Copa Holdings SA (CPA) 2007 Q2 法說會逐字稿

Good day everyone and thank you for standing by. Welcome to Copa Holding's second quarter 2007 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 on August 15, 2007.

Joining us today, representing Copa Holdings, are Mr. Pedro Heilbron, Chief Executive Officer, Mr. Victor Vial, Chief Financial officer, and Mr. Joseph Putaturo, Director of Investor Relations. First, Mr. Heilbron will open with an overview of Copa Holdings' second quarter highlights, followed by Mr. Vial, who will discuss the Company's financial results. Immediately after, the call will be open for questions from analysts. We kindly request that you limit yourselves to one question with a brief follow up to accommodate all questions.

In today's call non-GAAP financial measures will be discussed. A reconciliation of the non-GAAP to GAAP financial measures can be found in the Company's second quarter earnings release, which has been posted on the Company's website at www.copaair.com.

Additionally, the discussion will contain forward-looking statements, not limited to historical facts, that reflect the Company's current beliefs, expectations or intentions regarding future events and 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 the risks and uncertainties are discussed in Copa Holdings' annual report filed with the SEC.

Now, I would like to turn the call over to Mr. Heilbron. Please go ahead, sir.

Good morning to all and thank you for participating in our second quarter earnings call.

Copa Holdings for the second quarter came in with a solid performance, on the heels of what was an outstanding first quarter. Our team continues to deliver, to execute, and meet our expectations. My gratitude goes out to them on a job well done.

Among the main highlights for the second quarter were a 23% increase in revenues, which reached $235m. Consolidated revenue per available seat mile increased 6.6% on higher load factors and yields. Load factor came in at 71.6%, almost 2 percentage points higher than second quarter '06, led by an 18.3% traffic increase on a 15.3% capacity growth. Yields increased over 4% year over year. Once more, unit revenue growth outpaced unit expenses, leading to an operating margin of 16.6%, almost 2 percentage points higher than during the second quarter of last year.

All of this resulted in a strong second quarter, with net income coming in at $30.9m or $0.71 in diluted earnings per share, 33% above the second quarter '06.

These strong financial results continue to be driven by strong economic conditions in Panama and the region as a whole, robust demand for air travel, the competitive advantage of our network being the most complete and convenient for intra-Latin American travel, and a goal-oriented workforce committed to customer service and continued improvement.

On the operational front, the second quarter was very busy as we ramped up operations to deploy additional capacity during the second half of the year. This involved opening new stations and recruiting the necessary personnel to support fleet and network expansion.

In May, Copa Airlines announced the acquisition of four new Boeing 737-800 aircraft and options for three more. Additionally, Aero Republica recently signed lease agreements for two more EMBRAER-190 aircraft to be delivered in the second half of '08. So, on a consolidated basis, Copa Airlines and Aero Republica now have firm orders for 22 aircraft, nine Boeing 737 NGs and 13 EMBRAER-190s, and purchase rights and options for 38 aircraft, consisting of eight Boeing 737 NGs and 30 EMBRAER-190s.

In June, Copa Airlines reached an important milestone with the launch of its four bank Hub operation. This involved the de-picking of operation from a two to a four bank structure, which enables passengers to benefit from additional time channels, more frequency and destinations, while maintaining similar average connecting times. The four bank Hub structure also ensures future growth and efficiencies by optimizing our use of airport infrastructure and more efficient utilization of ground service equipment, and counter and ramp personnel.

Also in June, Copa Earnings began taking delivery of the first of seven aircraft scheduled for 2007. So far, three aircraft have been received - two EMBRAER-190s and a Boeing 737-800. For the remainder of the year, Copa will take delivery of four additional aircraft - three EMBRAER-190s and a Boeing 737-800, ending 2007 with a fleet of 37 aircraft.

Another positive development was the approval by the authorities of the second phase of the Tocumen airport expansion, which will increase gate capacity from 22 to 34 gates by mid 2009. We already have the most modern, efficient, and attractive airport facility in our region, and this expansion will strengthen even more this advantage.

For the quarter, Copa Airlines reported an on-time performance of 87.8% and a flight completion factor of 99.4%, coming in again among the best in the industry.

On a more recent note, I am pleased to report that on July 13 Aero Republica began its second daily frequency from Bogata to Panama City, now providing international connectivity into Copa Airlines' Hub of the Americas from four of Colombia's most important cities - Bogata, Cali, Cartagena and Medellin. Aero Republica will be adding another spoke into Copa Airlines' Hub in October, when it begins service from the city of Bucaramanga, one of Colombia's largest cities with an extended population of more than 1m inhabitants and little connectivity to the region.

