Avolta AG (AVOL) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Avolta's Q4 Results 2023 Conference Call and Live Webcast. I am Alice, the Chorus Call operator. [Operator Instructions] At this time, it's my pleasure to hand over to Mr. Xavier Rossinyol, CEO of Avolta. Please go ahead, sir.

Good afternoon, good morning, good evening, everybody. Welcome to this first, full year results presentation of Avolta. The result of the business combination between Dufry, the Travel Retail global leader, and Autogrill, the global leader in F&B in the travel space. I'm here joined with Yves Gerster, our CFO, and together we are going to go through the full year results 2023. Starting in Page 4, I'm going to give some highlights of 2023. The main one, obviously, is the merger, is the combination between Dufry and Autogrill. Together, we are something unique and different. Starting with the size of our network in more than 73 countries, with more than 5,000 points of sale that sets us apart from any other player in the industry. Also, give us access to more passenger data than anybody else. And that allows to build more relevant commercial offers to those passengers. The combination of passenger growth, plus this capacity to grow faster than that is the first transformational effect of the merger. The second message is, we are delivering in that combination. On the cost synergies, we already said that, they will be delivered a year ahead instead of 2025 in 2024, CHF 85 million cost synergies with savings on the restructuring cost from the initial expectations, CHF 25 million in '23, CHF 25 million in '24. We are also delivering on creating a unified group across all the 4 regions that addresses the passengers as a whole, both on retail and F&B. To reflect that we are much more than the sum of the parts, we change the name, and we are positioning that name vis-a-vis the landlords as an operator in the industry that can do things nobody else is able to do. So the combination allows us to be bigger and more diversified, benefiting both the growth but also the resilience. Being exposed to so many markets make us more resilient to external shocks. Moving to next slide, it's also a very strong message is that we are actually delivering and executing on everything we said we will do. Starting with the full year results 2023, we delivered a 21.6% organic growth, reaching CHF 12.5 billion on revenues, with an EBITDA margin of 9%, both ahead of the initial internal and external expectations. That translated in CHF 323 million of equity cash flow, also ahead of expectations. Equally important is that the strong performance we see across all the regions continues in 2024. We do not see any slowdown in January and February 2024, and we remain very optimistic for the remaining of the year. We are also executing on every pillar of Destination 2027, our long-term strategy, on consumer centricity, on delivering an absolute new way of experience travel through our stores, our shops, and our restaurants. I'll come to that in more detail in the next few slides. Third, we are also executing in business development, with a strong performance across the 4 regions, and including a few very important renewals. For example, the Spanish, where we renew practically all the contracts we had and we are so far very happy with the performance of Spain, which is slightly ahead of the expectations. We also renew for 15 years one of the top 3 contracts we have in North America, Las Vegas. We also increase our presence in China with a new concept, a full Master Concession in one of the Chinese airports that will allow us to manage both retail and F&B. That has been across the board. That's only a few examples. Our renewal rate has been more than 95%, but in key markets like U.S., it has been close to 99%. We also deliver with a very clear capital allocation policy. After a very strong deleveraging that Yves will explain, down to 2.6x net debt to EBITDA, we are targeting to further go down to 1.5x or 2x over the next years, potentially going to 2.5x from time-to-time if needed. 1/3 of the equity free cash flow is distributed in dividends, starting already on this full year results if the General Assembly may approve CHF 70 per share, and the remaining 2/3 of the equity free cash flow going to either deleveraging or for strategic opportunities that could include some bolt-on acquisitions from time-to-time. Going to next stage -- next Page, we have here in a little bit more detail the key financials. The key message is we have performed better than initially expected, both internally and externally, and also a strong performance versus 2022. I mentioned already the key numbers. I'm not going to repeat them, but I think all the lines have contributed to the improvement, both of the EBITDA and the equity-free cash flow and the net earnings that we will see later. We thought that being at the full year results and being the first time we present the combined results for a full year between Dufry and Autogrill, it was good to make a refresh of the strategy and the equity history of Avolta. And that's, if we move to the next page, Page 8. Some of the key messages of what. Avolta stands for. First is growth. We are in an industry where passengers grow 4% or 5% per annum. And on top of that, thanks to our new customer focus, traveler centric strategy, we will grow on spam per ahead on top. The second key message that thanks to the diversification we have today, we are more resilient than ever before. And we are more resilient than Dufry or Autogrill separately. Macro-economic effects, geopolitical effects, or even the risk of a single concession is lower, much lower than ever before. That is why we feel confident on not only generating growth, but generating that growth on a resilience manner. The third message. We are totally committed to deliver on a strategy destination 2027, particularly on the customer centricity and the geographical diversification. I'll explain that in a minute. The consequence of all that is a solid financial performance, very clear long term targets, with the aim to generate superior and sustainable shareholder value creation. And let me go one-by-one to these 4 key messages. Starting in Page 9 with the passenger growth. You have 3 graphics here. What you can see is that, the expectations for the next 15 years is an average growth of more than 4% on the passengers. And this is extremely consistent with the past. So it's very reliable data. That means in 15 years, we will double the number of potential costs. Second, the graphic on top right, it shows that in the last couple of quarters, the expectations also for the short and mid-term forecast is improving. So it's not only long-term good prospects, but accelerating good prospects for the mid and the immediate term. Third graphic, consistently passenger growth is ahead of GDP growth. That is on a global basis, but also in each of the relevant markets where we are in. And there are a few trends that are further supporting this growth. More leisure, there is an increased trend of leisure traveling. Also a new opportunity, thanks to this hybrid model of working from home and the office. Allows more breaks and more leisure travel along the year. I wanted to use the word a massive opportunity. My team said, well, maybe you say a very big opportunity. So very big opportunity on the underlying growth of the passengers. If we move to the next slide. Our diversification, today, we are in 73% countries in more than 1,000 locations with more than 5,000 points of sales with more than 1,000 brands, more than 1,000 concession partners across the world and with exposure to 2.3 billion passengers every year. Very