Ladies and gentlemen, welcome to the Avolta first quarter 2020 trading update conference call and live webcast. I am Alice, 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. 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. For operator assistance, please press star and zero. 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.
Thank you, operator. Good afternoon, and thank you for participating in this call for the first quarter 2020 trading update. Presenting the update here today are myself, Julián Díaz, CEO, and Yves Gerster, CFO. As in previous calls, we are going to use the presentation disclosed this morning on our website. Please, let's move to slide number three. We have here the agenda. I will first review our business performance in the period, then Yves will present the initiatives recently launched to support our financial structure. To conclude, I will return for a trading update on our performance in April and conclusions. Before starting with the update, I would also like to remind you that as of this year, for the Q1 and Q3 performance, Dufry will only provide a trading update and disclose full financial results for the half and full year periods.
This approach had already been communicated in the Q3 results presentation 2019. Moving to slide number five, I would like to highlight the most important topics of the first quarter 2020. Our turnover in the first three months of 2020 amounts to CHF 1.4 billion, which based on constant currencies, is a decline of 20.8% on the previous year. To manage the current crisis, Dufry has immediately set up a dedicated committee at the level of the global executive committee in January, as I commented on in the previous call, and implemented a comprehensive action plan to drive sales, reduce fixed costs, and safeguard liquidity. I will discuss the plan in more detail later during the presentation. Moreover, I want to highlight the important financial measures we have been implementing during the past few weeks.
In the discussion with the banks, we have been looking at several possible approaches to strengthen the financial structure and the liquidity position, while at the same time reducing as much as possible dilution of our existing shareholders and implemented solutions which could be executed in short term. The overall result of these negotiations and initiatives is that first, we have signed agreement with the banks to waive covenants until June 2021, an increase of financing lines by CHF 425 million. Second, including the share placement, the new convertible bond, and cash available, we have now reached a pro forma liquidity position of CHF 1.6 billion. Combined with the comprehensive cost-cutting initiatives implemented in parallel, this allows us to sustain a prolonged period of distress until the travel resumes and obviously, we can reach the net cash generation cycle.
Looking forward, we are ready to resume operation as soon the situation allows, and we have already developed a reopening plan on a base of location by location, which are individually considered based on profitability scenarios by operation. This allows us to act flexibly and adapt the business to the local opportunities as soon as the travel restrictions are lifted. In this context, we expect to see, obviously, first development in domestic flights, as I commented on in previous calls, followed by continental flights, and in the middle term, for example, the second half probably of 2020, intercontinental flights. If we move to slide number six, we can see that our turnover, as I mentioned, reached CHF 1.4 billion in Q1, equal to -20.8% in constant currencies.
Looking at the business evolution of the first quarter, we see that it has been characterized by a completely different development and change in business performance in each month. In January, the first part of January, we started with accelerated organic growth. During the second part of January and due to the crisis starting in Asia, we reached in the full month of January a performance of +0.8%, even obviously was positive. In February, we saw sales starting to slow down, and we reached -7%. Still, the main impact was from Asia and international destinations with Asian customers. The organic growth for the first two months reached -2.3%. In March, we saw an increased number of travel restrictions being implemented, especially during the second part of March, and that's drastically reducing passenger flows at airports.
This resulted in a sales decline for the month of March close to 56%. Organic growth was in the quarter, -21.4%. The impact comes from the vast majority from the like-for-like performance and the respective decline in passenger numbers across all divisions. We have seen many airports being closed or shops having to close because of government regulations, regarding especially bans to international arrivals, to cancels or limitations of movement of people. If we move to page seven, we can see more details of the growth components, as I mentioned before, with the main impact of the like-for-like. With respect to the change in the scope, you can see the positive impact generated by the two acquisitions executed in 2019, including the new cooperation in Moscow and Brookstone shops across several airports in the United States.
Let's move to slide number eight and look at the FX evolution on the first quarter of 2020, which had a negative impact of -2.8% in total sales. This shows a further acceleration as compared to the fourth quarter 2019 and reflects the ongoing appreciation of the Swiss franc versus our main currencies, USD -2.9%, EUR -5.6%, and GBP -4.6%. If we move to slide nine, we can see how the current crisis impacted each division, with Asia-Pacific and Middle East -30%. As I said, first division started to be impacted in January. North America -24%, being exposed the most, followed by Europe -20% and Central South America -16.3%. With respect to Central and South America, which is the least impacted during Q1, we need to consider that their travel restrictions started later than in other parts of the world. Let's move to slide 10.
Moving on to the division Europe and Africa, organic growth in this division reached -20.3% in the period. Performance was negative across most locations in the division, and particularly in Italy, Switzerland, U.K., and Spain, with negative double-digit growth. Turkey posted a positive performance in the quarter, supported by a very good passenger traffic in January and February, but declining significantly in March due to the travel restrictions. The performance in Africa was stable, with the growth in the first two months of the year being offset by the slowdown seen in March. If we move to slide number 11, we can see that over the full quarter, the division Asia-Pacific and Middle East was the division impacted for the longest time, resulting in an organic growth of -30.2%. Within the division, Asia-Pacific was the most impacted region, with a negative performance during the whole quarter.
In Eastern Europe, Australia, and the Middle East, most operations post negative organic growth. As we move forward, as shown on slide 12, in North America, organic growth was -24% in the period, with a slowdown in both segments, but especially in duty free, which is exposed to international and Chinese customers. Here we also saw a temporary closing of a high number of shops, especially during the second part of March. If we move to page 13, Central America and South America performance was less impacted among all divisions, with organic growth coming in at -16.3%. Here, the most important were the restrictions implemented in March. Performance in Central America and the Caribbean was impacted to a lesser extent and reported a single-digit negative organic growth, while the impact in South America was more pronounced.
Moving on to slide 14, you will see the details of the new openings and the refurbishments executed in the first quarter. These openings and refurbishments happened, most of them, during January and February. The new openings, for a total of 2,800 sq m, are well distributed across all divisions, with eight new shops in the U.S., five stores in Brazil, two in Perth, Australia, and one each in Finland and Mexico. In the chart below, we see that with respect to the total refurbished retail space of 5,500 sq m, the majority of renovations were related to Stansted Airport in the U.K. and the Guayaquil operation in Ecuador, with 2,600 and 1,100 sq m respectively. Starting in March, we have stopped further refurbishments in order to reduce CapEx in the short term, but we will resume to renew shops as soon as the overall situation normalizes.
