Copa Holdings SA (CPA) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Copa Holdings' first quarter 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 on May 14th, 2013.

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 first quarter earnings call. Joining us today are Pedro Heilbron, CEO of Copa Holdings, and Jose Montero, our Chief Financial Officer. First, Pedro will start with our first quarter highlights followed by Jose, who will discuss our financial results. Immediately after we'll open up the call for questions.

Copa Holdings first quarter results have been prepared in accordance with international financial reporting standards. In today's call we will discuss non-IFRS financial measures. A reconciliation of the non-IFRS to IFRS financial measures can be found in our first quarter earnings release, which has been posted on the Company's Website, Copa.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 our CEO, Pedro Heilbron.

Thank you, Joe. Good morning to all, and thank you for participating in our first quarter earnings call.

I first want to congratulate all of my coworkers for another outstanding quarter. As you can see from our first quarter earnings release, we're off to a great start for the year.

Among our main highlights, available seat miles increased almost 20% year-over-year. Passenger traffic grew very much in line with capacity as a result of strong demand trends throughout most of our network.

This resulted in a healthy revenue environment, as yields and unit revenues, RASM, came in higher on a quarter-over-quarter basis. Additionally, although lower year-over-year when adjusting for length of haul, RASM was actually up for the quarter.

On top of this very healthy revenue performance, we were also able to reduce our ex-fuel unit costs and are on track to meet our cost target for the year. As a result, we delivered an operating margin of 22.2%, representing a year-over-year and quarter-over-quarter margin expansion and undoubtedly one of the best operating margins in the airline industry.

On top of these outstanding financial results, we also continued delivering a world-class product, with on-time performance for the quarter coming in above 90% and among the best in the industry.

Our first quarter performance looks even more impressive when we consider that in the last 24 months we have grown capacity by approximately 50% and added 14 new destinations to our network.

For this year, we expect another year of double-digit capacity expansion, but more moderate than in 2011 and 2012 when we accelerated growth to transition our hub in Panama from four to six connecting banks. So, this year's 14% growth is more in line with our historical growth levels.

In addition, the capacity we're adding this year will be more focused on additional frequencies rather than new destinations, which is in a sense easier growth, as these are markets that we know are performing well where we have more visibility of the demand trends and where we already have the people and infrastructure in place.

As we announced early in the year, our expansion planned for the first half of 2013 includes one new destination, Boston, our eighth destination in the US. With this new destination, Copa Airlines will provide service to 65 cities in North, Central, South America, and the Caribbean.

We're very optimistic about adding a daily flight to Boston, which will offer very convenient schedules and be the only direct flight to Panama and Latin America with convenient connections to other important cities in Central America and South America. In fact, early booking data suggests that the flight will be another successful and important addition to our network.

In addition to Boston, we will also be increasing several frequencies. We will add a sixth daily frequency to Medellin. Orlando and Punta Cana go from three to four daily flights, and we will expand our flight to Port of Spain from daily to twice daily.

I am also pleased to mention that work has already started on the Tocumen Airport south terminal expansion, which will add another 20 jet bridges to our connecting center in the next three to four years. This project will keep Tocumen Airport at the forefront of regional airport capacity and ensure that our hub has the necessary infrastructure to accommodate our future needs.

Over the years, our growth and connectivity have undoubtedly contributed to Panama's prosperity through job creation and enabling Panama to consolidate itself as a regional business and logistics center as well as a growing tourism destination.

We are pleased that this and previous governments have recognized the connectivity we provide as one of Panama's unique competitive advantages and have decided to make the necessary investments for continued growth in the aviation sector.

Turning to the economic environment, we expect another year of healthy growth for our regions, with GDP for Latin America expected to expand between 3% and 4% with countries such as Panama, Peru, and Chile leading the growth forecast. In fact, this year Panama is again expected to be the fastest growing economy in Latin America, with GDP forecasted to expand 9%.

