LATAM Airlines Group SA (LTM) 2011 Q3 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 third 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 website www.tam.com/ir and that a presentation is available to download at the Presentations and Conference Call section. Also this event is being recorded and all participants will be in a listen-only mode during the Company's presentation.

After the Company's remarks are completed there will be a question-and-answer section. At this 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 may relate to future events and therefore depend on circumstances that may or may not occur in the future.

Investors should understand that general economic condition, industry condition, 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 SA, and Libano Miranda Barroso, IR Director of TAM SA, and CEO of TAM Airlines.

Now, I'll turn the conference over to Marco Antonio Bologna, CEO of TAM SA. Mr. Bologna, you may begin your conference.

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

Let's begin the presentation on slide number 4. On slide 4 we show some of the achievements of our business units. On September 1st we announced a new positioning and a new identity for Multiplus.

The new brand reinforces its mission of connecting companies and people through our relationship network in which everybody wins. The new value proposition fully aligned with the Company's future positions Multiplus of the loyalty program Company that through the vast network of partners offers recognition and rewards for the construction charge made by its members.

In the coming years we expect to be a definitive part of consumers stabilized through a strong, comprehensive, and attractive partnership network. In addition, earlier this week we announced a joint venture agreement with AIMIA (inaudible) which I will comment on the following slide.

TAM Cargo, our cargo unit celebrate this October, 15 years delivering agility and thrift through the world. Another highlight was the opening of a new cargo terminal in Maceio Estado de Alagoas. The new terminal is three times larger than the previous one. Throughout the Northeast we already added 13 TAM cargo terminals and a total of 50 in Brazil.

Regarding to the MRO, our maintenance and repair and overhaul center, we intend to grow an average 20% per year until 2015. To achieve this target we increased our revenue offering services to external customers, we improved (inaudible) and searching for strategic partners aligned with our business plan.

Currently with (inaudible) service for (inaudible) accounting for 15% of the total revenues. Despite this really 14% until 2015. We have appointed a new executive director of TAM MRO who reports directly to the holding Company TAM SA. Tam Vacations our tourist link operator celebrates its 13th anniversary in October and currently has 120 franchise stores in all Brazilian states and serves more than 5,000 travel agents.

Formed at the moment when Global Alliance gave their brands to tourist operators, Tam Vacation was pioneer in Brazil in the implementation of this new concept in 1998. At that time we spent -- realized the opportunity to make our name even stronger in the larger segment and followed the strategy of continuing to attract the Brazilians to air travel.

On slide 5, in late March we announced defining 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 (inaudible) and offer our passengers greater choice of cities and distribution between companies.

The due diligence process was complete and satisfactory. In early August TRIP concludes the implementation of the new technological platform for the duration, sales and check-in. This platform allows the extension and consolidation of the code-share agreement between the companies moving to the TRIP sale agreement with access to inventories of both companies.

With this, we increased the amount of code-share flights and the number of cities served. We observed an increase of more than 110% in the volume of passengers transported via code-share, and we believe that this number will keep growing.

At this moment, we are working on projects and projections to generate the business plan in order to conclude the evaluation of the Company. We will keep our shareholders and the financial market informed with respect to any fact that should be disclosed as required by law and regulation.

On slide 6, regarding the status of our agreement with LATAM, on September 21st TDLC Chile's anti-trust authority approved the merger, a very important milestone in the process. The transaction has also been approved by antitrust authorities in Germany, Italy, and Spain, which completes the required antitrust approvals in Europe.

In addition we received several opinions from two secretaries in Brazil, one of the Ministry of Finance .and the other of the Ministry of Justice. We are still missing the antitrust approval from CADE, which we expect to received in the coming months. However, we keep working the next steps to finalize the merger.

As announced, we appealed to the Supreme Court in Chile regarding 3 of the 14 mitigation measures imposed by the TDLC. This appeal is under review, but we do not expect that it will delay the transaction.

