Q1 2025 Azul SA Earnings Call
Hello, everyone and welcome charges first quarter earnings call. My name is <unk> and I will be your operator for today.
Is being recorded and all participants jobina listen only mode until we conduct a Q&A session. Following the Companys presentation.
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Speaker Change: Her name is analysis. Please turn your microphone on and proceed for those who are listening to the call for something to fall in the prices start 92 joined <unk> to accept the idea when requested.
Speaker Change: I would like to turn the presentation over to <unk> head of Investor Relations. Please proceed.
Speaker Change: Thank you Vic and allow come out as the fourth quarter.
Speaker Change: The results that we announced this morning, the out of this call and the slides that we referenced are available on our IR website.
John Rodgerson: Presenting today will be John Rodgerson CEO.
Speaker Change: Alex Lafitte early our CFO and Abbvie.
Speaker Change: Chief revenue officer, and President of ago I also here for the Q&A session before I turn the call over to John I'd like to caution you regarding our forward looking statements any matters discussed today that are not historical.
Speaker Change: Okay, particularly comments regarding the company's future plans objectives and expected performance constitute forward looking statements. These statements are based on a range of assumptions that the company believes are reasonable but are subject to uncertainties and risks that are discussed in detail in our receive them and SEC filings.
Speaker Change: Also during the course of the call we will discuss non <unk> performance measures.
John Rodgerson: It should not be considered in isolation with that I will turn the call over to John.
John Rodgerson: Thank you.
Welcome everyone and thank you for joining us today.
John Rodgerson: First let me begin by thanking our incredible crewmembers for their passion and dedication the first quarter for US all brought our return to operational excellence that our customers expect as we've shared many times before in 2024, we did not run the best operation due to the significant OEM issues. We experienced this was tough on our customers. Our crew members and had an impact on our result.
John Rodgerson: <unk> I am happy to report now that towards the end of the first quarter. Our operation is back I will give you more details later on this call but for now I just want to thank our crew members for their perseverance and hard work.
John Rodgerson: Turning to slide three I want to just highlight the sustainable competitive advantages of the <unk> business model. The combination of a differentiated network with unique fleet flexibility our high growth business units, our lowest unit cost in the region together with passionate crew members and supportive stakeholders is what allowed us to deliver the results we present to you today on.
John Rodgerson: On slide four I want to start with our network.
John Rodgerson: One, which we are constantly optimizing with a singular focus on profitability and the best use of our assets our aircrafts.
John Rodgerson: This network that is different by design with no nonstop competition and 82% of our routes representing 77% of our revenue a remarkable competitive advantage still we're constantly making changes to make it even better this quarter was particularly active in the month of March we suspended service to 14 cities. This.
John Rodgerson: In response to the high fuel environment combined with the revenue performance in these markets at the same time, we increased service and many other markets up gauging to fuel efficient Embraer E. Two aircrafts, especially at our Belo Horizonte hub. These.
John Rodgerson: These are just some examples of how we continuously strive to extract the best possible results from our network.
John Rodgerson: On slide five you can see that we're excited to report another strong first quarter revenue of $5 4 billion Reais with a RASK of 42.
John Rodgerson: That year over year with a 16% increase in capacity our EBITDA for the quarter was $1 4 billion Reais with a margin of 26% and EBIT of 571 million Reais in the first quarter, we were impacted significantly higher than expected because of the devaluation of local currency and irregular operations, which I will address.
John Rodgerson: Later on this call.
Turning to slide six I want to share the details on our revenue performance.
John Rodgerson: Overall, we maintain unit revenue flat.
John Rodgerson: With a 16% growth in capacity a strong result, overall, even more impressive given the fact that the major part of our year over year increase in capacity was in our international network due to low base from last year.
John Rodgerson: Normally this would have an effect on lowering unit revenues due to the longer stage lengths, but thanks to the demand environment and the contribution from our ancillary business units, we were able to overcome that effect. We are also actively using technologies in the area of revenue management tools and make recommendations on pricing yield management and ancillary revenue.
John Rodgerson: On a quasi realtime basis further, allowing us to maximize our unit revenue.
