Gol Linhas Aereas Inteligentes SA (GOL) 2014 Q1 法說會逐字稿

Welcome to GOL Airlines first quarter of 2014 results conference call. With us here today we have Mr. Paulo Kakinoff, CEO; Mr. Edmar Lopes, Chief Financial and IR Officer; and Mr. Eduardo Masson, Financial and Investor Relations Director.

This event is being recorded, (Operator Instructions). After GOL remarks, there will be a question-and-answer session. (Operator Instructions).

This event is also being broadcast live via webcast and may be accessed through the GOL's website at www.voegol.com.br/ir, where the presentation is also available. Participants may view the slides in any order they wish. The replay will be available shortly after the event is concluded.

Those following the presentation via the webcast may post their questions on our website. They will be answered by the IR team after the conference is finished.

Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of GOL management and on information currently available to the Company. 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 conditions related to macroeconomic conditions, industry and other factors could also cause results to differ materially from those expressed in such forward-looking statements.

Now, I will turn the conference over to Mr. Paulo Kakinoff. Mr. Paulo, you may begin your presentation.

Thank you. Hello, everyone, and thank you for being interested in our earnings conference call.

Let's begin our presentation with page number 3 in which we bring the highlights of the first quarter of 2014. Net revenue increased at 20% over the first quarter of 2013 or BRL 411 million. Plus, we reached a record level for our first quarter of BRL 2.5 billion.

The operating result EBIT was 43% higher than in the first quarter last year reaching BRL 144 million and an operating margin of 5.8%. The EBITDAR also had a strong evolution and totaled BRL 493 million which allowed GOL to reduce it's financial leverage from 27.9 times to 6.5 following our (inaudible).

Here on page 3 we show record levels on the last 12 months net revenues and EBITDAR of BRL 9.4 billion and BRL 1.7 billion, respectively. The operating results EBIT reached BRL 309 million in the same period representing an increase of BRL 1.1 billion against the last 12 months. Our focus on increasing revenue generation and cost control can be noted in the last 12 months' RASK and CASK (inaudible) which grew by 18% and 3%, respectively.

During the quarter CASK increased by 17% due to the scenario of record fuel prices which reached BRL 2.62 per liter, the highest for a quarter and also the 18% depreciation of the real against the average dollar. Even with this scenario, RASK has increased by 18% in the quarter, up by 1.2 percentage points compared to the CASK. The (inaudible) between RASK and CASK has been improving margins quarter by quarter.

On the liquidity side our cash at BRL 2.8 billion remained at a high level representing 30% of the net revenues for the last 12 months. We understand that this is an important time to (inaudible) the world's macroeconomic scenario.

On slide number 4, representing a (inaudible) rate, the figures have increased in revenues, EBIT and EBITDAR, as well as operational costs which as said has been under pressure by the devaluation of the real and a scenario of record fuel prices. It's important to know that the increase in revenue was 20%, exceeding the increase in costs, which (inaudible) 18% in the quarter.

On slide number 5 we evaluate EBIT and EBITDAR over the last 12 months quarter by quarter. On the EBIT side we achieved an improvement of BRL 1.1 billion against the first quarter last year. And [surely] I'm talking of the average of the last 12 months. This led to a cumulative operating margin of 3.3%, an improvement of 13.4 percentage points. On the EBITDAR side, the increase reached BRL 1.3 billion totaling an EBITDAR of BRL 1.7 billion on the last 12 months.

Turning to slide number 6, I show here our operational improvement. Using metrics that involve cost and revenues, we can see the results of GOL's commitment to become more efficient. The total of the net revenues per employee improved by 58% since 2011. The same [claim] is observed in the RPK indicator by the number of employees, which improved by 34%. On the efficiency side we bring (inaudible). Revenue per flight and fuel consumption in liters per RPK. In both indicators we can also notice significant improvements.

On slide number 8 we analyze our performance against interesting peers from the perspective of the EBIT margin evolution. Among the peers analyzed, GOL showed the greatest evolution in the last 12 months' EBIT margin, an increase of 13.4 percentage points of that peer group.

Moving on to the next slide, number 9, in a comparison with the same peers now we look from the revenues per ASK perspective. As is indicated, GOL was the only company that showed a double-digit increase, reaching 17.7%. This was an important driver to achieve the operating margin evolution that we talked about in the previous slide.

