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Edited Transcript of FRA.DE earnings conference call or presentation 7-Nov-18 1:00pm GMT

Q3 2018 Fraport AG Frankfurt Airport Services Worldwide Earnings Call

Frankfurt Jan 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Fraport AG Frankfurt Airport Services Worldwide earnings conference call or presentation Wednesday, November 7, 2018 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christoph Hans Nanke

Fraport AG - Senior VP, Head of Finance & IR

* Matthias Zieschang

Fraport AG - Executive Director of Finance & Controlling, CFO and Member of the Executive Board

* Stefan Schulte

Fraport AG - Chairman of the Executive Board & CEO

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Conference Call Participants

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* Andrew Lobbenberg

HSBC, Research Division - Head of the European Transport Team

* Arthur David Truslove

Crédit Suisse AG, Research Division - Research Analyst

* Johannes Braun

MainFirst Bank AG, Research Division - Director

* Michael Kuhn

Societe Generale Cross Asset Research - Equity analyst

* Ruxandra Haradau-Doser

Kepler Cheuvreux, Research Division - Equity Research Analyst

* Stephanie Fabienne D'Ath

RBC Capital Markets, LLC, Research Division - Analyst

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Presentation

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Christoph Hans Nanke, Fraport AG - Senior VP, Head of Finance & IR [1]

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Hello, everybody. Also, a warm welcome from my side. Welcome to the presentation of Fraport Group Results of the Third Quarter 2018. With me at the table, I have Stefan Schulte, our CEO; and Matthias Zieschang, our CFO. Stefan Schulte will provide you a business update and outlook, then Matthias Zieschang will guide us through our financials. Finally, there will be sufficient time for questions, which we will happy to answer.

Dr. Schulte, would you like to start?

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Stefan Schulte, Fraport AG - Chairman of the Executive Board & CEO [2]

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Yes. Of course. So good afternoon, ladies and gentlemen. Also, a warm welcome here from Frankfurt from my side.

I would like to go straight into my presentation. I'd start on Slide #4. The numbers we released this morning confirms the strong traffic trend we were seeing over the past couple of months, while the revenue growth was really impacted by an accounting effect, you know this IFRS 12. EBITDA performed just fine, EUR 880 million meant a new record high for the group. The key driver for the strong growth in the group again, was our International business. I would like to especially point out to development in Greece but also Brazil and Lima continued to experience vital traffic and earnings growth.

Going more bottom line, it was also investment in Turkey, which performed very well. Thanks to the ongoing passenger momentum in Antalya, the investment was able to grow its 9 months results by more than 60% to EUR 70 million. Therefore, Antalya is clearly on track to achieve its best traffic and financial result ever this year. As a result, after good earnings momentum, also our EPS were clearly up and exceeded the full year value of 2017 already after just 9 months.

Going on Slide 5, taking an eye on the broader picture as we increasingly get the question about our operational leverage. The slide clearly proves what we achieved over the past 24 months. Coming from a level of less than EUR 700 million, our EBITDA grew by more than EUR 200 million to today's all-time high level. Certainly, the key driver for this growth was our international portfolio. The Greece and Brazil alone added more than EUR 160 million to the group. Having said this, our group in the meantime has increasingly become international. Around 37% of our overriding profit these days is coming from outside Frankfurt, and therefore is making international activities to the segment to our biggest single segment inside the group. But it was not just our international activities segment, also Frankfurt was growing its results. Coming from a period of no growth in 2016, Frankfurt shifted back into the growth mode. Despite a higher wage increases of more than EUR 30 million in the meantime and more staff hire ups, the 3 Frankfurt segments grew its EBITDA by around EUR 35 million or 7%. Clearly, most of the group-wide EBITDA growth was achieved by new investment, but also on EBITDA and EPS level. So including for the capital costs of the new investments, we were able to grow our results substantially. As you see here on the slide, EBT plus 40% and EPS plus 60%. Having said this, despite all the operational headwind, we are getting, I would like to especially thank also our employees who showed a strong commitment to the group, making this good results work. More details on the current financial performance you will get later as you will hear from Matthias.

So let's go to the traffic performance and I'm now on Slide 7. I hope it's the same number you have. You know the numbers on the chart, they are not new, as we already published them a month ago. But let me just highlight a really strong traffic growth we continue to see across all our airports this year. Growth these days in Frankfurt clearly comes from Lufthansa and from the low-cost carriers. We expect the growth will continue also into 2019 but on a different scale. Although we have not guided for our airports in 2019 yet, from today's perspective, it seems rather realistic that our international assets will trade somewhere around the mid-single digits. While we expect for Frankfurt to see a growth number somewhere in the range of low-single digits. Why lower in Frankfurt? Lower than the international business, but also lower than this year? Firstly, we had now 2 years with a very strong growth. So thereafter, low growth rates are quite normal. In addition, the infrastructure in Frankfurt airport, especially the terminal capacities, are increasingly becoming full. On whether we will also see some headwind from uncertainties out like the global trade wars, the higher oil prices, or all questions around the Brexit, it's too early to answer. But clearly, more important are those bottlenecks we saw this year and which will continue at least throughout 2019, question is just on which magnitude. I mean all the capacity problems caused by the air traffic control system in Germany, but also in Europe, where Frankfurt is more exposed than other airports due to the central location in Germany, but also due to the high connectivity of flights. Coming back on this year's growth in Frankfurt, you can also see our preliminary figures for October in the green box. October was already showing a somewhat slower growth, but still really dynamic rate of around 5.2%. On a cumulative base from January to October, growth is now on 8%, which is quite high. More news are the current winter flight season, I will provide in some minutes, but let's focus in our international assets first.

So business update, Brazil. I'm on Slide 9 following the takeover in January we already finished the operational quick wins. With regards to the mandatory CapEx, you can also see it on the charts, we already had the groundbreaking ceremony in Fortaleza and also in Porto Alegre. The total bill for the 2 investment programs will amount up to BRL 2.3 billion as signed with the 2 EPC consultants. More news we can also provide on the financial side. Here we already see a closed one and are in the process of starting a second project finance. Both financings are done with local BMB and BNDES infrastructure banks, securing around 70% of the CapEx needs. Regarding the financial framework and conditions, it is also fair to assume a market common interest rate for the projects financing with some mid -to high-single-digit percent range. Operationally and financially, 2 airports are also on track to deliver our budget value set around BRL 160 million EBITDA for this year.

