Ladies and gentlemen, welcome to the Dufry's first quarter 2019 results presentation conference call and live webcast. I am Sandra, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode, and the conference is being recorded. 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, sir.
Thank you, operator. Good afternoon, and thank you for participating in Q1 results call. Presenting the results here today are myself, Julián Díaz, CEO, and Yves Gerster, for the first time, new CFO. As in previous calls, we are going to use the presentation disclosed today on our website. Let's move to slide number three. You can see the topics for today's call. I will first review our operations performance in the prelude. Yves will first present the implications of IFRS 16 implementation done as of 1st of January this year, and also present the KPIs which we have aligned with IFRS 16, and that which we'll be using going forward. He will then continue with the presentation of Q1 2019 financials. To conclude, I will return for trading update and our performance so far in 2019. Let's continue with slide number five.
As a preliminary remark to this first quarter results, which show a positive start into the 2019 business year and an organic growth of 2%, I would like to remind that we have been implemented for the first time this year the IFRS 16 accounting standard. Which impacts both our balance sheet and P&L, and thus reduces the comparability with the related previous year periods. However, it is very important to note that IFRS 16 will not impact our economic performance and will not change our strategy and the way we run our business. Continuing with slide number six, with the highlights Q1. Dufry delivered in 2019 first quarter a turnover growth of 3.4%, reaching CHF 1,882,000,000. To which organic growth contributed 2% despite the shift of Easter holidays in the second quarter. Excluding Brazil and South America, organic growth increased by 5.6%.
We also continued to expand our gross profit margin, which grew by 40 basis points, reaching 60.3% compared with 59.9% previous year. The following two KPIs are new and have been introduced in the context of the first-time implementation of IFRS 16 as 1st of January this year. Thus, not comparable to previous years, the impact of IFRS 16 implementation and the details of the new KPIs adopted will be explained by our CFO, Yves Gerster. The first new KPI is adjusted operating profit, which reached CHF 46 million in the first quarter 2019. The second is adjusted net profit, which amounted to CHF -8.9 million. As you know, Dufry's business has always had a pronounced seasonality for cash and profit generation during Q1. In the first quarter 2019, our adjusted operating free cash flow reached CHF 159.3 million, compared with CHF 164.7 million in 2019.
The equity free cash flow came at CHF -123 million compared with CHF 103 million in 2018. As mentioned, the first and fourth quarter are the less important for cash generation. Let's move now to slide seven. Moving on to the operational developments, we continued to grow our retail space by opening 9,100 sq m of retail space across 86 shops, which include new shop openings and space increases in existing locations. We are also continuing to execute on our refurbishment plan with the renewal of 14,400 sq m across 27 locations. At the end of March, we have already a portfolio of 18,800 of signed contracts to be opened along 2019 and beginning 2020. I would like also to mention the new organization, which we announced in mid-January this year.
Everything is now in place, we created the new division, Europe and Africa, by combining the former divisions, U.K. and Central Europe, with Southern Europe and Africa. This will allow us to accelerate our custom focus and the commercial decision process in order to be closer to the market by consolidating the collaboration of two institutions in line of managing the commercial side, the global platforms, and the commercial departments in the divisions. I would also like to confirm the continuation of the dividend policy in this first Q1. Our shareholders have approved the dividend payment of CHF 4 per share at the AGM held last week. As compared with last year, the dividend has increased by 6.7%. If we move now to slide eight, we will comment on the organic growth.
We have continued to improve in positive territory with the turnaround trend seen in the fourth quarter 2018. Organic growth reached 2%, saw a positive development of all divisions, except for South America, where the situation in Brazil and Argentina remains challenging. Especially, we are talking about countries where Argentinians and Brazilians are the important ones in South America. Excluding South America, the group organic growth reached 5.6% increase. As you can see in the bottom chart, Europe and Africa have further improved by doubling their performance as compared with last year. Asia, Pacific, and Middle East have continued with a double-digit growth on top of the double-digit growth last year, despite, obviously, the high comparable. As mentioned, South America remains challenging, both because the unchanged economic environment and the high comparable that this region reached last year.
If we move to slide nine, we will comment division by division. Organic growth in division Europe and Africa improved by 2.4% which doubles the performance in Q1 2019. This has been driven by, first, a positive contribution from the U.K., in general, also by its new cruise business. Second, by an improvement seen in Spain, where we have implemented several commercial initiatives announced during 2018. Third, by the good performance in several other countries, such as Turkey, Italy, and most of African operations. In slide number 10, division Asia Pacific and Middle East. We are reporting an ongoing high double-digit growth of 17.3% by this, obviously, duty-free new concessions, MTR, that I announced a couple of times last year, and also the new duty-free shop at Perth Airport. Within this division, Eastern Europe reported a single-digit organic growth.
The Middle East saw a slightly lower performance due to the high comparables of the previous year, while Asia as a whole showed a good performance with positive contribution coming also from Cambodia, China, and Indonesia, besides, obviously, the aforementioned performance of Hong Kong and Australia. In page, slide number 11, North America delivered a resilient performance which improved to 5.3% as compared with the fourth quarter 2018, but stayed below the Q1 2018, where we have seen a high single-digit performance. The main factor here were the ongoing healthy performance of the duty-paid operations, while we saw some of the duty-free locations being impacted by the lower spend of Chinese passengers, especially in Canada. If we move to slide 12, Central and South America.
