Copa Holdings SA (CPA) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Copa Holdings first quarter 2008 earnings call. During the presentation, all participants will be on 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, May 8, 2008.

Now I will turn the conference over to Joseph Putaturo, Director of Investor Relations. Sir, you may begin.

Thank you very much, 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.

First, Pedro will open up with an overview of the first quarter highlights, followed by Victor, who will discuss our financial results. Immediately after, we will open up the call for questions from analysts. We kindly request if you could limit yourself to one question with a 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 first quarter earnings release which is posted on the Company's website. 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 and results.

These forward-looking statements involve risk and uncertainty 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 our CEO, Pedro Heilbron.

Thank you, Joe. Good morning and thank you for participating in our first quarter earnings call. First of all, I would like to thank and congratulate all of our coworkers for another fine quarter. Their continued focus and commitment are what sets us apart in this challenging environment for our industry.

Let me now briefly go over our first quarter results. Among the main financial highlights for the quarter, Copa Holdings reported net income of $39.5m or diluted earnings per share of $0.91 despite a $21.7m related to additional fuel costs.

Revenue growth came in more than 20% above first quarter '07 on traffic growth of 13.4%. Higher yields and strong growth factors resulted in an almost 10% increase in unit revenues and we ended the quarter with $357m in liquidities, which translates to more than 33% of last 12 months' revenues.

On the operational side, Copa Airlines once again delivered leading on-time performance and completion indicators, with on-time performance in excess of 90% and a flight completion factor of 99.8% for the quarter.

In March, Copa Airlines continued its network expansion by launching direct service from the Hub of the Americas in Panama City to Port of Spain, Trinidad and Tobago, the airline's 41st destination.

In less than two years, Copa Airlines has increased the scope of its network from 30 to 41 destinations while continuing to deliver outstanding profit margins, world-class service and exceptional operational performance.

Also, at the end of March, KLM began direct service from Amsterdam into our hub in Panama. Our coach share alliance is conveniently enabling passengers of both carriers to travel more easily between Copa's extensive Latin American network and Europe via two of the world's most convenient hubs, Panama City's Hub of the Americas and Amsterdam's Schiphol.

More recently, in April, Copa Airlines took delivery of its 12 Embraer 190 aircraft, bringing its fleet total to 38 aircraft, with an average age of less than 4 years. Copa Holdings' consolidated fleet, including Aero Republica, is currently composed of 51 aircraft.

Also in April, Aero Republica was certified under IATA's operational safety audit, IOSA. The certification places Aero Republica, as well as Copa Airlines, among a select group of airlines around the world which meet the agency's international standards for safety.

I'm also pleased to say that economy in the region continued to do quite well. In fact, the latest forecast for Latin America calls for an aggregate GDP growth rate of 4.9%, with Panama and Colombia expected to grow above this average at 8.5% and 5.5%, respectively. What's more, Panama is expected to be, once again, the fastest growing economy in Latin America.

All this has resulted in high demand for air travel in our region, which for the first quarter resulted in an average load factor for Copa Airlines of 81% and 63% for Aero Republica, which showed an 8% point improvement over the first quarter of '07.

Looking at the remainder of '08, we expect demand in the regions to remain strong, contributing to healthy load factors which, together with pricing and revenue management initiatives, taken to mitigating refuel costs, should result in higher unit revenues.

However, as reflected in our revised guidance which Victor will discuss in more detail, despite an effective pass through of increased fuel prices, through fare increases and fuel surcharges, we do currently expect a slight operating margin dilution, having increased our full year cost of fuel forecast by approximately 25%.

Nevertheless, we're confident we can continue to produce industry-leading margins, thanks to healthy demand, very competitive unit cost, a defensible business model and a world-class team.

As a result, at this moment we do not see any significant changes in our operational plan for 2008. Positive regional demand and the continuing need for better service and connectivity in Latin America create unique growth opportunities for Copa on a profitable and sustainable basis.

Furthermore, we're maintaining a very solid balance sheet with ample liquidity and adequate leverage. So although the industry as a whole faces a difficult situation, we're well-positioned to weather the storm and come out ahead, always ready to take advantage of any particular opportunities that may come up along the way.

