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Edited Transcript of LAN.SN earnings conference call or presentation 14-Aug-19 2:00pm GMT

Q2 2019 LATAM Airlines Group SA Earnings Call

Santiago Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Latam Airlines Group SA earnings conference call or presentation Wednesday, August 14, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrés Del Valle Eitel

LATAM Airlines Group S.A. - SVP of Corporate Finance & IR

* Ramiro Diego Alfonsín Balza

LATAM Airlines Group S.A. - CFO & Senior VP of Financial Fleet

* Roberto Alvo Milosawlewitsch

LATAM Airlines Group S.A. - SVP of Commercial

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Conference Call Participants

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* Duane Thomas Pfennigwerth

Evercore ISI Institutional Equities, Research Division - Senior MD

* Fernando Abdalla

JP Morgan Chase & Co, Research Division - Senior Analyst

* Marcos Barreto Guerrero

Citigroup Inc, Research Division - Research Analyst

* Matthew Aaron Wisniewski

Barclays Bank PLC, Research Division - Research Analyst

* Matthew Vernon Fallon

Deutsche Bank AG, Research Division - Research Associate

* Paula Gomes

* Rogério Araújo

UBS Investment Bank, Research Division - Director and Equity Research Analyst

* Savanthi Nipunika Syth

Raymond James & Associates, Inc., Research Division - Airlines Analyst

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Presentation

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Operator [1]

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Good day, everyone, and welcome to the LATAM Airlines Group earnings release conference call. Just a reminder, this conference is being recorded.

LATAM Airlines Group earnings release for the period was distributed on Tuesday, August 13. If you have not received it, you can find it on our website at www.latamairlinesgroup.net, in the Investor Relations section.

At this time, I would like to point out that 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 turn the call over to Mr. Ramiro Alfonsín, Chief Financial Officer of LATAM Airlines Group. Mr. Alfonsín, please begin.

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Ramiro Diego Alfonsín Balza, LATAM Airlines Group S.A. - CFO & Senior VP of Financial Fleet [2]

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Thank you, Stephanie, and good morning, everyone, and welcome to LATAM Airlines Second Quarter Earnings Call. Joining me today are Mr. Roberto Alvo, Chief Commercial Officer; Mr. Jerome Cadier, CEO of LATAM Airlines Brazil; and Mr. Andrés Del Valle, Vice President of Corporate Finance.

Please join me on Slide 2, where you will find the highlights for the second quarter of 2019. During the second quarter, LATAM carried almost 17 million passengers, 1.4 million more than in the second quarter of 2018. Even excluding the Chilean operations, passengers carried rose by more than 1 million in the quarter, mainly driven by increases in the domestic operations. No company in the region grew more than LATAM in terms of passenger growth during the quarter. This growth resulted in an increase of 3.2% in passenger revenues.

In domestic operations, excluding foreign exchange, revenues per ASK rose 3% in the Spanish-speaking countries and 29% in Brazil as a result of a more balanced demand-supply environment. Increases in domestic segments mostly offset reductions in the international segment, mainly influenced by currency devaluations and revenue per ASK, especially from Argentina and Brazil, that continues to be affected by the currency devaluation and overcapacity in routes from Brazil to Europe. As a result, capacity grew by almost 5% and consolidated passenger revenues fell by 1.5% in U.S. dollars. In addition, cost per ASK improved by 3.5%, while corporate cost per ASK excluding fuel improved by 5.2%.

Reductions during this quarter were mainly influenced by currency devaluation. As a result, total operating income amounted to $40 million and the operating margin to 1.7% in the second quarter 2019.

As anticipated in the first quarter results, we completed our merger between LATAM Airlines Brazil and Multiplus at the end of May, according to the foreseen schedule. Regarding the joint business associations, the Supreme Court in Chile ruled against the Joint Business Agreements with American Airlines and IAG. This certainly was a surprise for us as these agreements were previously approved by all other jurisdictions in the region. We are currently evaluating our next steps to be consistent with the Supreme Court's ruling.

Finally, in July, Fitch Ratings upgraded our corporate rating from B+ to BB-, acknowledging our continuous efforts to strengthen the balance sheet. Fitch recognized the healthy liquidity levels, the financial flexibility and the debt reductions in these past years. Now LATAM holds a BB- rating by Fitch and S&P and a Baa3 rating from Moody's, with a stable outlook for all of them.

