Copa Holdings SA (CPA) 2006 Q4 法說會逐字稿

Good day and welcome to Copa Holdings fourth quarter 2006 earnings 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 March 7, 2007. Now I will turn the conference over to Joe Putaturo, Director of Investor Relations. Sir, you may begin.

Thank you very much Jennifer and welcome everyone to our fourth quarter and full year 2006 earnings call. Joining us today are Pedro Heilbron, CEO of Copa Holdings and Victor Vial, our Chief Financial Officer.

First, Pedro will open up with an overview of the fourth quarter and full year accomplishments, followed by Victor who will discuss our fourth quarter financial results. Right after we will open the call for questions from analysts. We kindly request if you could limit yourself to one question with a brief follow-up, so we can accommodate most questions.

In today's call we will discuss non-GAAP financial measures direct reconciliation of non-GAAP to GAAP financial measures can be found in our fourth quarter earnings release. 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 risks and uncertainties that could cause actual results to differ materially.

For examples of these risks and uncertainties, please see the risk factors set forth in the company's filings. Now I would like to turn the call over to Pedro Heilbron, our Chief Executive Officer.

Thank you Joe. Good morning to everyone. Thank you for joining us today for our fourth quarter 2006 earnings call. First, I would like to commend our management team and our entire workforce for another record quarter and year. Our targets for 2006 were aggressive, and thanks to the hard work, we were able to meet and surpass them.

We had a year full of accomplishments. Copa Holdings increased capacity by 28%, yet load factors increased year-over-year nearly 2% to 73.1%. During 2006 we grew our fleet by seven new aircrafts, two Boeing 737 and five, Embraer-190s, ending the year with a total of 43 aircraft. To the benefit of our passengers we continue to have one of the most modern and efficient fleets in the region and the world. Copa Airlines initiated service in unprecedented six new markets. So we continued to strengthen Copa Airlines network, offering the most frequencies and destinations for inter-Latin American travel.

For the year we continued to deliver on our commitment to world-class operational performance. Copa Airlines maintained industry-leading on time performance, as the airline recorded its fifth consecutive year above 90%, and AeroRepublica shown significant improvement over 2005.

Fuel prices hit record levels during the year, yet Copa Holdings was able to sustain industry-leading margins. For 2006 our consolidated operating margin came in at 19.6%, 4.6 points above '05. Net income for the year came in at %134.2m, a 62% increase over 2005.

During 2006 Tocumen International Airport in Panama completed a $70m expansion project. This expansion, which increased the number of jet bridges from 14 to 22, will facilitate our growth in the coming years, with the added value of providing our passengers with the most attractive and modern hubs in our region.

We also continued laying the foundation for future operational improvement and cost saving initiatives, which included the utilization of Howard Airport as our new alternate, replacing Cartagena in Columbia, which is almost 300 miles away, and imposed some restrictions on our long-haul flights.

The signing of an MRO contract with Panama Aerospace Engineering, a subsidiary of Singapore Technologies Aerospace, which will enable Copa Airlines to perform heavy maintenance for it's Boeing fleet, in our own backyard, at lower costs with a world-class service provider.

In Panama, Copa Airlines began using its fleet [r-nap] capabilities, which will result in more direct approaches, arrivals and departures, [inaudible] tires, approaches and most importantly, less fuel burns resulting from traffic flow optimization.

During 2006, Copa Airlines continued to be recognized as one of the best airlines in Latin America. In June we were recognized by the Skytrack World Airline Award, for the third consecutive year, as best Airline, as well as best Cabin Staff, in Central America, Mexico and the Caribbean. And in October, Copa was again named one of the best employers in Latin America, by the America Economia Magazine in conjunction with Hewitt Associates.

Now turning to the fourth quarter, among the main highlights for Copa Holdings were a 32% increase in revenues which reached $237m. A 75% load factor, almost 5 percentage points higher than fourth quarter '05, led by a 26.8% traffic increase, and an 18.7% capacity growth, a 5.5% year-over-year increase in yields.

Unit revenue growth outpaced unit expenses, leading to an operating margin of 21.7% or 6.7 percentage points higher than fourth quarter '05. Net income for the quarter increased 137% year-over-year, to a record $41.8m, representing diluted earnings per share of $0.97. This record financial result's are the product of a sound business model, being executed by a world-class workforce. A continuous focus on cost saving initiatives, healthy demand for air travel in our region, and the consolidation of the Copa of the Americas, as the best option for intra-regional travel.

On the operational front, in the fourth quarter '06 Copa Airlines took delivery of two, Embraer-190s to end the year with a fleet of 30 aircraft. Additionally, AeroRepublica began its fleet modernization plan, with the arrival of its first Embraer-190, ending '06 with an operational fleet of 11 aircraft.

