LATAM Airlines Group SA (LTM) 2003 Q4 法說會逐字稿

Welcome to the LanChile fourth quarter earnings release conference call. As a reminder, this call is being recorded. At this time for introductions and opening remarks, I would like to turn the call over to Maria Barona with i-advize Corporate Communications. Please go ahead.

Good morning, everyone, and welcome to LanChile's fourth 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 not yet received it please contact us immediately in New York at 212-406-3690.

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 statements. These expectations are highly dependent on the economy, the airline industry and international markets; therefore, they are subject to change.

At this time it is my pleasure to turn the call over to Mr. Alejandro De la Fuente, Chief Financial Officer of LanChile. Mr. De la Fuente, please begin.

Thank you, Maria on I am Alejandro De la Fuente, Chief Financial Officer, and with me today are Pedro Pablo Errazuriz, Vice President Domestic Passenger division; Abel Bouchon, Vice President International Passenger division; Luis Eduardo Riquelme, (indiscernible) director, International Passenger division; Alvaro Carril, Vice President Cargo Marketing and Sales; and Andres Bianchi, head of Investor Relations.

Today I will discuss our financial results for the quarter and the full year, explain some of LanChile's strategic developments, and comment on our expectations for 2004. Then we will be pleased to answer any questions you may have.

I am very pleased to report that LanChile earned a record $83.6 million in net income for 2003. Operating income increased 80 percent to $111.7 million, with margins up 2.5 points to 6.8 percent. 12.8 percent revenue growth outpaced a 9.8 percent increase in operating expenses. For the fourth quarter, LanChile earned $35.2 million in net income, more than two times the 2002 results.

Both our quarter and full year success in 2003 reflects our ability to manage adversity, including the war in Iraq, depressed demand and high fuel prices. This performance proved the resiliency of our unique passenger and cargo business model, our commitment to further improve efficiency and the success of our growth strategy.

Market conditions. In general, while passenger demand reflected the different economic conditions in each of our markets, cargo demand continued to strengthen across the entire region. Chilean and Argentine passenger markets continued to rebound. In Chile, results were positively impacted by better economic expectations and a stronger (indiscernible). In Argentina, our improvements reflected an easy basis of comparison and some rebounding economic performance. Nevertheless, conditions in Peru and Ecuador have weakened due to political and economic uncertainty.

Northbound cargo demand has remained strong and southbound volumes to Argentina, Brazil and Chile have continued to recover. In most cases, southbound volumes now exceed the levels recorded in 2001 and 2002. Competition in both the passenger and cargo segments have been relatively stable. In the domestic passenger business, Sky Airlines' market share has declined from its midyear high to approximately 15 percent. On international routes, the only major changes were Lufthansa's return to 1 daily flight from Frankfurt to San Diego (indiscernible), and the start of Air Canada's (indiscernible) weekly service to Santiago from Toronto. In cargo, we continued to observe the exit of several additional competitors from the Latin American market.

Our results. Careful capacity management has enabled us to respond to improved demand, while cost controls have resulted in improving operating margins. For the quarter, our operating margin grew 3.6 points to 8.6 percent. The 22.8 percent increase in passenger revenues and a 20.4 percent increase in cargo revenues were partially offset by a 43 percent decline in all revenues, which was mainly related to an accounting adjustment for the consolidation of LAN logistics' full year results into the fourth quarter of 2002. On a comparable basis, other revenues were nearly flat year on year.

The passenger business. Passenger revenues grew due to a 20.6 percent increase in traffic and a 1.8 percent improvement in yield. With a 6.1 point increase in load factors, revenues per ASK (ph) rose 11.2 percent. International passenger traffic grew 28.7 percent as a result of market share gains, capacity increases to selected destinations, and the launch of new routes. However, domestic traffic fell 4.6 percent, mainly due to increased competitive activity. While LanChile has continued making gains on key long-haul and regional routes, LanPeru has strengthened its position in the main carrier from Peru to the United States, and (indiscernible) has continued to expand its presence in routes from Ecuador to the US.

During the quarter, the Company also increased capacity on routes from Chile to Brazil, Mexico, the United States and Europe, in order to capitalize on competitive opportunities and recovering demand. In addition, we started service on several new routes like (indiscernible) Buenos Aires, and more importantly, Lima (indiscernible), which has already delivered breakeven results ahead of expectations. Overall yields increased due to improvements in average fares and the positive impact of a stronger Chilean peso on domestic yields. Domestic (indiscernible) in Chile are denominated in pesos, and have improved in dollar terms due to a 14 percent appreciation of the peso.

