Controladora Vuela Compañía de Aviación, S.A.B. de C.V.
Q2 2015 Earnings Call Transcript

Published: 28 Jul 2015

[Operator:]

Good morning everyone. Thank you for standing by and welcome to Volaris’ Second Quarter 2015 Financial Results Conference Call. All lines have been placed in a listen-only mode. Following the company’s prepared remarks, we will open the call for questions-and-answers. Instructions will be provided at that time. Also please note this event is being recorded. Thank you. I would now like to turn the call over to Mr. Andrés Pliego, Volaris’ Investor Relations Manager. Please go ahead, sir.

[Andrés Pliego:]

Thank you. Good morning everyone and thanks for joining us today. I would like to introduce Enrique Beltranena, CEO; Fernando Suarez, CFO and Holger Blankenstein, CCO. They will be discussing our second quarter 2015 results published yesterday. Afterwards they will take your questions. Please note that this call is for investors and analysts only. Before we begin, please let me remind everyone that some of the statements we will make on this call will constitute forward-looking statements within the meaning of applicable securities laws. Forward-looking statements are subject to a number of 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 statement. For our opening remarks, I will turn it over to our CEO, Enrique Beltranena.

[Enrique Beltranena:]

Good morning everyone. Total operating revenues for the second quarter of 2015 grew 24% year-over-year. Adjusted EBITDA and EBIT margins continued to expand and reached 31% and 9% respectively. We continue to see a strong growth on non-ticket revenues for passenger, which increased to a level of 339 pesos or $22 per passenger. While CASM expressed on a dollar basis decreased by 19%. CASM mixed fuel was at a record level at $0.49. In addition, total available fleet miles increased by 14%. International capacity increased by a solid 35% while we continue with the conservative approach in domestic capacity with a growth of 7%, while the grew-up almost 10%. We also achieved an improvement in low factors, net world-wide 1.3% touch-point and a TRASM growth of 9%. The quarterly achievements are a reflection of our hard-work to becoming market leader in the local segment and the continued long-term growth trend in the Mexican air-travel market during the recent years. It is worthwhile noting that in the past 46 months, the Mexican air-passenger market grew at rates around 10% which was two to four times higher than Mexico’s GDP growth rate for the same period, a behavior similar to an emerging market under stimulation by locals. Despite the substantial position in Volaris in the industry and the continued growth and demand, we’ve been very cautious about capacity basically. During this quarter we net back into demand growth by adding capacity opportunistically in existing routes. Many of Volaris’ markets are requiring more capacity. As we see, a consolidation of our ultra-low-cost model with passengers increasingly switching from bus to air-travel, thereby stimulating demand for our services. During the first half of 2015, we announced another 15 routes on top of the 38 routes that we launched in 2014, all of this driven by a strong demand. These are divisions in line with our point-to-point and our visiting friends and relatives expansion plan announced during our IPO. We also recently launched new routes to Central America and the Caribbean destinations, Guatemala, Costa Rica and Puerto Rico. Today, Volaris has a total of 45 international routes and 93 domestic routes, totaling more than 138 routes, making us the Mexican Airline with the largest number of routes in Mexico and to the U.S. Volaris is growing probably thanks to our focused ultra-low-cost model and generating shareholder value independently of our lower fuel price. Today a

[Fernando Suarez:]

