LATAM Airlines Group SA (LTM) 2023 Q1 法說會逐字稿

Good day and thank you for standing by. Welcome to the LATAM Airlines Group earnings conference call. (Operator Instructions) Please be advised that today's conference is being recorded.

Before I turn the call over to management. I'd like to remind you that certain statements in this presentation and during the Q&A may relate to future events and expectations and as such, constitute forward-looking statements. Any matters discussed today that are not historical facts, particularly comments regarding the company's future plans, objectives, and expected performance or guidance are forward-looking statements.

These statements are based on a range of assumptions that LATAM Group believes are reasonable but are subject to uncertainties and risks that are discussed in detail in our CMF and SEC filings. The company's actual results may differ significantly from those projected or suggested and any forward-looking statements due to a variety of factors, which are discussed in detail in our SEC filings. If there are any members of the press on the call, please note that for the media, this is a listen-only call.

And now I'd like to turn it over to Ramiro Alfonsin, CFO.

Thank you, Jill. Hello, everyone, and good morning. Welcome to our first-quarter 2023 conference call and thank you for joining us today. My name is Ramiro Alfonsin, and I am the CFO of LATAM Airlines Group. Here with me today is Mr. Roberto Alvo, CEO of LATAM Airlines Group; Andres del Valle, VP of Corporate Finance; and Tori Creighton, Head of Investor Relations. And we will present our highlights and results for the first quarter of 2023. I'd like to pass the presentation to Roberto to set the stage for our first-quarter results.

Thank you, Ramiro. We are very excited to announce that after challenging times following a financial restructuring and emergence of Chapter 11, we are able to go back to operational and bottom-line profitability. We achieved these solid results despite softness in cargo demand and passenger demand impact on Peruvian operations due to the socio-political unrest between the (technical difficulty). We believe -- sorry, I hear some bouncing back. Can you hear me okay?

Yes, we can hear you okay.

Okay, great. This result was mainly driven by increase in our passenger operations and a healthy demand context, which has allowed us to significantly recover our network, essentially matching the number of destinations compared to pre-pandemic context.

In addition, LATAM's more efficient cost structure has been reflected in a reduction of our unit cost when compared to 2019, even taking into account the inflationary pressures throughout the period. Despite the above, our levels of operation are still not fully recovered. With passenger capacity reaching [86] (technical difficulty) levels during the quarter and jet fuel prices continue remain -- continue to remain elevated -- in elevated levels with high volatility regardless of the recent reductions in the last months.

These quarterly results are a solid proof of our strategy as we intend to keep strengthening in our operations and we continue expanding our network and [presence] where we operate. During the quarter, the group also continued its firm commitment towards sustainability goals, reaching 88% reduction on single-use plastics during the first quarter, which is in line with our commitment to eliminate 100% of single-use plastics by the end of the current year.

We're very proud to share that during (technical difficulty) the company's first -- LATAM made its first flight using sustainable aviation fuel, SAF, operated in one of our cargo flights from Europe to the United States. Recently, LATAM also announced the expansion of the Alliance with the Cataruben Foundation located in the Colombian Orinoquia wetlands region, which aims for the conservation of 575,000 hectares to capture more than 11 million tons of CO2 by 2030.

Additionally, we recently announced the expansion of our codeshare with Voepass in Brazil, which will further increase our leadership position in domestic Brazil with 30 new routes that will allow passengers to connect with LATAM (technical difficulty) Brazil.

Important changes have occurred also in the Colombian market, specifically following the cessation of operations from two operators facing financial difficulties to which we have reacted proactively with strong focus on the continuity of the Columbian travel market, relocating stranded passengers by Airbus 320 aircraft and more than 2,000 -- 200 employees to our operations.

We're confident that these actions will be more opportunities for LATAM in order to further strengthen the presence in Colombia and in the region. Our affiliate, LATAM Colombia, is now a solid second player in the Colombian market.

We're experiencing a stable scenario in terms of demand and booking curves. LATAM Group continues to see strong load factors, loyalty of customers, and an improvement in our service and offering. With regards to the corporate demand recovery, we're approximately 98% of 2019 levels in the first quarter, which is a positive highlight.

