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Edited Transcript of DUFN.VX earnings conference call or presentation 5-Nov-19 1:00pm GMT

Q3 2019 Dufry AG Earnings Call

Basel Nov 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Dufry AG earnings conference call or presentation Tuesday, November 5, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Julián Díaz González

Dufry AG - CEO & Director

* Yves Gerster

Dufry AG - CFO & Group Treasurer

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Conference Call Participants

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* Edouard Aubin

Morgan Stanley, Research Division - Head of Luxury Goods

* Gian Marco Werro

MainFirst Bank AG, Research Division - Analyst

* Jon Cox

Kepler Cheuvreux, Research Division - Head of Swiss Equities and Head of European Consumer Equities

* Jörn Iffert

UBS Investment Bank, Research Division - Director and Analyst

* Rebecca Anne McClellan

Grupo Santander, Research Division - Equity Analyst

* Andrew Pentol;TRBusiness;Senior Editor

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Q3 2019 results conference call and live webcast. I am Shard, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. (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.

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Julián Díaz González, Dufry AG - CEO & Director [2]

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Thank you, operator. Good afternoon and thank you for participating in this Q3 2019 results call. Presenting the results here today are myself, Julián Díaz, CEO; and Yves Gerster, CFO.

As in previous calls, we are going to use the presentation disclosed today in our work site. Please go to Slide 3, the agenda. Here you can see the topics for today's call where I will first review our operational performance in the period. Then Yves will present the financials. To conclude, I will return for a trading update on our performance so far in October.

Let's continue with Slide #5. This slide summarizes the Q3 results and performance so far. Our organic growth further accelerated in the third quarter, supported by the improvement in like-for-like which came back to positive territory. The cash flow continues to develop strongly as expected and is in line with our yearly target. Moreover, we have seen several positive developments with respect to contract extensions, new wins and acquisitions materializing after the closing of the quarter and which positively influence our performance going forward.

Moving to Slide #6. I would like to first focus on the third quarter where business performance accelerated considerably. Organic growth in Q3 reached 4.1%, driven by strong like-for-like improvement and new concessions. In fact, like-for-like improved by 1.3% as compared with the second quarter of 2018 and turned like-for-like performance for the 9 months to positive territory.

Our adjusted operating cash flow in Q3 considerably increased by CHF 87 million when compared with Q3 2018, from CHF 396 million to CHF 309 million in the same quarter 2018. In the third quarter, we also saw a significant acceleration of equity free cash flow, increasing by CHF 58 million, reaching CHF 266.3 million (sic) [CHF 266.2 million] for the quarter compared with CHF 207.9 million last year. This improvement result in a solid performance for the 9 months which we are looking at now.

Let's move to Slide #7 with the highlights for the 9 months. We see that Dufry delivered in the 9 months 2019 a turnover growth of 1.8%, reaching CHF 6.682 billion, to which organic growth contributed 2.9%. And if we analyze organic growth for the 9 months excluding South America, we would stand at 5.5% (sic) [5.4%].

Taking into account this ongoing improvement in performance we can confirm [medium-term] organic growth target of 3% to 4%. We also continued to expand our gross profit margin, which grew by 40 basis points, reaching 60.3% compared with 59.9% in the previous year. The main driver here were the negotiations with the suppliers, especially local suppliers, and Dufry implementation of plans. Going to our P&L KPIs, our adjusted operating profit, adjusted EBIT reached CHF 633.8 million in the 9 months 2019, while adjusted net profit amount to CHF 336.7 million (sic) [CHF 337.1 million].

As already discussed in our last calls in May and July, our P&L is now very much impacted by IFRS 16 and thus heavily compared to the previous year. For this reason, we prefer to look at the cash flow metrics. In the 9 months 2019 our adjusted operating cash flow reached CHF 805.3 million compared with 761.8 million in 2018.

Equity free cash flow came in at CHF 406.6 million. As you know,

due to the seasonality of the business, the second half of the year is typically the most important in terms of cash generation. Yves will provide you with more insight on the resilient cash flow performance. Moreover, in the 9 months we managed to further deleverage and to reduce our net debt to CHF 3.066 billion (sic) [CHF 3.067 billion] which includes the dividend payment of CHF 199 million in May 2019. And represent the lowest net debt levels since 2016.

Let's look now at Slide 8 where we can comment one of the pillars of organic growth, new concessions. Moving on to the operational development, we continued to grow our retail space by opening 20,400 square meters across 172 shops. This includes new shop openings and space increase in 15 locations.

We also continued to execute on our refurbishment plan with the renewal of 36,800 square meters across 105 shops in the 9 months 2019. And at the end of September, we had already a portfolio of 14,600 square meters of signed contracts to be opened along the remaining of 2019 and 2020.

As I already mentioned in my introductory remarks, we saw a number of important achievements and developments materializing after the closing of the third quarter which will positively influence Dufry's growth and performance going forward. Above all, we will reach the agreement with ANEA in Spain to extend our existing contract for up to 5 years. I will come back on this later.

Second, we have now received all regulatory approvals for the acquisition of the 60% stake in Vnukovo operation in Russia announced early this year. I will come back on this one later in the presentation as well. Through our Hudson subsidiary, we also acquired the concessions writes for 34 Brookstone shops across several USA ports and exclusive right to serve as exclusive Brookstone airport retailer.