With regards to Aero Republica, load factors and revenues are being positively impacted by the transition to a smaller gauge and more efficient Embraer fleet, as well as from higher domestic fares, growth in their international operations and a stronger local currency.

Aero Republica continues to implement initiatives to consolidate its position in the Colombian market and be profitable on a consistent and sustainable basis.

They have made progress and we're encouraged by their contribution to the consolidated network through their growing international operation. But we do realize there's still much room for improvement.

Aero Republica, for the quarter, reported a close to $700,000 operating loss, although top-line growth was very healthy. Driven in large part by the strength of the Colombian currency, the airline's operating results were affected by timing of major overhaul events related to their MD-80 fleet which, as we have mentioned before, will be phased out by next year.

Given the dynamics and seasonality of the Colombian market, as well as our new fuel cost assumptions, we expect Aero Republica will report an operating loss for the first half of the year and be profitable for the second half and full year 2008.

Aero Republica's 2008 operating plan calls for flat capacity growth, mainly as a result of their transition from an MD-80 to an Embraer 190 fleet. With this big transition already well underway, Aero Republica capacity through Embraer aircraft during the first quarter reached 50%, versus 16% in the first quarter of '07.

With regards to the international expansion, a key factor in Aero Republica's strategy, year-over-year international capacity doubled, reaching 15% of total capacity compared to only 7% in first quarter '07.

Furthermore, for full year 2008, this percentage will increase, as we continue to expand international capacity to and from Colombia's most important cities.

Among other important developments disclosed today, were the declaration of our annual dividend of $0.37. This dividend of -- will be paid on June 15 to stockholders of record as of May 30.

Additionally, CIASA and Copa Airlines recently agreed in principle to give an early release to our shareholders, shareholder and strategic partner, Continental Airlines on their remaining stake in Copa Holdings. This lock-up was for a period of two years and was scheduled to expire next month.

I want to assure our shareholders that this event in no way affects our longstanding relationship with Continental. Our alliance and agreement, but more importantly the mutual benefits behind them, are stronger than ever.

So to recap, Copa Holdings' first quarter was marked by healthy demand and capacity growth, strong yields for both Copa and Aero Republica, a challenging fuel cost environment and continued execution and strengthening of our business model.

Looking ahead, although we expect margins in the second quarter to be affected as a result of recent record fuel prices and despite that its a traditionally low-season quarter for both Copa and Aero Republica, we believe the outlook for the year is still very positive.

As I mentioned before, we remain confident on our ability to continue driving unit revenues higher, to mitigate this adverse fuel cost environment.

This will be driven, in no small part, by a healthy demand environment and the continued preference of our network for intra-Latin America travel.

Thank you. Now I will 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. Once again, let me begin by joining Pedro in thanking all of our co-workers for their hard work and congratulate them on another strong quarter.

I'm pleased to report that Copa Holdings net earnings for the first quarter of the year reached $39.5m which translates to diluted earnings per share of $0.91. These results were achieved despite $21.7m in additional fuel costs as a result of a 35% increase in the all-in average price for a gallon of jet fuel, which (inaudible) averaged $2.82 in Q1 '08 compared to $2.09 in Q1 '07.

In terms of capacity, Copa Airlines, which accounted for 83% of Copa Holdings' total available seat miles, delivered another quarter of strong growth with a 17% year-over-year increase in air times.

Healthy overall demand for air travel as a result of strong economic growth in Panama and throughout the region contributed to higher internet revenues at Copa Airlines where revenues per available seat mile, or RASM, increased more than 3% year-over-year with load prices remaining healthy at 81.2% and yields coming in strong, showing a 4.3% increase compared to Q1 '07.

Aero Republica, which accounted for 17% of Copa Holdings total ASMs in the quarter, decreased available seat miles almost 10% compared to Q1 '07 as result of the Company's ongoing decision to down gauge from an MD-80 to an Embraer 190 fleet. This resulting capacity coupled with a 3.7% increase in traffic led to an 8.1 percentage point increase in load factor to 62.5%.

