Ladies and gentlemen, welcome to the Avolta Q3 Trading Update Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. I would like to remind you that all participants have been in listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and one on your telephone. Webcast viewers may submit their questions or comments in writing via the relative field. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it is my pleasure to hand over to Mr. Xavier Rossinyol, CEO of Avolta. Please go ahead, sir.
Thank you very much. Good morning, good afternoon, good evening, everybody, and thank you for attending this trading update on quarter three results for Avolta. I'll go straight to page four of our presentation with some highlights of the current situation. I have said that many times, but what we are seeing in this quarter three is the direct consequence of our strategy. We implemented a newer strategy in 2022 called Destination 2027, based on three key pillars: the focus on the traveler, both on the physical space and the digital space, geographical diversification, and a continuous improvement operating model. As a consequence of this strategy, we have been year-on-year increasing and diversifying our platform. Geographically, we are in many more countries than four years ago. Also, on business lines, complementing retail with food and beverage and vice versa, which gives us an increased level of resilience.
Our continuous improvement operating model is more flexible and faster for change than it was before. That's what we are seeing in quarter three. Despite an increased volatility, starting with the Middle East crisis, but also the consequences that crisis had on the oil price, on the airfares, on affecting the level of traffic in certain regions of the world, like North America, where we have flat-ish or slightly negative number of passengers. Despite all those that had an effect on quarter two, we see a fast recovery in quarter three. It's not by chance. It's the consequences of our network and resilience and the decisions we've been taking in the last few months on a pretty rapid manner. Going to the next step, to the next slide, we can see that in the organic growth.
The organic growth in quarter three has reached 4.6%, way ahead of the 2.9% we had in the quarter two. Part of it is a dilution on the headwinds we saw in quarter two, but a lot of it are the actions we have taken, not only on cost and cash generation, but also commercial measures, which show that in all the markets we have, we have increased spend per passenger. That's why the organic growth is accelerating in EMEA, in North America, slightly, and in Asia Pacific in a very considerable way. Not so in Latin America, but there are quite a few macro effects, like some elections, some macroeconomics, some climate-related effects in some locations. Once more, I think what is important is the resilience of the overall group.
I know afterwards there will be detailed questions about growth in this region, in this month, in this quarter, but as I always say, of course, there will be volatility. The shorter is the time, the more specific is the location, but that's what Avolta provides. Despite this local performance or underperformance, the overall, it goes on the right direction. Moving to the next slide. I think here we included this to reassure everybody that, of course, we focus on the short term. Of course, we try to compensate for the short-term headwinds. But we are equally committed to the transformational programs that will deliver growth, profitability, and cash flow over the next years. And one of the key projects where we focus a lot of energy is the digital data and technology transformation. We launched last month the concept of Avolta IQ.
Avolta IQ is the name we give to all these digital and data-related initiatives that are continuously improving the business. I have repeated some of the data in this slide quite a few times, but I think it's so relevant, I'll do it again. Of the 10 billion people that travels by plane, we have access to a quarter, 2.5 billion of those. We had 700 million of those being our customers. And Club Avolta, our loyalty program, has reached 21 million active members. Knowing that was launched only in October 2024, so just about two years. All the programs related to data have the purpose to gather as much data, as many signals as possible from the customers, from the non-customers, and from the environment. But getting a lot of data is not enough to make value. You need to connect that data.
Our data strategy is to convert as much as possible that data in elements we can use to change the business, and that's what we call the activations. So as many signals as possible to connect them as much as possible, but to convert them into specific actions. Club Avolta is one, but not the only one. This new digital data-driven approach is changing the way we approach assortment to have it faster, adapting faster to what the passengers want. And if you do that efficiently, you also have advantages on the net working capital. Getting the right pricing at the right moment, getting the right staffing. Sometimes we talk a lot about digital measures that affect the top line, but also there are a lot of digital transformation that affects directly the bottom line.
Despite what happens quarter-on-quarter, we continue on the transformational elements of our strategy, and we do not stop them because we believe it's the future for the next few years. Moving to the next slide, just an update I typically give on Club Avolta. Club Avolta continues evolving, but not only on number of members. There are other measures, and we don't disclose all of them for obvious reasons, that are very important. For example, today, 1/3 of the pre-ordering, it's already done through the Club Avolta app, not through the website or other options you have, but through the Club Avolta. Club Avolta, as I said, is only one of the elements of our overall data and digital strategy, but of course, it's the one that provides for frequent flyers the highest possibility of intimacy.
That is why we are getting traction quarter-on-quarter, not only with the passengers, but also with partners, airlines, VIP lounges, et cetera. People that want to be part of this connection with the travelers. The industry is recognizing year-on-year with a few awards, that it is really the most advanced program in the travel space, the travel retail and travel food and beverage. I want to say something. I still believe we can have a much better program, much bigger, and much more value added. Moving to the next slide is to emphasize a concept, consistency. In some roadshows, I say we want to become a boring company. Hopefully, we are not boring people, but we want that you know what we stand for. The two key elements of what we stand for is, number one, the outlook.
