Individual and Consolidated Quarterly Information (ITR) for the quarter ended June 30, 2017 Smiles S.A.

Transcription

1 Individual and Consolidated Quarterly Information (ITR) for the quarter ended Smiles S.A. with Independent Auditors Review

2 Smiles S.A. Individual and consolidated quarterly information (ITR) Contents Comments on performance Comments on business projection trends Audit Committee s Report Declaration of the officers on the quarterly information form (ITR) Declaration of the officers on the independent auditors review report Report on review of the quarterly information Statements of financial position Statements of income Statements of comprehensive income Statements of changes in equity Statements of cash flows Value added statements Notes to the quarterly information form (ITR)... 20

3 Comments on performance In the second quarter of 2017, Smiles operating and financial indicators continued to improve. The main operating improvements were the year-on-year increases by 54.9% in the volume of accrued miles and 59.7% in the volume of redeemed miles. It is worth noting that, as of this year, the financial portion of Smiles & Money will be booked as a mile sale, i.e., each time a client made a redemption with Smiles & Money, the financial portion of said redemption is converted into a new mile accrued which is simultaneously redeemed without jeopardizing the Company s profitability. This new dynamic increase the transparency and alignment of this product for our clients and partners. The main financial improvements include the continued increase in total gross billing ex-gol (up by 10.5% on 2Q16), as well as net revenue, up by 26.3% on the same period in In 2Q17, Smiles' net income increased by 18.3% over 2Q16, mainly driven by a 31.6% growth in operational income. At the end of 2Q17, Smiles had 119 employees. Smiles is Top of Mind. Smiles was elected Top of Mind brand among all loyalty programs of the country, according to the research realized by Kantar Millward Brown. National Credit Card Survey (PNCC). The ninth edition of the PNCC revealed that the company is the most used loyalty program of credit card users from A and B income brackets. The survey also showed that Smiles has the largest penetration in the customer base of major loyalty programs. New benefits of Clube Smiles. On the sing in on the club, all miles pass to be validity of 10 years and count to change of category (Silver, Gold and Dimond). Furthermore, the Clube Smiles pass offer too tree new agenda so that the client can chose the best option for your travel profile. The Clube s new benefits are expanded for Dimond clients too. Family Account. Aligned with company s innovative DNA, it is now possible to share in only one account miles of friends, lovers, relatives and family, to facilitate redemption of tickets and other products and services offer by Smiles. This is more one exclusive benefit for Clube Smiles and Diamond members. We are optimistic about the opportunities in the loyalty industry and are committed to consolidating Smiles as an innovative business platform and a complete travel company. 1

4 Operating Performance Operating data 1 Unit 2Q17 1Q17 2Q16 2Q17 vs. 1Q17 (%) 2Q17 vs. 2Q16 (%) Members mn ,5 1.3% 8.2% Miles accrual mn % 54.9% Gol mn % 4.8% Banks, retail and services mn % 35.4% Smiles & Money mn (11.4%) - Smiles' redemption program mn % 59.7% Airline redemptions mn (0.2%) 57,9% Non-airline redemptions mn % 84.4% Breakage rate % 17.8% 17.4% 15.9% 0.4 p.p. 1.9 p.p. 1 All relevant miles amounts are net of reimbursement. The data in this table do not reflect financial information. Members: The program reached 12.5 million customers in 2Q17, 8.2% up on 2Q16. Miles accrual: The program s miles accrual increased by 54.9% in 2Q17 over 2Q16, boosted by the 35.4% increase in banks, retail and services accrual and the new dynamic of Smiles & Money, whose financial portion is now recorded as accrued mile that is immediately redeemed. Miles redemption: The redemption of miles from the program in 2Q17 was 59.7% higher than 2Q16, reaching 16.4 billion miles in the period. The burn/earn ratio of the program excluding the effect of the new dynamic of Smiles & Money was 76.5%, a slight decrease of 9.6 p.p. when compared to 1Q17. Comparing to 77.7% presented in 2Q16, there is a 1.2 p.p. reduction. 2

5 Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 Gol + Intl Partners Redemptions Other Products Redemptions The Company continues to show sustainable growth in the volume of miles redeemed which were 59.7% this quarter, partially influenced by the new dynamic of Smiles & Money. Operating data 1 Unit 2Q17 1Q17 2Q16 2Q17 vs. 4Q16 (%) 2Q17 vs. 2Q16 (%) Smiles' redemption program mn 16,353 16,022 10,243 2,1% 59.7% Gol + International Partners Tickets mn 14,955 14,992 9,485 (0,2%) 57.7% Non-airline mn 1,398 1, ,7% 84.4% % of miles redeemed Gol + International Partners Tickets % 91.5% 93.6% 92.6% (2.1 p.p.) (1.1 p.p.) Non-airline % 8.5% 6.4% 7.4% 2.1 p.p. 1.1 p.p. 1 All values corresponding to miles are net of reimbursement. Segregation among different redemption types were not reviewed by auditors. Breakage: The breakage rate in the last twelve months increased by 0.4 p.p. over 1Q17, reaching 17.8%. 3