On July 15, Copa Airlines began service from its Hub in Panama City to Washington DC and Punta Cana, Dominican Republic, as well as Guadalajara, Mexico on July 18. And Cordoba, Argentina will be incorporated into our network today. Copa Airlines currently provides service to 40 cities in 21 countries in North, South and Central America and the Caribbean.

As in 2006, the new destinations we are adding represent attractive markets that will benefit significantly from Copa's vast regional network. They also represent an investment in future growth as this market's full up, and provide a base for future more competition capacity expansion by the way of additional frequencies.

On July 30, Copa Airlines announced a comprehensive code share agreement with AeroMexico, which formally began on August 1. As part of the agreement, Copa Airlines has placed its designator code on AeroMexico-operated flights beyond Mexico City to 17 Mexican cities. Additionally, AeroMexico has placed its designator code on Copa Airlines-operated flights between its Hub in Panama City and Mexico City, Cancun and Guadalajara.

Yet another important milestone will be achieved this quarter when Copa Airlines joins the Skyteam Alliance, significantly broadening its global reach and value proposition for its passengers.

So, as you can see, we continue to set the stage for sustained growth and profitability through further network expansion, additional aircraft deliveries and commitments, as well as securing the necessary infrastructure to accommodate this growth, and entering into value-added alliances for the benefit and convenience of our passengers.

Now, turning to Aero Republica. Operating earnings for the second quarter came in close to $3m, marking the fourth consecutive quarter of positive operating earnings. This was achieved as load factors increased by 2.2 percentage points on a slight capacity increase.

This improvement in operating earnings was mainly the result of higher yields, driven for the most part by favorable Colombian currencies. Nevertheless, these results are encouraging as Aero Republica enters its seasonably stronger half of the year. And we believe the airline is on track to achieving our previously forecasted operating margins.

Aero Republica is currently operating a fleet of three EMBRAER-190s and eight MD-80s, after one of its EMBRAER aircraft skidded off the runway in Santa Marta, Colombia and sustained considerable damage. Although an unfortunate event, there were no major injuries and Aero Republica is making the necessary operational adjustments to minimize the impact of the loss of this aircraft. At this point, we believe this is a manageable short-term setback which will result in a slight capacity reduction for the second half of '07 and lower second half load factors as a product of this incident.

Continuing with their fleet modernization plan, Aero Republica is scheduled to receive an additional four EMBRAER-190 aircraft during the second half of '07, to end the year with a fleet of seven EMBRAER-190s and six MD-80s. Moving into 2008, Aero Republica recently closed with GECAS a lease agreement for two additional EMBRAER-190s. So we continue with our plan to phase out all of our Aero Republica MD-80s by 2010, which will gradually lead to better operational performance, improved load factors and a superior product for the Colombian market.

During the second half of the year, we will continue to grow and strengthen Copa Airlines' network and the Hub of the Americas gains ground as the best and most complete intra-Latin America network, providing the most destinations and frequencies with the added benefit of exceptional customer service and on-time performance. Additionally, we will continue advancing Aero Republica's transition program through further integration into Copa Airlines' network and its ongoing fleet modernization.

For the rest of '07, we continue to expect a positive demand environment, driven mainly by strong local and regional economic growth and demand for our product. However, we do face some challenges in the second half of the year, which include fuel prices, near record high, a more competitive pricing environment and deployment of new markets, which is currently putting downward pressure on yields.

And on the operational front, continued growth of demand for pilots is currently presenting a challenge with respect to the hiring, training and retention of the necessary recruits to support planned capacity deployment. Consequently, we have scaled back capacity growth at Copa Airlines for the second half of the year to approximately 21% from approximately 25%.

Additionally, Aero Republica's full year capacity growth is expected to be in the range of 3%, down from the previously forecasted 5%, mainly as a result of operational changes resulting from the loss of an EMBRAER-190 aircraft in the month of July.

Nevertheless, we remain very confident on the growth potential and the strength of our business model. So we will continue into the second half of the year focused on execution and determined to further strengthen our competitive advantages by strengthening our product, expanding our network and fostering a motivated, committed and cost-conscious workforce.

Thank you. Now I will turn it over to Victor, who will go over our second quarter financial results.