During the next week, we will start the filing process with the different security regulators especially the Security Standing Committee, CVM in Brazil, the Superintendencia de Valores e Seguros in Chile.

The necessary documents for such files has been prepared and are currently in the final stages before submission. In the next week, we will also notify shareholders to the upcoming shareholders' meeting.

Finally, once we have received all approvals from security related regulators and shareholders, including the resolution of the appeal to Chile's Supreme Court, we will proceed with the exchange offer aiming to close up to the end of the first quarter 2012.

At the end of October, we began with the technical works for the integration of our international consulting Company in order to move forward in the process. In the new group's structure, Mauricio Rolim Amaro will be the Chairman of the Board of Directors of LATAM and Enrique Cueto will be the CEO of LATAM.

Maria Claudia Amaro will remain as Chairman of the Board of Directors of TAM SA, and will be a member of the Board of Directors of LATAM. I will remain as CEO of TAM SA and Ignacio Cueto will be CEO of LAN.

Libano Barroso who currently is TAM Linhas Aereas' CEO, will be the CFO of LATAM. The structure which currently reports to him, will start reporting to TAM SA after the creation of the Group.

Slide 7. We will now talk about our retail project that started in the third quarter of 2010, aiming to encourage the air transportation showing that TAM is for everybody. This project was based on the strategic relevance to work with the client who travel mostly for leisure. To capture this new client, we worked with the concept of elasticity of our brand and our strategy was to keep a regular business in the retail market focusing on off-peak flights.

A year later we nearly doubled the numbers of TAM Vacation Stores, thereby increasing its popularity. In addition, we are continually expanding our kiosks at Casas Bahia, a retail company and in subway stations. We can observe in the bottom of the slide the significant reductions of the gap between load factor through the day represented the success of our strategy.

On slide 9, we have the highlights of the Multiplus. Multiplus issued 20 billion points during the third quarter 2011, a 38% increase over the same period in 2010 mainly due to the increase of points sold to banks. The number of points redeemed reached 12 billion, and the average breakage rate of the last 12 months ended the period at 24%.

Regarding the financial highlights, Multiplus achieved a total gross billing of points of BRL397 million reflected increase in the number of points issued. Net revenue was BRL321 million. EBITDA was BRL78 million with a 24% margin. Adjusted EBITDA was BRL82 million with a 22% margin. And Multiplus net income was BRL51 million and margin was 16% this quarter.

And slide 10, as discussed, we announced -- as discussed before, we announced a joint venture between Multiplus and AIMIA, a global leader in loyalty management. The joint venture will create a new loyalty marketing services company in Brazil, and the company will be owned in equal share of participation by each of the party. This partnership will focus on the design, development, management and value creation for data analysis and insight for third-party loyalty and incentive programs.

At this time there is no anticipated transfer of assets by either party to the joint venture other than know-how and expertise with the respective cash investment by each of the partner expected to be less than $25 million over a three-year period.

Now Libano will comment on our third quarter results.

Good morning everyone. On slide number 11, we have the figures of the domestic passenger market. In the annual comparison, our demand in RPK grew 4% which combined with the supply growth of 8% resulted in a decrease of 3 percentage points in the load factor reaching 67%. The average yield increased 2% in the year-over-year comparison and 7% compared with the second quarter of 2011 in-line with the margin recovery movement confirming our expectation. The combination of those items reflected a reduction of 1% in the RASK in the year-over-year comparison. However, we observed a recover of 4% versus the second quarter of 2011. The total revenue grew 6% in this year.

On slide 12, we show the numbers for the international passengers market. The load factor in the third quarter presented an increase of -- from 83% to 84%, the best load factor ever recorded in a quarter. This increase combined with a 10% increase in the yield in dollars represented an increase of 11% in our RASK in dollars compared with the third quarter 2010. Our total revenue in dollars grew by 21% year-over-year. Even with the recent exchange rate volatility, we continue observing a high international demand during the fourth quarter.

