Ladies and gentlemen, good morning or good afternoon. Welcome to the Dufry nine months 2017 results conference call and live webcast. I'm Sarah, the conference call operator. I would like to remind you that all participants will be in listen only mode, and the conference is being recorded. After the presentation, there will be a Q&A session. You can register for questions at any time by pressing star and one on your telephone. Should you need assistance, please press star and zero to call an operator. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Julián Díaz, CEO of Dufry. Please go ahead, sir.
Thanks for the introduction. Good afternoon. This is Julián Díaz speaking. This is also Andreas Schneiter participating in the call. Welcome to Q3 results presentation. As always, we are going to use in this presentation the information disclosure this morning on our website. Please go to page five of this document. When the most important period of the high season in the northern hemisphere is almost finished, we could confirm that the good trade prospects commented on during the last call are delivered. The highlights of this page show what I am explaining. Solid organic growth, increase of 7.9% in nine months. Gross profit margin reached 59.4%, 100 basis points higher than last year. EBITDA grew 9.3% in Q3 and 8.5% in nine months, reaching CHF 744 million September year-to-date.
Finally, free cash flow was CHF 464.6 million in nine months, with CHF 333 million in Q3, the highest quarterly results in cash flow ever. If we move to page six, we will be able to really go through the detail. Turnover reached CHF 6.2 billion in the first nine months, 6.7% increase compared with the previous year. If we consider also the effect of FX -0.9%, we reach +7.6% increase in turnover in current rates. Organic growth increased by 7.9% in nine months and 7.6% in Q3. The performance by division was as follows. Division one, Southern Europe and Africa. Turnover reached CHF 1.4 billion in nine months, an increase of 8.7% compared with the previous year, driven by a strong 10.1% organic growth in Q3 and 7.7% in organic growth increase in nine months. A strong growth in African countries.
Morocco, Ivory Coast, Ghana, Kenya, double-digit growth increase. Turkey grew strongly, double-digit growth too, supported by the return of Russian customers. France, Italy, Spain, and Malta, single-digit growth. Division two, Central and Eastern Europe. Turnover reached CHF 1.6 billion during the first nine months. The division reached 7.2% increase in total turnover in constant FX rates and 2% increase in reported figures. Organic growth reached 8.4% in the division. By country, a strong double-digit growth in Serbia, Russia, Kazakhstan, and Armenia. Single-digit growth in U.K., Sweden, Finland, and Switzerland. Single-digit negative performance in Bulgaria to the rerouting of Russian passengers to other destinations. In division three, Asia, Middle East, and Australia. Turnover reached CHF 574 million, compared with CHF 569 million in 2016. Organic growth turned positive in Q3, +4.4%, compared with -2.1% in half-year.
As a consequence, we reached +0.5% organic growth in nine months. After the refurbishment in Melbourne, with significant good results in spend per passenger since we finished it in August, we continue with two impacts in the organic performance in this division. Number one is the full renovation in Sharjah shops in the Emirates and the temporary closing of Sri Lanka. Both issues will be solved during the last quarter 2017. All the countries in this division performing well. China continental, Macau, Indonesia, Cambodia, double-digit growth. South Korea, Singapore, Emirates, Sharjah, Jordan, and Kuwait, single-digit positive growth. The negative performance in Hong Kong and the closing of our operations in Mumbai also impacted the positive performance in the division. In division 4, Latin America, turnover reached CHF 1.2 billion, +13% compared with the previous year.
Organic growth increased by 12.7% in nine months and by 13.2% in the quarter. Double-digit positive growth in Uruguay, Chile, Peru, Dominican Republic, Brazil, Jamaica, and our operations on board cruise lines. Single-digit growth in Argentina, Ecuador, Mexico, Aruba, and Puerto Rico. Negative performance in our operations in the British Caribbean. In division 5, North America. Turnover reached CHF 1.3 billion. 6.6% increase compared with the previous year, with organic growth of 6%. Driven by a predictable and long-term duty-free and duty paid business. Duty-free, with significant acceleration of growth in all operations, especially in Canada. Regarding our gross profit margin, the increase of 100 basis points, reaching 59.4%. The confirmation of synergies of our last acquisition and the increase of efficiencies in our logistics system were the drivers of this performance.
EBITDA grew by 8.5%, reaching CHF 744 million during the first nine months, with 11.9% EBITDA margin compared with 11.7% last year. The main positive drivers supporting the EBITDA increase were the organic growth and gross profit margin increase. Concession fees and general expenses partially compensated then because the rent margin increase in Spain and the refurbishment and extensions of several shops during this part of the year. Regarding Cash EPS, we reached CHF 5.81 from CHF 4.55 in 2016, 28% increase. In the first nine months of 2017, we have generated CHF 464.6 million in cash, with CHF 337.1 million in the quarter. This cash flow was impacted by CHF 104 million during the first nine months due to some extensions and new negotiations of important contracts, as commented on during our previous call. As a consequence, net debt was reduced by CHF 275 million by September 2017 compared with December 2016.
For completing the highlights, the opening of new commercial space, 20,500 sq m, and the refurbishment of 23,000 sq m in 60 shops, supported our acceleration of organic growth. Year-to-date September, we have signed contracts adding 18,000 sq m to our concession portfolio, where 9,400 will be opened in 2017. If we move to page seven, please. In this page, we have comment on to mobile revolution and organic growth. Let's focus in trading update. We are talking about the first three weeks of October. In all the divisions, positive performance. In most of the operations during the first weeks of October, significant acceleration compared with the first nine months. Division 1, Southern Europe and Africa. All operations performed better compared with nine months, especially Morocco, Ghana, Kenya, Greece, Malta, Dufry, and in Italy, France, Spain, and Turkey. Division 2, Central and Eastern Europe.
