Ladies and gentlemen, good morning or good afternoon. Welcome to the Dufry's first quarter 2016 results conference call and live webcast. I am Shari, the conference call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. After the presentation, there will be a Q&A session. You can register for questions at any time by pressing star and one on your telephone. Should you need assistance, please press star and zero to connect to 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. Hello to everyone. This is Julián Díaz speaking from Dufry's headquarter in Switzerland. Also here with me, Andreas Schneiter, Global CFO. For this presentation, we are going to use the document that we have disclosed this morning in our website. Let's go to page five. I will make some comments here. During Q1 2016, Dufry started with strong sales, EBITDA, and significant improvement of organic growth compared with previous quarters. This is the first time, Q1, we consolidate the three companies, Dufry, Nuance, and World Duty Free. The result is a strong seasonality in amortization, depreciation, impact of financial expenses, and linearization. As a consequence, in profitability and cash generation, what will be mitigated in Q2, Q3, and Q4.
In Q1 2016, we have reached the highest level ever in Q1 of net cash flow from operating activities and free cash flow with a clear covenant level and significant headroom compared with the threshold. Let's move to page six. Turnover reached CHF 1.6 billion with 60% growth. Consolidation of World Duty Free added 63%. Organic growth was -5.2%, compared with 6.5% in Q4 2015. Translation impact was positive 2.2%. Pro forma organic growth in Q1, including World Duty Free, was flat, +0.1%, compared with -2.3% in Q4 2015. Gross profit margin improved, reaching 58.6% compared with 57.5% last year. Synergies expected from Nuance acquisition are already reflected in the P&L due to the vendor's terms and condition renegotiation and standardization of pricing policies in the different companies. From now on, EBITDA and cash generation will be very seasonal, being Q1 the lowest quarter.
In this quarter, EBITDA reached CHF 146.5 million, 59.2% increase compared with the previous year, and 9% EBITDA margin. Free cash flow reached the highest ever in this quarter, CHF 78.9 million, compared with CHF 19 million last year. World Duty Free integration continued as expected. All the synergy targets and plans identified and completed for cost and gross profit margins. The first impacts will be reflected in the P&L during the second half of the year. 60 million cost synergy plan and 45 million gross profit margin synergy are confirmed and will be reflected in 2017 P&L as disclosure on previous calls. Regarding the trading update, I will do it as always, in this case, by division with the new organization.
Division one, Southern Europe and Africa, performed well and turnover reached CHF 286.9 million in Q1, compared with CHF 125.3 million one year ago. Underlying growth, including World Duty Free, reached 6.6% positive, mainly due to a significant double-digit growth in Spain and France, and high single-digit growth in Africa, Italy, Czech Republic, Malta, and Portugal. Greece maintained the same trend than previous quarters, although it is the lowest quarter now. Turkey, with double-digit negative performance due to the drop in Russian passengers. In division two, Central and Eastern Europe, turnover reached CHF 427.7 million compared with CHF 150.3 last year. Underlying growth, including World Duty Free, reached 3.4%. Most of the operations performed well with single-digit growth in Switzerland, U.K., Germany, Sweden, and Serbia, and double-digit growth in Finland and Bulgaria.
In Eastern Europe, Russian operations continued to face difficult environment with double-digit negative growth, although they were significantly better than in previous quarters. In division three, Asia and Middle East, turnover reached CHF 187.2 million, compared with CHF 137 million one year ago. Underlying growth was +0.1%. Operations in Middle East and India, single-digit growth with good performance in Jordan, India, and Sri Lanka. South Asia Pacific, single-digit growth with very good performance in Indonesia and Cambodia. Negative performance in China, Hong Kong, and Macau, and very good double-digit positive performance in Korea. Division four, Latin America and Caribbean, reported turnover reached CHF 351.8 million, compared with CHF 327.1 million one year ago. South America is still impacted by the strong devaluation of local currencies versus U.S. dollar, and the underlying growth was, including World Duty Free, -13.1%.
