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Hudson Ltd. (NYSE:HUD)
Q1 2020 Earnings Call
Jun 17, 2020, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day everyone and welcome to Hudson's First Quarter 2020 Earnings Call. [Operator Instructions]

At this time, I'd like to turn the call over to Cindi Buckwalter, Vice President of Investor Relations and Corporate Communications for Hudson. Ms. Buckwalter, you may begin.

Cindi Buckwalter -- Vice President, Investor Relations & Corporate Communications

Thank you, operator, and good day everyone. Thank you all for joining us. This afternoon we released our first quarter results. You can find a copy of our press release and the presentation on our website at investors.hudsongroup.com along with our Q1 financial statements. On today's call we have Roger Fordyce, our CEO; and Adrian Bartella, our CFO.

Please note that management may make forward-looking statements regarding their beliefs and expectations as to the company's future business prospects and results. These statements are subject to risks and uncertainties that could cause actual results to differ materially from these statements. Although we believe the expectations reflected in our forward-looking statements are reasonable, we can give no assurance that such expectations will be realized. We urge everyone to review the state harbor statements provided in our earnings release and financial statements today as well as the risk factors contained in our 2019 Annual Report on Form 20-F, which is available on our website.

During today's call, we will refer to both IFRS and non-IFRS financial measures of the company's operating and financial results. For information regarding our non-IFRS financial measures and reconciliations to the most directly comparable IFRS measures, please refer to our earnings release.

And with that, I'll turn the call over to Roger.

Roger Fordyce -- Chief Executive Officer and Director

Thank you Cindy, and good afternoon everyone. Thank you all for joining us to review our first quarter 2020 results. I want to begin my remarks today by acknowledging how much has changed in the world since we last spoke back in March. When the COVID-19 pandemic first began, we could never of imagine the unprecedented impact that it would have on the global economy, world travel and on so many businesses, including ours. Our thoughts go out to every who has been impacted as a result of this virus, including our team members, customers, partners, vendors and landlords, all who have endured significant hardship but have remained strong in the face of adversity.

Looking back at the first quarter, we started off on a positive growth trend in the first few weeks of January, despite the closure of our New Orleans operation in November of last year. However, passenger traffic and sales started to decrease later in the month. This COVID-19 began to impact inbound passenger traffic from Asia and continued to decline further as the virus spread globally in March. Following the World Health Organization's declaration of a global pandemic, the TSA passenger throughput soon reflected a volume reduction of about 90% by late March. Air travel continued to decrease even more sharply in April with the TSA passenger volumes down 95% year-over-year, leading to our decision to close more than 700 of our stores temporarily -- and temporarily furlough a majority of our team members.

As outlined in our press release today, we also took a number of significant actions to reduce expenses to preserve looking to ensure the fiscal health of our business, including instituting salary reductions for corporate team members and our field leadership, reducing operating expenses and capital spend to minimal levels, and very tightly managing inventory. Additionally, we began working with our landlords to secure rent waivers and deferrals in order to better align our cash outflow with our significantly reduced sales levels. To-date, we've been relatively pleased with the response from our landlords. However, we are closely monitoring passenger and sales level rebalance market-by-market, and we will continue to work with our landlords on additional requests in the markets where travel remains at low levels. Adrian, will be providing further details on the rent waivers later on in the call.

As we work to ensure our financial stability, we were also rapidly instituting in-store measures to ensure the health and safety of our team members, customers and the essential workers still traveling. Through the efforts of our internal emergency response team, we were able to secure an extensive supply of Personal Protection Equipment, develop enhanced store cleaning protocol, implement in-store social distancing measures and expand our contactless payment capabilities among other initiatives. I'm incredibly proud and grateful for how both our field and corporate team members stepped up to address this unprecedented challenge, and for our business partners who have continued to work jointly with us to seek rent relief in our local communities. Above all, we greatly appreciate the efforts of our frontline team members who continue to work in our open stores through the pandemic to serve those still traveling, including essential workers such as healthcare professionals and airport and commuter hub personnel.

Looking ahead to where we stand today, we have slowly begun to reopen stores as passenger volumes have gradually been increasing. The decision to reopen our stores and bring back a number of our furlough team members has been in close alignment with our landlord partners and the lifting of stay-at-home measures. In doing so, we have taken extraordinary steps to ensure our stores are supplied with ample Personal Protection Equipment and that enhanced health and safety measures are in place as we begin to welcome back our team members and customers.

