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Edited Transcript of FHZN.S earnings conference call or presentation 6-Mar-17 11:30am GMT

Thomson Reuters StreetEvents

Full Year 2016 Flughafen Zuerich AG Earnings Call

Zurich Mar 6, 2017 (Thomson StreetEvents) -- Edited Transcript of Flughafen Zuerich AG earnings conference call or presentation Monday, March 6, 2017 at 11:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Stephan Widrig

Flughafen Zuerich AG - CEO

* Lukas Brosi

Flughafen Zuerich AG - CFO

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Conference Call Participants

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* Pascal Furger

Bank Vontobel - Analyst

* Patrick Laager

Credit Suisse - Analyst

* Armin Rechberger

Zuercher Kantonalbank - Analyst

* Andrew Light

Citigroup - Analyst

* Patrick Hasenboehler

Zuercher Kantonalbank - Analyst

* Vittorio Carelli

Santander - Analyst

* Albert Pranger

Kempen - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good afternoon. Welcome to the Flughafen Zurich AG full year results 2016. I am Sarah, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. (Operator Instructions).

At this time, it's my pleasure to hand over to Mr. Stephan Widrig and Mr. Lukas Brosi. Please go ahead, gentlemen.

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Stephan Widrig, Flughafen Zuerich AG - CEO [2]

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Ladies and gentlemen, welcome to the presentation of our Company's full-year results 2016 at Zurich Airport. I also welcome the attendants who are connected via telephone conference and would like to remind these attendants that the analyst presentation is available on our web page, Zurich-Airport.com. My name is Stephan Widrig, I am the CEO, and I will host this presentation together with Lukas Brosi, the Company's Chief Financial Officer.

In order to structure the conference properly, we will go through the presentation first and take your questions at the end. I will start with the business update and give you some insights on strategic topics before our CFO will provide you with detailed information on our financial performance followed by a brief outlook. At the end, we will have enough time to answer your questions.

Flughafen Zurich AG can look back on a successful year 2016. In the past year, we handled more than 27 million passengers, we have hit the CHF1 billion mark in revenue for the first time in our history and report an all-time profit record.

In April, the Swiss Federal Supreme Court made two decisions concerning compensation claims, relating to the eastern and southern approach routes. These rulings, in the final instance, clarified important questions for the processing of pending claims for compensation and, significantly, increased legal certainty about the total noise-related cost and also confirmed our assumptions.

In the same month, Flughafen Zurich AG signed an agreement to sell its 5% share in Bangalore International Airport Limited. The agreed purchase price is $48.9 million before tax. The transaction is set to be completed in the first quarter of this year. The sale of this shareholding will result in a substantial one-off gain.

End of July, the duty-free contract with Dufry AG has been prematurely extended until 2028, which includes an improvement in the key financial parameters for Flughafen Zurich AG starting next year.

By September 1, 2016, the new aviation charges became effective, this was particularly relevant for passenger-related charges which were reduced. At the same time, landing and aircraft parking charges were also included in the revised regulation. The new charges will now apply for four years.

Last but not least, we have announced two new anchor tenants for the Branson dialogue module in The Circle in the course of last year; Dufry and Jelmoli, the House of Brands.

In the past year, Zurich Airport reports a passenger growth of 5.3%; the number of local passengers rose by 6.5% to 20 million. Also, the transfer share of all passengers declined in comparison to 2015, the number of transfer passengers at Zurich Airport increased by 2.3% to 7.8 million.

The total flight movement was 270,000 in 2016, an increase of 1.5% on 2015. Freight volume rose by 5.3% compared with last year, a total of 433,600 tons were transported during the year under review.

On the commercial side, the retail offering has been enhanced by the areas new openings as well as expansions and optimizations from the previous years, which are having a positive impact on revenue. The Airport's digital competence and presence are also being continually expanded.

The Swiss retail industry remains under pressure, with decreasing sales; the commercial business at Zurich Airport is growing. Turnover on airside increased by 3%, benefiting to some extent from the increased transfer passenger volumes, whereas landside posted a plus of 0.5%.

In the reporting period, total sales for retail outlets and restaurant operators at Zurich Airport amounted to CHF544.6 million. This corresponds to an average spend per departing passenger of CHF39.4. The average concession rate is currently stagnating; medium-term projections, however, suggest the rate to be on a positive trend again.

Zurich Airport is undertaking a number of projects to upgrade its infrastructure for private transportation. The renovated and upgraded curbside lanes were reopened phase by phase in mid-2016. The new curbside lanes have greatly improved passenger convenience.

In addition, the expanded car part P6 was opened at the end of 2016, involving investment of some CHF80 million, with 3,500 parking spaces added. Car park P6 has now approximately 7,500 car park spaces and is one of Europe's largest parking facilities.

