LATAM Airlines Group SA (LTM) 2009 Q2 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 Second Quarter 2009 Earnings Conference Call. We would like to inform you that this call and the slides are being broadcast in the Internet at the Company's website, www.tam.com.br/ri. And data presentation is available to download at the Investors Information section.

Also, this event is being recorded and all participants will be in listen-only mode during the Company's presentation. After the Company's remarks are completed, there will be a question-and-answer session. At this time, the phone instructions will be given.

(Operator Instructions)

Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of TAM's management, and on information currently available to the Company. They involve risks, uncertainties and assumptions, therefore 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 net 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 would like to turn the floor over -- the presentation over to Mr. David Barioni Neto, the CEO. You may proceed, Mr. Barioni.

Thank you. Good morning. We would like to thank you all for your presence. Let's begin the presentation of the second quarter 2009 results. Let's jump to slide number three, please. We have the highlights of the quarter. We boasted the highest quarterly net income in the history of the Company, reaching BRL789 million. We reached a punctuality index of 93.4%, remaining 1.5 percentage points above the industry average.

Regarding the aircraft utilization, we flew 11.6 hours per aircraft per day, remaining 8% below the 12.8 hours we flew in the second quarter of last year and 3% below the average of the first quarter of 2009.

As we announced at the end of last year, we decided to maintain our fleet plan and change it for 2009, given that we believed the market would recover until the end of year. For this reason, we decided to control the capacity addition by reducing the hours we fly with each aircraft.

Considering only the operational fleet, excluding spares and aircraft in maintenance, we posted a daily utilization of 12.2 hours per aircraft. We started our codeshare operations with Swiss, including the integration of both company's loyal programs. Also, we integrate our TAM loyal program with Aeroplan from Air Canada since April. Passengers can accrue and redeem points in both companies.

Last Monday, we announced our codeshare agreement with Air China. Now our passengers will be able to buy tickets to Beijing through a connecting flight in Madrid. In the other way, we are going to transport Air China's passengers from Madrid and distribute them in Brazil.

With the utilization to operate the Congonhas airports in Rio de Janeiro, beyond the shuttle service to Sao Paulo, we have started 34 new flights between that airport to other seven Brazilian capitals. We updated the line of product and service from TAM Viagens, our tourist provider. Now, we offer an even more personalized service to our customers.

Also, we repopulated TAM Viagens' website that now has a more modern design and new tools that gives our customers the ability to make purchases online. I suggest you to visit the website at tamviagens.com.br. Regarding our MRO, we signed a long-term contract with LAN group for hedging maintenance checks in several aircraft to be performed at our maintenance centers. We are focusing our commercial efforts, and soon we hope to announce new contracts. And at last, we received a four -- the fourth time in a row the operational excellence award from Airbus as a recognition for our service history with the A320 aircraft.

On slide number four, continuing with our target to generate increased value from the Company, we launched the Multiplus Fidelidade, aiming to explore all potential of the customers' loyalty.

Multiplus Fidelidade is a coalition of loyal programs from several companies from different sectors. Multiplus will be a tool to assist partner companies to capture, retain customers and increase sales. TAM loyal program was based on a unilateral approach, where TAM used it to sell points to its partners, that would award the clients and the clients would only be able to redeem their points for airline tickets.

With Multiplus Fidelidade, all partners will award their clients with the same points. Those points will be accrued in the same account and the client will be able to redeem those points for products and services from all the partner companies. For instance, a client will be able to accrue points flying with TAM and redeem them to buy a book at a partner bookstore. It already happens today with clients who redeem their points in exchange for travel packages at [TAM Linhas Aereas], including the airline ticket, hotels and other facilities.

On slide number five, we illustrate Multiplus cash flow, which will achieve the cash and selling points to the partner company. The cash outflow happens when Multiplus pays for the programs of service acquired by the clients. Multiplus profit comes from the spread between the price of the points sold and the cost of the product acquired.

The program already has more than 6.1 million members, of which 2.3 million are access members. We are negotiating and soon we will announce new partner companies in our online catalogue at Americanas -- dot-com, I mean, that will allow members to redeem points from products available in websites. In a second set, we will have a vast database and we will be able to cross-current purchasing behavior between companies.

On slide number six, in order to increase the Company's liquidity, guarantee credit conditions and strengthened working capital, we realized a public debenture offering through our wholly owned subsidiary TAM Linhas Aereas , which will be restriction is only directed to qualified investors.

