Earnings Call: Q2 2017

Aug 14, 2017

Good morning, everyone, and welcome to Lazyd's Second Quarter twenty seventeen Results Conference Call. My name is Natalie, and I'll be your operator for today. This event is being recorded and all participants will be in a listen only mode until we conduct a question and answer session following the company's presentation. I would like to turn the presentation over to Andrea Bottcher, Investor Relations Manager. Please proceed. Thank you, Natalie. And welcome all to Zu's 2nd Quarter 2017 Earnings Call. The results that we announced this morning, the audio of this call and the slides I will reference are available on our IR website. Presenting today will be David Neeleman, Azul's Founder and Chairman and John Hodges from the CEO Alex Mofitani, our CFO and Hamish Shah, our Chief Revenue Officer, are also here for CFO and Abhi Shah, our Chief Revenue Officer, are also here for the Q and A session. Before I turn the call over to David, I'd like to caution you regarding our forward looking statements. Any matters discussed today that are not historical facts, particularly comments regarding the company's future plans, objectives and expected performance constitute forward looking statements. These statements are based on our usual assumptions that the company believes are reasonable, but are subject to uncertainties and risks that are discussed in detail in our CVM and SEC filings. During the course of the call, we will discuss non IFRS performance measures, which should not be considered in isolation. For a reconciliation of these measures, please refer to our earnings release. With that, I'll turn the call over to David. David? Thanks, Andrea. Thanks, everybody, for joining us this morning. We are excited to announce our 2nd quarter results today in a really traditionally weak quarter. We achieved record 2nd quarter earnings. And first of all, I'd like to thank our crew members for doing such an outstanding job. There's no way this company would be in the position where it is today without the dedicated effort of more than 10,000 people that serve our customers every day and those that are behind the scenes taking care of our crew members. So a huge thank you for them. I think what this shows, as I said, the Q2 is a really traditionally weak quarter for the industry in Brazil. But to have a strong operating a really good operating profit shows that we have a resilient business model with more stable earnings profile throughout the year. And certainly, we're looking forward to now the 3rd Q4. As you can see on Slide 3 in our presentation that we gave you, we grew capacity in the 2nd quarter by 18% and our revenue increased by 19%. So it's amazing to see you can increase capacity that much and the revenue can follow along. We even actually increased our load factor year over year. So our margin expansion strategy is working. We continue to add the low cost A320s that are really bringing in our low cost, and you'll see how that's affecting our cash going forward. We continue to build Brazil's largest network. We've added 11 cities since June of last year. If you go to Slide 3, back to Slide 3, all those red dots that you have on that slide are all cities that we successfully added over the since June of last year. So we had an operating margin of 6.1% and EBITDA margin of an incredible 28%, really which cements us as certainly confirms our position as the most profitable airline in Brazil. We also ended the quarter as the most capitalized airline in Brazil. We were solidly liquid with $3,000,000,000 in cash, representing 42% of our last 12 months revenue. We also had the highest on time percentage of any other airline in Brazil in the Q2 with an 86.4 on time percentage. So we're delivering a great product to our customers. And that obviously is evident in the fact that Skytrax just awarded us for the 7th time 7th year in a row the best low cost area in South America. And for the 2nd time in a row, the best staff in South America and all of South America, which really shows that our people are doing a fantastic job of taking care of our customers. All of that on top of our 3rd in the world ranking at TripAdvisor, which came out 3 months ago. So we're very pleased about that. We don't do this for awards, but it's nice to get the recognition for our crew members. I'm also excited about the recent management changes that we've made here. At Azul. John Rogerson, who's our new CEO, I've worked, known him for 15 years. He made the decision to leave JetBlue and come down to Azul and help found this company. He's one of our founders. He's very passionate about this business, and he's going to do a great job as CEO. Alex is also a founder, Alex Mafaltani, he's our new CFO, and he's going to be fantastic in that role. And he's worked with John since the beginning as well. So they work really great together. And I think a lot of comments on the roadshow will arrive in America and believe that we're certainly proves that that's not the case. Johnny is committed and will be here for a long time to come as he needs to go over the airline. It's also great to have Anshuewaldo, Nevis move to TAP. As you know, we have a significant investment and upside in TAP. And so it's good to have him over there. And he's a great talent, and he'll do great for TAP in his position. So we continue