Avolta AG (AVOL) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Dufry Q3 2020 Trading Update Conference Call and Live Webcast. I am Moira, the Chorus Call operator. [Operator Instructions] And the conference has been recorded. [Operator Instructions] At this time, it's my pleasure to hand over to Mr. Julian Diaz, CEO of Dufry. Please go ahead, sir.

Thank you, operator, for the introduction. Good afternoon to everyone, and welcome to Dufry's Q3 2020 Trading Update. These are, as always, Julian Diaz, Dufry's CEO; and Yves Gerster, CFO. We are going to comment on the presentation disclosure this morning in our website. Please go first to the agenda to Page 2. I will start commenting on group highlights Q3 and 9 months, continuing with an update of business performance, then passing it to Yves for the financial summary. And finally, I will talk about the outlook and conclusions. Let's now move to Page #4 of this presentation, please. Many things have happened since we started in 2020. The expansion of this pandemia is impacting fundamental areas in our lives and in the way we work. Within this environment, we have implemented the most aggressive and important changes in the history of our company in the shortest period of time possible. For protecting us, we repeat many times, the liquidity consumption and reducing the cost fixed structure. Today, Dufry is a stronger and more resilient company than before. We started, in March, a complete restructuring and reorganization and also simplifying the way we used to work, implementing initiatives targeting CHF 1 billion cost saving in 2020. The new company structure started on September 1, and the restructuring is almost complete. In this process of group-wide reorganization and simplification, Hudson delisting and reintegration in the group is in the last steps, and we expect to complete it in Q4 2020. The strength of our financial structure was successfully finished with our second capital increase. The total gross proceeds of CHF 890 million were a significant support from current shareholders and facilitate also the investment of 2 new ones: Advent International and Alibaba. Both reached equity stakes of 11.4% and 8.5%, respectively, creating a solid financial structure with loan expanding shareholders. The partnership with Alibaba, that we are also building through a joint venture company in China, will allow Dufry to expand our travel retail activities in this country and accelerate our global digital strategy. And finally, to comment on us at the end of October, almost 55% of our shops were reopened, representing around 72% of our sales capacity in 2019. Still, important shops are closed down, and in the process to be reopened. This reopening is part of the reopenings program that will continue during the next 2 months based in individual profitability, case by case, and in the release of travel restrictions. I think we can move now to Page #5. Top line 9 months reached CHF 2.074 billion, minus 67.8% compared with previous year. Q3 turnover reached CHF 487 million, minus 79.7%. We had a very promising rainy season in July and August. It slowed after the new travel restrictions and quarantines that happened at the middle -- on the middle of August. But since then, turnover has been stable, including October. Cost saving target established in CHF 1 billion, including rents, minimum annual guarantees, in this case, personnel expenses and operational expenses, with CHF 760 million execute at September 30. In this CHF 760 million is enclosed [ CHF 262 million ] minimum annual guarantees accrued in the P&L as MAG reliefs, CHF 370 million due to personnel expenses and CHF 125 million due to operational expenses. For next year, we are expecting CHF 400 million recurrent cost for this type of expenses, personnel expenses and operational expenses. Acceleration of restructuring plan results in a better-than-expected cash burn in Q3 with CHF 51 million. For the second part of the year, we maintain our guidance with minus 70% in sales, minus CHF 60 million monthly cash burn. Successful execution of our second capital increase with CHF 890 million proceeds. CHF 295 million of this will be used to finance Hudson reintegration and the rest for strategic growth opportunities and reinforce our balance sheet. Dufry has, as I mentioned before, a stronger financial position regarding cash flow and cost control, enhanced by the rights issue and support by the existing and new shareholders. Strong liquidity, CHF 2.065 billion pro forma September 30, due to the already mentioned initiatives. Net proceeds of the capital increase CHF 860 million including the convertible bond, cash on hand, CHF 748 million, available credit line, CHF 745 million, minus what I mentioned regarding the outflow for Hudson acquisition CHF 295 million. Please go to Page 7, and we will comment on organic growth in the group and evolution. First, as I mentioned, turnover reached CHF 2.074 billion organic -- total sales with an organic of minus 67.8%. In the quarter, CHF 487 million with minus 79.7%. The spend per passenger continues elevated or higher compared with last year. During Q3, we have reached plus 8%. And the normalization supported by countries reopening and spend per passenger, like in France, Greece, Malta, Spain, Switzerland, Turkey and U.K. and during the summer, especially, have obviously facilitate this stabilization of sales even with more problems along these different countries. If we move now to Page #8, this is the new regional composition. This segment reporting has started on September 1. Two or three ideas here, reporting the new structure, obviously, is also having historical turnover information already provided. I think you can check it in our website and in the next