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Edited Transcript of AMS.MC earnings conference call or presentation 24-Feb-17 12:00pm GMT

Thomson Reuters StreetEvents

Full Year 2016 Amadeus It Group SA Earnings Call

Madrid Feb 24, 2017 (Thomson StreetEvents) -- Edited Transcript of Amadeus It Group SA earnings conference call or presentation Friday, February 24, 2017 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Luis Maroto

Amadeus It Group SA - President & CEO

* Ana de Pro

Amadeus It Group SA - CFO

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Conference Call Participants

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* Stacy Pollard

JPMorgan - Analyst

* Adam Wood

Morgan Stanley - Analyst

* John King

Bank of America - Analyst

* Suhasini Varanasi

Goldman Sachs - Analyst

* Michael Briest

UBS - Analyst

* Alex Tout

Deutsche Bank - Analyst

* Neil Steer

Redburn - Analyst

* Alexandre Faure

Exane BNP - Analyst

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Presentation

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Operator [1]

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Welcome to the Amadeus IT Group Results Presentation for the Full-Year 2016. The management of Amadeus will run you through the presentation, which will be followed by a Q&A session. (Operator Instructions)

I'm now pleased to hand over to you Mr. Luis Maroto, President and CEO of Amadeus. Please sir, go ahead.

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Luis Maroto, Amadeus It Group SA - President & CEO [2]

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Good afternoon, ladies and gentlemen, and welcome to our 2016 full-year results presentation and thank you for joining us today. As always, Ana is with me and she will go through the financial part of the presentation.

So let me start with the most important developments. If we start on page four, as you can see we continued to progress strongly in the fourth quarter, delivering a solid set of results for 2016. Revenue and EBITDA grew 14.3% and 16% respectively, driving adjusted profit and EPS growth above 21%. In 2016, we generated free cash flow of EUR811 million representing 23.1% growth over last year. And in the context of a sound capital structure, which ended the year with leverage at 1.14 times EBITDA.

Our financial results were achieved on the back of solid performances by both Distribution and our IT Solutions businesses. They were also supported by a contribution of our 2016 Navitaire acquisitions. In Distribution during 2016, we continued improving our competitive position in the market, which expanded by 0.8 percentage points to 43.2%. This positive evolution supported a 5.9% of volume increase for Amadeus and a distribution revenue increase of 6.8%.

In IT Solutions, we had a 31.7% revenue increase in 2016 resulting from underlying double-digit growth, and the consolidation of Navitaire from late January and the full-year impact of our 2015 acquisitions. I will slightly elaborate on our most recent business developments, but before I do this, I would like to emphasize as I generally do that we have been and remain highly focused on our technology, which we believe is key to our success.

In 2016, R&D represented 15.8% of our revenues and it was dedicated to supporting long-term growth through customer implementations, product evolution, portfolio expansion, investment in new businesses and our continued shift to open systems and cloud-based architecture as well as system performance optimization.

Please now turn to page five. In distribution, we continued to renew and sign content agreements with eight carriers in the fourth quarter and 46 in total over 2016 securing and expanding content for our subscribers. We were pleased to announce that we have expanded the scope of our partnership with Fareportal as we will support them in their expansion across Europe, Asia Pac and Latin America. Fareportal is one of the largest and most innovative online travel agencies in the world, we have been working together to deliver industry-leading merchandising search and shopping capabilities.

Working towards higher level of personalizations and developing merchandising solution is key for our airline customers. Our aim is to support our customers in realizing their full revenue potential. And at year end, 66% of air bookings processed through us would carry an attached ancillary service and 120 airlines have contracted Amadeus Airline Ancillary Services for the indirect channel.

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Also our Fare Families Solution had 52 contracted customers and over 40 OTAs has integrated Amadeus merchandising solutions. In Airline IT, we also had a number of successful business developments. Kuwait Airways contracted a complete suite of Altea solutions, including revenue management, e-commerce, loyalty, inventory reservation, departure control, payments as well as mobile and travel intelligence solution.

Ukraine International Airlines implemented Altea Reservation and Inventory. Ryanair renewed its Passenger Service System agreement with Navitaire until 2025, representing 25 years of collaboration between Ryanair and Navitaire. We are also pleased to announce that Boliviana has contacted Amadeus for the Altea PSS, including reservations, inventory and DCS. It is expected to be implemented in the second half or 2017. We continue to invest in the areas of personalization, merchandising, revenue optimization and disruption. Our key 2016 airline deals in these areas are progressing very well that is with Avianca launching Amadeus Anytime Merchandising and Amadeus Customer Experience Management. Singapore Airlines working towards the implementation of revenue management and SWISS launching Amadeus Passenger Recovery.

Finally in our new business areas, we continue to make good progress. With respect to hospitality, where as you know, we are working with IHG in the development of a new generation Guest Reservation System for the hospitality industry, we are advancing very well. We are also progressing in the development of our next generation property management system both GRS and the PMS modules, which will also work as standalone solutions, will be fully integrated in the same platform.

On page six, we have more details on our Distribution business performance. As I described at the start, in 2016 our competitive position in the market improved by 0.8 percentage points relative to last year further increasing our relevance to airlines and other travel providers.

The travel agency air bookings industry grew by 3.1% in the year with a notable acceleration in the last quarter, in the fourth quarter, growing 5.6%. The acceleration happened in most regions except for Middle-East and Africa. The industry acceleration was supported by continued strong underlying growth in AsiaPac, improving performance in specific class markets such as Brazil, Argentina, Russia and by a relatively lower base of comparison at the end of 2015 was impacted by terrorist attacks.

