Copa Holdings, S.A.
Q4 2012 Earnings Call Transcript

Published: 7 Feb 2013

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to Copa Holdings Fourth Quarter and Full Year Earnings Call. [Operator Instructions] As a reminder, this call is being webcast and recorded on February 7, 2013. Now I will turn the conference call over to Joe Putaturo, Director of Investor Relations. Sir, you may begin.

[Joseph Putaturo:]

Thank you very much, operator, and welcome, everyone, to our fourth quarter earnings call. Joining us today are Pedro Heilbron, CEO of Copa Holdings; and Victor Vial, our Chief Financial Officer. First, Pedro will start with our fourth quarter and full year highlights, followed by Victor, who will discuss our financial results. Immediately after, we'll open up the call for questions from analysts. Copa Holdings' fourth quarter financial results have been prepared in accordance with International Financial Reporting Standards. In today's call, we'll discuss non-IFRS financial measures. A reconciliation of the non-IFRS to IFRS financial measures can be found in our fourth 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/or intentions regarding future events and results. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially and are based on assumptions that are subject to change. Many of these risks and uncertainties are discussed in our annual report filed with the SEC. Now I'd like to turn the call over to our CEO, Pedro Heilbron.

[Pedro Heilbron:]

Thank you, Joe. Good morning to all. Thank you for participating in our fourth quarter and full year 2012 earnings call. I'd like to start by congratulating our coworkers for their efforts in delivering another solid quarter and a great year. Our team began 2012 with an ambitious set of goals and objectives aimed at further consolidating our hub as the best option for intra-Latin American travel and improving the appeal of our product and our passengers' travel experience, all while delivering world-class financial results. I'm happy to inform that with the commitment and support of a world-class team, our objectives were once again accomplished. Among our main highlights for 2012, we were able to deliver another year of very strong growth with consolidated capacity increasing 24% and traffic not far behind, growing nearly 23%. We continue to strengthen our network by adding 5 new cities this past June

[Victor Vial:]

Thank you, Pedro, and good morning, everyone. Thanks again for joining us. First and foremost, as always, let me begin by joining Pedro in congratulating the entire team for another strong year. Last year, we added 10 new 737-800s to our fleet, grew ASMs by more than 24%, added 5 new destinations to our network in addition to frequencies in several cities, increased revenue by almost 23% and further strengthened our balance sheet to continue funding our growth. On that, really these results would have been impossible to achieve without the hard work and dedication of the whole team at Copa Airlines. So to each and every one of them, thank you, and again, congratulations on a job well done. Today, we're reporting $326.5 million in net income for full year 2012, which translates to an EPS of $7.35 and an operating margin of 17.9%. Excluding a $9.6 million fuel hedge mark-to-market loss for the year, underlying net income came in at $336.1 million or EPS of $7.57 compared to an EPS of $7.06 last year. With respect to the fourth quarter, we had another quarter of strong growth with capacity in terms of ASMs increasing close to 22% year-over-year, as we continue strengthening our Hub of the Americas in Panama City. We continue to see strong demand for air travel in the fourth quarter, as revenue passenger miles increased almost 24% year-over-year, resulting in a consolidated load factor of 75.7%, almost a full percentage point increase over Q4 '11 despite significant capacity expansion. On the other hand, passenger yield came in 4% lower than last year, resulting in revenue growth of approximately 18% year-over-year to $600 million. On the expense side, fourth quarter operating expenses increased 25% year-over-year, and our cost per available seat mile increased close to 2%. However, our ex-fuel CASM decreased approximately 1% year-over-year to $0.068, mainly as a result of unit cost improvements in labor, maintenance and distribution costs, which were partly offset by higher unit costs related to passenger services and general administrative expenses. In terms of operating earnings, consolidated operating earnings for the fourth quarter came in at $104.3 million compared to $111.5 million in Q4 '11, with our operating margin coming in at 17.4%. Looking at non-operating income and expense, fourth quarter generated a net non-operating expense of $7.4 million, mainly consisting of a net interest expense of $4.7 million and a $2.7 million fuel hedge mark-to-market loss. With respect to fuel hedges within accordance with our hedge policy, we firmly have in place the following coverage

[Pedro Heilbron:]

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

[Operator:]

[Operator Instructions] The first question will come from Stephen Trent of Citi.

