LATAM Airlines Group SA (LTM) 2011 Q4 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 fourth-quarter 2011 earnings conference call.

We would like to inform you that this call and the slides are being broadcast in the Internet at the Investor Relations Company's website at 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 that time, further instructions will be given. (Operator Instructions).

Before proceeding, let me mention that forward-looking statements are based on beliefs and assumptions of TAM's 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; and Libano Miranda Barroso, IR Director and CFO.

Now, I'll turn the conference to over to Mr. Antonio Bologna. Mr. Bologna, you may begin your conference.

Good morning. Thank you all for your presence in our 2011 fourth quarter results presentation.

Let us begin the presentation on slide number 5. On slide 5, we will begin talking about our recently announced the fleet's planned revision. In August of 2011, we announced a reduction on our narrow body fleet for 2012. Initially, we expected an increase of 4 aircrafts, but in August we announced that our domestic fleet would not grow compared to 2011. In other words, we would keep 127 aircrafts in 2012.

On January 31st, we announced a new revision now reducing 3 aircrafts in the domestic fleet. With that, we will end the year of 2012 with 124 narrow body aircrafts. This is a very important movement in our recent history, because it is the first time since 2003 that we reduced the number of aircrafts in domestic markets compared to the previous year. We will focus our effort in order to increase the profitability of our Company, continuing the movement of yields recovery started in the second half of 2012 -- 2011.

On slide 6, we believe in a strong and growing market in 2012. The commercial aviation segment will remain hit this year, in line with the increase in the Brazilian GDP and the arrival of new passengers who will continue to migrate to airplane trips. Based on this fact, we estimate a growth between 8% to 11% on the demand for domestic flights in the Brazilian market for 2012.

The seat capacity growth shall increase between 0% and 2% in domestic market and 1% to 3% in international. We do not expect to open new routes in 2012, but we work for consolidating and increasing load factor on existing flights and increasing frequencies in some international routes. We expect ending the year with an average load factor between 72% and 74% on the domestic and 83% to 85% in the international segments.

It's worth highlighting that in 2011, we reported the best load factor rate of our history international route. Regarding the assumptions, we estimated the price of oil barrel at $95 as average for the year, while the exchange rate should be BRL1.74 per dollar.

On slide 7, we will explain our rationale in planning a moderate supply addition, even predicting an year with strong demand growth. The explanation for this decision is directly related to our strategy of increasing the load factor during the off-peak hour. We announced this strategy a few years ago and we are observing a significant improvement in the load factors at this period of the [base].

For 2012, we believe that demand will continue to grow and we will capture this demand, primarily through the hours with lower load factors, but we will be able to apply this strategy without significant dilution impact in the domestic yields. Indeed, we believe that the yields will continue with the recovery movement started in the second half of last year.

We will continue offering affordable tickets (inaudible), but the strength is that the yield average will grow over 2011. Another important point to be mentioned is that our target is always to maximize the RASK that comes from the combination of the load factor and the yields. For 2012, we believe in increases in both indicators.

On slide 8, we show a comparison of the evolution of the load factor in Brazil with the United States. We always make comparisons with the US, because we believe that both countries are similar regarding the [turitaro] extinction, but we know that the US market is already more developed and there are some differences.

The US has a higher penetration, registering more than two trips per year per inhabitant, while in Brazil, the figure is about 0.4 trips per inhabitant. Moreover, United States don't have a large concentration of passengers at airport. The top 10 airport represents only 35% of the total volume of passengers. The RASK will distribute in more than 1,000 airports. In Brazil, top 10 airports accounting for nearly 70% of our passengers. This occurs in Brazil because we still have the majority of passengers flying by business [performance].

As a consequence, there are concentrates in seats where there is greater economic activity. The result was observed in the previous slide, where there are moments with concentration of passengers, while at other periods we will see -- we still see unused peaks.

We understand that over the years, the market will develop, reaching a more balanced mix between business and leisure passengers, and as a result, there will be an increasing trend in our load factors. Furthermore, we believe that the Brazilian airports will provide great improvement in the near future.

On slide 9, now we will talk about our business unit. Regarding TAM Airlines, the highlight was the recovery of the RASK yields for the second consecutive quarter. In the third quarter of 2011, we obtained a 7% increase compared with the previous quarter -- now represents another 5% increase in comparison with the third quarter of 2011.

We will provide more detailed information about the financial performance of the Company in the next slide. It's important to mention that this recovery in yields was important to compensate the increase of some costs that we do not have the control, such as fuel, airport fee, increased spending with customers in light of new consumer law, besides the restrictions, which will be observed in some airports that will undergo reforms in 2012.

