LATAM Airlines Group SA (LTM) 2009 Q4 法說會逐字稿

Good morning. My name is [Wes] and I will be your conference operator today. At this time I would like to welcome everyone to the LAN Airlines' fourth quarter 2009 earnings conference call. All lines have been placed on mute to prevent any background noise. Thank you I'll now turn the conference over to Mr. Pete Majeski of i-advize Corporate Communications. Please go ahead sir.

Thank you Wes and good morning everyone. Today LAN Airlines' management will be discussing fourth quarter and full-year 2009 earnings on this January 27, 2010. Today's conference will be based on the earnings release distributed yesterday. This is an analyst and investor call only, so if you are a member of the media we request that you refrain from asking questions and contact LAN directly.

In addition, we would like all participants to view an accompanying presentation on the Internet at www.lan.com within the Investor Relations section. If you are having trouble viewing the presentation please contact the Company after the call so the presentation can be mailed to you or call us here in New York at 212 406 3694.

Please note that certain statements regarding the Company's business outlook and anticipated financial results constitute forward looking statements. These expectations are highly dependent on the economy, the airline industry, international markets and therefore are subject to change.

At this time it is my pleasure to turn the call over to Mr. Alejandro de la Fuente, LAN's Chief Financial Officer. Mr. de la Fuente, please begin.

Thank you Pete. This is Alejandro de la Fuente, Chief Financial Officer of LAN and with me here in Santiago are Luis Eduardo Riquelme from our International Passenger Division; Alvaro Carrill from our Cargo business; Andres del Valle our Corporate Finance Director; Gisela Escobar, our Investor Relations Officer.

We hope that you have all been able to access the webcast presentation that is available on our website for a better understanding of our results for the fourth quarter and for the year 2009.

On slide three you can see the main highlights of LAN's results for the full year 2009. We are very happy to report that despite the global crisis that affected the industry during 2009 LAN ended the year with very solid operational results at $231 million in net income.

As you know 2009 was a difficult year. The global recession had a very negative impact on our Cargo operations. The Cargo business was also affected by reduced salmon export from Chile as a result of the ISA virus which devastated the industry. As a result Cargo revenues for the year declined 32%.

LAN's Passenger business was less affected by the global downturn, mainly due to the strength of our domestic market, but Passenger yield tougher and [caused] a revenue decline of 7% during the year. During the year our Passenger traffic was also negatively affected by the swine flu epidemic on our regular routes within Latin America.

This has been one of the most serious crisis in airline industry. And we have proved that our flexible and (inaudible) business model is resilient even under the most difficult economic conditions.

In addition to the external shocks during 2009, our results were negatively impacted by significant fuel hedging losses. The fuel hedging loss for the year amounted to $129 million compared to fuel hedging gain of $35 million in 2008. However, even including this loss LAN increased its EBITDAR margin from 22.1% in 2008 to 22.5% in 2009. Excluding this loss, LAN achieved an EBITDAR margin of close to 26% (sic - see presentation) demonstrating the strength of our operations under this difficult operating environment.

On slide four you can see the main highlights of LAN's results for the fourth quarter. Fourth quarter results clearly reflect the recovery that LAN has seen in both Cargo and Passenger operations. Operating revenues saw a moderate decline of 4%; margin was strong, with operating margin reach -- with operating margin reaching 17.8% and EBITDAR margin reaching 27.3%.

Net income for the quarter was $110 million. This is a decline of 23% as compared to fourth quarter 2008. It is important to remember that in the fourth quarter 2008 LAN recognized its [$59] million one-time charge related to fee agreement with the DoJ in relation to the Cargo business investigation.

Turning to slide five you can see in more detail the valuations and EBITDAR margins within the fourth quarter. As you can see in this graph the main impact on margins was the decline in yield during the quarter. This was offset in part by an increased in our load factor and by lower fuel prices, as well as increased efficiency, although we feel LAN was able to show solid operating efficiency despite the ongoing global crisis reaching a 27% EBITDAR margin.

