Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

GOL Linhas Areas Inteligentes S.A. (NYSE:GOL)

GOL Day New York 2013

June 24, 2013 1:30 pm ET

Executives

Edmar Prado Lopes - Chief Financial Officer, Financial Director, Investor Relations Officer, Member of Financial Policies Committee and Member of Accounting, Tax & Financial Statement Policy Subcommittee

Paulo Sérgio Kakinoff - Chief Executive Officer, President, Member of Human Resources & Corporate Governance Committee, Member of Financial Policies Committee and Member of Risk Committee

Eduardo Sanovicz

Analysts

James D. Parker - Raymond James & Associates, Inc., Research Division

Helane R. Becker - Cowen and Company, LLC, Research Division

Michael Linenberg - Deutsche Bank AG, Research Division

Stephen Trent - Citigroup Inc, Research Division

Duane Pfennigwerth - Evercore Partners Inc., Research Division

Augusto Ensiki - Morgan Stanley, Research Division

Edmar Prado Lopes

We have here Mr. Paulo Kakinoff. He will start the presentation right now, and thanks again, and thanks for the webcast, people who are listening to us over the web. And just for you to know, we have just uploaded a presentation from Eduardo. And if you want to move from 1 presentation to the other, it's control F5, okay? Mr. Kakinoff, thanks very much.

Paulo Sérgio Kakinoff

Good afternoon, everybody. And we would like to deliver 20 minutes, 25 minutes presentation, then later on, I will hand over to Eduardo Sanovicz, and we're going to have enough time for questions and answers. So thank you very much, you all, for coming. It's a great pleasure to introduce and to present to you our strategy. That's the GOL profile just as a recap information. As you probably know, our structure has now a different -- a new company called Smiles. We are going to comment on Smiles later on. And here, you can see also the main figure of GOL Airlines. We are the largest low-cost airline carrier in Latin America. We are 12 years in business, flying to 65 destinations in 10 different countries. In South America, Caribbean and United States since last year. We are operating today around 970 flights per day, and we have all our fleet made of 737 Next-Generation's aircraft. We have already announced it also last year, the purchase of 60 aircraft, the Boeing 737-800 MAX, which are supposed to be delivered from 2018 up to 2023. We have the dominant position in Brazil, Brazil's main airports, and we are offering also different services on top of our low-cost, low-fare position, which for example, Buy on Board, comfort seats, so on and so forth.

So we have, as mentioned before, a dominant position in Brazil's main airports, all of those are the airports predicted to be the main ones, the Brazilian World Cup, which is supposed to happen next year. And in all of them, GOL has the market leadership, the -- has the leader position or the same market share than our main competitors. We have adjusted our company quite fast, along the last 2 years. Since the volatility in the market became stronger and stronger, we have adjusted our capacity and our cost structure in order to face such difficult times in the external environment. In this chart, you can see the main movements done by the company. Most of them are reduction in supply, including also the shutdown of Webjets, operating activities and returning the very old 737 Classics, not efficient in comparison to our brand-new 737-800 Next-Generation fleet.

GOL has an average 7 years age of -- in our fleet, and Webjet was operating with 22 years old fleet on average. So we have now a new projection of supply, which is 9% shorter in comparison to last year, full year effect. And also this 9% means additionally to the current size of the company, 5% less flights than we had in the first half of this year. Basically, we are talking about 200 flights cut per week in comparison to the 970 flights that we have per day. Naturally, the schedule does not happen linearly, so it means we have different reduction or different cuts in the offer in each weekday. But in average, we are, as I mentioned, reducing about 200 flights in a week in our operation. Those flights are either the less profitable or their nonprofitable at all, mainly pressed or pushed by the recent dollar evaluation in comparison to our currency, real.

Here, you can have an overview on the Brazilian airline industry, what have changed in the last years. Into 2011, the companies had basically the same behavior: the market was growing, the demand was also going quite -- growing quite fast and the companies were increasing supply month after month. As a result of that movement, we came to 2012 with an oversupply in the whole industry and now a very, I would say, a very healthy movement started to happen last -- I'm sorry, April last year when GOL started to cut capacity and it was followed by its main competitor since September last year. So at the moment, the trend in the industry is to reduce the mass-market supply, which has been very, very productive in order to support our strategy and to make us able to face this deterioration in the macroeconomic environment. Later on, Eduardo Sanovicz will talk on ABEAR.

Finally, the airline sector in Brazil has been organized through an association, which has driven our agenda towards the government, and we have achieved very important benefits for the industry as a whole. Eduardo will talk a little bit more about that. And this, the combination of that effect, of having the mass-market supply better discipline and industry governance us is leading us to cover our operating margin as has been already announced in the beginning of this year. And we are keeping exactly the same guidance today, achieving by the end of the day an EBIT -- a positive EBIT margin between 1% and 3%.

Here, you can see how has -- developed the current dynamics of the domestic market related to reducing supply and maximizing load factor. So here, we can see the industry supply variation and the industry demand variation also. This downtrend -- I'm sorry, this downtrend has been clearly presented here. And finally, the industry -- I mean, finally, since April last year, the industry has followed and adapted itself to a new reality.

The same effect here can be shown through numbers and GOL has clearly presented it has lead that movement. We see also some of our competitors increasing capacity and those have also different reasons why they are doing so. Azul plus TRIP, they are growing regionally. They are operating basically smaller aircraft and they are then able to fly to smaller airports, where the 737s and the Airbuses are not able to fly. And Avianca is just changing or replacing its smaller aircraft like Fokker 100 by Airbuses. So therefore, you can see here their -- the increase in domestic supply. In number of flights, they are also either cutting or just keeping the same amount.

The regulatory environment. After the ABEAR creation, we could achieve, as we have mentioned before, very strong and important benefits to the sector like the payroll tax exemption with represented for GOL only BRL 100 million last per year. Based on the current exchange rates, something around $43 million indirectly -- apply directly to our net margin. And now we are -- have also the reduction by 50% in the ICMS tax. ICMS tax is the Brazilian VAT, which is managed by each state in Brazil. So Brasilia means our fourth largest market and there, we could cut 50% in this extremely high tax. It was 25% and now, it is 12%.

