Copa Holdings, S.A. (CPA) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Copa Holdings Second Quarter Earnings Call. [Operator Instructions] As a reminder, this call is being webcast and recorded on August 4, 2022. Now I will turn the conference over to Daniel Tapia, Director of Investor Relations. Sir, you may now begin.

Thank you, Catherine, and welcome, everyone, to our second 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 second 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 second quarter earnings call. Before we begin, I'd like to thank all of 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. As all of you are aware, the significant increase in jet fuel prices has put serious pressure on the operating cost of the entire airline industry. This impact was especially noticeable in the second quarter in which, in our case, the effective price of jet fuel increased more than 86% when compared to the same period in 2019. On the positive side, passenger yields for the quarter came in higher by 10.1%, partially offsetting the additional fuel costs. The combination of these 2 factors plus our ability to control our nonfuel-related costs enabled us to deliver a 6.1% operating margin and an adjusted net profit of $13.2 million in Q2. Now I would like to mention the main highlights for the quarter. Our capacity reached 97% of second quarter 2019 ASM. RPMs decreased 3.8% when compared to Q2 2019, resulting in an 84.8% load factor. Passenger yields came in at [ $0.13 ] or 10% higher than in the second quarter of 2019, while cargo revenue was 62% higher resulting in unit revenues, or RASM, of $0.116, an 11.3% increase compared to the second quarter of 2019. Ex-fuel CASM decreased from $0.062 in Q2 2019 to $0.06, representing an almost 5% decrease, on 3% less capacity. And on the operational front, Copa Airlines delivered an on-time performance of 85.9% and a completion factor of 99.8%. In terms of fleet during the quarter, we took delivery of one 737 MAX 9 to end the quarter with a total of 94 aircraft, reaching 92% of our year-end 2019 fleet size. With the addition of this aircraft and the expected remaining deliveries for the year, more than 20% of fleet will be composed of MAX aircraft, resulting in valuable fuel efficiencies. These figures also include our recently retrofitted 737-800 freighter, which operated during the entire quarter carrying almost 30% of our total cargo volume. By shifting most of our previously third-party cargo operation to the retrofitted freighter, we're able to transport higher cargo volumes at lower costs. In terms of our network, Copa Airlines started operations in 2 new cities during the quarter, Santa Marta in Colombia and Barcelona in Venezuela, ending the quarter with service to 76 cities in 32 countries compared to 80 cities in 33 countries in year-end 2019. We also announced a new service to the Santa Lucia airport in Mexico City, starting in September, which will complement our existing service to Mexico City as we continue strengthening and solidifying our position as the most complete and convenient hub in Latin America. Turning now to Wingo. Wingo continues its regional expansion with the announcement of 4 new routes starting in October. With this addition, Wingo will operate 31 routes with service to 21 cities in 10 countries. [indiscernible]. So you can see despite the current fuel price environment affecting the entire airline industry, we have established our capacity and network to near pre-pandemic levels and continue delivering profitable financial results. Looking ahead, we continue to see a recovering demand environment in the region and healthy booking trends, which led us to anticipate an increase in our unit revenues for Q3 and consequently, to expect higher operating margins quarter-over-quarter. In Q3, we also expect to bring back our capacity measured in ASMs to 100% of our pre-pandemic levels. Nonetheless, considering the uncertainty of the current economic environment, we remain cautious and continue to closely monitor demand patterns in the region. So we will remain focused and flexible in terms of capacity adjusting our plans as needed. I'd like to conclude by reiterating that we have a proven and strong [indiscernible] 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 a strong balance sheet, and we expect that our Hub of the Americas will continue to be a 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 their efforts to deliver world-class service to our passengers. I will start by going over our second quarter results. Capacity came in at 6 billion available seat miles, which is approximately 97% of our Q2 2019 capacity. Load Factor came in at an average of 84.8% for the quarter, a 0.4 percentage point decrease compared to the same period in 2019. Our adjusted net profit for the quarter, excluding special items, came in at $13.2 million or $0.32 per share. Second quarter special items totaled $111 million comprised of an unrealized mark-to-market gain of $113.7 million related to the company's convertible notes and a $2.7 million unrealized mark-to-market loss related to changes in the value of financial investments. We reported a quarterly operating profit of $42.3 million and an operating margin of 6.1%. Driven by higher jet fuel prices, unit costs or CASM increased 19.9% versus those of Q2 2019 to $0.109. Our CASM, excluding fuel came in at $0.06, a 4.6% decrease compared to Q2 2019, even though we operated 3% less capacity. And finally, driven by a 10.1% increase in yields, unit revenues came in at $0.116 or 11.3% higher than in the second quarter of 2019. I'm going to spend some time now discussing our balance sheet and liquidity. As of the end of the second quarter, we had assets of close to $4.4 billion. And in terms of cash, short- and long-term investments, we ended the quarter with $1.1 billion, which represents 47% of last 12 months' revenues. As to our 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 first quarter of 2022, and our adjusted net debt-to-EBITDA ratio came in at 0.8x. Turning now to our fleet. During the second quarter, we received one Boeing 737 MAX 9 to end the quarter with a total of 94 aircraft. Our total fleet is comprised of 68 737-800s, 17 737 MAX 9s and 9 737-700s. These figures include 3 737-700s, which ended the quarter in temporary storage and 1 737-800 freighter. For the second half of the year, we expect to receive 4 additional 737 MAX 9 aircraft. And so we expect to end the year with a fleet of 98 aircraft. We have financed these deliveries through sale and leaseback transactions, increasing the proportion of operating leases to above 30% of our total fleet, ensuring we continue to have a flexible fleet plan going forward. In 2023, we expect to receive 13 additional aircraft 11 Boeing 737 MAX 9s and 2 Boeing 737 MAX 8s. We've already secured financing for the first 6 of these deliveries through [indiscernible] Turning now to our outlook for the third quarter of 2022. Based on the current state of the demand environment and the current expectation of the price of jet fuel, we can provide the following guidance. We expect capacity to be back at approximately 100% of Q3 2019 levels or about 6.4 billion ASMs, and we expect our operating margin to be in the range of 16% to 18%. We are basing our Q3 2022 outlook on the following assumptions: Load Factor of approximately 86%, unit revenues of approximately $0.127, CASM, ex-fuel, of approximately $0.06 and an all-in fuel price of $3.80 per gallon. Regarding full year 2022, we reiterate our expectation of achieving approximately 98% of 2019 ASMs and a CASM ex-fuel of approximately $0.059. Thank you. And with that, we'll open the call to some questions.

