Q1 2021 Azul SA Earnings Call
Following what's happening in terms of vaccines and the reopening.
So that's really encouraging thank you and if I might the there is cargo stats that you shared today are John but were really interesting.
And is it fair to say that the cargo strength that youre seeing today is not really kind of a supply issue as it is for most carriers around the world and it's really been driven by demand and just you know what would it take to kind of grow that addressable market.
Yeah, Hey, Savi. So what we are seeing you know we went backwards and we looked at the incremental revenue Regenerated, Inc. Fourth quarter and the first quarter. The vast majority of that incremental revenue was domestic customers moving their supply chains from ground to air.
Sure.
And the electronics is a big part of it shoes clothing.
You know so well.
What we were able to the Dolby as customers is that this is going to make your business just move more goods quicker and they're realizing that.
And so the vast majority of our market share is increasing but its increasing because of mathematically has to some to of 100, but really what's happening is that the air logistics market itself is growing.
And so it's a shift in thinking it is a shift in how our e-commerce customers on industrial customers of our pharma customers.
Thinking about their logistics solutions.
And basically they're moving from ground to air, which is making which is speeding up their business, which is great for them.
And so we think there's just a lot of opportunity ahead now lately I would say the last two to three weeks, we've seen an increase in international we're flying 16 round trips of Brussels for example.
Because of reduced capacity on the international network, but the vast majority of our cargo growth is coming domestically from a shift in thinking.
Customers in Brazil.
It's an arms race zavvi with the e-commerce players and so the market caps of these companies are approaching $100 billion in Brazil.
It's pretty remarkable in order to justify that they need to deliver and they need to grow top line revenue of the best way to do that is reducing the time to delivery and that's where the duals network provides all throughout Brazil, not just in the triangle in the southeast of Brazil, Yeah, I sort of add one data point, we have access toward on 4000 cities and communities.
900 of them, we already serve with deliveries in two days or less right. So and there's a lot of improvement there to go so we get to a large part of the population of already.
102 days.
Alright, thank you.
Our next question comes from Josh Milberg from Morgan Stanley.
Yeah.
Sorry about that.
Everyone's heard of sorry about that congrats on the results.
And also on the big strides on stream of streamlining the business.
Just wanted to touch base on the issue of deferrals on.
I think you made reference of paying for some of those hospitals out of the period, but I just wanted to ask if you could elaborate on that and also on.
Your schedule of believe aircrafts, the least remember because of some of them.
We saw that the total.
Nominal long term of Ameren the refinish from because you reported came up by more than 2 billion at the end of the first quarter versus what you reported the.
At year end 2020, and just wanted to understand what went on there.
Yeah, sure Hey, Josh.
So if you recall of our management plan right. We went through all of our stakeholders lessor of suppliers banks on ask for deferrals.
Then the repayment of <unk> was essentially the start paying back suppliers in 2021 banks starting in 2020 through endless stories in 2023, right. So that essentially stays in place.
With the second wave.
If you recall deals all day slide that we talked about we're going to have cash flow operations.
Going to be positive and then that money is going to go towards paying down deferrals paying down principal and investing in the future to get the fleet back ready for the recovery right, mainly capex right.
That also stays in place, it's just that the cash flow generation from operations that we had budgeted because of the second wave is going to be smaller right. So we essentially took that shortfall and we went back to our lessors and back to our suppliers and we ask for additional deferrals. So if you look at our.
Schedule in our financial statements you have the annual expected lease payments there were <unk>.
Kind of shift a few hundred million realized out of 2000 and.
'twenty into 2021 on top of what you see there right and essentially that's going to take us to the.
Liquidity position that John mentioned, we're going to end the year was essentially the.
The cash position that we ended this quarter right 3 billion plus.
Plus because of the shortfall in cash flow generation from operations, we're going to negotiate additional deferrals from.
From suppliers and from the from a source of strength and Josh. It also wasn't prudent given the 10 per cent move in exchange rate quarter over quarter to make a significant amount of the U S dollar payments right and so that's another thing that impacted that balance that youre seeing that the exchange rate has already moved 10% back since the end of the first quarter from where we are today, so you'll see that kind of.
Total debt balance will be reduced just naturally because of the exchange rate move.
And the gross debt balance.
