LATAM Airlines Group SA (LTM) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the First Quarter 2009 TAM S.A. Earnings Conference Call. My name is Noellia, and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Mr. David Barioni Neto, CEO. Please proceed, sir.

Good morning. We would like to thank you all for your presence. Let's begin the presentation of the first quarter 2009 results. Let's jump to slide number three. On slide number three, we have the highlights of the quarter. And our first highlight is a new record set. On January the 4th on the return from the year-end holidays, we transported more than 112,000 domestic and international passengers in a single day with an average load factor of 85% in our aircrafts.

We reached a punctuality index of 92.2%. The punctuality index is one of the main indicators monitored by us because it links the three excellence pillars that sustain our strategy -- excellence in service being directly observed by the customers, excellence in technical/operational, showing the high quality of our aircraft maintenance and capability of the people responsible for the operation, and excellence in management, where we can see a well-designed network supported by the great performance of our people in the airport.

Regarding the aircraft utilization, we flew 12 hours per aircraft per day in the quarter. Considering only the operational fleet, excluding stairs and aircraft in maintenance, we posted a daily utilization of 12.6 hours per aircraft. We received two new aircraft A321 and one A320 in our narrow-body fleet. We have started code-share operations with bmi. And finally, in agreement between our cargo business unit and TAP Cargo to increase in city the number of destinations that we will reach, including several destinations in Europe and Africa.

We announced a new share buyback program, which will respect a maximum limit of 4.75% of the total preferred shares currently in the circulation. We received two prizes through the Airfinance Journal -- the Aircraft Finance Team of the Year 2008 for our team responsible for negotiations of 32 aircraft in 2008. Also, we received the Latin American Deal of the Year 2008 for our structured operations for the acquisition of two Airbus and four Boeing 777 aircraft.

I would now like to invite our CFO, Mr. Libano Barroso to comment our results in the quarter. Please, Libano.

Thank you, Barioni. On slide number four, I would like to mention that all values in these figures in this presentation are forth into the North American accounting principles, the US GAAP. We recorded a 17% increase in total gross revenues, reaching BRL2.7 billion in the period. In the domestic market, we presented a 9% growth composed by 5% increase in our domestic demand, combined with an increase in the use that we will comment on the next slide.

On the international market, revenues increased 30% due to the rate increasing demand of 10% made possible by the fleet increase allowing the beginning of several new runs. Our cargo revenue decreased 3% compared to the third quarter of 2008 due to the slowdown in the global economy activity, impacting mainly our international business. To complement our revenues, we had a 53% increase in other gross revenue, mainly due to the increase on the loyalty program revenues.

On slide number five, our total RASK increased 0.5% year-over-year. Our scheduled domestic use increased 2%, offset by a load factor decrease, resulting in 7.6% scheduled domestic RASK, decreased compared to the first quarter of 2008. The international RASK in reais increased by 10%. This was due to scheduled international use increasing 11% in dollars.

And the load factor decreased roughly 5 percentage points which combined with the depreciation of the real by 32%, part of what I mentioned the increase in RASK in reais. The main reason for the decrease in use in dollars was the integration of new international flights to the United States, which are easily launched with promotional fares.

On slide number six, we can observe the increase in the spread between RASK and CASK, which corresponds to the operating margin to BRL1.17 due to the RASK increase already mentioned and a reduction of 3% in total CASK to BRL15.23. The CASK in US dollars reduced by 14% year-over-year. CASK excluding fuel reached BRL10.91, increasing 14% due to the depreciation of the real against dollar in 32%.

On the slide number seven, we had a negative financial result of BRL110 million. The main item that impacted the result was the interest expense, which totalized BRL117 million. The hedge impact in our cash was BRL290 million in the quarter. And we had a non-cash gain of roughly BRL228 million.

On slide number eight, we had an increase on our EBITDAR by 68% with margins expansion in 5 percentage points from 13% to 18%, reaching BRL475 million. In terms of EBIT, we had an increase by 125% with margin expansions from 4% to 7%, meaning 3 percentage points of increase, reaching BRL188 million. We posted a net income of BRL57 million, increasing 22% when compared to the first quarter of 2008. Our earnings per share reached BRL0.38 versus BRL0.31 in the same period of 2008.

On slide number nine, in this quarter, we had a [dilute cut] variation in our cash position, mainly due to the increase in operating activities and consumption and hedge contract settlement. We have no restricted cash mainly due to our hedge positions renegotiated with our counterparties.