With that, I would like to hand the call to Andrés Del Valle, Vice President of Corporate Finance, to see the quarter in more detail.

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Andrés Del Valle Eitel, LATAM Airlines Group S.A. - SVP of Corporate Finance & IR [3]

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Thank you, Ramiro, and good morning, everyone. Please turn to Slide #3. Here, you can see the summary of the income statement. Total revenues for the company reached $2.4 billion in the second quarter. On the passenger side, we carried more than 1.4 million additional passengers and capacity grew 4.8% in the quarter, while revenues per ASK fell only by 1.5% in dollar terms. As a result, total passenger revenues rose 3.2%. The devaluation of the local currencies continued to affect international demand, and revenues in domestic operations were measured in dollar terms. Cargo revenues decreased by 10.2%, in line with previous quarter, mainly due to the sale of a former subsidiary in Mexico, MasAir; and lower imports into the region, especially to Brazil and Argentina. Finally, other revenues fell 19.9% to $81 million mainly due to revenues from sale and leaseback transactions carried out in 2018.

Total cost increased by 1.1% in the quarter to $2.3 billion due to a 5.2% increase in fuel cost as the company operated almost 5% more ASKs compared to last year. Excluding fuel, total cost declined by 0.7% and cost per ASK declined by 5.2%. With all of this, our operating income for the quarter was $40 million, accounting for a 1.7% operating margin.

Nonoperating result amounted to $107 million loss in the second quarter compared to $207 million loss in the second quarter of last year. This is explained by a $24 million foreign exchange gain during this quarter, whilst in the second quarter of last year, we had a $178 million foreign exchange loss. With that, net income amounted to $63 million loss in the second quarter, an improvement of $145 million versus last year.

If we take a look at the year-to-date figures on the right-hand side of the slide, revenues declined 3.8% while cost remained relatively flat despite an increase in almost 6% in capacity, resulting in a decline of 5.2% in cost per ASK and 0.7% in cost per ASK excluding fuel. With that, operating income for the first half was $122 million and operating margin, 2.5%. While net income amounted to $123 million loss.

Please turn to Slide #4. Looking at the different business units, you can see that the international operations continued being the most affected but showed improvements versus the last quarter. International segment represented approximately 57% of the total ASKs for the company during this quarter, and capacity grew by 3.3%. Traffic was up 6%, and load factor shows 2.2 percentage points to a very healthy 86.1%. The increase in load factor was driven by operations from Brazil as a result of the capacity adjustments announced in the previous quarter. As a result, revenues per ASK were $0.054. That is 12.1% lower than the same quarter of last year.

If you look at the domestic Brazil operations, which represents 26% of the total ASKs, total capacity increased by 1.3% and traffic grew by 4.8%. Load factor reached 80%. This is 2.7 percentage points above second quarter of last year. If you remember, last year's second quarter was affected by the strike of the truckers in Brazil, but the lower comparison base together with the continued recovery of Brazil domestic demand drove revenues per ASK by 29.5% in local currency. While measuring in U.S. dollars terms, revenue per ASK rose 18.7% to $0.067.

In Spanish-speaking countries domestic operations, which altogether represent 17% of the total passenger capacity, our capacity rose 16.4%, especially in Chile, Peru and Colombia. Traffic grew 15.2%, resulting in 0.8 percentage points decline to 79.5%. Revenues per ASK declined by 7.3% during the quarter, mainly in Argentina and Colombia, due to the devaluation of the Argentine and Colombian peso. If we exclude foreign exchange effects, revenues per ASK would have grown 3% in the Spanish-speaking countries domestic operations.

As a result, overall passenger capacity grew by 4.8% year-over-year this quarter, and revenues per ASK declined 1.5% year-over-year, and load factors reached 83.3%.

Lastly, if we exclude the effect of the former Mexican subsidiary, our cargo operations reduced capacity by 1.6% while traffic rose 0.8%. We saw an increase of 1.3 percentage points in load factors to 55.8%. Revenues per ASK declined by 2.2% in the second quarter mainly due to lower imports in the region, especially to Brazil.

If you turn to Slide #5, you can see the main changes by point of sale of our passenger and cargo revenues over the last 12 months. If you look at the graph at the left, this reflects revenues by point of sale in the second quarter of 2018. Here, you can see that Brazil represented approximately 33% of our total revenues. Chile was 16%, and Argentina, 12%. Once we move to the graph on the right side, which reflects revenues by country in the same period 2019, we can see a 5 points increase in Brazil and 2 points increase in Peru, while Argentina declined by 6 points to 6%. All of this shows the flexibility of the company to adjust quickly in order to mitigate the impact it could have in certain markets.

