Controladora Vuela Compañía de Aviación, S.A.B. de C.V. (VLRS) Q3 2016 Earnings Report, Transcript and Summary

Good morning, everyone. Thank you for standing by. And welcome to Volaris's Third 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 questions and answers. Instructions on how to ask a question will be provided at that time. Please not that this event is being recorded. At this point I would now like to turn the call over to Mr. Andres Pliego, Volaris's Financial Planning & 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 to-date. After that 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 segments will -- we will make on this call would constitute forward looking statements within the meaning applicable, securities loss. Forward looking statements are subject to a number of factors that could cause company assured results to differ materially from expectations, for reason described in the company's findings with the US Securities and Exchange Commission. Furthermore, Volaris undertakes no obligation to publicly update to 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 the call today. Let me begin summarizing the solid results achieved by Volaris during the third quarter with the following key indicators. 88% record loan fact. 43% non-ticket revenue growth year-over-year. 21% increase in non-ticket revenue for passenger. 19% passenger volume growth, 16% increase in fathom at a record level of a Ps.155 cents. 40% EBITDAR margin and 21% last 12 months adjusted pre-tax right. As you can see, these numbers really speak for themselves. But let me go into further detail on our performance for the quarter and further growth opportunities. During the quarter, Volaris transported 4 million passengers, RPMs and ASMs grew 18% and 20% and 12% year-over-year respectively. The company say ASM growth was comprised to 6% in additional frequencies, 2% joining or 66 statistic inset stations and 4% from new destinations further diversifying our network. We have continued our airports to increase the number of seats per car. Not only do we have 10 additional aircraft compared to last year, and also we have an average of six more seats per aircraft up to 174 seats per aircraft flown. The average of 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 lined with our point-to-point strategy. The Mexican VGA the districts continue to report in a 61 consecutive month of solid market demand. During the third quarter, domestic market grew 13%, and international 16%. Volaris represent the 36% of that growth, proving that it is one of the main driving forces of the Mexico airlines. Our boss switching program continue to serve this immediate passenger demand. It is very large. During the third quarter, we implemented a number of initiatives. We launched a market in [indiscernible] campaign target in bus passengers and we also deployed new sign at displacing airports where we have a presence to facilitate the travel experience of our passengers. We also continue in implementing our low fares communication strategy. Offer prepaid cards and continue with our geo-fencing features. And hovering initiatives targeted an increasing passenger traffic from current bus uses. Non-ticket revenue generation has been strong with new pros such as an additional third party insurance service. For example, home weather and personal items coverage as well as a new offering of a standby ticket fee to serve this pressing venture. Regionally, in order to increase pro-penetration, we have expanded our commissional pro portfolio on mobile channel. For example, the Tijuana Cross Border Xpress facility, parking under lights. But other new features such as instant credit card approval in the booking pad. Furthermore, we continue to tap in to customer analytics in order to fine tune our dynamic pro pricing and increased rich for commission based driven. Now, I will 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. These core sketual completion aircraft and maintenance with the ability were all above 99% demonstrating world class operation. Thanks to all the team. It's on, we continue to work throughout all the deeper areas of the company to guarantee to further construct of a refilled resilience of an 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 out more that 15% filter and efficiency receipt. We also renegotiated our MRO contract for heavy check 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 confession and as we speak, the local authorities are holding a public [indiscernible] on that marriage. Fernando will now review the financial results in detail for us here. Fernando, please go ahead.

