Gol Linhas Aereas Inteligentes SA (GOL) 2014 Q3 法說會逐字稿

Good morning everyone and welcome to GOL Airlines third 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 IR Director.

This event is being recorded. (Operator Instructions). This event is also being broadcast live via webcast and may be accessed through 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. A 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 may relate to future events and therefore depend on circumstances that may or may not occur. Investors and analysts should understand the conditions related to the 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 with us in GOL Airlines' earnings conference call for the third quarter of 2014.

Let's begin our presentation on slide number 2 where we have the period highlights regarding the macroeconomic scenario, which showed a high exchange rate volatility and dollar appreciation. This scenario indicated a reduction in the corporate passenger traffic, reflecting a slowdown in economic activity. We have also observed a decline in oil barrel prices which was not yet reflected on this result. In light of this scenario, GOL reinforced its commitment to rationality in terms of seat supply.

The Company has also maintained its focus on improving its products and services. With this in mind, we extended our GOL+Conforto to our entire domestic route network, consolidating our position as the leading airline in ANAC's category-A seating, which means the most comfortable seats possible. We also launched our exclusive Express Bag Drop service to make check-in easier and faster.

The measures taken by the Company to improve its products and services have enabled it to reach the first place in number of transported passengers in the market. Also for the first time GOL was the airline company leader in tickets issued for the corporate segment year to date, according to Abracorp, Brazilian Travel Agents Association.

New international flights to Chile, Miami and Punta Cana are part of GOL's strategy of strengthening the share of revenue in other currencies. The new domestic destinations are also the result of the efforts to identify market opportunities. As a result, the Company has announced flight to regional destinations in the domestic market, to Carajas and Altamira in Para state, cities that have been rapidly growing, creating demand for ourselves. With these measures, GOL remained focused on improving its results.

Moving on to slide number 3, we can see our main numbers in the quarter and in the last 12 months. Net revenue grew by more than 10% to around BRL2.5b, bringing the last 12-month figure to a record BRL10b. Operating income, EBIT, reached BRL152m in the third quarter 2014, BRL115m up on third quarter 2013. The EBIT margin widened by 4.5 percentage points to 6.2%, increasing for the seventh consecutive quarter. EBITDAR totaled BRL463m in the period and BRL1.9b in the last 12 months. The constant increase in this indicator allowed the Company to reach record levels.

On the operational side, as you can see on slide 4, we reduced domestic supply by 3% year to date while managing to capture 53% of the industry's 5.4% upturn in demand. The load factor increased by 8 percentage points to 77%, reducing our gap in relation to the industry's average of 79.4%.

As a result of this operational improvement, on slide 5, we point out that GOL maintained its industry leadership in terms of number of passengers carried. According to ANAC, we reached a record mark of 26m passengers transported in the first nine months of the year, an increase of 11% over the previous year, which represents 2.6m more passengers transported than our main competitor. This advantage is equivalent to approximately the volume of passengers transported by GOL in one single month.

Moving on to slide 6, we can see GOL's continued focus on RASK growth and the strategy to reach this result. In the fourth quarter 2014 we had a favorable quarter in terms of load factors and a bigger challenge in terms of yields, which decreased by 2% year over year. The 8 percentage points growth in the load factor more than offset this decline, fueling PRASK, which moved up by 9% in the period. Passenger revenue combined with the 47% increase in ancillary revenue led to a 13% upturn in RASK.

On slide 7 we can see that efficiency and productivity indicators are improving every quarter. Net revenue per employee increased by 68% over 2011. The same trend can be seen in seat demand per employee, which was 37% higher in the same comparison basis. From the operations standpoint, GOL also showed continued progress both in revenue generation per flight and improving fuel consumption per RPK.

Moving to the next slide, number 8, we can note the results of the strategy of international expansion, further strengthening our revenues in dollars, which creates an important natural protection for GOL. In this quarter we implemented a two-way code-share partnership with Aerolineas Argentinas, allowing us to sell their tickets on our website, and we'll shortly begin offering the same facility for Air France-KLM flights.

