Azul S.A. (NYSE:AZUL) Q4 2022 Earnings Call Transcript

Azul S.A. (NYSE:AZUL) Q4 2022 Earnings Call Transcript March 6, 2023

Operator: Hello, everyone, and welcome all to the Fourth Quarter Earnings Call from Azul. My name is Zach and I’ll 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. 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. I would like to turn the presentation over to Thais Haberli, Head of Investor Relations. Please proceed, Thais.

Thais Haberli: Thank you, Zach and welcome all to Azul’s fourth 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’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 fourth quarter call. As you can see on Slide 3, there is a lot to talk about today. I know you all want to hear the details of our comprehensive go-forward plan. John and Alex and their teams have worked very hard over the past 55 (ph) days to successfully reach commercial agreements for more than 90% of our Aircraft leases. These agreements fundamentally changed the financial future of our company. I’d like to personally thank our management team and our partners have shown a tremendous amount of confidence in our business and for . As you can see in the presentation, we have created the company creates billions in cash flow annually. First, let me tell you about our great business and then, John and Alex will share with you the details of our plan.

Moving to Slide 4. 2022 was a wreck for Azul. We generated BRL16 billion in revenue, up 40% compared to 2019, unit revenue was also a record $40.29, (ph) up 26% from the full year 2019. Revenue performance due to our structural competitive advantages and our network combined with the strong growth of our business units made this possible. Our wholly-owned and unencumbered business units also had record results this year compared to 2019. Our loyalty program — and compared to 2019, our loyalty program TudoAzul almost double its gross billing. Azul Cargo, our logistics business, impressive (ph) 153% in revenue and ended the year, as Brazil’s largest domestic air logistics provider . Finally our travel business TudoAzul, Azul Viagens grew 90% (ph) to BRL1.3 billion in gross bookings.

Looking at 2023, we are excited at the opportunities we see. Later this month, we will begin flying our expanded network from Sao Paulo’s downtown airport Congonhas. More than double to 84 daily flights which will serve all the largest corporate markets. We cannot wait to show these new customers, all that Azul has to offer. Overall for the year, we expect BRL20 billion in total revenue and EBITDA above BRL1 billion, that’s more than a 40% (ph) increase in 2019. Moving to Slide 5, we show making development of our route network and unrelenting focus, building and expanding our competitive advantage. We serve a 158 destinations and Azul is the only carrier in 80% of our routes and the market leader in more than 90% of them. In addition to our domestic network, our annual capacity will fully recover this year.

We recently announced exciting new destinations such as Paris and Curacao. Together with Miami, Fort Lauderdale, Orlando, Lisbon and , we are putting together a very relevant international network. In addition, our codeshare partners — partnerships with United, JetBlue, TAP and Air Europa will allow us to connect our customers all over the U.S. and Europe, significantly increasing our position in new markets. Finally, turning to Slide 6. I am very happy to say that 2022 (ph) was another exceptional operating year for in which we followed up with the world’s best airline award with the world’s on time airline award. Just last week, this achievement in our hanger and with our crew (ph) members and there was not a dry eye in the house. I think I even spot on shedding a few tears.

I’m just so proud of this team. As John will explain, we have an amazing business, which generates billions of reis in cash flow from operations. We have built something very special and I am so excited about what is ahead of us. With that, I’ll pass the word to John to give you more details on our fourth quarter results and our go forward plan. John?

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John Rodgerson: Thanks, David. Yeah. I did get emotional last week, it was very special and I cannot thank enough our crew members who repeatedly shown their dedication for Azul, without their passion and support these results would simply not be possible. I would like to remind everyone that we had more than 11,000 of our people took unpaid leave of absence to help Azul during the pandemic, when they came back, they came back stronger and more dedicated and that dedication led us to be the most on time airlines in the world. As you can see on Slide 7, revenue for the fourth quarter was another all-time record at BRL4.5 billion, 37% above 4Q 2019. Yield also an all-time record was BRL50.6, an increase of 16% compared to 4Q €˜21 and 32% versus 4Q 2019.

We also had a record RASK compared to 4Q 2019, our RASK was up 27%. Operating income was BRL525 million in the quarter and our operating margin of 12%. Our EBITDA was — our EBITDA margin was 25% with an absolute value of BRL1.1 billion. This is even more impressive when you consider that fuel was up 116% versus fourth quarter 2019 and the currency devalued 30%. On Slide 8, you can see the sequential improvement in our RASK. First, you can see how significant and sustained the RASK improvement has been since 2019, and then how it improved through the year 2022. This is a clear signal of not just pent up demand, but a new level of sustained revenue performance. Second, you can see that for 2023 our assumptions are not aggressive. I know Abhi and his team will always try to maximize RASK, but this chart shows that for 2023, we’re just assuming what we’ve already achieved in 2022.

