LanChile’s active IR program is a high flier in the teeth of what appear to be major market headwinds. And these are serious impediments to IR aspirations. The company only has a free float of 15 percent, it’s an airline, and it’s in an emerging market. Even so, not only did the company carry on making money at the low point of this highly cyclical industry, they were the first Latin American airline company to float an ADR in New York.
The airline was partially privatized in 1989, and the rest followed in 1994 when a consortium of four majority shareholders bought it. In 1997, they had an IPO in New York that coincided with the Asian crisis – and of course New York has difficulty sorting out the differences between emerging markets. IRO Dan Jones comments laconically, ‘It was successful because we were the last Latin American company to complete a deal before the Asian crisis. But because the Asian crisis hit the markets in the middle of our roadshow, our IPO wasn’t a full success. We didn’t issue as much as we would have liked and, in addition, because of the crisis our results suffered through 1999.’
Jones was in Chile doing IR for drinks bottler CCU for a year and a half before joining LanChile in May 1999. He found it an interesting comparison since the drinks business is easily modeled and intensively covered by analysts and CCU had been the second Chilean company to go to New York for capital. LanChile is, he found, very different. ‘We’re not just the first Latin American airline to trade on the NYSE, we are also different because we have a unique model for the airline industry since approximately 40 percent of our revenues are cargo business oriented.’
This double uniqueness makes comparisons ‘pretty difficult for analysts. So it’s been a little bit of a challenge.’ That’s not to knock North American analysts, since LanChile is also the only airline traded in Santiago, so there’s not even a whole lot of knowledge about the local airline industry even in Chile, which makes the IR job additionally challenging.
‘We’ve got the cards stacked against us in that there are difficult comparisons to make. We’re in a difficult industry for sure, especially with high fuel prices now, so the best thing we can do is be as transparent as possible and to communicate with investors. Certainly with foreign investors that really goes a long way.’
Strategic feedback
Jones works closely with Kyrl Acton, an Irishman who is LanChile’s senior vice president for strategic development, and who has worked in the company for almost six years. Acton believes that, in the end, the essence of investor relations, no matter how many nominal strikes are against the company, is the quality of the business. ‘I start with another perspective, which is to say is this a good business or not?’ And of course he answers his own question in the affirmative, pointing to LanChile’s expansion and its resilience in the face of adverse external circumstances. Of course, accentuating the positives does not entail painting out the negatives, and they pre-emptively raise issues such as their limited liquidity with analysts and fund managers. However, savvy investors look on the bright side: the majority holders are involved in management and have a serious track record in the industry and in finance. CEO Enrique Cueto, whose family owns the biggest stake, came to the group with more than 15 years of cargo experience. They began with a cargo airline that bought belly space in the holds of LanChile’s passenger aircraft. ‘They basically realized that there was a good opportunity at LanChile, so they got together with the remaining majority shareholders and bought it in 1994.’
The other groups are the Pinera family, which has been heavily involved in politics in Chile and the global move to privatize pensions. Also on the board is Boris Hirmas, a Chilean born Mexican businessman who came to the business with passenger experience.
Of course, in IR terms, the plus side is that since 85 percent of the holders are involved in the business, the IR effort is really dedicated toward the minority shareholders who make up the 15 percent. Moreover, there is a strategy to expand the free float as soon as conditions allow. In the choppy conditions of the last few years – all externally caused – LanChile can be forgiven for not putting a precise date on it.
Even so, ‘We’re the only South American carrier to have made money in 1999,’ Jones comments. ‘These guys have really been devoted to putting their noses to the grindstone and getting good results. We’re really one of the only two or three publicly-traded Chilean companies that has consistently had double-digit revenue growth, which we expect to continue. We know that we’re going to have to come back to market since the stock is certainly discounted because of its lack of liquidity.’
Low float
The 15 percent free float means that half of Jones’ ‘clients’ are ADR holders in New York. ‘A lot of the IPO holders got out when the Chilean market tanked, and when our results for 1998 showed weakness. But the remaining shareholders are very committed, and we’re also back on the road trying to get the story out as the Chilean market begins to look more and more attractive.’
The bad timing of the IPO means that the company wants to prepare the ground for further offerings in New York, and it is also planning a local issue later this year which should help improve the liquidity situation.
Since the airline business is a difficult one to make money in, Jones finds that there is an advantage in being treated as Chilean ADR, and he does actually believe in Chile. After graduating from Dartmouth, he decided to give Latin America a try and consciously chose the country to start his career – ‘because I thought it was a place where I could learn quite a bit. The business environment here is one that’s relatively clean, without other issues like corruption which you see in other regions of Latin America. And I thought it was an area with a lot of US investment and a lot of potential.’ He now speaks Spanish to the extent that he wonders whether his English suffering.
