Ladies and gentlemen, good morning or good afternoon. Welcome to Dufry's first quarter 2018 results conference call and live webcast. I'm Sherry, the Chorus Call operator. I would like to remind you that all participants will be 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 connect to 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 for the introduction. As you all heard, this is Julián Díaz speaking. Also participating in the call, Andreas Schneiter, both from Dufry. Welcome to this Q1 results presentation. Let's use, as in previous calls, the presentation we published this morning on our website. Page five of the presentation shows the headlines of, in my opinion, positive Q1 2018 in two different fronts. From the financial point of view, organic growth increased by 7.1%, gross profit margin increased by 30 basis points, achieving 59.9%, and EBITDA reached CHF 183 million, reaching 10.1% EBITDA margin. Cash flow generation improved significantly compared with last year, too. From the corporate point of view, I think two very good news also announced during the quarter. First of all, the dividend of 3.75% approved by our annual general assembly.
The second one, the share buyback program up to CHF 400 million, that will be launched, as already communicated in the press release, on May 11th. Let's move to page six of the presentation. In Q1, we have delivered, as I said, a strong organic growth, 7.1% compared with last year, and ahead of Q4 2017, where we reached 5.7%. Total turnover increased by 6.6%, reaching CHF 1.8 billion. All divisions performing well, especially division 3, Asia, Middle East and Australia. I think the significant acceleration of this division had obviously the two main drivers. One is the Chinese passenger destinations, and the other one, also the good performance with Russian passenger destinations, too. As part of the acceleration in organic growth and on top of the healthy increase in passengers in Q1, 5.4% in the locations where Dufry is operating shops.
We have continued with the refurbishments of 7,100 sq m of commercial space, with a total target for the full year of 48,000 sq m, and the opening of new 4,500 sq m with a total objective of 22,000 sq m, basing the information on up to March 2018. As is obvious, we are only in the first quarter. At March 31st, we have signed a new 13,900 sq m of new commercial space that will be open along 2018 and beginning 2019. The total number of square meters of commercial space operated by the company by March 2018 was 440,200 sq m. Regarding our gross profit margin, we reached 59.9% compared with 59.6% last year, 30 basis points of increase as a consequence of two specific issues. One, implementing better negotiation terms with our suppliers, and the second one, the activation of several promotional agreements negotiated with all brands partnered during 2017.
EBITDA expanded by 100 basis points, reaching 10.1% compared with 9.1% one year ago. EBITDA was CHF 183 million, 18.4% above last year. The profitability improvements are due to increase of gross profit margin, 30 basis points, the efficiencies generated by our business operating model and efficiency plan in personal expenses and other expenses, and the decline in concession fees due to better performance in sand operations and the negotiated terms in others. Cash EPS in Q1 was CHF 0.56 compared with CHF 0.29 in 2017. Specifically due to a better performance in most of the lines in the P&L, but especially EBITDA and financial expenses improved by the financial reorganization implemented last year, as commented during full year results presentation. Free cash flow improved by CHF 32 million, with minus CHF 45 million as reported information.
As explained in previous calls, Q1 is the lowest quarter during the year in generation of cash and profitability for the highest seasonality concentrated in Q2 and especially in Q3 after World Duty Free and Nuance acquisitions. If we move now to page seven, we are going to comment on the performance by division. In division one, Southern Europe and Africa, turnover Q1 reached CHF 321 million, plus 11% compared with previous year, and positive 3.7% organic growth. Morocco, Egypt, Ghana, Nigeria, Kenya, Malta, France, double-digit growth. Italy and Greece, single-digit growth, and Spain is slightly positive. Division two, U.K., Central and Eastern Europe, turnover reached CHF 397.4 million, an increase of 3.5% compared with previous year. Organic growth was negative -1.4% due to the closing of all operations in Geneva. Excluding this one, organic growth reaches plus 3.9%. U.K., Zurich, Basel, Sweden and Finland, single-digit growth.
Division three, Asia, Middle East, and Australia. Turnover reached CHF 256.5 million, with an increase of 16.7% compared with the previous year. Organic growth was 21.1%, and continuing the good performance in most of the countries compared with Q4 2017. Macau, Indonesia, Cambodia, India, Jordan, Kuwait, Russia, Kazakhstan, Bulgaria, and Armenia, double-digit growth. Singapore, Emirates, Serbia, and Korea, single-digit growth. Division four, Latin America. Turnover reached CHF 409 million, plus 2% compared with the previous year. Organic growth reached 9%. Mexico, Dominican Republic, Trinidad, Flagship, the company that is operating sales on board cruise lines, double-digit growth. Brazil, Argentina, Uruguay, Chile, Peru, Jamaica, single-digit growth. Finally, division five, North America, turnover increased by 3% in CHF and 8.4% organically. Double-digit growth in duty-free U.S. and Canada, and single-digit growth in duty paid in all the operations. Regarding trading update in April.
Obviously, April is only one month of the quarter, but the information shows as follows. Despite the strong comparable with Q2 last year, due to the seasonality effect, last year organic growth was, in this quarter, 8.9%. Total global performance was, in April 2018, middle single positive growth. Division one, Southern Europe and Africa. Very good performance in Africa. Greece, Turkey, Malta, Italy, France, and a slowdown in Spain, especially due to seasonality. Division two, U.K., Central Europe. Despite the seasonal effect, positive performance in Zurich and Basel. Division three, Asia, Middle East, and Australia. Very positive trend accelerated in April. Good performance in Macau, Korea, Indonesia, India, Jordan, Kuwait, Bulgaria, and Armenia. Division four, Latin America. April sales composite performance in the division, with Ecuador, Chile, Peru, Mexico, Dominican Republic, Flagship, and Jamaica, and April sales slowed down in Brazil, Argentina, and Uruguay. Division five, North America.
