Copa Holdings - Earnings Call - Q1 2021

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by. Welcome to the 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. As a reminder, this call is being webcast and recorded on 05/06/2021.

Now I will turn the conference over to Raul Pascal, Director of Investor Relations. Sir, you may begin.

Speaker 1

Thank you, Tamika, 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 and the actions the company has taken to mitigate the impact from the COVID-nineteen pandemic, followed by Jose, who will discuss our first quarter financial results in detail. 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, coplan.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 Hebron.

Speaker 2

Thank you, Raul. Good morning to all, and thanks for participating in our first quarter earnings call. Before we begin, I'd like to thank all 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. In our last earnings call in February, we advised of deteriorating demand patterns and expressed concerns over what appeared to be new infection waves across many countries in our region.

Since then, we've faced two diverging themes in our network. On the one hand, in The U. S, Panama and a few other countries, we're seeing a downward trend in infection rates, which has led to fewer travel restrictions and an uptick in demand. On the other hand, several countries in Latin America continue to struggle with the virus, leading many to reimpose their travel restrictions and or new health requirements, affecting demand for international travel and in many cases, leading to a reduction in our planned capacity. However, we're hopeful that as countries in our region continue taking the necessary actions to control this health crisis, we should start seeing a more robust recovery, fewer restrictions and improving traffic patterns.

Now I'll highlight some of our first quarter results. In terms of capacity, we reached 39% of first quarter twenty nineteen ASMs. Load factor improved from 63% in January to 75% in March, leading to an average load factor of 69% for the quarter. Our revenues increased by 17% over the previous quarter to $185,000,000 as a result of additional capacity. This additional capacity also allowed us to bring down our ex fuel CASM from $0.01 $34 in Q4 to $0.85 We reported an operating loss of $77,000,000 in the quarter, 16% better than the adjusted operating loss of $95,000,000 reported in the 2020.

In terms of our liquidity position, we increased our cash balance to $1,200,000,000 and our total liquidity to over $1,500,000,000 This was driven by extraordinary net proceeds from aircraft financing and asset sales. And our cash consumption, excluding the previously mentioned proceeds but including CapEx and the payment of all financial obligations, was $23,000,000 per month. That was better than expected due to higher sales, mostly for travel in the second quarter. In terms of our operations and despite the incremental complexity imposed by the biosafety protocols, we're pleased to report an on time performance of 95% for the quarter and a flight completion factor of 99.3, which is a true testament to our employees' laser focused commitment to providing a world class product to our passengers. So we are proud to be back connecting The Americas with the industry leading operational standards our passengers expect from us.

Subject to demand and air travel restrictions in the region, in June, we plan to return our flight network to a six connecting band hub structure, which will enable us to operate more efficiently and to continue adding frequencies and destinations. If our current plan holds, we should be operating more than 60 destinations by the end of the second quarter compared to 80 before the pandemic. Jose will provide a more detailed outlook for the second quarter, which will include specific capacity figures, our latest revenue assumptions and an update on our cash consumption projections. Regarding our fleet, it was a very busy quarter. We received six previously built and stored seven thirty seven Mach 9s and delivered four Embraer 190s to their new owner.

As per our fleet plan, we expect to deliver the last four Embraer aircraft in the second quarter and receive two more seven thirty seven MAX 9s in the fourth quarter, which would have us ending the year with a fleet of 83 aircrafts. I'd like to reaffirm 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, leveraging Panama's advantageous geographic position with the region's lowest unit cost for a full service carrier, best on time performance and strongest balance sheet. Going forward, the company expects that its hub of The Americas will be an even more valuable source of strategic advantage. It's likely that fewer intra Latin America markets will be able to sustain direct point to point service. So we believe the hope of The Americas will be the best positioned to serve this market.

Now I will turn it over to Jose, who will go over our financial results in more detail.

Speaker 3

Thank you, Pedro. Good morning, everyone. I hope that you and your families are safe and doing well. Thanks for being with us today. I'd like to join Pedro in acknowledging our great Copa team for all their efforts and great spirit during these very challenging times.

I'll start by going over our first quarter results. Our capacity came in at 2,500,000,000 available seat miles, which amounts to about 39% of the capacity operated during the 2019. Load factor came in at an average of 69% for the quarter. We reported a net loss of $110,700,000 or $2.6 per share. Excluding special items, we would have reported a net loss of $95,100,000 or $2.23 per share.