If we move to slide 15, we have also continued to sign new contracts, expanding our footprint with 13,800 square meters of shops to be opened in 2020 and in 2021. The largest shop here is the duty paid Circle operation at Zurich Airport, which will open during Q4 of this year. With respect to expansion, the chart at the bottom with 36,000 square meters in the current pipeline shows that the travel retail industry continues to propose new opportunities, and we can benefit from this overall growth trend. If we move to page 16. In this slide, I would like to give you an update on our action plan to manage the crisis.
As you know, already in January, we have established a special committee at the level of the group executive committee, which has implemented a comprehensive set of operational initiatives to drive sales, save fixed costs, and safeguard liquidity. This committee is supported by 13 dedicated teams, centralized, driving, and supervising the execution of all the initiatives. Important to note is that we have based the action plan on different scenarios, considering different levels of full-year sales declines from 40% to 70%, and allowing to flexibly adapt measures to the business performance. The scenarios include the following cost reduction and saving levels. In a decline of business by 40% to 70%, the concession-related expenses would amount between 32.5% and 38%, expressed as a percentage over turnover in a pre-IFRS 16 situation.
Personnel expenses to be reduced by 20%-35% on the previous year, and other expenses to be reduced by 26%-38% on the previous year. Let me take you through the initiatives in more detail. In order to reduce as much as possible the fixed costs, we have adapted the operating structure of the company to reflect the current situation in the business environment and to leverage as much as possible our flexible cost structure. Looking at the cost reduction measures in detail, the main initiatives are as follows. The reorganization of the personnel costs at the level, including participating in government schemes, implementation of voluntary salary reduction schemes involving both management and employees. I must say that we have received great support and response from all our teams, shown by a high adherence to the scheme.
Furthermore, we established a hire freeze, including a limitation to appoint temporary staff, and a reduction of personnel expenses in headquarters and divisions and country offices. With our landlords, we have currently a lot of discussions to renegotiate concession fees. In general, we have received positive feedback and support by the majority of the landlords, and some airports have already granted reliefs. Here, it is important to note that first, for the vast majority of our concessions, we pay a variable fee. Second, that for a large part of the contracts which contain a fixed component, we have received consent from the landlord to waive the MAG, or are still in discussions to reduce rent and concession.
If airports have closed operations on their own or if local legislation does not allow shops to be open, our understanding is that for this period, we are exempt for paying rent. We are reducing as much as possible all operating expenses and monitor every single payment at group level with a dedicated team. Looking now at the net working capital and CapEx initiatives, we have also implemented several initiatives which are well supervised by a dedicated team at group level. Among these initiatives, we are negotiating with suppliers for a higher flexibility in payment terms and accelerated promotions for reducing volume. We presently reduced CapEx to zero, and we will continue to tightly manage them going forward. That for 2020, the overall CapEx level will be considerably lower as compared to the previous year.
In total, the mentioned initiatives at net working capital and CapEx level, total cash savings of around CHF 160 million in the full year 2020. In order to maximize sales in the locations still open and also during this recovery phase, we have set up several initiatives, including global promotions and focusing the assortment of offering core products, categories, and exclusivities to drive sales and volumes, and allowing to increase conversion and maximize sales per customer. I will now hand over to Yves for the presentation of the detailed initiatives implemented to support our financial structure and the liquidity position. Yves.
Thank you, Julián. Good morning or good afternoon, everyone, depending from where you are listening to the call. On slide 18, I want to take you through the individual initiatives which we have implemented in the past few weeks and which strongly support our financial structure and liquidity position. First, we have received commitments by a group of relationship banks for an additional 12-month committed credit facility of approximately CHF 425 million, with two six-month extensions. This new facility ranks pari passu with the existing syndicated facility. This new facility replaced existing uncommitted facilities. The agreement is subject to final documentation, which is currently being finalized. Second, we have successfully executed a private placement to institutional investors by means of an accelerated book building procedure of five million shares from our existing authorized share capital and 500,000 treasury shares.
The placement has generated gross proceeds of CHF 151.3 million. Worth mentioning here is that this share placement has also been supported by members of the board of directors and the management with a meaningful amount. Third, we have issued a senior unsecured convertible bond. Due to strong demand, the initial principal amount of CHF 300 million has been increased by CHF 50 million to a total size of CHF 350 million. The convertible bond carries a coupon of 1% payable semi-annually. The conversion price is CHF 33, corresponding to a conversion premium of 20% over the reference share price. Unless previously converted, redeemed, or repurchased and canceled, the convertible bond will be redeemed at par at maturity on May 4th, 2023. Moving on to the next slide.
In this, it is important to note that our bank consortium, consisting of 25 international banks, has approved our request to waive the current financial covenant until and including June 2021, and to establish an increased threshold of net debt by adjusted operating cash flow of 5.0 instead of the former 4.5 for the covenant testing in September and December 2021. This agreement is signed and has become effective. If we look now at the proposals to be made to the upcoming ordinary general meeting on May 18th, the board of directors reconsidered its initial proposal and decided to cancel the 2020 dividend payment, thus avoiding a short-term cash outflow of close to CHF 200 million.
The board of directors proposed to the upcoming ordinary general meeting to increase the conditional share capital to CHF 63.5 million, divided into 12.7 million registered Dufry shares with a nominal value of CHF 5 to enable the physical settlement of the convertible bonds upon conversion. The equity measures presented today, as well as the new credit facility, the cancellation of the dividend, and the other operational cost-cutting measures being implemented, will significantly strengthen Dufry capital base and liquidity position. The initiatives are designed to help us to continue operations until the next cash generation cycle in 2021, even under a severe scenario, with sales reducing by 40%-70% on a full year basis, while also providing us with enough flexibility to react to business opportunities arising in the context of the current situation.
This concludes my presentation, and I pass the floor back to Julián.
