Q3 2019 Earnings Call
Good day, everyone and welcome to Latam Airlines Group earnings release Conference call.
Just a reminder, this conference is being recorded.
Airlines Group earnings release for the period was distributed on Tuesday November 12, if we have not received it you can find it in our website Www Dot Latam Airlines group Dot net in the Investor Relations section.
At this time I like to point out that the statements regarding the company's business outlook and anticipated financial and operating results constitute forward looking comments.
These expectations are highly dependent on the economy, the airline industry and international markets.
Therefore, they are subject to change now it's my pleasure to call to turn the call over to Michigan Midwest, We've seen Chief Financial Officer of Latam Airlines group yourself on seen please begin.
Thank you Victor good morning, everyone and welcome to Latam Airlines third quarter earnings call.
Joining me today optimistic or what a blood level chief commercial officer, instead of Jerome could you see on Latam Airlines, Brazil, and we said under the advisor VP of corporate finance.
Please join me on slide two where do you will find the highlights for the third quarter of 2019.
We have an eventful third quarter. These here.
During this period that we announced the strategic agreement with Delta nothing both not only a joint business agreement could be presented to the authorities, but also has a broader scope stuck in both commercial and operational collaborations.
And a tender offer in which the delta intends to acquire up to 20% of lot Downs share.
In addition, we announced that Mr. Enrique <unk>, though I would feel for the past 25 years, we'll leave it to position and would be replaced by mix it or what the audible starting in March next year.
Well, what bill has an extensive knowledge of the company and the airline industry. He has been part of let them for the past 18 years in different roles, including finance fleet than planning and fast fears asked how were chief commercial officer.
Finally, we unified our loyalty program under their lifetime past, Brian concluding the integration process that started one year ago with the announcement of the tender offer multiplus.
The integration West is a good executed according to plan and we're very happy with this investment that's we already seen the results of having a more flexible and competitive loyalty program.
Do they love time, that's a single frequent Flyer program, which has over 38 million members ended the fourth largest frequent flyer program in the world.
Now moving to our results of the third quarter, Latam Airlines carried more than 19 million passengers into quarter.
One for 4 million more than the third quarter of 2019 18.
Driven exclusively by domestic operations, both in Brazil, and the Spanish speaking markets.
Our consolidated passenger RASK rose by 9.1% year over year.
Measured in U.S. dollars.
This improvement reflects a proactive imagine at capacity management across our international markets and the healthy domestic demand.
Capacity adjustments, you know international markets are bearing resold, especially to the U.S.
You know where domestic Brazilian market, we continued to see a strong rasgas expansion.
Local currency and in us dollars, what capacity increased by 10%.
Regarding the Spanish speaking domestic market, we have the capacity increase of 10% in a escape without affecting our RASK in local currency.
On the other hands I would call spray SK rose by 3.6% year over year.
I would cost for a escape excluding fuel however increased by 8.2%.
Due to the accounting non cash effect, Oh, I pretty inflation in Argentina.
If you remember you know where third quarter results of last year, we recognized 93 million lower cost in the third quarter of 2018 when in the third quarter 2019, hyperinflation generated 38 million lower cost.
Excluding these accounting effect I would cost per escape rose by 1.1% year over year.
As a result, we're operating income amounted to 269 million, representing an operating margin of 10.1%, which is 1.2 for central point over the operating margin of the third quarter last year.
In respect of our balance sheet, our leverage ratio decreased to 4.2 times by the end up this quarter down from 4.5 times at the end of the second quarter 2019.
And yesterday, we announced that we will exercise the make whole option for the outstanding amount over the last time 2020 unsecured bond.
The focus we have placed in our passenger remains unchanged.
We weren't the most punctual airline in the world in every single month.
Oh, the third quarter according to flights that.
Furthermore, we continue working to provide the best experience to our passengers and that weren't planes with the new cabins are ready, providing a significant improvement in customer satisfaction.
I want to thank all of our passengers for their preference and continuous support.
