LATAM Airlines Group SA (LTM) 2010 Q1 法說會逐字稿

Good afternoon. My name is Melissa and I will be your conference operator today. At this time, I would like to welcome everyone to the LAN Airlines First Quarter 2010 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. Thank you. I will now turn the conference over to Miss Maria Barona of i-advize Corporate Communications. Please go ahead.

Thank you, Melissa, and good morning. Today, LAN Airlines management will be discussing first quarter 2010 earnings as per the press release distributed yesterday. This is an analyst and investor call only. If you are a member of the media, we request that you refrain from asking questions and contact LAN Airlines 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're having trouble viewing this presentation, please contact the Company after the call so that the presentation can be mailed to you or call us here in New York at 212-406-3691.

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, Maria. This is Alejandro de la Fuente, Chief Financial Officer of LAN. With me here in Santiago, are Ernesto Solis from our Passenger Division, Alvaro Carrill from our Cargo business, and Andres del Valle from our Corporate Finance Department, and 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 first quarter 2010. On slide three, you can see the main highlights of LAN's results for the first quarter 2010. LAN's first quarter results reflected strong recovery in demand, especially in the cargo business. The passenger business also showed solid growth despite the negative effects of the earthquake that hit Chile at the end of February. The revenues increased 17% and led to increasing margins for the quarter. Both operating margins and EBITDAR margins increased reaching 13.8% and 24.1% respectively. It is important to note that operating income for the first quarter of 2009 included a US$58 million fuel hedging loss which affected operating margins last year. For the first quarter 2010 the fuel hedging loss was only US$2.6 million.

Our net income for the period was US$88 million, increasing 35.8% compared to the first quarter 2009.

Turning to slide four, you can see in more detail the variations in our EBITDAR margin during the first quarter. As you can see in this graph, the strong recovery experienced in the quarter led to better margins mainly through the expansion of our operations, increased yields, and higher load factors. However, these positive effects were partially offset by higher fuel prices. Overall, LAN was able to show solid operating efficiencies taking advantage of the global recovery and reaching the 24% EBITDAR margin.

Taking a closer look at passenger operations this quarter, on slide five you can see in detail the evolution of this business. Traffic growth of 6.7% was driven by stronger quarterly international traffic. Load factors increased 1.4 points reaching levels over 29%. Yields and unit revenues showed an important increase of 6.6% and 8.4% respectively over first quarter 2009. These increases are related to a better economic environment and higher fuel surcharges driven by increasing fuel prices during the quarter.

Please turn to slide six. On February 27, Chile was struck by an earthquake which caused devastation throughout the country, especially in the south of Chile. As a result of the earthquake, the terminal building at the Santiago International Airport suffered significant damage leading to the cancellation of all passenger operations for three days. On March 2nd, we were able to gradually resume flights, but operated for most of the month of March with provisional facilities. The reduced operations resulted in a traffic decline of 8% during March related with all passenger traffic with originating destination in Chile which represents about half of LAN's passenger base case.

Cargo operations were not materially affected by the earthquake, nor were the passenger operations of LAN and its subsidiaries in Peru, Ecuador and Argentina. We estimate the impact of the earthquake on first quarter results is a net loss of approximately US$25 million. We have continued to see some weakness in and out of Chile as a result of the earthquake during April and May and continue to monitor the evolution of demand during the second quarter. However, we believe that during the second half of the year, demand should show a strong recovery. Therefore, we have not made any changes in our capacity expansion plans for the year.

In addition, LAN suffered limited damage to its buildings, equipment, and aircraft. All of LAN's buildings, equipment, and aircraft are insured including fire and earthquake damage. The specific amount of the insurance deductible is approximately US$3 million. LAN continues to expand passenger capacity throughout its network.

On slide seven can see a breakdown of passenger capacity growth during the quarter. ASK growth reached 5%, driven mainly by 15% growth in international local markets which represent 48% of total passenger capacity. Our operations in the Chilean as well as the regional market were affected by the earthquake during March and show a decrease in capacity over the period. In future years, LAN's passenger capacity deployment and growth will remain highly diversified, providing flexibility to adjust capacity to demand conditions in different markets.

