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Edited Transcript of AGL.MI earnings conference call or presentation 1-Aug-19 2:00pm GMT

Half Year 2019 Autogrill SpA Earnings Call

Milano Aug 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Autogrill SpA earnings conference call or presentation Thursday, August 1, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Camillo Rossotto

Autogrill S.p.A. - CFO & Corporate GM

* Gianmario Tondato da Ruos

Autogrill S.p.A. - Group CEO, Director of the Internal Control & Risk System and Executive Director

* Lorenza Rivabene

Autogrill S.p.A. - Group IR Manager

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Conference Call Participants

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* Alessandro Cecchini

Equita SIM S.p.A., Research Division - Analyst

* Geoffrey d'Halluin

BofA Merrill Lynch, Research Division - Director & Research Analyst

* Jaafar Mestari

Exane BNP Paribas, Research Division - Analyst

* Luca Bacoccoli

Banca IMI SpA, Research Division - Research Analyst

* Simon LeChipre

MainFirst Bank AG, Research Division - Analyst

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Presentation

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Operator [1]

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Good afternoon, and welcome to Autogrill First Half 2019 Financial Results Conference Call. (Operator Instructions)

Lorenza Rivabene, Group Corporate Development and Investor Relations Director, is going to start the call. Please go ahead, Madam.

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Lorenza Rivabene, Autogrill S.p.A. - Group IR Manager [2]

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Good afternoon, and welcome to Autogrill's First Half 2019 Earnings Call. Joining me on the call are Gianmario Tondato, our Group CEO; and Camillo Rossotto, our Company's General Manager and Group CFO.

Before we get started, we want to emphasize that some of the information discussed in this call may contain forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those anticipated in these statements. For a discussion of these risks and uncertainties, you should review the disclaimer in the earnings presentation we issued today.

Now we are available to take your questions. Thank you.

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Questions and Answers

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Operator [1]

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We will now begin the question-and-answer session. (Operator Instructions) The first question comes from Alessandro Cecchini of Equita.

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Alessandro Cecchini, Equita SIM S.p.A., Research Division - Analyst [2]

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The first one is about North America. First half benefited from easy comparison and likely price hikes started in mid-2018. I would like to better understand, should you expect the second half to be supported by a new wave of price increases? This is my first question about North America. And then what is your feeling about the labor cost, cost inflation in the -- in North America. If -- what was the trend in the first half? And if you consider the second half trend similar to this. And my second question is about international. In the first half, you reported weak margins. And this trend probably is much different from your guidance of flattish margins. I would like to better understand what kind of assumption for the full year or better color on the initiatives that you are undergoing in order to improve the margins in the second half. And then finally, on the net working capital. I would like to better understand if you'd expect to fully recover the minus EUR 60 million of negative net working capital trend of the first half for the full year?

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Gianmario Tondato da Ruos, Autogrill S.p.A. - Group CEO, Director of the Internal Control & Risk System and Executive Director [3]

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Thank you for the question. Let me address the last one first. The answer is yes, we expect that on a full year basis, we're going to be on track with the guidance we provided at the Capital Markets Day of doubling our free cash flow generation versus 2018, the (inaudible). And that implies especially go back on a full year basis with around something like [0 or] (inaudible) and working capital [on a full year basis] (inaudible) over the absorption in the first half, which was driven by receivables in that space were already forecasted related to the monetary expression of the one-off costs there we booked in 2018 for the consideration indeed into the matter of VAT receivables, which reversed in the second half of the year. So the answer is yes, we are confirming the kind of (inaudible) the free cash flow and, therefore, recovering the absorption of the first half.

On the margins, let me start with North America. Based on the recall, we take the [previous] guidance and cover around the full year performance, given the elements of seasonality also in our numbers. So when you look at our view and confirmed guidance for 2019 in terms of the EBITDA range, EUR 450 million to EUR 470 million on an underlying basis, that implies operating margins and GDP in the North America level. And as you recall, last year, we talked about something like 11% of underlying EBITDA margins in North America. And I think that's still the operating assumptions.

The dynamics on the -- so the incrementals in the first half from '18 to a second [DB] comparables with last year's, largely impacted by strong dynamics in terms of labor cost inflation. We're talking about 5%, 5.5%, roughly there. And we don't see those subsiding in the short term. So we continue to guide for margin stability as opposed to margin improvement.