Azul has one of the highest EBITDA margins among its peers as you can see on Slide 9. The strength in the revenue performance, the improvements in the fuel environment and the milestones, such as our Congonhas growth gives you a clear indication as to the earnings strength of our airline and why we’re so excited for this year and beyond. On Slide 10, we bridge our 4Q 2019 results to 4Q 2022. You can see the negative impact from fuel, currency and inflation, how we were able to offset those cost injuries through our growth, revenue performance, business units, and being a more efficient airline exiting the crisis. With these initiatives, we were able to offset over 90% of the cost impact during the quarter alone, an impressive achievement, given how fast and how much fuel prices increased during the year.

Even more impressive is our strong cash contribution from operations. Slide 11 shows that in 2022, we had a cash contribution of BRL5.5 billion, when comparing the cash inflows to the outflows from operation. We paid over BRL5.1 billion in rent and debt. These are significant payments that supported our deleveraging process. As a result, we ended the year with leverage below 6, consistent with the guidance we gave you at the start of the year. On Slides 12 and 13, we want to highlight further, the magnitude of these aircraft, rent and debt payments and how they have grown since 2019. On Slide 12, you can see that in 2022, we paid over BRL3.6 billion in aircraft rent, BRL1.6 billion more than 2019, mainly due to the devaluation of the Brazilian real, COVID rent deferrals and our fleet growth.

Debt interest payments also increased in 2022. As you can see on Slide 13, in 2022, Azul paid over BRL1.5 billion in principal, debt and interest. BRL1.1 billion more than 2019, mainly due to the debt that we had to take on during the pandemic. As a reminder, unlike subsidized airlines in the U.S. and Europe, we did not receive any government financial help during that challenging time. But with the strong results from our operations, we’ve been able to significantly accelerate our deleveraging process. These levels of aircraft rent and debt payments are clearly challenging and this is why we’re so focused on optimizing these. So we can strengthen our balance sheet, and improve our cash flow going forward. As David mentioned at the opening, we have already made significant progress on that front.

Moving forward to Slide 14, you can see our yearly results since we launched Azul and where the pandemic, currency devaluation, high fuel prices have impacted our results. As mentioned before, for 2023, we expect a full and strong EBITDA recovery of over BRL5 billion. That’s more than BRL1 billion of EBITDA, the strength of our business is evident. On Slide 15, you can see that from 2017 to 2019 Azul consistently traded at about 8 times EBITDA, while we currently are trading at 4 times. It’s incredible to think that just going back to a 5 multiple, which would still be well below our historical average. Our valuation would need to triple. Moving to Slide 16, we show what we believe is the main reason that our valuation is held back. As I showed you on Azul day, here you can see the net effect of the combination of higher cash outflows recovering EBITDA and the lack of government financial support during the pandemic.

We have continued to address these challenges through revenue and productivity initiatives together with the valuable support of our partners, we made significant progress since 2020 and we’ve had previously projected cash gap of BRL3 billion for 2023. Now, thanks to the progress we have made, not only have we already eliminated that gap, but our comprehensive go forward plan results in significant cash flow and balance sheet improvements for the foreseeable future. Let me now turn it over to Alex, so he can give you more details on this plan.

Alex Malfitani: Thanks, John. I’m really excited to share with you the details of what we have been working on starting with Slide 17. As you can see here, we have developed and started to implement a comprehensive plan that provides a permanent solution to our capital structure, significantly improved our cash flow and provides maximum value generation for our stakeholders by ensuring that they receive 100% of what was committed to them. We started implementing this plan by negotiating with our lessors, and on Slide 18, you can see why? About 80% of our gross debt is related to aircraft leases, therefore, addressing this debt in a comprehensive way results in significant cash flow improvements. On Slide 19, you can see the progress we have already made over the last 45 days.

As we announced in our material fact last night, we’ve already reached commercial agreements with lessors, representing more than 90% of our lease obligations and I am confident we will reach an agreement with the remaining share. We have seen strong support from our partners as they understand that this is a smart business decision, it maximizes the return on investment, and I want to thank them for their support and confidence. Throughout this negotiation, we’ve had zero aircraft withdrawals, in fact, our partners have delivered to us 12 additional new aircraft in the last few months, including four A320neos. On Slide 20, we described these lessor agreements in more details. So under these agreements, subject to certain conditions and corporate approvals, lessors will reduce our lease payments to eliminate the COVID-related deferrals.

They will also eliminate the gap between Azul’s contractual lease rates and agreed upon market rates. In exchange, lessors will receive a tradable note maturing in 2030 and equity priced in a way to reflect our new capital structure, our improved client cash flows and our reduced credit risk. Out of the total value that is being exchanged, which again the reduction from both the COVID-related deferrals and the rent gap, the long-term note represents 40% while the equity represents 60%. Consistent with our reputation and our track record, this plan is designed to give lessors a 100% of our committed payments through this combination of long-term debt and equity in a reset balance sheet. Moving onto Slide 21, we have also engaged with our OEM partners, another vital stakeholder group, so we can address our CapEx requirements.

