Gol Linhas Aéreas Inteligentes S.A. (GOLL54) Earnings Call Transcript & Summary

Today, we've presented at the Crédit Suisse conference in São Paulo, and this is a summary of what was presented for the benefit of those of you who are not present. Greetings to you all. It's Wednesday, January 29, 2020, at 2:00 p.m. in Los Angeles, 4:00 p.m. in Chicago, 5:00 p.m. in New York, Boston, Miami and Lima, 7:00 p.m. in São Paulo, Rio, Buenos Aires and Santiago, 10:00 p.m. in Ireland and the U.K., 11:00 p.m. in Europe, 2:00 a.m. in the UAE, 6:00 a.m. in Singapore and Hong Kong and 7:00 a.m. in Japan. These are the main geographies where GOL Airlines has significant capital partners, around $1.5 billion on the fixed income side and around $1.5 billion on the equity side. Moving to Page #2. I show our disclaimer regarding forward-looking statements for this presentation. I will call out the page numbers as I do this rundown. Moving to Page #3. Last Wednesday, GOL celebrated 19 years transporting passengers during which GOL has transported almost 0.5 billion. And this page highlights some of our accomplishments. GOL is the pioneer of the low-cost business model in Brazil and is among the leading LCCs worldwide. GOL's costs are over 20% lower than its closest competitors. We revolutionized air travel in Brazil and made it possible for over 35 million Brazilians to fly for the first time. We have adapted our product to both the leisure and the business segments in Brazil to both economy passengers as well as high-value customers. We serve over 100 destinations and have the best and most defensible position in the main airports in Brazil. We are the airline tech pioneers in Brazil, developing product innovations such as mobile check-in, geolocation and onboard WiFi and the leading loyalty program, Smiles with 16 million members. Our over 15,000 strong team is doing a great job of minimizing the impact of the MAX delays, and we generated record revenues of BRL 13.8 billion in 2019, a 22% growth over 2018. Our team is working very hard to make GOL the best airline to travel with, to work for and to invest in. Here, you can see that GOL is the most liquid airline stock in Latin America, and amongst the most liquid of all publicly traded stocks in Brazil. Also, GOL is one of the most liquid stocks on the B3 Brazilian Stock Exchange with a free flow of approximately 47% of the total shares outstanding. And after the issuance of new equity for the reincorporation of the Smiles minorities, GOL will, by far, be the most liquid stock. Moving to Page #4. GOL is the leader in Brazil, and Brazil is beginning to boom. Inflation and interest rates are at record lows, and policies and reforms have produced a steady recovery of economic growth over the last 3 years. Domestic air travel is expected to expand at 6% to 9% this year. Moving to Page #5, you can see that we delivered on our earnings per share guidance for 2019. GOL demonstrated capacity discipline, increased unit revenues, reduced unit costs and expanded recurring operating margins and reduced leverage. Moving to Page #6, you can see that GOL has delivered on the market's consensus expectations as well. In the fourth quarter of 2019, GOL delivered BRL 1.3 billion of EBITDA on BRL 3.8 billion of net revenue, representing a 34% margin. Moving to Page #7, you see that GOL has an optimized capital structure, which stands today at an appropriate 40:60 debt to market equity ratio. GOL's balance sheet today is aligned with a successful operational and financial strategy, which is represented by $2 billion of long-term debt, financing our position in aircraft assets. And BRL 1 billion of working capital debt that finances our airline operations and over BRL 4 billion of total liquidity on the balance sheet. Leverage continues to decline. Gross adjusted debt could decline by BRL 2 billion over the next year, substantially improving GOL's metrics versus peers. Net debt to LTM EBITDA is expected to reach 2.4x. And this will continue to unlock equity and credit value as the market reporting adjusts during 2020. Moving to Page #8. As you see here, operating and financial improvements have translated into earnings growth. In the first 9 months of 2019, GOL had a 5% net margin and generated almost $500 million of recurring cash earnings. And as you can see on Page 9, you have a compelling case about why now is the right time to invest. While GOL's 2020 and 2021 estimated revenue and EPS growth rates are higher than the peers on this page, GOL has the lowest PEG ratio. Moving to Page #10. You see that we have a solid capacity plan to deliver on our guidance for 2020, which is summarized here for you. And the portion of GOL's 2020 earnings exposed to oil prices have been properly protected with hedge ratios above 80% for the first half of 2020 and above 40% for the second half of 2020. Moving to Page #11. We created this diagram here on Page #11, to help you understand the drivers of GOL's earnings growth, interest expense and taxes will continue to reduce from our work on capital