Thank you, Enrique. Now let me expand on our financial performance during the second quarter of 2015. Our operating revenues for the second quarter were 4.1 billion pesos, a 23.9% increase compared to the same period last year. As a result of our emphasis on a successful international network expansion, our U.S. dollar denominated revenues already represent 30% of total operating revenues for this quarter, continuing to build a natural hedge to exchange rig volatility for our business. During the second quarter, our non-ticket revenues reached 977 million pesos, a growth of 48.3% compared to the second quarter of 2014. On a non-ticket revenue per passenger basis, we reached 339 pesos up 23.2% year-over-year. TRASM in the second quarter was 8.7% higher year-over-year partially driven by yield and RASM increases of 1.7% and 3.4% respectively, in conjunction with growing non-ticket revenues. On the cost side, CASM was 112.5 peso cents, a 3.3% decrease during the quarter, driven by lower fuel prices and efficiencies and salaries and benefit which helped to offset exchange rate pressures. We also achieved further labor productivity reaching 55 employees per aircraft. CASM mixed fuel expressed in dollars was a record low of $0.49. As we continue to grow, capacity has become diluted to our unit costs. This is a result of greater economies of scale, a young fleet further fleet out-gauging to A320s and A321s, more Sharklet equipped aircraft, higher sheet density and better lease terms, the optimization and diversification of our network is not only supporting our cost reduction initiatives but contributing to our improved performance overall. More, point-to-point joining the dots approach strengthens, further economies of scale in our focused cities resulting in unit cost declines. We also observed efficiencies in fuel-burn reached 708 gallons per block hour, one of the best fuel-burn indicators in for an A320 fleet worldwide. Fuel costs represent 32% of operating expense for the quarter, 7 percentage points lower than in the second quarter of 2014. The total average blended economic fuel cost per gallon for the second quarter was $1.99 per gallon. We have continued to remain active in our fuel risk management program. For the second quarter we hedged 44% of our consumption primarily through jet fuel call options at an average price of $2.15 per gallon. For the remaining half of 2015, full 2016 and the first half of 2017, we have purchased call options to hedge 47%, 54% and 7% of the expected jet fuel consumption at an average price of $2.07, $1.99 and $1.91 per gallon respectively. On the other hand, the Mexican peso depreciation has impacted our results. Again, our best hedge against exchange rate volatility is to further expand our international network which we have been accelerating. Adjusted EBITDA for the second quarter was 1.3 billion pesos representing a margin of 31% which is 13 percentage points higher than last year. Operating profit reached 349 million pesos. Operating margin was 9% up 11 percentage points compared to the second quarter of 2014. Below the operating line, we recorded our 146 million pesos exchange rate gain resulting from a depreciation of the Mexican peso on our balance sheet, net monetary U.S. dollar asset position. Conversely, if the Mexican peso were to reevaluate, we would book an exchange-rate loss. Net income for the quarter was 361 million pesos, representing a net margin of 9%. On an earnings per share basis, we earned 35 peso cents for Series A share and $0.22 per ADS. During the second quarter, we generated strong cash flow with 947 million pesos generated in cash from operating activities resulting in a net increase of 872 million pesos in total net cash. We continued to strengthen our balance sheet and maintain a good liquidity position enabling us to have the national flexibility to continue our growth. We recorded 4 billion pesos in unrestricted cash as of June 30 representing 25.5% of the last 12 months revenues and a record cash balance for the company. We maintained a negative net debt or a net cash position of 2.6 billion pesos. During the second quarter, Volaris incurred capital expenditures of 281 million pesos. Our pre-delivery requirements for the remainder of the year and next year are fully financed with our revolving PDP line of credit. All 2015 and 2016 aircraft deliveries are also financed by way of executed sale lease tax agreements. Moving on to guidance. We are carefully placing capacity, where market demand is requiring by increasing sheet density and aircraft utilization when supported by demand. Traffic to the U.S. remains robust and we will maintain our projected growth rate in the international markets for the rest of the year. Based on strong demand in the domestic markets, we are increasing our guidance to an ASM growth rate of 5% to 7% for the full year. We now expect this will result in a full-year ASM growth rate for the entire network of approximately 12% to 15%. We remain very flexible on our network and fleet. And we’ll continue to be disciplined in our capacity management adjusting our growth rates based on market demand. Now, I’ll ask Enrique to make his concluding remarks before we open the line for questions.

[Enrique Beltranena:]

Thank you, Fernando. Before concluding, as an evidence of our commitment to generate shareholder value, I want to highlight our main financial metric. A pre-tax lease adjusted return on investment capital or ROIC for the last 12 months of 19%. We believe we have the right business model in the right market with a solid management team that is working diligently to deliver results. But before concluding, I would like to thank all the Volaris ambassadors. Without their dedication and hard-work, a solid second quarter results would have been impossible to achieve. Thank you for your attention. And we would now like to proceed on to your questions. Operator, please open the line for the questions.

[Operator:]

[Operator Instructions]. Our first question comes from Duane Pfennigwerth from Evercore ISI.

[Duane Pfennigwerth:]

Hi guys, good morning.

[Enrique Beltranena:]

Hi Duane, how are you doing?

[Duane Pfennigwerth:]

Good, good, thank you. I wonder if you could talk a little bit about the success you’re having with service to secondary markets in the U.S.? How much of your international growth is the secondary markets where you may not have direct competition and has this success kind of changed your thought process about where to grow?