presentation. And the main reasons for this change, independently of cost-cutting, was also to create a more stable and efficient company. Three main subjects to comment here. Number one is this structure was decided in order to centralize the two of the company worldwide in the headquarters with 2 different steps. One was the divisional structure, obviously, at that time before the reorganization. The divisional structure were responsible for managing the different divisions and countries and closes in the divisions. All these layer of the company has so far disappeared. And then the merger of commercial activities and commercial teams in countries, divisions and platform, remaining only at the platform level. The second level of a critical base for explaining this reorganization is the customer-centric passenger profile. This is, in fact, what we are doing is organizing the countries based in the same customer profile. And the third one is, as a consequence of the previous one, is based this -- the new setup of countries in the distribution centers because the same distribution center will distribute to the same passenger profile in the same group of countries. Those are the ideas that are behind this simplification of the organization. If we move now to Page #9, we will comment on turnover and organic growth by region. North America, minus 63.9%, 9 months organic growth. Had the fastest recovery due to the high exposure to domestic travel, 85% in a normal year, in 2020, even more pronounciated. Canada, more exposure to international travel. As a consequence, obviously, the duty-free activity. Europe, organic growth, minus 70.6% in 9 months 2020 compared with 2019. Performance improved in July and August, especially in Southern Europe. From middle of August, the decision to start quarantines and other travel limitation slowed down the recovery, but the level of performance was maintained compared with previous months. Mediterranean region, including Turkey and Greece and also Eastern Europe, Russia and Middle East remain less impacted and performed above-average in the region. Asia, minus 72.7% organic growth 9 months 2020. Dufry's operations more oriented towards international travelers is still limited, with the most important shops are still closed down in Australia, Indonesia, Hong Kong, South Korea. China recovered faster, supported by domestic travel since Q2 benefited our duty-paid too. Central and South America. Overall performance was minus 64.5% in 9 months as the crisis started later. Central America and Caribbean performing above region and group average with some countries as Dominican Republic reaching 80% of last year's sales. Cruise business heavily impacted and all shops almost closed down. South America, demand pick up in domestic travel. Duty-paid performing better than duty-free due to the acceleration of domestic flights and international flights gradually reinitiating in October. Let's now move to Page 10 and comment on net sales by region and sector. In Dufry by sector, on the right side, we benefit from exposure to domestic traffic due to the reinitiation of domestic flights, plus 17 percentage point compared with 2019. In 9 months, 56% as domestic and intra-regional passengers recover. Duty-paid, domestic and intra-regional travel also reflected and shared by region on the left side of the slide. North America from 22% to 25% of the total; Central and South America from 12% to 17% due to the good performance in the Caribbean; APAC lost share 4 percentage points; and EMEA 7 percentage points. I think from here, we can move to Page 11 and comment on net sales and performance by channel. In sales by channel, only marginal figures. Uptake on domestic and intra-regional travel in Q3 support airport channel development. Cruise lines, obviously, low sales because the closing of most of the shops. Other channels like railway stations, border and downtown shop saw also weak demand too, but better performance than cruise line because we were able to continue the operation. If we move now to Page 12. Reopening plan in line with the reinitiation of flights, number of passengers and customer preferences. The first shops opened in type of commercial concept are general stores duty-free, then convenience and then duty-paid in general. Higher demand in food and confectionary, 22% of last year sales, and tobacco 24% of last year's sales. Luxury goods impacted because most of the shops still are closed down, and there are only just a limited number of luxury shops open, for example, in Heathrow and in Zurich. We are benefiting from a broad range of offerings with full flexibility to open up location by location and offer merchandise in line with the number of passengers and customers' requirement. If we move now to Page 13, we will comment on retail space development. At September -- by September 30, a total of 470,000 square meters of commercial space. Gross retailers space opened in 2020 during the first 9 months, 4,700, including new openings in Odessa, in Ukraine, in Salt Lake City in the U.S., Singapore in Changi Terminal 2, et cetera. Gross retail space refurbished, 10,500. We have refurbished shops, duty-free and duty-paid, in Mykonos, Corfu and Thessaloniki in Greece, Belgrade in Serbia and Antalya in Turkey. Also important to mention, and the picture is in this slide too, the new 12-year contract concession in Istanbul Sabiha Gökçen International Airport from November 1. This airport is expected to reach 70 -- 65 million passengers by the year 2024. And finally, to confirm, the CapEx target for 2020 is CHF 100 million, with the current pipeline opportunities, still very high, 29,000, by end of October. And now I will pass it to Yves for commenting on financial information. Yves, please?

