Copa Holdings, S.A. (CPA) Q1 2022 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to Copa Holdings First Quarter Earnings Call. During the presentation, all participants will be in 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 12, 2022. Now, I will turn the conference call over to Daniel Tapia, Director of Investor Relations. Sir, you may begin.

Thank you, ma’am. And welcome everyone to our First Quarter earnings call. Joining us today are Pedro Heilbron, CEO of Copa Holdings and Jose Montero, our CFO. First, Pedro Heilbron will start by going over our first quarter highlights, followed by Jose, who will discuss our financial results. Immediately after, we will open the call for questions from analysts. Copa Holdings financial reports have been prepared in accordance with International Financial Reporting Standards. In today's call, we will discuss non-IFRS financial measures. Our reconciliation of the non-IFRS to IFRS financial measures can be found in our earnings release, which has been posted on the company's website, copa.com. Our discussion today will also 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 subject to change. Many of these are discussed in our annual report filed with the SDC. Now, I'd like to turn the call over to our CEO, Mr. Pedro Heilbron.

Thank you, Daniel. Good morning to all and thanks for participating in our First Quarter earnings call. Before we begin, I'd like to thank all our coworkers for their commitment to the company and recognize their continuous efforts and dedication to keep Copa at the forefront of Latin American aviation. To them as always, my utmost respect and admiration, where we faced challenges in Q1 such as the impact in January and February of the Omicron variant on our operations and demand for air travel, as well as a significant increase in jet fuel prices, we were able to deliver a profitable quarter. In terms of the main highlights for the quarter, our capacity reach 88% of first-quarter 2019 ASMs, fuel CASM decreased from $0.061 in Q1 2019 to $0.06. Unit revenues or RASM came in at $0.0102 a decrease of 3% when compared to Q1 2019 and approximately 10% lower than Q4 2021. Mostly as a result of the Omicron impact on load factors and yields. Our Q1 operating margin came in at 7.8%, slightly above the range we guided to. In terms of fleet, during the quarter, we took delivery of two 737 MAX 9. With the addition of these aircraft and the remaining deliveries for the year, more than 20% of our fleet will be composed of MAX aircraft by the end of the year, resulting in valuable fuel efficiencies to our operation. I'm also pleased to mention that Copa earnings delivered an on-time performance of 91.3% and a completion factor of 99.3%. Again, amongst the best in the industry. This was also a true testament to our employees ' dedication and commitment to delivering a world-class travel experience for our passengers. In terms of our network, we restarted service to four cities during the quarter and announced two new cities to start in June, Santa Marta in Colombia and Barcelona in Venezuela. Ending the quarter with service to 72 cities in 30 countries compared to 80 cities in 33 countries before the pandemic, as we continue strengthening and solidifying our position as the most complete and convenient hub in Latin America. Turning now to Wingo, Wingo receive its 8th 737-800 and continued its regional expansion by launching a new route from Medellín, Colombia to Santo Domingo in the Dominican Republic. So, as you can see from our results, we have been executing both operationally and financially, despite continued headwinds. Although the demand environment in the region is recovering at a steady pace, fuel prices have increased dramatically, which combined with what's historically a low season quarter, lead us to expect lower second quarter margins. Jose will share our Q2 guidance during his presentation. I want to reiterate that we have a proven and strong business model, which is based on operating the best and most convenient network for intra -Latin America travel from our Hub of the Americas, leveraging Panama's advantageous geographic position, with low unit cost, best on-time performance, and strongest balance sheet. And we expect that going forward, our Hub of the Americas will be an even more valuable source of strategic advantage. Now I'll turn it over to Jose, who will go over our finance results in more detail.