We issued 600 regular debentures, not convertible into shares. We think unilaterally, the value of BRL1 million (inaudible) BRL600 million. The current value of the bonds will be amortized in 13 quarterly and constructive payments, from July 2010 until July 2013. The debentures will be paid -- established remunerative interest based on the accumulative variation of 126.5% of the daily Interbank deposits rate, which mostly due date as of August 24th. The debentures are guaranteed by fiduciary assignments of receivables and by an additional security guarantee given by us in favor of the holders.

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

Thank you. Good morning to all. On the slide number seven, I would like to mention that all values in the presentation are according to the Brazilian accounting principles, the BR GAAP and the law 11638. Our gross revenue decreased 8%, reaching BRL2.4 billion in the period.

In the domestic market, we presented a 16% decrease in revenues composed by 0.5% decrease in our domestic demand, combined with a decrease in the units to be commented on the next slide. In the international markets, revenues decreased 3% due to the huge decrease in the real's appreciation, versus the US dollar of 23% partially offset by the rise in demand of 15%, made possible by the huge increase, allowing the beginning of several new routes in the second half of last year.

Our cargo revenues decreased 16% compared to the second quarter of 2008, due to the slowdown in the global economic activity, impacting mainly our International business. To complement our revenues, we have a 37% increase in other gross revenues, mainly due to the increase in loyalty program revenues.

On slide number eight, our total RASK decreased 21% year-over-year. Our scheduled domestic use decreased 17% combined through a loan factor decrease of seven percentage points, resulting in 25% scheduled domestic RASK decreases, compared to the second quarter of 2008. It is important to mention that the comparison base is strong because in the second quarter last year, we had already started the huge recovery in the domestic market.

Our scheduled international yields presented a 32% decrease in dollars. The load factors decreased roughly five percentage points, which combined with the depreciation of the real versus the dollar is 23%, resulting in a decrease in the scheduled international RASK in reals of 22%.

The reason for the decrease in use in dollars was a combination of an increase in capacity due to the inauguration of new international flights to the United States and impact in the demand, from the international economic crisis.

Number nine, we can observer that our CASK decreased 11% versus the same period of last year, mainly due to the reduction in the third quarter ASK of 46%. The CASK, excluding fuel, increased 15%, mainly due to the average real rate depreciation -- sorry, average real rate depreciation of 25% versus the second quarter of 2008. When we compare these indicators in dollars, we can very [quietly] decrease of 8%.

On slide number ten, the dynamics of the real depreciation versus the dollar from BRL2.31, in the end of the first quarter of the year, to BRL1.95 in the end of the second quarter, generated a positive net impact with no cash effects of more than BRL1 billion, mainly due to the reduction of future values of capital lease to be paid.

Also, our financial result was positive impacted by our future fuel hedge position that the market-to-market and generated and unrealized gain of 47.2 -- BRL172 million. Mainly due to the renegotiation that we did with our own positions, which represented more than BRL200 million from this value.

On slide 11, according to these Brazilian accounting principles, our net income in the quarter reached BRL789 million, a 34% margin over the net revenues. The EBIT represented a negative margin of 4% and they reached EBITDA margin represented 8%. While, according to the IFRS our net income in the quarter reached BRL540 million, a 24% margin, the EBIT was minus 6% and the EBITDA margin was 8%.

Moving to the slide number 12, we present the main difference between Brazilian GAAP and the IFRS. Under IFRS, we defer the revenue in relation to unredeemed loyalty program points earned by participants in our TAM Fidelidade.

Under Brazilian GAAP, with respect to points earned by customers taking flights with us, we record a liability and related expense points for incremental expenses in relation to the redemption of outstanding loyalty points. With respect to revenue from points sold to partners, we record -- recorded, at the time those points are issued to participants.

Regarding the aircraft reevaluation, meaning assets reevaluation. Under IFRS, we revalue our assets annually and under Brazilian GAAP, we report the value of our assets and fixed assets on a historical value basis.

Slide 13. In this quarter we had a significant variation in our cash position, mainly due to the increase in financing activities, consumption and hedge contracts' maturation. We are including the chart; our debenture issue that we mentioned previously.