What's our strategy? We have been -- we are managing very close our capacity. We are working on our cost efficiency. So we have achieved very low CASK levels. CASK, as you say here in United States, and you have also worked along the last year to strengthen our balance sheet.

By cutting capacity and bringing much more discipline to the market, we were also able to design a new and much more corporate-oriented network that new customer focus the corporate customers has also lead our PRASK to increase period after period, and we have achieved 2-digit PRASK increase since the end of the last year. That has been our target and that's how we are managing our capacity. The first priority, clearly said, is to keep this growth path on PRASK. We are not driving our company to artificially increase load factors. Therefore, our decision is always to cut offer and keeping the discipline instead of deteriorating our PRASK. So the goal is going to be the right size for the market to be profitable.

The focus on business travel -- travelers has increased not only our PRASK, but at the same time, our yields and this is a very, very important. The ABRACORP, the Brazilian Association of the Corporate Traveler Agencies, for the first time delivered its result showing GOL as the leader company, specifically for the corporate travelers. And this has been the first clear answer that we got since we started this new strategy by the end of the last year.

The focus on operational efficiency in a readjustment of cost structure scenario. We have also dropped dramatically the number of employees in the company. Since the first quarter of 2012 up to now, we reduced about 20% the total number of employees, keeping a very interesting ratio between employees and aircraft, and also compensating the additional cost coming from the exchange rate. Today, we are operating a company with 16,470 employees on average. And at the same time, we have improved significantly our punctuality, achieving 95%. And already for the 11th month in a row, GOL has been the most punctual airline in Brazil, one of the most important aspects from a corporate traveler perspective.

We are managing to combine both things, increasing punctuality and reducing number of employees, by investing a lot in remote check-in, and we have acquired a lot of patents for our self -- self-service patents to the airport at the same time, that we are reducing the number of employees. So this formula has proven to be extremely successful at the same time that we have been also able to increase our customer satisfaction index.

In the fuel consumption efficiency, we also had positive reflect of the readjustment of cost structure. We were also able to partially compensate the fuel price increase, also verified along the last 8 months by operating our company in a much more efficient way. We have 6% reduction in fuel consumption per flight in comparison to the same flights that we were operating last year.

Together with Delta, who is supporting us in all of those initiatives, we have working -- worked on different strategies, those are all combined and also leading the GOL's results towards a 2-digit PRASK increase. The coordination of flight schedules, both companies, they have perfectly matched their flight connections here in Brazil or in the United States, mainly GFK, Atlanta, where we are flying daily with Delta from Brazil. And we also have -- now, we are addressing 400 destinations in over 70 countries served by GOL and Delta. We have just started to implement the full seamless culture. It started in the beginning of last month. And to the end of August, all of the destinations operated by Delta and GOL in both sides, we will be sold by both companies' structure without any kind of disruption.

Smiles. We -- December last year, we did the spin-off of the company. Smiles became a totally independent company. And then in April last year -- this year, I'm sorry, we -- Smiles went public through the initial public offer of the company. You know already the results. The most important message here is that 100% of the proceeds were used to improve our cash in the total amount of BRL 1.1 billion or something around $490 million. So the use of proceeds was totally applied to purchase VRG, which is the airline company, air tickets in advance.

So now, I'd like to hand over to Edmar, who is going to explain -- talk more about financial results.

Edmar Prado Lopes

Thank you, Kakinoff, and we're still using first quarter results, so we very quickly here over. The numbers you know already most of it. We just have to reinforce. We had an EBIT of BRL 101 million. EBIT margin came close to 5%. It was a really good improvement over last year when we had just about a breakeven level even with the tough environment that you're seeing on the right hand of this chart. We had an exchange rate devaluation of the real of 12%, fuel price went up by 14% and airport fees went up by 10%. Even though we were able to raise our margins by almost 5%

[Technical Difficulty]

Edmar Prado Lopes

And the main factors that influence our results from the first quarter were supply reduction. You saw that. Kakinoff went over that, and we were able to show a growth on the RASK over 9%, almost a double-digit growth. And we are also benefiting for the first time, showing the numbers for the first time of the new cost structure that we have, as well as the payroll tax relief. On the accounting numbers, we were able to see some gain in sale leaseback transactions of about BRL 30 million for the first quarter alone.

When we go to the main financial operational indicators, we saw that supply was down by 12%, and I'm talking here over total supply, domestic and international. Domestic supply was down by more than 15%, while we saw some decrease on demand side as well. But what I would like to highlight here is the commitment that the company has over the CASK side. Even though we cut capacity by 12%, even though we saw the FX moving up, even though we saw airport fees moving up, our CASK ex-fuel was up just over by 1%, showing that the amount F4 that the company has done in order to have this new structure going on.

On the revenue side, I would like to highlight, as again as Kakinoff mentioned before, the fact that we are -- we have a clear strategy here. We're not worried about filling up the planes with low fares, we are worried about PRASK, we are worried about having the right yield and the right size for the company here. So although we have lagged behind over load factors, we are very confident that our strategy is in place, and it's showing the results. And the fact that we are moving the margins by a lot this year shows us that we are on the right track.

Again, on the financial indicators, it's important to highlight again that we will see a lot of improvements this year, not only on the EBIT margin. Again, for the quarter, we showed a 4.6% improvement. We are reassuring the guidance today between 1% and 3% for the operating margin. And this will take our EBITDAR, according to analysts, to a number close to BRL 1.2 billion, and this is very important for our leverage because you will see leverage coming down -- going down quarter-over-quarter from the peak that we saw in the fourth quarter of 2012. So this is not a debt issue. This is much more related to a results issue, and we are confident that we will deleverage the company just because of that. At the same time, you know, we have been telling the market that we'll keep cash at least at 20%. We did that in the first quarter before the Smiles IPO. And when we will deliver the results from the June quarter, you'll see that our cash has gone up, as Kakinoff again mentioned, by the proceeds from Smiles.

