Strong third quarter boosts Dufry Group; RegStaer Vnukovo deal to be finalised

By Andrew Pentol |

Diaz-small-for-web

Julián Díaz, CEO, Dufry Group.

Dufry Group has reported turnover of CHF6.68bn ($6.74bn) in the first nine months of 2019, an increase of 1.8% from the CHF6.56bn registered in the previous corresponding period last year.

The nine-month results released this morning (5 November) reveal that organic growth continued to accelerate in the summer months, reaching 4.1% for the third quarter and 2.9% in the first nine months. Net new concessions added 2.8%.

In terms of business development, Dufry continued to expand and refurbish its operations. During the first nine months of 2019, the company opened and expanded 20,400sq m of gross retail space, including 20 stores in Russia, 45 shops in North America, 11 shops in Latin America and 30 stores on 18 new ships.

Contracts have been signed for the opening of a further 14,600sq m in 2019/2020 including a new contract with Mexico City International airport for three additional shops covering 1,400sq m.

Dufry has also refurbished 36,800sq m of retail space including operations in Spain, Sweden, Jordan, Argentina, Macau, Morocco and Turkey, which supported like-for-like growth.

KEY AENA CONTRACT EXTENSION

The most significant achievements and developments after the third quarter include the extension of its current concession contract to operate duty free shops at 25 Spanish airports for up to five years and the acquisition of the 60% majority stake in RegStaer Vnukovo which is expected to be completed in the coming days (The Vnukovo operation shall be fully consolidated as of November 2019).

Madrid-Duty-Free

The extension of its contract with Spanish airport operator Aena to operate 25 Spanish airports was a significant third-quarter development.

Other highlights were Hudson Group’s acquisition of 34 Brookstone stores across several US airport locations. This includes the exclusive right to expand the brand in airports and to sell select Brookstone merchandise in Hudson shops.

In addition, Hudson Ltd also acquired OHM Concession Group LLC, adding new food and beverage concession capabilities and expanding its North American footprint. Another crucial development was the increase in the Brazilian duty free allowance from $500 to $1,000, effective January 2020.

Meanwhile, turnover in Europe and Africa reached CHF2.93bn in the first nine months of the year, from CHF2.94bn in 2018. Organic growth in the division reached 5.3% in the period. In the third quarter, organic growth accelerated to 7.2%, driven by a healthy like-for-like performance. In the UK, performance remained positive. In Spain, sales continued to improve during the holiday season, supported by the implementation of several commercial initiatives and pilots across five Spanish airports.

Dufry-Table-1-nine-month-2019

Organic growth for Dufry Group reached 4.1% for the third quarter of 2019 and 2.9% in the first nine months.

Turkey delivered solid growth and Greece posted positive performance. Finland, Italy and Malta also reported positive growth along with Africa, particularly Morocco, Kenya and Egypt. A significant regional highlight, as previously mentioned was the agreement with AENA to extend its current contract in Spain to operate duty free shops at 25 Spanish airports for up to five years, starting in November 2020.

In Asia Pacific and the Middle East, turnover increased to CHF957.3m in the nine-month period from CHF8469.4m in the first nine months of 2018. Organic growth in the division of 13.4% was mainly sparked by new concessions. Organic growth for the third quarter reached 12.5%, supported by new concessions and improved like-for-like performance.

Eastern European performance was positive, with Russia and Serbia posting growth. Asia Pacific reported double-digit growth, led by Hong Kong with the successful opening in the MTR high-speed railway station and strong performances in Macau and China. Performance in Australia remained solid ‘at double-digit levels,’ supported by the start of operations in Perth.

Dufry-riboon-cutting-Perth

Dufry Group has opened its fully refurbished duty free walkthrough store at Perth International Airport in June 2019, having signed the contract in July 2018.

As previously mentioned, Dufry has received regulatory approvals for the acquisition of the majority 60% stake in RegStaer Vnukovo, with the transaction to be completed imminently. The Vnukovo operations will be fully consolidated this month.

North American turnover rose to CHF1.5bn from CHF1.4bn in the first nine months of 2019. Organic growth amounted to 2.1% in the nine-month period, supported by the resilient performance of the duty paid business. The duty free segment was negatively influenced by the lower spending of Chinese passengers. This mainly impacted the Canadian duty free operations and was more noticeable in the third quarter, where organic growth was -0.6%.

As alluded to above, Hudson signed an agreement to acquire 34 Brookstone shops across several US airports. This includes the exclusive right to sell select Brookstone merchandise in Hudson shops and to further expand the brand in the airport channel. Hudson also acquired OHM Concession Group LLC, which generated sales of $62m in FY2019 Group. The transaction is expected to be finalised in Q4 2019 or Q1 2020.

Finally, in Central and South America, turnover reached CHF1.1bn in the first nine months of 2019 compared to CHF1.2bn a year earlier. Organic growth in the region was -8.4%. Performance in the third quarter was -3.8%, supported by the implementation of commercial initiatives.

Dufry Chart 2 nine-months

Global passenger numbers are expected to grow 4.9% in 2021.

In South America, Dufry says the situation remains challenging with most operations still impacted by the devaluation of local currencies, especially in Brazil and Argentina. Performance in the Caribbean was positive, with the cruise business continuing to make a positive contribution. Performance in Mexico and Dominican Republic was also positive.

