U.S. Markets closed

Edited Transcript of PGSUS.IS earnings conference call or presentation 7-Mar-17 10:59am GMT

Thomson Reuters StreetEvents

Q4 2016 Pegasus Hava Tasimaciligi AS Earnings Call

Istanbul Mar 17, 2017 (Thomson StreetEvents) -- Edited Transcript of Pegasus Hava Tasimaciligi AS earnings conference call or presentation Tuesday, March 7, 2017 at 10:59:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Mehmet Nane

Pegasus Hava Tasimaciligi AS - President and CEO

* Serhan Ulga

Pegasus Hava Tasimaciligi AS - CFO

================================================================================

Conference Call Participants

================================================================================

* Alper Paksoy

BNP Paribas - Analyst

* Gorkem Gorker

Yapi Kredi Yatirim - Analyst

* Osman Memisoglu

BofA Merrill Lynch - Analyst

* Kerem Tezcan

Citigroup - Analyst

* Baris ince

Garanti Yatirim - Analyst

* Nida Iqbal

Morgan Stanley - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(interpreted)

Distinguished participants, we would like to welcome you to the teleconference where we will share with you the financial results for 2016. As speakers today, we have Mr. Mehmet Nane, the CEO; and Mr. Serhan Ulga, CFO.

I would like to now turn it over to Mehmet Nane.

--------------------------------------------------------------------------------

Mehmet Nane, Pegasus Hava Tasimaciligi AS - President and CEO [2]

--------------------------------------------------------------------------------

(interpreted)

Hello. Good morning to all. I will try and summarize the year very briefly because this year, it was really a very busy year; maybe the first of its kind for a period of 93 years. We had the attack in Sultan Ahmed and then the embargo by Russia. And then we had the Ankara attacks.

And all of these, of course, reached a peak with the coup attempt of July 15 and then there was the military operations. And of course, things quickly escalated. And all of these, of course, because of the developments in Turkey affected our foreign guests.

According to announcements by the Ministry of Tourism, if we do a year-on-year comparison with 2015, there have been about a 10 million passenger decrease and also a decrease in revenues. So this affected the tourism sector and naturally us as operators in the transportation sector.

Of course, this was not the end of the world. We had to learn to live with it. And we sat down and we thought about and we launched an initiative called [Tracy] and Serhan will be sharing this with you.

We aim to bring down our costs and we tried to effectively manage our capacity, and we also did try to ensure a good cash management. So as you will see in our results, thanks to these measures as the Pegasus family, we closed the year 2016 in the best possible way, and this, of course, gives us hope for 2017 and beyond.

And so this was a short introduction. Mr. Serhan Ulga, our CFO, will be going through the presentation and sharing with you the figures. And I would like to apologize. We have an annual meeting that I have to attend, so I will have to leave at quarter past. So I apologize for having to leave this conference.

--------------------------------------------------------------------------------

Serhan Ulga, Pegasus Hava Tasimaciligi AS - CFO [3]

--------------------------------------------------------------------------------

(interpreted)

Hello. I think you've all seen the numbers, but I will go over them briefly and then I will try and answer your questions. On Slide 5, you see a general comparison with 2016 and 2015.

What quickly strikes our attention is of course the increase in the number of passengers by 8%. And the load factor has remained stable in spite of all of what has happened. And then in ancillary revenue per passenger, there has been about a $0.50 increase per passenger. These are very positive movements.

And in addition to this, if we carry on, if we look at the total revenues. In total revenues, the most important point is of course that the volume impact the effective volume growth. And this is, of course, very significant.

And then there was a devaluation of the Turkish lira and the increase in international, and an increasing, of course, FX impact. This has also carried our revenues forward.

And if we look at growth and market dynamics, we see that we grow much faster than the market. And if we look at the domestic lines, the market has grown at 5.8%, but we were able to grow almost to twice -- twofold of that. And in Sabiha Gokcen, of course, our market share is at around 60%, and for 2 years it's been stable.

In international lines, Turkey is contracting by 16%, but we have recorded a growth of 4%. And from Sabiha Gokcen, we ensure and provide 70% of the international capacity.

If we look at the details of domestic lines, again, there has been a passenger growth of 10.7%. And as we have said and we did share with you before that on the domestic side, we have quite a good performance.

On international lines, the opposite situation is apparent. In international lines, maybe even more apparent is the increase -- is a drop in the yield of about 15.7%. And unfortunately, there is a non-fair security perception and we feel as if we haven't done much in that area to counter that. So we plan to bring down our prices and become more competitive.

