LATAM Airlines Group SA (LTM) 2004 Q4 法說會逐字稿

Good day everyone. Welcome to the LAN Airlines conference call. As a reminder today's call is being recorded. At this time for opening remarks and introductions I will turn the conference over to Maria Barona.

Thank you. Good morning everyone and welcome to LAN Airline's fourth quarter conference call. We thank you very much for joining us today.

The LAN Airlines earnings release for the period was distributed this morning. If you have not yet received it, please contact us at 212 406 3690, that's in New York, and we will 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 comment. These expectations are highly dependent on the economy, the airline industry and international market. 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 Airlines. Mr. de la Fuente, please begin.

Thank you Maria. I am Alejandro de la Fuente, Chief Financial Officer. And with me are [Pedro Paulo Razuiz], from our Chilean Domestic Passenger Division, [Luis Riguelme] from our International Passenger Division, [Almero Garril], from our Cargo Division, and Andres Bianchi from our Investor Relations Department.

Today I will discuss our financial results for the quarter, review 5 strategic topics and comment on our expectations for 2005. Then we will be pleased to answer your questions.

LAN reported record results for the fourth quarter, with net income increasing from $35m in 2003 to $48m in 2004. Operating income decreased from $42m in 2003 to $34m in 2004, as we were only able to partially offset the $54m in additional expenses caused by higher fuel prices.

The impact of high fuel prices was also compensated at a non-operating level by a $14m fuel hedging gain. As you know, most airlines recognize this hedging gain as an operating item, and if we adjust our results to conform to this practice, our operating margin would have exceeded 8%, an outstanding result when compared to other companies.

Fourth quarter results rounded up an excellent year with record profits in every quarter, leading to net income of $164m and an 8.2% operating margin. Including fuel hedging gains, operating margin amounted to 10.4% in 2004.

The fourth quarter. Our performance during the fourth quarter was driven by 4 main factors - strong revenue growth in passenger and cargo, high fuel prices, effective cost controls and a $5.7m one-time positive adjustment in income taxes.

The passenger business. Passenger revenues for the quarter grew 26%, due to a 15% increase in profit and a 9% improvement in yield. This improvement fully offset the 7.9 increase in load factors, and led to an 8% increase in revenues per ASK. Passenger revenue growth can be attributed mainly to continued improvements in demand, market share gains and an improvement in yields.

Demand in key markets showed a positive evolution during the fourth quarter. In Chile, strong economic performance and appreciation of the peso have contributed to demand growth, which is by now reaching pre-crisis levels.

Meanwhile, Argentina continued to recover from the dramatic drop of 2002, and demand in Nicaragua and Peru, which had lagged all markets during previous quarters, showed signs of recovery during the fourth quarter.

On the competitive front, conditions remained fairly stable. In the Chilean domestic market we saw a new entrant, Aerolineas del Sur, start service to 1 destination in December. While in the Bolivian domestic Aero Continente stopped operating and its market share has been taken over by LAN and other smaller players.

Changes in capacity in international markets, both in inter-Latin American and inter-Continental services, were limited. With [10] new services between Sao Paulo/Santiago and Air Canada's frequency increased in the Toronto/Buenos Aires/Santiago route, being the only major changes. LAN has taken advantage of these scenarios to consolidate its leadership in domestic markets and deepen its presence on key long-haul markets.

In terms of capacity growth during the quarter, we focused mainly on strengthening our domestic operation in Peru, continuing to develop our regional network out of Lima and selectively reinforcing long-haul routes. In Peru, we are now operating 5 more aircraft than a year ago and our market share has increased to over 70%, consolidating us as the leading domestic player.

At the same time, results in the regional routes we launched out of Lima in the first and second quarters have shown an encouraging performance and are ahead of expectations.

We have increased capacity in long-haul routes in response to market conditions, with the most significant changes being the launch of our 4 weekly flights to Auckland and Sydney, and additional frequencies from Chile and Peru to the U.S. and Mexico.

Yields increased year over year, this is still related to fare increases, [indiscernible] charges, improved segmentation, shorter average trip length and the positive impact of the stronger Chilean peso on domestic yields.

The cargo business. The cargo revenues grew 32% year over year due to the 14% increase in traffic and a 15% improvement in yield. This, together with the 1.9 point increase in load factors, led to a 19% increase in revenues per ATK. It is important to recall that given the seasonality of [indiscernible] exports, the fourth quarter is usually the best for our cargo business.