On slide number 10, the operational data shows that GOL has increased its load factor by 9 percentage points. The 15% growth in RPK led us to a gain of 1.8 percentage points in the [domestic] market share. Also in the quarter we increased supply by 1.6% in the domestic market and 1.4% internationally.

In slide number 11 we can see (inaudible) to pursue an increase in PRASK, combining factors such as the (inaudible) equivalency rate, the continued increase in [new], which increased by 18% compared to the first quarter 2012, and rationalization of supply, currently 12% lower than when the Company started (inaudible) in late 2012. This dynamic is the key point to provide a sustainable growth.

On the next slides we will talk about GOL's strategy. On slide number 13 we can see the expansion of our strategic partnerships, aiming to increase connectivity and become more effective. During the quarter we announced a new agreement with the three major international airlines that fly to Brazil: Air France-KLM, TAP and Aerolineas Argentinas.

The (inaudible) Air France-KLM followed the successful model of cooperation between GOL and Delta Airlines. CADE has already fully approved Air France-KLM and Aerolineas Argentinas agreements. Just for the record, CADE is the Brazilian antitrust authority.

The next slide, number 14, we highlight our new flights, in line with the objective of gradually increase revenues in foreign currency. First, the flights between Campinas and Miami, Sao Paulo and Santiago, and from Fortaleza to Buenos Aires deserves a special highlight. This (inaudible) will benefit all domestic flights departing from Ceara with the VAT reduction on jet fuel by 13 percentage points, plus that is for all GOL domestic flights flying -- coming to this state.

In slide number (inaudible) the key measures we have been taking for the FIFA World Cup. The load factors we have seen until now for this (inaudible) reinforce the prices we have [set] from the first moment with 98% of the tickets available for less than BRL 900. That means a continuation of the current price [strategy] of GOL. We didn't change anything related to the World Cup and that -- the maintenance of the price was only possible due to the additional flights we could get approved from the Brazilian Civil Aviation Authority. However, since there will be less business customers traveling during this period, the outlook regarding the amount remains uncertain.

On slide number 16 we would like to emphasize that we are on time with the [scheduled] (inaudible) configuration having 70% of the seats with the new configuration until the end of this month, ahead of the (inaudible) will be served (inaudible) aircraft configuration.

Turning to slide number 17, the Smiles results demonstrate the success of GOL's Smiles complementary strategy. Our revenue growth and the strong involvement of Smiles which, as we know, is an important distribution channel for GOL, among other benefits. During the quarter Smiles recorded a profit of BRL 78 million with a margin of 41.6%. As a way to maximize value for all shareholders and reaffirm its commitment to corporate governance, Smiles will distribute BRL 1 billion special dividend.

Now I will hand over to Edmar (inaudible) the results for the period.

Thank you, Kakinoff. Good morning, everyone. Thanks for joining us this morning.

I would invite everyone to move to slide number 19 and I will make a highlight of a few drivers that are leading us to the results we are showing today.

First, one is load factors. Load factors are beyond 76% for the first quarter. This is the highest ever for the first quarter at GOL and it shows indeed the effort that we are making over rationalization, and revenue management and product development are paying off.

The second one that -- the second item that I would like to highlight is the yield. The yield has been growing; as Kakinoff mentioned, 18% over the last 2 years and 4% over last year. So at the end of the day, PRASK is moving up by 18% on a year-over-year comparison and this has been the running rate at GOL for the last 9 months at least within a year at this point.

I will -- in the next slide I will go over what has impacted our CASK, our costs on the fuel side as well on the ex-fuel side, but I would like to highlight at this stage the EBIT. Operating result changed 42% bigger than last year. It shows -- we show today not only a bigger margin, but also a bigger company. That is we are increasing revenues and, at the same time, we are capturing more margin; therefore showing better results.

If you look at the EBITDAR margin, this is the second quarter that we are running very close to 20% EBITDAR margin. Again, it shows a decent level of the Company's execution. The results (inaudible) over the financial results which account for BRL 194 million [exchange] below the EBIT line.

I will ask you to please to move page 20. The main comment that I would like to make here is related to the macroenvironment. Fuel was up by 8%. The real was down by 18%. And over the past 2 years on the domestic front we have taken out 12% of the capacity. Even in this tough scenario we have been able to improve margins. The margin expansion at this point of time came primarily from revenue, from the top line. On the CASK side, as this slide shows, we have a comparison which is tough on us quarter over quarter, that is total CASK only up by 17% roughly. But if you look at the last 12 months' number, you see that CASK is up by 3%, ex-fuel by 5%.