Thank you, Yves. I will try now summarize in three blocks. One is regarding operations, the other one is financial structure, the other one is communication. Regarding the first part, operations. I think in the first quarter 2020, the turn number has been dramatically impacted by the crisis. We have reached CHF 1.4 billion, equal to a -20.8% in constant currencies as compared with last year, and -23.6% in reported growth. Looking here at the trends, we have seen sales levels still reducing in the month of April as expected, as more locations were impacted in April. Periodic sales were at -94.1%. As of January, we have implemented a comprehensive action plan to drive sales, reduce fixed costs, and safeguard our liquidity position.
The action plan considers possible sales decline scenarios for the full year of between 40%-70% of sales, which, depending on the scenario, will result in a different cost cutting, depending on the type of cost, from concession fees to personal expenses and general expenses. With respect to the net working capital and CapEx initiatives, we target savings of CHF 160 million. Furthermore, in view of the reopening, we have already developed the respective plans for each location. Obviously, based in a gradual recovery. In this case, the plans are based in the profitability of each single location to drive sales and volumes in parallels with the recovery of the different operations. In the second block is in terms of enhance of financial structure.
I think in the positive side, I want to highlight again the successful implementation of several financial initiatives executed in a short period of time. New bank facilities, covenant holiday, capital increase, and convertible bond. The new liquidity allows us to sustain and even prolong an impact period to obviously reach the next cash generating cycle in the second or third quarter 2021. The last part is in terms of communication. We have already communicated that we have withdrawn our guidance for 2020 business year, as the business environment is very dynamic and visibility is still very low. When the business will reinitiate and how it's going to reinitiate is still uncertain. What we have seen is a significant number of new scheduled flights for June and especially July.
From my side and from the company side, this completes our presentation, and we can now move on to the Q&A session. Thank you very much.
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 telephones. You will hear a tone to confirm that you entered a queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to unmute only hands that will ask any questions. Anyone who has a question may press star and one at this time. The first question comes from the line of Jon Cox, Deutsche Bank. Please go ahead.
Yeah. Good afternoon, guys. Jon Cox, Kepler Cheuvreux. I have two questions for you. The first one is really, you talk about this pro forma cash and liquidity you have, of CHF 1.6 billion as of the end of March, which obviously includes a convertible and all the new facilities, et cetera. Can you tell us what that figure was at the end of April, as you've kindly given us your 94% sales decline in April? The second question, just on the sort of recovery or whatever may happen. Julián, I think you've said before that your worst-case scenario is for 2019 sort of business or passengers to be back to where they were, at the latest in 2022.
In the meantime, you've seen the ACI and IATA and Boeing and Airbus and quite a few airplane operators actually saying the figure is more likely to come back maybe 2024 or even 2025. I just wonder if you've thought about that at all, or if you've changed your opinion on when we may be back to those 2019 levels. Thank you.
Yeah. Regarding the cash position, as I told you the last time, in April, we were expecting between CHF 200 million, CHF 220 million, I think it was CHF 250 million cash burn. It's already confirmed. You can deduct from the CHF 1.6 million, the CHF 200 million that I mentioned at that time. It was confirmed. This is just for confirming the first thing. The second is a bit more, obviously, difficult to answer because there are many different scenarios now. I think if you look at, I don't want to mention specific, obviously, institutions, if you look at, for example, ACI, sorry, IATA. I think this is obviously one of the most relevant ones. They are talking about -57% decrease in income per passenger for the airlines in 2020. We are looking at worst case scenario -70%.
In terms of the gradual recovery, when I said at that time, and it's based on the information that we have also collected, it still is very short, the information. In any case, that the full recovery of this -70% scenario will be along 2022. I don't have any other information. If you think that there are more available information, we can share information, but still the visibility is very short. I sustain that with -70% scenario, talking about sales, basing a significant number of dropping passengers. Today, I think what is on the available information is between 50%-60% drop in number of passengers in 2020. I don't change anything. I prefer to say that the information that we have collected says that in 2022, the number of passengers could be recovered. It could be 2024, could be 2025.
I don't have a clue, but I don't know what the rationale is to say 2022, 2023 or 2024 today. It's still very early.
Thanks for that. I wonder if I can have another go. You said the last time around, you think the cash burn should get down to around CHF 70 million from May as you sort of really tighten the screw on all of the cash outflows. Can you just confirm that figure if sales are down?
No, I didn't say that, Jon. Maybe I explained myself wrongly. You asked me the question the last time, what is the burn case scenario? For me, cash burn case scenario is zero sales. With zero sales, I maintain the same thing, CHF 70 million-CHF 75 million. When I think somebody asked me the question about May, I say in May, the cash out scenario, not the cash burn scenario. The cash out scenario was half done in April. It's around CHF 90 million-CHF 95 million. In a standard way, with no sales, in let's say May or June or July scenario, I maintain the same thing, CHF 70 million-CHF 75 million. In May will be due to previous, obviously commitments of payments or cash outs during the first quarter, will be around half of April. From now on, if there are no sales, the cash burn scenario is CHF 70-CHF 75.
Okay. Thank you very much.
The next question comes from the line of Jaafar Mestari with Exane BNP Paribas. Please go ahead. Mr. Mestari, your line is open. You may ask your question.
Hi. Good afternoon, everyone. Just two questions from me, please. The first one is, could you please just repeat your operating cost assumptions? You were speaking fairly fast. I think I heard you say in your minus 40% revenue scenario, your assumption is that rents would represent, I heard 38% of revenue.
Oh, 32.5%. If for 40% scenario, it's 32.5%. In minus 70% scenario, it's 38%.
Thank you. That's to be compared to the pre-IFRS number.
Pre-IFRS, yes.
of something like 28.
If I explain you this in IFRS 16, we are not going to end. I think it's easier. I thought that was easier to compare pre-IFRS 16 for the reason I mentioned.
Fair. I think the reference number is 28%, so obviously it's close enough, but just to be very clear, you don't assume Fully variable rents. You do assume
No.
That the rents will-
We are assuming, depending on the location, because there are rents that are not MAG, are related with the sq m and things like that. In most of the cases, let's talk about the minus 70%. Minus 70%, the 38% is considering a vast majority of the MAG in relief.
