Ladies and gentlemen, good morning or good afternoon. Welcome to Dufry's half year 2018 results presentation 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. After the presentation, there will be a Q&A session. You can register for questions at any time by pressing star and one on your telephone. Should you need assistance, please press star and zero to call an operator. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Julián Díaz, CEO of Dufry. Please go ahead, sir.
Thank you very much. Good afternoon. Thank you for participating in the call. These are Andreas Schneiter and Julián Díaz participating from Dufry. We are going, as in previous calls, to use the presentation disclosure this morning on our website. Please go to page six of the presentation highlights. In half year, we delivered 7.2% turnover increase compared with 2017, reaching CHF 4.1 billion. The main driver was organic growth, increasing by 5.5%. During the second quarter, organic growth was 4.2% and was impacted by the seasonal calendar effect and the slowdown of our operations in Spain, Brazil, and Argentina. We also continued with a very healthy growth in most of all the other operations worldwide, especially in Asia, U.K., and U.S.
As part of the organic growth, like-for-like contributed 3.5%, and the new concessions net, 2%, confirming again the value of our diversified concession portfolio, creating positive results at company consolidated level. During H1, we have opened 109 shops with 13,200 sq m of new commercial space. The plan for this year is to open around 28,000 sq m. We also refurbished 22,400 sq m out of a plan of 43,000 full year, including a very good new generation store in Heathrow Terminal 3. During the first six months, we have signed 14,100 sq m of new commercial space. 10,000 will be open along 2018 and 4,000 in 2019, including the new MTR fast train terminal in Hong Kong, the new Jazeera Terminal 5 in Kuwait, the retail operations in Chicago Midway and Perth Airport in Australia, and 30 increases with different companies, among other projects.
At June 2018, the group's pipeline opportunities were 40,000 sq m. Most of them, as is obviously commented on several times, focus in division three, Asia, with 43% of the total. Just for reference point, the total number of square meters operated by Dufry on June 2018 was 446,700. Moving to gross profit margin, we reached 59.8%, compared with 59.5% last year, due to the renegotiation of better terms with global and local suppliers. EBITDA expanded by 50 basis points to 11.3% from 10.8% in 2017, reaching CHF 464 million +13% compared with the previous year. EBITDA was in line with our objectives 2018 for half year.
On top of the gross profit margin, 30 basis points of improvement, the contribution of cost rationalization due to our business operating model implementation and efficiency plans are on track and deliver savings in personal expenses and general expenses of 40 basis points on turnover. Concession fees increased by 30 basis points, in line with the forecast commented on during our last call, where we mentioned concession fees will increase between 20 and 30 basis points this year, and this is still our target by year-end. Cash EPS increased by 14.5%, reaching 2.68 CHF compared with 2.34 CHF in 2017. With that significant good performance of financial expenses due to the financial reorganization negotiated last year and despite the negative impact of the increase in one-off income taxes, where an important part is related with non-cash payments.
Free cash flow reached a record for the period of CHF 330 million, more than double than the previous year, showing on top of EBITDA growth and better performance in net working capital, 4.9% on turnover compared with 5.3% last year, and a contained CapEx growth, 3.1% on turnover compared with 4% last year. Finally, with the free cash flow reached CHF 222 million versus CHF 16 million in the previous year. If we move to page seven, here we have again, the information regarding the turnover, where we increased by 7.2%, 5.5% organically. I would like to comment on the performance division by division. Division one, Southern Europe and Africa. Turnover increased by 7.3%, reaching CHF 833 million, compared with CHF 766 million in 2017. Organic growth was 0.5%.
On top of the seasonal effect Due to Easter and a slowdown affected Spain with single-digit negative growth due to the shifting of international passengers, mainly British, to other destinations, especially Turkey and Greece, and substituted by local Spanish passengers with lower spend per head. Good double-digit positive performance in Turkey, Malta, France, and African countries. Single-digit positive growth in Italy and Greece. During the first weeks of July, although it's still very early for reaching any conclusions about it, the trend in the performance is very similar. Division one performing single-digit positive growth, with Spain remaining with the same negative performance compared with previous quarter. Division two, U.K. and Central Europe. Turnover increased by 3.5% compared with previous year and reaching CHF 910 million. Organic growth increases by 3.3%, excluding the contract exited in Geneva and -1.2% taking into consideration this operation.
Very good performance in U.K., Switzerland, Sweden, and Finland, with single-digit positive growth. Slightly better performance during the first weeks of July, also with single-digit growth led by good performance in U.K. and Switzerland. Division three, Asia, Middle East, Eastern Europe, and Australia. Turnover increased by 20.3%, reaching CHF 546 million. Organic growth remained very high, 22.1%. Double-digit growth performance in Macau, South Korea, Indonesia, Cambodia, India, Jordan, Kuwait, Russia, Kazakhstan, Bulgaria, Armenia, and Australia, and single-digit growth in Emirates and Serbia. The good performance in operations targeting Chinese and Russian passengers continued also during the second quarter. The performance during the first weeks of July continues double-digit growth, but at lower level due to the tough comparables. Division four, Latin America. Turnover reached CHF 820 million. Organic growth reached 4.2%. Double-digit growth in Dominican Republic, sales on board cruise lines and Mexico.