high retention rate of 95%. When you combine all that, what you see is the opportunities of growth, because we can understand passengers better than anybody else. And we can adapt the offer to what they really want. And second, the resilience I already mentioned. We probably will have questions about some of the disruptions we have in the world from a geopolitical. And we will have to say, we do not expect them to have any effect on 2024 sales like they didn't have any effect in 2023. And how is that possible? Because, of course, there are some areas of the world that are affected, but we more than compensate that in other parts of the world thanks to our network. If we move to the next slide, this uncompromised commitment to deliver on the 4 pillars of Destination 2027. Starting by the travel experience revolution, making passengers happier. I have a couple of slides to go in more detail. But the bottom line is, we do not decide. What we put out in stores, in our shops, in our restaurants on a central manner or because the suppliers say so. We have changed completely the way we work. We offer what the passengers really want. And that's different from different nationalities, different type of travel, different age groups. And we are accelerating that in a very substantial manner. Having Food & Beverage and retail gives us more opportunities to adapt better to those changing demands. Second message, geographically speaking, we know very well what we want to do. As I mentioned, we are having a very successful renewal rate in the main markets in the Americas and in EMEA. But, of course, we have an increased focus in Asia Pacific. And Asia Pacific is China. It's the Chinese travelers, but it's much more than that. India, Vietnam, Indonesia, many other countries have massive populations. And they are reaching the level of GDP per passenger that historically makes them a powerhouse in the travel. So Asia Pacific will remain a diversified area with all kinds of passengers, but definitely a very interesting one. Third pillar, operational improvement. We have delivered unquestionably on the synergies, but more than the synergies. We have improved EBITDA margin this year more than the results of the synergies. We keep on a very disciplined approach to portfolio management and a very disciplined approach to cost. And everything we do, we try to make sure that the effects it has in planet, people and communities, it is affecting positively. Moving to next stage -- next page. A couple of slides on the commercial strategy and the consumer centricity. The passengers are changing. By 2027, 70%, 7-0, of the passengers worldwide will be Millennials or Generation Z. The good news is that Generation Z 65%of them say travel and knowing the world is #1 priority in their life, and the #1 priority on where to spend the money. And as we know, they will be one of the largest move of wealth over the next decade to those generations. Of course, as you can see, they don't necessarily consume on the same way than older generations. They focus on Brands Identity, on Experience, I'll come to that later, Sustainability, Digitalization. That's why we are adapting to better and better address these new trends and this new potential. But we have something that is very unique. Those potential passengers are only a few meters away from our stores. So if we find what makes them happy, what makes them move, we can bring them to our restaurants and our shops much easier than bringing them on a higher street like in other areas of the consumer spending you need to do. And we all do that, because we are convinced we can drive spend per head, spend per passenger, on top of the passenger crew. Moving to the next slide. We are executing and we are moving ahead with all the key initiatives we have already described. To name a few, Flexibility. This is an industry that designed commercial concerts to last 10 or 15 years, the duration of the contract. We believe that is not possible anymore. You need to change your offer as fast as you can. We have introduced more than or close to a thousand brand innovation. We have introduced more than 70 new brands. We have started with smart shopping pods, pop-ups that you can move. Every shop should be able to adapt to the changing niche. Second on Digital & Generative AI. As I already mentioned, thanks to our network, we have access to more passenger information than anybody else. But just information, if you don't use it, it doesn't make a difference. We are putting together all that information from the different parts of the group. And the good thing is that AI can accelerate massively, the intelligence behind that data. I don't believe generative AI will solve every problem of the world, but one thing it does very well is use big amounts of data and extract intelligence and recommend actions that you can then use to improve your commercial performance. Our digital engagement to give data this year has doubled and have gone already to 20%. Entertainment. We have done a lot of tests during 2023, and we know I can say it works. And entertainment could be a digital screen. It could be live music. It could be a magician to entertain children. It could be gaming for teenagers. You name it. All of it is intended to slow down the passenger that might be rushing into their gate and focus on our commercial offer. And when you are able to do that, we see double-digit increase in spend per head. Innovation goes much faster than that. We mentioned the smart stores. We are at 52 now. We started with 6, and we will go to close to 100 by the end of this year. But we have seen that when you use actual data of what is happening in your stores to improve the assortment, to improve even the staff, you can generate additional value. All of this and many more other things we are doing is for the traveler, but it's also to show the landlords that we are a different operator than others, and therefore, increase the chances to win new spaces and also to attract brands in a different way. We see that if you interact with them with an unadded value that nobody else has, you are able to extract more margin from them. If we go to next page, our main target is to generate shareholders' value. But doing that, also taking care of what we think are key constituencies for the company, that is the planet, is our own people, as is the communities where we are. But we don't want to have a nice report here and there. We want to make things that make a tangible change that our people, our communities, and the people around us, like the landlords, that we are part of the same community in an airport or in a motorway, we all see that the voltage contributing in positive change. If we go now to Page 15, and all that, it needs to be reflected on financial performance. And we have very clear outlook for the next few years. This outlook is to 2027. The data I'm going to give is in constant exchange rates and is per year. We expect an organic growth of 5% to 7% per year, an increase on the EBITDA margin between 20 basis points and 40 basis points per year, an equity free cash flow conversion starting on the 28.6% of 2023, increasing between 100 basis points and 150 basis points per year. That will bring the leverage to our capital allocation policy of 1.5x to 2x. And 1/3 of the cash flow will be distributed as dividend. For 2024, with all the information we have, we believe we are going to be on the top part of that range. And in revenues, in turnover, maybe even a little bit higher in line with the consensus that there is in the market today. Thank you for your attention. I'll come back in a few minutes for the conclusion. Now I hand over to Yves. Thank you, Yves.

