Earnings Call Transcript - CPA Q4 2022

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to Copa Holdings Fourth Quarter Earnings Call. As a reminder, this call is being webcast and recorded on February 16, 2023. Now I will turn the conference over to Daniel Tapia, Director of Investor Relations. Sir, you may begin.

Daniel Tapia, Director of Investor Relations

Thank you, Latif, and welcome, everyone, to our fourth quarter earnings call. Joining us today are Pedro Heilbron, CEO of Copa Holdings; and Jose Montero, our CFO. First, Pedro will start by going over our fourth quarter and full year 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. A 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, cpaair.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 fourth quarter earnings call. Before we begin, I would like to extend my sincere gratitude to all our coworkers for their commitment to the company. Their continuous efforts and dedication have kept Copa at the forefront of Latin American aviation. To them, as always, my highest regards and admiration. We're proud to report solid fourth quarter and full year results despite the pressure higher net fuel prices have added to our operating costs and other headwinds impacting our business. Among the main highlights for the quarter. In terms of capacity, although we had a similar number of daily departures compared to 2019, we achieved 6% more ASMs than in Q4 2019 due to a higher average stage. Revenue passenger miles increased by 7.5%, which led to an 86.6% load factor, a 1.4 percentage point increase when compared to the same period in 2019. Passenger yields came in at $0.151 or 20% higher than in the fourth quarter of 2019. While cargo revenue, including the contribution from the operation of our Boeing 737-800 freighter was 69% higher, resulting in unit revenues, or RASM, of $0.137, a 23% increase compared to the fourth quarter of 2019. Adjusted fuel CASM decreased by 7% compared to Q4 2019 from $0.066 to $0.061. And our operating margin came in at 24.7%. Now turning to our main highlights for the full year 2022. Unit revenues increased 12.6% year-over-year to $0.121 mainly driven by a 10.8% increase in yields. CASM ex fuel came in at $0.598, almost 5% lower than 2019. And the operating margin for the year came in at 15.2%. During the year, we started the flight to Barcelona, Venezuela, Santa Marta, Colombia and to the Felipe Angeles Airport in Mexico City, ending the year operating to 77 destinations in 32 countries in North, Central, South America and the Caribbean, strengthening our position as the most complete and convenient hub in Latin America. We inaugurated our new Copa club in the Tocumen new Terminal 2. This modern facility provides our business class and preferred members with a world-class experience, while passing through our Panama hub of the Americas. We also reactivated our Panama stopover program, which promotes our home country as a tourist destination, and we're seeing good results. In September, we launched our new distribution strategy, including the new Copa Connect option for travel agencies to access coaters and other content via the IATA new distribution capability or NDC. At the same time, Copa introduced a cost recovery surcharge for bookings made through the legacy GDS technology, known as EDIFACT. During Q4, we were pleased with both the adoption of Copa Connect among our agency partners and the increase in direct sales via copa.com. We're still at an early stage, but these changes are helping us gain more control over our distribution strategy and offset and eventually lower our distribution costs. On the operational front, Copa delivered an on-time performance of 87.4% and was recently recognized by the official airline guide as the most on-time airline in Latin America in 2022. In fact, according to OAG, Copa's on-time performance was again the highest of any carrier in the Americas. Additionally, last year, Copa Holdings was recognized by Skytrax for the seventh consecutive year as the best airline and the best airline staff in Central America and the Caribbean. I would like to once again express my recognition to our more than 7,000 coworkers who day in and day out deliver a world-class travel experience for our customers. Their contributions are key to our success. With regards to Wingo, Wingo received one additional 737-800 from the Copa fleet and ended the year with a total of 9 aircraft. Additionally, we continue this regional expansion and ended 2022 operating 31 routes with service to 20 cities in 10 countries. Turning now to our expectations for 2023. During our last call in November, we shared preliminary capacity guidance for the year of plus 15% compared to 2022. We mentioned that we were expecting to receive 13 Boeing 737 MAX aircraft during the year. As you see in our earnings release, we are reducing our capacity growth guidance to a range of 12% to 14% as it now looks like Boeing won't be able to maintain the scheduled delivery dates. We now expect to receive 12 aircraft during the year instead of 13. Additionally, we are experiencing higher maintenance costs related to our engines and turnaround time. We expect that this issue will add pressure on our unit cost for the year. Jose