Copa Holdings SA (CPA) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Copa Holdings Third 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 November 13, 2009.

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

Thank you very much, Operator; and welcome everyone to our Third 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 third quarter highlights, followed by Victor who will discuss our financial results. Immediately, 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'll discuss non-GAAP financial measures. A reconciliation of the non-GAAP to GAAP financial measures can be found in our third 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 our 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; and good morning to all. Thank you for joining us. As always, I want to start this call by congratulating all of our coworkers for another strong quarter and by thanking them for their hard work and dedication.

Among the main financial highlights for the quarter; Copa Holdings reported net income of $43.1 million or diluted earnings per share of $0.99. However, excluding special items detailed in our earnings release, Copa Holdings' adjusted net income came in at $52.6 which represented diluted earnings per share of $1.20 or 14% above Q3 '08.

Operating revenues were down 7% to $324 million as a weaker demand environment resulted in lower load factors and yields. However, we were able to offset these lower revenues as operating expenses, excluding special fleet charges, were down nearly 10% as a result of lower fuel costs for the quarter.

As a result, our adjusted operating margin which excludes $14.6 million in special fleet charges related to the return of Aero Republica's last four MD-80 aircraft, came in at 18.7%; again also better than Q3 '08 and extremely positive, given the economic environment and the H1N1 flu crisis which had some impact on demand during the quarter.

On the operational front, Copa Holdings ended the third quarter with a consolidated fleet of 55 aircraft. On the Copa Airlines side, the fleet stood at 43 aircraft; 28 Boeing 737 NGs and 15 Embraer-190s; while Aero Republica's fleet ended the quarter with 12 aircraft; 11 Embraer-190s and one MD-80.

During the quarter, Aero Republica returned three of the last four MD-80s it had in operation with the last one projected to leave in January.

In August, as part of our ongoing ecommerce initiative, Copa Airlines launched its new website. This website platform significantly improves our passenger online purchase experience through enhanced functionality that allows for faster and easier searches; country-specific store fronts and more payment options, among others.

We're very excited about this new initiative which we expect will be a valuable tool in our efforts to increase direct sales and lower distribution costs going forward.

On a more recent note, on October 6, Aero Republica announced daily flights to Quito, Ecuador from Bogota, Colombia beginning in December. Quito will become Aero Republica's third international destination.

On October 12, the Panamanian government issued the order to proceed with Phase 2 of the expansion project of Tocumen International Airport. This project which represents an investment by Tocumen Airport of approximately 70 million and it's expected to be completed in early 2011; includes the addition of 12 international gates, bringing the total to 34; way ahead of the current or projected capacity of our competing hopper airports in the region and paving the way for Copa's continued growth.

As previously announced, on October 24, concurrently with Continental Airlines, Copa Airlines exited the SkyTeam Alliance. As you know, Continental entered the Star Alliance just a few days after on October 27. Copa Airlines is currently evaluating its alliance options and our future course will be based on what is better for our Company and our passengers.

Our commercial agreement and alliance with Continental remain in place and our stronger than ever. In addition, as a result of Continental moving over to Star; our passengers will now be able to accumulate and redeem their OnePass frequent flier miles with Star Alliance members.

On the economic front, the performance of the region's economy seems to be improving after being hit by external shocks in the last quarter of 2008. In the last few months, financial markets have stabilized and commodity prices have recovered. So the current outlook suggests that the worst of the crisis is behind us.

The IMF now forecasts that our region will return to modest growth in the second half of this year and pick up in 2010, with expected GDP growth of close to 3%, up from the previous forecast of 2.3%.

For the first half of the year, Panama's economy grew 2.4% and it's expected to grow approximately 3% for the full year. Although this rate is below previous years, it is still forecasted to be one of the fastest growing economies in the region for both 2009 and 2010.

In fact, according to the IMF, Panama is now expected to be among the fastest-growing economies in Latin America. Current GDP growth forecasts for 2010 range from 3.7% to 5%.

