Q1 2022 Copa Holdings SA Earnings Call

Ladies and gentlemen, this is the operator speaking todays conference is scheduled to begin shortly please continue to standby and thank you for your patience again, ladies and gentlemen, todays conference is scheduled to begin shortly please continue to standby and thank you for your patience.

[music].

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 at that time. If you have a question you will have depressed star then one on your touched.

On the phone.

As a reminder, this call is being webcast and recorded on May 12, 2022.

Now I will turn the conference call over to Danielle 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 pivotal Haley T.

T O of Copa Holdings, and Jose Montero, our CFO .

But I 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.

On today's call, we will discuss non <unk> financial measures.

A reconciliation of the non <unk>.

<unk> 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.

Limited to historical facts that reflect the company's current beliefs expectations and our 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 Heather.

Thank you Danielle.

Morning to all.

Thanks for participating in our first 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 <unk>.

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 Varian on our operations and demand for travel as.

As we all saw 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 ASM.

Ex fuel CASM decreased from $6 one.

In Q1 2019 to six inch.

Unit revenues or RASM came in at 10, 2%.

A decrease of 3% when compared to Q1 2019.

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 seven 8% slightly above the range we guided to.

In terms of fleet.

During the quarter, we took delivery of two 737 Max nines.

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 efficiency store operation.

I'm also pleased to mention that Copa earnings delivered an on time performance of 91, 3% and a completion factor of 99, 3% again, 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 four cities during the quarter.

And announced two new series to start in June .

Murphy in Colombia in Barcelona in Venezuela.

Ending the quarter with service to 72 series in 30 countries compared.

Compared to 80 cities in 33 countries before the pandemic as.

As we continue strengthening and solid find our position as the most complete and convenient hub in Latin America.

Turning now to Wingo Wingo received its 877 800 and continued its original expansion by launching a new route from mainly in Colombia to central mainland and 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 is historically a low season quarter lead us to expect lower second quarter margins.

Sam 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 <unk>.

Leveraging panamax advantageous geographic position with low unit cost best on time performance and strongest balance sheet and we expect that going forward. Our hope is 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 for our passengers.

I will start by going over our first quarter results.

<unk> 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 one nine percentage point decrease compared to Q4 2021, given that we operate at 10% more of a sense.

Were also impacted by the only calling wave in January and February .

We reported a net profit of $19 $8 million or <unk> 47 per share <unk>.

Excluding special items, we would've reported a net profit of $29 5 million or.

Or <unk> 70 per share.

Special items for the quarter totaled $9 $7 million, consistent with where they realized mark to market loss of $6 $8 million related to the company's convertible notes issued in 2020.

And then on realized $2 9 million loss related to changes in the value of financial investments.

We reported a quarterly operating profit of $44 8 million or an operating margin of seven 8%.

Unit costs, excluding fuel improved versus the previous quarter coming in at <unk>, driven by our continued focus on reducing expenses as well as our quarter over quarter capacity growth of 10%.

Unit revenues came in at $10 two and.

A 3% decrease when compared to the same period in 2019.

Finally, our cargo revenues for the quarter came in were 40% above our cold weather needs for Q1, 2018, 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.

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 <unk> eight times.

I want to highlight that our average cost of aircraft related debt for the quarter was two 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 277, Max Nines to end the quarter with a total of 93 aircraft. Our total fleet is comprised of 68 737, eight hundreds 16, 10% MX lines and nine 737 seven hundreds. These figures include $3 737, seven hundreds which.

Currently in temporary storage and one 737 800 trader.

As to our outlook based on the current state of the demand environment and the current expectation of the price of fuel.

Can provide the following guidance for the second quarter of 2022.

We expect capacity to be approximately 96% of Q2 2019 levels were about $5 9 billion.

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 nine <unk>.

Ex fuel of approximately <unk> <unk>.

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 ASM.

And our CASM ex fuel to be approximately $5 nine.

Thank you and with that we'll open the call to some questions.

Thank you ladies and gentlemen, if you have a question at this time. Please press the star and the number one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.

We have the first question comes from the line of Savi Smith of Raymond James Your line is now open.

Hey, good morning.

Just on the revenue guide that.

You have.

Load factors are really strong higher than kind of historical levels that we've seen could you talk a little bit about what youre seeing in terms of demand as it is there it just business demand coming in that's been strengthening.

And on the leisure side or is it still driven by leisure.

Hi, Savi this is Pedro and good morning.

It's mainly leisure like has been the case.

In the last number of months. However, we are seeing an uptick in business problem and it's still I mean in the first quarter was still in the 50% range our corporate business.

Versus 2019, but its increasing in April and in the same quarters picking 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 he can talk a little bit about.