We move to page 8 of the presentation. One of the most obviously relevant components of the organic growth is shown on this page, is passengers' expectations and increase. First of all, the international passengers grew by 6.6%, based in ACI, Airports Council International information, by 6.6% during the Q1 2018. International passenger forecast is still very healthy, and I hope that very positive also, 6.8% in 2018, 5.8% in 2019, and finally, a projected increase of 5.5% in 2020. We move to page 9. Page 9, what we have is a detailed explanation about the square meters of commercial space we are operating today. Total space, as I said, is 440,200 as a total commercial space.
We opened 4,500 of new commercial space with a target of 22,000 for the full year. We refurbished 7,100 with a total objective 2018 of 48,000. We have signed 13,900 signed space on the top right side of this slide, with expected 11,500 that will be open along 2018 and expected 2,400 that will be opened during the first quarter of 2019. Obviously, in both cases, we are still in March, and we have still nine months to go in order to generate more new spaces. Project pipeline.
As a consequence of our strategy, many times mentioned it, of developing the company in Asia, within the 50,400 square meters of pipeline opportunities, almost 50% of these opportunities are located in Middle East, Asia, and Australia, a significant development also expected in North America with 24%, Latin America with 12%, Southern Europe and Africa with 10%, and U.K. and Central Europe of 8%, all based in the 50,400 square meters of pipeline opportunities. We move to page 10. Terms of duty segmentation, I just comment on duty division performance on the right side, top side of this slide. As a consequence, I will comment on the duty free by channel.
As I am going to explain during this presentation, on top of the April retail activities, either duty free or duty paid, representing 90% of the business, the company started a new strategic move one year ago with three focus of implementation in terms of channels. One is border shops, the second one is cruise lines, and the third one is downtown duty free. Also commented during the previous call, we just have been awarded one of the most important projects in terms of border shops is the MTR project, is fast train from Hong Kong to Shenzhen in China. Cruise lines, we have been awarded 31 new cruise lines that will be open along 2018 and 2019, and downtown duty free, especially in Asia. We just opened a casino shop in Malaysia that will follow with, obviously, I hope, more new outlets during 2018.
In terms of the U.S., just confirming our strategy, food and beverage and master concessionaire. In terms of regional diversification, Asia continues to be number one priority for the company. In page 11, by category, all the product categories performing well. Just reminding, the strategy of the company is personal care, food and confectionery, and luxury products. Personal care first quarter increased by 8%, food and confectionery by 7%, and luxury products by 9%. In all these categories, we have seen a significant increase compared with the first quarter of 2017. Duty free by sector, 66% of the sales are generated through duty-free activities and 34% through duty paid. If we move to page 12. In page 12, the priorities for 2018, already commented in previous calls.
I think the first comment is regarding the new global organization that we implemented during the first quarter of 2018 with different priorities. One of them is the acceleration of the project that I am going to comment on right now. Regarding the business operating model, business operating model will be fully implemented by the end of 2018 and will focus especially in 5 areas. Number 1 is the standardization of ERPs in terms of IT systems. Number 2 is standardization organization. Number 3, standardization of process and procedures. Number 4, supply chain reorganization and standardization, including advertising, promotion, master data, global catalog, and the leverage of the logistic in terms of scale. The expected efficiencies due to this program in a full year basis will be CHF 50 million, as already commented on. In 2018, the impact in the P&L will be CHF 26 million.
We have already launched this project in 32 countries, and we are expecting that it will be launched and implemented by the end of 2018. If we move to the second page of priorities, page 13. We have started a significant development of digital capabilities in the past, two and a half years ago. In 2018, we have the intention, and is part of the strategic plan, is to digitalize the company and to create a new digital plan that will be launched along the year. This digital plan will cover not only what we call customer focus and digital-driven, basically focusing the customer, but also all the areas of the company that are considered global at the level of headquarters and in terms of the standardization of the logistics system.
In case of the digital tools that we are using today, just for summarizing what we have done so far, first of all is the standardization and digitalization of customer research through the CRM database. The second one is the employee digitalization with the tablets project that is implemented today in many countries. All our employees in the shops are equipped with iPads. The only channel strategy, including the new digital generation store, the Red loyalty program, the Forum and the social media. Finally, the project that will elaborate the strategy for new products, exclusive products for travel retail, and new services. Regarding the new strategic initiatives, as I said, duty free, duty paid and downtown, multichannel, cruise line, border shops, and as well food and beverage and master concessions in the U.S.
The footprint in Asia is remaining the number 1 priority in terms of geographical diversification. Finally, as a consequence of all the initiatives already mentioned, ongoing focus on cash generation and deleveraging of balance sheet. Right now, I am passing through Andreas Schneiter, Global CFO, for continuing with the financials. Andreas, please.
Thank you, Julián, and good morning and good afternoon, everyone. Let's move to page 15. As already commented, organic growth in the first quarter 2018 remained very strong at 7.1%, which is almost the same growth rate as one year before. There is one big difference, however. Comparables are now much tougher versus one year ago. It is fair to say that even if timing of Easter supported growth in the first quarter, we performed very well in the first quarter of 2018. As already mentioned by Julián, looking at a divisional split, Asia, Middle East and Australia had an outstanding growth of 21% through a combination of like-for-like and additional space. Equally, Latin America and North America both did very well with high single-digit organic growth.