On slide number 10, our hedge positions for the first quarter represented 37% of our total position for 2009. It means that a large portion of our cash outlays were already realized. For the next 12 months, we have 27% of the consumption hedged at an average strike price of $111. Our total future positions as of the end of this quarter cover 22% of the projected consumption with an average strike price of $112 per barrel.

On slide number 11, we presented a generic for future cash outflow due to the hedge in 2009 assuming that WTI will remain constant at $50 per barrel. In this case, we can verify that the outflow will reduce significantly as shown in the previous slide. The main point was concentrated in the first quarter. In this example, we would have a total cash impact of $322 million.

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

Okay. On slide number 12, regarding our guidance for 2009, we believe the domestic market will grow between 1% and 5%, remembering that it grew 4.7% in the first quarter. We are maintaining the leadership in both markets with 49.5% domestic and 85.5% international market share. We will increase our domestic capacity in 8%. In the first quarter, we grew 15%. But this number will decrease along the year as the base gets stronger. In the international market, we will grow 20%.

Our overall accumulated load factor is 67% and we believe it will remain at this level until the end of the year. And finally, we will launch one of new international destination, Johannesburg in South Africa, which we expect to start flying as of September. Africa is an opportunist destination because it is both a very popular destination for tourist and an important connecting point to Southeast Asia or other countries in Africa, where many Brazilian companies have business.

On slide 13, seeking further cost reduction, we are now a fleet in the domestic market having only Airbus A320 family aircraft. We have a young fleet with an average age of only 5.7 years. We intend to end 2009 with 132 aircraft, remembering that we already have a pre-financing commitment for the aircraft to be received this year.

And the last slide number 14 -- our strategy is based on providing a superior-quality product with a more attractive value-price relation to our customers. We work based in three excellence pillars, which sustain our constant pick of being the preferred airline company.

Jointly, these three points reflect a strategy that we believe will give us higher competitive advantage and will also sustain our leadership in both domestic and international markets with profitability. Thank you.

(Operator Instructions).

Your first question comes from the line of Steve Trent with Citigroup.

Good morning, gentlemen. And forgive me as I maybe dialed in a little bit late as there was a conflict with another results call. I was curious about how you see the Star Alliance developing. I see you have this -- you're doing a code with bmi now. One of your competitors announced that it's leaving SkyTeam and might also join Star. Are you comfortable at this point with reiterating what you said on the last call with respect to the revenue you might receive, incremental revenue you might receive from Star?

Hello, Steve. (spoken in Portuguese)

(spoken in Portuguese)

Well, we are very comfortable with the Star Alliance integration and being part of the 24, 25 across working together. And yes, Steve, we're expecting the $60 million increase in revenue due to the Star Alliance operation. Of course, we will just pick up these results in 2010 because, as you know, we are now developing the -- especially the IT process to be completely connected with them. And so, once again in 2010, we expect $60 million in revenue.

Okay. Great. Thanks, David. And just one other thing -- looking at I guess the regulators down there have been looking to eliminate floors on the prices of international flights and seems to be some statements with respect to taxation for the Brazilian carriers versus international carriers. And apologize if you mentioned this earlier and I just dialed in late, but if you could maybe give some color as to what recourse TAM might have in managing this. And so --

Thank you. No problem. We're going to have a floor decrease in 20% in the next month, 50% until September, and 80% until December and 100%, which means cancel the floor on the first quarter of 2010. We do not expect any great variations in the price. Of course, we can have here or there some promotions.

But in the regular sense, I think that is not a time right now to go below the price. I mean, for the international airlines, they are solving a very strong crisis and the situation in Europe and United States not so strong. And so, we are not expecting any rate decrease in yields due to the decrease of floor level. Okay?

Okay. (spoken in Portuguese).

(spoken in Portuguese).

(spoken in Portuguese).

Your next question comes from the line of Nicolai Sebrell with Morgan Stanley.

Hi, gentlemen. If we could start out with the question I'm sure you've gotten a lot, is there any impact on your network due to swine flu, due to the decline that we've seen in passenger traffic Mexico, parts of North America, et cetera? That's the first question.

And second, if you could talk a little bit about the yield environment, both internationally and domestically as you're looking forward in the second quarter and especially with respect to competition -- Azul, although it's still small, if there's any impact from that; Webjet, and although it's a charter, if you've seen any impact from that. Has there been any change in charter demand? And that's it. Thanks.

