Azul S A Sp/Adr

Hello, everyone, and welcome all to this first quarter earning call. My name is Zach, and I will be your operator for today. This event is being recorded, and all participants will be in a listen-only mode until we conduct the Q&A session following a company's presentation. If you have questions, click on the Q&A icon at the bottom of your screen and write your name and company. When your name is announced, please turn on your microphone and then proceed. For those who are listening to the conference on the phone, press 9 to join the queue and 6 to accept the audio when requested. I would like to turn the presentation over to Thais Eberle, Head of Investor Relations. Please proceed.

Thank you, Zach, and welcome all to ASUS First Quarter on News Call. The results that we announced this morning, the audio of this call, and the slides that we referenced are available on our IR website. Presenting today will be David Niederman, ASUS founder and chairman John Murchison, CEO, and Alex Malfitani, our CFO. Abhi Shah, the president of Azul, is also here for the Q&A session. Before I turn the call over to David, I'd like to caution you regarding our forward-looking statements. Any matters discussed today that are not historical facts, particularly comments regarding the company's future plans, objectives, and expected performance constitute forward-looking statements. These statements are based on a range of assumptions that the company believes are reasonable, but are subjected to uncertainties and risks. They are discussed in detail in our CVM and SEC files. Also, during the course of the call, we will discuss non-IFRS performance measures, which should not be considered in isolation. With that, I will turn the call over to David. David?

Thanks, Thais. Welcome, everyone, and thanks for joining us for our first quarter of 2003 on this call. First of all, let me thank our crew members. as usual, for their incredible experience they've delivered every day. In March, we were once again the most on-time airline in the world, following our recognition as the world's most on-time airline in 2022. We are flying more than ever. Our NPS scores are high, and all of this with an airline that is more productive and more efficient than ever, 15% more than last year, to be exact. It is truly remarkable what our crew members have achieved, and I could not be prouder. On slide four, you'll see that our business model is stronger than ever. We serve 158 destinations. We have a leadership position in 93% of our routes, and we have the most fuel-efficient fleet in the region. And we combine all of this into several fast-growing, high-margin businesses. One recent milestone has been the start of expanded Congonia service, where we more than doubled our slots to 98 daily flights, We can now fly from Sao Paulo's downtown airport to the largest corporate markets in Brazil. In addition, we just launched our nonstop service to Paris, the only nonstop from South America to convenient Orly Airport. Excitingly, our data shows that more than 30% of our customers flying us in these new markets are first-time Azul customers. That means we have an incredible opportunity to bring them the Azul universe, and showcase all that we have to offer. On slide five, you can see that our business units perform, you can see how our business units perform this quarter. Azul, Tutu Azul, our loyalty program, more than doubled its gross billing since 2019, and is benefiting significantly from our expanded presence and congruence. My personal favorite, Azul Viajings, continues its remarkable expansion growing an impressive four times in gross billings versus the pre-pandemic level. Azul Viagens is now firmly the second largest vacations agency in Brazil and the largest seller of Disney tickets in Latin America. Our logistics business, Azul Cargo, almost tripled since 2019 and continues to be the largest air logistics provider in Brazil with an impressive 33% market share. Finally, I'm excited to announce that we just launched our newest business unit, Azul Tech Ops. With a rich 15-year history in supporting Azul's operation and a world-class facility, we're in a unique position to be able to handle all of the region's heavy maintenance needs. Azul Tech Ops is now ready to bring this expertise to our customers. and we know how challenging the MRF capacity is around the world. So this is a perfect time to launch this new venture. Before I turn this over to John, let me share my thoughts on the restructuring process that we have been working on this year. We set out with a goal to protect our shareholders and make our business partners whole. I am amazed at the progress this team has made, and I am excited about the opportunities that this new optimized system Azul creates. As John and Alex will share in their presentation, the results of this process are transformational to our business. As we said before, these are permanent structural solutions that significantly improve our cash flow, leverage, and capital structure. I want to thank our team for their hard work. I also want to thank our partners who have supported us during this process. This is a unique plan that is strengthening Azul's capital structure and the cash generation matching it to our superior business model and profitability. With that, I'll turn this time over to John to give you more details on the first quarter results. John?

Thanks, David. I would also like to start off by thanking our crew members for taking care of each other and our customers every single day. I recently spotted on the World of Statistics Twitter account a listing of the world's most punctual airlines, and Azul was first on the list. That was really cool. We have a lot to show you today, including important updates on our restructuring plan. Before that, though, let me describe our first quarter results. As you can see on slide six, we had a strong quarter. Revenue was an all-time record 4.5 billion reais with an EBITDA of more than 1 billion, an increase of 74% versus last year, even with a 24% increase in fuel prices. EBITDA margin for the quarter was 23%, and the operating result was 460 million reais with an operating margin of 10.3%. On slide seven, you can see the strength of the revenue performance with a record first quarter RASC of 41.47 cents. PRASC increased a strong 23% year-over-year, even with 120% increase in our long-haul wide-body capacity. Looking at just the domestic market, PRASC increased 28% year-over-year, highlighting the advantages of our network and our discipline capacity. Turn to slide eight, you can see that we generated more than 1 billion of EBITDA, 42% higher than first quarter 2019. This is even more impressive considering that fuel more than doubled since 2019. This clearly shows that our structural competitive advantages and fleet transformation program allow us to grow and at the same time recapture the effects of higher costs with higher revenues. One incredible example of this is that departures in 2023 versus 2019 will increase only 5%. Departures up 5%, while total ASKs will increase 25%, all on next-gen aircraft. This is truly sustainable, profitable growth. On slide nine, you can see our EBITDA trajectory and how we consistently grew profitability since we launched. COVID was a temporary setback, and now we're firmly back on our margin expansion for 2023 and beyond. With that, we expect 2023 EBITDA of 5.5 billion reais, by far the highest in our history. On slides 10 and 11, we want to show you the combination of the tailwinds that we're seeing this year. First, on slide 10, you can see the effect of a significant reduction in jet fuel prices. The second half of the year is currently showing 29% lower fuel price in reais per liter versus the first quarter. This is a result of the reduction in global fuel prices, as well as the strengthening of the Brazilian real versus the U.S. dollar. Combine this with slide 11, which shows our expectation for RASC performance this year. We expect similar overall RASC performance, oscillating just with seasonality. On the capacity side, we expect to grow 14% overall versus 2022, but only 6% in the domestic market. Once again, strongly reaffirming our commitment to capacity discipline. The best part is that 100% of the capacity increase is from upgaging and transforming our fleet into extremely fuel-efficient aircraft. Trip cost actually goes down while revenue opportunities increase. The natural Brazilian market's stronger second-half seasonality combines really well with the expected fuel curve for the remainder of the year. Slide 12 illustrates the combination of lower fuel with stable RASC in our expected EBITDA per quarter for the year. You can see how the fuel price reductions by themselves contribute to 1.1 billion of EBITDA over what we generated in the first quarter alone. Therefore, the first quarter results annualized together with lower fuel and seasonality gives us a high level of confidence to deliver on the guidance of 5.5 billion EBITDA for the full year. To summarize, we had a strong first quarter results. Revenue performance is robust. Fuel prices are coming down, and the best seasonality is still ahead of us. Transitioning now from earnings to our restructuring plan, we're really excited to give you new details on the progress we have made. If you remember on our last call, we described a comprehensive and permanent plan to address our capital structure and significantly improve our cash flow and financial leverage. This plan has been implemented amicably. ensuring a fair treatment and full recovery to all of our partners. Today, we're excited to share with you new and important details about these commercial agreements and how they will positively impact our capital structure and cash flow going forward. Let me turn it over to Alex so he can give you the details on this plan.