Thank you very much Enrique. I look forward to elaborating upon our financial performance for the period. Total operating revenues for the third quarter reached Ps. 6.7 billion, up 29% compared to the same period last year. Turning to quarter. Non-ticket revenues reached Ps. 1.5 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 onto costs. Fathom was equal to a Ps. 131 cents for the quarter a 23% year-over-year increase, mainly driven by the average exchange rate the precision 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, fathom 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 up from premium of $9 per gallon. For the quarter, fuel costs were presented 28% of total operating expense. 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 updates 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, as an average price of $1.64 per gallon. Adjusted EBITDAR in the third quarter was Ps. 2.7 billion, equal to a 40% adjusted EBITDAR margin. Operating profit was Ps. 1 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 a holding higher U.S. dollar net asset position enabling us to offset FX pressures at the bottom line. During the quarter we booked an FX gain of Ps. 382 million which resulted from the depreciation of the Mexican peso on our balance sheet, monetary U.S. 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 Ps.1 million with a net margin of 16%. Earnings per series A share were Ps. 1 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 30, Volaris registered Ps.7 billion in unrestricted cash, representing 32% of the last 12 months operating revenues. We maintain negative net debt or a net cash position of Ps. 6 billion. During the quarter, our high mix cash balance and in U.S. dollars generated a net foreign exchange effect of Ps. 209 million. These together with operating, financing and investing activities resulted in a total net cash increase of Ps. 63 million. With a cash flow generation and EBITDAR expansion, we achieved a ratio of 3.4x adjusted net debt to EBITDAR, this being the lowest leverage amongst Mexican carriers. All of our 2017 and 2018 pre-delivery payment requirements are fully financed with our revolving PDP line of credit. On the flip side, we ended the quarter with 65 aircrafts 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 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 30% assuming current spot exchange rate and fuel prices. We foresee an aircraft and engine rent expense amount of $ 7 million to $8 million in the fourth quarter which includes contingent rents from expected re-delivery costs. Now I will 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 successfully in our 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. [Operator Instructions] Our first question will come from Duane Pfennigwerth with Evercore ISI.

Good morning guys. We will have to figure out a day for your report where there is no potential distraction from your results here. Can you quantify the magnitude this year of your lease return expense, what that total expense of re-delivery was in 2016?

Yes Duane. In particular for the third quarter, the contingent risk from re-delivery expenses was $90 million and this is due to the fact that we had three re-deliveries in the third quarter. However, in the fourth quarter we will only have one re-delivery. So that amount should be below what we posted in the third quarter.

Okay. Maybe I can follow-up with you offline, it will 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 [Cross Talking]

Give me couple of minutes and I’ll have the answer for you.

Alright, just as my second question, does the company have a longer term view on the Peso. What is that if you – that you are managing towards call it over a 3 to 5 year basis do you feel like we have had some unreasonable depreciation here of 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 our medium to long term basis against exchange rate volatility having a diversified more and more international network.

Okay, that’s great and along those lines I 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 Rica operation concision. [Indiscernible] is being held as we speak, and we are expecting a favorable resource from that. As a result of that we foresee ourselves having a certificate of operation maybe end of the this month beginning of the next month. We are 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 will place between 18 and 22 aircrafts in that region and at the full potential our operation in Costa Rica will reach this high of our current Mexico to US operation.

And Duane to follow up on your contingent rent question, including the [$90 million] of contingent rent in the third quarter. Full year, we would expect to see contingent rent resulting from re-deliveries in the neighborhood of $50 million equivalent. USD.

Thank you very much. I will turn it over to others.

Our next question will come from Michael Linenberg with Deutsche Bank.

Yes, I just Fernando, I just wanted to clarify so you said you returned 3 aircraft this quarter, this past quarter and you said it was Ps. 19 million or $19 million, the re-delivery cost?

$19 million Michael and that is for 3 re-deliveries in the third quarter. We expect to have one re-delivery in the fourth quarter and next year we will have another 3 re-deliveries that we start provisioning for re-deliveries as well.

So it's roughly over 6 million an airplane if I am hearing that right.

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

It depends a lot Michael on the LLP from the light limited parts, and the time remaining in the fuel and other components so it really depends from aircraft to aircraft. You cannot make a number of 6 million like just like that. That’s why we give you guys a specific amount of the rentals for every quarter because otherwise you cannot fuel it up.

And then, just my second question I want to go back, if I look at your unit cost they were up 7% in dollar term 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 call out a rent expense and maybe it's the re-delivery cost. Are they the primary driver there that took that number up?

While it's mainly exchange rate pressures on rentals obviously on fuel costs, but also on traffic costs in particular related to airport costs in the US. We also had an increase in the chasm due to fuel price. 8% year-on-year average economic fuel cost per gallon increased. In conjunction with the contingent rents that’s what put pressure on the cost across the board.