We have been recognized for the sixth consecutive year in the World category. The Dow Jones sustainability index, that's placing us in that 10% with the best performance its sustainability, all industries and representing one of the only three airline groups in this get there.
Globally and the only one in the Americas.
To conclude I want to thank our where employees for their efforts during this year.
Together, we have adapted to a complex first part of the year and demonstrates the resilience of the company in a difficult here.
I want to thank in particular, our employees in Chile, the do it the recent events in the country, we covered our operations in only three days.
With that I would like to turn the call to under this advisor I wear vice president of corporate finance to see the quarter any more detail.
Thank you for me to and good morning, everyone.
Please turn to slide three on who you would see if somebody be income statement.
Children revenues the company, we'd stupid sort of been daughters, and the third quarter.
We're sending any piece of almost 7% year over year.
We carried more than 1.4 million additional passengers while capacity grew one point in person in the quarter.
Revenues for escape grew by 9.1% in dollar terms as a result of healthy domestic market and capacity adjustments in our international network.
As a result total pattern revenues rose 11.1%.
Cargo revenues decreased by 9.8% year over year in line with the previous quarter due to the sale of performance subsea in Mexico, Masera lower imports into the region, especially coming into Argentina and Brazil.
Other revenues decreased 31% to 73 million daughters explained by the merger Multiplus with Latam Airlines in Brazil.
Multiplus revenues are now recognized on the passenger revenues same as revenues of our loyalty program, but then pass.
Total costs increased by five from Piper sending to quoted to $2.4 billion, excluding the hyperinflation affect our cost would have recent by 3%.
As a result, our operating income for the quarter amounted to 206 and I'm going to daughters. This is 22% hi than last year's operating results.
Operating margin improved by 1.2% importance to 10.1%.
Non operating results amounted to 214 million dollar loss in the third quarter compared to 209 billion done and lost in the third quarter 2018.
This is mainly explained by a 75 million dollar foreign exchange loss during the quarter was the third quarter 2018, we have 92 million foreign exchange loss.
With that net income amounted to $86 million into third quarter, an improvement of $51 million versus last year.
If you look at that year to date figures on the right inside of the slide despite a difficult first semester revenues remained flat at 7.6, and I'm daughters, well cost grew by 2% due to an increase of 4.4% in capacity, resulting in a decline of two for 4% incorporates game and a decline of 2.3% in cost for escape.
Excluding fuel.
With that operating income for the nine months ending September was 391 million daughters operating margin was 5.2% while net income amounted to 837 billion dollar loss.
Please turn to slide four.
Looking at each of our business units you can see that international operations showed improvement year over year I'm versus first half of this year due to the active capacity management the company.
International segment represented approximately 54% up in total is cases it this quarter down from 57% in the previous quarter as a result of the 4% decrease in capacity during the third quarter.
Traffic declined by 1.8% and load factor rose, 2% upon to a very healthy 85 from 2%.
The increase in load factor was driven by appreciation to the U.S.. That's not time quickly adjust its capacity much with turned the bond environment due to currency devaluations across South America.
As a result revenue sprays case, where six cents, which is zupan, 5% higher than the same quarter last year and compares with the 15% decline in a 12 person to decline in first and second quarter respectively.
For domestic Brazil operations, which represents 20% of a total its case total capacity increased by 9.8% and traffic by 10.4%.
But factor, which 82% this is zupan, 5% the punch above the third quarter over the last year.
Uptime Ellis, Brazil leased 14, Erica people to see operated by a banker, Brazil at the beginning of the year.
That's accelerated its growth compared with the first time for the year, mainly by opening the slots upping after the exit of the Bianca Brazil.
In addition, the continued recovery proceed on domestic demand group revenues for Husky go up 24.3% in local currency and 23% growth in USANA terms, which is 7.4 cents in the quarter.
For the Spanish speaking countries domestic operations, which altogether groups and 18% of a total of passion and capacity capacity rose, 95%, especially in Chile, Peru and Colombia.
Profit grew 9.2% my intending to load factor at 81%.
Revenues for escape declined by nine for 5% during the quarter, mainly due to the devaluation of local currencies.