[Holger Blankenstein:]

Hi Duane, this is Holger. Let me tell you a little bit more about our network expansion. What we’ve done is obviously focused a lot on the international growth mainly to the U.S. And the growth year-on-year in the second quarter was 35.8% for the international markets. And the overwhelming majority was coming from the U.S. Bear in mind that we also launched Guatemala service in this quarter. And out of that growth, 13% pitch-points come from U.S. existing routes that we already operate and most of those existing routes are Guadalajara routes which expanded 20% during the quarter. And then the remaining growth 23 percentage points come from new routes into the U.S., most importantly are routes from Guadalajara to Portland, Reno, Orlando, Fort Lauderdale and so on but also Mexico, we opened some new routes from Mexico and our VFR niche routes, we opened some new VFR niches from - mostly from the bay area down to some of the VFR markets in Mexico. I hope that gives you some color on where we’re focused on growth.

[Duane Pfennigwerth:]

That’s great Holger but I guess, within that opportunity set in the U.S., any qualitative commentary you could give about maybe more secondary markets like Portland where you may not have had a directly competitive set of carries ruling the market?

[Holger Blankenstein:]

Duane, now what I can tell you is that we are very happy with our U.S. markets. In general we’ve seen significant demand growth both in the niche markets that you mentioned and in our overall markets. And demand has not been affected by the exchange rate for example. So in general both niche markets and existing capacity from Guadalajara is doing really well. Going forward, we do see additional opportunities in more of the U.S. niche markets both from Guadalajara and from other locations in Mexico going to the U.S.

[Enrique Beltranena:]

Maybe to give you, I mean, yes, those routes are doing very well. They are performing very well but they do not represent more than 10% of our ASMs.

[Duane Pfennigwerth:]

Okay, that’s helpful. And then I might just stay here with Holger. Just very simply, what are the components of your ancillary revenue that you feel have not hit maturity yet? And thanks for taking the questions.

[Holger Blankenstein:]

Well, we are exploring three avenue of ancillary revenue growth and let me highlight a couple of those. First of all we are applying proven revenue management techniques to some of the ancillary products. And that is a process that we started this year and we believe that there is quite a lot of opportunity in that area. Secondly, we are capturing a larger portion of the overall travel budget. In the second quarter we successfully launched some commission based products like selling motels and rented cars directly in the booking flow. And that’s the process that again started in the second quarter and I think there are still opportunities going forward. And then finally, thirdly, we’re offering more products. We started with some new ALACAD [ph] products as Enrique mentioned. But we do have a long list of new products that we’d like to bring to the market for the remainder of 2015 and even through 2016. So those are the three components of growth going forward for the ancillary revenues.

[Duane Pfennigwerth:]

Okay, thanks guys.

[Operator:]

Thank you. Our next question comes from Michael Linenberg from Deutsche Bank.

[Michael Linenberg:]

Hi, good morning. Just follow-up on Duane on some of the market development. I was curious about how the new JFK launch has gone? I know, I think you started that just a few weeks ago and I know it’s less than daily. In addition, a lot of these routes that are out of Guadalajara, you have built up a pretty sizable presence in Guadalajara. How much traffic is actually connecting in Guadalajara onto the U.S. flights or is it mostly point-to-point?

[Holger Blankenstein:]

Michael, thanks for your question, this is Holger again. Let me first comment on Guadalajara-JFK, we’re operating that obviously from Guadalajara because Mexico City is taken up by the bilateral. And the way we launched JFK I think is a very good example of how we think about the U.S. markets. It’s a non-daily flight, very much focused on the VFR niche. And we utilized the aircraft very well overnight. It’s a redeye flight, which helps us increase the utilization of our entire fleet. Many of our U.S. markets operate that way. And our bookings for that market have been really, really solid. Regarding connectivity, effectively yes, in Guadalajara, we have a large U.S. presence with over 20 markets that we service in Guadalajara. However, our network is built on a point-to-point methodology. So we do connect people in Guadalajara but it’s not a primary focus of our business. Overall connecting traffic is about, is in the low single-digit overall.

[Michael Linenberg:]

Is it? But Holger, as you build out that operation because of the slot-constraints in Mexico City, my sense is that your Guadalajara operation is going to continue to grow. We should see that connectivity go up, even if it’s by accident and it’s not intentional, my sense is that it would probably be a very effective way to get people from within Mexico to the U.S.?

[Enrique Beltranena:]

You may be right Michael, this is Enrique. But remember that we also added more than 40 routes directly from Guadalajara and we think we kept on adding routes direct for example to Montreal, 18 routes to Cancun. We have now more than 15 routes, okay. And so, I guess you’re probably right. But we are much more focused on the point-to-point and growing the point-to-point, recognizing that there is some flow. And then on the other side Michael, I mean, the connecting process of the airports in Cancun and Guadalajara is really bad, okay. So, we understand that’s an on-the-prowl process. And we’re focused on the point-to-point VFR car.

