INTERNATIONAL. Dufry Group today reported a +5.8% year-on-year rise in turnover to CHF3,821.3 million (US$3.9 billion). This was driven by an +8.9% surge in Q2 organic growth, which accelerated from the +7.2% achieved in Q1. Most markets performed well, said Dufry, and performance was particularly strong in the UK as well as businesses welcoming Brazilian and Russian travellers; the latter positively impacting the performance in Russia, Greece and Turkey.
The company also said that it was considering an initial public offering of its North American business including both duty free and duty paid travel retail. It noted: “The North American travel retail market differs from Dufry’s other markets in its focus on food & beverage and other specific segments, and an IPO would create strategic flexibility for the North American business to pursue growth opportunities specific to this market.
“Proceeds from an IPO would be used initially to reduce leverage allowing Dufry to reach its target leverage ahead of time. After the IPO, Dufry would retain a majority stake in the business and continue to fully consolidate it. The business would remain an important component of Dufry’s global diversification strategy, and its operations would remain integrated with Dufry Group across all major functions, allowing the North American business to continue to benefit from Dufry’s expertise and scale in the global travel retail industry.”
Dufry maintained its Shop Development Plan for 2017, which foresees the opening and refurbishing of 70,000sq m of space (300 shops), or more than 15% of existing retail space. From January to June Dufry opened 86 shops, which represent close to 14,500sq m of retail space and refurbished close to 13,500sq m across 42 shops. Furthermore, Dufry signed contracts that will add 21,800sq m to the portfolio in the remainder of 2017 and in 2018.
Dufry CEO Julían Díaz said: “The second quarter of 2017 confirmed the positive trends in the business. After three consecutive quarters of positive growth, organic growth reached +8.9% in the second quarter, which is the highest since 2012. Most of our operations performed well, with particularly strong growth in the UK and South America, and most locations seeing good growth.
“2017 has to date been a successful year also in terms of business development. In the first six months of 2017 we have already opened close to 14,500sq m of new space and refurbished close to 13,500sq m of retail space. With respect to the future, we have already signed contracts to open further 21,800sq m of new commercial space in 2017/2018 and we are also currently working with a pipeline of additional opportunities which add to around 35,000sq m. Last but not least, we have just opened two new generation stores in Melbourne and Madrid, which represent important steps for the implementation of our digital strategy.
“At gross profit margin level we have made a considerable step forward as synergies from the WDF acquisition continue to flow through our results, improving our margins as expected. Our focus now is on the implementation of the new Business Operating Model, which will standardize our processes and procedures and which will drive efficiencies in our group. After the definition of the model and initial pilots, the programme is currently being implemented simultaneously in selected operations across divisions and is planned to be completed group-wide by the end of 2018 and expected to generate by then efficiencies in the magnitude of 50 basis points at EBITDA margin level.”
On the possible North American IPO, he said: “The IPO would create significant flexibility to capitalise on trends specific to the North American travel retail market, such as its focus on food & beverage. As North American passenger traffic is increasing, airport authorities are dedicating more commercial space to retail opportunities and adopting a more comprehensive and integrated approach to its development as compared to other regions in the world.
“An IPO would provide the North American business with financial flexibility and a separate focus, enabling it to better take advantage of these growth opportunities. From a group perspective proceeds from an IPO would be used initially to reduce leverage allowing Dufry to reach its target leverage ahead of time. As mentioned in the past, the financial strategy going forward will be based on a combination of capturing growth opportunities as well as returning cash to shareholders.”
He added: “We expect to see good market conditions also in the second half of the year, with the third quarter being the most important period for us. We expect trends to continue in most markets, although some markets will have a higher comparison base in the second half of 2016, such as UK, Brazil and Spain. The third quarter is also the most important for cash generation and deleveraging, which continues to be a focus point of management.
“Dufry’s fundamentals are strong, and our strategy of diversification by geographies and channels puts Dufry in the right position to strongly benefit from the normalized business environment. At Dufry we continue to be strongly committed and working towards a successful year.”
