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Edited Transcript of DUFN.VX earnings conference call or presentation 12-Mar-20 1:00pm GMT

Q4 2019 Dufry AG Earnings Call

Zurich Apr 3, 2020 (Thomson StreetEvents) -- Edited Transcript of Dufry AG earnings conference call or presentation Thursday, March 12, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Julián Díaz González

Dufry AG - Group CEO & Director

* Yves Gerster

Dufry AG - CFO & Group Treasurer

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Conference Call Participants

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* Alexander Nordhagen

* Aman Mahal

* Daria Fomina

Goldman Sachs Group Inc., Research Division - Equity Analyst

* David Moon

* Edouard Aubin

Morgan Stanley, Research Division - Head of Luxury Goods

* Gian Marco Werro

MainFirst Bank AG, Research Division - Analyst

* Jaafar Mestari

Exane BNP Paribas, Research Division - Analyst

* Jon Cox

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

* Jonathan Eley

* Jörn Iffert

UBS Investment Bank, Research Division - Director and Analyst

* Mustaba Davoodi

* Neill Keaney

CreditSights Ltd. - Senior Analyst of European High Yield Retail and Consumer

* Rebecca Anne McClellan

Grupo Santander, Research Division - Equity Analyst

* René André Saner

Octavian AG - Research Analyst of Sales UK/US/LatAm

* Santiago Domingo

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the full year results 2019 conference call and live webcast. I am Cherry, 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 - Group CEO & Director [2]

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Thank you very much, operator. Good afternoon. Thank you for joining us. Obviously, in these times, it's very appreciated. Thank you for being participating directly here and also the people participating via call. Today, we have scheduled this presentation in 2 parts. One part that is regarding the full year results 2019. And the second part is, obviously, the situation of the business in general, and specifically, the impact of the events that are happening in the company. As always, participating from Dufry, we have my colleague, Yves Gerster, CFO; and myself, Julián Díaz, CEO. Let's move and using the presentation that we have published this morning in our website, let's move to Page 3. In Page 3 of the presentation, is the -- obviously, the most used type of approach. #1 is we are going to talk about the business performance. Then I will hand over to Yves for discussing the financial performance, and then I will finish with a conclusion and Q&A. Let's move to Page 5 of the presentation, please.

Last year, finally, even as you probably all know that we started slowing down, thinking that, obviously, the problem in South America could impact the performance of the company, in fact, impacted the performance of the company because we grew total sales by 1.9%, but excluding South America, organically, the company grew 5.5% or 5.6%.

But finally, because the acceleration of growth in the third quarter that was the most important one -- is the most important one due to the seasonality and the acceleration of the fourth quarter, we were able to reach the 1.9%, but the most relevant information, and I think it's clear, is the 3% increase in organic growth. 3% that was generated by 0.6% increase in like-for-like positive by year-end and 2.4% due to the net of openings and closes of new concessions. Also it's remarkable in my view that during the last quarter, organic growth accelerated 3.1%.

If we move to Page 6. One year more, I have to say that the company has been able to increase the gross profit margin, reaching 60.2% compared with 59.8% previous year. The reasons, I think, I already mentioned it in different quarters in 2018, we're #1. It's -- obviously, the negotiation process with local suppliers. The planned plans with global suppliers and the acceleration of implementation of the platforms, of the global platforms, we have in 3 locations worldwide.

Adjusted operating profit reached CHF 767 million with a margin 8.7%. Again, I have to repeat because IFRS 16 really is not very comparable with previous years, but in terms of comparability, we were very similar. The problem is that because we are talking about discounted cash flows, the first year is not like the second year. I think it's better that we fix the idea that the company reached CHF 767 million operating -- adjusted operating profit with a 8.7% margin. I think, in 2020, the comparable is more realistic.

In terms of adjusted net profit, we reached CHF 350 million. Equity free cash flow, that is the most important KPI that we have mentioned since the beginning of the year, we reached CHF 383.3 million, compared with CHF 370 million last year, above the expectation because we were telling that between CHF 350 million and CHF 400 million target, but with the condition that we are increasing the CHF 371 million previous year minimum with increase of sales, and the business, obviously, we're able to deliver that.

In terms of cash flow, Yves is going to comment with more detail, and I think it will be very useful because the equity free cash flow has been -- or has reached the highest level in the history of the company. Net debt was reduced, including, obviously, the payment of the dividend, CHF 184 million, and we have reached since the moment we acquired the big companies, and we have the ideas the big companies acquired in 5 years ago. The best level in December, net debt, CHF 3.1 billion.

Covenant, 3.52x. Again, I want to remind that this covenant is not the previous covenant net debt to EBITDA, this is net debt adjusted operating cash flow. It's more obviously based in cash. With a threshold of 4.5. And finally, I want to say that Board of Directors last week--with information we provided, including cash flows, including projections, including, obviously, different scenarios for the situation we are living--decided to submit to the General Assembly the payment of our dividend similar to the previous year as we have in our dividend policy. And it's obviously important to mention that this company, at the time that we, the Board, were ready to decide to submit this to the General Assembly. We had the information enough in order to justify to do it. Then the situation is obviously gradually changing.

Page 7. Organic growth again. Why? Because I think it's important always to remind about how the company is generating growth and most -- more important in these times is the pillar of the generation of growth. There are 2 pillars: one, is organic growth, like-for-like is similar. It's got a bit of similar shops and new concessions and acquisitions.

And I think this combination of things will continue in the future to deliver the growth we are expecting. Last year, continuing with the presentation in 2019, like-for-like increased by 0.6%, 2 lines of explanation. One, is the refurbishment of shops. I repeat many times, it's not refurbishment, it's obviously a renovation of the shops, including assortments, including many of the traffic flow, locations, many aspects for increasing the business, and the second one, commercial initiatives in order to drive more sales.

Basically 3 things: promotions, novelties and exclusive products.

Probably, those are the most important things that we are using in order to increase the like-for-like, not now, it's for the future. In other of new concessions contributed 2.4% of the total, we have added 34,000 square meters of commercial space, new commercial space to the portfolio. And on top of that, we have already signed 15,000 -- 14,900 square meters of commercial space that will be opened most of them along 2020.

In terms of the second pillar, this is organic growth. Second pillar, acquisitions. We have signed 3 small and middle-sized acquisitions already commented on. I think probably the most relevant is Vnukovo in Russia. This acquisition is very strategic. On top of that, it's a very good company, a very profitable company because it's completing the portfolio of airports in Russia for us because we are now operating in Sheremetyevo; Domodedovo; Vnukovo, that is this one; and also in St. Petersburg on top of all the 2 or 3 small airports. We have a completely set up in Russia. The second one is Brookstone. Brookstone in the U.S. Brookstone is one of the most famous electronic shops, as you may know

and this is going to be probably very useful in the conversation later that U.S. is a market -- that is a duty-paid market for us. And the duty-paid market is basically, today, food and beverage for us and electronic products. And Brookstone is one of these initiatives invested in this direction to develop more the electronic products. And the second one or the third one -- sorry the third one is OHM. It's a food and beverage company that we have acquired in the U.S. in order to fulfill the equity story that we have been communicating to the market is the way to accelerate sales in the U.S., basically, will be delivered through food and beverage. And this OHM that was signed already in -- at the end of last year, is in the process of closing.

We move to Page 8. There are other events that also I think are relevant in terms of one of the most important is the concession portfolio. Last year, we have extended the contract with AENA, with no significant increase in CapEx. I think the information is already in the disclosure. It's around 1.5% increase per year in the minimum guarantee. It's a very, very important contract for us. We have been able over the past month to accelerate sales at the level of 7.1%. Never in the history of this specific contract, these sales were achieved. And the reason is very simple, is we have tested in 5 of 6 locations in different airports, initiatives, commercial initiatives jointly with AENA, in collaboration with the commercial department, and these initiatives were delivering significant results. And then we are now expanding to other locations, the commercial initiatives.

The second one is the extension in Toronto Pearson. Toronto Pearson is one of the most important concessions we have in America. We have been there for many years, and we have extended the contract for 8 more years in similar conditions. And then the new contract in Mexico City. Mexico City Terminal 2. I think, obviously, those are the more relevant. We have extended many others, many square meters. But the reality is that in order to mention something specific we decided to put these 3.

Other events that were positive in terms of future developments, Brazil. The #1 is the increase of the allowance from USD 500 to USD 1,000 allowance in the arrival stocks. This has 2 characteristics. One is we are able to deliver and to display products above $500. We were not able to do it due to this limitation. Imagine in travel retail, selling products only below $500. In travel retail, arrivals in Brazil, we generate 65% of the business. This is a significant improvement that we can, obviously, use as a trigger for continuing with the growth. And the second one is the border shops. We have opened the first border shop in Uruguaiana. We are testing the border shop. As soon as the situation is confirmed, we will expand it or we will try to expand it to another 32 locations in the identified twin cities. Twin cities of Brazilian border shops with other international cities on the other side of the border.

