Earnings Call: H1 2018

Aug 3, 2018

Ladies and gentlemen, good morning or good afternoon. Welcome to the Bluefry's Half Year 2018 Results Presentation Conference Call and Live Webcast. I'm Alice, 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. After the presentation, there will be a Q and A session. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Julian Diaz, CEO of Dufry. Please go ahead, sir. Thank you very much. Good afternoon and thank you for participating in the call. These are Andreas Sisner and Julian Diaz participating from Dufry. We are going as in previous calls to use the presentation disclosure this morning in our website. Please go to Page 6 of the presentation highlights. In half year, we delivered 7.2% turnover increase compared with 2017, reaching CHF 4,100,000,000. The main driver was organic growth, increasing by 5.5%. During the Q2, 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 and the new concessions net 2%. And the new concessions net 2%. Confirming again the value of our diversified concession portfolio creating half 1, we have opened 109 shops with 13,200 square meters of new commercial space. The plan for this year is to open around 28,000 square meters. We also refurbished 22,400 square meters out of a plan of 43,000 full year, including a good very good new generation store in Hydro Terminal 3. During the 1st 6 months, we have signed 14,100 square meters of new commercial space. 10,000 will be opened along 2018 and 4,000 in 2019, including the new MTR fast train terminal in Hong Kong, the new Aljazeera terminal in Kuwait, the retail operations in Chicago, Midway and Perth Airport in Australia and third increases with different companies among other projects. At June 2018, the group's pipeline opportunities were 40,000 square meters. Most of them, as is obviously commented on several times, focusing Division 3 Asia with 43% of the total. The total in 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 percent in 2017, reaching EUR464,000,000 plus 13% compared with 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 personnel expenses and general expenses of 40 basis points on turnover. Concession fees increased by 30 basis points, in line with the forecast commented during our last call, where we mentioned it, concession fees will increase between 20 30 basis points this year, and this is still our target by year end. Cash EPS increased by 14.5 percent, reaching CHF 2.68 compared with CHF 2.34 in 2017. With a 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 record for the period of Swiss franc EUR 330,000,000 more than double than previous year, Showing on top of EBITDA growth and better performance in net working capital 4.9 percent on turnover compared with 5.3% last year and a contained CapEx growth of 3.1% on turnover compared with 4% last year. And finally, with the free cash flow reached Swiss franc EUR 222,000,000 versus EUR 60,000,000 in the previous year. If then we move to Page 7, here we have again the information regarding the turnover, where we increased by 7.2%, 5.5 percent organically, but I would like to comment on the performance division by division. Division 1, Southern Europe and Africa. Turnover increased by 7.3%, reaching $833,000,000 compared with $756,000,000 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 substitute 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 1st weeks of July, although it's still very early for reaching any conclusions about it, the trend in the performance is very similar. Division 1 performing single digit positive growth with Spain remaining with the same negative performance compared with previous quarter. Division 2, UK and Central Europe. Turnover increased by 3.5% compared with previous year and reaching Swiss francs EUR 910,000,000 Organic growth increases by 3.3%, excluding the contract exited in Geneva and minus 1.2% taking into consideration this operation. Very good performance in UK, Switzerland, Sweden and Finland with single digit positive growth. Slightly better performance during the 1st weeks of July, also with single digit growth led by good performance in UK and Switzerland. Division 3, Asia, Middle East, Eastern Europe and Australia. Turnover increased by 20.3 percent reaching Swiss franc $546,000,000 Organic growth remained very high, 22.1 Double digit growth performance in Macau, South Korea, Indonesia, Cambodia, India, Jordan, Dubai, 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 Q2. The performance during the 1st weeks of July continues double digit growth, but a lower level due to the tough comparables. Division 4, Latin America. Ternove reached $820,000,000 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 1st week of July, the situation in South is slowed down in same path. Division 5, North America turnover increased by 5.5% expressed in Swiss France, reaching $850,000,000 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 1st week of July, the trend has been similar than in half year results. If we move now to Page 8, 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. And in April, the increase in international passengers worldwide was 7.1%. In locations where Vutufir is operating, this Regarding international passenger growth forecast, we remain very strong. Regarding international passenger growth forecast, it remained very strong and continued 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 9 of the presentation, a bit more detail about the gross retail space open. We have opened 13,200 square meters. The total target for this year is 28,000 with several important openings. In Madrid, new Hudson International Shops. In Malaysia, the 1st 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 and O and in several locations as always a small locations in 23 new stores in North America. Regarding