The increase in the international flight, with new routes to Chile, Miami and Punta Cana, are boosting revenue in other currencies, which already surpassed the mark of BRL1.1b in the last 12 months. The amount represents 11% of total revenue, an increase of more than 4 percentage points in two years. In the quarter this share came to an even higher level, 13%.

On slide number 9 we present an illustration of the client's entire experience, from the ticket purchase to the flight and the final consumer assessment. GOL closely follows the changes in passenger needs in order to improve its products and services and make the clients' experience even greater.

In in-flight the improved search tools helps clients to have an easy access to information, flight and make purchases. When arriving at GOL -- I'm sorry, when arriving at the airport, GOL's new visual identity helps clients notice it, with clear and multi-language signs streamlining the entire process. Count on Me is an important point of contact that they can use prior to launch. In order to provide even more convenience to our customers, passengers can check in using their computers and smartphones or our self-service totem.

This quarter we began offering an exclusive express baggage service at Congonhas Airport through which customers can complete one more check-in page at the self-service totem, labeling their own baggage as well as paying for any excess. This is one more simple and intelligent innovation to make our clients' airport experience fast and convenient.

Regarding the flying experience, in order to meet the clients' need for more comfort, GOL's fleet has GOL+Comfort seating with an even greater angle recline and even more distance between seats. We have also extended our GOL+Comfort seating to our entire domestic route network. These seats are located in the seven first rows of our aircraft and it has more distance between the seats. By the end of the year, 100% of the fleet will be configured for our GOL+Comfort.

Our in-flight service has also been redesigned with improvements to buy-onboard service, with a new menu with lighter and more nutritious options for all tastes. On the shuttle service the service is free and it has options especially developed for the different times of the day.

Upon arrival clients will receive the satisfaction survey by SMS in which we kindly ask them to rate their experience from zero to 10. These new facilities have strengthened our capacity to ensure an even better flying experience for leisure passengers and attracting more corporate clients.

Moving on to the next slide, number 10, where we can see the highlights for Smiles, which closed the third quarter 2014 with an operating income of BRL69m and an operating margin 6 percentage points higher than in the third quarter 2013. The results of Smiles operations reflect a 20% increase in the number of accrued ex-GOL miles and help direct redemption miles. The Company launched an innovative campaign in which it undertook to offer 365 daily reasons in addition to establishing new accrual partnerships with (inaudible), one of the largest retailers in Brazil.

I now turn the presentation to Edmar who will present the period results. Please go ahead.

Thank you Kakinoff and good morning everyone. I would like to invite you to page 12. And before going over the numbers I would like to highlight that from our point of view here we are executing the plan and we also say that it is a multi-year plan. It doesn't finish at the end of 2014. We still have a lot to improve and that's how we see, we face the future.

Going back to the numbers, Kakinoff has mentioned revenues are up 10% on a quarter basis and 20% (sic ? see slide 12 "17.8%") up on the last 12 months comparison. It shows that all the efforts, all the improvements that we have done in the products and the services of the Company over the restructuring time are indeed showing the results. EBIT came at BRL152m. This is 4.5 percentage points above last year and it shows that we have been able to maneuver even in a very challenging scenario.

As for the scenario, we highlight that FX has moved 10% against us. We, all of us, we know that we have a mismatch here. And even with that we have been able to increase and to improve the Company's results.

Yields came down by 2%, but we understand that our strategy was flexible enough to, in order to accommodate that and to have higher load factors, so working more on the leisure side ensure a RASK increase of close to 13% while CASK grew by just over 7%, and I'm including fuel here.