The performance of U.K. and Central and Eastern Europe was impacted by the closing of Geneva, operational performance of the division overall continued to be solid. The same applies also for Southern Europe and Africa. Moving to page 16, where we have the details on currencies. The FX translation effect in the first quarter was -0.5%. The stronger Swiss franc against the US dollar resulted in a negative FX effect, which could not be fully compensated by the positive FX effect on the euro and the British pound versus the Swiss franc. Based on the current exchange rates, FX translation effect will turn positive in the second quarter. If we move to page 17, the income statement. Gross margin increased by 30 basis points as mentioned, mainly driven by negotiations with suppliers and additional promotional activities.
Concession fees improved by almost 20 basis points as a percentage of turnover. Main driver was mix changes as well as an improvement on some of the concession contracts. For the full year, we continue to expect a small increase in concession fees as a percentage year-on-year. Even so, Q numbers illustrate that concession fees can improve in certain situations. Personal and general expenses together improved by half a percentage point. Key driver was efficiencies from the BOM, business operating model implementation launched in 2017. As a result, EBITDA margin increased by one percentage point to 10.1%. On depreciation, amortization, and linearization, all items were in line with last year and were developing as expected. Depreciation remained stable as a percentage on turnover, and amortization and linearization were stable as absolute amounts as usual. Other operational result was a negative CHF 11.2 million.
The bigger part of that was expenses related to new openings and closings, which accounted for CHF 6.5 million of the total. This line also includes transaction costs from the Hudson IPO of CHF 1.5 million. Financial results improved by CHF 10 million, mainly due to the refinancing of the bonds and the bank facilities that we did in 2017. Income tax expense for the period was CHF 12.5 million. There we had a one-off non-cash charge of CHF 1.8 million due to the legal restructuring done in the U.S. prior to the Hudson IPO. The other comment on taxes that I like to repeat on every call, the tax rate does vary quite significantly along the year, and the first quarter is not indicative for the full year tax rate. Non-controlling interests were CHF 1.9 million for the quarter.
The lower amount compared to last year is mainly due to Hudson. Similar to Dufry, Hudson's net earnings are negative in the first quarter. Hence, the additional minorities from the Hudson IPO do reduce this line for the quarter. For the full year 2018, minorities will increase compared to 2017 because of the Hudson IPO, though. Cash net earnings, to go to the bottom line where we add back acquisition-related amortization, almost doubled to CHF 29.9 million for the quarter. Let's move to page 18 where we have the overview of the Cash EPS. Cash EPS increased 93% year-on-year to CHF 0.56 per share. The first quarter is always the lowest quarter because of the seasonality, and as such, the contribution to Cash EPS is relatively low.
Q1 results illustrate quite nicely on how the good top-line performance, combined with the improvements on the cost side, flow down to the bottom line. Let's move to page 19, where we have the cash flow statement. Starting with the free cash flow, we were -CHF 45 million in the first quarter, which is an improvement of CHF 32 million compared to last year's same period. As in 2017, we invested a substantial amount in net working capital in the first quarter of 2018. This year, in 2018, it was CHF 131 million compared to the CHF 137 million last year. If you break this down in both years, 2018 and 2017, the investment in core networking capital was around CHF 52 million. Part of that is due to seasonality, and the other part is growth related.
The other part of the CHF 131 million is the other working capital, and there the change was this year, CHF 79 million versus last year, CHF 86 million. Again, it's almost similar. The other working capital has become a lot more seasonal since the Nuance and World Duty Free acquisition due to the geographic exposure on one hand and contractual terms on the other hand. Having said that, the key message is that the changes are seasonal and will revert throughout the year as we saw it in 2017. We will revisit this point in a minute. Equity free cash flow also improved by CHF 30 million, in line with the free cash flow before financing. Below equity free cash flow, we have cash flows related to the Hudson IPO, which is a net inflow of CHF 660 million, and the purchase of treasury shares, an outflow of CHF 120 million.
We already commented on these transactions on the full year 2017 call. On page 20, I would want to revisit the seasonality on the free cash flow. There we have illustrated again the quarterly evolution. The chart shows that using 2017 as a template, Q1 and Q4 are typically cash neutral or even cash negative, and the big cash generating periods are the second and third quarter. On page 21, we show our operational cash flow KPIs. Measured as percentage of turnover, core networking capital was higher by 30 basis points compared to last year. For the full year 2018, we do not expect any change in the core networking capital levels, i.e., our target range remains between 4.5% and 5.5%. This remains unchanged, there will be obviously seasonality as usual.
Typically, our networking capital is highest at the end of Q1 and the lowest at the end of Q3. On CapEx, for the quarter it is 3.5%, also there, our expectation remains unchanged at around 3% to 3.5% of turnover for the full year. On page 22, we have started to put the additional cash flow metrics which we want to start reporting going forward. I already discussed the various contributors earlier on, I am not going to repeat it. Overall, we can say that we are on track for full year 2018 regarding operational performance and cash generation, we have delivered good results in the first quarter. On page 23, we have the balance sheet. There, the big changes have been in a reduction in net debt and an increase in equity. Both are mainly related to the Hudson IPO.
Other than that, the other lines are consistent with December 2017. Let us move to page 24. Net debt at 31st March was CHF 3.2 billion, our leverage covenant, which is basically net debt to EBITDA, was 3.07 against the maximum threshold of 4 times. As mentioned in earlier calls, our target leverage range is between two to three times net debt to EBITDA. Effectively, we reached our target leverage this quarter. To conclude, Dufry shareholders approved a dividend payment of CHF 3.75 per share on the AGM last week. This is going to be paid in the next couple of weeks. We will launch next Friday the share buyback program of up to CHF 400 million that we announced about one month ago. This is all from the finance section, I hand back to Julián.
We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only hands to ask your question. Anyone who has a question may press star and one at this time. The first question is from Charles Maurice-Sans, Deutsche Bank. Please go ahead.