the refurbished shops, we have complete 22,400 square meters 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 2nd part of the year, these 43,000 will be complete. Every time that there is a renovation, the spend per location increase between 15% 25%. The reality of the refurbishment done during the first half are here listed. Malaga, 3 stores, Raclion in Greece, Toulouse, Malta, Hydro Terminal 3 and Liverpool. If we move to Page 10 of the presentation, a new space signed so far during the year, 14,100 square meters, main contract 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 square meters 43% of these 40,000 square meters 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 our risk diversification strategy in the different divisions. We have reached 23% of the business in division UK 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 of the accelerated growth that we have had in this division. By channel, we confirm we are at APO Retail, 91% of the total sales, but we are growing now in the 3 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 3. If we move to Page 12, top and bottom side on the right part of the slide shows the performance during the 1st 6 months. We are still focusing personal care, portion 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 and luxury products with 13% of total sales with growth of 6% compared with previous year. Dufry by sector, the operations in Duty Free generated 63% of the total sales and Duty Pay 37%, quite in line with previous year. And if we move to Page 13, in Page 13 and Page 14, I'm going to explain the status of 2 of the most important projects we are developing so far. 1 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 and L in 2018 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 areas already certified, and we expect that all the countries will be fully implemented by year end 2018. The expected efficiencies that will be impacting the P and L, EUR 50,000,000 will be split EUR 26,000,000 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 4th one is supply chain standardization with the 3 platforms that we have already announced in the past. And finally, the global implementation of emotion. I am going to comment of emotion in the next page. Everything is on track and the efficiencies announced are expected to be delivered in the timing also disclosure. 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 of the 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 3 types of priorities in this digitalization process. Number 1 is drive revenue. We are not going to be digital. What we want to be is a very efficient company or more efficient company based in digital. The initiative will 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 and L. And finally, we are preparing the company for the future, building capabilities and building the platform that will develop the future Dufry. For developing new Dufry in the future, we need a very solid technological platform with the ideas that the company is going to implement during the 1st part of 2019. And during the first and second part of 2019, we're going to develop the platform that will allow us to really implement at the maximum level the idea of digitalization in Dufry. This is going to be reflected in 2 projects. 1 is emotion. Emotion 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 reset and collect, it's online side. The idea is expand internationally. This Receive and Collect service for pickup on departures and arrivals, the merchandise order from the digital devices. Bread by Dufry, the loyalty program. Personalized benefits depending on the customer and creating a CRM database. Safe tablet for the employees in the digital shops in the new generation stores, improving the mobile payments and training 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 APOS brands in the social channels and 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 Aman in 2019. And this part of the digitalization is allowing us to increase the sales in most of these locations in close to double digit growth and over double digit growth, especially in Asia. Strength communications with brand stories and novelties, Grishev and Colette already launched in 20 countries, CRM and RED already launched in 32 countries and social media forum already available in online. With all these rollout with the tablets, the shop employees in new generation stores are ready to attend and welcome any type of nationality and customers with a 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 2. And this specific move from noninteraction to interaction is one of the areas that we are developing more with digitalization. Finally, 3 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 198,000,000 and in the future areas, our commitment is to pay minimum $200,000,000 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 $400,000,000 during 12 months. Share purchased until July 27 is 1,352 1,000,000. Total amount of share buyback program executed by July 27 is 182,000,000. For continuing with the financials. Thank you, Julian, 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 percent after 1st quarter growth of 7.1%. Apart from the very strong comparables that we had in the Q2 last year, we also had the impact of the Easter effect in 2018, which was negative in the Q2 as the start of the Easter was in Q1. Now the Easter effect is about 70 to 80 basis points of quarterly growth. So this was contributing to Q1 this year, but not to Q2 where it was missing. So adjusting for this effect, the expected run rate in Q2 was about 5.5%. So 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 Julian. Now on the organic growth by division. Julian already explained that in detail. So in a nutshell, division Eastern Europe, Middle East and Asia continue