As of this past Monday, we have reopened over 100 stores with plans for additional reopenings each week at an accelerated pace. Well, this is a difficult process, rebuilding efforts have benefited from our ability to keep our operations opened during the pandemic, although at a reduced capacity. Due in part, the effort of our team members still working, we are able to reopen locations more quickly in comparison to our competitors. We expect that traveling trends will be different at every location, and so we will continue to do pilot tests of store openings before resuming full operations in a location.

Our travel convenience stores have been the first to reopen. However, even now we're starting to open specialty retail stores as well. We are also beginning to slowly reopen our duty-free stores in alignment with the gradual but steady increase in international flights. Although we do expect this to be the last part of our business to return given the ongoing restrictions in international travel. And our expectation is that leisure travel will pick up much more quickly than business travel. While we are pleased to see that passenger volume levels are gradually increasing from the record low numbers experienced in April, we are still witnessing passenger volumes through the second week of June that are approximately 85% below last year, making business conditions extremely challenging. Our ongoing actions to reduce expenses and manage cash flow are critical in navigating this crisis and positioning Hudson for a full recovery and successful long-term growth.

Despite these headwinds, we are confident in the resiliency of the travel retail business as we've seen in the past, and we remain focused on our strategic imperative to become the all encompassing travel partner and grow our four key pillars: travel convenience, specialty, duty-free and food and beverage. And while some of our initiatives have been temporarily slowed due to the current conditions, we have continued to drive our business forward in a number of important growth areas. On the retail side of our business, we're pleased to have recently secured several contract extensions. In Des Moines, we signed a four year extension and in both Charleston and Myrtle Beach, we secured a five year extension. Lastly, we strengthened our partnership with Atlantic City International Airport with a 10-year contract extension. During the course of working with our landlords on rent relief, we have also begun discussions with multiple airports about potential lease extensions to offset lost business opportunity.

On the Food and Beverage side, we're also seeing some new opportunities to provide grab-and-go products. In airports, we have Food and Beverage companies that have not yet opened. We've also had two recent notable store openings that demonstrate our ability to stay on course and continue to operate at a very high level even in the midst of a global pandemic with New York at the epicenter. We successfully opened two stores this past Saturday, the date of the grand opening of the LaGuardia Terminal B, which unveiled two new localized travel convenience stores, New York City Aglow, and Mad Avenue Market. Both stores are inspired by the history and culture of New York City and feature a locally sourced selection of gifts and snacks. Mad Avenue Market also features self checkout capabilities. We're very proud of our teams who worked under extreme conditions to meet the opening deadline.

Moving to digital initiatives. We've continued to adapt our business model to adjust to the behavioral change in travelers as the result of COVID-19. Last week, we announced our first venture into automated retailing with the introduction of our personal protection equipment vending machines to 27 airports across North America starting at the end of June. The vending machines will be located in pre-security locations and will be stocked with a proprietary line of essential PPE products, thermometers, ultraviolet light sanitizing products, providing an opportunity to create a 24/7 retailing experience. The same product line, which will be marketed under Hudson's travelers best brands will also be offered in all of our travel convenience stores within our travel safe, travel well displays.

Additionally, to continue to adapt the heightened expectations for contactless shopping environments, we've enhanced Tap to Pay capabilities in all of our stores, we've added self scanning capabilities and are continuing to actively pursue a greater digital presence in our stores, including expanding our self checkout capabilities and exploring alternatives to the traditional shopping environment. Our Hudson Booksellers has also enhanced its e-commerce presence through our hudsonbooksellers.com platform.

Lastly, this morning or just this morning we were pleased to announce a strategic partnership with Luxottica, a leader in premier eyewear. Over the next few years, we will be introducing 250 Sunglass Hut shop-in-shops to our travel convenience concepts across North America. The addition of Sunglass Hut to our portfolio will make it more convenient than ever for travelers to shop for sunglasses and this complements our current offering of 15 sunset stores. COVID-19 has challenged the travel industry like never before. It has shown us how adaptive our business model can be. We are continuing to make decisions that are in alignment with the evolving passenger trends and will position us for long-term success.

Thanks one against -- thanks once again to our incredible support of our team members, our business partners and our landlords who were in the early stages of our road to recovery. We look forward to rebound from this crisis stronger than ever with an enhanced focus on expanding our footprint to new retailing opportunities and overall continued emphasis on adapting digital innovation into our operating model.

I'll now turn it over to Adrian to review our first quarter results in more detail.

Adrian Bartella -- Chief Financial Officer

Thank you, Roger. Now turning to the results of -- for the quarter. As Roger noted, our first quarter results were significantly impacted by COVID-19, and the reduction in travel was significant in the last two weeks of the quarter. Turnover in the first quarter decreased by 23.3% to $341.5 million compared to the first quarter of 2019. Organic net sales, which is a combination of like-for-like sales and net new business declined 24.2%. Like-for-like sales decreased 22.4% on a constant currency basis. The like-for-like sales in our duty-paid business decreased by 19.4%, while our duty-free business declined by 31.1%.

