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Edited Transcript of FRA.DE earnings conference call or presentation 17-Mar-17 1:00pm GMT

Thomson Reuters StreetEvents

Full Year 2016 Fraport Frankfurt Airport Services Worldwide AG Earnings Call

Frankfurt Jun 27, 2017 (Thomson StreetEvents) -- Edited Transcript of Fraport AG Frankfurt Airport Services Worldwide earnings conference call or presentation Friday, March 17, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Stefan Rueter

Fraport AG - SVP, Head of Finance & IR

* Stefan Schulte

Fraport AG - Chairman and CEO

* Matthias Zieschang

Fraport AG - CFO

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Conference Call Participants

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* Ruxandra Haradau-Doser

Kepler Cheuvreux - Analyst

* Charles Maynadier

Kempen & Co. - Analyst

* Andy Chu

Deutsche Bank - Analyst

* Michael Kuhn

Societe Generale - Analyst

* Elodie Rall

JPMorgan - Analyst

* Andrew Lobbenberg

HSBC - Analyst

* Adrian Pehl

Commerzbank - Analyst

* Christian Cohrs

Warburg Research GMBH - Analyst

* Vittorio Carelli

Santander - Analyst

* Arthur Trasilov

Credit Suisse - Analyst

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Presentation

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Operator [1]

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Welcome and thank you for joining the conference call of Fraport AG. Throughout today's recorded presentation, all participants will be in a listen-only mode. (Operator Instructions)

I now hand over to your host today, Stefan Rueter, Senior Vice President, Head of Finance and Investor Relations.

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Stefan Rueter, Fraport AG - SVP, Head of Finance & IR [2]

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Thank you. Welcome to our today's conference call. It's the first time that we make a conference call for the full-year presentation because of efficiency. And also since it's Friday afternoon, we did not want to have everybody going for traveling. So welcome for our publication today. All the material has been sent to you and is on the Web available.

We going to have a [Senate] presentation of the CEO, Dr. Stefan Schulte; followed by the CFO, Dr. Matthias Zieschang. And after that, as always, we're going to have the Q&A.

So thank you very much. And please, Dr. Schulte.

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Stefan Schulte, Fraport AG - Chairman and CEO [3]

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Yes, thanks, Stefan Rueter. Good afternoon, and warm welcome also from my side. The past year kept us busy, and this will probably not change. 2016 was characterized by lots of unfortunate terrorist events in some regions here in Europe. And on top, we had a volatile political situation with the refugees. So we had tensions between Russia and Turkey, and all this met or went to the traffic line. So for us was a more moderate passenger development here in Frankfurt, I'll especially talk about intercontinental traffic to and from Far East, but also from the US. And in addition our Germans don't want to fly to Northern Africa or to Turkey for holidays any longer, so those numbers were also reduced.

But we hope this might change this year, but let's talk first about the year 2016. The result of the geopolitical situation, you are aware of this, so there was a passenger decline here in Frankfurt and a negative performance in our retail business because especially the high spenders from Far East traveled less to Frankfurt, minus 3%, minus 4%. We will see it a little bit later. And in addition the aviation segment performed financially weak due to the lack of a fee adjustment, so it's a double effect: no fee increase and less traffic.

On the other side, the external business contributed strongly to revenue, EBITDA, and net results. Yes [it's one], we had a difficult year in Antalya; was a swing of roughly minus EUR45 million. But on the other side, we had a very strong positive performance in Lima, Varna-Burgas, also Xi'an that performed quite fine. Moreover, we received money from Manila and also St. Petersburg, with an average of 10.5%. And those compensated -- all our compensated the entire effect.

I am on slide 5, so talking more about the traffic performance as such. Frankfurt our passenger wise was solid in 2016. I mentioned this already due to the effects I mentioned. But it was not the case for the full year. We had a very strong first quarter, but a very weak second and third quarter, so during summer. During summer we saw passenger declines of up to 5% on the one side due to the geopolitical situation, especially -- and you see it here on the slides -- due to the reductions on Far East, also in Africa.

But on the other side, we have been affected double because we have such a high portion of transfer passengers. And if somebody is less on Far East, not staying in Frankfurt but transferring in Frankfurt, it has a double effect on those numbers.

In addition, there was also some change of routine by our main customer, Lufthansa, especially on the counter transfer passengers. All this sums up to the declines in summer.

As mentioned, first quarter was very strong: plus 3%. Winter -- so the fourth quarter, the winter season was also improving with a strong fourth quarter. And this we could take over and we could continue in January and February. We also showed growth over there ?and even up to now we have growth there, so we are quite optimistic for this year.

Going forward, I would like to give you an update regarding summer in 2017, but first let's have a broader picture. Slide 6, where you see a little bit of the development of the different airports we manage over the recent 5 to 6 years. And they show a strong growth despite the difficult development last year in Antalya or in St. Petersburg. So it's a -- we're clearly above our expectations.

And from the other side, one of the winners of the situations is Varna and Burgas who won traffic momentum. Again, in addition, Lima, who outperformed our expectation year-over-year, so we are very positive on this. We will also come back to this. Ljubljana suffered last year somewhere from the restructuring of its main carrier, Adria Air, but also there we see some growth. And Hanover continues to develop quite stable.

Regarding financials, I'm on slide 8. Revenues -- or the revenue was on the level of the previous years, close to EUR2.6 billion. If I adjust for the deconsolidation effect from the disposal of our cargo subsidiary over the year before and other consolidation effects of the sale of our daughter company, AirIT, in the US in 2015, our revenue grew slightly by around 2%, and this growth can mainly be attributed to our external business, or especially Varna-Burgas-Lima.

EBITDA is at EUR1.050 million, of which an all-time high, and ended the year within our guided range. Here, in addition to the special effect from Manila and the gain selling the 10% stake of St. Petersburg, we booked a provision for a staff restructuring program in the amount of EUR38 million. If I adjust for those three effects, EBITDA would have reached slightly more than EUR850 million, which is a good result, being aware of the challenging environment we had.

On the level of the Group result, the reported figure was EUR400 million; strong growth due to the aforementioned effects. But also on the adjusted basis, Group result was on the level or slightly above the previous year, despite the negative development in Antalya. So we compensated the minus -- the swing of minus EUR45 million roughly on Antalya. More details will be given by Matthias in some minutes.

What does this mean for our dividend? We lifted our dividend proposal by 11% to EUR1.50, or in absolute terms by EUR0.15 per share. That made the payout ratio in the adjusted Group level profit is around 47% or slight -- or roughly 50%. And this increase reflects on the one side the good reported performance; and on the other side, enabled us to keep the dividend going forward stable despite future challenges we might have. But in principle, we are quite optimistic. I will give you, in a second, the outlook for 2017.

On slide 10, going forward to our operational activities. The new summer schedule in Frankfurt is about to start in two weeks from now. The flight plan so far looks good, and we are seeing more demand coming in from new airlines but also existing airlines upgrade their fleet. And this [endures] new flights are expecting to grow, so the pre-booking numbers are quite fine.

Talking numbers, we see growth in seat capacities by around 2%, and also movement up same direction. One reason for the growth is the market entry of Ryanair and Wizz Air. But also Sundair recently announced that they will start with warm water destinations on -- so on those tourist regions they are coming back to the market; also like Egypt, Tunisia, and Morocco. Here offer capacities, in some cases, is even up by more than 50%.

Still on the downside, Turkey is in a real volatile situation. We are quite optimistic that the Russian passengers will come back. They will see a strong growth on West European -- Western European passengers. It depends very much on the further development on Turkey. We would expect that the situation is getting a little bit more stable and, to say in other words, more quiet after the referendum in April. But we have to see and -- yes.

On the other side, we also know the restructuring of Air Berlin will mean that they have lower capacities from this carrier for us here in Frankfurt. But if I take all topics together, we expect a clear growth in this year in a range of 2% to 4%. And if everything works fine, it should be more on the upper side than the down side; so in the range of 2% to 4%.

It's not just because of the new carriers, but we get also clear signals that Lufthansa or Condor and other carriers also want to go on Frankfurt, from Frankfurt. And even Eurowings, you can book them already; they start operation on the winter schedule. First destination seems to be Frankfurt-Mallorca, so it [goes a while to wait].