Good afternoon, gentlemen. Thank you for taking my questions. I have three, please. The first one is, when you talked about border stores and the strategic opportunity there, I wondered if you have seen any further progress in the regulation of those in Brazil and how you think you're positioned there. The second one relates to the buyback which you will commence shortly. I just wondered how will you think about balancing that against your ambitions to prioritize growth in Asia? Do you think that there's scope to do both if you saw an interesting acquisition opportunity, or do you think it's a case of one or the other? Finally, your interest charge, your net interest charge for Q1 was only CHF 31 million. I think you've guided CHF 150 million-CHF 160 million for the year, and that was before you announced the buyback.
I just wondered whether that stood still or whether you're a little bit lower. Thank you.
Thank you for the three questions. Regarding Brazil, the project is progressing and accelerating now. The local government's already designed the way these shops will be operated and located. We don't have any specific, obviously, calendar that I can communicate publicly because it's not fixed. The project is progressing very fast now, and I think these shops will be open soon. Regarding the share buyback program, it's not going to interfere with what we already comment on in the market. These small middle-size acquisitions will be part of the strategy of the company from now on, and in parallel with whatever is the share buyback implementation along the next 12 months, we remain alert of any possible steps on this regard. Regarding the interest, Andreas?
I think we may have made two assumptions when we talk about the forecast, if you want, or the indication that we gave. I think we do assume slightly higher interest rates along the year. I think that's one point. The other one is obviously with the share buyback, we may have slightly higher debt levels than what we initially forecasted. I think, if you were to assume that interest rates do not change, I would tend to agree. I think the CHF 150-CHF 160 are probably at the higher end. Depending on how you visualize the interest rate environment, I think we still feel comfortable with what we said beforehand, but I think there is certain potential, if you want, in that respect.
Great. Thank you very much.
Next question.
Thank you. Thank you for the question.
Next question is from Jon Cox, Kepler Cheuvreux. Please go ahead.
Good afternoon, Julián and Andreas. Just two questions really. One is on the emerging market currencies. Maybe Julián, maybe you can comment on that. And the slowdown you're starting to see in Brazil and Argentina. Are you worried about what is happening with the emerging market currencies, or do you think the amount of decline so far is not really a concern? Obviously, if you look back to 2015 and 2016, when organic sales were really under a lot of pressure, the weakness in the Brazilian currency particularly was much more pronounced. I think it was like 30%-40%. I think now we are just down maybe 10%. When should we get worried, or are you guys worried about that at all, considering that you slowed down to mid-single digit growth in April? That is the first question. Second question, sorry, Andreas, I know I keep coming back to the cash flow statement.
It was an improvement, of course, still negative. Obviously, as you say, the seasonality does tend to confuse everybody, myself particularly. It is a CHF 30 million-odd improvement. Should we just, say, multiply that by four to try and come up with a full year figure? Or maybe you can give us a best guess for your thoughts on free cash flow after payment of minorities for this year. Thank you.
The first point, Jon, the currency fluctuation is always obviously a concern for us, but so far what we have seen is not the volatility that may impact the sales. As you know, because I think I tried to explain it in the past, we have a significant saving in the pricing strategy and the pricing policy compared with the domestic markets. As far as, obviously, the savings are still significant, the fluctuation is not impacting the volume of sales. More concern is probably the high volatility more than the high devaluation or depreciation in one single moment. If the volatility is very high, then the expectations from the different customers is they wait until they see exactly how much they are going to pay for the product. As you know, we nominate the prices in U.S. dollars in this part of the world.
My conclusion is so far, I think what we have seen is not impacting the sales because still the savings are very healthy compared with the domestic market. Then the cash flow, Andreas.
On the cash flow, I think, look, the mechanics is always the same for the full year, and I think we shouldn't be confused by Q1 numbers. I think the cash flow is always a bit more complicated in Q1. On a full year basis, I think if I just do my standard math and say, look, historically, free cash flow before financing has been, let's say, 55% of EBITDA, and then I deduct from that, give or take, CHF 200 million for, A, the financing costs and, B, the minorities. Depending obviously on what EBITDA you're taking as starting point, based on our plan, we will be somewhere, let's say, between CHF 350-ish and CHF 400 according to our plan, if everything goes as we expect.
Again, you will need to use your model as a starting point, I think that's where we end up in our plan.
Thanks. Just as a follow-up, Julián, just wondering about the currencies elsewhere in the world. Obviously, as you say, there is a tax advantage in Latin America, even if you're still pricing in dollars. What about, for example, in Russia? The ruble is under pressure. The Turkish lira is under pressure. Some of those, excluding Latin America, are you seeing any weakness there at all because of what's happening with the currencies? Or again, are you pretty relaxed?
No, not relaxed. No, we haven't seen any impact yet. In fact, Russia and Russian destinations, where the Russians are the main passengers, are growing very good, very significantly. I think, obviously, the volatility is an issue again. For example, in Russia, due to the devaluation of the ruble, also the prices in the domestic market increases significantly. As a consequence, the savings in the subs, again, are adjusted. As I explained, there is always a period of time, depending on the inventories in the domestic market, where obviously these devaluations and fluctuations may impact the sales. Gradually, as soon as the merchandise imported in the domestic market is reaching the level of obviously the new exchange rate, the savings are again very good and obviously very solid. As a consequence, the sales are not affected.
Last year, spend per passenger globally increased by 2.2% or 2.3%. This year, during the first quarter, we had, again, a significant increase in spend per passenger on top of the increase of last year. Again, we are concerned, yes. We are concerned because this is something that we need to monitor, but it's not yet impacting the performance of the company.