Single-digit positive growth in Ecuador, Chile, Peru, Aruba, and the British Caribbean. Brazil, slightly negative performance and Argentina, single-digit negative performance deteriorated during the last part of the quarter. Also, measured in local currency, all these operations performing very well, especially Argentina. During the first weeks of July, the situation in South America slowed down in same path. Division 5, North America. Turnover increased by 5.5% expressed in CHF, reaching CHF 850 million in 2018. Very positive organic growth of 7.7%, driven for a significant increase in productivity and new contracts added to the portfolio. Both retail concepts performed well, duty-free double-digit growth and duty-paid single-digit growth. During the first weeks of July, the trend has been similar than in half-year results. If we move now to page eight, we always comment on the trends in terms of the passengers, especially international passengers growth.
The only information we can comment so far, officially disclosure, is April. In April, the increase in international passengers worldwide was 7.1%. In locations where Dufry operating, this number was 5%. The leading regions were Africa and Asia-Pacific. Regarding international passenger growth forecast remain very strong and continue to be very positive in terms of the outlook, 7.2% in 2018, 6.3% in 2019, and 5.7% in 2020, led by Asia-Pacific, Europe, and Latin America. If we move to page nine of the presentation, a bit more detail about the gross retail space open. We have opened 13,200 sq m. The total target for this year is 28,000, with several important openings. In Madrid, new Hudson International shops. In Malaysia, the first downtown shop in the region in this specific country.
In cruise lines, 12 new ships that were opened during the last part of the first half of the year. In Holland America, in Carnival, and in P&O, and several locations, as always, small locations in 23 new stores in North America. Regarding the refurbished shops, we have complete 22,400 sq m with a total target for the year of 43,000. I would like also to comment that this is an important part of the like-for-like growth, and we are so far expecting that during the second part of the year, this 43,000 will be complete. Every time that there is a renovation, the spend per location increase between 15% and 25%. The reality of the refurbishment done during the first half are here listed. Malaga, 3 stores, Heraklion in Greece, Toulouse, Malta, Heathrow Terminal 3, and Liverpool.
If we move to page 10 of the presentation, new space signed so far during the year, 14,100 sq m. Main contracts already disclosure, MTR railway station in Hong Kong, Perth in Australia, Chicago Midway, and Boston Logan. The project pipeline opportunities remains obviously significantly high, 40,000 sq m. 43% of these 40,000 sq m are located in division 3, in Eastern Europe, Middle East, Far East, and Australia. If we move to page 11, segmentation. What we have seen on the right side of the slide, bottom and top part, is the confirmation of a rich diversification strategy in the different divisions. We have reached 23% of the business in division U.K. and Central Europe, 21% in Southern Europe, 22% in North America, and 20% in Latin America.
Probably the most relevant issue is that we have increased the mix participation of Eastern Europe, Middle East, Asia, and Australia from 13% to 14% this year as a consequence, obviously, of the accelerated growth that we have had in this division. By channel, we confirm we are airport retail, 91% of the total sales, but we are growing now in the three strategic channels that we have identified for diversification. On top of the airport retail, duty-free and duty-paid, we are now trying to develop cruise lines, border shops, and downtown shops, especially in division three. If we move to page 12. Top and bottom side, on the right part of the slide, shows the performance during the first six months. We are still focused in personal care, perfume, and cosmetics, 32% of the total sales, with an increase of around 7% compared with previous year.
Food and confectionery, with 18% of the total sales, with an increase of close to 9% compared with previous year. Luxury products, with 13% of total sales, with a growth of 6% compared with previous year. Duty-free by sector. The operations in duty-free generated 63% of the total sales, and duty-paid 37%, quite in line with previous year. If we move to page 13. In page 13, page 14, I am going to explain the status of two of the most important projects we are developing so far. One is the business operating model in page 13. Many times repeated. This is a way of increasing the efficiency of the operation, but also is the impact in the P&L in 2018 and 2019. The business operating model implementation is right now being implemented in Europe, Middle East, and South Africa as expected.
Launched in 39 countries, where 14 are already certified, we expect that all the countries will be fully implemented by year-end 2018. The expected efficiencies that will be impacting the P&L, CHF 50 million, will be split CHF 26 million in 2018, and the difference in 2019. The scope of the business, meaning what are the pillars of implementing the business operating model. The first one is the standardization of IT systems. The second one is the standardization of organizations, meaning the footprint of each organization. The third one is process and procedures. The fourth one is supply chain, the standardization with the three platforms that we have already announced in the past. Finally, the global implementation of e-motion. I am going to comment of e-motion in the next page. Everything is on track, and the efficiencies announced are expected to be delivered in the timing also discussed.