Also in the fourth quarter Copa Airlines added Rio Janeiro to its network, which represented 36th destination we are serving. We are very happy with the performance of this new route. Copa now serves three important cities in Brazil, and in most cases is the best choice for travelers flying to Central America and the Caribbean.

More recently, we announced that Copa Holdings signed a formal agreement with the SkyTeam Global Airline Alliance. This is a step forward in Copa's ongoing membership process, which is being sponsored by Continental Airlines, and should culminate in the airline becoming an associate member later this year. Our participation in the SkyTeam Alliance will enhance our network, widening our customer base and improve our commercial appeal, at little extra cost for Copa Airlines. But more importantly it is a testament of the Alliance's perceived value of our network, customer service and operational performance.

Now turning to our Columbian subsidiary AeroRepublica, recorded operating earnings of $3.5m for the fourth quarter, as load factors increased by 6 percentage points year-over-year on a moderate capacity increase.

The airline has already taken delivery of four of the eight Embraer-190 aircraft it will receive by the end of this year, which will reflect most of its MD83. AeroRepublica will gradually see the benefit from this fleet transition to capacity rightsizing and lower purchase costs. The effect of AeroRepublica's fleet transition into smaller-gauge aircraft, along with schedule modifications, and increased international routes, will result in a capacity growth of approximately 5% for '07.

During the first quarter AeroRepublica has started a daily flight from Cali into Panama City. And will soon be adding another one from Cartagena, thereby increasing its fleet into Copa Airlines Hub of the Americas, and increasing AeroRepublica's international connectivity.

We expect all initiatives, being implemented, at AeroRepublica to translate into full year profitability for the airlines. Nevertheless, we expect the main benefits to kick in with the start of their high season late in the second quarter, and during the second half of '07. When the remaining four, Embraer-190 aircraft are received, and which is seasonally their strongest half.

For 2007 we expect Copa Airlines to have another solid year, on continued strength in our regional economy. Especially in Panama where the start of the Panama Canal Expansion Project will begin to stimulate an already fast growing economy. So with these opportunities ahead we will continue to develop and strengthen our networks, building upon what has become the preferred option for intra-Latin America travel.

Thank you. With that I will now turn it over to Victor, who will go over our fourth quarter financial results.

Thank you Pedro and good morning everyone. Thanks again for joining us today. First, I would like to start again by congratulating all of the men and women in the Copa team for a great quarter and another outstanding year. Their hard work and dedication once again has paid off, resulting in another banner year for Copa Holdings.

I am pleased to report that, for the fourth quarter, Copa Holding's net earnings reached a record $41.8m, which represents a 137% year-over-year increase, and diluted earnings per share of $0.97, above consensus estimates of $0.91 per share.

For the most part solid revenue growth drove fourth quarter performance, as consolidated operating revenues for Copa Holdings increased 32% compared to Q4, '05 reaching a record $237.4m.

On a segment basis, Copa Airlines operating revenues increased 36% to $49.8m; while AeroRepublica saw a 20% or $8.3m increase. In a year marked by healthy economic conditions in the region, especially in Panama where GDP growth continues to be one of the highest, Copa Holding's 2006 operating revenue reached a record $851.2m, which reflects a 40% increase versus prior year on a 28% capacity increase.

Unit revenue for Copa Holdings continued strong in the fourth quarter, as revenue per available seat mile, RASM, increased 11.3% from $0.116 in Q4, '05 to $0.129 in Q4, '06. Passenger revenue, which accounted for 94% of total operating revenues, reached a record $222.7m during the quarter, reflecting a 34% or $56.2m over Q4, '05.

Capacity for the fourth quarter increased 19% compared to Q4 '05, as total ASMs increased to approximately 1.8b with Copa Airlines, which accounted for 78% of this total, growing over 22% year-over-year, while AeroRepublica capacity increased by almost 7.5%.

Consolidated load factor increased 4.8 percentage points to 75%, as Copa Airlines ended the quarter with a 78.2% load factor. And AeroRepublica saw a 6.0% quarterly year-over-year increase in load factor to 64.1%.

We also continued to see strength in yields, with fourth quarter consolidated yield climbing 5.5% year-over-year from $0.153 to $0.161. Our strongest yield performance came from Copa Airline's operations where yield increased just over 7% quarter-over-quarter to $0.157. However, AeroRepublica's yield also gained, increasing close to 1% to $0.18.

On the cost side, operating cost for the quarter increased 21.6% year-over-year or approximately $33.1m. Of which $28.4m relate to Copa Airline and $5m to AeroRepublica. Unit costs or costs per available seat mile, CASM, increased 2.5% year-over-year to $0.101, while CASM Ex-fuel increased by 7.8% from $0.65 in Q4, '05 to $0.07 in Q4, '06.

