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Edited Transcript of DUFN.VX earnings conference call or presentation 15-Mar-17 1:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Dufry AG Earnings Call

Zurich Mar 15, 2017 (Thomson StreetEvents) -- Edited Transcript of Dufry AG earnings conference call or presentation Wednesday, March 15, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Julian Diaz

Dufry AG - CEO

* Andreas Schneiter

Dufry AG - CFO

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Conference Call Participants

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* Joern Iffert

UBS - Analyst

* Jon Cox

Kepler Cheuvreux - Analyst

* Felix Remmers

Credit Suisse - Analyst

* Stefan Hooplich

Bateset Basle - Analyst

* Andrew Pentol

Duty Free Magazine - Journalist

* Jaafar Mestari

JP Morgan - Analyst

* Charlie Moy Sands

Deutsche Bank - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good morning or good afternoon. Welcome to the Dufry full year 2016 results presentation. I am Sherry, 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).

This time, it's my pleasure to hand over to Mr. Julian Diaz, CEO of Dufry. You will now be joined to the conference room. Thank you.

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Julian Diaz, Dufry AG - CEO [2]

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Okay. Good afternoon. Welcome to this full year results presentation once more in Zurich. Thank you for participating here in the room. These are Andreas Schneiter and Julian Diaz calling and participating in the conference in Zurich

We are going to do -- we are going to go through the presentation in the same way as on previous times. There is a presentation that was disclosed this morning on our website. Please go to the page 5 of this presentation.

One year ago when we were here, we were talking about 2017, obviously with all the uncertainties with many events that happened within the last quarter of 2015 giving many months with many question marks. And we were talking about the 2016 goals for the Company.

We were commenting about the acceleration of organic growth, which has been over the past 18 months a request and a question that was repeated many times by investors, by analysts. We were talking about how to improve EBITDA after the obviously acquisitions. And how to really deliver what was expected in the integration with World Duty Free and Nuance.

We increased the free cash flow.

And finally we were ahead of time but thinking how to extend important contracts of the Company that for us were critical. And we obviously tried to renegotiate ahead of obviously anything else. Melbourne, Zurich, Sao Paulo, Cancun, Cozumel, Marrakech and many others have been commented on during the last 12 months.

And in the bottom side of page 5 what we have is what happened. Is finally we have reached a level of growth in organic growth within the last quarter very similar to the one that we have had over the past years 5.6%. And finally 2016 was a year with positive organic growth plus 1%.

I am going to comment on the different details within the presentation. I don't want to explain at this stage.

The second one is EBITDA reached CHF935 million, 29% above last year.

Free cash flow increased by 43%, the highest in the fiscal year of the Company CHF484 million.

Net debt reduced by CHF205 million reaching CHF3.7 billion. Obviously compared with the previous year, it reduced by CHF200 million.

The integration of World Duty Free was finally complete. We were expecting CHF105 million synergies and what we can comment on now is that the final amount of synergies identified has reached CHF125 million. The remaining part will be implemented along 2017.

And these contracts, as I mentioned before, were obviously representing 80,000 square meters of commercial space. I comment on that by year-end December 2016 total number of the square meters we are operating from the commercial point of view is 425,000, representing CHF1.2 billion of sales.

We also finalized the program for refurbishment in the shops for accelerating the value growth and we completed 30,000 square meters of commercial space.

All these events and all these results cannot be separated of the business model. I have been very consistent over the past year repeating the same thing. Our profitable growth steady and the business model still remains intact and I think this information is confirming what I am telling.

Situations like what happened during the first half of 2016, we were subject to many events many times repeated, currency volatility, economic and social unrest in many countries worldwide have been a good example about what I am talking about. The business model is resilient. The diversification strategy is still valid. And the focus for driving more growth that we are using the three pillars, acquisitions, organic growth and obviously new concessions included -- inclusive there are still valid.

In terms of information with more detail, if we move to page 6, what we have here is just the highlights of the full year results. Then the details will be explained by Andreas.

Turnover reached CHF7.8 billion. As I said, 5.6% organic growth during the last quarter, plus 1% in full year.

Gross profit margin improvement of 40 basis points, confirmation of the synergies -- Nuance synergies already fully implemented. And starting implementing -- impacting the P&L in 2016 with around CHF40 million synergies generated from World Duty Free.

Free cash flow again CHF484 million.

And net debt reduction already commented on. But I want to remind one thing. One of the questions that I hear more and more often is how could you accelerate in Dufry the organic growth if you want to reduce the leverage and you want to reduce the impact on net debt? The answer is here. Is we have been able to accelerate organic growth, and in parallel we have been able to reduce the net debt and the cash generation.

The World Duty Free synergies are obviously represented there and the CHF125 million is something that has not been announced to the market. And I, at this stage of the process in the position to confirm that the total synergies due to World Duty Free's acquisition is CHF125 million.

If we move, for the people participating in the call, to page 7, I think I will try to separate the first semester to the first quarter and the fourth quarter. The challenging first semester in 2016 with the strong currency devaluation in key emerging markets, for us Russia, Brazil, Argentina and even China not mentioned it, but obviously was also minus 10% compared with the mature currencies.

And the economic crisis in Brazil and Russia, socioeconomic events impacting our operations in Turkey, the number of Russians in Antalya dropped by 97%, and the drop in number of passengers in many Russian airports and also in Antalya around 47%. So, at that time, that the situation during the first semester was a bit challenging.

But, again due to the diversification strategy, we also had a very positive performance in Spain, UK and North America balancing the negative results mentioned before. And, again, it is important that the diversification strategy has a meaning and this is the meaning.

Our Company's performance in the first half of 2016 was a challenge, true. During the second quarter, a strong acceleration of organic growth in Q3 due to the continued good performance in Spain and US and the significant increase in the UK as well the Brexit announcement.

Good recovery in Brazil and higher impact of good performance in Turkey due to the strong seasonality of the business. I think at that time during December we were expecting a recovery in Turkey, but Turkey was not recovered. The situation didn't normalize until later on.

Finally, in Q4, the initiatives launched to drive organic growth impacted positively in the Company worldwide.

In addition, very strong performance in Brazil and North America and the recovery of our Turkish business also in the low season. We were, at that time, obviously expecting the recovery during the summer, but the recovery happened during the last quarter. It was the low season. The impact in the performance of the Company was very low. But we have seen the recovery in Turkey, in Antalya. As a consequence, organic growth reached plus 5.6% in Q4 and plus 1% in full year.

Regarding our trading update and divisions performed better in Q4 and -- than in the previous three quarters. All the divisions. Division one, Southern Europe and Africa turnover in 2016 reached CHF1.7 billion compared with CHF1.2 billion in 2015. Organic growth full year was minus 2.5% and plus 1.6% in Q4, impacted by the seasonality of Turkey during the summer.

Italy, Spain and Portugal had a very good year with single digit growth.

Turkey, due to the events mentioned before, dropped sales close to 50%. And other countries as Greece and African operations held up relatively well with a small decline of [assets] compared with the previous year.

Division two, the UK, Central and Eastern Europe, turnover reached CHF2.1 billion compared with CHF1.4 billion one year ago. Organic growth grew by 3.9% and 8.7% increase in organic growth within the last quarter. Very good performance in the UK, high single digit growth in the year and double-digit growth in Q4.

Serbia and Finland, single digit positive performance in the year and double digit in the quarter.

Sweden and Switzerland were both almost flat.

Russia and other related countries remained negative, but with positive acceleration the second part of the year, especially in number of passengers.

