Earnings Call Transcript - CPA Q1 2022

Operator, Operator

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. 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.

Daniel Tapia, Director of Investor Relations

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

Pedro Heilbron, CEO

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. 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. However, we were able to deliver a profitable quarter. In terms of the main highlights for the quarter, our capacity reached 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. This was mostly 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. In terms of fleet, during the quarter, we took delivery of two 737 MAX 9 aircraft. 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 achieved 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. We ended 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 received its 8th 737-800 and continued its regional expansion by launching a new route from Medellín, Colombia to Santo Domingo in the Dominican Republic. 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 leads 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 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 costs, the best on-time performance, and the strongest balance sheet. 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 financial results in more detail.

Jose Montero, CFO

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 their efforts to deliver 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. The 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 $0.102, a 3% decrease when compared to the same period in 2019. 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 and 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 the end of the fourth quarter of 2021. 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 the currently increasing interest rate environment. Turning now to our fleet during the first quarter, we received two 737 MAX 9s to end the quarter with a total of 93 aircraft. Our total fleet is comprised of 68 737-800s, 16 737 MAX 9s, and nine 737-700s. These figures include three 737-700s, which are currently in temporary storage, and one 737-800 freighter. As for our 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. 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, and CASM ex-fuel of approximately $0.06, with 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 $0.059. Thank you. And with that, we'll open the call to some questions.

Operator, Operator

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

Savanthi Syth, Analyst

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?

Pedro Heilbron, CEO

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. In the first quarter, we were still at about 50% of our corporate business compared to 2019, but it's increasing in April and the second quarter is ticking up. Again, it's mostly leisure and VFR travel.

Savanthi Syth, Analyst

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 similar momentum going forward? And I wonder if you can talk a little bit about when you might be comfortable introducing a dividend again.

Jose Montero, CFO

Savi, we indeed have a very strong liquidity position and we've been generating cash flow the last year. Therefore, we believe there was an opportunity to reactivate our approved $250 million program that we have ongoing, thereby bringing value to our shareholders.

Pedro Heilbron, CEO

In terms of that program, it is pretty much done, by the way. We're in the final stretch. That started many years ago. In terms of dividend, we still have the same dividend policy we had before, which is to pay 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.

Savanthi Syth, Analyst

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?

Pedro Heilbron, CEO

In terms of the dividend, I cannot speak for our board right now, but if we remain in a solid cash position and deliver the expected profit this year, which we're on track for, I would assume that the board will look favorably at reinstating our dividend policy, which, again, is still in place.

Savanthi Syth, Analyst

All right. Thank you.

Pedro Heilbron, CEO

Thank you, Savi.

Operator, Operator

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.

Duane Pfennigwerth, Analyst

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?

Pedro Heilbron, CEO

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. However, it's the right trend, which is encouraging for all. I would say it's happening all over the place. We have a very balanced and diversified intra-America network, so I will not really point out a specific market.

Jose Montero, CFO

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

Duane Pfennigwerth, Analyst

And then along the lines of some of Savi's questions on capital allocation. How do you think about the convertible notes? 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?

Jose Montero, CFO

Yeah. That's something we look at quite a bit. We have been implementing the buyback program that is ongoing, and we're always looking at this in light of the fact that our liquidity levels are strong right now and we're cash-flow positive. So, we are always considering that as alternatives, keeping our options open in terms of mitigating or managing the liabilities that we have.

Duane Pfennigwerth, Analyst

Great. Then 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 there fuel surge surcharge dynamics? And what are you seeing incrementally in the yields outlook beyond what is typically a seasonally softer Q2 for you? Thanks for taking the questions.

Jose Montero, CFO

That's a very important question, Duane. For Q2, when you isolate the seasonality into the quarter and the stronger demand environment that we're seeing sequentially, look at the load factor guidance that we provided. In Q2 specifically, we are in a position to say that we’re capturing almost half of the fuel increases through the yield moves we've made. We expect that to continue on a positive trend, but for Q2 we'll have the visibility we're seeing right now where the increases in yields are through our functions and fare actions. We're very active in that space, especially with the current fuel environment.

Duane Pfennigwerth, Analyst

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

Jose Montero, CFO

Correct.

Duane Pfennigwerth, Analyst

Thanks for taking the questions.

Jose Montero, CFO

Thank you, Duane.

Operator, Operator

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.

