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

The 2024 Annual Stockholders Meeting of Cebu Air Inc. will now start. Good morning, ladies and gentlemen. We will now play the Philippine National Anthem. [Presentation]

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 2023. Cebu Pacific finished the past year strongly and experienced significant growth. We expanded our network, our fleet and our capacity, empowering Filipinos with safe, reliable and affordable flights. This was made possible through several initiatives, such as the resumption of local and international routes, the strategic launch of the Clark Hub and increased frequency in popular destinations. Alongside these efforts, we focused on improving our safety measures and operational efficiency. We elevated our customer-first efforts and empowered our frontline teams to ensure a seamless travel experience for everyone. In terms of sustainability, Cebu Pacific continues to lead in Southeast Asia. This is a result of our efforts to incorporate sustainable aviation fuel, or SAF, in aircraft deliveries, and expand our fleet with additional neo aircraft. We are also enhancing our ground operations to be more sustainable through our electric vehicle transition program. Finally, despite challenges in the aviation sector, Cebu Pacific showed resilience in 2023 and achieved sterling financial recovery. This demonstrates our commitment to stability and growth. None of these accomplishments would have been possible without your support. Your trust in our mission motivates us to continue pushing boundaries and improving our operations for the benefit of all our stakeholders, our community and the environment. In the next part of our meeting, my colleagues will give you a deeper look into our accomplishments in 2023. Joining us are Cebu Pacific's Chief Executive Officer; Mr. Michael Szucs; Cebu Pacific's Chief Financial Officer, Mr. Mark Julius Cezar; and our 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 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 8, 2024, 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 they are present in this meeting via remote communication or by proxy, stockholders entitled to vote representing 80.28% 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 Punongbayan & Araullo. 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 last May 11, 2023.

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, 2023, has been approved as submitted by votes representing 80.28% of the total outstanding voting shares of the corporation.

Thank you. The minutes of the Annual Meeting of Stockholders held last May 2023 is hereby approved as presented. Moving on to the next item on the agenda. May I now call on 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.

Good morning, everyone. I'm delighted to share with you the commercial and financial highlights of Cebu Pacific during last year. We ended 2023 on a high note as we both have the most extensive domestic and international network to, from and within the Philippines. Our operations span across 60 destinations, across 108 routes and over 2,700 weekly flights, and as of December 2023, system-wide capacity reached 100% [ of pandemic ] levels. We carried over 20.8 million passengers in the past year, 41% higher than 2022. For domestic, we flew 16 million passengers, 19% higher year-on-year. This growth allowed us to capture a market share of 53%, solidifying our position as the leading domestic carrier. Initiatives like the resumption of routes such as Manila-Laoag, Iloilo-Puerto Princesa and Iloilo-Cagayan fueled this growth. Furthermore, our strategic relaunch of operations at Clark International Airport has expanded our network, establishing us as the largest airline service in Northern and Central Luzon. Internationally, we flew 4.8 million passengers, a 260% increase. Adding more flights to popular destinations and reopening routes like Manila-Melbourne and Cebu-Tokyo drove this surge. Direct flights from Manila to Da Nang launched in December 2023 further enhanced our global network. Focusing now on our financial results. Cebu Pacific generated total revenue of PHP 90.6 billion in 2023, a 60% year-on-year growth, already 7% higher than 2019. The passenger business led this steep recovery with PHP 62.5 billion in revenue, 78% higher year-on-year. This is on the back of 41% growth in passengers flown. Seat load factor increased almost 9 points to 84%, while fares improved 26% to almost PHP 3,000. Passenger revenues in 2023 were already 1% higher than in 2019. Ancillary business generated over PHP 24 billion in revenue, 66% higher year-on-year. In addition to more passengers, ancillary yields have improved 21% year-on-year to PHP 1,042 per passenger. Ancillary revenues in 2023 were already 39% higher than in 2019. On the other hand, cargo business displayed a downward trend and generated over PHP 4 billion in revenue, 43% and 29% lower than the previous year in 2019, respectively. With PHP 90.6 billion in revenue, Cebu Pacific generated operating income of PHP 8.6 billion and a pretax core income of PHP 4.2 billion in 2023. This remain shy of 2019 profitability levels due to higher fuel and fleet expenses but show a significant recovery from the losses incurred in 2022. Notable operating expenses in fuel, which was 21% higher year-on-year. Fuel volume requirement increased on the back of 30% more flights, partially offset by lower fuel prices. Depreciation expense increased year-on-year as we added a net 13 aircraft into our fleet. Crew and airport expenses likewise increased to support growing operations. Furthermore, embedded in our OpEx are digitalization and other efforts to support our customer-first initiatives. Total operating expenses grew 20% year-on-year to PHP 82 billion, while available seat kilometers, or ASKs, grew to over PHP 27 billion, 59% higher year-on-year. This reduced our cost per ASK, or CASK ex fuel, to PHP 3 and PHP 1.9, respectively, both 25% lower year-on-year. Financing cost increased to support our growing fleet but were offset by noncore gains from sale and leaseback transactions as well as tax benefits accumulated since the pandemic. All these combined, Cebu Pacific recorded a net income of PHP 7.9 billion in 2023, 13% shy of the PHP 9 billion net income in 2019, but a significant recovery from the PHP 14 million net loss incurred in 2022. We ended 2023 with total assets of PHP 187 billion, PHP 39 billion higher than in 2022. Our total fleet count by year-end was at 85 as we took delivery of 18 aircraft plus 4 spare engines and exited 5 aircraft. Aircraft and aircraft-related assets constituted PHP 146 billion or 78% of total assets. Total liabilities ended at PHP 182 billion, of which over PHP 130 billion are debt related, inclusive of lease liabilities and convertible bonds. The current portion of debt and leases was PHP 14 billion, while unearned transportation revenue from passenger bookings increased to PHP 14 billion. With this, we ended 2023 with equity of almost PHP 5 billion. The current ratio ended at 0.5x, while average net debt to EBITDA improved to 4.6x. Summarizing our cash flow for 2023. Cebu Pacific generated cash income of PHP 23 billion. This was reduced by a working capital requirement of about PHP 2.1 billion, which included PHP 8.1 billion settlements for heavy maintenance and aircraft returns. Cash outlook for investment totaled over PHP 9 billion as CapEx of about PHP 19 billion was offset by over PHP 10 billion proceeds from sale and leaseback transactions. Meanwhile, outflow for financing amounted to PHP 11 billion as debt and lease payments were offset with PHP 10 billion in new borrowings. These payments comprised PHP 9.8 billion, while debt payments included a pre-termination of PHP 5.1 billion. These, combined, provided CEB with ending net cash and cash equivalent of PHP 16.9 billion. Moving forward, we hope that Cebu Pacific's solid 2023 financial results will set the foundation for more exceptional financial performance in 2024. This concludes my report, Mr. Chairman.