Thank you, Julian, and welcome also from my side to everyone on the line. If we move to Slide 15, let me start with an overview of the financing initiatives taken since the beginning of the crisis. This slide is already well-known as we have reacted fast and decisively from March on with the placement of 5.5 million shares out of the existing authorized capital and treasury shares. The issuance of a CHF 350 million convertible loans and securing loans of CHF 540 million from our syndicated banks and additional COVID-related government-backed securities. In total, we have secured more than CHF 1.9 billion in equity and debt since the beginning of the year. This is split into around CHF 1 billion in equity supported by an existing and new shareholders, around CHF 400 million in equity-linked products and CHF 540 million in additional debt facilities. Going on to the next slide, some further insight on the recent rights issue and mandatory convertible bond. The capital increase that we concluded exactly 2 weeks ago initially indicated -- intended to raise around CHF 300 million to finance the reintegration of our North American business and the delisting of Hudson from the New York Stock Exchange. The rationale was well understood by the market, and we received positive feedback and support for the underlying transaction itself as well as for the related financing via the rights issue. With the support by our existing shareholders and the commitment of 2 new investors, Advent International and Alibaba Group, we were able to raise gross proceeds of CHF 890 million, which increases our financial flexibility, strengthens our balance sheet and overall financial position. Dufry issued around 24.7 million new registered shares in the rights issue process with high support of existing shareholders of 43%. The remaining ramp shares were taken up by Advent International, having a 11.4% stake in Dufry right after the rights issue. And Alibaba Group, having a 6.1% stake in Dufry premandatory convertible note and 8.5% post-conversion of the mandatory convertible note. Within the next few weeks, Dufry will issue the mandatory convertible note out of its remaining conditional capital of around 2.1 million shares at market conditions to be placed with Alibaba Group. Moving on to the next slide. We are confirming our cost reduction and cash flow scenarios provided earlier this year and which we have renewed during the half year presentation in early August. The turnover scenarios served as a sensitivity analysis to adopt our cost base and manage our cash flow flexibility in line with top line development. The scenarios have not been a guidance to the market. However, as we have now visibility until the end of October and only 2 more months to go until year-end, a scenario with around minus 70% turnover might be a realistic to expect for the full year 2020 given the current environment. In line with the turnover scenarios provided, we expect personnel expenses reductions of around CHF 450 million for 2020 and around CHF 300 million permanent cost reductions. This reflects a decrease of around 35% for 2020 and 25% for 2021 compared to 2019 levels. We have provisioned CHF 62.7 million for restructuring-related expenses at end of June. But we expect some additional costs of around CHF 5 million. We target cost reduction in general expenses of around CHF 230 million for 2020. And of at least CHF 100 million in 2021, a decrease of around 40% and 20% compared to 2019, respectively. In addition, we have taken actions with respect to CapEx, with expected capital expenditure of around CHF 100 million for the full year 2020. Regarding concession fees, we confirm our target of CHF 500 million in relief of minimum annual guarantees for the year compared to 2019, bringing us to an overall concession fee of around 39% of turnover in a minus 70% turnover scenario or around CHF 1 billion of concession fees in 2020. Going on to the next slide. Let me go into more details with the next slide on the accounting treatment in respect to IFRS 16. According to the IFRS 16 standard, any changes to the underlying contract will trigger modification accounting, which basically means that all IFRS 16-related parameters would need to be reassessed and adapted to the new reality. However, based on the current COVID-19 situation, the International Accounting Standard Board allows for a simplified, temporary treatment to contractual adjustments if certain criteria are fulfilled. Those criteria are: first, the MAG relief must be connected to the COVID-19 situation; secondly, the relief is granted only until June 30, 2021; and third, no other contract terms or conditions are changed. Dufry's in negotiation with various landlords. We are talking about more than 1,000 partners and contractual agreements here. Naturally, negotiations result in a different outcome and IFRS 16 requires different treatment on a case-by-case basis. The most common outcomes we have displayed on the slide, and I want to shortly walk you through. In the first case, if a MAG relief is granted until June 30, 2021, and no other term is changed, the full MAG relief will be reflected in the P&L at the moment the amendment is signed. We have already recognized CHF 161 million in half year 2020, and now, additional CHF 121 million in Q3. For the second case, in other negotiations, we conclude with the landlord to MAG reliefs beyond June 30, 2021, and/or we prolonged the contract in addition to the MAG relief. This figures modification accounting, and we need to adjust right of use assets, lease liability and the other parameters in the financials in respect to IFRS 16. And we will only see a positive impact on the successful negotiation in the P&L over time. In that regard, we have even cases in which the P&L impact in 2020 looks worse than without the relief. To give you a realistic example, we have cases where the cash flow represents 25% concession fees over sales, but the P&L charge this year is rather in the area of 70% concession expenses or sales. For the third case, we also see contract changes from a fixed to a variable MAG. For those example, a fixed amount -- for example, a fixed amount per passenger. This will trigger a derecognition of IFRS 16 balances entirely. There is something important to note here. In all the cases mentioned, the cash out in 2020 remained the same. However, the P&L expense varies considerably. In the de-recognition example, the P&L impact would be lower than the cash flow. In the 2 other examples mentioned, the P&L impact this year would be higher than the cash flow. For Dufry, all of the cases mentioned are positive from a contractual and cash flow perspective with reliefs and more flexibility. Moving on to the next slide. All of the previously mentioned measures in regard to costs and cash management as well as the financing initiatives result in an improvement in our net debt position and especially in change in net debt from Q1 to Q3 2020. Net debt stands at CHF 3.735 billion at the end of September 2020. If you take into account the right of -- the rights issue and the expected outflow to fully purchase back Hudson, pro forma net debt stands at CHF 3.171 billion. The position changed by only CHF 69 million since December 2019 pro forma despite the significant drop in turnover. The maturity profile has not changed since August 2020 as no additional debt position have been added. Please note that the maturity in 2021, this credit facility is currently not used at all. For the maturities in November 2022, it is important to note the following: Dufry always renews its financial debt way ahead of maturity, and we will also do that this time. With ahead, I mean at least 12 to 18 months ahead of the maturity in November 2022. Moving on to the next slide. You can see the net debt bridge with a quarterly change in net debt. I have already mentioned the improvement in change in net debt from CHF 435 million in Q1 to only CHF 76 million in Q3 2020 by gradually reducing the monthly cash outflows. Change in net debt can be considered as a proxy for cash consumption. In fact, the numbers provided in Q1 and half year 2020 were based on change in net debt. Change in net debt, however, does not consider FX effect on net debt as well as some noncash items like amortization of arrangement fees. We received feedback from the market to show also cash consumption proxy, including FX and other noncash effects. From our perspective, the best proxy would be equity free cash flow, one of our key KPIs. Beside of the net debt bridge, I will therefore show you also the equity free cash flow as the bridge to change in net debt on the next slide. Slide 21 shows the quarterly cash consumption evolution, decreasing from CHF 483 million in Q1 to only CHF 51 million in Q3. As mentioned previously, during the first 2 quarters of 2020, some payments related to previous periods affected the cash outflow as well as the inventory build for the high season earlier in the year. However, on Q2 onwards, the decisive measures taken by the company significantly decreased the cash outflow. Please bear also in mind that some of the payments like bond interest or taxes are not linear. We, therefore, confirm our cash flow guidance for the second half of 2020 provided with the half year results. We expect an average monthly cash flow in the second half of 2020 of CHF 60 million if full year 2020 turnover decreases 70% compared to 2019 turnover. This includes change in inventory, trade payables and trade receivables, however, does not include changes in other working capital. Moving on to the next slide. Our liquidity position as of September 30 stood at CHF 1.493 billion. This includes CHF 745 million of available credit lines and CHF 748 million in cash and cash equivalents. Pro forma, the liquidity position amounts to CHF 2.065 billion. This pro forma position also considers CHF 572 million net proceeds from the rights issue and mandatory convertible note and already includes the cash outflow for the buyback of the remaining Hudson shares not already owned by Dufry. Also it is noteworthy that during the last quarter, we have further reduced our payables by nearly CHF 300 million, especially trade related. Those payments are reflected in the current liquidity position as well. Given the current liquidity position in cash outflow, we have achieved a comfortable financial position during the recovery, while we are continuing with our cost reductions and tight cash management measures. With that said, I hand over back to Julian.