Alejandro Zamacona, Analyst

Hi, Pedro and Jose. Thank you for the call. It's been a long time since the potential JBA without prior notice, 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.

Pedro Heilbron, CEO

Yes. So, as you know, it's been very up and down since the pandemic. We did sign a JBA with the three airlines. Avianca then went into Chapter 11 proceedings during the pandemic, which put everything on hold. The pandemic itself put everything on hold, and the expectation was to sit down with the three airlines and rethink the JBA. We need to figure out when is the right time to implement it. However, with the new development that just came up yesterday, announcing that several people didn't really know about it, I would assume this whole JBA conversation will have another twist, and we'll see. It's hard for us to say right now what's going to be the decision of our other partners in the JBA, so it's up in the air right now. But it's something that we need to talk about.

Alejandro Zamacona, Analyst

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

Pedro Heilbron, CEO

Yes, totally cost efficiencies. We work on sustained sustainable cost reductions. Even during the beginning of the pandemic, we chose offers for temporary reductions that would kick back later, and it was unattractive to us. When we show cost reductions for lower costs, it's because we plan to keep it that way.

Jose Montero, CFO

Thank you.

Operator, Operator

Next question comes from the line of Mike Linenberg of Deutsche Bank. Your line is now open. You may ask your question.

Michael Linenberg, Analyst

You answered Duane's question about your fuel recapture actually increasing and 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 the revenue trend is not only very strong but accelerating. Is that a fair assessment based on what you said?

Jose Montero, CFO

My comments were specifically related to the fuel recapture. And by the way, Mike, I missed the first part of the question. But the way I understood it was whether the recapture 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 specifically for the second quarter. That's where we're seeing for Q2, and ultimately, fuel is increasing faster than the revenue recapture we're making, specifically speaking for where the spot and the immediate curve are in terms of fuel. But going forward, of course, we are continuing to make pricing moves to increase that percentage as time goes on.

Michael Linenberg, Analyst

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, 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 to put on more capacity and maybe you're just being opportunistic?

Jose Montero, CFO

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

Pedro Heilbron, CEO

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

Michael Linenberg, Analyst

Okay, very good. Just lastly, could you respond to Abra, which feels a bit understated considering it has equity in Avianca? As I understand you still have an anti-trust immunized agreement with them. Also, when we start thinking about all the other connections, I believe you also code share with Gol and have a bilateral agreement. The list goes on. My question is, with the announcement of Abra, there are concerns from investors that this is negative for Copa and that Copa might be compelled to respond in some way. What are your thoughts on that?

Pedro Heilbron, CEO

That’s a good question. First thing, I should say is that the news just came out yesterday, and I don't think anyone knew about it before then. Most of yesterday we were preparing for this call, so we haven't really spent a lot of time thinking of the spider web that this announcement presents. However, I would say a few things: One, we have faced many challenges and consolidations over the last 20 years, and we usually have a good answer. Typically, our answer is to continue operating in a better, more effective, and more efficient manner. At the end of the day, we have a very strong and resilient business model, which from what I understand is not losing its strength or 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, which is a plus. It wasn't like that maybe before the pandemic, but with the way some of our competitors are operating, that might be the case now. Even if it’s not, we have a unique, robust hub model. Our cost structure is low; we've maintained costs and even reduced them when needed. We’ve demonstrated our efficiency, our strong product, our strong network, so we're confident that we're in a good position. I won’t discuss whether we have to react or not. I firmly believe that if we focus on our business model, we can continue to succeed.

Michael Linenberg, Analyst

Very good. Thanks, Pedro.

Operator, Operator

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

Pablo Monsivais, Analyst

Hi, thanks for taking my question. I just have one question. In terms of your unit revenue, if— I don't know if you have the calculation—but if we take out the impact of Omicron, do you have a sense of what your revenue should look like? And also if we take 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 the trend on a normalized basis of the unit revenues.

Jose Montero, CFO

Yeah, Pablo. I would prefer not to discuss 'what ifs.' The reality is that we did face Omicron and a high fuel environment. On a normalized basis, this year is a recovery year for us. Overall, our margin would argue that it would have been almost back to typical levels if we eliminated all these external factors. However, the reality is otherwise. As you can see, we've adapted to it in a very good way. We are low-cost and have the capability to pass on some of the increases to our yields.

Pablo Monsivais, Analyst

Perfect. Thank you.

Jose Montero, CFO

Thank you, Pablo.

