Latam Airlines Group S.A. Q1 FY2024 Earnings Call

Good day and thank you for standing by. Welcome to First Quarter LATAM Airlines Group Earnings Conference Call. Please be advised 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 believes are reasonable, but are subject to uncertainties and risks that are discussed in detail in the recently published 20-F earnings release, financial statements and related CMF and SEC filings. The company’s actual results may differ significantly from those projected or suggested in any forward-looking statements due to a variety of factors, which are discussed in detail in our SEC filings. And if there are any members of the press on the call, please note that for the media, this is a listen-only call. I would now like to hand the conference over to your speaker today, Ramiro Alfonsin, CFO of LATAM Airlines Group. Please go ahead.

Thank you, Gigi. Hello, everyone, and good morning. Welcome to our first quarter 2024 conference call, and thank you for joining us today. My name is Ramiro Alfonsin, and I’m 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. We will present our highlights and results for the first quarter of 2024. I’d like to pass the presentation to Roberto to set the stage for our first quarter results.

Thank you, Ramiro, and good morning, everyone. Yesterday, we made our first quarter results public, which were strong, reflecting not only our unique network footprint, the strength of our frequent flyer program, our solid financial foothold and good operational execution, but also with growing clarity, a strong customer preference for LATAM. Before continuing, I want to take a moment to express my gratitude to the more than 35,000 people in our group. They are LATAM’s most valuable asset, and it is they who make things happen. Their passion, dedication, and commitment are what drives and will drive LATAM’s success. Every day, we strive to make traveling a more distinctive experience by not only offering our customers a unique value proposition but also ensuring that they are properly served at every touch point of their journey in a caring and dependable way. Certainly, this is a demanding task as the group transports over 220,000 passengers per day, 100,000 bags, and 2,500 tonnes of cargo day in, day out. But we have set ourselves ambitious goals to make sure we succeed in making customers feel that we meet all their traveling needs and we enable their destination dreams to become true as we travel every day. During this quarter, we have seen solid operational performance. The group transported a record-breaking number of 20.2 million passengers, achieving a robust load factor of 84.4%. These numbers were accompanied by a complete recovery of LATAM’s group capacity as compared to 2019. The affiliates of LATAM Group continued to ramp up in 3 of the 5 domestic markets, notably LATAM Brazil reaching a record domestic market share of 41% in March, the highest in the last 11 years. However, it is important to acknowledge that the industry is still facing important challenges, significant issues related to aircraft financing durability, persistent aircraft delivery delays, stripped supply chains for parts, and high and volatile fuel prices due to global geopolitical factors, among other issues, defined the operating environment. Despite these obstacles, LATAM revenues continue to show positive figures, and our passenger ex-fuel cost remains contained at a stable $0.043 per ASK, the same figure as for the full year of 2023. In light of these achievements, revenues for the quarter reached $3.3 billion with a solid double-digit adjusted EBIT margin of 13.9%. Our adjusted EBITDA was just shy of $800 million, and our net income reached $258 million. Furthermore, we have continued to make improvements in our capital structure. For the fifth consecutive quarter, we had a positive increase in cash, achieving a cash generation of $137 million and bringing total liquidity to approximately USD 3 billion with an adjusted leverage of 1.9x. I would like to highlight that our consistent positive results have been recognized by the rating agencies. Moody's has upgraded the LATAM Group to BA3 with a stable outlook, and S&P has given the company a B+ rating with a positive outlook. Seller, which is one of our local rating agencies, has upgraded us to BBB with a positive outlook. This is an important recognition of the solid track record in Chapter 11 emergence that happened this day 18 months ago. Looking into the second quarter, we see healthy booking figures. However, it is important to remember that the second quarter is our seasonally slower period for the year, and like last year, where the post-pandemic demand recovery faced seasonality, we see good figures for the second quarter of 2024. Taking all these factors into consideration, we’re providing guidance for the full year 2024, which includes higher ranges for adjusted EBITDA with improved growth prospects in different segments, stable costs, and better capital restructuring. Regarding some of our most important recent announcements, on April 25, our shareholders approved a dividend distribution of approximately $175 million, which will be paid on May 16. Finally, last month, LATAM’s Board approved the initiation of the reopening and releasing process for the New York Exchange, subject to market and other conditions. The company has started this process and actively engaged, and it will certainly keep the market informed of advances. These improvements and advancements are the result of years of effort. We’re proud of our results, and LATAM will continue trading each of its defined areas, ensuring safety, quality, customer service, dependability, care and seeking efficiency, environmental care, and social wellbeing. I look forward to discussing progress on these and other areas in the upcoming quarters. Thank you for your time. I’d like to turn the call over to Ramiro to further discuss our financial and operational results.

