Good morning, everyone. Thank you for standing by and welcome to Volaris' Third Quarter 2018 Financial Results Conference Call. All lines are in a listen-only mode. Following the Company's prepared remark, we will open the call for questions-and-answers. Instructions on how to ask a question will be provided at that time. Please note that this event is being recorded. We have today Volaris' President and CEO, Enrique Beltranena; Airline EVP, Holger Blankenstein; and Maria Elena Rodriguez, Investor Relations and Corporate Finance Director. They will be discussing the Company's third quarter 2018 results announced yesterday. Afterwards, we will move on to your questions. Please note that this call is for investors and analysts only. Any questions from the media will be taken on an individual basis. I will now turn the call over to Maria Elena Rodriguez.

Good morning, everybody. I would like to introduce myself. My name is Maria Elena Rodriguez, and effective October 1, I'm honored to represent Volaris in this new role as Head of Investor Relations. I'm looking forward to meeting all of you. Before we begin, please let me remind everyone that some of the statements we will make on this call would constitute forward-looking statements within the meaning of applicable securities laws. Forward-looking statements are subject to several factors that could cause the Company's actual results to differ materially from expectations for reasons described in the Company's filings with the U.S. Securities and Exchange Commission. Furthermore, Volaris undertakes no obligation to publicly update or revise any forward-looking statements. It's now my pleasure to turn the call over to Enrique Beltranena.

Thank you very much, Maria Elena. Good morning, everyone, and thank you for being with us today. Let me start with two important pieces of information. The first one is we achieved a 17% improvement in the third quarter on TRASM versus first quarter 2018. This number combined with a 10% CASM ex-fuel reduction are both figures that not only reflect our commitment to achieving better results, but also indicate that Volaris is now on a more favorable path. I would like to mention some economic factors that drove our performance for this quarter and will certainly influence the coming months. Remittances of $22 billion from January to August 2018, that's historical levels. Just in August, remittances reached $2.9 billion. This data shows the strength of Volaris' core market, the visiting friends and relatives. Year-over-year, in the first quarter of 2018, remittances grew up by 4%; in the second quarter, they grew by 18%; and in July and August, they grew by almost 10%, now representing 2.6% of the GDP. Traffic volume in the domestic market continues to rise in line with an emerging market economy, which is the way you should look at Volaris, in which the middle-class evolves and requires more seats and air travel options, which is not the case of the business market in Mexico. With wages at an all-time high, we believe that Mexicans living in the U.S. are kind of postponing their vacation and travel plans, preferring to remain working at this time rather than traveling. We also believe they are sending remittances and purchasing tickets through their relatives to fly within Mexico. They're also taking advantage of the current peso exchange rate benefits. This trend explains part of Volaris' traffic behavior where it is our belief that domestic demand of visiting friends and…

Thank you, Enrique. Total operating revenues for the third quarter were MXN7.3 billion, 11.3% above last year. Total ancillary revenues represented 30.3% of total operating revenues, increasing by 23.5% year-over-year. Total ancillaries on a per passenger basis, now under IFRS 15 adoption, were MXN474 for the third quarter, increasing 10.1% year-over-year. Since we are cautiously managing capacity, we diligently worked on network adjustments and optimized our itineraries in our core markets. Regarding fleet. At the beginning of the year, we were planning to add 18 new aircrafts and redeliver 4 for the full year of 2018. However, we are going to close the year with only 6 net new aircraft additions, which means a reduction of 60% of what we had originally planned. All our new deliveries were Neo A321s and A320s, which are younger and more fuel efficient, and all our redeliveries were A319s in line with our healthy growth. Average seats per departure is now at 186 seats. We also improved the key performance metrics towards profitability. Volaris maintained its low base fare model, while correctively yielding up as supply and demand conditions allowed. Our domestic passenger growth was close to 15% year-over-year, commensurate with our ASM growth. This capacity growth was mostly achieved through improving productivity of the existing fleet, what we call healthy capacity growth. TRASM is almost at the level of last year, with improved domestic load factors of 86% for the quarter. We move through the -- as we move through the quarters, we saw strength with demand and yield continuously improving on a seasonally adjusted basis. Our core markets in Tijuana, Guadalajara and Cancun performed very well. During the third quarter versus last year, we saw high cost airlines barely increasing capacity in the domestic market, and the low cost carriers positioning themselves…

