Ladies and gentlemen, thank you for standing by. Welcome to Copa Holdings Second Quarter Earnings Call. During the presentation all participants are in a listen-only mode. Afterwards we'll conduct a question-and-answer session. [Operator Instructions] As a reminder, this call is being webcast and recorded August 10, 2017. Now I will turn the conference call over to Raul Pascual, Director of Investor Relations. Sir, you may begin.

Thank you, Jonathan, and welcome, everyone, to our second quarter earnings call. Joining us today are Pedro Heilbron, CEO of Copa Holdings; and Jose Montero, our CFO. First, Pedro will start 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' 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 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/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 that are subject to change. Many of these risks and uncertainties are discussed in our annual report filed with the SEC. Now I would like to turn the call over to our CEO, Mr. Pedro Heilbron.

Thank you, Raul. Good morning to all, and thank you for participating in our second quarter earnings call. First of all, I want to congratulate all of our coworkers for a very strong quarter. Their efforts and dedication allowed us to achieve great results while delivering the world-class product that our passengers expect from us. During the quarter, thanks to recovering economy and solid commercial execution, we were able to, once again, deliver strong load factors and improving yields, resulting in a significant year-over-year unit revenue improvement and margin expansion. More importantly, we remain encouraged by forward-looking demand and focus on maintaining our operational excellence and industry-leading unit costs. Among our main highlights for the quarter. Passenger traffic grew a strong 14% year-over-year, outpacing our capacity growth of nearly 9%. This resulted in a strong 82.2% load factor, close to 4 percentage points higher than the second quarter of 2016. Yields increased 3% year-over-year, especially driven by April, which had the year-over-year advantage of the Easter holiday shift. As a result of our higher load factor and yields, unit revenues or RASM improved 7.5% year-over-year to $0.10. On the cost side, we delivered ex fuel unit cost of $0.063, among the lowest for a full-service airline. As a result, our operating margin came in at 14.4%, more than double our operating margin for the second quarter of 2016. On the operational front, Copa earnings delivered on-time performance of 85.1% and a completion factor of 99.7%, placing us again among the best in the industry. We continued working on several important projects that should contribute significantly to our results over the next couple of years, including upgrading our reservation system, which will eventually enable us to enhance our revenue through new ancillary opportunities; migrating to a new unified MRO solution, which…

Thank you, Pedro. Good morning, everyone, and thanks again for joining us. First and foremost, as always, let me begin by joining Pedro in congratulating the entire team for all the efforts and achievements during the first part of the year. Among our highlights for the quarter, we grew capacity by 8.6% year-over-year, while revenue passenger miles increased 14% year-over-year, which resulted in a consolidated load factor of 82.2%, a 3.9 percentage point increase versus Q2 2016. Furthermore, passenger yields came in about 3% higher year-over-year, which combined with a higher load factor resulted in a unit revenue increase of 7.5% from $0.093 in Q2 2016 to $0.10 in Q2 2017. When adjusting for length of haul, unit revenues increased 8.3% year-over-year. Consolidated revenues increased almost 17% to over $578 million. On the expense side, our second quarter operating expenses increased 7.6% year-over-year, and our cost per available seat mile decreased 1% to $0.085. So our effective oil and fuel price decreased 2.4%, from $1.81 per gallon in Q2 2016 to $1.77 per gallon in Q2 2017. Cost per available seat mile, excluding fuel, ex fuel CASM, remained flat at $0.063 for the quarter. Consolidated operating earnings for the quarter came in at $83 million, resulting in an operating margin of 14.4%, more than double the 7% margin generated in the second quarter of 2016. In terms of net results. Net earnings for the quarter came in at $63 million or earnings per share of $1.49. When excluding extraordinary items, underlying net income for the quarter came in at $62.8 million or earnings per share of $1.48. Almost 3x last year's second quarter underlying net income of $21.5 million or adjusted earnings per share of $0.51. Looking at nonoperating income and expense. The second quarter generated a net nonoperating expense…

[Operator Instructions] Our first question comes from the line of Michael Linenberg from Deutsche Bank. Your question please.

