Investor Update

Jun 1, 2018

Hello, everyone, and welcome to Azul's Investor Update Call. My name is Paula, and I'll be your operator for today. This event is being recorded and all participants will be in listen only mode until we conduct a question and answer session following the company's opening remarks. I would like to turn the call over to Andrea Bocha, Investor Relations Manager. Please proceed. Thank you, Paula, and thanks, everyone, for participating in such short notice. Joining me today are David Niemerman, Azul's Founder and Chairman John Rogerson, CEO Alex Malfitani, CFO and Avi Shah, our Chief Revenue Officer. Before I turn the call over to John, I would like to caution you regarding our forward looking statements. Any matters discussed today that are not historical facts, 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 TDM and SEC filings. With that, I'll turn the call over to John. John? Thanks, Andrea. It was important for us to get in front of our investors today and give a little bit more clarity on the situation in Brazil and also give you an update on the aircraft sale. So as all of you are aware, truck drivers went on strike in Brazil against rising diesel prices on May 21, causing significant disruption in the economy over the last 10 days. Our industry was not immune to this. Only 2 airports in the country, the Garulhos airport in Sao Paulo and Galiano in Rio are fed by pipelines. All other airports in Brazil depend on fuel trucks. So some of the other airports which are stations all stations all over the country ran out of fuel, making it difficult for customers and crew members to reach our airports. While we recognize that the country is still recovering, we can say the worst is over and that we'll be back to flying our full schedule as of Monday, June 3rd. During the strike, we canceled 100 69 flights as the operations team did an incredible job in keeping more than 95% of our flights operating during this difficult environment. In addition, because of the reduced travel demand during the peak of the strike, we also proactively reduced our schedule by 5.23 flights. In total, we estimate that this truck strike will have a non recurring impact of approximately R50 $1,000,000 on our 2nd quarter operating results. Since the beginning of the strike, we implemented several initiatives to minimize the impact, including tankering fuel, technical refueling stops, waiving change and cancel fees for all flights and offering shuttle services to help our crew members reach the airport. This experience has been very similar to what a U. S. Carrier goes through when there's a hurricane. Our team did a fantastic job and I want to express my deep gratitude for their incredible efforts in taking care of our customers, our operation and each other during the last 10 days. In addition to the update on the strike, we wanted to provide you an update on our fleet plan. I'm pleased to let you know that we've been able to sell 6 E Jets this quarter, which will be replaced with A320neos. As you know, the replacement of older generation aircraft with larger next generation fuel efficient aircraft is key to support our CASK reduction and margin expansion plan going forward. The sale is expected to generate net cash gain of approximately $1,000,000 resulting not only in better liquidity, but also in a reduction of our dollar denominated aircraft debt of approximately R244 $1,000,000 and it will also reduce our leverage. Our goal is to accelerate this process as much as we can as this will allow us to be a much more profitable airline in the future. We also want to make sure that we hold frequent and transparent communication with our investors. We were with you in New York as well as Sao Paulo in the last couple of weeks, but times have significantly changed in Brazil, so we wanted to give everybody an update. We wanted to make it very clear, nothing has changed in our business plan. I've never been more excited about our future. We're the best crew members, the best network, the best customer experience and have a solid plan to continue to deliver superior value to our shareholders as we move forward. With that, we wanted to open the time up to you to ask any specific questions you may have as it relates to the fuel strike or the aircraft sale and make ourselves available. With that, I'll turn it over to the operator. Ladies and gentlemen, thank you. We will now begin the question and answer session. You. Our first question comes from Debbie Siet, Raymond James. Thank you. Good afternoon. Could you provide a little bit more granularity on kind of where the impact has been the greatest? Is it any specific region? Has it been just countrywide? And maybe is there a difference between how domestic versus international got impacted? Yes, Savi. As you know, we serve over 100 cities in the country. And so I think our impact is probably slightly more than our competitors. Obviously, the logistics of getting fuel in some of the more remote cities was even more challenging during this period of time. But I'll let Avi kind of speak to the revenue impact and kind of how he trends the network in response. But overall, it was the logistics of getting the fuel to all the various airports around the country. Hey, it's Avi. Avi here. Just to the second half first, domestic versus international, the impact was on the domestic network. We saw very little impact on international bookings or international demand. So the our international flights, we operated every single one of them. We had some tech stops, but it was a slight diversion. But and also the no show rate and the cancel down for international was normal, did not change. The impact was on domestic. And just to give some more color on kind of what we saw. I think that by the time the strike we were on Wednesday, Thursday of last week, as we started to see the fuel shortages in some of our airports away from Sao Paulo and Rio like Cuyahoga in the Midwest, Recife in the Northeast, I think the operations team did a great job of getting the hands around the operation. We did cancel some flights. We also had tech stops and tankering. So we were able to figure out the operation pretty quick. The part that really was big was the cancel down of reservations. Customers basically giving up on travel due to the uncertainty of not being able to get to the airport or conduct business at the origin or the destination. To give you an example, we would have a day with booked to 84% load factor the day before. The morning of, we'd be at 80% and we'd end up flying at 72% load factor. So really significant numbers in terms of cancellations being reservations being canceled as well as no show rates that were 15% in some cities, much, much higher than what we normally have. So that's what prompted us to take the significant trim our schedule basically for the remainder of the month through this Sunday. And I think if we had not done that, I think we'd be flying 60% load factor. So I think it was the right decision based on what we were seeing in terms of reservations being canceled and the high no show rates. But it was primarily on the domestic network. The international impact was minimal. That's helpful. If I just my second question on the do you see any kind of implications on maybe the payroll tax break being reversed sooner or any other kind of risk of kind of higher