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

Good morning, everyone. Welcome to the Annual Stockholders' Meeting of Cebu Air, Inc. It is my honor to give you an overview of the company's business and operational highlights for the full year 2022. In its 26 years, Cebu Pacific stayed true to its objective to enable Filipinos to fly and make air travel more affordable and accessible. Although the road to recovery was steep, the gradual reopening of local and international destinations allowed us to restore most of our flights and revive our network. We also implemented significant innovations in our operations and services to meet the growing demand for air travel and ensure the safety and convenience of our passengers. Revenge travel is a term that grew more popular during the first months of the year as people became more eager to take back the days, weeks or even months they lost to explore places they have been longing to visit. As soon as the COVID situation allowed it, we responded by rapidly increasing the number of flights, particularly for the local market, by the second quarter and for the international market by the third and fourth quarters. We complemented these increases with continued implementation of a multilayered approach to safety as well as operational enhancements to ensure a convenient and seamless experience for all our passengers. We exemplified leadership in sustainability performance by incorporating sustainable aviation fuel in our operations and taking delivery of additional Airbus neo aircraft, consistent with our goal to have an all-neo fleet by 2028. Lastly, we continue to support the national government in its COVID-19 efforts by helping transport millions of vaccine doses all in the name of BayaniJUAN. All these efforts and initiatives were achieved to help more Juans reach their dream destinations, be reunited with their loved ones and experience the joy of air travel. In the next parts of our meeting, my colleagues will give you a deeper look into our accomplishments for 2022. Joining us are Cebu Pacific's Chief Executive Officer, Mr. Michael Szucs; Cebu Pacific's Chief Financial Officer, Mr. Mark Julius Cezar; and the Corporate Secretary, Attorney Anne Tieng. But for now, let us proceed with the first agenda. May I request the Corporate Secretary to please certify on the sending our 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 11, 2023, via the following methods: first, by delivering 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 been thus notified of this meeting in compliance with applicable rules and regulations. I hereby certify that they are present in this meeting via remote communication or by proxy, stockholders entitled to vote representing 82.20% of the corporation's total outstanding voting 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 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 on the agenda, which is the approval of the minutes of the Annual Meeting of the Stockholders held on May 11, 2022.

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 11, 2022, has been approved as submitted by votes representing 82.20% of the total outstanding voting shares of the corporation.

Thank you. The minutes of the Annual Meeting of the Stockholders held on May 11, 2022, is hereby approved as presented. Moving on to the next item of the agenda. May I now call on 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?

