Azul - Q1 2024

Transcript

Operator (participant)

Hello, everyone, and welcome all to Azul's First Quarter Earnings Call. My name is Zach, and I will be your operator for today. This event is being recorded, and all participants will be in listen only mode until we conduct a 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. When your name is announced, please turn your microphone on and proceed.

For those who are listening to the conference on the phone, press nine to join the queue and six to accept the audio when requested. I would like to turn the presentation over to Thais Haberli, Head of Investor Relations. Please proceed, Thais.

Thais Haberli (Head of Investor Relations)

Thank you, Zach, and welcome all to Azul's Fourth Quarter Earnings Call. The results that we announced this morning, the audio of this call, and the slides that we reference are available on our IR website. Presenting today will be David Neeleman, Azul's Founder and Chairman, and John Rodgerson, CEO. Alex Malfitani, our CFO, and Abhi Shah, the President of Azul, are also here for the Q&A session. Before I turn the call over to David, I'd like to caution you regarding our forward-looking statements.

Any matters discussed today that are not historical facts, 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 CVM and SEC filings. 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 call over to David. David?

David Neeleman (Founder and Chairman)

Thanks, Thais. Welcome, everyone, and thanks for joining us for our first quarter 2024 earnings call. First of all, I wish to express my solidarity with the people of Rio Grande do Sul during this very difficult time. We are deeply saddened by the loss of lives, the displacement of people, and the widespread destruction caused by severe flooding in that region. On a personal note, my family has deep connections to that region. My father's done business there for decades. My daughter served a mission for our church there, and we have many, many dear friends.

Azul crew members from all over the country have put their heart and soul into relief efforts, donating time, money, and supplies, while at the same time running the day-to-day operation. I've always stated that we have the best crew members in the world, and they are once again proving it. I cannot thank them enough for their passion and their dedication. We've already received more than 1,300 tons of supplies and donations, and the challenge now is to swiftly get the supplies to those who need them.

With that in mind, we have created, together with Itaú Bank, a fund to enable as many dedicated flights and truck shipments as possible. I want to especially thank Milton Maluhy Filho, the CEO of Itaú, for his partnership and support in these efforts. Turning to our earnings presentation, I want to remind you of the fundamentals, the fundamentals of our business. Our exclusive network, diverse business units, combined with a growing, efficient, and flexible fleet, are key drivers to another record quarter of results. One clear example of this is the fact that we continue to be the only carrier in 82% of our routes.

Many thought that as we grew, we would have to encounter more competition, but in fact, the opposite has happened. We stayed true to our strategy, we grew within our network, and by doing that, the percentage of routes that we are the only carrier has actually increased. On slide five, we show one great example of this effect, our focus city, Belém, in the north of Brazil. In the past, if a customer from the north of Brazil wanted to fly to another destination in the north, they first needed to fly south, the so-called V routes, adding hours and sometimes more than a day to their journey.

We saw that as an incredible opportunity to connect all of the north of Brazil via Belém. Since 2019, only in Belém, we're up 70% in departures. Out of the 23 destinations served, we have competition on only five of them. This is just another of the many examples around the country of how we've been able to grow by finding and developing new demand. We are confident Brazil still has a lot more room to grow, and Azul will continue to explore that opportunity. On slide six, we summarize Azul's ecosystem of business, which has powered our growth and diversified our strategy.

In Q1, our core businesses of loyalty, vacations, and cargo once again had solid results. For example, gross billings of our loyalty program increased 31% versus the first quarter of 2023, and our vacations business increased gross billings by 75% year-over-year, thanks to strong demand in leisure markets supported by our dedicated vacations network. Even with all this growth in the Brazilian market since we founded Azul in 2008, Brazilians still travel significantly less than countries such as Colombia, Chile, or Mexico. So imagine the opportunities we have to grow even more in these businesses.

In addition, we continue to ramp up our maintenance unit, Azul TecOps, our overhaul and maintenance unit. We have seen accelerated growth in our charter unit, Azul OnDemand as well. These fast-growing, high-margin businesses strengthen our leverage in our business model and are a major factor in driving margin expansion. I am proud to see the great strength of our company. Once again, we are reporting record results and margin growth. We are doing all we can to help the people of Rio Grande do Sul.

At the same time, we are laser focused on our business and our path through 2024 and beyond. With that, I will now turn the time over to John to give you more details on our record first quarter results. John?

John Rodgerson (CEO)

Thanks, David. First, as David said, our heart goes out to all those people affected by the devastating floods in Rio Grande do Sul. I've been in contact with dozens of our crew members, and we're doing all we can to support them during this difficult time. I'm so proud of all of our crew members for their incredible volunteer efforts, which are deeply appreciated by the people in the south. The culture and sense of family at Azul are stronger than ever. One question I'm sure you all have is: when do we expect the Porto Alegre Airport to reopen?