On slide 13, we present the general figures for the quarter. Our net revenue increased 13% in comparison to the same period of the previous year. The EBIT reached BRL553 million representing a margin of 16.7% (sic - see slide 13). The net loss registered in the quarter amounted to BRL620 million mainly due to the exchange rate variation on our dollar-denominated debt.

Our total RASK increased by 4%. It is important to mention that in this quarter we have the effect of the recognition of a PIS and COFINS credit. On the next slide I will explain more about this credit and show some adjusted figures. In addition the 2010 numbers are affected by additional tariff reversal recorded in the third quarter of that year significantly reducing our operating costs.

On slide 14, during this quarter we've continued the revision of the criteria used in determining tax credit initiative in the prior quarter through evaluation of the interpretation of the law which is relatively new and the legal opinion from independent tax advisors we revised the criteria used in determining credit, also in respect to international passenger revenues.

With this we have the change on the proportion corresponding to the ratio between revenue subject to the credit. During the third quarter, BRL426 million of tax credit were recognized of which BRL382 million as a reduction of fuel, BRL40 million as a reduction of takeoff, landing and navigation aid charge, and BRL4 million as a reduction of final cost. From this total amount about BRL24 million third quarter are recurring.

We started this credit review in the second quarter when we identified a recurring credit of BRL20 million third quarter. Considering both recurring credit, we will have a total recurring amount of roughly BRL404 million third quarter going forward, which represent around BRL180 per year.

Slide 14 -- 15, sorry. On slide 15 we show the financial indicators for the quarter excluding the non-recurring credit of PIS and COFINS. And for the third quarter 2010 we excluded the additional credit reversals which impacted our numbers in that year. Besides that in these numbers, we adjusted a non-recurring impact of BRL37 million related to payment to Infraero regarding the difference of the average takeoff rates related to the previous year.

Our net revenue increased 15% compared with the same period of the previous year. The EBIT reached BRL192 million representing a margin of 5.8% and our total RASK increased by 6%.

On slide 16, it is part of our strategy to maintain high levels of liquidity. We ended the third quarter with a cash position of BRL2.1 billion. Our adjusted net debt divided by the EBITDAR of the last 12 months is 4.6 times. This index is impacted by the exchange rate variation on our dollar-denominated debt because in the end of the third quarter the exchange rate was BRL1.85 per dollar.

Making a simple exercise simulating the dollar rate observed nowadays which is about BRL1.75 per dollar, this index would be 4.3 times or comparing it to the end of the month of October when the exchange rate was BRL1.6 per dollar we would have an index of 4.1 times.

Slide 17. We can see basically our new hedging policy on our contracted position. The blue line shows the highest level of coverage set by the policy. In the red line we observe the minimum levels. 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.

For the next 12 months we have coverage for 30% of our consumption with an average strike price of $93 per barrel. Between October 2012 and September 2013 our percentage of coverage is 17% of projected consumption with an average strike price of $99 per barrel.

Moving to the slide number 19 we present our guidance for 2011. Domestic demand of passengers grew by 19% and through September 2011. The growth of the domestic supply as well as the load factor is in-line with our estimates announced earlier this year. We announced that in 2011 we would launch two new destination, international frequency or destination continuing with our strategy to grow in markets where there is high demand especially from Brazilian and business travelers.

Considering the great opportunities in the international market, we decided to launch three new international destinations of frequency. The new frequency to New York by Rio de Janeiro, second daily flights between Orlando and Sao Paulo and a new destination Mexico City is started last October (inaudible). We remain focused on the cost control. And that's expected to reduce the CASK excluding fuel expense by 5%. By now we have reduced it 1.5% and in the next slide we will comment about our actions in order to continue reducing cost.

Regarding the assumption we estimate the price of oil barrel at $93 as average for the year. The realized year-to-date is $95 per barrel or BRL154 per barrel below our estimates which is BRL166 per barrel. We understand that our guidance fits the market reality. And our growth in supplies will be lower than the estimates for demand growth.