Regarding Terminal 3, slide 11, the expected growth for summer and also for the upcoming winter season where Ryanair and other carriers already addressed more demand, brings me to capacities here in Frankfurt. And to be clear, Terminal 3 will not be built for low cost, but we see that the [grosses] are getting back to higher levels than in the past so that's the reason we need Terminal 3.

We are on track there. We are now finishing the preplanning phase there. We are going into the deeper planning phase, the execution planning phase. We are going on tenders for construction of the piers, but also for the deep excavation work. And probably end of the year we would expect the tender for the people mover, so we are on track. CapEx this year should be around -- a little bit lower than EUR100 million; next year probably slightly above EUR100 million.

And then we have to look and we prepare ourself because, depending on the growth, depending especially on the growth also on low-cost, we are working on specific services and products where we can -- how we can deal with those carriers and what is the right service we have to offer them. There's no decision taken up to now. But we are working on that and it depends very much how fast the growth will be, whether we need some additional, specific local infrastructure before the year 2023, or how we can match with all the different requirements we have there. Terminal 3 itself, [for two] as mentioned, will be a premium product and not a low-cost product.

Coming to another internal topic but related to the market changes, the market structure; that's our internal cost structure. Here's the staff restructuring program on slide 12. Why do we initiate this? The one thing is that the market, especially on the continental traffic, is getting tougher and tougher and there is a high margin pressure on that one; on continental traffic, not on the intercontinental traffic. Low-cost shares, but also the shares of point-to-point traffic are getting higher on the market. That's pressure on the margin and also on airlines, but also on airports.

So we prepared for that and that's a reason we set up this staff restructuring program, which is focusing very much on ground handling, as you can see. Size, EUR38 million reserve we booked in the fourth quarter for this regarding compensation payments, regarding earlier retirement, partial retirement, but also changes from shift to -- from full-time to part-time. But it's also -- it's not just ground handling; it is also focused on administration and more efficiency to get cost savings over there.

The take-up of the program so far is very good. Details are now to be worked out together where the workers' council over here. And as mentioned, we booked a provision in the amount of EUR38 million. We will keep you updated. We will keep you informed with the following publication calls.

Leaving Frankfurt behind, going on the international side. First, Greece, on slide 13. Yes, it's wide. We have some delays compared to our initial plan, but the delay was due to several issues which we were also not directly in our hands, like the financing of some banks, like a lot of pre-conditions which have to be served by the state. But we are now on the final steps. We're for clear agreement with the government with all parties involved, with the milestone plan day by day. And I'm quite convinced that we will take over the responsibility for those airports before Easter, so over the next three weeks.

The financing documents have been handed into the Greek privatization fund already. They check them now. We don't expect big comments on that side. We expect the approval in the next couple of days already. After that we will close the financing; also sign the EPC contract after the EPC contract is negotiated through. Additionally, there are some further steps to be taken in order to close the deal. As mentioned, a detailed schedule is agreed with the government. CCD is now expected to be before Easter and so it's just a question of days or weeks.

Regarding the operational performance of the 14 airports, on slide 14, you see that we are at an average growth of the portfolio of 9% last year. And if you take the recent three years of -- since 2013, so in four years we have a growth of 30%, so that's very strong. And it's also promising regarding 2017. We've got a lot of signals from the market that the airports will show another time of good growth in the year 2017.

So, Greece is one of the most attractive summer destinations these days in Europe, and not just on low-cost, but also on charter carriers and -- so we are prepared for this. We have our investment plans prepared, and we will start immediately after taking over the airports with quick wins on the one side. Then after we'll start with changes on the processes. And the EPC contract, as mentioned, is already all ready, so we'll start also really soon with some capacity extensions which are necessary on some of the airports.

Going on slide 16, our latest topic on the M&A side. You are aware of yesterday we were awarded to be the preferred bidder for the airport concessions in Porto Alegre and Fortaleza by the Brazilian government.

Porto Alegre is itself a city of more than 4 million inhabitants. The surrounding area is a good and wealthy environment. It's very strong on business also in the south part of Brazil. The airport is handling more than 7 million passengers in 2016.

Fortaleza is a 4 million inhabitant beachside city, so it's much stronger on the touristic side. And growth rates over there are stronger also in the past and we expect to continue that way. They are handling around 6 million passengers.

So what's the reason why we bid? We are convinced that South America and especially Brazil will have a good future. They will recover from actual recession and would show another time economical and aviation market growth. And maybe it's really the right timing and better timing than the other rounds of privatization before, because we see already growth on the pre-booking numbers over there, so we would expect also stronger growth from those airports in this year.

What are the next steps? First, the signing of the concession contract is expected to be on July 2017. The operation of taking over the airport should be, due to the plans of the government, January 2018. That's in phases. There are three transition phases.

And somewhere in the second half of this year -- or, actually, end of this year, beginning of next year -- the mandatory CapEx phase would start. Mandatory CapEx is just for the first three years. That's linked to terminal extension programs of around 25,000, 30,000 square meters on the airport. It's on ground handling some issues. It's on extension on the runway on (spoken in German)?

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Stefan Rueter, Fraport AG - SVP, Head of Finance & IR [4]

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Remodeling.

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Stefan Schulte, Fraport AG - Chairman and CEO [5]

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Remodeling of the taxiways, and then some other topics over there. And we will of course invest also on better processes and better retail and food and beverage areas, which we will link with the extension of the terminal facilities. So we expect this year an equity contribution for both companies in total of around EUR300 million.

And in addition, there will be some debt financing. Whether this year, probably not; maybe a small amount, but then especially next year and the year after. Because of the mandatory CapEx could go up to another time EUR300 million, but probably spread it over time. There we have to sit together with the government now and detail to see how the timing will be; whether there are delays in, whether they stay to the schedules I mentioned, yes or no.

Going on slide 16, Lima airport. Another time of great traffic and financial performance, but this is also linked to the point that we are very close to the maximum capacity of this airport. And the positive message over here is that we are on the final step to agree with the government regarding the terminal extension, to agree with the government regarding concession -- regarding the concession period, the extension of the concession period and some other topics, including to hand over the land. And I would expect over the next weeks or months that we are able to sign there those necessary contracts.

So, we will probably start with the construction for the new runway, I would expect, in 2018. And we are already really deep in deeper plannings regarding the new terminal or the addition of the terminal capacity, which then probably also will start maybe 2019. But we are on the final way to agree with the government on those topics. And that's a positive message, because the growth in Lima is continuing on a very strong pace and we expect this to continue also for the next years.

Going to slide 18 and combining all these points together, I'm coming to the outlook for the full-year 2017. We are quite optimistic regarding traffic -- I mentioned this already -- so we would expect this year growth rates of plus 2% to plus 4% here in Frankfurt. And if we don't have negative exigent factors, it should be more on the upper side than the downside.

Therefore -- but also due to Greece and Lima, we expect revenue growth to a level of up to EUR2.9 billion. You know that Greece revenues should be around EUR200 million. And then we have construction revenues, depending on the level of construction because of IFRS, which we had to take over. The revenue -- what you have to include in the revenue line in Greece and in Lima, which will also be shown on the revenue side. And these are the three factors who are mainly driving the revenues despite Frankfurt traffic growth.

On EBITDA, we expect to be between EUR980 million and EUR1.02 billion. This represents a strong increase of plus 15% to 20% to compare to the adjusted level of 2016, so the roughly EUR850 million. But you have to include around EUR100 million from Greece. That means EUR850 million plus EUR100 million goes to EUR950 million. And from that adjusted base, or comparable base, we expect on all the other activities another time of growth of EBITDA in between a level of EUR30 million to EUR70 million.

As we have just shown on the slides, Group results should be on a level of around EUR310 million to EUR350 million compared to the adjusted 2016 number which was around EUR290 million. There is no Greek effect because we expect a black zero on Greece this year, so it's pure growth. For the dividend, as I mentioned already, we expect a stable dividend in 2017 based on the higher dividend we proposed for 2016, so EUR1.50.