When you might be comfortable introducing a dividend again.

Yeah, sorry, we.

Indeed.

We have a.

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 did it yes it was.

And that program is pretty much done by the way we're likely in the final stretch.

Many years ago.

In terms of dividend, we still have the same dividend policy, we had before they're paying out 40% of net profits for the year. So.

So at the end of this year, our board will consider.

<unk> 2022 results and decide accordingly.

If I may a follow up on that is that that's super helpful to address it.

If you think about may.

Maybe increasing your buyback program or anything.

Anything that might cause us pause to reinstating the dividend.

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 cannot speak for our board right now.

But if we stay in a solid cash position and delivered 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.

Just.

Reinstating our hour.

Dividend policy, which again as steel still in place.

Yes.

Alright, thank you.

Thank you Terry.

Thank you we have the next question comes from the line of Julin Panama worth of Evercore ISI. Your line is now open you may ask your question.

Hey, Hey, guys. Good morning, Thank you.

Just on you.

Your comments on business travel can you.

Comment regionally, where youre seeing that pick up and recently on on travel policy restrictions any notable changes with respect to easing.

Again, it's just picking up in the second quarter, which is a positive development, but still.

Not a significant change.

What we've seen before but again its a right as the right trend which is encouraging.

For all in I would say, it's all over the place we have a very.

Balanced and diversified intra America network, so I would not.

Not really points out a specific market, yes, I think it will all regions are performing.

It will be in line with with kind of what the average is four four that Edward.

And then along the lines of some asami so obvious 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.

We look at.

Quite a bit and again.

We have been.

As I mentioned before we have been.

We have an active buyback program that is.

That is ongoing and so yes, we always look at this and also in light of the fact that are.

That are <unk>.

Liquidity levels are strong right now under we were cash flow positive. So we are.

In.

Always looking at that as a.

As alternatives to keep all options open in terms of mitigating we're managing the liabilities that we have.

Great and then just for my last one is just 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 fuel surge surcharge dynamics and what are you seeing sort of incrementally you're kind of in the yield outlook beyond.

What is typically a seasonally softer <unk> for Ya. Thanks, Thanks for taking the question.

It's a very important question Duane.

For Q2, when you sort of.

Isolated.

You know the sort of seasonality into the quarter and the stronger demand environment that we're seeing sequentially and you see that through a load factor of 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 all of the fuel increases.

Through our yield.

The moves that we've made.

Over the coming months and quarters, we expect that that continuing a positive trend for Q2 is kind of the visibility that we're seeing right now the increases in yields are true RM punches and further actions.

And we're very active in that 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.

Alright, thanks for taking the questions. Thank.

Thank you Duane.

Thank you we have the next question comes from the line of Alexander <unk> of Credit Suisse. Your line is now open you may ask your question.

Yes.

Sorry pivotal Pacific Thank you for the call.

It's been a long time since the potential JV acreage.

Jamaica.

I'm wondering if these potential plan.

That's still on the table or nothing more of them.

Hello, this potential deal.

May change after the recent.

And we shouldn't agreement with Avianca.

Do you.

Yes, so as you know it.

It has been.

Been a very.

Kind of up and down time since the pandemic.

We did sign that J P 83 year lengths.

And then went into bankruptcy or chapter 11 proceedings during during the.

The pandemic, which put everything on hold and the pandemic itself put everything on hold.

And.

So so your expectation was to sit down to three airlines.

And rethink.

The J P E and figure out what's the right time to it.

Implemented is that was the desire of all three are aligned now with this new development with just just came up yesterday and I don't think anybody really neuro Barton.

I would assume this whole conversation is going to have another another twist and we will see so it's hard for us to say right now.

What's going to be the decision of them or of the other partners. The three partners.

Maybe part of that JV, So, it's helping dear right now I would say, but its still its still there its still.

Yes.

Something that we need to talk about.

Okay.

Okay. Thank you Brandon.

Two questions if I may.

The cost reductions.

I mean do you feel comfortable to see these cost reductions are actually.

Rather our cost efficiency, rather than the cost reductions on a quarterly basis.

Yes totally cost efficiencies, we work on cost efficiencies, we work on sustaining sustainable cost reductions.

And even during the pandemic at the beginning of the pandemic is not over and we were altered we when we went back to our.

Leasing less source aircraft Lessors for example, just as an example of how we think and we were offered a temporary reduction which would then kick back.

Later on.

I was not attractive to us and so when we show cost cost reduction for lower costs.

It's because we plan to keep it that way.

Yes.

Yeah.

And do you have the number.

Sorry.

Next question, we had the line of Mike Lindenberg of Deutsche Bank. Your line is now open you may ask your question.

