Ladies and gentlemen, thank you for standing by. Welcome to the Copa Holdings Fourth Quarter Earnings Call. During the presentation all participants will be in 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 February 22, 2018. Now I will now turn the conference over to Raul Pascual, Director of Investor Relations. Sir, you may begin.

Thank you, Carmen, and welcome, everyone, to our fourth quarter earnings call. Joining us today are Pedro Heilbron, CEO of Copa Holdings; and Jose Montero, our CFO. First, Pedro will start with our fourth quarter and full year 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 reports have been prepared in accordance with International Financial Reporting Standards. In today’s call, we will discuss non-IFRS financial measures. A reconciliation of the non-IFRS to IFRS financial measures can be found in our earnings release, which has been posted on the company’s website, 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’d 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 fourth quarter and full year 2017 earnings call. First of all, I want to congratulate all of our co-workers for their efforts during the quarter and throughout the year. Their on going dedication and commitment keeps us at the forefront of Latin American aviation. Our fourth quarter results were a strong finish to a very good year. The sudden increase in oil prices that put pressure on operating expenses, we delivered a very solid fourth quarter load factor and stronger yields, resulting in the highest unit revenues in more than two years and a significant year-over-year operating margin expansion. Among the main highlights for the quarter, passenger traffic grew a solid 11% year-over-year out pacing our capacity growth of 9%. This resulted in a very strong 83.2% load factor, 1.6 percentage points higher than the fourth quarter of 2016. Yields increased 1.2% year-over-year, due to our higher load factor in yields unit revenues or RASM improved almost 3% year-over-year to $0.111. On the cost side, ex fuel unit costs came in at $0.065, as a result our operating margin came in at 17.8% more than 6 percentage points above the fourth quarter of 2016. On the operational front, Copa earnings delivered an on-time performance of 87% and a completion factor of 99.6%, again amongst the best in the world. Now turning to our main highlights for the full year 2017. I’m pleased to say that we reach an operating margin of 17.4% for the year or 5 percentage points higher than 2016. These came as a result of improving unit revenues our highest since 2014 and record low unit costs as a result of the many cost saving initiatives we have implemented over the years. Unit…

Thank you, Pedro. Good morning, everyone, and thanks for joining us. As always, let me begin by joining Pedro in congratulating our entire team for all their outstanding achievements during 2017. Now our highlights for the year. We decreased our ex-fuel unit cost by 1.7% to $0.063, amongst the lowest in the world for a full-service carrier. Despite significant capacity growth in 2017, we delivered our highest yearly load factor of 83.2%, and operating revenues increased close to 14% year-over-year. Reported net income for full year 2017 came in at $370 million, which translates to earnings per share of $8.72 and an operating margin of 17.4%, 5 percentage points higher than 2016. Excluding special items, mainly if you hedge mark-to-market gain of $2.8 million, adjusted net income came in at $367.2 million or adjusted earnings per share of $8.66, 82% higher than adjusted net income of $201.4 million or adjusted earnings per share of $4.75 in 2016. Now turning to our fourth quarter results. We grew capacity by 9.2% year-over-year, while revenue passenger miles increased 11.3% year-over-year, which resulted in a consolidated load factor of 83.2%, a 1.6 percentage point increase versus Q4 2016. Passenger yields came in 1.2% stronger year-over-year, which combined with a higher load factor resulted in a unit revenue increase of 2.9% from $0.107 in Q4 2016 to $0.111 in Q4 2017. Consolidated revenues increased 12.4% to over $676 million. On the expense side, our fourth quarter operating expenses increased 4.6% year-over-year on the 9.2% capacity growth, which resulted in a cost per available seat mile decreasing 4% to $0.091. Our effective oil and fuel price increased 3.5% from $1.96 per gallon in Q4 2016 to $2.03 per gallon in Q4 2017. The cost per available seat mile, excluding fuel, ex-fuel CASM decreased 6.7% from $0.069…

Thank you. [Operator Instructions] And our first question comes from the line of Michael Linenberg with Deutsche Bank. Your line is open.

Yes. I guess, a couple of questions here. Your – Jose, on your operating margin guidance, the 17% to 19%, previously, when you had provided that, we didn’t have all of the underlying costs, and I don’t believe we have the cost and revenue forecast. So what has changed? Obviously, fuel prices are higher, and yet, you’re keeping the same number. So it suggests that is it the cost outlook coming in better? Or is it all revenue? So maybe it’s a mix of both. What has changed since you initially gave the guidance a few months ago, three months ago?

