Good morning, everyone. Thank you for standing by and welcome to Volaris' Second Quarter 2018 Financial Results Conference Call. All lines are in listen-only mode. Following the company’s prepared remarks, we will open the call for question and answers. [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 thanks for joining the call. With me today we have our CEO, Enrique Beltranena; and our EVP, Fernando Suarez and Holger Blankenstein. They will be discussing the company's second quarter 2018 results announced today. Afterwards, we will move on to your questions. Please note that this call is for investors and analyst 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 would constitute forward-looking statements within the meaning of applicable securities laws. Forward-looking statements are subject to several factors that could cause company's actual results to differ materially from expectations for reasons described in the company's filings with the U.S. Securities and Exchange Commission. Furthermore, Volaris undertakes no obligation to publicly update or revise any forward-looking statements. It is now my pleasure to turn the call over to our CEO, Enrique Beltranena.

Thank you, Andres, and good morning to everybody. Thank you all for being with us today. The first six months of 2018 were challenging for the aviation industry in general, including the Mexican industry. But Volaris finished this year second quarter with a cost per available seat mile of US$0.069, despite an economic fuel cost spike of 41% year-over-year. The company carried out an effective cost-reduction program to finish the second quarter with the same unit cost as the second quarter of 2017, totally compensating the fuel cost increase. But you think that's quite an achievement? The second quarter 2018 had record CASM ex-fuel of US$0.044, which is a blend of both domestic and international costs, which means our domestic cost is even more competitive. I want to take the opportunity to thank the finance and leadership teams of Volaris, who implemented more than 150 cost-cutting strategies, redefined core functions, mapped out other ambitious cost-cutting plans for the next 12s, which means this will continue. At the same time, Volaris continued to drive ancillary revenue growth with an increase of 9% year-over-year in total ancillary revenues per passenger, reaching a new record of MXN 466 per passenger or 34% of the total revenues. We are now very close to the top-quartile low-cost airlines in the world. In terms of capacity, we continue to carefully manage ASM's deployment given the current competitive landscape. Let me start with international market. Load factors continue showing improvement, and we are still seeing capacity cutbacks from the industry in general. Volaris has rightsized capacity to reflect market demand and we decreased capacity year-over-year. Adjustment of minus 7% ASMs in the Mexico to U.S. market is translating into better loads – load factors, both – with both yields and ancillary increasing to a better TRASM in…

Thank you very much, Enrique. I'll be reviewing our results for the figures filed with the SEC and BMV. During the second quarter, total operating revenues were MXN 6.2 billion, an increase of 4% year-over-year. Total ancillary revenues now represents 34% of total operating revenues, increasing 20% year-over-year. Total ancillary revenues on a per-passenger basis now under the IFRS 15 adoption were MXN 466 for the second quarter, increasing 9% year-over-year. During the second quarter, from the total collection, 41% was U.S. dollars denominated, partially helping us to insulate the company from exchange rate volatility and reflecting the company’s effort to strengthen the natural hedge. CASM ex-fuel decreased 6% year-over-year to MXN 0.86 for the second quarter. As Enrique mentioned, our CASM ex-fuel in U.S. cents decreased 10%. The total average economic fuel cost per gallon in the second quarter was USD 2.3, which includes a net economic benefit from our fuel-risk management program of MXN 133 million. The fuel price year-on-year increase in the second quarter represented approximately MXN 700 million of additional cost. Looking at the second half of the year, we have existing call options for approximately 50% of the expected jet fuel consumption at an average price of $1.81 per gallon. All the positions are in the money. Adjusted EBITDAR in the second quarter was MXN 1.1 billion. Adjusted EBITDAR margin was 17%. Operating income was negative MXN 575 million for the quarter, representing a negative 9% operating margin. The FX depreciation at the end of the second quarter led us to a non-cash FX net gain of MXN 653 million, below the operating line, given our net U.S. dollar monetary asset position. Net income for the quarter was MXN 38 million. The earnings per Series A shares was MXN 0.04 and USD 0.02 per ADS.…

Thank you, Fernando. The sequential monthly unit improvements was stable load factors, strong ancillary revenues and CASM ex-fuel at $0.044. So that all the structural things are happening as we predicted. Volaris is fully on track to ensure volume for our customers and for our shareholders. Thank you to our ambassadors, to the Volaris management and to the Board of Directors who are fully committed to maintaining a successful business. Thank you very much, and I will start with the questions.