Excluding foreign tax effects revenues for its case would have been relatively stable in Spanish speaking countries domestic operations.
That's a result, abrol passing capacity grew by 1.8% year over year. This quarter revenues for escape Rose, 9.1%, you every year and load factor rose by one percentage points, we think 83.6%.
Lastly, if we exclude the effect of a former Mexicans in theory Masera, our cargo operations increased capacity by 1% well the traffic rose 0.8%.
We saw an increase of 2.4% components in load factor to 53.6%.
Revenues for educate declined by 6.2% in the third quarter made it to two lower imports into region, especially looking into Brazil and Argentina.
Please turn to slide number five.
I once again, we wanted to show you dislike what are you can talk to maintain this by point of sale of a person you're uncover revenues in the past 12 months.
On the left side you can see revenues by point of sale the third photo for 2018.
Sure, Brazil represented approximately 35% up until the revenues well, Argentina represented 9% of revenues he'd been moved to the graph on rights.
Got to flex revenues by country in the same period 2019, we can see a seven points increase for Brazil.
While Argentina declined almost two half of what it was one year ago accounting for only 5%.
At this diversification allows us to adjust our operations and to offset the impact that we may face in certain markets.
Please turn now to slide number six.
The top of the slide you can see that my time today continues to expand its embrace sons and transfer more passengers, we cared more about 19 million passengers in second quarter.
And to reduce the number of abuse or arkon compared to less.
Few cost decreased by 4% due to the kind of 11 cents in the fuel price per gallon upset by 4% increase into conception and 9 million has lost in the third quarter.
Last year would purchase it again of $19 million.
Cost associated the wages and benefits increased by 11% in the third quarter.
Compared to some quoted 2018.
In the last year, we reversed to provision of the performance bonus.
If we exclude this onetime effect wages and benefits would have remained flat year over year.
Average headcount for the <unk> declined by one for one person and offset cost increases from the Ah onez assess payroll taxes in Brazil.
Once we look at the fleet cost, which includes maintenance depreciation and amortization expenses those were up 12% year over year the quarter, maybe due to lead production expected life of the engines and to 13 additional aircraft in our feet compared to third quarter of 2018.
[noise] lastly, the other costs on this slide increased 8% as we carried 7.6% more passengers and due to the hyperinflation effect in Argentina.
Finally customer escape increased by 3.6% to six month feet, you sense well the cost breaks key ex fuel increased by 8.2% you every year to Portland for you a sense.
Please turn to slide seven for few words regarding our strategic agreement with Delta.
We are excited with the opportunities that this agreement thinks about times stakeholders, our customers would benefit from expanded probably choices and enhance customer experience.
Not that would benefit from new growth opportunities building upon stealth test times global footprint and they are complimentary networks well for shareholders beaten section will improve free cash flow generation reduce forecasts a debt by over $2 billion by year 2025 improved lifetimes kept the structural and provide funding for testing.
<unk> costs in connection to these agreements.
I'm pleased with benefit from being part of the company that that strong growth opportunities and is aligning with one of the premier chairs and awards.
On the tender offer death that already submitted the HSR medication with the U.S. authorities and await the response before lunch independent offer.
On the ERCOT part of the agreement this nothing different since the last call. We will set for about three fifties Airbus If it's just a delta.
Two at the end up at the year 2022 at the beginning with 2021 and will assign the fleet Commencements of 10, Airbus three fifties, which will reduce our delivers for the group 2021 to 2025.
We're currently working to execute beacon season, as seamless as possible for passengers getting ready within commercial agreement with does that that would replace existing cultures agreement with American Airlines.
Lastly regarding the transition costs, we are received under $50 million up the $250 million committed.
We will be recognized these costs as we move forward with implementation of this agreement.
Please turn to slide number eight.
Regarding a financial metrics shown on slide number eight.
Gross debt declined by $251 million from the two decoder done to $7.5 billion.
That's a leverage was down to 4.2 times in September compared with the 4.5 times in June .
