Annual Report by a Foreign Non-Canadian Issuer — Form 20-F — Sect. 13 / 15(d) – SEA’34 Filing Table of Contents
Document/ExhibitDescriptionPagesSize 1: 20-F Annual Report by a Foreign Non-Canadian Issuer HTML 1.62M
2: EX-2.1 Registration Rights Agreement Between Hudson Ltd. HTML 153K
and Dufry International Ag, Dated February 1, 2018
3: EX-4.1 Master Relationship Agreement Between Dufry HTML 176K
International Ag and Hudson Ltd, Dated February 1,
2018
4: EX-4.4 Hudson Trademark License Agreement Between Dufry HTML 113K
International Ag and Hudson Group (Hg), Inc.,
Dated February 1, 2018
5: EX-4.5 Franchising Agreement Between Dufry International HTML 136K
Ag and Hudson Group (Hg), Inc., Dated February 1,
2018
9: EX-13.1 Certification Pursuant to 18 U.S.C. Section 1350, HTML 38K
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
10: EX-13.2 Certification Pursuant to 18 U.S.C. Section 1350, HTML 38K
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
11: EX-14.1 Consent of Ernst & Young Ag HTML 40K
6: EX-11.1 Code of Business Conduct and Ethics HTML 52K
7: EX-12.1 Certification Pursuant to Section 302 of the HTML 42K
Sarbanes-Oxley Act of 2002
8: EX-12.2 Certification Pursuant to Section 302 of the HTML 42K
Sarbanes-Oxley Act of 2002
18: R1 Document and Entity Information HTML 64K
19: R2 Combined Statements of Comprehensive Income HTML 113K
20: R3 Combined Statements of Financial Position HTML 113K
21: R4 Combined Statements of Changes in Equity HTML 76K
22: R5 Combined Statements of Cash Flows HTML 133K
23: R6 1. Corporate Information HTML 39K
24: R7 2. Accounting Policies HTML 107K
25: R8 3. Critical Accounting Judgements and Key Sources HTML 49K
of Estimation Uncertainty
26: R9 4. New and Revised Standards and Interpretations HTML 62K
Issued But Not Yet Adopted/Effective
27: R10 5. Segment Information HTML 49K
28: R11 6. Acquisitions of Businesses and Transactions HTML 57K
With Non-Controlling Interests
29: R12 7. Turnover HTML 69K
30: R13 8. Selling Expenses HTML 53K
31: R14 9. Personnel Expenses HTML 45K
32: R15 10. General Expenses HTML 52K
33: R16 11. Investments in Associates HTML 128K
34: R17 12. Depreciation, Amortization and Impairment HTML 48K
35: R18 13. Other Operational Result HTML 60K
36: R19 14. Interest HTML 57K
37: R20 15. Income Taxes HTML 67K
38: R21 16. Earnings Per Share HTML 38K
39: R22 17. Property, Plant and Equipment HTML 159K
40: R23 18. Cash Flow Used for Purchase of Property, Plant HTML 45K
and Equipment
41: R24 19. Intangible Assets HTML 109K
42: R25 20. Cash Flows Used for Purchase of Intangible HTML 42K
Assets
43: R26 21. Deferred Tax Assets and Liabilities HTML 71K
44: R27 22. Other Non-Current Assets HTML 50K
45: R28 23. Inventories HTML 53K
46: R29 24. Trade Receivables HTML 57K
47: R30 25. Other Accounts Receivable HTML 59K
48: R31 26. Share-Based Payments HTML 44K
49: R32 27. Breakdown of Transactions With Non-Controlling HTML 44K
Interests
50: R33 28. Information on Companies With Non-Controlling HTML 73K
Interests
51: R34 29. Financial Debt HTML 103K
52: R35 30. Other Liabilities HTML 50K
53: R36 31. Post-Employment Benefit Obligations HTML 38K
54: R37 32. Related Parties and Related Party Transactions HTML 88K
55: R38 33. Commitments and Contingencies HTML 51K
56: R39 34. Fair Value Measurement HTML 40K
57: R40 35. Financial Instruments HTML 316K
58: R41 36. Events After Reporting Date HTML 39K
59: R42 2. Accounting Policies (Policies) HTML 134K
60: R43 2. Accounting Policies (Tables) HTML 46K
61: R44 5. Segment Information (Tables) HTML 48K
62: R45 6. Acquisitions of Businesses and Transactions HTML 53K
With Non-Controlling Interests (Tables)
63: R46 7. Turnover (Tables) HTML 72K
64: R47 8. Selling Expenses (Tables) HTML 52K
65: R48 9. Personnel Expenses (Tables) HTML 45K
66: R49 10. General Expenses (Tables) HTML 52K
67: R50 11. Investments in Associates (Tables) HTML 128K
68: R51 12. Depreciation, Amortization and Impairment HTML 47K
(Tables)
69: R52 13. Other Operational Result (Tables) HTML 59K
70: R53 14. Interest (Tables) HTML 56K
71: R54 15. Income Taxes (Tables) HTML 67K
72: R55 17. Property, Plant and Equipment (Tables) HTML 158K
73: R56 18. Cash Flow Used for Purchase of Property, Plant HTML 45K
and Equipment (Tables)
74: R57 19. Intangible Assets (Tables) HTML 99K
75: R58 20. Cash Flows Used for Purchase of Intangible HTML 41K
Assets (Tables)
76: R59 21. Deferred Tax Assets and Liabilities (Tables) HTML 74K
77: R60 22. Other Non-Current Assets (Tables) HTML 51K
78: R61 23. Inventories (Tables) HTML 54K
79: R62 24. Trade Receivables (Tables) HTML 59K
80: R63 25. Other Accounts Receivable (Tables) HTML 61K
81: R64 27. Breakdown of Transactions With Non-Controlling HTML 43K
Interests (Tables)
82: R65 28. Information on Companies With Non-Controlling HTML 70K
Interests (Tables)
83: R66 29. Financial Debt (Tables) HTML 102K
84: R67 30. Other Liabilities (Tables) HTML 50K
85: R68 32. Related Parties and Related Party Transactions HTML 89K
(Tables)
86: R69 33. Commitments and Contingencies (Tables) HTML 50K
87: R70 35. Financial Instruments (Tables) HTML 308K
88: R71 1. Corporate Information (Details Narrative) HTML 39K
89: R72 2. Accounting Policies (Details) HTML 40K
90: R73 2. Accounting Policies (Details Narrative) HTML 48K
91: R74 5. Segment Information (Details) HTML 43K
92: R75 5. Segment Information (Details 1) HTML 43K
93: R76 6. Acquisitions of Businesses and Transactions HTML 84K
With Non-Controlling Interests (Details)
94: R77 7. Turnover (Details) HTML 48K
95: R78 7. Turnover (Details 1) HTML 58K
96: R79 7. Turnover (Details 2) HTML 43K
97: R80 7. Turnover (Details 3) HTML 45K
98: R81 8. Selling Expenses (Details) HTML 58K
99: R82 9. Personnel Expenses (Details) HTML 47K
100: R83 10. General Expenses (Details) HTML 63K
101: R84 11. Investments in Associates (Details) HTML 73K
102: R85 11. Investments in Associates (Details 1) HTML 77K
103: R86 11. Investments in Associates (Details 2) HTML 64K
104: R87 12. Depreciation, Amortization and Impairment HTML 51K
(Details)
105: R88 13. Other Operational Result (Details) HTML 66K
106: R89 14. Interest (Details) HTML 59K
107: R90 15. Income Taxes (Details) HTML 56K
108: R91 15. Income Taxes (Details 1) HTML 67K
109: R92 17. Property, Plant and Equipment (Details) HTML 121K
110: R93 18. Cash Flow Used for Purchase of Property, Plant HTML 45K
and Equipment (Details)
111: R94 19. Intangible Assets (Details) HTML 72K
112: R95 19. Intangible Assets (Details 1) HTML 44K
113: R96 19. Intangible Assets (Details 2) HTML 37K
114: R97 19. Intangible Assets (Details Narrative) HTML 39K
115: R98 20. Cash Flows Used for Purchase of Intangible HTML 41K
Assets (Details)
116: R99 21. Deferred Tax Assets and Liabilities (Details) HTML 55K
117: R100 21. Deferred Tax Assets and Liabilities (Details HTML 44K
1)
118: R101 21. Deferred Tax Assets and Liabilities (Details HTML 49K
2)
119: R102 21. Deferred Tax Assets and Liabilities (Details HTML 45K
3)
120: R103 22. Other Non-Current Assets (Details) HTML 47K
121: R104 22. Other Non-Current Assets (Details 1) HTML 46K
122: R105 23. Inventories (Details) HTML 45K
123: R106 23. Inventories (Details 1) HTML 48K
124: R107 24. Trade Receivables (Details) HTML 42K
125: R108 24. Trade Receivables (Details 1) HTML 50K
126: R109 24. Trade Receivables (Details 2) HTML 47K
127: R110 25. Other Accounts Receivable (Details) HTML 68K
128: R111 25. Other Accounts Receivable (Details 1) HTML 45K
129: R112 27. Breakdown of Transactions With Non-Controlling HTML 50K
Interests (Details)
130: R113 28. Information on Companies With Non-Controlling HTML 63K
Interests (Details)
131: R114 28. Information on Companies With Non-Controlling HTML 65K
Interests (Details 1)
132: R115 29. Financial Debt (Details) HTML 49K
133: R116 29. Financial Debt (Details 1) HTML 72K
134: R117 30. Other Liabilities (Details) HTML 61K
135: R118 32. Related Parties and Related Party Transactions HTML 74K
(Details)
136: R119 32. Related Parties and Related Party Transactions HTML 82K
(Details 1)
137: R120 32. Related Parties and Related Party Transactions HTML 46K
(Details 2)
138: R121 33. Commitments and Contingencies (Details) HTML 47K
139: R122 33. Commitments and Contingencies (Details 1) HTML 45K
140: R123 35. Financial Instruments (Details) HTML 57K
141: R124 35. Financial Instruments (Details 1) HTML 103K
142: R125 35. Financial Instruments (Details 2) HTML 95K
143: R126 35. Financial Instruments (Details 3) HTML 56K
144: R127 35. Financial Instruments (Details 4) HTML 46K
145: R128 35. Financial Instruments (Details 5) HTML 122K
146: R129 35. Financial Instruments (Details 6) HTML 111K
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‘20-F’ — Annual Report by a Foreign Non-Canadian Issuer
(Exact name of Registrant as specified in its charter)
Not Applicable
(Translation of Registrant’s name into English)
Bermuda
(Jurisdiction of incorporation or organization)
4 NEW SQUARE
BEDFONT LAKES
FELTHAM, MIDDLESEX TW14 8HA
UNITED KINGDOM
+44 (0) 208 624 4300
(Address of principal executive offices)
(Name, Telephone, E-mail and/or Facsimile number and Address of
Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b)
of the Act:
Title of each class
Name of each exchange on which registered
Class A common shares, par value $0.001 per share
New York Stock Exchange
Securities registered or to be registered pursuant to Section 12(g)
of the Act:
None
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act:
None
Indicate the number of outstanding shares of each of the
issuer’s classes of capital or common stock as of the close
of the period covered by the annual report.
Title of Class
Number of Shares Outstanding
Class A common shares, par value $0.001 per share
39,417,765
Class B common shares, par value $0.001 per share
53,093,315
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
Yes☐ No☒
If this report is an annual or transition report, indicate by check
mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Securities Exchange Act of
1934.
Yes☐ No☒
Note – Checking the box
above will not relieve any registrant required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 from their obligations under those
Sections.
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.*
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).
Yes☒ No☐
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of “accelerated filer and large
accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large Accelerated Filer☐ Accelerated
Filer☐ Non-accelerated Filer☒
Emerging growth company☐
If an emerging growth company that prepares its financial
statements in accordance with U.S. GAAP, indicate by check mark if
the registrant has elected not to use the extended transition
period for complying with any new or revised financial accounting
standards† provided pursuant to Section 13(a) of the Exchange
Act. ☐
The term “new or revised financial accounting standard”
refers to any update issued by the Financial Accounting Standards
Board to its Accounting Standards Codification after April 5,2012.
Indicate by check mark which basis of accounting the registrant has
used to prepare the financial statements included in this
filing:
☐ U.S. GAAP
☒ International Financial Reporting Standards as issued
by the International Accounting Standards Board
☐ Other
If “Other” has been checked in response to the previous
question, indicate by check mark which financial statement item the
registrant has elected to follow.
☐ Item
17 ☒ Item 18
If this is an annual report, indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Item 11. Quantitative and qualitative disclosures about market
risk
88
Item 12. Description of securities other than equity
securities
88
A.
Debt securities
88
B.
Warrants and rights
88
C.
Other securities
88
D.
American depositary shares
88
Part II
89
Item 13. Defaults, dividend arrearages and
delinquencies
89
A.
Defaults
89
B.
Arrears and delinquencies
89
Item 14. Material modifications to the rights of security holders
and use of proceeds
89
A. Material modifications to
instruments
89
B. Material modifications to
rights
89
C. Withdrawal or substitution of
assets
89
D. Change in trustees or paying
agents
89
E. Use of proceeds
89
Item 15. Controls and procedures
90
A.
Disclosure controls and procedures
90
B.
Management’s annual report on internal control over financial
reporting
90
C.
Attestation report of the registered public
accounting firm
90
D.
Changes in internal control over financial
reporting
90
Item 16. Reserved
90
Item 16A. Audit committee financial expert
90
Item 16B. Code of ethics
90
Item 16C. Principal accountant fees and services
91
Item 16D. Exemptions from the listing standards for audit
committees
91
Item 16E. Purchases of equity securities by the issuer and
affiliated purchasers
91
Item 16F. Change in registrant’s certifying
accountant
91
Item 16G. Corporate governance
92
Item 16H. Mine safety disclosure
92
Part III
93
Item 17. Financial statements
93
Item 18. Financial statements
93
Item 19. Exhibits
93
PRESENTATION OF FINANCIAL AND OTHER INFORMATION
Unless otherwise indicated or the context otherwise requires, all
references in this annual report on Form 20-F “Hudson
Ltd.,”“the Issuer,”“we,”“us,”“our,” and “the Company”
refer to Hudson Ltd., an exempted company limited by shares
incorporated in Bermuda, and its consolidated subsidiaries, giving
effect to the Reorganization Transactions (as defined below),
unless context otherwise requires. References to “Hudson
Group” are to all entities and operations directly or
indirectly owned by Dufry AG that carry on Dufry AG’s
duty-free and duty-paid travel retail operations in the continental
United States and Canada that have been transferred to Hudson Ltd.
in connection with our initial public offering. References to
“our financial statements” are to the financial
statements of Hudson Group, unless context otherwise requires. All
references to “Dufry,”“Dufry Group,”“Dufry AG” and “our controlling
shareholder” are to Dufry AG, a Swiss stock corporation, and
its consolidated subsidiaries (other than Hudson Ltd.). All
references to “Dufry International AG” are to Dufry
International AG, a Swiss stock corporation, which is a
wholly-owned subsidiary of Dufry AG.
All references in this annual report to “U.S. dollars,”“U.S.$,”“$” and “USD” refer to
the currency of the United States of America.
Financial Statements
This
annual report includes our audited combined financial statements as
of December 31, 2017 and
2016 and for each of the years ended December 31, 2017, 2016 and 2015 (hereinafter
“Combined Financial Statements”).
Our
Combined Financial Statements are presented in U.S.$ and have been
prepared in accordance with International Financial Reporting
Standards (“IFRS”), as issued by the International
Accounting Standards Board (“IASB”).
Our
fiscal year ends
December 31. References in this annual report to a
fiscal year, such as “fiscal year 2017,” relate to our
fiscal year ended on December 31 of that calendar
year.
The Reorganization Transactions
In connection with the completion of our initial public
offering, as part of a series of reorganization transactions, Dufry
caused all of the equity interests of the entities that constitute
the Hudson Group to be contributed to Hudson Ltd. in
exchange for common shares of Hudson Ltd. As
a result of these reorganization transactions, which occurred on
February 1, 2018, our
business is conducted through Hudson Ltd.
and its subsidiaries. In this annual report, we refer to all of
these events as the “Reorganization Transactions.”
Prior to the Reorganization Transactions, Hudson Ltd.,
which was incorporated on May 30, 2017, had no operations, nominal
assets and no liabilities or contingencies.
Market Share and Other Information
Market data, other statistical information, information regarding
certain industry forecast data used in this annual report were
obtained from internal reports and studies, where appropriate, as
well as estimates, market research, publicly available information
and industry publications. Industry publications generally state
that the information they include has been obtained from sources
believed to be reliable, but that the accuracy and completeness of
such information is not guaranteed. Similarly, internal reports and
studies, estimates and market research, which we believe to be
reliable and accurately extracted by us for use in this annual
report, have not been independently verified. However, we believe
such data is accurate and agree that we are responsible for the
accurate extraction of such information from such sources and its
correct reproduction in this annual report.
Rounding
We have made rounding adjustments to some of the figures included
elsewhere in this annual report. Accordingly, numerical figures
shown as totals in some tables may not be an arithmetic aggregation
of the figures that precede them.
1
FORWARD-LOOKING STATEMENTS
This annual report on Form 20-F contains “forward-looking
statements.” Forward-looking statements are based on our
beliefs and assumptions and on information currently available to
us, and include, without limitation, statements regarding our
business, financial condition, strategy, results of operations,
certain of our plans, objectives, assumptions, expectations,
prospects and beliefs and statements regarding other future events
or prospects. Forward-looking statements include all statements
that are not historical facts and can be identified by the use of
forward-looking terminology such as the words
“believe,”“expect,”“plan,”“intend,”“seek,”“anticipate,”“estimate,”“predict,”“potential,”“assume,”“continue,”“may,”“will,”“should,”“could,”“shall,”“risk” or the negative of these terms or similar
expressions that are predictions of or indicate future events and
future trends.
By their nature, forward-looking statements involve risks and
uncertainties because they relate to events and depend on
circumstances that may or may not occur in the future. We caution
you that forward-looking statements are not guarantees of future
performance and that our actual results of operations, financial
condition and liquidity, the development of the industry in which
we operate and the effect of acquisitions on us may differ
materially from those made in or suggested by the forward-looking
statements contained in this annual report. In addition, even if
our results of operations, financial condition and liquidity, the
development of the industry in which we operate and the effect of
acquisitions on us are consistent with the forward-looking
statements contained in this annual report, those results or
developments may not be indicative of results or developments in
subsequent periods.
Factors that may cause our actual results to differ materially from
those expressed or implied by the forward-looking statements in
this annual report include, but are not limited to the risks
described under “Item 3. Key Information
– D. Risk factors.” For example, factors that
could cause actual results to vary from projected results include,
but are not limited to:
–
events
outside our control that cause a reduction in airline passenger
traffic, including but not limited to terrorist attacks and natural
disasters;
–
changes
in general economic and market conditions;
–
competition
among participants in the travel retail market;
–
loss
of and competition to obtain and renew concessions;
–
changes
by airport authorities or airlines that lower the number of
passengers in the terminals in which we have
concessions;
–
ability
to execute our growth strategy effectively to integrate
successfully any new concessions or future acquisitions into our
business and to remodel existing concessions;
–
ability
to successfully expand into the food and beverage concession
industry;
–
dependence
on our controlling shareholder to provide us with key services and
to finance our operations;
–
dependence
on our local partners;
–
changes
in the taxation of goods or duty-free regulations in the markets in
which we operate;
–
adverse
impacts of compliance or legal matters;
–
restrictions
on the duty-free sale of tobacco products and on smoking in general
that affect our tobacco product sales;
–
changes
in customer preferences or demands;
–
the
future travel habits of our customers and potential changes in
transportation safety requirements;
–
reliance
on a limited number of suppliers;
–
disruption
in our supply chain;
–
information
technology systems failure or disruption;
–
ability
to attract and retain qualified personnel;
–
litigation;
–
the
concentration of our operations in New York and other metropolitan
areas;
–
ability
to borrow from banks or raise funds in the capital
markets;
–
our
controlling shareholder’s control over us; and
–
other
risk factors discussed under “Item 3. Key
Information
– D. Risk factors.”
Forward-looking statements speak only as of the date they are made,
and we do not undertake any obligation to update them in light of
new information or future developments or to release publicly any
revisions to these statements in order to reflect later events or
circumstances or to reflect the occurrence of unanticipated
events.
2
PART I
ITEM
1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND
ADVISERS
A. Directors and senior
management
Not applicable.
B. Advisers
Not applicable.
C. Auditors
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
A. Offer statistics
Not applicable.
B. Method and expected timetable
Not applicable.
3
ITEM 3. KEY INFORMATION
A. Selected financial data
You
should read the following selected financial data together with
“Item 5. Operating and
Financial Review and
Prospects” and our
Combined Financial Statements and the related notes appearing
elsewhere in this annual report.
Our
historical financial statements present the results of Hudson
Group, which comprises all entities and operations that will be
transferred to Hudson Ltd.
pursuant to the Reorganization Transactions. Prior to our initial
public offering, Hudson Ltd. was a newly formed holding
company with nominal assets and no liabilities or contingencies,
and did not conduct any operations. Following the Reorganization
Transactions and our initial public offering, our financial
statements present the results of operations of Hudson Ltd. and its consolidated
subsidiaries. Hudson Ltd.’s financial statements are
the same as Hudson Group’s financial statements prior to our
initial public offering,
as
adjusted for the Reorganization Transactions. See
“Presentation of Financial and Other Information – The Reorganization
Transactions.”
The
selected financial data are not
intended to replace the Combined Financial Statements and are
qualified in their entirety by reference to the Combined Financial
Statements and related notes appearing elsewhere in this annual
report. The selected historical
combined statements of
comprehensive income and other financial data for the fiscal years
ended December 31, 2017,
2016 and 2015 and selected
historical combined statements
of financial position data as of December 31, 2017 and 2016 were derived from
our audited Combined Financial Statements included elsewhere in
this annual report. Our historical results are not necessarily
indicative of the results expected for any future
period.
4
We prepare our Combined Financial Statements in accordance with
IFRS as issued by IASB.
IN MILLIONS OF
USD
2017
2016
2015
Combined
Statements of Comprehensive Income
Turnover
1,802.5
1,687.2
1,403.0
Cost of
sales
(680.3)
(645.3)
(534.1)
Gross
profit
1,122.2
1,041.9
868.9
Selling
expenses
(421.2)
(395.7)
(325.7)
Personnel
expenses
(371.3)
(337.4)
(279.5)
General
expenses
(156.9)
(151.9)
(130.9)
Share of
result of associates
(0.3)
(0.7)
1.7
Depreciation, amortization and
impairment
(108.7)
(103.7)
(86.7)
Other
operational result
(3.7)
(9.3)
(1.7)
Operating
profit
60.1
43.2
46.1
Interest
expenses
(30.2)
(29.8)
(25.4)
Interest
income
1.9
2.1
1.6
Foreign
exchange gain / (loss)
0.5
–
(0.2)
Earnings before
taxes (EBT)
32.3
15.5
22.1
Income
tax
(42.9)
34.3
(3.8)
Net
earnings
(10.6)
49.8
18.3
OTHER
COMPREHENSIVE INCOME
Exchange
differences on translating foreign operations
26.8
12.9
(35.9)
Items to be
reclassified to net income in subsequent periods, net of
tax
26.8
12.9
(35.9)
Total other
comprehensive income / (loss), net of tax
26.8
12.9
(35.9)
Total
comprehensive income / (loss), net of tax
16.2
62.7
(17.6)
ATTRIBUTABLE TO:
Equity
holders of the parent
(40.4)
23.5
(7.7)
Non-controlling
interests¹
29.8
26.3
26.0
1
Dividends paid to
non-controlling interests amounted to $34.4 million, $27.4 million
and $28.7 million for the years ended December 31, 2017, 2016 and
2015, respectively.
