Gol Linhas Aereas Inteligentes SA (GOL) 2016 Q1 法說會逐字稿

Good morning, everyone, and thank you for waiting. Welcome to GOL Airlines first quarter of 2016 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 and all participants will be in a listen-only mode during the Company's presentation.

After GOL remarks, there will be a question-and-answer session. At that time, further instructions will be given. (Operator Instructions). This event is also being broadcast live via webcast and maybe accessed through the GOL 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 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.

Good morning, everyone, and thank you for joining our webcast presentation. In this teleconference, we will first present information regarding the Company's restructuring plan, which is currently in its final phase. This information is important as we unexpected affected by macroeconomic wave, which struck Brazil at the beginning of last year and required our management team here at GOL to develop and execute a solid, but complex set of initiatives.

I and our team at voegol's are committed to delivering lasting and long-term results from these initiatives. And this is the first quarter that we are showing results from our restructuring plan. After providing this update on the Company's restructuring, we will present GOL's results for the first quarter of 2016.

So please turn to page two of the presentation. GOL is the largest low-cost airline in Latin America. The Company has a standardized fleet of 143 Boeing 737-700s and 800 Next-Generation aircraft. We serve 65 destinations in Brazil, South America, and the Caribbean. We transport 39 million passengers per year. GOL is the leader in on-time service with an average of 860 flights per day. Our Smiles mileage program has over 11 million members. Our cargo operation is present in over 3,000 cities. We have approximately BRL10 billion in revenues per year. You haven't seen what our team has done in the past as we took GOL from a negative 12% operating margin in 2012 to a positive 5% operating margin in 2014 and management is committed to delivering GOL from the current crisis.

Moving to slide number three now. While we are most proud of our accomplishments becoming the largest low-cost airline in Latin America, this could not have been achieved without best-in-class corporate governance. We are proud of our track record as one of the best governed corporates in the market. Investors who have been with us from our beginning recall that GOL was one of the first foreign private issuers to provide Sarbanes-Oxley 404 certification one year ahead of the international deadline. GOL was one of the first non-US companies to demonstrate its commitment to the principles of transparency, full access to information, and equal treatment of investors.

Please turn to the next page to slide four. First in our agenda today is to provide an update on the Company's restructuring plan. Last week, we announced the final phase of this comprehensive restructuring plan that was begun in mid-2015. All pieces of this plan are critical, work together and should allow us to achieve our targets. The final and most important piece is the exchange offers we recently announced. The need to restructure derived from several fronts, which I review on the next slide, slide number five.

After years of healthy growth, Brazil's economy began to weaken in 2012. You have seen that the deterioration has accelerated since 2015 when the recession began stronger than ever fueled by significant uncertainty caused by the Petrobras-related scandals, growing lack of confidence in the economic and political outlook, and the recent proceedings to impeach the President of Brazil. Credit default swaps on Brazilian bonds increased by over 100% in 2015 reflecting the weak and contracting economy. The same period saw the Brazil aviation sector as a whole being adversely affected principally by a shrinking economy, climbing inflation, and a steep decline of the Brazilian real versus the US dollar.

The political instability has been caused by the ongoing Lava Jato investigations revolving around Petrobras that have implicated numerous officials. The Brazilian House of Representatives has just voted on the impeachment to the Brazilian President causing expectations, that's for sure, but also further an increased instability and uncertainty. Brazil's GDP contracted 3.8% in 2015 after averaging only 1.3% growth in the period between 2012 and 2014.

The market analyst consensus compiled by the Brazilian Central Bank in April shows [an expected] GDP decline in 2016 of another 3.9%. According to estimates published by the IMF, the Brazilian economy is expected to shrink more while grow only marginally until 2018. Unemployment rose from 7% in January 2015 to 11% in March this year. A significant part of our operating and capital expenditures as well as a significant part of our debt is in US dollar base. The real devaluated 47% versus the dollar in 2015 and in the year at BRL3.90 per dollar. Also, the oil prices in 2015 decreased 48% considering the WTI barrel, but in Brazil, our fuel expenses dropped only 14% again because of the real devaluation. The inflation as measured by the IPCA index increased from an average of 5% between 2012 and 2014 to 11% in 2015. The market consensus compiled by the Brazilian Central Bank in April showed an expected inflation rate for 2016 of 7% and inflation in the first quarter of this year was already almost 3%.

In part to combat the inflation, the Brazilian Central Bank has reacted by successively raising the base interest rate. At year-end 2014, the SELIC rate was 11.75%, rose to 14.25% by the end of 2015 and has remained unchanged since, which has depressed travel and substantially increased borrowing costs. We and the Brazilian airline industry in general saw a marked decrease in certain segments and especially in corporate air travel, which fell to 58% of our total passenger revenue in 2015 from a historical average of approximately 70%. As the business level segment has a significantly higher yield than other segments, our revenues were negatively affected as a consequence.

Being the market leader in Rio de Janeiro as measured by departures, we were particularly affected by the crisis in the oil and gas industry caused by the government investigations and the collapse of international oil prices. The largest airlines in Brazil, led by GOL, have taken steps to rationalize capacity, but this were offset by increased competition in major airports and rapid growth of smaller competitors. As a result, the industry had suffered huge declines. The labor unions representing our employees want new industry-wide contracts that raise the monthly salaries by 7% in 2015 and 11% in 2016. As a result and also as a consequence of inflation, our personnel costs increased by 15% in 2015.

