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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, welcome to the Dufry's Q3 2021 Trading Update Conference Call and Live Webcast. I'm Myra, the Chorus Call operator. [Operator Instructions] The conference must not be recorded for publication and broadcast. At this time, it's my pleasure to hand over to Mr. Julian Diaz, CEO of Dufry. Please go ahead, sir.
Thank you, operator. Good morning, and good afternoon, depending the place you are. Welcome to this Dufry's third quarter trading update 2021. These are Yves Gerster, Dufry's CFO; and Julian Diaz, CEO, participating in the call. The first remarks should be about the positive performance in Q3 based in accelerated volume of sales, sustainable cost reductions, solid financial position, jointly with our disciplined cash management, leading Dufry to our recovery of the equity free cash flow level before pandemic in Q3 2019. At the starting, I suggest we use the presentation disclosure this morning in our website. Please go to Page 3, and we will comment on our agenda for today's meeting. I will start with the group highlights and then update, then I will pass through for financial update. And finally, I will explain the outlook for the rest of the year.Please move to Page 4 and comment on the financial highlights. Third quarter characterized by significant advance in turnover compared to first-half 2021. Turnover reached CHF 2.5 billion, plus 23.6% compared with 2020 and CHF 1.3 billion in Q3. Good progress in the U.S., Central America and Caribbean, and in Q3, good development in Mediterranean, South of Europe and Africa, with a good acceleration in South America is still a slow business in Asia Pacific with 50% of the shops still close. Some are months in general, high season, but we saw demand acceleration well into September and October too, for more regions globally. With Mediterranean, Eastern Europe and Middle East, Central America and Caribbean, North America, Central and North Europe and Southern Europe leading the recovery, and South America and U.K. in the most positive performance since the beginning of the year. The remaining, as I mentioned already, Asia Pacific has the lowest level of performance for the limited international flights operations open yet.The positive sales trend is also reflected in our strong cash flow generation for the quarter, reaching CHF 253 million in Q3, with similar levels to pre-COVID Q3, 2019. At that time, we had CHF 266.2 million despite, obviously, the decrease in sales. Cash flow has been positive since May this year and shows Dufry's strong cash conversion capabilities even in a volatile environment. Dufry's cost management is clearly supporting this positive development. With our full year cost savings, target increased again to CHF 1,870 billion, CHF 1.59 billion minimum annual guarantee release and CHF 810 million personal and OpEx expenses based in sensitivities provided to the market.Net debt and liquidity also improved. Net debt at end of September was CHF 3.086 billion, reduced CHF 266 million during the Q3 2021 and reaching similar levels than in September and December 2019, pre-crisis. Liquidity position was CHF 2,347.8 million compared with December 2019, CHF 1.2 billion, confirming sufficient liquidity to drive re-openings and growth during a significant period of time.And now, let's move to Page 5 of the presentation for commenting on the business highlights. At the end of June, around 65% of the stores were opened, having now increased to more than 80% as today, with 84% of sales capacity already reopened with a total of 1,850 shops. Looking at the regions, reopening are especially good in the Americas and across EMEA, representing around 90% of 2019 sales capacity already opened. In-line with the improved health situation and resuming of travel concession renewals and tender activities are restarting too. Dufry reported several prolongations of contracts as well as important openings or of first ever full-service restaurant at Dallas International Airport, Cambodia, Wales, Dominican Republic and several locations in the U.S. We have also entered the second phase of our collaboration in Hainan which represents an interesting long-term growth opportunity.With the opening of new 30,000 square meters of commercial space in Mova Mall with total commercial surface so far of 33,000 square meters. In this extension, we have added 200 international brands, including a significant number of first entries in Hainan duty-free market. Importantly, from my perspective, we have progressed on our internal journey to identify levels of growth for the profitability post-crisis. And we are implementing initial projects while finalizing the strategic setup in the areas as follows, in the core-- in the acceleration of core business, expansion in alternative channels in duty-free and duty-paid, digitalization, diversification in food and beverage and online, strength of our business model, and finally, the very relevant strategy this year for ESG.Please, let's move for now to Slide 6, ESG highlights. Integral part of our strategy in our ESG engagement with 4 focus areas, customer, employee experience, protecting environment and trusted partner. During the third quarter, we have progressed on various initiatives and are now included in the Swiss Stock Exchange SXI Sustainability 25 Index. On diversity and inclusion, we have set up the necessary governance structure, aligned on priorities and implementation steps and conducted master classes for managers during Q3.We are also progressing on the responsible retailer certification for all the staff related to liquor and spirits and have expanded our overall internal employee engagement channels. On the environmental side, we are on track to achieve our 2021 objectives. We are also an active member in various aviation and travel-related associations as well as participating at ESG industry and customer events to engage with our various stakeholders on sustainability-related matters.Please, turn now for commenting on our trading during Q3 in Page 8 of the presentation. Dufry's third quarter to Growth Evolution 2021 was characterized by a rebound of travel, mainly in the Western hemisphere, with turnover at 55.6% of 2019 levels, reaching CHF 2.5 billion. We see a clear encouraging upwards trend from 26.1% of 2019 levels for quarter 1, 34% for quarter 2 and now 55% -- 55.6% of 2019 for quarter 3, driven by U.S., Central American, Caribbean and EMEA, with all regions contributing positively.October net sales performance trends at 60.6% of 2019 levels with sustainable