John Rodgerson: Turning to our business units I want to highlight their revenue contribution and impressive performance. This quarter our business units have done a great job of growing beyond the metal finding new and unique ways to increase our revenue outside of just ticket revenue on slide seven you can see the contribution of our high margin business units unrest, which grew from.
John Rodgerson: 19% in first quarter 'twenty four to a very strong 23% in first quarter 'twenty five all units combined resulted in positive impact of more than 480 million reais in the quarter accounting for 35% of our total EBITDA in the quarter.
John Rodgerson: On slide eight you can see the continued high growth from each of our beyond the metal business units. Our loyalty program now both 19 million members and a record high monthly active users.
John Rodgerson: Loan revenue was up 65% year over year and net unit revenue contribution was double compared to first quarter 'twenty for the combination of our domestic and international network airline hotel retail and banking partners has resulted in record engagement.
John Rodgerson: And results in our loyalty program, our vacations business continues to grow with gross billings up 56% year over year.
John Rodgerson: Upcoming neck network conditions, such as Port, though Mendoza bear largely in Madrid will continue to propel growth in this leisure focused business for years to come.
John Rodgerson: Finally, as all cargo our logistics business had a very strong quarter total revenue up 20% year over year.
John Rodgerson: International revenue up 62% and most importantly, our EBITDA doubled compared to first quarter of 2024 during the quarter. We entered into service. Our two <unk> hundred 21 freighters and they are becoming a key driver of revenue and margin expansion in the business. As we have always said our business units are a key part of our strategy and a draw.
John Rodgerson: River of unit revenue and earnings expansion going forward.
John Rodgerson: On slide nine I want to highlight the improvements we have made in our ancillary revenue.
John Rodgerson: Overall ancillary revenue was up a very strong 22% year over year and ancillary revenue per Pax was up 14%. These increases were driven by the growth in our premium products, such as business class and extra legroom seats together with a record activity in our loyalty program, we continue to see opportunities improving merchandising.
John Rodgerson: CRM and pricing. So we expect continued growth in the ancillary revenue per passenger metrics on slide 10, I want to highlight another key competitive advantage our co branded credit card with Ito. We believe we have the strongest cobranded program in the country with the highest percentage of premium cardholders, we already had the visa infinity card that.
John Rodgerson: Incredibly popular with spending of about one half of 1% of Brazil's GDP and this April were proud to launch the Mastercard Black skylight in premium credit card. This product further positions <unk> as a premium airline in Brazil, and expanding even further our base of high yield demand and revenue.
John Rodgerson: On slide 11, I want to turn to the cost side of the business, we continued to be the lowest cost.
John Rodgerson: Provider in Brazil. This includes the effects I mentioned on the costs, we are facing from operational impacts and OEM challenges as I mentioned in the opening and will show in the next few slides were significantly improving our operation and those inefficiencies are coming out of our business. We also continue to be laser focused on efficiency, whether that is in our aircraft utilization or our head count.
John Rodgerson: Productivity ground time at airports, we're focused focusing azula into a lean operating airline we have made significant progress so far but there's still more we can do.
John Rodgerson: Turning to slide 12, you will see two great examples of operational improvements that lead to efficiency. Despite all OEM challenges faced in the latter part of 2024 and early 2025, we were able to increase our aircraft utilization by almost 5%. This is a result of a combination of factors, including our network optimization strategy I mentioned before.
John Rodgerson: More new generation fuel efficient aircraft flying in our network and a significant improvement in our operational reliability. In addition to a higher utilization.
John Rodgerson: Leading to more efficient <unk> generation. The airline is also more efficient.
John Rodgerson: Delivering additional <unk> case with less head count our efforts to optimize processes develop new automation technologies alongside our passionate crew members resulted in a productivity being up 18, 9% year over year.
John Rodgerson: On Slide 13, you will see the impact on the SK generation from all of the challenges we faced in 2024 I would like to highlight two major factors. We began the year with the unfortunate floods in southern Brazil, a devastating natural phenomenon that turned 10% of our network offline overnight in one of the most profitable basis.