structure. We plan to pay, in advance, the $300 million term loan that matures in August 2020. Call the remaining $80 million outstanding on our senior notes that mature in 2022, and amortize the remaining amount of our last PRL debenture issue. The Smiles corporation will improve tax efficiency, capital structure and yield management. Revenues will increase and costs will reduced from our work on our network and our aircraft. We are leveraging our domestic market leadership and international partnerships into higher regional and international growth. And our smart and flexible fleet management is creating value through lower rates, true-up gauging, higher fuel efficiency and longer-range and also greater flexibility to match supply with demand. Moving to Page #12. As you see here, our debt amortization schedule is properly matched. GOL's average tenure on its long-term debt is around 5 years and our liquidity service is around 5 years of debt. Our medium-term plan for GOL's capital structure contemplates: one, fleet transformation, which includes maintenance CapEx lower by -- via the modernization of our fleet, includes building free equity on 60% of our max order; number two, liability management. More than BRL 2 billion debt reduction over the next 8 months. More than BRL 300 million of interest expense reduction in 2020 this year and access to diverse funding sources; number three, optimizing the balance sheet. 100% of our CapEx financing for PDPs and engine overhauls, improving working capital and availability of credit for hedging, maximizing use of capital deployed in tax credits, improving interest coverage ratio and taking our credit rating back to BB minus. Moving to Page #13, you see that GOL's asset management is a consistent and reliable source of liquidity via off-balance sheet equity monetizations. GOL has realized significant equity from its aircraft assets and over BRL 1.2 billion to date, with an additional BRL 400 million additional expected in the near term. The higher residual value on GOL's aircraft helps reduce ownership risk and enables better aircraft financing. The major factors why the 737-700 and -800s are valued more than the competition are their lower operating cost economics from better structural efficiency and better reliability. And the 737-800,has 12 more 2-class seats in 36 inches and 32 inches and 15 more 1-class 30-inch seats than the A320 as well as Boeing's disciplined production rates. Moving to Page 14. In the proposed Smiles incorporation, investors can elect to receive a consideration comprised of cash and GOL's shares. And GOL is funding the incorporation of Smiles by issuing shares and diluting its current shareholders to maintain a prudent balance sheet and improved credit ratios. Cash consideration will come from the consolidated cash balance. Transaction structure terms are 40% to 60% payout with cash and a 40% to 60% payout with GOL equity. In this 60-40 alternative, this will be 0.4213 GOL PN shares and redeemable PN shares in the value of BRL 24.80 for each Smiles share. The reorganization of Smiles is effectively self-financed and increases cash generation and is earnings accretive. I want to highlight some positive points. First, it increases GOL bondholders' seniority; second, the reorganization will use equity and group's cash to finance acquisition; the third positive point is the increase in the group's EBITDA, with subsequent conversion into cash flow; fourth, it is earnings accretive. And as the proposing corporation of Smiles will result in 1 single shareholder base, it will increase GOL's position as the most liquid airline stock in Latin America. Moving to Page #15. As I highlighted in the diagram on Page 11, GOL's network is a key source of earnings growth. And we can't highlight this enough, we fly where people want to fly. The highest density routes, the most important cities. We have the highest share of passengers on these routes, which allows us to drive pricing. And because these routes are as dense as they are. We have a buffer from new entrants. Moving to Page #16, here you have some of the economics of our network today. Through our flexible management of our core and regional markets, we are driving earnings growth. PRASM is highly correlated with the supply/demand equilibrium. Moving to Page #17. GOL's revenue strategies ensure high engagement and the best customer experience. Our continuous and customer-focused innovation and truly digital business, create a customer experience that builds loyalty. Over the past 5 years, our NPS has increased to over 40. And our recent Black Friday sales tell us that GOL is the preferred airline in Brazil. GOL is a company of opportunity, examples of how our workforce relates to and impacts GOL's culture include their acceptance of their roles as innovators and agents have changed, promoting shifts in the way Brazilians fly, strong focus on low-cost and high quality, a constant redefinition of our low-cost operations and popularizing air travel in South America, a consumer-friendly attitude, simplified