Ladies and gentlemen, good morning or good afternoon. Welcome to the Dufry AG 9 months 2016 results conference call and live webcast. I'm Selina, 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 1 on your telephone. Should you need assistance, please press star 0 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.
Thank you very much for the introduction. This is Julián Díaz, participating in the call with Andreas Schneiter from Switzerland. As in previous calls, we are going to comment on the presentation disclosure this morning on our website. Please go to page five of the presentation. In 2016, we have 3 main objectives as follows: acceleration of organic growth, integration of World Duty Free, and delivery of synergies due to the transaction, and increase of free cash flow generation for accelerating our deleverage. During Q3, we have seen good progress in the 3 targets. We have returned to positive 3rd quarter organic growth, including World Duty Free, plus 1.3%, after several quarters impacted by significant devaluation in the most important currencies for Dufry's customers, Brazilian real, Argentinian peso, Russian ruble, et cetera, and the tough sociopolitical conditions in Brazil, Russia, Turkey, and North Africa.
Despite these macro trends, due to the initiatives started, including brand plans with the most important suppliers and the refurbishment of 22,500 sq m of commercial space, by September 30th, we have seen the first positive impact in our organic sales in 2016. It is also relevant, the trend has continued during October. We have also dedicated a significant effort to improve our most important asset, the concession portfolio, reaching agreements for extending several of our most important contracts in Zurich, Cancun, São Paulo, Rio, Guadeloupe, Morocco, Basel, Melbourne, et cetera, representing a total aggregate of CHF 1.2 billion in sales of the company. The extensions have been done with similar average terms to the previous ones and 10 years average in duration. We have also signed 26,100 sq m of new commercial space so far in 2016. That will be open Q4 2016 and beginning 2017.
As Cairo Terminal 2, Marrakech, Milan, U.K., Brazil, Cancun, Argentina, Jamaica, Las Vegas, Detroit, Kenya, and Macau. All these contracts are part of the new set of concessions. We have dedicated a lot of efforts to the improvement of our own working capital. As a consequence of the acceleration of sales and the integration of Nuance and World Duty Free logistics system in our global platforms, Dufry has generated important improvements in net working capital, reaching 4.2% in September 2016 on turnover, compared with 5.3% last year. Following with World Duty Free integration, I would say that it's progressing as expected, and we have implemented CHF 59 million of cost synergies will be impacting the P&L in 2016 and 2017.
Regarding the gross profit margin synergies, we have already agreed 97% of the target, CHF 55 million, that will impact the P&L during Q4 2016 and full year 2017. Finally, we have reduced our net debt by close to CHF 400 million compared with 31st December 2015. Despite the acceleration in CapEx, reaching our main covenant net debt/EBITDA 3.72x compared with 3.92x in December 2015. Then if we move to page six, we have highlights for the nine months. Turnover reached CHF 5.9 billion, with a growth of 39.4%. The relevant organic growth, for the first time in several quarters, including World Duty Free, increased by 1.3%. Gross profit margin improved to reach 58.4%, 30 basic points above last year.
Without considering the impact for the seasonality and also for the high margin in the operation in Turkey, the increase should be around 70 basic points. EBITDA grows by 35%, reaching CHF 685.4 million, with an EBITDA margin of 11.7%. The most relevant, in my opinion, in this quarter, is to comment on the free cash flow increase by 64%, reaching CHF 535 million compared with last year, CHF 326.4 million. As a consequence, the net debt was reduced by CHF 400 million since December 2015, reaching a level of CHF 3.5 billion at the end of September. Cash EPS, nine months, grew by 48%, reaching CHF 4.55 per share. As I commented before, World Duty Free integration is going as planned. Let's move to page seven. Page seven, I think the most relevant is in the bottom left side and the quarterly evolution of the organic growth.
The Q2 2016, we reported -2.9%. Q3, including World Duty Free, in both cases, +1.3%. The most interesting is to comment, and I will be more specific in the next slide, about the good performance in Spain, U.K., U.S., and South America, excluding Argentina, and especially to remark the fast recovery in Brazil. On the negative side, Turkey is obviously a significant one, where the impact of this operation during the high season is more than proportional to the contribution along the year. During the third quarter, what we have seen is a non-recovery in the Turkey's operation. Let's move to page eight. The performance in total sales, organic growth, and October trading update is as follows. Division 1, Southern Europe and Africa. Turnover reached CHF 1.3 billion during the nine months 2016, compared with CHF 894 million in 2015. Underlying growth was -3.6% during the nine months.