Regarding the second component of organic growth net new business. Total contribution of net new business was down 1.7% in Q1. Gross margin was 62.5% compared to 63.8% in the prior year first quarter. As noted in the earnings release, 140 basis points of the decrease was due to an additional inventory allowance of $4.7 million or slow moving and obsolete items resulting from the extended store closures. This expense decreased by 51.3% to $13.5 million, reflecting lower variable rent based on decline in sales and the rent waivers of $3.3 million received from numerous airports and commuter terminals associated with the waived rent payments that are primarily due for March 2020.

As Roger noted, we continue to have ongoing discussions with landlords and the rent waivers are expected to increase significantly in the second quarter due to the timing of waivers that have been granted. Personnel expenses decreased by 15.9% to $96.7 million. The decrease was primarily due to a $7.6 million of executive separation expense recorded in the last year's first quarter as well as the expense management actions we took toward the end of the first quarter this year in response to the COVID-19 pandemic. As a percent turnover, personnel expenses increased to 28.3% from 25.8% due to the lower sales levels that quickly materialized late in the first quarter.

Other expenses decreased by 7% to $37.3 million, primarily driven by a reduction in variable selling expenses due to the sales decline. As a percentage of turnover, other expenses were 10.9%, compared to 9% in Q1 2019. Other income, which was previously reported in other expense line, is now a separate line item. This consist of sales related to income, franchise and management fee income and other operational income. Other income decreased by 7.4% from the first quarter of 2019. Depreciation, amortization and impairment increased by $56 million to $144.6 million. This was primarily due to a non-cash goodwill impairment charge of $52 million, reflecting a reduction in forecasted cash flow due to the impact of the COVID-19 pandemic.

Adjusted EBITDA decreased by $43.1 million year-over-year to a negative $5.4 million. Adjusted EPS attributable to equity holders of the parent was a loss of $0.28 for the first quarter.

Turning to our balance sheet and cash flow. The cash flow from operating activities for the quarter was $24.9 million compared to $111.2 million in the prior year period. The decrease in the cash flow line was driven by a decline in operating performance due to COVID-19 and the timing of increased cash payments for accounts payables. The cash flow used in investing activities increased slightly to $19.4 million in the first quarter from $18.8 million in 2019, primarily due to higher capital expenditures in information technology.

Our adjusted net debt, which represents total borrowings excluding lease obligations minus cash was $315.4 million, including $225.6 million available cash balance and resulting in net debt to adjusted EBITDA leverage of 1.7 times. While the net debt was higher and available cash balance lower than at year-end, we feel comfortable with the current debt and liquidity position, given our ongoing personnel and other operating expense reductions, combined with the rent waivers and abatements we have received from many landlords. Additionally, as Roger noted, while still at very low levels, we are seeing travel volume gradually increase from the record loss we experienced in April.

Looking ahead, given the current low level of travel, both business and leisure, we expect continued pressure from traffic and sales in near-term. As we can't currently estimate the duration of future trajectory of travel disruption, we don't believe it's prudent to provide guidance at this time. However, if you are very good about our ability to execute against the things that are in our control, including continued highly disciplined cost management in response to sales trends. Fortunately, we enter this crisis in a strong financial position. With our existing cash balances as of end of May of $204 million, expected operating cash flows and long-term financing arrangements with our controlling shareholder Dufry, we believe we have adequate funds to support our revised operating plan, make necessary capital expenditures and fulfill debt service requirements for the foreseeable future.

In summary, while we currently have faced pressures related to the corona virus, the travel retail industry is a resilient one. And we are confident in the long-term potential of our model. We will continue to advance our digital initiatives in line with consumer behavior trends, expand our brand partnerships and drive the growth of our Food and Beverage business, all against the backdrop of strict financial discipline.

I would now turn it back over to the operator and to open it up to the Q&A.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Michael Lasser with UBS. Please go ahead.

Michael Lasser -- UBS -- Analyst

Good evening. Thanks for taking my question. Roger, what level of passenger traffic in the US does Hudson need to experience in order to breakeven?

Roger Fordyce -- Chief Executive Officer and Director

I think that's a real tough question to benchmark, primarily because the passenger flows in every airport are a little bit different and as you know the structures across many of our contracts are very, very different. So it's difficult to kind of put a broad brush stroke across a universal snapshot of that. I would tend to think that as we near close to the 50% return, we probably near that as an average overall. So that 50% return has to be favorable across the spectrum of all of our contracts in order for that to be a fair statement.

