Copa Holdings SA (CPA) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Copa Holdings second-quarter 2009 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 August 6, 2009.

Now, I would like to turn the conference over to Joe Putaturo, Director of Investor Relations. Sir, you may begin.

Thank you very much, operator, and welcome everyone to our second-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 second-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 second-quarter earnings release, which has been posted on the 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 are discussed in our annual report filed with the SEC.

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

Thank you, Joe, and good morning to everyone on the call. Thanks for joining us. It may not be very apparent from the strong results we reported yesterday, but the second quarter has been one of the most challenging ones we've had in quite a while. Several issues put to test the resiliency of our team and our business model and I am happy to say we are able to come through once more with industry-leading results, both financially and operationally speaking. So my congratulations go out to all of our co-workers who day in and day out are committed to excellence. Their efforts do not go unnoticed.

Turning now to our financial highlights for the second quarter. Copa Holdings reported net income of $55.2 million or diluted earnings per share of $1.26. Excluding the US $27.1 million non-cash gain associated with the mark-to-market of fuel hedged contracts, adjusted net income came in at $28.1 million or diluted earnings per share of $0.64, a 13.5% increase above last year's adjusted net income.

Our operating margin, which continues to be among the highest in the industry, came in at 13.2%, also better than Q2 '08, despite a significant drop in unit revenues and a realized fuel hedge loss of almost $13 million. I am also pleased to highlight that our Company ended the quarter in a very solid financial position.

On the operational front, on a consolidated basis, Copa Holdings ended the second quarter with a fleet of 58 aircrafts. On the Copa Airlines site, the fleet stood at 43 aircrafts, 28 Boeing 737NGs and 15 Embraer 190s, while Aero Republica's fleet consisted of 15 aircrafts, 11 Embraer 190s and 4 MD-80s.

For the second quarter '09, Copa Airlines reported on-time performance of 90% and a flight completion factor of 99.5%, consistently delivering exceptional operational results. Additionally, Aero Republica's on-time performance also continues to be at outstanding levels leading the Columbian market once again.

On a more recent note on July 16, Copa Airlines and Boeing announced a firm order for 13 Boeing 737-800 aircrafts plus options for an additional eight. Delivery of the 13 newly ordered aircrafts will begin in 2012 and end in 2015 with options for eight additional deliveries between 2015 and 2017.

This new order increases our firm orders to 27 aircrafts scheduled for delivery through 2015 with options for additional aircraft through 2017. These options along with expiring leases gives us significant flexibility to manage growth going forward.

Additionally, and Victor will give you some more detail on this, we have obtained important commitment from the Export-Import Bank of the United States to support the purchase and financing of our scheduled aircraft deliveries for the next four years.

So having secured most of our aircraft needs for the following years at what we consider very favorable terms, we will without a doubt be able to take advantage of growth opportunities in the years ahead.

Now, turning specifically to the second quarter, passenger traffic grew 7.5% on a 16.5% capacity expansion for the quarter. We are very pleased with this result given that the second quarter is seasonally our weakest quarter and this year this was aggravated by the H1N1 flu crisis. By our estimate, the H1N1 flu crisis, which unfolded in the second quarter specifically in the month of May and June, reduced passenger revenue by approximately $12 million.

Also weaker yields, which were down nearly 4% from Q1 '08 and 13% year-over-year, along with a lower load factors resulted in a 20% decrease in unit revenues. However, this softness in unit revenues was offset through unit cost improvements, all of which came from fuel cost savings.

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.

Now looking at our expectations for the second half of the year, although we continue to expect some uncertainty regarding our regional economies and the ongoing H1N1 flu, we still expect year-over-year traffic growth.

In fact our just released July statistics showed solid traffic growth of 8% with load factors for the month down 4.7 percentage points year-over-year on a 14.7% capacity expansion.

Additionally, during the third and fourth quarters, we expect to see moderate RASM improvement over the second quarter as we go into what is seasonally our stronger half of the year.