Positive performance in U.K., Finland, Serbia, Russia, Kazakhstan, and Armenia. Switzerland impacted due to the closing of our operation in Geneva starting the 1st of October, but good performance in the other operations, including Zurich and Basel, despite the full refurbishment started in Zurich. Division Three, Asia, Middle East, and Australia. Good acceleration in this division compared with the first nine months. Very good performance in Macau, South Korea, Indonesia, Cambodia, Emirates, Jordan, and Kuwait. Division Four, Latin America. Good performance in this division, too, with similar rates than nine months. Uruguay, Chile, Peru, Mexico, Dominican Republic, Aruba, Jamaica, and our operations on board cruise lines performed very well. Significant impact due to the hurricane in Puerto Rico and some other Caribbean islands, also not relevant in terms of consolidated figures. Division Five, North America.
Significant acceleration of growth in the division in all channels, duty-free and duty paid in the U.S. and Canada, with double-digit growth. If we go to page eight. Base of the organic growth is the new space openings that we have communicated in this conference call and also in different press releases. We have achieved 20,500 of growth retail space that were opened in this period of time. Shops in China in duty paid, duty-free in Macau, in a casino, several shops in Rio de Janeiro, U.S. with shops in two casinos also in Las Vegas, some other airports, and we also reorganized the activities in our business with the company cruise, with the cruise lines. The start of Dufry Cruise Services, including a new ship in Asia, is going to be one of the most relevant expansions in this channel in the future.
We have also opened an operation operating cruise lines in the Mediterranean with Pullmantur. Regarding the shop refurbished, part of the organic growth also commented, we have refurbished 23,000 square meters. The most relevant are listed in the bottom side of this slide, including Madrid, Athens, Guadeloupe, Gatwick, and many others that are clear here. If we move to page nine. In page nine, the most relevant is to comment on the 18,000 square meters signed so far in 2017. Several new shops in Pisa in Italy, Lisbon, Fuerteventura in the Canary Islands, Madrid, Athens, Kazakhstan, Jamaica, Colombia, Bahamas, and in the U.S., Phoenix, Grand Rapids, New Orleans, L.A., Tulsa. There are many other operations. We have expanded so far, this 18,000 signed square meters, and we have a new opportunity of negotiating, and in process of negotiation, 38,000 of pipeline in the different operations.
Most of them, 35%, are located in North America, 26% of these 38,000 square meters are in Division Two, U.K. Central and Eastern Europe, and the other divisions are also clear there. If we move to page 10, the second important pillar in terms of forecasting for organic growth, international passengers so far in 2017, August, is 8.8%, and the different divisions performance is also in the chart, top left side. International passenger forecast for the next two years are confirming the positive trends in travel retail. Number of passengers increasing by 7.4% in 2018 and 5.6% in 2019. The expectations, facilitating the understanding of the business, organic growth basically is number of passengers and productivity on top of that, based also in the currency-reported fluctuation. If we move to page 11, what we have is the pillars of the strategy since a long time ago.
We are communicating that this company is well-balanced in terms of concession portfolio and risk diversification strategy, expressed in this top chart on the left side, duty-free by division, the division that is representing the less important part, Asia, Middle East, and Australia, 9%. As I mentioned many times, we are in the process, and we have the intention to expand the business in this part of the world with the target to balance all the operations around 20% contribution to the sales. Duty-free by channel, we are expanding the airport retail business. We represent today 25% of the total airport retail worldwide, and airports generated 92% of our revenues during the first 9 months of 2017. We have also, as alternative channels and diversified channels, cruise lines and seaports, railway stations and border downtown and hotel shops.
Obviously, the next months ahead, what we are going to see is a development in the cruise line and seaports business, because we are in the process to sign a new agreement that will expand this business. Duty-free by category, just confirm personal care is number 1, perfumes and cosmetics, 33%, and it is going to be the leader of all categories from now on. Confectionery, foods and catering, 17%, and affordable lux that today represent 13%. Obviously, with maintaining the other categories, core categories, wine and spirits, and tobacco. Duty-free by sector, the company is a duty-free company, 62%, but we have a good representation of duty paid activities, 38%. The target for the company, as I mentioned many times, is to reach 50/50.
The opportunities in duty paid are still very high because, as you know, almost 65% of the total passengers traveling today are doing it domestically, and it's the way to expand the business through two of our commercial concepts. One is convenience stores with Hudson. The other one is core categories in duty paid. We move to page 12. I think in this page, probably it's better to comment on two things. Number 1 is one of the most important drivers of growth in our company this year and mid-year 2018 is going to be organic growth. We are going to do it in two different approaches. One is the traditional approach, including acceleration of commercial initiatives, refurbishment plan, and many other promotions and activities that will accelerate sales. Also, it's very relevant, the digitalization.
I think it's important because the travel retail, like the retail, is today in a constant evolution. Changes in passengers profile, origin of the passengers, motivation, behaviors. I think all these passengers expecting more experiences and better services and differentiated products are obviously part of the environment. Travel retail is not really isolated of what is happening. The evolution of ways of traveling, today, obviously, it's very simple to buy a ticket via internet or to connect with your travel agency via the internet. The use of the technology in the shops, new opportunities for checking prices, for checking the availability of products. Changes in the way operators and suppliers environment are behaving today are generating a significant change in the value proposition for travel retail. Duty-free is not isolated of that again.
What we need is to identify a new way of engaging with the passengers. This is part of the digital strategy that we have developed over the past 2 years, and now this strategy is really implemented and in the process, obviously, to be expanded worldwide. Our digital strategy has today 4 pillars. One is customer research information that is collected in international sources, but also collected by our own means. We have quarterly reports regarding the passengers profile, passengers motivation in most of the airports worldwide. The intention is to understand these changes. The employees digitalization is the second pillar. Employee digitalization, especially in the shops. Everywhere, but especially in the shops. Holding and operating via iPads. These iPads facilitate the employees in the shops to communicate with 120 different nationalities per day going through them.
