Copa Holdings SA (CPA) 2022 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Copa Holdings' First Quarter Earnings Call. (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, Mel, 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 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. 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, 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.

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.

While we faced challenges in Q1, such as the impact in January and February of the Omicron variant on our operations and demand for our travel as well as a significant increase in jet fuel prices, we were still able to deliver a profitable quarter. In terms of the main highlights for the quarter, our capacity reached 88% of first quarter 2019 ASMs. Ex-fuel CASM decreased from $0.061 in Q1 2019 to $0.06.

Unit revenues or RASM came in at $0.102, 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 2 737 MAX 9s with the addition of this 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 Airlines delivered an on-time performance of 91.3% and a completion factor of 99.3%. And again, among the best in the industry. These results are 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 4 cities during the quarter and announced 2 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 received its 8 737-800s 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 was 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 financial 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 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 the realized 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%. The 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.

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 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, and our adjusted net debt-to-EBITDA ratio came in at 0.8x.

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 current increasing interest rate environment.

Turning now to our fleet. During the first quarter, we received 2 737 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 9 737-700s. These figures include 3 737-700s, which are currently in temporary storage and 1 737-800 freighter.

As to 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, 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 and 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 Instructions) We had the first question comes from the line of Savi Syth of Raymond James.

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

Savi, it's Pedro. It's mainly leisure. Like it's been the case in the last number of months. However, we are seeing an uptick in business travel. And it's still -- I mean, in the first quarter, it was still in the 50% range, our corporate business versus 2019, but it's increasing in April and in the same quarter, it's ticking up. But again, it's 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 kind of 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?

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

In terms of -- yes, Savi, in term -- 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's paying 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 if anything that might kind of cause you pause to reinstating the dividend? And what are you looking at? And what -- maybe what is the Board considering in terms of cash flow or environment?

In terms of the dividend, I mean, I cannot speak for our Board right now. But we stay in a solid cash position and deliver the expected profit this year and we are on track, I would say. I would assume that the Board is going to be -- it's going to look favorably at just restating our dividend policy, which, again, is still in place. Yes.

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

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 ticking 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 network. So I would not really point out a specific market.

Yes. 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?

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

Great. And then just for my last one, as you sort of think about the competitive environment and higher fuel, can you talk about -- I mean, 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 kind of booking curve, can you just remind us, are there a fuel surge -- surcharge dynamics? And what are you seeing sort of incrementally kind of in the yield outlook beyond what is typically a seasonally softer 2Q for you?

Yes. That's a very important question, Duane. The -- for Q2, when you sort of isolate the sort of seasonality into the quarter and the stronger demand environment that we're seeing sequentially, and you 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 the coming months and quarters, we expect to continue a positive trend. But for Q2, that's kind of the visibility that we're seeing right now. The increases in yields are through our RM functions and fare actions. And we're very active in that space, of course, given the fuel environment and how it is.

So is it fair to say that, that recapture is sort of increasing and building as you look out further into the future?

Correct. Correct.

We have the next question comes from the line of Alejandro Zamacona of Crédit Suisse.

It's been a long time since the potential JVA with Avianca and [United]. I'm wondering if this potential plan is something that's still on the table or nothing more. How this potential deal may change after the recent contribution agreement with Avianca and GOL?

Yes. So as you know, it's has been a very kind of up and down time since the pandemic. We did sign a JVA, the 3 airlines. Avianca then went into bankruptcy, 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 3 airlines. And we think the JVA and figure out when was the right time to implemented if that was the desire of all 3 airlines. Now with this new development, which just came up yesterday, and I don't think anybody really knew about it, I would assume this whole JVA 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 the other partners, the 3 partners that make part of that JVA. 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. And then my second question, if I may. In terms of the cost reductions, I mean, do you feel comfortable to say these cost reductions are actually rather a cost efficiency rather than a cost reduction on a temporary basis?

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

Next question, we have the line of Mike Linenberg of Deutsche Bank.

You answered Duane's question about your fuel recapture is 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 want 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 I -- the way that I guided was that whether the recapture was getting stronger as time went by. So my comment related to the fact that our revenue or yield moves are sort of covering almost half of the fuel increases are specifically for the second quarter.

That's specifically what we're seeing in the second quarter. And the second quarter ultimately what we're seeing is that fuel is increasing faster than the revenue recapture we're making, specifically given where the spot and the immediate curve over the next 1.5 months is in terms of fuel. But going forward, of course, we are continuing to put in our RM and pricing moves in such a way to be able to increase that percentage as time goes by.

