LATAM Airlines Group SA (LTM) 2011 Q2 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 Second 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 Relations Company's Website at www.TAM.com/IR and that a presentation is available to download at the presentation and conference call section. Also, this event is being recorded. (Operator instructions).

Before proceeding, let me mention that forward-looking statements are based on beliefs and assumptions of TAM management and on information currently available to the Company. They involve risks and 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 cause-- affect the future results of TAM and could cause results to differ materially from those expressed in such forward-looking statements.

Your host for today's call is 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.

Good afternoon. I would like to thank you all for your presence in our 2011 second quarter results presentation.

Let us begin the presentation on slide number 4. Last month was very important for us. Our company has completed 35 years since its foundation on July 12, 1976. This year, we remember our historical growth and the visionary and the pioneer trajectory of Captain Rolim. We are celebrating the existence of the Company that was born regional and has become global, which reinforces our passion for flying and serving and also inspires the achievements of the future.

To celebrate this date, we have prepared several actions, such as welcome videos displayed in our flights since the beginning of the year, where important personalities of our history report stories strongly linked to our values.

In addition, in this special year, we are proud of receiving two awards in the World Airline Awards, the Oscar of the global aviation. We were elected the "Best Airline in South America" and also recognized for the "Excellence in Service in South America." We are especially pleased because these awards are chosen by the passengers.

On slide 5, during these 35 years, we have grown and learned a lot. Aiming to minimizing risk and maximizing return to our shareholders, our Company became a multi-business group related to aviation, where the airline is the backbone of the Group, but we have also developed other business units linked to the main services. In order to increase the focus and, therefore, maximize the results of the business units, they are treated independently in the Group. The main example is Multiplus, which has its own management, board of directors, and is even listed on the Sao Paulo stock exchange. However, we are also expanding and increasing the focus of each one of our business units, which have their own targets and dedicated people. We understand the value of diversification in our revenue sources, and we believe that this is the correct way to achieve our target.

On slide 6, as mentioned, we continued developing our business units, reaching several achievements. Besides the awards listed at the beginning of the presentation, TAM Airlines won three other awards, and its CEO, Libano Barroso, was recognized as the Brazilian Personality of the Year by the Brazil Chamber of Commerce in France.

Pantanal now replaced the old ATRs for Airbus 319 aircraft and also launched new routes, expanding its network.

TAM Cargo received the award of the best company in the logistics segment and also recorded the highest quarterly revenue of our history, reaching roughly BRL300 million.

Multiplus continues to expand its partnership and began the capillarity project, where the main target is to enable accrual and balance checking at the point of sale using credit card terminals. This will help to spread the loyalty concept, speed up the capillarity strategy, and increase sales in retail market.

TAM Vacations opened its 100th unit, and we expect to end the year with 200 stores. In addition, it established an agreement with Caixa Economica Federal, speeding up the current access to the franchisees.

Our MRO continues to expand and increase the number of clients served. Seeking to maximize results and increase the focus of this business unit, we are changing the subordination of the MRO that we will now report directly to the holding TAM S.A. We will hire a new executive to lead this company. This is another step in our unlocking-value strategy announced in late 2007 for the market.

Slide 7. In late March, we announced the signing of a non-binding agreement in order to acquire a minority stake in TRIP, representing 31% of its total capital. Our strategy is to use TRIP's network to increase our capillarity and offer our passengers greater choice of seating and distribution between companies. The due diligence process was complete and satisfactory. TRIP concluded last week the implementation of a new technological platform for the reservations, sales, and check in. This platform will allow the expansion and consolidation of the code share agreement between the companies.

We will now move to the free sale agreement, which access to inventories of both companies. As a next step, we will study the impact of this new agreement, so we can analyze an investment decision. We will keep our shareholders and the financial market informed with respect to the conclusion of this negotiation, and we will comment again about this subject which materializes an effect that should be disclosed as required by law and regulation of CVM in Brazil.

On slide 8, we comment on the status of our intention to combine with LAN, remembering that, last year, on August 13, we announced our intention to combine with the disclosure of the nonbinding agreement. On January 18, we announced the signing of the definitive agreement, binding between the parties. On March 1, we received the prior approval from the Brazilian National Civil Aviation agent. And, on May 26, it has held the public hearing in Santiago, Chile.

As next steps, we'll have all the regulatory approvals and the shareholders meeting to approve this transaction from both LAN and TAM's side.

Now I'll pass the floor to Libano, who will comment on our second quarter results.

Good afternoon, everyone.