The cargo business. Cargo revenues for the quarter grew to a 9.8 percent increase in traffic and a 9.6 percent improvement in yields. Improvements in traffic reflected the recovery of southbound demand, continued strength in northbound markets, and a stronger competitive position. In order to take advantage of these conditions, LAN cargo increased its (indiscernible) lease capacity to 3 Atlas Boeing 747 freighters and improved its utilization of the Boeing 757 freighters, which flew more than 17 hours a day during the full quarter. Cargo yields rose due to fuel surcharge, improved demand, and reduced pricing pressures as competitors have scaled-down Latin American operations.

Operating costs for the quarter grew 8.1 percent as (indiscernible) capacity increased 10.2 percent. However, operating costs were also distorted by the consolidation of LAN logistics in 2002. On a comparable basis, operating costs grew 16.6 percent and unit costs rose 6.4 percent. However, excluding the impact of fuel prices, unit costs grew only 5.6 percent. With the normalization of the LAN logistic consolidation costs, wages and benefits were up 26.8 percent due to increases in headcount to support current and future growth, higher performance related to bonuses, and the impact of a stronger Chilean peso. Commissions (indiscernible) rentals and landing fees, passenger service expenses, maintenance, and other expenses all grew in line with increased operations. For the quarter, the Company had a $1.2 million non-operating gain compared to a $2.4 million loss for the same quarter of last year. This reflects a lower net interest payment, a $6.6 million foreign exchange gain, and a $3.3 million fuel hedging gain.

Liquidity and financial resources. Our positive financial performance has led to a much stronger financial position. At year end the Company had $219 million in cash and equivalents, no short-term debt, and a long-term debt related only to aircraft, with long repayment profiles and attractive interest rates. We continue to hedge our fuel prices. And in addition to the benefits of the cargo fuel surcharge, have hedged approximately 50 percent of our exposure for the first quarter of approximately 72 percent -- 72 cents per gallon, and 40 percent of our exposure for the rest of the year.

Strategic developments. First, we are very pleased with our recent progress to develop a new regional (indiscernible). On February 4th, LanPeru started daily service from Lima to Buenos Aires and three times per week to Kito (ph). Later in February, it also began a 3 weekly service to Caracas and is scheduled to start operations to Bogota and Mexico in March and April, respectively. These new operation will enable us to consolidate traffic in Lima and provide improved and more convenient service for passengers traveling across the region.

With regard to Peru, I will also like to comment on a number of recent claims in the Peruvian press that LanPeru has violated foreign ownership regulation rules regarding leasing procedures and the nationality requirement for the Company's management team. We have demonstrated in every occasion that LanPeru complies with all the requirements set forth on Peruvian laws. Moreover, we believe these (indiscernible) accusations are fueled by a Peruvian airline in an effort to avoid competition. We are confident our world-class product and operating efficiency will enable us to provide customers with an attractive alternative on these new routes.

Second -- on January (indiscernible), the Chilean Anti-monopoly Commission made its final decision on the proposed fine for breaches in the Company's self-regulation program from '97 to 2003. After analyzing our appeal, the Commission decided to reduce the fine by nearly 90 percent, from close to $500,000 to $50,000. This decision both underscored LanChile's commitment to Chilean authorities not to abuse its dominant competitive position, and a knowledge that most breaches were not significant. Finally, we have been pleased to continue advance advancing our fleet growth and renewal program. During December we incorporated one additional Boeing (indiscernible) passenger aircraft and our first 2 Airbus A319 passenger aircraft.

The future. Our record level fourth quarter and annual result demonstrates our ability to respond to challenges successfully and our (indiscernible) position to continue expanding our service. In the near future, we expect to continue to grow our revenues through market share gains, frequency increases in some routes, and the launch of new operations.

In the first quarter we plan to grow capacity in the passenger business between 9 and 14 percent and in the cargo business by 12 and 15 percent. For the long-term, we plan to expand capacity for the full year by between 10 and 15 percent in the passenger business and by 12 and 18 percent in the cargo business. To support these and future growth, we plan to incorporate additional aircraft. And in addition to the one new Boeing (indiscernible) aircraft we will incorporate in March, we plan to adopt to five more Boeing 757 passenger aircraft to our fleet in 2004.

We will also continue to monitor events in other Latin American markets in order to analyze possible expansion opportunities. (indiscernible) the last few days, (indiscernible) Argentina has stated its intention to form a new Chilean subsidiary. While we do consider (indiscernible) to be a relevant competitor, we view this as a positive development for the (indiscernible) of the airspace across the region, and anticipate that these types of changes will help advance LAN's network into the future.

Finally, we are currently working on a number of initiatives to strengthen our competitive advantages, including programs to -- improve service quality, enhance customer knowledge, drive new gains in operating efficiency, further develop our human resources, and launch a new brand and corporate image. Our efforts and performance clearly demonstrated our unique position in commercial transportation across the region. While our results for the year are record-breaking, we believe that we have only just begun to realize our full potential and continue to be aggressively committed to making future financial gains and delivering continued value for shareholders.

Now we will be pleased to answer any questions you may have.

