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Edited Transcript of AENA.MC earnings conference call or presentation 31-Jul-19 11:00am GMT

Half Year 2019 Aena SME SA Earnings Call

Madrid Aug 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Aena SME SA earnings conference call or presentation Wednesday, July 31, 2019 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Emilio Rotondo

Aena S.M.E., S.A. - Deputy CFO

* José Leo Vizcaíno

Aena S.M.E., S.A. - Head of Financial Matters

* Maurici Lucena Betriu

Aena S.M.E., S.A. - Chairman & CEO

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Conference Call Participants

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* Arthur David Truslove

Crédit Suisse AG, Research Division - Research Analyst

* Charles Maynadier

Kempen & Co. N.V., Research Division - Analyst

* Cristian Nedelcu

UBS Investment Bank, Research Division - Associate Director and Aerospace & Defence Analyst

* Elodie Rall

JP Morgan Chase & Co, Research Division - Research Analyst

* Guillermo Fernández-Gao Sánchez de Nieva

Kepler Cheuvreux, Research Division - Equity Research Analyst

* Johannes Braun

MainFirst Bank AG, Research Division - Director

* Marcin Karol Wojtal

BofA Merrill Lynch, Research Division - Analyst

* Stephanie Fabienne D'Ath

RBC Capital Markets, LLC, Research Division - Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's Aena 2019 First Half Results Presentation Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today, Wednesday, the 31st of July 2019.

I would like to hand the conference over to your speaker today, Emilio Rotondo. Please go ahead.

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Emilio Rotondo, Aena S.M.E., S.A. - Deputy CFO [2]

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Yes. Hi, good morning to everybody, and thank you for joining us in our first half '19 results presentation. As in any other occasion, the presentation will be led by our Chairman, Mr. Maurici Lucena; and our CFO, Mr. José Leo.

Now I hand over the floor to Mr. Lucena.

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Maurici Lucena Betriu, Aena S.M.E., S.A. - Chairman & CEO [3]

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Hello, everybody. I propose you to start with Slide #4. Regarding passenger traffic during the first half of 2019 in the Spanish network, the increase amounted to 5.7%, up to almost 130 million passengers, which implies that in the second quarter of the current year, passenger traffic grew by 5.5%. And during the first half of the current year of the current year, Luton Airport traffic, for its part, grew by 10.3%.

Concerning financial results. Total consolidated revenues increased to EUR 2.1 billion, which represents an increase of 6.9% compared with the first half of 2018. On the other hand, EBITDA for the period came to almost EUR 1.2 billion, which implies a growth of 5.6% compared with the same period of 2018. And this includes, of course, Luton, the consolidation of Luton, which amounts to EUR 45.7 million.

And the -- all in all, the EBITDA margin reached 56.6%. And you know that this EBITDA margin, also, the results are affected in this first half of 2019 by the accrual of local taxes at the beginning of the year. And of course, also, we have the significant impact of the seasonality of the business which, let's say, grows -- or evolves more strongly in the second half of the year. And this happens every year, of course.

On the other hand, consolidated net profit reached EUR 559 million, which represents an increase of 8.6% compared with the first half of 2018. And there was, in the first half of 2019, an increase in operating cash flow of 10.1%, up to EUR 1,111.6 million, which compares with the EUR 1,009.8 million in the same period of 2018. And this means that the net financial debt increased to EUR [6,905.8] million, which means that the consolidated group's ratio of net financial debt-to-EBITDA remains constant at 2.5.

In its meeting of yesterday, the Board of Directors, which I chair, approved the proposed charges for 2020 setting the maximum annual adjusted income per passenger, what we call the IMAAJ for 2020, it means for the next year, for next year beginning that year in March, this is when the new charges will start. At a -- and the level it was yesterday approved at EUR 10.2997, which represents a decrease of 1.17% compared to the current year. And this proposal, of course, as you know, is subject to the review and validation by the Comisión Nacional de los Mercados y la Competencia, CNMC.

This is all for my part so far, and I will join you again at the Q&A. Thank you.

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José Leo Vizcaíno, Aena S.M.E., S.A. - Head of Financial Matters [4]

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Okay. Good afternoon, everybody. This is José Leo, the CFO, and I will talk you through the next section of the presentation, dealing with the business trends.

Moving on to Slide #6, traffic data, as the Chairman and Chief Exec, Mr. Lucena, indicated, the passenger growth in the Spanish network over the first half of the year was 5.7%. As you can see in that -- in this particular slide, that growth has been very balanced in terms of domestic and international traffic with domestic growing 7.3%, and the international traffic growing, also a healthy 5%. In that figures, it is also significant that the main airports are growing and are growing healthily.