Thank you, Holger. Let me start with fuel, where the total average economic fuel cost per gallon in the third quarter was USD 2.3, which includes a net economic benefit from of fuel-risk management program of MXN163 million. The fuel price year-on-year increased 37% in the third quarter representing approximately MXN933 million of additional costs, which were nearly offset, as Enrique explained, with our cost reduction program. Looking at the last quarter of the year, we have existing 2 hedges for approximately 45% of the expected jet fuel consumption, which at today's mark-to-market would save us about $10 million in the fourth quarter. It is worth mentioning that we have already started building our hedging position for the first quarter of 2019. At the end of the first quarter, the Mexican peso appreciated 5.3% with respect to the previous quarter. This generated a noncash foreign exchange loss of MXN419 million. We continue with a U.S. dollar net monetary asset position and a natural hedge created by our U.S. dollar collection, partially helping us insulate the Company from exchange rate volatility. Cash flow from operating activities for the quarter was negative MXN136 million. However, cash flow from operating activities in the first 9 months was positive MXN464 million. And looking ahead for the fourth quarter and the full year, we expect to be operating cash flow positive, all of this despite a challenging year. CapEx requirements for the fourth quarter are fully covered. As of September 30, our balance sheet remains strong, liquid and intentionally dollarized. Volaris have MXN6 billion in unrestricted cash, representing 23.4% of the last 12 months operating revenues. This figure is well above our domestic peers in terms of liquidity. We maintained negative net debt for a net cash position of MXN2.9 billion. The main difference between the third quarter 2018 is cash balance and the second quarter 2018 is driven by payments of financial debt for working capital and a net FX difference. Adjusted EBITDAR in the third quarter was MXN1.9 million, representing 27% of adjusted EBITDAR margin, 1 percentage point better than the same quarter of last year, adjusting average economic fuel cost per gallon at this year's level. Nevertheless, net loss for the quarter was MXN119 million, representing a negative net margin of 1.6%, driven mainly by the exchange rate effect. Now, I'll pass it over to Enrique for closing remarks.

Thank you, Maria Elena. In closing and to reinforce what Holger stated, I think our core VFR revenue environment is improving. And we feel we are well prepared to capitalize on this in the fourth quarter and in the following year. Our successful efforts to reduce CASM ex fuel are evident, and the Company will continue implementing and carry out its effective cost-reduction program, not only this last quarter, but through the following year. Having the lowest unit cost is a vital competitive advantage, and Volaris remains the long-term winner. We keep on doing that because we are separating ourselves more and more from our competitors. Regarding profitability guidance, we expect to achieve for the fourth quarter an adjusted EBITDAR margin in the range of 23% to 25%. Lastly, we want to welcome our newly appointed Chief Financial Officer, Sonia Jerez, who will join the Company effective January 7, 2019. Sonia, clearly strikes the right balance of experience and leadership and has been part of a very successful group of ultra-low-cost carriers in Europe. And we look forward to introducing her to you in our next call. Volaris reinforces its commitment to ensuring value for our customers and our shareholders by having strong and thriving numbers. These numbers are proof of the efforts made by all the ambassadors, our management team and our Board of Directors. And for this, I thank all of them. I feel very proud about the team and the changes we have done through the year. Thank you very much for your attention. Operator, we are ready to open the call for questions, and thanks for your attention.

[Operator Instructions] We'll take our first question from Josh Milberg of Morgan Stanley. Your line is open.