With regards to our consolidated fleets and capacity for 2009, there haven't been any major changes since our last conference call.

On a consolidated basis, we still expect to receive six aircrafts in '09, four 737-800s and two Embraer 190s. However, keep in mind we are also returning six leased aircrafts, two 737-700s at COPA and the last four MD-80s at Aero Republica.

As such, our end-of-year fleet plan is expected to remain flat at 55 aircrafts. Also in terms of capacity, we still expect consolidated growth in the range of 12%.

I also want to highlight that Aero Republica came in with very positive results for the quarter. Operating earnings came in at $9 million, which represented an operating margin of close to 16%. Although yields were down significantly mostly as a result of a weaker Colombian currency, further RASM decline was mitigated due to a 22% year-over-year increase in traffic, which resulted in a load factor increase of almost 7 percentage points.

The weaker revenue environment was also offset through lower CASM, which decreased more than 30% year-over-year, mainly as a result of lower fuel costs, lower distribution costs, and a weaker Colombian currency.

Aero Republica's load factor and financial results continued to be positively impacted by their transition to a smaller gauge and more efficient Embraer fleet as was growth in their international operations.

In the second quarter, Aero Republica's capacity flown in Embraer aircraft reached 68% against 52% in the second quarter of '08. By the end of the year, Aero Republica will operate an all Embraer 190 fleet, one of the youngest fleets in the world, and will benefit fully from reduced fuel consumption and maintenance costs that this modern fleet will provide.

As I mentioned earlier, Aero Republica is also benefiting from improved operational performance and is year-to-date the leading carrier in on-time performance for the Colombian market and probably the whole continent.

On the economic front, the IMF now forecast a GDP construction of 2.6% compared to 1.5% in April's forecast. On the positive side, the new IMF figures now also forecast a steeper economic rebound next year, having increased their 2010 GDP growth forecast from 1.6% to 2.3%.

Panama's economy has not been immune to the global slowdown. However, our economy grew 2.5% for the first quarter of the year and the forecast for full year is around 3%.

The country's first-quarter GDP growth rate was the best in the region and keep in mind that during the first half of the year Panama was in a pre-election period.

Moving forward, the newly elected pro-business government of President Martinelli has transitioned quickly and is working on measures to further bolster the economy including important infrastructure projects and other economic stimulus measures.

More importantly, the long-term potential of Panama as a leading business and logistics hubs for the Americas is stronger than ever.

In fact, moving along with the Panama Canal expansion projects, earlier this month the Panama Canal Authority awarded the largest contract for this mega project, which involves the design and construction of a third set of locks.

The contract was awarded on a best value basis to a multinational consortium led by a Spanish construction firm along with Italian, Belgian, and Panamanian companies.

The winning bid of $3.1 billion received the best technical evaluation and was actually under original cost forecast.

Work for this important contract is expected to begin in the months ahead and along with other related expansion activity it is expected to fuel the economy for the coming years.

So to recap, we had a second quarter of very solid results and our business model continues to consistently deliver industry-leading profitability.

We continue to operate in a positive demand environment where passenger traffic has grown more than 9% year-over-year up to July.

Our team continues to be successful in its efforts to deliver a better product while driving initiatives to maintain an extremely competitive cost structure.

Our recent order of up to 21 737-800s is a very important initiative, which will drive efficiencies going forward. And last but not least, we are very confident in our Company's future and our ability to seize future growth opportunity and emerge stronger than ever.

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

Thank you, Pedro, and good morning everyone. Thanks again for joining us. As always, let me begin by joining Pedro in congratulating the whole Copa team for a job well done.

As Pedro mentioned, Copa Holdings delivered another quarter of strong earnings with second-quarter net income coming in at $55.2 million or diluted earnings per share of $1.26.

Excluding mark-to-market gains, adjusted net income for the quarter came in at $28.1 million, beating last year's adjusted net income by 13.5%.

