Copa Holdings SA (CPA) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Copa Holdings fourth quarter and full year 2007 earnings call. During the presentation all participants will be in listen only mode and afterwards we will conduct a question and answer session. (OPERATOR INSTRUCTIONS). As a reminder this call is being webcast and recorded, February 21, 2008. Now I would like to turn the conference over to Mr. Joseph Putaturo, Director of Investor Relations. Sir, you may begin.

Thank you very much Lisa and welcome everyone to our fourth quarter earnings call. Joining us today are Pedro Heilbron, CEO of Copa Holdings and Victor Vial, our Chief Financial Officer. First Pedro will open with an overview of the full year and fourth quarter highlights, followed by Victor, who will discuss fourth quarter financial results. Immediately after, we'll open up the call for questions from analysts. We kindly 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'll discuss non-GAAP financial measures. A reconciliation of non-GAAP to GAAP financial measures can be found in our fourth quarter earnings release, which has been posted on the company's website. In addition, our discussion also contains forward looking statements, not limited to historical facts that will reflect the Company's current beliefs, expectations or intentions regarding future events and results.

The fourth quarter -- the 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'd like to turn the call over to our CEO, Pedro Heilbron.

Thank you Joe. Good morning to all and thank you for participating in our fourth quarter earnings call. I would first like to begin by congratulating our co-workers for their efforts in delivering a great fourth quarter and another year of record earnings.

Looking back at '07, it was a year of many accomplishments and highlights. Growth for '07, in terms of capacity, was in excess of 15%, with Copa's earnings growing more than 20%. Our consolidated operating margin, excluding special charges, came in at 19.2% for the year. So I'm pleased to say that our Company continues to consistently deliver above average growth and industry leading margins, even in a challenging fuel cost environment.

In 2007, Copa Airlines has continued expanding and consolidating its networks, adding four new destinations. Cordoba, Argentina, Guadalajara, Mexico, Washington DC and Punta Cana in the Dominican Republic. Copa currently has the most complete and convenient network for intra-Latin America travel, serving 40 destinations in 21 countries in the Americas.

At the same time, AeroRepublica continued growing internationally and contributing to our consolidated network by initiating a second daily flight from Bogata to Panama, as well as adding new service from three Columbian cities, Bucaramanga, Cali and Cartagena into our hub of the Americas in Panama City.

During the course of the year, Copa Airlines received seven aircraft, two Boeing 727-800s and five Embraer 190s, to end the year with a fleet of 37 aircraft. In addition, AeroRepublica continued modernizing and right-sizing its fleet, receiving seven Embraer 190 aircraft to end the year with 13 aircraft. So our total consolidated fleet at year end reached 50 aircraft.

Another positive development, which paves the way for sustained growth was the approval by the authorities of the second phase expansion of Panama's Tocumen Airport, which will increase capacity from 22 to 34 gates by next year. We already have the most modern, efficient and attractive airport facility in our region and this expansion will strengthen even more this advantage.

Among other important events for the year, in June, Copa earnings reached an important milestone, with the launch of its four bank hub operation, which involved the de-peaking of operations from a two to a four bank structure, allowing passengers to benefit from additional time channels and more frequencies and destinations, while maintaining similar average connecting to our hub. The four bank hub structure also ensures future growth and efficiency by optimizing our use of airport infrastructure, equipment and personnel and more importantly, gives us more flexibility to continue expanding through frequencies and destinations.

In August, Copa Airlines was named by Skytrax for the fourth consecutive year as best airline in Central America, Mexico and the Caribbean, as well as best cabin staff. The same month, Copa Airlines signed a comprehensive co-share agreement with AeroMexico, with Copa Airlines now co-sharing on AeroMexico operated flights beyond Mexico City to 17 Mexican destinations.

In September, Copa Airlines entered into the SkyTeam Alliance, as an associate member. SkyTeam was named 2007's Best Airline Alliance Program by Business Traveler Magazine.