We confirm another quarter that despite all the movements we have, on the midterm, we still believe on this organic growth of 5%-7%, this expansion of the CORE EBITDA margin as a measure of the profitability, expanding 20-40 basis points per annum, and more than that on the cash flow transformation. It does not mean it is going to be a mathematical formula every quarter, every nine months, even every 12 months, but the average year-on-year is going to be there, and that is at least what we target for. The second key element of this consistency is the capital allocation. Number one, investing in the growth of the business. New locations, the digital transformation, the commercial transformation, the improvement of the operations. Potentially, medium size, small size, accretive M&A, always financed with a balance sheet, not new shares.
Like the ones we have done this year, one small one in the Caribbean and a larger or slightly larger, in Japan, Okinawa. Second commitment, to keep managing the leverage. With a target leverage, net debt to EBITDA, 1.5x-2x , potentially going on a temporary basis to 2.5x if we have some of these small, medium-size M&A I just described. The last one, a clear focus on shareholders' returns. A third of the cash flow goes to dividend on a yearly basis, and if there is enough cash after the growth of the business and the deleverage, share buybacks, and we already announced, as you know, three years, three share buybacks, and we will update on the status of the current one.
Resilient business, progressive improvement, and we continue with the same commitments on the strategy, on the resilience, on the outlook, and the capital allocation. Thank you very much. I hand over to our CFO.
Good morning and good afternoon to everybody on the line, also from my side. Let me complete the picture on Q3 with an update on the financial performance. The key message here is that the improvement we have observed, and Xavi has explained on the top line with the organic growth and the other growth components, also is applicable on the profitability and also on the cash flow generation of the group. Let me start with EBITDA first. EBITDA margin for the third quarter came in with 11.6%. That reflects an improvement or narrowing of the gap versus last year from 60 basis points we have seen in the second quarter to around 40 basis points we have seen in the third quarter. This reflects three key developments over the last quarter. Number one, a continuation ramp-up of some of the larger operations, specifically also JFK.
Number two, a moderation of the Middle East impact we have observed in the third quarter. Number three, the measures and actions we have taken as an organization and management team to safeguard the profitability and the cash flow generation of the organization, disregarding the external factors, have started to gain traction. For the nine months, EBITDA margin came in at 10%. That is a negative of 20 basis points versus the performance of last year, in line with what we have seen over the half year results, where it was also minus 20 basis points. If I look at the underlying business, the EBITDA margin would have improved by 20 basis points, reflecting that the business and the initiatives we do in line with our strategy Destination 2027 are progressing as planned.
Looking at the cash flow, we have generated CHF 501 million equity free cash flow for the nine months, just shy of the CHF 503 million we have generated in the same period last year. So it is roughly in line with the performance of last year, but what is interesting is the progression, and you see that at the bottom chart very well. In Q1, related to Pudong initiation and the required net working capital there, we had a negative performance this year in equity free cash flow of CHF 60 million versus last year. That gap has reduced to around CHF 7 million-CHF 9 million in the half year, and further reduced to only CHF 2 million in the nine months. So steady progression and actually a pretty good performance on the third quarter equity free cash flow generation of CHF 294 million, slightly better than the performance in the same period of 2025.
Moving on to the next slide, with the typical treasury overview. Leverage in the nine months or in September 2026 came in at 2x , slightly higher than in September 2025. This needs to be seen in the context of our capital allocation and the deliberate allocation of capital. We have done and completed the acquisition of Okinawa. We have paid a higher dividend than last year. On top of that, we have progressed with the share buyback program of up to CHF 225 million this year by purchasing by September already CHF 191 million, around CHF 50 million more than in the same period of last year. Nevertheless, including those capital allocation execution, we are in line with our leverage target of 1.5x-2x . Looking at the bottom of the page, you see the usual maturity profile.
We have refinanced this year a bond, a maturing bond of EUR 750 million with two bonds, one in June of EUR 400 million, another one in September with EUR 350 million. On top of that, we have extended successfully the maturity profile of our RCF by one year from 2030 to 2031. The consequence is that until 2031, we only have one bond maturing in 2028. There is no other maturity of major financing arrangements until 2031, which provides us stability. Not only that, the refinancing risk is significantly reduced. Refinancing was never an issue for Avolta, but what is also important to note is the interest rate risk.
From an interest rate risk perspective, because there is no upcoming maturity except one in 2028, and given the fact that around 70% of our debt is financed with fixed rate coupon, also from an interest rate risk perspective, we are very solidly hedged. Having said that, I hand over back to Xavi with the closing notes.
Thank you, Yves. If we go to the last page 13, you have here the key messages, the progress in quarter three versus quarter two. We see the market as being a volatile place because of the geopolitics mostly. But we also see that the measures we have been taking over the last few months keep gaining traction. Also, some of the aspects like the ramp-up of large new operations, it is also getting momentum. So we remain cautiously optimistic for the incoming near and long-term future. With that, we finish the presentation. If we can go to the next page to make sure that we have the thank you with the Club Avolta membership. If somebody is asking questions and want to become a Club Avolta member, will be very welcome. So we go now to the Q&A. Thank you.