Improvement in cargo revenues during the fourth quarter reflected continued growth of south-bound markets, stable demand in north-bound markets and a stronger competitive position.

Market conditions continued to show similar trends to those of the third quarter, with south-bound volumes to Argentina, Brazil and Chile continuing to recover, given positive economic performance and stronger local currencies. North-bound volumes also continued to be strong out of the Pacific coast, although Chilean south-bound exports contracted slightly by the end of the year.

Competitive activity remains moderate as existing regional carriers, such as [Stand Point] Columbia and [Sirus] in Peru have replaced the carriers that pulled out in late 2003 from Latin American routes.

During the quarter we added capacity and [would lease] as many as 4 Boeing 737 jumbo jets and 2 DC10 freighters, which operated alongside our fully utilized Boeing 737 freighter fleet. This additional capacity enabled us to respond to increased seasonal demand and to continue developing new markets such as north-bound routes out of Argentina and Brazil. In terms of pricing, yields improved [if you add] in the fuel surcharge, improved demand and reduced pricing pressures.

Operating costs. Operating costs for the quarter grew 32% as system capacity increased 13%. As a consequence, costs per ATK, which also includes net financial expenses and other operating revenues, increased 16% year over year. Higher fuel prices were the main reason for this increase, as they led to $54m in additional expenses and accounted for more than 70% of the unit cost increase.

Excluding the impact of high fuel prices, cost per ATK increased [4.8%], basically due to increases in commissions and other sales-related expenses, higher personnel costs and higher training expenses. Specifically, the 10% increase in commissions per ATK is directly related to the 13% increase in revenues per ATK.

Meanwhile, personnel expenses rose due to increases in headcount to support future growth, the stronger Chilean peso and higher performance-related bonus payments. Training expenses increased, mainly because of the quick expansion of our operations, especially in Peru.

Excluding these 2 elements, our cost structure showed the positive evolution during the quarter, as most of the items moved according with our expectations and increased in line or below with their selected drivers. For example, total fleet costs, including aircraft rentals, depreciation, interest and [web-leases] remained flat, despite a 13% increase in capacity and thanks to higher aircraft utilization and lower rental rate.

We maintain a solid financial position, with no short-term debt, well structured long-term financing and healthy liquidity with more than $300m in cash and equivalents as of the year-end. Additionally we have contributed $62m in pre-delivery payments that we will recover during 2005 and 2006.

The big overview. I will now update you on 5 key topics - fuel costs, LAN Peru, our fleet plan, alliances and labor relations.

Okay, 1, fuel costs. Fuel costs continued to be a major concern during the quarter, as prices reached record levels and generated $54m in additional expenses. In order to mitigate this cost increase, we have used a comprehensive fuel hedging strategy, including financial hedging, cargo fuel surcharges and higher passenger fares. Together, these measures enabled us to significantly limit the impact fuel prices had on our profitability in absolute terms.

As of today, we have hedged roughly 20% of our total fuel requirements for 2005, at approximately $1 per gallon of jet fuel. While current prices and projections are a source of significant concern for us, we are confident that we have the right tools to manage the long period of high fuel prices, and we believe we will continue to be in a position to improve our results in the near future.

2, LAN Peru. As we discussed on the previous conference call, LAN Peru was forced to suspend its operations on October 15, due to a temporary injunction order, but was allowed to resume operations 14 hours later. And as a consequence, this situation had no material impact on our results.

More importantly, in December the superior court of Arequipa overturned this temporary injunction order, before putting an end to this situation.

3, fleet plan. During the fourth quarter we incorporated 4 aircraft under operating leases - 1 Boeing 737-200, 2 Airbus A319s and 1 Boeing 737-300. In 2005, we plan to add 3 leased Boeing 737-300 passenger aircraft and to purchase 2 new Boeing 767-300 freighters and 2 new Airbus A319s. During the fourth quarter, we also ordered 3 new Boeing 767-300 passenger aircraft and 1 additional Boeing 767-300 freighter.

4, alliances. During the fourth quarter, we signed a memorandum of understanding with Korean Airlines, in order to develop a comprehensive alliance between Latin America and Asia. This alliance will provide our passengers with increased access to destinations in Asia and Korean Airlines will benefit from LAN's Latin American network.