Taking a closer look at the Passenger business this quarter on slide six, you can see in detail the evolution of this business. Traffic growth of 13% was driven by strong recovery in long haul and regional traffic. Load factors increased 3 points reaching the very high level, almost 79%.

Yields continued to decline as compared to fourth quarter 2008, mainly due to a weaker economic environment and lower fuel surcharges. However, it is important to note that yields continue to recover on a sequential basis, improving [7%] over the third quarter 2009. LAN continues to expand passenger capacity throughout its network.

On slide seven you can see a breakdown of passenger capacity growth during 2009. ASK growth reached 10% driven by [22%] growth in the domestic markets of Chile, Argentina, Peru and Ecuador, as well as a 6% increase all international routes.

Domestic operations in Chile, [Peru and Ecuador] grow passenger growth in 2009 and now represent over 30% LAN's Passenger operations. During the fourth quarter we have seen domestic growth becoming more moderate, partly because of the higher comparison base, but also due to our limited ability to grow capacity in this market.

Meanwhile international traffic is beginning to recover. We were able to increase capacity accordingly with the two Boeing 777s delivered during the fourth quarter. In future years LAN's passenger capacity deployment and growth will remain highly diversified, providing flexibility to adjust capacity to the demand conditions in [different] market.

Turning to slide eight on the Cargo side, we saw an important improvement in the global Cargo scenario during the last two months of the year. In December LAN Cargo traffic increased [24%], which leads to an 8.5% increase in profit for the quarter. Together with a moderate increase in capacity, this leads to an increase of 3.2 points in load factor, ending the quarter at 72.8%.

Despite a recovery in traffic yields decreased 17.7% in the quarter, reflecting lower fairs and fuel surcharge. However, yields are beginning to show a positive trend with a 10.5% improvement over the third quarter levels.

In addition to the global decline in Cargo traffic LAN Cargo is still affected by the decline in the salmon exports from Chile as a result of the ISA virus. This effect has been compensated in part by the operations in Columbia and in the Brazil domestic markets, as well as by a stronger European operation with the two new Boeing 777 freighters. These new operations put LAN Cargo in a very good position to benefit from the recovery expected in the Cargo business during 2010.

On slide nine you can see in detail the evolution of LAN's costs. Total expenses decreased 2.3%. On a unit basis costs per ATK decreased 9.4%, costs per ATK ex.-fuel decreased 4.6% as compared to the fourth quarter of 2008. The decrease in costs per ATK is due mainly to lower fuel prices which has a reduction of 10.9% in the quarter.

Cargo and Passenger commissions continued to trend positively due to a decreasing traffic revenues coupled with a 0.8 point reduction in other commissions and a high penetration on direct sales.

LAN's fleet cost decreased in the quarter mainly due to the lower [operating] leases in the Cargo business and a lower interest rate related to fixed financing. These effects were offset in part by higher personnel costs, which was reflecting the appreciation of local currencies in Latin America.

During 2009 LAN has worked on several initiatives to improve its operating efficiency. One of these has been the installation of [windlass] on all our Boeing 737 fleet, all passenger and cargo. These devices generate a saving of between 4.4% and 4.8% in fuel consumption. So far 22 of LAN's Boeing 737s are operating with windlass. The project will be completed in September 2010 with a total of 36 aircraft converted.

The windlass has generated savings of 2 million gallons in 2009 and are expected to generate savings of 10 million gallons for 2010, providing significant efficiency for our long haul and Cargo operations.

On slide 10 you can see our fuel hedging position for 2010. We have hedged close to 50% of our consumption for the first half of 2010, and approximately 30% for the second half of the year. We have used a combination of hedge, including swaps and collars, at levels of around $80 per barrel. We estimate that under the current demand environment between 50% and 60% of the increase in fuel prices can be passed on to fares in both the Passenger and Cargo businesses.

