LATAM Airlines Group SA (LTM) 2003 Q2 法說會逐字稿

Good day everyone. Welcome to the LanChile second quarter earnings release conference call. Just a reminder -- this call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Maria Bruner.

Thank you. Good morning, everyone, and welcome to LanChile's second quarter earnings conference call. We thank you very much for joining us today. The LanChile earnings release for the period was distributed yesterday. If you have not yet received it, please contact us immediately in New York at 221-406-3690 and we will send you one. At this time, I would like to point out that certain statements regarding the company's business outlook and anticipated financial and operating results constitute forward-looking comments. These expectations are highly dependent on the economy, the airline industry and international markets. Therefore, they're subject to change. At this time, it is my pleasure to turn the call over Alejandro De la Fuente, Chief Financial Officer of LanChile.

Thank you, Maria, and thank you for joining us for LanChile's second quarter conference call. I am Alejandro de la Fuente, Chief Financial Officer, and with me today are (indiscernible), Vice President of Domestic Passenger Division; (indiscernible) from the International Passenger Division; (indiscernible) Pitrelli (ph) from our Cargo Division and Andres Bianchi (ph), head of investor relations.

Today, I will discuss the highlights of the financial results, explain some of LanChile's strategic developments, and lastly, comment on our expectations for the rest of 2003. Then we will be pleased answer any questions you may have.

The results. LanChile earned $4.1 million in net income for the second quarter of 2003; typically, the weakest quarter due to the seasonality of the business in the southern (indiscernible). These results reflect a significant improvement on the $9.3 million loss reported for the second quarter 2002 and is the company's for second quarter net profit since 1997. By leveraging its operational efficiency and competitive position, we were able to increase profitability. We improved our financial results, despite the continued depressed demand caused by the uncertainty of global economic conditions and the negative impact of the Iraqi conflict, which affected passenger demand and fuel prices. LanChile's ability to adapt to challenging market conditions continued to be the basis of our operational and financial success, resulting in the highest reported first half earnings since 1998.

On a consolidated basis, total revenues grew 12.5 percent due to the improvement in all areas of the business. The passenger business. Passenger revenues increased 12.1 percent due to a 13.4 percent increasing profit, which fully offset a 1.2 percent decline in yield. In the domestic business, we continue to face weak demand and increase competition while in total domestic industry, profit barely grew year-over-year. Sky Airlines (ph), our only domestic competitor, has increased its market share to nearly 20 percent. It is important to highlight that, during the second quarter of last year, we had nearly 100 percent of the market. Due to these conditions, our domestic profit declined 18 percent during the quarter. However, total traffic grew thanks to a 20 percent increase in international traffic due to market share gains, deeper penetration into new markets and recovery in some points of sale. We have continued improving market share in key groups, like Europe and the United States, while in routes between Chile and Europe, will have gained between 2-4 percentage points compared to last year and now have close to 20 percent of the market. Our share of the market between Chile and the United States improved 3 points to approximately 30 percent. For (indiscernible), we estimate our share of the total Chilean international passenger market top have recent (indiscernible) 5.2 points (ph) to 49 percent. It has become more relevant when considering that, during June, international sales by travel agencies grew nearly 9 percent, breaking three straight months of June year declines that exceeded 10 percent.

The expansions of our regional affiliates, such as (indiscernible), have enabled us deeper market penetration. For example, after the launch of LanEcuador, our market share between Ecuador and the United States increased 4 points to 28 percent. During the quarter, we were also encouraged to see the first signs of improvement in (indiscernible) demand since, for example, traffic to the United States increase in June for the first time since September 2001. Yields declined mainly to a 12 percent increase in average (indiscernible) as well as the implementation of commercial strategies aimed at stimulating (ph) travels during and after the Iraq war. However, units revenue grew 4.9 percent as slower yields were upset by a 3.7 point increase in load factors.

The cargo business. In the cargo business, revenues increased 9.3 percent due to an 11 percent increase in yields and a 1.5 percent reduction in traffic. Yields increased partly due to the implementation of the 10-20 cents fuel surcharge. We have also benefited from weaker competition, mainly as Atlas Air (ph) has scaled back its operations, especially out of Chile. Also, yields out of Europe improved during the (indiscernible). Cargo traffic declined in the second quarter as northbound (ph) traffic out of Chile dropped more than 15 percent due to reduced (indiscernible) export (ph). However, this decline has been partially compensated by a gradual recovery of southbound demand to Brazil and Argentina. Additionally, southbound volume out of Europe has increased due to our alliance with Lufthansa Cargo. (indiscernible) declined half a point during the quarter as capacity decreased .7 percent. However, higher yields fully offset this decrease and led to a 10.1 percent improvement in revenues per ATK.