In October, Copa Airlines and KLM announced a broad co-share alliance. KLM, also a SkyTeam partner, will begin service from Amsterdam to Panama City in March 2008, with flights timed to connect with Copa's vast intra-Latin American network. Also in October, Copa Airlines was included in Fortune Magazine's top five best companies for leaders in Latin America.

Among the main highlights for the fourth quarter, net income excluding the $6.3m in special charges related to the early termination of leases for three MD-80 aircraft at AeroRepublica came in at $40.4m, or earnings per share of $0.93. I must highlight that these results were achieved despite $14.6m in additional fuel costs for the quarter.

Copa Holdings operating margin, excluding special items, for the fourth quarter came in at 17.3% and net margin came in at 14.2%. Driving these results was an important improvement in consolidated yields, which increased an outstanding 9% year over year and 9.6% over the third quarter. This coupled with strong demand resulted in an almost 7% increase in unit revenues.

In the fourth quarter, Copa Holdings continued expanding its fleet with the delivery of four aircraft. In October, AeroRepublica continued providing its customers increasing international connectivity with the launch of new services from Bucaramanga into Panama City.

For the fourth quarter, Copa Holdings revenues came in at $285m, almost 20% above fourth quarter '06, as a result of strong yield gains in both Copa Airlines and AeroRepublica. We're very pleased by this yield strength, which we see following through so far in 2008.

We're also very pleased with demand for travel in Panama and the region, resulting from continued economic growth as well as increased regional commerce, trade and tourism. Panama's economy is experiencing extraordinary GDP growth. Among the main sectors of the economy fueling this growth are banking, tourism, construction and transportation. Forecast for 2008 calls for another year of strong growth, with Panama once again coming in as the fastest growing economy in Latin America, benefiting from the just recently started Panama Canal expansion and several other major projects, which will positively impact Panama's economic growth in years to come.

Looking at '08, demand with respect to Copa Airlines remains strong across the region and we do not see imminent signs of future weakness. Copa Airlines growth in 2008 will be more focused on the addition of new frequencies to further strengthen the connectivity of our recently implemented four bank hub.

Growth from new destinations will be less than in 2007 as we expect to add only two new destinations in 2008. Copa's current operational plan calls for capacity growth in excess of 20%, resulting mostly from full year effect of capacity added in '07 and the new frequencies, which will be added this year.

We -- with regards to AeroRepublica, we're very encouraged with their financial results and recent load factor improvements, which are being positively impacted by their transition to a smaller gauge and more efficient Embraer fleet. Financial results are also benefiting from higher domestic fares, growth in international operations and a stronger local currency. Excluding the one-time special charges mentioned previously, AeroRepublica recorded a 10.8% operating margin for the quarter and 11% for fully 2007, surpassing the high end of the 5% to 10% operation margin to which we guided earlier in the year.

With regards to fleet, during the quarter, AeroRepublica received two additional Embraers, to end the year with seven Embraer 190s and six MD-80s. As a result, AeroRepublica now has the youngest and most modern fleet in Columbia, having reduced its average fleet age from more than 17 years at the end of '06 to slightly above seven years at the end of '07. AeroRepublica's 2008 operational plan calls for flat capacity growth, mainly as a result of the fleet transition from an MD-80 to an Embraer fleet.

In the fourth quarter, AeroRepublica capacity flown in Embraer aircraft reached 35% versus only 1% in the fourth quarter of '06. This percentage will increase to more than 50% of capacity in '08. As a result of the full year effect of the aircraft added in '07 as well as the replacement in '08 of two more of their MD-80s.

For the fourth quarter, AeroRepublica's international capacity, as a percentage of total capacity, more than doubled to 14%, with international load factors reaching 71%, significantly higher than its domestic load factors.

AeroRepublica now provides international service from five Columbian cities into Copa's hub in Panama. We're also very encouraged by this as AeroRepublica is benefiting more and more from Columbia's faster growing and better yielding international market.

This fourth quarter and full year results are very positive and reflect the execution of the right business model, which will be valid and sustainable for the foreseeable future.

So in summary, Copa Holdings fourth quarter was marked by healthy demand and capacity growth, significant yield improvement for both Copa and AeroRepublica, continued improvement in AeroRepublica's year over year results and the continued execution and strengthening of our business model.

