Thank you for standing by and welcome to Volaris' Second Quarter 2019 Financial Results Conference Call. All lines are in a listen-only mode. Following the company's prepared remarks, we will open the call for question-and-answer. Instructions on how to ask a question will be provided at that time. Please note that this event is being recorded.At this point, I would now like to turn the call over to Ms. Maria Elena Rodriguez, Volaris' Corporate Finance and Investor Relations Director. Please go ahead.

Good morning everyone and thank you for joining the call. With us today is our President and CEO, Enrique Beltranena; our Airline Executive Vice President, Holger Blankenstein; and our Vice President and CFO, Sonia Jerez.We will be discussing the company's second quarter results announced yesterday. 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 taking separately.Before we begin, please let me remind everyone that this call may include forward-looking statements within the meaning of applicable securities laws. Forward-looking statements are subject to several factors that could cause the 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's now my pleasure to turn the call over to Volaris' President and CEO, Mr. Enrique Beltranena.

Thank you, Maria Elena and good morning to everyone and thank you for joining us today. Let me begin with some key facts and that of the second quarter. Volaris is one of the three lowest unit cost publicly traded airlines in the world with a unit cost ex-fuel during the quarter of $0.0389. CASM ex-fuel decreased 3.3% year-over-year. Total unit revenue in the quarter improved 10% year-over-year.Let me explain some of the elements. Total ancillary revenues increased 39% year-over-year. Volaris' ancillary revenues per passenger increased 10% and now, Volaris is among the top four airlines in the world.Second, Volaris is the largest passenger operator in the Mexican market with 40% more passengers carrier than our closest competitor during the quarter. In this market, Volaris operates with a load factor of 90%.Third, Volaris is the global carrier with most direct routes to the U.S. In the last 10 years we have carried almost 20 million passengers in the transborder market. In addition to that, with this new Frontier codeshare, we now connect almost 100 U.S. destinations with our Mexican markets. Volaris completed important strategic financial transactions during the second quarter.The first one was that we secured the landmark sale and leaseback transaction for 22 aircraft that will be delivered between 2020 to year 2022. The terms and lease rates are highly attractive and are historically unprecedented for the company.The second one is that Volaris successfully issued a Ps. 1.5 billion denominated long-term bond in the Mexican public market at a very competitive term notwithstanding the difficult capital market conditions during the process of placing the instrument.To facilitate development of our Central American initiative, Volaris has established a subsidiary in El Salvador and obtained its airline operator certificate from the Civil Aviation Authority. We are targeting operations to start during August 2019. These achievements led to the following second quarter 2019 results.Total operating revenues increased by 34% with a year-over-year TRASM improvement of 10%. EBITDA margin improved by 10.4 percentage points versus last year closing at 27.7% and operating cash flow generation of Ps. 1.5 billion a year-over-year improvement of Ps. 680 million.For on-time performance is on track and scheduled completion is at 99.5% return on invested capital pretax of 16% at the end of the quarter. Nevertheless, I would like to additionally highlight that the earnings per ADS for the first half of the year at $0.33.Now I would like to turn the call over to our airline Executive Vice President, Holger Blankenstein to talk about the detail of revenues margin dynamics and give an operational update. Please, Holger.

Thank you, Enrique. Total ASM growth was 22% above our previous stated guidance, as a result of higher utilization, new routes and a focus on our core markets. Domestic ASM growth for the quarter was also 22%. VFR traffic and the bus markets remain our most important drivers of growth. We have been diversifying our point-to-point network focusing on non-competed routes to sustain our double-digit growth. The also low-cost model penetration in the Mexican market is expected to continue throughout 2019 and beyond.In the international market, our ASM capacity growth was 21%. We continue observing a more sustainable transborder market. The VFR segment showed solid demand, supported by remittances from the U.S. Capacity in Central America represented only 3.4% of our total ASMs by the end of the second quarter. The region is maturing well and is contributing to our U.S. dollar-denominated collection. While still a smaller part of our business, it is growing well and performing to our expectations.As Enrique mentioned, we obtained a foreign air carrier permit to operate direct flights from El targeting to start during August of this year. El Salvador and Guatemala are the most fertile VFR markets in Central America. In the second quarter, we started operations in five new domestic and four new international routes from existing stations in order to continue developing our point-to-point services and attracting first-time flyers.We are strengthening point-to-point presence in cities like Queretaro with three new domestic and one new international route and from Durango with two new domestic and one new international route. In the second quarter, we achieved a passenger volume growth of 26% year-over-year. We improved our total load factor by 1.5 percentage points, which shows that our ultra-low-cost model has been well accepted by the market.In the domestic market, the load factor was 90%,…