Thanks, John. Yes. Today, we're proud to provide you additional details about the commercial agreements we announced during our last call in March. First, let me remind everyone of the general terms of that plan. Our agreements with LifeSource and OEMs contemplate the elimination of lease payments that were deferred during the pandemic. They also provide a permanent reduction in our lease payments going forward from the original contractual lease rates to agreed upon current market rates. We have also agreed to defer certain additional lease and OEM payments in 2023. as well as improved end-of-lease compensation and aircraft return conditions, the elimination of future maintenance reserve payments, and the negotiated early termination of certain aircraft leases. In exchange, LISORs and OEMs have generally agreed to receive an unsecured tradable note maturing in 2030 with a coupon of 7.5% per year and an equity instrument convertible into preferred shares valued at 36 reais per share. On slide 13, we show you exactly how these agreements reduce our lease payments each year. As you can see, we're reducing our annual payments in a neighborhood of a billion reais and even more in 23 and 24. As you recall, almost 80% of our nominal debt comes from operating leases. So this significantly reduces our debt burden and improves our cash flow. We now expect to be cash flow breakeven in 2023 and generate positive free cash flow in 2024. And more importantly is that Azul has more than 70% of RESKs already coming from next-generation fuel-efficient aircraft. So we now have the most efficient fleet with also the most competitive lease rates. This is a permanent solution that enables us to convert our strong operational profitability to positive free cash flow. On slide 14, you can see the aggregate results of these lease reductions. Our nominal lease payments are dropping by 5.4 billion reais in total, a 21% reduction. On a present value basis, assuming constant discount rates, this is a reduction of over 4.1 billion in our balance sheet debt, an even bigger reduction for those who use seven times rent to capitalize our leases. In the first quarter, leverage organically decreased 0.5 turns to 5.2 as we paid down debt and increased our last 12-month EBITDA. With the reduction in lease liabilities from our agreements, our deleveraging process is accelerating. On slide 15, you can see that our 1Q23 leverage would reduce another 0.6 to 4.6. This already includes the 2030 notes that Lesseurs and OEMs will receive in exchange for their contribution to the plan. And then if you recall, we originally expected to end leverage in 2023, starting with a 4. With these agreements, we now expect to end 2023 with a leverage of 3.5 and 2024 around 3 in line with our pre-pandemic levels. I would just like to remind everyone that we're returning our leverage to 3 in 2024 without any government support, without using bankruptcy or other judicial restructuring process, and without imposing a haircut on our creditors as other airlines around the world did. On slide 16, we give you the details on the equity portion of our commercial agreements. You all saw the material fact we released this morning, but just to provide you with a little bit more detail. Lessors and OEMs are also receiving an equity instrument in exchange for their contribution to the plan. This instrument converts part of their contributions into preferred shares valued at 36 per share. The equity instrument is limited in its upside and downside, aiming to minimize dilution to our shareholders, and at the same time to provide full recovery for our partners. The instrument has a lockup provision until the second half of 2034. After that, it vests over 14 quarterly installments, taking it all the way to the second half of 2027. That amount will vest per quarter, the amount that will vest per quarter ranges from 3.2 million to 7.5 million shares. Just to give you a reference point, our preferred shares in ADRs trade almost 28 million shares per day. So, the vesting profile of the equity instrument should not create any noticeable selling pressure. With a conversion price of 36 rads per share, we estimated the dilution from the equity instrument at 17.5%. Throughout the vesting period, between the second half of 24 and the second half of 27, If at the time of measurement a sold market price is higher than certain thresholds, the number of shares issuable via the equity instrument will be reduced, and dilution will therefore be lower. If the market price is lower than 36, we'll compensate our partners, and we may do so with additional shares or with cash or with the issuance of new debt instruments acceptable to our partners. Our comprehensive solution and its corresponding reduction of our net debt combined with their EBITDA growth, give us strong confidence that we're creating all of the necessary elements for Azul's equity value to reflect our strong fundamentals, as John will explain on slide 17.

Thanks, Alex. I'm extremely proud to see the evolution of our comprehensive plan and everything that you and your amazing team are doing for Azul. Since Azul's IPO, we've historically traded at about eight times EBITDA, and we're currently trading at four times. We know the cost of capital around the world has increased since COVID, but our comprehensive plan was designed to optimize our capital structure and increase our cash generation going forward. Reason why we estimate a significant upside in our stock price, even at a reduced multiple. Considering our net debt estimated after reflecting the new capital structure, and the equity investment and new shares to be issued, as well as a multiple of 6.5, lower than our historical average, our stock should be trading almost three times the current market price. This is the reason we're so excited about this plan and all the upside to come. As you can see on slide 18, our fundamentals are strong. Our business model is unique, and I'm very excited to see all the great things Azul will deliver in the coming years. And I also want to thank all of our incredible and passionate crew members, and I'm confident that Azul will deliver better than expected results as we move forward. With that, David, Alex, and Avi and I will answer your questions as I turn the call over to the operator for Q&A.

