Copa Holdings, S.A.
Q2 2014 Earnings Call Transcript

Published: 7 Aug 2014

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Copa Holdings Second Quarter Earnings Call. [Operator Instructions] As a reminder, this call is being webcast and recorded on August 7, 2014. Now, I will turn the conference call over to Rafael Arias, Director of Investor Relations. Sir, you may begin.

[Rafael Arias:]

Thank you very much, operator, and welcome, everyone, to our second quarter earnings call. Joining us today are Pedro Heilbron, CEO of Copa Holdings; and Jose Montero, our Chief Financial Officer. First, Pedro will start with our second quarter highlights, followed by Jose, who will discuss our financial results. Immediately after, we will open up the call for questions from analysts. Copa Holdings' second quarter financial results 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 second quarter earnings release, which has been posted on the company's website, copa.com. In addition, our discussion will contain forward-looking statements not limited to historical facts that reflect the company's current beliefs, expectations and our 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 that are subject to change. Many of these risks and uncertainties are discussed in our annual report filed with the SEC. Now, I'd like to turn the call over to our CEO, Pedro Heilbron.

[Pedro Heilbron:]

Thank you, Rafa. Good morning to all, and thank you for joining us for our second quarter earnings call. First, I would like to congratulate Copa coworkers for another excellent quarter. Thanks to their efforts, we have accomplished great financial and operational results for the first half of the year, while continuously delivering the world-class product that our passengers enjoy and expect from us. Among our main highlights for the quarter

[Jose Montero:]

Thanks, Pedro, and good morning, everyone. Thanks again for joining us. First, let me begin once again by thanking all of our coworkers for their efforts in running a world-class operation and delivering a very solid quarter, one in which we grew capacity by 10%, increased revenues by 14% and maintained very competitive unit costs, which led to an operating margin of 19.5% for the quarter. Looking at our financial results, reported net earnings for the quarter came in at $118.2 million, or earnings per share of $2.66, compared to last year's net income of $74.4 million or earnings per share of $1.68. Excluding a fuel hedge mark-to-market gain of $4.1 million and a $1.9 million loss in Venezuelan currency devaluation, underlying net income for the quarter came in at $116 million compared to last year's second quarter underlying net income of $85 million, which excludes a fuel hedge mark-to-market loss of $10.6 million during that period. With respect to traffic, revenue passenger miles increased 13% year-over-year, gain on load factor for the quarter [ph] to 77%, a 2 percentage point increase compared to last year's second quarter load factor. Furthermore, passenger yields increased 1.6%, which altogether contributed to a 3.7% improvement in unit revenues for the quarter. Operating revenues for the quarter came in at $674 million for 14% year-over-year increase on 10% capacity growth. On the expense side, second quarter operating expenses increased 9.7% year-over-year, in line with capacity growth. Hence, cost per available seat mile were unchanged when compared to the second quarter of 2013. We also saw an improvement of nearly 1% year-over-year in CASM x fuel, which came in at $0.066 for the quarter, partly due to the timing of expenses, some of which should come in later in the year. Moving on to operating earnings. Consolidated operating earnings for the quarter came in at $131.2 million, growing 34% year-over-year and translating into an operating margin of 19.5%. Nonoperating income and expense, second quarter results reflected net nonoperating income of $0.8 million, consisting mainly of a net interest expense of $3.3 million and a $4.1 million gain in the other net line, mostly related to the mark-to-market of fuel hedge contracts. With respect to fuel hedges, we ended the second quarter with hedges for 23% of the projected volume for the second half of the year using crude oil and jet fuel swaps. 15% of our volume is hedged in crude oil at an average price of $89 a barrel, and 8% in jet fuel at an average of $2.78 per gallon. In addition, for 2015, we have coverage for approximately 15% at similar prices and using same instruments. Turning now to our balance sheet. We continued to strengthen our company's position as cash and cash equivalents at the end of the quarter totaled $1.15 billion, which represents 42% of last 12 months revenues. Excluding cash in Venezuela, cash and cash equivalents represent a healthy 23% of last 12 months revenues. We also maintained a very favorable position in terms of leverage with a total debt-to-equity ratio of 0.5x. In terms of debt, we closed the quarter with approximately $1 billion in debt, approximately half of which is fixed-rate debt with a blended rate, including fixed and floating rate debt coming in at just under 2.5%. With regards to Venezuela, we ended the quarter with a total of $528 million in bolivar exposure. During the month of June, we received payment from the Venezuelan government for $43 million in the 6.3 bolivar per dollar exchange rate. Furthermore, with the capacity reductions we have performed, we expect to reduce our accumulation of bolivars to a minimum going forward. Turning now to dividends. It is important to mention that we continue to return value to our shareholders. On September 15, we will pay a quarterly dividend of $0.96 per share to stockholders of record as of August 29. In terms of fleet, during the quarter, we received the second and third of our 8 scheduled aircraft deliveries for the year, all Boeing 737-800s. So we ended the quarter with a fleet of 93 aircraft