Unit revenues at Aero Republica increased 46%, mainly due to stronger yields, which came in 23% above Q1 '07. Approximately half of these yield gains were the result of the strengthening of Colombian currency against the U.S. dollar with the other half due to higher domestic fares and growth in high-yielding international runs.

Strong yields and healthy load factors during the quarter led to higher operating revenues for Copa Holdings, which for the quarter generated $296m in operating revenues for a 22% increase over Q1 '07.

On a segment basis, Copa Airlines operating revenues increased 20% or $40m, while Aero Republica delivered a 32% or $14.9m increase.

Passenger revenue for Copa Holdings, which accounted for 95% of operating revenues, saw an increase in the quarter of 22%, or $50m from $230m in Q1 '07 to $280m in Q1 '08.

Turning to the expense side, operating expenses increased 34% year-over-year or approximately $62m, while unit costs or cost per available seat mile, CASM, increased 21% year-over-year to $0.118.

Ex-fuel CASM increased 14% year-over-year to $0.077, mostly driven by additional aircraft and engine maintenance events related to Aero Republica's MD-80 fleet, a stronger Colombian currency and the expense of down gauging to an Embraer 190 fleet.

Now turning to Copa Holdings main operating expenses compared to the first quarter of '07, fuel expense increased 51%, driven by an 11.7% increase in gallons consumed and a 35% increase in the [overall] average price of fuel (inaudible).

Salaries and benefits increased 28%, mainly as a result of an overall increase in operating headcount to support increased capacity and the effect of the Colombian currency appreciation against the U.S. dollar.

Passenger servicing increased 30%, driven by an increase in passengers carried by Copa Airlines, more international service offered by Aero Republica and the effect of the Colombian currency appreciation.

Commissions increased 15%, for the most part as a result of a 22% increase in passenger revenue, partially offset by lower average commission rates at both Copa Airlines and Aero Republica.

Reservations and sales increased 21%, mainly due to more passengers carried and additional costs associated with global distribution systems at Aero Republica.

Maintenance, materials and repairs increased 55%, mainly due to more scheduled major maintenance events at Copa and Aero Republica.

Depreciation increased 25%, due to additional aircraft and fares. Aircraft rentals increased 16.5%, driven by additional lease of Embraer 190 aircraft at Aero Republica.

And flight operations, lending fees and other rentals combined, increased 34%, mainly as a result of increased capacity and higher crew-related expenses, including simulator rental related costs.

Other operating expenses increased $1.6m, or 14% year-over-year, in line with capacity. And other non-operating income and expense totaled a net expense of $8.1m in Q1 '08, the main components of which are net interest expense of $7.7m and a gain of $1.8m related to fuel hedge contracts mark-to-market.

Looking now at the Company's earnings, Copa Holdings first quarter earnings before interest, taxes, depreciation, amortization and rent EBITDAR increased 4.6% to $75.9m, while EBITDAR margins decreased 7.1 percentage points to 25.6%, mainly as a result of higher jet fuel prices.

With respect to Copa Holdings operating earnings, higher jet fuel prices led to a 15% year-over-year decrease in operating earnings and a 7.6 point decrease in operating margin to 17.5%.

It is worth noting that although these unprecedented fuel prices did impact our margins, Copa Holdings continues to deliver one of the highest margins in the industry.

With respect to fuel hedges, Copa Holdings has 18% of its first quarter volumes hedged at a U.S. Gulf Coast price of $2.16 per gallon and currently holds fuel hedge positions for the rest of the year as follows, 17% for the second quarter at $2.25, 13% for the third quarter at $2.34 and 9% for the fourth quarter at $2.49.

Moving on to the balance sheet, assets and owners' equity at the end of the quarter reached $1.7b and $577m, respectively. And debt and capitalized leases totaled $1.1b.

Bank debt at the end of the quarter totaled $836m, 45% of which is U.S. acting bank bid debt. 41% of our total debt balance has been fixed for a period of 12 years and the average blended rate, including fixed and variable rate debt, for the first quarter came in at 4.3%.

Lastly, Copa Holdings liquidity continues strong, increasing during the quarter to $357m, which translates to approximately 33% of last quarter's revenue.