process weekly-basis. Finally, spend per passenger and sales per ticket values continued elevated. Turning to the regional performance on the next slide, #9, please. Continued progress in the U.S. and Central America, including Caribbean Islands, with the U.S. reopening for inter-continental flies to Europe and U.K. as of November expected to be a further catalyst. Americas reached CHF 1.13 billion until September and CHF 499 million in Q3 with 60% of sales in 2019. South America started to trend upwards too, including Brazil, Argentina and Uruguay, but especially, in Colombia and Ecuador, progressing in parallel with the vaccination campaigns.The most significant uptake was reported across Europe, Middle East and Africa, reaching CHF 1.068 billion at September 30th and CHF 692 million in Q3 with 52% of sales of 2019. Here best performing well Mediterranean, including Turkey and Greece, Eastern Europe, Russia, Middle East and Africa, benefiting from leisure demand and more flexible travel protocols. Also France, Portugal, Italy, Spain, Switzerland and the U.K. saw an uptake since July as vaccination campaigns are progressing and authorities are implementing more convenient intra-European travel protocols.Departure destination with inbound travel to the U.K. benefited from new regulation related to Brexit and duty-free quotas. Due to a set of COVID approach in the APAC region, travel continues to be impacted.Please, let's move to Slide 10, net sales by region and sector. Let me start with quarter 3 performance reflected in regional revenue split. EMEA having advanced from 32.2% in half year 2021 to now 52.1% of total sales. APAC performance will bounce back once restrictions are lifted as could already been seen from domestic travel for example in China. Asia Pacific represented 1.7% of total sales during the first 9 months. Americas reached 37.4% of total sales, positively impacted in the mix by the good performance in the U.S., Central America and Caribbean, an acceleration of process in Canada and South America.The duty-paid segment continues to recover more strongly, but duty-free has already gained share compared to half year 2021 as a consequence of the reopening pattern. Dufry's present in both segments is highly supportive, duty-free and duty paid. Duty-free was 47.2% of total sales and duty-paid 52.8%.And please, turn now to Page 11 and comment on the net sales performance by channel. Airport retail advanced from 82.4% in half year 2021 to now 85% in Q3. More visibly has been the performance increased from 26.6% of 2019 levels to now 51.8% of 2019, especially with the fast reopening in Europe during the summer. Resuming our travel encouraging data for the next months, especially, as I mentioned before, due to the release of restrictions in the U.S. starting on November 8th.Sales performance of various other channels also supported and underlines our ongoing diversification strategy. Border, downtowns, hotel shops, etc. improved from 38.8% of 2019 levels to 62% of 2019 levels, maintaining a good participation in the mix with 3.4% of total sales. Sales to Hainan contributed with around CHF 85 million during quarter 3 and will be transferred to the [ inventure ], as mentioned before in other calls, shortly. The Hainan collaboration will not be consolidated by Dufry.Please, move now to Slide 12 for commenting on performance by category. The category mix reflects the current reopening patterns with domestic and interregional travel recovery earlier. During quarter 3, a strong improvement of perfume and cosmetic, increasing to 32% of the total sales and strongly improved also in performance too, from 25.1% of 2019 levels in half year to 59.7% levels in quarter 3. Very good performance in wine and spirit, 16.2% of total sales, especially due to the positive impact of sales in U.K. and Europe Continental, supported by the new Brexit regulation.Food and confectionary as another core category also fuel increased its performance from 37.1% to 66.6% of 2019 levels, supported due to the duty-paid and convenience store re-openings. Other categories performing in-line with the pattern reopening.Please, let's turn now to Page 13 of the presentation and comment on retail space development. During Q3 2021, Dufry reports several concession wins. Extended for another 10 years, duty-free concession at Santiago International Airport in the Dominican Republic. Extended contracts in Cardiff airport for a further 12 years, the only major passenger airport in Wales. Extended for 5.5 years, duty-free concessions at Cambodia's 3 international airports in Phnom Penh, Siem Reap and Sihanoukville which in 2019 welcomed 11.6 million international travelers.Total global retail space opened during Q3 amounted to 2,208 square meters, predominantly related to several openings in the U.S. and total year, 7,595 square meters around 1.6% of the total retail space. Dufry opened its first-ever full-service Plum Market at Dallas Fort Worth International Airport, which is part of the company's continued strategy execution ongoing and focusing food and beverage business. Refurbishments during the third quarter amounted 4,263 square meters, including stores in Manchester, U.K., Athens, Greece-- Mikonos, Greece, Vancouver, Canada and several locations in the U.S., among others, Nashville, New York, Seattle, Los Angeles and Salt Lake City. The total number of square meters from since the beginning of the year was 14,530.There of several locations in the U.S. introduction of reimagined Brookstone store concepts, including immersive digital elements, an ultra-modern design and expanded product assortment.Please, let's continue with Page 14 and comment on the update of our participation in the duty-free Hainan market. Dufry's Hainan collaboration entered its second phase, the grand opening of-- the grand opening of the additional 30,000 square meters during the third quarter. Now featuring more than 200 renowned international brands and the global duty-free plaza in Mova mall in the city center of Hainan's Capital Haikou in China.Phase II embraced all categories covered by Hainan offshore duty-free policy, including cosmetics, perfumes, bags, shoes, watches, liquor, glasses and jewelry. Additional 6,000 luxury-focused square meters will become available for travelers in 2022. Mova Mall is a collaboration and is not consolidated by Dufry. Mova Mall offers an opportunity to enter the fast-growing Chinese duty-free market and to contribute to the group results from a middle to long-term perspective.Now, please allow me handing over the presentation to Yves for the financial update. Yves? Please.