Maybe just then a final question, Julián, and my apologies on this one. Big congratulations. 100 basis points on the margin improvement in Q1 EBITDA. Surprised a lot of critics out there. What do you think for the year as a whole? We're not asking you to be exact, but I guess 100 basis points for the year as a whole would probably be a bit too aggressive. What are your thoughts on the margin for the year?
I think it's difficult always. I am going to explain how I look at it because I think it's better that instead to say one number, you build your own model. I repeat, I think several times that we are projecting this year around 50 basis points increase in gross profit margin. After that, what we expect due to the projects, the business operating model, and efficiency program, between 30 and 50 basis points increase due to the leverage of these efficiencies in the P&L. Finally, the concession fees. The concession fees, as I said, during the first quarter, along 2018, what we are going to see is an increase of around 20 basis points compared with previous year. This is already giving you something between one number and another number.
I don't want to give, again, the impression that I want to discuss about the EBITDA margin. Those are the targets we have in the company for 2018.
Great. Congratulations again. Thank you.
Thank you very much, Jon.
Next question is from Eduard Oba, Morgan Stanley. Please go ahead.
Yeah, good afternoon, guys. Eduard, Morgan Stanley. I have two questions. The first one is on Spain, which I guess is an important market for you. Given that your concession fee will increase by a fixed EUR amoun t, I guess it's key for you to increase your sales there.
To come back on cash flow, sorry, Andreas, but last year in 2017, extraordinary project generated cash outflow of, I think, around CHF 104 million, if I remember correctly. I think a few months ago, you indicated that you did not expect any significant impact in 2018 and 2019. Is that more or less the case still or not?
Okay. I will start, Andreas.
Okay
If you want. I will start with the first question. Regarding Spain, it's obvious that Spain still had very healthy increase in number of passengers. In the locations where we are operating was around 9%. What is behind this 9% for Dufry? Obviously, we are retailers. First of all is the low cost driven passengers, and the second one is the importance of the British passengers. The low cost is a very good passenger. I read in many locations that low cost is a threat for the travel retail. It's completely the opposite. Low cost is a significant increase of passengers. What we need is to really deliver in these shops the value these passengers are expecting. We have, and I think, different commercial concepts that will accelerate sales based in low cost passengers.
The meaning of the consequence of the low cost passenger is that maybe the average spend per passenger will drop, but the total sales will facilitate, obviously, the leverage of many other costs in the company. I am sure that this part of the business, during the next years, will be a big contributor to the sales of the company. The second one is, in Spain, a significant part of the number of passengers are British. Obviously, over the past years, what we had is a significant devaluation of the pound. This is important because in Spain, we nominate the prices in EUR. As a consequence, British passengers are, in terms of growth, not contributing to the growth in Spain. In any case, in Spain, the growth during the first quarter was positive. This is more or less from Spain.
Okay. Look, on your cash flow question, you were absolutely spot on. Last year, we had extraordinary project or investment of CHF 104 million. The largest part of that accrued actually in the second quarter 2017, and so far there's nothing special if you want in 2018. I think the outlook for 2018 remains unchanged in that context. We don't plan to repeat, if you want, the 2017 extraordinary investment.
Okay, great. Thank you.
Thank you very much for the questions.
Next question is from Joern Iffert, UBS. Please go ahead.
Hello, Julián. Hello, Andreas. Thanks for taking my question.
Hello, Joern.
The first one would be, please, on the net new shop expansion, the growth contribution of 2.2% seems very strong, looks very strong. Can you please give us a split of where you have expanded an existing concession contract and where you have won a new contract where you haven't been the incumbent before? Second question would be, please, on the minimum rent increase in Spain. Can you give us an update where we stand here? Do we see the cash component of the minimum rent increase in Spain below the EBITDA line in the linearization? The last question would be, please, on the Spain concession. It's a quite big one for you as far as we are informed, it should mature 2019-2020. Have you already started negotiations? When do you expect negotiations to start, if not happened already? Or will this be a tender process?
Some more details there would be appreciated. Thanks very much.
Okay. Regarding the 2.2% increase in sales due to new concessions, I don't have the split here, but most of these spaces were totally new. In any case, they are new even considering the spaces where we are operating today. In the sense of your question, most of them were new.
Second is Spanish MAG. I think the Spanish MAG is a public information. Every year, it increases, and this year, it increased by around 6%, 7%, based in the original MAG. The third one, Spanish concession, we have not start any negotiation yet, and I think it's a very early stage. We need to understand, obviously, better what could be the negotiation basis, and the information provided by the performance of the company is the relevant one.
Okay, thanks. Regarding the Spanish MAG, the increase of plus 6%, 7% year-over-year, the cash component is also showed in the linearization, right?
No, the MAG, what is below EBITDA is the cash advance payment that was done in the past. The rest is above EBITDA.
All right. The cash component is captured in EBITDA already?
Exactly. If we would have a higher MAG, this will be captured in the line concession fees.
Great. Thanks very much.
Okay. Thank you very much.
Next question is from Rebecca McClellan , Santander. Please go ahead.
Good afternoon. This is Rebecca at Santander, not Mariana. I've just a couple of questions for you. Just going back to the 2.2% new space contribution or new concession contribution. What do you think it should be for the full year?
That's the question, or there are more questions?
There's more questions.
Okay.
Secondly, of the like for like, what was the split sales per passenger and pax growth? My third question is about Asia, and whether you're sort of seeing any sort of increased activity in terms of small and mid-sized assets on the market.
Okay. Any other questions?
No, that's it.