The overall performance of the division has remained at the same level of fourth quarter 2018, reporting a negative organic growth of -10.8%, is still impacted by both the high comparables of the previous year and the unchanged economic environment. On the opposite, Central America has both global performance, mainly supported by our operations in Mexico and the Caribbean, as well by the ongoing high double-digit growth of the cruise business supported by the start of operations on board new ships. In page number 13, I will now look the passenger growth. Both chart and table continue to show a very positive picture. Indeed, the global performance in passenger numbers in the first quarter 2019 has continued with a healthy increase of 5.4%. As we can see from the outlook chart on the right, also expectation continue at levels above 5% for the next two years.
With respect to openings and closings, in slide number 14. In the first quarter 2019, we have continued with our expansion of retail space by opening a total of 9,100 sq m of new retail space. The main highlights of the openings were four stores in Casablanca, covering 430 sq m, a new shop in Helsinki, 310 sq m, three new stores in China with a total of 330 sq m, 17 shops in Russia with 960 sq m of retail space, 14 shops across several locations in North America and a total surface of 1,890 sq m. Finally, 17 new stores on board these new ships with a shop space of 1,230 sq m.
Looking at the refurbishments, we have been quite active on the renovation of our operations as we have been renovating some important stores with considerable sizes in the first quarter 2019 for a total of 14,400 sq m. The most important one are listed here. These two areas of discussion, growth retail space open and shops refurbished, are really the basic key pillars for developing organic growth. If we move to page 15, talking about new space signed. Among the new space signed until March 2019, we have a portfolio of 18,800 sq m to be opened during 2019 and 2020. The most relevant ones are as follow.
Further expansion in our cruise division with operation in existing new ships, a new store in St. Petersburg with over 900 sq m, 18 shops in Boston totaling 1,100 sq m, seven stores in Indianapolis with 600 sq m, and three new stores in Nassau across 500 sq m. Moreover, we have an important project pipeline, 35,500 sq m. We are currently, obviously, negotiating or participating in tenders. These potential opportunities are well distributed across several divisions such Europe and Africa, Asia Pacific, Middle East, and Central and South America. If we move to page 16, resolutions of the AGM. On slide 16, I would also like to give you a summary of some of the main resolutions approved by shareholders meeting on annual general meeting in 2019. First, our shareholders have approved the cancellation of 3,300 and 4,541 shares, both in the share buyback program.
Please note that this cancellation has a total accretive effect of 6.5%. Second, the AGM has approved the payment of a dividend of CHF 4, increased from CHF 3.75 last year. The increase of 6.7% has been decided based on the strong equity free cash flow we have generated in 2019. It was also an important decision, the appointment of a new member of the board, Mr. Luis Maroto, CEO in Amadeus, that will contribute a significant knowhow about the travel market and the IT developed in the travel market over the past years by Amadeus. I will now pass the floor to our CFO, Yves Gerster, for his comments on the implementation of IFRS 16 and the financial statements Q1 2019.
Thank you, Julián. Good afternoon. Before we get started, let me quickly introduce myself. I have been with Dufry for 13 years now in different positions within finance, most recently as Director of Treasury and Shared Service Centers. I have taken over the CFO position from Andreas Schneider on April 1st, and I'm very pleased to be with you here today. Having said this, let's move on to slide 18 and to introduction of IFRS 16. As you know, we adopted IFRS 16 in January 2019. The new standard brings profound changes to our financials, especially as part of the leases are now capitalized. As a consequence of the changes, we have adopted the set of KPIs we use to measure the performance of the business. It is important to note, the new IFRS standard has no economic impact on Dufry.
This is evidenced, especially in our cash flow statement, which remains largely unchanged. If we move to slide 19, here a summary of the main impacts on our financials. The starting point is the balance sheet, where a lease liability and the right-of-use assets are recognized. In the case of Dufry, only the fixed minimum annual guarantees are capitalized. In the income statement, we see the consequence of this. Concession fees, which formerly were part of selling expenses, are now reflected in two separate lines. Lease expenses, which contain the variable component of the concession expenses and depreciation of right-of-use assets. As an additional effect, there is an interest charge on the lease liability. To the cash flow, as already mentioned, this remains largely unchanged. On slide 20, a summary of some very important aspects you need to keep in mind.
First, the amounts capitalized on the balance sheet do not say anything about the quality or profitability of the concession portfolio. Contracts with very different economics and risk profile may have a similar impact on the balance sheet. Dufry is seeking for long-term contracts. The second very important point is the so-called front-loading effect. Due to the lease interest charge, net earnings are affected negatively at the beginning of a contract and positively in the second half. Third important point. Over time, the balance sheet positions as well as the P&L will develop quite dynamically. Renewals and new contracts, which contain fixed lease components, will lead to additional capitalizations. We will see later, the amended KPIs were designed to deal with this issue. Last but not least, it's not too much to repeat that the new standard has no economic impact on the group.
Let's move now to slide 21 and explore our KPIs. Mentioned, we align our KPIs with IFRS 16. An example, EBITDA is no longer a meaningful KPI anymore, it doesn't include all concession-related expenses. On the next slide, I will guide you through the amended and new KPIs on a step-by-step basis. On slide 22, we see our first KPI, adjusted operating profit. Our adjusted EBIT, you prefer. The only adjustment here is the PPA amortization. This should be a concept known to you we always added this back to our profit. We like this KPI as it provides for a good operating profit metric using the current elements of the income statement. Moving to slide number 23. Next is adjusted net profit and adjusted earnings per share.