Balance.
It varies by a couple of drivers right, especially of facts, which was the the big driver here. If you look at the end of period exchange rate.
The big driver, that's always going to affect the.
On the operational lease liability.
<unk> adjusted every quarter by FX, So you know.
All of those up that goes up and as John mentioned dollars going down hopefully that's going to go down and in Q2, and then if we have additional aircraft deliveries, which we didn't have like we have a couple of spare engines and the effect of the the balance as well, but that number should stay obviously as we delever that nobody is going to grow that.
Number is going to go down but it's also important to note that we have a young fleet right and for those of you that haven't adjusted flow Ifr 16, yet of young fleet normally means of higher capitalized the lease liability on old fleet means of lower capitalized lease liability right. So you can't look at the lease liability of in the.
Airline with the young fleet on airline with an old fleet and comparison because of those numbers are not apples to apples I know you know that Josh but just the other people on the line I think it's good.
Yeah.
Okay. Thank you very much from that explanation.
Yeah.
Our next question comes from Mr from from Citi.
Hey, good morning, everybody and thanks for taking my question.
Definitely very intrigued by your mention of the.
The the business travel bounce.
On that you've seen sequentially.
And just kind of two kind of very quick questions around that.
The first when we think about your domestic booking curve kind of of any sort of high level color of what it looks like you know.
Close in and then two I'm wondering on the international side.
What kind of price point youre seeing so.
The U S. Trans Atlantic, we're seeing you know low volumes, but the.
Price point.
On the right direction, just would love to get your thoughts on that.
Hey, Stephen I'll be here, so the best news I saw in the last months when Jamie Diamond, though the.
He was canceling all of his zoom calls.
And in addition of fleet. He said that he was telling his clients that if they lose the business, it's because somebody else visited them and because Jamie Morgan did not.
And you know and that's great I think if you want people to travel so I think that thats, perhaps going to stop the set the tone here for corporate travel recovery, we know in Brazil.
Especially our base of corporate demand, which is much more fragmented much less dependent on a single region like Sao Paulo.
We actually lead the market the region in terms of corporate travel recovery. So.
We actually saw that happening prior to the second wave. It obviously took a bit of a pause, but now its coming back again, but I think that that sentiment that Jamie Diamond shared is probably shared with a lot of businesses and.
I mentioned this last time, even within our <unk>.
Sectors, we're seeing for example on the finance side.
One customer flying a lot more than the others like double and we know that the other day or competitors are going to try and catch up. So I think Brazil was actually the need in terms of corporate recovery I think it was going to lead in that context because of how net.
Network is.
Positioned in terms of the booking curve.
It's actually it's two things that happened as the fares have come up you actually end up with better revenue closing.
The cash close in revenue was a lot more dependent on average fares than it is in terms of volume. So we're seeing better revenue is closing, which is helping unit RASM.
Cause of average fares, improving and as we're seeing people get vaccinated and confidence in the reopening.
Seeing more interest for example in June and July as well, which is the our winter break here, so better closer in revenue from average fare and more confidence driving volume for the route.
In terms of international.
Happy that were back in Lisbon.
The.
The Portuguese government opened up flights to and from Brazil. So we're back the three times a week, increasing the five or six in the summer.
The Fort Lauderdale.
Three to four times, a week plus some cargo the fares are.
Wouldn't say, they're high but I think there okay, given the demand scenario.
Seeing some improvement but.
The restrictions still remain especially for Brazilians to enter both the U S and the EU.
<unk> the <unk>.
Key gating factor is going to be that the opening of the borders and Orlando as our next milestone, which we're still waiting for it. So all of international rollout is going to be disciplined it's going to be careful and it's going to be.
Based on what the market wants and needs.
We'll take that as it comes.
No very helpful. I appreciate that.
Our next question comes from Mike one of them back at Deutsche Bank.
Oh, Hey, good morning, everyone, Hey are the some really great information on bookings and pricing in the near term et cetera, I was particularly interested in the chart that you had where you show the regional differences in capacity.
Comparing the CFA.
The convenes in Sao Paulo, and I'm curious.
When I look at that chart is it that people flying in and out of our seafood or just far more risk seeking the nose out of Sao Paulo or are you just adding back more capacity, maybe because there's an opportunity to take share like what's driving that why is receive a bouncing back so much faster than say you know Sao Paolo.