Thank you, Roberto. Please join me on Slide 4. The group’s results have remained strong, understanding that this successful outcome stems from doing things right in a holistic business sense. This first quarter, the group continues to consolidate the trend of strong performance through the P&L, cash flow, and capital structure. In the top line, revenues amounted to $3.3 billion, representing an increase of 18%. This growth is primarily in the passenger business, which saw a 21% increase compared to the same period of 2023. Total adjusted operating costs during the quarter increased by 14% compared to the same period in 2023. This increase is mainly explained by a 17% increase in capacity year-over-year. Importantly, as Roberto mentioned, we have been able to contain our unit cost in line with what was reported for the full year of 2023, with the passenger CASK ex-fuel of $0.43. In terms of adjusted EBIT, this figure grew 57% year-over-year. It amounted to $463 million, contributing to a net income of $268 million for the company. Moving forward, we remain committed to delivering exceptional value to our customers. LATAM Group will continue to focus on providing a distinctive travel experience, ensuring reliability, safety, and customer satisfaction in every step of the journey, thereby looking to attract more customers and foster loyalty through continued strategic investments. In line with this commitment, LATAM Group has renovated the premium cabins of our wide-body aircraft and is advancing on the onboard connectivity of the fleet. We have achieved 100% implementation of onboard Wi-Fi in Brazil, 60% in Colombia, 40% in Peru, and 35% in Chile. Additionally, LATAM Group has started the construction of a new VIP lounge in the Lima Airport. These strategic investments will further enhance the travel experience of our passengers both onboard and during their overall journeys. These initiatives have already started to yield positive results for LATAM Group. We have seen higher customer satisfaction from our passengers and our premium customers. Moving to Slide 6. We are pleased to share that anchored in a unique value proposition, LATAM Group continues to grow. LATAM has achieved record-breaking levels of passengers transported with a total of 20 million passengers during the quarter. This represents an increase of 19% compared to the period last year and an additional 2 million passengers when compared to the same period of 2019, which was the year of the highest number of passengers transported. Furthermore, consolidated load factor reached 84%, marking a 3 percentage point increase compared to the same period in 2023. We are happy to see that more passengers are choosing to fly with LATAM Group, resulting in higher seat occupancy and improved operational efficiency. Please join me on Slide 7. We’ll take a closer look at the growth of the group, which has been reflected across all its segments, with consolidated capacity in terms of ASKs registering an increase of 17%. The company consolidated RASK has increased by 3% compared to the same period last year. In particular, the international business segment continues to show strong growth, reporting an increase of 25% in capacity. Despite the substantial increase in capacity, the group has notably achieved higher load factors across all segments, reaching a robust 87% in the international business segment. We fly more with better load factors and increased RASK. I think this speaks volumes about our value proposition. Turning to Slide 8. LATAM Group has been vocal in previous quarters about the importance of a competitive cost structure. One of the key factors contributing to the solid financial figures is the constant focus on maintaining low unit costs. During this first quarter of 2024, the group was able to contain costs at levels achieved in 2023, thanks to our commitment to continuously finding cost savings within the group, initiatives that include the use of artificial intelligence in maintenance and customer service activities, among others. In terms of cost per ASK, excluding fuel, LATAM Group reported a CASK ex-fuel that includes cargo operations of $0.48, and the passenger CASK ex-fuel of $0.43, both figures falling well within the lower end of our guidance. This low unit cost results in LATAM Group being significantly more competitive within the industry and in the Americas. Regarding the fleet, this quarter, LATAM Group reported a total free cash cost of a little over $200 million with an average fleet size of 24 additional aircraft compared to the same period in 2023. The fleet cash cost is becoming increasingly relevant in this industry context as we are seeing that the global aircraft shortage is leading to increased prices. We are confident in our projection for a competitive fleet cost for the group going forward, which for 2024 is expected to be around $900 million. As you can see in the next slide, the result of delivering a unique business model and value proposition in the region, coupled with healthy demand and contained costs, has led to strong growth in adjusted EBITDA. Currently, the last 12 months adjusted EBITDA is 66% higher compared to the same period in 2023, marking a record-breaking figure for the group, reaching $2.8 billion for the last 12 months adjusted EBITDA. If