Q1 2020 Hudson Ltd Earnings Call
[music].
Good day, everyone and welcome to Hudsons first quarter 2020 earnings call.
All participants will be in late listen only mode.
Should you need assistance. Please signal a conference specialist I pressing the starkey followed by zero.
After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then too.
Please also note that today's event is being recorded.
At this time I'd like to turn the call over to Cindy Buck Walter Vice President of Investor Relations and corporate Communications for Hudson Ms. Buck water you may begin.
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 that had been group Dot com along with our Q1 financial statement.
On today's call, we have Roger Ford <unk>, our CEO and Adrian bar Tallow 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 resolve these statements are subject to risks and uncertainty they 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.
The words, everyone to review the Safe Harbor statements provided in our earnings release and financial statements today as well as their risk factors contained in our 2019 annual report on form 20-F, which is available on our website.
During today's call well refer to both I FRS and non I FRS financial measures of the company's operating and financial results for information regarding our nine I FRS financial measures and reconciliation to the most directly comparable I as far as measures. Please refer to our earnings release.
And with that I'll turn the call over to Roger.
Thank you Sandy and good afternoon, everyone.
Thank you all for joining us through 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 Cobot 19 pandemic first began we could never have a manages the unprecedented impact that it would have on the global economy World travel and on so many businesses, including ours.
So let's go out to everyone, 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 that have remained strong in the face of adversity.
Looking back at the first quarter, we started off at a positive growth trend of the first few weeks of January despite the closure of all our New Orleans operation in November of last year.
However, passenger traffic and sales started to decrease later in the month. This call with 19 began to impact inbound passenger traffic from Asia and continued to decline further as the virus spread globally in March.
Following the world's health organizations declaration of a global pandemic. The TSC 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 Trc passenger volumes down 95% year over year, leading to our decision to close more than seven hundreds of our stores temporarily for a low end 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 liquidity 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.
Today, we have 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 who will be providing further details on the rent waivers later on the call.
As we work to ensure our financial stability. We will 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 internally emergency response team, we were able to secure an extensive supply of personal protection equipment.
All of enhanced store cleaning protocol implement in store, social distancing measures and expand our contact list 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 Brent belief in our local communities.
Above all we greatly appreciate the efforts of our frontline team members, who continue to work in our open stores. There are the endemic to serve those still traveling.
Including a central workers, such as healthcare professionals and airport in computer hub personnel.
Looking ahead to where we stand today.
We have slowly begun to reopen stores his passion to volumes of 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.
While this is a difficult process are rebuilding efforts have benefited from our our ability to keep our operations opened during the pandemic, although at a reduced capacity.
In part to the effort of our team members still working we're 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'll continue to do pilot tests of store openings before resuming full operations in a location.
Our travel convenient stores have been the first to reopen however, even now we're starting to open specialty retail stores as well.
We're also beginning to slowly reopened our duty free stores in alignment with the gradual but steady increase in international flights.
But 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're pleased to see the 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 and 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 real 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 to the current conditions. We've 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 both Charles 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've 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, where food and beverage companies have not yet opens.
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 met Avenue market.
Both stores or aspired by the history and culture of New York City and feature a locally sourced selection of gifts and snacks.
Net revenue 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 covered 19.
Last week, we announced our first venture into automated retail and 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 PE products thermometers ultraviolet light sanitizing products, providing an opportunity to create a 24 seven 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 to the heightened expectations for contact with shopping environments, we've enhanced tap to based capabilities and all of our stores. We've added sell 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 ecommerce presence through our Hudson booksellers Dotcom platform.
Lastly, this morning.
Just this morning, we were pleased to announce a strategic partnership with exotic a leader in premier.
Hi, where 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.
Well covered 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 we will position us for long term success.
Thanks went against thanks, once again to our incredible support support of our team members our business partners on our landlords. We're in the early stages of our road to recovery.
We look forward to rebounded 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.
Thank you Roger.
Now turning to the results of for the quarter as it also note that our first quarter results was significantly impacted by covered 90.
And the reduction in travel most significantly the last two weeks on the quota.
Turnover in the first quarter decreased by 23.3% to 304 to one and half million compared to the first quarter of 2019.
Organic net sales, which is a combination of like for like site and that business declined 24.2%.
Like for like sites decreased 22.4% on a constant currency basis.
Like for like those in our duty paid business decreased by 19.4 person.
Why are due to preserve declined by 31.1%.
Regarding the second component of organic growth net new business. So the contribution of net new business was down 1.7% in Q1.
Gross margin was 62.5 per cent compared to 63.8% in the prior year first quarter.
