Hudson Group Reports First Quarter 2018 Results

"Our impressive first quarter organic sales growth reinforces the attractive and resilient nature of the travel retail industry as well as the multiple levers we have to expand our concession portfolio," stated Joe DiDomizio, President and CEO of Hudson Group. "We made significant progress in executing our strategic initiatives, highlighted by the ongoing development of our grab & go offerings as well as capturing additional white space opportunities through key wins at Phoenix and Seattle airports. As we look ahead, we are confident our performance year-to-date, combined with the continued execution of our strategic priorities, will position Hudson Group to deliver continued growth."

First Quarter 2018 Summary

• Turnover increased $36.1 million or 9.2% to $426.8 million for the first quarter 2018 compared to $390.7 million in the first quarter of 2017.
  • Net sales increased $34.0 million or 8.9% to $415 million from the year-ago period;
  • Organic sales growth, which is a combination of like-for-like sales growth and net new business and expansions, was 9.4%, compared to 8.5% in the year-ago period;
  • Like-for-like sales growth was 5.5% (4.5% in constant currency), despite the high comparison base of 6.1% (5.3% in constant currency) in the year-ago period, and benefited from an increase in average ticket size and the number of overall transactions.
• Gross profit increased $24.7 million or 10.2% to $268.0 million in the first quarter compared to $243.3 million in the year-ago period. Gross margin increased 50 bps to 62.8% in the quarter due to sales mix shift to higher margin categories and additional vendor promotions reimbursements.
• Selling expenses increased $6.2 million or 6.5% to $100.9 million in the first quarter as compared to the year-ago period, driven primarily by concession fees, which comprise the majority of this item and is a variable expense driven by net sales. For the quarter, selling expenses as a percentage of turnover totaled 23.6% compared to 24.2% in the prior year quarter, primarily due to a rent reduction in one of our concession contracts.
• Personnel expenses increased $9.7 million or 11.0% to $97.6 million in the first quarter as compared to the year-ago period primarily due to new hires associated with opening new store locations. As a percentage of turnover, personnel expenses increased from 22.5% to 22.9% this quarter.
• General and administrative expenses decreased $4.1 million or 11.1% to $32.8 million in the first quarter as compared to the year ago period due to the reduction of franchise fees paid to Dufry starting January 1, 2018. As a percentage of turnover, this item decreased from 9.4% to 7.7%.
• Adjusted EBITDA increased $13.1 million or 55.3% to $36.8 million in the first quarter as compared to the prior year quarter, and adjusted EBITDA margin increased from 6.1% to 8.6%. Assuming the reduced franchise fee rates we currently pay Dufry had been in effect in the first quarter of 2017, adjusted EBITDA for the quarter would have increased $6.3 million or 20.7% instead of 55.3%, as compared to the year ago period.
• Reported net earnings attributable to equity holders of the parent improved $5.0 million to a loss of $5.7 million in the first quarter compared to a loss of $10.7 million in the year ago quarter while reported diluted earnings per share increased from a loss per share of $0.12 to a loss per share of $0.06.
• Adjusted net earnings attributable to equity holders of the parent increased $5.8 million to $6.1 million in the first quarter compared to $0.3 million in the year ago quarter, while adjusted earnings per share increased from $0.00 to $0.07.

Balance Sheet and Cash Flow Highlights

• Cash flows from operating activities for the year were $50.5 million compared to $35.9 million in the prior year quarter due to improvement in operating performance.
• Capital expenditures in the quarter totaled $11.2 million compared to $15.3 million in the prior year quarter.
• At March 31, 2018, the Company's net debt was $379.9 million resulting in net debt leverage of 2.0 times, compared to net debt of $288.2 million and net debt leverage of 1.8 times at March 31, 2017.

Operational Update

As of March 31, 2018, Hudson Group operated 1,005 stores, across 88 locations, totaling 1.1 million square feet of retail space.

During the first quarter, Hudson expanded its business though RFP wins at Phoenix Sky Harbor, Seattle-Tacoma and Billy Bishop Toronto City Airport.

The Company also successfully extended existing contracts in Pittsburgh, JFK Terminal 7, and Clinton National in Little Rock.

As part of Hudson's strategy to continue expanding its portfolio of concepts, the Company entered into an agreement to serve as the exclusive airport retailer for FAO Schwartz toys and FAO Schweetz candy products and shops.

Other Developments

On February 5, 2018, the Company completed its initial public offering of common stock ("IPO") on the New York Stock Exchange in which its parent company, Dufry International AG, sold 39,417,765 shares of common stock. The shares of the Company's common stock were sold at an IPO price of $19.00 per share, which generated net proceeds of approximately $714.4 million after deducting underwriting discounts and commissions and other offering expenses for Dufry International AG, the selling shareholder. Hudson Group did not receive any of the proceeds from the offering.