[Pedro Heilbron:]

Thank you. Thank you, Jose. Now we'll open up the call for some questions.

[Operator:]

[Operator Instructions] And the first question is from Michael Linenberg of Deutsche Bank.

[Michael Linenberg:]

Hey, I want to just touch on the Venezuelan situation. What I will get -- what your cash was in Venezuela at the end of the quarter, the amount that was trapped, that was up about $40 million or so. And during the quarter, you also got basically $40 million back. So if it's up $40 million on a net basis, it looks like it was a pretty significant accumulation this quarter. For some reason, I thought that you were actually going to stop or really slow down your sales in bolivars during the June quarter. Or is that more of a third quarter phenomenon? And then also, the cash build, the gross amount, not the net amount. That did seem extreme. Was there a run on the bank? Were people trying to buy tickets? I mean what drove that? Unless it was just maybe seasonal.

[Pedro Heilbron:]

Yes. The accumulation -- reducing the accumulation is more of a Q3 thing. But I should say that we had -- our bolivar sales very tight at the beginning of the year and the beginning of the second quarter. So we opened -- and again, the capacity costs were going to start gradually in May, mostly in June and July. So we had to open up bolivar sales to sell some of that inventory we still had. And the sales just shot up more than what we expected. So we sold more than what we were expecting at the moment. That contributed to a much stronger Q2 than what were at first forecasting. I should say that since we have a further cut Venezuela capacity, and that's part of the reason why we implemented the additional 10% cut, which took us from 40% to 50% of capacity being taken out, we have also stimulated more nonbolivar sales. So from now on, our expectations are that the accumulation of bolivars will be minimal, if any.

[Michael Linenberg:]

Okay. And then to Jose's point that there would be -- I think he said that a significant reduction in the accumulation of bolivars by year end. By year end, should the number actually be less? I mean, will we be below $500 million, for example? Or will it still be higher, it just won't grow at as fast of a clip. How should we think about that?

[Jose Montero:]

I think, in general terms, Mike, you should expect it to remain constant. Of course, if the government were to pay us, then it would go down.

[Michael Linenberg:]

Okay. Okay. Then, just my last question is, the 50% cut is significant, but then when we compare it to what everybody else is doing, it's actually less. I mean, do you have other airlines that are either pulling out of the market completely or cutting anywhere from 70% to 90%. As a result, is your relative share in Venezuela today -- because you've historically one of the biggest international carriers to and from Venezuela. Is your relative share actually larger today than what it was 6 months ago or even after the 50% cuts?

[Pedro Heilbron:]

It might be. This is Pedro. It might be larger, but we're also serving different markets. So we're all in our own different markets. So it doesn't really make a big difference from that standpoint. But it could be larger. The key thing for us is that we've been taking our capacity to bolivar neutral, and that's a combination of the capacity we're offering and the sales that we can stimulate in nonbolivar currency, or to put it another way, outside Venezuela. So those are the 2 things we're balancing, and we feel that we have balance that -- I don't know, we have finally balanced that. We were not there in the second quarter. That's why we sold so much. But right now, as we speak, we're not accumulating a bolivar. We're still selling to a point but not accumulating.