As I mentioned before, for 2008, we continue to expect a strong demand environment, largely driven by healthy local and regional economic growth and the preference of our convenient hub and world class service for intra-Latin American travel.

Our new 2008 guidance, which builds -- Victor will discuss further, offers significant capacity expansion with increasing unit revenues and competitive unit costs. Therefore, and despite continued high fuel costs in '08, we expect Copa Holdings will continue delivering industry leading margins next year, again, driven by a solid and proven business model and being executed by an outstanding team.

Thank you. Now I will 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. As always, let me begin by joining Pedro in thanking all of our co-workers for their hard work. I commend you for another outstanding quarter and another year of record earnings and solid growth.

I am pleased to report that for the fourth quarter, Copa Holdings net earnings, excluding special charges, reached $40.4m or diluted earnings per share of $0.93. Special charges totaled $6.3m and relate to accrued expenses associated with terms negotiation for early termination of operating leases for three MD-80 aircraft as part of AeroRepublica's ongoing transition to an all new, fuel efficient Embraer 190 fleet.

This growth was also achieved despite $14.6m in additional fuel costs as a result of a 23% increase in the all-in average price per a gallon of jet fuel, which net of hedges averaged $2.51 in Q4 of '07 compared to $2.12 in Q4 of '06.

In terms of capacity for Copa Airlines, which accounted for 81% of total ASMs delivered, another quarter of strong growth with 17.5% year over year increase in available seat miles. Despite this significant capacity increase, Copa Airlines unit revenues or revenue per available seat mile, RASM, increased 0.5% year over year with load factors remaining healthy at 76.1% and yields coming in strong, showing a 3.4% increase compared to Q4, '06 and an 11.8% increase compared to Q3, '07. Yields at Copa Airlines improved on a quarter over quarter basis, mostly as a result of measures taken back in September to recalibrate the forecasting tool of our revenue management system, strong demand which continues to contribute to a healthy fare environment as well as increased fuel surcharges.

AeroRepublica, which accounted for 19% of ASMs during the quarter decreased available seat miles approximately 5% compared to Q4 '06 as we continued with our program to down gauge from an MD-80 fleet to the Embraer 190 fleet.

Unit revenues at AeroRepublica increased 38%, mainly due to stronger yields, which came in 37% above Q4 '06. Yields at AeroRepublica were mostly the result of the strengthening of the Columbian currency versus the U.S. dollar, higher domestic fares and growth in high yield international routes.

Strong yields and load factors during the quarter led to higher operating revenues for Copa Holdings, which for the quarter generated approximately $285m in operating revenues for a 20% increase over Q4 '06. On a segment basis, Copa Airlines operating revenues increased 18% or $34m, while AeroRepublica delivered a 31% or $15.3m increase.

Passenger revenue for Copa Holdings, which accounted for 94% of operating revenues, saw an increase during the quarter of almost 20%, or $45m, from 221m in Q4 '06 to $266m in Q4 '07.

Looking now at the expense side, operating expenses excluding special charges increased 26% year over year or approximately $49m, while unit costs or costs per available fleet mile, CASM, excluding special charges, increased 12% year over year to $0.114. Ex-fuel CASM, excluding special charges, increased 7% year over year to $0.076, mainly as a result of AeroRepublica's down gauge to an Embraer 190 fleet and the strengthening of the Columbian currency.

Now turning to Copa Holdings' main operating expenses compared to the fourth quarter of 2006. Fuel expense increased 39% as a result of a 12% increase in gallons consumed, due to increased capacity and a 23% year over year increase in the all-in average price of jet fuel, which net of hedges went up from $2.12 in Q4 '06 to $2.61 in Q4 '07.

Salaries and benefits increased 19%, mainly as a result of an overall increase in operating headcount to support increasing capacity and the effect of the Columbian currency appreciation against the U.S. dollar. Passenger servicing increased 29%, mostly as a result of an increase in passengers carried by Copa Airlines and the effect of the Columbian currency appreciation.

