Copa Holdings SA (CPA) 2006 Q1 法說會逐字稿

Please stand by; we’re about to begin. Good day everyone and welcome to the Copa Holdings 2006 first quarter earnings release conference call. During the presentation all participants will be on a listen only mode. Afterwards we will conduct a question and answer session. [OPERATOR INSTRUCTIONS]. As a reminder, this call is being webcast and recorded Wednesday, May 17, 2006.

I’d like to turn the conference call over to Joseph Putaturo, Director of Investor Relations. Sir, you may begin.

Thank you very much Jamie and welcome everyone to our first quarter earnings call.

Joining us today in Panama are Pedro Heilbron, our Chief Executive Officer and Victor Vial, our Chief Financial Officer.

As in previous earnings calls, first Pedro will open up with an overview of the quarter followed by Victor who will discuss first quarter ’06 results. Immediately following we will open up the call for questions. We have allocated approximately 20 minutes for management comments and 25 minutes for questions. We’d kindly ask you if you could limit yourselves to one question with a brief follow up, so we can accommodate most questions.

Today we will be discussing non-GAAP financial measures. Direct reconciliation of non-GAAP to GAAP financial measures can be located in the Investor Relation sector section of Copa Airlines' website.

In addition, our discussion will contain forward looking statements, not limited to historical facts that reflect the Company’s current beliefs, expectations or intentions regarding future events. All forward looking statements involve risk and uncertainty that could cause actual results to differ materially. For examples of such risks and uncertainties, please see the risk factors set forth in the Company’s S-1 filing.

And now I’d like to turn the call over to Pedro Heilbron, our Chief Executive Officer.

Thanks Joe. Good morning and thank you all for joining us today.

I would like to start this call again by thanking all the men and women of Copa for all their efforts in making the first quarter another outstanding quarter for Copa Holdings. I am pleased to report that despite continued high fuel prices during the first quarter of 2006, Copa Holdings delivered record earnings as a result of strong revenue growth driven by increased capacity, strong load factors and yields, as well as our commitment to strict cost controls.

At the same time, we continued to deliver a world class product built upon the most complete intra-Latin American network, outstanding on time performance and one of the youngest fleets in the world. And most importantly, a highly motivated workforce with a well recognized customer oriented culture.

Copa Holdings reported record net income of $32.2m and diluted earnings per share of $0.75 for the first quarter of ’06. This represented EPS growth of 82.4% over fourth quarter ’05 and 42.8% over first quarter ’05 basic EPS.

Among the main highlights for the quarter we have a 58.6% year over year increase in available seat miles, a 6.4% year over year increase in revenue per available seat miles, RASM, to $0.119. CASM, excluding fuel, decreased 2.2% to $0.064. Operating margin for the first quarter was 21.8%, which places us amongst the highest in the industry.

Consolidated load factors stood at 71.5% for the quarter. Additionally, on May 10 we reported a consolidated load factor of 71.1% for the month of April. So, we continue to see strong demand for our services.

During the quarter we announced the re-fleeting of AeroRepublica with an order for five firm and 20 option Embraer 190s, the first two of which arrive in the fourth quarter of this year.

For the first quarter ’06 Copa Airlines reported an on time performance of 92.3% and a flight completion factor of 99.7%, consistently placing us among the best in the industry.

On May 11 the Board of Directors of Copa Holdings declared an annual dividend of $0.19 per share. The dividend is payable June 15, ’06 to all shareholders of record as of May 31, ’06.

Our first quarter results continue to be driven by the economic growth in Panama and Latin America, greater intraregional business, trade and tourism, demand stimulation by increasing frequencies to destinations that were previously under-served for intra-Latin America travel, and the overall strength of our proven business model, centered on the strategic location of our hub of the Americas in Panama and a world class product.

Looking forward to the remainder of ’06 Copa Airlines segment upcoming addition of six new aircraft that will take us from 24 to 30, six new destinations and increases in frequencies to current markets will lead to greater market penetration, increased revenues and even more choices for our growing customer base. Copa Airlines segment aircraft additions for ’06 consist of two Boeing 737-700s, with scheduled deliveries in June and July, as well as four Embraer 190 aircraft with scheduled deliveries for May, June, October and November.