Please turn to Slide #6. On the top of the slide, you can see that LATAM today continues to expand its operations and transport more passengers with a much leaner organization. We carried almost 17 million passengers in the second quarter and have reduced number of employees per aircraft compared to last year. Fuel cost increased by 5.2% due to the expansion in our operations. In addition, we recognized a $4 million hedge loss in the second quarter, while in the last year, we registered a gain of $17 million.

Cost associated with wages and benefits decreased 0.8% driven by a reduction of 2.7% in average headcount for the quarter and the devaluation of local currencies, especially the 8% and 6% devaluation of the Brazilian real and the Argentine peso, respectively.

If we look at the fleet cost, which includes maintenance, depreciation and amortization expenses, those were up 3.2% year-over-year in the quarter mainly due to 6 more average aircraft in our fleet compared to second quarter of 2018. Lastly, the other cost on this slide declined 2.9%, in line with the previous quarter despite increasing operations as a result of our efficiency initiatives. Finally, cost per ASK decreased by 3.5% to USD 0.067, while our cost per ASK ex fuel declined by 5.2% year-over-year to USD 0.046.

Please turn to Slide #7. Here, we can see that our customers continue recognizing the efforts to provide the best customer experience. We were recognized as the Best Airline in South America by Skytrax Airline Awards. We were also recognized the Best Business Class, Best Business Class Lounge and Best Economy Class.

Our commitment to provide the best experience is reflected in the investment of $400 million during 2019 and 2020 to upgrade the cabins of most class of our fleet. We are receiving aircraft with new cabins, which will help us to maintain the preference of our passengers and a competitive product. In addition to the first A320 and Boeing 767, during July, we have received the first Boeing 777 for long-haul operations out of Brazil. Furthermore, LATAM Airlines was the most punctual airline in the world in April, June and July, and we had the second place in May according to Flightstats. On-time performance is one of the dimensions of our operations where we have been focusing in the past quarters, and those efforts have been recognized by different organizations such as Flightstats or OAG at the beginning of the year.

Finally, in line with our commitment with sustainability, we have launched the campaign Recycle your Journey in domestic flights in Chile to recycle waste on the buy-on-board service, and this will be gradually introduced to other LATAM's operations in the region. We have been recognized among the 3 most sustainable airlines in the world by the Dow Jones Sustainability Index, and initiatives such as Recycle your Journey will help us to maintain our leadership in terms of our sustainability.

Please turn to Slide #8. If you look at the financial metrics on Slide 8, gross debt reached $7.7 billion and the leverage, 4.5x. We continue having a very good liquidity position with $1.4 billion of cash on hand plus a revolving credit facility that has been increased back to $600 million in the second quarter. With this, LATAM's liquidity position reached 19.5% of last 12 months' revenues.

If you look at the debt maturity profile, let me update you on the last capital markets activities of LATAM. During June and July, we further adjusted our profile with the first public bond issuance in the Chile market for roughly $200 million with a tenure of about 10 years. In addition, we reopened the LATAM 2026 bond issued early in February at 7% and added $200 million at a rate slightly below 6%, using the proceeds plus a portion of the cash on hand in the tender offer for $238 million of the LATAM 2020 bond, reducing the maturities for 2020.

Moving on to our hedges. At the bottom left, you can find our updated fuel hedge position as of today. For the second quarter of 2019, we hedged approximately 65% of the estimated fuel consumption. For 2019, we have a good portion of the estimated fuel consumption hedge, with 60% hedge for the third quarter and 53% for the fourth quarter. Now for next year, we started to hedge, and our current position is 45% for the first quarter and 38% for the second quarter.

Finally, regarding the guidance, please move to Slide #9. We are not changing the guidance provided in the previous quarter. We expect total capacity to grow between 3% to 5% this year. This is composed by 0% to 2% target for international business, 5% to 7% growth for domestic Brazil and 8% to 10% for domestic Spanish-speaking countries operations. We are also expecting cargo capacity to be between 0% to 2% this year. As a result, we expect our operating margin to be between 7% to 9% this year.

First half of the year was undoubtedly very challenging, and market conditions were very tough. However, strategy remains intact, and our plans are delivering results.

