Dufry AG

SIX:DUFN

Earnings Call Transcript 2018-Q1

[Operator]

Ladies and gentlemen, good morning or good afternoon. Welcome to the Dufry's First Quarter 2018 Results Conference Call and live webcast. I'm Sarah, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions] 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.

[Julián Díaz González, CEO & Director]

Thank you for the introduction. As I believe you all heard, this is Julián Díaz speaking. It's also participating in the call Andreas Schneiter, both from Dufry. Welcome to this year Q1 results presentation. And as used in previous calls, the presentation we published this morning in our website. Page 5 of the presentation shows the headlines of our, in my opinion, positive Q1 2018 in 2 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, 2 very good news also announced during the quarter. First of all, the dividend of 3.75% approved by our Ordinary General Assembly and 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 11.Let's move to Page 6 of the presentation. In Q1, we would 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 performed well, especially Division 3 Asia, Middle East and Australia. I think the significant acceleration of this division had obviously 2 main drivers: One is the Chinese passenger's destinations and the other one also the good performance with Russian passengers destinations. 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 refurbishments of 7,100 square meters of commercial space with a total target for the full year of 48,000. And the opening of new 4,500 square meters with the total objective of 22,000 square meters based on the information [indiscernible] to March 2018. It's obvious we are only in the first quarter. On March 31, we have signed a new 13,900 square meters of new commercial space that will be opened along 2018 and beginning 2019. The total number of square meters of commercial space operated by the company by March 2018 was 440,200. Regarding our gross profit margin, we reached 59.9% compared with 59.6% last year, 30 basis points of increase. As a consequence of 2 specifications: One, implementing better negotiation trends with our suppliers; and the second one, the activation of several promotional agreements negotiated with old brands partnered to 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 margins, 30 basis points; the efficiencies generated by our Business Operating Model and efficiency plan in personal expenses and other expenses; and a decline in concession fees due to better performance in China operations and the negotiated trends in others. Cash EPS in Q1 was CHF 0.56 compared with CHF 0.29 in 2017. Specifically due to our 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 high seasonality concentrated in Q2 and especially in Q3 after World Duty Free and Nuance acquisitions. If we move now to Page 7, we are going to comment on the performance by division. In Division 1, Southern Europe and Africa, turnover Q1 reaches 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 lightly positive. Division 2, 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 minus 1.4% due to the closing of our operations in Geneva. Excluding this one, organic growth reaches plus 3.9%. U.K., Zurich, Basel, Sweden and Finland, single-digit growth. Division 3, Asia, Middle East and Australia. Turnover reached to CHF 256.5 million with an increase of 16.7% compared with 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 for Latin America. Turnover reached CHF 408 million, plus 2% compared with previous year. Organic growth reached 9%. Mexico, Dominican Republic, Trinidad, Flagship, the company that is operating sales onboard cruise lines, double-digit growth. Brazil, Argentina, Uruguay, Chile, Peru, Jamaica, single-digit growth. Finally, Division 5, North America. Turnover increased by 3% in Swiss franc an 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 is April is only month of the quarter, but the information source 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 1, South American -- Southern Europe and Africa -- sorry, very good performance in Africa. Greece, Turkey, Malta, Italy, France, and slowdown in Spain especially due to the seasonality. Division 2, U.K., Central Europe despite the seasonal effect, positive performance in Zurich and Basel. Division 3, Asia, Middle East and Australia. Very positive trend accelerated in April, good performance in Macau, Korea, Indonesia, India, Jordan, Kuwait, Bulgaria and Armenia. Division 4, Latin America. April sales composite performance in the division with Ecuador, Chile, Peru, Mexico, Dominican Republic, Flagship and Jamaica. April sales slowed down in Brazil, Argentina and Uruguay. Division 5, North America. Group positive performance continued in April duty free and duty paid in U.S. and Canada. Then we move to Page 8 of the presentation. One of the most obviously relevant components of the organic growth is shown in 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. If we move to Page 9. In 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 square meters as a total commercial space. We opened 4,500 square meters of new commercial space with a target of 22,000 for the full year. And with the full reach, 7,100 square meters with a total objective in 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 9 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, and then 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. If we move to Page 10, in terms of Dufry's segmentation, I just comment on Dufry divisional performance on the right side, top side of this slide. As a consequence, I will comment on the Dufry 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 new strategic move one year ago with 3 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 previous call, we just have been awarded one of the most important projects in terms of border shops is the MTR project. It's fast train from Hong Kong to Shenzhen in China. Cruise lines, we have been awarded of 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 concession here. And in terms of regional diversification, Asia continues to be #1 priority for the company. In Page 11, by category, all the product categories performed well. Just reminding the strategy of the company's personal care, food and confectionary and luxury products, personal care last year -- sorry, 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. Dufry 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 organization that we -- the new global organization that we implemented during the first quarter of 2018. With different priorities, but one of them is the acceleration of the projects that I'm going to comment on right now. Regarding the business operating model, business operating model will be fully implemented by the end of 2018. And we'll 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, Masterdata, Global catalogue and the leverage of the logistic in terms of scale; and the expected efficiencies due to this program in a full year basis will be CHF 50 million as already commented on, and 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, 2.5 years ago. But in 2018, we have the intention, and as 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 logistic system. In case of the digital tools that we are using today, and yes, for summarizing what we have done so far, first of all, it's the standardization and digitalization of customer research through the CRM database. The second one is the employee digitalization with the tablet project that is implemented today in many countries or employees in the sub-Sahara equipped with iPad. The only channel strategy including the new digital generation store, the RED loyalty program and the [ forum ] and the social media. Finally, the project that we'll elaborate the strategy for new product, exclusive product for travel, retail and new services. Regarding the new strategic initiatives, as I said, duty free, duty paid and downtown and multichannel, cruise line, border shops and there's one [ food and beverage ] master concessions in the U.S. The footprint in Asia is remaining the #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. And right now, I am passing through Andreas Schneiter, Global CFO for continue with the financials. Andreas, please?

