Good morning, and welcome to the Despegar First Quarter 2019 Earnings Call. A slide presentation is accompanying today's webcast and is available in the Investor section of the Company's website, www.investor.despegar.com. There will be an opportunity for you to ask questions at the end of today's presentation. This conference call is being recorded.

As a reminder, all participants will be in listen-only mode. 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 first quarter 2019 results. In addition to reporting financial results in accordance with US Generally Accepted Accounting Principles, we discuss certain non-GAAP financial measures and operating metrics, including foreign exchange neutral presentations.

Investors should read the definition of these measures and metrics including our press release carefully to ensure that they understand them. Non-GAAP financial measures and operating metrics should not be considered in isolation as substitutes for or superior to GAAP financial measures, have provided supplemental information only.

Before we begin our following remarks, allow me to remind you that certain statements made during the course of the discussion may constitute forward-looking statements which are based on management's current expectations and beliefs and are subject to a number of risks and uncertainties that could cause actual results to materially differ, including factors that may be beyond the Company's control.

For description of this risk, please refer to our filings with the SEC and our press release. Speaking on today's call, CEO, Damian Scokin, who will provide an overview of the first quarter and update you on our strategic priorities. Alberto Lopez Gaffney, our CFO, will also discuss the quarter financials and our outlook for the next quarter.

After that we will open the call for your questions. Damian, please go ahead..

Thank you, Javier. Good morning, everyone and thank you all for joining us. In the quarter we've made significant progress across a number of our key initiatives to better position the Company for the years ahead.

From a macro perspective this was a mixed quarter starting on a more stable footing, when compared with the volatility experience through 2018. This dynamic continued through February with such positive macro environment, with focus on driving improved profitability.

We did this by increasing customer fees and reducing package discounts and the offering and duration of installments. The latter affected mostly our Argentine business. This strategy was successful, and we delivered improved profitability, when compared with the prior quarter. This was so, even as we faced record one first quarter 2018 results.

Additionally with a more favorable market environment, we saw an increase in demand for higher margin international travel versus most of 2018 when travel was dominated mostly by domestic flights. However by March, the macro environment has weakened again. The Argentine peso has further depreciated and inflation has hit mid-50s.

Nevertheless even in the face of challenging conditions we have demonstrated further success in evolving our business models to meet changing customer preferences for booking travel.

A key metric reinforcing this strategy is our mobile app downloads which now exceed 52 million and mobile transactions which accounted for 38% of the total in the quarter.

Also from an operating metric standpoint we continue to perform well gaining market share improving NPS growing room nights and achieving a better mix and with growing mobile transactions. Excluding Argentina which experience 54% FX devaluation in the quarter, transactions and room nights were up 11% and 22% year-over-year respectively.

With respect to key financial metrics both gross bookings and ASP's increase on an FX neutral basis up 24% and 17% respectively. A key driver of our strategy is identifying new sources of growth. To that end, subsequent to quarter's end we completed our first acquisition post IPO which I will discuss later in my presentation.

Importantly, our healthy cash position enables us to fund this acquisition with cash on hand.

Turning to Page 4, moving through a discussion of transactions and growth bookings, over time we have been able to successfully increase, both total transactions and gross bookings as well as gain market share, and this trend continued into the first quarter.

We have been able to accomplish this despite the macro environment and weakening industry conditions in Latin America, as we are able to leverage our leading market position by opportunistically adjusting our business model and adding more products and services for the traveler.

As you can see on this chart, total transactions were up 5% in the quarter with air transactions increasing faster than Packages, Hotels and Other Travel Products. Total Packages, Hotels and Other Travel Products were down 1% in the quarter on a reported basis, and accounted for 43% of total transactions.

This was down 300 basis points when compared to record first quarter 2018 results, impacted by economic conditions in Argentina which accounts for a significant share of these products offering. This also continued to drive a shift toward lower margin products in the country.

If we look at the mix excluding Argentina, Packages, Hotels and Other Travel Products grew by 10% year-on-year. A key area of focus is driving sales and increasing share of higher margin Packages, Hotels and Other Travel Products with a particular focus on the stand-alone packages.

As a result of this effort, in Q1 stand-alone packages increased 17% year-on-year remaining our fastest growing product. Contributing to the growth was an increase in international tourism. Gross bookings increased 24% on an FX neutral basis, a similar rate as the past two quarters.

