Azul S.A. (NYSE:AZUL) Q2 2023 Earnings Call Transcript

Azul S.A. (NYSE:AZUL) Q2 2023 Earnings Call Transcript August 10, 2023

Azul S.A. misses on earnings expectations. Reported EPS is $-0.81 EPS, expectations were $-0.7.

Operator: Hello, everyone, and welcome to Azul’s Second Quarter’s 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 a Q&A session following the company’s presentation. [Operator Instructions] I would like to turn the presentation over to Thais Haberli, Head of Investor Relations. Thais, you may proceed.

Thais Haberli: Thank you, Zach, and welcome all to Azul’s second 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; and John Rodgerson, CEO; Alex Malfitani, our CFO; and Abhi Shah, the President of Azul are also here for the Q&A session. Before I turn the call over to David, I’d 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 second quarter 2023 earnings call. This quarter was one of the most important in our history. I could not start without recognizing the impressive work of our leadership team. In this quarter, we made significant progress on our comprehensive and permanent capital optimization plan, leading to a successful conclusion in July. John and Alex together with their skillful teams successfully implemented our plan, which included new agreements with lessors and OEMs an exchange offer and new and a new money rate. John will give you more details later. It is absolutely incredible what they were able to achieve all of this in just a six-month window. I also want to thank all of our partners and investors who supported us throughout this process.

Together, we have delivered a true win-win solution that we promised on the outset, one that is value-maximizing for all stakeholders. I thank you for your vote of confidence and in our company and in our future. Finally, most importantly, I have to thank our passionate crew members who continue to deliver excellence every day without our industry-leading operation, customer service and a company that produces over $1 billion of EBITDA per year, none of this would have been possible. Thanks to their continued efforts. We are now in a position where we can put the crisis behind us, and we can focus on the future. Turning to Slide 4. You can see that our network is stronger than ever. Our superior business model and structured competitive advantage allow us to connect all of Brazil.

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We are the only carrier in 81% of our routes and fly to over 160 destinations 3x more than our competition. We are the leader in more than 90% of our routes, which supports our industry-leading profitability. During the second quarter, we launched our expanded Mongolian service, more than doubling the daily departures now serving all of the top corporate destinations. In addition, we launched our newest international destinations, Paris and Curacao. Both of these are off to a very strong start. On Slide 5, you can see the outstanding performance of our business units this quarter. Our loyalty program to Azul more than doubled in gross billings versus 2019 and is clearly benefiting from our new Mongolian flights. Sign-ups to the program have increased more than 80% since we launched our expanded concurrence schedule.

I could not be proud of our vacations business, which has had another exceptional quarter with more than a 40% growth in gross billings compared to the second quarter of 2022. Now this business is now 4x the size in terms of net revenue than in 2019. Azul Viagens is the second largest vacations agency in all of Brazil, and we continue with our strong growth, expecting to double our stores to more than 100 by the end of this year. Azul Cargo, our logistics business continues to be the largest air logistics provider with the market share – with a domestic market share of 34% and with net revenues more than doubled compared to 2019. As I said, this is an important quarter for us. I could not be prouder of how the entire team has pulled together to deliver these amazing results for our shareholders.

With that, I’ll pass the time to John to give you more details on our second quarter results.

John Rodgerson: Thanks, David. I would also like to thank our crew members for their incredible work. Every day, I see how passionate and caring our people are for each other and our customers. It is this special culture that will fuel our company for years to come. Turning to the numbers, I would like to highlight our record results, as you can see on Slide 6. In the second quarter, we achieved record revenues for a second quarter of BRL4.3 billion, 9% up versus second quarter 2022. Revenue in the second quarter ’23 was up an impressive 63% compared to the same period in 2019. Yield and RASK were also second quarter records at BRL46.8 and BRL0.44, respectively. Our EBITDA grew a remarkable 88% year-over-year, reaching an all-time record for a second quarter of BRL1.2 billion with one of the highest margins in the industry at 27%, 11.4% points higher year-over-year.