to perform very strong as did North America. U. K. And Central Europe had stable growth and divisions in Southern Europe and Africa as well as Latin America both slowed down relative to the Q1. Then 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 euro and the British pound. Based on the current rates, we do expect that the FX translation effect remains positive for the full year 2018. Then if we move to Page 19, where we have the income statement, we already talked about turnover, so 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's plan. Concession fees increased by 30 basis points to 27.7 percent 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 Julian. As a result, EBITDA grew to €464,000,000 and EBITDA margin improved by 0.5 percentage point to 11.3%. Then moving on, depreciation was slightly higher than in previous quarters at 2% 2.3% of turnover, and this is a result of our continuous investment in refurbishments as well as new space. Amortization increased slightly as an absolute amount to $183,000,000 As a percentage of turnover, duration improved to 4.5%. Linearization was CHF 40,000,000 as anticipated. As a reminder, linearization comprised of the noncash 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 50,000,000 Other operational result for the half year was CHF 23,000,000. Of this amount, about CHF 14,000,000 are related to new projects and start ups as well as restructurings and closings. Financial results improved by almost 30% to CHF64 1,000,000 This is mainly due to the refinancing and the better terms that we did that we got, and this is something we executed in 2017. Income tax was CHF 47,000,000 in the half year. Of this charge, about €35,000,000, so 3 quarters roughly, relate to deferred taxes and are noncash in nature. This amount includes one off charges of about CHF 20,000,000 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 20,000,000 that will come on top of it. Moving on. Noncontrolling interest were CHF 23,000,000, of which the largest part is due to our business in North America. The CHF 23,000,000 already includes the Hudson minorities since the IPO in February this year. The result then basically is cash earnings, which improved by CHF15 1,000,000 to CHF142 1,000,000. Then 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. So if everything goes to plan, we should have an acceleration there again. Then moving to Page 21, where we have cash flow statements. We had a record cash generation with free cash flow at $330,000,000 and equity free cash flow at $222,000,000 for the half year. The first half did not have any exceptional items or major projects, so 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 and because I commented on the taxes and 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 €665,000,000 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 420,000,000 to our shareholders since the beginning of the year. Now let's look at the different cash flow elements in a bit more detail, and let's start with the seasonality on Page 22. So the Q3, as you see, is typically the quarter with the highest cash generation. As you also see, we had an outstanding Q2 in terms of cash generation, which was even higher than the Q3 last year. Now given that we already have a good improvement on working capital in the Q2, 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 then to Page 23. In the first half of twenty eighteen, core net working capital improved by $40,000,000 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. So typically, the core net working capital is below 5 percent in Q3 and then it moves back about 5% at year end. Overall, across the year, our goal is keep the core networking capital at around 5% on average. For CapEx, in the first first half twenty eighteen, we were at 3.1 percent of turnover, and this is fully in line with our target range of 3% to 3.5% of turnover. And we do expect to end up within the same range for the full year, so no changes there. Then 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, 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% to 55%. And for the equity free cash flow, we expect to end up at the higher end of the initial range, which was €300,000,000 to €400,000,000 I. E, our expectation today is that we can generate an equity free cash flow between $350,000,000 $400,000,000 for the full year 2018. Then 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 the 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. Then on Page 26 to conclude, there we have the net debt as usual. So we reduced our net debt to SEK3.15 billion as per June, and our covenant was a 2.95x net debt to EBITDA. So we are within our target range of 2x to 3x net debt to EBITDA on one hand and well within the threshold that we have agreed with the banks of 4x leverage. As mentioned in the earlier calls, we have a long term financing in place and there are no maturities before 2022. So this concludes my part of the presentation, and I hand back to Julian. Thank you, Andreas. 