Copa Holdings SA (CPA) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Copa Holdings first quarter 2009 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 May 7, 2009.

Now, I will 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.

First, Pedro will open up with an overview of our 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 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 has been posted on our Company's website, copaair.com.

In addition, our discussion will contain forward-looking statements not limited to historical facts that reflect the Company's current beliefs, expectations, and our 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 these risks and uncertainties are discussed in our annual report filed yesterday with the SEC.

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

Thank you, Joe. Good morning to all. Thank you for participating in our first quarter earnings call. I would like to begin by congratulating our coworkers for their efforts in delivering another great quarter. As all of you know, we're operating in a challenging environment and their continuous efforts to deliver world-class service and financial results are very much appreciated and admired.

Among the main highlights for our first quarter, Copa Holdings reported net income of $71.6 million or diluted earnings per share of $1.65. Excluding the $16.2 million non-cash gain associated with the mark-to-market of fuel hedge contracts, net income came in at $55.5 million or diluted earnings per share of $1.28. These exceptional results came despite a realized fuel hedge loss for the quarter of $20 million.

Our operating margin for the quarter came in at an industry-leading 22.3%. Although unit revenues declined approximately 11% in line with our guidance, we also benefited from a 16% drop in unit costs. Moreover, unit costs excluding fuel came in at $0.068 representing an 11% decrease year-over-year.

I am also pleased to highlight that our Company ended the quarter with a very healthy balance sheet and a very strong equity position. In fact, yesterday our Board approved a dividend of $0.37 cents per share, payable on June 16 to all shareholders of record as of May 29th. This dividend, which is the same amount per share as paid in '08, represents a dividend payout of 14% of our '08 net income, which is above the established dividend policy of 10% of [annual] net income. This action reinforces our Board's trust in the Company's performance going forward, and its solid financial position and liquidity.

On the operational front, in the first quarter, Copa Holdings took delivery of three aircraft, one 737-800 for Copa Airlines and two Embraer-190s for Aero Republica. So Copa Holdings ended the quarter with a fleet of 58 aircraft, 43 at Copa, and 15 at Aero Republica.

For Q1 '09, Copa Airlines reported on-time performance of 90.6% and a flight completion factor of 99.6%, maintaining its position among the best in the industry. Additionally, Aero Republica's on-time performance continues to be at outstanding levels, also averaging above 90% for the quarter.

On a more recent note, in April Copa Airlines renewed its IOSA audit certification through 2011. The IATA Operational Safety Audit is the benchmark for global safety management in airlines and we're very pleased both Copa and Aero Republica meet these standards.

Also recently our partner, Continental Airlines, announced its intention to leave its SkyTeam Alliance. As you know, for over a decade, Copa and Continental have shared a successful and mutually beneficial relationship. And in order to ensure we remain fully aligned with Continental, today we are announcing Copa Airlines will also be leaving the SkyTeam Alliance concurrently with Continental on October 24, '09.

In the meantime, we will continue evaluating future alliances as we maintain our established bilateral relationships. Needless to say the strong alliance partnership between Copa and Continental along with the many important programs and initiatives we operate jointly, such as OnePass will remain in place as we continue to explore new and better ways to work together to leverage our joint presence throughout the Americas.

Now, turning to the quarter, traffic was very strong, growing almost 12%, on a 17% capacity increase for the quarter. Our yields were down due to a generally weaker demand environment, increasing length of haul, and a weaker Colombian peso at Aero Republica. This along with lower load factors resulted in an 11% decrease in unit revenues. However, this softness in unit revenues was offset through unit cost improvements. We remain continuously focused on operating the airline more efficiently and reducing costs that do not impact the quality of our products.

This has been, and will continue to be one of our key competitive advantages, which is even more important in today's demand environment.

Looking at the second quarter in general we continue to see traffic growth across most of our network. Our just released April statistics showed very solid traffic growth of 23.7%, with load factors for the month remaining virtually unchanged despite a 24.2% capacity expansion. If we group March and April to normalize the Easter holiday effect, during these two months traffic grew an average of 16% per month.

Going forward, as you can imagine, it has become increasingly challenging to forecast demand, especially if to the weakening economic environment you add the uncertainty concerning the current swine flu crisis. Regarding the latter, we continue to monitor the situation, which depending on how it develops, has the potential of impacting demand for our services.

However, on a consolidated basis, Mexico represents only a small percentage of our capacity and revenues. That said, we are seeing reduced travel not only to and from Mexico, but throughout our system, as some passengers postpone or cancel business and leisure travel, and as some travel restrictions have been imposed by certain countries. We have been proactive in this regards, having reduced our capacity to Mexico by approximately 20%.

