LATAM Airlines Group SA (LTM) 2004 Q1 法說會逐字稿

Good day, everyone. Welcome to the LAN Chile First Quarter Earnings Release Conference Call. Just 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. Please go ahead.

Thank you. Good morning, everyone. I am Maria Barona with I-advize Corporate Communications. Welcome to LAN Chile's First Quarter Conference Call. We thank you very much for joining us today. The LAN Chile earnings release for the period was distributed yesterday. If you have not received it yet, please contact us in New York at 212-406-3690 so that we may send you one immediately.

At this time, I would like to point out that 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 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 LAN Chile. Mr. De la Fuente, please begin.

Thank you, Maria. I am Alejandro De la Fuente, Chief Financial Officer. With me are Pedro Pablo Errazuriz, Vice President of Domestic Passenger Division; Luis Riquelme, Growth Economics Director, International Passenger Division; Alvaro Carril, Vice President of Cargo, Marketing and Sales; and Andres Bianchi, Head of Investor Relations.

Today, I will discuss our financial results for the quarter, explain our recent steady development and comment on our expectations for the rest of the year. Then, we will be pleased to answer any questions you may have.

I am very pleased to report that we earned a record $48.1m for the first quarter with a 9.8% net margin. This not only represents the significant improvement over the $21.6m in net income and the 5.5% net margins earned in 2003, but it is also the best quarterly result in our history. However, it is important to remember this is our seasonally strongest quarter.

The results - our performance during the quarter was driven by strong revenue growth on our two main businesses as well as effective cost control across the entire company. Total operating revenues increased 24.3%, outpacing the 16.1% increase in operating costs. I am leaving to the 6.2 point increase in operating margins to a record 12.8%.

The passenger business, during the quarter passenger revenues grew close to 30% due to a 21.4% increase in traffic and a 6.9% improvement in yield. With a 5.9 point increasing in load factors, revenues per ASK rose 16.2%. In general, market conditions improved during the quarter. Demand continues to remain below historical levels. Markets have yet to rebound.

While demand in Chile, the United States and Argentina continues to grow, demand in Peru and Ecuador remains sluggish. Nevertheless, it is important to know that last year's first quarter was impacted by the war in Iraq and weak economic growth.

Competition, on our main markets, we remained stable during the quarter. In the North American Chile Market, the only change was the launch of Air Canada new two-weekly service from Toronto to Santiago, which had no major impact on our operations. In international routes out of Peru, Ecuador and Argentina, there were no major changes during the quarter.

Finally, in the Chilean passenger business, while we are still expecting an official launch date for [indiscernible] Argentina Chilean Affiliate, Sky Airlines domestic market share remained constant at approximately 15%. Passenger revenues for the quarter grew due to traffic increases associated with the launch of Europe's improved demand and market share gains as well as improvement in yield.

Traffic grew 21.4% partly due to an 11.7% increase in capacity. This increase reflected services started or expanded in mid 2003 such as, LAN Ecuador's routes to the United States, Europe and Argentina and operations to Australia and New Zealand. Capacity also grew due to the expansion of LAN Peru's original hub in Lima, which we will discuss in further detail later.

Recovering demand and market share gains led to improvement in traffic, especially to the United States on specific regional routes. We also saw improvement in domestic growth factors with traffic growing 1.9% as capacity decreased 3.1%. Yield increased year-over-year with improved segmentation, higher premium traffic and the positive impact of a stronger Chilean peso on domestic yield. Domestic fares, in Chile, are generated in pesos and have improved in dollar terms due to the 23% appreciation of the peso.

The Cargo Business - cargo revenues grew 20.9% year-over-year due to 11.4% increase in traffic and 8.6% improvement in yield. Improvement in revenues reflected the recovery of outbound demand continued strength in North-bound markets and a stronger competitive position.

In the Cargo Business, North-bound demand has remained strong and South-bound volumes to Argentina, Brazil and Chile have continued to recover.

Finally, competitive activity has remained stable after the pullout of several carriers in late 2003. In order to take advantage of these conditions, our Boeing 767 fleet continued to operate at impressive utilization rate of about 17 hours per day. We expanded temporary capacity even further by wet-leasing up to five aircraft including additional Boeing 747 freighters.

Growth in cargo yields reflected the improved surcharge, improved demand and reduced pricing pressures as competitors have scaled down Latin American operations.

