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Edited Transcript of ANA.MC earnings conference call or presentation 1-Mar-19 10:00am GMT

Full Year 2018 Acciona SA Earnings Call

Madrid Mar 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Acciona SA earnings conference call or presentation Friday, March 1, 2019 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jose Angel Tejero Santos

Acciona, S.A. - Group CFO

* José Manuel Entrecanales Domecq

Acciona, S.A. - Executive Chairman & CEO

* Rafael Mateo Alcala

Acciona, S.A. - CEO of Energy

* Raimundo Fernández-Cuesta

Acciona, S.A. - Director of Mergers & Acquisitions

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Conference Call Participants

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* Gonzalo Sánchez-Bordona

Banco Português de Investimento, S.A., Research Division - Analyst

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Presentation

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José Manuel Entrecanales Domecq, Acciona, S.A. - Executive Chairman & CEO [1]

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Very good. Good morning, ladies and gentlemen, and thank you for attending this full year results presentation for 2018.

You will see that there is a reduced representation of company management in this particular table, but we've attempted to shorten up our presentation and leave more time for Q&A. However, top management of the company is sitting in the first row here. So any questions can be addressed to them or I will convey to, when appropriate, to the appropriate executive.

I am pleased to report today a good set of results and a successful year that has not been exempt of some challenges. But let me start first with a review of the financial targets we set out at the beginning of last year and how we have met or exceeded most of them.

In terms of EBITDA on a like-for-like basis, we have reached the high end of our projections with 9.2% growth, while the reported growth figure was flat as a result of the '17 and -- 2017 and 2018 asset sales.

As for working capital, our initial target was, as you may remember, in the range of EUR 250 million. Then later in the year, we were foreseeing EUR 250 million to EUR 300 million. The truth is that finally, we have ended up at EUR 200 million in working capital as a result of better cash flow management, improvement in contractual conditions and execution of our key projects, in particular, Sydney Light Rail.

Better working capital, together with asset sales and improved cash flow, have resulted in a net debt-to-EBITDA ratio of 3.5x, significantly better than the 4x target announced at the beginning of the year and consistent with our investment-grade credit profile.

It is worth also pointing out that the reported 3.5x ratio includes about EUR 600 million of debt related to work in progress without which the underlying ratio would be significantly better. In fact, it would be like 3.0x or 3x.

In terms of the business performance underlying these results, we have had a strong year in energy with better output, better prices and incremental contribution from new assets on the ground. This is important because it corroborates the soundness of our investment policy in renewables, which brings good levels of EBITDA very swiftly.

2018 has also been good in terms of generating potential growth for future years. We will have 1 gigawatt of projects under construction during 2019. And we continue to feed our own growing pipeline of 7 gigs at different stages of development in new, traditional and our own domestic market.

In infrastructure EPCs, we continue to successfully execute and expect positive outcomes in all of our key projects and particularly the 5 key projects we had last year, which are the Quito subway, the Sydney Light Rail, the Föllo Line tunnels in Norway, the Dubai Metro and the Site C in Canada.

On the water side, we have one big contract in desalination and water treatment plants, particularly in the Middle East. We are -- I'd say that placed us as the world leader in reverse osmosis desalination.

On the negative side, as you all know, we have had the ATLL confiscation, which we will continue to challenge in every possible legal instance.

Our total infrastructure backlog is at EUR 11 billion, which is approximately 24 months of activity of the total Infrastructure division. And the -- particularly, in the EPC side, we are at EUR 7 billion, which is also 2 years of EPC at present rates.

In the concession business, we have robust flow of new investment opportunities enhanced by a recently reinforced team. The irreplaceable first hand-on-the-ground intelligence provided by our EPC business and naturally strong reputation as a reliable technical expert.

Bestinver was inevitably affected by the negative market trends of the second half of the year with a decrease of assets under management of 10%, despite which it continued to grow in its client base, grew by 11% to 51,000 clients. And average funds under management over the year was EUR 6.2 billion relative to EUR 5.8 billion the year before, that's 2017. Fortunately, the beginning of 2019 seems to be offsetting these negative effects with a healthy growth in number of clients, profitability and assets under management.