Having said that, these figures are absolutely 100% consistent with our guidance, so we maintain the guidance that we provided at the last quarterly results presentation, which means that we are still expecting the total traffic in the Spanish network to grow by 3.7%, plus/minus 0.5% margins or range. And why we say that the current growth is consistent with that because, clearly, we expect the summer season to show a more modest growth, and the winter season, probably likewise. Although we have no -- we haven't got a great deal of visibility on the fourth quarter of the year yet.

Everybody's aware of the trends in the market. And I have to say that for some people, that may constitute a surprise. We have been consistently arguing in the past against some views that we were too prudent that the summer could be slightly different to the winter. And you can see that for us to get to 3.7% at the end of the year, we need to grow by 2% over the rest of the year, which is perfectly consistent with our views.

In the current figures, it's also worth mentioning that the U.K. traffic still grows at 3%, and the German market is still growing at 3%. So that's what it is in the figures that we are presenting today, accumulated at the end of June.

Then moving on to the next slide and looking at the performance by business lines, I think they are pretty consistent and pretty healthy. We see that particularly the commercial business is growing. And is maintained -- is growing at 10.5% in terms of revenues, and the EBITDA is growing at a similar rate. And keeping the margin very, very stable, vis-a-vis the EBITDA margin pretty stable vis-a-vis the previous year, the real estate services, although they are still clearly a relatively small part of the business, is developing very positively with some additions to the existing portfolio of assets. And then the international markets are -- or the international business is performing extremely well. Behind these figures, we have mainly the Luton Airport's performance that we will discuss in a minute.

Looking at the aeronautical business, of course, that is the business where the margin is getting eroded a little bit. That is consistent with our guidance from the time of the presentation of the strategic plan and it's not at all a surprise. But it still is keeping a very significant and very attractive margin level against the backdrop of a declining tariff and the backdrop of an increasing operating cost bill that, once again, is not coming as a surprise because we have been advising of that for a while already.

On the next slide, commercial information. In terms of revenues, all the business lines are growing significantly. I have to say that there is a very small adjustment to be taken into account, which is the IFRS 16 adjustment that you will see a little bit later in one of the slides, that would imply that the like-for-like growth in total commercial revenue is slightly less than 10.4%, but that still is 9.3%.

And you can see growth across the board in all the lines with some businesses performing particularly well. For instance, car parks, clearly, that is partly driven by the growth in the domestic market -- in the domestic traffic, sorry. VIP services, as we are getting into an increasing in-house managed service provision, we see that revenue is growing, and they are really enhancing the EBITDA across the commercial side of the business. And indeed, the food and beverage business line that, by the way, yesterday, we -- our Board of Directors approved the contracts that will be awarded to the new operators of the Palma de Mallorca food and beverage offer. That will be a significant positive improvement in terms of revenues. We expect the revenues in that particular business to increase year-on-year on EUR 10 million per annum, net.

So that's an indication that as we are tendering out some of the contracts that are aspiring, we still see a great deal of appetite and a great deal of competition for it.

Looking at the next slide, the international shareholdings. As I said before, Luton is performing really well. The passenger growth, 10.3%, is extremely positive. Clearly, the Brexit backdrop or a scenario for the time being is not affecting that traffic. And the EBITDA is indeed growing very, very significantly, 36.7%.

Looking at the rest of the shareholdings, the rest of the associates, all of them are growing in terms of traffic. Aerocali was the only one that last year was lagging behind, but now it's clearly joining the rest of the international airports participated by Aena in a double-digit or close to double-digit traffic growth scenario.

At this point in time, I want to mention very briefly the Brazilian concession. We -- in quarter 1, we provided the main data, the main information and the highlights of this new venture for Aena. At that time, we showed that we were contributing -- we were expecting to contribute at some point in time in the year, the capital committed. The total capital committed is equivalent to EUR 537 million. And that contribution will take place in the second half of the year. Well, actually, a part of that around the equivalency in Brazilian real of EUR 110 million have been already contributed in July. The rest, which is EUR 430 million or EUR 427 million, will be contributed at the end of August. We expect the contract -- the concession contract to be signed off in the early days of September, and we expect to take control of the operation after a transitional period in January, February 2020.

The -- I have to say that the capital contribution we made was made up of 2 components: one of them was the EUR 437 million, representing the payment of the [Autoriga], the concession price. The -- that will be made at the end of August. The remaining 110 -- equivalent to EUR 110 million have been already paid. And they are mainly earmarked to deal with the funding of a number of expenses that were all then described in the quarter 1 results presentation. Namely, things like concession cost, startup cost and also, more importantly, the redundancies that mandatorily should be paid to the current staff of those airports, which are Infraero staff.

