LATAM Airlines Group SA (LTM) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for waiting. At this time we would like to welcome everyone to TAM's first quarter 2008 earnings conference call. We would like to inform you that this event, this call, and the slides are being broadcast via the Internet at the company's website at www.tam.com/ri and that a presentation is available to download at the investor relations section. Also, this event is being recorded and all participants will be on listen-only mode during the company's presentation. (OPERATOR INSTRUCTIONS).

Before proceeding let me mention that forward-looking statements are based on the beliefs and assumptions of TAM management and on information currently available to the company. They involve risks, uncertainties, and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of TAM and could cause results to differ materially from those expressed in such forward-looking statements.

Now I'll turn the conference over to Mr. David Barioni Neto, CEO. Mr. Barioni, you may begin your conference.

Hello, everyone. Good morning. We would like to thank you all for your presence. Let's begin the presentation of the first quarter 2008 results. Let's jump to slide number 3. The domestic aviation market in Brazil has great growth potential resulting double digits growth in the past several years. In 2008, we have already seen another growth score of 9% accumulated from January to April.

Slide number 4, the international market among Brazilian carriers that fly international routes decreased 5% in 2007, but have been recovering after the second half of the year. In 2008, the average growth is 44% mainly due to TAM's international network strong increase. As a result, due to the nature of the bilateral agreements, international carriers have represented a higher ratio of international traffic flowing to and from Brazil creating additional opportunity for Brazilian carriers in this market.

Slide number 6, in July 2003, TAM took the leadership position in the domestic market. Our average market share for the first quarter of 2008 was 50% and for April was 47%. In July 2006, we became international market leader among the Brazilian companies and in the first quarter of 2008, our average market share was 68% reaching 72% in April.

The highlights of the first quarter of 2008 were the increase of one A320 and the redelivery of two Fokker 100s following our phase out plan to the 100 seat aircraft. We also signed a firm contract for acquisition of 22 Airbus A350, four A330s, and 20 Airbus A320 family aircrafts.

Regarding operational efficiency, our daily block hours per aircraft reached 12.6 hours in the first quarter of 2008. Considering only the operational fleets, excluding fares and aircraft in maintenance, we posted a daily utilization of 13.6 hours per aircraft. Our total average load factor for the quarter was 73%.

We have started our code-share operations with LAN Peru and also we combined our frequent flyer program with Lufthansa. Now our customers can accumulate and redeem frequent flyer points and miles on flights operated by both airlines.

On slide number 8, we renewed our IOSA International Certification which is the most comprehensive and widely accepted international audit standard of civil aviation operational safety. We concluded 30 SPAs and now we maintain this kind of partnership with 64 international airlines operating in practically every country in South and North America, Europe and Middle East, Africa, Asia, and (inaudible).

Also, we expanded our business agreement with NHT offering now nine destinations throughout Brazil through our partnership. We have expanded the Easy Web Check-in service offered on our domestic flights to serve passengers on international flights to Caracas, Santiago, (inaudible). And this service will be extended to other international 10 flights in coming months.

We launched our international website and now our customers will be able to buy through the internet from anywhere in the world. Regarding our share buyback program, we have already bought back 153,000 shares. I would now like to invite our CFO, Mr. Libano Barroso, to comment on our results in the quarter.

Good morning to all. On slide number 9, addressing now our first quarter 2008 results, we recorded a 23% increase in total gross revenues. In the domestic market we presented a 21% growth composed by a 15% increase in our domestic demand combined to a yield increase commented on the next slide. In the international market, revenues also increased 21% due to the raise in demand of 61% made possible by the fleet increase, partially offset by the 15% appreciation of the real against the dollar and the beginning of several new routes, which are usually launched with promotional fares.

We also had a 37% increase in cargo revenues due to higher availability of aircraft cargo space for sale, especially in the international operations. To complement our revenues we had a 26% increase in other gross revenue, mainly due to the increase on mileage program revenues. On slide number 10, our total RASK decreased 2% year over year. Our scheduled domestic yield increased 5%, combined to the load factor increase resulting in roughly 6% scheduled domestic RASK increase compared to the first quarter of 2007.