[Stephen Trent:]

If I may ask, Victor, if you don't mind, just a little bit of color as to what motivated this move away from the CFO position?

[Victor Vial:]

Sure. Thanks for asking that, Steve. I think that's a great a way to start, so we can get that out of the way. If you look at it, I've been with the company 17 years. The first 5, I was Head of Planning. The last 12 years, as CFO. The last 7, a CFO of a public company. And I'll tell you it's been a great experience, very exciting but also quite grueling at times. On the other hand, the company has never been in better shape. As Pedro mentioned earlier, financially speaking, every financial ratio we have only grown stronger in the past 5 years operationally. All of the metrics, the operational metrics we have, running a great company, and competitively speaking, we're in a better position also. So I couldn't think of a better time to move on. And I'm also looking forward to investing more time in my personal affairs, my personal business. And probably last but not least, maybe I'll have some time to play more golf, and I can bring my game up to the level of Jim Parker.

[Stephen Trent:]

Well, fair enough, Victor, and certainly no argument that the carrier has done extremely well under your tenure.

[Operator:]

The next question will be from Michael Linenberg of Deutsche Bank.

[Michael Linenberg:]

On just, I guess, a few quick ones, and Victor, you're going to be missed. And I guess in that regard, I'll give you the first question. Just recently, I've noticed you've been a bit more active it seems like on the sale-leaseback front, and I'm just wondering how the financing market looks. I mean, I know in the past, I believe you were one of the carriers that took advantage of export credit financing, and since starting in January, we know that the costs have moved up. How much have they moved up? Have they moved up to the extent that you're going to look at other alternatives in financing the fleet going forward? I.e., should we see more sale-leaseback-type transactions, et cetera?

[Victor Vial:]

Okay, yes. Yes, the prices have moved up since the new ASU aircraft sector understanding took effect. So now when you do the NPV, NPV analysis of leasing versus buying with [indiscernible] guarantees, obviously, the difference is a lot less. I think [indiscernible] bank financing is still very attractive, but when we looked at our fleet mix also, the fact that we were so heavy on loaned aircraft and then took into accounting the higher price, though still competitive or rates in financing, we arrived at a conclusion that it's not a bad idea to mix it up a little more and have more operating leases, which gives you, as you know, flexibility in your fleet plan, as it allows you to return aircraft when the lease expires or extend the lease and then manage your capacity with some flexibility. So you could expect you might be more sale-leaseback going forward. The mix now owned versus lease is now about 65%, 70% owned and 30% operating leases. We want to see that closer to 60% owned, 40% operating leases.

[Michael Linenberg:]

Victor, are you -- the prices that you're getting on these sale-leasebacks, are we going to see you -- like how is that going to run through the P&L? Is that -- are we going to see you take gains that you'll then just amortize over the life of the lease? Or -- and I'm presuming you are taking gains on these sale-leasebacks given -- when you bought these airplanes? Is that -- I guess maybe I should start, is that safe? Is that a safe assumption?

[Victor Vial:]

Well, it won't be anything material, Mike, because at the end of the day -- you take the gain, at the end of the day, you're going to be paying it back on lease rate. So no, anything that you will see, it won't be much to move the needle on the P&L.

[Michael Linenberg:]

Okay, good. And then just sort of as -- on a second question, when we look at capacity growth for the year, how is that trending through the year? Do we start high and then it trends down by the time we get to the fourth quarter? Can you give us just some additional color on that?

[Victor Vial:]

Yes, absolutely, yes. And as we mentioned in our guidance, we're expecting to grow 14% in terms of ASMs. Well, yes, the first half of the year will be somewhere around 17% to 18%. In the second half of the year, you'll see lower growth on a year-over-year basis. We'll be more like in the range of 11%.

[Operator:]

The next question comes from Duane Pfennigwerth of Evercore Partners.