The duration of these capacity reductions is currently limited to the month of May. And we expect traffic in the rest of our system to start normalizing during the second half of this month.

On the economic front, the latest April IMF figures call for a regional GDP contraction of 1.5% from the 1.1% GDP growth projected in December. However, Panama still represents a bright spot in the regional and global context, with GDP expected to grow between 3% to 4%. As you know, there are several private and public sector mega-projects taking place; among them, the Panama Canal expansion, which will continue to stimulate the economy, and mitigate the effect of the global crisis going forward.

Last Sunday, Ricardo Martinelli, a well-known and successful US-educated businessman, won Panama's presidential election with a 60% majority vote. We expect Mr. Martinelli will lead a conservative, pro-business government, and has promised to make improvements in health care, education, transportation, and security.

Looking at our fleet plan, and as mentioned in our previous earnings call, we took the decision to return two 737-700 leases that expire in October of this year, and which we had the option to renew. Additionally, Aero Republica's fleet transition contemplates the return of four MD-80s by the end of the year.

So considering we now expect to receive six aircraft in '09, four 737-800s and two Embraer-190s, our end-of-year fleet plan is expected to remain flat at 55 aircraft. Nevertheless our growth for '09 is mostly in place as a result of capacity added in '08.

With regards to Aero Republica, we are pleased with the results for the quarter. Operating earnings came in at $6.3 million, which represents an operating margin of 12%. These results were recorded despite a 13% drop in revenues, which were affected by a drop in yields mainly related to a weaker Colombian currency. The weaker revenue environment was more than offset through lower CASM, which decreased 30% year-over-year, mainly as a result of lower fuel costs, the timing of maintenance expenses, and a weaker currency.

Aero Republica's load factor and financial results continue to be positively impacted by their transition to a smaller gauge and more efficient Embraer fleet, and a growth in their international operations. In the first quarter, Aero Republica's capacity, flown in Embraer aircraft, reached 66% against 50% in Q1 '08. Additionally, for the first quarter Aero Republica international capacity grew 90% year-over-year, reaching 26% of total capacity.

Aero Republica now has a 9% share of Colombia's international market. So as you can see, by all counts we consider our first quarter results extremely positive.

Our business model continued delivering growth and industry-leading margins, even in an extremely challenging environment. Although there is still much uncertainty on how the demand environment will develop for the remainder of '09, we're very confident on our ability to meet the challenges ahead and emerge in a stronger position.

Our ability to meet these challenges is strengthened by the competitive advantage of being based in Panama, a growing and strategically located country, having the most complete and convenient network for inter-Latin America travel, maintaining a very competitive cost structure, a strong balance sheet, and ample liquidity, having a flexible fleet plan, which if needed allows us to scale back capacity going forward, and last not but least, a great team that has won the preference of our passengers time and time again.

With that, thank you. Now we'll turn it over to Victor who will go over our first quarter results.

Thank you, Pedro, and good morning everyone. Thanks again for joining us. First and foremost, let me begin by joining Pedro in congratulating all of our coworkers for yet another outstanding quarter. As Pedro mentioned, Copa Holdings net earnings for the first quarter reached $71.6 million, which translates to diluted earnings per share of $1.65. Excluding $16.2 million in mark-to-market gains related to the 2008 fuel hedge contracts, and excluding a mark-to-market gain of $2 million booked in Q1 '08, net income increased 47% year-over-year. That translates to $55.5 million or diluted earnings per share of $1.28.

Strong financial performance and this despite $20 million in realized fuel hedge losses in the quarter.

The first quarter was marked by healthy traffic growth as revenue passenger miles increased 11.6% year-over-year on 17% capacity expansion. This led to a decrease in load factor of 3.6 percentage points year-over-year to 74.4%. However, underlying breakeven load factor dropped almost 8 percentage points from 65% in Q1 '08 to 57% in Q1 '09.

In addition, a 6% increase in length of haul and a weaker Colombian peso dropped yields down some 6%, contributing to a 10.6% year-over-year decline in passenger revenue per available seat mile. However, as we expected, lower fuel prices, including realized hedge losses offset most of the impact of the lower unit revenues during the first quarter.

In terms of revenues, Copa Holdings' first quarter operating revenue came in at $309 million for a 4.3% year-over-year increase, with Copa Airlines showing an 8% increase and Aero Republica a 13% decline as a result of lower fares and a weaker Colombian currency.

With respect to passenger revenue, we continue to deliver solid topline growth. During the first quarter our consolidated passenger revenue increased 5% year-over-year to $293 million.