The economic crisis has resulted in a constricted and expensive credit environment in Brazil. Lenders, lessors, and fuel providers either increased their cash collateral requirements or reduced payment flexibility, sometimes both, negatively affecting our available cash as shown by our restricted cash, which more than doubled from the end of 2014 to the end of 2015. Our credit ratings of B-, B3, B from Fitch, Moody's, and S&P respectively from July of 2015 have declined at an average of four notches to C, Caa3 and CC, which has significantly reduced our access to and increased our cost of capital. At the same time as high margin revenue decreased, operating cost has increased principally as a function of the exchange rate variation, inflationary pressures, increase in sales incentives and service improvements.

Our ex-fuel cost per ASK increased by 16% in 2015 thus compressing our operating margin. The [factors have] caused our financial expenses to climb significantly. Our interest expenses increased by 50% from BRL593 million in 2014 to BRL886 million in 2015. Our capacity reduction, the shrinking Brazilian economy, the real devaluation, pricing pressure, and increased competition have reduced significantly our cash flow and consequently, the payment capacity.

You can see graphically the evolution of some of these developments on page six. 2016 is expected to be very challenging with an expected exchange rate of BRL3.70 per US dollar. The inflation around 7% and GDP growth at a negative 4% while the interest rates at 14%. This year is expected to be the second consecutive year in a row of 4% negative growth in GDP in Brazil as Brazilian airline [demand growth] has a historical elasticity of two times GDP growth, the sector is expected to suffer a significant reduction. As you can see on slide seven, overcapacity in Brazil has added pressure on GOL. While the Company has been very disciplined, others have not. While we have since 2012 successfully worked to rationalize our route network and fleet size, the confluence of diverse effect in 2015 offset much of the actual and expected operational improvements that our team worked very hard to achieve. Most observed and we believe that a turnaround in the Brazilian economy is two or more years away. As a consequence, we embarked in the past year on a series of initiatives to comprehensively address our liquidity and capital structure concerns.

Moving now to slide number eight. In mid-2015, GOL began its comprehensive restructuring plan, as I said earlier, addressing over BRL17 billion of debt and other obligations. We have executed several important initiatives in the second half of 2015 and first months of this year. These initiatives [should retain assistance and concessions] are well-balanced. In September 2015, Volluto, our concerning shareholder, made an active investment in GOL of BRL284 million.

Concurrently, Delta purchased additional capital stock for BRL177 million. Working closely with Delta, we obtained a new unsecured term loan of $300 million [purely guaranteed by urgent]. Being able to offer this guarantee allows us to secure this financing and amounts and on terms that most likely would not have been available to us otherwise. Our obligation to Delta is secured by a pledge of our shares in Smiles or cash.

Early this year, we returned five aircrafts under finance leases, two of them outright and the other three under sale and leaseback agreements, generating a net cash inflow of BRL212 million in February and [sold] our rights to three aircraft deliveries from Boeing in 2016 which originally would have replaced outgoing fleet aircraft. Also in 2016, we implemented various operating cost saving initiatives including overhead reductions, introduction of part-timing employees to offset reduced demand during low seasons and renegotiations with suppliers.

In February, VRG entered into a ticket purchase agreement with Smiles totaling up to BRL1 billion providing for advanced ticket sales to Smiles in various trenches through June 2017. The first tranche of BRL376 million was disbursed by Smiles in February 2016 and the remaining tranches are conditioned upon certain other additional cost savings and liquidity initiatives including the completion of the exchange offers.

On May 1, we implemented a change to our route network to focus on more profitable routes, suspended flights to eight destinations and expect to reduce our fleet by approximately 15% by the year-end. We estimate that these changes will reduce year-over-year the number of take-offs and seats by 15% to 18% and the number of ASKs by 5% to 8% due to the longer [stage left]. Key suppliers are helping us to reduce our cost and adjust to the new network and fleet profiles. For example, in the first quarter of 2016, we revised our delivery schedule with Boeing so that we will not receive any new aircraft until mid-2018.

The concluding phase of our initiatives includes the renegotiation of the vast majority of our debt and lease obligations. Specifically, the exchange offers, renegotiation of the leases and amendments to the terms of the debentures. We are in advanced discussions with all our lessors to renegotiate certain commercial terms of lease agreements including returning aircraft, deferring and reducing aircraft cost obligations, and reducing monthly lease rates and deferring payments on a substantial number of remaining aircraft.

A key initiative with lessors is reducing the GOL fleet by 21 aircraft, which we expect should have a net present value savings of approximately BRL220 million and is invaluable for [happily] adjusting GOL's operations to current demand conditions. We are in discussions also with our local credit providers and debenture holders regarding concessions including a deferral of 90% of principal during 2016 and 2017 to 2018 and 2019. A new two-year credit facility of BRL300 million is also under discussion and a waiver for one year of compliance with the debt service and leverage governance. We expect that the concessions we have asked from our debenture holders will reduce our principal payments until 2018 by BRL225 million. Delta has agreed on an interim basis to reduce the over collateralization ratio we were required to maintain under our agreement related to Delta's guarantee of $300 million, the term loan. Delta has agreed to make the reduction permanent, subject to the successful completion of the exchange offer.

At December 31, 2015, we had BRL550 million in future commitments with Boeing. Boeing supported the rationalization of our network fleet plan and the future deliveries of aircraft. This agreement will give us material relief in terms of cash flow. Part of this cash flow relief is intended to fund the exchange offers. Our agreement with Smiles provides that if we achieve the expected cash savings from a series of initiatives including the exchange offers and lease renegotiations, we will receive from Smiles advance payments for the future ticket sales of up to BRL1 billion including the BRL376 million already disbursed by Smiles in February 2016.

There is a great deal of uncertainty, political and economic, in Brazil and also globally and significant challenges in the airline sector, but we believe that our plan including the exchange offers, renegotiation of other commitments, and achievement of the listed initiatives should permit us to address our current situation. On the next page in this webcast presentation, the slide number nine, you can graphically see that our short-term liabilities increased dramatically during 2015 primarily due to the macro effects described.