Moving on to the next page, we can see our, the numbers for the last quarters, and we have come from an EBIT of minus 3% over last 12 months, third quarter last year, to an almost BRL500m for this year, meaning a 4.9%, almost 5% EBIT margin for the last 12 months. On the EBITDAR side, this is the right part of the chart, 19% of margin and BRL1.9b for EBITDAR. This is a record for the Company. And I would like to remind you that just nine months ago, by the end of 2013, we were at BRL1.5b. That is, we are not only improving margins but we are also growing the Company in terms of revenues and in spite of ASKs being down.

On the next page, this is page 14 please. We show a chart with the highlights of our CASK. So the first one is the growth over last year has come down to 10% and on a quarterly basis CASK is down by almost 9%.

The highlights are, first, pressure on the wage side, labor, and this is primarily related to the law. We have an annual adjustment here in Brazil. And also for union agreements, where we had a charge of BRL5m in the quarter related to risk premiums. Also different from last year, we have been provisioning a profit sharing from the first quarter. It was BRL15m this quarter.

Aircraft rent, it does suffer from the FX. All of it is in USD and remember that the FX moved by 10%.

Sales and marketing, this is an issue for 2014, and we recognized amount of BRL23m losses. The trend here is down and we do expect to go back to the previous levels by 2015 as a result of all the efforts that we have made in the last few months. So the numbers should be to keep, we should keep the trend of the losses going down.

On the other, the comparison here doesn't favor us because at September quarter last year we had a gain related to six aircraft that came of BRL49m. We didn't have any this quarter so this, it does explain the change in this line alone.

Moving on to the next slide, although we haven't got all the data from the other companies here -- there's still some companies to show the results -- we would like to emphasize that, although the number of total ASKs are down and although we have seen inflation in Brazil and although we have seen the FX moving a lot, the Company remains very, very competitive in terms of ex-fuel cost.

Just compare us with airlines that have the same aircraft as we have like Southwest, have more or less the mission, our ASK would be not so different than the model that we had been developing recently, meaning that we understand that we have been able to improve the margins not only with the growth on the revenue side but also with the cost being tackled and being managed on a quarterly basis.

This is exactly what we show on the next page. This is page 16 where we're talking about the spread RASK and CASK. And although we recognize, because of the many reasons I have mentioned, the CASK is up, more important is that the RASK is growing faster. That is, we have come from a negative margin of BRL0.0154 to a positive number of BRL0.0126, which is a 200% improvement in this spread.

Moving on to the next page, this is a common, usual slide for us. It talks about liquidity, 27%. We have a target of 25%, meaning that we could use some of the excess cash to prepay some of the debt. It depends on conditions. And also EBITDAR, and it's helping to deleverage the Company. And in this quarter, because of the volatility because of the devaluation of real, we were not able to improve as expected, but we show indeed that the trend is under control.

Moving to the next page, and this is page 18 please, we show you the amortization schedule and this is a result of all the measures that the Company took in the last quarter. That is, we kept the market, we buy back some of the bonds that we had and then we issued a new bond with maturity in 2022.

The main message here is that the Company paid in terms of amortization from 2011 to 2013 just over BRL1.2b in terms of debt. And we did it at a very, let's say, challenging time, when the margins were shrinking and we had our turnaround being built. If you look at what we have from 2015 until 2020, you can see that for the next five years the average amortization that we have in nominal terms is even more than the one that we had previously, meaning that, yes, we have prepared the Company to continue its recovery and if there is a downturn we would still have room to maneuver and again to improve.

By saying that, I pass the floor back to Kakinoff for his final remarks as well as comments over the guidance.

Thanks Ed. The results make us confident that we are on the right track to deliver the margin projected in our guidance for 2014. We are therefore reiterating our projections for this year. I would like to close this conference call with the final message on slide 20, reinforcing the Company's consistency in delivering results and executing its strategy, always seeking the best value proposition for its stakeholders.

Thank you for participating in our conference call. Now I will begin the question-and-answer session.

(Operator Instructions). Mike Linenberg, Deutsche Bank.