Last, I think you were asking about international. The -- it's taking a bit longer to expect it to fix some of the issues in some of the stores in the Nordics. And as a consequence of that, that affected the profitability compounded by, I think, a slowing down of traffic in the Nordics. And that has kind of driven the lower operating profitability. We're still seeing solid growth overall. But I think in terms of overall guidance, we are probably slightly lower than we expected when we met with you at the Capital Markets Day, which then on the total numbers of the group still blend to the range that we've given before.

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Alessandro Cecchini, Equita SIM S.p.A., Research Division - Analyst [4]

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Okay. And about -- back to North America, about the price increases. And you said the first part of this year, 2019, [are you] (inaudible) some price hikes have been (inaudible) for the second half? Or we are still, I mean working on the 2018 price action?

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Gianmario Tondato da Ruos, Autogrill S.p.A. - Group CEO, Director of the Internal Control & Risk System and Executive Director [5]

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No. There's still some new pricing in there. So that those should be sufficient to weather the increases on the labor cost side. And therefore, it's consistent with the flattish margin indication that we provided you.

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Lorenza Rivabene, Autogrill S.p.A. - Group IR Manager [6]

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Okay. I received via e-mail some questions from Ali Naqvi of HSBC. So some questions on margins. So European margin growth of 100 basis points, how much of this was driven by the tenant turnaround? How far are you in the cross-generational deal? And any opportunities for further margin progression that you are given? On international, can you talk about the preopening costs, what would the margin have been for H1? On -- finally, on margin, could you explain the moving parts you'll then -- so your raw material cost fall as a proportion of sales and operating these concession fees increased, but not as much as like-for-like sales growth.

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Gianmario Tondato da Ruos, Autogrill S.p.A. - Group CEO, Director of the Internal Control & Risk System and Executive Director [7]

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Maybe we repeat the last one because it's -- but the first, on Italy. On Europe, the 100 basis point it's really driven by Italy. Clearly, the cross-generational deal is in there. The first half result reflects out of that. But there's other pieces in there with have to do with the cost of products, actions on the operating cost and the store labor cost and others. So definitely, the driver of improvement is Italy.

The second question was on...

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Lorenza Rivabene, Autogrill S.p.A. - Group IR Manager [8]

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On international. Is it better...

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Gianmario Tondato da Ruos, Autogrill S.p.A. - Group CEO, Director of the Internal Control & Risk System and Executive Director [9]

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Now it's hard to break out international things. I mean that's the operating performance, probably the indication there were given previously of a [set] of margins and recovering if in the course of 2019, sort of the 10.5% profitability will require a little bit longer. So we still have given you an overall guidance that reflects the fact that we'll get to around 10.5% by 2020.

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Lorenza Rivabene, Autogrill S.p.A. - Group IR Manager [10]

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[Earning.] On margin, could you explain the moving parts for the full year raw material costs for -- as a proportion of sales and operating lease concession fees increased, but not as much as like-for-like sales growth?

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Gianmario Tondato da Ruos, Autogrill S.p.A. - Group CEO, Director of the Internal Control & Risk System and Executive Director [11]

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I mean the -- I see more of a statement than actual question. But anyway, the cost of the materials, of raw materials are actually pretty effectively managed both in Europe and in the U.S., and you can see that on the P&L. And yes, one component that's new in terms of the business model is the American Airlines deal, which is clearly impacting the P&L in terms of additional cost of materials that we will then re-invoice as we move on. So that change a little bit the percentages in terms of the impact of the cost of goods. And we see -- at the early stages, so we see that reflected in the second half in that bigger magnitude.

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Lorenza Rivabene, Autogrill S.p.A. - Group IR Manager [12]

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Okay. We can go ahead with the other questions, please.

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Operator [13]

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Okay. We have our question. And the next question, it comes from Simon LeChipre of MainFirst.

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Simon LeChipre, MainFirst Bank AG, Research Division - Analyst [14]

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A few questions from me, please. First of all, I will follow-up on the free cash question. What do you expect in terms of CapEx for the full year? And second question, in North America, for the motorway business, how do you see like-for-like trend evolving over H2? And last question, still in North America. It seems that you are -- you have a slight loss in terms of net contract effect over the May-June period as opposed to the January-April period. So if you could explain a little bit on this point? And how do you see the net contract effects will be over H2?