Thank you, Pedro. Good morning, everyone. Thanks for being with us today. I'd like to join Pedro in acknowledging our great team for all the efforts they make, to deliver a world-class service to our passengers. I will start by going over our first quarter results. Capacity came in at 5.6 billion available seat miles, which is approximately 88% of our first quarter 2019 capacity. Load factor came in at an average of 81.5% for the quarter, a 1.9 percentage point decrease compared to Q4 2021, given that we operated 10% more ASMs, and were also impacted by the Omicron wave in January and February. We reported a net profit of $19.8 million, or $0.47 per share. Excluding special items, we would have reported a net profit of $29.5 million, or $0.70 per share. Special items for the quarter totaled $9.7 million, consisting of an unrealized mark-to-market loss of $6.8 million related to the company's convertible notes issued in 2020, and an unrealized $2.9 million loss related to changes in the value of financial investments. We reported a quarterly operating profit of $44.8 million and an operating margin of 7.8%. Unit costs excluding fuel, improved versus the previous quarter, coming in at $0.06 per ASM, driven by our continued focus on reducing expenses, as well as a quarter-over-quarter capacity growth of 10%. Unit revenues came in at ¢10.2, a 3% decrease when compared to the same period in 2019. Finally, our cargo revenues for the quarter came in over 40% above our cargo revenues for Q1 2019 driven by an improved cargo demand environment in the region. I'm going to spend some time now discussing our balance sheet on liquidity. As of the end of the first quarter, we had assets of close to $4.4 billion and our cash short and long-term investments ended at $1.2 billion which represents 65% of last 12 months revenues. In terms of debt, we ended the quarter with $1.6 billion in debt and lease liabilities, at similar levels to those reported as of end of the fourth quarter of 2021, and our adjusted net debt-to-EBITDA ratio came in at 0.8 times. I want to highlight that our average cost of aircraft-related debt for the quarter was 2.3%, and more than 80% of it is financed at fixed interest rates, limiting our exposure to occurrent increasing interest rate environment. Turning now to our fleet during the first quarter, we received two 737 MAX 9 s to end the quarter with a total of 93 aircraft. Our total fleet is comprised 68 737-800 s, 16 737 MAX 9 s, and nine 737-700s. These figures include three 737 700s, which are currently in temporary storage, and one 737 800 freighter. Our store outlook, based on the current state of the demand environment and the current expectation of the price of fuel. We can provide the following guidance for the second quarter of 2022. We expect capacity to be approximately 96% of Q2 2019 levels, or about $5.9 billion ASMs. And we expect our operating margin to be in the range of 3% to 5%. We are basing our Q2 2022 outlook on the following assumptions. Load factor of approximately 86%, unit revenues of approximately $0.113 CASM ex-fuel of approximately $0.06, an all-in fuel price of $4 per gallon. Given the current volatility in the environment, we believe it is premature to give complete full year guidance. However, preliminarily, we expect our full-year 2022 capacity to be approximately 98% of 2019 ASMs and our CASM ex-fuel to be approximately ¢5.9. Thank you. And with that, we'll open the call to some questions. Question-and-Answer Session

Thank you. [Operator Instruction]. We have our first question comes from the line of Savanthi Syth of Raymond James, your line is now open.

Hey, good morning. Just on the revenue guide that you have. Load factors are really strong, higher than historical levels that we've seen. Could you talk a little bit about what you're seeing in terms of demand? Is there just business demand coming in that's strengthening what you've seen on the leisure side or is it still driven by leisure?

Hi Savi, it's Pedro. Good morning. It's mainly leisure, that has been the case in the last number of months. However, we are seeing an uptick in business travel. It's still in the first quarter, was still in the 50% range. Our corporate business versus 2019, but it's increasing in April and the second quarters ticking up. But again, it's as mostly leisure and VFR travel.

That's helpful. And then if I might ask on the capital allocation side? It looks like you did some share buybacks here in the first quarter. Should we expect a similar momentum going forward? And I wonder if you can talk a little bit about when you might be comfortable introducing a dividend again.

Savi, we indeed -- as you know, we have a very strong liquidity position and we've been actually cash -- generating cash flow the last year. So, we believe there was an opportunity to reactivate our approve $250 million program that we have ongoing. And thereby also bringing value to our shareholders.

In terms of -- yeah, and that program is pretty much done by the way. We're like in the final stretch. That started many years ago. In terms of dividend, we still have the same dividend policy we had before. It came out 40% of net profit for the year. So, at the end of this year, our board will consider our 2022 results and decide accordingly.

If I might follow up on that. That's super helpful, Pedro. So, if you think about maybe increasing your buyback program or anything that might cause you pause to reinstating the dividends, what are you looking at and what is the board considering in terms of cash flow or environment?

In terms of the dividend. And I mean, I cannot speak for our board right now but if we stay in a solid cash position and deliver the expected profit this year, and we're on track, I would say, I would assume that the board is going to be -- it's going to look favorably, just reinstating our dividend policy, which again is still in place. Yeah.

All right. Thank you.

Thank you. Savi.

Thank you. We have the next question, comes from the line of Duane Pfennigwerth of Evercore ISI. Your line is now open. You may ask your question.

Hey, guys. Good morning. Thank you. Just on your comments on business travel, can you comment regionally where you're seeing that pick up? And recently on travel policy restrictions, any notable changes with respect to easing?

Again, it's just picking up in the second quarter, which is a positive development, but still, not a significant change versus what we've seen before. But again, it's the right trend, which is encouraging for all. And I would say it's all over the place. We have a very balanced and diversified intra -America networks. I will not really point out a specific market.

