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Azul S.A. (NYSE:AZUL) Q4 2023 Earnings Call Transcript

Azul S.A. (NYSE:AZUL) Q4 2023 Earnings Call Transcript March 28, 2024

Azul S.A. misses on earnings expectations. Reported EPS is $-0.47 EPS, expectations were $-0.22. Azul S.A. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: [Call Starts Abruptly] [Operator Instructions] I would like to turn the presentation over to Thais Haberli, Head of Investor Relations. Please, Thais, proceed.

Thais Haberli: Thank you, Zack, 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. Presented 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 the 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 I subject to uncertainties and risks that are discussed in detail in our CVM and SEC filings.

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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: Thank you, Thais. Welcome, everyone, and thank you for joining us for our fourth quarter 2023 earnings call. I'm happy to report that Azul had a record 2023. As you can see on Slide 3, we reported record revenues of almost BRL19 billion for the year with BRL5 billion in a single quarter for the very first time. Record yearly and quarterly RASK and an EBIT of BRL5.2 billion, BRL2 billion above our previous year. 2023 was also transformational, thanks to the conclusion of our capital optimization plan, where we partnered with all of our stakeholders to create a win-win solution that set up Azul for long-term success. And finally, in 2023, we continue to deliver exceptional operational performance by being the second most on time airline in the world.

For this, I have to thank our incredible crew members for what they are doing each and every day. They are taking care of our customers and each other. On Slide 4, you can see that our network strength is foundational to our structural and long-term competitive advantages. We continue to be the only carrier in 82% of our routes. This is a direct result of our unique network combined with our fleet flexibility where we put the right aircraft on the right market at the right time. In fact, I remember when we went public, investors would say, as we grew, there would be more overlap. The opposite is the case. We have more than doubled in size over the past several years. Always staying true to our business -- into our business model, we have gotten stronger and stronger.

The construction of this unique network strategy together with our fleet transformation, with the A320s and E2s is a critical ingredient to our continued sustainability and profitable growth. On Slide 5, we show a little more detail of how our network strength is so unique. We have always said that our mission is to grow the Brazilian market to serve cities that have never been served before and to provide connectivity and convenience like never before. Let me give you an example. Today, a customer can travel from [Sohizo]s a strong agribusiness market in the Midwest of Brazil. And with one convenient connection, our customer can be in Sao Paulo for a Monday morning meeting. A journey that would otherwise take 26 hours by car, this has never existed before, and it only does because of Azul.

This is how we grow the market, and this is how we continue to profitably grow. On Slide 6, I want to show you another example, our Recife Hub. We have long identified Recife as a strong market in the northeast of Brazil. A growing city that has elements of a strong leisure demand with a growing corporate demand in technology and automotive. In 2017, we started to build out our Recife Hub, connecting every major city via nonstop service and then onto the rest of our network. Today, Recife is better served than ever, rivaling cities like Brasilia in terms of departures and even Sao Paulo in terms of destinations served. Today, our entire fleets from the caravans to the A330 fly in and out of Recife, bringing service and connectivity to Brazil and beyond.

Recife is also a great example of market discipline where we are focusing on where we are strong and the industry is focusing on where they are strong. This is the type of network development supported by our flexible fleet and allows us to continue growing within our network. Finally, on Slide 7, I'm excited and proud of the partnership we have with the Brazilian Olympic Committee. Azul is unique and uniquely Brazilian. The cities we serve, the warmth and attention you feel when you fly us, and it's all unique to us and reflect the best of Brazil and the best of Brazil. With that spirit, we are so happy to partner with the Brazilian team for the Paris 2024 games. And with that, I'll turn the time over to John who will give you more details on our amazing results.

John Rodgerson: Thanks, David. I would also like to thank our amazing crew members for everything they do. I've always said we are a people business, and our crew members are our greatest asset. We know that sometimes the operating environment can be challenging, but the fact that we continue to deliver exceptional service and performance is all credit to them. On Slide 8, I want to highlight the big numbers for the fourth quarter. As David mentioned, 2023 was a record year and particularly the fourth quarter. For the first time ever, we did $5 billion in revenue, 60% higher than 2019. We had a record RASK of $45.3, up 6% year-over-year on top of a very strong base and with 7% capacity growth. Fourth quarter EBITDA of $1.5 billion with a 29% EBITDA margin.

A close up shot of a commercial aircraft in flight with its expansive wingspan.
A close up shot of a commercial aircraft in flight with its expansive wingspan.