On the -- over the financial indicators here, and this is Slide 27, this is a much more related to the trend. From now on, what we'll see is that we will put behind us bad quarters that we had last year. So we should expect that the company will deliver quarters, which will be better by 10 percentage points at least we say even 15 percentage points sometimes comparing to last year. So it will take us to a completely different scenario over the next few quarters and the company will deleverage us because of that.

As for the CASK, on the right-hand side of the chart, again over Page 27, it shows the amount of effort that the company has done over the lines, over the -- what we can manage, and we have done a very sound job in order to restructure the company and we have rightsized it to the new times.

Going over the cost side, and we are now at Slide 28. The chart shows us that not only we have been very, let's say, regular or recurring as for having a very competitive CASK, but also the last quarter showed us very, very competitive against the peers that we have in the region.

As for cash, this is Slide 29, for those of you who are on the web, we ended first quarter with BRL 1.6 billion. This is roughly 20% of last 12 months' revenues. And on a pro forma basis, with the proceeds that we got from Smiles, both the IPO and the sales of miles in advance to the banks, we've got an additional here of BRL 1.5 billion. That is, we are close to 40% of last 12 months' revenues. This is a very, very strong cash position and we are absolutely positive this is the cushion that we needed to get the margins back to the positive side.

On the right-hand side of the chart, when they see the financial debt that we have, the commitments that we have, we have very little commitment coming in the next 2 years and we have a challenge here, and this is from 2015, when we have the first local debenture coming mature. And if you ask me, if I have a wish list for Christmas, very much where we're dealing with that over the next few months, not now, that is we'll keep some cash for the moment. But in the midterm, we do expect to be able to stretch it and having, by that way, no financial pressure over the next few years, but it's still to be worked on.

Well, with that, I will hand it back to Kakinoff, and he will go over the guidance, what we have changed and what we have sustained. Please, Kakinoff.

Paulo Sérgio Kakinoff

Thank you, Edmar. So coming to you at the close of the first presentation, as you can see, it's basically the summary of what we have presented right now. We do see in Brazil sort of economy slowdown. Therefore, we are considering an even more conservative GDP growth for this year. Our original guidance delivered by March consider a GDP growth between 2.5% and 3%. We have dropped 0.5% that forecast. We are keeping our ASK and CASK variation -- ASK variation and CASK ex-fuel as the same that we have delivered in March. Once -- while we are cutting capacity, additionally, 2 percentage points in a full year effect. We are also working on a different, much less attractive average exchange rate. Previously, we're hanging from 1.95% and 2.05%. Now we are considering the new scenario, 2.08% to 2.18%.

Fuel price key, the Brazilian jet fuel price. This is the price in reais. From BRL 2.30 as yearly average, we are now considering more expensive and costly fuel price in Brazil between BRL 2.3 and BRL 2.4, but we are keeping exactly the same EBIT margin that we have presented by beginning of this year. So we reiterate our EBIT margin projection and announces the new domestic supply reduction in 2013.

So the final message is, we are keeping our focus on execution of the company's strategy. We are working on the maintenance of our very interesting current liquidity situation. We have a very strong competitive advantage on cost structure, which has been our first priority, and we are going to keep our operational efficiency at the highest level. Those are the key drivers of our strategy leading the company along this turnaround process. And it's also our commitment to keep the clear and frequent communication of the company's strategy to the market.

So sorry, now, I would like to also to hand this presentation over to Eduardo Sanovicz. And later on he can comment on the question and answer.

Eduardo Sanovicz

Good afternoon, everybody. It's a pleasure to be here with you and thanks for your presence here. Now, as just mentioned by Mr. Kakinoff, the Brazilian Association of Airlines, there's -- like your AFRA you have here in U.S., there was just founded in the end -- in the beginning of 2012, up to make 1 year as an association. The idea -- the main idea is to improve the fact that people can fly in Brazil, people and cargo can fly in Brazil to improve this way of transportation in our country. The 5 groups that founded the association -- now they are 4 because TRIP and Azul just joined, but they represent about 99% of the market, to 2,7000 flights a day around the country, on the domestic market in 450 aircraft right now. The 3 main agendas are related with competitiveness and then we're talking about infrastructure and cost, sustainability. And now -- and then we are talking about technology, improving the way we fly in Brazil and new technologies like biofuel and people. People here, we are talking about consumers and about our colleagues. The guy who -- the people who is working in our companies. These are the numbers that we represent around our country, something like 1.2 million jobs, direct jobs and indirect jobs. The amount of a little bit more than 1% of the GDP, taxes and how much we consume as an industry. The one thing which is very important and we began to address just recently to the society, to the media and to the government, is that the Brazilian -- if you sum what we import and export, Brazilian freight influence in the market, we have something like USD 500 billion. And 10% of what the Brazilian import and export flies, but it's in value. But it represents only 0.2% in weight. It means that soy go by ship, but microchips of iPhones, get in and get out by airplanes. And these kinds of message became very important in the way we begin to talk around the country.

In the last 10 years, Brazil became the third large domestic market after China and U.S. We came from a level of around 38 million passengers -- tickets sold in 2002 to almost 100 million tickets sold in 2012. And it's related with the fact that in 2002, there was this deregulation of the market. And we have 2 lines, the deregulation that brought the average of the tickets, the price of the tickets, 46% slow, down in 10 years. And in the other hand, there was an important increase of the income of the people in the last 10 years, the level of employment and the income of the families. So when the 2 lines cross, we have this growth of the way people begin to fly.