Operating costs grew 10.5 percent during the quarter as capacity increased 3.3 percent, leading to a 4.8 percent increase in per ATK cost. However, more than half this increase can be attributed to higher through prices, which generated $77 million in additional expenses. Unit cost, excluding fuel, rose 2.3 percent, mainly driven by increases in areas such as commissions and our operating expenses which are heavily influenced by revenues and traffic volumes. The consolidation of Lan (indiscernible), which contributed with $5.3 million in additional expenses and a low comparison base in maintenance expenses due to a onetime reduction in expenses in 2002. Due to the nature of this impact and to the fact that during the quarter, we had (indiscernible) in increased expenses to prepare the launch of new LanDominicana and LanEcuador operations, we're not concerned about the increase in (indiscernible) fuel unit cost. In fact, expect them to decline net of revenue related factors in the future.

Operating margin for the quarter increased 1.8 points to 2.7 percent as the revenue growth clearly outpaced increased increases in cost. More importantly, operating income for the quarter increased more than 3 times to $97 million, highlighting the effectiveness of our adjustments. (indiscernible) operating income amounted to a $5 million loss, a 63.7 percent decrease, compared to last year. This improvement reflects lower net interest payments and foreign exchange gains.

During the quarter, we recorded a $.2 million dollar fuel hedging loss as we accounted for additional financial expenses related to hedging. Excluding these expenses during the quarter, we recorded a $1.1 million fuel hedging profit. As a consequence, net margins improved from a negative 2.9 percent to a positive 1.1 percent and we reported our first second quarter profit since 1997.

Our balance sheet remains solid. As of June 2003, the company had $133 million in cash and (indiscernible) liquid assets, twice the amount in June 2002. Additionally, we have continued strengthening our available liquidity and secured a $30 million standby facility with international finance corporation. This medium-term (ph) credit line enhances our flexibility in the face of continued unpredictability. We have continued with our fuel and interest rate hedging strategies. In fuel, we have hedged nearly 60 percent of the fuel needs of our passenger business for the next quarter. And according to the our traditional strategy, we have also hedged part of our requirements for up to seven quarters in advance and we continue to a apply a cargo fuel surcharge. It is also important to know that due to the increased efficiency in our new fleet, fuel consumptions for ATK for the quarter came down more than 1 percent.

With regards to interest rates, we have recently taken advantage of the current low rates environment to capture a significant part of our exposure to the 90 days LIBOR rate to the financing of aircraft.

Strategic developments. I would like to mention five strategic developments that are key to LanChile. First, during the quarter, LanEcuador continued to expand its net worth. In May, LanEcuador replaced in its five time per week service to New York and Miami with daily service to both destinations, significantly improving the quality of the product it offers to its customers. Additionally, in July, LanEcuador initiated two weekly frequently services from Quito and Guayaquil (ph) to Buenos Aires and in June, it was clear by cleared by financial authorities to begin service to Madrid. This operation will begin in September 2003 and will provide Ecuador originates (ph) in passengers and also the large Ecuadorian population living in Spain with three flights between Ecuador and Spain. Additionally, by structuring convenient connections with LanChile and (indiscernible) flights between Lima and Guayaquil, we will be able to provide one-stop service to Europe to Peruvian passengers.

Second. In June, LanDominicana began service between Santo Domingo and Miami, offering three weekly flights. Although LanDominicana is still relatively small, its use of (indiscernible) aircraft from LanChile provides us with a major opportunity to increase fleet utilization and improved efficiencies.

Third. In June, the Chilean antitrust agency advised the antitrust commission LanChile be fined approximately $400,000 for abusing its sell-through (indiscernible) plan. We made a presentation to the antitrust commission answering any of these requirements and are currently awaiting a decision by the commission on the matter. However, we are confident that, given the strength of the arguments we presented, the fine should be partially or fully reduced.

I must emphasize that we currently fulfilled all of the requirements included in the sell-through relation plan, and that this increased competitive activity we believe further monopoly (ph) accusations are groundless.

Fourth. To better adapt our fleet to our new route (ph) structure, which relies more heavily on Ecuador and Peru than originally anticipated, and therefore, require less full turnover (ph) capacity, we have changed our (indiscernible). As a result, we have cancelled the A340 (ph) aircraft we were to receive in 2004. And instead, we will receive three A (indiscernible) aircraft. These additional (indiscernible) aircraft, which will add up to the two A319s (ph) we will be incorporating into our fleet later in 2003, will unable us to accelerate the phasing out of our Boeing 737 aircraft and increase the efficiency and flexibility of our shorthaul fleet. Additionally, we plan to incorporate additional Boeing 737 aircraft to expand our medium and longhaul fleet.