Enrique, I wanted to start off just asking you about the scenario with respect to cost. You had mentioned that there was more to come in terms of reductions. Just hoping you could elaborate a little bit on that and detail what some of the opportunities are. We did see that you have this very big move down in sales, marketing and distribution expenses, and wanted to understand how sustainable that reduction was?

Yes. Thank you very much, Josh. I have some other topics that I can give you on the cost and the cost program, okay? The first one is we need to be absolutely conscious that the fuel has created an impact, which is in the ballpark of MXN2 billion for Volaris this year. So doing a very, very thorough program in reducing costs has been basically one of our major concerns. In the following months and as you see in our P&L, I mean, you already can see the commercial cost going down at levels of 24%. We'll keep on doing that. There's money we're sparing in air navigation and the way we are flying the aircrafts. We're doing a humongous effort on G&A. There's maintenance cost that we are restructuring and there was a major change on the bulletins from Airbus recently, which will allow us to extend the intervals between services. We did major reductions in crew and we will keep on doing that. And ownership has been also one of the most important things for us to be concerned and what we've been working. I think, all in all, all these items are minimal compared with the increasing of utilization of our network connectivity. During the last months -- 18 months, the Company had been taking away capacity on a sort of level in some routes, and our itinerary ended up with a lot of holes which we had to fill in. Holger launched a massive restructuring of the network, and it is starting already at the end of this month into the equation. But that's what is giving us this capacity -- additional capacity, which was not being utilized, which has the same cost for us and it's being plugged into the market. Maybe, Holger, you can explain us how much of that and how you are thinking about this process because that's probably what is going to drive most of the money.

Right. So what we've done is densified the schedule, made it more efficient, increased ASMs per aircraft per day and thus utilization. That's the process that we launched in 2018, and we're going to see some of the benefits in 2019 as well as we continue to densify the schedule. And that should continue to reduce our unit costs.

Okay, that's helpful. But even with that densification of the schedule and that network restructuring and the benefit that it brought in terms of your TRASM, your better -- the better trend that we saw there, and also considering your cost cuts and I think you guys also had some gains on the -- in terms of sale leaseback gains, even with all of that, we still saw a pretty sharp contraction of your profitability in the quarter. And we just wanted to ask you, why a larger scaling back of capacity growth might not be in order at this stage? I think, if I heard correctly, you're still targeting 9% to 12% growth.

That's right. So, a couple of thoughts on capacity; number one, we are fundamentally in a different market than some of our high-cost competitors. Volaris traffic is VFR and that has a different traffic pattern, which is more focused to the high season, which is the third quarter and the fourth quarter. We are an airline that is more dependent on the U.S. economic performance, which is precisely the VFR traffic. That is an economy that is doing really well. So we've seen some benefits on that. We've grown into domestic markets, and we've seen less growth in international markets for the reason that Enrique explained. But I think the most important message here is that our cost position is the best in the market. We are now 45% below our high-cost competitors in terms of unit costs. And that's why we believe we're going to be the long-term winners in this market. We've invested in our core markets, Tijuana, Guadalajara and Cancun, and we're seeing the benefits of that through high load factors, a lot of passengers switching from the buses to our airplane, and that's the volume trend that we see continue in 2019. And remember, the growth that we put into the market is healthy growth. It comes from using the existing fleet more efficiently. So we're not adding any cost. We're reducing our cost per available seat mile. And that's a very important point to explain.

We'll move next to Duane Pfennigwerth of Evercore ISI. Your line is open.

Can you -- maybe you said it, and I missed it, but can you speak to deliveries in 2019 and 2020? And have you made any changes to the pacing? And what is your '19 capacity plan at this point?

Yes, Josh. We originally had more than 15 deliveries next year. The new schedule is planned to have a net-net growth of the year.

So you had 15 and now you're going to net 3? And so can you convert that to an ASM forecast, kind of old versus new?

No. We are still working on the business plan for next year, Duane. We'll come back whenever we have it.