Furthermore, the second quarter of the year, which is not historically the strongest in terms of seasonality for us, but we do keep observing healthy context, both in terms of industry and demand that allow us to remain cautiously optimistic about the near term and the rest of the year.

With that, I'd like to turn the microphone over to Ramiro to further discuss our financial and operational results.

It's a bit choppy at some times, but I guess we all heard you quite well. Please join me on slide 2.

During the first quarter, LATAM Group continued to increase its passenger capacity in a context of strong passenger demand and with international segment driving this improvement. With regard to the operations, the group's passenger operations measured in ASKs grew 26% compared to 2022 levels.

Consolidated revenue per ASK increased 24% in the first quarter in a context marked by strong demand for air travel and by high jet fuel prices. International operations represented 47% of the quarter's capacity, followed by domestic Brazil with 35%, and the Spanish-speaking countries was 18%. This latter partially affected by a year-over-year decrease in domestic Peru as a result of certain interruptions in our port operations associated to the process in the country during the first quarter. It is worth noting that the recovery in the operations has been accompanied by a healthy consolidated load factor of 81% for the group.

Cargo continues to be an important pillar for the group's operations. No one offers a one-stop-shop cargo solution and the capillarity and network offering or facilities and capabilities to transport dangerous goods, pharmaceuticals, and others like LATAM. Cargo capacity increased 19% compared to the first quarter of 2022 and yields continued to be significantly higher than 2019 levels.

When we look at the LATAM Group market positions on slide 3, we can note that LATAM continues to be highly competitive in all the different markets where it operates. Notably, LATAM has once again recovered its leadership position between North America and the countries where it operates domestically in South America, reaching a capacity share of 19%, which increases to over 25% of the market when adding Delta's capacity share now operating under the JV agreement.

We are very proud of the important presence that we have been able to build throughout our entire network, which currently positions us as a leader in three of the five domestic markets where we operate and as leaders within South America, both between South America and North America and Asia Pacific.

During the first quarter of 2022, the group transported 17 million passengers, by far more than any other airline in the region. This is a result of the competitive market shares accompanied by an efficient cost structure and healthy levels of liquidity, allowing for continued organic growth.

On slide 4, you can see that this quarter LATAM registered an adjusted operating margin of 10.5%. Despite operations not being fully recovered or the impact of the socio-political unrest in Peru, adjusted EBITDAR amounted to $573 million. In the first quarter, total operating revenues increased a notable 43%. As operations continue to recover, passenger revenues increased 61% over the same period of 2022.

Cargo revenues registered a 12% decrease, mainly explained by the softening of cargo yields, but that's still 42% over the 2019 level. Total adjusted operating costs during the quarter increased by 23% versus 2022, mainly explained by the increase in the aircraft fuel cost line which increased 41% following a 14% increase in the fuel price during the quarter.

Ex-fuel adjusted operating expenses were up 13% from 2022 levels, while ASKs increased 26%. Therefore, LATAM reported a passenger CASK ex-fuel of $0.04, 10% lower than in 2020 to reflect the important cost-saving initiatives that we implemented. Adjusted EBIT amounted to $295 million and net income of the parent company to $121 million.

The group generated $199 million in cash in the quarter, therefore, improving its liquidity to $2.5 billion. Cash generation and liquidity levels are very distant to other competitors in the region. Finally, total fleet cash cost amounted to $199 million for all of our 300 aircraft.

Please join me on slide 5 to take a closer look to our cost structure. We are proud to continue showing improvements compared to the previous year, to the previous quarter, and even to pre-pandemic levels. In the first quarter 2023, we reported passenger CASK ex-fuel of $0.04, which is 10% lower than the same period of 2022 and below the 2019 figure as well. That is even taking into account the significant inflationary pressures that the region and the world have experienced during this time.

LATAM cost structure is extremely competitive, both on an absolute and on a relative basis, when compared to European or US carriers that you can find on the right-hand side of the slide. When one looks at the available public information of other carriers, you see increasing cost unit, especially following the inflationary pressures worldwide.

