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 Chief Executive Officer; Mr. Lance Gokongwei, the Corporation's Chief Financial Officer; Mr. Mark Julius Cezar; and the Corporate Secretary Attorney Tieng. May I request the Corporate Secretary to please certify on the sending of notices to the stockholders and to the existence of a quorum of this meeting.

Mr. Chairman, I hereby certify that notice of this meeting has been sent to the stockholders of record as of April 6, 2022, 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. The stockholders have thus 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 82.64% 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 procedure for 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 12, 2021.

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 12, 2021, has been approved as submitted by votes representing 82.64% of the total outstanding common shares of the corporation.

Thank you. The minutes of the annual meeting of the stockholders held on May 12, 2021, is hereby approved as presented. Moving on to the next item on the agenda. May I now call over Mr. Mark Julius Cezar, Chief Financial Officer 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. Thank you for joining us in our annual stockholders meeting. I am pleased to present Cebu Pacific's 2021 financial results. Before we go to our financial statements proper, allow me to provide some context by sharing some key operating statistics that drove our performance. For the full year 2021, we flew 34,463 flights and 4.88 billion available seat kilometers, or ASKs, with an average seat load factor or SLF, of 60.6%. We flew 3,411,000 passengers, 32% lower year-on-year. This was largely due to the high base in the first quarter of 2020 prior to the start of the lockdown. Average fare was PHP 1,844, 27% lower year-on-year due to weaker demand, coupled with a change in revenue mix as the higher-yielding international market was more severely constrained by border closures and travel restrictions. On the other hand, cargo operations have been consistently strong, carrying 120.7 million kilos at PHP 53.63 per kilo. Those are 10% and 9% up year-on-year, respectively. Throughout 2021, Cebu Pacific transported various goods ranging from COVID test kits from Australia, automotive and electronic parts from Japan to live milk fish from Indonesia. The high demand to transport essential goods as well as e-commerce pushed yields to increase by 9%, which consequently resulted in PHP 6.47 billion in cargo revenues surpassing that of 2019 levels. Focusing on our quarterly performance trend, you will see that almost all statistics during the fourth quarter showed steep improvement year-on-year as well as versus the third quarter as regulation eased ahead of the Christmas peak. The 1.5 million passengers flown in the fourth quarter more than doubled the throughput in the prior quarter and was 346% higher year-on-year as seat load factor went up 18 points. You will also see here first quarter 2020's high base as this was prior to the COVID lockdown in the middle of March of 2020, similar to the average quarterly performance in 2019. It is worth noting that passengers flown in the first quarter of 2020 was 4.41 million, while average per quarter in 2019 was 3.42 million, both already higher than the 3.41 million total passengers flown in the full year 2021. Overall travel demand during the fourth quarter of 2021 improved despite having several flight cancellations due to Typhoon Odette. Seat load factor was 68%, 10 percentage points higher than last quarter and 18 points higher year-on-year. Average fare was still lower year-on-year as overall recovery this year was led by the domestic network, but this likewise improved to PHP 1,943 from PHP 1,865 in the third quarter. We were very encouraged to see the improvement in travel demand as increased vaccination rates, together with lower COVID cases, allowed the government to ease up travel restrictions in time for the Christmas travel season. The National Capital Region and surrounding provinces shifted from Alert Level 3 to Alert Level 2, and local government units simplified travel requirements. For example, Boracay removed the RT-PCR test requirement for fully vaccinated people. Despite long-haul travel limitations, our cargo business delivered record sales in the fourth quarter