Michael Lasser -- UBS -- Analyst

So 1 million and are you expecting that it will gradually build over the course of this year to that level. I think there was 500,000 people who recently passed through the TSA lines so versus 2 million a year ago. So, is it reasonable to expect we'll get to 1 million by the end of this year?

Roger Fordyce -- Chief Executive Officer and Director

Again, I don't have a crystal ball and I would be remiss in trying to forecast where I think things could end up. We are optimistic that the return continues to remain steady. If you look at the passenger flows, those TSA numbers you just mentioned and take a look at the trends of how they have evolved since the end of March through just recently.

Michael Lasser -- UBS -- Analyst

Okay. My follow-up question is on the nature of the traffic -- is more of the traffic is dominated by leisure travel versus business travel or one of the other Florida [Phonetic] to come back. How does your spend per passenger compare leisure travel versus business travel? And if airline are going to be reducing the amount of Food and Beverage that they offer to passengers while in flight, what is the opportunity you boost spend per traveler because of that?

Roger Fordyce -- Chief Executive Officer and Director

So, typically our analysis has shown that the spend between business and leisure is pretty historically on the convenience side of the business. It's been about the same. And yes, reduction of any Food and Beverage served on the planes, served in the airports will enhance our overall spend as is the new opportunity of the personal protection equipment we've added as well, too, which is kind of a new ancillary spend should continue to help to improve our overall spend on the convenience side of the business.

Michael Lasser -- UBS -- Analyst

And my last question is, Roger, recognizing that it's only been a few weeks in some of these, the heart of some of these changes have been made. Have you noticed a rise in spend per -- spend per passenger is a result of some of this?

Roger Fordyce -- Chief Executive Officer and Director

So once again, overall, remember a good part of the stores that were closed were a lot of our specialty stores, that when we -- and the duty-free stores that when we look at a blend overall as an organization, because right now convenience stores are a big part of what's driving our business that is not true overall. What we are seeing though is on the convenience side of our business where that is driving the business right now, we are seeing an average increase in that convenience spend.

Michael Lasser -- UBS -- Analyst

Can you quantify that, Roger, just in the convenience piece?

Roger Fordyce -- Chief Executive Officer and Director

I don't have those numbers right now to know what the latest spend on that convenience side is right now. Sorry.

Michael Lasser -- UBS -- Analyst

Okay. No problem. Thank you very much and good luck.

Roger Fordyce -- Chief Executive Officer and Director

Thank you.

Operator

The next question is from Seth Sigman with Credit Suisse. Please go ahead.

Seth Sigman -- Credit Suisse -- Analyst

Hey guys. Thanks for taking the question. I wanted to start a little bit with the cost structure and thinking about the decremental margins. I think we talked about 30% to 50% decremental margins for the full year previously. How should we be thinking about that for the quarter and just given the rent waivers and obviously stores were closed for a lot of the quarter which I think was different than when you gave that number initially, should we expect it to be better than we talked about previously?

Adrian Bartella -- Chief Financial Officer

Hi, Seth, this is Adrian. I think the 30% to 50% is still valid. I would expect it to be a bit better than in the first quarter taking into account, rent waivers we have received. We expect around $30 million to $50 million in rent waivers -- to receive around $30 million to $50 million rent waivers in the second quarter compared to the $3.3 million in the first quarter. So obviously the sales would be a bit softer than in the first quarter. So, this will offset a bit the waivers. But in general terms, the 30% to 50% range is still valid.

Seth Sigman -- Credit Suisse -- Analyst

Okay, got it. And then maybe just an update on the Food and Beverage strategy? Specifically the OHM deal not going through. Can you just remind us how you're thinking about that? What's some of the options are? I think the release had talked about maybe exploring some alternative options with them. So I'm just curious how you're thinking about that? And then related, do you think on the back of COVID, there will be structural changes in how consumers shop Food and Beverage or interact with restaurants in the terminals? Are you rethinking at all types of model including beverage that can work and may be play to your strength? Thanks.

Roger Fordyce -- Chief Executive Officer and Director

Hey Seth, this is Roger. I think from our perspective, Food and Beverage is still something that we're still very, very excited in, and are aggressively looking at as part of our long-term growth. I think you hit probably one of the greatest challenges that we're looking at is what does COVID-19 mean to the overall Food and Beverage portfolio on an airport, particularly as it relates to sit-down -- sit-down restaurants, queuing and other aspects. So -- and we've been having conversations with many airport and landlords as well too in that regard to understand what their thoughts are as airports long-term start to look at the evolution of what COVID-19 means to their overall programs. We continue to look at grab and go as unique opportunities. We are continuing to look at cafes and quick-serve as things that we could add and tap onto our retail contracts, very, very quickly. And at some point in time as things evolve a little bit more we will continue to look at M&A as part of our long-term strategy.