to be on track to create superior value for our shareholders. That's very important to us. And we have a differentiated business model and a great management team. So we're very excited about the business. I think and doing all this when Brazil still hasn't recovered. There's still difficult times in Brazil, but you can only imagine how things would change if Brazil actually recovers a bit. So with all of that, I will turn the time over to John Rogerson to give you more detail on these numbers that I've shared with you so far. John, it's all yours. Thanks, David, and good morning, everyone. As David mentioned and as you can see on Slide 4, we had a very strong quarter this year with an operating margin of 6.1%, 6 margin points higher than last year and an EBITDA margin of 28%, one of the highest in the industry. I'm very proud of our CASK ex fuel performance, which decreased 8.1% in the quarter, while total CASK decreased 4.9%, and that's with an 11% increase in fuel prices. This reduction was mostly due to the introduction of the A320neos in our fleet, which have roughly 29% due to lower unit costs. We also reduced our financial expenses by $60,000,000 by paying down more expensive debt. Over the second half of the year, some of the debt prepayment penalties will expire, so we'll continue to delever and reduce our financial expenses going forward. Moving on to Slide 5. You can see our revenue performance in the quarter. The fact that we only carry on 73% of our routes allowed us to grow double digits in the 2nd quarter and at the same time increase unit revenue by 2%. This increase is even more meaningful considering the 9% increase in stage length. Average fare also increased 8% to BRL280 and our load factor increased almost 200 basis points. Moving to Slide 6. We talked a lot about this on the roadshow, which was our margin expansion strategy. I want to go through each of these pillars with you, just reminding everyone on the call what these are. First was the A320neo, up gauging our fleet the A320neo aircraft, which has 56 incremental seats, essentially the same trip cost and 29% lower unit cost. The second pillar was expanding to Azul, our loyalty program, which currently has 7,600,000 members. And the 3rd pillar was increasing our ancillary revenues through our cargo business, which grew 49% year over year in the second quarter, our packaging business and our initiatives with our charging for bags and unbundling the product. As you will see in the next few slides, we are successfully executing on each of these pillars. And that's with the macroeconomic backdrop, as David mentioned, that hasn't yet started to improve. Once Brazil starts growing again, we are very well positioned to benefit from improved macro scenario. Moving to Slide 7. We continue to be impressed with the performance of our A320neos. They have amazing productivity. With an average utilization rate of 14.2 block hours per day, we're seeing strong margin expansion on the routes they currently serve. Our A320neos are being deployed on our longer haul routes, replacing the Embraer 195, which is more suited for our high frequency business markets. As I mentioned previously, the Neo with the Neo, we're able to add 56 incremental seats at practically no extra cost, a very low risk growth strategy moving forward. The introduction of the larger aircraft in these longer haul routes allows to drive increased connectivity throughout our network. As we widen the pace on these trunk routes, these aircraft will also help us grow our ancillary revenue, specifically in TudoAzul Cargo and our Travel Packaging division. Most of our capacity growth this year is coming from the A320neo. Over the next few years, we expect to grow through a significant fleet transformation process as we replace older generation aircraft with next gen aircraft, namely the A320neo and the Embraer E2 starting in 2019. Moving on to Slide 8, you can see the performance of our loyalty program in the Q2. Our loyalty program, as I stated previously, reached 7,600,000 members. This represents an addition of 1,400,000 members over the last 12 months. We increased gross billings ex Azul by 48% during the last 12 months, with the majority of this increase coming from sales to our banking partners, further increasing our share of the Brazilian loyalty markets. And as we stated many times previously, unlike other airlines in Brazil, TutorAzul is 100% owned by the company. This means that we have no tax inefficiency and benefit 100% from the cash flow generated by this high growth, high margin business going forward. Moving on to Slide 9. Azul was a leader in the industry with charging for bags. We were the first ones to implement the bag fee starting on June 1. We implemented a new baggage policy with minimal operational or customer disruption and are seeing BagTree revenue ramping up as expected. We are upselling by charging R30 dollars in advance for the first bag online and R50 dollars at the airport. Charging per bag is just the first step of unbundling of our product. Bag fees and product unbundling will be an important source of ancillary revenue in 20 18 beyond. Moving quickly to Slide 10, you will see that our strong network and great customer service allow us to attract high yield business travelers. Although we had an overall market share in terms of RPKs of 19% in the 