LATAM Airlines Group SA (LTM) 2011 Q1 法說會逐字稿

Good morning, ladies and gentlemen and thank you for waiting. At this time, we would like to welcome everyone to TAM's first-quarter 2011 earnings conference call.

We would like to inform you that this call and the slides are being broadcast on the Internet, at the investor relation Company's website, www.tam.com\ir, and that a presentation is available to download at the presentation section.

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

Before proceeding, let me mention that forward looking statements are based on the beliefs and assumptions of TAM management and on information currently available to the Company. They involve risks, uncertainties and assumptions, because they relate to future events and, therefore, depend on circumstances that may or may not occur in the future.

Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of TAM and could cause results to differ materially from those expressed in such forward looking statements.

Your hosts today are Marco Antonio Bologna, CEO of TAM S.A. and Libano Miranda Barroso, IR Director of TAM S.A. and CEO of TAM Linhas Aereas. Now, I'll turn the conference over to Marco Antonio Bologna, CEO of TAM S.A. Mr. Bologna, you may begin your conference.

Hello, I would like to thank you for your presence in our 2011 first-quarter results presentation.

On slide 4, we began the year of 2011 reaching several achievements in all of our business lines. Starting with the air operations, April was marked by a series of records regarding the number of transported passengers in a single day. The first was on April 15, when we transported 126,000 people; on April 20, we transported 131,000; then on Monday, April 25, the Easter holiday return, we recorded the highest number in our history, 136,000 passengers.

We are pleased to announce that despite this strong movement, we recorded high levels of punctuality and regularity. Another point which should be highlighted is the 5.4 percentage increase in the utilization of our aircraft, reaching 13.2 hours per day.

We will continue to monitor our networks, in order to maintain high utilization rate, because we know that this is a key factor in the dilution of fixed cost and [constant] reduction of the Company's CASK.

In these early months of 2011, TAM Vacations opened 17 new stores across the country. Through the franchising model launched last year, our tour operator assured business in all Brazilian states. Today, the network of TAM Vacations shops is composed by [90] establishments, but we believe that by the end of the year, we will be about 200.

The MRO, our maintenance unit, completed its tenth anniversary in February, launching a new website demonstrating to be totally prepared to provide maintenance for the groups of other large companies in our sector. Increasing sales to third parties, we bring the target of becoming another business unit of the Group.

TAM Cargo, our unit of [size] transportation, has launched two new products to its portfolio. The first is the TAM Cargo Prepaid, where the customer can purchase an exclusive package and send the order at a fixed price of BRL22.90. The volume weight is limited to the capacity of the package. The other product is the Cooled Big Box, a package with three layers of protection for maintaining the temperature.

Throughout the presentation, we'll go into more details and other highlights of all our business units.

On slide 5, we comment on the status of our intention to combine with LAN, remembering that on August 13, we announced our intention to combine with the disclosure of the non-binding agreement. On January 18 of 2011, we announced the signing of the definitive agreement between the parties.

On March 1, we received the prior approval by the Brazilian National Aviation Agency, ANAC. On May 26 we will take place in the public hearing in Chile, where we, LAN and other interested parties will be able to opine on the combination. As next steps, we will have all the regulatory approvals and their Shareholders' Meeting to approve the transaction from both LAN and TAM's side.

On slide 6, we present the operating and financial highlights of Multiplus. In the first quarter of 2011, 17 billion points were issued. The number of points redeemed was 9 billion, and the breakage in the quarter remained stable at 23%.

Regarding the financial highlights, Multiplus reached BRL340 million of gross billings with sales of points. Net revenue was (technical difficulty).

Thank you for your patience. We are having technical difficulties. Please hold.

Back to on slide 6, we present the operating financial highlights of Multiplus. In the first quarter of 2011, 17 billion points were issued. The number of points redeemed was 9 billion and the breakage in the quarter remained stable at 23%.

Regarding the financial highlights, Multiplus reached BRL340 million of gross billings with sales of points. Net revenue was BRL242 million. Adjusted EBITDA was BRL103 million, representing adjusted EBITDA margin of 33%. Net income reached BRL71 million, a net margin of 29%.

Regarding the partnership network, during the first quarter, Multiplus coalition announced four new partnerships with BM&F Bovespa, the Brazilian leading broker institution of the capital market and the only secured commodities and future exchange in Brazil; Central de Carnaval, the largest company in Bahia with entertainment, events, congress and party business; with Pontofrio.com, an e-commerce company created in August 2008 from the spin-off of the online and telemarketing sales operation of Pontofrio, one of the country's largest retailers; and ExtraFarma, one of the largest drugstore networks in the northeast of Brazil.

