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Edited Transcript of SMLS3.SA earnings conference call or presentation 30-Oct-19 1:00pm GMT

Q3 2019 Smiles Fidelidade SA Earnings Call

BARUERI Nov 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Smiles Fidelidade SA earnings conference call or presentation Wednesday, October 30, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* André Fehlauer

Smiles Fidelidade S.A. - CEO & Member of Management Board

* Marcos Pinheiro

Smiles Fidelidade S.A. - Chief Financial & IR Officer

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Conference Call Participants

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* Daniel Vaz

Santander Investment Securities Inc., Research Division - Research Analyst

* Lucas T. Barbosa

Morgan Stanley, Research Division - Research Associate

* Paula Athanassakis

Banco Bradesco BBI S.A., Research Division - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and thank you for waiting. Welcome to Smiles' conference call to announce the results of quarter 3 2019. (Operator Instructions)

Please be advised that information given during this conference call may contain forward-looking statements or statements about future expectations. This information is subject to known and unknown risks and uncertainties that may cause them not to materialize or to be substantially different from what we expected.

Today, we have with us Mr. André Fehlauer, CEO; and Mr. Marcos Pinheiro, CFO.

Now I turn it over to Mr. André Fehlauer. You may proceed, sir.

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André Fehlauer, Smiles Fidelidade S.A. - CEO & Member of Management Board [2]

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Good morning, everyone. Welcome to our conference call to announce the results of quarter 3 2019. I'd like to thank you all for your presence and participation.

On Slide #1 of our presentation with the highlights for the quarter, the numbers that you see here, what they actually show is the engagement of our customer base. We finished the quarter with more than 16 million customers, an increase of more than 11%, and these are very engaged customers. As you see in these numbers, we had a little over 1.2 million airline tickets redeemed; 120,000 hotel stays; and 120,000 car rental bookings. So this shows engagement, not just with our core business, which is airline tickets, but also following our strategy of the traveler's chain. This also show engagements in the other fronts in which we work.

Still on this slide, we see a record net revenue of BRL 279.3 million, gross billings of BRL 633.7 million in the quarter. And we still keep a very lean and agile structure to streamline decision-making with 136 employees.

On the next page, this is one of the reasons why we have been able to achieve such good results this quarter, which is our promotional marketing efforts and the speed at which we launch our promotions. This quarter, to innovate our promotional work, first, we launched the Orange Friday campaign, which was a sort of an early Black Friday, and it was a very successful campaign. It was the best second day of the year in sales. And the Clube Smiles Day, which is now more sophisticated and has a greater promotional capacity. We reached record sales in the year in only 1 day, 450 million miles redeemed on 1 day, which shows the fantastic engagement of our customers. So this is truly remarkable, and it's very satisfying to see such good results.

Just to give you an idea for -- in 1 month, we had more than 60 promotions, so it's truly a very good promotional marketing, CRM and pricing tool. And this also strengthens the relationship with the partners that help us offer our services.

Moving on to the next slide. This had already been announced, the agreement with the Nubank. So it was rolled out this quarter, and our sales team is working closely with the banks and is now entering this new segment of fintech, which is growing consistently. So we are exclusive partners of Nubank today. And if a customer of Nubank Rewards wants to transfer miles to Smiles -- to their Smiles account, they can do it automatically and online, which is a very interesting experience, very innovative and this loyalty building work.

On the next slide, you can see a little bit of our strategy to promote Clube Smiles. I already mentioned the Clube Smiles Day. We also had the anniversary of the club, and we launched 2 new plans. The 20,000 plan, and the great differentiator here is that it offers the Diamond Category. So it facilitates for our customers to stay on the Diamond Category, which is a category that has numerous benefits for frequent flyers with -- particularly with our greatest partner, Gol. And so we had an exclusive launch ceremony for guests only. For the 25,000 plan, this plan, the most engaged customers of the company were invited to the launch, and we had a great acceptance of the 2 new plans. So we will continue to develop the strategy of Clube Smiles. And if you look at Clube Smiles customers' experience, they always feel special. Either when booking tickets or hotel stays or renting cars, there will always be a differentiator, either in terms of promotions or retention prices. So this shows that we can truly offer benefits to our most engaged customers in addition to our Diamond Category customers.