Our scheduled international yield presented a 12% decrease in dollar. The load factor increased roughly 6 percentage points which, combined with the depreciation of the real versus the dollar is 15%, resulted in a 19% scheduled international RASK decrease in real. As we commented on the previous slide, the main reason for the decrease in yield was the inauguration of new international flights, Caracas, Montevideo, Frankfurt and Madrid, which are still maturing. These new frequencies increased our international average days yield impacting even more the RASK compared to the previous year.

On slide 11, we can observe that our total CASK increased 2% and CASK excluding fuel decreased 5.5%. The main reasons were the impact by reducing aircraft days utilization from 13 hours in the first quarter 2007 to 12.6 in the first quarter 2008 jeopardizing our cost dilution, and the 20% increase in fuel costs per liter. We continue to pursue an increase of efficiency in our operations and believe that it will be a main driver for future profitability.

On slide 12, with combined effect of RASK and CASK, our margins suffered this quarter reducing the spread year over year. When compared to the first quarter '07 there was a decrease of 4 percentage points in the EBIT margin, reaching 0.8% in the first quarter of 2008.

On slide number 13, according to Brazilian accounting principles, BR GAAP, our EBITDAR margin reduced to 12% reaching an amount of $272 million, representing a 20% reduction. Our EBIT decreased 80% to R$18 million. Our net income was R$3 million, a decrease in the margin to 0.1% in the first quarter of 2008.

On slide 14, according to the North American accounting principles, US GAAP, we have observed the following figures in the quarter. Our EBITDAR margin was 13% representing R$283 million. Our EBITDAR margin was-- sorry, the EBIT reached R$83 million representing a margin of 4%. Our net income was R$0.7 million representing 2% margin.

On slide number 15, our earnings per share reduced in the first quarter of 2008. In BR GAAP, earnings per share reached R$0.02 and in US GAAP R$0.31 or $0.18 of dollar per ADS.

On slide 16 we can understand the main reasons for the difference in net income between Brazilian and US GAAP. In US GAAP, 44 aircraft were restated from operating leases according to the FAS 13 requirements to finance those lease. This means that these aircraft are recorded as fixed assets in reais and the related debt is recorded as liability in U.S. dollars, therefore suffering exchange variation and recognition of interest impacting our financial results. In the first quarter our net income was impacted mainly by the lease treatment in approximately R$57 million.

On slide 17, our cash position at the end of the quarter reached approximately R$2.2 billion and our debt increased due to the issue of bonds in April of 2007 and PDP financing. Also we are substituting the F100 for A320 family aircraft which have higher leasing costs. When we adjust our total debt by capitalizing 7 times the annual lease payments and subtracting the cash in equivalent divided by the result by capitalization adjusted by adding 7 times the annual lease payments, we will arrive to a ratio of 69%.

On slide number 18, the growth in our international operations has altered our dollar exposure. Foreign currency went from 33% in the first quarter of 2007 to 34% in the first quarter of 2008, even with appreciation of the real versus dollar in 15%. Considering that our costs linked with foreign currency represents approximately 50%, we are improving the natural hedge of the business, reducing the necessity for FX hedging with derivatives and therefore decreasing the overall spend on this transaction.

With international flights launched in the end of 2007 and the new ones that will be launched up to the end of 2008, we expect foreign currency revenue to increase between 40% to 50% of total revenues until the end of the year.

On slide 19, since our IPO in June 2005, our stocks reached roughly 85% appreciation (inaudible) by the end of the first quarter '08. The average daily trade in the quarter was 1% of the total free float, with the daily trade volume remaining about R$28 million. Our ADS at New York Stock Exchange has an average daily trade volume of $19 million. We are part of eight index and our shares are covered by several analysts listed in our investor relations website.

On slide 20, we foresee domestic market demand growing within the range of 8% to 12% in RPK. And (inaudible) for the year already, the correlation for the year already grew roughly 11%. Regarding our operations, we held 50% domestic market share and roughly 68% in international among the Brazilians. We grew capacity in ASKs by 14% in the domestic market and 50% international. Out total load factor, including both markets is over 73%. In terms of CASK, we reduced 5.5% CASK excluding fuel year over year in BR GAAP.