Moving to the next page, page 21, those are the main items that have impacted our costs and I will go over them briefly. Most of them are explained in our release.

The first one is fuel. Fuel (inaudible) the price increase BRL 104 million more in our expenses. On salaries and wages, again, we have social security (inaudible) that were not due in the first quarter of 2013 because there was a write-down related to the change in the methodology [update] for BRL 20 million. Collective pay rise decided back in December by 6%. And profit sharing and total compensation for crew which account for BRL 22 million on a comparison to the first quarter. We didn't have this expense one year before.

Also, the marketing we are highlighting here two main items. The first one is commissions related to sales. We are increasing the level of sales; therefore, we are not only increasing the level of commissions, but we are also (inaudible) for different channels at different costs at this point of time. And also, this is an issue that has been affecting our results -- that had affected our results in the first quarter. This is a lost in sales primarily related to credit cards. We have reached a peak in the first quarter. The recent numbers show an improvement on a month-over-month -- or rather on a week-over-week basis so we should see this number decreasing along the year, I'm very positive of that, even keeping the sales at the current level.

The next item that I would like to highlight is landing fees. Our connection fees were not due in all airports all over the -- in 2013; therefore, this line will be increased by that this year. There will be connection fees being collected all year round at our airports at this point.

And airport services, we are highlighting something that is very (inaudible) there was a readjustment for contract [related] through our CPA -- CPI, I'm sorry. And then also the enhancement of IT services took primarily to packages that we have been deploying, but it will -- it comes back in terms of decisions that Kakinoff mentioned a little bit earlier today.

Now, moving to the next page, this is as well a slide which is well known to all of our. This is our cash position, 30% of last 12 months' revenue, and also our amortization profile. As you know, there will be a capital reduction in Smiles. Smiles will [reissue] that up BRL 700 million. I can be very positive again on that. We are working on our profile at the same time. So depending on the kind of decisions that Smiles make over the profile of its debt, we will change our profile. So on a consolidated basis, there won't be any pressure in the next [24] months. That's where we are working on now.

At the same time, I would like to remind you that there will be a cash increase related to the Air France transaction. It will bring BRL 52 million to the Company, as well as another BRL 23 million related to commercial (inaudible). (Inaudible) all of them catching up (inaudible) in a year, it's all of them in US dollars which will take us roughly an extra BRL 200 million in the next week.

Related to the credit profile, our bonds have seen a rally recently. In the last few weeks they have been trading at a premium, which reflects the better position in terms of credit that the Company has shown in the last quarter.

I would like you to move on to page 23. This is a hedge slide and I will start with fuel. In the last quarter we have contracted that the meaningful amount of fuel supply with Petrobras -- this is the right side of the chart, probably in the next few months. You'll see that in the left side of the chart, top of the chart. And those bars now -- the orange bars, we'll have roughly 1 million barrels means 25%, 30% of the [construction] for that year. We have been touching the market on a daily basis, so the position that we have nowadays is different than this one. And I think that we have been very successful in capturing the recent downturn in the fact that helped us with a final price for fuel (inaudible).

On the bottom part we see the dollar hedge. We have reviewed our position. We think that the [price] scenario of [2.20, mid-2.20] is not the level for the second half of the year and that's why we're not changing the guidance in this point of time. We are keeping that. We have, again, a conservative approach and we would like to see some more time of (inaudible) stability to address that in our guidance.

On the next page we are, let's say, building up or down our results so we come to the bottom line. And I would like to highlight again our conservative approach to the Venezuelan situation. We have recognized a loss of BRL 76 million in the financial expenses this quarter and this is by far the most conservative approach of the Company (inaudible) money into Venezuela so far. We have (inaudible) the money that we have there from 6.3 to 10.7 which everyone understands is the current effect for repatriating -- for bringing home, bringing back home the money that we have in Venezuela. Okay?

By saying that, I will give the floor back to Kakinoff for his final words. Kakinoff?

Thank you, Ed.

The first quarter results were certainly within the plan and any [potential] variation, CASK ex-fuel for instance, was already (inaudible). Thus, we reaffirm our guidance for the year of 2014 with a high level of confidence to achieve operating margin.

Now we would like to hand the presentation over to (inaudible) in order to start the Q&A session.

Thank you. (Operator Instructions). Michael Linenberg, Deutsche Bank.

Hey, Kakinoff. Hi. It's (inaudible) in for Mike. Good morning.

Good morning.

