Dufry AG
Q4 2020 Earnings Call Transcript

Published: 9 Mar 2021

Operator:

Ladies and gentlemen, welcome to the Dufry's Full Year Results 2020 Conference Call and Live Webcast. I am Alice, the Chorus Call operator. And the conference is being recorded. 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.
Julián Díaz:

Thank you, operator. Welcome to Dufry's Full Year Results Presentation. There are, Julián Díaz, Dufry's CEO; and Yves Gerster, CFO.
Yves Gerster:

Thank you, Julián, and welcome also from my side to today's conference call. Let me please start with some personal remarks before turning to the financial summary. I am convinced that you are not surprised to hear that the 2020 events were completely unexpected. What started as a local disruption became the perfect storm. Julián already talked about the various initiatives we implemented, those reached from taking immediate actions and control costs and cash, to short and midterm financing initiatives, implementing a new organizational setup, engaging with new and long-standing shareholders, as well as initiating projects for organic growth during and beyond the recovery. This brings me to the second development, I would not have expected at the beginning of 2020. The crisis has resulted in changes, which go way beyond surviving the next month. We fundamentally transformed the whole organization on all levels. In this regard, the crisis allowed us to focus on organizational change and we took this chance to act fast and decisively. For me, most surprising, at the same time most rewarding, was the dedication, commitment and support within the different teams.
Julián Díaz:

Thank you, Yves. Please, let's move to Page 26. We have here the global travel passenger recovery forecast. I think concern on 2021 passengers still obviously has to be said that visibility is very strong. And project between minus 24% and minus 49% compared with 2019. Different data providers predict different recovery levels from 2022 to 2024. And for the year 2029 -- sorry, '21 compared with 2019, we can see in this column, the different projections by institution. What we have seen, and this is a repeated event, following the announcements of governments lifting restrictions, what we expect is a resuming of travel, especially domestic and interregional travel, by the end of Q2 and Q3 onwards. The long duration experience is what happened with specific examples that we have with the U.K. and other countries. So in a sort of bookings, and this is happening today, when restrictions are listed or they are in the process to be lifted. I think if we move to Page 27, what we have here is the different scenarios that I mentioned at the beginning of my presentation. The situation is still with very limited visibility. We cannot provide guidance again because, obviously, there is not any specific, obviously, support for that. But we are going to approach at the beginning, especially of this year, again, provide turnover scenarios and the latest sensitivity analysis on expenses and cash consumption. We are aligned with estimates from industry and industry associations, and applied 2 scenarios, minus -- for 2021, minus 40% and minus 55%. We have 2 columns. On the left side, minus 40%, and the other one is minus 55%. Sensitivity on expenses is also clear here. What we have tried with concession fees is to put the pre-IFRS 16 in order to provide an information regarding what is the impact that we expect in terms of concession fees when the drop of sales is minus 40% and minus 55%. The other 2 ones, personnel expenses and other expenses, as we said and repeated, are basically starting with a CHF 400 million sustainable saving, CHF 285 million for personnel expenses and CHF 150 million for other expenses. There is still a set of initiatives that we have in order to protect the company in case the situation is not going in this range of performance. In terms of CapEx, we have also projected 2 scenarios, CHF 160 million in minus 40% and CHF 130 million and minus 55%, regarding the average cash consumption or cash per month consumption. In the first case, in minus 40%, we are expecting that full year 2021, we could reach breakeven due to the savings implemented with 2 different parts. The first half, minus CHF 50 million per month; the second part, around plus CHF 50 million per month. In terms of minus 55%, what we are expecting, especially with the trend today in half year, is minus CHF 60 million per month during half 1, and slightly negative minus 10% per month during the second half, with a total cash consumption per month or cash burn per month of CHF 35 million. Through the, obviously, all the restrictions and through the savings of this CHF 400 million, we expect to recover our cash flow levels base in 2019 faster than our turnover, but it will depend obviously on the evolution of 2021. If we move to Page number 28, reopenings and situation of reopenings. Performance improved from -- obviously, from the middle of June, July, and to middle of August last year through the re-initiation of new -- due to the re-initiation of new restrictions. Sales