Okay. Some MAG relief, but not 100% MAG relief.
I don't know. I don't remember now, but most of them. You can count on most of them, because today we have most of the negotiation processes are very advanced or really today closed down, and we are losing the first month.
My second question is on your reopening scenarios. Do you have flexibility to choose your own schedule of reopenings, or are you pretty much tied and committed to the schedules that the airports will decide? As an example, could you choose to delay a certain reopening if the airport said, "We go live tomorrow morning," but you think that realistically, the expected footfall is still too low. Are you absolutely confident that it's better to have some sales, even if it's 10%, 20%, and you're confident that paying sales teams, paying support teams, paying rent is worth it, even if there's only a small recovery?
It's also difficult to answer the question. What we have is a plan that has identified based in profitability, location by location, meaning shop by shop, what should be the scenario that we would like to reopen. There is not one single negotiation process open today with anybody in the world yet in order to discuss how the reopening will happen. I think the first thing probably will be airports, especially, with better understanding about how the passengers evolution during the next months is going to happen. As soon as this is a challenge. We need to obviously meet with each one of the landlords and discuss what the reopening plan should be.
What we have done is in this line, what we have identified location by location, based in profitability, what the shops are that we should open in a case of reopening of an airport. Then depending on the number of passengers and depending on the airport interest, we don't control obviously the second part is today if you ask me the question. Do you know if tomorrow you will be obliged to open all the shops in one single location? I don't have a clue. I don't know, because depending, obviously, on the landlord or airport authority. The plan is basically taking into consideration what I have mentioned.
Okay. Thank you very much.
The next question comes from the line of Michael Bone with Sonova. Please go ahead.
Hi. A few questions from me. It would be very useful to have, I know these are exceptional times, and I know that you'd agreed not to file quarterly financials, but the reality is it's very hard to model the business without being able to see what's happening to it on a quarterly basis. Is there any chance you could release Q1 financials so that at least we could do our own math, and try and gain further insight into the various business trends?
The answer is no, we cannot. We disclosed first that we were not having the intention because first of all, this business was very volatile due to the seasonality, and that was the main reason at that time. If there is volatility now, it's settled because obviously we don't have any business, and the reality of the business is completely different than in the past. We have not yet, obviously, decide what is the best way of approaching the business from the accounting point of view. We are discussing with auditors and with other people, and we don't want to, in any case, disclose our information that is not completely audited and solid. I cannot answer the question in a yes because it's not possible.
Okay. The second question is with respect to the various line items in your P&L and what you commented on, because it was rather rapid around concessions, personnel reduction, and other line items under the 40% and 70% decline in business.
Yeah. Sorry, I couldn't understand the question.
Could you repeat?
I don't understand.
Do you expect personnel-
No. Let me explain. Obviously, I mentioned the lines of the P&L that are related with the operation. I think below today is easier because nothing has changed. In fact, below the operational performance, what you have is the typical lines of the P&L.
Financial results.
Financial results. That's all. This is something that nothing changed so far.
No. What I'm asking you is how much, for example, your concession rates will come down by, how much, for example, your personnel costs will come down by under the 40 and 70.
I think I explained it. In a scenario -40%, concession fee, we are expecting will be 32.5%. In any scenario -70%, the concession fee percentage on turnover, we expect is 38%. Personnel expenses. In any scenario -40% sale is -20% personnel expenses. In any scenario -70% is a -35% drop or lower personnel expenses. In other expenses, if -26% is -40% scenario and -38% is a -70% scenario. Sorry, because probably I didn't explain it properly.
No, that's okay. Thank you very much.
The next question comes from the line of Rebecca McClellan with Santander. Please go ahead.
Yeah. Good afternoon, Julian and Yves. I hope you're all well. I've had most of my questions answered, but just is there any sort of situation of where lockdown has been easing that you can sort of talk us through in terms of what you're seeing, domestic traffic, or is there anything that you can give us to sort of understand what's going on the ground?
Hello, Rebecca. Yes.
Hi.
I think during the last two weeks, what we have seen, still is very low increase in the U.S. I think especially in the West Coast, we have seen an increase compared with sales, if you compare the sales with previous weeks. Okay? This is probably the best example. The other divisions still in May are at the same level.
Right. What you're saying is on the West Coast, the sales contractions are just of a lesser extent to what they were perhaps in April, or?
Yeah. If you compare the sales in the last two weeks in the U.S., let's talk about the U.S.
Mainly it's because the origin of the West Coast. If you compare the sales in the U.S., the last two weeks with the sales one month ago, in order to compare with a period of time where it really was very hard, the sales are increasing in percentage high, but still very low.
Right. That's obviously just domestic travel, right?
It's domestic.
Yes.
In the U.S. and in Canada it's international, because obviously when you say U.S., we are talking about the division.
Yeah.
In terms of U.S., the increase in Canada has been, again, very low numbers, but increase in duty-free in Canada, especially Vancouver, and the increase in the domestic traffic in the U.S.
Right. Okay. I think Ryanair this morning announced that they were going to resume 50% of their flight schedules or something as of July. Do you get visibility on what these plans are and can you talk about that at all in terms of what the airlines are planning?
The detail is very difficult, Rebecca. What we have seen is a lot more scheduled flights for June and July. A lot more.
Right.
The numbers, what I heard, because I called some of the airlines directly, is they want to move between 15% and 25% of the passengers in this way around.
Right. In this case, you're just open sort of a minimum necessary stores to accommodate that sort of passenger flow, right?
Yeah.
I suppose.
This is the plan we have. It's a minimum requirement in terms of profitability per shop.
Okay. All right. Okay. Thank you.
Thank you.
The next question comes from the line of Gian-Marco Werro with Mediobanca. Please go ahead.
Hi, everybody. From my side, only a quick question also on the net working capital and the CapEx improvements that you mentioned. The CHF 160 million, in the press release, I just try to understand there a little bit more the background behind it. I can understand that this is a rough estimate for the current full year. However, if I just look at your inventories by the end of 2019, which was over CHF 1 billion on the books, can we expect that, especially now at the current quarter, you are significantly reducing net working capital by stronger amounts than what you mentioned for the full year?