[Operator:]

The next question is from Savi Syth of Raymond James.

[Savanthi Syth:]

On the yield deterioration that you saw on the World Cup side, did you not see softness in June? And also now that the World Cup is done, are you seeing a recovery there?

[Jose Montero:]

Savi, Jose here. World Cup affected our regular traffic patterns in July in Brazil and to some degree in other markets. And so we believe it will impact Q3. But we expect, in the case of Brazil, to perform well [ph] throughout the rest of the year. And as a matter of fact, we're adding Campinas at the end of the year, so we believe that Brazil actually for the rest of the year should be performing relatively well.

[Pedro Heilbron:]

This is Pedro. Just to add a little bit to that is in June we had a lot of people going to Brazil for the World Cup. That traffic returned in the first half of July. That basically blocked the regular July high season Brazilian traffic from leaving Brazil and returning in the second half, so we had a weaker second half, plus less people traveled ran a regular -- outside of Brazil. Brazilians -- less Brazilians traveled outside of Brazil because they had the World Cup going on. Their money went to the World Cup. And other countries in South America traveled to Brazil or drove to Brazil instead of going to some of our leisure destination. So the traffic flows were kind of messed up versus what we're used to in our usually strong July. And for revenue management, that was also a big challenge dealing with something that was hard to predict.

[Savanthi Syth:]

It's a very [indiscernible] follow-on -- is the thinking that maybe as you go into the fourth quarter, that you'll start to firm up?

[Pedro Heilbron:]

Yes, gross market should be back around the fourth quarter. And Jose mentioned we're adding Campinas, our eighth Brazilian destination at the end of the year in December.

[Savanthi Syth:]

Got it. And then just on Venezuela, I know last year, 10% of the sales were in U.S. dollars and maybe, as you narrowed the booking window, maybe that went to closer to 20%. Where is it right now as kind of a percentage of sales? And where do you expect that to go?

[Pedro Heilbron:]

So we have reduced capacity, as I mentioned before, and we have been leading nonbolivar sales, which could be in any other currency, which is automatically transferred to dollars. And right now, it's probably slightly about 50%, and it's taken us to a point where we're no longer accumulating bolivars. We can cover our local expenses with our bolivar revenues. And then the difference is being sold outside of Venezuela. Load factors are still strong and remain strong. So we think we've reached the right balance. But Venezuela, it's a dynamic situation. So it has to be monitored daily. And if it changes, we'll make the necessary adjustment either way.

[Operator:]

The next question is from Hunter Keay of Wolfe Research.

[Hunter K. Keay:]

When you guys affirmed the margin guide 3 months ago under 19%, 21%, I think the broad opinion was that, that the low end was probably more likely than the high end given the commentary about Venezuela having a 1-point impact. But now you're saying, obviously, 18% to 20%. So what was the primary driver of that change from 3 months ago, even though you knew you were cutting? Is it the incremental cuts to Venezuela above and beyond what you're cutting 3 months ago being replaced with lower-margin flying? Or is it more the weakness elsewhere in the network that drove that downward revision?

[Jose Montero:]

Hunter, it's Jose here. So yes, the main reason is the additional cuts that were performed in Venezuela and much higher proportion of sales outside of Venezuela than what we originally estimated, but I also have to say there's some yield weakness in some other markets, such as Argentina, that we're seeing that are contributing a little bit to this.

[Hunter K. Keay:]

Okay. So maybe a roughly even mix between the 2 then, Jose?

[Jose Montero:]

I would say it's mostly Venezuela.