Division three, Asia, Middle East and Australia, turnover reached CHF770 million compared with CHF638 million one year ago. Organic growth positive in the year plus 0.4%. Compared with obviously the previous quarter, this is a significant improvement and 1.5% in the quarter.

Excellent double-digit growth in Korea, Indonesia, in Sri Lanka and India, single digit growth in Cambodia and Jordan. Operations as Hong Kong, Macau and Australia with negative performance due to the impact of the Chinese consumers and the renovation of our shops in Australia that at that time were starting obviously with a lot of impact in the sales.

Division four, Latin America, turnover reached CHF1.5 billion in 2016 versus CHF1.4 billion one year ago. Organic growth in the division was minus 4.1% full year and plus 3.7% in the quarter. The main impact Brazil and Argentina.

Good performance in Uruguay, Ecuador, Chile, Peru, Mexico, Dominican Republic and Jamaica with high single-digit growth or double-digit growth. Brazil reached minus 6% full year with high double-digit growth in Q3 and Q4.

And finally division five, North America, turnover reached CHF1.6 billion compared with CHF1.3 billion in 2015. Organic growth reached 4.5% positive in full year with plus 7.2% in the quarter. A strong performance in cards and duty paid business and duty free in Canada, mitigated by a negative performance in duty free US due to the stronger US dollar.

All the positive trends commented during Q4 2016 have been confirmed in January and February despite the calendar effects in February. All divisions performing well with positive recovery in Africa, Turkey, Greece and Italy in division one. Acceleration of growth in UK, Sweden and Finland, and excellent recovery in Russia and other Eastern countries with double-digit positive growth in January and February in division two.

Similar performance in division three, Middle East and Australia. Good performance in China, Macau, South Korea, Indonesia, Cambodia, Jordan and Dubai, and a still negative performance in Hong Kong.

In division four Latin America, very good acceleration of growth with double-digit growth in Brazil, Uruguay, Ecuador, Chile, Peru and Dominican Republic. All the other operations with similar performance compared with Q4.

And division five North America, very good double-digit positive growth in US and Canada duty free and single digit positive growth in our duty paid business in the US.

This is, in my view, obviously we have 64 countries in a very short time the explanation can't be extended. But we have a very good picture about what's happened and what is going to happen, or what is happening now in the January and February.

Let's move to page 8. I have already commented on that. I think the most positive thing is the acceleration of growth in Central and Eastern Europe 8.7% in the last quarter, the acceleration of growth in North America 7.2%, and in Latin America 3.7%. Still Asia, Middle East and Southern Europe and Africa remains a bit weak, but still obviously I can say is positive.

If we move to page 9, I comment on that. Last year we have 80,000 square meters of commercial space on total of 425,000 of extended and signed, 340 shops and approximately CHF1.2 billion in total sales of the Company. The concessions renewed were at similar terms than the concessions before the renewal.

The average duration of the concession portfolio is eight years. I always repeat the same thing; the quality of the concession portfolio is one of the most important assets we have.

Based in the rent we pay 27.2% in the P&L, the duration is above eight years, and diversification. We are in 64 countries with hundreds of concessions. And I think there is not a similar case in the travel retail. The concession portfolio is truly one of the strongest assets that we can sell to the market.

In terms of the shops opened, page number 10, we have opened 42,000 square meters of gross retail space in 2016. As I said, openings represent close in gross terms 10% of the total retail space. As we are going to see in a minute later on, still the pipeline opportunities is very healthy.

When we comment on the organic growth acceleration, we also comment on renovations and refurbishments. We have renovated last year 30,000 square meters of commercial space in the different locations that are listed in page 10. I don't think that I should explain anything else because you know the -- you have the places there.

If we move to page 11, regarding the new space, we have already signed 22,000 square meters of commercial space. These 22,000 square meters of commercial space, as you see in the chart, will be opened, most of them, 2017 and a small part in 2018.

The locations have I think we have won the tendering board in Colombia. The first time that we step in Colombia. One of the few countries that we have been able to step in. Cairo, in the new terminal, new premise with NCL, new shop in Macau. Mozambique new country also. Hard Rock Hotel in Las Vegas, terminal four in Cancun, Tampa (inaudible).

And there is a long list of concessions that we have already signed on top obviously of the pipeline opportunities.

The pipeline opportunities are represented there. 38,000 square meters of commercial space. Most of this space is negotiated, or in the process to be negotiated, in Asia, Middle East with 14,000 square meters and in North America with 11,000 square meters.

If we move to page 12, just for commenting one of the most important KPIs regarding the organic growth. It's very interesting. International passenger growth as in 2017 is plus 7.1%. In January and February, we had plus 9% global basis. I'm not talking about Dufry division. But I am talking about global basis.

In 2018, the forecast is 6.2% and in 2019, 5.8%. I think the regions are clear here. Asia Pacific, Middle East and Latin America, obviously we are represented well in all these regions, except in Asia.

If we move to page 13, I have repeated many times the strategy and Dufry's segmentation. But in terms of Dufry division, I think the diversification strategy is also represented here. 27% of the business is UK, Central and Eastern Europe in division two. 22% of the business is Southern Europe and Africa and so on and so on. I think it's relevant to say that still in Asia and in Middle East we have only 10% of the market. We are not represented property. And as I repeat in the past, our intention is to multiply this 10% by 2. Obviously now to balance the business by -- during the next five years.

In terms of Dufry categories, the most important perfumes and cosmetics 32%, confectionary and food 17%, luxury plus 12%, tobacco and spirits 15%. That's confirming again the strategy of the Company regarding the product diversification and the product mix.

In page 14, Dufry is still an airport retail company. I confirm that 91% of the total sales this year are generated in airport retail. But we have a significant good diversification in border shops, railway stations and cruise liners and seaports.

During the next five years, the Company has the intention to expand these categories, especially the cruise liners and seaports and the border shops, and specifically in the regions where we are not well represented from the airport retail point of view, for example in Asia.

Dufry by sector, Dufry duty free 60%, duty paid 40% I think gradually the Company is going to this 50/50 balance between the two businesses that we comment on many times.

Let's move to page 15, implementation of synergies I already comment on that CHF125 million. I don't think that I should comment on anything else. Maybe that in the P&L 2016 we had an impact in terms of savings in the cost structure of CHF49 million. And in terms of gross profit margin, positive impact of CHF14 million. This is due to World Duty Free acquisition.

If we move to page 16, I think in January 2016 we were here and I remember that we comment on the efficiency plan, CHF50 million target efficiency plan. And one of the arguments we did at that time is that obviously after several years of acquiring companies, it was the time to really reorganize the way we work it and the opportunity to really be more efficient.

At the time that we acquired World Duty Free, I had to say we cannot do everything at the same time. And we differentiate between synergies and efficiencies. We differentiate because obviously there are two different ways of generating both things. In the World Duty Free case, what we said is CHF105 million is the target in terms of synergies.

And somebody -- when an analyst asked me why are you talking about now synergies and not efficiencies. And I said because I think the efficiency is something that we need to implement in a different way and we need now to concentrate in delivering to the market what we had promised at the time that we acquired the company. And we put also the efficiency program (inaudible).

Now I think after the integration of World Duty Free is the right time to come back to the original idea, how to make the things better, how to continue obviously with a lot of the company with efficiency of the company. And one of the most important initiatives probably, not one of the, the most important initiative is the business operating model implementation.

I think this is, in my view and is the intention of the Company, that when this business model, or business operating model will be implemented, the Company will be more efficient, more focused on the customer and also will generate more profitability.