Ladies and gentlemen, thank you. We will now begin the Q&A session. Remembering that if you have a question, click on the Q&A icon at the bottom of your screen and write your name and company. When your name is announced, please activate your microphone and proceed. For those who are listening to the conference on the phone, press 9 to join the queue and 6 to accept the audio when requested. Let's go to the first question from Gabriel Rezende, Sales Site Analyst, Itaú BVA. We're going to open your microphone so that you can ask a question. Please proceed.

Hi, David, John, and Alex. Good morning, and thanks for providing the valuable details on the restructuring. Actually, my first question is on that thing. I would just like to confirm with you guys the understanding that we had on the details you shared. So, you mentioned in the material fact that what happens in case the zoo shares do not reach 36,000 between second half 24 and second half 27, and it seems like you have three options here, to issue additional shares, issue a new note, or pay it in cash. I would just like to understand who can decide on this, whether it is Azul, the lessors, or you expect some kind of negotiations in that scenario. And the second point here on a different subject, you just released your guidance for 2023, mentioning a 14% increase in this case for the year, and also saying that international traffic should grow above that. So can you explore that a little bit more? I mean, will this expansion on international traffic be sustained by Azure increasing on the same routes you operate right now, or maybe creating new routes such as the one you just announced, connecting São Paulo and Paris. That's it. Thanks.

Thanks, Abigail. So we have the option to do it in shares. Obviously, the source, if we choose to do it in cash, they also accept that. And we also have the option to do it in debt. But, you know, the terms of that debt would be negotiated and agreed by the source, right? So in a way, the option is ours, but the terms of the debt needs to be agreed by the source.

I think it's really important to reinforce the how much cash savings come as a result of this deal? You know, when you're talking about not getting to 36, it would be an enormous disappointment. We'd need to continue trading at, you know, four times this year, I think three times next year and, you know, to not move the stock from where it is today. And so, And there's a significant improvement in our cash flow generation because of this deal. And with that, we'll kind of pass it over to Avi to talk about the ASK growth.

Hi, Gabriel. So overall, we're looking at 14% ASK growth. That's total. In the domestic market, as John mentioned in his remarks, we're growing only about 6%. So very disciplined overall and especially disciplined in the domestic market. internationally um it's basically the network that we have right now i do not see any major new markets or destinations for the remainder of the year we are selling the capacity we are saying the network That leads to that number. So, nothing new. We do have some new stuff to fly, which is to the U.S., as well as to the U.S. But everything is already selling, 14% overall and 6% domestic.

Okay. Thank you, guys. That's very clear.

You know, I just want to highlight one other thing, too, is that as we go through between now and 2027, as the stock rises, there can actually be less shares issued as well, right? I think that, you know, I think you're looking at the downside scenario, but there's actually an upside scenario to it as well. And, you know, I want to remind everybody that we were trading in these ranges two, three years ago, and now we're at EBITDA numbers that this business has never seen, cash flow generation that this business has never seen, and, you know, an improved capital structure as our leverage is, you know, down to three in 2024.

Thanks, John.

The next question comes from Josh Milberg, sell-side analyst, Morgan Stanley. We will open your order so that you can ask a question. Josh, please proceed.

Hey, everyone. Can you guys hear me? Yes. Hey, Josh. Oh, great. Good morning, and good to connect with you guys. Thank you for the call. My first question was if you could give some additional detail around the near 300 million REIs of non-recurring items that you recognized in the period. I think the biggest piece of that were fleet adjustments related to your restructuring, but you also had advisor fees and a one-time adjustment that you mentioned could reverse. So if you could just give some more color around that, it would be great.

Sure. Yeah, the biggest part of the 300, more than half of it, is that adjustment on the engine power by the hour agreement. You know, right now the agreement is being renegotiated. The agreement doesn't really exist, but we're confident that we're going to have another agreement in place before the end of the year, right? And those amounts that have been deposited towards future engine maintenance within the sort of the first life of the agreement, should be restored once we have another agreement, right? And that, you know, so we expect that amount, which represents more than half of the non-recurrent adjustment for this quarter, to be reversed, right? The rest, the next biggest item are advisory fees and legal fees related to all of the negotiations that we're doing with the multiple stakeholders, right, like SOARs, OEMs, bondholders, you know, were going to raise additional capital as well. So all those fees related to restructuring then would be sort of the next biggest item there. And then you have some just adjustment, you know, as part of that restructuring as well. As we mentioned, some of the, we had some lease terminations as part of our agreement, some restructurings in the fleet, and that is sort of the third largest item. in the non-recurrent adjustment that we mentioned.

But I think, Josh, what's really important is majority of that will be reverted back, and we'll call it out as one time when it comes back in as well, so.

Perfect. Thanks for that, John and Alex. My second question is just on the prospective lessors agreement. You know, from our understanding, both the note component and equity instrument components are that you're now contemplating are somewhat lower than what you had anticipated earlier in the year. But I think that the rent payment reductions are fairly in line. So I was just hoping you could reconcile those two items. And I also wanted to hear a little bit more about what hurdles remain to close a definitive agreement and, you know, and to what extent a definitive agreement is linked to, you know, an agreement with your bondholders?

Sure. So, you know, we didn't provide, you know, we're only now kind of close to, the formalization of all of these agreements, so only now we're providing the details. I think last earnings call we provided some general views, right, but not the the full amount. So I think the reconciliation is essentially, you know, the fine-tuning of the agreements as we continue to transform sort of the high-level term sheets that we have negotiated to a final document with all the details that go into a new kind of leasing agreement, you know, until the end of the leasing term, right, and all the details that That goes along with it. And in the meantime, you also saw the real strengthening throughout, you know, these last few weeks. So maybe there's a little bit of that as part of the reconciliation.