On the expense side, Q1 '09 operating expenses decreased 2% year-over-year while on a unit basis or cost per available seat mile, our costs decreased 16% year-over-year to $0.099. Excluding fuel, unit costs decreased approximately 11% year-over-year to $0.068, mostly as a result of lower overall distribution costs, timing of maintenance events at Aero Republica, in addition to higher aircraft utilization.

Turning now to Copa Holdings' main operating expenses compared to its first quarter of 2008, fuel expense decreased 13%, driven by a 23% decrease in the all-in average price per gallon of jet fuel, including realized hedge losses, offset by a 14.5% increase in gallons consumed resulting from increased capacity.

Salaries and benefits increased 8% mainly due to overall increase in operating headcount to support increased capacity. Passenger servicing increased 12%, driven by an increase in capacity and passengers carried.

Commissions decreased 22%, driven by lower commission rates; reservation and sales decreased 2%; maintenance materials and repairs decreased 3%, mainly as a result of the timing of maintenance events at Aero Republica. Depreciation increased 19% due to additional aircraft and spares; and flight operations, landing fees, and rentals combined increased 13%, mainly as a result of increased capacity.

Other non-operating income and expense totaled a net non-operating gain of $8.3 million, the main component of which are a net interest expense of $6.1 million and the $16.2 million non-cash gain associated with the mark-to-market of hedge contracts mentioned earlier.

Regarding operating earnings the Company produced $69 million in operating earnings, again despite $20 million of fuel hedge losses for a year-over-year increase of 33% while operating margin came in at 22%, almost 5 percentage points above Q1 '08 operating margin.

In terms of fuel hedges, as past of its strategic hedging program, the Company hedged 36% of its first quarter volume and currently has hedged 30% for its second quarter of '09, 25% for the third quarter in 2009, and 16% for the fourth quarter of 2009.

In addition, we also have hedged 6% for 2010 and 9% for 2011 through a combination of jet fuel and crude oil swaps.

Moving on to the balance sheet, assets as of the end of the quarter totaled approximately $2 billion, while owner's equity reached $700 million and debt plus capitalized leases totaled just over $1.2 billion. Our bank debt at the end of the quarter totaled $927 million, 43% of which is US Ex-Im Bank guaranteed debt. Close to half of our total debt balance has been fixed for up to 12 years and the average blended rate for the first quarter including fixed and variable rate debt came in at a very competitive 3.7%.

In terms of cash, the Company closed the quarter with a very strong cash position with $403 million in cash, short-term and long-term investments, which represents approximately 31% of last 12 months' revenues.

This figure includes $29 million of restricted cash of which $23 million are collateral for out-of-money hedge contracts related to future quarters. In addition, the Company has committed lines of credit totaling $31 million.

So in summary, our business model continues to perform extremely well both financially and operationally. Our team is doing a great job of managing costs, our balance sheet and liquidity position are stronger than ever, and we continue to be well-positioned competitively.

In terms of our guidance we remain optimistic about our prospects for '09. However, in light of recent developments regarding the swine flu situation we continue to maintain a cautious stance on our outlook for the year.

As such we're maintaining our guidance for fullyear '09 which is as follows. Capacity in the range of 10 billion ASMs, for plus or minus 13% year-on-year growth. Load factor at plus or minus 74% compared to 76% in 2008, RASM at $0.126 for 14% year-over-year decrease as we also expect further softening of yields during the remainder of the year.

The price for a gallon of jet fuel net of current hedges of $2.11 compared to $3.24 for fullyear '08. CASM ex-fuel of plus or minus $0.075 which is basically flat with '08 and operating margins in the range of 16% to 18% compared to 17.4% in '08, and we do still expect to come in on the high end of this range.

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.

Thank you. (Operator Instructions) We will take Jim Parker with Raymond James.

Good morning, guys.

Hi, Jim.

Hi, Jim.

Just a -- the question regarding your non-fuel unit costs, you're at $0.068 in the first quarter and your guidance is $0.075 for the year, I believe. I'm curious if some of these very nice cost improvements that you've shown in the first quarter like distribution expense being down substantially, if that's going to continue as well as you say the timing of engine overhauls at Aero Republica, is there is some bubble coming out there?

So a couple of questions there regarding why your non-fuel unit cost won't be lower, let's say, than $0.075 or why you're expecting it to actually go up from that level?

Right. Yes, don't forget that $0.075 has a plus or minus in front, so again we wouldn't be surprised if we come in somewhat below the $0.075. But we do expect, Jim, in the remainder of the year to have more maintenance events.