IN MILLIONS OF
USD
DEC 31,
2017
DEC 31,
2016
Summary of Combined Statement of Financial Position
Non-current
assets
1,069.0
1,134.0
Current
assets
388.8
409.0
Total assets
1,457.8
1,543.0
Non-current
liabilities
571.4
548.1
Current
liabilities
314.0
264.5
Total liabilities
885.4
812.6
Net assets
572.4
730.4
5
IN MILLIONS OF
USD
2017
2016
2015
Other Data
Operating Metrics
Number of stores 1
996
948
973
Total square feet of stores
(thousands)2
1,069.8
1,010.5
997.9
Financial Metrics
Net
sales growth
6.7%
20.5%
25.7%
Like-for-like growth 3
4.8%
3.9%
3.0%
Like-for-like growth on a constant currency
basis 4
4.4%
4.3%
4.3%
Organic growth 5
8.8%
5.4%
1.9%
Net
earnings (millions of USD)
(10.6)
49.8
18.3
Net
earnings growth
(121.3%)
172.1%
(38.2%)
Net earnings margin 6
(0.6%)
3.0%
1.3%
Adjusted EBITDA (millions of USD)7
172.5
156.2
134.5
Adjusted
EBITDA growth
10.4%
16.1%
15.7%
Adjusted EBITDA margin 8
9.5%
9.3%
9.6%
Net
earnings attributable to equity holders of the parent
(40.4)
23.5
(7.7)
Net
earnings attributable to equity holders of the parent
growth
N / A
N / A
N / A
Net earnings attributable to equity holders of the
parent margin 9
(2.2%)
1.4%
(0.5%)
Adjusted net earnings attributable to equity holders
of the parent (millions of USD)10
1.1
67.6
25.7
Adjusted
net earnings attributable to equity holders of the parent
growth
N/A
163.0%
4.5%
Adjusted net earnings attributable to equity holders
of the parent margin 11
0.1%
4.0%
1.8%
1
Represents number of stores open at the end
of the applicable period.
2
Represents gross square footage of all
stores open at the end of the applicable
period.
3
Like-for-like growth represents the growth
in aggregate monthly net sales in the applicable period at stores
that have been operating for at least 12 months. Like-for-like
growth during the applicable period excludes growth attributable to
(i) net new stores and expansions until such stores have been
part of our business for at least 12 months, (ii) acquired
stores until such stores have been part of our business for at
least 12 months and (iii) eight stores acquired in the 2014
acquisition of Nuance and 46 stores acquired in the 2015
acquisition of World Duty Free Group that management expected, at
the time of the applicable acquisition, to wind down. For more
information see “Item 5. Operating and Financial Review and
Prospects - A. Operating results - Principal factors affecting our
results of operations - Turnover".
4
Like-for-like growth on a constant currency
basis is calculated by keeping exchange rates constant for each
month being compared from period to period. We believe that the
presentation of like-for-like growth on a constant currency basis
assists investors in comparing period to period operating results
as it removes the effect of fluctuations in foreign exchange
rates.
5
Organic growth represents the combination of
growth from (i) like-for-like growth and (ii) net new stores
and expansions. Organic growth excludes growth attributable to
(i) acquired stores until such stores have been part of our
business for at least 12 months and (ii) eight stores acquired
in the 2014 acquisition of Nuance and 46 stores acquired in the
2015 acquisition of World Duty Free Group that management expected,
at the time of the applicable acquisition, to wind down. For more
information see “Item 5. Operating and Financial Review and
Prospects - A. Operating results - Principal factors affecting our
results of operations - Turnover - Organic
Growth".
6
We define net earnings margin as net
earnings divided by turnover.
7
We define Adjusted EBITDA as net earnings
adjusted for the items set forth in the table below. Adjusted
EBITDA is a non-IFRS measure and is not a uniformly or legally
defined financial measure. Adjusted EBITDA is not a substitute for
IFRS measures in assessing our overall financial performance.
Because Adjusted EBITDA is not determined in accordance with IFRS,
and is susceptible to varying calculations, Adjusted EBITDA may not
be comparable to other similarly titled measures presented by other
companies. Adjusted EBITDA is included in this annual report
because it is a measure of our operating performance and we believe
that Adjusted EBITDA is useful to investors because it is
frequently used by securities analysts, investors and other
interested parties in their evaluation of the operating performance
of companies in industries similar to ours. We also believe
Adjusted EBITDA is useful to investors as a measure of comparative
operating performance from period to period as it is reflective of
changes in pricing decisions, cost controls and other factors that
affect operating performance, and it removes the effect of our
capital structure (primarily interest expense), asset base
(depreciation and amortization) and non-recurring transactions,
impairments of financial assets and changes in provisions
(primarily relating to costs associated with the closing or
restructuring of our operations). Our management also uses Adjusted
EBITDA for planning purposes, including financial projections.
Adjusted EBITDA has limitations as an analytical tool, and you
should not consider it in isolation, or as a substitute for an
analysis of our results as reported under IFRS as issued by
IASB.
8
We define Adjusted EBITDA margin as Adjusted
EBITDA divided by turnover.
9
We define net earnings attributable to
equity holders of the parent margin as net earnings attributable to
equity holders of the parent divided by
turnover.
10
We define Adjusted net earnings attributable
to equity holders of the parent as net earnings attributable to
equity holders of the parent adjusted for the items set forth in
the table below. Adjusted net earnings attributable to equity
holders of the parent is a non-IFRS measure and is not a uniformly
or legally defined financial measure. Adjusted net earnings
attributable to equity holders of the parent is not a substitute
for IFRS measures in assessing our overall operating performance.
Because Adjusted net earnings attributable to equity holders of the
parent is not determined in accordance with IFRS, and is
susceptible to varying calculations, Adjusted net earnings
attributable to equity holders of the parent may not be comparable
to other similarly titled measures presented by other companies.
Adjusted net earnings attributable to equity holders of the parent
is included in this annual report because it is a measure of our
operating performance and we believe that Adjusted net earnings
attributable to equity holders of the parent is useful to investors
because it is frequently used by securities analysts, investors and
other interested parties in their evaluation of the operating
performance of companies in industries similar to ours. We also
believe Adjusted net earnings attributable to equity holders of the
parent is useful to investors as a measure of comparative operating
performance from period to period as it removes the effects of
purchase accounting for acquired intangible assets (primarily
concessions), non-recurring transactions, impairments of financial
assets and changes in provisions (primarily relating to costs
associated with the closing or restructuring of our operations).
Management does not consider such costs for the purpose of
evaluating the performance of the business and as a result uses
Adjusted net earnings attributable to equity holders of the parent
for planning purposes. Adjusted net earnings attributable to equity
holders of the parent has limitations as an analytical tool, and
you should not consider it in isolation, or as a substitute for an
analysis of our results as reported under IFRS as issued by
IASB.
11
We define Adjusted net earnings margin
attributable to equity holders of the parent as Adjusted net
earnings attributable to equity holders of the parent divided by
turnover.
6
The following is a reconciliation of Adjusted EBITDA to net
earnings for the periods presented:
IN MILLIONS OF
USD
2017
2016
2015
Net earnings
(10.6)
49.8
18.3
Income
tax expense
42.9
(34.3)
3.8
Earnings before taxes (EBT)
32.3
15.5
22.1
Foreign
exchange gain (loss)
(0.5)
–
0.2
Interest
income
(1.9)
(2.1)
(1.6)
Interest
expenses
30.2
29.8
25.4
Operating profit
60.1
43.2
46.1
Depreciation,
amortization and impairment
108.7
103.7
86.7
Other operational result a
3.7
9.3
1.7
Adjusted EBITDA
172.5
156.2
134.5
a
For the year ended December 31, 2017, other operational result
consisted of $9.4 million of other operating income resulting from
a related party loan waiver due to Dufry and other operating
expenses including $3.4 million of audit and consulting costs
related to preparatory work in connection with our initial public
offering, $4.1 million of restructuring expenses associated with
the World Duty Free Group acquisition and $5.5 million of other
operating expenses including restructuring and non-recurring items.
For the year ended December 31, 2016, other operational result
consisted primarily of $8.3 million of restructuring expenses
associated with the World Duty Free Group acquisition. See note 13
to our audited Combined Financial Statements.
The following is a reconciliation of Adjusted net earnings
attributable to equity holders of the parent to net earnings
attributable to equity holders of the parent for the periods
presented:
IN MILLIONS OF
USD
2017
2016
2015
Net earnings attributable to equity holders of the
parent
(40.4)
23.5
(7.7)
Amortization related to
acquisitions a
39.2
38.4
32.4
Other operational result b
3.7
9.3
1.7
Income tax adjustment c
(1.4)
(3.6)
(0.7)
Adjusted net earnings attributable to equity holders of the
parent
1.1
67.6
25.7
a
Although the values assigned to the
concession rights during the purchase price allocation are fair
values, we believe that their additional amortization does not
allow a fair comparison with our existing business previous to the
business combination, as the costs of self-generated intangible
assets have been expended.
b
For the year ended December 31, 2017, other
operational result consisted of $9.4 million of other operating
income resulting from a related party loan waiver due to Dufry and
other operating expenses including $3.4 million of audit and
consulting costs related to preparatory work in connection with our
initial public offering, $4.1 million of restructuring expenses
associated with the World Duty Free Group acquisition and $5.5
million of other operating expenses including restructuring and
non-recurring items.
For the year ended December 31,2016, other operational result consisted primarily of $8.3 million
of restructuring expenses associated with the World Duty Free Group
acquisition. See note 13 to our audited Combined Financial
Statements.
c
Income tax adjustment represents the impact
in income taxes we actually accrued during the applicable period
attributable to other operational result.
This assumption uses an income
tax rate of 39.0% for the adjustment. Amortization expenses related
to acquisitions did not reduce the amount of taxes we paid during
the applicable periods, and therefore there are no corresponding
income tax adjustments in respect of the amortization expense
adjustment.
B. Capitalization and
indebtedness
Not applicable.
C. Reasons for the offer and use of
proceeds
Not applicable.
7
D. Risk factors
Risks relating to our
business
Factors outside our control that cause a reduction in airline
passenger traffic, including terrorist attacks and natural
disasters, could adversely affect our business and our turnover
growth.
We derive substantially all of our turnover from, and therefore our
business is primarily dependent upon, sales to airline passengers.
The occurrence of any one of a number of events that are outside
our control such as terrorist attacks (including cyber-attacks),
severe weather, ash clouds, airport closures, pandemics, outbreaks
of contagious diseases, such as the Zika or Ebola crises, natural
disasters, strikes or accidents may lead to a reduction in the
number of airline passengers. Any of these events, or any other
event of a similar nature, even if not directly affecting the
airline industry, may lead to a significant reduction in the number
of airline passengers.
Further, any disruption to or suspension of services provided by
airlines and the travel industry as a result of financial
difficulties, labor disputes, construction work, increased
security, changes to regulations governing airlines, mergers and
acquisitions in the airline industry and challenging economic
conditions causing airlines to reduce flight schedules or increase
the price of airline tickets could negatively affect the number of
airline passengers.
Moreover, increases in oil prices, including as a result of global
political and economic instabilities, may increase airline ticket
prices through fuel surcharges, which may result in a significant
reduction of airline passengers.
Additionally, the threat of terrorism and governmental measures in
response thereto, such as increased security measures, recent
executive orders in the United States impacting entry into the
United States and changing attitudes towards the environmental
impacts of air travel may in each case reduce demand for air travel
and, as a result, decrease airline passenger traffic at
airports.
The effect that these factors would have on our business depends on
their magnitude and duration, and a reduction in airline passenger
numbers will result in a decrease in our sales and may have a
materially adverse impact on our business, financial condition and
results of operations.
General economic and market conditions may adversely affect our
results.
Our success is dependent on consumer spending, which is sensitive
to economic downturns, inflation and any associated rise in
unemployment, decline in consumer confidence, adverse changes in
exchange rates, increase in interest rates, increase in the price
of oil, deflation, direct or indirect taxes or increase in consumer
debt levels. As a result, economic downturns may have a material
adverse impact on our business, financial condition and result of
operations. Economic conditions have in the past created pressure
on us and similar retailers to increase promotions and discounts,
particularly at our duty-free concessions, which can have a
negative impact on our business, financial condition and results of
operations. These promotions may continue even after economic
growth returns.
The market to obtain and renew concessions continues to be highly
competitive.
We compete with travel retailers, managers / operators and,
increasingly, master concessionaires to obtain and renew
concessions at airports and at other travel facilities such as
railway stations. Obtaining and renewing concessions at airports is
particularly competitive, as there are a limited number of airports
in the continental United States and Canada that meet our minimum
operating criteria, which include that an airport has a sufficient
number of airline passengers to support our retail operations. Our
competitors often have strong financial support or pre-existing
relationships with airport authorities that benefit those
competitors when competing for concessions. Certain of our
competitors have been and may in the future be able and willing to
outbid us for concession agreements, accept a lower profit margin
or expend more capital in order to obtain or retain
business.
There is no guarantee that we will be able to renew existing
concessions or obtain new concessions. If we do renew a concession,
there is no guarantee that it will be on similar economic terms.
The failure to obtain or renew a concession means that we will not
be able to enter or continue operating in the market represented by
such concession. If we were to fail to renew major concessions or
fail to obtain further concessions, our business, financial
condition, results of operations and future growth could be
materially adversely affected.
8
Our concessions are operated under concession agreements that are
subject to revocation or modification and the loss of concessions
could negatively affect our business, financial condition and
results of operations.
We conduct our business primarily through concessions in airport
terminals. The airport authorities and landlords with whom we
contract for these concessions are generally able to revoke them at
will by terminating the applicable concession agreement. Our
concessions may also be terminated by annulment, which may be
declared by the airport authorities or by courts where the grant of
the concession or the terms of the concession do not comply with
applicable legal requirements, such as procurement, antitrust or
similar regulations.
–
Our
concessions may also be terminated early by airport authorities or
landlords in certain default scenarios, including, among
others:
–
assignment,
transfer or sub-lease to third parties, in whole or in part, of the
rights or obligations provided in the applicable concession
agreement without the consent of airport authorities or landlords,
to the extent required;
–
failure
to comply with any of the provisions of the concession
agreement;
–
use
of the concession area for any purpose other than the object of the
agreement;
–
entering
into an agreement with a third-party with respect to the concession
area or services without prior approval of the applicable airport
authorities or landlord;
–
making
certain modification to the facilities without prior approval from
the applicable airport authorities or landlord;
–
default
on the payment of the fees for a period provided for in the
relevant agreement; or
–
not
providing the services to an adequate quality level or the failure
to obtain the necessary equipment for the satisfactory rendering of
such services.
The loss or modification of our concessions could have a materially
adverse impact on our business, financial condition and results of
operations.
Our profitability depends on the number of airline passengers in
the terminals in which we have concessions. Changes by airport
authorities or airlines that lower the number of airline passengers
in any of these terminals could affect our business, financial
condition and results of operations.
The number of airline passengers that visit the terminals in which
we have concessions is dependent in part on decisions made by
airlines and airport authorities relating to flight arrivals and
departures. A decrease in the number of flights and resulting
decrease in airline passengers could result in fewer sales, which
could lower our profitability and negatively impact our business,
financial condition and results of operations. Concession
agreements generally provide for a minimum annual guaranteed
payment, or a MAG, payable to the airport authority or landlord
regardless of the amount of sales at the concession. Currently, the
majority of our concession agreements provide for a MAG that is
either a fixed dollar amount or an amount that is variable based
upon the number of travelers using the airport or other location,
retail space used, estimated sales, past results or other metrics.
If there are fewer airline passengers than expected or if there is
a decline in the sales per airline passenger at these facilities,
we will nonetheless be required to pay the MAG or fixed rent and
our business, financial condition and results of operations may be
materially adversely affected.
Furthermore, the exit of an airline from a market or the bankruptcy
of an airline could reduce the number of airline passengers in a
terminal or airport where we operate and have a material adverse
impact on our business, financial condition and results of
operations.
9
We may not be able to execute our growth strategy to expand and
integrate new concessions or future acquisitions into our business
or remodel existing concessions. Any new concessions, future
acquisitions or remodeling of existing concessions may divert
management resources, result in unanticipated costs, or dilute
holders of our Class A common shares.
Part of our growth strategy is to expand and remodel our existing
facilities and to seek new concessions through tenders, direct
negotiations or other acquisition opportunities. In this regard,
our future growth will depend upon a number of factors, such as our
ability to identify any such opportunities, structure a competitive
proposal and obtain required financing and consummate an offer. Our
growth strategy will also depend on factors that may not be within
our control, such as the timing of any concession or acquisition
opportunity.
We must also strategically identify which airport terminals and
concession agreements to target based on numerous factors, such as
airline passenger numbers, airport size, the type, location and
quality of available concession space, level of anticipated
competition within the terminal, potential future growth within the
airport and terminal, rental structure, financial return and
regulatory requirements. We cannot assure you that this strategy
will be successful.
In addition, we may encounter difficulties integrating expanded or
new concessions or any acquisitions. Such expanded or new
concessions or acquisitions may not achieve anticipated turnover
and earnings growth or synergies and cost savings. Delays in the
commencement of new projects and the refurbishment of concessions
can also affect our business. In addition, we will expend resources
to remodel our concessions and may not be able to recoup these
investments. A failure to grow successfully may materially
adversely affect our business, financial condition and results of
operations.
In particular, new concessions and acquisitions, and in some cases
future expansions and remodeling of existing concessions, could
pose numerous risks to our operations, including that we
may:
–
have
difficulty integrating operations or personnel;
experience
unexpected construction and development costs and project
delays;
–
face
difficulties associated with securing required governmental
approvals, permits and licenses (including construction permits and
liquor licenses, if applicable) in a timely manner and responding
effectively to any changes in local, state or federal laws and
regulations that adversely affect our costs or ability to open new
concessions;
–
have
challenges identifying and engaging local business partners to meet
Airport Concession Disadvantaged Business Enterprise ("ACDBE")
requirements in concession agreements;
–
not
be able to obtain construction materials or labor at acceptable
costs;
–
face
engineering or environmental problems associated with our new and
existing facilities;
–
experience
significant diversion of management attention and financial
resources from our existing operations in order to integrate
expanded, new or acquired businesses, which could disrupt our
ongoing business;
–
lose
key employees, particularly with respect to acquired or new
operations;
–
have
difficulty retaining or developing acquired or new
businesses’ customers;
–
impair
our existing business relationships with suppliers or other third
parties as a result of acquisitions;
–
fail
to realize the potential cost savings or other financial benefits
and / or the strategic benefits of acquisitions, new concessions or
remodeling; and
–
incur
liabilities from the acquired businesses and we may not be
successful in seeking indemnification for such
liabilities.
In connection with acquisitions or other similar investments, we
could incur debt or amortization expenses related to intangible
assets, suffer asset impairments, assume liabilities or issue stock
that would dilute the percentage of ownership of our then-current
holders of Class A common shares. We may not be able to complete
acquisitions or integrate the operations, products, technologies or
personnel gained through any such acquisition, which may have a
materially adverse impact on our business, financial condition and
results of operations.
10
If we are unable to implement our growth strategy to expand into
the food and beverage market, our business, financial condition and
results of operations could be negatively impacted.
We have limited experience in the food and beverage concession
market. Expansion into the food and beverage concession market
increases the complexity of our business and could divert the
attention of our management and personnel from our existing
activities, placing strain on our operations and financial
resources. We may be unfamiliar with certain laws, regulations and
administrative procedures in new markets, including the procurement
of food permits and liquor licenses, which could delay the
build-out of new concessions and prevent us from achieving our
operational goals on a timely basis. Our efforts to expand into the
food and beverage concession market may not succeed. Furthermore,
we will incur expenses and expend resources to develop, acquire and
set up food and beverage concessions and we may not recoup our
investment if we are unable to deliver consistent food quality,
service, convenience or ambiance, or if we fail to deliver a
consistently positive experience to our customers.
The profitability of any food and beverage concession we acquire or
operate is dependent on numerous factors, including our ability
to:
–
adapt
to consumer tastes and appeal to a broad range of consumers whose
preferences cannot be predicted with certainty;
–
partner
with nationally recognized brands;
–
create
and implement an effective marketing / advertising
strategy;
–
hire,
train and retain excellent food and concession managers and
staff;
–
manage
costs and prudently allocate capital resources; and
–
obtain
and maintain necessary food and liquor licenses and
permits.
In addition, profitability, if any, of our food and beverage
concessions may be lower than in our existing activities, and we
may not be successful enough in this line of business to execute
our food and beverage growth strategy. If we are unable to grow in
the food and beverage concession market, our reputation could be
damaged. If any of the risks identified above were to occur, it
could limit our growth and have a materially adverse impact on our
business, financial condition and results of
operations.
We are dependent on our local partners.
Our retail operations are carried on through approximately 173
operating districts in the continental United States and Canada.
Our local partners, including our ACDBE partners, maintain
ownership interests in the vast majority of these partnerships and
other operating entities, some of which operate major concessions.
Our participation in these operating entities differs from market
to market. While the precise terms of each relationship vary, our
local partners may have control over certain portions of the
operations of these concessions. Our local partners oversee the
operations of certain stores that, in the aggregate, are
responsible for a significant portion of our turnover. The stores
are operated pursuant to the applicable joint venture agreement
governing the relationship between us and our local partner.
Generally, these agreements also provide that strategic decisions
are to be made by a committee comprised of us and our local
partner, and we typically encourage our local partners to follow
Hudson operating parameters. These concessions involve risks that
are different from the risks involved in operating a concession
independently, and include the possibility that our local
partners:
–
are
in a position to take action contrary to our instructions, our
requests, our policies, our objectives or applicable
laws;
–
take
actions that reduce our return on investment;
–
go
bankrupt or are otherwise unable to meet their capital contribution
obligations;
–
have
economic or business interests or goals that are or become
inconsistent with our business interests or goals; or
–
take
actions that harm our reputation or restrict our ability to run our
business.
In some cases, and within limits recommended by the Federal
Aviation Administration (the “FAA”), we may loan money
to our ACDBE partners in connection with concession agreements in
order to help fund their initial capital investment in a concession
opportunity. If our partners are unable to repay these loans, we
will record a writedown and our net income will decrease. For these
and other reasons, it could be more difficult for us to
successfully operate these concessions and to respond to market
conditions, which could adversely affect our business, financial
condition and results of operations.
11
We have experienced net losses in the past, and we may continue to
experience net losses in the future.
We
experienced a net loss attributable to equity holders of the parent
of $40.4 million and $7.7
million for the years ended
December 31, 2017 and
2015, respectively. We cannot
assure you that we will achieve profitability in future
periods.
The retail business is highly competitive.
We also compete to attract retail customers and compete with other,
non-airport retailers, such as traditional Main Street retailers or
Internet retailers. Some of our retail competitors may have greater
financial resources, greater purchasing economies of scale or lower
cost bases, any of which may give them a competitive advantage over
us. If we were to lose market share to competitors, our turnover
would be reduced and our business, financial condition and results
of operations adversely affected.
If the estimates and assumptions we use to determine the size of
our market are inaccurate, our future growth rate may be
impacted.