So my first question is on the cash you expect to receive from Smiles. And I know you commented on this, but with regard to the capital reduction plan, the BRL 1 billion guidance, you said you're expecting to get BRL 700 million. Can you remind us on the timing of when you expect to receive that cash? And then second, just elaborate on what you expect to do with the proceeds. You already have a very strong liquidity position, so just curious if you'd consider any debt repayment opportunities or other shareholder (inaudible) actions.

Hi. Thanks for the question. So, this is -- it's a little bit different than people may think, okay? The BRL 1 billion capital reduction means that from (inaudible) on a consolidated basis there will be BRL 450 million going out of our total cash, okay? So if you have -- if we have nowadays BRL 2.8 billion, for instance, and we do a capital reduction of BRL 1 billion, in the very next day there will be BRL 450 million left. And why is that? Because BRL 550 million, that's the majority part, there will be only a change in geography. The money will move from Smiles to (inaudible) which is the holding company. That's the change that we have. So (inaudible) had the approval from its board to issue back.

We have to understand what is the profile (inaudible) with that and, at the very same moment, we have to work here on a consolidated basis to stretch the profile that we have. At this point of time we have been discussing with the Brazilian Bank, the Banco do Brazil, to be very specific about our [four debentures] which are due next year. We're still negotiating but, if needed, we will stretch it. If there is any news over that I will come back to market and announce, okay? I hope I have clarified that for you.

Okay. And then second, Kakinoff, you kind of reiterated your conservatism regarding the World Cup. I was just curious how much of a margin impact you might be expecting from that regarding the 36% for the year. So I'd be curious to know what that margin then could look like if we didn't see any slowdown from the World Cup event.

Technically I cannot (inaudible) at this very moment a projection related to the margins in June. What I can tell you is that the (inaudible) demand is quite comparable to the (inaudible) last year when we were very beginning of the (inaudible). So I mean we 2014 basically the same demand, but truly we do not know how the business travel demand will behave over the World Cup. Surely we have considered in our projections a reduction in such demand around the business travel won't travel as often as they would in a typical June, July month. I cannot tell you at the moment, as I mentioned before, how much we are going to deteriorate in margin in our projections because also that is part of our pricing strategy. So the only information I can give you by now is that the World Cup impact has been (inaudible) into our projection and that means our -- that our guidance which we are confirming today with a higher level of confidence.

Okay, got it. And I could just squeeze in one more, on the Air France-KLM deal, now that you have antitrust approval could you just refresh us on that regarding the $25 million, US dollars, you synergies you expect? I think you said that's over the course of two years. Should we expect it to be more front-end loaded or is (inaudible) transaction there? How should we think about the progression of that?

The agreement that we have -- this is Edmar here. The agreement that we have with Air France-KLM says that we will get BRL 52 million for the capital increase. We'll get BRL 23 million related again to commercial and synergies that the project will gain. And there will be a remaining $50 million which will be due in the next 2 years, $7.5 million each year. This is the cash flow that we have from the agreement and this is unconditional not related to any meeting targets of any kind. Okay?

Okay. Thank you.

Savi Syth, Raymond James.

Good morning. Just on the margin side, I was curious. I know you're expecting a weaker currency than currently persists and I understand your conservatism around that. But I was wondering is there anything beyond the kind of weaker currency that's keeping that margin in the 3% to 6% range?

Savi, this is Edmar here. Please remember -- good morning and thanks for the question. Please remember what we did last year. Same kind of volatility, the real moving from 2.15 to 2.2 and then to 2.40; very, very volatile. The average of the -- for the effects up to March 31st was 2.37. In the last few weeks, yes, 2.25 or below 2.30. In our opinion it's too early to say that this is the level that will be for the year. We do expect some more volatility in the second half of the year. Remember that we have elections. Remember that we have the tapering in the US being decided and bringing a lot of volatility to the market, special currency. So we are conservative now as for changing any item of our guidance. But as Kakinoff mentioned, we have a higher level of confidence through the guidance we gave because of what we have done so far.

(Inaudible) Kakinoff here. I'd like just to complement by saying that we would like to keep the same (inaudible) behind the guidance-giving process which we have utilized the last year, to be more than realistic but actually conservative as Edmar as properly said. And then by the end of the year we were able to deliver the top end of our guidance. I'm not telling you that we are going to again deliver the top end but, as I mentioned before, we have a higher level of confidence of delivering the EBIT margin which has been shown in our guidance. Basically because we have utilized a very conservative approach for -- as we indicated. So the exchange rate has behaved very, very volatile on the last three years and we wouldn't like to believe the market and not ourselves by strengthening the guidance at this moment just because we are leading at a lower level of exchange rate. So, that's the reason why (multiple speakers). Please.