So in summary, Panama and the region as a whole continued to benefit from solid economic growth, resulting in strong demand for air travel. We delivered another quarter of strong top line growth with healthy load factors and high yields.

We continue having a very strong liquidity position. And we'll remain focused on profitable growth in what we expect to remain a very challenging fuel price environment for the remainder of the year.

Looking forward to the rest of 2008, and based on our revised outlook for jet fuel prices, which increased from our previous guidance of $2.38 per gallon, U.S. Gulf Coast to $2.98 for full year 2008, we're updating our 2008 guidance as follows.

We're revising our year-over-year capacity growth to 15% from approximately 7.9b ASMs in 2007 to plus or minus 9.1b in 2008. This adjustment relates, for the most part, to Copa Airlines growth which, under the new guidance reflects a year-over-year growth of plus or minus 18%, as we look to optimize earnings in a very challenging fuel price environment.

We are maintaining our load factor guidance at 75%, up from approximately 74% in 2007. We continue to see a healthy fare environment as demand for air travel in the region is expected to remain strong. And as such, our RASM guidance has been revised to plus or minus $0.142 compared to $0.013 in 2007.

With respect to unit costs, as a result of our revised capacity guidance, we're revising casenex fuel up to $0.075, compared to $0.071 in 2007.

And lastly, looking at margins, we are revising our operating margin guidance to a range of between 15% to 17%, compared to 19.2% for 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. At this time we'll be happy to open up the call for questions.

Certainly. (OPERATOR INSTRUCTIONS) We'll hear first from [Daniella Brethauer] with Goldman Sachs.

Hi. Good morning. Question on your results today and, more importantly, well, you changed your guidance and you disclosed that Continental is free to sell their stake. I wanted some clarity. How soon are we talking about on the timing for the sale and what exactly -- can you confirm the Continental stake, let's say, latest position?

The Continental stake is 10% right now, currently. And the Company -- with respect to the timing, the Company is currently working on the documents for the registration. As we mentioned, it's going to be a marketed deal. And the registration process is -- should be pretty straightforward. After that's done, then you talk to Continental to decide if they will be able to sell when they see fit. But again, the registration process should be pretty straightforward.

And Daniella, we should add that our controlling shareholders at CIASA had Continental locked up for two years, so this is a month -- a little bit over a month before the lock-up was due anyway.

Right.

So (multiple speakers) relationship with Continental that -- we see it as something that -- support we have to give them.

No, right. I understand that. And I was wondering, as a result of, let's say, if they exit completely their stake in Copa, does that change anything in terms of your relationship or some of the agreements that you have with Copa? How does those agreements remain following their sale?

Nothing changes. When they went down from 49% to 10%, nothing changed. Our relationship is as strong as ever and will be as strong as it has always been after they sell the remaining 10%, if that was to happen. It's based on the mutual benefit we both get out of it. It's based on contracts -- written contracts which makes sense for both. The alliance was renewed in 2005 and it doesn't really have an expiration date. It can be cancelled after 2015, but it doesn't really have an expiration date. So it's still very good for both of us. And we really expect no changes in our relationship.

We'll go ahead and take our next question from Mike Linenberg with Merrill Lynch.

Yes. Good morning all. I guess a couple questions on the Aero Republica piece where I think, Pedro, you indicated that the percentage of capacity, I think, last year was 7% and this year it was 15%. What does that number look at, like at year end?

And then can you talk about some of the international expansion with Aero Republica that may be -- is outside of Panama? There was something up here that indicated that there may be some new service to Venezuela from some of the Columbian cities. Any color on that would be great.

Okay, yes. Their international capacity, I think it's going to look slightly better than that 15%. It depends on when the Venezuelan capacity you just mentioned, some international flying that they have not yet announced comes in line. It may happen towards the end of the year, so it won't have a great effect on that percentage. It will have a greater impact in 2009, of course, but not in this year.

They are planning flights to Venezuela. I'm not sure how much has been disclosed. And I think they're going to be making an official announcement the minute there's a fixed date for that startup.