And our further financials Matthias will present now and will go through. Thanks very much.

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Matthias Zieschang, Fraport AG - CFO [6]

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Thank you, Stefan, and a warm welcome also from my side. Let me start my part of the presentation with further explanations regarding the development of our Group EBITDA in the past year, on slide 20.

Starting at the previous year's level of EUR849 million, we needed to face a reduction of revenue in the amount of EUR18 million. This reduction was solely due to the deconsolidation of our cargo subsidiary, Airport Cargo Services, which we partially sold in November 2015, and until then generated a revenue of EUR54 million. Adjusted for this deconsolidation effect and the disposal of our AirIT subsidiary in the US, revenue was up by around EUR46 million or close to 2%.

The next column reflects the extra income received from Manila and St. Petersburg in an amount of EUR281 million. In the past year, we reported in this line EUR8 million extra income from the disposal of AirIT. The gap between the EUR281 million and the figures shown on the slide is largely due to higher internal work capitalized and the write back of receivables in the retail and real estate segment, which we already highlighted in the second quarter.

Coming from income to expenses, on a reported basis, expenses increased by around EUR65 million to EUR1.9 billion. When we make the adjustments for the deconsolidations and IFRIC 12 effect, we get a cost increase of around EUR125 million. This figure includes special effects from the repayment of the Manila guarantee as well as the provisions billed for the restructuring program.

The remainder amounts to EUR45 million. Out of this organic increase, EUR20 million came from Lima and Bulgaria since the concession fees increased due to the higher revenue. Salary increases in Frankfurt impacted the personnel costs by an additional about EUR20 million. Another EUR8 million material cost came from investments that we were not possible to capitalize. Those mentioned figures are the most driving ones. As a consequence, EBITDA stood at EUR1.05 billion, or at EUR853 million when adjusted for the shown special effects on the slides.

Moving now onwards to the bottom line. Following the strong increase in Group EBITDA, we had to face some housekeeping effects on our balance sheet impacting the Group D&A.

As you are aware, from a pure legal perspective, we are obliged to carry out impairment tests for each of our holdings on an annual basis. Due to a more conservative outlook, which was mainly due to higher expected staff costs, we wrote down the EUR22 million goodwill of FraSec that we still had on our balance sheet. Please remember here that we are conservative bookkeepers, and always want to reflect the true and fair view in our balance sheet and no pumped up values.

In addition, we wrote down about EUR7 million of book values from our US AIRMALL subsidiary, which we renamed to Fraport USA. This adjustment stood in connecting -- our connection with the upcoming tendering of the Boston concession. Here we assume to get the renewal but with some discounting factors. Despite this adjustment, we still do have some EUR11 million remaining Boston book value in our accounts. If I adjust for those two write-downs, the underlying Group D&A would have been close to the previous year figure, at EUR330 million.

The financial result in the past year wasn't as expected, due to Antalya. At the end of the year, our target investment brought a negative swing of EUR46 million. Having that this -- the total decline in financial result of around EUR26 million looks modest. The stand-alone interest result improved by around EUR18 million due to lower interest rates and lower indebtedness. Further improvements resulted from Xi'an, which contributed some EUR3 million more to our P&L. The lower other financial result was due to currency effects in connection with the Manila payment in the amount of some EUR9 million.

As a result of the higher Group EBIT, we also faced a higher tax burden of around EUR44 million, while proceeds from St. Petersburg only were tax impacting by 5%. Thus, the Group result came to a level of EUR400 million, more than EUR100 million up on the previous year. EPS also clearly improved and stood at EUR4.07.

Moving on to the cash flow statement on slide 22. As in the previous quarters, operating cash flow was below the level of 2015. The main reason for the decline was again higher cash outflows for one-off tax payments. Adjusted for this effect, the operating cash flow was close to be on the level of the previous year.

Please note at this stage that we carved out all Manila and St. Petersburg effects in order to provide for a true and fair view of our operating cash flow.

On the CapEx side, we recorded some EUR20 million higher cash outflows for PPE. This increase stood in connection with the progress of Terminal 3 and the completion of other projects, like the new arrival lane in front of Terminal 1 in Frankfurt.

Investments in airport operating projects also moved up slightly. This increase was, on the one side, due to some additional CapEx in Lima; and on the other side, some capitalized expenses in connection with the start of Fraport Greece. Hence, free cash flow before Manila and before St. Petersburg was EUR92 million below the previous year. Including the net cash effect of Manila and St. Petersburg, we recorded a net cash inflow of around EUR532 million or EUR5.76 per share. The effects from the positive free cash flow on our asset and financial situation are now shown on the next slide.

Despite the repayment of EUR240 million financial liabilities and cashing out the dividend for the 2015 fiscal year, our Group liquidity increased by more than EUR200 million to EUR1.25 billion. Correspondingly, our indebtedness went down by EUR418 million or 15% to EUR2.36 billion.

For the current year, 2017, we expect this trend to change, so an increase in net debt. The reason for this will obviously be the upfront payment for Greece, Fraport Greece, and the full consolidation of the debt of the investment. Subject to the closing date of Brazil, there will be some sort of a net debt increasing effects already in 2017 of about EUR300 million. Nonetheless, we expect the indebtedness of the Group to remain in comfortable ranges in the current fiscal year.

Coming back to the period under review. Our Group equity went up significantly by more than EUR300 million, thanks to the positive Group results. Consequently, our gearing ratio reached the lowest level since 2009. A gearing level of 65% represented a decline of around 19 percentage points compared to the previous year.

Before coming to our segment financials, let me highlight some further points on how we derived the Group financial outlook for 2017.

Starting at the adjusted EBITDA level of EUR853 million, we add the 1.9% price effect in aviation which is equivalent to an amount of EUR14 million. On top, we include the forecasted passenger growth here in Frankfurt, and deduct some elements for the incentives key. Moreover, we assume some upside potentials regarding our retailing here in Frankfurt, following the weak performance in 2016.

Within our external division, we expect Lima to keep on growing. For Twin Star, we are also optimistic, but clearly at a slower pace than in 2016. For our Greek investment, we include some EUR100 million of EBITDA as a minimum, which will finally also depend on the question, when we will be effectively in charge and start consolidating. At the end, we also needed to deduct some EUR20 million, as always, for the higher wages here in Frankfurt.

Combining all those effects, we come to an EBITDA within the before mentioned ranges of EUR980 million on one side and EUR1.02 billion on the other side. Bottom line, we expect an increase in Group D&A by around EUR14 million due to Greece. The figure shown on the chart is starting at the underlying D&A level of 2016 without the FraSec company and AIRMALL, so at EUR330 million. Therefore, we expect Group EBIT to be between EUR610 million and EUR650 million.

Within the financial result, we adjust for the EUR112 million underlying negative financial result of 2016. Greece then will lead to a financial result burden of maximum EUR80 million. As a number of EUR80 million appears very high, I'd like to be more precise in this regard. Cash effective, we will only have an additional burden of around EUR35 million base in the full year. EUR40 million additional expenses will come from adding back the balance sheet item based on IFRIC 12 accounting. This item is not cash effective as it is just an accounting effect.

Leaving Greece behind, we expect Antalya to recover. Here the Russians should provide for a good development, whereas our expectations for the Germans are clearly below the previous year. The rest of the financial results or interest result in associates should perform well, so that in total we expect Group EBITDA to be between EUR450 million and EUR490 million. Using a 30% tax rate, we expect Group results to be between EUR310 million and EUR350 million.

Following the Group outlook, I'd like to go quickly through the segments. On slide 25, we start with aviation. The picture here is more or less unchanged to the nine months development.

Revenue still was down due to the weak traffic and also the EBITDA performance remained negative. The one-off burden in the previous year from the provision for the fire brigade was balanced by the EUR9 million provision which we created for the restructuring purposes this year. So this is a part of the EUR37.7 million total provisions.

The poor performance of segment EBIT is also reflecting the EUR22 million impairment of FraSec goodwill. Due to the strong one-off effect this year, we also provided adjusted EBITDA and EBIT numbers in order to allow for better modeling of the segment going forward. The outlook for 2017 we see clearly positive, as the adjustment of airport charges and the volume growth will support revenue. EBITDA and EBIT, in addition, will benefit from the absence of the restructuring provision and the impairment loss of FraSec.