On page number 10, we show a study that compares several aviation markets around the world. The X axis contains the GDP per capita in US dollars, and the Y axis shows the number of trips per capita in different countries. We can observe that the higher is GDP per capita, the higher is the frequency of the trips per capita. Brazil still is below the world average, and there are countries with a lower GDP per capita than ours but with much higher volume of trips. Furthermore, we understand that, with the popularization of the air transportation and increased purchasing power of the Brazilians, the trend is to move to the right and up on the chart. We remember that Brazil still has a low penetration and continental expansion, and we believe that demand will remain strong for several years.

On slide 11, we can explain about the domestic passenger market. In the annual comparison, our demand, in RPK, grew 31%, which, combined with the supply growth of 15%, resulted in an increase of 8 percentage points in the load factor, reaching 69%. The average yield decrease is 21% in the year-over-year comparison. And the combination of those items reflected a reduction of 10% in the RASK, while the revenue grew 3% in the period.

On slide 12, the 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. In this chart, we can observe the reduction of the gap between peak and off-peak hours. In the second quarter of 2010, there was a gap of roughly 7 percentage points between these times, and, now, this difference was reduced to 4 percentage points. This shows the success of our strategy. Increasingly, Brazilians are changing from bus travel to air travel, ending up paying less in this option.

On slide 13, we show the numbers for the international passenger market. The load factor in the second quarter presented an important increase from 76% to 81%. This increase, combined with a 10% increase in yields in dollars, represented an increase of 17% in our RASK in dollars compared to the second quarter 2010. Our total revenue in dollars grew by 32% year over year. In the second 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 sectors.

On slide 15, we present the financial highlights of Multiplus. Multiplus achieved total gross billings of BRL355 million. The net revenue was BRL285 million, and the net income was BRL81 million, representing a margin of 28%. Regarding the cash generation, Multiplus reached BRL331 million in the quarter.

On slide 16, we show the general figures for the quarter. Our net revenue increased 17%, comparing with the same period of the previous year. The EBIT increased significantly, reaching BRL16 million, representing a margin of 0.5%. The net income registered in the quarter amounted BRL60 million versus a net loss recorded in the same period of 2010. And our unit cost, excluding fuel expenses, reduced by 3.5%.

It is important to say that, in this quarter, we have the impact of the recognition of a PIS and COFINS credit, Brazilian taxes, valued at BRL173 million distributed among the fuel expense and financial results.

On slide 17. It is part of our strategy to maintain high levels of liquidity. We ended the second quarter with a cash position of BRL2.3 billion. At the end of May, we issued $500 million in senior guaranteed notes due 2021 at a rate of 8.375% per year. The net proceeds will be used for payment of the maturing debt, pre-delivery payments, and general corporate purpose. Our adjusted net debt divided by the EBITDAR of the last 12 months is 3.7 times, a considerable reduction comparing to the last years. As previously announced, we ended 2010 with an index below 5 times. And, in two years, we expect to reach levels around 3 times.

Slide 18. We can see graphically our fuel-hedging policy and our contracted positions. The blue line shows the highest level of coverage set by the policy, which is 60% of the estimated consumption. And, in the red line, we observe the minimal levels, which are 20% for the first year and 10% for the second. We understand that this policy is appropriate to our needs, and we will maintain consistency in its compliance. The green line shows the level of contracted coverage of our operations, and the black dots are the average strike price.

In June, we restructured some of our old contracts, extending the horizon of protection. The restructuring consisted in the redistribution of expiration dates for a longer period and reduction of the strike price. For the next 12 months, we have coverage for 30% of our consumption with a strike price of $94 per barrel. Between July 2012 and June 2013, our percentage of coverage is 18% of the projected consumption with an average strike price of $99 per barrel.

On slide 20, we present our guidance for 2011. We believe that the 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 half, it grew 21%. 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 or destinations, continuing with our strategy of growing in markets where there is high demand, especially from Brazilians and flying by business purpose. We are launching five new frequencies or destinations, over-delivering our guidance-- new frequencies to New York, Frankfurt, and London via Rio de Janeiro, second daily flight between London and Sao Paulo. And we also announced for the second half a new destination, Mexico City.

We remain focused on the cost control and expect to reduce the CASK, excluding fuel expense, by 5%. By now, we have reduced it 3.6%, but we are confident in delivering this indicator.

Regarding the assumptions, we estimated the price of oil barrels at $93 as the average for the year. The realized year to date is $98 per barrel, or BRL159 per barrel, below our estimate, which was BRL166 per barrel.

