Copa Holdings SA (CPA) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Copa Holdings first quarter 2007 earnings call. During the presentation, all participants will be in a listen-only mode. Afterwards, we'll conduct a question and answer session. [OPERATOR INSTRUCTIONS]. As a reminder, this call is being webcast and recorded, May 16, 2007. Now, I'd like to turn the conference over to Joe Putaturo, Director of Investor Relations. Sir, you may begin.

Thank you very much, operator, and welcome, everyone, to our first quarter earnings call. Joining us today are Pedro Heilbron, CEO of Copa holdings and Victor Vial, our Chief Financial Officer.

[Pedro] will open up with an overview of the first quarter highlights, followed by Victor, who will discuss the first quarter financial results. Immediately after, we will open up the call for questions from analysts. And we request if you could limit yourselves 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. A reconciliation of non-GAAP to GAAP financial measures can be found in our first quarter earnings release, which is posted on our website, www.copaair.com.

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 investor results. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially and are based on assumptions that are subject to change. Many of these risks and uncertainties are discussed in our annual report filed with the SEC.

Now, I would like to turn the call over to Pedro Heilbron, our CEO.

Good morning to everyone and thank you for joining us today for our first quarter 2007 earnings call. First, I would like to take a minute to thank our entire workforce for yet another record quarter. We continue committed to executing our strategy of being the best option for intra-Latin American travel, delivering a world-class product through outstanding customer service and leading operational performance. Congratulations for a job well done.

Among the main highlights for the first quarter were a 26.6% increase in revenues, which reached $243m. A 76.4% load factor, almost 5 percentage points higher than Q1 '06, led by a 26.3% traffic increase on a 15.8% capacity growth. Continued strength in our yields, which, year over year, yields increasing 3%. Unit revenue growth outpaced unit expenses, leading to an operating margin of 25%, or 3.3 percentage points higher than during the first quarter of last year.

All this resulted in another record quarter, with net income coming in at $48.6m, which is 50% above Q1 '06 and represents diluted earnings per share of $0.0112 [sic - see press release]. These record financial results are the product of continued strength in our regional economy, healthy demand and the growing preference of Copa Airlines and its Hub of the Americas as the best option for intra-Latin American travel.

On the operational front, Copa Airlines has already announced five of the six new destinations we plan to add service to in '07. These are Cordoba in Argentina, the country's second largest city and a major industrial center, Guadalajara, Mexico, also the second most populated city in the country. Port of Spain, Trinidad and Tobago and Punta Cana in the Dominican Republic continue expanding our presence in the Caribbean. And Washington D.C. provides service to an important U.S. destination not well-connected to our region.

Plans are to begin service to all six new destinations during the second half of '07. And with this, Copa Airlines will expand its network to 42 cities in 22 countries in North, South, Central America and the Caribbean, offering more and better options for intra-Latin travel than any other airline.

During the first quarter, Aero Republica initiated service from the Columbian cities of Cali and Cartagena into Copa Airlines' Hub of the Americas in Panama City. They will also be adding a second daily frequency from Bogota to Panama City beginning in July. Aero Republica also continued its fleet renewal, which began in '06, by taking delivery of three additional EMBRAER-190 aircraft and is currently operating a fleet of nine MD-80s and four EMBRAER-190s.

During the first quarter, Copa Airlines' on-time performance came in at 91% and flight completion at 98.8% [sic - see press release], placing us, once again, amongst the highest in the industry. Another important highlight for the quarter was the signing of a formal agreement with the SkyTeam Global Airline Alliance. This agreement is a step ahead in Copa's membership process, which we plan to complete by the end of this year. Not only will Copa Airlines benefit from entering in this alliance, but Aero Republica also stands to benefit through its vast code-share agreement with Copa Airlines.

On a more recent note, I am pleased to report that, on May 2, Copa Airlines announced the acquisition of four new Boeing 737-800 aircraft and options for three more. Copa Airlines now has firm orders for 19 aircraft and purchase rights and options for an additional 22 aircraft. On a consolidated basis, Copa Airlines and Aero Republica combined now have firm orders for 23 aircraft - 10 Boeing 737 NGs and 13 EMBRAER-190s - and purchase rights and options for 38 aircraft - eight Boeing 737 NGs and 30 EMBRAER-190s.

