LATAM Airlines Group SA (LTM) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to TAM second quarter results conference call. My name is Marissa and I'll be your operator for today. At this time, all participants are in listen only mode. Following the prepared remarks, there will be a question and answer session.

(Operator Instructions)

Your host today, Marco Antonio Bologna, CEO of TAM SA, and Libano Barroso, IR Director of TAM SA and CEO of TAM Linhas Aereas. I would now like to turn the presentation over to Mr. Libano Barroso, IR Director of TAM SA and CEO of TAM Linhas Aereas. (Spoken in Spanish).

Thank you. hi. Good afternoon for all. We would like to thank you all for your presence in our results presentation. The purpose today is to comment on our new retail campaign announced in the beginning of the month, the figures for the second quarter of 2010, and the intention to combine with LAN announced last Friday. As a reminder, all the figures refer to the second quarter numbers are presented in accordance with international accounting rules, IFRS. Let us begin the presentation by slide number three.

We intend to continue to be the airline for those who travel by business, but we also want to attract all customers, promoting travel by plane even more accessible for Brazilian populations. This means of transportation is becoming an alternative increasingly more tangible for the emerging population in Brazil.

A survey made by (inaudible) shows that about 9 million Brazilian from middle class intend to fly for the first time in the next 12 months. Providing a dimension, 53% of middle class have never traveled by plane, and 58% have traveled by bus on journeys longer than eight hours.

On slide number four, based on this huge market opportunity, we launched our new retail project, which uses logline, You Will Go With TAM, in order to encourage the use of air transport, showing that TAM is accessible to all classes. This project is based on the strategically importance of working with clients who travel primarily by leisure purpose.

To attract this new customers, we will work on three fronts. Communication. The Brazilian singer, Ivete Sangalo, was chosen to be the star of the campaign because she's a celebrity consider flexible, able to communicate with all social classes. Furthermore, it is part of the strategy, making comparisons between the flight and buses, showing the benefit of traveling by plane either because of the ticket price, travel time or payment convenience.

Sales channels. We are beginning our strategy of opening franchising stores of TAM Vacations, our tourist operator, where we intend to go from the current 17 stores to a total of 200 in two years. We are also increasing our contact points with customers through kiosks installed in Casas Bahia retail store. And payment choice, payment options. Today we are the airline that offers the broadest scope for payment.

Slide number five. In July we announced the acquisition of TAM Milor, the owner of TAM and other co-related brands used by TAM SA, TAM Airlines and other [collegiate] companies. The purchase process is (inaudible) in amount BRL170 million, 15% paid in cash on the contract signing date and 85% by promissory notes in favor of the selling parties.

This credit will be paid with TAM SA's capital increase. The capital increase will amount BRL144 million by issuing 5.6 million new common shares. With this, we expect substantial benefit such as reduction in cash outflows because we have a contract with TAM Milor where we pay annually about BRL17 million adjusted by inflation.

In addition, we will have cash inflows of royalty payments from TAM (inaudible) and TAM Vacation franchise, improving corporate governance. Since we are eliminating transaction with related parties, resulting in the same distribution flow to all shareholders by dividend payments. And finally, we are incorporating a valuable asset to TAM SA. TAM's brand was evaluated on BRL247 million according to the global consultancy, [Interbrand].

Moreover, institutional marketing expense will be made in a company's asset. The regional closing date for exercising the right of subscription of the shares was August 31st, but due to union operation with LAN, this deadline was postponed to September 14th.

On slide number six, as of August 23rd, we will expand Pantanal's network from the current six destinations served to a total of 17 Brazilian cities. Increasing ASKs by more than seven times, from 3 million to about 22 million. The number of flights will be extended by 84%, from 220 to 405 per week. The new network will have 48 routes, being 23 of them operated from the Congonhas Airport and 23 from [Sao Luis] in Sao Paulo and two from Brasilia. Three Airbus (inaudible) has been subleased from (inaudible) to Pantanal. These planes were delivered with delivery were delayed until Pantanal defined extensions and renovation of its own fleet.