Retail and real estate is shown on slide 26. Revenue growth of 1.2% came down in the fourth quarter a bit, as the increase in real estate revenue slowed down, and we also had property sales in Q4 2015. Retail revenue itself was more or less the same as in the previous year's quarter in absolute terms. Due to higher costs for our multichannel program, the change in internal cost allocation, and the provision for the staff restructuring program, EBITDA and EBIT were down by around 3% and 4%, respectively.

As with aviation, our outlook for the segment in 2017 is positive. We expect higher revenue in retail, real estate, and parking. Other revenue and other income are expected to go down, while the staff-related provision clearly won't reoccur this year.

A closer look at our retail revenue per passenger, as shown on slide 27 and 28. Here a negative trend was not our friend. The fourth quarter copied the negative performance of the third quarter. After minus 3% spending per passenger in Q3, we recorded a negative minus 4% in the fourth quarter. Also the trends regarding the spending per destination remained more or less unchanged.

Within the top spenders, China, Russia, and Korea remained negative; Vietnam and Japan performed positive spending-wise, but not volume-wise. Within the top five volume markets, we did not record major positive effects from the strong US dollar. While Turkish ticketholders remained positive spending-wise, we unfortunately suffered from the lack of volume. The spending behavior on German, Indian and routes to the Emirates remained uninspiring.

Leaving now the world of duty-free behind, coming to ground handling on slide 29. Adjusted for the deconsolidation of the cargo subsidiary, revenue in 2016 grew by around EUR11 million, thanks to the landing of personnel from the parent company to the sold cargo subsidiary. In addition, we saw a slightly better revenue from infrastructure services, so for the baggage conveyor system.

Despite the increase in underlying revenue, EBITDA was down for the full year due to the provision for the restructuring program. Adjusted for this EUR19 million effect, EBITDA would have reached a level of EUR53 million, representing an increase of around EUR7 million.

EBIT was at minus EUR6 million or EUR13 million plus, when adjusted for the mentioned provision. Especially towards our ground handling management, I want to say that they made really a good jump in 2016. Due to the absence of the staff-related provision, the outlook for 2017 is clearly positive. This will also be due to the anticipated volume growth in Frankfurt.

Our final segment, external activities, is shown on slide 30. Revenue, EBITDA, and EBIT are clearly up thanks to Lima, Twin Star; but also due to the significant one-off effects from Manila and St. Petersburg. Adjusted for the positive and negative one-offs, segment EBITDA came to EUR203 million and EBIT to EUR122 million. Those numbers represent a good increase of EUR17 million and EUR19 million compared with the already well-performing previous year. For 2017, we expect the segment to again deliver revenue, EBITDA, and EBIT growth due to Greece, Lima, and again, Twin Star.

Being conscious of time and the fact that there were no major surprises regarding our external investments in the fourth quarter, I'd like to skip the explanations on slide 31 to leave more room for Q&A. And our thanks for the interest so far and please go ahead with your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Ruxandra Haradau-Doser, Kepler Cheuvreux.

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Ruxandra Haradau-Doser, Kepler Cheuvreux - Analyst [2]

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Several questions, please. First, how do you expect airport fees at Frankfurt Airport to develop in 2018 and medium-term? Then some clarification on your incentive program. If an airline will start operations in Frankfurt in 2018, will it benefit from three years of incentives or less? And if an airline that benefits from incentives will operate on the same route with airlines that do not generally qualify for incentives, will the other airlines receive, on their respective routes, the incentives as well?

Then on your terminal capacity of 4% passenger growth this year, would imply traffic almost at a nominal terminal capacity of the airport. Actual capacity is slightly higher than the nominal capacity. But there is still a long time until 2023, so it would be helpful if you give some more details on opportunity to upgrade current terminal capacities, short-term.

And finally, most of your external activities were acquired at a time when prices in the market were lower than today. Do you see potential to make some partial divestments going forward? Thank you very much.

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Stefan Schulte, Fraport AG - Chairman and CEO [3]

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Thank you very much. Just regarding gross weights and expectations for 2018 and medium-term, [purtic] was regarding 2018, it's of course too early to give you clear guidance on that side. But if I take all the plans together, everything is working out as airlines are indicating this to us. Like the growth of Ryanair, like the growth of Wizz Air; like all the other things that will come, then we should see another time of strong growth in 2018. I don't want to mention it's a number, the percentage; that's really too early. There we have to wait out the summer coordination 2018 and so on, it's working and what the plans are and how progressive also plans of Condor, of Lufthansa, and others are.

But you are right; it could mean that we'll reach a nominal capacity. That's not really our topic, but even to reach the maximum capacity of Terminal 1 and Terminal 2 earlier, so earlier than 2023. Maximum capacity depends, of course, how successful we are also on setting new rules, additional flights on new movements. Not on peak levels but also on lower times; so whether a capacity is not fully used. That's one of the options. Other options are how successful we are to relocate to one or other airline, or one or other destination in between the different terminal sites. So, Terminal 1, Terminal 2; in between Terminal 1, in between Terminal 2, and so on.

But we're also preparing ourself from what has to be done to work out and to capture with the growth where the really critical processes -- most critical are some of the security processes, especially in Terminal 2. There we have ideas how to upgrade then to get the volume done, and what would have to be done in addition. There we are still working on.

One of the topics could be that we have pass gate building occurring between Terminal 2 and Terminal 1; so close to terminal 2, which we could use in a different way in the future. Another option could be that we start earlier just with the pier of Terminal 3 but not with the main building. Those topics we are working on and we'll keep you updated as soon as we have clear plans on that side, and we have a clearer view what's going on forward and how strong the growth rates are.

Regarding incentive program, there's no decision at the moment regarding the fee application 2018. So from today's point of view is there would be no application at all for 2018. Then the actual incentive program would continue. For those airlines who started in 2017, applying to the incentive scheme, whether new airlines over new awards or growth, whatever their -- they would get the 80% of the amount of 2017; and 2019, 60% of that amount. So it's degressing; it's getting down. But it depends on the decision what we do for 2018.

It's not linked to the same routes, but that's typical not the case for those incentive programs also in other airports. Because the main costs for new airlines are linked with the new station and with the exploring content and working out of the new market environment and to help them with marketing support on that side. That's not just on Frankfurt the case; that's in all airports in Europe's the case. And that's also in line with the decisions by the euro commission on what's allowed and what's not.

Potential to divestments, we always have a clear view and a look on the market. It could be possible there's nothing very specific where we are working on at the moment. But you know that, for example, India, where we just have a 10% stake, we would take probably in the course of this year a decision of which way we go ahead over there. And probably not just staying with 10%, but the one option would be to upgrade this one and to go up to a higher level, but this will only make sense if we then really have a strategic interest.

Or the otherwise would be to sell that stake. And there are some other options where we don't have such a high strategic interest. But we will keep you update there as soon as we have more to communicate on that side.

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Ruxandra Haradau-Doser, Kepler Cheuvreux - Analyst [4]

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Thank you very much.

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Operator [5]

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Charles Maynadier, Kempen & Co.

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Charles Maynadier, Kempen & Co. - Analyst [6]

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Three questions from my side; the first one on Brazilian airports. Could you disclose a rough estimate of the IRR you expect to get on these two concessions? And were you actually ready to bid more for the two airports? And just last one, why did you not to bid for the other two airports? That was the first one.

Then on the Lufthansa conference call yesterday, the management clearly mentioned moving away from Fraport and investing more in the other hubs. But you just mentioned in the call that you got a clear signal from them to grow at Fraport. So if you could just comment on that.

And the last one, on your traffic items, if you could quantify how much is driven by low cost only. Thank you.

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Stefan Schulte, Fraport AG - Chairman and CEO [7]

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So thanks for those questions. Let me start to first with the Brazilian airports. We don't disclose the detailed IRR figures, but it's clear that they're on a double-digit number and that all requirements and -- so it's based on the work we are working on, plus country of risk, plus the project risk. And then you are minimum on those numbers you know from us, double-digit. And more details we don't disclose on that side.