With respect to margins, operating margin for the quarter came in at 13.2% despite $12.8 million in realized fuel hedge losses and a softer demand environment, which without a doubt was aggrevated by the onset of the H1N1 flu in May.

Nevertheless, our business model showed its resilience as we delivered another quarter of traffic growth in a year-over-year basis. Though traffic growth did trail, capacity growth as revenue passenger miles increased 7.5% while available seat miles increased 16.5%.

Consequently, system-wide load factor decreased almost 6 percentage points year-over-year to 68.7%. However, our breakeven load factor dropped by almost 7 percentage points from 66.4% in Q2 '08 to 59.7% in Q2 '09.

In addition, lower average fares drove yields down approximately 13% contributing to a 20% year-over-year decline in passenger revenue per available seat mile. Nevertheless, the impact of lower unit revenues was fully offset by lower unit costs mainly driven by lower fuel prices during the quarter.

In terms of revenues, Copa Holdings second-quarter operating revenues came in at $278 million for a 6.8% year-over-year decline with Copa Airlines and Aero Republica showing revenues declines of 8% and 6% respectively.

On the expense side, Q2 '09 operating expenses decreased nearly 10% year-over-year while on a unit basis or cost per available seat mile our cost decreased 22.5% year-over-year to $0.099. Excluding fuel, unit costs decreased approximately 9% year-over-year to $0.071 mostly as a result of lower distribution costs driven by a lower average commission rate in addition to a lower revenue base and an increase in direct sales.

Turning now to Copa Holdings main operating expenses compared to the second quarter of 2008, fuel expense decreased 34% driven by a 41% decrease in the all-in average price per gallon of jet fuel, including realized hedge losses, partially offset by a 14% decrease in gallons consumed resulting from increased capacity.

Salaries and benefit increased 17% mainly due to an overall increase in operating headcount to support capacity expansion.

Passenger servicing increased 8% mainly as a result of passenger growth. Commissions decreased 29% mostly due to lower commission rates on a lower revenue base. Reservation and sales decreased 9% driven mainly by lower reservation volume handled through global distribution systems. Maintenance, materials, and repairs increased 33% mainly as a result of additional capacity and the timing of maintenance events at Copa Airlines.

Depreciation increased 15% due to additional aircraft and spares, and flight operations landing fees and rentals combined increased 6% mainly as a result of increased capacity.

Other non-operating income and expense totaled a net non-operating income of $21.5 million, the main components of which are a net interest expense of $6.1 million and the $27.1 million non-cash gain associated with the mark-to-market of hedge contracts mentioned earlier.

Regarding operating earnings, the Company's operating earnings increased 18% year-over-year to $36.8 million, despite $12.8 million in fuel hedge losses and an estimated revenue loss of approximately $12 million as a result of the H1N1 crisis which impacted May as well as June.

In terms of profit margins, operating margin came in at 13.2%, almost 3 percentage points above Q2 '08 operating margin.

With respect to fuel hedges, as part of its strategic hedging program, the Company hedged 30% of its consolidated second-quarter volume and currently has hedge positions as follows.

28% for the third quarter of '09, 16% with zero cost collars with floors averaging $111 per barrel, and 12% with swaps at an average of $85 a barrel. With respect to the fourth quarter, 21% of our volume has been hedged, 5% with zero cost collars with floors averaging $105 a barrel, and 16% with swaps at an average of $75 a barrel.

In addition, we have also hedged 9% of both 2010 and 2011 volume through a combination of jet fuel and crude oil swaps at average equivalent prices of $75 and $67 a barrel respectively.

Moving on to the Company's balance sheet, assets totaled just over $2 billion at the end of the quarter, while owner's equity reached $748 million and debt plus capitalized leases totaled approximately $1.3 billion.

Debt at the end of the quarter totaled $949 million, 41% of which is US Export-Import 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 second quarter including fixed and variable rate debt came in at a very competitive 3.4%.