In Greek, moving to our segment international growth driver this year. Following the exceptional good traffic performance we recorded last year, also this year we're showing an outstanding traffic momentum again. Across all 14 airports we operate in Greece, we ended more than 15 million passengers in just the last 3 months. This growth rate of more than 7% is even more impressive bearing the strong passenger numbers of 2017 in mind. The big demand of passengers who travel there is also making our congested capacities inside and outside the terminal more obvious. Together with Intrakat, our local EPC contractor, we intensively work to bring up the airport capacities.

The third milestone here we will have waged within the next couple of weeks, which is a contractual for seeing completion of the refurbishment and imminent growth. Following these steps, we already made good progress in our capacity expansion program. Here, we also handed in the application to raise the airport charges for the first 3 airports to be ready for the upcoming summer season in Chania, Zakynthos and Kavala. Moreover, we also had the groundbreaking ceremony at Thessaloniki airport, which is the single biggest airport and construction project. So in Greece, all is performing fine and we are really confident with the progress so far.

Coming back to Frankfurt. On Slide 11 (sic) [12], we provide an update regarding the current winter season. The figures look quite strong. Movements and seat capacities are expected to grow within the mid-single digit wage. And in addition, it is worth to highlight that the winter season will also see an even split between continental and intercontinental growth that's positive. And main growing airlines will be Lufthansa and Condor, while on the continental side, it will also be Onur Air, EasyJet and Wizz Air, so the low-cost carriers that would provide for some capacity growth.

Regarding the traffic split key growing international and intercontinental market is North America, but also the Northern Africa and Indian markets would see a good growth. Our important next task is must be to smoothly process this capacity growth.

Regarding processes, we recognized, as you know, a terrible summer with many cancellations and disruptions here in Frankfurt but also throughout Germany and Europe, in general. Most of the disruptions were also the result of the bankruptcy of Air Berlin and carriers trying to capture the split of market share. But as mentioned already, also the staff shortage at the air traffic control and the congested upper air space layer were main reasons for the extraordinarily high number of delays and cancellations we saw. As a result of this challenging situation all involved parties, airlines, air navigation, airport and politics, agreed on to more than 20 measures on a German aviation summit which took place at the beginning of October and which was initiated and moderated by the Federal Ministry of Frankfurt. Perhaps, most important point certainly is the situation at the security checks. In addition to the measures we have already taken during the summer, so the phasing in of new security lines and hiring of more staff, we also want to take over more active role within the security process. Why are the security checks so important for us? The security checks clearly are one of the main processors inside the terminal and direct customer interface. He has a long queuing time. Certainly within customer satisfaction and the perceived quality of the airport by the customers who enter the airline. And finally as passengers lose time to do and shop we are also effectively losing money on the retail side. I'll come back on this topic later on.

What do we want to change? The current status of the security process. So what -- who does what is described in the appendix of this presentation. You can see that the staffing and procurement of technical equipment is with the state. So we have no position in that, no chance of changing anything. This is -- and this is what we want to change and assume those responsibilities in order to ease a bottleneck situation at the security checks and to secure the high quality we're aiming for our passengers in Frankfurt.

Next steps. Next steps are the Federal ministers asked for second Summit. This will presumably take place somewhere on spring next year. In order to monitor the progress taken by the involved parties and also by the states. And that's important because on security business side, the main responsibility and to get process to achieve progress is with the state, they have to take some actions there.

In addition to the situation at the security checks, we are also working hard on the topic of new capacities to be made available on the ground. So therefore, we are glad to finally receive the permit to go ahead with Pier G with 1 year delay. That's really angry. So we expect to get Pier G available somewhere in summer 2021, but not earlier. We're now on the tender process and we have to see how the tender process will come out and then what the results are. More progress we are doing on Terminal 3 already because in Terminal 3, the tender process for the construction works on the first pier are done. So we will start with the first pier with the construction there somewhere over the next week, latest beginning of next year and even the tender process for the construction work on the main hall is on the way. So somewhere mid of next year after the construction of the main hall would start. So we are on track there with all those topics to bring in additional capacity beyond Frankfurt airport, which is important also for the point to increase and the number of slots. Which is the big differentiator compared with Munich because you know that the politicians decided not to go for a third runway in Munich, which is intrinsically positive for us but not positive for aviation, in general. And as you see, such a development is even more positive for more important that we got the greenlight from the politicians here in the state of Hessen for Pier G and Terminal 3, in general. We need also this Terminal 3, in general, because you know that we also want to set up a much more modern new retail airway in Terminal 3.

And that brings me to the slide on Slide 14 (sic) [15] , on the retail development this quarter and the first 9 months, which was not as favorable as we would have expected. Clearly, we were negatively impacted by the strength of the euro compared to a number of other currencies. While the comparison against U.S. is no major topic as of Q3 any longer, we still see several emerging markets currently strongly devaluing against the euro. Despite this obvious reason also our peer group is exposed to the currency topic but still they performed better than we did. That's all. Therefore, we must be frank and need to admit that first of all, the Frankfurt infrastructure is by far not the benchmark for retail and that is the reason I just mentioned we need a big central marketplace which we will get with Terminal 3 and -- but not with the actual infrastructure. And in addition, due to the strict fire protection regulations we are having in Germany, we're also very constrained when it comes to adapting and upgrading the infrastructure. Second, the long queuing times we recorded within the airport. I mentioned those already with security businesses here, was certainly not helpful for our retail activities. Over most of the growth, we recorded this and last year was on the continental side. And you know that they spend additional money, that's positive, but they spend less than average, so it is positive to have them in, but is not positive for the spend per passengers or for the key performance indicator. And this reason, and this is a structural one but hard to measure is the general trend of e-commerce. We don't believe it's the main reason, but it's somewhere also a topic you have to take into account. Following the summer, it is now our task to steer against. Currency and passenger mix are certainly troubles we cannot steer against. Also e-commerce is somewhat a topic which no one can stop. But despite this headwind we will work intensively on measures to growing up our retail business again. In broad terms our retail measures can be divided in short-term, mid-term and long-term measures as shown on the slide. Short-term measures, yes, that still comprise actions we are taking on existing plays like promotional activities and ramping up our sales force. In addition, we are making, for example, some ticket sales available or team up with so-called digital giants like Alipay or WeChat. Here, we intend to further cooperate and promote our goods via their platform. Our target of the short term measures is to stabilize the retail business per passenger somewhere into 2019. More important are the midterm measures then representing the adjustment and upgrading of existing terminal areas wherever it is possible from a fire protection perspective. Among others, we plan to relaunch our duty free and travel value shops in Terminal 1 Concourse B between 2020 and 2021. Here we are clearly shaping the profile of the shops between World of Taste and World of Beauty. In addition, we effectively are focused on the food and beverage offering and high-luxury brands. Those brands still show a very high space productivity, combined this effect you can't usually buy them on a digital marketplace, and that's important. Financially, our target there is to recover our spend per passenger somewhere to the level of EUR 3.3 that we recorded last year. Long term then, as mentioned, new areas within the infrastructure to be made available as of summer 2021 with Pier G or later on 2023, end of 2023, with Terminal 3, the main hall building, these are very important steps going ahead.