Josh, we were a little conservative initially as well, and I think that was part of our plan. And, you know, as we talk about the next step, which is the bondholders, we're in active discussions with the bondholders, right? And the bondholders have organized around the 24s and the 26s. They have about 75% are in one unit. And those conversations are ongoing. And I think you're going to see something over the next couple of weeks with those bondholders. So we're excited that... You know, we're sequencing the plan exactly the way we said we would, and I think getting this information out to you was really important today, and I think the bondholders are excited about all the work we've done as well, right? And so, you know, there's discussions with the bondholders around, you know, hey how how far out are we going to roll it what's the interest rate going to be can they provide new money capital so there's robust discussions with the 24s and the 26s and it's part of our plan and as we told you earlier we hope to have all this wrapped up you know prior to the start of the third quarter yeah and we get that question a lot on whether the lessor agreements are conditional on the bondholder agreements and that's not really how we think about this and how we structure this but the plan as we said in the beginning

encompasses all stakeholders and benefits all stakeholders. And so, you know, I think we were able to come up with something fairly unique that you haven't really seen on any other airline restructurings. And it's also fairly unique in terms of other deals that you see in other industries, right, where, you know, the agreement of one group of stakeholders actually benefits all the other, right? So it's very synergistic. It's, you know, it's something that, you know, by resolving the issue with our lessors, which are 80% of our nominal debt, that's buying us the confidence, giving us the confidence on reaching an agreement with the bondholders. And the really what they want is recovery, right? And every other airline out there that didn't get government help applied a haircut to bondholders, either through Chapter 11 or through an exchange offer, right? And so it's not that, you know, we think we need the bondholders to, you know, solidify the lessors, it's really the support that we got from the lessors that's giving us this tailwind to be able to reach an agreement with the bondholders as well.

And it all starts, Josh, with a company that's going to produce over a billion dollars of EBITDA this year, a company now that previously all of our EBITDA was eaten up by aircraft rent payments. But as you can see, as you move forward into 2024, 2025, and beyond, our aircraft rent is significantly lower, significantly lower, and that's where the cash generation goes going forward. That's great for our lessors, for the long-term viability of our company. It's great for our bondholders. It's great for our shareholders as well.

That was super clear. Thank you, guys, for all the color. Have a great day. Thanks, Josh.

The next question comes from Lucas Barbosa, sell-side analyst from Santander. We will open your audio so that you can ask your question. Lucas, please proceed.

We're not hearing you, Lucas.

Lucas?

Lucas question is, good morning and thank you for taking my question. I have two questions. Can you provide me more details on how the conditions on the convertible debt issued to LASERS vary according to ASUS stock price? Second question, with the development on the agreement with LASERS, how does ASUS fleet commitment plan look like for the next several years?

Let me answer the second part and then Alex will answer the first part. I think what's really important about this is this doesn't change Azul's growth, right? The lessors believe in Azul. That's why they did this plan. That's why we did it amicably. So the number of aircraft we were expecting to take previously is the same number of aircraft we will continue to take over the next few years. There's some delivery delays because of the OEMs, but our fleet plan does not change. And as Alex highlighted, we are – well ahead of all Latin American peers in terms of having next-generation aircraft in our fleet, right? And so you take a look at how many A320neos we have, how many A321neos we have, how many E-2s we have. And so over the next couple of years, we'll continue to finalize that fleet transformation to have an all next-gen fleet. And, you know, that's already reflected in our forecast, and it's already reflected in our leverage assumptions as well. So when Alex talks about getting leveraged out to 3.5 this year, 3.1 into 2024, you know, that is the reflection of additional fleet coming in over the next couple of years.

Yeah, just continuing on the fleet, right, I think we've indicated to you sort of the way we think about managing the fleet growth. Going forward, right, and I think we've created a lot of optionality throughout the pandemic because right now what we're thinking is if the markets don't grow significantly, right, if Brazil grows only, you know, 1% a year GDP or less, right, we're going to keep our fleet fairly stable, right, with, you know, just a, you know, low single-digit fleet growth in terms of aircraft count. But we're going to grow our capacity significantly because, you know, as we move into next-generation aircraft, we get a lot of incremental seats at a negative cost, right? And so we can stimulate the demand on Azul markets. We don't need to steal customers from other airlines. we can essentially just stimulate demand within our own markets with these costs, with these seeds that are coming in at a negative cost. Now, if Brazil grows more than we expect, right, more than our conservative assumption, we have the ability of accelerating aircraft deliveries, especially from Embraer, provided that these short-term supply chain issues are resolved, which we know they will be. So that gives us the optionality to grow safely at a low risk with the fleet transformation, but also be able to grow on an absolute basis if the demand is there, maintaining the capacity discipline that we've demonstrated throughout all these years. And then on the detail of the of the equity instrument, right? It's not a convertible debt. You know, it is equity that we're going to issue to the list source, which will have an adjustment, you know, on the number of shares that are issued in case the shares trade better than we expect or worse than we expect. Now, you know, obviously the price per share should be an output of everyone's model, right, and not an input, right? And so when we do our valuation like we had on the slide on our presentation, when you look at the EBITDA guidance that we've provided, the new level of debt that we have achieved with the negotiation with our listeners and OVMs, you know, if you use the historical multiple of eight, we would be way beyond the 36, right? And potentially, you know, we might be talking about why we settled on 36 when the the fundamental value of the shares of Azure are much higher than that, right? But assuming a conservative multiple, even at 6.5, you get to 36 with 2023 EBITDA, right, not even 2024. And as we indicated, we need the shares to sort of be around the 36 level between the end of 24 and the end of 27. So at the end of 37, you're going to be looking at 2028 EBITDA, right? And, you know, I don't know what your EBITDA for 2028 for Azul is, but it's significantly higher than 5.5. The share price is significantly higher than 36, right? So as you calculate the fundamental value of Azul shares, if you get to more than 36, you know, you don't have to worry about incremental dilution. The dilution will be the 90 million shares that we indicated. If you start getting to something higher than 36, then, you know, potentially the dilution could be even lower.