At year-end 2015, our current assets and current liabilities were BRL2.5 billion and [BRL5.5 billion] respectively representing a shortfall of BRL3 billion. In the first quarter this year, we received over BRL900 million of planned cash inflows from initiatives in the restructuring plan that more than offset planned cash outflows reducing the current ratio shortfall to BRL2.6 billion. Major cash inflows contributors from our plan were BRL213 million from sale leaseback transactions, the BRL126 million of reduction in collateral related to the term loan, and the BRL376 million first tranche of the Smiles agreement. I will now turn the presentation to our CFO, Edmar Lopes, who will provide details on the exchange offers of our restructuring plan and how this fits into the Company's financial restructuring plan.

Thank you, Kaki. Good morning everyone. I would invite you to turn to slide number 11. In May this year, just a week ago, we began the final component of the restructuring plan. This component, which is the restructuring of $780 million of outstanding dollar unsecured bonds issued in international capital markets is a critically important transaction for the Company as it is for the bondholders and also the most important component of our restructuring plan.

GOL's dollar unsecured bondholders now have the opportunity to exchange their securities for cash and a new secured bond at a premium to their current market value. The dollar unsecured bonds are the last major group to be approached in GOL's comprehensive financial restructuring. GOL's offer to exchange all of its outstanding unsecured dollar bonds for new secured bonds with collateral covering more than 100% of the new bonds in addition to a cash component and with a premium to current market value is a great opportunity for GOL's bondholders to voluntarily participate in its restructuring and receive again a premium for their bond.

We strongly believe that this is a good and fair offer and we expect that bondholders will understand that it is in their best interest to exchange their notes. Existing note holders who do not exchange will become [strictly] subordinated to the new secured note as a result of the pledge of collateral. In addition, holders of perpetual notes will receive new notes that have a set maturity date of 2028. The [95] threshold for completing the exchange offer is set by the Company and we can change it, if circumstances call for it.

On the slide in front of you, you can see the see the summary of the offers. As you can see, the GOL offer to the bondholders represents a 20% to 50% premium over current market prices. A significant component of our offer to unsecured creditors is providing collateral that is crucial to the operation of the airline. The new notes are secured by a first priority security interest in spare parts. We hired MDA to conduct an appraisal of this collateral and the appraised value came at $223 million. Furthermore, it's important to recognize that the value to GOL of this collateral is beyond measure given the importance of this to our operations.

I would like to bring forth the main advantages to the holders of the new secured notes, which are the following: first, we are providing cash to existing note holders. Also, in addition the holders of the new note become the permanent owners of the collateral and are entitled to sell the collateral to third-parties. Additionally, payment obligation secured by the collateral under the fiduciary sale agreement are not subject to judicial recovery proceedings up to the amount secured by the collateral. Next, the holders of the new notes may enforce the right in the collateral during a judicial recovery. Fifth, the collateral will not be part of a liquidation proceeding. And finally, obligation secured by the collateral are not subordinated to claims that have a statutory preference under Brazilian bankruptcy law in a liquidation proceeding.

I would like also to reinforce the main advantages to (inaudible) holders of old notes. First, the old notes will not get the benefit of the collateral securing the new notes and will be effectively subordinated to that. Second, [pay-in] obligations under the old notes will be subject to the automatic stage of the restructuring plan in the judiciary recovery. Last but not least, in a liquidation proceeding, obligations under the old notes are subordinated to claims that they have statutory preference under the Brazilian bankruptcy currency law including labor claims, secured creditors, and debt claims.

On the next page, page 12, I summarize the important dates for holders of the notes. Next Tuesday, just a few days from today, May 17, is the deadline to qualify for the early participation premium that is the early bird of 5% to 10% or withdraw tenders of old notes. The offer expires on June 1, the deadline to validly tender old notes and qualify for payment. Holders of old notes who would like to tender to old notes in exchange for new notes should be sure to allow enough time for the necessary documents to be timely received by the exchange agents. I also would like to tell you that it is very easy to access that. You can access the link on our website to register to receive the premium for exchanging your bonds by next Tuesday. The address of our website is www.voegol.com.br/ri. Through today, many bondholders have already registered on the site. In summary, I would like to say that the exchange offers are a very critical component to our restructuring plan and I require to close certain other liquidity initiatives described earlier. I will now invite you to go to slide number 13, which has the title of exchange offer considerations. Despite significant operating improvements as we have shown in this quarter, GOL still needs to continue to address its capital structure challenges. Our ability to service our capital structure has been impacted by industry overcapacity, political and macroeconomic conditions in Brazil and a significant devaluation of the real affecting our lease expenses, interest expenses, and fuel costs and as Kaki mentioned earlier, our capacity payment. Our shareholders have contributed significantly to improve the Company liquidity. All of our important stakeholders and partners are expected to provide substantial support to improving our capital structure. The exchange offers are a crucial aspect of our overall restructuring. It allows unsecured bondholders to receive cash plus new secured notes. Also, the completion of the exchange offers will facilitate completion of contributions from stakeholders and partners as we described. I will now turn the presentation back to Kaki who will review the results for the first quarter of 2016.

The next part of today's presentation, we will review the results of our first quarter of 2016. Please move to slide number 15 of the webcast presentation. In the first quarter of 2016, we saw an improvement of 17.3% in yield and 16.4% and PRASK when compared to the first quarter of 2015. We decreased the ASK in the domestic market by 4% and 18% in international markets. Combined, the total ASK was 6% lower than the same period of 2015. The takeoff volume and the number of seats reduced by 8.2% in the quarter. The 2.3 percentage point reduction above the ASK reduction is due to increase in [exchange map] which is part of the new route network, which was fully implemented on May 1. The net revenues expanded 8.3% percent reaching BRL2.7 billion in the quarter. Recurring operating income was BRL225 million and operating margin was 8.3% in first quarter of this year. We generated BRL213 million related to the sale leaseback transactions of six aircraft. CASK was BRL20.3 representing an increase of 12% in the period when compared to the first quarter 2015.