Last quarter, as we emerged from Chapter 11 stronger and more competitive, we commented about the importance of capital and cost structure and how LATAM was reporting solid figures on both those fronts. This quarter, as you can see in slide 6, we have built upon that strong foundation and reported higher levels of liquidity and quarter-over-quarter leverage reduction. LATAM Group generated cash amounted to $199 million this quarter and presented $2.5 billion liquidity. This represents 24% of liquidity as a percentage of last 12 months' revenues.

In terms of leverage, the group reached an adjusted leverage of three times, the best in LATAM's history. When we look at our debt maturity profile, it's very important to highlight that LATAM has no significant non-fleet debt maturities in the next four years. As of today, LATAM only have maturities coming from our exit financing due in 2027. And it is worth mentioning that these can be refinanced in 2024.

As you can see on the next slide, LATAM Group has seen a sustained improvement in its capacity measured in ASKs with a noticeable path to recovery in the past quarters. The financial results on the lower hand have mirrored this recovery with healthy numbers and the best last 12 months' EBITDAR to Chapter 11 filing. Lastly, I would like to highlight that the first-quarter EBITDAR was $565 million, and the last 12 months' EBITDAR amounted to $1.6 billion.

Let's turn to our cash flow statement on slide 8. In the first quarter 2023, LATAM generated a positive cash flow of $199 million, driven by a very strong adjusted operational cash flow of $409 million in the quarter. This strong result was mainly due to the recovery in operations and the ramp-up in demand during the first part of the year.

As a result, LATAM was able to cover its investments, including maintenance and growth, which mainly consisted of engine maintenance and resulted in a positive, unlevered free cash flow of $289 million for the quarter.

Let me conclude on slide 9. LATAM continues to grow. Its growth is leveraged in a unique network and in extremely competitive cost structure that is combined with a strong capital structure, enabling us to increase our operations by 26%, measured in ASKs compared to the last year. LATAM has begun 2023 with $121 million in net income and this presented an adjusted double-digit operating margin of 10.5%. The continued cost-saving initiative has been successful, and we are seeing this impact having reported a passenger CASK ex-fuel of $0.04 in the first quarter, a reduction of 10% from last year.

Finally, LATAM continues to strengthen its capital structure. LATAM generated $199 million, improve its liquidity to $2.5 million, and continues to reduce leverage, reporting a record low in LATAM's history of three times adjusted leverage.

With that, I thank you for your attention, and we would like to open the floor for any questions.

(Operator Instructions) Guilherme Mendes, JPMorgan.

So good morning, everyone, Roberto, Ramiro, Andres, Tori. Thanks for taking my questions. I actually have two. The first one is on the guidance. It was a pretty strong performance in the first quarter, especially in terms of margins. And I understand that you reaffirm your guidance for the year, but just wondering if you see any kind of upside potential for the -- your current estimates?

And the second question, which is kind of related questions in terms of tariffs. First, if you could explore, how was the performance between segments, leisure, and corporate and maybe between regions as well? And according to the first question, if you see some upside for you going forward over the coming few quarters. Thank you.

Hi, Guilherme, and thank you for your questions. I'll take the first one on guidance. As you know, we announced guidance on January 19 last year, and we're still at the beginning of May, and we're seeing macroeconomic context that is volatile. The political atmosphere here in the region is still a little bit choppy. We're seeing fuel prices with a lot of volatility. So at this time, we continually are reviewing projections, but we will timely inform the market in case of any material changes. But at this time, as you said, we are reaffirming our guidance.

All right. Thanks, Guilherme. I'll just take the second question here. So in general segments are -- I would say stable and healthy (technical difficulty) is a strong both to Europe and to US, some weakness between Peru and the US given the social unrest in the beginning of the year here. Domestics, in general, are stable. Again, domestic Peru is probably the country with a little bit more weakness for the same reasons.

And cargo, we have a slowdown of cargo vis-a-vis last year, still better than 2022. We had a long Lunar New Year in China, as you know. So that impacted some flows as well. The numbers (technical difficulty) by 5% traffic in the region.

But now we see some stability in the softness, and we have a slightly better uptake for the remaining of the year. So in general, I would say the demand is in a good level. Segments are generally good as I explained, 98% of our corporate traffic came back and is also in a good place. Just to remind you that second quarter is seasonally the lowest for us. So we're now in the moments of more downside demand -- not downside demand, but slower demand just because of seasonality reasons. Thank you.

