Javier Kelly – Investor Relations Damián Scokin – Chief Executive Officer Alberto Gaffney – Chief Financial Officer

Eric Sheridan – UBS Rodrigo Nistor – Itaú

Good morning, and welcome to the Despegar Third Quarter 2018 Earnings Call. A slide presentation is accompanying today's webcast and is available in the Investors section of the company's website, www.investor.despegar.com. [Operator Instructions] This conference call is being recorded. [Operator Instructions] Now I would like to turn the call over to Mr. Javier Kelly, Investor Relations. Please go ahead.

Good morning, everyone, and thanks for joining us today for a discussion of our third quarter 2018 results. In addition to reporting financial results in accordance with U.S. generally accepted accounting principles, we'll discuss certain non-GAAP financial measures. Investors are encouraged to review the reconciliation of these non-GAAP financial results, which can be found in the press release. I would now like to turn the call over to our CEO, Damián Scokin, who will provide an overview of the third quarter and then update you on our strategic priorities. Alberto Gaffney, our new CFO, will afterwards discuss the quarter's financials, and after that we will open the call to your questions. Damián, please go ahead. Damián Scokin: Thank you, Javier. Good morning, everyone, and thank you all for joining us. Before I discuss Despegar's third quarter performance, I would like to take a moment to introduce Alberto Gaffney, our new CFO, who joined on October 29. Alberto's solid experience in finance and capital market growth will be key as we work to ensure we capture all our growth opportunities. Furthermore, he has a long, established and proven track record of consistently delivering results. I would also like to thank Bettina Zubin for her significant contributions as interim CFO. We are pleased to have Alberto join us. Now to third quarter results. Overall, we performed well on a number of key operating metrics in light of the challenging environment, particularly in Argentina and Brazil, which saw the travel industry across the whole region decline in the low double-digit range. Excluding Argentina and Brazil, transactions, which are impacted by weakened currency, as people travel less, expanded in the low 20% range, while gross bookings and revenues also delivered a robust performance. As we have discussed in prior calls, we have been strategically focused on reinforcing our position in the marketplace as the leading online travel agency. We have made significant investments in support of this goal, which has the desired impact of increasing our market share and improving post-travel customer satisfaction scores. We were able to accomplish this, while many other competitors were suffering the impact of the economic turmoil. Our long-term strategy focused on driving sales of higher-margin Packages, Hotels and Other Products remains intact. With transactions and as a percentage of total revenues in this higher-margin segment increasing close to 380 points in the quarter. Even in this increasingly difficult macro environment, we grew room nights by 12% year-on-year, and we believe there is more room for growth ahead of us. Mobile. This is a clinical initiative for us as mobile continues to be an important device for our customers. In fact, over 1/3 of transactions came from mobile devices in this quarter. We expect mobile to continue to grow as we make further enhancements to simplify the booking process. Our mobile-first mentality is also working to drive sales. In contrast to the solid performance in operating metrics, on the financial front, the investments I just mentioned along with a challenging macro environment, particularly with respect to foreign exchange, negatively impacted our profitability during this time. In particularly, we experienced quarterly average devaluation of 46% in Argentina and 20% in Brazil. As a result, revenues declined 9% year-on-year, while average selling prices fell 13% in the period. However, on an FX neutral basis, we saw gross bookings increase year-over-year in the high 20% range. With over two decades of operating history behind us, we have successfully managed through macro and industry volatility in the past and each time we have emerged as a stronger company. When the macro picture improves and we are confident that it will, the investments we are making now will position us to deliver top line growth and improve profitability. The last point on this slide. During the quarter, we repurchased $15.7 million of the outstanding shares and a total of $25 million to date. This action further demonstrates our commitment to returning value to shareholders and our confidence in the company's long-term growth potential. Turning to Page 4. Throughout the year, we have been able to increase our market share by attracting new customers and retaining existing ones. Market leadership and share gains continue to be our priority, and we have been making investments to achieve these. As you can see on this chart, total transactions were up 13% in the quarter and 16% through September. The share of higher-margin Packages, Hotels and Other Travel Products transactions in the third quarter of 2018 remained relatively unchanged year-on-year at 42% of total transactions. Impacted by the difficult macro environment, Argentina, which is our country of operations with the highest share of Packages, Hotels and Other Travel Products, represented a lower share of overall transactions in the