Number seven. On slide seven, we now comment the numbers from the second quarter of 2010. Regarding the passenger domestic market, in the annual comparison, our load factor reduced by 1 percentage point, which, combined to the 1 percentage (inaudible - background noise) resulted in a flat [rate fee] of BRL0.13. Besides the increased field year over year, we had a (inaudible) consisted ratio recovery of 17%, reflecting the higher mix of passengers flying by business purpose, our efforts in revenue management, and the rationality in the market.

On slide eight, we have the numbers for the passengers international market. The load factor in the second quarter presented an important increase from 68% to 76%. This increase combined with the recovery of yields represented a significant improvement in our revenues in dollars of 42% compared to the second quarter of 2009. Our total revenues in dollars grew by 45% year-over-year.

After the success in the domestic market, we launched in our website the international fare bundles, designed to fit the needs of each client. Those who decide their trips according to the price and executives who travel frequently and require more flexibility and benefits.

On slide number nine we highlight the growth of our cargo revenues, especially in the international market, where we observed a 50% growth compared to last year. This signature increase was a result of improvement in the total volume of cargo transported and international rates, despite the fast recovery of the market and sales expansion to market not previously served.

Other revenues increased by 1% due to a 19% increase in revenues from expired tickets and were partially offset by a reduction of 13% of revenues from the loyalty program partnerships, mainly due to the real appreciation over the (inaudible) institutions, which are dollar denominated.

On slide number ten we show the financial indicators for the quarter, where our total net revenues increased by 15% and our operating expenses increased by 6%, resulting in a EBIT margin of 1.3% compared to a negative margin of 7% in the second quarter of 2009. In the non-operating cost lines, we have a net expenditure of BRL211 million, remembering that the main portion of that is due to the exchange rate variation and market-to-market of few hedging position with no impact in our cash. Our CASK, excluding fuel costs, decreased 11% compared to the previous year, remembering that our guidance is a reduction of at least 6% on the average of the year.

On slide 11, it's part of our strategy to maintain high levels of liquidity. We increased debt amortization figures related to the debentures issued on July 2009. The debentures interest initially established based on the accumulated variation of 126.5% of the [CBI] were reduced to 124%. The maturity was postponed four years and amortizations of the nominal value of securities increased from quarterly to semiannual payment. The first payment originally scheduled for July 2010 was postponed to January 2012, with positive impact on our cash flow.

Another positive impact on the cash flow was the change in the interest payment frequency from monthly to every six months. We believe that the change were beneficial for both sides of the Partnership. Our adjusted net debt divided by EBITDA of the last 12 months is 6.3 times, already showing an improvement over the previous quarter. We believe that we'll continue improving this indicator.

On slide 12, we now follow our guidance for 2010. The demand in the domestic markets grew 26% until July. And we believe that growth will be less intense in the coming months, resulting in a growth rate close to 18% in the average of 2010 versus the previous year. On the supply chart side, we are still growing below our estimates, but we expect stronger growth for the second half.

The growth will be a consequence of the arrival of (inaudible), but also the possibility of increasing the utilization of [excess] in this period of stronger demand. We are operating in the domestic market with load factors in line with estimates, while in international market with load factor rates higher than originally expected. Our CASK, excluding fuel costs, is 10% below the first half of 2009.

On slide 13, we ended the second quarter with 143 aircraft in our fleet, and we will close the year with 151. We added to our fleet three aircraft being two A319 and one A320 whose delivery were postponed to meet the needs of the new Pantanal's network. In June we announced an order of 20 new Airbus (inaudible) from the A320 family and five A350. The purpose of this order is to fulfill the fleet plan already announced and reinforce our commitment to maintain a low average fleet age. Now I will pass the floor to Marcos Bologna, TAM SA's CEO, which will comment on our intention to combine with LAN announced last Friday.