The possibility to offer the products they bought in the past, the possibility to offer them products depending on their nationality, and even to communicate with them in their own language, is done through these specific iPads. This is not a project, it's a reality. Today, there are two examples. One is Madrid Terminal 4S, the other one is Melbourne. The third pillar is the omni-channel. It's how to really connect with the passengers since the moment they are at home to the moment they back at home, including the whole journey. New generation stores, to mention it, one is in Madrid Terminal 4S, the other one is Melbourne. Or RED application, or Reserve and Collect.
The social media development that we have done in order that the shop will be a best point of connection with all these passengers going through the airports, is the sense of what we believe the travel retail future will be. The last point is the new products and services. We are convinced that passengers will require better service, more specialized service, better experience, and also products that can be unique. We are developing with several brands. Two examples that I always comment, one is Diageo, the other one is Lindt. A specific product with international brands that could only be acquired in Dufry shops. This is the basic thing about how to drive organic growth in 2018, but obviously also in 2017. Second main priority, focus on cash generation. I think what we are reporting this quarter is an example of the leverage of the company.
We have communicated to the market that in medium-term, we want to reach leverage below 3 times net EBITDA, this remains absolutely unchanged. Information about the new business operating model. This is one of the drivers that will facilitate us to reach next year the 13% EBITDA that I comment on many other conference calls. What is the business operating model? It's what we are doing after the integration of the companies, is standardize the organization and the way we work. Expanding our global best practices acquired from the different groups that we have been acquiring, standardize processes and procedures. As a consequence of this reorganization, what we are expecting, that CHF 50 million will be delivered in 2018 at the EBITDA level. Two countries already are certified. One is Mexico, the other one is Switzerland, 17 other countries are in the process to be implemented right now.
We are planning this business operating model development will be totally finalized in December 2018. I already commented, two new generation stores already open, Melbourne and Madrid, and in the process to build and will be reality, one of them this year, Zurich, and Heathrow will be beginning 2018, and Cancun, that will be open during the next days, are examples of what I comment on at the beginning of this slide. We move to next pages, 13, 14, 15, 16 and 17. I think, obviously, it's not easy because there are pictures, but we want to see what the new generation store is. This shop has the aim to provide a better and a unique experience to the customers, including the digitalization of employees, as I mentioned with the iPads.
It is also allowing us to tailor the messages to our customers, taking into consideration offers and promotions to the different passengers profile and nationalities in each airport. This project have also continued expanding our Reserve and Collect service, where customers can order online before they travel and collect at the airport what they have ordered. We have expanded our application, RED by Dufry, in more than 30 countries so far. This is our loyalty program, which allows us to send individual offers to our customers. We believe digitalization will improve tremendously travel retail, and as a consequence, Dufry in the future. The most important thing, penetration and spend per ticket. Now, I pass through the presentation to Andreas for continuing with the financial information.
Thank you, Julián, and good morning and good afternoon to everyone. Let's move directly to page number 19. As to organic growth, Julián already commented on the healthy growth in the third quarter of 2017, which was 7.6% and which we generated through a combination of like-for-like growth and growth from the new concessions. In this quarter, there were no changes in scope anymore, and there will be none going forward. On the FX impact in the third quarter, this turned positive and was 0.5% for the period. As a result, the reported growth accelerated to 8.1% in the third quarter. At a divisional level, we had a strong performance across the group. In the third quarter, again, organic growth in Southern Europe and Africa accelerated to 10%.
Organic growth in U.K., Central and Eastern Europe held up very well at above 5%, even if the devaluation of the British pound analyzed at the end of the second quarter and did not support the growth any longer in the third quarter. Asia, Middle East, and Australia had a clear organic growth acceleration to 4.4%. A number of locations, as mentioned by Julián, posted a strong growth, which more than compensated for the refurbishment impacts and the closings in this division. Latin America continued to grow double digits at 13.2%, which is remarkable given that compared to the first half of the year, there was no significant tailwind from the Brazilian real appreciation anymore. Finally, North America continued to post yet another very solid result number, close to 6% growth. On page 20, we have the overview of the FX translation effects.
I've mentioned before, third quarter result was positive, this was mainly driven by the appreciation of the euro against the Swiss franc. Compared to previous quarters, the devaluation of the British pound had only a very limited impact on the translation effect. Assuming that the current rates that we see as of today would prevail, we would expect to see also a positive translation impact in the fourth quarter of 2017. Let's move to the income statement on page 21 and starting with the gross profit line. Gross margin improved by one percentage point to 59.4%. As in the last quarters, this is mainly due to the synergies from the World Duty Free integration, and they have been a main driver of this improvement. Concession fees as a percentage of turnover increased to 27.8% from 27.2%.
About three quarters of this increase is due to changes in concession fees, whereby the biggest shift came from the minimum guarantee in Spain, as well as from renewal of contracts where not all operational improvements have been implemented yet. Personal and general expenses combined increased by 20 basis points compared to the last year. If we just look to the third quarter specifically, these expenses as a percentage on turnover remained virtually unchanged. Share of results of associates was negative CHF 2.4 million for the nine months. As mentioned in earlier calls, the share of results of associates were negative in the second quarter due to a one-off charge. Looking only to the third quarter, the contribution was a positive CHF 2.1 million this year compared to CHF 1.4 million in the same quarter 2016.
EBITDA for the nine months, as already commented, was CHF 743.6 million, and EBITDA margin increased 20 basis points to 11.9%. Moving to the depreciation and amortization, in absolute amounts, this was in line with previous quarters. The total charge for the nine months were CHF 389 million and CHF 129 million for the quarter. As a percentage of turnover, D&A improved by about 70 basis points to 6.2% for the nine months. If we move to the next line, the linearization. Just to remind everyone, this includes two non-cash elements related to the Spanish contracts. Firstly, there is the non-cash portion of the concession fees, which were prepaid. Secondly, there's the straight lining of the yearly minimum guarantee increases, which we have to do according to IFRS. This line linearization was CHF 35 million for the nine months.