Hi, Nick. This is Libano.

Hey.

First of all, we didn't see any kind of impact due to the swine flu on our future forward bookings or revenues. So, we are not facing any impact of that. Regarding yield environment, as you see, we reported a first quarter year-over-year better yields on the domestic market. On the second quarter, domestic markets speaking, we are maintaining yields flat with the first quarter this year. So, it's more equivalent because second quarter is at first quarter.

What we have been doing is trying to stimulate, but not on price, by a combination of creative ways by incentivating people to fly off peak and giving them differentials in terms of financing not provided by ourselves. For instance, we -- as it came two weeks ago an agreement with Caixa Economica Federal. Now, they are financing up to 24 months with a maximum of BRL10,000 package for including flight, hotel, and land transportation.

We are selling this through our operator TAM Viagens, which will be fully financed by Caixa Federal. We will receive cash upfront. And we have with that stimulated off-peak flight, leisure, traffic. We are doing the same with our loyalty programs incentivating people to burn their points on off peak and leaving the space for the business peak hours exactly to avoid regular displacement.

So, yields domestic second quarter aligned with the first quarter '09. Internationally speaking, they are higher. So, we are with better yields in reais and in dollar terms on the second quarter on par with the first quarter. And the reason behind that is on the second quarter we start having more better mix of business travelers than the first quarter, which have a strong concentration on leisure passengers. Okay?

Is that a normal trend? I mean, do you see that every year? Or is that special this year, the mix between business and leisure changing from one quarter to another?

Normal. It's normal.

Okay. Normal.

Regarding competition, local competition, as we mentioned, you mentioned that exactly Azul is growing their capacity. They are maintaining their model by serving mid-sized cities, which they have seven -- I believe seven -- aircraft today. So, they are not competing head to head with us. The other companies in this area as you mentioned, Webjet, they have the -- they are regular company. But they have the -- because they are owned by the same -- they're under the same controllership by the CVC, which is the biggest operator in Brazil. They have a bias for being more a discount charter company.

You know that our charter revenues have been reducing year over year for the past two years exactly because we have been using and deploying better our fleet and reducing expense for charter flights, which are important but less profitable than the regular ones. So the environment, as we can see, is a rational environment, everybody looking for how to stimulate demand. But with promotional firsts restricted to off-peak flights, plans, fares, we are not facing any kind of warfare in the market.

Okay. Thank you.

(Operator Instructions).

Your next question comes from the line of Dan McGoey with Deutsche Bank.

Good morning, gentlemen. My question was just on the selling and marketing expenses. And apologies if you mentioned it already, but short drop in selling expenses, if you could discuss a little bit about why that occurred. And then just to follow up on the comment I think you mentioned international yields looking higher in the second quarter versus the first quarter, is that -- are you looking at it in dollars or in reais?

Hi, Dan. Libano speaking. First, in terms of market and commercial expense, you're right. We had a reduction this first quarter by a combination of more being -- raising the target, the bar in terms of incentives, targets for travel agents. With that, we are reducing the commercial incentives and we reduced a little bit our marketing budget. But this was more controlled than exactly a trend; you see on the next quarters returning to the normal level. So, but we made this decision this quarter. In terms of yields international only, both are growing in reais and in dollars. So, we had an increase in both yields.

Okay. And then, one additional question if I may on hedging, fuel hedging policy going forward -- you outlined the existing state of the hedges. But I'm wondering with where oil price -- well, one, I guess if you can just remind us of your hedging policy and whether you're making any changes to it as you look forward for new contracts in the next couple months or quarters.

Okay. We are maintaining the same policy, which is to protect minimum of 30%, maximum of 80% within a timeframe of three to 24 months. As you can see, we are at the minimum now with 34% of 2009 and 22% of 2010. Combined we are -- the total period, we are 22%. So, we are fairly below our minimum. But what we have been doing -- this policy, we -- it's not bureaucratic and written in stone because we have to analyze on a daily basis what is happening on the treasury side.

And since August last year, we have been seeing future curves for oil on a constant way, which means that futures are very expensive to hedge. This reduced a lot. We used to have contend with 70%. Now it's more closer to 20%, 17%, 15% to 20%. In our view, it's still expensive to hedge. We didn't enter in any new position since August. But we are monitoring the market now with this thought in our view since the fourth quarter.