[Andreas Schneiter, Chief Financial Officer]

Thank you, Julian. And good morning, and good afternoon, everyone. So 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 of 1 year before. Now there is one big difference however, comparables are now much tougher versus 1 year ago. So 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 Julian, looking at the divisional split, Asia, Middle East and Australia had an outstanding growth of 21% through combination of like for like and additional space, and an 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, but operational performance of the division overall continue to be solid. The same applies also for Southern Europe and Africa. Moving now to Page 16 where we have the details on currencies. So the FX translation effect in the first quarter was minus 0.5%. The stronger Swiss franc against the U.S. dollar resulted in negative FX effect, which will not be fully compensated by the positive FX effect on the euro and the British pound versus the Swiss francs. Based on the current exchange rates, FX translation effect will turn positive in the second quarter. Then 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, but even so few numbers illustrate that concession fees can improve in certain situations. First on general expenses together improved by 0.5 percentage points. Key driver was efficiencies from the BOM, Business Operating Model implementation launched in 2017. As a result, EBITDA margin increased by 1 percentage point to 10.1%. On depreciation, amortization and linearization, all items were in line with last year and [indiscernible] were developing as expected. Depreciation remained stable as a percentage on turnover and amortization, 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 cost from the Hudson IPO of CHF 1.5 million. Then 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 noncash price charge of CHF 1.8 million (sic) [ CHF 8.1 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 not [ classify ] significantly along the year and the first quarter is not indicative for the full year tax rate. The noncontrolling interest was CHF 1.9 million for the quarter. The lower amount compared to last year is mainly due to Hudson. So 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 get to 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 a subsequent contribution to cash EPS is relatively low. However, Q1 results illustrate quite nicely on how the good top-line performance combined with improvement on the cost side slowdown to the bottom line. Let's move then to Page 19 where we have the cash flow statements. Starting with the free cash flow, we were minus CHF 45 million in the first quarter, which is an improvement of CHF 32 million compared to last year 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. Now as you break this down in both years, 2018 and '17, the investment in core net working 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 to change ] was this year CHF 79 million versus last year CHF 86 million. So 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, but we will revisit this point in a minute. Equity free cash flow also improved by CHF 30 million in line with a 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 a purchase of treasury shares and outflow of CHF 120 million. We already commented on these transactions on the full year 2017 call. Then on Page 20, I would want to revisit the seasonality on the free cash flow. So 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. Then on Page 21, we show our operational cash flow KPIs. Measured as a percentage of turnover, core net working 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 net working capital level i.e. our target range remains between 4.5% and 5.5%. This remains unchanged and there will be obviously seasonality as usual. Typically, our net working capital is highest at the end of Q1 and the lowest at the end of Q3. Then on CapEx, for the quarter it's 3.5%, and also there our expectations remains unchanged at around 3% to 3.5% of turnover for the full year. Now 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 early on so I'm not going to repeat it. Overall, we can say that we are on track for the full year 2018 regarding operational performance and cash generation, and we have delivered good results in the first quarter. Then on Page 23, we have the balance sheet. There, the big changes have been in the 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. So let's move to Page 24. Net debt at 31st March was CHF 3.2 billion and our leverage covenant, which is basically net debt to EBITDA was 3.07x against the maximum threshold of 4x. As mentioned in earlier calls, our target leverage range is between 2 to 3x net debt to EBITDA, so effectively we'll reach our target leverage this quarter. To conclude, Dufry shareholders approved the dividend payment of CHF 3.75 per share on the AGM last week, so this is going to be paid in the next couple of weeks, and we will launch next Friday the share buyback program of up to CHF 400 million that we announced about 1 month ago. So this is all from the finance section, and I hand back to Julián.

