Earnings Call: Q4 2018

Feb 27, 2019

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's Aena full-year 2018 results presentation. At this time, all participants on the phone are in a listen-only mode. There will be a presentation followed by a question and answer session, at which time, if you wish to ask a question, you will need to press star and one on your telephone and wait for your name to be announced. I also must advise this conference is being recorded today on Wednesday, the 27th of February 2019. Now I would like to turn the conference over to your first speaker today, Emilio Rotondo. Please go ahead, sir. Hi. Good morning to everyone, and welcome to Aena's full year 2019 results presentation. My name is Emilio Rotondo. I've recently joined Aena as Deputy CFO. This presentation will be led by our Chairman and CEO, Maurici Lucena, our CFO, José Leo, and myself. Now I hand the floor over to Mr. Lucena. Thank you very much, Emilio. Hello, everybody. I propose you to turn to slide number 4 of the presentation we gave you regarding and slide 4, regarding passenger traffic in 2018. Passenger traffic, including the network of airports in Spain and Luton Airport, reached more than 280 million. In the Spanish network airports, the increase amounts to 5.8%. It means almost 264 million passengers, which means that in the fourth quarter of 2018, traffic has grown by 6.9%. With regard to financial results, I would like to note that total consolidated revenues increased to more than EUR 4.3 billion, which represents an increase of 7.3% compared to 2017. EBITDA for the period stood at more than EUR 2.65 billion, which represents 6.5% growth compared to 2017. This figure of EBITDA includes a net exceptional negative impact of almost EUR 20 million, derived from the recognition of impairment of the assets of Murcia San Javier Airport, and on the positive side, the application of income from capital grants. Excluding this exceptional impact, EBITDA for the period would have increased more than 5.5%. Specifically, it would have increased by 6.3%, and all in all, the EBITDA margin stood at 61.5% in the year 2018. On the other hand, attributable consolidated net profit reached more than EUR 1.3 billion, which represents an increase of 7.8% compared to 2017. This reflects the positive trend in the business, the reduction in financial expenses, and on the negative side, the increase in corporate income tax. There has been additionally, a drop in operating cash flow of -3.3% up to EUR 1.9 billion. This drop in operating cash flow is affected by the refund of 2015 corporate tax that took place in 2017, as we have mentioned several times, and by the change last year in 2018, of the payment method for an airline from prepayment to bank guarantee. Excluding both effects, operating cash flow would have increased by 3.8%, and accounting net financial debt has increased to EUR 6.6 billion, reducing the consolidated group's ratio of net financial debt to EBITDA from 2.8 in 2017 to 2.5 at the end of 2018. Finally, as you all know, the board of directors proposed yesterday to the ordinary general shareholders meeting that will take place next April, the distribution of a gross dividend of EUR 6.93 per share. This dividend, as you all know, implies the distribution of the 80% of the net profit. Thank you. Good morning, everyone. This is José Leo, the CFO. Moving on to slide number 6, taking a look at the traffic data this year, I think that it has been a really positive year with a growth of 5.8%, slightly over our forecasts and our initial expectations of 5.5%. I have to say, not too far away from our estimates during the year. As we have mentioned a number of times in previous quarterly and half-yearly results presentations, this particular year, the traffic growth in the domestic segment has been much more significant than the one in international, growing 10% in domestic, slightly over 4% international. That performance is particularly impacted by the changes in the, let's say, government subsidies to the traffic between the different islands and between the islands and the Spanish peninsula. At the same time, the more moderate traffic growth in the international arena was affected by a number of factors, namely the recovery of alternative destinations in the Mediterranean area, as well as the U.K. in particular, the U.K. events in terms of Brexit, pound depreciation, so on and so forth. The most significant aspect of that is the decline in the U.K. traffic in the year by 3%. I have to say that, as we already mentioned some months ago, we are starting to see the U.K. traffic recovering, and that has been the case in the last part of 2018, as well as in the January traffic numbers that we published recently. That's promising, obviously, subject to any other event that can come up as a result of Brexit and geopolitical considerations that are far from our reach. It's positive to see that the traffic with the U.K. and generally the traffic with the rest of the European continent is growing. That is obviously also potentially having an impact on the commercial arena going forward. I think from the traffic standpoint, those are the most significant aspects to highlight. Then we can move on to slide number 7, where we take a look at the results, the performance of the different business lines. In general, as the Chairman and Chief Exec said, has been a positive year, a good year. The business continues to deliver healthy results and healthy cash flows across the board. Clearly, you can see that the relative weight of the commercial activities is picking up. That is the result of the particular dynamics of the aeronautical business line, whereby we have the 2.2% or 2.22% decline over time in tariffs, as well as the moderation in the traffic growth. I have to say, the commercial activities overall are performing well with a number of aspects that I would like to highlight. For instance, the renegotiation and the new tenders of contracts in the food and beverage segment that have been successful with very competitive offers, with commitments in terms of minimum guaranteed rents, which are significantly over the previous ones, with definitely competitive tension in every process we have been running over the year. Similarly, we can see a good performance in terms of the car parking, in terms of the car rental that we will see now in a little bit more detail in the next slide. The international business also performing very well, with Luton traffic growing 5% and the EBITDA of Luton in terms of