This is, I guess, a question for Jose. Just on the updated guidance. So RASM and CASM are the same. The fuel price is the same. So it sounds like that this is capacity driven or maybe even more refined is better utilization. So is that what's driving the margin improvement, the new range that you're just getting better utilization on the airplanes? And can you just talk about what their current -- what the block hours maybe, where they were and where they're going per day just to get a feel for how much those airplanes are in the air?

Mike, the way to frame it really is to look at the unit revenue and unit cost guidance that we have, have some intrinsic variability in them, given that we only guide to 1 decimal. So I think that we, today, have one more quarter under our belt and it gives us more visibility to adjust up to margin range. So I think you put it as an intrinsic variability that our RASM and CASM have within that guidance.

And Mike, this is Pedro. Just quickly, utilization is up year-over-year to 11 hours and change from around 10.5 the previous year.

Okay. Can I go back to just the variability that you talked about, RASM and CASM? Was the sort of impetus to take the margin guide up was that because you were seeing better RASM or better CASM?

I think that it's a little bit of both, I'd say. But mostly, I think there's some CASM benefit on the upside, I'd say. And when you look at our $0.064 range, you would argue that there's some movement there you could argue of almost $20 million within that $0.064 CASM range. And now we're thinking that there's some upside in terms of CASM for the year.

And then just lastly, markets that are outperforming or markets that have -- that are doing well and maybe the markets are countries where things are still a little bit soft, like what are some of the -- what have been some of the positive surprises from a regional perspective that you're seeing?

This is Pedro, Mike. Most markets are doing well. We need to keep in mind that the comps are going to be much harder in the second half, so we started seeing the stronger load factors and improving yields in the second half of last year. So we're going to have stronger comps. We're also growing much faster in certain markets like, for example, Brazil and the U.S. in the second half of this year. So that will always put some pressure in yields, but still we're seeing overall a positive growth in almost every market. We're seeing strong unit revenues, and just a few markets may be where there is a little bit of pressure from competition, mostly in Central America, but that's not a significant percent of our overall business.

Thank you. Our next question comes from the line of Savi Syth from Raymond James. Your question please?

Just on the capacity growth and kind of taking a step back. If you look into the fourth quarter, you are increasing capacity. Copa is increasing capacity as well as you're seeing industry still pretty modest growth, but this is a slight change from the trend that we've seen, and I just wanted to get a sense of the recovery that we're seeing was partially on the currency side and are we starting -- are you starting to see just economic growth as well kicking in? Or is some of this capacity that's being added in anticipation of improvement?

This is Pedro again. Well, first, I should say that it's all utilization. So it's capacity that in most cases we had two years ago -- over two years ago. We've brought down utilization in the last two years, and we're putting back some of that capacity in this year and in the second half of this year, so it's mostly utilization. So it's more effective capacity growth than if we were bringing out a new aircraft and just growing from that aspect. So it's mostly that. And we are seeing, obviously, not only currency that has strengthened over the last 12 months but also they have stabilized. So we're not seeing the currency fluctuations of one and two years ago. And there is positive growth in Latin America after two years of negative growth. But I would say again, we are still being rational. It's capacity. We're not being irrational. We're not doing anything where there isn't a -- the demand and it's not very different to where we were in the past.

That makes sense. And then as we look to next year, you are going to start getting the MAX aircraft. And I was just wondering a little bit more on the MAX on how you plan to configure the aircraft from a seat perspective? The 8s and 9s you're getting next year and maybe the 10s that you're planning to get down the road, how much more seats those might have? And just curious, as you roll them out, if you see any -- should we kind of expect any cost pressures related to introducing new fleet type?