Good performance with single-digit growth in Mexico, Puerto Rico, Trinidad, Tobago, Jamaica, and Ecuador, and very good double-digit growth in Dominican Republic. Brazil continues with double-digit negative growth, but with a significant good improvement compared with previous quarters, and with negative performance in Argentina after the peso devaluation during the last weeks of December 2015. Peso versus U.S. dollar devaluated 66% year-on-year in Q1 2016. Division five, North America, turnover reached CHF 367.3 million, compared with CHF 267.1 million in 2015. Underlying growth was +4.9%, as a result of a very good performance in our operations in Canada, with double-digit positive growth and single-digit positive performance in the U.S. If we move now to page seven of the presentation. As already commented, Russians and Brazilians having an impact in the organic growth of the company.
Comparing spend per passenger and spend per ticket, gradually improving over the last three months. Regarding the organic growth and the initiatives that we have started in order to reach this 0.1% compared with -2.3% reflected in the bottom of this slide, including World Duty Free, were a range of initiatives that we started in 2015 and continued during the first quarter of 2016 to accelerate the organic growth, and showing good results, -5.2% compared with -6.5% in Q4 2015. We have refurbished 8,000 sq m of commercial space, 2% of the total, during this first quarter. With a target to complete 65,000 sq m by year-end, around 15% of the total commercial space we have today.
We have opened 4,500 sq m of new commercial space along the first quarter in locations as Italy, France, Nigeria, U.K., Switzerland, Hong Kong, Cambodia, Puerto Rico, Brazil, and the U.S. We have also signed 25,000 new sq m of commercial space. 22,000 of this commercial space will be open during 2016, 5% of the total, including operations in Cairo, in Egypt, Kenya, Nice, Alicante, Malpensa in Milano, Malaga, Lagos, Morocco, Glasgow, Newcastle, Cambodia, Korea, Bali, Brazil, Lima, Buenos Aires, Puerto Rico, Mexico, and several new locations in the U.S. The total number of new shops signed was 75. On top of that, we have also signed 25 new shops with 3,100 sq m of commercial space that will be open along 2017. We have also 36,000 sq m of pipeline opportunities.
As commented in the past, 46% of these spaces are in North America, 25% in Latin America, and 16% in Asia. We have also developed a significant number of marketing activities and initiatives as global promotions, new pre-order websites in 13 countries, customer retention programs as VIP promotions and/or RED by Dufry application for creating a global loyalty program, customer engagement initiatives as virtual makeup, and brand plans with the 25 most important suppliers. We move to page eight and analyzing the different components of the organic growth. In this page, what we can see is a forecast for 2016, 2017, and 2018 regarding the international number of passengers. Obviously, the regions where we are better located for gaining productivity are Asia-Pacific, Middle East, and Latin America and Caribbean, with a very also strong possibility to drive more passengers in North America.
On page nine of the presentation, at this stage of the organic growth situation, significant improvement in terms of spend per passenger due to the significant improvement in the local currency evolution. U.S. dollar/Brazilian real, devaluation of the Brazilian real, 36%. Devaluation of the Russian ruble, 19%. Devaluation of the Argentinian peso, 66%, and devaluation of the Mexican peso, 21%. I am sure that if the situation continues to evolve in the same direction, the spend per passenger and spend per ticket will gradually also improve. We move to page 10, I have already commented on most of these things. The only pending matter here in this slide is the opening Q1 2016. 50% of the 22,000 sq m that I comment at the beginning of the presentation. Sorry, not 22,000.
The 4,500 that I comment on the presentation were opened in North America, 41% in Latin America, and the other ones in Southern Europe and Africa and Central Eastern Europe with 2%. We move to page 11. For updating regarding the World Duty Free integration process. We have created a stable organization, defined it including employees from Nuance, World Duty Free and Dufry. In the process to be finalized by June 2016. Integration process timing and resources defined and approved. Implementation expected to be complete by June 2017. Final synergy implementation plans defined for achieving the CHF 50/6 0 million core synergies and the CHF 40/50 million gross profit margin synergies during 2016. Full impact in the P&L in 2017. First effect in the P&L during the second half of 2016. The group executive committee approved in March the future business operating model with the targets as follow.