Thank you very much, Xavier, and good morning, good afternoon, and good evening to everybody on the line this afternoon. Looking at the financials, let me start first with the top line. Looking at the different regions, all of the regions have contributed very well to the excellent result in 2023, with the highest growth, and that's not as a surprise, coming from APAC, which started on a much lower base. Looking at the different business lines, we have now, with the combination with Autogrill, a very balanced approach between 1/3 duty-free, 1/3 convenience/duty-paid, and 1/3 coming from food & beverage. Overall, in many, many regards, and you see it on the slide, from a geographical point of view, from an assortment point of view, from the business lines, the channels, and the category mix, et cetera, et cetera, the company is very resilient and very diversified, which supports very much the growth Xavier mentioned before also going forward. Moving on to the next slide, Slide #18, with the P&L, the core P&L, as we used to show it since about 1.5 years. Before we get into the details, what is important to note here is what we mentioned many, many times over the last year. With the combination with Autogrill, some of the elements and different line items have changed quite a bit because the 2 heritage companies, Dufry and Autogrill, now become Avolta have different metrics. On an EBITDA level, they yield similar performance, but if you look at the different cost lines, there are differences. And therefore, what we show here is not Dufry standalone in 2022, but we show the pro forma combined entity already in 2022 on 11 months to have a comparable basis. Looking at the different elements in more detail, starting with the turnover. Turnover came in at CHF 12.5 billion, which represents an organic growth of 21.6%. A very strong result on increasingly challenging comparables to the previous year. Looking at the different cost elements, concession fee is slightly higher than last year. Here it's very important to note that in 2022, especially at the beginning of the year, we have still received some support as a consequence of the COVID pandemic. Personnel expenses is slightly lower than 2022. That's on one hand side an effect of the higher revenues, on the other side our efficiency internally coming on one hand side from the synergies and on the other side also by a number of initiatives, including internal first, where we are hiring instead of on the market internally within our own organization. EBITDA came in at CHF 1,129 million, 9%, a very solid result also compared to the outlook we have provided in the second half of last year, as commented by Xavier earlier. Depreciation and amortization is with 2.5% a little bit lower than in 2022. Please keep in mind that in 2022, we had some minor, but some impairments, which led to a slightly higher depreciation and amortization. In regard to financial results, that came in with CHF 201 million, income taxes with CHF 159 million, or 25.9%, which is from our perspective, a normalized level, which we can accept also going forward. Overall, core profit to equity holders with CHF 308 million almost doubled, or actually more than doubled compared to the previous year. So, overall, on all lines, be it turnover, EBITDA, and also the net result, a very strong performance. Moving on to the next slide, Slide #19, with the translational impact we have on our financials. As you know, we are reporting in Swiss Francs. However, most of our revenues we generate in other currencies, and you see that on the top right side of the chart. 44% of the revenue is coming from U.S. dollars, followed by euro and pound sterling. Now, what happened over the last couple of years, and you see it on the bottom right-hand side of the slide, is that the Swiss franc has appreciated quite a lot over the recent years against most of those currencies. The impact between 2019 and 2023 is actually 11%. And on the top right side, we thought for illustrative purposes, we would like to show you the impact of that. So on the left hand side, you see actually the impact in reported numbers from 2019 to 2023. It's a negative of 7.5%. However, if you take the same numbers and you express them in U.S. dollars, the minus 7.5% actually turns into a plus of 2.5%. So it's a delta of 10%. Again, it's purely for illustrative purposes on the top line. If you look at EBITDA margin, equity free cash flow conversion as a percentage of EBITDA, there is no impact at all. We have a natural hedge in place, as we have mentioned many, many times. We are sourcing, pricing, and selling in hard currencies in the corresponding markets. So there is no FX impact in that regard. It's pure translation. But we thought it's important, especially also for modeling purposes, because the translation effect is something which from time to time can get lost in translation. Moving on to the next slide, Slide #20, with the cash flow statement. The key impact here is obviously the good operational performance, starting with the core EBITDA. On the cash flow statement, there are not that many elements which are noteworthy. There are basically 2. #1, from a net working capital perspective, the way I like to look at the picture is taking the first 2 lines, the non-cash items and the change in net working capital together. There, you see a slight positive effect if you take both 2 numbers. However, the effect is less than last year. There are obviously some swings in there, but the way we like to look at it is net working capital in principle is neutral in the medium and long-term. On the CapEx, we have seen a normalization of the picture. CapEx came in at 3.5% of turnover, whereas in 2022, we were still below that level with 2.8%. Reason for that, as we have mentioned many, many times, was the beginning of 2022, where we still had Omicron variant, and therefore, were hesitating with spending money in that regard. Otherwise, nothing noteworthy on the cash flow statement. The result is strong, with an equity free cash flow of CHF 323 million, and a reduction of net debt by CHF 140 million. The difference between the equity free cash flow and the decrease in net debt is mainly related to the combination with Autogrill. As you remember, most of the commitments there have been paid with Dufry shares. However, there was a small portion of net debt of Autogrill. And on top of that, in the MTO, we had around CHF 50 million of commitment with cash. And that's basically a big part of that difference. On top of that, some FX effect on net debt. Moving on to the next slide, Slide 21 with the balance sheet here, just 2 very simple implications. #1, obviously, the combination with Autogrill, which basically affected most of the lines. And secondly, business development of the organization. We have extended and entered into new concessions and extended some existing ones. And that had implications on lease liabilities and right of use assets, the famous IFRS 16 lines. Moving on to the next slide, Slide #22, with the financial net debt and the leverage. Here, the same picture as before, we have decreased net debt to the lowest level since around 8 years, i.e. 2015. So very strong performance, also here as a consequence of the strong cash flow generation. And on leverage, we came down from 4.8x by the end of 2022 to 2.6x by the end of 2023. Obviously, a consequence of the good performance of the operations and as well as the combination with Autogrill again. And the combination has been mainly financed with shares, as you know. As mentioned by Xavier before, the target of the organization is to go down to 1.5x to 2x in the future. Moving on to the next slide, Slide #23, with the maturity profile. Also here, 2 messages on one hand side, the maturity profile is still or the debt situation is still very balanced and diversified. We have 80% of our debt on the fixed rate coupon with only 20% of the drawn debt on the variable. We have a well-balanced split between different products, different currencies and different maturities. There's obviously a second point, which is the maturity in 2024. Here, we will address this maturity in due course and plan to refinance it with either a new bond or cash or a combination of a new bond and cash in due course. Again, the group has access to CHF 1.6 billion of liquidity, which is basically split into CHF 700 million of cash on the balance sheet. And on top of that, an RCF, which is undrawn portion is CHF 1.9 billion. So with that CHF 2.6 billion of available liquidity, we do not see any refinancing risk at all. We have waited opportunistically to find the right window. And I believe the right window is there now. And we will address that in due course. Having said that, I'm handing over back to Xavier.

