Dufry turns in a strong 2016 performance as organic growth accelerates and WDF integration is completed

INTERNATIONAL. Dufry Group, the world’s largest travel retailer, posted turnover of CHF7,829.1 million (US$7.75 billion) in 2016, up by +27.5% year-on-year.

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Dufry CEO Julián Díaz: “We accomplished our three main goals: driving organic growth, completing the integration of World Duty Free, and maximising cash flow generation to deleverage.”

From the third quarter, Dufry returned to positive pro-forma organic growth (+1.3% in the period), and saw the trend accelerating in the fourth quarter, with organic growth reaching +5.6%, resulting in full-year organic growth of +1.0%.

Changes in scope, which include the consolidation of World Duty Free, contributed 28.6% to turnover growth, while the foreign exchange translation effect was -0.6%, mainly the result of the weaker British Pound.

EBITDA increased by +29.2% to CHF935.1 million (US$926.4 million), while net earnings bounced back, reaching CHF45.8 million (US$45.3 million) in 2016 compared to CHF-36.9 million a year earlier. Free cash flow reached CHF483.8 million (US$479.3 million), an increase of +43.0% compared to 2015.

Dufry Group CEO Julián Díaz said: “2016 ended up being a successful year for Dufry after a tough start. Throughout the year we focused on and successfully accomplished our three main goals: driving organic growth, completing the integration of World Duty Free, and maximising cash flow generation to deleverage.

“Dufry managed to accelerate organic growth along the year and including World Duty Free organic growth reached +1.0% for the full year 2016. The clear rebound of the business we saw in the last two quarters of 2016 with a +5.6% organic growth in Q4, was driven by our growth initiatives.”

He added: “The global alignment of our operational approach and the extensive refurbishment plan covering over 30,000sq m of retail space in 119 shops not only supported our performance in 2016, but will also be one of our key organic growth drivers in 2017.

“To further accelerate organic growth and to reach under normal conditions a yearly average organic growth of between +5% to +6% going forward, we have developed a “customer focused, digitally driven” strategy approach, which will allow us to drive sales by increasing our penetration rate, the average spend per ticket and the spend per passenger. A key element of this strategy is the intensified use of digital technology to multiply the customer touch-points during the whole travel journey and to improve the customer experience with individualised offers, promotions and services along with an intensified training of our sales force.

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Dufry’s Brazilian business (Rio de Janeiro pictured) bounced back in late 2016, with double-digit growth in the second half

“The integration of World Duty Free has been completed by the end of 2016 ahead of plan. We not only confirm the CHF105 million synergies announced, but we expect now to realise over CHF125 million synergies in total. More than half of the expected synergies are already reflected in the 2016 financials and they include CHF49 million of cost and CHF14 million of gross profit margin synergies. The remaining synergies will build up quarterly in 2017.

“Deleveraging was a priority for 2016. We reduced net debt and leverage in 2016 as expected and this focus on cash generation will also remain a focus for 2017. Despite our focus on cost control and cash generation, we have continued to invest in the ongoing acceleration of organic growth.”

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Dufry key financials for 2016, above and below

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Díaz said: “Another area where we worked heavily was the definition of our new Business Operating Model (BOM), which we completed in 2016 and for which we ran a successful pilot in Mexico. The new business operating model aims at refining our processes, benefitting from best practices and adopting new efficient ways of working to better serve our customers, drive our sales and generate additional efficiencies. Our current estimates suggest that we could generate more than half a percentage point of savings at EBITDA level. The BOM will now be implemented country by country in multiple waves, with completion expected for end 2018.

“The start of 2017 has confirmed the positive trends seen in the second half of 2016. Above all, the return to organic growth seen in the last two quarters in 2016 is continuing. Those markets with significant headwinds in 2016, such as Brazil and Turkey, have started to turn around and we expect a significantly improved performance in those markets in 2017 relative to 2016. We also continue to see a reduction of currency volatility in emerging markets. Thanks to the additional efficiencies we implemented over the past 12 month, our organisation is ready to perform, backed by our solid strategy.

“Positive fundamentals on the global economy and the resilient growth in passenger numbers indicate a positive overall business environment. Combined with our focus on operational improvements and the already signed additional space of 22,000sq m to be opened in 2017 and beyond, we expect a successful year for Dufry.”

Regional results 

Southern Europe and Africa: Turnover reached CHF1,702.3 million in 2016, a +34% surge compared to a year earlier. Organic growth in the division was -2.5% in the full year and +1.6% in the fourth quarter. Spain had a strong year, mainly driven by double-digit growth in the number of passengers visiting the country. In Turkey the business was impacted by the sharp decline in the number of travellers – especially the travel ban for Russians, that was in place from February to August 2016, which hit the business during peak season. Greece held up “relatively well” said Dufry and posted a small decline on sales. Italy also posted a solid performance in the year.

