Good morning, everyone. Thank you for standing by. Welcome to Volaris' Second Quarter 2023 Financial Results Conference Call. All line are in a listen only mode. Following the company’s presentation we will open the call for your questions-and-answers. Please note that we are recording this event. This event is also being broadcast live via a webcast and may be accessed through the Volaris website. [Operator Instructions] At this point, I would like to turn the call over to Ricardo Martinez, Investor Relations Director. Please go ahead, Ricardo.

Good morning, and thank you for joining the call. With us today are our President and CEO, Enrique Beltranena; our Airline Executive Vice President, Holger Blankenstein; and our Chief Financial Officer, Jaime Pous. They will be discussing the company's second quarter 2023 results. Afterward, we will move on to your questions. Please note that this call is for investors and analysts only. Before we begin, please remember 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 results to differ materially from expectations. As described in the company's filings with the United States SEC and Mexico's CMBB. This statement speaks only as of the date they are made. And Volaris undertakes no obligation to update or modify any forward-looking statements. As in our earnings release, our numbers are in U.S. dollars compared to the second quarter of 2022, unless otherwise noted. And with that, I will turn the call over to Enrique.

Thank you, Ricardo, and everyone, for joining us today. During the quarter, our company's performance was aligned with our projected full-year outlook, supported by favorable macroeconomic conditions, including lower jet fuel costs and a stronger Mexican peso. We are seeing solid bookings for the summer months and remain confident in the resilience of our VFR passenger base in Mexico and the robust demand we see in Central America and the United States. We eagerly await the return of Mexico's Category 1 status and the growth in the domestic market resulting from the Mexico-U.S. nearshoring. So we would like to start by reiterating our revenue and EBITDAR margin guidance for the year. We will continue to focus on delivering total operating revenue between $3.2 billion and $3.4 billion and an EBITDAR margin of 21% to 31%, which is an increase of 8 to 10 percentage points versus 2022. During this last quarter, we moved capacity from the Mexican domestic market to our Central American Air Operator Certificates or AOCs, alleviating the temporary overcapacity in Mexico in achieving a more balanced supply and demand. As a result, we consciously reduced a few points of market share in the domestic Mexican market to achieve higher network profitability. Throughout the second quarter, we maintained total revenue per passenger flat, taking advantage of strong ancillary revenue to offset domestic base fare reductions. Additionally, we maintain healthy load factors. The second quarter of 2023 feature hallmark progress for our ancillary strategy. Our ancillary revenues as a percentage of total revenues were 49%, up from 40% in the second quarter of 2022 and 47% in the first quarter of 2023. The reduction of base fares shows the strength of our ultra-low-cost carrier model, stimulating volume through lower base fares. The load factor remained healthy in the mid-80s…

Thank you, Enrique, and good morning. I am pleased to share that the second quarter of 2023 marked a period of continued robust international growth and an exciting announcement of new domestic routes to expand our network and bolster ancillary performance. Throughout this quarter, we have implemented various initiatives to enhance both the conversion of bus travelers to air passengers and increased passenger repetitiveness. Regarding our second quarter results, I would like to highlight that we achieved 7 percentage points of the 18% capacity growth by driving superior utilization of our fleet, particularly on longer routes. We saw remarkable progress with a daily average of 909,000 available seat miles per aircraft per day, up from 835,000 in the same quarter last year. Additionally, we achieved 13.4 daily block hours. TRASM experienced a slight decrease in the second quarter due to reduced base fares on domestic routes, aiming to recover volumes. However, this impact was offset by solid ancillary performance. As a result, total revenue per passenger reached $93.4 higher than the $92.6 achieved in the second quarter of 2022. Total revenues per departure increased by 3%, while the overall load factor for the second quarter fell 1 percentage point year-on-year. The domestic market saw a 3.5 percentage point reduction, nearly offset by a robust 4.9 percentage points growth in the international market. Currently, we are facing a short-term excess of capacity. And to address this, we have taken action to reduce capacity on domestic trunk routes. We are also reshuffling our domestic capacity to alleviate pressure on specific higher-density routes and prepare for redeployment to the Central American market and the Mexico to U.S. routes upon the recovery of Cat 1. Furthermore, we have encountered infrastructure constraints, particularly at Mexico City International Airport, where our slots have been reduced. However,…