Good morning, shareholders. 2022 marked the year where Cebu Pacific climbed the steep road to recovery from the COVID-19 pandemic, which started 3 years ago. We started the year facing early headwinds. COVID cases surged in January, pushing local government units to reimpose strict travel restrictions. The national government lowered international arrival limits. But sadly, we also had our own resource limitations driven by the virus. By the second quarter, however, we saw a strong recovery driven by the traditional summer peak and the revenge travel phenomenon. This was further supported by declining case counts, higher vaccination rates and less travel restrictions. We rapidly increased domestic flights as the market exhibited stronger demand. As a result, domestic passengers grew more than twice the first quarter level. The third quarter of the year, despite the domestic lean season, saw a minimal decline in passenger count and seat load factor. Growth on the international front began as some countries eased travel restrictions. Cebu Pacific resumed flights to destinations such as Sydney and Brunei. Cebu to Singapore and Cebu to Incheon also resumed, which signaled the start international travel for those living in the Visayas and Mindanao regions. Toward the end of the year, operations accelerated further as we shifted from lean season to holiday peak. Likewise, the reopening of North Asian markets, such as Japan, South Korea, Taiwan and Hong Kong boosted international network growth and demand. Many of our Overseas Filipino Workers, who were unable to see their families for 2 to 3 years, were able to reunite during Christmas as travel restrictions continued to loosen. Average fares showed a clear quarter-on-quarter uptrend since 2022, driven by higher domestic demand, which took up the larger share of our network for most of 2022. The gradual reopening of international destinations during the second half of the year also supported the increase in average fares, bringing us closer to pre-pandemic levels. The ancillary segment outperformed as ancillary spend per passenger broke 2019 levels. In fact, starting the third quarter of this year, our ancillary yield was over PHP 1,000 per passenger, a growth of over 30% versus pre-pandemic yields. Several initiatives contributed to the improvement in ancillary performance, such as price bundling, launching of insurance products such as the CEB Piso Protect and the transition to a per piece checked baggage allowance. Change fees, which were waived during the pandemic, were also reinstated in the fourth quarter. In cargo, during the pandemic, the cargo business became a substantial contributor to our revenues as we mounted cargo charters, including utilizing both the belly and seats for carriage. With the return of capacity, coupled with a competitive pricing environment, cargo yields and volumes started to temper from fourth quarter. Nonetheless, at close to PHP 50 per kilo, yields are still twice higher than pre-pandemic levels. Now, to summarize our full year key performance highlights. In 2022, we flew over 108,000 trips and over 14.8 million passengers, a steep 214% and 335% year-on-year growth, respectively. Seat load factor of 75.3% was up by 14.7 points and average fare of PHP 2,367 per passenger, which was 28% higher year-on-year. Ancillary revenue likewise improved 26% to PHP 862 per passenger. We flew 129 million kilograms of cargo, 7% higher year-on-year, supplemented by 3% higher yield year-on-year. Increased capacity, combined with longer routes driven by an international market recovery, drove available seat kilometers, or ASKs, to 17.2 billion, a sharp 254% increase year-on-year. Looking deeper into each of our market segments. For domestic, Cebu Pacific continued to lead the travel recovery in the Philippines. The easing of travel restrictions within the Philippines enabled us to restore more than 100% of our domestic capacity as early as the second quarter of the year. This allowed us to capture 57% of the domestic market for full year 2022, 5 percentage points higher than our 2019 market share of 52%. By the end of 2022, Cebu Pacific flew to 33 destinations and 57 routes on 2,189 weekly flights, even higher than our weekly frequency pre pandemic. Cebu Pacific has now emerged an even stronger domestic market leader in air travel. Now for our international market. The first half of the year was slow in terms of our international recovery as only a handful of Southeast Asian countries, such as Singapore and Thailand, eased travel restrictions for visitors going into their countries. By the third quarter, however, we saw our international network accelerate its recovery. We increased flight frequencies to destinations such as Bali, Hanoi, Bangkok, Fukuoka and Singapore. We also restarted flights to Brunei, Kota Kinabalu and