Yes, Mike, I think it’s both. I think – as I mentioned earlier, we are working very diligently in terms of our cost position and ensuring that we have – we deliver our lowest cost that we can. And we have been marketing this program to reduce our costs. We’ve achieved already over $40 million of savings. But also, yes, the fact that the economies we’re seeing still a recovering environment, and so, therefore, there is also a bump-up in our unit revenues and our kind of guidance for the year related to that.

Okay. And then just on the bump-up in revenues. Is it because there’s better pricing in the market? Or is it better volumes? And I’m highlighting the volume piece because your load factors are running very, very high during what is seasonally some of the more periods where you’d see lower loads.

So hi, Mike, this is Pedro.

Hi, Pedro.

In most markets, we’re seeing a combination of better loads, and you’ve seen our load factors, which have kept on improving, and also better yields. So it’s slightly better yields with slightly better load factors make for healthy better PRASM numbers in most markets.

Okay, in most markets. And then just lastly on your – if you look at your cash position to sales, you’re back all the way up to 40%, and I suspect that internally, the right number for you is probably somewhere between 25% and 30%. I – as I recall, I know you had a share repurchase program out there, which I think you had exhausted. You were done with that. What are your thoughts? And what you think that right number is? And are you running a pretty high surplus?

Mike, the first thing is that we have – first of all, we are – we want to keep a very strong balance sheet and a very strong cash position. This is – given the industry we’re in, et cetera, but I’d say that also, we have a significant number of investments coming up our way in the next couple of years in terms of aircraft deliveries. This year, we have seven aircraft deliveries. And next year, we have eight aircraft deliveries. So there’s a quite a bit of investments going forward and pretty good deposits related to that. But also, we’ve also increased our dividend. Our dividend at $0.80 per share is up from last year, so we are returning more cash to our investors as well. So I think that the way to frame it is really related to the significant number of investments that the company is going to have in the next couple of years.

Okay. Very good. Okay, thanks gentlemen.

Thank you.

Thank you. Our next question comes from the line of Savi Syth with Raymond James. Your line is open.

Hey, good morning. My first one is just a follow-up on Mike’s question for a little bit of clarity on the revenue side. As you think about it, it looks like roughly 3% revenue, and I understand that’s just based on the current environment. Should we think about that as relatively steady? And with maybe second half, getting more contribution from ancillary revenue initiatives? Or would you kind of expect a similar contribution from ancillary revenue? Or are you even considering that in your kind of outlook?

Yes. This is Pedro first, and then I’ll let Jose add anything. But obviously, in our guidance in our revenue – unit revenue guidance, we have embedded a increase or improvement in ancillary revenues. So that started last year, and we expect that improvement to continue this year. That’s already in our numbers. And I would say that over all, we are expecting a steady number throughout the year, knowing that they’re seasonal variations. So not every quarter is going to be the same.

Yes. And indeed, I think that in terms of ancillaries we’re talking here, I think last year, during the Investor Day, we were talking a figure of around $20 million, and we’re kind of in that sense around that in terms of the ancillaries for the year. And we’ve rolled out last year our seat program or purchase of seats. We recently modified slightly our baggage policy, so there’s some of the items that we had been planning to do, we started to roll them up in these last couple of months.

Helpful, thank you. And Pedro, I think you alluded to this a little bit, but I was wondering now that Wingo has been up and running for a year, if you can kind of talk about the progress there and your thinking on, one, when that gets to profitability; and two, are you still kind of planning to keep Wingo the size that it is today or if there’s an opportunity to kind of either grow or shrink that?

Yes. So we’re very happy with how Wingo has developed. It’s been flying now for 12 months, a little bit over 12 months. And it has reduced our Colombian losses significantly, which was kind of the first objective with Wingo was replacing a traditional legacy service on a network, a Colombian network that require more of a low-cost offering. And that’s what we did with Wingo, and that has worked out very well. Wingo performs with very high reliability and very low cost and pricing at the same time, which is a unique combination that is not found in just any LCC or CC. And we’re seeing improving results accordingly. We’re not reporting Wingo separately but we see this year off to a good start, and the number should be better than last year where, again, we reduced losses significantly. So I think breaking even, if things continue the way they are, are in the not too far away horizon for Wingo. And obviously, Wingo’s performance is already included in our guidance.

All right. Thank you.

Thank you. Our next question comes from the line of Duane Pfennigwerth with Evercore ISI. Your line is open. Duane, your line is open, check your mute button.

Hi, thank you. Sorry about that. Just following up on ancillary. I wonder if you could disclose an ancillary revenue per passenger and what it contributed in terms of RASM growth in 2017. And maybe how many points of the 3 points you’re assuming it will contribute in 2018.