Got it. That makes a lot of sense. So if you look at April and May, how has unit revenue and demand done? It sounds like similar to last year, but are you seeing kind of a similar strength as you said in the first quarter on a euro net revenue basis?

Let me talk only on the April figures. (Inaudible) I wouldn't like to not obey the quite several recommendations we got -- we get on our (inaudible) related (inaudible) information on future performance. April we have (inaudible) the [load] cycle at the level of 78% for the domestic market and 76% in the combination I think we mentioned in domestic. That shows that our (inaudible) of recurring (inaudible). And then getting a percentage to increase load cycle without damaging our margin strategy has been quite successful. That is the all-time high load cycle for an April month.

So this -- the market has been -- is still challenging, but (inaudible) GOL has been able to manage those challenges in order to keep its growth pattern in line with our expectations. So we are not delivering the (inaudible) figures any longer because, as you can understand, we were the only company doing that in the region -- I'm sorry, in the country, and that was an important disadvantage in comparison to our competitors in which applies to month strategies. So, this is the reason why we are delivering just the load cycle information. But I can -- you can see data that the April month is (inaudible) a positive one.

Understood. And then just a last quick one. It looks like gain from sales in 1Q 2014. What was the benefit?

Savi, please repeat.

I'm sorry. What was the kind of gain in 1Q 2014 from the sale leaseback?

It was 40 -- (inaudible).

It was roughly BRL 40 million, Savi. BRL 38 million to be very specific. And again, this is a very important issue for us because part of the (inaudible) gain or the (inaudible) exceptional or whatever item. I would like to reemphasize that this is part of our strategy. We have announced a couple of years back that we would do a lot of sale leaseback in 2014 and 2015. Okay? So, at the same time that we recognize these gains on the other line, we also increase our rent line because we are not taking any financial result -- or any financial funding here for the aircraft. I mean, the reason why we recognize that, again, is because we have a price with the manufacturer which is lower than the market and this is again related to the size of the order that we have. Just going back to the number BRL 48 million, okay; almost BRL 50 million.

Okay, understood. And that's -- but that price is recaptured then in your rent expense? Is that fair?

Yes, yes, down the road there is an increase in the rent line because we are not taking an aircraft which will be owned by ourselves. So that explain part of the increase on the rent line, because nowadays we have 11 aircraft more than we had one year ago as part of the fleet on the operating (inaudible).

But your rent is based off of the higher aircraft price, correct?

Yes, because we're taking 800 and we are turning 700 as well.

Alright, great. I've taken a lot of your time. Thanks guys.

The average price is automatically yet higher once -- with that bigger airplane, so different value.

Understood. Perfect. Thanks very much.

Thank you.

Tom Kim of Goldman Sachs.

Hi. Thanks for your time here. I wanted to ask you your thoughts on one of your domestic peers expanding onto international routes and your views on your potential -- their potential competitiveness given the fact that they'll have range to go non-stop to a lot of the markets in the US that you're actually also targeting as well.

Okay. So thank you very much for the question. (Inaudible) to better explain our international development strategies. As mentioned, by the beginning of the next -- of last year, GOL had said that it's part of our strategy to increase our international (inaudible) revenue. So we had at the time 8% (inaudible) revenues denominated in international currency and we would like to achieve through about 3 years the level of approximately 17%.

So then we have (inaudible) our international expansion strategy by creating new routes or reactivating others that weren't feasible in our history. Based on that strategy we have until now included the international (inaudible) revenues from the level of 8% to the current 12%. And the United States is part of that strategy. We have started to fly to Miami and to Orlando via Santo Domingo since December 2012 and those flights have presented themselves very, very successful. And that happened and (inaudible) the information meeting to some of you guys. That happened not only because there is some demand for (inaudible) to such market, but also considering how important is that offer to our frequent flyer program, to Smiles (inaudible).

So, this is a very good example of combining the strategy between the airlines and the lower (inaudible) which makes (inaudible) the flights to the United States particularly good to our strategy. But it's also important to highlight that the United States is just 1 among 15 international markets to which GOL's clients every day. And we are expanding our international coverage, flying to the United States, flying to Chile as we have just announced, and also having an additional flight from Fortaleza in the northeast region that will go to Buenos Aires. Are there some room for further expansion? We are just analyzing these opportunities and it's like that GOL will announced new routes already by end of this year concerning this new strategy.