Panama's economy continues to be supported by large public infrastructure projects, such as the Panama Canal expansion, improved roads, and a new metro system, a healthy and growing financial sector, as well as very strong domestic demand which is being supported by a growing middle class, an expanding tourism industry, and a large influx of multinational corporations who are establishing their regional headquarters in Panama.

As you can see from our recently released April traffic figures where international traffic grew 19%, the continued strength in our regional economies and Panama in particular is having a positive impact on the demand for our services, which gives us confidence in the long term growth prospects of our business as we continue to expand and strengthen our network.

To summarize, we are very pleased by our first quarter results, and our team continues to deliver world-class operational performance. The regional economic environment remains strong, which is evident in the strong demand trends we are seeing. And we look forward to another year of healthy growth and industry leading results.

Now I would like to turn the call over to Jose Montero, who as you know assumed the CFO position after Victor Vial's retirement last month. Jose has been with us at Copa for the last 20 years, the last nine as head of planning. The Board and I are very confident in Jose's leadership, knowledge, and ability to lead the finance organization.

Thank you. Now Jose will go over our first quarter results.

Thank you, Pedro, and good morning, everyone. Thanks for joining us.

As you know, this is my first earnings call as CFO of the Company, and I would like to take this opportunity to thank Pedro, our Board of Directors, and my coworkers for supporting me throughout my 20 year career here at Copa.

I also want to congratulate our entire team for their efforts. We had a very strong first quarter and we're off to a great start for the year as we expanded capacity and revenues by almost 20%, were able to maintain very competitive unit costs, and continued strengthening our competitive position as well as the financial position of the Company.

In terms of financial results, net earnings for the quarter came in at $113.8 million and earnings per share at $2.56, compared to last year's first quarter net income of $95.9 million or earnings per share of $2.16.

However, excluding a fuel hedge mark-to-market gain of $3.4 million and a $13.9 million charge related to the devaluation of the Venezuelan currency back in February, underlying net income for the quarter came in at $124.4 million, or earnings per share of $2.80, close to a 40% year-over-year increase compared to last year's first quarter underlying net income of $90.6 million or adjusted earnings per share of $2.04.

With respect to traffic, we continue to see strong demand for air travel throughout our network, as revenue passenger miles increased 19.5% year-over-year on a slightly higher capacity expansion.

As a result, we delivered a very healthy load factor for the quarter. Strong demand allowed us to improve our yields and RASM quarter-over-quarter.

On a year-over-year basis, we saw a small decline in yields and RASM of 0.8% and 1.5% respectively. However, adjusting for a 6.3% increase in length of haul, yields increased 1.5% and RASM increased 2.2%.

Operating revenues for the quarter came in at $641 million, or an 18% year-over-year increase on 20% capacity growth, very strong revenue performance especially in light of the fact that during the course of the last two years we've added 14 new destinations to our network.

On the expense side, we also had very solid performance. First quarter operating expenses increased 16% year-over-year. Cost per available seat miles increased close to 4%. CASM excluding fuel came in at $0.065, representing an almost 5% year-over-year decline.

This is a strong improvement over fourth quarter, but keep in mind it is also early in the year and there are some timing considerations which will impact some of the cost lines later in the year. Additionally, as was discussed in our previous earnings call, our fourth quarter ex-fuel CASM was affected by some one-off items.

Moving on to operating earnings, as a result of lower unit costs, consolidated operating earnings for the quarter came in at $142 million, or a 28% year-over-year increase. This translates to an operating margin of 22.2%, almost two points higher year-over-year.

In terms of non-operating income and expense, first quarter results reflect a net non-operating expense of approximately $14.2 million, consisting mainly of a net interest expense of $5 million and other net non-operating expense of $9.2 million which includes the $3.4 million fuel hedge mark-to-market gain and $13.9 million charge related to the devaluation in Venezuela.

With respect to fuel hedges, we ended the first quarter with hedges for 32% of the projected volume for the year, using crude oil and jet fuel swaps at an average equivalent price of $89.00 a barrel. In addition, for 2014 we had approximately 12% coverage at similar prices and using the same instruments.