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 communicated 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 and L and full year this 2018, we expect CHF 26,000,000 above EBITDA. The share buyback program under execution and the dividend payment that happened in May. And the priorities for 2018 remain unchanged. Number 1 is 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, and as a consequence of all of these, focus on cash generation and deleveraging what is reflected in the information that we just commented on. I think from our side, in terms of the presentation, is done. And now I suggest we open the Q and A section. Thank you very much. We will now begin the question and answer session. The first question comes from Rohit Rajan from Morgan Stanley. Please go ahead. Mr. Rajan, your line is open. Mr. Redan, maybe your line is muted from your end. Yes. Hello? Can you hear me? Yes. Yes. We can hear you now. Yes. Hi. Sorry, it's Edouard Aubin from Morgan Stanley. I guess there was some confusion. Two questions for me, 1 on Southern Europe and 1 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 from away from Spain to Greece and Turkey, am I right in thinking that Spain is roughly 10% of your sales and Greece is roughly 4% and Turkey 1%. So that's number 1. In terms of the sales evolution, I think you 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? And 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? And when it comes to concession fees, they are all variable versus EUR 6,000,000 in Spain. So that's EUR 4,000. And then on free cash flow, so historically, you had significant cash flow leakage in the past and then clearly, that was not the case in the first half. So just a few clarification. Am I right in assuming that the one off, the negative one off were around CHF 100,000,000 in the first half twenty seventeen? Also Andreas, if you could please comment on the working capital improvement in the first half twenty eighteen not related to the one offs? And 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 €350,000,000 to €450,000,000 for the year. Is there any reason to believe that the number 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 up front payment you need to make for in terms of concessions next year? Thank you. [SPEAKER CARLOS ALBERTO PEREZ DE SOLAY:] 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 and more are flying to North of Africa and in other operations, especially to Turkey and to Greece. This is correct. And they are substituted by Spanish passengers what impact in terms of the spent 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 2 lots, as I said many times, we are paying a minimum guarantee. And as a consequence, the minimum guarantee is impact 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 mark 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. Is there anything else? No. So yes, that's perfect. And on the variable completion fees in Greece, if you could comment on that, that would be great. No, I cannot comment on that. It's information that we don't disclose and it's not possible to disclose because it's confidential based in the contract. Right. And so just to follow-up on Spain. On my calculation, your profitability is going to be extremely low this year likely. So if the terms of the contract will not change when you have to renew them end of 2019, beginning of 2020, would you basically walk away from the contract in Spain? If it's a satellite today, yes, but there are opportunities and I think I answered this question in the past. If there are opportunities for increasing significantly the sales, But this is based in 3 aspects. 1 is configuration of the shops and sites. The second one is configuration of the assortment and third one is the configuration of the traffic flow. And if this is happening, I think the mark 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 5 or 6 years ago. But I am very confident. First of all, that this year in 2018, the situation is now going to be at the level that probably looks like today just because a few days of the high season in June. And 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 in 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. And this is a conversation that is already open with the April Authority and we will discuss with them our initiatives in order to really implement these initiatives as soon as possible. Thank you so much. And on the free cash flow, please, Andreas? Yes. So on your first point on the 2017 numbers, you were absolutely right. There has been projects or extraordinary projects of about €104,000,000 cash outflow, of which about €75,000,000 or €74,000,000 were covered in working capital and €30,000,000 were covered in CapEx. So if you were to normalize 2017, first H1 2017, we would have had a normalized cash flow of about CHF233 1,000,000 So 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. Now to the equity free cash flow. So what we are currently thinking is that we will get between €350,000,000 €400,000,000 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. And 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. So 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. The next question comes from John Cox from Kepler. Please go ahead, sir. Yes. Good afternoon, guys. A couple of questions for you. Just on the tax rate, Andreas, you're talking about 25% plus $20,000,000 this year. Any thoughts about the coming years? Because I think most people assume your tax rate would be below 20% amid the U. S. Tax changes. And then 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. To go back to free cash flow, Andreas, I thought you said 350 to 400. My colleague was saying 350 to 450, which you seem to agree with. Can you just give us a bit of clarification on that? And as an add on on that, the fact that you've done so well already in Q2 and it's still the it's not even the high season, Q3 is obviously the high season. I'm surprised if you just keep it at 400 on the top, why aren't you nudging up the top end of the range given the sort of size of the beat? And then just a last question on Latin America. Can you just give us a bit of an update on what's happening now and what maybe you're doing to try and offset the issues there? And maybe if you could 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. So let me start with the tax rate and the cash flow question, and then Julian will take the Latin America and Brazil question. So 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. So 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 have tax