(OPERATOR INSTRUCTIONS). Michael Linenberg, Merrill Lynch.

Alejandro, I guess as you were going through your comments you did indicate that you were going to establish a new subsidiary, and I want to make sure -- is that a subsidiary flying into Argentina? If you could just clarify that?

No, we don't have plans right now to establish any subsidiary, but the future probably maybe is to create new companies to enhance our network in the region. But we don't have for the short-term plans to establish a subsidiary.

This is (indiscernible). The comment was referred to (indiscernible) Argentina establishing a new subsidiary in Chile.

I see. That makes sense. My second question -- when you indicated that you're going to be adding some passenger aircraft, up to five planes, was that 767's (indiscernible) wide-body aircraft?

Yes.

I guess one more. Alejandro, you did indicate that on the cargo side you were seeing better pricing and it reflected a less intense competitive situation. I was just wondering if you can clarify or just elaborate on some of the carriers that may have pulled down cargo capacity which has created opportunities for LAN?

Yes. Starting the second semester of last year, AGI, which was the broker, was chartering aircraft from Atlas (ph) and pulled out of the area. They pulled out of all the markets they were flying. They were flying to Chile, Brazil, Ecuador. So they started to pull out, and that competition of these 747's which was a strong competition just went out. And then by the end of the year, (indiscernible) started to show their weakness that by the beginning of this year he went into Chapter 11. So (indiscernible) and (indiscernible) AGI through Atlas pulled out of the market last year. And the other thing that happened regarding competition last year is that UPS also pulled out of the Peruvian market and also out of the Venezuelan market. So all these companies -- and the last thing is that FedEx cancelled their regional freighter connecting Brazil, Argentina and Chile. And they gave us that traffic. So all these situations, all of this competition was pulling out, and therefore we gained some market share in all these markets.

That's very helpful. Very good quarter.

Rodrigo Martin, Santander Investment.

First of all I would like to congratulate all of you for such a remarkable quarter and year result. My question is related basically with what would you expect to happen in the domestic market, mainly due to the increased competition that we (indiscernible) is the (indiscernible) group through domestic market? Related to the first question, do you expect to maintain the current market share in the domestic market?

This is Pedro Pablo Errazuriz. Of course we are prepared for the new competitor. Clearly our dominance shows the impression that we have been working alone, but the reality is that apart from a few years -- sorry -- a few months in 2002, we have always had competitors in the domestic market. Normally we have between two and three competitors, and we have always been prepared for a competition. The arrival of (indiscernible) Argentina coincides with the decline of Sky's share of the market and also with a small recovery on the market. So we see this as, of course, something we should work on very hard, but also good timing in the sense that the market is growing. The share of the market that we take depends mainly on the earnings and the result we want to have. Of course we would like and we do our best to keep a high share of the market, but the main driver is not the share of the market but the results of the operation. And the story with Sky was that for a while they had a share bigger than the one day have today, and we recovered the share by making profitable the operation that we were recovering.

Glenn Engel, Goldman Sachs.

I'll add to everybody's congratulation. A couple of questions. You mentioned the strong peso. Can you talk about how much that those lifted yields for the system as a whole and (indiscernible) made your unit costs look higher than they were?

(indiscernible). Perhaps the main impact is on domestic revenues, because our incomes are in pesos and we show results in dollars. So the most important impact was earnings, and of course we have additional cost in pesos, but we are -- the results are bigger in terms of income than their impact in costs. We have a good hedge between the additional income created by the selling in pesos in Chile and the higher cost that we have, both in the domestic operation and international operation. On general terms, clearly the peso appreciation is a very good result for LanChile.

I guess what I'm trying to get at is a 5 percent unit cost increase ex fuel would not be a number that you'd normally be very happy with, but what is that number really if it wasn't for the currency?

This is Andres Bianchi. Basically, the main impact of a stronger peso goes to wages and benefits. So out of that increase that we said was about 29 percent, I would say the FX expense was about half of it. So that gives you an idea about the impact it has on our unit costs. I would say other (indiscernible) wages explains a significant part. And besides (indiscernible) you have to include the fuel price effect. Now in terms of the overall cost structure, about 15 percent of it is pesos. And that's basically (indiscernible) in wages. That's the impact overall.

The 11 percent revenue per ASK you talked about, I would assume -- again, because of the currency -- the domestic was up more. Of the European, South American and U.S. routes, which ones performed best and which ones lagged behind the average?

Could you repeat the question?

Your RASM was up 11 percent, and I assume that domestic was up more than that because of the currency. Which of the other ones, Europe, U.S. and the regional routes --

(indiscernible) not in the domestic operation, it is not due only to the currencies. Of the additional income coming from the domestic, about half percent is the currency. The rest is due to the operation, the good results of the routes

And did the other routes -- did Europe, South America and U.S. also, each of them have higher double-digit revenue-per-seat-mile gains?

