Cebu Air, Inc. (CEB) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Thank you for coming to this meeting. Joining us are the corporation's President and CEO, Mr. Lance Gokongwei; the corporation's Chief Financial Officer, Mr. Andrew Huang; and the Corporate Secretary, Attorney Anne Tieng. May I request the Corporate Secretary to please certify understanding of notices to the stockholders and to the existence of a quorum for this meeting?

Mr. Chairman, I hereby certify that Notice of this Meeting has been sent to the stockholders of record as of April 7, 2021 via the following methods: first, by delivery to the stockholders of record to their addresses as registered in the books of the corporation; second, by posting on the website of the corporation; and third, by disclosure to the Philippine Stock Exchange. Thus, the stockholders have been notified of this meeting in compliance with applicable rules and regulations. I hereby certify that there are present in this meeting, via remote communication or by proxy, stockholders entitled to vote representing 85.37% of the corporation's total outstanding common shares, and that this meeting is therefore competent to transact the business provided for in the agenda. A quorum is present, Mr. Chairman.

There being a quorum, the annual meeting of the stockholders of Cebu Air, Inc. is hereby called to order. May I request the Corporate Secretary to share the rules and procedures of this meeting?

The rules and procedures are set forth in the definitive information statement and the explanation of the items in the agenda is integrated into the Notice of this Meeting. All tabulation results of this meeting are subject to validation by SyCip Gorres Velayo & Co. In case there are stockholders who are with us now during this broadcast, you may send your questions to us at our e-mail address, and we will reply to your questions. The corporation will reply to the questions and comments not taken up in this meeting through e-mail. The e-mail address of the corporation is flashed on the screen.

Let us now proceed to the next item in the agenda, which is the approval of the minutes of the annual meeting of the stockholders held on May 14, 2020, and the minutes of the special meeting of the stockholders held on November 20, 2020.

Mr. Chairman, copies of the minutes have been distributed to the stockholders by providing the link to the said minutes in the information statement and by showing the QR code on the screen prior to the meeting. The minutes of the annual meeting of the stockholders held on May 14, 2020 has been approved as submitted by votes representing 85.37% of the total outstanding common shares of the corporation. Meanwhile, the minutes of the special meeting of the stockholders held on November 20, 2020 has been approved as submitted by votes representing 85.37% of the total outstanding common shares of the corporation.

Thank you. The minutes of the annual meeting of the stockholders meeting held on May 14, 2020 and the minutes of the special meeting of stockholders held on November 20, 2020 are hereby approved as presented. Moving on to the next item in the agenda. May I now call on Mr. Andrew Huang, CFO of the corporation, to present his financial report, together with the audited financial statements for the preceding fiscal year?