As travelers are also making more use of alternative options, such as public transport, taxis or off-airport services, the Airport is launching various services to attract additional leisure travels with longer parking times, a new online booking system for parking spaces, for example, simplifies parking and is being utilized more frequently.

In order to further enhance the product, the construction of an offsite car park, where passengers can reach the terminals easily by public transportation and which allows the best of product differentiation, is planned. The new 10-story car park with around 3,000 spaces is intended to serve primarily as a long-stay car park and allow some more flexible pricing. The approval process is underway with some legal and court proceedings expected. As soon as those issues are settled, we will start construction.

The landside view of the Airport is currently dominated by the construction site of The Circle. Together with co-owners, Swiss Life, we have decided to launch the second construction stage, meaning that both stages will both be implemented simultaneously. The excavation work has been completed and construction is progressing well.

News on the marketing front is, likewise, encouraging. As mentioned before, Dufry and Jelmoli were successfully acquired as additional major tenants. PROMISING talks are underway for the art and training modules. The office space sector still presents a great challenge in the current environment. However, discussions with prospective tenants are showing that the location, coupled with modern office concepts, makes a highly attractive product.

The current pre-letting for the whole project, including stage 2, is now about 50% and the completion of The Circle is scheduled for the end of 2019.

At this year's General Meeting of Shareholders, two representatives of the Board of Directors have to be replaced. Kaspar Schillar, who has been a Member of the Board since 2004, turned 70 years old this year and, therefore, reaches the defined age limit. Ulrik Svensson, Member of the Board since 2008, has become the new Chief Financial Officer of Deutsche Lufthansa, which led to his resignation at the end of last year.

The Board of Directors nominates Josef Felder and Stephan Gemkow as new Board Members, both experts of the aviation industry. Josef Felder was CEO of our Company between 2000 and 2008 and successfully guided the Company through the crisis after the grounding of Swissair.

Stephan Gemkow held various management positions at Deutsche Lufthansa AG between 2006 and 2012; he was Member of the Management Board and responsible for finances.

With this, I will now hand over to Lukas for the financial part of the presentation.

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Lukas Brosi, Flughafen Zuerich AG - CFO [3]

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Thank you, Stephan. Good afternoon, ladies and gentlemen, welcome also from my side. Let me start my part of the presentation with the key figures, including noise components.

In 2015 as well as in 2016, figures have been impacted by one-off effects. You can find an overview below the table. In total, revenue rose year-on-year from CHF989 to CHF1,012.8 million with both aviation and non-aviation segments performing well.

Of the total revenue, approximately 61% was attributable to aviation revenue amounting to CHF620.4 million in the reporting period. Revenue from non-aviation operation saw a rise of CHF0.8 million to CHF392.4 million. After adjusting for one-off effects, EBITDA was CHF568.1 million and the EBITDA margin climbed from 55.4% to 56.1%. Adjusted EBIT amounted to CHF326.6 million, which represents an increase of 2.3%.

The finance result of Flughafen Zurich AG amounted to CHF17.4 million in the reporting period, significantly better than in the prior-year period. The main reason for the positive change is related to the valuation of noise provisions, whereas an expense of CHF70 million was incurred in the previous year, a non-cash income of CHF1.1 million was generated in the reporting period in that respect.

Adjusted for one-off effects, profits totaled CHF239.5 million, plus 11.2%. The financial key figures, excluding all noise-related line items, provide a more accurate view on the operational performance of our Company. Here as well, aviation and non-aviation business were on the positive trend.

Excluding last year's one-off effects, EBITDA improved by 3.7% and EBIT grew by 2.1%. On a like-for-like basis, profit excluding noise increased by CHF9.3 million or 4.1% to CHF236.8 billion.

Let me continue with some additional top-line information on the aviation segment. Despite the lower charges from September 1, 2016, revenue from passenger related airport charges was lifted from CHF411.4 million to CHF421.9 million, with a rise in the number of local passengers especially having a positive impact.

The new charging model also saw an increase in parking charges balanced out by lower landing charges. However, the rise in the number of flight movements, coupled with the trend towards larger aircraft, offset the reduction in landing charges, resulting in higher revenue. At the same time, the adjustment to parking charges has resulted in an increase in revenue by CHF6.5 million.

The positive trend in aviation fees, which increased by CHF2.9 million to CHF67.8 million is attributable to volume effects. Movements between charge items are due to user fees being formally introduced, together with the flight operation charges. In total, aviation revenue is up by 3.9% to CHF620.4 million.

I am now moving on to the non-aviation business. In the reporting period, total commercial and parking revenue increased from CHF216.8 million to CHF220.7 million. Here, revenue from retail, tax and duty free and food and beverage operations are a year-on-year gain of 1.5% to CHF113.1 million.

