Gol Linhas Aereas Inteligentes SA (GOL) 2017 Q4 法說會逐字稿

Welcome to GOL Airlines' Fourth Quarter 2017 Results Conference Call. This call is being recorded. (Operator Instructions) This event is also being broadcast live via webcast, and may be accessed through the GOL website at www.voegol.com.br/ir, and the MZiQ platform at www.mziq.com, 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 the platform and their questions will either be answered by the management during this call or by the GOL Investor Relations team after the conference is finished.

Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumption of GOL's 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 events related to macroeconomic conditions, industry and other factors could cause results to differ materially from those expressed in such forward-looking statements.

At this time, I will hand you over to Paulo Kakinoff. Please begin.

Good morning, ladies and gentlemen, and welcome to GOL Airlines Fourth Quarter 2017 Conference Call. I am Paulo Kakinoff, Chief Executive Officer, and I am joined by Richard Lark, our Chief Financial Officer, and Mario Liao, Treasurer.

Good morning. Good morning everyone.

This morning we released our Q4 figures. Also we made available on GOL's Investor Relations website, 3 videos, [replay] presentation, financial review and brief Q&A. We hope this allows you a better understanding of our quarterly results at the moment we disclose our earnings release. Also, this format will give us much more time on the conference call for questions and answers.

For the beginning, I would like to highlight that we have significantly improved all indicators in the fourth quarter 2017. GOL's RPKs increased by 8% from BRL 9.2 billion in the fourth quarter 2016 to BRL 9.9 billion in the fourth quarter '17, mainly due to a 6.2% increase in the number of passengers. GOL achieved this strong growth in demand, despite its continued focus on pricing. Average yield per passenger increased by 3.1% in the quarter compared to fourth quarter '16, reaching BRL 0.2636.

Supply growth remained conservative, with ASKs increasing 3.5% compared to the Q4 '16, driven by a 1.6% increase in take-offs and a 1.8% stage-length expansion. As a result, the average load factor in the fourth quarter grew 3.4 percentage points compared to the same period in 2016, reaching 81%.

For full year 2017, RPKs increased by 3.6%, primarily due to a 4.8% higher stage-length with yields growing by 2.2%. ASKs increased by only 0.8%. Load factor was 79.7%, 2.2 percentage points increase compared to 2016. GOL remained the industry leader in flight punctuality, with 92.5% of flights on-time in fourth quarter and 94.6% in 2017, according to Infraero.

We continue to have a strong revenue growth. The combination of higher demand and improved pricing resulted in net revenue for the quarter of BRL 3 billion, an increase of 11.8% quarter-over-quarter. For full year 2017, the figure was BRL 10.6 billion, 7.2% higher than the prior year. GOL's current 2018 guidance is for net revenue of approximately BRL 11 billion.

Our network serves higher-yielding routes and has a leading share in the corporate client segment. We have currently the largest share of business traffic in the country and we are optimistic about our prospects as the economy and business demand continues to strengthen. We also remain committed to providing the best overall air travel experience. We designed our air network to provide integration and inter-connectivity, as well as offer the largest number of flights in the main business destinations. This January we started selling tickets for GOL's 4 routes between Brazil and United States, from Brasília and Fortaleza to Miami and Orlando.

With that I'm going to hand you over to Rich, who is going to take us through some of the highlights.

Thanks, Kaki. First, we like to comment about our controlled cost environment. Total CASK in quarter was BRL 0.2121, just 1.4% higher than the same period of 2016, in spite of a less benign fuel environment. GOL remains the cost leader in South America for the 17th consecutive year and our margins continued to expand. GOL's EBIT margin continued to expand, reaching 13% in the fourth quarter of 2017, which is the highest fourth quarter indicator since 2011 and a 5.6 percentage points improvement over the same period in 2016. Operating income, EBIT, in 4Q '17 was BRL 388 million, an increase of 96% quarter-over-quarter. For the full year 2017, EBIT margin was 9.4%, which was a growth of 2.3 percentage points compared to 2016, and operating income reached BRL 1 billion. GOL's current 2018 guidance is for an EBIT margin of approximately 11%.

EBITDA margin was 17.8% in 4Q '17 and 14.1% in 2017, a growth of 5.8 percentage points quarter-over-quarter and 2.5 percentage points year-over-year. EBITDAR margin was 25.5% in 4Q '17 and 23% in 2017, an increase of 9 percentage points quarter-over-quarter, and 1.3 percentage points year-over-year.