Well, all those costs will be accounted for in the consolidated accounts of Aena in the second half of the year. So we expect that amount of cost to reach something in the region of EUR 90 million, or 9-0, that will be accounted in the second half of the year, consolidated accounts, with the rest of the cash up to the EUR 110 million to be held as cash holdings in the Brazilian subsidiary. That's -- entry will not have any impact in the individual accounts of Aena, which, as you know, are the ones -- the net results of Aena are the ones that are relevant to the dividend distribution at the end of the year.

And that's the end of my section. And I hand you over to Emilio Rotondo that will be dealing with the financial results section of the presentation. Thank you.

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Emilio Rotondo, Aena S.M.E., S.A. - Deputy CFO [5]

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All right. Now we move on Slide 11, the financial results. Most of them has been -- have been highlighted by both our Chairman and our CFO. Let me maybe highlight the growth in operating cash flow that increased by 10% to roughly EUR 1.1 billion. Net financial debt increased to EUR 6.9 billion. And -- but the ratio of net financial debt-to-EBITDA remained constant at 2.5x EBITDA at June 2019. Regarding the investments, the capital expenditure amounted to EUR 276 million, which included roughly EUR 13 million of -- in Luton, and represents an increase of 0.5%, it's just EUR 1 million or plus EUR 9 million if you consider just the capital expenditure in the network in Spain.

Going to next slide. Here are some explanation on the financial results. First of all, as in other quarters, I highlight there that the minimum annual guaranteed rents amounted EUR 69.7 million versus EUR 55.8 million of last year, representing roughly 19% of the revenue from the business versus roughly 17% of last year. This difference is due in -- most of its part to the sales evolution and to the conditions agreed in the new contracts.

Then we move into the staff costs that increased by 8.9%. Here, I would like to highlight that this increase comes from 2 impacts. First of all, the salary review. Last year, in 2018 up to September, it was accrued an increase of 1% that was finalized -- and that finalized in 2.75% increase that was realized in September. Now in 2019, the increase has been 2.4%. And also, the increase comes from new hirings. These are the 2 main impacts affecting this staff cost increase.

Then, and José also mentioned before, the impact of the IFRS 16, that has 2 impacts: first of all, in the reclassification of the financial effect of that advanced payment received from Dufry from -- that moved from a lower commercial income to a higher financial expenses amounting roughly EUR 6 million with no effect on cash. If we exclude this effect from the revenues from Duty Free in the first half of 2019, would have amounted EUR 152 million, with an increase of EUR 9.2 million versus last year or 6.4%.

Also, the impact moves into the increase in financial cost, that has an impact of this 9 -- this same figure of EUR 9.5 million. Okay, that is the effect of this IFRS 16 or Duty Free. But also we have an impact of roughly EUR 11 million that comes from the fair value of the hedging instrument contracted to protect against the ForEx risks in the Brazilian deal.

So if we strip out these 2 effects and we just see the like-for-like of the interest of the debt, the decrease in the interest rate would have been of EUR 8.2 million.

Moving into the Slide #13, and also moving into the -- maybe the topics that are more important. Well, first of all, the supplies line decreased by 1.3%, that is roughly EUR 1.2 million during to the -- mainly to the fall in the cost of the ATM and CNS service due to the agreement to ENAIRE, okay. And then we -- the staff costs that increased by the -- just already highlighted, 11%, due to both impacts of the salary views and the hirings. And then the operating expenses, that in this year -- in the first half of the year, increased by roughly 9.5%.

Here, we would like to emphasize that the -- this OpEx trend is going as expected and is consistent with the strategic plan, although, as we have mentioned in past quarters, the phasing of the OpEx is being slightly different than was maybe initially expected or as you can see quarter-by-quarter. As you have seen with the comparison -- or the difference between the first quarter and the second quarter.

Finally, on depreciation and amortization, it went down by 3.9%, EUR 14.5 million basically due to certain assets being fully depreciated. Finance costs already mentioned also. Highlight again than the reduction in interest on debt. Due to the reduction on both the interest rate and the volume of debt has been of EUR 8.2 million that was offset by the impact of Dufry and the IFRS 16 and the fair value of the hedging instrument in Brazil.

Corporate income tax increased by EUR 18 million, mainly due to the increase in activity as the effective tax rate of the period was 24.4%, quite similar to last year, 24.1%. The net profit will reach EUR 559 million with an increase of EUR 44.5 million or roughly 8.6%.