Yeah, well, let's just reframe that the risks seeking a little bit please.
I would say I was looking for out of their line.
[laughter].
All of the our safety protocols and cleanliness are are great but.
I think the speaks to the strength of our network. It speaks to 115 destinations. It speaks of the fact that we have caravans ATR and Embraer <unk> hundred 20 of the 80 21, <unk> hundred 30, <unk> flying out of housekeeping.
All of them connecting two regional local and national destinations.
It's our focus on the hubs and I'll give you some numbers here Sao Paulo, Campinas, we are 116% Ricky.
Recovered compared to pre crisis.
<unk> hundred 19%.
But god Julio's, 42% right.
Because we're disciplined in how we are recovering with the recovering where we're strong.
Sure.
Having connect.
Connectivity, you know very strong connectivity in our network and that's giving us access the demand that nobody else has.
So I think it's just a little bit of the nature of the demand the demand is more connecting.
The demand is further out from these.
Places like Sao Paulo.
Please see the Midwest of Brazil, the north of Brazil. They don't have the same luxuries they have to get out of the Gotta do business are the.
We got off of their customers whether it's the.
Engineering, whether it's the consultant, whether it's agro business, where the infrastructure.
We are just simply much more exposed.
Does that kind of demand.
So we are flying with the demand as we're flying where we are strong.
And so I think it's the combination of our network. It's the combination of connectivity all the different destinations that we have.
And where the where the demand is right now so I also think of as important Mike just to highlight the <unk>.
Strength of the network matters, we've been telling you that over a 10 year period, we had more revenue and less cost than any of our competitors that's pretty remarkable for an airline that was previously in the third position. If you will the means that we're managing the revenue environment very closely we've taken care of the cost environment as well and it's the opportunity that we have and it does.
One of the only airlines in the world of positive EBITDA and certainly the only one in Latin America to do that in South America, and so it's the strength of the network that matters and that we will be able to build upon that as the recovery moves forward.
Yeah, and just one more data point, Mike right now we're around 115 destinations our plan calls for us to be of 135.
The next six months, so we're going to keep beating the the network connected and our hubs like Campinas, which is over 100% healthy fee of 120% of Belo Horizonte.
Of almost 100%, they're going to just keep getting stronger.
Yeah, I I have another question, but I want to add on to John about the network. You are the only airline in Brazil that does have the diversified fleet and as much as I know of complexity adds cost when I see how markets are spooling back of the one size fits all approach isn't going to work and so weather.
You have the caravan with whatever I don't know nine seats, all the way up to an 80 330 with more than 300, I just you're the only ones who can actually take advantage of that so I mean I I thought it was great that you did have that one the slide in there and maybe that's something that.
You want to reinforce.
I have another question I don't know if you want to comment on it Hey, Mike I, just I do want to comment on that.
Anyone can operate the single fleet type.
In the in the World a lot of the royalties do it but the kind of half of complex fleet like we do flying everywhere from caravans all the way the wide bodies. It makes the difference and that's why we're able to access demand you know keep in mind. There are more than 5000 flight changes. Okay think about that just year to date, where <unk> put the flight out there trying to sell it he can fill.
It is the media to get settled as of 320, he can sell it as an ATR. It gets out of the Caribbean and that fleet flexibility matters and that's why we're able to fly more than our competition and Thats why were more profitable than our competition, because we don't need to keep a flight in the market. When we can just down gauge at her up gauge it and have the right metal in there and it makes all of the difference in the world when you.
Bring on more of you to more <unk> hundred 20 meals and you bring in the most fuel efficient aircraft in the world and that's the competitive advantage that we have we've invested in that over the course of 10 years and its complexity, but it's crucial at this stage of the game.
Okay, Great and then just my second is just you know and I don't think of it was intentional or anything but there was really I don't think I saw anything in the release as it related to your your JV with with Latam I mean, it seems like that.
The bigger fish to Fry and other things to focus on and you wanted to get that out on this call on but the fact is the structure of the you know it's now been running up and running for some time any any any sort of nuggets that you can give us about you know how that is how you're benefiting from that and is that when I see it you know constantly referred to as the joint venture.