The answer is we do not know yet, and of course, ANAC and Fraport are monitoring this difficult situation, and we will determine when the airport can be reopened safely. In the meantime, we're working with authorities to allow a limited number of commercial flights into the neighboring Canoas Air Base. This will allow the industry to reconnect the region to the Brazilian airline network, enabling critical movement of people and supplies. We will keep you updated as the situation develops. Focusing now on our results, as you can see on slide seven, we once again had a record quarter.

Our operating revenue increased 4.5% to BRL 4.7 billion, driven by a healthy demand environment, robust ancillary revenues, and growth in our business units. RASK and PRASK stood at record levels for a first quarter, demonstrating the strength of our business model. Capacity for the quarter grew 2.6%, supported by a 6% growth in domestic market, offset by a temporary reduction in our international network due to a transition in our wide-body fleet. EBITDA reached BRL 1.4 billion, a record for our first quarter, and an increase of 37.4% compared to first quarter of 2023.

Our EBITDA margin of 30.3% was also a first quarter record and one of the highest in the world. It clearly confirms our ability to grow and expand margins at the same time. As David mentioned, as we grow, we get stronger and more profitable. On Slide eight, you can see the continued evolution of our EBITDA. Since first quarter 2019, our EBITDA has more than doubled as the company has grown, but now our EBITDA margin has reached a record as well to more than 30%. This is especially remarkable given the fact that both currency and fuel are much more challenging today than they were in 2019.

So even with these headwinds, we were able to grow and expand margins, demonstrating once again the strength of our business. On Slide nine, I want to highlight one of our key initiatives to further expand margins this year and beyond: aircraft utilization. We have significantly increased aircraft utilization compared to last year, supported by strong demand throughout our businesses. For example, our vacations business alone has doubled its dedicated route network. These flights allow us to increase utilization at non-peak times, while at the same time bringing us a whole new segment of demand.

These are opportunities that we continue to develop, and we're extremely excited with the progress we're making. Looking ahead to the rest of 2024, I want to talk about a key driver of our growth and EBITDA expansion, our E2 deliveries. As you can see on Slide 10, we will significantly increase the rate of E2 deliveries this year with 13 new Embraer E2s. To remind you, the E2 has 18 more seats and delivers 18% lower fuel burn compared to the E1.

This means we get a 26% reduction in our cost per seat. In summary, with this aircraft, we can have more revenue and lower costs compared to the first-gen E1s that we're flying today. Today, we have 20 E2s flying, but by the end of 2025, that number will more than double. Slide 11 shows how relevant the E2s are becoming. In the next 12 months alone, the flights and capacity flown on E2s will more than double. The economics of the E2 allows us to fly longer stage lengths and more hours in the day, and as a result, drive significant operational leverage and margin expansion. Azul will be a larger airline as we exit this year.

Our broad network and unique connectivity serve as the ideal platform for this profitable growth going forward. Moving on to slide 12, you can see we have a consistent growth and EBITDA expansion over the last 15 years, only interrupted by the pandemic. But if you exclude that period, you can see that we're back to the earnings growth trajectory that we've always had, and there's more to go. Our 2024 EBITDA of BRL 6.5 billion will be by far our best year ever, and still, the best is yet to come. Our strong operational performance leads to improved cash flow and reduced leverage.

On slide 13, you can see that even in a seasonally weak quarter from a cash perspective, the operation was able to generate enough cash to pay down aircraft debt, CapEx, and interest. We've also been able to invest in our growth, with, for example, pre-delivery payments for upcoming aircraft, which we know will come back when these aircraft are delivered. In the second half of this year, the airline will be about 15% larger than it is today.

Combined with favorable demand seasonality, EBITDA will be even higher, while the cash outflows will practically not change, clearly leading to improved free cash flow generation. As we annualize these numbers, you can clearly see that we're on the path to sustained cash generation. As a result, as we show on slide 14, thanks to significant EBITDA generation in 2024 and continued pay down of debt, our leverage at the end of this year will be around three, lower than what we had in the fourth quarter of 2019.

As we reach this milestone, we will exit 2024 as a truly stronger company than we've ever been. Concluding on slide 15, our business is doing extremely well, with record revenues and EBITDA. Going forward, our continued fleet transformation and increased aircraft utilization will lead to much higher growth in EBITDA than in lease payments or CapEx. Our interest payments will also reduce as we pay down debt and our cost of capital improves.