On slide 14, understanding the challenging macroeconomic scenario and knowing that the cash preservation is crucial, we renegotiated our hedge positions in the beginning of the year in order to defer the cash burn, which was concentrated in the first half of 2009, and settled most of the contracts in a period with expectations to have lower volatility and a strike price closer to our operations. Gained back from the renegotiations was a reduction in cash outflows of $95 million in the first half of the year, combined with a reversal of market-to-market of BRL472 million.

Slide number 15 represents a sensitivity analysis simulating our cash outflow with our hedge positions until the first quarter of 2011, in three different scenarios, with average (inaudible) -- average of $60, $70 and $90. We can verify that our cash outflow will be significantly lower in the upcoming quarters. As presented in the previous slide, the highest hedge volumes already matured in the first half of 2009.

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

Thank you, Libano. Let's jump to slide number 16. We are confident regarding the domestic market recoveries and we decided to revise our demand guidance for 2009. We're increasing the guidance to a range between 7% and 10%, remembering until July, it grew 6.6%. We're maintaining the leadership in both markets, with 47% and 86% market share.

We will increase our domestic capacity in 8%. In the first half, we grew 11% but this number will decrease among the year as the base gets stronger. In international markets, 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.

Aiming to preserve the cash flow in this changing year, we took the decision to postpone the launch of the new international flights, once there are several initial costs related to the new destination. That new destination was South Africa.

On slide number 17, seeking further cost reductions, we are moving a fleet into the domestic markets, having only Airbus 320-70 aircraft. We have a young fleet with an average age of only 5.8 years. We intend to end 2009 with 132 aircraft, remembering that we already have a pre-financing commitment for the aircraft to be achieved this year.

Thank you very much.

Ladies and gentlemen, we will now initiate the question-and-answer session.

(Operator Instructions)

And your first question comes from the line of Duane Pfennigwerth from Raymond James. Please proceed.

Hi. Good morning, Libano, and Barioni. I appreciate the detail on the domestic yields. I'm sure investors appreciate that transparency as well. I'm wondering if you could talk about the forward outlook, obviously, in the second quarter, domestic yields down 17%. How are those tracking so far in July?

Hi, Duane. This is Libano. Okay. First of all, you mentioned -- you're right, just one important thing is just reminding that the second quarter in Brazil, because of seasonality, is a weaker quarter in the year, reminding the stronger -- the stronger in the fourth, second is the third, the third is the first and the weakest is the second.

Because of that, and combining with the environment -- economic environment, worldwide, we suffer more than usual in -- on the second quarter and we have this reduction. On an accumulated basis, as you can see, we have on the domestic market yields, 8% below year-over-year and we have, internationally -- we have 18% in dollar terms.

What's happening now in July? First of all, July and August. July, as you saw on the official data yesterday, markets grew 25% -- almost 26%, domestically speaking. August, according to our estimates, we believe markets should grow 20%, August, year-over-year.

Because of this combination, we changed our guidance for the year. We are more confident on a range of 7% to 10% for the market to grow this year, 2009. Because we have, beyond October, year-over-year, a [least comp], if you remember last year, markets grew up to above 11%, accumulated to September and then we have a weak fourth quarter.

The combination of these means that demand is there. So we have the demand, it's accumulated a lot by use. And because of this, we are now ready the opportunity to increase use. So our view, Duane, is up the year-end, we will be able to close '09 year-over-year to '08 at least, we believe, this will be. We will still be on a conservative base, considering a negative 5% on the domestic market year-over-year.

But we are now -- we increased it more than 10% -- close to 10% the yields on the domestic market, on tickets sold and we are foreseeing that the same thing on the forward-looking -- the forward bookings on our reservation curve. So we are confident with the recovery and we are foreseeing a rational behaved on the market as a whole.

On the international markets, we are positive with opportunities to increase the yields in dollars. We don't have an estimate to share with you up to now, but good news is despite of Europe had been considered the last to recover on the economy after the out -- the estimates of this crisis, we are -- for us, Europe has been a resilient market. We have been maintaining loads on Europe higher than 70% -- closer to 75%.

And because now we are -- we have signs from recovery in France and Germany, we are still more confident to increase yields because demand is there. And demand with yields will be, we believe, will be realized soon.

The same in the United States. Because the United States, our loads are lower than Europe, more because we grew a lot of capacity there. We opened Miami and Rio via -- Miami and New York via Rio or London via Sao Paulo and -- but, we are now seeing more business activity on our flights -- international flights, and the business passengers are the best yield payers. So that's why we are more confident demand is there in Brazil, and it's a matter of time for -- to recover on price.