[Operator Instructions] We’ll take our first question from Duane Pfennigwerth with Evercore ISI. Please go ahead, your line is open.

Hi, thank you. I wonder if you could – and I apologize, I actually lost the line for a period and had to dial back in. But can you talk about the trajectory of unit revenue over the months of the quarter, April, May and June from a TRASM perspective?

Good, Duane, this is Holger. Good to hear you. So for the second quarter, as Enrique mentioned, we’ve seen a much healthier market environment versus the first quarter of the year. And specifically for May and June, we saw TRASM recover year-on-year. We saw small gains in unit revenue versus last year 2017 third quarter. This was driven by some of the pricing actions that Enrique mentioned, as we – past fuel price increases over 12 customers and slightly higher fares. We’ve done that in a very measured fashion, so that not to affect load factors and demand electricity. This trend is something that we’re seeing continuing into the third quarter with relatively healthy TRASM.

Is there any distinction right now, I guess, here in July. Is there any distinction between those trends in closing pricing versus further out? Are you seeing year-over-year improvement in closing pricing as well right now?

Absolutely, Duane. What we’re seeing is pretty strong last-minute bookings, especially in the summer season, especially after the football World Cup is over, we’re seeing people go on vacation. We’ve seen healthy demand in the summer season as well.

Okay, that’s great. And then just lastly, to the extent you can detect, can you speak qualitatively about demand trends post the election. Are you getting any sense that there was pent-up demand that’s now active? Thanks for taking the questions.

Thanks, Duane. No, we haven’t seen any change on the path of the booking after the elections.

Thank you.

Thank you. And we’ll take our next question from Helane Becker with Cowen. Please go ahead, your line is open.

Thanks, operator. Hi, everybody. Thank you very much for the time this morning. So just a question on the domestic market. I’m hearing that beach traffic to Cancun especially has been relatively weak. And I’m just wondering if you’re seeing that or if that’s more U.S. to this beach market spend it is domestic issue? That’s my first question.

Yes, Helane, thank you. We have seen relatively strong demands to all the Mexican beach destinations, especially from the domestic market. We don’t operate any beach destinations from the U.S. to Mexican beaches. So what we can detect is pretty healthy demand from local domestic tourism to the beaches, somewhat substituting U.S. destinations, leisure destinations as the peso has weakened year-over-year.

Okay. Thank you. I appreciate that. And then my other question is, I guess, it’s been going on for what about a year, 1.5 years or so now that there’s been this intense overcapacity situation in the market, and I’m just wondering how sustainable it is and how much longer you think you can go on for? Because it just seems like it’s a steady erosion of – I don’t know, the right word to use, but it’s just the steady erosion possibility for not only Volaris, but for all the airlines in the domestic market. And I’m just wondering if there is any light at the end of the tunnel, I guess? Thank you.

So Helane, let me tell you little bit about what we’ve done in the domestic markets regarding capacity. We’ve been very cautious regarding capacity additions. As Enrique mentioned, we grew capacity only 1.2% versus the first quarter. And obviously, there was some growth versus last year. We have seen very diligent in shifting capacity from less profitable markets to more profitable markets. And specifically, we’ve seen pretty healthy demand growth in the northern corridor, Iguana, Guadalajara and the beach market, as I already mentioned, which really is geared towards defending our core markets, the Pacific Corridor that we’ve been very successful in. And we’ve also seen the competitors being relatively cautious with capacity growth in the domestic market. For the remainder of 2018, we are maintaining our previously stated guidance of 9% to 12% ASM growth for the full network – for the full year. And probably that would be towards the lower end of that range as we see it today. We continue to face delivery delays from Airbus, which might lower the growth that we stated in the guidance in the range to the lower end of the range. That’s what we’re seeing in terms of capacity, Helane.