With a similar comprehensive permanent plan, we are making tremendous progress with this group as well. Once again, we’re committed to significantly improving the cash flow for the airline, at the same time, that we follow the principle of 100% recovery for our partners. And on Slide 22, you can see the cumulative effect of this plan. In 2023 alone, we converted the cash gap of BRL3 billion that we talked about from a negative to breakeven. The main items that were reduced are eliminated, as I mentioned, are the monthly lease payments, the maintenance CapEx and the COVID-related deferrals. Remember though, this plan does not cover just 2023, this is not a stop gap for one year only. The results of this plan go well beyond as you can see on Slide 22.

This is truly a permanent solution that aligns the interests of all of our stakeholders and creates a balance sheet and cash flow generation that is consistent with our strong profitability. Now let me turn it back over to John for the conclusion.

John Rodgerson: Thanks Alex. Now, you can see why we’re so excited to share all of this with you today. On Slide 24, we start to look a little ahead, we have always talked about the incredible growth opportunities and margin contribution from our wholly-owned and unencumbered business units. TudoAzul, Azul Cargo and our packaging business, Azul Viagens. We recently had them appraised by an independent firm, and in total, these fast growing businesses are praised at more than $5 billion or BRL25 billion. Our comprehensive solution and its corresponding reduction of our credit risk combined with our growth in EBITDA, cash generation and our valuable unencumbered assets gives us strong confidence that we can access the capital markets when needed to invest in our growth.

Finally on Slide 25, we have to show you why we’re so excited for the future. Our business is doing incredibly well, Abhi will talk about the revenue. We’re hitting record revenues and record EBITDA, our customers love to fly us and our crew members love to work here. Yes, COVID and macro effects have had a negative impact, which is why we presented today real progress towards a permanent and comprehensive plan to improve our cash flow, optimize our capital structure and continue to invest in our business. I realize we gave you a lot of information today, but just in the last 45 days, we’ve made incredible progress and there’s much more to come. With that David, Alex, Abhi and I will answer your questions. Thank you for your time.

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Q&A Session

Operator: Ladies and gentlemen, thank you. We will now begin the Q&A session. So let’s go to the first question from Fernanda Recchia, sell-side analyst, BTG. Fernanda Recchia, we will open your audio so that you can ask your question. Please proceed.

Fernanda Recchia: Thank you. Can you hear me?

John Rodgerson: Yes.

Fernanda Recchia: Great. So, hi, John, Abhi, Alex. Thanks for taking my question and congrats on the deal with lessors you recently announced it. Just two questions from our side, I was wondering if you guys could provide us additional color regarding the terms agreed with the lessors especially in terms of the equity portion of it. I was curious to see if you could provide us the strike price you agreed with them or if you could give somehow any color on the potential equity dilution from the deal? And second question, if you could please update us regarding the discussion with United Airlines, is this something that it’s behind or discussions are still ongoing? Thank you.

John Rodgerson: Yeah. Let me start and Abhi and Alex can add color to the rest of the questions. First of all, obviously today’s price does not reflect Azul’s value, right. When you have a business that produces over $1 billion of EBITDA and I think our partners recognize that, and so the strike price at which lessors will come in is higher than it is today but we’re 90% done and we’ll communicate when we’re 100% done with our lessors, right. And so it’s more reflective of a 7, 8 times multiple based on where we are and it will give full recovery to our partners and we’re excited for them and excited for us and it’ll minimize dilution to the company because it’s not being done at today’s prices which don’t reflect Azul’s true value.

Alex Malfitani: Yeah. And just to add to that, I think the main objective here that we had on this call today, if you trace back to Azul Day, we talked about the BRL3 billion cash gap, we talked about how it was the smallest cash gap since the pandemic happened, we said that, well, obviously the preferred alternative would be to access the capital markets to finance that cash gap, but if that weren’t possible, we knew we could count on the support of our stakeholders, and we even provided some information that we were getting a lot of support from our stakeholders that in spite of us being very public about the cash challenges that we were facing, lessors were delivering new aircraft to us and we were seeing a narrative in the market that lessors — it made sense for lessors to support airlines in 2020 but it didn’t make sense to support in 2023, which obviously we disagreed.

And today, I think the main message that we wanted to communicate to the market is that that support has materialized, right. And it’s not because the lessors are nice or because they like us, I think they are nice and I think they like us, but that’s not right, it’s a good business decision and they know that a company that produces more than $1 billion in EBITDA a year is not fairly priced at these levels, right. And so, we will provide additional color over time, we will provide additional details, but as John said, we want to be fully finalized with our negotiations with lessors, and over time, we will provide that information.

John Rodgerson: We entered COVID as one of the most profitable airlines in the world and we will end 2023 as one of the most profitable airlines in the world. COVID wasn’t our fault, the devaluation of the currency wasn’t our fault, but we’ve done enormous things to combat those challenges, including having our people go on unpaid leave of absence. And so I think the market and our partners give us a lot of credit for what we’ve done and they want to invest in Azul going forward because they know it’s a good business this season. Well, I’ll let Abhi talk through the relationship with the United…