Ladies and gentlemen, thank you for standing by. Welcome to the Copa Holdings Third Quarter Earnings Call. During the presentation, all participants will be on 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 November 16, 2022. Now, I will turn the conference call over to Daniel Tapia, Director of Investor Relations. Sir, you may now begin.

Thank you, Victor. And welcome everyone to our third 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 third 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 earning's release, which has been posted on the company's Web site copaair.com. Our discussions 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.

Thank you, Daniel. Good morning to all, and thanks for participating in our third quarter earnings call. Before we begin, I'd like to thank all our co-workers for their commitment to the company and recognize their intense efforts and dedication to keep Copa at the forefront of Latin American aviation. To them, as always, my utmost respect and admiration. Despite the pressure that higher jet fuel prices continue to add to operating costs, in the third quarter, we were able to cover this increase, thanks to strong demand and unit revenue performance and lower ex fuel unit cost. During Q3, our effective fuel price per gallon increased by 77% compared to the same period in 2019, which drove a unit cost increase of 16%. However, both our load factors and yields also increased improving unit revenues by 15% compared to Q3 2019, driven by a currently stronger travel demand environment in the region. The combination of these factors plus our ability to control our non-fuel related costs enabled us to deliver a 17.8% operating margin, which compares to an operating margin of 18.8% in Q3 2019. Now I would like to mention the main highlight for the quarter. Our capacity measured in ASMs reach ed99% of third quarter 2019, bringing us [Technical Difficulty] back to our pre pandemic levels. RPMs increased slightly by 1% compared to Q3 ‘19, which led to an 86.8% load factor, a 1.2 percentage point improvement. Passenger yields came in at 14.01 cents or 12% higher than in the third quarter of 2019, while cargo revenue was 80% higher, resulting in unit revenues or RASM of 12.8 cents, a 15% increase compared to the third quarter of 2019. Ex-fuel CASM decreased 5% compared to Q3 ‘19 from $6.02 to $5.09. On the operational front, Copa Airlines…

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 world class service to our passengers. I will start by going over our third quarter results. Net profit for the quarter came in at $115.9 million or $2.93 per share. Excluding special items, profit came in at $115.1 million or $2.91 per share. Third quarter special items totaled approximately $900,000 comprised of an unrealized mark to market gain of $1.6 million to the company's convertible notes and a $700,000 on realized mark to market loss related to changes in the value of financial investments. We reported a quarterly operating profit of $143.7 million and an operating margin of 17.8%. Capacity came in at 6.3 billion available seat miles, which represents almost 100% of our Q3 2019 capacity. Load factor came in at an average of 86.8% for the quarter, a 1.2 percentage point increase compared to the same period in 2019, while passenger yields increased 12.1%. As a result, unit revenues came in at [12.8 cents] or 15% higher than in the third quarter of 2019. Driven by higher jet fuel prices, unit costs or CASM increased 16.4% compared to Q3 2019 to 10.5 cents. And finally, our CASM excluding fuel came in at 5.9 cents, a 5.3% decrease compared to Q3 2019. Although, we face certain inflationary pressures as well as higher sales and distribution unit costs related to higher sales levels, our continued initiatives to reduce our costs have reduced a sustained level of lower ex-fuel CASM. I'm going to spend some time now discussing our balance sheet and liquidity. As of the end of the third quarter, we had assets of close to $4.6 billion. And in terms of…

Thank you [Operator Instructions]. Our first question comes from the line of Duane Pfennigwerth from Evercore ISI.

I wanted to ask you about competitive capacity. This analysis gets a little noisy with everything comp year over three year and versus 2019. But if we actually look year-over-year, it looks like Central America to the US is one of a few regions in the world where capacity is actually down year-over-year. So I wonder if you could just comment broadly on what you are seeing from a competitive capacity perspective in your markets in the fourth quarter versus the third quarter?

So Central America to the US could be down, but it was higher right after the pandemic. So it's coming back to a more normal level in a way we could say that. The main airlines in our region, the main international airlines will be back to nearly the pre pandemic capacity by the end of this year, so by the end of Q4 ‘22, and then the new entrants and the OCCs are above pre pandemic.

And then on dividend policy, apologize if you mentioned this. but how are you and the board thinking about restoration of the dividend and kind of the historical payout, and how do you think about buybacks versus dividends here? Obviously, you've done a substantial amount of buyback already and an incredible amount of buyback for an airline.

So the dividend policy, it's still there. It was suspended when the pandemic started. And to be reactivated, it's a decision that Board must take. And I am assuming that's going to be discussed in the next board meeting after Q4 closes.

Duane, and in terms of the buyback, as you mentioned, yes, we've been active. We have an active program of $200 million that is not yet completed. And rationale for the program is, A, as we've always had to maximize shareholder value, but also as a tool to have some management of the liability related to the convert. So that's kind of the rationale of the buyback program that we've been executing.

Our next question comes from the line of Alejandro Zamacona from Credit Suisse.