The average of the tickets that's the other line, and the important thing to mention here is that in 2002, less than 16 -- less than 27% of the seats were sold for something around USD 150, BRL 300. And now, we have 65% of the seats being sold below $150 in our domestic market. It means that one of the most important things that have been built is that in 2002, to fly in Brazil, aviation in Brazil, commercial aviation in Brazil was an issue for a very few people. It means something that wasn't in the media every morning, nobody cares about this sector, about this industry. In 2012, it began -- it became -- excuse me, it became a real issue. Every day, every morning, you open the newspaper, and there's something mentioning what's going on in our industry. And that's a very concrete reason for that. The main system for people to move from 1 state to another state in our country was bus. These are a confirmation of the bus price, if you book your ticket in airplanes, 3 months, 1 month prior or the day before and what you compare of going by road from São Paulo to these 4 destinations that are a little bit far. To give you an idea, go from São Paulo to Fortaleza is something like to go from, I don't know, like New York to Dallas by bus.

The consequences of this economic growth was the inclusion of the Brazilian middle class in the airplanes. They became consumers. They became to fly -- they began to fly. And now, we have to deal with this new challenge, and what's this challenge? Well, the answers of the industry were to invest in new airplanes. So we have a fleet of airplanes that is quite new. We can even grow the offer of airplanes and flights, both for people and cargo till 2020. In order to double it, that's our possibility. If we double that, how much money we're going to represent in our GDP? And the challenges and the opportunities, which are very important to make here a remark, is that it's quite recent this movement to the countryside in Brazil. If you look to this blue areas, about 74% of the passengers are concentrated in 18 airports in those regions. So if we move forward in this model of keeping this development in some new countryside areas and a lot of things are doing -- are being -- are in this way, we can forecast new flights and new airports in these regions.

Last week, we just finalized, as an industry, a list of around 60 new airports and we send it to our government in order -- saying to them that if they improve the infrastructure in these airports, we can in a space from 6 to 9 months to launch flights not all the companies, not daily flights from everywhere, but even 1 of the 4 companies we represent could launch a new flight to these new destinations. And this is an opportunity, because the improvement of the amount of passengers wasn't followed by an improving of the infrastructure of the airports. So the main airports in Brazil are almost -- are on 100% of the capacity to receive new passengers. 3 airports had been considered to private sector months ago, 2 are going to be considered next September. These 5 represent almost 50% of the traffic of the domestic traffic. They have -- the new owners, they have several and very strong penalties if they don't deliver an improvement of these airports prior to the World Cup next year. So the renovations and the new terminals are on the move and they are going to be ready. I believe they are going to be ready for the World Cup. What does it mean? It means that for us, the World Cup is a pretext and it's an issue in order to make things move forward. More than the World Cup itself, it's an opportunity to improve infrastructure, and to concentrate the investments in some sectors and one of them is ours. That's why we are pursuing very hard the government to move in these directions.

I think Mr. Kakinoff already mentioned how fuel and taxes are important on our agenda. The most -- one of the most important moves that the association did in this direction was to the federal district, Brasilia airport, we reduced 50% of this tax, ICMS. And 2 weeks ago, we just addressed to the government in a formal meeting with our minister that we want now to discuss a federal policy, a new federal policy to fuel. Because the prices of fuel in Brazil, and this is another challenge we have, the prices are over the average around the world. Fuel costs for us, as an industry, something like 43% of our operational cost. The world average, about 33%. So we have a challenge here to reduce it.

Our recent history, and this is the price structure we have, in our recent history, as we just showed here, is the fact that when we organize ourselves as an industry and we begin to address our government very concrete issues till now, we really could manage and they answered in a very positive way, not to all of them. We are still on a very tough agenda and we have 4 or 5 very important steps to move forward, especially this one, the fuel prices. But we already made -- we already have important steps related with the cause of another issues. This is just to illustrate how we can compare prices. The green lines are the prices we have to pay for fuel in different Brazilian airports. And ICMS, the RVAT is quite important because Brazil joined the international commercial agreements. So as almost none -- almost anyone -- no country in the world charges any tax on fuel, we cannot charge for international companies. So international companies in Brazil, they don't pay this VAT on fuel in Brazil and we pay. If you fly from São Paulo to Rio, you pay VAT on fuel. But if you fly from São Paulo to New York, you don't pay it. That's the difference. One thing that we really moved in advance was in labor costs when we reduced them very strongly last years.

So what our next challenges? The regulation of the system of working hours in Brazil. In the '80s, we have the same structure that you have -- that everybody had around the world, but in the '90s and the last decade, we had 2 new generations of aircraft -- of airplanes. And so here in U.S. and in Europe, these regulation was adapted to these new improvements, but it didn't happen. In our country, we are in the middle of this agenda. Another agenda is to remove a limitation of 20% of plane -- the possibility of plane ownership of our companies, and the government, as you know, is sending positive signs in this demand and the Open-Skies issue. The new airports are on the move. And the fifth issue is related with our second agenda, new technology. A lot of infrastructure is being built in these airports and one of them that we are really confident about is the infrastructure that allowed us to fly in a more rationale way, the performance-based navigation system. The investments, the entire industry is forecasting is related with new aircraft, and this is what I really want to show you.

We, as an industry, with input forum, the 4 different companies, we forecast. If we manage to face and to build a new model of regulation and infrastructure in our country, we can face this scenario for the next 8 years. From about 100 million passengers, we are forecasting to double it in 8 years, from 96 airports to 169, about the double of domestic roads, 700,000 more employees and almost double of airplanes. We presented the first person who received this agenda, of course, in a very more detailed way was the President, Ms. Rousseff, about 3 months ago. And since then, we began to move step by step in order to build this agenda. The scenario you can -- we can forecast is that some of the steps have already been done. Mr. Kakinoff just presented them to you a few moments ago, and some of them are still on the move. I think these are the main issues I could address to you. Thanks for your attention, and I give the presentation back to Edmar.

Edmar Prado Lopes

Thank you, Eduardo. I think that now, we may go to the Q&A session and I will assist some media guys here. I will kindly ask them to keep their questions for later on and I will try to have a lot of focus here on investors and analysts. Okay, we'll start with Tom over there.

Question-and-Answer Session

Unknown Analyst

Just given a lot of the recent geopolitical events that have risen in Brazil, can you give us an idea what the climate is like and are you beginning to see some of these translate into lower traffic? Obviously, we had seen a little bit of a slowdown last quarter and is this something based on some of your initial forward bookings? I'd suggest that we could see some further deterioration in the market conditions?