In the full year, the industry performed positively throughout all regions. As you know, AsiaPac experiences strong growth throughout the year, driven by high growth in several countries such as South Korea, Hong Kong, India and the Philippines. Despite an improvement in the second half of the year, Central, Eastern and Southern Europe was the weakest regions backed by unfavorable macroeconomic conditions. The other regions Western Europe, Middle East and Africa and Americas posted overall moderate industry growth in the period.

Our bookings growth in the fourth quarter also accelerated. Our performance was particularly strong in Western Europe, LatAm and AsiaPac supported by the industry acceleration adjustments and an improvement in our markets in these regions. In the year, as you can see our bookings grew 5.9%, AsiaPac was our best performing region where we benefited from a strong industry growth and enhancement of our competitive position. Volumes in North America, Middle East and Africa grew as well very solidly. Bookings in Western Europe and LatAm supported by strong fourth quarter closed the year with healthy growth rates. Finally, bookings in Central, Eastern and Southern Europe were impacted by the industry weakness during the year.

In IT Solutions, we continue to see a strong growth. Total passengers boarded increased by 85% during 2016, driven by the first time inclusion of Navitaire's passengers boarded. Excluding Navitaire, Altea PB grew 12.2%, positively impacted by a 4.4% organic growth. In migrations, we have undertaken in 2015 namely All Nippon Airways and Thomas Cook. And in 2016, China Airlines and both Swiss and Brussels Airlines from the Lufthansa Group.

Navitaire's New Skies passenger performed well both in the year and in the quarter growing double digit organically and also benefitting from implementations such as Viva Group. The acquisition of Navitaire and our latest migrations have contributed to the international expansion of our business. Notably the weight of Asia-Pac and North America have increased and will continue to grow in 2017 with the planned migrations of Japan Airlines, Malaysian Airlines and Southwest, the domestic passenger business.

As we have mentioned before, we also continued with our upselling efforts, an important element of our Airline IT strategy where we continue to see a lot of interest and activity. In particular, in the fourth quarter, we had new contracted customers for this year's [CM and FM] revenue accounting, loyalty and cloud availability solutions. Airport IT in the fourth quarter, we successfully implemented our Amadeus airport sequence manager and A-CDM portal solutions to Copenhagen Airport. We come today with over 240 customers and our Airport IT solutions are used at more than 350 airports.

Hospitality IT is growing steadily and we now service close to 25,000 [company venues]. In payments, our customer base continues t6o grow, and now we have close to 750 customers' contracted services with contracted services from our new portfolio and the volume of payment transactions processed by us in 2016 delivered a strong double-digit growth rate. With this, I will turn to Ana to cover the financial performance.

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Ana de Pro, Amadeus It Group SA - CFO [3]

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Thank you, Luis. Hello, everyone. We are now in page 9. As Luis has just described, we have continued delivering strong growth in the fourth quarter of 2016 supported by the positive performance of both distribution and IT solutions segment as well as by the contribution from Navitaire. In 2016, Group revenue was EUR4.47 million, 14.3% higher than in 2015. This increase was supported by a 6.8% revenue increase in distribution and a 31.7% increase in IT solutions. Luis has touched on the industry growth, the market share gains and the volume evolution. Regarding pricing, in distribution we have experienced average pricing expansion resulting from customer renegotiations, booking mix meaning both higher weight of global bookings and a decline in weight of rail bookings, which have a lower fee. And additionally, revenue growth was also supported by a non-booking revenue increase despite the negative effects from a number of factors including the cancellation provision. The underlying non-booking revenue growth was driven by search solutions provided to metasearch engines and enhanced functionalities provided to travel agencies, travel management companies and corporations. That's advertising solutions as well as our B2B wallet part of our payment portfolio also contributed to this growth.

In IT solutions, we continued to experiment a significant expansion in 2016, driven by underlying double-digit growth, plus a positive contribution for our acquisitions. We saw higher volumes supported by a 12.2% Altea volume increase as we have mentioned, an average pricing growth reflecting our successful upselling activity of departure control systems, e-Commerce and standalone solutions.

We saw a strong Navitaire evolution driven by double-digit of volume growth and we continue to see double-digit growth from our new businesses in particular in airport IT, in passenger processing area, from our payment merchant hub, through which we help travel merchants get paid and in our sales and catering businesses, part of our hospitality portfolio for solutions.

Looking now into contributions by segment on page 10, I would highlight the following. As you can see, we have experienced contribution growth in absolute terms, both in distribution growing 3.9% and in IT solutions, which are a remarkable 36.8% increase. In distribution, we have experienced margin dilution, partially due to non-recurring effects leading to certain personnel-related payments, local tax provisions and bad debt provisions amongst others. Excluding these non-recurring effects, the segment margin dilution due to higher unitary distribution costs as a consequence of competitive pressure and country mix was broadly in line with the [same] margin dilution expected and reported in the past years. Regarding IT solutions, a notable expansion was a result of our successful upselling strategy in Airline IT as we have mentioned before and margin expansion in our new businesses.