as it carried 37.6 million kilos, a 29% increase compared to the third quarter and 17% higher year-on-year. This was supported by increase in yields from PHP 49.5 per kilo in the third quarter to PHP 58.7 per kilo in the fourth quarter. Overall, our total capacity as measured by available seat kilometers, or ASKs, improved 77% versus last quarter and 105% year-on-year. Given our operational performance, we generated total revenues of PHP 15.74 billion for the year, 30% lower year-on-year and still 81% lower than 2019 levels. Passenger business generated PHP 6.3 billion of revenues, 50% lower year-on-year and still 90% below 2019 levels. Similarly, ancillary revenue stood at PHP 2.98 billion, 35% lower year-on-year. This includes nonpassenger-related ancillary revenues of PHP 587 million, primarily liquidated damages from original equipment manufacturers, third-party revenues from joint ventures, sublease of property and others. As I had previously indicated, cargo performed strongly and delivered PHP 6.47 billion in revenues, 20% up year-on-year and already 13% higher than 2019. On a more positive note, the graph on the right shows the fourth quarter of 2021 revenues posting at PHP 6.6 billion, 101% higher year-on-year and 103% higher quarter-on-quarter. This was driven by passenger revenues, which increased steepest at 297% year-on-year and 124% versus the third quarter. Cargo revenues growth likewise sustained, posting at PHP 2.21 billion for the quarter. That's a 19% increase year-on-year and even 54% higher than pre-COVID level. Here's our full year 2021 income statement summary with a detailed view of our expenses. Revenues were at PHP 15.74 billion, 30% lower year-on-year, largely driven by an 18% decline in flights and a 32% decline in passengers. Operating expenses, on the other hand, were at PHP 38.9 billion, a 10% decline. Fuel expense was 18% lower year-on-year as fuel volume requirements decreased with flights, but average fuel price increased to $75.1 per barrel, a 68% increase from last year's price of $45 per barrel, offsetting the lower volume. Operations-related expenses, excluding fuel, declined by 29% versus 2020, driven by lower aircraft traffic expenses and passenger service operations. Maintenance costs were slightly higher year-on-year. A significant portion of our aircraft maintenance expenses remained fixed. We also deferred several aircraft checks from 2020 to 2021, thus increasing our time and material costs. Others pertain to general and admin expenses, which include reservation costs, which we have successfully renegotiated with our distribution provider, staff and overhead costs. Onetime piece from our fundraising transactions are also included here. Given the low level of operations, our largest operating expenses are still fleet related. We ended 2021 with 74 aircraft, same as of the end of 2020 as we had 6 lease returns replaced with 6 new deliveries. We have more right of use or ROU assets this year as we had 7 aircraft sale-and-leasebacks. As such, our asset retirement obligation, or ARO, and heavy maintenance visit, or HMV, provisions increased but were offset by lower depreciation. With that, operating loss for 2021 was PHP 23.6 billion, and after interest on debt and leases of PHP 2.4 billion, core loss before tax posted at PHP 25.81 billion. We also recorded noncore loss of PHP 1.12 billion. We had PHP 1.3 billion in ForEx losses, primarily from translation of our U.S. dollar debt and the Philippine peso depreciated by PHP 3 versus the U.S. dollar. These were offset by PHP1.4 billion gain from the sale-and-leaseback transaction of 7 aircraft in the fourth quarter. Another item to note is the PHP 1.3 billion mark-to-market loss from the derivative component of our convertible bonds with our share price at PHP 42.15 at the end of 2021 versus PHP 38 conversion price on the convertible instruments, underlying conversion option has become more valuable. And as the writers of the option, we are required per accounting standards to show a mark-to-market loss with a counterpart derivative liability. And the exercise date, the balance of bonds payable and derivative liability will simply be closed out against capital stock and additional paid-in capital or APIC. Lastly, we calculate a net benefit from income tax of PHP 2 billion, giving us a net loss of PHP 24.9 billion for 2021. At this