Yes. So we start getting the MAX 9s next year and the year after it's going to be all MAX 9. We have still not announced the exact configuration because we have not chosen those details yet. We hope to announce that configuration in the not too distant future. So we're not ready. There's not going to be much difference from our premium configuration that we use for our longer flights to South America except that it will have a few more rows, being a longer tool. So we will have a few more rows, and we will announce that when we're ready and done. And we do not expect any significant material cost from introducing that aircraft. We actually expect cost advantages from the lower operating cost of the aircraft.

Our next question comes from the line of Stephen Trent from Citi.

I was intrigued to hear you mention Wingo. I mean, I know it's a small piece of your operation, but you guys mentioned that it's doing somewhat better than you had anticipated. Would you say that some of the better performance in Wingo is coming from cost management? Or is it something that's coming from perhaps weaker-than-expected competition headwind? That's my first question.

Yes, it's mostly from cost management, which is -- what was a big part of the Wingo strategy. Because Wingo pretty much replaced a Copa Colombia network that we were already flying. But we were flying this network with high cost and very low yield, given that was mostly leisure market. So we replaced that with a much more lower cost operation in Wingo. And even though yields came down, of course, the cost came down by a higher degree, so it's mostly cost management.

Okay. That's very helpful, Pedro. Just one other from me. If you could refresh my memory where we are at this point regarding Tocumen Airport's upgrade? And maybe when we think over the next 5 years, your comments on the adequacy of the infrastructure.

Yes. So first part of your question, the Tocumen upgrade is coming along, but it seems to be delayed or further delayed. So we were expecting to have the facilities by mid-2018, and we feel now it's going to be more towards the end of 2018. We already have 8 new remote positions, which are part of that new expansion. And also there's a plan to make available some of the gates that are closer to the current terminal even before the full facility opens. And we feel that with that, we're going to be able to manage our second half of 2018 operational growth. And with that, mitigate the effect of the delays. Going forward, after that, we feel pretty good about the airport infrastructure versus our need for the next 5 years. Since not only will we have 20 new gates once Tocumen opens, but there's also, let's say, a new extension which adds another 8 gates very easily and with neither a major investment. So we would expect those additional gates to start being planned the minute the new facility is inaugurated. And with that, we think we have a good number of years of the right infrastructure.

Our next question comes from the line of Helane Becker from Cowen and Company.

On dividend policy, is that the increase just the -- having the substantial cash position? Or is it actually a change in the payout? How are you thinking about the payout ratio?

I think that -- Helane, this is Jose here. The board saw our strong cash position and our strong recent financial performance and decided to increase the payout. And I think that they'll revisit the further payouts, as time comes in the part -- latter part of the year. So that's something that the board will decide at a later date. But yes, I think that the board is totally keen on returning value to the shareholders and that's what I think's been shown with this increase in the dividend payout.

Okay. And then can you say if there's any update on your contract with your pilots? Has that been done now?

Yes. That was done at the end of June, I believe, if I'm not mistaken. So that's all done. And we have kept our CASM guidance as we had before. So already that was embedded in our guidance, it's in our projection for the year and nothing has changed.

Okay. And then I know you raised the -- the margin guidance for the second half of the year, given the strong performance and what you're seeing is. As you look at over the next few years, is that kind of a range we should be thinking about for margins? Or how are you thinking about the long-term goal, if there are any, for margin performance?

Yes. I think that what we've been discussing over the last several months is that we have, I think, set a path towards achieving our historical margins that are in the high teens and even upwards of 20%. So I think that with all the initiatives that we've taken over the last year, we're clearly in -- I think, in that path right now. So over the next several years, our expectation is that our margins are going to be in the levels they have been in the past.

Our next question comes from the line of Duane Pfennigwerth from Evercore ISI.

This is actually Ray Wong for Duane. Just a couple of question. First, how are we -- how are you guys thinking about 2018 growth rate? We understand there's some flexibility, but we're just trying to get a better feel for '18 and '19 growth rates.

