Copa Holdings, S. A. (NYSE:CPA) Third Quarter 2022 Results Conference Call November 17, 2022 11:00 AMm. ET
Participating companies
Daniel Tapia – RI
Pedro Heilbron-CEO
José Montero – Chief Financial Officer
Conference Call Participants
Duane Pfennigwerth – Evercore ISI
Alejandro Zamacona – Credit Suisse
Michael Linenberg – Deutsche Bank
Savi Syth-Raymond James
Stephen Trent – Citi
Helane Becker – Cowen
Operator
Ladies and gentlemen, thank you for being here. Welcome to Copa Holdings’ third-quarter earnings call. During the presentation, all participants will be in listen-only mode. We will then conduct a Q&A inquiry [Instructions for the Operator]. As a reminder, this call is webcast and recorded on November 16, 2022.
I now give the floor to Daniel Tapia, Director of Investor Relations. Lord, now you can begin.
Daniel Tapia
Thank you Victor. And welcome everyone to our third quarter earnings call. We are joined today by Pedro Heilbron, executive director of Copa Holdings; and Jose Montero, our CFO. First, Pedro will start by reviewing our third quarter highlights, followed by Jose who will talk about our currency effects. Immediately after, we will open the call for questions from analysts. Copa Holdings’ monetary reports have been prepared in accordance with International Financial Reporting Standards. On today’s call, we’ll be talking about non-IFRS monetary measures. A reconciliation of the non-IFRS currency measures to the IFRS currency measures can be found in our earnings release, which was posted on the company’s website copaair. com. Our discussion today will also include forward-looking statements, not limited to past facts, that reflect the Company’s existing beliefs, expectations and/or intentions regarding long-term effects and events. These forward-looking statements involve risks and uncertainties that could cause actual effects to differ materially and are based on assumptions that are subject to change. Many of them are mentioned in our annual report filed with the SEC.
Now, I would like to pass it on to our CEO, Mr. Pedro Heilbron.
Peter Heilbron
thank you daniel Good morning everyone, and thank you for participating in our third quarter earnings call. Before we begin, I would like to thank all of our colleagues for their commitment to the company and recognize their effort and determination to keep Copa at the forefront of Latin American aviation. To them, as always, my greatest respect and admiration. Despite the pressure that emerging jet fuel values continue to rise at constant rates, in the third quarter we were able to cover this growth, thanks to strong demand and unit earnings functionality and a lower unit rate excluding fuel. During the third quarter, our fuel cash value consistent with gallon accumulation increased 77% compared to the same constant period in 2019, resulting in a 16% accumulation in unit load. However, our charging points and throughputs are also increasing, with up to 15% better unit gain compared to Q3 2019, thanks to stronger demand lately for environments in the region. The combination of those points and our ability to control our non-fuel charges allowed us to deliver a constant margin of 17. 8%, compared to a constant margin of 18. 8% in the third quarter of 2019.
Now I would like to mention the main focus of attention of the quarter. Our measured capacity in ASM has hit 99% since Q3 2019, bringing us [technical difficulty] back to our pre-pandemic levels. RPMs increased slightly to 1% compared to Q3 2019, resulting in a load of 86. 8%, a performance of 1. 2 percentage points. Passenger throughput was 14. 01 cents or 12% higher than the third quarter of 2019, while shipping earnings increased 80%, resulting in a unit profit or RASM of 12. 8 cents, an increase 15% from Q3 2019. Ex-Fuel CASM decreased 5% from Q3 2019, from $6. 02 to $5. 09. Operationally, Copa Airlines achieved a punctuality of 86. 6% and an auction of 99. 5%. Finally, in October, Copa Profits was identified through Skytrax for the seventh consecutive year as Best Airline and Best Airline Staff in Central America and the Caribbean. I would like to remind you that at the beginning of the year, Copa was also identified through Cirium as the most punctual airline in Latin America in 2021 for the eighth consecutive year. I’d like to take this opportunity to recognize and thank our more than 7,000 employees for all they do every day to provide the world’s most productive experience for our passengers. These awards mean that your continued effort and commitment are especially valuable to our passengers and do not go unnoticed.