Due to the situation in Turkey, -48% in sales and similar decrease in number of passengers, most of them Russians, the impact in this quarter was over proportional due to the high seasonality of this operation. All other operations continued improving the performance, especially Spain, with close to double-digit positive growth, mitigated by the still negative performance in North Africa. Division 2, Central and Eastern Europe. Turnover reached CHF 1.5 billion in the year to September, compared with CHF 867 million in 2015. Underlying growth was +0.8% and 2.3% increase during the quarter. Sales in U.K. accelerated, reaching double-digit growth in local currency, with single digit positive performance in Switzerland, Finland, Serbia and Bulgaria. Operations in Russia and other Eastern European locations continued with negative performance, but with a gradual positive improvement compared with half year 2016 report. Division 3, Asia, Middle East, and Australia.
Turnover reached CHF 569 million in the nine months 2016, compared with CHF 469 million in 2015. Underlying growth was flat compared with last year and +0.8% in the quarter. Good performance in Middle East with single-digit positive growth and significant double-digit growth in Korea, Sri Lanka and India. Still negative performance in Hong Kong and Macau, and gradually recovery in continental China, reaching similar level of sales than previous year. Division Four, Latin America. Turnover reached CHF 1 billion during the first nine months 2015, compared with CHF 1 billion last year. Underlying growth in the quarter reached +2.1% and -6.7% in the nine months. Good performance in Mexico and other operations in the Caribbean, with double-digit growth in Dominican Republic and single-digit growth in Puerto Rico and Jamaica.
In South America, acceleration of growth in Brazil, single-digit positive growth in the quarter, but double-digit in August and September. Peru and Chile reached also double-digit growth in the Q3, with almost flat performance in nine months compared with 2015. Argentina is the only country still reporting negative performance compared with 2015. Double-digit negative in the quarter, but slightly improving compared with half-year 2016. The operation is still impacted by the Argentinian peso devaluation. Division Five, North America. Turnover reached CHF 1.2 billion during the first nine months 2016, compared with CHF 968 million in 2015. Underlying growth reached +3.8% nine months and +4.7% in the quarter. Good performance with single-digit positive growth in our duty-free operations in Canada and duty paid operations in the U.S.
Regarding the trading in October, at constant FX rate, has continued with gradual sales improvement, accelerating compared with Q3, with single-digit positive growth. Division One, positive single-digit growth performance led by Spain and significant recovery in Turkey, also still in negative double-digit territory. Division Two, Central and Eastern Europe, single-digit positive performance led by the U.K. with double-digit growth and significant improvement in Russia and other European countries. Some of them recover the territory of single-digit negative. Division Three, Asia and Middle East. Similar performance in October compared with Q3. The only relevant change has been the positive growth in Macau and continental China, due to the increase in spend per head of Chinese passengers. Division Four, Latin America and Caribbean.
Single-digit positive performance with acceleration of growth division led by Brazil, high double-digit growth in October and good double-digit growth in all other countries in South America, including Uruguay, Chile, Peru and Ecuador. Argentina is still negative double-digit, but improving again compared with Q3. Regarding Division Five, the same single-digit positive performance accelerating even compared with Q3. I think in terms of trading update, those are the main comments. If we move to page nine, we have a description here about first, on the top side of the slide, the contract that we have extended during the first nine months of 2016, with a total of 66,500 sq m of current commercial space, with a total, as I mentioned before, of CHF 1.2 billion in sales. I want to remark again the same thing.
These extensions have been done with similar conditions and with longer duration in most of the cases that we have had in the past. Regarding the acceleration of organic growth, it's also important to comment on the bottom of this slide. The total number of sq m forecasted to be refurbished in 2016 is 35,000. What we have done so far, September 30th, is 22,500. These renovations, this refurbishment, will contribute in 2016 with around 0.8 to the organic growth in the full year, and next year with around 2%. We move to page 10. A significant, obviously important driver of the organic growth is the number of passengers. Again, what we have seen with the last forecast published in October, the international passenger flow is, in 2017, +7%, in 2018, +5.7%.
