Earnings Call: Q3 2017

Oct 31, 2017

Ladies and gentlemen, good morning or good afternoon. Welcome to the Dufry Nine Months twenty seventeen Results Conference Call and Live Webcast. I'm Sarah, the Chorus Call operator. I would like to remind you that all participants will be in listen only mode and the conference is being recorded. After the presentation, there will be a Q and A session. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Julian Diaz, CEO of Dufry. Please go ahead, sir. Thank you very for the introduction. Good afternoon. This is Julian Diaz speaking. This is also Andreas Sneider participating in the call. Welcome to Q3 results presentation. As always, we are going to use in this presentation the information disclosure this morning in 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 $744,000,000 September year to date. And finally, free cash flow was CHF 464,600,000.0 in nine months with CHF $333,000,000 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 6,200,000,000.0 in the first nine months, 6.7% increase compared with previous year. And if we consider also the effect of FX minus 0.9%, we reached plus 7.6% increase in turnover in current rate. 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 to another reach, Swiss francs €1,400,000,000 in nine months, an increase of 8.7% compared with 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 1,600,000.0 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 UK, 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 $574,000,000 compared with CHF $569,000,000 in 2015. Organic growth turned positive in Q3, plus 4.4% compared with minus 2.1% in half year. And as a consequence, we reached plus 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 the Sri Lanka. Both issues will be solved during the next quarter last quarter twenty seventeen. 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 1,200,000,000.0 plus 13% compared with 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 onboard 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, two Novav reached CHF 1,300,000,000.0, 6.6% increase compared with 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 $744,000,000 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 them because the rent marked increase in Spain and the refurbishment and extensions of several shops during the first 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 464,600,000.0 in cash with CHF 3 and 37,100,000.0 in the quarter. This cash flow was impacted by CHF 104,000,000 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 $275,000,000 by September 2017 compared with December 2016. For completing the highlights, the opening of new commercial space 20,500 square meters and the refurbishment of 23,000 square meters in 60 shops supported our acceleration of organic growth. Year to date September, we have signed a contract adding 18,000 square meters to our concession portfolio, where 9,400 will be opened in 2017. If we move to Page seven, please. In this page, we have commented on to mobile evolution 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 October, significant acceleration compared with the first nine months. Division one, Southern Europe and Africa. All operations performed better compared with nine months and especially Morocco, Ghana, Kenya, Greece, Malta, Dufryta in Italy, France, Spain and Turkey. Division two, Central And Eastern Europe, positive performance in UK, Finland, Serbia, Russia, Kazakhstan and Armenia. Switzerland impacted due to the closing of our operation in Geneva starting the October 1, but good performance in the other operations including Zurich and Basel despite the full refurbishments 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 more 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. Now if we go to Page eight, base of obviously the organic growth is the newest space openings that we have communicated in this conference call and also in different press releases. We have achieved 20,500 of gross retail space that were opened in this period of time. Socks 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, San Jose Ports, and we also reorganized the activities in our business with the company cruise the cruise lines. The start of Dufry Cruise Services, including our new ship in Asia is going to be one of obviously the most relevant expansions in this channel in the future. We have also opened an operation operating cruise lines in the Mediterranean with Tour Mantou. Regarding the self 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, Guadalupe, Gatwick and many others that are obviously clear here. If we move to Page nine. In Page nine, I think 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, Forti Ventura in the Canary Islands, Madrid, Athens, Kazakhstan, Jamaica, Colombia, Bahamas and in The U. S. Venice, Grand Rapids, New Orleans, LA, Tusa. Obviously, there are many other operations. We have expanded so far this 18,000 Chinese square meters and we have a no 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 2, UK Central And Eastern Europe and the other divisions are also clear there. If we move to Page 10, the second pillar 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 and obviously 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. Then if we move to Page 11, what we have is the pillars of our strategy since a long time ago. We are communicating that this company is well balanced in terms of concession portfolio and risk diversification strategy is present in this top chart on the left side, Dufry 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. Dufry 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 nine months of 2017. We have also as alternative channels and diversified channels, cruise lines and seaports, regular stations and other onboard downtown and hotel shops. The next obviously, next months ahead, what we are going to see is our development in the cruise line and shipboard business because we are in the process to sign some agreement new agreement that will expand this business. Dufry by Cafeberi just confirmed personal care is number one, precision cosmetic 33% and it is going to be the leader of all categories from now on. Confectionery, food and catering 17% and affordable looks that today represent 13%. Obviously, we're maintaining the other categories, core categories, wine and spirits and tobacco. Duty 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 fifty-fifty. 