Operating cash flow generation was strongly positive by BRL 630 million with a record operating cash flow margin of 21%, our highest since 2011. And for the full year 2017, GOL had an operating cash flow of BRL 1.7 billion with a 16% operating cash flow margin. On Page 11 of our press release, we provided a summary of operating cash flow, which helps you all reconcile that from the financial statements where there are 2 major adjustments. One is that in the financial statements from an [accounting] perspective, investments in -- financial investments in cash securities are out of the operating cash flow that needs to be added back. And also, as you know, GOL is in the final phase of heavy engine overhauls which are capitalized and those or excluded from suppliers payable and put into the net investment line or the CapEx line, where we had approximately BRL 362 million in the fourth quarter of 2017. So that reconciliation is provided for you on Page 11 of the company's press release.

And to finalize this brief review, we wanted to share the highlights of our balance sheet strengthening. The net debt, excluding perpetual bonds to last 12 months EBITDA was 3.0x in 4Q '17, improving both versus the 3Q '17 where it was 3.4x and the 4Q '16, when it was 4.2x. Total liquidity including cash financial investments, restricted cash and accounts receivable, totaled BRL 3.2 billion, which is an increase of 51% versus September '17, and an increase of 66% versus December, '16.

The combination of GOL's credit rating upgrades, successful notes offering, tender offers and redemptions and improved cash liquidity, substantially increased the company's financial flexibility, while decreasing its blended cost of debt and increasing the average maturity of the company's indebtedness. On January 30, 2018, our GOL subsidiary GOL Finance priced an additional issue, a retap offering in the amount of $150 million of its Senior Notes due 2025, with a coupon of 7% per year.

Regarding guidance, we expect to close 2018 with 1% to 3% growth in domestic ASKs over 2017. We've projected a load factor of 79% to 80%, an ex-fuel CASK of around BRL 0.15. EBITDA and EBITDAR margins in 2018 are expected to be around 16% and 11%, respectively. Earnings per share are expected to between BRL 1.20 and BRL 1.40. Earnings per ADS are expected to be between $0.75 and $0.90 on the dollar.

For 2019, on a preliminary basis, we expect domestic capacity growth to be between 1% to 3%, and non-fuel CASK to remain stable in relation to 2018. EBITDA margin is expected to be around 18% and leverage is expected to be approximately 2.5x.

Now I'd like to return the mic over to Kakinoff.

Thanks, Rich. We expect to continue to drive our efficiency and technology advantage this year. We're configuring our 737-800 NGs from 177 seats to 186, as well as incorporating the new Boeing 737 MAX 8 in the second half of 2018. With a range of up to 6,500 kilometers, the new 737 MAX 8 aircraft will allow GOL to offer nonstop flights from Brazil to any destination in Latin America, as well as to our recently announced destinations in Florida.

We remain focused on offering the best experience in air transportation, providing exclusive service to our customers on new modern aircraft that connect our main market with the most convenient schedules. Over 100 aircraft in our fleet have already been retrofitted with eco-leather seats, and more than 80 have on-board Wi-Fi and Live TV. Our entertainment platform is the most complete and modern in Latin America and also offers a free entertainment catalog. We also offer our customers selfie check-in, GOL+ Conforto seats, and an expanded menu of on-board products, while remaining a low-fare leader.

To conclude, I would like to mention again that we made available on GOL's Investor Relations website 3 vidoes, [replay] presentation, financial review and brief Q&A, as well as the full presentation and the earnings release. Allow me to say, we would highly appreciate your feedback on these new tools being available. We hope this will provide a better understanding of our quarterly results. In addition, this format will give us much more time on the conference call for the questions and answers that we'll start at this moment.

(Operator Instructions) The first question comes from Michael Linenberg of Deutsche Bank.

It's actually Catherine O'Brien filling in for Mike. So thank you for sharing that 2018 and 2019 operating margin guidance, very helpful to put some context on what you're seeing over the next couple of years. But can you talk about if we should view 2019's 13% margin, operating margin, as a normalized level? Are you expecting to see further improvement from there? Any color on your view of what GOL's average margin to be over the cycle, would be really helpful.