point, allow me to also share the key strategies that we had implemented over the past 2 years as part of our future size and shape or FSAS, which I'm happy to note have already generated over PHP 2 billion in cost reduction and avoidance in the following. In network and fleet, our focus on the domestic-driven network maximized our growth recovery together with the investment into the cargo freighter business, which supplemented commercial operations. More efficient operational processes, digitalized customer and supplier service processes as well as synergies from the acquisition of our line maintenance business contributed PHP 1.3 billion over the past 2 years. Similarly, rightsizing our organization matched by new normal compensation packages provided under PHP 1 billion in cost avoidance. In addition, our fleet reshaping strategy altogether reduced our CapEx requirements by as much as PHP 20 billion. We are also proud to report that we have successfully raised over $1.6 billion in new capital for the company since the start of the pandemic. We have successfully issued PHP 12.5 billion in convertible preferred shares last March 2021 and $250 million in convertible bonds last May 2021. The proceeds for these were used to fund existing debt and lease service obligations, CapEx and working capital requirements. We also restructured approximately $234 million in debt, which likewise reduced near-term cash flow. In addition, we have raised $800 million over the past 2 years through various asset-backed transactions for both new and existing assets, through sale-and-leaseback and asset-backed loans. We note that the PHP 16 billion syndicated loan, which was signed in March 2021 continues to be fully available and undrawn today. This leads us to our cash outflow summary, as shown in this slide. We generated net cash inflows of PHP 14.16 billion for the year, PHP 10.4 billion cash from investing plus PHP 9 billion cash from financing, offset by PHP 5.9 billion cash outflow from operations. Another perspective of our cash flows would be to show the various components of our cash inflows, namely, PHP 12.5 billion from the convertible preferred share rights offering, PHP 12 billion from the convertible bonds transaction. We also had PHP 1.5 billion net refund from predelivery payments through 100% financing of new aircraft via sale-and-leaseback or SLB and another PHP 6.8 billion net proceeds from 7 SLBs. All that would total about PHP 37 billion in externally generated funds for the year. Our cash outflows, on the other hand, consisted of PHP 3.85 billion cash losses and PHP 12.6 billion in debt service obligations. Together, that's PHP 16.5 billion in the cash outflow. It's worth noting that our cash burn has been improving. During the first quarter, it was PHP 4.93 billion or about PHP 1.6 billion per month. But by the fourth quarter, it has gone down to PHP 2.43 billion or about PHP 800 million per month. CapEx of PHP 1.8 billion were all non-aircraft related as all our aircraft deliveries were financed via sale-and-leaseback. Lastly, we posted PHP 421 million net outflow in working capital, which includes PHP 1.3 billion of refunds paid and over PHP 3 billion in end-of-lease settlements on 6 aircraft during the year. With that, our cash balance at the end of 2021 was at PHP 19.6 billion. Finally, our balance sheet. Cebu Pacific's total assets as of December 2021 was PHP 138.25 billion, 8% bigger than 2020. This was driven by higher cash balance of PHP 19.6 billion, [ 261% ] higher than 2020 and 8% higher than 2019 pre-COVID. Our aircraft-related assets such as plant, property and equipment, right-of-use assets and predelivery payments make up 76% of our total assets or about PHP 104.6 billion. In 2021, we had 6 new deliveries, 6 returns and 7 existing aircraft undergo sale lease. With this, we ended the year with 74 aircraft, same as last year, 34 of which are leased and while the remaining 40 are owned. Total liabilities posted at PHP 127.64 billion, 75% or PHP 95 billion of which was debt. This includes $87.5 million short-term notes payable to JG Summit Philippines Limited, PHP 77.9 billion finance and operating leases and the $250 million convertible bonds payable. Total equity balance at the end of 2021 is at PHP 10.61 billion with a net debt-to-equity ratio at 7.25x and current ratio at 0.74x. Thank you very much.