These strong expectations are, in my opinion, very positive, and I hope that they will be reflected also in the organic growth of the company next year. Let's move to page 11. I think the evolution before and after the Brexit is very transparent in this slide. Before the Brexit and after the Brexit, the difference is that we are now growing double-digit growth in sales in most of the operations, and especially in Heathrow. Significant increase in passengers. In Heathrow was +0.8, probably is the lowest because it's the largest airport, but significant increase in all the other airports, and significant increase, very relevant in spend per passenger. The future about the opportunity to operate duty free in European destinations in the U.K. is a question mark. As I mentioned before, it's an opportunity, great opportunity for driving more sales in the business and profitability.
At the stage of the process we are today, without knowing what the Brexit is going to be about and how the Brexit is going to be implemented, it's very difficult to even comment on any type of financial information. The positive sign is, if for whatever reason, during the Brexit process, there is an opportunity to drive duty free sales in the U.K. airports and in the European airports in destinations with the U.K., it will be a tremendous positive impact for the company. Let's move to page 12. In page 12, the second part of organic growth is new sq m. What we have opened during 2016 so far is 27,000 sq m. The openings are in this slide, top left side, per region. We have opened a total of 153 new shops during the first nine months, representing around 7% of the total retail space.
Regarding the contract signed, I comment on that. Indeed, Morocco, Italy, U.K., Brazil, Mexico, Argentina, Jamaica, U.S., Kenya, Macau, with a total of 27,000 sq m that will be opened. You have here when, last quarter 2016 and first quarter 2017 in the different regions. Finally, to confirm that still we have around 43,000 sq m of commercial space, and the project pipeline, more or less between 8%-12%, depending on the region of opportunities based in the number of sq m. If we move to page 13, the opportunity to confirm the synergies. For the cost synergies we have implemented, most of what we were expecting is CHF 59 million. That will be reflected in the P&L in 2016 and 2017. Regarding the gross profit margin synergies, we have reached agreements with a total percentage value of the target of 97%.
This will be finally reflected during the last quarter of 2016 and along 2017. On page 14, a bit of Dufry strategy for confirming. The risk diversification strategy on the right side of this slide, Dufry by region, with the participation in the mix of all the regions in the total sales of the company. Regarding the Dufry by category, to confirm the same thing, the company is very focused on personal care, personal cosmetics, and personal care including creams and makeups, representing today around 32% of the total sales. food and confectionery, with a total of 17% of the total sales of the company. And finally, luxury goods with 12%. If we move to page 15, two obviously confirmation here. Dufry is an airport retailer, 91% of the total sales are generated through airport shops, but we have also started the diversification of the sales outlet.
In general terms, the most important today is border shops, railway stations, and cruise lines. I visualize that these percentages will increase in the future and will accelerate in the future. Dufry by sector. Still the company is a pure duty free company, but we have a significant part of 40% in duty paid sales. The relevant thing here is that the total number of passengers in any airport is divided normally between 70% in domestic passengers, 30% is international. It's obvious that there is a tremendous opportunity, especially in Asia, for the development of duty paid markets. That's all so far from my side. Andreas, could you please lead the financial discussion?
Thank you, Julián. Good morning and good afternoon, everyone. Let's move directly to page number 17. I'll start as usual with the growth components. Overall growth in the third quarter was 14.1%, to which changes in scope, that means the consolidation effect of World Duty Free contributed 15.8%. This was the last quarter where we have such a consolidation effect from the World Duty Free acquisition. That was until end of July, from the fourth quarter onwards, financials will be comparable. The FX translation effect was negative this quarter with -1.4%. This is going to be something that we will look in detail later on. organic growth, including World Duty Free, was 1.3%. There both the like-for-like growth as well as new concessions contributed in a similar way with 0.7% and 0.6% respectively.
