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Edited Transcript of SMLE3.SA earnings conference call or presentation 28-Apr-17 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Smiles SA Earnings Call

Sao Paulo May 2, 2017 (Thomson StreetEvents) -- Edited Transcript of Smiles SA earnings conference call or presentation Friday, April 28, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ivan Bonfanti

* Leonel Dias De Andrade Neto

Smiles S.A. - CEO and Member of Board of Executive Officers

* Marcos Antônio Pinheiro Filho

Smiles S.A. - Chief Financial and IR Officer

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Conference Call Participants

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* Lucas Barbosa

UBS Investment Bank, Research Division - Analyst

* Samuel Campos Alves

Banco BTG Pactual S.A., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Thank you for waiting. Welcome to Smiles teleconference to discuss first quarter results. (Operator Instructions) Information in this teleconference may contain future expectations and projections. Such information are subjected to known and unknown risks and uncertainties that may interfere in the results of these estimates. We have Mr. Leonel Andrade, CEO; and Mr. Marcos Pinheiro, CFO with us today.

I will now turn over to Mr. Leonel Andrade. You have the floor, Mr. Andrade.

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Leonel Dias De Andrade Neto, Smiles S.A. - CEO and Member of Board of Executive Officers [2]

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Good morning, everyone. Thank you for attending this call. This is our results for the Q1 2017. It's the fifth year of the company's operation. Actually, these are the first or the 5th first quarter. Our net income reached BRL 156.3 million, growth was 32%. It's very satisfying because the first quarter -- the 1st, first quarter we had 4 years ago was BRL 29 million. So this has been very robust and consistent growth.

Our EBITDA is BRL 182 million, growth of 45%. We have to manage to grow maintaining our net operating profit. Net income increased 26.4% reaching BRL 443 million. That is proof of the engagement of our customers. We have BRL 60 million not including Smiles & Money miles, 25.4% growth. It's an outstanding first quarter. Gross billings grew by 8%. We're now going through an uptick in our economy, despite the fact we grew during the economic turmoil. The industry will be favored with this recovery and we are going to continue to lead out of that growth. 2.9%, I think we should say in the next 3 years, we're going to have better financial results as well.

I would like to point out that our focus will be always on the operating performance. And we have managed to grow consistently in that regard. I would like to outline the Viaje Fácil to introduce second quarter and this product has gained market share. You can schedule the trip, confirm it and you pay for it 60 days before takeoff, before the flight. We are acquiring more market share. It's very easy to attract customers because they can transfer their miles once the flight is confirmed because it's a very innovative product. Other plans, people have to get miles and miles so that before they can book a flight. Now they can book a flight at the best price possible and then they can use their miles and they can, of course, benefit from the promotions. This has been a very positive experience. We are now going to start introducing Viaje Fácil in 100% of our operations. The Go tickets that account for most of our business will be involved in the program. As of July, Go customers will be able to issue their tickets and pay 60 days later. We are going to provide many more benefits to our customers. As customers accrue miles, we can benefit from that new campaign. In May, we are rolling out a partnership with Shell. It's the company that has the partnership with Shell. As of May, every Shell gas station will have the possibility to redeem their mileages electronically. So they can take gas -- pay for the gas using their miles. The only way to work in retail is using electronic capture of that data. So that we can scale to the marketplace. This is something innovative, nothing has been done in the Brazilian market.

On Page 6, we're still finalizing a couple of issues here. Once we've renewed our contract with Banco do Brasil, we can move on with our co-branding effort and we're now revising it and these banks will introduce that product very shortly. There will be a project for the upper class. We are not exclusive partners of these 2 banks. So we can resort to a third bank, where we're already negotiating with several banks in the marketplace, and this is still being negotiated. We will probably have 3 of the top banks in Brazil operating in the co-branding. We have an agreement with Polishop, the company focused in higher income families and you know that we have gained ground in that income bracket. They mostly travel abroad. Even in the worst of times, during the economic turmoil, we managed to gain market share in international flights. Everyone is going to grow and we'll keep on growing above the industry average in that income bracket.

I'm going to turn over to Marcos, and of course, I will be available to answer any questions you may have. Marcos, over to you.

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Marcos Antônio Pinheiro Filho, Smiles S.A. - Chief Financial and IR Officer [3]

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Thank you. (technical difficulty) of the accrued miles grew by 52%. I'm sorry.

(technical difficulty)

Let me now move on to net revenue, 150 -- net income...

(technical difficulty)

We'll now have the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question comes from Mr. Samuel Alves from BTG Pactual.

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Samuel Campos Alves, Banco BTG Pactual S.A., Research Division - Research Analyst [2]

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So here's my question. It's about the volume growth. It's very consistent and robust this first quarter. Could you elaborate where it comes from? Are these the financial partners that are also growing? Or is it because of the new products of Smiles, Viaje Fácil? Are they significant? What's behind that strong volume growth we have seen in miles?

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Marcos Antônio Pinheiro Filho, Smiles S.A. - Chief Financial and IR Officer [3]

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Thank you, for your question. All of our new operations have grown consistently, but they are not that substantial in that sense. And we mentioned, we pointed that out in the last call. We believe that this new operation will account for 10% to 15% of the company in 2 to 3 years. We still believe in that because we can detect enthusiastically -- we can enthusiastically detect the growth. But what had brought miles was the alliance with banks -- all banks grew consistently across the board and we're getting closer and closer, connected to banks more alliances, more innovative products will be working for them and with them. So I like to point out that the banks stand out behind that growth.