That concludes our presentation for today, and we'll be happy to open the line for questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Matt Fallon with Deutsche Bank.

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Matthew Vernon Fallon, Deutsche Bank AG, Research Division - Research Associate [2]

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Just had a couple of quick questions here. First, just a quick update on the JBA you had planned with American Airlines and IAG. Following the Supreme Court's ruling against the JBA, is there any alternative that you might plan to pursue? Or is there some appeals process by which you might be able to get a different verdict? Or should we assume that it's not a viable business case in the current regulatory environment? How should we be thinking about this?

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Roberto Alvo Milosawlewitsch, LATAM Airlines Group S.A. - SVP of Commercial [3]

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Matt, this is Roberto Alvo. So the Supreme Court ruling in Chile which refused the approval of the JVs is final. We cannot appeal to that in Chile under the given circumstances. And now we are working with both American and IAG in looking into how make operational the JV with the carve-out of the Chilean geography. So that's where the focus is at this point in time, and we're working hard with both our partners in making sure that we can implement this in the right way. That's the focus at this point in time.

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Matthew Vernon Fallon, Deutsche Bank AG, Research Division - Research Associate [4]

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Got it. So if you cut out the Chilean part, there may still be a viable business case for this in the future?

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Roberto Alvo Milosawlewitsch, LATAM Airlines Group S.A. - SVP of Commercial [5]

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Yes.

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Matthew Vernon Fallon, Deutsche Bank AG, Research Division - Research Associate [6]

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Okay. And then the second question we had was, could you just give us an update on the international side of the business? I know you mentioned there was some capacity pressures in markets between Brazil and Europe. So what are you seeing as we look at the international side of the business thus far in the current quarter? Is the overcapacity a trend that you see persisting? Or are there some offsets which might benefit your international RASK as we look into the back half of the year?

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Roberto Alvo Milosawlewitsch, LATAM Airlines Group S.A. - SVP of Commercial [7]

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Yes. I think that from South America to the U.S., the market has been balanced, and we are seeing positive trends going forward. And we feel confident of gradual improvements in that regard. The current situation of Argentina after the election poses a question mark on that specific market. But fortunately, we have been able to adjust due to the prior prices, and we believe that, that impact will be minor in the case of the U.S. at this point in time. Europe is under more stress and pressure with respect to capacity. Capacity is still growing significantly vis-à-vis last year in both Spanish-speaking countries and Brazil. But we are seeing also a gradual improvement and a slowdown in the growth. A French operator just announced last week cancellation of their flights between France Orly and Viracopos, so I think that we are starting to see a little bit of a rebalancing there. But it's gradual. It's not sharp.

And then in the regional market, which is within South America, persistent weakness on Argentina because of the situation in Argentina, of course. Significant improvement, I would say, in other markets in the regional side that do not touch Argentina. So in general, I would say that a positive trend in the last few weeks. We are more optimistic as we approach the second half. And the question mark at this point in time is, I guess, in the short term, the reaction of the Argentine economy given the news and just monitoring the rebalancing that we think is necessary in the case of Europe to South America.

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Operator [8]

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And our next question comes from Savi Syth with Raymond James.

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Savanthi Nipunika Syth, Raymond James & Associates, Inc., Research Division - Airlines Analyst [9]

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With all 3 LATAM, Gol and Azul (inaudible) and taking advantage of the kind of thoughts and aircraft made available by Avianca Brasil, I wonder if you could characterize what you're seeing in terms of schedules, their bookings in domestic Brazil here in the second half and if you're seeing some of the discipline that was demonstrated so far kind of being maintained.

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Ramiro Diego Alfonsín Balza, LATAM Airlines Group S.A. - CFO & Senior VP of Financial Fleet [10]

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So yes, we -- well, remember that the process of the slot allocation still has 2 different alternatives, an active with allocating slots in the 3 airports but also the judicial reorganization process, which moves in parallel and has a different allocation of those slots, and that's still an open process from a legal perspective. Having said that, we are very happy with what we have been able to achieve in terms of slot use and allocation in Guarulhos and Santos Dumont, and we are increasing service in key corporate markets out of those 2 airports. And our leadership in Guarulhos is very clear at this point in time with the slots that we gained out of the process with ANAC.

With respect to capacity, I guess we still see capacity in the second semester that resembles more or less the capacity we had in the second semester last year, a little bit less with what's been published today by the 3 carriers. And that means that, I would say, that a relatively important amount of the capacity that Avianca was flying second semester of last year has been, in a way or another, recovered or -- is that the word? Yes, recovered, I guess, by the 3 carriers. We still see, I would say, a very balanced situation in the market for the second semester in Brazil.