So as you can see, we continue to set the stage for sustained growth through further network expansion and additional aircraft deliveries and commitments. As in '06, the new destinations we're adding to our network during '07 represent markets that will benefit significantly from Copa's service and will strengthen and consolidate even more the position of our Hub of the Americas as the most extensive network for intra-Latin America travel. To sustain this growth, Copa Airlines will receive seven new aircraft in the second half of the year, consisting of two Boeing 737-800s and five EMBRAER-190s.

Now, turning to Aero Republica, our Columbian subsidiary recorded operating earnings of nearly $4m for the first quarter, as load factors increased by 1.3 percentage points year over year, on a slight capacity increase. This improvement year over year was the result of higher yields and a favorable currency environment, lower maintenance costs due to timing of heavy maintenance events and lower fuel costs during the quarter. These results are encouraging, as Aero Republica enters the Columbian market's seasonally weak second quarter and builds momentum for what should be a stronger second half.

During the months of December '06 and January '07, Aero Republica received its first four EMBRAER-190 aircraft and will be receiving an additional four during the second half of '07, to end the year with a fleet of eight EMBRAER-190s and six MD-80s. It is worth noting that the introduction of the first four EMBRAERs into Aero Republica's fleet has been very successful. Maintenance dispatch reliability for this fleet has been averaging 98.3%. We expect this right-sizing and modernization of Aero Republica's fleet will lead to better operational performance, improved load factors and a superior product offering for the Columbian market.

Other initiatives that have been or will be implemented in '07 include the transition into Copa Airlines' reservation and check-in platform, the implementation of a new revenue management system and additional international service into Copa Airlines' Hub of the Americas from the Columbian cities of Bogota, Cali and Cartagena. As we had envisioned, Aero Republica now offers convenient international connectivity to its passengers from four major Columbian cities, providing them more choices for travel to and from Columbia.

For the remainder of '07, we continue to see a positive demand environment, driven mainly by robust regional economic growth and the strength and completeness of our network. This year, Latin America and the Caribbean is expected to grow at a 5% pace, on the heels of a 5.5% growth during '06. We're going into our fifth consecutive year of economic expansion, which has been its most vigorous in decades. This highlighted even more by Panama's economic growth, which was above 8% in '06 and it's also expected to be one of the fastest-growing economies in the region this year. So the outlook of our market is very favorable. We're seeing more intra-regional trade and commerce and our Latin American passengers are benefiting from greater economic prosperity in general.

Additionally, our network continues to strengthen, as the Copa Airlines Hub of the Americas gains ground as the premier intra-Latin America network, providing the most destinations and frequency between North, South, Central America and the Caribbean. The scope of our network has made it easier to add capacity by increasing frequencies or stimulating a market by providing them connectivity through our vast network.

This factor should continue to translate into healthy load factors and yields, despite a 20% forecasted capacity growth for '07. With this in mind, we will continue to build on our competitive strength by focusing on our customers, further improving our product, expanding our network and fostering a motivated and committed cost-conscious workforce.

Thank you. Now, we'll turn it over to Victor, who will go over our first quarter financial results

Thank you, Pedro, and good morning, everyone. Thanks again for joining us today. As always, I'd like to begin by joining Pedro in commending everyone on the Copa team for another outstanding quarter.

I'm pleased to report that, for the first quarter, Copa Holdings' net earnings reached a record $48.6m, which represents a 50% year over year increase and diluted earnings per share of $1.12, above consensus estimates of $0.99 per share. Capacity for the quarter increased 16% compared to Q1 '06, as total ASMs increased to approximately 1.9b, with Copa Airlines, which accounted for 79% of this total, growing about 21% year over year, while Aero Republica's capacity remained basically flat, increasing less than 1%.