Thank you very much, Yves. If -- this is the last slide, the key messages are pretty simple. Thanks to the combination and our network, we expect to grow not only in line with passengers, but ahead of passenger growth. Thanks to our data, our consumerist centricity, to have F&B and retail, we can do things nobody else can do. And that will allow us to be structurally having a competitive advantage for growth. On top of that, again, thanks to our network and our capacity to operate in many geographies and in different segments and channels, we are more resilient than ever before. Microeconomic swings, geopolitical disruptions, and the risk associated to specific concessions are massively decreased from the past. Third, uncompromised commitment to focus on cash generation and return on shareholders. And because of all that, we are having a very strong commitment on the long-term, the mid-term. And that's the outlook you see here that I just explained a few minutes ago, with a point that in 2024, we will be ahead or on the top part of the range. Before going to the Q&A, I want to take this opportunity to thank each team member of Avolta. Starting with the shops and the restaurants and the warehouses, the frontline, they are the ones dealing with our customers daily. And everybody else that is supporting to make these results and the future results possible. So thank you your commitment. It's highly appreciated and highly valued. With that, we will open now the floor for any Q&A. Thank you very much.

[Operator Instructions] Our first question comes from the line of Dhar Manjari with RBC.

It is Manjari Dhar from RBC. I just had 2 questions. The first is, I wondered if you could give any more granularity on the plus 7% year-to-date trading number. Any color you could give by geography would be very helpful. And then secondly, I wondered what are your expectations for the recovery of business travel versus leisure this year? Have you seen much of an uplift in the most recent months? And are you expecting business travel to come back more strongly, maybe this year or next?

So, all the regions have been growing strongly in the first part of this year. In Asia and EMEA, double-digit; and high single-digit in North America and Latin America. But in all the cases, not seeing, when you see specific countries, that is really what matters, not seeing any slowdown. Sometimes what happens is that, of course, there are geographies that are more seasonable than others. And therefore, the behavior can be different. What is relevant is to compare each geography with the specific seasonality. And I can say, we do not see any slowdown in any of the key geographies globally. It's increasingly difficult to distinguish between leisure, business and hybrid models, because sometimes people is traveling more and more for different targets. What we see, and I think that's what is relevant, is an uplift on all the key nationalities, on the key geographies. We still expect a very strong leisure session, that is confirmed by airlines, confirmed by airports, our own sources. There is a pick-up on the Asian travelers in Europe that was behind the past, despite the strong results in 2023, including the European summer season. This year, we lack some of the highest spenders, and some of them are coming back. So in general, the news are positive.