We will now begin the question- and- answer session. Anyone who wishes to ask a question may press star and one on the 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. Questioners on the phone are requested to disable the loudspeaker mode and eventually turn off the volume of the webcast while asking a question. Webcast viewers may submit their questions in writing via the relative field. Anyone with a question may press star and one at this time. Our first question comes from Dhar Manjari from RBC. Please go ahead.
Good afternoon, Xavi. Good afternoon, Yves. It's Manjari Dhar, RBC. I just had a couple of questions, if I may. My first question was on the contract ramp-ups. I was wondering if you could give us an update on how long we should expect JFK to be a drag. On Pudong, is there anything that you guys can do to sort of help offset the impact whilst you wait for the tobacco license? My second question was on spend per passenger. I think you called out increase in spend per passenger across all regions. I was just wondering if you could give some color on what you think is driving that. Is it just the demographics that are still traveling, or are there any actions that you have taken as well? Thank you.
Thank you, Manjari, for your questions. On the ramp-ups, one thing that is important is that even if it takes a little bit longer to get at the full potential of the operations, what is clearly improving month- on- month and quarter-on-quarter. I am going to answer your question, but in any case, on the next few quarters, those ramp-ups are going to improve versus the current situation. There is only one direction it goes. It's not back and forward. It's only positive quarter-on-quarter. With the latest information we have, I think two of the new terminals in JFK will be at full potential in 2027. One, it will be in 2028, and Pudong, we are thinking also the full potential will be in 2028.
But again, I want to emphasize that 2027 for both operations will be better than 2026, but probably full potential only in 2028. The reasons on the spend per passenger growth, it's a combination, as always, of many things. Of course, you have some mix of passengers, but in general, that has been going negative more than positive. It's actions we have taken. The new commercial approaches, the increased digital acceleration of the change of what we put on the shops and the restaurants, all that is helping. But it's helping different things in different parts of the business. Better data, better focus on the right brands and the right pricing is helping, for example, the duty-free. Having faster QR codes for ordering is helping the food and beverage, because there, the speed of service might be equal or more important than the assortment.
In the convenience, the self-checkouts progressive implementation is also helping, just to name a few. Spend per passengers is always a combination of what you do internally and what is happening externally. I will need to speak for an hour to go with all the details of the different profile of customers by airport, et cetera. But I think it's progressing in the right direction. We always want more, but at least the direction is the right one on most of the operations. We still have a lot of homework to be done in specific locations, but I am satisfied with the direction of the progress. I would like to be more progress, but the direction is the right one. Thank you for your questions.
Thank you for the color. Very helpful.
The next question comes from Natasha Bonnet from Morgan Stanley. Please go ahead.
Hey, good afternoon. Thank you for taking my questions. It is more a follow-up on the previous questions, actually. Just could you give us some more color on the split of volume growth, of passenger growth and spend per passenger per region in Q3, and whether you have seen any changes in October and specifically on the spend per passenger. It was very helpful what you gave, but within that, are you seeing increased AURs? Are you seeing higher, sorry, basket sizes? My second question would be, could you provide maybe the basic contribution from the JFK ramp-up that you expect there being Q4 and 2027, and just how we should be thinking about modeling that going forward? Thank you.
The split between passenger and spend per passenger, I always say that if you take the midterm, it should be 2/3 passengers, 1/3 spend per passenger. That is a rule of thumb that works most of the time. Today, for example, if you look at the last quarter in North America, practically all the growth is motivated by spend per passenger because the passenger numbers is flattish or slightly negative. My rule of 2/3, 1/3 works when you have growth. When you do not have growth, maybe the passengers are zero, but you still have increase on the spend per passenger. I am not going to go through the details, what is basket pricing, et cetera, because I think that is maybe a little bit too sensitive and also very different from the different regions and the different parts of the world.
The behavior of a domestic passenger in the U.S. or a holidaymaker from the U.K. going to the south of Europe or a business traveler flying between London and Zurich, it is completely different and very diverse. In general, though, what we see, and sometimes I believe is not fully embedded in the mindset of the people, is you might or might not travel. But once you travel, you are spending a significant amount of money already on the flight ticket, on the air, on the hotel, et cetera. As the most important driver of our sales is either you are hungry or thirsty in the food and beverage, or you need something in the convenience, or mostly you want to reward yourself or take a gifting, all those reasons to buy remain.
Maybe you are shortening your holidays because the global situation or the affordability, it makes you not to be able to spend so much time on your holidays, but you still take one fly in and one fly out. That means you touch our portfolio at least two times. That is why I think the spend per passenger is more resilient, as long as you adapt to the tastes, to the changing needs of the passengers. That is what we have said in 2022, 2023, 2024, 2025. It is not a given. The underlying propensity to spend is there, but you need to adapt your assortment, your pricing, your brands, your way you give the service, your convenience over and over and over. But if you do that, the propensity to spend when people travel is higher than their propensity when they are back home.