Just a few days ago we could announce the acquisition of OHM Concession Group LLC by Hudson, which adds new food and beverage concession capabilities and which will allow not only to increase and expand our footprint in North America, but most importantly it will allow us to further accelerate the expansion in the important North American food and beverage airport concession market.

Moreover, the Brazilian government announced the increase of the duty-free allowance for arrival duty-free from USD 500 to USD 1000, which will allow us to further expand our assortment with higher-priced products. It's obviously important to remark here that starting in January 2020 we will be able to display products with the unit value about $500 and below $1000. That means that in the arrival stocks that is the allowance that we are talking here. The number of new items or the percentage of new items that will be added to the portfolio will be between 25% and 30% to the current ones.

It's also important to mention that the sell unit ticket now when this allowance will be fully in operation will be maximum $1,000 when today it is $500.

If we move now to Slide 9. We can see how during the third quarter organic growth has considerably accelerated, reaching 4.1%. Thus organic growth was 2.9% for the 9 months. In the context, it is important to note that beside the contribution of the new concessions amounting 2.8%, our like-for-like performance continued to improve and return to positive territory.

As you can see from the summary of organic growth divisional performances, most of our operations are performing well with the exception of South America which remains challenging, but improving significantly compared with other quarters. But let us -- we will discuss the development of the single division separately in the coming slides.

If we move to Page 10 we can analyze the performance division by division. Organic growth in division Europe and Africa reached 5.3% in the 9 months, which is again a significant improvement versus the last year. Looking at the third quarter alone, performance was even more impressive with organic growth reaching 7.2%. The positive development has been driven mainly by the U.K., supported by the new cruise and ferries contract, as well as the strong performance of our Heathrow operation.

Spain also improved, where we have implemented several commercial initiatives and introduced best practice across 5 pilot airports agreed with AENA. Other countries such as Turkey, Italy, Malta, Finland as well as most of our African operations with Morocco, Egypt and Kenya also performed very well.

In Slide #11 we look at the division Asia Pacific and Middle East, which continued to report an ongoing double-digit growth, reaching 13.4% in the 9 months. In the third quarter, we saw an improvement versus the second quarter, with a healthy organic growth of 12.5%. Organic growth continues to be driven by the new concessions, the MTR in Hong Kong and the new duty-free shop at Perth airport, but also by improving like-for-like contribution. Within this division we saw good performance in Eastern Europe with Russia and Serbia, while the Middle East showed a slightly lower performing due to the high comparable of the previous years.

Asia as a whole continued to show a good performance with positive contribution coming from China and Macau besides obviously the aforementioned performance of Hong Kong and Australia.

Slide #12, North America. In Slide 12 we see that North America delivered a resilient performance of 2.1% in the 9 months. The main factor here were the high comparable and the lower spend of Chinese customers mainly in our Canadian duty-free locations. While the underlying duty-paid business continues to perform resiliently in Q3, we saw a temporary impact of Hurricane Dorian and the grounding of the Boeing MAX 737 aircraft, impacting the number of passengers temporarily.

Let's move to Slide 13, Central and South America. Well, we can see that the overall performance of the division remains challenging with organic sales at minus 8.4% for the 9 months, the third quarter has shown a considerable improvement with organic growth for the quarter, reaching minus 3.8% from minus 10.5% in the second quarter.

Central and North America has again posted a positive performance, mainly supported by our operations in Mexico, the Caribbean and the Dominican Republic. As well by the ongoing strong growth of the cruise business, driven by the start of operations onboard new ships, 18 new ships with 30 new stores.

On Page 14. I will now look at the passenger growth. Both chart and table continue to show a very positive picture. Indeed, the global performance in passenger numbers in the 9 months 2019 has continued with a healthy increase of 4.6%. As we can see from the outlook chart on the right, also expectations continue at level of above 5% in average for the next 2 years.

Slide 15, regarding openings and refurbishments. In the first 9 months 2019 we have continued with our expansion of sales area by opening a total of 20,400 square meters of new retail space. The main highlights of the openings were 20 stores in Russia, covering 2,000 square meters, 49 -- 45 shops in North America, et cetera. Looking at the refurbishments, we have been quite active on the renovation of our operations as we have been renovating some important stores with considerable sizes in the 9 months 2019. Our total renovated stores is 36,800 square meters. The more important ones are listed here.

Let's move to Page 16, regarding the new contracts pipeline. We see that our portfolio of signed contracts reached 14,600 square meters to be open during 2019 and -- beginning of 2020. The more relevant ones are as follows. 3 new shops in Mexico, already opened during beginning of November, we opened 1,400 square meters. 13 new shops in Brazil, totaling 1,100 square meters. 9 new shops in Chicago, totally 900 square meters. 3 new stores in the Nassau for 500 square meters. A new shop in Dominican Republic with 540 square meters. Moreover, we have an important project pipeline of 40,000 (sic) [43,000] square meters along all the divisions.