(Operator Instructions) Michael Linenberg, Deutsche Bank.

Hi, there. This is actually Shannon Doherty on for Mike. Thank you for taking my question. Just my first one, are you guys facing issues, preparing new aircraft or seeing delays in the maintenance of your existing fleet like many other carriers are? And if so, how are you compensating for this?

Hi. So I'll take this. All engine manufacturers or in-framers are struggling. It's well known in the market. Currently, all of our operation, our all of our fleet is operating despite of the challenges of both supply chain and engine deliveries. But we're monitoring this very closely. We don't expect any significant disruption to our operations given the situation. But we are putting a lot of focus today in making sure that we can run our operations smoothly despite the challenges from some of our suppliers.

That's great. And for my second question. It's sounds like the Board approved the future distribution of dividends. Can you remind us of what that dividend policy would be and is that a 2023 even or maybe 2024 and beyond?

Yes, for the shareholders' meeting, we capitalized some retained losses that would allow us to tune to distribute dividends if we have positive results in 2023. Here in Chile, we have a legal constraint that we need to distribute 30% -- at least 30% of the net income of the company into dividends.

(Operator Instructions) Victor Mizusaki, Bradesco BBI.

Hi. Thank you. So I have a -- just a quick question here. So basically, LATAM issues some -- I mean, the 2027 and the 2029 bonds as part of the plan to emerge from Chapter 11, but why do we take a look on your results and maybe the first quarter, actually, the numbers are improving really fast. So my question is, I mean, you do have end plans? Or if -- is there any kind of possibility to refinance these bonds?

Yes. Thank you. Thank you, Victor. Yes, we can refinance the bonds. We are constantly monitoring the market. The '27 -- the 2027 bonds and the Term Loan B can be refinanced from 2024 onwards. And we are going to be analyzing that according to market conditions.

Okay. Thank you.

(Operator Instructions) Stephen Trent, Citi.

Hi, guys. Actually, it's [Felipe] from Stephen Trent's team speaking. Thanks for taking my question. So we have two questions on side. I'll start with the first one and then I'll do the second. The first one would be if you see any specific regions that drove stronger margins like we spoke about -- a little about there's differences between regions, but I was curious to hear about differences in margins between different regions and partners. And that's the first one now and then I'll do the same.

Yes. Hi, Felipe. Thank you for your question. We're seeing -- as Roberto mentioned, a strong international segment it has been growing well. We see steady demand there. Generally, I would say that we see all the segments performing reasonably well with the exception of the Peru US segments. Corporate demand, we see it now fully recovered to pre-pandemic levels. And so we're seeing a stable demand throughout the different segments that we operate in.

Okay, thanks. And regarding the joint business agreement with Delta Airlines, what should be the next steps for LATAM in this agreement? And is there any chance that you do something similar with Aeromexico in Mexico? Thank you.

Felipe, so this season, the summer season of 2023 is the first season we would see published capacity. So that's an important first step with Delta. We look and we feel very confident of the development of the relationship with them. It's actually a great team to work with. We've announced already two important routes as part of the JV. We'll start Sao Paulo to Los Angeles in July of this year. And also we would start operating Bogota to Orlando as well in the third quarter of the year.

So I guess what you will see in the next months is, as we think about how to enhance the network and provide better options for our passengers, aligning of our networks, particularly in our hubs, making sure that we increased connectivity for our passengers beyond our hubs, both in the northern side, so in the US, as well as in South America, we're exploring new routes and new operations as we get those agreed and streamlined, we'll publish them.

But all in all, we feel very, very confident and can be with respect to how this has been evolving. We are clearly the first player in the South America to US market by far. And I think that we're starting to feel this in terms of the ability we have to provide options for our customers and also in our frequent flyer program. So strong (technical difficulty) agreements.

With respect to the second part of your question, we're always analyzing ideas and opportunities to doing things. I'm not going to talk about any of those. But of course, our take is always to see if we can develop and strengthen the network for our customers and looking forward to serving them better.

Thank you for your question.