Thank you, Julian, and welcome to everybody also from my side.On Slide 16, we provide an overview on release of minimum annual guarantees received year-to-date in 2021. This includes waivers and also changes to MAG per passenger. The total amounts to CHF 1,059.6 billion as of October 2021. Those reliefs refer to periods 2020 and also 2021. However, they were confirmed only during the year 2021. Depending on the agreement, MAG waivers are reflected in different lines in the income statement. Depending on the accounting treatment, they are either fully impacting the current year or in some other cases, also future periods.For our 2021 P&L, we are expecting to receive -- to recognize CHF 825.3 million as MAG release on the lease expenses. The remaining CHF 234.2 million are largely subject to the modification accounting and will lead to lower lease expenses, right-of-use assets and lease interest. We will also see an impact on our balance sheet with a de-recognition of right-of-use assets and lease liabilities. This is the case for contracts which now have a MAG per passenger or are now fully valuable, i.e., have no MAG anymore at all.The overall 2021 impact on net profit is expected to amount to CHF 975.9 million. All information is preliminary and subject to final review by us and also the auditors.Turning to the next slide, to the cash generation during the third quarter. Based on the strong performance during Q3, we have significantly improved our equity free cash flow compared to the previous quarters. The equity free cash flow for the third quarter stands at positive CHF 253.7 million. This is comparable to the performance pre-crisis in the years 2017 to 2019. To be very clear here, there have been no relevant one-offs during the third quarter this year. So it's a clean number.Equity free cash flow generation has been positive since May this year. Key drivers to achieve this fantastic result were sales acceleration, a higher than initially expected cost savings. Looking at the net working capital changes for the 9-month 2021 period, we stand at a neutral position with inflows in the core working capital of around CHF 100 million and an approximately similar outflow on the other working capital.Going to the next slide, Slide 18. The strong cash generation also translates into an improved change in net debt versus the previous quarters. Change in net debt stood at CHF 265.4 million in Q3 2021. Equity free cash flow in Q1 and quarter 4 are typically negative, even in a normalized environment. We also expect to see a similar pattern in Q4 this year.Looking into fourth quarter in more details. A cash flow outflow in line with the normal seasonality of our business needs to be expected as we typically see lower turnover on an absolute basis versus the third quarter. Important to mention that we also expect in Q4, sales to perform similar or even improve further on a relative basis to previous quarters. The seasonal pattern will translate into lower inflows or even neutral working capital changes during Q4. We also have some higher interest-related cash outflows, notably coupon payments related to the bonds.CapEx contributions, which are in-line with the recovery are also slightly higher in the last quarter of the year compared to previous ones. For comparison, Q4 cash outflow between 2017 to 2019 was in the range of minus CHF 23 million to minus CHF 83 million, and we are now expecting an outflow of around CHF 130 million despite the lower turnover environment.However, the second half of 2021 will still be cash generative, contrary to our initial assumptions earlier this year, which from my perspective, is really a fantastic result.Turning to Slide 19. Net debt decreased by CHF 266 billion to CHF 3.086 billion since the end of June. With the current position, net debt stands at a similar level as in September 2019, i.e., pre-crisis. It is also in-line with the seasonal pattern of our business as visible in the graph on the left side. Dufry's strong cash conversion capability will contribute to de-leveraging going forward, in-line with our capital allocation priorities. Our maturity profile is unchanged since half year 2021 and related comprehensive refinancing of CHF 1.6 billion. Relevant maturities are only coming up in 2024. What is important to note in that respect is that the RCF which matures in 2024 is currently fully undrawn.Moving on to the next slide, Slide 20. The final slide on the financial update from my side provides you with the details on our current liquidity position. During the first 9 months, liquidity increased from CHF 1,905.7 million to now CHF 2,347.8 million. This was related to the set of refinancing measures successfully executed during the first-half of the year, our continued cost discipline as well as due to the cash inflow during quarter 3. Therefore, liquidity increased by CHF 175.8 million since the end of June with a cash position of CHF 841 million at the end of September and CHF 1.5 billion available lies currently undrawn.As highlighted during previous market updates, we are well-positioned in regard to liquidity and are focusing on the reopening of our business globally and growth opportunities during the recovery and beyond. Liquidity and cash flow management will continue to be the core from a company's perspective as well as from my personal perspective.With that, I hand back to Julian for the reopening trends and the summary.