On the next slide. Yesterday, we announced the inclusion of new airline partners in our portfolio. We already had Gol plus 19 companies. And now we have 25 additional airlines, mostly focused on regional destinations and exotic destinations. So customers, starting today, they can fly, for example, inside China, Greece or within Europe, for example, inside Ireland, Bahamas and other Asian airlines. So with this offer, which is dedicated to our exotic flyers or exotic travelers, this is a very important addition. This shows our customers that we can offer them the opportunity to fly anywhere in the world. It's a huge world. There are many places to visit. And we can help you do that through our partners.

On the next slide. Here, we talk about Smiles by air, by land and now by sea because now we are also selling sea cruises. We used to have operations in the past that sold sea cruises with miles. But now we have revisited this experience in a partnership with Agaxtur sea cruises. And now you can buy your sea cruise and you can accrue miles for your next trip, and this can all be done online. And I think that this is something unprecedented in our market. You can have the entire experience online. You can choose your cabin. You can choose your ship. You can choose your destination. This is -- it's all very simple and easy. We are selling almost 20 ships in approximately 50 ports in Brazil and worldwide. We want Smiles to be a complete solution to any traveler that wants to go anywhere in the world.

On the next chart, there is some information about our co-branded credit card. This is a partnership with Banco do Brasil, Bradesco and Santander. This was created about 1.5 years ago, and we've been making efforts with our financial partners to give visibility to this product. On the left side of the chart, you see the increase in sales of the co-branded product year-on-year. And another important point in this partnership is our capacity to sell credit cards. You see that a very large part of what was sold was through Smiles channels. So when banks are seeking partnerships, that's what they want. They want to see what the size of the brand is, the reputation of the company and the capacity of the company to sell the product. So this has been a very fruitful partnership in this sense, and we are looking for more partners. This product truly facilitates our customers' lives, and this is about customer experience. With this credit card, they can buy whatever they need. They get the bill online. It's much easier to accrue miles and then to use our mile redemption services.

Slide #10. I don't know if you've heard of the Radar Smiles. You can see more information on our website. This is a realtime monitoring tool, so you can monitor the best airfares of our 20 partners online in real time. As I said, what we want is to make our customers' lives easier. So the idea here is to use the app to search for your favorite destinations, your approximate date, and we will help you monitor the prices, the airfare. You can set notifications. You can go straight to the partner's website to buy the ticket. So this is a great tool for people who want to plan their travels but don't have much time. And this is how Smiles can help customers plan their trips.

Here, we have a step-by-step showing the screenshots of the application and how it works. I'm not going to go into details, but I strongly recommend that you try out our service. I am sure that you're going to like it. And this product, together with Viaje Fácil and bookings give us a very important competitive edge in the purchase of airfares through our services at Smiles.

On Slide #12, here we see the logic behind all these initiatives. The company truly believes that the consumers should be in the center of everything that we do. Everything that we do has to be focused on our customers, and they will have Smiles as their favorite place to accrue miles. So the traveler's journey is increasingly -- an increasingly important focus for us in the company. We talked about the Radar. We talked about the application, and you can expect more solutions in the future to put the customer at the center when redeeming their miles, when buying air tickets. We wanted to -- Smiles to be the easiest way to plan your trips.

So this is the end of my part of the presentation and now, Marcos Pinheiro is going to share some of the numbers with you. And I'll be available in the end for questions.

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Marcos Pinheiro, Smiles Fidelidade S.A. - Chief Financial & IR Officer [3]

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Thank you, André. Good morning, everyone.

On Slide 11, we see the evolution of the company's gross billings. So when we look at the sequence, quarter against quarter, we see a slight decrease in our revenues of 7%. But when we look at the annual number, we see that the company is clearly expanding its business but particularly focused on increasing customer engagement and not the engagement of any customer but the right customers. We want to be loyalty program targeted at customers that truly value their travel experience.

On Slide #12, the numbers are somewhat similar. Here, we clearly show the evolution of our net revenue. The company's revenue was stable, and the evolution is very healthy when compared to the same period last year. We had an increase of 6% in our net revenue.