Operating Costs - operating costs for the quarter grew 16.1% as system capacity increased 11.6%. As a consequence, cost per ATK increased 4.6% year-over-year. During the quarter, growth, fuel prices and the appreciation of the Chilean peso significantly impacted our costs. Fuel prices remained extremely high and accounted for $4.7m in additional expenses or O.38 cents per ATK. Excluding the impact of high fuel prices, cost per ATK increased only 3.3%.

The appreciation of the Chilean peso affected primarily wages and benefits, as a significant part our peso denominated. We estimate that the 23% appreciation of the Chilean peso accounted for nearly 60% of the increase in personnel costs or approximately 0.33 cents per ATK. Here, it is important to note that while costs increased with the appreciation of the peso this also led to higher domestic yields and stimulated demand.

The third factor affecting our cost performance was revenue growth, which drove higher commissions and sales related expenses. The dramatic 13.2% increase in revenues per ATK led to a similar increase in commissions per ATK and accounted for 0.63 cents in additional unit costs.

These three elements accounted for a total 1.74 cents in additional unit costs. Excluding these items, unit costs actually declined 1% year-over-year, demonstrating our ability to improve, to continue improving, efficiency and streamlining operations.

On the non-operating side of the business, the company had a $4.4m non-operating loss for the quarter compared to a $0.2m loss last year. This reflects lower net interest payments, a $3.4m foreign exchange loss and $7.3m fuel-hitting gain.

Liquidity and financial resources - our positive financial performance has led to a much stronger financial position. Aside from maintaining no short-term debt and well structured long-term financing, we were able to generate a significant amount of cash during the quarter. By March 31, we had $257m in cash and equivalents, nearly twice the amount recorded from the same date last year and 17% higher than our year-end 2003 position.

We continued to hedge our fuel prices to match competitive behavior. Excluding the fuel consumption associated with the cargo business, which [indiscernible] benefits from the cargo fuel surcharge, our passenger operations are hedged close to 55% for the rest of the year, at an average price of 71 cents per gallon. Overall, we have hedged nearly 40% of total fuel requirements.

Strategic development - first we began to implement our plan to make Lima a regional hub. In February LAN Peru launched new routes to Buenos Aires, Quito, Caracas, Bogota and Mexico City, which joined pre-existing services to Santiago and [indiscernible].

This new network will enable us to consolidate intra-regional traffic in Lima and sustain an unprecedented number of frequencies between these destinations. We expect that this will make Lima a key connecting point and position for LAN Peru as Peru's main International Airline.

Beyond the potential for growth into the future, we will continue to keep these new operations highly efficient as they allow us to expand the utilization of our Airbus 826. I am pleased to report that the results of this new operation have been in line with expectations. We are currently analyzing the launch of additional routes.

Secondly, on March 23, we launched our new corporate image, which is based on Lan Airline's concept. This new brand will serve as an umbrella for our regional operations and highlight the consistent delivery of our world-class service standards and our recognized real liability. It also enables us to streamline, simplify, and [vast] the impact of our global market efforts. This change will involve painting all of our crafts with a new livery, which we expect to be completed by mid 2005.

Thirdly, we have continued strengthening our fleet. This week we added an additional Boeing 767-300 passenger aircraft to our fleet. This is our 12th Boeing 767-300 and will be utilized to increase capacity on long-haul routes. We have also leased three additional Boeing 737 200s in order to replace some of the older 737s that we currently operate.

Finally, in April, we started negotiations to acquire two additional Boeing 767-300 freighters. These aircraft have proven to be extremely valuable to our cargo operations and the two additional aircraft will significantly enhance our operational capacity and flexibility. Negotiations are currently underway and will help to incorporate the two new aircraft by 2005.

The future - our record first quarter results prove that we have been able to successfully respond to major challenges and to take full advantage of all opportunities to build a stronger position and increase profitability.

In the near future, we expect to continue growing capacity on both existing and new routes in response to improving demand and new competitive opportunities. For the second quarter, we plan to grow capacity in both the passenger and cargo businesses between 12% and 16%.

For the long term, we plan to expand capacity for the full year by between 11% and 16% in the passenger business and by between 10% and 15% in the cargo business.

To support this and the future growth, we plan to incorporate four more Boeing 737 passenger aircraft and three new Airbus 319s in 2004. We will also continue to monitor events in all Latin American markets to study possible expansion opportunities.