First of all, create a stronger divisional teams able to lead and support significant number of countries. Create new governance processes to ensure headquarters, divisions, and countries are fully aligned. End goal to streamline country organizations and achieve savings in the local P&Ls by end of 2017. At this stage, we are analyzing the efficiencies and the valuation and the processes to be implemented. I will pass through Andreas Schneiter now for continuing with the second part of the presentation financials first quarter 2016.
Thank you, good afternoon and good morning, everyone. Let's move straight to page number 13. There, starting with the different growth components in terms of organic growth. We have seen a further improvement of 1.3 percentage points in first quarter 2016 compared to the fourth quarter in 2015. If we look also at the pro forma organic growth, including World Duty Free, the improvement from Q4 is about 2.4 percentage points. I think it does confirm the trends that we saw in previous quarters, so that there is kind of a normalization, if I can call it that way, underway. If we go to page number 14, there we have basically the divisional performance. Again, it's the very same picture. It's consistent with the trends that we've seen in the past quarters. Julián Díaz already commented in detail on the divisional performance.
I suggest we move directly on the next page to the FX, page 15. There, the volatility in emerging market currencies reduced a bit in the first quarter of 2016, although, as pointed out, the effects are still considerable. The Brazilian real traded still at the 36% devaluation compared to one year earlier, and in the case of the Russian ruble, the impact was still -19%. Things are getting better, but we are not back to normal yet. As to the main currencies, the translation effect in the first quarter 2016 was a positive 2.2%. Basically there, the strong exchange rate of the US dollar and the euro against the Swiss franc supported that translation effect.
On page 16, if we go to the income statement, there again, as in previous quarters, it is actually pretty hard to compare to last year because of the substantial impact from the acquisitions. Just quickly going through the different points. Gross margin improved by 110 basis points. If we adjusted for scope changes, the gross margin improvement, if you want on a stable basis or on an adjusted basis, would be 50 basis points. There, one of the main drivers has been the Nuance synergies. The EBITDA margin overall remained flat at 9% year-on-year. Really the cost structure has changed. On one hand, the concession fee increased on the back of the World Duty Free consolidation. On the other hand, personal and general expenses were lower. There again, we have actually quite a bit of Nuance synergies contribution to that lower expenses.
Below EBITDA, the depreciation and amortization were similar to Q4 2015. The overall charge in the first quarter was CHF 137.5 million. This is also basically the run rate going forward on a quarterly basis. Other operational results in the quarter was CHF -5.5 million. There hasn't been any material charge from the World Duty Free restructuring in the quarter. We do expect to have some additional expenses in the remaining 2016. Overall, we do expect still to have around a CHF 30 million charge for restructuring still to come. Linearization was CHF 43 million for the quarter. This is a fairly new item in the sense that we presented it the first time in the third quarter 2015. We will explain it in more detail in a few minutes. Financial results, CHF 50 million in the quarter. This again, is basically the run rate going forward.
There was nothing special in there. I think it's a good proxy going forward. Income taxes were CHF +10 million. This was very much driven by the deferred tax impact of the negative results for the quarter. There, I would like to reiterate that the tax rate does vary quite strongly along the year, and also it's quite complex to forecast the overall tax rate. At this stage, we feel that tax rate of 20%-25% is realistic for the full year 2016, but on a quarterly basis, still, there may be significant deviations from that tax rate. Non-controlling interests were CHF 5.6 million. The most important minorities that we have nowadays It's basically in the U.S. business, but we also obviously have others, but the U.S. is by far the biggest part. To conclude, net earnings to equity holders were CHF -86 million.
Main driver for the result was the linearization charge as well as the more pronounced seasonality as already commented by Julián. I think for the sake of clarity, I would like to discuss now the seasonality and also the linearization in a bit more detail, and we have prepared slide 17 for that. Starting with seasonality, what the charts at the top of the page show is that the seasonality pattern, for different lines in the income statement are actually getting more extreme as we go down the income statement. The further we go down the income statement, the more pronounced the effect is. If you go, for example, to sales, the first quarter was about 20% of turnover. In terms of EBITDA, it's about more or less 15% of the overall EBITDA.
