Copa Holdings SA (CPA) 2006 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Copa Holdings third quarter 2006 earnings release conference call. During the presentation, all participants will be in 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, November 15, 2006. Now I will turn the conference over to Joseph Putaturo, Director of Investor Relations. You may begin.

Thank you very much, Audra, and thank you, everyone. Welcome, everyone, to our third quarter earnings call. Joining us today are Pedro Heilbron, our Chief Executive Officer and Victor Vial, our Chief Financial Officer. As in previous calls, first Pedro will open up with an overview of the quarter, followed by Victor, who will discuss third quarter results.

Immediately following, we will open up the call for questions. We've allocated 20 minutes for management to comment, and 25 minutes for questions from analysts. We kindly ask you to limit yourselves to one question with a brief follow up so we can accommodate all questions.

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

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 F1 filings.

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

Thank you, Joe. Good morning to all. Thank you for joining us for our third quarter earnings call. We're pleased to report that Copa Holdings delivered record earnings for the third quarter '06 as a result of strong revenue growth driven by increased capacity, strong load factors and yields. For the quarter, Copa Holdings reported net income of $37.2m and diluted earnings per share of $0.87. This represented earnings per share growth of 34.3% over Q3 '05 and 63.1% over Q2 '06.

Operating and net margins for the quarter stood at 19.6% and 16.1% respectively, among the best in the industry.

Among the main highlights for the quarter were a 16.8% year over year increase in available seat miles, a 19.6% year over year increase in traffic measured in revenue passenger miles, a strong 75.4% consolidated load factor. Operating revenue for available seat miles, RASM, increased 11% year over year to $0.1293 as a result of higher load factors as well as higher yields. Operating costs for available seat miles, CASM, increased 11.9% to $0.093 in Q3 '05 to $0.104 in Q3 '06, led by an 18.3% increase in fuel cost per ASM.

In July, Copa Airlines continued its fleet expansion by taking delivery of an additional Boeing 737-700. In December our airlines will receive two additional Embraer 190 aircraft to end the year with a fleet of 30 aircraft, 24 Boeing next generation aircraft and six Embraer 190s.

In the third quarter Copa Airlines successfully continued its network expansion by adding service to five new destinations – Manaus, Santiago de Caballeros, Maracaibo, San Pedro Sula and Montevideo as well as adding new frequencies to three markets - Havana, Santo Domingo and San Jose.

On September 5, '06, Copa Airlines announced the signing of a maintenance agreement with Panama Aerospace Engineering, a subsidiary of Singapore Technologies Aerospace Limited. As part of this agreement, Panama Aerospace will perform all heaving maintenance of our Boeing next generation fleet in their new facility at Howard Airport, located a short distance from Panama City.

In October, Copa Airlines was again named as one of the 10 best employers in Latin America by the business magazine America Economia in conjunction with Hubert Associates, a global human research consultant. We're very proud of this distinction because it validates our effort to maintain a highly motivated workforce with a commitment to excellence.

In the third quarter, we continued our efforts to accelerate at AeroRepublica's fleet renewal. AeroRepublica signed lease agreements with GE Commercial Aviation Services, GECA, for three Embraer 190 aircraft to be delivered in '07. The airline now has firm orders and delivery commitments for eight aircraft, all of which are Embraer 190's.

On August 3, '06, AeroRepublica began daily service from Bogota to Copa Airlines hub of the Americas in Panama City. AeroRepublica now provides the Columbian market with intra regional connectivity from two major Columbian cities - Bogota and Medellin. Additionally, in the first quarter of '06, we expect AeroRepublica to begin daily flights from Cali to our hub in Panama City.

On September 6, '06 AeroRepublica unveiled its new corporate image. This image introduced Copa Airlines logo, livery and overall image while maintaining the AeroRepublica brand name.

And last but not least, on October 22, Panama voted in a national referendum to approve the expansion of the Panama Canal. This multi-billion dollar project will stimulate our economy in the years to come and should be positive for our business.

So as you can see, the third quarter was a very eventful and successful quarter. Copa Airlines continued setting the path for sustained growth through the introduction of five new markets. The performance of these new markets has been very encouraging and in most cases exceeded our initial expectations. The new markets complement and enhance our network and reaffirm the potential of entering medium density markets and the flexibility of the Embraer 190 give us in developing this route.