In 2018, we're getting 6 new aircraft net. 5 of those are going to be MAX 9, so higher gauge, which we get towards the end of the year. So we're not going to have a huge impact on the year. But we haven't still guided it to growth next year. But if you think of the number of aircraft we're getting, the MAX 9s at the end of the year, we're probably going to be in the high teens -- I mean, sorry, high single digits -- in the high single digits, what I meant to say.

That's helpful. And with the deliveries of MAX aircraft over the next couple of years, how should we think about the nonfuel cost trajectory going into '18 and '19?

I think it's too early to tell but the aircraft does have a -- in the range of 12% fuel savings. So however, we will introduce the aircraft on a stage basis or they won't be a significant portion of our fleet up until 2020, 2021. So I think that we have to assume that the impact on fuel at that level immediately in the overall fleet. So you would argue that fuel could come down on a per gallon basis in the mid-single digits, low- to mid-single digits over the next couple of years and then start going on from there.

Great. And finally, how does your team measure competitive capacity? And if you guys do track that, how is it tracking in the 3Q and 4Q compared to 2Q?

We do track it and what we've seen so far is rational behavior from our peers in the region in Latin America. So we're not seeing any major changes from what we've seen before earlier in the year. There's a little bit more growth maybe to Brazil, but a lot of that is from Brazilian and U.S. carriers between Brazil and U.S. We're not a big player in that market, but overall, intra-Latin America, they're still very rational growth.

Our next question comes from the line of Hunter Keay from Wolfe Research. Your question please.

Pedro, you terrified me for a second with that high teens comment on capacity.

I know, I know, I know, but I couldn't correct it myself and everybody else in the room over here jumped on their feet.

Yes. That's good stuff. So can we talk about -- this is a little bit of follow-up to the last question on competitive capacity. Obviously, you took the load factor off and you got the RASM guidance changed. Maybe it is just rounding, Jose, you kind of talked about how you guide. So there's a lot of percentage variability there with rounding. But are you thinking, are you planning for maybe a little bit of softening in the yield environment as we move through the year, as just the industry sort of stabilizes and some natural growth kind of returns to the market from competitors? And you said you're seeing rational behavior, but are you bracing for maybe a little bit of yield softness in the back half?

Yes, I think that you would see that on a systemwide basis, yields are going to be flattish for years, especially because of the comps become more competitive, right, on a year-over-year basis. So that's I think the way that we're seeing it.

Okay. And then, Pedro, can you talk about Venezuela? There's some bad stuff going on there. Seems like it gets worse every day. The questions I have are really how does demand over there look generally? What percentage of your profits comes from Venezuela now versus a few years ago to the extent you want to talk about that? And how are you thinking about serving that market longer term and through even the near medium term with all the unrest?

Yes, Venezuela is like the topic that always comes back, and it's sad really what's happening over there, too bad. But we continue serving Venezuela. We have three flights I mean, we have five flights from Panama, three to Caracas, one to Maracaibo, one to Valencia and one from Bogotá, that's flown by Wingo. So it's six -- more or less six daily flight. Demand has held up still even though throughout the year we go through peaks and valleys. There are times when it gets very tough. So in the next few months, it might get a little bit tougher. We're not sure. It's a market that is seeing a lot of immigration to Panama and some of the other countries in our region. And there's a lot of people coming back and forth between the two countries. So we somehow feel the responsibility to serve those passengers. And we don't want to abandon that market unless it's unprofitable and unsafe to serve. So far, we are closely monitoring our operations. We feel that we can still serve the markets and stay within international accepted standards. And even though it's not the profitability of years past, we're still in the black. We're not -- I mean, some flights might not be doing as well as older, but overall, we're staying in the black. And in terms of capacity and profitability relative to rest of Copa, it's now very low, both the impact on capacity and profitability, that is, 2% range is not really significant. So we no longer depend on Venezuela in any significant way. But as long as we can stay, we can run a operation with right safety and quality standard and stay in the black, we feel we need to continue serving the market.