What are the targets here? Number one is drive growth. Drive growth at what level? The same level that we have had over the past years. From the management point of view, and I am going to repeat it many times during this presentation, we want to set up these 5%, 6%, 7% obviously depending on the situations that organic growth representing over the past 13 years.

Then drive efficiencies. It's already there. We are -- we have the intention to contribute to the P&L with 50 basis points at the EBITDA level when the planned business operating model will be fully implemented. That will be around 2017 and 2018.

The third one is to protect the commercial model. I think what we are going to really deliver to the market is very unique in terms of commercial approach. The business model has a big component that is how to connect with the customers. And one of them is the shop and the new generation store that will be opened, and I am coming -- I am going to comment on that later on, is one of the main drivers.

And through the financial model, I am going here now to say every time the same thing. We are very disciplined from the financial point of view and we don't do crazy things intentionally. This company has the intention to continue with the same level of discipline in terms of financial approach.

Then is increased competitiveness in the market. It's obvious with one single intention; to get the share of the customers and fulfill their new challenging expectations. That's the whole thing about.

Then how this business operating model is going to be developed? Number one is aligning the operating processes and procedures in the companies, to change the organizations in these companies, introducing the benefit of this process of integration with Nuance and World Duty Free with all the lessons that we have learned from them too. And finally, adapt the new ways of collaboration between the headquarters, the divisions and the countries.

This business operating model is a reality. It's not a project. It has been already tested in Mexico. We are in the latter steps of the project in Mexico and will be fully implemented in 13 locations along -- 13 group of countries along 2017 and fully implemented in 2018.

Then the second important project, and I think it's very also relevant is digitalization. I think we are talking -- everybody is talking about digitalization. And to understand what the digitalization is about is every time more difficult because we don't want to be a digital company. What we want to be is a company focused in the customer and behaving with the maximum efficiency possible. And digitalization is just a tool for doing that.

Our intention is that this technology will facilitate the increase in penetration, in the spend per ticket and, as a consequence, in spend per passenger and this is a process that is already started too.

I think the historical performance in travel retail is known. Penetration is very low. Only 15%, 16% of the total people going through an airport buy something. The opportunity is unbelievable.

We have been for many years trying to connect with the customers before they travel and it was impossible. I remember that we did things with the taxi driver, with the bus stations with many things. And it's impossible because the moment you try -- you are there wanting to travel it is a long way and long time normally. With digitalization, with digital tools, and we are going to explain how, this is something that is very -- is very important and very useful.

Travel retail is very unique. Everyone is talking about online and high street. Both are very competitive and both will probably have an input in the business we have, but we have very special conditions.

Number one is we have a captive audience. We invest millions in attracting the people to the shops. The customers are there. The difficulty here is how to refine really the assortment, how to adapt the assortment to the new passenger profile, how to connect them when they are in the journey of traveling. This is the real challenge and we have had very unique shopping environments.

Information that we have done in research is 47% of the total customers, in terms of people that buy something, normally are based in impulse buy. 47% of the total people buy by impulse based in gifting, price perception promotions, type of assortment, sharing with others and novelties. And we, Dufry, travel retail companies and Dufry as well, has all these things. The products will sell if you go through the list. I can do a little but all these things are.

53% of the passengers are planned. They go there with an intention. And the intention is based in price perception, gifting, assortment, indulgence, myself, selling with others. It's the same thing. We have the opportunity to drive more value and operational growth through these, obviously, type of customers.

Growing this channel for display is also very attractive because we are a very good window display. What are we going to do? I think the opportunities are there, but we need to really deliver and deliver in the short term, not deliver in the five years' plan.

Number one that we need to do is continue developing our core categories. I think core categories are very resilient to many other types of retail activities. Core categories, the wine or spirits partnered with the -- are there since the beginning of the travel retail.

Number two is continue to develop impulse purchase for sure.

Number three is protect our channel, especially as value saving channel.

Number four is to develop exclusive assortment for travel retail.

Number five is achieve level of footfall in the travel retail so more walk through, so better traffic flow within the shops and better location.

And number six is accelerate the utilization for increasing the penetration rate, the spend per ticket and, as a consequence, the spend per passenger.

And this is leading me to the second program. This is page number 18. This is how driving customer experience is very difficult. It's very difficult and Dufry has obviously a model. This is the model that we run that we are implementing now.

Number one, we are using digitalization for understanding better our customers. We have referred, mystery shoppers and many other analysis of information. We have more information than any other company in this business. We collect information in all the shops. We are operating in 350 locations, 2,200 shops.

Training the staff, and I think there are two examples there. One is providing the latest technology that is the iPad and how to deal with the customers with the iPad and really generate more sales through the information that could provide.

And the second one is this program that we have started with Disney in order to train the personnel in a really interactive and focused in the customer service.

The third one is omnichannel, digital experience. We have three elements to that, Dufry Red loyalty program, probably you heard about it. We are going to expand it globally very soon. It's an application that will facilitate your identification and your connection with the Company, a pre-order service, this is merchandise, and social media and celebrities.

And finally new experiences through digital innovation. The most relevant one is the new generation store. I think in 2017, you are going to see the new generation stores in several locations starting in Heathrow Terminal three, Cancun, Mexico. The opportunity and unbelievable. This is going to be a new type of approach to the customers from now on and Dufry is going to lead the process.

The intention is always the same is how to connect with the customer, how to provide the customer the service they are expecting, how to increase the penetration and how to increase the sales per ticket.

The way and the approach in terms of communication is here. I cannot go through all the details. But you have here home, airport depart in page 19, in flight, airport arrival and post arrival. What you have here is all the channels that we have -- we are in the process to implement on the left side with channels and the locations where we are contacting with the people. It's the first time in the history of travel retail that we are able to do that.

And the second obviously, the aim is that all the stakeholders are aligned. Stakeholders starting with the travel agents, air carriers, operators, airport landlords and also the suppliers. And this is again an exercise of approaching the business from the moment the customer is at home to the moment that the customer is back in their journeys.

And we can do it for one single reason we can do it because we are the largest and we are everywhere and we can connect on board. We can connect at the airport. We can connect at home. There are no companies today in the travel retail that can do something like that.

The strategic priorities for 2017 in page 20. Number one, to continue with organic growth. Organic growth is going to be again in 2017 a main purpose of the Company. Drive penetration in the shops, part of the organic growth including the next generation stores, the connection with the customers and new customer profiles, digitalization.

We are going to continue with the refurbishment. We are going to comment on in a minute.

Then we have new projects and expansions. I mentioned we have today under negotiation 38,000 square meters of commercial space. And the target in terms of refurbishment this year is 50,000 square meters.

Drive profitability through -- and efficiency through the business operating model implementation. Obviously, use the central functions in terms of the best practice to implement the business operating model and the efficiencies around the Company.

And deleveraging, that obviously is a key [element] for 2017. It will lead in the future also to acquisitions because this is a question that sometimes I heard quite often. Is this Company still thinking about to implement acquisitions? The answer is yes, but not now. We need obviously to do the things properly, and what the intention we have is to continue with the organic growth and acquisitions growth at the due time. The due time is when the deleveraging will reach a value -- a level that it will be acceptable in terms of what we are expecting from the Company. As you know, between 2.53 net debt EBITDA leverage.

In page 21 is strategic priorities again just with obviously more detail. Organic growth above 5% and we have signed 22,000 square meters, 38,000 pipeline and 50,000 refurbishment. The intention is 5%, 6% -- in any case, above 5% organic growth 2017.