My first question is on the expectations for 2023. So besides the capacity load of 15% that you disclosed, do you have any early expectations in terms of yield, fuel costs, profitability, especially for yields, assuming that oil prices have started to normalize and for costs a [middle] the high inflationary environment.

We issued our preliminary guidance just in terms of capacity at this time. And I think that will [Technical Difficulty] probably have more visibility into 2023, and so we'll hold on until then for a clearer, more comprehensive guidance for the full year.

And we'll have more visibility on the specific factors you have mentioned for sure.

And then my second question, if I may, regarding the labor union negotiations. Could you share any thoughts on the current negotiations and expected outcome?

We have four main unions, earlier in the year, we closed negotiations with the airport workers and the mechanics, and we're currently in negotiations with the pilots and in the final stage with the cabin crews. So I would not like to speculate on results.

One moment for our next question. Our next question comes line Michael Linenberg from Deutsche Bank.

Good results, by the way. Great outlook, too. Couple here. Jose, just back on the share repurchase, it looks like this last quarter, maybe it was a little over $20 million. The previous quarter, maybe it was $120 million, $125 million. If I think about what, $200 million in total, what do we have about $50 million left, $60 million. Can you just give us what's left in the program?

No, it's a little bit more because there is a portion of what we purchased in the second quarter that was associated with the prior program that we had. So there's a little bit north, I think, about $100 million left in the current program.

And then just my second question to either you and/or Pedro, this 88% load factor in the fourth quarter, not only is it very high, but -- and of course, you're bringing back capacity now, but it's up versus the third quarter, so we have sequential improvement. And if I think pre-COVID normally, seasonally, you would see loads maybe dip down 0.5 point, 1 point, 2 points. We could go back and do a 10 year average, and you probably see a few points less. And I'm just trying to get behind why the load is higher. It's sort of a counter seasonal move on one hand, on the other hand, your network will now be fully back to normalcy and maybe you're getting the full benefit of connecting across all your various banks, and that's helping drive that additional load factor despite the fact that capacity is up. Can you just kind of give us -- walk us through maybe what's driving that because that does seem very unique and interesting?

Things have changed, of course, since the pandemic. And the patterns are slightly different, demand is strong right now. It doesn't mean that it's going to be strong forever. Yields are strong, driven by higher fuel price, but we all know for how long either. And then competition, as I mentioned before, has been gradually adding back capacity. Some will come back sometime in this quarter, others are already above pre-pandemic. So there are so many moving parts that are so different to pre-pandemic that we're really having a hard time predicting exactly how demand is going to behave quarter-over-quarter. So this is like the best of what we can see right now. And that's kind of like -- that's like the most we can say because again, it's all changed.

So it sounds like it's just a period where all the planets are in alignment and you're just getting good numbers.

It could be, exactly.

I think that's a good assessment.

Our next question will come from the line of Savi Syth from Raymond James.

Just on the 2023 capacity, could you talk a little bit about the mix in terms of stage and upgauging and new departures in that 15%, as well as I wonder if you can talk about how you're thinking about new markets versus kind of building back frequencies.

Yes. I would say, Savi, that about a little bit more than half of that capacity is just a full year effect of some of the capacity that we built in during 2022. And then the remainder is probably going to be between gauge and frequency into markets that we already [Technical Difficulty]. So I think the focus more anything is going to be on initially sort of full year effect and then frequency into markets that we reserve with kind of the additional gauge, that's kind of at this stage kind of what we have.

So kind of lower risk growth there then…

I would say so. Yes. I mean I mean the hub still -- we have right now 77 markets or 77 cities. We had 80 prior to the pandemic. And so I think that there's still certainly opportunities in terms of cities and new markets that we would serve, and I think there is going to be some of that. But the majority of the growth is going to come from the latter or the other two areas that I mentioned.

And then if I might on the kind of revenue strength that you're seeing. Is there any kind of color that you can provide on business corporate has -- it seems like most of the commentary we are hearing across the kind of various geographies is it's really coming from leisure and VFR. Are you seeing kind of a more return to corporate, or -- and I know some of the premium capacity in your markets have maybe come off, and wondering if that's helping you gain any corporate share.

So it's still mostly leisure, where the strength is coming from, but business is up. Our corporate accounts, for example, our -- at 75% of pre-pandemic. And overall, business is now around 25% of total revenues before -- in the previous quarters, it was about 20%. So we are seeing a little bit of an uptick in the business travel.

Are you seeing an improvement? I mean is kind of our valuation right, is the premium seats in your -- the competitive premium seats in your market lower now, or is that not never noticeable?

I don't think there's that much of a switch. And you’re talking about competitors, right?

Exactly.

Yes.

Yes, we don't -- I don't think there's a clear picture there.