Then we move to Page 9. I think I've already commented on that. The only thing that probably is important is to say by division. Europe and Africa, and I will comment on the details, increased organic growth by 5.8%; Asia by 10.8% -- on top of, obviously, what happened last year. Last year was a significant improvement. The third one is North America, continuing with 1.8% and turning positive during the last quarter. And Central and South America is still negative, but for a several number of quarters. This is the first time that we are reaching positive organic growth like, obviously, is happening today.

Moving to the different divisions, Page 10. In Spain, as I said, we have developed this program in the test -- 5 test and we started with 5%, 4%. And now the acceleration in the division, especially during the last quarter, was 7-point-something, 7.2%, 7.3%. Then U.K. also performing very well. And not only because the cruise business, that is a new business. Cruise and ferry business, is because the most important airport in the U.K. performed very well, including Heathrow. A strong performance also in Turkey, Malta, Greece and Italy as well also like most of the African countries. The African countries, last year, were very, very strong in terms of performance, and this year, we are starting also very, very strong. Especially, I would like to mention countries like Morocco, Kenya and Egypt with double-digit growth.

We move to Page 11. Double-digit as I said, 10.8% in this division. Duty-free stores in MTR, Perth, obviously, facilitating new stores, the continuation of the high growth. And then very positive growth in Russia, Serbia and Middle East. Even that in Middle East, the comparable last year was very tough.

Finally, North America. We are continuing, as I said, with deterioration of the situation compared with previous year, minus 6%, but the turnaround that happened during the Q4 with plus 0.8% is obviously -- is a very good sign. That continued also during the first months of 2020.

Moving to -- I was talking about North -- South America. Let me talk about North America. I was not looking at the screen, and I was talking about South America. Let me talk about North America like the last division. In South America, as I already commented on. In North America, the situation is, what I said, is turning around 0.8% in the last quarter, and we reached finally 1.8% increase in division North America growth in 2019.

And then in Page 13, is finally South America. It's what I explained about the growth, minus 6.3%. Then positive territory plus 0.2% in Q4. And then Central America, good performance in Caribbean, especially Mexico and Dominican Republic, the cruise business growing very fast, too, and in South America, still challenging because the situation, especially in Brazil and Argentina. But again, it's the first time in a very number of -- very low number of quarters where we'd turn around the situation.

Let's move to Page 14. Second part of the earning growth. We have opened 33,900 square meters of commercial space. In Russia, 50 new stores, including Vnukovo, Kuwait, North America 75 new stores in different locations, Mexico, Brazil, and cruise and ferries, 19 new ships. And renovated shops 41,000 square meters, especially in Spain, Sweden, Jordan, Antalya, Casablanca, Macau and Buenos Aires with a new generation store.

Let's move to Page 15. Contracts already signed and already disclosure. The new shop in the Circle in Zurich, the new shops in Corfu, Helsinki, Singapore, Newark, Boston and Brazil. And regarding the pipeline opportunities in the bottom side of Slide #15, the situation remains quite stable. I think 40,000 for the 5,000 is an added asset of new pipeline opportunities every quarter with report. Then total number, just for putting a perspective for numbers, the number of square meters we are operating today is 470,000.

If we move to page 16. I think for now on, we are going to comment on ESG. For us, it's very relevant. We have not done any communication probably during the quarterly presentations, but I think it's important that we are all aware about what we are doing. And I think we have progressed a lot over the past 3 or 4 years, in the 3 areas: environmental, social and governance. In terms of environmental, we have accelerated many initiatives, especially reduced the supply chain related emissions, continuing with our distribution of plastic bags by paper and other materials bags, started to develop initiatives to reduce footprint. But the most important, we are working together in the ACI Climate Task Force, for contributing to all the airports, especially in Europe and this specific first step to reduce the emissions by the year 2025.

In terms of social, we have expanded the Dufry Supply Code. We have today received 84% of confirmation by the suppliers, and we have 42% -- now representing 42% increase the acknowledgment. Increased the rollout of Dufry Connect. Dufry Connect is a platform only for the employees in order to -- obviously, to facilitate the communication and also the opportunity to create this channel that is very famous. And we are reaching today 90% of the total employees. It's not easy because not all the employees are having internet. We have employees in many places where they don't have Internet or they don't have access to Internet.

The second one or the third one is the survey. We have done for the fourth year or fifth year, on engagement survey. And I am very satisfied to say, probably the most interesting thing is that 73% of total employees are really proud, very proud to work in the company. And within the other different areas of dissatisfaction, let's say, we are the lowest in the industry and the lowest in the -- in similar companies, like, we are a global company.

Finally, we have reached an agreement with the Equity Salary Certification Organization in Switzerland, and we have been audited with the confirmation, and obviously, with the certification at this time. In terms of governance, we have appointed a Lead Independent Director. Application to the Union Nation Global Compact submitted early 2020. There are only 2,000 companies in the world listed in this type of initiative. We have revised the materiality, IT security metrics and data protection, strengthening our Dufry Code of Conduct, expanded and communicated now via Internet. We have the Code of Conduct over the past 4 or 5 years, but we didn't publicly announce it, and now it's publicly disclosure. And we are continuing supporting the first company worldwide with the UN Nations Goals awareness. This is a campaign that we started 4 years ago in collaboration with Union Nations, and the idea is to reach by the year 2030, 3 -- no 2 billion people aware of the international sustainability targets of the Union Nations.

This is only one page. I think in the Internet, you probably explore more what we are doing with detail. But in terms of our presentation, probably put a bit of light.

Until here is from my side, the information about 2019. Let's move now to the information regarding the actual situation of how we are performing. I want to start with Slide #17. In Slide #17, I try to put a couple of 3 examples. In September 11, SARS and the Global Recession. There were many others. I remember, in 1991 or 1992, the first Iraqi War. I remember the second Iraqi War. Very similar events in terms of impacts during 2 or 3 months really set ourselves in one of them. I remember that is exactly in travel retail. There is a characteristic that normally happens, is an event that is always limited and the recovery is very fast. Is this an example for today? I think so. Because the rationale behind what is happening today has a reason. And as soon the reason is mitigated or is in the way to be mitigated, I think the situation from the approach point of view in terms of government is going to change dramatically. One of them, obviously, the more relevant is what is going to happen in China, especially today in China. Typically, what we have learned in these processes is 2 things: if -- we need to react very fast, we need to focus in the generation of cash, and we need to protect the P&L. And we started in January 2020 with that at the time that we heard that something was starting to happen in January 2020 in the third week. We created a specific group of people, top management in the company, Group Executive Committee, for analyzing, first of all, what the situation was. This is a normal thing in order to understand the reality, but second is to really implement initiatives in these 3 lines, okay?

Number one, Dufry has very good fixed-variable cost structure, and I think this is one of the relevant things that happened in 2009. In 2009, and I don't want to be obviously explaining things about 10 years ago, what happened is very similar to what that happened today. During the first 6 months, we dropped organic sales by 16%. During the year 2009, the sales dropped by 10%. The drop in EBITDA margin was 120 basis points. Why? Because we went, obviously, in the same process. We identify from the P&L point of view, CHF 25 million fixed costs that should be at that time attack in order to really mitigate the problem and we end the year with CHF 39 million or CHF 38 million. That was, obviously, an important part. What was part of this negotiations with obviously, unions, employees, decisions about cost or indirect cost and also discussions and interchange of, let's say, proposals with airports. And at the year of -- at the end of this year, what we saw is slightly and step-by-step recovery that during the last quarter of 2019 was really reaching this level. What happened at that time in terms of the product and the passengers' mix? We were, during many months, dropping luxury products tremendously. And I remember, 30%, 35% in luxury products. Second less affected was perfumes and cosmetics. And the other product categories, especially tobacco and spirits were affected but not strongly. Obviously, we had negative performance, but the main impact was this. Today, what we have seen so far is very similar. This is the decade of impact.

The initiatives in terms of P&L today are going to explain are basing that, is focus in acceleration of sales, gross profit margin maintenance and initiatives to protect the cost structure of the company, especially attacking the fixed cost. On the other side is the cash flow and the liquidity because one of the more important -- if I have to put in a situation like that, the priorities -- priority number one is to protect the liquidity. And this is basically something that in the type of company we are, and I am going to explain why, liquidity is something that you can manage very quickly because we are a global centralized company. It's not 65 companies working independently. We are controlled globally by IT, obviously and by the sysem we are operating.

Let's move to Page 18. There are 3 characteristics of our company today in order to understand what we are going to explain in the next slide. Number one, the cost structure, as I said, obviously, there are a significant part of the cost that is going to be reduced because the activity is variable cost. Number two is Dufry's risk diversification strategy that have not important concessions that individually if considered could really impact the company. We can balance that, depending on the region, depending on the division. Sometimes, we had in the past bad performance in South America, and then we have performance -- good performance in Asia or in Europe. Now we may have a good performance in South America and the U.S. and then more aggressive or worse performance in other regions, but this diversification is also an important part. And what I said, we are highly integrated company, meaning decisions can be implemented very quickly. If tomorrow, we need to do something, it's implemented because we have the control of the cash, the control of the merchandise and the control of the expenses of the company globally. It's not something that we need to call, we need to say. Everything is controlled globally.