We understand that our guidance fits the market reality, and our growth in supply will be lower than the estimate for demand growth, increasing our load factor.

On slide 21, we show our fleet plan through 2015. We ended the second quarter with 156 aircraft, and we will end 2015 with a total of 182 aircraft.

Now we will open for the question and answer section. Thank you.

(Operator instructions). Jim Parker, Raymond James.

The first question I have is about capacity growth domestically. What do you anticipate that your domestic capacity growth will be in the third and fourth quarters of this year and in 2012?

First of all, we will grow within our guidance. We have, as of today-- as of June, 14% on the domestic, but we believe that, for the next quarter, this will be lower, more 10% to 12%. And, international is-- we have year to date 13%, and this will represent 14%. This is for the second half of the year.

For the next year, as you can see, we are adding marginal capacity in terms of domestic market. In fact, we are adding on our fleet plan just three aircraft. So it's a net of three aircraft on the narrow-bodies. And we are adding--We are bringing three new wide-bodies.

On the narrow-bodies for the domestic market, these three additional aircraft, in fact, we are discussing this and, probably, we believe, by the third quarter results, we will be more precise on releasing the final figure. But consider that three aircraft for the next year is a cap, and there is a real chance for us to even reduce even more, being flat 2011-- 2012 to 2011 or even lower. But it's too soon for us to release the 2012 guidance. But, for now on, consider that our fleet plan is a cap with a bias to a small reduction, especially on the domestic market.

Okay. That's good. Libano, a second question has to do with-- Was there a tax credit in the fuel expense category during the second quarter, I think, of like BRL143 million?

Yes. This was a one-time credit. This is related to our legal-- lawyer, accounting, and fully audited interpretation. And we brought to the Company more fiscal efficiency by compensating on our goods acquired. It's some kind of credit related to [this ability] of certain revenues considering the Brazilian laws. So we captured this efficiency one time, and there will be a recurrent-- you can consider that recurrently from now on. This should represent per year something like $50 million, or BRL80 million, yearly speaking.

Okay. So the 143 million is BRL143 million or $143 million?

BRL143 million.

Okay. And, going forward, you're saying it's going to be $50 million.

Yearly. Yes. On a 12-month period. Yes.

Okay. All right. Thank you.

Ray Neidl, Maxim Group.

I've got some very general questions, being way up here in New York, on just what's happening in Brazil. It sounds like your stock market and economy is kind of as mixed up as what's happening in the US. Could you just give a brief update on the macro conditions in Brazil? I know you said that growth in demand is still very strong, but are there problems popping up like in inflation or a potential tightening by your central bank?

The trend in Brazil, in fact-- we are growing. The country is growing on a GDP base of 6% to 7.5% this year. Last year-- this year, the forecast is around 6% for the year. Inflation will be pari passu with GDP growth this year. It will be more closer to 4% to 5%-- 4.5% to 5%. This is the average of the central target, the target for the central bank.

It means that our economy is in a good momentum. We have all the service area growing fast. We have industry related to general markets growing very well. Real estate-- So we have many factors running at this growth rate.

And what-- the doubt now with this international scenario is more related to commodities. You know that we have a strong commodity based economy, speaking especially on oil and oil-- we have food proteins. We have many things related to commodities. And the doubt-- And Brazil is a great-- has a huge export balance on these commodities. So the discussion now is what kind of impact this new worldwide scenario should translate into Brazilian economy.

But we believe that, for this year, the country should grow at this level. The country has a tremendous trade surplus reserve for more than $300 billion, and the debt is minimum. So the country is in pretty good shape. Of course, it's not insulated. It's not an island. But it is in pretty good shape.

Okay. Good. And general questions concerning the potential merger. There's been some Bloomberg headlines a couple days ago that were saying the merger could be endangered, and they mentioned some lawsuits by PAL in Chile. Is this old news, or is this something new that's developing?

There is Marco Bologna speaking. We are, as you know-- we have to wait for the approval for the antitrust court in Chile. The name is the Tribunal-- the TDLC. So we are waiting. We are expecting to have a decision for this court in order to move forward with our merger. It is necessary to receive the approval of this court. And then PAL Airline is against the deal. We don't know why. But we do believe all the courts in Chile are sovereign, and we do believe we are proposing a very compelling story. Our merger is a very creative deal for our shareholders, for our customers, and for our employees. So, as you know, the courts are sovereign, and we have to wait for the decision.