But are you really sharing revenue or is it more of a marketing agreement with code share and maybe I don't know of frequent flier reciprocity.
And the underlying mechanics would be interesting to know thank you. Thanks for the question, Yeah, Hey, Mike So actually just to be clear, it's not a joint venture right. It's the culture.
So from flow and co chair and we've actually.
The expanded with the Latam.
<unk>.
Happy with the results and I would say, we are happy and they're happy the.
Balance between each airline selling the other is actually almost very close to 50 50, which is very good.
We're selling a nice piece of local demand.
But also a very big chunk of connecting demand.
Hum.
We are not sharing revenues of just just what you fly basically and then Theres no joined the planning or pricing or anything of that so it's the frequently and co chair and I think it's allowing.
Each other to have access to a network that they probably wouldn't have otherwise whether it is due out of brasilia or Latam out of ACC right and that's allowing each of us to do what we do best.
And focus where we are strong and use the partner, where we're not basically so I actually think it's a win win I think it's a very good model around the world as well.
The in terms of the size. It is you know all.
All of the factors above all of the other cultures, we have combined right, which are of international to domestic because of the domestic domestic culture of the volumes are much bigger so.
Yeah, I think I think we're happy I think theyre happy with it and our intent is to keep growing it as the airlines grow and recover the networks.
Very good thanks, everyone.
Thanks, Mike.
Our next question comes from Dan Mckenzie of Seaport Global.
Yeah.
Hey, good morning, Thanks, guys a couple of housecleaning questions here I guess, just clarification questions. The logistics market in Brazil at 300 billion is that today or is that some point in the future and then you know as you kind of look at the 45 billion dollar addressable market from road the air.
You know what percentage of your share are you targeting any of that saying two to three years.
Yeah, Hey, Hey, Dan So yeah. It is 300 billion reais.
On the total cost of 300 billion.
The ice total today.
This includes everything right so agro.
The construction material all of that kind of on yeah.
When we look at.
Addressable so electronics you know.
Clothing that kind of stuff. It comes down to 45 billion, Hey, ice per year today, right and Thats and Thats the market that we're gonna efficient I think our market share, which is about 33% to 35% today is going to be of consequence of how much we can help grow the air.
The logistics market.
We've shown that we've grown faster than the competition, but because we've been able to grow the market and able to create new opportunities for example of our law.
<unk> business Flyers, the destination Halo Bronco that we don't even fly on the passenger side and we do it with the Embraer Air <unk>.
Been adapted from passenger to cargo ops, because it's the perfect load trip cost of airplanes.
The access new markets, that's exactly what we did on the passenger side 12 years ago, and that's what we're going to do and we are doing on the logistics side. So you know I don't have a target for market share I think it would be a result of our work, but our goal our target is to fish and the.
45 billion Ocean and.
If we're 1 billion Reais per day, and we have 45 billion worth that we can capture gives you an idea of how much we can grow.
Yeah.
Understood Okay.
Yeah very interesting.
The $4 billion goal that you laid out for 2022 did I hear that was an EBITDA goal I guess that was another clarification on clarification question from me and then if we just simple math macro factors. Aside you know what does the path back to net profitability look like and what kind of growth you know or not gets you there.
<unk> you know potentially the later this year or next year.
I'll, let Alex kind of walk through the details of how we get there, but keep in mind, we've reset our cost structure. We're a much leaner organization going forward. We show the operating leverage we have on the cost side and we will grow this business back to where it was pre COVID-19 and beyond I mean, we if you take a look of these numbers in the in the EBITDA.
That we produced in the first quarter.
I think we had a negative 11% EBIT margin.
Clearly way ahead of any of our peers in the region, but as but we have the capacity of the fly 40% more E. S case with that think about that per second right and then as you layer on fleet transformation going forward, that's where you can see the leverage in the past back the profitability and again, you're taking a look at the first quarter was.
It was a challenging quarter for us from a fuel perspective from a currency perspective, the currency of one month ago with 574 is 528 right now I mean, just to give you an idea of the move that we've seen just in the last 30 days and why we're optimistic the first quarter. We had very few people vaccinated throughout the entire country by the end of the second quarter.
You can have almost the entire priority group in Brazil vaccinated.