EBITDA in order to reach 13%, 13.5% in medium term I think three areas that I need to remind here. Number one is the World Duty Free synergies. They are already there will be fully impacting the P&L in 2017.

The second one is the contribution from the business operating model efficiencies 7.5 percentage points of EBITDA margin.

And the third one is the recovery of the business in operations like Brazil, Russia and Turkey that obviously at the time we did this announcement were in a different mood than today. What I can see is the companies in these countries are performing well today so far.

And finally, the cash generation, cash generation the medium-term target is below 3. I will say, we always say between 2.5 and 3 net debt/EBITDA and this target remains unchanged.

That's all from my side. Andreas, do you want to continue?

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Andreas Schneiter, Dufry AG - CFO [3]

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Sure. So good morning and good afternoon everyone. I'm going to present the financial part of the presentation. So if we move to page 23, and there we have the different growth components. Julian already commented most of them, so I'm not going to repeat it.

Just one comment, which I'm going to repeat along on my presentation is the first quarter was the first quarter where we actually had no consolidation impact. So as you may know, the World Duty Free acquisition annualized in August 2017, so the Q4 is -- sorry August 2016 so the Q4 is the first quarter where we can have a direct comparable.

Now, if I look at the currencies and starting with the emerging market currencies, what we do see is the second half of 2016 was a lot more benign in terms of exchange rates than the first half. So especially the Brazilian real and the Russian ruble they have stabilized over the last few quarters. They even slightly strengthened from their lows.

In terms of the Argentinean peso, there we had a big devaluation December 2015. So there again in Q4 2016 we had the full-year impact of that. Going forward from Q1 2017 onwards what we do see is the Argentinean peso is a lot more stable compared to 2016. Generally, when we look at the emerging market currencies, we see a lot less volatility at the moment, so this makes our lives a bit easier, if I can say it that way.

Then if we go to our main currencies the British pound, euro and US dollar, so on the full year we had a negative translation effect of minus 0.6%. This was mainly driven by the British pound devaluation starting in the second half of 2016.

Now if you go to the Q4, there we had two effects, the British pound devaluation which increased a bit compared to Q3 and also the euro Swiss franc was a tad weaker than in previous quarters. For that, in the fourth quarter we had minus 3.3% versus minus 0.16% in the third quarter.

Now if I look forward into 2017, we will continue to have a negative FX impact because of the British pound after June 2017. Just to reiterate what we always say at this point is we are largely naturally hedged. So when we talk about FX impact, this is mere translation impacts but no transaction risk.

Then if I move to page 26, the P&L overview, so again we already discussed top line. If I then start directly with the gross margin, so this improved 40 basis points year on year mainly driven by synergies. On the concession fees, on a full-year basis, this increased as a percentage over sales because of the consolidation of World Duty Free. But if you compare the full year to the nine months, you will see that this remained stable at 27.2%.

Then personnel and other expenses they improved by 1.2 percentage points year on year. And this was the same percentage also in the fourth quarter comparing Q4 2016 to Q4 2015. Overall, EBITDA was 0.1 percentage point higher than last year.

Then below EBITDA, we have the depreciation. This is in line with last year at 2.1%.

Amortization, this is higher as an overall amount, because again of the full-year consolidation of World Duty Free. If you look at it on a quarterly basis, you will see that we had a charge of CHF95 million approximately for the quarter. This is fully in line with previous quarters. And that is also the number you should assume going forward for 2017 on a quarterly basis for this line.

Then the next line we have here is the linearization. And just to remind everyone the linearization is related to our Spanish concession contract. Here we had a charge of CHF75 million as we communicated. For 2017, for the full year, the respective amount will be CHF59 million.

Again, to mention, we have a very, very strong seasonality in that respective line. So the biggest charge that you will see in linearization will be Q1 2017 and the charge for Q1 will be CHF42 million, so, for everyone to be clear on that one.

Other operational result ended up with CHF42 million. There, the restructuring cost, the additional charge that we put in 2016, was CHF6 million. Else, the biggest element was basically project cost startup costs, which amounted to close to CHF20 million.

Then on the financial result we had CHF215 million of expenses. As we mentioned on our last call, and we are going to discuss that later on, we repaid a US dollar bond and that generated one-off charges in total of CHF19.6 million, all of which were charged in the fourth quarter. Of those, CHF13.5 million were cash, and those were charged to the financial result.

Just to remind, the annual interest expense of that bond was CHF27 million, so we're going to save that. So, in principle, you can reduce at least the financial result by that amount.

Then on the income taxes, the income tax charge was CHF11 million. This will translate into a tax rate of about 20%. As you know, there's many discussions in many countries on corporate tax rates, so I think a forecast is really, really difficult to make. I don't dare to do it. What I can say, though, is we internally continue to use a tax rate of 20% to 25%. That's the best guess that we have, but take that with a pinch of salt.

Then, moving on, non-controlling interests were CHF43 million. The biggest minorities we have are in the US. The US performed very well and, as such, I think that is also reflected in that line.

Then, to conclude, the cash earnings, so where we add back acquisition-related amortization, amounted to CHF323 million, so CHF140 million higher compared to last year.

Now if we go to page 27, so there we have, basically, a focus just on the fourth quarter. As I said, you can directly compare it, because there is no acquisition effect any more. And I think what these two charts do show in a very, very nice way is all the work, the integration work, that we have done.

So you do see the 40 basis points that we have on the gross margin and you see the 160 basis points in total on the EBITDA margin in Q4. So I think it does reflect all the work we have done to generate the synergies.

On the synergies side, already mentioned by Julian, so CHF60 million are already baked in 2016. There's another CHF60 million which we expect to come in 2017.

On the cash EPS, moving to page 28, the cash EPS has become a lot more seasonal ever since we acquired World Duty Free. Especially, this linearization effect that I was mentioning beforehand adds to that. So I think it's -- we need to look at it on a quarter-by-quarter basis.

If you look at the fourth quarter, cash EPS grew by 60%. On a full-year basis, it was 50% growth. So you do see again the synergies and the improvements coming through the bottom line.

Then on the cash flow statement, page 29, we had a very strong cash flow generation, year on year plus 43%. Also in the cash flow, you do see the seasonality of our business, especially in the working capital, and we're going to see that later on. We will discuss core net working capital and CapEx in a separate slide.

But if I look at the other lines here, there's actually no surprises, or nothing unusual in the cash flow statement. So I think it's suffice to say that we are very cash generative as a business and we have used the cash to deleverage the Company.

Then on page 30 we have the two key metrics for the free cash flow. And starting with the core net working capital, on the right-hand chart, what you do see very nicely there is that we have been able to lower the core net working capital year on year starting with 2014 before the acquisitions, and now ending up at 5.4%.

If you then look at the seasonal pattern, we also see that the improvement that we have shown in Q3, so this about 1 percentage point improvement year on year, we have the same improvement in Q4. So this improvement on the core net working capital, I think we consider it structural. So we really have made an effort to improve the core net working capital and to generate some cash there.

On the CapEx side, we have 3.3% of -- sorry, CapEx is 3% -- 3.3% of our turnover. This is bang in line with the 3% to 3.5% guidance that we gave. That is also fully in line with the CHF250 million, CHF275 million that we indicated.

Going forward, we feel that this 3% to 3.5% range is the right percentage to use, so I think there is no change in that respect.

