GOL records operating income of R$505 million and EBIT margin of 5% in 2014, 89.8% up on the previous year

 

São Paulo, March 30, 2015 - GOL Linhas Aéreas Inteligentes S.A. (BM&FBOVESPA: GOLL4 e NYSE: GOL), (S&P: B, Fitch: B-, Moody’s: B3), the largest low-cost and best-fare airline in Latin America, announces today its consolidated  results for the fourth quarter and full year of 2014. All information is presented in accordance with International Financial Reporting Standards (IFRS) and in Brazilian reais (R$), and all comparisons are with the fourth quarter and full year of 2013, unless otherwise stated.

Highlights

4Q14 and 2014 Earnings Release

Message from Management

GOL continued its recovery in 2014. Despite the challenging economic scenario, especially after the World Cup period, the Company generated consistent results as showed in its main indicators.

Annual net revenue totaled R$10 billion, a new Company record, led by the increase in international revenue to R$1.2 billion and the increase in ancillary revenue, which reached R$1.0 billion.

GOL captured 49% of domestic market  growth in 2014. Domestic supply fell by 1.7%, thanks to the maintenance of the Company’s flexible capacity management strategy in place since April 2012, while demand for seats (RPK) grew by 9.8%, leading to an average domestic load factor of 77.8%, a new Company record.

Annual operating income (EBIT) came to R$505 million, virtually double the prior year’s figure of R$266 million, while the EBIT margin improved by 2 percentage points to 5%. In 4Q14, EBIT totaled R$171 million, with a margin of 6.3%, versus 6% in 4Q13. These results reflect the continuity and consistent delivery of our “Flight Plan”, launched in 2012. With this operating margin, operating cash generation was neutral, before oil hedge expenses. We closed 2014 with a cash position of  R$2.5 billion, representing 25% of last 12 months net revenues.

The year was marked by the expansion of our route network through the addition of new routes and destinations, including Santiago (Chile), direct flights to Punta Cana (Dominican Republic), and the Fortaleza-Buenos Aires (Argentina) and Viracopos-Miami (EUA) routes. In Brazil, we began flying to Caldas Novas, Altamira and Carajás, and will begin flights to Ribeirão Preto in March 2015. We added five new destinations and 44 new domestic and international routes. The expansion is aligned with  two important strategies: increasing our international presence and expanding services to regional destinations. We closed 2014 with flights to 71 destinations in 11 countries.

In 2014, we also achieved the leadership in the domestic market in terms of numbers of passengers transported, which reached 37.7 million customers, 3.5 million more than the second-place airline. According to Abracorp (Brazilian Association of Corporate Travel Agencies), the Company is also a leader in the corporate segment in number of ticket sold with a market share of 31.2%.

In February, we entered into a long-term strategic partnership and commercial cooperation agreement with Air France KLM, which acquired 1.5% of GOL’s total capital. In October, we also expanded our partnership with Aerolíneas Argentinas, when we began selling the airline’s tickets through our sales channels. TAP, Etihad and Aeroméxico were also added as codeshare partners. We closed the year with nine codeshare partnerships, offering even more destinations to our customers and aligned with our strategy to increase our Dollar revenue.

We also concluded implementation of the GOL+ project to improve comfort onboard, increasing the distance between all seats, and assuming the leadership with the highest offer of ANAC category A seats in the domestic market. On international flights, we offer our Comfort Class product, where as well as the above- mentioned increased space, we offer a blocked middle seat and additional on-board services, bonus miles and priority access. Since February 23, 2015, the Comfort Class product was expanded to all GOL international routes.

4Q14 and 2014 Earnings Release

We launched Conte Comigo (Count on Me), an exclusive service inside an airport secured area (post security screening). Unprecedented in Brazil, the project was created to provide customers with additional support in case of questions or specific needs, equipped with self-service totems, phones connected directly to the Call Center and personal service whenever necessary. Sao Paulo-Congonhas and Rio de Janeiro-Santos Dumont airports are already equipped with this service and we will be extending it to other airports throughout 2015.

Aiming  to standardize and simplify our dialogue with customers, we implemented new tools and functionalities with the main objective to improve our customer care service. Informing passengers of the status of their flight by e-mail or mobile SMS, which has been available since December, is one feature of this project.