We continue having a pretty good liquidity position with that one forbidden dose of cash on hand, less evolving credit facility above 600, and daughters and the third quarter.
With this lead times liquidity position reached over 90% off at last 12 months revenues came in last quarter.
During the quarter, we fully tested our debt profile by reopening dilletante, when it's going to six bonds.
Adding an additional two had been indebtedness at rates below 6% and prepaying 238, Minimed taught us a for my time 2020, but we did coupon of seven point 25 cents.
As announced yesterday, the remaining $262 million that same bump in attempting to 20 will be prepaid. The next few days once we exercised to make ups on reducing opportunities for 20 to 24 on $1 billion.
Moving onto our head test at the bottom left same slide you can find our updated fuel hedge position us up to date.
For the third quarter of 2019, we had approximately 66% of fuel consumption.
For the fourth quarter of this year, we have a 53% of the estimated consumption hedged well for next year, we have a good portion hedged for the first up and we're building a position for the second half a 2020.
Please turn to slide number nine.
Finally, we got into guidance are we on based on the visibility that we up in fourth quarter 2019.
We have about narrowed down our guidance for 2019 to the lower end up it rains originally provided.
Operating margin guidance wasn't range of 7% to 9% and we expect to close the year with an operating margin of approximately 7%.
Regarding capacity on this remains unchanged compared to the previous guide quarter. We expect total capacity to go between people thought here.
This is composed but due to 2% target for international segments.
5% to 7% go for domestic Brazil, and 8% to 10% for domestic speaking countries operations.
For cargo, we expect the current capacity to grow between zero to 2% this year.
Even though the first time for the year was undoubtedly very challenging our resilience and active capacity management have allowed us to adapt and reports from results this quarter.
With that we conclude our transportation for today I would be happy to open the line for questions. Thank you very much.
As a reminder to ask the question you want to press Star one on your telephone.
To withdraw your question I suppose alky.
Please standby will be composite Q and a roster.
And our first question will come from the line Oh, Mike Linenberg from Deutsche Bank, you may begin.
Oh, Yes, hey, good morning, everybody.
A couple of questions here, what was what drove the decision to sell.
Yes, cargo and where there any airplanes that went with that.
That company.
Hi, Mike This is Robert <unk>, Yeah, we sold the Masera late last year, we basically they did because it has very little synergy with our passion to operation and remember that our cargo strategies to support our Bailey.
I must say it had 1767.
Subleased to the company that aircraft East field sub leased two months, there and they fly now whatever whatever they decide but it was relatively small for cargo operations and really related to our network.
Okay. Okay. Okay. So then it just its just a year over year impact, Okay, and just a second question.
The recent announcement by AG two two by area rope Oh, you that company I believe does does compete head to head with you other companies as well is that.
Potentially change the relationship that you currently have with 80 or how how are you thinking about it I'm just your thoughts on that thank you.
Yes, no. It is not our expectation that it'll change and we're analyzing the situation as we speak so we'll provide more information when we have it.
Okay fair enough okay. Thanks, everybody.
Yes.
And our next question will come from the line of Savi Syth from Raymond James You May begin.
Hey, good morning, everybody.
Just a question on on Brazil, now that you're seeing and in fourth quarter, I think Oh, well all the players have kinda back field of younger vessels capacity, and then kind of new networks that kind of sad, what's your kind of U.S. of trends there.
It's it's still kind of strong and as it can be underlying demand is strong and.
Directionally, how should we think about raskin in that region.
Hi, Savi. This is Robert though again, yes, we are we're confident and optimistic for what remains with the year, we see that Monday in domestic Brazil still being strong.
And we expect healthy figures for the fourth quarter in domestic Brazil.
Perfect and then if I might on the cost side, Yes, I think last time, you were thinking unit cost roughly flat that.
That would do require for Q costs to be up more than than.
The adjusted cost I think CASM ex without the.
Accounting change and the B.
Can you add back last year I'd like to take away last year. He oh.
Some of that bonuses it kind of Kevin It comes in there roughly up 1%.