Yes, hi Edmar, Kakinoff. Good morning. I guess two questions here. One in regards to the new regional aviation plan. I know that that's been proposed. I know it's still -- it's in the bill. It has to go to Congress. Based on this, the opportunity to fly these regional flights with up to 60 seats I believe, 100% of up to 60 seats would be subsidized, does that -- how does that drive your thinking as it relates to future fleet decisions? Would you be considering maybe smaller jets like the Embraer, or would you be looking at maybe some other smaller Boeing 737s? How should we think about those opportunities for GOL?

Hi Michael. Actually what was approved yesterday and it's yet to be submitted to the Congress is basically what was presented to us at the beginning of the year related to the travel. There was no news despite of the new possibility to have foreign investors having a higher stake in the Brazilian airlines. That was I would say the only news.

Therefore, we have developed our strategy already considering this scenario since the beginning of this year and we are improving our regional routes operated with our current fleet, the 727s, 700s and 800s. This subsidy plan also boosts our reserves once GOL is today the largest airline carrying people to these so-called regional airport basically due to our bigger planes. That said, I think this new plan seems to be an opportunity to even expand or expand even more our regional routes and we could do that with our current planes being very, very competitive. So there is no reason to, at the moment to consider additional jets or to change our current fleet.

It is very, very important to say that we need to replace from 2018 on our 737-700s. We have just purchased 60 Max-8, so the bigger plane, the bigger in the 737 family which is supposed to replace the current 737-800s. Therefore, there is a bid in the market, a request for purchase involving Embraer and Boeing. Those companies are competing to have -- to win actually this opportunity to serve and to supply GOL with the 737-700 replacement from 2018 on. There is nothing related to the regional plan in this competition. So it's just to keep our fleet at the end as it is today.

Okay. That's helpful. And then just, you mentioned the changes in foreign ownership. Is that -- I know this had been kicked around in the past, but that would be to change the voting of foreigner restrictions that would lift the cap from I believe 20%. Is that to lift it from 20% to 49% or is it something different?

As it was presented there will no barrier any more. It could be virtually 100% foreign ownership, as it is presented. So and it's still under assessment and validation process. It could be 100%.

Okay. Wow. And then just my second question and this is a completely separate topic, but I saw recently that what I call your scissors hub in the Dominican Republic, you were -- the planes were basically connecting in Santo Domingo and I saw that it looked like it was going to get moved to Punta Cana. And when I think about the Dominican Republic, one market is much more business oriented, the other is much more leisure oriented. Is that what's going on? You're switching airports. Was there an airport issue or was it just that many of the passengers would rather go to the vacation city rather than the business city?

You have already answered the question. It is basically following the leisure high season, so it makes more sense to move it to Punta Cana.

Okay. Perfect. Thank you.

Thank you.

Duane Pfennigwerth, Evercore ISI.

Hi. Good morning. Just wanted to follow up on your comment about a slowdown in corporate travel or corporate bookings. Can you talk a little bit more about what specifically you're referring to? When did that start and are you seeing any recovery in that trend?

Hi Duane. You know that I can't give any guidance to the next year, but I can tell you that this movement or this effect, it started just right after the Brazilian World Cup, the soccer games, wherein the load, the purchase before, prior to departure, from zero up to three days prior to departure, went down by 20%. As far as we learnt, the same effect happened in South Africa and in Germany the last two prior soccer games. And month after month this flux is supposed to recover and this is exactly what has happened.

So when we show the quarter results we cannot see the month after month evolution, but it's happening. And I think that until the end of this year, when we will meet the leisure high season we will have the corporate sales back on track. So there is nothing which is make us believe that in the next year the corporate sales will not be back at the same level that it was in the beginning of this year.

So the recovery following the slowdown during the period of the World Cup, has that been consistent with what you expected or has the recovery post World Cup been slower from a corporate perspective?

It's slightly slower than we expected, but fortunately we were fast enough to compensate it improving the our load factor, as you can see. So it was, the final output, the EBIT margin, is even higher than it was expected in our plan because we were able to compensate this yield reduction with higher load factor.