We expanded the Ganhando Asas ( Gaining Wings) project to all airports where we operate in Brazil. This initiative is aimed at helping first-time fliers throughout the entire flight experience, from check-in to arrival. They all receive a commemorative badge, facilitating their identification by the Company’s attendants. 

Combining customer comfort and enhanced efficiency, we added even more features in our self-service channels: airport totems, mobile site, new website and a smartphone app. We also launched in 2015 a new globally innovative functionality in our GOL app – geolocation, which allows customers to receive information on how long it should take to arrive at the airport.

Also in 2014, we launched Bagagem Expressa (Express Baggage), an exclusive service in Brazil giving passengers greater autonomy, allowing for self-weighting and tagging of their baggage at the self-service totems, as well as the functionality to pay for any excess luggage with a credit card, if necessary.

Safety is an absolute priority for our business. For the fourth consecutive time, we received the IOSA (Iata Operational Safety Audit) certification, valid until 2016, which is recognized throughout the world as the standard for evaluating an airline operational safety management.

As to the financial results, the annual net loss can be mainly explained by the devaluation of the Real against the Dollar and by the decision of unwinding our oil hedge positions aiming to limit losses from sharper decreases in oil commodity prices, resulting in negative shareholders’ equity. Our high liquidity and appropriate debt amortization profile, together with a liquid asset pool, created sufficient financial resilience to confront this period.

Continuing with our long-term strategy of strengthening our already recognized corporate governance practices, on January 22, 2015, we informed our shareholders of a proposed long-term structural solution to remove important regulatory restrictions on our capitalization capacity, giving us the same competitive condition as our competitors. At the extraordinary shareholders’ meeting held on March 23, 2015, the proposal was approved by 99% of the votes cast. The meeting was attended by shareholders representing 81.7% of GOL’s total capital stock (100% of common shares and 62.79% of preferred shares). The new structure will allow GOL, at the appropriate moment, to access capital markets for an eventual capitalization.

4Q14 and 2014 Earnings Release

The macroeconomic scenario became even more challenging at the beginning of 2015. As part of our plan for this year, we will be concentrating on the domestic market and will continue to evaluate international opportunities. With the best value proposition for our customers, we will continue to prioritize the corporate segment. Our strategy for confronting this turbulence is to continue to focus on the values that have guided the Company: Safety, Intelligence, Service and Lowest Cost.

Once again, GOL would like to thank our customers for their increased loyalty, our employees and Team of Eagles for their commitment throughout the entire year, and our investors for their confidence, increasingly reinforcing our vision of being the best company to fly with, work for and invest in.

Paulo Sérgio Kakinoff 

CEO of GOL Linhas Aéreas Inteligentes S.A.

4Q14 and 2014 Earnings Release

               Operating and Financial Indicators

4Q14 and 2014 Earnings Release

Aviation Market – Industry

The aviation industry maintained its capacity discipline in managing seat supply (ASK) in 2014, with a 0.4% increase while accompanied by a 5.6% increase in demand (RPK) in year-over-year comparison. Load factor increased by 4 p.p. to 80.4%. In the quarter, industry supply and demand increased by 4.2% and 6.8%, respectively. As a result, load factor came to 81.2%, 2 percentage points higher than in 4Q13.

The number of revenue passengers transported in the domestic market increased by 6.6% in the year, reaching 95.9 million. In the international market more than 6.4 million passengers were transported, 5.7% more than in the same period in the previous year.

Domestic Market - GOL

        Domestic supply in 2014 decreased by 1.7%, in line with the Company’s guidance of a reduction of between 3% and 1%. In 4Q14, domestic supply increased by 1.8% over 4Q13, reflecting GOL’s substantial capacity management flexibility, allowing it to take advantage of seasonal market opportunities.

        Domestic demand increased by 8.0% in 2014 over 2013, representing 49% of the increase in total Brazilian industry demand. In 4Q14, demand increased by 7.5% over the same period the year before.

        The domestic load factor was78% for the year, 7 percentage points up on 2013, and 80% in the fourth quarter, 4.3 percentage points more than in 4Q13.