You answered <unk> question about.

Your fuel recapture.

Is actually increasing in building and yet we're also dealing with a much higher fuel price in the June quarter than what we were in the March quarter. So.

I just wanted to clarify that.

It seemed like the revenue trend is not only very strong, but it but its accelerating is that is that a fair.

Assessment based on what you said.

Yes.

My comments related to the fuel recapture and by the way Mike I missed.

The first part of your question, but the way that I guided was that whether the recapture was.

It was getting stronger as time went by.

So my comment related to that.

So the fact that our revenue.

Our yield moves are sort of covering almost half of the fuel increases are specifically for the second quarter.

Actually specifically, what we're seeing in the second quarter into the second quarter were ultimately what youre seeing is that fuel is increasing faster than revenue.

We're making a just specifically given where the spot and the immediate curve over the next month and a half of it's in terms of fuel.

But going forward of course, we are continuing to to put in our RM and pricing moves in such a way to be able to increase that percentage as time goes by.

Okay. So thats helpful. And then so does that sort of thing.

Sort of follow up and tie to it is that.

Last quarter, it looks like that.

By year end, you were going to get to sort of 93% of 2019 capacity and you know our five points higher we're looking at 98% when we look across the industry and we look at other competitors.

All host of reasons some of it is labor shortages and alike, but also some of it is higher fuel prices, we've seen carriers actually scaled back.

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 you want to put on more capacity and maybe you're just being opportunistic.

Yeah, 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.

Especially in domestic markets are above 2019.

We're still not at a 100%. So so we're still trying to get to a 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 pages since I have you on the on the response to opera.

Did you say that there is a twist there sort of feels like a bit of an.

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 codeshare with coal.

In a bilateral.

The list goes on I guess the question that I wanted to ask though is that.

With the announcement of Albright.

Some of the questions. We were getting from investors is that the market is concerned that that is a negative for Copa in copel will be compelled to respond in some way shape or form.

Have your thoughts on that is that does that make sense or where do you come out on that thank you. Thanks for my question.

Okay. So that's a good question to answer so do we have time.

Well first thing I can say is that the news came out yesterday.

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 that the Arab revenues kind of percent tool, but I'll say a few things.

One.

We have faced.

Many challenges and consolidations.

You know a bunch of stuff.

In the last let's say 20 years.

We usually have a good answer.

And unusually our answer is doing more of the same but just in a better and 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've read is not really not really losing losing its strength or its uniqueness.

<unk>.

We might be the only.

Carrier with with the right product for the business traveler.

We're 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 AB rice growing that might be the case, but even if it's not.

Have a unique very strong hub model.

Not only with low cost, but we've shown the ability to keep costs, lower LOE and push them lower and when needed.

We have efficient trains we have a strong product.

A strong network. So we're actually confident that we are in a good position.

And that won't talk about if we have to react or not or not I think I think if we choose to stay focused on our business model.

I think we can continue to be very successful doing it that way.

Very good thanks Pedro.

Thank you. The next question comes from the line of Paolo must have yet.

Barclays. Your line is now open you may ask your question.

Hi, Thanks for taking my question I just.

One question. The first one is in terms of your unit revenue.

I don't know if you have the calculation, but for me I mean, taking out the impact of comic Con do you stop.

A sense of what revenue should look like.

Number one number two.

We take also the effect of a higher jet fuel.

The price environment for the second quarter, what would be the level of kidney revenues I guess I'm trying to get what is the trend on a normalized basis of the unit revenue. Thank you.

Yes, I would say I think I don't want to talk about about sort of what answer because the reality of what we're facing is we did face will make wrong and we did face.

We are facing a.

High fuel environment.

But the reality is that that is I would say that on a normalized basis. This year was going to be a recovery year for us and <unk>.

Overall, our margin I think.

Would have you would argue that it would've been.

Most almost back to where we're in a regular year was was for us.

I think initially you want to.

Have all been 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 reallocating selling price, but as you can see we've adapted to win.

Very good way, we are a low cost base.

Our ability to pass on some of the increases tomorrow.

Yes.

And we have.

Yes.

Perfect. Thank you.

Thank you Paolo.

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

Thanks, very much operator, hi, everybody and thank you for the time.

So the one greater that you have what's the revenue opportunity from cargo.

<unk> exist for you guys.

Well, Hi, and then we serve.

Our region.

And we're not in the long haul wide body markets and a lot of the markets. We serve are not well or not well served by by kind of the big International.

Our national Carnival carriers, so it's a niche.

We feel that can be further developed but right now it's just a single freighter.

Maybe a second later on not.

Not this year and next year, but maybe after that so so although were very successful in our trade business.