Paulo Sérgio Kakinoff

At the moment, we don't see any difference or any significant difference on demand side in comparison to the natural seasonality that we have. So even considering the future sales for the high season or July vacation, which has been extremely strong along the last years, we didn't see any negative movement in that side. So those movements, all those events are not affecting the demand differently than it has been affected along the years.

Unknown Analyst

That's very helpful. Just with regard to the general market conditions, can you just help us, who may not be in Brazil, to know what -- can you just characterize for us the climate, the activity and how you see it from a business perspective?

Paulo Sérgio Kakinoff

I think, for the business perspective, the situation will add even more volatility. So the confidence level in the country might be somehow affected. But as we could see since the beginning of this year, the world economic instability has affected also the Brazilian environment. Honestly, we do not see -- and this is the current as stated in today's discussion in Brazil, what's the agenda? What's the required agenda for those movements? We do see there is a lot of dissatisfaction in different areas, but I guess that, among everything that we have read along the last few weeks, and this is -- I might say, this is a personal opinion, was everybody in Brazil is seeking for the same answer and there is no clarity at all at the moment. I think that people is realizing they are customers of public services and they are fighting for a much better quality for those services, because they are expensive. We are paying taxes, we are all and the service level in those segments are not at this expected level. So once -- if you could be there and see people on the streets, there were -- I do not know, 50, 60 different claims ranging from better buses tomorrow, up to hospitals bringing up why are we running the World Cup and there are some mixed feelings at the moment, but nobody at the moment is really capable to say that's the required agenda, this is what the people is fighting for. You can't, but this is the result of 25 to 30 different items. It's nothing -- something straight.

Eduardo Sanovicz

Just let me -- let me just compliment on what I think is quite important. For the first time in our Republican history, this manifestations are being organized and they're a Democratic environment. So it's quite important to address that our stability as a democracy, as a country when contracts are on the right way, and when the legal system is really working, are absolutely safe. So for us, it's quite important to understand that this generation that is in the streets, they are asking for the rights as consumers because in the last 10 years, about something like 50 million inhabitants became consumers and then 10 years after, they realized that they have the right to have good quality of services. And that's the challenge now, is how to improve the quality of services, especially public services, for people that is demanding a quality that they can see everywhere in the world, wearing their tablets, because they are now are able to buy the tablets. So it can be viewed as a very important opportunity to anyone who can improve the services or the goods, which is able to sell or to deliver to Brazilian people.

Edmar Prado Lopes

[indiscernible], please, Jim Parker first, then...

James D. Parker - Raymond James & Associates, Inc., Research Division

Jim Parker with Raymond James. Your guidance is interesting on your CASK-ing, your nonfuel CASK-ing and that you have reduce your capacity plan further, but yet, you're maintaining your guidance on CASK-ing. So I mean how can you maintain that level of unit cost while you're cutting your capacity further?

Edmar Prado Lopes

Okay, Jim, this is -- thanks for the question. If you look back a few weeks, we had the fuel on a different situation and I'm just leaving the FX aside for a while. And to be very candid, there would be, maybe, a potential upside for us on the cost side, okay? Now we have to reevaluate everything over the next few weeks and we're not doing that as for CASK and RASK before the end of the second quarter, when we have a much better view. What we know now is that with the adjustments that we are starting as of today, as for our network and the CASK-ing capacity and what Kakinoff showed over, our revenue side is that we are able to keep the same guidance that we gave a while ago. What we -- going back, what we will do is that we'll have to be even leaner on the cost side. Again, if we were maybe to show a better performance on the cost, now, we are more challenged, but we are keeping that for a while and we understand that we are able to reach the guidance. This is the main message here, Jim. We're keeping the guidance even with the current macro environment against us.

Paulo Sérgio Kakinoff

It is important to highlight, Jim, that we have already cut 7% in comparison to last year and we kept the CASK ex-fuel even lower than we were operating the company before. So we have been successful in driving internally other cost, not only in the labor cost side, but also in fuel consumption in order to keep the CASK in a very low level. So we decided to give even more accurate CASK forecast after the second quarter results. By the way, I'm also quite confident in keeping the margin or the Delta between CASK and RASK that we have presented before this cutting capacity.

James D. Parker - Raymond James & Associates, Inc., Research Division

My second question is for the gentleman from ABEAR. I understand that the government is considering legislation for regional airline package. And I would like to know the status of that legislation and I think it involves government subsidies and airport cost reductions of more than BRL 1 billion per year. How can we expect the government with the demand for funds for education, hospitals, so forth to allocate BRL 1 billion to regional aviation improvement?

Paulo Sérgio Kakinoff

Because the funds for these initiatives come from different sources. The funds that the government is considering to launch this new regionalization policy come from the money that the companies which are now running the new private airports paid in the process of assuming the concession of the airport. But in the other side, we think that one of the facts that is driving the government to analyze until now to not announce in a very concrete way, what is this policy to regional aviation is related with the decisions about what you do with this funds.

Eduardo Sanovicz

That's protected -- let me try to, just to complement it, that's protected by law. Once the money -- with the money coming from the auction -- auction processes of the airports cannot be applied to any other investment, then -- but the FNAC, FNAC means Fundo Nacional de Aviação Civil or Civil Aviation National Fund. You cannot get access to that money, but utilize it for the civil aviation. Therefore, the government cannot come and say I would like to apply the resources coming off the private legislation process to any other thing. Actually, it became quite a challenge to spend that money once -- it's a huge amount of money. Therefore, we are talking about this type of aggressive investments in the regional airports' subsidies, even retrofitting the current airports to make them able to host larger aircraft and just simply to renew it. So I would say, that's the lowest possible risk that we are forcing having that money utilized for any other thing.

James D. Parker - Raymond James & Associates, Inc., Research Division

And what is the status of that legislation? And what would be the impact on GOL?