Thank you, Pedro, and good morning, everyone. Thanks again for joining us today. As always, let me begin by joining Pedro in congratulating all of our coworkers for yet another solid quarter.

I am pleased to report that for the second quarter, Copa Holdings' net earnings reached $30.9m, which represents a 35% year-over-year increase and diluted earnings per share of $0.71.

Capacity for the quarter increased 15% compared to Q2 '06. And ASMs reached approximately 1.9b, with Copa Airlines, which accounted for 79% of its total, growing about 20% year over year, while Aero Republica's capacity remained virtually flat, increasing just under 1%.

Load factor for the second quarter, traditionally our low season quarter, increased 1.8 percentage points year over year to 71.6%, with both Copa Airlines as well as Aero Republica load factors showing gains. Copa Airlines' load factor for the quarter came in at 76.7%, which represents a 0.7 percentage point increase year over year, while Aero Republica came in at 52.6% for a 2.2 percentage point increase.

Yields during the quarter gained more than 4% year over year, from $0.158 to $0.164. Yield gains this quarter related to Aero Republica operations and were mostly the result of the strengthening of the Colombian currency. As for Copa Airlines, yields during the quarter were basically in line with Q2 '06, showing a slight decrease of approximately 1% to end the quarter at $0.152. Some of the main factors contributing to this were longer average length of haul, and competitive pressures in some markets. However, on a length of haul adjusted basis, Copa Airlines' yields increased 1% year over year.

High consolidated yields and load factors led to healthy top line growth during the quarter, as operating revenues for Copa Holdings increased nearly 23% compared to Q2 '06, reaching $235.3m. On a segment basis, Copa Airlines' operating revenues increased 19.4% or $30m, while Aero Republica delivered a 39% or $15m increase.

With respect to passenger revenue, which accounted for 94% of operating revenues, Copa Holdings saw an increase of 23% or close to $42m, from $180m in Q2 '06 to $221m in Q2 '07. From the standpoint of unit revenues, revenue per available seat mile or RASM for Copa Holdings stood at $0.125, reflecting a 6.6% year-over-year increase.

Looking now at the expense side, operating expenses for the quarter increased 21% year over year, approximately $33m, mostly relating to Copa Airlines' operations. Unit cost or cost per available seat mile, CASM, increased 4.5% year over year to $0.104, while CASM ex-fuel increased by 8% from $0.067 in Q2 '06 to $0.073 in Q2 '07.

While two-thirds of this increase relates to Aero Republica, whose year-over-year ex-fuel unit cost increased 28%, mostly as a result of the strengthening of the Colombian currency against the U.S. dollar. Copa Airlines' ex-fuel unit costs increased by 3.6%, mostly as a result of higher maintenance costs associated with a greater number of airframe overhaul events, and increased salaries due to additional capacity, increased profit-sharing expenses and incremental pilot benefit costs.

Now turning to Copa Holdings' main operating expenses compared to the second quarter of '06, fuel expense increased 12% as a result of a 13% increase in gallons consumed due to increased capacity, and a 0.8% decrease in the average price of jet fuel, which net of hedges went from $2.24 in Q2 '06 to $2.22 in Q2 '07.

Salaries and benefits increased 34.6%, mainly as a result of an overall increase in operating headcount to support increased capacity, increased profit-sharing expenses, incremental pilot benefit costs and the effect of the Colombian currency appreciation against the U.S. dollar.

Passenger servicing increased 30.4%, mostly as a result of increased capacity and passengers carried, as well as costs incurred as a result of weather-related cancellations and delays.

Commissions increased 24%, for the most part as a result of higher passenger revenue and the effect of the Colombian currency appreciation.

Reservations and sales increased 25%, primarily as a result of more passengers carried and higher GDS fees.

Maintenance, materials and repairs increased 10%, mainly due to increased capacity and more airframe overhaul events at Copa Airlines, partially offset by timing of engine major overhaul events at Aero Republica.

Depreciation increased 54%, due to additional aircraft repairs and flight operations, landing fees and other rentals combined, increased 20% for the most part due to increased capacity.

The remaining operating expenses increased 20% year over year, mainly as a result of increased capacity.

Other non-operating net totaled $2.4m for the quarter, which includes $2.6m Copa Airlines fuel hedge mark-to-market gain and a $4.8m Aero Republica mark-to-market loss as a result of currency forward contracts to hedge exposure to the Colombian currency.

