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Gol Linhas Aereas Inteligentes SA (NYSE:GOL)

Q3 2012 Results Earnings Call

November 14, 2012 9:30 AM ET

Executives

Paulo Kakinoff - Chief Executive Officer

Edmar Lopes - Chief Financial Officer

Analysts

Richa Talwar - Deutsche Bank

Jim Parker - Raymond James

Stephen Trent - Citi

Operator

Good morning, ladies and gentlemen. At this time, we'd like to welcome everyone to GOL Airlines 3Q '12 Results Conference Call. Today with us we have Mr. Paulo Kakinoff, CEO; and Mr. Edmar Lopes, CFO.

We'd like to inform you that this event is recorded and all participants will be in a listen-only mode, during the Company's presentation. After GOL's remarks, there will be a question-and-answer session for analysts. At this time, further instructions will be given. (Operator Instructions)

We would like to inform that a webcast - that questions can only be asked via telephone. So if you are connected through the webcast, you should email your questions directly to the IR team at ri@golnaweb.com.br.

Today's live webcast, including both audio and slide show may be accessed through GOL's website at www.voegol.com.br/ir, and this presentation is available for download at the website. Before proceeding, let me mention that forward-looking statements will be made under the Safe Harbor of the Securities Litigation Reform Act of 1996.

Forward-looking statements are based on the beliefs and assumptions of GOL's management and on information currently available to the Company. They involve risks, uncertainties and assumptions because they relate to future events, and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions, and other operating factors could also affect the future results of GOL and could cause results to differ materially from those expressed in such forward-looking statements.

Now, I'll turn the conference over to the CEO Mr. Paulo Kakinoff who will begin the presentation. Mr. Kakinoff, you may begin your conference.

Paulo Kakinoff

Hello everyone and thank you for participating on our third quarter earnings results conference call.

Let's begin with slide 5, which shows the most important events of the third quarter. Firstly, I would like to draw your attention to the 3.4% growth in passenger revenue per seat-kilometer, or PRASK, representing our decreased activities domestic supply.

We think GOL has arrived since the beginning of the year, we would be dealing with this issue in more details, later on. The second point referring to the company's efforts to maintain fixed costs excluding sales at the same level as last year. In this context, labor cost ASK fell by 2.4% over third quarter '11.

The third quarter referred to (inaudible). During the quarter GOL put great efforts improving passenger service. It is worth mentioning our onboard sales service we so called Buy on Board, which recorded a growth of around 300% over the same period of last year. This service offers passengers more options, and drives the need to increased [tax].

Another highlight was Remote Check-in ratio which moved up by 20 percentage point over from third quarter '11 and showing even greater passenger comfort. Another important event was the creation of the Brazilian Airline Association, that also so called ABEAR, which analyses and discusses measures that affect the [problems] with the government should help create a more [routinized] trend sustainable decision airline industry in the coming years.

Recently the government reduced the airlines payroll tax as of January 2013. After the end of the quarter GOL announced the important strategic progress for the coming year. (inaudible) approval of Webjet's acquisition will allow GOL to explore more operational synergies between these three companies.

Since the approval the sales of both the lines have decentralizes on GOL's website, ensuring greater potential institution. The Company is still analyzing the operational integration possibilities and we'll inform the market of the next steps we'll lead in next few weeks.

With the announcement of the purchase order for 60 B737 NG MAX aircraft, GOL has extended its long-term cost advantage, given that these aircrafts are even more fuel efficient than the company's actual aircrafts, which are currently the most efficient of the aircrafts on the market.

GOL will be the first airline in South America to use these models, which in addition today with increased efficient, will provide greater passenger comfort as they are already fitted with a (inaudible).

We also announced at the beginning of regular flights to Miami, Orlando and Santo Domingo, following the huge success of the special flights for SMILES participants. The credit we provide with the low-cost and the high utilization rate of the Boeing 737 NG fleet. GOL will continue evaluating new markets and to increase profitability and offer even more options to its passengers.