On the last question, I do not think we are disclosing that, but I will divert the question to Yves on the JFK contribution in quarter four. Rebecca is here. She is telling me that we do not disclose that. But it will be more in quarter four than quarter three, and 2027 will be more than in 2026. I think that is what.
That is fair.
She tells me I can answer.
That is fair. Yes. We cannot add more to that, unfortunately.
Thank you, Natasha.
Thank you.
The next question comes from Joern Iffert from UBS. Please go ahead.
Thank you for taking my questions, and hello. Two questions, please. The first one is a little bit on the current top-line trends you have seen in the last quarter. Can you give us a little bit of split between the categories, how you see food and beverage versus cosmetics? If anything is declining, increasing, how is tobacco doing? The second question would be please on the full year numbers. To reach consensus, you need around 12% EBITDA growth year-over-year, and the margins need to improve to +20, 30 basis points year-over-year versus a -40 basis points in Q3. Can you give us some bridges here to help us, to reach the numbers? Thank you very much.
Yves will take the second one, Joern, and I will take the first one. Look, of course, the evolution of sales per category is different. Not only that, it is different also by region and it is also different by country. I think this is a trading update. It is probably the detail for all the categories on a longer term is more for a Capital Markets Day. To give you a few insights. What you see in the general industry is not different. If you take certain categories that are performing worse on the high street, we also reflect that, and vice versa. Beauty remains strong. There is certain weakness, but lower than the overall performance on the category of wine and spirits. Still, the wine and spirits in travel retail is more linked to gifting. It is not a bulk buying.
You buy few units, and still, there is a strong performance. But it is true that maybe not as strong as other categories. The performance between food and beverage and retail is very similar in country by country. If you have a soft macro in a certain country, that affects both. Of course, food and beverage is, in theory, a little bit more resilient because maybe you trade down on the gifting, but you still get a sandwich and a coffee. But in general, and I think that is what I like about what I am seeing is, it is pretty consistent across categories, across different business and different regions. But again, and I think that was very clear on the Capital Markets Day a couple of years ago when we showed the performance of the spend per passenger on the different categories and the different regions.
You might have categories or regions going down, even down for a few years, but we are still able to reach the overall expected numbers because the reasons to buy remain there. Maybe the tastes of what you give changes, but you still want to give something when you go back home. That is why this business, beyond if we do a better or worse job, beyond if our digital strategy works better or worse, the underlying trends are more on the positive side than on the negative side. On the second question ?
Yes, absolutely. Thank you, Joern, for the second question. There, as we have mentioned, we are providing a guidance, which is a midterm guidance. We cannot provide a guidance for a specific quarter or a specific year, and that also applies for the fourth quarter and into 2027. Look, having said that, there are two elements I want to mention. Number one, there are the external factors. We are seeing ahead of us the midterm elections. We are having the elections in Israel, and all of that has implications on the geopolitical situations over the next couple of months. Those are factors we cannot directly influence. However, we can manage the situation for Avolta. When you look at the evolution of the last two quarters, you can clearly see how we approach that.
As Xavi has mentioned before, when you look at the ramp-up of the operations, including JFK and also of Pudong, looking at the contribution of the M&As we did, including Okinawa, we have not disclosed the specifics and the financials there, but we also clearly mentioned our capital allocation policy that we only do M&A if they are accretive in regard to profitability and returns. You can assume that at some point they will contribute positively. Having all of that in mind, and also taking into account what Xavi has mentioned before in regarding to the outlook of the major evolution of the bigger projects which are ongoing, the situation should accelerate in regard to profitability and also in regard to cash flow generation. But look, we cannot be specific in regard of the fourth quarter and regard of the performance we expect for that quarter.
Very fair. Thank you for this. Just one follow-up on this, and Yves, if I may.
Sure.
The tobacco license in Pudong, is this something which will be supportive in Q4, or is this too early to call this out?
Currently we have not received the tobacco license for Pudong. The timing there is not something we can comment on. It would be pure speculation. So currently there is no insight. While we have very good discussions with the landlords, the regional government, and also with other external stakeholders, which are all very supportive in that regard, there is simply no process defined or visible. Again, we have discussed that in the past, it is the first time an international operator is getting a duty-free license in China, and that comes with certain administrative hurdles which need to be overcome, and that takes its time.
Thank you very much.
Thank you.
Thank you.
The next question comes from Jaafar Mestari from BNP Paribas. Please go ahead.
Hi. Good afternoon. I have three, if that's all right. Firstly, you state that the disruptions at JFK and at Pudong are now moderating. I guess I would have expected maybe to show in slightly better net contract contributions in your organic growth in Q3 versus H1, which is not the case. It's pretty stable, +0.2%. Does that mean it's still early days, or does that mean there is some minor portfolio exits going on at the same time? Then on JFK, I think you said previously that what you had signed at the time would normally add around 3% to North America revenue when ramped up. If I'm correct, you've had a couple of additional awards since. Is it useful to update that figure of that 3% incremental revenue for the region?
