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

Today, we presented at the JPMorgan Global Emerging Markets Corporate Conference in Miami. And this is a summary of what was presented for the benefit of those of you who were not present. Greetings to you all. It's Tuesday, February 25, 2020. Moving to Page #2. I show our disclaimer regarding forward-looking statements for this presentation. I will call out the page numbers as I go through the slides. Moving to Page #3. We believe that GOL offers opportunities for asymmetric returns, including attractive opportunities from the leader in the Brazilian air passenger transportation sector, a value entry point with near-term protection through enhanced liquidity. We are in the early innings of a Brazil macro recovery. We operate in one of the fastest-growing aviation markets, and we operate in multiple partnerships. We see asymmetric returns as Brazil's airline activity resumes. Brazil is back. A cyclical upturn makes it one of the most attractive investment cases in emerging markets. Investors are beginning to price in Brazil's growth. After years of stagnation, growth projections are being revised upwards. And air travel demand has a significant GDP growth multiplier. Airlines are a high beta way to play the Brazilian recovery. GOL is in the solid position to benefit from this scenario and to create value for investors. Moving to Page #4. GOL Airlines is the leading LCC in South America. GOL's Brazil's longest-running airline, now in its 20th year. In 2001, GOL pioneered the LCC operation in Brazil. And to this day, GOL is the only true LCC operating in Brazil. Only GOL 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 industry-leading aircraft utilization of near 13 block hours per day. Only GOL has the lowest unit cost, giving us global standards of competitiveness. Our competitors do not have the cost structure to viably offer the lowest fares. And the LCC model always wins due to its increased network scale and increased passenger flow. Over its 20-year history transporting passengers, GOL has transported almost 0.5 billion. 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 competitor. 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 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 numbers. Our 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. GOL is Brazil's best-in-class airline with the largest customer base at 45 million customers, the highest customer satisfaction with an NPS of over 40, the highest profitability with an EBITDA margin of approximately 30% and the highest earnings growth with projected earnings growth of around 100%. On to Page #5. GOL's strategy positions it to outperform due to its unique strengths deriving from lowest cost operations. GOL achieves the highest aircraft utilization from the newest and most fuel-efficient B737 fleet, the right product. GOL offers the best value proposition to customers via the most attractive product and experience and the best fares. The GOL product leads both the corporate high-value customer segment and the leisure economy segment and the right market. Over the next 2 decades, Brazilian air travel should add over 100 million traveling passengers per year, growing to 200 million per year. The air travel markets in South America should grow by a CAGR of 4% over the next 20 years, serving a total of 730 million passengers, which is an additional 370 million passengers compared to today. GOL's winning operating model that produces the lowest unit cost and the highest unit revenues, when combined with our 90-strong alliance partner network, has positioned the company to expand its network in South America, the Caribbean and the United States. Moving to the next page, Page #6. You have a summary of why GOL is the leading LCC in South America. Our aircraft are deployed in a highly flexible manner to transport the leisure, corporate and international customers, achieving the highest customer satisfaction, creating the structural basis for achieving the lowest unit cost. And GOL utilizes its assets more efficiently than any other player. We achieved a world-leading aircraft utilization of over 12 block hours per day. Key components to our high operating efficiency are: our operation analytics capabilities that use big data, advanced analytics and new technologies to keep our processes streamlined; improved management of disruptions and optimized scheduling; and our in-house MRO that uses predictive maintenance tools to maximize aircraft availability and keep costs low. And on Page #7, you see that GOL is an international LCC benchmark. The left graph here compares costs adjusted by average stage length for the last 12 months 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 more complex competitors. On the right graph, you can see our efficiency measured by the operating cost to net revenue ratio. GOL remains in the top tier internationally and is the continental leader. Cost advantage makes GOL the best-positioned carrier to capture Brazil's Brazilian air travel growth. Moving to Page 8. You see that GOL is the leader in productivity and profitability among the Latin American airlines. 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 adopted the low-cost carrier operating model in an innovative way to Brazil by adding some additional attributes to maximize unit revenue. Such attributes have allowed us to attract a leading share in the business market in Brazil in the high-value customer without adding significant costs. GOL's value creation plan, which is summarized for you here on Page 9, occurs through our activities in aircraft acquisition, air transportation and loyalty. All investments in our product are already made, and GOL has the highest operating margin and the most resilient business model to take advantage of economic growth. Our key metric here is not just the yield premium that we are extracting, but it's also the share of wallet that we have been able to capture from the various passenger segments. We maintain a right-sized fleet and focus on profitable routes and high-yielding business travelers. We are not only the market leaders, we have the best network, the best fleet, the lowest cost base and a solid liquidity position. Moving to Page #10. 