2nd quarter, our market share in terms of corporate revenue according to Aprecor, the Brazilian Association of Corporate Travel Agency, is as high as 30%. This is further evidenced on the graph on the right, which shows our pricing power advantage. This again mostly thanks to our network, which has less than 30% overlap in terms of ASKs with our competitors. Taking a quick look at the balance sheet on Slide 11. We ended the quarter with a solid liquidity position of $2,200,000,000 Including receivables, our total liquidity position reached BRL3 1,000,000,000 at the end of the quarter, representing 42% of last 12 months revenues, certainly one of the highest in the industry. We amortized $200,000,000 in loans during the Q2, resulting in a debt position of BRL3.6 billion and a leverage ratio of 4.5. By the end of the year, we expect to reach a leverage ratio closer to 4. With the proceeds of the IPO received in April of approximately BRL1.3 billion, our cash position was significantly strengthened. Going forward, we will be able to lower our borrowing costs by paying down our more expensive debt. In addition to having the lowest leverage in the country, we also have much lower exposure to foreign currency. Only 46% of our debt is denominated in U. S. Dollars and virtually all of our working capital debt is denominated in local currency. As you look at to Slide 12, we are now long dollar, which is very unique for Latin American Airlines. Our dollar denominated assets, mainly our cash that we hold in dollars, deposits on aircraft and maintenance reserves abroad and our investment in TEP now surpass our dollar denominated liabilities by over BRL500 1,000,000. If you add to that the aircraft engines and spare parts, which are not restated to the exchange rate every quarter, but are U. S. Dollar denominated assets, we have more than twice the asset U. S. Dollars compared to our liabilities. This is a major development, which reaffirms our position as the airline with the best balance sheet in Brazil. We're very excited about the quarter. And with that, we'll turn it over for questions. Ladies and gentlemen, thank you. We will now begin the question and answer session. Our first question comes from Michael Linenberg with Deutsche Bank. Good morning, gentlemen. This is actually Tantra Bryan filling in for Mike. First of all, can you speak a little bit about how the rollout of the ad season is going? It sounds like it's in line with expectations, but maybe you can give us a little more color on what the take rates are like and what kind of growth you could expect to see in ancillary revenue in the back half of 2017? Hey, Katy, it's Avi. Yes, so we started selling fares without baggage on June 1. And initially, we did it in market that we were alone, which is obviously a big part of our network. GOL came in on June 20, which rounded out the rest of the competitive landscape and LatAm was a week after that. So by June 27, pretty much the bagless fares were implemented network wide for Azul, GOL and LatAm. As John said, the implementation has been very smooth. I want to thank all our crew members. It's a big change for Brazilian customers, but we've seen very little operational disruption and very little negative feedback. So currently, we're selling 2 product fares. 1 is called Azul, which is without checked baggage and one is called My Azul, which has a 23 kilo per passenger allowance for checked baggage for BRL 30. If you buy the Azul fare and you show up at the airport with a bag for whatever reason, that you pay BRL 50 at our counter or the kiosk or on the app. So the I don't want to be too specific, but we're seeing something like 50% to 60% of our customers buying the fare without jet baggage. And then we're seeing a relatively good percentage of those customers actually show up to the airport with a bag. And so they could have saved 20 AIs actually if they had brought up, but for whatever reason they changed their mind or something happened and we're seeing a meaningful percentage of those customers then coming to the airport and checking the bag, which gives us R50 dollars So as John said, what's really interesting about this is that it's just the start of unbundling. As you've seen in the U. S. And in Europe, the typical things that come with unbundling are seat assignment, things like anticipate your flight, things like less points or no points, both for different types of fares. So those are the kinds of products that we will explore in the second half of the year and into 2018. It is ramping up as I expected, slowly. And so we feel good about the $100,000,000 number that we gave you last time for 2018. That's really what we're focused on. This year. We just want to make sure it's the food rollout continues and the ramp up happens as we expect. Okay, great. Thanks for all that. If I could just maybe one more in. How quickly are these 18/20 meal flights ramping up? And maybe just in general, how do margins compare at least on these slides compared to your system average? And then is everything still going in line with expectations now that we're starting to see capacity get added back between the U. S. And Brazil since you've cut from last year? Yes. So, Avi can talk about the routes, but I think I'm really pushing the team to get them as soon as possible to kind of what we're seeing today is far