[Operator Instructions] Our first question comes from Duane Pfennigwerth with Evercore ISI.

This is [ Jake Gunning ] on for Duane. I realize that it's early, but could you offer any thoughts on your 2023 capacity plans? 4Q is already implied that 100% of 2019. So could we see capacity up over 10% next year?

Jake, it's Pedro. So the fleet plan we have published takes us from -- takes Copa Holdings from 98 aircraft at the end of '22 to 108 at the end of '23, but it could be even a little bit more if we renew all of our leases. It could even be 111. So we do the math there, I mean -- and I should first have said that we have not yet guided to ASMs, ASM growth for 2023. So we're only guiding for Q3. But if you look at our fleet plan and you do the math, it's going to be like low double digits, I would say.

Okay. Yes, that makes sense. And then could you just confirm that the 120 million that you bought back was roughly 4% of the stock in the second quarter.

I think that sounds about right, I think, I would say yes. It's in the range.

We have a question from Savi Syth with Raymond James.

Just kind of curious on the demand and the revenue outlook is really strong here. And is there kind of a particular region or trip type business or leisure that's driving this revenue recovery trend?

Savi, Pedro here. So I would say that it's across the board. There's not one particular region that's underperforming or -- I mean in no significant way. And we need to keep in mind that in part, it's a reaction to higher fuel prices. Strong demand allows us to produce better yields. And it also allows the fact that fuel affects everyone pretty much the same. It allows for this yield improvement to be more sustainable, at least for now. So I would say it's across the board.

And the other thing I'll add, Savi, is we got to remember that Q3 has -- from a seasonality perspective, is a strong quarter for us. So sequentially from Q2, which is the sort of weakest quarter of the year from a seasonality perspective to Q3. you also see that difference in the RASM. However, as Pedro mentioned, we're following closely the demand and the macroeconomic environment and the fuel impact. And so we're very closely paying attention to the demands that we see in the region.

And on the business versus leisure, part of that is seeing anything different?

Business has improved slightly, but still half of what it was in 2019, but we see an improving trend.

Yes. And on a sequential basis, it's gotten better over the course of the year. Yes.

Helpful. And then if I might, just a quick question on the fleet. It does look on the fleet plan, there are MAX 8s coming that I thought initially that kind of the plan was for MAX 9s and 10s and I know 10s aren't certified yet. Is that a kind of a change in strategy there? I know it looks like maybe one MAX 9 has slipped from this year to next year. So maybe it's just the fact that [indiscernible] available? Just curious what the strategy behind the fleet plan.