John Rodgerson: Shortly after the constant OEM challenges, we faced throughout the year worsened with several unscheduled engine removals and longer recovery time impacting our case for the second half of 2020 for these impacts were a loss of close in <unk>, which had a devastating impact to our customers and.
John Rodgerson: <unk> operation overall, however, since early 2025, working together with the Oems and our partners we're seeing.
John Rodgerson: Improvements in all operational areas, we've been able to close the gap and get back on track to our planned capacity generation.
John Rodgerson: On slide 14, I would like to highlight two examples of impacts disruptions trigger sure.
John Rodgerson: Our operations and customers that have been significantly.
John Rodgerson: That we've been able to significantly improve over the past few months are irregular operations as a percentage of departures has decreased by over 65% in the first quarter and continues to be a downward trend session.
John Rodgerson: Correctly to another great indicator, which is the average night's customer spend in hotels due to the impact to their booked flights during the past quarter, we reduced our average customer hotel nights by 75%.
John Rodgerson: Even though we made significant improvements during the first quarter, we were still impacted by the additional cost generated by the irregular operations and the customer litigation caused by it looking forward, we see a positive trend and expect these costs to improve during 2025.
John Rodgerson: Going forward on slide 15, you can see the improvements in the macro scenario to support our EBITDA generation in 2025 and beyond.
John Rodgerson: The real has appreciated nine 3% in 2025, which reduces our dollar denominated debt and expenses and improves our cash flow generation and reduces the cash outflow to pay down aircraft lease capex and interest.
John Rodgerson: We're also seeing improvement in the heating oil curve, which is down more than 17% compared to the January peak using the current spot price fuel expenses would have been $200 million lower in the first quarter, showing the potential upside to improve EBITDA and cash flow generation in the coming quarters.
John Rodgerson: Turning to our final slide I must highlight how the first quarter really shows how much is all has overcome a challenging year and is already generating positive results. Our unique business model has once again proved the value generation. This airline has at its core our enhanced approach to our network strategy are beyond that beyond.
John Rodgerson: Beyond the metal business units and improved operation have resulted in improved more efficient afk generation at the lowest cask in the country, while sustaining a strong unit revenue.
Certain that our competitive advantages will continue to prove how is always the strongest airlines in the region and yield positive results on a consistent basis I can't thank enough our entire crew member base for bringing back to our usual levels of operational excellence I'm proud of the unique business model, we have built together with that Avi, Alex and I are.
John Rodgerson: Payable to take your questions.
John Rodgerson: Okay.
Speaker Change: Ladies and gentlemen, thank you we will now begin our Q&A session remembering that if you have a question click on the kidney icon at the bottom of the screen and write your name and company name as announced please activate your microphone and proceed for those furnace initiative conference on the phone press Star 90 to join the queue and star.
John Rodgerson: <unk> requested.
Speaker Change: We will now.
John Rodgerson: Go to the first question <unk>.
Speaker Change: That will come from <unk> sell side analysts at Raymond James Savvy, and we're going to open your microphone. So you may ask a question. Please proceed.
John Rodgerson: Good morning, everyone.
John Rodgerson: If I might just add this.
John Rodgerson: A lot improvement you called out here.
John Rodgerson: The cost side, just operation FX feel.
John Rodgerson: Could you talk about how youre feeling about EBIT for the year.
John Rodgerson: How it should progress from here because it seems like maybe the seasonality and might be a little bit different this year, just given the momentum and macron operations.
John Rodgerson: Sure.
Yes, so Q1 I think.
John Rodgerson: Was worse than we expected, but it's early enough and also we saw a significant improvement going forward right. So when you look at the forward curve for oil when you see where the real is and there has been already some recapture in the first quarter right so, namely.
John Rodgerson: You'll alone the fuel expense line alone like we said was over 200 million Reais of a bad Guy when you add effects. That's another $100 million and then the irregular operations, but everything is improving right all of those items.
John Rodgerson: <unk> and irregular operations are all are also are all improving and we are still getting benefits on the demand side, we're seeing strong RASK, even with high capacity growth. So when you combine all of that we're going to work and we think we have enough time to still.