We move to Page 17. I am very pleased to repeat that we have renovated our long-term partnership for up to 5 years with AENA. And with a minimum guarantee containing a lower annual increase than before, already disclosure, amounting 1.56%. We can see in the summer months Spain has improved its performance tremendously to above the agreed annual MAG increase. And I am looking forward to rolling out to fewer locations our successful commercial initiatives. I think the best practice, I've mentioned it here and I have mentioned this during previous calls, but the results after the implementation of these initiatives are very satisfactory. And as I said, above the market expected growth for the next 5 years.

Regarding the CapEx. I would say just for clarifying the situation that the CapEx is almost all invested. And we are not investing -- we are not expecting significant CapEx, expect obviously if the airports are renovated or changed, this is a different question.

In terms of Slide 18, as you know, we have been opening our first border shop of around 850 square meters at the end of August at the border with Argentina in a city with the name of Uruguaiana. We are currently monitoring customers' preferences and adapting our offers accordingly. But it's too early to give an indication on performance at the stage, but we have a lot of expectations.

Of course, this is a first step, but the potential is considerable. As all in all, 32 cities in Brazil are eligible to receive this type of stores. In October also the Brazilian government announced the duty-free allowance, as I mentioned before, will increase from $500 to $1,000. This increase is not even covering the U.S. inflection rate in U.S. dollars since the moment that was increased the last time, but is a significant obviously opportunity for us. In terms of what I said before is the assortment of products that will be offered to the customers in arrival shops today, it's around 65% of total sales, will increase significantly. And the opportunities that the increase of the individual sell tickets from $500 to $1,000 will be also very relevant.

On Slide 19. I would like to first focus on the acquisitions of the majority of stock of 60% in RegStaer Vnukovo announced in June. We have now received all the regulatory approvals for the closing, which we expect to be completed in the coming days. This will allow us to fully consolidate the new operations probably as of the beginning of November. It is a very important step that allows us to considerably strength our position in the Moscow region where we are also operating in Domodedovo and Sheremetyevo airport. In addition to other Russian existing operations in St. Petersburg, Sochi and Krasnodar.

The operator in Vnukovo is a very long-term concession, until 2035. It includes more than 30 duty-free and duty-paid shops across a retail space of over 6,800 square meters. And it reached close to EUR 59 million sales in full year 2018. We also further consolidated our presence at the Mexico City International Airport, winning a new contract for 3 additional shops covered in a retail space of 1,400 square meters. Combined with our previous shops, we are now operating a total of 29 shops, covering 7,400 square meters at Mexico City International Airport, which is the busiest hub in Latin America.

Moreover, I would like also to highlight the acquisition done by our subsidiary, Hudson, for the 34 Brookstone shops in the U.S., which on top of the physical stores include the right to add as exclusive Brookstone airport retailer and to expand the brand further while at the same time also being able to include selected Brookstone products in our Hudson stores.

Last but not least, our subsidiary, Hudson, also acquired OHM Concession Group, adding new food and beverage concessions capabilities and expanding the North America footprint. The acquisition will add approximately 60 additional food and beverage units to the existing 50 currently operated by Hudson. OHM Concession Group generated sales of USD 62 million in full year 2018. And we expect the closing of the transaction will happen during the last quarter of 2019 or beginning of 2020.

If we move to Slide 20. I would like to inform you that as of the 2020 financial year Dufry will release a quarterly trading statement for Q1 and Q3 instead of publishing full financial results. Obviously, we will continue to publish full financial results for the half year and full year. We will allow the changes to focus on a more meaningful time period of 6 months when assessing the performance of the company. That's been less influenced by the quarterly volatility as well as the more pronounced seasonality which we have seen after the implementation of IFRS 16.

The first quarterly trading statement will be published for Q1 on May 12, 2020. I will now handover to Yves the presentation of the 9 months financials. Yves?

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Yves Gerster, Dufry AG - CFO & Group Treasurer [3]

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Thank you, Julián. And good evening or good afternoon, everybody, depending on where you are listening to the call.

Before I start with the performance of the third quarter and the 9 months, I would like to shortly mention the correction we have made for the first and second quarter of this year. What is the reason for the change? As you know, we have implemented IFRS 16 this year. As commented before, under IFRS 16 only the fixed future lease obligations are capitalized. In a number of concession agreements the lease obligations have initially been considered as being variable and therefore have not been capitalized.

However, depending on how you interpret the clauses in the contract, you can come to the conclusion that these contracts contain a de facto fixed future obligation. These contracts are now also capitalized. The change results in a EBIT improvement of around CHF 40 million for the half year, while the net profit increased by approximately CHF 14 million. Again, it is important to note that cash generation remains unaffected by IFRS 16.

Moving to Slide 23. Let us move to our actual performance of Q3 and the 9 months. Julián already commented on organic growth, so let me just emphasize on the improvement in like-for-like, which reached 1.3% in the third quarter. Also, net new concession accelerated and reached 2.8% growth in the quarter.

Organic growth comes in at 4.1%, which represents a further acceleration of the organic growth. The FX impact reached a negative 2.5%. To further understand the FX implications let's move to the next slide.

If you look at the bottom-left chart, you will see that the positive effect of the appreciation of the U.S. dollar reduced over the last quarters. By the same token, the devaluation of both euro and pound sterling accentuated. The performance of these currencies explain the more negative translation impact seen in the third quarter.