Okay. Just one follow-up to that. Is there schedule available, because I think you mentioned – or not you, Holger, but I think Fernando might or Enrique might have mentioned that. You were seeing delivery delays from this year and then aircraft delivery delays for next year. And I’m just wondering if there is a new aircraft schedule that we can look at?

Yes, Helane. We currently have 70 aircrafts. We expect to close the year at around 77 aircrafts, which is 5 aircraft less, as mentioned by Enrique earlier. In terms of next year delivery stream, it’s still unclear, but it will reflect certain delays in the delivery schedule. We’ll post you as soon as we have something more from both the airframe and the engine manufacturers.

Okay.

We are updating the presentation, so in the next hours, you’ll see the update of the schedule of the fleet in the corporate presentation on the web page.

Okay, that’s great. All right. Thank you, everybody. Thank you for your time.

Thank you, Helane. Thanks for being with us today.

And will take our next question from Matt Phelan with Deutsche Bank. Please go ahead.

Hey, it's actually Michael Linenberg. A couple of questions here. Holger, you told us the system number is 9% to 12% for the year. What – can you just give us a sense of what that is for the third quarter?

Sure, Michael. So in the third quarter, we're expecting network-wide growth in the low double-digit number, so low teens for the network as a whole.

Okay, great.

I Just want to add one comment to the capacity growth we're seeing, some of that is coming through upguage of the equipment that we have. We now have 14 A321s in service, which is up from last year. And some of that growth is also coming from growth in ASM productivity. So an increased fleet utilization, which in turn has a positive effect on cost per available fleet line.

Okay. And then, I guess, Holger, that actually leads to my next question the fact that your fleet is now I think you're down to 8 A319s, and I believe you redelivered three during the quarter. So it looks like you're moving away from the A319. And I know it's all about bringing down lower unit costs and improving that part of the equation on one hand, on the other hand, by moving away from the smaller airplanes. Does that preclude or prevent you from certain markets not being able to serve some of the smaller markets because you don't have those smaller aircraft or does it really does not matter. At the end of the day you're going to focus on the trunk markets, the bigger city pairs, because that's where you're going to generate the best returns.

So Michael, we do have some A319s remaining in the fleet. We have 7 A319s remaining in the fleet. We're use those for Central America and for Central America to U.S. line, which are longer-range stage lanes. And specifically, for the domestic market and the U.S.-Mexico market, we are using the A320and A321, which precisely serves the more dense market – the markets that are growing significantly to our fare stimulation.

I guess, I was to say you were only down to seven on a fleet of 70. You used to have a lot more, so I'm just – it sounds like that, that fleet is slowly going away, and it's going to prevent you from flying into some of the smaller city copy experimental-type markets or even flying Central America to the U.S. So that's what I was getting at. You're down to a very small fleet. Once your smallest airplanes A320, it sort of knocks you out of a lot of smaller midsize markets. I just – I guess, that's not an issue. It's sounds like that, that's not going to be a problem for you?

Michael, it's not a problem. Our market is based on volume stimulation. We like the cost effects of the A320, A320 Neo and the A321. That gives us a better CASM and to that we are able to lower our fares and stimulate demand. That's our model and that's what we're going to continue to do in the Mexico market.

Okay. That makes sense. And then just one quick one. Fernando, you usually give us a sense of where the EBITDAR margin or EBIT margin, typically, I guess, EBITDAR margin for the next quarter? Did you mention that? I may have missed, not heard it.

No we're not giving specific profitability items. The only items Enrique mentioned is on CASM ex fuel in U.S. dollars. We mentioned that we expect to reduce that CASM ex fuel in U.S. dollars in the neighborhood of 8% to 10% in the third quarter.

Okay. That’s great. Okay, thank you, everybody.

And we'll take our next question from Rogerio Araujo with UBS. Please go ahead. Your line is open.