What would cause fourth quarter costs to be up year over year, maybe I'm wrong, maybe CASM ex should be better than flat for the year.
But when we think at our commitment was to do have cask ex fuel lots within the year that these offsetting inflation and escalation of our costs and we're maintaining that we see our costs overall when we compare 2019 full year 2018 full year to be within that range can be flattish.
Yes.
Including the hyperinflation effect that was mentioned, particularly in this quarter.
But we will have said that during the whole year. So all 2019 cask ex fuel, we will be flat compared to 2018.
Okay, that's still on and if I might just a follow on to it to Michael's.
Question on on a real time it seems like as you know it inside genes cut out a proposed acquisition does true they'll be a very kind of as strong a player in that kind of year at black hat market, which I would think would make for a strong partnership for lot tab, because they still need lots.
You know what you provide which is kind of the beyond connections and things like that is it is still kind of agnostic and kind of the partnership.
Well that doesn't really change the way you view Europe is that still the right way to think about it I know you're looking through that it's kind of curious if he can share a little bit more of your thinking about how you think about your positioning north south where she's going to east west.
So I think that the two things are.
Let me separate its Harvey our partnership with Delta relates to the U.S. and those don't relate to any other region or other than that so we will look at our decisions, whether it's Europe or elsewhere and also within the region a we'd be independence of what the company needs and it's best for the company. So we're working on that line and a and that's.
Our point in this particular case, yes, indeed, the acquisition that potential because you know energy.
In two over a rope a will create a much larger company into the region and we will go and we will talk to them and see how these proceeds in the upcoming weeks and months, we'll keep you update.
All right. Thank you.
Thank you and as a reminder, that star one for question Star one.
Our next question will come from line of that's still video from you've yes, you may begin.
Hi, Good morning, Thanks for taking my question deductible issue could provide additional color or above the guidance. That's a insights on the bottleneck Oh we.
We see strong Q3 quarter results a as well.
International markets and that was reduction a whole lot you keep that's it.
Thank you very much.
Yes. Thank you all know though.
I think we'd have been mentioned since the first quarter, we had a very soft first quarter improving slightly on the second quarter and these are very solid results for the third quarter, but we have been mentioning the past calls that we will be under shorter side of the guidance particular due to affect the effect of the Argentinian reduction in terms of demand.
And in the first quarter that affected our in time international operations.
And therefore, you saw where capacity adjustments during the end of the first quarter and beginning of second quarter, and but that has an effect does we won't be able to recover and that's why when we provided guidance between 7% to 9%. We started saying we're going to be under shorter end of that guidance and now we're being more concrete we're almost at the end of the year and we think we'll.
Going to be on this approx seven due to the international impact.
Perfect and.
And view about the everything else vaccine.
The ground often box for next year, especially in Brazil.
The grounding of the Max I think that do that you mentioned the question. We're following the news on when the Max will be flying so we have no personnel or company opinion or otherwise than what we've seen the news.
What we understand at this point in time read that he will potentially to fly during the first quarter. Then we just following the news we have no no Max is committed to the company. We don't operated so no no issue for us.
But but how about the supplying bread she could that through the okay. Oh, if she can go over supplied for next year when when tax return.
If we.
We don't comment on the complexity of competitors.
Alberto and we will provide guidance on our growth for 2020 asked we always do later into Europe beginning of 21.
Perfect. Thanks very much.
Thank you and our next question will come from the line, although most device from Barclays you may begin.
Hi, Good morning, I have a quick question.
What has been the impact of the social unrest in Chile in your day to your operations and what do you and to what extent do youve seen that the situation may influence your guidance for 2020.
Thank you.
Hi, Paul Odcs, but I'm Ito, and we have announced that the cost.
Oh, the social unrest in Chile.
And the impact on future demand, we estimate would currently our estimate in that in $30 million or the fourth quarter that is included in the guidance that we're providing now which is a product 7% of EBIT margin.
Just just to complement to the middle Duck, that's a statement, which we made at the date of the statement would be information. We had of course the situation in two days fluid and it may change us us the situation nibbles here.