However, we have increased our hedging activity in the last three weeks, so we now have increased our hedges to 16% of our projected volume for 2014 and we have added hedge positions for 10% of 2015's projected volume.

Turning to our balance sheet, we continued to strengthen the Company's position. Cash and cash equivalents at the end of the quarter totaled $732 million, which represents 31% of the last 12 months' revenues. We also maintain a very favorable position in terms of leverage with a total debt to equity ratio of 0.7 times.

In terms of debt, we closed the quarter with approximately $1.2 billion in bank debt, approximately half of which is fixed rate debt with a blended rate between fixed and floating rate debt coming in at 2.5%.

Additionally, we have already secured our financing needs for 2013 through the sale-leaseback of four 737-800s which were direct orders from Boeing.

In terms of fleet, during the quarter we received two of our seven scheduled aircraft deliveries, which are all Boeing 737-800s. So, we ended the quarter with a fleet of 85 aircraft, 41 737-800s, 18 737-700s, and 26 Embraer 190s.

Turning to our future aircraft deliveries, during the remainder of the year there are five scheduled, one in the second quarter, which was already delivered in April, three in the third quarter and one in the fourth quarter. We will end the year with a fleet of 90 aircraft with an average age of approximately five years.

Please keep in mind that all these aircraft deliveries will be operating leases. As you can see, we're making the necessary investments to sustain our growth, maintain our product appeal, and the overall efficiency of our fleet.

So, to recap, we had another quarter of very strong capacity and revenue growth. Our financial position continues to strengthen, and we're well positioned for what should be another year of strong earnings.

In terms of our guidance for 2013, given our performance during the first quarter, the economic outlook in the region, and current demand trends, we're updating our guidance as follows.

We're maintaining our capacity growth in terms of ASMs at approximately 14%. Load factor is expected to come in at plus or minus 76%. We are updating our RASM guidance to approximately $0.136 cents.

We're maintaining our CASM ex-fuel guidance at plus or minus $0.066. We are adjusting our fuel price assumption for the year for an effective price per gallon including into plane and net of hedges of approximately $3.20.

And with respect to our operating margin, we continue to expect another strong year with operating margins in the range of 19% to 21%.

Before turning the call over to Pedro, I would like to assure all our shareholders I am committed to continue taking the Company down a path of efficiency and continuous improvement, as has been done up to now.

Thank you. And with that I'll turn it over to Pedro for closing remarks.

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

(Operator instructions.) Michael Linenberg from Deutsche Bank.

Hey, good morning, gentlemen. I had a couple questions. Jose, in the press release, when you highlight your unit cost performance, there's a mention of the timing of certain expenses that impacted it in the quarter. And when I look through the press release, it looks like that the advertising expense was a little bit lower. Is that the only timing event, or are there other expenses where timing had some impact?

Hello, Mike. I hope you're doing well. And we -- there are always some timing expenses associated kind of with issues in the first quarter. Advertising is one of them, and there are some IT projects that will be initiated later in the year. And as you know, there are some other cost items that will increase throughout the year.

Okay, very good. My second question has to do with your comment about all of the aircraft coming in on operating leases. When I look at where your profitability is and where it seems to be headed and I look at some of the potential terms in the marketplace, would it make more sense to put those airplanes on balance sheet, or is this more of a move to maintain a balance between lease versus owned?

Can you just talk about why you're pursuing operating leases on all of the airplanes that are coming in for the rest of the year? What's underlying that? What's driving that?

Well, Mike, we always want to keep a balance between our aircraft, our owned aircraft and our leased aircraft. And so, we thought, given our current composition of the fleet, that -- and this year we wanted to maintain these airplanes as leases, so just essentially said it's an issue of flexibility in the fleet.

Okay, great. And just if I can squeeze in one last one, when you look at where your capacity growth is and you look at the increase in revenues or passenger revenues, there's a strong -- they're sort of running in tandem. But, when I look at your cargo, other, and mail, that is up only about 7%.