This new alliance is consistent with our goal to strengthen our presence in the Asia-Pacific region, and we plan to start implementing it during the first half of 2005.

Also during the quarter, we advanced the implementation of our expanded agreement with AeroMexico and Mexicana by initiating old shared services to 9 new destinations in Mexico.

5, labor relations. In January 2005, we signed a new agreement with the LanExpress pilot union, which will replace the agreement that was to expire in March 2005. This new agreement has a 4-year term, the maximum allowed in Chilean law, and features essentially the same conditions on the previous contract.

The early negotiation of this contract highlights the excellent relations between LAN and its unions, and provides a very strong foundation for our future development.

Okay. The future. For 2005, we plan to increase capacity between 15% and 17% on the passenger business, and between 14 and 16% in the cargo business. This capacity increase will be focused mainly on passenger and cargo routes that we are currently serving, as well as the launch of new cargo routes.

This plan takes into account the moderate increases in both demand and competitive activity. Specifically, Aerolineas del Sur recently started service to a second domestic destination in Chile, and it has indicated it plans to initiate services to 2 additional destinations in coming months. We believe that even the similar strategies, Aerolineas del Sur will hurt [Sky] Airlines the most and will only have a minor impact on our results.

In the Peruvian domestic market, we also expect competitive activity to increase moderately, as current operators are adding capacity and should be joined by new entrants in the short term.

In terms of long-haul routes, we are currently expecting capacity between Latin America and Europe to increase, as growing demand has driven current operators to modify their itineraries and increase capacity slightly. And as a new carrier, Air Madrid has announced its plans to operate a weekly flight to Chile, starting in June.

Finally, in cargo we expect current players to increase capacity in order to respond to demand growth. In terms of yields, we expect passenger yields to decrease slightly, based on capacity increases in competitive activity. In cargo, we expect fares to remain relatively stable, with gross yields being impacted mainly by changes in the fuel surcharge.

We are also working on a number of initiatives to reduce costs, including increased utilization of our short-haul fleet, and lower commercial expenses that should enable us to compensate high fuel prices. As a consequence, we believe [indiscernible] margins will improve during 2005.

We are also following events in other Latin American markets, especially in Argentina and Brazil, in order to evaluate possible growth opportunities, including alliances, acquisitions, or the start of a greenfield operation.

LAN was able to deliver excellent annual results in a year in which demand remained below historical levels and fuel prices soared to unprecedented levels, by leveraging the work done in previous years to diversify revenue streams, refine operations and streamline costs. This has set LAN apart from its peers. And we are now thinking on product enhancements, long-lasting efficiency gains and other development plans that will allow us to continue improving our financial performance and delivering continued value for shareholders.

Now we will be happy to answer your questions.

[OPERATOR INSTRUCTIONS]. The first question of today will come from Mike Linenberg with Merrill Lynch.

Yes. Good morning gentlemen. I guess my question is at Alejandro. Alejandro, you talked about the Korean alliance, and I heard you mentioned passengers. And I was curious if the alliance with Korean Air also includes a cargo component. And are we going to see the possibility of Korean -- excuse me, LAN maybe even flying some of its own airplanes into Asia as this alliance progresses over the years?

Hi. This is Almero Garril from the cargo division.

Yes. Hi.

Yes, the alliance with Korean also includes cargo. In fact, next week, we are seeing the president of Korean Cargo in Miami to sign the MOU related to cargo. So the answer is yes. In the past we also have had Korea as our main partner in Asia. And we are increasing the cooperation with them thanks to this MOU.

Okay. This is Luis Riguelme. In the short term or medium term, I don't see flying directly to Asia. We see an increasing cooperation through our main gates, Los Angeles and Sydney. That's what we see.

Is there any chance that down the road what you have in Miami, with your cargo complex there, that you make some sort of investment in the Los Angeles airport and you have some sort of cargo facility there that promotes the alliance?

At the moment we have not -- we don't have any plans to change our current situation in Los Angeles. We have -- there we have -- we are in the Mercury (ph) facility, which is a big 1 and has been working very good for us. So we don't see any changes at the moment in the arrangement that we have in LA.