growth, resilient on a low but relatively stable between middle to high 70s compared with 2019. And this has been repeated over the past month. It's independently of the importance of the restrictions initiatives, the company is quite resilient at this level. Sales performance improved in December and January due to the holidays and some leisure travel. But especially visiting family and friends, as well obviously as reopening in areas like Central and South America. February, and most important the trends in February, as you see there, is minus 78%. And there are 2 aspects that I would like to really remark. One is the demand of travel retail resume fast once the restrictions are lifted. And the second one is performance. Performance driven by easing of containment measures is also gradually improving. And the graph here shows, obviously, the evolution in general terms every week improve. If we move to Page 29, we have also here the number of shops that we are planning to reopen. Global network and the diversified portfolio mitigate effects of some re-closings with outlook trending to our openings and obviously increasing number of shops and sales capacity. What we are expecting is by the end of March, 60% of the shops that we are operating will be reopened, representing around 65% and of sales capacity. In any case, we go step by step. We continue to align opening days and hours, number of staff, shop categories and assortment to passengers' evolution and profiles per location. If we move to Page 30, a couple of, obviously, slides of information that could be useful. Customer insight is an integrable part for commercial approach and operations. We do a lot of research, and we continue through 2020 to assure customer behaviors and preferences to supply setup and obviously offerings accordingly to the operations. On the left side, I think there are a couple of remarks that could be very important. This research was done in June 2020 and in January 2021. When you ask the question, if the customers will engage the same or more with different airport activities, 92%, 91%, depending on the one that you choose, still is thinking that duty-free will be a priority. And regarding the activities that probably they are more afraid of, when you try to obviously discover what are the concerns and what are the most difficult initiatives that they may think about, there are 2 aspects that I think are relevant, and we are using also, of course, in the development of the shops opening. 88% is convinced that they need to pay with credit card or mobile payments, and 83% stay away from crowded areas. Those are obviously informations that are using the new operations that we reopened during 2021. On the right side, significant to these activities done from security control and until they board, most travelers keep, obviously, thinking duty-free as a buying destination, a preferred service compared with all the services during the customer journey. And there is not an evidence. And I want to remind that there is no one single evidence that free WiFi or smartphones affect purchasing behaviors, and we asked this question. Shopping in duty-free also in the second part. It's a main service with customers consider to spend more time around the airport. If 60% -- and also 60% of our customers consider that duty-free prices are cheaper compared with 2 years ago. I think the perception in the customers traveling so far remains very positive. Finally, we are also gathering insights into product preferences, purchasing motivations or value perception, and implement it as a part of the commercial offer for this reopening phase. The elevated of passengers -- spend per passenger and average transaction value, sales per ticket, gives us the confidence that with the reopening and with the speed of the reopening, we will recover the business as soon as possible. Let's move to Page 31. This is the company plan to maximize in the shortest period of time, the value creation and some examples about capital allocation. There are 5 key pillars we would like to present. On the left side, from the left to the right, we are continuing, and it's important to remind that main priority still is obviously a disciplined cost approach and cash flow management. To control the Capex, to control the OpEx, to control the personnel expenses remains main priorities in 2021. And these priorities are aligned with the reopening phases in the different countries. The second one is protect liquidity and -- protect liquidity not in the general terms, total liquidity with the specific initiatives due to the limited visibility of the recovery. Currently, we don't have a dividend payment, and this will be subject, as is obvious, with a condition to the initiation and depending on the recovery trajectory. As also mentioned by Yves, we have already started the renegotiation process for refinancing in 2021 and '22 maturities. If we move to drive growth, what is the meaning of drive growth? I think there are 2 aspects here. One is reinventing operations to maximize the value of current portfolios with 3 areas
Operator:

The first question comes from the line of Jörn Iffert with UBS.
Jörn Iffert:

The first one would be, please, on digitalization. I mean, with your cooperation with Alibaba, can you give us 1 or 2 examples what is in your project pipeline here linked to digitalization which can really drive your revenues over the medium term? Second question would be, please, on the gross profit margin. You highlighted there's a higher average ticket spend at the moment in the shop, but you lowered your price points. Do you see the risk that due to the accelerating online retail trends we have seen due to COVID-19, your price points are lower for longer? And the last question would be, please, on your scenarios which are very helpful. When sales are down 40%, you said for the full year, you had around equity free cash flow breakeven. I did a quick back-on-the-envelope calculation. Can you help me here? Is there any cash inflow coming from net working capital or deferred concession payments, which will fall into '22?
Julián Díaz:

Thank you, Jörn. Yves, let me answer the first 2 questions, and then I will pass to you. Regarding the digital projects with Alibaba, the scope of the collaboration is already defined. And both teams, Alibaba and Dufry, are developing several initiatives as follows. The first one is an assessment by Alibaba about what is the digital capabilities that we need to fulfill or we need to complement within the current setup of IT in Dufry. And this is coming from, obviously, hardware, software and ways of using the technology. This is our -- this is already one -- obviously, is a basic starting point. For them, we have been developing digital over the past 4 or 5 years. And the next step that is happening today that was planned, in any case, but with Alibaba, we have a great support. The second one, I think this is probably the most -- the second and third one are the most effective in terms of how the business is going to be impacted. In the first case is we want to boost the digital marketing. The digital marketing means is how to use the data for understanding better the passengers' evolution and also how to engage with the customers even before the challenge. And this is something that, historically, as you know, we have been -- we have commented on that in the past. We have been very concerned about. Because when you travel, you can travel 4 or 5x per year, but to engage with somebody that is going to travel in 5 months, it's very difficult because finally, you need to be engaged with the customers in the moment that they go through the airport or they are planning to travel. This digital move is basically talking about the information and the data that is collected by both organizations will be very useful, not only for Asian customers, but will be for everybody. For example, if -- when the customer is going to travel, what are the plans they have in terms of destination, what is the timing they have when they go through the airport. I think all these initiatives are dedicated and addressed to increase the spend per passenger. And as a consequence, better explaining, first of all, the penetration rate, the spend per ticket and the spend per passenger. And the second group of initiatives is how to really step forward in the digitalization of what we identify as a smart shop. A smart shop is a reality, it's not a situation where we are obviously trying to invent something new. It's using technology how to really attract the passengers in China so and how to increase the penetration. For example, this is something that also, I think I commented on in some conversations we had, is -- the idea is that the shop stand-alone will contact with the passengers adapted by the system, holding the right application or other applications that we are also using or we want to use in order to forward these specific passengers promotions and/or discounts or offers based in the database that we have been building over the years. These 2 areas are very commercial and very specific. How it is going to impact the company in 2021? It's very early to say. But I think in terms of what we try is increase the like-for-like in all the locations where we have been operating for years. Then there are 2 other areas where probably -- 3 areas where we are talking in a second phase. The first one is digitalization of the supply chain. As you know, we are a global company, we deal with inventories globally. We have 4 distribution centers. And the idea is to use the digital technology, especially the use of data for improving the efficiency and the deliveries. This is also impacting -- this will also impact the sales because we are talking about how to reduce as much as possible the out-of-stock situation in a global company, operating global inventories. And then 2 other projects that are still confidential that I prefer to keep it. The second one is gross profit margin. Gross profit margin this year has been impacted for different, obvious and nonobvious reasons. Let me explain this drop of 600 basis points. An important part of this, 3.5%, is inventory liquidation and obsolescence, for example, chocolate, for example passing and selling tobacco with obsolescence -- due to the obsolescence policy in the company, then we need to provide provisions. And this is one-off and it's not going to be repeated. The second part is around 3% or 3.1% of total. There are 2 aspects here. One is the mix of food sale because the retail part dropped significantly. This is impacting around 1.5% of the margin in the wholesale mix. But the only one that is probably the second part that I want to say is the discounts on promotions in 2020 only represent 1.6% of the total margin. Meaning commercial initiatives dedicated to implement or drive sales were 1.6%. There are then small differences with duties and freight. Especially freight, this is higher because the lowest level of volumes that we ever had happened in 2020, and the use of transportation increased percentage due to this inefficiency. But this is also something temporary. Regarding the second part of the question, in 2021. And again, Jörn, we are talking about 2021 with the visibility we have today. The margin will not recover the level of 2019. It will be probably, I don't know, between 100 and 200 basis points below, depending on the mix of the wholesale, again, because we are now doing more wholesale. But from the commercial point of view, at least they will be between 100 and 200, depending how the recovery is happening. I cannot confirm anything, but the recovery of the margin is possible because conditions have not changed. And if this is the situation, probably the margin will be recovered in 2022. This is regarding your first 2 questions. Regarding the third question, Yves?
Yves Gerster:

Thank you, Julián. So look, Jörn, in respect to the third question you have, the cash flow in respect to net working capital, the scenarios we have provided contain a certain normalization of the net working capital. So yes, that's correct. And then in respect to the question about deferral of concessions, no, this is not the case. So we haven't taken into account any deferral of concessions in that regard. It's actually the opposite. So what you see there is the concessions which we plan to pay, and we have not taken into account any MAG relief for the year 2021 which go beyond what has already been granted by the landlord. So from that perspective, it's a prudent approach.
Operator:

The next question comes from the line of David Holmes with Bank of America.
David Holmes:

Just 2 questions. On your cash scenarios for the first half of the year, Yves, I think you mentioned you're expecting that to be noted in Q1. Can you give us any indication of your expectation of the monthly cash burn in Q1 to start with? And then the second thing that I wanted to ask you was you mentioned earlier you don't expect to see a medium-term catch-up in CapEx. So just wondering if you found some efficiencies in the CapEx numbers going forward. Those are my 2 questions.
Yves Gerster:

Look, in respect to the first question -- thank you very much for the questions. In respect to the first one, we cannot go as granular as providing monthly or quarterly cash consumptions. Obviously, as you know, if you defer a payment by a couple of days or an inflow happens a couple of days earlier or later, that has obviously some disruptions on the picture. What I can tell you is that for the first half, in the first scenario, the minus 40%, we assume that we have a monthly cash burn of CHF 50 million. And for the second scenario, the minus 55% scenario, of CHF 60 million in the first half in average per month. Having said that, you can assume that the first quarter, Q1, due to the seasonality of the business, the cash burn is higher than in the second half -- sorry, than in the second quarter. So from that perspective, you will see a higher cash outflow in Q1 2021 than Q2 2021. But that's normal. Nothing unusual. Then to the second part, the catch-up in CapEx. Look, there, if you look back or if you remember, that already during 2019, i.e., before the crisis, I always mentioned that the historical CapEx level of 3% to 3.5% per year in average does not hold through anymore. And that my assumption is that it is slightly below the 3%, i.e., between 2.5% and 3%. Now yes, we have obviously optimized a little bit, so you can assume that going forward, the CapEx level will be short of the 3% we have communicated before.
Operator:

The next question comes from the line of Jaafar Mestari with Exane BNP Paribas.
Jaafar Mestari:

I've got 3 questions, if that's okay. Firstly, just coming back on that cash burn for H1, I appreciate the exact quarterly sequence is difficult to estimate. But maybe looking at the type of outflows you're facing in H1 across your guidance, we're looking at a total to CHF 300 million to CHF 360 million outflow for H1. Are you able to break this down between what should be ongoing operating cash burn and then separately the more one-off payments in nature, like the true-ups on the minimal guaranteed rents, for example, that come out around Q1, if I'm correct? And secondly -- yes, please...
Yves Gerster:

Please, please go ahead. Sorry, I didn't want to interrupt you.
Jaafar Mestari:

And secondly, still on free cash flow, just big picture. Before COVID, you had a few years in a row where you delivered equity free cash flow between CHF 350 million and CHF 400 million. Any major changes to the business model, to the assets, to the economics of certain contracts or relationships that we should have in mind that would make this historical performance not a good indicator of future performance if we assume you return to peak profitability? And just lastly, on the minimum guarantees, we've seen the public proposals that AENA has made to all its retail partners. If I'm correct, as of February, when they presented it, it looks like you had not accepted the proposal yet. So just to clarify what's included in your '21 guidance with regards to that and what's the range of outcomes, please?
Yves Gerster:

Perfect. Thank you very much for your questions. I will start with the first 2 ones, and then hand over to Julián for the third one. In respect to the cash burn for the first half or the consumption there. So look, all the cash flows we have reflected there are ordinary business. So there is not any specific one-offs in that regard. You mentioned the concession fees or the true-ups. So look, let me repeat on how that works. So there are concessions where we pay the true-up after a quarter. So it's quarterly true-ups. In some other ones, it's annual true-ups. So there is no significant cash outflow to be assumed for the first half of 2021 in respect to minimum annual guarantees. Also, you need to bear in mind that we have achieved a waiver for around CHF 551 million of minimum annual guarantees already for 2020. So from that perspective, there is no significant cash flow included in the CHF 300 million to CHF 360 million in respect to MAG reliefs, which goes beyond the normal ordinary business in that sense. In respect to the free cash flow or the equity free cash flow, you mentioned the CHF 350 million to CHF 400 million and what potentially could have changed materially. Yes, indeed, there is obviously the restructuring and the organization we did in 2020, which will lead to sustainable savings of around CHF 400 million, of which CHF 280 million are coming from personnel expenses savings and around CHF 130 million from general expenses savings. So if you take that into account, leaving any tax impact of the higher profitability and some other effects aside, yes, the performance or the free cash flow we would generate once the business has recovered, is significantly higher than pre-crisis.
Jaafar Mestari:

Anything major on the negative side?
Yves Gerster:

No, there is nothing major on the negative side. Obviously, you can assume that there are certain small pressures on one of the other lines, especially taxes. As I've mentioned before, if we are generating CHF 280 million of personnel expense savings and CHF 130 million of general expense savings, you can assume that profitability of the group is higher. And therefore, there's a certain tax effect on that additional profitability. But besides of that, no, nothing material.
Julián Díaz:

Regarding the remarks, and especially, the question was regarding Spain in these projections of cash bond is the normal rent. We have not considered any discounts. Regarding the negotiation process, it's still ongoing. I don't see that this is final at this stage of the process. We can still negotiate basically in -- due to the situation of the passengers in Spain.
Tom Gibney:

And just a follow-up on that, it looks like what AENA is proposing is the formula that applies to every single retailer. So I appreciate it will end up being maybe a bit more at least...
Julián Díaz:

I think it's better that I say one thing is we don't comment on specific concessions. Regarding AENA, the cash flows that you have seen is already considered in the full payment. And the reality is that until we know exactly where we land, I cannot comment on that.
Operator:

The next question comes from the line of Jon Cox with Kepler.
Jon Cox:

Just a couple of questions. When you talk about this returning to 2019 equity free cash flow at an adjusted EBIT. I'm just wondering what level would the sales need to be to get there? Is it like you now assume that you can get that with a 20% decline in revenue versus 2019? Or was that a 10% decline in that, just to give us an idea of where you're coming from? And are you saying then that, basically, if you manage to get -- if we get back to 2020 -- sorry, 2019 sales figures in the next few years, because of that CHF 400 million sort of cost block you have moved, then in theory you would be -- well, it's almost doubling what you were in 2019 at the equity free cash flow. Is that your expectations going forward, whenever that could be 5, 6 years or whatever it may be? And then just on the -- you mentioned everything you're doing with the rentals. And obviously, it's more accounting. But what will that do to that amortization line, which you've had a big chunk there is coming down? I wonder where you see that line would be in the medium term? And then just a final question. I guess, and maybe I didn't catch it, but talking about lease turnover scenarios. You've given us the negative in H1 and looking better at H2, and you've got, say, down 40% and down 55%. What are the sort of half year scenarios there? Because if you've given us down CHF 50 million in H1 with minus 40%, I'm guessing it's kind of -- you're thinking maybe minus 50% or so in H1 and then minus 30% in H2. Is that the way we should look at it? And then for the other one, maybe minus 60% in H1 and then minus 40% in H2. Is that your thinking on that?
Yves Gerster:

Thank you very much for your question. So look, in respect to the equity free cash flow and when we reach, again, a similar level then in 2019, with the cost savings we have now implemented, a good proxy is probably around 1/3, 30% of drop in sales to reach a similar level. Then in respect to the second question, if we were to double the equity free cash flow, obviously, once we have recovered sales, not entirely due to what I have mentioned before. So look, again, if there is a higher savings in respect to personnel expenses or there's savings in respect to personnel expenses and also general expenses, obviously, you have a higher profitability in respect to -- or higher EBT level, which results in some tax outflows in that regard. So what you can assume is that probably around 2/3 of those savings will end up in the equity free cash flow. Then with respect to the amortization, I'm not sure if I understood the question right. If you were talking about the impairments we did in 2020 then the answer is, yes, that will lead to substantial lower impairments or amortization -- sorry, amortizations in future periods, which are obviously significantly lower than in 2020, leading to a higher profitability in future periods. And in respect to half year 1 and half year 2, you're absolutely right. I don't have the information right in front of me. I know it by heart, but you're correct. So in the full year scenario, where we assume a drop in sales of 40%, the first half year is probably, give or take, in -- at around 65% drop in sales, and the second half of the year is obviously then slightly better than the 40%, giving a full year effect of minus 40%.
Operator:

The next question comes from the line of Tom Gibney with BNP Paribas.
Tom Gibney:

I just wondered if you could comment on your plans with respect to your November '22 term loan maturities? And would you consider doing a bond refinancing for those?
Yves Gerster:

Look, in respect to the refinancing, as we have mentioned before, we have started the discussions. We are currently evaluating and fine-tuning different options. At this stage, I cannot tell you exactly what the plans are. We will only disclose that, obviously, once we approach the market. But what I can tell you is that the discussions are advanced, and we have a very clear plan and we will execute that in due course.
Operator:

The next question comes from the line of Gian Marco Werro with Zürcher Kantonalbank.
Gian Werro:

First one on the JV with Alibaba and also the successful opening in Hainan. So from the press release, I was not reading anything about Alibaba being also involved. Now in the presentation on Slide 14, you also included that Alibaba is also involved in the cooperation with the Hainan Development Holding and the opening there. So do I understand then right that the sales that you achieved there is not directly affecting your sales, it's more like an income from minorities as you hold a minority share in this JV? That's the first one. Second one is in relation to your planned expansion in food and beverage in the U.S. You again mentioned this target now. But did you also cut somehow your expectation in relation to expansion plans in this category now for even the midterm? And then a third question is really corporate governance question also. So what I just observed is that you -- or you reduced your headcount by over 1/3 now year-over-year. And at the same time, I just see in the compensation of the Executive Committee that you're paying out a special bonus exception -- especially for exceptional performance. And for the whole Executive Board, this accounts for over CHF 11 million. Just don't get me wrong. I really have high respect for your efforts, but it's also difficult for me to understand how you derive to the amount of the special bonus. Maybe you can also give us some more light there, please.
Julián Díaz:

Yes. Thank you for the questions. So let me start with the first one, the joint venture in Hainan. The joint venture in Hainan has been, since the beginning, a joint venture between the 3 parties Alibaba, HDH and Dufry. As you know, we cannot invest in duty-free in China. Still we cannot invest as Dufry as international company. International companies are not authorized even to be investors or to be involved directly in the investment. As a consequence, what we are doing at this time is to provide services to the operation through 3 different levels. One will be intercompany charges, the other one will be management fees and the other one will be, obviously, income from the joint venture company, or dividend from the joint venture company with Alibaba. Alibaba is an important partner, probably the most important partner. But from the communication point of view, we have been, altogether, the 3 partners, thinking that in terms of the relationship with the brands, is more relevant that Dufry that has obviously these skills and this value in joint venture should lead the external communication. Regarding the plans for food and beverage in the U.S. and in expanding the business, I think we are specifically in that situation and now more -- even more important. And you have heard this from us many times, that diversification is one of the main areas where Dufry super step forward. You can do it in the airport retail. You can do it in the airport environment. You can do it outside the airport environment. And the most obvious, I would say, in terms of development in expanding the deep diversification is probably food and beverage. If food and beverage is a business where we are not familiar with, as you know, we have a significant volume of sales generated to the grab and go in the U.S. And internationally, we have also some restaurants worldwide. Restaurants, obviously, fast food restaurants, not sitting-down restaurants. One of the alternatives in order to synergize the presence in the different locations through relationship with landlords, number one. Number two, synergies that could also be created due to the structures we have in the different regions or globally could be an identification of synergies and at the same time, diversification and the use of cash in a very efficient way. When and how, this is obviously depending on the circumstances. We are not talking about anything specific. What we are talking about is within the diversification and due to the collapse of the -- specially cruise lines, we believe that food and beverage within the environment of an airport could be a very good allocation of capital for us. And the third one regarding the governance and the compensation. I think just for reminding how the process of compensation happens is normally every year, the Remuneration Committee prepares the targets for the company in a regular basis and in a non-regular basis. When we started to discuss about compensation in 2020, obviously, we were in the middle -- absolutely in the middle of the collapse. We didn't have any shops open. The reality of the cash was very limited. We were under significant stress. And the idea, run by the Remuneration Committee was to create a set of initiatives with 2 targets. Number one is let's try to do as much as possible in terms of the cost structure reducing, especially, the most important lines of the cost structure. In terms of the special bonus, there were 2
Gian Werro:

Okay. And the absolute amount of CHF 11 million, how do you derive on that? Because just from my perspective, I think what you did is really tremendous, but it was also part of your job.
Yves Gerster:

Yes, obviously, everything is part of our job, everything, from the top to the bottom. But the problem -- not the problem, sorry, it's not a problem. The target is always the same. How you could identify what is really critical in the life of anybody and then the professional life of anybody that happened in this time. And you may -- I accept that you may consider it's too much. It could be -- I don't know from your point of view, but I think what happened, CHF 1.3 billion reduction in COGS structure in a company in a period of time of 9 months, I think it's a very great achievement. And I don't like to talk about great achievements, believe me. I only talk about different things. But in this case, it's a one-off situation that has been compensated in relation with the size of the program.
Operator:

Your next question comes from the line of Rebecca McClellan with Santander.
Rebecca McClellan:

Just a couple of questions from me. Firstly, you talked about 60% sales capacity currently open with the aim of sort of 65% by the end of March. If you had to look at that 60% now, what's its hours traded versus a normalized sort of trading schedule?
Julián Díaz:

Sorry, Rebecca, I cannot understand the question. Regarding what we are performing now with a normalized performance?
Rebecca McClellan:

In terms of the actual hours that the shops are open, so 60% of sales.
Julián Díaz:

The shops are opened normally between 60% and 70% of the time. The shops that are open, normally are open between 60% and 70% of the time.
Rebecca McClellan:

Okay. I mean -- sorry?
Julián Díaz:

In a normal situation, if you consider normal situation 100% and sometimes they open 24 hours, the shops that are open so far are open between 50% and 70% of the time, independently of the number of passengers that we need to obviously welcome any passenger going through.
Rebecca McClellan:

Ye's. No, of course. And by the end of March, do you expect that time component to increase?
Julián Díaz:

In March? No. By the end of March, I don't think so. I think if the situation is in the way we think it will gradually normalize, I think we are talking about here beginning of May. And especially when the U.K. will -- if theoretically, will reopen on May 17 that is announced by the government, I think this will be a driver in terms of intensive capital, human capital in the shops.
Rebecca McClellan:

Okay. And the end of March, 65%, does that incorporate any major change in the U.K.? How much is open in the U.K. currently?
Julián Díaz:

No, by end of March, nothing. What it is now 5% or 4% of the total. I think the plan for the U.K. is going to be with the reopening. And probably, I am not sure now, but beginning of May, the shops in the U.K. will start to reopen.
Rebecca McClellan:

Okay. And then we should see an increase in the hours traded as well, I suppose?
Julián Díaz:

Yes, exactly. Yes.
Rebecca McClellan:

And my second question is more about sort of like going forward, talking about sort of normalized equity free cash flow, suddenly things potentially optimistically look quite good. And so for the sake of the market, I mean pre-COVID, you sort of had interest in Asia and sort of building up footprint in Asia. Has there been any major change in assets on the market for sale? And have you seen any major change there which we should be following?
Julián Díaz:

Well, there is one, Rebecca, that probably you remember, is our new operation in Istanbul Sabiha, probably the most relevant so far. But apart of that, not yet. Anything else, I don't think so.
Operator:

Next question comes from the line of Iva Horcicova with Napier Park Global Capital.
Iva Horcicova:

Two questions from my side. And the first one is actually following up on my colleague, just asked the question about the expansion to Asia. Does that relate to mainly to sort of all the initiatives you do with Alibaba in China? Or do you also expect a significant growth in the other parts of Asia? And if so, could you help me to sort of understand the magnitude of your growth? Because historically, obviously, Asia was sort of underrepresented in your revenue split. So in the medium term, should we expect that Asia will take sort of more prominent role in your revenue split and will be more in line with some of the other regions? And the second question is for you, Yves. Coming back to the impairment, which you recognized in 2020, could you comment a little bit more to what this impairment relates to and then quantify a little bit how much lower the amortization depreciation will be going forward?
Julián Díaz:

Regarding the first part of -- the first question, Iva, I think the expansion in Asia for us remains -- and I think this is also in the presentation, remains priority number 1 in we need to rethink. And the downtown is a business that we have already developed in -- especially in Macau. And I think, in Malaysia, we have also downtown shops. And what we want is not to just develop the retail, what we want to develop is the online retail in Asia, and for -- something similar to. That, Alibaba is probably the best partner possible in the in the scope of partnerships in Asia. The first step is clear, it is China, China offline and online. But this will have also an impact in the development of the other countries because if everything is normalized, I am not expecting that Chinese will play the relevant role that they have played over the past years in expanding the travel retail business worldwide, especially in Asia. As a consequence, and as you probably know, Chinese were the customers, I think, number 5 or number 4 worldwide. In Asia, we're the number 1 customers, I think it will be critical, the collaboration with Alibaba. As critical as, obviously, we are trying now and this is something that I didn't comment when somebody asked me about the relationship with Alibaba, we are trying to connect the platforms, take platforms and connect platforms in order to reach, obviously, a better engagement with the customers. Is this a significant move in Asia? The answer is yes, with the current portfolio and how to increase the like-for-like in the current portfolio. Second part of the question is if we are going to expand in Asia with Alibaba in terms of the same partnership that we are now doing in China, and this is a different conversation. I think we have not touched this in terms of how to do it. But I think from this perspective, it could be very important if we can create in China, a good test, an example, of how to operate both worlds, online and offline. And obviously, today, it's very early to say if we can grow 5%, 10% or 20% in Asia. Just one comment before the crises. Before the crisis, the possible development in terms of passengers or customers in Asia was the highest in all the regions worldwide. We were talking about 9%, 10% per year. Again, when the traffic will be recovered, maybe it will be recovered in '23 and '24. But for now -- from this moment on, I think the traffic has recovered. May have, again, the same expectation between 9% and 10% per year. But more than that, I cannot say because this is very early, and the development of the strategy is still ongoing.
Yves Gerster:

Thank you very much. In respect to the second part of the question about the impairments done in 2020. So look, if you look at the specific lines where those impairments have been done, then you will see that it's coming mainly in the line of right-of-use assets and concession rights. Both of those lines are subject to regular amortization. So the impairments done in 2020 can be seen as a timing shift. Instead of amortizing it in the future, we have impaired it in 2020. Or put it the other way around, and I think that's really important, as we have done the impairments in 2020, this will lead to a significant lower P&L charge in the future years, and therefore higher profitability in that sense.
Operator:

The next question comes from the line of Edouard Aubin with Morgan Stanley.
Edouard Aubin:

So 2 questions from me. The first one on the competitive landscape. I guess despite the crisis last year, none of the main players in the travel retail space, at least to my knowledge, have gone under. So I was just wondering what your -- if you're expecting some rationalization or consolidation to pick up this year. So that's question number one. Question number two is on ESG as well. As you know, yesterday was the International Women's Day, and I cannot help notice that in your Executive Committee, you have no women. And correct me if I'm wrong, but I think it has been the case ever sent the IPO in 2005. So just wondering why that's the case and how important is kind of promoting diversity for you?
Julián Díaz:

Okay. Thank you for both questions. The number 1 is the competitive landscape has not changed yet. And I think if the question is are you expecting in 2021, will happen something? I will be very brave to say yes, because I don't know, okay? The reality is that the situation is very tough, especially in regions like Asia. But I don't have information in order to confirm any straight questions like that. The second one, ESG, and women participation in the Group Executive Committee. Just let me remind one thing is in the second level of the company below the group Executive Committee, we have more or less around 40% of the group management meeting -- management level that are women. The question regarding the Group Executive Committee is right. We have not had, since the IPO, one single woman in the Group Executive Committee. We obviously consider the situation, but the situation is not just to appoint somebody because we want to appoint somebody, the situation is how to create the base for not discriminating women in any position in the company. And I can promise you one thing. This is happening and it's confirmed, because we want to do it in a proper -- and I hope that we can do it in a proper way very soon because we started around 4 or 5 years ago with a program with the name Women@Dufry. The intention of this program is to really discuss -- mainly this Women@Dufry is a group of executives in the second level of the company. Trying to understand why in the company we don't have positions or we don't have women in positions of the Group's Executive Committee. And the consequence of that is, in my opinion, very promising. We have several in -- today in the succession plan for the Executive Committee, we have around 35% of the total candidates that are women, meaning that within the near future, we will have the opportunity to appoint a woman in the Group Executive Committee. In any case, I accept what you said, I totally agree that this is something that should evolve in the right way and in the right process and we are trying.
Operator:

The next question comes from the line of Yvonne Chow with Nan Fung Trinity.
Yvonne Chow:

Actually, most of my questions have already been asked and answered. I just want to confirm because I think I missed it during the presentation. Can you reconfirm that -- about the 350 basis point write-off on gross margin. Is it 330 basis points on inventory write-off and then 20 basis on promo? Can you clarify that?
Julián Díaz:

Yes, yes. Thank you very much for the question. I will clarify that. In 2020, the 600 basis point more or less that the gross profit margin drop only 1.5% of this has been due to discounts and promotions and especially impacting the commercial margin, all the other ones are due to the circumstances. For example. I mentioned 3.5%, that is due to obsolescence and liquidation of merchandise. And I put as an example, chocolate, for example, worldwide. And the remaining part, the other 1.5% is the mix of wholesale. Wholesale has a lot lower gross profit margin even that productivity or profitability level is a good business. But from the gross profit margin point of view, is very, very different than the retail margin. As a consequence, because last year, we had a significant drop in retail, wholesale had more importance in terms of the mix, and this is more or less due to 1.5%. And then I mentioned a very small amount, 0.3% that is basically due to the, let's say, the less-efficient use of the transportation because volumes drop significantly. And I repeat then 2 things. One is we are not expecting in 2021 the gross profit margin will be recovered -- will be dropped -- will be lower, 100, 200 basis points in 2019, especially due to the evolution of the sales because maybe we have to use also gross profit margin for attracting more people to the shops and being more aggressive in terms of commercial activities. And I also said it's a compare that if everything is recovering in the way that we are talking here 2020 -- 2022 will see probably a recovery of the gross profit margin we had in 2019. I've never -- was 50.2%. This is what I said.
Yvonne Chow:

So 350 basis points for inventory. So actually, the whole impact is 3.5% plus 1.5% plus 0.3% because I think in the -- it was 450.
Julián Díaz:

Yes, it's 3.5% plus 3.1%, plus 0.3%, more or less impact in 2020.
Operator:

Your next question comes from the line of Volker Bosse with Baader Bank.
Volker Bosse:

Volker Bosse with Baader Bank. Three questions from my side. First is for clarification. What are the numbers of outstanding shares at year-end '21 we should calculate with? And the second question is, given all the financial transaction which you successfully placed in the market, could you provide us a potential range of net debt or financial results for 2021? And the third question is on covenants. I understand the covenants are on vacations, so to say, but you also mentioned from September to December, you had a kind of test, it's now 5x net debt to adjusted operating cash flow. Could you clarify that what does mean test? And what is about the covenants going forward? Perhaps I also misunderstood something, but a bit of color on that.
Yves Gerster:

Thank you very much for the questions, Volker. So look, I will answer the 3 questions. For the first one, the average number of shares outstanding is, give or take, 80 million. To the second one, look, we don't give any guidance in that regard. So I cannot give you an outlook for the year 2021, which goes beyond what we have disclosed on the slides with the scenarios it's actually Slide 17 of the full year presentation. And then to the last question in regards to the covenant testing. This is actually the normal covenant testing we used to have in the past, i.e., before the covenant holiday. The only difference for September and December is that instead of having the normal 4.5x testing, it's 5x. So it's a slightly higher threshold in that regard. Having said that, it's important to remember what we discussed during the presentation. We have already approached the banks in regard to the covenants and also in regards to the refinancing. And in that regard, we also address the covenants if need be. So you can assume that over the next couple of weeks and months, we will have the discussions with the group of bank lenders. And if need be, we will address the issue with the covenant thresholds and take required changes if required.
Operator:

Gentlemen, there are no more questions at this time.
Julián Díaz:

Okay. Thank you very much for participating in the call again. I hope next year we could do it in a physical environment. It's always more pleasant and also it's better to see face-to-face. Thank you very much for your support.
Operator:

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. Bye-bye.

Dufry AG Q4 2020 Earnings Call Transcript

Other Dufry AG earnings call transcripts:

Dufry AG
Q4 2020 Earnings Call Transcript