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 the high-value customer brand metrics. This table here shows how GOL has positioned its product offering as 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 times. The customers love the experience of traveling with GOL. It's reflected in one of the highest Net Promoter Scores in Brazil. We align GOL's products and services with the attributes that customers value most. Moving to Page #11. All of our revenue strategies for passengers, for ancillaries, for cargo and for loyalty make the GOL brands very well recognized among current and prospective customers. In 2019, not only was the GOL brand top of mind for the second consecutive year, it increased its lead over the #2 player. The GOL brand is strongly connected to our revenue strategies and is tied to the variety and top-quality services in everything we offer. Moving to Page #12. One of the reasons why GOL Airlines is the leading LCC in South America is, 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. And on Page 13, you can see that our successful platform for international flights from and to Brazil is organized around the hubs where Brazil has the highest demand concentration. Our hubs have 3 unique aspects. One, they enable high frequency with a better aircraft utilization and lower cost. Our high aircraft utilization drives operating leverage. Two, they enable GOL to open new destinations such as Florida and Mexico. Three, they lever expansion and network integration via 90 codeshares and interline agreements for global distribution. GOL's international flights from the Guarulhos and Galeão Airports serve destinations in Uruguay, Argentina, Chile, Paraguay, Bolivia, Peru and Ecuador. Our Brasília hub serves Florida and Cancun. Our Fortaleza hub also serves Florida markets as well as Paris and Amsterdam via our partnership with Air France-KLM. These represent the main markets served, where GOL is the best positioned to connect passengers intra-South America. And over the last few years, we expanded our regional network. At the same time, we maintain our leading 26% share in the Brazil-Argentina corridor. We started operations to Cancun and Lima. We launched flights to Quito, Miami and Orlando. And we maintain the structure and expertise to grow further in international markets when the fundamentals and expansion tools return. In 2020, we plan to expand our U.S. operations with the right product, which is MAX nonstop. And we expect to see good results with an even better position in Florida provided by our new partnerships. Moving to Slide #14. At the beginning of this presentation, I said that GOL Airlines has the highest earnings momentum. GOL's competitive strengths and business strategies have shown up as results for our customers, our employees and our investors, as you can see here in our achievements for the last 14 reporting quarters. Income is up significantly. Cash flow generation is up consistently, and deleveraging is driving credit ratings improvement. Moving to Page 15. You see that GOL has a profitable combination of revenue generation and cost structure. Our disciplined growth and cost control has enabled GOL's best value proposition in the market to increase our unit revenues and at the same time, maintain our ex fuel CASK flat. And this has translated into solid earnings growth as you can see here, and also as you can see here on Page 16, which shows our outlook. Moving to Page #17. 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. And supporting this compelling case, GOL has a very clear and unique drivers of earnings growth. Interest expense and taxes will continue to reduce from our work on our capital structure. We plan to pay down in advance the $300 million term loan that matures in August 2020. We've already initiated a call on the remaining USD 80 million of outstanding amount on our senior notes that mature in 2022, and we plan to amortize the remaining amount of our last PRL debenture issue. The Smiles reincorporation will improve tax efficiency, capital structure and yield management. Revenues will increase, and costs will reduce from our work on our network and our aircraft. We are leveraging our domestic leadership and international partnerships into higher regional and international growth. And our smart and flexible fleet management is creating value through lower rates through upgauging, higher fuel efficiency and longer range and greater flexibility to match supply with demand. Moving to Page #18. Here, you have the relative contributions last year to each one of our group's businesses, their contribution to consolidated revenues and EBITDA. Passenger transportation contributed around 3/4 of our EBITDA with loyalty contributing 19% and cargo contributing 6%. Moving to Page 19. 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 BRL 350, GOL earns an additional BRL 32 from checked bags, WiFi, onboard food and drinks, the GOL Comfort Class, carry-on bags, priority check-in, call center assistance, seat assignments, flight changes and trip interruption insurance. On the right side of this page, you see that our ancillary revenues have been growing at a CAGR of 7%. GOL's LTM gross revenues from passenger ancillaries were BRL 1.3 billion, approximately 9% of total revenues. Move to Page #20. The Smiles loyalty program is a 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. GOL not only improves travel experience by offering Smiles miles to customers, but also offers to 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 in the Silver, Gold and Diamond categories 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 redemptions. 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, its exclusive relationship with GOL and GOL's global network of partners. Moving to Page 21. Our cargo business, Gollog, serves clients from leading companies 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 all 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 130 franchise units nationwide. By 2022, our plans are to grow Gollog to 9% of our total revenues. Moving to Page 22. We 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. GOL's 1 million square foot facility is the largest in Latin America and has 3 hangars, including a hermetically sealed painting 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 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 ANAC, the FAA and the EASA. 