exceeding what we had actually thought. When we were on the road trip talking about this, we obviously had said, if we could snap our fingers and have 25 of them today, we'd do that. We see that number is actually significantly higher than that. And so we expect to have around 20 by the end of next year, but we have 8 today. And so I'm actually pushing the team to see if we can move out some of the other airplanes quicker and bring them in faster. So it's top of our priority right now and it's what we're really focused on. But just getting to 2020 by the end of next year is going to be a great accomplishment and it will you'll see it in our numbers. We'll significantly improve our numbers. I thought it was interesting that I was reading through one of our competitors' earnings release and it showed on a per ASK basis, it showed how we have really high rental costs and really high maintenance costs for ASK. They're totally right. We do. But that's upside for our investors. I was going to put that as an exhibit knowledge and use their source. We do. But that just means that, hey, we have smaller planes with flush shuttle routes to bring us higher revenue, and they were doing that on the longer routes. And now we're going to be able to put the right plane on the right route over the next 2 to 3 years. And that is going to that's what we're really excited about. That's what we're moving and having a seat change here to do. Yes. Thanks, David. And Katy, regarding the margin, our seat cost, as we've said many times on these airplanes, is going to be 29% lower than the Embraer 195 on like for like routes. We're definitely seeing that. On the margins, I can't be too specific, but what I can say is that we are seeing unit revenue reduction significantly lower than that number. If it were not that much lower, it would have kind of affect our overall numbers more. And so we are seeing very, very healthy margin expansion in these routes. In terms of is it going as expected, I would say it's probably going better than we expected in terms of the operation and as well as how it's helping the network, how it's helping cargo, how it's helping loyalty. And so as David said, we're anxious to get these implemented and ramped up as soon as we can. And Katy, I think it's important, we've needed these aircraft for a couple of years. And so when you talk about ramping these in, these markets needed the larger capacity over the last couple of years. And so it's a blessing that we now have in the fleet. So there's not a significant ramp up that's happening because these markets needed 174 seats, not 118 seats. Seats. And Katie, I missed your question on international. Do you mind saying it again, please? Yes, sure. Thanks for all that color. That was great. Just on some of these routes where you're adding to the U. S, we're starting to see capacity get added back. So I just didn't know if maybe that had impacted your projections at all or if things are still going as expected? Yes. It's going as expected. You are right. Some capacity is coming back. But the market, we think it's still strong. It's going as expected. As you know, we announced 2 routes on Friday. One is Belle Horizontial and one is Belle M to Fort Lauderdale, which David has been mildly encouraging me to do for a while now. Finally. So it's going as expected. We're excited about them. And overall, we're happy with international. Let me just say one thing about these North and Brazil to Florida routes. The ability for us to kind of fly those airplanes still at 18 hours a day or 14 hours a day going back and forth with the low cost. And what we've seen at TAF is the high market share they have flying to Europe from the northern Brazil cities. And we think there's a big opportunity. So this will be a good experience experiment for us to be flying Bela into Orlando. People up north, they're going to love it, not have to come all the way down to Sao Paulo to catch a flight to go north. The next question comes from Savai Syth with Raymond James. Hey, hi, guys. I was wondering, to follow-up a little bit on to your question, on the international side, I was wondering how much of your revenue international is today? And what kind of unit revenue trends are you seeing between kind of domestic versus international that's netting out to the amount 2% here? Yes. Savi, we're not breaking out the breakout between the Messian International. The main reason being because the absolute numbers are different because of the aircraft size and then paid rent, it can lead to a good conclusion if you try and do the math without having all the details. What I can tell you is that American said that their LatAm was up 43% in 2nd quarter. NAPAM just reported July international, the international load factor was 88% or something like that. And so international is strong. The unit revenues are up year over year. As we come out of the crisis of last year, the strengthening of the local currency is definitely encouraging Brazilians to travel more to the U. S. And Europe. So I think all of the airlines are benefiting and reporting good year over year unit revenues. That being said, we would have been able to have a frac up almost 2% year over year if domestic was terrible. International isn't that big to single handedly carry us over the line in that way. So our domestic is hanging in there. It's