Finally, net indirect costs were highly impacted by the consolidation of Navitaire's central cost such as those related to hosting in Accenture's data centers. Excluding Navitaire total indirect costs increased at mid-single digit rate. For some additional color on our fixed cost, personnel and other OpEx together increased 15.7% in this year, of course, highly impacted by the consolidation of Navitaire on our 2015 acquisitions as well as by non-recurring effects that I have just mentioned. Excluding these non-recurring effects and the impact from acquisitions, fixed operating expenses grew mid-single digit, mostly driven by a 4% increase in our workforce. As you know, a large part of this is R&D as we continue to invest significantly on our programs.

We had this year a lower capitalization ratio, a significant part of our fixed costs related to in-house development are linked to activities, which are subject to capitalization, which means a lower P&L expense and higher CapEx in the period, although it's neutral in terms of cash flow.

The intensity of ongoing projects may vary during the year and over the years determining a higher or lower level of CapEx and operating expenses in any given quarter of the year. In addition, the natural evolution of projects may also imply changes in the level of capitalization and therefore in the [spend] recognition.

Finally in the year, we have also benefited from a positive ForEx impact on costs due to the appreciation of the euro versus several currencies such as for instance the British pound, the South African rand or the Indian rupee.

On page 11, we can see our EBITDA amounted to EUR1.7 billion in 2016, representing a 16% increase over last year. This growth resulted from the positive underlying performance of Distribution and IT Solutions as we have seen, as well as from the contribution of Navitaire and the rest of acquisitions. Our EBITDA margin was 38% of revenues representing an expansion of 60 basis points versus prior year.

Please note that foreign exchange effects have no impact on revenue growth. And as I was saying before, it had a positive impact on our cost evolution. Nevertheless, excluding foreign exchange impact and excluding Navitaire, we experienced high single-digit EBITDA growth and broadly a stable margin in 2016. Below the EBITDA line D&A increased 18.3% in the year, mostly driven by the higher amortization of intangible assets as more capitalized expenses in our balance sheet is there to be amortized when we come into [exploitation] as well or by the consolidation of Navitaire.

We have also reported some impairment losses, including the write-off of the Newmarket International brands. We follow a very strict approach to impairment analysis. We carry them out item-by-item on an individual project basis as opposed to as part of the business as a whole. Usually our impairments relate to products that have become obsolete due to the industry changes or a specific customer development, which will not deliver the expected economic benefit.

Our net financial expenses grew by EUR20.7 million largely explained by lower exchange gains in 2016 versus the previous year. Interest expense declined by 8.2% in the year as a consequence of further reduction in the average cost of debt. Income tax rate was 28.2% and we benefited from a lower income tax rate compared to the previous year, driven by a reduction in corporate tax rate in Spain, a deferred tax liability adjustment to reflect government changes to the corporate tax in France from 2020 onwards, as well as tax deductions related to recurring and non-recurring event.

So the combination of the growth in EBITDA plus the growth in ordinary D&A and the growth in financial expenses, excluding foreign exchanges gains plus a lower tax rate resulted in a 21.2% growth in adjusted profit in 2016. Adjusted EPS was EUR2.08, 21.3% higher than in 2015. As a reminder, adjusted profit is calculated after eliminating the non-recurring items, the PPA amortization and the non-operating foreign exchange impacts, which are accounted for under the net financial expense structure.

Turning to page 12, as you know, an important part of our cost are related to R&D. In 2016, total R&D amounted to EUR706 million, an increase of 10.2% versus 2015 representing 15.8% of revenues. This is centered in three main categories. Customer implementation, which accounts for approximately 20% to 30% of the total investment, product portfolio expansion including the non-air IT diversification, which is more or less 50% and internal technological projects, =-which amount to 20%, 25%.

CapEx is very linked to our R&D investment. Typically 70% of our CapEx is capitalized R&D. As you know, R&D is capitalized when there is a significant visibility as to future revenue generation. Other than capitalized R&D, 15% to 20% of our CapEx generally relates to tangible assets, mainly in relation to our data center in Erding and finally we also invest in contractual relationships and payments to travel agencies in the form of signing bonuses that are also capitalized under certain circumstances.

In 2016, our CapEx increased by 8.2% and represented 13.3% of revenue. Our CapEx increase was the result of a 10.4% increase in intangible CapEx from higher software capitalizations due to the growth in R&D, higher signing bonuses and an increase in licenses purchased. CapEx in the property, plant and equipment remain broadly stable. Of course, in 2016, R&D investment was highly impacted by the consolidation of Navitaire.

On page 13, we can see, we have generated EUR811 million of free cash flow in 2016. This figure is 23.1% higher than in 2015 and the increase is primarily explained by a higher contribution from operations with a 16% growth in EBITDA as well as lower working capital requirements, partially offset by the higher CapEx, taxes and interest paid. We believe we have now finished our presentation of our 2016 result and I will hand over back to Luis, so he may run you toward our outlook for 2017.

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Luis Maroto, Amadeus It Group SA - President & CEO [4]

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Okay so let's talk about 2017. Moving to next slide, so this is a year that where we'll have biggest implementations. As you know we will have [Southwest], and it will be our biggest customer and also our first large US Airline IT customer who will complete the implementation of Amadeus our Altea PSS in the second quarter 2017. We also have as well IHG, the launch of [Arn Air] for our platform for the hospitality industry or CRS, we will initiate the progressive implementation in the fourth quarter. These important milestones aside in 2017 despite an uncertain macro environment marked by geopolitical events, which could impact our expectations, we expect to continue seeing substantial traffic growth rate. This together with our technological offering, our track record should help us continue delivering growth in both of our businesses, distribution and IT Solutions. We'll get into more detail shortly, but as a result of the above, we expect Group revenue to expand at a mid-to-high single-digit growth rate. We should also see a broadly stable EBITDA margin.