Let's move to page 14. This is one of the most relevant strategies for the present and especially for the future of the company. Digitalization is the most important foundation, on top of the number of passengers, for accelerating organic growth, like-for-like and new concessions, and for improving the efficiency. We have identified three types of priorities in this digitalization process. Number one is drive revenue. We are now going to be digital. What we want to be is a very efficient company or more efficient company based in digital. This initiative will drive revenue growth, especially organic, as I said, from now to the year 2023. The second one is drive cost savings and efficiencies. The initiative will drive better and more efficient process and procedures, and this will be also impacting the P&L.
Finally, we are preparing the company for the future, building capabilities and building the platform that will develop the future duty-free. For developing new duty-free in the future, we need a very solid technological platform with the ideas that the company is going to implement during the first part of 2019 and during the first and second part of 2019, we are going to develop the platform that will allow us to really implement at the maximum level, the idea of digitalization in duty-free. This is going to be reflected in two projects. One is e-motion. e-motion is in this page. In the bottom side is the update of the project, in the top side are the initiatives. Starting with the initiatives, just for reminding, the first one is Reserve & Collect. It's online side.
The idea is to expand internationally this Reserve & Collect service for pickup on departures and arrivals, the merchandise order from the digital devices. RED by Dufry, the loyalty program. Personalized benefits depending on the customer and creating a CRM database. Sales tablet for the employees in the digital shops in the new generation stores, improving the mobile payments and personalizations for expanding all the know-how of the company through the different employees in the new generation stores. Social media forum is our, obviously, social media platform forum, connecting the airports brands in the social channels. The new generation stores that are today in several countries, Melbourne, Madrid, Cancun Terminal 4, Zurich, London, Heathrow. In the future, will be in Cancun Terminal 3, planned for 2018, Buenos Aires and Amman in 2019.
This part of the digitalization is allowing us to increase the sales in most of these locations in close to double-digit growth, especially in Asia. Strengthen communications with brand stories and novelties. Reserve & Collect already launched in 20 countries. CRM and RED already launched in 32 countries. Social media forum already available online. With all this rollout, with the tablets, the shop employees in new generation stores are ready to attend and welcome any type of nationality and customers with specific subjects, including products offered, pricing policies, products that could be related with their experience in the past. There are many aspects of this program that will be very relevant in order to increase the spend per passenger.
It's very interesting because in the different research that we have done, if the ticket is 100 in a standard transaction, when the customers don't interact with the employees, if the customers interact with employees, the spend per ticket is multiplied by two. This specific move from non-interaction to interaction is one of the areas that we are developing more with digitalization. Finally, three focus, customers, employees, omni-channel, and new product and services. If we move to page 15. In page 15, what we remind here is the cash return to shareholders during 2018, the dividend that we pay in May 17, 2018 CHF 3.75 per share. Total dividend was CHF 198 million. In the future years, our commitment is to pay minimum CHF 200 million, and the sustainable return to shareholders, 40% of cash net earnings as a target.
In terms of the share buyback program already announced, the share buyback program is up to CHF 400 million during 12 months. Share purchased until July 27 is 1,352,000. Total amount of share buyback program executed by July 27 is CHF 182 million. The intention, as is already announced, is to cancel the shares bought back. I am going to pass through Andreas Schneiter, CFO, for continuing with the financials.
Thank you, Julián, and good afternoon and good morning, everyone. If we move directly to page 17, there we have the organic growth, which in the second quarter was 4.2% after first quarter growth of 7.1%. Apart from the very strong comparables that we had in the second quarter last year, we also had the impact of the Easter effect in 2018, which was negative in the second quarter, as the start of the Easter was in Q1. The Easter effect is about 70 to 80 basis points of quarterly growth. This was contributing to Q1 this year, but not to Q2, where it was missing. Adjusting for this effect, the expected run rate in Q2 was about 5.5%. The remaining difference of this 5.5% to the 4.2% was actually driven by the lower growth of Spain, Brazil, and Argentina, as already commented by Julián.
On the organic growth by division, Julián already explained that in detail. In a nutshell, division Eastern Europe, Middle East, and Asia continued to perform very strong, as did North America. U.K. and Central Europe had stable growth, and division Southern Europe and Africa, as well as Latin America, both slowed down relative to the first quarter. On page 18, we have the FX translation effect, which in the second quarter was strongly positive with 3.5% due to the weaker Swiss franc against the EUR and the GBP. Based on the current rates, we do expect that the FX translation effect remains positive for the full year 2018. If we move to page 19, where we have the income statement. We already talked about turnover, let's move to gross margin.
Gross margin improved by 30 basis points, driven by the negotiations with the suppliers and also the initiatives that we developed together with the brands, mainly on promotion and the brand plan. Concession fees increased by 30 basis points to 27.7% in the half year. The increase is actually fully attributable to the performance in Spain, where the lack of growth in combination with the increase in minimum guarantees has led to a relative increase in concession fee charge. For all the rest of the business, there were actually some pluses and minuses, but the overall concession fees as a percentage remained stable. Personal expenses and other expenses together improved by 40 basis points in the period. This is mainly due to the efficiencies from the business operating model, as explained by Julián.