On slide 16, we show the total net revenue growth of 8.3% in the quarter. Excluding the non-recurring earnings from sale leaseback transactions, the operating results, EBIT was BRL224.6 million in the period with a margin of 8.3%. These recurring operating results reflect the realignment of our flight network and operations, CapEx reductions, and downsizing. This is the first quarter that we have seen some results from our initiatives. Our last 12 months figures are indicative of the new macroeconomic environment. In the last 12 months as a reflection of the Brazilian economic collapse, EBIT reached a negative BRL113 million with a margin of negative 1.1%. Recurring EBITDAR reached BRL663.2 million with margin of 24.4%. In the last 12 months, this indicator accounted for BRL1.5 billion and a margin of 15.3%, a decline of 2.5 percentage points versus the same period 2015.

In the next slide, the number 17, we breakdown the first quarter results which were strongly impacted by two events. The sale leaseback of aircraft of BRL213 million and BRL654 million in net exchange rate variation due to the real appreciation of the US dollar and on top of that, at December 31, 2015 and March 31, 2016, this exchange rate variation has no immediate cash impact. Excluding the non-recurring effects mentioned earlier, gross EBT or earnings before taxes were a negative BRL190 million.

Please move now to slide 18, GOL has been reducing capacity since 2012. However, the smaller players have been adding capacity negatively affecting sector results. As shown in the first block, you can see that GOL reduced domestic ASK by 4% in the first quarter 2016. For 2016, we reiterate our capacity reductions of 5% to 8%.

You can see on slide 19, a summary of our efforts to reduce capacity mainly in Brazil, which includes a 15% to 18% decrease in available seats, a suspension of eight destinations, Miami, Orlando, Aruba, Caracas, and Ribeirao Preto, Bauru, Alta Mira, and Imperatriz and a reduction of 20 aircraft. Please turn to slide 20. I want to reaffirm the capacity projection for 2016, which includes a total supply reduction of 5% to 8% and a total seat and volume of departures reduction between 15% to 18%. Given the higher level of uncertainty, we are currently unable to provide any kind of additional guidance for other metrics. I will now return the presentation to Edmar. Please, Ed.

Okay. Thank you Kaki. In this section we will review our recent financial results highlighting the main aspects and drivers of this quarter. Please move to the next slide, this is slide 22. Yield increased 17% over the first quarter of last year and it was up 4% over December quarter 2015. The increase in PRASK was 16% quarter-over-quarter and 7% quarter-to-quarter. The improvement in RASK came at 15%. At [BRL0.20 a real], total CASK increased 12% over the same quarter last year. Ex-fuel CASK and I will go over that a little bit further in the presentation, increased 17%. RASK minus CASK was [1.87 of real], an improvement of 66% when compared to the same period last year.

Please turn to the next slide, page 23. Here we can see that the CASK ex-fuel increased by 17%, [BRL014.1% of real]. The increase was driven primarily by a 60% increase, that is [BRL0.01 of real] in aircraft lease expenses. It happened due to the higher number of aircraft in operation and a 36% depreciation of the Brazilian real versus the US dollar, a 24% increase in servicing expenses also related to the FX, a 7% increase in salary expenses as mentioned by Kaki earlier due to the general agreement and they were partially offset by a 7% increase in maintenance expenses. I will highlight here that aircraft lease expenses were affected in a very significant manner by the FX rate, doubling the participation of this line item to around 14% of total expenses against just 6% one year ago.

Now please move to the next slide. Here on this slide, we show our March quarter results for this year on a recurring basis comparing to last year. First quarter this year, earnings before non-recurring items, exchange rate variations, and taxes were a negative BRL48 million compared to a negative BRL46 million last year in the same quarter. So, although we have improved our margin, it hasn't changed much in terms of cash flow. These results reflect the new macroeconomic environment facing us in the airline sector. Total net income was positively affected by sale leaseback generating BRL213 million and as aforementioned by Kaki, the exchange rate gains which have no cash impact from the recent appreciation of the real came at BRL654 million.

Please turn to the next slide. Turning to our balance sheet, we see at the end of the first quarter, our total adjusted debt including capitalized operating leases was [approximately BRL15 billion]. Our total on-balance sheet debt, as the chart shows totaled almost BRL8 billion, an increase of the BRL2.3 billion against year-end 2013 and a decrease of BRL1.4 billion versus the end of 2015 primarily due to the FX.

Including capitalized operating leases, our total debt-to-EBITDA ratio at the end of this quarter was 9.4 times. At March 31, 2016, our total cash balance was at BRL1.8 billion.

On the next slide, on the left side of the page, you can see that the cash balance of BRL1.8 billion was composed primarily by the three tranches. The first one is free cash, BRL658 million. The second one, BRL744 million of cash on the balance sheet of our Smiles subsidiary, which we consolidate on our balance sheet and which the airline does not have direct effect. And also, the last tranche would be the BRL413 million of restricted cash.

Out of the almost BRL8 billion of on-balance sheet debt, approximately BRL840 million is due in the next 12 months as you can see in this graph. A significant tax reduction from current levels is required. Our plan balances overall operating growth and long-term credit improvement. It is expected to deliver approximately BRL300 million of annual cash flow improvement when fully implemented. All of the initiatives are important for GOL in order to be able to match its cash outflows with expected cash inflows.