These are direct results of our competitive advantages and profitable growth strategy. On Slide 9, I want to highlight a really important and strategic shift that has been happening at Azul over the past year. More than 25% of our RASK is now non ticket revenue. This is because of our business units, vacations, loyalty, cargo, ancillary revenue and charter are all growing even faster than the based airline. This is a key diversification strategy that further extends our competitive advantages. This strategy captures customers from all different segments and brings them into the Azul universe from where we can cross-sell across all of our products and services. Even better, business units like vacations and loyalty can grow faster by providing services such as hotels, experiences, shopping, travel on other airlines, products that do not depend exclusively on Azul's growth.

This diversification and contribution are a further example of why we are so confident in our profitable growth strategy going forward. It's hard to believe, but the $6 billion in revenue from these business units is almost the same as all of Azul's revenue we went public in 2017. Turning to Slide 10, we show a bridge for 2022 EBITDA to 2023. You could see the BRL2 billion increase David mentioned in EBITDA, with contributions from RASK expansion, network growth, lower fuel and currency and offsetting effects from inflation, increased maintenance expenses and investments in the future that I will discuss shortly. We significantly increased margins, improved revenue performance, grew the airline and therefore produced the best results in our history.

On Slide 11, we bridge immediate liquidity from the third quarter to the fourth quarter. You can clearly see the operation generated positive cash flow, which was used to pay down debt and deferrals. Cash flow from operations was significant enough that even after aircraft rent, CapEx, and interest payments, we generated BRL300 million in cash. This clearly shows that our EBITDA directly results in cash flow generation and deleveraging. As a result, as we show on Slide 12, our leverage at the end of last year was down to 3.7, a full two turn improvement since 2022 and in line with our guidance. Even more exciting is that thanks to the significant EBITDA generation in 2024 and the continued pay down in debt, our leverage at the end of this year will be a very solid 3x.

This is lower than what we had in the fourth quarter of 2019, when using the same methodology. We told you we would emerge as a stronger company, and we truly are, a remarkable achievement by our team. Transitioning now to the future, the exciting part of Azul. I want to talk about how we're preparing and investing so that we can meet and exceed our updated EBITDA guidance of BRL6.5 billion for 2024 and even higher in the years to come. We realized late last year that we needed to invest in our operational capabilities prepare for this growth. We invested in operational staffing, allowing us to reduce aircraft ground time and increase aircraft utilization. We invested in fleet and engine availability, ensuring we have adequate spare engines.

We invested in our maintenance facilities, bringing forward by three years additional heavy maintenance capabilities that we are not dependent on external MRO capacity. Finally, we invested in pilots and flight attendant hiring so we can have the crew trained and ready to go. All of this combined with our next gen deliveries, especially the E2s, this year means that we are ahead of the curve and are more in control in terms of our fleet availability and capacity. On Slide 14, you can already see the results of some of these investments. While aircraft utilization improved in 2023, there are still opportunities to grow it. Looking ahead at our planned network for 2024, reaping the rewards operational investments and reduction in ground time, we can take another significant step to increase aircraft utilization.

All fleet types will once again increase aircraft utilization in 2024. These are opportunities that we continue to develop, but we're extremely excited at the progress we're already making in 2024. On Slide 15, we thought it would be important to give you a panorama of our OEM partnerships. For the A320neo fleet, we have the LEAP engine as well as the CFM34 for our Embraer E1 fleet. For our E2s and ATRs, we have partnered with Pratt & Whitney. For our wide body fleet, we have partnered with Rolls-Royce. With each of these partners, we have ongoing long-term maintenance agreements that support the operational reliability of our fleet. On the aircraft manufacturer side, the majority of our future deliveries over the next few years will come from Embraer, a relationship that we are very close to and in this OEM and is an OEM that we believe is better positioned than others to deliver aircraft on time.

While the situation is still volatile, we strongly believe that these are the best possible partnerships. And with our own internal capabilities, we are well positioned to continue our fleet transformation and growth plans. As I draw to a close, I want to share that we released updated guidance this morning that we released updated guidance this morning. As you can see on Slide 17, we expect BRL6.5 billion of EBITDA this year on an overall capacity increase of 11%. Leverage, as I mentioned earlier, will be around 3 below 2019 levels. Our fundamentals are strong, our business model is very unique, and I'm very excited to see all the great results Azul will deliver. And thanks to our incredible and passionate crew members, I'm confident that Azul will deliver better than expected results on a going forward basis.

With that, David, Alex, Abhi and I are here to answer any of your questions.

Operator: [Operator Instructions] Let's go on now to the first question. It will come from Victor Mizusaki from sell-side analyst from Bradesco.

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