[Operator]

[Operator Instructions] The first question is from Charlie Muir-Sands, Deutsche Bank.

[Charlie Muir-Sands]

I have 3, 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 commented shortly. I just wondered, how will you think about balancing that against your ambitions to prioritize growth in Asia. Do you think that there is scope to do both if you saw an interesting acquisition opportunity? Or do you think it's a case of one or the other? And then finally, your interest charge, your net interest charge for Q1 was only CHF 31 million. I think you've guided CHF 150 million to CHF 160 million for the year and that was before you announced the buyback. I just wonder whether that stood still or whether, you know, it's a bit lower.

[Julián Díaz González, CEO & Director]

Thank you for the 3 questions. Regarding Brazil, the project is progressing and accelerating now. The local governments already designed the-- where this shop will be operated and located. And we don't have any specific obviously calendar that I can communicate publicly because there's no [ fees ]. But the project is progressing very fast now. And I think this shop will be open soon. Regarding the share buyback program, it's not going to interfere with what we already comment on in the market. As more middle-sized 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'll remain alert of any possible steps on this regard. Regarding the interest, Andreas?

[Andreas Schneiter, Chief Financial Officer]

Yes. So look, I think, we may have made 2 assumptions when we talk about forecast if you want or information that we gave. I think we do assume slightly higher interest rates along the year. And 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. So I think if you were to assume that interest rates do not change, I would tend to agree. I think the CHF 150 million to CHF 160 million are probably at the higher end depending on how you visualize the interest rate environment. I think we're still too comfortable with what we said beforehand, but I think there is certain potential if you want in that respect.

[Operator]

Next question is from Jon Cox with Kepler Cheuvreux.

[Jon Cox]

Just 2 questions, really. One is on the emerging market currencies, maybe Julian, maybe you can comment on that. And the slowdown you start to see in Brazil and Argentina. Are you worried about what's happening with emerging market currencies? Or do you think the main decline so far isn't really a concern? Obviously if you look back to 2015 and '16, when organic sales were really under a lot of pressure, the weakness in the Brazilian currency, particularly, was much more [indiscernible]. I think it was like 30%, 40%. I think now, we're just down maybe 10%. When should we get worried or you guys worried about that at all, considering that you slow down to mid-single digit growth in April? And that's 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, those tend to confuse everybody, myself particularly. It is a CHF 30 million-odd improvement. Should we just, say, multiply that by 4 to try and come up with a full year figure? Or maybe you can give us the best guess per your thoughts on free cash flow after payment of minorities for this year?

[Julián Díaz González, CEO & Director]

Regarding 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 explained it in the past, we have a significant saving in the pricing strategy, in the pricing policy compared with the domestic markets. As far as, obviously, the shavings are insignificant, 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. Either volatility is very high, then the expectations from the different customers is they wait until they see exactly how much they're willing to pay for the product. As you know, we nominate the prices in U.S. dollars in this part of the world. Finally, the -- my conclusion is so far, I think, what we have seen is not impacting the sales because I feel the savings are very, very healthy compared to the domestic market. Then the cash flow, Andreas?