Market opportunity estimates and growth forecasts are subject to
uncertainty and are based on assumptions and estimates that may not
prove to be accurate. The estimates and forecasts in this annual
report relating to the size and expected growth of the travel
retail market may prove to be inaccurate. Even if the market in
which we compete meets our size estimates and forecasted growth,
our business could fail to grow at similar rates, if at all. The
principal assumptions relating to our market opportunity include
projected growth in the travel retail market and our share of the
market in the continental United States and Canada. If these
assumptions prove inaccurate, our business, financial condition and
results of operations could be adversely affected.
We may not be able to predict accurately or fulfill customer
preferences or demands.
We derive a significant amount of our turnover from the sale of
fashion-related, cosmetic and luxury products which are subject to
rapidly changing customer tastes, as well as from merchandise
associated with national or local one-time events. The availability
of new products and changes in customer preferences has made it
more difficult to predict sales demand for these types of products
accurately. Our success depends in part on our ability to predict
and respond to quickly changing consumer demands and preferences,
and to translate market trends into appropriate merchandise
offerings. Additionally, due to our limited sales space relative to
other retailers, the proper selection of salable merchandise is an
important factor in turnover generation. We cannot assure you that
our merchandise selection will correspond to actual sales demand.
If we are unable to predict or rapidly respond to sales demand,
including demand generated by one-time events, or to changing
styles or trends, or if we experience inventory shortfalls on
popular merchandise, our turnover may be lower, which could have a
materially adverse impact on our business, financial condition and
results of operations.
We rely on a limited number of distributors and suppliers for
certain of our products, and events outside our control may disrupt
our supply chain, which could result in an inability to perform our
obligations under our concession agreements and ultimately cause us
to lose our concessions.
Although we have a diversified portfolio of suppliers across most
of our product categories, we rely on a small number of suppliers
for certain of our products. For example, the distributors
responsible for supplying magazines and periodicals to virtually
all of our concessions are the News Group, which includes The News
Group L.P. and TNG, which is a division of Great Pacific
Enterprises Inc., and Hudson News Distributors, which includes
Hudson News Distributors, LLC and Hudson RPM Distributors, LLC. Mr.
James Cohen, who is a member of our board of directors, controls
Hudson News Distributors. See “Item 7. Major Shareholders and
Related Party Transactions – B. Related party
transactions – Transactions with entities
controlled by Mr. James Cohen.” Mr. James Cohen became a
member of our board of directors upon consummation of our initial
public offering. We do not have a long-term distribution contract
with Hudson News Distributors, but we expect to continue purchasing
magazines and other periodicals from them. Future amalgamation may
reduce the number of distributors even further. As a result, these
distributors may have increased bargaining power and we may be
required to accept less favorable purchasing terms. In the event of
a dispute with a supplier or distributor, the delivery of a
significant amount of merchandise may be delayed or cancelled, or
we may be forced to purchase merchandise from other suppliers on
less favorable terms. Such events could cause turnover to fall or
costs to increase, adversely affecting our business, financial
condition and results of operations. In particular, if we have a
dispute with any of the distributors that delivers magazines and
periodicals to our concessions, we may be unable to secure an
alternative supply of magazines and periodicals, which could lead
to fewer customers entering our stores and may have a material
adverse impact on our business, financial condition and results of
operations. Additionally, some of our concessions in airports
require that we sell magazines and periodicals. If supply of these
products were disrupted, we could lose one or more of these
concessions, which would have a material adverse impact on our
business, financial condition and results of operations. Moreover,
Hudson Media, which is controlled by Mr. James Cohen, is a co-owner
of COMAG Marketing Group, LLC a national wholesale distributor in
the periodical distribution channel. The other co-owner of COMAG
Marketing Group, LLC is The Jim Pattison Group, which also controls
The News Group, another major wholesale distributor in the
periodical distribution channel and one of our suppliers. Mr. James
Cohen is also a member of the board of directors of COMAG Marketing
Group, LLC. As such, Mr. James Cohen and his business partners play
a major role in the wholesale distribution of periodicals in our
markets and his interests and those of his business partners may
not always align with our interests.
12
In
addition, affiliates of the selling shareholder have been our
exclusive supplier of certain categories of products. We are
obligated, at Dufry’s option, to continue purchasing these
products from such affiliates pursuant to the Master Relationship
Agreement that we entered into in connection with our initial
public offering. See “Item 7. Major Shareholders and Related
Party Transactions – B.
Related party transactions – Transactions with Dufry
– New agreements with
Dufry – Master
relationship agreement.” The prices we pay to Dufry for these
products will be determined by Dufry in its sole discretion in
accordance with its transfer pricing policy as then in effect for
all members of the Dufry Group. We cannot assure you that the
transfer pricing policy will not be amended in a manner adverse to
us, which could result in us paying higher prices for certain
products than we currently pay. The Master Relationship Agreement
will terminate on the date when there are no issued and outstanding
Class B common shares. Also, Dufry may terminate the Master
Relationship Agreement without cause upon six months’ notice
to us. If the Master Relationship Agreement is terminated, we may
not be able to obtain an alternate supplier of such products on
favorable terms, if at all, which could have a material adverse
impact on our business, financial condition and results of
operations.
Further, damage or disruption to our supply chain due to any of the
following could impair our ability to sell our products: adverse
weather conditions or natural disaster, government action, fire,
terrorism, cyber-attacks, the outbreak or escalation of armed
hostilities, pandemic, industrial accidents or other occupational
health and safety issues, strikes and other labor disputes, customs
or import restrictions or other reasons beyond our control or the
control of our suppliers and business partners. Failure to take
adequate steps to mitigate the likelihood or potential impact of
such events, or to effectively manage such events if they occur,
could adversely affect our business, financial condition and
results of operations, as well as require additional resources to
restore our supply chain.
Certain airports or groups of airports in metropolitan areas
generate a meaningful portion of our turnover.
Though none of our individual concessions was responsible for 10%
or more of our turnover in 2017, certain airports or groups of
airports in a metropolitan area were responsible for meaningful
amounts of our turnover. Concessions located at airports in the New
York metropolitan area, including John F. Kennedy, LaGuardia and
Newark, in the aggregate generated 15% of our turnover in 2017.
Concessions located at airports around Chicago, Las Vegas, Los
Angeles, Seattle, Toronto and Vancouver generated in the aggregate
at each location between 5% and 10% of our turnover in 2017. Our
duty-free concessions in Vancouver and Toronto generated the
significant majority of our turnover at each location in
2017.
Any disruption to activities at these airports or groups of
airports could have a material adverse impact on our turnover and
results of operations. Moreover, any serious dispute between us and
the operator or concession landlords at such airports or group of
airports that could threaten the continuity or renewal of
concessions at such airport or group of airports, which could have
a material adverse impact on our turnover and results of
operations.
13
Our expansion into new airports may present increased risks due to
our unfamiliarity with those areas.
Our growth strategy depends upon expanding into select markets that
meet our minimum operating criteria. Airports that meet our
criteria may be in locations where we have little or no meaningful
operating experience. In addition, these locations may be
characterized by demographic characteristics, consumer tastes and
discretionary spending patterns that are different from those in
the markets where our existing operations are located. As a result,
new airport terminal operations may be less successful than our
current airport terminal concessions. We may not be able to
identify new markets that meet our minimum operating criteria, and
even if we do, we may find it more difficult in these markets to
hire, motivate and keep qualified employees. Operations in new
markets may be less successful than those in markets where we
currently operate and may not reach expected sales and profit
levels, which could negatively impact our business, financial
condition and results of operations.
We rely on our customers spending a significant amount of time in
the airports where we operate, and a change in customer habits or
changes in transportation safety requirements and procedures could
have a materially adverse impact on our business, financial
condition and results of operations.
Since most of our concessions are situated beyond the security
checkpoints at airports, we rely on our customers spending a
significant amount of time in the areas of the airport terminals
where we have concessions. Changes in airline passengers’
travel habits prior to departure, including an increase in the
availability or popularity of airline or private lounges, or an
increase in the efficiency of ticketing, transportation safety
procedures and air traffic control systems, could reduce the amount
of time that our customers spend at locations where we have
concessions. A reduction in the time that customers spend in
airports near our concessions could have a material adverse impact
on our business, financial condition and results of
operations.
Failure to timely obtain and maintain required licenses and permits
could lead to the loss or suspension of licenses relating to the
sale of liquor.
The laws in the United States and Canada, including in each state
and province in which we operate, require that any concession at
which we sell alcohol be properly licensed. Alcohol control laws
and regulations impact numerous aspects of operations of our
concessions, such as hours of operation, advertising, trade
practices, wholesale purchasing, relationships with alcohol
manufacturers and distributors, inventory control and the handling
and storage of alcohol. These laws and regulations also generally
require us to supervise and control the conduct of all persons on
our licensed premises and may assign liability to us for certain
actions of our customers while in our concessions. In addition,
obtaining liquor licenses for multiple concessions or that cover
large areas often requires overcoming regulatory obstacles and can
be time consuming and expensive. Any failure to comply with these
regulations or to timely obtain or maintain liquor licenses could
adversely affect our results of operations.
Failure to comply with ACDBE participation goals and requirements
could lead to lost business opportunities or the loss of existing
business.
Many of our concessions in the continental United States contain
minimum ACDBE participation requirements, and bidding on or
submitting proposals for new concessions often requires that we
meet or use good faith efforts to meet minimum ACDBE participation
goals. Due to various factors, the process of identifying and
contracting with ACDBEs can be challenging. The rules and
regulations governing the certification and counting of ACDBE
participation in airport concessions are complex, and ensuring
ongoing compliance is costly and time consuming. If we fail to
comply with the minimum ACDBE participation requirements, we may be
held responsible for breach of contract, which could result in the
termination of a concession or monetary damages and could adversely
affect our ability to bid on or obtain future concessions. To the
extent we fail to comply with the minimum ACDBE participation
goals, there could be a material adverse impact on our business,
financial condition and results of operations.
14
Information technology systems failure or disruption, or changes to
information technology related to payment systems, could impact our
day-to-day operations.
Our information technology systems are used to record and process
transactions at our point of sale interfaces and to manage our
operations. These systems provide information regarding most
aspects of our financial and operational performance, statistical
data about our customers, our sales transactions and our inventory
management. Fire, natural disasters, power loss, telecommunications
failure, break-ins, terrorist attacks (including cyber-attacks),
computer viruses, electronic intrusion attempts from both external
and internal sources and similar events or disruptions may damage
or impact our information technology systems at any time. These
events could cause system interruption, delays or loss of critical
data and could disrupt our acceptance and fulfillment of customer
orders, as well as disrupt our operations and management. For
example, although our point-of-sales systems are programmed to
operate and process customer orders independently from the
availability of our central data systems and even of the network,
if a problem were to disable electronic payment systems in our
stores, credit card payments would need to be processed manually,
which could result in fewer transactions. Significant disruption to
systems could have a material adverse impact on our business,
financial condition and results of operations.
We also continually enhance or modify the technology used for our
operations. We cannot be sure that any enhancements or other
modifications we make to our operations will achieve the intended
results or otherwise be of value to our customers. Future
enhancements and modifications to our technology could consume
considerable resources. We may be required to enhance our payment
systems with new technology, which could require significant
expenditures. If we are unable to maintain and enhance our
technology to process transactions, we may experience a materially
adverse impact on our business, financial condition and results of
operations.
If we are unable to protect our customers’ credit card data
and other personal information, we could be exposed to data loss,
litigation and liability, and our reputation could be significantly
impacted.
The use of electronic payment methods and collection of other
personal information, including sales history, travel history and
other preferences, expose us to increased risks, including the risk
of security breaches. In connection with credit or debit card
transactions, we collect and transmit confidential information by
way of secure private retail networks. Additionally, we collect and
store personal information from individuals, including our
customers and employees.
As a retail company, we have been and will be subject to the risk
of security breaches and cyber-attacks in which credit and debit
card information is stolen. Although we use secure networks to
transmit confidential information, the techniques used to obtain
unauthorized access, disable or degrade service, or sabotage
systems change frequently and may be difficult to detect for long
periods of time, and as a result we may be unable to anticipate
these techniques or implement adequate preventive measures. Third
parties with whom we do business may attempt to circumvent our
security measures in order to misappropriate such information, and
may purposefully or inadvertently cause a breach involving such
information. In addition, hardware, software, or applications we
develop or procure from third parties may contain defects in design
or manufacture or other problems that could unexpectedly compromise
information security. Unauthorized parties may also attempt to gain
access to our systems or facilities, or those of third parties with
whom we do business, through fraud, trickery or other forms of
deceiving our team members, contractors, vendors and temporary
staff.
We may become subject to claims for purportedly fraudulent
transactions arising out of actual or alleged theft of credit or
debit card information, and we may also be subject to lawsuits or
other proceedings relating to these types of incidents. Any such
claim or proceeding could cause us to incur significant unplanned
expenses, which could have a materially adverse impact on our
business, financial condition and results of operations. Further,
adverse publicity resulting from these allegations could
significantly impact our reputation and have a materially adverse
impact on our business, financial condition and results of
operations.
15
Our results of operations fluctuate due to seasonality and other
factors that impact the airline industry.
The third quarter of each calendar year, which is when passenger
numbers are typically higher, has historically represented the
largest percentage of our turnover for the year, and the first
quarter has historically represented the smallest percentage, as
passenger numbers are typically lower. The results of operations of
our concessions generally reflect this seasonality, and therefore,
our quarterly operating results are not necessarily indicative of
operating results for an entire year. We increase our working
capital prior to peak sales periods, so as to carry higher levels
of merchandise and add temporary personnel to the sales team to
meet the expected higher demand. Our results of operations would be
adversely affected by any significant reduction in sales during the
traditional peak sales period.
We are exposed to fluctuations in currency exchange rates, which
could negatively impact our financial condition and results of
operations.
We are impacted by the purchasing power of both the U.S. and
Canadian dollar relative to other currencies. When the U.S. or
Canadian dollar appreciates in value relative to other currencies,
our products become more expensive for the international airline
passengers whose home currency has less relative purchasing power.
In addition, the increased purchasing power of the U.S. or Canadian
dollar, as the functional currency of our stores, could also cause
domestic airline passengers to purchase products abroad. The
exchange rate fluctuations in either such currency could have an
adverse effect on our business, financial condition and results of
operations.
Our success depends on our ability to attract and retain qualified
personnel, including executive officers and
management.
Our success depends, to a significant extent, on the performance
and expertise of executive officers, top management and other key
employees. There is competition for skilled, experienced personnel
in the fields in which we operate and, as a result, the retention
of such personnel cannot be guaranteed. The loss or incapacitation
of our executive officers, senior management or any other key
employees or the failure to attract new highly qualified employees
could have a material adverse impact on our business, financial
condition and results of operations. Our continuing ability to
recruit and retain skilled personnel will be an important element
of our future success.
In connection with our initial public
offering, we identified a material weakness in our internal
control over financial reporting. If we are unable to remediate
this material weakness, or if we identify additional material
weaknesses in the future or otherwise fail to maintain an effective
system of internal controls, we may not be able to accurately or
timely report our financial results, or prevent fraud, and investor
confidence in our company and the market price of our shares may be
adversely affected.
In connection with our initial public offering, we
identified a material weakness in our internal control over
financial reporting in connection with the preparation of the
combined statement of cash flows for the year ended
December 31, 2014. The
material weakness identified is our internal controls over the
review of assumptions made in the accounting for business
combinations, specifically the determination and presentation of
cash flows related to business combinations and its effect on our
statement of cash flows when preparing our Combined Financial
Statements. We restated our statement of cash flows for the year
ended December 31, 2014
to correct the identified accounting error resulting from this
material weakness. However, if not remediated, this material
weakness could result in future material misstatements to our
annual or interim Combined Financial Statements.
We have
begun taking measures and plan to continue to take measures to
remediate this material weakness. This includes designing and
implementing a new control over the review of assumptions made in
business combinations, specifically the assumptions made that
affect the determination and presentation of the statement of cash
flows. However, the implementation of these measures may not fully
address this material weakness, and therefore we would not be able
to conclude that it has been fully remedied. Our failure to correct
this material weakness or if we experience additional material
weaknesses in the future or otherwise fail to maintain an effective
system of internal controls, we may not be able to accurately or
timely report our financial statement and could also impair our
ability to comply with applicable financial reporting requirements
and make related regulatory filings on a timely basis.
As a
public company, we are subject
to reporting obligations under U.S. securities laws, including the
Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act
requires that we include a
report from management on the effectiveness of our internal control
over financial reporting in our annual report on Form 20-F
beginning with our annual report for the fiscal year ending
December 31, 2018. If we
fail to remediate the material weakness identified above, our
management may conclude that our internal control over financial
reporting is not effective.
16
We cannot be certain that we will be able to implement and maintain
adequate controls over our financial processes and reporting in the
future. In addition, any testing by us conducted in connection with
Section 404 of the Sarbanes-Oxley Act of 2002, or any subsequent
testing by our independent registered public accounting firm, may
reveal deficiencies in our internal controls over financial
reporting that are deemed to be material weaknesses or that may
require prospective or retroactive changes to our financial
statements or identify other areas for further attention or
improvement. Any inability to do so could result in a negative
reaction in the financial markets due to a loss of confidence in
the reliability of our financial statements. In addition, we may be
required to incur additional costs in improving our internal
control system and the hiring of additional personnel. Any such
action could negatively affect our results of operations and cash
flows.
Damage to our reputation or lack of acceptance or recognition of
our retail concepts or the brands we license from Dufry, including
Dufry, Hudson, Nuance and World Duty Free, could negatively impact
our business, financial condition and results of
operations.
We believe we have built a strong reputation for the quality and
breadth of our concessions. Any incident that erodes consumer
affinity for our retail concepts or brand value could significantly
damage our business. If customers perceive or experience a
reduction in quality, service or convenience at our concessions
carrying the brands we license from Dufry or in any way believe we
fail to deliver a consistently positive experience, our business
may be adversely affected. In addition, Dufry uses the brands that
we license from them outside of the continental United States and
Canada. If Dufry takes actions that result in adverse publicity
surrounding the quality, service or convenience of these brands,
our business may be adversely impacted. Additionally, other travel
retailers or brands with similar names to our brands may be the
subject of negative publicity, which is outside of our control, and
which may arise from time to time and could cause confusion among
consumers, who could lose confidence in the products and services
we offer. Any such negative publicity, regardless of its veracity
as it relates to our brands, may have a material adverse impact on
our business, financial condition and results of
operations.
Furthermore, our ability to successfully develop concessions in new
markets may be adversely affected by a lack of awareness or
acceptance of our retail concepts and brands. To the extent that we
are unable to foster name recognition and affinity for our
concessions in new markets or are unable to anticipate and react to
shifts in consumer preferences away from certain retail options,
our growth may be significantly delayed or impaired.
Our or Dufry’s failure or inability to protect the trademarks
or other proprietary rights we use, or claims of infringement by us
of rights of third parties, could adversely affect our competitive
position or the value of our brands.
We believe that our trademarks and other proprietary rights are
important to our success and our competitive position. However, any
actions that we or Dufry take to protect the intellectual property
we use may not prevent unauthorized use or imitation by others,
which could have an adverse impact on our image, brand or
competitive position. If we commence litigation to protect our
interests or enforce our rights, we could incur significant legal
fees. We also cannot assure you that third parties will not claim
infringement by us of their proprietary rights. Any such claim,
whether or not it has merit, could be time consuming and
distracting for our management, result in costly litigation, cause
changes to existing retail concepts or delays in introducing retail
concepts, or require us to enter into royalty or licensing
agreements. As a result, any such claim could have a material
adverse impact on our business, financial condition and results of
operations.
17
Taxation of goods policies in the United States and Canada may
change.
A substantial part of our turnover is derived from our sale of
duty-free products, such as perfumes, luxury products, spirits and
tobacco. Governmental authorities in the United States or Canada
may alter or eliminate the duty-free status of certain products or
otherwise change importation or tax laws. For example, sales and
excise taxes on products sold at traditional retail locations
situated outside airports or online may be lowered in the future,
partly removing our competitive advantage with respect to duty-free
product pricing. If we lose the ability to sell duty-free products
generally or in any of our major duty-free markets or if we lose
market share to traditional or online retailers as a result of a
reduction in sales and excise taxes, our turnover may decrease
significantly and our business, financial condition and results of
operations may be materially adversely affected.
Future changes in effective tax rates or adverse outcomes resulting
from examination of our income or other tax returns could adversely
affect our operating results and financial condition.
We are subject to income taxes in the U.K., United States and
Canada, and our tax liabilities will be subject to the allocation
of expenses in differing jurisdictions and provinces. Our future
effective tax rates could be subject to volatility or adversely
affected by a number of factors, including:
–
changes
in the valuation of our deferred tax assets and
liabilities;
–
expected
timing and amount of the release of any tax valuation
allowances;
–
tax
effects of stock-based compensation;
–
costs
related to intercompany restructurings; or
–
changes
in tax laws, regulations or interpretations thereof.
The
United States recently enacted tax reform legislation (the “Tax Reform Legislation”)
that, among other things, reduced the U.S. federal corporate income tax rate from
35% to 21% and imposes an
alternative “base erosion and anti-abuse tax”
(“BEAT”) on domestic corporations that make deductible payments to foreign
related persons in excess of specified
amounts. The reduction in the U.S. federal corporate income tax rate is
expected to be beneficial to us in future years in which we have
net income subject to U.S. tax .
However, the reduction in the U.S. federal corporate income tax rate resulted
in a net downward adjustment of
$40.2 million to the amount of
deferred tax assets and deferred tax liabilities reflected
in our financial statements, and
as a consequence adversely
affected our overall effective tax rate for 2017.
There
are a number of uncertainties and ambiguities as to the
interpretation and application of many of the provisions in the Tax
Reform Legislation, including the provisions relating to the BEAT.
In the absence of guidance on these issues, we will use what we
believe are reasonable interpretations and assumptions in
interpreting and applying the Tax Reform Legislation for purposes
of determining our income tax payable and results of operations,
which may change as we receive additional clarification and
implementation guidance. It is also possible that the Internal
Revenue Service could issue subsequent guidance or take positions
on audit that differ from the interpretations and assumptions that
we previously made, which could have a material adverse effect on
our cash tax liabilities, results of operations and financial
condition.
In addition, we may be subject to audits of our income, sales and
other transaction taxes by U.K. tax authorities, U.S. federal and
state authorities and Canadian national and provincial authorities.
Outcomes from these audits could have an adverse impact on our
operating results and financial condition.
Our ability to use our net operating loss carryforwards and certain
other tax attributes will be limited.
As of
December 31, 2017, we had
federal net operating loss carryforwards of $241.1 million and state net operating loss
carryforwards of $172.7
million. We expect that approximately $51.5 million of our federal net operating
loss carryforwards (“NOLs”) and approximately
$36.4 million of our state
NOLs will be used to offset gains from the Reorganization
Transactions. Under Sections 382 and 383 of the Internal Revenue
Code of 1986, as amended (the “Code”), if a corporation
undergoes an “ownership change,” its ability to use its
pre-change NOLs and other pre-change tax attributes to offset its
post-change income may be limited. In general, an “ownership
change” generally occurs if there is a cumulative change in
our ownership by “5-percent shareholders” that exceeds
50 percentage points over
a rolling three-year period. Similar rules may apply under state
tax laws. We have experienced ownership changes in the past and our
initial public offering resulted in another ownership
change. As a result, if we earn
net taxable income, our ability to use our federal and state NOLs,
or other tax attributes, to offset U.S. federal and state taxable
income will be subject to limitations. However we do not believe
that these limitations will materially affect our ability to
utilize our existing NOLs or other tax attributes to offset our
current and future federal and
state taxable income. In addition, we may experience additional
ownership changes in the future as a result of future transactions
in our common stock (including any future dispositions by Dufry),
some of which may be outside our control, and could result in
additional limitations which could significantly limit our ability
to utilize our existing or future NOLs or other tax
attributes.
