Copa Holdings, S.A. (NYSE:CPA) Q1 2023 Earnings Call Transcript May 11, 2023

Operator: Ladies and gentlemen, thank you for standing by. Welcome to Copa Holdings First Quarter Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder this call is being webcast and recorded on May 11, 2023. Now I will turn the conference call over to Daniel Tapia, Director of Investor Relations. Sir you may now begin.

Daniel Tapia: Thank you, Felicia, 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, copaair.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: Thank you, Daniel. Good morning to all, and thanks for participating in our first quarter earnings call. Before we begin, I would like to extend my sincere gratitude to all our co-workers 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. Today, we’re pleased to report strong results for the first quarter and a solid outlook for the year. Despite the continued high fuel prices in the quarter, we were able to deliver an operating margin of 22.3%. These results were mainly driven by a robust demand environment in the region which led to an improved load factor as well as an increase in passenger yields during the quarter.

Among the main highlights for the quarter, passenger traffic grew 7.1% compared to the same period in 2019 outpacing our capacity growth of 2.8%. This resulted in an 86.8% load factor, a 3.5 percentage point increase compared to Q1 2019. Passenger yields came in at $0.146 or 20% higher than the first quarter of 2019. While cargo revenue was 52% higher, resulting in unit revenues or RASM of $0.131, a 25.5% increase compared to the first quarter of 2019. On the cost side, our unit cost excluding fuel came in at $0.062 or 2.1% higher compared to Q1 2019. As a result our operating margin came in at 22.3% 5.5 percentage points higher than in the first quarter of 2019. On the operational front Copa earnings delivered an on-time performance of 92.2% and a completion factor of 99.9%, once again amongst the very best in the world.

I would like to take this opportunity to express my recognition for more than 7,000 coworkers who day in and day out deliver a world-class travel experience to our customers. Their contributions are key to our success. Turning now to our fleet. We received two 737 MAX nine aircraft during the quarter and we expect to receive 10 more MAX nine during the remainder of the year to end 2023 with a total fleet of 109 aircraft. With regards to our network as we mentioned in our last call, we plan to start new service to the cities of Manta in Ecuador and Baltimore and Austin in the US starting this summer. With these additions, we will serve 80 destinations in 32 countries in North, Central, South America and the Caribbean, as we continue to strengthen and solidifying our position as the most complete and convenient hub in Latin America.

Finally with regards to Wingo, Wingo continues its regional expansion with the announcement of three new domestic Colombia routes from Bogota to Barranquilla, Pereda and Bucaramanga and one international seasonal service from Cali in Colombia to Aruba. With these additions, Wingo will operate 34 routes with service to 21 cities in 10 countries. Now, turning to our expectations for 2023. As you saw in our earnings release, we increased our operating margin guidance to a range of 22% to 24%, mainly driven by the current solid demand environment in the region as well as a lower fuel curve for the remainder of the year. As always, Jose will provide more detail regarding the full year’s outlook. To summarize, we’re off to a very good start in 2023 and expect to keep seeing a healthy demand environment throughout the year.

We continue growing and strengthening our network the most complete and convenient hub for intra-Latin America travel. And as always, our team continues to deliver world-leading operational results while maintaining our cost low. Lastly, we’re as confident as ever in our business model. We continue to deliver solid margins and competitive unit costs while offering a great product for 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: 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 our first quarter results. We reported a net profit for the quarter of $121.5 million or $3.07 per share. Excluding special items, net profit came in at $157.8 million or $3.99 per share. First quarter special items are comprised of an unrealized mark-to-market loss of $37.9 million related to an appreciation in the value of the company’s convertible notes and a $1.7 million unrealized mark-to-market gain related to changes in the value of financial investments. We reported a quarterly operating profit of $193.2 million and an operating margin of 22.3%.