Good afternoon. Our founder, Captain Rolim Amaro, used to say that the only way to compete in an open skies market is with the creation of a large Latin American airline group. Last Friday we signed an MOU with LAN. And as of the next slide we show the [sufficient] rationale and the structure of this unit. The transaction is to the [best] of both parties entering into a binding definitive agreement, including corporate, shareholder and regulatory approvals.

On slide 15, we are experiencing a critical time in airline industry. Consolidation is happening across the globe. International players start to create interest in the Latin American market, which is presenting increasing demand at a fast pace. Taking advantage of this strength, we took a step forward. Combining our companies, we will create a new Latin American airline group able to compete globally.

Not only are TAM and (inaudible) are the right partners, but we are partnering at the right time. We are confident that with the business combination, we will continue to drive value for our shareholders and deliver world-class services to our customers.

On slide 16 we'll talk about the structure of this transaction. [Terms concerning] shareholder we'll maintain the control of TAM, holding 80% of TAM's voting shares, respecting the legal requirement. TAM shares will be de listed from the San Paulo Stock Exchange and it's ADRs from New York Stock Exchange and (inaudible) have its corporate name changed to (inaudible).

Each preferred shares and each common share issued by TAM will be equivalent to 0.9 Brazilian depository receipts used by LATAM. We will ensure equal treatment to all TAM shareholders. The exchange rate will be the same for TAM's controlling shareholder and the other TAM shareholders that are not part of the controlling group. The new group, LATAM, will consist of LAN and TAM companies and its affiliates.

Each of the airlines in the group will continue to operate under their existing operating certificate and brand. The carriers will work to build a comprehensive network of international passengers, flights and cargo services through the region. LATAM will be listed in Santiago Stock Exchange and will also [yield] its shares through (inaudible) San Paulo Stock Exchange and ADR in the New York Stock Exchange.

On slide 17, at the end of all corporate transactions, Cueto family will have its 24.1% and Amaro family will have 13.5% stake in LATAM, while the minority shareholders of TAM and LAN will represent 15.8% and 46.6% of the free float respectively. The controlling shareholders agreed upon a jointly managed governance model regarding the administration of LATAM. Mauricio Amaro currently Vice Chairman of the Board of Directors at TAM SA, will serve as Chairman of Board of Directors of LATAM. And Enrique Cueto will serve as LATAM's CEO.

TAM and LAN current administration and corporate governance structures will remain the same. Maria Claudia Amaro will continue to serve as Chairman of TAM. I will remain as CEO of TAM SA, and Libano Barroso will remain as CEO of the Linhas business, which includes TAM Airlines, TAM Mercosur and Pantanal Airlines. Ignacio Cueto will remain as LAN CEO. The controlling shareholders have signed a shareholder agreement which [underlines] equal LATAM control distribution.

On slide 18 is we provide a brief summary of TAM and LAN on a standalone basis. As you can see, LAN and TAM both have strong profiles and it is easy to understand the opportunity of the business combination. On slide 19, we are creating a Latin American giant. LATAM will offer an incomparable level of services through the region. Our passengers will benefit from the higher number of destinations and connections. Besides that, our customers will have access to the most comprehensive cargo network in Latin America, with more capacity, frequency and destinations than any other carrier.

Slide 20, we can see the changing face of our industry. We are glad to be participating in the consolidation process in a way that benefits our customers, our investors, our employees, and the community we serve. Together with LAN, we look forward to leveraging our international, our individual strengths to become an even greater company. LATAM will be among the leading airline groups in the world in terms of size, profitability and market reach.

On slide 21, we may see that LATAM will be the clear number one player within South America. In addition, we'll be a co-leader on routes to and from the US and Canada and a solid player in European markets. As the first time Latin American airline group we'll have the scale to compete on a global basis.

On slide 21, combining the numbers of the two companies, we can observe that LATAM will (inaudible) as a global player. We can expand our areas of [strategic] and therefore strengthen ourselves even more. We'll have the ability to grow into new markets, through greater supply of the hubs in the Brazilian and southern cone, enabling, for example, new flights to US and Mexico and Europe.