Turning to slide eight, on the cargo side we have seen an improvement in the global cargo scenario that started in the last two months of 2009. In the quarter, cargo traffic increased 29% which coupled with a 52% increase in capacity led to a 3.8 point increase in load factor ending the quarter at 68.7%. Besides the increase in traffic, the recovering cargo market led to an increase of 4.9% in cargo yields, following the positive trends of the industry. As a result, cargo's unit revenues showed an increase of 10.8% in the quarter.

Please turn to slide nine. Growth in the cargo business is being driven by strong import markets in the region as well as increased operations to Europe. We have more than doubled our capacity to Europe with our new Boeing 777 fleet and also continue to expand our domestic operations in Brazil. 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 10, you can see in detail LAN's costs for the first quarter. Total expenses increased 16.7% in the quarter driven mainly by a 45.9% increase in fuel costs offset in part by a smaller fuel hedging loss. Wages increased 19.2% driven by an appreciation of local currencies as well as higher headcount. Fixed costs also increased due to the incorporation of the new aircraft, especially the two leased Boeing 777 Freighters received in the second quarter 2009. On a unit basis, cost per ATK increased 3.5%. The increase in cost per ATK is due mainly to higher fuel prices during the quarter. Cost per ATK ex fuel increased 2.9% as compared to the first quarter 2009 driven mainly by higher wages as a result of the appreciation of local currency.

On slide 11, you can see our fuel hedging positions 2010. We have hedged close to 50% of total consumption through the rest of 2010 and approximately 10% of the first quarter of 2011. We have used a combination of hedge using swaps and collars at levels of around US$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. Our strategy is to hedge 40% to 50% of our fuel consumption at prices between US$80 and US$85 per barrel, taking advantage of market opportunities. In the short term, our policy is to be hedged at about 50% for the coming quarter.

On slide 12 you can see LAN's financial highlights for the quarter. LAN ended the quarter with US$657 million in cash, representing over 17% 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. LAN was able to access the capital market at very attractive interest rates for the financing of one Boeing 767 supported by EX-IM Bank. In addition, we recently mandated long term financing for 15 A320 family aircraft to be supported by European ECAs. Easy access to debt and capital markets with several conditions set LAN apart from the rest of the industry and represent the very important aspects of our business model, especially under the difficult economic environment. Most of our long term debt is at fixed rate with an average cost of debt of 5% for the first quarter.

Now turning to slide 14, we will discuss recent relevant information about the Company. This slide shows LAN's ownership structure as of March 31st, 2010. The first quarter 2010 the Pinera Group divested an 18.3% ownership stake in LAN though a partial sale to the Cueto Group and two auctions in the Santiago Stock Exchange. In addition, an agreement was signed between Pinera Group and Bethia for the sale of AXXION which owns 8% of LAN. This transaction is expected to be finalized shortly.

Now turning to slide 15, we will focus on our fleet initiatives and our fleet plan for the future. In March LAN announced an adjustment in the delivery schedule of ten Boeing 787 Dreamliners. With this new delivery schedule, LAN will receive its first two Dreamliners in the first half of 2011, becoming the first airline in the Western Hemisphere to operate this aircraft. It is an extremely important event for LAN not only from a product perspective, but also because the 787 is between 10% and 15% more efficient on a cost per ASK basis than any other long haul aircraft that LAN and its competitors currently operate.

On slide 16 you can see our fleet plan for the coming years. During the quarter, LAN received one Boeing 767 passenger aircraft for our long haul operations. We ended this quarter with a fleet of 97 aircraft, 86 in the passenger business and 11 dedicated freighters. For the rest of 2010, LAN expects to receive eight A320 family aircraft.

Please turn to slide number 17 to see our estimates for ASK and ATK growth for the coming years. Our capacity outlook for 2010 remains unchanged. For this year we are expecting capacity growth in the passenger business of approximately 10% driven especially by expansion in international markets and the strengthening of our hub in Lima as well as continued growth in our domestic markets. For 2011 we expect capacity growth of approximately 12%. For this year, LAN is increasing its frequencies on many international routes. We have already announced the opening of two new destinations. We will start operations between Lima and San Francisco in July with four weekly frequencies between the cities, also connecting Santiago, Sao Paulo and Buenos Aires. In September LAN will start operations between Santiago and Paris via Madrid with three weekly frequencies.

