Q4 2022 Azul SA Earnings Call
Speaker 1: My name is Zach and I will be your operator for today. This event is being recorded and all participants will be in your list of only modes 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.
Speaker 1: Bring your names and now, please turn on your microphone and proceed. For those who are listening to the conference on the phone, press 9 to join the queue and 6 check the audio when requested. I'd like to try the presentation over to the A's Harbily. You have to have a read that to your relations. Please proceed please.
Speaker 2: Thank you, Zach, and welcome out to Azure's fourth quarter early-school. The results that we announced this morning, the outdoor of this call and the slides that we reference are available on our IR website. Resizing today will be Dave the minimum, Azure founder and chairman.
Speaker 2: John Rogers, CLEO, and Alex Malfi-Toni, our CFO . I wish them the presence of a zoo is also here for the Q&A session.
Speaker 2: Before I turn it over today, but I'd like to caution you with the our four-dlooking statements. Any matters discussed today that are not historical facts, particularly comments regarding the company's future plans of objectives and expected performance constitute four-dlooking statements. These statements are based on a range of assumptions.
Speaker 2: that a company believes are reasonable but are subjected to uncertainties and risks that are discussed in detail in our CVM and FACFI.
Speaker 2: 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 phone over to David.
Speaker 3: Thanks, guys. Welcome, everyone. And thanks for joining us for our fourth call. As you can see on slide three, there is a lot to talk about today.
Speaker 3: 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 25 days to successfully reach commercial agreements for more than 90% of our aircraft leases.
Speaker 3: These agreements fundamentally change the financial future of our company. I'd like to personally thank our management team and our partners who have shown a tremendous amount of confidence in our business and for good.
Speaker 3: As you can see in the presentation, we have created the company, creates billions in cash flow annually.
Speaker 3: 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 record for a Zool. We generated 16 billion in revenue of 40% compared to 2019. Unit revenue was also a record.
Speaker 3: 40 points and cents of 26% from the full year 2019. Revenue performance is due to our structural competitive advantages.
Speaker 3: in our network combined with the strong growth of our business units made this possible. Our holy and unencumbered business units.
Speaker 3: I also had record results this year compared to 2019. Our loyalty program.
Speaker 3: And compared to 2019, our loyalty program tutored us to almost double this gross billing.
Speaker 3: Azul Cargo, our logistics business, is an impressive 153% in revenue and end of the year as Brazil's largest domestic air logistics provider. Finally, our travel business, due to Azul's biagings, grew $1.3 billion in gross bookings.
Speaker 3: Looking at 2023, we are excited at the opportunities we see. Later this month, we will begin flying our expanded network from São Paulo's downtown airport, Canguayas.
Speaker 3: more than double to 84 daily flights, which will serve all the largest corporate corporate markets. We cannot wait to show these new customers all that Azul has to offer. Overall, for the year, we expect 20 billion total revenue and EBITDA above billion.
Speaker 3: That's more than a percent increase in 2019. Moving to slide five, we show the development of our route.
Speaker 3: network and unreleaning focus building and expanding our competitive advantage. We serve 158 destinations and the Zool is the only carrier and 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.
Speaker 3: We recently announced exciting new destinations such as Paris and Curacao. Together with Miami, Fort Lauderdale, Orlando, Lisbon, and Montevideo, we are putting together a very relevant international network. In addition, our co-chair partnerships with United, JetBlue, TAP, and Air Europa, and T leakage of the hub,room home and space a contacts us with other directly user stall options such as awarded systemmable plus pros to walks run services. By the way, if anyone in this room has a vehicle uh, an wearing a sports car what do you take
Speaker 3: will allow us to connect our customers all over the US and Europe , significantly increasing our position in the markets.
Speaker 3: Finally turning to slide six, I'm very happy to say that 2020 was another exceptional operating year.
Speaker 3: in which we followed up with the world's best airline award, with the world's on-time airline award. Just last week, we celebrated this achievement in our hangar and with our crew members, and there was not a dry eye in the house. I think I even spot on shedding a few tears.
Speaker 3: I'm just so proud of this team.
Speaker 3: proud of this team. At John will explain.
Speaker 3: We have an amazing business which generates billions of re-icing cash flow from operations.
Speaker 3: We have built something very special. I'm so excited about what is ahead of us with that. I'll pass the words to John to give you more details on our fourth quarter results and our Go Forward plan. John .
Speaker 4: 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 Zool. 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 little absence to help us all.
Speaker 4: 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 airline in the world.
Speaker 4: As you can see on slide seven, revenue for the fourth quarter was another all-time record at 4.5 billion reais, 37% above 4 Q2 019. Yield also an all-time record was 50.6 cents, an increase of 16% compared to 4Q21 and 32% versus 4 Q2 019.
Speaker 4: We also had a record rask compared to 4 Q2 019. Our rask was up 27%.
Speaker 4: Operating income was 525 million reais in the quarter at an operating margin of 12%. Our EBIDA was 25% with an absolute value of 1.1 billion reais.
Speaker 4: This is even more impressive when you consider that fuel was up 116% versus fourth quarter 2019 and the currency devalued 30%.
Speaker 4: On slide 8 you can see the sequential improvement in our RASC.