But we have also received some approvals. We have already got-- Just to remind you, we have announced our binding agreement with LAN in January this year, so we have settlement in terms of binding-- to be [bound] with them. And we have already got the approval from the Civil Aviation Agency in Brazil, very important. It's a very critical [factor] for us. And then, in terms of Brazil, we need to get approval for the antitrust department as well. In our case, we don't need a previous approval. We have already got the approval from the German antitrust department. We are imminent to receive the approval from Italy and are waiting for the approval from Spain. So we are very confident we'll get the approval in Chile as well. It's just a question of time and just a question to show that we have a very creative deal for all the stakeholders of both companies.

Okay. So our best guess is it may be done by the first quarter of next year then.

Yes.

Okay. One other thing I heard from a third party in Brazil, and it's something I haven't heard of before, is that there's some kind of a stockholder vote, where, if 95% of the stockholders do not approve, then LAN has to buy back stock of any stockholder who requests it at an average price of the past 90 days. Does that sound familiar to you? Is there anything to that at all?

We have-- we are binding in terms of the controllers of both companies. Then we need to delist at the Bovespa stock exchange. We need to have the approval of the non-controllers of both companies. In the case of TAM, we are asking for-- to have at least 95% of the non-controller shareholders. We have a public offering at the stock exchange. It's a mandatory public offering in order to get the approval of 95% of the non-controllers.

In the case of LAN, we are-- we don't want to have more than 2.5% of the shareholders that want to leave the deal.

So that's the two conditions that we are-- we released this since August last year, so it's not new. I don't know what is your third party here in Brazil; probably, it's a gossiper, because, in terms of the deal, we have all these conditions disclosed [by the market], all the precedents and the pre-conditions to get the deal done.

Okay. So, if enough stockholders do not want to own the new stock, there is potential for a cash drain on the Company as they buy back those shares? Is that a possibility?

No. The cash drain at LAN level is-- we are-- there is a maximum of 2.5% of the total shareholders. In our case here, we are-- as you know, there's a law in Brazil. We need to delist the Company in the stock market. You have to list two-thirds of the known controllers. We are asking for 95%. So we are saying, in other words, only 5% as squeezed out.

We put a cap, Ray. For us, the cap to squeeze out and cash drain for the Company is 5% of the existing shares.

Okay. Great. So there is that cap, then, for the protection.

Okay. I understand now. Good. Thank you very much.

Michael Linenberg, Deutsche Bank.

This is actually Catherine O'Brien filling in for Mike Linenberg. I just had a quick question.

After February, when [Go's market share jumped fairly high], TAM very quickly regained the lead position and actually achieved an 8-point lead on Go by March. I'm assuming the 20% or 21% decline in domestic yield can be explained by this jump in market share. Do you plan to continue focusing on load and market share rather than yields? And do you think this is a viable strategy to achieve long-term profitability?

We are targeting profitability. Of course, leadership is important, but we never guide the Company for purely market share position. So, what has been happening? You mentioned what happened in February and other months. It's exactly-- In our case, we are target-- and you can see this from our performance. You see this when all the companies will have the results released. We believe that we have been able to, at the same time, maintain leadership in market and a premium in terms of revenues.

So that's why we are always targeting to charge a differential in terms of yield and RASK because we believe we are offering a better proposition in terms of more frequencies, destinations, international, comprehensive network, the strong alliance internationally, a better loyalty program, and having Multiplus as a coalition. So we believe that we are able to charge this premium in terms of yields. And exactly what we are targeting is to increase the yields, maintain a differential in price, and maintaining the leadership on market but leadership more to deploy our network than just for [lead tables].

Okay. Do you think that you would possibly see a similar decline in domestic yield going forward this year, or do you think that was just a one-time occurrence this quarter?

The second quarter is the weakest quarter of the year. The dynamic in Brazil is second half represents 60% of the year, roughly speaking, and 40% the first half. And we are now-- We have the best quarters ahead of us now. And we believe third quarter, quarter on quarter, on top of the second quarter. We believe there will be a 5% yield increase on the domestic market. And we are foreseeing this now, probably with a slight reduction on load factors but bringing more revenues and more cash for the Company.

Okay. Great. And just one other quick one. What was the catalyst for the presale of miles to Multiplus? Was there anything going on that you needed cash?

No. The idea was the airline and Multiplus enter on this agreement, and this is just a way to provide Multiplus with a predefined price for the seats to cover a period ahead of them. And for the airline, this represented a discounted value based on [NPV] value with a discount rate that is exactly on an arm's length basis what is the secondary market for the notes in reais for the Company. So, for the airline, it is neutral because it's cash in advance instead of cash in the future. For Multiplus, it's a kind of-- they are providing for them the stock of seats with a predefined price for them to act on their best purpose in terms of their revenue management.