Okay. I mean, is it fair to say we'll see meaningful deceleration from this rate into 2019?

You will see a meaningful deceleration of new capacity, but you won't see a good improvement on our utilization of the actual capacity, which will still hit the ASM growth in an efficient way.

Okay. I mean, if you had to guess today, right, you faced -- nobody would fault the cost position of this company, right? The cost position of this company is very, very attractive and continues to get better. It feels like the cost cutting's been going on for a while, but really that hasn't been able to turn the corner on margins. It feels like you need to find some revenue, not cost. And that's probably a function of a more conservative capacity plan for you and for the industry. So as you sit here today, when do you think you'll be able to put up sufficient positive RASM growth to offset the cost pressure from fuel?

I think, Duane, with all respect to what you're saying, I think the number that I mentioned on how the TRASM improves versus the first quarter is an amazing number. I don't think any company has reported an improvement in TRASM 17% in the last 9 months, okay? And then since I know you, you will probably come back and tell me that this was high season versus the other seasons. I mean, same number versus last year, improved 10% last year, the first quarter versus the third quarter. So I think we're doing meaningful improvements of the TRASM. It's something that happens slowly. It's something that happens step-by-step. On the other side, we're seeing the high-cost competitors pulling away capacity from the market. And I think that's perhaps has happened. I mean, more important than Volaris, which -- this is the core market and the VFR market is so important for us, more important in terms of reducing capacity is to seat people that have 45% more cost pulling out capacity and going back to zero growth in their path for the following year. So I think we're doing a good job positioning ourselves, gaining the position, but this is not a short-term play, this is positioning the Company for the future, which is where we want to see the Company stay and be for many years in the market.

Look, I don't want to take anything away from the progress you've made digging out of the hole you were in, in the first quarter, and appreciate that. I just think year-over-year is just how investors are generally going to analyze your business. And it's a function of getting RASM growth above your CASM growth to get margins headed in the right direction. So just lastly, Enrique, can you tell me, does the Mexico domestic market -- does it have to consolidate here? And when are we going to see that?

Thank you very much, and I appreciate your concern, Duane. I just think, as I already said, that it is not a short-term game plan. It's an important game plan for the future. There's a number which I probably missed in the explanations or I didn't make that much emphasis, okay, the Company will finish the year with positive operating cash flow despite the situation that we are leading through. That's not the case in the rest of the markets, okay? So I think let's look at all the indicators altogether, which are, I would say, getting better and are improving.

And consolidation -- your view on consolidation?

I think, Duane, I mean, here you are asking me to speculate. And to be honest with you, I cannot speculate on this. I'm seeing Volaris gaining the right steps towards being the permanent winner in the market.

We'll move next to Michael Linenberg of Deutsche Bank. Your line is open.

Just couple of questions here. Looking at the numbers, third quarter, the sort of this negative other operating income of negative MXN243 million, presumably that's the sale leaseback gain that I think you mentioned. Does some of that also show up in your depreciation and amortization line? I know that, that's down 23%. So I guess, the question I'm asking is can you just give us a little bit more detail behind the meaningful decline in depreciation and amortization? And then the -- just run through what's underlying the MXN243 million sort of contra cost item, MXN243 million of other operating income.

No, Michael. The first line is clearly that, I mean, it's the profits generated by the 2 airlines arriving to the fleet very, very end of this quarter, okay? It's just part of the capacity we need today until the end of the year, as Holger explained. The second thing, which I -- which you're mentioning, in reality is driven by how we amortize the maintenance expenses. And it is scheduled basically as this occur with when we give the maintenance. And in reality, that is why we have that effect, okay? It's also related to the reduction of intervals of maintenance, which I mentioned, okay, which is not -- I mean, it's hitting on another line on the balance sheet and then depreciated at a much more slower pace.