As commented in the past, this line does consider seasonality, and therefore, we had a positive result in the third quarter of about CHF 11 million. For the fourth quarter, we will have a negative charge again of about CHF 25 million, bringing the expected charge for full year 2017 to about CHF 60 million. Other operational result was CHF 27.5 million for the nine months. Start-up and closing costs, restructuring costs accounted for about three-quarter of the overall expenses. Financial result was CHF 132.9 million for the nine months. Compared to last year, the financial result improved by close to CHF 20 million. This was mainly due to the repayment of the US dollar bond that we did at the end of 2016. Financial result in the third quarter was CHF 42.6 million and fully in line with expectations. Income taxes were CHF 37 million.
The tax rate was similar to previous year, for the nine months at around 30%. As we have mentioned many times, our group tax rate does vary quite significantly across quarters. For the full year, I think the indication that we gave in the past, the 20%-25%, still seems a very good indication. Non-controlling interests were CHF 37.3 million for the nine months, compared to CHF 29.7 million in the same period last year. If you just look at the quarter, minorities were practically stable at CHF 13.3 million, versus CHF 13.2 million in the same period last year. Net earnings to equity holders increased significantly year-on-year and reached CHF 84.7 million. The same would apply to the cash earnings, which adds back acquisition-related amortization and which stood at CHF 312.3 million compared to CHF 244.5 million last year.
If we move to page 22, we have, as usual, the cash earnings per share. There, the seasonality is important. The third quarter is the most important period for the cash EPS generation, and it was no different this year. Cash EPS in the third quarter grew by CHF 0.60 to CHF 3.48. For the first nine months, cash EPS grew by 28% to CHF 5.81. If we move to the cash flow statement on page 23, free cash flow before financing was CHF 464.5 million for the nine months. This amount includes, however, some project-related non-recurring cash outs, which we already commented on in our last calls. In total, these specific cash outs amount to about CHF 104 million, of which CHF 29 million are reflected in CapEx, and about CHF 75 million are included as a change in working capital.
All these cash outs were done in the first half of the year. If we therefore look specifically to the third quarter, free cash flow was CHF 337 million, and I think it's fair to say that we have delivered a very strong cash generation in the quarter, as well as year-to-date. When we look at the equity free cash flow, i.e. deducting the interest and the minority payment, we actually have quite a similar picture. Equity free cash flow for the nine months was CHF 270 million, including the one-offs, and CHF 375 million adjusting for these ones. Again, I think very strong results. On page 24, we have our cash flow KPIs, and they are fully in line with our targets, both the core net working capital and CapEx.
For the core net working capital, which includes inventory, trade receivables, and trade payables, we reached 4.7% of turnover compared to our target of 5%-6% on average. For CapEx, we were at 3.5% of turnover for the period against the target range of 3%-3.5% for the full year. Hence, we can confirm that we do expect to end 2017 within our target range. On page 25, we show the quarterly cash flow generation. As mentioned before, the first two quarters were impacted by one-off cash outflows, as well as some seasonal shifts. In the third quarter, we have been fully on track with our free cash flow generation. Now looking at the slide, I think it is worth mentioning that Q3 2016 was actually an outstanding quarter already in terms of cash generation.
To match and to exceed that this year actually is quite an achievement again. If we move then to the balance sheet on page 26, there haven't been any significant shifts. In very general terms, on the asset side, the line concession rights has decreased as we continue to amortize these assets. As you may remember, these are mainly related due to acquisitions. On the liability side, we continue to deleverage and to reduce our net debt. If we move to page 27, there we have the key metrics on the financing. Net debt evolution shows the charters to deleveraging year to date, and as per 30th September, we had a net debt just below CHF 3.5 billion.
In terms of covenants, we improved our leverage covenant by almost a quarter turn in the third quarter, and at the end of September, we were at 3.45 times versus the maximum allowed covenant threshold of four times. Debt by currency remained largely unchanged to previous quarters. No change there. If we conclude on page 28, as you may have read, we issued a new bond earlier this month with a notional of CHF 800 million. The duration is seven years, so 2024, and the bond has a coupon of 2.5%. We will use the proceeds to repay early our 2022 bond of EUR 500 million that currently pays 4.5% coupon, and that we have called early in October. With the remaining amount we will reduce bank debt.
Apart from the bond refinancing, we're also currently working to refinance our bank debt, and we expect this transaction will complete during the fourth quarter of 2017. The bond and the bank refinancing together will generate recurring savings of up to CHF 25 million per year, starting in the first quarter, fully in the first quarter in 2018. As to the cost, there will be a one-off financial charge of about CHF 40 million for both transactions together in the fourth quarter of 2017. I think if we take one step back and look at the changes that we have done in our financing structure over the last four quarters, i.e.
the bond repayment that we did in December 2016, as well as the current bond issuance and repayment and the bank refinancing that we're currently doing, we have further strengthened our balance sheet in two important aspects. Firstly, we have significantly pushed the maturity profile essentially to 2022-2024 in this area. Secondly, and almost more importantly, we have a combined interest savings of these different transactions of around CHF 50 million per annum that we will have going forward from 2018 onwards. This is all from my side, and with that, I hand back to Julián.
Thank you, Andreas. Let's move to page 30 of the presentation. We commented and we disclosure that Dufry is considering the IPO for North American subsidiary. We are in the process of preparing all the administrative steps required, the decision is not today reached yet. The main subjects will be a part of, obviously, completing all the requirements from the legal point of view, market conditions, good market conditions, and valuation as critical aspects of the decision. As I said, it's not decided yet. Just for reminding a bit what are the consideration of this IPO. Three aspects that are very relevant. Dufry will continue controlling the company. The consolidation of the business is one of our, obviously, main initiatives, but also the implementation of all the synergies that globally we could generate.