Well, the numbers we gave you, I mean, that's management guidance. You can use that as you see fit, but that's based on what we see. I'm not sure if I understood your question, but -- in terms of average and so on, but the company has recovered substantially its margins, 2017, as you can see and we gave you guidance for '18 and that reflects basically what we see in terms of the combination of what we're planning on doing with our network specifically. Keep in mind, in 2019 we also start to get a larger portion of our fleet with the 737 MAX 8s, okay. They start coming in, in July of this year, but it's a timid impact. But the MAX 8 for us, in our figures, it's kind of like a double whammy for our economics. We get about a 3% or 4% annual cost reduction, as we feather that into our fleet, on the cost side, mainly deriving out of the lower fuel consumption on the MAX, 15% lower fuel consumption, but also we get greater revenue productivity. So we also get a hit above the line, if you will, on the revenue side, not just on cost, but also on revenues, because of the greater productivity of the MAX, not just in terms of a larger seat configuration, but also in terms of what we expect in utilization, increase in average stage lengths. As you know, the MAX, in addition to the 15% fuel economy on the cost side, it also has an average stage length of another 1,000 kilometers, which allows us to increase revenues and is a key driver for us, adding -- being able to add the Florida and international destinations that we're adding. So it's a combination of those factors that in addition to what we expect in terms of the overall macroeconomic environment that's really behind those numbers that we're providing to you on guidance. But that's based on what we can see into the future at this point.

Okay, understood. I just meant like, are you thinking that 13% is peak margins or do you think kind of next 5, 10 years, you're going to average something more like 15% or just kind of how you think about that longer term?

Yes, we haven't provided any guidance on what peak margin would be. I think, probably what you could do there, given your guys experience in the U.S. market and understanding of airline economics, kind of model that. In Brazil, we have a high concentration of business travelers, and in our network we have an even higher concentration, we're the #1 business airline in Brazil, so that gives us a relatively higher yielding traffic. But on top of the very same aircraft that you see, companies like Southwest and Ryanair operating. You guys know those economics of Southwest and Ryanair very well. And I think on the revenue side, I would just add is, Brazil and especially in our network, in our business, we have a very high component on the business travel, the corporate travel, which is a higher yielding traffic for us. But the key driver what I was just trying to say is that the key driver for us, and this is really a competitive advantage for GOL is what we're doing to MAX aircraft. But, I mean, you have now 17 years of history of GOL to kind of see where margins could go. Obviously a key driver of that is also going to be solid capacity management. But that's what I would add in terms of contextualizing that.

Understood. And I could just sneak one more quick one in. For your new service in Orlando and Miami, are you able to schedule those flights in a way to create connection opportunities with Delta to other U.S. destinations?

Yes, of course. I mean, that's part of the partnership that GOL has with Delta, is to not just on the Brazil side in Guarulhos and Galeao, and airports in Brazil, but also on the U.S. side to do connections with Delta through our partnership with them.

The next question comes from Duane Pfennigwerth of Evercore ISI.

On the '18 capacity guidance, it's actually a bit less than what we were thinking, we were thinking more mid-singles, and it could just be that we were off base. But has your '18 capacity planning changed at all, has it moderated a little bit? And then can you give us any sense for the cadence of that by quarter?

I just would like to mention that we have developed in a quite flexible way to adjust capacity intra-year, whenever we do see higher opportunity to increase yields, sustaining higher load factor level, or carrying capacity or -- sorry -- adding capacity to an average [year], stronger demand than expected. So at the moment, we are -- we have been quite conservative regarding that, because we do not know exactly how the second half of the year will behave with regard the election period in Brazil and the political volatility and consequently, if possible, instability due to political speculations. So what we have done so far is there's a strong demand in the first quarter of the year. However, short/medium term forward bookings are also pretty positive. But the company has played a major role in keeping or influencing the capacity discipline, being a company as big as GOL is today. So we think that we have the right tools to quickly react whenever we see further opportunity regarding ASKs. But at the moment we believe that we should play a more conservative game. Richard, would you like to add something on this?