Here, we have some news for you, and we can discuss this further during our question-and-answer session. This slide shows what has been happening with competitiveness in our industry. When we look at the dynamics of the airline industry, some factors end up affecting our lives. And everything that happened recently with the exit of a very relevant player, the positive evolution of occupation rates and our partners, of course, at some point, we would feel the impact of all that.

Just to explain the size of this challenge. This chart shows the mix of air tickets redeemed with Gol. And we see that this is the first time ever in the company that we have to buy so many air tickets at market price, of course, with some discounts due to volume purchasing, but in similar conditions when compared to any other travel agency in this field. And to tackle this challenge, we had to improve the internal capacity of the company. Our CRM and revenue teams virtually worked 24 hours per day to try to establish a pricing level that can help us maintain our high profitability but also engage our customers. That's why we had to slightly decrease our margin. You see that the redemption margin, which is the main profitability indicator of the company, we see a decrease of 3.2 percentage points compared to the previous quarter. And now it is below the historical level of 40%.

On the next slide, we present the net income of the company. In the quarter, it was BRL 150 million approximately of net income, which was slightly lower than previous periods but still very interesting and very healthy. This is the last slide of the presentation.

And now we can answer your questions if you have any.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is by Paula Athanassakis, Bradesco BBI.

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Paula Athanassakis, Banco Bradesco BBI S.A., Research Division - Analyst [2]

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Actually, I have 2 questions. I'd like to know whether you have any update regarding the extraordinary price adjustment of Gol air tickets. And do you have any update regarding when you're going to have the updated business plan? And my second question is will there be any impact with the exit of Delta and the new partnership with Latam. Could this affect your results in your international flight business?

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Marcos Pinheiro, Smiles Fidelidade S.A. - Chief Financial & IR Officer [3]

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Paula, this is Marcos. Thank you for your questions. Let me start with the updates. So if I understood right, you asked about the company's business plan, which is now being revised and also about the extraordinary readjustment that was requested by Gol a few months ago. So in respect to the 2 issues, we are working on them. These matters are being appreciated by our Board. And we don't have any news to share with the market right now, except for the objective fact that we are working on these 2 issues to solve everything as fast as possible.

And regarding your second question about the impact of Delta, I don't think we're able to talk about any impacts on profitability right now. But objectively, the end of this partnership will impact somewhat our attractiveness to our customers. We don't have to hide that the destinations in North America are very appealing. The destinations in North America are very appealing to Brazilian travelers, so losing relevant access to such a highly desirable market will put us in a more challenging situation before our competitors because they have very comprehensive partnerships to deal with this demand. And they also have their wide-body planes traveling these routes, which are so desirable for Brazilian travelers. But we have a privileged position in terms of our relationship with Gol, and Gol has some routes in North America. And this will become increasingly important in our everyday operations. Nevertheless, we are seeking new alternatives to improve the experience of our customers, to increase our connections going after new rates, new partners. So I don't have any concrete things to tell you in terms of the impact on our activities or our results, but it will indeed impact the attractiveness of our program.

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André Fehlauer, Smiles Fidelidade S.A. - CEO & Member of Management Board [4]

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Just like Marcos said, of course, Delta has always been a very important partner, but we still have Gol. We have Copa. We have flights to North America via Aeromexico, Air Canada. We have other partners that will help us compensate for that. And we will work to try to reestablish this value proposition and become even more competitive because we know that North America is a very important destination to our customers. So having a good connection with North America is essential for our business.

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Operator [5]

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The next question is by Daniel Vaz, Santander.

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Daniel Vaz, Santander Investment Securities Inc., Research Division - Research Analyst [6]

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I have 2 questions. The first is I'd like to know what is your vision for 2020 and the highlights, both negative and positive. And do you think that this dynamics of 1/3 of air tickets being purchased as they were, not just with Gol? And the second question is about Smiles Argentina. Have you already been able to see any impacts of the changes there?

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André Fehlauer, Smiles Fidelidade S.A. - CEO & Member of Management Board [7]

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So let me start with the second question with Argentina. We know that Argentina is going through some difficulties related with inflation and interest rates. With the elections now, we hope things become more stable. But our operations in Argentina have a long-term view. It's a very lean operation. Of course, the results are coming at a slower pace than expected because when we opened our business there, the outlook was better. But it is a company that has a good value proposition for partners and for customers, and we have been able to grow. Of course, the business there is small when compared to Brazil's. But as I said, our operation there is very lean. We -- the investments are not that high, and we are starting to see some interesting results. So our plan is to continue to operate in Argentina. And we are certain that we will soon start to see very good results in that market.