sterlings, so in local currency, like for like, excluding all the one-offs, growing close to 25%. Going on to slide number 8. In this slide, we can see a little bit more color. We can give a little bit more color on the different commercial activities. As I said before, very strong performance in food and beverage. Really, this business is one of the best performers. During 2018, we have seen new concessions being granted in places like Gran Canaria, Barcelona, Mallorca, or Málaga, where the minimum guaranteed rents committed by the concessionaires were substantially over the previous ones. In terms of the specialty shops, we also can see a very healthy growth in excess of 16%. With the contribution of the new commercial offering in some airports, such as Madrid-Barajas or Palma de Mallorca, being major drivers of this performance. Car parks as well, doing really well. It is clear that the significant growth in domestic traffic is part of the reason, because there is more propensity to use the car park service by domestic passengers. Car rental also doing well with increase in penetration in this particular business as well. Across the board, a good performance. I will dwell for a while on the VIP services where you can see, well, more than 50% growth year on year. I think we mentioned that before, there is a corresponding increase in costs, and this is the result of Aena moving into a different business model. We are starting to manage the VIP services in-house rather than contracting a managing agent to deal with that. That is generating more cost, more revenue, but more importantly, more EBITDA. It is a value-creative process from both the financial standpoint and the quality of service point of view. All in all, clearly, there is nothing to hide in the fact that the minimum guarantee rents are representing a relatively higher weight this year than the year before. As we always say, that it is a coin with two different, let us say, sides. One of them is clearly long-term. We would like to see this underlying sales to catch up. At the same time, short-term, when you are dealing with, let us say, less dramatic traffic growth, it is always good to be protected by this kind of mechanism. I think I am going to skip the next slide. We can move on, please. Very briefly, we already mentioned the Luton's performance, which has been really good. The rest of the companies, the associates in other countries, Mexico and Colombia, are performing well with the sole exception of Aerocali. That has been a story that has been going on for a number of months. That is likely to turn around sooner rather than later, because that was driven by the particular performance of Avianca, which is now coming back to operate an increasing number of aircraft at the airport. I will stop here, and I will hand you over to Emilio Rotondo, that will deal with the financial results section of the presentation. Thank you very much. Thank you, Jose. Now we move on to slide number 11. As you may see, and with the aim of not repeating what has been said by our chairman and by our CFO, I will just mention that all of the revenue, OPEX, and EBITDA has been already mentioned. I move over to the cash flow, highlighting that there has been a drop in the operating cash flow of 30.3% to EUR 1,950 million, affected by the refund of 2015 corporate tax that took place in 2017, and the change of the payment method from an airline. Also that the net financial debt has decreased to EUR 6.6 billion, including Luton. Move to page 12 and 13, and moving over to the operating expenses. The operating expenses have increased, as Jose was mentioning, by 11.2%, mainly due to the cost of the security services by EUR 20 million, the new PRM service, the Persons with Reduced Mobility service contract that has increased by EUR 19 million, the OPEX new management of the VIP lounges by EUR 9 million is what Jose has mentioned in terms of the VIP business and the accretive impact on EBITDA. Other management expenses by EUR 9 million and cleaning by EUR 6 million, and several other operating expenses that have made that total line to increase by what have been mentioned of 11% to EUR 91 million. Depreciation and amortization has remained stable. There is a small decline of 0.6%. Financial expenses and other financial results have decreased by EUR 11.5 million, 8%, mainly due to the reduction of the volume of debt that has been mentioned, and this reduction is partially offset by the payment of the compensation for the swap breakage cost associated with the loan with Depfa Bank that was canceled in July of this year, with an impact of EUR 17.2 million. Interest expenses and expropriations increased by EUR 5 million, corporate income tax by EUR 34.9 million. That led to a net profit of the parent company of EUR 1.3 billion with an increase of 8%. Moving to the cash flow statement, slide number 14. Net cash flow from operating activity has already been highlighted. Moving to the investment net cash flow from investment activities, they used has rose to EUR 502 million compared with EUR 362 of last year, mainly consisted of payment for acquisition and replacement of fixed assets relating to the airport infrastructure, and that amount of EUR 525 million. That includes EUR 102 million for certified investments that have not been paid at the end of 2017, but was of that year. As you know, these investments mainly focus on improvements to facilities and operational security of the airport network. Also, we have the additional CapEx activities, including the dividend proceeds from the equity account associates with an amount of EUR 20 million and proceeds from other financial assets for an amount of EUR 10 million. That corresponds to the refund of the guarantee established for the participation of the bidding process of the Aeropuerto de Murcia for the International Airport of Región de Murcia. Finally, the cash flow from financing activities. The main financing outflows corresponds to the payment of dividends and the principal repayment of debt. The dividends have amounted EUR 993 million last year and the repayment of the principal debt that corresponds to the mirror debt that we have with Enaire for an amount of EUR 632 million. Also has included the early amortization of the debt for amount of EUR 166 million. Now, in order to conclude the presentation, I give the flow back to our Chairman to give us the outlook for 2019. Thank you. Hello, again. I will now review what we consider the main perspectives for the current year, for 2019. With