Thank you, Holger. I will now review the five main achievements of the second quarter. First, CASM ex-fuel closed at $0.0389 which represents a 3.3% year-over-year reduction.What the most important drivers were: one the continuous company-wide cost reduction program; two, the operation of the company with the most fuel-efficient fleet in the market with an average of 186 seats per aircraft and with 24% of our aircraft with NEO technology; and three utilization, utilization of our fleet is at 13.1 block hours per day. Block hours per day had an increase of 13.5% year-over-year.Second achievement: Total CASM was $0.065 for the second quarter in line with last year. The cost-cutting program initiatives continue offsetting the increase in the average economic fuel cost per gallon which was mainly driven by the new transfer fees added by the jet fuel suppliers in the domestic market.During the second quarter, Volaris executed a fuel tender in order to partially rectify these incremental transfer costs. The fuel cost savings achieved from the initiative may began materializing during the second half of the year. Additionally, Volaris hedged 30% of its projected jet fuel consumption for the remainder of 2019 mainly through Asian call options at an average stock price of $1.91 per gallon.Third achievement our solid balance sheet and good liquidity. Volaris had a net cash flow provided by operating activities for the second quarter of Ps.1.5 billion closing the quarter with cash and cash equivalents of Ps.1.1 billion. This represents 36% of the last 12 months operating revenues. The adjusted net debt-to-EBITDA ratio closed at 4.4 times.Fourth as initially – as Enrique mentioned later during the June, the company successfully completed the first tranche of a 5-year Ps.3billion local bond program with a first issuance of Ps.1.5 billion at the Mexican interbank rate TIIE plus…

Thank you, Sonia. Volaris been proactive during the last 2.5 years in counteracting the economic upward pressure on costs. From the beginning of 2017, the net jet fuel impact on total costs for the company was Ps.1.6 billion. The company-wide efforts to improve our financial performance also focused on the revenue side accounting for Ps.1.8 billion incremental revenues during the same 30-month period.All-in-all the company had a strategy for its healthy capacity growth and deliberate management of departures, station and fleet utilization, passenger demand, load factor, base fares and ancillaries offset the cost hit. Volaris managed it's network systems to drive higher departures and healthy ASMs and is now number three in the world, measuring ASMs per aircraft per day, differentiate itself in the strong productivity of our fleet.Stronger regional market demand produced higher RPMs and load factors that reached 87% across the system. This demand supported higher yields and with Volaris robust ancillary revenue model, produced stronger TRASM increase and top line revenues. We work hard to rethink and simplify the earning, to the extent that we produced Ps. 4.2 billion, let me repeat that number, Ps. 4.2 billion in non-oil cost reductions over the same month period. This amount is the equivalent to operating the airline for four months without incurring any fuel expense.We have talked about our strong passenger growth, but let me explain and unpack what we see occurring in our markets. Over the last six months Volaris' 21% passenger growth comfortably exceeded our ASMs growth of 17%. But this is not luck, or an anomaly, but it is supported by the following macroeconomic indicators. I think, there's a lot of moving variables that you must analyze.Let me start with the first one. GDP growth across Mexico is not uniform. The GDP growth, with or without…

[Operator Instructions] We'll take our first question from Duane Pfennigwerth of Evercore. Your line is open.

Hi, thank you. So double-digit TRASM growth, very solid declines in nonfuel cost. Not a lot of models around the world that offer that right now, driving very strong margin expansion. Can you talk sort of high level your view or your prospects for margin expansion in the back half of the year?

Yes Duane, thank you very much and thanks for your comments. We strongly think Duane that we can basically sustain the performance that we had during the first half of the year. Obviously, as I explained I mean or Sonia explained them sorry. The numbers of last year in the second half improved dramatically versus the first half. So our comparison is really higher than in the first half. So I'm expecting to continue performing the way we are performing, but probably at a smaller pace.

Okay. And then, on the A321neo deliveries, are there any recent or incremental delays or supply chain issues that you're seeing? And I know you had to re-slot some of those in the past, but let's say in the last 30, 60 days, are you seeing any incremental A321neo delays?

