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Edited Transcript of HUD.N earnings conference call or presentation 14-May-19 12:30pm GMT

Q1 2019 Hudson Ltd Earnings Call

May 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Hudson Ltd earnings conference call or presentation Tuesday, May 14, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adrian Bartella

Hudson Ltd. - CFO

* Deborah Belevan

Hudson Ltd. - VP of IR

* Roger Fordyce

Hudson Ltd. - CEO & Director

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Conference Call Participants

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* Christopher Prykull

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Marisa Sullivan

BofA Merrill Lynch, Research Division - Research Analyst

* Michael Lasser

UBS Investment Bank, Research Division - MD and Equity Research Analyst of Consumer Hardlines

* Seth Ian Sigman

Crédit Suisse AG, Research Division - United States Hardline Retail Equity Research Analyst

* Vincent J. Sinisi

Morgan Stanley, Research Division - VP

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Presentation

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Operator [1]

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Good morning, and welcome to the Hudson Group 2019 First Quarter Results Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Deborah Belevan, Vice President of Investor Relations. Please go ahead.

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Deborah Belevan, Hudson Ltd. - VP of IR [2]

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Thank you, operator, and good morning, everyone. Thanks for joining us. Earlier this morning, we released our first quarter results. Please note that we released our results at the same time as our Swiss-based parent company, Dufry. You can find a copy of our press release and the presentation on our website at investors.hudsongroup.com, along with our interim report.

On today's call, we will have Roger Fordyce, our CEO; and Adrian Bartella, our CFO.

Please note that management may make forward-looking statements regarding their beliefs and expectations 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 these expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will be realized. We urge everyone to review the safe harbor statements provided in our earnings release as well as the risk factors contained in our 2018 annual report on Form 20-F, which is available on the SEC's website.

During today's call, we'll 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 the earnings release.

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

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Roger Fordyce, Hudson Ltd. - CEO & Director [3]

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Thank you, Debbie, and good morning, everyone. I would like to start this morning by providing an overview of the first quarter's performance and operating highlights and then I will turn it over to Adrian for a deeper dive on our financial results.

We've had a strong start to 2019, delivering solid growth in both turnover and EBITDA as well as continued gross margin expansion. We made progress on growing our footprint in North America's busiest airports, executing on our strategic initiatives and increasing employee engagement across the organization. And I'm confident we are well positioned to deliver on our goals for this year and beyond.

During the first quarter, we achieved 4.7% organic sales growth, in line with our expectations despite industry challenges during the quarter, including government shutdown during the first 3 weeks of the year, the shift in the timing of the Easter weekend related travel into the second quarter and continued currency FX headwinds.

In regards to the headwinds related to the Chinese passenger trends that resulted in softer duty-free and luxury sales in the second half of the last year, this trend appears to have moderated during the first quarter. However, we are closely monitoring sales trends in this segment and caution that the headwinds may not have fully subsided.

As we discussed on our year-end call, we'd implemented some promotional programs starting in December to offset softening sales. This continued in quarter one but with a different focus. Specifically, we were in events around the Chinese New Year. We partnered with Vancouver and Toronto airports to promote the holiday on various social media platforms. And overall, we were quite successful in driving sales and higher average tickets in these locations. We also entered into strategic partnerships with credit card companies to create offers for using their card in our shops, which was well received.

As you can see, these programs had minimal impact on our overall gross margin, which expanded by 100 basis points during the quarter to 63.8%. On the business development front, our net new business was up 2.5%.

During the first quarter, we had 2 key wins, a 10-year contract win at Indianapolis International Airport that will add an additional 9 stores and 9,000 square feet to our portfolio, and the expansion of an existing contract at Philadelphia International Airport, which brings our footprint to over 17,000 square feet at this location.

As recently announced, we were also awarded a master concession contract in partnership with SSP at St. Pete-Clearwater Airport. We continue to have a robust pipeline of projects that we're working on for future opportunities in both retail and food and beverage.