Now turning back to our business; during the third quarter which is seasonally our busiest quarter, passenger traffic grew nearly 9% on an 11% capacity expansion. This growth underscores the resiliency of our business model. In fact, up to September, our traffic has grown more than 9% year over year, despite the effect of the H1N1 virus and a weaker regional economic environment.

So believe we are very well positioned now and we'll be even more so when demand normalizes and high yield traffic recovers, which we're starting to see already.

During the third quarter, we saw double-digit quarter-over-quarter RASM improvement as a result of higher load factors and yields. We also continued focusing on costs as our adjusted CASM, excluding fuel and special charges, came in 1.4% below last year; and along with lower fuel, contributed to offset lower unit revenues.

Looking at Aero Republica, excluding the charges they took in the quarter related to the return of MD-80s, they came in with solid results.

Operating earnings came in at $4.7 million, which represented an operating margin of 7.4%. Although yields were down significantly as a result of a more competitive [FER] environment in the Colombian domestic market, their RASM decline was mitigated due to an 18% year-over-year increase in traffic which resulted in a load factor increase of more than 7 percentage points.

The weaker revenue environment was also offset through lower CASM which on adjusted basis, decreased almost 18% year over year, as a result of lower fuel cost.

Aero Republica's results continue to be positively impacted by their transition to a smaller gauge and more efficient Embraer fleet, as well as growth in their international operations which represented 20% of total capacity in Q3 '09.

With regards to the fourth quarter and as our updated guidance implies; we're seeing noticeable pickup in demand and a healthier yield environment. Our just-released October traffic statistics showed solid double digit traffic growth of almost 18%, with load factors for the month up 7.6 percentage points year over year to 80.8% on a 6.6% capacity expansion.

These strong traffic numbers, along with improved forward bookings, give us optimism for the fourth quarter and for 2010.

Our preliminary 2010 guidance which Victor will talk more about, calls for capacity growth of approximately 10% with an increase in both load factors and yields, as we expect demand to pick up and business travel to strengthen compared to '09. This, along with lowering fuel CASM, should lead to higher operating margins if fuel prices stay at expected levels.

In terms of fleet, we now expect to end the year with a consolidated fleet of 58 aircraft, compared to the 55 aircraft we mentioned in our last earnings call. This increase comes as the result of our decision to extend two 737-700 leases at Copa Airlines which we had planned to return. Additionally, we previously expected all four MD-80s to be out of Aero Republica's fleet by year end. But now we expect the last one to come out in January. This additional aircraft has very little effect on 2009's capacity but will indeed strengthen 2010 capacity growth.

For 2010, we now expect to end the year with 61 aircraft; 46 operated by Copa and 15 by Aero Republica.

In 2010, our growth plans incorporate several new destinations and expanded frequencies to existing markets, both at Copa and at Aero Republica; as we will continue reinforcing what is currently the most complete and convenient intra-Latin-American network, proving our passengers with better options in terms of destinations and frequencies. We will also keep working on product and cost initiatives that will further solidify our competitive position.

Finally, as you know, in the last few weeks there has been much talk about the announced merger between two of our main competitors; TACA and Avianca. Although it remains to be seen exactly how this merger will play out, we have been able to compete very successfully with both of these airlines for many years and we'll continue to do so.

We're clearly well-positioned financially and operationally and believe this merger, in and by itself, does not diminish our business model's advantages. With that said, we have never taken our competition lightly and rest assured we will remained focused on taking any necessary action to ensure we maintain and even strengthen our competitive advantages.

So to summarize; we're very pleased with our third quarter results and how our business model has been able to deliver industry-leading profitability. We continue to operate in a favorable demand environment where passenger traffic continues to grow. Our team continues to deliver a world-class product. We maintain an extremely competitive cost structure and last but not least, we're very confident in our Company's future, our ability to seize future growth opportunity, maintain our regional leadership and continue delivering world-class results.