Our next question comes from the line of Harry Gowers with JPMorgan.

And well done on the '23 results. I've got 3 questions if I can. First one, just on the 5% to 7% organic growth guide, maybe you could talk a little bit about spend per passenger and what your assumption is there for spend per packs growth? And if you're seeing any early signs of revenue benefits or the revenue synergies from the combination? Second one, just on the EBITDA margin outlook of plus 20 basis points to plus 40 basis points, which I think applies for 2024 as well. I would have thought the lower end of that at plus 20 basis points is far to conservative, given the full run rate of synergies that come in and the organic growth outlook. So maybe you could just talk about the range of scenarios you see for 2024 on that margin guidance? And what do you need to actually come in at the high end or to outperform the guidance on that? And then final one, just a quick one on M&A, if I can. So I think I'm right in saying you'd be open to do some bolt-on smaller acquisitions. So the question is where and what would you look at? Any geographies or channels that you think are particularly attractive or you might see some gaps in your portfolio?

Look, organic growth for the group is always an average. And as I said, this is a seasonal business. It's different in different regions across the year. So what we do in order to see and judge ourselves, if we do a good job or not on a spend per head is we look at that location-by-location. And even we go further than that, and we look at the key constituencies. We typically talk about nationalities. We are a little bit more sophisticated than that, because it's not the same that in a given nationality what a 25 years old or a 50 years old spend. So we go to that level to really measure the performance of our teams. What I can confirm is that the spend per head and all those key constituencies is actually positive. It was strongly positive in '23 and it started positive in '24. And as part of the outlook, we include, because that's an essential part of our strategy, that we need to grow faster than the passengers. Of course, the passengers that come to our locations, not the worldwide passengers, because sometimes we can be ahead of the average of the world. Sometimes we can be lower than the average of the group. On EBITDA margin outlook for 2024, I think, I just mentioned that on the mid and long-term outlook, we expect to be in 2024 on the top part of the range. And the reason is because on top of the net synergies that come this year, remember, it is the additional synergies minus the restructuring cost, but that's positive. But on top of the synergies, we still want to bring some additional cost improvement. That's why 2024 should be on the top range of the outlook. M&A, bolt-on small, of course, we try to look for places that will fill well our portfolio. And more importantly, that have accretive in our portfolio. We have -- we see a small opportunities here and there. Of course, Asia, to be consistent with what I said earlier on, it's a place where we are looking at specific opportunities, but there are other markets. I'm not going to disclose now for obvious reasons, but we see some opportunities. But again, our focus is organic growth.

The next question comes from the line of Jörn Iffert, UBS.

The first one would be please, what do you see in the consumer behavior? Do you see any skew in your shops towards Food & Beverage, a little bit away from the classical retail or is both growing the same pace? Do you see some up-trading, down-trading for certain categories? So it would be helpful to understand this. Maybe I take the question one by one. This would be the first one, please.

The answer is yes. There is a lot of changes and not only in the segments or the categories, but even at product level, at brand level. I think that is a very important question. And I think the question is more important than the answer. Because recognizing that there is constant changes on the passengers and that you need to adapt to that is what we are doing now more than ever. It depends on the markets. It depends on the situations. So, for example, F&B, we all know it's a segment of the business that might be a little bit more resilient than retail in general terms. Retail could come up in certain moments with a higher path of growth. Having both is what allows us to capture the maximum growth with a lower risk. On the categories, I think we made no secret fragrances, cosmetics. It's growing, especially on treatments faster than in the past. Electronic segment, new type of products. But you see, what is also growing very strongly is cross categories. I think we mentioned, Haute Parfumerie in the past. We have done hybrid concepts combining a convenience store and a coffee store. We are bringing in Spain F&B concepts inside the main duty-free stores first time ever. And the reaction of the passengers is very strong. Because you don't necessarily, when you are traveling, you're thinking about how the shop supplies. What you think is what you want. I need a gift. And you maybe don't know exactly what you want. You might want something expensive. You might want something cool. You might want something that is on an indie brand. And that's why we are reimagining that. I could give you a lot of data, some of which I shouldn't because it's competitive advantage. Because one thing Avolta has now is we have a better understanding on the trends in many places than anybody else. Every year, everything changes. But maybe, I don't know, maybe behind your question sometimes people ask, well, luxury is -- when the luxury had some heat in the last few quarters, we did not see a heat in ourselves, because our luxury is affordable luxury. It's the fragrances. And also we need to think that a lot of our purchase is impulse purchase. People need a gift. And then they are maybe potentially less sensitive than when it is a more intentional consumption. So our -- I'm not going to say we are completely different, but we are pretty unique as an industry on the way people address consumption. That's why despite some financial crisis in some specific countries, even in those countries, we have been performing very well.