6 Financial Performance Financial information summary Unit 2Q17 1Q17 2Q16 2Q17 vs. 1Q17 (%) 2Q17 vs. 2Q16 (%) Gross billings 1 R$ mn % 10.5% Gol R$ mn % (47.3%) ex-gol R$ mn % 14.3% 1. Gross Billings is not an accounting measurement and corresponds to total billings from the sale of miles gross of taxes. These revenues may have affected the current period or will be recognized as revenue in future periods, depending on the date of redemption by the program members. Gross billings: Total gross billings climbed by 10.5% over 2Q16, essentially due to the 14.3% increase in ex-gol miles billings. Revenues (R$ thousands) 2Q17 1Q17 2Q16 2Q17 vs. 1Q17 (%) 2Q17 vs. 2Q16 (%) Gross redemption revenues 487, , ,663 (0.4%) 26.3% Miles redemption revenue 411, , , % 24.5% Breakage revenue 61,984 77,279 53,364 (19.8%) 16.2% Other revenues 13,865 7,194 2, % 585.0% Taxes and contributions (45,347) (45,541) (35,821) (0.4%) 26.6% Net revenues 441, , ,842 (0.4%) 26.3% Redemption revenue: Gross revenues from miles redemption increased by 26.3% over 2Q16, driven by the increases of 24.5% in revenues from miles redeemed and 16.2% in breakage revenue. Breakage revenue: breakage revenue reached R$62.0 million, 16.2% up on 2Q16, mainly driven by the higher number of miles effectively expired. Other revenues: Other revenues increased by R$ 11.8 over 2Q16, reaching R$13.8 million. This item is mainly composed of cancellation fee, incentives to sell co-branded credit card and Gol s loyalty program s management fees. 4

7 Direct redemption margin: For the calculation of the redemptions margin, only the revenues and costs directly related to redemptions are considered, as calculated in the chart below: Redemption P&L 2Q17 1Q17 2Q16 2Q17 vs. 1Q17 (%) 2Q17 vs. 2Q16 (%) Gross redemption revenue 421, , , % 27.5% (-) Direct Taxes (38,952) (38,007) (30,550) 2.5% 27.5% (=) Net redemption revenue (a) 382, , , % 27.5% (-) Cost of products purchase (224,143) (213,415) (176,160) 5.0% 27.2% (=) Redemption result (b) 158, , ,565 (0.9%) 27.9% % Direct redemption margin 41.3% 42.8% 41.2% (1.4 p.p.) 0.1 p.p. Other revenues (c) 59,566 70,425 50,117 (15.4%) 18.9% Breakage revenues 61,984 77,279 53,364 (19.8%) 16.2% Other revenues 3, , % 96.5% (-) Direct taxes (6,395) (7,534) (5,271) (15.1%) 21.3% (-) Other costs (11,448) (9,228) (6,919) 24.1% 65.5% (=) Non redemption results (d) 48,118 61,197 43,198 (21.4%) 11.4% Gross profit [e = b + d] 206, , ,763 (6.6%) 23.6% % Gross margin [e / (a + c)] 46.7% 49.8% 47.7% (3.1 p.p.) (1.0 p.p.) 1. Gross Redemption Revenue considers others revenues related to redemption which are accounted on Others Revenues. Operating expenses (R$ thousand) 2Q17 1Q17 2Q16 2Q17 vs. 1Q17 (%) 2Q17 vs. 2Q16 (%) Operating expenses (37,501) (41,301) (39,099) (9.2%) (4.1%) Commercial expenses (22,055) (21,433) (26,233) 2.9% (15.9%) Administrative expenses (15,446) (19,868) (12,866) (22.3%) 20.1% Other expenses/revenues n/a n/a Operating expenses: Operating expenses decreased by 4.1% over 2Q16, essentially due to decreased of R$3.6 million on advertising expenditure that are accounted on commercial expenses. Operating profit: Smiles recorded operating profit of R$168.6 million, 31.6% up on 2Q16, representing an operating margin of 38.2%. The year-on-year operating profit growth mainly driven by the 26.3% net revenue increase. Other information (R$ thousand) 2Q17 1Q17 2Q16 2Q17 vs. 1Q17 (%) 2Q17 vs. 2Q16 (%) Equity method investment (100.0%) Net financial result 44,311 59,066 57,599 (25.0%) (23.1%) Financial expenses (238) (22) (60) 981.8% 296.7% Financial income 47,975 59,493 53,040 (19.4%) (9.5%) Net exchange variation (3,426) (405) 4, % (174.2%) Income tax and social Contribution (66,696) (82,096) (62,112) (18.8%) 7.4% Financial result: The financial result decreased by 23.1% over 2Q16, chiefly due to the negative exchange variation and the decrease of financial revenues due the reduction of interest rate. 5

8 Net exchange variation: The net exchange variation recorded in the period is chiefly explained by the variation in the foreign exchange rate of accounts payable outstanding in USD, related to the cost of international ticket redemptions. Income tax and social contribution: The effective income tax and social contribution rate was 31.1% in 2Q17, 3.0 p.p. lower than the 34.0% tax rate, equivalent to R$5.0 million, mainly due to a payment of interest on own capital and tax incentives of Rouanet Law. Net income: Smiles second-quarter net income totaled R$146.2 million, accompanied with a net margin of 33.1%, 2.2 p.p. lower than in 2Q16. 6

