Copa Holdings, S.A. (NYSE:CPA) Q2 2023 Earnings Call Transcript

Copa Holdings, S.A. (NYSE:CPA) Q2 2023 Earnings Call Transcript August 10, 2023

Operator: Ladies and gentlemen, thank you for standing by. Welcome to Copa Holdings’ Second Quarter Earnings Call. [Operator Instructions] As a reminder, this call is being webcast and recorded on August 10, 2023. I will now turn the conference over to Daniel Tapia, Director of Investor Relations. Sir, you may go ahead.

Daniel Tapia: Thank you, James, 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 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 second quarter earnings call. Before we begin, I would like to extend my sincere gratitude to all of our workers for their commitment to the company. Their continuous efforts and dedication has kept Copa at the forefront of Latin American aviation, to them as always, my highest regards and admiration. Today, we’re pleased to report solid results for the second quarter. Our unit revenues continued to benefit from a healthy demand environment in the region. While our unit costs came in lower year-over-year mainly driven by a lower jet fuel price and our consistent focus on delivering low ex-fuel unit costs. Among the main highlights for the quarter, passenger traffic grew 15.4% compared to the same period in 2022, outpacing our capacity growth of 13.6%.

This resulted in a load factor of 86.1%, a 1.3 percentage point increase versus Q2 ’22. Passenger yields came in at $0.133 or 2% higher than the second quarter of 2022, resulting in unit revenues or RASM of $0.12, a 2.7% increase compared to the second quarter of 2022. Our unit cost decreased 17%, mostly as a result of a 35.9% year-over-year drop in our effective jet fuel prices. On an ex-fuel unit cost basis we came in at $0.059 almost 1% lower compared to Q2 2022. As a result, our operating margin came in at 24.1%, 18 percentage points higher than in the second quarter of 2022. On the operational front, Copa Airlines delivered an on-time performance of 91.6% and a completion factor of 99.8%, once again the highest in the Americas and one of the best in the World.

Additionally, in July Copa Airlines was recognized by Skytrax for the eighth consecutive year as the best airline in Central America and the Caribbean. This award and our leading operational numbers are a testament to our employees’ continuous focus on our customer satisfaction. With regards to our network, we recently announced the start of a new service to Barquisimeto, Venezuela, in October of this year. With this addition, we will serve 81 destinations in 32 countries in North, Central, South America, and the Caribbean, as we continue strengthening and solidifying our position as the most complete and convenient hub in Latin America. Turning now to Wingo. In June, Wingo continued to optimize its network with the start-up operations to three new domestic Colombia routes from Bogota to Barranquilla, Pereira, and Bucaramanga.

Additionally, in July, it started service from Bogota to Caracas, Venezuela, and one seasonal route from Cali to Aruba, with these additions, Wingo is currently operating 35 routes with service to 23 cities in 11 countries. Now turning to our current expectations for the remainder of the year, we continue to see a healthy demand environment in the region going forward, and although we’re seeing a recent increase in jet fuel prices, we continue to expect strong financial results in 2023. As always Jose will provide more detail regarding the full year’s outlook. To summarize, we delivered solid second quarter results, and we continue to see a healthy demand environment in the region. We continue growing and strengthening our network, the most complete and convenient hub for intra-Latin America travel, Copa Airlines was recognized once again by Skytrax as the best airline in Central America and the Caribbean, and as always, our team continues to deliver world-leading operational results while maintaining our costs low.

Lastly, we’re as confident as ever in our business model. We continue to deliver solid margins and low unit cost while offering a great product for passengers, making us the best position airline in our region to consistently deliver industry-leading results. Now I will 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 second quarter results. We reported a net profit for the quarter of $17.5 million or $0.44 per share. However, excluding special items, net profit came in at $154.5 million or $3.92 per share. Second quarter special items are comprised of unrealized mark-to-market loss of $137.5 million related to the company’s convertible notes and a $500,000 unrealized mark-to-market gain related to changes in the value of financial investments. We reported a quarterly operating profit of $194.7 million and an operating margin of 24.1%.

Capacity came in at $6.8 billion available seat miles, 13.6% higher than in Q2 2022. Our load factor came in at 86.1% for the quarter, a 1.3 percentage point increase compared to the same period in 2022, while passenger yields increased 2% to $0.133. As a result, unit revenues came in at $0.12 or 2.7% higher than in the second quarter of 2022, mainly driven by lower jet fuel prices, unit costs or CASM decreased to $0.091 or 17% lower than our CASM in Q2 2022. And finally, our CASM excluding fuel came in at $0.059, a 0.8% decrease versus Q2 2022, mainly driven by lower sales and distribution costs due to a higher penetration of both direct sales and the lower-cost travel agency channels, which were launched by Copa Airlines in September of 2022.