We have done some additional adjustments due to IFRS 16, however, still very close to the former KPI, cash EPS. Moving to the slide 24. The cash flow KPIs. Mentioned, the impact of IFRS 16 on the cash flow is very small. The cash flow became by far the best way to measure the performance of the business. This is a new KPI. Mentioned before, in the way IFRS 16 works, part of the concession payments are now reported as cash flow from financing activities. By adding lease payments as shown in the table on the right, we have a very good view on the cash generation by operation. The beauty about our adjusted operating cash flow. It is a good proxy to the former EBITDA. We will see that also later when we're talking about the financial covenants.
Finally on slide 25, we have the equity-free cash flow. Here, we have no changes IFRS 16 has no impact on it. This concludes the KPI that we'll be using going forward. Let's move on to slide 26. IFRS 16 also resulted in a change in our covenant calculation. Adjusted operating cash flow replaces EBITDA as a denominator. Net debt continues to be defined the old way, i.e., not considering these liabilities. With the new calculation, the covenant increased slightly, which is reflected on the bottom right chart. We increased the threshold from four times to 4.5 times to maintain the headroom under the covenant. Again, this is purely due to the calculation and does not reflect the change in risk profile of the company. That was a quick introduction of IFRS 16 and our KPIs.
As you know, tomorrow we will be holding our capital markets day in Zurich, when I will go through that in more details. If you're not able to attend the event, the presentation will be available, and feel free to reach out to the IR team to schedule a call. The team is delighted to answer any questions you may have to IFRS 16, the new KPIs, and obviously also to any other questions or comments you may have. Let's move now directly to slide 28 to discuss the Q1 financials. Julián already commented on organic growth, so let me just emphasize two messages here. First, we are pleased with the continued improvement of organic growth in the first quarter, despite the shift of Easter to April this year. Secondly, that we achieved this despite the challenging conditions in South America.
Looking at the currencies, challenging environment in some of the key currencies, especially due to the Argentine pesos and Brazilian real. On slide 29, we have the FX impact on turnover. We had a positive FX impact in the first quarter, a result of the strengthening of the US dollar versus the Swiss franc. As you can see on the bottom left chart, the impact would have been more positive if it wasn't for the euro and pound sterling going in the other direction. Let's now move to the income statement on slide 30. There are a number of things to understand in this slide. Let me walk you through that step by step. The first element I want to focus is the second last column called comparable.
This is very important because given we have not restated 2018 figures, the Q1 2018 reported and Q1 2019 reported are not directly comparable for the most part. For this reason, we have pro forma adjusted Q1 2018 in order to provide you with a better comparison with Q1 2019. The adjustments provide you with an indication of the magnitude of IFRS 16 would have on Q1 2018. Again, it's important to keep in mind, it's just a pro forma calculation. Before going into details on the P&L, let me repeat again. The best way to measure the performance of the company for the first quarter is to look at the cash flow. Having said this, we can now go into the most important changes. I will use the reference we have in the last column called note to guide you through.
Note one, this reflects one of the biggest changes. Only concessions or part of concessions which are not capitalized are shown here as expense in Q1 2019 and Q1 2018 pro forma. On top, as we are bridging from the former selling expense line, some expenses related to concessions, not related to concessions, like credit card fees or packaging, et cetera, were moved to the line called other expenses. Moving to Note two, other expenses has only a small impact from IFRS 16. The biggest impact in the line is from reclassifications. On top of the portion that came from selling expenses, the former other operational result line is reflected here. Note three, here we show the new account depreciation of right-of-use. Note four, this reflects the new interest charge on the lease liability.
Finally, note five and six are the consequence of all the items above in both taxes and minorities. Moving on to slide 31. Let's focus now on the two income statement KPIs we will use going forward to measure the performance of the business. As I already explained the concept before, let me go directly to the analysis. As you can see in the top table, adjusted operating profit reached CHF 46 million from CHF 80 million the year before. Q1 2018 is just as an indicative pro forma calculation, so take it with a pinch of salt. On the positive side, gross profit expanded by CHF 45.7 million as a combination of turnover growth and gross margin expansions. On the other hand, personal expenses increased by close to CHF 23 million.
Most of the changes can be attributable to our North American business, where we see from the increase in minimum wages and additionally this quarter, a one-off expense related to changes in the management team. Expenses also increased in lease expenses and depreciation of right-of-use. As explained before, these two line will vary dynamically going forward as a result of new contracts and renewals. Moving to the table below, where we show the adjusted net profit and the adjusted earnings per share. Here, we have most of the items relatively in line with last year, so I will not comment on those. The only point I would like to highlight is the accretive effect of the share buyback program executed last year. If we go now to slide 32, where we have a summary of the cash flow. Let me repeat once more because it's really important.