In addition, we recently obtained loan guarantee commitments from EX-IM Bank to support the purchase and financing of two Boeing 737-800s scheduled for delivery this year as well as preliminary commitments for 10 additional 737-800s scheduled to be delivered between 2010 and 2012.

We now have final and preliminary loan guarantee commitments for 12 out of 25 aircraft we have on order directly from Boeing, including all scheduled deliveries throughout 2011.

In terms of cash, we ended the quarter with $394 million in cash, short-term and long-term investments, which represent approximately 32% of last 12 months revenues.

So in summary, the second quarter showed the resilience of our business model as it again delivered strong financial results even under a very challenging environment.

We continue to see healthy traffic growth despite the backdrop of slower economic growth. Our team continues to do a fantastic job at managing cost. We have a strong balance sheet, and most of all we continue to be well positioned competitively.

In terms of our guidance for full year '09, we are maintaining our capacity guidance at plus or minus 10 billion ASMs for a 12% year-over-year growth. We are reducing our load factor guidance from a previous guidance of plus or minus 74% to plus or minus 72%.

We are reducing our RASM guidance from $0.126 to $0.122. On the other hand, we are also reducing our CASM ex-fuel guidance from $0.075 plus or minus to plus or minus $0.072, and we are maintaining our operating margin guidance to a range of 16% to 18%.

Our guidance assumes the price per gallon of jet fuel including [into] plane costs and net of current hedges of $2.16 per gallon compared to our previous guidance of $2.11 per gallon.

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

Thank you, Victor, and now we will open the call for some questions.

Thank you gentlemen. (Operator Instructions) Our first question will come from Jim Parker with Raymond James.

Good morning gentlemen.

Hi Jim.

Just some revenue related questions, you have become a little less optimistic on the revenue side and then offset that with greater optimism on the cost side. But on the revenue side, swine flu -- has the impact diminished? Is it still there? Secondly, is there any issue with the civil unrest in Honduras? And then thirdly in that regard or just with regard to your fares, it appears that some LatAm currencies, at least in Brazil, were strengthening against the dollar, which would make your fares, since you peg your fares to the dollar, might make your fares more attractive, have them go down. So just in general, without the revenue outlook, please assess it given those factors I just mentioned.

This is Pedro and I will let then Victor follow me with some comments. The H1N1 flu crisis hit us at its strongest point in May and June. I don't think what's left is that material. It's not that hard -- it's not that easy to identify how much it is affecting us now. But there is still something going on in Argentina. So it's not totally out of the picture, but again not as strong as it was in May and June. So we won't see it as a material issue right now. That could change, but not right now.

In terms of Honduras, it's the -- it's not significant. Honduras is a very small percent of our ASMs. The flights continue. The load factors are slightly lower but again Honduras is not having material impact on our revenue forecast.

Jim and just to add to Pedro's comments on the revenue, for the first half of the year RASM was down 15% year-over-year. For the second quarter on a year-over-year basis, RASM was down 20%, obviously H1N1 being a big part of it. But also what we have seen in the first half of the year is that there is less business travel or also there is more business travel in the coach cabin or on lower fare buckets. So we are forecasting -- we are projecting based on advance bookings there could be an upside maybe towards the latter part of the year with respect to more business travel working at a higher bucket or in the front cabin, but that's not something we are banking on right now.

If you look at yields, the first half of the year and if you back into it with our RASM guidance for full year, we expect yields for the second half of the year to be recovering some, certainly will be higher than the second quarter, but it will not be as high as the first quarter. So -- and then the load factor guidance we are providing basically tells you that we expect load factor in the second half of the year to be pretty similar to the first half around 72%, 73%.

Okay. Victor, what about with fuel prices having moved back up to the $70 range? Are you inclined to increase or reinstitute fuel surcharges?