quarter. Reflecting the success of our strategy to drive higher-margin products, standalone packages remained the fastest growing product doubling year-on-year total transaction growth. In the quarter, international order mix declined by 200 basis points year-on-year. This switch from international to domestic travel also impacted ASPs, which declined 13% year-on-year in this quarter. Note however, that on an FX neutral basis, ASPs were up 12% year-on-year. Gross bookings were down 2% on a reported basis, but up 27% on an FX neutral basis. As a reminder, our international business is typically based on U.S. dollar prices and adjusted in local currency terms very quickly in periods of devaluation. However, suppliers to our domestic business have less ability to increase prices based purely on devaluation. Excluding Argentina and Brazil, as reported, gross bookings increased 22%. Now turning to Page 5. Regarding business development initiatives, we are trying to always do something better on behalf of our customers that may be a new product feature in maybe the way we do customer service. There are a lot of different things we can do. The key priority is providing the best experience in online travel by offering an attractive value proposition as well as more, better and exclusive services. Over the past year, we made good progress in the way we provide services and interact with our customers. For example, we launched call center operations in Argentina and Brazil in September and in Chile during October, now covering our seven key markets. We see this as a good opportunity to complement our online platform to gain new customers and interact with those who might not be digitally enabled yet. Our customers are quickly embracing these options as gross bookings from our call centers were up 14% quarter-over-quarter. Importantly, ASPs are significantly higher than online. Over the past year, we also made several improvements to our booking experience. A refreshed mobile experience, improved inventory visibility and faster checkout as well as different payment options. We are now leveraging the strength of our competencies to deepen customer engagement and enhance customer service. This has been reflected in the further improvement of our NPS scores, which increased over 700 basis points compared to the same quarter last year. We will continue to enhance customer experience by launching additional services as well as providing the broadest and most unique travel offerings. The digital experience we are providing is more robust and engaging and give us the capability to deliver more personalized products and services. We are also encouraged by the success of our recent product launches, which we believe deliver the type of added benefit many customers are seeking. Recent launches include multiple destination packages, fast checkout through QR technology, new digital help center and airport destination transfers. It has been a very active year as we remain focused on offering the best experience in online travel booking. You can expect to see us continue to introduce product enhancements and services offering as part of our strategy. Next, Slide 6. We saw transaction growth and market share gains in all our key markets. This was achieved despite a sharp industry contraction in some segments of the travel industry resulting from a more challenging macroeconomic backdrop in several of our markets. We were able to do this through aggressive investments in Mexico and Colombia. These are two competitive and strong-performing markets, where driving significant market share gains is a key priority for us. In Brazil, our largest market, we achieved an 11% year-on-year increase in transactions, driven by our goal of expanding domestic and international higher-margins packages and hotels. We also saw increased demand in lower market domestic air, which has traditionally represented a sizable share of transactions. As a result, local currency gross bookings were up 24% year-on-year. Measured in U.S. dollars, however, gross bookings in Brazil were relatively flat impacted by a 20% FX depreciation in this period. In Argentina, even with the challenging macro environment and travel contraction, we delivered transaction growth of 4%. With a 46% year-on-year quarterly average peso devaluation, growth was mainly driven by lower-margin domestic travel. On an FX neutral basis, gross bookings in Argentina remained strong, although with the increased domestic air travel in the mix, we did not quite make up for all the currency devaluation in the period. We are particularly pleased with the robust performance delivered in two of our most competitive and strong-performing markets, Mexico and Colombia, as our initiatives to gain market share continue to drive results. In Mexico, transaction growth accelerated to 20% year-on-year, significantly exceeding industry growth. This was mainly driven by air and further supported by continued growth in domestic and international higher-margin packages and hotels. Colombia posted significantly high transaction growth, up 28% year-on-year. Growth was mainly driven by a strong performance in both international and domestic packages along with higher growth in international air passenger traffic. Our smaller markets, Peru and Ecuador, also performed well again, reporting the highest growth rate across the portfolio, both in terms of transactions and gross bookings. I will now turn the call over to Alberto to discuss the financial results for the quarter.