Regarding our domestic operations, in September LAN Ecuador will start daily operations to the Galapagos Islands from the city of Quito and Guayaquil. Additionally, on May 10, LAN Argentina will launch three daily flights between Santiago and Aeroparque Metropolitano Airport in central Buenos Aires. These frequencies were previously served from Ezeiza Airport in Buenos Aires.

On the cargo side, we are expecting capacity growth of approximately 18% for 2010, reversing the decline experience during 2009. We do not have any freighter deliveries due in 2010. This goal will be driven by increased capacity in the bellies of passenger aircraft as well as an increasing utilization of the freighter fleet, especially the two 777s received during the second quarter of 2009. For 2011, we expect capacity growth for cargo to be around 8%. Given the strength in the cargo business, we are evaluating additional capacity expansion for 2010 and 2011 through additional aircraft purchases and/or leases in the short term.

Overall, we are seeing strong positive trends in both the cargo and passenger businesses and are confident that this year will represent important growth opportunities. LAN is well positioned to benefit from the recovery of the global economy, maintaining its solid position in the markets it operates in. For 2010, the Company expects to continue applying its successful strategies that will enable us to maintain profitability in line with expectations. We believe we are in a good position to continue growing revenues, implementing cost efficiencies, and creating value for shareholders.

Now, we will be pleased to answer your questions.

(Operator Instructions) Nick Sebrell, Morgan Stanley.

Hi, good afternoon, gentlemen. Could you talk a little bit about the Chilean ops? Have they returned completely to normal? And linked to that, could you talk a little bit about the increase in marketing expenses that you described in one of your slides? Was that all at involved with or because of promotions to run to fill planes again following the earthquake? Or is that related to something else and do you foresee marketing expenses continuing at a higher level going forward? Yes, that's it. Thank you.

Hi, Ernesto Soleis from passenger division. Yes, I mean the earthquake really hit a lot the operation in Chile, the domestic market. Basically the load factor went down at least 10%, 15% in the first week, so we are making some promotional efforts in the coming weeks, just pushing the demand in Chile and the other general point of sales were flights to Chile. We increased in a number of ways. We think the market is recovering. The scale for domestic market is going to be full recovery at the end of May. What we are seeing in the second quarter is that demand is coming back, so probably we are going to try to slow down the marketing effort that we're running at this moment.

Okay, so there might be some upside with respect to promotional costs and marketing efforts as things further normalize. Are operations 100% now in Chile?

Yes, just to give you some kind of highlights, our marketing spends are somewhere really I would say weak or small. So yes, we are going to increase but it's a small amount of money. You're talking about the kind of (inaudible) we have in the operations.

Okay. And if you don't mind a follow-up question, I read somewhere that you guys were considering maybe selling your A318s or taking them out of your fleet. Is that accurate or what's the plan for your A318s? Are you going to buy more?

Yes, actually we are forecasting for the next year that we are going to increase a lot the capacity from the Airbus A320 family and part of the deal that we have with Boeing is to take out some Airbus A318 basically because the demand that we are seeing in the market that we are running with that plane is so high that we realize that the kind of plane that we were using wasn't upgraded, so we [were a couple of months] making some kind of study how we stay efficient. So yes, you are right, we plan to take out five Airbus A318 next year. But we are going to replace for Airbus 318, Airbus 320 what we finish basically the plane that we need for the domestic operations and the regional operations.

Okay, so you're up gauging those. Okay. Thank you very much.

Duane Pfennigwerth, Raymond James.

Hi, good afternoon, Alejandro. Just wondered on the cargo business, your unit revenue growth in the first quarter, how should we think about that growth trend going forward? Because your comparisons get substantially easier in the second quarter and then the third quarter. If I look at unit revenue declines last year, that comparison gets about 11 points easier sequentially. So could we see potentially 20% unit revenue growth on the cargo business?