9 Business Model Smiles started as a single loyalty program, but has evolved into its current coalition model, which features several unique characteristics that allow for the accrual and redemption of Miles from GOL flights and its international partner airlines, as well as Brazil's main commercial banks, including co-branded cards issued by Bradesco and Banco do Brasil, and a wide network of retail partners. The current model works through (i) the accrual of Miles by Members when they purchase airline tickets with GOL or other partner airlines, or products and services from Business and Financial Partners; Smiles Miles being acquired through the loyalty of these customers to those businesses, and (ii) Awards redemptions by Members when they exchange their Miles for flights on GOL and other partner airlines, or for products and services offered by Commercial and Financial Partners The main sources of our revenues come from (i) redeemed miles revenues, represented by tickets and awards in its network of airline, commercial and financial partners, (ii) interest income between the date the miles were accrued and the date they were redeemed, and (iii) Breakage revenues if issued miles expire without being redeemed. Glossary Awards - Products or services provided to members by a commercial partner as the result of redeeming customer miles loyalty program. Award Products - Product or service, excluding air tickets, provided to members by a commercial partner as the result of redeeming customer loyalty program points. Breakage Estimate Miles expired and not redeemed; it may be expressed as a number of miles, an amount in Brazilian reais or as a percentage of miles issued, depending on the context. Burn/Earn Ratio - The ratio between the number of redeemed and accrued miles in a given period. Free Float - Shares owned by non-controlling shareholders. Miles - The redemption rights of Smiles Program members sold to commercial partners. Smiles & Money - A means of issuing air tickets by combining money and miles. Smiles Program - A multi-loyalty program for several companies, including GOL Linhas Aéreas Inteligentes S.A. This release may contain forward-looking statements related to business prospects, estimates of operating and financial results, and growth prospects for Smiles. These are merely projections and, as such, are based exclusively on management's expectations for Smiles. Such forward-looking statements depend, substantially, on external factors and risks presented in the disclosure documents filed by Smiles, and are, therefore, subject to change without notice. Independent auditors did not review the Company s non-financial information. Some values from this report may differ from the financial statements due to rounding. 7

10 Comments on business projection trends Until the date of this quarterly information form (ITR), the Company had not disclosed to the market projections or estimates of any kind, whether operating, technical, administrative or financial. 8

11 Audit Committee s Report Smiles S.A. s Audit Committee, in compliance with its legal and statutory obligations, has reviewed the quarterly information for the period ended. On the basis of the procedures we have undertaken, and taking into account the independent auditors review report issued by Ernst & Young Auditores Independentes S.S. on August 3, 2017, and the information and explanations we have received during the period, we consider that these documents are fit to be submitted to the consideration of the Board of Directors. Barueri, August 3, Constantino de Oliveira Junior Member of the Audit Committee Marcos Grodetzky Member of the Audit Committee Natan Szuster Member of the Audit Committee 9

12 Declaration of the officers on the quarterly information form (ITR) In compliance with the provisions of CVM Instruction No. 480/09, the Executive Board declares that it has discussed, reviewed and approved the quarterly information for the period ended. Barueri, August 3, Leonel Dias de Andrade Neto Chief Executive Officer Marcos Antônio Pinheiro Filho Chief Financial and Investor Relations Officer 10

13 Declaration of the officers on the independent auditors review report In compliance with the provisions of CVM Instruction No. 480/09, the Executive Board declares that it has discussed, reviewed and approved the conclusion expressed in the independent auditors report on their review of the quarterly information for the period ended. Barueri, August 3, Leonel Dias de Andrade Neto Chief Executive Officer Marcos Antônio Pinheiro Filho Chief Financial and Investor Relations Officer 11

14 Report on review of the quarterly information To The Shareholders, Board of Directors and Officers Smiles S.A. Barueri - SP Introduction We have reviewed the accompanying individual and consolidated interim financial information of Smiles S.A. ( Company ), identified as Company and Consolidated, respectively, contained in the Quarterly Information (ITR) for the quarter ended, which comprises the balance sheet as at and the related income statement, statement of comprehensive income for the quarter, the statement of changes in equity and statement of cash flows for the three and six-month periods then ended, and a summary of significant accounting practices and other explanatory notes. Company management is responsible for the preparation of interim individual financial information in accordance with the Technical Pronouncement of the Accounting Pronouncements Committee (CPC) 21 (R1) Interim Financial Reporting and the consolidated interim financial information in accordance with CPC 21 (R1) and IAS 34 Interim Financial Reporting, issued by the International Accounting Standards Board (IASB), as well as for the presentation of these information in compliance with the rules issued by the Brazilian Securities Commission ( CVM ), applicable to the preparation of Quarterly Information (ITR). Our responsibility is to express a conclusion on this interim financial information based on our review. Scope of review We conducted our review in accordance with Brazilian and International Standards on Review Engagements (NBC TR Review of Interim Financial Information Performed by the Independent Auditor of the Entity and ISRE Review of Interim Financial Information Performed by the Independent Auditor of the Entity, respectively). A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. The scope of a review is significantly narrower than an audit conducted in accordance with Brazilian and International Standards on Auditing and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might have be identified in an audit. Therefore, we do not express an audit opinion. Conclusion on the individual and consolidated interim financial information Based on our review, nothing came to our attention that causes us to believe that the accompanying individual and consolidated interim financial information included in the Quarterly Information referred to above was not prepared, in all material respects, in accordance with CPC 21(R1) and IAS 34 applicable to the preparation of Quarterly Financial Information, consistently with the standards issued by the Brazilian Securities Commission (CVM). 12

