Gol Linhas Aéreas Inteligentes S.A. (NYSE:GOL) Q4 2022 Earnings Call Transcript

Gol Linhas Aéreas Inteligentes S.A. (NYSE:GOL) Q4 2022 Earnings Call Transcript March 8, 2023

Operator: Good day, everyone, and welcome to the GOL Airlines Fourth Quarter 2022 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 in live via webcast and may be accessed through the company website at www.voegol.com.br/ir and the MZiQ platform at www.mziq.com. Those following the presentation via webcast may post their questions on the platform and their questions will be either answered by the management during this call or by the 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 typing your question. Before proceeding, we emphasize that forward-looking statements are based on the 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. At this time, I will hand your call over to Mr. Celso Ferrer. Please go ahead.

Celso Ferrer: Hi everyone, and thank you all for your participation in this conference call. This morning, we posted our Q4 2022 earnings release, and a slide presentation on GOL’s IR websites. So we will make some brief comments and should straight through to your questions. I would like to start by highlighting our most important results of the period, which were made possible by the trust from our customers, investors, suppliers, partners and specially from our Team of Eagles. GOL delivered strong performance in Q4, a quarter with similar supply to the pre-pandemic period. We achieved a new record for revenues of R$4.7 billion and increased a return EBITDA to R$1.2 billion, the highest level since before the pandemic. Let me share how we got there.

2022 was characterized by the rebound of demand for air travel in all segments and this beats in the fourth quarter. We served more than 200 markets and ported approximately 8 million passengers, 90% of GOL’s fourth quarter last year. We operated more than 700 flights a day in December as post-holiday bookings and the recovery of business demand led to the strong ticket sales. Our supply measures in ASKs grew by 29% during the quarter, in part this is due to the resumption in corporate demand as workers returned to the offices and this strong and resilient demand of the leisure passengers. In line with this recovery, or flights frequencies increased by 26% when comparing to the fourth quarter 2021 and we reactivated frequencies in corporate markets predominantly in the downtown airports of Congonhas and Santos Dumont.

At the same time, our aircraft utilization continued to improve and we maintained our load factor around 80% during the quarter reflecting our focus on improving our operation fleet delivery as we expand our network. We are still serving a rational pricing environment among industry player and the resumption of strong load factors which in the GOL’s case were followed by an incremental combining offer of seats and profitability. GOL has the lowest unit cost in the industry and plans to reduce it even further to generate a faster recovery of its operating margin and increase efficiency. In the fourth quarter, in order to partially offset the effects of the jet fuel price increase, our recurring unit cost ex fuel decreased by 17% when comparing to last year to 3.6 cents a dollar.

By acting assertively and managing capacity, controlling costs and improving productivity, we maintained growth of our revenues in our operating results during this period recording the highest quarterly revenue figures in the GOL’s history, 62% and 24% above fourth quarter 2021 and fourth quarter 2019 figures respectively. It is also important to note that 25% growth in yield and 25% expansion in unit revenue, RASK. This yield is more than 45% higher than the pre-pandemic figures in the fourth quarter 2019. 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 on preserving profitability and liquidity. We are highly committed to run an efficient operation and as our results show today, our productivity standards are getting better and better.

By generating higher revenues and reducing costs we are making significant progress on improving our balance sheet. By 2023, we expect that our ability to drive operational efficiencies will be our main competitive advantage. This will be critical in continuing to win the business of our customers and growing market share in the current economic scenario. Similar to growing profitable market share is expanding our offer in both domestic and international markets. In the case of the former, we expanded our presence in the regional markets during the quarter. The company has increased its offer to Rio Janeiro by over 40% during the high season. In addition to achieving a record level of seats available at Congonhas airport. In November, we announced the expansion of our operations in the Midwest connecting capitals in the region on direct flights to the south and the northeast regions during the high season.

In the international markets, we have added more frequencies on the Brazilian Orlando routes and we have now raised new flights from Congonhas airports to Rio Janeiro to Montevideo. We have also returned the series of Córdoba and Rosario which represents the return of 100% of pre-pandemic destinations in Argentina. I also want to highlight the beginning of our operations between Manaus and Miami connecting the north of Brazil to the United States. We have that in the customer experience at every stage of the travel journey from the continued refreshment of our reach with next generation and far more fuel efficient aircraft to technology investments that are providing our employees better tools and our customers a more seamless experience.