Speaker 4: First you can see how significant and sustained the RASC 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.
Speaker 4: Second, you can see that for 2023, our assumptions are not aggressive. I know Obby and his team will always try to maximize RASC, but this chart shows that for 2023, we're just assuming what we've already achieved in 2022.
Speaker 4: Azul has one of the highest EBITDA margins among its peers, as you can see on slide 9. The strength and revenue performance, the improvements in the fuel environment, and the milestones such as our congonious growth, give you a clear indication as to the earning strength of our airline and why we're so excited for this year and beyond.
Speaker 4: On slide 10, we bridge our 4 Q2 019 results to 4 Q2 022. You can see the negative impact from fuel, currency, and inflation and how we were able to offset those costings, please.
Speaker 4: 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.
Speaker 4: Even more impressive is our strong cash contribution from operations. Slide 11 shows that in 2022 we had a cash contribution of 5.5 billion reais when comparing the cash inflows to the outflows from operation.
Speaker 4: We paid over 5.1 billion in rent and debt. These are significant payments that supported our de-leveraging process. As a result, we ended the year with leverage below six, 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.
Speaker 4: rent and debt payments and how they have grown since 2019.
Speaker 4: On slide 12, you can see that in 2022, we paid over 3.6 billion in aircraft rent, 1.6 billion more than 2019, mainly due to the devaluation of the Brazilian Rial, COVID rent deferrals, and our fleet broke.
Speaker 4: debt and interest payments also increased in 2022, as you can see on slide 13. In 2022, a zool paid over 1.5 billion in principle debt and interest, 1.1 billion more than 2019, mainly due to the debt that we had to take on during the pandemic.
Speaker 4: As a reminder, unlike subsidized airlines in the US 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.
Speaker 4: 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.
Speaker 4: Moving forward to slide 14, you can see our yearly results since we launched the Zuul and where the pandemic, currency devaluation and high fuel prices have impacted our results. As mentioned before, for 2023 we expect a full and strong EBITDA recovery of over 5 billion reais.
Speaker 4: That's more than one billion dollars of Yvda, the strength of our business is evident.
Speaker 4: On slide 15, you could see that from 2017 to 2019, a zoole consistently traded at about eight times EBIDA while we currently are trading at four times. It's incredible to think that just going back to a five multiple, which would still be well below our historical average, our valuation would need to triple.
Speaker 4: Moving to slide 16, we show what we believe is the main reason that our valuation is held back. As we showed you on a Zool Day, here you can see the net effect of the combination of higher cash outflows, recovering EBITDA in the lack of government financial support during the pandemic. We have continued to address these challenges through revenue and productivity initiatives.
Speaker 4: together with the valuable support of our partners. We made significant progress since 2020, and we've had previously projected a cash gap of three billion reais 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.
Speaker 4: Let me now turn it over to Alex so he can give you more details on this plan.
Speaker 3: Thanks, John . I'm really excited to share with you the details of what we have been working on, starting with slide 17.
Speaker 3: As you can see here, we have developed and started to implement a comprehensive plan that provides a permanent solution to our capital structure.
Speaker 3: significantly improves our cash flow and provides maximum value generation for our stakeholders by ensuring that they receive 100% of what was committed to them.
Speaker 3: We started implementing this plan by negotiating with our list source and on slide 18 you can see why. About 80% of our growth debt is related to our craft leases. Therefore addressing this debt in a comprehensive way results in significant cashflow improvements. On slide 19 you can see the progress we have already made.
Speaker 5: Over the last 45 days.
Speaker 3: 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.
Speaker 3: And I am confident we will reach an agreement with our remaining share. We have seen strong support from our partners as they understand that this is a smart business decision. It maximizes their return on investment. And I want to thank them for their support and confidence.
Speaker 5: Throughout this negotiation, we had zero aircraft withdrawals. In fact, our partners have delivered to us 12 additional new aircraft in the last few months, including 4-8-3-20 years.
Speaker 5: On site 20 we describe these last SOAR agreements in more details. So under these agreements subject to certain conditions and corporate approvals, the SOARs will reduce our lease payments to eliminate the COVID-related deferrals.
Speaker 5: They will also eliminate the gap between a Zoltz contractual lease rates and agree upon market rates.
Speaker 5: In exchange, LeSor will receive a tradeable note maturing in 2030 and equity priced in a way to reflect our new capital structure, our improved cash flows, and our reduced credit risk.
Speaker 5: Out of the total value that is being exchanged, which again is the reduction from both the COVID-related deferrals and the rent gap, the long-term node represents 40% while the equity represents 60%.
Speaker 5: Consistent with our reputation and our track record, this plan is designed to give La Source 100% of our committed payments through this combination of long-term debt and equity in a reset balance sheet.
Speaker 5: Moving on to slide 21, we have also engaged with our OEM partners, another vital stakeholder group so we can address our CAPEX requirements.
Speaker 5: With a similar comprehensive permanent plan, we're making tremendous progress with this group as well. Once again, we're committed to significantly improving the casual for the airline at the same time that we follow the principle of 100% recovery for our partners.