18
We may be adversely impacted by litigation.
We and our third-party business partners are defendants in a number
of court, arbitration and administrative proceedings, and, in some
instances, are plaintiffs in similar proceedings. Actions,
including class action lawsuits, filed against us from time to time
include commercial, tort, customer, employment (such as wage and
hour and discrimination), tax, administrative, customs and other
claims, and the remedies sought in these claims can be for material
amounts and also include class action lawsuits. In addition, we may
be impacted by litigation trends including class action lawsuits
involving consumers, shareholders and employees, which could have a
materially adverse impact on our business, financial condition and
results of operations.
Restrictions on the sale of tobacco products and on smoking in
general may affect our tobacco product sales.
The sale of tobacco products represented 3.0% of our net sales and
constituted our fourth largest duty-free product category for the
year ended December 31, 2017. As part of the campaign to highlight
the negative effects of smoking, international health organizations
and the anti-smoking lobby continue to seek restrictions on the
sale of tobacco products, including duty-free sales. More
generally, an increasing number of national, state and local
governments have prohibited, or are proposing to prohibit, smoking
in certain public places. If we were to lose our ability to sell
tobacco products, or if the increasing number of smoking
prohibitions caused a reduction in our sales of tobacco products,
our business, financial condition and results of operations could
be materially adversely affected.
We may experience increased labor costs, including for employee
health care benefits.
Various labor and healthcare laws and regulations in the United
States and Canada impact our relationships with our employees and
affect operating costs. These laws include employee classifications
as exempt or non-exempt, minimum wage requirements, unemployment
tax rates, workers’ compensation rates, overtime, family and
sick leave, safety standards, payroll taxes, citizenship
requirements and other wage and benefit requirements for employees
classified as non-exempt, including requirements related to health
care and insurance. As our store level employees are paid at rates
set at, or in relation to, the applicable minimum wage, further
increases in the minimum wage could increase our labor costs.
Significant additional government regulation could materially
affect our business, financial condition and results of
operations.
Our business is subject to various laws and regulations, and
changes in such laws and regulations, or failure to comply with
existing or future laws and regulations, could adversely affect
us.
We are subject to various laws and regulations in the United States
and Canada, as well as international treaties, that affect the
operation of our concessions. The impact of current laws and
regulations, the effect of changes in laws or regulations that
impose additional requirements and the consequences of litigation
relating to current or future laws and regulations, or our
inability to respond effectively to significant regulatory or
public policy issues, could increase our compliance and other costs
of doing business and therefore have an adverse impact on our
results of operations.
Failure to comply with the laws and regulatory requirements of
governmental authorities could result in, among other things,
revocation of required licenses, administrative enforcement
actions, fines and civil and criminal liability. In addition,
certain laws may require us to expend significant funds to make
modifications to our concessions in order to comply with applicable
standards. Compliance with such laws and regulations can be costly
and can increase our exposure to litigation or governmental
investigations or proceedings.
We are subject to the risk of union disputes and work stoppages at
our concessions, which could have a material adverse impact on our
business, financial condition and results of
operations.
As of
December 31, 2017,
41 % of our employees
were covered by collective bargaining agreements, some of which
have since expired. We are also often subject to airport
“labor harmony” policies, which require (or effectively
require) that we employ unionized workers. In addition, negotiating
labor agreements, either for new concessions or to replace expiring
agreements, is time consuming and may not be accomplished on a
timely basis. If we are unable to satisfactorily negotiate those
labor agreements on terms acceptable to us, we may face a strike or
work stoppage that could have a materially adverse impact on our
business, financial condition and results of operations. In
addition, existing labor agreements may not prevent a strike or
work stoppage.
19
Our business requires substantial capital expenditures and we may
not have access to the capital required to maintain and grow our
operations.
Maintaining and expanding our operations in our existing and new
retail locations is capital intensive. Specifically, the
construction, redesign and maintenance of our retail space in
airport terminals where we operate, technology costs and compliance
with applicable laws and regulations require substantial capital
expenditures. We may require additional capital in the future
to:
–
fund
our operations;
–
respond
to potential strategic opportunities, such as investments,
acquisitions and expansions; and
–
service
or refinance our indebtedness.
We must
continue to invest capital to maintain or to improve the success of
our concessions and to meet refurbishment requirements in our
concessions. Decisions to expand into new terminals could also
affect our capital needs. The average annual capital expenditure
for the last three fiscal years has been $80.2 million. Our actual capital
expenditures in any year will vary depending on, among other
things, the extent to which we are successful in renewing existing
concessions and winning additional concession
agreements.
Over
the longer term, we will need to make additional investments in
order to significantly grow our footprint in new airports and
terminals, expand in other travel retail channels and increase our
presence in the food and beverage concession market. Additional
financing may not be available on terms favorable to us or at all
due to several factors, including the terms of our existing
indebtedness, our relationship with our controlling shareholder,
who has historically provided us with financing, and trends in the
global capital and credit markets. We are also subject to certain
covenants in Dufry’s 4.50 % Senior Notes due 2023 and
2.50 % Senior Notes due
2024, including restrictions on the amount of debt we may be able
to incur from third parties and on our ability to grant liens on
our assets. In addition, we are also subject to certain of the
covenants contained in Dufry’s existing credit facilities,
including restrictions on the amount of third-party debt we may
incur, on our ability to grant liens on our assets and to provide
guarantees and on our ability to enter into certain acquisitions,
investments, mergers and asset sales. See “Item 5. Operating
and Financial Review and Prospects – B. Liquidity and capital resources
– Indebtedness
– Restrictions on our
indebtedness.” We may in the future be subject to other
restrictions that limit our ability to incur indebtedness. The
terms of available financing may also restrict our financial and
operating flexibility. If adequate funds are not available on
acceptable terms, we may be forced to reduce our operations or
delay, limit or abandon expansion opportunities. We cannot assure
you that we will be able to maintain our operating performance or
generate sufficient cash flow, or that we will have access to
sufficient financing, to continue our operations and development
activities at or above our present levels, and we may be required
to defer all or a portion of our capital expenditures. Our
business, financial condition and results of operations may be
materially adversely affected if we cannot make such capital
expenditures.
Risks relating to our structure
Our controlling shareholder, Dufry, provides us with certain key
franchise services for our business and loans to finance our
operations. If Dufry fails to perform its obligations to us or
provide financing to us, and we do not find appropriate replacement
services or financing sources, we may be unable to perform these
services or finance our operations, or may not be able to secure
substitute arrangements on a timely and cost-effective basis on
terms favorable to us.
Prior to our initial public offering and the related Reorganization
Transactions, we operated as a business unit of Dufry. We
historically relied on franchise services provided by Dufry,
including centralized support services such as treasury, audit and
other similar services. In addition, we have licensed all of our
proprietary brands, including Dufry, Hudson, Nuance and World Duty
Free, from Dufry. Dufry has also been one of our largest suppliers.
In connection with our initial public offering, we entered into a
series of new agreements with Dufry, including the Master
Relationship Agreement. See “Item 7. Major Shareholders and
Related Party Transactions – B. Related party
transactions – Transactions with Dufry –
New agreements with Dufry.” The services provided under the
Master Relationship Agreement include financing and treasury
operations, the supply of duty-free products for sale, IT services
and tax services, among others.
20
Our new agreements with Dufry also include various franchise
agreements pursuant to which Dufry licenses to us the use of
trademarks for Dufry, Nuance and World Duty Free. Each of these
franchise agreements is terminable without cause by Dufry upon six
months’ notice. Separate from the franchise agreements, Dufry
has granted us a seven-year license to use the Hudson brand and
trademark within the continental United States and Canada. If Dufry
were to decide to terminate, or to not renew, any of these
agreements, our business, financial condition and results of
operations would be materially adversely affected.
The services provided under the new agreements with Dufry may not
be sufficient to meet our needs and we may not be able to obtain
other needed services on favorable terms, if at all. If Dufry were
to encounter financial difficulties that impact its ability to
provide services to us, our business, financial condition and
results of operations could be materially impacted. Any failure of,
or significant downtime in, our own financial or administrative
systems or in Dufry’s financial or administrative systems and
any difficulty establishing our systems or integrating newly
acquired assets into our business could result in unexpected costs,
impact our results or prevent us from paying our suppliers and
employees and performing other administrative services on a timely
basis, which could have a material adverse impact on our business,
financial condition and results of operations.
In
addition, we have historically been an integral part of
Dufry’s global treasury and cash management operations and we
expect to continue to be an integral part of such operations.
As of December 31, 2017, we had
$520.4 million of
long-term financial loans (excluding current portion) due to Dufry.
To the extent that the terms of our existing or future indebtedness
to Dufry are unfavorable compared to other financing opportunities,
our financial condition could be adversely affected.
The two-class structure of our common shares has the effect of
concentrating voting control with Dufry and its affiliates. Because
of its significant share ownership, Dufry exerts control over us,
including with respect to our business, policies and other
significant corporate decisions. This limits or precludes your
ability to influence corporate matters, including the election of
directors, amendments to our organizational documents and any
merger, amalgamation, sale of all or substantially all of our
assets or other major corporate transaction requiring shareholder
approval.
As of March 8, 2018, the shares owned by our controlling
shareholder represent 93.1% of the voting power of our issued and
outstanding share capital. Each Class A common share is entitled to
one vote per share and is not convertible into any other shares of
our share capital. Each Class B common share is entitled to 10
votes per share and is convertible into one Class A common share at
any time. In addition, each Class B common share will automatically
convert into one Class A common share upon any transfer thereof to
a person or entity that is not an affiliate of the holder of such
Class B common share. Further, all of our Class B common shares
will automatically convert into Class A common shares upon the date
when all holders of Class B common shares cease to hold Class B
common shares representing, in the aggregate, 10% or more of the
total number of Class A and Class B common shares issued and
outstanding. Any Class B common shares that are converted into
Class A common shares may not be reissued. The disparate voting
rights of our Class B common shares will not change upon transfer
unless such Class B common shares are first converted into our
Class A common shares. See “Item 10. Additional Information
– B. Memorandum of association and
bye-laws.”
As a result, our controlling shareholder has the ability to
determine the outcome of all matters submitted to our shareholders
for approval, including the election and removal of directors and
any amalgamation, merger or sale of all or substantially all of our
assets. Dufry has significant power to control our operations, and
may impose group-level policies on us that are based on the
interests of the Dufry Group as a whole. Group-level policies may
not align with our interests and could change the way we conduct
our business, which could have a material adverse impact on our
business, financial condition and results of
operations.
21
The interests of our controlling shareholder might not coincide
with the interests of the other holders of our share capital. This
concentration of ownership may have an adverse impact on the value
of our Class A common shares by:
–
delaying,
deferring or preventing a change in control of us;
–
impeding
an amalgamation, merger, takeover or other business combination
involving us; or
–
causing
us to enter into transactions or agreements that are not in the
best interests of all shareholders.
Our controlling shareholder, Dufry, could engage in business and
other activities that compete with us.
Dufry and its controlled affiliates (other than us) have informed
us that they will not, subject to certain exceptions, pursue
opportunities in the continental United States or Canada in the
following areas: retail or food and beverage concessions; leases at
airports or train stations; master concessionaire roles at
airports; or any other Dufry, Hudson, Nuance or World Duty
Free-branded retail operations, except that Dufry may continue to
pursue travel retail operations, using any of the aforementioned
brands, on board cruise lines that visit the continental United
States or Canada or at ports in the continental United States or
Canada visited by cruise lines. Except as described above and
subject to any contract that we may enter into with Dufry, Dufry
will have no obligation to refrain from:
–
engaging
in the same or similar business activities or lines of business as
us; or
–
doing
business with any of our partners, customers or
vendors.
Dufry is a diversified travel retailer with significant operations
outside of the continental United States and Canada, including in
six continents, covering 64 countries and over 390 locations. Dufry
continues to engage in these businesses, including use of the
Hudson brand outside the continental United States and Canada. To
the extent that Dufry engages in the same or similar business
activities or lines of business as us, or engages in business with
any of our partners, customers or vendors, our ability to
successfully operate and expand our business may be
hampered.
Conflicts of interest may arise between us and our controlling
shareholder, Dufry, which could be resolved in a manner unfavorable
to us.
Questions relating to conflicts of interest may arise between us
and Dufry in a number of areas relating to our past and ongoing
relationships. Our chief executive officer is a member of the
Divisional Executive Committee of Dufry. Our directors and officers
may own Dufry stock and options to purchase Dufry stock. Ownership
interests of our directors or officers in Dufry stock, or service
as a director of our Company and a director, officer and / or
employee of Dufry, could give rise to potential conflicts of
interest when a director or officer is faced with a decision that
could have different implications for the two companies. These
potential conflicts could arise, for example, over matters such as
business opportunities that may be attractive to both Dufry and us,
the desirability of changes to our business and operations, funding
and capital matters, regulatory matters, matters arising with
respect to agreements with Dufry, employee retention or recruiting,
labor, tax, employee benefit, indemnification and other matters
relating to our restructuring or our dividend policy.
The corporate opportunity policy set forth in our bye-laws
addresses certain potential conflicts of interest between our
Company, on the one hand, and Dufry and its officers who are
directors of our Company, on the other hand. By purchasing Class A
common shares, you will be deemed to have notice of and have
consented to the provisions of our bye-laws, including the
corporate opportunity policy. See “Item 10. Additional
Information – B. Memorandum of association and
bye-laws.” Although these provisions are designed to resolve
certain conflicts between us and Dufry fairly, we cannot assure you
that any conflicts will be so resolved.
22
As a foreign private issuer and “controlled company”
within the meaning of the New York Stock Exchange’s corporate
governance rules, we are permitted to, and we will, rely on
exemptions from certain of the New York Stock Exchange corporate
governance standards, including the requirement that a majority of
our board of directors consist of independent directors. Our
reliance on such exemptions may afford less protection to holders
of our Class A common shares.
The New York Stock Exchange’s corporate governance rules
require listed companies to have, among other things, a majority of
independent directors and independent director oversight of
executive compensation, nomination of directors and corporate
governance matters. As a foreign private issuer, we are permitted
to, and we will, follow home country practice in lieu of the above
requirements. As long as we rely on the foreign private issuer
exemption to certain of the New York Stock Exchange corporate
governance standards, a majority of the directors on our board of
directors are not required to be independent directors, and we are
not required to maintain a compensation committee or a nominating
and corporate governance committee. Therefore, our board of
directors’ approach to governance may be different from that
of a board of directors consisting of a majority of independent
directors, and, as a result, the management oversight of our
company may be more limited than if we were subject to all of the
New York Stock Exchange corporate governance
standards.
In the event we no longer qualify as a foreign private issuer, we
intend to rely on the “controlled company” exemption
under the New York Stock Exchange corporate governance rules. A
“controlled company” under the New York Stock Exchange
corporate governance rules is a company of which more than 50% of
the voting power is held by an individual, group or another
company. Our controlling shareholder controls a majority of the
combined voting power of our outstanding common shares, making us a
“controlled company” within the meaning of the New York
Stock Exchange corporate governance rules. As a controlled company,
we are eligible to, and, in the event we no longer qualify as a
foreign private issuer, we intend to, elect not to comply with
certain of the New York Stock Exchange corporate governance
standards, including the requirement that a majority of directors
on our board of directors are independent directors and the
requirement that our nomination and remuneration committee consist
entirely of independent directors.
Accordingly, our shareholders will not have the same protection
afforded to shareholders of companies that are subject to all of
the New York Stock Exchange corporate governance standards, and the
ability of our independent directors to influence our business
policies and affairs may be reduced.
Our financial information included in this annual report may not be
representative of our financial condition and results of operations
if we had been operating as a stand-alone company.
Prior to our initial public offering and the related Reorganization
Transactions, the travel retail business of Dufry in the
continental United States and Canada was carried out by various
subsidiaries of Dufry. Since we and the subsidiaries of Dufry that
operated our business are under common control of Dufry,our
Combined Financial Statements include the assets, liabilities,
turnover, expenses and cash flows that were directly attributable
to our business for all periods presented. In particular, our
combined statement of financial position includes those assets and
liabilities that are specifically identifiable to our business; and
our combined income statement includes all costs and expenses
related to us, including certain costs and expenses allocated from
Dufry to us. We made numerous estimates, assumptions and
allocations in our historical financial statements because we did
not operate as a stand-alone company prior to the Reorganization
Transactions. Although our management believes that the assumptions
underlying our historical financial statements and the above
allocations are reasonable, our historical financial statements may
not necessarily reflect our results of operations, financial
position and cash flows as if we had operated as a stand-alone
company during those periods. See “Item 7. Major Shareholders
and Related Party Transactions” for our arrangements with
Dufry and “Item 5. Operating and Financial Review and
Prospects” and the notes to our Combined Financial Statements
included elsewhere in this annual report for our historical cost
allocation. Therefore, our historical results may not necessarily
be indicative of our future performance.
23
Risks Relating to the Ownership of
Our Class A Common Shares
The price of our Class A common shares might fluctuate
significantly, and you could lose all or part of your
investment.
Volatility in the market price of our Class A common shares may
prevent you from being able to sell our Class A common shares at or
above the price you paid for such shares. The trading price of our
Class A common shares may be volatile and subject to wide price
fluctuations in response to various factors,
including:
–
market
conditions in the broader stock market in general, or in our
industry in particular;
–
actual
or anticipated fluctuations in our quarterly financial and
operating results;
–
introduction
of new products and services by us or our competitors;
–
issuance
of new or changed securities analysts’ reports or
recommendations;
–
sales
of large blocks of our shares;
–
additions
or departures of key personnel;
–
regulatory
developments; and
–
litigation
and governmental investigations.
These and other factors may cause the market price and demand for
our Class A common shares to fluctuate substantially, which may
limit or prevent investors from readily selling Class A common
shares and may otherwise negatively affect the liquidity of our
Class A common shares. In addition, in the past, when the market
price of a stock has been volatile, holders of that stock have
often instituted securities class action litigation against the
company that issued the stock. If any of our shareholders brought a
lawsuit against us, we could incur substantial costs defending the
lawsuit. Such a lawsuit could also divert the time and attention of
our management from our business.
The obligations associated with being a public company require
significant resources and management attention.
As a public company in the United States, we have incurred and will
continue to incur legal, accounting and other expenses that we did
not previously incur. We are subject to the reporting requirements
of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), and the Sarbanes-Oxley Act, the
listing requirements of the New York Stock Exchange and other
applicable securities rules and regulations. The Exchange Act
requires that we file annual and current reports with respect to
our business, financial condition and results of operations. The
Sarbanes-Oxley Act requires, among other things, that we establish
and maintain effective internal controls and procedures for
financial reporting. We have made, and will continue to make,
changes to our internal controls and procedures for financial
reporting and accounting systems in order to meet our reporting
obligations as a public company. However, the measures we take may
not be sufficient to satisfy these obligations. In addition,
compliance with these rules and regulations will increase our legal
and financial compliance costs and will make some activities more
time-consuming and costly. These additional obligations could have
a material adverse impact on our business, financial condition,
results of operations and cash flow.
In addition, changing laws, regulations and standards relating to
corporate governance and public disclosure are creating uncertainty
for public companies, increasing legal and financial compliance
costs and making some activities more time consuming. These laws,
regulations and standards are subject to varying interpretations,
in many cases due to their lack of specificity, and, as a result,
their application in practice may evolve over time as new guidance
is provided by regulatory and governing bodies. This could result
in continuing uncertainty regarding compliance matters and higher
costs necessitated by ongoing revisions to disclosure and
governance practices. We intend to invest resources to comply with
evolving laws, regulations and standards, and this investment may
result in increased general and administrative expenses and a
diversion of management’s time and attention from
turnover-generating activities to compliance activities. If our
efforts to comply with new laws, regulations and standards differ
from the activities intended by regulatory or governing bodies due
to ambiguities related to their application and practice,
regulatory authorities may initiate legal proceedings against us
and our business, financial condition, results of operations and
cash flow could be adversely affected.
24
Future sales of our Class A common shares, or the perception in the
public markets that these sales may occur, may depress our share
price.
Sales of substantial amounts of our Class A common shares in the
public market, or the perception that these sales could occur,
could adversely affect the price of our Class A common shares and
could impair our ability to raise capital through the sale of
additional shares. As of March 8, 2018, we have 39,417,765 Class A
common shares outstanding. The Class A common shares offered in our
initial public offering are freely tradable without restriction
under the Securities Act of 1933 (the “Securities
Act”), except for any shares that may be held or acquired by
our directors, executive officers or other affiliates, as that term
is defined in the Securities Act, which will be restricted
securities under the Securities Act. Restricted securities may not
be sold in the public market unless the sale is registered under
the Securities Act or an exemption from registration is available.
We intend to file a registration statement under the Securities Act
registering our Class A common shares reserved for issuance under
our equity incentive plans, and we have entered into the
Registration Rights Agreement pursuant to which we have granted
demand and piggyback registration rights to Dufry.
In the future, we may also issue our securities if we need to raise
capital in connection with a capital raise or acquisition. The
amount of our Class A common shares issued in connection with a
capital raise or acquisition could constitute a material portion of
our then-outstanding share capital.
We do not currently intend to pay dividends on our Class A common
shares, and, consequently, your ability to achieve a return on your
investment will depend on appreciation in the price of our Class A
common shares.
We do not currently intend to pay any cash dividends on our Class A
common shares for the foreseeable future. The payment of any future
dividends will be determined by the board of directors in light of
conditions then existing, including our turnover, financial
condition and capital requirements, business conditions, corporate
law requirements and other factors.
Our ability to pay dividends is subject to our results of
operations, distributable reserves and solvency requirements; we
are not required to pay dividends on our Class A common shares and
holders of our Class A common shares have no recourse if dividends
are not paid.
Any determination to pay dividends in the future will be at the
discretion of our board of directors and will depend upon our
results of operations, financial condition, distributable reserves,
contractual restrictions, restrictions imposed by applicable law
and other factors our board of directors deems relevant. We are not
required to pay dividends on our Class A common shares, and holders
of our Class A common shares have no recourse if dividends are not
declared. Our ability to pay dividends may be further restricted by
the terms of any of our future debt or preferred securities (see
also “Item 10. Additional Information – Memorandum of
association and bye-laws”). Additionally, because we are a
holding company, our ability to pay dividends on our Class A common
shares is limited by restrictions on the ability of our
subsidiaries to pay dividends or make distributions to us,
including restrictions under the terms of the agreements governing
our indebtedness.
If securities or industry analysts do not continue to publish
research or reports or publish unfavorable research about our
business, the price and trading volume of our Class A common shares
could decline.
The trading market for our Class A common shares will depend in
part on the research and reports that securities or industry
analysts publish about us, our business or our industry. We have
limited, and may never obtain significant, research coverage by
securities and industry analysts. If no additional securities or
industry analysts commence coverage of us, the trading price for
our shares could be negatively affected. In the event we obtain
additional securities or industry analyst coverage, if one or more
of the analysts who covers us downgrades our Class A common shares,
their price will likely decline. If one or more of these analysts,
or those who currently cover us, ceases to cover us or fails to
publish regular reports on us, interest in the purchase of our
shares could decrease, which could cause the price or trading
volume of our Class A common shares to decline.
