if fuel is higher or lower than that reference price, we get reimbursed from the charter customer for either more or less based on the fuel price. When fuel is really high, the reimbursement is higher, so the revenue looks higher. When fuel is really low, the reimbursement is less, so the revenue looks less.

Got it. And then for some of the seasonal flying that you do, can you just remind us, to what extent Mexico or Cancun is a part of that seasonal set? Obviously, we heard some more cautious comments on Cancun, specifically from Spirit yesterday, but could you just kind of comment on your trends to maybe Mexico and near Caribbean?

Yeah. I'll give you some backdrop. Our international network is focused from Minneapolis in the wintertime. And in the summertime, the predominance of our international network is focused on origination in southern large markets. The distinction there is that the southern business is largely a scraping business where we don't support that flying with a lot of marketing. We're not focused on building a brand and some of these origination markets in contrast to what we do out of Minneapolis in the wintertime. And therefore, we're a little more subject in the summertime to the prevailing airfare in some of these international markets. And I would be -- I agree with Dave's comments about some of the weakness that we're seeing in southern markets, but these are still highly profitable markets for us. And we have the ability to dial capacity to whatever optimal level is supported by the fair environment at that given time. Most of our international markets in the summertime are now winding down and we'll be out of by the end of August. And then we'll focus on building up are largely Minneapolis but also some Milwaukee and a few others, where we fly winter markets as we approach into the fourth quarter. Any color, Grant?

Yeah, just echoed Jude's comments that there was a little pressure this year. But the results were on an absolute basis. We're still acceptable for us down for maybe what we've exceeded. And, but we do some unique things down there. There's one market that has been particularly strong for us, which is Harlingen, which did not have sort of the competitive impacts. And that one performed very nicely. So to Jude's point, our agility will make it work. We've been there for a while. And it's going to be something we continue to do in the summer.

My diagnosis is Cancun, because it was a really strong summer in '22. And a lot of carriers chase that demand into this summer. And if you look at capacity levels, year on year, it was -- Cancun was the beneficiary of a lot of capacity growth in that drove down fares. I think there's still strong structural demand. And we can, as I mentioned, fly in any environment and be successful.

Okay, makes sense. I'm going to have to look up that originating market that you talked about, I'm going to go look at my map. But, I appreciate the thoughts.

Thank you. One moment for questions. Our next question comes from Catherine O'Brien from Goldman Sachs. You may proceed.

Hey. Good morning, everyone. Thanks so much for the time. Hey, another topic that's been popular this earnings season is, domestic carriers having to right size day a week, just based on their current view on, on where corporate now sits? Not that's a market use case. But, I know your network has less overlap with some of these carriers. But have you started to see any pickup and competitive capacity into the fall or early winter, as these changes take place in other airline schedules.

Generally, our capacity environment is constructive, meaning that a lot of growth. We are seeing some build backs into Minneapolis, based on 2019 levels, stuff that was coming back from non-Delta carriers. And so, but that's perfectly fine. On the day a week stuff, I mean, this sort of what we do. And I don't think it should be a surprise to anybody that Vegas is a little weaker on Tuesdays than it is on weekend demand patterns. So, we built the business around that it's not a substantial change. Here's a point that I can bring up, which is perhaps out of consensus. July doesn't have a lot of day week sensitivity. There's a tremendous amount of demand, but it's elastic. As compared to March, which has these fantastic days. So there's really deep demand that's inelastic on a few given days, particularly around spring break travel patterns. So July, we need to be a lot bigger than we were. And that means adding into off-peak periods. So we have a capacity constraint, that's a block our constraint based on pilot availability. And so we choose to put our flying on the very best of days during that month. However, if we had more flying, we would expand and flatten the schedule, with a relatively moderate or de minimis even reduction and unit revenues because the off-peak days are so powerful. In contrast, September is completely different. And as it always has been -- there's just not a lot of midweek opportunities in September. And I agree with the overall sentiment that there is a focus, a renewed focus perhaps, from the Big Three on to leisure demand, which is crowding out somewhat leisure carriers when there is limited demand. But we've already focused on flying around those limited demand periods. And so for us, it's really about adding into off peak periods during peak months. So it's a more nuanced and complicated matter, I think then the market is making sense of it at this point. Our opportunity is to grow into these 40% variable contribution scheduled service networks that we have during peak months and that's what gets our third quarter margins up into the mid-teens from where they are today at this fuel price.