We expect to sustain our CapEx investment in the range of 12% to 15% of revenue. CapEx will continue to be focused on new customer implementations, such as the one I mentioned before, expanding our offering to airlines including investments in shopping merchandizing, revenue optimization and disruption management solution and toward new businesses. System security and stability will also remain as a priority to Amadeus and investments in this area will be maintained. We expect our cash generation to range between EUR850 million to EUR900 million in 2016. Finally, our proposed payout target ratio of 50% of 2016 profit, implies a growth dividend of EUR0.94 per share. An interim gross EUR0.40 per share was paid out in February 2017 and the complementary growth 54% is subject to approval by our General Assembly in June 2017.

If we move to the last slide, we see IATA's latest projection point to a 5.1% traffic increase in 2017. This growth in passengers should help us to maintain our volume growth, both in distribution and airline IT. Please take into account as you know, our goal [to print] is different from IATA's, ours is more - has more weight towards Europe and not disposed to China.

In Distribution, we expect disintermediation levels to remain more or less stable, depending on the evolution of [corporate travel]. We also expect to continue enhancing our competitive position globally. As a result, our volumes should grow steadily. We expect revenue in this segment to grow up mid- single digit rate based on broadly stable average pricing assumptions. We also expect to see certain margin dilution, driven by continued competitive pressure.

In IT Solution, we expect revenue to grow at a low double-digit rate. In volumes [to expand] held by organic passenger growth and the addition of airlines to our PSS platform, which together with the impact from the 2016 migration will add 100 million PBs. This year, we need to take into account that at some point Air Berlin should believe in Altea, although there is no certainty yet around timing, possibly in the second half . Also the TAM de-migration date is still uncertain although it seems likely it should not happen in 2017. In TAM, we expect a lower average pricing as a result of a higher weight of low cost on hybrid carriers on our customer base, a [success pool] of selling activities would help to mitigate partially this effect.

Finally, our new businesses contribution to revenue should continue increasing. The operating leverage of the Airline IT business along with the expansion in the new business average margin should drive the overall segment contribution margin slightly up. With these, we have covered the presentation and are ready to answer your questions.

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Questions and Answers

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Operator [1]

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Ladies and gentlemen, the Q&A session starts. (Operator instructions) Stacy Pollard, JPMorgan.

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Stacy Pollard, JPMorgan - Analyst [2]

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Hi, thank you very much, two questions if I may. IHG implementation to begin in Q4 that seems a little behind schedule, can you give us maybe an estimate of the size of the deal, or at least what metrics you would use to measure and take transaction revenues, for example, is it something like a per room per night, per month, per hotel, something like that. And then do you have a pipeline for other large hotels interested in your hotel reservation platform and kind of the same question for the PMS, do you have a launch partner there? And my second question, can you talk us through how to think about the contribution margins in IT solutions going forward and the various component mix shifts so there is the core and then Navitaire and then the NBUs, so for example, the NBU margins improving but maybe it's still a lower percentage or that is growing faster at a lower average that kind of - what are the different components and mix shifts going on there?

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Ana de Pro, Amadeus It Group SA - CFO [3]

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Okay, thank you, Stacy. Let me take the last question first, about the contribution margins of the IT solutions part. As you know, there are many things impacting that figure in terms of percentage over their revenues. So you have Airline IT, where you have, let's say, three drivers, you have the current Altea performance, where, of course, migrations have an impact depending on which kind of carrier, in this year we have the implementation of Southwest, which will represent in terms of unitary price invested at PB declined because it's a hybrid as you already know. Then you have the upsell and cross sell, which usually impacts positively the unitary pricing and not all of the solutions have the same contribution margin. So depending on which area you are growing more whether it's the PSS or some of the other solutions, et cetera, you may have up and downs. You also have another activity, which is services that has also a different contribution margin in terms of percentage, and also a different pattern of growth, not being to [excessive] to credit because it is more bumpy, up and down depending on the quarters. Then you have Navitaire, which has a higher growth because the low cost carrier segment in organic terms is growing higher, but usually has lower margin compared to what you can expect in Altea. That's on the IT part, related to Airline.

And then of course, you have all the other different components coming from hospitality, coming from payments, coming from airport where you have exactly the same thing, which is not all of the modules have the same level of profitability. So depending on the mix and when you have higher growth in one or the other, that may impact your margins and, of course, when you start putting a new model in practice, you know that you have a low margin, because you are having the whole platform with a fully loaded on cost side before you launch a customer and is when you are kicking more customers that you start seeing operational leverage.

And that's why, in terms of margin we give you an annual outlook on how we believe is going to evolve throughout the year, because they have different capitalization ratios, different markets individually, different growth rate and we understand it's quite difficult for you to be able to predict that and that's precisely why we have gave you a guidance on this area on what the markets in 2017 may look like.

On the IHG metrics is right, you are right, it's reservations room per night, and no we are not late on our deployment, we are well on plan. Remember that this migration is going to be gradual. So we will start in 2017, but we have to progress with all of their properties and therefore, it may go up to 2018 once we finalize 100% of the competition. So the revenue recognition will be gradually as more and more properties are implemented throughout the year. And Mr. Luis you'll take the -.