John Rodgerson: Deliver as higher EBITDA generation as we can even with the impact in Q1.
John Rodgerson: Okay.
John Rodgerson: Understood I appreciate that and I wonder maybe.
Speaker Change: Maybe a question for Avi could you elaborate a little about what you're seeing on the on the demand side just between corporate and leisure.
Speaker Change: It doesn't seem like there's been much of a head wind.
John Rodgerson: Some of the macro headlines that we've had.
Speaker Change: So what youre, saying.
Speaker Change: Hey, Savi, yes, youre right.
Speaker Change: I mean, nothing compared to what your anecdotally hearing in the U S right.
Speaker Change: Ex Brazil point of sale demand has been.
Speaker Change: Has been strong.
Speaker Change: Even with the noise in the U S. We didn't see any oscillations.
Speaker Change: In our U S business.
Speaker Change: National Network is a high end leisure network.
Speaker Change: So I think we are more insulated in that sense on the corporate side in Brazil, it's been very very steady we havent seen obviously, we've grown and the revenue has grown with us.
Speaker Change: And so we are maintaining our maintain that base. We had you can check.
Speaker Change: Our corporate travel agency shares we had.
Speaker Change: A 34% revenue share or the <unk>.
Speaker Change: The last report this is public data from corporate travel agencies. So.
Speaker Change: Brazil sort of local environment has been solid has been very steady Brazil point of sale internationally has been good as well.
Speaker Change: And we're actually seeing a growth year over year.
Speaker Change: In ex Brazil point of sale, which is revenue that's coming in euros and coming in both.
Speaker Change: Both of our international network as well as <unk>.
Speaker Change: Our domestic network so.
Speaker Change: I think youll see our unit revenues expansion into Q1.
Speaker Change: Is good so I think overall, a pretty steady demand environment.
Speaker Change: Very helpful. Thank you.
Speaker Change: Thanks Avi.
Speaker Change: Thank you. The next question comes from Andrew <unk> sell side analysts Bradesco and whenever you open your audio so that you can ask a question. Please proceed.
Speaker Change: Hi, good morning, and thank you for for this space here. So two questions from my side.
Speaker Change: The first if you could comment on your thinking regarding regarding the $200 million equity raised in terms of timeline and whether there are talks for an anchor investors.
Speaker Change: And my second question is Alex you mentioned that fuel was 200, but it has a tractor effects on other 200.
Speaker Change: And from the other cost line, which had the 300 330 million has higher costs.
Speaker Change: Year over year.
Speaker Change: In the release, you mentioned that it's mainly from the performance issues.
Speaker Change: How much of the 330 was.
Speaker Change: Performance issues alone.
Speaker Change: <unk>.
Is there a chance that as all will be compensated for it.
Speaker Change: By the Oems that's it thank you.
Speaker Change: Yes. Thanks, so on the equity raise I think just to remind everyone of the timeline right. We've reached an agreement with our bondholders with Sars Oems and part of that agreement called for an equity duration of that to happen in April we actually had three.
Speaker Change: <unk> equity offers over the last few months around <unk>, one for the controlling shareholders to bring in new money into the company and more recently the acquisition of 35% of our 29 and 30 notes. So we've been implementing the plan as agreed.
Speaker Change: That's why we had an equity offer in April now the markets didn't favor the timing, we didn't get incremental equity raise but we were successful in advertising a significant amount of debt and.
Speaker Change: Reducing our leverage right.
Speaker Change: Obviously, it would make sense for us to bring in additional equity capital, but we will find the right time to do that right. I think there is a lot of.
Speaker Change: Noise in the market both in macro terms.
Speaker Change: Understanding our overall restructuring and so I think things will come.
Speaker Change: Come down over time, and we will.
Speaker Change: <unk> continued to evaluate that opportunity.
Speaker Change: On the cost side.
Speaker Change: Yes fuel about $208 about 100 other was impacted like we set about irregular operations and just think about what that entails right when you're unable to fly and when you have closed in <unk>.
Speaker Change: Impacts from Oems like we did that creates a lot of disruption in terms of us having to re accommodate our customers in terms of meals hotels transportation sometimes.