As a result, we will continue to periodically analyze companies in other countries. In recent days, speculation has surrounded the possible acquisition of Argentine carrier, American Falcon. We are currently performing [indiscernible] on the company. We will remain fully committed to entering the Argentinean market in the near future. We will continue to evaluate any and all possible alternatives to ensure we can enter the market in the best possible conditions.

Finally, we are currently working on a variety of other internal initiatives to strengthen our competitive advantages, including programs to improve service quality, enhance customer knowledge, drive new gains in operating efficiency and further develop our human resources.

Our efforts and performance clearly demonstrate our unique position in commercial transportation across the region. With this quarter's results, we have completed four consecutive quarters of record profits. As a consequence, our 12 month net income is over $100m for the first time in history.

Despite this unprecedented performance, 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 the shareholders.

Now, we will be pleased to answer any questions you may have. However, I would like to emphasize that, due to regulatory restrictions, we have no comments on possible secondary offering of LAN Chile's shares that was announced in March. Thank you.

[Operator Instructions] . Our first question today will come from Steve Trent with Smith Barney.

Good afternoon, gentlemen. It’s Steve Trent from Smith Barney. Congratulations on a fantastic quarter. I just have one or two quick questions. You mentioned for 2004 with respect to your Fleet Plan you are looking to take on three new Airbus A319s. Was that four Boeing 767-300s?

Yes, four more Boeing 737 Passenger Aircraft and three new Airbus A319s.

Great. Any color as to your strategy of putting them on balance sheet versus leasing?

The four Boeings will be operating leases, and we will acquire the three new A319s. They will need to be incorporated on our balance sheet, the Airbuses.

Great. Thank you very much.

You're welcome.

Next, we will hear from Michael Linenburg with Merrill Lynch.

Hi, good afternoon and nice quarter. I have two questions. First, Alejandro, I think, you did indicate that Sky's domestic share, I believe, is running around 15%. Going back a quarter or two, I think, Sky had gotten up to maybe 20%, 22% or 23%, at least that was what had been reported, and I was curious about what has happened between then and now. Have they shrunk their Fleet? Have you added more aircraft domestically or have you been more aggressive on the pricing on the domestic front, although, I think you indicated that you had better domestic yields. Could you just give us some insight onto the market share shift?

Hi, this is Pedro Pablo Errazuriz. This is mainly a seasonal effect. On the high seasons, we keep the same number of aircraft so we increase our share because we do increase our operation. During the lower part of the year they keep the same number of aircraft flying, and therefore, in terms of the amount offered that they have they have a bigger share. It’s just a seasonal effect. They are minor effects. They have reduced a little bit their share, but it is minor. It is not a big impact.

My second question, and again this is another competitive question, but this is more international. I think, Alejandro, you talked about LAN Peru becoming Peru's intercontinental or international airline. I was curious because I know TACA Peru has also similar aspirations, and I realize that they are in many of the markets that you announced that you would be adding service to with LAN Peru. In markets where you compete with TACA Peru today, who is the stronger carrier? How do you see that play out going forward?

In Peru, we consistently target three plans. The first competition has already been done, and it was when TACA was operating to Miami from Lima. Now, they no longer operate that route. They operate also intra-South America, connecting Lima with some main cities in Latin America.

That battle is a battle that we have been giving, and as we speak it is, frankly, very strong, the battle that we are fighting for the market share in those markets. If I may say, fortunately for LAN Chile, we have outperformed our expectations in terms of market share. We are in three or four out of the six main cities within South America. We have become the market leaders already.

We see that we will continue to compete over the last year or so until we envision that they will draw back a little bit their capacity. One special route, which is the [indiscernible] will be Mexico, Lima–Mexico. In Lima–Mexico, we launched a new route a very short time ago. We need to balance a little bit better the operation there to adjust our frequencies, to adjust the itinerary to make it better.

I would say, as a summary, in the United States there is ongoing growth. In South America we envision one year for the drawback. In Mexico, as we speak, we are competing, and we need six more months to envision what is going to happen.

Okay, just, I guess, to add, is it safe to conclude that because of your very product both passenger and cargo into Peru, and I realize that you do fly some A319s out of Lima, but because of your ability to offer cargo capacity up to Miami and down to Chile, that you have better staying power than the competition?

Yes, and in addition to that, I would also argue that we have better filling possibilities out of our Lima hub from both Argentina and Chile to them, because we have a stronger position in terms of shared mind and in terms of frequent flyers and in terms distribution channels and etc, both in Argentina and Chile.