North America will be fully integrated in the structure of our business, even in the case that there is an IPO. One of the rationales that we were explaining at the time when we announced the IPO is the different characteristics of the travel retail market in the U.S. There are three aspects that, in my opinion, are relevant. One is North America is a food and beverage market. 60% of the business is food and beverage, 40% is retail. The main priority for Hudson will continue to be a retailer, duty-free, duty paid, and within the duty paid, convenience, and standalone branded shops.
On top of that, the possibility to accelerate growth could be also supported by the food and beverages on one side, and on the other side, the different airport management that happens also in this territory, is the possibility to become master operator in areas where we will operate directly, or we will sublease to third parties in case we are not specialized in the business. Finally, the third one is the requirements for minority partners. What is identified ACDBE. This is a very specific structure, only operative in the U.S. today that obviously requires a specific approach with the partners. The equity story, in my view, is exactly the same than before. If Hudson is unpredictable. Why it's unpredictable? Because it's a company that will be based on the number of passengers.
Number of passengers are growing, average between 4% and 5% in the U.S., and will be the same way during the next five, 10 years. This long-term sustainable growth will create a significant resilience for the business. Like in all travel retail activities, Dufry is part of that. When you are comparing this with high street and other type of retail, when they have to compete with online. This is, in my view, one of the strengths of this business in the U.S., is a business that has the opportunity to grow in retail, especially in convenience, duty paid, and duty-free. On top of that, the opportunity to develop a $60 billion market that is the food and beverage market in the U.S. is a great opportunity for us. The reality of this strategy will be developed during the next three years.
What we are planning today is this IPO as a consequence of what? Let's move to page 31. The IPO is going to facilitate two parts of Dufry global and Dufry local in the U.S., to focus on their specific travel retail business drivers. In North America, for Hudson in the U.S., on top of the convenient stores, on top of the duty-free retail, and the standalone branded shops, the group will also develop food and beverages and master concessions, as I said. At Dufry's level, the main, obviously, driver of this IPO is to increase the financial flexibility with a faster deleverage, increasing the possibilities to really continue with one of our pillars of the strategic growth in the past, M&A, in specific regions like Asia, where the company today is underrepresented with 9% of the total sales in the company.
There is an alternative, obviously, that is not subject to, but is facilitating also the return of cash to our shareholders. Those are the main ideas regarding the IPO. Again, everything remains open and depending on the circumstances, first of all, in the legal process, secondly, in the conditions of the market, and thirdly, in the valuation of the company. If we move to page 33, the conclusion, focus, and fundamental targets of our strategy in 2017 and 2018. I don't want to go through the detail, but organically, we think that it's possible to continue delivering growth. The aspects of the traditional organic drivers plus the digitalization, in our opinion, will increase the organic growth in 2018 and 2019 too.
The implementation of the new business model in order to reach the level of margins, EBITDA margins that we have communicated to the market is one of the key drivers, but also the increase in gross profit margin. As implementing the digital strategy, the four aspects that I comment on, the customer research and store digitalization. As a conclusion, the company will continue focus on cash generation and deleveraging. Those are the key points and fundamental targets for 2017, the remaining part of 2017 and 2018. That's all from our side, now is obviously the opportunity of Q&A. Thank you.
We will now begin the question and answer session. Anyone who wishes to ask a question may press star 1 on their touchtone telephone. You will hear a tone to confirm that you've entered a queue. If you wish to remove yourself from the question queue, you may press star 2. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star 1 at this time. The first question is from Joern Iffert from UBS. Please go ahead.
Yeah. Hi, Julián. Hi, Andreas, thanks for taking my questions. The first one would be, please, on the cash conversion. It really looks very strong. May I quickly ask regarding the around CHF 100 million one-off payments, which has materialized in 2017? Are you expecting any other pre-concession payments for 2018 or higher CapEx? Can we really make the simple math and add in our cash flow bridge, the CHF 100 million one-off investments in 2017 to 2018, so that the FCFE cash flow in 2018 should be closer to CHF 400 million? Second question would be, please, on the EBITDA margin. Have the World Duty Free synergies now annualized, and can you roughly guide us for Q4 if the EBITDA margin will expand or will be down? The best guess would be helpful. The last question, again, please, on the EBITDA margin for 2018.
If you would exclude the benefits from the World Duty Free synergies, the EBITDA margin would be down to some extent, potentially for the nine months 2017. What is making you confident that you can really boost your EBITDA margin in 2018 year-over-year? I mean, is concession fee, the increase much smaller than in 2017? Have you fixed cost savings ahead? Some color would be appreciated. Thank you very much.
I will take the first question on the cash conversion. Look, I think at this stage, we haven't any plans for any other one-off payments. From that perspective, my best indication to you is the 3%-3.5% CapEx and core networking capital as we presented it. There shouldn't be anything, if I can call it that way, extraordinary, that we have at this moment.
Okay. Regarding the EBITDA in 2017. The target is exactly the same than when we started the year. We will reach above CHF 1 billion, and, as a consequence, we will be around 12%-12.1% EBITDA margin, I hope. As a consequence, 2018, as I said, is the year where we need to, first of all, transform the synergies of the both companies acquired in the past as part of the EBITDA. This is done and this is confirmed. The second thing is the recovery of the operations that were tremendously impacted by the currency fluctuation. I am talking about Brazil, Russia, and especially Turkey. In the first two cases, it's done. The Turkey case is very advanced, not totally recovered, but it's very advanced. I don't see that there is an issue there.
The third issue is obviously the delivery of the efficiencies, and I differentiate efficiencies because they are depending on the business operating model implementation. Synergies were depending on the acquisitions. This CHF 50 million of efficiencies will be implemented along what is 2017, but reflected in the P&L in 2018. This is part of the evolution of the EBITDA margin. How the EBITDA margin next year will be, this is the last part of the question, will be built? In my view, on top of what I said, is we need to deliver the CHF 50 million of the business operating model implementation efficiencies. The concession fee will be the same or slightly higher. The important thing here is leverage at the level of the cost in general expenses and personal expenses.