Revenue from car parking grew by 1.4% to CHF75.4 million. In the facility management segment, revenue totaled CHF123.4 million, revenue from rental and lease agreements was up year-on-year by CHF1.3 million, mainly due to the new lounges in Dock E. Compared to the previous year, revenue from the cross-charging of energy and utility costs fell by CHF2.5 million to CHF22 million as a result of various rate adjustments.

On the other hand, in its role as lead manager for The Circle joint ownership company, Flughafen Zurich AG received an increase in revenue from facility management of around CHF2.2 million. Revenue from services declined by CHF4.2 million, or 8%, mainly owed to the expiry of the management contract for Bangalore in May 2015 and lower revenue from the consulting agreement with Belo Horizonte. In total, non-aviation revenues are up by 0.2% to CHF392.4 million.

Let's switch from revenues to the development of our cost base and other important key figures. As mentioned before, in 2015 as well as 2016, figures have been impacted by various one-offs. In 2015, it was the establishment of the co-ownership structure for The Circle project, the extended sound insulation program and the adjustments in the pension plan.

In the reporting period, the extraordinary income consists mainly of an additional purchase price payment of CHF7.3 million from the land for The Circle, which was due to the initiation of the second phase of the project and a dividend of CHF3.5 million in connection with the liquidation of Swissair.

Personnel expenses amounted to CHF196.6 million plus 5.9%. This is mainly due to the higher average headcount in Zurich, especially following the endorsing of the operation and maintenance of Skymetro, the underground transportation system to Dock E. Despite strong growth in the number of local passengers, expenses for police and security contracted slightly to CHF118.3 million.

Thanks to more favorable purchasing terms, costs for energy and waste fell to CHF18.5 million. Costs for maintenance and materials decreased to CHF35.2 million; this is a consequence to lower external costs following the insourcing of the Skymetro staff as mentioned before.

As with costs for SM&A, there was a slight reduction in other operating expenses. After adjustment for the aforementioned one-off effects, capitalized expenditure and other income and expenses came to CHF9.6 million. In total, after adjusting for the one-off effects, operating expenses remain almost on a par with 2015.

Please let me now outline some key figures, focusing mainly on the right-hand part of the slide, the number excluding the noise components. To allow a better comparison of the operating performance, the numbers are excluding this and last year's one-off effects.

The EBITDA margin increased from 55.2% to 55.9%. At CHF235.9 million, depreciation and amortization increased by CHF13.5 million; this is the result of a general review of the operating life of property, plant and equipment. The reported savings in the finance result are mainly attributable to the repayment of the US private placement in April 2015.

Associated companies show a non-cash loss of CHF5.3 million, which is mainly due to the accounting policy related to the concession fees of our investment in Belo Horizonte. During the first fixed year of the 30-year concession, the Airport in Belo Horizonte will negatively impact our financial results before this accounting effect will be reversed.

Due to a higher balance of cash and cash equivalents, in combination with lower leasing liabilities, net financial debt is down by CHF84.8 million to CHF566.4 million and net debt to EBITDA currently stands at 1 time. The return on invested capital is at 8.5%, whereas the equity ratio stands at solid 61.5%. Last, but not least, the Company has generated CHF297.1 million free cash flow.

I will give you now some information on the segment reporting according to IFRS. The regulated segment shows a slightly lower return on invested capital of 5.7%, mainly due to the aforementioned increased depreciation. The decrease in return on invested capital from 13.7% to 12.9% in the non-regulated business is mainly attributable to the higher non-regulated asset base, which is a result of the investment in The Circle. Please note that the figures of the non-regulated business are excluding this and last year's one-off effects.

Next, let me provide you with an overview on CapEx. Investments in property, plant and equipment in the 2016 financial year amounted to CHF220.7 million. A proportional share of investments in The Circle amounting to CHF46.6 million was posted; otherwise, the largest investment comprised the completion of terminal 2 with CHF36.7 million, the expansion of car parks with CHF33.5 million and a redesign of curbside lanes with CHF15.2 million.

With this, I hand back to Stephan for the outlook.

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Stephan Widrig, Flughafen Zuerich AG - CEO [4]

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Let's have a look what is ahead of us. I will start with the timetable highlights for the upcoming summer timetable. EasyJet then Germania, the two low-cost airlines, are significantly strengthening their European network out of Zurich by adding new destinations or additional flights.

Just a couple of weeks ago, Qatar announced to operate a route Zurich to Doha four times weekly with a brand new A350, the first carrier serving Switzerland with this new plane. Compared to the 787, the A350 offers a total of 283 seats, that's an increase of 11% in seat capacity. At the same time, Qatar is increasing its weekly schedule.