As for the international market, will announce soon the new destinations or frequencies to be launched in this year.

On slide 21, we are one of three domestic markets having only Airbus A320 standard aircraft, always looking for capital reduction. By the middle of 2008 we will start the substitution of the M11 by the new wide 777 300AR. To face international growth opportunities, we are adding two Boeing 767 300s into our fleet through the upcoming months. We intend to end up 2008 with a young fleet having an average age of five years composed by 123 aircraft.

I will pass the floor back to David Barioni, our CEO.

On slide number 22, our strategy is based on providing a superior quality product meaning more attractive value price relation to our customers. To do so, we are always working and focusing on excellence. Excellence in service working with commitment to serve and offering always a differentiated product to our passengers. Excellence in technical-operational focusing at all times on safety, maintaining quality operations with both quality and reliability. Excellence in management, hiring and training the best people, high performance culture, controlled costs and efficiency culture, management alignment and team work. Jointly these three points reflect a strategy that we believe will give us higher competitive advantage and we will also sustain our leadership in both domestic and international markets with profitability. Thank you very much.

(Operator Instructions). Your first question is coming from Mike Linenberg of Merrill Lynch. Please go ahead.

Good morning. A couple questions. First off, on your international flying, your yields were down a lot. Obviously it's a function of all the capacity and the higher stage length and I think Libano, you talked about promotional fares. As we look out over the next couple of quarters and some of that capacity or some of those new markets start to mature, plus the fact that you have [Vare] pulling out of those markets, do we see some stability there? What is the yield outlook on international as we look out over the next quarter or so?

Hi, Mike, Libano. Our view is you are right, we started-- just reminder, we started four new international destinations on the fourth quarter '07, namely Caracas, Montevideo, Frankfurt and Madrid. We accrued there in the fourth quarter, all the costs, preoperational costs related to that. This first quarter we had impacts due to these new flights, you are right. With stage length we had this increase on stage length and more marketing costs to advertise these new flights and promotional fares. What we are envisioning for the end of the year, for the full year, is we are in terms of stage length on international, these will remain the same as we are today with a maximum increase of 3% to 5%, not more -- more on the 3%. In terms of yields, these new routes are maturing. We are increasing yields in a way that our assumption now we started the year with an assumption to maintain yields, international yields, flat in dollar terms. We had this 12% negative in dollar yield year over year. Our target now is to increase yields full year '08 to full year '07 by 5% in dollar terms. To offset the fuel impact and because these new routes are maturing, all of them are reload sectors, higher than 70%. We are doing very well on these routes. This proves that we are right on the momentum to stick with these flights with the proper alliance by bilateral. So we are increasing yields in dollar terms by 5% because we changed our view on (inaudible). We are working now on (inaudible) with WTI with 110 to 115 for the average of the year.

Okay, and then my second question, what percentage of your domestic traffic is connecting to international? And maybe a better way-- because your international loads are high, what percentage of your domestic load, or should I say the percentage points, are actually passengers who are flying on an international itinerary?

Okay, you can consider that on our domestic load factor 2 percentage points are part of the international, is connection for the international.

Okay. Great. And then just my last question, on your fleet plan, it looks like you have two less Airbus wide bodies in the plan. Obviously we see the 767s coming in. Are you-- did you end the lease on the A340s? Are those the two A340s coming out? What's that difference?

We are maintaining the A340s and these new A330s will be brand new leases that we receive on the fourth quarter of the year and we are bringing these two 767 300s with a short term lease facility.

I see, so just two less A330s in your forward fleet plan versus what you provided in the past.

No, in fact we are maintaining the same because if you-- we are maintaining the same figure of 22 wide bodies because-- and what we have by the end of the year, we will end up with 14 A330s, two A340s, four 777s, and two 767 300s,

Okay, Thank you very much.

(Operator Instructions) Your next question is coming from Steve Trent of Citigroup. Please go ahead.