Join our fleet. During the quarter, we took delivery of a Boeing 737 MAX nine to end the quarter with a total of nine5 aircraft compared to 102 aircraft in our pre-pandemic fleet. Regarding our network, in September Copa Airlines introduced service to Felipe Ángeles International Airport, which complements our existing service to Mexico City. With the addition of this route, we continue and strengthen our position as the most comprehensive and convenient hub in Latin America, ending the quarter with service to 77 locations in 32 countries. Head over to Wingo. Wingo continues its regional expansion and through the end of the year plans to be successful on 31 routes with installations at 20 locations in 10 countries. Additionally, in the fourth quarter, Wingo will source another 737,800 from the Copa fleet through the end of 2022 for a total of nine aircraft. In short, despite the existing fuel value environment impacting the airline industry, we have restored our capacity and network to pre-pandemic levels and are consistently achieving better financial results. Looking ahead, we see strong environmental demand in the region and a smart end to bookings, leading us to anticipate a build-up to our fourth quarter unit revenue and higher operating margins for a quarter. for the other. However, given the uncertainty in the existing economic environment, we continue to closely monitor the demand for finishes in the region. Therefore, we will remain focused and flexible in terms of load and capacity, adjusting our plans as necessary. I would like to conclude by reiterating that we have a proven and forged business model, based on operating the maximum productive and convenient network for intra-Latin American trips from our hub in the Americas, taking into account the geographical position of Panama with low unit load, maximum productive functionality. on time and a strong balance sheet. And we anticipate that our hub of the Americas will continue to be a valuable source of strategic merit.
I will now pass the word to Joseph, who will review our monetary effects in more detail.
Jose Montero
Thanks Peter Hi everyone. Thanks for being with us today. I would like to join Pedro in thanking our amazing team for all their efforts to provide global elegance service to our passengers. I’ll start by reviewing the third quarter results. Net cash inflow for the quarter was $115. 9 million or $2. 93 consistent with participation. Excluding special pieces, cash proceeds were $115. 1 million or $2. 91 consistent with participation. Third-quarter specials totaled approximately $900,000, comprising an unlearned gain of $1. 6 million on the Company’s convertible notes and a learned loss of $700,000 on the market price similar to adjustments in the price of monetary investments. We report a consistent quarterly profit of $143. 7 million and a consistent margin of 17. 8%. Capacity was 6. 3 billion available seat miles, representing nearly a constant 100 percent of our capacity in the third quarter of 2019. Average load was 86. 8% for the quarter, a cumulation of 1. 2 percent compared to the same constant percentage. within 2019, while passenger yields increased by 12. 1%. As a result, cash inflow per unit was [12. 8 cents], 15% higher than in the third quarter of 2019. As jet fuel prices increased, unit prices or CASM increased by as much as 16 . 4% from Q3 2019 to 10. 5 cents And finally, our CASM fuel came in at 5. 9 cents, down 5. 3% from Q3 2019. Distribution rates increased accordingly With the outlets, our ongoing projects to reduce our prices were down a sustained point of decline without fuel CASM.
I will now end by discussing our balance sheet and liquidity. At the end of the third quarter, we had assets of almost $4. 6 billion. And in terms of cash, long-term and short-term investments, we ended the quarter with $1. 1 billion, which is 42% of revenue for the last 12 months. Regarding our debt, we ended the quarter with $1. 7 billion in debt and lease liabilities and our adjusted net debt to EBITDA was 0. 8 times. Now let’s move on to our fleet. During the third quarter, we gained a Boeing 737 MAX nine to end the quarter with a total of nine5 aircraft. In October, our total fleet grew to nine6 aircraft since we gained another nine 737 MAXs. With this addition, our total fleet now consists of 68 737-800s, nine 737 MAX nines and nine 737-700s. These figures come with a 737-800 freighter. Of our total fleet, two thirds of our aircraft are owned and one third are leased. And for the rest of the year, we expect to get another 737 MAX nine, and we expect to end the year with a fleet of nine7 aircraft compared to 102 aircraft in our fleet at the end of 2019. In 2023, we expect to get thirteen more [technically difficult] aircraft, 12 Boeing 737 MAX 9s and one Boeing 737 MAX 8. We have already secured financing for seven of those aircraft, one aircraft through a sale-leaseback transaction. and six through operating leases with acquisition features in Japan.
