Azul S.A. (NYSE:AZUL) Q3 2023 Earnings Call Transcript

Azul S.A. (NYSE:AZUL) Q3 2023 Earnings Call Transcript November 14, 2023

Operator: Hello, everyone, and welcome all to Azul’s Preliminary Third 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 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. Please Thais, proceed.

Thais Haberli: Thank you, Zach, and welcome all to Azul’s Preliminary Third Quarter Earnings Call. The preliminary 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. Also it’s important to mention that Azul has not yet published its interim financial statements for the three and nine month ended September 30th due to the considerable volume and complexity of tests to ensure that all effects of its capital optimization plan are correctly reflected in the financial statements and we’ll keep the market updated on these efforts.

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. 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. I welcome, everyone, and thanks for joining us for our third quarter 2023 earnings call. As you can see on Slide 3, we continue to strengthen Brazil’s largest network by adding more than 40 new destinations since 2019. We’re the only carrier in almost 80% of our routes and the leader in departures in 90% of our markets, a profitable strategy we will maintain as we grow. In fact, if you look at our ASK growth since 2019, 8% has been in five cities. Four of them are hubs and the one exception being Congolese. More importantly, we have demonstrated we can grow in a way that maintains our customer service excellence. We continue to run the most on-time airline in the region with the highest net promoter scores.

John is going to give you more details on the quarter, but let me still extender for a second by summarizing on Slide 4. What this incredible team has achieved. Total revenues of BRL 4.9 billion in the quarter, an all-time record, 12% above last year and 62% above 2019. Fares and unit revenues are all up versus last year. In stark contrast to many other airlines around the world where airlines have fallen, especially in the United States in a year-over-year comparison. Finally, an EBITDA of BRL 1.6 billion and EBIT of BRL 1 billion, both records and most importantly, both in EBITDA margin and operating margin above 2019 levels. These numbers are a clear demonstration of what the real Azul looks like and is capable of delivering. This amazing team also implemented in record time, a comprehensive capital optimization plans that we have already described to most all of you.

Upon the conclusion of this plan, Azul will have no significant maturities until the end of 2028 and we can now rely on the strong balance sheet, leading liquidity position and lower cost of capital to continue leveraging our superior network, product offering and cost structure, all of which creates a strong cash flow from operations. And the best is yet to come. For example, you all know about the E2 opportunity. This aircraft has a lower fuel burn, lower maintenance costs, lower ownership costs, lower trip costs while generating more revenue with 18 additional seats than the old E1s. We only have 17 of them operating now, but by the end of 2024 next year, we’ll have 33. This is just one reason why we are so excited what we can achieve going forward.

We’re executing on our fleet transformation plan, demand environment is strong, our business units are all producing record revenues, and we are emerging as a more efficient airline. All I can say is thank you to each and every crew member. What they continue to deliver is absolutely incredible and we are truly excited about the opportunities ahead of us. With that, let me turn the time over to John to give you more details about the third quarter results. John?

John Rodgerson: Thanks, David. I also want to start by thanking our entire Azul team for their passion and dedication. Just last week, we were voted the best airline in Brazil by Melhores Destinos, the largest travel site in Brazil. Our internal crew member satisfaction scores this year were another all-time record with 82% participation among our people and 87% favorability score. Our team excels in delivering the Azul experience, our culture is stronger than ever, and our customers recognize the difference each and every time they fly Azul. Thanks to their dedication, we delivered another record result in the third quarter. On Slide 5, we summarize the cumulative effects of the strong demand environment, along with the high growth in our business units.

Our all-time record revenue of BRL 4.9 billion in the quarter represents a 62% increase over third quarter 2019. This is a result of overall capacity of 19% and unit revenues up 36%. As you know, ASK growth often leads to a reduction in unit revenue, but demand for Azul flights is so high that we were able to simultaneously increase both capacity and fares. RASK in the quarter was $42.59, was a record for a third quarter and actually just missed the all-time RASK record for Azul by 0.3%. So overall, truly outstanding numbers across the board. Moving to Slide 6. You can see how the strength of our business model led us to 5% higher fares in the third quarter versus last year, even with fuel price dropping 33%. Remember, though, that fuel prices are still higher than 2019 and fuel prices in Brazil are the highest in the world.