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 80.28% 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 Chief Financial Officer is accordingly noted, and the audited financial statements for the preceding fiscal year is hereby approved as presented. May I now call on the Corporation's Chief Executive Officer, Mr. Michael Szucs, to provide some recent updates and outlook on the corporation's business.

Good morning, everyone. I'm pleased to present Cebu Pacific's outlook and strategic plans for the upcoming year and beyond. Let me start by giving updates on some key economic indicators affecting our financial outlook. Fuel prices are steadily rising with jet fuel nearing $106 per barrel. This is partly due to growing political tensions in the Middle East and OPEC's decision to extend their voluntary output cuts into the second quarter. On ForEx and interest rates, the U.S. dollar is seeing a year-to-date high against the Philippine peso due to strong U.S. economic conditions. This delays expectations for a federal rate cut, making it unclear when it might happen this year. In terms of our fleet, we have actively pursued opportunities to expand, ensuring operational resilience while maintaining our growth trajectory. This 2024, we are preparing to welcome an additional 18 aircraft deliveries, ending the year with a fleet of 93. Our 2024 capital expenditure estimate is at PHP 48.7 billion, and we plan to finance this through a mix of long-term debt and sale and leaseback arrangements. This shall increase our capacity year-on-year by 12% to 15%, allowing us to provide affordable flights for all of our passengers. For the first quarter of 2024, Cebu Pacific is already offering 14% more seats compared to last year. We expect this to continue in the second quarter with double-digit capacity growth as we upgrade several international routes, including Manila to Bangkok, Hong Kong and Incheon. Mr. Chairman, I'd also like to share the milestones and recognitions we've received in the last year. We're proud to be recognized as one of the Philippines' strongest and most valuable brands, reflecting the trust and confidence our customers have in us. Our commitment to excellence has earned as titles such as the best low-cost airline brand and the most sustainable low-cost carrier in the country. Further, our dedication to safety has placed us among the top 20 safest low-cost airlines worldwide. These accolades reflect our unwavering focus on delivering exceptional service and ensuring the safety of our passengers. Building on this strong foundation, we look at the future with great optimism for Cebu Pacific. With a young and growing population, an economy back on the growth treadmill, there are boundless opportunities for the aviation sector. Significant advancements are underway in aviation infrastructure, marked by improvements in the Ninoy Aquino International Airport and the ongoing construction of the new Bulacan Airport. Moreover, the recent privatization of NAIA is a welcome development that adds another dimension to our progress. These are crucial in amplifying our ability to serve more passengers and connect to a wider range of destinations. Cebu Pacific is also making a historic investment in what will be the largest aircraft order in Philippine aviation history. This is a strategic move to meet the increasing demand for air travel. In doing so, we are engaged in a rigorous selection process with the different manufacturers to ensure we ultimately make the best choice for our passengers, our company and the environment. This expansion isn't just about adding more planes. It's about creating more opportunities and more connections. None of this would have been possible without the unwavering support and confidence of our investors and stakeholders. I extend my heartfelt gratitude to everyone for joining us in this journey. As we move forward, let us continue to focus on our mission of providing safe, reliable, affordable and sustainable flights to our passengers. Thank you for your continued trust and support. Together, let's soar to greater heights and create lasting value for all. Let's fly everyJuan. 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; Jose Fernando B. Buenaventura; Robina Gokongwei-Pe; David Gulliver G. Go, who assumed the position of director following the resignation of Frederick D. Go last January 8, 2024; Brian H. Franke; and Alexander G. Lao. And the independent directors are: Bernadine T. Siy; Brian Matthew P. Cu; and Richard Raymond B. Tantoco.