Okay. That's great. And then wonder if you could give us any thoughts maybe preliminarily on capacity growth next year. It looks like the schedules are indicating maybe mid single digits or 5% to 7% growth over the next couple of quarters. And typically when we look at the scheduling data, it's higher than what you actually end up flying. So is 5% to 7% the right way we should be thinking about it or something less than that? Thanks for taking the questions.

Hi Duane. This is Edmar here. It's very preliminary but I would like to remind you that one of the main drivers here is being flexible within the year, meaning that this is you're talking about high season so we do expect to have a higher number of ASKs here. But at the same time during low season we have been very, very conservative. So it's too early to give a guidance. But the main concept here is, yes, we will still be very, very rational in terms of capacity in Brazil. This strategy has been working for us and we have no reason to change that at this moment.

Okay. Thank you.

Jim Parker, Raymond James.

Yes, good morning, Kaki and Edmar. I have a couple of questions here, one following up on Mike Linenberg's questions regarding the regional airline package. As currently proposed, what would be the annual revenue benefit for GOL?

Our previous calculation shows that just in case it would be implemented exactly as presented yesterday on the current GOL network, it might represent something around $20m in subsidies.

$20m not BRL20m? $20m?

$20m, yes. But let me be really, really or perfectly clear here, Jim, what has been voted and it's about to be validated by the Congress is the allowance to the government to invest in regional aviation. The formula behind that has been unofficially shown to the airlines. So what I have -- to everyone at the same time. So it can be considered now that the formula will be explicit only after the Congress approvement -- approval, sorry. And only after that we can say, okay, these are the real figures.

What I am telling you in advance is based on the previous discussions held by the government with the airlines showing their intention how to build this subsidies formula. So based on that, which is not wrote down, it is not officially announced yet, we can calculate $20m as additional resources to GOL only.

Okay. And what proportion of your revenue is currently either in USD or tied to USD? So when you sell international tickets, a connecting flight on Delta to, say, the US, what percentage of your total revenue is in USD or tied to USD?

Jim, this is Edmar here. We have a chart. This is last 12 months, it's 11% and last quarter it's 13% and it's moving up. It's either USD or related to USD.

Yes, I would say from other revenue perspective it means USDs because it's tied to US dollars.

Okay. Edmar, did you answer Duane's question specifically about capacity growth next year? You said you could vary it. What is your best guess currently regarding capacity growth in 2015?

Jim, look even if I knew I wouldn't be able to tell you because we normally deliver that with the guidance. This is how [CGM] has been -- this is how we have been dealing with CGM. But the main message here is that we don't know, haven't approved the budget at this point. This is very, very true. Trying to avoid that you not have the answer as close as possible to what you need to be -- to know Jim and the colleagues too, personally we do not see any environment to additional capacity. This, let's say, the closest we can get to what you would to know. Rational supply might be in 2015 too.

Alright, thank you.

Stephen Trent, Citigroup.

Hi. Good morning Kakinoff and Edmar. Thanks for taking the question. I guess the first question would be how much of your all-in debt, and that's including operating leases, is dollar denominated?

The operational leases are 100% in USD, Steve.

Okay. And secondly, I guess how is your rollout with Air France going? Are you seeing an acceleration there or --

No, look, Kakinoff has mentioned we will fully implement the code-share two-way by the end of this year. And this is where -- this is exactly when the results pick up. So, so far the trend is up, but we understand that there is still a lot of room to improve here. But overall by going over what has been done from the execution of the agreement until today, we are very, very satisfied with the outcome.

The annual effect of having Air France and Aereasinteligentes Group in a two-way code-share situation will be only effective or will only be felt next year because we have just implemented it. So just those two actions are enabling us to tell that the uptrend is seen and must continue to the next year.

Okay. Great. And then just circling back to the regional aviation plan and the new news about the foreign ownership, would that require an amendment to the constitution to allow for ownership like, let's say, up to 100% over the current 49% limit or would that be more of a regulatory issue?