        GOL transported 37.7 million passengers in the domestic market in 2014, 9.1% more than in 2013, and 10.2 million in 4Q14, 6.6% up on the same quarter in the previous year. In 4Q14, the total passengers transported reached 10.2 million, an increase of 6.6% when compared to 2013.

        For the second consecutive time, GOL was the leader in corporate passengers of tickets  sold in 2014, with a share of 31.2%, according to the Brazilian Association of Corporate Travel Agencies (Abracorp).

International Market - GOL

        International supply increased by 11% in 2014. The Company announced several new flights during the year, including São Paulo to Santiago (Chile), Fortaleza (Ceará) to Buenos Aires (Argentina) and  Campinas to Miami (EUA), as well as to Punta Cana (Dominican Republic) from Sao Paulo, Belo Horizonte (Minas Gerais) and Brasília.

        International demand grew by 25.7% in 2014, raising the load factor to 71%, a growth of 8.3 percentage points. In 4Q14, the load factor increased by 2.7p.p to 70.7%.

        GOL transported 2.1 million passengers in the international market in 2014, 18.1% more than in 2013, and 540 thousand in 4Q14, a year-over-year increase of 16.6%. The Company maintained its focus on gradually increasing its frequencies and destinations in other countries, expanding the share of foreign-currency revenue.

4Q14 and 2014 Earnings Release

PRASK and Yield

        In 2014, PRASK moved up by 11.7% over the year before, fueled by the 7 percentage point increase in load factor and  1.4% increase in yield. In 4Q14, PRASK fell by 4% and yield by 8.8%, accompanying Brazil’s challenging economic activity scenario and higher competition in the domestic aviation industry.

      Income Statement in IFRS (R$ million)

4Q14 and 2014 Earnings Release

*In accordance with CVM Instruction 527, the Company presents the reconciliation of EBIT and EBITDA, whereby: EBIT = net income (loss) plus income and social contribution taxes and the net financial result; and EBITDA = net income (loss) plus income and social contribution taxes, the net financial result, and depreciation and amortization. We also show the reconciliation of EBITDAR, given its importance as a specific aviation industry indicator, whereby: EBITDAR = net income (loss) plus income and social contribution taxes, the net financial result, depreciation and amortization, and aircraft operating lease expenses.

Net Revenue

In 2014, net revenue totaled R$10 billion, 12.4% up vs. 2013 and a new Company record. In 4Q14, net revenue came to R$2.7 billion, in line with the same period the year before.

Net passenger revenue amounted to R$9 billion in 2014 and R$2.4 billion in 4Q14. This revenue increase was mainly driven by the Company’s new load factor level.

International passenger revenue totaled R$1.2 billion in the year, equivalent to 12% of total net revenue. This result was impacted by GOL’s international expansion, which increased the number of passengers transported in this market by 20%, in turn pushing up revenue, as well as by revenue from connections with partner airlines. In the quarter, international revenue came to R$295 million, growth of 26%, or R$61 million over 4Q13.

Net cargo and other revenue totaled R$1 billion, accounting for 10.1% of total net revenue, up from 9.3% in 2013, driven by the increase in cargo revenue and revenue from ticket rebookings, refunds and cancellations,  as well as from revenues generated by the “GOL+ Conforto” product in the domestic market.

Operating Expenses

Operating costs and expenses totaled R$9.6 billion in the year, 10% up on 2013, and R$2.6 billion in 4Q14, virtually in line compared to 4Q13. Excluding fuel expenses, annual expenses came to R$5.7 billion, 12.5% more than the year before and R$1.6 billion in the 4Q14, or 1.6% below 4Q13 figures. Also in the year, the cost per ASK (CASK) stood at R$19.31 cents, 10.3% higher than in 2013, while in the current quarter, has achieved R$19.45 cents, being 3.9% below the same quarter of 2013

4Q14 and 2014 Earnings Release

Aircraft fuel per ASK totaled R$7.76 cents, 6.7% up on 2013, primarily due to the 4.6% period upturn in the average per-liter fuel price and the increase in consumption as a result of the 7 percentage point improvement in the load factor over the previous year. Fuel costs in 4Q14 still did not reflect the decline in the per-barrel oil price which will only become apparent in 1Q15, due to the 45-day delay in jet fuel price formation.