Thank you. May we now have the list of nominees for the 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 Board of Directors: Lance Y. Gokongwei; Jose Fernando B. Buenaventura; Robina Gokongwei-Pe; David Gulliver G. Go; Brian H. Franke; Alexander G. Lao; and as independent directors; Bernadine T. Siy; Brian Matthew 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.

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 the agenda items as well as the result of the 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 2024. After tabulation of the votes, the appointment of SyCip Gorres Velayo & Co. as external auditor of the corporation has been approved by stockholders representing 80.26% 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 2024. Let us proceed to the next item agenda, which is the ratification of the acts of the Board of Directors, its committees, officers and 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 to the said list on the screen prior to the meeting. After tabulation of the votes, we are pleased to report that stockholders representing 80.26% of the total outstanding voting shares of the corporation have confirmed and ratified the acts of the Board of Directors and its committees, officers and management of the corporation for the period beginning from the last Annual Stockholders Meeting up to the 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 with the stockholders or questions raised via e-mail for management?

We will now address the inquiries sent to us via e-mail by our shareholders. We've received several questions from our shareholders, and we will try to answer some of them. If we are unable to address your questions at this meeting, the corporation will reply to them via e-mail. Our first question is, "Based on reports, there was a recent request for proposal issued by the company to purchase 100 to 150 planes. Can you provide clarity and explain the rationale behind the request for proposal? What is the net growth that would result from the company's plan to purchase 100 to 150 planes?" This question will be addressed by our Chief Financial Officer, Mr. Cezar.

Thank you for the question. The company is indeed in the final stages of coordination with both Airbus and Boeing regarding the request for proposal for 100 to 150 narrow-body jets amounting to over $12 billion. We expect to announce the results by the second quarter of the year. The order is expected to result in approximately a 9% compound annual growth rate on seats, beginning 2027 where we anticipate initial deliveries to commence. Delivery schedules are still under discussion.

Thank you, Mr. Cezar. Our second question is, "Are there any updates on the Pratt & Whitney issue? How is it affecting the company's capacity growth?" For this query, we look to our Chief Executive Officer, Mr. Mike Szucs to respond. Mr. Szucs?

Thank you for the question. As with all narrow-body neo operators, we follow the directives of the Federal Aviation Administration and Civil Aviation Authority of the Philippines to park and preserve aircraft that meet prescribed conditions. With this, Cebu Air currently has 11 aircraft on the ground, commonly referred to as AOGs, parked in Clark, Manila and Australia. With our additional investments in fleet, including these extensions and short-term leases, our guidance of 12% to 15% seat growth versus 2023 already incorporates the impact of long-term AOGs. In addition, Pratt & Whitney have initiated expansion of their facility in Singapore and added a new partner shop to the network. They are also planning to open shops in Korea, Japan and China. This will continue to add more capacity globally and will be advantageous for Cebu Air as constraints in the maintenance, repair and overhaul will be relieved, and engine checks will be faster. All combined, this has allowed us to improve our growth outlook from our previous guidance of 5% to 8% versus last year.

Thank you, Mr. Szucs. And for our last question, "Will the company reassume dividend payouts since the airline returned to profitability?" Our Chairman, Mr. Lance Gokongwei, will address this query.

Thank you. We would like to note that while Cebu Pacific has returned to profitability, our retained earnings still remain in negative territory. This prevents us from declaring dividends at the moment. Nonetheless, we are committed to ensuring profitable operations and exploring avenues such as quasi reorganization to improve this. We intend to revisit the resumption of dividend payout once retained earnings returned to positive. For reference, prepandemic, our dividend policy was 20% of pretax core income, subject to cash available for capital requirements.

Thank you, Mr. Chairman, and thank you to our shareholders for sending in your questions. This concludes the Q&A session.

Are there any more matters that need to be discussed?

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. We look forward to connecting to more cities, communities and people. Our purpose remains the same. Let's fly everyJuan. With this, the 2024 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.