Regarding our outlook, based on existing higher environmental demand, we can provide the following direction for the fourth quarter of 2022. We expect to operate approximately 6. 5 billion ASM, implying a 6% capacity increase for the fourth. 2019 quarter, and expect a steady margin of approximately 22%. We base our outlook for the fourth quarter of 2022 on the following assumptions; it carries a thing of about 88%; unit revenue of approximately 13. 7 cents; CASM ex-fuel about 6 cents; and an all-inclusive fuel value of $3. 75 consistent with gallon. Looking ahead to next year, [preliminary] based on our existing fleet plan, we expect our ASM capacity to increase by approximately 15% by 2022. Thank you.
And with that, we will open the to some questions.
Q&A session
Operator
Thank you [Operator Instructions]. The first comes from Duane Pfennigwerth’s lineage of Evercore ISI.
Duane Pfennigwerth
I wanted to ask you about competitiveness. This research gets a bit noisy with everything related to the year for 3 years and compared to 2019. But if we look year after year, it turns out that Central America in the U. S. is in the U. S. UU. es one of the few regions in the world where capacity is declining year after year. So, I wonder if you can just comment a few times on what you’re seeing in terms of competitiveness in your markets in the fourth quarter compared to the third quarter. ?
Peter Heilbron
Therefore, Central America in the United States may be down, but it is up after the pandemic. So, it comes back to a more general point in a way you can say that. Major airlines in our region, major foreign airlines will return to almost pre-pandemic capacity until the end of this year, so until the end of the fourth quarter 22, new entrants and OCCs will be above the pre-pandemic.
Duane Pfennigwerth
And then, as for the dividend policy, apologize if you discussed it. But how do you and the board view dividend recovery and the old payout type, and how do you think about refunds instead of dividends here?Obviously, you’ve already made a really wide amount of purchase and a purchase amount for an airline.
Peter Heilbron
So the dividend policy is still there. It was suspended when the pandemic began. And to be reactivated is a resolution that the Council will have to take. And I guess that will be discussed at the next board meeting after the fourth quarter closes.
Jose Montero
Duane, and in terms of acquisitions, as you mentioned, yes, we’ve been active. We have an active $200 million program that is not yet complete. And the raison d’être of the program is A, because we’ve had to maximize shareholder value, but also as a tool to have some obligation control similar to conversion. That’s the kind of explanation of the buyback program we implemented.
Operator
Our next one comes from the line of Alejandro Zamacona of Credit Suisse.
Alejandro Zamacona
So in addition to the 15% capacity load you revealed, do you have any early expectations in terms of performance, fuel costs, profitability, especially for yields, assuming oil costs have to normalize?inflationary environment.
Jose Montero
We have issued our initial address only in terms of capacity at this time. And I think [Technical Difficulty] will have more visibility until 2023, so we’re going to wait until then to have a clearer, fuller direction for the whole year.
Peter Heilbron
And we’re definitely going to have more visibility on the express points you mentioned.
Alejandro Zamacona
And then my question for now, if I may, about union negotiations. Could you share your opinion on the ongoing negotiations and the expected results?
Peter Heilbron
We have 4 main unions, this year we closed negotiations with the airport staff and mechanics, and lately we are in negotiations with the pilots and in the last stages with the cabin crews. So I need to speculate on the results.
Operator
A moment for our nextArray Our next comes from Michael Linenberg of Deutsche Bank.
Michel Linberg
Good results, by the way. Good customers too. Jose, I just went back to the buyback percentage, it looks like this last quarter, maybe a little over $20 million. Last quarter, maybe $120 million, $125 million. If I think about what, $200 million total, what do we have about $50 million, $60 million. Can you tell us what’s on the agenda?
Jose Montero
No, it’s a little bit more because there’s a portion of what we bought in the current quarter that relates to the previous program we had. So, it’s a little bit to the north, I think, about $100 million remaining in the existing program.
Michel Linberg
And then my consultation at the moment for you and/or Pedro, this 88% load in the fourth quarter, not only is it very high, but of course it’s recovering capacity now, but it’s above the third quarter, so we have a sequential improvement. And if I think about before COVID in general, seasonally, I would see rates fall by maybe 0. 5 problems, 1 point, 2 problems. We may go back and average over 10 years, and you’ll probably see a few fewer problems. And I’m just trying to figure out why the load is higher. And maybe you’ll totally take advantage of the connection between all your other banks, and this is helping to build that extra load despite the fact that capacity is increasing. This because it sounds really exclusive and interesting?