Load factor for Copa Holdings increased 4.8 percentage points to 76.4%, with Copa Airlines ending the quarter with an 82.4% load factor. In addition, Aero Republica improved its load factor by 1.3 points year over year to end the quarter with a load factor of 54.4%. Along with higher load factors, yields during the quarter [gained], with consolidated yields climbing more than 3% year over year from $0.156 to $0.161.

On a segment basis, Copa Airlines' yields during the quarter increased 2.3% year over year to $0.154, while Aero Republica's yields also gained, increasing close to 12% from $0.183 in Q1 '06 to $0.205 in Q1 '07. Higher yields and load factors -- and higher load factors led to strong top line growth during the quarter, as operating revenues for Copa Holdings increased over 27% [sic - see press release] compared to Q1 '06, reaching a record $242.8m [sic - see press release].

On a segment basis, Copa Airlines' operating revenues increased 30% or $45m, while Aero Republica delivered a 17% or $6.8m increase. With respect to passenger revenue, which accounted for 95% of operating revenues, we saw an increase of 28% or close to $50m during the quarter, from $180m in Q1 '06 to $230m in Q1 '07. From the standpoint of unit revenues, revenue per available seat mile or RASM for Copa Holdings increased 9% from $0.119 in Q1 '06 to $0.13 in Q1 '07.

Looking now at the expense side, operating expenses for the quarter increased 21% year over year or approximately $32m, mostly relating to Copa Airlines' operations. Unit cost or cost per available seat mile, CASM, increased 4.8% year over year to $0.097, while CASM ex-fuel increased by 5.8% from $0.064 in Q1 '06 to $0.067 in Q1 '07. Approximately two-thirds of this increase relates to passenger-related costs due to higher load factors, stock compensation and incremental profit sharing [accrued] expenses.

Now, turning to Copa Holdings main operating expenses compared to the first quarter of 2006. Fuel expense increased 19%, as a result of a 13% increase in gallons consumed due to increased capacity and a $0.104 increase in the all-in average price of jet fuel, which, net of hedges, went from $1.99 in Q1 '06 to $2.09 in Q1 '07. Salaries and benefits increased 37.6%, mainly due to capacity growth, increased profit sharing accrued expenses and the effect of the Company's stock compensation program, which was implemented pursuant to the Company's initial public offering.

Passenger servicing increased 22.5%, mostly as a result of an increase in passengers carried. Commissions increased 13%, for the most part as a result of a 28% increase in passenger revenues, partially offset by a lower average commission rate in both Copa Airlines and Aero Republica. Reservations and sales increased 33%, primarily as a result of more passengers carried and higher GDS expenses.

Maintenance, materials and repairs increased 8%, mainly due to increased capacity, partially offset by the timing of engine major overhaul events at Aero Republica. Depreciation increased 48%, due to additional aircraft and spares. And flight operations, landing fees and other rentals combined increased 18%, for the most part as a result of increased capacity and higher user fee rates. The remaining operating expenses increased 13% year over year, mainly as a result of increased capacity.

Looking now at the Company's earnings, Copa Holdings' first quarter consolidated earnings before interest, taxes, depreciation, amortization and aircraft rent, EBITDAR, increased close to 38% to $79.5m. Our EBITDAR margin increased 2.8 percentage points to 32.8%. With respect to operating earnings, Copa Holdings' operating earnings for the first quarter increased 46% year over year to $60.8m, while operating margin has increased more than three points to 25%.

Moving on to the balance sheet, total property, plant and equipment increased approximately $93m during the quarter to $955m, mostly as a result of the acquisition of three EMBRAER-190 aircraft assigned to Aero Republica operations. Debt and capitalized leases at the end of the quarter totaled $972m, of which bank debt totaled $703m and of which approximately 51% is U.S. [equity and] bank-guaranteed debt. [inaudible] bank debt [of] about $317m has been fixed for a 12-year term at an average rate of 4.7%.

Lastly, liquidity remains strong, with Copa Holdings ending the quarter with $244m in cash, cash equivalents, short-term and long-term investments and approximately $34.5m in committed lines of credit, which together translates to approximately 30% of last 12 months' revenue, which is a solid position to continue with our expansion plan.