Okay. The net working capital, when you don't have sales and you buy merchandise and certain time in percentage, first of all, it's not going to be an issue because you cannot compare. In terms of value, I think the target that we have in terms of net working capital is reduce the net working capital between CHF 10 million and CHF 20 million. This is something that we announced probably three calls ago or four calls ago. The difference with the CHF 160 million is basically stop in CapEx. This stop in CapEx is this CHF 140 million. This stop in CapEx will depend on the situation of the reopening, because if we start with a significant level of activity, we will invest more.
The basic minimum CapEx that we will invest this year, including January and February and middle of March, that were invested before, obviously, the crisis, is around CHF 69 million plus that. The total CapEx that we are expecting in a maximum crisis scenario this year, that the CHF 70 million will be around CHF 80 million, CHF 85 million. This is the maximum scenario. There is the gap to the CHF 140 million, depending how the company will evolve in terms of sales. In terms of inventory, it's obvious that we are not selling anything now, and that we are trying, especially ridding of older stock and obsolescence products, around CHF 20 million. This is the reason of the drop of the CHF 20 million. Not because we are selling more or less, we are not selling anything now.
It's because we are ridding of merchandise what is considered obsolete or merchandise that is close to expiration date. This is the CHF 20 million improvement. In these two lines, not because we are selling more or less. If you want to model this part, I would say in terms of CapEx, I would put in, obviously, the company's reinitiating during the next 30 or 60 days. I will consider CHF 140 million saving compared with previous year. In terms of the net working capital, in equal terms, the target to be the same in value compared with previous year. In this case, what we are trying is to save CHF 20 million due to obsolescence and two expedition days.
Okay, thank you. This means that you are, at the moment, just trying to sell back non-durable goods to suppliers or even to other retail channels.
Yes.
With all the durable goods, you keep them in the stock?
Yes. The good products are in the stores because we want to sell as soon as shops are open.
Okay. Thank you, and all the best.
Thank you.
The next question comes from the line of Neill Keaney with CreditSights. Please go ahead.
Hi, guys. Thank you for your time. Just a couple of technical questions from me. You mentioned, with regard to the covenant waiver, that you've secured that until June 2021, and then renegotiated to a 5 times threshold for September and December. Can we assume therefore that the covenant test will take place quarterly going forward? I believe it was semi-annual prior to this. Secondly, can you confirm if a breach of that covenant would be just a draw stop event, or would that be an event of default, which you would need to get cured or waived under your senior facilities agreement?
To the first one, the testing has been done on the quarterly basis already before, so that's nothing new. We had quarterly covenant testing, and we, going forward, will have quarterly covenant testing once the covenant holiday is over. To the second one, a breach of the covenant would result in an event of default.
Okay, thank you for clarifying that. I appreciate it.
The next question comes from David Holmes, Bank of America. Please go ahead.
Hi. Good afternoon, guys. Just a quick question on leases. You mentioned you were in a fairly advanced stage of negotiations with partners. I just wonder if you can comment at this stage whether you expect that to result in any deferrals in minimum guarantee payments to the coming years, and we should expect that to be a drag on cash.
Well, I don't expect this type of result for the negotiation process because, as I said, majority of the partners are aligned with the idea that we need to solve this in order to create a sustainable business. If we have 1,400 contracts or I don't know how many, and a small part of these contracts are related to a possible MAC. I mentioned the last time, it's around 20%-25% of the contracts who are related with different approaches in terms of MAC. Maybe we are not successful 100%. I think in these percentages that I provide, we are considering these type of possibilities.
The next question comes from Kelly Goncalves on BlueBay. Please go ahead.
Hi. Thank you for taking my questions. I have two quick clarifications. Can you confirm that the cash burn from June onward is CHF 70 million-CHF 75 million maximum if you have zero sales? Can you elaborate on how we should be thinking of working capital movement this year and next year across your three cases? If that's possible. Thank you.
Okay. Regarding the cash burn in zero sales scenario, I confirm it. It will be CHF 70, CHF 75, obviously, depending on the circumstances, but yes, I confirm. Regarding the net working capital, I think for 2020, what I suggest is that in terms of no percentage, forget now the percentage because everything is going to be totally different. You have to follow up. The net working capital amount minus CHF 20 million. Amount meaning, if similar amount that we had at the beginning of the crisis will be alone 2020, this is the intention, minus CHF 20 million. In 2021, I don't have the information here, but we will discuss it with you in another call.
Thank you.
The next question comes from the line of Edouard Aubin from Morgan Stanley. Please go ahead.
Yeah. Good afternoon, guys. Just two or three questions from me. The first one is, Julián, you were kind enough to give your assumptions in terms of employee costs, in terms of under the different scenarios. Could you just please elaborate a little bit in terms of what you're expecting in terms of prolonging and government support? Because in some of your main markets, some governments, like in the U.K., have announced that the support would be cut quite materially over the next few weeks, few months. That's question number one. The second question is on the cash burn. Sorry to come back on that again. You gave us the CHF 70-75 in a zero sale scenario. Sorry to ask the question again. Actually, could the cash burn increase actually further in a scenario where the airports reopen but your sales are very low?
What could be your maximum potential cash burn? If you could answer that question, that would be super helpful. Last question is on the U.K. and Gatwick. As I'm sure you know, it's quite likely to lose BA, Virgin, and Norwegian, so it's a very important airport for you. How material, should Gatwick lose some of these airlines, how material could it be for you, for Avolta? Thank you.
Okay. Sorry, I think.
Next government support, how long they last?
Edouard, you know that there are different approaches depending on the governments. I cannot answer the question with one number. If you ask me about the U.K., we have one, obviously, deadline. In Spain, it's another one. There are hundreds of program supports. I think all these program supports are related with the crisis and also with the tourism and/or aviation. I think the crisis, understood as obviously lockdowns and things similar to that, is not the only supportive decision that obviously established the support by the government. I don't know. There are hundreds. I cannot tell you specifically one number. Regarding the cash burn, I repeat it's CHF 70, CHF 75, because this is the zero sales scenario.