Okay. And then on that international service, as you move into some of these markets where maybe there's more of a business component or maybe a passenger connecting onto the Copa system. As Aero Republica maybe has more of its market or more of its capacity in the international markets, thoughts on the configuration on the airplanes, whether or not you'd be in a position where you'd have to go to -- you'd have to offer a first-class product.

Well we don't think that's the case as of yet. Most of the flying it's still a short haul. Even if it's international, it's one-hour segments. And their configuration on the Embraers is actually quite comfortable with two-and-two seating, leather seats, a very comfortable pitch. So for one-hour segments, I don't think there's -- we don't feel there's a need in changing either configuration.

We'll go ahead and take our next question from Ray Neidl with Calyon Securities.

Yes. Once again, the maintenance costs were a little bit higher. Going forward, can we expect to see that -- I think it was Aero Republica with the transition. I thought maintenance costs might be coming down because you're using new aircraft there.

Yes right. This is Victor. Yes, maintenance costs would be coming down. But this year, what you're seeing is Aero Republica is basically more engine events related to the MD-80 fleet which we're -- as you know, we're exiting. And also more seat checks. If you look at it on a year-over-year basis, last year, in terms of events, Aero Republica had two seat checks. And this year they're going to have five seat checks.

And last year, in terms of engine events, they had three engine events. This year, you're looking more at 10 to 11. But again, it's related to the MD-80 fleet that we're exiting and that's something that will be reflected in '08 results, which you won't see in '09 results when you have an all brand new fleet of Embraer 190s.

Okay. And the tax rate going forward. What would be a good average tax rate to use, about 11%?

An effective rate of -- yes, around 10% -- 10% to 11% for the year.

And moving on. We'll go ahead and take our next question from Tatiana Feldman with Morgan Stanley.

Good morning, gentlemen. Just wondering if you could comment a little bit on Casamex fuel. Obviously the revised guidance is a little bit stronger at 7.5%. But you did 7.7% this quarter. So I'm wondering, is that just the capacity growth that's going to bring that down or is there anything else we can look for?

No, it's exactly that. It's going to be a capacity growth that's going to be pulling in the second, third and fourth quarter, which is going to bring it down to the guidance level that we provide.

Thank you so much.

(OPERATOR INSTRUCTIONS) Next we'll hear from Steve Trent with Citi.

Good morning, gentlemen. Just two questions for me. The first with respect to the jet fuel environment and what you might be seeing on a competitive level. Are you seeing any big movements, either positive or negative from some of the regional competitors that might or might not be holding back on certain routes just because profitability has got tough and this oil price environment?

And my second question. I'm not sure if you're able to share with us, buried within the RASM, CASM guidance, what might be your expectations on the Colombian peso exchange rate by the end of this year? Thank you.

Thank you, Steve. On the competitive side, we haven't seen any significant changes. It's as expected. Latin America is growing quite nicely -- traffic in Latin America. So we're not seeing any pullbacks. We're not pulling back either. What we are seeing is a willingness from most airlines in the region, to match fare increases and fuel surcharges in most cases.

I'll let Victor answer the other part of the question.

Yes, Stephen. With regards to your question about the Colombian peso, as you know -- as you probably know, the Colombian peso has been strengthening against the U.S. dollar. And we expect that to continue through the year, but at the end of the day, we're looking at a peso and a U.S. dollar by the end of the year in the range of somewhere between COP1,700 and COP1,800 to the dollar. And yesterday it was around COP1,750 to COP1,800. So it was a little bit higher for the first quarter. So we don't expect it to strengthen significantly more in the remainder of the year. At least that's what's embedded in our guidance for the year.

Okay. Very clear. Thanks gentlemen.

Next we'll hear from Jim Parker with Raymond James.

Question for Victor. Back in January when you had your investor get-together in Panama City, your oil assumption was $85. And I think you indicated that -- at that point that higher fares and surcharges had offset about 94% of that. Where are we now, say, at oil at $120? How much of that have you offset?