will provide more details around this. This year, we expect to continue growing our top line in terms of frequencies and new destinations. So far, we have announced new service to the cities of Manta in Ecuador and Baltimore and Austin in the U.S. with these additions, we will be serving 80 destinations in North, Central, South America and the Caribbean by July of this year. To summarize, we delivered strong results in Q4 and for the full year 2022. Our team continues to deliver world-leading operational results, including once again, the best on-time performance in the Americas. We're reducing our capacity assumptions for the year given the current delays in the aircraft delivery stream. And as always, we will continue looking for efficiencies and savings to further reduce our unit costs and strengthen our competitiveness going forward. Lastly, we're confident as ever in our business model. In 2022, we delivered competitive unit costs and solid margins while continuing to offer a great product to our passengers, making us the best positioned airline in our region to consistently deliver industry-leading results. 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 a world-class service to our passengers. I will start by going over the main highlights for full year 2022. Our load factor came in basically flat versus 2019 at 85.1%, driven by a 10.8% increase in yields, unit revenues improved by 12.6% versus 2019 to $0.121. Our unit cost came in at $0.598, 4.6% lower than in 2019. Due to an increase of 67% in jet fuel prices, our operating margin was 0.9 percentage points lower than in 2019 at 15.2%. Reported net income for full year 2022 came in at $348.1 million, which translates to earnings per share of $8.58. Excluding special items, mainly an unrealized mark-to-market net gain of $12.7 million related to the company's convertible notes as well as changes in the value of financial investments, adjusted net income came in at $335.4 million or adjusted earnings per share of $8.26. Now turning to our fourth quarter results. Net profits for the quarter came in at $88.3 million or $2.23 per share. Excluding special items, net profits came in at $177.7 million or $4.49 per share. Fourth quarter special items are comprised of an unrealized mark-to-market loss of $91.3 million related to the company's convertible notes and a $1.9 million unrealized market gain related to changes in the value of financial investments. We reported a quarterly operating profit of $219.7 million and an operating margin of 24.7%. Capacity came in at $6.5 billion available seat miles or approximately 6% higher than in Q4 2019. Load factor came in at 86.6% for the quarter, a 1.4 percentage point increase compared to the same period in 2019, while passenger yields increased 20.4% to $0.151. As a result, unit revenues came in at $0.137 or 23.4% higher than in the fourth quarter of 2019. Driven by higher jet fuel prices, unit cost or CASM increased by $0.103 or 10% more than the adjusted CASM in Q4 2019. And finally, our CASM excluding fuel came in at $0.061, a 7% decrease versus the adjusted CASM excluding fuel for Q4 2019. I'm going to spend some time now discussing our balance sheet and liquidity. As of the end of the year, we had assets of close to $4.7 billion. In terms of cash, short- and long-term investments, we ended the year with $1.1 billion, which represents 38% of last 12 months revenues. As to our debt, we ended the year with $1.7 billion in debt and lease liabilities and achieved an adjusted net debt-to-EBITDA ratio of 0.8x. Turning now to our fleet. During the fourth quarter, we received 2 Boeing 737 MAX 9s to end the year with a total of 97 aircraft compared to 102 aircraft in our fleet at year-end 2019. In January of 2023, we received an additional 737 MAX 9 to bring our total fleet to 98 aircraft. With this addition, our total fleet is now comprised of 68 737-800s, 21 737 MAX 9s and nine 737-700s. These figures include one 737-800 freighter and the nine 737-800s operated by Wingo. Two-thirds of our fleet continue to be comprised of owned aircraft and one-third of our aircraft are under operating leases. During the remainder of 2023, we expect to receive 11 additional aircraft, all Boeing 737 MAX 9s. We have been informed by Boeing of additional delivery delays in our 2023 delivery stream. So we now expect all 11 aircraft pending to be delivered during the year to have between 2 to 4 months of delays versus the original delivery date. As to our outlook, based on the current demand environment and the expected delivery dates for our incoming aircraft, we can provide the following guidance for full year 2023. We expect to increase our capacity in ASMs versus 2022 within the range of 12% to 14%, and we expect an operating margin within the range of 17% to 19%. We're basing our outlook on the following assumptions: load factor of approximately 85%; unit revenues within the range of $0.121, CASM ex fuel to be in the range of $0.06, mainly due to the additional costs associated with our engines and the longer maintenance shop and turnaround times that we expect for this year; and finally, we are expecting an all-in fuel price of $3.15 per gallon. Thank you. And with that, we'll open the call to some questions.