fees or taxes with what's going on in Brazil currently? Yes. So there's been a few measures that have taken place. And so both the House and the Senate passed the payroll tax, that would help the industry, or vetoed us along with all other industries with the exception of 1 or 2. And So now it goes back to the Senate. And so I think that's still up for debate, Savi. If it does get passed without the inclusion of our industry, it would go into place in 90 days. And so we've already gotten the benefit already this year and then even into the Q3. But we're working as an industry organization as well as with many other industries that were vetoed. And I'm quite positive that we should see a change there. But at this time, we don't have any news to report. All right. Thanks. The next question comes from Mike Linenberg, Deutsche Bank. Hey, thanks for doing this everybody. Just a couple of questions here. The $50,000,000 hit to presumably the way I think about it, that's maybe a $50,000,000 hit to EBIT. And if that's the case, how should we think about the underlying components? Like if we think about potential hit to revenue and then offset by a reduction in your variable expense, Like if we were to think about the top line hit, is it like a $75,000,000 EIS hit to top line offset, say, by, I don't know, dollars 25,000,000 dollars of variable cost. Can you just drill down into that number if you have that? Yes. Hey, Mike. Avi here. Yes. Hi, Avi. I would say that hey, so yes, I mean, in terms of the the biggest driver of the $50,000,000 is absolutely top line revenue due to the distraction. So we had a drop in bookings clearly at the end of last week and the first part of this week, large numbers of reservation canceled and high no show rates. That's why we took the measures to slim down our schedule because we know we knew customers were not able to make it and didn't really want to fly this week. So yes, the so I don't have the exact breakdown for you, but yes, the biggest piece by far is revenue. And we will have a small we'll have we'll add some savings in terms of variable because these are closing cancels. You save the fuel and you save the landing fees. You don't necessarily save a lot in terms of crew because they were already scheduled, but you definitely save the fuel and landing fees under passenger provisions. Mike, I think it's important as you take a look at on the cost side of things. Obviously, cost is down because of it. But what we ended up doing, as you know, in the state of Sao Paulo, fuel is 25% ICMS and other states around Brazil is significantly less than that. And so what we were doing is we were bringing fuel from high cost states into other states where we actually have fuel incentives. And so that it's not as much of a reduction as you would think on the cost side. And so that's and then also, Avi has said we had no impact on our international flights. That's correct from a passenger standpoint, but we operated to kind of give you an idea, we flew Campinas Galleao, Lisbon Campinas Galleao, Orlando. So there was incremental fuel burn and incremental landing fees and just to kind of maintain the schedule. And so there's a little bit of both in here, but we did everything we could to make sure all the customers were protected during this time. Okay. Okay. Now that's helpful. If I do the math on the $50,000,000 reais hit, that's based on what we think your revenue is going to be for the year. That's call it a half a margin point. So if I think back to your range for the year, whether or not whether we include this in it or not, it seems like that the range would still be intact because it's only about 0.5 point of margin in total. Is that a fair way to look at it? Yes. I think that's true, Mike. I mean, we reiterated our guidance couple of weeks ago. Obviously, this is something that happened. I think as we look at we're going to have the aircraft sale that's going to have a book loss. We typically like to set these things aside, but we still feel very confident in our 11 to 13. Okay, great. And then just one last one. The fact that you have cancellations as a result of this event combined with the fact these 6 airplanes are going out. Should we come away from this with the view that originally the range was 17 to 20 and you were hinting that you're going to be toward the lower end. Is it now somewhat more formal that we can come away from this and say 17% capacity growth is probably going to be the right number for 2018? Hey, Mike. Yes. So two points on that. So yes, I think as we said last week, we've already made schedule adjustments for the rest of the year that take us from the high end 20% range to about the 17.5% range. This certainly will bring down a little bit more. To give you an idea for the month of May, our completion factor was 97.5% and normally our completion factor is 90 9.5%. So it's about a 2% hit for the month of May, and you can annualize that. So I would say yes, in terms of our capacity guidance for this year, we're going to be at the low end of the range, definitely much closer to 17 percent than we are much closer to 20 percent in the low 17 percent basically. The other thing that's been very encouraging over the last week, I want highlight to the market, is that we're starting to see competitive capacity adjustments as well come through on the tape. So I'm starting to see the industry start to make capacity adjustments that are encouraging in competitive markets and other markets that really is the right time. And I think it sets up the industry and all of us well as we exit Q2 and get into July and beyond. And Mike, just one other thing too that I'd like to highlight. These DGS were prepped them for sale. This is the formal announcement because we actually came to an agreement with the leasing company that's going to buy the aircraft. And so they were the removal of these jets was part of our plan originally. But we're excited to be able to pay down the debt and bring in the cash proceeds as a result. Very good. All right. Hey, thanks everybody. Really appreciate it. The next question comes from Alberto Valerio, Citibank. Hi. Thanks for taking my question. Just one that remind for me. Any color on who is buying the E195 Embraer? Thank you. So usually, we've as you've seen over the as we've gone through our fleet transformation, Alberto, the demand for E-one aircraft usually comes from E-one operators, right? So there are plenty of E-one operators around the world. Obviously, the Embraer is a very successful aircraft. We've moved aircraft to in the past to TAB and other E-one operators. These ones in particular, the 6, are being bought by Elisor called Nordic, and they will be flown by LOT in Poland. Okay. Thank you very much. Ladies and gentlemen, Great. I don't think there's any more questions coming in. And so we'd be more than happy to take individual calls from investors or analysts that would like to talk to any of the management team. And we appreciate everybody taking the call today on such a short notice. We're working hard. We're going to do all we can to make up for the $50,000,000 hit that we took. And we're we got a lot more to do. We're just starting on kind of executing on our multi year margin expansion story. So we're pretty excited. So thank you everybody for your time. Ladies and gentlemen, that does conclude the Azul's audio conference