Hi, gentlemen. Good morning. Thanks for the opportunity. I have a couple of questions here. The first one, in the first Q you mentioned that Volaris main destinations were being attacked or capacity were being added to those regions, mostly Guadalajara, Tijuana and Cancun. So my question is how is – this capacity grows from your peers going in those regions in second Q and also in July? And this is my first question, I can make the second one afterwards. Thank you.

So yes, we've seen some capacity additions to our core markets in Guadalajara and Tijuana. We are very clear on descending our core markets. We've been very successful in those markets. We've seen volumes simulation in those markets from our VFR core markets and we intend to continue to grow in those markets. Remember that Mexico – the Mexican market is a high-growth emerging market, so we see demand growth and we see capacity additions by competitors and by us. So we don't see any – there is a lot of room to grow for our competitors in a very high-growth emerging market.

So your competitors are also – they also remain adding capacity to those destinations or only Volaris?

Specifically, Aeromexico has been reducing capacity in the domestic market. Interjet has been focused on Mexico City. And we have seen some capacity additions by Viva Airbus; however, to a lower extent because they're just a third of our size.

Okay, makes sense. Thank you. And the second question is regarding the other operating income. This came positive at MXN 231 million this quarter. This is much above historical levels. So I don't know if business is related to sale leaseback made in the quarter or is there any other item that explains that? Thank you.

Yes, it's related to two spare engine sale leasebacks we had in the second quarter.

And this is – we should continue to see that in upcoming quarters? Or this is pretty much one off for second Q?

We don’t have spare engine sale leasebacks every quarter. But there are relatively recurring. And also we didn't experience any sale leaseback on aircraft per se in the second quarter, but we do have some scheduled for the third and fourth quarter. So that's also part of our business.

Okay. Thanks very much.

Thank you. We’ll go next to Josh Milberg with Morgan Stanley. Please go ahead.

Good morning everyone. Thank you for the call. How are you guys?

Fine Josh, thank you very much for joining the call.

So just a couple of delta from my side, that the first is if you could just elaborate a little further on the competitive dynamic, especially in your core markets on the domestic side. One thing that has struck us in the first quarter, which is how well Aviva did from a top-line standpoint, which did suggest a very fluid market and that they were under cutting you on pricing. So we’ve wondered whether today, you’re seeing any meaningful fare spread with them. And that’s the first question.

Let me split that question in two, three line items. The first one is you – some times, we tend to forget from a quarter to a quarter, how difficult this year has been in terms of demand, okay? And I would say the demand has been picking up slowly. It’s coming along very well. As Holger explained in the month of May, in the month of June, it’s doing much better, but, I mean, still the pressure is there. And when you have a lower volume, everybody makes pressure on fares, okay? So that’s the first line. The second line in those core markets, I think it’s important to mention is the fact that we have been adding capacity, and we have been pulling much more service into them, and that service is coming along very well, and it’s coming along profitably for the company, okay? The third thing, which I would say going out from the core market is, how good the yields are coming off from Central America, and how the yields affecting our Central America operation from last year to this year. The operation in Central America is coming along much more better and it’s supporting the entire network in terms of TRASM. And finally, I think, it’s really important to say the advance we are doing, I mean, yes there is pressure in the base fare yield market, but please guys, look at the line of ancillary revenues. The line of ancillary revenues is coming along tremendously well and keeps on hitting record levels every quarter.

Okay, Enrique. And then my second question was, just that you would talk a little bit about – a little more about the factors that drove down your CASM ex-fuel this quarter other than sale leaseback?

Sure, I’ll have Fernando answer that. I mean, he had more than 150 strategies.

Yes, Josh. Despite the few price pressures and FX volatility, we did manage to reduce unit costs, CASM ex-fuel specifically. And a part of it comes, obviously, from upgauging. That sort of virtuous affect we have going on in the company by going into more A320s and A321s, more short-lived with aircraft, more Neos and so forth. But it’s not just fleet, it’s across the board cost management that we’ve been pushing through every cost line item across the board in the company that has helped us achieve this very tight cost level that you’re observing. And also the momentum that we have going on, on cost is very good. Going forward on the next 12-month basis, we’re also being very aggressive in the cost target reductions that we’re implementing in the company and we feel upbeat that we can achieve such savings in a relatively short timeframe.