15 Other matters Statements of value added We have also reviewed the individual and consolidated statements of value added for the six-month period ended, prepared under the responsibility of management, the presentation of which in the interim financial information is required by rules issued by the Brazilian Securities Commission (CVM) applicable to the preparation of Quarterly Financial Information (ITR), and as supplementary information by IFRS, whereby no statement of value added presentation is required. These statements have been subjected to the same review procedures previously described and, based on our review, nothing has come to our attention that causes us to believe that they are not prepared, in all material respects, in accordance with the overall accompanying interim individual and consolidated interim financial information. São Paulo, August 3, ERNST & YOUNG Auditores Independentes S.S. CRC-2SP015199/O-6 Vanessa Martins Bernardi Accountant CRC-1SP244569/O-3 13

16 Statements of financial position As of and December 31, 2016 (In thousands of Brazilian reais - R$) Parent Company Consolidated Assets Note 06/30/ /31/ /30/ /31/2016 Current assets Cash and cash equivalents 3 36,452 16,924 71, ,659 Short-term investments 4 85, ,477 50, ,742 Trade receivables 5 287, , , ,864 Advances to suppliers 6 559, , , ,913 Credits with related parties 8-75,545-75,545 Other credits and values 9,976 7,699 9,976 7, ,471 1,413, ,471 1,413,422 Noncurrent assets Deferred taxes 7 67,533 62,665 67,533 62,665 Advances to suppliers 6 672, , , ,674 Other credits and values 7,744 7,373 7,744 7,373 Investments 10 15,184 15,184 15,184 15,184 Property, plant and equipment 1,947 1,728 1,947 1,728 Intangible assets 11 31,662 34,832 31,662 34, , , , ,456 Total assets 1,774,926 1,926,878 1,774,926 1,926,878 Parent Company Consolidated Liabilities Note 06/30/ /31/ /30/ /31/2016 Current liabilities Suppliers 143, , , ,055 Salaries 10,635 14,863 10,635 14,863 Dividends and interest on equity payable , ,243 12, ,243 Tax obligations 34,590 22,257 34,590 22,257 Obligations to related parties 8 17,399-17,399 - Advances from customers 13 77,223 6,454 77,223 6,454 Deferred revenue , , , ,934 Other liabilities 5,154-5,154-1,071,186 1,061,806 1,071,186 1,061,806 Noncurrent liabilities Suppliers 1,876 9,138 1,876 9,138 Provision for legal proceedings 15 1,357 1,262 1,357 1,262 Deferred revenue , , , , , , , ,725 Equity 16 Capital stock 185, , , ,822 Cost of issued shares (36,402) (36,402) (36,402) (36,402) Capital reserve 43,765 43,765 43,765 43,765 Profit reserves 36,364 36,364 36,364 36,364 Additional dividends proposed - 402, ,508 Share-based payments 7,526 7,290 7,526 7,290 Retained earnings 287, , , , , ,347 Total liabilities and equity 1,774,926 1,926,878 1,774,926 1,926,878 The accompanying notes are an integral part of the quarterly information. 14

17 Statements of income Periods ended and 2016 (In thousands of Brazilian reais - R$, except basic and diluted earnings (loss) per share) Parent Company and Consolidated Three-month period ended Six-month period ended Note 06/30/ /30/ /30/ /30/2016 Net revenue , , , ,431 Reward redemption cost 18 (235,591) (183,079) (458,234) (373,158) Gross profit 206, , , ,273 Selling expenses 18 (22,055) (26,233) (43,488) (44,345) Administrative expenses 18 (15,446) (12,866) (35,314) (26,955) Operating expenses (37,501) (39,099) (78,802) (71,300) Equity results (3,541) Operating profit before financial result and income taxes 168, , , ,432 Financial income 47,975 53, , ,188 Financial expenses (238) (60) (260) (110) Exchange variation, net (3,426) 4,619 (3,831) 11,939 Financial result 19 44,311 57, , ,017 Income before income and social contribution taxes 212, , , ,449 Income and social contribution taxes current 7 (68,839) (60,930) (153,660) (123,514) Income and social contribution taxes deferred 7 2,143 (1,182) 4,868 (1,997) Net income for the period 146, , , ,938 Basic earnings per share Diluted earnings per share The accompanying notes are an integral part of the quarterly information. 15

18 Statements of comprehensive income Periods ended and 2016 (In thousands of Brazilian reais - R$) Parent Company and Consolidated Three-month period ended Six-month period ended 06/30/ /30/ /30/ /30/2016 Net income for the period 146, , , ,938 Other comprehensive income (loss) Total comprehensive income (loss) for the period 146, , , ,938 The accompanying notes are an integral part of the quarterly information. 16

19 Statements of changes in equity Parent company and Consolidated Periods ended and 2016 (In thousands of Brazilian reais - R$) Capital reserve Profit reserves Note Capital stock Additional Shares to be Cost of issued Share-based Special goodwill Retained Legal reserve dividends issued shares payments reserve earnings proposed Total Balances as of December 31, ,164 - (36,402) 6,429 72,942 29, , ,940 Capital increase for exercise of stock options 3, ,213 Advances for future capital increase - 2, ,950 Capital increase special goodwill reserve 29, (29,177) Stock options Dividends distributed (269,574) - (269,574) Net income for the period , ,938 Balances as of June 30, ,554 2,950 (36,402) 7,074 43,765 29, , ,112 Balances as of December 31, ,822 - (36,402) 7,290 43,765 36, , ,347 Capital increase for exercise of stock options , ,784 Stock options Net income for the period , ,570 Dividends distributed (402,508) - (402,508) Interest on equity payable (14,698) (14,698) Balances as of 185,606 - (36,402) 7,526 43,765 36, , ,731 The accompanying notes are an integral part of the quarterly information. 17