On slide 7 you can see (inaudible) strategy - of the decision to reduce domestic supply which resulted in the constant improvement in the domestic load factor over last year. In the fourth quarter domestic supplies fell by 8.4% over fourth quarter '11. In terms up the first fuel (inaudible) prices by two percentage points.

Slide 8, shows a newer industry supply trend during the quarter, due to these we saw increases of more than 50%. Now all the leading players have adopted the same strategy initiated by GOL in the beginning of the year.

On slide 9, you can see that the 2.2 percentage points increasing in the total load factor [displayed] with low [fuel inflation] in the year. The combined effects as we have stated reduced (inaudible) 3.4% increase in PRASK over fourth quarter '11.

Gross PRASK figures for October, we shoed to the market show that PRASK moved up by 4.4% year-over-year mainly due to the 3.4 increase in the domestic present increase in the mast load factor, this was a 8th consecutive mark that we will (inaudible) was recorded than our peer.

And our load average, as we mentioned previously, we can see the initiatives that you have extended, and organize the aviation sector in the coming years. In the short term, GOL with (inaudible) stages for 100 million reais from the reduction in the payroll taxes.

In 2013 our cost [surplus] will be basic with traditional 115 million reais due to the increase in airport fees, 110 million of which from the new navigation, (inaudible) fees and 40 million from the airport connection fees.

Moving on now to slide 13, here we highlight certain aspects related to the client service (inaudible). The punctuality and remote check-in vehicles increased by 3.4 percentage points and 20 percentage points, especially over the third quarter in the last year. Around 90% of the company's flights were on schedule and 65% of boarding passengers made use of the remote check-in facility.

Important initiatives in this area was the introduction of corporate seat on the wheels of our route our very famous shuttle service, where passengers can buy the middle seats in the first rows of the aircraft if they want. GOL will continue to efforts on increasing and expand passengers walkins.

On slide 14, you can see that the company's graph excluding CASK, that is dollars, we remain have competitive with that of six peers, considering the adjustment of our average pay plan. I will now hand over to Edmar and he'll present our [excellent] results.

Edmar Lopes

Good morning, everyone. Thanks for joining us today, it was again a success quarter. Primarily we've see the tax over the increase of few expenses, the depreciation of the reais as well as the increase in the airport fees. We'll start this - I will go over slide 16, it's an highlight some of the operational onset.

First of all I would like to say that our strategy has been consistent, we have seen load factors going up by 2.4 percentage points for the quarter. (inaudible) were again, in the RASK as mentioned previously by Kakinoff. We were able to do that without losing up any of the yields or yields were flat quarter-over-quarter, we are showing the strategy that we have shown in the results. I would also like to highlight that the RASK for nine months of 2012 grew by almost 3% year-over-year.

Turning on page 17, again I will give you some of the main issues that were related to our business. First of all, revenues came 7.8% above last year's this is primarily due to the RASK as well as to an increase of 7.7% in our ancillary revenues, this is always part of our strategy to have a better margins theme grow ancillary revenues have a better results.

On the expense side, we saw an increase of almost 15% on our cost and at the end of the day the EBIT came down to minus 201 million reais. We can say that fuel alone was responsible for 198 million reais in increase of the expenses. This is due to the fact that jet fuels went up by 20% period over (inaudible).

Going down to net income, net income was different from last year, with now effects that we saw in the third quarter of 2011. And we saw also a reversion over traffic of 30 million reais again on (inaudible), that's been under 109 million reais on the negative side, this is a margin of minus 15.06%.

Turning on to slide 18, it is always important to highlight the effort that the company has been doing over the past few months in mitigating the effects over the market environment, so in this stage we thought that CASK related to labor, was 2.4% quarter-over-quarter and year-to-date it is down by more than 3%. Even a few [cents] that in terms of CASK that we're not enough to mitigate or to offset the increases in other lines.