[Hunter K. Keay:]

Mostly Venezuela. Okay. And is there a CASM benefit from cutting? I mean, presumably it's -- I would -- correct me if I'm wrong, but I believe that's a high-cost country to do business in. Is there a CASM benefit that as you're pulling capacity out, we might see a bit of a lagged benefit on the cost side to give us a reason to be optimistic about, say, a CASM benefit as we move into 2015 on lower Venezuela flying? Is that fair to think about it that way?

[Jose Montero:]

Yes. Well, let me talk first about our CASM. Even though we're maintaining our CASM at $0.068 for the rest of the year, there could be some upside there, and especially going up towards 2015. So that certainly could be the case.

[Pedro Heilbron:]

And this is Pedro. I would add that Venezuela has lower distribution cost. So there's some upside there. And I would like to add also that as we shifted capacity away from Venezuela, some on relatively short notice, we have to wait for that capacity to spool up, which is something that would happen in 2015, and also for revenue management to adjust to different demand patterns from what we were used to. Venezuela bolivar sales were, as we all know, a high yield and that kind of dominated the preference of our revenue management system. So as we bring that down, we need to adjust the way we manage our systems.

[Operator:]

The next question is from Duane Pfennigwerth of Evercore.

[Duane Pfennigwerth:]

As we think about your guidance and the decline in unit revenue in the second half that it implies, can you give us any help on the progression by quarter? It looks like you imply about down 7%, maybe there's some conservatism there. Do you expect a materially larger decline in the fourth quarter because it feels like 4Q last year was well above seasonal trend?

[Jose Montero:]

Duane, it's Jose here. We have to start by saying that the first half also had better performance than we expected, mostly due to the stronger year-over-year Venezuela performance. And also due to some timed expansions that we had during the first half. Having said that, the lower guidance for the second half of the year is mostly driven by Venezuela, and also due to some events that occurred during -- mostly third quarter, specifically as Pedro mentioned earlier, the World Cup and some -- Argentina, the performance of Argentina. And again during the second half of the year, there are some kind of expenses that should come in with the potential upside for having some benefits in terms of our cost performance during the latter part of the year. So I think that's the way kind of we see it right now.

[Pedro Heilbron:]

And this is Pedro. And in terms of how that's going to play out in the next few quarters, we have more upside -- we look at it kind of even the next 2 quarters, but there's more upside in the fourth quarter because, obviously, there's still more time to take revenue management actions for some markets to spool up, et cetera. So we would expect to see a gradual improvement in the fourth quarter.

[Jose Montero:]

And you mentioned something about 2015. And, I think as Pedro mentioned here, as these markets mature and our revenue management team adjusts the shift of capacity that we'll perform 2 other markets, we expect a lower impact on margins in 2015. However, it's still too early to tell in terms of what occurs then.

[Duane Pfennigwerth:]

Okay. I guess, could you just maybe play back some history for us for the fourth quarter of last year? You crushed that number, if I recall, and I do remember you saying something about kind of a surge in demand in Venezuela, specifically. Was there something on the ground, some incentive that changed or that people feared would change that caused the surge in bookings in Venezuela in the fourth quarter of '13?

[Pedro Heilbron:]

Fourth quarter, bookings were just -- that's kind of when bookings started shooting up in Venezuela. And it had to do with the currency and arbitrage between the official rate and the black market rate and expected further devaluations, plus it's a strong troubled [ph] quarter for them. So people bought 6 months into the future for all those reasons and probably some other reasons. We have that under control. We're not accumulating. So that Venezuela upside won't be there. We have also lowered capacity by 50% on selling a lot more in nonbolivar denominated currencies. So kind of the Venezuela factor, which was a big boost through -- actually through the last 3 quarters will not be there in the second half of the year.

[Operator:]

The next question is from Bernardo Velez of GBM.

[Bernardo Velez Diego Fernandez:]

Just regarding the performance in Venezuela after the capacity cuts. If you could share with us some of the performance in Copa in terms of yield sentiment during June and July.