Thanks, Holger. In the second quarter of 2023, Volaris posted a 27.1% EBITDA margin, an improvement of 11.5 percentage points. During the quarter, fuel costs normalize from last year's spike, and we are not forecasting disruptions in the jet fuel market for the remainder of 2023, with only seasonality driving movements in price levels. For the full year, we now expect Gulf Coast jet fuel prices in the range of $2.55 to $2.65 per gallon versus a range of $3 to $3.10 in our original outlook. EBITDAR for the quarter totaled $212 million, nearly double the prior year. We maintained our full year EBITDAR margin guidance in the 29% to 31% range. EBIT, totaled $51 million with an EBIT margin of 6.5%, up from a negative 2.8% in the second quarter of 2022. Net income was $6 million, translating to earnings per ADS of $0.05. Total operating revenues for the second quarter amounted to $782 million, a 13% increase compared to 2022. For full year, we maintained our top-line guidance of $3.2 billion to $3.4 billion, with implied revenue growth of 12% to 19% versus 2022. And as Enrique explained, we now expect full year capacity to increase by around 13%, up from 10% in our original outlook. While the appreciation of the Mexican peso positively impacted our TRASM by $0.78, our CASM was deadly impacted by $0.19 against the second quarter of 2022, ex-fuel unit costs increased as budgeted driven by the Mexican peso appreciation and delivery cost, which will peak in 2023 and 2024 and gradually return to 2019 levels by 2027. We maintain our 2023 CASM ex fuel guidance to be in the range of $4.7 to $4.8. Contrary to what has happened in other jurisdictions Volaris has controlled labor costs without any significant bump and has…

Thank you, Jaime. In summary, in the second quarter of 2023, we marked significant achievements to Volaris showcasing the advancement of our diversified growth strategy and reinforcing our position as the leading Mexican airline. Our world-class cost has been instrumental in creating opportunities for sustained growth. As a result, we are on track to achieve our annual targets. Besides the above, we'll continue exercising prudence in the capacity and being conservative with our balance sheet which will allow us to anticipate challenges and capitalize on opportunities in our markets in ways few global operators can. We have been and continue to position Volaris for the long term as this translates into future growth, we will drive returns for our shareholders and provide a solid long-term investment opportunity. I want to close these remarks by reinforcing our commitment to double revenue and EBITDAR and free cash flow from 2019 levels by 2025. Thank you very much for listening. Operator, please open the line for questions.

Thank you. The floor is now open for questions. [Operator Instructions]. Our first question comes from the line of Stephen Trent with Citi. Your line is open.

Good morning, gentlemen and thanks very much for taking my question. I had two for you. The first, if I may, when you think about the new airport in Tulum, what are your high-level thoughts about servicing that airport versus also maintaining the operations that you already have in Cancun?

So Steve, Good morning. Thanks for your question. I personally met the people from Tulum last week. I think it's too early in the equation to say what we will end up doing there. From the market perspective, seems to be a good alternative but we haven't made any decisions to move further on Tulum.

Okay. I appreciate that Enrique. And just one other quick one. Any kind of a high-level view whether it's become easier or more difficult to add domestic routes since the government open Felipe Ángeles Airport. I know for you guys, you added a bunch of routes. And I was wondering if anything has changed in the process or as it was before. Thank you.

Stephen, so we've been adding routes to our domestic network. We've been diversifying our presence in some of the smaller and secondary cities. We announced the opening of 40 new domestic routes in the quarter, and that is the highest number of routes we've opened in one quarter in the history of the company. So we continue in the same path as we've said, focusing very much on our core market and identifying opportunities for bus switching.

I would only add, Steve, that there's no change in terms of how we approve routes to be flown in the future.

Okay. That’s perfect. Very helpful. Thanks, gents.

Thank you. Please standby for our next question. Our next question comes from the line of Duane Pfennigwerth with Evercore. Your line is open.

Hi, guys. Good morning. Just on Cat 1. Specifically, what should investors be watching to gain comfort that it's going to happen and the timing on when it will happen?

Thank you very much, Duane. I appreciate your question. Let me tell you, I mean, Volaris is ready and prepared and we'll move forward in accordance with the Mexican U.S. authorities time. We'll focus on our core markets and our core VFR customers. And we are still sticking to the possible date, which is sometime during the fourth quarter.