Peter Heilbron
Of course, things have changed since the pandemic. And the patterns are a little different, the demand is higher at the moment. That doesn’t mean it’s going to be strong forever. Yields are higher, driven by emerging fuel prices, but I all know how long it won’t be. And then the competition, as I mentioned earlier, gradually added capacity. Some will return this quarter, others are already above the pre-pandemic period. Others from before the pandemic that we are suffering are waiting for exactly how the call will behave from one quarter to another. So that’s the most productive thing we can see right now. And it’s like. . . that’s all I can say because again, everything has replaced it.
Michel Linberg
So it turns out it’s just an era where all the planets are aligned and you only get smart numbers.
Peter Heilbron
It is possible, exactly.
Jose Montero
I think it’s an evaluation.
Operator
Our next one will come from Raymond James’ Savi Syth lineage.
Savi Syth
Just about 2023 capacity, could you talk a little bit about the combine in terms of level and construction and new starts at that 15%, and I wonder if you can talk about how you see new markets rather than some kind of frequency rebuild.
Jose Montero
Oui. Je would say, Savi, that about a little more than a portion of that capacity is just a full-year effect of some of the capacity we built in 2022. And then, the rest will probably be between caliber and frequency in the markets we have. they already have [technical difficulty]. So I think it will be more in the initial effect in the full year, and then in the frequency of the markets that we reserve with some kind of additional indicator, that’s something we have at the moment point.
Savi Syth
So, a kind of diminishing of the expansion of the threat there then. . .
Jose Montero
I would say oui. Oui. Je means, I mean the center: we have 77 markets or 77 villages right now. We had 80 before the pandemic. So, I think there are definitely still opportunities in terms of cities and new markets that we would serve, and I think there will be some of them. But most of the expansion will come from the last or the other two spaces I mentioned.
Savi Syth
And then, if he could, about the kind of profit force he sees. Is there any kind of color you can provide in business?It turns out that most of the comments we hear in other geographies are recreational and VFR. Do you look at some sort of corporate return or, and I know that some of the premium capacity in your markets would possibly have decreased, and you wonder if that’s helping you gain share in the business?
Peter Heilbron
Therefore, it is still more commonly leisure, where strength comes from, but business is on the rise. Our corporate accounts, for example, are 75% before the pandemic. And overall, the business now accounts for about 25% of overall profit before: in recent quarters it was around 20%. Therefore, we are seeing a slight increase in business travel.
Savi Syth
Do you see an improvement? I mean, is it our show, the premium seating in your. . . Competitive premium seats in your market decline now, or are you never noticeable?
Jose Montero
I don’t think there will be that much change. And you’re talking about competitors, right?
Savi Syth
Exactly.
Jose Montero
Yes, I did.
Peter Heilbron
Yes, we don’t, I don’t think there’s a transparent image here.
Operator
[Operator Instructions] The next one will come from Citi’s Stephen Trent lineage.
Stéphane Trent
I was wondering if I could dig a little deeper into capacity expansion by 2023. I mean, it turns out that in terms of your seat charge fee, you exceed the maximum of U. S. airlines. UU. de agreement with SE. And when we think about moving to 2023, how do we think about some kind of division between constant and variable prices, for example, when we think, for example, about the improvement that has made since then: Boeing and some densification of seats. dig and its good fortune in what turns out to restrict the prices of the number of seats compared to some of its North American competitors?
Jose Montero
I’ll start by telling a little bit about how we got here. We reduced our non-fuel CASM between 2019 and 2022 by approximately 5%. And that’s come, as you mentioned, with the fleet movements that we’ve done with fleet simplification and we’re optimizing overhead across grades and making other changes, adding some changes to our onboard offerings, et cetera. In the future, we will continue to do more. I think we are still looking to put everything in position as a component of our CASM 2023 consultant. And I think February will be more in a position to give a unit charge consultant for the full year for the year. But as you mentioned, all the things you mentioned, the continued expansion of the 737 fleet, densification, etc. , will also come into play to move forward and keep our prices in a very competitive position.