So, this strategy is less dependent than the competitor's movements and I would say (inaudible) those flights are delivering very interesting results which makes it -- sorry, which makes that even more (inaudible) from a (inaudible) perspective. Therefore we are not considering the competitive movement would affect that decision too much.

Okay. No, I appreciate all that detail and color. And clearly, you have a tremendous ramp in your load factors on international is a good testament to this rapid development of your international exposure.

Could you just help us understand the Santa Domingo opportunity? I think this has been a market where you've been looking to expand. And correct me if I'm wrong; is that Domingo -- are you looking to convert that into a hub? And can you just update us on your investments sort of in that market as you embark on your international growth opportunities?

We are basically testing Santo Domingo as a hub. So as I mentioned, we are already operating flights to the United States via Santa Domingo already for [15] months. So we are every month improving our operational skills to offer such type of flights. And there is a good potential, but we (inaudible) decide on improving our -- increasing our operations to Santa Domingo. It has been very promising, but there are no decisions yet related to make it a more (inaudible) hub for the Company.

Just as my last follow-up, if I may, are there any regulatory constraints or approval processes that you need to go through to make it a hub if you wanted to make it a hub?

Actually, no. No regulatory constraints. There are surely discussions in order to make it even more effective from the economic point of view. So, in case we decided to go for being a hub, we would be able also to deal with the local government and the local providers to achieve a more competitive cost scheme to operate more flights via the Dominican Republic, but there aren't regulatory constraints.

Thanks a lot for all of your time. I'll jump back in the queue.

Thank you.

Duane Pfennigwerth with Evercore.

Hey, good afternoon.

Hi.

So, we've been hearing a lot recently about how Delta is helping to improve results at its minority investment partners like yourselves, like GOL. And I just wanted to talk with you a little bit about how they're helping to shape your view of capital discipline. Because when we look at Delta's strong performance, what really stands out is strong free cash flow and capital discipline. And if we think about GOL, you certainly have shown capacity discipline, but I'm not sure you've yet demonstrated capital discipline. If we think about your aircraft commitments, plus PDPs, I think it's BRL 1.4 billion in 2015, BRL 1.3 billion in 2016, it still feels like a positive free cash flow for GOL is years away. Could you respond to that? Is that a fair assessment?

Hi, Duane. This is Edmar here and thanks very much for the question. It's a very good opportunity to go over our cash capital strategy here. First, remember that this year the target is to have a free cash flow neutral, okay? And this is primarily related to having better margins, as well as having the discipline on the CapEx side, okay? CapEx side.

And next year -- we will assume here just for a second that the margin expansion will continue, there will be also discipline on the CapEx side. And why I'm telling you that? Because what we disclose in our financial statement is the thorough commitments that we have on the financial side. But we have said that we have a special agreement with Boeing due to the amount of orders that we have with the manufacturer. So we cannot disclose, but we have a cap -- we have -- I will repeat that, we have a cap for PDP for any aircraft that we deliver. So we -- on the cash side it's [relative] and I will be a very positive here. It's a cap that we can live with with the current margin. That is if we push up, if we grow up our margin from now on there will be excess cash here.

So the main point for us remains the balance sheet and the cost of that. Our balance sheet has a lot of exposure to the US. It will remain like this for a while and it's primarily related [standards]. We don't go long here in the group at this point, but we do in the US. But as we have been discussing, we are always looking for opportunities in the capital markets. So one of the targets that we have for the near term is to lower our cost of funding. That is as our ratings go up at our American group, we will probably change the debt that we have for a lower coupon debt. So this is primarily (inaudible) let's say (inaudible) for our strategy. But I can be very positive. If we keep the margins from now -- from this level that we are talking for 2014, and we're confident of that, up, there's not a scenario that we have -- there's no cash constraint, no -- any pressure of any kind at this point.

But, I agree with you that we still need some time to (inaudible) all of that goal (inaudible), goals (inaudible) in this case. Again, this year the first thought is to be free cash flow neutral and then for next year on we'll have a strong result that we'll be able to deliver a positive bottom line, even with the FX being against us. And on the aircraft delivery side, please remember that we have been, let's say postponing, stretching our delivery so there will be less pressure on the CapEx side. Next year we have less aircraft than we had three years ago. Later on (inaudible) with the right amount of plane. If I'm' not mistaken, next year we're taking six planes.

