Gol Linhas Aereas Inteligentes S A : 3Q22 Results Conference Call Transcript

32Q2 Results Webcast

October 31, 2022

Operator:

Good day, and welcome to the GOL Airlines 3Q22 Results Conference Call.

This morning, the Company made available its results. After GOL's presentation, we will initiate the Q&A session for analysts and investors when further instructions will be provided.

This event is also being broadcast live via webcast and may be accessed through the Company's website at www.voegol.com.br/ir, and MZiQ platform at www.mziq.com.

Those following the presentation via webcast may post their questions on the platform, and their will be either answered by the management during this call, or by GOL's Investor Relations team after the conference is finished.

As of now, participants are free to submit questions through the webcast platform. You just need to click on the question mark in the upper left corner and type in your question.

Before proceeding, we emphasize that the forward-looking statements are based on beliefs and assumptions of the Company's management and on information currently available to GOL. They involve risks and uncertainties, given that they are related to future events and, therefore, depend on circumstances that may or may not occur. Investors and analysts should consider that events related to macroeconomic conditions, industry and other factors could also cause results to differ materially from those expressed in such forward-looking statements.

And at this time, I would like to hand the call over to Mr. Celso Ferrer. Please begin, sir.

Celso Ferrer:

Good morning, everyone, and thank you for your participation in this conference call. I would like to start by highlighting our most important results of the period, which were made possible by the trust we have obtained from our customers, investors, suppliers and especially from our Team of Eagles.

The third quarter was characterized by the impact of the highest jet fuel price per liter in the history of the Aviation industry. This resulted from the combined effect of increases in oil prices and devaluation of the BRL.

On the revenue side, we had a rational price environment among the industry players and the resumption of strong load factors after the slowdown of service in the end of second quarter. By acting assertively and managing capacity and improving productivity, we maintained the growth of our revenues and our operating results during this period, recording the highest quarterly revenue figures in the growth history, reaching R$4 billion in third quarter, 109% and 80% above of 3Q21 and 3Q19 figures, respectively.

As we continue to see recovery in demand, we subsequently resumed more flights and expand our network. We served more than 200 markets and transported 6.9 million passengers in the quarter, 39% above last year and still 29% below the volume of 3Q19 last year.

Our supply measured by ASKs grew by 41% year-over-year. In part, this is due to the resumption in corporate demand as workers return to the office, less restrictions in international markets and strong VFR and leisure demand. It is also important to note the 51% growth in yield and 50.6% expansion in PRASK.

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This yield is more than 42% higher than the pre-pandemic figures in 3Q19. Our unit revenues grew 48% followed by an increase in forward bookings by 58%. Once again, GOL's ability to efficiently meet the increasing demand stems from the Company's key differentiator, our strong and disciplined capacity management with a continuous focus in preserving profitability and liquidity. By 2023, we expect that our efficiency will be our main competitive advantage. This will be critical of winning the business of our customers and reduce our cash even further consolidating our cost advantage.

In order to partially offset the effects of the jet fuel price increase, our recurring unit cost ex-fuel decreased by 24% when compared to 3Q21. When converted into USD resulted in US$3.6 cents or 4.5% lower than the same quarter in 2019, even considering a supply that was 23% lower than that period. The capacity was preserved over the 9M22 and will be added in a balanced way in fourth quarter, our highest season.

This figure clearly demonstrates how GOL is resuming its productivity and efficiency and we will further reduce the already lowest unit cost in the industry, its main competitive advantage to generate a faster recovery of its operating margins and adapt the Company to the best efficiency indicators by the beginning of 2023.

Our growth factors and aircraft utilization continue to improve, and flight frequencies increased by 40% when compared to the fourth quarter last year. We expanded our presence in regional markets, notably through the implementation of a flight distribution centered in Bahia, which should reach 50 daily domestic flights by 2023. We will have connections abroad to our international partners and the launching of routes connecting Salvador to the main tourism destinations in the States.

In the international markets, we strengthened our operations from Brasília to Florida. We also launched 2 new routes to Miami that will be operated as of December from Manaus and Fortaleza.

We also inaugurated our regular cargo network, which is operated with Boeing 737-800 freighter in partnership with Mercado Livre. We started with a route between Guarulhos and Fortaleza, and we will expand the network to 6 new cities, Teresina, Sao Luis, João Pessoa, Recife, Brasília and Porto Alegre. The partnership between GOL and Mercado Livre provides an increase in unit revenue (RASK) and lower costs associated with aircraft return since the aircraft operated by GOL in regular passenger transport are converting to freighters.

And we will generate approximately R$100 million potential incremental revenue to GOLLOG. We maintain the pace of our program to accelerate the transformation of the fleet to a new more efficient equipment aligned with the Company's carbon neutrality goals.