As noted in the earnings release hundred 40 basis points of the decrease was due to an additional inventor allowance of 4.7 menu.
Or slow moving and obsolete items, resulting from the extended store closures.
This expense decreased by 51.2% to 30 100 million.
Reflecting lawyers whatever rent based on decline in size and the Ren waivers of 2.3 million received from numerous airports.
And camuto totally not associated with the way the rent payments.
Our primary due from March 2020.
As an alternative.
We continue to have ongoing discussions with landlords and their unwavering I expect the through increased 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 covered 19 pandemic.
As a percent of turnover personal expenses increased 28.2% from 25.8% due to the lower safe level could materialize late in the first quarter.
[music].
Although expenses decreased by 7% to 37.3 medium.
Primarily driven by a reduction in one number selling expenses due to the site declined.
As a percentage of turnover other expenses of about 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 sites that relate to the income franchise, a management fee income and other operation on income.
Other income decreased by 7.4% from the first quarter of 2019.
Depreciation amortization in the impairment increased by 56 million 244.6 million.
This was primarily due to a noncash goodwill impairment charge of 52 million.
Reflecting a reduction in forecasted cash flow due to the impact of the covered 19 fund them.
Adjusted EBITDA decreased by 43.1 million year over year to a negative 5.4 million.
Adjusted EPS attributable to equity holders of the pipeline was a loss of 20 cents for the first quarter.
Turning to our balance sheet and cash flow.
The cash from operating activities for the quarter was 24.9 million compared 211.2 million in the prior year period.
The decrease in the cash flow line was driven by decline operating performance due to covered 19, and the timing of increased cash payments for accounts payable.
The cash flows investing activities increased slightly to 19.4 medium in the first quarter from 18.8 million in 2019.
Primary due to higher capital expenditures in information technology.
Our adjusted net debt was represents total borrowings excluding lease obligations minus cash was 315.4 million.
Including a 225.6 million available cash balance and resulting in and then debt to adjusted EBITDA leverage of lump on seven times.
Why is an in depth was higher and available cash balance lower than at year end.
We feel comfortable with ICANN depth and liquidity position, given our ongoing personnel and other operating expense reductions combined with their end waivers.
And our basements would have received from many landlords.
Additionally, as Roger noted when steel at very low levels, we are seeing travel volume gradually increase from the record lows we experienced in April.
[music].
Looking ahead, given the current low level of travel both business and leisure. We expect continued pressure from truck on traffic in size and near term.
As a compound to estimate the duration of future trajectory of covered disruption. We don't believe it's prudent to provide guidance at this time.
However, if you very good about our ability to execute against the things that are in our control, including continue its highly disciplined cost management in response to size trends.
Fortunately we entered described is 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 do fruit.
We believe we have other quite funds to support our device operating plan Meg necessary capital expenditures and fulfill Dep service requirements for the for for example, future.
In summary, we currently have said pressure related to the Corona virus the travel retail industry, it's a resilient Ron.
And we are confident in the long term potential of our modem.
We will continue to advance our digital initiative in line with cost 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.
Ill now turn it back over to the operator and to open it up to the QNX.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad. If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then to at this time, we will pause momentarily to assemble our roster.
Our first question comes from Michael Lasser with UBI, Yes. Please go ahead.
Good evening, Thank Robert taking my question Roger work rebel passenger traffic in UK.
Hard to experience in order to breakeven.
I think thats, a real tough question to benchmark, primarily because the.
The passenger flows in every airport or 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 closer to 50% return, we probably near that as an average overall does that 50% return has to be favorable.
Across the spectrum of all of our contracts in order for that to be a fair statement.
Good.
Even a million in and.
Are you expecting that it will gradually build over the course through this year to that level. I think there was 500000 people, who recently passed to the key that they were fine so versus 2 million year ago, who is it reasonable to expect can get to a million by the end of this year.
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 TSC numbers, you just mentioned and take a look at the trends of how they have evolved since the end of March through just recently.
Okay.
Follow up question is on the nature of.
The traffic it's more of the traffic is dominated by leisure travel versus business travel or one of the others or Florida to come back how does your spend per passenger compare.
Leisure travel versus business travel and its airline are going to be reducing the amount of food beverage if they offer to passengers wall in flight what did the opportunity to boost spend per traveler.
Because of that.
So yes. It typically aren't analysis has shown that the spend between business and leisure is pretty historically on the convenience side of the business been about the same.
And yes reduction of any food and beverage served on the planes served in the airports.
It 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 improve our overall spend.
On the can be distracted.