And then maybe the second out of 3 questions, if I may. A change in the shop concepts. I mean, what we see on the high street is the trend away from general warehouses to mono-brand shops. Do you see the same at airports developing here over the next couple of years? Do you see this trend right now? And if this trend would materialize, are you operating then these mono-brand shops for the consumer brands? Or do you see the trend that they operate this by their own?

Very good question. Typically, what happens in an airport, also in the other travel spaces we operate, but particularly in an airport, the space is limited. So you will never be able, because of that, to do exactly what it is done in a high street. Also in a high street, people might be thinking, okay, I want to go to that shop. On purpose, they even Google it where it is and they go. Some of these mono-brands, they have already a lot of the purchase decision done ahead of time, and they just go to check the final product. So it's a different way of operating. In our case, you happen to be at the airport, you are doing something else that is traveling, and then your consumption, it's very much related to what you need. You need a convenience, you are hungry, you are thirsty, you need to give a gift, you want to self indulge yourself, you feel guilty because you've been for a week traveling and you're going back home and you need to bring something home. There is a space for some mono-brands and we typically operate them on the airports where we are, but it will not be, it will be a trend, but not as strong as in high street.

All right. And the last question, just a technical one. When we look about on your EBITDA margin guidance with the 20 basis points to 40 basis points improvement each year, is this equally driven by a gross profit margin expansion and SG&A operating leverage, or is this more driven by SG&A operating leverage rather than gross profit margin expansion?

Take that one?

Yes. So look, I mean, the guidance we are providing is on the top line, on EBITDA, equity free cash flow, and if you want also to a certain extent CapEx. We cannot disclose or discuss every single line, because it depends on many, many different elements. It depends also on the P&L, on what I said before, on the different concepts. I mean, for example, let's imagine we grow more into Food & Beverage. In that case, most likely personnel expenses would increase, but gross profit margin would increase. If we, on the other hand, would grow more into travel retail, the opposite happens. So look, it very much depends on the growth in which direction we go. What we are committed to is the improvement in the EBITDA margin. As Xavier has mentioned, 20 basis points to 40 basis points year-on-year, and that's as far as we can go in respect to the guidance.

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

Yes. Jon Cox with Kepler here. A couple of questions as well, some of it, again, on the guidance. Just on the 5% to 7%, typically, if you look at the weighted average of your passengers in your markets, you're probably going to get somewhere around 4% or so passenger growth. So I guess we can take the additional up to 5% to 7%. Really, that will be the additional spending per passengers. That's what you're going for basically, maybe 1% to 3% additional spending per year. That's the first question. The second question is again, just on that EBITDA margin guidance. And if for some of us covering the company for a while, we seem to remember that concession fees going up was a big problem for you historically. Just wondering what your thoughts are on concession fee inflation going forward. I've had a lot of questions about it this morning in terms of your guidance this morning and where concession fees are going. Do you think it's going to be now pretty much stable where we are? Or do you think there'll be sort of ongoing 10 bps, 20 bps a year improvement on that? And the last question about this year's guidance, you're saying you're confident about 7% or even above towards that consensus figure for this year, but you're only growing 7% in the first couple of months. And if anything, the comparables get more trickier this year. Just wondering what gives you the confidence to say you'll be at the top line and maybe you can just add on a little bit about some of those initiatives you talked about doubling the sales per passenger when you do fancy things to shops and that sort of stuff? And how you will be introducing those as we go through the year?

Good questions. So on your question -- on your first question, yes, I think what you said, it makes sense. Traffic in some of the years, if we take the mid-term, could be around 4%, a little bit less, a little bit more. And then the difference is our capacity to manage ahead of that. Look, I think we have been pretty consistent to say that we will work to manage concession fees at similar levels than today, but that the prudent thing is to expect a slight increase on those concession fees. I will keep saying the same. So in our guidance, in our outlook, we expect concession fees to go slightly up over the next few years. But we believe that the operational leverage, the synergies, and the general improvements we are putting across the Board, with this zero-based budgeting approach to everything we do, that we will more than compensate and we will be able, on a net-net, still able to increase the EBITDA margin. Also, one thing that has changed is that the concession fees in F&B are typically lower than in duty-free, and that is also helping the average. Look, your question on February versus full year, it's a very well put, but it's a very simple answer. It's the different seasonality. So, January and February are very low season. And we see, which is the performance in January and February versus last year, of those operations that they are not meaningful now, but they will be very meaningful. And we extrapolate that. And when you do that, if you have, if you have a strong performance already now in south of Europe, to give you an example, you know that, that will have a multiplier effect in summer. That's why we feel comfortable with what I just said.

And just some of these new initiatives you're talking about, conversions of shops where you're seeing an uptick. Can you convert the whole of your store network over the next 3 years, just in terms of, what you're planning to do and how you're planning to do that?