Lastly, I just wanted to understand, just conceptually, how do the margins improve in Asia-Pacific and at Pudong? Is it that the tobacco category is a key missing piece because itself it has fantastic margins? Is it just that revenue will ramp up and margins will improve naturally, and tobacco is very important in the overall revenue ramp up and that gets you to your target margins, please?
Thank you, Jaafar. On the first question, it is both. It is still moderated numbers, particularly Pudong is still small numbers in quarter three, and that will become bigger and bigger over the next few quarters. It is also true that the change of scope we report includes the wins, but also some selective exits. In general, I never give outlook on the change of scope because I always say that we want to keep the discipline on bidding, but of course, the change of scope, just because of some of the confirmed wins, it should be progressing on the positive side over the next five, six quarters. I do not think we are going to say anything else specific on the change of scope on North America beyond what we already said. Yes, there are a few wins, et cetera, but we are not going to update the number.
We never do that, and we only mention JFK because of its importance, and we confirm that when it is fully deployed, the numbers will be the ones that we disclose at that time. For your question on APAC margins, you are spot on on your second option. T obacco is an important category in the duty-free in China. When we have that category, because of all the fixed costs you have in the operation, the margins will naturally improve. It is a question of the lack of volume. When that volume comes, the margins, it will evolve on the positive side, not because it is higher margins or lower margins, and the rest is the lack of volume what is dragging the margins in Pudong right now. Thank you for the questions.
Thank you.
The next question comes from Laura Bucher from Octavian. Please, go ahead.
Hi. Good afternoon. Thank you for getting my questions. I have two. First one, I would like to understand the underlying margin development. You highlight the improving momentum, Q3 year-over-year contraction to 40 basis points from the 60 basis points in Q2. But in H1, you report the combined impact from Middle East, Pudong, JFK, at approximately 40 basis points, and you reported the same 40 basis points for the nine months. However, if I work backwards from these adjusted numbers, I would get to a Q3 margin underlying broadly flat, right? Implying that standalone Q3 headwinds actually moderated to around 25 basis points. First, I want your clarification if this calculation is correct, and if so, would it be fair to conclude that the narrowing reported actually reflects more the easing of the conflict rather than cost-cutting or underlying operating leverage? I will ask the next one after this one.
Thank you very much for the question, Laura. It was maybe a little bit fast. I am not sure if I fully got your calculation. Look, in essence, what we see is that the Middle East impact on the total group has moderated to a certain extent. That is on one hand side, thanks to the seasonality effect, but then on the other hand, also because of the normalization to a certain extent on the flight schedule to and from the Middle East, specifically also the Emirates, but also other locations which were affected in our case. That certainly helped. In regard to Pudong, as we have discussed before, the license is not there yet.
That has a significant impact on the profitability because of the share of tobacco and also the profitability of that category, and as a consequence, we are still suffering from those two effects, and that leads in the nine months to an EBITDA margin of 10.0% instead of the 10.4% we would have without those two effects.
Maybe if I make a suggestion, because a reconciliation of numbers on a call is probably very difficult. The performance has improved with and without these effects, and then maybe you talk to Rebecca, and you can go to the details of the reconciliation, because I think it will be very difficult to follow in the call, if that is okay to you.
Okay. No, that is fine. Maybe if I can ask, I know that you do not guide on Q4, but do you think, having the October numbers in, do you think it is realistic to expect at least a broadly flat reported margin in Q4 versus Q4 2025?
You are right on the first part of the question that we will not give a specific outlook for the quarter. Nice try. Thank you very much.
Okay. That is fine. My final question on Pudong. When the concession was awarded, were you aware those permits were not in place? If so, when did your base case assume that these licenses would be granted? Also, is there a contingency plan if approvals take significantly longer or maybe do not come? Can you still bring this concession to group-level returns without the tobacco category?
That was not expected, and it is nobody's fault per se. It is just a slight inconsistency on the legislation that was changed to allow a foreign company to participate in this business, and there were secondary type of regulation to be changed that was not changed on the proper speed. Yes, we have contingency plans. Of course, if this will not come or will come very late, we will have to resize the operation. The profitability could still be there over time, but on a smaller type of business. We are already working on making the best possible of this operation without tobacco. Our team there is introducing new categories, subcategories that were not in place. We are improving the merchandising, the retailing, the marketing.
We still believe it is a very interesting operation, but of course we are missing a part of business, and we are working on that. In the worst case, assuming tobacco will never come for whatever reason, the operation will still work. It will be smaller, it will not be ideal, but it will be still contributing positively to the group over time.
Okay. Thank you.
The next question comes from Jon Cox from Kepler Cheuvreux. Please go ahead.