Speaker 5: And on slide 22 you can see the cumulative effect of this plan. In 2023 alone, we convert the cash gap of $3 billion that we have talked about from a negative to break even. The main items that were reduced or eliminated, as I mentioned, are the monthly lease payments, the maintenance capex, and the COVID-related deferrals.
Speaker 5: Remember, though, this plan does not cover just 2023. This is not a stopgap for one year only. The results of this plan go well beyond as you can see on fly 22. This is truly a permanent solution that aligns the interests of all of our stakeholders.
Speaker 5: and creates a balance sheet and cash flow generation that is consistent with our strong profitability. Now let me turn it over back over to John for the conclusion.
Speaker 4: 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. Tudo Azul, Azul Cargo, and our packaging business, Azul Viagings. We recently had them appraised by an independent firm, and in total, these fast growing businesses appraised at more than $5 billion.
Speaker 4: USD or 25 billion reais. Our comprehensive solution and its corresponding reduction of our credit risk combined with our growth in EBITDAH, cash generation and our valuable on- and corporate assets gives a strong confidence that we can access to capital markets when needed to invest in our growth at the hands of economics and all other? our persons and
Speaker 4: Finally on slide 25, we have to show you why we're so excited for the future. Our business is doing incredibly well. Obviously we'll 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?
Speaker 4: 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.
Speaker 4: With that, David Alex, Abid and I will answer your questions. Thank you for your time.
Speaker 1: Ladies and gentlemen, thank you. We will now begin the Q&A session. Remembering that, if you have a question, click on the Q&A icon at the bottom of the screen and write your name and company. Bring your names and outs. Please activate your microphone and proceed. For those who are listening to the conference on the phone, press 9 to join the queue.
Speaker 6: Can you hear me? Yes.
Speaker 6: Great, great. So, hi, John , Abby, Alex. Thanks for taking my question and congrats on the deal with lessons you recently announced. Just your question from our side. I was wondering if you guys could provide additional caller regarding the terms.
Speaker 6: agreed with the last or especially in terms of the equity portion of it. I was curious to see if you could provide a strike price. You agreed with them or if you could give somehow any color on the potential equity dilution from the deal.
Speaker 6: And second question, if you could please update us regarding the discussion with United Airlines.
Speaker 4: Is this something that is behind or is cushioned are still ongoing? Thank you. Let me start and obvious analysis can kind of add color to the question. First of all, obviously, today's price does not reflect a Zool's value. When you have a business that produces over a billion dollars a day to die, I think our partners recognize that. And so the strike price...
Speaker 4: And we're excited for them and excited for us. And it'll minimize delusion to the company because it's not being done at today's prices which don't reflect Azul's true value.
Speaker 5: 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 a Zool day, we talked about the 3 billion real cash gap, we talked about how it was the smallest cash gap since the pandemic happened. And we said that obviously the...
Speaker 5: you know, preferred alternative would be to access the capital markets to finance that cash gap. But if that weren't possible, we knew it could count on the support of our stakeholders. And we even provided, you know, some, you know, information that we were, you know, getting a lot of support from our stakeholders, that in spite of us being very public.
Speaker 5: about the cash challenges that we were facing, Lissores were delivering new aircraft to us. And we were seeing a narrative in the market that Lissores, you know, it made sense for Lissores to support airlines in 2020, but, you know, 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...
Speaker 5: has materialized, right? And it's not because the stores are nice or because they like us. I mean, I think they are nice and they think they like us, but that's not it, right? That is a, it's a good business decision. And they know that a company that produces more than a billion dollars in EBITDA a year, is not fairly priced at these levels, right? And so we will provide additional color over time. We will provide.
Speaker 4: 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 little lapsense. And so I think the market in our partners give us a lot of credit for what we've done. And they want to invest in the zoole going forward because they know it's a good business issue. I'll let Abby
Speaker 7: the US. We're always looking at opportunities, but there's nothing in the short term more than a commercial partnership to announce.
Speaker 6: Perfect guys, thank you very much.
Speaker 1: The next question comes from Bruno Amurin, a cell site analyst from GS. Bruno, we will open your auto so that you can ask your question. Please proceed.
Speaker 5: Hi, good morning everybody. So my question is on the unit revenue assumption for the year as you laid out your assumption seems to be conservative indeed. What can you comment in terms of this slatish rascal going forward in light of falling? Yes, definitely.
Speaker 5: Jet fuel prices have you been feeling the pressure from the market, you know, to lower units revenues or since you know everybody as we included needing to see higher margins going forward means that even under lower jet fuel prices the pressure is not there. Can you can you comment on that dynamic place?
Speaker 7: down 3% capacity domestic. And that was because of few prices and the adjustments we made to our network. Looking ahead this year, we're gonna grow about 15% total, but only about 6 to 8% domestic.
Speaker 7: And so we're not seeing the volume pressure or the load factor pressure that would cause us to sacrifice the hard work that the industry has done in increasing average fares. I think the industry did a really good job when the war started last year.
Speaker 7: And I think that overall we want to keep those gains. The customer is used to these new prices. Customers are not asking for lower prices. And in fact, as we talk today, we're just coming off the last seven days as John reference record booking revenues.
