Azul S.A. (NYSE:AZUL) Q1 2023 Earnings Call Transcript

Azul S.A. (NYSE:AZUL) Q1 2023 Earnings Call Transcript May 15, 2023

Azul S.A. misses on earnings expectations. Reported EPS is $-0.99 EPS, expectations were $-0.34.

Operator: Hello everyone and welcome all to Azul’s First Quarter Earnings Call. My name is Zach and I will be your operator for today. This event is being recorded and all participants will be in a listen-only mode until we conduct the Q&A session, following the company’s presentation. [Operator Instructions] If you have a question, click on the Q&A icon at the bottom of your screen and write your name and company. When your name is announced, please turn on your microphone and proceed. [Operator Instructions] I would like to turn the presentation over to Thais Haberli, Head of Investor Relations. Please proceed.

Thais Haberli: Thank you, Zach and welcome all to Azul’s first quarter earnings call. The results that we announced this morning, the audio of this call, and the slides that we reference are available on our IR website. Presenting today will be David Neeleman, Azul’s Founder and Chairman; John Rodgerson, CEO; and Alex Malfitani, our CFO. Abhi Shah, the President of Azul is also here for the Q&A session. Before I turn the call over to David, I would like to caution you regarding our forward-looking statements. Any matters discussed today that are not historical facts, particularly comments regarding the company’s future plans, objectives, and expected performance constitute forward-looking statements. These statements are based on a range of assumptions that the company believes are reasonable, but are subject to uncertainties and risks that are discussed in detail in our CVM and SEC filings.

Also during the course of the call, we will discuss non-IFRS performance measures, which should not be considered in isolation. With that, I will turn the call over to David. David?

David Neeleman: Thanks Thais. Welcome everyone and thanks for joining us for our first quarter 2023 earnings call. First of all, let me thank our crew members as usual for their incredible experience they’ve delivered every day. In March, we were once again the most on-time airline in the world, following our recognition is the World’s Most On Time Airline in 2022. We are flying more than ever, our NPS scores are high, and all of this with the airline that is more productive and more efficient than ever, 15% more than last year to be exact. It is truly remarkable what our crew members have achieved and I could not be prouder. On slide four, you’ll see that our business model is stronger than ever. We served 158 destinations, we have a leadership position in 93% of our routes, and we have the most fuel-efficient fleet in the region.

And we combine all of this into several fast-growing high margin businesses. One recent milestone has been the start of expanded Congonhas service, where we more than doubled our slots to 98 daily flights. We can now slide from São Paulo’s downtown Airport to the largest corporate markets in Brazil. In addition, we just launched our nonstop service to Paris, the only nonstop from South America to convenient early airport — Orly airport. Excitingly, our data shows that more than 30% of our customers, flying us in these new markets, are first-time Azul customers. That means we have an incredible opportunity to bring them the Azul universe and showcase all that we have to offer. On slide five, you can see that our business units performed — you can see how our business units performed this quarter.

Azul — TudoAzul, our loyalty program more than double its gross billings since 2019 and is benefiting significantly from our expanded presence in Congonhas. My personal favorite, Azul Viagens continues its remarkable expansion, growing an impressive four times in gross billings versus the pre-pandemic level. Azul Viagens is now firmly the second largest vacations agency in Brazil and the largest seller of Disney tickets in Latin America. Our logistics business, Azul Cargo, almost tripled since 2019 and continues to be the largest air logistics provider in Brazil with an impressive 33% market share. Finally, I’m excited to announce that we just launched our newest business unit, Azul TecOps. With a rich 15-year history supporting Azul’s operation and a world-class facility, we have — we’re in a unique position to be able to handle all of the regions’ heavy maintenance needs.