Now, if I move to the balance sheet on page 31, again, I keep repeating myself. It remains substantially unchanged. There is no surprises there. Biggest items are intangible assets, so concession rights and goodwill. On the liabilities side it's obviously net debt and equity.

Then if we move to page 32, so what you do see here is that we have reduced net debt by CHF200 million. So I think we deleveraged the Company somewhat in 2016. Covenant was 3.69 versus a threshold of 4 times.

Now, going forward we do have a number of projects in our pipeline in Greece and LatAm, which does require investments in addition of our normal CapEx. Overall, we expect to deploy a bit more than CHF100 million in these projects and this will happen in the next couple of quarters.

Now, because typically the next -- the first quarter and, to a certain extent, also the second quarter are not very strong in terms of cash generation, we have triggered what we call a permitted ratio increase. This is an existing feature that we have in our bank facilities and this is designed to give us short-term flexibility for three quarters, so until the end of 2017 in that context, for small- and mid-sized investment.

The basic idea is basically to have sufficient headroom, which is typically -- or, not typically -- which is required by the rating agencies. So this has been executed. Important point here, the permitted ratio increase does not trigger any additional costs, neither one-off nor recurring.

Then, to conclude, as I mentioned earlier, we repaid our $500 million bond expiring 2020. We did this repayment in December 2016. This was our most expensive piece of debt, with a 5.5% coupon, so the savings, until the maturity of the bond, will be in excess of CHF80 million. As I said, there has been a one-off charge of CHF19.6 million and a yearly saving will be $27 million.

The debt by currency, again, we have mentioned that in previous calls. We try to match the cash flows of our business, so that's why you see an important part of our debt in euros and US dollars.

That is all from the financial part, so I hand back to Julian.

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Julian Diaz, Dufry AG - CEO [4]

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Thank you Andreas. In think in page 35 we have what probably is the best explanation about what we have discussed today. Number one, Dufry in 2017 is going to be focused in driving organic growth. Achieving this above 5% organic growth is one of our targets, using the new technologies, using the new spaces that we are negotiating and using the refurbishments of the 50,000 square meters I comment before.

The second one is the business operating model. Through that, a significant improvement in terms of efficiency and the way we work, but also in terms of the P&L. And this 50 basis points is a target that will be developed along 2017 and 2018.

It's also -- and I would like to do it with -- obviously, with all the detail possible, but we are in a presentation from the financial point of view. That the new store generation that we will launch in Heathrow terminal three, Zurich, Melbourne, Cancun, Madrid and all -- they're now in progress. It will obviously change the way that travel retail shops are perceived.

And, finally, continue with the cash generation and deleveraging with the middle long-term target of 2.5, 3 leverage net debt EBITDA covenant.

That's the presentation so far. I think it's probably the most interesting part, the Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions).

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Joern Iffert, UBS - Analyst [2]

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Thanks for taking my questions. Joern from UBS. The first one would be on the equity free cash flow. I think it was around CHF200 million for 2016. I have to admit, significantly below what I have expected. I was close to CHF300 million. Now it seems the organic growth is becoming more capital intensive with the new projects in Latin America and Greece.

Does it also automatically mean that organic growth in 2017 will accelerate versus Q4 2016? And also what should we expect then for an equity free cash flow run rate for 2017, 2018 considering net working capital, tax charges and potential prepayments? This would be the first question.

The second question on the EBITDA. Can you please share with us what was the incremental synergy benefit in Q4 from World Duty Free?

And the last question would be on the concession fees. What do you expect in terms of step up, including potential repayments for 2017, 2018? Thanks very much.

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Andreas Schneiter, Dufry AG - CFO [3]

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Look, I think on the equity free cash flow, I have tried to highlight that, but I think it's really, really important here is that if you were to compare Q3 with Q4, and I think that's what you're doing, we do have a very, very strong seasonality nowadays on the net working capital. So I think what is always a bit dangerous here is to do the short-term comparison because this may be misleading.

If you look at the overall model, I think we should be able to significantly increase the equity free cash flow, because actually as the synergies come through and as they're going to be reflected, this should be increasing almost franc for franc, if I can say that. So if we can continue to grow profitably, as we do now, you should see an increase which is quite significant. What I would want to avoid is to tell you the CHF200 million is the right number to plug in this -- in your model. It should be a lot higher than that.

And one point that I also wanted to make, which you alluded to, I disagree with the notion that growth -- organic growth should be more cash intensive. There are some specific projects that I mentioned, but that doesn't necessarily mean that the CapEx or the overall investment that we need to do in projects should be higher going forward. So I feel very, very comfortable with the model that we have done in the past, or that we have had in the past will also be applicable to the future.

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Julian Diaz, Dufry AG - CEO [4]

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Okay, from my side the organic growth, obviously, is conditioned to many events that are also not controlled by us. I think to say that it will be above 5% is the most realistic figure. We have only two months.

If you ask me if the organic growth within the first two months is more than 5%, the answer is yes. But I cannot at this stage of the process to tell that it's going to be higher than that. My statement is in 2017 the target is to be above 5%.

Regarding the impact of the synergies in the last quarter, I don't have the information here, but I think this information we can share. It's not an issue. If you contact our investor relations department we can discuss it. I don't remember exactly how much.

And the last question was?

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Andreas Schneiter, Dufry AG - CFO [5]

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I think that was the last question.

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Joern Iffert, UBS - Analyst [6]

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Concession fees (multiple speakers).

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Andreas Schneiter, Dufry AG - CFO [7]

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Sorry?

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Joern Iffert, UBS - Analyst [8]

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It was on concession fees, a step up including potential prepayments for 2017, 2018.

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Andreas Schneiter, Dufry AG - CFO [9]

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Increase in concession fees.

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Julian Diaz, Dufry AG - CEO [10]

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Increase in concession fees in 2017. This is the question?

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Joern Iffert, UBS - Analyst [11]

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Yes.

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Julian Diaz, Dufry AG - CEO [12]

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I think it will be quite stable. I don't think that in 2017 we are going to see a lot in terms of increasing of concession fees. Instead, obviously if we win a significant concession, then it will be higher. With the like-for-like comparable I don't think so.

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Unidentified Audience Member [13]

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Hi. Sorry.

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Julian Diaz, Dufry AG - CEO [14]

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Just a moment, because I think Jon was here with a --

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Jon Cox, Kepler Cheuvreux - Analyst [15]

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Thanks Julian. Jon Cox, Kepler Cheuvreux. Congratulations on a very interesting set of figures, particularly that organic sales growth in Q4. I wonder if I can just push you a little bit more. Actually, we don't have to plug it into our models necessarily, but what was organic sales growth in the first couple months of the year, because the way you're talking it seems to be closer to high single digit rather than 5% at this point?

Second question. You talk about gross retail space expansion being about 10% of your existing space currently. Just wondering, are you going to be withdrawing from any space at all, or are there any contracts that you're not satisfied with? Or could you give us a net figure, basically, for this year?

Then just to come back on that CHF100 million expenditure you mentioned, Andreas, is this just because of the timing, or is it -- and it's not included in your guidance of 3% to 3.5%? Or actually is it included in your 3% to 3.5% and it's all about timing? It's just you're doing it in the first part of the year and you don't have sufficient funds to do it. Thank you.

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Julian Diaz, Dufry AG - CEO [16]

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Well, I think this is a question that probably I have already answered, but, yes, in January and February the Company has grown more than 7% organically. But this is January and February and I don't want it to lead to any conclusion. The conclusion for me is above 5%.

