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On May 11, TAM S.A reported its financial results for the first quarter of 2012, with a net income of R$100.9 million (US$57.0 million), down 21.7% from R$128.8 million (US$77.6 million) in the year-ago quarter based on elevated expenses.

Earnings per share were recorded at R$0.6 per share (US$0.34 per ADR) compared with R$0.8 per share (US$0.48 per ADR) reported in the year-ago quarter.

In the first quarter, operating revenue was R$3,228.5 million (US$1,824.0 million), up 6.1% year over year and down 9.8% sequentially. The year-over-year improvement was primarily attributable to an increase in revenues from international passenger business alongside a rise in passenger demand across the company’s domestic route network.

Passenger revenues and the overall cargo revenues in the first quarter reached R$2,602.1 million (US$1,470.1 million) and R$208.6 million (US$125.7 million), representing year-over-year growth of 9.7% and a decline of 18.2%, respectively.

Total operating expenses in the first quarter increased 10.9% year over year to R$3,251.9 million (US$1,837.2 million). Huge personnel expenses alongside cost of fuel, marketing, third party services and aircraft leasing increased operating expenses.

EBITDA in the first quarter was R$171.8 million (US$97.1 million), down 38.7% year over year, with a margin of 5.3% compared with 9.2% in the corresponding quarter of 2011.

Exiting the first quarter, financial liability was recorded at R$2,021.8 million (US$1,110.9 million) versus R$1,998.0 million (US$1,057.1million) in the previous quarter. Cash and cash equivalents were recorded at R$553.6 million (US$304.2 million) versus R$650.1 million (US$344 million) in the prior quarter.

During the quarter, net cash generated from operating activities was R$259.9 million (US$146.8 million). However, net cash used in operating activities was recorded at R$105.0 million (US$63.3 million) in the year-ago quarter. Purchases of property, plant and equipment were recorded at R$47.8 million (US$27.0 million) compared with R$21.9 million (US$13.2 million) in the year-ago quarter.

Earlier in 2011, LAN and TAM entered into binding agreements to combine their holdings as a single entity known as LATAM Airlines Group. Finally in May 2012, LAN and TAM successfully obtained registrations and authorizations to commence offer in order to exchange TAM shares initially for Holdco II shares and ultimately for LAN shares in Brazil and in the United States.

TAM S.A., operating through its subsidiaries TAM Linhas Aéreas and TAM Mercosur, is a renowned air transportation services provider, both in the domestic and international markets. TAM competes directly with its peers, such as AMR Corporation and GOL Linhas A (GOL - Analyst Report).

The company revised its guidance for 2012 aiming to maintain profitable business. Management expects demand growth in the range of 7%–9%, scaling down from the original guidance of 8%–11%. Supply growth target has been revised to (-1) % to 1% compared with 1% to 3% guided earlier. The load factor estimate, however, remains in line with the previously guided range of 76% to 78%.

We currently maintain a long-term ‘Neutral’ recommendation on the stock. Moreover, Tam S.A has a Zacks #3 Rank, which translates into a short-term (1-3 months) ‘Hold’ rating.

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