As we have mentioned before, the exchange offers are a critical component of this plan. We are confident that the initiatives in execution will deliver the required cash flow savings with the result being a stronger balance sheet. We are targeting [be it credit metrics post restructuring with a goal of choosing BB metrics longer-term]. That is exactly where we were before the turmoil started here in Brazil just a few years ago. With that, we will have our adjusted net debt below BRL13 billion post restructuring. We do expect that the results of our restructuring will be long lasting. Again, thank you for your attention and now I will give the floor back to Kaki.

I would like to end here by thanking you for joining us during this presentation. GOL is the largest low-cost airline in Latin America and is committed to best practice, corporate governance, and transparency. I hope our review of the impact generated by the unexpected macroeconomic wave that hit us last year and the restructuring plan we are executing help you understand where we are taking the Company.

First quarter 2016 was our first quarter of resource generated from the initiatives we began in mid-2015. Our team will continue to deliver solid execution of initiatives so that GOL weathers the crisis and emerges as an even stronger company. We will now move to the Q&A session, please.

Actually, before we open the line for your questions, guys, I think I should address several questions that we have received from investors in the market since last week when we launched the exchange offer. We have received mails, website calls, but I think it's important we have a summary here. So the first question was what GOL expects from these exchange offers?

We think that the goal of these exchange offers primarily is to ensure that GOL emerges from this current crisis in the best competitive position. Another question that was made is that whether creditors were being treated in an equal manner? Certainly, yes. GOL secured creditors, it's lessors and lenders secured by aircraft are providing concessions and support and the terms of the offer are based on current market prices. GOL's local credit providers and partners are also providing concessions and support and the terms are truly based upon credit relationships. Again the exchange offers are a critical component of GOL's restructuring plan and the terms that we are offering are based on market prices for the bonds.

There was a guy that also asked me about the Brazilian banks.

Banco do Brasil and Bradesco, which have long supported the Company are key credit providers to GOL and we are discussing with them extending the maturities and additional lines of credit of up to BRL300 million, also letters of credit, discussions as Kaki mentioned before are underway. So at this point, there is no final conclusion.

How much we can expect from those initiatives?

Just reinforcing what we have said before, we do expect BRL300 million of annual cash flow savings, when and if all the initiatives are executed.

There was a question also about equity. Why we wouldn't be offering equity at this point?

There was a lot of discussions with several of our bondholders and PJT has advised us that unsecured creditors would rather have new notes secured by a collateral and receive cash rather than having an equity at this point. Our goal again earlier today, Kaki was asked in our journalist call whether we would review the terms of the offer. We have no intention to change that or to amend anything in the offer. Of course, we will obviously assess the status of the exchange offer following the early bird date that is next week. So it's very clear for us that at this point, we will not change.

Another question that was made, this one I remember, came directly to me is what we think that will happen if the exchange offer does not succeed. If we're not successful, we will not be able to complete several of the liquidity initiatives described previously because they are related. As you can see from the presentation here, our liquidity, which has been shrinking will suffer and we will not be able to improve, neither our cash position, our cash flow status, and our credit profile.

And with that, this is a final comment, because of the rating agencies having downgraded us, and some of them put on a special [kettle], if you will, we were asked whether this is default or not. No, this is not a default. We are conducting an exchange offer or exchange offers because of the number of the bonds and we are offering a premium price, cash, and collateral. Voluntarily unsecured bondholders can exchange for secured bonds. I will now turn to the operator and please open the line for questions.

(Operator Instructions) Michael Linenberg, Deutsche Bank.

I have a couple here and its either Edmar or Kakinoff whoever would like to answer them. If we can just talk about to start off, what your cash burn looks like right now. It does look like that your unrestricted cash at the end of the year was over BRL900 million and it looks like at the end of the March quarter, it was BRL650 million something on the order of about BRL3 million plus a day. Where are you now? What does it look like as we move through the June quarter, which I know seasonally is one of your weakest quarters?

We are pointing out that the cash available is shrinking and that's why we're being very clear about all the initiatives. I don't know if you saw the presentation, Kaki mentioned that in this quarter, we were able to raise at least BRL900 million of additional cash in order to meet our financial obligations and expenses as well.

To say how much cash we will burn next quarter, it's a tough moment because as Kaki mentioned, the uncertainty here in Brazil is very high at this point. It's unclear, but we know that we will burn cash because this is for sure the worst quarter, seasonality speaking, as for Brazil. We don't have much visibility, but we are counting on the initiatives to move on. That's what we can say at this point.

This is Kakinoff. (inaudible) this is a comprehensive restructuring plan made of several parts. We are fully committed to deliver all of that but [this early we cannot miss none of these parts], otherwise, we will have the Company being exposed to a quite risky situation. So the second quarter is a pretty challenging one. All the initiatives are linked to strict time plan to be executed and delivered. So at the moment, the only thing we can tell we are 100% focused. Fortunately, the initiatives have been delivered on time. The second quarter is really challenged and currently we are in a cash burn rate. So having the plan being executed, we will be able to go through this stormy weather, but we need to have all of those initiatives delivered.

With respect to sale leasebacks, you did three in the last quarter, you raised BRL212 million, at least that was the gain. Do you have other aircraft available that you could pursue additional sale leasebacks on and if you do, are you currently contemplating those additional sale leasebacks and will they impact this quarter.

Michael, we could have another aircraft to be either sold or sold plus sale leaseback but, it's pretty much unlikely that we would get the same amount. Those were six aircrafts with a lot of equity already paid and we were somehow lucky because we could get quite favorable exchange rate when those aircrafts were sold, the exchange rate was [BRL4.15]. So we would not have the same amount of earnings, not even close to that by selling more aircrafts, considering the current market values and exchange rates. Certainly, those are variables, they could change, but that would be a more opportunistic approach of the Company and not a part of our cash inflow plan or something like that.