If we move to our last slide, #14. In terms of cash flows, highlight the net cash generated by operating activities reached EUR 1.1 billion, reflecting an increase of 10.1%. In terms of investing -- or the CapEx, the investment activities amounted to EUR 270 million compared with EUR 261 million last year, or roughly EUR 10 million more. And in terms of financing outflows, mainly, and the most important payment has been of dividends, EUR 1,000,045,000 (sic) [EUR 1,045,100,000] and the repayment of debt, amounting EUR 362 million.

With these comments, the presentation has finished. So we now can move into the -- on the Q&A session. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Elodie Rall.

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Elodie Rall, JP Morgan Chase & Co, Research Division - Research Analyst [2]

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Can I ask you first on tariff announced for 2020, your proposal of 1.17% cut? I know it's not as high of a cut as the 2.2% yearly cut that you were supposed to get, but I had understood previously from your comments that we could be expecting flat tariffs again in 2020 partly because of the discounts to airlines. So can you just please give us some color behind the 1.17% sales decrease for next year?

Next question would be on the next DORA actually. When would you start negotiations regarding the next DORA?

And lastly, would you be able to give us an update on the process regarding the Duty Free contract renegotiation for the minimum guarantees? Has there been new development here?

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Emilio Rotondo, Aena S.M.E., S.A. - Deputy CFO [3]

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Allow us one second.

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José Leo Vizcaíno, Aena S.M.E., S.A. - Head of Financial Matters [4]

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Elodie, sorry, this is José here. Starting with your question on the tariff review proposal for next year. Well, clearly, the views on the coming year's tariff reviews changes. The views change as a result of, particularly, the traffic evolution, that's one of the drivers. So the fact of the matter is that today, we are proposing this 1.17% reduction for the coming year, taking into account the current traffic circumstances as well as taking into account the full recovery of the K factor, the dilution of previous year. So this year, we will be able to recover 100% of that element. As well as the peak index that for the first time is taking -- is being taken into account.

Without getting into the detail of which particular P index level we are suggesting or -- suffice to say that all those elements are being taken into account, we expect all of them to be recovered. That's all subject to the CNMC review, final say in the coming months.

With regard to the DORA, the mandatory dates are as follows: the first quarter, just to -- simplifying, the first quarter of Q1 2021, mandatorily, we have to have all the consultation process done and dusted, consultation process with the airlines, to allow the supervisor, which is the CNMC and the regulator to deal with the documentation in the second and third quarter of the year, 2021. And then the government to approve the DORA 2 by the end of September 2021. That's the -- those are the mandatory dates or deadlines. Of course, we expect informal consultations and exchanges of information and all sorts of things to be taking place in 2020, probably the second half of 2020. Particularly the investment proposals, the CapEx proposals, are already being discussed as we speak with airlines and authorities. You know we are minded to invest in more capacity in Barcelona and Madrid, so those are the kind of things you need to start discussing a couple of years ahead.

And then finally, Duty Free, no news. We keep working on that. Our expectation is to be able to be -- well, at the end of the year in the market, tendering out this contract. And that's what we are planning to do.

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Operator [5]

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And the second question comes from the line of Guillermo Fernández.

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Guillermo Fernández-Gao Sánchez de Nieva, Kepler Cheuvreux, Research Division - Equity Research Analyst [6]

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My question is on the OpEx on -- and particularly whether you still back the guidance you gave in the strategic plan. In particular, you guided for EUR 1,767 million of total OpEx by 2019, which represented like a 10% increase year-on-year. Do you think this is still in place? Or we may see some delay of that? Or a slip into 2020?

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José Leo Vizcaíno, Aena S.M.E., S.A. - Head of Financial Matters [7]

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I think we will be there or thereabouts. But as you rightly said, you cannot rule out the possibility of a slightly different phasing, so some delays. But we shouldn't be too far from that figure.

As you can see today, in the second quarter of the year, we see the operating costs growing more than in Q1. I know those movements are taking us into that range of 9% to 10% growth in OpEx, considering OpEx, the combination of supplies, staff costs and other operating costs. So subject to phasing, we should be there or thereabouts.

And I have to say that, once again, I want to emphasize, this is all for good reasons. If -- this is the kind of cost that we are incurring responsively and efficiently, extremely efficiently because you know our procurement processes are very, very efficient. Because the business, medium and long term need it, and because if we don't invest, so to speak, in that kind of improvements, sooner or later, the business will -- would lose momentum in terms of operational efficiency and operational -- and quality of service.

And secondly, we are still running the business below the per unit cost allowed by the regulator in DORA 1's determination. So this is the right thing to do, first and foremost, because of business reasons and strategic reasons and quality of service reasons. And secondly, because otherwise, we would be, I don't know, facing an extremely, extremely challenging DORA 2 explanation in terms of costs, and we need those costs to run the business.