LAN's strategy is to hedge 40% to 50% of our fuel consumption at prices that guarantee our budget for the year, taking advantage of market conditions -- [marketable synergy]. Short-term, our policy is to be hedged at about 6% for the coming quarter.

Now I would like to highlight a few strategic initiatives that LAN has been focused on during 2009. One important development for us during this quarter was the agreement reached with Sabre, one of the better operational system solutions providers in the industry. December LAN announced its agreement to acquire the most advanced technology in reservation and distribution systems. This will allow us to offer itineraries that best fit the needs of our passengers and a simple, bigger, streamlined and (inaudible) to both at the airport and in sales and reservation.

Through this agreement, LAN is taking a major step in terms of innovation by implementing world-leading technology in the industry, improving the efficiency of the commercial and operational processes involved in the service we provide to our customers.

This agreement includes the process of implementation, migration and technological adjustment that will take approximately two to three years. During the implementation period, the Company will continue using the current platform for reservation and distribution system.

On slide four, you can see a summary of the finance activities for LAN -- that LAN completed this year. In spite of the difficult economic scenario, LAN was able to access the capital markets at very attractive interest rates. Most of our long-term debt is at fixed rate, with an average cost of debt of 4.95% for 2009, and we expect it to remain below 5% for coming years.

Besides raising $250 million through bi-lateral loans during 2009, LAN completed the financing for three Boeing 767s, supported by Ex-Im Bank and accessed capital markets with the new Ex-Im Bond product. We also arranged PDP financing for 15 A320 family aircraft to be delivered between 2010 and 2011, and completed the refinancing for spare engines supported by Ex-Im Bank.

In addition, during the year we have increased our liquidity, and in the fourth quarter with $792 million in cash, representing 22% of revenues. We continue to maintain our solid financial position, as reflected by our BBB international credit rating. And LAN remains one of the few investment grade-rated airlines in the world.

This year's access to the capital markets at favorable conditions sets LAN apart from the rest of the industry and represents a very important aspect of our business model, especially under a difficult economic environment.

Now, turning to slide 13, we will focus on our fleet initiatives and our fleet plan for the future. As we announced in December, LAN placed an order for 30 new A320 family aircraft for LAN domestic and regional Passenger operations. These will be delivered between 2011 and 2016, as shown on the slide.

In addition, LAN's fleet plans include the sale of five aircraft, 318s, in 2011. We believe this order is of strategic importance to ensure LAN's growth in domestic and regional operations for the coming years.

Please turn to slide 14 to see our fleet plan for the coming years. During the quarter LAN received two Boeing 767 passenger aircraft for our long haul operation, and ended the year with a fleet of 96 aircraft. For 2010, LAN expects to receive nine new aircraft, including eight A320, family aircraft, and one Boeing 767 for our Passenger operation.

LAN has an outstanding order for 32 Boeing 787s, the first six of which are operating leases. These are currently scheduled for delivery starting at the end of 2013. LAN has significant growth opportunities in our long haul operations. And we are permanently looking for opportunities to grow and renew our long haul fleet.

Please turn to slide number 15 to see our estimate for ASK and ATK growth this year. For now, we have not changed our capacity outlook compared to what we told you in our last conference call. For 2010, we are expecting capacity growth in the Passenger business of approximately 10%, driven especially by expansion in international markets.

LAN is increasing its flight frequencies on many important international routes, including Ecuador [to Madrid] and New York, [Santiago to] Miami and Lima and Lima to Madrid.

In addition, today we are announcing the opening of a new destination in the United States with the launch of our operations between Lima/San Francisco. This operation will begin in July with four weekly frequencies between these cities, also connecting with Santiago, Sao Paulo and Buenos Aires.

On the Cargo side, we are expecting capacity growth between 16% and 18% for 2010; reversing the decline experienced during 2009. We do not have any freight deliveries during 2010. This growth will be driven by increased capacity in the (inaudible) of passenger aircraft, as well as by increased utilization of the freighter fleet, especially of the two 777 received during the second quarter 2009.