I think all regions are performing reasonably in line with kind of what the average is for the network.

And then along the lines of some of Savi's questions on capital allocation. How do you think about the convert -- how long do you want to live with that? Is that something you look at paying down or ultimately settling in shares at some point?

Yeah. That's something that we look at quite a bit. And again, we have been -- as I mentioned before, we have been the factor buyback program that is ongoing and so we always look at this and also in light of the fact that our -- that our liquidity levels are strong right now and we're cash-flow positive. So, we are always looking at that as alternatives, keep our options open in terms of mitigating or managing the liabilities that we have.

Great. Then just -- just for my last one, as you think about the competitive environment and higher fuel, can you talk about, again, your guidance was ahead of where we were despite a higher fuel assumption. So, the fuel recovery is clearly working. As you look out over the booking curve, can you just remind us, are their fuel surge -- surcharge dynamics. And what are you seeing incrementally in the yields outlook beyond what is typically a seasonally softer 2Q for you? Thanks for taking the questions.

That's a very important questions, Duane. When for Q2, when you sort of isolate the seasonality into the quarter and stronger demand environment that we're seeing sequentially and see that through the load factor guide that we put out. And you see specifically Q2 as such. I think we're in a position to say that we're capturing almost half of the fuel increases through our yield moves that we've made. That almost the coming months and quarters. We expected that continue a positive trend, but for Q2 have kind of the visibility as we're seeing right now, the increases in yields are through RN functions and fair actions. And we're very active in that space, of course, given the fuel environment and how it is.

Is it that recapture is sort of increasing and building as you look out further into the future?

Correct.

Thanks for taking the questions.

Thank you, Duane.

Thank you for the next question comes from the line of Alejandro Zamacona of Credit Suisse. Your line is now open. You may ask your question.

Hi, Pedro and Jose. Thank you for the call. It's been a long time since the potential JBA without [Indiscernible], I'm wondering if this potential plan is something that's still on the table or nothing more, and how this potential deal may change after the recent contribution agreement with Avianca and [Indiscernible]. Thank you.

Yes. So, as you know, it's been a very up and down times since the pandemic. We did sign a JBA, the three airlines. Avianca then went into bankruptcy, a Chapter 11 proceedings during the pandemic, which put everything on hold. And the pandemic itself put everything on hold. And so, the expectation was to sit down, the three airlines and rethink the JBA and figure out when was the right time to implement it. Is that was the desire of all three airlines. Now with the new development, which is just came up yesterday, announcing to anybody really knew about it. I would assume this whole JBA conversation is going to have another twist, and we'll see. So, it's hard for us to say right now, what's going to be the decision of them or of the other partners, the three partners that that make part of that JBA. So, it's up in the air right now. I would say, but it's still there. It's still something that we need to talk about.

Okay. Thank you. And then my second question, if I may? In terms of the cost reductions, do you feel comfortable to say the cost reductions are actually rather a cost efficiency rather than the cost reduction on a temporary basis?

Yes, totally cost efficiencies we worked on cost efficiencies. We work on sustained sustainable cost reductions. And even during the pandemic -- at the beginning of the pandemic is not over. We were offered -- we when -- we went back to our leasing -- less source, for example, just an example how we think we were offered I temporary reduction, which would then kick back later on and was not attractive to us. So, when we show cost reductions for lower costs, it's because we plan to keep it that way.

Thank you [Indiscernible].

[Indiscernible] Sorry. Next question, we have the line of Mike Linenberg of Deutsche Bank. Your line is now open. You may ask your question.

You answered Duane's question about your fewer recapture is actually increasing in building, and yet we're also dealing with a much higher fuel price in the June quarter than what we were in the March quarter. So, I just wanted to clarify that it does seem like that the revenue trend is not only very strong, but it's accelerating. Is that a fair assessment based on what you said?

My comments related to the fuel recapture, and by the way, Mike, I missed I don't know, the first part of the question, but the way that I got it was whether the recapture was -- was getting stronger as time went by. So, my comment related to the fact that our revenue or yield moves are covering almost half of the fuel increases us specifically for the second quarter. That's a specifically where we're seeing in the second quarter and the second quarter ultimately where you're seeing is that fuel is increasing faster than the revenue recapture we're making -- just specifically to given were the spot and the immediate curve or the next month and a half is in terms of fuel. But the going forward, of course, we are continuing to put in our M and pricing moves in such a way to be able to increase that percentage as time goes by.