Coming to the outlook. I'll make it very short. It brings us to the last slide of this -- of my presentation, on my part. Compared to the update outlook materials was giving you the first half result there was no further update today. Hence, we confirm our target set for Frankfurt passengers and also for the financial ranges, the extra gain from the Hanover divestment we see last October and will be added to our fourth quarter results. Having said this, I would like to hand over to Matthias for the financials

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Matthias Zieschang, Fraport AG - Executive Director of Finance & Controlling, CFO and Member of the Executive Board [3]

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Yes. Thank you, Stefan, and warm welcome also from my side. Let me start my presentation with our bridge for the group revenue in the past 9 months. As he already presented during our call for the H1 results, our Aviation segment continued to show good revenue performance. Main drivers here were higher volume related airport charges and security revenue. Profitability-wise, please keep in mind that security revenue, in general, is more or less a pass-through so that only airport charges will impact the segment's EBITDA.

Within the retail and real estate segment, revenue again was negatively impacted by the higher number of property sales that took place in the previous year, which can be seen in the column of land sales. In addition, real estate revenue was down due to the energy supply contract we lost at the start of this year.

Regarding our energy business. It is again worth noting that the revenue we are recording here has a very low margin so that the absence of revenue almost has no impact on EBITDA. In addition, we will have also written our interim release we signed contract to divest our energy subsidiary to local supplier. Subject to the closing of the deal, which we expect to happen in the next year, our real estate revenue should go down even further by approximately EUR 20 million in the next year. On the other side, EBITDA should remain broadly the same as indicated before. As a result, we expect a positive impact on the segment margin out of the divestment.

Regarding the other revenue streams of the segment. Parking revenue still was positively impacted by the higher number of O&D passengers, while our retail business remained relatively weak during the third quarter. In line with our H1 development, the ground handling segment, again, was able to record a good revenue performance, which was up by around EUR 27 million. Our 3 Frankfurt segments, therefore, in total contributed some EUR 42 million to the increase in group-wide revenue. Outside of Frankfurt you can see the positive contribution of our airports in Greece and Brazil. As a result of the euro strength, the performance of Lima, Airmall and Fraport Brazil however continue to be broadened when converting the local accounts into euro. Despite this adverse effects impact, Lima still was able to show a revenue increase for the first 9 months, reflecting a good operational performance we have seen in Peru. Revenue thus grew by close to EUR 160 million or more than EUR 300 million when taking the IFRIC 12 impact into account.

The development of our operating cost is shown on Slide #19. Out of the EUR 180 million increase in revenue and other operating income, you can see that we translated some EUR 72 million into EBITDA growth. Bearing in mind that the EUR 16 million security revenue has a very low margin or 0 margin, it translated more than 40% of the incremental revenue into EBITDA. The key drivers for OpEx inflation you can see on the chart. In line with the H1 results, our staff cost pillar again showed the biggest volatility. Neglecting the security business, our staff cost in Frankfurt were up by around EUR 33 million. EUR 17 million can be explained by the high collective bargaining agreement signed at the start of this year. So that EUR 16 million was the underlying increase in staff cost. This additional growth can mainly be attributed to the higher number of employees within our ground handling segment and by extra shifts performed by existing staff to handle the sharp increase in traffic. The gains of our restructuring program can be seen in the decline of labor force within our parent company. Here, we are able to record a relief of around EUR 19 million. Doing the math properly, you can see that we paid some EUR 28 million additional staff cost for around 1,100 employees within our ground handling subsidiaries. While on the other side, some 370 employees left the parent company causing savings of around EUR 19 million. So we continue to see clear positive impact from our restructuring program also in the past quarter. Despite this relief, our cost performance this year was certainly below expectations. Going forward, we are, however, confident that the newly hired and trained staff show an improved efficiency next year. In other words, we don't expect the increase in labor force that we have seen these year to be sustainable going forward. Also the extra shift component, we expect to come down next year. Hence, for 2019, we assume efficiency gains and the continued support from our restructuring program. Despite this cost inflation, group EBITDA of around EUR 880 million was in line with our expectations so that we are absolute confident with our guidance Stefan just mentioned.

Going more bottom line now on Slide 20. Comparable to the first half results, we continue to see an increased D&A due to our investments in Greece and Brazil. The absence of the Boston concession book value write-down and the euro strength on the other side were easing our D&A burden from our U.S. and Peruvian businesses. In Frankfurt we additionally recorded and increased D&A due to our CapEx program. Here we, updated our maintenance plans going forward, leading to shorter average usual lifetimes of some of the assets that we plan to refurbish over the next years. Hence, D&A increased strongly in the third quarter. For the full year, we now expect to reach a level of around EUR 400 million.

Within our financial result, we -- there was not much of a change compared to our H1 results. Certainly, Antalya was performing very fine on the back of the sharp passenger growth mostly remaining effective and more or less the same. Pooling all those effects together, our group result improved by around 10% to EUR 378 million, which also was broadly in line with our expectations.