Overall, we are seeing strong positive trends in both the Cargo and Passenger business, and are confident that this year will present important growth opportunities. LAN is well positioned to benefit from the recovery of the global economy, maintaining its solid position in the markets we operate.

For 2010, the Company expects to continue applying its successful strategy that will enable us to maintain profitability in line with expectation. We believe we are in a good position to continue growing [variance], implementing cost efficiencies and creating value for shareholders.

Now we will be pleased to answer your questions.

(Operator Instructions). [Susan Lindhurt] of Banchile Investments.

Good morning. I have two questions that I would like to ask. My first question is, given the likely further appreciation of local currencies during the first semester of 2010, what are your expectations regarding the development of Passenger and Cargo yields for the coming year?

The second question will be, given the $28 million loss related to the devaluation of the Bolivar in Venezuela, can you specify the percentage of consolidated ATK where it is exposed to the currency? Thank you.

Okay and hi, Luis Riquelme here from international business. In terms of international business, the impact, I would say, of the currency movement is rather -- not very important. We normally sell in US dollars in almost every country. There is some impact -- some positive impact in terms of yields in sales in Chile, Australia, and Europe. But in the overall, the total network, I would say that it's not very important.

In terms of the domestic market, in Chile we have seen some impacts in terms of the yields. But also, I wouldn't say that that's the most important issue for next year. I would say the important issue regarding yields has to do with the recovery of the market and with the recovery of business traffic.

Regarding yields on the Cargo side, it's the same situation than in the Passenger side. We sell all of our cargo traffic, it's in US. The domestic portion of cargo is very, very little, so that's the only thing that's affected by the appreciation of the local currencies. So, 95% of our revenues are dominated in US or euros.

Regarding your question on Venezuela, we -- this quarter, and as you mentioned, we recognized a one-time charge related to the devaluation of the Venezuelan currency. Venezuela represents about 2% of our total Passenger operation. And it's important to note that of that $28 million that we recognized in the fourth quarter, we had been making certain provisions regarding the risk of this possible devaluation, and we had about $20 million of that provisioned during 2008.

Thank you.

Mike Linenberg of Bank of America.

Yes, hi. Good morning everyone; two questions here. What when -- you've given the capacity numbers for 2010. When we look at the March quarter, what should we be using for year-over-year capacity, both Passenger ASK and Cargo ATK; what are the growth rates?

Okay, hi, Mike.

Hi.

In terms of Passenger ASKs, we're thinking in the total growth of around 10%.

Okay.

With a bigger growth in the international markets, where we have seen the biggest recoveries in the markets.

One important issue is that we have delayed some 767 delivery of our aircraft during the middle of the crisis to October. And now we have been -- we have rescheduled the delivery for that aircraft for February of this year. And that is now absolutely related with the recovery in the markets we have been seeing and we forecast for this year.

In terms of ATKs for Cargo, we -- as Alejandro mentioned before, we will be growing around 16% to 18% in [the year].

Okay. But, actually, I'm looking for March, March quota for both Passenger and Cargo, not -- the full-year numbers I have.

First quarter?

Yes, first quarter.

The first quarter in Cargo --

Yes.

Was about 25%. This more than the year-end because we are going to be flying the 777s that we didn't have in this quarter.

That's probably -- and then Passenger in the March quarter? Do we know what Passenger is?

Yes. In the international markets we are a little bit below 10%.

Okay.

The domestics I would say the growth will be around a little bit less than that; 8% or something around that.

Okay, that's perfect. And then, my second question, the rate of improvement in yields that we have seen through 2009, as we think about 2010 and maybe what you're seeing right now, the comps do get easier as we move through the year and they get -- it looks like on the Cargo side, they get exceptionally easy as we move into the next quarter or two. When do we start seeing yield gains, year-over-year gains? Or, maybe, are you starting to see yield gains right now? And I'd like just commentary on both the Passenger side and also on the Cargo side.