Got it. That's really helpful thanks for the perspective. Maybe just two quick ones on cost for Dave. So you're just coming back to the CASM commentary through your end that eases. Can you just give us some more color on if that's ratable like what's a step down and each quarter or anything you should be aware of an 4Q capacity growth. And then just on the share base comp, in the press release, you notice it was like a one-off that's been in stock comp, but 1Q wasn't too far below this quarter, both relevant elevate last year. Can you just give us some color on how we should expect that to try and just outside of your commentary on CASM [ph].Thanks so much.

Yeah, sure. So essentially, I think what, what -- this is consistent with Jude's commentary is, we're a little bit oversized. We mentioned on the aircraft front, we have enough aircraft, we add a two more to really sustain reasonable growth levels through 2025. So we're a little oversized, and as we continue -- and that's negatively impacting CASM. As we sort of roll forward into the quarters ahead. And you see some of this growth, particularly like some of the third quarter growth, and then some growth going out in the fourth quarter as well. Those year-over-year numbers will begin to -- will continue to, I should say moderate. So we should be single digit kind of stuff in the third quarter and fourth quarter. I'm not giving guidance on yet but we should just think continually improving year-over-year trends here on the CASM front. Regarding the management options, there was -- there were a number of folks here who had considerable options from Apollo, when we -- when the original acquisition was made. Apollo's ownership which I think is an important point for investors has continued to drop and is now sub-30%, that the company. So the overhang is getting less and less. But that 30% was a sort of a trigger for the vesting of management options that happened last quarter. So when we fell below that number, a significant number of management options vested. So those original options are now fully vested. So vesting costs will not continue to recur in the quarters ahead, at least for those for those options. So that number will moderate.

Okay, great. Thanks so much, Dave.

Thank you. One moment for questions. Our next question comes from Helane Becker with TD Cowen. You may proceed.

Hi, thanks very much. This is Tom Fitzgerald on for Helane. My question is just on what you're seeing in terms of pilot attrition and how you're feeling about getting first officers to upgrade into the captain seat? I appreciate any color you could have. Thanks very much.

I'll make some very general comments and then Greg, if you want to jump in. Well, we don't have any problem hiring pilots and our attrition is consistently below where we had expected it would be at this time. The issue boils down really to getting pilots to upgrade to captains. So we're constrained in the left seat and we continue to make strides in improving that figure. And as we will grow as we upgrade captains.

Yeah, I mean -- to Jude's point, we don't have a problem hiring pilots right now. We've got really robust applications. We've got a great recruiting team. On the attrition front, we watch that daily. That stayed within our expectations. We see these other deals that are going on out there now that might affect that attrition. But we believe we can moderate that with additional cost sizes that we can fill. So as Jude said, it really does come down to our ability to grow is at the rate of our captain upgrades.

And this is an industry-wide issue as the -- and in the case of the Big Tree they did a bunch of early retirements, and so everybody is trying to get pilots to their training pipeline and rightsize their pilot groups is taking a little time.

Yeah, I think one of the points as you know we've talked about this point for now in number of quarters. This continues to be a challenge for us, but I think you can look at the growth that we're looking at here in the third quarter as a testament to the fact that we are making progress, but it's not linear, it's bumpy and this is the focus.

Thank you. [Operator Instructions] Our next question comes from Mike Linenberg with Deutsche Bank. You may proceed.

Hey, good morning, everyone. I did get on a few minutes late, and I apologize if you may have addressed this. But just going from a 15% operating margin you're guiding 6% to 11%. We're coming off of what was one of -- seasonally one of your weaker quarters. What are sort of the primary drivers there? Is it things like fuel? I know September is a tough month for you guys. Can you just run through some of the puts and takes you're thinking behind that de-sell and profitability? Thanks.

I mean, the main thing is segmented capacity allocation. So we have very consistent profitability from our track and cargo programs, track, charter and cargo programs. And it's a good thing that they -- in many ways, it's a good thing that they are flat in capacity. And then we have scheduled service which is variable. And as I mentioned and Dave alluded to, we're flying our airplanes in July, one of the strongest demand months of the year at about eight hours a day, and that number should be 10 to 11, and those are 40% incremental margin opportunities that we're cutting out because of capacity constraints that don't have anything to do with opportunity or airplanes, it's really about staffing. So that's the biggest thing. In contrast, the second quarter is relatively flat demand period as compared to the third quarter. So third quarter -- the way the third quarter goes July, in contrast, the second quarter has a really good April, a really good June. May is not great, but it's not that bad. It's not as bad as September. So it's a lot more flat, and that's the difference in the two quarters.