When you look at the number of events coming through in the second, third and fourth quarter compared to the first quarter we do have a significant incremental cost in the first quarter that -- if you look at the seat check and major airplane overhauls the total cost was roughly $3.5 million, $4 million, but if you look at second, third, and fourth quarter, you're looking at around $16 million, $17 million in additional maintenance events related to only seat checks and airplane overhaul.

So yes, there's somewhat of a bubble there but also yes, we expect to continue seeing pretty good performance with respect to distribution costs for the remainder of the year. So it will be higher than the first quarter, our guidance is $0.075, flat with '08; we could come in slightly below that

Okay. I think Duane has a question as well.

Yes, thanks. Just wondering if you could quantify the impact of currency on your unit revenue and also on your CASM ex-fuel in the quarter.

Yes, I am looking for it right now, Duane. It's approximately $3 million for the quarter on a net basis. So on a CASM basis it doesn't have that much of an impact.

Okay. And can you give us any feel for yields in April and relative to your guidance for a 14% decline in RASM, what do you think we could see here in the second quarter?

In the second quarter we expect to see the softness in yields that we've been seeing in the last couple of months. Don't forget there is an impact of the devaluation of the Colombian peso when you compare year-over-year. So that's part of the reason we've seen lower yields. Another part of the reason is there is some softening of demand and also there is an increased length of haul year-over-year. So that explains the lower yield.

In the second quarter we also need to keep in mind this whole swine flu situation which obviously will impact those factors as well. Yield, it's not clear right now what the final impact will be, so it's tough to project. But it will be coming back, especially in May and definitely in the second quarter as well.

So relative to your 14% decline in RASM do you think it could be within that range?

Yes, in the 14% decline in the RASM we've already considered that. The only caveat in that, Duane, is -- again, as Pedro mentioned, it's getting very tough right now to project -- to predict in this kind of environment.

So we feel pretty comfortable with the 14% guidance we've provided. That already includes what we're seeing right now in terms of the second quarter, it forecasts a low cycle on yields but it's something that we need to monitor every day, because it's a situation that's developing, and we'll be updating our guidance if necessary, but right now that's how we see it.

Okay. Sorry to be stubborn here but in the Q2 do you expect the RASM decline to be greater or worse than that 14%?

In the second quarter if you look at our RASM guidance for the year it would implicitly have a higher decrease than the 14%, yes.

Okay. Thanks very much.

We will take our next question from Nicolai Sebrell with Morgan Stanley.

Hi, Pedro and Victor. Quick question on -- we were talking about first quarter April better than I think anybody expected, and then leading into the second quarter due to the swine flu, probably worse, do you think the two offset each other?

If you're looking at your guidance particularly with respect to RASM, operating margin, it seams like the two are setting each other or offsetting each other and that you don't see a lot of risk to the downside to your guidance. But is that accurate or how should we think about it? That's the first question.

And the second question, particularly in April, it looks like significant process was made on -- in -- for Aero Republica, if you look at the load factor, if you look at the year-over-year traffic growth. Was that pretty much as expected or is Aero Republica doing a little bit better than you had expected?

And then if you don't mind just giving a quick comment on the competitive dynamic what you're seeing in Colombia, are you seeing the US carriers pull back as we might expect them to, given the economy in the US?

Yes, Nick, in terms of Q2 traffic, it's too early to tell if April is going to offset any softness derived from the flu swine -- the swine flu prices.

It's just too early to tell because it's really been maybe a full week or 10 days where we've seen traffic really affected by this whole thing. And we do not know how long it's going to last. So again, it's just too early to tell.

In terms of Aero Republica, they did slightly better than expected for a couple of reasons. One, most importantly, they are doing great, they're doing very well. I think that's number one.

Also April '08 was very weak for them. They did not do that well in April '08. And then on top of that, the Easter holiday fell in April this year rather than in March like the previous year, and it has a greater impact on the Aero Republica segment than on Copa. So I think those three factors contributed to a very strong April for Aero Republica.

In terms of competition, we've seen no changes, no significant changes since our last earnings call, either in terms of new capacity or (inaudible) pulling back.

Okay, back to Republica, just quickly. So the 60 -- the load factor that's been as high as in the low 60s -- I'm just going off memory, so it might be a slightly different number but I think that's the right range -- on Aero Republica, we could expect that on average -- obviously there is seasonality -- but on average to continue through the end of the year?

Swine flu aside, let's forget swine flu.

Yes, I would say there is a [connect], I would say so. Yes, and in our 74% plus or minus guidance we're assuming that Aero Republica would be in the low 60s range.