And that's why exactly we re-profile the materials of our hedge. We had a view that is probably for the concern was more a correction on the spot price than in the future. And in fact, this is happening now. As you can see, we are with spot price more closer to 60% than what we had year end '08 at 43%. So, with a combination of this and FX now at 2.10, this will represent for us on the -- especially on the second quarter positive financial gains on these hedging positions because if you represent a reversal of the negative mark to market that we accrued on the fourth quarter last year.

Great. Understood. Thank you.

At this moment, I am showing no further questions. And I'm showing you now have a question from the line of Victor Mizusaki with Itau Securities.

Hi, good morning. Only a quick question -- comparing what happened in terms of the last year then in the first quarter, quarter-over-quarter, okay, the net yields went down almost 15%. And the distribution -- maybe there's some comparison to first quarter '08. The net yield went down 7%. So, I'd like to know if it's a consequence of the economic downturn.

And another point that you mentioned that in the second quarter international yields are improving but at the same time have the end of the full price for international fares. So, I'd like to understand a little bit what we can expect going forward for international yields.

Hi, Victor. First, let's talk a little bit about seasonality in our industry. We have a clear seasonality where we have on the fourth quarter of the year is stronger. So, the best quarter in the year is the fourth, second best the third. The third is the best. And in fact, the weaker is the second quarter. And while we have this, in Brazil, roughly 70% of the passengers are flying on business purpose and 30% leisure purpose. Commonly, as an average economy in Brazil, always we have a second half better than the first half. So, this enforce once again the seasonality of our business.

That's why we don't believe it is correct to compare yields in a row. It's better for you to compare yields year-over-year, the same quarter year-over-year, because when you look for -- as you mentioned, if you look on the first quarter compared with the fourth quarter, you can have a kind of misbelieving idea of melting down the yields. But in fact, the yields on the first quarter year-over-year, they increased. We had an increase by 2% on yields on the first quarter, as you see. And what we have seen on the domestic market -- and you have to notice that this is a very tough new era now because we are facing a crisis in the market.

But what we have seen is -- for the second quarter this year, once again, the weaker in the year for the industry, we are seeing decrease in yields on the domestic market more flattish compared with the first quarter. But when we are looking year-over-year, this is a reduction. Year-over-year, we are taking reduction on the second quarter. But we are not in the mid of May yet. So, we still have June, which June is always a good month. We are seeing a very nice recovery. And we have more positive than we were in the fourth quarter of last year.

So, we are seeing load factors maintaining system wide on 67% according to our guidance. And the price environment has been very rational. We have been trying to stimulate yields -- sorry, stimulate demand, not with yields but more with creative ways, especially off-peak flyers with financing provided by banks instead of bearing the credit risk. I don't know if I answered totally, Victor.

Yes, yes. And what about the international yields, given the end of the full price?

International yields are differentially -- if you'll look on the second quarter, they're sequentially with the first quarter, but having in mind once again that the weaker quarter compared with the first quarter they are increasing. They are increasing reais. They are increasing in dollar terms. And year-over-year, we have a trend to have a kind of low single-digit reduction in dollar terms. In reais, we are increasing, increasing a lot because we have a depreciation of real this year around 32%. In reais, it's a very important increase year-over-year.

Okay. Thank you. And another question in regards to your hedge -- if you take a look in the net financial results breakdown, we can see that you booked a loss of BRL290 million with WTI hedge. But given that your mark-to-market, your contract in the end of the year, the end of '08, I'd like to understand what happened here, given that in my opinion you'd have only a cash effect and not an impact in your income statement.

Thanks for the question, Victor. It's a very, very important question, this. If you have combined both, you must look on the BRL290 million on the expense combined with the BRL228 million positive unrealized gains. So, the net for both is roughly BRL60 million. What is this? This is the outcome for the re-profile that we did on our hedging position. This represents the cost related to this re-profile. So, this will represent a little bit cash impact in future, okay, just the impact of the re-profile.

Okay. Thank you.

(Operator Instructions). And at this moment, I am showing there are no further questions. I'm going to go ahead and hand the call over to Mr. David Barioni, the CEO, for closing remarks.

Well, ladies and gentlemen, good morning once again. On behalf of TAM, thank you very much for being here in our webcast and see you next time. Thank you very much.

Thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a great day.