Fifth. Yesterday, LanChile was awarded of Chile's Company of the Year by ICARE, a prestigious Chilean business organization. This award recognizes our development, which according to ICARE, has enabled LanChile to become one of Latin America's most outstanding companies remaining profitable while operating on highly competitive environment.

The future. For the rest of the year, we plan to increase passenger capacity approximately 6-8 percent through new operations, such as LanEcuador's operations to Madrid or additional frequencies in the regional market. In cargo, we expect capacity to increase 2-3 percent year-over-year to accommodate higher (ph) seasonal demands on the fourth quarters. Recent press reports have stated that we are in negotiations with Argentine authorities to participate in (indiscernible) Federales (ph), a new company formed to replace (indiscernible), The national Argentine airline. Argentina is an (indiscernible) market for LanChile since it is close to Chile and we transport nearly 10 percent of the Argentina U.S. traffic. We are constantly monitoring developments there and we have indeed inquired about (indiscernible) Federales (ph). This conversation will mainly aimed at fact gathering, and there are currently no official negotiations taking place. However, we continue to follow events in Argentina closely as we have for the last four years.

Colombia is (indiscernible) markets where opportunities are appearing, giving that Bianca (ph) filed for bankruptcy protection. We're also observing how this (indiscernible) unfolds, but have no immediate plans there. With regard to the recent warning by the United States Department of Homeland Security on the possibility of terrorist activity using airliners, I must mention that all of our longhaul fleet complies with U.S. security regulations, such as (indiscernible) of armored doors and a special training for flight crews.

LanChile had an extremely positive second quarter. And even though we continue to face adverse market conditions, a new challenge has appeared, we have just successfully -- we have been able to continue proven results consistently and our 12 month net income, which amounts to $48 million, is back to the same levels recorded since 1999 and 2000. It had not only positioned us as the best performing carrier in Latin America, but as one of the few profitable carriers in the world. During the last 18 months, LanChile made significant adjustments and these results proved them to be successful. We expanded into new markets, developed new alliance relationships, streamlined our operations and increased efficiency. And by preserving the quality of our product and implementing an effective commercial strategy, we have been able to increase our market share. And while our regional peers struggle, we have continued to advance on our long-term strategy by capitalizing on opportunities to both grow our revenues and reduce cost even further. Therefore, we are confident our results will continue to improve, even if market fails to rebound. In summary, I believe that LanChile is an impressive position to improve profitability and consolidate its position in Latin America's most important airline. Thank you very much. Now we will open to answer any questions you have.

(Caller Instructions). Ben Laidler, UBS.

Good afternoon. Just a question on the cargo business. Could you give us some idea of north-south tariff differentials in pricing and what you are seeing in competition, both on northbound and southbound routes?

Yes. We have seen -- in June, we had been able, due to the less (indiscernible) to maintain our rates. We implemented our new area management and pricing and we have been able to establish very decent rate levels from the last -- compared last year's. What has been helping us a lot was the European route, whereas this alliance (indiscernible) they put us in a very strong position into the Latin American market, gaining a lot of market share together, increasing probably further the expectations of market share into Argentina, Brazil and LanChile. In regards to the U.S., even though the competition has been tough, we have been able, due to the network we have today in South America, to have the first right of refusal with all of the airlines. And actually, it has been putting us in a very, very strong position. We have seen a very, very decent June compared to June last year. I don't know if that answers the question or if you need a further explanation?

Could you give me a rough idea of the tariff differences between Chile/Miami, Chile/U.S. northbound verses southbound?

Well today -- I don't know if you know, but years ago it used to be that probably the southbound was (indiscernible) of the northbound and today the rates almost equals. The difference between southbound and northbound is about 10 percent today.

Does that change quarter over quarter?

Yes, but we expect that, as Alejandro said, a good improvement in the southbound rates from here until the end of the year. Don't forget that we are going to probably get into the -- we are getting into the high season starting in September, and we see a much better high season than it used to be in a couple of years (ph).

That's great. Thanks.

Glenn Engel, Goldman, Sachs & Co.

Congratulations. A couple of things. One is on the currency side, how has the peso been doing versus the dollar, and what effect has that had?

(indiscernible). The peso against the dollar compared to last year was a bit higher. It was about an average of 6.99 against 6.88, so that had an impact of both domestic yields, since they are denominated in pesos. And also on the cost side mainly on the wages as (indiscernible) wages are peso-denominted. Now during the quarter, we saw a decline through the quarter in the effects (ph) (indiscernible) sideways (indiscernible).

So if you looked at your wage increase and adjusted for the currency, how much would that --

I would say that the FX (ph) difference accounted for a 1.5 percent decline and the increase is mainly due to increases in headcount related to expression of our operations.