Speaker 7: And so we're seeing good momentum on the booking side. Our intention certainly is to be very disciplined on the average fair side, not give back the gains regardless if fuel goes down or not. And I think the industry overall wants to recover the profitability in the best way possible.
Speaker 8: Thank you. And then if I may just a quick follow up. So your guidance implies an EBITDA margin of at least 25% right? 5 billion EBITDA, 20 billion revenues. Should we think about the target as?
Speaker 8: around 30% which was the pre-pandemic level is that the level that you are targeting for the next couple of years or are you thinking differently?
Speaker 4: Yeah, you know, but there's no reason why it will shouldn't get back to those levels, right? And so, you know, we showed you what we did in the fourth quarter at a 25% EBITDA margin. We're going into 2023 with lower fuel prices, a strong revenue environment. And so there's no reason why this business shouldn't be there. So if we don't get there, it'll be a, it'll be a big disappointment.
Speaker 4: And we're not saying that we're going to get there in 2023, but we're obviously that's our target going forward. And we're going to continue to kind of go after it.
Speaker 1: Perfect. Thank you so much and congratulations. Thank you. Thanks, Ram. Okay, the next question now comes from Gabrielle Rezaengi, a website analyst from Itau BBA.
Speaker 1: We will open your audits today. If you can ask your question, Gabriel, please proceed. Thanks. Thanks. Hello, everyone. Thanks for giving us space to make the questions, two on our side as well. One regarding your announcement regarding the negotiations with Blasters.
Speaker 9: So just trying to confirm here that that's doing 23, 2030, it will not be comfortable, right? So just confirming that. And also just try to get a caller on what the cash outflows regarding should this that should be in the coming years until it is paid fully in 2030. And also on the operational front.
Speaker 9: I was just trying to get your color, your view.
Speaker 9: on what your expectations are for the room you have to recover things back to pre-pandemic levels regarding your passengers. So for example, corporate customers, they're still not back to pre-COVID-19 levels, just like to understand what is the additional room that you have to expand on those clients.
Speaker 9: and what is already incorporating in our guidance for a five-billion EBITDA in 2020-23 as well. Hey, Gabriel. Thanks for the questions, Alex here. Correct. The 2030 note is not convertible.
Speaker 5: In terms of cash outflows in coming years, that is additional detail that we are looking forward to providing to you over time once we conclude all of these negotiations. And like we said, this plan is a comprehensive plan that involves more than what we've done so far.
Speaker 5: But I think the main message is the negative 3 billion realize that we have for 2023 is going to be break even. And we had talked about a break even for 2024, which is now going to be positive and should be positive every year after that. Connected by The Connect, By the way.
Speaker 7: We look forward to providing you with additional details over time. Hey, Gabriel, about the opportunities, you know, I can just think of three quick ones. So corporate, you are correct. We are seeing about 85% corporate volume recovery.
Speaker 7: Revenue is above 100% because the average fares are 50% higher. So we are over 100% in revenue, but still corporate volumes are 85% and we expect that recovery to continue. Another great opportunity we have is our utilization. You will notice our utilization is still below our pre-pandemic levels.
Speaker 7: And that's for a couple of reasons. One is higher fuel. As you have higher fuel, you tend to reduce your flights that are at the end of the day, early at the day or nights and weekends. As fuel is coming down and stabilized at these levels, we are seeing opportunities to increase utilization, which is obviously very, very positive for EBEDAM.
Speaker 7: International, at the end of last year we were still only about 85 to 88 percent recovered in terms of our international network and by the end of this year we will be 100 percent recovered in our international network. So that's future opportunity as well. So –
Speaker 4: Overall, we've seen great momentum with the industry, with discipline, with demand, and there's still some significant upside to come. I just want to highlight a couple of things. We just removed the masks last week. Okay. So you think about where's the demand potential going?
Speaker 4: And Brazil, we just got over Carnival, mask finally came off last week. And so I think there's a lot of runway. Unemployment in Brazil is at a multi-year low. We're seeing good economic activity overall. And so I think we feel good about the macro environment here the first time in quite a few years.
Speaker 9: That's very clear, guys. Thank you.
Speaker 1: Okay, thank you. The next question now comes from Stephens Trent, Cell Site Analyst from City. Stephens, we're going to open your audio so that you can ask your question. Please proceed. Oh, great. Good morning, everybody. And thank you very much for taking my question.
Speaker 10: I was curious, I would just on a long-term basis love to get your view on a high-level basis on how you might be thinking about long-term consolidation in Brazil. Not only that, but also the solid results this morning.
Speaker 4: of revenue this year, the EBITDA performance, the cash gap closing, the cash flows going into 24 and beyond. That assumes no cooperation consolidation, anything along those lines. We'll study it if there's an opportunity there, but you know what? We believe so much in the core business that we've built. We've got 13,500.
passionate crew members that are kind of delivering on a daily basis to deliver an unbelievable great experience. And as I said earlier, one of the most profitable airlines in the world, we just had an overhang because of COVID and the devaluation of our currency. And we've addressed that. And we've addressed that in a big way. And as Alex said, it's not a stopgap. It's not a bandaid. We've addressed it once and for all. And we're ready to move forward.