Okay. And just -- my second question, I know Alejandro, you talked about opportunities in Brazil and Argentina, whether it's an acquisition or even starting a Greenfield operation. With Cintra publicly out there looking to sell off its stakes in AeroMexico and Mexicana, you mentioned Argentina and Brazil. But I know that you've also had interest in Mexico. What sort of appetite or interest would LAN have in maybe getting involved with 1 of the Mexican carriers?

Maybe our strategy needs to be stronger competitor in the southern part of Latin America, and that means in South America. It's not part of our strategy to be involved in an acquisition in Mexico. Mexico is too close to the United States, which is another type of competition.

And our goal is to be very strong in Chile, Argentina, Peru, Ecuador and maybe Brazil. So that is why we are looking very close at the situation right now in Brazil and Argentina, as I mentioned, to evaluate possible growth opportunities, including alliances, acquisitions, or the start of a Greenfield operation.

Okay. Very good. Very good quarter. Thank you.

[OPERATOR INSTRUCTIONS]. Next we will hear from Steve Trent with Smith Barney.

Good morning gentlemen. I echo Michael's comments, congrats on another solid quarter.

Thanks.

Just 1 or 2 quick questions for you. The Peruvian market share is very impressive, at 70%. Given competitors adding capacity there and perhaps some new entrants, what do you see as a more sustainable longer-term market share for Peru?

And my second question is on the fuel side. Certainly we think that the cargo business is valuable in acting as a natural hedge. In terms of your synthetic hedging activity, you know the crude oil curve, that doesn't look terribly encouraging going out to '06, '07 etc. Any thoughts as to how you might adjust your synthetic hedging strategy further out? Thank you.

This is Andres. LAN Peru, our market share, we believe that market share between 65 and 70% at [indiscernible] are a good stable situation going forward. But we believe those are going to meet some capacity increases and the market is going to reshuffle somewhere, to remain at roughly the same levels that we have.

Now, on the fuel side, we don't have planned many changes on our strategy. And, as you say, the future score (ph) doesn't look terribly encouraging to enter into any new hedges. So at this point we plan to continue looking for any opportunities in the market, [indiscernible] shows a movement -- downward movement. We have full ability to hedge. At this point we believe it's not reasonable to change our strategy.

Okay. That's very clear. Thanks for that Andres.

You're welcome.

[OPERATOR INSTRUCTIONS]. Glenn Engle with Goldman Sachs has a question.

Good morning. A few clarifications. And I echo, what a remarkable year. First 2 questions are 1, on the pilots you mentioned. I wasn't quite clear, will the wages be flat wrapped to 4-year contract? No wage increases?

It's similar to what previous agreement we had. It has some minor adjustments on wages in fixed terms. But the main issue is that we have focused on variable increases that are related to the results of the Company.

Okay. So there will be modest pay increases and the pay will still be tied to the Company's profitability?

Right. Main effort was to relate payments to variable according to the results of the Company.

And any other big contracts coming up?

With the unions?

Yes.

Yes, for '05, the only contract that is going to expire is the administrative union, which handles basically our office duties etc. There's no major maintenance, pilot or factory unions running out this year.

Okay. Second is that on the yield side you were again 9% in the fourth quarter. And you mentioned that you would see yield pressure in 2005. Does that mean you would expect the yield increases just to be narrowing or do you actually expect yields to be flat to down in 2005?

This is Luis Riguelme. No, what we expect is that we are growing in different markets. We have put some new operations to [franchise] in the Lima/Miami market and we expect to grow a little bit in the regional markets. So what we expect is that we need to expand a little bit the demands and also the new operations have to be first -- they should obtain profits including mode factors. And capturing all the market shares that we expect to capture with increasing the operations.

And finally, on the political fronts, when you want to try to do things in Brazil and Argentina, what is the reception from the governments? Are they showing any signs of deregulating and being more open to foreign airline?

No. The political situation or the relations are [indiscernible] to the past. We don't see any difficult relation of the market. So we have to live with the environment that we know. But we don't see any changes in the next future. Possibly with Argentina, but we don't know exactly what is happening right now. So we are evaluating the situation very, very close.

Thank you very much.

You're welcome.

At this time we have no questions in the queue. [OPERATOR INSTRUCTIONS]. There are no further questions in the questions in the queue. I will no 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 speak with you again. Thank you very much. Good bye.

That does conclude our conference call today. Thank you very much for joining us.