Multiplus is committed with the construction of a coalition network, which will help us to diversify both accrual and redemption. Recently, in the second quarter, Multiplus already announced three new coalition partnerships with the furniture manufacturer, Unicasa, which includes the brand Dell Ano, Favorita and New; with the Raia drugstore, the second largest drugstore chain in Brazil; and with Icatu Seguros a company specializing in life insurance, pension plans, saving bonds, pension funds and asset management. In addition, Multiplus is concluding a capital reduction of approximately BRL600 million aiming to optimize the capital structure of the Company.

On slide 7, our strategic focus on the domestic market operation is to operate high frequency flights between major cities in the country called [Trans route]. However, we observe that most of the Brazilian aviation growth has come from the smaller market. We understand that, in the upcoming years, this market will continue experiencing high growth rates. Seeking to remain focused on these operations after the [Trans route], but aware of the importance of the mid-[destination] market, we announced the signing of a non-binding agreement for investment in TRIP Linhas Aereas, which we intend to acquire a 31% stake of the company.

Our strategy with TRIP is to use its broad network to increase our [capillarity] where we will offer, to our passengers, greater choice of [freedom] and distribution between the companies. At this moment, we are conducting a due diligence in the company, and believe that, within 90 days, we will have a conclusion about the deal.

Now I turn the floor to Libano, who will comment on our 2011 first-quarter results.

Hi, everybody.

On slide number 9, regarding the passengers' domestic market, in the annual comparison our demand in RPK grew 15% which, combined to the supply growth of 13%, resulted in an increase of 1.2 percentage points, in our load factor, to 70%. The average yield decreased --

(Technical difficulty).

Sorry for the technical problem that we had. We're starting on slide 9.

Regarding the passengers' domestic market, in the annual comparison our demand in our RPK grew 15% which, combined to the supply growth of 13%, resulted in an increase of 1.2 percentage points, in our load factor, to 70%. The average yield decreased 6% in the year-over-year comparison.

The combination of those items results in an increase in domestic passenger revenue by 8% in the period. A yield reduction reflects, primarily, our strategy of stimulating the demand of leisure passengers traveling at off-peak hours, anticipating the change in the passenger mix that is becoming even more relevant.

On the next slide we have further comments about the opportunities identified in the Brazilian market.

Slide number 10, following the trend of offering more options for passengers and demonstrating the success of our strategy to promote air transport for the emerging classes, we announced a two [unprecedented] partnership with interstate bus companies; Passaro Marron, which serves 50 cities in the states of Sao Paulo and Minas Gerais; and Princesa do Agreste, north-eastern company, which serves 29 cities in the states of Pernambuco, Ceara and Piaui.

With these partnerships passengers can buy but tickets from TAM Vacations in stores, or even plane tickets at the ticket office located on the bus terminals. Our idea, with this partnership is to further increase the capillarity of our network, and facilitate the customer experience which can meet all their travel needs at a single sales point.

We already have partnerships in Europe with railway companies, where we provide train integration to our passengers. In Brazil this capillarity is accomplished with bus transportation. Thus, we believe that these partnerships will be fundamental to the achievement of our strategic objectives.

On slide number 12 we have the figures for the passengers international market. The load factor, in the first quarter, presented an important increase from 77% to 80%. This increase, combined with a slight reduction of 2% in the yield in dollars, represented an increase of 2% in our RASK in dollars, compared to the first quarter of 2010. It is important to note that in sequential comparison, from the first quarter of 2010 to the first quarter of 2011, we have increased in yield and RASK, both in real and in dollars, offsetting the effect of the real appreciation against the dollar.

Our total revenues in dollars grew by 14% year over year. In the first quarter the demand of passengers traveling between Brazil and abroad remained strong and consistent, encouraged by the appreciation of the real reflected in high load factors.

The slight reduction in the yield presented is due to the new routes launched in the second half of 2010, and are still in the [maturation] period.

On slide 13, last Friday, May 13, 2011, we completed one year as a Star Alliance member. During this year we could expand our service, offering a range of benefits to passengers. Some (inaudible) customers, for example, can earn and redeem points on flights upgraded by any of the 26 member companies of the Alliance.