Salaries, wages and benefits per ASK came to R$2.78 cents, 3.3% more than in 2013 due to the approximate 6% annual pay raise.

Aircraft leasing per ASK stood at R$1.71 cent, 21.1% up on 2013, mainly due to the increase in the average leasing price in Dollars over the previous year and the average Dollar appreciation of 9.1%.

4Q14 and 2014 Earnings Release

Sales and marketing per ASK, excluding losses from direct sales channels, totaled R$1.06 cent, 2.2% up on 2013, due to higher expenses with marketing and advertising. Including losses from direct sales channels in 4Q14 amounting to R$140.9 million, sales and marketing per ASK stood at R$1.35 cents, up by 29.7%. The level of losses in direct sales channels should fall in 2015, due to the Company’s focus on improving prevention systems.

Landing fees per ASK totaled R$1.24 cents, 8.5% more than in 2013, due to new international routes and the charging of a passenger connection fee (totally implemented as of July 2013) in all airports operated by GOL in Brazil.

        Aircraft and traffic servicing per ASK stood at R$1.51 cents in 2015, 25% up on the year before, primarily due to: (i) the addition of a government mandated risk premium to employees from third party companies providing handling services; (ii) IT services in the domestic and international bases; and (iii) the increase in the number of tickets purchased through peer  airlines.

        Maintenance materials and repairs per ASK came to R$1.03 cents, 11.2% up on 2013, due to the 9.1% period devaluation of the Real against the Dollar and the aircraft maintenance calendar.

        Depreciation and amortization per ASK stood at R$0.94 cents, 17.2% less than in 2013, due to the lower number of engines capitalized in the period in line with the Company’s maintenance schedule and by the end of depreciation period on certain existing engines throughout 2014.

        Other expenses per ASK totaled R$1.00 cents, 44.9% more than in 2013, primarily due to: (i) higher expenses with travel and accommodation due to additional costs in the period of the World Cup; (ii) introduction of new international frequencies; (iii) increased expenses with the on-board service and; (iv) reduced gains from sale leaseback operations (9 aircraft in 2014 versus 13 in 2013).

Operating Result

GOL recorded operating income (EBIT) of R$505 million in 2014, with an operating margin of 5%. In 4Q14, EBIT came to R$171 million, with a margin of 6.3%, the sixth consecutive quarter with a positive operating margin and the eighth with quarter-over-quarter improvement.

Net Financial Result

GOL posted a net financial expense of R$1.5 billion in  2014, versus an expense of R$919 million in 2013, and an expense of R$723 million in 4Q14, compared to an expense ofR$201 million in 4Q13. The increase was primarily due to losses from oil derivatives totaling R$370.2 million due to the substantial slide in oil commodity prices in 4Q14, and the net exchange variation of R$426 million due to the devaluation of the Real against the Dollar, although the latter had no immediate cash effect.

      Interest expenses totaled R$593.1 million in 2014, R$61 million more than in 2013, and R$167 million in 4Q14, R$21.9 million up on the same period the year before, driven by the depreciation of the Real against the Dollar and the interest payment on the R$600 million debentures issued by Smiles S.A. to finance part of its R$1 billion capital reduction in 3Q14.

4Q14 and 2014 Earnings Release

      The net exchange variation was an expense of R$426 million in the year, versus R$490 million in 2013, due to the 13.4% period appreciation of the Dollar against the Real, impacting the Company’s balance sheet accounts, although this was partially offset by the reduced share of dollar-denominated debt in total debt. In 4Q14, the result was an expense of R$262.9 million.

      Interest income totaled R$148.6 million in 2014, virtually flat over the previous year, and R$50.9 million in the fourth quarter, versus R$33 million in 4Q13, as a result of the period increase in the Brazilian base rate (CDI). The Company has maintained part of its cash in Dollars in order to mitigate the impact of exchange variations on its financial liabilities and create a natural hedge for its foreign-currency expenses.

      Other financial expenses came to R$144.3 million in 2014, 50% up on the year before, mostly due to the premium paid on the two tender offer transactions for 2017, 2020 and 2023 senior notes. The 4Q14 result totaled R$21.8 million.

Hedge Result

The Company makes use of hedge accounting to recognize some of its derivative instruments. In 4Q14, GOL recorded a book loss of R$325.6 million from hedge operations.