Makes sense. Jude did you mention what your ASMs will be, up scheduled ASMs in the September quarter?

We didn't mention that. I don't think we have an issue sharing it. I just don't have it in front of me. We can get it to you.

I got it, it's about mid-teens.

Okay. Mid-teens, okay. And then just my last question and this is more of a modeling question as we think about the rental revenue, the $6 million is that sort of the right quarterly run-rate? And when does that start to fade out? What is it sometime late '24-'25? Thanks for taking my questions.

Yeah, that's right. The fade-out will begin really in November 2024 and then continue through November 2025 as the five aircraft roll off and come to us to operate.

Okay. Thank you.

Thank you. One moment for questions. Our next question comes from Christopher Stathoulopoulos with Susquehanna Investment Group. You may proceed.

Good morning, everyone. Just want to get back to the comment you made on, I believe you said that the stock comp should be moderating given the changes in the vesting schedule. So, could you help frame the implied operating income for 3Q? How should we think about stock comp there? I believe this quarter was a little north of 15%, that's a significant step up from recent quarters. I just want to better understand how we should think about that underlying as we think about the second half of the year? Thank you.

Yeah. I don't have that precise number in front of me, it will just be a significant step down. I mean in the second quarter there was a significant chunk of options that had not yet vested, they all vested in one quarter. So there'll be a step down number. I just don't have that in front of me. As it pertains to the 2018 option grant that was associated with Apollo transaction, all those options are either vested or done. So that goes to zero. Yeah, so, exactly. So that number goes to zero and as with any other company, we have an RSU program, which is ongoing, so there'll be some stock comp expense that continues just at a significantly lower level.

Okay. The second question. So I think you're backing out the DNA associated with these five dry leases from your CASMx. Could you just walk us through the rationale why, I'm guessing because they don't have associated ASMs. And -- but you're including the revenue side of it. And then also as those come off, I think you said dry lease in 2025. Could you just kind of walk us through how we should think about the unit cost impact or unit margin? Just want to kind of better understand this relationship here that's sitting in revenue here, but it looks like it's coming out of your CASM. Thanks.

Yeah. So, I mean it's sitting in revenue and it's sitting in expense in our financials. But since -- as you pointed out, it doesn't generate any ASMs. We take it out of the CASM comp and it's out of the TRASM comp. So it's out of unit costs on the revenue side and on the cost side, in the same way that our cargo revenue wasn't in our cost per ASM or revenue per ASM number that generate ASM.

Just strategically, I want to just reiterate from last quarter. We are not being a lessor. We are just acquiring airplanes for future delivery. So when we report, we are doing our best to back out all those results so that you can kind of see the underlying success of the business, which is what we care about.

Okay. And then follow on one more -- yeah, I'm sorry. Go ahead.

No, I just want to follow up quickly, I just pulled the numbers. So stock comp in the second quarter I think is around 4.5% that number will probably drop to $1 million plus or minus.

For 3Q, or second half or?

No, for 3Q.

Okay. Great, thanks. And then just if I could get in one more here. So we've heard from U.S. peers talking about how the strong international travel is pulling from a pool of what would be domestic travelers. And are you seeing any of that? And if so, what are your thoughts on when that might slow? Thank you.

I mean, my view is that we observe something and then try to make up a reason why it exists. And so, it's true that the transatlantic yields are much higher than they had been. I think it's a stretch to say that those folks that are flying transatlantic would have otherwise flown domestic. I think more confidently we can say summer of '22 was an outlier in demand recovery with a lot of recapture from the previous years. Instead, we're going down to a fairly consistent year over four unit revenue environment month-by-month where improvements are between 35% and 45%. And that seems consistent going into all the bookings we're seeing through the spring of next year. So, I think it's a little much to draw that conclusion. But I think what gets me excited is just, it looks like fares have sort of permanently reset into a post-COVID environment for our network anyway. Anything else, Grant?

I would just add to that, that those unit revenues versus '19, I think we're at the high end of that. So that's specific to us and a testament for the good job this team has done. And I also think Jude's comments are spot on. If you look at our network, we grew -- Jude mentioned 15 new markets this summer. They've all met expectations. Our load factors are up. So we saw strong demand across our network and really happy with the results.

Okay. Thank you.

Thank you. I'd now like to turn the call back over to Jude Bricker for any closing remarks.

Thanks for joining us. Thanks for your interest in Sun Country, and we'll talk to you again at the end of the next quarter. Good morning, everybody.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.