And just on the exchange offer. I know in the documents, you're targeting 95%. Is there a minimum that you need to achieve in order to affect all of the other agreements that you have in principle with other creditors like some sort of minimum threshold. Number 1A, and I guess sort of a Number 1B, does each class of security have to achieve that minimum, say you have to get to a majority percent in order to effect -- to succeed with the exchange offering?

The answer is no, but it's also pretty much related to the penetration of acceptance in each of the notes plus the perk. I mean, we're going to analyze and make the assessments for each note and then come to an individual conclusion whether -- individual I mean for each note, whether it will make sense or not to go for review. So there's no minimum preset amount, but certainly, we're going to analyze whether it makes sense or not.

Okay and just quickly, lastly and this is technical, when we get to May 17 or May 18, will you put out a press release with an update on the percents of note holders who have tendered. Will that be available or will you just remain quiet until we get to June?

Michael, this is Edmar here. We will decide on the eve -- the night during May 17 and May 18 depending on what comes out. It's too early to say, but let me go back to one of your questions that is, about how much cash, take it because of seasonality and the size of our operations, we're shrinking operations here, ballpark numbers for cash burn should be at the same levels of this quarter, okay.

Okay. So what we saw in the March quarter and that was around BRL3 million a day or so.

Yes.

Renato Salomone, Itau.

First of all, congratulations on the network re-shuffle and the capacity discipline that we saw especially in the latter part of the quarter. My first question is regarding the fleet. Could you please give us a ballpark for the number of aircraft that are currently part if possible with the mix of 700s and 800s. And also, how advanced are the negotiations with lessors that are being led by SkyWorks?

At the moment, we have 16 aircraft grounded. The mix of those aircrafts are related to the Company's mix. So I mean, 40% of them are 737-700s. The negotiations with the lessors are progressing quite well. We are also treating all of them equally, but knowing that they have different exposure to the Company and different number of aircraft leased, they will also participate proportionally to their exposures. For each of the lessors, the negotiations are in a different point of development where they are progressing well. I believe that over the following weeks, we will start to deliver some news on this progress.

Second question, I was impressed with the 80% yearly jump in international revenues. Even with the 18% ASK reduction in the international market, can you give us some insight on this growth so we can properly project international revenues going forward?

Hi Renato, this is Edmar here. Thank you for the question. As we have been telling the market, we are expanding our channels of distribution offshore Brazil. Okay, this is one. So now we have GDS in a lot of places that we did not. We're talking about 50 countries that were not served by our distribution channel. So this is one. We should expect still some growth but also in terms of on a relative basis, we were benefited by the FX, okay because the real was devaluated meaning that we should see some revenues coming down, okay.

Now, the next point is related to accounting, which is important because we got a few questions whether people would be able to do the math to see a RASK and PRASK in international and domestic revenue. No, you can't because what we do here, what we account is the point-of-sale while for doing the right math for RASK, domestic and international, you need to see the flights by themselves. So you can do the math and we do not disclose the information. What we see here in our financial statement are the point-of-sale, okay, but again, it's growing but we should see some downturn nowadays in the next close future because of the FX.

Brad Armstrong, GAA Hedge Fund.

My question just relates to the exchange offer. I was hoping you guys could explain in more detail just how the liquidity initiatives are linked to the completion of the exchange offer?

I would take this Kaki. Hi Brad. Here we cannot go into more specific details of the negotiations because they're not public. What we have told the market is exactly where we are at this point, but one should understand that most of them had credit conditions that if we cannot meet, that will jeopardize the exchange offer meaning that there is some correlation among the negotiations, some craft conditionality, but at this point, we cannot disclose much besides what we have told the market so far.

Savi Syth, Raymond James.

Just a few follow-ups, on the domestic and international, could you give roughly like what you're seeing from a domestic PRASK improvement standpoint in 1Q and maybe what the trend in for the rest -- is that what you've seen so far in 2Q?

This is actually one of the post effects of cutting capacity, which we started to implement. The second quarter as I mentioned before is not only challenging, but the first output of the advanced sales showed us that this quarter will be not different regarding the demand reduction than we had last year or even lower. The whole industry is cutting capacity at the moment, but the demand seems to be really, really weak. We could not take the first quarter as a parameter for the remaining quarters mainly the next one. So there is a lot of uncertainty and we cannot foresee the PRASK for the current year. Sorry for that.

I appreciate that Kaki. So you're taking a lot of capacity out and most of that started coming out in March. So are you at least seeing then the yields improving or as you get into the weak quarters, is that a struggle as well?

Again, the yields improved in the first quarter. Now for the second, yields could improve in case that the corporate demand, the business travelers would be at the expected level, which is not happening. Considering that the expected level was already at a lower level than last year. So that's probably the main concern. We do not know how the market will react and how the economy in the short-term will react to today's news. I mean, the change of the President, but it would be may be too optimistic to assume that next week, the companies and the businessmen will be back to their traditional level of frequency of business travels. Therefore, again, we cannot give any kind of optimistic not even a more accurate view on the following weeks.

Understood. And then just on the capacity guidance for the year. If was wondering if you could kind of break it out between domestic and international but also so that the 20 leased aircrafts that you're hoping to return, does the guidance reflect all 20 being returned or if you're successful there, could we see maybe that updated if the demand calls for it?

No, this number [is a] 100% linked to the guidance already delivered. So our task is now to get rid of those airplanes.

Okay. And my last kind of quick question on the fuel hedging. It doesn't seem like [learning] on new fuel hedges. I was wondering if you could and I appreciate the color that 6% is hedged over the next 12 months, but is more of that hedged in the next quarter or two or how we should think about any kind of what levels have been locked in?