[Michael Linenberg:]

Great, thank you. Just one more, if you can just discuss the overall pricing environment, earlier in the year it seemed like that there was a bit more discounting and then it seemed like things had stabilized I think really latter part of the March quarter, early part of the June quarter? The fact that, you’re going to add more domestic capacity suggest to us that things have stabilized on pricing. Can you give us an update on how yields are looking?

[Holger Blankenstein:]

Yes, Michael, in general our strategy of diversifying and building our network domestically and international has worked really well. In the peso denominated yields have been relatively strong obviously because we have so much more international capacity last year. And the international markets continue to be robust in terms of demand despite our strong capacity addition and FX pressure. In the domestic market, the yield environment for our markets has been quite stable. Although we’ve seen some price softness in some of the short-haul regional markets, mostly from Mexico City. But in general, we are adding capacity opportunistically where we see strong demand especially where we are able to shift people from the buses to our airplanes which is mostly in the Pacific corridor and the Northern Mexico area.

[Michael Linenberg:]

Okay.

[Holger Blankenstein:]

So, in general, yield environment for our markets has been quite robust and stable in the domestic market and healthy in the U.S. market.

[Michael Linenberg:]

Very good. Thank you, Holger.

[Holger Blankenstein:]

Thank you, Mike.

[Operator:]

Thank you. [Operator Instructions]. Our next question comes from Stephen Trent from Citibank.

[Stephen Trent:]

Hi, good morning gentlemen, and thank you very much for taking my questions.

[Enrique Beltranena:]

Thank you very much, Steve. Thanks for being here.

[Stephen Trent:]

Pleasure, thank you. I was curious gents, intrigued by the expansion into Central America. And I’m curious with respect to where do you see other airlines may be looking to do the same thing, maybe not necessarily, flights originating north of that region but even flights originating from the other side. And what sort of, competitive build-out are you seeing or should I say interest in the region from other players?

[Enrique Beltranena:]

Yes, Steve, look, we started operations with three routes, one from Guadalajara to Guatemala and two from Cancun to Guatemala and Puerto Rico is also within our core point-to-point VFR velocity back. And then we later on announced from Costa Rica within service to Cancun and Guadalajara which starts in September. I think the traffic between Mexico and Central America is something small and it’s very well served by our competitors. So it’s something that we foresee something that will start developing but it’s going to be slowly and, it’s going to develop while we keep on analyzing and stimulating the markets. We understand that some more players are looking at it, which is okay. We’re used to compete, but in general we think we would like to keep this, the whole thing smaller than everybody’s thinking and that’s the way we are thinking about it.

[Stephen Trent:]

Okay, that’s very helpful. And just one other question, just looking at also related to expansion some of your - you announced some flights to Puerto Rico, any color with respect to the extent which sorties in that region have maybe been trying to lower airlines maybe spot availability or attracting landing fees given what looks like some economic difficulty occurring in Puerto Rico?

[Holger Blankenstein:]

Stephen, this is Holger. Let me tell you little bit more about Puerto Rico we have four weekly flights, so it’s relatively small operation. The market, the flight is geared towards Mexican tourists wanting to get to know the Caribbean. And yes, every time we open certain markets, we are, we engage with the local government and the airport authorities to see how we can make this flight work jointly.

[Stephen Trent:]

Okay, very helpful. Well, I’ll let someone else ask the question but thanks for your time guys.

[Enrique Beltranena:]

Thank you.

[Operator:]

Thank you. Our next question comes from Helane Becker from Cowen.

[Helane Becker:]

Thanks very much operator. Hi guys, thanks for the time. I think you said that your U.S. dollar revenue was about 30%. Do you have a goal in mind for where you want that to be?

[Fernando Suarez:]

Helane, this is Fernando. You’re right. It’s currently 30% of revenue that comes from U.S. operations. If we look at it on a collection basis, it’s actually 36%. But we don’t have a specific target for that. However, we do see that figure increasing as we continue to grow our international network.

[Helane Becker:]

And then the other question I had was with respect to U.S. growth versus other international. Is there, should we think about a mix that you were going to think about in terms of one U.S. city than one non-U.S. city that kind of thing or is it more opportunistic. How should we think about that growth as you fill out your network?

[Holger Blankenstein:]

Helane, this is Holger. The Mexican-U.S. market is the most important international market going out of Mexico, it accounts for about 80% of the capacity and demand. So, clearly our focus is going to remain in the U.S.-Mexico market. And we’re going to eventually add capacity to Central America but we’re going to focus on our core which is the U.S.-Mexican VFR niche markets and that’s where we’re going to see most of our growth going forward.

[Helane Becker:]

Okay, great. Thanks very much. I appreciate the help.