Thank you, Mr. Chairman. Good morning, shareholders. I am pleased to present today Cebu Pacific's 2020 results of operations as well as our audited financial statements to which our external auditor, SyCip Gorres Velayo & Co., provided an unqualified opinion. 2020 was a most challenging year for Cebu Pacific and for the entire aviation industry. With the COVID-19 crisis, health and safety concerns brought down travel confidence and government authorities placed various travel restrictions, severely affecting the corporation's performance. When the Philippines' enhanced community quarantine, or ECQ, began on March 19, 2020, the resulting lockdown grounded Cebu Pacific's commercial operations. We recommenced scheduled services on June 3, albeit gradually, with most of the Philippines having downgraded to a less stringent general community quarantine, or GCQ. However, Metro Manila returned to the most stringent ECQ for most of August before downgraded again in September. In addition to the fluidity of the situation, various documentary and regulatory travel requirements, as required by individual cities, as well as provincial governments, presented a major challenge for the company, other airlines and the traveling public for most of the second half. We flew 41,804 flights in 2020, 71% lower than 2019. To provide some reference, during the immediately preceding pre-COVID period, we flew approximately 400 flights a day. We restarted on June 3 with only 4 to 5 flights a day and steadily grew to about 70 to 80 flights per day by December. We flew 5 million passengers, 78% lower than 2019, recording a seat load factor of 76%. Our network restart was domestic focused and given the shorter distance has flown, resulted in lowering our capacity as measured in available seat kilometers, or ASKs, by 76% lower than 2019 by 7.1 billion ASKs. As a result of the severe curtailment of operations, Cebu Pacific reported revenues to PHP 22.6 billion, 73% lower than previous year. We also posted an operating loss of PHP 20.77 billion and a net loss of PHP 22.2 billion for the year compared to a net income of PHP 9.13 billion in 2019. Notwithstanding these substantial losses, one thing worth highlighting is that our net debt-to-equity ratio end 2020 stood at 3.17x, which remains a relatively strong indicator in comparison with competitors in the Philippine aviation market, indicating the strength of the company's balance sheet. Cargo operations performed better than expected, supplementing commercial passenger operations. It contributed PHP 5.4 billion in net revenues, 24% of total revenues in 2020 versus 7% of revenues in 2019. While cargo volume declined by 48%, cargo revenues were offset by an 81% increase in yield per kilo. Chartered cargo flights also contributed substantially to this increase in yield. Aside from 2 cargo freighter aircrafts, our 330 (sic) [ A330 ] cargo converted aircraft also started operations last November. Let us now take a closer look at our financials, starting with our income statement. Passenger revenues for the year totaled PHP 12.6 billion, 80% lower than previous year. This was a result of a 78% decrease in passengers coupled with an 8% decline in average fare, which in turn, was brought about by market pressures and weak demand as well as a focus on shorter, lower-priced domestic flights. Ancillary revenues contributed PHP 4.6 billion, including PHP 4 million of revenues from Aviation Partnership (Philippines) Corporation, or A-plus, our line maintenance provider. Last November, we acquired the remaining 51% ownership in A-plus from our former JV partner, SIA Engineering Corporation of Singapore. This resulted in our now holding 100% ownership in A-plus. And for this reason, A-plus financials are consolidated into our financial report. We envisaged the streamlining of activities between our internal engineering department and A-plus and anticipate that this will result in a more efficient and highly focused collaboration, which should result in reducing our maintenance costs over time. Total expenses were PHP 43.4 billion, 40% lower year-on-year. Depreciation and amortization was our largest expense at PHP 16 billion, 4% higher. We ended 2020 with a fleet of 74, composed of 8 wide-body, 21 turboprops and 45 narrow-body aircraft. Flight operations costs showed the steepest decline at 69% as a result of less flights, coupled with lower jet fuel prices. We also undertook rigorous cost reduction initiatives, including rightsizing our network, operating fleet and manpower. Thankfully, our employees also agreed to new reduced compensation packages as well as voluntary pay cuts, reducing our manpower costs. Repairs and maintenance costs increased 7%, driven by higher provisions for asset retirement obligations, or ARO. By end 2020, we had 27 leased aircraft, of which 8 are for return this 2021. In addition, we also had 8 engines sold then leased back in 2020, increasing ARO provision. These brought us to an operating loss of PHP 20.77 billion and pretax core loss of PHP 23.13 billion. We incur -- we also incurred some nonoperating gains and losses, including hedging losses of PHP 2.1 billion, partially offset by PHP 1.7 billion in foreign exchange gains as the peso appreciated to USD 49.6 from USD 51.8 per United States dollar in 2019. Our result is a net loss for 2020 of PHP 22.2 billion, a significant downturn from 2019's net income of PHP 9.1 billion. For our balance sheet, by end of 2020, our total assets stood at PHP 128.5 billion, PHP 29.3 billion, less than end 2019. Cash balance was PHP 5.4 billion, already including restricted cash of PHP 1 billion. Property and equipment stood at PHP 91.3 billion, consisting of our 47 aircraft and 7 spare engines owned or under finance lease. Right of use assets, on the other hand, consists of 27 aircraft and 11 engines on operating leases. We had total liabilities of PHP 105.8 billion. Biggest components of these are our long-term debt of PHP 53.2 billion and lease liability of PHP 18.3 billion. Last October, we sought the support of our parent, JG Summit Holdings, Inc., to provide $100 million in bridge financing while we awaited completion of our capital raising activities. With lower passenger bookings in 2020 compared to 2019, our unearned transportation revenues reduced to PHP 3.8 billion (sic) [ PHP 3.7 billion ], PHP 8.2 billion lower than end 2019. In addition, flight cancellations in relation to lockdown and travel restrictions resulted in refunds or travel fund payable. By end 2020, we still had PHP 1.4 billion in refunds under accounts payable, while travel fund payable was at PHP 3.5 billion. Liquidity was our most critical issue at the end of 2020, largely driven by PHP 13.2 billion cash outflow from operations versus a net inflow of PHP 29.2 billion in 2019. Operating income after noncash items was marginally negative at negative PHP 132 million in 2020, but changes in working capital resulted in an PHP 11.4 billion cash outflow. We also paid PHP 4.6 billion for refunds and PHP 3 billion for hedging settlements. We generated PHP 3.5 billion cash inflows from investing primarily from the sale and leaseback of 5 aircraft and 8 engines. We repaid PHP 14.9 billion in debt and lease liabilities in 2020, but also raised new capital in excess of PHP 11 billion. This includes debt financing for an aircraft delivery, the bridge financing from JG Summit Holdings, Inc. and another PHP 4 billion of unsecured debt to support our working capital requirements. These components, plus the restricted cash of PHP 1.1 billion, resulted in a PHP 13.9 billion net cash, bringing our cash balance to PHP 4.3 billion. This ends my report on our company's financial results as well as its audited financial statements.