It was also a busy quarter for new store developments. As you may know, Hudson operates many concepts and brands outside of its core travel convenience stores, including souvenir shops and landmarks in museums and luxury stores in airports. The breadth of our offering not only serves to diversify our business across locations, customer demographics and product categories, it is also the key advantage that allows us to deliver a wide range of choices for travelers across North America's busiest travel hubs and landmark locations.

I'd like to highlight a few key locations we opened during the quarter.

In February, we unveiled a newly designed 4,500 square foot Empire State building official store in New York City's most famous landmark, which caters to over 4 million annual visitors from all over the world. The renovation, which was part of a broader reimagined Empire State building observatory experience, features art-deco and modern design along with unique products like curated souvenirs, mementos and exclusive luxury branded products.

Given Hudson's deep roots in the big apple, we are very proud to partner with Empire State Realty Trust at this location, elevating gift store experience to a new level and showcasing our talents in this channel.

As you may recall, in 2018, we announced a partnership with FAO Schwarz to serve as the exclusive airport retailer for this iconic toy brand.

During the first quarter, we opened our second FAO Schwarz store as part of this agreement in Chicago Midway International Airport. Our first location was opened at LaGuardia Airport during the fourth quarter, and our team is excited by the early performance results. We look forward to future expansion opportunities and growth for this brand.

We also continue to expand our luxury brand portfolio as we announced the opening of our first Moncler boutique at Vancouver International Airport, bringing our total duty-free footprint at this airport to 18 stores. This store has performed very well in its first 2 months, exceeding our expectations.

In our travel convenience concepts, we opened a number of unique, localized Hudson stores that cater to the sense of place airports are looking to deliver to their customers. These include a combination ironwood and giant coffee stores in Phoenix, a San Francisco Chronicle branded store in San Francisco, and Ontario provisions at Ontario International airport.

Lastly, I'm excited to announce a new partnership that we just signed with Joe & The Juice. This award-winning Scandinavian coffee and juice concept will have 2 locations opening this year at Vancouver International Airport, serving a signature organic coffee blend, fruit and vegetable juices and made-to-order sandwiches.

We're confident this concept will resonate well with travelers given the huge success this brand has had to date. This is a great addition to our portfolio of food and beverage concepts and further advances our expansion into this category.

At Hudson, we work hard to stay competitive as a retail business and landlord partner but also as an employer.

With unemployment at its historical lows, a modern workplace that includes 4 different generations, spanning baby boomers, Gen X, Millennials and now Gen Z, we're in a more dynamic workforce environment than ever before. We've recently introduced new projects and processes that utilize the ever-changing opportunities of digital technology as it relates to employee engagement and training. During the quarter, we rolled out travel retail university, a proprietary training tool for Hudson employees to manage the company's learning materials categorized by specific role or function as well as instructor-led courses that permit staff to self-design their training paths regardless of where the employee is located.

We're also piloting a new internal social media tool to boost collaboration and communication that will eventually reach employees across all locations, whether they are in our North American support center, our warehouses or in one of our stores. The goal is to further drive employee engagement, encourage innovation and idea generation. And we've already seen widespread adoption. At Hudson's, we know that engaged employees lead to an overall better experience for our customers, which will ultimately drive value for all of our stakeholders. Additionally, high engagement leads to low turnover and we've seen success in reducing our employee turnover, which is already well below the industry average.

Finally, before I turn it over to Adrian, I'd like to reiterate my commitment to drive the growth strategy that we laid out during our IPO just over a year ago.

Through a combination of best-in-class merchandising, product selection, store formats and digital enhancements, we're constantly thinking about ways to enhance the customer experience and grow sales and profitability.

These elements supported by a strong industry growth fundamentals, net new business wins and the benefit of selective strategic M&A down the line will position us for long-term growth.

Reflecting over the past few months in my new role as CEO, I can assure you that our growth strategy has not changed. We have picked up momentum on some projects that were in their infancy last year and are making progress on exciting new initiatives that stretch across the organization and that we'll be sharing over the next few quarters.

We're working on a broad range of projects, many of which center around the use of digital technology that will improve the experiential and transactional elements of our stores as well as the overall efficiency of the organization.