For the company, the target is to reach 13% with one more single initiative, is the expansion of gross profit margin of around 50 basis points next year. My calculations are targeting the 13% based in that.
All right. Thanks very much. Really one last follow-up, please, to Andreas. Andreas, did I understand you correctly that the interest cost savings, in total, also looking at the bank refinancing, should be around CHF 50 million from 2018 onwards?
Yeah. It depends on what you take as a basis. If you take 2016 as a basis, which were before we did any of the transactions, there you should have a delta of more than CHF 50 million to 2018. That is correct. If you look to 2017, we already will have parts of the savings baked in, so there relative, the improvement will be CHF 25 million at least.
Okay. Thanks very much for the clarification. Thanks for answering the questions. Thank you.
The next question is from Charlie Mearns from Deutsche Bank. Please go ahead.
Hi, good afternoon. My first question is following up on that interest cost. Did you say that the refinancing was 14, one, four, or CHF 40 million, and how much of that is writing off capitalized fees that you've already paid versus how much is cash?
Yeah. It's CHF 40, four, zero, as an amount, and about CHF 25 million is cash, and the rest will be non-cash.
Great. The second question relates to the U.S. IPO. Are you envisaging that that entity would carry a similar proportional amount of leverage to your group business? More or less? The third one, and the final one is, I just wondered now whether you had further discussions with HNA now that they've confirmed their equity position with you, and whether you see further commercial initiatives available with them that go beyond the scope of what you've talked about as your plans for 2018. Thank you.
If I just can take the question on the U.S. business and the leverage there. Look, we currently have a somewhat lower leverage in the U.S. group that we have at the overall group level. I think the leverage we will be looking to give or take is somewhere between the two to three times range in the U.S. This will be something that we will need to calibrate. I think the other question or topic that we will address there is, currently we would plan that the financing of the U.S. asset will remain integrated with Dufry. We wouldn't look for a separate financing there, but we would keep it as part of the Dufry financing.
Fantastic. On HNA.
Yes. From my side, I can confirm that we are progressing with HNA in almost 10 initiatives for identifying synergies within obviously the different activities we operate and the different activities they operate. From the retail point of view to the management of databases of the different passengers and travelers they manage in the different operations. I think we are quite advanced, but nothing specific yet in order to say synergies or identify synergies. There are 10 projects where we are progressing so far.
Great. Thank you.
The next question is from Rebecca McClellan from Santander. Please go ahead.
Yes. Good afternoon. Can you hear me?
Yes, we can.
Yes. Hello.
Yes.
Two questions. Good afternoon. Firstly, I think you said that there'd been an acceleration in organic growth in the first three weeks of October versus the nine months level. Is that right?
Yes. The acceleration because the comparable is tougher. Yes.
Right.
It was 7.6% during the third quarter.
Right. It's simply because of the comp, is that you think?
Yes. I think so.
What do you think is an achievable organic growth in sort of when you look at current momentum going into 2018?
Yeah. Let's start with 2017. In 2017 and also obviously because we have confirmed already what happened in the high season, I would say
Yeah
that yearly basis, we could say around 7% instead the five, six% that I mentioned during the last call. Obviously, the last call was before the high season. Now
Yeah
I think we will reach in 2017 around 7%. For next year, I always maintain the same thing. On top of the average number of passengers that are going through airports and taking into consideration the countries we are, we should think about five, six% organic growth for 2018.
Excellent. Okay. Thank you very much. Just flipping to, because you talked about Asia and eventually sort of your underexposure at the moment. What sort of are the particular markets that you might be interested in if as and when finances or assets become available?
Mm-hmm. There are three aspects of the strategy in Asia that are very important for us. Number 1, to identify a flagship operation, like we have done in other regions, in order to create a critical mass. Because we are operating today in 13 countries, and these 13 countries are not really sizable in terms of obviously importance. We are in second and third-tier airports, especially in airport retail. We have identified-
Okay
targets in several countries. Obviously, I cannot comment on the countries because it's a very confidential information. 1 is airport retail. The second 1 is to develop alternative channels that will facilitate expansion in the region. One of them is cruise lines. For example, we have opened the first operation in a cruise line. The name is Joy, and it's one of the most successful operations we ever had. It's a tremendous opportunity for us, and we will continue through this type of business. We have also the intention within this second pillar of alternative channels to develop downtown shops, but not the downtown standalone shops. We are talking about destination shops. For example, we have today 2 operations in Macau, in casinos. We have just announced another 1 in Malaysia. That was a disclosure-
Yeah
a couple of weeks ago.
Yeah.
The third channel that we believe that could be an alternative in Asia is border shops. It's what is going to happen with the digitalization and the expansion of the digital strategy in Asia. We believe that there are many alternatives for travel retail, and especially for Dufry, in order to engage with the customers before they even travel. This is part of obviously the strategy that we are Let's say, developing with some companies in HNA, also internally, we believe that digitalization will drive a significant value in travel retail in Asia. I cannot be more specific, again, because this is a public conference, and what we are planning is specific. Let's say, airport retail, number 1. Alternative channels, number 2. Digitalization, number 3.
Thanks. Just one final sort of top-up then. Do you feel that the market in Asia is more ripe for consolidation than it was perhaps two or three years ago?
The market in Asia is still very fragmented. As you know, there are important companies, but located in one single place. There are many other locations where the consolidation is possible.
Okay. Thank you very much.
Welcome. Thank you.
The next question is from Peter Tesar, from Waman Investments. Please go ahead.
Hi. Thank you for taking the questions. I had a couple, please. The first is just to understand on this concession fee aspect. You've talked about the new impact of reorganized concessions like Melbourne and so on, which is sort of hard to get a full handle on how significant this will be going forward, especially as you're engaging and refurbishing sites for the new model. Then within that, you've also in the past explained how you have renegotiated many of the concessions. You have fewer expiring going forward, that the growth of emerging market concessions, Turkey and Greece, come in areas with lower than average concession rates. I was wondering if you could help us understand going forward the different components of the concession rate dynamic, please.