So, to complement my previous answer, of course, when we give an outlook, we take into consideration everything, our best estimate of the passengers, our best estimate of the effect of our initiatives on all key places, the positives and the negatives. In some more key markets like Spain, we have material refurbishments to be done this year. And, even if we don't like it, they have a slightly negative effect during the works and, of course, a positive effect after the works. So, even that has been considered when we mention the outlook. So, we expect the initiatives to have effects. No, we are not going to transform or refurbish all our network in the next 3 years. That is not realistic, but we don't need to do that. What we need to do is to focus on those places where the change could be more material and also to be smart deploying the CapEx. We can, even physically, you cannot do that. You need to agree with airports. You need to do it on the right place in the right moment of the year. You cannot do it in high season. So, what we are doing is to be, have a transformation plan over the next 5 years and we identify progressively where we are going to implement those transformations. Some of those transformations like entertainment does not actually mean a massive transformation of the shop. It might mean training of our sales force. It might be meaning to put some activations. The new digital engagement does not necessarily need to transform the physical store fully, but it can just implement increase on sales because people has a new loyalty program or it has a cross-sell. I mean, you're sitting in a bar, you're having a nice whiskey at the end of your day. Well, that might be a good indication that you might like whiskey, so we can maybe suggest that you go buy and you get an incentive to go after you have that drink to the duty-free store and take one of that bottle. So, it's commercial, it's digital, it's entertainment and in some cases it's also physical transformation of the stores. But this is a multi-year program. I'm not going to be forced to say, look, this is going to happen. This is a revolution that happens in a quarter or in a year. But every year quarter, we should keep going on the right direction. And there is a cumulative effect over time.

It sounds really exciting. Just on the equity-free cash flow conversion, you mentioned previously getting up to 35%. You already managed almost 30% in 2023. Any thoughts where that figure could go? Can it go above 35%? You're talking about 150 basis points expansion per year just over the next few years. But can we go further, way past that 35%?

So, look, I believe it's pretty simple. I mean, we have provided the guidance of 100 to 150 basis points improvement. Now, we haven't given or we don't give a barrier or a maximum or whatever. But if you do, the math is relatively simple. If you take EBITDA and you go down through the different elements, you naturally come to a certain level. I mean, you have the net working capital. We said, in principle, neutral. There might be some swings here and there. CapEx is the 4% over turnover. It's also pretty straightforward. In respect to minorities and also in respect to income tax, this basically can be modeled relatively straightforward. And that basically gives you roughly at the end with the EBITDA guidance, we provide you a natural number. So, from that perspective, look, we cannot provide a specific number or amount. I think that would not be right, but it gives you a very clear boundaries in that sense.

The next question comes from Karine Elias with Barclays.

Thanks again for the presentation and well done on the results. I just had a quick question, and I know you've commented on that in the past, but on your 2025 -- 2024 year maturity, I know this is well covered with the liquidity that you've got. But any preferences, whether you want to repay those with cash or potentially reissue bonds?

So, look, if I can freely wish, I mean, obviously subject to market conditions, but a new bond is definitely on the table. But again, subject to market conditions over the next couple of months.

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

I've got a couple, please. The first one is very boring, so maybe I can start with this. Just on full year '23, you give a pro forma revenue number in the presentation. It looks like 1 more month of Autogrill consolidation. We should add CHF 330 million of revenue when we think about a comparable base for '23. Can you maybe just help us with the same for EBITDA and free cash flow? January, I assume, is a very low profitability and possibly small cash burn month for Autogrill. So, do we start a touch below the reported EBITDA and free cash flow, or is it irrelevant?

Look, in regard to the top line, I mean, Xavi was very explicit on how to model it in regard to EBITDA and cash flow. Look, January, as you have already mentioned, it's low season. It's typically the effects there are basically neutral. So, I wouldn't assume any material amount or anything like that there.

And hopefully more interesting, just on new concessions, a couple of points. One, I just wanted to bring new concessions into the discussion about current trading, 7%. Does it accelerate through the year? Last year in Q1, you were doing plus 3% net new contracts, and you ended the year at minus 1. Is that part of how you see the year phasing, that you actually have a difficult phase in terms of business that probably exited after Q1, Q2 last year, and that 7% in January, February is held back by that, and then it improves? And, of course, you mentioned seasonality in the specific regions. And, bigger picture on the same theme, plus 3% in Q1 last year, minus 1% in Q4, what's the right number over the medium-term? I think in 2022, you were saying 0% to plus 1% net new contracts. A couple of years later, how do you see that? Do you see more opportunities to cross-sell? Do you see more of those master concessionaire opportunities, or is it still 0% to 1%?

Look, #1, the business development opportunities, the new concessions, the new spaces do not come with any particular seasonality, not even on a yearly basis is a guarantee the amount that goes to the market, because that depends on the duration of the existing contracts, building new terminal, new airports. So, you cannot extrapolate absolutely anything for whatever happened in '23 or any given year, and what is going to happen in the future. You could have a very exciting first quarter and very low opportunity in the fourth quarter, but it could be completely contrary to that. I think on business development, what is important is that, first, the weight of any particular concession today in our portfolio is much lower than any time before, obviously. The most important ones in the U.K. and in Spain have been renewed in the last 18 months, also decreasing the opportunities or the potential risk of renewal. Third, I mentioned briefly this 95% renewal rate. In some cases, we actually exited concessions because they were part of this plan of active portfolio management, getting rid of those structurally loss-making opportunities. If you look at the key markets in the sense, of markets where we are leaders and we have to defend more, like the U.S., we had 99% renewal rate. On new opportunities, new spaces, of course, there are countries that are building massive number of airports. That is an opportunity, but that comes with the timing that it comes. Forecasting the specific number of opportunities that you will win when it's not even clear the number of opportunities that will be in the market is very difficult. That's why we decided that is not part of our guidance but we are very big. We are extremely disciplined. I do not need to grow in sales for the sake of growing in sales. We only target new locations if we are going to generate the right return on investment and the right cash flow. So that's why the new concessions will be a number that will be small, but we will not give any specific data at this stage.