[Duane Pfennigwerth:]

First, I want to say good luck to you, Victor. Anyway, with respect to unit revenue growth, I just wanted to ask you a general question. How much does that depend upon the price of fuel? I mean, if fuel is flat or even down, does that change at all the rationality you see from your competitors?

[Victor Vial:]

Well, what we see in the past, Duane, is a very close correlation between fuel prices and fares. Probably the reason being is that we operate in a region of the world where a lot of these economies actually prosper if the commodity prices are clanked, which allows you then to raise fares. So I would expect this year to be not too different from that. That is fuel prices head up, we'll keep raising fares and fuel surcharges to compensate. We've been very successful in the past at doing that and I think we'll be successful going forward. And there is no fundamental change in that equation. So yes, fuel price is up, we'll raise fares and surcharges.

[Duane Pfennigwerth:]

Okay. And then just second question, regarding the dividend you paid in 4Q, should investors view that as an early dividend or a special dividend?

[Victor Vial:]

It was announced, reported as an early payment of the dividend we would have paid in June. Having said that, Duane, that doesn't mean that come May when we meet with the board that we will not be reviewing the cash situation, how the company's performing. And I think we've shown, in the past, that we're not reluctant at all to return value to shareholders. I mean, we've increased our dividend policy from 10% to 20% then to 30%. And then in December, we made an exception and we paid early dividends for the sake of our shareholders. So we'll look at it in May again.

[Operator:]

The next question is from Hunter Keay of Wolfe Trahan.

[Hunter K. Keay:]

Victor, congratulations, and a couple of questions for you. On the CASM x fuel, you guys reiterated your full year guidance in November obviously, and you came in above it on a full year basis. So I'm wondering, were there any costs that were pulled forward into the fourth quarter from early next year?

[Victor Vial:]

That we've pulled forward into the fourth quarter? Not really. No, there's nothing that I can think of, no.

[Pedro Heilbron:]

This is Pedro, Hunter. What did happen is there were some costs in the fourth quarter that were not expected. Some were timing, and some were just a -- I don't want to call them inefficiencies but areas of opportunity. So some were costs that we do not expect to have in the future if we do things well. So that's also part of the answer.

[Hunter K. Keay:]

Appreciate it. And I guess as you talked about adding frequencies to routes that you already have going and going well with high demand, your system load factor is 75%, which is good, but it's not great for a hub-and-spoke carrier. So I'm wondering, I guess, how high can you get loads? And what are the load factors on the routes that you're adding frequencies to? Are they above the system average? And if so, by how much?

[Pedro Heilbron:]

Yes, well, it's a good question and a tricky answer because you get to an average load factor by averaging out some flights that might be operating at 90-plus percent load factors and some that are traditionally low-load-factor route. But some of our low-load-factor routes have very high yields and return a very healthy profit. So we cannot look only at load factors. We usually manage unit revenues, manage RASM, look at yields and loads and make our decisions based on that. But yes, usually the flights where we're going to be adding frequencies have load factors that are going to be about 85% on average. That would be norm.

[Victor Vial:]

And if I could just add to that, if you look at our business model for the past 5, 6 years and you look at our average load factor, it's pretty much in that range, 75%, 76%. And as I've said before in earlier calls, we really don't focus only on load factor. We're looking at the RASM of the company and especially given the fact that our break-even load factor is 61%. So we can -- we have a RASM premium because we have healthy fares. We prefer to move less passengers because there's a cost to moving each passenger, and we don't have to get to 80% like other airlines to break even.

[Hunter K. Keay:]

Okay, great. That's helpful. And I guess just maybe one more quickly on yields and load and fuel. I mean you talked about this is the -- this is not a very often occurrence to see your yields come down in a period where your fuel prices go up. So you guys -- you can't fuel surcharge on all your routes, right? I mean, that is -- I believe that's the case. And was there any kind of sort of pricing? Did you drop the ball on a particular market or something like that? Or did you forecast lower fuel prices going into the quarter? What drove that mismatch between yields and fuel increase?