Okay.

I hope I have (multiple speakers)--.

Appreciate that (inaudible). Appreciate that detail. Just one follow-up point there, Edmar. I assume when you say free cash flow neutral we're discussing after net CapEx, this whole concept of net CapEx, which includes--.

Yes.

The financing of the aircraft as opposed to a gross CapEx number, which would be kind of the full value of your aircraft. Because I think if you -- if you're spending time with Delta, I would encourage you to appreciate that difference.

Yes, we have done that. And please take also -- sorry, this is Kakinoff. Just please take into consideration that we have established that the reduction of our debt net level is part of the (inaudible), not only by increasing EBITDAR and then for reducing the leverage, but also by prepaying some debt, something that we have done already last year. Once our obligations were at the level of $250 million then we would be able to pay $550 million.

So, we have learned a lot from Delta; that's for sure. Not only on the revenue management side, but also the careful management. And we are consistently delivering our strategy which is, as (inaudible) Delta base in connection to reduce significantly our investment level. But you can be sure that that time will be further [understand] and appreciated.

Thank you.

Thank you.

Bob McAdoo, Imperial Capital.

Hi, folks. Obviously, you had -- your operating line numbers were very good, but below the line there were two or three things which I guess I didn't understand or I was a little surprised on. And I was curious if you could just spend a little time talking about the negative line for interest rate hedge and also for foreign exchange hedge.

And also, if I look at the fourth -- on the income tax. On the fourth -- or the -- on the fourth quarter of 2013 we had a pretax loss and then there was a credit offsetting some of that so that the net loss was somewhat less, much like we have here in the States. But this quarter we have a negative pretax and then additional tax on top of that so that the bottom line is actually worse. And I was wondering if you could help us understand how to -- give us some guidance as to how to think about that going forward as to whether the tax line is always going to be negative or how should we be planning on that? And then again, just maybe some better understanding of the two hedge transactions.

Okay, how about -- this is Edmar here, okay?

Hi, Edmar.

And I will go in parts, okay? The first one is FX. FX depends a lot on the real. So (inaudible). This quarter we recognized a gain on the balance sheet because the real appreciated so the burden of debt in US dollars has decreased in real terms. That's why in the slide number 24 we show the gain at BRL 133 million all considered, which is just the balance sheet. There is a loss of [BRL 51 million] and this is the hedge position that we have over FX. So this is the [MTM] on a daily basis, meaning that we have a position that on average was at a higher level than the [2.26 reals per dollar] that was the closing rate for March. So, it explains the FX.

On the interest hedge, in our financial statement you will find that we have a major position of more than $1 billion of hedge for the interest of the airlines which we will receive in the following years, in the next few years. And this is a protection that we make so we will protect the variable part of the rate that we will pay from the moment we receive the aircraft until we end the agreement. So, it's a few years down the road. But for accounting reasons, and you know better than I do, we have to recognize the loss right away so it accounts for another RBL 56 million. And this is primarily related to the interest rates in the US. They went up in the second half of last year, but if you compare the position at the end of March with the position at the end of last year, you will see that they have decreased.

As for tax, first and foremost from now on you will see a negative line here on the -- on taxes because of Smiles. Smiles is a separate entity because we consolidated Smiles, but Smiles makes profit and therefore we pay interest [for it]. We pay taxes over there. There's always a small difference related to before taxes, which are on the (inaudible) of the airline and this is related to the Brazilian legislation. Sometimes it's a single-digit number and sometimes a little bit more, but it depends on the events that takes -- the events that happen with in the quarter.

Now, putting it all together. FX. It's very hard to predict. It has been very, very volatile. Okay? Taxes. We do expect negative numbers from now on on a regular recurring basis, primarily because -- due to Smiles. And on interest rates it depends. I think you have understood, it depends a lot on the US. There is one specialized in this quarter, which is in Venezuela. Venezuela is also FX related. We have recognized a loss of BRL 76 million and we are taking all the cash that have in Venezuela to the 10.7, 10.9 FX rate that is the new rate, if you will, that the [government] has published as of January this year. We were for sure the most conservative airline and we have anticipated that, so our cash, which is very important for us, is at market level. So, there is no misconception -- no let's say deviation here from what we expect to receive and repatriate.

I hope I have helped you in understanding all the big items here below the operating line.

Yes, that's very helpful. I appreciate it. Thank you.