Okay. Yes, that makes sense on the maintenance when you're dealing with lumpiness and then obviously you're benefiting from the fact that now on the airplanes, some of the maintenance procedures have been stretched out. So it will hit but at a lower rate. So that's helpful. And then my second question, and this Enrique, it's kind of a bigger picture question about where things are going with respect to the New Mexico City airport? And I know that there apparently is going to be some referendum out there but not even sure if it's binding. Some are even saying whether or not the referendum is going to be legal or not. So on a couple of things, one, let's say we have a referendum and the vote is to not pursue the airport. And yet isn't this airport, the last that I saw, isn't that like 30% completed? Hasn't been -- already been billions of dollars or pesos invested in building up this airport? So where are we going with this airport? It just doesn't seem to be pro-Mexico to stop this project dead in its tracks.

Michael, I think everything you said is right. We are in the process of having the referendum this same weekend. It ends on Sunday of this week and the process is going through -- to be honest with you, again, I mean, you are asking, kind of speculating. And I don't like to speculate on it. And yet in effect, the airport is, I would say, 30% to 33% already in progress. And there's a lot of this linked to financial risks and bonds and FIBRAS and everything, which is important. But let me make you one very important point to check, I think it's probably what is more important for Volaris, I mean, although we strongly think Mexico City airport constrain has to be solved. But then on the other side, this company only 35% of its ASMs in Mexico City contrary to our competitors who have -- that have 55% to 70% or 80%, 88%, okay? This company is a company that was born and grew up effectively outside of Mexico City, okay? And that Volaris is in a much better position than any competitors because we have used any other city in Mexico to grow in the last 12 years. Our core markets are Guadalajara, Tijuana and Cancun, and we are in model, which is point-to-point. So it is a model which is less, I mean, dependent on a hub-and-spoke airport like Mexico City. All in all we still think that the problem has to be solved, and we're looking forward to keep on working with everybody to try to get the best solution.

We'll move next to Steven Trent of Citi. Your line is open.

And I guess, first off, welcome to Maria Elena Rodriguez, hope to meet you sometime. Just 2 questions for me, if I may. Actually, the first is a follow up of Mike Linenberg's question. When we think about Volaris' position as more of a point-to-point player per se as opposed to a hub-and-spoke player, given your route strategy and your fleet composition, is it fair to say, hypothetically speaking, if the Texcoco airport doesn't go through, that you guys would at least have somewhat more ability to shift capacity to, let's say, over to Toluca versus some of your domestic competitors? I was just wondering if you think that's fair?

Look, I mean, we were an airline that was born in Toluca. we were the largest operator in Toluca at some time. We know the airport very well, and we can move if needed in an effective way. But, I mean, I remind you guys that our core markets are Guadalajara, Tijuana and Cancun.

Okay, great. Great. Thank you, and I appreciate that. And just one other question. Certainly, you guys were on the, I think, the positive end of truly getting some fuel hedging in place ahead of this storm -- hike we've seen in jet fuel. When we look in the longer term, I think you guys mentioned that you're starting to look at hedge positions in the first quarter of next year. Generally speaking, how should we think about the longer-term strategy with respect to fuel hedging as opposed to should we think about it directly as jet fuel kerosene -- excuse me, fuel hedging directly or shifting your mix towards a more dollarized revenue? Just kind of wanted to get your sense.

Steven, thank you for your question. Yes, regarding jet fuel hedging, our plan is to continue to build up our program. We've already started to hedge the first quarter of 2019. And our objective at the moment is to continue to build up our projected fuel consumption to levels of 35% to 50% going ahead using jet fuel as an underlying.

On the exchange rate issue which you also asked, we still have a position until the end of the year on exchange rate. And as we said, I mean, we continue strengthening our U.S. dollar sales position.

We'll move next to Natalia Zamora of GBM. Your line is open.

I was wondering if you could elaborate what -- on the main drivers behind the marketing expenses and depreciation for the quarter. And do you think maybe you could tell us if we can expect these going forward? Or is this a one-time event?