This is Edmar here. If the deal is voted and approved, we understand that it's done. There's no constitutional amendment here being required. This is the understanding that we have at this point.

Okay. So there wouldn't be an additional vote needed. Like if this is approved then foreign ownership can go up beyond the 49%?

Yes.

Okay. And then I guess finally then just a kind of follow up on that. What extent are you seeing potential from other airlines buying GOL stakes? I know Delta has a small stake, Air France does. Could you see like maybe a LAB, TAM coming in and buying a stake, any others?

Well, there is nothing of this kind being discussed or any plan or any whatever over foreign ownership at GOL. Of course it allows the Group, it does open new opportunities and possibilities for us. But at this point there is absolutely nothing here to be said.

Okay. Great. Thank you very much for the questions.

(Operator Instructions). Bob McAdoo, Imperial Capital.

Yes, a couple of things. First thing, a few years ago when the currency weakened pretty severely it seemed like you made an announcement in June of a schedule change that had -- a schedule change, reschedule, reduced supply that was effected in August with a relatively short notice. Are we anywhere near, with the currency and what's happened with the currency since the elections, are we anywhere near a situation where you would take a similar action? Or maybe you wouldn't do that during the holiday period that's coming up, but shortly after the holiday period are you anywhere near feeling a need to do a relatively short-notice pull down of capacity?

No, it's a completely different situation, Bob. The Company had a negative operating margin at that time. At the moment we are expanding our EBIT margin so we do not foresee any major changes relating to schedule or something like that.

Okay. And then secondly on this issue of the Dominican Republic and when -- two things there. When would the shift take place out of Santa Domingo over to Punta Cana?

And I remember when you started that whole process, you always described it, seemed to always describe it as a way to get Brazilian citizens to the United States and really never talked about the fact that maybe some of the people might actually get off and stay in the Dominican Republic. In today's world or thinking forward, what do you envision or what is the actual situation in terms of percent of the travelers who are on those flights who actually stay in the Dominican Republic and don't go on to the United States?

Since the beginning of these flights we have improved the load factor and also the capacity to the United States via Dominican Republic. We have just launched an additional flight from Campinas-Viracopos today through the same route.

Now we found out an additional opportunity after noticing that Punta Cana might be a leisure destination to, not only to Brazilians, but also to Americans. Therefore over the leisure high season we could improve even more our load factors and yields by offering Punta Cana as a final destination exactly due to the fact that you properly mentioned that Punta Cana is also a final destination, not only a stopover to United States. We are taking this opportunity to test Punta Cana as an additional route which could play in combination with Santo Domingo together. So this is something that makes sense to be delivered at the moment.

So you would actually go to both cities. When does the Punta Cana thing anticipated to start?

Punta Cana will start now in December for the high season. And I mentioned that we can have both operations, but not for the leisure high season. Leisure high season we are moving the operations to Punta Cana whilst the demand is much higher there than in Santo Domingo. But later on we can come back to Santo Domingo those flights and keep an additional one in Punta Cana in case that makes sense.

Okay. But over the last several quarters the Dominican Republic, has there been any meaningful amount of traffic that really saw Dominican Republic as their ultimate destination or is it virtually all going through?

In every flight we have some 5 to 10 seats of Dominican -- occupied by Dominicans in both directions. And it's growing, it's improving. When we implemented the project we considered up to five seats occupied by Dominicans. So it's not such a fundamental part of the traffic, but it helps to improve our RASK and our yields. Moving this flight to Punta Cana gives us the opportunity to improve even more the yields basically due to the higher demand in this period.

Okay. And then one final thing, did I understand you to say that the treaties do allow you to have local traffic rights between the US and Punta Cana, that you could carry US citizens down if you wanted to during the high season there?

Yes.

Okay. Great. Very good. Thank you.

Okay. Thank you.

(Operator Instructions). Having no questions, 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 for your attention and wish a very good day to everyone. Thank you very much.

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