So in summary, we're off to a strong start for the year and we're well-positioned for the second quarter, traditionally our low-season quarter. We continue to seek solid top line growth as we expand our network and grow capacity. We continue to focus on maintaining a competitive cost structure, especially important in light of the high fuel price environment the industry continues to face. And most important, we continue to deliver strong earnings.

Based on our performance for the first quarter and outlook for the year, we are revising our guidance for 2007 as follows. Our [inaudible] capacity remains unchanged in the range of 8.2b ASMs. Average load factor increases from a range of 74% to a range of 75%. RASM increases from a range of $0.126 to a range of $0.128. CASM ex-fuel increases slightly from a range of $0.067 to a range of $0.068 and operating margin increases from a range of 20 to 21.5% to a range of 20.5 to 22%. With that, I'll 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 these outstanding first quarter results. For our shareholders, thank you for your ongoing support. For our employees, thank you for another record quarter, but, more importantly, for your continued commitment to running this world-class airline. We will now be happy to open up the call for questions.

Thank you. The question and answer session will be conducted electronically. [OPERATOR INSTRUCTIONS]. We'll go first to William Greene with Morgan Stanley.

Hi. I'm just wondering if you can talk a bit about the yield trends. It sounded like you're basically saying we're not seeing any signs of price elasticity whatsoever, given the strength in the regional economy. Is that a fair statement?

I think so, yes. That's a pretty fair statement. What we're seeing is that we're facing a pretty steady yield environment. Demand has been strong, which has allowed our folks in the revenue management department to do a good job in the management of inventory and to manage fares. So what we've seen is strong yields. Our -- We're maintaining strong yields and we're seeing the future as steady yield environment.

So then, if I look at your new RASM guidance, it seems like you took it up mostly for the first quarter, but shouldn't the first quarter be sort of continued here in the second and even third quarters? So how conservative is that RASM assumption?

The issue again, and as you may recall from last year, is that we are introducing new markets and those new markets are being introduced during the third quarter and fourth quarter in the second half of the year. So we are increasing our network from 36 destinations to as high as 42 destinations by the end of the year.

So -- And as you all know, when you are introducing new markets, as you start out, you will offer introductory fares, which would have some impact on yield. So the rest of the network maintains a strong yield performance, so overall that's how we're getting to that RASM guidance. Strong demand, but new markets being introduced in the second half of the year.

Okay. And then at Aero Republica, your margin number was basically very close to what you think you're going to do for the full year. And I realize first quarter may be strong, but do you think that perhaps it's realistic that we even get over your 5 to 10% operating margin number that you threw out for 2007?

We still -- We're entering the second quarter and [we're well in] the second quarter of Aero Republica. And the second quarter in Aero Republica is their low season and we're still assuming a 5 to 10% operating margin by the end of the year. So we haven't changed our mind on that. If we get more than that, that will be nice, but we're still expecting between 5 to 10%.

Okay. Thanks for your help.

We'll go next to Mike Linenberg with Merrill Lynch.

Yes, hey. Good morning, everyone. Just a couple of things. I don't know, Pedro, I want to make sure I heard you correctly. Did you say that the completion factor for the quarter was 98% or was it 98.8%?

99.8%.

99.8%. Okay, that's a lot better than what I thought. And then when we look at -- This is probably a question for Victor. We're looking at consolidated 20% ASM growth for the year. What -- Can you give us a sense of maybe how that breaks up by quarter and/or by carrier?

Most of the growth will come from Copa Airlines. Copa will go up somewhere in the range between 23 to 24%, in terms of ASMs year over year. Republica will go up slightly, less than 5% or so year over year. When you look at it by quarter, for Copa Airlines, most of the growth will come in the second half, or I should say, rather, that a little bit over half of the growth will come in the second half for Copa Airlines. And then for Aero Republica, when you look at the growth, which, again, is going to be 5% or a little below that, most of that growth will come in the second half of the year.

Okay. And then if I could just ask one more. Maybe it's a bigger picture question. When you look at your profitability and you pull the Aero Republica arm out, the operating margin for Copa was just -- these are levels that we rarely see. It's like I always refer to when you get close to 30% operating margin, it's like running a sub four minute mile here.