Yes. Let me tell you a little bit about sales, marketing, distribution. So what we've done is we streamlined our call center expenses, primarily by reducing the number of calls to call centers, implementing a lot of self-service customer functionalities and chatbot that takes away calls from the call center and allows the customers to really answer their questions in a self-service way. And that has reduced calls and expenses. And we believe that, that cost reduction is sustainable going forward. We've also worked on commissions we pay to distribution partners and the way we deal with the commissions. So we believe that the cost reductions you see in sales, marketing, distribution is sustainable in the long term. And on depreciation and amortization, I'll ask Maria Elena to comment.

Natalia, regarding depreciation and amortization, it was MXN115 million, mainly due to lower major maintenance events of engines.

I will explain that, Natalia. It's a result of opening the intervals in the maintenance, I think. Then as a result you start seeing a slower depreciation rate -- a slower depreciation with this.

And we'll take a question from Helane Becker of Cowen. Your line is open.

I don't know who wants to ask -- answer this particular question, but we noticed that your salaries and benefits line was up almost 20%. And I thought Holger said that you were eliminating crew when you don't need them. And maybe I misheard that, but can you just explain that?

Yes. Can we start with the first question. So -- okay, it's -- I mean, we have some severance costs that we incurred when we reduced the population or the number of ambassadors during the month of June, and that's one thing. The second thing is driven by a reduction of crews. We originally had prepared a number of crews for the arrival of aircrafts, which didn't arrive. As we explained, we originally had a much more larger amount of aircrafts that were going to arrive, and we only ended up the year -- or will only end up the year with a net addition of 6 aircrafts, okay, rather than double digits. And as a result of that, we have been preparing pilots and we have been preparing flight attendants, which were already in the training process, but not hired. We have reduced the pace in the way we are contracting them and looking much more into the new capacity, which I said for next year is only 3 net.

Okay, that's hugely helpful. And then just for my follow-up question. As you look ahead to the end of the year and the holiday season, are you seeing bookings? Are they meeting or exceeding your expectations of what you thought the holiday would be like, let's say, 3 or 4 months ago?

Yes, Helane. This is Holger. So as we look into the fourth quarter, we do see the TRASM trend that we've been observing quarter-over-quarter maintain itself. So we're seeing pretty solid bookings and strong volumes in the domestic market and also in the international market. So we're cautiously optimistic about the fourth quarter.

Okay. And then just 2 -- one last question, one follow up on that is on Frontier, I think you said you started the code share in August. Can you say how many passengers in each cities? Can say how many passengers you're exchanging with them right now? And can you say if your beach markets are showing any signs of weakness or recovery?

So Helane, what I can tell you about the Frontier code share is that we're seeing about 1 to 3 percentage points of increased load in our transporter flights. And that is mostly through the 8 connecting airports that we have right now. And we are expanding -- we're trying to expand that in 2019 to 20 connecting airports. We have seen some beach markets that are benefiting from the code share, especially Cancun and Puerto Vallarta.

I would be happy to return the call to Mr. Beltranena for any concluding remarks.

Well, I just only wanted to say thank you very much. I want to strengthen the point that we keep on working on the cost reduction points that we already spoke. I also want to strengthen the point that it is important to differentiate an ultra-low-cost carrier with a base of traffic, which is quite different than other airlines. And I also think that it is important that you keep on appreciating the fact that we have been doing a fabulous work on improving the TRASM for the Company. Having said that, I would like to say, again, thank you very much to my team, I feel prouder of them every day. And I think this year, which has been a very challenging year they have done an amazing work. Thank you very much to everybody. Looking forward to see you, I will be around in New York, in Boston and in Chicago next week. So I hopefully will see a lot of you guys there and have the opportunity to introduce Maria Elena. And we will be there with Holger. Thank you very much, and have a great weekend.

This does conclude Volaris' Third Quarter 2018 Financial Results Conference Call. You may now disconnect your lines. And everyone have a great day.