The team is energized with a renewed sense of urgency to bring these projects to fruition. My goal is to make our team feel empowered, encourage forward thinking and challenge our team members to think outside of the box. This is critical to further strengthen our competitive edge and expand our market share. So stay tuned, there's a lot more to come.

I will now turn it over to Adrian for the financial details.

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Adrian Bartella, Hudson Ltd. - CFO [4]

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Thank you, Roger. Before I get into our financial results, I would like to highlight some changes you have seen in our presentation of our financial statement which came into effect during the first quarter.

First, as of January 1, 2019, we implemented a new IFRS 16 accounting standard related to capitalization of leases. Under this standard, companies are required to record a right of use asset and a lease obligation for capitalized leases.

The income statement is impacted as these leases move out the rent expense and now we have depreciation on the asset and finance expense on obligation. Liabilities continues to be recorded under lease expense.

Also the treatment of leases now differs from U.S. GAAP considerably. Under IFRS 16, there's a strong learning effect from interest expenses compared to this trade lane expensing under the U.S. government.

It's important to understand that the adoption of IFRS 16 does not impact our strategy, our cash flows and doesn't change how we run the business.

To address IFRS 16 income statement effects, we have revised our definitions of adjusted EBITDA and adjusted net profit to be more comparable to previous periods.

Specifically, adjusted EBITDA removes the charge related to capitalized leases to be more comparable to prior years. And adjusted net profit now additionally backs out impairment of assets, the income tax adjustments on amortization and impairment and one-off tax charges. We also disclosed separately the impact of IFRS 16 on adjusted net profits.

More detailed information on these changes can be found in our press release and attached table. Following the adoption of IFRS 16, we have also revised our chart of accounts to comply with IFRS 16 requirements and to better align with our operations.

Turning to results. We are pleased with our solid financial performance through the first quarter, which highlighted our continued ability to drive organic sales and to strengthen our gross margin.

During the quarter, our turnover, defined in net sales plus advertising income, increased a healthy 4.3% compared to the first quarter of 2018 and reached $445 million.

Adjusted EBITDA on a comparable basis to last year increased 2.4% to $37.7 million.

Our adjusted net profit to equity holders of the parent more than doubled to $7.8 million or $0.08 per share versus $0.04 last year.

If we back out the impact of IFRS 16 to be more comparable to prior year, adjusted net profit and earnings per share attributable to equity holders of the parent were $11.1 million and $0.12, respectively.

Organic sales growth, which is a combination of like-for-like sales and net new business, was 4.7% during the first quarter compared to 4.1% in the fourth quarter of last year and 9.4% in the first quarter of 2018.

In the terms of the 2 components of organic growth, we continue to see similar trends as in the last few quarters.

First, like-for-like sales. For the quarter, like-for-like sales on a constant currency basis grew 3.2% compared to 4.5% in Q1 2018. This quarter like-for-like sales growth was driven primarily by robust duty paid growth and partially offset by weaker duty-free and luxury sales. Duty paid like-for-like grew at 4.2% at constant currency and duty-free grew at 0.5%.

Duty-free was positive in the fourth quarter 2018, and we anticipate continued softness in this part of our business given the variability we have seen.

The second component of organic growth is net new business. The total contribution of net new business to organic growth was 2.5% in Q1 as compared to 3.9% in the first quarter of 2018.

Turning to income statement. During the first quarter, our gross margin improved approximately 100 basis points to 63.8%. The key drivers of this upside were improved vendor terms and continued sales mix shift to higher-margin categories.

As we previously noted, there was a change in the structure of our vendor allowances, which started in Q2 2018 and it was retroactive to January 1, 2018. Vendor support now comes in the form of reduction of -- in cost of sales instead of advertising income.

While we continue to evaluate our cost structure to identify opportunities to enhance the margins, we will [anniversary] the benefit of this change in vendor terms beginning in the second quarter of 2019.

As a result, we expect gross margin in the second quarter to be slightly down on a year-over-year basis.