Now looking at the fleet development, on the fleet side, the situation is again similar to what we have explained. As we have said, we are currently taking steps in the framework of 3cs and we continue to work in the field of aircraft. We have signed a contract for the sales of three aircraft and I think there will be an additional sale of seven aircraft. We have made some strides in this.

And if we look at network and frequency development in 2016, there has been a significant growth, but there were some lines that came into play for 2017: Diyarbakir, Ercan, et cetera, and SAW and Grozny. And there are some activities on the pipeline and we are receiving the permits.

Armenia is one destination I can count, Mostar, Abu Dhabi from Istanbul and from Turkmenistan. We are working on several cities as destinations. In Russia, Samara, [Zelenograd], and Volgograd are some of our destinations that we are currently working on. So next year, hopefully, we will increase our range of passengers with new destinations coming to the market.

We are presenting to you the figures in all of its frankness and we have listed all the figures. I'm not going to go over these figures. Here, we have hit the targets in EBITDAR. And yes, we have reached some TRY550 million and there are various important factors that have played an important role here.

Of course, there has been the contraction in various lines and then there are some parts that have compensated this. There has been a drop of about $100 in the fuel costs. This has made a positive contribution, and there have been some structural changes which have also had an impact.

For nonfuel costs per available seat, nonfuel CASK development. Here again, we have the familiar actors. What's important here is that when you look at production, of course the most important effect comes from a low CASK production per aircraft. And the capacity cuts at Sabiha Gokcen airspace has had an impact here and the operational at least has increased. So I am sure you've seen these factors before and we're going to talk about our estimations and targets for 2017.

And in the balance sheet structure, of course our cash is going down and we continue to make investments in aircrafts. This is the main reason for this drop and we will be making the payments for these incoming aircraft. So we continue with our aircraft investments, because as an operation, we produce positive cash. And most of the cash is being kept in hard currency, especially in US dollars. Our strategy has remained the same.

And if we look at our foreign currency exposure, we don't see significant changes here. As you see, the income statement dollar has of course gone up. And in expenditures, the dollar has a continuing effect. It doesn't make sense to buy dollars. And so we would like to take certain measures which will be more economical, as we have explained.

The dollar-denominated flight tickets, we used to convert these into dollars. And for ticket and for non-ticket items now, what we do is we convert them to dollars. So this is the situation, and then we put these amounts in our cash deposit.

So we have the non-discretion standard structure for the fuel hedge. And half of that is being done through purchase and then we secure the rest. And for fuel, we haven't had an initiative for extra hedging, so this is the hedge operation we have.

About our management action plan about 3c, we had presented to you the roadmap and there hasn't been a significant change in these. In many processes, we have moved forward. And we have agreed with [yvonne] on various issues. And we have agreed on the new neo engine and we have signed a final sales contract for three aircraft. Again, we have in the pipeline the possible sales of seven more aircraft. Hopefully we are going to conclude these operations.

And about the human resources structure, we have taken some steps forward and now we are doing some fine-tuning. And we don't expect a lot of change in that.

About the pricing of ancillary activities -- products -- we will have a more dynamic approach to this, and hopefully we will aim at a higher load level. And also the taxiway -- the speed taxiway construction is expected to be completed in 2017 summer season. This will also contribute to capacity.

And we also revisit existing contracts with suppliers. And we have concentrated more on digital marketing, and we continue with optimization in fuel consumption. So there are no new news on that.

And for the cash position, as I said, it is important to manage capacity and introduce cash. And of course, the sales of aircraft will be an important step towards that direction. And we will have more effective aircraft operation at lower cost. And as we have said, we have the sales and lease operation that is underway. We have some eight aircraft engines and hopefully that will also be concluded.

Yes, we can now move to the targets page. Yes, we can easily say that we have kept our promise. And you can even see that, especially in the category of passenger growth, we have exceeded our targets. And we have kept to all of the other categories and we have kept our promise.

I would like to now turn it over to Mehmet and then we can have your questions.

--------------------------------------------------------------------------------

Mehmet Nane, Pegasus Hava Tasimaciligi AS - President and CEO [4]

--------------------------------------------------------------------------------

(interpreted)

If we look at 2017, we will hopefully be very active in 2017. We would like to -- we have an estimate of 5% to 7% passenger growth. Hopefully there will be more passengers coming from Russia. That will hopefully contribute to domestic lines. And we expect our capacity increase to be between 6% to 8%.