But as David said, this contrast with what other regions around the world are experiencing and this demand is consistent with what we’ve been seeing for almost three years now. Brazil had one of the fastest demand recoveries in the world, and Azul has the fastest demand recovery in Brazil. I don’t know many airlines around the world whose revenues are 62% higher than 2019. Our business units continue to outperform, further adding to our Arsenal of competitive advantages as we show on Slide 7. Our loyalty program is now approaching 17 million members with high customer engagement, our co-branded credit card is doing incredibly well with a significant portion of the membership base coming from the Platinum and Infinite categories, premium segments with high levels of personal spending.

In fact, our projection for total card member spend in 2024 is equivalent to 0.5% of the entire GDP of Brazil being spent on our credit card. Our vacations business continues to break records every month. It is now three times larger than 2019. This growth is extremely well aligned with our business model as it takes advantage of our low aircraft utilization [ph] on nights and weekends. Finally, our logistics business, Azul Cargo continues its growth trajectory and maintains its position as Brazil’s largest domestic provider. We know that global cargo market is in a tough spot right now with many airlines reporting revenue decreases of around 30%. Azul Cargo, on the other hand, is performing significantly better and continues to show revenue growth, especially in the domestic market.

We continue to win over new clients and to increase our partnership with existing ones. You may have seen the news that Amazon at a recent global event in Seattle, announced Azul as their partner for air logistics all throughout Brazil. On Slide 8, we turn to the cost side of the business. We told you we would emerge a more efficient airline, and that’s exactly what we’ve done. Controlling for headcount on our hangar, which did not exist in 2019, Azul today generates 40% more revenue per full-time employee than we did in 2019. This is – this result is remarkable. We now have the lowest CASK in the region, not just when comparing aircraft within the same category, the A320neo compared to our competitors with the 737. We already had the lowest cost there.

But now we have the lowest CASK overall, even with a smaller aircraft in our fleet. And as someone once said, it’s low cost always wins. We have the most efficient cost structure in the region, and we will improve it further with our fleet transformation. This really gets us excited about the future. As you can see on Slide 9, we significantly increased the rate of E2 deliveries, doubling the size of that fleet in the last 12 months. The E2 delivers 18% lower fuel burn compared to the E1 with 18 more seats, leading to a 26% lower cost per seat. In 2023, we still had – had twice as many departures on our E1s than our E2s. As this ratio switches in favor of E2s, this will drive significant margin expansion going forward. This fleet transformation that is unparalleled in the region, in addition to making financial sense is also clearly a more sustainable way to grow.

Our fuel consumption per ASK and carbon emissions per ASK are down an incredible 24% compared to 2016. Turning to slide 10. You can see the result of all these remarkable attributes, an all-time record EBITDA of BRL 1.6 billion and a 31.6% EBITDA margin, we have surpassed pre-pandemic EBITDA even with fuel 60% higher in an exchange rate 23% weaker to the dollar. Frankly, these numbers speak for themselves. This demonstrates the strength of our business and our structural competitive advantage. Turning to slide 7. You can see the significant increase in liquidity obtained through our capital optimization plan we concluded in September. As you recall, this plan yielded new agreements with practically all of our lessors and OEMs with the reduction in lease liabilities and improvement in cash flow.

Given the scope and complexity of this plan, we haven’t yet published our interim financial statements, and we’ll keep the market updated on these efforts. Also thanks to this plan and all the support of our crew members, partners and stakeholders, we have no significant debt maturities until 2028, as you can see on slide 12. Now we can turn our attention to focus on our business and growing it. On slide 13, we show further evidence that demand in Brazil remains strong by comparing our expectation for fourth quarter RASK versus Bloomberg consensus for other airlines. In addition to the domestic market, our international network, which is now more than 100% recovered compared to 2019, is performing extremely well, with our complete network to the US and growth in Europe, with our new Paris service.