In the other lines we can see that fuel alone was responsible for 1.23 cents as well as (inaudible) for an average 32 cents. Even with this as a border of (inaudible) one may feel that CASK ex-fuel came through at for the year-to-date. This is very important because it does show the efforts that the company again has been making in the past few quarters.

Turning on to page 19, we put out this new cost to show you the kind of for reference that the yearly [fees] here in Brazil. And we can see the others the decrease of overall 2 percentage points as part of total costs that we were able to gain over the last quarter extra labor, that were almost completely offset by the hike by the increase in the airport fees which accounted or 1.5 percentage points for most.

And again as Kakinoff said the because we - there has been an announcement that there will be another hike in the airport fees for the next year offsetting all the gains that we were able to amass in the labor tax expenses.

Moving on to the next slide, moving over the main financial indicators, again on the left hand side we see that our strategy to shift the use at the same level while putting (inaudible) has indeed come to an excellent results, the RASK year-over-year is up.

On the left hand side also we see that we have changed a minus 75 million reais (inaudible) minus 4.1 margins for our worst scenarios in the third quarter 2012, I can tell you that fuel alone was responsible for between 8 percentage points and 10 percentage points of this downturn.

On the right hand side we see cost of [issuance] the efforts that the company again has been making over roughly manage it, in the area the ex-fuel, the ex-fuel -- CASK ex-fuels has been CASK over the same level in the last two quarters in spite of the 24% depreciation of the [real], as you'll recall we've had 55% of our costs are US (inaudible).

Moving on to the next page, we see that although the reports are still to come, the recovery is taking longer than previous years axis, we are able to show a strong cash position, we are at 23% that is 1.9 billion reais in cash, we have 3 times our debt [salvation] for total cash, over of course and that our loan average has increased, we do not foresee any trouble over the next few years.

And for debt I would like to ask you to move to page 23, which is a [sharp] that if you are to raise 1 million reais, that show that there is no correction in the short term we are now as we have a few for 2013, roughly 330 million reais, we think it's manageable, it's not concentrated for just correction of (inaudible) some liability management while we have [debt covenant].

Before I handover to Kakinoff again, I would like to go over the slide 24, which is once more that our liquidity our cash position is among the highest within our peers 23% for cash is still very high, and which due to receivables and we will be able to show even more than 25% that is again a sign that the company has some very strong points, the feel is that we will tie it, as far as our strategy and few quarters - of goal have we have (inaudible) for is strong liquidity and no refinancing needs in the quarter.

As quarterly close, if we're taking longer but we'll last numbers for that we are in the right way. And now I will give the floor back to Kakinoff and he will go over SMILES, and then we will open for Q&A. Thanks again, Paulo.

Paulo Kakinoff

Please let's switch over to slide 26. On that we present the [theory] on SMILES program initiatives. Thanks to the success of exclusive flights for SMILES program participants, with 100% of tickets sold and with it's a currently high demand we decided to begin new regular flights to Miami, Orland and Santo Domingo.

Next we have SMILE shopping, and our online platform through which participants can use the collected mileage points to acquire not only a ticket but also 300,000 new products and services from various partners. The new development focus on retail and provide the SMILES members through (inaudible) and other options providing greater reach and facilitating the accumulation and redemption of points. Partners include Natura, Walmart, Pão de Açúcar, C&A, Editora Abril, Netshoes and other renowned companies.

On slide 27, we showed the program's most recent numbers the SMILES client base recorded year-over-year growth of 11% while redemptions were used with international partner airlines moved up by about 53% year-to-date, mainly due to the implementation of renewed platforms which makes things [used], increases convenience and improved client perception of the product. The increase also reflects just many seats are available for redemption with international partners.