This quarter, GOL took deliveries of 3 new 737 MAX aircrafts, and we returned 2 737-NGs. By the end of the year, we expect to have 44, 737 MAX aircrafts, representing about 30% of the total fleet. And our goal is to have 50% of the total fleet composed by 737 MAX by 2025.

Turning to our loyalty program, the Smiles customer base surpassed the 20 million mark and revenues reached R$1.2 billion this quarter, 26% higher than the previous quarter and practically double when compared to 3Q19.

The customer base that Clube Smiles records consecutive increase demonstrating its potential while GOL expand its operations. Synergies were generated from tax management and fixed inventory, important levers that optimize those working capital and liquidity. We also recorded a year-over-year improvement of 5 percentage points in our NPS, Net Promoter Score, alongside imported advances to improve the customer experience and strengthening our presence in the high added value corporate segment.

I will now turn the floor over to Richard, who will present some financial highlights.

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Richard Lark:

Good morning, everyone. Thanks, Celso. Our detailed financial analysis for the quarter was shared in the earnings release and in the presentation made available on the webcast platform as well as on the GOL IR website. I will go through some of the highlights here, after which we will turn over for a Q&A session.

Our liquidity remained relatively stable at R$3.7 billion, with R$869 million of short-term debt at the end of the quarter. The management of our working capital, together with the increase in accounts receivable and the advanced sales of miles and advanced sales of tickets has enabled us to maintain a pace of growth necessary to operate our high season, with a greater dilution of unit costs, at the same time with the maintenance of very healthy fare levels.

As Celso mentioned, the transformation of the GOL fleet to the Boeing MAX has a fundamental role in our operating strategy, which is in part, guided by increased and enhanced productivity and reduced unit costs. We estimate that in the next few years, about 50% to 60% of the new aircraft delivered to GOL will be financed under finance lease formats. Our ASK and RPK in the quarter increased compared to the 3Q21 and reached around 77% of 2019 pre-pandemic year levels. Yield in RASK showed increases of 51% and 48%, respectively, over the same period, reaching R$0.45 and R$0.39, respectively.

Our recurring EBIT and EBITDA margins reached 6.5% and 17.3% respectively and our EBITDA totaled R$1.7 billion in the 9M of the year. We obtained an increase in the average fare sold, demonstrating our ability and experience in managing variations in fuel prices and the foreign exchange rates. We achieved approximately 6% growth in our recurring cash measured in USD compared to the 3Q21. We continue to be impacted by higher oil prices, which increased in the range of 30% compared to the 3Q21, which drove consequently an increase of 91.3% in the Brazilian price of jet fuel over the same period.

Regarding our cash flow, in the quarter, we had R$4.8 billion of operational inflows, which, although impacted by the fuel price increase generated an operating cash flow of R$1.1 billion, excluding interest expense.

The Company's successful liability management during the pandemic, as we have highlighted to you throughout the pandemic has put us in a leading position with the lowest short-term debt ratios among our peers. We have updated our financial outlook for the year 2022 to take you through the end of the year, taking into account the increases in jet fuel and also the results of the 9M of the year.

Celso, back over to you.

Celso Ferrer:

I would like to conclude by again thanking our Team of Eagles as well as our customers, investors and suppliers who continuously show confidence in the Company's business model and management. Through your support, we are convinced that we not only have the champion business model, but also that we are prepared to overcome the market challenges and continue to play a leading role in the recovery of the airline industry in the next phase of growth.

Operator, you may initiate the Q&A session.

Daniel McKenzie, Seaport Global:

Good morning. Thanks. Congrats on the revenue generation this morning. I thought there was some interesting slides in there. I just would like to put a finer point on them. Slides 11 and 12,

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profitability resumption, and underpinning there is better utilization. So it looks like 11 hours today versus 12.6 in the 3Q19. Can you get back to 2019 utilization levels, say, in the 4Q or the 1Q? And does that imply profitability? Or maybe, what does the path back to full profitability look like? And if I am reading the guide correctly this morning, it looks like you might be expecting a small profit here in the 4Q.

Celso Ferrer:

Dan, good morning. Thank you for your question. We have been managing capacity very carefully by adding more aircraft into our network, as we also increased aircraft utilization. By the end of the 4Q, we will be flying at the levels we used to fly pre-pandemic in the utilization of the aircraft we are operating.

We still have some planes on the ground, and we consider this idle capacity, and we want to address this over the next months, next year. But what we call the operating fleet, we will be flying at 12-plus hours per day as we always did in the GOL's history.