Yes. Good afternoon or good morning to you guys, Xavier, Rebecca, Yves. A couple of questions, really, and coming back to this whole profitability, and you can see with some of the questions, just to help us a little bit. The gap from last year, the decline in margin has narrowed. Do you think Q4 will be close to, say, flat year-on-year in terms of the margin Q4, or is that still a bit optimistic given some of the things that you are talking about? The second part of that question is then to come to 2027, let us assume that you are back to the midterm model, 5%-7%, and the 20 basis points-40 basis points. Should we just think along the lines of the 20 basis points-40 basis points, or can we actually add, say, 20 basis points, thinking, "Well, the Middle East has gone. Pudong is slowly getting there.
It's not going to get there until 2028, but JFK is slowly getting there. Our modeling should be like, oh, 20 basis points base effect plus whatever you do on top, this 20 basis points- 40 basis points. This is sort of like the margin question. Then just on the second question is really on the top line, and you guys did a great job in Q3, along with the equity free cash flow, incidentally. Well done, Yves. But on the top line, clearly, the comps are easy for you next year in some cases, not always. I know you guys still have to work hard. But in terms of the airlines increasing the flights prices by 20% or whatever it may be, are you concerned about maybe the elasticities maybe having a short-term impact as those price rises are rolled out?
Maybe that impacts you at the start of the year, or are you still relatively confident that we can do, in a normal environment, 5%-7% next year, whatever may happen. Thank you.
We committed, Yves, myself with Rebecca, we will not answer the question of quarter for profitability. But, as all of you are going to ask, look, with the plans we have in place, and this is not an outlook or a guidance, it's just the way we are trying to improve the business, and we said we have achieved some progressive improvements, and we continuously cautiously optimistic. Of course, our target is to keep narrowing the gap with last year. I think, not to sound impolite, that's as far as we're going to go. If somebody asks again the same question, we're going to answer this. So we expect to keep narrowing, but we are not going to give specific numbers because it will be improper to do so. It's too short term, and there's still a lot of volatility. But we target to keep narrowing the gap.
We said, and we confirm once again, our midterm outlook, that's what it is, a midterm outlook, and we take it for that. I'm not going to go at this step if on top of that, we should do even better than the midterm outlook. The midterm outlook, it stays there. I think it's an aggressive one, and we feel comfortable with that on a midterm outlook. Comparables, easier, more complicated, et cetera. Yes, there are some tailwinds for us next year. There might be new headwinds that we don't know right now, but the target is the same. Thanks to our resilient network plus the flexible operating model, we still believe the midterm outlook should be there on the future. Of course, I worry about high inflation, cost of living, airfares, but a lot of that has already been happening in 2025 and 2026.
We have certain regions where the airfares have already increased more than 20% this year versus last year, and last year versus the prior year. That might have an effect, and we are seeing that. In some regions, the number of passengers is lower than we would like. But in others, they are still healthy. Again, the performance will not be as stable everywhere, but there are headwinds like there are tailwinds for next year. That is why the midterm outlook, we feel comfortable with that. Thank you, Jon, for your questions.
Thank you.
The next question comes from Luka Trnovsek from Berenberg. Please go ahead.
Hi, both. Thank you for taking my questions. Two from me. You gave the number that you expect organic growth of 4% in October. I was curious within that, what has happened to the Middle East headwind? Has that continued to improve from Q3, or should we think of it as more as being stable relative to Q3, given disruption in markets like Saudi Arabia? The second one, you mentioned in your opening remarks that you saw flattish passenger volumes in North America in Q3. That looks like a 3% difference to TSA passenger volumes, which are down 3%. I am wondering if that kind of 3% delta is due to your limited Spirit Airlines exposure. Thank you.
Thank you very much. October is stable, the Middle East effect. To be more precise, I think our passenger numbers, when I said flattish, if I recall properly, in our network was -0.92%, so slightly negative. But yes, the difference between the global country and our network depends on the locations, and Spirit is one of the effects that is more limited in our airports than in the overall country.
Perfect. Thank you very much.
Thank you.
The next question comes from Manuel Lang from Vontobel. Please go ahead.
Yeah. Good afternoon. I have a question on the cash conversion increase, and sorry if I'm targeting the midterm targets again, but this measure you have beaten in the past, always by a good margin, and just wondering now with this higher base and a more challenging environment, even excluding the ramp-ups, I feel this could be a talking point also with a direct implication then on the dividend. So just wanted to see what's the risk of you hitting a ceiling there and progression slowing in the near term. The second is actually connected to that. You have a direct and indirect impact on travel from the Middle East and geopolitics in general.
We don't know how this will develop going forward, but is this view changing or is it changing your view on short-term capital allocation, in particular, with regards to a potential share buyback renewal, for example, in a similar size or even higher? I guess that's a talking point for January and February then. Thank you.
