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

Good morning to those of you here in Asia listening into GOL's Asia Investor Round Table. And also hello to those of you here with us at the Singapore Exchange, where we're holding today's event. And thanks to the Singapore Exchange for their hospitality and letting us have this event at their facility here today. I'm Richard Lark, and [indiscernible] our investors based in Singapore, Hong Kong, and we're actually in [indiscernible] the today [indiscernible] investment [indiscernible]. Today, I'll share the latest developments regarding the demand recovery in GOL's markets, report on synergies already being captured from the Smiles reincorporation, the status of our fleet transformation further [indiscernible] it on the map [indiscernible] and our preliminary expectations for the near term, followed by a Q&A session. For those of you here with me at the Singapore Exchange, you can give me your questions in writing here. And for those of you participating remotely, you can send us your questions via the webcast platform at any time beginning now. [Operator Instructions] And I'll answer them in the Q&A session that will begin in approximately 15 minutes. Moving to Page 2. I'd like to remind you that this presentation is being recorded and that forward-looking statements are based on the beliefs and assumptions of company management and on information currently available to GOL. They involve risks and uncertainties because they relate to future events and therefore depend on circumstances that may or may not occur. Investors and analysts should understand that events related to macroeconomic conditions, industry and other factors could also cause results to differ materially from those expressed in such forward-looking statements. With that said, I will begin by unpacking the domestic revenue recovery here on Page 3. In Brazil, domestic air travel has recovered to pre-pandemic levels driven primarily by VFR traffic. Moving to Page 4, I share the evolution of GOL's domestic sales over the last 2 years, showing the month-to-month growth rates as well as the growth over the same month in 2019, which is considered the pre-pandemic comparison. GOL averaged over BRL 20 million of sales per day in the third quarter of '21 and averaged BRL 34 million of sales per day in the fourth quarter of '21. Our December traffic results, which we announced recently, showed an 82% load factor on 3.54 billion of ASKs, representing an 11% increase in ASKs over 2020 and an -- representing 82% of 2019 domestic market ASKs. In terms of sales, our December 2021 results of BRL 970 million were 10% above December 2019 sales and 9% above January 2020 sales. This above pre-pandemic sales level has primarily been driven by VFR traffic. In relation to the pre-pandemic levels, GOL's large corporate sales in December were at around 80% of 2019 levels. And we expect to recover the remaining 20% over the next few months. Now I unpack what we are seeing in the recovery of corporate travel here on Slide #5. This chart groups large corporate clients in Brazil into 4 archetypes based on their recovery of 2019 volumes. Starting on the lower right and then working up: first category is sectors that are still far from recovering; the second category are those that are -- still have low volume in terms of purchases of air travel; the third level above is sectors that are recovering, mainly in the last few months; and on the top are the leaders who have led the recovery. The sectors who have recovered the most are the vehicles and parts sector, the beverage sector and the machinery and equipment sector. When I say recovered the most, that's in the recent period in 2021 through the end -- through October when this analysis was done compared to 2019. And so as you can see, the leader sectors have, in most cases, recovered to above their level of air travel that we had in the same period in 2019. The finance, oil and gas and pharmaceutical cosmetic sectors are at around 40% of what they were in December of 2019. The financial sector, which represented 18% of airline industry sales in 2019, by the end of last year, had only recovered to around 40% of 2019 levels. The oil and gas sector, which is traditionally one of our main drivers of corporate revenues and represented around 10% of industry pre-pandemic sales, by the end of last year had only recovered to around 50% of 2019 levels. And so these components in the far from recovering and the low-volume sectors represent the bulk of corporate sales volumes that we expect to recover in the next few months. And that also relates to what we're doing at GOL in terms of reactivating our business-focused network to transport these corporate clients on point-to-point flights and shuttle flights. I'll now move to Page 6 and switch and report on the synergies already captured from the reincorporation of Smiles. Since the end of June of last year, we're generating significant operational, financial and tax synergies that were not available when Smiles