Thank you, Yves. We will continue with outlook. So let's go straight to Page 24. Hudson reintegration is an essential part of our reorganization. That obviously will represent a simplification of our company structure, improving efficiencies. There's lifting synergies that will be created on top of what we have commented on of around CHF 20 million in addition to that. Impact of the current crisis, coronavirus 19, in Hudson, coronavirus will obviously interfere in the strategy that we have commented on during our presentation to the market regarding the acquisition in food and beverage. To accelerate growth in the U.S. today, you need, as obviously, leader of retail to accelerate the growth in food and beverage. And due to the circumstances, this is going to be significantly delayed if possible in the future. The low liquidity of -- and volatility, as a consequence of the low liquidity, of Hudson share price and also the need of -- to create a more -- a stronger group from the financial point of view for Hudson and for Dufry at the same time. This transaction is in the process of being complete by the last quarter of 2020. Initially, the time line was forecasting approval by and recommendation by the Board of Directors, a special committee of independent directors of Hudson and Hudson Board of Directors, and this was already complete. Then Dufry, as a consequence of the closing process, was obliged to deliver lender concern in our existing credit facilities also shareholders' approval for the equity capital increase and complete finally the rights offering for financing this transaction. All these steps were already done. What is the only step pending is Hudson shareholders' approval. And this shareholders' approval will happen during a general assembly that probably will be during the last part of November. If we move to Page 25. The reopening of shops continue, as I said before, in October. Organic growth reached minus 76.4% and despite the restrictions and actions in some countries, especially in Europe. Despite the situation, sales have been stable during September and October. And I think it's important to mention that we are benefiting this case from our broad geographical exposure. Europe and U.K. maybe -- could be impacted. But Mediterranean, Turkey and Greece, Russia, North America, Central America and Caribbean, above group average. Reported information today will be part of this sustainable situation that we are describing here. If we move to Page 26. Total number of shops that we were operating before the crisis, 2,500. 1,350 of these shops already opened by the end of October, around 55% of the total shops with potential sales capacity of 72%. We are, in this case, going a step-by-step and case by case. In weekly reviews, we analyze the profitability and adjustments in operations needed, opening hours, days of staff, assortment needed, products, promotions, displays, et cetera, and the most important, with a total full cost control in order to plan the next openings. By November 30, we are expecting that 60% of the shops will be open with 73% of sales capacity. The new openings that are in the process to participate in this program are in U.S., Las Vegas, Orlando, Miami, Chicago, Oakland or Tampa; in Bangalore, in India; Buenos Aires in South America; Cancun in Mexico; Colombo in Sri Lanka; some shops in Greece; Helsinki; Jordan, especially and Toronto. Let's move to Page 27. We have tried to briefly explain here the last research done with our customers in the shops after the last meeting after the last presentation in August. We have repeat the questions about what motivate you to purchase during your next flight. And this is at the bottom left side of this -- the -- sorry, at the top left side of this slide. 38% of the passengers during these days in the airport are looking for good offers, discounts; 30% exclusive -- looking for exclusive products; 20% local products; and 12% gifts, perfect gifts. If we continue, the second finding is below, at the bottom of this slide, is regarding attitudes and behaviors of travelers in an airport when they have to face different activities and the answer is very clear. It's higher even than in the first part of the pandemic results. 89% of the passengers confirmed they are willing to engage with duty-free shopping. Other activities are also listed here. And finally, on the right side, some customers post-COVID behaviors. I think we have different ones, but let me mention something like stay away from crowded areas. Avoiding touching or picking items, higher extent to go straight items they have planned to purchase with lower time spent in store. I think the most important thing is that learning in this process, what we have done is accommodate and adapt the sales protocol in all the shops that are open to define it, in order to facilitate the customers the best possible experience when they are traveling and they go through a shop. If we move to Page 28, in terms of conclusions, I think there are probably 5 aspects that I would like to comment on. The first one is we have been in a very intense last 3 months since half year presentation on the beginning of August. With Dufry, and I want to remark that, emerging as stronger and more resilient company. The second one is to thank to all our employees for supporting the incredible transformation we have gone through in this difficult moment. The third one is thanks for, obviously, the support of our existing shareholders as well as Advent and Alibaba for joining all their loan standing shareholders in the company in this specific moment in time. For the year 2020 full year, we expect to be close to minus 70% scenario in sales, and we'll pursue cost cutting initiatives as described by this, according with this guidance. And finally, we have sufficient liquidity and financial and managerial flexibility to manage a slower-than-expected recovery, and also engage in strategic opportunities at the same time. That's all from the point of view of the presentation. And now we could start with the Q&A section.

