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Edited Transcript of FHZN.S earnings conference call or presentation 10-Mar-20 11:30am GMT

Full Year 2019 Flughafen Zuerich AG Earnings Call

Zurich Mar 10, 2020 (Thomson StreetEvents) -- Edited Transcript of Flughafen Zuerich AG earnings conference call or presentation Tuesday, March 10, 2020 at 11:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Lukas Brosi

Flughafen Zürich AG - CFO, Chief Risk Officer & Member of Management Board

* Stephan Widrig

Flughafen Zürich AG - CEO & Member of Management Board

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Conference Call Participants

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* Andrew Lobbenberg

HSBC, Research Division - Head of the European Transport Team

* Cristian Nedelcu

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

* Ruxandra Haradau-Doser

Kepler Cheuvreux, Research Division - Equity Research Analyst

* Stephanie Fabienne D'Ath

RBC Capital Markets, Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Flughafen Zürich AG Full Year Results 2019 Conference Call and Live Webcast. I am Alessandro, the Chorus call operator. (Operator Instructions) And the conference is being recorded. (Operator Instructions) The conference must not be recorded for publication or broadcast.

At this time, it's my pleasure to hand over to Mr. Stephan Widrig, CEO. You will now be joining to the conference room.

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Stephan Widrig, Flughafen Zürich AG - CEO & Member of Management Board [2]

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Ladies and gentlemen, welcome to the presentation of our company's full year results 2019. I would like to remind that the analyst presentation is available on our web page, zurich-airport.com. My name is Stephan Widrig, I am the CEO of Zurich Airport. And I will host this presentation together with Lukas Brosi, our company's CFO. The presentation is available at a webcast for the first time as well.

I will start with the business update before our CFO will provide you with detailed information on our financial performance, followed by the outlook. At the end, we will have enough time to answer your questions.

Although we experienced slower growth than in recent years, we can report a successful financial year. At around 31.5 million, once again, we hit an all-time record in passenger numbers. We also recorded a disproportionately steep price in the number of peak days with over 100,000 passengers, 70 in the past year. The commercial turnover in our shops and restaurants exceeded for a first time, CHF 600 million, and we were able, again, to profit from higher average concession rate.

At the end of last year, we acquired additional real estate and land directly at the airport from Priora Suisse AG. These properties secure the further development of the airport of Zurich in the development areas in the East, South and West. The acquisition price has been refinanced from parts with the issuance of a new Swiss franc bond in February this year at favorable conditions. Our major construction project, THE CIRCLE, is on track for a phased opening in the course of 2020. As in the previous year, we succeeded in signing up numerous new tenants, and pre-letting commitments are in line with our expectations.

Pleasing news in relation to the development of our international business is winning the concessions for operating the Vitória and Macaé Airports in Brazil and the contract for a new greenfield project in Jewar, near New Delhi in India.

In the 2019 financial year, Flughafen Zürich AG's revenue grew by CHF 57 million to CHF 1.2 billion. Of the total revenue, approximately 55% was attributable to the aviation and 45% to the non-aviation business. In the previous year, the figures were affected by a one-off effect in the amount of CHF 57.6 million for the increase of the provision for sound insulation measures. When adjusted, EBITDA grew by 2.1% and profit rose by 9% to CHF 309 million.

Let's have a closer look at the aviation business. Last year, passenger volumes showed an increase of 1.3% to a total of 31.5 million passengers. The number of local passengers rose by 0.1%, and the number of transfer passengers went up by 4.2%, growing the transfer share to 29.3%. Flight movements totaled 275,000 in 2019, down 1.1%. Freight volumes were down by 8.4% compared with 2018. A total of some 450,000 tons of freight were transported, and the reduction is mainly attributable to the overcapacity in the aviation freight market.

In November 2018, the Federal Office of Civil Aviation in Switzerland, FOCA, proposed a revised ordinance on airport charges we found insupportable. The Swiss Federal Council finally decided on the ordinance on airport charges in June 2019 in our favor. We welcome the fact that the Swiss government decided not to alter the economic parameters of the cross-subsidy mechanism counted to the original proposal of FOCA. The revised ordinance came into force in August 2019 and now forms the basis for future airport charge setting rounds. The negotiations for the next tariff period have just started and are expected to last around 4 to 6 months.

In parallel to the ongoing negotiation phase for the next regulatory period, we have to deal with the decree from the regulator that affects the current regulatory period. In November 2019, FOCA decreed that airport charges, excluding noise and emission charges, shall be cut by 15% as of April 2020 as the regulator sees a violation of the cost covering principle in the current regulatory period. We have appealed this decision in the courts, and the matter is pending.