If you tell me 10%, 20% of sales, 50% of sales, what I said at the time that we announced the financial initiatives is that with minus 70% scenario in sales, we were in the position to continue until the next cash cycle with the initiatives started based in the financing increase, financing facility increase. This is what I mentioned at that time, and I confirm now. It's depending, Edouard. I cannot tell you, 20%, 50% is different, obviously. The company is preparing a minus 70% scenario, and with the financing increase, lines increase that we have agreed with the banks to continue until the next, let's say, first, I think it's second quarter. Next year will be second quarter because it's going to be April, May. Regarding the U.K. and Gatwick, I don't know what to say.
We are obviously following up all our partners, and we would prefer that our partners will maintain and sustain the same level of business, but I don't have any comments to that. I think this is a situation that Gatwick is probably discussing with British Airways and with other airlines.
Okay. Thank you.
The next question comes on the line of Stefan Alb with Sierra Global. Please go ahead.
Thank you for taking the questions. Hope all of you are well. My question is related to basically, I guess Aena. Clearly, you mentioned 20% to 25% of negotiations are with airports where you have some kind of MAG. Is it possible that even a very difficult sort of partner as Aena could actually maybe give you some leeway? You will have to pay the full MAG in January, and so we will see the cash burn actually deferred in 2020, but it will show up in the beginning of 2021? That's the first question. The second question I have, clearly with these times, e-commerce would be nice to have some way to liquidize some of the inventory.
Is there any initiative that you're pursuing with respect to either setting up your own e-commerce abilities or through partners to try to basically liquefy somewhat the inventory, get rid of stuff that you can't send back?
Official declaration by the minister in Spain and also official declaration by AENA during the last conference call. This is my reference point. From Dufry, we don't have any comment. Regarding e-commerce, it's obvious that we cannot sell duty free products, not because the suppliers are not allowing us. It's because, as you know, we are bonded areas. As bonded warehouses, we cannot sell merchandise online. What we can do is pre-reserve. Pre-reserve when you are traveling. I think this is a business we cannot do. If you are asking me, can you sell duty free products in duty free online? We cannot do it legally.
I see. Is there a way that you can sell some product that you think maybe is not expired, but basically is no longer relevant? For example, if it's spring collection of something, clearly that's not going to be in demand, you can perhaps sell it on another platform, even though you are clearing out your inventory. You could do a write-off then basically get some of the money back.
If we agree with the suppliers, yes.
Okay. Thank you.
Not at all. Thank you very much.
The next question comes from the line of Alexander Kretzler with Barclays. Please go ahead.
Hello. Thanks for having the question. Just one question actually for the cash burn in April and May. I think on the very beginning of the Q&A where you mentioned it, I just didn't get it actually, it was headline. I have noted down that you had in April, CHF 20 million-CHF 215 million of cash burn. Does that include actually your May figure or does this come on top of that?
Look, just to clarify again, what we said before is cash burn in April, what we stated last time is CHF 200 to CHF 215, not CHF 50. One five.
215 million. What is confirmed is around CHF 200 million. That's for April. For May, what we have said before, what Julián mentioned before is about half of April. It's probably shy below CHF 100 million.
Okay.
That's one message. The other message is, in a no-sale scenario, CHF 70 million-CHF 75 million per month.
Understood. Thank you.
The next question comes from the line of Aman Mahal from PGIM. Please go ahead.
Hi there, guys. I have a few questions. The first is, you've obviously modeled out various scenarios for the year between the -40% and -70% stress. At what sales decline do you reach free cash flow breakeven?
I don't understand the question. It's difficult to say. Look, it really depends on how you draft the scenario. In a scenario where we lose 40% of sales, we already see a certain negative element of cash flow for the year.
Okay. Do you have a sense what the breakeven decline is then? Are we talking -30%?
Look, I cannot give you a percentage, and I believe it probably would also be misleading. Look, it really depends on how and where you draw the line, how you make the geographical split, et cetera. I think it's pretty difficult to give a precise percentage. It's also not the way we looked at our models. We looked at the models of -40% to -70% at this stage, and we were not calculating a breakeven model in that sense.
Okay. That's obviously kind of your stress assumptions for 2020. What are your kind of assumptions for obviously when you size the size of your liquidity facility? How are you thinking about 2021 in terms of the range of scenarios there?
In 2021, what we are expecting is obviously. In the first scenario, the 40% that we comment on, what we were expecting is a late recovery in 2020, meaning November, December, and/or early 2021. In minus 50%, we were talking about a recovery during the middle to late 2021. Minus 70%, we were talking about a full recovery along 2020. Those are the three bases that we have featured.
Great. Just one final question. I guess you talked about it a little bit in terms of the April and May cash burn. Just thinking about working capital, for the full year, you see a CHF 20 million improvement year-on-year. Where do you see peak working capital year-on-year in terms of cash burn?
Look, it's obviously depending on the scenario and the underlying assumptions, but you can assume that it's in the first half of 2020. Basically what you can assume there is a certain shift because we started to stop purchasing at some moment in Q1. Obviously with already being partially in the crisis, the peak in that sense is obviously in the first half, and then the effect should or is expected to fade out over time.
Okay. That's great. Thank you very much, guys.
The next question comes from the line of Julien Martin with Aberdeen Standard. Please go ahead.
Yeah. Hi, good afternoon. Just coming back on the working capital question. I think you have a positive net working capital position in that, your inventories and receivables are exceeding quite largely your payables. I think in most people's mind, if you have a business that's generating half of the sales it used to do, you should be able to release some cash from that working capital. It's a bit difficult for at least me to understand why you would want to have a similar value of
working capital going into 2021 when your business is going to be half of what it is. You're only expecting a mild recovery in 2021, only going into full speed in 2022. My assumption would be you would be selling most inventories as you can in 2020, not rebuilding any real stock, receivable from trade would unwind as well. You should be seeing some cash inflow from that. I'm struggling to understand why you would not see that. Thank you.
Sorry, I didn't say so. What I said is regarding 2021, is that I didn't have here the information and I don't remember exactly all the facts. In terms of 2020 is what I answered. In terms of 2020, we would like to maintain the same level and value of the net working capital minus the CHF 20 million that we want to improve. Regarding 2021, theoretically, this is correct, we need to obviously answer with the detailed information. Theoretically, it's correct, think about one issue here. You have, for certain level of sales, you need to buy merchandise. This is, today, uncertain what is the type of merchandise, where we need to buy. We have, obviously, numbers for 2021, I think it's less concrete and less specific.