Thank you, Mr. Huang. May I call on the Corporate Secretary to present the results of voting for the approval of the audited financial statements for the preceding fiscal year?

Mr. Chairman, we are pleased to report that stockholders representing 85.25% of the total outstanding common shares of the corporation have approved the audited financial statements of the corporation for the preceding fiscal year as presented.

Thank you, Ms. Corporate Secretary. The report of the CFO is accordingly noted and the audited financial statements for the preceding fiscal year are hereby approved as presented. May I now call on the corporation's President and CEO, Mr. Lance Gokongwei, to provide some recent updates and outlook. on the corporation's business?

Thank you, Mr. Chairman, and good morning to our shareholders. Allow me now to provide some recent updates and outlook on our business. The first few months of 2021 have been very volatile with respect to both passenger demand as well as regulatory restrictions, which have impacted the corporation's operational capability. We conducted a survey in the third quarter of 2020 to understand key concerns of the traveling public amidst the COVID pandemic. The tough concern at that time was safety and security, followed by flexibility in cancellations and travel restrictions. When the same survey was conducted this January 2021, results showed that travel requirements and restrictions had surfaced as the most pressing concern, particularly due to varying travel regulations depending on the destination. The Philippines government's COVID Inter-Agency Task Force, IATF, published Resolution 101 last February 26, which yielded very promising results for Cebu Pacific as it simplified multiple travel requirements by removing various documentary requirements such as travel authority and health certificates. Testing was also not mandatory but may still be required by local government units. Finally, the mandatory quarantine requirements was also removed unless travelers exhibited symptoms upon arrival. Immediately after IATF 101, we saw upward momentum in Cebu Pacific's passenger bookings, including those for leisure destinations, indicating there remains a strong underlying demand for travel. Sadly, confirmed COVID-19 cases in the Philippines have been steeply rising over the recent weeks, surpassing the previous peak levels seen in August 2020. New daily cases rose to a high of 15,310 just last April 2, 2021, with most of these coming from Metro Manila and nearby provinces. This chart shows that on April 6, 2021, reported cases were 8,773. Understandably, over the same period, Cebu Pacific's passenger booking trend started to decline. IATF Resolution 104 was, therefore, published and more recently, IATF Resolution 106, which placed Metro Manila and nearby provinces back to the strictest lockdown level called enhanced community quarantine from March 29 to April 4, and then extended to April 11. The difference with this recent ECQ as compared to the ECQ instituted in March last year is that the aviation sector is allowed to operate flights for essential travel at such capacity and protocols as provided for by the Department of Transport. It is unfortunate that these restrictions came at the seasonally peak travel season of summer and the Holy Week. Following this resolution, the Cebu Pacific Group had to cancel several flights to reduce frequency, particularly on high leisure destinations such as Boracay, Coron, Puerto Princesa, among others. In order to give our passengers the most flexibility, we provided 3 options for their existing bookings: passengers may rebook for travel within 90 days without any additional cost or fare differentials; passengers may also opt to refund; or alternatively store the amount in a virtual Cebu Pacific wallet valid for 2 years and use this fund to either book a new flight or pay for add-ons such as baggage allowances and seat selection. While the company continues to operate its network, passengers who wish to postpone their travel at this time may also avail of either unlimited rebooking or a 2-year travel fund. We would like to highlight, however, that this is a developing situation. As such, we may have to adjust flights depending on government regulations moving forward. As such, before going to the airport, we advise passengers to check the real-time status of flights on our website, along with travel requirements and safety protocols. Passengers are