regard, starting with the passenger traffic. We still feel that the best estimate for the passenger growth for the whole year is 2%. So we keep this estimate as a good one so far. For regulated business, I would like to highlight the following issues. Firstly, remind that airport tariffs in the current year, in 2019, will remain stable compared to 2018. This has been already approved. Secondly, the fulfillment of the objectives established in our regulatory document, the DORA, the popular DORA, will be, as always, a priority. Regarding the commercial activity, I would like to underline the following issues. Firstly, we will implement or we are already implementing an action plan to improve the commercial performance of the duty-free business, and we will define, during the whole year, a contractual strategy for the renewal of the duty-free contract in 2020. In particular, the contract ends in October 2020. Secondly, we will award the new advertising contract. Finally, concerning commercial activity, we will renew the commercial offer of specialty shops and food and beverage for the contracts that expire in 2019. With regard to real estate services, I would like just to insist on what we are currently doing. We are defining and designing the corporate and legal business model for the real estate development plans of Spain as a whole, but especially of Madrid and Barcelona. In the international area, we will continue analyzing the opportunities with a special emphasis on the Latin American and European markets. And of course, we will also consolidate the current assets. Finally, I would like to reiterate our commitment to distribute dividends of an amount equivalent to 80% of the annual net profit for the period. Well, of course, 2018 has already been approved, but this policy will continue during the current year and next year. Thank you. Now we will move to the Q&A session. Please, operator. You are here. Thank you, sir. Ladies and gentlemen, as a reminder, if you wish to ask a question at this time, please press star and one on your telephone keypad and wait for your name to be announced. Please stand by while we compile the Q&A queue. This will only take a few moments. If you wish to cancel your request at any time, please press the hash key. Once again, it is star and one for questions, please. Your first question today comes from the line of Vittorio Carelli from Santander. Please go ahead. Your line is now open. Good afternoon, gentlemen. I will do three questions, one by one, to facilitate the answers. The first question is, you have already paid for the new Murcia Airport concession, or is just one euro, as I read in the newspaper last year? We should not expect any upfront payment for the new airport in Murcia? No, you are absolutely right. There is no upfront payment. What we have committed is to pay concession fees, going forward, with a minimum and then an element linked to the traffic. Okay. No CapEx here, let's say no investment on- No Investment on the airport. Okay. Obviously, there are small elements of CapEx just to, let's say, upgrade or keep up some of the facilities, but nothing material in the context of Aena's accounts. Okay. Thank you. Quickly to the second one. On retail, duty-free revenues EUR 318, minimum annual guarantee EUR 321. How can I reconcile those two numbers? Well, we can provide to you the detail, but bear with me. This is just an accounting adjustment driven by the way the initial upfront payment some years ago when this contract was entered into. At that time, we have a payment in advance that we need to recycle through the accounts. Rather than me, let's say, getting into the detail now, rest assured that the IR team will help you out with that. No, absolutely. I just was wondering about the half a year commercial initiatives on duty-free, which apparently are not delivering the expected results. That just was a derivative question. This is a different question. I understand. Okay. Yeah. Okay. Okay. A further question is related to traffic. Last year, you gave a guidance with a deviation of 1.4 million passengers. This year, you are giving a guidance with a deviation of half of it, sorry. The deviation last year was 2.5, and this year, the deviation is 1.4. Do you have a more precise idea of passengers this year, or it's just a matter of maths? To be honest, it's just pure statistics. The team in charge of producing forecast came to us or just delivered that sort of range of potential variations. To be honest, we haven't been particularly, let's say, involved in getting the detail, but this is just a purely technical approach, and it's coming up as a result of the process run by the experts. I suppose it's because they can, let's say, narrow the range this year, maybe more closely, but I don't know. The 2% plus/minus, let's say, half percent is something that has been delivered by the technical team. Va bene. Grazie. Thank you very much. Your next question comes from the line of Guillermo Fernandez-Gao from Kepler Chevreux. Please go ahead. Your line is now open. Good afternoon, everyone. Thanks for taking my call. I have a couple of them. One is a follow-up from Vittorio modern on the deviation from the central 2% growth. My question would be, taking into account the strong start of the year above or around 7% in January, what keeps you being so conservative? If you have already any visibility for the summer season, in particular for the airline's capacity intentions? The second one would be on the CapEx. You have finally expended or invested 500 and something million when in your guidance, the guidance you shared in the strategic review, it was closer to 650, if I remember correctly, 645. Was just wondering what has been the difference there. Thank you. I will start with the first question concerning our forecast for the current year in the traffic guidance. I perfectly understand that one could think that this maybe is too conservative. We are comfortable being prudent because, regardless of the figures of last January, we still feel that we have quite uncertainty coming from, first, our main markets, secondly, our competitors or the country that host our airport competitors, thirdly, Brexit, fourthly, the evolution of the cost of oil. Finally, I would also like to highlight the consolidation process in the aviation industry that is taking place, and it can move you some figures and some forecasts. In addition to this, you mentioned the summer season. I would say that our visibility at the present time on the summer season is quite