Q3 2022 Wheels Up Experience Inc Earnings Call
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Hello, everyone and thank you for joining the wounds of <unk> 'twenty 'twenty earnings call.
My name is Sarah <unk> quick just flipped today before until what's your host Keith Ferguson I would like to remind you that we would like to ask a question. Please press star followed by one Mitchell.
That's helpful Keith.
Our non Hudson you over to your host Keith Gibson. Please go ahead Keith Your line is now open. Thank you.
Good afternoon, we announced our third quarter financial results. The earnings release, we did supporting tables as well as a copy of today's presentation can be found on our Investor Relations website at <unk> Dot com slash investors. Please refer to the slide with our disclaimer.
Today's presentation contains forward looking statements based on our current forecast and expectations of future events. These statements should be considered estimates only and actual results may differ materially.
During today's call, we will refer to non-GAAP financial measures as outlined by SEC guidelines unless otherwise noted all income statement related financial measures will be non-GAAP other than revenue.
Reconciliations of GAAP to non-GAAP financial measures and definitions of non-GAAP financial measures are found within the financial tables of our earnings release and appendix of today's presentation and with that I'd like to turn the call over to wheels up Chairman and Chief Executive Officer Kenny Day.
Thank you Keith and thanks to all of you for joining US today, let me start by highlighting the strong foundation, we have built for wheels up.
Today, we are a clear leader in on demand private aviation with our highly recognized brand.
Growing base approaching 13000 loyal members and we are poised to deliver over one $5 billion of revenue this year.
For today's call. We are prioritizing three topics that we think are important for investors as we continue our intense focus on delivering on our path to positive adjusted EBITDA in 2024, one our business performance for the quarter.
To a realignment of our management structure to improve our speed of execution as it relates to our operations and technology initiatives and three our strong cash position.
With that I will go through some highlights from our third quarter.
We reported revenue of $420 million.
A record for the third quarter and up nearly 40% year over year.
Active members are up 12% compared to a year ago.
Our lives light leg increased 7% year over year, reflecting a continued appetite for travel as well as the contribution from air partners private jet business.
Prepaid blocks are a great indicator of future flying as you may recall, we announced an out of cycle price increase in June which resulted in unusually high block sales in the second quarter.
As a result, our third quarter block sales were down year over year. However, prepaid block sales for the year were exceptionally strong through the third quarter of 2022 up 85% year over year.
As a result to make clear.
Even in an uncertain macroeconomic environment overall demand remains healthy with continued strong customer retention and cohorts spend levels. There are clear macro concerns that are prevalent in many sectors of the market today, we do expect demand from our high net worth customer base and our business clientele to be more <unk>.
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With strong foundational demand and our commitment to positive adjusted EBITDA in 2024, we are laser focused on two key areas, including one.
Ensuring that we continue to prioritize safety and support of our members, including delivering World class service with great pilot enhanced maintenance capabilities and improve execution. However, we know that while prioritizing those areas, we must make significant cost reductions elsewhere.
Ensure we achieve our committed path to positive adjusted EBITDA and two <unk>.
Green lining our organization to improve focus and accountability are current structure limits, our ability to focus on driving specific outcomes at the appropriate levels in the organization.
In order to address this we are eliminating the role of president and transitioning to a more granular organizational design focused on operations.
Digital transformation and more specifically our marketplace, while evolving our product offerings.
I want to thank <unk> for his service and the President's role and look forward to his continued partnership in an advisory capacity.
Before I turn it over to Todd I want to highlight our recent WTC debt financing, which gives us added flexibility to continue to invest in our business as we execute on our strategy.
In the current market, having added cash reserves is extremely valuable.
And we will help us support continued progress on our operations customer experience and technology initiatives.
In summary wheels up has built a strong foundation with great people, a well respected brand and a substantial base of loyal high value customers. Our goal is to turn that foundation into a scaled and profitable business.
Our goal is profitable growth.
As always I am thankful to our loyal members and customers for continuing to put their trust in us.
I'd also like to recognize and thank our entire hardworking global team for their tremendous effort and commitment to wheels up.
Now I'll turn it over to Todd who will provide more details on our third quarter and our go forward plan.
Thanks Kenny.