This leads directly to higher cash generation, which is why we're so excited about the future. More importantly, our customers love to fly us, and our crew members love to work with us. We are sharply focused on executing our business plan for 2024 and beyond. With that, David, Alex, Abhi, and I are available to answer your questions, and I turn the call over to the operator.

Operator (participant)

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. When your name is announced, please activate your microphone and proceed. For those who are listening to the conference on the phone, press nine to join the queue and six to accept the audio when requested. Let's now move on to the first question. First question will come from Gabriel Rezende, sell-side analyst, Itaú. Gabriel, we will open your audio so that you can ask your question. Please proceed.

Gabriel Rezende (Analyst)

Hello, everyone. Thanks for taking my questions. It would be great if you could provide some comments regarding the forward bookings and the respective yields you are seeing at this point for the coming months, the months that you already have some visibility. Mainly considering that Azul has been able to maintain yields at a very attractive level, with increasing on a year-on-year basis, despite what has been happening with fuel costs and the favorable effects on a year-on-year basis as well. So that's my first point.

And the second point, if you could provide some comments regarding potential supply chain risks that could challenge your expectations for the aircraft to be delivered this year. I understand this might be a key point for your guidance and expectations regarding fuel savings as well. Thank you.

Abhi Shah (President)

Yeah. Hi, Gabriel, Abhi here. I can take the first part. So, overall, we feel pretty good about demand. We are in the middle of second quarter, so there is second quarter seasonality, which is very similar to last year. So I expect similar flown RASKs this second quarter to last second quarter. But we are seeing really good momentum in terms of future sales. I'll give you some highlights here for the month of April. So the month of April, for example, we had a 100% recovery in corporate volumes versus pre-pandemic.

We had a 40% increase year-over-year in corporate volumes versus last year, and a 40% increase in leisure volumes versus last year as well. So, looking ahead to the end of middle of June, end of June, July onwards, we feel pretty good about how the curves are building and how the demand is kind of moving forward. So I would say second quarter seasonality, very similar to last year, but a really good month in terms of forward bookings. Like I said, up 40% in the month of April, looking ahead. John?

John Rodgerson (CEO)

Just quickly on the supply chain issue that you, that you highlighted, we have a great partner in Embraer, we have a great partner in Airbus, as well as ATR, and we're closely tracking the deliveries this year. We were assured by our partners that all the deliveries we're supposed to get will happen on the new schedule, and so they're more back-end loaded than we would want. However, that's why we're exiting 2024 a much larger airline, which rolls forward to 2025. That will be a much larger airline, going into 2025 because of the back-end nature of when the aircraft will deliver.

I just want to remind everybody that all of our engines are under power by the hour agreements, which is a strategic advantage at this time in the industry. People that do not have deals locked in with the OEMs, it's a strategic disadvantage, and all of our engines are now under a long-term agreement with the OEMs, which means we've got great partnerships and the ability to grow going forward.

Gabriel Rezende (Analyst)

That's very clear. Thank you, John. Thanks, Abhi.

Operator (participant)

Thank you. The next question now comes from Victor Mizusaki, sell-side analyst, Bradesco. We will open your audio, Victor, so that you can ask your question. Please proceed.

Victor Mizusaki (Senior Equity Analyst)

Hi, congrats for the quarter. We have two questions here. The first one is a follow-up with regards to the aircraft deliveries. So, John, considering that the deliveries are backloaded this year, what does this mean in terms of capacity growth for 2025? My second question is if you can comment about a potential deal with Gol or the negotiations with Abra. Thank you.

Abhi Shah (President)

Yeah. Hi, Victor. So, the aircraft with this year, I think our guidance for capacity growth was 10%-11%. There's gonna be a little bit of an impact now with the Porto Alegre network, so I think 10%-11% is a good number for this year. When you then take the aircraft that we are expecting second half and beyond, and you annualize that towards next year, you can expect a slightly higher rate for 2025. We don't have 2025 guidance yet, and of course, we're still closing the fleet plan. But, this year between 10%-11% and a little bit above that for 2025 versus 2024 in terms of overall ASK growth.

John Rodgerson (CEO)

And Victor, obviously, we can't comment on kind of the news reports. The only thing I'll say is, you know, we believe strongly in what Azul is building. We believe strongly in what we have going forward, and we're big fans of consolidation. I think that that's also, you know, something that we've been pretty open about, you know, for the last five years or so. And so, we'll see what happens going forward. There's a process in place, and we're watching very closely, and that's all we can really say.

Victor Mizusaki (Senior Equity Analyst)

Thank you.