With this association, we expect that LATAM will grow faster and profitably through our ability to launch new flights and also have more alternatives for cargo customers. As a result, our revenues and market share should increase.

Finally, LATAM will be a leading Latin American company competing with the major players in the world. We believe that the future growth will result in job creation, economic growth in Brazil and in Latin America. I now would like to turn the call back to Libano, who will comment about the expected synergies.

On slide 23, we expect the transaction will create $400 million in annual synergies. On the revenue side, we expect to achieve approximately $280 million in annual synergies through optimization of airline networks. About $170 million will come from passenger revenue and $110 million is related to new cargo opportunities, which I will explain in the next slide.

On the cost synergy side, we expect to achieve approximately $120 million annually. We are confident that one-third of the synergies should be captured in the third year, more than offsetting the onetime costs achieved our combination. We expect to achieve all allotted synergies by the end of the third year.

Slide 24, regarding the opportunities in the cargo business. We believe that LATAM will have a great opportunity for growth in the cargo market in Brazil, combining LAN (inaudible) network, along with its expertise with the largest market potential in Brazil. We will provide cargo service throughout Latin America and around the world.

Finally, on slide 25, data on share price from July 30th. LATAM will be the third largest airline in the world in market value, being the largest with 100% private equity ownership. Thank you for your attention. Now I would now open for the session of Q&A.

(Operator Instructions)

You have your first question from the line of Caio Dias from Santander. Please proceed.

Hello, everyone. My first question is on the shareholder agreement. I understood that there will be two shareholder agreements, one at the LATAM level and the other one I'm not sure if it's at the TAM or over LAN. Could you please explain better how these two shareholder agreements will work?

And besides that, on the presentation, on slide presentation, slide number six, you mention a veto power over the control of TAM in Brazil. Can it be interpreted as indirect control over the Company and could it cause any problem with the Brazilian aviation agency when asking for the approval of the deal?

And finally, one last quick questions, just to confirm the ADR holders, TAM's ADR holders will receive an ADR of LATAM or they will need to -- they will get a [BDR] in Brazil. How will it work with the ADR holders nowadays, TAM's ADR holders?

Okay, this is Marco Bologna speaking. About the shareholders agreement, they going to have a shareholder agreement between the Amaro family and Cueto family to regulate their power of both in part control of LATAM, is the first shareholders agreement they are going to have.

The second one is a shareholders agreement between Amaro family and LATAM because, at the end of the day, TAM SA is going to be controlling by Amaro family that will have 80% of the voting shares, keeping the regulatory framework in Brazil, and the remaining shares will be controlled by LATAM. So this shareholders agreement between LATAM and Amaro family will provide the shared control of TAM.

But considering the non-voting shares that LATAM will have, the veto will be the same kind of veto we have today in the level two (inaudible). In other words, we're going to have a veto entire simple majority issue or (inaudible) provisions. So this will not give any power to change the operating -- or the operational business of TAM. They only regulate how the shareholders, Amaro shareholders, controlling shareholders and the remaining shareholders will control the Company and keep the Company under the same level of governance they're going to have (inaudible).

And regarding -- Caio, regarding the exchange offer, there will be at times as the company LATAM will be originally listed in Santiago Stock Exchange and with ADR and BDR ADR in New York Stock Exchange and BDR in the (inaudible) in Brazil.

So the clients will exchange their shares in TAM, no matter if the shares are (inaudible) or ADR, they will exchange for LATAM shares. And they will have the opportunity to trade them or in Chile or in Brazil via BDR or in New York Stock Exchange via ADR because they will be at the end they will be fungible in all stock exchange.

Okay, clear. Thank you very much.

Your next question will come from the line of Stephen Trent from Citigroup. Please proceed.

Yes, good morning, gentlemen. Just wanted to follow up on one or two things, if I may. The first is with respect to synergies. Not synergies related to LATAM, but you previously mentioned synergies associated with your integration with the Star alliance. I'm wondering, now that it looks like the LATAM transaction is likely to move forward, is it your view that synergies that potentially disappear vis-a-vis Star are more than offset by the synergies you'll gain from LATAM? And that's my first question.