As reported gross bookings however were impacted by weaker economic conditions in Argentina and were down 6%. Of note though, this performance was better than the high single-digit contraction experienced by the travel industry in Latin America during this quarter, excluding Argentina has reported gross bookings increase 7%.

Lastly the average selling price or ASP increased 18% on an FX neutral basis, primarily benefiting from a mix shift toward international problem. The increase in international travel was reflective of a more stable macro environment earlier in the quarter and supported by a reduction in ticket prices in some markets.

Now turning to Page 5, moving on to a discussion of some of the latest business development initiatives to accelerate growth, we are driving innovation and utilizing technology to shape the future of online travel. We are making travel bookings at Despegar easier and have put in place the tools to serve customers better than ever before.

Let me now talk about the field. Our strategy is to invest in the most promising opportunities that will expand how we can grow the customer base. Last month we announced plan to acquire Viajes Falabella, a full service travel operator with online presence, call centers and unique for us, asset-light stores within stores.

With Viajes Falabella, we are purchasing a well-established business in the fast growing LA [ph] region. Viajes Falabella product mix has a core focus in packages which account for about two-thirds of Viajes sales. This is strongly aligned with our strategy to grow our higher margin Packages, Hotels and Other Travel Products.

In today's marketplace, personalization is key and is a differentiating and competitive advantage. We are leading this charge and continue to personalize our product offerings in the individual markets we serve. We know and understand our customers and have been a leading OTA player when it comes to providing payment options for travel.

This quarter, we added an additional payment option for our customers in Mexico, enabling them to pay for their travel in cash through more than 17,800 Oxxo stores located throughout the country. We have been investing in brand building to attract new customers, increase market share and improve customer service.

At the close of the quarter we launched a rebranding campaign, centered around Continuous Travelling. We seek to inspire customers to travel more frequently and elevate the trip experience along every step of the journey. This starts from the moment they begin dreaming of travelling and till they share their memories of that trip.

We believe this new positioning is more reflective of our customer-centric approach, strong technological commitment and new product initiatives.

As we continue to deepen our customer-centric approach, we also added several leading edge features to our online and mobile platforms to enhance the customer booking journey remain close to our customers and drive cross-selling. Let me mention some of our exciting launches this quarter. Move on to Page 6.

First, we launched a new home page that is personalized based on the travel history as well as current travel plans for each customer. We not only provide appealing suggestions to enhance a trip [ph] and cross-sell other products during or after the purchasing of a trip.

But, we are now also following approximately after the trip requesting feedback to continue improving the experience and address any issues that may have arisen to ensure flawless execution on our end. Through this new home page, we're also offering suggestions for upcoming trips based on each person's travel history.

Second, we added a new tool that provides suggestions for short two to three day getaway. This consists of travel packages that are personally customized by each customer based on the city and date of departure. The number of people travelling, distance willing to travel and experiences interested in enjoying.

This new getaway feature also provides a creative list of attractive package trips ideal for a specific holiday or times of the year. Finally a unique development this quarter was the launch of our new travel inspiration tool. This is a unique customized and very easy to manage flow of traveler recommendations based on each individual's preferences.

Through a friendly journey, there are traveler through the purpose of building his or her trip and provide suggestions based on the date of the trip or time of the year, number of people travelling, assign the budget destination beach, city, mountains and type of activity of interest, relaxation, sport and cultural, et cetera.

We are excited about the enhancements we have added to reach customers in a more digitally connected way. Our commitment to the customer is clear. We will be there when we are and how they want to book travel and where we deliver new and convenient experiences that are unique at Despegar.

I will now turn the call over to Alberto to discuss the financial results for the quarter..

Thank you, Damian and good morning everyone. Please turn to Slide 7 for a deeper look at our operations on a regional basis. Importantly we expanded FX neutral gross bookings and gained market share across our seven key markets.

In Brazil, our largest market, we delivered a 3% year-on-year increase in transactions against a very strong first quarter last year and gained share for the past three years.

We continue to drive growth in international travel particularly packages and air travel support an increase of 16% in ASPs and 20% in FX neutral gross bookings beating overall market growth.

As reported gross bookings rose only 3% as the 16% currency depreciation offset the benefit from the mix shift from domestic to international travel and the expansion of higher margin packages.

In Argentina, despite our reported 9% decline in transactions, we continued to gain market share as we performed in a difficult macro and industry environment.