loss carry forwards. Now with the change in tax regulation, we have started to pay taxes. This is still relatively marginal, so this is not a huge amount. But with the IPO and the changes in the tax rate tax laws, we are slightly less efficient in the U. S. Today as we were in the past. So 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. So if you want, the tax structure that we have historically had has become somewhat less efficient. So 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 certain extent in 2018 in the first half. As I said, look, 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 of 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 typically not or not that is not typically that is not tax deductible. And then you will have actually a very good base of taxable profit where then you can apply the tax rate. So what I want to say here is like if we look on how the taxes, the cash taxes are trending, you can assume that they should grow in line with profit growth at an EBT level, if you want, in the past. Then to the equity free cash flow, our guidance is $350,000,000 to $400,000,000 not $450,000,000 for 2018, but obviously for 2019 as we continue to grow, hopefully, this should be able we should be able to increase that. Now 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 Q3. And this year, we already have preempted that, if I can call it that way, in the Q2. So in a way, what I want to say here is like the Q3 2018, I don't expect it relatively as much stronger as Q2 was. And that's why maybe the 350 to 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 1 Perth. We have Hong Kong coming up. So there is also CapEx that will be kicking in. So we feel more comfortable with the €350,000,000 to €400,000,000 at this stage. So Andreas, just on the tax, so you assume that we 25% over the next few years then? Sorry, yes, correct. That will be my best guess at this stage. Okay. Thank you. Okay. John, regarding South America, what we have seen over the last 3 months, especially during the Q2, is this acceleration in terms of sales in U. S. Dollars. As I mentioned, the performance in local currency is very high, especially in Argentina, high double digit growth and in Brazil is single digit growth in local currency. And don't forget that most of the costs in these locations are in local currency. We don't pay the costs in U. S. Dollars. As a consequence, the profitability, especially margins is not affected a lot, especially in Argentina increasing. Regarding the profitability in Brazil, Brazil is not a low profitable company. You need to take into consideration depending on the recent calculation you do, the allocation of the different obviously cost in and margins in the distribution centers. If you ask me the question is 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 from Baader Bank. Please go ahead. Hello, gentlemen. Three questions from my side. First of all, on gross profit margin. And Julian, you indicated in previous conference calls, gross profit margin could be up by 50 basis points in 2018 and the full year. So after H1, you were at 29%. So would you confirm your indications of 50 basis points as of today? And second question would be on concession fees. They are up by 40 basis points in H1. So what can we expect here on a full year basis? I mean, the run rate historically, I think, is 25 to 30 basis points on average. So is it fair to assume concession fees to be slightly ahead of these historical average? And the third question, sorry to come back on taxes. And just for clarification, Andreas, what is the €20,000,000 one off related to? Thank you. I will start with the gross profit margin. The 30 basis points of increase in 2nd quarter and first quarter is mainly due to the mix effect. And I think I mentioned that there are new operations started by the company that are impacting this gross profit margin. By year end, my best estimate is that we will be between 30 40 basis points because I've seen again with the mix in summer, we will come back to that. To reach 50 basis points straight to the P and L, it's possible, but I prefer to say between 30 40 basis points of increase. Regarding the concession fees, it will be in line 20 basis points, 30 basis points of increase by year end. It is still the same. This is obviously based also in the sales calculation because most of the concessions are variable, but depends on the performance. But I confirm 20, 30 point basic points. The meaning is by year end, we will be mitigating or above the gross profit margin on top of the concession fees. And then is the leverage and the efficiency and business operating model plans that so far have delivered 40 basis points. But as I said the previous times, we would be between $50,000,000 $50,000,000 $50,000,000 $60,000,000 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 the what else, taxes? The taxes. So on the €20,000,000 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. And that has led to some internal profits. But for tax purposes, they obviously are still profits in that context. And for that reason, we have deferred taxes of €20,000,000 that you see on top of that normal taxes on the tax income line. So the exact amount for Hudson was €13,000,000 And there are some other smaller stuff then related to other projects and other restructurings that we did, which accounted for the other $7,000,000 to get to the $20,000,000 But the largest part, as I said, was the Tufts 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, Julian. Hi, Andreas. So I had a quick question on first the 5% to 7% organic growth guidance, because 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. And 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% to 7% organic growth guidance for the full year is the first question? Then the second okay, fine. Yes, go ahead. Go ahead. Go ahead. And the second question is about the distribution center. What can we expect there? Because I see that they increased 200%. So almost €30,000,000 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 question. Regarding organic growth, I confirm that we expect to be above 5% full year. This is our best estimate still today. Obviously, it will be 2 different parts. 