Thank you, Yves. I suggest we move to Slide 22, for commenting on the re-openings. For October 2021, Dufry estimates net sales to reach 60.6% of the October 2019 level sales, a strong recovery of all the reopened geographies, except in Asia Pacific. By region, net sales in October estimates for Europe, Middle East and Africa close to 62%, Asia Pacific at 7.7% and for the Americas, very close to 61% of October 2019 level.Locations with a stronger exposure to domestic and intra-regional travel and more flexible travel protocol performing well above group average. Dufry's operation in the U.S., for example, reached net sales of 74.1% of 2019. Central America, including Mexico, the Dominican Republic and Caribbean Islands stood at 90.4% of 2019. With EMEA, Turkey, Greece, Eastern Europe and Middle East advanced most with October net sales at close to 90% of sales in 2019. We also have locations performing above 2019 levels so far, for example, Turkey, Dominican Republic, Puerto Rico, Bahamas, [ Antigua and Bermuda ].Please, let's comment now about reopening shops in Page 23. Dufry reopens its retail business gradually. And by the end of September, 1,850 shops, around 76% of physical shops and 84% of sales capacity were reopened. Their reopening strategy will continue as follows. First, following single location-by-location productivity scenarios. Second, in line with the easing of travel restriction by governments and resuming operation by airports and other landlords. By region, EMEA and Americas are operating at 90% sales capacity versus 2019 with 624 and 1,198 shops reopened, respectively. Only considering open net shops, trading as October is expected to be at around 75% of 2019 levels already.Please, move now to Page 23 and comment on cost and cash flow scenarios 2021. Basing continued priorities in all cost lines, including MAG, PAX and OpEx, we are upgrading our sensitivities for second-half of 2021 as well as for the full year. We have provided to operating scenarios to the market at the beginning of the year. The minus 55% turnover scenario versus 2019 might be the more realistic one, based on the current visibility. However, we are not in a position to provide to turnover guidance yet. Concession fees free IFRS 16 moved to 31% of turnover compared with 35% at the beginning of the year. Personnel expenses to 17% of turnover compared with 19% at the beginning of the year. Other expenses, 8% of turnover compared with 10% at the beginning of 2021.I would like also to confirm, CapEx is expected to remain at CHF 130 million. Regarding average monthly cash flow, equity free cash flow, half 2021 plus CHF 20 million per month when at the beginning of 2021, we were forecasting minus CHF 20 million. Full year 2021 forecast, money cash flow, equity free cash flow, now improved to minus CHF 30 million, when at the beginning of the year was minus EUR40 million in both cases per month. The drivers for the upgrade are primarily full alignment of concession and especially, minimum annual guarantees to pandemic situation and the significant drop in passenger numbers, cost discipline and execution on saving as well as ongoing program in several countries, reflecting a still lower levels versus 2019. Better gross profit margin than initially expected of now around 57% for 2021 and higher working capital inflows related to sales acceleration during Q3.Please, go now to Slide 25, and we will comment on the different forecasts provided by important institutions. Leading associations provide updates on travel expectation with passenger recovery and passenger is obviously the most important KPI for Dufry. Consensus currently express full passenger recovery by the year 2023. Estimates for 2022 passengers range from minus 10% to minus 24% versus 2019 levels.We are in our 2022 budget process currently and approach 2022 with 2 average scenarios and related costs and cash flow sensitivities, again, as we did in 2020 and 2021. The scenarios will relate to bottom up data from our business as well as the top-down view of the industry experts, with the current expectation that 2022 to average scenarios will range from 75% to 85% of 2019 to other levels.Please, now turn to Page 26 and we will comment on the customer insight. I think it's important related to comment on overall passenger recovery expectations, but also, how the business and travel is often-- where sometimes travel is very focused on. We have repetitively addressed that we are not depending on a specific passenger profile. Contrary to airlines, we are not reliant on business travelers, but have the flexibility to adapt our product offering, pricing, promotions, to traveler profiles like we are doing currently. In addition, most recent data is encouraging. Analyzing 2019 business, traveler profiles McKinzie expect 80% of business travel to recover by 2023. Based on pre-bookings, American Airlines just mentioned in their third quarter call that they even expect the business travel to fully recovered by the year 2022.Also, Delta expects continued improvements as offices reopen. Lufthansa mentioned that with announcement of resuming of international flights, more tickets to the U.S. for premium economy, business and first-class were both than in the same period of 2019.Please, let's move now to Page 27, and we will present all conclusions. Let me get started with the activities Q3 and October are confirming on reopening plans. We also expect inter-continental flight acceleration between the U.S., U.K. and Europe to act as a new catalyst. On November 8, we are expecting this re-initiation of flights. Dufry will continue to manage re-openings in line with the travel uptake and customer demand while. Driving commercial and operational efficiency, engaging in the diversification and digitalization of initiatives. Positive cash flow generation since May, so is Dufry's strong cash conversion capabilities. We are also focusing to the strengthening of our ESG capabilities. And finally, let me comment on 2 things. Saving cost scenario for 2021 are now expected to be CHF 1.870 billion considering MAG, PAX and OpEx; and second and finally, our total trading is continuing with very good trend. And considering the shops open, we are expecting to reach 75% of the business level in 2019, based obviously, this assumption. I think from our side, we have completed the presentation, and we could start now the Q&A section.