25
We are a Bermuda company and it may be difficult for you to enforce
judgments against us or our directors and executive
officers.
We are a Bermuda exempted company. As a result, the rights of
holders of our common shares will be governed by Bermuda law and
our memorandum of association and bye-laws. The rights of
shareholders under Bermuda law may differ from the rights of
shareholders of companies incorporated in other jurisdictions. A
number of our directors and some of the named experts referred to
in this annual report are not residents of the United States, and a
substantial portion of our assets are located outside the United
States. As a result, it may be difficult for investors to effect
service of process on those persons in the United States or to
enforce in the United States judgments obtained in U.S. courts
against us or those persons based on the civil liability provisions
of the U.S. securities laws. It is doubtful whether courts in
Bermuda will enforce judgments obtained in other jurisdictions,
including the United States, against us or our directors or
officers under the securities laws of those jurisdictions or
entertain actions in Bermuda against us or our directors or
officers under the securities laws of other
jurisdictions.
Our bye-laws restrict shareholders from bringing legal action
against our officers and directors.
Our bye-laws contain a broad waiver by our shareholders of any
claim or right of action, both individually and on our behalf,
against any of our officers or directors. Subject to Section 14 of
the Securities Act, which renders void any purported waiver of the
provisions of the Securities Act, the waiver applies to any action
taken by an officer or director, or the failure of an officer or
director to take any action, in the performance of his or her
duties, except with respect to any matter involving any fraud or
dishonesty on the part of the officer or director. This waiver
limits the right of shareholders to assert claims against our
officers and directors unless the act or failure to act involves
fraud or dishonesty.
We may lose our foreign private issuer status in the future, which
could result in significant additional costs and
expenses.
We are a “foreign private issuer,” as such term is
defined in Rule 405 under the Securities Act, and therefore, we are
not required to comply with the periodic disclosure and current
reporting requirements of the Exchange Act, and related rules and
regulations, that apply to U.S. domestic issuers. Under Rule 405,
the determination of foreign private issuer status is made annually
on the last business day of an issuer’s most recently
completed second fiscal quarter and, accordingly, we will make the
next determination with respect to our foreign private issuer
status based on information as of June 30, 2018.
In the future, we could lose our foreign private issuer status if,
for example, a majority of our voting power were held by U.S.
citizens or residents and we fail to meet additional requirements
necessary to avoid loss of foreign private issuer status. The
regulatory and compliance costs to us under U.S. securities laws as
a domestic issuer may be significantly higher. If we are not a
foreign private issuer, we will be required to file periodic
reports and registration statements on U.S. domestic issuer forms
with the U.S. Securities and Exchange Commission (the
“SEC”), which are more detailed and extensive than the
forms available to a foreign private issuer. For example, the
annual report on Form 10-K requires domestic issuers to disclose
executive compensation information on an individual basis with
specific disclosure regarding the domestic compensation philosophy,
objectives, annual total compensation (base salary, bonus, equity
compensation) and potential payments in connection with change in
control, retirement, death or disability, while the annual report
on Form 20-F permits foreign private issuers to disclose
compensation information on an aggregate basis. We will also be
required to comply with U.S. federal proxy requirements, and our
officers, directors and controlling shareholders will become
subject to the short-swing profit disclosure and recovery
provisions of Section 16 of the Exchange Act. We may also be
required to modify certain of our policies to comply with good
governance practices associated with U.S. domestic issuers. Such
conversion and modifications will involve additional costs. In
addition, we may lose our ability to rely upon exemptions from
certain corporate governance requirements on U.S. stock exchanges
that are available to foreign private issuers.
26
Bermuda law differs from the laws in effect in the United States
and may afford less protection to holders of our common
shares.
We are incorporated under the laws of Bermuda. As a result, our
corporate affairs are governed by the Companies Act, which differs
in some material respects from laws typically applicable to U.S.
corporations and shareholders, including the provisions relating to
interested directors, amalgamations, mergers and acquisitions,
takeovers, shareholder lawsuits and indemnification of directors.
Generally, the duties of directors and officers of a Bermuda
company are owed to the company only. Shareholders of Bermuda
companies may only take action against directors or officers of the
company in limited circumstances. The circumstances in which
derivative actions may be available under Bermuda law are
substantially more proscribed and less clear than they would be to
shareholders of U.S. corporations. The Bermuda courts, however,
would ordinarily be expected to permit a shareholder to commence an
action in the name of a company to remedy a wrong to the company
where the act complained of is alleged to be beyond the corporate
power of the company or illegal, or would result in the violation
of the company’s memorandum of association or bye-laws.
Furthermore, consideration would be given by a Bermuda court to
acts that are alleged to constitute a fraud against the minority
shareholders or, for instance, where an act requires the approval
of a greater percentage of the company’s shareholders than
that which actually approved it.
When the affairs of a company are being conducted in a manner that
is oppressive or prejudicial to the interests of some shareholders,
one or more shareholders may apply to the Supreme Court of Bermuda,
which may make such order as it sees fit, including an order
regulating the conduct of the company’s affairs in the future
or ordering the purchase of the shares of any shareholders by other
shareholders or by the company. In addition, the rights of holders
of our common shares and the fiduciary responsibilities of our
directors under Bermuda law are not as clearly established as under
statutes or judicial precedent in existence in jurisdictions in the
United States, particularly the State of Delaware. Therefore,
holders of our common shares may have more difficulty protecting
their interests than would shareholders of a corporation
incorporated in a jurisdiction within the United
States.
We have anti-takeover provisions in our bye-laws that may
discourage a change of control.
Our bye-laws contain provisions that could make it more difficult
for a third-party to acquire us without the consent of our board of
directors. These provisions provide for:
–
a
classified board of directors with staggered three-year
terms;
–
restrictions
on the time period during which directors may be
nominated;
–
the
ability of our board of directors to determine the powers,
preferences and rights of preference shares and to cause us to
issue the preference shares without shareholder approval;
and
–
a
two-class common share structure, as a result of which Dufry
generally will be able to control the outcome of all matters
requiring shareholder approval, including the election of directors
and significant corporate transactions, such as a merger or other
sale of our company or its assets.
These provisions could make it more difficult for a third-party to
acquire us, even if the third-party’s offer may be considered
beneficial by many shareholders. As a result, shareholders may be
limited in their ability to obtain a premium for their Class A
common shares. See “Item 10. Additional Information
– B. Memorandum of association and bye-laws” for
a discussion of these provisions.
Hudson Group, anchored by our iconic Hudson brand, is committed to
enhancing the travel experience for over 300,000 travelers every
day in the continental United States and Canada. Our first
concession opened in 1987 with five Hudson News stores in a single
airport in New York City. Today we operate in airports, commuter
terminals, hotels and some of the most visited landmarks and
tourist destinations in the world, including the Empire State
Building, Space Center Houston, and United Nations Headquarters.
The Company is guided by a core purpose: to be “The
Traveler’s Best Friend.” We aim to achieve this purpose
by serving the needs and catering to the ever-evolving preferences
of travelers through our product offerings and store concepts.
Through our commitment to this purpose, as part of the global Dufry
Group, we have become one of the largest travel concession
operators in the continental United States and Canada.
As of
December 31, 2017, we had
a diversified portfolio of over 200 concession agreements, through which we
operated 996 stores across 88 different transportation terminals
and destinations, including concessions in 24 of the 25 largest
airports in the continental United States and Canada. We have over
one million square feet of commercial space and conduct close to
120 million transactions
annually. From 2008
to our initial public offering in
2018, we were a
wholly-owned subsidiary of Dufry, a leading global travel retailer
operating close to 2,200 stores in 64 countries on six continents,
and we continue to benefit from
Dufry’s expertise and scale in the travel retail
market.
We operate travel essentials and convenience stores, bookstores,
duty-free stores, proprietary and branded specialty stores,
electronics stores, themed stores and quick-service food and
beverage outlets under proprietary and third-party brands. Our
proprietary brands include:
We offer our customers a broad assortment of products through our
duty-paid and duty-free operations. Within our duty-paid
operations, we offer products in the following categories: media
(including books and magazines), food and beverage (including
snacks and confectionary), essentials (including travel
accessories, electronics, health and beauty accessories),
destination (including souvenir, apparel and gifts) and fashion
(including apparel, watches, jewelry, accessories, leather and
baggage). Within our duty-free retail operations, our product
categories include perfume and cosmetics, wine and spirits,
confectionary, fashion (including watches, jewelry, accessories,
leather and baggage) and tobacco.
28
B. Business overview
For the year ended December 31, 2017, our net sales were broken
down as follows:
NET SALES BY PRODUCT CATEGORIES
As a travel concession operator, we operate primarily in airports
and other locations where concessions are awarded by landlords,
which include airlines, airport authorities, cities, counties,
developers, master concessionaires, port authorities and states.
Our success has been driven by our ability to provide
differentiated retail concepts and customized concession programs
to address the complex requirements of our landlords and the
characteristics of the market that each location serves. This
capability is key to our strong relationships with
landlords.
Operational
flexibility is key to our success. To promote and sustain our
flexibility, we have established integrated and collaborative
processes to drive coordinated operations across real estate
management, store operations, marketing, merchandising and store
concept design and planning. Our flexibility enables us to operate
multiple retail concepts, ranging from 200 square-foot retail walls
to 10,000 square-foot stores. Our stores are well-organized and
designed to be comfortable and easy-to-shop, and are tailored to
meet the unique specifications of each airport or travel facility.
Additionally, our stores utilize innovative and highly-customized
designs to draw attention to impulse items and maximize sales. As
an example, in 2013 we introduced the new Hudson format, which
brings modern visuals, a different layout and new allocation to
product categories, such as increased space allocation to beverages
and snacks, and reflects the changing needs and preferences of the
travelers. Over the past three years, we have invested over $200 million in new store buildouts, store
upgrades and expansions to improve the overall shopping experience
at our stores, as well as other capital investments in our business
to support our stores.
29
Through our customized merchandising approach, we provide curated
assortments to each market to take advantage of traffic flow,
seasonality, landlord preferences, local tastes, large-scale
regional events and traveler spending habits. We merchandise our
stores with both necessity-driven and on-trend discretionary
products and we provide discretion to our location general managers
to make choices regarding product mix for the stores they manage.
Our merchandising team is committed to continuously sourcing new
products to stay ahead of trends, getting the right product at the
right price, to the right place at the right time. Both our and
Dufry’s tenured relationships with a diversified set of
suppliers support our successful merchandise-sourcing
approach.
We remain an integrated part of the global Dufry Group. Dufry is
our controlling shareholder, a number of the members of our board
of directors are affiliated with Dufry and our business continues
to benefit from Dufry’s global expertise and best practices
across all major functions. Moreover, we expect that Dufry will
continue to be one of our largest suppliers, extend intercompany
financing to us and provide us with other support and services. See
“Item 7. Major Shareholders and Related Party Transactions
– B. Related party transactions.”
increased
our number of stores from 733 to 996, representing a CAGR of 16.6%;
and
–
increased
the total square feet of our stores from 996 thousand to 1.1
million, representing a CAGR of 2.9%.
Our strengths
Hudson is an iconic brand in North American travel
retail
With over 450 Hudson-branded stores and a 30-year heritage in
travel retail, Hudson is one of North America’s leading
travel essentials brands. We believe that we have built a
reputation among travelers as a reliable destination to meet their
needs and preferences when traveling. According to an Ipsos Market
Research survey conducted in 2017, more travelers who shop at
airports would prefer to shop at Hudson stores than at any other
travel news, gift and convenience retail store. Our customers look
for Hudson stores for personal items, gifts for loved ones or a
convenient stop for food and beverages. We have also leveraged the
strength of the Hudson brand to become one of the leading airport
retailers in the United States for many international consumer
brands such as Godiva Chocolates, Papyrus, Mophie, SwissGear, Sony
and Belkin. We believe the iconic Hudson brand anchors our
proposals for concessions and provides us with a competitive
advantage.
Customized and Local Approach Delivers Compelling Traveler
Experience
Our customized and local approach to creating our concession
portfolio and to the design, layout and merchandising of our stores
produces a compelling retail experience for travelers. We believe
that our ability to operate multiple proprietary and
third-party-branded retail concepts, ranging from 200 square-foot
retail walls to 10,000 square-foot stores, while simultaneously
meeting the unique specifications of each airport or travel
facility, also provides an attractive retail proposition for our
landlords.
We believe customers find our stores to be well-organized,
comfortable and easy-to-shop. Our stores are merchandised to
deliver both necessity-driven and on-trend products, while also
displaying products that travelers may have forgotten to pack. We
have unrivaled access to travelers, which enables us to understand
their mindsets and behaviors and informs the evolution of our
merchandising strategies and product mix. For example, we have
merchandised our stores to take advantage of recent trends in
traveler tastes, resulting in an increase in the share of our
duty-paid sales mix attributable to electronic accessories, snacks
and beverages. In addition, we serve customers’ needs and
preferences by offering merchandise that targets regional tastes
and includes city-specific branding and logos. Our merchandising
approach benefits from Dufry’s expertise in duty-free retail
and access to strong global brands, which complements our portfolio
of concepts for our airports and customers.
30
Extensive experience and superior scale in our
industry
We believe that other operators cannot match our 30 years of
industry experience, unparalleled scale of over 200 concession
agreements under which we operate over one million square feet of
commercial space in the continental United States and Canada. We
believe this experience and scale reflect our strong credibility
with landlords and other business partners and our knowledge of
airport retail operations and travel concessions.
Additionally, we believe the expertise and operational track record
required to bid successfully on new concessions combined with our
ability to offer a broad range of retail concepts and customize
each opportunity regardless of landlord structure or concession
model are advantages when competing for new concessions. Our
expertise also allows us to successfully manage the myriad of
legal, regulatory and logistical complexities involved in operating
a business in complex and highly regulated
environments.
Diversified and Dynamic Business Model
Our business model is diversified in terms of the customers we
serve and concession models we manage. We operate a mix of
concession programs and retail concepts under both proprietary and
third-party brands, including travel essentials stores and
bookstores under the Hudson brand, specialty branded retail stores
such as Coach, Estée Lauder, Kate Spade and Tumi, duty-free
shops under Dufry, World Duty Free and Nuance, themed stores such
as Tech on the Go, Kids Works and 5th and Sunset, as well as food
and beverage outlets such as Dunkin’ Donuts. As of December31, 2017, we sold products in 996 stores across 88
locations.
Our concessions also benefit from multi-year contract terms. For
the year ended December 31, 2017, no single concession accounted
for more than 10% of our sales. The long average residual duration
of our concession portfolio and diversification across contracts
provide us with a high degree of sales visibility.
In addition, our strategy emphasizes continuously improving formats
and adjusting our store concepts and product mix to meet and exceed
travelers’ needs and preferences. Due to our merchandising
flexibility, our location general managers can tailor their
purchasing to address regional preferences. This approach enables
our location general managers to update store concepts and product
mix every season and allows them to be nimble in their approach,
including testing new concepts.
Service-driven, cohesive management team
Together with our global parent, Dufry, our talented and dedicated
senior management team has guided our organization through its
expansion and positioned us for continued growth. Our team has an
average of 18 years of experience at the Hudson Group.
Additionally, our management team possesses extensive experience
across a broad range of disciplines, including merchandising,
marketing, real estate, finance, legal and regulatory and supply
chain management. Our management team embraces our core purpose to
be “The Traveler’s Best Friend” and embodies our
passionate, dedicated and service-oriented culture, which is shared
by our employees throughout the entire organization. We believe
this results in a cohesive team focused on sustainable long-term
growth.
Our strategies
Increase Sales at existing concessions
Continue Innovation in Store Formats and Merchandise
At Hudson, every square foot matters. We aim to increase sales per
transaction and overall sales by maintaining our emphasis on
merchandising and refining operations to continuously provide
travelers with an array of in-demand products. We seek innovative
ways to increase potential selling space within existing locations.
Through continuous refinement, we optimize our concession
configurations to maximize sales for our landlord and product
vendor partners. We also constantly evolve our merchandizing mix to
stay relevant and on-trend, as well as to continue driving sales by
serving travelers’ enthusiasm for large-scale regional
events, including music festivals, trade shows and sporting events,
such as the Super Bowl and the World Series. We also will continue
to leverage technology to enhance the customer experience through
mobile pre-ordering applications, self-checkout capabilities and
other evolving technologies.
31
Refurbish and Convert Existing Stores
We intend to improve sales and profitability within current
concession agreements by focusing capital investments on
refurbishing or converting existing stores, including when we
pursue contract extensions. For example, we will continue
converting our existing Hudson News stores into our updated and
reinvigorated Hudson retail concept. We have already rebranded 60
Hudson News stores to our Hudson concept, and we plan to rebrand an
additional 31 Hudson News stores to our Hudson concept over the
next two years.
Expand concession portfolio
Continue to win airport concessions
We intend to grow by securing new concessions at the airports in
which we currently operate and at additional airports in the
continental United States and Canada, while maintaining a high
renewal rate for our existing concessions. Airport authorities are
dedicating more commercial space to concession opportunities and
adopting a more comprehensive approach to its development. We are
well-positioned to succeed in this competitive environment due to
our experience and reputation with comprehensive retail concession
opportunities, our integrated and collaborative approach, and the
proven economics of our concession model. For investments in new
concessions, expansions and renewals, we have defined a hurdle rate
of a low double-digit internal rate of return over the lifetime of
the concession and we typically target a payback period between two
and five years.
Continue expansion into non-traditional locations
We intend to leverage Hudson’s consumer brand awareness and
retail expertise to capture customer spending at travel centers,
tourist destinations, hotels and other non-airport locations. These
venues share similar retail characteristics with airports, such as
higher foot traffic and customers with above-average purchasing
power and greater time to shop. Our ability to deploy our
successful turnover maximizing capabilities outside of airports has
led to a number of recent wins in such locations. For example, in
June 2017, we announced the opening of six new stores at Hard Rock
Hotel & Casino in Las Vegas, which will incorporate our
specialty and travel essentials retail concepts. We will
opportunistically pursue avenues for growth across the continental
United States and Canada in these non-traditional
locations.
Grow food and beverage platform
We intend to pursue growth opportunities in the large and expanding
travel food and beverage market in the continental United States
and Canada. Based on market data from the ARN Fact Book and our
estimates, the airport food and beverage market in the United
States and Canada generated in excess of $4.9 billion of passenger
spending in 2016. This market generated sales of approximately 1.3x
the combined airport sales of specialty, news and gifts and
duty-free products in 2016. The travel food and beverage market is
highly fragmented and there is an increasing overlap between travel
food and beverage and travel retail, such as packaged food and
“grab-and-go” concepts. We intend to pursue these
growth opportunities both organically and through acquisitions. In
addition, we believe that growing our food and beverage expertise
and track record will strengthen our ability to compete for
master-concessionaire contracts and drive sales, gross margin and
cost synergies with our existing retail concepts.
Pursue accretive acquisitions
We believe that we have demonstrated our ability to create value by
acquiring and integrating companies into the Hudson Group. During
the last three years, we have successfully integrated the North
American operations of Nuance and World Duty Free Group. By
deploying our customized and collaborative approach to store
operations and merchandising, we have been able to drive sales and
advertising income growth at acquired locations and achieve
significant cost synergies. Our management team will approach
potential acquisitions in a disciplined manner with a focus on
strengthening our offerings for travelers and driving additional
procurement and cost synergies. We actively maintain a pipeline of
potential acquisition opportunities across retail and food and
beverage.
32
Target improved profitability by leveraging our fixed costs and
investments
We plan to continue to improve our operating results by leveraging
our scale, partnerships and operational excellence. The strength of
our market position in the continental United States and Canada,
combined with Dufry’s global presence, enables us to
negotiate favorable terms with our business partners. Additionally,
as we continue to increase sales under new and existing concession
agreements, we will seek to improve our profitability as general
corporate overhead and fixed costs shrink as a percentage of sales.
Further, we have invested in our sourcing and distribution network
and integrated information technology systems. We intend to
leverage these investments to grow our sales and
profitability.
Our market
We operate in the travel concession market in the continental
United States and Canada, which we consider to consist of
concessions located in airports, ports, bus and railways stations,
tourist destinations, hotels and highway rest stops, as well as
sales onboard aircrafts, ferries and cruise liners. We plan to
continue to expand across store formats and into non-airport
locations as we grow our operations. See
“ – Our strategies – Expand
concession portfolio.”
The majority of our sales are derived from airports. As of and for
the year ended December 31, 2017, 92% of our concessions were
located in, and 94% of our net sales were generated at, airports in
the continental United States and Canada. According to the ARN Fact
Book, airport concession sales at the top 44 international airports
by performance in the United States and Canada were approximately
$8.7 billion for the year ended December 31, 2016. Based on the ARN
Fact Book, as a breakdown of sales at these airports for the year
ended December 31, 2016, food and beverage contributed $4.9 billion
in sales while specialty, news and gifts and duty-free contributed
$1.3 billion, $1.3 billion and $1.1 billion in sales,
respectively.
The airport concession market
Airport concessions are comprised of a variety of retail, food and
beverage and commercial service concepts. The terms of an agreement
between an airport concession operator and the relevant airport
landlord are generally set forth in a concession agreement.
Concessions are generally awarded through either a public tender
process or pursuant to direct negotiations. Landlords generally
determine the number and type of concessions to be awarded, and
terms for individual concessions may vary considerably from
facility to facility.
Concession agreements may permit an airport concessionaire to sell
a particular assortment of goods (for example, general duty-free
shops may sell wine and spirits, tobacco, perfumes and cosmetics
while specialty stores may sell one specific product category, such
as sunglasses) or operate in a specified physical location (for
example, an allocation of space within a terminal or the right to
operate an entire terminal). The concession operator may also
obtain the right to allocate concession space within all or a
portion of the facility, subject to the approval of the landlord.
The duration of a concession agreement typically ranges from five
to ten years, depending on the location and type of
facility.
Each landlord has needs and requirements that differ depending on a
number of factors. Certain landlords may prefer to develop
commercial operations from idea conception through to completion,
and therefore will partner with an experienced travel concession
operator to assist with overall development of airport concessions.
Other landlords may be more involved in the management and
allocation of commercial space and therefore may be more focused on
maximizing returns at a given location, with pricing terms being
more important. Most airport landlords determine rent by reference
to metrics such as gross sales or the number of passengers
traveling through an airport. Concession agreements typically
provide for rent that generally is based on a variable component
and in addition includes a MAG. See “
– Concession agreements.”
33
Airport retailers
Airport retailers differ significantly from traditional retailers.
Unlike traditional retailers, airport retailers benefit from a
steady and largely predictable flow of traffic from a constantly
changing customer base. Airport retailers also benefit from
“dwell time,” the period after travelers have passed
through airport security and before they board an aircraft.
Airports often offer fewer shopping alternatives compared to the
traditional channel, including limited competition from Internet
retailers, which leads to necessity and impulse-driven purchases
being made from available airport retailers.
Airport retail customers differ from traditional retail customers
in their wants and needs. Increased security incentivizes travelers
to arrive well before their flights depart, which creates the
opportunity and time for shopping, meals and other activities.
Enhanced security checks and the need to reach a departure gate on
time may also add to overall travel anxiety and drive impulse
purchases. In general, airport retail customers are relatively more
affluent than traditional retail customers, and travelers who are
on holiday may be more inclined to spend money at the
airport.
Trends
Recent trends affecting the airport concession market in North
America include:
Growth in passenger numbers
In the past decade, there has been a significant increase in both
domestic and international air travel due largely to improvements
in, and greater accessibility of, air transport, as well as
increased disposable income and business professionals needing to
travel due to the internationalization of many industries.