Okay. So that's helpful and then sort of a follow-up and tied to it is that last quarter, it looked like that by year-end, you were going to get to 93% of your 2019 capacity, and you now are five points higher. We're looking at 98%. When we look across the industry and we look at other competitors, for a whole host of reasons, some of it is labor shortages and the like, but also some of it is higher fuel prices. We've seen carriers actually scale back their growth aspirations in 2022. What are you seeing in the back part of the year where you feel that much more confident that you want to put on more capacity and maybe you're just being opportunistic?

Yeah. And Mike, we're seeing a recovering robust revenue environment or traffic or demand environment certainly in the region. And yes, we're seeing positive trends in the demand environment in our space in particular.

And Mike, let's also remember that not every carrier has recuperated the same capacity. There are some carriers in -- especially in domestic market. They are above 2019. We're not still not at a 100%, so we're still trying to get to a 100% and we'll be there in the second half of the year. And so, I think that needs to be kept in mind also.

Okay, very good. Just lastly, patients have you on the response to Abra a twist, they're sort of feels like a bit in an understatement knowing that it has equity and Avianca. And yet as I believe you needed still has an anti-trust immunized agreement with you guys. And just for starters, when we start thinking about all the other connections, I think you also code share with goal and a bilateral can chip. The list goes on. I guess the question that I want to ask though, is that with the announcement of Abra, some of the questions we were getting from investors, is that the market is concerned that that is a negative for Copa, and Copa will be compelled to respond in some way, shape, or form. What are your thoughts on that, does that make sense or where do you come out on that? Thank you. That's my questions.

Okay. So that's a good question to answer. Do we have time. Well first thing I would say is that the news came out yesterday. I don't think anybody new before yesterday. And yesterday most of the day we're preparing for this call so we haven't really spent a lot of time thinking of the spider web that abrupt news presents to all. But I'll say a few things. One, we have faced many challenges and consolidations and a bunch of stuff in the last, let's say, 20 years and we usually have a good answer. And unusually, our answer is doing more of the same but just in a better, more effective and more efficient way. Because at the end of the day, we have a very very solid and resilient business model, which from what I read is not really losing its strength or its uniqueness. As a matter of fact, we might be the only carrier with the right product for the business traveler in our part of the world, and that's a plus. It was not like that maybe before the pandemic, but the way some of our competitors, including [Indiscernible] is going, that might be the case. But even if it's not, we have a unique, very strong hub model. Not only with low cost, but we've shown the ability to keep cost lower -- low and put them lower when needed. We have efficient pains. We have a strong product, a strong network, so we're actually confident that we're in a good position. And I won't talk about if we have to react or not. I think if we choose to stay focused on our business model, I think we can continue to be very successful doing it that way.

Very good. Thanks, Pedro.

Thank you. We have the next question comes from the line of Pablo Monsivais of Barclays your line is now open. You may ask your question.

Hi, thanks for taking my question. I just have one question. That first one is in terms of your unit revenue. If -- I don't know if you have the calculation, but if Omicron, I mean, taking out the impact of Omicron, do you have a sense of what your revenue should look like? That's Number 1, and Number 2 see if we take also out the effect of a higher jet fuel price environment for the second quarter. What would be the level of unit revenues? I guess I'm trying to get what is the trend on a normalized basis of the unit revenues. Thank you.

Yeah. Pablo, I would say I don't want to talk about what ifs. Because the reality of what we're facing is, we did face Omicron, and we are facing a high fuel environment. But the reality is that if I would say, that on a normalized basis, this year was going to be a recovery year for us. And overall, our margin, you would argue that it would've been almost back to a regular year was for us. That's I think initially [Indiscernible] half all these external factors in there. You would've had a very close to normal year in terms of operating margin for us. But again, the reality is otherwise. But as you can see, we've adaptive to it in a very good way. We are low cost and we are going to pass on some of the increases to our yields that we have.

Perfect. Thank you

Thank you, Pablo.

Thank you. We have the next question comes from Helane Becker of Cowen, your line is now open. You may ask your question.

Thanks very much, Operator. Hi, everybody. And thank you for the time. So, the one freighter that you have, what's the revenue opportunity from cargo that exists for you guys?

We serve in our region, and we're not in the long haul wide-body market. And a lot of the markets we serve are not well-served by the big international cargo carriers. So, it's a niche we feel like can be further developed. But right now, it's just a single freighter. Maybe a second later on. Not this year and next year, but maybe after that. So, although we're very successful in our freight business, it's mostly bellied cargo and this niche cargo operation. So, I don't think it's going to be -- it's valuable to our bottom line, but it's not something that's going to go through the roof and change results in a way that's much different to what it is right now.