I guess just a follow-up there, Enrique. From a U.S. investor's perspective, what should they be watching vis-a-vis the process to gain comfort that, that timing is on track?

Look, I think the first thing they need to see is that the U.S. recognizes that there's been a big progress at the [FAC] (ph) the authority in Mexico and that things have progressed tremendously. The second thing, which is really important, is approval of the laws, which were already approved and are well in process. The third topic is they need to pay attention to the U.S. bureaucracy process, which has its time and its process and I think you guys will be gaining confidence once they come out and they finish that process with FAA and start requesting the DOT to raise the category.

Appreciate that thoughtful response and understand it's not an easy question. Secondly, just with respect to the comment about positive TRASM in the second half. Could you put a finer point on that? Do you expect it to be both in the third quarter and in the fourth quarter? Or is it more fourth quarter weighted? And just related to my first question, is there a dependency on getting Cat 1 to bring that to fruition?

Duane, certainly, we see a seasonally better second half of the year traditionally at Volaris. So certainly, we will see some uplift in TRASM versus the first half of the year. In addition to that, we do see a return of Cat 1 towards the end of the third, beginning of the fourth quarter, as Enrique just mentioned, and we have a plan in place to reshuffle capacity, take some pressure of the domestic front and reallocate that to the international markets. That includes three aircraft to Central America, which should also help lift TRASM. So we have certain actions in place and plans in place to improve TRASM for the second half of the year.

Okay. Maybe I misunderstood. Did you say you expect year-over-year improvement in TRASM in the second half or just that you expect a better second half versus the first half?

Both statements are true. That’s what we…

Thank you very much. Thank you, guys.

Thank you. Please standby for our next question. Our next question comes from the line of Helane Becker with TD Cowen. Your line is open.

Thanks very much, operator. Hi, team. Just a couple of questions. On the new routes, I think you said a couple of times that there were 40 or something new domestic routes, about 33 of those have no competition. Just kind of curious about the size of the market on a daily basis and what the load factors on those new routes look like. And is there opportunity to improve the load factor?

Helane, so, yes, these 40 new domestic routes are in mostly secondary cities in the domestic market. We have a combination of target markets there. They are all focused on generating and stimulating demand. We have some leisure routes in there from secondary cities, but we also have a lot of VFR markets in there. Big focus city is Bajio, Guanajuato, Mexicali, Culiacan. So these are secondary cities that previously didn't have direct service to other cities in Mexico. As traditionally is the case. New routes have ramp-up periods in domestic market, typically somewhere between six and nine months. Early indications are that the routes are performing as expected. And we are stimulating the demand in these new routes with very attractive pricing and are building load factors as expected.

Okay. I think that's helpful. And then -- okay, and then shifting gears a little bit, on the capacity plans. So I think there was a plan to return the A319s, right? And so you have -- are there still A319s or are they gone? And then as you say on these routes, as you think about the right aircraft in the market, your -- I mean I would think as secondary cities, they would lend themselves to a smaller aircraft rather than a larger aircraft, but I don't know what's the size of your smallest aircraft now? And will it be a drag on load factors?

In terms of fleet delaying, we already returned to A319 this year, and we have still the fleet three airplanes, which are going to leave next year. Having said that, I will pass it over to Holger for the use of the planes.

So in the domestic market, we have a mix of A321s and A320s. And we have shifted capacity of the 80/20 to longer stage length routes, and that has helped lift our productivity in the fleet and has contributed to our ASM capacity growth in the first quarter -- first half of the year. For new routes, what we typically do is we start with very few frequencies per week. These new routes have about two to three weekly frequencies, and we employ the A320, A321 and as we stimulate demand in these new markets, we add weekly frequencies instead of upgauging the aircraft...

Helane, I have the feeling that you have a problem with our load factors, and I want to make that really clear, okay? I think we did have a little bit of our capacity during the quarter. It took us a little bit of correct that moved some itineraries, created these new routes, move the capacity to Central America. And we ended up basically solving the problem. So to me, what is very important to be very clear in your mind is that there's not a demand problem. I mean we are an ultra-low-cost carrier. So what we do is we basically reduce our pricing, we increased our ancillaries in the same proportion and that worked perfectly. So there's not an underlying demand reduction behind what you are asking, and I want to leave it very clear, it's not a matter of sizing of aircraft, for us, the aircraft size is really important because of the cost. So let's be absolutely clear. We do have the right aircraft, the right capacity and the right loads going forward.