[Operator Instructions] The first question is from Rebecca McClellan from Santander.
Just a couple of questions, please. Firstly, what drove the better than-- what's driving the better than anticipated gross margin with just sort of incorporated in your full year guidance upgrade? And put alongside that, how are you sort of experiencing the supply-side constraints, inventory flow? And what are you expecting vis-a-vis on cost pressures related to that going into 2022?
I think, obviously, it's important to mention that at the time of announcing the gross profit margin target for 2021, we were not clear about how the reopening could be and we planned more price-off and discounts basically for accelerating sales. What we have seen is a significant acceleration, especially, starting in June, July, August, as I mentioned. And as a consequence, we have been able to protect the gross profit margin. I want to remind you that you know that we control the gross profit margin globally and the decisions regarding the gross profit margin are taken always globally. Regarding the supply chain, yes, we have seen let's say, impact in the supply chain in tobacco and in-- mainly tobacco and spirit. But the impact so far in the out-of-stock situation is not relevant enough in order to justify any type of disruption in the sales. We are protected so far, and we have a very good level of out-of-stock situations.
Next question is from Lorenzo Margiotta from Bank of America.
First, maybe could you on the sort of contract extensions that you talked about, could you give us an idea of how those are looking in terms of new rent levels and any minimum guarantees that are present, etc.? Have you seen a difference versus pre-COVID there? That's one. Two, does the strong performance on cash during the quarter-- is it fair to say that gives you more confidence that you'll be able to return to an equity free cash flow on a full year basis before sales return there, 2022 or 2023? And then, maybe finally, could you maybe just remind us of the strategy around full-service restaurants? How important that could be in your future?
Yes. Regarding the contract extensions, most of the contract extensions that you have heard today have been extended with similar conditions and the condition we had. I think this is a good advantage obviously, compared with possible strong competition or strong negotiation processes. I think the COVID is obviously impacting during the near-future and the conditions, in my opinion, in a positive way. The second one is the service restaurant. Okay. Service restaurants is something that we have been commenting on since the moment we listed Hutson Limited in the U.S. why, because the most important market in the U.S., 65% of the total market in the U.S. travel retail is food and beverage. And we commented at that time that Hutson was addressed and was listed with intention to accelerate in this type of business. Due to the COVID and due to the circumstances of the market, the travel retail market worldwide, we decided to delist the company. But the intention remains the same, is we have the intention to expand in food and beverage, especially in the U.S., with the possibility to accelerate growth during the next 2 or 3 years. This is a good example, and this is a contract that we won in an RFP process. And I believe that during the next months, you are going to hear more of these contracts added to the portfolio. Regarding the cash, you want to talk, Yves?
Absolutely. Thank you. So look, Lorenzo, in respect to the cash flow, it's exactly like you mentioned and as we have mentioned it in the past. So we expect equity free cash flow to recover before the sales recover to 2019. That's mainly related to the permanent cost savings. So as we have mentioned previously, part of the permanent cost savings will be also affecting equity free cash flow going forward. We assume that this is in the area of CHF 200 million. An additional effect, you need to consider during the recovery is that as we go along with the recovery on sales, we will also see a positive effect on the net working capital-- on the core net working capital as we are building up again payables, and that also provides us some tailwinds during the recovery phase, especially next year.
Next question is from Jon Cox from Kepler Chevre.
Just to come back on that, the free cash flow equation. I think, Yves, you've mentioned if back to 2019 levels, maybe somewhere between CHF 500 million and CHF 600, just wondering if you have some sort of sliding scale. So for example, if sales next year is down 25% from 2019 levels, just wondering where that might land? That's the first question. And second question, maybe more for Julian. Just looking at those forecasts for next year, I look at consensus, and it's down around 20% from 2019 levels already last year. The IATA, which is probably the most realistic certainly on this year, is talking about -- certainly on the RPK, a decline still of about 40% compared to 2019 next year. Just wondering what your thoughts are on that. And then, just to brief, small one, you've basically done this year. You've done a fantastic job on the savings and sort of repairing the balance sheet. Do you have any already initial thoughts how you're going to give guidance next year? Will it be the same like a range of sales and that sort of stuff? And I wonder if you have any thoughts on that already today.