Too, can you go over some of the components of the passenger demands? One, how Chilean outbound is doing, and two, how the premium classes are doing?

I didn't get the first part the question.

How Chilean outbound traffic is doing internationally, and two, how the premium cabins are doing versus the economy?

Regarding the total demand in Chile, as it was mentioned in the press release, we have some weakness during March, April and May. And there has been a significant rebound in June. We had declines in total international sales of about 10 percent during those months. The weakest was April with 18 percent, which we attribute to the war effect. And in June, the demand, the Chile demand increased by 9 percent. We feel that that should be more or less the growth rate for the near future. In terms of (indiscernible) of demands, there has not been a rebound yet in the traffic to the U.S. I would say the weakest demand is in the traffic to the U.S. right now. But we have seen better figures in the traffic to Europe.

You mentioned passengers, you expect to be up about 6-8 percent in the second half of this year in capacity. Do you have any rough guidance for 2004?

Yes. The increasing ATKs (ph) for 2004 is expected to be around 8-9 percent also. It is a little bit higher than year 2003.

Finally, can you talk about the -- has there been any new movement on the court case on domestic routes where they wanted to split up your cargo and passenger?

The split of cargo and passengers is something that we see as a very low likelihood. Today, the issue is more defined that they requested us to pay. The (indiscernible) splitting I think is something -- they are presently analyzing the situation. There are no -- any other solutions yet, but if you ask me my opinion, that issue is less relevant today. I don't see a high-risk an that being an important issue in the final ruling (ph).

thank you very much.

Rodrigo Martin, Santander Investment

First of all, congratulations. According to the news that appear in local press, (indiscernible) Argentina is (indiscernible) to operate in domestic flights in Chile. If this came true, what is LanChile expecting for the domestic markets -- for the domestic market, in terms of market share? And do you think that this will be a drive for LanChile to start operations in the domestic Argentine market?

Well, yes -- Argentina has been saying this for about six months now, even eight months. And what I would like to say is that we are always prepared for competition, and actually, Sky (ph) has been doing (indiscernible) competition. We don't foresee our market share to decrease more than what we have today. And of course, if they come to the market, that would be a new phase of the competition, but the reality when this happened in the past, it affected more our competitor than us. They start fighting mainly on the lower segment of the market. And so we don't -- of course we are prepared and it would effect our operations. But clearly, we don't foresee that as a high issue. We are always prepared for that.

Perfect. The second part the question was -- if LanChile considered this a drive to (indiscernible) operations in Argentinean domestic market?

No. Those two things would be (MULTIPLE SPEAKERS). We are always, as Alejandro mentioned, we are always analyzing the Argentina market. It is important for us and is a relevant market, so we are always seeing an opportunity. But our decision was based more on how attractive that opportunity becomes, more than on what they are doing on our market.

Okay, thank you very much.

(Caller Instructions). Barbara Angerstein, Celfin Capital.

Good afternoon and congratulations for a great quarter. I have two questions. In the last two quarters, you had onetime reductions in maintenance expenses due to the change in your return conditions of operating leased aircraft. And I was wondering if, given the current fleet plan, you will have similar reductions over the coming quarters, and in what amount they would be? And the second question would be what is your CapX for the next two years, meaning 2003 and 2004?

(indiscernible). First on the maintenance onetime reductions in expenses, it is likely that we may have them in probably the next two quarters, although it is hard to tell right now how much it will be. Now in terms of the CapX, we would expect our CapX for this year to be around 100 million. The CapX for 2004, due to the change in the aircraft times that we are acquiring would be between 125 and 135 million.

Okay, thank you very much.

(Caller Instructions). Greg Brown, Latin Trade.

Good afternoon. I would like for one of the gentleman to comment if you can on the deal with Lufthansa, and how that might bode for a U.S. Chile free trade? My impression is that the cargo business is picking up because of the Europeans trade deal that was signed previously. And I don't know if a U.S. Chile free trade necessarily will cause the same thing to happen, or if there are other factors involved?

No, we don't see any effect on that. I think they're both independent. Obviously with the TLC (ph), with a free trade agreement, we will see a very -- we will expect a growth for the next -- for the coming future. But the Lufthansa is totally independent. I think that what we're doing over there in Europe, the alliance has been doing pretty well and will not affect really -- it's totally independent. I don't know is that answers your question or you want to -- hello?

At this time, there are no questions in the queue. I will turn the conference over to Mr. Alejandro de la Fuente for the closing remarks.

Okay. Thank you again for joining us today. Please feel free to contact our investor relations department if you have any additional questions. We look forward to speaking with you again. Thank you very much.

That concludes today's conference call. Thank you for joining us.

(CONFERENCE CALL CONCLUDED)