In 2011, Multiplus continues with the strategy of increasing its network and expanded its numbers of coalition partners from 11 to 26. In addition, the Company continues to expand its capillarity through the partnership with Redecard, where customers can accrue multiple points using Redecard term. This feature is available in several establishments. We will continue working to expand both number of coalition partners as well as places where customers can earn points through the Redecard machine.

In TAM Vacations, 2011 was a year for the consolidation of the franchise model directly responsible for the expansion of the number of stores. Since the beginning of the model in 2010, we more than doubled the number of stores across the country, reaching all Brazilian states and 160 units at year's end. This expansion comes as a result of the good moment for the tourism market as well as our efforts to provide the facilities to new and existing franchisees, such as the agreement signed with the Caixa Economica Federal to open credit lines and special financing.

TAM MRO, our maintenance business unit, continues to increase its focus on independent management, change in process, and the development of a continued improvement program with the LEAN model. Thus, we continue working to make it grow and become stronger as an independent business unit. We received the certification of European Aviation Safety Agency, EASA, for four maintenance station lines located in Porto Alegre, Recife, Salvador and Fortaleza. Now, they can provide the services on Airbus aircraft registered in Europe. In addition, our MRO received the certification to provide the services for ATR-72 aircraft, and we are preparing to obtain the certificate to provide the maintenance on the Embraer aircraft.

TAM Cargo, which celebrated 15 years in 2011, was recognized with the award of the Consumidor Moderno magazine in the category logistics. Moreover, the month of November was historically for our cargo units achieving record sales, both in the domestic and international market.

And finally, we had changes in the structures of the Company. Libano Barroso, who was in charge of the airline business of the Group since October 2009, left this role, but will remain CFO and Investor Relations Director of the holding Company TAM SA until the creation of LATAM Airlines Group, where he will be CFO. I, currently the CEO of the holding Company TAM SA, will also assume the role of CEO of the airlines. Libano will be dedicated to the development of the holding Company TAM SA, which includes the structuring of our Company for the future integration with LAN as soon as all necessary legal requirements for the merger are completed.

On slide 11, we will talk about the status of the merger with LAN. Last year, we have successfully advanced in meeting all the requirements for the completion of the merger. The LATAM Airlines Group received the approval of all authorities, including the TDLC in Chile and the Administrative Council for Economic Defence, the CADE, in Brazil.

In December, LAN shareholders approved this transaction, and at the beginning of this year our shareholders unanimously approved the ratio of 0.9 LAN shares for each TAM shares in the public exchange offer. Moreover, we already performed the necessary filings with CVM, the Brazilian Securities and Exchange Commission, and with the SEC in the United States. Once we receive the approval of this document, we will begin the exchange offer to finally close the [TAM SA capital] and start the LATAM operation.

On slide 12, in the end of October last year, we started the technical works for the integration via international consulting companies in order to move forward in the process. After reviewing the numbers related to the merger, it was possible to estimate that together TAM and LAN will generate annual synergies between $600 million and $700 million, increasing between 50% and 75% guesstimate previous announced of $400 million per year. These synergies will be captured in its total in four years after the completion of the transaction.

Now, I will pass to Libano, who will comment on the fourth-quarter 2011 results.

Good morning everyone. On slide 14, we have the highlights of Multiplus. Multiplus issued 21 billion points during the fourth-quarter 2011, a 28% increase over the same period in 2010. The number of points redeemed reached 17 billion, increasing 40% compared to the previous quarter, and the average breakage rate of the last 12 months was 24%.

Regarding the financial highlights, Multiplus achieved a total gross billings of points of BRL434 million, an increase of 33% compared to the fourth-quarter of 2010. Net revenue was BRL398 million. EBITDA was BRL61 million, representing a 15% margin. Adjusted EBITDA was BRL93 million, a 23% margin.

Multiplus net income was BRL71 million and margin was 18% this quarter. It is also important to say that in 2011, Multiplus distributed more than BRL680 million in dividends, interest on capital, and capital reduction. In addition, it was approved more than BRL261 million for payment in 2012 related to 2011 results.

On slide 15, we highlight Multiplus's strong growth. During 2011, the number of members increased by 1.5 million, reaching a total of 9.4 million members at year end. Besides that, the network ended the year with 190 partners, including coalition, accrual, and redemption types. We also would like to highlight Multiplus gross billings growth, reaching more than BRL1.5 billion in 2011, and also the potential of non-air redemption, as you can see in the chart.