[Pedro Heilbron:]

Well, it's Pedro. And maybe Jose wants to add something. But, Venezuela remained strong in the sense that load factors are high and yields are healthy, but obviously, we're not getting paid. So that's why most airlines have reduced capacity in a significant way, so that there's a balance, and we don't continue accumulating bolivars. So -- but it's not a problem with demand. Demand is -- we could triple capacity, open up sales and fit it all. But then there's the problem with getting paid. So we've taken our capacity and our bolivar-denominated sales to a point where we expect not to accumulate a significant balance for the rest of the year. But again, it's not a problem with demand. Demand is very strong, really strong.

[Jose Montero:]

However, talking about our revenues and proportion of revenues that Venezuela has, Venezuela used to be before the reductions in terms of revenues about in the low teens in terms of percent of our revenues and that with the capacity reductions that we perform is probably going to end up for the second half of the year to be in the mid single digits.

[Bernardo Velez Diego Fernandez:]

Okay, perfect. And I would like to understand what was the main constraint in the negotiations with the Venezuelan government? Meaning, why didn't you reach an agreement to repatriate the remaining $446 million at the 6.3 rate.

[Pedro Heilbron:]

Those negotiations continue. Those talks continue, and as far as I know, most airlines have not reached an agreement, and I'm not sure the ones that have reached an agreement, those agreements have been honored and they are getting paid. I'm not sure. So I think that's an ongoing process that is really not totally up to us.

[Bernardo Velez Diego Fernandez:]

Okay. Fair enough. And lastly, could you comment about your sales and cash exposure in Argentina and how are you looking at that market?

[Jose Montero:]

Well, we are monitoring the situation in Argentina very closely so as to not accumulate any large balances in pesos. And so far, we have had no issues in repatriating our funds out of there. The one thing that I would say is that, as we mentioned previously, yields are down in the market and are down approximately 10% year-over-year.

[Operator:]

[Operator Instructions] And the next question is from Edward Couto of Morgan Stanley.

[Eduardo Siffert Couto:]

I still have a question on the guidance. When we look especially the low end of the guidance, now the 18%, given that you did 22% in the first half, it implies 14% for the second half of the year. So my question is, if we think about Copa now without cash accumulation in Venezuela, which is what you guys said that this capacity reduction could mean. Should we think about a company with this like 14%, 15% margin? Or you think the company can do better than that?

[Jose Montero:]

Well, I think, first of all, to talk about what the second half of the year RASM is or margin guidance is, we feel that's what is realistic from where we stand right now for the second half. And going back, the first main reason why that is occurring typically in this period of time is because of the reductions or the additional reductions we made in Venezuela. However, we believe that going forward, there is a good upside, especially as our revenue management team is -- adjusts to the capacity shift. And we believe that 2015 to have even though is too early to talk about 2015. 2015 should have better performance than what we were seeing in the second half of the year.

[Pedro Heilbron:]

And I would add to that, that we're giving you a range. We're not expecting -- when we give you a range because we expect to be in the middle of the range, we don't expect to be in the lower part. And we also always, if we give you a range, it's because we feel there's upside to the middle of the range. So I would not assume that the second half is at 14% you mentioned. I think that would be like a worst-case scenario. And as Jose mentioned, there's upside. We talked before about expenses and then as revenue management made their adjustments, some markets cool off. So we're quite more optimistic than that.

[Eduardo Siffert Couto:]

Okay. So the idea is kind of work with the middle of the range, right, Pedro?

[Pedro Heilbron:]

That's why we give you a range. Correct. But again, there's a range. You can decide that yourself. But when we give you a range, that's what we're expecting. But obviously, there's a range for a reason.

[Operator:]

The next question is from Bob McAdoo of Imperial Capital.