Hi Savi, this is Edmar. We have been carrying very light positions of hedging here and we have been using primarily Petrobras fixed price because of the credit crunch that we're facing here. And therefore, we are carrying the minimum levels that our policy has established. There is 20%, 25% for the short-term.

Hedging became even though, I mean hedging for the Company because there is, you know, like --, and the Company does not have cash availability to purchase a new position. So it is in light of the moment not just because of our view on oil future prices but also because the Company is facing several constraints to get credit in case that we would go for a higher position.

Ravi Jain, HSBC.

So just two couple of quick questions. First is on the restructuring. So at the end of the restructuring, assuming that the exchange offer and the negotiation with the aircraft lessors are successful, this too probably looking at a leverage which is relatively slightly high and just want to get your thoughts on, is it just going to be deleveraging from the business there on, do you have some other initiatives in mind? That's the first question.

And the second one was on the CASK ex-fuel. Now that -- assuming there's a more stable FX going forward, are there any other efficiencies or changes that we should expect? Thank you so much.

Starting from the last question, most of the cost-cutting initiatives were either already implemented or announced. We do expect to have additional efficiency gains along this year, but the total amount to be saved would not really be as meaningful as necessary to really be considered as a game changer regarding our cost structure.

We have been under pressure on several items like navigation fees, tax, airport fees and labor costs just to name some of our costs. Those are under pressure and increasing at the moment. So we do not expect really sizable cuts to be delivered when we compare to our total cost structure. Could you please repeat again your first question because I'm not sure that we really understood what you said.

So the first question was assuming a successful exchange offer and negotiation with the aircraft lessors, we are probably still looking at a debt level or a leverage that is relatively high. Do you have any other initiatives in mind after that or do you think it's going to the deleveraging from the business there on?

Considering that our leverage is pretty much linked to the exchange rate and that's extremely volatile at the moment, it's really hard to predict how it's going to be our leverage profile after this initiatives, but I'm pretty sure that being successful in delivering those two fronts, the Company will be not only sustainable, but able to assume it's business continuation in a much healthier way than we have today. Actually, this is necessary to have the Company out of this transition period being at least at the same size that the Company became now and being again back on the growth track. We are pretty much confident on that, but we do need to deliver those two front results.

Pablo Zaldivar, GBM.

I just have a couple. The first one, could you give us a little bit more insight regarding the current competition and pricing dynamics that you are seeing in the market for the following quarters?

The competition has been tough. I mean I guess that as mentioned before, the capacity reduction has not been followed by all the competitors. So it means that in some months of the year, we are predicting to face still an overcapacity in comparison to demand. So I would summarize like the following: the discipline regarding capacity is much more rational than before, but I wouldn't say that it has achieved its balance in comparison to the demand when we are talking of the whole system. It's improving, but we are still not close to the optimum point.

And another question regarding cargo and ancillary revenue. During the quarter, we saw a slight decrease. Could you give us a little bit more color on the reasons that this happened, because in terms of gross revenue, you registered a 13% increase and when you moved to net revenue, it is a 1% decrease?

Hi, Pablo. This is Edmar here. Some of our products have decreased in terms of revenue. It's seasonality and also related to the lack of demand because we are charging more for some of the products. And also, if you look at our earnings, you see that net revenues came down but the gross revenues were up. This is also related to taxes, but overall, this is a reflection of the lower demand level that we're seeing in Brazil because a lot of ancillary revenues are up selling products that we have. And also the cargo, which is very much related to GDP in Brazil like [tech] demand, we're seeing the numbers coming down every single month. We are keeping our market share through pricing.

Victor Mizusaki, Bradesco BBI.

I have two questions. The first one is actually a follow-up on the CASK for the second quarter and going forward. If you take a look on what you reported in the first quarter on the average FX rate, can we assume that maybe your likely see another decline of maybe 3% to 5% in the second quarter?

Hi Victor, this is Edmar here. We should not assume again on the CASK at this point because as Kaki mentioned before, we have at least 16 planes grounded at this moment. So they will be less efficient during this quarter. This is one of the reasons why we are discussing with lessors. We need to get these planes out of Brazil. So it's too early to say that. Fuel is up. Fuel went from [BRL30 a barrel in the first quarter, that is generally BRL45] so we should see fuel moving up as well.

Again, total CASK will be up and ex-fuel CASK will see the pressure of the planes being grounded and a reduction in capacity as well because you saw that the number of ASKs in the first quarter decreased significantly after March. So at this point, I would say that it's a concern.

Victor, just to add an important information. Considering the beginning of this year's forecast, regarding jet fuel price and exchange rate of dollar/real. For this year, the full-year [FX] the jet fuel price in reals is 7.6% higher than it was supposed to be because of the 50% price increase on the WTI price since the beginning of this year. So let's call it the best forecast we can give you on the jet fuel price for the year at the moment.

Just a last question, when you take a look on your average stage length, we can see an increase of 3%. What can we assume for the remainder of the year?

It varies between a high and low season, but it's something around 1,050 kilometers is the new average stage length.

The forecast for the year after the new network. You should remember that new network was implemented in May 1. So it should add 60 kilometers to 70 kilometers on top of the average length you saw in the first quarter 2016, but as I said, it varies between high and low season because during the high leisure season, we naturally have longer stage lengths.

Bruno Amorim, Santander.

So I have one question related to maintenance expenses, which came down by 13% year-on-year in the first quarter. I like you to better understand why this happened given that the FX has depreciated by over 30% in the same period and also to our extent is the current level of maintenance expense recurring going forward. Thank you.

Hi, Bruno, this is Edmar, it's just a calendar. You see this sometimes it varies -- the number of engines from one quarter to the other.

So should we expect an increase in the upcoming quarters?