So look, starting with the first one -- or the second one first. In respect to kind of scenarios, I wouldn't call it the guidance as we're not providing guidance in that respect at the moment. But we will do or we plan to do for next year the same thing as we did this year, which means that we will provide for probably 2 different possible scenarios kind of an indication on where we would stand on the different P&L lines and also, some relevant cash flow lines and also, the equity free cash flow we expect in that regard. That brings you to the first point, you mentioned the equity free cash flow for next year. So look, in that respect, it's still a little bit too early to disclose something or to mention something. What I can give you as a very, very rough and very early indication, I wouldn't even call it indication, but a kind of like-- yes indication is probably the right word is that if you look at what IATA and the other external parties are forecasting and they are in the range of minus 10% to minus 25% versus 2019 sales, give or take. So again, very rough. And if we assume a minus 25% scenario, my best guess at this stage, but again, it's extremely preliminary. It's a high double-digit million equity free cash flow positive. And if we are rather in a minus 15% scenario, the amount will obviously be significantly higher. But look, it's really early to provide some information there. We haven't finalized our budget yet in that regard.
So down 25%, your equity free cash flow would probably be down -- sorry, up in have an equity free cash flow, but probably less than CHF 100 million.
Yes, a little bit less than CHF 100 million, something like that, yes, give or take. But again, taking it a pinch of salt, very preliminary, but yes.
Okay. Sorry, Julian.
Just for clarifying this IATA revenue per kilometer. This is not -- is not having any correlation with the sales that we have been historically analyzing. I think ACI, IATA also in passengers and air forecast are forecasting passengers recovered by the year 2023. This is the base that we are using for project in 2022 and project in 2023, just clarifying that revenue per kilometer based on with the evolution of sales in duty-free or duty-paid travel retail.
Next question is from Simon LeChipre from Stifel.
Three questions, please. First of all, as a follow-up on gross profit margin, just wondering the--let's say, better Q3 performance. What does that mean for 2022? If you could give us any preliminary indication on where you expect gross profit margin to be next year? And secondly, on wage inflation, could you just give us an update on what sort of pressure do you see at the moment? And how confident are you on your ability, I would say, to cover that? And lastly, as a follow-up on the food and beverage strategy in the U.S., just wondering how confident are you to be able to gain market share organically? I would be curious to better understand what would be your competitive advantages, given there are already some strong players, very well established and they are strong players, and we have seen in the past it was not so easy for new players to gain market share.
Thank you very much. Regarding gross profit margin for the year 2022, it is still very early, but we are optimistic in one sense. We have been projecting sales and different scenarios. And so far, what we see is an improvement compared with 2021. And are we going to reach the gross profit margin 2019 in 2022? The answer is no, it will be below 2019, but it will be a lot higher than this year. Regarding inflation, I want to remind one thing, is travel retail duty-free is an activity that basically is considering savings with the domestic market. As far as the domestic market increase the prices, you can maintain the savings, increasing the prices or as far the domestic market is not increasing the prices, you can reduce the savings and at the same time, to maintain, obviously, the gross profit margin. Inflection, depending on the type of inflection, depending on the -- obviously, the importance of the place. We are, as you know, in all the countries selling in hard currency, U.S. dollars. And we are buying in hard currency. We are not doing a hedge. I think it's something that we can deal of, obviously, with limitations and always the limitations are, depending on the size of the inflection. Regarding food and beverage, it's a very clear strategy. It has been communicated since, I don't know, 1 year ago or maybe more 2 years ago. The reality is that we have a lot of market capabilities. You know why? Because 32% of the sales in 2019 were food and beverage for us in the operation in the U.S., including restaurants and cafeterias. We were operating in different concepts like Euro Cafe or like Dunkin Donuts, we have different commercial concepts. Are we at their level today to say that we are going to be one of the most important competitors in the U.S. with the strategy today of going one-by-one or step-by-step? It is not. You are right. We cannot be compared with the big competitors in the U.S. except you have something important happens, and it's not the case. We are today in a move of organic growth in terms of food and beverage in the U.S..
The next question is from Edouard Aubin from Morgan Stanley.
So 2 questions from me. The first one is, sorry to come back on the cost savings, but I guess you raised from CHF 1.2 billion to CHF 1.9 billion, if I'm not mistaken from since July. So obviously, the biggest moving part is the MAG relief, if you exclude the MAG relief, what if you please could comment on the biggest different moving parts and possibly quantify them? And to what extent these moving parts are permanent and temporary? So that's for the cost saving. And I guess, partially related to that. So your equity free cash flow generation in Q3 was better than what I think you had -- you guys had anticipated previously, despite the fact that sales came in towards the low-end of the range. So I know you already talked about gross margin coming in better than the cost savings. But if you-- what would be the -- in terms of the building block, if you include the working capital and so on what was the main reason for the higher-than-expected equity free cash flow in Q3?
