Hudson Group Reports Second Quarter 2018 Results

Highlights for the Quarter:

• Turnover of $499 million, a year-over-year increase of 7.4%;
• Organic net sales growth of 8.2%; like-for-like net sales growth of 4.5%;
• Gross margin of 63.9%, a year-over-year expansion of 170 basis points;
• Adjusted EBITDA of $72.2 million, a year-over-year increase of 51.4% (or 24.1% assuming the reduced franchise fee rates currently paid to Dufry¹ had been in effect in the second quarter of 2017);
• Successfully won, extended or expanded six concessions contracts including Boston Logan International Airport.

“We had a strong second quarter performance in which we continued to drive organic sales growth and margin expansion,” stated Joe DiDomizio, President and CEO of Hudson Group. “The execution of our productivity initiatives, including expanding our grab & go food offerings, and our strategic wins this quarter, most notably at Boston Logan airport, are all key to the sustainability of our organic growth profile. Further, we have successfully renegotiated key contracts with our vendor partners that have led to improved terms. Looking ahead, we have an exciting opportunity to continue to win new contracts and extend existing relationships, capitalizing on the uncaptured whitespace in the top airports. Through these multiple avenues of growth, we plan to continue to expand our strong footprint, drive top line growth and profitability, ultimately enhancing shareholder value.”

Second Quarter 2018 Summary

• Turnover increased $34.6 million or 7.4% to $499.4 million for the second quarter 2018 compared to $464.8 million in the second quarter of 2017.
  • Net sales increased $36.2 million or 8.0% to $490.4 million from the year-ago period;
  • Organic net sales growth, which is a combination of like-for-like net sales growth and net new business and expansions, was 8.2%, compared to 9.1% in the year-ago period;
  • Like-for-like growth was 4.5% (3.8% in constant currency), compared to 4.3% (5.1% in constant currency) in the year-ago period, driven primarily by an increase in the number of overall transactions as well as average ticket size, partially offset by the timing shift of the Easter holiday from Q2 2017 to Q1 2018.
• Gross profit increased $30.4 million or 10.5% to $319.3 million in the second quarter compared to $288.9 million in the year-ago period. Gross margin increased 170 bps to 63.9% in the quarter due to improved vendor terms as well as continued sales mix shift to higher margin categories.
• Selling expenses increased $6.9 million or 6.4% to $114.1 million in the second quarter as compared to the year-ago period, driven primarily by concession fees, which comprise the majority of this item and is mostly a variable expense driven by net sales. For the quarter, selling expenses as a percentage of turnover totaled 22.8% compared to 23.1% in the prior year quarter, primarily due to a rent reduction in one of our contracts.
• Personnel expenses increased $8.7 million or 9.4% to $100.8 million in the second quarter as compared to the year-ago period. As a percentage of turnover, personnel expenses increased from 19.8% to 20.2% this quarter. The increase in personnel expenses was primarily driven by new hires associated with opening new store locations, wage increases and additional personnel expense upon becoming a public company.
• General and administrative expenses decreased $9.7 million or 23.2% to $32.1 million in the second quarter as compared to the year ago period due to the reduction of franchise fees paid to Dufry starting January 1, 2018, partially offset by higher professional fees upon becoming a public company. As a percentage of turnover, this item decreased from 9.0% to 6.4%.
• Adjusted EBITDA increased $24.5 million or 51.4% to $72.2 million in the second quarter as compared to the prior year quarter, and adjusted EBITDA margin increased from 10.3% to 14.5%. Assuming the reduced franchise fee rates we currently pay Dufry had been in effect in the second quarter of 2017, adjusted EBITDA for the quarter would have increased $14.0 million or 24.1% instead of 51.4%, as compared to the year ago period.
• Reported net earnings attributable to equity holders of the parent increased $16.1 million to $14.3 million in the second quarter compared to a loss of $1.8 million in the year ago quarter while reported diluted earnings per share increased to $0.15 per share compared to a loss per share of $0.02 in the prior year quarter.
• Adjusted net earnings attributable to equity holders of the parent increased $14.1 million to $26.0 million in the second quarter compared to $11.9 million in the year ago quarter, while adjusted earnings per share increased from $0.13 to $0.28.

Balance Sheet and Cash Flow Highlights

• Cash flows from operating activities for the quarter were $71.4 million compared to $58.4 million in the prior year quarter due to improvement in operating performance.
• Capital expenditures in the quarter totaled $14.9 million compared to $31.4 million in the prior year quarter.
• At June 30, 2018, the Company’s net debt was $344.0 million resulting in net debt leverage of 1.6 times, compared to net debt of $256.1 million and net debt leverage of 1.6 times at June 30, 2017.

Operational Update

As of June 30, 2018, Hudson Group operated 1,009 stores, across 88 locations, totaling 1.1 million square feet of retail space. During the second quarter, Hudson expanded its footprint in existing markets though RFP wins at Boston Logan International Airport and LaGuardia Airport. The win at Boston Logan represents an incremental 9,000 square feet, or an increase of approximately 36%.

The Company also successfully extended existing contracts in Orlando International Airport, Greater Rochester International Airport, Burlington International Airport and Baltimore/Washington International Thurgood Marshall Airport.

Earnings Conference Call Information

Hudson Group will host a conference call to review its second quarter financial performance today, August 3, at 10:00 a.m. ET. Participants can pre-register for the conference by navigating to http://dpregister.com/10122523. 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 1-833-255-2832 (toll free) or 1-412-902-6725. A web replay will be available at https://services.choruscall.com/links/hson180803.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 prospectus 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 net sales growth represents the combination of growth in aggregate monthly sales from (i) like-for-like net sales growth and (ii) net new business and expansions. Like-for-like 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 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 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 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 June 30, 2018 divided by adjusted EBITDA for the trailing twelve months ended June 30, 2018.

¹ Dufry AG (SIX: DUFN) is the ultimate parent and controlling shareholder of Hudson Ltd.

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