and very efficient customer service, the provision of safe, on time operations and participation in profit sharing and stock options programs. In summary, it's great to work with GOL. And as you can see here, you see how the investment in the GOL product and the GOL culture has translated into superior revenue productivity. On the right side of this page, you see that over the last 5 years, we increased net revenue per flight by 68% from BRL 31,000 to BRL 52,000, and we increased revenue per employee by 41% from BRL 594,000 to BRL 837,000. Moving to Page #18. GOL has the best product available in the Brazilian market. When compared to all of our competitors, we are able to offer the lowest cost and the best product at the same time. As we strive to offer the best product, our leadership is recognized across all high-value customer brand metrics. This table here shows how GOL has positioned its private offering as the best value proposition in the Brazilian market. The best value proposition in the Brazilian market. GOL offers the most attractive product, the best experience and the best fares for business and leisure customers. We offer the most convenient flight schedules and a highly integrated flight network for fast connection types. The customers love the experience of traveling with GOL as reflected in one of the highest Net Promoter Scores in Brazil. We align GOL's products and services with the attributes that customers value the most. Moving to Page #19. Here you see that GOL is an international LCC benchmark. On the right side of the page here, adjusted by average stage length for the last 12 months is broken down by fuel, variable and fixed costs. As you can see, GOL is the second best globally among significant players, while operating in a country with one of the highest tax, legal and infrastructure costs. And by far, GOL is the lowest cost carrier among all Latin American airlines. Our low-cost base is a significant and sustainable competitive advantage. Our standardized single fleet allows us to obtain lower crew costs, better spare parts management and higher aircraft utilization than our more complex competitors. Cost advantage makes GOL the best positioned carrier to capture Brazil's air travel growth. On the next page, Page #20, I make a direct comparison of GOL with Ryanair. This chart shows how GOL adapted the LCC model to become the market leader in Brazil. We do this comparison by taking the world unit cost leader, Ryanair, and adjusting it to the Brazil market for taxes, infrastructure limitations and the existing airport infrastructure. These Brazil specific differences explain around 73% of the difference between the unit cost of GOL and Ryanair. The additional 27%, which is only about 5% of the total cost differential is due to attributes that GOL added to our product, our loyalty program and our aircraft configuration to become the #1 airline in Brazil and allow GOL to attain a 40% share of the business market in Brazil. For example, instead of configuring our aircraft at 189 seats, we configure them at 186 seats. That allowed us to create a premium economy comfort class in the first 5 rows of the aircraft with another 4 inches of pitch. The other attributes, which have 0 or marginal costs are things like onboard internet and WiFi, onboard entertainment, in-power seat outlets, domestic lounges in the international and domestic airports, and free onboard snacks and beverages. All of these cost at the end of the day only at about 5% of our total cost of doing business compared, for example, in this case, to the no-frills product offered by Ryanair. Moving to the next page, Page 21, you'll see that GOL is a global benchmark in terms of fuel productivity. As demonstrated here, GOL has the highest ASK production of peers, as you can see on the left side of this page. And on the right side of the page, you have a list of some of the main initiatives, projects, studies and developments that GOL has executed over the last 7 years to reduce fuel consumption. Fuel consumption optimization is a complex and continuous work. We are continually and currently working on new initiatives such as tankering model improvements, contingency fuel reductions, alternate improvements, statistical extra fuel/taxi statistical fuel, improved climb, route planning optimization, passenger weight profile and ICMS tax reductions that, combined with the proven fuel performance of the MAX, will bring additional reduction in GOL's fuel consumption. On to Page 22. On the left side of this page, you see that our average revenue-producing hours per aircraft per day is 1 to 2 hours higher than all of our peers. We are at over 12 hours per day of utilization per aircraft, meaning that GOL utilizes its assets more efficiently than any other airline, while maintaining the best customer experience in the market. In the graph on the right side of this slide, you see the average number of passengers per flight carried by each of the main players in the Brazilian domestic market. Our competitors have adopted very