Pricing and capacity discipline in the Brazilian market continued to be solid. This, together with our unique network advantages and flexible fleet deployment should result in unit revenue growth in the fourth quarter of 2023, leading again to an all-time record. As you can see on slide 14, Azul is the leading operator in next-gen aircraft in the region, with 79% of our ASKs flown by next-gen aircraft. Given that fuel prices in Brazil or about $1 per gallon higher than the United States, trying a young, fuel-efficient fleet is crucial. The fact that our fleet transformation is far ahead of our peers is a clear structural advantage that will remain for years to come. We also continue to outpace our competitors in next-gen deliveries, especially given the fact that Embraer, one of our main partners is experiencing fewer delivery delays than its competitors.

We have roughly one Embraer E2 entering the fleet every month of 2024. Remember, we fly the most fuel-efficient aircraft over the shortest stage length with the lowest unit cost in charging the highest average fares. That’s pretty hard to beat. Finally, on slide 16, we estimate 2023 EBITDA to be around BRL 5.2 billion, slightly lower than the previous projection as a result of the recent volatility in fuel prices and our adjusted capacity growth together with international cargo volumes being down. However, with strong demand we are seeing, together with our — all of our margin expansion initiatives, including the E2, we already mentioned here, we increased our 2024 EBITDA expectation to BRL 6.3 billion. I truly believe the best is yet to come.

In the last three years, we have focused on getting through the pandemic and then optimizing our capital structure. Now that this chapter has been completed, we can really focus on the future. That means accelerating our fleet transformation, unlocking value in our loyalty program by pricing our points for profit maximization, investing heavily in our co-branded card, attacking structural costs in Brazil, like the high-level litigation in the country. These results we show today are just a start. That is why we are so excited for 2024 and beyond. With that, David, Alex, Abhi and I are here to answer your questions. Operator?

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Q&A Session

Operator: Ladies and gentlemen, thank you. We will now begin the Q&A session. [Operator Instructions] Let’s move on now to our first question. This question will come from Gabriel Rezende sell-side analyst from Itaú BPA. Gabriel, we’re going to open your microphone so that you may proceed.

Gabriel Rezende: Thanks, and good morning. I’ll start with a follow-up on John last comment regarding the guidance for 2024. It will be nice if you guys could provide us some color on how you’re seeing the pass-through on forward bookings? Just trying to understand the assumptions for the higher fuel costs being passed through into the tariffs that you are selling right now for 2024? And second — just quickly on a second point, if you could comment also on the OEM supply chain issues, whether you’re seeing some deterioration on improvement looking forward or whether we could see some more delays in terms of aircraft being delivered to you guys? Thanks. And sorry, Abhi, please go on.

Abhi Shah: Hey, Gabriel. Yes, thanks for the question. We feel pretty good about the revenue environment. We’ve seen very good fair discipline, very good discipline on the capacity side as well. In fact, if you look at capacity in the domestic market compared to 2019, 4Q this year is actually flat, even slightly negative to what we had four years ago, roughly $28 billion to $30 billion ASKs. So — and I think that, that capacity discipline is going to continue for next year and beyond. Sort of everybody is facing the same issues with fuel going up and down interest rates. So I really think the industry overall is very much interested in maximizing results and focusing on where they are strong. Like as David said in the opening, we’ve increased capacity, but 80% of it has been in five cities, all except a Congo is our hub.

So our assumption for unit revenues for next year is basically what we are seeing at the back half of this year. And then you take that forward all through next year. So just run rate performance with the growth in our business units, which is a little bit of recovery in Azul Cargo, continued growth in our vacations business, Azul Viagens and our loyalty business. So we’re not expecting something very different than what we are seeing already this year. Overall market discipline and growth in our business units.

John Rodgerson: I just want to talk quickly the OEM delays Airbus, Boeing, Embraer, Rolls-Royce, everybody has their challenges. And we received a delayed notification for aircraft we’re supposed to receive in 2026, right? So I don’t think this is a problem that gets resolved in the short term. I think the new technology that these engines are burning significantly less fuel. They just don’t stay on wing as long, right? And so engines that we’re supposed to stay on wing for 20,000 hours are coming off at 5,000 hours. And I think there’s a fight in the market for spares versus production aircraft. And so I think what we’re seeing today in terms of capacity around the world, capacity will be constrained for the foreseeable future until the OEMs fix that.