Thank you very much for that thorough answer.

Next, we will hear from Glenn Engel with Goldman Sachs.

Good afternoon, very impressive quarter. A couple of questions, can you give in passenger revenue per ASK was up about 16%. Can you talk about the regions in which did better or worse in that 16%, domestically the intra-South America, Europe and the US?

This is Luis Riquelme from the International Division. As you pointed out, revenues per ASK grew a lot and as a consequence of higher load factors. I would say load factors were higher all over the international network.

It’s a consequence of the recovery of Chile, particularly, and strong demand from the United States and Europe also, with limited amounts of supply in the industry. That also has led to a better segmentation, and also has helped to increase our load factors in the regional markets also.

In terms of the domestic operation, it is mainly driven by the value of the peso in relation to the dollar. As Alejandro pointed out, our prices are in pesos, and the change of peso to dollar was different in the period. Therefore, most part of the increase in the yield is due to that.

Are you seeing much revenue per seat mile growth in the regional markets, within South America?

Yes, I would say Chile has been leading about this growth, Argentina also. Ecuador and Peru, although they are not growing as high as Chile and also their markets have a lower yield, are also recovering from not a very good year of 2003, but they are showing signs of recovery.

You mentioned you are in negotiations to pick up a couple of freighter planes for 2005. Why are you not looking to pick up any passenger planes?

I just mentioned that we are picking up for this year four new 737s, and also for 2005 we are expecting to receive two new Airbus A319s and two more Boeing 767s.

So, they will be passenger not full freighters?

Passenger, plus two freighters, 767 freighters in 2005.

Thank you.

You're welcome.

[Operator Instructions]. Steve Trent with Smith Barney has a follow-up question.

Good afternoon, gentlemen. I just have a quick follow-up question here on your yield. For the quarter, of course, the passenger yields were very impressive. You implied that the strong peso was a factor as well as recovery in premium traffic. I believe your sensible ability is to mimic higher yield stage links because you have such a strong regional network. With respect to the quarter's year-on-year improvement in yield, can you tell us what percentage of that was driven by the exchange rate?

With respect to the outlook for the remainder of the year, do you see any room for further year-on-year improvement, the currency aside?

The peso is mainly on the domestic operation. To give you a figure, it is about 80% of the total increase. The peso also somehow impacted the total demand, and the rest of the operation. Most of the impact is really produced on the domestic operation.

As far as the international operation is concerned, the increasing yield I would, basically, blame it on a better mix of foreign business, the increase in yields, more than the peso. The peso impacts no more than 10% in the overall. So, I would say better increase in mix in the [ONDs] and some better price layers in some markets as compared to one year ago where competition was more fierce in some markets, such as Ecuador.

That's great. Thanks again.

Next, is Dan Morton with Daniel Morton Company, Inc.

Congratulations to you all. Up here in the States, we are only used to seeing companies produce operating margins like yours when they are low fare craft like Jet Blue.

In all seriousness, I am fascinated with your strategy throughout Latin America. I wondered if you could comment on the possible recent activity of an expansion of that to other nations particularly deep South America, such as Argentina and Brazil, whether your competitive as well as regulatory actions to increase the move of your strategy into countries like that?

In terms of what we see in the near future, we have been working very hard to develop three hubs in Latin America and we need to add a fourth one. We already posses a strong hub [indiscernible] in Chile. We are now halfway, too, in Peru. We envision that in the next two years we will have a high dominance there, both in the regional operations as well as in the long-haul operations.

We are also covering three in Ecuador. What is important for us is what we are going to do in the near future in Argentina, because that hub will represent in South America, probably, an important part of operations. So, I would say that our efforts will be enhancing our presence in Peru and Ecuador and looking very closely at what we have in the hub in Argentina. That will keep us very busy for the next years.

Thank you very much.

You're welcome.

[Operator Instructions]. Michael Linenberg with Merrill Lynch has a follow-up.

Yes, just one follow-up. Can you update us on the plans by Air Lineas to start a subsidiary in Chile? Is that within the next couple of months that we see something on that front?

Yes, they have said different dates, they said that they were going to be operating in July, now they are saying September. Actually, what has happened is that they have not presented any legal papers to the authorities. Therefore, they really have not started any real moves. If we have to take a guess, it would be at the end of the year.

Okay, thank you very much.

At this time, there are 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 and goodbye.

That concludes today's conference call. Thank you very much for joining us. You may now disconnect.