Thank you. Our next question comes from the line of Joseph DeNardi from Stifel. Your question please.

So just on the reservation system. The new system coming online. Can you just speak to kind of some of the integration risks or how that's going? When you expect to see the benefits start to ramp up there?

Yes. It's an upgrade to our current system. We used to be owned by HP -- HPE and it's now -- they merged and it's now called DXC. And so it's an upgrade, which will be implemented in modules and in phases. It's not a one-time switch-off, switch-on type of transition and it's somewhat delayed. We were expecting something by the end of this year, and it's going to be now more like the first half of 2018. However, we're looking for ways to implement certain initiatives even before we have the system fully running. So for example, we've talked a lot about ancillaries and what that's going to mean for the company once we have the new system. But even with those delays, a few weeks ago, I think two or three weeks ago, we implemented a seat functionality, kind of outside the system, which allows us to start charging for a preferred seat and for booking certain seats in the airplane. And we are projecting in the first 12 months run rate to get somewhere between $4 million to $5 million in additional revenues, and that fits within our target of increasing ancillaries this year and next year.

And then, Pedro, if I just go back to -- I think it was a couple of years ago, the Investor Day you guys did down in Panama, when you announced the kind of the launch of your own loyalty program. There was a pretty active discussion at the time as to what the longer-term strategy there was, given that some other carriers down in that area have chosen to monetize their programs. I know it's very early on in the life cycle of your program, but can you just speak to the private equity market for loyalty programs now? Do you think that there's still interest on their part to invest in those types of programs?

Yes. Honestly speaking, we're not exploring those options. We have a very young program, still small, and it's not really in our plan. And we have some doubts if that is the way to go. And we've seen however [airlines that have had a] spin off their programs and now they're bringing them back in-house. So we're not exploring that. So to be honest, we don't really know what's going on out there.

Yes, I think Joe, one of the items is that airlines in the recent past have done this just as a cash play, more than anything, and that's something we're -- the position that we're not in right now.

And our final question comes from the line of Leandro Fontanesi from Bradesco.

So some airlines have announced that they're going to reconsider their Embraer-190 fleet. So I don't know [Indiscernible] American Airlines and others, so probably some of them may fly with 737s or replace by new models for these manufacturers. Would you consider -- have you considered your Embraer fleet?

I mean, we're constantly looking at our fleet mix and in particular, at the Embraer-190A fleet. We were up. We had as many as 27 aircraft Embraer-190s at one point. By next year, we will have brought down that number to 19, which we feel is the ideal number of 100-seat aircraft we need. Our plan is for the next few years to keep the 19 Embraer-190s, which are all owned. Many will be paid for, so we plan to keep those 19, which we think is the right number of 100-seaters that we need in our fleet. But let's say, hypothetically, 5 years from now, anything is possible, both a new type of 100-seater if that makes the most sense from a bottom line net profit aspect or we could by then be able to sustain just a one 737 kind of fleet -- type of fleet. So that's also possible. That's something we're constantly evaluating. But I would say for the next 4 to 5 years, we're going to stay with our 19 Embraer-190s.

And just the last question. So you mentioned about competition in Central America. And one of your competitors is looking to obtain the certificate to fly directly to the U.S. from Central America. Do you think that this could change materially the competitive environment that you experience right now or not?

Okay. No, we don't think so. The Central America to U.S. market, let's say, Central America to U.S. East Coast, for example, which is the main market there, is not a significant portion of our revenue or our network. We're not big players in Central America to the U.S. So we will not see -- and there's enough service already, both from traditional carriers and low-cost carriers. So we don't think that a new operator in those market would have a material impact in our results.

And this does conclude the question-and-answer session of today's program. I'd like to turn the program back to Pedro Heilbron for any further remarks.

Okay. Thank you all. This concludes our second quarter earnings call and thank you for being with us. Thank you for your continued support. I hope you have a great day, great weekend and see you during our next call. Thank you.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. Everyone have a wonderful day.