Also, important for the connectivity of Zurich's hub will be the relaunch of the Zurich to Beijing route operated by Air China, since the Chinese flag carrier ended its operation in 2000, it is launching again the non-stop service with four-weekly flights using an A330 aircraft.

Edelweiss announces direct flights to Cancun, San Jose and San Diego, except for San Diego which will be served only during the summer season, all other flights are planned to operate as year-round services. Finally, the ongoing fleet replacement of Swiss will positively impact on transfer volumes.

On the commercial side, 2017 will be impacted by the redesign of the duty-free locations as consumer behavior is changing making new sales boosting measures and close cooperation with partners correspondingly important. The extension of the duty-free contract with Dufry ahead of schedule was a key milestone in 2016. All of the duty-free areas can thus be refurbished early and the related revenue will get strengthened for 2018 and after.

Lukas will now elaborate on the financial outlook.

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Lukas Brosi, Flughafen Zuerich AG - CFO [5]

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Thank yo, Stephan. Let me start with the guidance 2017. Please note that the guidance is based on 2016 figures excluding one-off effects. Flughafen Zuerich AG expects passenger growth of around 4% in 2017, with disproportionately higher growth coming from the transfer passenger segment as result of the Swiss fleet development.

Despite the first full-year effect of the reduced passenger-related charges, aviation revenue is likely to be slightly higher in the 2017 financial year, particularly as a result of the expected passenger growth. Revenue from non-aviation business is also expected to rise slightly.

For the operating expenses, marginal year-on-year rise is expected in 2017 as well. Therefore, EBITDA is expected to be stable and net profits shall slightly increase as a result of lower financing cost. The Company has earmarked around CHF300 million for investments. The biggest investment volume of around CHF130 million is for The Circle. Calls for additional aircraft stands and for the Zone A project, which includes the replacement of the baggage sorting system, are also included in the investment budget.

Let me add some color on the upcoming capital market transaction. In May 2017, a bond in the amount of CHF250 million will mature and Flughafen Zuerich AG will therefore refinance this debt in the course of the year. Our potential success in the upcoming bid in Brazil would increase the funding need. The Company aims to benefit from the favorable interest environment and we target a tenor of minimum 10 years.

In parallel, the reduction of cash reserves also remained an important goal to avoid negative interest rates. The financial flexibility will, however, be secured with committed credit lines. Both the refinancing of the maturing bond and the lower cash reserves will result in sustainable lower financing cost for the next years.

To end the presentation, let me give you a summary on shareholder remuneration. The Board of Directors is proposing to the General Meeting of Shareholders the payment of an ordinary dividend of CHF3.2 per share as well as the payment of an additional dividend out of the capital contribution reserve of CHF3.2 per share.

Last year's statement on the shareholder remuneration policy can be confirmed. The dividend policy to pay out 35% to 45% of profit excluding the influence of aircraft noise and excluding one-off effects will remain unchanged for now. On top of the regular dividend, the Company intends to pay an additional dividend in the range of CHF100 million per year out of the capital contribution reserve.

This mechanism shall remain valid for the next years, depending on the overall economic environment as well as on potential acquisition or investments made. Latest by the time the capital reserve is depleted, we will consider a change in the overall payout policy.

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Stephan Widrig, Flughafen Zuerich AG - CEO [6]

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So with this we are at the end of the presentation. We now open the Q&A part with questions first of the attendants here in the meeting room, after that participants on the telephone will have the opportunity to bring up their questions. May I ask you to introduce yourself with your name and your company before asking your question.

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Questions and Answers

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Pascal Furger, Bank Vontobel - Analyst [1]

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Hello, this is Pascal Furger from Bank Vontobel. I have three questions, so the first one is with regards to your retail concession margin. So, if I remember correctly, there was a timing impact in the first half year, was there still an impact in the second half year related to this or is the 20.8 the real reported number? You mentioned you see some upside from this, especially in 2018 when the Dufry stores are refurbished and new concession is in place; can you give us a feeling what would be the amount of upside you would see in this?

Then, second question is with regards to The Circle. Here you mentioned opening in 2019, so just out of curiosity, I know now you combined the two steps for one, so is the higher total for instance opening earlier or is, basically, is there now not delay but, as the construction size on an absolute amount has increased, will it hide for instance open also one year later than initially expected?

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Stephan Widrig, Flughafen Zuerich AG - CEO [2]

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That's two questions.

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Pascal Furger, Bank Vontobel - Analyst [3]

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Okay, so I have a last -- the third one is just a small add-on. You mentioned Belo Horizonte loss-making, so in associative, so something like CHF5 million or CHF6 million, this is a higher loss than last year; so, will this continue to increase and after year six will there be a profit there or just flat?