complex multiple fleet type operating models in search of efficiency at the expense of higher ownership costs. Over the last 3 years, GOL increased by 18 the average number of passengers per flight versus 15 and 5 at our competitors. So I ask you which airline is doing efficient upgauging in the Brazilian market. Also, together with good contract negotiations, our high asset utilization gives GOL the lowest aircraft ownership cost. Moving to Slide #23, you see that our fleet, as it transforms from 137 aircraft at the end of 2019, composed of 5% MAX, to 151 aircraft at 38% MAX at the end of 2023, will bring a 13% increase in productivity, solely from the increase in the number of seats per aircraft. GOL's average available seats will keep increasing without impacting the passenger experience. The increase in average seat count per aircraft is also important to bring incremental cost per seat to very low levels, which will result in significant efficiency improvements, bringing a 24% increase in the ASKs produced per month per aircraft, and our operating costs will be diluted across more ASKs. Additionally, when the MAX 10 begins to join the fleet in 2024, GOL will be able to increase capacity in markets that are restricted in terms of infrastructure or that are high density. The MAX 10 has a high commonality with the MAX 8, and will reduce further and will dilute further our costs by adding an additional 30 seats. Moving to Page #24. Here, we show 3 indicators of productivity and profitability. The chart on the left shows our revenue competitiveness in Brazil and the middle and right-hand charts, RASM minus CASM and EBITDA margin, respectively, confirm GOL's position in the top-tier of profitability. On the revenue side, we have adapted the low-cost carrier operating model in an innovative way in Brazil by adding some additional attributes to maximize unit revenue. Such attributes have allowed us to attract our leading share in the business market in Brazil in the high-value customer segment without adding significant cost. And that has given us this unique value proposition versus other low-cost carriers in the world. Moving to Page #25, you see the relative contributions last year to each one of our -- from each one of our group's businesses to consolidated revenues and EBITDA. GOL's passenger revenues account for approximately 91% of its total revenues. And in addition to passenger revenues, GOL makes an additional 9% of its total revenues from its cargo business Gollog, which contributes 3% of revenues, and its loyalty business Smiles, which contributes 6% of revenues. And on the next slide, Slide #26, you see GOL's earnings growth from passenger ancillaries. Since the adoption of IFRS 15 in 2018, our reported PRASK includes all passenger ancillaries. In our average ticket price of approximately BRL 350, GOL earns an additional BRL 32 from checked bags, WiFi, onboard food and drinks, the GOL Comfort class, carry-on bags, priority checking, call center assistance, seat assignments, flight changes and trip interruption insurance. And on the right side of this page, you see that our ancillary revenues have been growing at a CAGR of 6%. GOL's LTM gross revenues from passenger ancillaries were just under BRL 1.3 billion, which is approximately 9% of total revenues. Moving to Page #27, you see our earnings growth from loyalty. The Smiles product is a key component of the GOL value proposition. As the top-of-mind brand amongst all loyalty programs in Brazil, Smiles is a great tool for attracting frequent flyers who consider the loyalty program as the third decision factor for ticket purchases. Smiles members fly twice as much as regular non-Smiles customers. And a good portion of load factor is from Smiles members in accrual or redemption operations. GOL not only improves travel experience by offering Smiles miles to customers, but also offers the Smiles customers over 900 global destinations, access to VIP lounges around the world, courtesy tickets, free checked baggage, special seating and airport priorities. In 2019, our loyalty program attracted over 1.6 million new members. Increased by 26% its base of top-tier customers, silver, gold and diamond. And grew by 59%, considering only diamond customers. In addition to GOL, 15 airline partners and 18 retail partners and service providers bring Smiles customers a wide range of possibilities for miles redemption. When the proposed competitive realignments are completed, Smiles will be better positioned to take advantage of market growth due to better attractiveness of the product, the quality of the membership base, it's exclusive relationship with GOL and the GOL global network partners. On to Page #28, Gollog's clients are leading companies in Brazil in the health care, clothing and automotive industries. Gollog customers can have their product picked up and delivered to their door or use the convenience of one of our 117 stores around Brazil. We have several cargo warehouse facilities around Brazil. Gollog is growing its client base. And for 2020, we