I will now move on to the non-aviation business. In 2019, Zurich Airport further strengthened its position as the most successful commercial platform in Switzerland. Both commercial centers, land and air side, were on a positive trend. Please let me guide you through the most important topics of the non-aviation segment.

On the commercial side, several changes have been made to the food and beverage offering. Today, the airports gastronomy presents a diversified offering from takeaway up to fine dine. There is also a focus on having a good combination of well-known brands, for example, the well-known British takeaway Chain Pratt, and restaurants with a local sense, for example, (inaudible), which is serving delicious Italian food. On the retail side, the Rolex Boutique and the Bucherer multi-brand store have been operating since spring. Further additions include the luxury brands, Moncler, Bottega Veneta and Lingerie, along with global accessories and Creadel with fashion and accessories for women.

Although the commercial environment in Switzerland is difficult and subject to disrupting changes such as online shopping, Zurich Airport has convincing USPs. First of all, frequencies, the main driver for commercial business, are increasing on land and on air side. Just think of the additional 6,000 employees working in THE CIRCLE, generating additional demand. Secondly, shopping at the airport is convenient. More and more people are buying the daily required goods at the airport as commuters. The area around the airport is growing, and the importance of the airport as a public transportation hub is increasing. And last but not least, we are benefiting from favorable opening hours compared to traditional shopping centers.

In sum, the commercial turnover 2019 at Zurich Airport grew by 1.3% and exceeded CHF 600 million for the first time. The average concession rate saw another increase of 50 basis points year-over-year and currently stands at 20.3%. Overall, a very satisfying performance of the commercial business in 2019.

Shortly before the end of the year, Flughafen Zürich AG bought a total of 36 buildings and plots of land from Priora Suisse AG. The acquisition of the Priora portfolio is strategically crucial for the company in the long-term development of the airport, especially in relation to the modernization and expansion of areas to the South, East and West. These include, for example, freight areas or new developments for aircraft ground handling as well as the building of new infrastructure for business aviation and hangers. Besides the strategic motivation for this purchase, the transaction marks a further expansion of the real estate business of the company, and it's attractive from a financial point of view as well. Additional revenues from facility management are estimated to amount to roughly CHF 20 million per year and are accretive to EBITDA as of this year. Relative to the purchase price, the transaction shows a gross rental yield of approximately 9%.

5 years after the construction works have started, THE CIRCLE will be completed soon. During the past months, we were able to welcome numerous new tenants, for instance, the pharmaceutical company, MSD Merck; Edelweiss, management consultants, Horváth & Partners; Globus, SAP; Hyatt International; Läderach and Valora sides. Pre-letting now stands at around 75% that meets our expectations. We are confident to reach our 80% letting target by the time of the opening.

First tenants are to move into THE CIRCLE in the spring of 2020, while the public opening will be in September 2020. As a go-to destination, THE CIRCLE will significantly shape the land side aspect of the airport and will greatly enhance the prestige of the address and the airport experience as a whole. THE CIRCLE will not only generate additional real estate revenues, THE CIRCLE will also attract additional people coming to the airport. Employees working at THE CIRCLE, hotel guests, conference participants, shoppers and visitors will all commute through our platform and increase the footfall in the land side part of the airport. We, therefore, expect to see a positive impact on land side commercial activities as well.

Our international business development also progressed well in 2019. In March, we were awarded the concession for 2 new airports in Brazil, Vitória and Macaé, both with 100% stake. Furthermore, we celebrated the opening of the new terminal at Florianópolis Airport in Brazil in October 2020. This has been our first international project that we own 100%, and our experience has been very positive all around. We were able to build a new terminal earlier than what was demanded from authorities' side and on budget. After the terminal in Floripa is now built, we will enter the harvest phase in due course and are looking to increase passengers to make use of the operating leverage. Floripa also sets a new standard for environmental management in Brazil. The waste management project has an innovative aspect within the Brazilian airport practices with aims to increase the amount of recycled materials.

At the end of November 2019, we won the concession to design, build and operate the Delhi Noida International Airport in India. The concession will run for 40 years and shall mark the continuation of our success story in India, following our previous involvement in the airport in Bangalore. In a nutshell, we have the obligation to build a new airport with an initial capacity of a minimum of 12 million passengers per year. We currently estimate that total CapEx for this airport hovers around CHF 650 million. Additional CapEx for further phases are purely traffic driven, and only required if traffic numbers exceed its designed capacity.

We are happy with the progress we have made so far in Delhi. On the technical side as well as on the legal issues, especially in terms of clearances needed. The speed, which the authority is pushing the project, for instance, in providing the required land, shows that this is a high priority project for the governments of India and to Uttar Pradesh. And we are looking forward to make this a success together with the government bodies. The next milestone will be the signing of the concession agreement that should take place within the next weeks. This new asset in India will contribute to low double-digit Swiss franc million to EBITDA in the first year of operations. High EBITDA margins are projected, especially in the first 6 years of operations, since the concession fee per passenger only kicks in 6 years after in operation.