Yes, I would say yes, but it will depend on the physical fleet itself.

Rogerio Araujo, UBS.

I have two questions. First, if you allow me I'd like to do a follow-up on international revenues. I think this is an important point to understand as it seemed to represent most of the [yields] expansion in the first Q. I know you mentioned that we cannot do the yield calculation breakdown, but I imagine that this can be, it is the best approximation we have. You mentioned that we should see international revenue going down as of second Q due to the [real] appreciation. But my question is regarding the magnitude of this reduction because when you do this approximation for the national yields, we have [92.1%] increase in international yields, 55% explained by a point-of-sales basis, and only 36% [expanded] by the FX depreciation. So what's the magnitude of this reduction that you could see as of second Q? This is my first question. Thank you.

Rogerio, I will go back. Please do not take this as a good proxy what we have in the financial statement. As a proxy for calculating the yields for domestic and international flight, you will go into mistakes because what you see in the financial statements are the point-of-sale, this is not what we fly. So there is a difference. For the trends, as Kaki mentioned before, we are seeing the yields going down both in the domestic market as well as in international market. In the international market, I would add as factors that would make the number go down is lower demand, seasonality, and also because of the FX. Again, we should not see the same growth in the next quarter. Rather, we should see a decrease from one quarter to the other.

My second question is regarding the initiatives you're taking. You mentioned, if I'm not mistaken, BRL300 million of annual cash flow savings. My question is regarding is this number right and does it include that interest savings as well or its mostly lessors and other cost-cutting.

Rogerio, as I mentioned, it includes everything and the number will only appear if we do as acute, and complete all the initiatives, which at this point, we are still discussing with lessors, we are still discussing with Brazilian banks, the exchange offers are around in the streets. So there is still a lot of uncertainty here, but for sure, we need all of them to be done and completed.

Josh Milberg, Morgan Stanley.

Just a few doubts on your CapEx. It looks like excluding the effects of the PDP inflows that you had about BRL170 million of investment in the quarter. Can you just comment on what's behind that amount and also I think you've said in the past that you expect to keep the maintenance CapEx to as little as BRL200 million on an annual basis. So I just wanted to know if that's what you're still targeting?

Yes, that's what we're still targeting, but it depends on a few movements, it's still unclear for us. The first one is where the FX will stabilize, debt FX, CapEx, and other [expenses] and also as we have told the market, we have come to an agreement with Boeing that gives us flexibility in terms of cash flow, but there are some conditionalities here and we cannot disclose them, but the number you're looking for could be higher depending on FX but that's a ballpark number.

Even if it's a bit higher, how sustainable would that level be taking into account that your depreciation is well above it (multiple speakers).

Again, depreciation also takes into account the engine. So this is a different item, it just not depending upon not only the CapEx of an aircraft on a stand-alone basis. And again, as Kaki mentioned before, at this point, we need to do everything -- all the initiatives should be completed in order to take the Company out of this crisis. That's where we are now. We cannot say that we will keep all the CapEx levels exactly the same way that we were in the last few years.

Julia Bertz, BCP Securities.

I just wanted to double check on CapEx. Does that include the prepayments and the sale leaseback. The prepayments for Boeing, the BRL200 million net investments?

It goes on a different line. The sale leasebacks it comes above the EBIT line. So, whenever we have a transaction like this, we book it a different way. Everything that we're talking about -- every time we're talking about CapEx, we're talking both PDPs and the engine that are overhauled in a more sound manner. So that's how I would split the two lines here.

Okay so for CapEx, still including the BRL322 million and BRL369 million for Boeing's aircrafts?

Sorry. Would you repeat the question please?

For CapEx, are you including or excluding the advances for acquisitions of Boeing's aircrafts, which is about BRL700 million.

I'm including. That's part of our CapEx.

Michael Linenberg.

Just one quick one here. Earlier, I think Edmar, you had talked about the collateral backing the new loans, $223 million that [NBA] did an appraisal on. Can you just give us any color on what that collateral is? Is that gates or slots or engines or is it just all spare parts? What does the collateral consist of?

Hi, Michael, I will take this okay. This is a question, it's an opportunity that we have to clarify that. We hired NBA. NBA is the well-known company that has done a lot of work to the market as for appraisals, you know, aircraft, appraisals, spare parts appraisals. They came with the number of $223 million for our spare parts, which are rotables and expendables whoever is familiar with the aircraft business will know what it is. One of our most valuable assets, that's our spare parts. First, the value is linked to the value of Boeing 737-700s and 800s because they are all parts that we need to fly. We cannot operate without them. That's the point.

We need to keep them in order to fly. So that's a very important issue. So we will take care of the spare parts and because they have a very good liquidity in the marketplace, I can assure that as for bondholders, this is a very good security that we can offer. So $223 million, appraisal from an external agent. It covers 100% of principal. It has its value linked to Boeing aircraft and we cannot absolutely, we cannot operate without them. So that's where we are now for the collateral.

This is really important to emphasize. Those parts as properly said, they have high liquidity. Their value is automatically adjusted by this 737-800 market price, which has only ground since the aircraft was market introduced and what Edmar said is the most important thing. We do need those rotables to operate the airline. So that security is pretty much aligned with the bondholders, new note expectations was the Company will make everything, but not honor those notes because we cannot operate without these parts. So that's a very robust and a strong collateral that has been offered to the new notes.

(Operator Instructions) There are no further questions at the time. 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 all for the attention. That's a very important conference call. Also, we had opportunity to explain the most important information on our restructuring plan, on the exchange offers, and mainly on the challenging scenario ahead. I would like to kindly invite you to clarify further questions in case they will exist along this day, our team is fully available. Thank you very much. Have you all a very nice day.

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