Number two is regarding the space. The target for this year is exactly same; 10% of the total space more or less as new space added to the concession portfolio. And we already got 22,000.

And the third one is regarding (multiple speakers).

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Andreas Schneiter, Dufry AG - CFO [17]

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So, look, the reason why I've done it is mainly a timing issue. So if you look at the overall CapEx number, I feel comfortable with the 3% and the 3.5%. Timing wise, we will have to deploy that cash into -- in the first and second quarter and we just wanted to make sure that we are comfortable, if you want, on the covenant side.

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Julian Diaz, Dufry AG - CEO [18]

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Thank you. Please.

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Felix Remmers, Credit Suisse - Analyst [19]

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Yes, thanks. Felix Remmers from Credit Suisse. Two questions from my side. First, you mentioned that you renewed quite a lot of new contracts and you even mentioned that at similar terms, so I was wondering why is that? A normal structure you would expect that you have to pay more to the airports, so what are you seeing in these negotiations? Do we hit some ceiling in terms what your competitors are willing to pay? That will be the first question.

The second question will be on the gross margin expansion. I just wanted to understand a bit better why does it take a bit longer to expand the gross margin versus realizing operating cost synergies. So your, quote, only achieved CHF40 million on a gross profit margin level? Why does that take longer than the other savings?

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Julian Diaz, Dufry AG - CEO [20]

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Yes, okay. Regarding the concession fees, that is not a secret. There is no here that we are smarter than anybody else. No, we have commercial propositions that offer the authorities, whether airport authorities or landlords, the opportunity to increase their income with obviously the spend per passenger.

The negotiation process is quite often where you go there with a proposal, where you visualize in five years' time the income for the landlord. Let's say landlord. And the way to manage -- to maintain this is specifically that. It's value created for the landlord. And I think this is not an issue that there is a top line or is a threshold that now is lower than in the past. I don't think that this is the case in the negotiation process.

In this negotiation process we have one-on-one negotiation where we offer them, from the commercial and financial point of view, propositions that are increasing their revenues per passenger in the long term. Most of the contracts that were here were for 10 years, extended for 10 years. All of these are long-term propositions.

Number two is regarding the gross profit margin. Obviously, it's very difficult that the day one in a cost structure you can go there, save, and since this moment on it's saving. You know you can calculate it and it's very obvious in the gross profit margin. You have different alternatives.

First of all, you have inventory acquired with the old price. And obviously you need to sell the inventory and at the same time buy the new inventory. Then you have negotiation processes that are based in volumes and then you need to wait until the volume is performing. There is not a single way.

It is not a mathematic issue where you go there and the first day it's there. It's a combination of negotiations where you are levered to increase the gross profit margin 40 basis points, but it's a consequence of different negotiation processes. For this reason it takes more time, especially because the old inventory has to be sold.

Another question here in --

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Unidentified Audience Member [21]

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Yes, hello. I have a group of questions with regard to synergies. First of all, just to get it right, the numbers you mentioned that are reflected in the 2016 accounts, these are actual numbers, it's not annualized or something like that?

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Andreas Schneiter, Dufry AG - CFO [22]

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No, it's actual numbers.

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Unidentified Audience Member [23]

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It's not annualized, right?

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Andreas Schneiter, Dufry AG - CFO [24]

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Correct.

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Unidentified Audience Member [25]

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So if I calculate, then, the gap to even to the increased synergy potential to the CHF125 million, I see that accounts for roughly 70, 80 basis points of whatever the sales expectation is. That means more is required to get above 13%. Here, the question. Do we have to see further leverage, top line growth and the BMO impact, to come through in order to get the margin above the 13%? That's a bit of a difference to what you commented in the past, right?

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Julian Diaz, Dufry AG - CEO [26]

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Yes. Obviously, you have three components of this difference. One component is in synergies. This is something that's already there. This is confirmed and will be implemented along 2017.

The second component is, obviously, the efficiencies generated through the business operating model implementation, this 50 basis points that are already calculated.

And the third one is at the time I comment on the 13.5% -- 13%, 13.5% EBITDA margin target, it was based in the situation we had then.

What has changed? The Russians have changed. The Russians in Russia, the Russians in Turkey have changed. What we have seen so far is a recovery of these operations. And these operations were good in terms of the blend and in terms of the mix. And I think what we need now is this business come back.

I am sure it's coming back, because it's a reality, it's there. Brazil is growing double digit. Russia is growing double digit now. The operation in Antalya is also recovering, recovering compared obviously with low season. We need to see the high season. I don't think that it will be a problem to reach a 13%, 13.5% EBITDA margin if these conditions are met.

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Unidentified Audience Member [27]

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Okay. Now, the second question is the -- with the very strong growth that we see in Spanish airports, is there any chance that the linearization charge is going to be reduced or that we're going to see a different pattern on that line?

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Andreas Schneiter, Dufry AG - CFO [28]

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So, so far, no. I think we would need to have another extra strong growth of -- extra year of very, very strong growth in order to get closer to that. But if we just do the basic planning that we have of today, the minimum guarantee will stay -- or the linearization will stay as it is today.

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Unidentified Audience Member [29]

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Okay. And then a third one, again, to the BMO. How should we look at this? Is it primarily a cost? Is it tackling OpEx rather than the gross margin, or what is the effect?

And second perhaps to that on the timeline, could we put in -- I don't know, when you say by end of 2018 you want these 50 basis points of EBITDA margin, say, half of that in 2017 and half of that in 2018 and then the full 50 basis points in 2018? Or how should we see that?

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Julian Diaz, Dufry AG - CEO [30]

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The point here is the main reason for doing the business operating model is not the cost saving, but as a consequence of the business operating model there are cost savings because obviously, the Company will have a different structure and a different process and procedures and it will be more efficient. This is one thing.

As a consequence, from the financial point of view, the 50 basis points is something that we have calculated based in the change of the structure in the change where we work. When will it be reflected in the P&L? We will try to do it as much -- obviously, as fast as possible in 2017, but just due to the calendar implementing the different events, it will be the second part of 2018. This is the most realistic way of looking at it.

What is -- sorry, I forgot the other part of the question.

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Andreas Schneiter, Dufry AG - CFO [31]

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No, I think that was (multiple speaker) question.

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Unidentified Audience Member [32]

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Thank you.

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Unidentified Audience Member [33]

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Just one question. The Hong Kong package available, I think there are two different categories. Could you tell us a little bit your position in this one?

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Julian Diaz, Dufry AG - CEO [34]

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I think in Hong Kong there were two different packages. We have only participated in the perfume and cosmetic package. We have not participated in the package of tobacco and spirits. The reason to participate in the packages, when we analyzed the project it was under the parameters from the financial and commercial point of view that we were satisfied that we could awarded, with, obviously, the restrictions we have. The restrictions we have are the discipline, the financial discipline I said.

I think 60% of the awards of the coins, or whatever it is -- the name they use, is due to commercial activities and 40% is due to the financial offer. As a consequence, I got the impression that we have a chance, because, obviously, we think that we have been able to offer the authorities there an opportunity to really drive more sales, drive more income per passenger. That is, in fact, what they are looking for.

Then, how the competition and how the different participants will behave, we cannot control that. But I can tell you one thing. We want to work. Sorry, we want to win in Hong Kong is the only thing I can say.

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Stefan Hooplich, Bateset Basle - Analyst [35]

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[Stefan Hooplich] from [Bateset Basle]. A completely different question. Could you elaborate on the shop in Heathrow that you shop and the new experience you -- that the consumer is going to have there?