Slide 28, shows us the process of turning SMILES into independent GOL business unit, is moving ahead on schedule. The company believes that segregating this unit will add a value to its business as a whole. It also represents a future consolidation of (inaudible) although the company would like to make it clear that it has not yet making any decision regarding this option.

On the final slide, we have [outlined] other commitments to adjusting to next slide, meanwhile with the new macroeconomic scenarios. We need to improve the features and resume profitability by increasing the load factors and ensuring a continuous improvement in passenger revenue.

On the [crossroads] GOL will remained focused on integration of the structure and to pursue even more operational synergies. SMILE has been increasingly important in the government yield - given also a new strategic growth option as we will stage of industry development.

Management is fully aware of the business models, enormous potential for operating values, in regards to strengthening the factors for the first time we airline industry has organized a model to discuss issues of common interest and making these investments has already been adopted by many important sectors as the Brazilian economy.

At this moment we reach here civil aviation industry, is taking structural change and higher costs, its institutional organization has become certainly essential even if it is importance to national growth.

To serve this part of growth D&A and the company will continue to do everything possible including making (inaudible) investment to further increase passenger comfort and satisfaction and offer even more innovative option.

Thank you all for taking part and we will now begin the question and answer session.

Question-and-Answer session

Operator

Thank you. (Operator Instructions) And our first question comes from Michael Linenberg of Deutsche Bank.

Richa Talwar - Deutsche Bank

Hi, good morning, everyone. This is actually Richa Talwar, filling in for Mike. [Sales], just wanted to get a little bit more details, how is your long-term trend. You've already taken out [unjust] capacity, you've cut your workforce and I believe you've concluded in many cost cutting initiatives in 2011, so I was just curious as to what other levers you feel you can pull, to returning GOL to profitability and when you think that is likely?

Edmar Lopes

Richa, good morning, this is Edmar, (inaudible).

Richa Talwar - Deutsche Bank

Hi, Edmar.

Edmar Lopes

Thanks, for the question. In the long term we have a view in our (inaudible) over compacting offsets. We have a lot of opportunities to develop over our next work, without giving up our D&A or any of modern fleet airline. So you are right, we have been or - we have doing our homework as for cost cutting, being more efficient in trimming now, streamlining the process but we still see a lot of alternatives and then I will give over to Kakinoff.

Paulo Kakinoff

Our major aim at the moment - hi, good morning. Our major aim at this moment is to capture all the potentials we've got to enhance our results to [larger] optimization of our network. I mean, we are forecasting to further reduce our fleet size by 12 aircrafts, along the next year and even though we can keep the current [offer] level in next year too that we are offering today.

It means that we could improve even more our efficiency level and reaching different destinations or additional destinations as we are doing today, with Miami, Orland and Santo Domingo. Our higher level of retention usually related to our offer capacity, that we are keeping not only under control but also looking after additional opportunities to further reduce it. There is no definition or no clear definition on figures for the next year. But at the same time that we are bringing more rationalization to the network we are looking after opportunities to further develop our international network that we are doing with Santo Domingo, and Miami or through Miami via Santo Domingo and also to Orlando.

It's also important to management that the strategy to keep increasing our load factors will not be effective if we do not take care of our (inaudible), really speaking you will not keep up strong current use and craft recovery to an additionally our load factor. We are improving with three indicators with recovery mainly load factors aircrafts, strongly not expect improving the load factor as we could but if we increase - that we are if we have - sorry, if we boost necessary [time] to increase load factor right now, it's likely that we will decrease use or even compromise our track recovery plans. So it's likely that we will keep it at current pace, recovering load factors in a smooth way, and plus we do not keep on our strategy to keep growth indicators load factors and PRASK improving simultaneously.

Richa Talwar - Deutsche Bank

Okay, great. Thank you for that color and you guys have, are you willing to share sense of timing for when you think we can see profitability again, maybe even just on the operating lines?