Okay, great. Thanks, guys.

We will take our next question from Stephen Trent with Citigroup.

Yes, good morning, gentlemen. One or two --

Hi.

Hi, one or two questions from me. In terms of your fleet going forward -- I know you're getting rid of the MD-80s this year -- how should we think about long-term maintenance expense? In other words as you get these new aircraft, the E-190s and the Boeing 737 NGs, what sort of a grace period from the maintenance standpoint before we start to get into, let's say, regular medium- to long-term maintenance?

On the Embraers, you're talking about two to three years' honeymoon. And in terms of the cost, when you look at it in terms of maintenance CASM, we don't expect a significant difference in the next few years at our maintenance CASM.

On the one hand, you have the Embraer-190 coming in. They do have less seats to have an impact on maintenance CASM; they do have a honeymoon so that helps you also. And we also need to consider the NGs which we have a fleet of NGs that is also getting older.

So at the end of the day, when you look at the full picture, maintenance CASM going forward should not vary much in the next few years.

Great, thanks, Victor. The only other question in terms of Mexico, can you tell me roughly speaking approximately what percentage it represents of available seat miles, let's say, on a normalized basis?

Mexico is around 6% of our capacity and revenues also.

Great. And that of course excludes the 20% cut you discussed earlier?

That's correct.

Great, perfect. Thank you, gentlemen.

Thanks.

We will go next to Mike Linenberg, Banc of America-Merrill Lynch.

Hello, everyone, this is actually [Alex London] on behalf of Mike.

Okay.

I just wanted to see if you had an updated P&L impact, given what the fuel curve has done since your last update. The P&L impact of non-operating mark-to-market costs for the remainder of the year.

Sure, and actually let me go forward to full picture. If you look at the -- for the full year, including Q1 '09, and then you come back into how much is the second, third, and fourth quarter. For the full year we are -- we expect a realized loss of approximately $50 million as a result of the hedges we have in place, given the curve, the current curve.

In terms of mark-to-market, you're basically talking about a $45 million gain. So for fullyear '09, the net when you take into account realized fuel hedge losses and mark-to-market gains, then they're pretty much [squash].

And the first quarter, as you know, the realized hedge loss was $20 million and then the mark-to-market gains totaled around $16 million.

And -- okay, and then just finally, do you have any estimate for -- I know in April ASMs has increased 24% on a consolidated basis. Do you have an estimate for the second quarter ASMs by carrier and also for the remainder of the year?

Sure. In terms of ASM growth, Copa -- I don't have the number right here, what I have it is on the top of my head -- Copa basically should be growing around 16% year-over-year. And Aero Republica should be flattish to a couple of points up.

Okay, great, thanks very much.

(Operator instructions) We will take our question from Bob McAdoo with Avondale Partners.

Hello, just a couple of questions. The -- you made (inaudible) comments on the Colombian currency impact. How much of your revenues and expenses are actually denominated in the Colombian currency?

The Colombian currency, in terms of revenue, Colombian peso represents approximately 20% of total revenues when you look at Copa Holdings consolidated.

And in terms of expense, it's roughly 10% to 12% of the total, again looking at Copa Holdings consolidated.

Okay. So I have a different question. You talk about the lower commission rates. Did you just unilaterally decide to pay your agencies less amounts, or is there some other structural shift in terms of where the business is coming from? What's going on there?

That is a combination of factors. One is maybe being more surgical about which fare classes and markets are incentivized with backend commissions. And also there is a small effect due to lower revenues in certain markets and agencies not hitting the threshold to gain certain of the -- certain levels of backend commissions. So it's a combination again of hitting the target and also our management of the program.

So -- and the current run rate that we saw in this quarter, can we think that that's where it will be for the balance of the year?

We may invest some of it back. So I don't think it'll stay the same. Some of those savings are going to -- most of those savings will remain but the rate may change.

Okay, and just generally in terms of sales and distribution costs generally, anything going on there that we just -- that's meaningful, we can worry about or think about?

Not really. For the remaining -- remainder of the year, do not expect major changes from where we are now.

The only thing I would add is that, as always, we have an opportunity in terms of direct sales, but that's always something we'll be pushing -- will continue pushing, so --

In terms of getting people to use your website you mean?

Sure.

Okay. Yes, okay. Very good, thanks.

(Operator instructions) And at this time, it appears we have no further questions.

Okay, thank you all again. Rest assured our team remains focused on the opportunities and challenges ahead, and more committed than ever on delivering world class results and value to our shareholders. So we'll see you again at the end of the next quarter and have a very good day.

This does conclude today's teleconference. Thank you for your participation.