Let's move to Slide 25. Looking at the usual P&L statement, starting directly with gross profits. The gross profit margin expanded by 40 basis points in the first 9 months of 2019. The increase reflects the continued improvement in Dufry's negotiations with global and local suppliers in addition to the further roll out of the brand's plan, which includes the launch of exclusive products and novelties.

Lease expenses were at just over CHF 1 billion in the first 9 months of this year. As you remember, these expenses are related to variable concessions and variable part of concessions which contains a minimum annual guarantee. Personnel expenses as a percentage over turnover increased by 40 basis points. As we mentioned previously, most of the increase related to North America's increase in the minimum wage as well as a one-off change related to change in the management in North America.

Other expenses were slightly up compared to the same period last year. This line mainly replaces former general expenses and other operational results. Depreciation excluding right of use remains stable at the level of last year at 2.2%. Amortization in absolute terms stood at CHF 275 million, stable as a percentage over turnover of 4.1% compared to last year's 4.2%.

Depreciation of right of use increased by about CHF 55 million. As you know, changes in this line are related to renewals and new contracts.

Other operating income reflects the indirect tax refunds of around CHF 62 million, which Dufry became entitled to claim back in Brazil as communicated a few weeks ago.

Financial results improved by CHF 5.6 million due to achieved further optimizations. Looking at lease interest, this also decreased in the period. As mentioned before, there is a significant front-loading effect here in this line, which means that we expect lease interest to decline for the next few quarters.

Further down. Income tax is in line with last year. Having gone through the most relevant lines of the P&L, let's move now to our KPIs which are on the table below. Adjusted net profit reached CHF 337.1 million versus CHF 336.5 million in the first 9 months of 2018.

Moving onto the next slide. On Slide 26 we can find the summary of the cash flow. Adjusted operating cash flow improved by CHF 43.5 million or 5.7% versus 9 months last year. Equity free cash flow for the 9 months is at CHF 406.6 million, lagging just slightly behind last year's performance.

Looking at the bottom-right chart. In the third quarter, we have generated over CHF 266 million in equity free cash flow compared to the CHF 208 million last year. With that I would like to confirm our mid-term target for equity free cash flow of CHF 350 million to CHF 400 million.

Let's move now to the next slide where you can see the bridge of the equity free cash flow components. There are just 2 points to be mentioned here. The first is the change in net working capital which reached CHF 4.6 million this year versus CHF 93.7 million last year. The reduction is mainly due to the tax claim in Brazil, which I have mentioned before when discussing the P&L. What you see here is just a compensating effect because we have not yet received the money.

The second one, income tax paid, reached CHF 58.7 million versus CHF 81.1 million last year. The difference reflects mainly the tax refund in Spain already mentioned earlier on. Looking at the 2 charts at the bottom, you will find the typical seasonality of the business. Also, you will see that we managed to further optimize both core networking capital and CapEx as a percentage over sales compared to respective quarters last year.

Moving to Slide 28 with summarized balance sheet. Again, as mentioned previously, the only material changes are the right of use assets and the lease liabilities related to IFRS 16. Otherwise, there are no big movements worth pointing out.

On the next slide, an overview on our financing. Our net debt reduced since the beginning of the year by close to CHF 220 million and amounted to CHF 3.067 billion by the end of September 2019. Looking at the covenants, as expected, leverage reduced to 3.29x, further increasing the headroom against the threshold of 4.5x. The right chart illustrates the debt maturity profile. In that respect, I just wanted to mention that we have extended during October the maturity of our existing EUR 1.3 billion credit facility by 1 year from 2023 to now 2024.

On that note let me pass over to Julián for the closing remarks.

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Julián Díaz González, Dufry AG - CEO & Director [4]

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Thank you, Yves.

Let's move now to Slide 31. I want to conclude with, yes, talking about 3 areas. One is organic growth, the second one is contract extensions, new wins and acquisition. And the last one is cash flow. The 3 are obviously relevant for describing what happened during Q3.

In the third quarter of 2019 regarding organic growth, we continue to see a continuation of the improvement seen in the previous quarters. With organic growth reaching 4.1%, resulting in organic growth further increasing to 2.9% for the 9 months in 2019.

We are working very hard to continue to accelerate growth again. And seeing the business accelerating is encouraging. And in the first 3 weeks of October organic growth reached around 3%.

With respect to like-for-like, we expect performance to continue to be positive in the remaining quarters, supported by the commercial initiatives we have implemented by the ongoing refurbishments on the shops where we have so far executed 36,800 square meters of commercial space. And additional support will come from the newly opened retail space across divisions and body of channels. With 20,400 square meters open so far during the year. Therefore we can again confirm our mid-term organic growth guidance of 3%, 4%.

In the second obviously subject contract extensions, I would like to remark again that during the third quarter and in the first weeks of October we announced quite a number of contract extensions such as with AENA in Spain. New concession wins such as in Mexico City, as well as important acquisitions by Hudson, which together with the closing of Vnukovo in Russia underline the competitiveness of our business model and the company.

These footprint extensions will provide more drive to our performance in the coming quarters and allow us to access new market segments in North America. And finally, as obviously the important, KPI cash flow. Regarding the equity free cash flow, we have seen a strong improvement in the third quarter, increasing CHF 58 million compared with quarter 2018 -- if we consider equity free cash flow of the 9 months.