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

Hi, John, Alex, Abby. Thank you for taking my question. The first one, I would like to know if there is a percentage of lessors that already agreed with these new conditions and how much would be that. The second one on the same subject, it's about the leasing payments that look more expensive for next year and then decrease. Why we have this dynamic for the future leases? And change subject on the guidance, going a little bit over. the follow-up on Josh's question. You mentioned that the maintenance cancellation fee that you pay in this order might be reversed when you make a new agreement for the maintenance. How it works and how much on your EBITDA guidance will you have on low-recurrency items? That's my question. Thank you very much.

Yeah, let me just address that. So it's not, there wasn't a cancellation fee. It was just that we've already paid money into the transcendent thousand, the total care agreement with Rolls-Royce. Okay. And the contract is temporarily suspended as we negotiate a new contract. But the money has already been deposited there, and we're negotiating with them. So what we wanted to do from a guidance perspective is neutralize that. So it'll be a one-time bad guy in the first quarter, most likely a good guy in the second or third quarter. So that has nothing to do with the $5.5 billion that we have in there. It's neutral to that overall.

Right. And then, you know, on the percentage, these are new agreements, right? These are essentially we're just detailing the agreements that we announced back in early March, right? So the agreements are exactly the same. We're just refining them. We've been refining the language in the documentation that we're signing, and we're now providing to you the details on that. The table that we provided with the lease payments is essentially aimed at updating you for Note 19.1 of our financial statements. When you look at our financial statements, Note 19.1 shows all of the lease payments that we are contractually obligated to make throughout the following years. And that is what gets calculated on a present value basis to get to the value of our lease liability on our balance sheet. So now we're providing you with that updated 19.1 note on a pro forma basis, you know, based on the agreements that we are finalizing, right? We had more than 90% of lessors in March when we announced these agreements originally. Now we're closer to 95%, and we're talking, again, to every lessor that hasn't committed to the commercial agreement yet. So we still believe that it is possible for us to reach 100%. Now, for your, you know, cash flow estimates in terms of rent payments going forward, you know, obviously we're going to get more aircraft as we go forward. And so the rent payment will not be as low as what's indicated on note, right? But it won't grow up. It won't grow significantly. I think you can take 2024 as a starting point. And then, like I said, the fleet is not going to grow significantly unless there is significant demand in the Brazilian market. But, you know, so with that kind of low single digit growth in aircraft count, you can calculate how the lease payments would go forward. from 2024 and beyond.

Yeah, but just to kind of highlight your question, why is it a larger reduction in 23 versus 24? It's just a negotiation with the lessors, right? And so that's, you know, we know that we're going to have more cash generation going into 24, and so we ask for more relief up front. And so it's just a small timing issue there.

Yeah. In terms of sort of annualized rent payment, I think you can look at 2024 as a representative year and move forward from that.

Make total sense. Thank you, John and Alex. Just a follow-up. So taking these new numbers in consideration, we might find a cash gap. Now we have a positive cash for the year close to 300 to 400 million reais. Is that correct?

This year?

This year we're expecting break-even for 2023.

Okay. Fantastic. Thank you very much. And then positive 24 and beyond.

Makes sense. Thank you very much.

The next question comes from Bruno Mourinho from SalesSide Analyst from Goldman Sachs. Bruno, we're going to open your order so that you can ask a question. Please proceed.

Yes, thank you. Good morning, everybody. So the first question is on the transaction with the last version suppliers. The transaction as it is reduces the debts of the company by 1.8 billion, excluding the equity instruments. Can you just give us an idea of, you know, what would be the additional liability if eventually the equity instrument, you know, is not actually converted into shares? The second question is on the fleet plan you have commented to some extent on. I just wanted to understand what's the level of flexibility that you have around the base case, and also, you know, what's the implied ASK growth in the base case for the next couple of years. And finally, one last question, you know, if you deliver on the 5.5 billion they did up, as you showed, you seem to be on track. This would mean, you know, going back to margin similar to 30% roughly. which is similar to pre-pandemic levels. So is it fair to say that from 2024 onwards EBITDA should be primarily driven by revenue growth as opposed to margin expansion, or do you see it otherwise? Thank you very much.

So I'll take the first and the third, and I'll be, you know, talk about the ASKs. So again, the shares will be issued, right? You know, we believe that the market will trade based on our fundamentals. And if you calculate the value of Azul shares, you know, as the market has always calculated, right, using EBITDA, which we will deliver, and using a more conservative multiple than we've always had, you know, the shares will be converted and no additional shares need to be issued, right? So there isn't a chance that the, you know, the – you know, that this becomes shares and additional debt, right? You know, we're essentially committing to making our lessors whole. So one way or another, through debt, through a combination of debt plus cash, through the combination of, you know, equity plus cash plus debt, they're going to get, you know, 100 cents on the dollar roughly. So if you assume that they don't get the equity, they're going to get, you know, debt or cash, but then you don't get the dilution, right? So, when you're calculating your share price, you can include the debt as it was originally, whatever the lessors gave up, they're going to be made whole, but then the number of share count that we're using, which is north of $500 million an hour kind of pro forma calculation would be a lot lower than that. And you're going to get – so it's kind of a circular reference. If you do it either way, using it as fully as debt or using it fully as equity, you're going to get to a share price over 30 times, one way or another, as long as you don't double count. which I know you're not going to, right? But just to kind of highlight that if you don't consider this equity and you consider it as debt, right, you're going to have a reduced equity value for Azul, but you're also going to have a lower number of outstanding shares, and you're essentially going to get to the same number of shares, which is why we're confident that this goes back to $36 per share, and we pay our source in full using the shares.

Bruno, remember, this is Through 2027, a few million shares per quarter, and to the extent that the stock doesn't hit that, you know, let's say it comes up, oh, the stock is 30 reais as opposed to 36 reais. Big disappointment, obviously, for our equity holders. You're talking about a very minimal adjustment there overall.