stable. We are seeing solid numbers with the 8B-20s. I think as Goh said, there was acceleration of domestic demand in the end of Q2, that is true, driven mostly by leisure, which makes sense given the July holidays. And it led into a pretty nice July overall for us and now we'll see typically corporate revenue improve second half of the year. So international is strong, strong for everybody, strong for us. But that being said, single handedly, it's not enough. Domestic has had to be pretty solid as well, and it is. And the other thing about international is it's really helped our network, right? So that's why it's so hard to when you have over 50% of your customers connecting on your domestic network to go to your international network in a lot of our markets, then they're very intertwined and they help each other out. They're very synergistic. Good point. Just a follow-up on that corporate comment you mentioned. Are you seeing the corporate demand recover? Or is it still too early to say how the corporate demand is going to be cokefully injured in that season? Yes. I mean, I would say yes, but it's too early. The 1st week of August is like hangover week. People still coming back from July getting settled in. And so this week, next week, as we get into September, prior to the September 7 holiday are going to be important to get a feel for that. What we are seeing is typically second half of the year is always better than the first half, driven mostly by corporate at least until November. You have a lot of event activity, you have a lot of expos, exhibitions, conferences, that kind of stuff really help to drive that kind of demand. My sales team is telling me that we are seeing good momentum with events and those kinds of things picking up in the September, October, November time frame. So our fair discipline is good, capacity discipline is good. I think the table is set for a corporate recovery, given a macro that's steady, if you will, slow and steady. So it's a little bit early to say, but I think the conditions are right for a good corporate recovery. And I think we'll know more next several weeks. Very helpful. And if I John, if I may quickly ask you. On the working capital debt, could you elaborate a little bit on what's happening there? Yes. It's Alex here. Yes, thanks for the question. As you know, we had a very successful IPO in April. With that, we got a lot of additional liquidity on the balance sheet. And with that, we had the luxury of having more options on what to do with our cash and with our working a lot less receivable advancing in Q2, and we also had the ability to negotiate with suppliers to advance payments in exchange for very favorable commercial terms and better conditions. And so with that, we saved over $20,000,000 in interest expense. And if we had maintained the same sort of cash management policy as we had before, we would have had an additional BRL300 1,000,000 of cash on the balance sheet. The next question comes from Dan McKenzie, Babinham Research. Hey, good morning, guys. Thanks for the time. Alex, if I can go back to your last point, so plenty of liquidity is the message we're getting this morning, much better credit. Was the incremental $300,000,000 in liquidity you just referenced with that in reference to potentially some renegotiation of maintenance reserves? And if not, if you are able to potentially, given your better credit status, get some of that cash back, how much do you think about using some of that incremental liquidity? Yes. I'll start and I think John wants to add to that as well. So the $300,000,000 that I mentioned, Stephen, is more receivable advancing. So as you know, we sell with the credit cards and with that, we build a balance of receivables, which are very easy to advance. And sorry, yes. And so but because we had plenty of cash on the balance sheet, we could not advance those receivables. Had we advanced them, we would have an additional BRL300 1,000,000 on the balance sheet and we would have but we would have spent some interest to do so. In terms of the additional liquidity on the balance sheet, we're absolutely seeing an improvement in credit. We did renew a BRL 200,000,000 debt with one of our banks, and we mentioned that on our earnings with very favorable terms. So lower interest rates and longer payment terms. And we are also working with all of our suppliers in order to get better conditions on maintenance reserves and cash deposits as well. Yes. Dan, I just think it's opened up a whole new world for us since going public. And so once we brought the cash on the balance sheet, we're looking at we've talked about a lot. We've got about $2,000,000,000 or $2,000,000,000,000 of debt on the balance sheet, which is good debt, which is aircraft debt. And then the $1,600,000,000 which is the remaining is that's what we're aggressively attacking. And we're looking at various options that are afforded to us. And we'll be talking with you about that over the next couple of quarters, but you should have an expectation that, that total debt number should be coming down. Understood. And then I guess the second question here is for you, Avi. Imagine there was a sharp fall off in bookings that created a temporary revenue hole around May 19, around sort of the political corruption investment and the FX volatility that surrounded that. Obviously, it