Thanks.

(Operator Instructions) Neil Glynn, AIR Control Tower.

Good morning. If I could ask two questions, please. The first one with respect to ex-fuel unit costs. You obviously highlighted there, I think 3.7% below pre-pandemic levels on the slide. Just interested, can you give us some color as to where you're experiencing the most difficulty preventing costs creeping back in about 2023 progressive. How do you think about getting comfortable with 2024 and keeping those unit costs below pre-pandemic levels?

And then the second question with respect to Colombia, can you provide an update on your expectations for developments there? And with the two carrier failures in the local market, what is your latest ambition to grow in the market over the medium term? Thank you.

Yeah, thank you. Thank you, Neil, and thank you for your two questions. I'll take the first one regarding ex-fuel unit costs. As you know, we have worked tremendously in the Chapter 11. We renegotiated over 1,000 contracts and setting new rules containing escalation, and that has helped us a lot in this inflationary context. We think we have unique pricing on the fleet side, Neil. And we're seeing pressures in different aspects, but basically related to inflation from our suppliers.

We're seeing some pressure on the engine side related also to inflation and supply chain issues that affects on the depreciation side of those engines. But I would say that, and our concern now is the impact of new costs in order to grow. We expect to continue to grow in Q2 and Q3, and therefore, we're increasing our operations. We're increasing our pilot training, and this is putting a little bit of pressure into the costs. But it's linked to the growth and growth that we think is profitable and with good return on capital for the company.

Thanks for the question, Neil. So I think it's important to remember that Colombia is the second largest market in South America, domestically after Brazil. So it's an important and strategic market of the (technical difficulty). We purchased a company called AIRES 11 years ago -- 12 years ago. We had 10% market share at the time.

Today with the changes in the market we have seen, we expect to be approximately 35%, 34% of the domestic market and we incorporated five aircraft in March in order to compensate for the loss of capacity for the amount of money that came (technical difficulty) [American] flight to Brazil to Ecuador to Peru and Chile, and we're straining that complementing that with the strengthening of our networks with Delta as partners in Colombia.

Today, we're already the fourth largest player in the US to Colombia market. We were, by ourselves, way below that before, and we expect to keep on (inaudible). So at the end of the day, our expectation is to be a very good, solid, reliable alternative for our passengers and passengers in Colombia, whether they fly domestically or international.

And this complements our network really well, allowing us also to improve our one-stop-shop offering to people that want to fly into the region, adding a significant network to, as I said, the second-largest market in South America. So very, very happy about the move and what we've been able to achieve in the last 45 days, 60 days and confident with respect to our development in Colombia going forward.

Many thanks.

[Jonas Aida] who is an analyst.

Hi. Thank you very much. One question. Can you explain how your net debt from around $5 billion today is going to around $6.1 billion per guidance by the end of the year? Is that cash flow driven or it's just lease liabilities, non-cash driven by increase in number of aircraft? Thank you.

Yes, Jonas, thank you. Thank you for your question. Regarding cooperating fleet during 2023, we are receiving certain 78s and certain narrow bodies that are going to increase our debt levels. It's still a volatile environment. There are postponements of fleet deliveries that are being discussed with certain OEMs. So that number can vary. But at this point, I think that's a fair assessment of our end of year net debt.

So is it driven by just aircraft and non-cash movements? It's not so that you -- it's not you're burning cash?

No, no, absolutely not. It's driven by arrival of aircraft and all those aircraft in 2023 are already fully financed, so no cash outflow out of the company.

Thank you.

Wonderful. With the conclusion of the questions, I will now turn it back to Ramiro and Roberto for final comments.

Oh, thank you. Thank you all for joining us again. Our Investor Relations team is around for any further questions and have a very nice day. Thank you.

Thank you for your participation in today's conference call. This does conclude the program and you may now disconnect.

Thank you, Jill.

All right. Thank you, all.

Thank you, Jill.

Wonderful. Thank you. Sorry, if there's any questions you can let me know in chat, or otherwise, if we're okay, I'll wait until --

Well, Jill, I think we're good on our end, but appreciate your help today.

Okay, wonderful. Thank you all.

Thanks. Bye.

Thank you.