I think Josh, I would like to add that I – strongly thinking about changing Fernando’s title and make him cost czar after the success he had in the last months reducing the cost.

But don't cut his salary.

Thank you Josh.

And we'll go next to Stephen Trent with Citi. Please go ahead. Your line is open.

Yes, good morning gentlemen, thanks for taking my question. Most of them were answered already, but just a follow-up on what you guys mentioned on the FX hedging, I think you said 20% of FX hedged using forwards over the next 12 months. When we think about the income statement impact, you mentioned MXN50 million that value should be reflected somewhere in the operations or should it be, again, reflected below the operating lines? Just wanted to understand the mechanics?

Yes, we have effectively MXN60 million of notional FX forwards purchased for the next 12 months. We do have a just hedged accounting for the instruments, specifically they're earmarked towards aircraft rentals. So you should expect to see any result from that benefit us, given the current mark-to-market, the positive mark-to-market that we have on those positions netted out of the rent expense, so that is above the line.

Okay. Very helpful, Fernando. I appreciate that. And just one very quick question about fleet. I mean, kind of a follow-up to Mike Linenberg's question, with the movement you guys have had towards larger gauge airbus narrow bodies, is it reasonable to say or assume that the jet manufacturers out there have mainly been trying to also pitch other planes or newer planes, given the issues we've had with the Airbus narrow body, you've had of course a great deal of chop with the four main OEMs in terms of who is aligned where, but just curious if you're seeing a push on your side to go for another aircraft type?

No, Steve. I want to say it very clear. I mean, we are trying to deal with a situation we have in terms of performance with aircrafts. We've been totally focused on that and suppliers have been focused on that. I just want to remind you that the company still has to make a decision on the engines, on the more than 80 purchases – purchase order that we made for or 2022 to 2026. And I have to say that what is going on is really making the company very concerned about that decision.

Okay, appreciate that Enrique, that’s very clear, I will let someone else ask the question, thank you.

We will now take our next question from Mauricio Martinez with GBM. Please go ahead.

Hey, thank you.

Hi Mauricio

Good morning and thanks for taking my question, just like a follow-up question on the markets that you're moving your capacity. If you can give us a color on which routes you are leaving and what others are being reinforced particularly regarding, which are the most affected in terms of profitability. That would be my question.

Okay. So Mauricio, what we've been doing in the U.S. market, we've been rightsizing the capacity, specifically from Mexico City as we saw some overcapacity Mexico City to the U.S. from everybody. We've been rightsizing our capacity coming out of Mexico city, and we've been reallocating that U.S. capacity to some of the more profitable markets in the domestic markets from Mexico City, number one. Number two, In the domestic market, we have been carefully managing capacity additions. focusing on the profitable routes in our core markets, Guadalajara and Tijuana and the very elastic markets that worked well with our business model, stimulating fares and demand – stimulating demandful fares. And then third, in the Central American market, we have been growing capacity as we entered from Central America to three new destinations in the U.S. stimulating demand in the VFR markets from Central America to Los Angeles, JFK and Washington specifically.

Right, very clear. Thank you.

So thank you very much to everybody. Thank you very much to our ambassadors for the airport during the quarter. Thank you very much for the Board of Directors. And thank you very much for the new investors that joined us in the last day that have helped support the share. Before I want to commend the Volaris team for their recent humanitarian efforts in the pace of the separation of children from the parents in the U.S., Volaris' mission is to unite families, the basis of our society. In response to the situation and in compliance with all the corresponding laws and conventions, Volaris has announced and will continue with its willingness to work in coordination with the authorities of the United States, Mexico, and the countries where we operate in Central America to unite this children with the parents at no cost. I would like to say again, thank you to everybody, thanks to our operator, and have a great day. Bye-bye.

And this will conclude today's program. Thanks for your participation. You may now disconnect.