looks like you're able to close it in the quarter. But I'm wondering what kind of what was revenue what could have revenue been without that booking hold? And I guess I'm just trying to get a sense of how big a revenue headwind you had to overcome in the quarter? Yes. Hey, Dan. So first of all, second quarter was a pretty tricky quarter overall. April, we had Brazil had 3 consecutive long weekend holidays, and we actually had 4 consecutive 4 day weeks because we had 3 holidays and then we had some labor reform stuff that we had to strike on a Friday. So it was hard for corporate demand to get in any sort of rhythm in the month. And then as you say, on May, we had the JBS news. What I will say is that the demand drop off, as much as I would like to say, it was a big hole and we kind of made it up and there's potentially some upside there. But I would say that I think the demand was actually pretty resilient in the face of that news. We've seen demand drop off much more significantly a year or 18 months ago in when news like that comes out. This time, was it a distraction? Yes. Did it affect us for a week, especially in terms of close in corporates? Yes, it did. But it was not as steep as we have seen previously. I think that it was pretty resilient in the face of that kind of news. So it did affect overall a little bit. It was a distraction for sure. Obviously, we prefer not to have that. In terms of the overall impact, it's hard to say. I mean, June definitely did perform better than May on a year over year basis. So there is some impact from there. In terms of RASM for the entire quarter, I don't know. I would say it's 0.5%, maybe something like that, a ballparking. But overall, I would say that the impact was not as sharp as perhaps you were imagining. It was a little bit it was more resilient than what we've seen before. Dan, you and I have talked about this as well. The market's recovered significantly since May 19 when that happened. And what you're seeing in Brazil, where you haven't seen a recovery yet, you're seeing stability, right? You've seen the currency trade in a pretty narrow band, and we're seeing stable bookings. And so again, we're not here to claim that the recovery is in play yet, but we're very optimistic for the second half of the year. And the fact that the market digested the JBS news so quickly and got back to where it was previously, I mean, is a very positive signal. The next question comes from Stephen Trent with Citi. Good day, everybody, and thanks very much for taking my question. 2 for me. I was first curious about what your thoughts are on the international side, given you're moving a little closer to working more directly with Hainan Airlines and you continue to be, I guess, somewhat fully integrated in terms of food strategy, at least, with Pepto Portugal. I'm just wondering how your thinking has evolved. What's that should all look like on a long term basis? Steve, thanks for the question. I think Hainan is a great partner. They're deployed into Lisbon, which is fantastic for us. We are working very closely with TAP, and we are trying to get our fleet to be very similar to theirs. This gives us flexibility. And I think having flexibility is a great competitive strength in this market, the ability to move assets relatively quickly across the group. And so we've done that with we've proven to be able to do that with TAP. We've done that with Hainan. And I think that has allowed us to exit the crisis in Brazil a lot quicker from our competition. And so it's a competitive strength that we have that we can move a lot quicker. And the more we align ourselves with our partners and our I think the better. And I'll let kind of Abhi talk to the revenue side of it. Yes. It's David. What we said all along about international is we want to fly from where we are strong to where our partners are strong. And so that explains Viracopos Orlando, Belarozante Orlando, HCP Orlando explains Viracopos Lisbon, Bell and Fort Lauderdale as well. JetBlue is very, very strong in Fort Lauderdale. We're building a little bit of a connecting complex there as well. So that's our thinking. That hasn't changed. We still have plenty of opportunities within that space from where we are strong. We have multiple hubs in Brazil to where our partners are strong, Fort Lauderdale, Brisbane and kind of where JetBlue United and TAP are strong. So that hasn't changed. And that's kind of how we're seeing it evolve in the next couple of years. Okay. Very helpful, guys. And just one other question for me, kind of switching to the domestic market. I admittedly kind of don't question on that part. But when I think about at least some potential for the government to reduce jet fuel taxation on domestic flights, There's no reason to believe that if the fuel reduction benefit that will somehow lose your advantages on the regional market. At least from what I can see, it seems like a function of servicing smaller parts with smaller planes and the longer physics and not fuel tax policy. But I'd love to hear your thoughts on that. Yes. You're absolutely right, Stephen. It doesn't necessarily change the fact that we've got IMS agreements in a lot of the states because of the aircraft type that we fly, and we have the ability to serve a lot more cities and states than our competitors can because they have the 1 fleet