Finally, as regards to our real estate unit, our key markets, Spain, Mexico, Poland and Portugal, are experiencing healthy growth which, together with the recently incorporated new leadership to our team, our land bank and our reinforced focus on swift asset rotation, provide a very positive outlook for the short and medium term.

As far CapEx, we have investment -- we have invested approximately EUR 1 billion of which 54% was in energy, 14% in infrastructure and 19% in purchasing our own shares which, at the beginning of last year, we deemed to be deeply undervalued and start a program which result has been an average cost of EUR 68.5 and that we will be amortizing. It represents 4.2 of the outstanding capital. We will be amortizing in the coming weeks.

We continue to vigorously respect our investment criteria, always adjusting risk to return or return to risk and avoiding any opportunity where we believe that equation does not meet our minimum requirements.

We also try to maintain a balanced portfolio of assets, always competitively allocating capital internally and taking advantage of our global footprint and our different business skills.

This CapEx has been more than offset by EUR 1.4 billion in disposal proceeds with the completion of the sale of the Spanish CSP fleet, Trasmediterránea and Testa Residencial, as you all know. These represent a major capital recycling and a refocusing exercise, sometimes selling noncore or lower return assets or simply taking advantage of market opportunities. I think it is important to highlight our ability to quickly adapt our gearing ratio to the desired levels should we, for any reason, need to do that.

As you all know, only 4 years ago, as a result of unorthodox regulatory changes, we were led to somewhat excessive gearing that was 5.7x net financial debt-to-EBITDA. Only 4 years later, we are back at very comfortable levels with a strong balance sheet and mostly without having had to sacrifice much growth. It is the nature of our assets, high-quality cash generation -- cash generating, liquid, and hence, easy to sell.

I would like to briefly share with you our vision of what ACCIONA is today and what makes us unique in our view. We are illustrating this with an alternative breakdown of EBITDA and capital employed according to the underlying nature and risk profile of our different activities. ACCIONA is, in essence, a greenfield developer and operator of infrastructure assets with particular emphasis in renewable energy. Our core skill is to originate, design, construct and operate these complex and critical assets for third parties for our own portfolio.

As I mentioned in the beginning, our first hand-on-the-ground access to greenfield projects, mostly the EPC activity, and to transform these greenfield projects into infrastructure assets is the core of our competitive advantage. Hence, we're not really a construction or a -- construction company or a utility or even what is usually understood as an infrastructure service company. We are a vertically integrated infrastructure developer and operated -- and operator, hence, to some extent, all of the above.

But we understand that it is sometimes difficult for the investor community to judge our risk profile as the different sources of our cash flow vary in volatility and predictability. So in order to simplify -- to try to simplify this analysis, we have attempted to classify our EBITDA into 3 different risk profiles: long-term asset business, Service business and greenfield development or EPC business.

We do generate about EUR 1 billion of our total EBITDA from the first paragraph, the long-term asset business, namely our portfolio of renewable generation assets and infrastructure and water concessions. The -- this represents 3/4 of our EBITDA and almost 95% of our capital employed.

On the other side of the spectrum is the development or EPC business with low capital intensive, therefore, lower margins, high risk but high returns. Some in the financial market may take for granted our capabilities in this field, but greenfield development of infrastructure assets is a very scarce skill in a world that faces the major population growth and sustainable development challenges that you all know well. Our greenfield development activity represents just over 15% of our total EBITDA and a smaller fraction of our capital employed.

In between the 2, we have the Service business, more recurrent and predictable than the EPC business but, in most cases, less stable than the long-term asset base business. We would consider this an intermediate risk profile.

In conclusion, I believe ACCIONA is a unique infrastructure developer and operator benefiting from a highly coveted cash-generating asset base and a greenfield activity that enhances our investment opportunities for our own portfolio, for our clients or for third-party investors. Worth noting also that we are a significant player in some of the fastest-growing markets in the world, both geographically and by sector. And that providing solutions to world or corporate challenges such as carbon pricing, global warming, population growth or megacities is our main business opportunity.