Yes, on the Passenger side, I would say definitely we are going to see a positive trend starting in the first quarter. The first quarter, I would say, these trends will be lower than for the rest of the year. Basically, because this is a high season and when the crisis started in 2008, part of the inventory was already sold for that quarter, especially for January and February, or part of February. So we will see an improvement in the first quarter, and we will see better numbers from second quarter onwards.

Okay, that's very helpful. And then, on the Cargo side?

On the Cargo side, we are definitely seeing improved yields, especially on the south-bound cargo; south-bound cargo flying from North America to Brazil. Mainly, that's very strong and yields are going up.

The problem is that the north-bound is rather weak, mainly because of the lack of salmon out of Chile. So the north-bound yields are weaker and we don't see them to recover, but the south-bound yields will grow. All-in-all, as an average the yields we are going to see, a recovery in yields definitely but more, as I say, on the salmon side.

Okay. Okay, a very good quarter. Thank you.

(Operator Instructions). Stephen Trent of Citi.

Hi. Good day everybody; two questions for me. The first question pertains to Colombia. I guess, several weeks back when we were there we'd heard that local airline, AIRES, had been adding capacity to the market and cutting fares, and I'm wondering what you are seeing on that landscape.

Well, we don't -- as you know, we don't -- we only serve Colombia on international routes from Santiago and from Lima and we don't operate in the domestic market in Colombia. So we don't compete directly with that airline.

Fair enough. With respect to international, let's say the Colombia business as well, any color on what might be happening to Cargo yields there?

Well, Cargo yield in Colombia is a very export market; the largest export market in South America. And as all south-bound cargo is growing, and we don't have much cargo in the rest of South America, mainly because of the salmon problem that we mentioned many times before, all of this capacity will go to the Colombian and Ecuadorian markets for picking up flowers. This will mean that we'll be in excess of capacity in this market, and the rates and the yields there will not recover in that market. That's my -- what I see.

Okay, fair enough. Thank you very much.

Welcome.

Caio Dias of Santander.

Good morning gentlemen. My question is regarding the capacity expansion you are planning for the following years. I see on the chart of the presentation that there is a lot of capacity being added in 2011, when you plan to increase your fleet by 18 aircraft. Most of them should be the A320 you just posted an order.

My question is, are you forecasting a strong recovery in demand, especially in the domestic markets where you tend to operate these aircraft, 2011? Or most of these aircraft will be used to replace the current fleet?

Yes, hi. Yes, you see an important increase in terms of the narrow body aircrafts in 2011. I would say that has to do with two things. One is, of course, the recovery in the markets we are expecting into the near future. We expect that the regional markets in Latin America will experience an important growth in the following years. We see a high potential there. There is an opportunity to increase our operations, stimulate market and develop a market that when you see compared to similar markets in different areas of the world has a strong potential for growth in the future.

The other thing is that during the crisis, many companies delayed their orders and Airbus has a lack of slots in 2012. So part of the growth that you see in 2011 are aircraft that are received by the end of the year and means growth for 2012. The idea is try to move some of those aircraft into the following year as the slots are being freed by other airlines. We are confident that that will be possible.

But even if that is not possible, what we see is just some few months' anticipation in terms of the ideal months where we want to receive the fleet, but that was better to have the fleet plan to delay them for 2013.

The (inaudible) is there; it's that we were able to resell some A318s and reduce that aircraft in line with our expectation of the growth in the market in the future. So -- and that meant increasing in terms of other kind of aircraft at start of that negotiation.

Thank you, very helpful. My second question is regarding the Brazilian domestic market. We are about to -- here in Brazil the restriction to foreign ownership is about to be eased. The Government should increase it to 49%. Given that, does LAN intend to increase its stake in the Cargo company it controls here? Or should LAN take any other step towards the Brazilian domestic market?

Yes, we are already operating in the main route regarding domestic market in Brazil between Manaus and Sao Paulo.