type. And so I think overall, the ICMS cap at 12% is very positive for the industry. And so we're certainly supporting it jointly with ABYAR, and we've been working very closely. We got close to a vote this week and looks like it's been postponed for a couple of weeks. But we'll be looking at that very closely. It might tighten the gap a little bit because there's no if Sao Paulo comes down from 25 to 12. But overall, it's very, very positive from an industry perspective, and we have no intention of losing our individual ICMS agreements. And since we started doing these agreements, we've yet to have a governor in any state in Brazil remove the benefit to us because it brings a tremendous amount of activity for their state and economic development for their state. And so it's very important to us. I mean, I'll fly to the lifeblood of these cities. And in some states, we serve 8 cities in their state. And so and some of these, frankly, are cities we wouldn't fly if we didn't get the benefit. So there is a bit of a trade off there. It's not one it's not completely a benefit to us, But it's a win win for the states and for us. And so any tinkering they do with these taxes, we still have the governors that are still on our side and making sure that we're going to be able to fly to the cities they want to supply to. That's kind of the underlying principle. The next question comes from Pedro Bruno with Santander. Good morning. Thanks for taking my question. If you could just give us some color on your guidance, I don't know if can share with us what the premises are underneath for FX and fuel on the guidance that you reiterated in this quarter? Thank you very much. Hey, Pedro, we look at the forward curves. We're looking at the forward curve for both currency and fuel, and that's what we put in. So if you just go to Bloomberg, we're fairly confident that we're going to be able to hit our guidance, and we're excited. Now a lot of people have asked us, are we changing it? We still got 6 months to go. We're working really hard, and we intend to deliver our guidance. The next question comes from Vikrami Susaki with Bradesco De Bea. Hi. Good morning. I have two questions here. The first one, can you give any color on how that is performing? And the second question, I think that Abi mentioned a little bit about underwriting this year next year. So I don't know if you can comment a little bit more on what kind of service do you expect to charge? Okay. So first, Victor, let's say that on TAP, TAP is doing well. Great summer season, flights are full. The Brazil international recovery that we've seen is also something that TAP is seeing. Things are full, Europe's doing well. There is still a restructuring that needs to be taken there on costs. And so that takes a little bit of time. And so that's a 2 or 3 year ongoing process. And so we're very, very pleased with the revenues and feel very confident that the costs will are coming in and will continue to come in. It's not something that we can do quickly, but we're getting a lot of support from all the crew members there and everyone's working together. Everyone's the government, us, those who privatized it, the crew members, everyone knows how important TAP is to Portugal. And so everyone's working together. Victor, about the ancillary, I mean, it's stuff that you've seen other airlines do. For example, anticipate your flight. I mean, that's something that airlines around the world charge for. In Brazil, you can do that for free. That's something that maybe only customers paying their higher fares should be able to do. Seat assignments. Azura has not had a middle seat so far, so we haven't seen much value in charging customers for seat assignments, but with the A320 in the U. S, in Europe, customers absolutely pay for not having to sit in the middle seat. Things like points, if you want extra points or if you want to a point on your purchase, maybe the promotional fairs, the weekend sales fairs, the discounted fairs, maybe you get less points or no points. So it's things that have been done around the world that other airlines are doing and they've had success with. Obviously, we want to make sure we do it in a very customer friendly way. We want to do it in a way that doesn't upset our customers, doesn't upset our brand positioning and the loyalty that our customers have to us and we have to them. So but these are all tools and products that we'll look at over the next 6 months and into 2018. Okay. Thank you. This concludes today's question and answer session. I would like to invite David to proceed with his closing statements. Please go ahead, sir. Great. Well, thank you all for joining us on the call today. We're like I said, we're excited about our business. We feel like we have a ton of upside going forward. Just like once again did to thank all of our crew members, particularly those that worked on this release and all of the numbers and all of this work, you're very much appreciated. And really, it takes a lot of people to make a good airline, and I couldn't be happier with the direction that we're headed. So we'll talk to you next quarter, and we'll continue to increase shareholder value. That's what we're here for. So thank you very much. That does conclude the AzusaDao conference for today. Thank you very much for your participation, and have a good day.