For the first quarter, lease expenses, formally called selling expenses, were $45.4 million, down from $96.9 million due to the implementation of IFRS 16, requiring the capitalization of fix concession fees and other impairments on January 1, 2019.

During the first quarter of 2019, personal expenses rose 17.8% to $150 million. Of this increase, $7.6 million was attributable to executive separation expense. The remaining increase was driven by wage increases, new hires associated with opening of new store locations and public company related hires.

The other expense line item, which was formally called general expenses, has the most changes in our new income statement format.

As you can see from the table 6 in our press release, these line items now includes non-concession fees related selling expenses, like, for example, credit card fees and also includes other operational result. While premises expenses items, including rent on locations like warehouses and office spaces were moved to the lease expense line items as required by IFRS 16.

Other expenses decreased 4.8% to $37.4 million during the first quarter.

Turning to our balance sheet. You can see the line item that were impacted by the adoption of IFRS 16 primary capitalizing the right of use assets and recording the lease obligation.

Moving to adjusted net debt and cash flow. As of March 31, 2019, our adjusted net debt position excluding lease obligations was $304 million, resulting in an adjusted net debt leverage of 1.3x and in line with our year-end level.

Cash flow for operating activities for the quarter were $93.5 million compared to $50.5 million in the last year period. The sharp increase in operating cash flow was mainly driven by the reclassification of lease payments moving from operating to financing cash flows as a result of IFRS 16.

Capital expenditures increased $20.1 million in the quarter from $15.3 million in the prior year as a result of timing of new projects.

Lastly, I will like to remind you of our 2019 outlook, which remains unchanged from our last call.

In the first half of the year, we expect to see similar currency headwinds as in the second half of 2018, due to the weakening of our Canadian dollar versus the U.S. dollar as well duty-free and luxury sales weaknesses. In the second half of the year, we anticipate that the currency headwinds and macro economical factors will dissipate and reverse further impact. However, we will face contract expirations that will impact second half growth.

Given these factors, our expectations for 2019 are as follows: while we have confidence in our long-term growth framework and believe that our organic sales growth will ramp-up over the long term as currency headwinds and duty-free and luxury sales weaknesses mitigate, we expect organic sales growth for 2019 to be in a low to mid-single digit range, and our adjusted EBITDA margins to stay relatively flat.

We expect our adjusted EPS, which has been revised to the comparable year-over-year, also to be remained relatively flat this year.

In summary, we are pleased with our performance in the first quarter, particular with sales growth and gross margin improvements, which led to solid earnings performance, and we look forward to building on our progress in 2019.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Seth Sigman of Crédit Suisse.

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Seth Ian Sigman, Crédit Suisse AG, Research Division - United States Hardline Retail Equity Research Analyst [2]

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Nice quarter. My first question is on the duty-free business. There was a comment that you are starting to see some signs of improvement. It looks like just from the disclosure that duty-free was down slightly and maybe a little bit weaker than last quarter on a reported basis. How do we reconcile that? Is there something else going on there from a constant currency perspective which we should know about? And then just anymore color on how the duty-free business trended through the quarter. Should we interpret that, maybe exited or the second half of the quarter showed some signs of improvement?

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Adrian Bartella, Hudson Ltd. - CFO [3]

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This is Adrian here. So we have disclosed in our presentation this time the like-for-like for both duty-free and duty paid on constant currency basis. So you can see the duty paid grew at 4.2% in Q1 and duty-free was 0.5%. So the 0.5% was more or less in line with what we've seen in the Q4 2018. We see still pressures on this part, duty-free and luxury segment of our business and even if the situation is not worse than in 2018, it's still very volatile. So don't know if the worst is over or not. So we still are cautioning and monitoring the situation and we'll see how Q2 will perform.

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Seth Ian Sigman, Crédit Suisse AG, Research Division - United States Hardline Retail Equity Research Analyst [4]

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Okay. And then the comment that you're seeing signs of improvement, is that more because of internal initiatives, some of the things that Roger talked about to sort of offset those pressures? Is that how we should be thinking about that?