Paulo Sérgio Kakinoff

The legislation is ready to be put forward. They just didn't decide about the proper moment to launch the policy because it's related with some infrastructure measures in like retrofit the airports in the other hand with subsidies. But they are still discussing, which -- what are going to the rules to this subsidy because they are rated with the amount of passengers that each airport can have for 1 year. And when they launch this policy, all the companies are going to be able to assess it, because it's not going to be any kind of restriction.

Eduardo Sanovicz

Naturally, GOL will be positively affected once a very important number of airports served by GOL will be included or considered better, will be classified as a regional airports. So precisely, between 10 and 14 airports operated by GOL will be consideration of regional airports. So those subsidies will be also positively affecting us. I'm telling you, the conclusion based on the information we have at the moment, the law is, as we know, ready to go but not yet made public. So it can -- something can be changed, but we don't believe it. And once it becomes public, it might also represent an additional opportunity for GOL. But this one, we can only tell you after the legislation will be finalized and made public.

Edmar Prado Lopes

We have Helane over there.

Helane R. Becker - Cowen and Company, LLC, Research Division

It's Helane Becker with Cowen -- Cowen and Company. Actually, so, my question is this, what do you think the market doesn't understand about the changes you've made with respect to the company that the stock price is still and the valuation is still relatively low? It seems like you've made a lot of changes that are to be viewed favorably and yet, the market hasn't really accorded you maybe a fair shake. So could you just possibly comment on that?

Paulo Sérgio Kakinoff

Maybe I'll attempt to start. Last week, the press has related the current situation in Brazil to the current value of the companies and there are some examples in the Brazilian stock market where the companies have, today, a lower value than they have book values. So I would say, in our case, it seems to be a combination of extremely high exchange rate volatility, which affects our stock price directly. And if you see when our price, our share prices started to decrease, it's exactly the same time than the real started to devaluate in comparison to dollar. So we think that once there is no -- until there is no clarity related to what's going to be the new level of exchange rate between dollar and real, our share will suffer from the volatility. And that comes in combination with the first effect I have mentioned, the current stability related to the Brazilian macro environment. Those effects combined from our perspective affecting the prices of our shares at the moment.

Edmar Prado Lopes

Yes, I just, would add that we have another BOVESPA trading at 46,000, 47,000 points, which is we're going back 5, 6 years, depending on the timeframe and as Kakinoff said, we are not -- we're no different than the other -- many other Brazilian companies that are suffering over the recent volatility. In our case, I would like to add that as you mentioned, we're very confident that we are recovering the margins, that we are doing what has to be done. Though it's a very hard set of decisions, we are willing to take that and we are confident that we will show a much better, a lot of improvements over our operating margins for the full year. So we'll keep committed to coming back to positive margins. This is the message that we have, this is -- why, just today, we announced an additional cut and we have to wait. The market is on a mood that, show me the money way. That's the mood that the market is on. The honeymoon with Brazil has ended. So we saw a flow out of Brazil of over USD 6 billion in the last few days. So we just have to be very calm. And again, as we mentioned in the very last slide from Kakinoff, we're committed to deliver results, we are committed to our strategy. Nothing is going to change that for the GOL.

Paulo Sérgio Kakinoff

55% of our operational cost, rating cost, are dollar based. And we have, along the last 3 weeks, more than about 12% deterioration in exchange rate and we have been able to keep the same margin guidance that we have delivered before. So I think we have developed the right tools to face this stronger winter than expected. But actually, the current macroeconomic volatility needs to be a little bit more stable then to positively affect our shares. That's our [indiscernible] at the moment.

Helane R. Becker - Cowen and Company, LLC, Research Division

Could I just ask 1 quick follow-up? In your new capacity guidance, The 9% decline, you have to have any redundancy in the workforce?

Paulo Sérgio Kakinoff

The natural -- actually, we have, in Brazil, the natural turnover at the airports, nowadays, is at the level of between 1% and 2% month after month. So the reduction is not linear all over the airports.In some of them, we are going to have workforce reallocation for orders. We are not just replacing the natural turnover. This is the way we are adapting our workforce along the periods we have presented.

Edmar Prado Lopes

We have Michael Linenberg over here on the -- on my left hand side. [indiscernible], please.

Paulo Sérgio Kakinoff

Until the microphone arrives, that [indiscernible] will change again.

Michael Linenberg - Deutsche Bank AG, Research Division

It's Mike Linenberg with Deutsche Bank. I have 2 questions. I guess the first for Eduardo, you talked about the regional aviation package or the new policies. There is also some talk about either, I guess, a reallocation of slot set Congonhas or maybe a creation of slot set Congonhas, where are we on that? How does it look? How does it settling out? And will -- if there are additional flights per hour, how should we think about it?

Eduardo Sanovicz

The -- well, to make a long story short, the end of the day, we probably are going to have 4 new slots per hour to commercial aviation, taking them from what we call general aviation, that's active jets that are flying there. Congonhas has a formal capacity for 52 slots per hour. They were reduced as a consequence of the accident that happened 2007. And from 48 that we used to have in the industry, we were reduced to 30 per hour. Now we are going back to 34. So the solution to Congonhas will be to open it for new players without touching the flights we have from the companies actually based in the airport.

Paulo Sérgio Kakinoff

It's also important to mention that this new slot allocation is not yet decided.

Michael Linenberg - Deutsche Bank AG, Research Division

Okay, great. And then just...

Eduardo Sanovicz

No, for who it's going to be is not decided.

Paulo Sérgio Kakinoff

The 4 is the government already it's at something that way, but the allocation, how it's going to be distributed, delivered, is not yet decided, it's important information.

Michael Linenberg - Deutsche Bank AG, Research Division

And then for Mr. Kakinoff, back to the capacity changes, you were down 7, you're now down 9. That probably does free up some aircraft time. You've been growing internationally. Can you talk about -- do some of those hours, or utilization, does it find a way into the international market? And then touch on the, I guess I'm going to call it the Santo Domingo hub experiment, how that plays out over the next 12 months?