I think that’s a good thing as we look forward into 2024 and beyond. We’re really excited that Embraer, we worked through our delivery schedule with Embraer next year. We’re getting 13 new shells from them next year, not all on time, right? Some of those were supposed to be delivered earlier, but we do have a horizon as to when they’re being delivered. But I think it’s across the board, and I think all the OEMs are impacted by it, and it’s a challenge that the industry has overall. So it’s not necessarily specific to any manufacturer specific to Azul. It’s just an across-the-board problem the OEMs are having.

Gabriel Rezende: Great. Thanks, guys. That’s very clear.

Operator: Thank you. Let’s move on now to the next question. The next question will come from John [indiscernible] sell-side analyst for Goldman Sachs. John, we will open your audio so that you can ask your question. Please proceed.

Unidentified Analyst: Thank you, very much. Good morning guys. Thanks for taking my questions. Two from our side. The first one relates to the liquidity you guys posted, right? So, I would just like to get your help to reconcile your immediate liquidity change quarter-over-quarter, given the recent bond emission and the commitments you guys had in 3Q, right? So we saw immediate liquidity rises by BRL1.5 billion in 3Q, while you guys have raised roughly BRL4 billion in the third quarter, the 2028 notes, right? So, I would just like to get a sense from you guys to what were the key uses for the cash you guys raised it? And then a second one super quick related to the order for operating expenses. This quarter was significantly higher than the previous ones. So I just wanted to understand if this is the new level we should expect going forward or we should see a normalization back to last quarter’s average. Thank you, very much guys.

Alex Malfitani: Sure. Thanks, John. Yes. So the BRL4 billion number roughly Dave mentioned, obviously, that’s the gross capital raise that we had. We are going to provide a lot more detail once we have our interim financials with the auditor’s review. But just to give you a preview, some of this went to paying down debt, and we provided already some of this information on the exchange offer because we paid down some of the bonds that were exchanged from 2024 into 2029 were already paid down. So that is future debt payments that we have already made right now. We also paid down some of our convertible debenture, which is also principal that has been paid down now versus in the future. Obviously, when you do a capital raise like this, we actually had four big transactions, right, when you think about it.

We have the big capital raise of $800 million. We also had two exchange offers that together got to almost $1 billion plus the exchange of the convertible note. All of that, unfortunately, requires lawyers and fees and the moluments and advisers, which also took some of that money. But having said that, as we have told you already before, this was a much more cost-efficient way to restructure our balance sheet, right? We estimate that we paid maybe 20% to 30% of what a court process would have cost us, right, what some of our competitors went through, right? So — but there is a big number of fees there. And then there are some adjustments into payments to lessors that we hadn’t paid. We had gotten some bridge financing from lessors, which were paid some of it when the capital raise happened.

And then we had gotten some deferrals from our fuel suppliers, mainly that we also paid down when we did the capital raise. So the important, I think, concept to everybody to keep in mind here is that, yes, the cash increase obviously was not as high as $4 billion or BRL4 billion for all of the reasons that I mentioned. But the cash generation is as strong as ever. So the restructuring that we did and primarily the reduction in lease payments that we were able to negotiate and also in the CapEx deferral repayments that we had originally contracted that has significantly decreased, and it should allow us to deliver on the cash flow generation that we indicated when we published the — when we talked about the capital optimization plan.

John Rodgerson: And we cleaned up the payables. As Alex said, there were some fuel notes that we’ve got some deferrals on. We have no debt maturities coming in the next five years. So there was a lot of cleanup that happened. We feel very good about the cash balance where we’re at today, especially with where we’re at, we invested some CapEx in the quarter as well. That was a significant thing because the airline is getting back to growth. And I think that that was an important use of the proceeds as well. Now that we fix the balance sheet, we can focus the airline back on growth again.