As to the divisional contribution, this has already been explained by Julián in detail, I'm going to skip that. On page 18, we have an overview of the most relevant emerging market FX rates. There, the devaluation impact on the Russian ruble and the Brazilian real have now eased as the respective currencies have stabilized compared to previous year. The Brazilian real has even turned slightly positive in the third quarter. For the Argentinian peso, on the other hand, the devaluation has continued to be significant, with around -60%. This will most likely remain unchanged until the end of this year. Moving to page number 19. There, the big change in the third quarter in terms of FX was basically the devaluation of the British pound, which lost about 15% against the Swiss franc after the Brexit vote in June.
I just want to remind everyone, we generate about 17% of our business in this currency. Because we buy and sell in GBP in that market, we are effectively naturally hedged and have no transactional FX risk. However, because we consolidate in CHF, the devaluation of the GBP has resulted in a negative translation effect for the group of -1.4% in the third quarter after a positive effect in the first half of the year. Assuming that current exchange rates will prevail for the rest of the year, we will generate a small negative translation effect for full year 2016. Moving on to page 20. There we have basically the income statement for the nine months to September. As in previous quarters, the direct comparison needs some explanation because of the consolidation effect of World Duty Free transaction.
Starting with gross profit margin, we had an improvement of 30 basis points year-on-year, which was mainly driven by the synergy of the Nuance transaction. The reported numbers somewhat understate the improvement as the downturn in Turkey has weighed on the numbers. Excluding Turkey, the improvement was actually 70 basis points overall. Concession fees when measured as a percentage on turnover increased due to the World Duty Free consolidation. On a scope-adjusted basis, concession fees actually remain stable as a percentage of turnover. Personal and other expenses improved to a combined ratio of 19.6% on turnover, which is a 1.1 percentage point improvement compared to last year. There are on one hand, differences in the cost structure between World Duty Free and Dufry, but also the better ratio is due to synergies.
EBITDA in the first nine months grew by 35% to CHF 685 million, and EBITDA margin was 11.7%. Below EBITDA, all the items were in line with previous indications, and actually there were no surprises. Very quickly, depreciation as a percentage on turnover was 2% in line with last year, and the amount of CHF 118 million is consistent with previous quarters. Amortization was CHF 285 million. For the nine months, the respective amount for the third quarter was CHF 92 million. Again, this is in line with previous quarters. Linearization expense for the period was CHF 45 million. That's an amount that we already indicated in previous calls and presentations, again, no change there. Other operational result was CHF 43 million. About half of this amount is related to restructurings of the acquisition across the group. Financial result was CHF 152 million.
The quarterly expense of CHF 53 million again, was in line with previous quarters. Income tax came in with CHF 12 million. This means an implied tax rate of 29%. As we mentioned in the past, taxes tend to be quite volatile along the year, and they are difficult to forecast. Generally, we do believe that a tax rate between 20%-25% is a realistic range for the medium term. As a result, the cash EPS for the nine months increased by more than 80% to CHF 245 million. If we stick with the cash EPS on page 21, there we have the cash EPS. Maybe to start with, quarterly cash EPS has become a lot more seasonal due to the acquisition of Nuance and World Duty Free.
The pattern that you see for 2016 will also apply to our cash EPS in the future. From a performance point of view, it is important to point out that the cash EPS for the nine months grew by 48% to CHF 4.55. Basically, the acquisitions and the respective synergies start to contribute value to the bottom line. On page 22, we have the cash flow statement. Cash generation has been very strong in year-to-date, with free cash flow before interest reaching CHF 536 million. This is an increase of 64% compared to last year. Apart from the profit generation, we have made a major effort on the net working capital, and we will discuss that in a little bit more detail in a minute.
Otherwise, if you look at the rest of the statement, there were actually no surprises in the cash flow statement, all items were controlled and came in as expected. On page 23, we have basically our usual KPI for the cash flow. That is the core net working capital and CapEx. If we look at the core net working capital as a percentage of turnover, this improved to 4.2% in the third quarter. This is actually the best ratio we have ever had at Dufry. Just to be clear, core net working capital is also seasonal, and the third quarter is typically the lowest point in the year. Even if we compare that on a seasonal basis, the 4.2% is a clear improvement, compared to the 5.3% we had in the same period last year.