In terms of 2021, I didn't answer the question because I said we don't have the information here. If there is obviously interest, Renzo in the Investor Relations department could follow up the questions. The answer was 2020.
Okay. If you exclude the product mix that customers want, I'm not sure what your scenario entails in terms of recovery, in terms of sales, but you would be going into 2021 overstocked, right, if you had the same amount of working capital going into 2020, going into 2021?
That depends on, obviously, on the inventory that you sell. Not all the inventory has the same rotation in days. The most important thing is what is the inventory that this company is going to need in terms, not the values, obviously the amounts. It's in terms of the quality and the type of product. We don't know. Nobody knows yet. In previous crisis, and I mentioned this before, the most accelerated or what were the first recovered was the categories tobacco, spirits, and personal cosmetics. The other categories, including fashion, luxury, and luxury products in general, including fashion watches, et cetera, was obviously more slowing down. This is an important part because this part of the inventory is also seasonal. For calculating in 2021, the sales, independently of the volume of sales, that it will be, in any case, below 2019.
As I said, the recovery is expected in 2022. You need to really project how these different product lines are going to be impacted due to the crisis. If we are talking about tobacco, spirits, and personal cosmetics, we have an advantage because the investment in net working capital in these product lines is lower than in the other families, the other product lines. We don't know yet exactly. In any case, for financial information, we have a number. Obviously, we have projected and will be communicated by Renzo if you have interest.
Okay. Just on the CapEx, you said about 140 CapEx cuts. just for our modeling purposes, CHF 100 million seems a reliable part to think of for CapEx this year?
Imagine that the situation is not recovering. What I said is, if the situation is not recovering, we are going to invest around CHF 65 million-CHF 69 million from the moment the crisis started to the end of the year, that we've added to what we have already invested, will be around CHF 80 million-CHF 85 million. If the situation is normalizing in the sense that we are having, obviously, sales, not at the level that probably we would expect, the CapEx compared with previous year, we have today a possible saving of CHF 140 million as a projection. In a very low case scenario, you have to model around CHF 80 million-CHF 85 million in CapEx. In a normal circumstances, it's last year's CapEx minus CHF 140. All depends on the circumstances. If the situation is like today, it's CHF 80 million total.
The next question comes from the line of Linda Pasquini with Reuters. Please go ahead.
Hello. I just wanted to ask, since you mentioned in March about reducing personnel, if you're planning further reductions in staff and if we could have an indicative number about how many positions have been cut?
No, I don't provide this information at all. This is confidential totally, and it's obviously one of the most relevant information for our employees.
Okay. Thank you very much.
The next question comes from Farida Movlayeva from Network Markets. Please go ahead.
Hi. Thanks for the call. I just have a small, just one question, and it's regarding your concession portfolio. I want to know if you plan to exit some of your existing contracts. For example, 17% of your contracts like one to two years of life remaining. I thought it would be an opportunity to perhaps exit them without paying any penalties. Yeah, just your thoughts around that. Thanks.
Well, today, we are not planning to exit any contract, because if the contract has one or two years, it's the right time for starting a renegotiation for extending the contract. In principle, the answer is no, but obviously the reality then, if there is not a renegotiation, may be. Today, the very clear answer is no. We are not planning to rid off of any of the concessions today.
Okay, thanks.
The next question comes from Iva Horcikova, Napier Park Global Capital. Please go ahead.
Julián, Yves, good afternoon, and thank you for taking my question. Could you please comment on what you see in terms of rebound in Asia? I know that your presence there is not huge, but what do you see there in terms of increase in passengers? That would be really helpful. Thanks.
Yeah. No, we don't have any positive news from Asia. The only thing positive is probably in the domestic business we have in China. We have seen a slight increase, but not significant at the level to say anything. In the rest of the locations, still the situation is similar than in April.
Yep. Thank you.
We have a follow-up question from Mr. Jon Cox from Deutsche Bank. Please go ahead.
Yeah. Hi, I just have a couple of points of clarification. Just on the, you mentioned the personnel costs. Did you say there would be 20% of last year, or did you say down 20% from last year if you are down 40% for the year as a whole?
Yeah. It's down, Jon.
Down 20, and then down 35 if it was.
Yeah
down 70. Same for the other, down to 26 and then down 14.
Yeah. It's down. Yeah.
Yeah, down. Whereas the concession fee was a share of last.
Percentage on turnover.
Okay. You also mentioned, I thought you were saying if your sales continue down around 70%, you can last, and you're talking about the next cashflow cycle, you can last until Q2 next year. Is that what you were saying?
Exactly right.
That's your assumption.
Exactly that.
Yeah. Okay. Great. Thank you.
Next question comes from the line of Guillaume Ravic with Balna. Please go ahead.
Hi, good afternoon. I have a question regarding the rescue loans from government. I think last call you mentioned that you were potentially eligible for up to CHF 180 million from such government rescue loans or grants through all the subsidiaries combined. Can you please update on where you are on this? If you have applied for some of them, do the amounts reflect your estimates of up to CHF 180 million? Thank you.
Thank you very much for the question. What we have at this stage, we looked into a number of opportunities. We currently have around CHF 60 million-CHF 65 million, which we have agreed with governments. As you have rightly pointed out, the potential is probably in the area of CHF 180 million-CHF 200 million. Look again, the liquidity we have been able to safeguard over the last two weeks, the CHF 1.6 billion in total, i.e. new facilities and the existing ones we have on the balance sheet, is from our perspective, sufficient to navigate through the current crisis. If there are additional opportunities, we obviously look into that, but we don't depend on it.
We have a follow-up question from Mr. Stefan Alb with Sierra. Please go ahead. Mr. Alb, your line is open. You may ask your question.
Yeah, sorry about that. Thank you for taking the question again. Just a quick clarification, because maybe I'm just too thick-headed to understand. The personnel costs will be 20% down in absolute terms, in the 40% scenario or 20% of sales?
