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

Thank you for your interest in GOL Airlines. I am Richard Lark, the company's CFO. This is our presentation at the BofA Securities Emerging Markets Debt and Equity Conference, and we are making it available as well on our Investor Relations website. Moving to Page #2, I show our disclaimer regarding forward-looking statements for this presentation. Moving to Page #3. Anton Chekhov in the last half of the 19th century was quoted as saying that "Any idiot can face a crisis; it's day-to-day living that wears you out." In 1959, John F. Kennedy gave a speech where he was referring to the industrial rise of the Soviet Union and Communist China. In it, he said when written in Chinese, the word "crisis", weiji, is composed of 2 characters. One represents danger and the other represents opportunity. I believe both of these are helpful references as we stand tall in pursuit of our same goals. I'll use the last 15 minutes of this presentation for some advanced GOL where I will address how GOL is managing this latest crisis. But before that, here on Page 4, we're going to take around 10 minutes and give you a GOL one-on-one review for those of you that might be new to GOL. To achieve our goals, leverage our competitive advantages and deliver a high-quality product with the lowest unit cost, GOL's management is focused on delivering sustainable growth with capacity discipline and a strong balance sheet; strengthening our productivity by maintaining high aircraft utilization and a CASM significantly lower than competitors; increasing the competitivity of our team in all markets; and increasing our Net Promoter Score by being the easiest to use and the most affordable in the market. Part of this focus, moving to Page 5, for many years, is being a socially responsible company committed to sustainability. Not only is GOL one of the greenest airlines in the world, we continually invest in becoming more sustainable. We reinforce our accountability with various stakeholders through added transparency and credibility. We provide annual sustainability reports based on global reporting initiative guidelines as highlighted on this page, Page 5. We report relevant ESG information to investors in accordance with the Sustainability Accounting Standards Board standards for the airline industry. And GOL continually looks for ways to become more fuel-efficient and adopt efficient technologies. We reduced operating costs by utilizing a standard fleet and reduced fuel consumption and GHG emissions. And this has been consistent with, moving to Page 6, delivering results to investors. 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 15 reported quarters. Income increased significantly, cash flow generation grew consistently and deleveraging drove credit ratings improvements. Moving to Page #7, you can see that this is because GOL has the best 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 is the result of our strategy, which is summarized here on Page 8. GOL's strategy positions it to outperform due to its unique strengths deriving from lowest cost operations, where 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 high-value corporate customer segment and the leisure economy segment. And the right market, over the next few decades, Brazilian air travel should add over 100 million traveling passengers per year, growing to 200 million per year. 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, position the company to expand its network in South America, the Caribbean and abroad. Moving to Page #9. GOL's value creation plan is summarized here for you on this page, occurs through our activities in aircraft acquisition, air transportation and loyalty. Our aircraft acquisition activities generated over BRL 2 billion of cash gains over the last 4 years. We maintain a rightsized fleet and focus on profitable routes. All investments for our product already made, and GOL has the highest operating margin and most resilient business model. 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. A key to GOL's management 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, value creation, sustainable growth and generation of returns through the cycle. Among the main targets that we have are a unit cost, 24% lower than our closest peer, the highest wallet share in markets with the best margins, a sustainable growth rate higher than industry growth, operating cash flow generation above CapEx and debt service and leverage below 3x. Moving to Page #11. Our financial policies include maintaining margins throughout the cycle; properly matching cash flows, term and currency of assets and liabilities; managing levers throughout the cycle; and managing risk via capacity, revenue management and hedging. GOL will maintain discipline with -- GOL will remain disciplined with capital allocation, delivering sustainable returns to shareholders alongside investment in growth by maintaining an optimal capital structure. Our balance sheet will continue to be designed to allow us to benefit from the business cycle, flexibility in upturns and flexibility in downturns. 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 our brand values and vision. Moving to Page #12, continuing with our GOL one-on-one review here, here are the relative contributions last year to each one of our group's businesses to consolidated revenues and consolidated EBITDA. Passenger transportation contributed around 3/4 of our EBITDA, with loyalty contributing 19% and cargo contributing 6%. Moving to Page 13. Our reported PRASK includes all passenger ancillaries. In our average ticket price last year of BRL 350, GOL earned 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 can see that our ancillary revenues grew at a CAGR of 7%. GOL's LTM gross revenues from passenger ancillaries were around BRL 1.3 billion, approximately 9% of total revenues. Moving to Page #14. The Smiles loyalty program is an important 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 the Smiles customers over 900 global destinations, access to VIP lounges around the world, courtesy tickets, free checked baggage, special seating and airport priorities. Moving to Page #15. Our cargo business, Gollog, serves clients from leading companies in the health care, clothing and automotive industries. We have several cargo warehouse facilities around Brazil and Gollog customers can have their product picked up and delivered to their door or use the convenience of one of our over 100 stores around Brazil. Gollog is growing its client base. And by 2022, our plans are to grow Gollog to 9% of our total revenues. A driver of this growth is expected to be e-commerce. And as you can see here on the next page, Page 16, Gollog is enabling e-commerce. Brazilian consumers are shifting more of their spending online, but with a greater emphasis on fast-moving consumer goods. More sellers are listing on e-commerce marketplaces. Products which were almost exclusively sold offline are now online. Store closures, the availability of consumables and free shipping incentives are expected to drive higher purchase frequency. And the COVID-19 pandemic has accelerated online buying, and Gollog will