If we strip out any seasonality effects and normalize core net working capital across the year, we have actually achieved the full improvement that we were planning. Our original target was 5%-6% on turnover, and we are now actually at the low end of that range if we strip out seasonality effects, give or take at around 5%. On CapEx, we were at 3.4% of turnover for the nine months. This is in line with our target range of 3%-3.5%. For the full year 2016, we expect the CapEx to be in the range at CHF 250 million-CHF 275 million. Again, this is unchanged to what we have mentioned beforehand. The balance sheet on page 24, I think that is not very exciting in the sense that there has not been any significant change in the overall structure.
Obviously, on the asset side, the concession rights and the goodwill remain the main positions. If we move to page 25, there we have an overview on the financing aspect. The strong cash flow generation has allowed us to significantly reduce net debt. Since the beginning of the year, we have lowered the net debt by 10% or CHF 390 million to CHF 3.56 billion at the end of September. As a consequence of that, our leverage covenant has improved by 0.2 points to 3.72. With this level, we are already today below the long-term maximum threshold of 3.75, which will become relevant in the first quarter of 2017 onwards. Given the importance, I would just like to reiterate our setup in terms of the currency structure of our debt. We largely match the currency of our debt with the respective currencies of our most important cash flows.
That means the US dollar, the euro, and the British pound. This allows us to get good hedging also on the cash flow side and the balance sheet, and it does complement the natural hedging that we have in place actually for the income statement. On page 26, we have basically put the maturity profile of our debt. We do have a long-term financing structure in place with first maturity starting only in 2019. Due to the strong cash generation, we have actually excess cash on our balance sheet. Not the full amount of CHF 800 million cash that we had as per the end of September is operationally required. Also we have about CHF 900 million RCF that you see there, the green bit is largely undrawn.
We have therefore decided to do an early repayment of our $500 million bond that matures in 2020. Basically the savings are considerable. We currently pay a 5.5% coupon on this bond, which means that we pay $27.5 million per year on interest. This amount will fall away once this has been repaid. This is scheduled to happen on the 2nd December 2016. The early repayment will trigger some one-off costs of around CHF 18 million, which will be incurred in the fourth quarter. They will be reflected in the line financial results. Of the CHF 18 million, CHF 18.3 million, 13 and a half will be cash relevant and the remaining CHF 4.8 million will be non-cash. The cash payback for this transaction, if you want for the repayment, is only six months.
Overall, the early repayment will generate a net cash benefit in excess of $18 million over the original life of the bond. To summarize, from a financial perspective, I think Q3 numbers have been very, very strong. We manage costs and cash flows tightly. We have achieved our target improvement for core net working capital this quarter. Our goal is to maintain this level of efficiency and keep core net working capital at a low 5% levels on average. Last but not least, thanks to our cash generation, we do have substantially reduced our leverage. This allows us to considerably improve our financing costs for the long term. That is from the financial, I hand back to Julián.
Okay. As a conclusion, thank you, Andreas. As conclusion, yes, two or three ideas. Number one, we will continue with the same target for 2016. Number one is to accelerate the organic growth. We are going to continue with the same level of refurbishment, new level of an improved level of new concessions and the opening of new concessions. The most important is also facilitating the commercial initiatives. Number two, in my view, the number one target for this year is cash generation and try to deleverage as much as possible by year-end. What we have seen is a possibility that even that the last quarter, as I going to mention, is from the seasonal point of view, one of the lowest quarter, is the second lowest quarter. The company is in the position to continue with the deleverage.
Number three is to confirm that World Duty Free integration from the formal point of view is almost done, and from the delivery of the synergies are all implemented. The impact in the P&L will be along the last quarter of 2016 and along 2017 as planned and disclosure at the time that we acquired the company. That's all from my side. Now I suggest we go through the Q&A session.
We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. You will hear a tone to confirm that you have entered a queue. If you wish to remove yourself from the question queue, you may press Star and two. Participants are requested to use only handsets while asking question. Anyone who has a question may press Star and one at this time. The first question is from Mr. Jon Cox from Kepler Cheuvreux. Please go ahead.
Yeah, good afternoon, guys. A good set of figures there with that cash flow statement, particularly. A couple of questions for you, Julián. You were sort of saying a lot of things about how organic sales look like they're improving still in October. Should we be penciling in something around, I don't know, 3% for the final quarter of the year? Is that a good guess? That's the first question. A second question is, just remind me, I think your retail space at the moment is around 430-odd thousand square meters. Is that correct? If you can confirm that one. Just a third question for Andreas on the free cash flow and the working capital. We're now down to that 5% of sales. Do you think we can actually go any lower, or would you say that's pretty much as far as you can go?