Stéphane Trent
And just some other quick query. If memory works, that may not be the case. I remembered it in the past, it would possibly be a few years ago, when I think about the composition of your rental fleet compared to the property, it was a little over 80/20 compared to, I think, two-thirds, one-third as you mentioned. And this replacement, is my understanding correct? And when you think about leasing rather than ownership, is it a question about where you see the best financing opportunities?or with the growth of Wingo, possibly reluctant to take on some of the asset threat in NG, I love hearing your thoughts on this.
Jose Montero
No, actually, he didn’t move too much. It’s like two-thirds, a third for a while. And we’re used to it, and it depends on when it happened sometimes in the afterlife because of the availability of planes at a particular time. But in the end Today, we make our financing decisions based on the most productive characteristics offered to us from a purely economic point of view. So that’s the kind of calculation factor. Having aircraft leased to operate also gives us flexibility in terms of the fleet plan, which is a key component of that. They all have staggered due dates, allowing us to plan ahead in terms of capacity. reasoning we’ve been following over the years.
Operator
And the last one will come from the Helane Becker lineage of Cowen.
Helene Becker
Can you tell us about fuel power with the replacement of older aircraft with the MAX?And then the other component of the consultation is, could you maybe tell us about the loyalty program, the adoption, the increase, what you’ve experienced in the last few years, maybe a year, and a component about accepting this program?
Jose Montero
Helane, in terms of fuel, there are a few things I think are worth pointing out, yes. The MAX is, in terms of fuel, natural fuel power, as advertised to the NG. And so I remember, in our case, we eventually replaced some of the E190s with MAX as well. The advantages gained in terms of fuel consumption were also very clever. So it’s in the low double digits in terms of fuel power on a similar basis. So again, it works as advertised, on a fuel basis. The other vital thing is that we as a company have continued our fuel saving efforts over the last few years. And so, in addition to the aircraft’s natural operational fuel power, we’ve also embarked on a multitude of projects on the operational side, on the maintenance side, and even on the monetary side, to decrease our fuel consumption as well. — maybe there’s a set of about 12 or 15 metrics that we track in particular on an ongoing basis with fuel conservation that has also contributed to our overall fuel power in recent years. And the elements, I’ll give you an example of whatever it is, we’ve been on planes at the center of gravity, just blowing up the center of gravity of the plane on both, an express flight is anything that adds a lot of price in terms of economy of gas. So it’s things like that that we measure and track on both one and both flights. So it’s a smart progression there.
Peter Heilbron
Helane, as far as our loyalty program is concerned, we haven’t provided much data in the past. But I only took the note because, in line with, maybe we can make a special presentation on our Investor Day next year, in line with, maybe we can be more consistent with the percentage. Data, however, works well. I mean, of course, it’s not a massive program. It is moving directly to our site and the length of our internal market, however, it is a very successful program, which is going well. And again, in line with maybe we can agree with a percentage more data on our Investor Day. In terms of, to go back to Stephen’s consultations and his consultation in terms of power potency and accumulation or densification. I think it’s attractive to note that in the third quarter, our ASM is only slightly below our 2019 level, but if you look at our block hours, it’s about 7% below 2019. in our ex-fuel CASM and even our fuel functionality [procedure].
Helene Becker
In fact, that’s what motivated me in my practice. The fact that you are less than a percentage point and your fuel consumption is much lower, and this is not entirely explained through Savi’s query about the duration of the adventure and the stage. That’s what motivated this. And then just one last thing. Just before the pandemic started, you started the layover in Panama, and I wonder if the acceptance of that has started to pile up again.
Peter Heilbron
This year it would be. . . This year will end with practically the same figures we had in 2019 before the pandemic, on the order of 100,000 passengers, more or less a few thousand. So he’s doing very well and we’ll continue to push it. next year in 2023.
Operator
Now, I would like to return the conference to Mr. Pedro Heilbron for closing remarks.
Peter Heilbron
It is ok. Thank you, operator, Victor. So thank you all. This concludes our earnings call for the third quarter of 2022. Thank you for being with us. And thank you for your continued support. Have a nice day and see you in the next one. Thank you.
Operator
And this concludes the convening of today’s convention. Thank you for participating. You can now log out. Everyone, have a day.