Operator, Operator

Our first question comes from Michael Linenberg of Deutsche Bank.

Michael Linenberg, Analyst

Congratulations on the excellent results, team. I have two questions. First, Pedro, can you provide an update on some of the shareholder initiatives, specifically regarding the share repurchase and the status of the dividend reinstatement?

Pedro Heilbron, CEO

Yes. Okay. So I'll answer the second part, and then I'll let Jose address the repurchase part. So the board met last week and decided to discuss the dividend repayment decision at an upcoming board meeting towards the second half of March, so this coming month where we're going to present our budget, our CapEx need, our cash flow, etc. So they decided to make the decision then. So that will be in like a month or yes, like a month or so.

Jose Montero, CFO

Yes. Mike, in terms of the share repurchase program, we were active last year in the program. We have a currently approved $200 million program that is essentially halfway completed. And of course, the objective of the program is to maximize shareholder value. The strategy behind the program is to manage liabilities vis-a-vis the converts as well.

Michael Linenberg, Analyst

Okay, great. For my second question, regarding the 12% to 14% capacity growth, you've already announced three new cities: Baltimore, Austin, and Manta. Should we expect more cities? When considering the 12% to 14%, is the growth primarily about increasing the frequency or depth of the schedule, rather than just adding new locations? Is it a mix of new cities, and I'm curious about the nature of this growth in terms of its risk level?

Pedro Heilbron, CEO

Correct. So my answer in a way is all of the above. But 50% of the capacity growth in 2023 comes from the full year effect of the additions in 2022, both frequencies and new destinations added in 2020. Then the other 50% is mostly additional frequencies in current markets. A smaller part of that 50% is going to be new destinations. We have announced three new entries, and we hope to announce at least two more by the end of the year.

Michael Linenberg, Analyst

Pedro, the two or so that you're looking to announce, are they some of the destinations that you served prior to COVID that you have yet to restart? Or are they completely new destinations?

Pedro Heilbron, CEO

No, I meant to say new destinations. We still have about 8 destinations we haven't restarted from pre-COVID, and we hope to also reinstate some of those during the year.

Operator, Operator

Our next question comes from the line of Duane Pfennigwerth of Evercore ISI.

Duane Pfennigwerth, Analyst

Just on the traditional pattern of margins 4Q to 1Q, typically, we actually see some pickup sequentially from 4Q to 1Q. If you think about the kind of roughly 25% margin that you posted here, how do you think about that into 1Q? And I guess what we're trying to get a feel for is how much conservatism you've baked into the second half of the year because it just feels like a lot.

Pedro Heilbron, CEO

Right. So Duane, and of course, it's only February. So we're going to be cautious in how we try to forecast 9, what, 11 months we have ahead of us. But I should also say that was not necessarily a typical Q4, but I'll let Jose maybe get into more detail.

Jose Montero, CFO

Yes, Duane, Q4 was particularly strong for a couple of reasons. First, there was strong demand in the region. Second, most Q4 sales occurred during a time when fuel prices were high, which then decreased over the quarter compared to Q3. This led to a very robust result for the quarter. Regarding your question, we decided to revert to our yearly guidance, so we are providing full year guidance. For Q1, I would say there may be a slight reduction in the RASM compared to the very strong Q4 RASM. This is due to increased capacity in the network and also lower fuel prices. Despite these factors, we expect good profitability development in Q1 based on what we see so far.