Look, on the first one, two points to that. Number one, I need to go back to the guidance, unfortunately, and the outlook we have provided. I think there you have the element of the equity free cash flow conversion improvement, and that's basically what we can say to that. Point number two, having said that, look, you're absolutely right. We have overachieved the targets in reality. So the effective reported numbers, and the conversion improvement year-on-year were, in most of the years, above our own outlook. Now, is there a ceiling or not? We are not communicating that or discussing that. But having said that, what you obviously have in the cash flow statement are a couple of lines which tend to be rather sticky.
That includes the CapEx, the dividend to minorities based on our business model, the income tax paid, and also the interest based on the leverage. All of the lines we obviously try to improve, but there the possibility to improve them is maybe a little bit less than on the profitability and the single lines on the P&L. Yes, naturally, you may reach a certain level where it's becoming more complex and more difficult to improve in the same speed. But look, having said that, for the time being, our outlook remains the same, the medium-term outlook also in regard to cash flow conversion. In regard to capital allocation, frankly, I'm not sure if I fully understood the question.
Look, I think again, you were spot on on your second part. Yes, the discussion on the share buyback is for January when we see the full year, and the capital allocation is hierarchical. First we invest in the business, then on the deleverage, and then we have the dividend that is pre-established on 1/3 of the cash flow, and then the share buyback will be a combination of the others. Now is not the moment to talk about share buyback. That discussion will be taken with the full-year results.
Okay. Very clear. Thank you.
Thank you very much.
The next question comes from Tim Barrett from Deutsche Bank. Please go ahead.
Hi, everyone. Thank you. First question, just thinking 2027, you made the point about medium-term margin guidance, but as we stand here, it might be a good time to let us know anything on lumpy contract mobilizations for 2027. I just wondered if there was anything that you wanted to identify at this stage or indeed anything on any cost categories. The second question on the Middle East. I think you said the October impact was the same as Q3. Correct me if I am wrong in that. I just wondered about your exposure to Saudi, and apologies if I should know this, but is it broadly similar to your exposure elsewhere in the Middle East region? Thank you very much.
For 2027, we do not expect, internally speaking, anything special. On the Middle East, our exposure to Saudi is very limited. We have some food and beverage in some of the airports. The most important thing for us is all our employees in the region, but also in Saudi Arabia, are safe, and they were not affected by the developments of the last few weeks. If I just take Saudi, it is even less important than the Middle East as a whole.
Was that right about October, the same delta as Q3?
Yes. Similar.
Cool. Thank you.
Thank you.
The next question comes from Gian Marco Werro from ZKB. Please go ahead.
Yes. Good afternoon, everyone. Two questions from my side. First one on DFS Okinawa. There, the acquisition was closed. However, how big do you assess the potential for this year-end and also the next year, that you might take over additional business of DFS as they intend to exit travel retail? And what is, in general, your pipeline for small and midsize M&A globally, not only Asia? Then second one is more for the CFO and the direct wallet-to-wallet project that you had in Switzerland. What is your assessment over the next few years? How far do you think you can scale direct wallet-to-wallet payments within your payment mix? And what kind of impact could this have on credit card processing fees of Avolta and also net working capital? Just your key takeaways out of this project. Thank you.
On the first question, DFS basically has sold all major assets. We bought the one on Okinawa. Other competitors bought other locations in other places. I think on that front, whatever could be done, was done. We believe we got the best asset for us, complementary in a new market, in the right region, with the right contract duration, concession fees, et cetera. We are very satisfied with that. We keep on a constant basis exploring potential bolt-on M&As, but what we explore, to repeat it once more, are medium-size, small-size companies with good concession portfolios in the right locations, and we are very strict both on the valuation, because we do not need to do any of those acquisitions. If we do it is because we consider them clearly accretive.
On the financing, it will be financed by the balance sheet of the company, keeping always the target we have given on the total leverage. There are some of those opportunities, but we never given a specific target for those because they may or might not happen, as you know very well. Yves, on the last one.
On the second question, on the direct wallet-to-wallet payments we have piloted in Zurich, the idea there is, and we have already started with that, is to roll it out further in the organization. That is a technical aspect which is relatively easy to execute. We are prepared for that, and we will do that over the next quarters and years to come. Having said that, the impact from today's perspective is difficult to assess. When you look at the single transaction, what it obviously does is you reduce the cost of the transaction by 90%+, so that is very attractive. On the other hand, you get the cash immediately within seconds instead of days. That is also very attractive.
On the other hand, you depend on people and customers to use that mean of payment, and to have readily available the stablecoins in their wallets or a wallet which includes stablecoins. I think there we are currently still a little bit ahead of the curve, so this evolution has not yet happened in general in the populations, and we depend on that to happen. Look, for me, this is only one of the points. The other point is not the specific project, but it is the way we approach data, we approach technology, and we approach innovations in the front office and also in the back office of our operations.
And there I want to mention, for example, Avolta NEXT, the fact that we have a dedicated data management department, and the wallet-to-wallet payment is one single small aspect of how we think about the evolution going forward, of how we approach data technology and digitalization of the organization.