Looking now at the Company's earnings, Copa Holdings' second quarter consolidated earnings before interest, taxes, depreciation, amortization and aircraft rent, EBITDAR, increased 34% to $61.7m, while EBITDAR margins increased 2.1 percentage points at 26.2%.

With respect to operating earnings, Copa Holdings' operating earnings for the second quarter increased 37% year over year to $39m, while operating margins increased approximately 2 points to 16.6%.

Moving on to the balance sheet, total property, plant and equipment increased approximately $26.6m during the quarter to $908m, mostly as a result of the acquisition of one EMBRAER-190 which was incorporated into Copa Airlines' fleet during the month of June.

Debt and capitalized leases at the end of the quarter totaled $996m, of which bank debt totaled $724m, out of which approximately half is U.S. equity and bank-guaranteed debt, 42% of which has been fixed for 12 years at an average rate of 4.7%.

Lastly, liquidity remains strong, with COPA Holdings ending the quarter with $272min cash, cash equivalents, short-term and long-term investments at $34.5m in committed lines of credit.

So, in summary, we had a solid second quarter showing healthy earnings growth. Demand during the quarter was strong, resulting in higher load factors. We continue to strengthen our balance sheet and liquidity position, and we remain committed to maintaining a competitive cost structure.

Nevertheless, as Pedro mentioned, we do face some immediate challenges and therefore have revised our full year guidance as follows. We are scaling back capacity growth guidance by 2.4%, from 8.2b ASMs to 8b ASMs. We are maintaining our load factor guidance unchanged at 75%. We are reducing RASM guidance from $0.128 to $0.126, to reflect some expected yield pressures which will be partly offset by strong load factors. We have increased unit cost guidance slightly, from $0.068 to $0.069 as a function of less capacity dilution of fixed costs. And we are revising our operating margin guidance from a range of 20.5% to 22% to a range of 19.5% to 21%.

With that, I'll turn it over to Pedro for questions.

Thank you, Victor, and again, thank you all for joining us today.

While we are pleased to report this solid second quarter result, we are also very much focused on working on the challenges ahead and remain confident in our capacity to meet them. To our shareholders, thank you for your ongoing support. Rest assured, management and the entire workforce are committed to sustained shareholder value creation through efficient execution of our proven business model. To our employees, thank you for your hard work and another quarter of solid results.

At this time, we will be happy to open up the call for questions.

Thank you, Mr. Heilbron. (OPERATOR INSTRUCTIONS). For our first question, we go to Mike Linenberg with Merrill Lynch.

Yes. Hi, all. Good morning. Actually, two questions. First, you talked about yield pressures due to increased competition and also the opening of new markets. If we think about yield pressures being driven by those two factors, and maybe there's some more that you can address, which is the bigger issue? Which is having more of an effect on the yield pressures in your view? Number one, or part A.

And then, part B, can you talk about where you are seeing increased competition? Is this over connecting routes, and in which markets?

Okay. Thank you, Michael. I'll let Victor answer this one.

Yes. We are seeing some yield pressure on the Copa side. On the Aero Republica side, yields are actually up, partly due to the strengthening of the Colombian currency, but also with the increase of (inaudible) increasing fares in the domestic market.

On the Copa side, it is a combination of factors, Mike. Part of it has to do with the entry of the new competitors during the second quarter in markets such as the Panama, Mexico market and some markets in the Caribbean.

Okay.

Some of it has to due with the decrease in fuel surcharges in some markets. What we are seeing is that in some markets we have been able to hold fuel surcharges steady. In some other markets we have actually had to decrease fuel surcharges. And our guidance reflects a steady state for fuel surcharges for the remaining of the year.

We also have seen, during the second quarter especially, towards the end of the second quarter, a structural reduction in intra-Central America fares from our main competitor, and all those factors have had an impact on yields. It's hard to say which one has had more of an impact. They all have had an impact.

However, I should add that if you look at the load factor that you saw in the July load factor, demand remained very strong, which should allow us to mitigate the impact in RASM with higher load factors through the remainder of the year. So -- and we do expect also yields to recover towards the fourth quarter of the year, during the fourth quarter.

Okay. Just as a follow up, before I get on to my second question to that point, when you talk about the structural reduction in fares, and just so I heard you right, from your main competitor which I presume is TACA, did you say intra-Central America or is it throughout the Americas, the structural reduction in fares by TACA?