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Adrian Bartella, Hudson Ltd. - CFO [5]

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So on one side, yes. To Rogers point, he was commenting on all the different initiatives we run, which helped to stabilize the situation. The way to interpret this type of improvement, I would say, we've seen deceleration in the growth over the last 4 quarters and it looks like this stopped. And now as I said, we are more or less in line with the performance in Q4. In the prior few quarters, we've seen duty-free like-for-like and constant currency decreasing every quarter. So now, it seems the situation moderated. But as I said, it's still very volatile. So we need to monitor it closely and we are working on additional initiatives to offset and help the growth.

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Seth Ian Sigman, Crédit Suisse AG, Research Division - United States Hardline Retail Equity Research Analyst [6]

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Okay. That's great. It's helpful. And just a follow-up question on the new store pipeline. Can you just remind us the expected closings for this year, when that was expected to become a headwind, I think it was late Q2. Is that still the right way to think about that?

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Adrian Bartella, Hudson Ltd. - CFO [7]

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So we -- the biggest expected closes will happen in Q3 and Q4, more or less. We have some closings we already did like newer Terminal B, we already closed, it was in Q1. It was a bit later than expected this is why we had some tailwind coming from the delays in the closing of the newer Terminal B. But this will impact our growth in Q2. And then we will see additional closings, mainly New Orleans in Q3 and Q4.

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Operator [8]

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Our next question comes from Michael Lasser of UBS.

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Michael Lasser, UBS Investment Bank, Research Division - MD and Equity Research Analyst of Consumer Hardlines [9]

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Can you quantify the delayed Easter and its impact on like-for-like growth in the quarter?

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Adrian Bartella, Hudson Ltd. - CFO [10]

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I would not say so material. I mean the Easter and the way we define Easter is not primary the Easter, it is more like it's a spring break season. And even if Easter this year was in Q2 in April, the spring break historically starts sometimes mid of March. So we've seen some benefits from this in Q1 and Q2. So I would say roughly last year, we set 30 to 40 bps impact in Q1, which was helping us. This year, I would say the 30%, 40% are relatively spread between those 2 quarters. So those -- we will see half of the Easter benefit in Q1, half in Q2.

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Michael Lasser, UBS Investment Bank, Research Division - MD and Equity Research Analyst of Consumer Hardlines [11]

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And as we think about the impact to tariffs on your business, how the move to 25% impact both your like-for-like growth and your margin?

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Roger Fordyce, Hudson Ltd. - CEO & Director [12]

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It's Roger. So we've monitored it very, very closely and have looked intensely at the list of impacted items and the threat of even additional items being tariffed. There's obviously, at some point in time there's going to be some products that are going to impact our business model, although they don't primarily to be a significant impact at this juncture from what we can see, it's a little premature to see what the exact costs are going to be. But as we've dealt with this in the past, we'll continue to look at alternatives sources for products that may be impacted and they'll potentially look at price adjustments accordingly to ensure that we are protecting our margins.

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Adrian Bartella, Hudson Ltd. - CFO [13]

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I mean just to complement Roger's statement, we will try to pass the cost increases to our customers.

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Michael Lasser, UBS Investment Bank, Research Division - MD and Equity Research Analyst of Consumer Hardlines [14]

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So as you look at the current list, there's not a lot of exposure as it currently stands?

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Roger Fordyce, Hudson Ltd. - CEO & Director [15]

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Not from what we can see. But again, there's continued threats of expanding that list. Again, there's, I think, primarily on the electronic side and potentially a little bit on the apparel side, where we see impacts. Again, we continue to look at alternative sources, but again, where there are cost impacts, we'll adjust our retails accordingly.

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Michael Lasser, UBS Investment Bank, Research Division - MD and Equity Research Analyst of Consumer Hardlines [16]

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If the full list was implemented, do you have a sense of what your exposure would be?

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Adrian Bartella, Hudson Ltd. - CFO [17]

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It's difficult to tell because if you think about our product mix, you see half of our product mix is food and beverage, which technically there are some food and beverage items on the list, but we don't think we'll be impacted by those. So there's a small group of products which might be impacted. But to Rogers point, we will look at alternative sourcing and we will work with our pricing to adjust the impacts. Over the long term, we feel confident about it.