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Savanthi Nipunika Syth, Raymond James & Associates, Inc., Research Division - Airlines Analyst [11]

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That's helpful. And if I might ask one last question. Just on the domestic Colombia expansion, the first phase, we're still, I think, pretty early on in there. I wonder if you can provide an update on kind of how that is going.

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Roberto Alvo Milosawlewitsch, LATAM Airlines Group S.A. - SVP of Commercial [12]

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Yes, the expansion started in July 1, so we are just a few weeks into our project here. At this point in time, I can tell you we're satisfied with what we're seeing. The devaluation of the Colombian peso, of course, affects yields when you see them in U.S. dollars. But we have a product that we believe is a genuine alternative for the corporate passenger in the most important routes in Colombia. And so far, we are satisfied with what we have.

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Operator [13]

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And our next question comes from Matthew Wisniewski with Barclays.

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Matthew Aaron Wisniewski, Barclays Bank PLC, Research Division - Research Analyst [14]

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Just wanted to quickly come back to the operating margin guidance. If we look at just the year in 2 parts, margins were down for the first half of the year, and then the guidance implies really strong performance in the back half year. And correct me if I'm wrong, I think margins are well ahead -- or ahead of what has been achieved in the past. But can you quickly talk about some of the kind of the main drivers or underlying assumptions even from a high level of what's really kind of driving that operating margin guidance?

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Ramiro Diego Alfonsín Balza, LATAM Airlines Group S.A. - CFO & Senior VP of Financial Fleet [15]

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Matthew, this is Ramiro. Yes, of course, we can comment. I think we're confident in what we're seeing on the second semester. As you mentioned, we had a difficult first quarter. And this quarter, the second quarter is more in line with the previous year. The main point is that we have had the margins that we expect for the second half in the past. Traditionally, the second quarter is our weaker quarter and the third quarter is generally a positive quarter. And the point of comparison for the previous years since the devaluation of the currencies started on the second half of 2018 is more benign. So we do expect to reach the percentage, of course. As we mentioned in our previous call, we will be on the lower end of our guidance, but we do expect to be in that frame.

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Matthew Aaron Wisniewski, Barclays Bank PLC, Research Division - Research Analyst [16]

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Okay. All right. And then just thinking about unit cost, you had pretty strong unit cost declines in the first half of the year. But as capacity starts to kind of slow in the back half of the year, should we expect that cost could potentially kind of inflect positively?

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Ramiro Diego Alfonsín Balza, LATAM Airlines Group S.A. - CFO & Senior VP of Financial Fleet [17]

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Yes. I think that what we have target for the overall year is to maintain the cost ex fuel similar to 2018. We're still maintaining that view, although in the second half, as we will have a little bit less capacity in terms of ASKs, depends very much on what the currencies do. But maybe we will be in line or slightly above what the cost per ASK would have been in 2018, but very slightly above.

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Operator [18]

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And our next question comes from Rogério Araújo with UBS.

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Rogério Araújo, UBS Investment Bank, Research Division - Director and Equity Research Analyst [19]

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So I have a follow-up question on the breakdown for your major markets. So I would like an update in the low-cost carriers' increasing penetration in Chile and Peru, how LATAM is feeling since second Q, with this extra competition. If I'm not mistaken, you mentioned in the release that there was a positive RASK in local currencies in the Spanish-speaking countries. If you could just confirm that and say a little bit how this has been -- how RASK is behaving in Chile and Peru and what is the perspective for the upcoming months. So an update on that would be great.

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Roberto Alvo Milosawlewitsch, LATAM Airlines Group S.A. - SVP of Commercial [20]

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Yes, Rogerio. It's Roberto again. Thanks for the question. We are extremely happy, I would say, with our performance in both Chile and Peru in the last months. We've been not only able to grow and increase our passenger base. The RASK, if we were to measure them in local currencies in both markets, are increasing even despite the very important increase in capacity that we're seeing from us in the case of Peru, particularly, and from the low-cost carriers. We have relatively good load factors, but we believe we can improve them significantly and just as a matter of adding a lot of capacity in the short term because slots were released in Lima. We haven't reached that in the second quarter particularly, but we are very confident on that. And we are competing effectively. We just launched basic economy in Chile last week. It's been 9 days in the market, and the results are extremely satisfying. We believe we have the tools to compete in both Chile and Peru. And in the case of Colombia at this point in time, we have, we think, a good presence in the leisure market, and our focus is to try to become a general presence to the corporate passenger, and we're working on that. So very good results from our perspective.