It is a bit less, and I'm just -- I'm curious. Is that a function of the fact that, as you fly much longer haul, you can't carry as much cargo because of the weight penalty? I mean, why is that lagging the passenger revenue growth at such a big difference?

Yes, you're right, it's associated with the fact that we are running high load factors and that we do have a portion of our network that essentially carries passenger bags more than cargo. And so, that's kind of the reason.

Okay, very good. Great quarter. Thank you.

Duane Pfennigwerth from Evercore Partners.

Hey, good morning.

Good morning, Duane.

What was an earlier Easter worth to the March quarter, and how should we think about that impact into June?

Well, yes, Easter did come in in the first quarter, actually in the very end of the quarter. The second quarter is usually a low season quarter, so we do see essentially that this year it would be no different in that way. I mean, there is some impact, but it was not necessarily material to what we see in Q2.

Okay. And then, can you just let us know what you're assuming for jet fuel, I guess before the impact of your hedge and taxes? It feels like your guidance is actually a bit above the current futures curve.

Yes, I'll take that one, Duane. This is Pedro. It's very early in the year. Fuel is very volatile, as we all know. And we could have gone with the curve, but we've seen that the curve hasn't worked that well in the past, plus also not every country where we operate goes exactly with the fuel curve or the spot price.

So, that's our best estimate of where we think fuel is going to be for the rest of the year. And by the way, we're also averaging in what has already happened in the first quarter. So, we were taking that into account also. So, that's kind of our best estimate, but who knows.

Okay, that's great. And I'll sneak one last one in here. On your -- and we appreciate that conservatism, by the way. On your RASM guidance, you indicated flat versus I think up about 1% previously, yet your revenue trends accelerated from the fourth quarter into the first quarter when you last gave, I guess, higher revenue guidance for the year.

So, my question is, is that based on something you can see today, or is it an assumption based on the historical relationship between fuel and revenue? Thanks for taking the questions.

This is Pedro again. I think it's a combination. I mean, it's partly what we expect given a lower fuel guidance. And we've seen how fuel and yields have correlated in the past.

But also, yes, we are seeing yields, some staying kind of flattish to slightly down. That's what we're seeing. So, with fuel coming down, we're not expecting much -- a strengthening there.

Okay. Thank you.

Eduardo Couto from Morgan Stanley.

Hi. Good morning, Pedro, Jose, and Joe. I have a question on dividends. If I'm not wrong, I think you guys had a shareholders' meeting last week. Just want to know if there is any news in terms of dividend payment, if we can still expect around 30% payout for the middle of the year, and maybe something extraordinary towards the year end. So, just a current view on dividend payment.

Hi, Eduardo. So, our dividend policy is up to 30% of net income paid as dividend. And our dividend for 2013 was paid ahead of time in December of 2012, as you know. So, our dividend for this year has already been paid.

The Board would have to approve an extraordinary dividend or a change of policy, which has not yet happened. So, that has not happened.

But, as we have said before, if our cash levels go way above what the Company needs, we're sure our Board will make the right decision. They won't let us just stay with more cash than what's needed. But, there is -- nothing has been decided yet.

But, do you have an idea of timing for a decision on that, Pedro?

I would be speculating if I told you about timing right now, because it has not been discussed. But, I think our cash levels right now, even though are on the high end of where we want to be or where we've been in the past, they're still within range of where we've been in recent years.

But, again, as we go above that level, I'm sure a decision will be made by the Board. That has not happened yet, and a decision has not been made.

Okay, thanks.

Hunter Keay from Wolfe Research.

Hi. This is actually Jared Shojaian in for Hunter. Good morning, everyone. So, just to follow up on that commentary on cash deployment, if I look, it looks like your share count came down slightly sequentially from fourth quarter. Did you guys buy back any stock? And can you just remind us if you have an existing authorization in place?

No, we do not have any authorization in place, and we did not buy any stock. If it came down, and I don't have the numbers in front of me, it must have been by an immaterial amount.

Okay, thanks. Yes, it was small. Just wondering if you guys had started something towards the end of the quarter, or if it was maybe a change in strategy. Okay.