EBITDA grew to CHF 464 million, and EBITDA margin improved by half percentage point to 11.3%. Moving on. Depreciation was slightly higher than in previous quarters at 2.3% of turnover. This is a result of our continuous investment in refurbishments as well as new space. Amortization increased slightly as an absolute amount to CHF 183 million. As a percentage of turnover, the ratio improved to 4.5%. Linearization was CHF 40 million, as anticipated. As a reminder, linearization comprises of the non-cash elements of the Spanish contracts, i.e., the straight lining of the minimum guarantee increases as well as the prepaid concession fees. Due to the seasonality of the Spanish business, linearization charge will be positive for Q3, but for Q4, there will be a charge again. For the full year, the linearization charge will be around CHF 50 million.
Other operational results for the half year was CHF 23 million. Of this amount, about CHF 14 million are related to new projects and startups as well as restructurings and closings. Financial results improved by almost 30% to CHF 64 million. This is mainly due to the refinancing and the better terms that we got, this is something we executed in 2017. Income tax was CHF 47 million in the half year. Of this charge, about CHF 35 million, so three quarters roughly, relate to deferred taxes and are non-cash in nature. This amount includes one-off charges of about CHF 20 million, which are in majority related to the restructuring in the U.S. that we did due to the Hudson IPO. The other part is a mix or a shift effect whereby we accrue more profits and taxes in the faster-growing operations. Taxes are quite difficult to forecast.
Our best guess at this stage is that in 2018, we will end up with a tax rate of around 25% for the recurring income, plus the one-offs of about CHF 20 million that will come on top of it. Moving on. Non-controlling interests were CHF 23 million, of which the largest part is due to our business in North America. The CHF 23 million already includes the Hudson minorities since the IPO in February this year. The result in basically is Cash EPS, which improved by CHF 15 million to CHF 142 million. Let's move to page 20, where we have the Cash EPS. The growth was about 15% for the half year. This growth trajectory is a little below our target for the full year and was mainly impacted by the tax charges, which I just explained.
Which, however, should carry less weight in the second half of the year. If everything goes to plan, we should have an acceleration there again. Moving to page 21, where we have the cash flow statement. We had a record cash generation, with free cash flow at CHF 313 million and equity free cash flow at CHF 222 million for the half year. The first half did not have any exceptional items or major projects, this really does reflect the full performance of the business as it stands. We will review the various key elements in more detail in a minute, but just as a side comment, because I commented on the taxes in the income statement beforehand, you do see here in the cash flow statement that cash taxes are much more stable and growing in line.
Below the equity free cash flow, we have the proceeds from the Hudson IPO of CHF 665 million, as well as the cash that we returned to the shareholders, i.e., the share buyback and the purchase of treasury shares on one hand, and the dividend payment that we made in May on the other hand. Together, we returned about CHF 420 million to our shareholders since the beginning of the year. Let's look at the different cash flow elements in a bit more detail. Let's start with the seasonality on page 22. The third quarter, as you see, is typically the quarter with the highest cash generation. As you also see, we had an outstanding second quarter in terms of cash generation, which was even higher than the third quarter last year.
Given that we already had a good improvement on working capital in the second quarter, and we're going to see that just in a minute, we should expect less relative improvement from working capital in Q3 this year compared to 2017. Moving to page 23. In the first half of 2018, core net working capital improved by CHF 40 million, and the percentage of turnover improved by 0.6 percentage points. Looking at the same period last year, core net working capital was flat with no improvement there. Typically, the core net working capital is below 5% in Q3, and then it moves back above 5% at year-end. Overall, across the year, our goal is to keep the core net working capital at around 5% on average.
For CapEx, in the first half of 2018, we were at 3.1% of turnover, and this is fully in line with our target range of 3%-3.5% of turnover. We do expect to end up within the same range for the full year, so no changes there. If we move to page 24, we have, again, our key performance indicators on cash flow. In both cases, for the free cash flow and equity free cash flow, our expectation for the full year remain largely unchanged compared to previous calls. For the free cash flow, we expect to reach an EBITDA conversion of 50%-55%.
For the equity free cash flow, we expect to end up at the higher end of the initial range, which was CHF 300 million-CHF 400 million, i.e., our expectation today is that we can generate an equity free cash flow between CHF 350 million and CHF 400 million for the full year 2018. Moving to the balance sheet on page 25. The asset side hasn't any major changes. What you see that is concession rights continue to decrease as we amortize them. You may remember concession rights are mostly due to acquisitions. On the liabilities and equity side, we have an increase in equity, which is due to the Hudson IPO, and a decrease in net debt, which is due to a combination of IPO proceeds from Hudson, as well as the cash generation that I explained beforehand.