I appreciate that detailed color. So would you say yields in July, year-to-year, are down more than the 17% in the second quarter or less? Because the key question is, yes, there is a recovery in RPKs and traffic, but what is -- is there a revenue recovery or is this all the result of price stimulation? Thank you.

Duane, in July and in August, we have yields closer to 10% higher, when we compare with the second quarter.

How about year-to-year, Libano?

Year-over-year, we are down almost with the same, closer to 15% to 20%, because last year -- remember that we had, last year, a recovery -- strong recovery, on yields beyond April. Despite being the weaker quarter, we -- the industry recovered yields on the second quarter last year. So in terms of yields, it's our best comp. But on a sequential basis, we are improving around 10% with the second quarter.

Libano, thank you for the straightforward answers.

Thank you, Duane. Regards to Jim.

And your next question comes from the line of Mike Linenberg from Bank of America-Merrill Lynch. Please proceed.

Yes, hi -- hi, everybody. Two questions here. Let's see. Can you just give us an update on competition? What you're seeing with Azul and Webjet? When we looked at the data yesterday, it was interesting to see how much your domestic market share had declined year-over-year.

And I know some of that's a function of less utilization, but what else is driving that meaningful decline in your domestic market share? So, if you could talk about that, and then, just also, about the competitive, what you're seeing, maybe Santos Dumont; how the new flights are competing in that market.

Hello, Mike, this is David. Good morning to you. Mike, the Webjet and Azul, they are increasing their market share. They are something around 4%, up to 5%.

Yes.

As you know -- as you listened to Libano explaining this, yes, we decreased 3% the hours of utilization from the first quarter down to the second quarter, and 80% is going in the second quarter 2009, from second quarter of 2008. This was due to the set -- to have a fine tuning from demand and offer.

Okay.

We decreased the market share, but it is not a problem. We're going to keep the guidance to maintain the leadership of the market, consolidating during the 12th months of the year.

Okay.

Keep in mind that we are following the rampability, which is our most important driver. And so, this is an ordinary movement of the offer according to the waves of demand. Okay?

Okay.

In terms of Santos Dumont, Santos Dumont, as we read, we are offering 34 new frequencies for other places than Sao Paulo and, of course, this was a movement because the airport was opened from April and May -- was open to fly to other places.

Now our first movement was to keep the flights in [Galeao], and just flights from Santos Dumont to Sao Paulo and we have shuttle. But anyway, they are now open the airport and we are there with 34 flights, offering good flights and competing with Azul and other companies.

Okay. Is it ramping up well? I mean, is it a profitable operation out of Santos Dumont? Because the fear is that opening up that airport, there may be too many flights moving into it at the early stage.

Yes, Mike. It is profitable because we just changed flights from Galeao to Santos Dumont and the demand is there. We are not --.

Okay.

We are not doubling the network. We do not have the same flights from Galeao and [San Rio]. We just have one flight that was moved from Galeao to Santos Dumont.

David, now that you've brought up the Galeao business, the long-haul flights at Galeao that were connecting, maybe, to some of the domestic flights, has the movement of flights from Galeao to Santos Dumont -- has that hurt the profitability of the long haul out Galeao?

Well, we keep the flights that we used to connect to international flights --.

Okay.

In Galeao, otherwise you can kill the international long-haul flights.

I see.

But those are the -- we are keeping those flights. The other flights we are transferring from Santos Dumont -- from Galeao, I mean, to Santos Dumont. And keep in mind that you have a restricted flight in Santos Dumont. And so, there is not much more space to move flights from Galeao to Santos Dumont.

Very good. Very good. Thank you. That's helpful.

Okay, Mike, bye-bye. Thank you.

Okay. Thanks, David.

Bye-bye.

And your next question comes from the line of Nick Sebrell from Morgan Stanley. Please proceed.

Hi, David, and Libano. A couple of questions. First, if you could talk a little bit more about CASK ex-fuel, where you think it might be going into next year? In other words, do you see a lot of opportunities for improvement? Or, maybe do you think you could improve in 2010 because of expanding the capacity base? The first question.

The second one is if you could explain a little bit the flight equipment impairment. I -- just basically the mechanics and how often that is done. In other words, the frequency as well as the methodologies. Maybe two bullet points.