FX neutral gross bookings and ASPs were up 34% and 46% year-on-year reflecting the positive impact from increasing customer fees and lowering package discounts this quarter as we faced better market dynamics in the first two months of the quarter. The 54% currency depreciation however proved too high of a hurdle to offset.

Also remember, we are comparing against a record quarter a year ago. The rest of Latin America posted solid top line growth up 20% year-on-year and FX neutral gross bookings up 18%. On a reported basis, ASPs declined 7% reflecting currency depreciation in the region while gross bookings rose 12%.

We are particularly pleased with above industry growth in transactions in two of our more competitive markets. Transactions in Mexico rose 16% year-on-year driven by overall international travel while Colombia delivered a 27% increase in transactions both in domestic and international travel.

In both countries, our strategy to drive solid growth in sales of higher margin packages remained intact. Moving on to the financial results on Slide 8, FX neutral revenues were up 19% year-on-year.

This was achieved even as we faced a contracting market and it's a testament to our leading market position and ability to adapt to changing market conditions. We continue to make meaningful progress with our key strategic initiative of increasing the share of higher margin products.

Packages, Hotels and other transactions increased 400 basis points unaccounted for 63% of revenues this quarter, up from 59% in first quarter 2018. As reported, revenues for the quarter declined year-on-year by 10% to $133 million impacted by several factors.

First the FX, translation effect from currency depreciation across the region particularly the 54% better depreciation in Argentina. Second, revenues were also impacted by reductions in air customer fees and discounts in package transactions implemented last year to drive share gains in a weakened demand environment.

Third, we also saw lower supplier bonuses this quarter reflecting weaker customer demand. This more than offset a possible role year-on-year mix shift to international and domestic travel driven by lower air supplier crisis in key markets.

Note that while Argentina experience a drop of 570 basis points in the share of international transactions impacted by a sharp peso devaluation. On a consolidated basis we saw a positive mix shift of 100 basis points to higher margin international transactions.

Combined, these factors drove declines of 27% in reported revenues per transaction in the air segment and to a lesser extent of 4% in the Packages, Hotels and Other Travel Products segment. Overall, we reported a 57 basis point drop in revenue margin to 11.5% in the quarter.

Sequentially, however revenue margin was up 50 basis points mainly as we increased air customer fees and offered fewer package discounts early this year to drive profitability, given slightly better market conditions at the start of the quarter.

Moving down the P&L on Slide 9, our strategic initiatives of driving cross-selling can enhance customer satisfaction and share gains across our key markets resulted in a 6% increase in FX neutral gross profit reaching a $111 million in the quarter. Gross margin declined 460 basis points to 66% as we compare against a record quarter last year.

On a sequential basis, however, we delivered a 350 basis point improvement in gross margin despite first quarter being seasonally lower quarter. We also reduce the duration and availability of installment plans in Argentina. However, due to the steep interest rate environment, we incurred higher installment plan costs this quarter.

Also as we move ahead with our goal of further enhancing customer service, fulfillment cost were higher this quarter. Importantly on a per transaction basis, fulfillment cost declined 6% year-on-year as we gain operating leverage, while our net promoter score increased by 586 basis points year-on-year.

At the same time, our efficient approach to marketing and spending business, weak market environment allowed us to achieve savings in selling and marketing costs of 12% on an absolute dollar basis and improved 40 basis points as a percentage of revenues.

However, note that beginning in the second quarter, we stepped up our marketing spend as we pursue our revamping strategy across the region including an online, TV, radio and print campaign. G&A expenses in turn increased 30% year-on-year, impacted by a new export rights tax on service in Argentina, affected last January.

Prior stock based compensation as well as administrative and professional fees related to the implementation of our strategic initiatives. On a per transaction basis, total operating costs decreased by 2%. We remain focused on optimizing our operational structure taking efficiencies and leveraging our structure as we continue to grow the business.

Now please turn to Slide 10. Our strategy to drive further share gains together with significant currency devaluation impacted profitability. Adjusted EBITDA declined 44% year-on-year with margin down to 11% compared to a record of 18% in the first quarter of 2018. Sequentially, adjusted EBITDA margin improved 90 basis points.

This mainly reflects our focus this quarter on taking profitability by increasing air customer fees and lowering package discounts in the quarter, while reducing investments in installment plans.