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 is the way to expand the business through two or four commercial concepts. One is a convenient store with Hudson, the other one is a core categories in duty paid. We move to Page 12. I think in this page, probably better to comment on two things. Number one is one of the most important drivers of growth in our company this year and mid year twenty eighteen 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, but also is very relevant the digitalization. I think it's important because travel retail like the retail is today in constant evolution. Changes in passengers' profile, origin of the passengers' motivation, behaviors, And I think all these passengers expecting more experiences and better services and differentiated products are obviously part of the environment. And travel retail is not really isolated of what is happening. The evolution of ways of traveling today you can obviously, it's very simple to buy a ticket via Internet or to connect with your travel agency via the Internet or 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. And Dufry is not isolated of that again. What we need is to identify a new way of engaging with the passengers. And this is part of the digital strategy that we have developed over the past two years and now this strategy is really implemented and in the process obviously to be expanded worldwide. Digital strategy has today four pillars. One is customer research information and 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 employee's digitalization is a 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 this specific iPad. This is not a project, it's a reality today. There are two examples. One is Madrid Terminal 4S, the other one is MEGO. The third pillar is the omni channel, is how to really connect with the passengers is the moment they are at home to the moment they back at home, including the journey, the whole journey. New generation stores to mention it, one is in Madrid Terminal 4, the other one is Melbourne or rate application or Reset and Collect, the social media development that we have done in order that the shop will be 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. And 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. And we are developing with several brands, two examples that I always comment, one is the Algo, 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 a leverage below three times net EBITDA and 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, 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 and standardized processes and procedures. As a consequence of this reorganization, what we are expecting that 50,000,000 will be delivered in 2018 at the EBITDA level. Two countries already are certified, one is Mexico, other one is Switzerland. And 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 generation stocks already opened, Melbourne and Mali. And in the process to build and will be reality one of them this year, Surik and Q1 will be beginning 2018 and Cancun that will be opened during the next days are examples of what I comment on at the beginning of this slide. Then if we move to next pages, thirteen, fourteen, fifteen, sixteen and seventeen, I think it's obviously, it's not easy because there are pictures, but we want to see what the new generation story is. Bishop has the aim to provide better and unique experience to the customers, including the digitalization of employees, as I mentioned with the iPad. 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 research 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 rate 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, hopefully in the future. And the most important thing, penetration and spend per ticket. Now I pass through the conversation to Andrea for continuing with the financial information. Thank you, Julian, and good morning and good afternoon to everyone. So let's move directly to Page 19. As to organic growth, Julian already commented on the healthy growth in the third quarter of twenty seventeen, which was 7.6% and which we generated through a combination of like for like growth and growth on net 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. And 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, growth in Southern Europe and Africa accelerated to 10%. Organic growth in UK, 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 Julian, posted a strong growth, which more than compensated for the refurbishment impact on the closings in these divisions. Latin America continued to grow double digit 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. And then finally, North America continued to post yet another very solid result number close to 6% growth. Then on Page 20, we have the overview of the FX translation effects. As mentioned before, third quarter result was positive, and 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. And assuming that the current rates that we see as of today would prevail, we would expect to see also positive translation impact in the fourth quarter of twenty seventeen. Then 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 threefour 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 remain virtually unchanged. Share of results of associates was negative $2,400,000 for the nine months. As mentioned in earlier calls, this 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 $2,100,000 this year compared to $1,400,000 in the same quarter 2016. Then EBITDA for the nine months, as already commented, was $743,600,000 and EBITDA margin increased 20 basis points to 11.9%. Moving to depreciation and amortization, in absolute amounts, this was in line with previous quarters. The total charge for the nine months were $389,000,000 and $129,000,000 for the quarter. As a percentage of turnover, D and A improved by about 70 basis points to 6.2% for the nine months. Then if we move to the next line, the linearization, and 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. And secondly, there is a straight lining of the yearly minimum guarantee increases, which we have to do according to IFRS. So this line linearization was $35,000,000 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 $11,000,000 For the fourth quarter, we will have a negative charge again of about $25,000,000 bringing the expected charge for full year 2017 to about 60,000,000 Other operational result was $27,500,000 for the nine months. Startup and closing costs, restructuring costs accounted for about three quarter of the overall expenses. Financial result was $132,900,000 for the nine months. Compared to last year, the financial results improved by close to $20,000,000 and this was mainly due to the repayment of the U. S. Dollar bond that we did at the end of twenty sixteen. Financial results in the third quarter was 42,600,000 and fully in line with expectations. Income taxes were $37,000,000 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. So for the full year, I think the indication that we gave in the past, the 20% to 25% still seems a very good indication. Non controlling interests were $37,300,000 for the nine months compared to $29,700,000 in the same period last year. If you just look at the quarter, minorities were practically stable at $13,300,000 versus $13,200,000 in the same period last year. Net earnings to equity holders increased significantly year on year and reached 84,700,000 and the same would apply to the cash earnings, which adds back acquisition related amortization and which stood at $312,300,000 compared to the $244,500,000 last year. Then if we move to Page 22, we have, as usual, the cash earnings per share. So 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. So cash EPS in the third quarter grew by zero six zero dollars to CHF 3.48. And for the first nine months, EPS grew by 28% to CHF 5.81. Then if we move to the cash flow statement on Page 23, free cash flow before financing was $464,500,000 for the nine months. This amount includes, however, some project related nonrecurring cash outs, which we already commented on in our last calls. In total, these specific cash out amount to about CHF 104,000,000, of which CHF 29,000,000 are reflected in CapEx and about CHF 75,000,000 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 $337,000,000 And I think it's fair to say that we have delivered a very, 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 $270,000,000 including the one offs and $375,000,000 adjusting for these ones. So again, I think very strong results. Then 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. So 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% to 6% on average. For CapEx, we were at 3.5 of turnover for the period against the target range of 3% to 3.5% for the full year. Hence, we can confirm that we do expect to end 2017 within our target range. Then 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 twenty sixteen was actually an outstanding quarter already in terms of cash generation. So 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. Then if we move to Page 27, there we have the key metrics on the financing. Net debt evolution shows the chart shows the deleveraging year to date. And as per thirty September, we had a net debt just below $3,500,000,000 In terms of covenants, we improved our leverage covenant by almost a quarter turn in the third quarter. And at the September, we were at 3.45 times versus maximum allowed covenant threshold of four times. Debt by currency remained largely unchanged to previous quarters, so no change there. Then if we conclude on Page 28, as you may have read, we issued a new bond earlier this month with a notional of $800,000,000 The duration is seven years, so 2024 and the bonds have a coupon of 2.5%. We will use the proceeds to repay early our 2022 bond of EUR 500,000,000 that currently pays 4.5% coupon, and that we have called early in October. And with the remaining amount we will to reduce bank debt. Now 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 twenty seventeen. The bond and the bank refinancing together will generate recurring savings of up to CHF 25,000,000 per year and starting in the first quarter fully in the first quarter in twenty eighteen. As to the cost, there will be a one off financial charge of about $40,000,000 for both transactions together in the fourth quarter of twenty seventeen. Now 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 22% to 24% in this area. And secondly, and almost more importantly, we have a combined interest savings of these different transactions of around $50,000,000 per annum that we will have going forward from 2018 onwards. So this is all from my side. And with that, I hand back to Julian. 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 and 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. But as I said, it's not decided yet. Therefore, 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. And 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 beverage 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 ship lease to third parties in case we are not specialized in the business. And finally, the third one is the requirements for minority partners, what is identified as ACDB. This is a very specific structure only operative in The U. S. Today that obviously requires a specific approach with the partners. Equity story in my view is exactly the same than before. It's Hudson, it's unpredictable. Why it's predictable? Because it's a company that will be based in the number of passengers. Number of passengers are growing average between four percent and five percent in The U. S. And will be the same way during the next five, ten years. This long term sustainable growth will create a significant resilience for the business, like in all travel retail activities and 