Thank you, Mr. Cezar. 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 82.61% 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, Corporate Secretary. The report of the Chief Financial Officer 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 Chief Executive Officer, 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 present some recent updates and outlook on our business. To our dear shareholders, 2021, our second year of battle against the COVID-19 crisis, presented one of the most difficult years for Cebu Pacific. We started last year with early headwinds as another surge in cases led to strict lockdowns and other travel restrictions over the summer season. This was coupled with the emergence of the Delta variant during the third quarter, which also resulted in suspension of flights to various international destinations, including Dubai and Hong Kong. The steep increase in jet fuel prices was yet another battle altogether. And sadly, Typhoon Odette, which damaged multiple provinces, led us to cancel many flights during the Christmas season. These are all very significant obstacles in our path to recovery. Yet we remain encouraged as 2021 likewise presented a clear path of progress towards recovery. This began reflecting in the fourth quarter of 2021 when the COVID situation started improving as the vaccination campaign progressed. As of April 17, 2022, 74% of the population or about 80 million people have already received 2 doses. And the pediatric vaccination is likewise underway. Weekly positivity rate has been lowest at 1.3%, giving the public comfort that the Philippines is now very low risk. This paved the way for increased mobility and the ease of travel restrictions. As vaccination rates increased and COVID cases declined, alert levels toned down and local government units began simplifying travel requirements. The National Capital Region and surrounding provinces were lowered to Alert Level 2 in the fourth quarter of 2021 and further lowered down to Alert Level 1 since March 2022. Alert Level 1 guidelines paved the way to relaxed travel regulations. Establishments can operate at full capacity and tourists are allowed into various provinces without having to take an RT-PCR test upon entry. RT-PCR tests are only recommended for priority groups A1 to A3 and contact tracing is now optional. The Philippines also opened its borders to accept fully vaccinated tourists without the need to quarantine, paving the way for the recovery of our international network. Increased mobility further encourage people to go out and travel as reflected by the growth of our passenger bookings. As Mr. Cezar mentioned earlier, we flew 12,914 flights during the fourth quarter, 127% higher year-on-year. And passenger count likewise rose to 1.52 million, 346% higher year-on-year. As flight frequencies increase, bookings are already reaching pre-COVID levels for our domestic network, such as Boracay, Pagadian and Tacloban, where flight frequencies are even now higher than pre-COVID levels. As of April 20, 2022, our 7-day booking average is 29% higher than the same period 3 years ago in 2019. The resilience of our financial position throughout 2021 has enabled us not only to maintain our leadership in the domestic market, but also to grow well ahead of our competitors. As of mid-April 2022, our domestic market share posted at 60%, which is already well ahead of our full year 2019 and 2021 domestic market shares, which are both at 53%. We continue to boost our domestic capacity and estimate that by end of May, our capacity share will increase further to 62%. We are glad to share that to date, we are nearing the pre-COVID level networks for our domestic network, flying 37 destinations, 54 routes and at least 1,900 weekly flights. Forward bookings have likewise been strong and growing. Daily bookings are significantly higher than last year and better than any point in the last 12 months, save for one point where our 7-day moving average hit close to 80,000 bookings, which is the week we launched our 3/3 or March 3 sale. This graph clearly manifests our underlying demand to once again grow, which we now are able to do as alert levels come down and movement restrictions are eased. The success of our Future Size and Shape or FSAS strategy was critical. It not only allowed us to thrive amidst the pandemic, but also positioned us well into recovery. We celebrate our accomplishments thus far, but this does not mean we stop here. We recognize that there are still things that need to be done, protect our position as the Philippines' leading airline. Hence, we also commenced the second phase of our FSAS strategy wherein we undertook deeper negotiations and contracting exercises with our equipment manufacturers, lessors, maintenance providers and various other partners. With FSAS 2.0, we were able to defer and reschedule new aircraft deliveries to reflect our demand outlook post pandemic, at the same time, continuing to invest sensibly in the modernization of our fleet. We were also able to negotiate with existing lessors, secure new financing for future aircraft commitments and monetize existing aircraft assets through sale and leaseback transactions. Cebu Pacific already has one of the youngest fleets in the world with an average fleet age of only 5.75 years. We ended 2021 with 74 aircraft, the same as 2020. We accepted 6 new aircraft deliveries in 