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 BRL 140 million from GOL Aerotech. Moving to Page 23. A key to GOL's earnings momentum is our financial policies. We have the right policies for liquidity management, capital management, risk management, profitability and returns. We manage GOL with specific directives that address competitive advantage, focus on value creation, sustainable growth and generation of returns through the cycle. Among our main targets, we have a unit cost 25% lower than our closest peer, the highest wallet share in markets with the best margins, a company sustainable growth rate higher than the industry growth rate, operating cash flow generation above CapEx and debt service and leverage below 3x. Moving to Page 24. Our corporate financial policies include maintaining margins throughout the cycle, properly matching cash flows in tenor and currency of assets and liabilities, managing leverage throughout the cycle, managing risk in terms of capacity, revenue management and hedging. GOL will remain disciplined with capital allocation, delivering sustainable returns to shareholders alongside investment in growth by maintaining an optimal capital structure. We have a strong balance sheet that is designed to allow us to benefit from Brazil's economic upturn while giving us flexibility in any future downturn. Investment in growth will maximize long-term shareholder value by leveraging GOL's competitive advantages, succeeding in growth markets, improving GOL's ROIC and aligning with our brand values and vision. Moving to Page 25. The graph on the upper left shows that we plan to grow to 151 aircraft by 2023 when we will have 58 MAXs in the fleet. In our capacity planning, this is the optimal growth for GOL. And we have the contractual flexibility to meet higher or lower market growth by varying our fleet up or down by 10 to 12 aircraft. The graph on the right shows how we manage the GOL fleet during the extraordinary year that was 2019. While the MAX delays and the unexpected pickle fork maintenance presented challenges, our team minimized the effects by extending 6 expiring leases and contracting new leases for 19 NGs. We also used our high-efficiency operations to increase our aircraft utilized by 1 hour, and thereby, met our capacity objectives. This high flexibility in our aircraft agreements is a competitive advantage, and we are excited about the coming months in 2020, where accelerating GOL's fleet renewal will bring even more cost advantages to GOL. Moving now to Page 26. You see our debt amortization schedule is properly matched. GOL's average tenor on its long-term debt is 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 with maintenance CapEx lower via modernization of our fleet and building free equity on our MAX order; two, liability management with more than BRL 2 billion of debt reduction over the next 2 years and more than BRL 300 million of interest expense reduction already in 2020 and access to diverse funding sources; and then three, optimizing our balance sheet with 100% 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-. Moving to Page #27. You see that GOL Airlines has the lowest leverage of any airline in Latin America. And on Page 28, you can see that GOL's credit metrics reflect BB credit risk. GOL has BBB margins, above the 15% level; BB leverage, below the 3x level; and high B coverage, above the 3x level. Our BBB margins, which are in the high-teens, are driving our continued deleveraging based on increasing EBITDA. And we are guiding a 30% EBITDA margin for this year, lower financial expense, early debt amortization of BRL 1.5 billion in 2020, which is composed of a term loan due August 2020 and the senior notes due 2022, and the amortization of BRL 590 million of debentures through 2021, lowering the effective tax rate, which is based on BRL 2.1 billion of tax credits and the Smiles taken. Our BB rating is also supported by our yield management that recaptures FX cost variations, matching of cash flows and our oil hedges that protect 70% of 2020 consumption, which includes 85% protection for the first half of 2020. Moving to Page 29. 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. We reinforce our accountability with various stakeholders through added transparency and credibility. We provide annual sustainability reports based on the Global Reporting Initiative guidelines as are highlighted on this page. We report relevant ESG information to investors in accordance with the Sustainability Accounting Standards Board standards for the airline industry. GOL continually looks for ways to become more fuel-efficient and adopt efficient technologies. We reduced operating costs by utilizing a standardized fleet and reduced fuel consumption and GHG emissions. Being a socially responsible company, committed to sustainability is one of the reasons. And moving to Page #30, the final slide of the day's presentation, that supports GOL's positioning. Our current focus at GOL Airlines is on delivering sustainable growth with capacity discipline and a strong balance sheet; strengthening our productivity by maintaining aircraft utilization above 12 hours and maintaining a CASM 25% lower than competitors; increasing Net Promoter Score by being the easiest to use and the most affordable in the market; expanding internationally and regionally by leveraging our competitive advantages; and delivering a high-quality product with the lowest unit cost and increasing the competitivity of our team in all markets. You can also expect further strengthening of our balance sheet and an even more optimized capital structure, increased tax efficiencies, higher interest coverage and a credit rating in the BB category. GOL's unique positioning and market relevance is complemented by value maximization decisions that generate synergies to support and reinforce our position. Over the past 19 years of growth and the demand incentives we have provided with the best fares, GOL has created an irreplicable network: our slots, our position in main airports and our opportunity to create even more value. Our optimized capacity planning is based on a persistent search for the optimal supply-demand balance, where equilibrium is the objective. GOL's planning is based on multiple scenarios and permits fast reactions to market changes. Capacity flexibility is a key competitive differential for GOL. And last but not least, GOL is second to none in commitment to a sustainable business and to best practices in environmental, social and corporate governance, all wrapped up in a very solid and unique corporate culture. Thank you for your interest in GOL Airlines.