Special items for the quarter are comprised mainly of an unrealized mark to market loss of $15,700,000 related to the company's convertible notes issued in 2020. In terms of operating results, we reported a $77,100,000 loss for the quarter, an improvement over the operating results for the 2020. And our cash consumption for the quarter came in better than expected at an average of $23,000,000 per month, driven mostly by improving sales for travel during the second quarter. A significant part of our focus as a company is in our costs. Our unit costs, excluding fuel for the first quarter, came in at $0.85 per ASM.

We continued operating more efficiently in terms of passenger servicing as well as in terms of our administrative and other overhead expenses. And we are poised to achieve a sub zero six dollars CASM ex fuel once we reach our pre COVID-nineteen capacity. 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 $4,100,000,000 and our cash, short- and long term investments ended at $1,200,000,000 We also ended the quarter with an aggregate amount of $345,000,000 in unutilized committed credit facilities, which added to our cash, brought our total liquidity to more than $1,500,000,000 As to our debt, we ended the quarter with $1,700,000,000 in debt and lease liabilities. The increase in our debt balance compared to the 2020 is related to the financing of seven seven thirty seven MAX nine aircraft received between December 2020 and March 2021.

As for our fleet plan, during the first quarter, we received six seven thirty seven MAX nine aircraft. We also finalized the sale and delivery of four Embraer 190s. And as of today, we have delivered 10 out of the 14 aircraft we agreed to sell to a third party and expect to have delivered the entire E-one 190 fleet by June 2021. We ended the quarter with 81 aircraft, sixty eight seven thirty seven-800s and 13 MAX 9s. Including these figures are sixteen seven thirty seven-800s, which will remain in temporary storage until demand trends call for additional capacity.

We expect to receive two more seven thirty seven MAX 9s during the 2021 and expect to end the year with a total fleet of 83 aircraft. As to our outlook for the rest of 2021, we are still in a very uncertain and unpredictable demand and operating environment. And as such, we will not be providing full year guidance. However, based on preliminary results for the month of April and the current state of demand environment and air travel restrictions, we can provide the following outlook for the 2021 as compared to the 2019. We expect capacity to be approximately 45% of Q2 twenty nineteen levels at about 2,900,000,000 ASMs, a 17% increase quarter over quarter and revenues to be approximately 40% of Q2 twenty nineteen levels at about $260,000,000 Given these operating conditions and assuming an all in fuel price of $1.95 per gallon, we expect our cash consumption for the second quarter to be in the range of 10,000,000 to $15,000,000 per month.

Let me close by stating that once this most challenging situation passes, we believe Copesan of the Americas will remain as the best connecting point for travel in the region with a privileged location and even more efficient business model with lower cost and the best team in the industry. Thank you. And with that, we'll open the call to some questions.

Speaker 0

Please limit your questions or comments to one. Again, if you would to ask a question, press star one on your telephone keypad. We ask that you please limit your questions or comments to one. Your first question is from the line of Hunter Keay with Wolfe Research.

Speaker 4

Hey, good morning, everyone. Thank you.

Speaker 2

Good morning.

Speaker 4

I appreciate that you're not going to want to give full year guidance at this point, but the second quarter revenue guide was quite strong, I thought, relative to what I was expecting, particularly relative to the first quarter. So can you help me frame out how you're thinking about that trajectory into the back half of the year if these current trends continue? And if it's not a revenue commentary, maybe just help me think about sort of capacity as you're exiting 2021? Thank you.

Speaker 2

So let me start, Hunter, and then I'll let Jose add some comments. So I think as we have mentioned in the past, it's really very, very difficult to predict the future under the present conditions that we're dealing with, including travel restrictions by many countries and shifting demand patterns. And that's why we're only talking about Q2 and not the rest of the year. But we have enough flexibility in our fleet to add capacity on short notice as we see demand coming in. So we would expect for the second half of the year to maybe this growth trend that we're talking to between Q1 and Q2 to accelerate somewhat, maybe even as much as doubling the growth pace that we're seeing right now, but it's really hard to predict as we speak.

Speaker 3

Yes. I think that, Hunter, demand is increasing as of today, but we have seen this before, and there's still a level of uncertainty in terms of the behavior of the virus in the region. So things are still volatile, as Pedro mentioned. But as of today, for the second half, we could see a sort of the same trend that we're seeing sort of first, second quarter into the second half as well. But that's again, we have to just really be mindful that it is the picture that we have today.