This is Luis Riquelme. During the last quarter there was a very good recovery in the European traffic, mainly coming from Europe to South America, and that increased our load factors. And also we were able to have better yields because of the (indiscernible) appreciation. And also we have been feeling a hard recovery in Latin America in the regional traffic. The traffic to the States stayed more or less the same than the previous year. They have not shown yet a strong recovery, although they're showing something into the second quarter of 2004.

And the 767s you're taking this year, are those new planes or used aircraft?

Those are leased, used 767s.

And you mentioned the fuel price. You had 50 percent hedged the first quarter, was -- you said 92 cents? Is that what you have hedged for most of the year?

72 cents.

72, much better. And the rest of the year, is it at a similar level?

The rest of the year is just roughly the same level.

Steve Trent, Smith Barney.

I will echo the chorus -- congrats on the solid results. Steve Trent Smith Barney. I apologize, I actually got temporarily disconnected, so forgive me if I am repeating some questions here. But one -- with respect to your outlook on wages and benefits and passenger services for 2004, now that we are past currency issues, the consolidation of LAN logistics, maybe some cost savings from a hub in Lima -- what do you think is a normalized level for wages and benefits and passenger services, rentals, and landing fees for 2004?

In terms of the wages and benefits, we expect them to remain at the levels we have seen on the fourth quarter, ex LAN logistics. The FX should remain fairly stable going forward. And there's basically some additional personnel increases to support growth. But besides those changes on the fourth quarter, we should continue at roughly the same level. Passenger services grew basically in line with traffic growth, so that should continue to be the case. As you're aware, aircraft rentals are expected to go down approximately $10 million, in terms of what (indiscernible) pre-aircraft addition levels due to those savings achieved on the lease negotiation early in the first quarter of '03. And other rentals and landing fees should increase in line with the addition of additional 747s. So the levels seen from the fourth quarter should be roughly what we should expect going forward, with a higher -- with a slight increase on the first quarter given the fact that we utilized additional 74s on the high season in February.

One other follow-up question. I didn't totally hear -- for 2004 as a whole, you mentioned 10 to 15 percent growth in revenue passenger kilometers and 12 to 18 percent growth in revenue (indiscernible) kilometers? Did I understand that correctly?

It's capacity, it's not traffic. It's ASKs and ABKs.

Oh, capacity. Okay, perfect.

(OPERATOR INSTRUCTIONS). Ben Laidler, UBS.

Just two general questions if I may. One on the cash level -- obviously, seen a significant increase. What sort of level are you comfortable holding long-term? What are the uses of surplus cash? The second question would just be -- we've obviously seen a lot of press reports about associating you with other regional carriers, particularly Colombia and Argentina. Could you just sort of explain in a bit of detail what your sort of parameters or strategy would be for any acquisition, what the sort of financial benchmarks are, or subjective benchmarks are that you would look at for any acquisition to sort of clear?

In terms of our cash position, we're confident with the actual level. After September 11, this is our priority, to have a significant amount in cash in order to prevent future events or other terrorist attacks. So this is our priority and we changed our strategy.

In terms of the development of our footprint in South America, basically what we have tried to achieve is a network that would connect South America to the rest of the world. Basically the traffics that are produced from South America to the world represent, and within South America also, represent 4 percent of the traffic of the RPKs of the total world. So we envision that 5 to 10 years down in the road in South America, you will have one carrier that will be an important operator of basically 4 halves, which will be Ecuador, Peru, Chile and Argentina. You will have basically one big player trying to operate those markets, and therefore, we are now enhancing our presence both in the Peruvian and Ecuadorian halves, while trying to see what we are going to do in the near future in Argentina. Now after that we will definitely need to see how will Columbia and Brazil evolve, but as a second step in our strategy. Does that answer your question?

Sort of. There's no financial hurdle rates that you would want to share with us or anything like that? (multiple speakers) return on investment would you be looking at? What sort of profile of any potential acquisition are we looking at?

Not right now. We don't (indiscernible) any potential acquisition in the near-term.

We participate (indiscernible) in analyzing some ventures, but we're no longer participating.

I'm sorry, if I could just go back to my previous question on the cash. Am I right to read into that that you could have answered the same question the same way a year ago when you were running about $150 million of cash? What is the long-term sort of level of cash you're comfortable with? Is it 220, is it 150, is it 250?

Our prediction for this year is to be around (indiscernible) 50 to 70 (indiscernible).

And that's the level you want to hold on the balance sheet (multiple speakers). Okay, thanks.

At this time we have no further questions in the queue. (OPERATOR INSTRUCTIONS).

At this time there no further questions in the queue. I will now turn the conference back over to Mr. Alejandro De la Fuente for any closing or additional remarks.

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 very much for joining us. You may now disconnect.