On slide 20, we share with the market some of our initiative to continuously pursue out cost reduction. (inaudible) are divided on three fronts, sales and marketing, operations, and overhead. In the sales and marketing front we have the new commissioning model for agencies and focus in new marketing investment directly on retail.

In our operations we have optimized the management and control of maintenance components. We studied a new model of ground supported treatment and we conducted a major restructuring of our net worth that will -- that I will comment on the next slide.

In the back-office we have several initiatives like renegotiation of contracts with third parties, expense and layout analysis besides the optimization of our antifraud credit card system.

On slide 21 we will talk about the adjustments made in our network. After several studies where we analyzed the true origin and destination of the passengers, in other words, ignoring the connections made during the trip we decided to redesign our domestic network in order to offer a better product for the passengers and improve the profitability of our routes.

We are operating with this new network since mid-August and we have already seen a significant improvement in the profitability of the routes. In international market to increase operations efficiently, we switched the Airbus A340 aircraft which operated in the Sao Paulo-Milan route by the Airbus A330. This change will represent a gain of more than 20% in fuel cost per available seats in that route.

To make this equipment exchange possible, we promoted an adjustment in our international network involving the flights from Rio de Janeiro to Frankfurt and London. We did set of actions including the new flight to Mexico, the additional frequency of Orlando from Sao Paulo and the replacement of the A340 by A330. Among others, we estimate earnings of approximately by $50 million per year excluding the amount paid for the leasing of aircraft which we no longer operate.

Slide 22 focus on profitability and optimization in our operations. We revised our fleet plan. Choosing not to increase our domestic fleet in 2012 due to the fact that we estimate for 2012 a smaller growth in demand than what has been performed in 2011. In 2012 we will receive 13 new A320 family aircraft and we return 13 currently in operation.

We will not opt for the renewal of [four] lease for aircraft by modifying the original plan of receiving 13 new equipment and returning 9. To be precise, there will no net growth of the fleet. Even with the adopted measures as a result of efficiency gain already achieved by high aircraft utilization, our seat offered in ASK will increase 4% in 2012 compared to 2011.

Now we open for questions-and-answers section. Thank you.

Ladies and gentlemen, we will now initiate the questions-and-answer section. (Operator Instructions) Jim Parker, Raymond James.

Just a quick question on TRIP. It appears that TRIP has been incurring losses recently. And I'd like to know your assessment of why those losses are being incurred. And does that impact your desire to whether or not you will actually pursue your investment in TRIP?

Hi Jim. It's Libano. In fact I'm not aware of the specific items, the result for them. But what we are doing now is we are improving and fostering the code-share we used to have on old-fashioned ways in code share, but we see the block with them and then we change for the best way which is the TRIP sale agreement since August.

From there now one we more than redoubled. In fact we for 120 flights we have now 211 flights on a code-share fashion with them representing 76% increase.

We are very happy with this and we saw more than a 110% in the volume of passengers transported via code-share with us. And we are happy with this and we will continue to improve our code-share as maximum as possible in all city pairs that makes sense for both companies. And we are on this process now to proper evaluate the results.

And so what I can tell you is on the operation together with TRIP on the code-share we are very happy. Frankly, I'm not aware of their figures to tell you more about them, but we are happy where we are standing now.

Okay. And Libano, let me just make sure that I heard you correctly about domestic capacity in 2012. You were suggesting that TAM's growth and domestic ASKs will only be 4%, is that correct?

You are right, you are right, 4%. We did that (inaudible) as a clear sign of capacity discipline to proper -- have a better profitability and aiming to increase load factor and RASK for the next year. This we are renewing. We are bringing 13 Airbus 320, but at the same time delivering back other 13, net-net zero aircraft but by better utilization this should represent 4%, so a low-single-digit.

Yes, fine. All right. thanks very much.

Thank you, Jim.

Michael Linenberg, Deutsche Bank.