20 Statements of cash flows Periods ended and 2016 (In thousands of Brazilian reais - R$) Parent Company Consolidated 06/30/ /30/ /30/ /30/2016 Net income for the period 302, , , ,938 Adjustments to reconcile net income to net cash provided by operating activities Share-based payments Deferred income and social contribution taxes (4,868) 1,997 (4,868) 1,997 Provision for legal proceedings 885 1, ,002 Depreciation and amortization 6,688 2,712 6,688 2,712 Discounts in advance ticket purchases (87,790) (59,089) (87,790) (59,089) Exchange variations, net (2,428) (4,858) (2,428) (4,858) Allowance for doubtful accounts Profit sharing 6,345 4,135 6,345 4,135 Equity results - 3,541-3, , , , ,654 Changes in operating assets and liabilities Trade receivables (119,554) 30,677 (119,554) 30,677 Advances to suppliers (153,594) (307,596) (153,594) (307,596) Other assets (liabilities) 2,506 (6,391) 2,506 (6,391) Credits with related parties 92,944 23,335 92,944 23,335 Suppliers 22,161 16,825 22,161 16,825 Salaries (10,573) (9,352) (10,573) (9,352) Advances from customers 70, ,999 70, ,999 Deferred revenue (55,446) 53,376 (55,446) 53,376 Tax obligations 143, , , ,315 Provision for legal proceeding (790) (893) (790) (893) Income and social contribution taxes paid (132,958) (94,366) (132,958) (94,366) Net cash flows from operating activities 80, ,583 80, ,583 Investing activities Acquisition of property, plant and equipment and intangible assets (3,737) (1,490) (3,737) (1,490) Short-term investments 461, , ,674 82,807 Net cash flows from investing activities 457, , ,937 81,317 Financing activities Capital increase for exercise of stock options 3,784 3,213 3,784 3,213 Advances for future capital increase - 2,950-2,950 Interest on equity paid, net of taxes (3,190) - (3,190) - Dividends paid (518,561) (335,343) (518,561) (335,343) Net cash flows used in financing activities (517,967) (329,180) (517,967) (329,180) Effect of exchange variation on cash and cash equivalents (245) (816) (245) (816) Net increase (decrease) in cash and cash equivalents 19,528 (5,700) (181,953) (107,096) Cash and cash equivalents at the beginning of the period 16, , , ,989 Cash and cash equivalents at the end of the period 36,452 97,573 71, ,893 Statements of cash flows Additional information Non-cash items: Interest on equity payable 14,698-14,698 - The accompanying notes are an integral part of the quarterly information. 18

21 Value added statements Periods ended and 2016 (In thousands of Brazilian reais - R$) Parent Company and Consolidated 06/30/ /30/2016 Revenues Mileage redemption and breakage 954, ,265 Other operating revenues 24,411 6,612 Allowance for doubtful accounts 34 (247) Inputs purchased from third parties Cost with redeemed miles (467,017) (388,137) Material, electricity, third-party services and others (41,352) (35,230) Sales and marketing (30,850) (29,891) Gross value added 440, ,372 Retentions Depreciation and amortization (6,688) (2,712) Net value added produced by the Company 433, ,660 Value added received by transfer Equity results - (3,541) Financial income 113, ,253 Total value added for distribution 546, ,372 Distribution of value added Direct compensation 20,104 14,076 Benefits 1,494 1,118 FGTS Personnel 22,474 15,898 Federal 216, ,690 Municipal Tax, charges and contributions 216, ,903 Interest 4,336 6,079 Rent Other 38 1 Remuneration of third party capital 4,981 6,633 Interest on equity 14,698 - Retained earnings 287, ,938 Remuneration of own capital 302, ,938 Total value added distributed 546, ,372 The accompanying notes are an integral part of the quarterly information. 19

22 Notes to the quarterly information - ITR (In thousands of Brazilian reais - R$, except when otherwise indicated) 1. Operations Smiles S.A. ( Company ) is a publicly-listed company established in accordance with Brazilian corporate legislation and is a direct subsidiary of Gol Linhas Aéreas Inteligentes S.A. ( GLAI ). The Company s main purpose, within the scope of the Smiles customer loyalty program, is to carry out: (a) the development and management of the program; (b) the sale of redemption rights of awards; and (c) the creation and management of an individual and corporate database. The miles issued by the Smiles Program are mainly sold to: (a) Gol Linhas Aéreas S.A. ( GLA ), formerly VRG Linhas Aéreas S.A., which delivers them to passengers participating in the Smiles customer loyalty program; (b) financial institutions that deliver them to their customers based on their credit card expenses; (c) retail and entertainment customers; (d) airline partners; and (e) individuals. The Company is headquartered at Alameda Rio Negro, 585, Edifício Padauiri, Bloco B, 2º Andar, Alphaville, Industrial, in the city of Barueri, state of São Paulo, Brazil. The Company s shares are traded on the Securities, Commodities and Futures Exchange - B3. The Company adopts corporate governance practices in compliance with the Novo Mercado listing regulations, which, among other provisions, expand shareholders rights and improve the quality of the information provided. On 2016, the parent company GLAI received requests from Brazilian tax authorities regarding certaind payments to certain companies from exposed people in Brazil s politics. After the begginign of the internal investigation, GLAI hired legal consultants from USA and from Brazil to lead an independent investigation in order to perform a full investigation and clarification of the facts. On December, 2016, GLAI, through GLA, entered into a Leniency Agreement with the Federal Prosecutor Office, whereby it undertook to pay fines and penalties if the Federal Prosecutor Office did not bring charges related to the activities that are the object of the agreement. The investigation was concluded in April 2017 and showed that additional irregular payments were made to politically exposed persons. None of the amounts paid was significant (individually or jointly) in terms of cash flow and none of the current employees, representatives or members of the Board of Directors of GLAI and Smiles was aware of any illegal purpose behind the transactions identified, or of any illegal benefit for GLAI and Smiles arising from the operations object of the investigation. The Company did not identify any impacts resulting from this issue that may affect its operations and quarterly information. The Extraordinary Shareholders Meeting of July 1, 2017 approved the merger of the Company by Smiles Fidelidade S.A. (formerly Webjet Participações S.A., a subsidiary of GLA). As a result of this merger, the Company will be dissolved and all its assets, rights, obligations and contractual commitments will be transferred to Smiles Fidelidade S.A. As a result, the Company s equity will be fully transferred to Smiles Fidelidade S.A. 2. Approval and summary of significant accounting policies applied in preparing the quarterly information form (ITR) This quarterly information form was approved by the Company s Board of Directors and had its publication authorized at a meeting held on August 3,

