Letter from the CFO
Delivering on our goals
Dufry delivered resilient results in 2018 despite challenging market conditions in certain geographies in the second half of the year. Turnover came in at CHF 8,684.9 million and grew by 3.7 % while EBITDA reached CHF 1,040.3 million. Free cash flow before interest and minorities grew as well and reached CHF 617.1 million increasing by 32.1 %. Equity free cash flow reached CHF 370.8 million, almost double the CHF 187.8 million recorded in 2017.
One of the main achievements in 2018 was the implementation of the Business Operating Model (BOM). The initiative started in 2016 with a complete analysis of the group’s processes, procedures and organization. Based on this work, we then defined a blueprint of best practices and standardized organization structure, which were implemented country by country along 2017 and 2018. The implementation of the BOM generates efficiencies of CHF 50 million, of which CHF 40 million are already reflected in the 2018 results, with the remaining CHF 10 million to be delivered in the financial year 2019.
The healthy growth in cash flow generation, for both free cash flow before interest and minorities and equity free cash flow, is evidence that Dufry can deliver a robust operational performance even in sub-optimal market conditions. As such, the cash generation levels achieved in 2018 are a good proxy for the future and showcase the true and resilient potential of the company.
In 2018, Dufry started to return cash to shareholders. After a series of acquisitions between 2006 and 2015, Dufry consistently de-leveraged over the past years and in 2018 reached its target leverage range of 2 to 3 times net debt/EBITDA. As a consequence, we revised our capital allocation strategy to include both, investing in further growth and returning cash to shareholders through regular dividend payments. In 2018, the dividend payout was CHF 3.75 per share, totaling CHF 198.7 million. Additionally, in the year, we ran a share buyback program, in which we bought back shares in the value of CHF 401.9 million, which has an accretive effect in earnings per share in 2018 and 2019. The Board of Directors will propose to the Annual General Meeting of Shareholders in May 2019 to cancel these shares.
In February, 2018, we successfully floated our North America division at the New York Stock Exchange, under the name Hudson Ltd for proceeds of USD 714 million. The listing was done to provide additional strategic flexibility to our North American business to expand beyond the travel retail business into airport food and beverage operations and master concessions.
In 2018, Dufry terminated its Brazilian Depositary Receipt (“BDR”) Program and canceled the registration as a foreign issuer in Brazil. This decision was taken based on the low liquidity of Dufry’s BDRs and aimed at reducing costs and operational complexities.
Turnover grew by 3.7 % reaching CHF 8,684.9 million in 2018, from CHF 8,377.4 million in 2017 and including an FX translation effect of + 1.0 %. Organic growth contributed 2.7 %, of which net new concessions added 1.7 %.
Turnover in Southern Europe and Africa reached CHF 1,854.0 million in 2018, from CHF 1,857.8 million one year before. Organic performance in the division was – 2.6 % in the full year 2018. The Spanish business was negatively impacted by a change in the mix of passengers towards lower spending nationalities. On the other hand, Turkey benefited from the shift and posted good performance. Other locations such as Italy, France, Malta and Kenia, all posted good growth.
UK and Central Europe’s turnover grew to CHF 1,974.2 million in the year, versus CHF 1,945.1 million in 2017, with organic growth in the division reaching 0.3 %. The growth along most part of the year in the region was largely impacted by the closing of operations in Geneva as of October 2017. Excluding such impact, organic growth reached + 3.4 %.
In the UK, the main operation in the Division, performance was solid during the whole year, supported by a stable growth in passenger numbers as well as refurbishments and marketing initiatives. Switzerland, excluding Geneva, also posted good growth, due to a combination of the refurbishment and introduction of the New Generation store concept in Zurich along with growth in passengers.
Turnover in Eastern Europe, Asia, Middle East and Australia amounted to CHF 1,153.6 million in 2018, from CHF 1,011.4 million in 2017. Organic growth was double-digit at 15.1 %. The opening of operations in Hong Kong and Perth were key to maintaining organic growth at high levels, despite the higher comparables since the third quarter.