I really appreciate that, John . And if I could just follow up real quickly on one item, I spent most of the last two months hearing from your US-based counterparts about challenges trying to find pilots. Now, how are you guys seeing it down there in terms of your pilots' apply? Thank you.
You know, Brazil has a really rich history of aviation. And so we have a great pipeline of flight schools that we partner with. We actually use even our caravan operation as a mini flight school inside of a zoo.
to prepare our pilots to enter into our fleet. So we're not seeing any constraints when it comes to pilots or even staffing overall. And actually we're actually more efficient right now. And so in terms of our overall staffing, but no limitations in terms of pilot hiring.
Okay, very clear. Thanks, Abhi. I'll leave it there. Thanks, Stephen. Okay, thank you. The next question comes from Stefan Stig, Southside Analyst, Bank of America.
That's why we're going to open your audio so that you can ask your question. Please proceed. Hi, this is Sahton Stink with Bank America. Thanks for being my question today. I want to ask on the new 2030 notes. Will these be secured or unsecured?
And can you provide any other details on the terms like size, interest rate, potential call schedule, things like that. And then my other question is on the capital plan slide. It seems to apply that there's something coming up with bond holders and potentially a new money component as well. Can you expand on what options you're seeing here as well as planning? Thank you.
Thank you. Thanks, Steven. The 2030 notes are unsecured. We'll, you know, we talked about we were very excited to share more details and as we normally do, right, I think you, you know, us for our transparency, we just want to be really finalized. Thank you.
with all of our other source before we do that, but we'll provide that information in due time. I mean, obviously, I think similarly to the valuation that we're talking about to the equity, the coupon, and the cost of debt on this instrument.
is nowhere near the levels that you're seeing on the screen. Because again, they do not reflect the health of the restructured company. The interest that we will pay will be reflective of the improved cash generation, the stronger balance sheet, and the reduced credit risk. And like I said, we'll provide that.
as soon as we can. Yeah, as it looks towards our 2024 bonds or 2026 bonds, you know, I think that that's a conversation we plan to have and you know, we'll have that with the bondholders, right? And I think that you can see how we treat our stakeholders and the bondholders are part of our stakeholder group. But as you look to new money and the unencumbered assets that we have, no one wants to bring in new capital to a zool to pay for COVID deferrals.
So the new capital that comes into a zool is to fund our growth going forward, strengthen the balance sheet. Have us continue to take E2s and A320 neos and that's the intention. You really can't go to the capital market using two to a zool or other unencumbered assets that you have to raise new capital.
just to pay back old stuff, right? And so this is a true reset. This is a true fix, a permanent fix of the balance sheet that works for our crew members. It works for our less sores. It works for our bondholders. It works for everybody. And so yeah, that is the idea. And I think the fact that we got through 2020 and 2021,
with five billion dollars of unencumbered assets, you know, I think the potential is limitless for what we have to to do going forward.
Thank you. Okay, thank you. The next question now comes from.
Daniel McKinsey, cell 5 analysts from C-Port Global. Daniel, we're going to open your auto so that you can ask your question. Please proceed. Thank you, I'm you, Dan.
scale. than
We're going to move on to the next one and if Dan can try again. Yeah, can you hear me okay? Oh yeah, you are Dan. Yeah, I'm so sorry about that. A couple questions here. One is just on the pace of a potential pre-tax earnings recovery. So, you know, just a question for Abhi here. Revenue strong?
Growth looks like it's going to be double digits into the weakest quarters of the year. So the question is, can a Zool reach a quarterly pre-tax profit in any of the quarters this year? Yeah, so I think the main key there, Dan, as you know,
The main volatility that comes on the net income line comes from FX, right? So I think assuming, you know, stable FX or even some tailwinds coming from that, yes, that is a possibility. You know, we don't give guidance on a net income basis. See you next time.
I think all of you that have modeled us for the last few years, you know that's probably the hardest line to model, but in terms of business fundamentals, you know strength of demand, you know unit cost, unit revenue, size, and especially with a restructured...
balance sheet, right? Because the operation is strong, generates a lot of profit, a lot of cash, you know, and now with a balance sheet and an interest expense that fits within the company and is consistent with the profitability of the company, you know, that's certainly a possibility depending on what happens with the exchange rate.
Yeah, that's exactly my question is with the restructure debt reduced interest expense It would seem like it'd be a lower hurdle for you guys to get there um and then you know is the plan to encumber you know or was Tudu Azul or the cargo business in Cumber It doesn't look like it was and I guess if it was not you know What was the thought process around not in Cumbering those because at least outside looking in it seems like
open to us at that time. I think it's a blessing that we got through the pandemic without income bring our assets, right? And so I think that now we're gonna play from a position of strength. We fixed the balance sheet with the lessores, which again, as Alex showed, is 80% of the problem. And so the fact that we have the security associated with our cargo business, associated with Tudu Azul, I think that provides the opportunity.
markets were open, there was no need to income the assets. You know, we could accept a reasonable cost of debt without income-rearing the assets and save those for a rainy day. You know, when the bond is trading at the levels that we were seeing over the last few weeks, that...
did not really reflect the fundamentals of the business or the strength of the support that we knew we could count on. It didn't make sense for us to issue any kind of security, even if it was collateralized, because it would be anchored on these rates. There's a logic here to see, because once we, everybody realizes.
that there's no risk to this company, that the company is going to continue producing above average or industry leading profits and growing, you know, we should see a cost of equity and a cost of debt that is more in line with the company. And then, you know,
providing some additional collateral to reduce that cost of that even further. That's the right time to utilize the asset.