limited. That is why, all in all, and regardless of the optimistic forecast for the Spanish and the European economies, all in all, we are comfortable keeping this 2% increase as a guidance. Well, with regard to the CapEx, it is just pure phasing. It is not easy to, let us say, set clearly the final figures, because they are driven sometimes just some month delays could impact the payments. That is the reason for that. In terms of the execution, we are not so far. We can provide that data separately. But in terms of payments, any deviation in the phasing can create this sort of significant variation. But it is just phasing. The projects that were, let us say, planned to be executed or launched during this period of time are moving on as planned. Okay. Okay, Andres, thanks. I understand that anything that has not been incurred in 2018 will be in 2019, which probably will see some phasing as well into 2020, but- Absolutely Nothing has changed. You are right. Yeah. Okay. Understood. Thank you. Thank you. Your next question comes from the line of Stephanie D'Ath from RBC. Please go ahead, your line is now open. Thank you, Jaime, Clemens, for answering my questions. I have three, please. The first one is regarding traffic. You commented that your visibility was limited on summer, but could you please give us when you run the capacity seats, what you have? Because when I run the OAG numbers, I get a 1.7% increase for Aena. My second question is regarding U.K. passengers and borough countries. So you reported U.K. passengers down 3% in full year 2018, which implies that actually the fourth quarter was back to growth. So could you maybe give us a bit more comment on your expectations there? And then regarding borough countries, do you see any change or slowdown then taking the market share back? And then finally, my third question is on capital allocation, please. Could you give us an update on your external growth, potential projects and development of the real estate plans as well? Thank you. Thank you, Jenny. Allow us one minute, please. Well, thank you. In terms of traffic, when we said that we have limited visibility on the summer, clearly we have a number of data already available, but our experience about attrition in last summer are making us being particularly prudent about it. I think some of the potential seats reservations made by the airlines could potentially be misleading in the sense that they will retain the flexibility to drop some of those, let's say, reserved seats. We want to be prudent about it. Clearly, the last year was a very good example of what we are living today. If you remember, we were growing in the first quarter at rates of close to 9%, 10%, and then over the rest of the year, we clearly experienced a softening in that. We are concerned that that might be the case again. Dealing with the U.K. traffic in particular, I think the last quarter of 2018, as I mentioned before, was promising. We see that traffic picking up and growing, and we have seen that again in January. But we don't believe that growth will be or could be very dramatic, or let's say, would be potentially definitely single digit and low single digit. But we need to wait and see, because clearly, I think in a month time or month and a half, we will have much more information on that. We are concerned about, for instance, airlines yields going down, and as a result of that, the airlines taking away some capacity, things like that. On the other hand, the traffic borrow from other destinations, it is difficult to say, but I think maybe that is something that is, I wouldn't say coming to an end, but it's not going to, if you like, chip away Aena's traffic in the same way that did in the past. But this is just an impression that we have today. I'm not sure that I have answered all your questions on traffic, but anyhow, I will hand you over to the Chief Exec that will be answering the other questions. Thank you. Yes, that was all my questions on traffic. Thank you. Okay. Concerning your last question, starting with real estate developments, I want to be clear about this. We expect to be in a position to share more information with you over the coming months, but not at the present time, because at the present time, we are working with the consulting firms we hired some months ago to define the most appropriate corporate structure, the most convenient business models, for every activity. We are also trying to obtain precise economic appraisal of the real estate assets of the different airports we are analyzing. Of course, I would also like to again insist on that these are very long-term projects, up to at least 20 years. So, we will have time to discuss it with more precision. Concerning the international expansion, the international area, you know that the international growth strategy is one of the main pillars of the strategic plan. But, we have a sine qua non condition, which is that the opportunities have to fit from a strategic, economic, operational, and financial point of view. Of course, we are interested in European and Latin American markets, but we will analyze any asset that we consider interesting. Of course, you know that we prefer brownfield projects rather than greenfield projects, but on specific opportunities, unfortunately, some of them have been in the media, but many others remain private and our corporate policy is not to comment anything in this regard. Anything else? I mean. Thank you. Thank you. Thank you. Your next question comes from the line of Jenny Ping. Please go ahead. Your line is open. Hi. Good afternoon, and thank you very much for your time. Firstly, on duty-free, you have now been trialing out new use of space in order to improve profitability, and that, I understand, has been ongoing for a couple of months now. Can you give us an update as to how that is going in the five airports that you're trialing out, or have you actually seen material improvements in terms of profitability? Then on the second question is with regards to something you touched on earlier, which is excuse me, to say some of the airlines and the consolidations that's happening. I see from your release that Norwegian Air accounts for about 4% of your traffic. I just want to understand if either Norwegian Air or any of the other airlines who are struggling financially, how are the slots normally dealt with? Is that based on your allocation, or is it the airline's responsibility to essentially get rid of it? Thank you. Okay. Let me start with your first question, because it's a very important