we move to the next slide, over the course of the last year, the company generated more than $500 million in cash. LATAM was able to achieve this without resorting to any non-fleet debt issuance, relying on its own resources and generating substantial cash flow. With this, LATAM has established itself as a standout player in the region, reinforcing its reputation as a financially strong and sustainable airline group. In the first quarter of 2024, LATAM Group demonstrated its ability to sustain this positive cash flow trajectory. The company generated cash flow of $137 million. This performance allowed the group to end the period with a liquidity position of approximately $3 billion, further solidifying its financial stability and growth potential. Furthermore, moving to Slide 11. LATAM is actively focused on deleveraging the company. Following the trend of previous quarters, during the first period of the year, LATAM successfully reduced its adjusted net leverage to 1.9x. This has resulted in rating agencies improving LATAM's credit classification. Standard & Poor’s upgraded the company rating from B to B+ with a positive outlook, whilst Moody’s upgraded to Ba3 with a stable outlook, and Seller, which is one of our local rating agencies, has upgraded us to BBB with a positive outlook. Turning to Slide 12. The enhanced credit ratings and the healthy debt maturity profiles that we show here, in which LATAM has no relevant non-fleet maturities before 2027, create a positive backdrop for the upcoming liability management exercise later this year. During the fourth quarter, the group has the opportunity to refinance a significant portion of our non-fleet debt, which corresponds to debt that supported LATAM’s emergence from Chapter 11 process. LATAM Group can refinance approximately $1.4 billion at par value. Additionally, we can also refinance the $450 million 5-year 2027 notes that are callable at the price of $110. The type of refinancing process is a strategic opportunity to further strengthen our financial position and reduce associated costs. As we mentioned in our earnings release, if LATAM executes a liability management exercise, we will likely incur a one-time non-operational expense; however, this should reduce the interest expense and further improve our cash flow generation. We are committed to executing this operation efficiently and in line with our financial optimization goals, always subject to market conditions. On the back of our strong results, driven by better-than-expected growth, customer preference, and a stable demand environment, we are pleased to announce that we are updating and improving our guidance for 2024. This guidance accounts for an increase in capacity across the different markets, which is expected to impact the company’s revenue. We have managed to maintain our cost example-fuel at $0.43 and in the $0.045 range. As a result of these adjustments, the range for adjusted EBITDA has increased from a midpoint of $2,750 million to a midpoint of $2.9 billion, with an upper range of over $3 billion. These positive developments reflect our commitment to delivering strong operational performance. Furthermore, we expect to finish the year with an adjusted net leverage in the range of 1.6 to 1.8x. Let me conclude on Slide 14. It is important to conclude by remembering that the results of this first quarter for the LATAM Group reflect the dedication and effort of our 35,000 people within the organization. The dedication and hard work have enabled us to consistently report strong numbers quarter after quarter with continuous growth that can be traced back to previous years. We are immensely proud of their work and the efforts that they make every day. LATAM Group is growing. The record-breaking figures in terms of passengers transported, with over 20 million passengers during this quarter, and the revenue increase of over 18% demonstrates the preference of travelers for LATAM and their choice of a superior flight experience. These numbers are a testament to the strength of our network, the quality of our service, and the satisfaction of our customers. Furthermore, we have been able to maintain low and competitive yielding costs, providing us with a market advantage. The focus on cost containment and fleet optimization has contributed to our profitability with an adjusted EBIT margin of almost 14% and a strong financial position with an adjusted net leverage of less than 2x. The growth of the LATAM group and the preference of our customers to fly with LATAM have improved the outlook of the group, resulting in enhancements to our guidance figures. Thus, we anticipate that the adjusted EBITDA for this year will be in the range of $2.75 billion to a little over $3 billion. These figures also provide a better perspective of the company’s capital structure, with an expected range of adjusted net leverage between 1.6 and 1.8x. In summary, the first quarter results consolidate a very positive trend and reflect the success of the business strategy that is working and the commitment of the entire LATAM team. LATAM Group will continue to work towards delivering an exceptional travel experience, improving operational efficiency, and strengthening the group’s network. Thank you for your attention, and we’re going to turn into the Q&A segment.