This quarter, we took delivery of one new Boeing 737-MAX 8. Ending the year, we had 38 aircrafts of this model, approximately 26% of our total fleet. Our goal is to achieve 50% of our fleet composed of the Boeing 737-MAX by 2025. The GOL brand was recognized as Top of Mind by Folha de Sao Paulo for the fifth time in a row. This recognizes our commitment to customers and strengths our presence in all segments. Turning to our loyalty program with Smiles Customers base reached approximately 21 million and revenues were BRL1.1 billion in the quarter, almost 35% higher when comparing to fourth quarter in 2021. The customer base at Smiles has evolved continuously demonstrating its potential in a scenario of increased volumes of Gol operations. Synergies were generated from tax management and seats inventory, important levers that optimize GOL’s working capital and liquidity.

I would like to conclude by highlighting the results produced by our Team of Eagles. And that we were projecting also next year in 2023. The actions we have taken in the recent years has put us in a position of strength and enable us to have a competitive position to extract maximum value creation for 2023. I now turn the floor over to Richard who will present some other highlights. Richard?

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Richard Lark: Listening our call today from our hub in Brasilia which is one of GOL’s big hubs. That’s where we have direct flights on access from Brasilia to Miami and Brasilia to Orlando and just a point of curiosity that the flight we are doing on the Brasilia Orlando flight is the longest flight done to-date on A-737. And I am here with some €“ at GOL’s headquarters with Mario who will be participating with us in the Q&A. GOL’s detailed analysis for the quarter, you have in the earnings release and the presentation that are made available on GOL’s investor relations website and also on this webcast platform. So please access those there is some additional information, as well in the presentation. Revenue in the quarter was higher, in the fourth quarter of 2022 was higher than any fourth quarter in GOL’s history.

As Celso mentioned the domestic and short haul international markets continued to lead the way as GOL judiciously added back additional capacity into these markets and routes. The management of working capital, together with the increase in accounts receivable and advance sales of both tickets and end miles has enabled GOL to maintain and finance the pace of growth necessary in a very challenging market environment and enabled operations in the high season with a reduction in unit costs, while at the same time maintaining fare levels. The transformation of the GOL fleet to the Boeing, which is in part guided by enhanced productivity and reduced unit costs. Yield and RASK in the quarter showed increases of 25% over the same period of €˜21, reaching 48.2 and 41.6 cents in Real respectively.

We increase average fares demonstrating our experiencing in managing variations in both fuel prices, as well as the exchange rate. GOL’s reccurring EBIT and EBITD margins reached 15% and 25% respectively. Our recurring EBITDA totaled R$2.8 billion in the full year of ’22. As we plan to maintain these new levels of yields and unit costs together with the resumption of capacity, back to pre-pandemic levels, we are maintaining our financial projections for 2023, which incorporate a more robust nominal EBITDA generation. In the fourth quarter of €˜22, we achieved approximately a 12% reduction in GOL’s Recurring CASK excluding fuel measured in dollars, compared to the fourth quarter of ’21. We will continue to be impacted by high oil prices the range increase of around 7% compared to the fourth quarter of €˜21, which along with higher costs associated with the oil supply chain and logistics, and refining have represented an increase of approximately 44% in the average jet fuel price denominated in Reais paid by GOL here in Brazil in the same period i.e., 44% increase in GOL’s average jet fuel price.

Q4 of €˜22 compared to Q4 of ’21. As for cash flow, as for GOL’s cash flow in the quarter, GOL had generated R$5.3 billion of operating inflows. This resulted in a positive operating cash flow of R$2 billion excluding interest expense, despite the impact of higher jet fuel prices. In the fourth quarter of ’22, we concluded the issuance of senior secured amortizing notes in the amount of $200 million, which allowed the extension of financial obligations with lessors mainly due to leasing deferrals and improved GOL’s expected cash flow for 2023. These secured amortizing notes have a collateral of unencumbered receivables and represented an average cost capital to GOL of 4.3% per year, and also added a new innovative initiative to the company’s liability management toolbox and this was done even in the midst of a capital market environment, which was not conducive to new issuances.

At the end of Q4 GOL’s total liquidity had increased by 13% to a little over R$4 billion and in pro forma. for the issuance of senior secured notes due to €˜28, which was finalized on March, 3rd in Q1, Pro Forma, for that GOL’s total liquidity would have been R$6.2 billion and you have some more detail on that on page 18 of the presentation put on the website and the webcast platform. Leverage is measured by the ratio of net debt using the seven times annual lease payment convention and excluding the perks divided by recurring LTM EBITDA was 9.5 times on December 31st 2022. This is about 0.2 times lower than the leverage at the end of 2021 and that includes the issuance of the $200 million of senior secured amortizing notes that happened in the Q4.