Another benefit brought by the Star Alliance to our customers was the product, the Star Alliance upgrade awards, which allows customers to use miles or points on upgrade to a superior cabin class on scheduled flights operated by participating airlines in the Alliance.

Since we joined with Star Alliance we've recorded a 63% growth in the number of transported passengers on our flights with tickets generated by partner companies to code share an inter-line agreement. With this, we have exceeded the estimate of $60 million in additional revenue, which we forecasted to get. We can see from the chart that our international operation has shown a sharp increase in the last year, but reaches a new level after the entrance into the Star Alliance.

On slide 14, we can observe the major cities originating traffic of passengers to South America. Brazil appears as the main destination of most cities generating demand. In this slide it's important to note that we offer own flights for most of these cities which are New York, Miami, and Orlando in the United States; and Frankfurt, London, Madrid, Milan and Paris in Europe.

Moreover, it is important to mention that there are still many growth opportunities in the international market. Our strategy is always to search for routes with high demand for Brazilians, passengers flying by business purpose and high demand for the cargo market. That's why we are announcing now two new flights for the second semester; one brand new service directly to Mexico City, and the second daily service to Orlando in United States. We give you more light for that on the -- when we go over the guidance section.

On slide number 16, we show the general figures for the quarter. Our net revenue increased 17% comparing with the same period in the previous year. Our operational results increased 44%, reaching BRL110 million, representing an EBIT margin of 3.6%. The net income registered in this quarter amounted BRL129 million versus a net loss recorded in the same period in the previous year. And our unit cost, excluding fuel expense, reduced by 3.8%.

On slide 17, it is part of our strategy to maintain high levels of liquidity. We end the first quarter with a cash position of BRL2.1 billion, representing a reduction of BRL485 million compared to the end of 2010.

The main reasons for this reduction were a cash outflow amounting to BRL176 million for the prepayment of aircraft; and the seasonal effect, since the first quarter is marked by passengers traveling by leisure purpose, who buy their tickets in advance, and consequently, the sales volume is lower compared to other periods of the year. Also, it is important to mention that our fuel expense were roughly BRL100 million higher than the first quarter of 2010.

Our adjusted net debt divided by EBITDAR of the last 12 months is 3.8 times. A considerable reduction compared to the last year. As previously announced, we end 2010 with a [main] debt below 5 times. And in two years, we expect to reach levels around [3 times].

Slide 18. Our hedging policy is based a minimum coverage of 20% of estimated consumption for the first quarter -- sorry, for the first year and 10% for the second year. We understand that this policy is appropriate to our needs and we will maintain consistency in its compliance.

In this table we show our current new hedge position with the volume of coverage, the average strike price and the percentage of projected consumption coverage. For the next 12 months, we have covered for 25% of our consumption, with an average strike price of $87 per barrel. Between April 2012 and March 2013, our percentage of coverage is 10% of the projected consumption, with an average strike price of $96 per barrel.

It is important to mention that in the first quarter of 2011, we had a positive hedge result of BRL55.8 million with our hedge position. At the bottom of this slide, we show a sensitivity of the hedge position effect in our cash, where we have results close to zero, if the barrel remains in the range of $90.

Slide number 20; we present our guidance for 2011. We believe that domestic demand of passengers will continue to grow at a strong pace. And we expect to see a growth between 15% and 18% compared to 2010, while in the first quarter it grew 17%.

Regarding the supply, we will grow between 10% and 13%, depending on market conditions. We expect to maintain high load factors, both domestically and internationally.

We announced that in 2011 we would launch two new international frequencies of destinations, continuing with our strategy of growing in markets where there is high demand, especially from Brazilian and flying by business purpose. During the first quarter, we already announced the increased flights to New York, London and Frankfurt departing from Rio de Janeiro.

Now we are announcing two new service; one daily direct service to Mexico City and the second daily service to Orlando in United States. Both, we are expecting to start on the second semester and we will give more light for that as soon as we have all the arrangements in place.

We remain focused in the cost control and expect to reduce the CASK, excluding fuel expenses, by 5%. By now we have reduced it 3.8%, but we are confident in delivering this indicator.

Regarding the assumptions, we estimate that the price of oil barrel at $93, the average for the year. The realized year to date is $99 per barrel, or BRL162 per barrel, which is lower than our forecast at BRL166. But we maintain our WTI scenario, unchanged by now, due to the recent uncertainty and volatility.