On page 26, to conclude, there we have the net debt as usual. We reduced our net debt to CHF 3.15 billion as per June, and our covenant was a 2.95 times net debt to EBITDA. We are within our target range of 2 to 3 times net debt to EBITDA on one hand, and well within the threshold that we have agreed with the banks of 4 times leverage. As mentioned in the earlier calls, we have a long-term financing in place, and there are no maturities before 2022. This concludes my part of the presentation, and I hand back to Julián.
Thank you, Andreas Schneiter. Let's move to page 28. As a conclusion, in my view, we have had a good first half of the year with strong turnover growth, organic growth, margin improvements in all levels, especially in EBITDA margin, and record of cash generation. We have also communicate a significant number of new contract wins across all the channels, including downtown, border shops, and sales on board cruise lines. The first efficiencies of the business operating model are already reflected in the P&L and full year this 2018, we expect CHF 26 million above EBITDA. The share buyback program under execution and the dividend payment that happened in May. The priority for 2018 remain unchanged. Number 1 is the implementation of the business operating model in 2018. Number 2 is the digitalization and the implementation of initiatives that will become the company more efficient.
The strategic initiatives in order to expand the business in other channels, as I mentioned before. As a consequence of all of this, focus on cash generation and deleveraging what is reflected in the information that we just comment on. I think from our side, in terms of the presentation, is done, and now I suggest we open the Q&A section. 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 the touchtone telephone. You will hear a tone to confirm that you've entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only hands to ask a question. Anyone who has a question may press star and one at this time. The first question comes from [Rohit Rajan] from Morgan Stanley. Please go ahead. Mr. Rajan, your line is open. Mr. Rajan, maybe your line is muted from your end.
Yeah. Hello. Can you hear me?
Hello. Yeah.
Hi.
Yes. We can hear you now.
Yeah. Hi, sorry. It's Edouard Aubin from Morgan Stanley. I guess there was some confusion. Two questions for me, one on Southern Europe and one on your free cash flow. The first one on Southern Europe, just to get an order of magnitude, am I right in thinking that, when you look at the transfer of traffic away from Spain to Greece and Turkey, am I right in thinking that Spain is roughly 10% of your sales and Greece is roughly four and Turkey one? That's number one. In terms of the sales evolution, just to clarify, I think you mentioned that sales were down in Spain in Q2, but if you could give us an indication of how much sales were up in Greece and Turkey.
Lastly, on Southern Europe, am I right in thinking that your EBITDA margin is very high in Greece, maybe 25%-30%, but it's all variable when it comes to concession fees, they are all variable versus fixed in Spain. That's for Southern Europe. Then on free cash flow. Historically, you had significant cash flow leakage in the past, and clearly that was not the case in the first half. Just a few clarification. Am I right in assuming that the negative one-off were around CHF 100 million in the first half 2017? Also, Andreas, if you could please comment on the working capital improvement in the first half 2018, not related to the one-offs.
Lastly, on the free cash flow, I think, Andreas, if I heard you correctly, I think you talked about an equity free cash flow of around CHF 350-CHF 450 for the year. Is there any reason to believe that the amount would not be more or less similar next year? I know it's a bit premature, but for example, are you aware of any upfront payment you need to make in terms of concessions next year? Thank you.
Okay. I will answer regarding the first part, Andreas, and you will take the second part. Regarding Southern Europe, what is happening, as I mentioned, is that the international passengers, mainly British, are now flying, more are flying to North Africa and in all operations, especially to Turkey and to Greece. This is correct. They are substituted by Spanish passengers. What impact in terms of the spend per passenger, as a consequence of the profitability of this operation and sales. The participation of Spain, Turkey, and Greece is more or less what you said, and as a consequence, obviously, the impact is different. In Turkey, the growth has been double digit, very high, and in Greece, the increase has been single digit. Regarding the increase of sales or decrease of sales in Spain.
In Spain, the problem is that in two lots, as I said many times, we are paying a minimum guarantee, and as a consequence, the minimum guarantee, if the sales are dropping, is impacted more and higher. In this year, and this is public information, you can obviously check it in the internet, the MAG increased by 6%. As a consequence, the percentage of rent on the total sales, because the sales are dropping, will be higher. This is more or less what you asked, no? Is there anything else?
No. Yeah, that's perfect. On the variable concession fees in Greece, if you could comment on that would be great.
No, I cannot comment on that. It's information that we don't disclose, it's not possible to disclose it because it's confidential based in the contract.
Right. Just to follow up on Spain, on my calculation, your profitability is going to be extremely low this year, likely. If the terms of the contract were not changed, when you have to renew them, end of 2019, beginning of 2020, would you basically walk away from the contract in Spain?
If it is exactly like today, yes. There are opportunities, I think I answered this question in the past. There are opportunities for increasing significantly the sales. This is based in three aspects. One is configuration of the shops and size, the second one is configuration of the assortment, third one is the configuration of the traffic flow. If this is happening, I think the MAG or the minimum annual guarantee is not going to be a problem. The problem is the way we operate today, that is subject to the contract signed five or six years ago. I am very confident, first of all, that this year, in 2018, the situation is not going to be at the level that probably looks like today, just because a few days of the high season in June.