Eastern Europe had a good performance in the year, although the performance slowed in the second half. In the Middle East, operations in Jordan, Kuwait, Sharjah and India continued to grow solidly. The growth trend in Asia remained strong during 2018 although there was some slowdown in the second half of the year due to stronger comparables. We saw a solid performance in operations such as Cambodia, Macau, South Korea and Indonesia. Australia posted double digit growth in the year, supported by the opening of the New Generation Store in Melbourne.
Latin America’s turnover went to CHF 1,617.0 million in 2018 versus CHF 1,694.0 million one year earlier. Organic growth for the year stood at – 3.5 %. Most operations in South America faced challenging conditions driven by a strong devaluation of local currencies. Brazil and Argentina were the most impacted locations with the Brazilian Real and the Argentinean Peso devaluing 15 % and 70 % respectively in the year. Other operations in South America also saw a slowdown in performance as a knock-on effect from the two key countries above, especially in the second half of the year.
Central America and Caribbean had a good performance along the year, further supported by a strong development of the cruise business, where we started operations on board of a number of new ships.
Turnover in North America reached CHF 1,884.4 million in 2018 from CHF 1,771.5 million in the previous year. The Division delivered a good organic growth, totaling 6.8 % in 2018.
This performance was driven by a combination of passenger growth and new openings along the year. The duty-paid concept delivered a solid performance throughout the year. Growth in the duty-free operations was resilient as well until the third quarter. During Q4 2018, organic growth slowed slightly down to 4.7 %, mainly driven by the change in the Chinese passenger profile resulting in a lower spending and impacting the duty-free business in the region.
RESILIENT FINANCIALS IN A VOLATILE YEAR
Gross profit grew by 4.4 % and reached CHF 5,195.7 million in 2018 versus CHF 4,978.6 million in 2017. Gross margin improved by 40 basis points, which comes partly from a mix effect and mainly as a result of further renegotiations of terms and conditions with local suppliers, supported by a contribution from the acceleration of several brand plan initiatives, resulting either in better terms or higher compensation from suppliers.
Selling expenses, which include concession fees, reached CHF 2,580.5 million in 2018 from CHF 2,430 million in 2017. As a percentage of turnover, they went to 29.7%, from 29.0% in 2017. About one third of the increase is due to the effect of the minimum annual guarantee of the Spanish contracts and another 10 basis points due to new operations outside the airport channel.
Personnel and general expenses
Personnel expenses reached CHF 1,175.2 million in 2018 versus CHF 1,135.0 million one year earlier. As a percentage of turnover they were flat, reaching 13.5 % in 2018.
General expenses stood at CHF 403.5 million in the year to December from CHF 404.8 million in 2017. Measured as a percentage of turnover, it was 4.6 %, 20 basis points lower than in 2017.
EBITDA grew by 3.3 % and stood at CHF 1,040.3 million (CHF 1,007.1 million in 2017). EBITDA margin was 12.0 % in 2018, the same level seen in 2017.
Depreciation, amortization, impairment and linearization
Depreciation reached CHF 202.3 million in 2018, compared to CHF 158.9 million in 2017. Amortization and impairment stood at CHF 369.6 million in 2018, compared to the CHF 423.9 million reported in 2017. The amount in 2017 includes CHF 64.7 million related to the impairment charges.
Linearization amounted to CHF – 47.7 million in 2018. Linearization is a non-cash item related to the Spanish business and originates from the difference between the average minimum guarantee (MAG) over the full concession period and the effective MAG payable in the period. This item also includes the reduction in concession payments granted based on an upfront payment (prepaid lease) related to the Spanish contracts.
EBIT went to CHF 371.4 million in 2018 from CHF 418.7 million in the last year. Other operational result (net) was CHF – 49.3 million in 2018, mainly due to costs related to openings and closings of operations. In 2017, other operational result was positive CHF 53.3 million, mainly related to the release of provisions.