So, as far as like excess cash, what metrics do you look at? Is it a cash to LTM revenue? Is it cash to an air traffic liability metric? Because if I look at your balance sheet, you now have $733 million in cash, only $785 million in short term liabilities, of which $369 million is the air traffic liability. So, I'm just trying to figure out why you need so much cash and exactly how you think about that going forward. Thanks, guys.

So, first I should say that in the world we live in, there is probably not such thing as excess cash. But, we obviously have cash needs, and that has a limit.

So, we look at how fast we're growing. We look at our CapEx ahead of us. And we try to keep a conservative balance, which in the past has been around 30% of last 12 months' revenues. It's kind of where we like to be and where we've been in the past.

So, as we go above that number, and again considering our future growth trends and CapEx needs, there might be more than what we need to accomplish what I just said. So, I am sure the Board will take a look at that. No decision has been made yet.

Okay, great. Thanks for the time, guys.

Jim Parker from Raymond James.

Good morning to all. Pedro, perhaps an update on the Canal expansion status. And probably more important than all of that is, what happens to a lot of those people that are being employed in the Canal once we get to the end of the expansion, and how are they absorbed in the local economy?

Okay. The story's very good. The Canal was supposed to be done by the end of 2014. But, apparently it's slightly delayed so now they're talking of mid 2015.

And the interesting thing with the Canal expansion is that, although it generates some employment, the real story starts once the expansion opens for business, because a lot more revenues are going to come into the economy and into Panama. And that's going to be an additional boost to an already strong and growing economy. So, actually it's going to be better when it opens.

In terms of the employment, I don't remember the exact number, but it's not a significant number. And the economy of Panama has basically full employment. So, the economy in general needs those people to come back into the economy, plus there are other major projects going on including a large mining operation that will need a lot of employment that the country cannot provide right now.

Tourism is growing. Real estate remains strong. So, I see no problem in the workforce from the Canal expansion coming back into the rest of the economy. Actually, it's something that will be welcome.

Good. Okay. A question for Jose. Jose, would you explain the other net, the other non-operating? If you break out the mark-to-market gain on fuel hedges and the Venezuelan loss write-down, looks like there are some pretty substantial year to year changes. Can you shed a little bit of light on the sources of those changes?

Well, just to tell you a little bit about Venezuela, we have -- we declared a loss associated with the amount of -- the funds that were -- in a sense had not been presented to the Venezuelan authority for repatriation, because the Venezuelan authorities, essentially they've been honoring their exchange rate at the -- that had been valid at the time of presentation of the documentation. So, that's the one -- the $13 million loss that we declared.

And with respect then to hedges, we essentially have -- some hedges have come into -- in the money. Specifically we've seen -- we had some hedges in crude that were in the money for the first quarter. So, that's essentially what occurred.

What has come down, especially now in the first part of the second quarter, has been the crack spread more than the crude. So, we were able to gain on the hedges that we had for the first quarter.

Yes. Jose, if you break those two items down, if you exclude them, looks like your non-op income expense was an expense item of $2.2 million this year versus $7 million a year ago. So, I'd like to know --.

Yes, I think the rest is interest. And it's essentially the change of interest year-over-year, interest expense and the netting out of interest expense and net interest income.

Okay. All right. Thank you.

(Operator instructions.) Steve Trent from Citi.

Hi. Good morning, gentlemen. Just one question for me. Just taking a look at your fuel hedge positions, and you hit on this a little bit, but for the remainder of 2013, you're sort of hedging around 33% some-odd percent on average, which seems to be above what you've done historically.

And I'm wondering what's the sort of driver of that, as well as the driver of hedging 10% of 2015. Is this something that you're seeing in the development of the new routes that you've launched versus the lower density traditional routes? Anything in the -- that you're seeing in the tea leaves that's leading you to take higher hedge positions?

Hi, Steve. So, we're not modifying our hedge policy. We're actually within the range of our policy. However, as I mentioned before, given the recent drop in fuel and especially in the jet fuel crack spread, we've taken some discretionary positions in jet fuel for this year and for the next two years.