We haven't bid up to the maximum it was an intensive bid, but we haven't reached our maximum, so that's positive. On the other side, that's very positive that we are seeing that we are close together, so not at all overpaying those assets. But see the offers from Fortaleza, we competed with Vinci; and Porto Alegre we competed with Zurich airport.

If I take the other airports, we decided not to go for Salvador. We think Salvador is a very attractive site, no question at all. We had some problems to find the business case on that side because of the location of the new runway, which is a mandatory CapEx over there. So probably Vinci has better ideas than we on that side. But that's fine; that's business.

And we focus because of this on Fortaleza. And you only could get one airport in the north, so it makes no sense if you have two airports in the north but you only can win one that you go for both. So we decided also in the interest of cost reductions and so on, to focus just on one in the south, to focus just on one in the north. We have been lucky that this strategy worked out.

Regarding Lufthansa, I can just tell you -- and that's a little bit different maybe from the communication of Lufthansa. I can just tell you that we are in constructive discussions. And I'm optimistic, but I only also know how -- what the business is we have together and so our main customer. And we know how intense the business is, so I'm optimistic and I'm, well, let's say optimistic that we will come together at the end.

It's not for sure; that's clear. But I know that we are still the strongest intercontinental base for them. And we will do whatever is necessary to invest in services, in products, in better processes to get synergies out of the system also together in the north, Terminal 1 and so on.

So I can -- from today's point of view, I can just tell you, yes, we are in constructive discussions? So I have a good feeling, but not a guarantee at the moment; but a good feeling out of those discussions. That I would say that we'll compete, that we'll fight for their market and we will do --. We have also a common interest: they have a good position in Frankfurt to fight for their market share and to grow in Frankfurt and to explore further opportunities on a win-win basis.

I don't see, at the moment -- despite all communications, I don't see a very probable risk on moving away. But let's first see how the discussions end and I hope in some weeks from now we are able to give you a clear signal on that side. So the meetings are scheduled up the end of April from today's point of view, and I can just tell you they are constructive.

On low-cost gross weights, so how are the gross weights for this year? If you take roughly 61 million passengers, some 60.6 million, something like this, and we add 2% to 4%, then it could reach up to 63 million passengers. I would roughly estimate half on existing business, half on new business; but I don't have detailed numbers at the moment.

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Charles Maynadier, Kempen & Co. - Analyst [8]

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Okay, that's very clear. Thank you.

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Operator [9]

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Andy Chu, Deutsche Bank.

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Andy Chu, Deutsche Bank - Analyst [10]

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Just a few questions from me, please. Just wondered if you could give us a flavor of where you think retail revenues per passenger growth rates could go in 2017. You exited the year at minus 4%. You were at minus 4% for the year. And I think you saw a little bit of growth -- a very, very small growth in Q2, but you were pretty much down every quarter in 2016. So given that obviously you're expecting higher retail revenues in 2017, just wondered what you think the spend per passenger could look like.

Second question is around Brazil. I just wondered if you can confirm the sort of regulatory mechanism. Is it a single or dual till structure? And also in Brazil, could you give us a flavor of the tariff agreements? How long are these agreements set out for? And given the inflationary environment in Brazil, maybe a little bit around the terms and conditions of how charges are expected to develop there.

My last question, on the bigger strategic picture, I wondered if you could give us a view on your JV with Heinemann which you announced just before the year end. What do you expect from a financial positive from that deal? And understand you have to therefore probably put a little bit more CapEx at risk within this 50-50 JV. Thank you very much.

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Stefan Schulte, Fraport AG - Chairman and CEO [11]

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Thanks a lot. I will start, and Matthias will add some topics. On retail revenues per passenger, it's difficult to give you clear guidance. What we are more optimistic on is that the retail revenues in total will grow, and that's with or without -- will be better than last year. Why is it so difficult to give you a clear number? That depends very much on the structure of traffic this year.

So what we see in -- there were good signals that the traffic from Far East is growing. Because that means that also on that side that the retail spending per passenger should grow and depends very much on the levels of growth that's coming from Far East, but we see a good growth coming back from Japan. We see it from China; that's positive.

On the other side, the stronger the traffic on the point-to-point traffic growth: it's clear it's continental traffic and continental traffic, there's a lower spending per customer. Nevertheless, it's very positive for us, but it's a lower spending per customer. It would affect negatively the spending per passenger figure, but it will be positive for the total revenues for earnings. That's the reason it's a little bit difficult to say how the number will evolve.

And you see it also if you take the quarterly numbers. If you take the number for the third quarter, which is a very much driven by leisure traffic, point-to-point and so on, the number was always lower than first or fourth quarter, where much more business and intercontinental traffic is in. So that's the reason it's too early.

It depends very much how the structure is and that's linked to the question before, from which side is the traffic growth this year coming? Is it more -- I estimated 50-50 -- but is it more coming from point-to-point traffic on the continental side, or is it also not just continental but also intercontinental side?

On Brazil, it's a very clear formula: including inflation, estimation of inflation, but also including a productivity factor, always on a five years' base. I think it was always a five years' base. So that's a topic an airport operator likes very much because there is a really, really clear formula linked to the cost base, linked to CapEx and to inflation and so on. So that's the best thing you can have on that side.

I think it's on single till as far as I know, but there's a positive thing. I'm not absolutely sure. But I think it was single till, but the positive thing is it's on a very clear formula base. So we know that we can run on that side, the more traffic we are able to do, the better it is for us. But we will have another [kind of check run], because I'm not absolutely sure it's around.

Heinemann, Matthias?

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Matthias Zieschang, Fraport AG - CFO [12]

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Joint venture as of today or last year, the Heinemann Brothers, they were running about 27 shops in the airport. In the past we always collected an average of 25% of the revenue made in the shops. And now up from this year [as is joined Winshaw]. So now we are on one side we are [landlocked], still continuing to collect the 25% concession payment from the revenues.

And on the other side now, we together with the Heinemann Brothers -- we are running the shops. So from the profit out of the shops we are also now benefiting the 50%. So for the full year now, we expect a single-digit-million amount as our share positive contribution which we will see in the equity results. So we only have chance a positive contribution, and we do not see any risk incorporated in this joint venture.

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Andy Chu, Deutsche Bank - Analyst [13]

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Very good. Thank you very much. And could I just ask one, just a numbers question, just in terms of the cash flow timing of your provision of this roughly EUR37.7 million. I would have expected that that would flow mainly in the first half. But could you maybe just clarify how we should be thinking about the cash impact of the provisions, please? Thank you very much.

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Stefan Schulte, Fraport AG - Chairman and CEO [14]

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Which provisions? The EUR37.7 million provisions for labor restructuring, or what do you mean?

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Andy Chu, Deutsche Bank - Analyst [15]

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Yes, that's correct. Where will the cash -- or what's the timing of the cash flow likely to fall through 2017 (multiple speakers). Thank you.

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Stefan Schulte, Fraport AG - Chairman and CEO [16]

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In 2016 there wasn't any cash out, so we only built up the provisions. And the cash outflow of the EUR37 million will take place in this year for early retirement, for part-time, and all the things to have a sustainable reduction of personnel cost then in the future, based on these programs.

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Andy Chu, Deutsche Bank - Analyst [17]

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(multiple speakers) And should that be more first-half weighted? Yes.

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Stefan Schulte, Fraport AG - Chairman and CEO [18]

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Pardon?

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Andy Chu, Deutsche Bank - Analyst [19]

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(multiple speakers) More first-half weighted in the cash --

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Stefan Schulte, Fraport AG - Chairman and CEO [20]

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No. The cash outflow will be more in the second half of the year.

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Andy Chu, Deutsche Bank - Analyst [21]

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Okay, great. Thank you very much.

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Matthias Zieschang, Fraport AG - CFO [22]

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On Brazil, as mentioned, it's single till, but it was a very clear formula.

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Andy Chu, Deutsche Bank - Analyst [23]

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Great. Thank you very much.

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Operator [24]

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Michael Kuhn, Societe Generale.