Thank you. Our first question comes from the line of Fernando Grecia from BTG.

Hi, thank you for taking my question. Two from our side. The first, could you comment a little bit further on how you’re seeing the yield environment going forward? Maybe if you could explore domestic and international routes, it could be great. And second, I just wanted to understand if the guidance that you provided incorporates any compensation from Boeing or Pratt, or if this is outside? Thank you.

Hi, Fernando. This is Roberto. How are you? So as explained before, when you look at the second quarter, although it’s a seasonally weaker quarter of the year, demand looks healthy, and yields look in line with what is expected considering the seasonality. Further down the line, July still appears to be a healthy high season moment that we have because of holidays. When we think about demand throughout the region in general, we see stability. You asked particularly about international, which is very healthy in general. To the U.S., Australia, and Europe are in relatively good shape across the world. With respect to compensation, I understand regarding Boeing or Pratt. So we have no 787 deliveries this year from Boeing; only next year. So there’s nothing there. In the case of Pratt, we do have some aircraft on the ground, and we are currently under discussions with them regarding what that means. There is no compensation expected in the numbers we have provided.

Okay, thank you very much.

Thank you. Our next question comes from the line of Victor Mizusaki from Bradesco BBI.

Hi. Congrats on the results. We have two questions here. The first one is a follow-up on the fleet plan. I mean, when we take a look at your updated fleet plan, it looks like LATAM is trying to extend some of the aircraft leasing contracts. So, my question here is if there is any kind of cost pressure from these extensions. And the other point, when you take a look at the deliveries, if I’m not wrong, early last year, the company had a plan with Airbus to reserve like 8 or 11 planes, and then it was reduced to 3 aircraft this year and 11 next year. So, my second question is if there is any risk that Airbus may deliver these planes this year? Thank you.

Hi Victor. This is Ramiro. Regarding the plan, I would say, first, on your second point, we feel confident about the list that we need to grow in 2024 and 2025. We feel confident about the deliveries that we are expecting from Airbus. We have no news of further delays other than the ones included in the figures of the table of the earnings call. So, we are extremely confident about those deliveries, always subject to the current market conditions, but we are confident that the lift that we need in order to grow what we are expecting is going to be there. Regarding the extensions, we have extended and we have been vocal on this last quarter, if you remember, that we were extending certain A320 to A319s. We are not seeing particular pressure or pricing in our current negotiations. Although overall in the industry, we are seeing an increase in the cost of aircraft generally, but not on the extensions that we have signed.

Great. Thank you.

Thank you. Our next question comes from the line of Stephen Trent from Citi.

Good morning, everybody, and thanks very much for taking my questions. Two for me. The first is regarding the deal you reached with Fortress Aviation, I believe on 60 engines, and could you sort of give me a sense as to why you went with Fortress as opposed to maybe doing something similar with Delta Airlines tech ops? Thank you.