We increased our operation. We started in March last year with one daily flight, 767. We increased it to two daily flights. And we are looking for other routes, domestically, yes; mainly to the northeast, or probably to the south. But we are analyzing whether we are going to be able to do that. But, yes, we are looking to more destinations and to do more operations domestically in Brazil.

And in terms of Passenger, as we have mentioned in the past, LAN is interested in expanding its regional footprint in Latin America. We are constantly looking at the opportunities for further expansion in other markets, but for now we don't have anything new to report.

Okay, thank you very much.

You're welcome.

Brian Chase of JPMorgan.

Yes, thank you. Congratulations on the results for the fourth quarter. Could you please discuss how El Nino is impacting flower shipments out of Colombia, specifically to Europe, and how this may impact your ability to offset declines in Chile related to the salmon crisis?

Sorry, I'm not sure I understood correctly. You asked, regarding Europe, your first question.

Yes, I was wondering how El Nino, which is causing draughts in Colombia, and we've seen about a 30% reduction in the production of flour, how that maybe impacting shipments out of Colombia and specifically to Europe? And how that may be affecting your ability to offset decline in Chile related to the salmon crisis?

Okay, yes. We haven't seen any changes in the -- in production or in any expectations that it's going to be a change in the production of flowers regarding to the El Nino. Yes, there have been production problems but they, for many different reasons and none of them that I have heard of, is related to El Nino.

So they -- what the producers in Colombia expect, or what was the main problem in the last year was mainly the demand in the US -- mainly in the US, because demand for flowers in Europe was stronger than in the US and they see a recovery there.

So we expect an increase in production in Colombia, not a huge increase but roughly around 5% or so. And that is enough for -- because still a huge amount of cargo, is enough to absorb all the capacity that's been moved from -- not only from us but other competitors, from other markets in -- especially Chile, that is not going to be flying salmon, not in this capacity as I say, to Colombia.

Great, thanks. And just a quick follow-up question regarding the expansion plans in the region. Is there any progress regarding expansion in the domestic passenger market in Colombia?

No. No, no, we are [planning] no plans for the moment, but we are continuously looking for opportunities to enter to new markets. So maybe in the future we will apply to start the Passenger domestic operation in Colombia. But no, there is nothing right now.

Great, thank you.

Welcome.

(Operator Instructions). Augusto Ensiki of Morgan Stanley.

Hi, good morning. Just a couple of quick questions if I may? Firstly, in the other income line on the expense you have $25.1 million loss, of which $28 million was the devaluation. What was -- what else is in that line besides that one-time charge?

The remainder is mostly exchange rate differences, so the adjustment of our balance sheet accounts for exposure to fluctuations between local currencies and the US dollar. It's usually not a very relevant amount for us and for the most part we are pretty much naturally hedged and most of our operation is in US dollars. But there is usually a small amount in that line in each quarter. As well as that, also where we recognize profits and losses from ownership in other companies that are not consolidated.

And so then the interest expense line is purely interest expense right, there's no FX in there?

No, there's no FX in interest expense.

And then secondly, just if you have any news regarding anticipating deliveries of the 787s? I think there was a news article about that recently, if you have any update to that?

No. As I mentioned, we have an outstanding order of the two Boeing 737. But our plan has significant global opportunities in our overall operation. We are permanently looking for opportunities to grow and renew our fleet. However, for the moment we have no comment on the [chart changes] in our 787 deliveries. Yes? Sorry?

No, sorry, I missed that comment; sorry about that. So currently just the first deliveries then are they still scheduled for 2013, is that it?

Yes.

Okay, thank you very much.

You're welcome.

At this time I'm showing no further questions. And I'll turn the conference back to Mr. de la Fuente.

Okay, thank you. Thank you again for joining us today. Please feel free to contact our Investor Relations Department if you have any additional questions. We look forward to speaking with you again soon. Thanks very much and goodbye.

And ladies and gentlemen that concludes LAN Airlines fourth quarter 2009 earnings conference call. We appreciate your time and attention. You may now disconnect.