[Operator Instructions] The first question is from Jorn Iffert from UBS.

The first one would be, please, on your cash consumption in Q3. It was pretty good. Can you give us some more details how you have achieved this? What kind of -- what amount of payments are falling into Q4, for example, which will economically would fall in Q3? And can you also say if you are paying the employees for the shops which were closed in Q3. And second question, please, on Q4. Can you help us to understand what is the cash flow support from noncore working capital in the next 3 months? And the third question, please, on the fixed rents. I understand or expect this is fluid, but have you already made discussions with the landlord for the first half '21? And have you already some clarity here on the savings? And if you allow me, a last question on capital allocation. If there would be an opportunity in Asia, for example, on acquisition, would you evaluate this? Or would you prefer to reserve cash for liquidity?

Okay. I will -- I mean Jorn, this Julian. I will start with the minimum annual guarantees. And the answer is as follows is, we have been obviously discussing and negotiating with the airport for the year 2020. And in some cases, also for the year 2021. The answer is yes. We have been -- know now, since the beginning of this process, negotiating both. Most of the effort is in 2020, but we have also initiated discussions in 2021. Regarding capital allocation, I think with the uncertainty we have on the table today, what we need is to protect the liquidity and see what the evolution of the business is before we do anything in the short term. Yves, you want to talk about the cash flow Q3 and Q4?

Sure. So Jorn, thank you very much for the question. In respect to the cash consumption in Q3 and Q4, the key elements, which will apply in Q4, which basically could be allocated to Q3 are on, one hand side, taxes. It's payments to minorities. It's the restructuring of around CHF 65 million, which we have mentioned and it's also interest. In respect to interest, we have, for example, the bonds where the interests are paid only every 6 months. And we also have some bank debt, where there is an accumulation of the cash flow in Q4. So again, as a good proxy, what you can take is basically the guidance we have provided for half year, which is the CHF 60 million per month. Potentially, you're a little bit better than that, but that's a good proxy. And then in respect to the noncore working capital there, it's hard to say. So look, as you know, it really depends on where you do the payment. So basically, the noncore working capital is a residual amount of everything reflected on the P&L, which is not cash. And depending -- especially on how the process with the landlords in respect to concession fees goes, we will see some swings there in the noncore working capital.

Okay. And can you help me for Q3, regarding the cash consumption, yes, which was pretty low? Did you pay the employees for the shops which were closed in Q3, if I may ask?

So look, we paid all the employees, the salary to all the employees according to the contractual obligation and the agreement we have with them.

The next question is from David Holmes from Bank of America.

First question is just on the permanent cost savings of CHF 400 million. Can you just give a little bit more color on where you are achieving this and how you are achieving them? And I guess, following on from that, should we expect, in the long term, as revenues normalize back to '19 levels, high levels of margin than historically because of this? Second question is just on the Alibaba JV. I think you've touched on it too much. What are your intentions for this? How do you get access to the market? And are there particular channels which are most interesting to you in that market? I'll leave it there for now.