Speaker 0

Your next question is from the line of Steven Trent with Citi.

Speaker 5

Yes. Good morning, everybody, and thanks for taking my question. Just one or two quick ones for me. Was intrigued Pedro, you mentioned the kind of inability in my many to do point to point, especially in that region. But what sort of competitive trends or opportunities are you seeing for Wingo?

And then the second question, if you could just refresh my memory. You guys were running have been running four daily flight banks, and you're going to six by the June, if I heard that correctly?

Speaker 2

Yes, that is correct. I'll start with the second question. So we've operated a six bank hub since 2011. Yes, since 2011. We've been operating at six banks.

We've obviously reduced all of that since the pandemic started. But we're going back in June. By the June, we'll be back at six banks, at least that's our intention, which will give us a lot more flexibility in putting together a better network or scheduling flights in a more efficient and effective way. So it's not that that's going to drive our growth, but it will drive a better schedule and better rotation of aircraft for the remaining of the year. And then in terms of Wingo, so Wingo started pre pandemic with April 100 and is now operating six seven thirty seven-eight 100.

So they've actually increased capacity by about 50% since the pandemic started and have opened a few new domestic and international markets. So they're still affected by the pandemic. Colombia, of course, is still affected even though domestic markets have recuperated a little bit better than international market. But Wingo did see an opportunity to strengthen their network, and they've done so.

Speaker 5

Let me leave it there. Thanks very much, guys.

Speaker 2

Thank

Speaker 0

next question is from the line of Pablo Macevalles with Barclays.

Speaker 6

Thanks for taking my question. Perhaps it's kind of a little early to tell, but can you please provide some color on the path to recover your profitability levels after COVID. How should we expect yields to perform in light of lower corporate demand and perhaps with a weaker FX and higher oil prices, how are you going to pivot from low margins to the margins that you have pre COVID? Thank you.

Speaker 3

Yes, Pablo. This is Jose here. So I would say that we have to take a basis on where do we think what's the path to sort of bring our revenues our unit revenues from the place where they are today into a lower dilution and how we will match our capacity to sort of that revenue environment. So I think that if we assume that in the medium term, unit revenue dilution is sort of in the mid teens, we

Speaker 7

could reach

Speaker 3

an operating P and L breakeven at 60% of our pre core capacity. And I think that taking that a further step, if we were to assume Univera you News being at their pre COVID levels, we could reach our pre COVID level of operating margins in the teens at a much lower capacity than we had than the pre COVID-nineteen levels. So we could be at maybe sixty percent to seventy percent of our pre COVID capacity. Assuming zero revenue dilution, we will be achieving our pre COVID sort of mid teen operating margin levels. So that's I mean just to give you some of the framework where we are at.

And of course, that's a function of all the efficiencies that we're working in terms of our costs going forward.

Speaker 2

And Pablo, I'll add to that. You asked for some color. So a lot of the work we've put in since the pandemic started to make the company more cost efficient is with the new reality that you referred to in our mind. So if there's going to be less business traffic for a while, yields are going to be affected. But if we can deliver lower costs, which is our intention, then we'll be able to have the same success as before or even more at a yield at a revenue dilution or a yield dilution over pre pandemic.

Speaker 0

Your next question is from the line of Duane Pfennigwerth with Evercore.

Speaker 8

Good morning. This is actually Ray on for Duane. As you look across your portfolio markets in light of travel restrictions and reopenings, which are getting better and easier to predict and which are harder to plan as compared to the 1Q commentary that you laid out earlier in your press release?

Speaker 2

You mean in terms of markets? In terms of restrictions in markets. Yes. It's really hard to predict.

Speaker 8

You laid out a bunch of countries and just kind an uptick in the scans. Yes.

Speaker 2

So right now, for example, there are very strict restrictions in places such as Argentina, Chile, Venezuela, Cuba, even some in Panama for South American travelers, not flight restrictions, but in these other countries I've mentioned, most of them flights are actually restricted. So it's anyone's guess when those restrictions will be lifted. They will be lifted, of course. They will control the virus. Things will get better.