*OCI (Other Comprehensive Income) or Statement of Comprehensive Income is a transitional account where positive and negative fair value adjustments of future operations are booked, designated as effective for hedging cash flow. The purpose is to state income as close to the Company’s reality as possible. As the results from operations occur in their respective accrual periods, they are incorporated into the Company's income. GOL records the fair value of hedges due in future periods whose aim is to protect cash flow.

4Q14 and 2014 Earnings Release

      Fuel: fuel hedge operations generated losses of R$370.2 million in 2014 and R$357.6 million in 4Q14. The Company uses Brent and heating oil zero cost collar derivative contracts as protection instruments for its fuel hedge operations. At the close of the quarter, the Company opted to settle all its contracted put options in order to limit the downside risk given the substantial decrease in oil commodity  prices at the end of the period, only maintaining its exposure to the call options making up these positions. The Company also makes use of non-derivative instruments conferring an additional average protection of 13% for the next 3 months through fixed price fuel transactions for future delivery negotiated with its main fuel supplier. Adding the fixed price and the derivative positions, at year-end 39% of the Company’s exposure in the next 3 months and 20% of its exposure in the next 6 months was protected.

      Interest: swap transactions to protect the cash flow from future aircraft leasing deliveries against an increase in Libor interest rates generated total losses of R$61.5 million in 2014 and a total gain of R$0.7 million in 4Q14. The company increased its nominal hedged position from US$588.2 million in 3Q14 to US$591.1 million at the close of 2014.

      Foreign exchange: foreign exchange (FX) hedge transactions through derivative financial instruments in the form of NDFs (non-deliverable forwards) generated gains of R$31.3 million in 4Q14 and are used to protect the Company’s cash flow. GOL’s FX exposure is hedged through derivative instruments by 21% of  next 3 month exposure and 11% in the next 6 months. The Company also maintains part of its cash position in Dollars in order to create a natural hedge against its FX exposure. In 4Q14, this portion protected 45% of exposure in the next 3 months and 23% in the next 6 months. Adding the cash and derivative instruments, 66% of FX exposure in the next 3 months and 34% in the next 6 months was protected.

Income Taxes

Income taxes totaled R$164 million in 2014, due to income earned by the subsidiary Smiles S.A.

  Net Result

GOL posted a loss of R$1.1 billion in 2014,  with a negative net margin of 11.1%. In 4Q14, it reported a loss of R$631 million with a negative net margin of 23.1%. The result was adversely impacted mainly by the exchange variation of R$426 million and losses with derivatives totaling R$443 million.

             Balance Sheet: Liquidity and Indebtedness

4Q14 and 2014 Earnings Release

        GOL closed 2014 with total cash, including financial investments and restricted cash, of R$2,527 million, equivalent to 25% of net revenue in the last 12 months. Short-term receivables totaled R$352.3 million, consisting mostly of ticket sales via credit card and accounts receivable from travel agencies and cargo transportation.

        The Venezuelan cash position amounted to R$325.8 million on December 31, 2014. The annual devaluation of the Venezuelan Bolivar against the Dollar came to R$73 million, conservatively provisioned by the Company in its balance sheet. GOL is in constant discussions with the Venezuelan authorities regarding the repatriation of the remaining funds. This amount is subject to future oscillations given uncertainties in the Venezuelan scenario.  

     1- Financial commitments (gross debt + operational leasing contracts) less Cash;

     2 - Gross debt + LTM operational leasing expenses x 7.

4Q14 and 2014 Earnings Release

                   Loans and Financings

        The Company has been implementing an active liability management strategy to manage its debt in order to comply with its declared objective of avoiding large amortizations over the next three years.