2021, including 5 new engine options or neos that replaced 6 classic engine options or ceo planes. This year, Cebu Pacific will have 7 neo deliveries likewise replacing 8 ceos, which will exit the fleet. CapEx for the year totaled PHP 32.8 billion, which was 100% financed via sale-and-leaseback. While we remain conservative in our 2022 fleet flows, over the next 5 years, we will have 48 deliveries and 35 exits, ending 2026 with 87 aircraft, of which 63 will be neos and 16 will be ATR turboprops. This replacement strategy fleet will keep us ahead in fuel efficiency and maintain the lowest in cost-per-seat kilometer flown. Equally significant in our FSAS strategy is a guide on how to deliver our environmental and social sustainability commitments congruent to our shift to an all neo fleet by 2027. We welcomed our first A330neo last November 2021. It consumes up to 25% less fuel as compared to the previous generation of A330 ceos, thus reducing CO2 emissions and is configured with 5% more seats, reducing fuel and CO2 burn per passenger flown. Moreover, our new Airbus 321neos that will be replacing the previous generation of Airbus 320ceos are configured with 32% more seats. We are likewise exploring carbon footprint calculation to push our mitigation efforts, renewable energy sources to power our offices, fuel optimization management systems and possibly soon sustainable aviation fuel. It has always been part of our core purpose to give back to our community in any way we can. And in times like these, we come together in Bayanihan for our Kababayans. Throughout 2021, Cebu Pacific flew over were 648 tons of humanitarian items for free to support distribution of essential food and medical supplies to different destinations. These include distribution of over 43 million COVID-19 vaccine doses to over 28 provinces in the country on top of airlifting over 16.5 million doses into the Philippines. We also flew several Bayanihan flights. In partnership with Overseas Workers Welfare Administration are OWWA, we repatriated 11,400 OFWs so they are able to go home to their loved ones. In partnership with both public and private organizations, Cebu Pacific was the first airline to respond to Typhoon Odette victims. We transported over 336 tons of humanitarian and disaster relief across the Philippines. Sweeper flights out of Siargao and nearby provinces were mounted to fly out locally stranded passengers as well as fly in much needed medical volunteer doctors. As we undertake various practices to push our long-term sustainability agenda, we take pride in improving our ESG scores. Based on the S&P Global scoring system, we scored 39 points in 2021, 24 points higher than 2020, thus putting us above the airline industry standard. Cebu Pacific looks forward to better days as we regain our position as one of the world's strongest and best loved airlines. Our outlook gets brighter as we bank on domestic-driven recovery this 2022 and look forward as international borders likewise reopen. We continue to invest sensibly in the monetization of our fleet and stay true in our promise to provide affordable and accessible air transport services for all. We likewise continue to honor agreements and remain committed to strengthen partnerships within the industry. And we carry on with the confidence on the vital role our airline plays in our country's economic recovery. 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 Fernando B. Buenaventura, Robina Gokongwei-Pe, Frederick D. Go and Brian H. Franke. And the independent directors are Bernardine T. Siy, Brian Mathew P. Cu and Richard Raymond B. Tantoco.

Thank you. And we now have the list of nominees for election to the Board of Directors and the 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, Jose Fernando B. Buenaventura, Robina Gokongwei-Pe, Frederick D. Go, Brian H. Franke; and as independent directors, Bernardine P. Siy, Brian Mathew P. Cu, Richard Raymond 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, Jose Fernando B. Buenaventura, Robina Gokongwei-Pe, Frederick D. Go, Brian H. Franke; and as independent directors, Bernardine T. Siy, Brian Mathew P. Cu, Richard Raymond 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 on the Corporate Secretary to present this agenda as well as the results of the voting of 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 2022. After tabulation of the votes, the appointment of SyCip Gorres Velayo & Co. as external auditor of the corporation has been approved by stockholders, representing 80.68% of the total outstanding common shares of the corporation.

Thank you. The accounting firm of SyCip Gorres Velayo & Co. is hereby appointed as the external auditor of the corporation for the fiscal year 2022. 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 apps 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 to the said list on the screen prior to the meeting. After tabulation of the votes, we are pleased to report that stockholders representing 82.61% 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 the corporation 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, I hereby confirm and ratify it. Are there any other matters to be taken up for consideration of the stockholders or questions raised via e-mail for the management?

There are none, Mr. Chairman.

Thank you. With this, the 2022 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.