We now serve 35 destinations in 21 countries in North, South, Central America and the Caribbean with one of the youngest fleets in the world and with exceptional customer service. So our network and product offering is more compelling than ever. This, coupled with strong economic growth in Panama and the region, continues to drive demand and has resulted in increased load factors and yields, which along with a very competitive cost structure, has resulted in sustained industry leading margins.

We're also very pleased about the upcoming addition in December of Rio de Janeiro. Copa will now serve three important cities in Brazil, and will, in most cases, be the best choice for travel to Central America and the Caribbean.

Now turning toward our Columbia subsidiary, AeroRepublica recorded a small operating gain and a net loss of 1.1m for the quarter. Increased fuel costs for the quarter represented an additional $1.7m versus Q3 '05 and $0.5m versus last quarter. Although the third quarter is typically one of the strongest quarters, we still expect them to breakeven for the second half of '06, mainly due to lower average fuel costs for the fourth quarter and improving load factors.

AeroRepublica continues to execute its transition plan. Among the many initiatives being implemented are the following. AeroRepublica's fleet plan involves replacing its current fleet with modern and efficient Embraer 190 aircraft. This aircraft will better balance capacity and demand while enhancing the airline's operational performance and commercial appeal.

AeroRepublica's updated delivery schedule contemplates delivery of its first two Embraers in December '06 and six additional aircraft in '07. AeroRepublica's new corporate image was unveiled on September 6, ''06. The first phase of implementation has been completed through the incorporation of the new image in all airport check-in counters, as well as most of our city ticket offices. Currently, three aircraft have been painted with the new livery and all new Embraer 190 aircraft will also be introduced with AeroRepublica's new image.

Several initiatives have been implemented which have resulted in significant improvement in on-time performance which has increased from 73% in Q3 '05 to 84% in Q3 '06. And AeroRepublica has implemented a new winter schedule and it's in the process of establishing optimized spring and summer schedules. For '07, the result of this new schedule and replacement of AeroRepublica's MD-80's with new and efficient Embraer 190's should result in an increase in capacity in the range of 5 to 7%, as well as resulting in the optimization of routes and frequencies in business and leisure market to better balance capacity and demand.

For '07, we expect that the broad set of initiatives being implemented by AeroRepublica will begin to show positive financial results, which will benefit our margin on a consolidated level.

So to summarize, we have had another outstanding quarter. Our Copa segment continues to outperform despite very high average fuel cost for the quarter, thanks to healthy demand for travel in the region and the fact that Copa is arguably the best option for travel in most of the markets we serve. Additionally, we're very pleased with AeroRepublica's progress and believe they are on track to be profitable for full year 2007.

Many important initiatives are being accomplished in very little time. And this could not happen without a first-class workforce. Once again, I want to congratulate all of the people at Copa and AeroRepublica that are making things happen and contributing to our continued success.

With that, I will pass the call to Victor, who will discuss our financial performance for the quarter, guidance for full year '06, preliminary guidance for 2007.

Thank you, Pedro, and good morning everyone. Thanks again for joining us today. As Pedro just mentioned, the third quarter was another great quarter for Copa Holdings, both financially as well as operationally. I would like to begin again by thanking everyone in our team at Copa Airlines and AeroRepublica for all their efforts and contributions.

I am very pleased to report after the third quarter, Copa Holdings delivered a net profit of $37.2m, which represents a year over year increase of 34.6%. And diluted earnings per share of $0.87, well above consensus estimates at $0.79 a share. Third quarter performance was driven mainly by a strong 49.6% year over year increase in operating revenues, which for the quarter leaves a record $230.6m.

On a segment basis, Copa Airlines operating revenues increased 32% or $44.5m while AeroRepublica saw a 21%, or $8.4m increase. With a backdrop of sustained economic growth in Panama and the region, Copa Airlines delivered higher both prices and yields as demand for air travel increased during the third quarter.

I should add that load factors at AeroRepublica continues to strengthen with September and October coming in well above 2005 levels. Third quarter [unit] revenues for Copa Holdings came in better than expected as revenue per available seat mile, or RASM, increased 11% from $0.116 Q3 '05 to $0.129 in Q3 '06. Passenger revenue, which accounted for 94% of total revenues, reached $218m during the quarter. This represents a 31% or $51m increase over Q3 '05, of which $43m relates to Copa Airlines operations and approximately $8m related to AeroRepublica operations.