Going forward, the cash flow is the best way to measure the performance of the business. Besides the main KPI you see on top, it is important to remind you about the seasonality of the business. adjusted operating cash flow is very seasonable, with Q1 being the lower point. This seasonality is also reflected in the equity cash flow, with Q1 and Q4 typically being negative. Just to clarify once more, equity free cash flow is expected to be in the range of CHF 350 million-CHF 400 million. This is also valid for this year. For the medium term, we expect equity free cash flow to grow in line with the top line. Let's move now to slide 33. Here we have our typical cash flow summary, as you are used to see it in our presentation. The only difference here is the second line, lease payments.
As mentioned before, IFRS 16 requires us to reflect lease payments in cash flow from financing activities. As lease payments, in our case, are clearly related to the operations, we add it back to the operating cash flow. The first big mover here is cash flow is net working capital. I will talk about that on the next slide. Next, we have the income tax, which was close to zero in Q1 2019. This is the result of the tax refund received in the period. If it wasn't for this, income tax would have been similar to last year. All the rest is pretty much straightforward. Moving to slide 34. On top chart, we see the core net working capital evolution, which is higher in Q1 2019 compared to Q1 2018. There are three main reasons for the change. First, the shift of Easter to April.
Second, the continued weak trading in South America. Third, the new operations we have opened in the last few quarters. CapEx in Q1 stood at 3.1% over turnover, fully in line with our guidance of 3%-3.5% over turnover. We now move to slide 35. Slide 35 displays our balance sheet in the summarized way we like to show it. The big change here, as you can see, is the addition of the right-of-use on the asset side and lease liability on the liability side. Going to slide 36. I wanted to focus on the two chart at the bottom. As mentioned before, we have redefined our main covenant. The left chart shows the evolution of the former concept, and on the right side, the new one. You can see clearly that we continue to have a comfortable headroom in the new definition.
We now move to slide 37, all remains pretty unchanged here. We remain having a well-balanced maturity profile with no maturity before 2022. This concludes my part of the presentation. Julián, back to you.
Thank you, Yves. I now move to slide 39 for conclusion and trading update. In the first quarter of 2019, we have seen a positive start despite all the difficulties we have gone through in South America. We have increased organic growth by 2%. I think it's important to remark the improve of sales performance in Spain, and also the contribution of two very successful activities in Hong Kong and in Australia. Performance today in April, and considering that only part of the Easter period has been accrued here, that is the Catholic part, is 2.4%. There is still to be accrued during the first two weeks of May, the Orthodox Easter. Only with this, what we have confirmed is that the company is accelerating the increase in organic growth, 2.4%. We also would like to confirm our mid-term average organic growth guidance between 3% and 4%.
Regarding the equity free cash flow, I am going to repeat what I said within the last call presentation, is in 2019, our target is to reach between CHF 350 million and CHF 400 million, increasing in line with the turnover of the company, and also obviously depending on the circumstances. I think in terms of the target, I want to be very clear, just in case there is a misunderstanding. We confirm also our current dividend policy for the year 2019. This completes our presentation, and we can now move on to the Q&A session.
We will now begin the question and answer session. Anyone who wishes to ask a question may press Star and One on the touch-tone telephone. You will hear a tone that confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press Star and Two. Participants are requested to use handsets only while asking a question. Anyone who has a question may press Star and One at this time. The first question comes from Joern Iffert from UBS. Please go ahead.
Hello, gentlemen. Thanks for taking my questions. The first one would be please on the gross profit margin expansion, which was healthy for the quarter. It seems majority of this is coming from North America. Can you help us to better understand gross profit margin trends in the other regions?
Second question would be please on the category sales. You had a good boost in tobacco, wine, and confectionery, but cosmetics, for example, was down. Is there a structural change or it's just a snapshot for the quarter and this will change the next couple of quarters again? This would also be helpful to understand. Please, the last question on the concession fees. Again, up, if I calculated correctly, around 130, 140 basis points, even adjusting for the new accounting year-over-year. Is this annualizing then in Q3 once the new contract has annualized? Or shall we get used to a higher concession fee increase over a cycle versus your guidance of 20 to 30 basis points? Many thanks.
Thank you very much for the question, Joern. This is Julián speaking. Regarding the gross profit margin, I think North America, obviously, during this quarter performed very well, but all the divisions performed well, except one. We are expecting that during 2019, again, we are going to see an increase of gross profit margin in most of the divisions. The reasons are, as I mentioned before, the continued activities started with the brands, especially in the brand plans. The increase of advertising or compensations regarding the exposure of the brands, also the negotiation processes with the local brands. As you know, I mentioned that still we have not developed this part of the development of the gross profit margin. Regarding the category mix, it's just a mix.
Depending, obviously, on the circumstances, because some of the operations that we have started during the last quarter of 2018 are performing better in other categories, especially liquor and tobacco. The mix now is changing a bit, but the performance in terms of 2019, I don't think that perfume and cosmetics will be impacted in the negative side. Finally, the concession fees that you may calculate, but it's very difficult because there are also in the depreciation line, as you know, it's a discounted cash flow of the MAG. The reality is that it has been, as always announced, we are expecting this year between 20 and 30 basis points in the full year of increase in the line of concession fees. It's probably a bit deeper, the result here because the lowest quarter and the new operations started.
When the new operations will be normalized in 12 months, I think the 20, 30 basis points is a good reference in terms of growth of concession fees in 2019.
Thanks very much. If I may quickly have a short follow-up, just to clarify. On the cash flow, you had a tax payment from Spain, the equity free cash flow was down if I adjust for the tax payment, maybe CHF 40 million-CHF 50 million versus Q1 2018. I assume this is only coming from Easter predominantly, that Easter there's a time shift, or any other structural things that we need to consider?