We also reported use of operating cash flow of $5.6 million this quarter compared with cash flow generation of slightly over $14 million in the same quarter last year. This was mainly due to lower growth in supplier payables given slower sales growth and increase in other assets and prepaid expense balances and lower net income.

Last, we also made capital investments of nearly $8 million in technology, hardware and office expansion. Summing up, let's move to Page 11. Our first quarter results demonstrate continuous progress against the strategic priorities we have laid out to accelerate growth. We are evolving the business to better serve our customers.

We are improving our product offering and the client experience throughout the interaction with staff, as evidenced by some of the initiatives, Damian spoke about earlier. Viajes Falabella, we have announced our first acquisition which complements our organic growth.

Looking to the upcoming quarter, we continue to see our results flat in the macro environment. As mentioned earlier, the year become more stable footed. But weakened, as we moved into March and we are not seeing an improvement for this current quarter, experiencing software transaction and gross booking performance. Weakening trend extended into April.

2019 GDP growth forecast for Mexico and Brazil have been lower and Argentina is facing a more challenging scenario than previously expected, given higher FX volatility. As such we now see a full 2019, heavily back-ended, but with a weaker than expected Q2 and following the GDP revisions, our second half 2019 with a more muted recovery.

We should also remind you that starting April we have stepped up marketing spend in connection with our rebranding strategy across our key markets.

As we have done in the past, we've tried to find the right balance between growth and profitability and have opportunistically been able to make adjustments to our business model to adapt to changing competitive dynamics.

Our largest size, and more efficient infrastructure coupled with our healthy balance sheet provides a stability toward more challenging environments. We remain focused on driving long-term shareholder value by delivering balanced top and bottom line growth, while making strategic investments to accelerate long-term growth opportunities.

In sum, we have been operating in the region for over two decades. Latin American travel market is large and under-penetrated via online booking.

Taking into account our leading market position and consistent enhancements to the customer travel booking experience, we are very well positioned to succeed and to deliver improved profitability once the market environment improves. This concludes our prepared remarks. We will now take your questions. Operator, please open the line for questions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions]Our first question comes from Rodrigo Nistor of Itau. Please go ahead..

Hi, good morning. I just wanted to see if you could give us a bit more color on what's driving growth outside Brazil and Argentina and where specifically. Thank you..

Yeah. Rodrigo, hi, how are you? This is Damian. If you look at the markets outside this in Argentina, I would say that on, at the market level, the dollar value of those markets remain flat year-on-year.

And within that context, if you look at the page number 7 of our presentation, you can see that in that context our transactions grew 20% and bookings 12% year-on-year. They are, as you know and Alberto mentioned in a more stable and favorable market conditions. They are balancing between growth and profitability to be very positive for us.

And we are just executing our strategy in a more stable environment, both gaining market share in a stable market that will be in a nutshell..

Rodrigo, what I would add is, the Viajes Falabella acquisition also reinforces the commitment to that part of the region, okay. And I think that it goes without saying also that from a macro perspective, okay. Those countries in the region are the ones that have shown the most stability over a couple of decades.

So I think that we are implementing, on the M&A front that actually ties nicely with what we're seeing on the field. So, we're very excited on what's up for us over there in ex Brazil and Argentina..

Okay. Thank you..

Our next question comes from Edward Yruma of KeyBanc Capital Markets. Please go ahead..

Hi, good morning and thanks for taking my questions. I guess first I know that you highlighted that there have been dollar GDP [ph] revisions in key geographies.

Just so that we're completely clear, when you are modeling out a backhanded second half '19, what's the implied GDP for Argentina that you're using or just maybe ask differently, you had, you previously thought that the back half would see a pivot and kind of.

So, when in your model are you seeing that? And then as a follow up, a nice momentum in packages. I guess how should we think about the - your inventory positioning against packages. Are you taking more forward positioning given some of the success you're seeing there? Thank you..

Good morning, Alberto speaking here. Addressing the first part of the question - on your first question, as you know, as we have discussed with you in the past, okay, we analyze what's the - what's consensus view for GDP growth and following our analysis of that consensus, okay, we actually develop our business plan.

Importantly at the beginning of the year or end of last year our view was not different from consensus as that's usually the case. And specifically the numbers were actually as you might recall were pointing to Brazil that was around a 2.5% growth for the year.