Understood. Thanks for the time you guys. Thanks Jan. Okay, thank you. The next question comes from Victor Misusaki, sales side analyst from Bradesco BBI. Victor, we will open your auto so that you can ask your question. Please proceed.
for the second quarter. So how do we expect Latin to react as a zoo and go restriction the benefit? So do expect Latin to pull back some capacity. And then we're talking about, let's say, even the we're talking about for a little season, we're talking about higher yields than the higher margins. And the second question is regarding.
to this light number 21, what you mentioned about the OEMs and Capix.
So my question is if here we're talking about kind of a permanent reduction and if this only for 2023 and if this is a kind of permanent reduction. Can we say that maybe you're also changing maybe the the police plan you're I mean you're cooking about the deliveries.
and maybe you could get additional discounts. Yeah, I, I, Victor, you know, regarding industry capacity, obviously I cannot speak to let them directly, but you know, we've looked at the guidance that they put out. They go as also proud capacity guidance. And overall, we think the industry domestically is going to grow about.
8% to 10% this year versus 2019. So I actually don't think that that's that bad to be honest with you. I think it's pretty disciplined overall. I think we're going to be about 6% to 8% domestically the industry overall about 8% to 10%. And so I think everybody's being pretty disciplined. You know, yeah.
I think all airlines want to recover the profitability that we lost over the last couple of years. I think as I said before, the customer is willing to pay the prices that they're out there. We're not seeing drops in demand. In fact, we think demand is stronger than ever.
And I think airlines will adjust based on the load factors and the demand that they are seeing. So looking at overall industry capacity, I think it's gonna be about 8 to 10% above 2019 levels, which I think is a pretty decent overall, given the level of demand that we're seeing. You know, Victor, I just wanna highlight another thing too. I just wanna remind everybody that our capacity.
75% of it now and 80% of it going forward is on next-gen aircraft, A320neos and E2s, right? And so I think that's an important distinction. And the other thing that you highlighted, Azul's not going anywhere, Gol's not going anywhere, LaTann's not going anywhere, right? And so it makes sense for us to all act rationally in the market.
in price according to the cost structure that exists in Brazil today. And I think that's the big message, right? And so, again, we have more ASKs on next gen aircraft by a wide margin compared to our competitors. All right. And so when you talk about kind of the cost structure in Brazil, you know, we have the lowest cost in Brazil, you know, flying A320neos. We have the lowest cost in Brazil flying E2s. And so I think I think we're.
because the lessors, as we mentioned, represent almost 80% of our cash commitments. And we started talking to the OEMs about two weeks after the lessor. So the OEMs are maybe kind of two weeks behind on the sequencing. And similarly to what we mentioned on the lessors, once we are done with the negotiations with OEMs, we'll be happy to provide.
additional information. But the concept, you can already rest assured that it's the same 2030 note, same calculation for the dilution. So very similar concept and we'll provide that detail in due time. Hey Victor, one other thing I want to highlight is the OEMs are our partners. Specifically Embraer here in Brazil.
as well as GE, where we overhaul all of our engines in Brazil. Had we decided to overhaul our engines outside of Brazil, we'd have XM financing. And so one of the big things that we're pushing jointly with our OEM partners is, if I'm going to overhaul engines in Brazil, I should get access to financing of that. And so that's something that we're working with the new government on.
and Pratt & Whitney and Airbus and ATR, but they've been very constructive and very supportive. Why? They have a fantastic business and they see that.
bus and HER, but they've been very constructive and very supportive. Why? Because we have a fantastic business and they see that. Thank you.
Thank you. Okay, so the next question comes now from Michael Linderberg, sales side analyst from Deutschmark Bank. Michael, we will open your audio so that you can ask your question. Please proceed.
Okay, hey, can you guys hear me okay? Yeah, but you're good from Dutch and Mark. That darn autospell or auto, possibly. Anyway, hey, congrats on the news, obviously. Just a couple questions here. Here as...
you know as best as you can sort of give us on some of the numbers. Maybe Alex, when we think about you know your interest expense this last year it was 4.6 billion Ray eyes and when I look forward at least with the charts that you've provided. Does that as a result of these restructure deals?
Does that come down? What's the appropriate interest expense that we should think about going forward? Yeah, absolutely. It comes down my... If you remember, the 4.6 billion number, right? It's a big number for those of us that, you know, long for the days before IFRS-16, you know, that's... that it might.
rent payment is already included in that rent payment. Since that rent payment is going to go down, that interest expense should go down as well. We have a little bit of non-operating lease debt that will remain. That interest should stay roughly the same.
the 2030 note will have an interest component. Right? And I'm happy to provide that detail once we have it, once we're all done with this part. But the net result should be a reduction in the interest expense.