Okay. David, thank you for the questions. Regarding the permanent CHF 400 million, I would say that we are talking here about personnel expenses and operational expenses. Regarding this CHF 400 million, around -- especially, today, we are talking about CHF 260 million in personnel expenses, CHF 270 million that explain it and the difference is operational expenses. This is basically recurring. And depending on the circumstances in 2021, it could be even higher because, obviously, what we are planning here is just to go back to the normality. And if, for whatever reason, the normality is not -- normality in the sense of recovering, sorry, for the explanation. In a recovery, if it's not recovering, the situation will be modified again. And the target that we have identified today as recurring is CHF 400 million. Regarding Alibaba intentions, I already commented on that. There are two aspects: one is the joint venture company that we are creating in China right now. We have communicated to the market that the intention of the joint venture company is to expand the duty-free and duty-paid businesses in China, starting in Hainan. Go through the detail what is going on and more specifics is difficult to say because, obviously, this is a competitive environment. But I would say that we have identified several projects that will materialize on next year and depending on regulatory requirements that will be fulfilled, I hope, soon, we will be able communicate more specific things. But still, there is not a specific number of issues of projects that will be finally allocated to this joint venture until we know the most important thing, is the regulatory approvals. Regarding the second part, we are also very interested that Alibaba will contribute with, Dave, obviously -- probably the best -- level of the best ever possible digital skills to the digitalization of the company worldwide. We have been, for many years right now, 3 years, commenting on different projects. One of them has been developed in 65 countries. The explanation about the evolution of the project has been also provided to the market many times, especially in this Analyst and Investors Day. But I think there is a necessity that the company should implement. And the only way to do it for engaging with the customers in the whole journey for the travel is through technology. It's how to deliver merchandise in any time, in any place at the speed that the passenger customer is expecting it, and also with a more flexible way in order to facilitate the customers to decide. And this is something that technology will facilitate. This is a very important project for us. It's a transformation project that will happen during the near future. And when we will be in the position to comment on that, we will be more specific. But it's probably the most relevant thing that has happened in the history of the company if we can do it properly.

The next question is from Edouard Aubin from Morgan Stanley.

Yes. Just on the guidance you gave in terms of rental charge, I think you said CHF 1 billion for the current year. I think Aena in Spain, they published their results last week for the first 9 months of the year. And I think, if I'm correct, they are treating the MAG close -- they have, which I think is around EUR 350 million to be actually paid by you. And I think the cash payment will happen early next year, if I'm not mistaken. So how do you kind of reconcile your CHF 1 billion kind of guidance for 2020 with what some airports are booking from an accounting standpoint? And just to stay on the topic of the MAG payment. So if the airports are limiting the downside with you this year by kind of waiving the MAG payments, why wouldn't they share some of the upside by having higher -- close to -- closes of -- sorry, return to better fortunes with you, for example, having higher concession fee as a percentage? And lastly, just to come back on the topic of China. Am I right in thinking that in order to operate the duty-free business in China, you would need to partner with a license holder in China? Or what can you do today without partnering with the license holder? I guess I assume you can operate the duty-paid business. But what can you do from a duty-free standpoint?

Thank you, Edouard. Allow me please to comment on Aena because I am very close to that. I think what we have said is that in 2020, the fixed minimum annual guarantee that we are targeting savings is CHF 500 million. This is what we said. Then total drop in concession fees is also 1 billion or more and CHF 1 billion based in variable and fees. But this is a specific CHF 500 million for 2020. That is added to the other CHF 500 million in OpEx, total CHF 1 billion. This is the explanation. Regarding Aena. I cannot comment on Aena, I don't know what Aena says. What I know is what we are doing, and I am very sure that we are going to complete this target that I just commented on because we have more than that. As I mentioned, we have, today, formalized CHF 262 million. And we are in the process to formalize the remaining part to reach CHF 500 million, maybe above CHF 500 million. And there is nothing today that shows that is going to be different. Whatever -- I didn't participate in this call. I cannot tell you what they say, but it's not the issue here. The issue here is we are going to deliver CHF 500 million savings in minimum annual guarantees, and this is in the process to be complete. One part is already documented. The other part will be documented during the next weeks. Regarding the MAG payments and, I don't know, what is -- the question is if we are paying higher variable because we don't pay the market? The answer is no. I think this is clear. I already commented on that in the past, is what we are doing is renegotiating the minimum annual guarantees. Sometimes substituting that by variable. But the variable is obviously, far way lower than the minimum annual guarantees and providing us the flexibility that we pay in most of the cases is based in passengers if there are passengers. But the percentage is not going to be, by far, even close to the minimum annual guarantee. And regarding China, you are totally right. You need a license for operating in China, and you need to deal with a license holder today. This is the legal structure today, is correct. You need a license holder for operating duty-free in China. That's correct.

So you're currently negotiating with one? And are you going to start duty-paid right away basically? Or what are the plans?

No. We are planning to start operations in duty-free. If we start, obviously, depending on many things. But still, I think we are in this position to say that our intention is to start operations in duty-free.

The next question is from Jon Cox from Kepler Cheuvreux.

A couple of questions for you. You've been very kind to provide this long-term recurring savings, this CHF 400 million figure. Just wondering, can you give us a rough idea of what your concession fees as a proportion of revenue will be next year? Is it possible to do that? Because you seem to be renegotiating everything towards more flexibility. Should we assume it's going to be somewhere around the 30-odd percent, 31%, we saw 2019? Or should we think the new normal is around 35%, 36%? That's the first question. Second question, just on the gross margin. Are you confident you can get back to your typical 60% gross margin in the future? Then with this sort of information, we can try and build some building blocks in terms of where your profitability and cash could go depending where sales are in the future. So that's the sort of first part of the question. And then just in terms of the outlook next year. And I can see a lot of airlines and airports are talking about different testing procedures. I just wonder what your take is on what's happening in terms of trying to limit the number of quarantines to encourage people to start flying again as some of the airlines are hoping to do. Because at the moment, it looks like we're going to get this on/off, poor travel probably lasting well into Q4 next year in the absence of a vaccine, unless there is some sort of faster method in terms of quarantines or testing going forward. And I wonder what your take is on that.