Commissions increased 19% for the most part as a result of the 21% increase in passenger revenue, partially offset by lower average commission rate in both Copa Airlines as well as AeroRepublica.

Reservations and sales increased 19%, mainly due to more passengers carried at Copa Airlines and additional costs associated with global distribution systems at AeroRepublica.

Maintenance, materials and repairs decreased 4.9%, mainly due to fewer major maintenance events at AeroRepublica, partly offset by more maintenance events at Copa Airlines.

Depreciation increased 32% due to additional aircraft and spares and flight operations, aircraft rentals, landing fees and other rentals combined increased 17% from $25.3m in Q4 '06 to $29.7m in Q4 '07, primarily as a result of increased capacity.

Other operating expenses increased 41% year over year, mostly as a result of AeroRepublica prior year adjustments totaling $1.9m related to an increase in bad debt provision associated with prior year accounts receivables. And additional One Pass Frequent Flyer Program miles awarded during the period.

Other non-operating income expense totaled a net expense of $2.6m in Q4 '07 composed of a net interest expense of $8.6m, partially offset by $4.9m related to fuel hedge contract mark to market gains.

Looking now at the Company's earnings, excluding the $6.3m in special charges, Copa Holdings' fourth quarter earnings before interest, taxes, depreciation, amortization and rent, EBITDAR, increased 10% to $78.3m, while EBITDAR margins increased only 2.1 percentage points to 27.5%.

For full year 2007, Copa Holdings operating margin, excluding the $7.3m of special charges and the $8m in non-recurring pre-tax gain related to insurance proceeds in excess of aircraft book value, came in at 19.2%, once again producing some of the highest margins in the whole industry.

Moving on the balance sheet, total properties, plant and equipment increased approximately $73m during the quarter to $1.1b, mostly as a result of the acquisition of two aircraft, one Embraer 190 and one Boeing 737-800 delivered to Copa Airlines in November. For the year, Copa Holdings took delivery of a total of 14 aircraft.

Debt and capitalized leases at the end of the quarter totaled $1.1b of which bank debt totaled $843m and of which approximately 46% affecting bank guaranteed debt. Of our total debt balance, 58% is floating and 42% has been fixed for a period of 12 years as of the approximate date of acquisition of the aircraft.

Lastly, Copa Holdings liquidity increased during the quarter to $352m, which translates to approximately 34% of last 12 months' revenues.

So in summary, we're quite pleased with the fourth quarter results and performance. Demand for air travel in the region through our hub remains strong and those factors are healthy. Yields have recovered. AeroRepublica load factors are strengthening and Copa Holdings, again, continues delivering some of the highest margins in the industry, despite near record high fuel prices.

Looking forward, we're updating our 2008 guidance as follows. Year over year capacity growth of 18% from approximately $7.9b ASMs to a range of $9.3b ASMs. Load factor in the range of 75%, up from approximately 74%. RASM in the range of $0.134, up from approximately $0.13. CASM, ex-fuel, in the range of $0.073, up from approximately $0.071. And operating margin in the range of 17 to 19% from approximately 18.4% in 2007.

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

Thank you, Victor and again thank you all for joining us today. Please rest assured our team remains focused on the opportunities and challenges ahead. At this time, we will be happy to open up the call for questions.

Thank you, sir. (OPERATOR INSTRUCTIONS). And we'll take our first question from Raymond Neidl with Calyon Securities.

Hello. Good morning.

Hello Ray.

Good morning, Ray.

Basically, with what's going on in the U.S. with consolidation or potential consolidation, if Continental were to join another worldwide partnership, say if they joined with United and got into the Star Alliance, what if any effect would that have on Copa? Would you be wanting to follow Continental or would you break away and stay in the current alliance? Or would you just look at your options?

Well, it's obviously kind of early to tell what's going to happen and -- however, we have an alliance with Continental. That's very strong, and it has contracts that run through 2012, so we plan to remain with Continental. We will probably follow them wherever they go. And most of our, -- of the value, the alliance, is between us too.