Duane Pfennigwerth, Analyst

Okay. I mean fuel is lower sequentially. Obviously, fuel has been all over the place, but it is lower sequentially, at least our view today 4Q-to-1Q. And then maybe just for the follow-up on the pilot contract announcement, can you speak to the magnitude of that? I assume that's in your full year cost guidance? How should we think about that?

Pedro Heilbron, CEO

This is a process we undergo every four years with all our unions, including our pilot unions. Typically, you don't hear much about it because it tends to be a professional and respectful negotiation. This year was no exception, except it received more media attention. The agreement was signed last week, as is customary on the last day, and it was similar to what we agreed upon in previous negotiations four or eight years ago. There isn't much difference. We believe it won't have an impact that we can't manage through other efficiencies and growth.

Jose Montero, CFO

Yes. Just to be clear, it is included in our guide for 2023 in terms of ex-fuel CASM. And again, it's in line with what we have signed in the past with that group. The conclusion to the negotiations has been done in a very good spirit.

Pedro Heilbron, CEO

It is consistent with inflation in Panama, which is around 2% to 3%. This aligns closely with what we have agreed upon in previous years and is reflected in our guidance.

Operator, Operator

Our next question comes from the line of Rogério Araújo of Bank of America.

Rogério Araújo, Analyst

I have a follow-up regarding supply and demand. There appears to be a rest in the guidance that is about 12% of 1993 levels, and the fourth quarter was 20% to 21% above those levels. I would like your insights on what is contributing to that. You mentioned that some of the tickets sold in the fourth quarter were at higher oil prices. Could you break this down into three segments? First, how will the increased frequencies from Copa affect expected yields? Second, what impact will the higher anticipated capacity expansions from competitors have? Lastly, do you foresee any weakening in demand? I'm curious if the current demand environment is expected to normalize. How are you viewing Copa's supply in relation to competitor supply and demand?

Jose Montero, CFO

Thank you, Rogério, for the question. I want to start by noting that it's still early in the year, so our visibility into the latter part of the year is somewhat limited. However, in the first quarter, the demand environment appears to be relatively strong compared to the fourth quarter. Both unit revenue and load factor remain robust, although they may be slightly lower than in Q4. Generally, the performance is strong across the system and consistent across all regions. Regarding unit revenues for the second half of 2022 and our full-year guidance for 2023, I would indicate that the primary factor influencing the change in RASM relates to our fuel curve assumption, which accounts for about two-thirds of the movement. The remaining portion is attributed to the capacity we are adding. We are increasing our capacity for the full year by approximately 12% to 14%, indicating a significant double-digit increase. In summary, fuel and our own capacity are the key factors that are driving our guidance for 2023.

Operator, Operator

Our next question comes from the line of Savi Syth of Raymond James.

Savi Syth, Analyst

Could you discuss how you anticipate MAX deliveries will progress throughout the year and the associated capacity timeline? Additionally, do you foresee improvements in fuel efficiency as the year advances, or will it be influenced more by the new routes you are introducing, possibly including shorter haul routes, that might prevent fuel efficiency from improving despite the MAX deliveries?

Jose Montero, CFO

Yes, I would say that most of the growth will likely occur in the second half of the year, indicating that it will be more backloaded. For Q1, we are observing a low single-digit sequential growth compared to Q4. Keep in mind that we are also comparing against 2022 overall, so there is some variability in the data from 2022 to 2023. The growth is mainly concentrated in the latter half of the year. In terms of fuel consumption for the MAX, we are seeing improvements in the low double-digit range compared to the NG, which is an important assumption for our fuel consumption model.

Pedro Heilbron, CEO

Which is, of course, in our guidance.

Jose Montero, CFO

Yes, of course.