Thank you, Jon, for the questions. The first one is difficult to answer because as Yves explained, depending on the final agreement, the concession fee will be accrued in the MAG relief line will be accrued as a different IFRS 16 treatment. I would say because you are talking about the future, it's very difficult to say. But let me say if sales are recovering in the sense of, I don't know, 28%, 40% is the number of passengers drop that the market is forecasting today. But you know this figure changes dramatically from one day to the other. But in this line of 28 -- minus 28%, minus 40%, the 34% is not going to be far away. I think as soon as the situation normalizes, it will be even lower than the previous 30%, as you know, 29.9% or 30%. But I am talking about in a pre-IFRS 16 situation. I cannot comment on the specifics because depending on how we close down the agreements with airports, this will be different. But I think you have a line of investigation now. Then regarding the gross profit margin, I don't have any issues here. The gross profit margin will reach 60% again, not in 2021 because we probably need to clean up some inventory from now to the end of 2021. I think the gross profit margin in our company is very resilient. What is happening now is nothing related with the fundamental gross profit margin. The commercial gross profit margin is still the same. The difference now is the amount of promotions, the amount of activities, the discounts done through inventory cleanups, many other aspects that are impacting the gross profit margin and will impact the gross profit margin, especially during the last quarter of 2020. But depending how the business is evolving in 2021, maybe in '21, too. But as soon as the business is normalized, the gross profit margin I am sure is around 60%. The outlook for next year, this is very difficult to say, I don't know. I think the -- probably, what in the short-term will make more difference will be the testing. I think testing procedures implemented will facilitate confidence, and the people will travel more and more often. And I think the release of quarantines added to that is probably the best starting point for the re-initiation of business. Today, what we have seen is the business is very small, but it's very resilient. I think there are people traveling, and there are people going through the shops with no obstacles. And I haven't seen and we haven't perceived, in this research that we have done, any concerns. The problem here is, obviously, number one is quarantines; and number two is these testing procedures. If the testing procedures are implemented, the business will reinitiate faster. Quarantines are depending on the circumstances from the health point of view that I cannot comment on because I think it's very complex, and I cannot comment on that. But I think if people still wants to travel, what the research is telling us passenger results and customer research that we have done is that nothing has changed fundamentally. When there is somebody in the shop, they are buying now more than before. And the average spend per ticket and the average spend per head is higher than in 2019. This is fact. I'm not talking about statistics that are in future development. I am talking about what happened during the last months. That's all from my side.

I want to just have two follow-ups. You've given us great guidance on the net debt for the year. We can assume it's going to be maybe another CHF 300 million cash burn in Q4, so CHF 3.5 billion on the sort of debt and balance sheet side. Just wondering on the P&L side. Obviously, it's very, very messy what's happening. Do you have a guess -- a best guess for underlying EBIT, that figure for this year? I'm sure I'm not the only one thinking it could -- that could be anywhere by the end of the year. That's the first follow-up. The second one is I think you would have mentioned you could move over to Swiss GAAP at some point, which would obviously simplify a lot of the reporting structure, which is incredibly complex on occasion. Wonder if there's any more thoughts on that at all.

Thank you very much, Jon, for the question. So look, in respect to EBIT, I believe that -- well, first of all, we cannot give any guidance for the year. But I think having said, so if you summarize what we have said before, in respect to savings of personnel expenses, concession fees and general expenses and also the top line drop of 70%, you basically get pretty quickly to the EBIT number. Then in respect to the accounting standard, look, that's something also we cannot comment on. So obviously, there are different accounting standards out there. And there is U.S. GAAP, there's Swiss GAAP FER, which would lead to a different treatment of the leases and basically, potentially help in respect to the treatment there and generate more transparency in that regard. But then on the other hand, it has other potential disadvantages. So it's something we would need to analyze in detail. And if it's an option, we will inform the market in due course. But so far, I cannot comment more than that.

The next question is from Mr. Mestari Jaafar from Exane BNP Paribas.

It's Jaafar from Exane. Just three questions for me, please. The first one on your revenue guidance or rather indication. So to be at minus 70% revenue for the full year, you cannot have any slowdown from the minus 76% of October. You seem comfortable with that. But this also means, I guess, that you start the year 2021 not too far from minus 70. So I appreciate you're only showing us third-party forecasts on that slide, but how realistic is it that 2021 ends up only 25% or 35% below the pre-COVID levels. And second question, just in terms of the proceeds from the equity raise. You're mentioning CHF 300 million in the Hudson buyouts, but then for the rest, it's a combination of strategic growth and supporting the balance sheet for the remaining CHF 570 million. Is there any broad split you could give us on that for how much you could allocate to growth opportunities at the maximum? And how much you will absolutely keep on the balance sheet? And lastly, a very broad question right now. It's all about executing on cost savings and capturing every dollar of the revenue recovery, of course. And -- but if you were to start thinking about reinventing the business and venturing into completely new channels in a complete blue sky thinking, what are the options that you have to go get extra revenue outside of airports, outside of cruises, outside of border shops, please?