Okay. Okay. So that's helpful. And then sort of follow-up and tie to it is that last quarter, it looked like that by year-end, you were going to get to sort of 93% of your 2019 capacity. And you now are 5 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?

Yes. 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 markets that are above 2019. We're still not at 100%. So we're still trying to get to 100%, and we'll be there in the second half of the year. So I think that needs to be kept in mind also.

Okay. Very good. And then just lastly, Pedro, since I have you on the response to Abra, to say that there's a twist there sort of feels like a bit of an understatement knowing that United has equity in Avianca. And yet, as I believe United still has an antitrust immunized agreement with you guys. And that's just for starters, when we start thinking about all the other connections. I think you also co-shared with GOL in a bilateral partnership. 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? Is that -- does that make sense? Or where do you come out on that?

Okay. So that's a good question to answer. So do we have time? Well, first thing I must say is that the news came out yesterday. I don't think anybody knew before yesterday. And yesterday, most of the day, we were preparing for this call. So we haven't really spent a lot of time thinking of the spider web that the Abra news kind of present to all, but also 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 usually, 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 Abra 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 costs lower -- low and put them lower when needed. We have efficient planes. 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.

We have the next question comes from the line of Pablo Monsivais of Barclays.

I just have one question. The 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 unit revenue should look like? That's number one.

And number two, 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 revenue?

Yes. Pablo, I would say, I think I don't want to talk about sort of what is because the reality of what we're facing is we did face Omicron and we did face -- we are facing a high fuel environment. But the reality is that it -- I would say that on a normalized basis, this year was going to be a recovery year for us. And overall, our margin, I think, would have -- you would argue that it would have been almost back to where a regular year was for us.

That's, I think, initially, if you want to have all these sort of external factors in there, you would have 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 adapted to it in a very good way. We are low cost and we are ability to pass on some of the increases tomorrow the other yields that we have.

We had the next question comes from Helane Becker of Cowen.

So the 1 freighter that you have, what's the revenue opportunity from cargo that exists for you guys?

Well, Helane, 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 kind of the big international cargo carrier. So it's a niche. We feel that can be further developed. But right now, it's just a single freighter.

And maybe a second later on, not this year or next year, but maybe after that. So although we're very successful in our freight business, it's mostly belly cargo and this niche cargo operation. So I don't think it's going to be -- I mean, 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 serve as a replacement for an older airplane that we already were wet leasing from a third party and they will just provide us for sort of this complementary service that we have for full cargo service in the (inaudible) markets, complementing the value freight that we have, which is the main source of revenue for us.

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

It is an important part of the business, and we have a successful loyalty program. Leisure travels also take advantage of it. Business travels coming back step by step also. We should not forget that. And the loyalty program also generates non-air-mile revenues, which are also important.

The next question, we have the line of Dan McKenzie of Seaport Global.

My first question is for you, Pedro. You have been through too many cycles to count here. And it just seems like 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 higher commodity price is 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 in elastic. And I'm just wondering if that -- from where you sit, if that can continue to be the case.

Yes. Thank you, Dan. And you're right in what you're saying. So with time going through so many situations actually. I think we cannot get used to or learn that the region in general is quite resilient. I mean -- and we're also very diversified in our route network. So sales on GOL markets suffer the same way. And we've been able to increase capacity and revenues consistently over time and of course, not during a pandemic like what we live in 2020 and 2021, but we lived through many crises. And there's always a silver lining somewhere.

And yes, it could be a stronger demand from higher commodity prices in some countries, making up for others that may not be doing as well. 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 and 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 the same. And hopefully, this time 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? Is it -- 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 kind of in line.

2019.

Yes, with 2019 and in demand in general, we're seeing demand, let's say, from now on, very similar to 2019 levels and searches are in line with that. So...

Yes. 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, as the caveat, right?

That is correct.

For the last question, we have the line of Filipe Nielsen of Citi.

I'd like just to do a quick follow-up on the GOL Avianca agreement. I was just wondering if you could help me understand what are the main risks in terms of the demand exposure in routes through Latin American, Central American connection between Latin America and U.S. What are the main risks that this agreement brings to Copa? And where do you see the major risk, like what are -- is that in trunk routes, which connectivity do you see the greater risk?

Yes. So first thing I should say is that we have not really spent 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 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, hence, 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, it's more complex for the one consolidating, trying to combine different trials and cultures and the whole thing. We have always bet for a very simple, straightforward effective Panama-based 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.

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

Yes. 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.