We are bringing back the fleet and bringing back utilization as we are confident that we are going to be continuing to improve also the unit revenue. We do not want to dilute unit revenue so we postponed our growth to the 4Q when we see strong demand from all the segments, not only VFR, leisure but also corporate demand for 4Q and 1Q23. Also, in the international markets where we fly longest stage lengths with the MAX, for example, to Florida and other cities here in South America.

So with that, we are going to achieve even further CASK ex-fuel reductions and will be benefited by an increase in our margins.

Daniel McKenzie:

Very good, Celso. Second question here, slides 15 and 16, Richard, it looks to me like liquidity roadmap as we think about 2023. Is the message this morning that there's enough cash coming in from advanced ticket sales, Smiles, to bridge the working capital needs through next year? I am just wondering if you can elaborate a little bit more on that. Are there any operating outputs that worry you over the coming 6 months, whether it be, I do not know, CAPEX, maintenance, returns, purchase deposits, anything like that? I am just wondering like if you can elaborate a little bit more on that.

Richard Lark:

Sure, Dan. The working capital management and the CAPEX management are going to continue to be the same as you have been seeing, not just throughout the pandemic but pre-pandemic. The way we describe it to you is matching assets and liabilities, matching inflows and outflows, and that will continue.

A couple of points of difference, complementing a little bit what Celso responded to your first question. One of the key differences, a lot of you kind of look at the comparisons of pre-pandemic 2019. But in our company, GOL has a significant structural difference that during the pandemic, we completed the take-in or the minority interest of the loyalty program, Smiles.

So there's a significant increase in the retention of earnings and cash flow that's generated buy that business. If you were to kind of compare it on a 2019 basis down to bottom line, it's around R$500 million of additional cash flow. If you want to kind of back that into an EBITDA margin equivalent, it's about 400 bps to 500 bps on that.

And so when you are comparing margins, cash flow generation or EBITDA margins, profitability and cash flow today, where GOL is going forward to 2019, you need to account for that. And so

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it's a much more robust EBITDA. The other component that I want to highlight there that I think is often missed, especially when looking at a company like GOL, which has very low fixed costs is the leverage component. And so as we recover to high productivity, which for us, as you know, is 12 hours of aircraft utilization a day across the entire fleet, which we expect to get gradually evolve back to in the coming quarters.

The benefit of the operating leverage really kicks in. And when you combine that with the work that we have done on the yield management side of the equation to deal with the variations in oil prices, it puts us in a good position to generate incremental as you were saying earnings, but more importantly, incremental cash flow. And that's gradual. We have taken a very conservative posture with respect to capacity management, as you know, keeping it at the low end of the possible to conserve cash. And so we continue to be in that mode, meaning for more cash conservation as opposed tomorrow.

When you translate into liquidity, which is part of your question, you have seen whether the structural liquidity goals kind of settled into this number of R$3.6 billion, R$3.7 billion, which is how we are going to continue to be managing the business going forward. And if there's any adjustments we need to make, it's going to be on the capacity side in terms of how things are balancing out.

So to the next couple of quarters, I think you are going to see more of the same in terms of working capital management. We do need to reduce our days payable to something more sustainable. We have got a very large amount of support during the pandemic across our entire value chain.

If you sum it all together, over the course of the roughly 30 months of the pandemic, we generated about US$3 billion of additional cash resources that came in from everything from the very top part of the balance sheet with suppliers all the way down to the very bottom part with shareholders across the board. And we did not get any significant government support like you saw in the U.S. and.

So that US$3 billion helped us get to where we have got now in the pandemic. And over the next couple of quarters, we need to reduce days payable to something more sustainable. That will be matched.

When I say something more sustainable, our normal, if you have got our pre-pandemic working capital management, we were roughly 50 to 60 days receivable, 50 to 60 days payable. So on the payable side that needs to come down, on the receivable side, as we continue to recover in the corporate demand as well as overall recovery to pre-pandemic levels, that accounts receivable level will come up, and those will match out.

And on the investment side, on the CAPEX side, as you know, we have been able to do a pretty good job of pretty much 100% financing, all of our CAPEX needs, the most important of which is MAX aircraft. And we have the appropriate mechanisms lined up to 100% finance, any needs that we have on the new aircraft out of the equation. And then on the maintenance side of the equation, which continues to be a challenge, we are calibrating the returns of the NGs with our ability to get financing for such.

And so for example, the deal you saw recently on the spare engines that we were acquiring. That was an effectively way of keeping the NGs flying longer, so that we can also preserve cash as it relates to future returns of NGs, which the main cash outflow relates to the engine overhauls.

And so we are going to continue to match that definitionally, that's going to have to be pretty close to 100% LTV on all the new assets coming in, which is going to create long-term equity value with the new MAXs coming in, but we have to avoid short-term cash outflows.

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