Capacity for the third quarter increased nearly 17% compared to Q3 '05. Our total ASM increased to approximately $1.8b. Copa Airlines' capacity, which accounted for 70% of total ASMs grew 16% year over year, while AeroRepublica increased capacity by almost 20%.

Strong demand saw our consolidated growth factor increase 1.8 percentage points to 75.4% as Copa Airlines ended the quarter with a 79% growth factor. As for AeroRepublica, growth factors for the quarter increased to 63.6%, which is more than an 11 point improvement compared to Q2 '06 and only a one point decline versus Q3 '05, again, on a 20% capacity increase.

We continue to see a healthy yield environment with third quarter consolidated yields climbing 9.3% year over year from $0.148 to $0.162. Our strongest yield performance came from Copa Airlines operations where yield increased just over 11% to $0.158. However, we also saw an increase in AeroRepublica's yield, which increased just over 3% to $0.177.

On the cost side, operating cost for the quarter increased 31% year over year, or approximately $44m of which $30m relates to Copa Airlines and $14m to AeroRepublica. Unit cost or cost per available seat mile, CASM, increased 11.9% year over year to $0.104 while [CASM] fuel increase of 9% and $0.064 in Q3 '05, $0.07 in Q3 '06. Approximately half of this increase related to passenger related costs incurred as a result of having achieved higher load factors and additional costs related to our performance incentive programs.

[Inaudible] Copa Holdings main operating costs versus the third quarter '05. Fuel expense increased 38% as a result of increased capacity and higher hedged fuel prices at the all-in average price of jet fuel per gallon for the quarter increased almost 20% from $1.95 in Q3 '05 to $2.33 in Q3 '06.

Salaries and benefits increased 29%, mainly due to capacity growth, increased profit sharing, accrued expenses with respect to the Company's stock compensation program that was implemented pursuant to the Company's initial public offering. Excluding incremental profit sharing costs and the new strong incentive programs, salaries and benefits increased 16.5%, which is in line with capacity [growth].

Passenger servicing increased 23.6%, primarily due to an increase in passengers carried. Commissions increased 15.4% for the most part, and have resulted in a 31% increase in passenger revenues and partially offset by a lower average commission rate in the comparison segment.

Our duration of sales increased 31.5% mostly due to more passengers carried and higher [DVS] rates. Maintenance, materials and repairs increased 41%, almost half of which was capacity driven with the remainder mostly having to do with higher maintenance costs associated with AeroRepublica's MD-80 fleet, and incremental referred costs related to the Boeing fleet.

Write offs, landing fees and other rentals combined increased 26%, for the most part as a result of increased operations and air to ground communication fees.

Aircraft rentals increased 47% most of which relates to AeroRepublica, additional aircraft and certain reclassified expenses. Finally, the remaining operating expenses increased approximately 20% year over year.

Looking now at the Company's earnings, Copa Holdings third quarter consolidated earnings before interest, taxes, depreciation, amortization and aircraft rent EBITDA increased 30% to $66m while EBITDA margins increased 2 percentage points to 28.6%.

I should add that EBITDA margins for the Copa earnings segment increased 1.3 points year over year, reaching 33.4%. Turning now to operating earnings, our operating earnings for the third quarter increased 25.4% year over year to $45.2m, while operating margins decreased slightly to 19.6%. However, Copa Airlines delivered a solid 2.4 point increase in operating margins from 22.3% in Q3 '05 to 24.8% in Q3 '06.

Turning now to our balance sheet, Copa Holdings ended the quarter with approximately $190m in cash, cash equivalents, short term and long term investments and approximately $35m in committed [tax] credit. Better restricted cash liquidity in the quarter exceeded $216m or 27% for that [inaudible], which is a strong liquidity position for the Company.

Property, plant and equipment increased approximately $30m during the quarter to $772m, mainly due to the acquisition of 137/700. Debt and capitalized leases at the end of the third quarter totaled $815m of which bank debt totaled approximately $556m and of which approximately two-thirds is US acting bank guaranteed debt.

Of the total Copa holdings bank debt outstanding as of September 30, close to 60% has been fixed at an average rate of 4.2%. In terms of financing, Copa Holdings recently arranged financing totaling over $240m related to future delivery of 10 new Embraer 190 aircraft which are due to be delivered during the fourth quarter of '06 and during the course of '07.