As a consequence of that -- if we move to Page 19. We are at this stage of the process, already started. It's not something that is going to start, it's already started. First of all, is trying to accelerate sales. One of the most important things that we need to do is really use the capacity of the company for selling more, and this is only one way. We need to accelerate in the locations more sales. What is the main purpose of this first step? It's to accelerate more sales via volume. What we want to sell is more volume. In the locations, if you visit Zurich Airport or you visit any other airports, you will see that we have a global promotion today. Any product of the same supplier, you pay 2 and you bring home 3. And it's not expected to have an impact in the gross profit margin because we are working with the suppliers in the same direction. They want volume, we want volume. And what we are -- we have agreed is to protect the gross profit margin.

The second one is the negotiation of concession fees. What is the meaning of that? We have, in most of the cases, we pay today the variable. But assuming that the business is dropping tremendously -- we had, in 2009, the same experience, and we were able to adapt the reality of the concession to the reality of the business. Sometimes, it's not forever, it's for a temporary base, but this is also variable cost. From our perspective today, concession fees have variable cost. Why? Because independently that most of the concessions are today variable. In case of a significant impact, we are in the position, obviously, to collaborate, and in fact, we have received today calls from airports in order to really collaborate and understand what the solutions are. I think this is one of the most probably relevant things.

Personal expenses. Efficiency, number one, is to put on hold of the seasonal hirings; number two, is to use this period for holidays; and number three, in case needed, and this is also identified, to really reorganize the companies and putting the company temporarily basis, because we need the employees later on, with the right size in order to operate the company with, obviously, the business we will have if we need to drop. All these initiatives at the fixed cost level, not at the variable cost level, will impact CHF 60 million. This full year basis will impact the adjusted operating profit. In terms of cash, on top of the CHF 60 million, because obviously, CHF 60 million is also impacting the cash, is extra CHF 40 million in 2 different levels, net working capital and CapEx. With CapEx, we can even, obviously, depending on the circumstances, we can even increase. And in terms of net working capital, it's more complex because we are, in my view, very efficient, but we have also a gap for improving this type of net working capital rate. Considering what I said and I think basing the information we have today and assuming that the situation is going to deteriorate in March, for sure, and in April, for sure, and maybe slowly, obviously, recover in May and maybe in June, we will see better recovery. The company is not having or is not projecting to have any liquidity problems. What is the meaning of that? The meaning of that is that we have to protect today the cash for growing in a normal terrible process in March and in April in case it's needed. But in case it's not needed, we are there.

Finally, the situation in 2019. I hope that there are not many questions about what is going to happen in 2019 because it's very difficult to answer that -- 2020, sorry. It's better that we would be in 2019 than 2020 -- sorry, in 2020. The situation today, with information we have today and with the projections we have today, and I want to remark that because probably the situation could change, we will be negative -- single negative organic growth by year-end, if the situation we are projecting today. But again, the situation, we have a committee that is weekly revising the situation and changing the will, depending on where we are going. Then we will probably comment many other different subjects during the Q&A.

Page 20. This is the least of the different KPIs that we communicated in December. If more KPIs are needed, don't worry, we will obviously report because the uncertainty is also important for us. We need to really communicate properly the situation of the company. We are starting with what we agreed. It's basically report on top line sales and many other subjects related with sales. But if needed, don't worry because information will be available. Okay? We understand the situation we are, and we will be able to deliver whatever is needed in the market.

This is from my side. If I hand it to Yves and you continue.

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

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Thank you, Julián, and good afternoon, everyone. Julián already commented on organic growth, but just quickly from my side, on Slide 22, I would like to emphasize on the improvement in like-for-like, which reached 2.2% for the year -- sorry, in the fourth quarter and reflects the ongoing improvement of the business during 2019. Net new concession reached 2.4% growth in the year and 0.9% in the fourth quarter as some of operations such as MTR in Hong Kong, but also Perth, annualized in this quarter. Then organic growth for the full year came in at 3% and 3.1% for the fourth quarter. This is in line with our medium-term guidance of 3% to 4% per year. Last but not least, the FX impact in the year reached negative 1.2% and 1.5% in the quarter.

Now let's move to the next slide to further understand the FX implications. On Slide 23, negative translation in the currency impact seen in 2019 is a direct consequence of the strengthening of the Swiss francs basically versus all the other currencies. Looking at the bottom-left chart, you will see that both the euro and also the pound sterling devaluated very consistently versus the Swiss francs along the year. Even the U.S. dollar, which started relatively strong into the year, lost steam towards the fourth quarter.

Moving now to Slide 24, looking at the usual P&L statement, starting directly from gross profit. Gross profit margin expanded by 40 basis points in 2019. The increase reflects the continued improvement in Dufry's negotiations with global and mainly local suppliers as well as the further standardization of the supply chain and implementation of the commercial platforms. Lease expenses were in line with the previous year as a percentage of turnover. As you remember, these expenses are related to the variable concession fees and the variable part of concession fees or concessions, which contain a minimum annual guarantee. Personnel expenses as a percentage of turnover increased by 60 basis points in 2019. As we mentioned in previous meetings, most of the increase relates to North America, and there specifically, to the increase in the minimum wages on one hand side, and then on the other hand, to a one-off charge related to changes in the management.

Depreciation, excluding right-of-use, measured as a percentage of turnover, remained stable at 2.3%. Depreciation of right-of-use increased by around CHF 80 million. As you know, changes in this line are related to renewals of concessions and signing of new contracts. Amortization in absolute terms stood at CHF 403 million versus CHF 370 million in 2018. The increase is related to some impairments. Other expenses net also remained practically stable as a percentage over turnover, so nothing to be commented on that line. As already mentioned last quarter, the line sales tax recovery in Brazil reflects the indirect tax refund of CHF 64 million, which we became entitled to claim back in Brazil and which we have previously paid as an indirect tax starting in 2009. Financial results reached CHF 128 million, an improvement of around CHF 7 million for the year, mainly due to improvements in the financing structure.

Looking at lease interest, this has also decreased in the period. As mentioned in previous call, there is a significant front-loading effect there due to IFRS 16. Further down, income tax is lower when compared to last year, mainly due to lower tax in some of the jurisdictions.

Having gone through most of the relevant lines of the KPI -- of the P&L, let's now move to the KPIs at the bottom of the page. Adjusted operating profit came in at CHF 768 million versus CHF 772 million in the previous year. Adjusted net profit reached CHF 349 million versus CHF 354 million the year before. And finally, adjusted earnings per share reached CHF 7 versus the CHF 6.83 of the year 2018. Please note that in the annex there is some additional information on the calculation of the KPIs.

If I move to Slide 25, we find a summary of the cash flow. Adjusted operating cash flow reached CHF 960 million in 2019 from CHF 973 million in 2018. Despite a decline of 1.4% in this line, we managed to grow equity free cash flow by 3.4%, reaching CHF 383 million. The result comes at the higher end of our guidance range of CHF 350 million to CHF 400 million. And I'm especially glad to -- with this achievement because given the high comparison compared to last year, if you look at the top-right chart, you will see that between 2017 and '18, we have already doubled the equity free cash flow, and in 2019, we managed to maintain that high level.

Moving to Slide 26, where you can see the bridge of the equity free cash flow components. Changes in net working capital reached minus CHF 24.4 million this year versus minus CHF 4.1 million last year. Looking at the bottom-left chart of the table, you can see that we continue to manage working capital very well, reaching a good performance at the lower end of our indicative guidance of 5% to 6%.

Income tax paid reached minus CHF 97 million versus CHF 133 million the year before. The difference reflects mainly the refund we have received at the beginning of 2019 in Spain. CapEx reached CHF 245 million in the year versus CHF 251 million in 2018. Again, if you look at the chart at the bottom this time on the right side, you can see that we have also been very successful in controlling CapEx. All other items are relatively similar to last year. As you can see, looking at the cash flow, it's very clean. So I do not -- I do expect that this will provide even more confidence to the market that our ability to not only generate cash but also to manage the cash on an ongoing basis.

If I move on to Slide 27 with usual summarized balance sheet, there is nothing specific to report it here. The only difference basically to last year is related to IFRS 16. It's the right-of-use asset on one hand side on the asset side and the lease obligations on the liability side, which have changed due to IFRS 16.

Moving on to Slide 28 with the financing situation. Given our cash generation, our net debt was reduced by around CHF 184 million in 2019 and amounts now CHF 3.1 billion. Julián has already mentioned it. It's basically the lowest level since the big acquisitions in '14 and '15. Looking at the covenant. The covenant stood at 3.52 by year-end against a threshold of 4.5x. So still a relatively high threshold -- sorry, a relatively high headroom to the threshold of 4.5x. Then on the right-hand side reflects the debt maturity profile, including the new EUR 750 million bond issued last November, which is maturing now in 2027. The new bond has a coupon of only 2%, which leads to interest savings of EUR 16.5 million per year as of 2020. As you can see, the maturity profile, about half of the revolving credit facility has not been used at the end of 2019. So there are still around CHF 700 million of cash available under those committed credit lines. So from a liquidity perspective, as Julián has mentioned in his presentation, we don't see any issues in the next couple of months.