Operator (participant)

Okay, so the next question will come now from Savi Syth, sell-side analyst from Raymond James. We will open your audio service so that you can ask your question. Please proceed.

Speaker 10

Hi, this is Zara on for Savi. Our first question is, can you comment on what you're seeing in the domestic market in terms of competitive capacity?

Abhi Shah (President)

Yeah, hey, yeah, absolutely. So regarding competitive capacity, we see a pretty mild, competitive capacity environment disciplined. We think overall capacity growth this year, I think, is gonna be low single digits, for the industry overall. We're not seeing any large variations, from any of the players. So, it feels pretty disciplined overall. I think everybody's focused on results. And, and even the allocation of capacity within the networks, as I've said many times before, I think airlines are focusing where they are strong, and I think that's providing the best results for each one.

And, I think that's the best for the consumer, I think it's, it's the best for the industry overall. Yeah, if you were to model the whole year domestic market, I would say overall capacity growth this year, a little bit now. Porto Alegre put that in doubt, but I would say low single digits.

John Rodgerson (CEO)

I just wanna highlight, you know, the OEM issues that exist with engines across all of the engine manufacturers, are making it really tough to add capacity in the short term. And, you know, Airbus and, and Boeing having issues delivering aircraft on time. So I think that keeps capacity in check for the foreseeable future as well, which that makes for a healthy environment.

Speaker 10

Okay, great, thanks. And then just one more quick one. Do you have any color on cargo demand as well?

Abhi Shah (President)

Yeah. So cargo continues to be sideways, I would say. Internationally, we're not yet seeing a robust... We're seeing strong demand, but we have not seen a return in cargo yields. International cargo yields are still low, and I think many airlines that have reported so far have already commented on that. Domestically, we are growing, which is good. We see strength in our partnership with e-commerce players like Amazon, for example. Amazon had a press release about Azul a couple of weeks ago, so we're growing with them. So we are growing.

I would say growth is gonna be in the mid-single digits this year, which is still a positive scenario compared to many airlines around the world that are still reporting negative cargo revenue growth. So I would say domestic, growing mid-single digits, international, good demand, but, yields still soft and we haven't seen. So I would say kind of mid-single digit growth on the cargo side.

Speaker 10

Okay, perfect. Thank you.

Operator (participant)

Okay, so the next question will now come from Alberto Valerio, sell-side analyst, UBS. We will open your audio so that you can ask your question. Alberto, please proceed.

Alberto Valerio (Analyst)

So thank you very much for taking my question. First, I would like to congrats all Azul team for the initiatives that they are doing in Rio Grande do Sul. I have two questions. First one, it's about the seasonality of the year. Usually, we have a first and second quarter, very close, one to each other. Last year, we have a slightly worse second quarter compared to the first quarter. I would like to see about this year, how this year will be. And my second one is about the cash generation for the year. We in the beginning of the year, we are forecasting a zero cash burn for the year.

If you can keep thinking that way, we have slightly negative numbers for the quarter compared to our numbers, I think BRL 200 million difference. I would like to see if you can still keep this cash generation at zero for the year. Thank you very much.

Abhi Shah (President)

Yeah, Alberto, on the seasonality, yes. This year as well, we will have 2Q slightly below 1Q levels, very similar to last year, and then the rebound in 3Q and 4Q. Last year, we had many holidays in 2Q, especially in April. This year, we have much fewer holidays, which is good from a bookings perspective. We are seeing significantly higher bookings, especially with the more days available, but we are seeing a more diluted flown revenue environment, just not as peaky, not as many peak days as we had last year.

So overall, we will have similar seasonality to last year, 2Q slightly below 1Q, and then a rebound in 3Q and 4Q, which is normal for Brazil.

Alex Malfitani (CFO)

Yeah, and Alberto, on the cash, right? We're, we're very excited. I think this is a year where you're starting to see, you know, everything that we've built and everything that this strong EBITDA generation can provide. And you can see by the slide that we, that we provided, kind of, using the direct method, right? You can see that our EBITDA in a seasonally unfavorable quarter in terms of cash, like Q1, was enough for us to pay everything that we have to pay, right?

It, you know, we generate a lot of cash inflows from the operation, and that's enough for us to pay for all of our rent, to pay for all of the interest, all of the CapEx. Normally, in a seasonally unfavorable quarter, you could even burn a little bit of cash on that basis, right, of free cash flow to firm, and still generate cash, for the full year, right? Especially the way that Abhi talked about the seasonality.