You might have - you might have noticed that GDP revisions for Brazil went from around 2.5% to around 1.5%, that is a revision over the past, let's say four to three months, okay that's not immaterial. Then, when it comes to Mexico, Mexico, we were actually seeing in line with consensus growth that was shy of 2%, okay.

What we're seeing now is that consensus revisions have lowered those numbers between 1.1% to 1.4%. That's what we're seeing.

Then when it comes to Argentina, Argentina, the expectation was for a deep contraction in the first half, a contraction that we're currently going through with a backhanded recovery summing up for the overall year, contraction - overall contraction that was slightly above - around 0.91%.

What we're seeing now is that consensus is actually forecasting for Argentina, a contraction that will be more around 2%, so overall GDP growth negative of minus 2%. So these are the numbers that the economies are actually looking for the three geographies you've asked..

As per the packages questions, you are right, we are happy with the performance as you know, our normal revenue mix has increased by 400 basis points up to 63% of the total revenue.

And in terms of the inventory, we have - as we've been mentioning over the last few conversations part of the growth strategy there is to get some own inventory in order to build more attractive packages, not only in terms of their price points, but also differentiated products.

We've been growing in that direction, although still does not represent the percentage of the share, within the total packages we sell that we would like. There is ample room for growth there. I don't know if that answers your questions or you want to follow up on that..

Well, and just to that point I mean, as that momentum continues, are you - are you being compelled to kind of take more forward position of either air space or hotel space and how does that change the financial profile? Thanks..

No. Yeah. Good. Two things here, we plan to increase those to a by - I mean air and hotels, inventory and in terms of the financial implications of that, the - Alberto can go in detail through that, but it's not a significant impact on our working capital dynamics..

Our next question comes from Alejandro Lavin of Citi. Please go ahead..

Hello. Hi. Good morning, everyone. Thank you for taking my question. My first question would be, if you can give us three - not based on the competitive landscape in Argentina and the field.

And my second question would be, if you can you can give us a little bit more color on what you think in terms of more acquisitions perhaps for the rest of the year, what kind of products and regions you would be looking at? Thank you..

Good. Alejandro, hi. Damian, here. In terms of competitive landscape, I've perhaps spent two seconds about talking overall in the region and then specifically about Argentina.

Overall in Latin America, what we see is players like Airbnb booking and Expedia increasing their ad spend, and some of other global players like Trivago and TripAdvisor decreasing their relative expenditures. So, overall a little bit more competitive in the international - in terms of international players than before.

On the other hand the local players in each of the countries have somehow pulled out or decreased their investment. In Argentina, what you see is those same trends are accentuated by the macro environment.

As per the M&A as we've been commenting in previous calls, the only thing we can share given the nature of the conversation is that we are having conversations, we are actively looking into other attractive opportunities, and we are hopeful that we can come up with other additional positive news on top of Falabella..

Okay, understood. Thank you..

[Operator Instructions] Our next question comes from Kevin Kopelman of Cowen. Please go ahead..

Hi. Good morning. This is Emily Lavin on for Kevin. My question is regarding the revenue margin that increased q-over-q, noted an increase in air customer fees and fewer discounts. I was wondering in which markets, have do you deployed that strategy and do you plan to continue that going forward. Thanks..

Hi, Emily. Alberto speaking here. Good morning..

Good morning..

With regard to your question, I think that overall I wouldn't say that we have made material distinctions when it comes to increase in profitability in the region. There's one other variable that comes handy that is financing, like cost of installments, et cetera.

As you might imagine, the area or the region that we actually pulled about a little more was in Argentina. So that - over there you do see a differentiation, okay. So, when it comes to financing costs, Argentina, we decrease it more than in other regions. But we're also starting from a higher point.

When it comes to discounts in relative terms we actually, we increased, okay, our profitability across the Board, but as - and to be consistent with our strategy, we have actually identified Brazil and Mexico as our key growth countries.

As such every time we pull on these levers, we take into consideration, the importance of those two strategic countries. And as such we - lean more toward actually increasing profitability in countries where we have a lower level of priority..

[Operator Instructions] As we have no further questions, I would like to turn the conference back over to Damian Scokin for any closing remarks..

Thank you. Well, just wanted to thank everybody for your time and attention. As always, we will keep you informed of any relevant news on the Company's plans and performance. We look forward to talking to you soon, and definitely in the next earnings results call.

In the interim, as usual, the team remains available to meet with you and answer any questions that you might have. Again, thank you very much and have a good day..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..