Azul TecOps is now ready to bring this expertise to our customers and we know how challenging the AMR capacity is around the world. So, this is a perfect time to launch this new venture. Before I turn this time over to John, let me share my thoughts on the restructuring process that we have been working on this year. We set out with a goal to protect our shareholders and make our business partners whole. I am amazed at the progress this team has made and I am excited about the opportunities that this new optimized Azul creates. As John and Alex will share in their presentation, the results of this process are transformational to our business. As we said before, these are permanent structural solutions that significantly improve our cash flow, leverage, and capital structure.

I want to thank our team for their hard work. I also want to thank our partners who have supported us during this process. This is a unique plan that is strengthening Azul’s capital structure and the cash generation matching it to our superior business model and profitability. With that, I’ll turn the time over to John to give you more details on the first quarter results. John?.

John Rodgerson: Thanks David. I would also like to start off by thanking our crew members for taking care of each other and our customers every single day. I recently spotted on the World of Statistics Twitter account, a listing of the world’s most punctual airlines and Azul was first on the list. That was really cool. We have a lot to show you today including important updates on our restructuring plan. Before that though, let me describe our first quarter results. As you can see on slide six, we had a strong quarter. Revenue was an all-time record BRL4.5 billion with an EBITDA of more than BRL1 billion, an increase of 74% versus last year, even with a 24% increase in fuel prices. EBITDA margin for the quarter was 23% and the operating result was BRL460 million with an operating margin of BRL10.3 million.

On slide seven, you could see the strength of the revenue performance with a record first quarter RASK of BRL0.4147. RASK increased a strong 23% year-over-year even with 120% increase in our long-haul wide-body capacity. Looking at just the domestic market, RASK increased 28% year-over-year, highlighting the advantages of our network and our disciplined capacity. Turning to slide eight, you could see that we generated more than BRL1 billion of EBITDA, 42% higher than first quarter 2019. This is even more impressive considering that fuel more than doubled since 2019. This clearly shows that our structural competitive advantages and fleet transformation program allow us to grow and at the same time recapture the effects of higher costs with higher revenues.

One incredible example of this is that departures in 2023 versus 2019 will increase only 5%. Departures up 5%, while total ASKs will increase 25%, all on next-gen aircraft. This is truly sustainable profitable growth. On slide nine, you can see our EBITDA trajectory and how we consistently grew profitability since we launched. COVID was a temporary setback and now we’re firmly back on our margin expansion for 2023 and beyond. With that, we expect 2023 EBITDA of BRL5.5 billion. By far, the highest in our history. On slide 10 and 11, we want to show you the combination of the tailwinds that we’re seeing this year. First on slide 10, you can see the effect of a significant reduction in jet fuel prices. The second half of the year is currently showing 29% lower fuel price in reals per liter versus the first quarter.

This is a result of the reduction in global fuel prices as well as the strengthening of the Brazilian real versus the US dollar. Combine this with slide 11, which shows our expectation for RASK performance this year. We expect similar overall RASK performance, oscillating just with seasonality. On the capacity side, we expect to grow 14% overall versus 2022. But only 6% in the domestic market, once again, strongly reaffirming our commitment to capacity discipline. The best part is that 100% of the capacity increase is from up-gauging and transforming our fleet into extremely fuel-efficient aircraft. Trip cost actually goes down, while revenue opportunities increase. The natural Brazilian market stronger second half seasonality combines really well with the expected fuel curve for the remainder of the year.

Slide 12 illustrates a combination of lower fuel with stable RASK and our expected EBITDA per quarter for the year. You could see how the fuel price reductions by themselves contribute to BRL1.1 billion of EBITDA over what we generated in the first quarter alone. Therefore, the first quarter results annualized together with lower fuel and seasonality gives us a high level of confidence to deliver on the guidance of BRL5.5 billion EBITDA for the full year. To summarize, we had a strong first quarter results; revenue performance is robust, fuel prices are coming down, and the best seasonality is still ahead of us. Transitioning now from earnings to our restructuring plan, we’re really excited to give you new details on the progress we have made.