I am going to repeat again what I said during the last few presentations. Our mid-term target is to reach between CHF 350 million and CHF 400 million, and increasing in line with the turnover of the company.

And obviously, we are making all the efforts that we can in order to reach this target in 2019. This completes our presentation and we can now move on to the Q&A session. And obviously, all the questions are welcome. Thank you very much.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Edouard Aubin, Morgan Stanley.

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Edouard Aubin, Morgan Stanley, Research Division - Head of Luxury Goods [2]

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So Edouard Aubin, Morgan Stanley. So one question on gross margin in Spain. So looking at your top-line, the passenger growth was relatively weak in some of the key markets in Europe where you operate, like the U.K. for example. Yet your like-for-like in Europe was relatively, was strong, and I guess benefited from higher spend per passenger. So what drove this higher spend per passenger in Q3? And do you expect that to continue?

Just to follow up on the top line, Julián, you just talked about top line being up around -- organic growth being up around 3% in October. Is the comparison basis getting easier or more difficult in November, December? Just so we can have a sense. So that's for top line.

If you look at your gross margin. Again stepping back. I think it was below 50% when you IPOed. And it's now over 60% this year, up again I think 40 basis point year-to-date. Your like-for-like year-to-date, and I know it was impacted by LATAM, but it's essentially flat. So to what extent your gross margin expansion is a function of better buying? And to what extent is it a function of you raising your prices? If you can give us a sense. And obviously, should we expect further gross margin expansion next year?

And then lastly, to conclude on Spain. I think AENA recently during the Capital Market Day, few days ago, gave a guidance of passenger growth of about 1.1% next year in Spain versus, I think, 4% in 2019. So do you expect -- are you in line with them in terms of the expectation? And do you expect spend per passenger to accelerate in Spain and your profitability, given that the MAG is going to increase 6% next year to go down or up in Spain next year and further in '20?

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Julián Díaz González, Dufry AG - CEO & Director [3]

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Regarding the Q3 organic growth and especially obviously the growth in like-for-like, I think the basic thing is already answered, is due to the higher spend. And the higher spend in Q3 has been as a consequence of obviously different initiatives started at the beginning of the year.

When we saw a slowing down of the organic growth that are having, in my view, a tremendous positive thing. One of them is an acceleration of organic growth project. That is basically going shop by shop, understanding the most important basic retails things, from the compensation to the employees, to new assortment needed in terms of the change of passengers' profile, to initiatives that have been supported by the suppliers in terms of promotions.

Nothing that is obviously a secret is how to accelerate, to be a good retailer in challenges times. Regarding the like-for-like, my opinion, and it's obviously very early, is that we'll continue -- the growth will continue during the last quarter of 2019.

Regarding the situation in November and December. If we talk about comparables, it will be more difficult, little tougher, because obviously last year we opened 2, 3 important operations that now will be comparable. And this is obviously something that is going to impact the possible organic growth. But we have also new operations like Mexico that we opened the other day. And we have other operations that we'll start during the last part of the year.

I hope that these comparable -- tough comparable will be compensated by the new operations that we are opening. As you know, we are opening operations quarterly. Regarding the gross profit margin, the gross profit margin increase has not been on any regard basically increasing prices. What we have done is 2 things, one is negotiation with suppliers and renegotiation of specific deals, especially global deals and local deals.

The local deals are today generating probably the most important part of the increase in the gross profit margin. And the second in terms of -- in terms of obviously importance, the second one is global deals especially because we are still implementing global plans. For the future, I cannot obviously give any guidelines because it's very difficult for me to project it. But the reality is that we are still thinking that in 2020 the gross profit margin will increase again.

Regarding the AENA and obviously what is happening in Spain is (inaudible). The other day AENA disclosure that next year the number of passengers will increase 1.1%.

What I can say is that today with a trend -- with this trend in the Spanish airports our spend per passenger is increasing tremendously and totally mitigating and over-passing the minimum guarantee. I hope that in the future we will continue like that. Because if we continue like that, especially after October 2020, the recover of this concession will be very fast. Because what we have seen, and I think I commented on during the last quarter results too in this call, spend per passenger and spend due to the initiatives listed in the presentation, the pricing policies, promotions, reallocations and listing of new products are delivering. AENA knows that obviously. An AENA probably -- I don't know exactly what they say, but probably they commented on this significant increase in spend per passenger that has happened over the past 8 months. I think that's all from my side.

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Edouard Aubin, Morgan Stanley, Research Division - Head of Luxury Goods [4]

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That's very clear. But just to clarify, I mean the MAG is going to increase 6% I guess, up until October 2020. So in terms of your profitability in Spain, is it going to get worse before it gets better in 2021? Or what's your expectation there?

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Julián Díaz González, Dufry AG - CEO & Director [5]

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I think next year the profitability in Spain will be better than in 2020. If the -- let me explain, if the trend that is happening today regarding the spend per passenger continues in 2020 during the first 10 months of 2020, the profitability and generation of cash in Spain will improve.

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Operator [6]

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Next question comes from the line of Jörn Iffert, UBS.