Yeah. Thank you for the question. I think it's a very relevant question. What happened this year compared with last year, 27.8% this year, 27.2% last year. There are two different groups of aspects here. One is the increase of the minimum guarantee in Spain. That is something that is a fact. It has been published, not at the time that we acquired the company. It has been published since the moment this contract was awarded to Aldeasa at that time. There is a 9% increase per year of concession fee. This impacted, obviously, because the increase in concession fee in Spain is a very significant group of operations, was higher than the growth. In Spain, we have been growing, but we have been growing lower than the increase on concession fees due to two reasons.
Number one is because the traffic has been driven by low-cost carriers. The second one is because most of the passengers, 35% of the total tourists in Spain, are British. The devaluation of the pound 15% last year and 8% during the last quarter is impacting the concession. Obviously, the opposite side is that these passengers are buying more in the U.K. Number one is Spain. Number two is operations that were extended last year. Many operations extended last year that had two different approaches. One is conditions that were similar or even lower than in the contract. Those conditions were there, and I can confirm that. I don't want to mention specific locations because obviously there are confidential issues here that I cannot breach. There are other concessions where we agreed to increase, for example, the minimum guarantee per passenger.
There are today, nine months, this happened in three important concessions that were under renovation since the beginning of the year. This renovation was impacting the top-line growth, and as a consequence, we were paying the rent since January 1st. During the first nine months, we have been impacting the percentage on total turnover because the MAG in these locations were higher than the reality we were expecting. What is today the issue? Today, most of these locations are already solved in the sense that they are already finalized with the renovation of the shops, and this will facilitate in the future, and this is the part that is for the future, will facilitate the percentage on sales will be better. The second part of this formula of concession fees is what is going to happen with the new concessions.
In my view, what we are going to try is obviously to maintain the level of concession fee like it is today. Condition to that is the type of business we will start. If you tell me that tomorrow we are going to start, I don't know, let's say, sales on board cruise lines. Sales on board cruise lines has a concession fee higher, and the average probably will be slightly higher. My recommendation in your model, use the same that we have today. What we are going to improve due to the efficiency of the operations started with the new rent in 2017 probably will be mitigated by new operations with higher rent, but with higher return. These operations on board cruise lines have higher return. The investment from us is zero. The idea is 27%-28% is a good range for 2018.
Okay. No, thank you. Within that, with the refurbishment program you're going to engage in, will that provide any upward pressure, and are there any other sort of downward pressures within the mix of sales towards, say, emerging markets or areas with lower concession fees that kind of offset that?
Yes. This is an issue because every time that we start a renovation, depending on the country, for example, we are renovating Sharjah today in the Emirates, and there is no impact at all in the sales. We are renovating now Zurich, full renovation. We have an impact in the sales, not negative sales, but the growth that we had was mitigated or impacted by the renovation. Depending on one thing, in my view. In emerging markets, I think the sales will continue even with the renovations. This is something that has been historically like that. In mature markets, we are impacted due to the renovation, but what I have seen so far is no negative performance. For this reason, I am not going to give you a bad idea telling no, because we have a lot of renovation. No, we are going to renovate the shops.
We continue with the same trend. You should expect positive performance even with the renovation. Every time that we renovate a shop, the spend per passenger is increasing between 15% and 25%, depending on the location. I have two examples that I always repeat. One is Athens, saying that we terminate the renovation beginning of March this year. Spend per passenger increased by 22%. In Melbourne, we renovated the shop, and we have increased the spend per passenger by 15% since September. Those are the type of things. We cannot stop the renovation of the shops, and the renovation of the shops are not excuses for performing worse in organic growth.
Okay. Thank you. The other question I had was related to the IPO. Since you announced the potential IPO, you've also seen a potential partner in the food arena, Autogrill, announce a segmentation of its company into three entities, including U.S. airport, motorway and airport food and beverage. You obviously know that group very well. Does this have any consideration as a potential partner, or does other partnership talks have also considerations as to whether you carry forward with the IPO?
No, I don't think so. I think if the IPO happens, it will be an IPO only with the intention to do what I explained. The business will be controlled and, on any regard, operated by us. The competition in the U.S. will be tough, because obviously, HMSHost is a great operator, and they have a significant participation in the market, same level than we have in retail. In my view, we don't need any partners in the U.S.
That's great. Thank you for the answers.
Thank you.
The next question is from Jaafar Mestari from J.P. Morgan. Please go ahead.
Hi, good afternoon, everyone. Three quick questions for me, please. The first one is on this new organic growth guidance of 7% for the full year. It seems to imply only about 4% in Q4. Is there any particular reason why you would expect November and December to be weaker? I think you said so far in October, in a lot of regions, it's actually accelerated. My second question is on net new business, which was +1.2% in Q3, which is the strongest level in the past couple of years, since the middle of 2015, I think. Is there anything in particular to flag here? Have you benefited from any delays or exceptional business? We've heard from other players, for example, in Chicago Midway, some of the closures have been delayed.
Is this a bit of a blip, or is this a true underlying acceleration in new business?
Thank you. Regarding the organic growth and guidance, I don't like the word guidance because what I try is to really inform what our plans are. It's not guidance. What I said is, because I mentioned during the last call, we were expecting 5%-6% after half year results organic growth. Now that the high season is already over, I think the possibility to reach 7% is very realistic. What happened during the last quarter 2016 is that the company already performed 6% increase, we are talking about a different comparable. In my view, if we reach a significant level of organic growth during the last two months, we will reach the 7%. What happened during the first three weeks of October 2017 is what I said, it's very positive. It's higher than the nine months.
I don't want to change that because then the comparable is significant, is 6% last year. 7% for the year is what I think is a realistic target. That is the second part of the question.
The second part was the net new business contribution of 1.2%.