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Luis Maroto, Amadeus It Group SA - President & CEO [4]

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Pipeline, yes. I mean the first objective on that business has been to finish the products and our offer to the market both on the CRS and on the PMS. Once we acquired Itesso the company dealing with that, there were still, I mean, the products in the case of the CRS, of course, is being developed with the support of IHG and the first objective was really try to really deliver and have it ready for, first of all our customers and then for the overall market.

However, of course, in parallel, we have had conversations with other players in the industry. As you know, many of these people are customers of us more for our sales and catering offering and, of course, the fact that now we bring two additional solutions or functionalities and an opportunity for us to where we've been. So the objective of course, was to deliver on the PMS front to increase the quality of the product and then sell, so more than that I cannot share with you as in the case Altea because, of course, conversations are ongoing and hopefully we will start seeing traction in this business as we implement IHG and in the case of the PMS as we continuously improve the quality of our offers. So I'm optimistic about that but I cannot tell conversations that could be ongoing with potential customers for the future.

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Operator [5]

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Adam Wood, Morgan Stanley.

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Adam Wood, Morgan Stanley - Analyst [6]

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Thanks for taking the question and congratulations on another good quarter there. Two if I could, please. Just, first of all on Southwest, did I hear correctly that that comes in in the second quarter and that will basically be all the PBs cutting over? And then secondly can I ask - just coming back to that disintermediation point, can you help us understand, maybe from the travel agents' perspective, what their view is when airlines come and try to build direct connections with them, is that to mean they're open to or not? And then maybe in terms of the bookings that are on the GDS, is there any help you could give us in terms of the mix of home and away bookings and complex versus simple bookings on your platform taking the view that the home bookings may be more likely to move to a direct channel, but the rest is likely to stay in the GDS channel. Thank you.

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Luis Maroto, Amadeus It Group SA - President & CEO [7]

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Okay. Let me take the first two, and you want to cover the last one, Ana, and in Southwest, yes that's correct, it will be the second quarter. And, yes, it should be fully implemented, okay. Our this year solution for them, as you know, inventory and reservation has been already done. So that's right. In the case of disintermediation, I mean, we have seen quite a stable disintermediation and you can see from the figures compared to the previous year. So there is no an acceleration, I mean, of course, this depends quite a lot on the movement of corporate and mix of countries and regions, so it's never are a [disintegrated] number but we don't see ourselves a significant change compared to the past and with regard direct connect, this is pretty small and I mean (inaudible) try that. But we have always said that the [PBs] that it connect could be a solution in some specific markets, some specific relationship of airlines travel agencies but we don't see that at all as a industry solution. And this is far from new as you know because we have seen that in the US for many, many years and in Europe, so that's far from new, I've always expressed my view that I don't think this is the solution, but it could be one specific customer, one specific part of the business could be doing that via direct connect but at the end as you know direct connect is one to one solution between [Charlie and Swiss] airlines and at the end you need to have an overall aggregation of all this content that needs to happen to really have a seamless and optimal way of traveling and managing the content. So the current situation is now that the volumes are heavily increasing, but, of course, there could be situations where this may happen, but we don't see really that [Italy] is that keen of working on direct connect in general terms.

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Ana de Pro, Amadeus It Group SA - CFO [8]

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And in terms of what we call global bookings is more or less 50/50. The trend has been growing more that away part, so that's a general trend and then depending on when you grow in some specific markets, which are very large like India or Brazil or domestic where the weight of domestic is higher than the away part, you may have variations per year, but the underlying trend is that the away tend to grow more than the home. And now between complex and simple, I guess that you mean bookings that include more than just the mere booking functionalities, so bookings that we are selling with additional technology into profit, I would say that's the vast majority of what we do today. So we are increasing our selling of merchandising, ancillary and I think that Luis has mentioned during his presentation that the growth in the sales have been quite large and that adoption by the travel agency channel is also accelerating. So the growth of sales in the indirect channel of these kind of services has been quite strong during 2016 and we expect that this will continue in 2017.

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Adam Wood, Morgan Stanley - Analyst [9]

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Is it 50/50 for the platform or is it your platform or for the market, sorry just to clarify?

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Ana de Pro, Amadeus It Group SA - CFO [10]

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Our platform.

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Luis Maroto, Amadeus It Group SA - President & CEO [11]

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Yes, just to other comment, I mean it's truly depends a lot on the individual markets, where that's, as you know, the biggest part of this intermediation was coming from the home market. In the past, so it's normal that the trend is always to have more away bookings as the years gone by. Of course, if you have an increase in markets that is more domestic displays internally, I mean, in a specific year but overall the trend is that this intermediation happens much more in the domestic and in the home market.

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Operator [12]

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John King, Bank of America.

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John King, Bank of America - Analyst [13]

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Good afternoon and thanks for taking the questions. I've three if that's all right. The first one was actually a follow-up on Adam's question really. So I wanted perhaps, Luis, your view on the full content agreement across the industry more generally. Do you think it's possible we see more carriers over time engage with the GDS but still look for some kind of a more flexible agreement and not traditional full content, [it was a] contract that you traditionally signed or do you think that concept remains as relevant as it always was? The second question was around Altea, obviously, you got a very good pipeline of deployments in Altea this year, I guess if we look at into 2018 at least it's possible that those new deployments slowdown, you want so many of the large airlines as probably less really big ones to win. So if that does happen, should we anticipate that CapEx should also come down significantly as the essential go-lives are beginning to slow down or is it going to be other things that you think will probably keep the CapEx in the same kind of range that we see at the moment? And then the third question was on the margins in the GDS, obviously, we saw maybe there was some one-off factors but we do see a deterioration in the margin in the second half. I know that you pointed out that you've seen some competitive pressures broadly similar to before but I guess, I think I'm right in saying that your US growth was slower in the second half, which traditionally has been margin dilutive. So if you like, is it fair to say that that competitive pressure is a little bit stronger today than they have been? Thanks.