Speaker Change: Transportation on other airlines that close in fares.
Speaker Change: So that was a big part of the increase in the other line also the other line that has a lot of components that are dollar denominated and the average dollar between Q1 of <unk> 24. In Q1 was $25 was almost 20% right now obviously as we have demonstrated the operations have improved.
Speaker Change: Significantly so we should see a reduction in customer re accommodation for legal contingencies going forward, but that absolute number is not that far from what's consistent with our guidance as well right. So even though there was a big increase year over year.
Speaker Change: The improvement that we see in a regular operations.
Speaker Change: Would be enough for us to continue on the path that we had outlined.
Speaker Change: Yes, and as for the OEM claims were in constant discussions with them I mean, we had eight wide body engine removals in the span of six weeks in the fourth quarter and that had a significant impact to our customers Avi was unable to sell close in revenue because we were just re accommodating customer.
Speaker Change: And when you.
You cancel people's flights on international Youre, putting up in hotels and moving people around so yes. There is claims out there to the Oems for sure and we're and we're seeking compensation similar to what you've seen with other airlines around the world and we'll continue to and we will continue to do that but we wanted to show as Alex mentioned and the chart shows there's been <unk>.
Speaker Change: Ignition again improvement in that just in the last 60 days alone. So we have more spare aircraft.
Available to us more spare engines and more engines, leaving the shop and so we expect a significant improvement going forward in this line item.
Yeah.
Speaker Change: Very clear thank you.
Thank you. The next question now will come from Michael <unk>.
Speaker Change: Lindbergh.
Speaker Change: And analysts to Deutsche Bank, Michael We will open your audio so you may ask a question. Please proceed.
Shawn: Hi, This is Shawn <unk> on for Mike. Thank you for taking my question.
Shawn: The first one just a follow up on <unk> question are you officially reiterating the $7 4 billion reality with all this year I understand that semi back half loaded, but just wanted to know if you like walking away from the guidance.
Shawn: Okay.
Shawn: Yes, we're not changing guidance at this time.
Shawn: Okay understood.
Shawn: For the second one is you have just may have on forward what is the share count that we should be using for the next quarter, assuming the net profit.
Shawn: Yes.
Shawn: We're also pleased that the share count dilution and get a bunch of transactions done post quarter end.
Shawn: Update on share count was helpful.
Shawn: Yes, the current number of shares outstanding after the acquisitions that we have done is 980 million preferred equivalent shares.
Thank you.
Shawn: If you have a question click on the Q&A icon at the bottom of the screen and write your name and company. When your name is announced please activate your microphone.
Shawn: Proceed.
Shawn: For those who are calling from the.
Shawn: From their cell phone.
Shawn: <unk> to join the queue and star seeks to accept the ideal plan requested.
Speaker Change: The next question now will come from.
Alicia: Alicia sell side analyst of Bank of America.
Speaker Change: We're going to open your August so that you may ask your question. Please proceed.
Speaker Change: Hey, John.
Speaker Change: So Alex I have it takes a lot for the opportunity I have a couple here.
Speaker Change: First one on liquidity second use digitally at the third quarter.
Speaker Change: Seasonality and cash flow. So if you could.
Speaker Change: Those on any potential credit line from the government that has been spoken in the past if there is any update there.
Speaker Change: Also we saw the tax bonds going to.
Speaker Change: Yes.
Speaker Change: Two two.
Speaker Change: Actually short term asset in the balance sheet.
Speaker Change: As far as in March 26th right, if I'm not mistaken.
Speaker Change: So what do you expect with the Texas bone.
Speaker Change: <unk> become a cash position same amount in the balance sheet in March.
Speaker Change: Is there any way.
Speaker Change: That it could be repurchased by tab before that.
Speaker Change: Would that require a haircut so how can we think about that line.
Speaker Change: My second question actually it's.
Speaker Change: Follow up from the equity offering.
I understand there is anti dilution clause for creditors that our corporate and converting that into equity and that these price.
Speaker Change: And offer could trigger further dilution to the vest or so.
Speaker Change: How can we think about this potential equity offering.
Speaker Change: In terms of this.