Sorry, last one just for Julián again. Obviously, on the EBITDA consensus for the year is around CHF 950. Do you think that is reachable given the fact we haven't got much left as far as the year concerned? Do you think you can still maybe get to that CHF 950 before the end of the year? Thank you.
Thank you very much, Jon. Thank you for your words. Regarding the organic growth, 3%, I think it's very realistic. It's confirmed in October, the 3% is already there. For the rest of the quarter, we don't know, but I guess that in my view, it's going to be around 3%. The total retail space that we are operating by September 9th is 425,000 sq m, or 423,000, something like that. Let me answer the EBITDA question. The EBITDA question is obviously very relevant. I don't want to repeat myself many times, but the main objective of this company is to deleverage, the generation of cash, number one. The second one is to drive organic growth, and the third one is delivery of the synergies generated as a consequence of the integration of World Duty Free.
I think we have had, along 2016, many events that have been hitting, and is in my view what happened, the EBITDA of the company. One is what happened with the Russian destinations, especially in Turkey. As you know, I repeat many times, Turkey is over proportional in terms of contribution during the summer. We have the Brazil crisis and the devaluation in Brazil. We had the Argentinian crisis. Also, as the last issue was the translation effect due to the GBP devaluation in the translation, group translation effect. Depending on the evolution of the four issues that I just mentioned during the last quarter of 2016, the situation could vary in a range of obviously impacting the EBITDA.
If you ask me, the Bloomberg consensus is a good figure, I say yes, but I think in terms of the uncertainties that we have during the last quarter, I would position a range between the Bloomberg consensus minus 2%. This is the range I visualize, but confirmed today what is the final figure is going to be, first of all, it's impossible because it depends mainly, in my view, today of the currency evolution. Secondly, I think to put this Bloomberg consensus as a target minus 2%, this is a realistic opportunity.
Basically on the net working capital, look, as I said beforehand, I think we have been never as efficient with core net working capital as this quarter. I think to say the 5% is, at least for the moment, a good measure, I would feel more comfortable with that, I don't want to guide you to be more aggressive. Obviously, we'll try, but I think if you want to pencil something in your model, I would stick to the five-ish percent.
Okay. I want to just have a bit of a follow-up. On the Turkey issue, you seem to be then saying that Turkey may be have cost you 40 basis points for the nine months. I'm guessing that could have cost you almost 1% in Q3 in terms of the margin. That's the first question. Just one on the synergies. You mentioned the 100 million plus again. I guess the bulk of that will come through in 2017. Is that correct? Thank you.
Yes, the two assumptions are correct. Number 1, the 1% is correct in terms of the impact during the quarter, and the second one is also correct. Most of them will be impacting 2017.
Great, guys. Thank you.
Welcome.
The next question is from Mr. Felix Remmers from Credit Suisse. Please go ahead.
Yes. Hi, everyone. Thank you for taking my question. Two, actually. One on the gross margin. Still, I'm asking why is it not more because you're consolidating a business that generated a 59% margin, gross margin. You have the synergies from the Nuance transaction. Just Turkey must then have a huge gross margin if that's the only reason why it's not increasing more. A bit more color on that topic. The second one, simply asking, do you confirm your EBITDA margin target for next year of 13.5% to 14%?
Those are questions that are for me, Andreas. The number one is regarding the gross profit margin. First of all, the average gross profit margin in World Duty Free at the time that we acquired the company was lower than Dufry's, number one. Number two, all the synergies from Nuance have been impacting the P&L during the first nine months. The main two reasons why you don't see all these or whatever is the final calculation in gross profit margin. Number one is Turkey, because the gross profit margin in Turkey is one of the highest in the company. Number two is because the synergies from World Duty Free are not yet reflected in the P&L.
What I said is we have agreed about 97% of the targets in terms of the 50 50x target, 50 million targets. The reality is that synergies from World Duty Free are not yet reflected. For this reason, the impact of Turkey is very relevant. Just for reminding one thing, a contribution from Turkey to the EBITDA during the season is double than average in the year. It's tremendous what happened in terms of the communication to the market. The second question was regarding the EBITDA structure.