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

Thank you, Pedro and good morning, everyone. Thanks again for joining us. As always, let me begin by first congratulating the whole Copa team for another great quarter.

As Pedro mentioned, Copa Holdings posted another quarter of strong financial results with third quarter reported net income coming at $43.1 million or diluted earnings per share of $0.99. Excluding special items, adjusted net income for the quarter came in at $52.6 million, beating last year's adjusted net income by 15%.

Special items for the quarter included a $14.6 million special fleet charge related to the termination of our fully-gassed MD-80 fleet and a $5.1 million mark-to-market gain related to fuel hedge contracts. We're extremely pleased with the continued resilience of our business model which once again produced a quarter solid traffic growth on a year-over-year basis, with revenue passenger miles increasing 8.5% on 10.7% capacity expansion.

Despite the double-digit capacity growth, system-wide load factor decreased only 1.5 percentage points year over year; or 75.8%. And our break-even load factors dropped almost 5 percentage points to 64.5% in Q3 '08 to 59.7% in Q3 '09.

In addition, yields for the quarter were down 14% year over year, contributing to a 16% decline in passenger revenue per available seat mile. However, the impact of lower unit revenue was fully offset by lower unit costs, mainly as a result of lower fuel prices.

In terms of revenues; Copa Holdings third quarter operating revenues came in at $324 million for a 7.2% year-on-year decline with Copa Airlines and Aero Republica showing revenue declines of 5% and 13% respectively.

On the expense side; Q3 '09 operating expenses decreased close to 5% year over year, while on a unit basis cost per available seat mile decreased 14% to $0.109. Excluding fuel and special fleet charges, unit costs decreased approximately 1.4% year over year to $0.072.

In terms of our main operating expenses compared to the third quarter of 2008, fuel expense decreased 35%, driven by a 41% decrease in expected price per gallon of jet fuel, including realized hedge losses; partially offset by a 9.7% increase in gallons consumed resulting from increased capacity.

However, the benefit increased 11%, mainly due to an overall increase in operating headcount to support capacity expansion.

Passenger service increased 11%, mainly as a result of passenger growth. Commissions decreased 10%, mostly due to lower commission rates and a lower revenue base. Reservation and sales increased 14%, driven mostly as a result of a 13% increase in passenger carried. Maintenance, materials and repairs increased 20%, mainly as a result of additional capacity and the timing of maintenance events at Copa Airlines.

Depreciation increased 7% due to addition aircraft and spares. Flight operations, landing fees and rental combined increased 7%, mainly as a result of increased capacity.

Other operating expenses increased $2 million. And lastly, as mentioned earlier, we recorded $14.6 million in special fleet charges at Aero Republica.

Other non-operating income and expense totaled a net non-operating gain of $0.4 million; the main components of which are net interest expense of $5.7 million and a $5.1 million non-cash gain related to mark-to-market of hedge contracts.

Regarding operating earnings; the Company's operating earnings excluding special fleet charges, increased 6% year over year to $60.5 million. Because of profit margins, our adjusted operating margin came in at 18.7%, more than 2 percentage points above Q3 '08 level.

Turning to fuel hedges; as part of its strategic hedging program, the Company hedged 28% of its third quarter volume and currently has hedge positions as follows- 23% for Q4 '09, 5% of which are zero cost dollars with floors averaging $105 a barrel and 18% of which are jet fuel and crude oil swaps at an average equivalent price in the range of $80 a barrel; for 2010, 17% at an average equivalent price in the range of $75 a barrel; and for 2011, 9% at an average equivalent price in the range $67 a barrel.

Moving on to the Company's balance sheet; assets at the end of the quarter totaled $2.1 billion while owner's equity increased to just under $800 million and debt plus capitalized leases totaled approximately $1.2 billion.

Debt at the end of the quarter totaled $900 million, 42% of which is U.S. Export-Import Bank guaranteed debt and the average blended rate for the third quarter including fixed and variable rate debt, remains at 3.2%.

In terms of cash, we ended the quarter with $376 million in cash, short-term and long-term investments, which represent approximately 30% of last 12 months revenues.