Yes, Duane, I would just add to that is that we're -- our plan is to grow domestic capacity with GDP. And so we are still filling out the demand side of the equation here. We have the ability to increase that, because we operate with a couple of aircraft in subleasing that we can manage to bring back some additional capacity, to capture additional upside on demand. And also, as we bring in the MAX to our fleet, we have the ability to adjust capacity on the rest of the fleet via the configuration. So we have pretty good mechanisms on the upside to kind of manage that as we kind of fill out demand. And in terms of the quarterly, we're not providing quarterly guidance on capacity, but we're going to be getting 5 additional aircraft in our fleet, starting in July. They're all being dedicated to these flights from Fortaleza and Brasilia to South Florida. So they're in the international bucket, they are not going to be in the demand bucket. And so that's what I'll comment on that.

That's great. And then as you analyze these international markets and Florida specifically and you look at the prevailing fares, and of course it's going to adjust to these capacity changes, but what did fares look like on those routes today? What would you expect yields to look like on those routes relative to your system averages today?

The yields are, I think -- I would say, promising at the moment, despite of the fact that we have huge additional international routes regarding ASKs and we are talking on the industry, not GOL only. The market is reacting quite positively. And the main reason for that is that basically what the Brazilian industry has done is to cap the capacity cut in 2015 and 2016, due to the Brazilian real devaluation. So at the moment, we believe that the current trend of adding [2-digit] capacity on the international routes will be capped for 2018 and 2019 and it seems to be a quite positive movement regarding yields.

The next question comes from Savi Syth of Raymond James.

This is Matt Roberts on for Savi. I apologize if I've missed this, Richard, in the prepared remarks, but could you describe again what really drove the low maintenance per ASK value in 2017? Is that the right level going forward? And then just additional color on that one-time item in 4Q '16 rent per ASK. Again, sorry if I missed that earlier.

GOL's fleet returns ended in April 2017. So in the 4Q of '16 there were higher maintenance expenses per ASK, based on aircraft returns and those were not present in the 4Q of '17. So that's why you see the reduction -- a relative reduction in the quarter-over-quarter period.

Okay, great. And then turning then over to your 2019 guidance, given that there is a nice step up in capacity growth in 2019, it's somewhat surprising that your non-fuel CASK is expected to be flat. So is that a function of higher costs going into more international markets or if you could just provide some additional color and your thinking there, that would be great?

Well, if I understood your question, I mean, the MAX -- the 737 MAX 8 is a quite large cost reductions for GOL. Not only do we have the 15% fuel economy, we also have greater revenue productivity via the higher stage length. And so that's pretty much what's driving the revenue growth with stable CASK there. I don't know if that was your question, but that's how I would answer.

Yes, it was the question. I was just saying the capacity growth is stepping up from 2018 to 2019, maybe there would be some additional scale with the growth there that could reduce CASK. Is that not the case?

Well, no. I mean, the domestic capacity growth is growing pretty much at the same rate. The larger growth in capacity we're seeing overall is being driven by the international component of that, that started to have a larger component of the business. As we bring in the 737 8 MAX, we're going to be going from around 15% of our total hours per day outside of Brazil domestic to a little over 20%, and so that comes in. Yes, there is going to be a stage-length effect in there, longer stage-length effect -- slightly longer stage-length effect. 1,000 kilometers on that 20% of the network that's being the international flights, but that's in that non-fuel cost guidance that we've provided; it's in those numbers.

The next question comes from Dan McKenzie of Buckingham Research.

Rich, could I just follow up on the last question. I wonder if you can just provide some perspective on the relative profitability of international overall versus domestic. Is the international flying -- is there opportunities, we can think of that as a higher margin opportunity versus domestic or -- I just wonder if you can help us understand kind of the dynamic on that part of the network?

The domestic Brazil business has higher margins than the international long-haul, but we -- our main international today is South America, right, so Argentina and Southern Cone and that part. And now we're going to be adding with the MAX out of Fortaleza and Brasilia, flights up to South Florida. The relative profitability on those flights on an isolated basis is lower than the profit we get on our domestic network. We're the largest domestic carrier with the best position in the best markets, and that has kind of put us in a position to be the #1 business airline. Thinking of last year, we even passed competition in the Top Of Mind category. And so we are dealing with very high-yielding traffic in Brazil. It's not to say that the international traffic is also not profitable, but it has a lower profitability than our pure domestic traffic in our network, speaking specifically about our network specifically. I'm not talking generally about the market. I'm talking specifically about our -- the GOL network.