Okay, so that's helpful. And then in the release you do highlight or state that going forward, we should see a measurable reduction in in capex in 2023 and beyond. And the way I think about it is this last year.
you saw your lease liabilities go up by 1.8 billion. How, as I sort of tie that to CapEx,
Going forward, what is that number going to look like? Rather than giving me a CapEx number, what should we anticipate that lease liabilities would grow based on new airplanes coming in maybe 23, 24? Rough numbers would be great.
Yeah, that's an important question Mike because I always like to highlight that the catbacks that we're talking about does not include any new aircraft catbacks because for the next couple of years all of the aircraft that will be joining the fleet come from Lesore orders. So, the cat is related to new aircraft at the whole.
Capacts that you were seeing in our cash flow projections were for maintenance and they also had a big component of COVID deferrals. Stay holders, our OEMs also provided us with credit to get through the pandemic. They're providing us with additional credit. They are exchanging pass dues.
for the equity and debt structure that we mentioned. So the big reduction will come from the elimination of the COVID deferrals, and an additional reduction in the resulting or remaining maintenance setbacks through additional credit from.
The OEMs, and then as John mentioned, the credit lines that we are developing together, Azul and the OEMs, to make sure that this big part of our financing need is synapse, right? Because other airlines in the world that...
you know, maintain their engines, which is the majority of the CapEx here is engines on RE1. As they maintain their engines, they get financing and we've been paying cash for all of our maintenance events. Mike, it makes no sense to have the Brazilian development bank financing subsidized US carriers. Hi, Harriet. You think about it? All we do for Brazil, the jobs we create,
And again, I appreciate that, you know, yours.
You still haven't finalized everything, but again, I'm trying to get a sense of some of the impact here if I look at your leases
on your balance sheet at your end. Short term long term, I get to a number about 14 and a half billion. How much, like, can you give me just a rough number? Like, what percent is it half? Is it 40 percent that will tie to this 30, 30 note and the equity piece?
Is it some portion? Are you going to tell me all that is affected? I'm just trying to get a feel for how much of the CAP structure actually changes. And there is a deleveraging moment here too.
Hey Mike, if we think about it in the following way, you need to take our COVID deferrals, right? And that 60-40 split. And then you need to take a look at all of our aircraft and say, hey, how much was Azul paying for an Embraer versus current market? And that difference, and so, you know, it varies, right? Some aircraft, it's, you know, as much as, you know,
50% reduction in the rent in some it's you know Euro reduction in the rent right and so you know if you take a look at it and and you know But the big component is the COVID deferrals and then we did the market with the less sores But you okay, I said 90% were there right now the other 10% were negotiating with and and we believe we're going to get there So of that debt that you're seeing on the balance sheet
You know, all of it will be touched in some form, right? It doesn't matter. It means that it goes away, but it will turn into, you know, 2030 notes, some of it, and that, what is, some of it's going to remain, you know, where it is. But, you know, everybody's participating, everybody supporting the plan. And I think that's the most important kind of message that we want to have today. And I know everybody's dying for more details.
And this is a phenomenal accomplishment that Alex and his team have done in a 45-day period. Right? And so, why are we set 100 percent yet? Well, you know, quite honestly, we're going to get there. We're probably going to get there the next couple of weeks. Right? And so, you know, I've never seen anybody restructure their balance sheet in the speed at which Azul has done it and they've done it out of court and they've done it on an amicable way. Why? Because we have a
Okay, the last piece, and I still like that this is the most important piece from a deluded perspective.
And I still like that this is the most important piece from a delutive perspective. You showed up the chart, you said.
we're trading at 4.2 times. If we're at five, the stock would be a triple. I think it's what you said, maybe if I heard you. And then you threw up a bunch of charts and talked about seven to eight times and you sort of talked about, you know, the long term, you know, sort of where this company has traded. So if I think about where ultimately the equity is struck, it's not going to be struck at four times. I think you've been pretty clear about that.
and we kind of know the high end. And so it's somewhere in between, but it's clearly a lot higher from a multiple. Is that the right way to think about it? You're getting close, Mike. Okay. As you said earlier, we will give the details at the appropriate time, and I think that's important, but it's something that's great for our partners, it minimizes our dilution, it's great for our equity holders, right? And so I think...
That's the message today, right? We looked at all stakeholders, everybody wins. And that's what's most important here. Yeah, and as we think about why, right, we talked about why we're trading at four, it's either because the market doesn't believe our profitability or the market is seeing something different than us on a multiple basis. So it's not the profitability, right? We do think we're going to, our number is higher than consensus, but even if you just use consensus,
which is around 5 billion, right? Just adding one turn, which is 5 billion, you add that to the equity value that we had, not today, but Friday, to make the maximum. That's almost another 2x, right? So you take the 1x that you're starting from.
You had five billion on top of that, that's a three X. And then that's stopping at five X, which for a company that is one of the most profitable in the world, has cash flow generation, has lower leverage. Why would we be trading at five X when our average since we went public.
Yeah, now I think the market seems to be agreeing to some extent with your stock up over 60% right now. So very good. Congratulations again. Thank you for taking my questions, gentlemen.