We only have one month delay this year in the two deliveries that we took in the first semester. So, we are expecting some where there could be the second half.

Okay. And then just lastly, 10% TRASM growth, could you put a -- would you be willing to offer a view on how did that look in domestic versus transborder versus maybe the Central American operation? And thanks for taking the questions.

Thank you, Duane. I will ask Holger to answer that one please?

Yes. Thanks Duane. TRASM expansion was relatively equal between the domestic and international. And obviously Central America as it's in ramp-up was probably a little bit higher than 10%. That's the breakdown.

Okay. Thank you.

Thanks to you Duane.

And we'll take our next question from Michael Linenberg of Deutsche Bank.

Hey, good morning everybody. I just have a couple here. Just to start with you, Holger, you talked about the capacity growth. 22% and then high teens second half of the year, but sort of what caught my ear is that, you have been focusing on routes where there is either little to no competition. I think you said non-competed routes. And I know, we've been seeing that in both your transborder and to maybe a lesser extent in domestic Mexico. Do you have any sort of breakdown where if you were to look at your domestic city pairs, what percent have head-to-head competition which presumably actually a decent number of them probably have competition head-to-head. But in the transborder, if you look at the number of city pairs that you're flying today and what percent of them actually have head-to-head competition, I suspect it's actually quite low. But would you actually have any of that data just to support my premise.

So Michael, what we can tell you is that, about 25% of our capacity in terms of ASMs is operated in non-competed routes. That translates into about 80 routes that have no competition. And if you look at the transborder market it's actually – we're also focused on the VFR niches that connect directly to the center of Mexico. So we do have a sizable number of routes that don't have any direct competition in the U.S. as well.

Okay. Okay, great. Can I ask a question about in Central America with the FAA moving Costa Rica to Level 2 from a sort of a safety aspect? As you start obviously your – the new operation out of El Salvador will you – I guess, you won't be able to add any additional capacity to the Costa Rican operation until that safety level rating is moved back to what it was previously. Is that correct? Number one. Number two, does it really matter all that much now that you have an El Salvadorian operation any sort of growth that you were planning for the region you can take advantage of since the U.S. and many of the Central American countries have open skies and therefore they allow fifth freedoms. So it really shouldn't change your plan down there. Can you just – can you talk about that I guess this would be to you Enrique?

Yeah. Sure. Hi, Mikey.

Hi.

Well, let me tell you, yes, the U.S. rating clearly freezes expansion to the U.S. not to the rest of the areas. Okay?

Okay.

The second point, I would like to clarify is this is a qualification that is given to the Costa Rican aviation surveillance authority. So I want to be very clear that we are working with them to support their efforts to run to normality as soon as possible. But Volaris Costa Rica AOC recently obtained its AOS certificate, which makes our certificate and our operations really safe. Okay? The third statement, I would like to make is that, we have launched so much capacity before this happened that in reality what we're doing is maturing that capacity. So it is not having an impact on the numbers rather than that it's making the numbers better. And fourth, I would like to say that, yes the El Salvador operation is going to pick some of that.

Okay. Okay. That's really helpful. And I think I'm aware and I'm sure we'll make investors aware that this FAA rating is applicable to the country and not the airlines that are serving the country. So I think we're – we feel pretty good about your operation. And just an add-on about the Central American operation is one of your competitors in the region has been scaling back in some of the large markets. I think they recently indicated that they're going to pull out of Miami El Salvador, Miami Guatemala City. When I think about Volaris, I know historically when you fly internationally from some of those markets you may move into some of the smaller markets, you may target as you target VFR markets. But is it possible that we could see you move into some of what I would call the trunk routes that are being abandoned by one of your largest competitors? Is there an opportunity say for you to fly from Miami into some of the key Central American cities?

I cannot speak about the upcoming capacity yet until we have authorizations. But we are certainly focused on the region.

Okay. Great. All right. Well, listen nice job this quarter Enrique, and it looks like a good forecast well done. Thank you.

Thank you very much, Michael. And I appreciate your comment of making the investors know that the qualification of Costa Rica is not about the safety of Volaris rather than that Volaris is just received the certification which guarantee safety operation.

We'll take our next question from Josh Milberg of Morgan Stanley.

