Wheels Up Experience Inc. (NYSE:UP) Q1 2023 Earnings Call Transcript May 9, 2023

Wheels Up Experience Inc. beats earnings expectations. Reported EPS is $-0.27, expectations were $-0.31.

Operator: Ladies and gentlemen, welcome to the Wheels Up First Quarter 2023 Earnings Call. My name is Glen and I’ll be the operator for today’s call. [Operator Instructions] I will now hand over to your host, Keith Ferguson to begin. Keith, please go ahead.

Keith Ferguson: Thank you. This morning, we announced our first quarter financial results. The earnings release with its supporting tables, as well as a copy of today’s presentation can be found on our Investor Relations website at wheelsup.com/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.

With that, I’d like to turn the call over to Wheels Up’s newly appointed Executive Chairman, Ravi Thakran.

Ravi Thakran: Thank you, Keith, and thanks to all of you for joining us today. It is a pleasure to be with you today. As a Board and management team, we are committed to making the choices necessary to improve this business and deliver for our customers, employees and shareholders. The Board is taking action to strengthen management’s ability to execute the strategy and achieve the goal of positive adjusted EBITDA in 2024. In my new role as Executive Chairman, I’ll be focused on working with management on the changes Todd will discuss and on hiring a strong operation driven CEO to unlock the scale and potential of this business. As we execute through this transition, I feel strongly suited to guide the strategic direction of Wheels Up. Having served on the company’s Board of Directors since 2021 and having served through my career in executive roles at L Capital and LVMH, I have focused on driving strong profitability from luxury brands with existing scale and brand strengths like Wheels Up. I’m also pleased that Todd Smith will serve as our Interim CEO who will lead the day-to-day execution at the company while we conduct the search for a full-time CEO.

He’ll report to me and continue to serve as a Chief Financial Officer. Todd has been a tremendous asset to Wheels Up since joining the company last year. He has brought a significantly increased level of rigor and financial acumen to our team, and more importantly is the respected and strong leader across the organization. Prior to joining Wheels Up last year, Todd had 25 years of operational finance experience at GE, serving in a number of diverse industries, global businesses, and managing through numerous market cycles. As we continue to focus on achieving our profitability goals and improving our member programs to provide a better customer experience, Todd is absolutely the right person to guide the company through this transition period.

I and the rest of the Board look forward to working closely with Todd Smith on this next chapter. Finally, I would like to thank our Founder, Kenny Dichter for his vision, leadership and hard work to make Wheels Up what it is today. The leading on-demand charter operator in the United States with a substantial revenue base and more than 12,000 loyal members and customers. These are material advantages as we embark on the next phase for the company and stakeholders. I look forward to continuing to work closely with Kenny as a passionate ambassador for Wheels Up and its mission. With that, let me turn over the call to my friend Kenny.

Kenny Dichter: Thank you, Ravi, and congratulations to you and Todd on your new roles. I founded Wheels Up because I saw a clear opportunity in the industry for a new approach to private aviation, a technology enhanced membership driven model, built on a shared sense of community around the efficiencies, the convenience, and the joys of private travel. Our passionate focus on the member continues to define Wheels Up today. In less than 10 years, we’ve grown from a small startup with a handful of King Air 350i to the largest on-demand charter provider in the United States with an iconic brand more than $1.5 billion in revenue, and a loyal and engaged base of more than 12,000 members and customers. With this strong foundation for future success, it is the perfect time to hand the baton to new leadership for the next stage of the relay.

I would like to thank the Board for their support and guidance. I would like to thank our shareholders for their belief in us and our vision, and I’d like to thank our nearly 3,000 Wheels Up employees around the world who share a collective drive to make the extraordinary possible every day. And of course, I’d like to thank our members, without whom none of this would’ve been possible. I am looking forward to supporting the next stage of profitable growth and the exciting times ahead for Wheels Up. With that, I’ll hand the call over to Todd.