was a separate company. Within the over BRL 450 million in expected synergies per year result of the reincorporation, I highlight here on this slide some of our revenue management improvements. Integrated revenue management has increased both the average fare and the volumes of the Smiles redemptions, as you can see on the slide. Since we realigned inventory management at the end of June of last year, the average fare on Smiles' client redemptions has increased, improving the redemption margin by around 15% and improving our consolidated group margins by around 200 basis points. Moving to Page #7. The gray area on the right of this graph shows the average increase in sales for Smiles' redemptions due to the reincorporation of Smiles. The average increase in sales volumes for Smiles' redemptions in the latter part of last year was at over BRL 3 million per day of an incremental improvement when compared to pre-reincorporation. Moving to Page #8, I'm switching now to show our fleet plan and highlight the transition and the benefits of the transition to the 737 MAX. At the end of September of last year, our total fleet was 129 Boeing 737 aircraft, comprised of 114 NGs and 15 MAXs. GOL has 95 firm orders for the acquisition of Boeing 737 MAX aircraft, of which 73 are orders for MAX 8, and 22 are orders for MAX 10s. We recently signed agreements to acquire 28 additional MAX 8s, which are expected to help reduce the company's unit costs by an additional 10% in 2022. These 28 B737 MAX 8 aircraft will replace 23 NGs by the end of this year when we will have 44 737 MAX aircraft, around 32% of the total in our fleet. With current purchase commitments for 737 MAXs, GOL expects to have a fleet comprised of 50% MAX aircraft by 2025 and meet its goal of a 75% MAX fleet by 2030. Aircraft acquisitions are being financed via sale leasebacks and long-term loans, which will include U.S. Exim Bank guaranteed financings. The MAX has lower carbon emissions, a larger cargo capacity, improved ancillary revenues, is over 15% more efficient in fuel burn compared to the NG and provides lower maintenance cost for the next 4 to 5 years, all important for maintaining GOL's unit cost advantage. As I show here on Slide #9, at GOL, we have worked to set the foundation for structurally higher margins. Here, we show our expected cost plan progression for this year, 2022 full year. For 2022, we expect to operate an average of 108 aircraft with fixed costs 15% lower than pre-pandemic levels. Compared to 2019, our total unit costs in U.S. dollars are expected to be reduced by over 10% this year in 2022. Moving to Slide #10. I highlight the financing component of our fleet plan. To support the acceleration of the fleet transformation of GOL from NGs to MAXs, we will incorporate more finance leases going forward. By 2025, we plan to have 24 aircrafts in finance leases and the remaining part under operating leases to preserve our capacity flexibility. The incorporation of new 737 MAX aircraft allows GOL to accelerate the return of 700s and 800s NGs on short-term leases while maintaining the flexibility to keep alignment of our capacity with fluctuations in demand for air travel during and post pandemic. The Boeing 737 is the most liquid commercial aircraft in history and provides GOL with the ability to increase its unencumbered assets with low residual value risk. On the next slide, Slide #13 (sic) [ Slide #11 ], I show the evolution of some of GOL's main balance sheet indicators through the third quarter of '21. Through liability management, rational and efficient supply management, and our cost reduction actions and measures, we will continue to match our assets and liabilities and manage our cash flow. Since the COVID-19 pandemic started, GOL has paid down around BRL 12 billion of debt. GOL's short-term financial debt currently is below BRL 0.5 billion. And in the third quarter of 2021, our adjusted EBITDA margin reached 25% on an LTM basis. Move to Slide 12, I'd like to share a few considerations about the opportunities for mergers and acquisitions in Latin America. Prior to the pandemic, GOL was at the forefront of forging codeshare and interline agreements. In addition to our 14 codeshare agreements, we also have over 75 interline agreements with global airlines, creating a vast global network for our customers. This strategy was a very efficient way of expanding our network. In the post COVID environment, we believe the landscape will shift in the region. With the easing of travel restrictions within Latin American countries and among them in North America and Europe, we see previously more isolated economies in the region becoming more interconnected. This all means that going forward, it may be time to reconsider whether the codeshare and interline approach goes deep enough to capture the full set of available synergies from expanding the network and access for travel alternatives for our customers. Previously, this would have been difficult due to airline ownership restrictions in each country. But as most countries have