Savi Syth, Analyst

Got it. And if I might, on the Wingo, increased one more aircraft. I don't know if that was kind of expected or not. Could you just talk about what you're thinking about Wingo and how that's evolving based on what you're seeing in the environment today?

Pedro Heilbron, CEO

Sure. So Wingo did go from 8 aircraft at the beginning of 2022 to 9 is something we had planned for. However, the Colombia market is very competitive right now. I would say it has overcapacity. So we think that Wingo for 2023 is going to remain at 9 aircraft. We don't see Wingo growing much this year except for better utilization of its fleet. They'll do a few things, they'll add some markets, they'll shift capacity around, but they will remain with 9 aircraft during the year.

Operator, Operator

Our next question comes from the line of Bruno Amorim of Goldman Sachs.

Bruno Amorim, Analyst

So the question is actually a follow-up on the outlook for '23. Just wanted to make sure that we got the right message. Is it fair to say that you are taking advantage of the fact that margins are running above trend to stimulate some demand and bring margins back to what were the historical levels? Because I understand fourth quarter was particularly strong, but even if you look at third quarter, margin was already 18%, right? So it does seem that all else held constant, there was room for margins to be better in 2023?

Pedro Heilbron, CEO

Yes, I'll start and then let Jose finish the question. In the third quarter, we were able to cover our fuel expenses with higher yields. When fuel prices rise, it affects almost all airlines similarly, making it easier for everyone to adjust fares, which is what occurred in the latter half of the year. In the fourth quarter, we experienced a very strong October, with a load factor of about 90%, which is well above our high average. As fuel prices began to decline toward the end of the quarter, yields remained higher than before. However, we don't believe this level is sustainable, and based on past trends, when fuel prices drop, airlines tend to be more aggressive with their pricing. We have started to observe some of this. Therefore, our expectation for the first quarter is that demand will be slightly lower but still strong; however, we do not anticipate a repeat of October. The remainder will be quite similar, but yields will likely decrease slightly due to the reduction in fuel prices. Jose, do you want to add anything to that?

Jose Montero, CFO

The point is that we're also growing by between 12% and 14%, which is a significant level of growth. I think that that's also a driver of our strategy for the year to continue rebuilding the hub to where it was pre-pandemic. The margin guidance we're providing is at the high end of what we have delivered on a yearly basis over the last several years. It is a portion of the strategy that we're pursuing in terms of capturing new markets or recapturing our markets.

Operator, Operator

Our next question comes from the line of Stephen Trent of Citi.

Stephen Trent, Analyst

I just had one or two quick follow-ups on the competitive environment. So it seems, for example, like Spirit Airlines has exited Florida, Panama that may have had some trouble competing there. And then in Colombia, I know you also just mentioned it, but it looks like Viva Colombia is maybe looking a little wobbly from a competitive perspective. When you think about sort of broader capacity in the region? Do you see kind of medium- to longer-term upside for passenger capabilities through that?

Pedro Heilbron, CEO

Yes. Actually, the two examples you have alluded to are not really that significant impact in our network. We don't compete much against either one, and we have very little overlap. So those exiting certain markets don't really have an impact. What we have seen is a tilt towards more ULCC competition in our network versus what would have been 8 years ago or even 4 years ago. So that's, I think, the big change, which has two sides. One side is, of course, we need to remain very focused on our costs and efficiencies, etc.; but secondly, we are, like in most markets, the only full-service carrier, so that gives us certain uniqueness. In general terms, as I mentioned, competition right now in our network, it's mostly ULCC. I would say that most airlines have brought back most of the capacity to pre-pandemic levels or very close to it.

Stephen Trent, Analyst

Very helpful, Pedro. And as my follow-up, just really quickly, I know you guys did very helpful guidance on the full year. I was wondering if you might have a higher level of view as to how we might think about sort of 1Q jet fuel carriers, sort of relatively where you could see it settling in.

Jose Montero, CFO

Yes, Stephen, on a quarter-over-quarter basis versus Q4, fuel is down by about 4%. Yes. So that's kind of how we're seeing it on Q4 versus Q1.