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. It's a business that has the opportunity to grow in retail, especially in convenience, duty paid and duty free. But on top of that, the opportunity to develop a $60,000,000,000 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. And 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, Dufry Global and Dufry Local in The U. S. To focus in their specific travel retail business drivers. In North America, for Hudson in The U. S. On top of the convenience stores, top of the duty free retail and the standalone branded shops, the group will also develop food and beverage and master concession as I said. And 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 our strategic growth in the past, M and A, in a specific region like Asia, where the company today is underrepresented with 9% of the total sales in the company. Also, and 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. But again, everything remains open and depending on the circumstances in the first of all, in the legal process, secondly, in the conditions of the market and thirdly, valuation of the company. Then if we move to Page 33, the conclusion, focus on fundamental targets of our strategy in 2017 and 2018. I don't want to go through the retail, but organically we continue we think that it's possible to continue delivering growth. The aspects of the traditional organic growth 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. And as implementing the digital strategy, three aspects that the four aspects that I comment on, the customer research and store digitalization. Finally, and as a conclusion, the company will continue focus in cash generation and deleveraging. Those are the key points and fundamental targets for 2017, the rest of the remaining part of 2017 and 2018. That's also on our side and now is obviously the opportunity of Q and A. Thank you. We will now begin the question and answer session. Begin question and The first question is from Jorn Yiffert from UBS. Please go ahead. Yes. Hi, Julian. Hi, Andreas. And thanks for taking my questions. And the first one would be please on the cash conversion. And it really looks very strong. May I quickly ask regarding the around €100,000,000 one off payments, which has materialized in 2017. Are you expecting any other pre concession payments for 2018 or higher CapEx? Or can we really make the simple math and add in our cash flow bridge, $100,000,000 one off investments in 2017 to 2018 so that the equity free cash flow in 2018 should be closer to €400,000,000 And second question would be please on the EBITDA margin. Has the Virtually Free synergies now annualized? And can you roughly guide us for Q4 if the EBITDA margin will expand or will be down? So the best guess would be helpful. And the last question again, please, on the EBITDA margin for 2018. If you would exclude the benefits from the royalty 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 is much smaller than in 2017? Have you fixed cost savings ahead? So some color would be appreciated. Thank you very much. So 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. So from that perspective, my best indication to you is the 3% to 3.5 CapEx and core net working capital as we presented it. And 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 1,000,000,000 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 going to 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. And in the first two cases is 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. And the third issue is obviously the delivery of the efficiencies and I differentiate efficiencies because they are depending on the business of the operating model implementation and synergies were depending on the acquisitions. This $50,000,000 of efficiencies will be implemented along what is 2017, but reflected in the P and L in 2018. And 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, we need to on top of what I said is we need to deliver the $50,000,000 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 personnel expenses. And 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 on that. All right. Thanks very much. And 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 €50,000,000 from 2018 onwards? Yes. So if you take 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 €50,000,000 to 2018. That is correct. If you look to 2017, we already will have parts of the savings baked in. So there relative to improvement will be €25,000,000 at least. Okay. Thanks very much for clarification. So thanks for answering the questions. Thank you. The next question is from Charles Mearsons 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 14,000,000 one-four or €40,000,000 And how much of that is writing off capitalized fees that you've already paid versus how much is cash? Yes. So it's 40,000,000 four-zero, as an amount. And about €25,000,000 is cash and the rest will be non cash. Great. And then 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 or more or less? And then 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. So if I just can take the question on The U. S. Business and the leverage there. So look, we currently have somewhat lower leverage in The U. S. Group that we have at the overall group level. So 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. So 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. So we wouldn't look for a separate financing there, but we will keep it with as part of the Dufry financing. Fantastic. And then on Yes, my side, I can confirm that we are progressing with H and A in almost 10 initiatives for identifying synergies within obviously the different activities we operate and the different activities they operate. From the retail point view to the management of databases of the different passengers and travelers they're managing the different operations. I think we are quite advanced, but nothing specific yet in order to say synergies or identify synergies. But there are 10 projects where we are progressing so far. Great. Thank you. The next question is from Rebecca McLellan from Santander. Please go ahead. Yes. Good