Coming now to my final slide for today. Our cash flow and financial position on Slide #21. Our operating cash flow before working capital changes perfectly reflected our increase in EBITDA at a level of around EUR 692 million represented an increase of some 9%. In line with our H1 results, also, our 9 months operating cash flow was negatively impacted by a higher number of receivables and provisions as of the balance sheet date. Hence, our operating cash flow after working capital changes reached a lower level of EUR 652 million. This figure compares to a level of EUR 712 million in the previous year, which was positively impacted by a higher number of liabilities. Despite the negative impact of working capital changes, our operating cash flow was sufficient to compensate the higher CapEx we have recorded in Frankfurt and our international activities. Hence, we were able to generate a positive free cash flow of around EUR 82 million for the period under review. As a result of the positive free cash flow, our group indebtedness only increased slightly due to the dividend payout to a level of just under EUR 3.6 billion. For the full year, we expect free cash flow to be more or less breakeven. Thanks to the cash inflow we received from our Hanover disposal, we therefore expect to remain between EUR 3.5 billion and EUR 3.6 billion with regard to net debt in the full year. Correspondingly, we expect our net debt-to-EBITDA ratio, based on the full year outlook, to also remain below 3.3x, while our current gearing ratio stands at a comfortable rate of below 90%.

Having said this, I'd like to end my presentation and we can start now the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Ruxandra Haradau-Doser of Kepler Cheuvreux.

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Ruxandra Haradau-Doser, Kepler Cheuvreux, Research Division - Equity Research Analyst [2]

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Three questions, please. First, you mentioned the slowdown in traffic growth in Frankfurt next year, which sure is not surprising. But how should we think about the incentive payment in the context of slowing down passenger growth? What incentive payment should we consider in our model at only 3% growth in 2019? Second, do you expect Eurowings to start operations in Frankfurt next year? And if yes, to better understand incentives, will Eurowings be considered as a stand-alone airline? Or will it be included in the capacity growth of Lufthansa Airline? And will Eurowings operate from the same terminal as Lufthansa? And third on retail, could you please be more precise on your retail revenue per passenger target? What exactly means stabilization in terms of figures? Your retail revenues per passenger in Frankfurt are below those achieved by many of your peers. So when do you expect to close the gap to Flughafen Zürich or Aéroports de Paris? And has there been any personnel changes in the retail division given the weak performance of the last year? Or will it be the same people responsible for implementing the new measures you highlighted today? And from a medium-term perspective, maybe considering that the duty free market is organized more as an oligopoly, does it make sense to bundle retail activities at all your airport into one division?

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Stefan Schulte, Fraport AG - Chairman of the Executive Board & CEO [3]

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Yes. Thanks for those questions. Let me start somewhere with incentive scheme. The incentive scheme is linked to growth, of course. So the absolute volume of incentives is coming down then but only on the new growth because you know that we are also paying some amount even if the amounts are getting reduced for the growth of the years before as the scale and you know that and we can go more in detail, but I don't have at the moment a calculation, if it's 1% growth, if it's 2% growth, if it's 3% growth because it depends also on the growth the different airlines had in the years 2018, 2017 and so on. Regarding Eurowings, let me answer it a little bit more general. In principle, we welcome and are glad about any new airline that also new for Eurowings, but there's no special attention on Eurowings or special focus on Eurowings because at the end it's just one airline now out of the Lufthansa group. So even we are happy and glad about those of Lufthansa but as we are also with all the other airlines. And more important is which destinations, which intercon destinations and so on we are getting in and going on which frequency and so on. So there is no discussion about Eurowings and another time not only focus on Eurowings, there's no decision whether it is on which terminal or whatever. And yes, they would get, of course, as a new airline they would get incentives as they will grow on that side. Retail stabilization, I think Matthias and I, we gave you over the recent meetings the background on what are the reasons for the disappointed development. There's no question, but we have to differentiate, some of the developments are clearly just because of the smaller growth of continental passengers compared to intercontinental growth. So spend per passenger must come down, that's very simple on that side. But there are other disappointments. There's no question there are other tools also, and I tried to give you some of them, which not linked to the staff of the retail business, that's much more linked to the question of higher protection and then some other burdens we have there in that business. So I'm not so optimistic to say we close the gap to Zürich or other airports because we also have a much higher transfer share so you cannot -- you would have to exclude on that side and to take the special consumption policy of transfer passengers in. Our aim is to stabilize the number of spend per passenger in the following year and thereafter to get back to growth, but it depends also somewhere how the traffic will develop although we see more average growth on both sides intercontinental as well as continental, although that's continuing to be strong on the growth of the continental side. So there are some topics in on that side. So the bundling of one responsibility worldwide, we don't think there's any advantage because we have a really good best exchange -- best practice exchange in between the different retail responsibilities in South America, Europe and the different airports and so on. But we handle retail worldwide just by one department. The business is too different for that, we should not do this.

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Operator [4]

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The next question comes from the line of Michael Kuhn of Societe Generale.

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Michael Kuhn, Societe Generale Cross Asset Research - Equity analyst [5]

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Few from my side. Firstly on your key client, Lufthansa. And they have moved A380 some of them out of Frankfurt. They have threatened to move more out. It looks like they're going to station more small aircraft in Frankfurt next year. And obviously, those steps hurt. Where are you in your, let's say, strategic negotiations with Lufthansa? And can we expect some kind of agreement anytime soon? And then secondly, you mentioned several construction projects being tendered at the moment, especially at Frankfurt. Obviously, there's lots of news on scarce capacities and price increases. Do you see that in your current tenders? And do you see a risk of cost inflation or even cost overruns? And then last not least on retail again. Sorry to touch on that topic again.

But you used to have that EUR 4 midterm target, which from today's point of view, does not look realistic anymore. Would you be willing to provide us with a new target at some point? Or will it just be, let's say, improvement next year and no real midterm target?

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Stefan Schulte, Fraport AG - Chairman of the Executive Board & CEO [6]