Speaker Change: Disclose what you expect.
Speaker Change: Could that be revised is there are there alternative.
Speaker Change: Because I understand.
Speaker Change: That this has to be concluded for the third phase in their restructuring to be concluded as well.
Speaker Change: Thank you so much.
Speaker Change: Are we going to take it taken pieces first of all second quarter.
Speaker Change: As we build up this summer and sell the summer peak, usually there is improvement in cash flow in the second quarter compared to the compared to the first quarter, but your question about the government line I think we've seen.
Speaker Change: Mouvement for sure they pass through <unk>.
Speaker Change: Initial approvals for the FTE line, which.
Speaker Change: It could be a couple of hundred million dollars worth of liquidity to the airline into each airline and so we're very positive on that we've been in constant conversations with the government around that line. So all things indicate that that will get approved fully in the next week or two.
Speaker Change: That's exciting.
Speaker Change: As forward as for the equity offering I'll, let Alex kind of give more color, but obviously that anti dilutive clause was not helpful.
Speaker Change: As we went through the process, we needed to <unk> debt that they have and what I would say is we're in constant conversations with the bondholders and so they asked for something initially that was to protect them and it actually didn't protect them it didnt protect and sustain the stock and so yes.
Speaker Change: We're in constant conversations with them on a better approach because we do need to delever the business, even further and that clause is not helpful for sure yes.
Speaker Change: Yes, that's right on the liquidity.
Speaker Change: Sometimes I think people.
Speaker Change: Mix up.
Speaker Change: The strength of the quarter in terms of revenue versus the strength in terms of cash right Q1 is a very good quarter in terms of demand in revenue, but it's flown revenue, but most of that float revenue was booked in previous quarters. So in terms of cash Q1 is actually probably our worst quarter seasonally speaking Q.
Speaker Change: Two is our worst quarter in terms of demand traffic.
Speaker Change: Usually RASK, but it is a good quarter in terms of cash because youre starting to build books revenue into the July season, and the second half of the year, which is obviously the stronger in terms of demand.
Speaker Change: Not exactly like that but usually the strongest quarters in terms of revenue or the weakest quarters in terms of cash flow and vice versa right.
Weakest quarter in terms of revenue is the strongest quarter in terms of cash it's not exactly like that but.
Speaker Change: Q2 is not a bad quarter.
Speaker Change: In terms of cash generation in terms of the SAB bonds. There are within a year from maturity. So that's why they are in short term.
And we expect to repay that debt that has never been in question.
Speaker Change: There are discussions obviously on the collateral and the interest calculation, but no discussion on the existence of the debt. So we'll be discussing with.
Speaker Change: With tap and the Portuguese government, obviously directly with them.
Speaker Change: Any news, we will share with the market as soon as possible.
Speaker Change: Fair enough that's very helpful. Thank you.
Speaker Change: Thanks Sanjay.
Speaker Change: Thank you. The next question will now come from.
Speaker Change: <unk> sell side analyst Jpmorgan, Hey, let me we will open your audio so you may ask your question go ahead.
Speaker Change: Hey, John I'll ask Avi, thanks for taking the time.
Speaker Change: First one it's on the M&A potential M&A would go the complaint that was expected to exit chapter 11, probably in June.
Speaker Change: And you are evolving your own liability management. So if there is anything that you can share.
Speaker Change: On the exchange ratio or at least timing for you to be announced that and.
Speaker Change: And the second one just a follow up on the guidance.
Speaker Change: Are you guys formally withdrawing the guidance or just not updating it. Thank you.
Speaker Change: Yeah, Hi on the M&A.
Speaker Change: As we have said before we continue to be in conversations.
Speaker Change: With avera.
Speaker Change: They always made it clear that goal was going to exit first so that was always always.
Speaker Change: Always part of the plan.
Speaker Change: Discussions continue and.
Speaker Change: They continue on many parallel fronts, including valuation including antitrust.
Speaker Change: Documentation all those kinds of things so those discussions continue.
Speaker Change: And as you guys. There is no change.
Speaker Change: So.
Speaker Change: Perfect. Thank you.