Thanks, Enrique. It's not a load factor problem I have. It's more a capacity problem I have. Just getting over skis and getting to -- I guess the way I would say it is going into markets that are secondary or tertiary with large aircraft may not have the desired effect longer term, but that's fine. You explained it very well, and I appreciate it. Thank you very much.

Thank you, Helane.

Thank you. Please standby for our next question. Our next question comes from the line of Michael Linenberg with Deutsche Bank. Your line is open.

Hi. Good morning, everyone. I guess Enrique, back to your point about allocating, I guess, 5% more capacity to international markets. It does look like international is doing a bit better. If we think about the first half of the year, how much more profitable were international than domestic? And presumably, I think your domestic is probably just back of the envelope is losing money. And as we think going forward, is there a bit of a secular change here where maybe the international markets are going to generate better margins for you going forward, maybe because some of these markets that you're in, you're the only carrier in the market, maybe it's better growth potential and maybe we're seeing a maturation of the domestic market. I know there's a lot of questions in there, but I'm trying to square why your international are doing so much better than your domestic. And with this capacity, will that solve that? Thank you.

So a couple of comments here, Michael, regarding domestic and international. Overall, currently, as Enrique mentioned, we do see a temporary slight excess of capacity in domestic market, driven by the fact that our competitors have very few places other than domestic market to allocate new capacity coming into their fleets. As a reminder, we do have two Central American AOCs to be able to mitigate some of the excess capacity in the domestic market for us. Now if we look at the slip between international and domestic, we are allocating more capacity and we have plans to allocate more capacity once Cat 1 comes back. And if we look at our cost structure against some of our international competitors' cost structures, that cost gap has widened over the last two years. And that gives us a sustainable competitive advantage going forward, especially in the transborder market to the U.S. So yes, we are looking at higher international growth going forward once Category 1 comes back.

Okay. And then just one quick follow-up for Jaime. I was going to ask the question about big picture is a stronger peso better for you, but you actually broke out the differences, the impact that it had on CASM and the impact that it had on RASM. Can you -- I missed it, but it looked like the way the math was, it is a stronger peso, it's much better for you. But can you give us the impact on the two components? Thank you.

Sure, Michael. Starting with CASM, total CASM, the impact of the better FX for the quarter was USD 49.19. And for the CASM ex fuel, it was USD 0.16. In the TRASM, the effect is twice, the benefit that they impact the cost. The number on the TRASM was $0.78, the benefit during the quarter due to the strong peso. But in general

Oh. Go ahead. Sorry.

I would want to say that for every 5% depreciation of the Mexican currency EBITDAR margin improves approximately 0.9 percentage points and EBIT margin is 1.4 percentage points improvement. Sorry, I have a flu and my throat is sore.

And that's every 5% movement in the currency, I guess, appreciation.

That's correct.

So then just to go back on the CASM ex, why did that move up a bit more than it would seem like the strong peso had some effect, but it did, it seemed like there was a bigger impact there. Is that maybe because of some of the grounded Airbuses because of the GTF? Is there an issue there?

Partially, yes, this addition, remember since the Investor Day, we mentioned because you are comparing versus 2022, the additional cost based on the predeliveries and fleet substitution, which that accounted together with the fleet-related cost of $0.41. But this is still in line with the expectations that we have, nothing to worry about.

Okay. Very good. You answered all my questions. Thanks everybody. Appreciate it.

Thank you. Please standby for our next question. Our next question comes from the line of Rogerio Araujo of Bank of America. Your line is open.

Hi, guys. Thanks for the opportunity. I have a couple here. First one on redelivery costs. It seems there was a $40 million expense this quarter. How can we read this in relation to expectations for upcoming quarters? And I understand there that Volaris is currently having higher redelivery costs than what I would call a normalized scenario and to when should it go? And what can we think about normalization scenario in terms of redelivery costs once it normalizes? That's the first one. And the second, if I may, is on ancillary revenue. You mentioned there are some projects that we are excited about for the second half of the year. Can you please give us a little bit more detail on them? I know you have touched some, but what are you most excited about? Thank you.

Hi, Rogerio. As mentioned, basically, the redeliveries, it's an impact that we are going to be seeing in 2024, it start going down in 2025 and coming back to 2019 levels in 2020 -- by the end of 2026, beginning of 2027. So it's a temporary bump based on fleet substitution. We explained a lot during the Investor Day in December. That's basically the main reasons why the jump in those two lines noticed in this quarter, which should continue the rest of the year.