[Victor Vial:]

Yes. A couple of things. I think -- sure, we were maybe a little bit optimistic on the fuel price assumption for the fourth quarter, but obviously, hindsight is 20-20. Right now looking at the graph of the price of jet fuel for the past 3 months and what I noticed was that in the 2 weeks before earnings call in November, there was a clear trend to lower prices, and then it started going up later in November and December. So yes, the other part of it is due to seasonality. A lot of the tickets that gets sold, for example, in December gets sold very early, so those flights get full early in the year. It's a holiday season. So that prevents you then from being able to react. If price of oil goes up more than you expected and then you want to raise prices, you won't make it in December. So that's part of it. And maybe to a certain extent, we could have done maybe a little bit better of a job revenue managing. We are very pleased with the performance of our revenue management team. But you know it's tough to bat 1.000. If we batted 1.000 we would have done a better job in the fourth quarter.

[Operator:]

The next question is from Jim Parker of Raymond James.

[James D. Parker:]

All right. Maybe a question or 2 for Pedro. Just your neighboring countries, of course, what is going on in Venezuela regarding how much cash do you have there now because, of course, there speculation has been for some time that the bolivar would be devalued? So how much cash do you have at risk in Venezuela now?

[Pedro Heilbron:]

I'll let Victor answer that one. When you get too specific, I need to have Victor answer.

[Victor Vial:]

So in Venezuela, as you know, they have controls to be able to repatriate bolivars to dollars. And it's a very convoluted process, and it can take months. Most airlines, last information I saw, have between 5 to 6 months of lag. That's not unusual, but the wait is always between 3 to 6 months, and right now our balance there is somewhere between $180 million to $190 million accumulated. We should get approvals in the near future, but it's tough to predict. And the other thing is, I should add, that the last time there was an evaluation of the bolivar, airlines were treated in a special fashion in the sense that the funds that were in the pipeline for approval were, I guess, respected at a special rate. So I can't guarantee that will happen this year. There is an evaluation. But that's what happened in the past, and hopefully, that's what they'll do this year.

[James D. Parker:]

Okay. Pedro, with regard to Colombia, which is your largest market other than Panama, there is pretty heated competition going on between Avianca and LAN Colombia. Is that having any impact on Copa?

[Pedro Heilbron:]

Not really because what we've been doing for the past 2 years is reducing our domestic presence in Colombia where most of that battle has been played out, and we are focusing on our hub on flying from Colombia to our fortress hub here in Panama. So in a way, we saw that coming and went in a different and more profitable direction. So we're pretty much staying out of that one.

[James D. Parker:]

Okay. And then I see that LAN Colombia, I think's going to put a 767 in from Bogota to Fort Lauderdale. Would that have any impact on Copa?

[Pedro Heilbron:]

That's -- I think that's a question for Avianca because we are not really -- we don't fly that market. It's not important to us.

[Operator:]

[Operator Instructions] The next question comes from Eduardo Couto of Goldman Sachs.

[Eduardo Siffert Couto:]

Most of my questions were already answered, but considering that, that's the last day of Victor, I'll shoot one more. Regarding the -- my main question is basically on yields. The -- Pedro mentioned that the good traffic numbers in January, was just wondering how are yields in January and if we may see some increase especially in the first quarter given that fuel prices this quarter is slightly higher than the fourth quarter. Just want to get some thoughts on that.

[Victor Vial:]

Okay. And this is Victor, Eduardo. We're seeing a pretty decent demand environment, and yields are moving pretty good. So when you look at it on a year-over-year basis for January, adjusted unit revenues should be coming in almost flat. Obviously unit wear [ph] meaning RASM or PRASM. Which is a combination of load factor and yields. So like Pedro said, we're off to a good start. And I would add to that when look at what's going on in the macroeconomic environment in the region, Panama is having another year of 7-plus percent GDP growth. Obviously, that benefits us, and the region should have 3.5% to 4% GDP growth this year. That's great for us. There's no better way to get around in the region than our hub, so I would expect that demand will continue to be strong, and that should allow them to yield -- do a decent job with yield management.