We know that. But it's very difficult to know that's going to happen in July, in September or who knows. And in many cases, those are new restrictions that were not in place at the end of last year. So and there could be other countries imposing new restrictions as things change. But I would say that directionally, I think, even though there's like something like a third wave in many countries of the virus, I think directionally we're going in the right direction in terms of vaccination rates and travel demand and getting things under control.

Speaker 8

Thanks. And if I can just follow-up on here. I appreciate you gave us those deliveries for the balance of the year. But could you also maybe give us some of the corresponding CapEx around that and also the CapEx and deliveries for 2022? And as related, what do you think the balance between lease and owned would be?

Speaker 3

Ray, the CapEx for 2021, including the airplanes that we've already taken delivery of, so talking about full year total CapEx is going to be around $450,000,000 And that's mostly aircraft. There's a portion of it that is cash CapEx that is associated with maintenance events and IT investments, etcetera. That's around 50,000,000 out of that $450,000,000 And then for next year, you could assume that it's going to be between $350,000,000 to 400,000,000 total CapEx, again, both including aircraft and another type of CapEx. So that's basically where we're at. You had another follow-up on that.

What was second the question that you asked, Ray? Okay. Well Alright. We'll we'll we'll get in touch with you to answer the the other question that you have. Alright.

I guess we're going to the next question.

Speaker 0

Your next question is from the line of Mike Linenberg with Deutsche Bank.

Speaker 9

Oh, hey, Jose, Pedro, Joe. Hey. My one question is just the modeling question here. You know, obviously, the tax was basically zero, and I'm just curious whether or not have you taken a valuation allowance against your deferred tax asset to the extent that now you're not going to be booking any tax credits? Is that what's going on forward?

Or was this just some sort of anomaly or timing difference in this quarter? And next quarter, we should just assume it moves back to 10%? Thanks.

Speaker 3

Yes. It's a timing the specific line that we put into the fourth quarter was a loss carryforward that got booked. That usually gets done at the moment where you have a clear visibility about the performance of the entire year. So it's done towards the end of the year. So it's just simply timing.

So the difference that we saw in the tax line on this quarter was purely timing. And it will depend on if there's further sort of tax credits or tax loss carry forwards that we declare depend on the performance of the entire year, and they would usually be put in, in the fourth quarter. So that's kind of how that works here.

Speaker 0

Your next question is from the line of Savi Syth with Raymond James.

Speaker 10

Hey. Good morning. I'm just kinda curious relative to your kinda what you're seeing from a selling standpoint today. You know, how much of your kinda current ATL is in terms of vouchers? And kind of what percent of that what you're selling today is in the kind of the form of vouchers?

And somewhat related

Speaker 0

to that, was kind of

Speaker 10

curious if you're seeing any change in business demand recovery.

Speaker 3

Yes. In terms of ATL, the vast majority of the growth that we saw, think we had a growth in in the quarter of about $5,000,000 in the ATL, and it's it's purely I I would say most of it is is cash coming in. So yes, the majority of it is cash. There is a portion, but it's a minor portion associated with vouchers and the like for future travel. The majority of it is actual cash coming in.

Speaker 2

Yes. And we're not seeing a significant recovery in business demand. Of course, is more business demand than some months ago, but nothing significant yet. It's mostly VFR and leisure.

Speaker 11

Jose, just is the ATL mix how much of

Speaker 10

the ATL is vouchers today?

Speaker 3

I think it's less than 1010% probably, at most. Yeah. 10 to 15%.

Speaker 0

Your next question is from the line of Alejandro Camacono with Credit Suisse.

Speaker 7

Hi, Pedro. Hi, Jose Raul. Thanks for the call. Just a question in terms of the traffic recovery and the city pairs or routes. So which markets continue closed at this point?

And what's the expectation to open them? And perhaps the expected recovery may be more driven by the reopening of routes or by increase of capacity at the existing routes? Thank you.

Speaker 2

Yes. So I mean, most markets are open, but some, as I mentioned before, are very restricted in terms of how many frequencies we can operate to markets such as Venezuela, Argentina, Chile and others, I mentioned before, have restrictions that don't allow us to operate more than a few frequencies per week, whereas before we would have had multiple frequencies per day, and that's impacting demand. And there are also other travel restrictions around the region. In the markets that are open, like The U. S.

And The Caribbean, for example, we're seeing a stronger demand than in the restricted market that it would be expected.

Speaker 0

Your next question comes from the line of Joseph DeNardi with Stifel.