Financial result, net, reached CHF 137.2 million in 2018 from CHF 216.8 million in 2017. The improvement of CHF 79.6 million is due to the refinancing concluded in Q4 2017, lower debt levels in 2018 and refinancing related one-off charges in 2017 of CHF 41.6 million.
Income tax reached CHF 98.8 million in 2018, versus CHF 91.0 million in 2017. The impact from deferred tax income was slightly lower in 2018, totaling CHF 27.1 million compared to CHF 29.2 million in 2017.
Net earnings reached CHF 135.4 million, 22.1 % higher compared to 2017. Net Earnings to equity holders were CHF 71.8 million in 2018, compared to CHF 56.8 million seen in 2017.
Cash earnings, which add back acquisition-related amortization, reached CHF 379.2 million in 2018 versus CHF 367.9 million in 2017. Cash EPS in 2018 grew by 6.9 % and reached CHF 7.31, versus CHF 6.84 in 2017.
Cash flow and debt
Free cash flow before interest and minorities reached CHF 617.1 million in 2018, compared to CHF 467.0 million in 2017. Apart from the EBITDA generation, net working capital management led it to only a slight negative of CHF 4.1 million, with Capex further reduced to CHF 251.1 million in 2018 from CHF 283.5 million in 2017, now standing at 2.9 % of turnover and comparing to 3.4 % a year earlier.
Equity free cash flow reached CHF 370.8 million in 2018, almost double of the CHF 187.8 million reported in 2017. Besides the growth in free cash flow, the reduction in interest costs connected to the refinancing executed in 2017, contributed to the result.
In terms of capital structure, we focused on cash generation and deleveraging since the acquisition of WDF in 2015. In 2018, we continued to reduce net debt to CHF 3,286.1 million at the end of December 2018 compared to CHF 3,686.9 million one year earlier. Our main covenant, net debt / adjusted EBITDA, stood at 3.20x as per December 31, 2018, thus leaving a comfortable headroom to the agreed maximum threshold of 4.0x.
A LOT DONE IN 2018; MORE TO COME IN 2019
In 2018, we reached a number of milestones. From a financial perspective, we showcased for the first time the true cash generation potential of the company, with an equity free cash flow of CHF 370.8 million. On the operational side, we finalized the implementation of our new Business Operating Model (BOM) in 2018. 2018 concludes an important era for Dufry: in the last years we focused to integrate two large acquisitions, to generate synergies and to adapt our organization, processes and systems to benefit from the enlarged size as well as our position as industry leader. As a result, we improved our financial performance again, strengthened the balance sheet, extended our maturity profile, reduced interest costs, and reverted back to our target leverage.
With the conclusion of the BOM, the strong cash flow generation and the balance sheet being in good shape, we are now in a strong position for further development going forward. The deployment of the digital strategy and our retail skills will create new opportunities to grow existing businesses and to win new contracts and we can also look again at external growth with small and mid-sized acquisitions. At the same time, we will continue to return cash to our shareholders via a dividend payment.
In 2019, we will implement the new lease accounting standard IFRS 16, which in the case of Dufry will have a significant impact on the presentation of its financials. Due to the capitalization of fixed lease and concession components, Dufry will adapt the structure of its financials, and especially the income statement. Dufry’s cash flow is the least impacted by the change, therefore being the better way of measuring performance. Dufry’s main KPI’s therefore will include: organic growth, free cash flow and equity free cash flow.
Fundamentally positive outlook
We have seen an ongoing improvement of our sales performance in the first weeks of the year, which confirms a positive outlook for the 2019 business year, although there is overall low short-term visibility for the global political and economic environment. Moreover, traveling continues to be a mega trend long-term and in that context travel retail remains an attractive sector.
I would like to thank our shareholders, bondholders, banks, analysts and key advisors for their trust in Dufry and their support throughout the year to contribute to Dufry’s success.
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