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Michael, thanks very much. Regarding Lufthansa, I mentioned already the decision of the politicians in Bavaria regarding Munich short term what is the consequence out of that, short term, it means that the airlines will not try to get whatever they can as slots to maximize the market share on such a restricted infrastructure. So you would probably see that, my guess, for the next 2 or 3 years and our proportion of growth with the remaining slots, which are available there. And you would see a growth, which is going with the aircraft size -- linked to the aircraft size because we have no big opportunities to global, a number of slots so you have to go more with the aircraft size. That's the reason Lufthansa already moved some of the A380. And that's the reason they also mentioned to move more A340, A340-600 to Munich because they have to get up the aircraft sizes so everyone to participate in the potential offer for Munich Airport. And you know they want to build up Munich airport, also the second source and to have the airports more in competition, and so on, and so on. So that's logic. But you also see that they are growing, also in Frankfurt airport, and also the indication for winter traffic now is that will go also with Lufthansa on the Intercontinental traffic and not just on the continental traffic. So I'm quite optimistic for the future that we will grow or that we will see growth on continental, but also on the intercontinental side. Regarding an agreement, there are always discussions. Whether you have an agreement or not, there are always discussions because an airline, in general, wants to pay less. And in general, we would like to have more. That's clear. That will never stop. But I think on that side, it's quite okay. We discussed, as you know, and we agreed that will go for 0 increase for the year 2019. And then we have to decide sometime over the next 3 to 6 months what we are doing regarding 2020. We, of course, also see what's going on in the market. Amsterdam reduce their fees several -- at least 2 or 3 years, in (inaudible) some years ago, and now they announce a strong increase that's on the side of an airport (inaudible) to be quite honest, quite positive, that's good. We've seen also some increases on GDP -- no, in ADP, sorry not GDP. On ADP in France. So we'll follow what's going on in the market, of course. On the other side, we stay somewhat normal with the 0-increase policy because we have the strong increase on traffic growth. Now we have to see what's going on over the next 1 or 2 years and how productivity is going ahead. So on the strategic side, there are quite positive discussions how we could use together the infrastructure more intensively. They are well advanced, but they are not finalized. It's always possible that we would sign an agreement, but it's not that we are in dispute. No, we have good discussions. We have a lot of very constructive discussions. We know each other for years. So it's -- sometimes, the public tend to put out a little bit more than it's really the case. Regarding the second question, risk costs, risk of cost overrun. Up to now, yes, we see that the market is very difficult. So that's absolutely why there are a lot of big projects out. And so we have to be really careful on what we are doing there. Up to now, we stay with our tenders in a range where contingencies are compensating this, so that's working. [BG] is a little bit more difficult, because there we are targeting a turnkey solution with one turnkey company. There we have to see how the tender is coming out. I think we will see some results, the first result in January, that we have to take a decision on that side. But we're not willing to pay whatever market would like to see. So we want to stay in our budget and that's really a key for us, budget and timing, both topics. Regarding retail, it's too early to set a new target for you, it's not realistic. It depends very much and we have to work through more the 3 layers, not the short term, that's not so much important, but more the mid-term and the long-term that Matthias doesn't know more the mid-term, and we have to see how the passenger development is and then we consider target. I think, I have to look a little bit on Matthias, I think somewhere mid- of next year or first quarter next year, which we'll be able to set a new target.

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Matthias Zieschang, Fraport AG - Executive Director of Finance & Controlling, CFO and Member of the Executive Board [7]

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Yes. First of all now, we hope that the number would stabilize in Q4. And you look now on the trend, yes, we have an ongoing weak trend, but it's slowing down. We had -- in Q1 this year we had a discrepancy to the previous year of EUR 0.50, then in Q2, it was just EUR 0.40. Now in the third quarter, it's still a negative trend, but it's just EUR 0.20. Now if you take into consideration that the negative really started mainly in Q4 last year. I think there's a strong indication that the spend per pax in Q4 this year should achieve breakeven. This would be at the level of -- for them, for the full year, of around EUR 3 per passenger. And we think this isn't the rock bottom of the story that we can, based on the measures which Stefan already mentioned, as we again try to ramp up in the next couple of years, and we have to see what will be the ramp up path and perhaps in some months, you can specify what we expect as a ramp up pass in 2019, '20, '21.

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Michael Kuhn, Societe Generale Cross Asset Research - Equity analyst [8]

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Excellent. And one more, if I may, on let's say, the political landscape. There was a package of measures recently presented by the Minister of Economics in the State of Hessen, Mr. Al-Wazir. Obviously, the Green Party made a big jump in the recent election. Do you see, let's say, a risk of an intensifying political headwind with the Green Party strengthening at the moment?

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Stefan Schulte, Fraport AG - Chairman of the Executive Board & CEO [9]

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We should never comment on this as long as they are discussing and negotiating, and as long as it's unclear what's really the final solution of a coalition. You know there are 2 options. The one would be a big coalition out of the Christian Democrats and the Social Democrats, the other one is Christian Democrats and the Green. We are not a party of those discussions, of course, and negotiations. For us, there's a positive signals that the Christian Democrats are still the most important party, and they always supported the airport. So we have even seen yesterday where we've been able to clear the forest over here for the excess on the third terminal, on the autobahn #5. So we get the support. We still get the support and we also have good experience with the Greens. I would recommend them, of course. I would recommend them to focus much more on the individual traffic, and so on, and so on. There are a lot of topics, (inaudible) traffic and so on, but not so much on the airport because we are so much already on the way forward to review submissions, and so on, and so on. But I don't know whether they hear me.

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Operator [10]

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Next question comes from the line of Stephanie D'Ath of RBC.

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Stephanie Fabienne D'Ath, RBC Capital Markets, LLC, Research Division - Analyst [11]

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I have 3 please. The first one is regarding Lufthansa putting in maybe smaller planes in Frankfurt and bigger planes in Munich. Does the lower average size of aircrafts at Frankfurt means that eventually, you could increase the number of slots because the preferred time between smaller planes is lower than for bigger planes? So could you basically recoup some of that lost passenger flow by having more planes running on your runway? My second question is regarding the bottlenecks in security lines. You were having discussions with the regulator regarding internalization of the security process. And that's for all airports in Germany. Could you maybe give us a bit more details on that. And given the security bottlenecks you are facing, would you consider stopping the incentive program or put it on hold, maybe? And then finally, my third question is regarding your 2019 traffic outlook in Frankfurt of low-single-digit growth. Could you please let us know where the latest company consensus is regarding traffic growth for 2019?

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Stefan Schulte, Fraport AG - Chairman of the Executive Board & CEO [12]

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Okay. Let's start on the first one. To get the magnitude correct, we're still winning Frankfurt. We have the biggest number of big aircrafts, much more big aircrafts than Munich. We have a much higher share of intercon traffic than Munich has. So even if they are now whatever you take 3, 4, 5 aircrafts located on Frankfurt to Munich it would stay that way, that we have a much, much bigger share of intercon traffic than Munich. And if you know that we have 1,400 to 1,500 movements a day, even if you shift for intercon aircraft to some smaller aircraft, which there would be on the continental side, it really not changes the picture. So don't assume there are any effect on the number of slots or more slides or whatever. Second, on security lines. Yes, we are in discussions with not the regulator, it's the Federal Ministry of (inaudible) Affairs, and they produced a bullet point paper which is very much in our favor. So with the ministry, we are, in principle, find that's not our topic. The topic is that the government, on the federal level, consists of 2 or 3 parties, the Christian Democrats and the Social Democrats. And the Social Democrats would like to restructure the whole business in a way that all the people are state body people or state...