Thank you, Damián, and good morning, everyone. I'm delighted to be here. I look forward to meeting with many of you over the coming months and I'm committed to maintaining an open dialogue with investment community. I'm excited to be joining Despegar at this time as the company moves ahead and solidifying its leading position in the online travel market. Let's move on to our financial results. As reported, revenues declined 9% in the period to $121 million impacted by several factors. First, revenues were significantly impacted by the FX translation effect from currency depreciation, mainly in Argentina and Brazil. Excluding our operations in these two countries, revenues in U.S. dollars would have increased 26%. Second, we continue to experience a mix shift from international to lower-price domestic destinations, particularly in Argentina, where the sharp currency devaluation resulted in a decline in the share for international transactions of over 740 basis points. On a consolidated basis, we saw a mix shift from international to lower-margin domestic transactions of 200 basis points. Lastly, we maintained the planned reduction in air customer fees as well as discounts in package transactions implemented earlier in the year allowing us to continue to gain market share in this weaker demand environment. As a result, as reported revenues per transaction declined 14% in the Packages, Hotels and Other Travel Products segment and 25% in the air segment, resulting in a 53 basis point year-on-year reduction in revenue margin to 11.1% in the quarter. Our strategy to reduce fees to drive higher growth, however, has allowed Despegar to continue to gain market share while increasing the share of higher-margin price. Packages, Hotels and Other transactions accounted for 58% of total revenues this quarter compared with just 55% in third quarter 2017. Now please turn to Slide 8. Moving down on the P&L, the reductions in air customer fees and prices on packages introduced earlier in the year are allowing us to continue to gain market share across all of our key markets. We are achieving this even as we relied less on installments this quarter in Argentina as we reduced the offer and duration of installments following the steep hikes in interest rates in the country. At the same time, and with the goal of further enhancing customer service, we continue to invest in our fulfillment centers this quarter, hiring additional customer service agents, driving up NPS. By contrast, the regional marketing spend remained flat year-on-year but increased as a percentage of revenues as lower revenue margin more than offset the benefits from regional current depreciation, higher efficiencies and lower marketing investments. This initiative to accelerate market share gains and further strengthen our competitive position together with lower revenue margin resulted in an 11% year-on-year decline in gross profit with gross margin contracted over 170 basis points to a bit below 70%. Turning on to Slide 9. Our decision to accelerate market share gains along with significant currency devaluation impacted profitability in the quarter. This resulted in a 40% year-on-year decline in adjusted EBITDA with margin down 12% this quarter from slightly over 18% in the same quarter last year. On a comparable basis and excluding the $2 million onetime tax recovery gain in third quarter 2017 and an $800,000 severance charge this quarter, adjusted EBITDA would have declined 31%. Financial expenses more than tripled to $11 million year-over-year mainly resulting from the FX impact of currency devaluation in Argentina, Brazil and Chile. Note, this also includes a $2.6 million FX loss in the change in our balance sheet accounts resulting from the adoption of the U.S. dollar as a functional currency of our Argentine subsidiary starting July 1 as Argentina was declared a hyperinflationary economy. Higher interest income from invested cash balances partially offset these higher FX losses. During the quarter, we also reported a $0.5 million tax benefit compared to a $4 million tax loss in third quarter 2017, reflecting a lower effective tax rate from the recovery of deferred tax allowances in certain subsidiaries. Last, we generated negative operating cash flow of close to $27 million this quarter compared to positive $11 million reported a year ago, impacted by reduced payables from lower sales along with higher cash advances to travel suppliers resulting from new commercial agreements. Coming up, let's move to Page 10. Our brand is our strongest asset. We are proud to lead our category in brand awareness and have established ourselves as a trusted online travel authority and our improving NPS score is also a testament to this. Over the past year, we have been able to grow market share and reach new customers and to retain and serve existing customers, both online and off-line. Importantly, we accomplished this in a period when the industry was contracting and some competitors were finding it difficult to operate. Our decision to compete aggressively through lower air fees and price discounts in packages is working for us. As we look to the current quarter, the macro environment and FX volatility in our key markets has not changed significantly since the end of the third quarter. Given the full quarter impact of these macroeconomic disruptions, we expect further industry deterioration in the fourth quarter. As you know, we do not provide specific guidance, but given the sharp volatility in some of our key markets, we are sharing some additional color this quarter. The total travel market measured in U.S. dollars for the fourth quarter is expected to contract in the high teens and above the contraction experienced in the third quarter. We see these driven primarily by Argentina and to a lesser extent by Brazil. By contrast, we expect to continue seeing strong growth in our other key markets. In this context, and given the pressure some industry players are seeing, we are taking advantage of these unique opportunities to gain share and to solidify our leading market position. Again, we are prioritizing growth over profitability. Consequently, we do not anticipate a significant sequential change in gross bookings and ASPs. Our leading market position and healthy balance sheet enable us to take the necessary actions to drive the business forward as we face a challenging macro environment and weakened currencies. However, we need to strike the right balance between growth and profitability in the short term. The final point worth making is that we run the business for the long run. We are very focused on creating long-term value for our shareholders, customers, employees, but creating value in the long term also means that we can be opportunistic in the short term. In summary, we feel very good about the position of the business and our ability to continue executing against our strategic growth initiatives. This concludes our prepared remarks. We will now take your questions. Operator, please open the lines for questions.