But you've been growing and adding a lot of new markets. In fact, in 2006 you probably added a lot more new cities than we've seen in the history of the Company. And I'm just -- With those type of margins, are you -- is it the core markets, like a Panama-Miami, a Panama-LAX that are really outperforming here or are some of these new markets like Panama to Manaus, are they just ramping up and becoming much more profitable than what you ever even anticipated?

The new markets are not being any different to what we would expect a new market to be. It takes time for those to spool up. So although some do better than others, it's really the traditional markets that are stronger than ever. But having said that, the new markets provide a unique feed into the traditional markets.

So at the end of the day, it's a combination of the two things you're saying, and it's the strength of the network. It's the fact that we have an increasing number of unique destinations, where we're by far the best option to connect with the rest of Latin America. So it's that combination of strong traditional markets with the unique feed of the new markets.

So just based on what you're saying, is it possible that some of these new markets, maybe on a segment basis -- They're actually making a little bit of money or even losing money, but when you look at some of the beyond revenue, that margin contribution is significant.

You bet. Yes.

Okay, well great. Nice -- Very good quarter.

Thank you.

Next, Ray Neidl with Calyon Securities.

Yes. Your growth plan is now extending into deep South America. Is that going to change your model a little bit, particularly, I guess, as you look down into Argentina with their labor problems?

I don't think so. We -- As you know, Ray, we service -- we already service Buenos Aires twice a day. We service Sao Paulo twice a day. We service Rio, Montevideo, both of those almost daily, Santiago, Chile twice a day. So we're -- Our business model is already well into South America. So adding a service into Cordoba is complementary to what we've been doing up to now and we don't really expect any changes.

Okay, great. And also the guidance you gave us for ASM growth for the main airline Copa and Aero Republica for 2007, did you say you expected those same trends to continue through 2008 as well?

We're not providing guidance for 2008 just yet, but I would not expect them to be much different from what we were saying for 2007.

Great. Thank you.

Thank you, Ray.

We'll go next to Jim Parker with Raymond James.

Good morning to all. I'd like to enquire about Copa Airlines' load factor. You have shown in the first three months of this year above 80%, which is just super strong, and I'm curious. Can that continue? In this quarter, you showed April at 77%, down 0.6, and we understand the year to year Easter holiday timing impact, but what can we expect going forward at Copa Airlines? Should we see load factors in the low 80s?

I think that -- we have a -- You have a guidance for load factor, which Victor just mentioned for the year, so that's fresh information. And in terms of quarter to quarter or month to month, it's going to vary with the seasons. As you know from our results last year, our second half is stronger than our first half. The second quarter always is the lowest. So on a monthly or a quarterly basis, it's just going to vary with the season. But at the end of the year, we expect an average load factor for Copa Holdings more or less in the numbers that Victor gave a minute ago.

Okay. And regarding the competitive environment, I noticed recently that TACA is increasing its South American and Caribbean markets that it serves. How will that change the competitive environment for Copa?

They announced increased service out of their Lima hub, intra-South America. We're not really in the intra-South America market. So most of what they're doing in Lima doesn't really have an effect on us. Then, they've also announced some service from Peru to Central America, from Central America to the Dominican Republic, but it's really minor when compared to our network and the number of daily frequencies we already have in all of those markets.

And our hub in Panama also has a number of advantages which are very difficult to match by them. So we see strength in our network. We see strength in our hub. And we don't think that the increased competition from them or other airlines is going to have a significant impact.

Okay, thanks.

Thank you.

We'll go next to Stephen Trent with Citigroup.

Yes, good morning, gentlemen. Just two questions from me. First is, to an extent, a follow-up. We understand in the Columbian market that Avianca is making some recent moves to grow its fleet. And we're wondering what you're seeing there and the competitive landscape.

And my second question is with respect to Venezuela. We've seen President Chavez make controversial decisions about certain industries. We're wondering what you guys are hearing through the grapevine, if anything, with respect to what he's saying about aviation. Thank you.

