LATAM Airlines Group SA (LTM) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the LAN Airlines third-quarter 2010 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

I would now like to turn the conference over to Mr. Pete Majeski of i-advize Corporate Communications. Sir, you may begin your conference.

Thank you, Paula, and good morning everyone. Today, LAN Airlines management will be discussing third quarter 2010 results for 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 this 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 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. In here in Santiago are Luis Eduardo Riquelme from Passenger -- (technical difficulty) -- Bianchi from our Cargo business, and Del Valle from our Corporate Finance Department, and Escobar, our Investor Relations -- (technical difficulty).

We hope that you have all been able to access the webcast presentation that's available on our website for a better understanding of our results for third quarter 2010.

Okay, on slide four, you can see the main highlights of LAN's results for the third quarter 2010. We are very pleased to report that LAN's third-quarter results -- (technical difficulty) -- as well as significant growth in both the Passenger and Cargo businesses. Total Revenues, show a strong increase of 25.6%, driven especially by an increase almost 50% in Cargo, led to higher margins for the quarter. Operating margin and EBITDAR margins increased, reaching 13% -- (technical difficulty) respectively.

Important to note that operating income for the third quarter 2009 included a $14.4 million fuel hedging loss, which affected operating margins last year. For the third quarter 2010, our fuel hedging position had a negative effect of $4.6 million. Net income for the period was $106 million, increasing from $52 million during the third quarter 2009.

Turning to slide 5, you can see in more detail variation of our EBITDAR margin during the -- (technical difficulty) as you can -- (technical difficulty) -- margin expansion was driven by increased [yields] higher load factors. The main contribution is coming from the -- (technical difficulty) -- Cargo yields. Positive effects were partially offset by higher prices, higher wages and -- benefits and wages, and increasing ACMI cost -- (technical difficulty) -- Cargo business, where we increased our wet lease capacity in line with growth opportunities -- (technical difficulty) -- our markets.

Overall, LAN was able to post solid operating -- (technical difficulty) -- and growth in the markets where we operate -- (technical difficulty) -- margin. Taking a closer look at Passenger operations this quarter, on slide 6, you can see the evolution of the business. Traffic grew 14.2% while capacity increased 11.5%. Consequently, load factors increased almost 2 points, reaching 78.9%. Yields saw an increase of 4.8% third quarter 2009. This is a result of higher nominal fares, strong demands also helped by 6% -- (technical difficulty).

Slide 7, you can see a break down of Passenger capacity growth during the quarter. ASK growth reached 11.5%, strong growth throughout the LAN network. Long haul markets we did almost 12%, mainly with the launch in July of the Lima-San Francisco -- (technical difficulty) -- for frequent work for weekly frequencies without the Santiago-Lima-Paris, which started in September with the three weekly frequencies.

Within our routes, we also launched the Lima--Brasilia route -- (technical difficulty) -- with three weekly frequencies were increased to 5, starting October 15th. And Passenger capacity expansion remained high -- (technical difficulty) -- leading to adjust capacity deployment to the demand condition market.

Turning to slide 8 of the slide, we continue to see a further improvement in global cargo scenario. (technical difficulty) quarter, Cargo traffic increased 19% which coupled with a -- (technical difficulty) -- in capacity. Yet load factors -- (technical difficulty) LAN was able to capitalize on the recovering cargo markets with improved revenue management practices and achieved 25.6% Cargo yields.

As a result, Cargo in variance rose 25.5% in the quarter. And Cargo's significant traffic growth has been increased by this expansion in important markets in Latin America, especially Brazil, as well as an increase in the Company's European operations. And Cargo currently operates four weekly frequencies to Europe with a Boeing 777, which improved our competitive position due to -- (technical difficulty) -- cost conditions.

On slide 9, you can see that LAN's unique revenues and costs for the third quarter. Passenger and Cargo revenues per ATK increased 10.1%, driven by the 25.6% growth in Cargo yields. Costs for ATK grew 5 -- (technical difficulty) driven by higher fuel costs, increase in wages and benefits, and increase in Cargo wet leases.

Unit fuel costs increased 5.3%, mainly due to [13.7%] -- (technical difficulty) -- price of fuel -- (technical difficulty) 7.8% (technical difficulty). Third quarter 2010, the company recognized $4.6 million fuel hedge loss compared to a $14.4 million hedge loss in the third quarter of 2009. Wages and benefits in its basis increased 8.5% driven by an appreciation of -- (technical difficulty) higher -- (technical difficulty) -- costs, is driven by higher commissions to agents in line with higher sales, coupled with higher selling and marketing costs.