According to ACI, between 2010 and 2016, total passenger traffic in
North America grew at a compound annual growth rate of 3%. Looking
to the future, ACI projects that annual North American passenger
volumes will surpass 2.0 billion by 2019, and grow at a 3% compound
annual growth rate between 2017 and 2025. The North American
airport retail market’s overall exposure to passengers is
much more heavily weighted towards passengers traveling
domestically.
The chart below presents historical and projected North American
passenger volumes.
1
Source: ACL
Increased “dwell time” and propensity to
spend
Travel industry dynamics continue to evolve. Lengthy security
procedures and transportation delays have led to earlier arrival
times and increased passenger dwell time, with dwell times in
medium and large U.S. airports averaging 66 and 75 minutes,
respectively, according to the 2016 Airport Council
International-North America (“ACI-NA”) Concessions
Benchmarking Survey. Additionally, airlines have eliminated many
complementary services, such as in-flight meals, headphones and
other amenities to reduce costs. Further, travelers have
demonstrated a willingness to spend more at airports when presented
with better quality products, convenience and a greater product
selection. Finally, airports often offer fewer shopping
alternatives compared to the traditional channel, including limited
competition from Internet retailers, which leads to necessity and
impulse-driven purchases being made from available airport
retailers.
34
Airport expansion and focus on new revenue streams
Air travel is a critical and central aspect of the United States
economic infrastructure with resiliency to external pressures.
Airports and governments are focused on redevelopment of terminal
concession programs and additional space is being dedicated to new
opportunities to develop retail and other new sales streams. As
each travel location is unique, each airport operator works to find
the optimal mix of formats and products best suited to that region
or location in order to maximize turnover and profit.
Our history
Our business started in 1987 with a concession for five Hudson News
stores in a single airport. Over time, we expanded our operations
and successfully bid for concessions in other major travel hubs,
including at John F. Kennedy International Airport, Boston Logan
International and Washington Dulles International Airport. We
acquired the WH Smith North American airport operations in 2003,
adding 150 stores at 22 airports. In 2008, Dufry acquired the
Hudson Group. Since then, we have expanded our operations as an
integrated division of the global Dufry Group. Dufry acquired
Nuance in 2014 and World Duty Free Group in 2015 and we now operate
Nuance and World Duty Free Group’s respective operations in
the continental United States and Canada.
Our relationship with Dufry
Prior to our initial public offering, we were wholly-owned by
Dufry. Following our initial public offering, Dufry is our
controlling shareholder, the majority of the members of our board
of directors are affiliated with Dufry, and, as an integrated part
of the global Dufry Group, our business continues to benefit from
the strength of Dufry’s position in the global travel retail
market. Moreover, Dufry continues to be one of our largest
suppliers, extend financing to us and provide us with other
important support and services, including a license to use the
Dufry, Hudson, World Duty Free and Nuance brands and associated
brands that are owned by Dufry. See “Item 7. Major
Shareholders and Related Party Transactions.”
Dufry has informed us that it does not intend to pursue
opportunities in the continental United States, Hawaii or Canada in
the following areas: retail or food and beverage concessions;
leases at airports or train stations; master concessionaire roles
at airports; or any other Dufry, Hudson, Nuance or World Duty
Free-branded retail operations, except that Dufry may continue to
pursue travel retail operations, using any of the aforementioned
brands, on board cruise lines that visit the United States or
Canada or at ports in the United States or Canada visited by cruise
lines. Dufry will also continue to operate its duty-free and
duty-paid stores in Puerto Rico and maintain and operate its
international distribution facilities in the United States. Dufry
has also informed us that it intends to pursue opportunities
outside the continental United States, Hawaii and Canada using the
Hudson brand and other associated brands used by us in the
continental United States and Canada. We do not intend to operate
outside of the continental United States, Hawaii and
Canada.
Our retail concepts and products
We operate a number of retail concepts across our retail locations,
including:
–
Travel Essentials and
Convenience Stores. Under a
variety of brands, including Hudson, our travel essentials and
convenience stores offer a wide assortment of products to the
travelling public, including newspapers, magazines and books,
sundries, health and beauty aids, food, snacks and beverages,
souvenirs, electronics and travel accessories. These shops are
operated as stand-alone stores or, in some cases, together with a
coffee-take-out concept, such as Dunkin’ Donuts or Euro
Café.
–
Duty-Free Stores.
Under the brands Dufry, World Duty
Free and Nuance, we offer a wide range of traditional retail
products for travelers on a duty-free and duty-paid basis, as
applicable, including perfumes and cosmetics, food, jewelry and
watches, accessories, wines and spirits and tobacco. Many of these
stores are so-called “walk-through” stores, which are
designed to direct the entire passenger flow through the store.
This innovative concept allows travelers to explore the products we
sell without needing to deviate from their way to the boarding
gate.
35
–
Electronics Stores.
Our electronics stores, operated under
the brand Tech on The Go, offer products from a range of popular
electronics and electronics accessory brands, including Sony,
Mophie, Belkin and Moshi.
–
Bookstores.
Our bookstores offer a broad array of
bestsellers and new releases, as well as a large selection of hard
cover, paperback, trade and children’s books. Our bookstores
are operated under brands such as Hudson Booksellers and Ink by
Hudson, as well as local and regional bookstore brands such as
Tattered Cover and Book Soup, which we operate pursuant to licenses
with the owners of the brands.
–
Specialty Branded
Stores. We operate branded
specialty stores, offering a range of products from a single
well-known global or national brand, including Coach, Estée
Lauder, Kate Spade and Tumi. These stores, which are operated by
our employees, provide travelers with the same experience as
shoppers at the primary locations of the brands and appeal to both
customers and suppliers alike: customers can use their waiting time
to shop for their favorite brands and suppliers have a highly
visible showcase to display their products. We operate specialty
branded stores directly, although the brand owner or supplier may
provide financial support.
–
Themed Stores.
These stores offer a broad product
range relating to a special theme rather than a specific product
category. Examples include “Kids Works” shops offering
a wide selection of toys, dolls, games, books and apparel for
children, the “$10/$15 boutique” store concept offering
fashion accessories at value prices and “Discover”
stores showcasing local gifts and souvenirs to promote the local
market.
–
Quick-Service Food
Outlets. In addition to our
travel convenience and quick-service coffee combination stores, we
operate stand-alone quick service food and beverage outlets, such
as Dunkin’ Donuts, Jason’s Deli and Pinkberry. We
operate these stores under franchise
agreements.
The following table sets forth the distribution of our net sales by
product category as a percentage of our total net sales, and the
total value of our net sales by product category, for the years
ended December 31, 2017, 2016 and 2015:
As of
December 31, 2017, we had
over 200 concession agreements
and operated 996 stores across 88 retail locations in the
continental United States and Canada, totaling over one million
square feet of commercial space. Our locations are distributed
across 77 airports (representing 94 % of our stores), five commuter
terminals (representing 4 % of our stores) and six other
locations (representing 2 % of our stores), as illustrated
below:
For the years ended December 31, 2017, 2016 and 2015, sales in the
continental United States represented 81%, 82% and 85% of our net
sales, respectively. Over the same time periods, sales in Canada
represented 19%, 18% and 15% of our net sales in each period,
respectively.
Duty-paid and duty-free operations
We operate both duty-paid and duty-free stores throughout the
continental United States and Canada. For the years ended December31, 2017, 2016 and 2015, duty-paid stores represented 76%, 78% and
78% of our net sales, respectively and duty-free stores represented
24%, 22% and 22% of our net sales, respectively.
39
Duty-paid shops target domestic and international travelers.
Standard duties and other taxes apply to sales in these shops. They
are located in both international and domestic airport terminals,
train stations and other locations.
Duty-free shops are located in airports and generally offer goods
to both international and domestic travelers, with international
travelers exempt from duties and excise and other taxes on certain
goods, such as tobacco and liquor.
Concession agreements
We enter into concession agreements with landlords of airports,
railway stations and other locations to operate our stores.
Concession agreements often cover a number of stores in a single
location, and we often have multiple concession agreements per
location.
These concession agreements typically define the:
–
term
of our operations;
–
rent
and other remuneration payable;
–
permitted
uses and product categories to be sold; and
–
location
of our stores and exterior appearance.
Concessions may be awarded in a public or private bidding process
or in a negotiated transaction. Our landlords who award contracts
through a bidding process typically consider some, if not all, of
the following factors when reviewing concession bids: their
relationship with the concession operator and the concession
operator’s experience in a particular region, ability to
respond to the needs of the landlord for planning and design advice
and operational ability. Price is also a significant competitive
factor, as a concession may be awarded in a tender based upon the
highest concession fee offered. Landlords also often consider the
brands included in a proposal and ACDBE partnerships, if
applicable, among other things. Our concession agreements often
require us to perform initial renovations of the stores, as well as
refurbishment to the stores over the term of the
arrangement.
In return for the right to operate our concession, we pay rent to
the airport authority or other landlord that is typically
determined on a variable basis by reference to factors such as
gross or net sales or the number of travelers using the airport or
other location. Where rent is based on our sales, concession
agreements generally also provide for a minimum annual guaranteed
payment, or MAG, that is either a fixed dollar amount or an amount
that is variable based upon the number of travelers using the
airport or other location, retail space used, estimated sales, past
results or other metrics. A limited number of our concession
agreements contain fixed rents.
Many of our concession agreements at airports contain requirements
to use good faith efforts to achieve an ACDBE participation goal,
which we meet in different ways depending on the terms of the
concession agreement. A failure to comply with such requirements
may constitute a default under a concession agreement, which could
result in the termination of the concession agreement and monetary
damages. See “ – Regulation.” Generally,
our concession agreements are terminable at will by our
landlords.
Local partners
We operate most of our stores located at airports in cooperation
with local partners. We partner with many of these entities through
the ACDBE program operated by the FAA. See “
– Regulation.” We also may partner with other
third parties to win and maintain new business opportunities.
Consequently, our business model contemplates the involvement of
local partners and we typically operate these concessions as
associations and partnerships. The net earnings from these
operating subsidiaries attributed to us are reduced to reflect the
applicable ownership structure.
We generally structure our store operations through associations
and partnerships. As of December 31, 2017, we had 112 associations
and other partnerships with 90 local partners.
40
Our suppliers
We are supplied both directly from manufacturers and through
distributors.
Our principal travel essentials suppliers are Core-Mark and Resnick
Distributors. Our principal duty-free products supplier is Dufry.
Our principal beverages supplier is The Coca Cola Company. Our
principal book supplier is Readerlink Distribution Services. Our
principal magazines and periodicals suppliers are The News Group,
which includes The News Group L.P. and TNG, which is a division of
Great Pacific Enterprises Inc., and Hudson News Distributors, which
includes Hudson News Distributors, LLC and Hudson RPM Distributors,
LLC. For more information on our supply arrangement with Hudson
News Distributors, LLC and Hudson RPM Distributors, LLC, see
“Item 7. Major Shareholders and Related Party Transactions
–B. Related party transactions –Transactions with
entities controlled by Mr. James Cohen.”
As our largest duty-free products supplier, Dufry has historically
supplied us with perfumes and cosmetics, as well as, in the United
States, liquor and tobacco, for our duty-free stores. We expect
that Dufry will continue to supply us with such products. See
“Item 7. Major Shareholders and Related Party
Transactions.”
Competition
We face two different forms of competition in the travel retail
market in the continental United States and Canada.
First, we compete for concessions at airports and other
transportation terminals and destinations with a number of other
global, national and regional travel concession operators. Travel
concession operators compete primarily on the basis of their
experience and reputation in travel retailing, including their
relationships with airport authorities and other landlords, their
experience in a particular region, their ability to respond to the
needs of an airport authority or other landlords for planning and
design advice, as well as operational ability. Price is also a
significant competitive factor, as a concession may be awarded in a
tender based upon the highest concession fee offered. Our main
competitors for airport concessions are Paradies Lagardere and DFS,
as well as regional airport concession operators such as Duty Free
America and Stellar Partners.
Second, we also compete for customers directly with other travel
retailers in some locations, and, as our range of products
increases, we also become an indirect competitor of traditional
Main Street and Internet retailers. The level of competition varies
greatly among the different locations where we operate. For
example, in a number of airport terminals, we are the sole
concession operator, while in some locations we compete with other
retailers.
Regulation
Our operations are subject to a range of laws and regulations
adopted by national, regional and local authorities from the
various jurisdictions in which we operate, including those relating
to, among others, public health and safety and fire codes. Failure
to obtain or retain required licenses and approvals, including
those related to food service and public health and safety, would
adversely affect our operations. Although we have not experienced,
and do not anticipate, significant problems obtaining required
licenses, permits or approvals, any difficulties, delays or
failures in obtaining such licenses, permits or approvals could
delay or prevent the opening, or adversely impact the viability, of
our operations.
Airport authorities in the United States frequently require that
our airport concessions meet minimum ACDBE participation
requirements. The Department of Transportation’s
(“DOT”) Disadvantaged Business Enterprise program is
implemented by recipients of DOT Federal Financial Assistance,
including airport agencies that receive federal funding. The ACDBE
program is administered by the FAA, state and local ACDBE
certifying agencies and individual airports. The ACDBE program is
designed to help ensure that small firms owned and controlled by
socially and economically disadvantaged individuals can compete for
airport contracting and concession opportunities in domestic
passenger service airports. The ACDBE regulations require that
airport recipients establish annual ACDBE participation goals,
review the scope of anticipated large prime contracts throughout
the year, and establish contract-specific ACDBE participation
goals. We generally meet the contract specific goals through an
agreement providing for co-ownership of the retail location with a
disadvantaged business enterprise. Frequently, and within the
guidelines issued by the FAA, we may lend money to ACDBEs in
connection with concession agreements in order to help the ACDBE
fund the capital investment required under a concession agreement.
The rules and regulations governing the certification of ACDBE
participation in airport concession agreements are complex, and
ensuring ongoing compliance is costly and time consuming. Further,
if we fail to comply with the minimum ACDBE participation
requirements in our concession agreements, we may be held
responsible for breach of contract, which could result in the
termination of a concession agreement and monetary damages. See
“Item 3. Key Information – D. Risk factors –
Risks relating to our business – Failure to comply with ACDBE
participation goals and requirements could lead to lost business
opportunities or the loss of existing business.”
41
We derive a portion of our net sales from the sale of alcoholic
beverages. Alcoholic beverage control laws and regulations require
that we obtain liquor licenses for each of our concessions where
alcoholic beverages are served and consumed. Liquor licenses are
issued by governmental authorities (either state, municipal or
provincial, depending on the jurisdiction) and must be renewed
annually. Alcoholic beverage control laws and regulations impact
the operations of our concessions in various ways relating to the
minimum age of patrons and employees, hours of operation,
advertising, wholesale purchasing, other relationships with alcohol
manufacturers, distributors, inventory control and handling,
storage and dispensing of alcoholic beverages, as well as the
conduct of various activities on licensed premises including
contests, games and similar forms of entertainment.
We are subject to the Fair Labor Standards Act, the Immigration
Reform and Control Act of 1986, the Occupational Safety and Health
Act and various federal and state laws governing such matters as
minimum wages, overtime, unemployment tax rates, workers’
compensation rates, citizenship requirements and other working
conditions. We are also subject to the Americans with Disabilities
Act, which prohibits discrimination on the basis of disability in
public accommodations and employment, which may require us to
design or modify our concession locations to make reasonable
accommodations for disabled persons.
In the United States duty-free stores are considered an extension
of “bonded warehouses” by U.S. Customs and
Border Protection, and in Canada duty-free stores are part of a
Duty Free Shop Program with the Canadian Border Service Agency,
which avoids our clients from having to pay special taxes, such as
value-added and duty, when they purchase goods while in
international transit. This special status subjects us to bonded
warehouse regulations that require, for example, that any bonded
merchandise shall not be commingled with local merchandise or other
non-bonded merchandise and requires us to ensure that such bonded
merchandise is only sold to passengers leaving the respective
country on a non-stop flight.
We are also subject to certain truth-in-advertising, general
customs, consumer and data protection, product safety,
workers’ health and safety and public health rules that
govern retailers in general, as well as the merchandise sold within
the various jurisdictions in which we operate.
Seasonality
Our turnover is affected by seasonal factors. The third quarter of
each calendar year has historically represented the largest
percentage of our turnover for the year, which is when passenger
numbers are typically higher, and the first quarter has
historically represented the smallest percentage, as passenger
numbers are typically lower. We increase our working capital prior
to peak sales periods, so as to carry higher levels of stock and
add temporary personnel to the sales team to meet the expected
higher demand.
Intellectual property
In the United States and Canada, Dufry or one of its subsidiaries
(other than us) holds all of the trademarks for our proprietary
brands, including Dufry, Hudson Group, Nuance and World Duty Free,
or the respective applications for trademark registration that are
being processed by Dufry. Dufry licenses such trademarks to us. See
“Item 7. Major Shareholders and Related Party
Transactions.”
42
Employees
We are responsible for hiring, training and management of employees
at each of our retail locations. As of December 31, 2017, we
employed 9,641 people, including both full-time and part-time
employees. Of these employees, 8,147 were full-time employees and
1,494 were part time employees. As of December 31, 2017, 3,910 of
our employees are subject to collective bargaining
agreements.
Legal proceedings
We have extensive operations, and are defendants in a number of
court, arbitration and administrative proceedings, and, in some
instances, are plaintiffs in similar proceedings. Actions,
including class action lawsuits, filed against us from time to time
include commercial, tort, customer, employment (such as wage and
hour and discrimination), tax, administrative, customs and other
claims, and the remedies sought in these claims can be for material
amounts.
C. Organizational structure
Hudson Ltd. was incorporated in Bermuda on May 30, 2017 as an exempted company
limited by shares under the Companies Act 1981 of Bermuda as
amended (the “Companies Act”). Dufry AG, through its wholly-owned
subsidiary Dufry International AG, is our controlling shareholder as
of the date of this annual report.
Our principal executive office is located at 4 New Square, Bedfont
Lakes, Feltham, Middlesex, United Kingdom and our telephone number
is +44 (0) 208 624 4300. Our website is www.hudsongroup.com. The
information on our website is not incorporated by reference into
this annual report, and you should not consider information
contained on our website to be a part of this annual report or in
deciding whether to purchase our Class A common
shares.
We lease office space in East Rutherford, New Jersey, which
consists of 93,000 square feet in a commercial office building. In
addition, pursuant to our concession agreements, we operate 996
stores across 88 different transportation terminals and
destinations throughout the United States and Canada. We also lease
38 warehouse facilities. See “ – B. Business overview
– Our locations” and “ – B. Business
overview – Concession agreements.”
We do not own any real estate.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not applicable.
43
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. Operating results
Principal factors affecting our
results of operations
General
Our business is impacted by fluctuations in economic activity
primarily in the continental United States and Canada and, to a
lesser extent, economic activity outside these areas. Our turnover
is generated by travel-related retail and food and beverage sales
and income from advertising activities. Apart from the cost of
sales, our operating expense structure consists of selling expenses
(including our concession fees and rents), personnel expenses,
general expenses and other expenses associated with our retail
operations.
Turnover
Our turnover growth has been primarily driven by the combination of
organic growth and acquisitions.
Organic Growth
Organic growth represents the combination of growth in aggregate
monthly sales from (i) like-for-like growth and (ii) net new stores
and expansions.
Like-for-like growth represents the growth in aggregate monthly net
sales in the applicable period at stores that have been operating
for at least 12 months. Like-for-like growth excludes growth
attributable to (i) net new stores and expansions until such stores
have been part of our business for at least 12 months, (ii)
acquired stores until such stores have been part of our business
for at least 12 months and (iii) acquired wind-down stores,
consisting of eight stores acquired in the 2014 acquisition of
Nuance and 46 stores acquired in the 2015 acquisition of World Duty
Free Group that management expected, at the time of the applicable
acquisition, to wind-down.
Net new stores and expansions consists of growth from (i) changes
in the total number of our stores (other than acquired stores),
(ii) changes in the retail space of our existing stores and (iii)
modification of store retail concepts through rebranding. Net new
stores and expansions excludes growth attributable to (i) acquired
stores until such stores have been part of our business for at
least 12 months and (ii) acquired wind-down stores.
Net sales generated by acquired wind-down stores for the years
ended December 31, 2017, 2016 and 2015 was $4.8 million, $36.7
million and $34.1 million, respectively.
Like-for-like growth is influenced by:
–
Passenger
Flows: The number of passengers passing through the concessions
where we operate is the principal factor influencing sales. Between
2010 and 2016, total passenger traffic in North America grew at a
compound annual growth rate of 3%. Annual North American passenger
volumes were greater than 1.8 billion for the year ended December31, 2016, and ACI projects that annual North American passenger
volumes will grow at a 3% compound annual growth rate between 2017
and 2025, surpassing 2.0 billion by 2019.
–
Product
Pricing: Our concession agreements typically allow a maximum
mark-up above prices at certain comparable Main Street stores to
offset the additional cost of operating within the airport
environment, and some of our duty-free concession agreements
benchmark our prices against those in duty-free stores in other
airports. In order to drive our organic growth, our pricing
strategy reflects positioning and continuous monitoring of prices,
including the pricing policies of our suppliers, and targeted
marketing of specific products in certain concessions.
–
Net
Sales Productivity: Productivity may be improved through increased
penetration (i.e., the number of travelers who actually buy
products compared to total travelers the concession is exposed to)
and average spend per customer. In the past, we have sought to
influence both measures to improve net sales, through
infrastructure changes, such as improving the layout, location and
accessibility of our shops, and marketing and promotional
activities, such as signposting inside and outside the stores and
special offers, product variety, active selling by our sales staff
and improved customer service.
44
We also present like-for-like growth on a constant currency basis
by keeping exchange rates constant for each relevant month of the
prior period to account for fluctuations in foreign exchange rates
during such respective periods.
Net new
stores and expansions growth is impacted by the modification of
store retail concepts and the addition of new stores to our
portfolio by negotiating expansions into additional retail space
with our landlords to replace other travel industry retailers at
existing concessions as their contracts expire and by expanding
into newly created retail space. In addition, net new stores and
expansions growth is also impacted by concession agreements that
expire and which we are unable to renew. From December 31, 2017 to December 31, 2018, concessions representing
approximately 15 % of our
net sales for the year ended
December 31, 2017 are
scheduled to expire. We also expand into new markets and regularly
submit proposals and respond to requests for proposals or directly
negotiate with potential landlords for new
concessions.
Acquisitions
Due to the fragmentation of the travel retail industry,
acquisitions have been an important source of growth. We have
played a leading role in consolidation of the travel retail
industry in the continental United States and Canada. In 2014,
Dufry acquired Nuance. The operations of Nuance in the continental
United States and Canada have been included in our financial
statements from September 2014. Similarly, in 2015, Dufry acquired
World Duty Free Group and the operations of World Duty Free Group
in the continental United States and Canada have been included in
our financial statements from August 2015. We acquired 28 stores as
part of the acquisition of Nuance (eight of which management
expected, at the time of the acquisition, to wind-down) and 248
stores as part of the acquisition of World Duty Free Group (46 of
which management expected, at the time of the acquisition, to
wind-down). Acquisition growth represents growth in aggregate
monthly net sales attributable to acquired stores that management
did not expect, at the time of the applicable acquisition, to
wind-down.
Advertising income
Our significant presence in the continental United States and
Canada and our large number of concessions allow us to offer
attractive promotional opportunities for our suppliers, from which
we generate advertising income that positively affects our gross
margin.