If you go to EBIT and net earnings, you see that it's actually turning negative. On the other hand, if you look at Q3, this is really a quarter where there is a positive effect and the seasonality effect is actually compensating in the other way. Q3 is going to be the key quarter for us, going forward, even more so than it was in the past. The reason that we have such a strong seasonality nowadays is that many cost components are distributed or incurred evenly along the year, such as certain personal expenses, some general expenses above EBITDA or depreciation, amortization, and interest below EBITDA. The other point is basically linearization, and there the accounting treatment even reinforces the seasonality impact as we see on the bottom of the slide.
Overall, the linearization charge in Q1 is around 60% of the expected charge for the full year. If you look to Q3, you see actually that we will have a positive impact from linearization in the third quarter. Just to remind everybody what linearization is all about, it is a non-cash item, and it is an accounting treatment related to the concession contract in Spain, where there is, on one hand, an increase in minimum guarantee and on the other hand, prepayment of concession fees. Moving to page 18, if we look to the cash earnings per share, we had effectively a zero Cash EPS for the quarter with minus CHF 0.05 per share. Again, the main reason for the big change compared to last year is the linearization charge, which impacted Cash EPS for the quarter by about CHF 0.80.
As mentioned beforehand, both the linearization and the increased seasonality have changed the profile to a certain extent, the direct comparison year-on-year is not very indicative. The same pattern that we have seen, for example, for the seasonality of net earnings will also apply to Cash EPS going forward. If we move to page 19, as already mentioned, we had a very strong quarter in terms of cash generation with a net cash flow from operating activities of CHF 119 million and a free cash flow of CHF 79 million. This compares basically to the CHF 19 million free cash flow that we had one year ago.
If we look to the KPIs on page 20, what we do see is basically that we have improved the net working capital by 20 basis points compared to Q4 2015, which I think is a very good performance given that Q1 is the weakest quarter of the year. In terms of CapEx, that was at a normal level, 2.7% of turnover, CHF 44 million. This is very much in line with the expected CapEx of quarter 3 to 3.5% turnover on the full year. On the balance sheet, page 21, there has not been any significant change to year-end 2015. Very much same thing as we have seen, nothing to comment there. Last but not least, on page 22 on financing, our net debt at the end of Q1, was around CHF 3.88 billion, some CHF 70 million lower than at the year-end 2015.
In terms of covenants, our main covenant and net debt adjusted EBITDA remained practically stable at CHF 394 compared to CHF 392 at year-end. That's all from the financial side, and I hand back to Julián.
Let's move to page 24 of the presentation. We have seen organic growth gradually improving in Q1 2016 in almost all divisions, although the impact from Russians and Brazilians is still there. We expect in both cases the situation will improve in the next quarters. Spend per head in both nationalities has improved during the last three months. The seasonality of the new duty free has changed going forward. Q1 is the lowest quarter in sales and EBITDA, and evenly distributed depreciation, amortization, financial cost, and year's highest linearization effect further enhance impact on quarterly results. During 2016, our focus remained unchanged. World Duty Free integration and delivery of synergies. Accelerate organic growth with the initiatives mentioned before. Deleverage and generation of cash. I think we have been very consistent in terms of the message, and it still is, in my view, valid what we said.
If there are not any other issues here, we will start the Q&A section.
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 the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only hands to ask a question. Anyone who has a question may press star and one at this time. The first question is from Jon Cox, Kepler Cheuvreux. Please go ahead.
Good afternoon, guys, congratulations on that margin expansion and the cash flow. Very reassuring. I have a couple of questions for you. First one on organic sales for the year. Julián, I think you said earlier in the year, maybe between 3%-4% for the year as a whole. Q1 was pretty weak again, although it's sequentially improving. I wonder if you can give me a best guess on that for the year as a whole. That's the first question. Second question, just on Argentina. I estimate Argentina was probably about 3% of pro forma group. Can you give us an indication of what sort of sales decline you're seeing there? I presume it must be more or less in line with the currency, so potentially halving in Argentina because obviously you're pricing in dollars. A final question, just looking ahead.