Stephen Trent, Citigroup.

Good morning, Kakinoff and Edmar, and thanks for taking the questions.

Good morning.

Good morning. Just two for me, if I may. If you could refresh my memory, I had thought at some point in the past that you guys might have approached the Dominican Republic flying through like a new brand strategy or at least a slightly different brand strategy. Is that something that still might be in the works, or when you potentially do more international flying out of Santo Domingo that you're going to stick with the same brand?

Hi, Stephen. Actually, at the time we did mentioned that that would be a different strategy, even a different brand. The market has some of (inaudible) consider that opportunity. As we mentioned before, we are testing (inaudible) hub. So far that experience has been quite good, quite positive, but we do not decide yet on following that and applying new routes from there. And therefore, not even discussions related to branch (inaudible) or something like that took place in the Company, so maybe the second half, once we decide to further in the country and to develop this hub. But there is not a (inaudible) international flight expansion strategy basically operated by growth as it is today.

Okay, very helpful. That may have been something random I read several months ago and didn't come from you guys. Very helpful.

That's it.

The second question, if I may. And this is not exactly a fair question, but just wanted to get your view. I saw you guys write down the Venezuela cash, which strikes me as logical. And at the same time, some of your competitors are kind of still out there telling the market that they expect to get all their cash back at the original rates. I guess I would ask you in your view what are the main reasons do you think would motivate the sort of gulf in terms of differing expectations on the (inaudible) cash repatriation?

Steve, this is Edmar here. Thanks for the question. The fact that we have recognized a loss doesn't mean that we aren't fighting very hard to take the money out from the country at a 6.3 level, okay? This is -- first and foremost we have meetings with the government. We are working with [Iata]. We are working with (inaudible) and we are aligning with the other airlines for taking out the money at the historic -- as agreed FX rates that we have. This is one.

But, our accountants here are very conservative and they tell us every day that if we do have a problem in Venezuela, and let's say that we don't take out the money because at this point in time some of the money hasn't been out of the Company for more than a year, and then they convince us in order to be conservative and tell the market what is the real size of the story. And again, we were the first and we were the most conservative. I cannot tell you about the accounting and about the judgment of the other airlines. In our (inaudible) we have been very clearly about Venezuela and we -- and I would like to report that it doesn't mean that we are working every day in a -- for every opportunity to take the money out at the agreed FX rate.

Hi, Stephen. It's Kakinoff. I could summarize that by saying that I do not know whether it is good or bad, but the difference is that we have somebody here called Edmar and this guy is very (inaudible). (Laughter.)

Fair enough. Fair enough. (Laughter.) Well, that was very clear and very helpful. I appreciate the time and I'll leave it at that. Thanks, guys.

Okay. Thank you.

[Diego Leon], GBM.

Hi, guys. Thank you for taking my call. I was just wondering when are you expecting your capital increase?

Diego, this is Edmar here. The CADE has just approved. We need to wait a couple of weeks for the final approval and then we will start the process with [CDM], the local SSE, which will take roughly another three weeks or so. So I would say that in 45 days, or even less than that, there will be -- the capital increase will be done.

(Inaudible) we have properly communicated that. The CADE has already fully approved that, but there is a procedure to be implemented related to the communications and final statement and then we are going to -- able to start a process to have the money invested in the Company. So that -- those (inaudible) in combination that results in the 45 day maximum said by Edmar.

Okay. And I understand it represents 1.2% of your preferred shares.

1.5%.

1.5%.

Oh, 1.5%. Okay. Thank you.

Thank you.

Marcela Nagib, JPMorgan.

Hi. Good afternoon. I just wanted to know how you're thinking about your dollar bonds and if you're thinking about any potential liability management.

Hi, Marcela. This is Edmar here. First, the bonds have been reacting to the improvement in the credit metrics that the Company has been showing over the last few quarters. They have been trading with a premium recently, which we understand is related to the -- against the result. And as for capital markets, we are looking at it all the time. So, if there is an opportunity we may catch it, but at this point of time I have nothing to say about it, just to recognize that the market is giving us credit for the improvements we have shown.

Thank you.

Excuse me. This concludes today's question and answer session. I would like to invite Mr. Paulo Kakinoff to proceed with his closing remarks. Please go ahead, sir.

I just would like to thank you again for the attention and to report that we are still available here further questions along the day. Thank you very much. Have a nice day to you all.

This concludes GOL Airlines conference call for today. Thank you very much for your participation and have a nice day.