One more time.
The EBITDA margin for next year. Yes, I am still thinking in the same thing. It is exactly what I said. If the synergies are all delivered, and I hope that will be delivered, and the situation is normalized, we will be between 13.5%-14%.
Okay. Do I understand you correct, that a gross profit margin of 59% in Q4 and then going into 2017 is definitely feasible?
Well, I cannot confirm exactly the numbers because we don't disclose that. I think if you think about the new synergies generated by World Duty Free, could be possible.
Okay. Thank you.
The next question comes from Mrs. Rebecca McClellan from Santander. Please go ahead, madam.
Yeah. Hi, good afternoon. It's Rebecca at Santander, I've got three questions, please. Firstly, when you referred to slide 11 on the evolution in the U.K., can you talk a little bit about what you're seeing with the inbound passenger flows versus the outbound, and whether you're seeing any sort of slowdown in sterling remunerated travelers, as given the weakness in the sterling. My second question is about synergies. In the initial comment you gave out this morning, you were saying that some of the synergies are running ahead of original schedule. Does that mean there's a chance that we might actually see some slight increase in synergy expectations as you progress further? Finally, just for Andreas, I think I had in my numbers at least about CHF 40 million of other OpEx, then you've increased that by CHF 18, although that's in financials due to the debt restructuring.
What's your full year thoughts on other OpEx now, please?
Okay. I will start, Andreas. Regarding the inbound traffic in the U.K., I think what we have seen so far is an increase in number of passengers in all the airports that we are operating in the U.K. The most important that we have seen is a high increase in terms of the bookings from nationalities like Chinese and Middle East. The second is regarding synergies. Yes, I know that we are a bit slightly ahead of what we planned in terms of cost savings, but I would say we are in the high range of the synergies that we comment on to the market. We are above what we were expecting, but slightly above.
Basically, to your other operational results, just to make sure that I understood the question correctly. We have now CHF 43 million in other operational results for the nine months, and obviously there will be a bit more to come in the fourth quarter. I probably would be in the low 50s, based on my estimate. The CHF 18 million that we have as a one-off charge, this will not go to the other operational result, but that will be charged to the financial result. If you want this extra, this CHF 18 million are now on top. You need to add that, but you need to add them in the financial result.
Right. The financial savings will kick in from basically the beginning of December, really the first quarter 2017, right?
Correct.
Yeah.
From there on, you should have basically the quarterly savings.
Right. Sorry, Julián, just going back to the U.K., how about the outbound passenger flow? Let's say how you're sort of seeing British travelers going overseas.
Nothing negative regarding the departure in passengers in the U.K. so far.
Yes.
The reality is that even overseas passengers are increasing faster, obviously, than the European ones, but all are growing.
Okay. Thank you.
The next question comes from Mr. Joern Iffert from UBS. Please go ahead.
Hello. Thanks for taking my questions. The first one would be just to double-check. When you say the 97% of gross profit margin synergies linked to the [Variety] Futures action, is this already negotiated with the suppliers and signed? Will it fully materialize in 2017, timing-wise? This would be the first question. Second question would be for Andreas. Andreas, when you call the bond early, can you give a rough guide for what should be the net interest expense line for 2017? The last question, in general, in the industry where you're operating with your improvements, with your purchasing power, what kind of gross profit margin do you think is possible you can earn in the medium to long term here? Thanks very much.
Okay. The 97% are agreements already signed with the supplier. If the question is this agreement will be implemented in the P&L, the answer is yes. It will be implemented, started obviously in 2016, but will be fully reflected in 2017. Regarding the gross profit margin in the medium term, I don't like the idea that I give away information. I think the basic thing to do is you have the gross profit margin before the acquisitions. You may add CHF 35 million due to Nuance acquisition. On top of that, you may add and you can add the synergies, CHF 54 million, generated by World Duty Free. As a consequence, this will be the gross profit margin.
Basically on the net interest expense, if we assume now for 2016, we had about CHF 200 million of financial results. If I just simply deduct the CHF 27.5 million, we end up somewhere in the CHF 170s. If we have some deleverage, I would argue probably we can be somewhere between CHF 160 and CHF 170.