        At the close of 2014, the Company’s total loans and financings came to R$6,235.7 million (including financial leases), 11.6% up on the previous year, mostly due to the depreciation of Real in 13.4%. The Company amortized R$623 million in debt in 2014, including R$367.3 million from financial debt amortization and R$255 from finance lease obligations. Period funding issuances totaled R$1.8 billion, comprising R$797 million from the issue of the 2022 bonds, R$600 million from the Smiles debentures and R$93.2 million from a Finimp (BNDES import financeing)  

The adjusted gross debt/EBITDAR (LTM) ratio stood at 6.7x in 4Q14, versus 6.9x in 4Q13, affected by the 13.4% end-of-period depreciation of the Real against the Dollar, which was partially offset by the R$287 million improvement in EBITDAR. If the exchange rate had remained flat over the end of 3Q14, the leverage ratio would have been approximately 6.1x. Another factor that impacted the ratio was the R$600 million Smiles debenture issue maturing in the short term (R$347 million in 2015) that will be fully amortized through Smiles own cash flow generation.

The average maturity of the Company’s long-term debt in 4Q14, excluding aircraft financial leasing, the Smiles debentures  and non-maturing debt, was 4.36 years, versus 5.5 years in 4Q13, with an average rate of 12.3% for local-currency debt, versus 11.5% in 4Q13, and 7.95% for Dollar-denominated debt, versus 9.1% in 4Q13.

On September 18, 2014, the Company priced a US$325 million offer of Senior Notes maturing in 2022 at 8.875%, which may be redeemed after four years. Gol LuxCo, the guarantor of the 2022 Senior Notes, used most of the proceeds from the offering to pay the second Tender offer of the  Senior Notes maturing in 2023, 2020 and 2017. Both public Tender Offers for the acquisition of the Company’s bonds resulted in the repurchase of US$411 million.

Loans and Financings - Smiles

In July 2014, Smiles S.A. concluded the capital reduction operation initiated in April, having raised R$600 million in debentures and reimbursing R$1.0 billion to shareholders, corresponding to R$8.17 per share. On June 25, 2014, the Company approved the first issue of simple debentures, not convertible into shares, in the principal amount of R$600 million.

The Debentures are remunerated at 115% of the CDI rate (Brazilian Intebank Deposit Rate), with amortization of the principal in 12 consecutive monthly installments as of August 4, 2014, and the possibility of early maturity and voluntary early redemption. The proceeds from the issue were used by the Company exclusively to pay the amount related to the capital reduction.

Operational Fleet and Fleet Plan

        * Considers aircraft list price

                                        *Non-operational

At the end of 4Q14, out of a total of 141 Boeing 737-NG aircraft, GOL was operating 139 aircraft on its routes. The remaining 2 were in the process of being returned to their lessors.

GOL has 96 aircraft under operating leases and 45 under financial leases, 40 of which with a purchase option when their leasing contracts expire. In 4Q14, GOL returned 1 B737 NGs and 1 Boeing 767-300.

The average age of the fleet was 7.2 years at the end of 4Q14. In order to maintain this indicator at low levels, the Company has 130 firm aircraft acquisition orders with Boeing for fleet renewal by 2026.

Capex

GOL invested R$690 million in 2014, desconsidering the return of the pre-delivery deposits returns when the aircraft is delivered. For more details on changes in property, plant and equipment, see Note 16 to the financial statements.

2014 Financial Guidance  vs. 2014 Result

       ¹ the operating margin (EBIT) interval was revised on December 1, 2014 to between 4 and 6%. The first version of the guidance considered an interval of  3 to 6%.

Financial Guidance - 2015

Due to the impact of the adverse macroeconomic scenario, GOL may revise its guidance to incorporate any developments in its operating and financial performance, as well as any changes in interest, FX, GDP and WTI and Brent oil price trends.

Highlights of the subsidiary Smiles’ results in 2014

16.1% in the number of accrued ex-GOL miles in the annual comparison;   Miles redeemed increase by 9.4% over 2013;   Operating margin of 33.8%, 2.4 percentage points higher than in 2013;   Operating cash  flow of R$661 million;   Net income of R$283.9 million, 36.6% up on 2013.

Smiles S.A. closed 2014 with operating income of R$273.5 million, 51.8% up on 2013, with an operating margin of 33.8%, up by 2.4 percentage points, thanks to the 16.1% increase in the number of accrued ex-GOL miles and healthy direct redemption margins. The financial result reflects the capital structure following the capital reduction, which led to a significant increase in the return on capital indicators. For more information, please go to http://www.smiles.com.br/ri.  

            2014 Result by Operating Segment

For more information on the breakdown by business segment, see Note 29 to the standardized financial statements (DFPs).

            Balance Sheet