Quarterly trends and seasonality
Our sales are also affected by seasonal factors. The third quarter
of each calendar year, which is when passenger numbers are
typically higher, has historically represented the largest
percentage of our turnover for the year, and the first quarter has
historically represented the smallest percentage, as passenger
numbers are typically lower. We increase our working capital prior
to peak sales periods, so as to carry higher levels of merchandise
and add temporary personnel to the sales team to meet the expected
higher demand.
The following table sets forth certain data for each of the eight
fiscal quarters from January 1, 2016 through December 31, 2017. Our
historical results are not necessarily indicative of the results
that may be expected in the future. The following quarterly
financial data should be read in conjunction with our combined
financial statements and the related notes included elsewhere in
this annual report.
Like-for-like growth represents the growth
in aggregate monthly net sales in the applicable period at stores
that have been operating for at least 12 months. Like-for-like
growth during the applicable period excludes growth attributable to
(i) net new stores and expansions until such stores have been part
of our business for at least 12 months, (ii) acquired stores until
such stores have been part of our business for at least 12 months
and (iii) eight stores acquired in the 2014 acquisition of Nuance
and 46 stores acquired in the 2015 acquisition of World Duty Free
Group that management expected, at the time of the applicable
acquisition, to wind down. For more information see "-
Turnover".
2
Organic
growth represents the combination of growth from (i) like-for-like
growth and (ii) net new stores and expansions. Organic growth
excludes growth attributable to (i) acquired stores until such
stores have been part of our business for at least 12 months and
(ii) eight stores acquired in the 2014 acquisition of Nuance and 46
stores acquired in the 2015 acquisition of World Duty Free Group
that management expected, at the time of the applicable
acquisition, to wind down. For more information see "-
Turnover".
Cost of sales and gross margin
Our cost of sales is a function of the prices we pay for certain
merchandise and is positively influenced by our strategy of
negotiating with our suppliers on a centralized basis at Dufry and
Hudson. Moreover, as a member of the Dufry Group, we purchase
certain products from Dufry for our duty-free stores and benefit
from the economies of scale and enhanced purchasing power provided
by Dufry.
Our pricing and product mix policy at any given store also affects
the gross margin at such store.
Operating expense structure
Our principal operating expenses are selling expenses (including a
franchise fee payable to subsidiaries of Dufry), personnel
expenses, general expenses and other periodic expenses associated
with our operations.
Selling Expenses
Concession
fees and rents represent the substantial majority of our selling
expenses. In return for having the right to operate our concession,
we pay rent to the airport authorities or other landlords that is
typically determined on a variable basis by reference to factors
such as gross or net sales or the number of travelers using the
airport or other location, which we record as concession fees and
rents under selling expenses. Where rent is based on our sales,
concession agreements generally also provide for a minimum annual
guaranteed payment, or MAG, that is either a fixed dollar amount or
an amount that is variable based upon the number of travelers using
the airport or other location, retail space used, estimated sales,
past results or other metrics. Where the minimum payment is
adjusted based on prior year total rents, it usually represents
between 80 – 90 % of prior year total concession
expense. As a result, our profitability may be adversely affected
if sales decrease at concessions where the MAG is higher than the
variable concession fee. A limited number of our concession
agreements contain fixed rents. We have periodically been required
to make MAG payments to our landlords at certain of our locations.
While the majority of our MAG payments are not material to our
overall business, occasionally decreases in net sales result in a
higher MAG to net sales ratio, which has impacted our net earnings.
For example, at one of our concession locations, our MAG to net
sales ratio increased for the years ended December 31, 2016 and
2015 due to a 11.4 % and
11.9 % decrease,
respectively, in our net sales at that location. This decrease in
net sales coupled with the fixed MAG payments had a material impact
on our net earnings for those years. The respective concession agreement was
re-negotiated in 2017. No other MAG payment at any other
location has had a material impact for the years ended December 31,2016 or 2015, and there was no
contract for the year ended December 31, 2017, where the MAG
payment had a material impact. We cannot guarantee that any
future MAG payments will not be materially adverse to our results
of operations. See also “Risk factors – Our profitability depends on the
number of airline passengers in the terminals in which we have
concessions.” Changes by airport authorities or airlines that
lower the number of airline passengers in any of these terminals
could affect our business, financial condition and results of
operations.
46
Selling
expenses also include credit card commissions and packaging
materials and other expenses. Credit card commissions are typically
calculated as a percentage of credit card sales.
Selling
expenses are presented net of selling income. Selling income
includes concession and rental income and commercial services and
other selling income. At certain of our concessions, we sublease a
portion of our retail space, and we receive concession and rental
income from subtenants, which we record as concession and rental
income.
Selling
expenses also include our general and administrative expenses, such
as repairs and maintenance, office and warehouse rent and general
administration and marketing. These expenses are not impacted in
the short term by variations in sales. We have, in the past,
implemented a number of measures to control and reduce our costs in
an economic downturn.
Personnel expenses
Our
personnel expenses, which represent a significant expense, include
wages, benefits and cash bonuses located at our airport concession
locations. We expect personnel expense to grow proportionately with
net sales. Factors that influence personnel expense include the
terms of collective bargaining agreements, local minimum wage laws,
the frequency and severity of workers’ compensation claims
and health care costs. Personnel expenses are comprised of fixed
and variable components, such as bonuses, which are based on the
performance of the business and / or personal
goals.
In
connection with our initial public offering, we adopted
equity incentive award plans
(the “Plans”). We
did not grant any awards pursuant to the Plans in 2017. See “Item 6.
Directors, Senior Management and Employees – B. Compensation
– Changes to our
remuneration structure following the consummation of our initial
public offering – New
equity incentive award plan.”
General expenses
We have
historically been charged by subsidiaries of Dufry franchise fees
to license brands owned by Dufry or its subsidiaries, including the
Dufry, Hudson, Nuance and World Duty Free brands, as well as for
ancillary franchise services, including centralized support
services such as treasury, audit and similar services. This
amounted to $50.6 million,
$50.1 million
and $44.2 million
for the years ended December 31, 2017, 2016 and 2015,
respectively. In connection with our initial public offering, we
entered into new agreements with Dufry pursuant to which the
franchise fees we are charged were reduced. See “Item 7.
Major Shareholders and
Related Party Transactions – B. related party
transactions –
Transactions with Dufry –
New agreements with Dufry-Franchise
agreements.” If these agreements had been in place on
January 1, 2016, we would
have been charged the lower amounts of $14.1 million
instead of $50.6 million
and $13.6 million
instead of $50.1 million
for the years ended December 31, 2017 and 2016, respectively,
which would have resulted in higher earnings before taxes in each
period.
Furthermore,
in connection with becoming a
public company, we anticipate our general and administrative
expenses will increase as we hire more personnel and engage outside
consultants.
Depreciation, amortization and impairment
Our leases and concessions generally require us to invest in our
premises to build, renovate or remodel them, often before we
commence business. These capital expenditures are generally
capitalized as property, plant and equipment (“PPE”) on
our balance sheet. See “ – B. Liquidity and capital
resources – Capital expenditures.” We depreciate PPE
using the straight-line method over the useful life of the assets,
for example, five years for furniture and up to ten years for
leasehold improvements, but in any case not longer than the
remaining life of the concession term related to the location where
the PPE is used.
Our principal intangible assets are concession rights, all of which
have definite life spans. Intangible assets with a finite lifespan
are amortized over their economic useful life and are tested for
impairment whenever there is an indication that the book value of
the intangible asset may not be recoverable. Goodwill is tested for
impairment annually.
47
Interest expense
Interest expense primarily consists of expenses related to
borrowings from Dufry. As of December 31, 2017, we had $520.4
million in long-term financial debt outstanding (excluding current
portion), with a weighted-average interest rate of 5.7%. Interest
expense amounted to $30.2 million and $29.8 million for the years
ended December 31, 2017 and 2016, respectively. In connection with
the Reorganization Transactions, on August 1, 2017, one of our
affiliates entered into a CAD $195.0 million loan agreement with
another affiliate of Dufry, of which CAD$150.0 million remains
outstanding. See “ – B. Liquidity and capital resources
– Indebtedness.” If this loan agreement had been in
place on January 1, 2016, we would have had $527.4 million in
long-term financial debt outstanding with a weighted average
interest rate of 5.7% as of December 31, 2016. Interest expense
would have increased by $1.9 million and $1.1 million for the years
ended December 31, 2016 and 2017, respectively.
Income tax
Income tax expenses are based on our taxable results of operations
after financial result and non-controlling interests. Tax losses
carried from one tax period to the next may also influence our
deferred tax expenses.
As of
December 31, 2017, we had
deferred tax assets of $51.5 million in relation to net operating
loss carryforwards, which begin to expire in 2028. Utilization of
our U.S. net operating loss carryforwards is subject to
annual limitations
provided by the Internal Revenue Code and similar state provisions.
Such annual limitations could result in the expiration of some
portion of the net operating tax losses and the implied tax credit
before their utilization.
Non-Controlling interests
Airport authorities in the United States frequently require us to
partner with an ACDBE. We also may partner with other third parties
to win and maintain new business opportunities. Consequently, our
business model contemplates the involvement of local partners. The
net earnings from these operating subsidiaries attributed to us
reflect the applicable ownership structure, and as a result net
earnings attributable to non-controlling interests excludes
expenses payable by us which are not attributable to our operating
partners, such as franchise fees and interest expense payable to
Dufry and its subsidiaries, income taxes and amortization on fair
value step-ups from acquisitions.
The following table summarizes changes in financial performance for
the year ended December 31, 2017, compared to the year ended
December 31, 2016:
FOR THE YEAR
ENDED DECEMBER
31,
PERCENTAGE
CHANGE
IN MILLIONS OF
USD
2017
2016
in %
Turnover
1,802.5
1,687.2
6.8
Cost
of sales
(680.3)
(645.3)
5.4
Gross profit
1,122.2
1,041.9
7.7
Selling
expenses
(421.2)
(395.7)
6.4
Personnel
expenses
(371.3)
(337.4)
10.0
General
expenses
(156.9)
(151.9)
3.3
Share
of result of associates
(0.3)
(0.7)
(57.1)
Depreciation,
amortization and impairment
(108.7)
(103.7)
4.8
Other
operational result
(3.7)
(9.3)
(60.2)
Operating profit
60.1
43.2
39.1
Interest
expenses
(30.2)
(29.8)
1.3
Interest
income
1.9
2.1
(9.5)
Foreign
exchange gain / (loss)
0.5
–
–
Earnings before taxes (EBT)
32.3
15.5
108.4
Income
tax
(42.9)
34.3
(225.1)
Net earnings
(10.6)
49.8
(121.3)
ATTRIBUTABLE TO
Equity
holders of the parent
(40.4)
23.5
(271.9)
Non-controlling
interests¹
29.8
26.3
13.3
1
Net earnings to non-controlling interests
excludes expenses payable by us which are not attributable to
non-controlling interests (which primarily consists of our
operating partners), such as franchise fees and interest expense
payable to Dufry and its subsidiaries, income taxes and
amortization on fair value step-ups from
acquisitions.
Turnover
Turnover
increased by 6.8 % to
$1,802.5 million
for the year ended December 31, 2017 compared to
$1,687.2 million
in 2016. Net sales represented 97.7 % of turnover for the 2017 period,
with advertising income representing the remainder. Net sales
increased by $110.7 million,
or 6.7 %, to
$1,760.8 million.
Organic
growth was 8.8 % for the
year ended December 31,
2017 and contributed $142.6 million
of the increase in net sales. Like-for-like growth was
4.8 % and contributed
$72.6 million
of the increase in net sales. On a constant currency basis,
like-for-like growth was 4.4 %. The increase in like-for-like
growth was primarily the result of increases in average sales per
transaction, with the remainder attributable to an increase in the
overall number of transactions. Net new stores and expansions
growth contributed $70 million
of the increase in net sales, primarily as a result of opening new
stores. This growth was partially offset by a decrease of
$31.9 million
in net sales of acquired wind-down stores.
Gross profit
Gross
profit reached $1,122.2 million for the year ended
December 31, 2017 from
$1,041.9 million
for the prior year. Our gross profit margin increased to
62.3 % for 2017 compared
to 61.8 % in 2016,
primarily due to sales mix shift from lower margin categories to
higher margin categories, and gross margin synergies related to our
implementation in 2016 of the Hudson supply chain at the acquired
World Duty Free stores, most of which are duty-paid stores. Our
gross profit margin for our duty-paid sales was only slightly
higher than the gross profit margin for duty-free sales during
these periods which modestly impacted our gross profit margin for
the year ended December 31, 2017, as both margins increased
slightly and duty-paid sales and duty-free sales represented
75.8 % and
24.2 % of our net sales,
respectively, for the same period.
49
Selling expenses
Selling
expenses reached $421.2 million for the year ended
December 31, 2017,
compared to $395.7 million
for 2016. Concession and other periodic fees paid to airport
authorities and other travel facility landlords in connection with
our retail operations made up 92 % of the selling expenses for the
year ended December 31,
2017. Selling expenses amounted to 23.4 % of turnover for the year ended
December 31, 2017,
compared to 23.5 % for
the prior year. Our selling expenses as a percentage of turnover
were lower for the year ended December 31, 2017 due to a $0.7 million reversal of provision related
to the acquisition of Nuance. In addition, we consolidated our
credit card processors which contributed to lower credit card
commission costs as a percentage of net sales. For the year ended
December 31, 2017,
concession and rental income amounted to $11.6 million compared to $11.9 million for 2016.
Personnel expenses
Personnel
expenses increased to $371.3 million for the year ended
December 31, 2017 from
$337.4 million in 2016. As
a percentage of turnover, personnel expenses increased to
20.6 % for 2017 compared
to 20.0 % for 2016. The
increase in personnel expenses in absolute terms was primarily
attributable to opening of new locations and the increase as a
percentage of turnover was primarily due to medical benefits and
wage increases for hourly paid employees.
General expenses
General
expenses increased to $156.9 million for the year ended
December 31, 2017
compared to $151.9 million
in the prior year. As a percentage of turnover, general expenses
decreased to 8.7 % in
2017 from 9.0 % in 2016.
Our general expenses as a percentage of turnover were lower for the
year ended December 31,
2017 mainly due to lower franchise fees due to an affiliate of
Dufry following the integration of the acquired World Duty Free
Group into the Dufry franchise fee structure.
Depreciation, amortization and impairment
Depreciation,
amortization and impairment increased to $108.7 million for the year ended
December 31, 2017
compared to $103.7 million
for 2016. Depreciation reached $64.5 million for the year ended December 31, 2017, compared to
$61.4 million for the year
ended December 31, 2016.
Amortization increased to $44.0 million for the year ended
December 31, 2017
compared to $42.3 million
for the prior year. There was $0.2
million impairment for the year ended December 31, 2017 and no impairment for the year ended December31, 2016. The higher depreciation charge in 2017 was
primarily due to higher than historical average capital investments
in 2016 relating to renovating existing locations, opening new
locations and expansions to our offices in New Jersey.
Other operational result
Other
operational result decreased to $3.7 million for the year ended
December 31, 2017 compared to $9.3 million in 2016. These expenses
primarily related to $3.4 million of audit and consulting costs
related to preparatory work in connection with our initial public
offering, $4.1 million of
restructuring expenses
associated with the World Duty Free Group acquisition and $5.5 million of other operating expenses
including restructuring and non-recurring items, and were
offset by $9.4 million of other
operating income resulting from a related party loan waiver
due to Dufry.
Interest expenses
Interest
expenses increased slightly to $30.2 million for the year ended
December 31, 2017
compared to $29.8 million
for 2016.
Income tax benefit / expense
Income
taxes for the year ended December 31, 2017 amounted to an expense of
$42.9 million compared to
a benefit of $34.3 million
for 2016. The main components
of this change were (i) a $40.2 million expense as a result of the reduction in the U.S. federal corporate income tax
rate as part of U.S. tax reform and (ii) a non-recurring tax
benefit for 2016 from a reversal of an impairment of deferred tax
assets related to the U.S. operations of World Duty Free Group. The total tax
expense of the year ended December 31, 2017 consisted of
$8.5 million current
income tax expense incurred mainly in connection with our Canadian
business and $34.4 million
deferred tax expense principally due
to the impact of the
U.S. tax reform.
The
following table summarizes changes in financial performance for the
year ended December 31,
2016, compared to the year ended December 31, 2015:
FOR THE YEAR
ENDED DECEMBER
31,
PERCENTAGE
CHANGE
IN
MILLIONS OF USD
2016
2015
in %
Turnover
1,687.2
1,403.0
20.3
Cost
of sales
(645.3)
(534.1)
20.8
Gross profit
1,041.9
868.9
19.9
Selling
expenses
(395.7)
(325.7)
21.5
Personnel
expenses
(337.4)
(279.5)
20.7
General
expenses
(151.9)
(130.9)
16.0
Share
of result of associates
(0.7)
1.7
(141.2)
Depreciation,
amortization and impairment
(103.7)
(86.7)
19.6
Other
operational result
(9.3)
(1.7)
447.1
Operating profit
43.2
46.1
(6.3)
Interest
expenses
(29.8)
(25.4)
17.3
Interest
income
2.1
1.6
31.3
Foreign
exchange gain / (loss)
–
(0.2)
–
Earnings before taxes (EBT)
15.5
22.1
(29.9)
Income
tax
34.3
(3.8)
(1,002.6)
Net earnings
49.8
18.3
172.1
ATTRIBUTABLE TO
Equity
holders of the parent
23.5
(7.7)
(405.2)
Non-controlling
interests¹
26.3
26.0
1.2
1
Net earnings to non-controlling interests
excludes expenses payable by us which are not attributable to
non-controlling interests (which primarily consists of our
operating partners), such as franchise fees and interest expense
payable to Dufry and its subsidiaries, income taxes and
amortization on fair value step-ups from
acquisitions.
Turnover
Turnover
increased by 20.3 % to
$1,687.2 million
for the year ended December 31, 2016 compared to
$1,403.0 million
in 2015.
Net
sales represented 97.8 %
of turnover for the year ended December 31, 2016, with advertising income
representing the remainder. Net sales increased by
$280.5 million,
or 20.5 %, to
$1,650.1 million.
Acquisition
growth contributed $206.4 million
of the increase in net sales, primarily due to 12 months of World
Duty Free Group being included in our results in 2016, as compared
to five such months in 2015 (resulting in seven months being
attributable to acquisition growth in 2016). We added 248 stores as
a result of this acquisition, 46 of which were acquired wind-down
stores, and this contributed in part to the growth in our net sales
of food and beverage and perfumes and cosmetics of 21.9 % and 29.6 %, respectively, for the year ended
December 31, 2016
compared to the prior year.
Organic
growth was 5.4 % for the
year ended December 31, 2016 and contributed
$71.5 million
of the increase in net sales. Like-for-like growth was
3.9 % and contributed
$49.3 million
of the increase in net sales. On a constant currency basis,
like-for-like growth was 4.3 %. Like-for-like sales grew
primarily as a result of increases in average sales per
transaction, with the remainder attributable to an increase in the
overall number of transactions. Net new stores and expansions
contributed $22.2 million
of the increase in net sales, primarily as a result of new stores,
expansions and renovations. Acquired wind-down stores, contributed
$2.6 million
of the increase in net sales.
Gross profit
Gross
profit increased to $1,041.9 million in the year ended
December 31, 2016 from
$868.9 million in the
prior year. The 19.9 %
increase in gross profit was primarily driven by the acquisition of
World Duty Free Group.
51
Our
gross profit margin decreased slightly to 61.8 % for 2016 compared to
61.9 % for 2015. The
decrease was principally a result of the World Duty Free Group
acquisition, as World Duty Free Group had a lower gross profit
margin than Hudson Group, which fully offset the increase in gross
profit margin of Hudson Group on a stand-alone basis.
Selling expenses
Selling
expenses reached $395.7 million for the year ended
December 31, 2016,
compared to $325.7 million
for 2015. Concession and other periodic fees paid to airport
authorities and other landlords in connection with our retail
operations made up 91.8 %
of the selling expenses for the year ended December 31, 2016. Selling expenses amounted
to 23.5 % of turnover for
the year ended December 31, 2016, compared to
23.2 % for the prior
year. Our selling expenses were higher in the year ended
December 31, 2016 due to
the acquisition of World Duty Free Group in August 2015 and associated higher
concession fees. For 2016, concession and rental income amounted to
$11.9 million compared to
$7.3 million for
2015.
Personnel expenses
Personnel
expenses increased to $337.4 million for the year ended
December 31, 2016 from
$279.5 million in 2015. As
a percentage of turnover, personnel expenses increased slightly to
20.0 % for 2016 compared
to 19.9 % for 2015. The
increase in personnel expenses in absolute terms was primarily
attributable to the acquisition of World Duty Free Group and the
increase as a percentage of turnover was primarily due to wage
increases for hourly paid employees.
General expenses
General
expenses increased to $151.9 million for the year ended
December 31, 2016
compared to $130.9 million
in the prior year primarily as a result of higher franchise fees
based on sales and expenses on expanded office space. As a
percentage of turnover, general expenses decreased to
9.0 % for 2016 compared
to 9.3 % for
2015.
Depreciation, amortization and impairment
Depreciation,
amortization and impairment increased to $103.7 million for the year ended
December 31, 2016
compared to $86.7 million
for 2015. Depreciation and impairment reached $61.4 million for the period (all of which
was depreciation), compared to $51.1 million (of which $1.4 million was impairment) for the year
ended December 31, 2015.
Amortization increased to $42.3 million for the year ended
December 31, 2016
compared to $35.6 million
for the prior year. The higher depreciation charge was primarily
due to higher than historical average capital investments in 2016
mainly relating to the opening of a greater-than-average number of
high-end duty-free and specialty stores. The increase in
amortization charge related to new intangible assets related to the
acquisition of World Duty Free Group.
Other operational result
Other
operational result increased for the year ended
December 31, 2016 to an
expense of $9.3 million
from an expense of $1.7 million for 2015. The majority of
these expenses related to restructuring costs associated with the
World Duty Free Group acquisition.
Interest expenses
Interest
expenses increased to $29.8 million for the year ended
December 31, 2016
compared to $25.4 million
for 2015 due to a new $50.0 million loan from Dufry. This loan
was used in part to refinance pre-existing indebtedness of World
Duty Free Group.
Income tax benefit / expense
Income taxes for the year ended December 31, 2016 amounted to
a benefit of $34.3 million compared to an expense of
$3.8 million for 2015. The tax benefit for 2016 was
mainly due to a non-recurring reversal of an impairment of deferred
tax assets related to the U.S. operations of World Duty Free Group.
The reversal of the impairment was due to the tax and management
integration of World Duty Free Group into the Hudson Group and the
resulting reassessment of the prior deferred tax asset
impairment.
52
B. Liquidity and capital
resources
Our primary funding sources historically have included cash from
operations, and financial debt arrangements with Dufry. The balance
outstanding on our long-term debt obligations with Dufry at
December 31, 2017, 2016 and 2015 was $520.4 million, $475.2 million
and $483.1 million, respectively.
We believe existing cash balances, operating cash flows and our
long-term financing arrangements with Dufry will provide us with
adequate funds to support our current operating plan, make planned
capital expenditures and fulfill our debt service requirements for
the foreseeable future.
If our cash flows and capital resources are insufficient to fund
our working capital, we could face substantial liquidity problems
and may be forced to reduce or delay investments and capital
expenditures. We do not anticipate entering into additional
third-party credit facilities for our working capital, and expect
any future working capital requirements to be funded by Dufry. As a
result, our financing arrangements and relationship with our
controlling shareholder are material to our business. Nonetheless,
when appropriate, we may borrow cash from third-party sources, and
may also raise funds by issuing debt or equity securities,
including to fund acquisitions.