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Operator [8]

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And our next question comes from the line of Cristian Nedelcu.

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Cristian Nedelcu, UBS Investment Bank, Research Division - Associate Director and Aerospace & Defence Analyst [9]

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Three from my side, please. First of all, you talked previously about this 19,000 square meters of incremental retail space that you will add by the end of 2021. Can you give us a bit more color there? The phasing of this incremental space in each of 2019, 2020 and '21 as well as a rough split between Duty Free, food and beverage or others. So how much of this space goes to each category.

The second question is related to the revenues per square meter that you are generating on average in food and beverage and in Duty Free. Can you give us any data point there of what's -- what are the averages today. And the last question from my side, please, in terms of the hold baggage screening equipment tenders. I understand that there will be some tenders, or there are some tenders in progress now. Can you give us a bit more details on how many Standard 3 machines you are set to acquire over the short term, and if the CapEx investments associated with upgrading the Standard 3 are already included in the DORA CapEx expectations, the EUR 370 million you talked about in the past?

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Emilio Rotondo, Aena S.M.E., S.A. - Deputy CFO [10]

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Cristian, allow us one second. Sorry. Cristian, could you repeat to us the third question? Sorry that we didn't understand correctly.

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Cristian Nedelcu, UBS Investment Bank, Research Division - Associate Director and Aerospace & Defence Analyst [11]

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Sure, absolutely. So I think you mentioned also in the H1 report that you're in the process of organizing several tenders for hold baggage screening. So I think this just refers to the regulatory requirements that by September 2020, you would have to upgrade all your machines to Standard 3. And I was curious if the CapEx investments that are related to these upgrades or to acquiring this new equipment is already included in the DORA CapEx that you've flagged in the past? Or if it's incremental to an extent?

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José Leo Vizcaíno, Aena S.M.E., S.A. - Head of Financial Matters [12]

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Cristian, this is José. I will answer the last question and then, Emilio will deal with the question for -- regarding retail space.

Definitely, the Standard 3 equipment is part of the DORA. Furthermore, it's the highest -- it's the largest single project in the DORA 1 by amount, it's several hundreds of millions of euros. I wouldn't be in a position to tell you how many pieces of equipment we are installing. I -- we can't provide you with that. We have already run the tender in process, and we have awarded already. Most of the airports -- most of the contracts link to the main airports. They -- there is still some tail, but the bulk of it has been already awarded some weeks ago. So even in our procurement website, you could find all the details in terms of amount per contract, the contractors that have been awarded with the contract, the number of machines, everything. But if you like, we will try and get you that information in the coming hours because, honestly, that's not an information I have on the top of my mind at the moment. Thank you.

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Emilio Rotondo, Aena S.M.E., S.A. - Deputy CFO [13]

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And regarding the 2 first questions, as you mentioned, the -- most of the square meters or the increase in the commercial area that was included in the strategic plan would be active by the end of 2021. And mostly, it would come as -- along the expansion in the different airports, that would be mainly Madrid-Barajas and Barcelona. That would take, roughly, between both of them, 7,000 square meters. Then we have Palma de Mallorca with roughly 3,100 meters; Tenerife Sur with 2,000; and the rest would come from different airports. Nevertheless, there would be a smaller part of these square meters that would be open during 2022 and 2023.

Regarding the -- your second question, we don't disclose that information, I'm sorry.

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Operator [14]

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And the next question comes from the line of Stephanie D'Ath.

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Stephanie Fabienne D'Ath, RBC Capital Markets, LLC, Research Division - Analyst [15]

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I have 3, please. The first one is on your traffic guidance. So assuming you reached the midpoint of the guidance, which is 3.7%, as you said earlier, that would imply a 2% growth for the second half.

If I'm not mistaken, you guided previously for summer expectations at 6%. So could you confirm what your summer expectations are? And maybe a word in that context on the U.K. passenger. My second question is on CapEx. You mentioned that you already started discussing for DORA 2 CapEx plans. I believe the CEO has commented publicly that the CapEx would increase from about EUR 500 million to EUR 1 billion per year. Could you please tell us what is behind that? Is it related to real estate plan? And maybe an update on that. And my third question is just because it's -- I'm not sure if historically you reported Murcia International Airports as a per diem. What's the reason for that?

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José Leo Vizcaíno, Aena S.M.E., S.A. - Head of Financial Matters [16]

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Sorry, I couldn't get your last question well. Can you please say again? Sorry.

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Stephanie Fabienne D'Ath, RBC Capital Markets, LLC, Research Division - Analyst [17]

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Yes. So in your revenue statement, you have a new line which is Región de Murcia International Airport. Maybe I'm not pronouncing it right.