Well, we have been managing fuel surcharges as we mentioned in previous calls. And if you look at -- I don't know if you recall, but back in '08 towards the end of the year we were generating around 15%, 16% of our topline through fuel surcharge. That has come down in the second quarter of the year levels of around 12%, 13%. With fuel creeping back up, definitely we'll be looking at it and obviously we will have to take into account underlying demand to see how much we can pass on to passengers. But it is something that we never stopped doing, we have been managing fuel surcharges all along.

Okay, thank you.

And we will now move to Nick Sebrell with Morgan Stanley.

Hi gentlemen. I was wondering if you'd talk a little bit more about the pricing environment. I mean, do you see -- given the pricing environment that you see now, would you be able to raise fuel surcharges going forward given the rising oil? And as part of that, what are you seeing from competitors right now, particularly TACA, Avianca, the guys that are geographically closest to you?

And that's the first part of the question. Second, looking forward to 2010 and kind of expanding on what you said about the second half, do you think it's reasonable to assume a resumption of double digit traffic growth in 2010? And I am not asking for guidance or anything, but if you could just maybe comment on the outlook as we see recovery in the region as well as the US and Brazil, et cetera, in the year ahead.

Okay, Nick, this is Pedro first. And then I'll -- again I'll let Victor make some more comments. In terms of the pricing environment, it is obviously softer and you've seen our yields. So it's not the same pricing environment we had a year ago. But it's not all -- it's not all about lowering fares. There has been -- there are lower fares and obviously our competitors have been trying to fill up seats, empty seats with promotional fares. And not all markets are elastic enough to merit lower fares. So we are trying to manage that in a very intelligent way. So -- but there has been some softness there. But in our case what we've noticed the most is passengers -- as Victor mentioned before, a moving down to lower bucket -- lower fare buckets. So a shift from higher yield buckets to lower yield buckets is really what has impacted the most our drop in unit revenues.

In terms of a double digit growth in 2010, I mean we are not guiding to that yet, but we are pretty optimistic and we have -- we are not growing in terms of aircraft this year as we mentioned before. But we are next year, especially starting in the second half of 2010. We are going to get four new aircrafts and we plan to add frequencies and destinations. So we think that by then, our market should be in a position to start recovering and we see no reason why we should not see those numbers. If you think that we've grown this year up to July at an average of 9% year-over-year, so we are just 1 point below double digit. So it shouldn't be too hard to reach that in the near future.

Especially in 2010, when the expectation is that the economies will be coming back stronger than in 2009. So -- and just to add to what Pedro said on -- straight to your question on what the competitors are doing, what we are seeing is pretty rational behavior from competitors, not only with respect to capacity, but also with respect to pricing. So, again, you need to take into account underlying demand, but with fuel prices creeping back up and competitors being pretty rational and judging by past experience, we may be able to be pretty successful at charging additional fuel surcharges if the price of fuel keeps going up. Based on that prior experience and based on what we are seeing in terms of, again, capacity in our markets and what they are doing with prices.

Great, thank you.

Our next question comes from Stephen Trent with Citi.

Good morning gentlemen.

Good morning.

One of my questions has already been answered. So I am going to stick very strictly to your one-question limit here. But basically this is kind of a follow-up on Jim Parker's question. Honduras being a small market, I am kind of more curious about Venezuela. It seems that the Chavez administration is constantly in the news and doesn't seem to get along well with all of his neighbors.

I am wondering as you look at the political environment in the northern part of South America, are you seeing any or expecting any shift at all in inter-regional traffic or does it look still stable to you?

In terms of our service to every country in the northern part of South America, including Venezuela, things are business as usual. We have normal load factors and our flights are doing well. So -- and we don't have really any reason to think it's going to change in the near future.

That's perfect. Great, thanks very much, Pedro.

Thank you.

We will take our next question from Mike Linenberg with Bank of America.

Hi. This is (inaudible) on behalf of Mike. With respect to load factor, what are you seeing kind of in the next six weeks out on the Copa side and the Aero Republica side?