As for trends for 2018, with respect to this year, we see it as a year of the normal course of business given that the shape and focus of the group is about right and our credit ratios are at prudent level, consistent with an investment-grade credit profile.

In energy, we expect to have a good year given increased contribution from new assets, higher prices in Spain and intense construction and development activity laying the foundation for further short and medium-term growth. However, first few weeks of the year have not been very windy in Spain, as you may have noticed.

In Infrastructure, excluding the significant loss of EBITDA resulting from the confiscation of ATLL, we expect to improve activity and margins on the back of very healthy EPC backlog and contribution services -- of services. All other activities of the group look healthy, and we expect continued positive contribution to growth from all of them. We remain committed to preserving our balance sheet strength and in particular to maintaining our net debt-to-EBITDA ratio at investment-grade levels that is below 4x EBITDA.

To finish, I would like to give you what I believe to be reasonable targets for the current year. And notwithstanding 2019 changes in perimeter from last year's disposals, ATLL, IFRS 16, which have a significant effect on comparability, our expectations for next year are high single-digit growth in a like-for-like EBITDA; flat to mid-single-digit growth in headline EBITDA; CapEx will be approximately EUR 1 billion; and we expect to maintain our debt-to-EBITDA ratio below 4. As for bottom line results and dividend, we expect to achieve double-digit growth for the year.

On the back of these good results and good future prospects, the board will propose to the AGM a dividend of EUR 3.5 per share, implying a growth of 17% and a payout ratio of 58%.

And with that, I would like to hand over to José Ángel Tejero, CFO, who will take you through the details of the financial review. Thank you very much.

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Jose Angel Tejero Santos, Acciona, S.A. - Group CFO [2]

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Thank you, José Manuel. About the group financial information, let me start with an overview of the group key figures for the full year. I note again that year-on-year comparability is affected by the exit from the consolidation perimeter of the assets sold. As you know, the most relevant transactions for comparison purposes are the sale of CSP assets and Trasmediterránea, both completed in the Q2 2018. And Ruta 160 at the end of '17.

At the end of '18, we also sold Rodovia do Aço, a concession asset in Brazil. But the impact of this disposal will be more meaningful in 2019.

In the slide, you can see that the revenues grew only marginally with higher energy revenues, flattish infrastructure and declining revenues in other activities affected by the sale of Trasmediterránea. Headline EBITDA is down 2.4%, although in a like-for-like terms, it grew 9.2%, which, as José Manuel said, is a strong result and ahead of our initial expectations.

75% of that EBITDA in '18 came from our long-term asset business; 9% from services; and 16% from our greenfield development and EPC business.

With respect to profits, headline net profit increases by almost 50%, helped by EUR 109 million net capital gains from the asset disposals during the year. Excluding the capital gains, net profit declined slightly due to the stop of the contribution of those assets sold.

In terms of investment, total expenditure, including the investment in real estate inventories and the share buyback program, amounts to just over EUR 1 billion relatively to EUR 850 million last year. Investment has been offset by EUR 1.4 billion of disposal proceeds. Net debt fell by almost EUR 900 million to EUR 4.3 billion with an implied net debt-to-EBITDA ratio of 3.48x, which, as José Manuel mentioned, already is a major achievement.

In Slide 12, we show the detail of investment activity during the period of EUR 1 billion, of which EUR 728 million is CapEx; EUR 100 million is investment in real estate inventories; and EUR 196 million for the share buyback program. More than 3/4 of the CapEx is concentrated in our long-term asset business, in energy in particular, and this is discretionary growth CapEx.

In cash terms, the latest items are the completion of El Cortijo and Mt. Gellibrand wind farms in Mexico and Australia and the ongoing construction of the San Gabriel wind farm facility in Chile. Other investments include the Dymerka photovoltaic facility in Ukraine and the equity contribution to the massive 404-megawatt solar project, Puerto Libertad in Mexico, of which we own 50%.

We have also been completing the small wind power investment in Spain of 32 megawatts and have acquired the remaining 50% stake we did not own in 2 small Spanish wind farms.