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Michael Kuhn, Societe Generale - Analyst [25]

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Also essentially three questions; one follow-up on restructuring. Can you give an indication already what annual cost savings you expect? And I think I also heard that the reception of the program is quite positive so far. So if there's a possibility to increase the program and also increase the savings as a consequence?

Then secondly on capital expenditure, you mentioned several projects. Obviously T3 is going up now. Lima will be there; Greece; and at some point Brazil also on top. Could you give us, like, a midterm overview maybe over the next five years, what accumulated CapEx you expect? And also when you expect CapEx to peak?

And then lastly, also once again on retail revenues per passenger. You mentioned the passenger mix. Given that 50% of growth, roughly, will come from low-cost in the short term, maybe also medium term, is the EUR4 target still realistic? Or should we rather think about some dilution going forward, given that there's a structural change in the traffic mix that you have in Frankfurt? Thank you.

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Matthias Zieschang, Fraport AG - CFO [26]

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Thank you for the question. Let's start with the provisions for the restructuring program. So as you mentioned, the demand is surprisingly, and not surprisingly, is very higher. So we are very happy with the demand. But in the first step, we have reserved this EUR37 million. And the clear objection is to have a sustainable reduction of our personnel cost. And based on a conservative calculation, we now assume sustainable personnel cost reduction of EUR6 million per year based on the program. Whether we are going to have a second tranche of this program later on, as of today there's no clear picture. We are again happy that the demand is higher. And first of all we start with this (technical difficulty).

So with regards to CapEx, in this year, in 2017, there will be an increase, that's for sure, compared to previous years, because now T3 CapEx is ramping up a little bit. But let me say there's a significant increase then you will see from 2018. And then we came to a [saddle groove] up from 2019. Then also on top, we will see the investments in Lima. So that we are going from a level, as of today, EUR300 million up to roughly EUR600 million in the next couple of years, up from 2019 on this EUR600 million level.

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Stefan Schulte, Fraport AG - Chairman and CEO [27]

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And for [euro] target, don't know -- I mentioned already -- that depends very much how the structure of the traffic is. So with a higher portion of continental traffic because of higher growth, and expected in the next years, the target it will be a little bit reduced. That's why, because the target was given on another traffic structure with higher intercontinental traffic.

But if you see that the growth rate will now be more on the continental traffic for the next two, three years; thereafter, I don't know, at the moment. And then probably the target will be a little bit lower. Let's continue, or let's ask this question another time on half year's figures or three-quarter figures, then wait for a clearer picture on that side. How the traffic structure should develop over the next two, three years.

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Michael Kuhn, Societe Generale - Analyst [28]

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Excellent. Thank you.

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Operator [29]

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Elodie Rall, JPMorgan.

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Elodie Rall, JPMorgan - Analyst [30]

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Actually I had also the same question on CapEx. Just to come back to your answers, and I understand you are guiding from EUR300 million of CapEx today to go up to EUR600 million from 2019. But to follow-up from that, can you remind us exactly the phasing of Terminal 3? So at the moment you're spending EUR100 million in 2017, over EUR100 million in 2018. I recall Terminal 3's budget is about EUR2.5 billion -- EUR2 billion, EUR3 billion -- so how is that going after 2019, please?

And second, where are the other big CapEx that we need to have in mind? I don't think you have answered that question on how much is CapEx related to Lima. If we take everything -- Greece, Brazil -- so what are the big envelopes that we need to have in mind?

And then please can I follow up on leverage? Where do you see your net debt going to this year? If we could have a rough idea. I'm not sure you said that already. And where would you feel comfortable with leverage? Where do you see leverage peaking at, and where would be where you're comfortable in there? Thank you.

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Matthias Zieschang, Fraport AG - CFO [31]

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Yes, let's start with the last part of the question, the development of net debt. You know from the presentation that end of 2016 we reached a level of exactly 2.35% -- EUR2.35 billion for the Group, net debt. So from this level now we start in 2017.

And first of all, there is an increase from the consolidation of Greece, where there is a purchase price of EUR1.2 billion. And we have another amount for the mandatory CapEx, minus an equity injection from our partner, Copelouzos. So the net debt Greece effect is about EUR1.1 billion. Plus another roughly EUR300 million in 2017 for Brazil, minus EUR200 million normal free cash flow after dividend payment in 2017.

So if you collect all these four numbers -- starting from EUR2.3 billion, plus EUR1.1 billion, plus EUR0.3 billion, minus EUR0.2 billion -- we will reach, at the end of this year, a net debt level on the range between EUR3.4 billion to EUR3.5 billion. And at the same time, by the retained earnings, also our equity will go up in 2017 up to EUR4 billion. Well, that -- the gearing ratio will increase to a range up to a maximum 90%, which we think is a very comfortable level despite the acquisitions of Greece and two Brazilian airports.

First part of your question, CapEx development. Again, we have in the moment -- not in the moment. In this year, we are talking about EUR300 million, and then we have a, let me say a continuously ramp-up. Again, the T3 investment which is now only EUR100 million, will go up step-by-step, and you can say up from 2019. Then all the things are running on a relatively high level. The inauguration of Terminal 3 as of today is scheduled for 2023. So if you take six -- roughly, plus/minus EUR600 million year-by-year, the CapEx for T3 does not end in 2023 because you have always a normal delay between the progress of construction on one side and the payment for all the things.

So as you can see, even when we have the inauguration in 2023, that the payment of our CapEx for T3 will continue two or three years behind the inauguration date. And so you can a little bit (technical difficulty) the whole CapEx amount for T3 up to 2025 or even up to 2026, which is normal for a project in such a size.

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Elodie Rall, JPMorgan - Analyst [32]

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Okay, thanks very much.

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Operator [33]

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Andrew Lobbenberg, HSBC.

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Andrew Lobbenberg, HSBC - Analyst [34]

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I was curious to see -- I mean, obviously we're taking labor provisions in the handling business. But to what extent are you expecting to have the handling business of the low-cost carriers? Or do you think that will go to Acciona? Or will it go to some other structure? And what does the growth of point-to-point mean for the handling business?

And then my other question would be around the digital stuff, which earlier last year was being spoken about a lot. But it seems to have gone quiet. How are we feeling about the money we've spent on that project? And how are the rewards coming from it?

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Stefan Schulte, Fraport AG - Chairman and CEO [35]

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On ground handling, if I got your question correct, do we take the results because of low cost? No, that's nothing linked to this on ground handling now that we are in a difficult situation. Always around zero, sometimes a little bit negative; this year, without provisions of performance, was quite good. But the market is a difficult one. And we have to get the restructuring done there to be also, in the long run, positive. And so that's not linked to low cost.

As far as I know, Ryanair will be handled by a competitor, not by us. Although we will do self-handling, I don't know the final steps there; but not with us, so that's not linked there on that side.

Digital stuff, do we have numbers there?

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Matthias Zieschang, Fraport AG - CFO [36]

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Multichannel -- no, we don't have numbers yet. We do have steps. We have -- by now we did have costs; we did not have any additional new revenue, which is normal. And once we are now -- we're starting up this new business channel, then we would also report to what extent we are going to have additional revenues here.

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Stefan Schulte, Fraport AG - Chairman and CEO [37]

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Perhaps some additional remarks with regards to the provisions of the EUR37 million.

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Matthias Zieschang, Fraport AG - CFO [38]

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So in the presentation, you can see how we have allocated the provisions. We did it on a very similar mechanism. We took the number of employees -- we had on one side the whole amount, and then we had the number of employees in the four segments. And based on this metric, we have allocated the provisions. At the end of the day, this has nothing to do with reality because now have the demand from the employees for this program. And when we execute the program, the realized release of the provisions can be totally different.

So this means at the end of 2017, then we have a release of provisions which can differ to this what we did in the segments. We know that the EUR37 million will be done, that's for sure. But it can be that, for example, we have allocated EUR19 million in ground handling. It can be that we only use in this segment EUR14 million, but perhaps in another segment, more, or vice versa. We don't know it because now we take all the employees, we have a clear mechanism, who can benefit and who not. And this mechanism is linked to the -- let me say to the financial advantage from the employer side.