I think Andreas said at our Swiss seminar, you mentioned returning cash to shareholders could be back on the agenda, if you get to 3 times net debt to EBITDA, as you don't need to go much below that. I wonder if you can just confirm that potentially you could start returning cash to shareholders, either next year or the following year. Thank you.
Thank you for the questions. I would start with the organic growth sales. Jon, I think I mentioned in the previous call. In my view, I remain optimistic about the positive organic growth full year 2016. I think what I have seen in terms of the most important aspects of what we're impacting the organic growth were the sales to Brazilians and to Russians. In both cases, spend per passenger and spend per ticket, we have seen a gradual improvement. In the Russian case, we are very close to previous year sales per passenger and sales per ticket. In the Brazilian case, very close in terms of sales per passenger and also in sales per ticket. What is going to happen by year-end? The only thing I can repeat is what I said.
I think if the summer season, especially second and third quarter, are as we expect, we will be in line with, as I said, 3%, 4% organic growth increase. Decisionality this year could impact significantly if we are not performing well in organic growth during the summer. Regarding Argentina, you are right. In terms of more or less 3% of the total sales. It's two-point-something, it's not 3%. It's two-point-something. Sales dropped by 22% in Argentina in U.S. dollars.
I think for the returning cash to shareholders, I think this is still very much an important topic for us. At this stage, I think the focus clearly is the deleveraging profile. Sorry, the deleveraging of the debt. I think once we would get to a situation where we have, let's call it 3 or below 3, returning cash to shareholders, definitely is something that is very high up on the priority list. I think there our position is unchanged.
Thanks so much, guys.
Thank you.
The next question is from Joern Iffert from UBS. Please go ahead.
Hello. Thanks for taking my questions. The first one would focus on 2017. Can you please share with us what % of revenues has to be renewed in 2017? If negotiations have already started, what you are observing here regarding concession fees. Is it relatively stable? Do you see a step up or even maybe slight decreases at small airports which suffered from lower emerging market and consumer spends? This will be question number 1. Question number 2, you mentioned you will open around 5% of your total sq m in 2016. What is roughly the revenue contribution you're expecting from here? What also would be the net number for 2016 on the sq m? Last question, please.
If I remember correctly, you mentioned around CHF 20 million cost savings in Brazil, independent of any synergies from M&A. You also had an efficiency program running of around CHF 50 million. Would you mind sharing with us what is here reflected in the Q1 2016 profitability? The same with Nuance synergies. What was the incremental contribution in Q1 2016? Thanks very much.
Okay. Regarding the concession contract, I think we have disclosure in the annual report, the percentage. I don't see any understanding relevant concession that will impact the top line of the company that is going to be renovated in 2017. In my view, the concession portfolio is very stable. Regarding the impact in terms of new operations, I think we are going to open around 5% of the total sq m of commercial space that you, as in the past, could calculate 5% of the total sales. This year, what I think we should see regarding the closing in terms of non-profitable concessions or concessions that we are terminating and we don't want to extend, could be around 2%.
In Brazil, we have implement a plan full year impact in the P&L of around CHF 20 million savings in 2016. Sorry, along 2015, that will be gradually impact in 2016. I don't remember now. I don't know. Maybe if you would contact Rafael, he will be able to tell you exactly how much was the impact in the first quarter in Brazil. It's not significant because we are, in Brazil, as you know, having also the Q1 as one of the lowest quarter, if it's not the lowest quarter. Regarding Nuance, we have two impacts in the P&L in the first quarter. Around CHF 8 million, 0.5% of the total sales due to the gross profit margin improvement. In terms of cost synergies, the last figure I saw was around CHF 9 million. Always CHF.
All right. Thanks very much.
The next question is from Rebecca McClellan from Santander. Please go ahead.
Yeah. Good afternoon. Just a couple of questions. Firstly, can you strip out what the organic growth in Spain was over the first quarter, and also, if possible, the organic growth in North America excluding Canada?
Sorry, Rebecca. We don't disclose our specific operations performance in general, except if there is a big problem. In this case, we cannot disclose all the information.