be a critical part of this behavioral shift. Moving to Page #17. I highlight our in-house MRO which helps keep our productivity high and also offers our MRO services. Since 2006, for over 13 years now, we own and operate an in-house aircraft maintenance center located at the Confins Airport at 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 parts 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 Brazilian National Civil Aviation Agency, the U.S. Federal Aviation Administration and the European Aviation Safety Agency. With over 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. Moving to Page 18 to wrap up this GOL one-on-one review. Here, 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 high customer satisfaction and creating a structural basis for achieving the lowest unit cost. GOL utilizes its assets more efficiently than any other player. We achieve a world-leading aircraft utilization. And key components of our high operating efficiency are our operations analytics department that uses big data, advanced analytics and new technology to keep our processes streamlined, improve management of disruptions and optimize scheduling and our in-house MRO that utilizes predictive maintenance tools to maximize aircraft availability and keep costs low. Now here on Page 19, I will shift to the advanced GOL portion of this presentation, starting with the measures our management team took to address the pandemic. In March, our team moved fast and decisively. Our capacity management is highly flexible given our single fleet type and unique contract terms. Our compensation agreement reduced our order book size from 129 to 95 aircraft, provided cash and reduced liabilities. On the employee front, we took swift actions to support our team and ensure they have the tools to adjust to the new environment. On the financing front, we have rolled over our credit lines, extended the amortization profile of our debentures and refinanced CapEx lines. And we have access to over BRL 3 billion in additional liquidity sources in the form of unencumbered assets, restricted cash and deposits. And lastly, our controlling shareholders remain fully aligned with our success in the long term. Moving to Page #20. I highlight a key component of GOL's ability to manage through this pandemic, which is our highly flexible capacity management. Our fleet management allows GOL to better match capacity with a variety of demand scenarios. We have excellent relationships with our lessors. If needed, we can reduce our NG fleet to 112 aircraft by year-end 2020 and further in 2021 and 2022. And our fleet flexibility will help us delever if needed, and we can reduce our MAX orders, if needed, as I highlight here on the next page, Page 21. In March, we announced an agreement in which Boeing compensated GOL for the grounding of the 737 MAX. This agreement bolstered our liquidity by nearly BRL 0.5 billion in April. Additionally, this agreement allows GOL to adjust its order book, increasing our flexibility to reduce fleet if needed. We believe this will provide to be a significant competitive advantage in the future scenario. Moving to Page #22, you can see how the more flexible capacity management of the single fleet type has translated into better performance in the pandemic. The single fleet LCC model is the most resilient and will allow for a faster recovery and deleveraging once the market normalizes. On the left-hand side, you can see that irrespective of their home market, LCCs, such as GOL, Southwest and Ryanair had less leverage than their regional peers going into this pandemic. On the right side of this slide, you can see that the market has begun to reflect this strategic advantage within this crisis. Developed market LCCs have outperformed their multifleet peers by 20% in the equity markets, while GOL has outperformed by only 8%. In the credit markets, you can see that the LCC bond yields are tighter than their peers. And moving to Page 23, I'll highlight another key component of GOL's ability to manage through this pandemic. And that is our domestic-focused flight network. We are primarily a domestic Brazil airline, and our revenues are more driven by local business traffic and local leisure traffic and do not rely on international passengers. The small portion of international flights, which we normally operate, are to destinations that have experienced similar currency devaluations compared to the Brazilian real. Moving to Page 24, you can see that the LCCs also stand out with respect to cash liquidity. In the first quarter of 2020, GOL reported the highest cash position of any of its regional peers, with cash of over 20% of LTM revenues. Our cash position was the most resilient when measured by the difference from the fourth quarter of 2019 to the fourth quarter -- to the first quarter of 2020. Our April liquidity position was around BRL 4 billion, and we have another BRL 3 billion of potential additional liquidity sources such as financeable deposits and unencumbered assets. Moving to Page #25, you see that we entered this pandemic with the lowest leverage among our regional peers. And here on Page 26, you see that our cash liquidity is expected to be efficient and sufficient for our near-term debt amortizations. Moving to Page #27, I want to make a few comments on our oil hedging activities. First, crude prices have decreased, benefiting GOL's cost structure. If oil prices stay low, we could see around an 8% reduction in our costs, including the currency effect. Second, GOL has a comprehensive set of risk management policies and programs with the current budget of around $100 million to invest based on our 2019 fuel cost of around BRL 4 billion per year and recent crude oil price volatility of around 15% to 20%, meaning that GOL has up to $100 million in assets invested in restricted cash. GOL utilizes plain vanilla instruments such as options, CCCs and swaps, both OTC and exchange-traded. Currently, we have a hedge ratio of 60% for 2020 consumption in the low 60s and hedge ratios of 30% for both 2021 and 2022 each at oil prices in the mid-40s. Over 70% of our positions are in calls and call spreads with no downside risk of cash consumption. The remaining 30% are in 0 cost collars and swaps immunized with Brent underlying in the low 20s. GOL has fully mark-to-market and fully deposited all required margins with counterparties. Moving to Page 28, I will finalize by showing you some of the reasons why we believe GOL will emerge stronger after this crisis. Number one, GOL is Brazil's largest domestic airline with a strong presence in the main metropolitan areas; number two, GOL has a singular exposure to the underpenetrated Brazilian domestic market with organic growth opportunities; number three, we have an unparalleled brand and customer loyalty program; number four, we have a highly defensible, low-fare point-to-point network; number five, we have proven ability to maintain reliable operations, control costs and CapEx and improve liquidity; number six, we have a large fleet of modern Boeing 737s with high operational flexibility; and number seven, we have a strong and committed controlling shareholder. Thank you for your interest in GOL Airlines.