So I don’t think we can share the specifics that you’re asking for, Duane, but what we promised when we present at our pass-through higher margins plan in 2016 was that we were going to produce $30 million over – $20 million to $30 million over the next two to three years, and we’re in that path. I think we’re about half of that already.

Yes. And again, just to again restate, Duane, we have – I’d say the biggest buckets there are our seat program, our selling of seat that we rolled out last year; baggage, our baggage allowance that we’ve kind of recently refurbished; and loyalty as well as the air program that you would argue is part of that kind of $20 million to $30 million figure for the first – for the next couple of years. And we’re – I think, well on track to achieve that. We’re pretty confident of that figure overall.

Thank you. And then just a follow-up, you mentioned a comment about your res system upgrade is in testing. When do you plan to go live with that? Is it a sort of cutover from one system to the next? Or how are you planning on that migration?

Yes. So call centers and city ticket officers are going to go live in August, that’s the plan, and airports in October. But as Jose mentioned, we have advanced some of the ancillary initiatives with our current tools. So we found work around with our current tools. But once we launched the new upgraded system in August and October, it will just facilitate things, and we’ll be able to do more and do it more effectively.

And by the way, the launch of these modules is not kind of flipping off a switch. It will be on a gradual basis that we feel minimizes any sort of risk related to the system change. So that’s kind of the approach that we’re thinking here.

Right. And as I’ve mentioned, it’s an improvement to our current system.

That’s great. And then just for my last question, how would you frame growth CapEx, so not cash CapEx but growth CapEx for 2018 and 2019? And thanks for taking the questions.

Yes, Duane, so for 2018, we’re talking about around $500 million in total CapEx. And then 2019, call it, about $600 million.

Thank you, guys.

Yes, Duane. Thank you.

Thank you. Our next question comes from the line of Helane Becker with Cowen. Your line is open.

Hey, guys this is Conor in for Helane. How are you?

Hi, Conor. How are you?

Good. So you kind of answered this with Mike’s question, but I was curious if you could provide a little detail on the unit revenue and like specifically which markets are coming in. So some other carriers have talked about Brazilian revenue being flattish now and the Caribbean improving. We’re just curious on what you guys are seeing currently.

Yes. So I would say most markets are positive and except for mainly Brazil. Brazil is flattish to slightly negative after a strong unit revenue improvement or growth in most of 2017, and it’s due mostly to additional capacity from all airlines. Capacity in the first quarter of this year for Brazil is up over 25% year-over-year, most of it between Brazil and North America and the U.S., most of it. Some other markets are also up in capacity. So that has affected unit revenues, and again, those were flattish to slightly negative.

Okay, great. And then, so given the fact that you have had a solid recovery over the past year and parts of it returning to like historical levels, has there been any discussion about reinvesting in the product? Maybe adding Wi-Fi or power in the seats? I don’t think that Wi-Fi would actually benefit your ancillary strategy as well, and maybe you can talk if that’s included in the $20 million to $30 million you just referred to. Thanks.

Okay. So our kind of strategy or philosophy over the years is to try to be as consistent as we can, which means not cutting important stuff during tough times and then adding a bunch of unnecessary stuff during good times. And in a way, the fact that we also have consistent positive financial results or steady financial results, we’ve been able to maintain that philosophy, that thinking. So we – we’re never in a position where we have to add stuff that we’ve got in the past for lack of financial resources, and that we feel is kind of an advantage. Having said that, we always look for opportunities. I think there’s a day where probably 90% of the fleet in the world will have Wi-Fi. It’s not where we are right now. We have no plan – no immediate plan to implement Wi-Fi. But when we think that it’s good for the business and that it’s going to be positive in every sense of the world, we will be ready to do it. But it’s not where we are right now.

Great. Thank you.

Thank you. Our next question comes from the line of Hunter Keay with Wolfe Research. Your line is open.

Everybody good morning. You mentioned the CapEx, I think, of $500 million this year and $600 million next year. And I think, Jose, you also said eight deliveries of aircraft next year, I think you said. If you go back on like the fleet plan from early 2017, I think you show you were down like four shelves in 2019. Obviously, that’s changed. But so what is the fleet plan for net fleet growth in 2019? And can you bracket in sort of a low and a high end capacity figure as you’re thinking about it now, assuming this recovery continues?