23 Notes to the quarterly information - ITR (In thousands of Brazilian reais - R$, except when otherwise indicated) 2.1. Statement of compliance The Company s individual and consolidated quarterly information for the three and six-month periods ended, has been prepared in accordance with International Accounting Standards ( IAS ) No. 34, and Accounting Pronouncement No. 21 (R1) (CPC 21), which deals with interim statements. When preparing the quarterly information form, the Company adopts the following disclosure criteria: (i) regulatory requirements; (ii) the relevance and specificity of the information on the Company s operations provided to users; (iii) the information needs of the users of the quarterly information form; and (iv) information from other entities in the same sector, mainly in the international market. Accordingly, Management confirms that all the material information presented in this quarterly information form is being demonstrated and corresponds to the information used by Management in the course of its duties, and is in accordance with the standards issued by the Brazilian Securities and Exchange Commission, applicable to the preparation of quarterly information Basis of preparation This quarterly information was prepared based on historical cost, except for certain financial assets and liabilities that are measured at fair value, when applicable, and investments measured using the equity method. This quarterly information form (ITR) was prepared using the Brazilian real as the functional and presentation currency. Figures are rounded to thousands of reais (R$). This quarterly information does not include all the information or disclosures required in the annual financial statements, and it should therefore be read in conjunction with the financial statements for the year ended December 31, 2016, which were prepared in accordance with the accounting practices generally accepted in Brazil and the International Financial Reporting Standards ( IFRS ). There were no changes between December 31, 2016, and, in the accounting practices adopted. The Company s consolidated quarterly information also includes the following entities: Entity Subsidiary: Date of constitution Location Fundo Sorriso (a) 7/14/2014 Brazil Operational activity Investment fund % equity interest Type 06/30/ /31/2016 Direct control 100.0% 100.0% Associate: Netpoints (b) 11/8/2013 Brazil Frequent flyer program Non-controlling interest 25.4% 25.4% (a) (b) Sorriso is an exclusive investment fund and, pursuant to CVM Instructions 247/1996 and 408/2004, the Company consolidates this fund s assets in its quarterly information. Investment not consolidated by the Company, recognized under the equity method. The Company maintained the same accounting practices applied in previous years in the consolidated entity. All intercompany transactions, balances, revenues and expenses are fully 21

24 Notes to the quarterly information - ITR (In thousands of Brazilian reais - R$, except when otherwise indicated) excluded from the consolidated quarterly information New standards, amendments and interpretations of standards a) Issued by the IASB, but not yet in effect on the issue date of this quarterly information and not early adopted by the Company: IFRS 9 (CPC 48) - Financial instruments: In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments, which reflects all the phases of the financial instrument project and replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. The standard introduces new requirements for classification and measurement, impairment and hedge accounting. IFRS 9 will be effective for annual periods beginning on or after January 1, 2018, with early adoption being permitted. The adoption of IFRS 9 will affect the classification and measurement of the Company s financial assets; however, it will not have any impact on the classification and measurement of the Company s financial liabilities. IFRS 15 (CPC 47) - Revenue from Contracts with Customers: This standard establishes a new five-step model to be applied to revenue from contracts with customers. According to IFRS 15, revenue is recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange for the goods or services transferred to the customer. The new standard for revenues will replace all current requirements for revenue recognition under IFRS. The full retrospective adoption or modified retrospective adoption is required for annual periods beginning on or after January 1, 2018, with early adoption being permitted. The main impacts on the Company are related to: (i) co-branding agreement: the Company already recognizes this type of revenue separately and therefore does not expect significant impacts from this new standard; and (ii) recognition of breakage revenue, given that this standard introduces more specific guidelines for developing the estimate. The analysis of this standard s impact on the Company is still in progress. IFRS 16 Leases: In January 2016, the IASB issued the final version of IFRS 16 Leases, which establishes the principles for recognizing, measuring, presenting and disclosing leases. IFRS 16 will be effective for annual periods beginning on or after January 1, Internationally, initial adoption is permitted for IFRS 15 Revenue from Contracts with Customers for entities on the adoption date of IFRS 16 or before, but this is not yet defined for Brazil. IFRS 16 establishes that, for most leases, the lessor will recognize an asset related to the right of use of the identified asset, as well as the liability related to the lease. The Company does not have significant operating lease agreements and therefore does not expect this standard to impact its financial statements. IFRIC 22 Transactions in foreign exchange rate and in advance: On December 2016, IASB issued IFRIC 22, which establishes that the currency used in transaction that involves paid or received counterpart in advance in foreign exchange rate. The interpretation clarifies that the transaction date is that the non-monetary asset or liability was recognized. IFRIC 22 will be effective for annual periods beginning on or after January 1, 2018, and the Company does not expect material impacts of the application of the standard. IFRIC 23 - Uncertainty about income tax treatment: In June 2017, the IASB issued IFRIC 23 regarding the application of the requirements of IAS 12 "Income taxes" when there is uncertainty about the acceptance of the treatment by the tax authority. The interpretation clarifies that if acceptance is not likely, the values of tax assets and liabilities should be adjusted to reflect the best resolution of the uncertainty. IFRIC 23 will be effective for annual periods beginning on or after 22