So in summary, we had another outstanding quarter. Our business fundamentals and financial position remain strong. The economic outlook continues to be positive and traffic in the region continues to grow. We continue to focus on delivering a world class product and in keeping a competitive cost structure and our margins remain among the highest in the industry.

Based on our performance in the third quarter, we are revising our '06 full year consolidated guidance to reflect an average load factor at a rate of 73%, up from 71%. RASMin the range of $0.123, up from $0.118. Casenex fuel in the range of $0.067, up from $0.05. Operating margin in the range of 19.5%, up from between 16 and 17.5%. And capacity for full-year '06 in the range of 6.9b ASMs, slightly down from 7b ASMs.

Also, as we mentioned during our last call, we are providing preliminary guidance for full year '07 as follows. Consolidated capacity in the range of 8.2b ASMs, average load factor in the range of 74%, RASM in the range of $0.126, casenex fuel in the range of $0.067 and an operating margin in the range of between 20 to 21.5%.

With that I will turn it over to Pedro for closing remarks.

Thank you, Victor and again, thank you all for joining us today. We're very pleased to report this record third quarter result. Our team meant more than ever, committed to running and maintaining a world class operation. We're confident that with their support, we will continue to strengthen our business model, grow our passenger base and solidify our position as the best alternative for intra-Latin American travel.

Now we will now open all the call for questions.

Thank you. [OPERATOR INSTRUCTIONS] We'll go to our first question from Mike Lindenberg at Merrill Lynch.

Hi gentlemen. This is Libby standing in for Mike. My first question is I was wondering if you could provide some color on the competitive environment in Columbia with regards to the AeroRepublica operation?

Okay. Good morning, again. Columbia has always been a very dynamic environment and domestic industry, but there haven't been major changes. Abianca has increased capacity. I don't think I have information with me right now, this year. But nothing major. We have since the end of last year brought in the Fokker 100. And AeroRepublica as you know will start at the end of the year bringing in the Embraer 190's.

So those are, in terms of fleet, added to the development in the market. In terms of routes, there haven't been major changes except for what we've talked already about and no new entrants. So no major changes just, you know, AeroRepublica is in a very solid number two position. And the market has also been growing the last couple of months at a faster rate than what we saw in the beginning of the year.

Right. And you won't characterize -- would you characterize the yield environment to be rather stable?

It's been improving, actually. We also have strengthened this year.

Okay, great. And my next question is actually just housekeeping. I guess revisiting the whole issue of the tax rate. I know that last quarter you were at about a 7% tax rate and it comes in just under 7.5 this quarter. Would you mind providing maybe better run rates on what we should expect for the next quarter and maybe going forward?

For full year '06?

Yes.

You should expect something in the range of 9.5% or so.

Okay.

All right. And next year, you should be looking at something in the range of 10%.

Of 10%. Okay, that's great. Thank you very much and great quarter.

Thank you, Lilly.

We'll go next to William Green at Morgan Stanley.

Yes, good morning. I'm wondering if you can talk about pricing a little bit. Are you seeing any signs of demand elasticity? Do you think that the kind of yield improvement that you've had thus far this year can continue even into next year?

Well, there's one thing we need to keep in mind. There -- we have not seen an impact on our loads, as you can tell from the numbers, from the yield improvement this year. And at the same time, the new improvements have been, in part, a result of the higher fuel prices we have experienced throughout the year.

Depending on what happens with fuel next year, we will see what happens with yields. If fuel stabilizes, like it has lately, I think we will not expect the need for major yield improvements like we've seen this year again, so -- but so far the markets are growing throughout Latin America and the markets have been somewhat inelastic.

Okay. And then, on fuel, just -- do you have hedge positions for 2007?

Sure, for the last quarter of this year we have approximately 36% of the Copa Holdings volume hedged. Next year, for the first quarter, approximately 34%, second quarter, approximately 20% and the third quarter in the range of 11 to 12%.

At roughly what prices?

Right. For the last quarter of this year, something in the neighborhood of 2.12 to 2.15. The first quarter and second quarter next year, more or less in that same range, and in the third quarter, you're looking at a little bit higher price, more in the range of 2.25, 2.28.

And relative to what you're paying in spot, that's about right?

Say that again?

Relative to what you're paying in the spot market, you're hedged above the current price, right?

We are, yes. The last I saw was the spot pricing at 1.70.