We are prepared to deal with adverse scenarios with contingency plans and network [redistribution], if it's necessary. We believe that the best antidote to uncertainty is to keep focused on maintaining the highest levels of operational efficiency, low cost, zero-based budgeting, and always revise process to avoid [waste].

On slide 21. Relying on the great potential of the Brazilian market, our fleet plan was revised in the 2010 results release. We increased the number of all aircraft types; Boeing 777, Airbus narrow-body and wide-body. The reason for this increase was the new level of growth that has been observed in the Brazilian market, both for domestic and international routes.

We end 2010 with 152 aircraft and we will reach 2015 with a total of 182. Currently, we already have 155 aircraft, a record in Brazilian aviation, where no other airline in the country had a fleet of passenger aircraft of this size.

We will open now for questions and answers. Thank you.

(Operator Instructions). Jim Parker, Raymond James.

Just a question about Brazilian airlines in general. They all seem to talk about how strong demand is, and which you're doing as well in your first quarter.

Now, the profitability is not particularly good and it appears to me that a lot of the demand is fare stimulated, that perhaps the capacity is growing at a faster pace than demand. And by reducing the fares in order to do this, you're only just about breaking even in your airline operation. So I'm curious why this capacity growth that actually appears to be greater than the natural demand growth.

In fact, we -- what we are seeing in the market is the capacity is lower than demand. In our case, for instance, our guidance, we are guiding for the domestic market, 10% to 14% for the full year. On the first quarter we presented 13%, and the demand was 17%, which is good if we had been able to increase load factor.

The dynamic or price on the domestic market has been very competitive, and we believe that this is because of the change especially, on the first quarter, where we have more leisure passengers than business travelers. We are experiencing in Brazil one important event which is, for the first time, we have more passengers flying than riding on interstate buses. In fact, this happened last year in Brazil, 2010.

This is a very important point, because we are accumulating these new emerging individuals to fly. Instead of getting stuck on a bus for three days, they are able to do the same route with three hours and a half, and Brazil is a continental country. Due to this stimulation, these new emerging individuals coming to market, we had this dynamic of promotions and price lower than what we -- in fact, what we believe is better for the market.

Good news is we believe that this is changing. Second quarter now we are foreseeing a slight increase. We believe yields sequentially have room to be on the low single digit increase. And we feel that the majority of the players in the market are offering capacity supplies less than the demand pace of the market. That's why we believe it's a matter of time for the results to be offset with yield pressure, and we believe the yields on the domestic has room to increase quarter over quarter.

You must have in mind that second quarter is the lowest, the weaker -- or the weaker in the year. And second semester is strong and we believe that we are entering on second semester on a better price environment.

Thanks, Libano.

Nic Sebrell of Morgan Stanley.

I was wondering if you could expand a little bit on the yield question. In other words, we've seen an increase in the fuel price; granted, of course, the real is stronger, but still in real I think fuel price is still higher than it was before.

Was curious to hear from you what the dynamics are in the competitive environment now, regarding the ability to increase fares. Because I understood that you guys maybe tried to increase fares in the first quarter, at some point, maybe a little bit shortly afterward. And that they didn't stick, and I was wondering why that might be.

Second question is you talked a little bit about domestic load factors, what is your ideal domestic load factor you think? What are you working toward, over the long term, because Brazil is significantly lower than the global norm on that point.

And if I may ask a third question, I was just wondering, the 777s that you have coming in the out years, I was curious if maybe those might replace some of the A350s that you were going to have arriving. I saw that you don't show, you don't break out the A350s any more, specifically, and I was wondering if maybe those are delayed again, or if you could just explain what's going on there. Thank you.

Hi Nic. First of all, regarding use of the second quarter and now the first quarter. As I mentioned, the first quarter is a quarter with a mix of passenger more on leisure. And we had another important thing is carnival this year, was different than last year, was late this year, which is more leisure than normally we have.

That's why this combined with a higher (inaudible) naturally dilutes yields. We have this -- the huge lower portal year over year. But what we had better CASKs and RASKs, overall, as you saw, putting all the revenues together, and in fact this is how we manage the Company, by the total RASK of the Company.

We saw -- we are seeing on the second quarter now, and we gave an increase sequentially, quarter on quarter, on yields on the domestic market. That's why we believe we have been able to post a kind of low single-digit growth, quarter on quarter, on the domestic market.