Sydney. Our hub in Cebu also restarted international flights, which provided easier international travels for Filipinos in the Vis-Min area. The fourth quarter offered a more optimistic outlook, especially in terms of recovery of our international network. North Asian countries, led by South Korea and Japan, waived their pre-arrival test and quarantine requirements, making it easier for Filipinos to travel to these once-restricted countries. This signaled the ramp-up of flights and increase in capacity, which resulted the restoration of 19 destinations, 22 routes and over 370 weekly flights. While 2022 brought optimism on the demand front, the biggest challenge we had to face was the unfavorable economic environment. Average world jet fuel prices rose by 69% year-on-year to over $126 per barrel, peaking as high as $164 last June. Fuel prices have since tempered down to $110 in December but still materially higher than the average of $70 to $80 pre pandemic. As a low-cost carrier pushing for travel opportunities for every Juan through low fares, this was a significant challenge for us. Needless to say, this spike in fuel prices also pushed back profitability for us. The Philippine peso also weakened by about 9% to the U.S. dollar, averaging PHP 54.5 in 2022 with its peak at about PHP 59 last October. With approximately 2/3 of the airlines expenses being pegged to the U.S. dollar, including jet fuel, aircraft maintenance and various systems costs, peso depreciation was a significant headwind as well to our profitability. Focusing now on our financial results. Cebu Pacific generated total revenues of PHP 36.75 billion for the full year 2022, a 261% increase year-on-year. The passenger business led this steep recovery, posting total revenues of PHP 35.1 billion, up 459% year-on-year, followed by ancillary revenues, which grew 386% year-on-year to PHP 14.5 billion. Lastly, cargo revenues grew a steady 10% year-on-year to PHP 7.12 billion. Total operating expenses, on the other hand, amounted to PHP 68.2 billion 75% higher versus 2021. Fuel remained to be the biggest cost contributor at PHP 24.5 billion, 383% up year-on-year. The upward movement was partly driven by higher jet fuel prices, 69% higher year-on-year, to $126 per barrel. Our fuel requirement also increased 164% to almost 3.1 million barrels. Excluding fuel, operating expenses increased only 29% year-on-year, bringing our cost per ASK ex fuel down to PHP 2.53, 63% lower year-on-year. Operating loss reduced to PHP 11.4 billion, half of previous year's loss, while full year EBITDA now swings from negative PHP 8.8 billion last year to positive PHP 664 million. While a significant improvement year-on-year, bottom line results still shows a net loss of PHP 14 billion for full year 2022. But we remain confident that we are past the worst and proud of our current progress. We end 2022 with total assets of PHP 147.2 billion, PHP 8.9 billion higher than year-end 2021. We ended 2022 with a total fleet size of 76 aircraft, of which 46 are under long-term operating leases, which are classified as right-of-use assets, or ROU. Throughout 2022, we had six new aircraft deliveries, one lease return and one aircraft sale. We also had eight engine sale and leaseback transactions, increasing our ROU assets, while four ATR 72-500s have been reclassified as other assets as these are held for sale this 2023. Cash balance remains in a good place at PHP 20 billion. Total liabilities amounted to PHP 150 billion, up PHP 22.4 billion year-on-year. Increase in liabilities are primarily from increase in lease liability from new right-of-use aircraft and engines and increase in unearned transportation revenues as our forward bookings improve. Equity ended at negative PHP 2.9 billion while current ratio was steady at 0.7x. The slide summarizes our cash flow for 2022. Cebu Pacific generated cash income from operations of PHP 5.9 billion as another PHP 8 billion from working capital, primarily from inflows from new bookings. These sufficiently funded lease payments of PHP 7.3 billion and recurring debt service payments of PHP 5.7 billion. On this note, we can say that excluding one-time transactions, Cebu Pacific had a no-cash burn position for full year 2022. We had one-time debt payments of PHP 8.5 billion, PHP 5.2 billion of which was for payment of a short-term loan to JGSPL, a wholly owned subsidiary of JG Summit Holdings, and another PHP 3.4 billion in debt termination in relation to the sale of 1 aircraft and the sale and leaseback of 3 engines. An additional PHP 1.5 billion was gained from translation of our U.S. dollar cash, ending our cash position for 2022 at PHP 20 billion. Our financial results for 2022 hopefully concludes the airline's COVID pandemic era. More exciting times lie ahead of us in 2023 and beyond. This concludes my report, Mr. Chairman.