The second part of the year, I hope the situation will improve. The second level of the discussion here is what is going to happen at the time that this concession will finish. If I can say so, with the current scope of the contract, it's very difficult that anybody will operate this in a profitable way. What you need to do is changes that will improve and increase the performance, and those changes in the incumbent side, that we are the incumbents, are very clear. We have been operating this company for 30 years, and we know exactly what to do. This is a conversation that is already open with the airport authority, and we will discuss with them our initiatives in order to really implement these initiatives as soon as possible.
Thank you so much. On the free cash flow, please, Andreas.
Yes. On your first point on the 2017 numbers, you are absolutely right. There has been projects or extraordinary projects of about CHF 104 million cash outflow, of which about CHF 75 million or CHF 74 million were covered in working capital, and CHF 30 million were covered in CapEx. If you were to normalize 2017, first H1 2017, we would have had a normalized cash flow of about CHF 233 million. The increase year-on-year on a normalized basis is about 43%, of which about half is working capital improvement and the other half is really growth and profitability. What we are currently thinking is that we will get between CHF 350 million and CHF 400 million of equity free cash flow this year, and we should have at least the same, if not slightly higher numbers in 2019, as we continue to grow.
There is no leakage, as you pointed out. There are no specific projects that would require material cash that we have currently in the pipeline that we do see for 2019. Based on today's position, we should see at least the same, if not higher cash flow also in 2019, equity free cash flow in 2019.
Okay, that's great. Thank you so much.
Okay.
The next question comes from Jon Cox from Kepler. Please go ahead, sir.
Yes. Good afternoon, guys. A couple of questions for you. Just on the tax rate, Andreas, you are talking about 25% plus CHF 20 million this year. Any thoughts about the coming years? If you can just give us a rough breakdown of what the cash outflow of the taxes would be and what you think as well in the coming years. Because I think most people assume your tax rate would be below 20% amid the U.S. tax changes. To go back to free cash flow, Andreas, I thought you said CHF 350 million-CHF 400 million. My colleague was saying CHF 350 million-CHF 450 million, which you seem to agree with. Can you just give us a bit of clarification on that? As an add-on on that, the fact that you have done so well already in Q2 and it is not even the high season. Q3 is obviously the high season.
I am surprised if you just keep it at CHF 400 million on the top. Why are not you nudging up the top end of the range, given the sort of size of the beat? Just a last question on Latin America. Could you just give us a bit of an update on what is happening there and what maybe you are doing to try and offset the issues there? Maybe if you just tell us, I think in terms of profitability, Brazil is actually one of your poorest profitable operations these days. Is that still correct? Thank you.
Let me start with the tax rate and the cash flow question, and then Julián will take the Latin American Brazil question. On the tax rate, yes, the tax rate has actually increased. I think there are a couple of elements that I tried to explain, but maybe I wasn't fully clear. You are right that in the U.S., actually, the tax rate is reduced. But for our purposes, we didn't pay any taxes in the U.S. in the past because we had tax loss carry-forwards. Now, with the IPO and the changes in the tax laws, we are slightly less efficient in the U.S. today as we were in the past.
That is, if you want, a marginal contributor to the tax rate. The other part that is happening is that we are growing in markets and we're growing profits in markets where typically we have either higher tax rates or less tax loss carry-forwards available. If you want, the tax structure that we have historically had has become somewhat less efficient. That's why based on what we see today, the tax rate is actually moving up. It's not something that is actually new. We have seen that already in the past, but it has accelerated to a certain extent in 2018 in the first half. As I said, it's very hard to forecast taxes, so take everything I said with a pinch of salt. But that's our best guess going forward.
On the cash taxes, the simple way or the most simple way of doing it, at least from my perspective, is if you take the EBT that we have in the income statement and add back the acquisition-related amortization, because that is not typically tax-deductible. And then you will have actually a very good base of taxable profit, where then you can apply the tax rate. What I want to say here is if we look on how the cash taxes are trending, you can assume that they should grow in line with profit growth at the EBT level, if you want, in the past. To the equity free cash flow, our guidance is CHF 350-CHF 400, not CHF 450 for 2018. But obviously for 2019, as we continue to grow, hopefully we should be able to increase that.
Why do we not go for a higher guidance? And this is because if you look at how cash flow in 2017 developed, we did have a very strong working capital improvement in the 3rd quarter. And this year we already have preempted that, if I can call it that way, in the 2nd quarter. In a way, what I want to say here is the Q3 2018, I don't expect it relatively as much stronger as Q2 was. And that's why maybe the CHF 350-CHF 400 are slightly cautious. I may take that, but I feel more comfortable with that also in view of the fact that there are some new projects coming. We have one Perth, we have Hong Kong coming up, so there is also CapEx that will be kicking in. So we feel more comfortable with the CHF 350-CHF 400 at this stage.