Understood. And then I guess just with respect to your comment on business travel, I'm wondering if you can just elaborate a little bit further on that, because what we've seen over the past year is political volatility that has driven foreign exchange volatility, but the business travel trend seemed to have held pretty steady. And I'm just wondering if there is some additional sort of thoughts that you could just share, as we think about 2018, 2019, what are the key drivers and kind of what are you seeing across your network?

Yes, I'll start and I will flip over to Kakinoff to finish it. We're seeing -- the key driver of domestic demand in this recovery obviously is, first, the corporate travel. And I would say, since October or so of last year, we're seeing the domestic demand more or less track the GDP expansion. We're seeing kind of the domestic demand kind of since then in the rough kind of the 5% growth rate overall. With that I will ask Kaki to complement that.

This is the first time we have in Brazil, in fact a gauge, the very benign combination, that's a positive GDP, a very low inflation rate for Brazilian standards at the level of 4% to 5% and also a low crime rate. So that's created this benign environment, not only towards the airline, but to every business in Brazil. So that's the main reason why the business demand is growing so fast. And in complement to that, it is important to note is that GOL is offering at this moment, by far, the best product to this specific market segment. We have the largest network, we are -- believe me -- on the page are now the top 10 business airports in Brazil, we have the largest number of frequencies in our country and the product has some unbeatable experiences being offered, such as more (inaudible) economy classes, leather seats, Wi-Fi onboard, selfie check-in and the combination of free meals and live TV onboard. So we are not only making the most out of this benign environment, but also we have increased our market share among the corporate travelers, it is just because we have been able to attract those customers from the competition to fly with ourselves. That's the reason we are pretty much confident in our capacity of even increasing further our market share among these customers.

And if I can just squeeze one more in, and that's just tied to foreign exchange or FX sensitivity for 2018. I'm wondering what the FX sensitivity is for this year, just holding all else constant. And then just -- I'm wondering if you can share what the FX parameters are you're factoring in for kind of the high end -- or low end of your 2019 outlook. All else equal, at what point would you begin to worry about missing the lower end of that 2019 outlook, just looking at FX alone?

Yes, we -- I mean, looking at FX is not -- it's not -- I mean, we don't think like that, so I'd have to actually come up with kind of an alternative universe. I mean, in our business we have a combination of oil prices and FX working together, and that's how we manage the business. And so you necessarily have to have an assumption on oil to calculate the FX in Brazil. So we're assuming that the correlations will continue to work together. We have almost a perfect negative correlation between oil prices and Brazilian local currency. Yes, we probably have -- we expect the currency to be [bouncing] around at the current levels where we are right now through the rest of the year and that's reflected in our -- in the guidance that we've provided you. And we also -- we start with fuel and we kind of -- we're working with fuel, kind of working between $56 to $63, bouncing around in that level, and kind of be most of this year at the higher end of that range, closer to the $63. So I think with what I just said there, you should be able to figure out kind of what our view is. Having said that, if the correlations were to hold statistically, we should see a real at or below BRL 3 by the end of this year, if we continue with oil prices in the low 60s. You should see Brazilian currency in the low 3s or even perhaps as low as BRL 2.95 by the end of the year, if the historical correlations between oil and currency hold. Having said that, we expect oil to continue at this current level, kind of through this year, and currency kind of be bouncing around at the levels that it is right now, that's kind of what's reflected in the interviews that we're sharing with you. But if you were to use the statistics like I said, you should probably see real closer to the BRL 3 level, plus or minus.

The next question comes from Petr Grishchenko of Barclays.

Just have a few questions. I wanted to follow up on the ASK guidance, International segment specifically. The 7% to 10% increase in this year, does this assume just kind of fourth quarter ramp-up in Miami and Orlando routes? And specifically next year, 30% to 40% increase, does that assume additional routes or just kind of full ramp of the Florida routes?

Thank you very much for the question. Actually the combination of both. So we are ramping up the ASK capacity for international routes, basically on the first quarter, because that's the time when we are going to have 6 737 MAX delivered and operated. So you know that we are expanding our international routes, making the most out of such capable new equipment like the 737 MAX. It can reach [6,500] kilometer range, which give us the opportunity to further expand our network by adding new destinations. So far we have announced Miami and Orlando, but for 2018 -- '19, we are going to have new destinations being added. Considering the current international network being operated, the new aircraft has 9 seats more than the 737 current NG. You know that we're going to reconfigure it, the next generation's low cost, in order to keep the (inaudible), and then the 737 NG and 737 MAX, we will equally deploy the same 186 seats, which automatically adds on our current international routes some ASK, additional effect. So in summary, that's a combination of both, we will have more ASKs available on the current international network, we will have the 737 MAX giving us the potential to fly to new destinations. That's the reason why we are forecasting such big ASK capacity increase on the international routes, mainly in 2019, when we're going to have a much bigger number of 737 MAX being delivered. You know that our delivery pattern from 2019 on will be around 8 to 10 737 MAX being incorporated to our fleet.