Yes, we are forecasting -- this is Alvaro Carrill, sorry, from the Cargo Division. Yes, we are forecasting that our revenues for the second and third quarter will be up around say -- let me check here. Yes, more like 30%, so close to the 30% figure because last year the second or third quarter of last year was the bottom of the crisis in terms of cargo. So the increases will be this year compared with last year will be very high, as I say in the 30% figure I think. And on the fourth quarter then the increase will be not as big because of course last year's fourth quarter was already up and so the comparison would be totally different.

Thank you. And do you have any feel for what total capacity is on the cargo side? Not just your capacity growth, but total supply on your network?

No, we think that other companies are growing roughly the same as we are growing. So we are growing roughly around 20% in terms of ATKs and we think that the other companies that are operating in the region have also increased their capacity roughly the same amount. But some of them are more and some of them are a little less, but I think we all in average are increasing capacity around that 20% mark.

Thank you.

(Operator Instructions). Caio Dias, Santander.

Good morning, gentlemen. My question is specific on the aircraft rentals expense. It grew 49% year over year mainly due to the new 777s you are using. It's only two aircrafts. If I'm not wrong you have 16 freighters now, so how much are you paying per month for the leasing of these aircrafts in order to get this impact on your expenses?

Andres del Valle, Corporate Finance Director. Hi. We cannot disclose the set prices so just as a full expense for the year is the data of the quarter. But those contracts are strictly confidential between lessor and lessee. But we consider the main impact is driven out of those two 777 freighters.

Okay. And the other leases, they are -- you mentioned that you are not adding any new freighters this year to the fleet. But going forward, do you plan to -- how should work your fleet in the cargo operation in terms of model? Are you planning to substitute any long term all the different freighters by 777s? How should be the strategy on your fleet plan regarding the cargo operations?

Regarding the cargo operation our strategy for the future is to have a combination of 777s and 767s. The 777 is the right aircraft for long haul flights like the ones into Europe and for the high density traffic here in the region. But we will seek for, as I say, a combination of 777s and 767s. So we have already an option for a third 777 with Boeing that we will be receiving and in the future we will see what will be the exact combination, but it's around three or four 777s together with the fleet that we currently have of around ten we have today, or nine, 767s. We will be probably growing a little bit more on the 767, so as I said, it will be a combination of both aircrafts.

Okay, Thank you very much.

Susan Lindhurt, Banchile.

Good afternoon. I would like to ask two questions. The first question is do you expect to be able to maintain the growth rates of average years that we have seen during the first quarter of 2010? And secondly, were LAN's cargo operations to Europe affected by the eruption of the volcano and the retargeting and closure of airports in Northern Europe? And if they were, what is the impact that you estimate could happen in the second quarter results? Thank you.

[Just to give the highlights of all] the impacts outlook for the coming months. We were forecasting increasing [Europe] at least 5%, 6% in the second semester, this is last year. We are seeing, as I said before, that demand is coming back, especially in the part of say Chile. Normally domestic Chile, the international operation, [that arrive in Chile]. So we are seeing that as much as we felt the impact of the earthquake, the second semester is very well. So I would say the outlook is very positive in the PAX business.

On the cargo side, as I said before, we are expecting very strong demand, even stronger than what we saw in the first quarter. Second, third quarter are going to be very strong we think, only limited for the capacity we have as a whole for [all the companies] operating here in the region. We are flying the aircrafts as much as we can and with a high yield factor. So we see a very strong demand for the third -- second and third quarter.

How affected us the volcano? It affected us because one of our 777s was caught by the eruption of the volcano in Amsterdam. So the aircraft had to stay there for six days approximately. But on the other hand, we flew the rest of the fleet a lot here in the region because we were in a peak season for the seed season. This is the period of the year where we fly a lot of seeds, mainly corn seeds, to the US. This year the seed season was very strong so we utilized the fleet a lot here in the region and we compensated somehow the loss of this aircraft that was parked in Amsterdam for six days. So we don't see a big impact on the cargo side for this issue.

Thank you very much.

(Operator Instructions). At this time there are no further questions. I'll now turn the call back over to Mr. de la Fuente for closing remarks.

Okay, 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. Thank you very much.

Thank you for participating in today's conference call. You may now disconnect.