Todd Smith: Thanks, Kenny. It has been a true pleasure working with you. Wheels Up is here today because of your vision, marketing prowess and drive. And Ravi, I look forward to working with you as well in your new capacity. I am certain we can benefit from your commercial experience and leadership. Before I dive into the content of the call, I want to highlight that as a management team, we are committed to providing our members with exceptional service. As we continue to scale and mature, we expect to improve our service capability even further, increase our competitiveness and deliver improved profitability. We remain focused on achieving positive adjusted EBITDA in 2024 while strengthening our organization and improving the member experience.

As Interim CEO, these are my focus areas and the places where we believe we can make meaningful gains to strengthen the company and set the stage for a strong and profitable future. For today’s call, we are prioritizing three topics that we think are most important for investors. Our business performance for the first quarter of 2023, our go forward plan, including significant changes to our member programs that strengthen our outlook for positive adjusted EBITDA in 2024, and changes to our management team that will support our execution. I will start with our first quarter performance and the components of total revenue. Membership revenue was up 5% year-over-year in line with expectations. Growth in membership revenue was impacted by our focused sales and marketing spending to target more profitable revenue that leverages network density in specific regions and at specific times.

Flight revenue was down 2% year-over-year. A 12% year-over-year increase in flight revenue per live leg was offset by the overall decline in live flight legs. Without Air Partner, which reports on a net revenue basis, flight revenue per live flight leg was up 17% year-over-year. Aircraft management revenue was $64 million in the quarter, generally consistent with recent quarters and reflecting steady management fees and regular usage of the aircraft by their owners. Other revenue was $35 million up significantly year-over-year due to increased aircraft sales and the addition of Air Partner. Our adjusted contribution margin was 1.8% for the first quarter down sequentially and below our guidance of 3.5% to 4%. The sequential decline was due to lower demand in the first two months of the quarter that reduced our asset utilization and in part by the cleanup of prior period charges associated with the remediation efforts to address the control weaknesses we disclosed in our year-end filings.

Turning to operating expenses. For the quarter, sales and marketing expenses were 6.5% of revenue down sequentially in dollars, primarily due to lower advertising and marketing spend. Technology and development expenses were 3.7% of revenue in the quarter flat sequentially in dollars and up 24% year-over-year. We continue to invest in technology to support our efficiency efforts and improve the member experience. General and administrative expenses were 5.7% of revenue down 16% sequentially in dollar terms as we continue to aggressively reduce our spending, including reducing our reliance on outside consultants. G&A costs were up year-over-year due primarily to the addition of Air Partner. Overall, OpEx was down by more than $7 million sequentially in the quarter in excess of our guidance that OpEx would be down slightly as we worked to offset the additional pressure and contribution margin.

First quarter OpEx was down $12 million versus our run rate in the third quarter of last year. Adjusted EBITDA loss was $48.9 million for the quarter coming in toward the higher end of our $45 million to $50 million loss guidance range. Accelerated OpEx reductions largely offset weakness in adjusted contribution margin. Capital expenditures were $16.7 million in the quarter, including capitalized software of $8 million, well within our long-term target of mid-single digit percent of revenue. We ended the quarter with $363 million of cash and cash equivalent on our balance sheet, down sequentially and reflective of a normal seasonal decline in prepaid block sales, scheduled debt payments, one-time cash charges related to organizational restructuring, costs to build out our member operations center in Atlanta, and other working capital items.

Prepaid blocks were $100 million for the quarter, reflecting continued commitments from our loyal customers. As many of you know, the seasonal nature of our prepaid block purchases means that cash inflows typically improve over the course of the year, and we expect a number of the cash outflows described earlier will not repeat in subsequent quarters. Let me now turn to our path to positive adjusted EBITDA in 2024, which has three key components. First, cost reductions, second, pricing initiatives and program changes, and third, operational efficiencies. Let me start with the first component I just mentioned, cost reductions. Earlier this year, we announced a first round of organizational restructuring that we expect will produce $30 million of annual headcount savings.