Capacity came in at $6.6 billion available seat miles or approximately 3% higher than in Q1 2019. Load factor came in at 86.8% for the quarter, a 3.5 percentage point increase compared to the same period in 2019 while passenger yields increased 20% to $0.146. As a result, unit revenues came in at $0.131 or 25.5% higher than in the first quarter of 2019. Driven by higher jet fuel prices, unit costs or CASM increased 17.2% versus Q1 2019 to $0.102. And our CASM excluding fuel came in at $0.062, a 2.1% increase versus Q1 2019, mainly driven by additional engine maintenance costs, changes in supplemental rent provisions related to aircraft utilization as well as additional lease engine costs, plus an increase in our sales and distribution costs as a function of higher sales during the period.

I’m going to spend some time now discussing our balance sheet and liquidity. As of the end of Q1, we had assets of close to $4.9 billion. And in terms of cash short and long-term investments, we ended the quarter with $1.2 billion, which represents 36% of our last 12 months’ revenues. So our debt, we ended the quarter with $1.7 billion in debt and lease liabilities and achieved a net debt-to-EBITDA ratio of 0.6 times. 80% of our aircraft debt is fixed and I’m happy to report that our blended cost of aircraft debt for the quarter, came in at an annualized rate of 3%. Turning now to our fleet. During the first quarter, we received two Boeing 737 MAX 9s to end the quarter with a total of 99 aircraft compared to 102 aircraft in our fleet at the end of 2019.

With these additions, our total fleet is now comprised of 68 737-800, 22 737 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 continues to be comprised of owned aircraft and one-third of our aircraft are on their operating leases. During the remainder of 2023, we expect to receive 10 additional aircraft, all Boeing 737 MAX 9s to end the year with a total fleet of 109 aircraft. Finally, I’m pleased to inform you that this past month of March, our Board of Directors approved a quarterly dividend of $0.82 per share, subject to Board ratification each quarter, which reinstates our dividend payout of 40% of prior year’s adjusted net income. We made our first quarterly payment during the month of April and the second payment would be on June 15 to all shareholders of record as of May 31.

As to our outlook, based on the strength of the current demand environment, we can provide the following guidance for full year 2023. We expect to increase our capacity in ASMs versus 2022 within a range of 12% to 13%. We now expect an operating margin within the range of 22% to 24%. We’re basing our outlook on the following assumptions: load factor of approximately 85%, unit revenues within the range of $0.125, CASM ex fuel to be in the range of $0.061. And finally, we’re expecting an all-in fuel price of $2.85 per gallon. Thank you. And with that, we’ll open the call to some questions.

Q&A Session

Operator: Thank you. [Operator Instructions] The first question comes from the line of Stephen Trent from Citi. Stephen, please go ahead.

Operator: One moment for the next question. 1The next question comes from the line of Savi Syth of Raymond James. Savi, please go ahead.

Operator: One moment for our next question. The next question comes from the line of Guilherme Mendes from J.P. Morgan. Guilherme, please go ahead.

Operator: One moment for our next question. The next question comes from the line of Michael Linenberg from Deutsche Bank. Michael, please go ahead.

Operator: One moment for the next question. The next question comes from the line of Bruno Amorim from GS. Bruno, please go ahead.

Operator: [Operator Instructions] The next question comes from the line of Helane Becker of Cowen. Helane, please go ahead.

Operator: One moment for the next call or next question. The next question comes from the line of Daniel McKenzie of Seaport Global. Daniel, please go ahead.

Operator: One moment for your next question. The next question comes from the line of Alberto Valerio of UBS. Alberto, please go ahead.

Operator: One moment for the next question. The next question comes from the line of Araujo Rogerio of Bank of America. Araujo, please go ahead.

Operator: One moment for your next question. The next question comes from the line of Josh Milberg of Morgan Stanley. Josh, please go head.

Operator: Please hold for the next question. The next question comes from the line of Duane Pfennigwerth of Evercore ISI. Duane, please go ahead.

Operator: Thank you. I would now like to turn the call back over to Pedro Heilbron. Pedro, please go ahead.

Pedro Heilbron: Yes, thank you very much. And so thank you all. This concludes our earnings call for the first quarter of 2023. And so I’ll take also this opportunity to announce that we’ll have our Investor Day as I think Helane mentioned. It’s going to be on June 22 in New York City. You should be getting the invitations and any other details in the next couple of days. So hope to see you then next month and have a great day. Thank you as always for your support.

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