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Gianmario Tondato da Ruos, Autogrill S.p.A. - Group CEO, Director of the Internal Control & Risk System and Executive Director [15]

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Can you repeat the last question, please? Number [2 -- point 3].

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Simon LeChipre, MainFirst Bank AG, Research Division - Analyst [16]

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Yes. In North America, it seems you have had a slight negative net contract effect over the May-June period as opposed to a slight positive effect for the January-April period. So just wondering if you can expand a little bit on this one. And then also how do you see this effect in regards to H2?

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Lorenza Rivabene, Autogrill S.p.A. - Group IR Manager [17]

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Sorry, Simon, if we understood well, you want to break down the performance we had on the top line based in the month of May and June, in respect to what we have announced as of April. Is that the question?

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Simon LeChipre, MainFirst Bank AG, Research Division - Analyst [18]

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Yes. But with -- so the focus on the net contract gained or losses.

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Lorenza Rivabene, Autogrill S.p.A. - Group IR Manager [19]

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Sorry. I think that we don't have to look at month by month, but it's much more important to have a look at channel by channel. So I think that [most important point] is the fact that we are continuing increasing our footprint at airports while we are reducing a little bit the footprint on motorways. That is also relating to the fact that we are doing some refurbishment works, as you know, on the New Jersey Turnpike. So there are some point-of-sale that's now are closed for refurbishment, whilst the airports, we will continue to increase the footprint.

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Gianmario Tondato da Ruos, Autogrill S.p.A. - Group CEO, Director of the Internal Control & Risk System and Executive Director [20]

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Okay. On CapEx for the year, we confirm the 6.5% maximum CapEx for the year. As we continue to finish, the process would be motorways in Europe and we continue to invest also in the motorways in North America. You can see on Slide 17 all the material that -- there are CapEx by channel, how it breaks down. It's 55% in airports and 32% in the motorways. That is a function of the investment in -- also the New Jersey Turnpike and other. And the second half, the motorway like-for-like trends are still pretty flat and not always as -- we don't see any big change there.

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Operator [21]

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(Operator Instructions) The next question is from Bacoccoli, Luca of Banca IMI.

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Luca Bacoccoli, Banca IMI SpA, Research Division - Research Analyst [22]

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Just one question on the North America. Since given the very easy comps, I would have expected a quicker EBITDA margin recovery in this geography. So are -- still there are cost headwinds such as labor cost linking margin improvement or marrying this in line with your, let's say, budget? And should we expect an acceleration in the second semester, which seems not possible based on what you answered to some of the previous question?

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Gianmario Tondato da Ruos, Autogrill S.p.A. - Group CEO, Director of the Internal Control & Risk System and Executive Director [23]

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I think the gist of your question is if we either expected the better flow-through of the incremental sales in North America in the first half, given the comparable. But you have seen a bit of margin improvement. The labor cost is clearly there. Like I said before, it's in excess of 5% in terms of inflation. And so we need to weather that through efficiency and through productivity and through pricing.

The second one is there are some -- as you've seen, productivity in North America, we are reporting significant (inaudible) anywhere but [we are cautious]. What that means is that it takes a little bit more in some of these to get to -- up to speed and to get the full benefit of the operating leverage there. So that's part of what happened in the first half. And that's pretty much it. So I think, again, this is the [corporate reposition], the -- that full year indication of [400 still] of cost of margins on the incremental performance, which is pretty strong in airports.

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Operator [24]

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The next question is from Mr. d'Halluin, Bank of America Merrill Lynch.

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Geoffrey d'Halluin, BofA Merrill Lynch, Research Division - Director & Research Analyst [25]

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Geoff d'Halluin from Bank of America Merrill Lynch. Two questions, please, and I apologize because I missed you at the very start of the call, so maybe you've got these questions already. But just would like to get back to your working capital outflow for the first half, which has been minus EUR 68 million as compared to EUR 33 million in the first half '18. Just wanted to get your sense on how we can look at this working capital on a full year basis because it seems to be impacted by temporary items in the first half. And my second question is any update on the Starbucks partnerships you can share with us, please?