one, the duty-free, for Aena. Let me please answer you from a more general perspective, but I will give you the reason. We are so far happy with the results of the pilot schemes, but you have to allow me to be very prudent because Dufry is a listed company, so we understand that it is its decision to share the results, the specific and the precise results of these pilot schemes with the market if they consider this appropriate. I would like to highlight general considerations concerning the duty-free business from Aena perspective. Well, first of all, when you analyze what affects the duty-free activity within the airports, I would summarize that they are conditioned by the general economic situation, the new trends in retail consumption, specifically what concerns e-commerce, other geostrategic aspects such as Brexit, and the mix of passengers in our network, which you know is a very large network. The current concession ends, as I said at the beginning of my presentation, in October 2020, and we have started working with a consultancy company to analyze the different options. Our priority, our first best scenario is to launch a competitive bid process concerning the new contract. Of course, from the Aena perspective, the objective of this new contract is to increase sales that increase our revenue regardless of the minimum annual guarantee rents. This translated into some of the new aspects of the new contract. I would say that our aim is to increase the competition in the tender calling to other European and Asian operators. European operators, apart from Dufry, I'm thinking about Lagardère, DFS, Heinemann, Nuance, and so on. Secondly, we will consider in the new contract the possibility to reallocate or expand the commercial area within our airports. I would also say that we are assessing the possibility of splitting the contract into different lots. This, of course, in parallel, is run by these pilot schemes that, as I said, for so far, we are happy with the results. We will try to give you more color on the evolution of our strategy concerning the duty-free business in the coming months. Thank you. Okay. With regard to the slots allocation recycling, there is an institution organization appointed by the Ministerio de Fomento, which name is AECFA. All the slots available are managed and allocated through that institution. So it's not Aena. Obviously, Aena will have a say and will have an opinion, but it's not Aena which is in charge of selecting which slots are available to whom. Anyhow, let me say that my comment is a generic one and by no means I'm speculating with the particular company you mentioned before. Okay. Thank you very much. Thank you. Thank you. Your next question comes from the line of Cristian Nedelcu from UBS. Please go ahead. Your line is open. Hello. Thank you very much for taking my questions. Three questions, please. Firstly, in terms of your OPEX, in terms of other operating expenses, it was my understanding that most of your contracts were renegotiated by Q3 2018. The question is, in 2019, what should we expect in terms of growth in other operating expenses? Similarly, if you can elaborate on 2019 staff costs and supplies. Secondly, in terms of your retail business, looking at Q4 in particular, the specialty shops have been very strong. Growth accelerated at 30% year-on-year. You have been talking about new commercial offerings. Could you elaborate a bit on 2019 for both specialty shops and food and beverage, what initiatives you have there? Last but not least, on traffic, your guidance for next year, for 2019, could you split or could you disclose your expectations on different clusters of traffic? For example, traffic within Spain or intercontinental traffic or traffic Europe, Spain, what sort of growth you are expecting there? What makes up your 2% traffic? One last one short technical one, if I may. I noticed your incentives, so in aeronautical, your commercial incentives in 2018 were EUR 15 million lower year-on-year. You can just elaborate what is driving that and what should we expect for 2019. Thank you very much. Well, a lot of questions. I am afraid there is one I did not quite catch, which is the one on traffic, but we can come back to that. Starting with OPEX, I think that clearly the bulk of the third-party, let us say, services provided to Aena has been already rearranged and contracted under new conditions, the bulk of it. If I have to single out something which is still outstanding, that will be maintenance. We are now working as we speak in developing a new strategic framework to, let us say, engage maintenance suppliers, and that will involve rationalization and a different way of managing that over time will deliver better maintenance service and a more effective one. But that is likely to result in some cost increases short-term. Other than that, the rest will be the tail end or the annualized impact of the contracts that were put in place over the last year or so. As we have said already, and as you can see in the strategic plan numbers, in 2019, we are still expecting some OPEX increase that is quantified there in that strategic plan document. The driver for that operating cost increase is mainly third-party services. But clearly, we will see also staff costs moving up a little bit, and that is the result of our, let us say, ability as part of the strategic plan, for the first time, to get permission to increase our payroll a little bit and to increase our staff a little bit because we cannot carry on forever working, let us say, with the same limited amount of resources. But the main driver for that tail end that will impact 2019 will be the third-party services. You mentioned, let us say, new activities that contributed or new contracts that are contributing to the improvement in the food and beverage and specialty shops business lines. I am just reading through the paper. I can mention in 2018, for instance, we have Alicante opening 18 new premises under new contracts in food and beverage that involve a significant increase in the minimum annual guarantee rent, as well as a new offering, a better offering, a more fit-for-purpose offer to the customers, to the passengers. In Barcelona, also a new contract with 49 premises that started in May 2018, also with a significant minimum annual guarantee rent committed. You can see a great deal of detail of that in our management report that has been published with the annual accounts. But just to name a few, Málaga as well, back in September 2018, food and beverage. In the specialty