Regional performance
As reported above, turnover reached CHF3,821.3 million in the first half of 2017, a rise of +5.8%, to which organic growth contributed 8.1%, while the translational FX impact was -1.8%, mainly due to the devaluation of the British Pound. Changes in scope were -0.5% related to the former Nuance wholesale business already closed in May 2016.
Southern Europe and Africa
Turnover grew by +4.4% and reached CHF776.6 million in the first half of 2017. Organic growth in the division reached +5.8% in H1 2017, with most operations performing well and reporting good first results from summer destinations in the Mediterranean.
Spain and Portugal have shown a good performance supported by solid passenger growth rates. Positively influenced by Russians, business in Greece and Turkey returned to good growth. In Northern Africa, Morocco also performed very well following the full refurbishment and expansion of the shops in Marrakesh.
UK, Central and Eastern Europe
Turnover reached CHF961.4 million in the year to June, with organic growth strong at +10.1%. The UK continued to post strong results following the Brexit vote in June 2016 and the subsequent devaluation of the British Pound. Russia also performed strongly in the period, while Switzerland and Sweden accelerated growth in the second quarter.
Asia, Middle East and Australia
Turnover stood at CHF370.7 million in the first six months of 2017 with organic growth in the division down -1.5% as turnover of the division was impacted by store closings in India and Sri Lanka. Excluding these closings, performance was positive in most locations in the Middle East. In Asia operations in South Korea, Indonesia, Macau, and Cambodia performed well, while the business in Hong Kong has continued to be challenging, said Dufry. Performance of Melbourne, Australia, was impacted by major refurbishments, which however were completed by the end of the second quarter.
Latin America
Turnover grew by +13.8% to CHF819.6 million in the first half while organic growth in the division reached +12.4% in the same period. In Central America, Mexico, Dominican Republic and Puerto Rico had a good performance. In South America, Brazil continued to post strong growth and also other operations in the region performed well, such as Argentina, Chile, Uruguay and Peru.
North America
Turnover grew to CHF849.5 million from CHF790.1 million in the first half of 2016. Organic growth reached +6.3%, as a result of solid performance in the USA and Canada, in both duty free and duty paid businesses.
WDF synergies
Gross profit margin reached 59.5% in the first half of 2017, improving by 110 basis points from 58.4% in the previous year. The improvement is due to the synergies of the World Duty Free (WDF) integration, which was completed at the end of 2016.
EBITDA reached CHF411.2 million in the year to June, while EBITDA margin stood at 10.8% in the first half of 2017 from 10.6% in HY 2016. While the gross margin improvement supported the EBITDA margin increase, higher concession fees and general expenses partially compensated for it, said Dufry. On the concession fees the main factors were first the increase in the annual minimum guarantees in Spain and second the ramp-up phases in several operations refurbished after the contract renewals, such as Melbourne, and where increased performance will be reflected once the refurbishments are completed.
EBIT almost tripled to CHF90.0 million in the first half. Depreciation stood at CHF40.1 million in the second quarter of 2017 and was stable when compared to Q1 2017. Similarly, amortization remained nearly stable at CHF90.6 million in the second quarter of 2017, from CHF89.1 million in Q1 2017. Linearization (non-cash accounting treatment in regards to Spanish concessions) reached CHF -46.3 million for the half year and CHF -5.3 million for the second quarter. Linearization varies by quarter and due to seasonality the first semester is charged the most.
Net earnings reached CHF-0.9 million for the half year 2017, an improvement of CHF57.6 million versus same period last year. With respect to earnings levels, due to the high seasonality of the business the second half of the year is considerably stronger than the first, noted Dufry. Net earnings to equity holders reached CHF-24.9 million in the first half of 2017, compared to CHF-75.0 million one year earlier.
Cash flow before net working capital grew by +9.5% and reached CHF380.3 million in the first half of 2017. Capex was CHF152.0 million, up from CHF133.3 million in the first half of 2016.