Copa Airlines also announced the addition of four new aircraft to its fleet plan, one new Boeing 737-800 scheduled for delivery in October 2009 and three new Embraer 190 aircraft, one scheduled for October ’07 and the other two in October and November 2008. This will bring the airline’s firm orders to 21 aircraft consisting of eight Boeing NGs and 13 Embraer 190s, and options for 24 additional aircraft consisting of 9 Boeing NGs and 15 Embraer 190s. So, as you can see, the path is set for continued growth.

As announced, the new destinations Copa Airlines will be adding in 2006 are Manaus in Brazil and Santiago de los Caballeros, Dominican Republic both on July 15, Maracaibo, Venezuela and San Pedro Sula, Honduras on July 24, Montevideo, Uruguay on August 15 and Port of Spain, Trinidad and Tobago during the last quarter of the year.

With this we increased the number of cities served by Copa Airlines to 36 in 22 countries throughout North, South, Central America and the Caribbean. And including AeroRepublica together both airlines will serve 42 cities in the Americas by the end of ’06.

With respect to AeroRepublica we continue working on several initiatives, which include a fleet renewal program, which begins with the arrival of its first two Embraer 190s in just five months, a significant improvement in operational performance, the introduction in March of the award winning Frequent Flyer program OnePass, which by the way has affiliated more than 20,000 new members in only two months, the implementation of e-ticketing and other product and service improvements.

So, in short, we continue to execute both operationally and financially. Our business model continues to strengthen. And we believe our competitive advantages and our unique position as the preferred connecting point for intra-Latin America travel will continue to yield strong results.

With that, I will pass the call to Victor, who will discuss our financial performance for the quarter and our guidance for full year 2006.

Thank you Pedro. Good morning and again thank you all for joining us today.

First and foremost, like Pedro, I would like to start again by commending everyone in the Copa team for a job well done. Truth be told, the first quarter of ’06 has been the best quarter ever and we’re off to a great start for the year.

As Pedro mentioned, Copa Holdings' net earnings for the first quarter of ’06 was a record $32.3m, which represented 43% year over year increase and translates into diluted earnings per share of $0.75, significantly above consensus estimate of $0.52.

Copa Holdings continues to benefit from strong economic growth in Latin America, as well as a growing preference for our hub as the most convenient connecting centre in the region.

In terms of revenues, consolidated revenues for the quarter increased 69% year over year, or $78m, to $191.7m. Of this increase approximately $40m came as a result of the consolidation of AeroRepublica, which was acquired last year in April, and approximately $38m came from organic growth related to Copa Airlines' operations.

Consolidated RASM was a strong $0.1187 accounting for 6.4% year over year increase as yields increased 9.3% to $0.156. Consolidated passenger revenue, which represented 94.1% of the first quarter's total revenue increased 71.5% year over year to -- or approximately $75m to $180.4m. Of this increase approximately $39m relates to the consolidation of AeroRepublica and $36m relates to Copa Airlines' operations, which for the first quarter saw a capacity increase of 19.5%, an increase in revenue passenger miles of 28%, a load factor increase of 5.2 points year over year to 77.6% and a 5.1% year over year increase in yields to $0.15.

Consolidated operating costs for the first quarter increased 71.2% year over year or $62.4m, of which $39.5m relates to the consolidation of AeroRepublica and approximately $23m relates to Copa Airlines' increased capacity and higher jet fuel prices.

Consolidated CASM increased 7.9% from $0.086 in the first quarter of ’05 to $0.093 in the first quarter of ’06. However, we continue to drive down ex. fuel CASM decreasing it 2.2% year over year from $0.065 to $0.0637.

Now comparing Copa Holdings' main operating costs versus the first quarter of ’05. Fuel expense increased 120.8% year over year, or $25.8m as a result of the consolidation of $14.6m of AeroRepublica’s aircraft fuel expense, an increase in volume as a result of increased capacity related to Copa Airlines' operations, as well as an increase in average fuel prices as the average price of jet fuel per gallon increased 30% year over year.

Salaries and benefits increased 45.3% year over year, or $6.1m. This increase was for the most part a result of the consolidation of $4m of AeroRepublica salaries and benefits expenses and an overall increase in operating headcount due to Copa Airlines' increased capacity.