Hi, guys. Thank you for the call and congrats on the results. My question relates to the fuel transfer costs that Sonia highlighted. I was just hoping you could comment a little further on that issue and on the initiatives you've taken to address it? And also just with the initiatives how might we expect those costs to evolve in the second half and next year? That actually seems like it's something that could be a relevant driver in the coming quarters. Correct me, if I'm wrong about that.

Yeah. Sure. You're completely right. Yeah. So regarding the – specifically, the fuel costs, as I mentioned we finalized a few tenders for domestic market. It was very successful. We were able to reduce our increase on fuel by -- increase that we had due to the increase of tenant -- transfer price and as I also mentioned, so not only the tender help us to offset fuel costs, but also a lot of cost savings initiatives across the board.Honestly, regarding our expectations from CASM during the same quarter, remember that we have started the cost savings plans in 2018 which means that we're going to see less improvement during the second half of 2019 compared with 2018, but we continuing -- very, very focused on maintaining our cost ex-fuel.

Yes, I was referring specifically to the fuel transfer costs in the second half. But Sonia you did...

So, most likely it's going to be about a third of the -- for the first semester cost. I mean a reduction of a third to the first semester cost.

Exactly. That's it.

Okay, got it. Thank you.

In the domestic market obviously.

We'll take our next question from Helane Becker of Cowen.

Hey, guys. It's actually Conor Cunningham in for Helene. How are you?

Hey, Conor.

Hi. So, just -- I know you just raised your capacity outlook and it makes sense given the demand environment. Just curious what would need to happen for you guys to either scale back or maybe even push growth further in the coming quarters? Is it simply just a supply and demand equation? Or I mean just how much does like the competitive response play into that decision?

Well, first I'd like to remind everybody that what we're doing is healthy capacity addition. So, we're increasing the utilization. We're using our existing assets more effectively by producing more ASMs per aircraft per day. So, that's number one.Number two, clearly the competitive landscape plays a role also in our capacity guidance and plans going forward. You've seen some of the high cost carriers in Mexico scale back domestic capacity and we're taking advantage of that and backfilling in our core markets capacity.And obviously the demand environment plays a very significant role. And we're seeing very healthy demand in the transborder market in Central America and also in the price-sensitive domestic markets to the beach markets and to the VFR core market.

Okay that makes sense. And then just on the RASM side. So, it seems like you guys are guiding to RASM to remain positive despite a challenging comp in the third quarter. And I think the comp headwind is really more domestically focused than it is international or Central America.So, curious your expectations around each region in the coming quarters. Is it fair to assume that domestic will lag a little bit but international and Central America should outperform? Thanks again for the questions.

So, again a quick clarification. We think about our business in terms of TRASM total RASM which includes the ancillary piece. And what we've been seeing is declines in yields or in RASM and increases in our ancillary business which leads to a higher TRASM overall.To split it down by regions, we continue to see relatively similar growth in TRASM in both geographies U.S. transborder and the domestic market. And then as Central America is in ramp-up, TRASM growth there would be a little bit higher than the average.

Great. Thank you.

We'll take our next question from Rogério Araújo of UBS. Your line is open. Rogério Araújo: Yes, Hi everyone. Morning. Thanks for the opportunity. I have a couple of questions. One is a follow-up on the very strong TRASM. So, is there a possible way that you could break down which routes are explaining this very strong TRASM expansion even with a 22% ASM increase in the period.So, what I mean is if you break it down routes in which your competitors are taking out capacity from with routes that your competitors' capacity is flattish, is there a huge difference between them? In other words, is most of this very strong TRASM has been explained by those routes in which your competitors are taking out capacity from or not. This is the first question. Thank you.

So we don't break down traffic by geographies specifically, but what we can tell you is that we're seeing chart lift across the network. And here it is important to mention that Volaris' healthy capacity growth is focused on the northwest of the country and less on the southeast of the country. And if you look at regional GDP growth in Mexico, the country's GDP growth has been stronger in the northwest of the country.For example, we've seen new routes in Querétaro, Aguascalientes, Bajío, Guadalajara. Those are cities secondary cities in Mexico, which are located in the center and in the west of the country and that has contributed definitely positively to our TRASM expansion. Rogério Araújo: Okay. What about routes in which your competitors I think are taking out capacity from? Is it also boosting the TRASM?

We are very clear about our core business in the center and west of the country and we are closely observing capacity movements from the competitors in those markets. Rogério Araújo: Okay. Thank you. So my second question is on the other operating income. There was a significant gain about Ps.220 million. My question is, is this related to sales and leaseback gains?And also a follow-up. Is there any non-recurring item in this result in the revenue or in the cost besides this likely -- sale leaseback. Thank you.