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Jörn Iffert, UBS Investment Bank, Research Division - Director and Analyst [7]

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The first one is on your restatements. May I ask, was this suggested by the regulator or was it more or less your own choice why you restated H1 2019 and also 2018?

Second question would be, please, on airport sales. I mean, if you just for currencies, it's around flattish in the last couple of quarters year-over-year. But you launched already a couple of initiatives with exclusive products and your new shop concepts. I mean, what else can you do that the airport sales are improving again for 2020? And do you have the assumption that there should be growth again in 2020?

And the last question is, please, on the margins. I think in H1 you said adjusted EBIT margin should improve in the second half. If I take out the one-off tax benefits, I think adjusted EBIT margins decreased again by 50, 60 basis points in Q3. So no improvement versus Q2. What exactly are the reasons here? And how fast can you turn this around? And what are the initiatives?

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Yves Gerster, Dufry AG - CFO & Group Treasurer [8]

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Okay. So let me start with the restatement question. So look there, it has nothing to do with the regulator. So what we have done is there were discussions now over the year between us, advisors and also our auditors. And we came to the conclusion that what we do now, i.e. by adding those contracts to capitalize them in line with IFRS 16 reflects a better picture of the underlying economic reality. And therefore, we came to the conclusion to adopt that. But we were not forced in that sense by anybody or it was basically an internal discussion with the partners I've mentioned before to change that. You want to comment on the airport sales?

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Julián Díaz González, Dufry AG - CEO & Director [9]

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Yes. Regarding the airport sales, yes, the airport sales this year so far are flat. And the main reason is in most of the airports the sales are going very, very well. The problem here is South American and how South American customers are impacting in the business. Excluding South America, we are around 2% positive. And I don't -- next year even with obviously only the comparable the situation in airport sales are going to be positive. In my view, I am very confident that the airport sales will accelerate as soon the comparable is happening.

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Yves Gerster, Dufry AG - CFO & Group Treasurer [10]

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Okay, so for the last one, Jörn. So look, again pro forma 2018 is just a rough indication. You need to take that with a pinch of salt. It's our -- it's an estimate based on our assumptions and does not reflect entirely full accurate statement obviously. So look, in respect to the EBIT or the adjusted EBIT margin, what you have to keep in mind is that we have opened a number of concessions. And we have commented on that in the first half year, which are mainly in the area of the cruises but also others, which have a certain impact. I mean especially in those new contracts you will see a certain ramp up over the year until they are fully effective and reflected in our P&L. And that among other things lead to a decrease in this 50 to 60 basis points you have mentioned.

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Jörn Iffert, UBS Investment Bank, Research Division - Director and Analyst [11]

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Okay. And I mean it's fair though to understand this, I mean absolute EBIT was -- or absolute adjusted EBIT is going down in Q3. You mentioned ramp up cost. And this should then more or less fall away in 2020…

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Yves Gerster, Dufry AG - CFO & Group Treasurer [12]

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Yes, I mean look, if you look at Q3 isolated, there you already see a much better performance.

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Jörn Iffert, UBS Investment Bank, Research Division - Director and Analyst [13]

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And in 2020, these contracts should turn to, yes, positive profitability, the new contracts you have signed? Is it the conclusion?

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Yves Gerster, Dufry AG - CFO & Group Treasurer [14]

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The ones we have mentioned, yes, yes.

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Operator [15]

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Next question comes from the line of Jon Cox, Kepler Cheuvreux.

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Jon Cox, Kepler Cheuvreux, Research Division - Head of Swiss Equities and Head of European Consumer Equities [16]

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Congrats on that top line and the acceleration of organic sales growth. I think it was very welcome, as you can see, with the stock price reaction. Julián, you're talking about a 3% in the last couple of weeks. Can you just tell us, give us a bit of a breakdown because obviously, you're running over 4% in Q3, which parts of the business maybe is slowing down or accelerating? Obviously we heard Hudson yesterday talking about North America being quite difficult.

And then just to come back, maybe for Yves, on the whole margin. When I do -- when I back out the one-off in Q3 I get a underlying operating margin which is down about 90, 9-0, basis points. And I think you're running down about 100 basis points in the first half. I'm just wondering what your best guess is for the final quarter. I think you've said before you should see a stabilization of that margin at the end of the year. Should we assume then that Q4 will be flat? Or do you think that would actually more likely be into Q1? And well obviously we're not going to see the figures anymore by H1 next year.

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Julián Díaz González, Dufry AG - CEO & Director [17]

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Okay, regarding the -- Jon, regarding the impact of the difference of whatever is the calculation we used from the 4.1% and the 3%. There are 2 aspects here. One is North America, that they are starting the quarter with a negative organic growth. And the second one is the -- a bit of slowing down in Europe from 7% to 5%. All the other divisions are performing well, are normal, similar to the previous quarter.

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Yves Gerster, Dufry AG - CFO & Group Treasurer [18]

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So in respect to the adjustment, if you take out the CHF 62 million coming from Brazil, you're absolutely right. Then for the 9 months the metric indeed is decreasing by 90%. But look, having said that, if you look at the adjusted operating margin, it has been improving quarter-over-quarter over the last quarters, and therefore I would expect that trend to hopefully continue going forward.