These are the remarks to the program.

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Andrew Lobbenberg, HSBC - Analyst [39]

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Okay, thank you.

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Operator [40]

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Adrian Pehl, Commerzbank.

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Adrian Pehl, Commerzbank - Analyst [41]

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Two questions left from my side. First of all, a clarification one on potential upcoming M&A. So, is it right to assume that now after Brazil has been closed, that you have shifted a little bit the focus of M&A probably; i.e., do you consider still to be in the bidding for Belgrade here? Or what is your plans going forward?

And second question on the Brazil, actually you shared with us the CAGR for passengers. I was just wondering whether you would be also willing to share with us the CAGR for revenues. And what is the prerequisite that you require for a good rate of return here in your forecast? And I was just wondering whether you could share with us also the revenue base for the two Brazilian airports. Thank you.

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Stefan Schulte, Fraport AG - Chairman and CEO [42]

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Thanks very much. Let's first start with the question on M&A projects. The only thing which is really on the agenda, but maybe also off, I don't know, is the topic with Sofia. It was shifted already several times, and there we have to see how they develop on that site. Clear if we take Belgrade, we have a look on those issues, but at the moment I would say that the probability is less, whatever percentage less. So we just had a pure look on -- we'll just have a look on that one for now what's going on. Appetite on Belgrade is very much -- very high on the market. So there are a lot of competitors who are interested in Belgrade. We'll work more on Sofia, as mentioned.

On Brazil, I can give you, at the moment, total revenues on Porto Alegre, which are roughly around BRL200 million. So that means around 70 -- EUR65 million. And EBITDA is around EUR30 million. If you take Fortaleza, the numbers are a little bit smaller. Revenues are around EUR40 million; and EBITDA around EUR15 million, EUR20 million.

But I don't have the CAGR. And because with CAGR, you have to be careful; you have to also to differentiate then with the inflation. So was it nominal or was it real numbers? But we expect to have a clear CAGR in -- one thing is because of the traffic growth. And the other thing is because we expect a much stronger over-proportionate development on food and beverage, of course as the offerings are not very attractive on that side.

So, Matthias just mentioned maybe it's around 5% (multiple speakers). For the first year the [practice] are more than 5%. But we will see. We will give you later on more detailed numbers. I don't have the case with me at the moment. And that's another topic, I don't want to give all the numbers at the moment to the particulars, because then somebody else could recalculate our offering. But you will probably get later on more numbers. Not at the moment. We first have to work through and we have to see how we get through with the final discussions with the government on CapEx plans, and so on, because there are some topics in -- we of course like to optimize there.

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Adrian Pehl, Commerzbank - Analyst [43]

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All right. That's welcome. Thank you.

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Operator [44]

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Christian Cohrs, Warburg Research.

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Christian Cohrs, Warburg Research GMBH - Analyst [45]

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First, sorry to bother again on CapEx, but from -- given the EUR2.5 billion to EUR3 billion CapEx budget in place for T3, how much have you spent already as of year-end 2016?

Secondly, CapEx on Lima. What is the prospective CapEx for terminal and runway? And then changing the topic to your ROFRA parameter: in aviation, your ROFRA, if I exclude the one-offs, was I think slightly above 4%, so clearly below the WAC. And also in ground handling on an adjusted basis, clearly below the WAC. This is taking place already for some time already. Do you see a chance -- ever a chance that these two business will be EBITDA positive sometime? And what does it take to make these two business EBITDA positive?

And secondly, with regards to external activities, is it fair to assume that with now the Greece airports in place, and also the Brazil airports in place, that this will be dilutive for the ROFRA in the external activities division?

And then just two housekeeping questions. First, the EUR8 million provision booked for staff restructuring in the external activities, where actually did you book it? Did you book at Lima, Varna-Burgas, et cetera? So which item was touched?

And lastly on Brazil, in your press report, as well as in the presentation, your statements regarding Brazil include the word currently; that you currently own -- or will own 100%. So is there still a chance that you will invite a partner to jointly operate these two airports?

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Stefan Schulte, Fraport AG - Chairman and CEO [46]

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So let's start with Brazil. Yes, that's right; so we are working together with a local partner. We are in discussions there. It could be that we will introduce a local partner on a minority base. That will be decided over the next two or three months. We are still in discussions there. We have seen in general on the concession around Brazil that the local partners have not been very strong. That's probably due to the situation in Brazil. And that's the reason we haven't fixed those discussions before bidding.

But we are open now, and we know that we have now two airports, and we will continue the discussions on that side. We will say for sure, for a majority, but it is not given that we stay with 100%.

On CapEx, I can give you the CapEx numbers as mentioned already for Lima. It is around EUR1.3 billion, and then there are some other smaller numbers for the actual capacity constraints. But on the terminal facility and on the runway, it's around EUR1.3 billion. It's around EUR400 million, EUR500 million on the runway. It's around EUR900 million for terminal extension.

It depends on which side, at the end, we build the terminal extension. Whether it's just as an extension, which plan we will follow over there, so it could be around EUR1 billion. If you take this call for the next years, I would expect that Lima -- smaller investments will be in for 2017-2018 because of the capacity constraints we have over there. But no [subsidy] money should be in the years 2019 to 2022, something like this, around.

And if you take it over four years, it will be around EUR250 million, EUR300 million, something around that, because some money will flow out later on, on that time.

On Greece, Matthias mentioned already thee upfront payments. And there will be some further CapEx this year but not so big amount but -- because of some prepayments on the EPC contract. Yes, there will be some payments. And then you will see probably roughly another EUR100 million to EUR140 million in the years 2018, 2019, maybe up to 2020, but there other numbers would be lower already, around that level.

Brazil, we don't want to give you too detailed numbers at the moment because we haven't negotiated any EPC contract on that side. So you should take as a real rough estimate in the years 2018 to 2020 an average -- but it will not come that way -- but an average of EUR70 million to EUR100 million for both airports together, year-by-year. But it will be spread in a different way at the end.

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Matthias Zieschang, Fraport AG - CFO [47]

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Provisions? (multiple speakers) First of all, starting with provisions in the segment external activities. So the name of the segment is external activities and services. This means we do not have only the companies like Lima, like Varna and Burgas, like Twin Star, like Ljubljana, et cetera, in this segment. We have also internal services in the segment, like IT and also facility management. And especially facility management is very personnel-intensive. We have in this facility management subdivision about 1,100 employees. And we do not make any profit, so it's more revenue equals the cost items. And the provisions for restructuring is allocated to the internal subdivisions' IT services and facility management services.

And the second provision which we had was the AIRMALL right down in the US market, and this is a special provision for the concession in Boston, which then was also included in the P&L in the US company. And these are the only two provisions which we had in this segment.

Return on assets, it is absolutely sure that in 2016 there was a reduction in the return on assets in the segments aviation and also ground handling. In ground handling, this has only to do with the building of the provision.

So here, clear indication or clear guidance for 2018. That's based on the fact that there will be no additional provisions in this year. EBITDA and EBIT will go up. And this means, because EBIT is then the driver for the return on assets at the ROFRA in ground handling will improve in 2017.

When you look in aviation, we had, you can say, a double-dip in 2016 caused by the reduction of passengers, minus 0.4%. We had no price increase. We had on top of this the provisions for personnel and the write-down of the goodwill of FraSec. And all these elements had a huge negative impact on the EBIT, so only EUR70 million. On the other side now it's for sure there will be a strong recovery in 2017.

Of course we have 1.9% price increase. We have the volume increase. We do not see, again, these negative one-offs, so that the absolute EBIT number will go up. And driven by this also the return on assets in the aviation segment will improve significantly. And it's for sure that in the long run, we try to earn our cost of capital. That's for sure. That's our ambition.

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Stefan Schulte, Fraport AG - Chairman and CEO [48]

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On the (multiple speakers) business, the numbers would come down. We can give you later on the detailed expectation, but if you make your calculation, you know that Greece at the beginning will not have a positive contribution bottom-line, but the payment has to be done. Same will be on Brazil. It will be even negative at the beginning. Even if we try to optimize the whole structure, it probably will be somewhere negative at the beginning.