As we showed you, right, the first kind of vesting period is about 3 million shares. If we're short by 6 reais, we're talking about 18 million reais. you know, out of a company that at that point is going to be, you know, north of $20 billion in revenue, right? So, you know, probably not a material number. The fact that this has been distributed over 14 quarterly installments gives us a lot of confidence. And by the time you get to 2027, right, you're probably having the opposite problem where, you know, with the EBITDA that we're going to generate in those years, you know, you will see a share price much higher than 36%. and then you're going to compensate for whatever shortfall you have in the beginning if you have any shortfall, right? You know, the assumption that we wouldn't be – that we would pay more than what we always – if the shares never trade based on fundamentals for the next four and a half years, right, which is very unlikely, right, if not impossible. Let me talk about on the margin and then turn it over to Abhi. Yeah, you're right. I mean, we're going to be in the kind of high 20s in terms of EBITDA margin. Our best year was 2019 with 31.6% EBITDA margin. You know, we believe that we will get back to those margin levels, but we believe that we should do better. And the whole industry should do better because when you talk about cash flow generation, When you calculate the amount of cash that we generated in 2019, and just to remind everyone, we were free cash flow positive in 2019, to come, you know, to generate the same amount of cash with the real at 390, which was where it was in 2019, you need higher margins to generate the same amount of cash with the real at 490, where it is today, right? And hopefully the whole industry is thinking that way, that it's not enough to just go back to the pre-COVID margins. Because the real is weaker, we also need higher margins, right? When we do our five-year kind of plan and our valuation based on discounted cash flow, yes, we get back to that margin and we get above that margin. You know, I'm not going to say we're going to get to a 40% margin, but once we get there, obviously, we're not going to kind of rest on our laurels and give up. But the first order of business is to get back to that pre-COVID margin and then to continue expanding beyond that.

And Bruno, just to remind you, the entire Azul business is 76% larger than it was in 2019. But Tudor Azul is two times as big. You know, our packaging business, four times as big. Our cargo business, two and a half times as big. We also have Congonias that we didn't have previously. We also have more next-gen aircraft in our fleet. as we move forward over the next couple of years as well. And so margin expansion should come through those highly profitable business units, adding our newest little tech ops business unit, as well as the next gen aircraft kind of taking place. We still fly 50 E1s in our fleet today, right? And so, you know, think about what that looks like when those 50 E1s come out and are replaced with 50 E2s in the coming years.

Yeah. And Bruno, just a final point in terms of, 2024 capacity and beyond. You can consider something around high single digits, you know, 8% to 10% capacity growth kind of 2024 and beyond. And the philosophy on unit revenue is similar to what we have right now, which is Stable, steady unit revenues. You know, the industry overall is at a new level compared to pre-pandemic, 35% plus. It's maintained very steady the last four quarters. I expect that to continue this year apart from seasonality. And so as an industry, we're not giving that back. We should not be giving that back. Our philosophy certainly is not to give that back. and use the efficiencies that John mentioned to increase earnings and increase margins.

And the capacity growth that I've mentioned is consistent with what I mentioned in terms of the fleet growth, right? The fleet is almost not growing at all, maybe, you know, a couple of aircraft here and there per year. But because we are shedding smaller aircraft and bringing in next-gen aircraft with higher seat count, you know, which is what we call the up-gaging, right, that's where the ASK growth comes from. So it's very low-risk growth because these seats are coming in at a negative cost, and we are deploying those seats in Azul markets, right, not using that to steal share from other competitors. Now, if we grow more than the other competitors, obviously our market share will grow, but that's just a mathematical construct, right? You need to distribute 100% of market share across all players. If we grow more than – The other guy is that, you know, we will increase market share. But we, you know, the plan here is to grow in azul markets, stimulate azul markets using our fleet transformation.

Thank you. Can you just clarify, Abhi, please, you know, the 8% to 10%, especially in 24, is it evenly split between domestic and international, or is international still growing more, kind of recovering from, you know, the pandemic still? No.

Yeah, starting in 24, international will be more stable. The reason it's growing so much more now in 23 is because we are recovering our international network. We will actually be larger by the end of this year. So you have a little bit of full year effect in 24, and then from that point onwards, it will be more stable.

Thank you very much. And just one final follow-up. Sorry for so many questions. Alex, on your initial remarks, you commented on several scenarios. But, you know, is it possible to, you know, to let us know roughly what would be the amount of debt or cash needed to settle the liability if shares are not issued, just for reference? And I agree this is maybe, you know, a too pessimistic scenario, but just so we have the scenarios in mind.

I mean, you have the vesting, you know, the number of shares that vest every quarter, and that's the calculation, right? The number of shares times the, you know, the surplus or the deficit against the 36.

Okay. Thank you.

The next question comes from Michael Lindbergh. sell side analyst from Deutsche Bank. We will open your audio so that you can ask a question. Michael, please proceed.

Yeah, can you guys hear me? Yeah. Hey, Mike. Hey, guys. Just a couple here. Just, by the way, you know, congrats on getting through this process here. Just in the release that you put up, the separate release that has the notes, 2.3 billion hay eyes, Is that, I know it was a 40-60 split, and maybe it's a rounding error, but it looks like that it maybe is more like 43-57, just based on that number there, but that could be rounding. It looks like it's a little bit more debt than what we thought, a little bit less equity, which is fine.

Yeah, I think the way is, you know, some of this depends on kind of how you're calculating the present value of the lease payments. because essentially we're thinking the stores weren't going to get all of the, you know, $5 billion plus today, right? They would get that across, you know, up to 12 years, right? So what they are giving up, what they're contributing to the plan has been calculated back using a PV, and then, you know, that has been given back to them on a note and equity. You know, the equity has a floor and a cap, so that kind of all plays into it. So we did calculate using 40-60, but when you calculate the way you do it, Mike, it may – end up slightly different just because of the present value calculation.

Yeah, it's small. And then as we think about, you know, the next phase, you know, I think Alex and John, you both sort of said, you know, we get the sense it's the next few weeks. And so maybe by mid-June, we're actually done. What, from an equity holder perspective, Should we anticipate additional dilution or, you know, I know you've talked about, you know, some of your assets and your collateral and maybe that's the equity component that ties to this next round of negotiations.