Okay. Regarding the new space, I cannot comment on the specific new space, but the target that I mentioned regarding organic growth for 2018 between 5% and 7%, I think remains totally valid. This is, for me, the critical point. As a consequence, probably we will be around 2% or something like that. I prefer that we talk about organic growth.
Okay.
Regarding like-for-like, the increase of like-for-like is mainly driven in our case by passengers, it's obvious, but depending on the passengers, and this is a blended. Just for your calculation. Within the like-for-like, in this specific case, there is probably 1% that is generated through new space. New spaces, no. It's the same space. It's sales per passenger there, and the remaining is like-for-like.
Okay.
What is the third question?
It's about Asia and sort of small and mid-sized assets and whether the market-
Yes
you think it's starting to heat up, or?
There are several small, middle-size possible transactions in Asia, but we have not progressed a lot with these transactions yet.
Your view on small to mid-size is sort of what? CHF 100 million, CHF 200 million revenues, or?
It's between CHF 200 and CHF 400 sales.
Okay.
Million sales.
Thanks.
Next question is from Paul Bonnet, Bank of America Merrill Lynch. Please go ahead.
Hi. Thank you so much for taking my questions. I have a quick question. While going through your bond prospectus, I was looking at the U.K. framework agreement, which will expire in May 2020, but there is a three-year extension option. It said that certain conditions have to be met for it to be exercised. Who has the option to exercise it? Is it the U.K. airports or is it you?
It's a bond.
Look, put it that way, I think there are certain performance criteria, and this is actually quite standard for these type of contracts in the U.K. In a way, I think it goes both ways. I think we have the right and also the airport has the right. The basic assumption is if we continue to operate as we do today, this will be out of question that we do extend.
This will be out of question that you will extend?
It is clear that we will extend.
Okay.
Sorry. It is absolutely undoubted that we will extend the contract.
Okay. Thank you very much. Another quick question. I see that you had a 20 basis points selling expenses decrease. To what extent is this also driven by the loss of the Geneva concession?
Of the concession. Not at all.
Not at all?
No. It's the opposite.
Okay.
I think this is obviously, Geneva, it was a pure duty-free operation with better performance in terms of %s.
Lastly, if I may, I see that distribution centers added CHF 10 million to the EBITDA versus last year incrementally, excluding which basically your regionals margin are overall up 60 basis points instead of 100 basis points. How should we think of distribution center going forward? Because it seems that in terms of geographical split, they take an even more-
Okay
a bigger share of the cake, I think.
The statutory report is based in the obviously tax and international agreement we have with the distribution centers.
Yeah.
Calculating properly the EBITDA at the regional level, you need to allocate in the base, in the different volume of sales, in most of the cases, what is allocated in the distribution centers. You cannot understand from the performance point of view, the different divisions just with the statutory information, because obviously part of the gross profit margin is allocated in the distribution centers. This is number 1. Number 2, the distribution centers cannot be projected a lot because it's basically a reflect of the mix of sales in the different operations. I think to tell you that it's going to be like last year, it could happen similar to last year distribution, but it cannot be confirmed because depends on the performance, especially in the high season.
It's not an easy calculation in terms of the distribution centers because the gross profit margin of different product is different. The gross profit margin allocated to the distribution center, depending if the distribution center is contributing or not contributing to these products in the supply chain, it's very difficult. Sorry, I cannot give you any specific information, but in terms of projections for you, let's do it in one thing. Let's do it in % similar to previous year.
Okay.
Next question is from Volker Bosse, Baader Bank. Please go ahead.
Hello. Volker Bosse, Baader Bank. Congratulations on the great set of results. A lot of questions are asked. I've two final one. First on, especially on the upcoming summer season and your outlook for Greece, which is very much linked to the travel activity and spending power of the Russians. How do you look on Greece?
In the moment. Second question would be regarding your shareholder structure. On the paper form, HNA holds still 20.9%, although the shares are handed to third parties via derivative structures. Did you receive any news from your shareholders here, or is the 20.9 still valid or any update on that? Thanks.
Okay. Regarding the first point, summer season in Greece and [inaudible] Turkey. They look great, and the information we are receiving is very positive in both cases. In Greece, due to the European and obviously the renovated number of Russians too, and in Turkey, because the bookings from Russia. In both cases, what we have heard is very positive.
Regarding the shareholder structure, the official disclosure, as you know, is 20 point something %, and this structure has been disclosed through different three collar structure.
What is obviously important here is the official disclosure information. The reality, if you analyze the different disclosure done so far, is that the economic interest in the company is very low. I cannot comment on what because obviously it's a calculation that depends on many things, but it's far away of 20%.
Okay. Thank you very much. Congratulations again.
Thank you.
Next question is from Peter Tasta On Investment. Please go ahead.
Hi. Thank you very much. I'll just take three questions one at a time, please. Firstly, just to understand on space. Can you give us any thoughts as to whether there are any significant expiries or losses coming in the other quarters, kind of the size that we've noted before? Also at the same time, there were some renegotiations of concessions for space extensions last year. I was wondering when we should start to see the positive impact of those space extensions, in this year or is it next year?
Okay. Regarding space per quarter, we are not expecting any significant impact of square meters losses during second, third, and fourth quarter of 2018. As I obviously sometimes remind, we have a concession portfolio with an average duration of 8.5 years so far. This is something that obviously is, in my view, is supporting the growth in terms of square meters. The second one is the renegotiation of different contracts. We have renegotiated two contracts last year that started to impact during the second half of the year. I think what we have seen in the low season is a higher impact. For this reason, I comment on both things, the renegotiation of contracts and also as is also known, I comment last year that a couple of contracts, and I mentioned at that time, one contract in Australia, one contract in America.