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Jon Cox, Kepler Cheuvreux, Research Division - Head of Swiss Equities and Head of European Consumer Equities [19]

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Okay. And no best guess when you would actually start to see a flat margin?

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Yves Gerster, Dufry AG - CFO & Group Treasurer [20]

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No look, not at this stage. I cannot comment on that at this stage.

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Operator [21]

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Next question comes from the line of Rebecca McClellan, Santander.

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Rebecca Anne McClellan, Grupo Santander, Research Division - Equity Analyst [22]

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Just a couple of questions from me. Firstly, how much did the cruise business contribute to the Europe organic growth because I think you said that the organic growth came to the U.K. thanks to cruise. So how much was that contribution?

And secondly, what are you expecting for the -- out of new space contribution or new concession contribution in the fourth quarter versus the 2.8% earned through the 9 months?

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Julián Díaz González, Dufry AG - CEO & Director [23]

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Sorry, could you repeat the second question, Rebecca? I couldn't…

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Rebecca Anne McClellan, Grupo Santander, Research Division - Equity Analyst [24]

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The new space contribution or new concession contribution for the fourth quarter, I mean it's sort of running at 2.8% over 9 months. What would you expect in the fourth quarter given the annualization of some of the big contracts?

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Julián Díaz González, Dufry AG - CEO & Director [25]

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Okay, regarding the first question is the contribution from the new shipping lines, that -- the 30 lines, sorry, that we are operating. That is around 2%. I cannot comment on specifics regarding this quarter because we don't give short-term guidance. Again, we can -- and less obviously complicated is to say something regarding the specific contribution. We don't -- we prefer not to say anything regarding short-term.

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Rebecca Anne McClellan, Grupo Santander, Research Division - Equity Analyst [26]

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Okay. But would you expect it to come down from the 2.8% as we annualize?

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Julián Díaz González, Dufry AG - CEO & Director [27]

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Yes, I think so.

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Rebecca Anne McClellan, Grupo Santander, Research Division - Equity Analyst [28]

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Okay. And also just in terms of North America, you said, Julián, that the impact is largely due to Hurricane Dorian on 737 jet groundings. But actually what you're saying is that it's primarily due to pressure from, macroeconomic pressures. So have those macroeconomic pressures actually ramped up then over 3Q?

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Julián Díaz González, Dufry AG - CEO & Director [29]

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Okay, macroeconomic trends are always important. But this is the obvious part, no. I think the most important in travel retail is identify where the problems are. In our opinion, the problems are, number one, because the Chinese are spending less in Canada, especially in Canada. Number two, because they were a drop in passengers in duty-paid because this MAX, whatever name, is now is landed and in -- but in January will be again flying. And obviously these effects and the (inaudible) for a specific moment in -- specific period of time, that is obviously short in terms of 1 quarter, but in 1 year will be not relevant. Those are specific travel retail issues.

Then macroeconomic impact. Yes, I can talk about macroeconomic. But I think we are not having a lot of value with macroeconomic acceleration.

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Operator [30]

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Next question comes from the line of Gian Marco Werro, MainFirst.

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Gian Marco Werro, MainFirst Bank AG, Research Division - Analyst [31]

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I have a question in relation to the announced acquisitions of Hudson there and for the Brookstone and the OHM acquisition. Can you tell me also the expected closing date of Brookstone? And does this acquisition somehow also affect your CapEx in Q4 and also Q1 2020 probably?

And then my second question is in relation to Dufry's intention for quarterly trading statements in Q1 and Q3 instead of publishing full financial results going forward? So also in relation to the IFRS accounting and also related to high importance of cash flow KPIs. Will you also give then anyhow some granularity on the cash flow composition going forward?

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Julián Díaz González, Dufry AG - CEO & Director [32]

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Okay. Number one, regarding the closing. I think the closing of Brookstone will be probably Q4 2019. It could happen also that we'll move few weeks in 2020. But Q4 is a good expectation. Regarding OHM, it's very similar because what we are pending here are subjects to obviously the concerns in the contracts. And I think Q4 2019 is probably the most likely scenario.

Regarding the CapEx. The CapEx in Brookstone is not going to be - and I'm telling that obviously in advance, it's not going to be relevant. In OHM, the CapEx will be for new operations. In the current situation, the contracts that are already signed are considering the model. And in 2019 -- in 2020 depending on the new operations, but not for the current ones.

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Yves Gerster, Dufry AG - CFO & Group Treasurer [33]

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Gian Marco, can you please repeat the question, the second one you had? There was one around cash flow, if I remember correctly.

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Gian Marco Werro, MainFirst Bank AG, Research Division - Analyst [34]

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Yes, of course, Yves. So just in relation to your intention to only publish Q1 and Q3 on let's say on a -- yes with lower granularity there in relation to IFRS 16 accounting and also the importance of your cash flow KPIs I want to ask about how much granularity you will provide in the future in relation to net working capital changes or also CapEx also for Q1, Q3?

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Yves Gerster, Dufry AG - CFO & Group Treasurer [35]

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Sure. It's a little bit too early to comment on it. So we are -- we have a good idea. But we are finalizing on what and how we want to present Q1 and Q3 going forward. And I can only comment on the details at a later stage, unfortunately.