The impact of fuel, we forecast -- fuel for us, we forecast for the first quarter fuel to be at BRL166 and, in fact, was BRL162, because we had the partial benefit for the FX lower than we forecast. That's why the impact on fuel was important, but as -- within our budget.

Talking about the 777, you -- (technical difficulty).

That's unfortunate.

Thank you for your patience. We are having technical difficulties, and we will be up in just a moment.

Nic, are you there, Nic? Hi Nic.

Hi, so you -- I think you dropped off when you were talking about the 777s.

Yes Nic, sorry, we had some problem here. Okay, first of all, the 777s are in addition on our fleet plan, because we agree four 777 in for 2012, another two in '13 and another two in '14. Beyond the '14, we have the delivery of -- we are receiving the new A350. In fact, we have 22 A350s, plus five options that we have. They are up and coming beyond 2014.

So the 777 are on top of our fleet plan, and we are maintaining the 350 deliveries in place. We are -- Airbus so far is quite confident to match the timetable. So we are continuing with the delivery of the A350s on the second semester of 2014.

And you -- we believe, we truly believe that the players in Brazil will be able to act rationally, to offset fuel price, and to transfer this to the yields, as we are foreseeing this happening now. It's likely, but this is a good trend to enter on the business season, which is beyond June, on a better price environment. Thank you. Sorry, for the problem.

Okay and the last question, the load factor. If you guys foresee going -- yes.

Good question. In Brazil normally it is -- why Brazil has lower -- has a structurally lower load factor compared with other countries? Brazil has a concentration -- strong concentration in business travelers. We have two clear peaks in Brazil; from 7am to 10am, from 5pm to 8pm.

That's why on average we believe that 75% is a kind of optimal level and from 75% to 80% we believe it's a [steely] factor. That's why on [extend base] it's best range within 70% to 75% where we are able to deploy our network with good revenue management and holding capacity properly to demand on a pari passu base. Beyond 75% we have the risk of spilling over passengers to other airlines.

Great, thank you.

Michael Linenberg, Deutsche Bank.

Vicki Tower This is [Vicki Tower] calling in for Mike. I actually wanted to know if you could expand more on your Multiplus business; they posted very solid results in the quarter. And I was just hoping you could share trends in the business now and if you still expect growth to remain robust in the coming quarter and going forward? Thank you.

Could you please repeat; the line wasn't so good. We have problem with the phone.

No problem; I was just asking about the Multiplus business, and they obviously had a very good net result this quarter, around $70 million versus $10 million last year. I was hoping you could just share trends going forward; if you still expect such significant growth in the coming quarter and beyond?

Sorry are you there? Hello.

Hello.

Hello.

Are you there? I've got your question now, I am ready to answer it.

Okay, I was just asking about Multiplus, the trends in the business you see now, if you could still expect growth to remain robust.

You're talking about the Multiplus performances, Vicki? As we mentioned, Multiplus is performing very well. We released the results regarding Multiplus at the beginning of this month. And we are in line according to our plan. We are growing our coalition.

So our expectation for Multiplus is to continue to deliver the results as you have been seeing. But, as you know, we cannot give you any financial guidance between those companies, here or at the Multiplus level. Okay?

Okay, thank you. Actually just two clarification questions, apologies if I missed this; but did you give an official expectation for the close of the merger with LAN; do you have any sense of when you expect that to be finalized?

Well, about the [matter], the expectations we have announced, they're going to have a public hearing in the day of 26 this month, in the court -- in the Chilean court, in order to give us the opportunity to explain the benefits of the merger to the Judge.

And then we have to wait for their Sovereign decision and we are expecting to have this during the third quarter. And the merger, for us, we are explaining that it's very difficult to have agreed; going to be no chance -- going to be in this -- around the first quarter we can deliver the merge. We have, as you know, another important authorization. We need to get authorization for some European countries, in terms of extra law.

Announcements are important to us to have the public offering for the listing at the Bovespa and transform in LATAM shares. So this has to be an approval of 95% of the non-controlling shareholders. And also, you need to have the approvals of 97.5% of the LAN shareholders in order to move forward with the LATAM deal.

Perfect, thank you so much.

This concludes the question and answer section. At this time I would like to turn the floor back to Mr. Bologna, for any closing remarks.

Okay, many thanks. All the best for everybody, thank you.

Thank you. This concludes today's presentation. You may disconnect your line at this time and have a nice day.