We started to pay the new rent in January when the shops really were open with the new configuration and the new renovation done in the second and third quarter. As a consequence, I think as long as the year is going on, what we will see is that the savings that we have shown in the first quarter will be mitigated. For the reason I comment on that by year-end, the performance of concession fees will be an increase of around 20 basic points.
Okay. In terms of the space impact of those extensions, getting new space and terms and better quality space, when is that being felt?
The impact will be, as I said, is the same. I try to explain it through the concession fees. Is third and fourth quarter.
Right. This year. Okay.
Yes.
Yeah. Fine. Then you talked earlier about the exclusive travel retail product and services you wish to launch, and you mentioned your response on the low-cost carrier opportunity. Can you give any sort of sense as to what significant steps we may look for coming out this year or next year in that regard, please?
Yeah. We have created, in my view, a very good relationship with the suppliers, with the vendors, they have obviously the same intention. Is to develop exclusive products for travel retail in different areas. So far, what probably you have heard is about confectionery, where we have launched two or three new products, all great success with Lindt. There is also an ongoing project with Diageo for launching in travel retail new whiskeys with different international brands, but always well-known brands. The intention is to really attack the core categories, and especially spirit and confectionery. There are also initiatives that will be based in the personal care, perfume and cosmetics and other products, including the important brands.
What is the target here is within the brand portfolio we have is alternative presentations and products that will use the brand equity in order to impact the customers and also create this selectivity of selection of products that travel retail historically has had. What is going to happen in the future? In our view, this is a combination of things that are also linked to the digitalization that I mentioned before, that is one of the main drivers that we are expecting for organic growth in the future. It will be a combination of services and products that will be special and located in travel retail environments. When I mention travel retail, I say in duty free environments. During 2018, what we are going to see is a significant development in new exclusive products for travel retail in duty free.
In 2019, we are going to see products and services. The services will be also communicated through digital tools. This is obviously, it's a huge project that we started. Part of this project is recognized as the name eMotion, but the full and complete implementation of this project will be along 2018, and the first impact in the organic growth, I hope, will be reflected in 2019.
Right. For low-cost carrier passengers, were you talking more about specific products tailored to-
Yeah
sort of fast response, short stay?
Yes.
Are you talking about whole retail concept?
Yeah, we have two different lines of initiatives. One is to develop, as is today in more than 14 countries, our convenience store concept, is Hudson.
within the travel retail, standard travel retail shops, we have developed within duty free, duty free travel retail and with the concept in duty paid, product lines that are specifically addressed in passion and cosmetics, in drinks, in confectionery, that are specifically addressed to low-cost passengers. Low-cost passengers are good. I don't want to really discuss about that the low-cost passengers are going to deteriorate the travel retail. I think it's totally the opposite. Low-cost passengers are going to lead an important part of the growth in the future. What is going to happen, and this is something that is important to know, that the average spend per passenger probably will drop, because the spend per passenger in low-cost passengers is lower. This doesn't mean that they are not going to buy anything.
What we need to do, and we are doing it, is to develop specific products and commercial concepts, shops in this case, to really attend these passengers and lead these passengers to be customers in the travel retail environment. I think we have been very successful. Again, regarding duty paid activities, we have grown a lot, and regarding the convenience store concept, we have grown a lot, too. That's my opinion.
Okay, thank you. Last question is just, when you think about the investment and expense investment that's required behind some of these initiatives, or also the e-commerce, the red data initiatives and so on, can you give some sort of sense as to what you think you need to do to step up or maybe reinvest some of the BOM savings behind this to drive growth?
It's a very relevant, obviously, question because the digitalization is not for free. I think what I can say is what we are trying now is to enclose in this 3.5% of CapEx, whatever change is needed. So far, we have been doing that. In fact, if you compare this year, and we have done a lot of investment with previous year, we have 3.5% of increase in terms of CapEx. I am not telling that it's not going to be higher. Probably we will need specific higher investments, but in terms of projections, 3-3.5% of CapEx is a very good projection.
That's great. Thank you very much for the answers.
Thank you.
The next question is from Johannes Braun, MainFirst Bank. Please go ahead.
Yes. Hi, I have just one question, actually. I was wondering if you can give us an indication of what the impact of the Easter timing was, not on sales growth, but on the concession rate, really, because clearly you had more revenues in Spain, with last year's Easter travel sold partially in Q1. Would you pay fixed rents in Spain so the cost per sales ratio should have benefited from that. Just wondering if you can give us an indication of the underlying development.
Yeah.
I think last year gave us some idea of this effect, it was quite significant, if I remember correctly. That's why I'm asking.
Okay. Last year, Easter is not Easter, it's Holy Week and Easter, both weeks, because depending on the country, one is more important than in the other. In the last year, we have two weeks in April. This year we have one week in March, and that was the Holy Week, and then one week in April, that was the Easter period.
Yeah.
The impact, depending obviously on the location, is different. In Iberia, let's talk about in Iberia, it's around 0.7% of growth. I am talking about sales, eh? I don't know
Yeah
sales because it's difficult, but around 0.7%-0.8% in a quarterly basis.
Okay, the underlying development was still up
Yeah
Q1. Yep.
Yes.
Thanks.
Next question is from Rene Saner, Octavian. Please go ahead.
Yes. Hi. Thanks for taking my question. A question on the digital shop concept, obviously beyond the commercial opportunities you are expecting, it seems to me you're creating a lot of advertising space at the same time. My question would be, what is the expected impact midterm on this CHF 50 million advertising revenues you are recording? If I'm correct, I think there's no concession fees on that should be quite interesting opportunity. A follow-up on Brazil. There has been talks about a change in the duty-free allowance. Is there any progress on that? Thirdly, on Hudson, now that the business is listed separately, maybe you can elaborate a bit more about what we should expect going forward in terms of initiatives, in terms of pushing the food and beverage business and the master concession business.