The high Swiss standards of corporate governance continue to apply to Flughafen Zürich AG also in its operations abroad. Social and environmental aspects are always important considerations in exploring projects and form the basis for the sustainable development of this area of our business. This being said, I'd like to hand over to Lukas for the financial part of the presentation.

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Lukas Brosi, Flughafen Zürich AG - CFO, Chief Risk Officer & Member of Management Board [3]

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Thank you, Stephan. Good afternoon, ladies and gentlemen. Welcome also from my side. I will now give you an overview of the financial performance of the company.

In 2019, Flughafen Zürich AG generated revenue of CHF 1.2 billion, representing a year-on-year increase of 5%. This happened on the back of a solid passenger grow as well as increase in commercial and international revenues. For a one-for-one comparison, 2018 figures are shown excluding the one-off costs for the increased provision for sound insulation measures.

EBITDA improved by CHF 13 million or 2.1%. Despite the initial application of IFRS 16 and the new depreciation charges on right-of-use assets arising as a result, depreciation and amortization were down to CHF 239 million from CHF 245 million in the previous year. This was due in particular to buildings reaching the end of the operating life. Consolidated profit for the financial year amounted to CHF 309 million. When adjusted for the above mentioned one-off effect, profit for the financial year 2019 was lifted year-on-year by 9%.

Let's have a closer look at the aviation revenues. Passenger-related flight operation charges have grown by 0.6%, a slightly lower number than our passenger grow rate. This is justified by the fact that different charges apply for local and transfer passengers. Flight operation charges grew by 0.8%, mainly due to an increased -- mainly due to increased noise fees. Total income from aviation fees and other aviation revenue rose by CHF 1 million overall to CHF 77 million, a plus of 1.3%. In total, aviation revenues grew from CHF 657 million to CHF 661 million, a gain of 0.7% in the financial year 2019.

On the non-aviation side, total commercial and parking revenue increased year-on-year by 1.8% to CHF 253 million. Thanks to a higher average concession rate, the commercial business outperformed with more than 3% grow. The increase of CHF 4 million in earnings from facility management was mainly driven by higher revenue from rental agreements and higher revenue from energy and utility charges. Revenue from services remained virtually unchanged at CHF 44 million. The increase in revenue from the international airport business of CHF 44 million is still, in particular, to higher revenue from construction projects coming essentially from Florianópolis Airport.

Let me remind you of IFRIC12, the so-called concession accounting rules. According to the international reporting standards, CapEx in our international concessions has to be reflected in the P&L as revenue and operating costs at the same time.

In sum, this has a neutral impact on EBITDA. In total, non-aviation revenue increased by CHF 54 million. Excluding concession accounting, non-aviation business shows 2.1% grow.

Owing to a higher headcount and the moderate pay rise, personnel expenses for the reporting year rose by CHF 5 million to CHF 216 million. The high cost of CHF 1 million for police and security was in line with the achieved passenger growth. After adjusting for the one-off item in 2018, total operating expenses rose by 8.4%, mainly as a result of higher expenses resulting from concession accounting as described on the previous slide. Due to the initial application of the lease accounting rules according to IFRS 16, which resulted in rental costs being reclassified as depreciation charges on right-of-use assets, the operating expenses in Zurich fell by 0.4%.

I will now outline some key figures. Net financial debt, excluding the Airport of Zurich Noise Fund, stands at nearly CHF 1.2 billion, doubling the net debt-to-EBITDA ratio to 1.8x. We estimate the net debt-to-EBITDA ratio to go further up within the next years to approximately 3x. The increase in leverage is mainly a result of the newly acquired real estate from Priora, additional international CapEx, CapEx peak in Zurich and the payout of the planned last additional dividend this year. Further, the expected tariff cut will decrease the EBITDA as of the upcoming regulatory period.

The return on invested capital stands at 8.8%, down by 0.2 percentage points compared to the prior year period. Major reason for this increase is the higher invested capital. The operating cash flow was slightly lower compared to the prior year period. At the same time, free cash flow has decreased because of higher CapEx, the upfront payment for the 2 new airports in Brazil and acquisition of the real estate portfolio. All in all, free cash flow is negative with CHF 261 million.

In the year under review, Flughafen Zürich AG invested a total of CHF 360 million, excluding the Priora acquisition and ongoing projects at its Zurich base. Investments in THE CIRCLE, which were higher than in the previous year owing to the progress on this project, contributed in large part to this figure. Further significant investments include the renewal and expansion of the baggage sorting system, plus projects for upgrading the airfield power supply system and renovating the runway 28/10. The baggage sorting system project include a new building to increase the capacity of the existing baggage sorting system by around 1/3 and a larger early baggage store. The preparation work was completed during the first half of 2019, and the new building is now under construction. In addition to the airport project in Zurich, we spent approximately CHF 100 million in CapEx for our airports in Latin America.