[Andreas Schneiter, Chief Financial Officer]

Yes. So 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. But 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 data financing costs and be the minorities. Depending obviously on what EBITDA you're taking as a starting point. But based on our plan it will be somewhere, let's say, between CHF 350-ish million and CHF 400 million, according to our plan if everything goes as we expect. But again, you will need to use your model as a starting point. But I think that's where we end up in our plan.

[Jon Cox]

And just as a follow-up. Julian, 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. So 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?

[Julián Díaz González, CEO & Director]

No, not, not relaxed. No, no, no. We haven't seen any impact yet. In fact, in Russia and Russian destinations, where the Russians are, the main passengers are growing very good, okay, very significantly. And I think, obviously, the volatility is an issue again, but for example, in Russia, due to the devaluation of the ruble, also the price in the domestic market increases significantly. As a consequence, the savings in the subsequent are adjusted. As I explained, there is always a period of time, depending on the inventories in the domestic market, where, obviously, may -- these devaluations and fluctuations may impact the sales but gradually, as soon as the merchandise imported in the domestic markets is reaching the level of, obviously, the new exchange rate. The savings are already -- are again very good and, obviously, very solid. And as a consequence, this is [indiscernible]. As a -- we -- so last year, last year, spend per passenger globally increased by 2.2%, 2.3%. This year, during the first quarter, we had, again, an increase -- significant increase in the spend per passenger on top of the increase of last year. It's not yet -- again, we are concerned -- yes, we are concerned because this is something that we need to monetarize, but not yet -- it's not yet impacting the performance of the company.

[Jon Cox]

Maybe just then a final question, Julian, 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?

[Julián Díaz González, CEO & Director]

I think it's, okay, difficult always. I'm going to explain how I look at it because I think it's better that -- than to say one number. You build your own model. I repeat, I think, several times that we are projecting this year, around 50% increase in -- sorry 50% -- is 50 basis points increase in gross profit margin. After that, what we expect you today per audience business operated model and efficiency program, between 30% and 50% basis points increased due to the leverage of this efficiencies in the P&L. And finally, the concession fees. And the concession fees, as I said during the first quarter, around 2018, what we are going to see increase of around 20 basis points compared with previous year. This is already giving you something between one number and I don't know what number. I don't want to give again the impression that they want to discuss about the EBITDA margin. Those are the targets we have in the company for 2018.

[Operator]

Next question is from Edouard Aubin, Morgan Stanley.

[Edouard Aubin, Head of Luxury Goods]

Edouard Aubin, Morgan Stanley. I have 2 questions. The first one is on Spain, which, I guess, is an important market for you. And given that your concession fee will increase by EUR 6 amount, I guess, it's key for you to increase your sales there. Could you please give us an update on the traffic in Spain and what you're expecting for the year? And be on the spend of passenger, what you're seeing and what you're expecting. And then 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 '18 or '19. Is that more or less the case still or not?

[Julián Díaz González, CEO & Director]

I will start with the first question. Regarding Spain, it's obvious that Spain still has very healthy increase in number of passengers. In the location where we are operating, it was around 9%. What is behind this 9% for Dufry? Because, obviously, we have [ retailers ]. First of all, is the low-cost driven passengers, and the second one is the British or the importance of the British passengers. The low-cost is a very good passenger. And I think this is -- I heard -- I read in many locations that low-cost is 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 this shops the value these passengers are expecting. And we have -- and I think different commercial concepts that will accelerate sales base in low-cost passengers. The meaning of the consequence of the low-cost passenger is that maybe this pampered passenger -- average of this pampered passenger will drop, but the total sales will facilitate, obviously, the level-out. So many other costs in the company. And I think -- and I'm sure that this part of the business during the next years will be a big contributor to the sales of the company. And the second one is in Spain, a significant part of the number of passengers are British. And obviously, over the past years, what we had is our devaluation, significant devaluation, of the pound. And this is important because in Spain, we nominate the prices in euros. And as a consequence, the British passengers are, in terms of growth, not contributing to the growth in Spain. But in any case, in Spain, the growth during the first quarter was positive. This is more or less from Spain.