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Luis Maroto, Amadeus It Group SA - President & CEO [14]

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Okay. Let me talk about the first one. I mean, what we will see in the future, in my view and what we have already seen, we have a very different airlines around the world, different mix of airlines, some of them are much more domestic, some of them are more global and international. We also see different merchandising strategies, different ways to address merchandising to their customers, different strategies in the direct channel. So we will need to see that the deals that we have as a GDS on the distribution front will vary depending on the objectives of the airline and, of course, we will support the different strategies, commercial strategies, I would say that the airline has in mind. It is also true that as we move more to merchandising and in the future to dynamic pricing, the airlines will try alternatives and we'll see different models and therefore our full content, the way it is defined of course, need to evolve and we have been evolving that during many years. So I cannot give you an absolute answer, I think the industry is evolving, we are supporting the airlines in the objectives and the way they want to really address their different customers and flexible in the way we deal with contracts and with the agreements that we have with them. There will be some airlines where the strategy will be different and today with some airlines as you know, we have long-term and full content agreements and everything is included for that airlines, have been trying in different geographies to really have content for the base and then merchandising capabilities with alternative. So this is happening in an industry that is evolving according to the needs and to the evolution that the technology is allowing them to really enter into other space. That's why I mean we are investing heavily on our merchandising capability with airlines as part of our technology solutions to them both for the direct channel and the indirect channel, sophistication in the way the airlines fix their pricing, put the ancillaries in place for families and therefore the whole relationship between the different players in the industry is evolving as we speak. It is impossible to say with this airline, we'll have this kind of agreement and we know that airline is something different. I think there will be a mix of agreements, a mix of conditions where we will try to support a technology provider of the different channels and the GDS, as we have always said, is a very efficient way to distribute through the indirect channel. But, of course, we also as you know, support the sales in the direct channel.

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Ana de Pro, Amadeus It Group SA - CFO [15]

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In terms of your other two questions, the CapEx slowdown. I think that we have provided an outlook that is to remain between 12% and 15% and it's true that if you see the evolution of our CapEx in the last year, we have some years ago 50% of our CapEx related to customer implementations and only 20%, for example, was to incremental portfolio and now we have the opposite. So we have 50%, which is coming from investment on new solutions, whether they are for the airlines, on the distribution or on the IT Solutions side or whether they are for other providers, and the implementations have been decreasing precisely, because we are leaving behind us large programs, which will be the trend in the future.

Hopefully that will also revert when we start implementing large [hotel] into the new platforms and more of airports et cetera, et cetera. No, the absolute investment will remain in that range and we told you during our Capital Markets Day that, yes, there will be a slight decline, but not that we are going not to invest because we have many things going on and we continue to focus on the technology as a key driver to our success and therefore we will have CapEx as we have always had.

And in terms of the margins on the GDS, yes, we don't adjust as you know, we provide you the number with everything included as we want to you to understand what is the underlying evolution. We do tell you that every now and then, we have things that happen in a given quarter that may impact or in a given year that may impact. So in these cases basically local taxes and of course, we work in different - in almost every country around the world and sometimes we have tax issues with the local tax authorities that we accrue because what do we do is be very conservative so we accrue for all of this (inaudible) related to both airlines or travel agencies that may have difficulties. And in this case, also the performance of our year was very good and that has implied a higher accrued for the variable part of the remuneration of Amadeus ' employees because we had also a very good year. So that's the three things that usually are not recurring and therefore has impacted our margins in the distribution and that's why we have explained them, but we don't adjust for it because it's part of our business and therefore we consider that is part of the real business and that's basically it. But we don't see, if you exclude these things a further deterioration compared to what we have. And, yes, it's true that we have pressure from our competitors, which has been seen in the market share under pressure and therefore there's been higher cost of the bookings we acquire and this is something that has been happening for the last years and I think that we have been acknowledging that. You also have the mix depending on which region you will [faster] or lower that can impact the cost of the variable remuneration to travel agencies and also you know that we have distribution fees, which also depending on where you're growing may be fair in the unitary incentives that we are paying and the same thing happens by customer segment, so it's not the same, what you have with large travel agencies, or what you have with the smaller travel agencies online, offline et cetera, et cetera. So the mix also impacts the cost of our variable remuneration to travel [channels].

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Operator [16]

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Suhasini Varanasi, Goldman Sachs.

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Suhasini Varanasi, Goldman Sachs - Analyst [17]

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A few if I may. Just a follow up on the previous question on distribution contribution margin, I understand that you said that excluding the impact of the non-recurring items the contribution margin decline was in line with previous years. Just wanted to understand what this decline meant, if I take the last five years, average decline in contribution margin it's around 80 basis points, is that what we're supposed to expect for 2017? Second question is on, just a housekeeping, on tax rate. 28% is what you did in 2016, is it what we should expect for 2017 as well? And the last one is IHG content agreement renewal, can you comment on whether it's coming up for renewal, sometime in the next two months or later this year. Thank you.