As for 2020, I can't really tell you what's going to happen. If we look at the market today, as you said yourself, the -- we are operating with Gol, and we have some caveats. But based on what we did in the past, the investments that we made in the past, I think that we can navigate this market even in more complex times with a lot of flexibility and intelligence. We really master this market. Of course then, we will see some impact of the movements of the external market, but we have to see what the scenario will be for next year. The market has undergone many recent changes. Marcos, would you like to add something?

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Marcos Pinheiro, Smiles Fidelidade S.A. - Chief Financial & IR Officer [8]

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Well, thank you for the question. I don't have anything to add.

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Operator [9]

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The next question is by Paula Athanassakis, Bradesco BBI.

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Paula Athanassakis, Banco Bradesco BBI S.A., Research Division - Analyst [10]

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About the extraordinary adjustments, this was announced as a relevant fact a while ago. Do you think that you could see some retroactive impact of this extraordinary adjustment? Hello? Hello?

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Operator [11]

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Ladies and gentlemen, please wait.

(technical difficulty)

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Unidentified Company Representative, [12]

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Paula, are you there? I hope everyone can hear me. We don't have any updates related to your question. All the requests that we received are now being evaluated by our Administrative Board and the committee, which is independent from the Board and also our Board of Directors. Thank you.

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Operator [13]

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The next question is by Lucas Barbosa, Morgan Stanley.

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Lucas T. Barbosa, Morgan Stanley, Research Division - Research Associate [14]

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And congratulations for the results. I have 2 questions. First, it's about the anticipated buy of air tickets from Gol during this quarter. If we look at the transactions, it's about 115% of the CDI at the time of each transaction. I'd just like to understand the rationale of Smiles to carry out these transactions at this level of the CDI at times of very low interest rates and also about the limit spent with Gol air tickets in the past 12 months.

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Marcos Pinheiro, Smiles Fidelidade S.A. - Chief Financial & IR Officer [15]

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Lucas, thank you for your question. This is Marcos. The rationale is that, today, our investment policy follows a guideline, according to which the instruments in which we can invest in the capital market have a remuneration very close to 100% of the CDI. And any allocation in these anticipated purchases with any supplier and, specifically, with Gol, they have a higher remuneration.

In respect to the limit for these transactions, in the past months, we have been consistently operating at these levels, a global value equivalent to the 12 -- last 12 months of consumption of air tickets. So that's the limit that we are working with today.

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Lucas T. Barbosa, Morgan Stanley, Research Division - Research Associate [16]

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And if you allow me, I'd like to ask a second question about the breakage revenue. In this quarter, it was a little higher than in the others. Was there any different effect that affected this item?

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Marcos Pinheiro, Smiles Fidelidade S.A. - Chief Financial & IR Officer [17]

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That's a great question. Yes, in this quarter, the breakage revenue was a little higher and there are some specific reasons for that, including the variation of the unit price because we have been moving our deferred revenue. And the burner is higher also, which allows us to recognize this at an accelerated base. But when I look at the accumulated for the year, this is very in line with the same number that we saw last year. Actually, the numbers are very close to our internal projections as well. So no, there was nothing striking about this change. And although we were very active in terms of campaigns and interaction with the customers, there was no extraordinary item that could lead to an outlier breakage that would explain a boost in this revenue. And we're not expecting anything like that for the -- for quarter 4. We are changing the profile of our promotions. We are improving the quality of our engagement with our customers. We've seen orders where the mileage expiration was very high because we accelerated our promotional campaigns with a certain partner too much. So we are working on this to improve the quality of our relationship with customers. So that's what I have to say about the breakage. I don't know if I answered your question.

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Lucas T. Barbosa, Morgan Stanley, Research Division - Research Associate [18]

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Yes, thank you, Marcos.

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Operator [19]

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(Operator Instructions) This conference call is now closed. Thank you all for participating, and have a great day.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]