So, that's essentially what it is. We're not modifying our policy for now, but we're just taking advantage of these opportunities as they come.

So, you saw an opportunity on the pricing side as opposed to some shift in terms of the economics on the new routes?

Yes. Yes.

Okay, very clear. Let me leave it at that. Thanks very much, guys.

Thank you.

Bob McAdoo from Imperial Capital.

Thank you very much. Just could you give us a little bit of insight as to what the fleet deliveries might be in '14 and, in round numbers, what that might turn into in terms of capacity? Obviously a piece of it's going to be the '14 impact of things put in during '13, but just in round numbers what those things might look like.

So, Bob, this is Pedro. We have eight 737-800s delivered -- that will be delivered in 2014. We also have four 737-700 leases expiring. And we have not made a final decision in terms of how many of those leases will we retain, all, some, none, etc.

So, that's still up for analysis here in the Company. So, we could grow with as many as eight aircraft, or less if we return some of those 700 leases.

In terms of ASM percentage, it's going to be in the high single digits or low double digits.

Good. That gives me kind of round numbers where I'm looking for it. Thanks a lot.

Pablo Abraham from BBVA.

Hello. Good morning. Congratulations for the quarter, very impressive results. I have two questions left. The first one is if you could give a small color of the current proportion of the fleet in terms of how many airplanes you have -- are leased and how many are owned.

And the second question is, well, regarding if you are expecting a significant impact in the operation next summer, especially, well, because the FIFA World Cup is in Brazil and you are flying to six cities that will host matches. Thank you very much.

Yes. So, right now 69% of our fleet, a total of 59 aircraft, are owned. And 31%, or 26 aircraft of a total of 85, are leased. So, that's kind of the makeup of leased versus owned that we have.

In terms of the summer, we actually fly to seven -- the seven cities that we fly in Brazil are World Cup host cities. And we -- it's still in the middle of our high season, so we -- and our high season, in Brazil especially, always has a lot of traffic.

So, we expect it to be a good impact to us, but it's not necessarily it would be any different or too different from what we already have seen in previous years, because of the fact that the World Cup essentially is just a contained event for one month. But, as I say, we do expect it to be a good summer next year.

Pablo, this is Pedro. Except for one thing that could happen. If Panama makes it, then that's another story (laughter).

Bianca Faiwichow.

All right. Good morning. I'd just like to listen to your view on competition for the next few years, especially coming from Avianca-TACA and LATAM. Do you think there is enough space for the three companies, and also when we consider the American airlines in the next five years more or less? Thank you.

Okay. We face strong competitors who have consolidated and are building their own operations, their own hubs. But, when we think of the -- of what Latin America is today, it's a growing region, a fast growing region with a growing middle class.

I think there's plenty of space for three or four major airlines, so we have no problem with what's going on. And we have smart, rational competitors also. So, each airline is doing what makes sense for itself and, again, in a growing, stronger region.

So, we're okay with what we're seeing. We're not seeing anything that's out of the ordinary, that's irrational, or that would affect our plans in a material way.

Okay, thank you. And also, regarding the extension of the Tocumen Airport, should we see you adding capacity as in 2011 and 2012 that's at around 20% when the expansion is ready, or should we expect something around low double-digit growth? Thank you.

Right. So, before 2011 and 2012, our growth was averaging somewhere between 10% and 14%, in that range. We accelerated growth in 2011 and 2012 to take advantage of opportunities that were out there and to strengthen our transition from four to six connecting banks.

What we've said is in the coming years, our growth will be more in line with what used to be before, again 2011. So, that's what we should see going forward, growth in that 10% neighborhood.

Okay, perfect. Thank you.

Okay.

Thank you. I am not showing any further questions at this time. I would like to turn the call back over to CEO Pedro Heilbron for closing remarks.

Okay. Thank you all. This concludes our first quarter earnings call. Thank you for being with us, and thank you for your continued support. We will see you next time. Have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone have a great day.