Andreas, just on the tax, you assume it'll be 25% over the next few years then?
Sorry. Yes, correct. That would be my best guess at this stage.
Thank you.
Jon, regarding South America, what we have seen over the last three months, especially during the second quarter, is this acceleration in terms of sales in US dollars. As I mentioned, the performance in local currency is very high, especially in Argentina, high double-digit growth. In Brazil, it's single-digit growth in local currency. Don't forget that most of the costs in these locations are in local currency. We don't pay the cost in US dollars. As a consequence, the profitability, especially margins, is not affected a lot. Especially in Argentina, it's increasing. Regarding the profitability in Brazil is not a low profitable company. You need to take into consideration, depending on obviously the calculation you do, the allocation of the different, obviously, cost and margins in the distribution centers.
If you ask me the question, is it in line with the other locations worldwide, I would tell you, yes. In terms of margins, it's very similar, even that obviously it's a very sizable operation.
Thank you very much.
The next question comes from Volker Bosse of Baader Bank. Please go ahead.
Hello, gentlemen. Three questions from my side. First of all, on gross profit margin. Julián, you indicated in previous conference calls, gross profit margin could be up by 50 basis points in 2018 in the full year. After H1, you were at 29%. Would you confirm your indications of 50 basis points as of today? The second question would be on concession fees. They are up by 40 basis points in H1. What can we expect here on a full year basis? I mean, the run rate historically, I think it's 25-30 basis points on average. Is it fair to assume concession fees to be slightly ahead of these historical average? The third question, sorry to come back on taxes. Just for clarification, Andreas, what is the CHF 20 million one-off related to? Thank you.
I will start with the gross profit margin. The 30 basis points of increase in second quarter and first quarter is mainly due to the mix effect. I think I mentioned that there are new operations started by the company that are impacting this gross profit margin. By year-end, my base estimate is that we'll be between 30 and 40 basis points, because I think, again, with the mix in summer, we will come back to that. To reach 50 basis points straight to the P&L is possible, but I prefer to say between 30 and 40 basis points of increase. Regarding the concession fees, it will be in line, 20-30 basis points of increase by year-end. It's still the same. This is obviously based also in the sales calculation, because most of the concessions are variable, but depends on the performance.
I confirm 20-30 basis points. The meaning is by year-end, we will be mitigating or above the gross profit margin on top of the concession fees. It's the leverage and the efficiency and business operating model plans that so far have delivered 40 basis points. As I said the previous times, we will be between CHF 55 million and CHF 60 million full year impact. This is what is obviously becoming the EBITDA in line, or I confirm that we are in line with the projections or with the consensus by year-end. Regarding taxes.
The taxes. On the CHF 20 million, as part of the Hudson IPO preparation, we needed actually to restructure parts of the U.S. legal organization in order to be able to carve out, if you want, the Hudson business. That has led to some internal profits. For tax purposes, they obviously are still profits in that context. For that reason, we have deferred taxes of CHF 20 million that you see on top of that normal taxes on the tax income line. The exact amount for Hudson was CHF 13 million. There are some other smaller stuff then related to other projects and other restructurings that we did, which accounted for the other CHF 7 million to get to the CHF 20 million. The largest part, as I said, was the Hudson IPO, if I can call it restructuring. Or legal reorganization, actually, to be more specific.
Okay. Thank you for clarification. Thank you.
Thank you.
The next question comes from Paul Bonnet from Bank of America Merrill Lynch. Please go ahead, sir.
Hi, Julián. Hi, Andreas. I had a quick question on, first the 5%-7% organic growth guidance. We've seen the slowdown in Spain and Latin America, and that Spain gets slightly bigger in Q3, I guess, in terms of percentage of sales. In Latin America, the depreciation happened throughout the second quarter. I guess we should see that extend into Q3. Are you still comfortable with the 5%-7% organic growth guidance for the full year? Is the first question.
Yeah.
Okay, fine.
Yeah. Go ahead.
The second question is about the distribution center. What can we expect there? Because I see that they increased 200%, so almost CHF 30 million of impact on the revenue. What can we expect there for the second half of the year? Thank you so much.
Okay. Thank you very much for the questions. Regarding organic growth, I confirm that we expect to be above 5% full year. This is our best estimate still today. Obviously, will be two different parts. One is the high season, the other one is the fourth quarter. In the third quarter, I think we'll be obviously below 5%. Being specific, probably will be around 3%. I think due to obviously the information we managed today, that during the fourth quarter we will recover and the estimation we have today is above 5%. Regarding the distribution centers, it's difficult to really forecast, because the distribution centers depends on contracts between companies, and depend on the level of sales of each of the company. The allocation of the gross profit margin could be higher or lower. It's not something that we manage.
It's a contract between the distribution center and the different companies. This is official contract. Obviously, all is transparent. We cannot guess if it's going to be higher or lower. Personally, I suggest, because this is the trend, that you use the same proportions than during the half year. This probably is going to give you a better understanding.
