Wheels Up Experience Inc.

Hello, everyone, and thank you for joining the World's Up 3Q 2022 earnings call. My name is Darius, and I'll be the operator for today. Before I hand you over to your host, Keith Ferguson, I would like to remind you, if you would like to ask a question, please press star for the one in your telephone keypad. And I have the pleasure of handing you over to your host, Keith Ferguson. Please go ahead, Keith. Your line is now open.

Thank you. This afternoon, we announced our third quarter financial results. The earnings released with its supporting tables, as well as a copy of today's presentation, can be found on our investor relations website at wheelsup.com slash investors. Please refer to this 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 and non-GAAP financial measures and definitions of non-GAAP financial measures are found within the Financial Tables over Earnings release and appendix of today's presentation. And with that, I'd like to turn the call over to Wheels Office Chairman and Chief Executive Officer, Kenny Dickman.

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 a highly recognized brand, a growing base approaching 13,000 loyal members, and we are poised to deliver over $1.5 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. Two, 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 live flight legs increased 7% year-over-year, reflecting a continued appetite for travel, as well as a 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 our results make clear, even in an uncertain macroeconomic environment, overall demand remains healthy with continued strong customer retention and cohort 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 durable than that of the broader economy. 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 pilots, enhanced maintenance capabilities, and improved execution. However, we know that while prioritizing those areas, we must make significant cost reductions elsewhere to ensure we achieve our committed path to positive adjusted EBITDA. And two, streamlining our organization to improve focus and accountabilities. Our 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 offering. I want to thank Vinay Kegde for his service in 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 EETC 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 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 would also like to recognize and thank our entire hard-working 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 of 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 Britha 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 an 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, where 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 flight revenue, due to a 20% year-over-year increase in flight revenue per live leg, driven by a full quarter of the indexed fuel surcharge and higher average pricing. Without AirPartner, 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 AirPartner. 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 offering to ensure an optimal and increasingly profitable mix of revenue. Turning to margins, our adjusted contribution margin was 5.1% for the third quarter, up sequentially and slightly above the high end of our guidance of 4.5% to 5%. Importantly, 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 3P margins, partially offset by a sequentially lower contribution from AirPartner, as we had expected, and a slight drop in aircraft utility. Sales and marketing expenses were 6.7% 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 3.8% 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 5.7% 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 AirPartner. As a result, adjusted EBITDA was negative $45.2 million for the quarter. within our negative 42 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 improve 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 aircraft 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 line with our objective to achieve adjusted EBITDA profitability in 2024 and assuming continued reasonable revenue growth, we plan to reduce that ratio to the low double-digit level with meaningful improvement toward that goal in 2023. We 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 of the hallmarks of the Wheels Up brand. Turning to pricing, a 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 offerings, 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 will go into effect on December 1st. 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 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 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 the operational side, the changes we are making are designed to improve our focus and reorient how we manage, from a consolidated first-party fleet level to increasingly one that is managed on a sub-P&L basis, fleet by fleet, turboprops, light jets, supermids, etc., Strategies around pilot staffing, maintenance, 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 our planes. Second, improving our maintenance availability through better scheduling and productivity. And third, consolidating our operations through the FAA certificate consolidation and building the new MOC, or Member Operations Center, in Atlanta. One key to improving our dispatch availability is to increase our pilot staffing, which requires a focus 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 join 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, with it often taking up to 90 days for a pilot to get the required simulator time to enter 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 aircraft. 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 Air Crew 360 program, designed to improve the career opportunities and quality of life of our pilots. 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 standard, we are 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, efficient 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 costs. 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 costs. Once we complete the consolidation, we will have significantly greater scheduling flexibility, which will improve our service and lower our costs. We are working closely with the FAA and look forward to sharing our progress in coming quarters. Our new MOC is an investment in our operations and our people, 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 UpFMS. That is the first building block of our marketplace, as it provides a clear dashboard 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 for the trip and aircraft they want with real-time availability and pricing, book their trip, and complete all pre-flight actions without any other intervention. The real benefit is realized when we combine UpFMS 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 UpFMS With the customer signals we receive 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, or 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 aircraft. That will drive asset utilization, reduce empty repositioning legs, and provide 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 $1.55 to $1.58 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 4.25% to 4.75% range, with a lower sequential contribution from air partner and aircraft sales versus prior quarters. Notably, the core wheels-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 reductions and expect our progress there to accelerate as we move into 2023. We expect to report a gap net loss of between 90 to 100 million for the fourth quarter. Reflected in this gap range are several non-cash 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 non-cash 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 aircraft 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 me turn it back to Kenny 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 13,000 active members and over $1.5 billion of revenue expected this year. We have all of the pieces. Now it is up to us to execute. I look forward to sharing our progress With that, let's take some questions.

Thank you. So if you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure your phone is on your telephone keypad. Our first question comes from Sheila Calegula from Jefferies. Please go ahead, Sheila. Your line is now open.

Thank you, and good afternoon, everyone. Thanks for the time. So just on your initiative, maybe first more broadly, in terms of the initiatives you have in place, SG&A going from double digits or 16% to low double digits, that's $40 million of EBITDA benefit over the next 12 to 18 months. How do you think about the other buckets and how that saves? And then maybe more specifically for the quarter, adjusted EBITDA margins were slightly better sequentially from Q2. How much of that was due to the fuel surcharge, and how do we think about some of the sequential improvement going into 23-2?

Yeah, thanks, Sheila. I'll take that. So I think overall you're right, you know, at the current revenue levels that would equate to about the range of SG&A reduction. You know, I think the way we think about this is that, you know, first and foremost, as we said earlier, we'll always prioritize safety, service delivery, pilots and maintenance, and the member experience. That's always going to be first and foremost. But at the same time, we also think we need to continue to make some investments in technology, and we'll continue to do that. But I think as we think about that spending level, our goal is to reduce a lot of the overhead spent, be more focused on our marketing and advertising, and then deliver savings by consolidating a lot of activities that are performed in a more decentralized manner today. We still have a lot of silos out across the organization, and I think there's ways that we can bring that activity together in a more centralized fashion, use systems and technology to automate it, And then that's really going to help us. I would say some of the sequential improvement we've already seen is a result of some of the actions we've already started, hiring and headcount freezes, reduced internal travel, and some headcount 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 we'll execute and use in 2023. You asked about 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 indexed fuel surcharge now helping us mitigate some of that pressure that we saw earlier in the year. And we effectively look at that now as in place and ensuring that we shouldn't have any significant adverse impact from fuel fluctuations going forward. got it and then maybe just a quick follow-up on um the top line in terms of live flight legs i think they slowed down a little bit how do we think about um what's going on there yeah i mean i think we're still seeing some improvement i mean year over year um the live flight leg and the revenue for live flight leg is up significantly up 20 percent uh 25 percent of the excluded air partner so i i do think that we're seeing some I mean, it was done 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. You know, as we mentioned earlier, only about 20% of the revenue, flight revenue, in the third quarter was on that new June pricing basis. And it's still around 50% or Increasingly, we'll start to see more of that move through the book, and that'll continue to give us some lift on the revenue per live flight leg. And then we're continuing to watch, you know, the live flight leg 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 I think our outlook is still positive there.

Great. Thank you. As a reminder to ask any further questions, please press star followed by one on your telephone keypad. So that's star followed by one on your telephone keypad. It appears we have no questions at this moment, so I'm just going to hand back to the management team for any final remarks.

Yeah, thanks to everybody for joining us today, and thank you for 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.