Good morning, gentlemen. [Portuguese]. Just two questions for me, gentlemen, I apologize if I couldn't hear you earlier. Looking at the cargo business, when we were in Brazil this past November, you sort of mentioned maybe over the long term that you might eventually exit this business. It seems to be going very well, there seems to be momentum in cargo in South America, your friends in Santiago want to establish apparently a hub in Columbia. Mr. [Ofromovich] through [Abianca] is going to buy a cargo company, air cargo company in Columbia. How are you seeing the trend medium term and have your thoughts perhaps changed on the long term strategic value of cargo?

Hello, Steve. David. Next time I'm going to answer you in Portuguese, okay? Because your Portuguese is increasing a lot. Our point of view regarding international cargo -- we're going to increase the international cargo offer due to the 777s that will come in, in late 2008, July and so on, June, July and so on. And we expect to keep to maintain and to increase the income of cargo due to [boco] and belly of the aircraft. We do not have plans to compete with Mr. Ofromovich or any other guy utilizing the freighter aircraft. We're expecting revenues increase year over year, I mean 2008 over 2007, of 50% increasing revenue of the current, okay?

Great, great. And just one other quick question. Looking at effective tax rate, talking of course about US GAAP terms, how should we think about it going forward in terms of what could be sort of a baseline effective rate?

Hi, Steve, Libano. You can consider the steady effective tax rate of 34%.

Okay, great. Thanks, guys.

(Operator Instructions). Your next question is coming from Isabella [Bachi] of JPMorgan. Please go ahead.

Hi, guys, good morning. My question is regarding CapEx. I was on the Portuguese call, I couldn't hear you very well. I wanted to have an idea of CapEx and the operating lease figure for the full year in US GAAP if you could. Thank you.

Hi, Isabella. CapEx I mentioned on the Portuguese call is we are maintaining the same figure that we released on the last year. We have plans to increase R$400 million in CapEx for this year. The majority of this CapEx are linked to pre-delivered payments for aircraft plus hangars for maintenance that we are establishing for facilities for the 777s. In terms of lease, you can consider that the amount on the second quarter, if you can certainly consider that delivered as we are today, we will increase by adding the 777s. But roughly the monthly payment will be in dollar terms equivalent of the first quarter '08 with an increase on the second semester because of the 777s.

Okay. And this increase, I mean I know that it is, I would calculate that my the price of the aircraft, but do you have an idea how much in terms of the quarter or the end of the year that should be expecting?

Well I prefer to guide you this on the second, by the end of the second quarter because by that time we will have all the agreements closed and in place. We can guide you with this figure.

Okay, thank you.

Thank you. (Operator Instructions). Your next question is coming from Keith Weissman of Calyon Securities. Please go ahead.

Hi. I wanted to ask you a question regarding the new agreement with LAN. Do you expect that to have a meaningful impact going forward? I mean could you quantify what your thoughts are with respect to that agreement?

Hi, Keith, it's Libano. We closed last year four very meaningful and relevant code-share, namely United, TAP, LAN Chile and Lufthansa. All of these combined together we are expecting an incremental revenue for this year of roughly $65 million. Adding -- because of exactly these partnerships. In the case of LAN Chile, it's very important the partnership because together combined with LAN Chile, both companies have 66% of the capacity in South America. We are able with this partnership to improve the network for both companies, organizing better the connection, the connectivity for both, improving load factor in both companies, and what we can-- and for the passengers it's very convenient because of the frequent flyer program through checking just one baggage check- in. So this is very important and we are doing very well on both. We are not giving separate per company, but this total amount is $65 million for the four code-share agreements.

And you don't run into any issues with antitrust having 66% of capacity in a particular country?

No, it's not country, it's South America.

I know, it's across South America, but in any particular country there's no concentration that would raise cause for concern on antitrust?

No, because each company has their own revenue systems, their price system. It's more on the convenience for the passengers to have one, just one point of sale, just one point of check-in. But we are not with this breaching any antitrust constraints.

I was wondering with respect to financial income, I know you said there is smaller variation in foreign currency. Can you just talk about that a little bit, how that impacted the quarter?