With that, let me pass over to Julián for the closing remarks.

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

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Thank you. Okay. Let's move to Page -- let me check, Page 30 of the presentation. First part of the conclusion is, just fixing the picture in 2019. We reached CHF 8.9 billion sales -- CHF 8,848 billion. Organic growth reached 3% and important wins in AENA, Spain; Mexico City, International Airport; including, obviously, the extensions and new wins. Acquisitions, as discussed on percentage during many, obviously, quarters already performed and the strong free cash flow confirmed once again, CHF 383 million. As a consequence of, obviously, as I said, the financial information, the Board of Directors has considered to submit to the General Assembly, the CHF 4 dividend per share. What is important here? And I think this is -- we can learn about 2019 for understanding the evolution in 2020. This company is very flexible, can generate cash and in circumstances where the situation is not performing well, like in South America last year, the company could balance in different locations, the business in a positive way. This is the lesson for 2019. I know that probably 2018 is already over and nobody pays attention. But just to mention that there are lessons that can be learned in 2019 for understanding the evolution in 2020.

Regarding the second page, 2,000 -- sorry, 31. In January, we have started even faster in terms of growth during the first 3 weeks than in 2019 third quarter. We were reaching around 5% or 5.6%, something like that. In February, including, obviously, all the -- probably more located at that time in Division #2 minus 7.3%.

Europe and Africa performing slightly negative, but not very negative. There were many operations in Europe and Africa performing very well. The second one is Asia/Pacific and Middle East reporting negative double-digit growth. It's obvious, at that time, the problem was to really focus in China and around China and in operations probably with Chinese passengers. North America performing single digit negative, and Central and South America is starting again to perform positively. Year-to-date, February 28, 29, we were performing minus 2.3%.

During the first week of -- the first 8 days of March, the performance until the March 8 was minus 3.8%. We had obviously double the deterioration. I think it's difficult to say where we are going now. But March is going to be a very difficult month. It's very strong. I think the double-digit negative growth in March is for granted. It's for sure. And then in April, we are also thinking that will be negative, but we are seeing, in the second part, especially in May and June slowly increased, obviously, basing the statistics, that in the second part of the year, we'll be mitigated, I hope, for the recovery of the traffic and the recovery of the most important operations we have.

Provided the situation, I think what we could say is, the company is in the position to protect the cash generation and the P&L with initiatives I already mentioned, especially attacking, in this case, the fixed cost of the different operations. In terms of the net working capital and CapEx, the CHF 40 million savings could be improved. It's something that is underway. We will have, obviously, ready 2 modest scenarios regarding these 2 specific KPIs. But I got the impression that their companies are not flexible in order to really implement initiatives in this area.

With this model prepared with this basis, we don't foresee any liquidity problems in the near future, meaning, obviously, from now to the end of June. I think this is a situation where we are more, let's say, confident that we are going to be during the next month.

That's all from my side. I think the questions, as always, will be welcomed.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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

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From the audience here?

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René André Saner, Octavian AG - Research Analyst of Sales UK/US/LatAm [3]

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René Saner from Octavian. Maybe 2 questions. One, on the dividend. If you would see that the situation is deteriorating worse than you expected, would you consider or reconsider the dividend payment to protect the cash level?

And secondly, on net working capital management, you said there is more room. Or generally, how much more room would there be if things will be worse versus the CHF 100 million you announced now?

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

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Yes. Regarding the dividend, I think the only thing that I can say is what it is, is the Board of Director, based on the information we provided, they say, yes. What is going to happen? I prefer don't -- I don't want to guess because, obviously, everybody is very negative. Now Telenor is going to be a disaster. Personally, I think the company's healthy enough in order to really protect this part of the business. But again, it is what it is today.

The second one, net working capital. Yes, there is room for improvement. The answer is, yes. And it's -- but the problem now is that it depends on the evolution of the different product mix sales because if we have to accelerate in specific high luxury products is one thing. We have to accelerate, I think, the improvement. In tobacco and spirits, it's a different thing. In terms of luxury products, the situation is clear. We have, today, the inventories prepared for the season. We have the inventories ready. But if we need to accelerate the stock out of the inventory, we can accelerate. How much is going to be added to that? I think we have planning now around CHF 15 million, could say CHF 20 million, CHF 25 million, if we accelerate.

Any other questions here in the room? You can check also.

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Operator [5]

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The first question from the phone 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 [6]

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You were mentioning that certain airports would be willing to kind of reduce certain concessions. Can you quantitatively kind of elaborate on that? I mean how many airports out of all the clients you have, how about the railway station and others? The airport business is the major business, but not the only one. Just add some more flesh on the bone.

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Julián Díaz González, Dufry AG - Group CEO & Director [7]

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Yes, most of the contracts are variable. Because they are based on -- in percentage of sales or in rent per passenger, and if the passenger drop, the rent automatically drop, especially in cruise lines and businesses like that. There is a part of the business. Today, we have, I don't know, 1,200 concessions, I would say. It's very difficult to say in percentages, but I would say, the most important part of the concessions will not be in mark. We need to focus on a specific group of concessions, in my view, not very relevant in terms of size and importance that should require. I would say, if I have a negotiation, I would say it's to adapt the concessions temporarily to the reality of the business because obviously, this is the situation. But it's not only for Dufry, it's for 99% or 100% of the people working in the same type of business. It will happen in aviation, it will happen in many other things. The reality is, we need to adapt -- we all need to adapt the reality of the concession payment to the reality of the business, and this happened in the past. This is something that is not new, already happened in 2009 and even in 2003 and even before. The reality of the business will require 3, 4 months of adaptation but then the situation will be normalized. This is what we have seen in the history of travel retail, but being specific. The most important part of the concessions today are variable. Based in passengers' rent or based in percentage on sales. There is a part of the concessions that if the sales drop significantly, we will be in mark. But this mark will be adapted to the reality temporarily, for sure.

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Operator [8]

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The first question from the phone 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 [9]

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And well done through a decent-looking set of 2019 results. I have a couple of questions for you. Just on the -- coming back to this variable and [MAG]. Obviously, we're all trying to work out what the impact would be of a 10% or 20% or 30% decline in revenue for you this year. I'm just wondering, I assume maybe 60%, 6-0 percent, of your concessions, and I include right-of-use, the concession fee itself plus the lease expenses is variable. Is that a correct guess?

And I'm wondering, in terms of the MAG component, if we were starting to see a 20% decline in revenue this year, and you haven't been able to reduce that MAG component. I'm just wondering how much is it? Just in case you can't actually are able to renegotiate the MAG component. So any sort of visibility you can give us on that, that would be very, very useful as I think many of the people covering you and investing in you today probably didn't see you in 2008, '09 when you were very able to maintain your margin. That's the first question.

Second question, just based on your base case, and you're talking about a single-digit decline in revenues where are your equity free cash flow and your underlying operating profit based on this base case? I wonder if you could just give us some of your thoughts where you'll come in on that base case scenario. Of course, we know it could be better or it could be worse, but just to see what sort of planet we could be on this year. So there are my questions.

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Julián Díaz González, Dufry AG - Group CEO & Director [10]

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I will try, Jon -- this is Julián speaking. I will try to explain it because, obviously, it's important. If -- in this -- in our concession portfolio, most of the concessions are subject to variable. It's 60% -- obviously, I can't say exactly the number, right? Higher than 60%, okay, is a possibility. And then the only thing we need is obviously talk with the different landlords and discuss the situation. But today, I can say, with the drop of sales we are looking at, the situation is adapted to the reality, meaning the range will be adapted to the reality. If you tell me, 70%, 78%, I cannot say that because I never disclose the information, but it's very high, okay?

Regarding the base case equity free cash flow and operating profit, I think, Jon, we'll prefer that you do your own calculation, ask us whatever question you want, but I think to tell you what is the target for equity free cash flow today, the operating profit today, it's very difficult. But ask the questions because we will try to put light in order that you build your own model.

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Jon Cox, Kepler Cheuvreux, Research Division - Head of Swiss Equities and Head of European Consumer Equities [11]

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Okay. Well, maybe let me come back to the MAG question then. Let's just hypothetically say your sales are down 20% this year. What does that do in terms of how much MAG you have to pay if you cannot renegotiate with the landlords to adjust the MAG?

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Julián Díaz González, Dufry AG - Group CEO & Director [12]

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Again, it's the same question, Jon. I have to tell you the percentage of contracts with variable clauses. And I think this is -- this -- I tell you, most of the contracts today are variable, based in percentage of sales and in spend -- in rent per passenger. The -- how much is the specific volume of variable is higher than 60%, just for confirming your own information. It's higher than 60%, in the case of 20% drop of sales.

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Operator [13]

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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 [14]

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The first one would be please on the adjusted EBIT growth of around 30% year-over-year in Q4. And can you elaborate a little bit on this? How sustainable this is? And what were the special elements here? It seems like other operating income plays a role. Second question would be, please, on airport sales. It seems it was relatively robust and flattish in 2019, maybe had a good consumer and environmental passenger growth. In the future, is it again, cruise lines and other locations and distribution strategy, which will be the main growth contributor and airports are likely flattish over the cycle?