(Technical difficulty) -- costs increased to -- (technical difficulty) aircraft rental, depreciation and maintenance costs, partially upset by higher -- (technical difficulty) -- cargo wet leases increased from [0.3]% to 5.5% -- (technical difficulty) -- to take advantage of those opportunities (inaudible).

Operating costs increased is driven by higher costs of Passenger services as well as higher airport and landing fees, and handling costs.

In slide 10, you can see LAN's financial highlights for the quarter. LAN ended the quarter with $578 million -- (sic - see Press Release) -- in cash, representing 14% of last twelve months' revenues, and attained a solid financial position -- (technical difficulty) -- due to -- and strong cash flow generation as reflected in [5%] increase in EBITDAR during the quarter.

So, it confirms our BBB international grade rating, confirming LAN's position as one of the few investment-grade airlines in the world.

Third quarter, LAN was able to obtain -- (technical difficulty) fairly attractive interest rates for three Airbus -- (technical difficulty) -- supported by the European ECA. Access to debt and capital markets at favorable conditions set LAN apart from the rest of the industry, representing a very important aspect of our business model, and providing us with the ability to -- (technical difficulty) -- finance our growth plans.

(Inaudible) including the Q&A session, once he's done with his presentation.

Sorry, we are hearing someone else speaking on the speaker line.

Most of our long-term debt is at fixed rate, and average cost of debt slightly below 5%.

Slide 11, you can see our fuel hedging positions for 2010 and 2011. We have hedged 56% of our consumption for the fourth quarter 2010, and 54% of our consumption for the first quarter of 2011. It is a high season fortunately. We have used a combination of hedges including swaps and collars. Swaps at an average cost of $80 per barrel, while collars are between $65 and $90 per barrel.

We also continued with our fuel hedging surcharge policy, which allow us to pass on significant percentage of the increase of prices in both the Passenger and Cargo businesses.

Now, I will like to discuss recent relevant information about LAN strategic initiatives. Please turn to slide 13, On August 13, a non-binding memorandum of understanding was signed between LAN and TAM, outlining our intention to combine our holdings under Brazil [super] entity to be known as LATAM Airline group.

We continue to move forward with this transaction. September, we completed the due diligence process between both companies. Now, both LAN and TAM are publicly listed and audited companies that are subject to all -- (technical difficulty) -- home country financial reporting rules. The process focus on financial accounting and legal issues, and on understanding the differences in each company's accounting policies. As announced last week, the final transaction structure has been achieved and submitted for approval to the Brazilian -- (technical difficulty).

Our legal teams are currently working on the definitive agreements between the bodies, including the shareholders agreements. As we have previously stated, we continue to expect final agreements to be signed within days from the announcement, dated on August 13. Even at the current stage of the process, we cannot provide any further details or information at this time. Nevertheless, we continue to expect the closing of this transaction to occur during the second quarter of 2011.

Slide 14 shows the chart with the final structure of the transaction -- (technical difficulty) -- Brazil with the Amaro family will own 13.5% of LATAM, as well as 80% of the voting shares, and throughout the holding company base in Chile. LATAM will own the remaining [sum], as well as well as 100% of the economic interest in TAM.

That [presumes that] all LAN and TAM shareholders participate except for the shares to be issued in the transaction, the number of outstanding shares of LAM and TAM does not change.

On slide 15, you can see our fleet plan for the coming years. During the third quarter 2010, the company took delivery of its 100th aircraft, which was celebrated in a ceremony in October 18th. With this, a total of 5 Airbus A320 passenger aircraft were received in the quarter. Two of these are subleased AerOasis, the Colombian Airline, with which LAN has an agreement to provide technical support and advisory services -- (technical difficulty) -- from the Colombian Civil Aviation Authority.

But in the Cargo fleet, we will have new orders, the additional lease Boeing 767 freighters, which will be received during the fourth quarter of 2010 and first quarter of 2011. This will allow us to address the growth opportunities that we are seeing in cargo markets.

Overall, we are confident of the significant growth opportunities within domestic and international markets in Latin America. However, we are also -- (technical difficulty) and with expansion plan (inaudible) always maintained a certain amount of -- (technical difficulty) -- our fleet.

Please turn to slide number 16, see our estimate for ASK and ATK Group, coming years. We have maintained our passenger capacity expansion plans for this year at approximately 10%, driven especially by expansion in international markets and the strengthening of our hub in Lima, as well as continued growth of domestic markets.