also advised to update contract (sic) [ contact ] details to receive e-mail notifications on flight reminders and updates. I would like to end this recent business update on a positive note by providing a report on our fundraising initiative. In response to the COVID-19 pandemic, we embarked on 2 very significant programs to ensure our continued competitiveness in the foreseeable future. One of these programs is a business transformation exercise aimed at further lowering already industry-leading low unit costs. We introduced various initiatives, including the introduction of modern fuel-efficient aircrafts, a rationalized manpower base, optimization of operational standards and procedures and digitalization of front and back-end activities. Underlying this whole transformation exercise is a highly conservative fundraising program that will provide sufficient liquidity in order to withstand the effects of the pandemic and allow us to thrive in the new normal. We developed our funding plan based on a stress case that conservatively projected a recovery beyond IATA's pronounced global recovery of aviation demand by 2024. Such capital raising plan included: a, stock rights offered to existing shareholders for the issuance of convertible preferred shares; a syndicated loan facility with various domestic banks and financial institutions; and a private placement of convertible bonds or other similarly security instruments with foreign investors. I'm very happy to note that we've completed these 3 fundraising initiatives already. Last March 5, we signed a syndicated loan agreement with local banks, providing the corporation access to committed term loan facility for as much as PHP 16 billion. We also listed the convertible preferred shares with the Philippine Stock Exchange on March 29, 2021, which provided the company with another PHP 12.5 billion of new capital. We thank you, our shareholders, for the support you have provided in this endeavor. Finally, last April 16, we signed an agreement for a $250 million convertible bond investment from Indigo Philippines LLC, an affiliate of Indigo Partners, LLC and IFC, or the International Finance Corporation, and the IFC Emerging Asia Fund. We view Indigo Partners, IFC and the IFC Emerging Asia Funds, not only as capital providers, but also long-term partners in driving further improvements into the business as well as accelerating our sustainability agenda. We also restructured over $150 million in principal and lease payments, reducing cash outflow requirements in the near term and are already engaged in ongoing discussions with lessors and creditors for financing of our 2021 CapEx requirements. With all these, I remain confident that Cebu Pacific is well positioned to not only withstand financial challenges over the next few years, but to remain the leading low-cost carrier in the markets we serve. Rest assured that the Cebu Pacific family will continue all our hard work and perseverance to fulfill our long-term mission to allow everyone to fly. Thank you very much.

Thank you, Mr. President. We now go to the election of the members of the Board of Directors. May I request the Corporate Secretary to read the names of the incumbent members of the Board of Directors?

The incumbent members of the Board of Directors are: James L. Go, Lance Y. Gokongwei, Jose F. Buenaventura, Robina Gokongwei-Pe, Frederick D. Go. And the independent directors are Antonio L. Go, Wee Khoon Oh, Bernadine T. Siy, Brian Mathew P. Cu.

Thank you. May we now have the list of nominees for election to the Board of Directors and voting results?

Mr. Chairman, in accordance with the nomination process stated in the bylaws of the corporation, the following have been nominated as members of the Board of Directors: James L. Go, Lance Y. Gokongwei, Frederick D. Go, Jose F. Buenaventura, Robina Gokongwei-Pe, Lisa Gokongwei-Cheng. And as independent directors: Bernadine T. Siy, Brian Mathew P. Cu and Richard B. Tantoco. There being no other nominations, the affirmative votes in favor of those nominated have been tabulated and the following are hereby declared as the duly elected members of the Board of Directors of the corporation for the ensuing year until their successors shall have been elected and qualified: James L. Go, Lance Y. Gokongwei, Frederick D. Go, Jose F. Buenaventura, Robina Gokongwei-Pe, Lisa Gokongwei-Cheng. And as independent directors, Bernadine T. Siy, Brian Mathew P. Cu and Richard B. Tantoco.