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Julian Diaz, Dufry AG - CEO [36]

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Well, the shop is difficult to explain, because we don't have a picture. But the reality is that the shop will carry on specific initiatives from the digital point of view and commercial point of view that will change the way that the shops primarily are operated today.

The shop will be a shop alive and will contact through the customers when they are around in the corridors, obviously, with technology that is based in digital. Number one. Why? Because if you identify it early you can bring the people inside the shop and, at the same time, offer them personalized offers.

The second thing, the shop will have different departments and different initiatives that will be also dressed up with digital technology. The shop, depending on the time of the day, will input messages in the different languages of the nationalities going through. For example, they will have different departments in terms of products and in terms of services, because the shop will also deliver service.

For example, is social media areas where you can obviously contact with the social media and also you will be attracted by the famous personalities that are in the country. You will have the opportunity to discuss and go inside a shop and discuss with them about the shop and about many other things.

For example, the shop will have new products. And I mention here one of the most important things for the Company is to develop a specific product for travel retail that cannot be acquired in any other places. And I repeat in many presentations the same thing. We have developed with a Swiss company, Lindt, a couple of flavors -- chocolate flavors. One of them is stracciatella and it was a tremendous success because the only way to buy this product was in Dufry.

Now there is another -- there are 10 or 15 projects. One of them is with Diageo. They are going to produce a specific whisky that will be only available in Dufry's stores. That is the way that the shop will contribute. It's not only the format. It's not only the world. It's also the way that it will be operated. Thank you.

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Unidentified Audience Member [37]

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Just a quick question on South Korea and what's happening there with China banning travel groups to go there. Have you started to see any slowdown in your business there because I think about 3%, 4% of Group sales is in South Korea currently?

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Julian Diaz, Dufry AG - CEO [38]

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Not yet. In fact, the operation is performing better than even during the last quarter 2016. We have not seen anything yet. But the number of customers attracted to this specific location in terms of groups is very low.

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Unidentified Audience Member [39]

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And then just on the deleveraging, M&A, dividend question, the first part would be M&A targets in Asia, just what are you looking at? Is it smaller players potentially, like bolt-on deals maybe over the next couple of years, or is there thoughts of a big bang? There is a big China player, I think, Sunrise. Is that something you'd be looking at?

And the second point just on the deleveraging and a commitment to maybe paying a dividend, what are your thoughts currently? Depending on how this year goes, will you be in a position maybe to pay a dividend on 2017 results if you deleverage as much as maybe you could do based on what your organic sales growth is currently? Thank you.

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Julian Diaz, Dufry AG - CEO [40]

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I think with the current financial structure the Company is not in the position to do big acquisitions. This is, obviously, a rumor that I have done many times. The Company has the intention to continue exploring opportunities based in acquisitions that are middle and small sized, that can be assimilated or acquired with the current financial structure.

At the same time, and probably in order of events, the dividend is before these acquisitions, even the small ones. The Board of Directors is considering that in 2018, as a consequence of 2017 results, a dividend could be a good way of returning capital to the shareholders. How and how much is obviously a different question.

We are very early in the year, but I think it's a very active initiative within the Board in order to confirm to the next general assembly -- obviously, the general assembly not the next one, after next, that the Company will be in the position to pay a dividend. What are the conditions here? Obviously, one of the them is the performance of the Business and the generation of cash. And the second thing is the leverage of the Company.

What we have seen is that we are deleveraging as we expected. Obviously, independently of the events that happened in Turkey and all these places we could be better, but we are in the process of deleveraging at the level that we confirmed the Board the possibility to -- if they decided to go ahead with a dividend. I think 2017, if everything is normal, the Board will be in the position to decide it. Thank you.

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Joern Iffert, UBS - Analyst [41]

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Thanks for taking the follow-up question. First one would be on Greece. With Fraport privatizing a couple of airports, where do you stand here in terms of negotiations? What can be the impact on the profitability?

Second question. Making the EBITDA bridge, with the synergies with organic growth you're targeting is consensus EBITDA of CHF1.05 billion looking reasonable to you for 2017? Thanks.

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Julian Diaz, Dufry AG - CEO [42]

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The easiest question is about Greece. The other one is a little bit more difficult. We have a very long contract. Sorry, we have a very long license for Dufry exclusive in Greece, okay? The license is what it is. We can sell duty free products in all the regional airports. On top of that, we have a very good relationship with Fraport. They are our landlords in many locations. It started in Peru, continued in Bulgaria, St. Petersburg and we are creating a possibility to create more value in these airports. The answer is yes.

And we are in the middle of a negotiation where we have identified -- and we call it quick wins in order to accelerate extra growth in the locations they are going to renovate. Because as you know one of the most difficult things we have in Greece in the regional airports is shop locations, shop layouts and, especially, traffic flow.

The shops normally are in the first floor. If you want to buy something you have to go there and looking for the shop. They are not walk through. There are many things. And I think with Fraport this is something that they already know. It's a great, obviously, opportunity to develop a better business in these regional airports and we are really confident that we will be able to really deliver an extra value to Fraport.

On the second part, is EBITDA bridge and the possibility. We don't give guidance regarding EBITDA and I am not going to change this strategy in the future. I think what we try is to provide you with information in order that you may build your assumptions based in the information, but anything else is very difficult. Thank you very much.

Any other questions in the room? If not, we go to the calls. Thank you very much. We can continue form the calls, questions from the audience participating through conference call.

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Operator [43]

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The next question is from Andrew Pentol, Duty Free Magazine. Please go ahead.

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Andrew Pentol, Duty Free Magazine - Journalist [44]

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Hello and thanks for taking my question. I just wanted to elaborate a little bit more on the new generation store concept, the new generation concept. I know one of the other people asked about it. I understand at the moment the defined locations are Heathrow, Zurich and Melbourne, but I also understand there's going to be one in Asia. Can you just offer any light on that and also just perhaps provide a little bit more information in terms of how it's going to elevate the shopping experience, how brands are going to get more exposure, and a little bit more on some of the digital components and maybe a sense of place elements?

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Julian Diaz, Dufry AG - CEO [45]

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Okay. Melbourne is what we have identified in Asia and I think this is already announced is Australia. For us, it's Asia, because it's the same division. And it's in the process to be built. In fact, we are quite advantaged in terms of the construction and the renovation.

The second part of the question --

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Andreas Schneiter, Dufry AG - CFO [46]

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Was how it's going to be the experience.

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Julian Diaz, Dufry AG - CEO [47]

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I already commented on the new generation store. I think it's from the commercial point of view a significant advance compared with the shops we see today in travel retail because the shop is alive. It's a shop that in terms of interaction with the customers will create another extra value for increasing the penetration and the spend per ticket.

The reality is that the experience that we have, let's say, collated over the past years in terms of retail activities in travel retail, with all these companies that we have acquired with the different ways of doing things in Nuance and for duty free have contributed also to increase, first of all, the commercial performance, and, secondly, in my view, the novelty and the approach to the new construction.

What I say is it's a shop that will communicate with the customers through digital screens, but this is something that is very obvious. But at the same time the most difficult thing is the content. What is the content that these screens should communicate to the customers?

And we have a significant project, led by our Chief Operating Officer, Jose Antonio Gea, with the intention to develop the contents in all these shops, because the digital exists. There are no secrets. Digital screens are everywhere. The point is what to communicate. And this is obviously one of the most important things.

The second important thing is the new departments and new areas that the shop will carry on. The question coming from the travel retail I think it's better that we don't comment on anything specifically because obviously this is also know-how.