With this, let's move on to the outlook. Given the uncertainty created by the coronavirus outbreak, we are currently not in a position to give a detailed guidance for the financial year 2020. Whereas at the beginning, this crisis was focusing on China only, the impact of the virus has now spread globally. Now as the virus has arrived in Europe, a substantial part of our traffic comes under pressure. Our home carrier, SWISS, announced last Friday that capacity reductions of up to 50% are planned in March and April in response to the reduced demand. Also as a consequence of coronavirus, a slowdown in the commercial business cannot be ruled out as well.

However, in the commercial segment, we believe that we are adequately protected through the minimum annual guarantees of most of our commercial contracts on air and land side. Operating expenses are currently closely monitored and will be subject to reductions to minimize the financial impact of the coronavirus. It's, however, too early to quantify the financial impact of coronavirus, which will mainly depend on when the crisis peaks and how long it will take to recover. As soon as we have more clarity, we will update the market with more detailed guidance in the course of 2020. What we can say for the time being related to the financial year 2020 is that on the aviation revenues, we assume that a reduction in flight operation charges as a result of the FOCA decree or the outcome of the tariff negotiations does not come into effect already in 2020.

Thanks to our well-diversified business model, we have good visibility on the robust real estate revenues, which are expected to increase by roughly CHF 30 million year-on-year due to the opening of THE CIRCLE and the recently acquired objects of Priora. As our international portfolio is growing, we expect to see incremental revenues from the 2 new Brazilian concessions in Vitória and Macaé as well.

On investments, we have earmarked around CHF 350 million for investments in ongoing projects in Zurich, of -- with a total of some CHF 120 million. THE CIRCLE will account for the largest amount

of capital expenditure in Zurich. Two other major investment projects currently underway involve the extension and refurbishment of the baggage sorting system and the expansion of land side passenger areas. CapEx might be subject to changes as well if we either see disruption in the supply chain or in a more severe negative case scenario to maintain an adequate cash level.

With the recently renewed to meet the credit lines and the issuance of a bond in the amount of CHF 400 million in February, the cash position of the company is on a comfortable level. All bonds and loans of the parent company are without financial covenants. Although the coronavirus will affect the 2020 financial year, we are convinced that air traffic will grow globally in the medium to long term, and that Flughafen Zürich AG is strategically very well positioned. The diversification of our business activities with stable income from the real estate business, for example, has proven to be particularly important in the current situation.

To finish my part of the presentation, I would like to provide you with an overview of the estimated CapEx in Zurich and then internationally over the next few years. Seen as a rule of thumb, we believe a good proxy for our CapEx in Zurich is around CHF 300 million per year after THE CIRCLE will have been completed. This figure includes expansion as well as maintenance CapEx. Together with THE CIRCLE and the baggage sorting system, the third largest construction project is the expansion of land side passenger area, representing an investment of approximately CHF 275 million. The project will include new retail outlets, underground logistics and the food hall above ground. The new land site passenger areas are scheduled to come on stream in stages by 2025.

Internationally, CapEx is based on a project basis and is typically front-loaded. In Brazil, after having successfully built a new terminal in Florianópolis, there is only limited CapEx needed for this airport going forward. For the 2 new airports in Vitória and Macaé, we currently expect CapEx of approximately CHF 80 million until 2024. In Chile, the main CapEx items will come from the airport in Iquique with estimated investments for roughly CHF 40 million in the coming 2 years. In India, preliminary works will start after the concession agreement is signed. We estimate total CapEx for this greenfield airport to amount to around CHF 650 million, which is spread over the next 4 years.

With this, we are at the end of the presentation, and I hand over back to Stephan.

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Stephan Widrig, Flughafen Zürich AG - CEO & Member of Management Board [4]

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Thank you, Lukas. We now open the Q&A part of this presentation.

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Questions and Answers

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Stephan Widrig, Flughafen Zürich AG - CEO & Member of Management Board [1]

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First, we would like to invite the questions asked on our webcast platform. And then we answer the questions raised by phone.

And on the webcast, we start with 3 questions of Cristian Nedelcu from UBS. On the one hand, further indications on the March traffic, is the question, what is the impact of 1 million lost passengers? Secondly, the question, what gives us the confidence that there will be no charters reduction in 2020? And thirdly, what would be our cost-cutting initiatives if the traffic levels decline would last for a longer period?

All 3 questions for you, Lukas.