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José Leo Vizcaíno, Aena S.M.E., S.A. - Head of Financial Matters [18]

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Okay. Got it. Got it. No, that's fine. That's fine. Don't worry. Well, with regard to the traffic guidance, yes, you're right. We will -- to get to the 3.7% growth over the year, we would need the second half of the year to show a growth of 2%. And you mentioned something around 6%? Sorry, I forgot it now. But...

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Stephanie Fabienne D'Ath, RBC Capital Markets, LLC, Research Division - Analyst [19]

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Wasn't 6% your summer 2019 capacity forecast?

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José Leo Vizcaíno, Aena S.M.E., S.A. - Head of Financial Matters [20]

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Oh, okay. Okay. What we said from the very beginning is that the capacity declaration is just an indication of the willingness of the airlines to operate slots, provided they can make a living out of them, to put it that way.

So there is always an element of churn or an element of reduction between the number of seats they are asking for and reserving with no commitment whatsoever and then the number of seats that they finally use. And we said that, particularly in 2018, we experienced, if you like, a reduction in attrition level in that regard that we -- it was exceptionally high. And we were concerned that, that could be the case in 2020, again -- sorry, in 2019, again. So the fact that this 6% was -- is not going to crystallize in actual number of seats being flown is an indication of what we said before. That 6% is useful but it's never a good proxy of what the actual growth is going to be. I hope that helps.

In terms of the CapEx, the increase in CapEx is mainly driven by 2 large projects involving increases in capacity in both Barcelona-El Prat and Madrid-Barajas that we mentioned some point in time that, in both cases, we are expanding the terminal capacity. We are also adding some extra air fill facilities, this kind of things. Those are the 2 main -- and they are actually described in our strategic plan on some of our website's available presentations. That's the main driver. Plus, of course, many other airports that will require some extra investment. That's the reason for the expectation on that the CapEx will double potentially over the next DORA.

Nothing to do with the real estate developments that, as we said a number of times, will require no further capital contribution by us because we will only contribute the land, or to be more precise, the right-of-use of that land.

And we are working on it. And we are expecting the first tender processes to be in the market, hopefully, in the first months of 2020. That's time-consuming, it's a lengthy process but better get it right down earlier.

Sorry. Aeropuerto Internacional de la Región de Murcia is the airport that we have as a concession in that region. That was something we were awarded with some 2 years ago. And it started operating at the beginning of this year. That -- the opening of that new airport led us to close, to shut down the former airport in that region, the Murcia San Javier. So what we are doing now is just operating an airport 50 miles or 30 miles away from the previous one under a different model because this is a concession, it's not [freehold]. But this is -- it has been a concession and being different from the rest. That's the reason why we single it out in our P&L account, but it's not substantially different from Murcia San Javier in terms of size.

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Stephanie Fabienne D'Ath, RBC Capital Markets, LLC, Research Division - Analyst [21]

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And previously, it would have been reported in aeronautical, right?

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José Leo Vizcaíno, Aena S.M.E., S.A. - Head of Financial Matters [22]

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It would be reported as part of the Spanish network. That airport is not subject to regulation, for instance, although we apply the same tariffs that we were applying at the -- at his predecessor. But it's not technically subject to regulation and that's the reason why we show it separately as a different, if you like, unit, so to speak.

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Maurici Lucena Betriu, Aena S.M.E., S.A. - Chairman & CEO [23]

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Sorry, just to clarify on José Leo's comment. This airport is -- in our reporting, is included in aeronautical and in commercial business. So there is no change versus last year. So all the figures are completely comparable and like-for-like.

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Operator [24]

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And the next question comes from the line of Arthur Truslove.

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Arthur David Truslove, Crédit Suisse AG, Research Division - Research Analyst [25]

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Arthur Truslove from Crédit Suisse. Firstly, it looks like the food and beverages slowed somewhat in the second quarter. And in your initial remarks, you sort of mentioned that there would be a EUR 10 million uplift from Palma de Mallorca going forward. Obviously, other tenders and developments going on. Are you able to give a bit more color on where you're expecting the food and beverages revenues to go over the current years.

Question 2, obviously, we've seen a reduction in GBP in the last few weeks and also, we've seen increased speculation around no-deal Brexit. Are you seeing any sort of cancellations of flights sort of from the U.K. on the back of that? Are you seeing any impacts in the shops?

And then the final one for me in respect of your Brazilian business, when are you expecting to guide on revenues and EBITDA in respect of those assets?