Yeah, you know, Mike, I think it's really important. The dilution has happened via the lessor deal, right? And that's the way that our shareholders have contributed here. Just to remind you, to Azul, we have Azul Viagens, our packaging business. We have our cargo business. Those are all kind of unencumbered assets. And so the idea is once complete, we will raise some new debt using Tudwazul, right, and that new debt. And it's important to sequence it, right? And so get the lessor, get the bondholders done, and then kind of raise the new capital to strengthen the balance sheet even further. But there's no – especially given these equity prices, Mike, there's no intent to issue equity at these levels because we think we're a third of where we should be trading today. at a six and a half multiple, right? And I think as we migrate up, as you go into 2024 and beyond, you know, the stock should be significantly better than where it is today. And so, I think we did this the right way. We got through the pandemic with those assets, you know, at our disposal to be able to use to raise debt at the right price levels. And so, you know, obviously getting the lessors was very important. Kind of rolling the 24s and 26s is the next step that we'll be doing, then bringing in the new cash. And then we're off to the races, right? And I think that, you know, we're feeling very good about where we are today and about the progress because it's been – It's been a good, healthy process that's been amicable across the board, right? And so all lessors working with us, bondholders giving us their feedback and what they think is appropriate, right? And then also kind of looking at these great assets that we have still at our disposal to use to raise cash.

Okay, good. Very good. And then just two non-restructuring questions. Did I see that you guys renewed your deal with United? Maybe I did see that. And what were the changes, if any, in the term of the deal, et cetera?

Yeah, hey, Mike. I know we just put out a note saying we expanded the co-chair. So our commercial agreements continue with United. And so we expanded the coach to include more cities that they fly from Orlando and from Fort Lauderdale. That was the note.

Okay. Okay. That's good. And then just as obvious, since I have you, just one other, the new convoy of service, the ramp up, presumably it's RASC accretive. How is it on a margin basis? Is it margin accretive? I know you're ramping up. You added a bunch of new service, but, you know, historically those tend to be some of the higher yield markets out there. Any color that you could give on that? Thanks for taking my question.

We expect them to be margin accretive once ramped up, and especially once when we get into second half seasonality. We're still in April with Easter, had a bunch of holidays there. But, yeah, our expectation and, you know, from what we know of the other markets that are flying Congonias and Congonias demographics in general is that this is definitely margin accretive, and we expect that to happen through the year. Again, just having so many new people fly the services is great because they're signing up for the credit card, our loyalty program, and flying internationally with us as well. So, but just by itself, yes, margin accretive.

Very good. Thanks, everyone.

Thanks, Mike.

Moving on to the next question will come from Victor Misuzaki from Bradesco BBI. We will open your order so that you can ask your question. Victor, can you please proceed?

Hi, congrats on the restructuring. I have two questions here. The first one, John, you just mentioned to me about the bonds. And, I mean, in this case, we can see that you close a deal with the lessors and this new bond you pay seven and a half per year. So is there any kind of collateral that you need to grant to these lessors Can you say that basically you're anchoring the negotiations with the bondholders for the 2024 and the 2026? And my second question, think about the guidance for this year. What are you assuming for the purse? I mean, do you assume that these tax benefits will be approved, will pass in the Congress, or basically it will terminate in May? Thank you.

So, Victor, just quickly, the 7.5% is unsecured to the lessors, right? So, we still have that collateral out there. The 24s and the 26s, there is some security we're in discussions with them on, right? And so, I think that that's a positive thing to help get the rate down overall. As far as the 2023 guidance of $5.5 billion, we're very confident that the Pisco fees tax will pass, but it's not in our current guidance. It was only for the first five months of this year. However, we may have positive news in that regard in the next 10 days, you know, which could be very beneficial as well.

Okay. Thank you.

Moving on to the next question. It will come from Daniel McKinsey, Sales Time Analyst, Seaport Global. We will open your order so that you can ask your question, Daniel. Please proceed.

We can't hear you, Dan.

Okay, so let's move on to the next question. The next question will come from Jay from Citi. Jay, we're going to ask your question. We're going to open your eyes so that you can ask a question. Can you please proceed? Okay.

Sounds good. Yeah. So my first question is regarding the most recent upgrade of your agreement with United, do you see any possibility to adjust these agreements further with others such as JetBlue? And as a follow-up, can you tell us a little bit more about how your demand patterns compare with 2019 and if they're different in how you view these adjustments as temporary or structural? Thanks again.

Yeah, hi. Thanks so much for the question, Jay. So currently, together with United and JetBlue, we've been slowly expanding our network into the United States. And actually, we have a really broad network with these two partners. So in total, via our gateways in Orlando and Fort Lauderdale, we now can connect to 27 destinations in the U.S. and additional eight in the Caribbean. And so that obviously with all the major cities, U.S. domestic, with a mix of JetBlue and United via Orlando and Fort Lauderdale. And we serve those cities in multiple origins here in Brazil. Our hub in Sao Paulo, Recife, Belo Horizonte, Manaus, and Belém as well. So a really broad network. into the U.S. and then 35 destinations with our partners in the U.S. In addition, we also connect to 24 European cities via our partnership with TAP in Lisbon. So we're really able to provide great connectivity with our partners. In terms of demand patterns, overall, Average fares are higher, you know, as we've seen in the unit revenue performance. This is not just pent-up demand as was, you know, initially thought in the initial pandemic or even the post-Omicron recovery. The last four quarters, we've seen basically between 41 and 42 cents, and so that shows very, very consistent unit revenue performance. Corporate revenue is above 2019 levels, between 30, 35% above. Large corporates, a little bit below, but one demand pattern that's changed that's very interesting is groups revenue. Groups, meetings, conventions revenue is more than double what we've seen before. Small and medium businesses are up very strong as well. From the customer behavior, we are seeing average, let's say, purchase size increasing. So people are taking one extra person with them on their trips. sort of a little bit of a mix of business and leisure, personal. And so, but in general, we are 76% larger in terms of revenue right now than we were in the first quarter of 2019. And I looked across many airlines across the world, and I couldn't find anybody else that was 76% larger. So this is really robust, sustained revenue performance.

Thanks so much.

We will open the audio so that Daniel McKenzie from Seaport Global can ask his question. Please, Daniel, proceed.