So look, in respect to the higher than -- or in respect to the higher-than-expected cost savings, there are a couple of elements I quickly want to mention. The first one you have already mentioned is obviously the MAG relief, which plays the most prominent role here. Then on top of that, what we also have is in respect to personnel expense savings, 2 or 3. The first one is that the government support schemes took longer than expected, obviously, also due to the lower-than-expected recovery. So especially in some of the jurisdictions, we have received some more support from the government than initially expected. Second point, in respect to the personnel expenses is that the hiring on our side is less pronounced even with the recovery of sales than initially assumed. So we have hired a little bit less people during the recovery than assumed in that scenario. The second element is -- or the surge is the OpEx. In respect to OpEx, we also see that some of the costs are coming back slower than initially expected. There, it's on one hand side, advertising and promotions. It's travel expenses on our side as well as some additional advertising expenses which came in lower than assumed in the current scenario. So if you add all of that together, then you come out with the results we have reported. In respect to equity free cash flow, obviously, it's a consequence of that so because we have a higher gross profit margin on one hand side and then lower cost on the different elements that then ultimately leads to the relatively strong equity free cash flow.
Next question is from Jaafar Mestari from Exane BNP Paribas.
First, just on that equity free cash flow bridge. I appreciate this is a revenue release, so maybe not a full bridge, but can I go back on that, is can we have some color. You said no material one-offs, but how much of the CHF 250 million was working capital inflows? And then, I think you've just referenced some potential phasing elements on your personnel costs and overheads being delayed, are you able to put some sort of number on that? And then I guess the last thing I can think of is better gross margin? Presumably, you didn't do as much discounting in the previous quarter. Is that something you can isolate in that CHF 250 million performance, please? But really, the working capital contribution will be amazing.
Sure. So look, let's start quickly with the gross profit margin. The gross profit margin has an effect, but it's not a very strong one. And the reason for that is -- and that basically bridges the discussion to the net working capital, we have obviously had a strong Q1 with on the P&L, a nice gross profit margin. However, from a net working capital perspective, that will then have or lead to additional payments in the fourth quarter. And that's one of the reasons why the fourth quarter from a cash flow perspective, typically is less strong than the third quarter. That's the first element. The second element is -- or building block, you need to consider is CapEx. So as I've mentioned during the speech is that CapEx, there will be some more CapEx payments in the fourth quarter than in Q3, not significantly, but a little bit more. The third element, which is important to note is interest expenses, which I have also mentioned during the speech. So the way we have financed the organization at the moment with more bond financing than before the crisis, leads to fixed coupon payments which happen every 6 months. Now the way we are currently organized is that during Q3, there is a relatively low interest expense outflow. And in Q4, it's more. But that's purely due to the structure when the coupon on the bonds are happening, and that's like that also going forward. So they are happening on a fixed date every 6 months. In respect to personnel expense savings, I have mentioned it before. So there, we are hiring a little bit slower than initially assumed. And in respect to net working capital overall, September year-to-date is neutral. And it's neutral if you look at the net working capital changes as a total. However, if you look at the 2 key components, i.e., the core net working capital, that's around CHF 100 million positive as of September year-to-date versus the non-core is around CHF 100 million negative. And both together are yielding that neutral net working capital change results as of September year-to-date.
And then my second question was on the net openings, plus 33% is a very big number. Of course, it's year-on-year of a very small number. But if my math is correct, it still looks like 6.5% net on pre-COVID revenue. How much of that is deferrals of openings that were supposed to happen in 2020 and are just being pushed back? And how much is good signings momentum in 2021?
I'm not sure if I understand the question.
The net contract opening, it's plus 32.5% on revenue in Q3, if I'm correct.
No, but this is the performance of the operations. We opened during the last part of 2020, its operation by operation. I think the 52% is because -- and I can mention, it's on a specific location that is performing today better than they were performing in 2019. That's the reason. It's a specific operation.
I'm just not necessarily sure I understand. So in this line, new concessions, I thought the definition was new operations that have been opened in the year.
Yes. We are open in the year. But this operation is an operation that we started at the beginning of the year. But it's an operation that-- I understood the question was regarding when this operation was signed. It was signed last year, was started this year, but starting at the beginning of the…
That's exactly my question. Is there one specific thing there that we should just in going forward…
Yes. Sorry for -- I misinterpreted the question.
Next question is from Gian-Marco Werro from ZKB.
Two questions from my side. First one, you just mentioned in the beginning that the spend per passenger and average ticket volume continued at the elevated level compared to 2019. Can you please quantify this more in detail? And then, the second question is some contracts are even excluding now minimum annual guarantees to-date. I understand this might be a small number of contracts, but can you also maybe quantify what share of your total contracts do not include any minimum annual guarantees anymore?
Okay. Regarding the spend per passenger and the spend per ticket, as you know, it's an information that we normally -- we don't provide. But it still is double-digit growth when you compare duty-free with duty-free. Obviously, not blended when you have duty paid, it's different. But comparing duty-free with duty-free, it still is double digit. Most important operations, duty-free today, are still performing very high in both. Regarding the percentage of contracts that are subject or not subject to minimum annual guarantees. We have not reported that. I think it's not a KPI that is part of the reporting. And I prefer not to comment on that.