During the year, we have been constructing 1.3 gigawatts of capacity in total, out of which 1 gigawatt is our share. Some of these projects have been completed during the year, others continuing their construction or have been recently started. In total, capacity additions in 2018 amount to 583 megawatts net, of which we will consolidate 338 megawatts.

In the Infrastructure division, capital expenditure amounted to almost EUR 146 million, which is 60% below last year, '17. And as you remember, this included a large site, which was the acquisition of Geotech for almost EUR 140 million. This year, infrastructure includes the payment for the Andes Airport Services in Chile of EUR 33 million.

On the disposals, it is worth to remind you that in the last quarter, we have completed the sale of our 20% stake in Testa Residencial for EUR 379 million plus 1 of our commercial properties for an additional EUR 52 million, bringing total proceeds from EUR 1 billion as of September to EUR 1.4 billion for the full year.

Turning over to Slide 13, and you will -- you can see the evolution of net debt and we can see the drivers behind the EUR 900 million net cash inflow generated during the year. Starting with operating cash flow, it amounted to EUR 665 million compared to EUR 427 million for the previous year. I will highlight in particular the working capital outflow under control at EUR 200 million, as well as lower financial charges down almost EUR 30 million. Last quarter of the year tends to be a good period in terms of working capital, and we have delivered a positive swing of close to EUR 150 million in this -- on this side.

With respect to investment, we have discussed it at length. EUR 1 billion investment including the buyback more than compensated the EUR 1.4 billion of disposal proceeds. The other large item to mention is the dividend attributable to the '17 financial results, which amounted to EUR 172 million.

On Slide 14, we quickly show the profile of our debt, which stood at EUR 4.3 billion compared to EUR 5.2 billion a year earlier. I think it's of interest to show our interest rate exposure. The weight of fixed debt stood at 55% in '18 relative to 42% a year earlier. This is mostly due to the fixing of our 1.3 5-year syndicated loan signed in Q2 2018. Our current aim is to be around 60% hedged. And as we will see in a moment, we have just signed a 5-year -- a new 5-year syndicated loan that will increase our degree of hedging against rising interest rate, up to 60%, in line with, we think, is the right policy.

Moving on to the next slide, we show our debt maturity profile, liquidity and some additional statistics. With respect to the debt maturity profile, I want to mention that we have been very active in the earlier part of the year with transaction that are extending the life of our debt and reducing the cost at the same time.

We signed a week ago a EUR 500 million syndicated loan facility as explained in this slide. This loan has a 5-year -- is a 5-year term with an option of 2 additional 1 on 1-year extension and will be used to refinance shorter-term corporate maturities. The cost is attractive and is reflecting our improved credit profile.

This is also our first ESG-linked facility where credit spread can be adjusted relative to changes in ACCIONA, RobecoSAM and Dow Jones ESG rating. In this slide, we show the maturity profile of our debt as of December and this show what they would look like on a pro forma basis, taking into account the new syndicated facility and the other refinances coming out in January. All in all, the group has a liquidity of EUR 4.1 billion.

Our average cost of debt stands at 3.55% with a cost of -- with the average cost of corporate debt standing at 2.5%. The recent refinancing activity will extend the average maturity for -- from 4.25 years as of December '18 to 4.6 years on a pro forma basis. We estimate that the average cost of debt of the group can still be reduced during the year another 5 to 10 basis points.

And now let me hand it over to Raimundo Fernández-Cuesta for a review of the operating results of each business.

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Raimundo Fernández-Cuesta, Acciona, S.A. - Director of Mergers & Acquisitions [3]

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Thank you, Jose Angel.

Starting with the operating performance of the Energy business. EBITDA grew by 2.4% to EUR 743 million despite EUR 77 million lower contribution from the CSP assets relative to the previous year. Generation EBITDA amounted to EUR 821 million. On a constant perimeter or like-for-like basis, EBITDA grew by 15%, which is a great result in our view.

One of the key drivers behind the better EBITDA is the higher production of our assets, almost reaching in 2018 what we'd call P50 or normal -- expected output for a normal year following an unusually poor year in 2017. You may recall that 2017 was affected by the severe drought in Spain, the Mexican earthquake and other one-offs. Total output is therefore up 10% with Spain increasing by 7% and international by 14%. And these figures include the contribution from the new assets and also the lower output from the CSP.