[Bob McAdoo:]

At the risk of beating the Venezuela thing to death here, when I listen -- when I talk to the people at American, one of the things that they talk about is that there was this program which allowed people to buy $3,000 in dollars for a different exchange rate than what was out on the street. And in effect, somebody could go make a round trip to Miami or a round trip, I guess potentially, to Panama and walk away with $3,000 in actual dollars. And the only cost was really the cost of the round-trip ticket. And what they said was that, that caused those flights, just because somebody could use that to go -- basically make money just flying back and forth, just that mean that those flights were virtually always full and because they were virtually always full, the revenue manager system tended to drive the ticket price up but the people didn't mind paying a higher ticket price because they were doing it just to get the dollars. And I wonder, did you see that same kind of thing? And if that's the case, when you say that demand is weakening or whatever, yields are weakening, it's not necessarily yields are weakening, it's just that the old numbers were inflated because of this funny situation, and now you don't have that. It's not that there isn't demand through the rest of your system. It's really the fact that this layer of funny high-priced travel is not taking place anymore, and that makes the overall number look like it's down because it is down on an overall basis because that layer isn't there. But that the rest of your business, demand is not soft, and it's not -- and the revenues are not weak, it's -- or the yields are not weak. It's just the fact that, that one layer is not there. Is that to say -- are you seeing that same thing that American saw?

[Pedro Heilbron:]

No, Bob, you are partially correct. The only difference in what I would say is that, that demand is still there only that we were not getting paid. We were selling those high-yield bolivar fares that you had just mentioned, and the only reason we have reduced that is because we were not getting authorized to repatriate the dollars. But the demand is still there. I mean, if we open up the doors [ph] tomorrow, that demand will be there. In estimating, not exactly the same person, the same passenger, but there's still plenty of that high-yield demand. But we're getting paid, we have reduced capacity, we have stimulated more sales outside of Venezuela, nonbolivar sales. And we have kind of pushed that, the demand you're describing to the side. So you're right in what you're saying. The only difference is that the demand still exists. We just are not so interested in it.

[Bob McAdoo:]

I guess, I totally understand what you're saying there. I guess my point was, it seems like when those of us on the outside are looking at a total RASM that is down versus what we maybe saw last year or whatever, it's -- the total RASM is down because there is that chunk of high-yield traffic that is just not a part of the system anymore. And rightly shouldn't be a part of the system, but that the rest of the system, the other 60 some cities that you fly to, the demand is what it was, the yields are what they were. And those are not down. Is that correct?.

[Pedro Heilbron:]

So you're correct. Yes, you're mostly correct.

[Operator:]

And the next question is from Stephen Trent of Citi.

[Kevin Kaznica:]

This is Kevin Kanzica filling in for Stephen Trent. Obviously, we have questions about Venezuela, most of them have been answered. But I just had a quick question. I was talking to a competitor, and they basically said that they wouldn't accept any sales in bolivars. I was wondering how much control do you have over that, or is that you choose -- is it, like, part of your management system to choose to accept, like, partial sales in bolivars that your cash-balance neutral?

[Pedro Heilbron:]

Yes. So we're flying to Venezuela, and we feel that we need to service the local market also. And we have local expenses, of course. So it's not like we have no use for bolivars. So we try to find a balance where we can serve the local market and also cover our local expenses, continue providing a frequent and reliable service to Venezuela. So we think we found the right balance where we can provide frequent -- I think we're the international carrier right now with the most daily flights to Venezuela, and we're providing a service. We're selling locally, enough to cover our expenses. The difference we're selling outside of Venezuela, and we think that's the right balance in our case at least.

[Kevin Kaznica:]

Okay, okay, very helpful. Also, this is not really about [ph] Venezuela. We noticed that VivaColombia started daily nonstop flights from Bogota to Panama City's second airport, I think starting in August. Have you noticed any differences in advanced bookings? And do you guys ever use the second airport? And I think you had some landing rights there.

[Pedro Heilbron:]

Yes, we only use the second airport as an alternate. We don't have scheduled flights there. We haven't really noticed an impact in our bookings. I think we're kind of serving different market needs. They go off to a different market, and we rely a lot in connections. So most of our traffic out of Colombia connects beyond Panama. So it's a small percent of our revenue. Also, when you take out the business traffic, a small percent of our revenue that -- we would say up for grabs or that Viva competes against. So we see both our niches, maybe we'll have more promotional sales even there, and that would be about it.