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Stephan Widrig, Flughafen Zuerich AG - CEO [4]

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Thank you. I suggest, Lukas, you take the first and the third question and I take the second question with regard to The Circle. Completion is foreseen by the end of 2019, so please accept that to specify the exact opening of individual units it's a little bit too early to decide already know. What we can say definitely is that construction is progressing as planned, the exact openings of the hotels and convention still has to be defined I think, most probably in the course of next year. Also, a few individual buildings of the second stage depend also a little bit on the tenant's schedule. Also, if you look on the site, one can see that construction progresses well and we still see the completion end of 2019.

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Lukas Brosi, Flughafen Zuerich AG - CFO [5]

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In regard to the retail concession, we had an accrual effect in the half-year 2016, that's correct. The full-year 2016 then is on a proper base. There's one thing to add is that the food and beverage segment disproportionally grew higher than the average of the commercial business where the concession margins obviously are at the lower end. This was the result mainly because of having more passengers airside. Personally, I think, one should be aware in 2017 of the construction impact we may see for duty-free as a preparation of the new contract with Dufry starting in 2018. In the medium term or in the longer term I would say that the average concession out of the commercial turnover by our partners should be on a positive continuing trend.

On the Belo Horizonte accounting topic, we've been always aware since the beginning of the concession that the participation in Belo Horizonte will impact the financial result negatively at the beginning. This is due to a very technical and complex accounting policy around the concession payment at the Airport. Your particular question about increasing loss contribution, I would say that on that level being CHF5 million or CHF6 million is -- would be a stable number for the next two to three years, before the trend then revises and will lead to positive contribution.

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Stephan Widrig, Flughafen Zuerich AG - CEO [6]

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Next question in the room?

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Patrick Laager, Credit Suisse - Analyst [7]

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Thank you. Patrick Laager, Credit Suisse. I'm just wondering about your 4% passenger growth guidance. It looks like it is a bit -- let's say, it's cautiously optimistic here. 4% looks to me relatively small in terms of guidance, given that we are looking for additional B777s to be introduced in the next couple of months, so I would expect more passenger growth here.

This is my first question. Maybe regarding your project, The Circle. Probably yes, you are currently in talks with different potential tenants, but are we -- do you expect to be successful here? Your vacancy rate is relatively high here, and there might be some concerns here among investors regarding your -- the success you will have until 2019, when the opening is of your -- of this big real estate project.

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Lukas Brosi, Flughafen Zuerich AG - CFO [8]

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I take the question on the outlook and Stephan on The Circle. Well, the 4% passenger growth we expect for 2017 in total, one should not take the almost 10% growth of the January or the first weeks in 2017 as a sustainable traffic pattern for 2017. One has to be aware that especially during the high-volume months during summer, we've been almost at the capacity limits on a daily basis. This cannot be increased significantly, so we expect that the trend of the first weeks we saw in 2017 will be -- will be lower during summer, and on a full-year base, I would say that the 4% is a fair number to assume.

One really has to be aware that the base effect of the last year, which was also very good year with the 5.3% passenger growth, also has to be taken into consideration for the full-year passenger guidance.

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Stephan Widrig, Flughafen Zuerich AG - CEO [9]

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The Circle is CHF1 billion investment, 160,000 square meter, definitely is not a small development. We have this 50% three years before the opening for me is a very good figure. It's the same figure as last year, because last year we didn't have decided to do phase two at the same time, so it again shows [preferred] growth.

I -- two things I can elaborate. One is the signing of Jelmoli for me also is a key confirmation that it works also as a retail development. Jelmoli, as you know, has just one location in Switzerland. It's the leading warehouse in Bahnofstrasse, has decided that they want a second location, has analyzed the market, has concluded that if they go of relate second location, The Circle is the most wanted. And since Jelmoli is even owned by a very competent real estate investor, with Swiss Prime Site, I think they know what they are doing. It's a very good sign.

Secondly, I call this the Prime Tower effect. When you see Zurich's largest office tower, with the Prime Tower, once the facade was visible, once people realized that entity of the building, then only started really the selling of the smaller tenants. And we will see this year Circle coming up. We will see next year a huge facade that everyone will see when coming to the airport and when leaving the airport. It will be very prominently placed on the land site identify of the airport.

So I'm very sure that for a lot of smaller tenants, this will be the moment where they start to look at it more closely, while all the large tenants, step by step, we must say that we fulfilled our targets. We had -- with the hotel and convention, we've hired our most wanted partner.

We had then in the health business also with the University Hospital of Zurich the key partners we wanted now in the retail with Jelmoli and the largest travel retailer, I think again two key anchor tenants. So even if at the opening we would have a 10% vacancy, this would not be something special at all for such a large development, which is a long-term development to strengthen Zurich as a center.

But I would even as per now think that at the time of opening, we will have rented out more or less everything, but let's cross that bridge when we get there. But the advances on the marketing front for us are as expected.