Looking out six weeks out in the Copa side, we are looking at pretty decent load factors coming back strong from the second quarter where we are obviously affected by the H1N1. So on the Copa side, there will be north of the 75%, 76% load factor levels. In Aero Republica, we are very pleased with the performance we've seen from them in recent months. The load factor has been coming on strong. So we expect them to be also in the next six to eight weeks at pretty decent levels, not at the Copa levels, but at the mid-to-higher sixties, which we've been seeing in the past few couple of months.

Okay. Also just one follow-up, I think capacity was originally expected to be around 13% consolidated. Now, we are at around 12%. Maybe not too material, but I was wondering if there was anything you can kind of describe there, any color?

It's nothing major. I mean, we did do some adjustments during the second quarter as a result of the H1N1 crisis. Second quarter is also our low season. So we were pretty aggressive at managing capacity, taking into account H1N1, but also demand. And then when you take into account that 13% was a plus or minus, it's pretty close to what we had expected for the year.

Right. Okay. Thank you. Good quarter.

Thank you.

(Operator Instructions). We will now move [Natalia Lacapa] with Credit Suisse.

Hi. My question regards the new guidance. You reduced your CASM and RASM estimates, which led your spread to be pretty much the same. However, you are increasing your fuel estimate. So does that mean that now you believe you are going to stay more in the low range of your 16 -- 17 to 18 guidance, 15% to 18% operating margin guidance?

I did some rough calculations here based on your consumption and price estimates, and I am getting here to around 16.5% operating margin. Does that make sense?

What I will say is that not necessarily does it mean that we are going to be coming in at the lower end. That's why we are providing the guidance of 16% to 18%. What I will say is that if the price of fuel assumed for the year was $2.11, we will be coming again at the higher end of the range.

Sorry. I think I didn't understand. You're increasing your fuel expenses line estimates. So why would you be in the high range?

No, what I am saying is that if we had used the same fuel assumption we used during the last earnings call --

Yes.

-- we would comfortably say that we would expect to be at the high end of the range. The fact that we are using now a higher fuel price assumption means that we are not saying that we are going to come in at the high end of the range, but that doesn't mean that we are saying that we are coming in at the low end of the range. And that's why we are providing a 16% to 18% range.

Okay.

And we'll now take our next question from [Kio Diaz] with Santander Bank.

Good morning gentlemen. Could you please repeat the average strike price of your hedging positions for the next couple of quarters in 2010 and 2011? And still on the hedge, are you planning to change your policy and increase the share of hedge of fuel consumption hedges, or are you stick to the plan and keep this level of protection?

Okay. With respect to the prices, and I am giving you average prices because we have several contracts, so for the third quarter the percentage hedge was 28% for the third quarter '09, 16% with zero cost collars with floors averaging $111 per barrel, and 12% with swaps at an average of $85 a barrel.

With respect to the fourth quarter, that's 21% of the volume, consolidated volume, 5% with zero cost collars with floors averaging $105 a barrel, and 16% with swaps at an average of $75 a barrel. And therefore 2010 and 2011 we have 9% for both hedged using jet fuel and crude oil swaps at an average equivalent price of $75 for 2010 and $67 per barrel for 2011.

With respect to the strategy, we are sticking to our strategy. It's been working fine for us in the past. We see these as a long-term strategy to mitigate the volatility of fuel prices. And the Company is delivering excellent results despite in the second quarter having a realized fuel hedge loss of $12.8 million. So this kind of thing you have to look at in the long term, i.e. you can't keep changing your strategy every other year depending on fuel prices.

Okay, thank you very much.

Thank you.

And with no further questions, I would like to turn it over for any additional comments and closing remarks to Pedro Heilbron.

Okay, thank you. I think this concludes our second-quarter earnings call. Thank you all for being with us and thank you for your support. Have a great day.

This concludes today's presentation. Thank you for your participation.