Passenger servicing increased 40.3% year over year, or $4.2m, mostly as a result of the consolidation of $2.7m of AeroRepublica’s passenger service and expenses and an increase in Copa Airlines' capacity and traffic.

Commissions increased 75.1% year over year, or $5.6m. This increase was mainly a result of the consolidation of $3.9m of AeroRepublica’s commission expenses and higher passenger revenue related to Copa Airlines' operations.

Maintenance, materials and repairs increased 116.2% year over year, or $5.5m, mostly due to the consolidation of AeroRepublica’s maintenance expenses. With respect to aircraft rental we saw an increase of 92.3% year over year, or $4.3m, of which $3.1m is a result of the consolidation of AeroRepublica’s aircraft lease expense. The remaining operating expenses increased 42.6% year over year, or $10.9m, of which $6.6m relates to the consolidation of AeroRepublica.

First quarter consolidated earnings before interest, taxes, depreciation, amortization and aircraft rent, EBITDAR, increased 46.9% year over year to $55.2m, while EBITDAR margin decreased 4.3 points year over year to 28.8%.

With respect to operating earnings, first quarter operating earnings increased 60.6% year over year to $41.7m, while operating margins decreased only 1.1 points year over year to 21.8%, keeping our place amongst the highest in the industry despite continued high fuel prices.

Turning now to our balance sheet, the Company ended the quarter with $143.9m in cash, cash equivalents, short term and long term investment, as well as approximately $35.5m in committed lines of credit. Total debt and capitalized leases at the end of the first quarter of ’06 total approximately $750m, of which bank debt totals $454m. Of this total $329m was U.S. acting bank guaranteed debt. And of the total Copa Holdings bank debt outstanding as of March 31, 62% has been fixed during the past four years for a period of 12 years at very low rates, thereby significantly mitigating the Company’s interest rate risk going forward.

In summary, we had a very first -- very strong first quarter, both financially speaking, as well as operationally, and we’re off to a great start for the year.

Looking forward and based on the strength of our first quarter, we’re revising upward our full year consolidated guidance to reflect an increase in average load factor to a range of 71%, an increase in RASM to a range of $0.114, an increase in operating margin to a range of between 15.5 and 17%. Capacity guidance remains unchanged at $7b ASMs and ex. fuel CASM guidance remains unchanged at $0.064.

With that, I’ll turn it over to Pedro for closing remarks.

Thank you Victor.

As we have seen Copa Holdings had a record first quarter. This was achieved despite high fuel costs and thanks to strong demand and a favorable yield environment. As always, our team continues to do a great job in maintaining competitive costs while delivering world class service. Congratulations to every one of them.

I am confident that with their continued support and effort we will be able to meet the goals we have set for 2006, which are many. To our shareholders, thank you for your continued support. As always our management and our employees are committed to running a world class airline with world class results.

We will now open the call for questions.

Thank you. [OPERATOR INSTRUCTIONS]. We’ll take our first question from Ray Neidl with Calyon Securities.

Good morning, congratulations, great quarter.

Thank you Ray.

Thank you Ray.

Just for guidance going forward, the $7b ASMs are now fully -- have AeroRepublica fully consolidated in for this year? And I’m just wondering going in 2007 what we can look for basic growth out of both these airlines and then the yield trend in the first quarter is very strong. Do we expect those yield trends to continue through this year?

Well we -- this is Victor, Ray, and hello again. With respect to ASM growth going forward we expect for ’07 growth to be in the range of between 18 to 20%. And most of the growth will come from the Copa segment, as opposed to the AeroRepublica segment.

With respect to yields, what we’ve seen this last year and what we continue to see this year, we’ve continued to see a strong environment vis-à-vis yields. And we expect that to continue through the remainder of the year.

Okay, great. And my follow up question concerns AeroRepublica. What challenges do you see remaining with that carrier? And are there additional opportunities to further cut their unit costs as you make their operations more efficient?

Yes, AeroRepublica actually has very competitive unit costs, and especially given the fact that it’s like a very short segment. So, in that sense, I don’t think that’s where the benefits are going come from. They’re going to come from increasing -- improving the load factor and we have a number of initiatives that we have just implemented most in the first quarter of this year, that are going to pay benefits in the next 12 to 18 months.