Earnings Conference Call Information

Hudson Group will host a conference call to review its first quarter financial performance today, May 8, at 10:00 a.m. ET. Participants can pre-register for the conference by navigating to http://dpregister.com/10119855. The conference call also will be available in listen-only mode via our investor relations website: https://investors.hudsongroup.com/. To participate in the live call, interested parties may dial 1-866-777-2509 (toll free) or 1-412-317-5413. A web replay will be available at https://services.choruscall.com/links/hson180508.html for three months following the call.

Website Information:

We routinely post important information for investors on the Investor Relations section of our website, investors.hudsongroup.com. We intend to use this website as a means of disclosing material information. Accordingly, investors should monitor the Investor Relations section of our website, in addition to following our press releases, SEC filings, public conference calls, presentations and webcasts. The information contained on, or that may be accessed through, our website is not incorporated by reference into, and is not a part of, this document.

Non-IFRS and Other Measures:

Adjusted EBITDA is a non-IFRS measure and is not a uniformly or legally defined financial measure. Adjusted EBITDA is not a substitute for IFRS measures in assessing our overall financial performance. Because Adjusted EBITDA is not determined in accordance with IFRS, and is susceptible to varying calculations, Adjusted EBITDA may not be comparable to other similarly titled measures presented by other companies. We believe that Adjusted EBITDA is useful to investors because it is frequently used by securities analysts, investors and other interested parties in their evaluation of the operating performance of companies in industries similar to ours. We also believe Adjusted EBITDA is useful to investors as a measure of comparative operating performance from period to period as it is reflective of changes in pricing decisions, cost controls and other factors that affect operating performance, and it removes the effect of our capital structure (primarily interest expense), asset base (depreciation and amortization) and non-recurring transactions, impairments of financial assets and changes in provisions (primarily relating to costs associated with the closing or restructuring of our operations). Our management also uses Adjusted EBITDA for planning purposes, including financial projections. Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for an analysis of our results as reported under IFRS as issued by IASB. A reconciliation of Adjusted EBITDA to net earnings is provided in the attached schedules.

Adjusted net earnings attributable to equity holders of parent is a non-IFRS measure. We define Adjusted net earnings attributable to equity holders of parent as net earnings attributable to equity holders of parent adjusted for the items set forth in the table below. Adjusted net earnings attributable to equity holders of parent is a non-IFRS measure and is not a uniformly or legally defined financial measure. Adjusted net earnings attributable to equity holders of parent is not a substitute for IFRS measures in assessing our overall operating performance. Because Adjusted net earnings attributable to equity holders of parent is not determined in accordance with IFRS, and is susceptible to varying calculations, Adjusted net earnings attributable to equity holders of parent may not be comparable to other similarly titled measures presented by other companies. Adjusted net earnings attributable to equity holders of parent is included in this press release because it is a measure of our operating performance and we believe that Adjusted net earnings attributable to equity holders of parent is useful to investors because it is frequently used by securities analysts, investors and other interested parties in their evaluation of the operating performance of companies in industries similar to ours. We also believe Adjusted net earnings attributable to equity holders of parent is useful to investors as a measure of comparative operating performance from period to period as it removes the effects of purchase accounting for acquired intangible assets (primarily concessions), non-recurring transactions, impairments of financial assets and changes in provisions (primarily relating to costs associated with the closing or restructuring of our operations). Management does not consider such costs for the purpose of evaluating the performance of the business and as a result uses Adjusted net earnings attributable to equity holders of parent for planning purposes. Adjusted net earnings attributable to equity holders of parent has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for an analysis of our results as reported under IFRS as issued by IASB. A reconciliation of Adjusted net earnings attributable to equity holders of parent to net earnings attributable to equity holders of parent is provided in the attached schedules.

Organic sales growth represents the combination of growth in aggregate monthly sales from (i) like-for-like sales growth and (ii) net new business and expansions. Like-for-like sales growth represents the growth in aggregate monthly net sales in the applicable period at stores that have been operating for at least 12 months. Like-for-like sales growth excludes growth attributable to (i) net new business and expansions until such stores have been part of our business for at least 12 months, (ii) acquired stores until such stores have been part of our business for at least 12 months and (iii) acquired wind-down stores, consisting of eight stores acquired in the 2014 acquisition of The Nuance Group AG ("Nuance") and 46 stores acquired in the 2015 acquisition of World Duty Free S.p.A. ("World Duty Free Group") that management expected, at the time of the applicable acquisition, to wind down. Net new business and expansions consists of growth from (i) changes in the total number of our stores (other than acquired stores), (ii) changes in the retail space of our existing stores and (iii) modification of store retail concepts through rebranding. Net new business and expansions excludes growth attributable to (i) acquired stores until such stores have been part of our business for at least 12 months and (ii) acquired wind-down stores. Like-for-like sales growth in constant currency is calculated by keeping exchange rates constant for each month being compared from period to period. We believe that the presentation of like-for-like sales growth in constant currency basis assists investors in comparing period to period operating results as it removes the effect of fluctuations in foreign exchange rates.

Net debt leverage represents total debt less cash at March 31, 2018 divided by Adjusted EBITDA for the trailing twelve months ended March 31, 2018.

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[1] Dufry International AG (SIX: DUFN) is the global parent and controlling shareholder of Hudson, Ltd.