[Kevin Kaznica:]

Very helpful. And then kind of like just going back to Venezuela one more time. What would stop Venezuelan government from forcing the airlines to book ticket using a SICAD II? And if people are buying dollars to get one and then selling their dollars on the black market, forcing people to buy using SICAD II might, I guess, stem that in Venezuela outflow of dollars, like, could that cause a shortage and then nobody gets paid?

[Pedro Heilbron:]

Honestly, I wish they went to SICAD II. It would make it a lot easier for them to pay the airlines. I mean from here on. Obviously, not the old stuff, but it would probably create any sheer flow of dollars if it was SICAD II. So SICAD II will have no impact on us. We would welcome that, actually. But what stopped them, I cannot say, but it would create ticket price inflation in local currency, but the difference is airlines are cutting back.

[Jose Montero:]

And by the way, there is really no official word on whether the government will actually move airlines to SICAD II. And so we're really not sure [ph] if this will occur.

[Operator:]

And the next question is from Pedro Balcão of Santander.

[Pedro Balcão Reis:]

It's Pedro Balcão from Santander here. At the first quarter results, I think you clearly indicated that the reduction in capacity in Venezuela should have less than 100 basis points impact on this -- your full year margin and, I guess, another 100 basis points next year. My question is, to what extent has this estimate changed? Is it the number now 200, 300 basis points for this year and nothing for next year? And why? What is behind this change in estimate?

[Jose Montero:]

Well, Pedro, it's Jose here. Well, since the last earnings call, we reduced our capacity in Venezuela further by an additional about 10 percentage points. So the only thing that occurred is that we also stimulated more nonbolivar sales than what we clearly expected. And so what, if I was to estimate the impact on the second half of the year, I would say that it would be about 3 percentage points in operating margin due to these additional changes that we made in Venezuela. Now on the positive side, this will also reduce our accumulation of bolivars to a minimum.

[Pedro Balcão Reis:]

Okay. And what about next year?

[Jose Montero:]

2015 is a little too early to tell, but we believe that the impact in 2015 would be mitigated by the fact that as time passes, our revenue management team is making adjustments to a shift of capacity. So I really do expect better margins in 2015.

[Pedro Heilbron:]

But there will be an impact. I mean, it's also -- and it will be higher than what we mentioned in the previous earnings call, as Jose mentioned. So we're working to mitigate that impact. But there will be an impact greater than what we mentioned before for the reasons that Jose just mentioned.

[Operator:]

And the next question is from Helane Becker of Cowen and Company.

[Helane R. Becker:]

Just a question on Argentina. Do we have to be concerned about not getting paid in Argentina and that the problems that exist in Venezuela will spread to that country as well?

[Pedro Heilbron:]

Right now, no. Right now, we do not see that risk. We are not accumulating Argentinian pesos. Because we're totally on top of -- you learn from experience. And so we're totally on top of that, and I won't detail every action, but we have actions in place that are similar to the actions that we took in Venezuela after so much was accumulated. So that's not a risk right now, but the world changes. We would take actions a lot quicker. So we think that's under control.

[Helane R. Becker:]

Okay. So you are getting paid by Argentina now?

[Jose Montero:]

Yes.

[Pedro Heilbron:]

We are getting paid, and yes, and we're monitoring sales closely, so there's no speculation and no sales 6 months in the future. It doesn't change versus the regular pattern. So we are monitoring the regular sales patterns to make sure we stay within historical patterns.

[Helane R. Becker:]

Okay. And then my other question is, with respect to capital allocation. So you guys are committed to paying a pretty big percentage of net income out as a dividend. Have you talked to the board about changing the allocation somewhat to pay less of a dividend and do a share repurchase program?

[Jose Montero:]

Well, Helane, this is Jose here. We have not made any changes in our dividend policy. And our dividend policy is going to be maintained at our current 40% of previous year's net income. And in terms of a share repurchase program, right now, all options are on the table. We haven't really made a decision, not yet. But we're currently analyzing that and other options for returning value to the shareholders.