Paulo Sérgio Kakinoff

Thank you very much for the question. Among the truce we have developed to do with such high volatility are those related to the capacity. How we are managing the capacity in such volatile demand market, I mean, also -- because not all related to exchange rate but in Brazil, it happens. All over the world, we have the high and low season but huge difference between both periods. And by high, I mean July, the month itself, where we have the school holidays, and naturally, December -- into December -- between December and February, when we have Carnival in Brazil. Those, I would like just to mention some of those [indiscernible] they are bringing in a very interesting flexibility to deal with. Santo Domingo is one of them. We started last December 2 daily flights departing from Brazil, Rio de Janeiro and São Paulo to Miami and Orlando. Almost without any kind of advertisement in Santo Domingo, neither in Santo Domingo or Rio de Janeiro. The fight from São Paulo to Orlando is operating today at 100% of its capacity and the flight from Rio de Janeiro at a level of 75%. I'm talking now from the second -- about the second semester this year, the future flights we have already commercialized it, those at load factor levels. So they have proven to be very successful. Therefore, we are strongly considering to announce additional 2 -- between 1 and 2 routes flying over Santo Domingo to the United States or Central America/Caribbean until the end of this year. So our idea is part of the strategy to increase the foreign currency revenue of the company, which is today, at a level of 8% and we have a plan to increase it up to around to 17% of our total revenue in 3 years period of time. So part of this strategy goes through Santo Domingo, where we can develop our network flying to the United States, Caribbean islands and Central America with our 737-800 next-generation. So it has -- these flights, they have, relatively speaking, lower trip cost and in comparison to the direct flights and we have fought a very interesting demand for those flights. So this is one part. The second is, we have, with some strategic companies, we have strengthened our relationship in order to allocate our aircraft in their high seasons, where we are operating at low seasons. One very interesting example is transavia, the Dutch company, they use it to get 2 aircrafts from GOL to operate in their high season and this year, they are getting 5. And we have at least 2 additional airlines literally in their waiting list asking for the same operation, but we didn't decide on that, because we do not know yet how many aircraft we will need in July this year, which is high season. We have a very good idea and this idea does not show us any chance to send additional aircrafts. And we are now working on October and November demands just to find out whether it's going to be necessary to borrow more aircrafts to them. So just to mention 2 -- among those 2s that are giving us very interesting flexibility to operate it. Related to the block hours, before these additional cut, we were operating at the level of 12.2 hours a day and now it's going to come to 12.1, or worse case, 12.0. So it's a marginal effect.

Edmar Prado Lopes

We have Steve Trent over there.

Stephen Trent - Citigroup Inc, Research Division

Steve Trent from Citi. Just 2 questions from me, if I may. The first question is with all that's going on, on the Brazilian street and, of course, you gentlemen describe very well what's going on in the currency markets. Do you think this sort of confluence of events may be put a little bit more pressure behind the government to negotiate some relief for the sector? Or at least in short term, as we move towards the Olympics?

Eduardo Sanovicz

It can make it a little bit more difficult because in the and of the day, all the demands we have are related to exemption of some taxes of some costs we have and they are government related. In the other hand, the recent history is a history made of dialogues. So to give you just one issue, tomorrow at 6 p.m., I have this meeting with the President of the Nation of Civil Aviation Authority, to talk about connection tax. Connection tax is a new tax that was just launched and they obliged us to get about $3.5 per passenger that is being -- connecting between airports. And we address that we don't want them to take it out, but we just want to let it transparent to consumers in order to allow us to ask -- to tell the consumer that they are being charged. The first sign, very favorable, but of course, everybody in the government became a little bit more conservative prior to give answers when they involve money.

Paulo Sérgio Kakinoff

We don't like to allow anybody to leave this room relying on government benefits. That's really the idea. Eduardo Sanovicz properly mentioned that we do not know what's going to come out of this recent event in Brazil. What has been a very, very positive independent of what has been discussed, we never saw this -- the government so open for dialogue, I mean for that industry, as we have seen recently. This is a clear product of the ABEAR creation, I have no doubt about that. And now, so they have officially announced it and said to the market the Brazilian Civil Aviation Minister has said there are no new airports without strong airlines. This is -- that means a lot and we know their behavior, we know what they're doing. They are sharing with us some of their thoughts and I would say the very conservative approach please, nobody should leave this conference relying on additional benefits about to come. But on the other hand, we were closer to them than we were ever before. I mean, discussing the problems of the segment, how important the civil aviation in Brazil for the future of government plans and infrastructure is top priority in the government list. So I think we are going to address this problem together, that's the only commitment I would like to highlight here.

Stephen Trent - Citigroup Inc, Research Division

And just one other question, if I may. Speaking of ABEAR, which has really done some positive things over the last 1.5 years. Could you give us a sense -- a little more of a sense as to how it's organized? Is it going to be like a rotating presidency or something decided by the group, how long are people going to stay in these positions and how is the agenda driven? Does it kind of like a straight line vote so to speak? Or the 2 big airlines have the most say? I'm just curious.

Paulo Sérgio Kakinoff

You meant for ABEAR?

Stephen Trent - Citigroup Inc, Research Division

Yes.

Paulo Sérgio Kakinoff

It's 2 years period it's [indiscernible].

Eduardo Sanovicz

Two -- renovated for 2 more.

Paulo Sérgio Kakinoff

For 2 more, that might be decided in common sense for the associated and all the board members also are under the same contract so we do not predict to have any airline member taking that position. So it must be a professional driving that position.