[Operator Instructions] The next question is from Jorn Iffert from UBS.
The first question would be, please, on the inflation environment regarding logistic cost base inflation. What is roughly the average selling price increase your targeting for 2022? And are you confident to pass on the majority of the additional costs you're facing right now? The second question would also be on the MAG. I mean, looking on 2022, how many of your contracts in total have you changed more to a variable part or MAG per passenger, for example, is it 80%, 90%? Is it 60%? Just as a better idea here, please, for 2022. And then, maybe the last question on the spend per ticket, and you're saying, I mean, it's in duty-free, up 10%. What are you observing in terms of footfall benchmarking for the passenger numbers on your key airports?
Regarding the inflection for 2022, we cannot comment on that because we have not finished yet information here. We don't have the final information for 2022 is not finalized. Regarding MAG, we have been able to solve all the MAG that were under a stretch due to the circumstances. This means around 80% of the contracts that were subject to MAG. The third one, spend per ticket is obviously regarding the current footfall. We have, depending on the locations, different penetration rates and different number of passengers. It is related -- the spend per passengers and expert per ticket is related with that. In theory, it could be, but I think the most relevant is to comment that the -- and this is based on research. The quality of the passenger profile during the time that we are commenting on, during this period of 9 months is justifying that it is due to the passenger profile more than due to the footfall.
And then quickly to follow up on the price increases. I mean, I understand you can -- or you will not fully comment on this. But just in general statement, are you confident to pass on the majority of the writing cost in '22?
I can answer you with historical experience. This business has been historically very protected of any inflection rates. We buy and we sell in the same currency, especially, mature currency in each of the countries and the savings that we are facilitating to the market are protecting us obviously at a certain level. We cannot say that 20% or whatever it would be. But in a normal circumstance, the inflection in travel retail, duty-free is not going to be an issue. Next question is from Yvonne Chow from Nan Fung Trinity Limited.
I have a few follow-up questions. Just to clarify, number one, I think Yves just mentioned that in each country -- sorry, the products you buy themselves in the same currency for different countries. Is that correct? Because I thought the impression that I thought is centralized in U.S. dollar and maybe you will. So that's my first question. And second question is the MAG. So on the MAG, in 2022. So 80% of the contracts that were subject to MAG before will change to be based on variable base, and that's the case going forward? And my third question is on Hainan. I think -- I just want to -- this is more questions, so I'm just wondering when the accounting change will happen? When can you consolidate the Hainan business into the main P&L? I mean, the consolidation basically.
Let me start with the first one. What I said, and I'm going to repeat it is companies like Dufry are natural hedge regarding this currency or inflection volatilities why? Because we are selling and we are buying in the same currency, for example, in Brazil, we are not buying or selling in local currency. We are buying in U.S. dollars, and we are selling in U.S. dollars. And the same can be applied everywhere in the world. This is number one. And I think, obviously, it's a natural hedge that is facilitating a lot the stability of the company. The second one, I didn't say that 80% of the contracts were subject to MAG. What the question was, how many -- how much is the percentage of contracts subject to MAG that we were obliged to renegotiate due to the pandemic? And the answer was 80% of the contract, subject to MAG were renegotiated, that were the contracts that we needed because of the other contracts, most of the contracts are variable. Based in percentage on sales or based in sales per passenger, there are different alternatives, but variable. Most of the contracts, again, are variable. Within the contracts that doesn't have variable range, the question I answer was 80% were obviously part of the reason. And regarding the accounting change in Hainan, as you probably know, this is depending on one specific subject that to be modified, is international companies are not authorized to invest or to manage directly duty-free operations in China by law. As soon this legislation could be modified, we will have chances of consolidation. But today, I cannot obviously give any information because it's not clear.
And on the back MAG change, I understand the--I mean I didn't express clearly. I just want to ask. So that's sustainable change. It's not going to be changed back. So from then on, those contracts will be variable or the base. So one that we're subjected to. That was my question.
The question is, minimum annual guarantees have been modified during the period of pandemic in most of the cases when it was needed. And this happened in 2020 and in 2021, and we will expect, obviously, in 2022, but depends on the evolution of the business. I think that the message is in both parts, landlords and operators should be aligned in order to create a sustainable business. And this stability of the business-- sustainability of the business sometimes require the modification of the agreement. And I can tell you that most of the operations worldwide, I wouldn't say 99% of the operations worldwide that they required a modification of the minimum annual guarantee as expected was agreed. And I think this is a very good message for 2022. I cannot answer the question because, first of all, it will depend on the volume of sales. If the business is recovered, I think, obviously, there is a percentage of the current contracts with minimum annual guarantees that have been modified forever, based in number of passengers normally. But in general sense, the question for 2022 cannot be answered yet. It's a bit early. Thank you.
That was the last question.
Okay. Thank you very much to all the participants. Questions are always welcome. And if there is something further, please contact us, and we will answer the question with a lot of pleasure. Thank you very much, and I hope that we will meet in face-to-face very soon because we are travelers too. Thank you.
Thank you. Bye.