For 2011, we currently expect capacity growth of between 15% and 17% driven by a net increase of 18% passenger aircraft -- (technical difficulty) -- our fleet; 15 narrow bodies and 5 wide bodies in the first two Boeing 787.

Cargo side, we maintained our capacity expansion plan for 2010 at 20%, given a strong demand in regional cargo market and the expansion of our operations on Europe as well as the Brazilian domestic market. Our target for cargo capacity growth in 2011 is between 13% and 15%, driven mainly by the addition of B767 freighters.

Overall, we are seeing strong positive trends in both the Cargo and Passenger businesses and we are confident that the coming years will present important growth opportunities. LAN is well positioned to benefit from expansion opportunities in the market it operates, while maintaining our fleet flexibility and diversified business model, and strong financial position.

The company expects to continue developing our successful strategy 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). Your next -- your first question comes from Jim Parker of Raymond James.

Good morning. I have two questions. And the first has to do with your Cargo business, which looks terrific according to the IATA data that the Cargo momentum has slipped a bit -- or at least is on a bit of a plateau since May, and that LATAM is much stronger. Do you see anything that would suggest a flattening, perhaps in the year-to-year improvement in pricing and volumes, particularly in your volume from the US to Europe?

Well, I'm -- (technical difficulty) -- anyway we haven't seen a (inaudible) -- surprised with demand growth in the region through -- (technical difficulty) by input, I mean growth and stronger FX rates encouraged traffic into Latin America.

So we expect next year to be also growing, not as fast as this year, but we expect our demand to continue expanding. And that's why we are expanding capacity and quality.

What about pricing, has pricing peaked or do you expect further price increases?

The pricing should remain pretty stable or just slightly -- mainly our capacity has come in line, in terms of our year in year, and the rest is flat.

Okay. My second question has to do with your plans for building intra-LATAM hub in Lima, I believe. And I am curious about the relative advantages and disadvantages of being there. TACA is there, has been there for a few years trying to establish an intra-LATAM hub. And I believe it's now going to enter the domestic market. Would you discuss the pros and cons of LAN Lima is -- would be a good intra-LATAM hub?

And yes, this is Luis Riquelme from the Passenger division. No, we continue -- (technical difficulty) -- Lima. And I don't see -- maybe there will be some accommodation of traffic in the future. Bt we continue seeing Lima as a strategic point towards Latin development.

With our position -- (technical difficulty) -- and also with Lima serving as a hub for several smaller cities within Latin America especially through the US and the West Coast, basically. So how Lima compared to another future development is something we will need to see in the future to see what makes more sense from a passenger perspective.

Okay, thank you.

Your next question comes from Susan Lindhurt of Banchile.

Good morning. I was wondering if you have some new information regarding LAN's entry into the Colombian domestic market as AerOasis, or can we still expect entry in the second half 2011, I think as you told us before. And secondly, there has been deterioration of the flight leaving on time in the last quarters. And I was wondering if that something is going to change with the new airplanes arriving, or we should see similar figures around 81, 82% in the coming quarters? Thank you.

With respect to Colombia, there are no changes to LAN's plans in Colombia. We continue to support AerOasis -- (technical difficulty) -- on our process LAN has currently established -- (technical difficulty)AerOasis. If regulatory approval is received to acquire LATAM and make it part of this company. The carrier will become part of LATAM (inaudible). Now, we are planning to conclude the process in the next year.

Okay. (Inaudible) Yes, we have been -- (technical difficulty). We have taken some measures regarding itineraries and all with the expansion in the markets, better utilization. And now we have taken some adjustments to take care of that, and we expect that this problem is going to -- (technical difficulty) -- way of covering this moment -- (technical difficulty) -- any more deterioration based on that.

Hello.

Hello.

Ladies and gentlemen, this is the operator. We apologize for the delay. The conference will resume momentarily.

Ladies and gentlemen, we apologize for the delay. The conference will resume momentarily. Thank you for your patience. Speakers, you may resume your conference.

Ladies and gentlemen, this is the operator. We apologize for the delay. The conference will resume momentarily.

Hello. Again, we apologize for the delay. The conference will resume momentarily. Thank you for your patience.

Could you repeat the final question? We are not sure where the communication got cut off?

Okay. The last question was about Colombia, when you are going to -- is there any news. And what I understood is there was no change in plans when you are going to enter. I think you said February, correctly, February 2011?

Yes.