And if you wouldn't mind responding, just very briefly, on Star Alliance. You did mention things in your -- or in the presentation, but I was wondering when might that be finalized -- that is to say you're doing the Star Alliance? And that's it.

Okay, Nick. This is Libano. Nick, what -- the thing is, regarding CASK, is a first question.

Yes.

As you saw, we reduced the CASK, ex-fuel, in dollars.

Yes.

Because we reduced it by 8%. We reduced the total CASK by 11%, ex-fuel, in dollars, 8%.

Yes.

This trend -- the trend is to continue to reduce CASK ex-fuel in dollar terms because despite in all the things we have been doing in the Company, we have a very strong cost program, cost cutting program in the Company, in all areas; admin costs, operational costs, including CapEx. We are doing what's necessary to maintain our competitiveness, and we are -- and we will link -- remind you, we reduced the flown hours.

By reducing flown hours, even with that, despite this, we reduced the CASK. We are prepared to increase flown hours when the market recovers, and the market will recover. And by increasing flown hours, there will be another reduction on CASK ex-fuel. So, we are going to continue to reduce CASK ex-fuel in dollars.

Linking the strategic end-projects, like you asked about (inaudible) and Star Alliance. We changed our -- or we are changing and implementing the (inaudible) therefore, on a commercial basis, that's roughly to comply with the Star Alliance. The Star Alliance, we believe, will be able to change to be full -- in full compliance by the end of the first quarter of 2010.

So beyond April, we will be there and connecting with more than 170 airports worldwide. We will codeshare with -- yesterday, we reported our Air China codeshare -- two days ago, which was very important for us because we can fly to Asia, changing equipment in Madrid, with -- and changes to Air China.

It's very important for the -- for the business traffic that we have in Brazil to China, so we are very confident with this. And in terms of estimates, we believe on a full year basis, we were at least $60 million in revenues by entering on Star Alliance. This is very conservative, because we are not considering other intangible gains in terms of brand awareness, but just realistic base, at least -- 60, not 600, sorry -- $60 million in net served revenues.

Your question regarding the -- which assets -- permanent assets reevaluation. Under IFRS, once in a year, at year-end -- they're reported by year-end, we make a reevaluation. We -- the rule is we haul and we export independent assessments with an expert to reevaluate the assets and we set them by year end.

If we have, because their assets are very liquid, we are talking mainly in (inaudible). Because they are dollar linked, if we have only on an interim basis, meaning on the quarterly basis, exchange variations -- important exchange variations, we must adjust them to the effects of the quarter. That's why we have these BRL300 million reevaluation back in -- on this quarter, because real is stressed against dollar. So, that's on a sequential basis.

But the rule is, once in a year, reevaluation. Quarterly gains adjusting by FX. This is a pretty straightforward rule of IFRS.

Perfect. That was helpful. Thank you.

Thank you.

And your next question comes from the line of Luiz Campos from Credit Suisse. Please proceed.

Hi, this is actually Natalia. My question is could you provide the same data that you provided for yields on domestics? So how much a decrease before the international markets? So, how much has it decreased or increased in the third quarter in July and August, I mean?

Okay. We had -- you are talking about the estimates for the third quarter, no? We believe or on the (inaudible) schedule we mentioned, we will be able to increase, on a sequential basis, something like 10%. And on the domestic, (inaudible) speaking, the international. We don't have these yet because what we are doing is we are trying marketing -- buying market to increase yields, but without jeopardizing our load factor. But the trend is to increase in dollar terms, but we are not sharing an estimate so far with this.

Okay. Thanks. And just a second question. The mark-to-market of your fuel hedges, is that included in your financial expenses, or in the other line that you highlighted in your IFRS statements?

In IFRS, this is considered an operational, immediately below the operational cost and before financial expense, you have is specific line there, which is fair value of derivative instruments.

So the 1.2 gain on financial revenues, this all about FX on its dollar-denominated debt.

Yes, FX is financial.

Okay.

Hedged gains are on the operational -- immediately below operational and before the financial.

Okay. Thanks.

Okay.

(Operator Instructions)

Ladies and gentlemen, this concludes the question and answer session. At this time, I would like to turn the floor back to Mr. Barioni for any closing remarks.

Ladies and gentlemen, on behalf of TAM, I would like to thank you very much for your participation in this webcast. Thank you.

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