It's worth mentioning that during the year the Company has funded from cash approximately $96 million in pre-delivery payments related to Boeing aircraft scheduled to be delivered in 2010 and 2011.

So in summary, the third quarter showed once more the strength and resilience of our business model as it again delivered strong financial results. We saw another quarter of double-digit capacity growth while still delivering healthy load factors and higher year-over-year earnings.

Our team continues to do a great job at managing costs. Our balance sheet continues to get stronger, and most all, we continue to be well-positioned competitively.

In terms of our guidance for full year 2009 in light of our third quarter performance and recent events trends, we're updating our guidance as follows- we're increasing our load factor guidance from plus-or-minus 72% to 73%. We are increasing our RASM guidance from plus-or-minus $0.122 to $0.124. We're also increasing CASM ex-fuel guidance from plus-or-minus $0.072 to $0.073. This includes the special fleet charges booked in Q3 as well additional charges expected in Q4.

We're narrowing our operating margin guidance from a range of 16% to 18%; to a range of 17% to 18%. And in terms of capacity, we're narrowing our guidance from plus-or-minus 10 billion ASMs to 9.9 billion ASMs.

Our guidance assumes a price per gallon of jet fuel including into plane costs and net of current hedges of $2.17, compared to our previous guidance of $2.16 per gallon.

In terms of our preliminary guidance for 2010; we expect year-over-year capacity growth of approximately 10% to plus-or-minus 10.9 billion ASMs. We do expect improvement in both load factors and yields, as a result of our recovering demand environment. As such, we're guiding to a full-year load factor of plus-or-minus 75% and a RASM of plus-or-minus $0.128 which will represent a 3% increase over 2009 RASM guidance.

We're expecting CASM ex-fuel to come in 3% below '09 levels to plus-or-minus $0.07. And we expect full-year operating margin to come in within the range of 19% and 21%.

Our 2010 preliminary guidance assumes a price per gallon of jet fuel including into plane costs and net of current hedges of $2.23, which is 3% higher than the forecasted 2009 price.

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

Thank you, Victor. Now, we will open up the call for some questions.

Thank you. (Operator Instructions) And we'll go first to Mike Linenberg with Merrill Lynch.

Hey, good morning everybody. A couple questions here; Victor, just back to guidance; you indicated that the CASM guidance for the year for 2009 included the impact of the charges booked in the third quarter and also you said upcoming charges in the fourth quarter. Does the margin guidance-- the 17% to 18% operating margin; does that also include the impact of the third quarter charges, sort of 1a?

And 1b would be that-- are the charged for the fourth quarter-- are they in the operating line area or are they non-op?

Yes, the margin guidance does include it. And as you saw in the third quarter earnings release, the special charges and impairment charges are being booked above the line; so it's being reflected in the operating earnings for the Company and that will be the case in the fourth quarter as well.

What is the magnitude of the fourth quarter charges, though? And so-- I'm saying-- is it similar to the third quarter or how should we think about that?

In the third quarter we booked approximately $14.5 million and just to give you a little bit more information on that, around $9 million or so relates to the net present value of future rent as we're delivering the aircraft earlier by (inaudible). And then the difference relates to the write down of spare parts. However, we're still crunching the numbers, so we expect a further write down related to spare parts in Q4. And we estimate that's going to be somewhere in the range of $3.5 million to maybe $4.5 million. So the impairment charge in the fourth quarter will be in that range; $3.5 million to $4.5 million. It will not be $14.5 million like we saw in the third quarter.

Okay. That's actually very helpful. And then my second question; just specifically Aero Republica, it looks like you're going to go from 12 to 15 airplanes in 2010. Are those-- the three additional airplanes-- are those Embraer-190s or have you considered putting maybe a 737 Next Gen into the Aero Republica model, just because as you expand into some of these international markets, you may need the larger shell?