Regarding ancillary revenues, we have a couple of things that we are working on, and we are maturing. Number one, clearly, the uptake in our [v.club] (ph) membership program has been exceeding our expectations and now contributes a significant amount of our sales. And as we build that out, we're going to see improvements. Number two, products around insurance and helping the customer ensure for their entire trip. We are working on that. And then as we already mentioned, we just launched our affinity program with the retail partner OXXO, that's in early stages of development, and we should see more material contribution to ancillary revenues towards the end of the year and in 2024. Overall, we have mentioned in the past that our vision is to achieve 50% of total operating revenues through ancillary revenues. We are probably going to achieve that early than anticipated. And this is just a milestone, one milestone in our journey to offer more competitive base fares with optional value-added offerings on top. So certainly, the 50% mark is not at the end of the line.

Okay. Very clear. If I may, one follow-up from the first question. What was the 2019 levels for redeliveries?

$0.20.

Okay. 2020 -- 20...

$0.20.

Okay. Perfect. Thank you very much.

Thank you. Please standby for our next question. Our next question comes from the line of Bruno Amorim of Goldman Sachs. Your line is open.

Yes. Good morning everybody. Thank you for the opportunity to ask a question. I just wanted to have your help to better understand the changes to the guidance. Fuel cost or the fuel prices have fallen significantly year-to-date. So the environment now from a cost perspective is much better than before. And even so you are not increasing your margin guidance for the year, which might suggest some weakness on the pricing side vis-a-vis what we were expecting earlier in the year. Of course, Category 1 might play a part here. But correct me if I'm wrong, but you were not expecting a major contribution from Category 1 this year, right? Maybe you are now counting on the [indiscernible] initial plan. So what's happening there? Is demand weaker if competition is fiercer, any color there would be helpful. Thank you so much.

So in general, there's a lot of things happening in the revenue equation, which I think are important. The first one is we do have to balance capacity for the third quarter -- end of third quarter and fourth quarter based on what is going to happen both with engines; b, there's two aircraft that are being delayed by Airbus that will not be arriving towards the end of the year; c, so there's obviously because of the economies in the U.S. and Mexico some reduction of pricing. And in general, we are trying to balance the new capacity versus the old capacity, the introduction of new routes in the U.S. because of Category 1 has also a ramp-up, okay? So in general, those are the most important factors, but too many things happening in the equation. Having said that, I think sticking to our EBITDAR margin guidance is something really good and it takes us back to a level from 29% to 32%, which is really good -- 31%.

Thank you.

Thank you. Please standby for our next question. Our next question comes from the line of Alberto Valerio with UBS. Your line is open.

Good morning. Thanks for taking my question. One quick one on my side. We heard today in the morning that Pratt & Whitney will be recalling 200 engines for extra maintenance. I would like to know if Volaris has one of these aircraft with those engines or any of Volaris competitors in Mexico. Thank you.

That's correct. We heard right in the conference this morning that they have determined their rare condition in power -- material used to manufacture certain engine parts which will require accelerated fleet inspection. They are calculating about 200 engines that need to be inspected by mid-September of this year. And it's going to be a program -- a progressive program, which is calculated to be in the following six months. Thanks God, the company planned to retain six of the aircraft that were supposed to leave this year and we extended those aircraft and that decision will allow us to better handle, better any operational challenges related to engine availability and aircraft delivery delays during the last two quarters, okay? Too early to calculate what's the real impact and where it's going to be the impact. But I think the company has the provisions and has been working on an accelerated way to try to control the impact.

Okay. Thank you.

Thank you.I'm showing no further questions. This concludes today's question-and-answer session. I would now like to invite Mr. Beltranena for closing remarks. Please go ahead, sir.

Thank you very much, operator. As always, I want to thank our family of ambassadors, the Board of Directors, the investors, the bankers, the lessors, suppliers for their commitment and support during another quarter. I look forward to addressing you all again in October. And hopefully, I can see some of you in September when we celebrate 10 years of being public. Thank you very much to everybody. It was a great pleasure to be with you this morning.

Ladies and gentlemen, this concludes the Volaris conference call for today. Thank you very much for your participation, and have a nice day.