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The UK business turned in a strong second half performance, buoyed by the weaker Pound Sterling; pictured is World Duty Free at Birmingham Airport, where the retailer extended its contract and invested in a new store in 2016

UK, Central and Eastern Europe: Turnover grew to CHF2,088.9 million in the year, compared to CHF1,427.8 million in 2015 (+46%), with organic growth in the division reaching +3.9% (+8.7% in Q4 2016). The business in the UK showed a strong performance in the second half of the year, positively impacted by the weakening of the British Pound following the vote on Brexit. Finland and Serbia performed well, while Sweden and Switzerland were both flat. Organic growth in Russia and other Eastern European locations remained negative, but with improving trends in the second half of the year.

Asia, Middle East and Australia: Turnover amounted to CHF770.7 million in 2016, a +20% rise compared to 2015. Organic growth in the division for the full year and fourth quarter was +0.4% and +1.5% respectively. India and Sri Lanka saw strong growth while performance in the Middle East was flat. Certain locations in Asia performed well, for example South Korea, Indonesia and Cambodia. Against this, operations such as Hong Kong, Singapore and Australia were hit by lower spend from Chinese consumers.

Latin America: Turnover climbed marginally to CHF1,531.1 million in 2016. Organic growth in the division was -4.1% for the full year, to which the fourth quarter contributed +3.7%. In Central America, Mexico performed “very well, as did most operations in the Caribbean in particular the Dominican Republic and Jamaica as well as our cruise business,” noted Dufry. In South America, Brazil saw an acceleration in the second half, recording double-digit growth. Other operations in South America also did well, such as Ecuador, Peru and Chile, while Argentina remained negative throughout the year, but is showing improvements so far in 2017.

North America: Turnover reached CHF1,660.9 million in 2016, up by +22% over 2015. Organic growth reached +4.5% in the full year, while in Q4 it reached +7.2%. Growth was stronger in the duty paid business, while duty free saw the strong performance in Canada being mitigated by lower trading in the US, due to the stronger US Dollar.

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Key financials

Gross profit grew by +28.2% and reached CHF4,584.1 million in 2016. Gross margin improved by 40 basis points, reflecting the synergies achieved from the integration of Nuance and operational improvements.

EBITDA grew by +29.2% to CHF935.1 million in the year, as noted above. EBITDA margin was 11.9% in 2016, compared to 11.8% in 2015, and reported a strong increase in the fourth quarter, reaching 12.8% (Q4 2015: 11.2%) supported by synergies. While all synergies from Nuance are included in the result, more than half of the expected WDF synergies have already been reflected, includingCHF 49 million of cost and CHF14 million of gross profit margin synergies. EBITDA margin improved year-on-year despite the negative impact from some underperforming operations, such as Turkey and Brazil.

Depreciation was CHF166.2 million in 2016 (CHF 135.8 million in 2015). As a percentage of turnover it remained nearly stable at 2.1% compared to 2.2% in 2015. Amortization increased by CHF70.2 million and reached CHF379.2 million in 2016, as a result of additions generated by the acquisition of WDF. Linearization amounted to CHF -74.7 million in 2016. (This 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 at Spain’s airports. This item also includes the reduction in concession payments granted based on an upfront payment (prepaid lease) related to Spanish contracts.

EBIT more than doubled to CHF272.6 million in 2016. Other operational result (net) reached CHF -42.4 million, compared to CHF -117.1 million in 2015, when CHF -77.4 million of transaction and restructuring cost were included.

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Net financial results increased by CHF36.0 million to reach CHF215.5 million in 2016. While the higher net debt due to the acquisition of WDF explains part of the increase, the repayment of US$500 million of Senior Notes that expire in 2020 generated one-off costs of CHF14.2 million.

Net earnings improved by CHF82.7 million and reached CHF45.8 million in 2016 compared to CHF -36.9 million in 2015. Net earnings to equity holders saw a similar increase year-on-year and stood at CHF2.5 million in 2016, versus the loss seen in 2015, which was related mainly to one-offs from the WDF acquisition and the Nuance integration. Cash earnings grew by +76.6% in 2016 and reached CHF322.9 million versus CHF182.8 million 2015. Cash EPS in 2016 grew by +50.4% and reached CHF6.00, compared to CHF3.99 in 2015.

Free cash flow before interest increased by +43.0% and reached CHF483.8 million in 2016. In addition to EBITDA growth, a more efficient management of core net working capital was key. Capex in 2016 amounted to CHF262.2 million.

Net debt reached CHF3,750.4 million at the end of December 2016 compared to CHF3,956.0 million one year earlier. The main covenant, net debt/adjusted EBITDA, stood at 3.69x as per 31 December 2016 from 3.92x at the end of December 2015. In terms of financing strategy, Dufry called in advance its US$500 million Senior Notes (maturity in 2020) in December 2016. The repayment allows the company to further improve its debt structure, it said, and to reduce interest costs going forward.

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