You are right, it is TACA. And I said intra-Central America, and that for the most part it is intra-Central America.

Okay, good. And then just my second question is getting over to the pilots. Curious, what your pilot needs were this year before you scaled back? How many pilots were you planning to hire? And what is the base of pilots, just so I can get a sense of the growth on that side? And then, what we are seeing on maybe the retention rate? Are you losing pilots every month? Is there some percentage of pilots who are just leaving because there is maybe better opportunities overseas?

Correct. I'll take that one, Mike. We have been losing pilots, like probably any -- most airlines in the region and in the world, given the strong demand in places such as Asia, India, the Middle East. However, we have been losing them at the expected rate, so that has not been our biggest problem, although it has been a contributing factor. The biggest problem has been the time it has taken us to recruit and train the new pilots we need to bring in the pipeline.

So the total numbers that we need for this year are going to be in the 100 range of new pilots. That is not changing significantly, but it is going to take us longer to have them ready. So that is why we are scaling back some of our growth, to give ourselves more time to have our complete group of pilots ready.

And for our next question, we go to Rodrigo Goes with UBS.

Hi, guys. Just one quick question, then. Your vision for the ex-fuel CASMs, you mentioned that some of it has to do with less fixed cost dilution associated with a scale back in ASM growth. Does some of it have to do with pressure related to pilot salaries as well or is it just a mere fixed cost dilution issue?

I will let Victor answer that one.

Sure. No, it's mostly fixed cost dilution, Rodrigo. We haven't seen a significant impact on the other issue.

Okay. Got it. Okay. Perfect. Thank you.

We go next to Jim Parker with Raymond James.

My question is (technical difficulty) and the improvement in profitability due to the global currency (technical difficulty).

Jim, we lost you there. Could you repeat the question?

Victor, hopefully you can hear me. I wanted to know, with Aero Republica, how much of the improvement in profitability is due to favorable currency in Colombia.

Sure. Well, just to give you some background, the Colombian peso has seen an appreciation in the past few months. If you look at the exchange rate last year, it was around 2,400 or so pesos to the dollar and in the second quarter of this year we are talking about close to 2,000. So it's about a 17% appreciation. If we look at the P&L for the second quarter for Aero Republica, on an operational basis, you do have a benefit of approximately $4.2m or so. But below the line, you do have an impact of around $3.2m negative, and that's a result of the mark to market on currency hedges they have in place. So on a net/net basis, the benefit to Aero Republica is approximately $1m when you compare if for the second quarter of this year.

So you are saying that the positive benefit there was $4.2 m before the mark-to-market adjustment?

That is correct. So that's the operational income benefit, if you compare the exchange rate of the second quarter of this year versus the exchange rate of the second quarter of last year.

(OPERATOR INSTRUCTIONS). We go next to Stephen Trent with Citi.

Good morning, gentlemen. Just a quick follow up for me, to an extent a follow up on Mike Linenberg's question. If I understood you correctly, talking about the pilot issue, you mentioned that there is sort of a -- probably you will do some more intense recruiting to get the proper staffing needed on the pilot level. Now, is this specific to Copa or do you think the other carriers in the region are experiencing the same issue? And if they are experiencing the same issue, over time, shouldn't that lead to perhaps demand continuing to more dramatically exceed available seat miles?

Well, it should be happening to other carriers. We don't have hard data on that. We have some information, but hard to get specific information, but it should be affecting other carriers. And again, the attrition so far has been within expected levels. It could speed up in the future, but it's not what has happened so far. However, it is taking a little bit longer to recruit and train the new pilots and at the same time we are growing very fast, so that is going to have an impact on having our full staffing. So it's all coming, it's everything together that has led us to slow down or scale back a little bit our growth.

How does that impact demand? I don't know.

To me, that's pretty hard to say right now. We are scaling back capacity some for the remainder of the year. And right now we are looking at '08 and we will be providing guidance for ASM growth for '08 in the next call. Right now we are still working on the numbers.

Okay, that's great. Thanks, guys.

And with that, ladies and gentlemen, we have no further questions on our roster. Therefore, Mr. Heilbron, I will turn the conference back over to you for any closing remarks.

Okay. Thank you everyone for joining us. We look forward, as always, to having you back for our third quarter earnings call. Have a great day.

And ladies and gentlemen, this does conclude the Copa Holdings second quarter 2007 earnings conference call. We do appreciate your participation and you may disconnect at this time.