Chile’s major attraction for Jones was that its companies were leaders in the ADR world, and he had concluded that they have served to encourage transparency and a commitment to IR. So while it was ADRs that brought him, it was IR that kept him. ‘People persuaded me that it would be interesting to be the go-between for these ADR companies and international investors. After I’d been a year with CCU, LanChile phoned.’
He didn’t take long to decide that there was more effervescence in airlines than soft drinks. ‘They had a very strong brand, a very strong business, and a story that really had a lot of potential,’ competing as they did with major league players like British Airways.
Boosting transparency
In the case of LanChile’s ADR, boosting transparency involves going ‘to as many if not more conferences than any other Chilean company – between six and eight conferences a year.’ These cycle between emerging markets and airlines themes. In addition to the conferences, in New York and Florida, LanChile’s IR department is flexible about communications. The e-mail lists and even the newly revamped web site do not reach all parts of Latin America, so they are prepared to fall back on the fax. But fax-only recipients will be missing out, since the web site now has all relevant information in downloadable form. Because of the inappropriateness of most off-the-shelf benchmarks and models to the company’s distinctive position, Jones finds he also has to work closely with analysts at home and abroad to help them better understand the benefits of LanChile’s various idiosyncrasies.
Intriguingly, bearing in mind that Jose Pinera, who privatized pensions in Chile, is on the board, Jones comments that the local pensions ‘don’t have as big a stakeholding as we would like them to have.’ That is now changing, with the pension funds getting themselves involved in the company at the beginning of the year, ‘when we decided to really get out to the local market, which had been previously untapped for LanChile.’
In fact, there is a strong retail uptake in the US for Chilean stocks, for which Jones thanks ‘our friends at the Merrill Lynches and the Morgan Stanleys and the Goldman Sachs of the world who put out pretty extensive research on the sector as well as the company, which has resulted in generating significant retail interest in the ADRs.’ However, that does not mean he can afford to neglect the institutions. Some 40 funds were involved in the IPO, then that number declined to about 15 with the economic crisis. Jones has been actively targeting institutions, trying to ‘them back on board and to feel comfortable with LanChile.’
Outside help
In New York LanChile gets help targeting from DR depositary Citibank and also from i-advize, its IR firm. While happy with the sell side – since every airline analyst who covers them has a buy recommendation on them – increasingly ‘the buy-side fund managers require and do need personal attention.’
Indeed, in a tangential sense, the whole ADR program was aimed at the institutions and the broader financial markets. Airlines are capital intensive and airliners are not cheap, so the company knew it was going to have to go to international markets. ‘We just completed the biggest private financing deal in Chilean history: $1.3 bn for new Airbus aircraft. We were going to have to go to the international markets for that sort of financing and we knew that having an ADR would give us a start on developing the kind of profile that we needed.’
The team consists of financial analyst Cristian Vargas who along with Jones reports to CFO Alejandro de la Fuente. There are also close links to Kyrl Acton, the strategic development executive. Acton and de la Fuente make an equal commitment to attend the conferences and to be involved in international functions.
As befits an airline, the company has an international complexion with people like Jones, Acton and others enjoying an international background in the structure. More to the point, LanChile has internalized the equity culture so that the information flows freely both ways. ‘That’s one of the reasons why I report directly to the chief financial officer: to give me the credibility that I need, and to enable me to get information in a timely manner. Certainly my interaction with the senior vice president of strategic development and the chief executive also does that for us,’ Jones comments, adding, ‘I really view myself as a go-between. I not only work for LanChile but I also work on behalf of the company’s shareholders and analysts.’
In summing up how to fly against the wind, he concludes, ‘I think you’ve got to attack one issue at a time. On the Latin America side we have an advantage, since Chile has a good reputation among its regional peers. So you need to play the Chile card as well as you can especially because among Chilean businesses, LanChile stands out as a leader. We are also a relatively cheap buy since we are at a discount compared with other Chile stocks. We do prefer the airline investor who understands the cyclicality of the business, and who appreciates that in 1999 at the bottom of the cycle, while all the airline analysts forecast us losing money, we didn’t.’
What the analysts say
Barbara Angerstein, Celfin, Chile
Angerstein approves of LanChile’s IR program: ‘They are very good and provide a lot of good information. I really have a very good relationship with the company. The information is always on time, and I really like the way they work, especially compared with other companies in Chile.’
‘I think they are among the best in Chile for investor relations. I deal with other companies and they don’t give you information about volume, for example. If I call LanChile, there’s always someone there to answer the question, which is not the case with other companies. They are always open to talk to analysts.
Mark Jason, Merrill Lynch, Chile
Jason agrees with Angerstein’s glowing assessment. ‘Their investor relations is excellent. They are very open, very lucid, open to talking about their problems, in fact open to talking about whatever they feel is important.’
‘They really tell it like it is,’ he continues. ‘For example, they have a liquidity problem and they are the first to bring it up in meetings. They say, We recognize we have a problem, and we are working on it.’