Yes. No, it's not because of delays. It's very straight. It's because we comment on the new square meters that we have added since the beginning of the year, these 20,000 square meters. They are starting to produce now the results. The last information I saw in terms of this is around, you mentioned one, but my information is that gross contribution from new businesses is 3.1%. In any case, will be this year around 3%, I hope. Gross contribution.
Thank you. Just the last one on Spain. With the increase in minimum guaranteed that you've talked about, are you still above MAG for lot 2, which includes Barcelona, or has that increase taken you below MAG again? With that in mind, how have the Barcelona trends been since October?
Okay. Regarding Spain, we have not achieved to be out of MAG in lot number 1, Madrid and other airports, and lot number 2, Barcelona and other airports so far. Still we are subject to MAG. Regarding the situation in our operations in Spain, growing as before. Regarding Catalonia specifically, there are three airports in Catalonia. Two small ones, but very touristic destinations. One is Reus, the other one is Gerona. In both cases, growing at the same speed, double-digit growth. The third one is Barcelona. That probably could be the most affected in the future. So far, the business is flat compared with previous year, and nine months was +4%. It's more or less the same. We are not far away from what we were doing before all these events.
Okay, thank you very much.
Okay.
The next question is from Jon Cox from Kepler Cheuvreux. Please go ahead.
Good afternoon, guys. Congratulations on a very strong set of organic sales numbers and that gross margin gains look very impressive. Of course, just to keep digging back into the EBITDA margin expansion, Julián, you're saying around 12.1% for this year. Obviously, now we're trying to build out what will happen next year. First of all, just on the 50 basis points, new savings or synergies plan, just wondering how much of that will come in 2018. That's the first question. The second one, just going back to what my colleague said about the impact of renovations and how that dampens the margin initially, maybe because you have new space and you have to expand it once, but you have new concession fees which are higher. Just wondering how much of that could actually unwind in 2018.
Are we again looking at maybe your 10, 20 basis points there? I wonder what your thoughts are on that. That's my first set of questions. Thank you.
Okay, thank you. Regarding EBITDA, I think I was specific explaining how we build the target for 2018. The 50 basis points of the efficiencies, the CHF 50 million, as a consequence, 50 basis points of EBITDA margin added due to the efficiencies of the business operating model will be fully implemented in 2018. Sorry, fully impacting the P&L in 2018. On top of that, what we have, in this case, certain leverage in general expenses and personal expenses. The second part of the positive aspects is the increasing gross profit margin. I think 50 basis points for next year is a realistic target for us. On the other side, what we have is what is the evolution of the expenses, especially concession fees. Concession fees, so far is 27.8. By year-end will be similar or maybe slightly lower.
Next year, I think we cannot expect a significant increase in concession fees. Will be between 27.8%-28%. This is depending on two aspects. One is the new concessions in different channels that I mentioned, that probably we will announce soon, and the other one is the reality of the business that we will extend, we will negotiate. Those are the two parts of the balance for reaching the 28%. I think 28% is a realistic target in 2018.
If I add all of this together, then you're saying that basically the EBITDA margin could be close to 13% next year. Or is that too optimistic?
This is our target, yes. 13%, one, three.
For 2018?
2018, yes. As I said.
All right.
I am very bored because I am always repeating myself. Sorry for that.
It's an ambitious figure. Yeah.
Well, it's an ambitious figure. I think we have the intention and the focus to do it, and we will try.
Yeah. Just a bit of an add on to that. Basically, just wondering on the commitment to pay a dividend. Is it still the plan to pay a dividend on 2017 results, or is it still a bit contingent on whether that U.S. IPO goes ahead?
I think, still, the dividend payment or obviously the compensation to our shareholders is an important issue in the company. The board of directors is going to consider this payment of dividend independently of the IPO, obviously, depending on the IPO, will be different, but independently of the IPO, the answer is yes.
Okay. Just on the HNA, I'm wondering, have they asked for a seat on the board at the next AGM yet, or haven't you actually had those talks yet?
Well, what we heard, this is the only thing I can say, I don't know what will happen next year at the time of the general assembly, is that they are not requiring any type of governance in Dufry.
Can I ask the same question about Richemont? Have they asked for a seat on the board at all?
No, exactly the same answer. Far, there is not a communication by them or in any regard regarding governance or specific participation in the board.
Okay. Thanks very much.
Thank you for the questions.
The next question is a follow-up from Rebecca McClellan. Please go ahead.
Yeah. Hi. Just one follow-up from me. In terms of the MAG growth in 2018 in Spain, I think it's 6%, is that right?
Yes, it's correct.
Your assumption of sort of concession fee to sales of flat 28%, something like that. What sort of sales growth does that assume, or what sales growth assumption have you taken on board for Spain in order for there to be no sort of major deleverage risk.
Okay. Sorry, Rebecca, we don't disclose all these details at country level or specific level. Our calculation for next year is that we need to drive concession fee around 28%, including the increase of the concession fee in Spain.
Okay, thank you.
The next question is a follow-up from Jon Cox. Please go ahead.
Sorry. Just to come back on, you mentioned that you're comfortable with CHF 1 billion plus EBITDA for this year. Just looking at consensus at the moment, it's for CHF 1.1 billion or a little bit over for 2018. Obviously, some of the guidance you're giving today would indicate that figure should be higher. Maybe I'll just ask, are you comfortable enough with that 2018 consensus at the moment around CHF 1.1 billion? Or are you telling us actually with some of your plans you would like that figure to move a little bit higher? Thank you.
Please, Jon, allow me to wait a bit because 2017 is ongoing. I need to understand how 2017 will finish. What I tried to communicate is what are the targets for next year. To provide specific information regarding EBITDA in terms of amount or in terms of anything else, I prefer to keep it until we know exactly how 2017 is going to finish.
Okay. Thanks again.
Thank you.
That was the last question.
Okay. Thank you very much to all the participants in the call, and as always, we are willing and open to receive all the questions through our investor relations department or directly. Thank you very much.
Thank you. Bye-bye.
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