Okay. Great. Thanks a lot for taking my questions.

(Operator instructions). Eduardo Couto, Goldman Sachs.

Just a follow-up question from the Portuguese call; actually, just getting back to your point, Libano, on the potential lower capacity in the domestic market in 2012. If this scenario really materialized, how much can you-- or how much do you expect to recover in terms of yields if you really keep your capacity in the domestic market flat or reduce it a little bit? It would be something more like in line with inflation or a little bit more than inflation? How much can we see yields recovering in the scenario of flat domestic capacity out of TAM? That's the question.

First of all, I kindly request just to wait for another quarter. By the results of the third quarter, we'll be more assured to release the precise figure for fleet for the next year.

But, assuming the three aircraft that is exactly what is stated as of today on our fleet plan, net three aircraft for the domestic market, this should represent, on average, 6% of capacity increase on the domestic market with a small increase based on-- Let's assume that we will maintain the elasticity of two to three times. We believe this is perfectly feasible for the next year. We don't know yet-- We prefer to wait for the consensus for GDP for the next year. But let's assume that GDP is around 4% for the next year. It translates to a 10% to 12% RPK growth. If we bring 6%, it represents that we are-- once again, we'll be able to capture, to grab, load factor increase.

In terms of yields on the domestic market, we are still lagging market as a whole, and we are a good proxy for the market. We are still lagging 2008 yields in reais. Of course, we have benefits for dollar. We have everything-- we have to calculate everything. But we are still lagging the 2008 figures.

We believe that having more discipline, more rationale for the whole market, not just for us-- we believe the market should be able to bring back a two-digit growth in terms of yields for the market. We believe that, without forecasting this year-- once again, I prefer to wait for the third quarter. But by discipline on capacity, it's perfectly feasible to have something like 10% to 12% increase on yields for the next year.

But let's wait a little bit because we never guide on financials. We prefer to maintain our discipline on guiding on operations. But you know that it's a wise question because you know that, on our industry, there is a strong correlation between capacity and yields on the market. But we truly believe that, for the next year, 2012, there will be a good year for the market to exercise more capacity discipline and to have more balance between yields recovery and increasing load factor.

And, in terms of the load factor for next year, you're not anticipating any significant expansion on load factor as you are doing this year, because, this year, you're adding like 800 basis points in load in the domestic market. Do you think now this new level, around 70%, is more reasonable or a level that the Company's more comfortable with?

Makes sense, but, with our disclaimer that we are not guiding yet for 2012. But we believe-- it makes total senses, your-- what you said.

Okay. And just a final point, Libano. You mentioned the BRL143 million, the tax credit. This is non-recurrent, but you said that part of that is recurrent, which would be $50 million per year. Is that right?

Exactly.

Okay. Very clear. Thank you very much.

[Ubob Atwan], Moneda Asset Management.

A couple of months ago I heard that you were considering spinning off the cargo unit. Is that correct or no?

No. So far, what we have been doing in the Company is exactly to manage the Company with our business unit concept and focus. And we have, in the case of Multiplus, this we spin off and list the company. This was separate and listed.

For the cargo business, we do not have any plans of it spinning off and separate because, as of today, we are using just the belly of the aircraft. We are not operating cargo aircraft, freighters, which means that the total is dedicated to the passengers. And we do not have plans to spin off the cargo business. We are running and managing separately as a business unit with specific targets, KPIs, compensation for the executives related to the performance, but maintaining as an internal business unit.

Okay. And can you provide us a guidance for CapEx and EBITDA for the entire year?

By policy, we never guide on financials. We guide just on operational figures. You can the operational figures on the-- as I mentioned, on the page number 20. These are the guidance that we released on the beginning of the year. And, so far, we are confident with them, and we do not have any plans to change them. But, by discipline, we never guide on financials.

Okay. Thank you.

Augusto Ensiki, Morgan Stanley.

Just a really quick follow-up on the tax credit on the fuel line. Is that recurring? That future $50 million gain, is that spread out through the year, or does that come in in a specific quarter?

This is spread out equally on the year. It is totally related to the consumption, so it's spread out equally.

Okay. Great. That was it. Thank you very 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.

Thank you, everybody, to attend our second quarter results. Thank you very much, and have a good day. Bye-bye.

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