Hi Stephen, this is Ramiro. Yes, the Fortress agreement aligns with our goals in terms of having additional flexibility for our aircraft as we decided to extend certain of these aircraft. We carried out some sale and leaseback on the aircraft and sold some; we could eventually, if we want to reduce the fleet in case we need it or expand it a little more, so it gives us a lot of flexibility. In addition to that, it allows us to benefit from a certain pool of engines. We decided to do it with Fortress because they were a good partner in terms of conditions. We looked not only at pricing but also the flexibility that we need in this current market environment, and they had the pool of engines that we were targeting. That’s why we selected them. We have other partners for other engine agreements that we have, but that’s why we selected Fortress in this particular case.

Okay. That’s very helpful. Appreciate the color. And just quickly, just a second question. You mentioned adding more premium into your international intra-Latin America. I heard you mention the VIP lounge in Lima and the onboard WiFi and what have you. How far along are we in that process? Do you expect another three or four quarters of making these adjustments, or are you close to the finish line? Thank you.

Hi Stephen, this is Roberto. So, basically, we are installing Wi-Fi on our narrow-bodies. We are not installing at this point in time Wi-Fi on our wide-bodies. As explained in the presentation, around 70% of the fleet already has Wi-Fi; we expect to conclude the incorporation of Wi-Fi in our narrow-body fleet this year, okay? And all of our LATAM pass members will have free messaging on Wi-Fi, and our Lima pass members will have free browsing; and if you sign in to LATAM pass while on your plane, then you will also get free messaging. The objective also is to increase and improve the number of participants that we have in our LATAM pass program. We have not made a decision yet with respect to Wi-Fi on low-haul aircraft. As you know, in the past, because of where we are in the world, the Southern Hemisphere, there were significant blackouts in terms of satellite coverage, which is changing now with the new technologies. But for the time being, it’s on the narrow-body aircraft.

Okay. Thanks for that, Roberto. Thank you.

At this time, I am showing no further questions. I would now like to turn the conference back over to Ramiro Alfonsin for closing remarks. Pardon me. We actually have another question. One moment. Our next question comes from the line of Guilherme Mendes from JPMorgan.

Hello Roberto, Ramiro, good morning. Thanks for taking my question. I have two questions. The first one is a follow-up on the guidance assumption. We saw a revision on the capacity in the three regions, but I was wondering if you could provide more details on which route or region specifically you are seeing an upside regarding the international front and also the Spanish-speaking countries. And the second question is regarding the ADR listing. I understand there are a couple of requirements needed for the company to take the decision to go ahead with the process or not? Just wondering if you can provide more details on what kind of requirements you are talking about and if the base case is still to have the decision by September or October this year? Thank you.

So, I will take the first one and then Ramiro. So, on international – Guilherme, good morning, how are you? So, basically, what we are doing at this point in time is focusing on bringing back our particular Santiago, Lima, and Guarulhos hubs to pre-pandemic levels. So, we are increasing operations today on those flights from Guarulhos where we didn’t have dates. And we are launching new routes, or more or less re-launching routes that we used to fly before the pandemic, such as Santiago-Sydney direct, and we started Santiago-Maryland as well, increasing capacity to direct routes as well. So, it’s basically a reinforcement and complementation of our low-haul wide-body use out of our main hub Santiago, Lima, and Guarulhos.

Yes. Hi Guilherme, how are you? This is Ramiro. Regarding the ADR listing, all the work streams have started. There are many counterparts in this process. It is progressing well. As you correctly say, the Board will eventually approve at the time of the listing. So, there is no exact date at this moment on when this is going to happen, and we will keep the market informed as the board makes a decision so that everyone has sufficient information.

Super clear. Thank you. Have a great day.

Thank you. At this time, I would now like to turn the conference back over to Ramiro Alfonsin for closing remarks.

Thank you, Gigi, and thank you all again for joining us today. As always, our Investor Relations team is around for any further questions. Have a great weekend.

This concludes today’s conference call. Thank you for participating. You may now disconnect.