If you look at the fuel surcharges that we have implemented right now, today, and looking at oil prices in the future and current oil prices, what we're looking at is a coverage of between 70% to 80%. But that includes not only, again, fuel surcharges, but also includes fare increases that we have implemented. And that's how we look at it. That's how you have to look at it, because depending on the market, we may focus more on the fuel surcharge and the other markets we may focus more on the fares. But as you know, today we're looking at yields and RASM. And combined fares and fuel surcharges, we're looking at 70% to 80% coverage.

Okay. Thank you.

And we'll go back to Ray Neidl with Calyon.

Yes, I just wanted to clarify one thing on the growth rate. You are slowing it down this year because of high fuel costs, even though demand remains strong. I'm just wondering why, if you're able to get through the RASM increases and demand is strong, why slow down growth, despite the risk of higher fuel. And would you expect that trend to continue into next year, 2009, a slower growth rate?

Yes, Ray. Thank you. Well we're talking about our flight adjustment, mainly during low season. If we have four or five days frequency of destination and there are days of week when we can reduce one or two during low season, save some fuel and consolidate the revenues, recapture in our remaining flights, we will try to do so. So it's more that than really pulling back capacity and changing our growth. And by the end of the year, our network, our schedule, our capacity should look pretty much the same as it has always been projected.

Okay. And to follow-up on Jim's question, you were able to pass through less of the oil price increases now than you were earlier, simply because oil prices are going crazy, you might say. If oil were to go to $150 a barrel, would that percentage of increase pass through, would you think that that would go down even further as a percentage?

That's probably the toughest question to answer, Ray. If you had that impact a few months ago when oil was at $85, $90, it would keep passing fuel surcharges at $120, $130, maybe I would have said, maybe, maybe not. We're going to keep pushing. And demand is strong in the region. And we've seen in the past that we've been pretty successful.

So we'll keep pushing and we'll see how it goes. So I'm not ready now to sit here and predict that that percentage will go down because fuel will rise. We'll keep doing what we've been doing. And with demand strong, we should be able to revenue manage the fares and fuel surcharges up.

Okay then. Thank you.

And we'll go to Tatiana Feldman with Morgan Stanley.

Yes, hi. Just a follow-up. I wanted to -- I know you've mentioned that demand has been strong in the region. Just wanted to know any comments you have on what you're seeing from U.S. -- the U.S. side of demand. Has that shown any signs of weakening or -- thank you.

Our presence in the U.S., relative to the rest of our network is not that large. So even if the U.S. was -- had slower demand, it would not have a great impact. But so far we've seen -- we're pretty much where we expected to be in the U.S.

We haven't grown that much in our U.S. market, so obviously we don't have that much pressure to fill up extra seats, but we have not seen a significant change in our U.S. projections.

Thank you.

(OPERATOR INSTRUCTIONS) We'll hear from Mike Linenberg with Merrill Lynch.

Yes, if we could get a little bit more detail. I know you indicated that yields were strong across the region. But just some of the competitive -- across the region, what you're seeing from the competition, whatever -- I guess Delta did start service from Kennedy four times a week. And I know they've pulled that service. I don't know how long that was in the market. Maybe what you're seeing out of Ft. Lauderdale from Spirit, though I think they may have ramped that service up to daily. So anything just on the competitive and even anything that you're seeing out of Central America, vis-a-vis Taca.

With a caveat -- I won't do any free advertising for any competitor. We are not seeing anything out of the ordinary. You mentioned a couple of examples. Yes, one pulled out. The other one is talking about increasing to daily. We are not seeing anything that's significant enough to impact our projections -- our guidance. We're always keeping an eye, or both eyes, on our competitors. But we're also obviously worrying about our own performance, about fuel cost, about being very efficient and about satisfying our customers. And I think that's what we're going to keep on doing in the future.

Okay. Very good. Thank you.

And at this time we have no further questions coming in. Mr. Heilbron, I'll hand the conference back to you for any closing comments.

Okay. Thank you. And thanks again. Rest assured our team remains focused on the opportunities and challenges ahead. And we look forward to having you back for our second quarter earnings call. Have a great day. Thank you.

And that does conclude our conference. Again, thank you all for your participation. We do hope you enjoy the rest of your day.