We're seeing the demand recovery in the United States and that was in a developed market, Brazil is a developing market that still has not reached its full potential but I'll kind of let Alex kind of walk you through step by step to get to the 4 billion of EBITDA, Yeah, I think the.
The key here is operational leverage right now we are down.
We showed you what we did in Q1, you know obviously the dollar on what's happening with fuel prices, where cloud I think just how remarkable the operational leverage is that's why we wanted to show you what the normalized cash would be right. As you know, we don't like cask ex fuel because reducing fuel burn and reducing carbon emissions is a big part.
Part of our plan right, we're going to continue our fleet transformation as soon as we can and that's going to reduce fuel burn. So we much rather look at what we call.
Normalized cash.
Keeping fuel and FX constant and our cash would've gone down 10%. This quarter. If you will in effect put stayed flat right and we're still flying the airplane about seven hours a day in Q2 right now.
We've flown them 12 hours a day.
Uh huh.
Periods in the past so the overhead that we have is paying for those total 12 hours a day, but we're only getting seven hours a day right now.
Span of demand all of where obviously only flying the demand that exists today, but obviously the men's is going to improve and we're gonna be able to go from seven hours a day, the 12 hours a day and reduced cash significantly on top of that we have the.
Higher efficiency right. We always said that we were not going to rebuild the airline with the same cost structure as before so we're certainly going to be more efficient on the overhead side, we're going to be more efficient on the airport side more efficient on the at the <unk>.
Call Center, the more efficient in terms of maintenance, where we have more people, but we're in sourcing maintenance and paying a lot of less to have our maintenance events the them.
Right, but if you if you want to afford it from 2019 I think it's essentially the same story as we had in the assortment. We are assuming the corporate it's probably going to be a bad guy.
We have.
You said there are positive signs from from corporate but we'd like to be conservative. So even if you assume the corporate will not come back when we're back to a 100% operation you have a partial offset from leisure, which was certainly stronger than it was before sort of especially domestic leisure you have a more rational.
Competitive environment and that includes the law firm culture, but certainly beneficial to us on is adding additional revenue, though we didn't have before and we have more efficient airline than what we had in.
In 2019, so those are the kind of the building blocks that allow us to get to a higher EBITDA than before now.
It could also mean, we have higher revenue from 2019 because when.
When we get to.
Paul Operation I think Theres a lot of capacity that we can extract from the current fleet that we're already paying for.
Yeah.
Very good.
Thanks, Alex if I can just squeeze one last one in here. The you know this idea of of travel passport that IATA is working on.
What is the view here at the government level is it of potential solution to open up some of these international markets.
If you have a you know.
A vaccine on your travel passport.
I guess, what can you share about the Brazilian government you know of travel Minister doing anything here to help open that up or you know, what's what's the the path back to opening up some of these international markets.
So the minister of Tourism here has announced the Brazil supported I mean, this is something we're used to right theres yellow fever shots in order to travel in Brazil, and the rest of the Latin America, we don't see it as the problem and we know that all Brazilians Wanna be vaccinated I shouldn't say, all but most presenting sponsor of the estimated the very eager to do so, but we do not see that as the problem and we.
Hopefully that can open up borders sooner rather than later.
I see okay. Thanks for the time guys.
Thanks, Dan.
Our next question comes from kind of little Lima, which kept the house.
Yeah.
Oh, Hey, guys good morning.
Thanks for taking my question.
Just a follow up on the previous question.
And you guys decide to sign the tomorrow on the.
When they break it down of the on the.
Perhaps the best way.
I'm just trying to understand.
How you guys are seeing huge with COVID-19 and how that.
Have you seen the future of course, 2020 true and also just trying to understand if it changes a little bit from international side on bats are not from the previous presentation for Q2 of them.
Yeah, Hi.
You know us.
I have improved especially over the last couple of weeks.
The of reopening have accelerated.
In Sao Paulo, mostly and in other parts of the country.
But the process is gonna be consistent right. There's still more work to be done I think we need another probably 15% to 20% in terms of average fare.
And I think the industry wants to get there right in fact, the industry needs to get there.
And that will happen as the vaccine keep making progress and the.
And the economy keeps opening up so.