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

Mr. Chairman, we are pleased to report that stockholders representing 82.20% of the total outstanding voting 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 Chief Executive Officer, Mr. Mike Szucs, to provide some recent updates and outlook on the corporation's business?

Good morning, everyone. I'm happy to be presenting to you today our growth prospects for 2023. Cebu Pacific continues to have the most extensive domestic and international network to, from and within the Philippines. Our domestic network is serving 35 local stations across 70 routes. Domestic operations are already running at over 100% of pre-pandemic capacity, which will continue to increase as we grow further into 2023. We likewise continue to expand our international footprint as we are optimistic especially for countries such as Japan, Taiwan, Hong Kong, Australia and China, which have recently reopened and are registering a notable uptick in travel demand. We are adding more flights to destinations such as Narita, Fukuoka, Shanghai and Guangzhou and reinstating flights into Melbourne, Macau and Beijing, amongst others. We're also restarting domestic and international routes from outside Manila, such as Cebu to Hong Kong and Narita. More recently, we've announced the relaunch of our Clark hub by operating a combined 15 domestic and international destinations from Clark International Airport. This makes us the largest airline serving Northern and Central Luzon. We ended 2022 with 2,600 weekly flights. And in the second quarter of 2023, we expect to break over 3,000 weekly flights, going beyond pre-pandemic levels on a system-wide basis. So what about profitability? Well, we take comfort that macroeconomic conditions and outlook have begun to move in our favor. Starting off with fuel, fuel price continues to decline as inflation and rate hike concerns offset growing global demand. For example, month-to-date April 12, jet fuel prices averaged just over $99 per barrel, which is about 10% lower than December of last year. While median bank forecast remain conservative, forward prices are still backwardated with forward rates for September at $96 per barrel. Cebu Pacific's fuel consumption ranges anywhere from 350,000 to 400,000 barrels per month. And so such a trend not only offers a clearer path to profitability but also an opportunity for us to protect some profit margin. As such, we've restarted our fuel hedging program for short-term requirements filling approximately 50% of our March requirements, 30% of second quarter and 15% of third quarter requirements. We will continue to monitor such risk management opportunities very closely. On FX, from last year's peak at close to PHP 60 to the U.S. dollar, peso continues to swing back and forth around the PHP 55 mark. April 12 month-to-date average exchange rate was at PHP 54.76 to the U.S. dollar, which is about 1.6% lower than December '22 average of PHP 55.64 as markets anticipate nearing the end of the Fed's tightening program. On interest rates, March U.S. inflation came out as expected, though core U.S. inflation remains sticky, suggesting another 25 basis points hike in May, pushing short-term interest rates higher before pausing for the year. The bigger, more fundamental driver of Cebu Pacific's growth prospects is still the growing demand for travel. As the leading low-cost carrier in the Philippines, this is where Cebu Pacific's competitive advantage remains. Favorable economic fundamentals are key to higher disposable income for any consumer. Philippine GDP growth averaged 7.6% last year, exceeding the government's 6.5% to 7.5% target due to strong consumer spending, employment gains and continued economic reopening. The Philippines is strategically located in Southeast Asia and has a large addressable market that feeds perfectly into the LCC business model. The population of 100 million is young and growing. Plus of course, there is the large Filipino diaspora. Our fleet plan aims not only to support our overall growth ambitions but stay true to our objective of having the lowest possible unit costs. We ended 2022 with a fleet of 70 aircraft, excluding the ATR 72-500s. In 2023, our fleet will grow by 6 aircraft as we take delivery of 15 aircraft and retire 9. This will entail a CapEx commitment of PHP 42.4 billion. And by the end of this year, our seat capacity will have grown 10% to 15% higher than 2019. From 2024 onwards, we will have 37 more aircraft deliveries, replacing 25 existing aircraft, allowing us to grow at a 10% CAGR in terms of seats. Importantly, our transition into an all-neo fleet, which we expect to complete by 2028, allows us to not only reduce fuel burn per flight but also to increase seat density, enabling us to fly more passengers with every flight and further reducing our unit costs. Mr. Chairman, I'd like to share as well our sustainability commitments, starting off with the environmental initiatives. Cebu Pacific has been the Philippines leader in propelling decarbonization in the aviation industry. Our key milestone for the environment in 2022 is our sustainability aviation fuel program. We received our A320neo, which use sustainable aviation fuel, or SAF, on its delivery flight from Hamburg, Germany to Manila. In September, we operated a Singapore to Manila passenger flight powered by SAF, becoming the first Filipino carrier to incorporate SAF in its commercial operations. The use of SAF in our operations, paired with a shift to the more fuel-efficient and low-carbon emission neo aircraft, provides a pathway for us to incrementally reduce the carbon footprint of our operations. This ongoing fleet modernization is geared towards the goal of having an all-neo fleet by 2028. And another initiative that we started in 2022 is our electrification of our ground service vehicles and ground service equipment. The transition to these zero-emission vehicles and equipment will allow us to continue to provide safe and reliable service to our customers whilst at the same time push towards our net-zero emission goals. While these are small steps towards decarbonization, these are tangible and foundational and a pathway that we intend to build on in the coming years. In addition to all the internal initiatives and programs that we implement to take care of our people, Cebu Pacific was a dependable partner of the Filipino government and our communities in its pandemic response to initiatives. Last year alone, we airlifted more than 21 million doses of COVID-19 vaccines, helping the Philippines' efforts to manage the COVID-19 pandemic. We also repatriated significant numbers of Filipinos that were affected by the global economic slowdown and flew them back home to their families. In partnership with UNICEF and our passengers, we were able to raise PHP 10 million in support of Change for Good program, which contributes to investments of life-saving materials and services for vulnerable children. These are just some of our social initiatives in 2022 that focus on our commitment to the communities we serve and to contribute to nation-building. To further expand our network growth, we've come back in an even bigger way in Clark pre COVID. We now offer direct flights from this Northern Luzon hub to 15 domestic and international destinations, 4 of which were routes we have not operated to before, Clark to General Santos, Cagayan de Oro, Taipei and Seoul. We will be basing three aircraft in Clark as we remain committed to improving connectivity between this region and key cities in the Philippines and Asia. The Clark hub expansion also means more opportunities for aviation and related industries. With 140 pilots, cabin crew and ground staff that we are hiring to support this expanded operations, we foresee this will generate at least 4,000 additional tourism and other related jobs in Northern Luzon. This is based on IATA data that shows for every 1 job directly employed in the transport industry, this supports 29 other tourism-related jobs. In the area of governance, we made investments to put in place a robust crisis management system and structures founded on a strong oversight by our Board of Directors over enterprise risk management. These critical crisis management systems and structures are important to a country like the Philippines, which is always at risk from the effects of natural disasters and calamities. During 2022, this was crucial in allowing us to mitigate the effects of natural disasters and ensure that we were able to quickly resume operations and provide critical air services to affected areas. Cebu Pacific was one of the honoraries at the Golden Arrow Award organized by the Institute of Corporate Directors for having one of the best corporate governance practices amongst listed companies. This highlights our commitment to embedding sustainability in how we do business. Ongoing right now is our program to adopt the Task Force on Climate-related Financial Disclosures, or TCFD, a framework we will complete by the end of 2023. We continue to build a culture of effective and responsible business practices. We want to end our presentation with one of our sustainability highlights for 2022. We're very proud to have been recognized by the Centre for Asia Pacific Aviation. In 2022, we received CAPA's Environmental Sustainability Airline Group of the Year Award for our leadership in sustainability. With sustainability at the forefront in the minds of passengers and our stakeholders, Cebu Pacific remains committed to providing safe, convenient and reliable travel to our customers while building a greener and more sustainable future. We're very optimistic about the next phase of our growth. We're buoyed by the extraordinary resilience and agility demonstrated by the organization in the most difficult of times. We're very proud of our performance last year, ending the year with a solid share of the domestic passenger market and returning to the profitability that Cebu Pacific has been known for. We are confident that we are in excellent position to accelerate our growth. We are ready to soar to greater heights and excited to do what Cebu-Pacific does best, enabling every kind of Juan to fly and travel. This concludes my report, Mr. Chairman.