Approximately half of these increases relate to passenger-related costs due to higher load factors, incremental fees associated with other related services. And a recap of IPO related expenses in Q4, '05 from other operating expenses to other non-operating expenses.

Now, comparing Copa Holdings main operating cost for the fourth quarter of '05. Fuel expense increased 9.3% as a result of a 16.4% increase in gallons consumed, due to increased capacity. Partially offset by a $0.12 decrease in the all in average price of jet fuel, which net of hedges went from $2.24 in Q4, '05 to $2.12 net Q4, '06.

Salaries and benefits increased 22.3% mainly due to capacity growth, increased profit sharing accrued expenses. And the effect of the company's stock compensation programs that was implemented pursuant to the company's initial public offering.

Excluding incremental profit sharing costs and the new stock incentive program, salaries and benefits increased 17%, which puts it slightly below capacity growth. Passenger servicing increased 23.9% primarily due to an increase in passengers carried. Commissions increased 14.6% for the most part as a result of a 32% increase in passenger revenues, partially offset by a lower average commission rate in both Copa Airlines and AeroRepublica.

Reservations and sales increased 29.4% primarily as a result of more passengers carried and higher GDS rates. Maintenance, materials and repairs increased 31.6%, primarily as a result of fleet maintenance events at Copa Airlines, and AeroRepublica as well as capacity growth. Depreciation increased 48.8% mostly due to additional aircraft and spares.

Flight ops, landing fees and other rentals combined increased 24.8%, for the most part as a result of increased capacity and higher user fee rates. Aircraft rentals increased 15% most of which relates to additional engine leases at AeroRepublica.

And the remaining operating expenses increased 77% year-over-year, primarily as a result of audit and consulting fees related to the 2006 audit. And the reclassification of IPO related expenses in Q4, '05 to other non-operating expenses.

Looking now at the company's holdings, Copa Holdings fourth quarter consolidated earnings before interest, taxes, depreciation, amortization and aircraft rents, EBITDA, increased 82.4% to $71.2m, while EBITDA margins increased 8.3 percentage points to 30%. With respect to operating earnings, Copa Holdings operating earnings for the fourth quarter increased 92% year-over-year to $51.4m, while operating margins increased nearly 7 points to 21.7%.

Turning now to our balance sheet, Copa Holdings ended the quarter with more than $226m in cash, cash equivalents, short term and long-term investments, and approximately $35m in committed lines of credit. Net of restricted cash liquidity at the end of the quarter exceeded $253m or close to 30% of last 12 months revenues, thereby maintaining the company's strong liquidity position.

Property, plant and equipment increased approximately $91m during the quarter to $863m, mostly as a result of the acquisition of three Embraer-190 aircraft. [Debt and capitalized leases] at the end of the fourth quarter total [$888m] of which bank debt totals $621m. And of which approximately 59% is U.S. acting bank guaranteed debt. Of the total Copa Holdings bank debt outstanding as of December 31, 2006, approximately 52% has been fixed for a 12-year term at an average rate of 4.7%.

So in summary, we had an outstanding fourth quarter and another record year. We continue to see solid economic growth in the region. And as a result of our hubs, being arguably the most convenient way to connect in the region, we continue to see healthy passenger traffic growth.

Based on our performance through the fourth quarter, we are maintaining our 2007 full year guidance as follows, capacity in the range of 8.2b ASMs, average load factor in the range of 74%, RASM in the range of %0.126, CASM Ex-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 are obviously very pleased to report this record fourth quarter and full year results. In '07 we are more committed than ever to create value for our shareholders, by maintaining and strengthening our product and competitive positions. To our shareholders, thank you for your continued support. To our employees, thank you for a job well done and your committed commitment to running a world-class airline.

We will now be happy to open up the call for questions.

[OPERATOR INSTRUCTIONS]. Our first question comes from Mike Lunenburg, Merrill Lynch.

Good morning gentlemen. It's actually [Lori] on behalf of Michael, can you hear me?

Yes.

Good. My first question is in regards to the turnaround at AeroRepublica, which turned in some pretty nice results this quarter. You noted in the press release, and also in the call that, you are going to be implementing some new revenue management initiatives, at the division. Could you give us more color on some of the things that you are looking at regarding these initiatives?

Right. Well first of all we have to keep in mind that the second half of the year is the strongest half for AeroRepublica, in the mainly domestic market in Columbia. So we are always expecting a stronger second half of the year and a stronger last quarter. So that's a seasonal thing. Plus, obviously there are a number of initiatives, such as the new aircraft that are coming in, as being one. And a revenue management implementation to our Sabre AirMax system, which we have implemented at Copa and this, will happen within this year, '07.

Right, excellent. And my second question is just for housekeeping. Could you break out the quarterly ASM increases for both Copa and AeroRepublica for 2007?