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Lukas Brosi, Flughafen Zürich AG - CFO, Chief Risk Officer & Member of Management Board [2]

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Thank you, Cristian. What we can say so far in terms of passenger volumes during the year is that we have only seen related impact in February. You will see that in the numbers we are publishing tomorrow. So February was small, like a problem associated with China or a few cities in Asia. What we could also say is that we have seen days in March now where we had a passenger drop of more than 20% on a single day compared to the day -- the year before. But as we have said during the conference, it's too early to really give an impact. And that we are not giving a guidance on the impact overall, I would not go into details for the cash flow impact of 1 million passengers, et cetera. What we can say so far is that, as I mentioned, the extended duration is unclear. In the medium term, there's also like a risk of having negative effect from coronavirus to the overall economy. That's just as unclear as the impact on travelers. What we also can say is that all our business plans and budgets are always based on scenario with specific measures regarding costs and investment. And if such a risk as the current one arise, there are like predefined measures that we are now preparing to implement. In the short term, in such a situation, the focus is also on the liquidity situation of the company. With recently extended credit lines and bond issuance, we have sufficient liquidity for the current situation. And measures on the costs and investment side are already and will be further taken. We can react quickly to flexible cost, such as in relation to staff planning, building maintenance or administrative cost. And more extensive measures are assessed by the management as we are not providing a guidance on the financial impact of coronavirus. Overall, we're not providing more details at this stage on the impact on operating expenses and the investment.

I think we had another question regarding what convinces us in terms that there will no charges reduction in 2020. So far, we have started negotiations with our partners at the beginning of March. So the ordinance provides for a 4 months period of negotiation, so it can be extended. So even in a very fast and positive way, a tariff decrease out of this negotiation will not come into force before December in a very positive approach.

And on the the decree by the FOCA in terms of the 15% tariff cut in the running tariff period, we have appealed and as long as we have no core position on that, we don't have to decrease tariff. I think -- I hope...

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Stephan Widrig, Flughafen Zürich AG - CEO & Member of Management Board [3]

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Just to add on Lukas comments to the cost cutting, of course, in the short term, already now, we reduce all the variable costs that are linked to the passenger volumes to adjust also to the lower capacity. And in the midterm, if the situation would really be severe for a longer period, of course, our main focus would be also on the CapEx.

I then suggest we move to the next question in the webcast of Johannes Braun from MainFirst. Lukas?

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Lukas Brosi, Flughafen Zürich AG - CFO, Chief Risk Officer & Member of Management Board [4]

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Yes. Johannes ask us for more guidance on the net debt-to-EBITDA ratios. When we talk about the 3x net debt-to-EBITDA, this is always what we see as the peak in terms of the leverage of the company, materializing somewhere in 2022 as a result of the CapEx peak mainly from India.

Second question was regarding the dividend policy going forward. And if we do still thinking around the decoupling of the dividend from the profit, and also if coronavirus has an impact on that. I think we have now proposed to the Annual Shareholder Meeting to complete, let's say, this extraordinary dividend program with a fifth installment of CHF 100 million payout as an extraordinary dividend. I think the right time to go into more detail on that is on the Investor Day that we have planned or scheduled in June. For the time being, yes, we still think around the decoupling of the dividend from profit. The dividend -- the ordinary dividend was historically linked to the profit. And as we will see an impact by the tariff decrease to profit, including also more volatility from the international business, I think to focus on, let's say, more stable dividend going forward is the right approach for the stable companies such as ours.

The main question of, let's say, the magnitude of this new dividend payout going forward will -- it's always based on the leverage, on the net debt-to-EBITDA target. So also here, it's too early to talk about an impact of corona linked to the dividend. But if corona goes slower and impact us deeper, as we currently expect, and therefore, has an impact on the leverage of the company, this will automatically also will have an impact to be, let's say, maybe more conservative at the beginning. But it's -- from today's perspective, it's too early to talk about. We will give more color about this topic on the investment -- on the Investors Day, where, by this time, we will have more visibility on the impact of coronavirus and also in terms of the tariff negotiations we are we are more or deeper into the negotiation process.

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Stephan Widrig, Flughafen Zürich AG - CEO & Member of Management Board [5]

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The third question of Johannes Braun focused on the commercial business, and he asked us to explain how the minimum guarantee rents work at Zurich Airport. And what are the thresholds when a minimum guarantee will be triggered?

In every contract, we have slightly different rules in that regard. And of course, the main question is what growth we anticipate in the signing of a new contract. But in general, the minimum guarantee in the contract is about 80% of the targeted revenues, always, of course, with a growth perspective. So of course, we are not totally insulated from corona on the commercial contract is the minimum guarantee, but nevertheless, there will be an effect kicking in that isolates us towards -- to low range.