And the last question would be on the covenants, please. Let's assume a scenario, your sales are down 20%, 30%, and for a certain time period, you are preaching covenants. How flexible are your potential ops you have with holidays or you pay higher interest and have higher covenants for a certain time period.

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Julián Díaz González, Dufry AG - Group CEO & Director [15]

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I didn't understand the second question. Well, the first question, I do, but -- sorry, could you repeat the second question?

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Jörn Iffert, UBS Investment Bank, Research Division - Director and Analyst [16]

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Yes, sorry. The second question was on airport sales. I think it was relatively flattish organically in 2019. Is this something you also would expect for the future over the cycle? And this means that your growth is coming from cruise lines and train stations, et cetera, in the future. How you see this?

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Yves Gerster, Dufry AG - CFO & Group Treasurer [17]

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I'm starting with the first question. On the adjusted EBIT or adjusting operating profit so there, yes, this is sustainable. So look, if we quickly go through the lines, you know where we had seen some pressure in the last year. It's basically personal expenses. We have commented on that many times. And then the other line which was affected is depreciation of right-of-use. And as we have also commented many times, the depreciation right-of-use is, to a certain extent, a moving target because when you enter into newer concessions or when you renew concession which contain a MAG, that number basically is volatile to a certain extent. But coming back to your question, yes, it's sustainable.

And then going to the second part, in that sense, look, even now in the downturn scenario where we see some effects from the coronavirus, basically, also there, it should be sustainable. And the reason for that is basically the following: Julián has commented on it. There is a plan in place. We will generate some savings on the cost structure. And on top of that, when you look at the gross profit margin, purely the decrease of sales should basically not lead to a decrease of the gross profit margin. That should remain relatively stable in that sense.

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Julián Díaz González, Dufry AG - Group CEO & Director [18]

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Regarding the second question, Jörn, what you said is correct. It's -- the most important part of the growth was generated through the new operations, including the cruise lines. In my view, outside of the -- obviously, the situation we have today. The driver for the sales of this company will be airport retail, in terms of importance and in terms of dedication of the teams. And in fact, we have ongoing operations that will be announced duly, not now because, obviously, it's not going to be appreciated a lot. That will be significant and will be welcome.

The second question regarding the drop -- possible drop 20%, 30% during the next 2 months. All the initiatives that I mentioned, CHF 40 million savings are already implemented, meaning that all the employees that were -- the seasonal employees have put it on hold. All the employees that we were in the position because the sales were affected are already on holidays. All these initiatives are already done. We have even a second plan that will obviously impact stronger than I said this reorganization of companies, but this is not the case yet because, obviously, you cannot destroy the structure of the companies, if you think that this is going to be a temporal issue. We are still thinking that it's a temporal issue that will be recovered in a very short period of time. And as a consequence, what we are doing is temporarily measures and initiatives that impact the P&L in the shortest period of time. This is already implemented.

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Jörn Iffert, UBS Investment Bank, Research Division - Director and Analyst [19]

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Okay. So if I understand correctly, in a scenario, your temporary would breach your covenants. You don't expect that you would need to raise capital or so because there should be flexibility in the covenants to some extent. Is it my right understanding?

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

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So look Jörn, based on what we currently see, and it's difficult to make, obviously, forecast. But based on what we currently see, we don't foresee to breach any covenants. And look, even if an event happens, where -- I mean, we will -- under no circumstances breach any covenants. So if a situation occurs where we would go above 4.5x, I think that's the way we need to express it, above 4.5x on the leverage level, in such a case, there are mechanics in place, which we can take to basically mitigate the risk. And also, we need to take into account that we were working with our existing lending groups for the last 15 years. So with most of those banks, we went through a lot of crisis. Julián has mentioned it at the beginning and there are solutions. You mentioned one, which would be a covenant holiday. But again, based on the current assumptions and the forecast we do, we don't expect to breach covenants or to go above the 4.5.

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Operator [21]

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Next question comes from the line of Jaafar Mestari, Exane BNP Paribas.

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Jaafar Mestari, Exane BNP Paribas, Research Division - Analyst [22]

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I've got 3, if that's okay? Firstly, just in terms of how you built your guidance for this year. You seem to be basically assuming that you'll get a luxury of an almost normal Q3. So I'm very curious what the statistics are that you're referring to that suggests we will see an improvement starting in May already? And then you -- have you flexed this scenario? That's the base case. But if you're disrupted until July, August, even September, where do you end up in terms of top line and in terms of leverage?

And then second question, just coming back on those covenants. I appreciate there's many solutions you will find in advance if there is any issue, and we had the discussions before in 2016. There is no covenant on the bonds. But again, you partly answered already, but what happens with the bank loans if you get to 4.5? Because it sounds like there is no repayments, no increase in interest rates, it's basically a nonevent. So why is there even the covenants in the first place?

And my last question is, and I appreciate that maybe a point of detail because 2, 3 points of like-for-like is mostly a rounding error these days. But at the same time as all of that happens, the Brazilian real and the Russian ruble have also been weakening in recent weeks. So have you seen lower spend from those nationalities like you did in 2018?

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

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I will start with the first question. So I think what I said is basically based on the experience we have. If there is a period of time, especially in the beginning of the crisis -- economic crisis, and this is an economic crisis. It's a global economic crisis. And you have had significant deterioration during the first months, very strong during the first 3 months. This is what we had, in the past, this experience. After the third month, 4 months and depending, obviously, on the performance, we start to see a gradual improvement. This improvement happens normally during the fourth and fifth months in the worst-case scenario, and this happened in 2009. What is the behavior here? The behavior here is, first of all, the most important asset categories are categories related with luxury products. It's something like a very straight and fast impact. And this happening today is more than -- obviously, it's a very high double-digit drop in high-level products. The second most important impact is in product related with perfumes and cosmetics or personal care. And the lowest impact, very low impact, in fact, is in tobacco and spirit. What is going to happen? Nobody knows because this is something that is very -- obviously, today it's impossible. But in the plan or in the model we have, the big impact of these actual crisis is going to happen in March, April and probably May -- first part of May. After that, what we're going to see is a big and fast recovery? The answer is, no. What we are going to see is a slow recovery, but thinking -- or taking into consideration that the most important quarter for us, is the third quarter. We expect obviously a better performance in terms of cash and in terms of profitability. The behavior of the customers is very similar, as I said in the past. What is happening today is regarding the spend per passenger. And obviously, we don't have information enough in order to justify anything. In most of the locations, due to the promotion we have or we have started, the spend per passenger is increasing. And this is something that happened in several locations.

Regarding the 2%, 3% like-for-like -- sorry, I couldn't understand the question in the like-for-like?

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Jaafar Mestari, Exane BNP Paribas, Research Division - Analyst [24]

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Yes. So we're all talking mostly about the impact of the virus and the containments. But then separately, at the same time, there is also weakening of currencies like the Brazilian real and the Russian ruble. And this....

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

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Okay, in the past. Yes, yes, yes. But in fact, in Brazil, we have seen better performance during the last months than to the previous year so far. The reality of the real is an impact. The answer could be yes. But we have, as you know, this initiative decided that this regulation approved by the government where we are able to sell a product with higher value in arrivals. Arrivals is 65% of the sales. What happened in arrivals? In arrival what happened that the spend per ticket -- obviously, we are now talking about the number of passengers, increased by 8%. And this is a good sign that I hope whatever situation we have to face in Brazil now will be mitigated by the increase in the allowance. That is the most important part in the arrival shops.

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Yves Gerster, Dufry AG - CFO & Group Treasurer [26]

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Look, with respect to covenants, that was your third question basically. Look, again, I cannot repeat that enough. We are on the topic. We are analyzing the situation. Based on our assessment at the moment, we don't believe that there will be an issue with the covenants. However, if there is a scenario or if the case that this, indeed, becomes an issue, we know it at once. And again, as I've mentioned before, we have a very close relationship with our lending group with every single bank, which are around 25 different banks. And the feedback we have received also over the last couple of days from our banks was very positive. So from that perspective, we don't expect any issue. And even if there is one, yes, what you have mentioned could be one scenario. If you are at a higher leverage, you probably pay an additional markup, but there is no risk, per se, in that sense.

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Operator [27]

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Next question comes from the line of Daria Fomina, Goldman Sachs.

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Daria Fomina, Goldman Sachs Group Inc., Research Division - Equity Analyst [28]

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You've been very clear on the covenant. So I'm just going to ask a slightly different question. Are there any cross default provisions in other parts of your debt, RCF, for example, that could be triggered if you hit the covenant, which you were very clear that you don't expect to?

And my second question is, given that you mentioned you run a lot of the scenarios for your Board, can you please outline what needs to happen for your top line -- with your top line for you to hit the covenant? That would be very helpful.

And my last question on CapEx. Can you please help to understand what would be your minimum level of CapEx that you either contractually obligated or for any other reason cannot cancel for 2020, please?