This one-off tax payment. No, that's a one-off event. It's basically related to a tax payment we have done in an earlier year, if I remember correctly, two, three years ago. That's basically the refund because that tax has been paid in excess of what is actually required. We knew that this is coming at some point.
As the cash flow was weaker year-over-year in Q1, this has to do with the Easter timing, I assume? Net working capital movements.
Well, the Easter plays an effect, yes. As I've stated before, the net working capital was partially affected by that and obviously also some other effects. That's correct.
Thank you.
Thank you.
The next questions come from Jon Cox, Kepler Cheuvreux. Please go ahead, sir.
Yeah, good afternoon, guys. It is quite good to see organic sales accelerating and obviously gross margin gains coming through. Of course, a couple of buts. On the adjusted operating profit margin for the year compared to what you've given us now for 2018, i.e., the CHF 738 million on the revenue for the year, should we assume that margin then will be flat? Obviously, it was down in Q1 amid that concession fee inflation and other bits and pieces going on. The first question is that margin, everybody's going to move to looking at the adjusted EBIT margin, I'm sure. Should we expect a flat margin year-on-year compared to that CHF 738 million we see on slide 22? Second question, I'm going to ask the same about the adjusted EPS now. You've given us a CHF 750 figure for post IFRS 16 adjusted for 2018.
Holding all other things equal, I guess we should assume that will go up this year, at least in line with revenue if you have a flat margin at the adjusted operating profit level. That's the second question. Third one, just on Latin America. I seem to remember you saying in Q4 that Brazil was showing signs of improvement. Today you seem to be saying, no, Brazil is going backwards again. Brazil and Argentina still struggling. Just wondered if you could give us a bit more granularity on that because obviously Brazil is an important market for you. I'm going to finish off if I can with the free cash flow question. Basically, as Joern said, it's a CHF 50 million deficit more or less in Q1. You seem to be still saying CHF 350 million to CHF 400 million. Can I get some clarification?
Some people out there seem to think you were giving guidance of whatever your equity free cash flow was last year plus your sales growth. I seem to remember you saying it was going to be between CHF 350 million and CHF 400 million. I wonder if you can just give us guidance on that. As part of that, are you relatively confident that equity free cash flow will be higher this year than it was last year? A lot of questions, I'm very sorry. Obviously, it is all new for us with this IFRS 16, but that would be very useful if you can just clarify those points. Thanks again.
Look, let's start with the first one. Thank you very much for your questions. On the adjusted operating profit. There, what you can assume is flattish performance during the year 2019. It's basically similar to what we have commented before in the past on-
Sorry, that's margin or absolute? You're talking about margin, I guess.
I'm talking about margin, yes.
Yeah. Great.
To your last question first on the equity free cash flow. There, our guidance for the medium term remains the same. We are talking about, for this year, CHF 350 million-400 million of equity free cash flow, and we expect this to grow in line with the top line going forward. It's nothing changed to what we have stated before.
On that free cash flow, though, obviously, just to come back to Joern's question, you're CHF 50 million light in Q1 this year almost, if you exclude that one-off from the Spain repayment, et cetera. Are you confident that equity free cash flow this year will be higher than it was last year? Or you're saying, "No, no, we want to strictly say between CHF 350 and CHF 400. That's the guidance.
That's the guidance. We will stick to that. I'm not saying it's higher or lower. It's between CHF 350 and CHF 400, and the cash flow statement of Q1 is not changing my expectation in that respect.
Okay.
The next question comes from the line of Paul Bonnet.
Okay. Just a moment
Bank of America. Please go ahead, sir.
Have you answered everything?
No, not everything, but you will see.
Okay.
Hi.
Just a moment. The question regarding Latin America performance. Joern, at the time that we held the last conference call, Brazil saw a slight, and I said this word, slight improvement in terms of sales. During the quarter, it's exactly the same than the previous quarter. Both Argentina and Brazil are performing at the same level than during the last quarter 2018. What I have seen again in May, and I don't want to comment on very strongly about it, because maybe in the future you will tell me about Brazil again, is that Brazil is improving again, compared with the first quarter, the performance. This is something that is happening during the last two or three weeks. Thanks.
Next question.
Can I ask my question?
Yes, please. Go ahead.
Sorry, guys. Hi, Julián. Hi, Yves. Yves, welcome again to the team. I have a couple of questions on my side. I know you've done the pro forma numbers and everything, my question would be on the margins. Obviously the questions on the concession fee increase has been asked. If I just put everything into a brief summary calculation, I see EBITDA margins down around 140 basis points year-on-year. Even if I was to look just because of the 70 basis points staff cost increase, plus 130 to 140 increase in concession fees based on the pro forma numbers, and the 40 basis points increase in gross margin, obviously. This is also reflected in the adjusted operating profit coming down almost 40% year-on-year. Would you still guide towards flattish margins for the full year?
Is my first question. The second question is, in terms of the current trading, you mentioned that we're now at 2.4% organic growth in April, which is an improvement. I went back to the call transcripts of last year, and you were saying that Easter has generally a positive 70 to 80 basis points impact. Because Easter fell in April this year, is it actually on a comparable basis, almost a slowdown versus last year? Is the second question, or at least not an acceleration. I would say as well, I've noticed that you have other financial income that have increased by CHF 13 million. What's the driver of that? Maybe finally on Aena, if you can give us an update, because I've seen that they intended to maybe break down the contracts more or something.