And then my second question, if I may, pertains to fleet. Maybe a follow-up from Friday's call. But it looks like maybe Brazil domestic, especially the major routes, are somewhat slot constrained. Can we assume here that a lot of the growth is going to be international, inter-South America vis-a-vis your fleet lines? Thank you.

Hi, Stephen. Nice to take this. On the -- remember that when we enter on the Star lines we (inaudible). We share our views to have a kind of around $60 million in extra revenues on (inaudible) on an annual base by gaining member of Star Alliance. We believe that this is (inaudible) and we are on the path to. We are doing very well on that. And we believe this LATAM combination will even more fit the potential for that because there will be, in our view, more opportunities for better connections, better keeping and better distribution power.

Taking (inaudible) of your question, I want to cover that. It's not time for us to discuss potential change in alliance. We don't think that, first of all, we have to put all the things up in writing at the LATAM level. But in future we believe it will take more than a year or two years. We will discuss in future if we will maintain separately the Star Alliance and Oneworld or if LATAM, because the two companies will be independent, LAN and TAM, or if in future there will be a single alliance for both. But these are things to discuss in the future.

Talking about fleet. There is a lot of airports in Brazil, 50% of the traffic in South America is comprised within Brazil domestic market. You are right that we have some constraint in airports. That's why we have been doing our utmost to occupy this lot of airports, as we have been doing. And one clear sign for that was acquisition of Pantanal. That enable us to resume once again the leadership in Congonhas Airport, being that we used to have three years ago and now we are back.

We believe that we will grow both on the domestic market and into South America and long haul. On the domestic market there, in spite of the lot of airport constraint, but we will be -- we will benefit from the better connections, better connections and adapting our network to better integrate TAM's network with LAN's network.

For sure the outcome will be higher load factors, with the same slot, with the same access we will collect more and better occupation. That's why we are very optimistic and realize that the synergies and revenues, they are quite very measured. And if we took our time to study that. And this will be a combination of new hubs, looking for more flights to Europe, (inaudible) to Africa, more to the Pacific, and integrating even better the -- all this south cone.

Okay. Thank you very much for that, Libano. (Spoken in Spanish)

Thank you. (Spoken in Spanish)

Your next question comes from the line of [Helene Becca] from [Dalmon Rose]. Please proceed.

Thank you very much, Operator. Hi, everybody. I'm not really sure I got this, so I'm sorry if you answered it and I just misunderstood. Have you made the choice to leave Oneworld Alliance, then, and go with Star or have you not made that decision yet?

Hi. It is too early to think about that because, first of all, we have six to nine months on the integration period. And during that we have to look for the external third part authorization, meaning regulatory, stock exchange offer and so on. And beyond that, we'll be able to, as we integrate things and decide for the network, for the comprehensive network, for the joint combined company, the LATAM.

So, beyond that will be time for us to discuss if we will maintain two independent alliance, meaning the Star Alliance for TAM and Oneworld for LAN network, or if we'll discuss in future a single alliance for LATAM. But it's too early to discuss that. For sure, this is initial, that we'll be able to address in future and we believe it will take at least a year to answer on this decision process.

Okay. All right. So, bottom line is no decision has been taken yet. You're just going to keep operating each network independently until such time as the merger receives regulatory approval?

Yes.

Is that kind of a good interpretation?

Yes, you're right.

Perfect. Okay, thank you --

-- separates the operation, everything separate, alliance separate.

Got you. Okay. Thank you very much.

(Operator Instructions)

Sir, at this time there are no questions in the queue. Please proceed to closing remarks.

Thanks very much to attending these second quarter results and where we have the opportunity to announce this historical moment for Brazilian, South American and world aviation, where we were able to create a global player. And we are very happy to be part of this history and we are very optimist and engaged on the process of that. Thank you so much. See you next time.

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