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Yves Gerster, Dufry AG - CFO & Group Treasurer [29]

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Look, in respect to cross defaults, Daria, there -- yes, there are. Basically, all the financing arrangements we have in place contain such clauses and what is relevant in this case, if we default under the bank, if we would default under the bank facilities, there is a cross default under the bonds. For the top line hits in respect to covenants, it's not something we can disclose at this stage. I mean it really depends on what then happens, how quickly the initiatives are implemented, et cetera, but it's not something we can comment on at this stage.

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Julián Díaz González, Dufry AG - Group CEO & Director [30]

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Regarding the -- Daria, this is Julián speaking. Regarding the CapEx, it's very flexible. Of course, we have obligations in terms of extending contracts that we need to fulfill. But when you have an obligation for extending a contract, you can always -- and this is the case, negotiate to delay the investment in CapEx until certain time. This is not going to be an issue. The CapEx can be managed. The issue here -- there are 2 different aspects here that I think probably are important: One is CapEx that is needed because probably the airport is changing the terminal, and this terminal will be with a different traffic flow, and you cannot leave the shop in this location because the traffic is going to be in another location; and the other one is new -- let's say, new project -- new concessions that we have already signed, and we need to open, because obviously, finally, we need to open. This part could be today in the company, around CHF 80 million. But the rest of the concessions or the rest of the CapEx could be, obviously, minor.

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Operator [31]

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Next question comes from the line of David Moon, Wells Fargo.

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David Moon, [32]

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Just a question on the outlook. You mentioned that you've seen an uptick in the May and June statistics. So wondering if you could elaborate on that outlook.

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Julián Díaz González, Dufry AG - Group CEO & Director [33]

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We couldn't understand here. The line was not very good. Could you please repeat the question?

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David Moon, [34]

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Yes. So you mentioned that in the outlook, in May and June, in the data, in statistics...

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Operator [35]

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Mr. Moon your line is disturbed.

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David Moon, [36]

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Yes. Can you hear me?

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Julián Díaz González, Dufry AG - Group CEO & Director [37]

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Yes.

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Yves Gerster, Dufry AG - CFO & Group Treasurer [38]

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Now better, yes.

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David Moon, [39]

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Sorry, working from home, as you say. You mentioned on the call, you're seeing in the statistics an improvement suggested for May and for June?

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Julián Díaz González, Dufry AG - Group CEO & Director [40]

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Yes. Yes, this is the point. We are forecasting that the situation will turn around end of May or June gradually to a better situation.

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David Moon, [41]

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Yes. But what statistics are you referring to?

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Julián Díaz González, Dufry AG - Group CEO & Director [42]

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My statistics because of the experience we have with other crises in the past.

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David Moon, [43]

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Okay. So that's -- all right, in 2001?

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

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No, 2009 was the last time.

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David Moon, [45]

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Okay. So it's a base -- it's based back to 2009?

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Julián Díaz González, Dufry AG - Group CEO & Director [46]

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Yes.

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Operator [47]

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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 [48]

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A couple of questions, please. Firstly, I'm just trying to understand inventory. Is what your saying that, even on a lower top line, there is no major gross margin risk? Does that mean that the brands are basically taking the hit on the -- related to the sales slowdown? Or how does that work? And also, what's the sort of obsoletion of inventory that's currently in the store and that's probably stacking up at the moment?

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Julián Díaz González, Dufry AG - Group CEO & Director [49]

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I'm not sure, [Rebecca], I could understand your question.

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Rebecca Anne McClellan, Grupo Santander, Research Division - Equity Analyst [50]

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I'm just trying to understand inventory. You're talking about there being no major gross margin risk. But obviously, sales are going -- are falling below budget, and therefore, inventory is building. So basically, what you're saying is that the brands are taking that cost themselves rather than Dufry having to bear the brunt of higher promotional activity.

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Julián Díaz González, Dufry AG - Group CEO & Director [51]

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I didn't understand.

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Yves Gerster, Dufry AG - CFO & Group Treasurer [52]

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Let me try, Rebecca. I'm not sure if we understand the question, but there are probably 2 aspects. The first one is what I have mentioned. If sales drop, there should be no impact on the gross profit margin because you buy and you sell the same product just before. You probably sell less, but still at the same margin. And the second aspect is, Julián has mentioned that we are performing some promotions. There is some promotional activity, obviously, to boost sales. There, we are getting some support from the brands. So we had close interactions with the brands and the brands are supporting the promotions, and they pick up part of the cost in that sense. So yes, gross profit margin in that sense is protected.

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Rebecca Anne McClellan, Grupo Santander, Research Division - Equity Analyst [53]

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Right. And so -- but in terms of inventory ownership where -- as it stands right now, what you're saying is that the ownership is only as far as the revenues are achieved. Is that right? No, it doesn't matter, don't worry.

And secondly, it seems that Carnival are going to be -- yes?

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Yves Gerster, Dufry AG - CFO & Group Treasurer [54]

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Rebecca, let me understand because -- I am going through, but I don't understand the question. The question is regarding the days of inventory. The question is regarding the type of inventory. Sorry, I couldn't really understand the question. Could you please explain me what you want?

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Rebecca Anne McClellan, Grupo Santander, Research Division - Equity Analyst [55]

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In the stores, right now, you've got a whole load of inventory, right? Suddenly, for whatever reasons, people aren't going to the airport, they're not buying. So you've got an inventory sort of pile up. How do you manage that inventory? And at some stage, some of that inventory will become obsolete because it's sort of fresh inventory? Or it goes out of season or whatever? So I'm just -- I'm trying to understand how that's managed in terms of the inventory flow. And there is inventory risk. It seems to me, according to your guidance, of a flat gross margin that the inventory risk is with the brands, right?

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Julián Díaz González, Dufry AG - Group CEO & Director [56]

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No, luxury products in Dufry is 13% of total sales. The inventory maybe is a bit more, maybe it's 20%. This is the seasonal product. The -- all the other products are nonseasonal. You can buy this product today, tomorrow, the day after tomorrow. There is no obsoleteness in this sense. The reality is that this is a problem because we need to rid of this material or this inventory because if we want to have more inventory in the future, the reality is that we need to rid it off and sell this merchandise. What is the strategy? The strategy here is very simple, is we are going to impact the sale price in order to make attractive this to the suppliers. And the second initiative and is also very relevant because it's probably the more relevant is negotiations with the suppliers for the change in the merchandise that is today and this is also for merchandise for the new season. Why? Because obviously, you want to sell merchandise of the new season. You need space in the shop and you need, obviously, fresh merchandise, both things. It is to accelerate the promotions and to exchange merchandise with the supplier for continuing with the new merchandise during the next season.

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Rebecca Anne McClellan, Grupo Santander, Research Division - Equity Analyst [57]

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Right. And so what you're saying is that the suppliers that are taking, largely taking, the cost of that rather than Dufry, right?

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Julián Díaz González, Dufry AG - Group CEO & Director [58]

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Yes. In most of the cases, the cost is not -- the cost of the discount in most of the cases is supported by us in this specific merchandise. There is change now because, obviously, we have changed the merchandise.

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Rebecca Anne McClellan, Grupo Santander, Research Division - Equity Analyst [59]

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Right. Okay. Okay. Julián, and my second question is, it looks like Carnival are going to be stopping -- pausing their cruise lines for 2 months. Is that something that you've got with some of your cruise ship?

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Julián Díaz González, Dufry AG - Group CEO & Director [60]

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Yes. What we have today in the -- it's different, depending on the different companies. I don't know specifically Carnival. What we have seen now is an increase of the restrictions in terms of traveling due to the age, due to the health, sanitary conditions at the entrance. And the drop that we have seen so far is around 20% to 25% in terms of passengers. What is going to happen during the next 2 weeks, probably -- not probably, is going to happen is the most important companies will be on hold, and they will reinitiate in 2 or 3 weeks.

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Rebecca Anne McClellan, Grupo Santander, Research Division - Equity Analyst [61]

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Right. Okay. And so does that mean that there is 0 OpEx when these cruise ships are on hold. Basically, as there is entirely variable cost in that.

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Julián Díaz González, Dufry AG - Group CEO & Director [62]

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It is -- the [fee] is per passenger per day.

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Operator [63]

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Next question comes from the line of Neill Keaney, CreditSights.

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Neill Keaney, CreditSights Ltd. - Senior Analyst of European High Yield Retail and Consumer [64]

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I appreciate you've talked a lot about the 4.5x leverage covenant. I just wanted to point to something in the offering memorandum for the new 2027 bonds. It states there that the 4.5x covenant on the bank facilities can flex to 5 in certain circumstances. Can you tell us what those certain circumstances are?

And my second question is, again, just on your guidance. I appreciate the base case for the full year. Some other airport retailers have talked about 35% hit to revenues in March and April. Does that tally up with your full year guidance? Or is that more of a bear case than you're thinking at the moment? Basically, what I'm trying to get is, you've given us your base case, but you obviously must have contingency plans for a worsening of top line declines. So I'm trying to get a sense of what that would be?