We recently joined Sky Team, but we're only starting to work on all the necessary agreements, so we don't really have a lot of stake there. So our partnership and our value is with Continental.

We also have a very valuable intra-Latin American network, which is not only valuable to Continental, but to any other global alliance. So we think we're in a very, very strong position, no matter what happens.

Okay. Good. And my second question is with AeroRepublica, once you complete the fleet transition, what are your plans for that airline going forward? Will you be acquiring additional Embraer 190s or second equipment type? And are you looking more for international routes out of Columbia with that airline.

Yes, thanks Ray for the question. The plan right now is to keep migrating from an MD-80 fleet to an E190 fleet and as you know, the plan is to finish with that migration by mid '09. What we have done to now, as you know, is increase capacity from a major city in Columbia into our hub, with AeroRepublica and we will not continue doing that. The idea is to keep strengthening our hub with AeroRepublica, with brand new Embraer 190 aircraft. So you'll see additional international capacity, but it will be mainly focused on our hub.

Great. Thank you very much.

Thank you, Ray.

And your next question comes from Jim Parker with Raymond James.

Good morning to all.

Hello, Jim.

I want to ask a question about AeroRepublica and you indicated that the yields in the fourth quarter are up 37%. How much of that came from currency?

The currency impact on that is -- it's about roughly two-thirds, Jim. The rest is basically fare increases in the domestic market. We've been pretty successful at raising fares and passing along additional fuel charges to passengers.

Also you have to consider that we have additional international capacity, which is resulting in high yields and are also contributing to our higher yields for the fourth quarter.

Okay. And regarding AeroRepublica again, you're doing very well bringing international traffic over Panama City. I'm curious how you're doing domestically there and what is the game plan? So you're at 14% of capacity international. What is the game plan within Columbia? Is it to make AeroRepublica the majority of its business, tying into Panama? Or what about into Bogata? What are you doing there?

The domestic -- we expect the domestic operations to remain, in terms of flights and the destinations, pretty flat versus 2007. In terms of capacity, slightly down due to the down gauge from the MD-80s to the Embraer 190s. So their focus is going to be on growing internationally and little by little the percentage of their international revenues are going to grow. Eventually, hopefully, we want to get that number as high as possible.

(OPERATOR INSTRUCTIONS). And our next question comes from Luiz Campos with Credit Suisse.

Hello, good afternoon everyone. I just have a question related to the small changes you made to the guidance for '08. I just wanted to understand what was the reason for -- apparently you're assuming higher yields, right? Because the RASM is up and load factor is basically flat from the last guidance. And also the CASM is up a little bit, so just wanted to understand if you're seeing a better environment than what you believed back in the third quarter numbers when you released third quarter numbers?

With respect to the RASM, we definitely saw an improvement in yields in the fourth quarter and we see that carrying through, so there is some of that showing in the revised guidance for '08. And we also see a pretty robust demand for air travel environment in the region, so that's what's behind the RASM guidance.

And then on the CASM side, basically on the ex-fuel CASM side, what we're looking at is we finalized the numbers and the main drivers there in that slight increased from $0.101 to $0.073, it has to do with a down gauge at AeroRepublica from MD-80s to E190s and that the -- and the operational plan for '08, which we finalized. And also there's some additional maintenance, major events at AeroRepublica in '08 versus '07, in terms of fee checks and engines, which also resulted in a slight increase in ex-fuel CASM.

Okay. Thanks.

And our next question comes from Nick Sebrell with Morgan Stanley.

Hello, gentlemen. I was wondering if you could talk a little bit about potential downside risk. And what I'm thinking about is we've been surprised about how little the U.S. recession, if indeed it is in a recession, has impacted your operations and the operations of some of your peers.

Also kind of surprised that your yields have been actually going up and -- as reflected, of course, by your revised guidance. So do you think there's any real risk of the region slowing down? I mean you look to your north, seems like it might be softening up with recent news out of there. What does that mean for you and do you see a scenario, a realistic scenario, I'm not talking about fin tails or anything, where we might just see the RASM not quite playing out the way guidance has it. That's the first question.