This is Pedro here, Mike. Hi. The 15 aircraft are Embraers- so for example, I spoke about renewing two 737-700 leases that we had planned to return, so we have renewed those. We are staying with those 737s and we're giving two of Embraers to Aero Republica, so those are two that they're getting. However, we're going to consider NG 737s, but that's going to be more towards the end of next year, since there are interesting fleet interchange opportunities in international markets that you mentioned. But that's something that's going happen more towards the end of 2010, so it's not in our current plans and it's not in what we've said so far.

Okay. Well the Ecuador and obviously the Venezuela; it's very exciting on the Aero Republica side. Great quarter; thank you.

We'll go next to Duane Pfennigwerth with Raymond James. Please go ahead, sir.

Hi, thanks; good morning. I was wondering if you could give us some detail behind your 2010 RASM assumption. 3% just on the surface appears pretty conservative. Any assumption you have around GDP or fuel surcharges behind that?

This is Victor, Duane. What I would say is this is preliminary guidance. We have limited visibility with respect to 2010. We'll have more clarity early next year when we do our full-year earnings call in February. However, we're basing our guidance on-- is the fact we're seeing traffic pick up. And you saw our October traffic release which was very healthy. We're seeing a slight improvement in yields and we're basing it on the fact that, as Pedro mentioned, Panama's economy is doing pretty good this year and we expect it to do actually better next year and the region as a whole is expected to grow. So we would expect with this economic growth that traffic would pick up.

But again, we have limited visibility. We'll have more clarity next time we meet in February and we'll review our guidance and give you a firm guidance then.

Fair enough. Victor, can you give us commentary on yields in October, given the nearly 8 point load factor increase?

Right. We're seeing, as I mentioned, a slight improvement in yields; a very slight improvement in yields. And it's mostly as a result of being able to do more revenue management as you see higher load factors. I think it's too early to tell the business traveler is back to traveling as they used to; especially as in back in 2008. One would expect that in 2010, with the economies growing at a faster pace, you'll see more business travel. But at this point in time, it's too early to tell whether there is a trend there. So the improvement in yields that we're seeing is mostly a result of revenue management.

I think Jim may have a question. Thanks, Victor.

Yes, good morning to all. I have one question. Victor, how much do you estimate that your realized fuel hedged losses are going to be for the 2009 year?

The realized losses that we're estimating-- assuming there is not a dramatic change in the price of oil from now to the end of the year, are going to be just north of $40 million-- $41 million-$42 million, realized.

So if fuel stays around here, then that should not be there in 2010?

That's a fair assumption.

Okay, great. Alright, thank you.

(Operator Instructions). We'll go next to Nick Sebrell with Morgan Stanley. Please go ahead, sir.

Hi Pedro, Victor and Joe. A quick question on the competitive environment; I know you said during your comments that you didn't see any problems with Avianca and TACA in the past. Have you seen any behavior change by either airline or have you heard anything or do you foresee anything regarding looking forward, particularly in Colombia? That's part one.

And then part two; just if you could mention briefly whether the or how the Tocumen Airport expansion changes your plans; do you foresee a step up; like a prompt step up in your capacity as those new gates get added or is just a smooth transition?

Okay, thank you Nick; it's Pedro. The Avianca-TACA merger was not a surprise to us. We knew they had to do something and we're expecting something like what happened. In the short to medium term, we don't see significant changes in for example, in the number of new aircraft they have ordered and they're going to receive. So their capacity is not going to be much different; actually, we're expecting it to be the same; their capacity expansion, as we were projecting before when they were individual carriers. And they'll do coach sharing, they'll join their frequent-flier programs; but we don't see significant changes in the competitive environment we're facing; and that's short to medium term.

What they'll do longer term? It's hard to tell right now. But as mentioned before, we're very confident in the strength of our business model. And we feel that it will remain strong and successful going forward.

Okay, just as a short add-on; do you think there's any possibility for them to take capacity out? I mean often when you see coach sharing, you see consolidation of capacity.