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Camillo Rossotto, Autogrill S.p.A. - CFO & Corporate GM [26]

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Okay. I'll deal with the working capital. Indeed, I had talked about it, but I think you...

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Geoffrey d'Halluin, BofA Merrill Lynch, Research Division - Director & Research Analyst [27]

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I apologize.

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Camillo Rossotto, Autogrill S.p.A. - CFO & Corporate GM [28]

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No, no, no, don't worry. It's like we still are on task with the full year objective of doubling last year free cash flow. And as far as the working capital component of it, that means that it basically needs to go back to a -- call it a 0 level. So we would revert in the stake on the -- inversely in the second half most of the absorption in the first half. That probably has to do with receivables, which is both linked to the -- coming into regime of the American Airlines deal in North America and the some VAT receivables in Italy that we revert in the second half. And then there's a piece which is -- which was forecasted for and we'll provide for more free cash flow in terms of European operation, which was the considerational deal that was booked last year but cashed out this year. So the improvement in the second half in the free cash flow is going to be mostly driven by working capital.

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Gianmario Tondato da Ruos, Autogrill S.p.A. - Group CEO, Director of the Internal Control & Risk System and Executive Director [29]

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On the Starbucks question, I think as you have seen, we are pretty active in managing our brand portfolio, (inaudible). So we have -- we are improving our partnership with Pret A Mange. I think it's important because brand that we are developing, [we are very successful actually]. And the last brand that we got exclusive for the concession deals in the U.S. is Panera. This is a very, very important brand. It's a cutting-edge brand also for the digital development it will give. And I mean it's -- it is more than [EUR 2 billion] of sales (inaudible) and adjusting to the digital and then a small part of their business is coffee business. And of course, bread is there. There's so many [bread, the bagel is on there]. So just in terms of the people asking in developing and updating our portfolio. Starbucks, they've been a partner for more than 30 years actually. As you (inaudible), [you drink and] (inaudible). Starbucks products have grown (inaudible) in the world. We know that it's a milestone when we opened the first store together in Seattle–Tacoma. It's still there. So we still have a good relationship. And it is of course 20% of our sales. And very important for them, very important for us. And the -- we are in discussion now. So we have time and we are trying to shape the partnership and the friendship that we've been enjoying in the last 30 years. And of course, the landscape now is very different. So (inaudible) clients (inaudible) through the -- with the local and global perception and on strength of the brand in order to (inaudible). So we have to find as much solution to keep to us staying together and developing both the business, but also fulfilling the needs of different environment has changed in the last 7, 8 years, (inaudible). So from -- well, like -- again, I expect to be a Starbucks operator for the year to come. There's no question about that, but we're still in the middle of a long, I would say, discussion -- following the discussion on that.

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Operator [30]

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It's a follow-up from Alessandro Cecchini.

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Alessandro Cecchini, Equita SIM S.p.A., Research Division - Analyst [31]

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A couple of more questions from my side. The first one is more strategic about the bolt-on, I mean acquisitions and probably disposals. So just a few to better understand your current pipeline. Or what are you looking for? Just to have an update on this part of you. You were very active at the beginning of the year, but I would like to better understand if it could affect how -- to manage ramping by the year-end. This is my first question. My second question is about your guidance on EPS reported. It's not wrong to say that excluding one-off, your guidance was 0 -- [41%, 42% to 0 for 0.46]. So just to deduct in the one-off for the first half, it's correct?

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Camillo Rossotto, Autogrill S.p.A. - CFO & Corporate GM [32]

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Look at the second one. Now what we're guiding for is at the midpoint of the reported EPS for a EUR 0.47 of underlying EPS, and the new range is accordingly so. It's slightly higher because, I think, the calculation you're doing for deducting the one-off is a bit too generous. You need to consider in there not only the number that you've seen in the financial statements published today, but also the component of underlying the first half and the impact on a full year basis of having this all over Canada and, sorry, the Czech Republic. So the EUR 0.47, which was provided at the Capital Markets Day is at the center of the new range with EUR 0.90 to EUR 0.95.

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Alessandro Cecchini, Equita SIM S.p.A., Research Division - Analyst [33]

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So EUR 0.47?

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Camillo Rossotto, Autogrill S.p.A. - CFO & Corporate GM [34]

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4-7, yes.