Okay. So on the US dollar one. Okay and then I just wanted to see if I had anything else. I am all set. Thank you.

I think Michael, for some people which is really important is despite the moves of exchange rate and the higher fuel cost that we had in the quarter the company still providing a very high EBIT level. And that’s something really important I mean that means we have been able despite of those incremental cost to manage our profitability in a way which has been really aggresive.

Yes, you see with the numbers. It was a good quarter. Alright. Great. Thanks Enrique. Thanks Fernando.

Thank you.

Thank you. Our next question will come from Renato Salomone Itaù Unibanco.

Hi, Renato how are you doing? Welcome to the phone call.

Alright. Thank you. Just to clarify you said you plan to have 18 to 22 aircraft 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 profile, if you could breakdown between VFR, leisure and business on the – how you read the market, the opportunities that you see this market or if you want it in a different, how you deploy these aircrafts?

Renato it's very similar to what we do today. So, most of it is going to be friends and relatives. We typically have a smaller portion of those same basic inference and relative to some leisure and then business is going to be lower.

Okay and does [indiscernible] announcement of wangle, does it change in any way or strategy for Costa Rica?

I think [indiscernible] for Central America will only benefit the consumers and during the actual fair level of Mexico to the US and within Mexico inter-region I am expecting similar elasticity on the Mexican market during our market penetration. I will like you guys to remind everybody that [indiscernible] for the second quarter was $234 versus ours which was $58 and we have a unit cost of band more than 25% versus them. I think the change and improve yourself is giving yourself a second chance to be forced by others to changes like being discarded.

Perfect. Thank you very much.

Thank you. Our next question will come from Stephen Trent with Citigroup Inc.

Thank you, operator. Enrique, thank you very much and good morning everybody. I appreciate your time. My questions well, several of them have been answered but just a few follow-ups. First, I didn't hear you well when you mentioned the pre-tax on 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 kind of 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 rates?

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

Okay. Got it. Very helpful. Let me revisit 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. It's only going to be 3% to 4% of total ASMs of company for next year. So I mean don't kick the ball outside of the field.

Very helpful Enrique. Thanks very much.

Thank you. Our next question will come from Helane Becker, Cowen & Company.

Alright. Thank you operator. Hi everybody. Thank you very much for the time.

Helane, welcome. How are you doing?

Thank you. I have no complaints. Thank you for asking me actually. Just on cash balance I am just kind of wondering what’s the rate level of cash on the balance sheet for you guys I mean, it's a big number and I am wondering if you can better deploy that cash in either additional growth or buying more planes versus leasing more planes, buying aircraft fleet 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 are 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 and we do not have aircraft purchases or deliveries out of our order book until the third quarter of next year of [indiscernible]. We are doing the analysis of buy versus lease, we are 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. We are seeing short term purchasing two spare engines given the size of our fleet and our fleet requirement it makes all of the sense of the world to start doing those type of asset purchases.

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

No, I can’t answer that Helane, sorry.

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

Alright. Listen, thanks –

Maybe you can -- with your view of the lectures in the US and I give you this.

That’s a fair question. Thank you. I know I am not a political forecaster but thanks for asking. Have a good day. That was – just really wanted to kind of get that cost thing answered, thank you.

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

Thank you. Ladies and gentlemen at this time this conference, I would like to turn this question over to Gilberto García, Barclays. Gilberto García: Hi good morning and thank you for the call.

Sorry, I had not – your question in my screen that’s in the next page. I am sorry that I tried to cut down. Gilberto García: Don't worry. Don't worry. My question is about yields. You posted a surprisingly strong number so I just want to get a sense of how relevant the FX was on these achievements?

Well, this is Holger. Thanks for your question. As we have said all along in this year the fair 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 markets and international. We also would like highlight again that the new bilateral agreement will bring additional momentum and strength to the demand side of the equation so the yield, part of it is driven by FX but most of it is driven by just a very strong demand environment. Gilberto García: Okay. Great. Thank you very much.

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