Okay, thank you. Then just my second point. You talked about sort of the review of the country operations with the aim of getting some P&L opportunities, sort of I think probably towards the second half of 2017. These are new efficiency drives. Is that correct?
Yeah, this is the plan that we comment on before the acquisition, before World Duty Free's acquisition in January 2015.
Right.
At that time, I mentioned that we were targeting CHF 50 million synergies.
Yeah
due to the efficiencies that we have identified. The re-initiation of the same plan. It's nothing new.
Okay. It's over and above, for example, the CHF 20 million that's coming out of Brazil?
It is a part of this CHF 20 million. This CHF 50 million is regarding the new business operating model and the way that we are trying to manage the company with the new acquired companies and the efficiencies that we may identify, because, again, now we are in the process to identify all the values, especially in the local operations. This is a process we are involved right now.
Okay, thank you.
The next question is from Thomas Baumann from Mirabaud. Please go ahead.
Good afternoon, gentlemen. Most of my questions have been taken, but just a clarification on the linearization charge. Andreas, this includes the depreciation of the upfront payment to Aena, as you showed it on page 17. Can you confirm?
That is correct. It has two components. It has really the prepayment impact or effect. You also have, if you want, this minimum guarantee, straight lining. You have both components together in that linearization line.
Okay. The depreciation is linear. That is not subject to seasonality, right?
Correct. You're right.
Thank you.
The next question is from Felix Remmers from Credit Suisse. Please go ahead.
Yes. Hi, everyone. Thanks for taking my questions. Actually two. One on clarification. You talk about 3%-4% organic growth. Is that on pro forma organic growth or really underlying reported organic growth, if everything goes well? And on the shop refurbishment, you said that you're targeting 20,000 square meters or 15% of total square meters to be refurbished by the year, and that sounds quite high. Is that a normal run rate, or what do you also expect in terms of spend per passenger, sales increase out of that shop refurbishment plan?
The first question is organic growth. I will answer both. 3% to 4% is organic growth, including obviously World Duty Free. It's in pro forma basis. It's always including all the operations. The total number of square meters that we target for refurbishment in 2016 is 60,000, is 15% of the total. It's obviously very high compared with previous year.
Is that impacting CapEx in that sense and also sales growth, that refurbishment plan of 15% of total?
The sales growth, as I mentioned before, in many other conference calls, normally sales increase between 15%-20% of the renovated spaces. Along these sq m, I think you can count on that because it's a rule. Normally it happens everywhere.
In the sense, in terms of CapEx, I think with the indication that we've given like call it 3%-3.5% of turnover, we should be able to cover that CapEx program. From that perspective, there's no additional CapEx planned or to be added, if you want, in the model for that refurbishment program.
Thank you very much. Thanks.
As a reminder, if you wish to register for a question, please press star and one on your telephone. We have a follow-up question from Jon Cox, Jefferies. Please go ahead.
Yeah, just a couple of follow-ups. Sorry, Julián, this 3%-4% organic, this is based on you reporting minus 5.2% in Q1. Is that correct? Or are you referring to the plus 0.1%?
I am referring to the plus 0.1%, including World Duty Free.
Okay. Thanks for that. Secondly, you said next year there's no big concessions that you would need to renegotiate, but you also mentioned that you would potentially withdraw from 2%. Was that correct? That would be-
Yes.
-a negative.
No, this is for 2016, and only here. I am talking about 2016.
2016?
Yeah.
2%, will be in scope, which you're going to withdraw from?
Yeah.
Okay. Anything for 2017?
I don't know. 2017, I don't have a clue about what is the scope of possible closings. I cannot answer you.
Okay. All right. Thanks so much.
Thanks.
The next question is from Volker Bosse, Baader Bank. Please go ahead.
Hello, Volker Bosse, Baader Bank. Thanks for all the answers provided. Two questions remain from my side. First, the pro forma organic growth, if you would exclude Brazil and Russia, that was a figure you mentioned last time at the conference call. Could you provide us also with this kind of organic growth figures, so excluding Brazil and Russia? Second, as a kind of reminder, what's your net debt to EBITDA target going forward? End of 2017, around three times, is that something you have in mind, or 3.5? Perhaps as a reminder what you outlined as a target here. Thank you.