Yeah, hey, can you guys hear me this time? Yes, hey, Dan. Oh, yeah, okay, great. Sorry about that. So, you know, my question was, you know, you did talk about unsecured assets. That was my initial question, but, you know, big picture, what's the collective value of those unsecured assets? And then just on Tutu Azul, what percent of EBITDA was Tutu Azul in 2022, and how much capital would you like to raise ultimately here?

Hey, Dan. So, we mentioned at our last call, we had our unencumbered assets appraised through Azul, Azul Viagens, Azul Cargo, and our brand. And collectively, they were valued at about 25 billion reais, right? So, a little over $5 billion. And, you know, we're working with advisors to try to structure this. We want to use some of those unencumbered assets to renegotiate our convertible debenture and to raise new money and also to get some additional time on the 2024 and 2026 senior notes, right? It's essentially extending them. And also keep... some of our assets unencumbered too for a rainy day, right? We don't want to encumber everything because I think the main objective here is just to de-risk the company. You know, as we've been mentioning on this call, the business is doing great, right? And we are focused on, you know, generating cash going forward. and de-risking, right? So the idea is to not encumber everything. So we'll provide that detail over time as we get there, but the idea is to not encumber everything, and we want to use the assets that we do encumber to, you know, cover all of what I mentioned, right? The new capital that we want to raise with a secured note, no equity, renegotiate our convertible ventures and extend our 24 and 26 dollars.

Okay, that's terrific. Avi, you know, you talked about the current revenue environment. You know, pricing today is pretty strong, and for those of us that track pricing, if foreign exchange continues, if the Brazilian hail continues to strengthen, should we expect fares to fall somewhat? Usually there has been, or at least historically, there's been a link, you know, between the, you know, Brazilian hail and pricing.

Yeah, hey, Dan, you know, I think that that link is more a second-order effect. I don't see the industry, you know, doing it just because. I think that it's more linked to capacity. And if I look at capacity in the system for the Brazilian industry today, it's pretty well disciplined. And I don't see a lot of new capacity coming in. You know, we've given our number today around 6% domestic growth. You know, Gold Latam have their guidance out as well. And you can do the math, and the industry overall domestically is growing about 4% to 5% versus 2019. We're talking four years ago, right? And so the capacity environment, I think, is actually very constructive. for the industry to maintain these unit revenues. And so I think that as currency, you know, strengthens or fuel continues to come down, as long as the capacity situation remains disciplined, which from what I can see today will continue to be disciplined, that should not affect unit revenue.

You know, Dan, one other thing, too, is if you take a look at the industry in Brazil and our competitors, everybody's cost of capital is significantly higher today than it was in 2019. So everybody needs high fares, right? We have two of our closest competitors that need to get listed in New York over the next coming years, and I think it's going to be important for them to show positive results, and I think that's good overall for industry discipline across the board.

Yeah, that's terrific. Thanks so much, you guys.

Thanks, Dan.

The next question comes from Chris Reddy, sales side analyst, T.T. Cohen. We will open your auto so that you can ask your question, Chris. Please proceed.

Yeah, good morning, guys. Thanks. I just wondered if you could give me a little bit of insight into the forward-looking competition and capacity on the various routes you serve. And the rest of my questions have been answered. Thank you very much.

Yeah, hi, Chris. We continue to be to have a very different network. We haven't seen significant changes in market overlap over time. In fact, they've actually reduced, which I think is a sign of a healthy industry dynamic overall. I think airlines are focusing where they are strong and what makes them strong. Our network by nature is different. You know, we are alone in 80% of routes that we serve, a leadership position in over 90% of routes that we serve. And, again, I think that the industry is – that discipline is good overall, and the industry realizes that. So I don't envision, I don't see – I haven't seen, frankly, any major changes to the market overlap or to the industry dynamic from a capacity. I don't see anybody trying to attack somebody else or enter into a hub or anything like that. I think airlines are focusing where they are strong.

Great. Thank you very much. Appreciate it.

The next question comes from Rogério Araújo, Bank of America. We will open your order so that you can ask your question, Rogério. Please proceed.

Hi, gentlemen. Thanks a lot for the opportunity. I have a few follow-ups on the restructuring. One is you talked about liability that is going to be recognized. I think this is linked to the equity instrument. And my question is, how is this going to be calculated? Is there going to be a market-to-market effect on that every quarter? And is there a starting point of how much of this is going to be recognized in the next quarter or so when the deal is concluded? And then another one on the 36 reais per share. Conversion price, is there any adjustment rates to it until 27, or this is a fixed 36 reais per share? Lastly, on a confirmation, you talked about several conditions on this restructuring. One of them is new capital raise. This can be a debt, correct? I think you talked about Tudazul as a collateral on raising new debt. This is a new debt already fulfilled, this new capital raise condition. Thank you very much.

Yeah. Yeah, so, Rogério, under FRS, unless, you know, the amount of shares is completely fixed and predetermined, you need to recognize the whole structure as a liability, right? So, it will be easy for you to look at the amount. You know, it will be essentially what the lessor is. have given up on the equity side. So it's actually the 60%. But if you include that as a debt, again, you don't include the 90 million shares that are going to be issued. But, you know, the way we see it is if you do the calculation, you know, not including that debt and including the 90 million shares in your total shares outstanding, you're going to get something higher than 36. Therefore, there is no adjustment and the equity instrument will be equity as designed, right? But it will be either equity or debt. And in the balance sheet until that amount is determined, it will show up as one specific line on the balance sheet. Kind of similar to the convertible debenture that we have maturing in 25, right? If you include that as debt, then you don't include it in the number of outstanding shares. If you do include it in the number of outstanding shares, then you disregard the debt component on the balance sheet, right? The 36 on the floor, there's no adjustment going forward. And then you're right on the new money. As we mentioned, it will be a secured note essentially based on Tour Azul as collateral with no equity component.

Very clear, Alex. Thanks very much. Have a great one.

Thank you.

Thanks.

This ends our Q&A session. We will now have our final remarks.

Thank you for joining us today. Obviously, a lot to digest, a lot of information, and so we'll be available to take any of your questions offline. We're excited about what we have. This significantly improves our cash flow over the coming years, and, you know, Azul, back to the races. Thanks, everybody.

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