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Operator [18]

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Our next question comes from Vincent Sinisi of Morgan Stanley.

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Vincent J. Sinisi, Morgan Stanley, Research Division - VP [19]

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Wanted to see if you can give a little more color on the December promotions. How much maybe can you either quantify or qualify that maybe that helps some of the headwind moderation? And then also to your point, you still have a strong gross margin so just wondering what's the learning is there, is there going to be kind of any change of thought or strategy with your kind of your marketing, promotional cadence going forward?

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Roger Fordyce, Hudson Ltd. - CEO & Director [20]

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So I don't know we've actually quantified the December promotions to understand. We -- obviously, a lot of that was built around discounting to try to drive sales, to drive top line sales. As we moved into the first quarter, as I mentioned earlier, we looked at other types of promotions to try to drive sales. I think as we continue to face the headwinds and I think it's a combination of not just the issues with the overall Chinese spend but also the strength of the U.S. dollar as well too, impacting the -- strictly against the Canadian currency impacting our travel out of the U.S. into Canada. We are continuously looking at promotional tools and different ways of trying to drive sales. And then in the U.S. in particular, we're continuing to try to drive the domestic side of the business to offset any headwinds we're facing from the true international travelers. So it's an ongoing process. We're continuing to test and move different types of promotions in and out as we understand where these headwinds are taking us.

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Vincent J. Sinisi, Morgan Stanley, Research Division - VP [21]

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Okay. That's helpful, Roger. And then maybe just a quick follow up. Can you guys just give us an update -- I know you've been talking kind of digital initiatives as kind of overall, but just kind of what's first and foremost on cap, what should we maybe expect to see as we go through the rest of this year at this point?

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Roger Fordyce, Hudson Ltd. - CEO & Director [22]

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So we're driving a number of different areas as it pertains to using digital technology to enhance our overall business. I mentioned earlier in the call about our use for employee engagement. But we're also continuing to experiment and pilot a number of initiatives that we're looking to see how it would impact both the experiential as well as the transactional elements of our stores. As you know, there's the changing demographics of the passenger base, the broad range of demographics of our passenger base, each shop differently are looking at trends and looking at the experiential nature as well as how they conduct transactions on a regular basis. So those are the areas, I think, that we will throughout the year be potentially talking about a little bit more of how each of those are impacting our stores.

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Operator [23]

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Our next question comes from Marisa Sullivan of Bank of America Merrill Lynch.

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Marisa Sullivan, BofA Merrill Lynch, Research Division - Research Analyst [24]

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I just wanted to circle back on organic growth. I wonder if you can give us some additional color on how to think about the cadence of organic growth. Specifically, in 2Q, should we expect an improvement from 1Q or are there other factors that could be offset? I know you called out things like spring break, shifting into 2Q. And then with the delayed Q1 closing, how should we think about the 2Q net new business contributions?

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Adrian Bartella, Hudson Ltd. - CFO [25]

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So we had Q1, Q1 was better than expected. We're very pleased with the performance and primarily driven by different initiatives and some one-off effects like, for example, the Chinese New Year was better than expected. We had some delayed closures which helped us. So those items won't be there in Q2. So we think, as I mentioned before, we expect the pressure on luxury and duty-free to continue into Q2 and in absence of the -- and there will be absence of the one-offs effects we've seen in Q1.

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Marisa Sullivan, BofA Merrill Lynch, Research Division - Research Analyst [26]

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Got you. And then just in terms of thinking about your overall organic sales outlook for the year, should we be thinking just -- does it kind of even out a little bit in 2Q and the whole range is open? Or given the solid 1Q sales performance and some of the things you're doing to drive like-for-like, could the organic sales growth expectations track more towards kind of the mid to the higher end of the range?

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Adrian Bartella, Hudson Ltd. - CFO [27]

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No, I would say, at the moment, we're tracking to the mid of the range.