In block hours, we continue to be stable at a level of 12. And in domestic and international load factors, we expect an increase of maybe 1% to 2%. Capacity utilization here will be of more importance, and that will of course be reflected upon other categories. In domestic yield, we have a certain level; and an international yield, if we can reach the 2016 levels, we believe that that will be deemed as success for 2017.

The ancillary per passenger stood at EUR10.13 in 2016. We would like to carry this to the EUR11 mark. The total CASK -- keeping the total CASK at certain levels is important for us. And if we look at nonfuel CASK, we ended 2016 at EUR2.81. We would like to bring that by EUR0.10 further and pull it down to EUR2.70 levels. And hopefully the measures that we have taken in 2016 will contribute to this.

And for EBITDAR, hopefully in 2017 we will carry this 1 percentage point upwards and move towards 16% in 2017.

Yes, we can now start taking your questions. Our moderators will be assisting us.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(interpreted)

(Operator Instructions) Alper Paksoy, TEB Investment.

--------------------------------------------------------------------------------

Alper Paksoy, BNP Paribas - Analyst [2]

--------------------------------------------------------------------------------

(interpreted)

Mr. Nane, thank you for this presentation. I have several questions regarding the presentation and the results. First of all, you said you signed the contract for the sales of three aircraft. What will be the cash inflow from these?

And you said there will be some additional sales. If this is three plus up to the sales of seven aircraft, what are you going to use this cash for? And also all of these were probably aircraft that you owned or you were doing a financial lease of, so can you confirm that? And how much of the debt do you have fixed and variable interest rates?

--------------------------------------------------------------------------------

Mehmet Nane, Pegasus Hava Tasimaciligi AS - President and CEO [3]

--------------------------------------------------------------------------------

(interpreted)

Yes, we cannot share with you the information as to how much cash we are going to receive from the sales of aircraft, but we will be sharing these with you at a later stage.

But I can say the following. The cash that will come from the sales of these aircraft will contribute to the PDP, to the PDP of the aircraft that will be incoming. So for the prepayment. So it will not respond to any operational need, but we continue with the investments, so it will help support our investments.

Yes, we were doing financial lease of these aircraft, so they are on our balance sheets. And at the end of the lease periods, they are turned over to your ownership. As of the end of the year, we have 26 financial leased aircraft. The interest of five of these have been fixed with IRS, but the rest are based on variable interest rates at very minimal margins. I don't know if I have been able to answer your questions.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

(interpreted)

Gorkem Gorker, Yapi Kredi Investment.

--------------------------------------------------------------------------------

Gorkem Gorker, Yapi Kredi Yatirim - Analyst [5]

--------------------------------------------------------------------------------

(interpreted)

I would like to ask about growth in 2017. Can you tell us more about the breakdown between domestic and international? And also when we make our estimates, we now have some 80 aircraft. But based on what you're saying, 10 of these will be sold. But we see an increase in capacity, so how many aircraft will there be in the fleet in 2017 on average? And also what is the CapEx that you plan?

--------------------------------------------------------------------------------

Mehmet Nane, Pegasus Hava Tasimaciligi AS - President and CEO [6]

--------------------------------------------------------------------------------

(interpreted)

Now Gorkem, our strategy is as follows. In the summer months, April through September, we aim to grow our capacity. So our end-of-year figures will not reflect the real production. But

In 2016 between April/October, we have flown 73 aircraft, but that will increase. That will go up to 76. So there will be a 5% increase in the most important six-month period of the year. The rest, the maintenance and entry and exit of aircrafts are outside -- usually carried outside of this peak window.

And about the growth of 2017. I couldn't quite understand your question, because the [vix] that you see in financials will probably stay the same. A few percentage points may move towards the international destinations that will be launched, so there may be a change in the capacity.

But when we look at the CapEx investment, it's around TRY600 million based on the FX rates of today. So that is the total CapEx investment and more than half of that will go under aircraft CapEx.

--------------------------------------------------------------------------------

Gorkem Gorker, Yapi Kredi Yatirim - Analyst [7]

--------------------------------------------------------------------------------

(interpreted)

An additional question. You have reduced the human resources. Can we take that as a trend for 2017?

--------------------------------------------------------------------------------

Mehmet Nane, Pegasus Hava Tasimaciligi AS - President and CEO [8]

--------------------------------------------------------------------------------

(interpreted)

Yes.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

(interpreted)

Osman Memisoglu, Bank of America.