Seth Sigman -- Credit Suisse -- Analyst

Thank you for that. Could you just update us on OHM? Is that something that is still being explored? Or is that dead at this point? And then anything else on the pipeline would be helpful?

Roger Fordyce -- Chief Executive Officer and Director

I would basically just comment that the deals that we had structured was turned back on April 1. We are keeping -- any and all options open as it relates to M&A, but clearly want to have a better insight into how Food and Beverage is going to develop in the future to ensure that we're targeting the correct targets.

Seth Sigman -- Credit Suisse -- Analyst

Makes sense. All right. Thanks a lot.

Operator

The next question is from Kimberly Greenberger with Morgan Stanley. Please go ahead.

Kimberly Greenberger -- Morgan Stanley -- Analyst

Great. Thank you so much, and thanks for all the commentary today. I wanted to ask the 85% you indicated in your press release that in through the second week of June, you're seeing approximately 85% below last year levels, and I wanted to know is that a quarter-to-date revenue number? And if not, if you could just help us understand what the quarter-to-date number is, that would be really helpful?

Roger Fordyce -- Chief Executive Officer and Director

And I think it's a little premature to -- hi, Kimberly, it's Roger. A little premature to start talking about quarter-to-date. What that number reflected was where the current TSA passenger trends were running 85% below last year. And as Michael Lasser commented earlier on, obviously, if you take a look back to early April the passenger trends -- the TSA passenger trends, I would have to say and I will caveat this by indicating that TSA represents only US passenger counts, and its all passengers across the USA and of course, we don't -- or we were not exposed to all passenger counts. But our sales have been pretty much trending where the TSA passenger counts have been for the second quarter so far. And once again, I want to caution that that in no way should be indicative of future trends and only to-date we have been trending along the lines of how the TSA passenger numbers have been reported.

Kimberly Greenberger -- Morgan Stanley -- Analyst

Great. That's really helpful, Roger. Thank you so much for that. And then, I'm wondering if you can just help us think about your business in terms of -- and I think there are three primary categories, but please do correct me if I'm wrong? We've got the duty-free business, and then within duty-paid, you have specialty stores versus convenience? With the changed travel behavior and changed trends, can you just talk about the relative impact to each of those pieces of revenue? And if you have a rough proportion of sales, I know we've got the duty-free numbers. But if you could help us understand the proportion of sales for specialty stores, as an example, as well just so that we can try to think about how revenue -- we can do a better job of estimating how revenue might look for the rest of the year, if we just understand a little bit more about the composition of your revenue and which pieces you think are going to be much slower to come back as opposed to faster to recover?

Roger Fordyce -- Chief Executive Officer and Director

So on the duty-paid side of the business. I -- we have never really broken that out from the point of view of separating what portion is in specialty and convenience. Clearly the duty-free, we have over the past year or two, particularly because of the Asian impact to that particular part of the -- or component of the business. In regards to the second part of your question, convenience has been the area that we're focusing on. But as we've mentioned, both in the press release as well as in our report today, we are starting to actually open up specialty stores as well too. We are finding a demand for shopping. You saw some of the reports today about resales significantly rebounding from Street. We're seeing some of the same things. There is some pent-up demand. So we are starting to open up our specialty shops in addition to convenience. But convenience is really been our focus throughout April-May and even into early June, but are now focusing on balancing that out with the specialty to ensure that we're maximizing the revenues in each of the individual airport.

Kimberly Greenberger -- Morgan Stanley -- Analyst

Great. Thank you so much.

Operator

This concludes our question-and-answer session. I'll now turn the call back over to Ms. Buckwalter. Please go ahead.

Cindi Buckwalter -- Vice President, Investor Relations & Corporate Communications

Thanks, Gary. That does conclude our call today. Just a reminder, you can find the replay of today's call on the Investor Relations section of our website. So thank you all for joining us and enjoy the rest of your day.

Operator

[Operator Closing Remarks]

Duration: 32 minutes

Call participants:

Cindi Buckwalter -- Vice President, Investor Relations & Corporate Communications

Roger Fordyce -- Chief Executive Officer and Director

Adrian Bartella -- Chief Financial Officer

Michael Lasser -- UBS -- Analyst

Seth Sigman -- Credit Suisse -- Analyst

Kimberly Greenberger -- Morgan Stanley -- Analyst

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