Okay. When you consider year over year, the impact, you have to have in mind that in terms of year over year we had an important change on FX variation. But we have more debt now because last year, the first quarter last year we had, or we didn't have the bonds that we accrued them on April '07, $300 million. We didn't have another $330 million related to the specific facility that we closed exactly with Calyon. And because of this we have more now monetary exchange variation related to this indebtedness. And the dollar/real appreciation was 15% compared year over year.

So going forward do you expect it to have more variance?

Less.

Less.

Assuming that the dollar FX real/dollar will be stable less volatility.

Okay, thank you.

Thank you. Your next question is coming from [Jorge Mato] of Legg Mason.

Hi, Libano, thank you for taking my questions. Just two quick questions here. First, I would like to ask you if you could break the sales and marketing costs. I mean, how much of this is actually commissions and how much will be like commercial costs? That's the first question. And the second one is that in that you used to basically book the domestic commission costs paid to travel relations in the revenue and in the costs in '07. This 7% increase in yields you are gaining in the domestic market, I mean should we see it further increase because basically now you are not including the commission in the revenue, so you are gaining the 7% from a higher base? So if we were to exclude that basically increase would be higher. Is that correct? Thank you very much.

Hi, Jorge. First, in terms of the commercial costs relative to revenues, we have last year this represented roughly 10.7% out of net revenues. This is including commissions, incentives, and marketing, marketing costs. What we have is this year we are reducing this-- you can consider this year we will reduce by the end of the year on steady state 3 percentage points. We believe this will be almost 8.-- roughly 8% the total commission costs out of net revenue, just commercial costs. And in fact the relative effective is more because we are not charging-- so far we are not charging commissions anymore on the domestic market. We're not charging. Paying commission to the travel agent and we are at the same time negotiating with them to start the same facility on the international flights. We expect by probably the third quarter we will be able to implement the same scheme on the international flights.

Our view to increase yields on the domestic market this year by 7% year over year and assuming that last year we had the gross effect on the revenues because the commissions were part of the revenue and this year is net because the commission, we are not paying commission anymore. You are right, considering that this 7% on like for like if you-- probably represents quite a more than 7%, equivalent closer to a 12 or 13% increase in the yields But if the 7% is yield year over year on the domestic market.

That's perfect. Thank you very much, Libano.

Your next question is coming from Omar Veolia of UBS. Please go ahead.

Hi, Libano. My question was also regarding the yield. Did you mention that you were going to try to increase prices to improve the domestic yields? Or are you going, I mean how else are you going to do it?

Hi, Omar You are right, we have plans to increase yields year over year on the domestic market by 7% and on international flights 5% in dollar terms. We know that this is challenging especially because on the first quarter we have this 12% year over year less yield in dollars. But what we are doing is we are -- these flights that we stated in the fourth quarter are maturing. We don't have anymore any costs related to them and this is now-- the initial three to four months we charge promotional fare, this is for the initial phase is important. As we are now on the fourth or fifth month with loads higher than 7% on these new flights, we are able to increase the price. And we have another bucket which is our fuel surcharge. The fuel surcharge are part of the international revenue and we have to increase to offset partially the impact of the increase on WTI.

The 7% on the domestic market, you have to take in mind that we end up 2007 with yields on the domestic market 19% below '06. Increasing 7%, we are just adjusting partially the first and we are not replacing inflation. If you consider 19%, and we have expect to have in Brazil this year an inflation of 4%, 7% means that we will still be quite below 2006 average yield on the domestic market. That is why this level of increase will not impact on demand in our view because of this. We are keeping the stimulation of traffic and we are always looking for elasticity to look on the load factor. But we are optimistic and confident to make this increase on both markets.

Okay, and you mentioned 7% by the end of the year. Does that mean 7% will be the average for the year, will be 7% higher than '07 or will we get to a 7% higher level by the end of the year so like the annual average will be less than 7% higher than '07?

It's the average of the year, average '08 to average '07.

Okay. Thank you.

Thank you. This concludes the question and answer session. At this time, I would like to turn then floor back over to Mr. Barioni for any closing remarks.

Well, I'd like to thank you on behalf of TAM. Thank you very much for everybody and I hope to see you next time. Thank you very much.

Thank you. This does conclude today's presentation. You may disconnect you lines at this time and have a nice day.