--------------------------------------------------------------------------------

Osman Memisoglu, BofA Merrill Lynch - Analyst [10]

--------------------------------------------------------------------------------

(interpreted)

Thank you very much for your presentation and for this opportunity. My first question is about -- is the 20% the rate for now or is it a target? Because it was quite low in the beginning of the year.

And in your forecast for 2017, it seems as if capacity increase will be 6% to 8%, but you are moving upwards in the load factor. So does that mean kilometers will be increasing? Could you elaborate on that?

--------------------------------------------------------------------------------

Mehmet Nane, Pegasus Hava Tasimaciligi AS - President and CEO [11]

--------------------------------------------------------------------------------

(interpreted)

The hedge issue, Osman, is 30% and 30% of that is rolling. So when a new destination opens, that is also added in the pipeline. So we have to meet a target of 30% hedge. That is our target and that is the process that we are currently in.

And this is what the story of 20% signifies as it stands. But the 20% means that 20% of the production for the next month, and that is the story that you are asking about. What was the other question?

--------------------------------------------------------------------------------

Osman Memisoglu, BofA Merrill Lynch - Analyst [12]

--------------------------------------------------------------------------------

(interpreted)

About the number of passengers. And it seems as if the load factor is going down.

--------------------------------------------------------------------------------

Mehmet Nane, Pegasus Hava Tasimaciligi AS - President and CEO [13]

--------------------------------------------------------------------------------

(interpreted)

There is a stage rank that is present in this equation and we haven't written that down. Maybe that is the reason. Thank you.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

(interpreted)

(Operator Instructions) Kerem Tezcan, Citigroup.

--------------------------------------------------------------------------------

Kerem Tezcan, Citigroup - Analyst [15]

--------------------------------------------------------------------------------

(interpreted)

Thank you for this presentation. We are in mid-March. In forward bookings, do you believe that there will be a development where you can push your target for passengers more than the 5% to 7% mark? Are these conservative expectations or is this where it stands? And do you expect to be in this bracket until the year-end?

--------------------------------------------------------------------------------

Mehmet Nane, Pegasus Hava Tasimaciligi AS - President and CEO [16]

--------------------------------------------------------------------------------

(interpreted)

Hello, Kerem. What you said second holds true, especially the domestic development supports what you said last. And forward booking usually picks up towards the last weeks, so that's what usually happens.

--------------------------------------------------------------------------------

Operator [17]

--------------------------------------------------------------------------------

(interpreted)

[Global Moveables]

--------------------------------------------------------------------------------

Unidentified Participant [18]

--------------------------------------------------------------------------------

(interpreted)

I would like to ask about domestic yield and international yield. When we look at the realization, it seems as if your target for 2017 is a bit optimistic. Could you comment on this?

--------------------------------------------------------------------------------

Mehmet Nane, Pegasus Hava Tasimaciligi AS - President and CEO [19]

--------------------------------------------------------------------------------

(interpreted)

Yes. The fourth quarters are always one of the lowest for any airline company, so Q4 cannot be an indicator for the whole of 2017. I don't think there is anything I can say further to this.

--------------------------------------------------------------------------------

Unidentified Participant [20]

--------------------------------------------------------------------------------

(interpreted)

So that cannot be seen as a factor that will be spread out. If we look at the seasonality, my friends, the first three months usually are lower months and then there is an upward trend that starts. And then in Q2/Q3, this usually is sustained.

And as of October, there is a downward trend usually. And this period when -- and in November and December, there will be a low point and then there will be a movement. So November and December are the two worst months of the year.

My question really is about air travel demand and it is expected to be at a low level in 2017, so an aggressive pricing policy is questionable. Are you going to continue to have an aggressive policy for 2017? In passenger growth, you expect a 5% to 7% growth. So I wanted to ask if you can have a more aggressive pricing policy to increase the number of passengers. Just to measure your strategy.

--------------------------------------------------------------------------------

Mehmet Nane, Pegasus Hava Tasimaciligi AS - President and CEO [21]

--------------------------------------------------------------------------------

(interpreted)

Hopefully if you come and sit on this seat, you can apply these strategies. But this is how our strategy stands at the moment.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

(interpreted)

Osman Memisoglu, Bank of America Merrill Lynch.

--------------------------------------------------------------------------------

Osman Memisoglu, BofA Merrill Lynch - Analyst [23]

--------------------------------------------------------------------------------

(interpreted)

Thank you. On the lease side in costs, do we have the LIBOR effect on operating these? Because there is a significant increase on the dollar side.