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Julián Díaz González, Dufry AG - Group CEO & Director [65]

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In respect to the covenant of 4.5x and what you have mentioned about the latest bond issuance. So yes, the bank financing arrangements contain a clause which allows Dufry to increase the leverage or the threshold for the leverage 2x in the duration of the contract i.e., the 5 years to 5x. And the requirements for that is basically -- probably, if you go into the details, it's a little bit more complex than that. But to keep it simple, if Dufry is doing a project, whatever kind of project, which requires an investment or something similar, we are allowed to increase the threshold.

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Neill Keaney, CreditSights Ltd. - Senior Analyst of European High Yield Retail and Consumer [66]

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Okay. So just to clarify, that's not something that would be -- that you could utilize in the event, highly unlikely event, as you said. But in the current circumstances, it's only with regard to a specific CapEx project?

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Yves Gerster, Dufry AG - CFO & Group Treasurer [67]

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Well, not specific CapEx project. So if I remember correctly, the contract says investment. It's pretty broad. So if I buy a new laptop, probably it's enough.

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Julián Díaz González, Dufry AG - Group CEO & Director [68]

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Regarding the case -- the basic case in this specific projection is very similar. We are expecting in March, April around 30% or similar drop in sales.

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Operator [69]

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Next question comes from the line of Jonathan Eley, Financial Times.

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Jonathan Eley, [70]

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This is a question about Donald Trump's address last night. I'm assuming that the earnings statements and the annual report was written before the President basically banned almost all travel from Europe to the United States. Does that decision alter your outlook or worsen it in any way?

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Julián Díaz González, Dufry AG - Group CEO & Director [71]

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Obviously, these news were after we announced the results, but let me explain what is the type of business we have. In the U.S. and Canada because we consider both the same territory, around 70% -- 75% of the business is duty-paid local customer, and this is basically the U.S. The other remaining 25%, most of them, is duty-free in Canada, and 5% is duty-free in the U.S. This is in the front of the U.S. and Canada. On the other side is Europe. And in Europe, obviously, more -- the most important destination we have with origin for the U.S. is the U.K., it's in Heathrow. And I think this is important because obviously, Heathrow is still flying over the U.S.

Then the consequence, we have not evaluated yet, but I understand you that in order to give you, obviously, the opportunity to understand how we could be impacted. We have a duty-paid business in the U.S., the most important part of the Dufry is in Canada. And in Europe, the most important origin for the traffic to the U.S. is U.K., but obviously, we will have an impact. We need to calculate.

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Jonathan Eley, [72]

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Okay. But can you give me an idea how big Dufry is in the overall context of your operations? Is it the single largest contributor that you referred to in the slide?

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Julián Díaz González, Dufry AG - Group CEO & Director [73]

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Yes, it's the most important one, individually considered.

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Jonathan Eley, [74]

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Okay. So around 7% of sales.

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Julián Díaz González, Dufry AG - Group CEO & Director [75]

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This is what we disclosed in the past that there is a concession that around 7% is the highest, more or less, is the highest.

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Jonathan Eley, [76]

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Okay. All right. And can you say anything about the MAX that others have referred to. Which airports or which geographies are being the most cooperative in revisiting, like, terms?

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Julián Díaz González, Dufry AG - Group CEO & Director [77]

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Yes. So far, it's in Asia because we started before. I think, in Asia , we are quite advanced in terms of the discussions in terms of MAX, but we are also starting in Europe. Now still Europe, at the time that we report the information, financial information was not terribly impacted. Now is the time to start. But we started in January, in Asia, and we have had very good answers from the landlords in Asia. When I talk about Asia, it's from Middle East to Australia. This is the division number 2.

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Operator [78]

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Next question comes from the line of Alexander Nordhagen, Goldman Sachs.

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Alexander Nordhagen, [79]

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It's very helpful so far. I just got 3 quick questions. One, on the liquidity, would the Board consider cutting the dividend? I know you said at the beginning, it's already been announced, but would they consider restricting the dividend? Because it seems that would, I guess, display a lot of the questions you've had so far on liquidity. The second one is on 2009 and '10. How low did your -- or how did free cash flow to equity turn out in 2009? And do you think that's the fair comparable for this year?

And the third one is on just your labor cost. How much do you think you can flex those costs down this year? I know you've given us some numbers on or potential cost savings, but I mean, are we talking perhaps 5% down on labor cost? Or is it more?

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Julián Díaz González, Dufry AG - Group CEO & Director [80]

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In terms of 2009, at that time, we were not reporting equity free cash flow. I don't remember the number now. I know the number, but was not terribly impacted. What I want to put as a reference of generation of cash is that EBITDA dropped 120 basis points with 10% drop year-end in organic growth. Meaning, obviously, the cash was well protected. I'm sorry, I don't remember exactly the name of equity free cash flow because we didn't report this like today. Today, these are different things.

Regarding 2019 -- sorry, the cost savings that I identified before, our cost savings already implemented in the different companies. This CHF 60 million fixed cost is already implemented, and obviously, there is a significant part that is also -- by the way, what we adapted. How much is going to impact? I think the P&L in 2019 is very clear. In the personal expenses, we have 14.1% of total turnover. And there you have -- one part that is variable, and then you have the savings today identified as CHF 20 million on top of that. And on the other side is general cost. General cost, most of them are variable. And the reality is that the CHF 20 million we already identified, they are already implemented. And again, you have the starting point in 2019. You can obviously easily calculate.

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Alexander Nordhagen, [81]

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And the last one on the dividend and the Board?

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Julián Díaz González, Dufry AG - Group CEO & Director [82]

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The dividends on...

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Yves Gerster, Dufry AG - CFO & Group Treasurer [83]

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So if the Board would reconsider the dividend at some point.

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Julián Díaz González, Dufry AG - Group CEO & Director [84]

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I think the Board has -- obviously [I don't know everything before the annual assembly for] approving the invitation. The information we have today is, obviously, everything will be analyzed again, but I don't foresee any changes in the opinion. But again, who knows until we know exactly what is going on today, if not.

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Operator [85]

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Next question comes from the line of Aman Mahal, PGIM.

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Aman Mahal, [86]

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Most of my questions have been answered actually. Just one, on the February trading, you said that Asia Pacific was down double digit. Can you give an exact number for that?

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Julián Díaz González, Dufry AG - Group CEO & Director [87]

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Not yet, but it was above 25%.

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Aman Mahal, [88]

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And I don't know how much visibility you have on the first week of March, but has March worsened versus the February trading for Asia Pacific?

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Julián Díaz González, Dufry AG - Group CEO & Director [89]

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In Asia Pacific, specially, no. It's quite stable. The problem started in the division Europe and Africa.

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Aman Mahal, [90]

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Can you give any color on March trading for any of the regions?

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Julián Díaz González, Dufry AG - Group CEO & Director [91]

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Okay. I already comment on what I say. It's March 8. I prefer to wait until March 31. And in fact, we have the quarterly report for understanding the detail.

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Operator [92]

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Next question comes from the line of Edouard Aubin, Morgan Stanley.

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Edouard Aubin, Morgan Stanley, Research Division - Head of Luxury Goods [93]

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So 3 quick ones for me. Just Yves -- just to come back on Rebecca's question on gross margin, and I guess, the variability of cost, I guess you're getting some volume-based incentives from brands. So would you -- should we consider that? Historically, they've been quite minimal, and therefore, if your sales were to come under pressure that would not impact your gross margin as a percentage. So that's number one.

Number two, Julián, sorry to come back on the guidance and traffic and trading. But I think you said, if I heard correctly that you expect itself to be down roughly 30%, March, April. Should we look at just the European market, the airline market, I think some observers are saying, in the first quarter, passenger traffic could be down about 10%, but about 30% for the entire second quarter. And I guess, you're calling for an improvement in May. So would a 30% decline in passenger traffic for the entire second quarter be excessive to you?

And my third and last question is, the U.K. is clearly your most profitable market. Could we get a sense of the structure of the contract, the MAG for Heathrow and Gatwick. And I don't know to whether they will extend the informations to the public or not.

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Julián Díaz González, Dufry AG - Group CEO & Director [94]

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Okay. There are obviously 3 questions -- I will answer the 3 questions. Regarding the gross profit margin is the system. The system is that some companies are compensating as in percentage of sales. Obviously, the percentage of sales growth, the possibility that these will be maintained in percentages, okay, but in value will drop with the sales. And -- perhaps, in any case, gross profit margin in terms of gross -- of percentage of sales will remain unchanged so far. Regarding the guidelines, for me, 30% traffic during the second quarter. I don't know, I'm not an airline, what we have seen is 2 models in terms of income for the airlines is the model produced by IATA. Again, what they are talking is a basic year-on-year minus 11% in income per passenger by year end in the basic case and minus 16% in the, let's say, expanded case. How is this fitting with one quarter? I cannot tell you. I think it's better that you try to do your own calculation. For me, 30% sounds high, but I cannot guess because it's impossible. I am not obviously to tell anything regarding what the traffic is going to be because I don't know. Regarding the U.K., the contract is very flexible and don't require any adaptation. It will be adapted to the reality automatically.

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Edouard Aubin, Morgan Stanley, Research Division - Head of Luxury Goods [95]

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Right. So just I understand, so you have MAG closes in Heathrow and Gatwick or not?