Yes. So here you saw the company in the second quarter has two aircraft arriving and based on IFRS adoption that we did in January this year, we have to amortize those sales and leaseback gains over the lease term. That compares differently to 2018, where those gains were accounted as a one-off. Rogério Araújo: Sorry, can you explain this better?

Yeah. Sure. So IFRS accounting rules. So allow -- it's an obligation that the sales and leaseback gains must be deferred over the lease period. So -- but before IFRS all those gains were accounted as a one-off. It is clear? Rogério Araújo: Yes. It is clear. So the other operating income line, this is not a one-off gain from sales leaseback, right?

Yeah. So in reality what's going on is, you are comparing versus a year where we used to put the one-time shot…

Correct.

…when the aircraft arrived. And now that's amortized through let's say 12-year period, okay? So that's the new rule, okay? And that explains the reduction of 46.7% versus previous year. And it's basically because of the new IFRS adoption. Rogério Araújo: Yeah. Yeah. It's clear. Thank you. And but there is still a gain. So what is this related to?

Sorry, can you…

I'm not sure, I'm understanding your question.

Yeah. Rogério Araújo: Yeah. So I want to know what is included in this other operating income line.

The sale leaseback gain?

It is a more important topic.

We also have administrative expenses, travel expenses, technology and communications, marketing, but that's much more in the other operating expenses line. Rogério Araújo: Okay. So was there any relevant one-off impact this quarter?

No.

No.

It's just the sale leaseback of the…

Yes. I got it. Rogério Araújo: Thank you. Thank you very much.

And we'll take our next question from Stephen Trent of Citi. Your line is open.

Thanks very much everybody and good morning. Some of my questions have already been answered, but I wanted to dig in a little bit on some of your digital initiatives. So I know you guys recently launched YAVAS. And any color as to what program growth we can think about over the next six months or so? And how this might contribute to your RASM CASM spread? Thank you.

Yeah. Thanks Stephen. So we launched YAVAS publicly in mid-April 2019. So we are talking about a three-month period that it's been running. Currently the project is maturing and this has a positive trend. But I would say that it's currently not material for the ancillary revenues yet.We see sales of that new business unit growing week over week. And we are seeing quite healthy margins in that business. But clearly we have a roadmap to make this business more meaningful in the future. We're focusing on strengthening the content in those -- in the offering, elevating our online brand awareness, which will obviously boost sales while maintaining the quite healthy margins in the business. So eventually it will contribute in a more meaningful way to the ancillary revenues per passenger.

Okay, very helpful Holger appreciate that. And just one other thing and you've already kind of answered it. You guys had mentioned some time back that there were a couple of dozen routes where no airline was serving only interstate bus and I know you've certainly launched a service on some of those routes. When you think about these new opportunities from some of your competitors pulling back et cetera any broad sense how much is left of that first category that's perhaps only currently served by interstate bus or cross-border bus service et cetera?

So Stephen there are several midsized cities in Mexico that we don't operate yet, we don't have service to. So that's about 10 airports. So we're looking at that. And then we are adding a point-to-point service between cities that we already operate. And we do believe that looking at the bus traffic and the bus runs between those cities there continues to be a sizable opportunity for adding service in those secondary markets between cities that we already operate. So connecting the dots so to say.

Okay, crystal clear. Thank you very much Holger, and thanks guys.

Thank you, Steve.

Thank you, Steve.

There are no further questions at this time. I'd be happy to return the call to management.

So I would like to close with a topic, which grows in importance daily at Volaris. And it's the corporate sustainability. Each year we work hard to increase our efforts in this area. The IR team will share our annual sustainability report together with a project, which is very near and dear to Volaris. It's called a movie, which is called Serpiente Emplumada that we supported. And this documentary follows the quetzal bird and the environmental impacts on its Mesoamerican habitat. It is our hope that this film will generate awareness and importance of protecting our environment in the areas where we fly.Finally, I would like to thank you everybody for listening for investing in Volaris and supporting the efforts of these management, which keeps on doing efforts to improve performance. Operator, thank you very much for all your support and I hope you have a great weekend.

This does conclude today's Volaris' second quarter 2019 financial results conference call. You may now disconnect your lines and everyone have a great day.