As far as Brazil is concerned, Dufry inaugurated its first border shop in the city of Uruguaiana in August. The retailer is continuing to monitor the performance of this new retail format and is adapting the product assortment to best match local demand. Dufry also acknowledges the potential of the Brazilian border channel, which can be expended into 32 other cities across the country.

Additionally, the company has described the Brazilian Government’s decision to increase the duty free allowance from $500 to $1,000 from January 2020 as a positive development. This is because the increased allowance will allow the retailer to enhance its assortment with products priced between $500 and $1,000.

Julián Díaz, CEO, Dufry Group commented: “Organic growth has continued to accelerate in the third quarter, reaching 4.1%. Organic growth has benefitted from the solid contribution of new concessions and also like-for-like growth, which has improved since the last quarter and reached 1.3% during the holiday season in the third quarter of 2019.

Dufry-Brazilian-border-duty-free-shop-Uruguaiana-wide

The retailer is continuing to monitor the performance of this new retail format in Brazil.

“The continuous improvement in the first nine months of 2019, where we reached an organic growth of 2.9%, clearly shows that we are on the right track to achieve our targets. Excluding South America, organic growth for the nine months amounted to 5.4%. These achievements are the result of focused commercial initiatives in several markets.”

From a divisional perspective, Asia-Pacific and Middle East continued to deliver a strong performance, including a healthy like-for-like growth. Díaz added: “In Europe, Spain has accelerated performance, while North America has continued with its resilient growth, despite the impact from the duty-free business. In South America, although the situation remains challenging, we saw some signs of improvement supported by an acceleration of the performance with a pickup of like-for-like sales and by softer comparable.

“We also successfully extended existing contracts, among them, our contract in Spain with Aena. I am very pleased with the renewal of this long-term partnership for up to five years and with a minimum guarantee (MAG) containing a lower annual increase than before, now amounting to 1.56%.

“Spain has improved its performance to above the agreed annual MAG increase and I am looking forward to rolling out to further locations our successful commercial initiatives and best practices already tested across five pilot airports and for which no significant CAPEX investment will be needed.”

Dufry Chart 3 first nine-month

Dufry opened and expanded 20,400sq m of gross retail space in the first nine months of 2019.

BRAZIL ALLOWANCE INCREASE

Regarding business developments, Díaz remarked: “We added 20,400sq m of gross retail space during the first nine months of 2019 and have already signed 14,600sq m  to be opened in 2019 and 2020 in existing and new locations across the world. At the same time, we have refurbished 36,800sq m of retail space in the first nine months of the year.”

Commenting on Brazil he said: “In October, the Brazilian Government announced the long expected duty-free allowance increase, which will double to $1,000 and be effective on January 2020. This is a considerable improvement as we will be able to extend and increase our product assortment in the country, offering higher priced products in the range of $500 to $1,000 and increase the potential spend per ticket by up to $1,000.”

Dufry has also received all regulatory approvals for the acquisition of the 60% stake in RegStaer Vnukovo announced earlier in June. “Through this acquisition, we further consolidate our position in Russia, especially in Moscow, where we will be able to extract further synergies with the integration of operations at Sheremetyevo and Domodedovo airports. The newly acquired business is fully consolidated as of November 2019.”

RegStaer-Vnukovo

The acquisition of the 60% majority stake in RegStaer Vnukovo will be completed imminently.

The acquisition of 34 Brookstone stores by Hudson, including the exclusive right to further expand the brand in US airport retail, further supports the duty-paid business in the United States. “It shows that there are still additional growth opportunities also in mature markets,” Díaz said.

On the OHM Concession Group LLC acquisition by Hudson Group, he noted: “We are adding new F&B concessions with the acquisition of capabilities, which will allow us not only to increase and expand our North American footprint, but most importantly accelerate further expansion in the important North American food and beverage airport concession market.”

Summing up, Díaz remains confident in the market improvements experienced so far. “The prospects for the remaining months of the year are also encouraging, with organic growth in the first weeks of October reaching around 3.0%.

“We remain committed to further developing our growth strategy, which includes small and mid-size acquisitions as well as organic growth with a strong customer focus and to further accelerate it in the coming quarters.

“We also continue to leverage our business model to generate efficiencies and to further accelerate the implementation of the digital strategy. We confirm our mid-term organic growth guidance of 3%-4% as well as the expected mid-term range of CHF350-400m for the equity free cash flow generation.”

Dufry regional graph

Turnover in Europe and Africa reached CHF2.93bn in the first nine months of the year.

In further company news, Dufry has appointed Heekyung Jo Min in the newly created role of Lead Independent Director. First elected to the Dufry Board of Directors in 2016, Jo Min holds a PHD in Business and Masters Degree in Business Administration.

During her career, she has served as Executive Vice President at Prudential Investments and Securities Co in Korea and Executive Vice President of Global Creating Shared Value of CJ Cheiljedang, focusing on corporate social responsibility and sustainability.

Juan Carlos Torres-Carretero, Chairman of the Board of Directors, Dufry commented: “I would like to congratulate Ms. Heekyung Jo Min for her unanimous appointment to the new position of Lead Independent Director and I wish her lots of success in her new important role.”

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