Yes, Hunter. So for next year, I think you can plan – first of all, I have to say I have to introduce my answer by saying that we pride ourselves in having a very, very flexible fleet plan. I think it’s one of the key strengths that our company strategy has. For next year, we have a net growth of four aircraft. So we will go from 106 airplanes in – at the end of 2018 to 110 in 2019. And so we will take delivery of eight 737 MAXs in 2019. And currently – we currently have a four leased airplanes, four leased 737-800s that are planned to be returned. However, having said that, that is not a final reinstalled plan. We still have flexibility to extend leases. We have that option in case the market conditions are favorable for doing that. So as it is right now, I’d say that the growth for next year is, you could argue, it’s probably in the high single digits, but it could probably be as much as low double digits as well. But again, I have to reinstate how important the flexibility portion of our fleet plan is in terms of our overall strategy.

Yes. Make sense. Thank you. And then a little bit of an oddball question for Pedro, but I think, this is your – Pedro, your 30th year as CEO. I’d be curious to know kind of what you’ve learned over that time frame and what you would think is sort of the single most important guiding light for Copa that you think is core of the airline’s success now and going forward. If you had to pick one thing.

Okay. I think we only have one hour for this call, so – but I’ll give you a simple answer. Copa’s success is based on its people and its culture. I know it’s easy to say that, and probably most airlines in any industry say that, but we do have a very highly committed team, dedicated and committed team with a great company culture. I think that makes us different than many other airlines. We have, as you know, a high executive that come from other airlines all over the world, and I think that’s one of the things that surprised them the most about Copa. So I would say that’s our one not secret but key formula for consistent success over the years.

Okay. Thank you.

Thank you. Our next question comes from the line of Ricardo Alves with Morgan Stanley. Your line is open.

Just a couple of questions for me. With the five MAXs and the other eight you mentioned for next year, just help if you could talk a little bit about your expectation in terms of fuel burning improvement? Maybe if you could, I don’t if it’s possible, to quantify that a little bit. I know that’s one of the major drivers in terms of cost cutting for the next couple of years. So if you can give a little bit more perspective or maybe quantify it, that will be helpful. And then kind of related, we noticed you’re closing 2017 with no further hedge contracts. So if you could provide a little bit more color on your strategy on the hedge side, fuel hedge side going forward. Thank you.

Yes. This is – yes, thank you, Ricardo. It’s Pedro. I will talk first, and then I’ll let Jose talk about fuel hedges. So it’s five MAXs – MAX 9s this year, eight next year and so on. We will – actually, the number goes up in 2020 and beyond. That aircraft is going to come with a few benefits one is lower fuel consumption, and the other one is more seats. So we’re going to have much – in terms of fuel, I think it’s around 14%, the fuel consumption improvement. And then the additional seats are also going to allow us to, let’s say, produce lower ex-fuel CASM – I mean, lower total CASM numbers and ex-fuel CASM numbers. So on both sides, we’re going to be able to deliver better numbers. It was a MAX 9. But it’s only five this year, eight next year. I think it’s going to take maybe three years before the MAX 9 starts having a significant impact in our CASM and ex-fuel CASM number. I do not have a specific impact number to share with you right now, but it’s going to be meaningful. It’s not something that we will ignore. It’s going to be noticed once we have 20-plus MAX 9s in our fleet.

So Ricardo, this is Jose here. And talking about the hedges, we haven’t entered into new hedges. We were hedge positioned since July of 2015. As you know, we – over the last several years, we lost over $20 million in kind of these financial instruments, so we’ve decided not to pursue anymore hedges. And to be honest with you, the economies in Latin America are commodity-based economies, so we would argue that there is a correlation, a favorable correlation between fuel price strength and the strength of some of the currencies that we’re operating. And I think that a good way of looking at it is that we just increased our fuel price assumption for the year for – by $0.20 and reaffirmed our operating margin guidance. So it kind of tells you a little bit of how we see it in terms of the revenue impact or the revenue – the way that revenue reacts to fuel.

That’s helpful, Jose. Thank you, Pedro as well.

Thanks, Ricardo.

Thank you. Our next question comes from the line of Dan McKenzie with Buckingham Research. Your line is open.

Thanks. Good morning, guys. Just a couple of questions here. With the move of Aeromexico to go the route of a joint venture with Delta, I’m just wondering how your thought process is evolving here, if at all. And is it potentially an opportunity for Copa? And then just related to that, what IT challenges might exist if any?