What we have, disclosure today, the plus 0.1% is including Brazilians and Russians. It doesn't exclude anything. I think during the first quarter 2016, what we have seen is obviously the same performance in terms of one year ago, we don't want to differentiate now because it's just comparable. I cannot tell you how much is the impact now of Brazilians and Russians, because we are now consolidating World Duty Free complete, they have also Brazilians and Russians in the operations. It's very difficult because the way we organize the company, it was impossible. I think it's better that from now on, Brazilians and Russians are already disclosed within one year, because we thought that was a good idea to show the impact of Brazilians and Russians during the year. Now is they comparable.
You are comparing with the same scope last year and even that today still are important. I don't think that could explain anything else than we have already explained.
Just to be clear, I don't think we have any targets out there. We just try to explain our own planning and what we expect to happen if everything goes according to that plan. We should be probably below 3.5 times by the end of 2016 and below 3 times in the second half of 2017. That is if you want the medium-term planning that we have in terms of cash generation or deleveraging overall.
Perfect. Thank you very much. All the best. Thank you.
Thank you.
The next question is from Marta Bruska, Bank am Bellevue . Please go ahead.
Good afternoon, everybody. I just have two questions, maybe first, to clarify on the seasonality. I was just wondering, regarding the gross profit, it obviously will follow the same pattern as sales. How about the gross profit margin? Does it have the same seasonality as sales in the EBITDA, or will it be higher, for instance, in Q1 than in Q2 or Q3? The second question is regarding Korea. I was discussing maybe some time ago, the possibility, how attractive the Korean market is maybe also for potential acquisitions and with the recent extension of the concession lifetimes in Korea from five years to 10 years. Would that market look now more attractive for you for potential acquisitions? Thank you.
On the seasonality of the gross margin, I think you can assume. There may be some variances in the divisional structure and in the performance, but overall, I think the gross margin should follow largely the seasonality pattern of sales. For Korea?
Korea is a very important travel retail destinations. For duty free today, we are focused in airport retail, and obviously airport retail where we can generate profits. As you know, it's a very competitive market. So far, we have not identified any operation outside airport retail, talking about downtown shops. Regarding possible acquisitions, I think it's very early for discussing acquisitions on any regard, and especially in Korea, where there are obviously important companies. Today, my only message about Korea is we are going to remain in Korea in locations where we can generate the returns and level of profitability this company requires.
Thank you.
The next question is from [Markus Waeber], Zürcher Kantonalbank. Please go ahead.
Good afternoon, gentlemen. Once more regarding the linearization item. If I recall correctly, you gave an earlier guidance for about CHF 25 million negative for the whole year. In the first quarter, it was minus CHF 43 million, and for the whole year, it looks like it might be minus CHF 60 million or minus CHF 70 million. I don't quite understand why that is. Is the business in Spain going so much better than you expected, or what is the reason behind the much higher number here?
Well, I think there must be a misunderstanding or miscommunication from my side in this case, for which I apologize. What we said is basically the linearization for the accounting year 2015, for the four months was minus CHF 29 million. What we said at the full year presentation is that the linearization for the full year 2016 is expected to be around CHF 72 million to CHF 75 million. That is basically what is also shown here. What is happening there is that the Q1 linearization is over proportionally high because actually Q1 is the weakest quarter. Because you do actually straight line, the impact in Q1 is bigger. If you're referring to the CHF 25 million, in this case, we haven't communicated it very clearly beforehand, so I do apologize for that.
Okay, great. What would be your best guess for the year 2017 and 2018 then for the whole year, the linearization item?
2017 and 2018, probably for 2017, I would need to double-check that, just to give you a very rough number, it will be probably around CHF 50 million in 2017, and it probably will be around CHF 35 million-CHF 40 million in 2018. I should confirm that number separately.
All in the negative territory.
All in negative territory, correct.
Okay, thank you.
We have a follow-up question from Rebecca McClellan, Santander. Please go ahead.
Yeah. Hi. My first question is just following up on the linearization for Andreas. Given the sort of momentum in Spain, is there any chance that the annualized sort of hit will be revised downwards over time as PAX growth seems to be perhaps stronger than anticipated?