For 2007 the quarterly ASM increases, I don't think we have that here really.

Okay.

So we will owe you that one.

Okay, sounds good. Well, thank you very much.

Our next question comes from Jamie Baker, JP Morgan.

Yes, good morning everybody. Just a quick question on the Embraer-190s, curious if the aircraft is actually living up to expectations. I'm sure they are easily outperforming the MB80's that they are replacing. But the difficulties that certain carriers, notably, Jet Blue are having with the aircraft are well chronicled. Any margin pressure with the 190's or are they operating up to snuff?

Good morning Jamie. I think the main problem Jet Blue is having lately is how they spin their news. Because actually the -- what came out if it is spin properly, it's not a bad thing. All of those software upgrades are going to improve further the performance of the aircraft, which is starting to do a lot better. For example our Embraer this year, '07, has so far had a [desktop] reliability of 99.2%, which is pretty good for a fairly new aircraft and a new model.

And what came out is a number of software upgrades, and service [inaudible] which we have been implemented. We hope to have -- actually we are planning to have 75% of our fleet implemented by the end of May of this year with the software upgrades. Only that we are doing it without disrupting our schedules simply by using overnight, by using new aircraft delivery and tactical low-season cancellations. So we are happy with the performance of the aircraft, it's doing better every month.

Okay, thank you for the info I appreciate that.

[OPERATOR INSTRUCTIONS]. We'll go next to Steve Trent, Citigroup.

Good morning gentlemen. Just a quick question for me, you mentioned your maintenance facility, heavy maintenance factory. If you could -- I didn't totally hear what you said, could you please give a little color as to when this is going to launch? And approximately what is the cost of getting it up and running?

Good morning Steve. This activity -- well first of all it's going to be at Howard, at the Howard Air Force Base, which is something like 25 miles or so from our main hub here in Panama. And they expect to start operating in April, next month. There could be a slight delay, but we are already using a facility of theirs in San Antonio, so that facility could bridge any gap if they are late in being ready. But April is the target date for the facility at Howard to be ready.

Terrific, and any sense as to what sort of capacity you will have in terms of throughput? How many planes could you service for -- and will it be [A checked] and [B checks] etc?

Yes, first it will do -- everything has to be checked. For us, it's mainly [C] checks, what we are going to be doing at the facility. And in terms of infrastructure they have taken over four very large hangers, so as business builds up they have the facilities there to take care of that opportunity. We are just going to be a percentage, probably a small percentage of what Singapore Technologies launched at this new facility.

All right. Very clear, thanks very much guys.

Thank you Steve.

[OPERATOR INSTRUCTION]. We'll go next to Buck Horne, Raymond James.

Hello guys, how are you doing?

Good morning Buck.

A quick question on the guidance, it seems to imply that the '07 yields you are expecting could be flattish or up maybe very modestly. Is there something about the pricing environment that is changing as we move into 2007, given yet a very strong pricing environment in '06? Is it possibly just a conservative view here?

What we are seeing Buck is, and we saw in '06, a very strong pricing environment. Part of it is as a result of strong demand, and obviously also strong demand for our products. Fuel surcharges also played a role in that pricing environment.

What we are seeing right now is that we don't see any indication of any yield pressure. But we also are considering that you cannot keep increasing yields indefinitely. So what we are seeing right now is a steady yield environment, based on the strong yields that we saw in 2006, and maintaining that way so far.

Great, thanks you guys.

We will now take a question from William Green, Morgan Stanley.

Hello guys, this is actually John [Gotten] filling in for Bill Green. First, I was just curious if you could give us an update on your hedge positions in '07, the percent and the prices?

Sure, for '07 for the first half of the year, when you look at the Copa Holdings total volume, we have approximately close to 40% of the total Copa Holdings volume hedged with swaps. And the pricing is near the range of around $2.00 just about $2.00 using U.S. Gulf Coast pricing. For the second half of 2007 approximately 15%, 15 percent of the total Copa Holdings volume, and the pricing there is somewhere in the range of $2.10 U.S. Gulf Coast prices. And then for '08 we have a very small percentage so far hedged, under 6% for the first couple of quarters, at ranges in pricing in the neighborhood of around $1.90 or so.

Thanks. And are you still expecting operating margins in the range of 10% for AeroRepublica in '07?

Yes, what we said in the past is that we expect operating margins for AeroRepublica in '07, to be in the range of 5% to 10%, and we haven't changed our minds on that.

Okay great.

And at this time we have no further questions. I would like to turn the conference back over to Mr. Heilbron for any additional or closing remarks.

Okay. Thank you everyone for joining us. Thank you for your questions. We look forward to having you back for our first quarter earnings call. So have a great day.

Once again ladies and gentlemen this does conclude today's conference you may now disconnect.