If you remember on our last call, we described a comprehensive and permanent plan to address our capital structure and significantly improve our cash flow and financial leverage. This plan has been implemented amicably, ensuring a fair treatment and full recovery to all of our partners. Today, we’re excited to share with you new and important details about these commercial agreements and how they will positively impact our capital structure and cash flow going forward. Let me turn it over to Alex so he can give you the details on this plan.

Alex Malfitani: Thanks John. Yes, today, we’re proud to provide you additional details about the commercial agreements we announced during our last call in March. First, let me remind everyone of the general terms of that plan. Our agreements with lessors and OEMs contemplate the elimination of lease payments that were deferred during the pandemic. They also provide a permanent reduction in our lease payments going forward from the original contractual lease rates to agreed upon current market rates. We have also agreed to defer certain additional lease and OEM payments in 2023, as well as improved end-of-lease compensation and aircraft return conditions, the elimination of future maintenance reserve payments, and the negotiated early termination of certain aircraft leases.

In exchange, lessors and OEMs have generally agreed to receive an unsecured tradable note maturing 2030 with a coupon of 7.5% per year and an equity instrument convertible into preferred shares valued at BRL36 per share. On slide 13, we show you exactly how these agreements reduce our lease payments each year. As you can see, we’re reducing our annual payments in the neighborhood of BRL1 billion, and even more in 2023 and 2024. As you recall almost 80% of our nominal debt comes from operating leases. So, this significantly reduces our debt burden and improves our cash flow. We now expect to be free cash flow breakeven in 2023 and generate positive free cash flow in 2024. And more importantly is that Azul has more than 70% of our ASPs already coming from next-generation fuel-efficient aircraft.

So, we now have the most efficient fleet with also the most competitive lease rates. This is a permanent solution that enables us to convert our strong operational profitability to positive free cash flow. On slide 14, you can see the aggregate results of these lease reductions. Our nominal lease payments are dropping by BRL5.4 billion in total, a 21% reduction. On a present value basis, assuming constant discount rates, this is a reduction of over BRL4.1 billion in our balance sheet debt and even bigger reduction for those who use seven times rent to capitalize our leases. In the first quarter, leverage organically decreased 0.5 turns to 5.2 as we paid down debt and increased our last 12 month EBITDA. With the reduction in lease liabilities from our agreements, our deleveraging process is accelerating.

On slide 15, you can see that our 1Q 2023 leverage would reduce another 0.6% to 4.6%. This already includes the 2030 notes that lessors and OEMs will receive in exchange for their contribution to the plan. And then if you recall, we originally expected to end leverage in 2023 starting with a 4%. With these agreements, we now expect to end 2023 with a leverage of 3.5% and 2024 around 3% in line with our pre-pandemic levels. I would just like to remind everyone that we’re returning our leverage to 3% in 2024 without any government support, without using bankruptcy, or other judicial restructuring process, and without imposing a haircut on our creditors as other airlines around the world did. On slide 16, we’ll give you the details on the equity portion of our commercial agreements.

We also have the material fact we released this morning, but just to provide you with a little bit more detail. Lessors and OEMs are also receiving an equity instrument in exchange for their contribution to the plan. This instrument converts part of their contributions into preferred shares valued at BRL36 per share. The equity instrument is limited in upside and downside, aiming to minimize dilution to our shareholders, and at the same time, to provide full recovery for our partners. The instrument has a lockup provision until the second half of 2034. After that, it vests over 14 quarterly installments taking it all the way to the second half of 2027. That amount will vest per quarter — the amount that will vest per quarter ranges from 3.2 million to 7.5 million shares.

Just to give you a reference point, our preferred shares and ADRs trade almost 28 million shares per day. So, vesting profile of the equity instrument should not create any noticeable selling pressure. With the conversion price of BRL36 per share, we estimate the dilution from the equity instrument at 17.5%. Throughout the vesting period, between the second half of 2024 and the second half of 2027, if at the time of measurement, Azul’s market prices higher at certain thresholds, the number of shares issuable via the equity instrument will be reduced and dilution will therefore be lower. If the market price is lower than BRL36, we’ll compensate our partners and we may do so with additional shares or with cash or with the issuance of new debt instruments acceptable to our partner.