1 is the high season, the other one is the Q4. In the Q3, I think will be obviously below 5%. I being specific probably will be around 3%. But I think due to the obviously the information we managed today that during the Q4, 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 is 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, but we cannot guess if it's going to be higher or lower. Personally, I suggest, because this is a trend that you use the same proportions than during the half year, because this is probably is going to give you a better understanding. So if I just can chip in on that one. So what you do see is like because of the business operating model, there is now a higher proportion of sourcing shifted through the distribution centers, in a way, the change in Europe and Africa, 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 profit. So 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 Jurgen Isert, UBS. Please go ahead. Good afternoon, Julian, good afternoon, Andreas. Thanks for taking my questions. The first one would be, please, on the EBITDA margins. The 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 result from share of associates. And my question is linked to the business operating model. The $26,000,000 are they only fully coming through then in the second half? Or are they cross? And do you need to deduct something on the net line coming from the business operating model? And the second question please would be on the line below EBITDA, the other operating expenses. We have €22,000,000 now after first half. What do you expect here then for the second half? And what do you also think could be the run rate then for 2019? Thanks very much. Okay. Yes, regarding the first part, I will answer the first part, Jon, is the margin and 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 on a split. Advertising is not only the advertising, it's also the negotiation process basing the number of employees they provide us, the number of obviously promotions, easy to split both in order to understand the margin. I would say, please take the consideration of the 59.8 gross profit margin as a reference point. And the business operating model so far is not impacting this gross profit margin, it's only negotiations. Regarding the business operating model impact is about EBITDA line, it's personal expenses, especially personal expenses and general expenses. The impact so far has been EUR 16,000,000 more or less until June. And we expect the remaining EUR 10,000,000 by year end. But 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 €55,000,000 €60,000,000 of savings compared with previous year. This is the key point. You have EUR 26,000,000 due to the business operating model and the remaining balance in the EUR 55,000,000 is due to the efficiency plan that I comment on in previous calls. Then on the so maybe if I just can make one side comment. The share of results with associates, we had a negative one off last year. So I think this was more a negative impact last year than a positive this year. So what we are this year, we are completely recurring. So there is no adjustment, if you want, or question specifically to the other operation results, so we have in half year 2018, we have about CHF 5,000,000 give or take of, let's say, something that I will consider really non recurring, which is Hudson related or other projects that are kind of more one off in nature related. So I would argue that for the full year, we probably should be ending up above €30,000,000 to €35,000,000 And then for the full year 2019, my best guess at this stage will be somewhere between €20,000,000 $1,000,000 to $30,000,000 depending on how the year goes. All right. Thanks very much. And maybe if I may come back also to the growth. You indicated that organic growth in Q3 is likely around 3%. And what makes you confident Q4 is improving again to reach your full year targets? We have almost well, I cannot comment on the specifics because they are not open, but we are scheduling to open new operations too. All right. Thank you very much. Okay. The next question comes from Charlie Muir Sands 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 it 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? And 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 is obviously compared with the total company, it's still is not important, but there are locations. So there are companies where we are reaching 10% of increase in terms of the penetration due to the Swiss franco LEB and red because it's 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. The next question is a follow-up question from Mr. Cox from Kepler. Please go ahead, sir. Yes, sorry to come back. Julian, you said that you can sort of you're okay with consensus. Did I hear you correctly? And what were you referring to? Plus 50, plus 60 basis points this year, plus 50, plus 60 basis points this year. EBITDA is around $1,100,000,000 plus. Yes. Is it the margin or 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. Diaz and Mr. Steiner for any closing remarks. Okay. Thank you very much. It has been always a pleasure to communicate about Dufry. Thank you for the questions and the participation and I look forward to meeting you soon. Thank you. Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call and thank you for participating in the conference. You may now disconnect your lines.