[Andreas Schneiter, Chief Financial Officer]

Okay. Look, and on Europe, cash flow question here were absolutely spot-on. So last year, we had extraordinary project or event 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. So I think the outlook for 2018 remains unchanged in that context, though we will not -- we don't want to repeat, if you want, the 2007 (sic) [ 2017 ] extraordinary investment.

[Operator]

Next question is from Jörn Iffert with UBS.

[Jörn Iffert, Director and Analyst]

The first one on the new shop extensions, 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 what -- where you have won the new contract, but you haven't been the incumbent before? And the second question would be, please, on the minimum rent increase in Spain. Can you give us an update where we stand here? And do we see the cash component of the minimum rent increase in Spain before the EBITDA line in the linearization? And the last question would be, please, on the Spain concession. It's a quite big one for you as far as we are informed that should make 2019, '20. Have you already started negotiations? When do you expect negotiations to start, and what happened already? Or business, we [ attend ] that process, and some more details there would be appreciated.

[Julián Díaz González, CEO & Director]

Okay. Regarding the 4,500 square meters -- sorry 2.2% increase in sales due to new concession, I don't have the split here, but most of these spaces were totally new. And in any case, they are new even considering the spaces where we are operating today. But in the sense of your question, most of them were new. Second is Spanish market. I think the Spanish market is a public information. Every year, it increases. And this year, increased by around 6%, 7%, based in the original market. And the first one, Spanish concession. We have not started any in 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 a relevant one.

[Jörn Iffert, Director and Analyst]

And regarding the Spanish [ mac ], the increase of plus 6%, 7% year-over-year, the cash component is also shown in the linearization right?

[Julián Díaz González, CEO & Director]

No. The [ mac ] -- what is below EBITDA is the cash advance payment that was done in the past. It's already [indiscernible] above EBITDA.

[Jörn Iffert, Director and Analyst]

All right. The cash component is captured in EBITDA. All righty.

[Andreas Schneiter, Chief Financial Officer]

Exactly. So if we would have a higher [ max ] this will be captured in the line concession fees.

[Operator]

Next question is from Mariana Lopez, Santander.

[Rebecca Anne McClellan, Equity Analyst]

This is Rebecca of Santander, not Mariana. I just have a couple of questions, please. So just going back to the new -- the 2.2% new space contribution or new concession contribution, what do you think it should be for the full year?

[Julián Díaz González, CEO & Director]

That's the question, or there are more questions?

[Rebecca Anne McClellan, Equity Analyst]

There are more questions. Secondly, of the like-for-like, what was the split, so per passenger [ pax ]? And my third question is about Asia and whether you're seeing any increased activity in terms of small and midsized assets on the market.

[Julián Díaz González, CEO & Director]

Okay. Regarding -- any other questions?

[Rebecca Anne McClellan, Equity Analyst]

No, that's it.

[Julián Díaz González, CEO & Director]

Okay. Regarding the new space, I cannot comment on the specific newer space, but the target that I mentioned regarding organic growth for 2018 between 5% and 7%, I think, remains totally valid. And this is, for me, the critical point. And then as a consequence, probably, we will be around 2% or something like that. But I prefer that we talk about organic growth. Regarding like-for-like, the increase of like-for-like is mainly driven in this -- in [ north face ] by passengers. It's obvious. But depending on the passenger, this is our [ blended ] -- just for you -- for your calculation. Within the like-for-like in this specific area, there is probably 1% that is generated through newer space -- no, spaces, no. Is it the same space -- the space per passenger there, and the remaining is like-for-like. What is the third question?

[Rebecca Anne McClellan, Equity Analyst]

Okay. For Asia and for the small and midsized assets, and then whether the market is starting to heat up or...

[Julián Díaz González, CEO & Director]

There are several small, medium-sized possible transactions in Asia, but we have not progressed a lot with these transactions yet.

[Rebecca Anne McClellan, Equity Analyst]

And your view on small to midsized is what, CHF 100 million, CHF 200 million? Or...

[Julián Díaz González, CEO & Director]

That is between CHF 200 million and CHF 400 million in sales.

[Operator]

Next question is from Paul Bonnet with Bank of America Merrill Lynch.