The second question is really when do you think you might see a meaningful impact from KLM and other partner flights from Europe? Do you think that European travel to your area and into your hub specifically becomes meaningful within the next 12 months?

I was always taught to answer the easy questions first.

So the answer to the KLM question first and we're going to start flying to our hub at the end of March. Flights are timed. We're going to be co-sharing, so it is a time to connect with the co-sharing. However, it's hard to predict what the impact's going to be. It's something new. It's the first flight from Europe that's going to tie into our hub. So we'll see how that works out. We're optimistic, but again, we're not predicting.

In terms of downside risks, I mean we don't see any signs right now of our regional economy slowing down. But who knows? You know how things are and how things can change. We're growing next year by a healthy percent, but there's no -- it's not crazy growth. We're strengthening our hub. It's a proven business model. We're growing mainly in frequencies to places we know well and we know the potential of the demand.

In terms of RASM, I think we're fairly confident right now, but again, it's a volatile business. But right now we're confident on both fronts.

Okay. Great. And then, just one quick follow up on the MD-80s. Do you think that there's a possibility for releasing those, turning them back sooner than your fleet plan currently envisions?

That's a -- Nick, that's not likely.

Okay.

We're going to have -- returning some leases, a couple of leases in '08 and then the last few will be exiting the second quarter of '09 and there will be some early termination in '09 of operating leases. But I think that we're moving ahead of phase, that's the prudence and that's our plan.

Got it. Thanks guys.

And our next question comes from Tatiana Feldman. Please go ahead -- with Morgan Stanley.

Hi guys. Just wanted to follow up on Nick's question. I'm wondering if we should expect any special charges on -- from the MD-80s in the next four quarters?

During 2008, we are not doing any early terminations. We are returning some aircraft because the leases are expiring. And any costs related to returning those aircraft in terms of return conditions are reflected in the ex-fuel CASM guidance we provided.

Okay, but in 2009, we might see some charges again? Is that correct?

In -- yes. In 2009, we would see some.

Great. And then just wondering if you guys could comment a little bit on -- I see that, obviously, you're seeing robust demand in the region. But could you comment on what that's meant in terms of the competitive environment?

Yes. We -- I mean the way we're seeing competition right now, it's not different -- not any different to what's normal in our industry. So we see right now a stable competitive environment. We expect more competition as in years before. But again, we're not seeing anything drastic or major right now affecting our market.

Perfect. Thank you so much guys.

(OPERATOR INSTRUCTIONS). And we have a question from [Pravu Kumara with Lucite Research].

Comment on the EBITDA and EBITDAR margins of the Copa segment versus the AeroRepublica?

What -- I don't understand the question. What exactly are you asking about? EBITDA, EBITDAR margins?

Margins are -- how much is it different from like what the levels? Are they at parity, at the same levels as the Copa segment, the AeroRepublica's EBITDA and EBITDAR margins?

Yes, generally speaking, you're going to see higher margins at the Copa segment than AeroRepublica segment simply because of the business models and also the fact that AeroRepublica is still migrating to a brand new Embraer 190 fleet and it's still towards the back end of a transition program. So the margins will be higher in the Copa segment. At AeroRepublica, we don't need AeroRepublica's margins to be at the same levels as the Copa segment because the whole strategy here has always been to have an important presence in Columbia, provide flights to passengers in the domestic market in Columbia and also to strengthen our hub with additional flights to key cities in Columbia.

And our next question comes from Arthur Burns with Deltec Asset Management.

You commented before about the expansion of the Panama City Airport from, I think, you said 22 gates to 30 odd some odd gates. How does that affect Copa? Are you running up the gate shortage issues or is it just the general good thing for Panama?

It's a good thing for us and for Panama, of course. We would run, in the future, into gate shortage if this expansion was not done. But it has been approved and it should be ready sometime next year. So it will be just in time for when we need additional gates at our hub airport here. So it's well timed.

Thank you very much.

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

Okay. Thanks again to all. We look forward to having you back for our first quarter earnings call. Have a good day. Thank you.

And that concludes today's teleconference. Thank you for your participation. Have a good day.