And the second question was regarding flight statistics. There was a deterioration during the last couple of months. Is that something you are working on, and is it due to the lack of airplanes or is there other reasons for deterioration? Thank you.

Yes. (Inaudible). Technically, we had some problems with the 767 as I was explaining. And that was due to -- (technical difficulty) -- utilization. And we have taken some -- (technical difficulty) until make some pictures and -- (technical difficulty) the aircraft and finding this loss in the different bases. And we expect that the measures have been -- correction has been done already and we expect that this -- (technical difficulty) -- go up to the top.

It was very difficult to understand you, but that answered the question. Thank you very much.

Welcome.

Your next question comes from Michael Linenberg of Deutsche Bank.

Okay and good morning everyone. I just -- a couple questions here, if I could just -- I want to follow back up on Colombia. And I know the question was first posed is, are you on track to start second half of 2011. And then I think you answered that the AerOasis will be starting February 2011 with a few leased or subleased A320s from LAN.

Can you -- first off, can you tell us, is it February 2011, how many airplanes, and will LAN have a financial stake in this company? I know that you've indicated that it will be part of the LATAM Group, so presumably after LATAM is formed maybe there is some acquisition there. Or will there be an investment, so will we be accounting for the earning stream, under the equity method, or maybe it's in excess of that if you have a higher percentage; if you can just clarify.

Hi Mike. (Inaudible) handover.

Hey, (inaudible).

Yes, we'll start with three aircraft.

Okay.

We'll -- (technical difficulty) -- to five. And also we have plans for increased duration (inaudible) in a short period.

Okay.

On AerOasis transaction, we have an option to purchase the company. And once we -- the regulatory approvals are received, the idea is to acquire the AerOasis company, and to consolidate with -- (technical difficulty) -- but it would be probably, a major change would -- probably would -- I think that they will be back to the market.

And so the acquisition would potentially come later in 2011 if I heard you right, Alejandro, it will be a later event?

It would be right way with the approval.

So once you get approval. What would be the timing of the approval from the Colombian regulators? What -- is there a sense of timing at this point?

We are expected to receive the approval before February, early in January.

Okay. Okay, that's very helpful then. My second question is with respect to your capacity and CapEx plan beyond 2011. And I thought what was interesting is, we can see the growth of the cargo aircraft plan. And that makes a lot of sense, especially since I think there is going to be some pretty significant opportunities in and out of Brazil with the TAM merger.

But when I look at your fleet profile for 2012, 2013, 2014 or at least -- excuse me up to 2013, it looks like versus the prior plan, you are adding another 15 to 20 airplanes per year. And I think when we look at 2012, the CapEx is now roughly double or more than double what was in the original plan at least as of few months ago. Are those airplanes -- is it either those airplanes are potentially going to go into the Brazil market, or maybe their airplanes that make more sense -- it makes more sense to have a bigger order book out there, because of the merger.

Are these airplanes that go within South America, have these got a Colombian operation? I mean any color, because it is a pretty meaningful step up in the order book?

Well, it will. And Luis will explain in more detail, but all of our fleet plans; let's consider any -- Colombian market, if we enter to the Colombia market, probably we will need to, probably a new fleet plan for that market. Also with combination of LATAM, when you need sit down, but that will happen before we sign the agreement. Up to now, every company is going with their own fleet plan.

But you see on the chart, Michael, here is just the LAN standalone fleet plan; it's $7 billion going forward.

Okay.

(inaudible).And of course, we going forward -- we modeled the company for both business as Cargo and Passenger going at a certain rate. And then of course, we have very precise plans for say, what happens in 2011 may be 2012. But then going forward, we then with all the difference at business segments they compete for the (inaudible).

Okay.

You can go into any particular domestic market of (inaudible) that's regional, and also may be some long-haul routes. And then same thing with the cargo aircraft and with the long haul aircraft. So a very fine-tuned plan for 2011, maybe 2012. And then going forward, we model the company at certain growth rate.

Okay, good [Andreas]. And if I can just sneak in one more, just -- Argentina, when I was looking at on your market share, or your excuse me your composition of capacity, Argentina is down close to 5% year over year. What -- is there anything going on in the local market that we should be aware of -- I mean, I know Aerolinhas is -- looks like they're a stronger company today since I guess they've been nationalized versus maybe where they were a year or two ago. But I didn't see the reduction there, and I just was curious what was behind that.