You know when you will see that in the flown data will take some time. So it's now going to be in of <unk>. It's too soon you will see a little bit of <unk> Q and Youll see most of it in the fourth quarter, but.
Our our plan we're working on is to exit the fourth quarter with those views in place. So that we can half of 2022, that's mostly a.
The standard 2022 with the pre crisis yields.
Based on all of the progress that we make this year and I think the industry overall and needs to do that.
The goodwill I think of as the demand starts to come back and the confidence increases for everybody that that is the only path forward for everyone just to get back to the earnings potential. So we've seen good progress recently and I expect that that progress to continue and you will start to see that.
In the flow of data in <unk> very similar to what happened last year, we had very good yield expansion.
The expansion from July August September October and then you saw that in <unk>.
And then the very similar is going to happen this year as well.
The international side again, a lot of it is going to depend on depend on the borders.
I think vaccine passport is going to help or having approved vaccines that people can show to enter the countries is going to help I think places like Florida places like Portugal.
They need and want tourism, you're already seeing that with the Americans right Youre seeing places like Greece places like Iceland, even France talking about opening up the boarders for Americans, who had been vaccinated and I think places like Portugal in Florida, They need Brazilians.
For the local economies that have been impacted so strongly so I think that's going to be a very strong motivation for those kinds of economies to open up the Brazilians based on some sort of a vaccination or negative cash or some combination.
Over the next couple of months so the international market will depend mostly on that but I see steady progress happening on the domestic market and you will see that flow of data come in.
The <unk> onwards.
Alright, Thank you the.
Our next question comes from Victor on Mr. Sasaki mothers called the B I.
Yeah.
Hi, Good morning, I got two questions here.
The first one when you think of.
What kind of on the cargo.
The contributors to reduce let's say the reverse from revenue growth.
The as you mentioned during the course of.
Very attractive addressable markets.
So my first brush news.
Maybe art your maybe perhaps more of a charged part of students in order to reduce leverage.
The second one the crushing the audit financial statements.
The boat or perhaps of the lease receivables, which basically the third.
As of March the mall.
On the suburbs to many of range, let's suppose.
That's true but of no provision of wants to meet.
I'd like to go from the cause it's rooftops.
But if you do have.
Maybe it's because of the security deposits. Thank you.
Yeah.
We'll look at all options I mean, we are very bullish on our cargo business and I think that we've been approached by several partners. We'll continue to look at this business going forward.
It is certainly the story of the dual over the next couple of years I mean, you can see what fed ex U P S and others have done so.
So we're actively looking at it we've talked to bankers are we announcing an IPO of our cargo business at this time no, but we're going to continue to separate the P&L show results of people really see the value that our cargo team is driving but we're certainly not looking at selling it at this time, it's something that's very strategic to us and we know there's in the.
Enormous amount of growth when you look at that addressable market of 45 billion, we'd be foolish to sell it at this time right, where he led our team to go after it and try to get as much of that $45 billion as they can.
I know the on the sub leases.
Every airline on the World I think it's going through negotiations with the resource and in this situation, where all of sort of modeling seat.
Until the same type of deferral.
Concession that we obtained from our look source, our sublease of civil of cheese have also ask for it but it's actually a shorter of deferral than what we got from all of the source, we're still kind of dotting the i's and crossing the Ts we talked about the.
Secure deposits just so everybody can be comfortable that.
We have collateral to go get those receivables zone, but obviously the best way for us to maximize the revenue of the asked of us.
Tenure with the operating lease in place. So on the same way that we needed a deferral from all of the source and we were able to obtain from them.
Also on April and it's understandable pursue also negotiate a new agreement with all of the sublease space, but you know it's.
It's more of accounting or anything else, we're confident that we're going to get to an agreement and we will get those payments on it if we don't there is security force.
Okay. Thank you.
As a reminder, if you would like to pose the question. Please press the star key followed by one.
Ladies and gentlemen, with no further questions. This concludes today's question and answer session I would like to invite John to proceed with his closing statements. Please go ahead Sir.
Thank you for joining us today, if you of any follow up questions. Our team will be available and we appreciate your support and look forward to speaking with you in person over the coming months. Thanks, everybody.
That does conclude their sales the audio conference for today. Thank you very much for your participation and have a good day.
Okay.
[music].