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José Leo Vizcaíno, Aena S.M.E., S.A. - Head of Financial Matters [26]

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Well, food and beverage is one of those business, which, in my view, we are thriving. They are clearly very promising going forward. And I was mentioning Palma de Mallorca, although, clearly, the impact of that won't be seen in the coming months, that will take some time, but just an indication of how competitive those processes are -- still are. And I think the growth is looking very, very attractive.

Having said that, as you know, we don't provide any guidance beyond the existing -- or the coming year, so I'm afraid I'm not going to share with you any particular percentage of growth for the coming years.

With regard to the 2019, you can look at the strategic plan. And indeed, if you need any further detail, that I'm afraid I'm not able to provide right now here, the IR team will be happy to share that with you.

In terms of the Brexit, clearly, a lot of noise and a lot of preoccupation. We are concerned, and we keep an eye on that, as everybody else. But so far, we haven't seen any issue this year. 3% -- the traffic with the U.K. remains healthy, 3% growth so far in the year. So fingers crossed, but clearly, no major issues so far.

And then in terms of the Brazilian business guidance. Frankly, I'm not in a position to tell you when we are expecting to be able to share with you some numbers. First of all, we need to get under the skin of the business. Of course, one thing is the bid, and we believe the bid was extremely well prepared, and smart and meaningful. But we are not going to be taking control of the business until the 2020. So we will -- better wait and see before starting to share any views with the markets. Thank you.

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Operator [27]

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And the next question comes from the line of Charles Maynadier.

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Charles Maynadier, Kempen & Co. N.V., Research Division - Analyst [28]

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A few follow-ups for me. Going back on the 2020 tariffs, apologies if I missed that, so you're requesting around EUR 10.30 compared to the EUR 9.96 IMAP that is just a EUR 0.33 difference. Could you disclose how much is coming from the P factor? And how much is coming from the K factor, roughly? And on which aspect do you expect the CNMC to challenge you more if you expect them to challenge you? That's the first one. Then the second one on the debt side. So your cost of debt has been steadily declining over the last quarters or years. That's been driving part of the earnings growth. Given that we're now at an average cost of debt of 1.25%, how much more upside you think there is on that side?

And then last one on M&A, if you could give us a general update on your pipeline.

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Maurici Lucena Betriu, Aena S.M.E., S.A. - Chairman & CEO [29]

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This is Maurici Lucena speaking. I will start with a question -- with the last question. I guess it's question #3, our international expansion planning. Well, I would like, first of all, to underline that you know that this is one of the main pillars of the strategic plan of Aena that we presented almost 1 year ago. I will insist on the same as the last time I approached this issue.

We analyze opportunities on a case-by-case basis. Of course, naturally, the European and Latin American markets are our main focus, but it's related to cultural, economic and other factors links that exists between our country and our company and these regions. You know also that we prefer brownfields rather than greenfields. And we are very much satisfied with the acquisition of the concession of the 6 airports of the northeast of Brazil. And we are analyzing other opportunities. You know that the combination that we take into account when we analyze opportunities is based on financial analysis, of course, operational analysis. But also a strategic and, let's say, risk, political or regulatory risk. But apart from that, I'm afraid that we cannot comment anything in this regard apart from these general considerations. Thank you.

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José Leo Vizcaíno, Aena S.M.E., S.A. - Head of Financial Matters [30]

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Well, answering the other 2 questions. In terms of the tariffs, we -- the -- if you like, the calculation of the proposed IMAAJ is based on the EUR 9.96 2020 IMAP plus roughly EUR 0.10 for the P index, EUR 0.02 for the B factor, and EUR 0.21 for the K factor. That's roughly then the equation. So that will get you to the EUR 10.2997, more or less.

And which aspects we think the CNMC will be more challenging on. Well, hopefully, none. But we don't know, to be honest. We don't -- we have been through the process of getting these figures together. We have been in consultation with the airlines. And the CNMC was there, present, but never expressed any particular opinion so we need to wait and see.

With regard to the cost of debt, I'm not sure I understood your question. You said, whether there is any opportunity or any possibility of improving the cost of debt further. Well, frankly, it's difficult to say. It is only to the extent that there is an element of floating rate debt, which is increasing because we are using some of our credit lines, maybe, maybe, but marginally, marginally. We are where we are. And I think it's the -- next to that is just the -- if you like the floor.

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Operator [31]

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And our next question comes from the line of Marcin Wojtal.

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Marcin Karol Wojtal, BofA Merrill Lynch, Research Division - Analyst [32]

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Just a couple of follow-ups. So first, on your financial expenses, there is this item of EUR 11 million related to the hedging of your investments in Brazil. Is that something that we'll -- that we will see now every quarter fluctuating up and down? And is that something that you -- that will impact potentially a little bit the dividend that you will pay? I appreciate it's probably not a very material impact.