As you can see on Slide 7, our EBITDA increased 58% versus second quarter ’19 even with a 60% increase in fuel prices. This is a clear demonstration of the strength and the resiliency in our business. Our structural competitive advantages, combined with our rational and profitable growth allow us to expand earnings in any macroeconomic scenario. On Slide 8, you can see that average fares were up 6% versus last year, while fuel prices dropped 24% year-over-year. This is a very positive sign when we are in the – as we transition into the seasonally strongest part of the year under a very constructive demand and pricing environment in contrast to what you’re seeing in other regions in the world. As you can see on Slide 9, we continue to effectively manage our costs with a 10% decrease in CASK year-over-year.

This is mainly driven by the reduction in fuel prices and by our cost-reduction initiatives and productivity gains. Just to give you an example, a record 76% of our customers now use automated self-service tools for their check-in. In addition, productivity measured by ASKs per full-time employee has also increased, with the company now generating 13% more ASKs per FTE than in 2019. And this is with an on-time performance of 87% and no small feat. In addition, our fleet transformation and fuel savings initiatives resulted in a 4% reduction in fuel consumption per ASK compared to last year. We have the lowest CASK in the region even with a diversified fleet and lower average aircraft size. As we promised you, we are now more efficient airline and better than ever.

Azul has one of the highest EBITDA margins in the industry, as you can see on Slide 10. The strength of our revenue performance, efficiency of our next-gen fleet growth in our business units and world-class customer service directly led to these results. As David mentioned in the opening remarks, we’ve now concluded our capital optimization plan. This was an incredible achievement in such a short period of time, and I joined David in thanking our teams, our partners for their dedication and their support. On Slide number 11, we remind you of the pillars of our plan. As announced before, we successfully reached agreements with lessors, OEMs to exchange COVID deferral payments into a combination of debt and equity. We also agreed with our lessors to make mark-to-market adjustments on our leases with any differences to the original lease rates also to be in exchange for a combination of debt and equity.

Less stores and OEMs agreed to receive an unsecured tradable note maturing in 2030 with a coupon of 7.5% a year and an equity instrument convertible into preferred shares to be issued quarterly installments starting at the end of 2024 with all issuances to be completed by the end of 2027 and minimal dilution to our shareholders of roughly 17%. The next step in the plan was the restructuring of our debt obligation, which is why in June, we launched a par-for-par exchange offer to extend the maturities of our 2024 and 2026 notes to 2029 and 2030. We successfully concluded this offer in July with an aggregate acceptance rate of 86% of the principal outstanding. The final step was a new capital raise, which was concluded in July with the issuance of $800 million in bonds maturing in 2028.

The offer was 3x covered, enabling Azul to obtain the lowest coupon among our peers in the region. The success of our comprehensive plan clearly demonstrates Azul’s ability to execute and represents a significant vote of confidence in our company by the market and all of our stakeholders. I just want to remind everyone that this entire process was done amicably with our partners and stakeholders based on the guiding principle that our partners would receive 100% of what was committed to them. We always believe that this was the value maximizing solution for all, and I’m happy to say that this is what we have achieved. On Slide 12, we show you the updated amounts related to the reduction in our lease payments resulting from our lessor negotiations.

As you can see, we are reducing our annual lease payments by BRL1.5 billion in 2023 and over BRL1 billion in 2024, taking our recurring annual rent to below BRL3 billion. In summary, the plan delivered the lease payment reductions we were targeting to optimize our cash flow and enable our future growth. On Slide 13, you can clearly see the runway that we have created. We have no significant maturities for the next five years, another key targeted outcome from our plan. Both in terms of yearly cash flow and future debt maturities, we overachieved versus what we expected. We now have a strong balance sheet and liquidity to match our industry-leading operating performance. As you can see on Slide 14, the second quarter leverage organically decreased a full turn from 5.2x to 4.2x as we paid down debt and increased our EBITDA.