afternoon. Can you hear me? Yes, we can. Yes, hello. Two questions, good afternoon. Firstly, I think you said that there's been an acceleration in organic growth in the last in the first three weeks of October versus the nine month level. Is that right? Yes, deceleration because the comparable is tougher. It was 7.6% during the third quarter. Right. So and it's simply because of the comp, is it 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? Yes. In 2017 and also, obviously, because we have confirmed already what happened in the high season, I would say that yearly basis, we could say around 7% instead of 56% that I mentioned during the last call that obviously the last call was before the high season. Now 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 our airports and taking into consideration the countries we are, we should think about 5%, 6% organic growth for 2018. Excellent. Okay. Thank you very much. And then just shifting to you talked about Asia and eventually you're underexposure at the moment. Are there any particular what sort of the particular markets that you might be interested in if as and when finances or assets become available? We are it's very broad, obviously, the market. But there are three aspects of the strategy initiative that are very important for us. Number one, to identify 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. And we have identified targets in several countries. Obviously, I cannot comment on the countries because it's a very confidential information. One is airport retail. The second one 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 our 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 downtowns standalone shops. We are talking about destination shops. For example, we have today two operations in Macau in casinos, and we just announced another one in Malaysia that was a disclosure a couple of weeks ago. And the third channel that we believe that could be an alternative in Asia is border shops. Then is what is going to happen with the digitalization and the expansion of the digital strategy in Asia. And 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. And this is part of the obviously the strategy that we are, let's say, developing with some companies in H and A, but 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. But let's say, airport retail, number one alternative channels, number two and digitalization, number three. Excellent. And just one final sort of top up then. Do you feel that the market in Asia is more right 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. And there are many other locations where the consolidation is possible. Okay. Thank you very much. Welcome. Thank you. Next question is from Peter Tessa from Waimon 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. And then within that, you've also in the past explained how you have renegotiated many of the concessions. You have fewer expiring going forward and 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. Yes. 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 assets 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, has been published since the moment this contract was awarded to Aldeyas at that time. And there is a 9% increase per year of concession fee. And this impacted obviously because the increase in concession fee in Spain is a very insignificant 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. And the second one is because most of the passengers, 35% of the total tourists in Spain are British. And the devaluation of the pound, 2015% last year and 8% during the last quarter is impacting the perception. But obviously, the opposite side is that these passengers are buying more in The UK. Number one is Spain. Number two is operations that were extended last year, many operations extended last year that had different two different approaches. One is conditions that were similar or even lower than in the contract. And those conditions were there and they I can confirm that. And I don't want to mention specific locations because obviously there are confidential issues here that they cannot breach. But 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. And this renovation was impacting the top line growth. And as a consequence, we were paying the rent since January 1. And during the first nine months, we have been impacting the percentage on total turnover because the mark in these locations were higher than the reality we were expecting. What is today the issue? Today is 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. And the second part of this formula of concession fees is what is going to happen with the new concession. In my view, what we are going to try is obviously is 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 onboard cruise lines. Sales onboard cruise lines has a concession fee higher. And in the and the average probably will be slightly higher. But my recommendation in your model, use the same than we have today, because 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, because these operations from both cruise lines have higher return. The investment from us is set The idea is 27%, 28% is a good range for 2018. Okay. No, thank you. And then 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 Sharia today in The Emirates and there is no impact at all in the sales. We are renovating now Surik full renovation and 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 is in my view, In emerging markets, I think the sales will continue even with the renovation. 