And Helane, one more thing related to the cargo aircraft. I think we mentioned that back in our February call that the 800 that we have that we converted, we also mostly service and replacement for an older airplane that we're leasing from a third-party. And they will just provide us for this complementary service that we have for full cargo servicing to [Indiscernible] markets, complemented the belly freight that we have, which is a main source of revenues for us.

Okay. I got you -- I'm sorry?

Thank you.

The other question I have was on loyalty programs. Since the traffic is mostly visiting friends and relatives and leisure, is a loyalty program an important part of the business going forward or leisure customers taking advantage of that as well?

It is important part of the business. And we have a successful loyalty program. Leisure travels also take advantage of it. Business travel is coming back step-by-step also. We should not forget that. And the loyalty program also generates none air mile revenues, which are also important.

Those are all my questions. Thank you.

Thank you, Helane.

The next question we have of the line of Dan McKenzie of Seaport Global. Your line is now open. You may ask your question.

Hey, good morning, guys. Thanks. My first question is for you, Pedro. You have been through many cycles to count here, and it just seems like we are now in a new era of rising inflation interest rates and a strengthening dollar. So, I guess my question is, does this backdrop cause you to view this next cycle more cautiously? Or are higher commodity prices, ultimately the bigger economic stimulus from Latin America. And I guess what I'm really trying to get at is Latin American demand has historically been more inelastic. And I'm just wondering if that from where you said effect can continue to be the case?

Thank you, Dan. And you're right in what you're saying. So, with time, going through so many situations, actually, I think we kind of get used to or learn that the region in general is quite resilient. I mean -- and we're also very diversified in our root network, so sales on [Indiscernible] market suffer the same way. And we've been able to increase capacity and revenues consistently over time. And of course, not during a pandemic, that what we live in 2020 and 2021, but we've lived through many crises and there's always a silver lining somewhere. And yet it could be stronger demand from higher commodity prices in some countries, making up for others that may not be doing as well. And right now, as Jose mentioned, we're seeing strong demand. And although that could change, and every crisis is different, again, we're confident on our business model. On the resiliency of our business model and we think we can weather the current crisis and the hope of the Americas and Copa are in a very unique position to come out strong. And we take every crisis seriously. We try to take advantage of [Indiscernible] and hopefully this time we will be the same.

Yes. And then I guess I'm going to try the same question, different conference call here from last quarter and that's just on fair searches for copa.com, not bookings. So, the searches versus 2019. How are searches? How have they been trending? Just given some of the macro volatility? And how is that -- how are these searches affecting your view of future demand? I guess I'm just trying to get the durability of pent-up demand here.

It's all looking positive right now. The searches are in line with 2019. And with 2019 and in demand in general. We're seeing demand that save from now on very similar to 2019 levels and searches are in line with that, so. Yeah. Just encouraging I think in terms of what we're seeing with the current environment.

And those searches are despite business demand that remains down pretty substantially, I guess is the caveat, right?

That is correct.

Okay. Thanks so much for the time you guys.

Good.

Thank you, Dan.

Thank you. For your last question we had the line of Filipe Nielsen of Citi, your line is now open. You may ask your question.

Hello, guys. Thank you for taking my question. I'd like just to do a quick follow-up on the goal Avianca agreement. I was just wondering if you could help me understand what are the main risks in terms of demand exposure in routes through Latin American and Central America and connection between Latin America and U.S? What are the main risks that this agreement brings to Copa and why do you see them -- the major risks like what are the -- is that in Trent routes, which connectivity do you see the greater risk?

So, first thing I should say that we have not really spend much time, as I mentioned before. This is news for all. We have not spent much time analyzing it. We will in the coming days, so I'll stay away from specific answers for that -- for that reason. But conceptually, I feel there's room -- there's room for all maybe not for everyone that wants to come in, but for the ones that are in the market and in our region, we think there's room for all. And consolidation tends most cases -- tends to be a positive, not only for the airlines consolidating, but also for the other competitors. Like us and in many cases is more complex for the one consolidating trying to combine different styles cultures and the whole thing. We've have always bid for a very simple, straightforward, effective, Panama base Hub model. And this takes nothing away from that. If anything, it might help us make it stronger, but we'll see again, we haven't spent much time on it, and we're still very positive about our future.

Great. Super clear and helpful. Thank you, guys.

Thank you, Filipe.

Thank you. I would now like to turn the call over to Mr. Pedro Heilbron. Sir?

Thank you all. This concludes our earnings call. Thank you for being with us and thank you for your continued support. Have a great day and we'll see you in the next call. Thank you.

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