Four plus months into my time with the company I remain very confident in the opportunity in front of US we have a great foundation that loyal members with a well recognized and admired brand and a demonstrated track record of revenue growth.
The air partner team, which joined US at the beginning of Q2 is also continuing to deliver ahead of our initial expectations and I am quite excited about the additional cross sell opportunities we have identified with Mark <unk> and his team.
That being said there are a number of other areas, where we need to improve our execution.
Throughout my 25, plus year career I have come to appreciate the necessity of having the right alignment and accountability within the organization in order to drive results.
As Kenny mentioned earlier it is clear that we need to reduce our cost base and improve our focus and accountability in order to accelerate progress toward our profitability goals.
Our objective is to run our company at a more granular level.
Data more closely intersects with decisions that drive outcomes.
I believe the changes we announced today put us on a path to achieve that vision.
With that let me start with the quarter highlights.
Revenue came in at $420 million up 39% year over year and ahead of our guidance of 25 plus percent growth.
The increase was primarily driven by two factors first higher than expected slight revenue due to a 20% year over year increase in flight revenue per life leg driven.
Driven by a full quarter of the indexed fuel surcharge and higher average pricing.
Without air partner, which reports on a net revenue basis, the increase was 25% year over year.
Second stronger other revenue due to a $35 million year over year increase in aircraft sales, where we took advantage of a strong market as well as the acquisition of your partner.
Membership revenue was up 25% year over year, driven by an increase in new members.
Retention remains consistent with historical levels, but we continue to evaluate membership growth relative to our capability to execute and deliver at the service level that our customers expect.
Going forward, we will adjust membership growth initiatives.
And our product offerings to ensure an optimal and increasingly profitable mix of revenue.
Turning to margins or.
Our adjusted contribution margin was five 1% for the third quarter up sequentially and slightly above the high end of our guidance of four 5% to 5%.
Accordingly, while aircraft sales were higher than expected our core adjusted contribution margin was up sequentially, both on a percentage basis as well as in total dollars.
That was due to a full quarter of the index fuel surcharge and improved <unk> margins, partially offset by a sequentially lower contribution from air partner as we had expected.
And a slight drop in aircraft utility.
Sales and marketing expenses were six 7% of revenue in the quarter.
Down slightly sequentially, but up as a percentage of revenue year over year due to higher commissions related to strong aircraft sales as well as the addition of air partner.
Technology and development expenses were three 8% of revenue in the quarter up sequentially and up year over year as a percentage of revenue as we continue to invest in technology to drive operational efficiencies.
General and administrative expenses were five 7% of revenue up slightly sequentially as cost saving measures were more than offset by increased recruiting fees.
G&A expenses were up slightly year over year as a percentage of revenue driven by the acquisition of air partner.
As a result, adjusted EBITDA was negative $45 2 million for the quarter.
Within our negative $42 million to $47 million guidance range.
Capital expenditures were $9 2 million in the quarter, including capitalized software of $5 6 million.
Year to date capitalized software is almost half of our normal capital spending and reflective of our continuing technology investment.
With regards to cash on a pro forma basis inclusive of our debt financing. We would have ended the quarter with $545 million of cash and cash equivalents on our balance sheet.
That liquidity gives us added flexibility to continue to invest as we improved our operations enhance our technology infrastructure and execute on our plan for positive adjusted EBITDA in 2024.
Now, let me provide more details on our plan.
We have broken out our plan into three categories cost reductions.
Pricing and fuel surcharges.
And aircrafts utility and operational efficiencies starting with cost as a result of building our business via a number of acquisitions and the manual nature of many of our processes our cost base is higher than it needs to be.
As of Q3, SG&A as a percentage of revenue was 16% in.
In line with our objective to achieve adjusted EBITDA profitability in 2024 and.
And assuming continued reasonable revenue growth.
We plan to reduce that ratio to the low double digit level with meaningful improvement towards that goal in 2023.
Expect to achieve these reductions through increased focus organizational design and structural changes and in many areas just simply better financial discipline.
We will however at all times prioritize safety.
Our pilot and maintenance capabilities, and our member and customer experience as those are the hallmarks of the wheels up brand.
Turning to pricing.