Oh this is Luis Riquelme. Now, actually, we are increasing our fleet there. I think the first quarter, next year. And what you see there is just a consequence of maintenance, that this year we are in the third quarter, and last year it maybe was in the second quarter. So it's a consequence of available aircraft flying that there hasn't been a decrease and the position is the opposite. We're enthusing towards of next year.

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

Thank you.

[Operator Instructions]. Your next question comes from Stephen Trent of Citi.

Hi, good morning everybody. Some of my questions have already been answered. But actually, if I may, one or two follow-ups on Mike's questions.

Looking at the Colombian market, unlike other places you've entered there, it's already one dominant player there. If you look at the main airport, it's ostensibly slight constrained, and you have the additional challenge of operating out of a high altitude runway, which maybe --hit you somewhat on fuel burn.

How are you seeing that impeditive environment there? You kind of suggested in your previous quarterly result call that one might expect to see fewer competitors in Columbia. And medium term, in fact, you may have even said one less competitor. And I am wondering if you are seeing anything differently now than what you were seeing on the 2Q results goal. Thanks?

This is Luis Riquelme. Yes, now, regarding the operation -- aircraft, is basically domestic. It's more or less -- it's a low-cost model -- (technical difficulty) to other aircraft that are already operating in the Bogota airport conditions.

Almost in that regard, and long-term plans haven't been developed yet, so to say how the Bogota Airport is going to be, how the market is going to evolve in terms of the competitors there. Anyway, we know it's a competitive market, and but also is a very attractive market because we got -- (technical difficulty) -- there is a lot of opportunities of the relevance into the future.

We are pleased to grow very fast in the market or increasing the number of aircraft and to gain market share. We are very strong competitors there, but very efficient in costs. So we can [publish] a strong operation. We are trying to start technical operation, and the features start the international operation like --

Yes, and also regarding (inaudible).

Yes. And also regarding the airport, there are some plans in near future, although there is not a capacity -- (technical difficulty) is going to (inaudible).

Okay, thanks very much for that. I confess you were a little difficult to hear, but I may follow up back to you, later on. Thanks very much.

Thank you, Steve.

Next question comes from [Jorge Mendez] of HSBC Chile.

Okay. Hey all, Good morning. I just wanted to know how do you -- well, your results include 80% revenues are US dollar denominated. I just wanted to know how do you arrive in that figure -- to that figure, considering that almost two-thirds of your income comes from passenger revenues.

All of our international passenger operations are dollar-denominated, as well all of the cargo operations. So the only thing that is -- the only part of the business that is accounted for in domestic currencies are the domestic operations.

Yes, I understand, but how do you manage the various -- because on your side, I believe that you receive various currencies, not just US dollar denominated?

Depending on the market, as an example in Chile, we fix the exchange rate on a weekly basis. So whatever is sold for cargo or passengers, it's denominated in dollars, but can be paid in pesos. So we have a one-week exposure (inaudible).

In other markets like Argentina, the exchange rate is fixed on a daily basis. So whatever you sell, even point of sales, Chile, you sell international ticket, it's expressed in dollars, yes. (inaudible).

Okay. Okay, thank you for your answer.

(Operator Instruction) Your next question comes from [Reynaldo] of (inaudible).

Good morning, fantastic numbers, congratulations.

Great.

Basically, I just want to re-clarify some of the things that you have been saying just to make sure if I understand the entire merger with TAM. The projections going forward that you are giving us are solely based on LAN and there's no synergy or anything like that from the TAM merger worked into the merger.

And then after the merger, the two companies are going to be operated entirely separately doing their own planning, their own growth, and probably with limited coordination. Is that a good summary?

(inaudible)Just for LAN, we are not a (inaudible) company at this stage. We're convinced that there are stages for LAN and TAM working together and for the _development of both passenger and cargo business under the new LATAM sticker. However, until the transaction closes, both LAN and TAM continues to operate as completely independent entities. All joint business and the finance (inaudible) will be taken only after the transaction closes.

Okay. And within Brazil, your small freight airline; will that remain independent? Will that be worked into TAM or have relationship with TAM?

Probably, -- (technical difficulty) the process concludes to integrate this company to TAM's operations. However -- but we need to see that. Now it's completely independent and our plans are not shared with anybody from TAM.

Okay, great, thank you very much.

At this time, there are no further questions. I would now like to turn the floor back over to Mr. Alejandro de la Fuente for any closing remarks.

Okay, thank you again for joining us today. Please feel free to contact our Investor Relations department. If you have any additional -- (technical difficulty) forward to speaking with you again soon. Thank you very much and goodbye.

Thank you. This concludes your conference, you may now disconnect.