And can I just ask, as a follow-up on that 95% number for this year, how does that compare to history? Is it a very good year, slightly softer year? A completely normal year?

I think, if you probably remember, I think we used to say more than so.

So look, typically, historically the number was somewhere between 85% and 90%, but it was quiet for a couple of years now around 90% and most recently 95%. So it's pretty stable, slightly increasing.

You see, the target is never a 100%, because if you have a 100% it means you renew also the things that might not go so well. So it's good that it's in the mid 80%s, 90%s but it should not be on the 100%.

The next question comes from the line of Ali Naqvi with HSBC.

I hope you can hear me all right.

Yes.

Great. Just in terms of that portfolio of contracts, what is the sort of remaining tail of the business that's left that is either margin dilutive or margin neutral? Because I remember it used to be when you were Dufry, it used to be the Spanish contracts. And a follow-up to that is, has the Spanish contract now moved on to the new rates and when will they go towards group averages in terms of EBIT margins? And then I'll start off with that, please.

Your first question is very interesting, but I'm not sure I want to disclose. There are still some cleaning to be done, but I'm not going to give a specific percentage right now. Spain, we are very happy. I think the performance we have seen it is stronger than initially anticipated. The new categories don't start in one day. They start in some days, sometimes linked to the new stores, et cetera. But we have been able to introduce some of those. And the results have been as expected or better than that. Yes, the new rates on concession fees are already there, but the combination of the new spaces, the new categories, the new ratios altogether makes us believe that the contract we sign is a good one. But as we have refurbishments, the full profitability will probably be reached in year 3, but profitable this year, profitable next year, but year 3, probably the full profitability.

Understood. And then you mentioned there's a lot that you can't sort of account for, whether it be geopolitics or disruptions in airlines. How much do you think that you are bedding into your guidance for, let's say, airplane disruption or delivery delays, or if ticket prices get more expensive as a result of that? And then finally, in terms of capital allocation policy, at what point do you start considering either share buybacks or special dividends?

So I think we have considered in our outlook all reasonable disruptions in exchange rate, in plane deliveries, in airline, in strikes, in weather. That happens regularly in certain parts of the U.S. So unless something very extraordinary happens, I think, again, we are used to that. I don't remember 1 single year where we didn't have some type of disruption. So I think all what is reasonable is factored in. What was the second question on the capital allocation? You want to answer that?

Look, on the capital allocation. What we have disclosed is the leverage target and also the dividend policy. And from today's perspective, this is all that we can say to that. There is nothing new or additional to it. I mean, again, leverage target is 1.5x to 2x, but we also allow ourselves to go slightly higher if we find some opportunities for business development and smaller bolt-on M&A. And as Xavi has mentioned earlier, we're obviously considering things like that. And from that perspective, further actions in regard to the capital allocations and further disclosures are not required at this stage.

There are no more questions on the telephone. We now read questions coming from the webcast. The first question comes from [ Arben Hazenage ] from [indiscernible]. Can you elaborate on labor cost inflation in 2024? Do you see this as a margin headwind for 2024?

As we said, I mean, despite some of the challenges in inflation, I think we have proven in '23 once more that we've been able to pass on those increases in the sales price and therefore no effect. We remain vigilant. Labor costs, especially after including the F&B, is an important cost, and we monitor that on a local basis in a very strict manner. Technology is also helping. We have introduced a significant number of self checkouts, even some autonomous stores. So we believe the combination of productivity measures, the improvements thanks to technology, and our capacity, at least partially, to pass through on the prices, all in all allows us to still be confident, despite the inflation pressure on labor to increase the EBITDA margin over the next 4 years.

The next question comes from Simon LeChipre, Stifel. Do you intend to target an investment grid credit rating as you further deleverage the balance sheet?

So look, what we have received last year is significant upgrades in the ratings from both rating agencies S&P Global and Moody's. We are currently in the mid BB space area where we in principle feel comfortable. So look, a further upgrade or a slight upgrade obviously is something we would appreciate. Having said that, it's not our predominant target to become investment grade. What do I mean with that? So look, obviously it would be great to become investment grade. But we will not change our strategy, when it comes to business opportunities to become investment great. So first and foremost, we will make sure that we will growth, we deliver our growth to ultimately generate the cash flow we have targeted for to be able to return the cash also to our shareholders and stakeholders. But if that comes then together with an investment target investment grade rating, fantastic. If not, it's what it is.

That was the last written question. Back to you for closing remarks.

Well, again, thank you very much all of you for your attention. Thank you once more to all the team members of Avolta for an extraordinary '23. As you can see, the market expects more from you, from us the same year. So thank you very much everybody. And make sure this year you travel as much as possible and you buy as much as possible in the shops and restaurants you find in airports, motorways, train stations and cruise lines. Thank you very much.

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. Goodbye.