The third thing is regarding how to attract the people inside the shop. I commented on the famous key localization and even technologies for really attracting the people inside the shop and instead the people when they are in the airport.

There are many areas where this shop will contribute an extra value to the travel retailer. What is the value proposition of travel retail? Historically, we have seen one this has good savings. This is the value proposition. This has been, sorry, the value proposition.

We have been for many, many years talking about if it's 20% cheaper, or 30% cheaper, or 50% cheaper. Now the concepts will be different. The concept is what is the value proposition to the customers. And we need to be and elaborate in parallel with the customers' development.

By the year 2020 one-third of the total workforce population will be millennials, millennials that are not reading newspapers and not watching the TV and not wearing standard watches, or many other things.

I can obviously tell many things, because we have researched this entirely. One important thing. 96% of the time they are in an airport they are connected to Internet. We need to understand how to connect with them. Part of the whole strategy from the utilization point of view is exactly that.

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Andrew Pentol, Duty Free Magazine - Journalist [48]

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Thank you.

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Julian Diaz, Dufry AG - CEO [49]

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Okay.

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Operator [50]

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Next question is from Jaafar Mestari, JP Morgan. Please go ahead.

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Jaafar Mestari, JP Morgan - Analyst [51]

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Hi. Good afternoon everyone. I've got three questions please. The first one is just about this CHF100 million of investments that you're going to be making in Q1 and Q2 in LatAm and Greece. Could you maybe just clarify again whether this CHF100 million is included in the CapEx guidance for the year? So for the year if I take consensus revenue, are we looking at CapEx of around CHF260 million and then CHF100 million, or a total CHF260 million but with early phasing in Q1, Q2?

And then my two other questions are on US duty paid. I think you mentioned single-digit growth in your current trading comments, which is one of the slightly less spectacular growth rates this year. Some beverage players and food players have been tackling retail and convenience. People like [HMF Hoff] have made acquisitions there. They're talking more and more about Hudson and [Parody] like as competitors. Has this segment of convenience in the US become more competitive?

And finally, on organic growth, what do you think it would take for your like-for-like revenue to completely match the growth in passengers that we're seeing? It sounds like even in your January, February trends you're talking about passengers doing plus 9. You're doing plus 7. Is the Asia and the weight the main delta here?

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Andreas Schneiter, Dufry AG - CFO [52]

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So, if I start with the first one. To answer your question, so the -- let's say, the 3%, 3.5% of CapEx for 2017 should remain unchanged, so they shouldn't be higher in a way. So it's really about the cash out that we will see in the first two quarters of these CHF100 million.

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Julian Diaz, Dufry AG - CEO [53]

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Okay. Regarding the US duty paid, what I can say is that, obviously we are running the most important, largest and more efficient company in travel retail in the US. And single digit -- in this case, single digit -- high single-digit growth is in my view a very remarkable performance, because the number of passengers that are more impacted in this business are the duty paid passengers. And the duty paid passengers are not growing a lot.

In terms of competition in the US, the US market is very competitive. It's very competitive. I don't see what is the difference now. Compared with other operators, Hudson has, in my view, the best operational model and this is reflected -- not only that.

It's reflected in the P&L, it's reflected in the yearly growth and cannot be compared with any other one. Again, I am talking obviously from Dufry's perspective. You think that I am exaggerating. It's not. It's growing more than any other competitor. It's having better operational margins than any other competitor.

Regarding the like for like, I prefer not to mention the like for like separated from passengers because I learn a lesson. When the devaluation of the currencies, Brazilian real, Russian ruble, whatever, Mexican peso and many others, I think to convert the growth in passengers to sales depending on the degree of devaluation. And I don't think that today we are still in the position to separate the degree of this devaluation from the growth of number of passengers. I prefer to say the organic growth, including like for like and expansion, will be above 5% instead to mention the like for like independently.

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Jaafar Mestari, JP Morgan - Analyst [54]

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Okay. Thank you very much. And, I'm sorry, I just would like to go back on that CHF100 million investment. So are you saying that there's about CHF260 million in CapEx and then, separately it is not CapEx, but there's CHF100 million? Or are you saying that the total spend in CapEx, which would include LatAm and Greece, would be about CHF260 million please?

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Andreas Schneiter, Dufry AG - CFO [55]

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There are two things, okay. One is the timing of the cash flow, okay. And what I'm saying is there will be a cash out in the next two quarters of CHF100 million plus, okay. That's what you will see in the cash flow statement.

The other question that you put is to say what will be the CapEx number at the end of the year if you look at it as a percentage over turnover. And there I'm telling you it's 3% to 3.5%, okay. So that's, in principle, the way I would describe it.

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Jaafar Mestari, JP Morgan - Analyst [56]

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All right, thank you very much.

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Operator [57]

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The next question is from [Charlie Moy Sands], Deutsche Bank. Please go ahead.

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Charlie Moy Sands, Deutsche Bank - Analyst [58]

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Hi there, Julian, Andreas. I hope you're well. I just have two quick questions. The one is just to clarify your comment on space expansion and the contribution. So you're aiming to grow space by -- on a gross basis 10%, so should we be expecting a significant acceleration in the contribution of revenue growth from new space versus last year's 0.6%?

And then the second question is related to your increase in the synergies from World Duty Free. I wondered if you could just elaborate in a little bit more detail as to what area specifically you found in addition to your original plan? Or was it that you just were guiding us a little bit on the conservative side? Thanks very much.

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Julian Diaz, Dufry AG - CEO [59]

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Thank you. Regarding the space, or the new space, I think it's obviously difficult to confirm exactly the figure. But if you are considering 10% of gross space added of the total 425,000 that we had at the end of the year, it will be a good approach.

Then the difference is -- or the question is how many square meters are you going to close down this year. At this stage of the process we don't forecast a lot, but we don't know. I think in terms of the model, personally, I would put the 10% in terms of contribution of space and then discount, basically, in -- based in historic information a percentage.

Then regarding the synergies, the CHF20 million, most of these synergies are -- the extra synergies are going to be generated through the gross profit margin improvement, because of better deals that we have signed with the suppliers. And also there is obviously a part that has been identified as cost synergies. But the most important part, I hope, is generated through the gross profit margin and also it depends on the volume of sales, as I said before.

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Charlie Moy Sands, Deutsche Bank - Analyst [60]

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Great. Thank you very much.

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Julian Diaz, Dufry AG - CEO [61]

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Thank you.

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Operator [62]

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There are no more questions at this time.

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Julian Diaz, Dufry AG - CEO [63]

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Okay, there are no questions here. One more question in the room please.

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Unidentified Audience Member [64]

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On in-flight, just to clarify this one, you mentioned that on the slide 19 when it talks about communication with the customer and you called it in-flight emotion. Can you just exclude, or maybe you don't exclude, any penetration into that specific segment?

I recall that you don't like the business because you don't have control over the working capital management, but maybe now that -- even at 50,000 feet above you have connection to the Internet, so what is your statement there?

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Julian Diaz, Dufry AG - CEO [65]

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I stick in the same position. I don't like the business where you don't control the cash and you don't control the merchandize. We are not talking about that.

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Unidentified Audience Member [66]

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Okay. Thanks.

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Julian Diaz, Dufry AG - CEO [67]

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Thank you very much. Okay, that's all. Thank you very much for all the participants in the room and in the conference call. And let's see during the first-quarter results how the things are going. Thank you.

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Operator [68]

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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.