25 Notes to the quarterly information - ITR (In thousands of Brazilian reais - R$, except when otherwise indicated) January 1, 2019, and the Company does not expect material impacts of the application of the standard. The Company will adopt these standards when they become effective, disclosing and recognizing potential impacts on its interim financial statements as they are applied. There are no other standards or interpretations issued and not yet adopted that may, in Management s opinion, have a significant impact on profit or loss or equity disclosed by the Company. 3. Cash and cash equivalents Parent Company Consolidated 06/30/ /31/ /30/ /31/2016 Cash and bank deposits 16,485 10,864 16,485 10,864 Cash equivalents: Private bonds 19,967 6,060 19,967 6,060 Investment funds , ,735 36,452 16,924 71, ,659 As of, the private securities were comprised by private bonds (Bank Deposit Certificates - CDBs) at a weighted average rate of 100.0% of the CDI rate (99.9% as of December 31, 2016). The investment funds are represented by private funds with immediate liquidity, operated at a weighted average rate of 101.8% of the CDI rate (101.9% as of December 31, 2016). 4. Short-term investments Parent Company Consolidated 06/30/ /31/ /30/ /31/2016 Investment funds 84, ,999 48, ,264 Fundo Funcine 1,208 1,478 1,491 1,478 85, ,477 50, ,742 Short-term investments are instruments with a maturity of more than 90 days and risk of a change in value, which are measured at fair value through profit or loss, and are represented by private funds with immediate liquidity, operated at a weighted average rate of 102.1% of the CDI rate (101.1% as of December 31, 2016). 23

26 Notes to the quarterly information - ITR (In thousands of Brazilian reais - R$, except when otherwise indicated) 5. Trade receivables Parent Company and Consolidated 06/30/ /31/2016 Non-airline partners 96,960 79,001 Airline partner companies (*) 9,838 16,772 Credit card administrators 180,720 72, , ,042 Estimated losses from doubtful accounts (144) (178) 287, ,864 (*) Of the total, R$9,590 (R$15,716 as of December 31, 2016) refers to miles sold to GLA and R$248 (R$1,056 as of December 31, 2016) to the collection of Smiles program management fees from GLA, pursuant to the operating agreement described in Note 8.1. Until December 31, 2016, the Company used GLA s operating structure to receive its sales from nonairline partners and credit card administrators. In January 2017, the Company began using its own structure to receive these amounts, substantially increasing its receivable balance and reducing its credits with GLA, as per Note 8.1. All trade receivables are denominated in reais, and the aging list of trade receivables is as follows: Parent Company and Consolidated 06/30/ /31/2016 To be due Up to 30 days 210, , to 60 days 19,379 42, to 90 days 24, to 180 days 14, to 360 days 18,147 - Above 360 days - - Overdue Up to 30 days to 60 days to 90 days to 180 days to 360 days 1 16 Above 360 days Total 287, ,864 The maximum exposure to credit risk is represented by the net realizable value of each type of receivable mentioned above. 24

27 Notes to the quarterly information - ITR (In thousands of Brazilian reais - R$, except when otherwise indicated) The changes in allowance for doubtful accounts are as follows: Parent Company and Consolidated 06/30/ /31/2016 Balance at the beginning of the period (178) (169) Additions (44) (753) Recoveries Balance at the end of the period (144) (178) 6. Advances to suppliers As of February 26, 2016, the Company approved the execution of the advance airline ticket purchase agreement and the agreement of fiduciary assignment of credit rights and rights on accounts and other covenants, which provide for the acquisition, by the Company, of credits to be used in future acquisitions of airline tickets issued by GLA, in the amount of up to R$1,000,000, subject to certain terms and conditions established between the parties. On April 5, 2017, the Company entered into the first amendment to the advance ticket purchase agreement for the acquisition of new credits in the amount of R$480,000, which will be paid in installments to be agreed upon by the parties. In the period ended, the Company paid R$520,000, of which R$240,000 related to the agreement entered into on February 26, 2016 and R$280,000 related to the first amendment entered into on April 5, The weighted average annual rate of the outstanding advances of both agreements was 16.84%. As of, the balance of advances for ticket purchase was R$559,347 (R$598,913 as of December 31, 2016) classified under current assets and R$672,385 (R$391,674 as of December 31, 2016) classified under non-current assets. 7. Deferred taxes Parent Company and Consolidated 06/30/ /31/2016 Temporary differences: Provision for accounts payable and other provisions 44,202 33,259 Tax incentive for the incorporation of goodwill (*) 21,882 29,177 Other temporary differences Total deferred income and social contribution tax assets 67,533 62,665 (*) Refers to the tax incentive generated by the merger of G.A. Smiles Participações in 2013, which is being realized in proportion to its use in five years. The book value of deferred tax assets is reviewed periodically and projections of future results are reviewed annually, unless the Company identifies indicators that may affect these projections. The Company s Management considers that deferred income and social contribution taxes on temporary differences recognized as of will be realized in proportion to the realization of the respective provisions and the tax incentive resulting from incorporation of goodwill, given the taxable income history and future prospects. The amounts of income and social contribution taxes recorded in the statement of income are reconciled at a combined rate, as follows: 25