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Julián Díaz González, Dufry AG - Group CEO & Director [96]

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I am not going -- can not disclose contracts that by -- obviously, by the regulation of the contract, they cannot be specific, because it's confidential.

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Operator [97]

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Next question comes from the line of [Santiago Domingo, Solventis].

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Santiago Domingo, [98]

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My question is related to China, to Asian countries where we saw the first outbreak of coronavirus, and we see some kind of recovery in numbers of flights over the last 6 week. I would like to know if you see any guidance of improvement in that region in terms of this every week review that you are doing to your operations in all the parts of the call.

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Julián Díaz González, Dufry AG - Group CEO & Director [99]

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I already mentioned that. There is slightly improvement during the last week, this is for sure. This is what I said, and this is compared with the beginning of the crisis. But still, the crisis is there because the operations are impacted at the same level. But the -- in terms of performance of sales, I think the initiatives from the top line point of view that we have started in different of the operations -- again, we are not talking about China, we are talking about Division 2. It's not only China. There are other countries. They're, including Australia, including Cambodia, including Middle East. The situation has improved, but not at the level to say that has dramatically changed. It's similar, but better than previous weeks.

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Operator [100]

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Next question comes from the line of Mustaba Davoodi, Crédit Suisse.

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Mustaba Davoodi, [101]

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Sorry, if the question was already asked, we -- are you able to isolate the sales in Europe for the week of March as you've disclosed? Given that you've only disclosed the year-to-date numbers, can you...

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Julián Díaz González, Dufry AG - Group CEO & Director [102]

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What you've said is -- the last information we have in March is March 8, and this is already disclosed. It's in the presentation and in the press release. It is what it is.

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Mustaba Davoodi, [103]

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Yes. So what was the impact for March on a standalone basis? That's my question.

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Julián Díaz González, Dufry AG - Group CEO & Director [104]

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Just for the week, it's minus 17.5%.

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Mustaba Davoodi, [105]

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Okay. Very helpful. And apologies if this was also asked before, but in terms of -- what do you think is the possibility of potentially suspending the dividend? Is...

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Julián Díaz González, Dufry AG - Group CEO & Director [106]

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Okay. I think we are trying to explain what we know, okay? Let me -- I have to be fair. I cannot say more things, because it's not my responsibility. It's approved by the Board of Directors. The Board of Directors has decided to approve a dividend of CHF 4 per share last week during the Board. Based on the information, we have provided regarding the cash flows, the stress test, et cetera, et cetera, et cetera. That's the situation. Today, the intention is to submit to the general assembly a CHF 4 dividend per share. From now to this time, obviously, Board of Directors could meet and could -- in any case, has to meet because there is an important approval, it's the approval of the invitation to the general assembly that has to be published with 15 days in advance, et cetera, et cetera. This is going to happen during April. Is this situation that is normal? No. Every year happens the same thing. The Board of Directors decides to submit the CHF 4 or whatever is the dividend, and then before the invitation is issued, they can issue whatever opinion they want. But today, the information is exactly the same than yesterday.

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Operator [107]

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Next question comes from the line of [Thomas Sangler, R&D (inaudible)].

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Unidentified Analyst, [108]

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I have a question to the rating agencies. Do you have actual any comments from the rating agencies to the development of this business here in your company? This was the first question. The second question is, do you think you get support from the Swiss state if the crisis go on? And the last question is, we have some improvements in China, do you see any improvements on your revenues in China?

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Julián Díaz González, Dufry AG - Group CEO & Director [109]

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So look, let me start with the first one with the rating agencies. So we have -- we are in constant exchange, obviously, with rating agencies, not because of the current evolution with the coronavirus, but basically, on an ongoing basis also during a normal year. And so far, the interaction is the same as usually. I mean we are exchange news, we exchange budget and forecast models, and there is nothing specific to report in that sense. Obviously, they are also keen to get some additional information from our side, which we are providing to them, but there is nothing specific to be reported.

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Yves Gerster, Dufry AG - CFO & Group Treasurer [110]

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Regarding the Swiss state. So far, no, we don't consider any of these alternatives. What we are considering is really aligned with the stockholders of this company, excluding the -- obviously, the shareholders because this is operational side. The 3 most important pillars of this business: One is landlords; the other one is suppliers; and the other one is financing, is banks. This is an area that is growing. It's not something that will happen as new. And what we try is to align the interest of these 3 stakeholders in the business in order to go through the process, whatever is the dip of the importance of the damage. Regarding the improvement in China, I think to say that China is improving? The answer is, no. What I said is, this week, the information we received in Division 2 that it's including China and other countries is better than the previous week. This is for sure. It has been deteriorating, but this week has been better.

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Operator [111]

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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 [112]

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Three questions from my side, please. And the first one is on the sales tax recovery, the CHF 64 million which you booked in the P&L so far, but the cash flows is still outstanding. So do you have some more visibility on the timing of the payment of this sales tax recovery? And the second one is of the split of the announced nearly 15,000 that square meters in retail space for 2020 and 2021. Can give us a split of how much of this -- how much of this retail space will be opened in H1 and H2 in this year? And then the third question is in relation to the Brazilian duty-free allowances, being in place since January 1, so do you already see a significant increase in the arrival sales in Brazil, and therefore, also meaningful tailwinds in your sales?

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Julián Díaz González, Dufry AG - Group CEO & Director [113]

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Regarding the taxes recovery, I don't expect this tax recovery until the year -- beginning of the year -- probably, not beginning, end of 2021. The process is very bureaucratic, but for sure, it will be recovered.

Regarding the number of square meters that we are going to open this year, 14,900, everything will be opened during the first -- if everything is normal during the first 9 months. And regarding the -- now this 14,900 is 12,000-something because the remaining part will be open in 2021.

And then regarding the arrival sales in Brazil. In total sales, the sales in Brazil in arrival shops have not increased yet because the number of passenger also dropped, but there is one important sign. The spend per passenger increased by 8%. And the meaning of that is that they are in product more expensive than embedded. As soon as the traffic recovers a bit, the situation, obviously, will be impacted in a positive way.

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Operator [114]

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We have a follow-up question from Rebecca McClellan.

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Rebecca Anne McClellan, Grupo Santander, Research Division - Equity Analyst [115]

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Yes. Just one final one for me, please. So the first quarter trading update on May 12. And is there any sort of possibility that you might give an update at the time that the Board meets for something in order to sort of perhaps confirm that you feel that you're confident with your previous assessments? Or -- I'm just thinking about the communication with the market because at the moment, visibility is very low.

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Julián Díaz González, Dufry AG - Group CEO & Director [116]

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I think, Rebecca, we will be, I hope, that very systematic and very respectful. We are going to report at the time that we are sure the information is obviously totally audited and fine. I don't expect any trading update before the day that I expect that we have already scheduled.

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Unidentified Analyst, [117]

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Yes, I would have a very basic question. Could you explain the higher volatility in reported net profit to equity shareholders than one to the minority shareholders? Why are minority shareholders growing more stable and are always being positive? And why isn't it the case for the equity shareholders of Dufry? And can you boil that down maybe to geographies or single countries?

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Yves Gerster, Dufry AG - CFO & Group Treasurer [118]

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Sure. So thank you very much. So look, I mean, the growth of the minority interest is also related to -- in recent years, to the IPO we had in the U.S. So due to the IPO, obviously, in the U.S., you have some additional minority shareholders there. I mean we need to account for that on the consolidated levels.

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Unidentified Analyst, [119]

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(inaudible)

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Yves Gerster, Dufry AG - CFO & Group Treasurer [120]

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Well, that's the major one, yes, absolutely. The others are potentially also changing a little bit from time to time, but it's really marginal. The U.S. is the major change. So basically, it was stable for a number of years between CHF 35 million and CHF 40 million, and then it stepped up.

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René André Saner, Octavian AG - Research Analyst of Sales UK/US/LatAm [121]

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Rene Saner from Octavian, again. Maybe quickly coming back on government health or support. I mean, there is a discussion of -- for payroll tax cost in the U.S. Could you quantify what that will mean for your business?

Secondly, are you planning maybe to introduce or apply for short-term work hours in Switzerland? And are you in discussions generally with other governments regarding health in a similar sense? Because I assume whatever fiscal health is coming, it will be very much focused on the travel industry.

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Yves Gerster, Dufry AG - CFO & Group Treasurer [122]

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First one is the government health.

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Julián Díaz González, Dufry AG - Group CEO & Director [123]

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Well, in terms of the government health, we are not asking to any government to support our health. What is happening is that most of the concessions are -- the landlord has staye don. And in this case, if you understand this, like, we are asking for help. The answer is, yes, but not in the sense that was done in the question before. We are not asking any help for any government point of view. What we are asking is as conditions -- commercial conditions that will be adapted to the reality, nothing else.

Anything else from the audience in the call, no? Here? Again, we appreciate a lot, especially in these days of crisis, the questions and trying to clarify. I hope that we clarified most of the concerns. As I always said, in any case, we are always willing to receive calls or meetings, if needed. Thank you very much.

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Yves Gerster, Dufry AG - CFO & Group Treasurer [124]

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Thank you.

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Operator [125]

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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.