On a like-for-like basis, Spanish output grew by 11% with higher-than-normal hydro levels, which in fact were 25% better than expected, and recovering wind volumes in Spain but still below our normal year.

On the international side, like-for-like International output grew by 7%, which is also below our P50 and this is where we had a bigger deviation.

Looking at the Spanish EBITDA, better-than-expected prices have also helped despite our high levels of hedging during the year. Average Spanish power prices increased 10% year-on-year, reaching EUR 57 per megawatt hour, and this is the highest in history since 2008 where they traded on average at EUR 64. Prices are also strong on the basis of strong commodities during the year, carbon prices in particular. And despite the higher hydro and wind volumes and elimination of the tax on generational -- electricity generation and the green cent in the latter part of the year.

In the assets in Spain, no longer entitled to regulatory income and protection, our realized prices have been around EUR 48 per megawatt hour relative to EUR 42 the previous year.

For 2019, current market expectations are, on average, prices of EUR 56 per megawatt hour, which have been softening in recent weeks following weaker gas prices, coal, Brent and CO2. The last, we expect to benefit from higher power prices during 2019.

Spanish hydro reserves in the meantime are 10% below the 5-year average. So it suggests that is going to be a year on the dry side, although last year we were surprised with very high volumes from rainfall in April and March.

Moving to the international portfolio. EBITDA is up by 8.5% reaching EUR 380 million. And the main driver here, as José Manuel mentioned, is the contribution of new generation assets added to the portfolio during the year, which did not fully contribute in the previous year. This represents EUR 26 million of incremental EBITDA during 2018, and this is mostly due to the El Cortijo and Mt. Gellibrand wind farms that were commissioned during 2018.

During 2019, we expect a delta of around EUR 40 million or so at EBITDA level attributed to the new assets, basically Mt. Gellibrand and El Cortijo contributing for the first full year, plus some other assets that will come online sometime during the year like the Dymerka in Ukraine and Palmas Altas wind farm in the U.S.

Moving on to Slide 17 on the Infrastructure division. The Infrastructure division as a whole performed broadly in line with the previous year in terms of revenues and EBITDA with just over EUR 5 billion of revenues and close to EUR 420 million of EBITDA.

In terms of new awards, it was another good year with EUR 5 billion of new contracts added to our total backlog, which amounts to EUR 10.8 billion, having taken out ATLL.

Our EPC backlog in particular, including all construction, industrial and water EPC contracts stands relatively flat at EUR 7.1 billion or 2 years of revenue, and that is despite the very high levels of activity in civil construction linked to our big 5 projects that our chairman already mentioned. The net consumption of civil construction backlog has been compensated by other EPC contracts in water desalination, industrial installations, and of course, in construction.

All in all, we feel it has been a great year in terms of production and the ability of ACCIONA to replenish its EPC backlog with quality projects across all its EPC greenfield specialties.

In Page 19, looking with a bit more detail at the Infrastructure businesses. I would highlight, firstly, the stability of construction revenues and margins. The industrial division EBITDA margins are strongly up, and we have talked about already the large volume of successful new awards. In concessions, we would note that they are affected by sale of Ruta 160 concession in Chile in 2017, partially compensated by the acquisition of a further 15% in AUVISA Highway in Spain. The Water business shows a decline in EBITDA as we completed the Qatar desalination plants, and the large new projects in Saudi Arabia and the Emirates are still getting underway.

And finally, with respect to the other activities of the group, firstly, we would note the sale of Trasmediterránea. And therefore, the very limited contribution it made to the 2018 financial results as the business was sold before the high season, which is basically the summer.

In real estate, just to mention the results are marginally down as we did not have the contribution from the rental -- rent-generating assets during 2018, mostly due to the contribution of this portfolio to Testa, which has been successfully sold, implying over the history of the Testa transaction first contribution in this sale an extremely significant premium to GAV and NAV.