shops, there were new shops opening, most of them in the last part of 2018 in Barcelona. Also, there will be new openings in Q2 and Q3 in 2019 in Málaga, just to name a few. But you can see a great deal of information in the management report, and of course, we are always ready to help through the IR team in more detail. Then I will make a comment on the incentives, and I will ask you to repeat, if that's okay, your question on traffic. Incentives- Of course are going down because we changed the structure of our incentives a couple of years ago. We are now focusing on long-haul traffic, new routes, rather than incentivizing short-haul routes because we ended up in a situation whereby we didn't know what was first, a chicken and egg type of situation, whether the incentives were enhancing the short-haul routes or the short-haul routes were there and the incentives were paid, as simple as that. And clearly, that is reducing the bill of the incentives. But now the incentive scheme is much more focused, more fit for purpose, and is more, let's say, focusing on what we believe is going to generate more value long term. Yeah. Thank you very much. The question on traffic was more getting a better understanding of the components of the 2% guidance. In particular, how much you're seeing domestic Spanish traffic growing, how much intercontinental traffic growing in 2019, and the same for Europe-Spain traffic, if you can provide a bit more color there. From memory, I cannot provide the breakdown between intercontinental and short-haul international. But what I can tell you is, in terms of international and domestic, it's basically the same. It's 2%, around 2%. It's slightly over 2% international and slightly below 2% domestic. That's from memory. Yes, it's- Understood 2.2% for the domestic and 1.9% for international, as Jose mentioned. No, the other way around. Yeah. Okay. Understood. Thank you very much. Pretty even between the two. Understood. Thank you. Thank you. Your next question comes from the line of Andrew Lobbenberg from HSBC. Please go ahead. Oh, hi there, guys. Can I ask a first question, which I know relies on my ignorance, so apologies. On the outlook slide, under Regulated Business, you have the bullet that says, "The fulfillment of objectives established in the DORA will be prioritized." Could you be a bit more explicit as to what that refers to? That's my ignorance. Second question, I think there's been an increase in the minimum wage in Spain. Does that have an impact on you, or is that what's driving the change to the third-party services that you're seeing into 2019? My third question would be around your strategy for the renegotiation of duty free. You spoke about trying to involve a range of European and Asian players. Yet that doesn't actually seem very many, and it does seem, looking from the outside, like it's a bit of an oligopoly. In the context of the food and beverage, you said that you were having really good competitive tension. How confident are you that you can actually deliver a proper living, breathing, competitive tension in this duty free game, going against what is a great big oligopoly? Okay. I will start with your first question concerning the slide of the outlook for 2019. Probably, you are right, and the objective of the fulfillment of what the DORA document establishes is redundant, because this is not voluntary. We are obliged to fulfill the objectives. Here, what we just try to underline or to remind is that much of our CapEx is defined by the DORA. This increases our RAB, and you know that our RAB is retributed. So it's just a reminding of how our CapEx is defined every year. So, just a second. Yeah. Of course, this increase of CapEx is at the same time defined or affected by the increase of the quality that the DORA imposes. So all in all, it's just a reminder of our CapEx obligations for the current year, which is not, by the way, different from last year. José Leo, I give the floor to José Leo. Well, with regard to the minimum wage increase, at Aena level, that is not going to play any significant part, to be honest. I think our people are paid above that level. In terms of the third parties, the cost increases that you can see in the 2018 figures and that will have an impact through 2019 as well, are not necessarily linked to that. They are just a result of the latest round of tenders, where we were asking the suppliers to provide a better quality service, to link themselves and to commit themselves to the bonus and penalty scheme imposed in terms of KPIs by the DORA. Of course, to make sure that we have all the resources we need to deal with the volume increases, so on and so forth. We will need to wait and see. Clearly, they have contractual commitments with us, so if any of them, at any point in time, are affected by the minimum wage increases, time will tell. But for the time being, we are not expecting that to be affecting us, and to the best of my knowledge, we haven't seen anything coming up yet. Once again, there are contractual obligations that they are committed to and they have to honor. Furthermore, I don't think that necessarily is going to be affecting a significant chunk of the people they provide, but once again, we need to wait and see. In terms of the duty-free contract competitive tension or the lack of it, we are working hard. It's clear that the market is what it is. Oligopolies not necessarily mean there is no competitive tension. There are industries where the oligopoly, if anything, really keep the few players in the market very tense to be able to overtake the other two, three, or four. We still believe that despite that limited number of participants, we can create the conditions for that tension to be delivered. We believe that for big players in this market to retain or to win contracts of the size and the relevance of Aena's, is good. Is good for them. Most of them listed, and by losing the contract, there is nothing they can do about. If they win the contract, at least they have the opportunity to, let's say, take advantage of growth in the airport arena, as well as being able to manage. If you don't have a contract, there is nothing you can do. There is no management alternative or option. Thank you. Okay. Thank you. Thank you. Your next question comes from the line of James Holmes, Bank of Saint. Please go ahead, your line is open. Hi. Good afternoon. A few quick ones. Just firstly, on commercial revenue per passenger. In 2018, you did 3% growth. Clearly, as you look at minimum annual guarantees as