And question #2, in terms of your tax expense, I see in your P&L for H1 there is EUR 180 million of a tax charge. But in the cash flow, it's much lower, only EUR 45 million. So is that just a seasonal impact than you would expect those charges in the P&L and the cash flow to converge in the full year 2019? Or maybe there is a bit of a divergence going on?

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José Leo Vizcaíno, Aena S.M.E., S.A. - Head of Financial Matters [33]

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Okay. With regard to the treatment of the fair value of the [forward], that will end up getting fully settled at the end of August. So we know what the final picture is going to be because what really matters here is the underlying instruments or, let's say, reality. We know that out of the EUR 537 million that is going to -- or we are going to pay for the capital contribution in Brazil, EUR 531 million, roughly, will end up being considered equity injected and 6 -- the rest, EUR 6 million roughly, will end up being considered as financial expense representing the cost of the instrument. So that will be the final picture.

So at the end of the year, you will have a financial expense of EUR 6 million that was not originally planned because we didn't know we were about to win the Brazilian. That's the end of the story. So the EUR 10 million will move up and down, but in 1 months’ time, it will end up being $6 million. And that will be it.

On the other hand, the instrument has worked extremely well because we have saved -- now taking into account the evolution of the Brazilian real, we have saved, so far, something in the region of EUR 5 million, EUR 6 million, net. But that's a different thing. That's the reality of the instrument, on the other hand, you have the accounting treatment. I hope that helps.

In terms of taxes, the corporation tax expense is based on accruals, and the cash payments are -- is based on the way you pay taxes here in Spain. And normally, in July and October, you make the payments, direct payments. So you leave for the next year, just, if you like, the remaining part of the taxes that you have to pay.

So that's the reason why in the first half of the year, you see payments in the region of EUR 30 million, EUR 40 million because we paid already in advance in July 2018 and October 2018. And we will do the same in the second half of the year. That's the reason why you have that divergence between cash and accruals.

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Operator [34]

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And our next question comes from the line of Johannes Braun.

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Johannes Braun, MainFirst Bank AG, Research Division - Director [35]

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I only have one, actually, to clarify what you said regarding Brazil. I think you said that you will have some EUR 90 million of startup costs by the end of the year for that operation and that would be in your P&L accounts. I'll just say, if I understood it correctly, that would not be included in the calculation for the dividend. Is that correct?

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José Leo Vizcaíno, Aena S.M.E., S.A. - Head of Financial Matters [36]

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That's exactly right. That will be -- when we were awarded with this concession. We -- if you look at our first quarter results presentation, we disclosed that we would be paying in total BRL 2.4 billion, which taking into account that we already hedged that figure that will represent EUR 537 million, EUR 538 million.

Out of that, EUR 428 million were linked to the payment of the concession price. And the rest was a mandatory contribution that was part of the concession conditions. And that mandatory contribution was earmarked to deal with a number of costs and also to keep part of the -- well, the rest to keep -- to be kept in the business as cash.

The most significant cost of all was the cost of the redundancies of the -- Infraero's staff, and that's something you have to pay for. So the combination of all those costs in the concessionaire, in our newly incorporated company, will be treated as expenses, as cost, as you can imagine. And through the consolidation, that will be reflected in the second half of the year consolidated results. That's pretax. Post-tax will be probably something in the region of EUR 60 million.

But none of those effects have an impact on the -- Aena's individual accounts, the partner company in the group. And those results will be not affected at all, wouldn't be affected at all. And those results are the ones that, as you all know, are the reference to set the dividends on the back of the 80% payout commitment.

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Johannes Braun, MainFirst Bank AG, Research Division - Director [37]

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Right. But for modeling purposes, for the overall Aena group, you would have EUR 90 million additional operating costs in the P&L?

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José Leo Vizcaíno, Aena S.M.E., S.A. - Head of Financial Matters [38]

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In the consolidated P&L, yes, definitely.

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Operator [39]

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And our next question comes from the line of Arthur Truslove.

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Arthur David Truslove, Crédit Suisse AG, Research Division - Research Analyst [40]

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Actually, the question I was going to ask was that one that was just asked, so not a problem for me.

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Operator [41]

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We have no further questions at the moment. You can continue.

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Emilio Rotondo, Aena S.M.E., S.A. - Deputy CFO [42]

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Okay. Then, just thank you all for joining us in this conference call. Just if -- well, if you have already a vacation in summer, then enjoy them. And see you on -- next October. Thank you very much. Bye.

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Operator [43]

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That does conclude our conference for today. Thank you for participating. You may all disconnect.