Key feature of our value proposition is the ability of our members to lock in capped rate pricing and guaranteed availability through the purchase of prepaid blocks.
That remains the case today, however, as we have announced pricing and program changes we are constantly evaluating our offering both in terms of price as well as guarantee levels call out periods peak days and minimums.
All with the goal of ensuring an attractive product, but also one that we can efficiently and profitably deliver.
Our most recent changes were announced last week and we will go into effect on December one.
Our previously executed pricing changes are now beginning to flow through our top line.
However, much of the benefit of those changes are still to come.
With regard to our third quarter revenue only about 20% of our flight revenue was from our latest June pricing with.
With just over 50% still from blocks that were sold pre December 2021.
The recent program changes, which include pricing and higher minimums as well as our index fuel surcharge are a key reason for the strength in flight revenue per average flight leg and.
And we expect that to continue in the fourth quarter.
More importantly, as our flight revenue mix shifts to those latest programs, we are better able to recover from the inflationary pressures that have impacted our business in the past year.
The largest contributor to our profit improvement will come from operational improvements as well as our technology initiatives on.
On the operational side the changes, we're making are designed to improve our focus and reorient, how we manage from our consolidated first party fleet level to increasingly one that is managed on a sub P&L basis fleet by fleet turboprops light jets Super mid et cetera.
Strategies around pilot staffing.
<unk> and scheduling are best made at that level with clear metrics and feedback loops that allow us to measure the effectiveness of our decisions in a way that we routinely do not do today.
Our overarching operational goals remain the same as we focus on three key initiatives in the operations area of our business first improving our dispatch availability by ensuring we have pilots ready to fly airplanes second improving our maintenance availability through better scheduling and productivity.
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Third consolidating our operations through the FAA certificate consolidation and building the new Mo's seed or member Operation Center in Atlanta.
One key to improving our dispatch availability is to increase our pilot staffing, which requires a focused on hiring training and retention.
On the hiring side, we have exceeded our pilot hiring goals over the past year with over 450 pilots hired year to date.
We are excited to have these new pilots joined wheels up and appreciate the significant and important role they play as the face of our company to our members day in and day out.
While we believe our pilot hiring is going well training continues to be a bottleneck for the entire industry.
Is it often taking up to 90 days for a pilot to get the required simulator time to inner service after they have been hired.
That's why we've made a concerted effort to secure additional flight simulator availability in order to get our pilots into service faster.
This will expedite our onboarding process, giving us a larger pool of active pilots to best serve our customers and drive more utility on our aircrafts.
We believe we are making progress on this challenge.
Pilot retention has been relatively stable over the past six months, despite strong industry demand for pilots.
That's largely due to our aircrew 360 program.
Designed to improve the career opportunities and quality of life of our pilot.
We strive to be the employer of choice in private aviation and a place where pilots can enjoy long rewarding careers.
Turning to maintenance, while ensuring the highest safety standards.
We're working diligently to improve our maintenance availability.
Having as many aircraft as possible available to meet our strong demand is critical to ensuring our levels of service as well as improving our financial performance.
A robust preventative maintenance program.
Cycle times, and the ability to respond quickly to unscheduled maintenance events are all critical capabilities that we are working to improve.
Relative to that last area. We are on track to boost our mobile service unit capacity by over 50%. This year, providing faster response times to address unscheduled maintenance at remote airports.
Given the large number of remote airports. We serve this is a critical capability.
Improving dispatch and maintenance availability.
Has high incremental margins as it better utilizes our assets and it reduces our reliance on expensive third party fulfillment cost.
Next I want to provide an update on the consolidation of our FAA operating certificates.
Today, each certificate is an operating silo, whereby a pilot certified on one aircraft type cannot fly the same aircraft on one of our other certificates, even though we are one company.
That creates unnecessary friction on our pilot scheduling.
As well as added travel and logistical cost.
Once we complete the consolidation, we will have significantly greater scheduling flexibility.
Which will improve our service and lower our costs.
We're working closely with the FAA and look forward to sharing our progress in coming quarters.
Similarly, our new <unk> C is an investment in our operations and our people <unk>.
Providing the best environment to manage and communicate across our flight customer interaction and maintenance functions.