[Paul Jacques Philippe Bonnet, Analyst]

So 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 3-year extension option. And it said that it's at the -- 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?

[Andreas Schneiter, Chief Financial Officer]

So look, I think there's -- put it that way, I think there are certain performance criteria, and this is actually quite standard for these types of contracts in the U.K. So anyway, I think it goes both ways. So I think we have the right, and also the airports has the right. But the basic assumption is if we continue to operate as we do today, this will be out of question that we do extend.

[Paul Jacques Philippe Bonnet, Analyst]

This will be out of question that you will...

[Andreas Schneiter, Chief Financial Officer]

In a sense, it's clear that we will extend. Put it -- sorry, I was [indiscernible] sorry, sorry. It's absolutely [indiscernible] that we will extend the contract.

[Paul Jacques Philippe Bonnet, Analyst]

Okay. And another quick question. I see that you had 20 bps selling expensive decrease. To what extent is this also driven by the loss of the Geneva concession?

[Julián Díaz González, CEO & Director]

Not at all. It's totally -- no, no. It's the opposite. I see -- this is obviously -- Geneva's purely was a purely [indiscernible] operation with better performance in terms of percentages.

[Paul Jacques Philippe Bonnet, Analyst]

Okay. And 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 bps instead of 100 bps. How should we think of distribution center going forward? Because it seems that in terms of geographical split, they take an even bigger share of the case, I think?

[Julián Díaz González, CEO & Director]

The statutory report is based in the, obviously, in tariffs and international agreement we have with the distribution centers. Calculating properly, the EBITDA at the regional level, you need to allocate the base, in that different volume of sales, in most of the cases, what is allocated in the distribution centers. You can now understand, from the performance point of view, the different divisions, yes, with the statutory information because, obviously, part of the gross profit margin is allocated in the distribution centers. The distribution centers, this is number one. Number two, distribution centers cannot be projected a lot because it's basically a reflect of the mix of sales in the different operations. But 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 it depends on the performance, especially in the high season. It's not an easy calculation in terms of distribution centers because the gross profit margin of different product is different. The gross profit margin allocated to the distribution center, depending in the distribution center is contributing -- or not contributing to this product in the supply chain. It's very difficult. Sorry, I cannot give you a specific information, but in terms of projections for you, let's do it one thing. Let's do it in percentage similar to previous year.

[Operator]

Next question is from Volker Bosse, Baader Bank.

[Volker Bosse, Co]

A lot of questions are asked. Two final ones. First, on -- especially on the upcoming summer season and your outlook for Greece, which is very much linked to travel activity and spending power of the Russians. So how do you look on Greece in the moment? And second question would be regarding your sales structure. So on the pay-per-form, HNA holds still 20.9%, although the shares are handed to third parties here. [indiscernible] structures, but did you receive any news from your shareholders here? Or is the 20.9% still valid? Or any update on that?

[Julián Díaz González, CEO & Director]

Okay. The -- regarding the first point, summer season in Greece and I think we'll have Turkey. They look great and the information we are receiving is very positive in both cases. In Greece, due to the European arm, obviously, the renovated number of Russians, too. And in Turkey because the bookings were from Russia. In both cases, what we have here is very positive. Regarding the shareholder structure, the official disclosure, as you know, is 20-point-something percent. And this structure has been -- disclosures through different city [ color ] structure. The -- what is obviously important here is the official disclosure information. But 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 not as far away of 20%.

[Operator]

The next question is from Peter Testa, One Investment.

[Peter Testa]

Just 3 questions. One at a time, please. Firstly, just to understand on space. Can you give us any thoughts as to whether there are insignificant expiries or losses coming in the other quarters, kind of the size we've noted before? And also the same time, there were renegotiations at concessions per space extensions last year, and I was wondering when we should start to see the positive impact of the space extensions. In this year, or is it next year?

[Julián Díaz González, CEO & Director]

Regarding the space per quarter, we are not restricting 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. And 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 2 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 higher impact. And for the division, I comment on both things, the renegotiations of contract and also -- as is also known, I comment last year that capital of contract, 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 opened with the new configuration and the new renovation done in the third, 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 basis points.

[Peter Testa]

Okay. But in terms of the space impact of those extensions, getting new space and terms and better quality space, when is that being felt?