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Patrick Laager, Credit Suisse - Analyst [10]

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Thank you. Maybe a follow-up here regarding The Circle. Despite the fact that you look or you sound very confident to increase your tenancy ate here, do you believe that it will be at the expense of the rent per square meter. I'm thinking about you potentially switching from office space to shopping space, supermarket space, etc., where basically the rents per square meter are lower. Do you think that stays a risk here?

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Stephan Widrig, Flughafen Zuerich AG - CEO [11]

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Sadly, the current real estate cycle for office space has this pressure on the average trend, and for me, there is the kind of office space, which I call private space, above the roof. There it's more important to have the patience to wait rather than just sell it down now for lower prices.

Even there, if we see that one year before the opening, we don't get to the rates expected, we still have to make an assessment whether we prefer to keep partially empty or sell at a lower rent, while in the commercial part, first of all, it's important that everything is full and opening.

And secondly, the contracts signed so far are as we have defined in our business plan, so we think that on the commercial front, we have positioned The Circle early not as a new retail and shopping center but we have addressed the issue of retail going more online and increasing the necessity of brands to have fewer locations at more prominent locations with a higher brand identity. Therefore, we have also addressed this transformation of the retail industry at an early stage of the development, which helps us of course now that we are in line of the expectations.

Mr. Rechberger first?

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Armin Rechberger, Zuercher Kantonalbank - Analyst [12]

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Armin Rechberger from Zuercher Kantonalbank. A few questions. Brazil, you mentioned because of your financial situation, you mentioned there an acquisition, and it seems quite sure you get your target there. What can you say about that?

Then the other thing, Bangalore, you seem sure will be finalized during -- a month ago, you said will be finalized during these days, and we are a month later now, and it's not finalized. It was not finalized last year, as well. Some problems there, or what's the background? Then the new parking places, the peripheral parking places, when will they kick in?

And then I know you are very cautious about pre-letting rates, but I'm interested in a figure for -- just for the module of brands and dialogues. Can you give me a figure there, how much is the pre-letting rate?

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Lukas Brosi, Flughafen Zuerich AG - CFO [13]

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Well, let me start with Brazil, Bangalore and the pre-letting question, and Stephan can take the parking. For Brazil, we're currently assessing the bid of the third privatization round, which consists of four different airports.

The auction, as planned, takes place in a week from now, so we are very much on the final stage. We do have to hand in the bid early next week. The likelihood, and this was your particular question, if we're winning or not, depends on late -- finally, on the competition on those assets. So therefore, I cannot give you a percentage number of likelihood I expect.

Very generally, I think that at least one of these four airports will perfectly fit into our portfolio, as these are 25 or 30-years concession, where with an operating leverage being assets from state-owned property into privatized assets. That would be a perfect fit in a market that we already have a foot in with Belo Horizonte.

So I would be very happy if we can win at least one of these airports. Regarding Bangalore, I agree that it took longer than we have expected. You know that our sale of the 5% is linked to another transaction of existing shareholders selling to the same buyer.

For the time being, all conditions precedent on our side and on the other shareholders are now fulfilled, and we still expect closing in Q1 2017. And on the pre-letting question regarding individual modules for The Circle, they are not disclosed in details. Still through what we said is that the overall pre-letting is 50%, and this for both of the legs, so phase one and phase two together. So the whole project has a pre-letting rate of 50%.

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Stephan Widrig, Flughafen Zuerich AG - CEO [14]

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And regarding your questions, when do we open the long-term parking, [oberhau], the issue there is that we have still a legal proceedings at court. We are quite confident that these are just legal claims to prolong their existing business rather than they will have a legal chance to win, but we don't know to which court they will prefer to take it. So it's a little bit difficult to see whether these legal questions will be solved this year or next year. We then have a building time of around two years, so it will be somewhere in three years, I would say, that we expect the opening.

And with regard to Brazil, at the end, the target is not to win the bids, but the target is to win a bid at favorable terms, so there of course we then will -- since it's an auction, we will very much have the chance also to influence still what costs we will bid. And there, if recession in Brazil is such that it's a good time to invest, then this will certainly favor our bid strategy. And if there are too many aggressive bids, we will then decide whether or not to go further. So it's for us a good opportunity, since Brazil is a little bit anti-cyclical now. But if the mood still is too positive on others, then we have proven in the past that we are rather conservative on such bids.

Good.

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Andrew Light, Citigroup - Analyst [15]

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It's Andrew Light from Citi. Two questions. First of all, on your passenger rejections for this year, are you seeing any negative effects from the restructuring of the Air Berlin Group? And secondly, aside from Brazil, are you pursuing or interested in other international opportunities at the moment? Perhaps you can just clarify your international strategy?