Thank you. Let us move on to the next item in the agenda, which is the appointment of the external auditor of the corporation. May I call the Corporate Secretary to present this agenda item as well as the results of voting for this agenda item?

Mr. Chairman, The accounting firm of SyCip Gorres Velayo & Co. has been nominated as the external auditor of the corporation for the fiscal year 2021. After tabulation of the votes, the appointment of SyCip Gorres Velayo & Co. as external auditor of the corporation has been approved by stockholders representing 83.48% of the total outstanding common shares of the corporation.

Thank you. The accounting firm of SGV & Co. is hereby appointed as the external auditor of the corporation for the fiscal year 2021. Let us now move on to the next item in agenda, which is the approval of the employee long-term incentive plan. May I call on the Corporate Secretary to state the proposal?

Mr. Chairman, the corporation intends to adopt a long-term incentive plan for certain eligible or key employees. The plan will be adopted to achieve the objectives, goals, strategies and measures towards the corporation's vision of unrelenting commitment to provide its shareholders, customers and other stakeholders with better choices and creating shared success. The plan is being established with the following objectives in mind: first, to foster an ownership mentality among senior management; second, to drive performance and value creation; and third, to attract, retain and motivate key talents. Under the plan, eligible employees may be granted either restricted stock units, or RSU, which is an award granted to a plan participant that entitles the participant to receive on corresponding vesting date or dates a specified number of stocks indicated in the award agreement; or stock options, which is an award granted to a plan participant, which gives the participant the option to purchase shares of stock at a specified exercise price on a specified exercise date. Any grant of restricted stock units and employee stock options will be subject to an award agreement, which will contain the terms and conditions of the award. Further, the corporation's Corporate Governance Committee will be tasked to administer the plan. The corporation has identified that the plan be granted to eligible employees who are key employees as may be determined by the Corporate Governance Committee in its discretion, taking into consideration the objectives of the plan. The Board of Directors of the corporation approved the plan on March 29, 2021. The approval of the shareholders is now being sought. The corporation will also obtain the necessary approvals, particularly the approval of the registration statement or request for exemption as applicable from the Securities and Exchange Commission, covering the shares to be issued pursuant to the vesting of an award under the plan.

Ms. Corporate Secretary, do we have the results of the voting for this item?

Mr. Chairman, after tabulating the votes, we are pleased to report that stockholders representing 75.87% of the corporation's total outstanding common and convertible preferred shares have approved the employee long-term incentive plan.

Thank you. The employee long-term incentive plan is hereby approved. Let us proceed to the next item in the agenda, which is the ratification of the acts of the Board of Directors and its committees, officers and the management of the corporation. May I call on the Corporate Secretary to explain this agenda item as well as the results?

Mr. Chairman, the list of acts for ratification of the stockholders are shown right now on the screen. Copies of the said list have also been distributed to the stockholders present by showing the link and QR code to the said list on the screen prior to the meeting. After tabulation of the votes, we are pleased to report that stockholders representing 85.31% of the total outstanding common shares of the corporation have confirmed and ratified the acts of the Board of Directors and its committees, officers and the management of the corporation for the period beginning from the last annual stockholders meeting up to the current stockholders meeting as duly recorded in the corporate books and records of the corporation.

Thank you. The acts of the Board of Directors and its committees, officers and management of its operation for the period beginning from the last annual meeting of the stockholders up to the current meeting of the stockholders as duly recorded in the books and records of the corporation are hereby confirmed and ratified. Are there any other items to be taken up for consideration with stockholders or questions raised via e-mail for the management?

There are none, Mr. Chairman.

Thank you. With this, the 2021 Annual Stockholders Meeting of Cebu Air is hereby adjourned. A link where a replay of this meeting may be viewed shall be made available at the website of the corporation. Thank you very much for joining us.