well as your own estimates, is that probably a sensible number to use for 2019 as well, +3%? Secondly, just on your leverage targets. I think this time last year, you refused to give a net debt EBITDA target. I do not think you have given one since, even after your strategy outlook. I was wondering if 2.5 was the right level, the way things are going up and down. Then finally, any updates on the EU regulators looking at airport charges and hubs funding smaller airports as it relates to Aena? Thank you. Well, with regard to the commercial revenue per passenger, I will refer you to the strategic plan where you can find the 2019 numbers. Honestly, I cannot provide you now the specific figure, but I will be more than pleased to do it offline. Secondly, your question. You mentioned we refuse to provide any leverage target. It is not exactly that we refuse, it is simply that the reality of Aena's ownership and strategic framework means that there is no point in us taking a commitment on a particular gearing ratio. Let me put you an example. If we say the gearing target is four times, let us say for example's sake. Obviously, you can get to that level in two ways. One is by investing in good opportunities. That is right. If you get the right opportunity, and the board of directors think that you have to buy that and go ahead with it, you can reach that level. But what if you do not crystallize any opportunity? How on earth are you going to get to that level? Just by paying off, let us say, exceptional dividends or re-gearing, re-leveraging the company to pay dividends with that cash. That is not going to happen. It is not possible, at least in the foreseeable future, under the strategic plan that was approved by the government. I have to remind you that the strategic plan that we presented three, four months ago was the result of very long and hard work that, in our view, was a very successful one, because we ended up with the Spanish government supporting and backing in full the plan, taking a commitment, or supporting the commitment of the company to distribute the sort of dividend we are distributing, which I believe is attractive, could be better, but is attractive. So for us to be able to do the kind of things that you need to do to regear the company, paying extra dividends, we would need to go through that process again, and that is not going to happen short term. We need to be very clear and very upfront in that regard. There is no point in committing any particular gearing target. What we can say is that we are conscious that we can optimize our capital structure. If there are good opportunities in our growth strategy that makes sense to us, we won't be shy to invest, because we know we have firepower, we have potential, and we can run the business with a higher leverage ratio. I hope that helps. I forgot the other one. Sorry? Okay. In terms of the new directive, obviously, it's still a long way to go. We think there are things there that should be tackled. We are providing our input. We are confident that the key features of the existing Aena's business will remain in place, and which are being very successful for the development of the Spanish airport industry, but more importantly, to support the connectivity inside the country and with the country, with other countries, as well as the tourist industry, which is critical to our country. Right. Thanks a lot. Thank you. Your next question comes from the line of Arthur Truslove from Credit Suisse. Please go ahead, your line is open. Hi there. Just two from me. Firstly, you've obviously said that the 2019 tariffs are going to be in line with 2018, but as we look out to 2020, how should we expect tariffs to come down, stay the same, et cetera, in 2020? Second question, the working capital outflow was higher in the annual report than it was suggested it would be at the strategic plan. I just wonder whether you could explain why that was. Thank you very much. Okay. I suppose you mentioned what the tariff. You are not asking about DORA 2, you are asking about 2020 tariffs or end of DORA 1, let's say. Clearly, there is a commitment to reduce the tariffs by 2.22% per year. But at the same time, there is a mechanism that implies that if we under-recover our per passenger yield, we are entitled to factor that in the next year. So to the extent that there is a yield dilution element that needs to be recovered through the k factor, we will carry on doing that. So potentially, you can end up, I'm not anticipating that's going to be the case or otherwise, it's just potentially you can end up with this level of tariffs that is flat over the coming years, potentially. That would mean that de facto, you haven't reduced the tariffs because as you have to recover a particular revenue per passenger, the total revenue per passenger is sacrosanct under this particular framework. Sorry, second question. Working capital. Working capital. To be honest, that is almost a second derivative question that I would invite you to contact the IR team, so they can provide you with a detailed explanation on that. But nothing really, let's say, odd in that. Thank you. Thank you. Your next question comes from the line of Nicolas Mora from Morgan Stanley. Please go ahead. Your line is open. Yes. Good afternoon, gentlemen. Just a couple follow-ups. Just on the subsidies you got paid in the fourth quarter, the FEDER subsidies where you got a big uptick. Can you give us a little bit of insight as to whether this is properly one-off or we got ahead of us, basically a higher level of subsidies for the next, let's say, four or five years? I see there's still a stock of north of EUR 500 million of subsidies to be paid to you. Are we going to see an accelerated payment basically over the next few years? Second question is on the new Murcia airports. I understand you're not paying the expected EUR 160 million value of the assets and you've swapped that into a concession fee. Does it mean you'll pay something around EUR 20 million concession fee from next year? It's just to adjust a little bit the OPEX line. Last point on duty free. To help us a little bit assess where you stand versus the MAG, could you help us understand where you are in terms of the underlying revenue per pax in duty free versus what you're getting paid by Dufry? Thank you. Okay. What was the first? Sorry, I'm getting completely. On the subsidies. Okay, subsidies. You mean the grant? The subsidies, yeah. The government grant. Yes, exactly. The grant, yeah. We would love to say that is going to carry