On slide 16, we had the figures of the domestic passengers market. In the annual comparison, our demand in RPK grew 1%, which combined with the supply growth of 2% resulted in a decrease of 1 percentage point in the load factor reaching 68%. The average yields increased 3% in the year-over-year comparison and 5% compared with the third quarter of 2011, in line with the margin recovery movement, confirming our expectation for the quarter. The combination of those items reflected an increase of 1% in the RASK in the year-over-year comparison and 5% versus the third quarter of 2011. The total revenue grew 4% in the period.

On slide 17, we showed the numbers for the international passengers market. The load factor for the fourth quarter remained flat year on year, but we recorded a 14% increase in yields in dollar, which represented a 15% increase in RASK in dollars compared to the fourth-quarter 2010. Our total revenue in dollars grew by 21% year over year and 29% in reais. Even with the recent exchange rate volatility, we continue observing the high international demand.

Slide 18 represents the general figures for the quarter. Our net revenue increased 11% in comparison to the same period of the previous year. The EBIT reached BRL298 million, representing a margin of 8.3%. The net income registered in the quarter amounted to BRL96 million. It is important to mention that the RASK, our unit revenue, increased 7% year over year and 9% versus the previous quarter.

On slide 19, it is part of our strategy to maintain high levels of liquidity. We ended the fourth quarter with a cash position of BRL2.6 billion. Our adjusted net debt divided by EBITDAR of the last 12 months is 4.3 times. This index this impacted by the exchange rate variation on our dollar-denominated debt, because in the end of the fourth quarter, the exchange rate was BRL1.88 per dollar. Making a simple exercise simulating the dollar rate observed nowadays which is about BRL1.75 per dollar, this index would be 4 times.

On slide number 20, we can see basically our [new] hedging policy in 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 28% of our consumption with an average strike price of $94 per barrel. For 2013, our percentage of coverage is 14% of the projected consumption with an average strike of $101 per barrel.

Slide number 21, we present our guidance for 2011. Domestic demand of passengers grew by 16% in 2011. Our domestic supply growth is likely below the minimum expected, growing 9.5% according to our strategy of readjustment of the network, aiming to improve profitability. The international supply and the average load factor reached the estimated growth. We announced that in 2011 we would launch two new international frequencies or destinations, continuing with our strategy to grow in markets where there is a high demand, especially from Brazilian and business travelers.

Considering the great opportunities in the international market, we decided to launch three new international destinations or frequencies. New frequencies -- new frequency to New York via Rio de Janeiro; second, daily flights between Orlando and Sao Paulo; and a new destination, Mexico City, is started last October 13. Regarding the CASK ex--fuel, we did not achieve expected reduction of 5% reaching 2.4%, which we will comment on the next slide.

Moving to slide 22, we can observe the factors that have impacted us in achieving our CASK reduction target. The main point which impacted the reduction of CASK in 2011 was the wage adjustment of 8.75%, roughly 2% above inflation. In addition, we had not planned the readjustment from Infraero impacting domestic fees in force since March 2011. We also had non-recurring impact of BRL37 million from the difference of the maximum takeoff weight in the average fleet from previous year. As mentioned, our ASK growth was below the estimate. As a result, we have a lower fixed cost dilution impacts our CASK reduction in 0.2 percentage points.

Finally, we had expense with lawyers and other consultants due to the merger with LAN. Excluding these events, we show that we remain committed and focused on cost control. We believe that maintaining a high utilization rate of aircraft includes combining with our strict cost control is essential for us to remain competitive in all markets.

On slide 21 -- 23, sorry, we share with the market some of our initiatives in 2012, aiming the constant search for cost reduction. We are seeking internal benchmarks for reducing overhead cost and also seeking new approach to analysis through this package managers' work, which look at the cost as a metrics. Regarding third-party service, we have several actions such as new round of contract renegotiation with suppliers, implementation of targets for law firms and reduced consultancy fee -- cost.

Relating to variable cost, we are working to reduce the rate on board of our aircraft, reducing fuel consumption. In addition, we are performing an optimization control and inventory management of spare parts. Due to the increase in punctuality and regularity rate following our search for excellence for passengers, we will be able to reduce spending on contingencies in terms of interrupted flight.

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

(Operator Instructions). Nicolai Sebrell, Morgan Stanley.

I've got a couple of questions for you. The first is regarding expiring tickets and other. If my math is right, that's like 8% of your revenue, a pretty big number and it's been going up. So, I am curious as to what's going on with expiring tickets? Is this a trend that is continuing and should continue in 2012 or should this reverse be --- it seems odd that that would be a significant source of revenue. That's the first question.

The second question has to do with the loyalty program. Also, of course, we've seen healthy growth in the loyalty program and that's another 8% to 10% of revenue or so. I was wondering what you can say about the future of that. And when we look at the loyalty revenue program, should we just really be focusing on Multiplus or is there other sources of revenue or other things going on that business inside TAM that is not part of Multiplus? Thanks.