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Operator [21]

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Our next question comes from Duane Pfennigwerth with Evercore.

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Duane Thomas Pfennigwerth, Evercore ISI Institutional Equities, Research Division - Senior MD [22]

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Just a follow-up on some of the questions on domestic Brazil. As you think about the trajectory of unit revenue growth for the balance of the year and in the fourth quarter, in particular, what are the odds that we see declining year-over-year unit revenue in the fourth quarter versus the 23%, I think, that you just posted in local currency?

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Roberto Alvo Milosawlewitsch, LATAM Airlines Group S.A. - SVP of Commercial [23]

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We posted 29.5% on the second quarter. And we are, I would say, quite confident in the second semester, and we see strong double-digit RASK growth for the second semester when seen in local currencies.

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Duane Thomas Pfennigwerth, Evercore ISI Institutional Equities, Research Division - Senior MD [24]

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And you'd see that outlook for the fourth quarter as well?

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Roberto Alvo Milosawlewitsch, LATAM Airlines Group S.A. - SVP of Commercial [25]

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Yes.

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Duane Thomas Pfennigwerth, Evercore ISI Institutional Equities, Research Division - Senior MD [26]

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Okay. And then just on your Joint Business Agreement, I think you had a line in there. If you implemented it according to the court's ruling, what would you not be allowed to do versus how you intended to implement it? Is it specific markets? Or what specifically is restricted?

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Roberto Alvo Milosawlewitsch, LATAM Airlines Group S.A. - SVP of Commercial [27]

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What is restricted is the Chilean geography. So what we would not be able to do is to implement in (inaudible) operation, partnership on flights that touch or flows that touch Chile. That's the only carve out.

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Duane Thomas Pfennigwerth, Evercore ISI Institutional Equities, Research Division - Senior MD [28]

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Great. And then just lastly, Argentina was already a very weak market for you for some time. You've been making some capacity adjustments. How do we think about the incremental impact to earnings from this latest evaluation, whether margin points or RASM points, versus when this first started to devalue? Is it -- just if you could give us with a relative order of magnitude.

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Roberto Alvo Milosawlewitsch, LATAM Airlines Group S.A. - SVP of Commercial [29]

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I would love to have an answer for that question. It's just too early to make any assessment. We have only been selling for 48 hours after this. What is true, though, is that our exposure to Argentina has decreased significantly. We both cut capacity and also redirected our flows in a way to try to not be dependent on Argentina to the extent we were in the past. We are looking now into the receptive market in Argentina as an opportunity. It will not be immediate, but Argentina now is very cheap for people that want to fly to Argentina. So the impact is likely there. Hard to say at this point in time. But it's much more subdued than the impact we saw last year, when the big devaluation started and the whole process, I guess, of economic hardness started in Argentina. So it's much less relevant to us today. We are, I think, also more protected.

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Operator [30]

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And our next question comes from Marcos Barreto with Citi.

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Marcos Barreto Guerrero, Citigroup Inc, Research Division - Research Analyst [31]

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My questions have been answered.

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Operator [32]

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And our next question comes from Fernando Abdalla with JPMorgan.

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Fernando Abdalla, JP Morgan Chase & Co, Research Division - Senior Analyst [33]

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I have a question on capacity growth, actually. When you look to the level of margin that you delivered this quarter versus what your peers, Gol and Azul, delivered, it was a huge gap. Or even when you look to the full year margin guidance, there is a huge gap. I would imagine your operation in Brazil has been delivering similar profitability ratios. At least when we look to the RASK, for example, you grew almost 30% in reals, which was even greater than what Azul and Gol reported. So if you're having a much lower margin, it leaves me to conclude that your international and domestic Spanish-speaking countries operations have been dragging a lot of your profitability. So if that is the case and then the question on capacity, why are you still growing 8% to 10% in Spanish-speaking and still growing 0% to 2% on international and not the opposite, eventually reducing capacity on those markets and growing more in Brazil?