So, we’re just in the beginning. The e-ticketing, the OnePass, the commercial agreements with travel agencies and commercial initiatives together with Copa, those are all new things that are going on with AeroRepublica.

Once the new fleet starts coming on board towards the end of this year we’re going to see all these things coming together. And, again, the benefits are going to come from the revenue side, from improving those factors.

We’ll take our next question from Mike Linenberg with Merrill Lynch.

Hello, good morning gentlemen. This is Lily on behalf of Mike. My first question is regarding many references, you guys talked about the strong economic health in Panama. And I’m just curious, especially with the talk on the Canal expansion project sort of heating up and you guys looking forward to the referendum. Are you seeing distinctly more traffic related to that? Or any more color you can give on that? What’s all the talk about expansion there? That would be helpful.

Okay, thank you Lily. Not yet. The Canal project it’s very interesting. It can have a great economic impact for Panama, but it has to go up before a popular vote -- a referendum vote. And that hasn’t happened yet, as you know. They’re just debating the subject right now.

We have not seen a lot of traffic related to the Canal project. What’s going on in Panama and the region, it’s due to the general economic growth, tourism, a construction boom here in Panama and just the overall strength of the hub. I think in ’07 we could see some, what I would call gravy, from the Canal project if it gets approved.

Right. And my second question is regarding to the expansion of the Tocumen airport. Can you give us an update on that?

Yes, that’s going very well. We have -- of the 22 gates we have 20 functional right now. There are two more that we’re going to get by June 15, which are the last two ones. So, we’ll have all 22 new gates functioning by June 15, when our summer high season starts. Then there are six new remote positions that are going to help us also quite a bit. Those are going to be ready towards the end of the season, towards August and April.

And then the expansion inside most of it is done, just a little bit of work left to do, which I think is going to take another 90 days. But we’re very excited by what this is going to do to our hub here in Panama.

We’ll go now to Glenn Engel with Goldman Sachs.

Good morning.

Morning Glenn.

Morning Glenn.

A couple of questions, one is that I’ve looked at your yield in the first -- I mean your unit revenues in the first quarter, they’re about $0.119. And the first quarter usually isn’t your seasonally strongest, especially without Easter in the first quarter. So, why do you have only $0.114 estimate? What’s going to cause the unit revenues to drop so sharply for the rest of the year?

Right, don’t forget that we are adding six new destinations to our Group network. So, we expect that in the beginning you will have some softness in yields with respect to those markets, but that there is a time of pulling up where those yields will get stronger. So, there’s some of that going on.

Can you give me what the Copa Airlines alone's capacity growth is by quarter?

We don’t have that information handy by quarter.

Or just by the -- for the full year’s okay.

Right, for the full year it’s going to be in the range of 20% -- 20 to 22%. That’s the Copa segment year over year.

We’ll take our next question from Steve Trent with Citigroup.

Yes, good morning gentlemen and congrats again on the solid results.

Thank you Steve.

Thank you.

A quick question from me, to some degree it’s a follow up to some stuff that’s been asked already. But looking at AeroRepublica and the launch of the OnePass program, we noted that the April traffic for AeroRepublica alone looked surprisingly strong to us, even considering that April ’06 was a relatively easily comp, given the late Easter week. Are you attributing any of this growth to the launch of OnePass and that there’s a greater seamless quality to AeroRepublica's network now to Copa Airlines and to -- ultimately to Continental?

Well, what we’re going to see with AeroRepublica I believe it’s improving results month after month. It won’t be only attributable to OnePass. But, for example, their on time performance has improved greatly and actually they had the best on time performance, as reported by the DAT of Colombia for the first two months of the year. And this is for domestic carriers in Colombia.

And so, all those initiatives are going to come together, towards the end of the year we’re going to have the new fleet. So, I think we’re going to see a step by step improvement in their results. However, still they had a lot of capacity growth towards the end -- the second half of last year. And it’s taking some time for this pulling up of those load factors.

Okay, super. Thanks very much.

Thank you.

Thanks.

We’ll go now to a follow up from Ray Neidl with Calyon Securities.

The operator cut me off before you answered the full question about AeroRepublica. What do you see as the -- I think you answered it partly with the last question. But what do you see as some of the additional challenges ahead for you in getting that airline further -- to be further productive and integrated?