Speaker Change: Okay. Thank you and the next question comes from Savi <unk>.
Speaker Change: <unk> Raymond James So sad you open your audio so you May proceed.
Speaker Change: Hi, Thanks for the follow up just given the kind of outlook hasn't changed I'm guessing your views on capacity hasn't changed much but can you talk a little bit again about how youre thinking about that.
Speaker Change: For the rest of the year and between domestic and international.
Speaker Change: Yeah, Hey, Savi yeah it.
Speaker Change: It Hasnt changed a lot as John said, we are making.
Speaker Change: Changes to the network, but overall I see about India in the domestic industry is actually about 8% growth.
Speaker Change: On a year over year basis, it will be in the second quarter. So you will see higher growth from everybody in the second quarter, and then you will see lower year over year growth from everybody in the back half of the year.
We will go lockdown are kind of all following that same trend.
Speaker Change: And for Us.
Speaker Change: We're on plan I would say domestic around 8% international is going to be higher only because some of the OEM issues that we faced last year.
Speaker Change: Led us to have an artificially low base. So you will see high international now into Q and then you will see higher international again in <unk> because of the OEM, but I would say is good overall.
Speaker Change: Around 10% domestic will be around 8%.
Speaker Change: That's helpful. Thank you.
Speaker Change: Yeah.
Speaker Change: Okay. Thanks. The next question comes from Daniel Mckenzie Seaport Daniela leave you open your audio. So please proceed with your question.
Daniel Mckenzie: Oh, Hey, thanks, good morning, guys.
Daniel Mckenzie: Really the question that I have really are around hardening the business model to handle the macro swings that.
Daniel Mckenzie: Can cause revenue to move pretty hard FX will fill in.
Daniel Mckenzie: Just curious in the context of hardening the business model going forward, whether you guys have done a lot to build.
Daniel Mckenzie: Really impressive airline, but they traditionally has been the slow capacity cut capacity I'm, just curious how youre prioritizing delivers.
Daniel Mckenzie: Looking ahead.
Daniel Mckenzie: Related to that what leverage Matt great metrics are you targeting end of this year and end of next and what's the pathway to the optimal balance sheet that you'd like to see.
Dan: Hey, Dan.
John Rodgerson: Airline in Brazil, we always say that we are an important service in a way and so we are.
John Rodgerson: Close to the cost of importing the inputs that allow us to produce a seat in Brazil right. We have aircraft that are denominated in dollars. The financing for the aircraft is mainly in dollars, even though working capital for an airline as a capital intensive business you.
As you leave for you to be able to borrow the significant amount of capital that the business requires for the for a longer term debt capital is usually provided by U S or foreign investors that want a return in dollars fuel in Brazil. Unfortunately is dollar denominated and we don't think it should work, but it is.
John Rodgerson: And then a lot of other items stride Lake GDS fees in it.
John Rodgerson: Spare parts and maintenance and insurance and so yes that exposure is intrinsic to the to the business I think the lever we pull I wouldn't say as much capacity, but I think the main one is fair right, we see that fares.
John Rodgerson: Are essentially back to the dollar was a bit of a lag they're not indexed to the dollar, but we've demonstrated that over time, even though the real has significantly devalued since we started assort. The rail was at 160 to one when we started <unk> and I don't think anybody had in there.
John Rodgerson: The forecast that it would reach $6 32 to one.
John Rodgerson: But over time, we have been able to more than offset that currency devaluation with fares through the strength of our network and our fleet and the customer experience that we deliver we've also made the company a lot more efficient and we're going to do that regardless of the dollar will be.
John Rodgerson: Constantly pursuing more efficiently more efficiency more productivity higher aircraft utilization, while you just need to be constantly looking for opportunities to reduce costs and even though we've made a lot of progress. If you look at everything that's under our control right, which is employee productivity.
John Rodgerson: Aircraft utilization ancillary revenues the revenue that come from our business units everything Thats in our control is doing really well.
John Rodgerson: But unfortunately, the things that are outside of our control such as fuel and FX were big headwinds in Q1, but the positive news is that they should be much better.
John Rodgerson: For the remainder of the of the year, but also one thing that we had in the <unk>.