Got it. And I guess I just want to follow up on the aircraft ramp. It seems like you add about like 6 aircraft this year, and why the [rest] is nearly unchanged?

I mean, last year we had -- I just keep repeating this fact. I mean, in 2016, GOL reduced its fleet by [29] aircraft, and those aircraft will return all the way into April 2017. And so, there are additional costs in -- those aircraft were taken out of operations in May of 2016, and so the revenue is being generated were on the new fleet size. But they still continue in the cost side and were gradually phased out through April of 2017. And since April of 2017, the company has been operating at this new operating level of fleet. But the company had those aircraft grounded, was paying costs on those aircraft and also had additional costs related to the early return of those aircraft. And that affected the income statement all the way through April of 2017. So both on the rent side, as well on the maintenance side, those impacted higher levels operationally, inefficiency, if you will, inefficiency on the aircraft rent side, per ASK and on a total basis in the 2017 -- in the 2016 numbers and then in 2017, all the way through April. So was a much lower efficiency that the company was operating at, just given that it had this massive amount of aircraft in the return processes of April. As of May 2016, those aircraft were out of the revenues, and as of April of 2017, those aircraft were entirely out of the cost side of the income statement.

Okay, got it. And then just last question, just want to -- also want to follow up on the fuel pricing. I see (inaudible) you assume I think around 5% increase in fuel prices this year, and I'm just looking at the benchmark, I think it's up like over 20% so far this year, and wondering does this include hedges, and if so, maybe you can elaborate on the volumes hedged and price as well?

No. This is -- I mean in Brazil, I mean the -- you're probably looking at -- I don't know if you're looking at international oil prices. You have to remember that in Brazil our jet fuel is denominated in reais, and there's a specific mechanism of pricing of fuel with Petrobras. So basically, once a month, there is a formula which updates the fuel prices, which is based on the average Jet 54 for the previous month and the average exchange rate. And so both of those elements work together to determine our fuel price in reais per liter. And so, I mean, you have to have like I said -- as I was saying on Dan's question, to understand that you have to have a view on both oil and on currency to project the fuel price per liter. But the numbers we're providing you guys basically reflect our views on both of those. And we also have less volatility in Brazil on jet fuel, because once a month the fuel prices reset, based on the previous month's Jet 54 and exchange rates, and that's the price for the next 30 days. So we have 12 prices throughout the year. And so this is kind of how it works in Brazil. So we have less volatility, more predictability of the fuel, and we have higher taxes in Brazil than you see in international markets, higher fuel taxes. We do have the benefit of more stable foreseeable pricing mechanism. So we spend a lot of our time forecasting oil prices in our risk management strategy, and also obviously also on currency. But those numbers that you see there are basically what we are working with this year in terms of our budget and providing to you guys to reflect upon -- but international oil prices and currencies are extremely transparent, and so you can put your own assumptions in there and play around with what you think -- what you guys might speculate against this guidance in terms of what your views are on oil and on currency. As I was telling Dan, I think the currency side is easier; the harder is the oil side. So we spend a lot of time on the oil side, and we work a lot with statistics and correlations on that. But that's basically -- the numbers you see there that we were providing to you guys are easy to speculate against, because you've -- I guess, you have the -- you guys have a lot of knowledge on oil prices and currency. But that's basically what we're working within our process and given you guys some visibility on that.