And also our payment has to be done; it's clear that the ROFRA in total is coming down. Asset by asset, we don't expect any negatives on Lima. We do not expect at the moment any negatives on Bulgaria. It should be even positive on Antalya because there we should have a positive swing, so it's more linked by the two new assets.

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Christian Cohrs, Warburg Research GMBH - Analyst [49]

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Thank you very much.

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Matthias Zieschang, Fraport AG - CFO [50]

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We will start with a positive return even in Greece, because EUR100 million EBITDA minus EUR40 million depreciation means minimum EUR60 million EBIT. And given the purchase price of EUR1.2 billion -- so if you take this in relation -- so you can see that up from the beginning, the return on assets is positive. Of course, it's diluting the very high number, but it's positive, and then ramping up over time.

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Christian Cohrs, Warburg Research GMBH - Analyst [51]

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Thank you.

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Operator [52]

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Vittorio Carelli, Santander.

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Vittorio Carelli, Santander - Analyst [53]

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The first one is -- probably I missed some guidance about the possible CapEx to expect in 2018. Should we expect also, considering the growing volumes and the recalculation of the WAC, flat or even negative for the next year, for the aviation business in Frankfurt?

And the second question is about the portfolio that you have. Why don't you be -- or why won't you act more aggressively on the asset's rotation? Because considering the focus now on the consolidation of big assets in -- let's say in Brazil. Now we have Greece; you have Lima ready. And considering that the minority stakes are adding very little value to the equity of that Company, why don't you be more aggressive on, let's say, simplifying the portfolio and going forward?

On retail, I perceive sort of -- not passive strategy, but let's say that the growth in retail is mainly based on the quality of the volumes coming forward. And considering that the big discounting Fraport is given by the new aviation business, will you adjust the offer, going forward? Also in the light of the new locals carriers' growing presence, in order to have a better management of the area of the retail business, and apart from the joint venture that you have already [home] last year?

And also on retail -- how should we expect additional cost reallocation from the aviation business to the retail business squeezing down even farther their returns on the retail business, again in 2017?

And apologies for a Brazil question again, just a qualitative -- I need a qualitative justification of the double-digit return you mentioned at the beginning of this call. Because looking at the figures of the auctions, the Brazilian government was giving a sort of target IRR project return real of 8.5% based on very aggressive traffic volumes, above 4%. And you paid a premium on the expected minimum bid by the Brazilian government.

So, all in, I am just challenging a little bit what you have done, what you have said to us on the return -- real return on the project. I know that you cannot give us any details; but at least a qualitative idea of where are the synergies, or which other strategic view you have on those assets? And thank you.

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Stefan Schulte, Fraport AG - Chairman and CEO [54]

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Yes, thanks very much. Brazil, you mentioned already that we are not giving details on that side. But I'd probably be -- or you probably understand if I'm saying that -- whether you take Vinci, and I know them a little bit; whether you take Zurich airport, I know them a little bit; or you know us. Nobody of us three would go for 8%, very simple. So it's a question on how you structure the (technical difficulty).

Our process and synergies and those things are calculated so compared to the returns you get. So it's not so easy just to say that across platform, we also have to see the whole structure there. So it's clearly above 8%, so it's double-digit, as I mentioned.

On retail, we see shifts of profits from aviation to retail. No active shifts; I don't know whether you have a special topic there. But there's no actual shifts from our side in tender term to shift costs or revenues from aviation to retail, if I get your question the correct away.

Regarding special offers on low-cost, no, there are no special offers. But what we do, of course, and that's also one of the intentions with the joint ventures that we have more specialize offer in the different terminal areas, regarding the traffic structure we have here in Frankfurt. And we see already first positive effects out of that.

So if you would have, in the longer run, a dedicated area just on low-cost, just to assume this, if we would have something like this, then you would have probably different offerings over there than in high-value area of Pier Z or A or whatever, so where you have a lot of intercontinental traffic.

On portfolio, simplifying minorities, it depends always on -- I gave you somewhere an estimate. But it depends in principle always asset per asset. We'll have a look on that one. It's not, in general, that we say everything has to be consolidated, but it's a question how we see asset by asset.

So Antalya, for example, yes; they are going through a difficult period. But we still see a lot of volume even as this is a 50-50 joint venture, and we created already a lot of volume in the past. There are another roughly eight years to go or seven years ago, and so we look at this one asset by asset. And there are some assets, you are right, which don't have the same strategic importance for us; like Hanover, for example, there we're in just for 30%.

Antalya, 50%, is much more important for us, and we see other opportunities. 10% India, I mentioned already; 25% Xi'an. There we have to see on this we move forward. They are a very good growth rate. It's increasing performance. We get higher results out of this. But that's always -- we check this and then decide which way we go forward on yearly or two-yearly basis.

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Vittorio Carelli, Santander - Analyst [55]

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Thanks.

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Operator [56]

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(Operator Instructions). [Arthur Trasilov], Credit Suisse.

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Arthur Trasilov, Credit Suisse - Analyst [57]

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I was just wondering whether you could comment on the German wage increase. Obviously inflation is up in Germany and the labor market looks tight, so just wondered whether you could give some color on that.

And secondly, in respect of the retail development in Frankfurt with the new joint venture with Heinemann. Could you just give us some color on how much more retail space we can expect to see in the coming years? And also your strategy for remodeling of the retail, if there is one? Thank you very much.

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Stefan Schulte, Fraport AG - Chairman and CEO [58]

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Yes, thank you very much. Inflation is not really up. Yes, it's somewhere up from -- I think Matthias gave already an indication, or it's in the past, or it's -- I would always calculate with the wage increases, including the structural effect around 2.5% to 3% per year. That's the best guidance we can give you. I would be really lucky if we get it for 1.5% or 2%, but in my opinion it's not realistic. So I would more calculate with 2.5% to 3% per year, on average.

Regarding retail space, the joint venture is not because now we suddenly find new areas. So on Terminal 1, on Terminal 2, there are a lot of remodeling on areas, simply changed over the recent year, 50 or 70 shops somewhere; so modernizing and so on. That's very, very positive; but then on new areas, no. New areas will only come in with [some of the suite], not earlier. And we are really working on upgrading existing areas, having better product offerings, more fit on the traffic structures; those topics -- not promotion, and all those topics.

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Arthur Trasilov, Credit Suisse - Analyst [59]

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So when you think about the areas that you've already upgraded, what sort of revenue per passenger uplift have you seen in those areas? Or is that not possible to split out?

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Stefan Schulte, Fraport AG - Chairman and CEO [60]

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I don't have, to be quite honest. Maybe it's because of what happened. I don't have the number at the moment. We can work on that. It's always difficult, but we've seen upgrades, especially on Pier B; indication Pier B, because there is a lot of -- on upgrades over there. Up plus 5%, plus 10%, something over the next two years, would be possible over there. Pier A is quite fine. There we'll not expect big growth. It's a normal growth that we expect.

And Terminal 2 is getting interesting, because there will be somewhere traffic structure change, especially on the [Shingen] side. Somewhere on the non-Shingen side, [Etiette] is going out. So Etiette will come to -- or will join us on Terminal 1, Pier A. So let's see what does that mean for the retail side, because we have more retail offerings on Pier A.

And on Terminals 2 we'll have more have point-to-point, local traffic, continental traffic, and -- yes. Interesting to see what the numbers will be. But besides these two topics, I don't see big changes at the moment. That's a normal thing that on a year-to-year base we are upgrading [forts], new concepts, new tenants, and so on.

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Arthur Trasilov, Credit Suisse - Analyst [61]

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Great. Thank you very much.

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Operator [62]

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And we have no further questions.

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Stefan Rueter, Fraport AG - SVP, Head of Finance & IR [63]

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Well, okay. Thank you very much for the great number of questions and the deep discussions. We are done for today. We wish you a pleasant weekend. Any questions you still may have, call us. We're available; otherwise on the road the next days. Thank you very much.

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Operator [64]

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Ladies and gentlemen, that conference is now concluded and you may disconnect your telephones. Thank you for joining, and have a pleasant day. Goodbye.