[Operator:]

Thank you. Our next question comes from Benjamin Theurer from Barclays.

[Benjamin Theurer:]

Hi, good morning everybody. I actually have two follow-up questions. So, on the U.S. dollar base and that combined with the ancillary revenue. Do you have some part of the ancillary revenue also charged in U.S. dollars that would be question number one related to that? And then second, if I take a look at the trend where we’ve seen at least on a sequential basis in terms of non-ticket revenue on the ancillary side, so we’ve seen a little bit of a slowdown and it seems like it has been a little more difficult lately to grow that on a quarter-over-quarter basis? So, with the initiatives you’ve mentioned Holger just a specific question for you, what’s the level you think we can expect to see the non-ticket revenue on a per-passenger basis to be in let’s say six months’ time and about 12 months’ time just to get a little bit of a sense what you expect from all those from the three initiatives you mentioned earlier? Thanks.

[Holger Blankenstein:]

Benjamin thanks for your question. Regarding your question on U.S. dollar ancillaries, yes, all our U.S. itineraries are based in U.S. dollars, both the base fare and the ancillaries. So, yes, clearly we do see some exchange rate impact there. In terms of the opportunities going forward, I mentioned three avenues of growth. We would not like to give any specifics forward guidance for this year in terms of ancillary revenue per pass. However, our comparison base versus last year is getting increasingly difficult. So growth rates will certainly taper off. But we do see more opportunities in ancillary revenues per pass going forward.

[Benjamin Theurer:]

Okay. Is there a way that you can actually raise the dollar share so for example some of that part what you mentioned the commission based products etcetera, if you were to have ancillary revenues based on such a commission. Can you introduce maybe there some dollar commissions as well on domestic growth or is this only something where you have dollar revenues if it’s a U.S. itinerary?

[Holger Blankenstein:]

The commissions specifically are on a percentage basis and they depend on where the itinerary is sold. However, as we grow our capacity in the U.S. our dollar denominated ancillary share should also increase.

[Benjamin Theurer:]

Okay, perfect. So right now it’s more or less the same or is it actually little higher than the other one, or is that 30% figure you have mentioned already a blended figure?

[Holger Blankenstein:]

That’s already a blended figure Benjamin.

[Benjamin Theurer:]

Okay, perfect. Thank you.

[Enrique Beltranena:]

Benji, I think that when you need to think about the ancillaries, they behave pretty much in the same trend that as the revenues, the general revenues. And it’s basically the same platform and the same way we manage the currency, one. And then the second thing is we always said that down the road two or three years from now, we can be somewhere around with level of ancillary revenues which is somewhere around 35% - $35 per passenger because we cannot charge the first buyer which is the case of spirit analytics.

[Benjamin Theurer:]

Yes, I know. I know that little issue. Perfect, thank you very much for follow-up on this.

[Operator:]

Thank you. Our next question comes from Priscilla Bau [ph] from Itau BBA.

[Renato Salomone:]

Hi, this is actually Renato Salomone. Thanks for taking my question. If you could comment on the experience you’ve had so far with the two A321s in the fleet? And if you could see a faster than expected mix shift between A320s and A321s going forward as a way to capture opportunities out of Mexico City and also to offset cost pressures arising from the peso devaluation? Thank you.

[Enrique Beltranena:]

Yes, the A320s we’re using them, both of them which is only two aircraft, concentrated in the Mexican market. And we are now flying them to Cancun, okay. More, we will bring another three A321s in 2016 and we’ll keep them concentrated in the Mexico City so we can take advantage of their cabins.

[Renato Salomone:]

But is there any chance that you could accelerate this process to negotiate with sort of receive more A321s than you had originally expected?

[Enrique Beltranena:]

Yes, there is a way. But we remain very conscious about capacity management.

[Renato Salomone:]

Okay, thank you.

[Operator:]

Thank you. At this time, we’ve reached the end of our allotted time for questions. I’d now like to turn the call back over to Mr. Enrique Beltranena for closing remarks.

[Enrique Beltranena:]

Thank you very much, to all the bankers and thank you for your questions. We really appreciate it. And to report the ones that are already reported in the last 24 hours. Before concluding I just want to remind everybody this is the right rate that for the last 12 months this has 19%. And again, I thank our ambassadors. And I want to repeat it, I mean, without their dedication and the hard work they do, this solid second quarter results would have been impossible to achieve. Thank you very much for your attention. And thanks for joining us on this call. Bye.

[Operator:]

Thank you, ladies and gentlemen for your participation on today’s call. This concludes the teleconference. You may now disconnect.