You know, he talked about first quarter and second quarter, but also you have to think about how the first half is different from the second half, right? In terms of when the capacity growth is coming, what is the fuel curve for the year, right? Clearly, fuel is going to be higher in the first and second quarter, than it's gonna be for the third and, and fourth. And just the natural demand seasonality that you have during the year, you always have demand accelerating into third quarter and fourth quarter.

So if we're breaking even in a quarter like Q1, you know, we're very excited about what the result is going to be for the, the full year, right? And we reaffirmed our leverage guidance, right, on, for the year, right? We will be below the leverage that we had in 2019, in the pre-pandemic, which gives you an estimate for what the cash position is going to be. And that's 2025, right? That we're very excited about. Sorry, that's 2024, that we're very excited about.

But if you start doing this math for 2025, 2026, the number that we're gonna generate this year, which will be a positive number, can increase by about BRL 1 billion every year after that, right? It's not that we turn positive this year and then, you know, stay at those levels. EBITDA generation is gonna continue to grow, and as you know, we don't really have a lot of increased fleet costs, right? The CapEx is what it is. You know, the rent goes up, but it doesn't go up as much as EBITDA.

It doesn't even go up by as much as capacity, because some of the capacity growth comes from the upgauging of E1s into E2s and A320s, and some of it comes from increased aircraft utilization, as we described, right? So the revenue growth and the capacity growth is going to outpace growth in rent. And so when you do that math, you can see these significant jumps in the cash flow generation year-over-year, going forward.

Abhi Shah (President)

Especially as the airline just gets size, you know, with all these E2s that we're talking about.

Operator (participant)

Thank you very much, Abhi, Alex, and John.

Alex Malfitani (CFO)

Thank you.

Operator (participant)

Okay, so the next question will now come from Rogério Araújo, sell-side analyst, Bank of America. We will open your audio, Rogério, so that you can ask your question. Please proceed.

Rogério Araújo (Analyst)

Hey, good afternoon. Thanks very much for the opportunity. I have a couple here. One is one-off costs and expenses. The company had been reporting 5-7% of revenue in one-off costs in the previous quarters, but now it was zero, and this led to a strong margin gain when actually including these one-off expenses.

My question is: how should we think about it in the upcoming quarters? Should it continue to be close to null? And that's the first one. The second is on the 2.6% capacity expansion in the quarter. You talked about a temporary reduction because of international capacity on this wide-body fleet transition. If you could have more detail on that, would be great. Thank you.

Alex Malfitani (CFO)

Great. Yeah, on non-recurrent. Well, a lot of the non-recurrent that you have been seeing in 2023 was related to the restructuring, right? We were, you know, deeply, you know, in restructuring mode last year, and that caused, you know, restructurings in the fleet, in the lease payment schedule. Obviously, a lot of one-time fees to advisors, a lot of, you know, fees for new issuances. So yeah, going forward, unless, you know, there's anything that's actually extraordinary, we do not expect to have, you know, anything relevant in terms of one-time adjustments.

Abhi Shah (President)

Rogério, on the capacity growth, yeah, so a big impact this quarter from the international wide body fleet. To give you more detail, we had our 2 A350s that were flying. They, as part of the restructuring from last year, were returned to the lessor at the end of January, so they exited the fleet. We have 4 A330s coming to replace them, but due to the transition of the fleet, they are coming now. So 1 is already flying. It started flying in April. The second one is gonna start flying in the first week of June.

The third one is gonna start flying third week of July, and the last one at the end of August. So that's why you have the slow ramp-up in capacity. You have the dip, that was February, March, April, and then you have the recovery in international capacity as we go through 2Q, 3Q, and 4Q. So that's on the international side. We basically have two wide bodies leaving the fleet end of January, and then we have four coming in.

We also had some heavy maintenance calendar timing. And then, as John mentioned, we have the E2s coming sort of second half of the year. That's gonna provide some capacity for this year and then for next year. But that's the detail on the wide body fleet.

Rogério Araújo (Analyst)

Okay, that, that's pretty clear. Thank you very much.

Alex Malfitani (CFO)

Thanks, Rogério.

Operator (participant)

Okay, so this closes our Q&A session for this call. We'll put the call over now to John for closing remarks. Please, John.

John Rodgerson (CEO)

I appreciate everybody, and look forward to seeing many of you in New York this week. Once again, let's pray for the people in Rio Grande do Sul. Very catastrophic what's happened there, and, you know, rest assured, Azul is doing all we can to help, as we run a fantastic business. You know, we'll continue to grow this business going forward. We feel very strongly about what we've built, and we're gonna continue expanding margins and generating cash on a going-forward basis. Thanks, everybody.

Operator (participant)

Okay, thank you. This concludes the Azul audio conference call for today. Thank you very much for your participation, and have a good day.