Hi, Steve. With respect to Avianca, Avianca has increased capacity over the past year or so in the domestic market, probably in the range of 8 to 10%. Some of that or a lot of that capacity is focused on the business market. Aero Republica domestically has more of a presence in the leisure market, though we do compete with Avianca in the business market and that's really where all the initiatives that we've kicked in come into play.

We've introduced OnePass, as you know, since last year and we have over 50,000 enrollments in OnePass and that's building up nicely the loyalty from customers. And as you know, we now have four EMBRAER-190s operating in Aero Republica, so now the customers are getting a new fleet and the product is much improved. The image we changed [towards] the end of last year to make it very similar to Copa's image. We also have implemented a new reservation system, code-sharing flights with Copa. As Pedro mentioned, doing [inaudible] flights from Aero Republica into our hub, they're feeding our network nicely. Revenue management is working pretty good there.

So there a lot of things going on that are making it easier for us to compete against Avianca, but, as you know, today, it is a competitive environment and we'll compete based on product and service. What we have seen in the recent months, though, is that yields have been going up in the market, in the domestic market in Columbia, so we have improved yields, and that's good news. And so -- And again, with the product changes we're making, we're seeing the load factors go up and we expect Aero Republica to do nicely by the end of the year.

On your second question, Steve, we've seen nor do we expect any actions, major actions, that will affect aviation in Venezuela. We've been flying throughout Latin America for many years and aviation is an integral part of the economies of our whole region. And we've never before seen really any major actions against international aviation, again, nor do we expect any in the future.

Great. Very clear. And with respect to any pricing you get out of Venezuela, for example, no appreciable difference or no material difference in pricing there vis-a-vis other markets in the region?

Not to date. It's the same.

Terrific. Okay, thanks a lot, guys.

Thank you.

And we have a follow-up from William Greene with Morgan Stanley.

Yes, can I just ask what are your fuel price assumptions implicit in the operating margin guidance?

As you may recall, when we gave our guidance first -- earlier in the year, we were assuming the barrel to be somewhere in the neighborhood of 65 and we're assuming a crack of 15 or so. Right now, we still think the barrel's is going to come in at 65, but the crack has been all over the place. It's been pretty tough to forecast it, to project it. So we do think it's going to be higher than 15, perhaps as high as in the range of 20 or so. So 65, 20, more or less in that range.

Okay. And then, I'm sorry, did you say what [inaudible] percent you have hedged in the second, third and fourth quarters?

Sure. In the second quarter, of the total volume of Copa Holdings, we're hedged approximately 38% at an average price in the neighborhood of $2 per gallon, U.S. Gulf Coast. In the third quarter and fourth quarter together, it's a total of roughly 15% of the total Copa Holdings volume. And it's, again, a price more or less in the range of $2.05 or so. And we do have some hedges into 2008, first and second quarter, but within the single digits, around 5, 7% or so.

And the $2 and the $2.05, that's the spot price, right?

That's correct.

Okay. Thanks for your help.

[OPERATOR INSTRUCTIONS]. We'll go now to [Carlos Martins] of Credit Suisse.

Hey. Good morning, everyone. My question goes a little bit ahead of first Q results. Looking through your April traffic data, we saw a kind of deceleration in terms of RPM growth and I was wondering what happened in the specific month and your expectations for the full quarter. Thank you.

The -- someone mentioned before, which I think was Ray, that the first weekend of holy week, this year, fell in March -- I'm sorry, in March. So that affected a little bit the April numbers. The Copa segment still grew about 19% in what is the beginning of our lowest quarter of the season. So in that sense, it was a pretty good growth relative to the quarter. Victor, I think we aren't giving any quarter guidance, right?

No, we're not providing quarter guidance. I would just add to that, that 77% load factor, when you have a breakeven load factor below 58%, it's nothing to be ashamed about.

Okay. Thank you.

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

Okay. Thank you, everyone, for joining us and we look forward to having you back for our second quarter earnings call. Have a great day and remainder of the week.

Once again, that does conclude today's call. We do appreciate your participation. You may disconnect at this time.