Okay, it was not on purpose, Ray, we like you.

Okay, thank you. I like you too.

The -- I guess the main challenge is that AeroRepublica -- there are two things that we’re dealing with. AeroRepublica does not have the strongest reputation for their consistency in terms of on-time -- one day they were great and another day they weren’t. So, we have to -- the product delivery of AeroRepublica we have to make it very consistent. It’s been much improved this year. We have to keep it up and make it even better.

Then the other challenge is the fact that their aircraft are too large for the high frequency domestic market in Colombia. We’re taking care of that with the new Embraers. But it’s going to take the best part of this year, as we mentioned before.

So, I think the main challenges are within AeroRepublica and we have the tools to fix them. Of course, there’s competition. Avianca's bringing in Fokker 100s, etc. But again, I think the future of AeroRepublica is in our hands and we have the tools to make it perform as we expect.

Okay, great. And so as I dialed in again I get another follow up question I guess. The key thing I’m concerned with now, the growth that you’re doing is really significant. It’s very good. It’s going to I think propel the Company strongly going forward. Now, are you going to have to access the capital markets now to help fund this growth? And what are your plans for that? You saw what happened recently with American and [Go] when they came back to the markets.

Well, we look at our liquidity position as being very strong. And we expect that to continue as we keep delivering profits. So, at this point in time we don’t expect to go to the capital markets.

Great, thank you guys.

Thank you.

[OPERATOR INSTRUCTIONS]. We’ll go next to a follow up from Glenn Engel of Goldman Sachs.

Can you go through the first quarter for Copa segment alone and talk about how business traffic was -- the strength of business traffic was relative to economy, and whether there were any regions originating from south or from north that were particularly strong?

Okay, yes, as you’ve been able to see in our three traffic reports for the quarter, the Copa segment had a very, very strong quarter. Our load factor for the quarter was 77.6% compared to 72.3% for the same quarter in ’05, even though we had almost 20% growth in ASMs. So, it was really an outstanding quarter.

In terms of strength of our market and in terms of business over -- the balance is pretty much the same. Nearly half of our passengers are business -- are in business travel. The rest is a combination of tourism and visiting friends and relatives. Both have remained strong. Tourism was very high for the South American high season, which runs from January to mid March, but also business is growing and it’s very strong.

And in terms of our market it’s very balanced. When we look at our different regions they’re all doing much better than the year before. So, I could not really highlight one in particular.

The -- on the non-operating side, the other net made contributions last year, didn’t really have much this year. What changed?

The biggest item there is last year we had the sale of two 737-200s, the last two in our fleet. That would be the biggest item in a list of other nonoperating items, so that’s the biggest one.

And was AeroRepublica’s $1.5m non-op, was that all net interest expense or does it include any non-operating charges?

Say that again, Ray, I lost you there.

Sorry, AeroRepublica had a net non-operating expense of $1.5m. How much of that was interest expense and were there any one time things in that number?

Most of it was not related to interest expense. It’s related to other non-operating.

And is that something that is consistent for AeroRepublica -– is normal?

That’s something that would not be occurring every quarter going forward, put it that way.

And ladies and gentlemen, due to time constraints we’ll take our final question from Steve Trent with Citigroup.

Yes, good day gentlemen, just one quick follow up from me. You mentioned something, if I’m not mistaken, about the portion of the bottom line that’s roughly attributable to AeroRepublica. And I wasn’t sure if I heard that correctly and I was wondering if you could elaborate?

With respect to -- what you want to know is basically the performance of AeroRepublica for the first quarter?

Yes, exactly.

Yes, it’s slightly below breakeven on a net income basis. It’s about a $700,000 loss and about a $0.5m operating income, approximately. And that's within what we expected for the quarter for AeroRepublica.

Okay, super. Well, there seems like a huge potential from that piece of the business. Thank you very much.

We agree, definitely. Thank you, Stephen.

And at this time I’ll turn the conference back over to management for any additional or closing comments.

Okay, thank you everyone for joining us. We’ve had a good call. We look forward to having you back for our second quarter earnings call. So, have a great day. Thank you very much.

Thank you.

Thank you. Once again ladies and gentlemen that concludes today’s call. Thank you for your participation. You may disconnect at this time.