Speaker 12

Pedro, you mentioned in your prepared remarks that you think fewer markets will be able to support point to point post COVID. Can you just elaborate on that? Kind of why do you think that?

Speaker 2

Well, our yes, our hub has always distinguished itself by connecting large number of small city pairs. Over 70% of the city pairs we connect have less than 20 passengers per day each way. Post pandemic, we expect city pairs that have enough traffic that don't fall maybe within that 70%, but even some that do, that pre pandemic had enough traffic for nonstop service. And I'm not saying every city pair, I'm just saying some additional city pairs will need a hub and Panama is the best place hub to serve those markets. So we think there will be additional opportunities to strengthen the hub of The Americas.

And it could be, again, city pairs that can only be served through Panama, whereas before they had nonstop flights or city pairs that would be able to sustain much less nonstop capacity than pre pandemic. And of course, that will change over time. But coming out of this crisis, I think the hope of The Americas and Panama is going to be in an even stronger position to serve all those markets.

Speaker 12

Okay. That's helpful. And then Jose, maybe just following up on Pablo's question. Can you remind us how you're thinking about kind of cost structure post COVID? I think you had previously said you could get back to pre COVID CASM ex with 80% of pre COVID capacity.

Is that still how you're thinking about it? And then just a clarification on the ending the year with 83 aircraft, does that include stored or parked aircraft? Thank you.

Speaker 3

Yes. So the first question, Joe, is we think that we'll get sub six CASM by the time that we are back to pre COVID capacity. I think we'll be back to our pre COVID CASM by the time that we're around eighty eighty percent. Yeah. That's that's still very much our target, and we're relatively confident about that target.

And we've been making a lot of efforts in terms of contract renegotiations and savings in overhead and the fleet moves that we've made. So it's still very much in our radar. And then in terms

Speaker 2

of The three eighty three aircraft at the end of

Speaker 3

the year. Three are all total aircraft, including the stored aircraft. Yeah. Thank you. That will be yeah.

By the way, Joe, I mentioned in our in our script that we have right now 16 airplanes that are under long term storage. And they're included, of course, in in the 81 that we have right now. By the end of the year, we'll end up with 83 aircraft, and we'll we expect right now to have seven under long term storage by then, including those 83. So we will activate a a subset of those, like, the airbags that we have

Speaker 0

Our last question comes from the line of Helandi Becker with Cowen.

Speaker 11

Thanks very much, operator. Hi, everybody, and thank you very much for your time. As you think about adding cities back to the network, how will you think about adding them back? Will it be a focus of VFR or leisure traffic, cities first? Or how should we think about the shift in mix away from business travel into more leisure and VFR for now?

Speaker 2

So yes, it's an interesting question because the cities we've added are, of course, our stronger cities or stronger destination. And those, in many cases, include a significant business travel component pre pandemic, but we're adding a lot fewer frequencies than before. So strong business markets like Panama, Bogota, for example, we're serving a few times per day and pre pandemic would have been seven or eight times. So even though those are strong business markets, frequencies are way down because of that. But we have opened all those markets because they just, as mentioned before, happen to be stronger routes overall.

The ones that we're going to be opening gradually from here to the end of the year and into 2022 usually have actually a high leisure and VFR component, but are just much smaller markets than the others. So that's driving the decision more than the mix itself.

Speaker 11

Okay. That's very helpful. Thank you. And then the other question I had was, as you're thinking about getting back to profitability, how should we think about the return of capital plans? Because for a long time until the pandemic, your dividend was an important component of that.

And obviously, with the pandemic, that's just not the case right now. So how should we think about return of capital in '20 let's say, a year, one years point from now when maybe things are back to some level of the next normal?

Speaker 2

Yes. So we haven't changed our dividend policy. We're just missing the profit part of it. And even though I want to talk officially because we have to see how things develop, but I would expect that once we have the profit component, the dividend policy will kick in. We have strong liquidity.

We're in a strong overall position. So that's what I would expect going forward.

Speaker 11

Okay. That's very helpful. Thanks, Pedro. Thanks, Jose.

Speaker 3

Thank you, Helane.

Speaker 2

Thank you.

Speaker 0

There are no further questions.

Speaker 3

Okay.

Speaker 2

Thank you all. This then concludes our earnings call. Thank you for being with us. Thank you for your continued support. You know where to find us.

Please have a great day. Thank you.

Speaker 0

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