Our comprehensive solution and its corresponding reduction of our net debt combined with our EBITDA growth give us strong confidence that we’re creating all of the necessary elements for Azul’s equity value to reflect our strong fundamentals as John will explain on slide 17.

John Rodgerson: Thanks Alex. I’m extremely proud to see the evolution of our comprehensive plan and everything that you and your amazing team are doing for Azul. Since Azul’s IPO, we’ve historically traded at about eight times EBITDA and we’re currently trading at four times. We know the cost of capital around the world has increased since COVID, but our comprehensive plan was designed to optimize our capital structure and increase our cash generation going forward, reason why we estimate a significant upside in our stock price even at a reduced multiple. Considering our net debt estimated after reflecting the new capital and the equity investment and new shares to be issued as well as a multiple of 6.5% lower than our historical average, our stock should be trading almost three times the current market price.

This is the reason we’re so excited about this plan and all of the upside to come. As you can see on slide 18, our fundamentals are strong, our business model is unique, and I’m very excited to see all the great things Azul will deliver in the coming years. And I also want to thank all of our incredible and passionate crew members, and I’m confident that Azul will deliver better than expected results as we move forward. With that, David, Alex and Abhi, and I will answer your questions as I turn the call over to the operator for Q&A.

Q&A Session

Operator: Ladies and gentlemen, thank you. We will now begin the Q&A. [Operator Instructions] Let’s go to the first question from Gabriel Rezende, sell-side analyst, Itaú BBA. We’re going to open your microphone so that you can ask your question. Please proceed.

Operator: The next question comes from Josh Milberg, sales side analyst, Morgan Stanley. We will open your audio, so that you can ask your question. Josh, please proceed.

Operator: The next question comes from Lucas Barbosa, sell-side analyst from Santander. We will open your audio, so that you can ask your question. Lucas, please proceed.

Operator: Okay. So, the next question will come from Alberto Valerio from — sell-side analyst from UBS. We will open your audio, so that you can ask your question. Alberto, please proceed.

Operator: Next question comes from Bruno Amorim from sell-side analyst from Goldman Sachs. Bruno, we’re going to open your audio, so that you can ask a question. Please proceed.

Operator: The next question comes from Michael Lindberg, sell-side analyst from Deutsche Bank. We will open your audio so that you can ask a question. Michael, please proceed.

Operator: Moving on to the next question, we’ll come from Victor Mizusaki from Bradesco BBI. We will open your audio so that you can ask a question. Victor, can you please proceed?

Operator: Moving on to the next question. It will come from Daniel McKenzie, sell-side analyst, Seaport Global. We will open your audio so that you can ask your question, Daniel. Please proceed.

Operator: Okay. So let’s move on to the next question. The next question will come from Jay Singh sell-side analyst from Citi. Jay, we’re going to ask your question. We’re going to open your audio that you can ask a question. Can you please proceed?

Operator: We will open the audio for Daniel McKenzie, sell-side analyst, Seaport Global can ask his question. Please, Daniel, proceed.

Operator: The next question comes from Chris [Indiscernible], sell-side analyst, TD Cowen. We will open your audio so that you can ask your question, Chris? Please proceed.

Operator: The next question comes from Rogerio Araujor, sell-side analyst, Bank of America. We will open your audio so that you can ask your question, Rogerio. Please proceed.

Operator: This ends our Q&A session. We will now have our final remarks.

John Rodgerson: Thank you for joining us today. Obviously a lot to digest, a lot of information. And so we’ll be available to take any of your questions offline. We’re excited about what we have. This significantly improves our cash flow over the coming years and Azul’s back to the races. Thanks everybody.

Operator: Thank you. This concludes this audio conference call for today. Thank you very much for your participation and have a good day.