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Alessandro Cecchini, Equita SIM S.p.A., Research Division - Analyst [35]

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4-7 is the midpoint for the underlying EPS.

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Camillo Rossotto, Autogrill S.p.A. - CFO & Corporate GM [36]

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Right.

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Alessandro Cecchini, Equita SIM S.p.A., Research Division - Analyst [37]

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Okay. And...

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Gianmario Tondato da Ruos, Autogrill S.p.A. - Group CEO, Director of the Internal Control & Risk System and Executive Director [38]

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Talking about the acquisition, the bolt-on and the [disposal], I could just repeat what you probably heard during our Capital Markets Day. So as we said, we are not sitting on our assets. We have -- you should look at the portfolio model, portfolio from EUR 400 million on an annual basis. Evaluation of sales that demonstrate contracts with regulation with the -- around (inaudible) in relation with (inaudible) as we said, given the (inaudible). We already proved this with Canada, [Canadian disposal]. There is a market for this asset. And we try to do (inaudible), but if you could get positive (inaudible), it creates value for the corporation. High value (inaudible) is a way to invest the proceeds that we get from this active approach, the new asset and for the (inaudible) in the new (inaudible) make a decision after you (inaudible) the acquisition we've done. We can do it. We can (inaudible).

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Operator [39]

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The next question comes from Mestari, Jaafar of Exane BNP Paribas.

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Jaafar Mestari, Exane BNP Paribas, Research Division - Analyst [40]

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It's Jaafar Mestari from Exane BNP Paribas. And I'm (inaudible) because June is a good call, so (inaudible). Two questions, please. The first one on free cash flow. Have you made trades with the [set] guidance for free cash flow strategy to already double this year? And then secondly, on the next new business wins in North America, I appreciate there's a lot of churn there. And so of gross wins, you are definitely winning quite a lot, about EUR 100 million. And -- but the losses are basically of a similar magnitude so far. So given the updated brand strategy with new partnerships and given how much CapEx you've put in the initiatives to defend some of your strategic contracts, when can we expect net new business wins in North America to be more materially positive?

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Camillo Rossotto, Autogrill S.p.A. - CFO & Corporate GM [41]

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I certainly say I will slide to your question on free cash flow, Jaafar, because the one on America was very choppy. But I guess the first point is, yes, we are confirming, even on the back of the cash absorption at the operating level coming from working capital, our guidance for the full year of doubling free cash flow and the way we get there while we continue to guide for 6.5% roughly CapEx in the year. So there will be on the work -- in the change in working capital for the remainder of the year will make up the absorption of the first half. The -- there are components there which are structural like the payment for the -- what we call the transformation deal in Italy for the workforce that we had already forecasted. And you'll see it in the first half, it's [a fraction] of actually the disbursement having occurred there. But that will be recovered through operating cash from the second half. And then there are others which will reverse as a bank function of bank receivables being absorbed in the second half of the year, where we have more business volumes and the deal with American Airlines getting to cruising altitude in the second half. So the -- I guess that was your question on free cash flow.

On [what the next -- I'd...]

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Jaafar Mestari, Exane BNP Paribas, Research Division - Analyst [42]

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I'm sorry. Sorry if you didn't quite hear that, apologies. But basically, my question is the gross new contract wins, about EUR 100 million losses, about EUR 100 million revenue. And is there a realistic scenario where you start winning on a net basis a more material contribution?

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Gianmario Tondato da Ruos, Autogrill S.p.A. - Group CEO, Director of the Internal Control & Risk System and Executive Director [43]

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Understood. If you -- if I can, some of those [costs have been a million], roughly speaking, [hundred million] (inaudible). And the -- (inaudible) losses at the end of the year (inaudible). The [hundred million additional] are -- most of them are startup. So (inaudible) couple of big (inaudible) are starting the business, we are not (inaudible) shares or giving a share, a big improvement there definitely. So we got -- just starting to churn, so we're going to see an important improvement in the opening sales cost and the next year (inaudible).

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Operator [44]

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There are no more questions at the moment.

(Operator Instructions) There are no questions.

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Lorenza Rivabene, Autogrill S.p.A. - Group IR Manager [45]

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So many thanks for your time. I am available to take other calls, so if you want to have some follow-ups. Have a nice evening, bye.