Okay.

So, well you know, even the volumes you have hedged, the more the price comes down, the better for us, and then we're better off.

Okay, thanks for your help.

Thank you, Bill.

We'll move next to Ray Needle at [Calyon Securities].

Okay great. Good quarter, guys. Just wondering, if you're having such a good quarter, why you're slowing down your capacity growth next year?

Okay, Ray, an easy question there. We've had -- remember we planned capacity way ahead and it has to do with aircraft deliveries and availability, etcetera. So we're not making -- and another way we run the [inaudible]. We're not making major changes. I mean, we will adjust where we fly depending on demand, but in terms of the capacity coming in, we are not rushing to make major changes after a great quarter. And in the past that has worked well.

We have a thought out, a plan and we think it's the best way to go forward. And it helps load factor, it helps yields, so I think we're happy with the capacity we have going forward.

Okay, so that's a good strategy. And just as a general broad question, the proposed US Airway takeover of Delta Airlines, what, if any, effect do you think that might have on your operations?

Well, we will be joining, as we mentioned before, the Sky team next year, sometime next year, just a matter of finishing the paperwork and some of the technological links and Delta is an important member of the Sky team. So a much larger, stronger, and healthier Delta will bring us much better networks and more passengers to our alliance with Sky team so we think it should be positive.

From a competitive standpoint, we do not compete against US Airways and we really do not compete against Delta either. So it should all be positive.

Great. Thank you very much.

Thank you, Ray.

We'll go next to Buck Horn at Raymond James.

Hey guys, good morning. Just going back to the 190 delivery schedule, is there anything to be aware of with the pushback and the delivery dates that you have scheduled and will the '07 deliveries be pushed back at all as well?

Do you want to tackle that?

Yes, the delays -- but the delays are not significant. I mean, we're being affected with the first couple deliveries and the impact is only a month, a month and a half, so there's no significant impact to our operational plan or the financial impact to the Company.

Okay. And I guess on the performance-based pay, obviously it's a good thing when you're incurring those bonuses. But how much of that this quarter was kind of something that was accrued that was above the plan or, you know, in terms of -- was there a catch-up accrual that may not occur next quarter or how should we think about the performance pay?

No, it will be similar in the next quarter if we keep on performing as we have up to date. So it's basically accounting for much better performance and for our performance-based plan that is tied directly to our bottom line.

And I should add that when you look at it in terms of operating income, what's been accrued now is more efficient as a percentage of operating income than it was last year.

Okay. And last one, I guess. Just could you give an update on where your percentage of web based sales are versus agency sales and bring us up to speed on any targets you have for increasing online distribution and what you're doing there?

Okay that's one I'm not sure we have here with us right now. Yes, we've been slightly above 4% of website sales. I mean, Copa's website directly, not counting other Internet sites. And that is kind of stabilized there. We're hoping and expecting to improve on that number next year as we grow some other of our websites that will cater to, for example, group sales, tour packages, etcetera.

So some of that business we're expecting to directly web next year. That should help that number, plus the growth we're seeing in general. That 4% number, although not very large. It is more than double where we were last year. So there's an improvement there. Although, again, it has stabilized lately but we feel it's going to actually be growing next year.

All right. Thanks.

Thank you.

Thank you, Buck.

[OPERATOR INSTRUCTIONS] We'll go next to Jamie Baker at JP Morgan.

Hi, this is [Paki Edder] on behalf of Jamie. Just a couple of questions. First off, I know AeroRepublica margins you were expecting around the 10% level in 2007. Is that still your expectation?

We -- somewhere in that range. That is not something that will be out of the range for us. We still expect that to be profitable next year as a result of all the initiatives we're in the process and have been in the process of implementing. And a margin in the range of 10%, operating margin in the range of 10% would not be out of the range.

Okay. And then second question, what's your price you have embedded into your forecast for 2007, by segment?

For 2007 we're looking at oil in the range of 65 and the [crack] somewhere in the range of 12 to 15 and it will probably drop to forecast but that's what we're assuming right now.

Thank you.

Thank you, Paki.

And at this time, we have no further questions. I'll turn the conference back over to management for any closing remarks.

Okay, thank you all. You know where to find us. Thank you for your continued interest. Again, we're very happy with the results and very bullish about what's ahead of us, so thank you again, and good luck.

And that does conclude today's conference. Again, thank you for your participation.