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Operator [36]

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(Operator Instructions) The next question comes from the line of Andrew Pentol, TRB.

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Andrew Pentol;TRBusiness;Senior Editor, [37]

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Just wanted to ask you a bit more on new acquisitions. We heard a lot about -- we've heard in this call a lot about the Brookstone acquisitions, the RegStaer acquisition. But I was just wondering, are you -- in terms of acquisitions, could Asia/Pacific and India subcontinent be a target because of the fact that you've already got -- you've already got -- I mean, you already have (inaudible) businesses there of the MTR starting and in Perth?

And also I just wanted to just touch on Brazil. Number one, just -- is the situation improving in Brazil at all in terms of external influences such as the currency devaluations, et cetera? So are things like improving there and making the trading climate easier there?

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Julián Díaz González, Dufry AG - CEO & Director [38]

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Regarding acquisitions, we have been commented for a long time that the growth strategy of this company is accelerating organic growth and is small- and middle-size acquisitions. Focus and as much obviously availability are in Asia.

What we have seen during this part of the first 9 months of 2019 is an acceleration of both things. Organic growth due to new concessions and like-for-like, and acquisitions, already mentioned many times during the presentation. If the question is are you interested as a company invest in the capital in Asia? The answer is yes, we are. And we are pursuing different opportunities today middle- and small-size acquisition as we have been commented on. Obviously acquisitions, as I always said, are opportunistic and depending on circumstances that sometimes are not controlled by us. The second one -- but I feel it's stable now from the business point of view.

I think the situation is gradually going to improve. The stable exchange rate, Brazilian real-U. S. dollar is also a big relevant point. But not only the stability, it's also the lack of volatility. And I think the last weeks what we have seen is a lack of volatility and more stable currency. And we have seen a more stable acceleration of growth. And I hope that during the last month of 2019 we will confirm that.

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Operator [39]

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We have a follow-up question from Edouard Aubin.

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Edouard Aubin, Morgan Stanley, Research Division - Head of Luxury Goods [40]

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So just 2 quick ones for me. Just following up on OHM. So you're growing in food and beverage in the U.S. If I remember correctly, I think you talked about the food and beverage segments making up 2/3 of the market in the U.S. So if you could, Julián, please come back on kind of the rationale. To what extent is it going to allow you to accelerate your growth and complete for tenders there in the U.S.? That's number one.

And number two, just a quick one on cash flow. So your equity free cash flow was slightly over CHF 400 million in the first 9 months. If I look at the seasonality, usually in the fourth quarter it's an outflow of about CHF 50 million. So should we think about for the full year your equity free cash flow being towards the bottom end of your CHF 350 million to CHF 400 million guidance range? Would that be fair to assume?

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Julián Díaz González, Dufry AG - CEO & Director [41]

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Regarding the food and beverage and the U.S. I think at the time of the IPO we explained the rationale of this IPO. Basically explaining that Dufry as a global company is not so far interested to invest and develop the market in food and beverage. But in the U.S., due to the characteristics of the travel retail market, as I said, one thing that probably is well-known everywhere that 2/3 or 65% of the total market of travel retail in the U.S. is food and beverage. We are the leaders in travel retail.

As a consequence, if we want to continue with the same level of growth our company has had over the past 10 years, double-digit in most of the cases, we need to accelerate not only in the retail part. This is obvious, that is our core business. It's also in the food and beverage part.

As a consequence, we define or we explained to the market and to the participants in the IPO that the company -- Hudson was looking for small operations, small- and medium-size operations, this is a case, where we could acquire 2 things. First of all, is restaurant footprint, because we have already cafeterias and small food and beverage points of sales in the U.S. We have around 50 or 55 today without OHM. We were looking for expertise and we were looking for footprint in this food and beverage restaurant, fast food restaurant in this tie.

This is what we are acquiring with OHM. It's not just the footprint in the locations, it's also the expertise for expanding the business and participating and giving obviously the opportunity our colleagues in the U.S. to participate in new RFPs. RFP is basically food and beverage.

But without -- obviously I don't want to say that we want to be a food and beverage company. What we want to say is a good retail company. And in the U.S., we went to develop the food and beverage capabilities, because it's a market of food and beverage. Those are the rationales we use at the IPO time. And today we are confirming exactly the shape of the story acquiring OHM.

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Yves Gerster, Dufry AG - CFO & Group Treasurer [42]

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Perfect. And to the second question, Edouard. So look, as you know, we don't give or I don't give guidance for the next quarter or for a given year. So our equity free cash flow guidance is CHF 350 million to CHF 400 million in the medium term, flowing in line with the top-line growth.

However, what I can tell you is, and you're absolutely right, in the future, our seasonality in the fourth quarter, we typically see a slightly negative equity free cash flow. So as we stand now, it's CHF 406.6 million. And assuming that Q4 will be slightly negative, you can assume that we probably are slightly below or below our -- the higher boundary of the CHF 350 million to CHF 400 million. So you're correct.

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Operator [43]

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There are no more questions at this time.

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Julián Díaz González, Dufry AG - CEO & Director [44]

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Thank you very much. And obviously, the opportunity to participate in the call is great for us. But if you have any other questions, please contact us directly. Thank you.

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Operator [45]

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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.