Edmar Lopes

Richa, this is Edmar. We are still discussing next year's budgets, so very--

Paulo Kakinoff

Too early to--

Edmar Lopes

Too early to say when we'll have successful, we have no doubt that 2013, we'll be a much better [yielding] than this year.

Richa Talwar - Deutsche Bank

Okay, great. Thank you for that. Okay, my second question is just on Webjet, I know, you mentioned that, you're still evaluating synergies, but curious just to know, what you think your more significant challenges that you face, and you know what are some of the lowest hanging fruits from are moving forward with the indications?

Paulo Kakinoff

Okay, just to [give advices] return-based. As you know, we got the official approval from the regulators to merge both companies on October, so it means one month ago. And just after than we would allow to get [issues] that Webjet's integration in now that we've identified the potential synergies. Take that the we've established a three-week calendar to along this period we'll ask all the board members and executives to write personally to Webjet's integration into the Webjet integration, and to merge back, which must be analyzed and for the development along the following two weeks - along the following two weeks. And you'll use that to announce how we will negotiate plan if you are (inaudible) meanwhile we'll have already started some important movements like the commercialization channels, integration, we are following tickets, of both companies is to reschedule exclusively by gold-channels, it has a very (inaudible), somehow our sales levels, because we're having - added capability and also a higher penetration among other companies, through customer base and we are also merging our airport operations.

The new airports are [outsourced] that GOL came from Webjet's and we did this movement because Webjet was considered a benchmark in the airport's operations in Brazil.

Standard, efficient, rates and also the highest level of web, internet and self check-in are 100% inline with a our or low cost, low-fair approach therefore now we are focused on the airport integration together with the commercialization part. We believe that after [strong out] to as to two weeks or three, we will be back to the market announcing for the integration steps.

Richa Talwar - Deutsche Bank

Okay, thank you.

Paulo Kakinoff

No mention.

Operator

And our next question comes from Jim Parker of Raymond James.

Jim Parker - Raymond James

Good morning, Kakinoff and Edmar. I have two questions one is I would like for you to clarify your capacity growth particularly domestic capacity growth for 2013 I believe you said you're getting rid of 12 aircrafts but nine of those are the 300s, are they parked, what is the net increase in domestic capacity that you expect for 2013?

Paulo Kakinoff

We're not sure of the number of aircrafts and in our fleet 12 aircrafts. Those are basically 737-300, which are smaller planes in comparison relative to 737-800, just by replacing - redelivering that plane and having our 737-800 covering the network currently managed by Webjet. We will keep the same or be current offer level - capacity levels what we are offering today, because we have more ASKs slight over our network per hour and consequently we also our [work] hours larger than they are offered today by the Webjet network.

We are going to work with these drivers to manage that, first of all, we will not increase the ASK capacity in any case and also to further identify further opportunities to even decrease our current capacity. But there are no final figures related to the [process] because we are still working of the demand side, what's was going to be our domestic forecast, this topic has been aggressive in generally and going to be discussed also a long the following weeks and just after that we can work on our a project for 2013 and then decide on possible for the capacity reduction.

Jim Parker - Raymond James

Okay, why are you not cutting more capacity because your principle competitor, this looks like will take out about 7% of domestic capacity in the first half of 2013 and of course the big issue in Brazil, was their tariffs are very low, so why you're still not taking out more capacity?

Paulo Kakinoff

Actually we did it, actually we started this movement in April this year, we cut the capacity on April in comparison to March by 8% with basically this was an annual effect and around 4.5% this year in comparison to the full year 2011, it compared to just now we're taking the same measure. So I didn't say that there is no opportunities or possibilities for further reduction, I just mentioned that we fully [reduction] we'll later decide of the reduction is not 100% concluded at these [205].

So we do believe that current industry discipline to (inaudible) capacity is a right movement to be taken by the sector. And we'd like to keep this fact and find and possible find additional opportunities to deduct capacity – to reduce capacity mainly in the domestic markets at the same time, we are looking after additional opportunities to try over enhance the network to international destinations.