If you could give us an update on that based on what they said on their earnings call, that would be much appreciated. Thank you so much.
Look on the pro forma calculation you mentioned at the beginning, your first question actually. Look, as mentioned before, concession fees and EBITDA, it's actually gone as a concept, so we are not looking at that anymore. The adjusted operating profit, again, I expect a flattish development in respect to margin over the course of 2019. Let me quickly do the last question first before I hand over to Julián for the second one. Other financial income, you need to look at basically net. You need to look at the income and the expenses net. There are a number of interest optimizations we are doing which result in interest income. If you look at the figure net, then you get a pretty good understanding of our financing costs.
From my side, Paul. Regarding the Easter period, I have obviously comment on that. This year, the complete Catholic Easter was performing, including this, was performing 2.4% at the level of organic growth. It still missed there due to the seasonality, one important part of the Easter period, that is the Orthodox Easter, that happened during the first days of May. As a consequence, what you are seeing there is not the full effect of the Easter period for Dufry. It's only the Catholic part. Imagine for one moment that we are talking about Russia, we are talking about Greece, we are talking about Turkey. There are specific destinations and origins impacted by this shift. In any case, the 2.4% is including an important part of the Easter period. Regarding Aena, I don't know exactly what, obviously, their intentions are, but I know one thing for sure.
They are today developing with us, as I mentioned before, five tests in order to understand if there is a new business model after seven years of contract. Of course, the business model has to be changed in order to drive more sales and as a consequence, more income for the airport and obviously better profitability for Dufry. The only thing I can say is the test already started in beginning of the year, in my view, are very successful, and I think part of what is happening in the Spanish performance is due to this specific test, and I hope that during the next months, the test will be complete, and we will be both parts in the position to negotiate a possible extension or a possible new relationship. I don't want to guess on what is the next step.
The reality is that today we have a contract that will be terminated in October 2020. The second thing.
Yeah
Second fact is we are developing a project for understanding if there is a different way of operating the airports that were planned seven years ago. The third one is, I know that Aena is very willing to understand new formulas of collaboration with Dufry. I think that those are the facts. The rest, if there are intentions to do a split of the concessions, is something that, in my view, with Dufry, it has not been on the table.
Understood. Maybe just one very quick follow-up question on that. On the earnings call, I think the CEO of Aena mentioned that in terms of profits, so in terms of EBITDA, estimated EBITDA of those contracts between CHF 30 million and CHF 50 million in the past. I would say in terms of earnings, the CEO of Aena seemed to be saying that you were positive. Can you give us a magnitude of the earnings that you make in Spain just so we know what is at risk or not?
Historically, I have been repeating one thing. We are in the concession business. In each location-
Yeah
there is a concession. The incumbent, in our case, we are incumbents in Spain. We have obviously the advantage of knowing the business and performing as obviously the best way possible. If I disclosure specific about concessions, then any competitor, if there is a tender, will be able to compete with us. For this reason, we don't disclosure any specifics of any concession worldwide. It's a competition issue, not it's a financial issue. It's a competition issue. I am not going to create a competitive advantage to other competitors if there is a tender.
I completely understand. Okay. Fine. Completely understand. Thank you so much. Thank you for your answer.
Thank you.
We have now a question from the line of Daria Fomina, Goldman Sachs. Please go ahead.
Hi. Thank you so much. I actually have two follow-ups from the questions that were asked before. Sorry if I'm being slow here. The first question is on the concession fees. You mentioned that, adjusted for the new accounting, they're going to come down in the second half of the year as the new contract wins annualize back to the 20-30 basis points growth year-on-year. Does that imply that the actual full year growth will be stronger than that? Because clearly the first quarter is higher. My second question is the question that was just asked on Easter, right? My impression from the same conference call last year was that the Easter impact is bigger.
Can you just clarify and say what was the contribution of this Catholic Easter in April data? Also on the Russian Easter, speaking as a Russian person, right, it's not a public holiday. I would assume that most of the Easter benefit actually comes from the Catholic side of it, while you have a seasonally always strong May, in Russia, as it's a week off in the region. If you answer those two questions, that would be very helpful.
Oh, great. Sorry. I will repeat probably something that I already explained, but that doesn't matter. Let me try again. With the concession fees, the question was about more than the underlying concession fees, because what you are seeing in the P&L is obviously a combination between the lease payments and the depreciation of the discounted cash flow, obviously, the MAG, and all the formula. What I said is concession fees, as we repeat in the past, will increase between 20 and 30 basic points per year. The impact during the first quarter is higher, because the quarter is lower and there are new operations, and I mentioned the operations that we have opened during the last quarter of 2018, that are impacting more in the lowest quarter than in the highest quarter, basically because some of these contracts started to operate during October, November last year.
What I said is when these contracts will be annualized in terms of comparing the performance, these 20, 30 basic points are still valid, but I am talking about underlying concession fees. Regarding the Easter period, in general, Easter represent between 60 and 100 basic points of increase compared with the previous year. In this case, it's 40 basic points because still there is the possibility, and I haven't seen the total numbers regarding the Orthodox Easter, that another increase due to the Easter period will be accrued in May and not in April. That is the information I have provided there. I am still in the same thing. When Easter happens, it's between 60 and 100 basic points of increase compared with the previous year. This is normally the formula.