That would in theory be a good thing, but I don't think they overlap that much, so I'm not sure. There may be a little of that, but maybe not a lot. There's very little overlap between the two airlines.

In terms of Tocumen; the expansion is going to expand from 22 to twelve gates; and in our case it's going to be a smooth transition. What we'll see at first is a lot of aircraft that we currently have to park in remote positions, are going to have jetways available. So it's going to be pretty much a smooth transition, but we expect to keep on growing at a nice pace and to keep on adding aircraft. And an expanded Tocumen, with capacity way above what other regional competing airports offer, it's a great advantage to us.

And just to add on to that; so at the end, Tocumen is going end of up with 34 gates; so it went up from 22, we're adding 12; we're going to go up to 34 which is significant additional capacity and more capacity than the competing hubs today and even what they're forecasting in the near or even longer future. So we have an edge there, too.

Excellent. Thank you.

We'll go next to [Kio Diaz] with Santander. Please go ahead.

Good morning, gentlemen. My question is regarding the advantage we will have in Brazil soon; the World Cup and the Olympics; is Copa preparing a special plan in order to take advantage of the demand for flights to Brazil during this period?

And also regarding 2010; because similarly to Panama, Brazil should have a strong year in terms of economic activity; are you planning to accelerate CapEx expansion in the routes to Brazil?

No, I would expect us to do a little bit more. We currently fly to four cities in Brazil. And we see obviously great opportunities. But the way that we've done things in the past is that we don't go crazy over any one market and we don't bet all of our chips on one event. So we try to diversify what we do and we have a methodic approach to how we grow. So we're going to do more in Brazil for sure, but we are not going to go crazy.

Okay. And recently I have perceived a trend here in Brazil; many people are taking Copa flights to fly actually to the U.S., connecting in Panama. Are you adopting any different strategy in terms of pricing in order to compete against the Brazilian airlines and the U.S. carriers in order to gain market share in flights from Brazil or South America to the U.S.?

Not really. I mean there might be times when a given market is slow; it has space for different reasons and we may want to stimulate traffic between two given city (inaudible). But our focus in Brazil is connecting Brazil with Panama, Central America and the Caribbean is where we have a unique strength. Brazil to the U.S. is not something we really want to focus on long term. There is non-stop service. There are other carriers that can better serve those markets.

So going forward, we're going to focus more on Brazil to Central America and the Caribbean.

Okay. Thank you and congratulations for the quarter.

And we'll go next to Nick Sebrell with Morgan Stanley. Please go ahead.

Hey, just a quick follow up; in regards to the number of hours-- block hours per jet right now; correct me if I'm wrong, but it's somewhere between nine and ten; is that right?

It's ten and a half I think.

So a little higher. But of course we often see airlines that have higher; particularly in Brazil, have higher block hour counts per plane. Is there any plan in the future to maybe look at the pushing up utilization per jet or is that-- or because of the way your network works or something is that really not feasible?

This is Pedro, here. What drives-- I guess the main factor that drives our utilization is our network and it's the hub connections in Panama. So we're always willing to sacrifice utilization in exchange for having better connectivity in Panama. Having said that, we always look for opportunities and we feel that we do pretty well in terms of how many hours we get per day, even though we operate under a strict hub structure.

In the future there will be opportunity, as we add longer haul flights or as we grow more to longer hauls; that improves utilization. And we also have the opportunity of more fleet interchange with Aero Republica which we have started doing this year. We're doing fleet-ex and interchange with the Embraers which was an agreement that took over a year to negotiate between Colombia and Panama; it's now in place. And as we extend that to other fleet types, there will opportunities to improve on that number.

Okay, that's interesting. Thank you.

And that does conclude our question-and-answer session. Mr. Heilbron, I'll turn the conference back over to you for any additional or closing comments.

Okay. Thank you. I guess this concludes our third quarter earnings call. I want to thank you all for being with us and thank you for your continued support. Have a great day and we'll see you next time.

Again, that does conclude today's conference call. Thank you for your participation.