Okay. I think regarding the last quarter is correct, the assumption. We are planning to be stable and in line with what we have seen in October. And the reason is we have seen what happened in the last 2 months regarding the implementation of restrictions and limitations of traveling. And given the last part of the year, we are expecting also more new shops will be reopened. The shops that we have reopened so far are performing. I wouldn't say well because the word is not correct, but are performing. It's not like they are not selling anything. And I think to maintain the minus 70% will require that the new shops that are in the process to be opened are already open because there are some of them -- especially in South America, already opened, will maintain the level of whatever happens in Europe so far. Regarding the proceeds. The proceeds are strategically for supporting the financial situation of this company, number one. And in terms of strategic growth opportunities, we have some of these ones. We have already announced one is the contract in Sabiha in Istanbul, the second most important in Turkey and space in Istanbul. And opportunities like new concessions, we will continue. To split it between supporting and nonsupporting, I cannot do it now. It's very -- the uncertainty is very high. Probably during the next 2 or 3 months, the only thing that we will be able to do is to be alert to maintain the level of efficiency in the cost cutting, but also to maintain the level of liquidity as high as possible. And finally, well, this is obviously a very interesting question. I think it's probably the most interesting question. Is there a business model that will move this company, Dufry, as a global travel retailer to something else? And I think you have a model. Of course, we have a model. And Alibaba will play a significant role in that. How to become a global digital travel retail company operating in 65 countries, far away, obviously, number one. With the combination with institution like Alibaba, with the level of resources they have, is part of what we are talking about. We have a completely, obviously, picture about what we would like to do, but this is -- the point now is how to exchange these ideas and opinions with Alibaba and see what is the next step. I cannot comment on the market on that. It's very early, very, very early. But if the question is, do you have a model as a company for creating a different company after this pandemic and the crisis? The answer is yes. We have a model, and it's not a model that will happen in 20 years. It's a model that will happen very soon.

The next question is from Gian Marco Werro from MainFirst.

Three questions on my side. First one on the CHF 400 million cost savings, out of which you mentioned now during the call, CHF 270 million is related to personnel expenses and those are the recurring cost savings. So I'm quite surprised, I mean, those CHF 270 million account for around, let's say, over 20% of what you paid to your employees last year. So how can you achieve such meaningful cost-cutting on a recurring basis? And the second question is in relation to your contracts and competitors. Here, of course, you have very long-lasting relationships with landlords and also your contracts have a duration of around 7 years on average. However, contracts might also be at risk, I guess, without doing juristic background here. How do you assess the risk of competitors such as Lotte or Shilla to replace Dufry for some of the current contracts that are under negotiation with landlords? And then my third question is in relation to your space growth or the retail space growth. You mentioned 4,700 square meter more space, which is a positive growth of 1% versus last year. But just overall, you had a negative net concession growth year-to-date. So where [ did you move the ] spaces in travel retail?

Well, regarding the CHF 400 million is what I said, is CHF 270 million personnel expenses and the remaining part is operational expenses. I think it's obviously different if you were -- we're having all the information. What we have done in Dufry is a complete reorganization. The reorganization and restructuring is based in decisions that are oriented, first of all, to change the way we work -- we used to work and to become the company more efficient and faster in terms of execution. The main decisions have been, so far, is replacing -- in this case not replacing -- is dismissing this line of divisions, divisional structures that we used to have in the past plus the merger of the commercial activities in the country, in the commercial activity between the structures -- commercial structures in the country, in the divisions and in the platforms, in the global platform. This has been added to a new way of operating centralized from Dufry in Switzerland instead to decentralize the operation through the territories. And as a consequence, the most important part of probably all of these CHF 270 million is related with dismissal of people, okay? Contract, 7 years. If we can be replaced by competitors, I don't know. I haven't seen one single case like that in my life. I cannot answer the question. Is any competitor of Dufry in the position to step in a contract where we are negotiating the rent? I doubt it because, obviously, the negotiation of rent is based in the lack of passengers. As far as the passengers are not there, I cannot imagine anybody in the wall, going to an airport telling, yes, I want this contract at this range as Dufry. I cannot believe it, but why not? There are every type of situation, but it's not likely to happen. And then the space growth is a significant important aspect of the growth for the future. I think in terms of the model, you need to count in around 5% of net opening in the square meters compared with the 470,000 where the 470,000 will be open, totally open, per year. What happened during the last days or weeks is that we have allowed, obviously, to close down some shops that, in our opinion, could not be recovered due to the coronavirus during the termination of the contract. That's the reason of this minus 2.8%. 2.8%, of course, of sale is very low. It's not, in a total normal circumstances, almost 0, is nothing, is irrelevant. But with the normal circumstances, we are not talking here -- we are talking here with a significant drop in sales. It is more than CHF 2 billion, I think, to something that will impact the 2.8%. It's not relevant, believe me. 5% is the target for continuing with a normalization of the company regarding new spaces.