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Ana de Pro, Amadeus It Group SA - CFO [18]

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Okay. Let me try to drive you through it. What I was referring to the distribution margin decline is that we usually have a trend of declining the margins on yearly basis around half percentage point during the year, we had years where it was a little bit more, we had years where it was a little bit less and that's the normal trend and that's what we are also guiding you in the outlook of 2017, where we are saying that we will have the slight expansion from the IT Solutions and a slight decline on the distribution. So up to you to figure what that exactly percentage wise will be. On the tax rate, yes, 28% is 2016 and more or less the same for 2017 and I think that we have also said that the renewal of IHG would be during 2017 and what we don't give is a specific month because we always have conversations with our customers and therefore we'll tell you once its agreed on due course.

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Operator [19]

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Michael Briest, UBS.

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Michael Briest, UBS - Analyst [20]

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There were some leadership changes at the end of last year with Holger leaving and Laurens taking over. Can you say if there's been any changes in your go-to-market, do you still sell separately the distribution and IT solutions portfolio or is that now combined? And then secondly in terms of the balance sheet clearly delevering quite quickly there, given your cash flow guidance for this year, you're likely to be somewhere beneath the one times leverage by the end of the year. Is there a pipeline of M&A that you expect to execute this year, which will sort of preclude any buybacks or special dividends or when would you expect to sort of look at the balance sheet perhaps at the AGM, would you be in a position to announce a buyback or dividend, special dividend at that point? Thanks.

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Luis Maroto, Amadeus It Group SA - President & CEO [21]

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Okay. So let's start the first one. No, there are no changes in our go-to-market strategy, it's not that we go with a [joining] offer to airlines, I mean we always have people dealing with airlines, we have an organization where we have our account management, their relationship with airlines, yes, in some cases, everything that is related to the airlines is discussed, including on the products that we have on our IT, our distribution and whatever we have in front of the airlines because of course, we have an overall relationship with them; in some cases, it's completely independent, in some cases, we have a contract and then we talk about our products, as we have always had these people facing the airlines and there is nothing related to a change in our strategy, or a change the way we deal with airlines, of course, what we try is to provide an overall service as much as we can and the strategy has been consistent throughout many years. And, yes, of course, when there is a change in someone in the team, this person brings fresh and new ideas to the way to address the market. But overall, we expect to really continue having a good relationship, both with our travel agencies and our airlines overall and continue delivering what they expect. The second one is about delivery.

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Ana de Pro, Amadeus It Group SA - CFO [22]

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Yes, I think that as we have clearly said many times, our main focus is growth and continue to diversify and continue to expand whether it's into the businesses or different verticals, additional solutions. So our preferred use of capital is for this to support this growth whether it's organically or via M&A, I think that in the recent years we have been quite active in M&A, doing large deals such as Navitaire or Newmarket, this year we have also tried to acquire the remaining part of i:FAO et cetera, et cetera. So we are quite attentive to the opportunities that may appear in the market and, of course, if possible we will go for that, because that's our main target. But in absence of M&A, you are right, we will probably be (inaudible) because we generate the cash flow and as we maintain our capital structure ratio, we will have to do shareholder remuneration sometime.

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Operator [23]

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Neil Steer, Redburn.

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Neil Steer, Redburn - Analyst [24]

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Just got two quick questions. You referred, I think, in a response to a previous question that the contribution margin, obviously, steadily declines by, I calculate, sort of 60 basis points, 70 basis points each year. The question is, how much further into the future can the model persist where you continue to gain market share the contribution margin falls and you sustain growth and absolutely profitability in GDS. Do you have a view as to whether this is sort of three to five year strategic plan or whether this can continue indefinitely?

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Ana de Pro, Amadeus It Group SA - CFO [25]

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It depends on where the growth comes from, as you know, we try to keep the like-for-like profitability of the different business, the different solutions, the different activities, as much as we can and therefore declines in margins that come from having more cost for the same kind of revenues are not good and we try to avoid that as much as we can. The other kind of dilution in margin will always come from competitive pressure. It also comes from different mix, different types of growth, different solutions having different profitability, as I was trying to explain to Stacy on the IT Solutions, that also happens on the distribution part, where the non-booking revenue not always has the same margins as booking revenue et cetera, et cetera. And therefore, what we try to grow in absolute terms and accelerate this growth and we try to maintain the profitability at each of the different market segments - customer segments, type of products et cetera. And then you have a mix and sometimes competitive pressure. So I think the model can run for a long while doing this and in fact what we are seeing an acceleration in growth, which we believe comes to prove that doing more things for our customers, both the travel providers and the travel agencies has proven to be a good business where we continue to grow despite the fact that I think that everybody believes that the distribution business was kind of already quite mature.

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Neil Steer, Redburn - Analyst [26]

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Okay. And just, I think you mentioned in the management report, the low cost carriers, I think the volume growth there was 15%, 16%. What proportion of your bookings are now with low cost carriers?

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Ana de Pro, Amadeus It Group SA - CFO [27]

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We have 90 low cost carriers content available in the platform and, yes, you're right, this consistently has been growing double-digit. It has started from a low base in numbers of bookings and still they are not 10% of our total bookings, but is growing quite steadily year-on-year.

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Neil Steer, Redburn - Analyst [28]

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If you are close to 10%, will it start to be meaningful?

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Ana de Pro, Amadeus It Group SA - CFO [29]

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You know that if I would have wanted to give you the number, I would have said the number upfront.