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 non negative performance. For this reason, I am not going to give you bad idea and tell you no, because we have a lot of renovation. No, we are going to renovate the shops, continue with the same trend and you should expect positive performance even with the renovation. Every time that we renovate a shop, the spend per passenger is increasing between 1525% depending on the location. I have two examples that I always repeat. One is Athens, saying that we terminate the renovation March year, spend per passenger increased by 22%. Melrose, 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. And then the other question I had was related to the IPO. Since you announced the potential IPO, you've also seen one of a partner, a potential partner in the food arena, AfterGrill, announce a segmentation of its company into three entities including U. S. Airport well, 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 intention to do whatever what I explained it. And the business will be controlled and on any regard operated by us. The competition in The U. S. Will be tough because obviously, Jose Mario is a great operator and they have a significant participation in the market, same level than we have in retail. And 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 Mustari from JPMorgan. 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. And my second question is on net new business, which was plus 1.2% in Q3, which is the strongest level in the past couple of years since the middle of twenty fifteen, I think. So 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. So 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, is no guidance. What I said is because I mentioned during the last call, we were expecting 5%, 6% after half year results organic growth. And now that the high season is already over, I think the possibility to reach 7% is very realistic. What happened during the last quarter twenty sixteen is that the company already performed 6% increase and we are talking about a different comparable. And in my view, if we reach a significant level 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 is very positive. It's higher than the nine months, but 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 realistic target. That is the second part of the question. The second part was the net new business contribution of 20%. 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%. But in any case, will be this year around 3%, I hope, in gross contribution. Thank you. And just a last one on Spain. With the increase in minimum guaranteed that you've talked about, are you still above MAG for Lot two, which includes Barcelona? Or has that increase taken you below MAG again? And with that in mind, have the Barcelona trends been since October? Okay. Regarding Spain, we have not achieved to be out of mark in lot number one, Madrid and other airports and lot number two, Barcelona and other airports so far. Still we are subject to mark. 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 Dreyos, the other one is Helona. In both cases, growing at the same speed, double digit growth. And 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 plus 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 John Cox from Kepler Cheuvreux. Please go ahead. Yes, good afternoon guys and congratulations on a very strong set of organic sales numbers and that gross margin gains look very impressive. But of course, just to keep digging back into the EBITDA margin expansion, Julian, you're saying around 12%, 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 ten, twenty 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 $50,000,000 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 impacted impacting the P and L in 2018. On top of that, that we have in this case let leverage in general expenses and personnel expenses. The second part of the positive aspect 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%. By year end, it will be similar or maybe slightly lower. But next year, I think we cannot expect a significant increase in concession fees. Will be between 27.828%. And 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 explain, we will negotiate. Those are the two balance two parts of the balance for reaching the 28%. But I think 28% is a realistic target in 2018. So then if I add all of this together then, you're saying that basically the EBITDA margin could be close to 13%, one-three percent next year or is that too optimistic? This is our target, yes, percent, one-three. For 2018? 2018, yes. As I said, it's I am very bullish because I always repeat it myself with my sorry for that. It's one But it's an ambitious figure. Yes. Well, it's an ambitious figure. I think we have the intention and the focus to do it, and we will try. Yes. And then 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 of the 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. And obviously, depending on the IPO, it will be different. But independently of the IPO, the answer is yes. Okay. And then just on H and A, 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 and this is the only thing I can say, I don't know what will happen next year in the time of the General Assembly is that they are not requiring any type of governance in Dufry. And can I ask the same question about Richemont? Have they asked for a seat on the Board at all? No, exactly the same answer. So far there is not a communication by then 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 McLellan. Please go ahead. Yes. 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. And 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 and at a specific level. But calculation for next year is that we need to drive a concession fee around 20%, including the increase of the concession fee in Spain. Okay. Thank you. The next question is a follow-up from John Cox. Please go ahead. So yes, just to come back on you mentioned that you're comfortable with $1,000,000,000 plus EBITDA for this year. Just looking at consensus at the moment, it's for $1,100,000,000 or a little bit over for 2018. Obviously, some of the guidance you're giving today would indicate that figure should be higher. But maybe I'll just ask, are you comfortable enough with that $20.18 consensus at the moment around $1,100,000,000 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, John, allow me to wait a bit because I think 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 a 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. Ladies and gentlemen, the conference is now over. 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