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Roberto Alvo Milosawlewitsch, LATAM Airlines Group S.A. - SVP of Commercial [34]

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Yes, Fernando. So let me separate in 2. Yes, you are seeing a 0% to 2% increase in capacity international, but you have to distinguish first semester from second semester. In the first semester, we grew much more, so you will see negative capacity growth for the international in the second semester. I think it's important to separate the average from the 2 semesters as we cut capacity in the first half of the year, and that would be reflected in the second half. And we have been adjusting to the situation in international. We cancelled Rome. We decided not to launch, for the time being, Munich, and we took out approximately 20% of the capacity we had in international over Argentina. So we made the adjustment, and of course, we monitor this very closely all the time.

In the case of the Spanish-speaking countries, when you see the results in local currency, actually, they're very encouraging. And I would say that the biggest impact is the devaluation of the currencies more than the performance of the company and what we see. We are really happy in both Chile and Peru, which are long -- biggest Spanish-speaking markets, with our results. We took the opportunity of seating very relevant and important slots in Lima after the exit of 2 carriers there, so we are growing at strong double digits there. And our revenues are proving that, that was the right strategy. So I would separate the 2 things, and I would say that in the case of Spanish-speaking, it relates much more to the currency than to the performance of our operation itself.

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Operator [35]

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And our next question comes from Paula Gomes with Bradesco BBI.

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Paula Gomes, [36]

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It's actually a follow-up question on Argentina. And I would like to know how much of the 6% of revenue share that is Argentina is international? And how much of this is domestic?

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Ramiro Diego Alfonsín Balza, LATAM Airlines Group S.A. - CFO & Senior VP of Financial Fleet [37]

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Approximately 30% is domestic or 1/3, and the remainder is international approximately.

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Paula Gomes, [38]

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So sorry, so 1/3 is international?

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Ramiro Diego Alfonsín Balza, LATAM Airlines Group S.A. - CFO & Senior VP of Financial Fleet [39]

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No, 1/3 of that 6% is domestic. The remainder is international.

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Paula Gomes, [40]

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Okay. And for the international part, how much is like -- can you give the number or the share that is from Chile and Brazil, passengers coming from Chile and Brazil to Argentina?

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Roberto Alvo Milosawlewitsch, LATAM Airlines Group S.A. - SVP of Commercial [41]

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Passengers coming from Chile and Brazil to Argentina in flow and traffic? I mean...

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Paula Gomes, [42]

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Yes.

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Ramiro Diego Alfonsín Balza, LATAM Airlines Group S.A. - CFO & Senior VP of Financial Fleet [43]

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I don't have that figure, Paula, in my mind, and I don't think it's a number we will disclose.

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Operator [44]

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(Operator Instructions) Our next question is a follow-up from Savi Syth with Raymond James.

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Savanthi Nipunika Syth, Raymond James & Associates, Inc., Research Division - Airlines Analyst [45]

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Okay. Could you remind me, now that Multiplus and LATAM Pass are both in-house, what your plans are for the loyalty program?

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Roberto Alvo Milosawlewitsch, LATAM Airlines Group S.A. - SVP of Commercial [46]

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So yes, we've completed the acquisition of Multiplus, and therefore, it's fully into the company. We will -- in this quarter, third quarter of the year, we will complete the integration from most perspectives. And the only thing I would say that would be a reminder for the rest of the year will be some systems that are still different. But from an operational perspective, we are working since day 1 as a fully owned entity. And so that's it. So not sure -- what was the rest of the question?

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Ramiro Diego Alfonsín Balza, LATAM Airlines Group S.A. - CFO & Senior VP of Financial Fleet [47]

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No, I guess, Savi, that we can confirm that the synergies we anticipated and the time line that we committed to the market has been delivered and the synergies are proving to be there, and we're obtaining them. And basically, what we want to achieve is to provide our program members a better value proposition for redeeming their points in Brazil and abroad and to increase the preference for our services.

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Savanthi Nipunika Syth, Raymond James & Associates, Inc., Research Division - Airlines Analyst [48]

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That all makes sense. And if I might, just one quick strategic question. Just wondering if the LR or the XLR has any kind of good fit within the LATAM network?

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Roberto Alvo Milosawlewitsch, LATAM Airlines Group S.A. - SVP of Commercial [49]

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Of course, we watch, we see and evaluate all the alternatives, and we are looking into that as -- just as much as we're looking into all the other aircraft that are being produced and will be produced. And if we make a decision regarding these and other products, of course, we will disclose publicly at the time.

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Operator [50]

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And this concludes our Q&A session for today. 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.