This facility in Atlanta close to one of the world's largest aviation hubs and our partners at Delta is scheduled to open in mid 2023.
As you've heard us talk about we see a tremendous opportunity to apply state of the art technology to transform the industry and provide an enhanced experience for our customers.
We are working to prioritize and focus our digital transformation, both on improving our customer experience and reaching more consumers at the top of the funnel as we develop a larger addressable market for private aviation.
Customer experience is multifaceted.
Ease of use and robust features deep customer engagement and attractive prices are all central to our technology enabled marketplace over the past year, we have migrated our entire fleet to up SMS that is the first building block of our marketplace as it provides a clear dash.
Toward that helps to better schedule our operations.
With this platform, we can manage our daily operations in real time.
That allows us to quickly respond to last minute customer travel changes adverse weather and other unforeseen circumstances that happen regularly.
The consumer facing mobile App is the other critical component of a successful marketplace. As this is the preferred way to seamlessly engage with our customers.
Foremost it needs to be easy intuitive and alleviate the friction points that exist in private travel today.
Customers must be able to download the app.
Search through the trip and aircraft they want with real time availability and pricing.
Book their trips and complete all preflight actions without any other intervention.
The real benefit is realized and when we combine SMS and the mobile app to help shape demand.
Let me take a minute to provide some context.
When we combine the demand forecasting capabilities of <unk> with the customer signals, we received from the App, including early customer searches we have the ability to create real time incentives to push demand to days, where we have excess capacity or to destinations where we know.
We will have available aircraft.
Another example is the ability to help shape demand by incentivizing customers to adjust their travel plans, perhaps by changing a departure time by an hour or two.
Moving to a different airport that is still conveniently located for the customer, but better aligns with our flight operations.
Tightly integrating technology and pricing is an important lever for improved margins over time.
When we have a fully functioning marketplace platform. We believe we will be able to optimize for the right plane in the right place at the right time across our entire fleet of first Party second party and third party aircrafts.
That will drive asset utilization reduce empty repositioning legs and provides significant benefits to customers operators and wheels up in the near term as I touched on we are continuing to raise prices, while balancing our growth in relation to our operational and technology deliverables.
Once we have a fully functioning marketplace, we will be able to drive the growth of non guaranteed flying which helps to optimize our network at attractive incremental margins.
We believe all of those initiatives together will allow us to reach a mid teens adjusted contribution margin.
SG&A in the low double digit range as a percentage of revenue.
And positive adjusted EBITDA in 2024, I look forward to sharing progress on that goal each quarter.
So with that let me now turn to our guidance for the rest of this year.
For full year 2022, we now expect revenue to be in the range of 155% to 158 billion for the year with fourth quarter revenue expected to be up approximately 15% year over year.
Moving to adjusted contribution margin.
We expect fourth quarter adjusted contribution margin will fall in the four to 5% to 475% range with a lower sequential contribution from air partner and aircraft sales versus prior quarters.
Notably the core yields up margin, excluding air partner and aircraft sales is expected to continue to improve for the second consecutive quarter.
This core improvement is reflective of the underlying progress we are starting to make in the business.
We expect fourth quarter adjusted EBITDA to be in the range of negative 40 to negative $45 million we continue.
To focus on SG&A reduction and expect our progress there to accelerate as we move into 2023.
We expect to report a GAAP net loss of between 90% to $100 million for the fourth quarter reflected in this GAAP range are several noncash estimates a $20 million charge related to stock based compensation, including earn out shares and $17 million of depreciation and amortization.
Expense.
In addition, we expect approximately $10 million of cash expenses related to integration and other one time items and another $7 million of interest expense.
The range does not reflect any noncash gain or loss related to the fair value of our warrants or any other unusual items.
We expect capital spending for 2022 will be a few million dollars below our previous guidance of $125 million.
That includes what we consider more normal capital spending of approximately $67 million for purchased aircraft and capitalized software.
In addition, it also includes $58 million for the purchase of previously leased Textron aircrafts that we view as a financing transaction.
We expect normal capital spending to be in the mid single digit range of revenue going forward.
In closing it is clear that we have significant work to do to deliver the performance that our members and shareholders expect of us.