[Operator:]

The next question is from Michael Linenberg of Deutsche Bank.

[Michael Linenberg:]

So just 2 quick ones here. I want to go back to SICAD II. So back in early June, the Venezuelan government did say that effective early July, airline tickets would be sold at the SICAD II rate. And then right up until that date, right before, the government backtracked. And I'm curious whether or not it was with consultations with the airlines, whether the message back was that you'd see significant inflation in local currency affairs to offset for that and/or significant capacity reductions. And I would say that when the announcement hit the wire in the local press over that 4-week period, you had a slew of international carriers announce some significant capacity cuts. Some that had been holding out like Lufthansa, united, Delta, American. I mean, do you think that, that is what drove that? Your thoughts on that?

[Pedro Heilbron:]

I can't speak for the actions of other carriers, but the one thing that I would say, Mike, is that there really was no consultation from the government with the airlines in terms of what the exchange rate was going to be. And really, we have no official word on why is it that they backtracked on this.

[Michael Linenberg:]

Okay. And just one other quick one, and I'm not sure there's much you can say on this. But when I think about the fact that you are able to repatriate several months at the rate that was in place at the time that those sales were made, you heard about a few other carriers also repatriating. Not a lot, small amount, some we're also hearing at the more favorable rate. But then we are also hearing some better repatriating at a less favorable rate like SICAD 1. There's obviously, a quid pro quo here. In the conversations back and forth, it would seem that some carriers being able to get the more favorable rate. Are there nonfinancial considerations here? Is there a dialogue? Is there a promise to maintain service? I mean what can you say about that? Why some carriers are doing a better job than others? And it doesn't seem to be that it would just fall on the ability of each company's negotiating party. I mean, there's got to be some sort pro quo here, and maybe it's a nonfinancial consideration. Whatever you can shed on this topic would be very interesting.

[Pedro Heilbron:]

This is Pedro here, Mike. There's not really a lot more we can add because we don't really know a lot more. And I think when you add it all up, it's not that there've been great differences or changes or that so much has been repatriated. But I did hear at one point that some small carriers that had small balances were after right repatriations like SICAD 1 rate, but I think when we added it all up, it was not significant. I think the big balances are still there waiting for a solution. So there's really not a lot more I can add.

[Operator:]

And then last question is from Hunter Keay of Wolfe Research.

[Hunter K. Keay:]

Pedro, you guys have grown earnings for 10 straight years, and that's something that you're very proud of. And I think we've had conversations about how you said you'd be willing to trade a point of margin for EPS growth, if that situation unfortunately were to present itself. And we might be looking at that situation right now. I mean, I know it's a little early in 2015 to start talking about margin guidance, but how do you feel about the prospects of growing earnings again next year in the face of what appears to be pretty material margin dilution?

[Pedro Heilbron:]

Well, it is early, and I don't want to get ahead of ourselves, but we have work to do. Luckily, we have a number of months ahead of us. We're proud of our track record. We're very, very confident about the business model, the strength of our hub, how efficient we run the airline. We have a diverse network with lots of possibility. So we need to make sure we up our game and take advantage of all of what I've just mentioned and come up with a plan that would make 2015 another strong year for the company. And I'm confident that we have all the possibilities to do that. But we're going to have a lot of work in the next few months.

[Hunter K. Keay:]

And so that is the main priority then above all else is to grow earnings for this company going into next year?

[Pedro Heilbron:]

We're very bottom line-oriented and we have a board that's very bottom line-oriented. So we'll do whatever we need to do to have a strong bottom line.

[Operator:]

And at this time, I'd like to patch the call back to Pedro Heilbron for closing remarks.

[Pedro Heilbron:]

Okay. Thank you, all. Thank you for your support. Thanks for your questions, and have a great day, and see you in the next earnings call.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect, and have a wonderful day.