Hi, Nic, it's Libano. You can consider the trend for the expired ticket, the same trend for 2012 as we had in 2011. And this increase that we had was more related to certain promotions that we made last year and some of the tickets expired due to non-utilization, but we believe this will remain at the same pace. On the loyal side, these revenues are related with Multiplus. We do not add all the costs other than Multiplus, and you can consider -- I believe the best trend for you is to follow Multiplus on their call for Europe.

Okay. So, for expired tickets, we should look more at the year rather than that what happened this quarter, since there was a spike in the quarter, and that we can use the model for 2012. And the growth in the loyalty program is in line, I mean, I haven't been following Multiplus that closely, but I guess it must be in line with what we are seeing in Multiplus, is that right?

Yes, for both. Yes.

Excellent, Libano. Thank you very much.

Thank you.

Thank you. (Operator Instruction) [Ryan Santos], Citigroup.

Just one question for you guys. Does TAM see some possibility of picking up slots in Brazilian airports as a result of the GOL-Webjet merger? What do you think?

Hi, Ryan, my special regards to Stephen, okay.

All right.

I don't -- we don't know. Frankly, we don't know, we are not following this closely. We don't know what -- what's the aftermath of this merger. We cannot say anything for that. Okay.

It sounds good. It sounds good. Yes, that was my only concern as far as slot redistribution with so many -- I mean, they have so many overlapping routes, so, but thanks for the answer.

Just adding, you know that there is a very strict rule in Brazil for new slots. There is a rule that 80% of the new slots available are distributed among the incumbents and 20% for new entrants. So, this is -- this should happen in future. There is a clear rule how to -- they should be distributed.

It sounds good. It sounds good and once again congrats on --

Thank you.

Augusto Ensiki, Morgan Stanley.

Question regarding the revenue tax line. I noticed that it's been ticking up a little bit in terms of percentage of gross revenue. Is there --- I mean, what's the specific driver to that number increasing and is the level that we saw in the fourth quarter what we can expect going forward?

For you to model 2012, it is better to use the average for the year. What we had on the third and fourth quarter, we had an important increase on revenues related to cargo and other ancillary revenues. These two buckets, they have a high expectation compared with air ticket. That's why you saw this increase this quarter. But consider the average for the year, I believe, it is very fair.

Okay. So, then as you are saying with the cargo and other, the larger proportion that is to revenue than the higher -- the higher revenue tax we can expect.

Thank you.

All right. Thank you very much.

(Operator Instructions). Iyad Atuan, Moneda Asset Management.

Just a quick question regarding short-term debt. You have BRL2.3 billion in short-term debt. And how much of that is working capital lines and how much is regular loans?

Hi, Iyad. Around -- you can consider that BRL800 million roughly; we are talking about $450 million to $500 million. This is our revolving credit. We use this as financial import for spare parts. We consider this as working capital and revolving credit, we are always rolling this. I don't know if you have more. We have more -- we need to amortize, we have amortization for the bankers this year of around -- this is roughly $90 million. We will amortize this in due course.

Okay, thank you.

Thank you.

Thank you. (Operator Instructions). Marcello Gunther, HSBC Bank.

My question is related to the yield recovery. You expect, as a consequence from a rational capacity, additions in 2012. Second, [before] in the Portuguese call you have mentioned that you might see a double-digit growth -- not double-digit, I am sorry, high single-digit growth in 2012.

And if you could elaborate a bit more and provide some color on how is this material increase possible, given that even if the two major players in this industry stick to their capacity plans, we have the normal players adding capacity more aggressively, even though sometimes none overlapping routes. And also you have part of your growth coming from off-peak strategy. If you could elaborate a bit more on the scenario for your recovery, that will be great. Thanks.

Hi, Marcello. Our strategy is to maintain our technology on revenue management side in order not to jeopardize our strategy with business travelers, discounting with them and offering tickets at affordable price on off-peak flights, maintaining our ability to charge properly for the walk-up fares for the business travelers. So adding this, we believe that, because we are considering this year, once again, an important growth for the market, we are targeting 8% to 11% growth in RPK, combined with our domestic supply, as we mentioned, within the range 0% to 2%, it means that we are sure that we will increase our load factor. By increasing load factor and having less capacity, we will be more and more prepared to add some revenue measures to increase the yields and consequently increasing RASK also.

You know that we never guide on financials, but we can share our view that assuming this scenario, we believe that we will be able to post a high single-digits growth on yields on the domestic market year-over-year 2012 compared to 2011.

Okay, Libano. Thank you very much.

Thank you.

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

Many thanks for everybody and have a nice day. Thank you.

Thank you.

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