Jim Parker - Raymond James

Okay, before you arrived to GOL and actually for the past few years it appears GOL has been pulling back internationally. And now you're saying that you want to grow faster internationally, what's different now from what has gone on in the past few years when you were actually shrinking your international business?

Paulo Kakinoff

We've been successfully (indiscernible) strategy for network before to work with, it's different aircraft, grow flights to develop its international networks utilizing not efficient equivalent basically the long terms 767 that we brought from the (inaudible) that's information that we're fairly and inefficient and what we are doing now is to basically starting - making our through internet network larger than it is today. We have same planes, with the same configuration are flying over domestic and international network that we got, by reaching United States market over Santo Domingo we are developing a new flight as the same way that we are doing for whole South America region since many years.

So the basic difference in comparison to the prior international strategy is that we are making more of the same, more from the basic strategy of GOL which has been successful since many, many years.

Jim Parker - Raymond James

Okay, thank you.

Paulo Kakinoff

Thank you very much.

Operator

And our next question comes from Stephen Trent of Citi.

Stephen Trent - Citi

Good morning, gentlemen and thank you for taking my questions. I am curious about the -- a follow up to Jim's question, but looking at time to service self product via the Dominican Republic. It seems there's some perception in the market that you guys are going to some how form a hub in Santo Doming with different daily flight times, and maybe you'll start servicing in regions at least from what I can tell it looks like you're going to be servicing two high density route segment to travel to the U.S. which in my view is sensible but I just want to make sure I understand this correctly?

Paulo Kakinoff

Firstly, our strategy to as I mentioned reach additional destinations within our network over Santo Domingo, which could increase our range by two times. I mean having this refueling stock, in Santo Domingo, we could reach basically any city in the United States, which could bring us huge opportunities.

We are developing these international networks towards North or South America in combination with our major partner which is Delta, as you probably know Delta has daily flights to Santo Domingo from New York and Atlanta. Our first priority to develop the destinations with Delta is not serving the markets and therefore we have a complimentary strategy which is going to bring to our customers maybe the opportunities to fly to the most desired destinations from the Brazilian perspectives today with the United States.

So it's too early to think about a hub creation in Santo Domingo, we are reaching and searching this market extremely cautiously, we're now going to build a consistent, across the board and long lasting plan to increase our operations internationally.

Stephen Trent - Citi

Great appreciate that and that make sense to me and just one another question if I may speaking of Delta with the relocated LatAm headquarters and they are laying on more capacity into brazil I'm trying to get a sense as to how soon we could see maybe some increase in Delta's ability to [speed] the domestic network, as we move into the coming month.

Paulo Kakinoff

We are forecasting a full length operation between both companies right in the beginning of next year, preferably from February on, I mean in the commercial side and also from a customer's perspective, both companies are working together to address the combined network in other to really offer as complementary network to the customers. It means that the discussions related to capacity and demand on this corridor meeting united - North America or South America has been discussed in order to find to where and when each of both companies can better offer a value product to different customers side I mean we are going to keep our low cost low fair approach even to the dimension of that is United States. And Delta will offer and up product which is not form a customer's perspective also nearly about the GOL service levels that we are – we're going to be offering there. So it means that both companies are working together, covering together to cover both the regions with company [total].

Stephen Trent - Citi

Okay, great. Thanks for the color. I will let someone else ask a question. Thank you.

Paulo Kakinoff

Thank you very much.

Operator

This concludes the question-and-answer session. At this time I would like to turn the floor back to Mr. Paulo Kakinoff for any closing remarks.

Paulo Kakinoff

Thank you very much, thank you all for the attention, we are as always available here for the questions period, you know how to reach us any time. Thank you very much have a nice day.

Operator

Thank you. This concludes today's Gol Linhas Aereas Inteligentes's 3Q '12 result conference call. You may disconnect your lines at this time.

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