I have two questions. Number one, when we look at your guidance for CASK ex-fuel for the first nine months of the year, it's down 1.5%. And I know that the guidance is 5% for the full year. But to get there you would have to have a significant decline in the fourth quarter.

My sense is that number in the fourth quarter will be too big to achieve. That said, what are some of the cost pressures that you have seen in 2011 that has made it maybe more difficult for you to achieve the 5% reduction in CASK ex-fuel for the year? What are some of the areas that have been somewhat of a challenge?

Hi, Mike. In fact, you are right that this is just and only this is a one of our guidance that are at risk to deliver the 5%. More broadly, we believe we will deliver within the range of minus 3% to minus 5%. In fact we have a combination of events for not delivering properly this 5%.

One is, first of all if you look on our domestic supply growth guidance which is in the range of 10% to 14%, year-to-date is 12%. We took the decision to reduce partially ASKs exactly to have a better revenue management and then the order -- the good part of that is we are including RASK. We reduce partially ASKs to better manage the RASK.

But we have pressures on cost, especially cost related to landing fees, to airport tariff. We had a pressure this year around BRL50 million. We have some passenger assistance cost related. We have some cost related to the volcano -- the ashes on the beginning of the year, something like we had some $5 million to $7 million.

And but the combination of minor items of course that are related, but the bigger impact, the bigger impact of that is more on our decision to reduce ASK to better manage our RASK.

Okay. That's very helpful. And then my second question, Libano, we have started to see some improvement in yields in the Brazilian domestic market. Sequentially you've given us some information and we are hearing that things are improving.

What -- and I realize this is an early read. What does the fourth quarter look like versus the third quarter, or even -- or even fourth quarter of 2011 versus fourth quarter of 2010? Do you have an early read on the progression of yields? And is there something you can tell us about that based on what you're seeing now?

Yes, Mike. Remember that by the second quarter release of -- result release we announced that our intention to increase 5% on the domestic yields on the third quarter and sequentially another 5% on the fourth on top of the third. In fact we reached -- we accomplished 7% this third quarter.

And we believe we'll be able to increase on the fourth quarter 3% to 5%, the range 3% to 5% on top of the third quarter sequentially. So we are foreseeing this. And we are year-over-year -- fourth quarter year-over-year you see a low to mid-single-digit increase on the results.

Okay. Okay, very good. Thank you.

Thanks.

Augusto Ensiki, Morgan Stanley.

Question regarding the PIS COFINS tax credit, why does it go into the fuel line, if you can just give a little bit more detail on that?

And secondly, about the capacity increase. So 4% you're looking at to be below traffic increase. What's your view for traffic increase for next year? Thank you.

Hi, Augusto. Thanks for that -- for both questions. We -- this is the interpretation of the law. The idea of this interpretation exactly to -- not to double-charge all the supply chain of the Company in terms of product. And so this credit is we apply them proportionally by the cost items.

As fuel is a big item, so we recorded -- out of the BRL426 million we recorded BRL382 million on fuel, another BRL40 million on airport fees, and BRL4 million on finance cost. So this proportion is a proportion of the representation of the cost on our P&L. The cost related that are -- we -- on this credit apply on. So this is -- and we disclosed that you have more details on our footnote number 9 on our balance sheet where we have more details.

Okay.

Okay. On your second question regarding 4% increase on the domestic, we -- so far we don't release the guidance for 2012 yet. But what we are in the final process of finish the budget we believe by end of November, early December, we'll be able to release that.

But advancing, as we have historical elasticity between 2.5 to 3 times GDP demand to -- on the demand or (inaudible) Brazil. If we are -- consensus seems to be that GDP for Brazil next year will be 3% to 3.5%. With that taking this for grant we believe that the market should grow next year within the range 8% to 12%. We've been more precise in less than -- in about one month we'll be precise releasing our guidance.

Thank you very much, Libano.

Thank you.

[Angela Lee], Citigroup.