[Operator Instructions] The first question will come from Eric Sheridan with UBS. Please go ahead.

Thanks for taking the question. And Alberto, congratulations on the new role inside the company. Wanted to tease out your comments on the demand environment versus just FX translation. So with giving some of the FX-neutral data in the report, it looks like the demand environment is actually much healthier than the translation on the FX side. I didn't know if you could give us any color on a country-by-country basis, what you might be seeing from a consumer demand standpoint, where some of the good and bad pressure points are on the consumer side versus what we're seeing in the FX results? Damián Scokin: Eric, this is Damián. A couple of comments on overall demand. As you know, Argentina and Brazil combined are approximately between 40% and 45% of overall industry in terms of LatAm travel. Those two markets were very much affected by FX contractions -- by FX devaluation and that affects the willingness to buy from consumers in different ways. Number one, obviously products become more expensive, particularly international travel, but also what we see is the uncertainty of the FX value at the moment of the future travel of the consumer makes consumers stop making travel decisions. So there's a price impact that you see on the ASP, but there is an overall demand contraction due to the uncertainty and also to the fact that this is, obviously, a category of spending that can be postponed. So that's what we saw in Q4 -- in Q3, hard to predict exactly what we will see in Q4, but our forecast, as Alberto remarked, are some of a deeper contraction that what we saw in Q3, particularly in Argentina, in which the biggest FX devaluation were impacted on the late portion of the third quarter. So we're going to see the full impact of that in the Q4.

Great. Thank you.

The next question will come from Rodrigo Nistor with Itaú. Please go ahead.

Hi, all. Firstly, Alberto, good luck in the new role. Then I would like to have more color on the year-on-year air transactions outpacing packages in the quarter. Is that because you're seeing a significant increase in demand on domestic air tickets in Argentina?

Rodrigo, this is Damián again. This is a result of two things. One, the one you mentioned, the shift to domestic, particularly in Argentina and also in Brazil, has made transactions of air tickets grow fast. But as a second impact, I think we mentioned in our remarks earlier is that the market with the highest percentage of non-air products, in particularly packages, is Argentina in our portfolio. Since Argentina as a whole retracted or is less -- has less weight in our portfolio of countries, that affected the overall count. If you look on a country-by-country basis, we grew our penetration of non-air and, in particular, packages.

Okay. Thank you.

[Operator Instructions] The next question will be from Kevin Kopelman with Cowen and Company. Please go ahead.

Damián and Alberto, this is Emily, on for Kevin. I just wanted to dig in on your cost of revenue line. It looks like you were able to contain that nicely in the quarter. I was wondering if you scaled back on your installment plans, and if you could talk about your strategy in that area going forward? Damián Scokin: Yes, Emily. Yes, two things here, we're very happy with evaluation of cost of revenue. One component is, yes, due to macro conditions, we pulled back in some installment cost, and we rely more on other commercial levers and that worked very nicely in the quarter. And secondly, there is a significant also improvement in other lines including cost of revenue like from -- like fulfillment center fees, which given our scales have continued to pay nicely in our favor, and we plan on continuing doing so.

Okay. Thank you.

[Operator Instructions] Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Damián Scokin for any closing remarks. Damián Scokin: Thank you, operator. First, I wanted to thank all of you for joining the call today. If you have any further questions, as always, please do not hesitate to contact any of us and we'll be happy to follow up. Thanks very much and looking forward to seeing you on our next call.

And thank you, sir. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.