Very clear. Thank you.
The next question comes from Isacco Brambilla from Mediobanca. Please go ahead.
Hi. Good afternoon, everybody. Thanks for taking my questions. I have two. The first one is on October performance. Just wondering if there is any additional color by region you feel comfortable in sharing. Reason for asking is that Europe, for instance, should have faced a very demanding comparison base, if I'm not mistaken, October. So just wondering if there is any major difference in trends compared to Q3. Second question is on Asia-Pacific. Is there any specific driver of Q3 strength, or should we take the CHF 280 million quarterly revenue base as a sort of reliable starting point even for the coming quarters?
October trends is not even a full close month, but what we are seeing is very similar to quarter three. Also, if I go to quarter three, July, August, and September had different behavior, and then I go two weeks, et cetera. But there is nothing particularly material in October that should be mentioned. The second question, the sound was not very good. I understood the reasons of the strong growth in Asia-Pacific. That is a combination of a strong like-for-like. We have good operations performing well, but also, of course, the change of scope and the new operations, as indicated earlier in this call. The two are strong and the general trends are positive in Asia-Pacific for our portfolio. Thank you for the question.
Thanks. Thanks, Xavi, and apologies for the line.
We have a follow-up question from Jaafar Mestari from BNP Paribas. Please go ahead.
Hi, thank you for taking that last one, please. Just a very quick question on the cash flow generation in Q3. You state there are initiatives in place to protect cash flows. Should we consider any of those to be temporary in nature and likely to revert into next year? We do not have a full cash flow statement, of course, but have you worked harder than you would normally on net working capital and any optimization that by definition is not going to stay permanently?
There is nothing unusual in the cash flow or any actions. It is the underlying improvements of the business which also are reflected with the underlying optimization, which led to the additional profitability, which are then also as a consequence reflected on the cash flow statement. But there is nothing else we have done or are doing to safeguard the cash flow. It is really optimizing the business with all our commercial initiatives.
Thank you very much.
We now have a written question from Ajay Nandal from Citi, who asks: U.S. demand. We are seeing very strong results from U.S. hotel companies with REVPAR, guidance upgrade on strong demand for business and leisure travelers, et cetera. Are you seeing something similar in your business? If not, where is the disconnect? Second question, EMEA. Per my calculation, there was still a negative net new concession contribution for the segment of Q3. How should we think about Q4?
Well, I think the key point on the U.S. demand is the number of passengers, and I think TSA corrected by our network, and I think we discussed that. We are not seeing a strong number of passengers in North America. But despite that, we are performing quite well on the total growth, thanks to the increase on the spend per passenger. I think the change of scope per quarter per region is not meaningful because there are a lot of things entering and exiting. What we expect is a positive effect in 2026 in the overall group, and as I said, probably an acceleration, looking at the latest wins and acceleration in 2027. Thank you very much for your two questions.
We have a follow-up question from Jon Cox from Kepler Cheuvreux. Please, go ahead.
Yeah, just a quick one on the equity free cash flow again. Just in terms of Q4. I am just wondering, in terms of the phasing, Q3 looked really good. Was there anything in the phasing we should think about in terms of maybe something you got some benefit from Q4, or anything like that we have to think about for our numbers for Q4 2026? Thank you.
Look, there was nothing specific in Q3. It is basically what I have commented before. It is the underlying improvement of the business, which has improved, and that led to the cash flow of Q3. The weakness you see on the top line and also on the profitability in regarding to Pudong and also in regard to the ramp-up of JFK, do not have a meaningful impact on the cash flow generation because they are, in that regard, not relevant enough. We mitigate over the P&L and also the cash flow statement a lot of that weakness, and that is almost natural. But then on top of that, the improvement of the underlying business help. In Q4, you know typically the cash flow tends to be neutral. That is normal in the business. It is typical seasonality.
Actually, I was going to ask you, Q4, you can be slightly negative in Q4 with all the improvements you have done. Now, you are talking more about a neutral figure in Q4, maybe slightly positive?
Look, again, we don't give guidance for this fourth quarter this year. We have a medium-term guidance. What I say is that if you look at the history, if you look at the typical seasonality, you will see that typically over the last years, the fourth quarter cash flow was slightly negative to neutral. That's what we have seen in the past, and that's a typical seasonality. There's nothing unusual this year in that regard.
Great. Thank you.
Ladies and gentlemen.
More questions?
That was the last question. I would now like to turn the conference back over to Xavier Rossinyol for any closing remarks.
Well, first of all, thank you very much for your attention and your interest and your smart questions. Just to reassure that we continue working to deliver on our strategy. Second, to thank every single employee and team member of Avolta. If we are where we are, it is thanks to your efforts, and the efforts have been increasingly demanding with all what is happening in the world. So I highly appreciate all of those efforts. As a last comment, we still have the last opportunity before we close this call to get member of Club Avolta, if you are not. You just need to scan the code that you have on the screen. Thank you very much again. Have a nice day, and travel a lot.
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