largely done away with their ownership restrictions, there is now an opportunity to revisit what the landscape of the future might look like. We think our current strategy is the right strategy for the current market. We are prepared to pivot our strategy should these trends accelerate and new and interesting opportunities arise. Moving to next page, Page #13, I highlight our acquisition of Brazil's MAP airlines recently approved by Brazil's antitrust agency. This acquisition reflects our ongoing commitment to expanding the demand for passenger air transportation in Brazil and what we perceive to be a market opportunity as Brazil recovers from COVID-19. This acquisition includes a network of 11 routes in Brazil's Amazon region, where we have an opportunity to offer higher seat density to historically underserved markets as MAP's ATRs will be replaced with larger, more efficient aircraft, in line with GOL's regional expansion strategy on Boeing 737-700s and new routes complementary to our current network at São Paulo's Congonhas Airport, allowing us to provide a wider range of flight options for passengers and greater convenience for customers. Moving to the next slide, Slide #14, I highlight Brazil's economic recovery. And the recovery of the Brazil economy is enabling its return to its pre-COVID fiscal situation. The country should end this year with a nominal deficit of around 6% of GDP, meaning when the results come out for 2021, that's what is expected. And that's the same value as 2019 and much lower than the 14% that we saw in 2020. This compares very favorably with other markets. For example, the U.S. expects to reduce its nominal deficit from 15% of GDP in 2020 to 12% in 2021. Also, Brazil's balance of trade in goods had a surplus of almost $3 billion in September, and international reserves totaled $369 billion. Net inflows of direct investments to Brazil IDP were just under $5 billion at the end of the third quarter of last year. While Brazil recently raised its overnight interest rate by 1.5 percentage points, bringing it to 7.75% per year, which is a key anti-inflationary measure, we expect that supply chain and commodity prices will normalize as the effects of the pandemic subside. And GOL is prepared to ride out an inflationary scenario due largely to the effectiveness of our cost reduction and liability management programs. While estimates for GDP growth have recently been revised down, as you can see here on this page, we believe that air travel demand will continue to resume in Brazil with the progress of Brazil's vaccine implementation, which will eventually include more of the corporate travel segment as more people return to the workplace and corporates increase their consumption of air travel as it relates to economic activity. Moving to the next page, I highlight some data on Brazil's vaccination program. Brazil is a vaccination leader with a full vaccination rate 5 percentage points higher than that in U.S. currently. The full vaccination rate is higher in Brazil at 64% than in the U.S. at around 60%. And the partial vaccination rate in Brazil is also higher at 77% than the U.K., Germany and the U.S., which are in the mid to low 70s. In terms of doses, with over 350 million administered and close to 20 million boosters administered, Brazil ranks first in Latin America and fourth place globally, ahead of the U.K., Germany and France. 100% of the São Paulo city, the largest city in Latin America, adult population is already vaccinated with at least 1 dose. Brazil's government managed to purchase nearly 600 million vaccine doses, which is enough to cover more than 140% of the total Brazilian population. The government has secured these doses. And with regards to the Omicron virus strain discovered initially in South Africa and currently already identified in over 15 states in the U.S., the initial data shows that this variant is more transmissible and suggests that it also may be less deadly, which is something that would fit into the pattern of virus evolution observed historically. And as suggested by a recent report by strategists Marko Kolanovic and Bram Kaplan from JPMorgan, this might ultimately be a positive for risk markets because it could signal that the end of the pandemic is in sight with a significant benefit for air travel. According to them, the omicron could be a catalyst for steepening, not flattening of the yield curve, rotation from growth to value, which has actually begun over the last couple of days, and a sell-off in COVID and lockdown beneficiaries and rally in reopening themes such as airlines. So that's more of a note for our equity investors. Moving to Page 16, I show our preliminary guidance for 2022. We will benefit from a reduced fleet cost for the next decade as we take more deliveries of 737 MAX aircraft that will compose a more significant part of the GOL fleet. These strengths will enable GOL to capitalize on the many growth and expansion opportunities that are now available in our markets, enabling us to benefit from a strong rebound in the