Despite that, we are continuing to look aggressively for additional opportunities to reduce cost. Our better than expected progress on controlling OpEx cost in the first quarter is a testament to that effort. We remain confident that we can exit this year with OpEx in the low teens as a percentage of revenue, and in 2024 reach low double digits. We are managing to achieve that level regardless of our revenue profile. The next two components of our path to positive adjusted EBITDA relate to our adjusted contribution margin. Since our inception, the company’s goal has been to grow and invest in providing world class service to our customers. While we have consistently met our growth objectives, our historical one-size-fits product offering creates significant operational challenges that impact our ability to deliver our profitability goals, to truly realize the benefits of our scale and to improve our financial performance.

Today, we announced a significant change to our member program that we expect will benefit members and customers while improving our operational efficiency and per flight profitability profile. The new program, which is reflective of a comprehensive analysis over the past few months and expected to go into effect at the end of June creates two primary service areas. One is east of the Mississippi, including parts of Texas, and the other is focused on the western region of the country, which is primarily states like California, Nevada, Arizona, Colorado, and Utah. We will further concentrate our King Air fleet, one of the largest in the industry in the East Coast region. We will continue to offer light mid and super mid options in both the east and west regions.

These changes allow us to focus our efforts on the specific regions where we have a density advantage. Those areas account for approximately 80% of our customer flight revenue and our highest spending members. By focusing our efforts, we expect to lower our unit costs through improved asset utilization via more efficient aircraft and crew scheduling and fewer repositioning legs. In addition, a smaller operating region is anticipated to improve our maintenance economics. We expect our members will benefit in those regions from lower prices with our new program, including highly competitive capped rates, which provide certainty in peak periods for our customers versus others in the market. Our dynamic pricing capabilities allow customers to take advantage of lower rates during off peak periods.

To be clear, we will continue to service all regions in the U.S., but for those regions outside of our primary service area, we will leverage the capability of our Air Partner business team, which for decades has delivered a world-class profitable business utilizing an asset light model. These out of region flights will be dynamically priced at competitive market rates. We expect the new program will significantly improve our flight margins and strengthens our confidence in our plan to deliver positive adjusted EBITDA in 2024. We are also enhancing our corporate go-to-market initiatives through a new industry leading program with Delta Air Lines in which Delta’s business customers will receive volume-based preferential rates on Wheels Up charters and memberships.

This multimillion dollar two-year program reflects confidence that the expanded partnership will enable unmatched travel experiences on private and commercial travel for our mutual customers. Delta will continue to provide Wheels Up customers unique access and exclusive benefits such as earning SkyMiles, SkyBonus points, and Medallion Status. Let me now shift to what we are doing internally to improve our operations. We are now managing our fleets to make decisions on a more granular level that optimize the performance of each aircraft type across critical metrics such as pilot staffing, maintenance availability, spare parts inventory and demand shaping. This new structure has already resulted in improved processes that have reduced fuel burn and overtime through more efficient management of our operations.

We are continuing to overhaul our internal and external maintenance operations that are expected to improve aircraft availability by nearly 10% in 2023. A well-functioning maintenance operation supports higher utility of our aircraft and significantly reduces the need for expensive recovery flights, which can negatively impact member experiences and our financials. Our focus on leveraging our network density should effectively add capacity through more efficient and increased utilization of our asset base. This allows us to review our fleet strategy to optimize the size and composition of our fleet to best capitalize on future customer demand. We are also working to simplify our business operations, which will improve our agility. Next week and ahead of schedule, we will consolidate the management of our operations to our new state-of-the-art member operations center, which combines multiple operating facilities from around the country into Atlanta, one of the world’s largest aviation hubs and the location of our partners at Delta.

Our service delivery has already shown significant progress across multiple key metrics we track. Specifically, we reduced our controllable service interruption rate by half in the past year, resulting in 4,000 fewer customer trips impacted. That is the result of faster recoveries, real-time flight tracking, and improved maintenance operations. We believe our new MOC will lead to even further improvement via better automation and collaboration. We also continue to work toward the consolidation of our FAA operating certificates, which are expected to simplify our flight operations by harmonizing our procedures and scheduling across the entire company. We anticipate seeing incremental benefits over the course of the year with a larger impact in 2024.