Good morning, actually filling in for Steve Trent. We were just wondering what would be your read from CADE as to whether they would be -- it would be allowed -- you guys will be allowed to acquire a stake in TRIP? And why would you seek TRIP as a potentially important asset considering US-based carrier SkyWest already appears to hold 20%?

And my second question would be if you would have a sense as to how much incremental revenue you guys would receive from the Star Alliance membership? Thank you.

Hi Angela. As you know we are in the (inaudible) there's nothing in terms of (inaudible) to CADE, because we are in a non-binding agreement. We are now just making evaluation in expanding on code-share. So according to the law here in Brazil there is no implication at this junction to file in CADE any big announcements. We have to do the announcements TRIP, okay?

Okay, so it would be just for code-share purposes if I understood you correctly?

Yes, just for code-share now we are extending our code-share that we have since 2004 with TRIP. Now we are working -- as we say is keen that permits to have a better connectivity between the two companies, anyway continues to make devaluation of the Company. We are now -- we have any Group making our decision to have a stage at the Company.

Okay, yes, thanks very much. And how about my second question regarding revenue from Star Alliance membership? Would you be able to give us any comment?

Angela, this is Libano. We never disclose that, but I can give a figure -- official figure from Star Alliance not ours. Star Alliance has a kind of average range that the companies that are utilize Star Alliance on the potential as our case, they have within the range 2% to 4% out of the total international revenues on top five be part of the -- an alliance.

But we don't disclose this figure. I am just disclosing for you what is the official figure for Star Alliance, okay?

Okay, thanks. Thanks very much.

Thank you.

Eduardo Couto, Goldman Sachs.

My question is on a relation to international yields. Have you seen a lower competition from the international carriers after the recent depreciation that we saw in the Brazilian currency because with a stronger real I think it was easier for them to compete with you guys. So have you seen any lower competition on the back of that? That's the first question.

Hi Eduardo, thanks for the compliment, but in fact we -- the competition -- first thing competition, we foresee the same level of competition, so we are competing head to head to the passengers.

Okay, and in terms of the yields in the international side, Libano, can we say that this weaker real at least helps the yields in local currency or in reais, because if -- as you said the competition from the international guys is still fierce, but I think most of them they price the shares in dollars.

So for you at least in local currency that would be better. So have you seen or at least could that explain part of the growth that we saw, the very strong growth that we saw on yields in the third quarter for the international side and can we expect more from that in the fourth quarter?

Yes, partially I have to agree with you because we have more sales power locally because you can use that kind of (inaudible) of around 60% to 70% -- 60% of this passengers are -- they buy in Brazil. And which is in this time a volatility, we have better positions, sales power here because of our brand awareness so on, so forth.

But in fact it's -- there is a kind of trade-off between markets when you have change on effects. But we are maintaining high levels of load factor, high levels and loads higher than 80%. In fact we had all-time high in September, July in maintaining this level.

But have you seen your competitors trading shares in dollar terms in -- to maintain the shares in reais terms, have you seen that or no?

Dollar-denominated, it's dynamic. On average the price reflects the revenue matters of its company, but we didn't see a change on the behavior there. As always our work-ups first are higher, with more advanced purchase are lower. So maintaining the curve of the reservation.

I was just wondering that because we have seen specially some carriers in the US increasing a lot the number of routes to Brazil and I think on the back of that probably the incremental passengers should be more and more Brazilians which are really more sensitive to the fares in reais because that's the currency. So I was just wondering if maybe those international carriers are reducing a little bit the yields in dollar terms trying not to raise fares in reais significantly because of the BRL depreciation.

We have been able to maintain this trend of growing yields in dollars and in reais also. So, so far according to our inventory we are maintaining this level and this is the strength for the end of the year also.

Okay, so you still think it's possible to raise yields in the international side even in dollar terms despite the appreciation of the BRL?

Yes.

Okay. Thanks, Libano.

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.

Thank you very much everybody and have a good day. Bye-bye.

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