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Matthias Zieschang, Fraport AG - Executive Director of Finance & Controlling, CFO and Member of the Executive Board [13]

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State employees.

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Stefan Schulte, Fraport AG - Chairman of the Executive Board & CEO [14]

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State employees, where we are saying no, that's absolutely the wrong way. We would like to -- and that's also the position of the Christian Democrats, we as a private operator should be responsible for that. And that's the reason that there should be an audit, and the audit should start. But it's not done up to now, and the Christian Democrats and the Social Democrats are in the process to agree how the auditors should be asked to do the audit. So what is the scope. And we are waiting for that. It will then take another 6 months, and that's sometimes really frustrating, to be quite honest. That's the reason we do whatever we can do on our side, so we're going in a new building. This nearby to Terminal 1 or directly beside Terminal 1 for additional security lines before the summer peak next year, which is something between 8 to 10 security lines, depends how big they are. And we will also hire additional security people. But that's not helping at the end, because we are just one of the operators there doing the checks on site. Not being responsible for all the infrastructure for the process and so on, and not being responsible for all the different home courses there. So it's in some way helping, but it's not really helping, and it's very costly because you probably get the inefficiency in the full system. You just try to help by bringing in additional, whatever, people. Steph, your topic on traffic outlook, I think the traffic outlook is somewhere around consensus of 3% or something like this. And we don't give a new guidance. That's too early for fourth 2019. We just wanted to give you a first indication that due to all these points I mentioned, general trade war between U.S. and China other topics with Italy. The topics now with Iran, Saudi Arabia. So some -- I would not say a recession, but some a little bit more cautious view on the general economy that the goals set are coming somewhere a little bit down. And we believe the traffic will also be a little bit less next year, especially after the 2 strong growth years we had, 2018, 2017. Okay?

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Operator [15]

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Next question comes from Arthur Truslove of Crédit Suisse.

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Arthur David Truslove, Crédit Suisse AG, Research Division - Research Analyst [16]

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So just a couple from me, really. The first one was around the retail. Obviously, you're putting measures in place, but I mean, other particular areas of the retail business that are currently doing particularly well, and indeed particular areas that are doing particularly badly, and do you have any particular plans to focus more on those areas? Secondly, just to confirm, in respect of the building of Pier G in Terminal 3. Is it reasonable to assume that Frankfurt Airport will be at least somewhat capacity constrained, especially in peak times until the summer of 2021? And finally, on the tariff outlook. Clearly, next year will be Ryanair's third year of operating in Frankfurt. I was just wondering whether you could comment on how tolerant they would likely be of increases in headline tariffs.

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Stefan Schulte, Fraport AG - Chairman of the Executive Board & CEO [17]

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Let me start with the final question on the Ryanair, we -- sorry for that, but we never comment on a single airline, on any negotiations we have there on the commercial side. But linked with your second question, it's absolutely correct, that we are not expecting the big growth before we will bring additional capacity to the market, whether it's Pier G, whether it's Terminal 3, whatever. Because in principle, yes we have additional capacity from the runway side, but we are short on positions, we are short, really, on the terminal capacity. It's very much congested on peak times. And that's the reason we are working there together with the police on the guidance on the (inaudible) but especially -- so especially on some security controls. That's much more important. And we have to get our support systems there and do the most important things. So 2021, yes, we could be congested on peak times, that's right. But they are different topics, it's not just one umbrella that we are congested. It depends a little bit on which side, and especially, on the terminal, that is the topic. Matthias, on retail?

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Matthias Zieschang, Fraport AG - Executive Director of Finance & Controlling, CFO and Member of the Executive Board [18]

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Yes. With regards to retail, first of all, some general trends of -- first of all, also as a fact, the infrastructure is as it is, so we cannot change the infrastructure. We can then later on move into P&G. We can open T3. But in the meantime, we have to live with T1 and T2. But nevertheless, we have a lot of thoughts what we can do, what we can improve. And as already mentioned, we see on one side, the negative trend in the retail business. On the other side, we see a clear, also positive trend with regards to food and beverage, which you can see everywhere in the world. So with other words, we have to focus also on this area. We are going to modernize our food courts, especially in terms of one and the B area. Therefore, we have already made the plans to go for total refurbish of these food court. But given the high requirements and obstacles of our -- of the fire protection issues, it takes some time to start with this refurbishment. So we assume as of today we can start end of '20 with the refurbishment, but this is a big plan to totally change all of our -- all of the food courts, which we have in T1. The second issue, a short-term issue, is to go into the structure, the mix of assortment, and as already mentioned from Stefan, here we have to go away from, let's call mediocre products to more high-end luxury products. To have a shift in this assortment, and to focus on this high-end products, which are not available in the net, on these e-commerce channels, and this we can do relatively quick. But as a medium-term target also we have a refurbishment of all these shop, especially in the high-end area. Here we also start in 2020 with the infrastructure, do that in these program in 2020, '21. We will see a lot of improvements, which then also support our ramp up process, with regard to the spend per passenger. So it's a mix between assortments policy on one side, and going into the infrastructure in the F&B area on one side, and also refurbishment, modernizing, making bigger shops by combining them in this luxury segment.

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Arthur David Truslove, Crédit Suisse AG, Research Division - Research Analyst [19]

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Just one follow-up on the capacity constraints point. So if you are going to be somewhat constrained until 2021, if you manage to resolve the security issues that you have, what sort of growth do you think is likely to be possible across '19, '20, and indeed '21, given those constraints?

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Stefan Schulte, Fraport AG - Chairman of the Executive Board & CEO [20]

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It's not just a question of the congestion on security, but it's also there's one thing that's right, but it's also the question on airline policy and the market in general. So normally, I would also always expect a growth rate somewhere in the range of 2% to 3% as a long-term average growth rate, which could be in some years a little bit different, could be more, could be less, depending very much on airline policy.