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Lukas Brosi, Flughafen Zürich AG - CFO, Chief Risk Officer & Member of Management Board [6]

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We've got another question from Marcin from Bank of America, regarding our expectation for the allowed WACC during the next regulatory period.

Obviously, as this is one of the major items in the current discussions, we are not disclosing our assumption on this. I think it's clear that the allowed return going forward might be lower than for today's regulatory periods because of the negative interest environment we are in. But as this is something that is currently negotiated, so we are not disclosing more details on that.

Another question regarding the expected returns in Swiss franc for the project in India. What is true for the whole international business is that from the Swiss franc investors' point of view, we expect around 10% IRR for all the international projects, therefore, for the international portfolio as well. And that is true for the project in Delhi as well.

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Stephan Widrig, Flughafen Zürich AG - CEO & Member of Management Board [7]

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Then we have a question from Pascal Furger from Vontobel. Why the retail concession margin dropped in the second half of 2019 by 20 basis points?

And what would be the floor for our fixed rental agreements, considering a massive drop in ATMs. Can you provide an answer on that, Lukas?

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Lukas Brosi, Flughafen Zürich AG - CFO, Chief Risk Officer & Member of Management Board [8]

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There is no particular reason for that. In terms -- I'm talking about the concession margin for retail. I think it's due to the reference day, so no particular reason. The -- I'm just reading your question in more detail. So the fixed rental agreement -- I don't know if I understand your

Question correctly, but your question is regarding the impact of a drop in volumes by -- for the fixed rental agreement there. We -- what we -- what I said during the presentation is that we are not expecting an impact on the real estate, so the fixed rental business. And any costs related to the setup from the new airports in Brazil. So the setup -- so the start-up costs for the new airports in Brazil recognized in the last year's P&L is roughly CHF 3 million.

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Stephan Widrig, Flughafen Zürich AG - CEO & Member of Management Board [9]

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You then further ask whether we can confirm that we did not book a provision for the CHF 60 million potentially lower tariffs as of April 2020 demanded by FOCA. And we confirm that, yes, we did not book any provision because we believe that we have good legal chances on that one.

Could -- we are waiting for the next question on the webcast. And we have no more questions on the webcast, which means that we shift now to the questions raised by phone. Please?

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Operator [10]

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The next question comes from Ruxandra Haradau-Doser from Kepler Cheuvreux.

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Ruxandra Haradau-Doser, Kepler Cheuvreux, Research Division - Equity Research Analyst [11]

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Yes. 3 questions, please. First, IATA and airlines are currently asking regulators to temporarily suspend the 80-20 rule, according to which airlines can keep their slot in the next equivalent flight schedule. What is the feedback you received from regulators on this? Do you expect this to be allowed during the summer flight schedule? Or do you expect regulators to focus more on keeping air connectivity in Europe in place? Second, could you please give us an update on the plans of the Swiss government to introduce an environmental aviation tax in Switzerland for departing passengers? And third, I'm sorry if I missed that, I joined relatively late, the call. Could you please give us a guidance on the impact of CIRCLE on EBITDA and net income in 2020?

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Stephan Widrig, Flughafen Zürich AG - CEO & Member of Management Board [12]

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Can you repeat me again the first question on slots, what is exactly your question on that?

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Ruxandra Haradau-Doser, Kepler Cheuvreux, Research Division - Equity Research Analyst [13]

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Do you expect the airlines to -- do you expect regulators to suspend this rule during the summer flight schedule? What is the (inaudible)

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Stephan Widrig, Flughafen Zürich AG - CEO & Member of Management Board [14]

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Yes. I mean we certainly believe the regulators will provide adequate easing of the slot rules, meaning that if you had a flight to China before and could not fly now or to Italy, this will not impact your slot rights. On the other hand, what the airlines have asked to the European Commission, it goes far beyond that on a general slot freeze for several periods. And we don't believe that what the airline ask for will fully be provided by the government, but there will be a reasonable reaction of the European Commission on isolating the airlines on slots issues because of corona.

You secondly asked further insights on the environmental aviation tax discussed in Switzerland, this is a discussion in Swiss parliament. Currently, it's likely that parliament will pass a new legislation applying departure tax for climate change between CHF 30 for economy and CHF 120 for a first-class passenger flying intercontinental. We -- this will afterwards also be placed in a public quotation. So we do not expect that the effect of this law will come into place before for 2022. And it's also still a certain chance also that on the public vote, the law will not pass because it means a further burden for the consumers. Even if the tax would be -- become applicable as defined in the law now, we do not believe it will have a major impact on the traffic in Zurich.