expect a 14% increase in revenues on 89,000 tons of volume transported. E-commerce revenue growth of 75%. And expansion to 130 franchise units nationwide. By 2022, our plans are to grow Gollog to 9% of our total revenues. Moving to Page 29, I highlight our MRO services growth. Since 2006, for over 13 years now, we own and operate an in-house aircraft maintenance center located at the Confins airport in Belo Horizonte, Brazil. GOL's 1 million-square-foot facility is the largest in Latin America and has 3 hangars, including a hermetically sealed [ penny ] hangar, 6 shops, over 60,000 square feet of part storage and can handle up to 7 aircraft simultaneously. Last November, to generate a new source of revenue and to reduce our costs, we extended GOL's aircraft maintenance expertise to third-party airlines through the launch of GOL Aerotech, a new business unit that provides aircraft and components' maintenance, repairs and overhauls to third parties. Our MRO is certified by the national and international regulators. Including the Brazilian National Civil Aviation Agency, the ANAC; the U.S. Federal Aviation Administration, the FAA; and the European Aviation Safety Agency. With 760 employees and over 600,000 hours of availability per year, GOL Aerotech is qualified to perform maintenance services for 4 Boeing models, the 737 Classic, the 737 Next Generation, the 737 MAX and the 767 family. ACG, Aviation Capital Group, and Dubai Aerospace are among our first customers. And for 2020, GOL expects revenues of around BRL 140 million from GOL Aerotech. Moving to Page #30. GOL is a socially responsible company committed to sustainability. Not only is GOL one of the greenest airlines in the world, we continuously invest in becoming more sustainable. Some highlights of GOL's commitment include implementation of an environmental management system, the FAA 145 Repair Station certification, reuse of water and all effluents generated and treated, we have been pioneers in biofuel technology and greenhouse gas inventory via the GHG Protocol. Beyond the governance requirements of the ADR Level 3 and the B3 Level 2, our practices include tagalong rights in a change of control situation, a permanent audit committee, a mandatory tender offer if over 30% of dynamic rights are required, and 7 management committees that advise our Board of Directors. We reinforce our accountability with various stakeholders through added transparency and credibility. We provide annual sustainability reports based on global reporting initiative guidelines. We report relevant ESG information to investors in accordance with the Sustainability Accounting Standards Board, standards for the airline industry. And GOL continually is looking for ways to become more fuel-efficient and adopt more efficient technologies. We reduced operating costs by utilizing our standardized fleet and reduce fuel consumption and GHG emissions. Moving to Page #31. GOL's unique structure makes it Brazil's best sponsored airline and, therefore, well positioned for long-term growth. Our controlling shareholder, the Constantino family, is Brazil's largest passenger transportation operator. Our senior management team is the most experienced, Eduardo Bernardes has been with GOL since its founding in 2001. I've worked with GOL for the past 18 years and took us public on the New York Stock Exchange in 2004. Celso has been with GOL for 17 years, including the 3 years they invested becoming a Boeing 737 pilot. And we believe we are the most proven and seasoned management team in our industry with experience managing through all economic cycles. On to the final page, Page 32. In 2001, GOL pioneered the LCC operation in Brazil, and to this day is the only true LTC operating in Brazil. GOL only operates a highly efficient single fleet type with a standardized aircraft configuration type and size that optimizes cost per seat and creates market flexibility. Only GOL's operating model can achieve the highest aircraft utilization, which is today near 13 block hours per day. Only GOL has the lowest unit cost, giving us global standards of competitiveness. Thus, our competitors do not have cost structure to viably offer the lowest fares and the LCC model always wins due to its increased network scale and increased passenger flow. Past present and future, this is GOL airlines. At GOL, we all work to promote the fundamental principles of access to information, equal treatment and transparency, simultaneously in English and Portuguese. Our corporate governance in excess of the ADR3 and B3 Level 2 requirements. Our fair disclosure and best practices include required reports to the SEC and CVM and IR website, earnings releases with videos, calls and guidance. And conferences and meetings with investors and analysts, of which today is one. For this year, we will participate in 25 investor conferences, and we will be providing our 2019 audited results on February 20. We would greatly appreciate hearing your thoughts and suggestions on how to improve our communication tools and activities. Thank you.