demand for air travel as we move into the Southern Hemisphere's summer travel season. We are committed to delivering profitable growth in an environmentally sustainable manner with less fuel consumption and lower carbon emissions per passenger while, at the same time, improving GOL's industry-leading customer experience. Now moving to the last slide of today's presentation, Slide #17. I'd like to wrap up and summarize key initiatives and accomplishments over the last 23 months. Our decisive actions position GOL to lead as demand returns. We are the only airline in South America to have raised equity capital [indiscernible] we capitalized the company's balance sheet with approximately BRL 1 billion of new equity via, number one, a BRL 423 million capital increase, which was anchored by BRL 268 million [indiscernible] shareholder; and two, a BRL 670 million equity issuance as part of the BRL 1.3 billion take in of the minority interest of our loyalty program, Smiles. Pro forma, the Constantino family will maintain nearly a 60% economic stake in GOL, which historically has been the most liquid airline stock in Latin America. Also, we're the only airline in South America to have returned capital to our fixed income investors. Since the beginning of last year -- or I should say since the beginning of 2020, GOL returned $530 million in principal and interest to its debt investors, paid down BRL 800 million of bank debt with utilization of BRL 300 million of restricted cash, remained current on all interest expense, paying more than BRL 800 million, and raised $500 million through the issuance of long-term debt in the public markets last year. And that obviously complements some of the capital raising we did in the initial part of the pandemic in 2020. With that, I will now switch to the Q&A portion of today's Asia Investor Roundtable. [Operator Instructions]

So I have to use my mobile phone here, for those of you following live on the platform, to deal with some of the questions here. Okay. First question. It says, regarding the preliminary guidance for 2022, is it fair to assume an implicit yield recovery to 2019 levels? In addition, what could we expect for liquidity in 2022? Well in terms of yields, yes, we have already seen a yield recovery to those levels currently. And again, as I mentioned previously, the large part of demand during the pandemic up until now has been driven by VFR customers, visitors, friends and relatives, not the large corporates, which we expect to have fully back by the end of the Q1. And so to be where we are with [indiscernible] [ hard ] traffic is significant, and that leaves us significant room for improvement when the large corporates come back. And so it is possible that in the second half of this year, we should see yield levels which with full inquiry [ inflation risk ] [indiscernible] as well as rational capacity management by the airlines in the Brazilian market. And based on the public guidance that we've provided, one of the reasons why we provide that level of detailed guidance is it then allows us to talk to everybody in an equal way about our expectations for next year. And so with those numbers that we've provided to you for next year in terms of capacity and revenues, you obviously have the data there to see what we're expecting for the full [ year ] of next year. In terms of the [indiscernible] share, Q1 of this year is still suppressed, depressed as we're emerging from the pandemic. As I mentioned, a GOL ready at a revenue level, which is fully recovered versus 2019 levels, and that's with large corporates only 80% recovered. As the final part of large corporates come back in over the next couple of months, we expect to have a normalized customer base in the second quarter. In Brazil, we have a down quarter seasonality-wise in our [Audio Gap] quarter. And so that's a long way of saying that we expect a significant expansion in yields in the second half of this year as we will have the dynamic fully behind us and a full recovery of corporate travel and the GOL business-focused network based on a higher percentage of point-to-point flights and show markets fully recovered as well over the next couple of months. And so as we would enter into the second half, we'll have the benefits of all of those. In terms of liquidity, what we've guided there is that we'll be maintaining liquidity at the levels that you've seen with GOL [indiscernible] as we communicated [indiscernible] [ available ] to us with our assets and use of noncash current assets to unlock additional liquidity [ if needed ]. But we expect to basically manage the company and maintain our liquidity at these levels going forward with [indiscernible] at about [indiscernible] and [indiscernible] our aircraft acquisition and finance exercise, which includes the fleet replacement, cash outlays for return of NGs will be self-financed with [indiscernible] MAX assets that are either being financed through finance leases or sale leaseback. So that will not represent a net cash outflow for our company. Hopefully, that