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Stephan Widrig, Flughafen Zuerich AG - CEO [16]

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So with regard to Air Berlin, they primarily serve two markets. One is the German cities of Berlin and Dusseldorf, the non-hub cities, where there is a very strong demand, local demand, of Germans flying to Switzerland and the other way around. And the second market they serve is holiday destinations for Swiss people, mainly at Mediterranean. And these two segments that Air Berlin serves are driven by local markets of Switzerland, are very robust routes.

So irrespective of whether Air Berlin serves these routes or not, we are very sure that if they would drop out of one of those routes, there would be immediately another airline drop in these routes. So we do not anticipate any impact on traffic volumes, whatever happens with Air Berlin or Belair.

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Lukas Brosi, Flughafen Zuerich AG - CFO [17]

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On the international portfolio, we're currently really focusing on Brazil. This is a large project. It would bring our international business a significant step forward towards their strategic goals. In the medium term, I do see also opportunities in the eastern part of Europe, but this would be the short list for the next 12 months.

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Patrick Hasenboehler, Zuercher Kantonalbank - Analyst [18]

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Patrick Hasenboehler, Zuercher Kantonalbank. You mentioned during the presentation that you're targeting lower cash reserves. Could you give us an indication of what's the target level of the cash reserves in the balance sheet?

And second question, could you give us an update what we have to expect concerning the midterm net debt to EBITDA level?

And third questions concerning Brazil bids, is it theoretically possible that you will win all four bids?

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Lukas Brosi, Flughafen Zuerich AG - CFO [19]

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Well, on cash balance, having strong cash flows in 2016 or even the years before, we had the trend of an increased cash balance over the last years. This now generates the problem of negative interest. In total, as a really pragmatic rule of thumb, having CHF1 billion turnover, an adequate cash balance would be in an area of CHF100 million for our Company, in addition to the committed credit lines.

On the target of net debt to EBITDA, which currently stands at a historic low level of one, we mentioned 12 months before that the target considering international M&A activities, potential strategic assets here at the airport could be up to a level of 3 to 3.5 times net debt to EBITDA. I think it's really important to understand that this is not a number carved in stone to be achieved over the next three to five years, but would be the result of an acquisition success in Brazil and potential two or three other assets into the portfolio.

And please help me with your last question.

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Stephan Widrig, Flughafen Zuerich AG - CEO [20]

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Last question was whether we can win all four airports in the Brazil bids, and I would say we intend to -- the setup of the auction is such that you can only win a maximum of two bids, and whether you want to win one or two, you can still decide in the dynamics of the auction, so we do definitely not target -- it's impossible to get more than two, and we probably most likely will focus on one.

Any more questions in the room? Front row.

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Unidentified Audience Member [21]

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Growing internationally and growing in Switzerland, it just sprang up into my mind, Duebendorf, I don't know anymore what's going on there. Would there be a chance to invest or how is the situation there? The military airport with Duebendorf.

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Stephan Widrig, Flughafen Zuerich AG - CEO [22]

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We generally -- we have not as an operator of so-called FBO projects where you just have general aviation and business aviation, but we rather see our focus on airports with a sizable passenger growth. Duebendorf would never be such a case. We would not invest in Duebendorf internationally, neither.

The situation in Duebendorf is politically still very difficult. We think for Switzerland it would be good to have a second business aviation. We do not see any problem losing here business aviation traffic to Duebendorf. We have the opposite problem that we step by step lose or have to reduce slots for the business aviation community, since our priority currently is on the large planes full of passengers.

Good, so we would then switch now to the questions on the phone. And who do we have first?

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Operator [23]

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The first question from the phone comes from Vittorio Carelli, Santander. Please go ahead. Mr. Carelli, your line is open.

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Vittorio Carelli, Santander - Analyst [24]

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Hi. Good morning. Can you hear me?

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Stephan Widrig, Flughafen Zuerich AG - CEO [25]

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Yes.

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Lukas Brosi, Flughafen Zuerich AG - CFO [26]

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We do.

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Vittorio Carelli, Santander - Analyst [27]

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Hi. Good morning. Hello, can you give me? Can you hear me? Yes, okay.

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Stephan Widrig, Flughafen Zuerich AG - CEO [28]

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Yes, we can hear you. Go ahead.

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Vittorio Carelli, Santander - Analyst [29]

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I have five questions, very quickly. You are clearly overshooting -- okay. You are clearly overshooting the regulatory return, well above the WACC. So do you envisage any problem during the annual tariff decision that you are going to have this year?

Secondly, your net income guidance for 2017 is slightly higher. Should I assume that the slightly higher is without considering the Bangalore effect?