[Julián Díaz González, CEO & Director]

This is just -- this is -- the impact will be, as I said, is the same -- I tried to explain it through the concession fees is second -- sorry, is third and fourth quarter.

[Peter Testa]

Right. This year, okay.

[Julián Díaz González, CEO & Director]

Yes.

[Peter Testa]

Fine. And then you talked earlier about the exclusive travel retail product and services with the launch, and you mentioned your response in the low-cost carrier opportunity. Can you give any sort of sense as to what are these -- what significant steps may -- we may look for coming out this year or next year in that regard, please?

[Julián Díaz González, CEO & Director]

Yes, we have created, in my view, a very good relationship with the suppliers, with the vendors. And they have, obviously, the same intentions, is to develop exclusive products for travel and retail in different areas. So far, what probably you have heard is about confectionery, where we have launched 2 or 3 new products, all [indiscernible] 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 spirits and confectionery. But there is also -- or there are also initiatives that will be based in personal care, fashion 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 we'll use the brand equity in order to impact the customers and also create this selectivity or 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. And when I mentioned travel retail, I say in Dufry environments. And during 2018, what we are going to see a significant development in new exclusive products for travel retail in Dufry. And in 2019, we are going to see products and services. And the services will be also communicated through digital tools. This is obviously a huge project that we started. Part of this project is recognized as the main E-Motion, but the full and complete implementation of this project will be around 2018. And first impact in organic growth, I hope, will be reflected in 2019.

[Peter Testa]

All right. And for low-cost carrier passengers, is it -- were you talking more about specific products tailored to the fast-response short stay? Or you're talking about all retail concept?

[Julián Díaz González, CEO & Director]

Yes, we have 2 different lines of initiatives. One is to develop, as is today, in more than 14 countries over convenience store concept in Hudson. But also within the travel retail, standard travel retail shops, we have developed within Dufry, a duty-free travel retail and with the concept in duty-paid. Product lines that are specifically addressed in fashion 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. The low-cost passengers are going to lead an important part of [ liberals ] in the future. What is going to happen, and this is something that is important to note, that the average spend per passenger probably will drop because the spend per passenger in low-cost passengers is lower. But 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 concept, shops in this case, to really attend these passengers and lead these passengers to be customers in the travel retail environment. And 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.

[Peter Testa]

Okay. And then last question is just when you think about the investment -- the expense investment that's required behind some of these initiatives are also the e-commerce, the RED data initiative and so on, can you give some sort of sense as what you think you need to do to step up or maybe reinvest some of the BOM's savings behind this to drive growth?

[Julián Díaz González, CEO & Director]

It is a very relevant question because the digitalization is not for free. And I think what I can say is what we are trying now is to enclose in this 3.5% -- 3%, 3.5% of CapEx, whatever change is needed. And so far, we have been doing that. And 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 is 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.

[Operator]

The next question is from Johannes Braun, MainFirst.

[Johannes Braun, Director]

I have just one question, actually. I was wondering if you can give us an indication of what the impact of the Easter time. It was not on sales growth, but on the concessionary, really, because clearly, you had more revenues in Spain. It was last year that the Easter chill was still partially in Q1, but you paid [indiscernible] in Spain. So the cost of sales ratio should have benefited from that. Just wondering if you can give us an indication of the underlying development. And I think last year, you gave us some idea of [indiscernible]. It was quite significant, if I remember correctly, so that's why I'm asking.

[Julián Díaz González, CEO & Director]

Okay. Last year, Easter is holy days -- it is holy week and Easter, both weeks. Because depending on the country, one is more important than the other. This year -- last year, we have 2 weeks in April. This year, we have one week in March, and there was the holy week. And then one week in April that was the Easter period. The impact is depending obviously on the location, is different [indiscernible]. Let's talk about [indiscernible]. It's around 0.7% of growth. I am talking about sales. I don't know below sales because it's difficult, but around 0.7%, 0.8% in quarterly basis.

[Johannes Braun, Director]

Okay. So the underlying development was still up in Q1?

[Julián Díaz González, CEO & Director]

Yes.

[Operator]

Next question is from René Saner, Octavian.