Eduardo Sanovicz

And what is quite interesting in the association that it's a known voting association. We don't have 3 against 1 or 2 against 2. All the decisions, all my agenda is decided by consensus between the 4 members. So when ABEAR put forward some issue, it's a consensus between everybody. If something is an individual agenda, the company is allowed by the industry to keep it this agenda and put it forward, but our move is moved by the 4 of them. Would you allow me to make 1 very small comment, what I think it's important. The background of the concern about a comment everybody's addressing about the last 3 weeks in Brazil and the streets and manifestations, I think it's very strong, and it's very important to add to the comment that Mr. Kakinoff just said, one very important thing. In United States, you must consider that we have a very strong cultural identity and a commercial -- a very strong commercial business relationship with United States. And what I think is the most important background and the scenes around this manifestation is that you can see in a very strong way that 2 milestones we keep them as they were before, which is democracy and legal structure. So we think that in a political way, we can have movements. But between these 2 pillars, which keep very easy and very comfortable to everybody in any industry to keep thing forward in the relationship with the country. This is a new moment, but it's not a different moment.

Edmar Prado Lopes

We have Duane over there, with the next question, please.

Duane Pfennigwerth - Evercore Partners Inc., Research Division

It's Duane Pfennigwerth with Evercore. I wanted to ask you a fleet question. Can you tell us how many new aircraft you're going to deliver per year over the next 2, 3 years? And sort of the financing you have in place against your order book? And as you sort of persistently take down the capacity guidance, which is a great thing, it doesn't seem that there's any corresponding change on your order books. How do we make sense of the fact that you're taking a bunch of deliveries and yet, you're cutting capacity?

Paulo Sérgio Kakinoff

Okay, Duane, thanks for the question again. This is a good opportunity to tell everyone that we have changed the delivery schedule that we had, okay? So this year, we will take 16 new airplanes. Next year, rather than 16, we're taking 9. And this is very much related to the softness of the Brazilian economy. We have agreed that with Boeing on a very friendly basis, we are partners as you know and primarily we are taking that as to renew our fleet. So there won't be a lot of adding in terms of seats, but we will change mostly the 700s for the 800s. So this is a shy approach, this is a conservative approach for the next couple of years as for the fleet is related and we have also a window to decide upon 2015 and '16 and we will announce it when we have a clear view. The fact is that we have a more conservative approach for now. As for the financing, the funding of those aircrafts, remember that the last year, we put out an RFP. And at that time, we had a over -- almost 30 planes to come. And now, we have 25 and I'm including -- and I'm saying 2012, 2013. And we have funding agreed, signed, executed for all of them. So we don't foresee any special need as for funding or CapEx in the next couple of years for our fleet. We have settled we have arranged what is needed for the -- again, for the next couple of years.

Duane Pfennigwerth - Evercore Partners Inc., Research Division

And then just on the -- I guess, on the global airline investment front, similar with what you did with Delta, can you talk about the company's willingness or appetite to do another Delta-type deal with perhaps another global airline?

Paulo Sérgio Kakinoff

At the moment, we are discussing European airlines, 3 European airlines came to go starting discussions based on the same type of view, not necessarily involving equity transactions, but also it's a possibility and we are at this moment, discussing with them what could be positive or could be done with each of these 3 companies. Surely, they are requesting exclusivity in that corridor, Europe and Brazil and that might be quite interesting for us as well. But this is, I'd say...

Unknown Executive

Very early stages, very early stages.

Edmar Prado Lopes

I guess, we are running out of time here, we have.

Paulo Sérgio Kakinoff

Is there maybe just 1 more question and then...

Edmar Prado Lopes

Maybe 2.

Paulo Sérgio Kakinoff

Maybe 2, those 2.

Augusto Ensiki - Morgan Stanley, Research Division

Augusto from Morgan Stanley. Just one quick question going to the employee count. You said that no additional layoffs planned, but you won't be -- it'll just be rather a natural turnover that you won't be replacing. At what point do you hit a bottom like you cannot -- I mean, you had 16,000 or so at the end of first quarter. What's the minimum number of employees that you have to maintain?

Paulo Sérgio Kakinoff

I can't give you that number at the moment because it's part of also our strategy because it's related to our position in every single airport, mainly the restricted ones. So I would say, we can keep our leadership in this -- in the ratio aircraft a number of employees per aircraft, so have still flexibility to go further.

Augusto Ensiki - Morgan Stanley, Research Division

So no -- I guess, there's no issue at...

Paulo Sérgio Kakinoff

No target, no issue at all, no issue at all. A good -- just to complement it, a good chip on that is we still have room for more self services at the airport. So we are working hard on it.

Unknown Analyst

It's Oliver Latlan [ph] from [indiscernible]. When you look your -- the sort of market value at the stake in SMILES and the implied market value, equity value of the operating company, obviously, it's pretty low [indiscernible] something like that. With that in mind, how do you view the stake in SMILES on a sort of medium to long-term view?

Paulo Sérgio Kakinoff

Actually, this is one -- another signal how, not rational is the current share price at the moment and just considering the Smiles value, it will be higher than the airline value at the moment. Smiles is becoming stronger and stronger since the IPO. We are improving -- actually, they are improving a lot. Their partnership strategies, so we are about to announce a new strong partners to the program. At the same time that we are also developing our -- the SMILES model itself. So we do expect in both cases SMILES and airline together to move forward towards a more reasonable valuation in the market once the current volatility level will be more stable. But it's hard to say in which level we do expect to have it at the moment.

Unknown Analyst

But the intention is still to retain a controlling stake in SMILES on a sort of 2, 3-year view?

Edmar Prado Lopes

Yes, absolutely. We will retain control and we do understand that we have put up the right governance scheme so the minority has a lot of rights, the right rights. And for us, it's a win-win situation, that's how we see SMILES and GOL and Kakinoff used the very right word, this is a partnership between the loyalty program and the airline.

Paulo Sérgio Kakinoff

There is -- clear saying, there is no follow-ons in the horizon.

Edmar Prado Lopes

Yes. I'm sorry, but we have ran out of time. I would like to thank you for coming here today and for those who are on the web as well. And the presentations will be filed and they are available at our website.

And again, thank you very much for Eduardo, for joining us here today and I'm absolutely positive that he has contributed a lot of -- over the views. Thank you very much.

Paulo Sérgio Kakinoff

Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: GOL Linhas Aéreas Inteligentes' CEO Hosts GOL Day New York 2013 Conference (Transcript)
This Transcript
All Transcripts