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Marisa Sullivan, BofA Merrill Lynch, Research Division - Research Analyst [28]

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Got you. And then if I could just squeeze one last one in. Just on some of the initiatives that you're implementing to drive like-for-like growth on the duty paid side, can you just give us an update on some of the things you've talked about in the past, like rolling out more coolers, new brands or merchandise. What have you been doing that's been able to drive that strong performance on duty paid?

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Roger Fordyce, Hudson Ltd. - CEO & Director [29]

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So as we've continued to report, obviously, the food and beverage expansion continues -- continued into Q1. I believe we added another 19 additional coolers during the quarter. But we're also embarking on other areas as well too, adding additional products to our mix. We're successful in being able to add ample accessories this quarter to our electronics mix. We continue to look at electronics, a broad range of categories of product to supplement and complement the current offerings in our overall travel convenience store. It's a great opportunity as the overall shopping trends change, as I mentioned earlier, to really start to look at some new trends and some new directions to add. So our merchandising teams are continuing down the path of looking at categories of wellness, potential cosmetics and categories that are not traditional to the convenience stores as opportunities for us to continue to add on the merchandising mix in addition to the continued growth on the food and beverage side.

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Operator [30]

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(Operator Instructions) And our next question will come from Chris Prykull of Goldman Sachs.

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Christopher Prykull, Goldman Sachs Group Inc., Research Division - Equity Analyst [31]

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I just had one on personnel expenses. Can you quantify the impact that the long-term incentive plan had year-over-year in 1Q '19? And then do you think you can leverage that expense line item as a percentage of sales in the back half of the year? I know you mentioned some training initiatives, travel retail university. Any expense impact from that rollout?

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Adrian Bartella, Hudson Ltd. - CFO [32]

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So I'll start with -- Hi, Chris, I'll start with the public company cost. So overall, the long-term incentive plan plus other incremental -- new incremental public company, personnel related expenses added around 25 bps to our personal expense line. And for the full year, we expect around 10 to 20 bps, the leverage coming from this line, assuming the organic growth in the expected range.

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Christopher Prykull, Goldman Sachs Group Inc., Research Division - Equity Analyst [33]

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Got you. That's helpful. And then I think about the implications from a bigger push in the food and beverage for the P&L over the long term, particularly QSR and/or traditional restaurants as opposed to the grab and go. How should -- how do you all think about layering in that business to your current business. For example, I know it's a -- generally, it's a higher sales growth category, there's high gross margins, but is it really EBIT margin neutral given the highly labor expense and so it's really just an opportunity to grab share?

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Roger Fordyce, Hudson Ltd. - CEO & Director [34]

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Yes, I think that's a good analogy. It is somewhat EBITDA neutral. It -- we look at that as something that's good complement to our current retail portfolio. To the point that you mentioned, typically higher margins but typically higher labor cost as well.

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Adrian Bartella, Hudson Ltd. - CFO [35]

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And lower rents.

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Christopher Prykull, Goldman Sachs Group Inc., Research Division - Equity Analyst [36]

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Lower rents. Got it. And then maybe just lastly, on the balance sheet. How should we think about the right leverage ratio going forward. I mean cash is about 17%, 18% of market cap, 12% of EV, I understand M&A is still an option, so you may want to keep some on hand for that. But how are you all thinking about capital allocation?

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Adrian Bartella, Hudson Ltd. - CFO [37]

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So as we always communicated, so organic growth is the number one priority and M&A is the second one. We're working hard too on the food and beverage strategy and we're keeping our leverage to be able to execute on the strategy if the right target is there. I would say leverage, as mentioned earlier, 3x would be the cap, we would like to push it, so we have some room to acquire a small to midsize operators.

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Operator [38]

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This concludes our question-and-answer session. I would like to turn the conference back over to Deborah Belevan for any closing remarks.

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Deborah Belevan, Hudson Ltd. - VP of IR [39]

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Thank you, operator, and thanks, everyone, for joining us today. Just a reminder, we will have a replay of this webcast on our website. Thanks, and have a great day. Bye.

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Operator [40]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.