28 Notes to the quarterly information - ITR (In thousands of Brazilian reais - R$, except when otherwise indicated) Parent Company and Consolidated Three-month period ended Six-month period ended 06/30/ /30/ /30/ /30/2016 Income before income and social contribution taxes 212, , , ,449 Combined tax rate 34% 34% 34% 34% Income and social contribution tax credits at the combined tax rate (72,398) (63,137) (153,463) (124,933) Adjustments to calculate the effective tax rate: Equity results (1,204) Nondeductible expenses and others (1,337) (732) (2,606) (1,209) Interest on equity 4,997-4,997 - Tax incentives 2,030 1,739 2,268 1,964 Other 12 (130) 12 (129) Income and social contribution tax expenses (66,696) (62,112) (148,792) (125,511) Current income and social contribution taxes (68,839) (60,930) (153,660) (123,514) Deferred income and social contribution taxes 2,143 (1,182) 4,868 (1,997) Effective rate 31.3% 33.4% 33.0% 34.2% 8. Transactions with related parties The Company has a high volume of transactions with GLA related to the recognition of revenue, costs with the redemption of products and advances, whose restatements are recorded in the financial result. All these transactions were carried out under the following agreements: 8.1. Operating agreement The operating agreement governs commercial and operational relations between the Company, GLA and GLAI, as well as exclusiveness characteristics related to the Smiles Program. It was signed on December 28, 2012 and has a 20-year term as of the execution date, with the possibility of renewal upon agreement between the parties. The transactions covered by this agreement are recorded in the items as follows: Transactions recorded under Trade receivables : i. Miles sales: GLA buys miles from the Company to give them to its customers. The balance recorded as of was R$9,590 (R$15,716 as of December 31, 2016). ii. Smiles program management fees: a fraction between 3.5% and 6% is paid on a monthly basis over the previous year s gross revenue from the sale of Smiles miles to GLA, pursuant to the terms established in the operating agreement, restated by the General Market Price Index (IGP-M). The balance as of was R$248 (R$1,056 as of December 31, 2016). The amounts recognized in profit or loss under Other related to the Smiles program management fee charged from GLA in the three and six-month periods ended were R$3,576 and R$4,231, respectively (R$1,450 and R$2,588, respectively, as of June 30, 2016) as per Note 18. Transactions recorded under Suppliers : The amount payable to GLA refers to the provision of shared services. On, the balance was R$4,040 (R$4,029 as of December 31, 2016). 26

29 Notes to the quarterly information - ITR (In thousands of Brazilian reais - R$, except when otherwise indicated) In the six-month period ended, the Company s total expenses related to these services amounted to R$11,224 (R$12,558 as of June 30, 2016), of which R$7,896 (R$9,991 as of June 30, 2016) was recorded under Selling expenses and R$3,328 (R$2,567 as of June 30, 2016) under Administrative expenses, as per Note 18. Transactions recorded under Obligations to related companies : i. Certain products related to services and airline tickets were provided through GLA s operating structure. In the period ended, the Company began using its own structure to provide these products and services, substantially reducing its credits with GLA. Due to this change, the Company now has the obligation to make transfers to GLA referring to boarding fees related to the issue of airline tickets through the redemption of miles. The net balance payable related to these services was R$18,255 as of (the net balance receivable was R$74,689 as of December 31, 2016). ii. Share-based compensation plans: As per Note 9, the Company offers share-based compensation to GLA employees. As of, the Company s receivable balance totaled R$856 (R$856 as of December 31, 2016) Advance ticket purchase agreement On February 26, 2016, the Company approved the signature of the Advance Airline Ticket Purchase and Sale Agreement and the Agreement of Fiduciary Assignment of Credit Rights and Rights on Accounts and Other Covenants. On April 5, 2017, the Company entered into the first amendment to the advance ticket purchase agreement for the acquisition of new credits. In the six-month periods ended and 2016, reward redemption transactions involving the issue of airline tickets with GLA accounted for 70.4% and 77.1%, respectively, of the total airline ticket purchase cost incurred by the Company, as per Note Brand and domain name assignment agreement As of December 31, 2012, GLA assigned to the Company the right to use and explore the Smiles brands and domain names on a final and non-onerous basis Remuneration of key management personnel Parent Company and Consolidated Three-month period ended Six-month period ended 06/30/ /30/ /30/ /30/2016 Salaries and benefits 3,881 2,999 9,577 5,983 Related taxes and charges Share-based payments ,401 3,469 10,600 7,016 (*) Includes the Board of Directors and Audit Committee s compensation. As of and December 31, 2016, the Company does not have post-employment benefits, and there were no severance benefits or other long-term benefits for Management or other employees. 27