Okay. Thank you.
Thank you.
And our next question will come from I know my feel there's no ski from Barclays.
They began.
Hi, good morning.
So you spoke a lot about the capacity management on the international front I.
I was wondering if you could highlight maybe some potential changes that could be made.
Within or talk about the process of evaluating making changes within the within Latin America, given there's some kind of quite a bit varying pricing outcomes within the Spanish speaking countries in Brazil on should we assume there's can continue our capacity adjustments within Latin America or you any detail you could provide on that front would be great.
So we're very active in looking at the different markets on and we move capacity.
Along very quickly I had the biggest degrees that we did this year was there would reduce approximately 20% of our international capacity to Argentina.
We did that in the second quarter over the years, given the situation in Argentina, and ER and I'm that actually balanced I would say the capacity demand situation at least in our flights.
We look.
There is very.
A set of segments, where we look so we'll look regional Spanish speaking regional Brasil and of course long hole divided by Europe in the U.S.
And we make changes that are sometimes not related to be I thought piece, which is we told the residents who were trying to be more active in terms of managing capacity at this point in time, we feel comfortable with a capacity we have an international after the adjustments that you saw capacity is going down in the third for the third quarter for approximately 4% <unk>.
See these trend continuing into fourth quarter over you.
Okay. I guess I was just hoping maybe you could comment on within Latin America, Theres, an ability to switch given some strong outcomes in Brazil, and then some weaker within the Spanish speaking I'm, just within kind of more than the regional and within the region.
Okay, sorry, I misunderstood. The question here is we do.
On Spanish speaking side all the aircraft are same registration and we have interchange that helped that keeps us a capacity to move our capacity we've been.
Colombia, Ecuador, Peru, and Chile, a relatively freely.
And in the case will Brasil, we have we don't have interchanged, yet, but we do move capacity from one.
Factory to another by changing which aired in of the group operates the regional route. So we have the ability of adjusting without necessarily having to do register unregistered Erica.
In the industry vertical in the long hole, we have a few freedom rights between different countries, which allows us to operate.
From different airlines are different things just as an example, that's one point in time, we flew the Lima, a window side as route with four different operators.
Okay, Great. That's that's super helpful.
And then I was just.
I'm wondering if you are was hoping that you could provide a little bit a detail on or can just high level thoughts on what we should think about for cost next year I know the neos coming on but.
Some of the fleet growth slows a little bit what should we keep in mind as we look at look for next year and in terms of costs.
Thank you Matthew we will be provided guidance towards the end of the year at this point in time, we're working under budget. So we'll keep you informed on know what we see on cost and what are the target for next year.
Okay fair. Thank you. Thanks, so much.
Thank you Matthew.
Thank you and as a reminder, that's part one for question Star one.
Our next question will come from a line of Lucas Barbosa from Morgan Stanley You may begin.
Good morning, Hameed Andres So say thanks for taking my question I just wanted to hear your thoughts on how you're seeing the corporate demand pickup in Brazil, and also if you could comment on Lufthansa efforts to strengthen its position in the corporate market in Brazil, how much it.
Currently represents of your demand in Brazil, and how much. It has are presented in the past that's my question thinking.
Thank you Lukas this is jerome.
See you have not on Brazil, we have clearly did a significant moves over the last year or so to attract to the corporate passenger more this has come in the form of the scenario that we drew and the improvements of the product with the cabin retrofits and.
Domestic and international need so we do expect this would make sure our position in strengthen and convenience and strengthening in the corporate segment and we see as a whole when we look at the industry the corporate demand.
Over the last year with a small grow corresponding a little bit too would we see in terms of GDP expectations for 19, and 20, so small single digit growth.
Targeting that passenger with the changes both in lead you to inherit and also multiples over.
Over the last three months.
Okay. Thanks, very much Jerome.
Thank you.
And thank you again for joining US today, please feel free to contact our Investor Relations Department. If you have any additional questions. We look forward to speaking with you again soon.
You know disconnect.
[noise].