I’m going to spend some time now, discussing our balance sheet and liquidity. So at the end of Q2, we had assets of close to $5.1 billion and in terms of cash, short, and long-term investments, we ended the quarter with over $1.3 billion, which represents 39.6% of our last 12 months’ revenues. As to our debt, we ended the quarter with $1.8 billion in debt and lease liabilities, it came in with an adjusted net debt to EBITDA ratio of 0.5 times. I’d also like to take some time to discuss the settlement of our convertible notes. As we announced last month, the company has decided to redeem the 4.5% convertible senior notes due in 2025 on September 18, 2023, in accordance with the terms established in the indenture governing the notes. The conversion rate has been established to be 20.1603 shares per each $1,000.

This rate includes an additional 0.4751 shares related to the event being a make-whole fundamental change. We decided to perform the settlement via the net share method, whereby we will settle in cash, an amount equal to the principal amount of the notes, and the remainder is to be settled via the issuance of the corresponding number of shares. Turning now to our fleet, during the second quarter, we received two Boeing 737 MAX 9s, to end the quarter with a total of 101 aircraft. In July, we received an additional 737 MAX 9 to bring our total fleet to 102 aircraft. With these additions, our total fleet is now comprised of 68 737-800s, 25 737 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 under operating leases. During the remainder of 2023, we expect to receive five additional aircraft, all Boeing 737 MAX 9s, to end the year with a total fleet of 107 aircraft. As for our 2024 fleet plan, preliminarily next year we expect to receive 14 737 MAX aircraft, including two 737 MAX 9s, and 12 737 MAX 8s. We published an updated fleet plan on our Investor Relations website. I’m also pleased to announce that our Board of Directors has ratified the third dividend payment of the year of $0.82 per share to be paid on October 13 to all shareholders of record as of September 29. As to our outlook, we can provide the following guidance update for the full year 2023.

We expect to increase our capacity in ASMs versus 2022 within a range of 12% to 13% and we expect an operating margin within the range of 22% to 24%. We’re basing our outlook on the following assumptions, load factor of approximately 86%, unit revenues within a range of $0.123, CASM ex-fuel to be in the range of $0.06, and we’re expecting an all-in fuel price of $2.95 per gallon. Given this recent increase in jet fuel prices, we expect to be on the lower side of the 22% to 24% operating margin range. I would also like to take this opportunity to assure you that we continue to be focused on our plan to further reduce our unit costs. Our objective is to attain a CASM ex-fuel within a range of $0.058 by the year 2025. Thank you, and with that, we’ll open the call to some questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Savi Syth from Raymond James.

Savi Syth: Hi, good morning. Can I ask on the unit revenue, just – which was lower? Are you seeing any kind of softness to drive that reduction or is something else going on given that the second quarter came in pretty strong?

Jose Montero: Yes, Savi, how are you? The operating environment is still very robust. We had been seeing a drop in fuel prices throughout the second quarter and so there was some movement in our forward-looking unit revenues in the coming months. And your item, I think that of note that we’re monitoring closely, is that there was an increase in competitive capacity year-over-year, in the double-digit range, so all those factors I think we’re taking into account in terms of what the RASM was or is going to be in the second half of the year. Fuel spiked over the last couple of weeks, so that’s not necessarily fully captured into our unit revenue guidance given the sort of movement of fuel and it’s still somewhat early for Q4. So we’ll monitor it closely, but that’s how kind of we’re seeing it in the close end.

Pedro Heilbron: And I should add, Savi, that bookings are still strong for the second half of the year as far as we can see, still a very robust environment.

Savi Syth: That’s super helpful. If I might, on the 2024 fleet plan, it looks like even though you had some MAX flipping, you’ve taken the MAX count up? And just any early thoughts on how you’re thinking about capacity growth into 2024, especially given that your utilization in 2023 is quite strong?

Pedro Heilbron: Right, so we’re going to receive 14 aircraft next year. A few of those moved from this year, but it doesn’t make a big difference because moving from December to January doesn’t really have an impact in capacity. So you can do the math in terms, we’re still not guiding for a capacity growth in 2024, but I think it’s not hard to figure it out, given the 14 aircraft we’re receiving next year. Most are going to be MAX 8, two are going to be MAX 9, and we see demand and we have opportunities for all of those airplanes to fly at our current utilization – daily utilization numbers.

Jose Montero: Yes, plus a full-year effect of the aircraft that are coming in, we still have five aircrafts left to be delivered this year, so those airplanes most of its – their growth is going to show up actually in 2024 as well. So I think there’s – I think we’re seeing still the environment – the operating environment in a very positive way.

Pedro Heilbron: Yes, so in terms of capacity, there should be very healthy growth next year.

Savi Syth: Helpful. Thank you.

Operator: Our next question comes from Duane Pfennigwerth from Evercore ISI.

Duane Pfennigwerth: Hi, thanks, good morning. On the convert buyback, can you just walk us through how your share count and interest expense are going to change following that buyback? And maybe talk about some of the reasoning behind why September makes sense to do that?