Purely from a technical.
I think, Rebecca, if you don't mind, I will comment on that.
Okay.
I think there is a possibility that lot number 2, that has the base in Barcelona and the Mediterranean, will be out of the MAG along this year. As a consequence, the linearization will be positively impacted. Lot number 1, base in Madrid and other cities that were in the same package, will take more time.
Currently, the guided linearization chart incorporates lot 2 in MAG throughout the concession. Is that right?
In this linearization today, we have lot 1 and lot 2.
Okay. If Barcelona exits the MAG, then suddenly the linearization charge will have to be reviewed to positive, right?
Yes. It will improve.
Okay. My second question is just about the comment on the Chinese. Talking about sort of relatively weak trends in China, Hong Kong, and Macau. Are you also seeing that with the Chinese coming to London or into Europe, et cetera? Are you seeing any sort of weakness in spend per passenger or indeed actual Chinese, PAX in sort of long haul?
The slowdown in spend per passenger that we have seen is basically in China.
No issues in sort of the longer destinations.
It is in China or related Chinese destinations like Macau and Hong Kong.
Okay. All right. Thank you.
We have a last follow-up question from Joern Iffert, UBS. Please go ahead.
Yeah. Thanks again for taking my follow-up questions. The first one would be on the net working capital. Good performance in Q1. Should we expect this as a new run rate also for the next couple of quarters? The cash out from net working capital should be very limited for 2016. Second question would be, in the linearization, the upfront payments in Spain are reflected. What is the charge in 2016 and 2017 just for the upfront payments in Spain, which are amortized? Last question, industry trends. We have seen a couple of concessions on the market, competition. What are you observing at the moment incrementally in the last couple of months? Do you see a kind of industry discipline coming from larger players? Do new landlords look for local players or more for the global players?
Just maybe if you could share your thoughts on current industry dynamics. Thanks very much.
I'll take the first two questions and then Julián may want to comment on the industry trends. On the net working capital, I think we're very pleased with the improvement that we have achieved so far. I think we have the goal to improve further in the net working capital. I think to get below 6% is definitely something that we would like to achieve throughout 2016. It's going to require quite a bit of work, but hopefully we can improve that. I agree with you that we should get some positive impact, hopefully along 2016 from lower net working capital requirement overall. As I said, the long-term target is between 5% and 6% of turnover. On the linearization, the upfront payment. In principle, it's relatively simple. The upfront payment, the old World Duty Free made at the time was around EUR 300 million.
This would translate into about CHF 40 million or EUR 35 million per annum. That will be basically, if you want, adjusted for in the linearization. The industry trends.
Regarding the industry trends, the first thing is I don't want to create the idea that this industry has not been very competitive over the past, let's say, 10 years. It's still obviously very competitive. Regarding what happened over the past six months. That is specifically the question. I have seen, in my view, companies with less discipline in the past, having more discipline from the financial point of view. For example, as you may know, it has been attended in Korea, in Guam Airport, where nobody presented a proposal. It was totally empty of interest of different travel retail operators. Probably it's the first time in a long history of this business that I have seen that nobody presented a proposal.
I think the competition is going to remain tough, I think there are areas and market niche that we are going, as in the past, to continue to follow up and to chase in order to maintain the level of efficiency in the concession fee payment. This concession fee payment has been, with the whole company consolidated, with the new organizations consolidated, 26.4%. I think what I have mentioned is before the consolidation of these two companies, we were talking about 22.5%, 23%. Consolidating The Nuance Group and World Duty Free with around 33% and 33.5% concession fee, we will be around 26%, 27%. This is my expectation and due to the characteristics of the concession portfolio we have, as you may know, is above eight years, the duration. I think we will have a lot of chances that will continue.
Thanks very much. It's helpful.
That was the last question.
Okay. This is Julián Díaz. Thank you for participating in the call, as always. Any other further questions or clarifications can be addressed to all of us, Andreas, the investor relations teams, or myself. I hope next time we will have better organic growth to report. Thank you very much.
Thank you. Bye-bye.
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