Operator, Operator

Our next question comes from the line of Helane Becker of Cowen.

Helane Becker, Analyst

Just two questions here. The first question is with respect to cargo. Can you just talk a little bit about what you're seeing right now? Are you seeing similar declines to what others are seeing in the market? How are you thinking about utilizing the freight aircraft that you have?

Pedro Heilbron, CEO

Right. So the first thing I should say is that cargo, it's only about 3% of our revenues. So it's not that significant. I mean, it used to be 2.5%. So it's above what it used to be, but not by a huge margin. We are operating our 737-800 freighter. It's operating great with good load factors and yields. It's actually operating over 10 hours per day, so we're getting the most out of it. Yields have come down a little bit. But in our network, most of our cargo still moves in the belly of our passenger and narrow-body fleet, and the freighter is doing well. We're not a big cargo carrier, and we should continue seeing improvement in our numbers, in our cargo revenue numbers.

Jose Montero, CFO

And it's contributing positively. I think with those figures to the business.

Helane Becker, Analyst

Okay. That's really helpful. And then my follow-up question is, how are you thinking about the convert? I think you can start buying it back in April. So what are you thinking about with respect to that?

Jose Montero, CFO

Yes, Helane. I won’t go into specific details about the strategy, but there is a call option that becomes available in April of this year. The due date for the convertible is April 2025. Over the past several months, as we've discussed, we have been actively involved in our buyback program, which also allows us flexibility regarding the settlement of the convertible. This reflects the strategy we are pursuing. We have various options available to help minimize our effective liability.

Operator, Operator

Our last question comes from the line of Josh Milberg of Morgan Stanley.

Joshua Milberg, Analyst

Congrats on the results. I wanted to ask if you could discuss your CASM ex. outlook. What factors might allow you to surpass the $0.06 level? I'm thinking particularly about increased seat densification. I know you've mentioned in the past that you wouldn't be complacent about that level. I also want to understand how pilot crew salary adjustments factor into your CASM ex guidance. I joined the call a bit late, so I apologize if this has already been addressed.

Jose Montero, CFO

Yes, thank you for the question. I'll address the last part first. In our 2023 guidance of $0.06, we have accounted for all impacts related to our salaried waste and benefits contracts. The guidance for 2023 does reflect an increase in maintenance costs tied to engine shop visits and lease engine rentals. This is the main factor offsetting some improvements resulting from capacity changes and benefits gained from our new distribution strategy. That's why CASM is expected to remain flat for 2023. We still have opportunities associated with the fleet densification program, which we anticipate completing in the middle of the year, with additional parts to follow in later years. We're also seeing an increase in unit costs this year due to rising overflight fees in Colombia and Brazil, contributing to upward cost pressures. We have managed to mitigate some of these with improvements in our business. To summarize, we are maintaining our CASM expectation for this year at the same level as 2022, which is influenced by incremental maintenance costs, distribution fees, and countered by improvements we are making in our operations. So, again, to summarize, we are keeping our CASM expectation flat for this year against 2022, influenced by those maintenance and distribution costs, while offset by our business improvements.

Joshua Milberg, Analyst

Okay. That's great, Jose. If you could just touch very quickly on what you're seeing in terms of corporate versus leisure trends in the first quarter and the first half. I know you guys always get that question.

Jose Montero, CFO

Yes, it's still not fully recovered. I would say right now, leisure VFR is about 3/4 of the total volume of passengers that we're serving and about 1/4 is related to business. It is still not back to the sort of 2/3, 1/3 where it was pre-pandemic.

Operator, Operator

At this time, I'd like to turn the call back over to Pedro Heilbron for closing remarks. Sir?

Pedro Heilbron, CEO

Yes. Okay. Thank you, and thank you all. This concludes our earnings call. Thank you for being with us. Thanks for your continued support, and have a great day. Have a great weekend, and we'll see you next time. Thank you very much.

Operator, Operator

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