This year, I have commented on 40 basic points, and in the next call, we will talk obviously about May and June.
That's very clear. Thank you. Thank you so much.
The next question comes from the line of Rebecca McClellan, Santander. Please go ahead, madam.
Yes. Good afternoon, everybody. I'm Rebecca McClellan, Santander. I've got three questions, please, for Julián and Yves. Firstly, can you talk about your views on the minimum wage pressures in the U.S., when they're potentially going to annualize, or if you see that as a pressure going through 2019? My second question is on the current new space, which is contributing quite nicely to organic growth. My understanding was that was largely coming from cruise and MTR. Is it fair to say that they're lower returns or lower margin businesses at this stage in their life cycle? My third question is just about the Chinese spend per passenger in North America. I think you mentioned that you were still seeing some weakness there. Could you comment, please?
Thank you for the questions, Rebecca. Regarding the first question on the minimum wage, we have seen this increase of minimum wages along 2018, especially during the second part of 2018. I think to be sure that we all understand, the annualization will be starting in June 2019. Regarding the new space, an important part of the new space is due to the cruise business and MTR, but also we have obviously important new shops in St. Petersburg and also in Perth. It's true that, and I mentioned that, the margins in the cruise business and the MTR business are lower than the average in the company. This is something that I already explained in the past. The only thing to add to this explanation is that the returns, due to the type of business we are talking about, are very similar compared with the airport retail environment.
Regarding the spend per passenger in South America, it still is impacted. I think the problem in Argentina is different than the problem in Brazil. Let's say the problem for Argentinians is different than the problem for Brazilians. In terms of the problem for Argentina, it's the huge devaluation that happened compared with the Argentinian peso last year. This is impacting the operations not only in Argentina, also in Brazil, because an important part of the customers, even that the number 1 customer in Brazil are Brazilians, the number 2 are Argentinians. It's obvious that it's impacting because the perception of price, as you know, we nominate the prices in U.S. dollar. What is happening with the spend per passenger? In both cases, it still is weak.
Still, we have an issue regarding the impact of Argentinians and Brazilians in all the operations worldwide where we have this type of customers. My feeling, looking at what is happening, and I mentioned this before, is that the Brazilian case, it will be faster in terms of recovery, and that we are going to see from now on, and I hope that it's not going to turn around again, a slight and positive increase during the next months, especially during July and August, that are also good months in Brazil. Obviously the comparable will be better, as soon as, obviously, the devaluation last year is comparable with the devaluation this year. That will happen again from July, August, probably.
The best way of explaining is that in Argentina last year, during the last quarter, we had a significant hit because the devaluation started in September. Gradually, we are going to see probably a recovery, it's because the comparable is going to be better.
Okay. Thank you. Sorry. Also, could you just comment on Chinese spend per passenger in North America? I think in particular you made a comment about Canada.
The subject that was mentioned in the pre-release is regarding the Chinese passengers in North America. The Chinese passengers, especially in Canada, have been changing from the profile point of view. I think the evolution of the Chinese traveling is going to be significant because by 2020, it's expected that 200 million Chinese will travel. The average profile of these passengers is not the same than in the past, where we used to see only high-level Chinese passengers traveling, buying whiskey bottles of EUR 30,000 or cognac bottles of $25,000. Now we have a more, I wouldn't say mass market, but still the spend per passenger with the Chinese is higher than with any other different nationality. In 2019, what we have seen in Canada, especially, is the increase of this different profile Chinese passengers.
The main subject regarding the drop in spend per passenger in North America is in duty-free, I am talking about duty-free, is Chinese passengers, and the main reason is the change of profile.
Thank you, Julián.
Thank you.
The next questions come from the line of Edouard Aubin from Morgan Stanley. Please go ahead, sir.
Good afternoon, guys. Edouard Aubin from Morgan Stanley. I have two questions, one on Thailand and another one on, sorry to come back on the sales growth. If we look at Thailand, I think the press is reporting that you guys are bidding for Bangkok Airport, which is a very big airport. If you could confirm that's the case and then who you might be partnering with. Regarding Thailand, obviously you have upside and downside, but we had example in the past of, in Asia, due to the very competitive nature of this bidding process of some of your competitors incurring losses. If you are indeed bidding, can you please reassure us that the terms could be structured positively if possible? Just on the sales growth, I mean, Julián, you've been in this business for many, many, many years.
If we step back and I look at your like-for-like sales growth, which has been basically negative for the past three, four quarters, I understand obviously there is some impact of Latam, but structurally, has the price gap between duty-free retail and high street retail not narrow now to such an extent that the attractiveness of the duty-free is no longer very significant for passengers? I'm just wondering if that might not be a structural issue for the industry and the lack of growth, basically, given that the world economy is relatively strong, has been relatively strong over the past few quarters.
Thank you. Regarding Thailand, we have not decided yet if we are going to present a proposal. We are evaluating the project, the only thing I can say is that whatever proposal we are going to present, if any, it will be with one thing that I think Dufry has been working on in the past, is financial discipline. I think Thailand is a very important market, we are considering as a strategic move participating in this tender, but it's not decided yet and it obviously will depend on the final conclusion with our partners. I cannot disclose the partner because we have a confidentiality agreement where we are not allowed to disclose the partner until the presentation of the tender documentation. Regarding the sales growth, I think it's a very important question.