answers the question. But again, the [indiscernible] on that [indiscernible] we can help you [indiscernible]. Question number two, in regard to your year-end '22 operating fleet of 108 aircraft versus a total fleet of 136 aircraft, if utilization should return to more normal levels in the second half of this year, what is the lag in returning all 136 aircraft back to operations? Will it be demand-driven or other factors? Also, in your November earnings call, you seem to be thinking a return to CASK ex-fuel normalization more so in the first quarter of '22. Is that now pushed out more so to the second half of this year and why? Okay. Well, first of all, the 108 operating aircraft that I mentioned is not year-end '22, that's average for the year. That would be at a higher level in the second half of this year. And so regarding utilization, yes, we do expect that GOL's utilization will return to our normalized levels of around 12 hours a day in the second half. And that will not only mean that we are operating our fleet -- our total fleet at a very high level of operational efficiency because, remember, we have to build in -- it's -- in normalized operations, it's really [indiscernible] so January and July that we're operating the full amount of our total fleet operationally. As we have very dramatic seasonality in Brazil and we also have to schedule maintenance on an aircraft, there usually is a gap of 10 to 15 aircrafts between total fleet and operating fleet on average throughout the year. That will be much larger in the second quarter. But in the second half, as we shift into the more normalized demand environment, we'll also have the return of the large corporates, [ moving in at a much ] [indiscernible] big fleet with the [indiscernible] at GOL, which is a very high level of aircraft utilization around 12 hours a day. And that will have significant effects on use [indiscernible] with [indiscernible] consumption and unit in the second half of this year because of returning to the high level of utilization, because of not having aircraft, because of the [indiscernible], because of the acceleration of the fleet replacement from NGs to the MAXs. All those benefits will be kicking in significantly in the second half of this year. And so in your question on return ex fuel value [ that will be ] [indiscernible] in the second half next year. And so yes, in our November earnings call, we were expecting to have that fully in gear at the end of the first quarter of this year. That is pushed out a little bit given the lag -- the additional lag and the return of the large corporates. And the reactivation of the full GOL business network based on a high level of point-to-point flights in the short markets, which will be fully in effect by April, but the second quarter is a down quarter, and so you won't see the full effects of that until the third quarter. The next question. Can you discuss the prospects of international operations reopening and how that influences your revenue estimates for 2022, which are flat to 2019? Well, normally, pre-pandemic, about 15, 1-5, percent of our ASK production was focused on international flights, which [ were ] about 9% to 10% of total revenues and around 5% of EBITDA. Those numbers for 2020 is about half of the 2019 numbers. And so -- and we're going to be more of a follower [indiscernible] the return of international operations just given the volatility in restrictions that can apply to international destinations. The main international network destinations for GOL are Argentina [ destination ] followed by [indiscernible], followed by [indiscernible] and some other selected initiations around South America. And Argentina and Chile are still emerging from heavily restricted markets for international travel. And the U.S. operations at GOL depend on us having the larger percentage of MAXs in the fleet because those are the aircraft that have the range to reach Miami and Orlando. And so for us, that will kick in more in the second half of this year as well. As I said, we're going to be more of a follower than a leader. And in those estimates for 2022, the contribution from international is more weighted to the second half. But for the full year, it's about half of those numbers, which is about -- with around sort of 8% of ASKs and [ 6% to 7% ] of total revenues. And so it's a much smaller contribution to EBITDA. And so those are the questions that we received on the platform. Let me just do a double check here to see if I'm finding correctly the -- if there's any additional questions. And the manager of the platform is telling me that we don't have any additional questions. So with that, I want to thank you all for participating in GOL's Asia Investor Roundtable. As we have shared today with you, our management team is well prepared, strong and agile. And we thank you for your interest and investments in GOL Airlines. And once again, thank you to the Singapore Exchange for hosting us here today at their facilities in Singapore. Thank you, and have a nice day.