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Lukas Brosi, Flughafen Zürich AG - CFO, Chief Risk Officer & Member of Management Board [15]

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Regarding your third question, the financial impact of THE CIRCLE in 2020. What we said so far is that we expect additional revenues of about CHF 10 million, assuming that we are open in September and tenants are moving in starting in May but over the course of the year. We are not providing details on EBITDA and profit at that stage. But I can say -- confirm in addition that, obviously, THE CIRCLE will have a positive EBITDA contribution in 2020. But at that stage as we are not guiding in detail -- a lot more details as well on the financial impact of THE CIRCLE.

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Stephan Widrig, Flughafen Zürich AG - CEO & Member of Management Board [16]

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Fine for you? We move then on to Vittorio. No, on to the next question on the phone.

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Operator [17]

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The next question comes from Stephanie D'Ath from RBC.

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Stephanie Fabienne D'Ath, RBC Capital Markets, Research Division - Analyst [18]

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My first question is on THE CIRCLE, could you please let us know what kind of yield you're looking to achieve? And secondly, regarding your investment in Delhi, are you still considering partnering with a local company for the construction? Thirdly, when do you expect the legal appeal outcome in terms of the timing of the outcome? And then lastly, when you say you saw 20% passenger decline certain days in March, that is before Swiss capacity cut, right? And could you please comment on recent load factors. And what happened during the SARS outbreak back in 2003 at Zurich airport in terms of traffic impact?

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Stephan Widrig, Flughafen Zürich AG - CEO & Member of Management Board [19]

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Thank you, Stephanie. I'll start with your question to the legal appeal time lines. We practically do not know. It could be any time in the next weeks or months. It's not in the final court yet. So even if a decision would be made by the (inaudible), it then would -- we could move it up to the (inaudible). So I think in any case, it's unlikely that it will be introduced by April.

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Lukas Brosi, Flughafen Zürich AG - CFO, Chief Risk Officer & Member of Management Board [20]

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And your first question was regarding the yield expectation of THE CIRCLE. So nothing has changed there. What we said in the past is that we assumed a real estate return, including a risk premium for the construction, so in an area of above 5% on an IRR level. So this is unchanged.

In terms of partnering in Delhi. We are, I think, not in a situation where we are actively looking for a partner. So it's not completely ruled out. There is a certain threshold that we have to maintain a shareholding in -- under the concession agreement. But there is now -- no like active search for a partner for the Delhi project, which can be something when the project is under construction or is -- start of the construction is completed. Might be even a more attractive point on the time line once the asset is derisked to look for a financial partner in Delhi.

The 20%, I have mentioned in some days, we have seen now in March, it's 20% passenger drop. It cannot be directly linked to the announcement of Swiss, last Friday, to decrease capacity to up to 50%. In my view, we haven't seen days with more than 30% passenger decrease, but we will have to see what's in -- what's coming up in the next days.

And at least from your question regarding the SARS recovery, what we have seen. I don't know if this is a -- it's a good proxy for the current situation, but what we have seen there is like a 2-month drop of passengers and then a recovery, let's say, over the next 4 to 6 months. It might be a scenario for the current situation, but we don't know yet if this is applicable to the current situation.

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Stephan Widrig, Flughafen Zürich AG - CEO & Member of Management Board [21]

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I quickly respond to -- Thank you -- I quickly respond to a question of Vittorio Carelli from Avento. On the news feed, he asks us whether we can confirm that the traffic drop in 2020 will be included in the tariff calculation for the next regulatory period. And here, we can say that this will be completed, in case we expect the traffic drop to have an impact on traffic of the next regulatory period starting from '21 onwards.

Vittorio further asks, which is the total amount of the contractual MAGs in the air side retail business in 2020. That's a figure we cannot provide just like that, but in general, all air side retail contracts have a contractual MAG in general.

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Operator [22]

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The next question comes from Cristian Nedelcu from UBS London.

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Cristian Nedelcu, UBS Investment Bank, Research Division - Associate Director and Aerospace & Defence Analyst [23]

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And I apologize, I missed the early start of the Q&A session. But 3 questions from my side. First of all, in terms of the MAG protection, are you tracking the credit risk of your retail partners in any way? And I'm trying to understand if you would be willing to consider waiving the marked protection in order to support some of your retail partners. Secondly, we are hearing in different countries around Europe about fiscal support from the government side under -- either under the form of social contribution, tax deductions or anything along those lines. Just wanted to check if in Switzerland, there are any discussions currently? Or do you expect to see any similar measures being implemented? And the last one, if I may, please. Could you give us a rough rule of thumb in terms of cash burn or if you lose 1 million passengers or 3 million passengers or anything like that, could you give us a bit of indication what is the operation -- operating cash flow burn associated with that?