Great. And just I want to squeeze the last question. Just using your own guidance, I mean, you guys should be generating some cash this year, right, and the net leverage that you show is roughly unchanged. So I was just wondering is that like what --

That's a good question. I mean, the way that works is the following, that we have the positive operating cash flow, neutral working capital, with our margin guidance, we basically -- you have our margin guidance -- we basically have neutralized the effects of working capital. And our CapEx is fully financeable. So part of that will depend on, if we decide to fully finance the CapEx, which is mainly engine overhauls and the finalization of Wi-Fi and interior retrofits. But based on our assumptions, we expect there some operating cash flow to continue to reduce leverage. So you're correct that we -- that number of 3x there. But the run rate we should be at the end of the year should definitely be in the 2.5x range, maybe not on a full year basis, but because we're still carrying a little bit in the first quarter of this year, but by the end of the year we should be closer to that 2.5x number. And part of that will depend on the timing of what we do with amortizing our local currency debentures. As I was mentioning, our plan is to fully amortize those when they come due; the next maturity is on October of this year; there is another maturity on October of next year. So part of it depends on if we follow through on that and amortizing the debentures or not. If we do amortize the debentures, the debentures with operating cash flow, yes, by the end of this year, we should be close to that 2.5x level that we've guided you guys on 2019.

(Operator Instructions) The next question comes from Victor Mizusaki of Bradesco BBI.

I have 2 questions. The first one, when we take a look on your guidance for ancillary revenues, it will basically jump from 14.5% to almost 17% of total revenues. So I don't know if you can give some color -- any color on what will drive this growth. And the second one, when we take a look on your guidance and see effective tax rate, the guidance is 0 for '18 and '19. Is this just for GOL or the consolidated company?

Victor, you should note that this is consolidated guidance. Could you repeat the first question?

Yes. Because ancillary revenues as a percentage of total revenues will increase, right? So for this year we talk about 14.5% and it will reach 17% of total revenues by 2019. So is it something related to actually Smiles or there's some benefit from the [seat assignment] revenues? So I don't know if you can explain a little bit --

You are talking about the -- I'm sorry, if I understand the question, you're asking about the other -- the cargo and other revenue, is that what you are asking?

Yes, yes.

So you are trying to back-end some -- you are trying to back-end the Smiles revenue or something. I think Smiles is providing some guidance on their revenues. So you can kind of figure out that piece from the guidance that they're providing. We're also -- as you know, we've also developed some others -- additional revenue sources on other revenues that currently are not in the -- they were not in the full year last year. For example, first bag fees, as well as you know, the cargo business is growing at double-digit rates, low, in the teens, and so a combination of those 2 factors. Plus what Smiles is doing is allowing us to increase the revenues there. But I'll leave it up to you guys to figure out if you want to round that down or up on that. I mean we are giving you guys a little bit of peek in the future there, but you'll have to figure out how much you want to go down or up on that -- on that [2 billion] number there. I will leave that up to you guys for the time being.

And the effective tax rate 0 is for the group, right?

Say that again.

The effective tax rate for '18 and '19 that you're guiding 0, is this for the group or for the airline business?

You are talking about the tax business, okay, I'm sorry, I didn't understand your question. Again, all these numbers are consolidated. And so what we're trying -- this was a request -- many of you have requested help on understanding the tax, how do -- how to understand taxes at GOL. And obviously Smiles is a full taxpayer and GOL has a $1 billion of NOLs and -- but it's a combination effect. Yes, this reflects what -- on a group basis it includes what Smiles is paying and it also includes the effects of the tax credits that exist on the GOL side. As you saw in the fourth quarter results, GOL is now starting on -- effectively (inaudible) reversions or recognitions of the tax credits it already has on the balance sheet that have been impaired, they were impaired in recent years because of the business plan not justifying the full utilization. So they were basically wrote off -- over a period of time wrote off about a $1 billion of tax credits. And so it's a combination of those. But -- so you guys have asked for some help on the taxes and what I'm just providing here is that I'm just saying the effective group tax rate in terms of when you guys are looking at how you are going to be doing your modeling for earnings purposes is 0. You can -- you were saying you can use that number this year or next year. That's -- the purpose of providing this was really just based on a request to help understand. A part of this -- the complexity of that is that at one time, we have a carved out [op sub] that is a full taxpayer, 34% income tax. And we have another business, which is the airline, which has a $1 billion NOL, which doesn't pay any taxes and in fact creates deferred tax income. But those 2 are basically offsetting. But this is just a general guidance for you guys to -- for you guys that want to think about that and for those of you that are working on earnings projections. That was the purpose of providing that. Sorry, I didn't understand the question when you first asked it.

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

Okay, ladies and gentlemen, I hope you found our presentation and Q&A session helpful. Our Investor Relations team is available to speak with you as needed. So thank you all very much.

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