John Rodgerson: Dan you May remember, we kind of have to use it up jewelry.
John Rodgerson: Yes.
John Rodgerson: The Brazilian recession in 16, and then through the pandemic is that we are able to finance our fleet in Reais right. We are the only operators of Embraer in Brazil and in the past we had about a third of our fleet that was debt financed and a lot of those aircraft were financed in.
John Rodgerson: <unk> that is a great hedge unfortunately, it's not one hedge that we can just reset and rebuild overnight, but we will absolutely do that going forward. The beauty of that is that the aircraft. When it's an ancillary is it continues to be valued in dollars and if you need to reduce capacity you can sell that asset.
John Rodgerson: Pay down the debt and the debt will be constant right, we will not have.
John Rodgerson: Increased because of the devaluation, while the value of your asset will right. We had that cushion that we built over time, we have to use it up over a couple of crisis that we face and we're going to rebuild it going forward and that will be another competitive advantage that <unk> has which no other competitor can.
John Rodgerson: Yes, Dan a couple of them just the FX alone is going to improve and leverage but a couple of things that Alex said I just want to reiterate we're down year over year in head count absolute Ftes were down yet were up 15% in <unk> case. So we are building a more efficient airline real denominated debt, we have the ability to <unk>.
John Rodgerson: <unk>. The government line is also something we need to have less U S. Dollar denominated debt on our balance sheet, we need to Delever and that's why we're talking to our partners about doing.
John Rodgerson: Yes, thanks for that comprehensive answer.
John Rodgerson: Up to that is.
Alex can you speak to Capex this year and next.
John Rodgerson: Big round numbers, how should we think about that and then given everything that you just shared how can we tie that what kind of leverage metrics that we think about for <unk>. As we look ahead, one to three years.
John Rodgerson: So on Capex I think if you remember back in I think November we put out a boardwalk.
John Rodgerson: <unk> of our free cash flow to firm.
John Rodgerson: That number is dollar denominated the dollar has fluctuated somewhat so depending on what your assumption is for the year you need to adjust that capex number.
John Rodgerson: Going forward.
John Rodgerson: Also the OEM issues that we had may require a little bit.
John Rodgerson: More engines to be sent to overhauls, but.
John Rodgerson: We don't have guidance on Capex, and we don't have guidance on leverage either but you can use kind of those old numbers.
John Rodgerson: <unk>.
John Rodgerson: As a guideline for you to come up with your with your estimates now.
John Rodgerson: We want to reduce leverage I think that is something that all.
John Rodgerson: All stakeholders are as all would like to see.
John Rodgerson: <unk> done a lot of.
John Rodgerson: Progress on reducing debt leverage and unfortunately, some of that leverage came back through the devaluation, but it's coming back right. So we will continue working on everything thats within our powers to generate more cash pay down debt and that's also something that is always permeating, our conversations with all of our stakeholders.
Dan I just wanted to reiterate one other thing, which is which is a competitive advantage that <unk> has is that all of our next generation aircraft are under PVH contracts and engine agreements overall, so while capex will be up in the short term because of the reliability of the new engines youre going to get that back over.
John Rodgerson: It's just a pull forward if you will because all of our engines are under a power by the hour contract and Thats a competitive advantage that we have that quite frankly, the Oems are offering anymore right and so as we look forward.
John Rodgerson: We have that advantage.
Going into the next few years and it is an asset that is who owns right because as John said that contract is not being offered anymore and it is providing significant protection because the cost of engine overhauls with all of these <unk>.
John Rodgerson: Supply chain issues, and OE and MRO capacity issues is obviously going up significantly.
John Rodgerson: Thanks for the time guys.
Thanks, Dan.
John Rodgerson: Thank you I will now turn it over to John for closing remarks.
Speaker Change: I'd just like to thank everybody for your time today and thank our crew members for all their work in the quarter and we look forward to talking to you can feel free to reach out to our IR team. If you have any additional questions. Thanks everybody.
Speaker Change: Thank you. This concludes does is audio conference call for today. Thank you very much for your participation and have a great day.
Speaker Change: Goodbye.