Yes. So as you know, we have a long-standing and very strong and close commercial alliance with United. And it’s not a JV, but we co-share. We have frequent – full frequent flyer reciprocity not only through Star Alliance but also through our alliance, which has been in place close to 20 years now. It will be 20 years in May of this year. So that has provided us with some of the advantages of a JV in many aspects, and in that sense, we feel very comfortable. But if a JV is the way to go in the future, we – that’s something that will be considered by both airlines, and it’s an option that we always have.

Okay. And then, I guess, a second question here. It’s pretty early to be looking at second quarter booking data, but it is available, at least the GDS. I’ve got a partial sample of what I’m looking at here. And there is some – demand is looking pretty strong overall, but you do have some countries that are weaker, some that are quite stronger. And for those countries that are a little bit weaker, I’m looking at Chile and Costa Rica, I’m just wondering what you can share if we should read anything into that at this point, or if that’s just perhaps a revenue management system on your part, just given strength elsewhere across the system.

Yes, it’s hard to read that data accurately and so early. We have a – for one, we have a shift in Holy Week, and work falls. The carnival fell earlier in the year. Holy Week is going to fall earlier also so that always affects bookings from one month to the other. And then there are – of course, as you well mentioned, a revenue management tactics, which adjust to whatever happened the year before or the season before. So it maybe that one year, we’re open to sale too early and lose some yield opportunities there. And then the following, we may be a little bit tighter earlier on. And so it’s hard from the outside to see that and to see what’s happening by just looking at booking data, especially, again, three or four months before.

Understood, okay. Thanks for the perspective, I appreciate it.

Thank you. Our next question comes from the line of Stephen Trend with Citi. Your line is open.

Good morning gentlemen. Just two quick questions for me. First is Tocumen Airport, if you could give us a view on how the buildup is going there as well as whether they have implemented any procedural changes. I believe a few months ago after, there was a power failure that created some disruptions. And then the other question, I’m not sure if I heard you correctly, but I thought I heard you say something about centralizing MRO operations. And if you could elaborate, that would be great.

Okay. So in terms of the airport, we’re not expecting any. It seems like a date that we can trust to a high degree is to start partial operations in the near airport by the end this year, by the end of the fourth quarter. So it will be the use of a few gates in the – towards the end of November and then more gates early 2019, a kind of an increase in operations until some time between April and May where we’d be fully operational. But we should have a few gates available by the end of this year. So that’s good news. And in terms of the power outage they had in September of last year, they’ve hardened their system. They’ve brought in people. They brought in technicians from the Panama Canal. And from what we’ve seen, they’ve done a very good job in improving their systems and avoiding this happening in the future.

And in terms of the maintenance capabilities, there are a couple of items. One, last year, we upgraded our maintenance IT platform, and that came out very successfully. And more importantly, we are in the process of constructing an expanded hanger in Tocumen that more than double our current capacity in terms of ability to perform heavy checks here locally. So – and that we expect to be completed by, I want to say, the fourth quarter of this year. So we will have that expanded capability in the latter part of this year.

Okay. Great. Thanks guys. Jose, any chance that the MRO might eventually – it would be extended to third-party servicing?

For now, I think that we’re comfortable with our own needs and I think the plan in the immediate future is just simply to cater to our own requirements in terms of maintenance.

Okay. Very helpful. Thanks and let me stop there.

All right. Thanks Steve.

Thank you. And our last question comes from the line of Lucas Barbosa with UBS. Your line is open.

Hi, Pedro and Jose. Thanks for taking my question and congratulations for the results. My question is actually a follow-up on the unit revenue question. So you see unit revenue improving further into the rest of the year. Is that the right interpretation? And are you seeing supply increase only in Brazil? Or in other markets, too? So that’s my questions. Thank you very much.

So yes, the answer to the first part of your question is yes, we see unit revenues improving this year, year-over-year over 2017. And Brazil is not the only market where we’re seeing some softness, again, due to increased capacity, but it’s by far the main market. The other market where we’re seeing some softness is Argentina, and – but there, we’ve grown ourselves quite a bit. So the minute we put in more capacity, there’s going to be more lower first available to sales. So that’s kind of expected. That’s not surprising. It’s normal. It’s part of growing. We’ve grown quite a bit the last number of months. So to us, that’s okay.

Okay. Thank you very much, Pedro. Have a good day.

Thank you.

Thank you, Lucas.

Thank you. And that concludes our Q&A session for today. I would like to turn the call back to Pedro Heilbron for his final remarks.

Yes. Okay. Thank you, all. This concludes our earnings call, so thank you for being with us, and thank you for your continued support. Have a great day and a great weekend.

And ladies and gentlemen, with that, we thank you for participating in today’s conference. This concludes the presentation. You may disconnect, and have a wonderful day.