So a straight reduction in leverage but a substantial re-profiling of the maturity profile. Excluding payments made during the fourth quarter for deferred lease obligations, the leverage ratio was around 9 times and if you use – if you calculate aircraft debt under the IFRS 16, convention GOL’s leverage was a little over 6 times at the end of 2022. In the first quarter of €˜23 GOL completed one of the largest liability management and refinancing operations in the history of the company and the airline industry through the issuance of $1.4 billion of senior secure notes due 2028 in a private placement to Abra Group Limited, GOL’s controlling shareholder. These notes bear a total interest rate of 18%, of which 4.5% is paid in cash and 13.5% will be payment in kind with that pick feature giving substantial cash flow relief to GOL.

And these notes are guaranteed by the IP and brand of Smiles, GOL’s market leading loyalty program. And also a pari passu lean on the IP brand and spare parts of GOL. This issuance included $451 million in cash for specific uses at GOL subject to certain conditions and approvals and the contribution and retirement of approximately $1.1 billion in face value of GOL’s outstanding bonds, which was comprised of 83% of the bonds maturing in €˜25, 61% of the bonds maturing in 2026 and 10% of the perks. These bonds that were contributed and retired have been cancelled, which represents a discount to par of $313 million for GOL. Pro forma for this transaction, the net debt of GOL will be reduced by over $100 million and will result in over $30 million of annual interest savings for GOL.

As I said, you know, this transaction represented one of the largest completed liability management and comprehensive refinancing transactions in both the airline industry and the in emerging markets. It also represents the tenth liability management or capital raising transaction that GOL has completed since the onset of the Covid-19, pandemic, on page 14 of the presentation, you have a summary of that. GOL did three transactions in 2025 and 2021 the senior amortizing notes in €˜22 and the senior secured ’28 notes now in €˜23. And so with that, we’ve completed all of our liability and capital management transactions as it relates to what we need to do during the pandemic. As a result of this liability management operation GOL attained a series of important benefits in capital structure and a significant improvement in its credit profile by increasing the average maturity of its bonds from 2.5 to 4 .4 years.

Also the access of up to $451 million in cash resources and the significant reduction in a annual interest payments with the cash pay rate reduction on GOL’s bonds on average from 7% to 8% per year to a level of approximately 4%. And we will continue to work on both debt reduction opportunities and investments in the business, while continuing to meet appropriate target liquidity levels. Of course, you know, GOL’s successful liability management during the pandemic positions us with the lowest short-term debt among our competitors and as we mentioned we’ve updated our financial outlook for 2023. And we’ve also included our Q1 €˜23 projections, which take into account the increases in jet fuel prices, and are also based on the preliminary results for the first two months of the current year.

For the first quarter of €˜23, we expect an EBITDA margin of 22% on net revenues of R$4.8 billion. Back over to you Celso.

Celso Ferrer : Hey, thank you, Rich. Demand remains strong as passenger return to the skies while there is some supply constraints continue. As the industry leader with a proven strategy and strong execution track record, GOL is well-positioned to build on our momentum in 2023. We are confident in our ability to deliver significant improvement in earnings and free cash flow going forward. I’d like to thank our Team of Eagles for their outstanding work in delivering this quarterly results and serving our customers during our very busy holiday travel season. They are the reasons our brand and our customer loyal is at the top of the industry. I’m incredibly proud of our team for rebuilding the region’s best performing airline and importantly, we are not just building back, we are continuing to improve and extend our competitive advantage. Operator. You may initiate the Q&A session.

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Q&A Session

Operator: Thank you. Our first question today comes from Michael Linenberg from Deutsche Bank. Please, go ahead with your question.

Michael Linenberg : Oh yeah. Hey good morning everybody and congrats on getting this financing done team. Quick just question here on the guidance for 2023. You pulled down the capacity a little bit and you sort of point to the supply chain issues, which I think you know everybody’s dealing with that. But then you sort of there was another sort of part of the sentence that talks about in view of expectations of recovery and corporate demand. And I’m just trying to interpret is it that the recovery is more gradual or more moderate than maybe what you were anticipating. And so that’s part of it. Just if you can clarify, what is meant by that statement?

Celso Ferrer : Hi, Mike. This is Celso.

Michael Linenberg : Hey hey, Celso.