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I was wondering if I could just dig in a little bit on the capacity growth for 2023. I mean it seems in terms of your seat cost cadence, you're outperforming most of the US airlines per se. And when we think about moving into 2023, how should we think about sort of the split between fixed and variable costs, for example, as we think about, for instance, the upgauging that you've done from -- Boeing and some seat densification. Just sort of wanted to dig in and your success in what seems to be limiting seat number costs versus some of your North American competitors?

I'll start with relating a little bit of how we got here. We have reduced our CASM ex fuel between 2019 to 2022 by around 5%. And that's come, as you mentioned, with the fleet moves that we made with the fleet simplification and we streamline overhead across the board and perform other tweaks, including some tweaks in our onboard offerings, et cetera. Going forward, we will continue doing more of that. I think that we still are trying to put everything together in terms of our 2023 CASM guide. And I think in February will be more ready to give a full year unit cost guide for the year. But as you well mentioned, all the items that you mentioned, the continued growth of 737 fleet, the densification, et cetera, will come into play as well in moving forward and keeping our costs in a very competitive position.

And just one other quick question. If my memory serves me correctly, which it might not. I recalled in the past, maybe a couple of years ago, when I think about your fleet mix of leased versus owned that it was kind of somewhat more 80/20 as opposed to the, I believe, the two thirds, one thirds as you mentioned. And as that shift -- is my understanding accurate? And when you think about leased versus owned, is it a matter of where you see the most attractive financing opportunities or with Wingo's growth, maybe you're reluctant to take some of the asset risk on the NGs, just love to hear your thoughts on that.

No, it's actually not shifted too much. It's been kind of in that two thirds, one third for a while. And we usually -- and it depends on the moment it has been because of at points in time in the past because of aircraft availability at a particular moment. But ultimately, we make our decisions for financing based on what the better options are there from a purely economic perspective. So that's kind of the driving factor. Having aircraft on the operating leases also gives us some flexibility in terms of the fleet plan, which is a key portion of it. They all have tiered expiration dates and that allows us to plan ahead in terms of capacity. So that's kind of the rationale that we followed over the last several years.

And our last question will come from the line of Helane Becker from Cowen.

Just two questions. Can you talk about the improvement in fuel efficiency with replacing the older aircraft with the MAX? And then the other part of the question is, could you maybe talk about the loyalty program, the uptake, the increase, what you've experienced in the past maybe a year, year and half on the acceptance of that program?

Helane, in terms of fuel, there's a couple of items, I think, of note, yes. The MAX is, in terms of fuel, pure fuel efficiency is delivering as has been advertised vis-a-vis the NG. And so I remember, in our case, we also replaced ultimately, some of the E190s with MAX. So the benefit in terms of fuel consumption was also very good. So it's in the low double digit range in terms of fuel efficiency on a like basis. So it's, again, performing as advertised -- on a fuel basis. The other item that is important is that we, as a company, pursued quite a bit our fuel conservation efforts over the last several years. And so besides just purely the operational fuel efficiency of the aircraft, we also have embarked in multitude of initiatives from the operational side, from the maintenance side and from even from the finance side, to reduce our fuel consumption as well. Those are -- maybe there's a set of about 12 or 15 metrics that we follow on a specific manner on an ongoing basis with fuel conservation that has also aided in our overall fuel efficiency over the last several years. And items -- I'll give you an example of something that is -- we've been in like centers of gravity of aircraft, just mining the aircraft center of gravity on every specific flight is something that adds a lot of value in terms of fuel conservation. So it's items like that, that we measure and pursue in every single flight. So it's a good development there.

Helane, in terms of our loyalty program, we haven't shared much information in the past. But just took the note because maybe we can make a special presentation during our Investor Day next year, maybe we can share more information, but it's doing well. I mean, of course, it's not a huge program. It goes right to our site and the size of our home market, but it's a very successful program, is growing nicely. And again, maybe we can share more information during our Investor Day. In terms of -- going back to Stephen's questions and your question in terms of fuel efficiency and upgauging or densification. I think it's interesting to notice that in Q3, our ASMs are only slightly below our 2019 level, but if you look at our block hours are about 7% below 2019. So we're delivering a much higher ASM per flight, and that has a direct impact in our ex-fuel CASM and even in our fuel [proceeding] performance.

Actually, that's what prompt in my question. The fact that you're within a percentage point but your fuel consumption is lower by a lot, and it's not explained entirely by Savi's question about length of haul and stage, so that's what prompted that. And then just one last thing. Right before the pandemic started, you guys had started the Panama layover, and I'm just wondering if the uptake on that has started to increase again.

It has. This year would be -- this year it’s going to end pretty much in the same numbers we had in 2019 pre-pandemic in the range of 100,000 passengers, give and take a few thousand. So it's doing very well and we're going to keep on pushing it next year in 2023.

Now I'd like to turn the conference back to Mr. Pedro Heilbron for closing remarks.

Okay. Thank you, operator, Victor. So thank you all. This concludes our earnings call for Q3 2022. Thank you for being with us. And thanks for your continued support. Have a great day, and we'll see you in the next one. Thank you.

And this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.