[Eduardo Siffert Couto:]

Okay. No, I was just concerned, Victor, because this 17.5% margin in the fourth quarter and then we see some higher fuel prices since the beginning of the year. I was just wondering if the company can bring margins back to the -- closer to the 20% level already in the first quarter. Or you see more higher margins coming more in the second half of the year?

[Victor Vial:]

Yes, well, I'll stay away from giving margin guidance by quarter because we never have before. But again, I'll say what I said before, that I don't see anything, any fundamental change in our business model. So you have strong demand, allows us to do good revenue management. The hub is the better option. The infrastructure is there. I don't see why not. Let's put it that way.

[Pedro Heilbron:]

And then, Eduardo, this is Pedro, and I would add -- I will repeat something that Victor mentioned before and said a little bit about. We also feel that we could have done better on both yields and costs in the fourth quarter.

[Operator:]

The next question is from Bruno Amorim of Santander.

[Bruno Amorim:]

Given that growth rate should low along the year, is it fair to assume that higher margin should be obtained in the second half of the year as a result of higher load factors?

[Victor Vial:]

Yes, well, there's also the seasonality also taken into account, right? Because traditionally this year should not be different. Our high season is in the third quarter, and the second strongest quarter is the first quarter. The fourth quarter, not lagging far behind and then second quarter is what we call the low season. So the margins will have a high correlation to that. And if you look at over the past 5 years, the quarterly margins, you'll see that clearly, I think.

[Operator:]

The next question will come from Bob McAdoo of Imperial Capital.

[Julie Biel:]

This is Julie Biel for Bob McAdoo. I had a question about passenger servicing and what are the components of that? And what were the increases that you saw? Or is that the area that you see opportunities for?

[Victor Vial:]

Yes. Well, first of all, you have the passenger-related costs, and you have also aircraft handling fees or aircraft-related costs. The reason we had an increase during the quarter versus last year, half of it is basically volume, just all that growth that we've had, and the other half is related to obviously rates and a couple of other issues. The rate part of it has to do with some rate increases in meals, for example, in some of the markets we serve such as Panama. Panama growing at 10%, 11%, you'll see some inflation. Some of it comes from inflation. And then also, we are -- well, we move close to a higher load factor, so we have more passengers than others. That's part of the answer. And then we also have some higher rate airports where we're operating, such as, for example, JFK, which has a waiting lounge. The costs are pretty expensive. That's another part of it. When you move more passengers in these airports, that will then skew the total cost on a unit basis and on an absolute basis.

[Julie Biel:]

Okay. That's really helpful. And if you could talk a little bit looking at the capacity additions that you have for 2013, how is that going to impact your stage length?

[Victor Vial:]

Okay. When you look at -- well, as I said before, 14% ASM growth for the year. If you look at it in terms of fees, you're talking about 11%, and in terms of the stage length year-over-year, we should be seeing an increase in the neighborhood of around 5% or so. And again, as I mentioned earlier, with the heavier growth in ASMs coming in the first half to the tune of around 17% to 18% and then second half, around 11% on a year-over-year basis.

[Operator:]

The last question will come from Augusto Ensiki of Morgan Stanley.

[Augusto Ensiki:]

I just had a quick question regarding your capacity increase for the year. How much of the growth is coming from the full year effect of the new routes from last year and from the new frequencies to be added this year? I think you said this for last year as well. Could I just get that detail for 2013?

[Victor Vial:]

Okay. Most of the growth actually comes from what we did last year, somewhere around 85% of the growth. When you look at the impact of new destinations, it's really minor. I mean, we're now reopening -- we already announced Boston. We may be announcing a couple more, but this year will be more of a frequency year. In terms of frequencies, around 10% of the growth will come from frequency. So new destinations will be less than 5% or so.

[Operator:]

I would now like to turn the conference back for any further remarks to Mr. Pedro Heilbron. Please proceed.

[Pedro Heilbron:]

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

[Operator:]

Ladies and gentlemen, thank you for your participation. That concludes the presentation. You may disconnect, and have a wonderful day.