I am confident that the wheels up team is up to that challenge and look forward to sharing our progress in the coming quarters let.
Let me turn it back to <unk> for some concluding remarks before we open the call for Q&A.
Thank you Todd and thanks to all of you who have joined us today.
We are building a marketplace that will improve asset utilization across our industry and generate sustained profitable growth for wheels up in the years ahead.
We have a great foundation with nearly 13000 active members and over one $5 billion of revenue expected. This year, we have all of the pieces now it is up to us to execute.
Look forward to sharing our progress with that let's take some questions.
So if you would like to ask a question. Please press.
Staff on the new telephone keypad now have you changed your mind piece per stop by to limit. The fantastic question. Please ensure your folsom to low key thoughts.
Followed by London telephone keypads.
Yes.
Our first question comes from.
Sheila <unk> from Jefferies. Please go ahead Sheila your line is now open.
Thank you and good afternoon, everyone.
Thanks for the time just on your initiatives maybe more broadly.
In terms of the initiatives you have in place SG&A going from double digits 16.
16% to low double digits.
Thats $40 million of EBITDA benefit over the next 12 to 18 months, how do you think about the other buckets and how that and then maybe more specifically for the quarter adjusted EBITDA margin first slightly better sequentially from Q2.
Much of that was due to the fuel surcharge and how do we think about some of the sequential improvement going into 'twenty.
Yes, Thanks, Sheila I'll take that so I think overall you're right.
At the current revenue levels that would equate to about the range of <unk>.
SG&A reduction I think the way we think about this is <unk>.
First and foremost as we said earlier, we will always prioritize safety service delivery pilots the maintenance and the member experience, that's always going to be first and foremost.
At the same time, we also think we need to continue to make some investments in technology will continue to do that but I think as we think about that spending level.
Our goal is to reduce a lot of the overhead spend be more focused on our marketing and advertising and then deliver savings for bi.
By consolidating a lot of activities that are performed in a more decentralized manner. Today, we haven't we still have a lot of silos out across the organization and I think there's ways that we can bring that activity into together in a more centralized fashion use systems and technology to automate it and then thats really going to help us I would say some of the sequential.
The improvement we've already seen as a result of some of the actions we've already started hiring and headcount freezes reduced internal travel and some head count reductions.
And then we're going into our cycle right now to work on our 2023 budget. So we're doing a lot of work looking at the organization the organizational structure and really developing that quarter by quarter cost framework that will execute and use in 2023.
You asked about like the fuel.
As well I think.
In the third quarter, we saw about a $6 million benefit in terms of our cost structure related to fuel. So we are seeing that fully index fuel surcharge now, helping helping us mitigate some of that pressure that we saw earlier in the year.
And we effectively look at that now is in place and ensuring that we shouldnt have any significant adverse impact from fuel fluctuations going forward.
Got it and then maybe just a quick follow up on the top line in terms of lives.
I think there are down a little of that how do we think about.
What's going on there.
Okay.
Yes, I mean, I think we're still seeing some improvement year over year.
The Hawaii wagging the revenue per <unk> is up significantly up 20%.
25% of the excluded are partner so I do think that we're seeing some progress there I mean, it was up slightly on a sequential basis.
But if you think about the revenue impact of that I think that's really driven by starting to see some of those pricing increases come through.
As we mentioned earlier only about 20% of the revenue despite revenue in the third quarter was was on that due June pricing basis.
And and still around 50% or so was pre December of 2020. So increasingly we will start to see more of that through the book and that continues to give us some lift on the revenue per lifeflight leg and then we're continuing to watch the Wi Fi plague itself in terms of that activity, but still feel pretty good about the strength there.
Obviously, a lot of variables that drive that.
In terms of how that translates into revenue, but but I think our outlook is still positive there.
Okay. Thank you.
As a reminder to us and your further questions piece, but thoughtful and intentional Keith that powerful.
<unk> on the telephone keypad.
It appears we have no questions at this moment.
So just going to hand back to the management team for any final remarks.
Yes, thanks to everybody for joining us today.
For us we're being involved with wheels up and we appreciate you and have a great day.
This concludes today's call. Thank you for joining you may now disconnect your lines.
Yeah.
Okay.