Thank you, Mr. Szucs. 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: Lance Y. Gokongwei, who assumed the chairmanship position following the retirement of Mr. James L. Go. on December 31, 2022; Jose Fernando B. Buenaventura; Robina Gokongwei-Pe; Frederick D. Go; Brian H. Franke; Alexander G. Lao. And the independent directors are Bernadine T. Siy, Brian Matthew P. Cu, Richard Raymond B. Tantoco.

Thank you. May 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: Lance Y. Gokongwei, Jose Fernando B. Buenaventura, Robina Gokongwei-Pe, Frederick D. Go, Brian H. Franke, Alexander G. Lao, and as independent directors, Bernadine T. Siy, Brian Matthew P. Cu, Richard Raymond B. Tantoco. There have been 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.

Thank you. Let us move on to the next item of 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 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 fiscal year 2023. After tabulation of the votes, the appointment of SyCip Gorres Velayo & Co. as external auditor of the corporation has been approved by the stockholders representing 80.85% of the total outstanding voting 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 2023. Let us proceed to the next item of 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 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 to the said list on the screen prior to the meeting. After tabulation of votes, we are pleased to report that stockholders representing 82.20% of total outstanding voting 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 are hereby confirmed and ratified. Are there any other matters to be taken up for consideration of the stockholders or questions raised via e-mail or the management?

There are none, Mr. Chairman.

Thank you. Before we wrap up, let me take this opportunity to thank each and everyone here for taking part in the Annual Stockholders' Meeting of Cebu Air, Inc. Your unwavering support gives us the strength to power through the challenges along our way and build on our successes and accomplishments. We are optimistic that Cebu Pacific will continue to achieve growth in the years to come, aided by the relentless and outstanding work of the organization. On our 27th year, we look forward to connecting more cities, communities and people. Our purpose remains the same, let's fly every Juan. With this, the 2023 Annual Stockholders' Meeting of Cebu Air, Inc. is hereby adjourned. A link where a replay of this meeting will be made available on the website of the corporation. Thank you very much for joining us.