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Matthias Zieschang, Fraport AG - Executive Director of Finance & Controlling, CFO and Member of the Executive Board [21]

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And I think as an example, you have to look at London Heathrow, where you have the extreme situation where the number of lots has been constrained over the last 10 years. Nevertheless, Heathrow is showing passenger growth as a CAGR for about 2% every year by having bigger aircrafts and so on. This not the case for us so because we still have some slot reserves. But I think this is a strong indication that even in this time before we come with a new capacity in combination with Terminal 3 and Pier G, we were able to continue with the growth not with the same -- on the same level like in this year, that's for sure. But we are not going from a high-growth situation to a 0-growth situation. This will not be the case.

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Operator [22]

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Next question comes from the line of Johannes Braun of MainFirst.

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Johannes Braun, MainFirst Bank AG, Research Division - Director [23]

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Yes. A couple of ones for me. Firstly, you mentioned in the call that you have signed a deal to sell the subsidiary Energi Air (inaudible) next year. Just wondering if you can share any further financial details on that? So what will be the proceeds from the sale? What will be the book gain? And how profitable was this business? And then, secondly, coming back to the talks with Lufthansa, apart from what Michael Kuhn has asked, there are, currently, obviously, other topics on the table as well for the ground-tending contracts that needs to be renewed. And there was also this demand by Lufthansa to cap slots in Frankfurt at 200 -- as 102 slots per hour. Could you please comment on those points as well? And then, finally, the Chinese passenger volumes declined in the 9 months period by 1% according to your slide in the appendix, while I think H1 was still positive. So Q3 seems to have been a part or negative number. And I was wondering if you could comment on the expectation for the winter season, in terms of Chinese capacity, Chinese flights because obviously this is important for the retail performance as well.

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Stefan Schulte, Fraport AG - Chairman of the Executive Board & CEO [24]

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On Lufthansa -- let me start on Lufthansa. On the ground-tending contracts, we are in agreement with Lufthansa to (inaudible) that one. I'm not sure whether we signed it already, probably not, but it's very close to signature, let's say it this way. It's a possible agreement, and could be very tendered. On slots reduction, it was not just on Frankfurt, but (inaudible) topic to reduce slots in Frankfurt, in Munich, and maximum dailies number of slots for 4 airports in Germany, so for the top 4 regulated airports. That was very much linked to the congestion and the air traffic control system and navigation that Lufthansa is convinced the only chance to solve this issue is to have a maximum number of flights in Germany going in and out from the different regulated airports. Where we are saying, no, that's not really helping, because it's not really the point, the point are the overflights in Germany. So first, we should work, of course, in air navigation efficiency. We should work on additional loads and so on and application and (inaudible). But then we should also discuss, is it really necessary that everybody is flying across Germany or could some other flights also happening so on in Germany or whatever because that's also due to the point that the overflight fees have been reduced by German air navigation. So suddenly, there are more flights. So there a lot of topics that are coming together. So at the moment, it's off the table. For next summer, the extra slots, whether you take Frankfurt, whether you take Munich, whether you take Düsseldorf and so on, they are regulated on same level so now reduction, no increase. And then, we have to see how it's going ahead, and everybody has to take its measurements. China -- oh, Matthias there. Okay. Related to...

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Matthias Zieschang, Fraport AG - Executive Director of Finance & Controlling, CFO and Member of the Executive Board [25]

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First of all Energi Air. You asked for the other conditions of these years. So first of all, some facts and figures. So with Energi Air, we made revenues of about EUR 20 million per year. With internal and external customers, the margins are very, very low because we are an energy dealer. We are not producing energy. So we have an EBITDA contribution from this business of about EUR 1 million in EBITDA per annum. And the purchase price is already fixed. It's about EUR 12 million. And if you will then deduct the residual book value, we will see an extra gain in next year, EBITDA raise of about EUR 10 million.

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Stefan Schulte, Fraport AG - Chairman of the Executive Board & CEO [26]

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On Chinese passenger, I just have the information that, for winter, Intercontinental should go some relocation on traffic due to -- by Lufthansa to Munich because they increased some frequencies on that side. That could have a temporary effect, but there's no general trend besides this. So in general, I think China is growing because we have a lot of different carriers here. But what we are working for yet, that's one is what we need is that we get additional traffic rides on that side because the traffic rides are completely full. And as a request from additional carriers to come to Frankfurt, to come to Germany, and to have further flights.

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Johannes Braun, MainFirst Bank AG, Research Division - Director [27]

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Okay. That's great. Just one follow-up on the ground handling contract. Were you prepared to share any financial details on that? Or can we assume that it's more or less in line with the terms that you had in the past?

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Stefan Schulte, Fraport AG - Chairman of the Executive Board & CEO [28]

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It's more in line, and I would never share anything, but there will also not be a surprise on ROIC before there's a signature. But no surprise.

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Operator [29]

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(Operator Instructions) And the next question comes from the line of Andrew Lobbenberg of HSBC.

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Andrew Lobbenberg, HSBC, Research Division - Head of the European Transport Team [30]

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I was going to ask about your airport assets in the Eastern Mediterranean, which have traded very strongly this year. So Antalya, but also Greece and indeed Bulgaria as well. It sounded like, earlier, you were talking of mid-single digits, I think for 2019. So are we confident that these assets keep growing, but just more moderately? Or we can -- are those assets going to keep taking share from Spain? Or how should we think about the growth trends there? And then specifically, you spoke of plans to pursue tariff increases at 3 of the Greek airports. How are your clients responding to that?

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Stefan Schulte, Fraport AG - Chairman of the Executive Board & CEO [31]

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The message we gave you on mid-single increases was a message on the international portfolio in general, not focused on the one or the other airports, on average, in general. There could be something around 5%, could be something around 6% or 7%. I would see not less than 5% from today's point of view. But it's not really a guidance. It's just to give you a first idea. So Antalya, for example, has a terrific development. So this year, I will -- from today's point of view, I would expect even a higher gross also next year. But it's too early. We have to see how the pre-bookings are going ahead, and then, January, February, we will know more in detail. So in principle, we stay positive there, also for Greece, also for Bulgaria. These are great assets. These are great markets. They are very attractive. And yes, they probably kept some market share from Spain. That's widened and also from some Mediterranean African markets, where they still get market share and gain market share. Regarding traffic, tariff increase in Greece in the first 3 airports. Yes, we start already or we're on the way to start these days the official application, maybe the next week. But before summer season, we believe that for the first 3 airports, I think we will be through.

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Andrew Lobbenberg, HSBC, Research Division - Head of the European Transport Team [32]

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And what's the scale of the tariff increase?