[René Saner]

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. So my question would be what did you expect the impact to mid-term on this CHF 50 million revenues you are recording. And if I'm correct, I think there's no concession fees on that. So that should be quite interesting opportunity. Then a follow-up on Brazil. There has been talks about a change in the duty-free allowance. Is there any progress on that? And thirdly, on Hudson, that 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 beverages business and the mass concession business.

[Julián Díaz González, CEO & Director]

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. And sometimes we pay concession, sometimes we don't pay concession fees because it depends on the concession fee agreed also. This is number one, just for clarifying. The second thing, obviously, advertising is a good driver, but it's not advertising that -- in reality, what we are doing here, we call it advertising, but what we are doing here is really promoting the brands in collaboration with the brand owners and creating this equity -- this brand equity. What is a good thing with the digital shop? I think the digital shop has -- there are many, obviously. But there's talk about financial [ royalties ]. Number one is to increase the penetration rate. Number two is to increase the spend per ticket. And number three is to increase the advertising income that we call advertising income. Regarding the first 2 is they are the main drivers for continuing with organic growth. The last one, 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 this stage we are with the development of the shop. We have only opened 5 shops. If the question is, these shops will facilitate the development of the advertising income line in the P&L, the answer is yes. But I cannot tell you that it will be 1% or 2% or -- 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. And as you know, Brazil has more important things to decide than the duty-free allowance. And there is not a reason why this allowance has not been increased during the last 12 months. But the situation is exactly the same. And that country has today all their 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 that we are following up. What is, for us, the important in Hudson, Hudson is the leader in retail in U.S. and Canada, in either duty-free or duty paid. The company has significant room for improvement. In which areas? Obviously, number one is retail, but there are 2 areas where we need to understand if the company could perform. Number two is food and beverage. Number three two is master concession agreement. Regarding the first line, I don't think that I need to comment on anything else because we have been expanding the business in either duty-free or duty paid. And regarding the food and beverage, this company is involved in a territory, is operating in 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 facilitated that 1 of 4 subsidiaries that is going to be -- 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. And the food and beverage is an opportunity and is 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. And master concession 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. Also, 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, identified these master concession agreements outside the U.S. and Canada, but in 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 airport, Chicago Midway. And we are participating in other 2 [indiscernible] space. Is this something that will change the scope of the company in the short term? The answer is no. But in the mid and long term, will create a more sustainable and better concession portfolio. Regarding -- what is the last question? That's Hudson, okay? Thank you very much.

[Operator]

We have a follow-up question from Jon Cox.

[Jon Cox]

Just a couple of quick ones. On the buyback, starting on Friday, just wondering what method you're using. Is it -- 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, any -- can you give us any idea what you might be discussing at the Investors Day? And 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?

[Andreas Schneiter, Chief Financial Officer]

Okay. So I guess, I'll take all 3 questions. So 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 as -- paid in capital -- sorry, pre-reserves, and there is no tax consequences anyway. So -- and we will follow if you want, kind of the dynamic strategy relative to share price in volumes. So that's going to be kind of the approach. Then on the Investor Day, here, from operational perspective, we want to dive into more detail into, if you want the initial part of things, so operational aspect. That will be the focus on it on the finance side. As you pointed out, one of the possible topics will be IFRS 16. Now I think that context, I will defer if you want to hear in the Analyst Day as well. I think as a preliminary comment, what we do know as of today, based on the work that we have done so far, is that there will be obviously additional assets and liabilities generated through IFRS 16 because we will capitalize the fixed parts of our concession agreements. So in essence, the minimum guarantees or already fixed rents that we may have. The current, and I'd take that with a big pinch of salt, that we're talking about is about CHF 7 billion to CHF 8 billion of assets and liabilities that we'll add to the balance sheet. On the EBITDA side, we pretty much would double up EBITDA to around 25% EBITDA margin so there's about CHF 1-ish billion very large number, very rough number of concession fees that will be shifted through the amortization that, I think, given the complexity of the topic, I think there is, from the preference that we can, we'd explain that in more detail with more time, not by phone, but in person, so that will be one opportunity to do it on the Analyst Day.

[Operator]

That was the last question. I would now like to turn the conference back over to Mr. Diaz.

[Julián Díaz González, CEO & Director]

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 through the Investor Relations Department or calling us. Thank you very much.

[Operator]

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.