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Operator [4]

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Next question comes from Mr. Lucas Barbosa from UBS.

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Lucas Barbosa, UBS Investment Bank, Research Division - Analyst [5]

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My question is about Smiles & Money. Can you break that down, the income from Smiles & Money? I'd like to better understand whether there were any pricing changes in this quarter.

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Leonel Dias De Andrade Neto, Smiles S.A. - CEO and Member of Board of Executive Officers [6]

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Hi, Lucas. Thank you for your question. Let me address the first part of your question. The answer is no, I cannot break that down. But everyone should understand that this new dynamics was based on transparency, for both customers and partners. You should have the target incomes to all our website and you can find out the price of these miles, or how many miles, or how many miles you need for an air ticket. You remove the miles and then you have the difference and you can get the ratio of price, money and miles. BRL 0.0265 per mile, that's the commercial strategy. In terms of margin, the product is very consistent and it's very clear that margins are exactly the same. Let me just make a comment on what Marcos has already said. It's easier to understand the relative size, the sort of growth of the company when compared to the market by using the same methodology. All our competitors operate the same way. I was attending an Associations' meeting, I was talking to our peers, our peers rather to better understand, we were the only ones that were not adopting the same methodology. Now we're all on the same boat. So it's a lot easier to actually compare companies -- the growth of several companies and to attest that we are leaders in that growth and we hope to remain that way.

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Operator [7]

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(Operator Instructions) Let's give the floor to Mr. Ivan Bonfanti, Financial Planning Director and Investors Relations Director.

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Ivan Bonfanti, [8]

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Good morning. We received a few companies over the Internet, the first one is about other revenues. First we were asked about what's behind this fantastic growth of 254%?

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Leonel Dias De Andrade Neto, Smiles S.A. - CEO and Member of Board of Executive Officers [9]

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Thank you for your question. Other revenue came from auxiliary services related to accrued miles. We started to offer passenger -- especially, Gold Passengers to purchase preferred seats. All other auxiliary services, we're now offering those services, which they can purchase using their miles. Along the same lines, you have resources from our credit card operation co-branding, but this expensive growth comes from these auxiliary revenues. And we believe that, that standard is sustainable because these are new sources of revenue and they are already important to our results, and we're going to have similar penetration in Smiles. So we are very optimistic about it, and we hope to remain in the positive trends.

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Ivan Bonfanti, [10]

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I have another question about the negotiations with financial institutions that are our partners and what are price expectations for the year?

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Leonel Dias De Andrade Neto, Smiles S.A. - CEO and Member of Board of Executive Officers [11]

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Thank you for your question. This is Leonel speaking. Well what was already better, just got even better. So negotiations with banks have been very positive to us. We're not talking about prices anymore. Prices may vary because of the volumes. When you have greater volumes, prices can be scaled. If volumes go down, prices will increase, of course. But in the end, just like I mentioned in the previous call, prices should remain at the level they are at right now. There may be very few price fluctuations given the fact that negotiations have been finalized but there shouldn't be any changes in the initial contract. Some banks prepaid that growth. I'm very optimistic about the business with banks throughout the year because we're getting closer and closer, even developing new products. We'll be expanding that to Go. There will be innovations coming out throughout the year. We're introducing a very innovative product, just like we did with Club Smiles. These are all products, Smiles & Money, now Viaje Fácil. There'll be yet another product that will help us foster that relationship with banks. We have been in total alignment with the banks for the entire year of 2017.

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Ivan Bonfanti, [12]

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Along the same lines, there's a question about the banks feelings about credit this year. Does Smiles believe that we can grow above credit card growth? I am also a Director of AMAX.

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Leonel Dias De Andrade Neto, Smiles S.A. - CEO and Member of Board of Executive Officers [13]

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I've been discussing that in the Association of banks and credit cards. We're hopeful about small improvements, the industry may grew above the inflation rate favored or benefiting from the fall of inflation rates because the worst is behind us. We won't be having 3%, 4% interest rates drops just like we had in 2015-2016. We are not heading into another recession. So banks are very optimistic. The exchange rate is smaller than that of what we had last year, that also generates more miles, more points for credit card users. So the market will help the industry overall. And I think we did the right thing when we played the role and Smiles will come out winners in the next quarter because we are in more alignment with them, with banks. So I'm very optimistic about the future, especially, mostly because of that alignment with the banks.

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Operator [14]

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That concludes the Q&A session. We'll give the floor to Mr. Leonel Andrade for his final remarks.

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Leonel Dias De Andrade Neto, Smiles S.A. - CEO and Member of Board of Executive Officers [15]

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Once again, thank you very much. We have shown consistent results and we'll keep on focusing on improving even further. I'm very pleased to manage the company in its fifth year of existence. That improvement is the reason -- the result is because of consistent and focus in our control and our strategic management. I just wanted to, once again, thank the banks for placing their trust on us and we're very optimistic about the future, about this year, in particular. And we have signs to estimate that our performance will remain on the positive side. Thank you. Thank you, all the shareholders of the company's. Thank you, and we hope we can maintain those good results in the future. Thank you very much.

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Operator [16]

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That concludes Smiles teleconference. Thank you for attending. Have a good day.