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Neil Steer, Redburn - Analyst [30]

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Okay and just one final one if I could, on the, obviously, there was some, I appreciate that it's influenced by mix and so forth, but the average reservation fee up again this year. Is it fair to assume that all of the leverage on any increases in price on the reservation fee are always on the away side or does sometimes that happen on the home, the local fees as well?

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Ana de Pro, Amadeus It Group SA - CFO [31]

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You have a little bit of everything, you have the upside of solutions that you put on top of the [air] booking functionality, which is improving the average booking fee, you have although not this year, the ForEx impact is if you're looking in long-term trend, and then you have especially the mix, which is what is basically driving. And in 2016, the renewal of some customers that have favored the booking fee average. But when we renew contracts with the airlines, the booking fee varies depending on the combination of all of these factors. So there is no specific trend on one or on the other.

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Operator [32]

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Alex Tout, Deutsche Bank.

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Alex Tout, Deutsche Bank - Analyst [33]

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Sorry, just going back to the distribution contribution margin, could you just be very clear and say whether you expect the decline in margin to be less than it was this year in 2017. And in terms of where you're seeing the margin pressure, is that coming mainly on the OTA channel, mainly on the traditional TA travel agent and TMC side from competition, more and more traditional competition with [Sabre Travel] and if it is the OTA side of things , does the margin pressure kind of level off at a certain point, where you basically say to them, okay, if you think you can get, if you think you can do better by moving to direct connect please go and try, I'm sure you won't be quite [surprised and sad] but if there are sort of natural limit to how low the margins can go on the OTA channel that you might reach in the near to medium term. And then, sorry just finally on the hotel IT side, you mentioned you're developing a PMS as well as a CRS, how much dependency do you think that major CRS sales with the large chains would have on completion of the PMS development as well an offering in integrated solution there?

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Ana de Pro, Amadeus It Group SA - CFO [34]

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Okay, let me try to see if I clarify the distribution contribution margin for once. Yes, we had things that are normally non-recurring during 2016 that has impacted negatively on margins. So the fact despite that our guidance is to say slightly dilutive, that means that we do expect less deterioration of the margin in 2017 compared to what we have seen in 2016 but in line with the trend that we have seen all the years. So that hopefully clarifies that. And now where the pressure come from, I have tried to explain previously that our margins deteriorate by several factors. And when I mean pressure is usually our competitors, which offer incentives exactly the same way we do to the travel agencies and, of course, they do it in all the markets, in all the channels, in all customer segments because that's the way we grow to our business. And, of course we intend to grow as much as we can in all of the customer segments, because they all have their business models and they all offer a good distribution channel. And on top of that, I think that we have also tried to explain that usually it's the traveler who chooses what kind of channels they are going to be using in order to do their reservation and therefore we pretend to be present in all of the different segments and in all the markets. So now if you're saying are you in negative ground with any specific customer segment or in any specific market and, therefore, you still have this, the answer is no, I think that we have also explained many times that when we see contracts that are really not worth it, we have let go some travel agency every now and then. And in general terms, of course, we have positive relationships in terms of financing with all of the customers that we have on the business.

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Luis Maroto, Amadeus It Group SA - President & CEO [35]

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Okay. For the CRS and the PMS, I mean in the past CRS and the PMS were two different solutions and very often they are telling us what you see in different providers or in some cases, in-house solutions and for another - for the PMS could be a third party. So that was not linked. We believe there is a big abundance of having a consistent view between the CRS and the PMS. We're also coming with an offer, which is not so much property-related because it's not installed in a hotel but is as you know a cloud solution and therefore the big advantages of having a consistent view between the CRS and the PMS. However, we may also have different needs and different strategies of the hoteliers and therefore they may choose the CRS or the PMS and we will commercialize both on a standalone basis. But to have both together will bring in our view big advantages to the hoteliers. So in the past as I said, it was not the case, but in the future, more and more in my view as soon as we have a solution that is good, this will be a big advantage to the different hotel chains.

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Operator [36]

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Alexandre Faure, Exane BNP.

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Alexandre Faure , Exane BNP - Analyst [37]

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Thanks for squeezing me in. Just wanted to touch on your free cash flow that was very strong this year quite lot ahead of guidance and you've been tracking ahead of guidance the whole year. Is there anything, any sort of one-off or maybe any prepayment related to big migration that explain why this was about strong compared to what you had in mind at the start of the year and in that context, how should we understand your 2017 guidance. Thank you very much.

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Luis Maroto, Amadeus It Group SA - President & CEO [38]

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No, the answer is that we have been outperforming in everything. So when you look at the outlook we gave at the beginning of the year 2016, we have done better in revenues, we have done better in margins, we have done better in EBITDA, we have remained more or less in the line of CapEx that we gave for you, and as a consequence, of course, our free cash flow has accelerated. So I think that we outperformed probably the market expectations and even our own internal expectations and that's also related to what I was saying before of personnel pay-offs, which are not usually recurring. So we had a very good year, and that has translated into the last line, which is the cash flow.

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Operator [39]

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Ladies and gentlemen, there are no further questions in the conference call. I now give back the floor to Mr. Luis Maroto for the final remarks. Thank you.

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Luis Maroto, Amadeus It Group SA - President & CEO [40]

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Yes, thank you very much for attending this call and we will talk again with the results of the first quarter. So thanks again and have a nice weekend. Bye.