It's mostly belly cargo.

Niche cargo operation. So 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.

Unchanged results.

Yeah.

Thats much different to what it is right now.

And one more thing related to the cargo aircraft I think we mentioned that back in our February call.

The 800 that we have that we converted it.

It will also mostly service and replacement for an old airplane that we already were.

When leasing from a third party and they will just provide us for service complimentary service that we have for carnival.

Service insurance markets.

Complementing the belly freight that we have which is the main source of.

Ready for us.

Okay.

Sure.

Alright, thank you.

Okay.

The other question I had was on the.

A loyalty program since since the trough I guess, mostly visiting friends and relatives in leisure.

Total loyalty program an important part.

Going forward.

Leisure customers taking advantage.

John as well.

It is an important part of.

The business and we have a successful loyalty program.

Leisure travelers also take advantage of it.

Business travelers 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.

Okay.

Those are all my questions.

Thank you Elaine.

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

Oh, Hey, good morning, guys. Thanks.

My first question is for you Pedro.

You have been through too many cycles to count here and it just seems like we are now in a new era of rising inflation interest rates and <unk>.

The strengthening dollar so I guess my question is does this backdrop cause you to view this next cycle more cautiously.

Or are higher commodity prices ultimately the bigger economic stimulus for Latin America, and I guess, what I'm really trying to get at is Latin American demand has historically been more inelastic and I'm just wondering if that from where you sit if that can continue to be the case.

Yeah. Thank you then and you are right in what you are saying, so so with time going through so many situations actually.

I think I think.

Yeah.

We kind of we kind of.

Get used to or learn.

The region in general is quite resilient and we're also very diversified and our route network. So sales don't go all markets.

Software the same way and we've been able to increase capacity and revenues consistently over time.

Not during a pandemic like what we'll get in 2020 in 2021, but we've lived.

Through many crisis in there so there's always a silver lining.

Some were and yet it could be it could be.

<unk> demand from higher commodity prices and some concrete making up for others.

Not be doing as well.

Right now as Jose mentioned, we are seeing strong demand.

Although that could change and every crisis is different.

Again, we're confident on our business model.

The resiliency of our business model.

We think we can weather the current crisis in the hub of the Americas and Copa are in a very unique position.

To come out strong.

We take every crisis seriously and we try to take advantage of.

Same.

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 from last quarter, and that's just an unfair searches for Copa Dot com not bookings so the searches versus 2019.

How are searches how have they been trending just given some of the macro volatility and.

And how is that how are these searches affecting your view of future demand as it I guess I'm just trying to get at that.

The durability of pent up demand here.

It's all looking positive right now.

Searches are kind of in line with 2019 with 2019.

And demand in general.

We're seeing demand at Te.

From now on.

Very similar to 2019 levels and searches are in line with that so yeah, just encouraging I think in terms of what we're seeing with the current environment.

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

That is correct yeah.

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

Good Thank you Dan.

Thank you for the last question, we have the line of the leap in Nielsen of Citi. Your line is now open you may ask your question.

Hello, guys. Thank you for taking my question.

I'd like just to do a quick follow up on the.

On the goal.

Agreements Ah.

I was just wondering if you could help me understand what are the main risks in terms of.

Uh huh.

The demand exposure in routes.

True legend.

Latin America et cetera, Central American connection.

Latin America and U S are what are the main risks that this.

This agreement brings to Copa and where do you.

Uh huh.

The major risks like what are the is that in trunk routes, which are.

Which connectivity do you see the greater risk.

Yeah. So first thing I should say that we have not really spent much time as I mentioned before.

This is used for all we have not spent much time analyzing it and we will in the coming days it will show up.

I'll stay away from specific answers for that.

For that reason, but conceptually.

I feel there's room, there's room for all maybe not for.

Everyone that wants to come in before the one or the other in the market and in our region, we think Theres room for all and <unk>.

Consolidation.

You know in most cases, it tends to be a positive.

Not only for the airlines consolidating but also.

For the other competitors like us and in many cases is more complex for the one consolidating trying to trying to combine different titles and cultures from the whole thing.

I've always bad for a very simple straightforward effective.

Panama base.

The hub model.

And this takes nothing away from guidance.

If anything it might.

Help us make it stronger, but we will see again, we haven't.

<unk> much time on it.

We're still very positive about.

Our future.

Great.

Clear and helpful. Thank you guys.

Thank you Philippe.

Thank you I would now like to turn the call over to Mr. Pedro I have done Sir.

Yes. Thank.

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 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.

Okay.

Okay.

Yes.

Okay.

Okay.

Okay.

Sure.

Okay.

Okay.

[music].

Hello.

Okay.

Okay.