Operator, Operator

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

Helane Becker, Analyst

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

Pedro Heilbron, CEO

We serve in our region and are not in the long-haul wide-body market. Many of the markets we serve aren’t well-served by the large international cargo carriers. So, it's a niche we feel can be further developed, but right now, it's just a single freighter. Perhaps a second later on, but not this year or next year, but maybe after that. Although we're very successful in our freight business, it's mostly belly cargo and niche operations. I don’t expect it to drastically change our bottom line.

Jose Montero, CFO

And Helane, one more thing related to the cargo aircraft. We mentioned back in our February call that the 800 we have converted also mostly services as a replacement for an older airplane we were leasing from a third party. That will just provide us with complementary service for full cargo servicing to underserved markets and also complement the belly freight, which is a main source of revenues for us.

Helane Becker, Analyst

Okay. I understand. I'm sorry?

Jose Montero, CFO

Thank you.

Helane Becker, Analyst

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

Pedro Heilbron, CEO

It is an important part of the business. We have a successful loyalty program, and leisure travelers also take advantage of it. Business travel is coming back step-by-step as well. We should not forget that. The loyalty program also generates non-air mile revenues, which are also important.

Helane Becker, Analyst

Those are all my questions. Thank you.

Jose Montero, CFO

Thank you, Helane.

Operator, Operator

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

Daniel McKenzie, Analyst

Hey, good morning, guys. Thanks. My first question is for you, Pedro. You have been through many cycles here, and it just seems like we are now in a new era of rising inflation, interest rates, and a strengthening dollar. Does this backdrop cause you to view this next cycle more cautiously? Or are higher commodity prices ultimately a bigger economic stimulus for Latin America? I'm really trying to get at whether Latin American demand will continue to be more inelastic.

Pedro Heilbron, CEO

Thank you, Dan. You're right in what you’re saying, and as we go through so many situations, we learn that the region in general is quite resilient. We have a diversified route network, so sales aren’t affected uniformly. We’ve been able to grow capacity and revenues consistently over time. Of course, not during a pandemic, but we’ve experienced many crises, and there’s always a silver lining. Higher commodity prices can stimulate demand in some countries, offsetting others that may not fare as well. Currently, as Jose mentioned, we are seeing strong demand. Although that could change as every crisis is unique, we’re confident in our business model and the resilience of Copa Airlines. We believe we can weather the current crisis and emerge stronger. Each crisis is treated seriously, and we look to benefit from any opportunities that arise.

Daniel McKenzie, Analyst

Yes. I will ask the same question, trying a different conference call here from last quarter. What about fair searches for copa.com versus bookings? How are searches trending? Given some of the macro volatility? And how are these searches affecting your view of future demand? I’m trying to gauge the durability of pent-up demand.

Pedro Heilbron, CEO

It's all looking positive right now. The searches are in line with 2019, and the demand overall is very similar to 2019 levels. Searches are encouraging in terms of the current environment we're in.

Daniel McKenzie, Analyst

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

Pedro Heilbron, CEO

That is correct.

Daniel McKenzie, Analyst

Okay. Thanks so much for the time, you guys.

Pedro Heilbron, CEO

Good.

Jose Montero, CFO

Thank you, Dan.

Operator, Operator

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

Filipe Nielsen, Analyst

Hello, guys. Thank you for taking my question. I'd just like to do a quick follow-up on the Gol Avianca agreement. I was just wondering if you could help me understand what the main risks are in terms of demand exposure in routes through Latin America and Central America, and connections between Latin America and the U.S. What are the main risks that this agreement brings to Copa and where do you see the greatest risks?

Pedro Heilbron, CEO

First, we haven't dedicated much time to analyzing this deal. As I mentioned before, this news broke yesterday, and we will take time in the coming days to analyze its implications. Conceptually, I believe there's room for everyone in the market, not every player will thrive, but for those of us already in the market, I think we can coexist. Consolidation usually tends to be positive not just for the airlines involved but also for other competitors. We've always been focused on a simple, straightforward, effective, Panama-based hub model, and this — if anything — might make that stronger. However, we will see; we haven’t dedicated sufficient time to analyze it yet. We're still very optimistic about our future.

Filipe Nielsen, Analyst

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

Pedro Heilbron, CEO

Thank you, Filipe.

Operator, Operator

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

Pedro Heilbron, CEO

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.

Operator, Operator

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