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Lukas Brosi, Flughafen Zürich AG - CFO, Chief Risk Officer & Member of Management Board [24]

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Thank you, Cristian. You're active on all channels. You raised a question regarding cash flow impact also on the webcast. And as I've said, there is no further guidance as we are not in a position to really specific -- specify this for the time being, so in terms of the cash flow impact.

What we can say in terms of the minimum annual guarantee. They're obviously also based on an annual view. So it's now -- it's too early to keep the minimum annual guarantees for the time being. So I think when we see like a recovery, we will assess this question with our partners on an annual impact base.

And your second question regarding governments. What we -- we don't see like ideas in Switzerland of tax decrease for the time being. So this is something that have to be assessed on the way forward.

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Stephan Widrig, Flughafen Zürich AG - CEO & Member of Management Board [25]

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I mean the biggest discussion in Switzerland is regarding Court's Arbeit. But in our case, linked to a high level of fixed infrastructure. This is not really an issue on our side. And with regard to the retail partners, what I can add maybe, of course, we are lifting a little bit the opening times, helping them also to adjust their costs to the current situation, and that's the main contribution that we see towards our contractual obligations in this regard.

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Operator [26]

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The next question comes from Andrew Lobbenberg from HSBC.

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Andrew Lobbenberg, HSBC, Research Division - Head of the European Transport Team [27]

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Can I just step on the discussion of the minimum guarantees, please? And just to be clear that you said all of them are based on an annual basis, and there's nothing on off quarterly. And then equally, within the minimum guarantees is that none of them -- is there no clause in there that gives a special situation in the event of a passenger drop. Then can I ask about the traffic trends that you see in Brazil? How do they compare with what we're seeing in Europe? And then finally, just come back to this FOCA ruling, you said you're appealing it, and you just said that you don't expect a solution before April. And yet in your presentation, you said you are confident -- or you're working on the assumption, sorry, you're working on the assumption, there will be no tariff cuts in 2020. So you're working on the assumption that you win the appeal and they lose it. Is that right? And why should we have the confidence to build that into our models, please?

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Stephan Widrig, Flughafen Zürich AG - CEO & Member of Management Board [28]

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Maybe the response on the minimum annual guarantee, whether it's monthly or annual. This is annual. And the question was whether we reflect there also passenger drop. Here, again, not every contract is the same. But in general, it doesn't reflect an adjustment due to passenger drop.

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Lukas Brosi, Flughafen Zürich AG - CFO, Chief Risk Officer & Member of Management Board [29]

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In terms of your question regarding what convinces us that there is no decrease in the tariff this year as linked to the decree by the Bazel is that in a negative outcome on the court decision by the Federal Administrative Court. We will obviously carefully assess. But in our view, from today's perspective, if the outlook unfavorable to us, we also have a possibility to appeal to the highest court in Switzerland, which will be the Federal Court, which is something that is very likely that we are doing this.

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Stephan Widrig, Flughafen Zürich AG - CEO & Member of Management Board [30]

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Good for you?

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Operator [31]

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There are no further questions on the phone.

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Stephan Widrig, Flughafen Zürich AG - CEO & Member of Management Board [32]

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None on the phone. One last question coming in on the news feed. Nothing else? Did I understand right? There are no more questions on the phone.

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Operator [33]

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We have a follow-up question from Ruxandra Haradau-Doser from Kepler Cheuvreaux.

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Ruxandra Haradau-Doser, Kepler Cheuvreux, Research Division - Equity Research Analyst [34]

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One short question left. Could you please give a rough breakdown of the CapEx over the next years in India? And is it fair to assume a CapEx already in 2020?

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Lukas Brosi, Flughafen Zürich AG - CFO, Chief Risk Officer & Member of Management Board [35]

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The last part of your question, CapEx 2020, also for India?

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Ruxandra Haradau-Doser, Kepler Cheuvreux, Research Division - Equity Research Analyst [36]

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Yes, yes.

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Lukas Brosi, Flughafen Zürich AG - CFO, Chief Risk Officer & Member of Management Board [37]

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Well, there will be a very limited number, as we're now in the now process of signing the concession agreement, then we'll be half a year to the financial close. So construction, if it starts this year, will only be very limited in the last quarter. You can assume as a rule of thumb that the CapEx is mainly end loaded towards the 3- to 4-year construction period.

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Stephan Widrig, Flughafen Zürich AG - CEO & Member of Management Board [38]

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Good. No more questions on the phone. No more questions on the news feed. I thank you all for attending. Look also a little bit towards China where the situation is getting more and more normal in these weeks. And let's not dramatize too much. We will find solutions to the medical problem and international connectivity among the world is that deep nowadays that I'm very sure we will come back to normal traffic levels in midterm or maybe even shorter.

So I thank you all for attending the conference, and close it here by now. Thank you.

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Operator [39]

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Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.