If I just can chip in on that one. What you do see is, because of the business operating model, there is now a higher proportion of sourcing shifted through the distribution centers, especially for Division 1, for Southern Europe and Africa. When you look at the overall change in Southern Europe and Africa, that is somewhat overstated, because due to the supply chain change that we have done there, part of the profits have shifted to the distribution center. In a way, the change in Europe and Africa looks over proportionally bad, which is not fully the case. It is lower than it is before, but part of it is also in the distribution centers. And just to remind you, all of the distribution center profits are internal profits. It's a pure profit allocation between distribution centers and the divisions, if you want.
Makes sense. Thank you so much.
Thank you.
The next question comes from Joern Iffert, UBS. Please go ahead.
Good afternoon, Julián. Good afternoon, Andreas. Thanks for taking my questions. First one would be, please, on the EBITDA margins. Key drivers for the EBITDA margin improvement, in particular in Q2, but also for the first half, seems to be advertising income and the improving results from share of associates. My question is linked to the business operating model. CHF 26 million, are they only fully coming through then in the second half? Are they cross and we need to deduct something on the net line coming from the business operating model? Second question, please, would be on the line below EBITDA, the other operating expenses. We have CHF 22 million now after first half. What do you expect here then for the second half? What do you also think could be the run rate then for 2019? Thanks very much.
Regarding the first part, I will answer the first part, Joern. The margin, the gross profit margin especially, is obviously due to advertising and to cost of product. Sometimes you cannot separate because the negotiation is done together. It's not a split. Advertising is not only the advertising, it's also the negotiation process based on the number of employees they provide us, the number of obviously promotions. It's not easy to split both in order to understand the margin. I would say, please take into consideration the 59.8% gross profit margin as a reference point. The business operating model so far is not impacting this gross profit margin. It's only negotiations. Regarding the business operating model impact, it's above the EBITDA line. It's personal expenses, especially personal expenses and general expenses. The impact so far has been CHF 16 million, more or less, until June.
We expect the remaining CHF 10 million by year-end. There is another part that I mentioned in previous calls that is regarding the efficiency plan of reorganization of central offices in the different divisions and headquarters, where we are going to deliver this total CHF 55 million-CHF 60 million of savings compared with previous year. This is the key point. You have CHF 26 million due to the business operating model, and the remaining part, the CHF 55 million-CHF 60 million, is due to the efficiency plan that I comment on in previous calls.
Maybe if I just can make one side comment. Share of results of associates, we had a negative one-off last year. I think this was more a negative impact last year than a positive this year. What we are this year, we are completely recurring, there is no adjustment, if you want, or normalization in that line required. To your point, to your question specifically to the other operational results. We have in half year 2018, we have about CHF 5 million, give or take, of, let's say, something that I would consider really non-recurring, which is Hudson-related or other projects that are kind of more one-off in nature related. I would argue that for the full year, we probably should be ending up above CHF 30 million-CHF 35 million.
For the full year 2019, my best guess at this stage would be somewhere between CHF 20 million-CHF 30 million, depending on how the year goes.
All right. Thanks very much. Maybe if I may come back also to the organic growth. You indicated that organic growth in Q3 is likely around 3%. What makes you confident that Q4 is improving again to reach your full year targets?
We have almost Well, I cannot comment on a specific because they are not open, but we are scheduling to open new operations too, no?
All right. Thank you very much.
Okay.
The next question comes from Charlie Muller from Deutsche Bank. Please go ahead, sir.
Yes. Good afternoon, guys. Two questions, please. The first one is staying with that organic growth plan or ambition. To put another way, should we expect the contribution from net new space, which was 2% in H1, should we expect that to build in the second half? My second question relates to your RED loyalty program. Can you share with us any metrics around the level of penetration you are achieving in the stores where you have deployed that RED program, such as the proportion of sales where you're capturing the passenger details? Thank you.
Okay. Regarding the second part of the year, I think the 2% as a target is a realistic target to 2.5% for the new concessions. Regarding RED, obviously compared with the total company, still it's not important, but there are locations or there are companies where we are reaching 10% of increase in terms of the penetration due to the Reserve and Collect and RED, because all is connected. The target for the future, I am talking about 2023, 2024, is to reach around 10% of the sales at that time.
Great. Thank you very much.
Yeah.
The next question is a follow-up question from Mr. Cox from Kepler. Please go ahead, sir.
Sorry to come back. Julián, you said that you're okay with consensus. Did I hear you correctly? What were you referring to, the absolute EBITDA number or the margin expectations, which I think are plus 50, plus 60 basis points this year? EBITDA is around CHF 1.1 billion plus.
Yeah.
Is it the margin?
No, this is both. This is both in terms of total value and margin.
Thank you.
Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Mr. Díaz and Mr. Schneiter for any concluding remarks.
Okay. Thank you very much. It has been always a pleasure to communicate about Dufry. Thank you for the questions and the participation, I look forward to meeting you soon. Thank you.
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