on being the case, but no, clearly this year, there was a sort of, let's call it windfall. And it was unexpected, the scale of that. So we have something like EUR 36 million, could be, of subsidies in the revenue line that honestly were not expected four months ago, three months ago. Well, four months ago, I mean, back in October. Yep. They are all linked to the European Regional Development Fund. So that's all linked to CapEx plans that took place under that scheme many years ago. But, well. Second point, sorry, can you remind me? Second one was just on Murcia. Since you're- Yes you are expected to get a cash outflow that is swapped into a concession fee. Yeah. Is this anything material that we need to plug in into numbers? No Okay. No, the concession fee will be very minor. I wouldn't say peanuts, but in the context of the consolidated accounts of Aena, it's completely immaterial. So nothing really material. There is a minimum guaranteed, which is a small amount, so really a small amount. And third question, sorry? Just to understand on duty free, where you stand in terms of underlying revenues versus what you are getting from Dufry, just for us to assess that risk. We do not comment on that. We do not provide that detail. We recognize that out of the three lots, two of them, the most important ones, both of them operating under minimum guarantees, but we do not provide details about that gap. The information we provide on that is that figure in one of the slides where you can see the total amount of revenues that are driven by minimum guarantee rent over and above the underlying, supported by sales revenues. That is an overall figure. That is the total figure for all the contracts under minimum guarantees, not only duty free. Sure. Maybe to turn the question around, do you expect in 2019 to be able to match the growth in the duty free MAGs, which is around 6%? With the efforts you have put in, the pilot shops and so on, or are you still going to struggle to keep a pace with that trend? I do not think the gap between minimum guarantees and underlying sales for duty-free is extremely unlikely to be filled in next year. I do not think. I think the situation will remain the same. There will be a gap. Okay. If I may, just last question just on the international expansion, considering the bit of a vacuum at the government at the moment and ahead of the snap elections, do you think you still have basically the mandate to carry out deals right now? I am thinking about Sofia, thinking about Brazil, which are in the pipeline. Or do you find yourself a little bit hindered by your main shareholder situation? No, absolutely, I would say that the situation has not changed. The government will be supportive of any of the projects we present to them. What worries me is a previous question. As I mentioned before, the optimal combination of operative financial strategic aspects in terms of what Aena thinks or considers optimal. Having said that, the government, regardless of the current situation, will support any project that we present to them because we have the previous approval of the strategic plan. Nothing has changed, honestly. Okay, but you are worried that some of these opportunities out there are not fulfilling the basic criteria you set? Yeah, I would say that this is always the same, of course. Maybe I didn't understand correctly your answer, but I thought you were answering about the reaction of the government in the current political situation. What was it? True. No, that is it, whether basically a bit of a vacuum in power is limiting you in attending basically the ongoing tenders. No, I do not see so far any new limitation, no. Okay. All right. Thank you very much, gentlemen. Thank you. Your next question comes from the line of Marcin Chwiałkowsk from Bank of America. Please go ahead, your line is open. Yes, good afternoon, and thank you very much for the presentation. Just one question. I want to go back to the topic of airport tariffs. Do you have any update for us on the p-factor negotiation? Do you expect that to be already included in your tariff revision in 2020? Can you maybe comment a little bit on the process? Are those negotiations on the p-factor, is it an active discussion, or it's a little bit frozen? Well, I wouldn't call it negotiation. There was a process of consultation many months ago, I think more than one year ago. What we know now is there is a draft somewhere that has been already reviewed and informed by the different regulators, a draft of the royal decree. We are waiting for that to be released at, or issued at some point in time. Frankly, we don't know. There is no negotiation. That was never a negotiation. It was just, we were requested to provide our input and our views, and we did it. Do you have any, can you share any color on the timing of that? Or that is not really- No. A color on timing that I can tell you is reliable at this moment, the answer is no, I'm afraid. All right. Thank you very much. Thank you. Your next question comes from the line of Charles Medir from Kempen. Please go ahead. Hi, good afternoon, gentlemen. Just a follow-up on the tariff in the current DORA. What was the aviation yield dilution last year per passenger? Because if we know that, we can already work out the k factor recovery in 2020. I just want to confirm that figure. Do you expect that dilution that we've seen in 2017 and in 2018 to continue in 2019? Thank you. Okay. The figure for 2018 happens to be exactly the same than the one for 2017, EUR 58 million of dilution. What else you ask? Sorry. A little bit behind. That means that through the k factor, we can already work out with flat tariff for 2020, right? Yeah. I understand there are other factors, quality factors, involved, but the k factor is the main mover, right? Yeah, it's the dominant force. Yeah. 2020 flat tariffs is reasonable. Yes. Yeah. What about the dilution effect in 2019, in this year? Do you see it, well, two months in the year now, it is a bit early, but do you see that same effect happening? I think dilution will happen for sure. Okay. But it is difficult to quantify. Okay. Thank you. Thank you. Thank you. There are no further questions at this time. Please continue. Okay. Thank you very much to everyone who has attended the call, and hope to see you soon in next customers call for the first quarter 2019 results. Thank you. Bye. Good morning. Thank you, ladies and gentlemen, that does conclude our conference for today. Thank you all for participating. You may now disconnect. Have a good day.