Okay. Regarding the digital shop and the relationship with advertising income, first of all, advertising income is not always for free. It is not for free because it's a combination that we negotiate with all the airports, and depending on the airports, we pay or we don't pay, but it's basically an agreement airport by airport. Sometimes we pay concession, sometimes we don't pay concession fee because depends on the concession fee agreed also. This is number 1, just for clarifying. The second thing, obviously, advertising is a good driver, but it's not advertising. In reality, what we are doing here, we call it advertising. What we are doing here is really promoting the brands in collaboration with the brand owners and creating this brand equity. What is the good thing with the digital shop?
There are many objectives, but let's talk about financial objectives. Number 1 is to increase the penetration rate. Number 2 is to increase the spend per ticket, and number 3 is to increase the advertising income that we call advertising income. Regarding the first 2, they are the main drivers for continuing with organic growth. The last 1, advertising income, is a compensation that will depend on many things, will depend on the exposure of the brands, will depend on the number of product that we list from the brands. It's very difficult to really project this at the stage we are with the development of this shop. We have only opened five shops. If the question is, these shops will facilitate the development of the advertising income line in the P&L, the answer is yes.
I cannot tell you that it will be 1% or 2%. It's very difficult. We cannot project that so far. Regarding Brazil, the duty-free allowance is still an ongoing project for us. The project has been so far led by us and by the organization of retailers in Brazil. As you know, Brazil has more important things to decide than the duty-free allowance. There is not a reason why this allowance has not been increased during the last 12 months, but the situation is exactly the same. I think the country has today other important political issues and economical issues to solve, and this is one of the issues in the list. The last one, Hudson.
I prefer that we don't comment specifically on Hudson in this call because it's going to be a call in one hour from now, where probably my colleagues will explain the strategy we are following up. What is, for us, the importance in Hudson? Hudson is the leader in retail in the U.S. and Canada, in either duty free or duty paid. The company has a significant room for improvement. In which areas? Obviously, number 1 is retail, but there are two areas where we need to understand if the company could perform. Number 2 is food and beverage. Number 3 is master concession agreement. Regarding the first line, I don't think I need to comment anything else because we have been expanding the business in either duty free or duty paid.
Regarding the food and beverage, this company is involved in a territory, is operating in a territory where 65% of the business is generated through food and beverage, opposite to other territories in the world, where 65% is generated by retail. As a consequence, one of the strategic moves that we did with the IPO is facilitate that one of our subsidiaries that is going to invest in food and beverage is isolated in one single territory, obviously with the conditions of that is managed by us and is controlled totally by us. The food and beverage is an opportunity, and it's a great opportunity for Hudson, and in our view, will be one of the main drivers of growth in the future on top of the growth that they have already projected and reported to the market. Master concessionaire is one of the trends in the market, too.
Very often we see this type of agreements in the U.S., less important and less expanded outside the U.S. I think international is one of the models that we tried in the past with different airports. In fact, we have today in the list of priorities, identify these master concession agreements outside the U.S. and Canada, but in the U.S. and Canada is one of the main drivers for controlling concessions. In our case, we have already been awarded of one of the airports in Chicago, Midway, and we are participating in other two RFPs. Is this something that will change the scope of the company in the short term? The answer is no, but in the medium long term, we create a more sustainable and better concession portfolio. Regarding what is the last question? That's Hudson. Okay. Thank you very much.
That was it. Yeah. Thank you very much.
Thank you.
We have a follow-up question from Jon Cox. Please go ahead.
Yeah. Thanks very much. Just a couple of quick ones. On the buyback starting on Friday, just wondering what method you are using. Will you have a parallel trading line there? That's the first question. Second question, just on your Investors Day, coming up on the 31st of May, can you give us any idea what you might be discussing at the Investors Day? Just lastly, Andreas, on IFRS 16, wondering if you guys have done any work on what the impact will be on EBITDA and net debt next year when you implement IFRS 16. Thank you.
I guess I'll take all three questions. Look, on the buyback, we will not have a secondary line. We will do everything on the primary line. From a tax perspective, because this will be done out of paid-in capital, sorry, paid free reserves, there is no tax consequences anyway. We will follow, if you want, a dynamic strategy relative to share price and volume. That's going to be the approach. On the investor day, there from an operational perspective, we want to dive into more detail into, if you want, the digital part of things, so operational aspects. That will be the focus on it. On the finance side, as you pointed out, one of the possible topics could be IFRS 16. I think in that context, I will defer, if you want, to the analyst day as well.
I think as a preliminary comment, what we do know as of today, based on the work that we've done so far, is that there will be obviously additional assets and liabilities generated through IFRS 16 because we will capitalize the fixed part of our concession agreement. In essence, the minimum guarantees or any fixed rents that we may have. The current amount, but take that with a big pinch of salt, that we're talking about is about CHF 7 billion-CHF 8 billion of assets and liabilities that we will add to the balance sheet. On the EBITDA side, we pretty much would double up EBITDA to around 25% EBITDA margin. There's about CHF 1 billion-ish, very large number, very rough number, of concession fees that will be shifted through the amortization.
I think, given the complexity of the topic, I think there is a strong preference that we can explain that in more detail with more time, not by phone, but in person. That will be one opportunity to do it on the analyst day.
Thank you.
That was the last question. I would now like to turn the conference back over to Mr. Diaz.
Thank you very much to all the participants in the call. The questions are always welcome, and if you need anything else, please contact us directly to the Investor Relations department or calling us. Thank you very much.
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