Okay, thank you the following question comes from Igu Adavujo, cell site analyst, some genial envisionmentes. Igu, we're going to open your order so that you can ask your question. Please proceed. Hi, guys. Thank you for taking my question. Congratulations on the agreement with Lazarus. Just a quick follow up on the previous question.
Last year you talked about a reduction of around a 20% of the leasing costs from A1 to A2 aircraft, right? So what I would like to understand is do we continue with this assumption or does the new agreement change the level of cost reductions?
I understand, I don't need the exact number, but it will probably be last and that's right. Yeah, so just kind of highlighting what you talked about, you know, there's several E1s that we're paying, you know, north of $300,000 a month on, right? And this new agreement obviously reduces those to what the current market rate is, but the E2s were coming in at 20% below what we were paying. Obviously the-
and on a cost per seat basis is down 25%. Yeah, it was very clear. Thank you, thank you very much. Thank you. Thank you.
Okay, so the following question now comes from Jorge de Araúrjo, so I'll sign an the list from Bank of America. Jorge de Araúrjo, we're going to open your other so that you can ask your question.
Okay so the following question now comes from Jorge Araruzu, a sales side analyst from Bank of America. Jorge Araruzu, we're going to open your auto so that you can ask your question. Please proceed.
Hi, gentlemen. Can you hear me well? Yep. Okay, great. Congratulations for today's announcement.
So I have actually a follow up on this restructuring. I know you guys are going to provide more details when it's concluded, but only a direction on the expected impact on the balance sheet. So I understand there may be a reduction of leads liabilities, but also so incremental that instruments.
So unexpected balance sheet gains on that also in terms of operating these payments.
I understand that the deferrals has not been paid so far, so in terms of the level of payments that we see in current results and what is expected on the market to market on this repricing on rental rates going to market levels.
if the direction is downwards and if it's going to be relevant somehow.
if the direction is downwards and if it's going to be relevant somehow, left to leave by me.
There is some negotiations going on with the government in Brazil on taxes on jet fuel. Is there any update here on timing and likelihood?
negotiations going on with the government in Brazil on taxes on jet fuel. Is there any a few days here on timing and likelihood? Thank you very much.
Sure. So let me start with the expected impact on the balance sheet. Let me talk about it directly, Hujadio. First, you know, we see a lot of people using the balance sheet information. A lot of people using seven times rent, and I think there's even a segment of investors that are taking the balance sheet and kind of trying to calculate an average.
discount rate using an average discount rate to figure it out. Right. So let me talk about sort of the balance sheet impact if you are using IFR 16 and then the seven times ran impact. So.
That, you know, net, that gross that, or even leverage, was not really the problem, right? The reason why the market has been so nervous and there's been such uncertainty and volatility on our paper, was never a leverage and was never the level of debt that we have, right? We were able to issue...
that at 7 and 3 eighths, like John mentioned, when our leverage was in the double digits. And now that we are starting with a five, heading to start with a four, even before the restructuring, the markets a lot more nervous. So it was nervous because of the cash burn or the cash gap that we had in 2023, that we had projected.
or 223 and not because of the debt, not because of the leverage. Having said that, you should see a small reduction in that debt if you're using IFRS 16 and you should, you know, a lot of that depends on where our incremental cost of borrow will be by the time we finalize all this because for those of you that maybe are not too familiar with IFRS 16, I have to use.
my incremental cost of borrow to calculate the present value of the leases. I don't have an option. So whatever that cost of borrow is at the time, when we renegotiated our leases originally during the beginning of the pandemic, it was kind of in a 20%. We'll see where it is once we are done here, and that will determine a lot of what...
the present value on our balance should be depending on what that number is. But we believe with our estimates on what makes sense, you should see a small reduction in that debt if you're using IFRS 16. Now if you're using seven times rent, you should see a significant reduction in leverage, right? Because...
Even if you were doing it right and you were not including the deferrals in your calculation, if you were taking the recurrent rent, you're taking sort of the total rent payment, subtracting what was deferral related and leaving only the current rent and multiplying that by seven times. Because the rents are going to be reset to market values, you should see a significant reduction in the lease liability. It's going to be for-
for potential changes. So it does not impact the five billion plus EBITDA guidance that we're giving today.
But that's what we know so far. The way we always talk about government help, there's always a lot of talk. I think it makes sense for the government to stimulate travel in Brazil. This is a continental sized country where aviation can provide a lot of...
social benefits can generate economic growth, it can create jobs, and potentially there is something that's coming, but we never include that potential upside in any of our guidance, in any of our planning, right? If it comes, it will be additional upside. We're only including what is, you know,
known and that we can count on in our guidance. Fair enough, very clear. Thanks very much.
and that we can count on in our guidance. Fair enough, very clear. Thanks very much. Thanks, Ajay. Thank you.
Okay, that brings our Q&A session to a close. I would like now to invite John Rodgerson for closing remarks. Please on. I'd like to thank everybody for joining the call today and feel free to reach out to us. If you have any questions, we're really excited about what we were able to accomplish in such a short time. Thank you.
amount of time and there's a lot more work to be done. And so, you know, we look forward to updating you in the market over the course of the next two months. Thanks everybody for joining us. Okay, thank you. This concludes the Azure Zodiac conference call for today. Thank you very much for your participation and have a good day. Thank you.