Yes. We were always planning to get the MAX 8. We only need a kind of a set number of MAX 9s, which we use for our longer segments. So we get 2 MAX 8s, that's the plan next year, and we will continue getting more MAX 8s and probably a few more MAX 9s that we still have to receive to get to the said number.

And our fleet plan and our order with Boeing has enough of flexibility that we can determine which subtype we would receive in due course.

Are you able to share kind of what the right size of MAX 9 is or...

The MAX 9s are going to be -- yes, it's going to be in the low 30s. It's going to be in the low 30s. The rest are going to be most likely MAX 8s. We have options in the MAX 10s also. So we haven't made a final decision there. But that's kind of where -- how it looks right now.

Our next question comes from Alejandro Zamacona with Crédit Suisse.

Quick question on the CASM, ex-fuel. So beyond the $0.059 guided for the full year 2022, what has been the strategy to lower the costs despite the higher inflation environment? What can we expect on labor, marketing and maintenance in the medium term?

Well, I'll start with a few comments and then Jose can pitch in. So we're operating with higher gauge. So we have more and more seats for -- in our aircraft, which allows us to spread our fixed overhead costs. We've also, since the pandemic accomplished some important savings in overhead, which also helped in our CASM mix. And have been very disciplined, again, since the pandemic and we're renegotiating a lot of contracts, part of how we survived the worst of it. So that's also part of what we've been able to accomplish. And we're always, as you know, very, very nimble with our costs as much as we can.

I'll just add that going forward, Alejandro, as we've discussed before, we also have a plan to densify our 737-800 fleet, and so that will also provide for a reduction in CASM ex. And as Pedro mentioned, we have a very lean overhead structure. We've been very active in contract negotiations. And some of those mitigate some of the increases that we've seen in certain parts of the network as well. And we're also, of course, working in other avenues such as distribution and the like that, that should also improve our CASM in the medium-to-long term.

Okay. It makes sense. And then my second question, if I may, in terms of the capital allocation, is there any change in the strategy? I mean the full recovery. And also, if you can share any update on the potential dividends?

Yes. Look, our focus as a company has always been to return value to our shareholders. And as part of that, we've been active in our share repurchase program, which serves as a conduit to manage some of the liabilities that we had to take on during the pandemic. So that's our main focus right now. And of course, this is something that we look for. We have a set dividend policy that we have had even before the pandemic. So that's something that, in due course, will be addressed as well. But again, I just want to reiterate how important it is for us to return value to our shareholders. In addition to that, from the operational standpoint, we also have a set of aircraft arriving, which require predelivery deposits with Boeing. And as you saw, we have 13 airplanes coming into next year, et cetera. So that's also part of our capital allocation strategy to grow the business.

We have a question from Michael Linenberg with Deutsche Bank.

Pedro, just I want to touch back on Wingo. You talked about regional expansion and you listed a number of cities by October and countries. Does that include the new service, I think, that you're planning to Argentina? And if that's the case, what's the fleet size at that point because it would think that a flight to Argentina back and forth would probably use up a single airplane. Just some additional color on that operation.

Yes. It actually uses half an airplane. The way we operate at the wee-hours. So it uses half an airplane. It's contemplated in aircraft #9, but they'll get eventually aircraft #10. So there will be enough for them to serve that market and other. But Wingo grows carefully. We're very conscious of the competitive market in Colombia and the region. So Wingo does not have like a set plan to grow for the sake of growing. It grows to gain strength and be successful. So we measure every step like we always do. So Wingo is no different in that regard.

Pedro, is it fair to say, usually for high-density, no-frills type service, usually when you get beyond stage lengths of 3 and 4 hours, it becomes a much more difficult value proposition. But then when I look at some of the changes going on in the region, it seems like competitor airlines are doing very long haul with single-class type layouts. And so maybe that creates more opportunities for the Wingo product. Is that a fair sort of assessment of the competitive playing field?

Yes. I mean it could be. We're still learning. So it could be.

Okay. And just my second question on cargo. When I look at your passenger revenue up 6% versus '19 and others up 20%, cargo's up 62%. And I realize it's obviously being driven by the freighter. But absent the freighter, would your cargo revenue have been -- the growth rate been something more similar to maybe the other up 20%? Because I am sort of incorporating the higher cargo yields that we're seeing in the marketplace. And I'm trying to get at how much of that single airplane has added. It looked like it was very -- it was a meaningful contribution on the top line at least from a growth rate perspective.