Thanks very much.
Welcome.
The next question comes from Mr. Thomas Baumann from Mirabaud Securities. Please go ahead.
Good afternoon, gentlemen. three short questions from my side. First of all, with regard to the cost synergies, are the synergies or savings on kind of linear costs that you have equally throughout the year? Or in other words, when you say that you have already locked in 59%, can we kind of expect a quarter of that to come through in Q4 this year? That would be the first question. Second, with regard to change in scope, what you show in the numbers, is that all attributable to World Duty Free, or did you have also an impact from discontinued operations that you would have recognized on that line? If so, what would your best guess be for the last quarter this year?
Finally, if you could give us an update to the status of your new business operating model that you re-triggered early this year. Thank you.
Okay. Regarding the cost synergies, they are not equal per quarter because there are different costs involved. I think so far what we could expect in 2016, the P&L will be impacted around CHF 33 million total due to that impact in the P&L. The second thing is change in scope. I don't remember. I don't think so. There are not any other operation as discontinued in change of scope.
Well, if I may, there is one small wholesale business that we discontinued, but that is marginal. That's nothing.
The new business operating model obviously is already completely defined. The organization and structure is completely defined. The implementation of the new business operating model will start during December 2016 and will be impacting the company in different levels. One is efficiency, the other one is cost savings in 2017.
Okay. With regard to change in scope, there's nothing to come through in Q4?
No, it's nothing. In Q4, nothing is expected.
Okay. Thank you.
As a reminder, if you wish to register for a question, please press star and one on your telephone. Star and one. The next question comes from Tremaine Yep from Jefferies. Please go ahead.
Hi there. Thank you. Andreas, I have a quick question in terms of Q4 dynamics. If the consensus is correct of full year EBITDA of CHF 934 million, let's say around thereabout, it implies that Q4 EBITDA margins needs to increase by 160 basis points year-on-year. I understand there is seasonality that wouldn't be a drag anymore, but can you help split out how much is synergies, how much is seasonality, please? Thank you.
Sorry, I didn't get your question. Can you repeat that one again?
Sorry. What I meant was consensus for full year EBITDA, when we had confirmed is around Bloomberg consensus minus 2%. That implies Q4 EBITDA margins will increase year-over-year by 160 basis points, if I'm not wrong. I'm just trying to understand what the dynamics of Q4's EBITDA margin increase is. I understand there is seasonality impact, and there's also synergies, but it would be helpful if you can split that. Unless I'm wrong.
If you don't mind, this is Julián. I will answer the question.
Okay.
The main driver will be the impact of the synergies. I think this is one thing that is very relevant. The second one is the acceleration of growth in the most important operations where the EBITDA margin is the most important, the highest. Those are the issues.
Okay. Thank you.
The next question is from Mr. Marco Strittmatter from Zürcher Kantonalbank. Please go ahead.
Yes. Hello, gentlemen. Just one question about division 2, U.K., Central and Eastern Europe. On the one hand, you report on page 11 very good sales development in the U.K. after the Brexit, something in the range of 10%. On the other hand, in Q3, you report only for the whole division plus 2.3% increase, while U.K. is by far the most important part in this division. Somehow it doesn't match for me.
Sorry. There are two issues here. One is the page 11 is based in pounds and the reporting is in Swiss francs. There are two aspects there. In terms of the organic growth, we report without the FX impact. There are different things here. The sales in British pounds have been double-digit increase. The translation to Swiss francs, you have to take into consideration the devaluation of the pound compared with the Swiss francs. That was the difference between the reporting in one side and the other side, I think.
Also, sorry to interrupt you.
Excuse me. The organic numbers on page What is it?
Page eight.
Page eight, yes. They are in Swiss francs then?
No, they're in constant currency. What you need to bear in mind is we have a Russian business which has been negatively impacted.
Okay
impact between the U.K. and Russia.
Yeah, I forgot about that. All clear now. Thanks.
Okay. Thank you.
Thank you.
Gentlemen, that was the last question.
Okay. Thank you for the participants and the questions. Obviously, we will remain available and willing to answer any other questions through the investor relations department or direct call. Thank you very much.
Thank you. Bye-bye.
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