--------------------------------------------------------------------------------

Mehmet Nane, Pegasus Hava Tasimaciligi AS - President and CEO [24]

--------------------------------------------------------------------------------

(interpreted)

In operating leases? No, those are monthly payments. When we are concluding them, this could be the situation for maybe three, four aircraft. But for the majority, there is no such effect, no.

--------------------------------------------------------------------------------

Osman Memisoglu, BofA Merrill Lynch - Analyst [25]

--------------------------------------------------------------------------------

(interpreted)

And on the financial side, the majority of the leases are dollar-denominated, yes?

--------------------------------------------------------------------------------

Mehmet Nane, Pegasus Hava Tasimaciligi AS - President and CEO [26]

--------------------------------------------------------------------------------

(interpreted)

No, most of them are in euros is the answer.

--------------------------------------------------------------------------------

Operator [27]

--------------------------------------------------------------------------------

(interpreted)

Baris Ince, Garanti Investment.

--------------------------------------------------------------------------------

Baris ince, Garanti Yatirim - Analyst [28]

--------------------------------------------------------------------------------

(interpreted)

A short while ago, an announcement was made about some changes in the Sabiha Gokcen terminal. I think there will be a new boarding hall, et cetera. When will this construction be completed and how much is it going to ease the capacity situation in Sabiha Gokcen?

--------------------------------------------------------------------------------

Mehmet Nane, Pegasus Hava Tasimaciligi AS - President and CEO [29]

--------------------------------------------------------------------------------

(interpreted)

Now, the reason for building this boarding hall is for the second apron that will be built. One runaway is fully utilizing the existing terminal. When there will be two runways in 2019, then there will be -- it will be necessary to have another terminal. And it is not foreseen for the existing terminal to be extended. So there are plans to build a second terminal, but there have been no tenders.

You may remember that three or four months ago, our Minister of Defense said Sabiha Gokcen will be sold and they expect revenues. But what he meant was that the second -- he was talking about the tender process for the second terminal.

If we have any documents, any information, as regards this and if it is going to be a public tender, because sometimes there are targeted tenders, then of course we will carry out feasibility studies. And we will pass on information to you, but we don't have any information. There's no work on this currently. Thank you.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

Nida Iqbal, Morgan Stanley.

--------------------------------------------------------------------------------

Nida Iqbal, Morgan Stanley - Analyst [31]

--------------------------------------------------------------------------------

Thank you for the call. Most of my questions have been answered. But if you can comment on how competition is looking year to date?

And then secondly, in terms of your 2017 CASK guidance, which is basically largely flat in 2016, do you think this is conservative, i.e., could CASK be lower than this? And thirdly, why did ancillary revenue per passenger decline in the fourth quarter year on year? Thank you.

--------------------------------------------------------------------------------

Mehmet Nane, Pegasus Hava Tasimaciligi AS - President and CEO [32]

--------------------------------------------------------------------------------

(interpreted)

Three questions were asked. I don't know if everybody could hear. One was about competition, I think, if I didn't misunderstand, whether there is new color in competition. At the moment, it will be difficult to say yes to this question. I don't think there are any initiatives here.

And in the fourth quarter -- I think there was a question about the drop in ancillary income. This has to do with domestic lines and domestic destinations and the foreign exchange, and whether unit costs are conservative or that they can be even lower.

Maybe they can be a little lower, but we have to manage it as we carry on. So there may be a marginal downside movement, but we don't have reason to be more optimistic at the moment. I don't know if this has been the answer to your question.

Unfortunately, I will have to leave for the annual pilots meeting.

--------------------------------------------------------------------------------

Operator [33]

--------------------------------------------------------------------------------

(interpreted)

We have no further questions and I would like to turn it over to you once again.

--------------------------------------------------------------------------------

Mehmet Nane, Pegasus Hava Tasimaciligi AS - President and CEO [34]

--------------------------------------------------------------------------------

(interpreted)

I thank you very much to each and every one of you for taking part on behalf of our team and the CFO team. Hopefully, we believe wholeheartedly that 2017 is going to be a better year than 2016. And thanks to the measures that we employ, we will have a much better time in 2017. A very bright future awaits us, so please have confidence in us. Thank you.

--------------------------------------------------------------------------------

Operator [35]

--------------------------------------------------------------------------------

(interpreted)

Thank you, distinguished participants. This ends our conference for today. We thank you for your participation. Now you can leave the line.

--------------------------------------------------------------------------------

Editor [36]

--------------------------------------------------------------------------------

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.