Celso Ferrer : Hey. So, as you just said, I mean, we are, we are of course facing supply issues all over the chain. Not only on OEMs, but also in the whole supply chain and being in terms of parts and maintenance, and that’s why we are reducing a little bit the guidance. It’s a, it’s a slight movement down. We are also, like you know us, we managed the capacity on a very detailed way. So we do – first part of this year, for example we are flying 33% less in February compared to January. So we do this short-term adjustments based on the seasonality, but also what is happening on the industry as a whole. So, we this is the best picture we have from now and what we expect for the corporate, it’s not related to the – this capacity itself because the capacity for corporate, the main routes in the corporate market, we have just returned in the fourth quarter, especially from, Congonhas and Santos Dumont we rebuilt the strong network we have with the main frequencies between the – all the most important shuttles.

And those will stay and we are following close how the corporate demand is coming. It’s coming in a pace that was lower than we thought, but we are compensating this with other segments. Like I said, these are demand and also VFR and VFR is super strong in those routes. They are very resilient so we are managing a way that we are able to keep use at this level even though the corporate. And when I say corporate, I’m talking about the large corporate, because PMEs and other segments are already there. It’s just large corporates that is still like, going in a slow pace. I hope that now after carnival, and we are starting to see now beginning of March, we are starting to see a strong demand coming from corporate, but we are not assuming that we would stay for the whole year.

So we €“ you know us, we are taking this as a cautiously approach.

Michael Linenberg : Okay, good. Thanks. And then, just I guess, Rich, when we look at the aggregate principal amount of the senior secured, the secured senior notes due 2028 up to $1.4 billion. So presumably, where it is today is before you’ve incorporated the 13.5% pick per annum, is that the way to think about it, or

Richard Lark : No, no Mike. It’s the bond buyback portion was 1.1.

Michael Linenberg : Okay.

Richard Lark : And the cash portion is the 450. So that’s roughly. The, this is the mark via the bonds, there is some other components in there. There were disclosed OID and so on. But that’s, that’s at the beginning.

Michael Linenberg : Okay? So the 1:1 and then, it’s going to grow 13.5% per annum over the next five years. That’s the way to think about it, that’s sort of 1:1 is the base.

Richard Lark : Yes, it’s days outstanding for five years.

Michael Linenberg : Yes, that’s right. That’s right.

Richard Lark : That was designed to – I think, the focus should be on the 4.5% cash back, which is not something that GOL or frankly any airline would have been able to achieve on its own and that gives GOL a lot of flexibility to conserve cash. Then that overall cost there is also – if you include the pick component is significantly lower than GOL would have been able to do on its own. But it’s but it’s important to mention that ultimately, this will be a transforming to convert as you saw at the ESSN the exchangeable, very similar to the structure that GOL did back in 2018 with its first exchangeable. We did not want to issue the exchangeable from GOL in a distressed state. And so, the using of the of the debt mechanism, at the beginning allows us to remove the stressed component from GOL’s security prices and eliminates any concerns over the going concern issue, allow the market the price and the information about the what the impacts are on of this financing transaction before issuing an equity-linked security.

But the ultimate destination on this will be, it’ll be transformed into an equity-linked security, which, we described in the in the public announcements. And so it’s don’t like to be the SSN if you will. The notes would be outstanding for the five years still have a much you have order life. And that ultimately the idea is that this will be a equity-linked transaction. The cash pay component will not change and when that’s done at the appropriate time when it’s done, when all the dust settles on this and everything is stabilized and properly priced and trading in the market. It’s mandatory in Brazil that we offer preemptive rights to our PN shareholders and of course, we historically, voiceover that including to the ADR shareholders. So, everybody will have a bite of the apple when that rights offering happens at some point in the future.

We don’t know when exactly we will do that. But would likely be in the in the near future and all of GOL’s shareholders would have the right to participate that. That’s also a way of issuing equity at a premium to the market because, if you all were illustrate equity offering in its the stressed state with the market cap is, and with the size of this capital raising it would have had to come at a significant discount to the existing market valuation. So, the way we’re doing this in a sequence than well thought about way will allow when the equity-linked offering happens, you done at a premium to a more correctly priced equity price. And so that’s the – that’s part of the reasons for the more complex structure that you guys all saw in the announcements and so, it’s being done sequentially.

So that it wouldn’t, it would have any negative impacts on an equity-linked issuance on the market perception of the company in a distressed state. And so, we’re – we’ll see where the market is up on this and how the market prices all these effects in over the next couple months.