The loss of rental income was partially compensated with the delivery of residential units at the end of the year and the business is still in net investment phase.

Moving on to Bestinver. It increased EBITDA contribution, which is a good result. Average funds under management from EUR 5.8 billion in '17 to EUR 6.2 billion. And we start the year with lower funds under management. But as José Manuel said, Bestinver expects to make that up with customers, performance and assets under management.

And I would like to turn the floor over to José Manuel, who will chair the Q&A session. We would be grateful if you could stick to 2 questions per turn. So happy if you want to come back on the queue, but 2 questions. And please identify yourselves, your institution and please try to speak loudly and clearly. Thank you.

José Manuel?

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José Manuel Entrecanales Domecq, Acciona, S.A. - Executive Chairman & CEO [4]

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Thank you. So open to Q&A.

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Questions and Answers

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Raimundo Fernández-Cuesta, Acciona, S.A. - Director of Mergers & Acquisitions [1]

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Any questions from the floor?

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José Manuel Entrecanales Domecq, Acciona, S.A. - Executive Chairman & CEO [2]

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Person there. Thank you.

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Gonzalo Sánchez-Bordona, Banco Português de Investimento, S.A., Research Division - Analyst [3]

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Gonzalo Sánchez-Bordona from CaixaBank BPI. I have 2 questions, I've been limited to that. On the Energy division, I think you said that you are still 5% lower than normal levels in the hydro reservoirs. I was just wondering, in the guidance you've provided on EBITDA, what kind of assumptions are you using there? Are you using a normalized year or you're expecting a worse-than-normal year in terms of hydro and also in terms of wind production? And then on the real estate unit, I was wondering if you could provide some more visibility on when do you expect to end the current net investment cycle, and when do you expect to start delivering units and generating a positive cash flow generation.

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José Manuel Entrecanales Domecq, Acciona, S.A. - Executive Chairman & CEO [4]

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Let me go into the second part quickly and I'll pass on to Rafa Mateo, the CEO of the Energy division, for the first question. Next -- this year. Second answer to the first question is 2019. To the first question, Rafael.

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Rafael Mateo Alcala, Acciona, S.A. - CEO of Energy [5]

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Yes. About the first question, you know that the hydro reserves are 5% less than in normal year. But this year, 2019, January was excellent in terms of hydro, in terms of wind resource. February, you know while that is below P50, but probably at the end of March, we will start the month in almost a medium average P50 range. So this is our expectation today.

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José Manuel Entrecanales Domecq, Acciona, S.A. - Executive Chairman & CEO [6]

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Any more questions on the floor? Okay, so let's open up for online questions.

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Operator [7]

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(Operator Instructions) Our first question today comes from Manuel Palomo of Exane.

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José Manuel Entrecanales Domecq, Acciona, S.A. - Executive Chairman & CEO [8]

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Manuel?

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Raimundo Fernández-Cuesta, Acciona, S.A. - Director of Mergers & Acquisitions [9]

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Can we move to the next one or we give another chance to Manuel?

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Operator [10]

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(Operator Instructions) We have no further questions. So we'll go over to management.

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Raimundo Fernández-Cuesta, Acciona, S.A. - Director of Mergers & Acquisitions [11]

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Any other questions from the floor? Yes, another question over there.

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Gonzalo Sánchez-Bordona, Banco Português de Investimento, S.A., Research Division - Analyst [12]

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Gonzalo Sánchez-Bordona from CaixaBank BPI again. Since there were no more questions, just one other one. On the Construction division, what are your expectations in terms of margins for 2019 that you have included in your guidance? And in terms of the mix of the works, if we could expect something similar to '18 or some expected differences there?

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José Manuel Entrecanales Domecq, Acciona, S.A. - Executive Chairman & CEO [13]

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Yes, we do not normally provide guidance on margins. However, I foresee a general stability in numbers, in margins and the breakthrough of -- the breakdown of jobs or type of work, if that's what you're asking. Yes.

Very good. Well, if there's no more questions, I suppose we've been very clear, which is good.

Thank you very much, everyone, and I look forward to seeing you soon. Thank you. Bye.