We believe that all these initiatives will help us exit this year at a high single digit adjusted contribution margin and achieve a mid-teens level in 2024. To help simplify our business and focus on executing on our core charter operations, we are evaluating the disposition of some of our non-core assets as part of a comprehensive strategic review. Separately, we also remain confident in the value of our fleet. Current transactions continue to support the aircraft appraisal values from our October debt financing. We believe the market value of our aircraft is well above the caring value on our books and the principle outstanding on our debt. To further support our program changes and continued focus on operational improvement, I’m pleased to introduce some key management additions and changes that will be integral in helping us achieve our goals.

First, I’m pleased that Dave Holtz, a 30-year veteran of Delta Airlines is taking on expanded leadership responsibilities in our fleet operations. Dave brings valuable perspective on delivering efficient operations at scale and has recently helped develop and launch our forthcoming member operations center. Delta’s willingness to provide Dave in support of our operations is another example of the benefits and support we get from our strong partnership. In addition, as we announced last week, Dave Godsman will join as Chief Digital Officer. In this new role, he will focus on leveraging our technology investments and infrastructure to drive business results, further scale operations and help deliver an extraordinary member experience. Additionally, Kristen Lauria will join as our Chief Customer and Marketing Officer, where she will oversee the company’s brand and creative efforts as well as customer acquisition and customer experience.

The skills and experiences of all three of these individuals complement our existing leadership team and align directly with our objectives of improving operations, leveraging technology to drive efficiency and ensuring a world-class customer experience. So with that, let me turn to our guidance. There are a number of items related to our pending program changes that could create a higher-than-normal degree of financial variability in the short-term as we move through the transitional stage of implementation. As a result of this and to a lesser degree, the current macro environment, we are suspending our total year 2023 guidance and will focus in the near-term on the second quarter outlook as well as the year-end 2023 exit rates. We expect second quarter revenue to come in at a range of $350 million to $360 million, reflecting a seasonal pickup and some revenue headwinds from our focus on profitable flying that leverages the density of our network.

We expect second quarter adjusted contribution margin will come in the range of 3% to 4%, which balances lower short-term utilization with the migration to the new program model. We continue to expect to exit the year with high single-digit adjusted contribution margins. We are continuing to focus on additional opportunities to reduce our cost profile on top of the better-than-expected improvements in the first quarter and expect to end the year with OpEx as low teens as a percent of revenue. We expect second quarter adjusted EBITDA loss to be in the range of $39 million to $44 million, reflective of increased adjusted contribution margin and lower OpEx. We expect to report a GAAP net loss of between $95 million to $105 million for the second quarter.

We expect capital spending for 2023 will be in line with what we have outlined as normal capital spending in the mid-single-digit range of revenue going forward. While there was a lot announced today, including some items that may contribute to short-term variability, we are resolved in our belief that these changes are positive steps that position Wheels Up to improve profitability and continue to service our members and customers at the highest quality possible. We are committed to making the decisions necessary to improve this business and deliver for our customers, employees and shareholders. Before I close, I want to take the opportunity to sincerely thank all of our employees who tirelessly work to fulfill our most important obligation, delivering a world-class flight experience for all of our members and customers.

With that, let me open up the call for questions.

Q&A Session

Operator: Thank you. [Operator Instructions] With our first question comes from Sheila Kahyaoglu from Jefferies. Sheila, your line is now open.

Operator: Thank you. Our next question comes from Josiah Choy from Baird. Josiah, your line is now open.

Operator: Thank you. [Operator Instructions] We have our next question comes from Marvin Fong from BTIG. Marvin, your line is now open.

Operator: Thank you. [Operator Instructions] We have no further questions on the line.

Keith Ferguson: Thanks very much, everyone. We appreciate you joining us today and certainly reach out with any additional questions. We look forward to being in touch.

Operator: Thank you. Ladies and gentlemen, this concludes today’s call. Thank you for joining. You may now disconnect your lines.