In my last question is Roger read recognizing that until we didnt.
A few weeks.
The the harder from changes in the made have you noticed a rise in spend per trip.
Per passenger is a result from it.
So once again overall remember a good part of the stores that were closed or a lot of our specialty stores that when we end the duty free stores that when we look at a blend overall as an organization.
Because right now convenient stores are a big part of what's driving our business that that is not true overall, what we are seeing though is on the convenience side of our business with that is driving the business right. Now we are seeing an average increase in that convenience spend.
Can you quantify that Roger just in the could be piece.
I don't have those numbers right now to to know what the latest spend on that convenient side is right now sorry.
Okay. Thank you very much and good luck.
Thanks.
The next question is from Seth Sigman with Credit Suisse. Please go ahead.
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 second quarter and just given the rent waivers and obviously stores were closed through a lot of the quarter, which I think.
Different than when you gave that number initially should we expect it to be better than you talked about previously.
Hi, said, Hey, Sedrin.
I think the 30% to 50% is still valid.
I would expect.
And did to be better than in the first quarter.
Taking into account.
We're end waivers we have received.
We expect around 30 to 50 million Rand waivers to.
Let's see if it onto its to 50 million render ever since second quarter compared to 3.3 in the first quarter. So obviously, the say so we'd be a bit softer than in the first quarter. So this will also they'd be the waivers, but in general terms, the 30% to 50%.
Wrenches due to volume.
Okay got it and then maybe just an update on the food and beverage strategy, specifically the OEM deal not going through do you just remind us how you're thinking about that what some of the options are I think.
The release had talked about maybe exploring some alternative options with them. So just curious how you're thinking about that and then related do you think on the back of coal good 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 in food and beverage that can work maybe plates your shrink. Thanks.
Hey said, it's Roger I think from our perspective food and beverage is still something that we're still very very excited in our aggressively looking at as part of our long term growth I think you hate probably one of the greatest challenges that we're looking at is what does cope with 19, meaning to the overall food and beverage.
Portfolio, and 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 coal was 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 contract is very very quickly.
And at some point in time as as things evolve a little bit more we will continue to look at M&A as part of our long term strategy.
Thank you for that could you just update us on OE Chan is that something that is still being explored or is that did at this point and then anything else on the pipeline I would be helpful.
I would basically just just comment that.
Deal that we had structured was was turned back on April one.
We are keeping all any and all options open as it relates to M&A, but clearly want to have.
Better insight into how food and beverage is going to develop in the future to ensure that we're targeting the correct targets.
Makes sense alright, thanks, a lot.
Your next question is from Kimberly Greenberger with Morgan Stanley. Please go ahead.
Oh, great. Thank you so much and thanks for all the commentary today.
I wanted to ask.
The 85% Huh.
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 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.
And I think it's a little premature to Kimberly, it's Roger little premature to start talking about quarter to date, what that number.
A number of reflected was where the current TSH passenger trends were running 85% below last year.
And as Michael Lasser commented earlier on obviously, if you take a look back too.
To early April the passenger trends the TSA passenger trends.
I would I would have to say and I will caveat this by indicating that say represents only us passenger counts.
And is all passengers across the USA and of course, we don't we were not exposed to all passenger counts.
But our sales have been pretty much trending where the TSH passenger counts have been.
For the second quarter, so far and then once again I want to caution that that is no we should be indicative of future trends. It only to date, we have been trending along the lines of how the TSC passenger numbers have been reported.
Right that's really helpful. Roger Thank you so much for that.
Hi, I'm wondering if you can just help us think about your business in terms of and I think there's three primary categories that please do correct me if I'm wrong, we've gotten a duty free business and then within duty paid you have specialty stores versus convenience.
<unk>.
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 estimating how revenue might look for the rest of your fleet you understand a little bit more about the composition of your revenue and which piece. If you think are going to be much slower to come back as opposed to faster to recover.
So on the duty paid side of the business, we have never really broken that out from a point of view of separating what portion is in specialty inconvenience.
Clearly the duty free we have over the past.
A year or two particularly because of the Asian impact to that particularly part of the what 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 from Street.
We're seeing some of the same thing is there is some pent up demand. So we are starting to open up our specialty shops. In addition to convenience, but convenience has 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 airports.
Great. Thank you so much.
This concludes our question and answer session on the right now I'll turn the call back over to MS. Buckwalter. Please go ahead.
Thanks, Gary that does conclude our call today, just to remind or you can find the replay of today's call on the Investor Relations section of our website. Thank you all for joining us and enjoy the rest of your day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
[music].