The like-for-like that you have seen is a like-for-like that is impacted by one specific region in the past where South America and Spain, this year is only South America. What is the subject with like-for-like? Like-for-like is a way to express the same square meter sales compared one year to the other year. The impact due to the like-for-like drop in South America is significant, I can tell you the number. Excluding the South America business, like-for-like in the company increased during the first quarter 2019 by 2%. I think the business is still in a very good position, I am talking about travel retail, in order to compete with other types of channels. For example, you know the information. There are two channels today that are forecasted as the winners in the evolution of travel retail, in the evolution of retail.
One is online retail, that from today to the year 2021 is expected to grow to reach 10% of the total retail sales worldwide, around 16%, and the second one is travel retail, that is 6.7%. What is the positioning? I think this is also very relevant regarding the pricing policy. Pricing is a very important subject in travel retail. As probably you know, m1nd-set is an independent institution and company disclosure, very specific information about this subject. Today, pricing or pricing sensitivity is the number 4 issue when travel retail is welcoming customers in the shops. Number 1 is the variety of brands, number 2 is the service, number 3 is the opportunity to experience and to have experience in the shops, and number 4 is pricing or related with pricing. This is public information. You can check it.
In my view, we are in a huge position, in a very good position in order to compete with any high street pricing development. The like-for-like that I mentioned you, excluding South America, is confirming that. The travel retail is facilitating the customers to experience, to find the best brands, and also to find the most suitable prices, because as you know, the prices in each location are not nominated based in the country, are nominated based in the country of origin of the passengers, in order to facilitate the like-for-like growth. I am not convinced because you cannot guess what is going to happen with this type of evolution. I think travel retail will report positive like-for-likes in the future due to this competitive advantage. This is my opinion.
Regarding if in duty-free and duty-paid, the prices are narrowing compared with previous years or previous, obviously, times. Yes, it's true. It's true. I may agree with that, because the reality is that, especially the currency volatility and the currency fluctuation in South America shows that. Is when you compare the savings that we have in South America one and a half years ago with no high devaluation, no fluctuation, was around 40%-45%. Now we are 20%-25%. It's a deterioration of the perception. Maybe it could be understood like that, but I think still it's a very good saving, and I hope that as soon as the countries have recovered, the situation will also recover.
Okay. Thanks, Julián.
The next question comes from the line of Jan Herbst, MainFirst. Please go ahead.
Hello, everybody. Thank you. Just also a housekeeping question in relation to your net working capital increase, which you mentioned was affected by the concessions as well as South America, but also the Easter timing. Can you mention or quantify the effect of Easter timing on the increase in net working capital, please?
Well, no, we cannot quantify that. Look, it's obvious that due to the Easter, which is just starting in Q2 this year, you can assume that there was a significant amount of goods which have been purchased towards the end of the last quarter, and that obviously has an effect on the net working capital. I cannot be more specific on the magnitude of that.
Okay, thank you.
We have a follow-up question from the line of Jon Cox, Kepler Cheuvreux. Please go ahead, sir.
Yeah. Hi. Actually, just going back to one of the questions that maybe you missed, but the cash EPS adjusted for IFRS 16. I'm just wondering, you would expect that to be higher this year compared to last year. That's the first question. Actually, you can see there's a lot of questions about the timing of Easter and the impact. Can you give us any color on organic sales growth in the first couple of weeks of May? I know it's very early and it's very tentative, but have you seen actually an increase from this 2.5% we saw in April? Or is it still running around the same level? Thank you.
Okay, let me quickly start with the cash EPS. Look, Jon, as you know, we cannot give any guidance on that and also not on 2019.
From my side, I think what we have seen in May is I would start, but I cannot give you daily sales volume because it's going to be very complex. In the next call, you will tell me, "Julián, you told in the conference call that during the first days of May" I cannot do it, Jon. I'm sorry. I like to explain how the things are going, but not in weekly basis.
Okay. Thank you, and see you later.
Thank you. See you later.
We have a follow-up question from the line of Paul Bonnet, Bank of America Merrill Lynch. Please go ahead, sir.
The cash flow in the second quarter last year, you had some pull forward or something like this. Could you give us, not your expectations for the second quarter, but obviously it's a lot more important. Can you quantify the impact of that pull forward that you had last year?
Pull forward.
The line was cut at the beginning of the question.
Oh.
Paul, we didn't catch the full question, probably. Can you start with your question once more? It got cut off. I think the first half got cut off.
Of course. Sorry. Yeah, basically, I think the cash flow was unexpectedly strong in the second quarter last year. I just don't know if you can remember some of the granularity and give us some details around that and what you would expect for this year.
Well, I would need to come back to you on that. I don't remember what was the specific thing which affected Q2 last year, what you are mentioning. Let me review that and come back to you.
Okay, no worries at all. I'll just get the details, and we can talk about it later today.
Perfect. See you later, anyway.
Thank you.
Thank you. Bye.
There are no further questions, sir.
Okay. Thank you for participating in the call, and I'll see you later. That's all, no?
Ladies and gentlemen, the conference call is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.