A third question is the payout, the normal payout on the normal dividend. It's been 40%, roughly. What has prevented you to be slightly more aggressive on the payout going to the upper end of the range, to 45%? Regarding the capital structure, I'm happy that you realize that we are still optimized structure, below 1 times EBITDA, and that you confirm a sort of tentative 3 times EBITDA by three, four years.

But you only mention that the elements that may push up the leverage would come from only M&A. Is that confirmed, or do you also see some scope for debt against dividend? Debt against equity for shareholders, that may push up slightly at least such ratio.

And the last question regards the acquisitions, possible acquisition of one of or two of the Brazilian airports. May I expect -- may we expect a more aggressive stake -- target stake in the bid, so not only a minority stake but also a more relevant minority shareholding or even a control stake in such a bid?

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Stephan Widrig, Flughafen Zuerich AG - CEO [30]

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Thank you. All good questions, all for our CFO.

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Lukas Brosi, Flughafen Zuerich AG - CFO [31]

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Thank you, Vittorio, providing those questions. Let me start with question one on the regulated return. It's true that we currently are above the allowed return. One has to consider different things. First of all, we only had a four-month period on the new tariff regime. Also, the cost of capital is based on a 10-year average on the debt side, which has some effects or some delay effects when calculating cost of capital, etc.

So one can say that the tariffs are now set for the four years, and depends mainly -- not only on the volume impact, which has the -- which was the significant impact in last year but also on CapEx and traffic patterns such as local versus transfer for the next year. I don't see immediate pressure on the tariff, as these as mentioned are set only six or seven months ago.

On the net income guidance, which is slightly higher, this obviously excludes the Bangalore effect in 2017. The guidance excludes all one-offs in 2016 and any potential one-offs in 2017.

Then your calculation on dividends based on net income excluding noise components of roughly 40% is correct. There, the intention is to grow the ordinary dividend mainly in line with the net income. We will not change the policy towards 45%.

And on your question regarding net EBIT -- or net debt to EBITDA, I consider an increase in net debt EBITDA number mainly coming from M&A and not by financial engineering, increasing debt then paying it out as a dividend to shareholders.

And the last question was about the structure of -- related to the Brazilian bid. Very general speaking, which is also true then in particular for Brazil, is that we do not tend on a defined percentage number in such a consortium. Our main intention is to be the operator and to influence the operating processes, such as in the airport operation and commercial development.

If this comes with a minority stake, we are more than happy to not go into a majority. A majority, I can see a majority in a market where we do have comfort, too, which is true for Brazil, but also has to be linked closely to our role as the operator.

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Stephan Widrig, Flughafen Zuerich AG - CEO [32]

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Current market conditions in Brazil, though, are with Brazilians not --

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Vittorio Carelli, Santander - Analyst [33]

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Just as more --

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Stephan Widrig, Flughafen Zuerich AG - CEO [34]

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-- bit and with international financial investors also not looking too closely also that the operator share is rather higher than usual I would anticipate. Next question from the conference?

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Operator [35]

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The next question from the phone is from Albert Pranger from Kempen. Please go ahead.

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Albert Pranger, Kempen - Analyst [36]

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Thank you, gentlemen. I just have a small question with regards to CapEx, because if you look at CapEx this year on The Circle, it was 50% to 60% lower than previously guided. First of all, I'm curious, why was this amount actually lower, especially because you say that the project isn't running into any delays.

And second, I had a discussion with Mr. [Weber] this morning, and he said to me that the amount will be carried forward to next year. Is that included in current guidance, or should we add that on top, especially in light of the CapEx roadmap you previously provided us, which leads us to believe that there is CHF150 million to CHF200 million on CapEx to be expected in The Circle? Thank you.

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Lukas Brosi, Flughafen Zuerich AG - CFO [37]

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Well, it's basically through the year a lower CapEx number for The Circle in 2016 is mainly reference date driven and will be shifted to 2017. The CHF300 million is including the shift in CapEx. We have invested currently about CHF120 million into The Circle in total, and once the ground construction work is completed, which is currently the case, then CapEx numbers obviously tend to be higher in the following year. But one cannot link the shift of this CHF50 million from 2016 to 2017 into a delay in the project.

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Stephan Widrig, Flughafen Zuerich AG - CEO [38]

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Is that okay for you?

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Albert Pranger, Kempen - Analyst [39]

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Yes, perfect. Thank you.

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Stephan Widrig, Flughafen Zuerich AG - CEO [40]

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Yes. Next one.

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Operator [41]

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There are no further questions from the phone.

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Stephan Widrig, Flughafen Zuerich AG - CEO [42]

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Are there any further questions in the room? Good. Then we conclude here. Thank you very much for coming, for attending to the conference, and we have the chance for further informal dialogue in the back of the room. I hereby close our annual conference and look forward to the next one. Thank you. Bye.

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Operator [43]

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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. Bye.