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Matthias Zieschang, Fraport AG - Executive Director of Finance & Controlling, CFO and Member of the Executive Board [33]

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From EUR 13 to EUR 18.50.

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Stefan Schulte, Fraport AG - Chairman of the Executive Board & CEO [34]

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On the 3 airports.

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Matthias Zieschang, Fraport AG - Executive Director of Finance & Controlling, CFO and Member of the Executive Board [35]

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For these airports, for Chania, Zakynthos and Kavala. So we are talking about 5 million passengers for these 3 airports. And we are able to -- first of all, we have to really to fix all of them, and if it would be before summer season, it's fine, because then for the summer season, we can increase the fees from today, EUR 13 to EUR 18.50. So 5.5x -- yes, more or less, 5 million. If it would be before summer.

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Stefan Schulte, Fraport AG - Chairman of the Executive Board & CEO [36]

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The 5 million is arriving and departing? I have to ask, so...

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Matthias Zieschang, Fraport AG - Executive Director of Finance & Controlling, CFO and Member of the Executive Board [37]

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5 million is for all 3 airports together for the full year.

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Stefan Schulte, Fraport AG - Chairman of the Executive Board & CEO [38]

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So it's just on departing business, of course.

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Matthias Zieschang, Fraport AG - Executive Director of Finance & Controlling, CFO and Member of the Executive Board [39]

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Sure. You have to divide by 2 because it's just for departing. So that's 5 divided by 2, so 2.5 times -- thank you, times EUR 5.5.

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Andrew Lobbenberg, HSBC, Research Division - Head of the European Transport Team [40]

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But are you confident this doesn't send the airlines bananas? Or do you think because it's such a seasonal peak, that they will just take it?

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Stefan Schulte, Fraport AG - Chairman of the Executive Board & CEO [41]

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They will take it at the end. We are quite confident there. We are in a lot of discussions and information of the airlines. We explained why we are in contact with the government. We are in contact with local politicians. And also with the media and we explained why it is and that even the state is profiting from that because of the structure of the concession is getting a growing amount of that. So we have to do this and there was always based with the tender on the concession that was the assumption that was priced in and there's no flexibility on that. We are quite optimistic.

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Operator [42]

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

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Ruxandra Haradau-Doser, Kepler Cheuvreux, Research Division - Equity Research Analyst [43]

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Okay, some more questions for me, please. First, could you please give an update on CapEx at Lima Airport? Then considering the one-off you will book in Q4, what tax rate should we consider for this year? And what sustainable tax rate should we consider in our model forward? Then you maintained the guidance of a desired improvement in the U.S. business. So could you please explain what is your expectation for Q4? And could you please give an update on the operations at JFK airport? And finally, there should be now high visibility on the performance of Greek airport this year. So could you please indicate how retail revenues per passengers has developed this year relative to last year?

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Stefan Schulte, Fraport AG - Chairman of the Executive Board & CEO [44]

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Thanks. Those are -- some were very detailed questions where we should work out, maybe afterwards, because I don't have the detailed number on retail revenues, for example, on the Greek airport. I don't know what we get there to the market, but in principle, yes. That's absolutely fine, as the Greek airports are developing better than expected, that's absolutely okay. Same for the U.S. airports, whether I take JFK, whether I take all the others there, we're on track. And on Lima, Matthias probably has a number. I can just assure you, yes, the land has been handed over now. And we will now start very soon, we'll see to construct a new runway, in return, it will take a little bit longer. The principal amounts are the same in general, but they shifted a little bit. So my expectation is that CapEx is not starting before next year. This year, on Lima, there will not be a big CapEx. But Matthias has more closed numbers there.

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Matthias Zieschang, Fraport AG - Executive Director of Finance & Controlling, CFO and Member of the Executive Board [45]

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Yes. Let me say, up to now we, in Lima, we spend about EUR 25 million CapEx. And for the full year, we expect up to EUR 50 million, but this is relatively ambitious, and absolutely seeing a very low number. And now when we are able to sign the EPC contract for the runway for next year, and if you really could start at the beginning of next year, constructing the runway, then there would be a total CapEx, in Lima, 2019, of about EUR 150 million. But again, subject to the assumption that we will start at the beginning of next year with the construction.

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Ruxandra Haradau-Doser, Kepler Cheuvreux, Research Division - Equity Research Analyst [46]

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Maybe a follow-up on the CapEx. We see H1 [as] you indicated a group CapEx of EUR 800 million this year. But if I remember correctly, that included a high CapEx for Lima this year. So is there an update on the group CapEx for this year?

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Matthias Zieschang, Fraport AG - Executive Director of Finance & Controlling, CFO and Member of the Executive Board [47]

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Let me say, your H1 number is more or less a point landing. We also expect about EUR 800 million this year for the group. And this you can divide into EUR 450 million here in Frankfurt for the expansion, but also for maintenance CapEx. And the rest, so about EUR 350 million in 2018 for all our international activities. And as I already mentioned, roughly EUR 50 million maximum in Lima, about EUR 160 million, EUR 170 million in Brazil. And in Greece, we will achieve a total CapEx in this year between EUR 120 million and EUR 130 million. But next year will go up, that's for sure. Regardless whether we are starting with a runway or not in Lima, because then T3 is starting to run. And so CapEx next year will be significantly higher compared to this year.

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Ruxandra Haradau-Doser, Kepler Cheuvreux, Research Division - Equity Research Analyst [48]

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And in terms of tax rate for this year and next year?

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Matthias Zieschang, Fraport AG - Executive Director of Finance & Controlling, CFO and Member of the Executive Board [49]

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Tax rate? Tax rate. Yes. Tax rate in this year is -- yes, it's going down, which we think, it's perfect. We -- from about 28% to 24%. This has 2 reasons. First of all, you can say 3% we gained by having lower provisions for future tax audits. And then we have about 1% advantage because the net income contribution from the international activities is over proportionately growing. In here, in average, we have a lower tax rate compared to the tax rate of Frankfurt.

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Operator [50]

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(Operator Instructions) There are no further questions at this time. I hand back to Christoph Nanke.

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Christoph Hans Nanke, Fraport AG - Senior VP, Head of Finance & IR [51]

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Thank you. So thanks, everybody, for participating in the call. Of course, if there are any further questions, you can later call us in the IR department. We are happy to continue discussions.

Thanks. Goodbye, everybody. Have a good afternoon.