This is even more impressive considering it does not yet reflect the reduction in leverage expected from our capital optimization plan. With the reduction in lease liabilities from our successful agreements with lessors, our deleveraging process will accelerate. You can see that by the end of the year, leverage will reduce almost another full turn to 3.5x in line with the guidance we gave last quarter. We also remain with our expectations to end 2024 with a leverage of 3x, in line with our pre-pandemic levels. This leverage also includes the 2028 senior secured notes issued in July and the 2030 unsecured notes to be issued to lessors no later than September. As a result of the optimization plan, all three rating agencies have already upgraded Azul, reinforcing our financial health going forward.

On Slide 15, we show our view on Azul’s valuation. With our optimized balance sheet, positive cash flows, high liquidity and earnings growth, our current multiple should be closer to our historical levels versus the 4.5x we are trading at now. There is significant upside in our market valuation. I truly believe this, and I look forward to having this discussion with all of you and our investors in the days and weeks to come. Wrapping up on Slide 16. I just want to remind everybody that our senior leadership team spent countless hours on this plan. And having successfully concluded it, we can now turn our efforts to our business in all of the opportunities ahead of us. Our fundamentals are strong. Our business model is unique. Our upside is clear and most importantly for me, our crew members are as passionate as ever.

Once again, I want to thank all of our crew members, our partners and our stakeholders and our investors for all their support. What we have achieved together is remarkable, and the best for Azul is yet to come. With that, we’re here to take your questions.

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Q&A Session

Operator: [Operator Instructions] Let’s move on to the first question. It is from Philippe Newsom sell-side analyst from Citi. Please, Philippe, we will open your microphone, so you can ask your question.

Unidentified Analyst: Hi guys. Can you hear me?

John Rodgerson: Yes we can hear you. Go ahead.

Unidentified Analyst: Thank you. Thank you very much guys and thanks for taking my questions. So I have two questions on my side and congrats on the results. The first one would be on the international corridors. I saw that – I know that we have in Brazil, some backlog of U.S. visas. Tourist visa aligned for people to issue new visas and – but we know as well that there are some corridors that might be performing well. And we saw in this quarter, you guys shifting – continuing to shift aircraft from cargo to international corridors using wide-body. So I’d like to understand which are the markets where you see more opportunities in terms of international? And the second question would be in terms of the adjustments that you made on EBITDA in this quarter. Just wanted to hear your thoughts and some extra clarification about the adjustments made in the EBITDA. So, thank you,

John Rodgerson: Philippe, I’ll be here. I can start with the first part about the international. So you’re right. We are happy with the performance of the international network. Our international capacity in 2023, we’ll be larger than 2019. So we are fully recovered and more in our international capacity. You’re also right that last year, especially, we had some wide-bodies flying dedicated cargo missions to Brussels, Fort Lauderdale and even domestically in Brazil. We’ve now shifted them to our international long-haul passenger network. And the market is holding up very well. In general, what you’re hearing from other airlines is true for us as well. The European market is doing better, but the U.S. market is strong as well.

We have great partnerships with JetBlue and United in the U.S. and with TAP and Air Europa in Europe that allows us to feed lots and lots of cities beyond our gateways. So we have compensour main hub, but we also have Recife and Belo Horizonte. So we’re connecting our strongest hubs to the strongest hubs of our partners as well. So overall, we’re very happy. Unit revenues are significantly higher this year than 2019, and we expect that to continue. So overall, we’re fully recovered and larger, and we’re happy with the results of the international network.

Alex Malfitani: Yes. And Phillip, on the adjustments, they’re mainly tied to the capital optimization plan that we talked about. There were, obvious as you know, a lot of negotiations with lessors some of these negotiations, we were actually able to early deliver some aircraft that we did not want on our fleet. You all know how excited we are about our fleet transformation and how we want to replace all of our old-generation Embraers, which worked great for us to start the company. But now we have much better aircraft on the Embraer E2 and the A320neos. And with the demand the way it is today, there were some opportunities for us to accelerate the exit of some aircraft. When you do that, you have some costs that are not recurrent.