No. Sorry. Maybe this is a misunderstanding here. I said, in the scenario -40%, personal expenses to be reduced, is what I said, by 20%. In scenario -70%, -35%, is what I said. I am repeating again. Maybe there is a misunderstanding.
I appreciate that. It must have been my misunderstanding.
No.
There are some inventories that are caught on ships, from your new cruise line initiative. Those are probably not quite in the same bonded inventory level, or are they? Could you be able to liquefy those? What benefit could you get from those? Like the question before, I'm also thinking that perhaps there is a way that you can maybe have the opportunity to have sort of a better mix at the end of 2020 in terms of products that you clearly more skewed towards tobacco, liquor, et cetera, which will sell better in 2021, and perhaps an absolute level decline in value. There could be also some deflation in prices in the different products as well that could help you.
Okay. I think in terms of the cruise lines, the inventory is obviously a combination. It's blended. There is a significant part that is related with the ships, is related with branded merchandise. This is merchandise that will be there. As you probably know, these cruise lines are planning to reinitiate the different lines in around August. This is official information. I don't know specifics yet. Regarding the rest of the inventory, I already mentioned, is we are reading off the inventory that first of all, we identify based on obsolescence and based on expiration, and this is already in the process. For the rest of the inventory, we prefer to keep the inventory until the shops reopen, because, as you know, these type of companies always invest in net working capital. Why?
Obviously the delivery times and the distribution is not like in the domestic market. We need to be sure that we are not losing one single opportunity of sales because we are wholesaling merchandise X, Y, or whatever. The strategy today is clear. We prefer, as far obviously as the shops will reopen, we prefer to keep the inventory for selling the inventory in the shops with higher margin and obviously using the opportunity of selling merchandise when the customers will go through. For the rest, I think it's another business. We are a retail company.
Thank you. That question that was before about whether zero sales or maybe 20% or 30% level of sales, is it fair to say that once sales go up, your cash burn actually should decrease? Can you confirm that? If we have some kind of positive sales or it depends on the geographies.
Okay. No, not depending on the geographies. In general, when the sales will go up, depending on basically how much the sales will go up, there are different lines of the P&L that will be positively impacted, especially the lines with still fixed costs, as you know, because obviously the percentage of increase at the time will be important. If it's 5%, 10%, is, in my view, more dangerous than if we are talking about 40%, 50% increase. It's a completely different scenario. What I get here is the cash burn scenario that has been planned and agreed with the different departments is, number one, based in a zero sales scenario. Number two is the 3 scenarios that we mentioned before, from 40%-70%, including the 50% in the middle. In all these scenarios, the situation with the financing structure that we have implemented is solved.
If it's 10% or 20%, I cannot tell you now. I don't have a clue, but the reality is that 40%, 50%, and 70% minus in sales are covered completely. The other one is the cash burn zero sales scenario is already covered. We'll see, and we will adapt the company to the reality of the situation. This is one of the things that I mentioned before, especially during the first call when we were talking about the crisis in Asia at that time. We said one thing that is still very valid. The most important thing now is flexibility and adapt the organization to the reality of the business. This reality of the business is still uncertain, and to say one thing specific is very difficult. We work with scenarios.
If tomorrow, the day after tomorrow, we see that the sales are minus 40, minus 50, minus 70, we have a plan. If it's minus 40, we have another plan. This is a completely different story, depending on the circumstances. What I want to say is flexibility, implementation of a flexible cost structure.
Let's say one of the worst scenario of the three, the cash burn might be higher. You have the flexibility to take additional measures at that point to try to basically stay within your guardrails of the 70-75. You will do more.
This is exactly the point.
Got it. Thank you.
The next question is a follow-up from Miss Rebecca McClellan with Santander. Please go ahead, madam.
Yeah. My question has sort of been sort of addressed, but just in terms of your scenarios, I'm assuming you've incorporated all of the sort of government support or potential government support that is possible for the business, right?
If the government support is positive for the business, the answer is yes.
No, in your current scenarios, that they incorporate all of the possible support that you could get, right?
In 2020, yes.
Okay, thanks.
We have another follow-up coming from Mr. Alexander Kretzler with Barclays. Please go ahead.
Yeah. Hi, thanks. Just one quick question, actually, on the state aid or the state loans. You said CHF 60 million-CHF 65 million were already agreed. Does that mean you're actually drawing or basically using these facilities, or you still think that the liquidity at the current level is sufficient to reach your goal of second quarter 2021?
Look, as I've mentioned before, the facilities we have in place, i.e., the CHF 1.6 billion, is sufficient for the group. Nevertheless, we have those CHF 60, 65 million equivalent of government-supported facilities. In the cases where we have them, we have also drawn under those facilities. That's the way they work, actually. They don't work as an RCF, which you just have committed, but you don't draw under it.
Understood. How do they rank, actually, versus your other credit facilities?
Look, I cannot go into the details of that.
Okay. Understood. Thanks.
The last question for today comes from the line of Mr. Edouard Aubin with Morgan Stanley. Please go ahead.
Hi, Julian. Just one follow-up from me, sorry, on the capital structure. You went into this crisis with quite a bit of debt on your balance sheet, I guess, CHF 3 billion. Going forward, if we look at the medium to long term, what kind of optimal capital structure do you envision? Do you see lower leverage than, again, the CHF 3 billion you had previously? Obviously, would that mean that we should not expect any dividend payment for the next three, four, five years out?
I think Edouard, from our side, I think the dividend payment has been suspended due to the circumstances. If the circumstances improve, I think the dividend payment will be reinitiated, number one. Number two, regarding the leverage, this company has been in a certain level of leverage, depending on acquisitions, as you know. Obviously, due to the circumstances, to mention on acquisitions now is probably not the best case scenario as a consequence. What I think the company will plan for the next two years, and still is depending on the visibility, is to try to reduce the leverage. The level of three and a half times as we said obviously in the previous life, when we were talking about a different scenario. I can maintain the same thing.
Okay. Thank you.
That was the last question. I'd now like to turn the conference back over to Mr. Díaz for any closing remarks.
Thank you very much, and thank you for all the participants and the questions. Thank you.
Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.