Dufry Group cash pooling
For the efficient management of its short term cash and overdraft
positions, Dufry, among other initiatives, operates various forms
of notional cash pool arrangements. We have historically
participated in Dufry’s notional cash pool with Bank Mendes
Gans BV, a subsidiary of ING BV. At December 31, 2017, we had an
overdraft of $13.1 million compared to a deposit of $52.4
million in 2016 in our cash pool accounts. The overdraft was a
result of paying the remaining balance of franchise fees to Dufry.
The cash pool arrangement is structured such that the assets and
liabilities remain in the name of the corresponding participant,
i.e. no physical cash concentration occurs for the day-to-day
operations. We, along with other participants in the cash pool,
have pledged the cash we have each placed in the cash pool to the
bank managing the cash pool as collateral to support the aggregate
obligations of cash pool participants.
Capital expenditures
Capital expenditures are our primary investing activity, and we
divide them into two main categories: tangible and intangible
capital expenditures. Tangible capital expenditures consists of
spending on the renovation and maintenance of existing stores and
the fitting out of new stores. Intangible capital expenditures
consists of investments in computer software and occasional upfront
payments upon the granting of new concessions which are capitalized
as intangible assets and amortized over the life of the concession
unless otherwise impaired.
When contemplating investments in new concessions, we focus on
profitable growth as its key investment criterion. In addition to
fitting out new concessions, we expect to invest in renovation and
maintenance of our existing stores, including undertaking some
major refurbishment projects each year.
53
Our capital expenditures are presented for each of the periods
below:
FOR THE YEAR ENDED DECEMBER, 31
IN MILLIONS OF USD
2017
2016
2015
Tangible
capital expenditures
76.3
92.4
55.0
Intangible
capital expenditures
8.2
5.7
3.0
Total
84.5
98.1
58.0
Cash flows
The following table summarizes the cash flow for each of the
periods below:
FOR THE
YEAR ENDED DECEMBER, 31
IN MILLIONS OF
USD
2017
2016
2015
Net
cash flows from operating activities
130.8
169.8
105.4
Net
cash flows used in investing activities
(86.1)
(92.4)
(15.0)
Net
cash flows used in financing activities
(95.8)
(51.3)
(31.6)
Currency
translation
0.9
1.1
(2.9)
(Decrease) / Increase in cash and cash
equivalents
(50.2)
27.2
55.9
Cash
at the beginning of period
187.6
160.4
104.5
Cash
at the end of period
137.4
187.6
160.4
Cash flows from operating activities
Net
cash flows from operating activities were $130.8 million
for the year ended December 31, 2017, a decrease of
$39.0 million
compared to the prior year. The decrease in net cash flows provided
from operating activities mainly resulted from paying an outstanding balance of franchise
fees to Dufry. Net cash flows
from operating activities were $169.8 million
for the year ended December 31, 2016, an increase of
$64.4 million
compared to the prior year. This increase was primarily due to an
increase in concession fees payable, trade and other payables to
related parties, principally consisting of franchise fees. Net cash
flows from operating activities were $105.4 million
for the year ended December 31, 2015. This
decrease was primarily due to a decrease in other payables to
Dufry.
Cash flows used in investment activities
Net
cash used in investing activities decreased to $86.1 million for the year ended
December 31, 2017, as
compared to $92.4 million
for the prior year. The decrease was primarily due to lower capital
expenditures. Net cash used in investing activities increased to
$92.4 million for the year
ended December 31, 2016
as compared to $15.0 million for the prior year. The
increase was due to higher capital expenditures for the year ended
December 31, 2016 and
proceeds from the sale of investments in associates, which
consisted of Hudson’s interests in two entities, during the
prior year. Net cash used in investing activities decreased to
$15.0 million for the year
ended December 31, 2015.
This decrease was primarily due to proceeds from the sale of
investments in associates, which consisted of interests in two U.S.
entities, during the year ended December 31, 2015.
Cash flows used in financing activities
Net
cash used in financing activities increased by $44.5 million for the year ended
December 31, 2017, to
$95.8 million compared to
cash flows used in financing activities of $51.3 million in the prior year. This
increase in cash used was primarily due to repayment of financial
debt to Dufry. Net cash used in financing activities reached
$51.3 million for the year
ended December 31, 2016,
compared to $31.6 million
from financing activities for the prior year. This net outflow was
primarily due to repayment of financial debt to Dufry and
$28.7 million in dividends
paid to non-controlling interests. Net cash used in financing
activities decreased to $31.6 million for the year ended
December 31, 2015. This
change was primarily due to dividends paid to non-controlling
interests and repayment of third-party loans.
54
Recent development – Disposal of Dufry America
Inc.
As part of the Reorganization Transactions effected in connection
with the completion our initial public offering, an entity within
the Hudson Group sold its ownership interest in Dufry America Inc.
(“DAI’’) to an entity within the Dufry Group for
net consideration of $60.1 million. The net consideration for the
sale was paid to Hudson Group in full in cash on February 1,2018.
Internal control over financial reporting
In connection with our initial public offering, we
identified an error in previously-issued combined financial statements of Hudson
Group which required a restatement of our statement of cash
flows for the year ended December 31, 2014. The error was caused by a
material weakness in our internal control related to accounting for
the Nuance acquisition. We have begun taking measures and plan to
continue to take measures to remediate this material weakness,
including designing and implementing a new control over the review
of assumptions made in business combinations, specifically the
assumptions made that affect the determination and presentation of
the statement of cash flows. See “Item 3. Key Information
– D. Risk factors
– Risks relating to our
business – We have
identified a material weakness in our internal control over
financial reporting. If we are unable to remediate this material
weakness, or if we identify additional material weaknesses in the
future or otherwise fail to maintain an effective system of
internal controls, we may not be able to accurately or timely
report our financial results, or prevent fraud, and investor
confidence in our company and the market price of our shares may be
adversely affected.”
Indebtedness
Existing debt with Dufry
At
December 31, 2017, 2016
and 2015, we owed $520.4 million, $475.2 million and $483.1 million, respectively, to Dufry
pursuant to long-term financial loans (excluding current portion).
We were charged $29.5 million, $29.1 million and $24.7 million in each of the years ended
December 31, 2017, 2016
and 2015, respectively, in interest to Dufry. The weighted-average
interest rate on our loans from Dufry for each of the years ended
December 31, 2017, 2016
and 2015 was 5.7 %,
5.9 % and
5.9 %,
respectively.
Our
indebtedness owed to Dufry at December 31, 2017 consisted of 16
intercompany loans with affiliates of Dufry (the
“intercompany loans”), which are all on substantially
similar terms and most of which are due on October 15, 2022. The following table
summarizes certain information regarding the intercompany
loans:
Loan
Agreement between Dufry Finances SNC and Dufry Newark
Inc.
5.9589%
$290,637.02
Loan
Agreement between Dufry Finances SNC and Dufry Newark
Inc.
5.9589%
$600,000.00
Loan
Agreement between Dufry Finances SNC and Dufry Newark
Inc.
5.9589%
$850,000.00
Loan
Agreement between Dufry Finances SNC and Dufry Newark
Inc.
5.9589%
$2,800,000.00
Loan
Agreement between Dufry International and Dufry Houston DF &
Retail Part.
2.7800%
$2,994,066.78
Loan
Agreement between Dufry Finances SNC and Hudson Group
Inc.
5.9589%
$5,900,000.00
Loan
Agreement between Dufry Finances SNC and Hudson Group
Inc.
5.9589%
$7,700,000.00
Loan
Agreement between Dufry Finances SNC and Hudson Group
Inc.
5.9589%
$16,000,000.00
Loan
Agreement between Dufry Finances SNC and Hudson Group
Inc.
5.9589%
$21,000,000.00
Loan
Agreement between Dufry Finances SNC and Dufry North America
LLC
5.9589%
$39,700,000.00
Loan
Agreement between Dufry Finances SNC and WDFG North America
LLC
5.9589%
$50,000,000.00
Loan
Agreement between Dufry Finances SNC and Hudson Group
Inc.
5.9589%
$53,328000.00
Loan
Agreement between Dufry Finances SNC and Hudson Group
Inc.
5.9589%
$8,246,000.00
Loan
Agreement between Dufry Finances SNC and Hudson Group
Inc.
5.9589%
$88,811,000.00
Loan Agreement between Dufry Finances SNC and Hudson
Group Inc. 1
5.9589%
$110,464,207.74
Loan Agreement between Dufry Financial Services B.V.
and The Nuance Group (Canada) Inc. 2
Interest-bearing portion 2
3.8900%
CAD$65,000,000.00
Non-interest bearing portion 2
–
CAD$85,000,000.00
1
This loan agreement has been
filed as an exhibit to this annual report. All intercompany loans
are on substantially the same terms, except as noted
above.
2
In connection with the
Reorganization Transactions, on August 1, 2017, one of our
affiliates, The Nuance Group (Canada) Inc. (“Nuance Group
Canada”), a member of the Hudson Group, entered into a
CAD$195.0 million
loan agreement with another affiliate of Dufry. The loan consists
of a non-interest bearing portion for CAD$130.0 million and a
3.8900 % portion
for CAD$65.0 million. Nuance Group Canada
repaid CAD$45.0 million of the non-interest
bearing portion on August 1, 2017. The balance
outstanding on the loan is CAD$150.0 million, of which
CAD$65.0 million
bears interest at 3.8900 %.
55
Restrictions on our indebtedness
We are
subject to certain of the covenants contained in Dufry’s
4.50 % Senior Notes due
2023 (the “2023 Dufry Notes”) and 2.50 % Senior Notes due 2024 (the
“2024 Dufry Notes,” and together with the 2023 Dufry
Notes, the “Dufry Notes”). We are not a guarantor under
any of the Dufry Notes. However, if we or any of our subsidiaries
guarantee any bank debt or public debt of Dufry in excess of
$50.0 million in the case
of the 2023 Dufry Notes, or $75.0 million in the case of the 2024 Dufry
Notes, then we or our subsidiaries will be required to guarantee
such notes; provided however, that in the case of the 2024 Dufry
Notes, we or our subsidiaries will only be required to guarantee
such notes if, after giving effect to the guarantee of the bank
debt or public debt, the aggregate principal amount of bank debt or
public debt guaranteed by non-guarantor subsidiaries of Dufry
exceeds EUR 500 million.
In addition, the amount of debt that we may be able to incur from
third parties is limited by the terms of the 2023 Dufry Notes.
Subject to certain exceptions, we are also not permitted to grant
liens on any of our assets, absent certain exceptions, unless we
grant a lien to secure the repayment of the Dufry
Notes.
We are
also subject to certain of the covenants contained in Dufry’s
existing credit facilities (the “Dufry Credit
Facilities”). We are not a guarantor under any of the Dufry
Credit Facilities. The amount of third-party debt that we may incur
is limited by the terms of the Dufry Credit Facilities. We are not
permitted to grant liens on our assets, absent certain exceptions.
Under the Dufry Credit Facilities, there are also restrictions on
our ability to provide certain guarantees to third parties. In
addition, our ability to enter into certain acquisitions,
investments, mergers and asset sales is limited by the terms of the
Dufry Credit Facilities.
Uncommitted letters of credit facilities
In
addition to our debt-financing arrangements with Dufry, we have
local credit facilities with each of Bank of America N. A. and Credit Agricole, which we
use to obtain letters of credit. We use letters of credit to secure
concession fee obligations pursuant to certain of our concession
agreements. On October 30, 2014 we entered into a
$45 million Amended and
Restated Uncommitted Letter of Credit and Loan Facility Agreement
with Bank of America N. A. (as amended, the “BofA
Credit Facilities”). As of December 31, 2017, $36.1 million was outstanding (including
letters of credit) and $8.9 million was available for borrowing
under this facility. Direct advances under the BofA Credit
Facilities bear interest at the U.S. prime rate. Letters of credit
under the BofA Credit Facilities are subject to an annual fee of
0.75 % of the amount
borrowed. On October 3,
2013, we entered into a $30 million Uncommitted Line of Credit
Agreement with Credit Agricole Corporate and Investment Bank (as
amended, the “Credit Agricole Credit Facilities”). As
of December 31, 2017,
$27.9 million was
outstanding (including letters of credit) and $2.1 million was available for borrowing
under this facility. Under the Credit Agricole Credit Facilities,
we are required to pay a fee at a rate not to exceed
0.75 % of the amount
borrowed. Lenders under the BofA Credit Facilities and the Credit
Agricole Credit Facilities may in their discretion decline to fund
our borrowing requests thereunder.
Contractual obligations and commitments
The following table presents our long-term debt obligations and
operating and capital lease obligations as of December 31,2017:
PAYMENTS DUE BY
PERIOD
IN MILLIONS OF USD
TOTAL
LESS THAN 1
YEAR
1 – 3 YEARS
4 – 5 YEARS
THEREAFTER
Long-term debt
obligations 1
672.9
29.8
59.7
522.5
60.9
Operating and
capital lease obligations 2
1,707.2
276.7
480.2
414.1
536.2
Total
2,380.1
306.5
539.9
936.6
597.1
1
Includes aggregate principal
amounts of financial debt outstanding to Dufry at
December 31, 2017,
and interest payable thereon. On August 1, 2017, one of our affiliates entered
into a loan agreement with an affiliate of Dufry AG
for CAD$195.0 million
of which CAD$85.0 million
(short-term) and CAD$65.0
million (long-term) remain outstanding. See “– Indebtedness
– Existing debt
with Dufry.”
2
Represents management estimates of future MAG
payments under our concession agreements as of December 31, 2017, as well as storage,
office and warehouse rents. For the fiscal years ended
December 31, 2017,
2016, and 2015, we paid concession fees of $399.1 million, $375.3 million
and $307.0 million,
respectively, of which $136.7 million,
$168.7 million,
and $137.0 million,
respectively, consisted of variable
rent.
Notwithstanding the maturity date of the existing financial debt
outstanding to Dufry, we intend to make repayments of $15.8
million, $50.2 million and $402.7 million within the next year, one
to three year period and four to five year period,
respectively.
56
Off-Balance sheet arrangements
We have no off-balance sheet arrangements that have or are
materially likely to have a current or future material effect on
our financial condition, changes in financial condition, sales or
expenses, results of operations, liquidity, capital expenditures or
capital resources.
Quantitative and qualitative disclosures about market
risk
We are exposed to market risks associated with foreign exchange
rates, interest rates, commodity prices and inflation. In
accordance with our policies, we seek to manage our exposure to
these various market-based risks.
Foreign exchange risk
We are exposed to foreign exchange risk through our Canadian
operations. Our Canadian sales are denominated in Canadian dollars,
while expenses relating to certain products we sell in Canada are
denominated in U.S. dollars. We also make a limited amount of
purchases from foreign sources, which subjects us to minimal
foreign currency transaction risk. As a result, our exposure to
foreign exchange risk is primarily related to fluctuations between
the Canadian dollar and the U.S. dollar. We are also exposed to
foreign exchange fluctuations on the translation of our Canadian
operating results into U.S. dollars for reporting purposes, which
can affect the comparability quarter-over-quarter and
year-over-year of our results. We generally benefit from natural
hedging and therefore do not currently engage in material forward
foreign exchange hedging.
Interest rate risk
We have a significant amount of interest-bearing liabilities
related to our long term financing arrangements with Dufry, at a
weighted average interest rate of 5.7% as of December 31, 2017. We
do not have any material floating rate financial instruments and as
such are not currently exposed to significant interest rate
risk.
Commodity price risk
Our profitability is dependent on, among other things, our ability
to anticipate and react to changes in the costs of the food and
beverages we sell. Cost increases may result from a number of
factors, including market conditions, shortages or interruptions in
supply due to weather or other conditions beyond our control,
governmental regulations and inflation. Substantial increases in
the cost of the food and beverages we sell could impact our
operating results to the extent that such increases cannot be
offset by price increases.
Impact of inflation
Inflation has an impact on the cost of retail products, food and
beverage, construction, utilities, labor and benefits and selling,
general and administrative expenses, all of which can materially
impact our operations. While we have been able to partially offset
inflation by gradually increasing prices, coupled with more
efficient practices, productivity improvements and greater
economies of scale, we cannot assure you that we will be able to
continue to do so in the future, and macroeconomic conditions could
make price increases impractical or impact our sales. We cannot
assure you that future cost increases can be offset by increased
prices or that increased prices will be fully absorbed by our
customers without any resulting change to their purchasing
patterns.
Critical accounting estimates
The preparation of our financial statements in conformity with IFRS
requires management to make judgments, estimates and assumptions
that affect the reported amounts of income, expenses, assets and
liabilities at the reporting date. The key assumptions concerning
the future and other key sources of estimation include
uncertainties at the reporting date, which include a risk of
causing a material adjustment to the carrying amounts of assets or
liabilities within the next financial periods. We discuss these
estimates and assumptions below. Also, see Note 2.3 “Summary
of Significant Accounting Policies” to our audited Combined
Financial Statements included elsewhere in this annual report,
which presents the significant accounting policies applicable to
our financial statements.
57
Concession rights
Concession rights identified in a business combination are measured
at fair value as at the date of acquisition and amortized over the
contract duration. Hudson assesses concession rights for impairment
indications at least annually and whenever events or circumstances
indicate that the carrying amount may not be
recoverable.
Goodwill
Goodwill is subject to impairment testing each year. The
recoverable amount of the cash generating unit is determined based
on value-in-use calculations which require the use of assumptions,
including those relating to pre- and post-tax discount rates and
growth rates for net sales. The calculation uses cash flow
projections based on financial forecasts approved by Hudson’s
management covering a five-year period. Cash flows beyond the
five-year period are extrapolated using a steady growth rate that
does not exceed the long-term average growth rate for the
respective market and is consistent with forecasted passenger
growth included in the travel related retail industry
reports.
Taxes
Income tax expense represents the sum of the current income tax and
deferred tax. Income tax positions not relating to items recognized
in the income statement, are recognized in correlation to the
underlying transaction either in other comprehensive income or
equity. Hudson is subject to income taxes in numerous
jurisdictions. Significant judgment is required in determining the
provision for income taxes. There are many transactions and
calculations for which the ultimate tax assessment is uncertain.
Hudson recognizes liabilities for tax audit issues based on
estimates of whether additional taxes will be payable. Where the
final tax outcome is different from the amounts that were initially
recorded, such differences will impact the income tax or deferred
tax provisions in the period in which such assessment is
made.
Current income tax
Income tax receivables or payables are measured at the amount
expected to be recovered from or paid to the tax authorities. The
tax rates and tax laws used to compute the amount are those that
are enacted or substantially enacted at the reporting date in the
countries or states where Hudson operates and generates taxable
income. Income tax relating to items recognized in other
comprehensive income is recognized in the same
statement.
Deferred tax
Deferred tax is provided using the liability method on temporary
differences between the tax basis of assets or liabilities and
their carrying amounts for financial reporting purposes at the
reporting date. Deferred tax liabilities are recognized for all
taxable temporary differences, except:
–
when
the deferred tax liability arises from the initial recognition of
goodwill or an asset or liability in a transaction that is not a
business combination and, at the time of the transaction, affects
neither the accounting profit nor taxable profit or loss;
or
–
in
respect of taxable temporary differences associated with
investments in subsidiaries, when the timing of the reversal of the
temporary differences can be controlled and it is probable that the
temporary differences will not be reversed in the foreseeable
future.
Deferred tax assets are recognized for all deductible temporary
differences, the carry forward of unused tax credits or tax losses.
Management judgment is required to determine the amount of deferred
tax assets that can be recognized, based upon the likely timing and
level of future taxable profits. Deferred tax assets are recognized
to the extent that it is probable that taxable profit will be
available, against which the deductible temporary differences and
the carry forward of unused tax credits and unused tax losses can
be utilized, except:
–
when
the deferred tax asset relating to the deductible temporary
difference arises from the initial recognition of an asset or
liability in a transaction that is not a business combination and,
at the time of the transaction, affects neither the accounting
profit nor taxable profit or loss; or
58
–
in
respect of deductible temporary differences associated with
investments in subsidiaries, in which case deferred tax assets are
recognized only to the extent that it is probable that the
temporary differences will be reversed in the foreseeable future
and taxable profit will be available against which the temporary
differences can be utilized.
–
The
carrying amount of deferred tax assets is reviewed at each
reporting date and reduced to the extent that it is no longer
probable that sufficient taxable profit will be available to allow
the deferred tax asset to be utilized. Unrecognized deferred tax
assets are reassessed at each reporting date and are recognized to
the extent that it has become probable that future taxable profits
will allow the deferred tax asset to be recovered.
–
Deferred
tax assets and liabilities are measured at the tax rates that are
expected to apply in the year when the asset is realized or the
liability is settled, based on tax rates (and tax laws) that have
been enacted or substantially enacted at the reporting date
applicable for each respective company.
Recent accounting pronouncements
Effective for annual period beginning January 1, 2019, a new
accounting standard, IFRS 16, replaces existing guidance and
eliminates the current dual accounting model for lessees, which
distinguishes between on-balance sheet finance leases and
off-balance sheet operating leases, and introduces a single,
on-balance sheet accounting model. While we currently treat
operating leases, such as concession or rental agreements, as
selling expenses, under IFRS 16 all leases will become on-balance
sheet right-of-use assets with corresponding lease liabilities on
the statement of financial position. As a result, we will be
recording the fair value of the fixed or minimum payment
commitments for concessions and rents owed until the end of the
respective agreement as a lease obligation on the statement of
financial position, while a corresponding right-of-use asset will
be capitalized in the same amount as the lease liability. While the
Company is closely reviewing the terms of each lease and concession
agreement to assess the impact of IFRS 16, we currently expect that
it will materially increase the assets and liabilities on our
statement of financial position.
See Note 4 of our Combined Financial Statements for a description
of other recent account pronouncements.
C. Research and development, patents and licenses,
etc.
We do not conduct research and development activities.
D. Trend information
For a discussion of Trend information, see “ – A.
Operating results – Principal factors affecting our results
of operations,”“ – A. Operating results –
Results of operations” and “Item 4. Information on the
Company – B. Business overview – Our
strategies.”
E. Off-balance sheet arrangements
We have no off-balance sheet arrangements that have or are
materially likely to have a current or future material effect on
our financial condition, changes in financial condition, sales or
expenses, results of operations, liquidity, capital expenditures or
capital resources.
59
F. Tabular disclosure of contractual
obligations
The following table presents our long-term debt obligations and
operating and capital lease obligations as of December 31,2017:
PAYMENTS DUE BY PERIOD
IN MILLIONS OF USD
TOTAL
LESS THAN 1 YEAR
1 – 3
YEARS
4 – 5
YEARS
THEREAFTER
Long-term debt
obligations 1
672.9
29.8
59.7
522.5
60.9
Operating and
capital lease obligations 2
1,707.2
276.7
480.2
414.1
536.2
Total
2,380.1
306.5
539.9
936.6
597.1
1
Includes aggregate principal
amounts of financial debt outstanding to Dufry at
December 31, 2017,
and interest payable thereon. On August 1, 2017, one of our affiliates entered
into a loan agreement with an affiliate of Dufry AG
for CAD$195.0 million
of which CAD$85.0 million
(short-term) and CAD$65.0
million (long-term) remain outstanding. See “– B. Liquidity and
capital resources –
Indebtedness –
Existing debt with Dufry.
2
Represents management estimates
of future MAG payments under our concession agreements as of
December 31, 2017,
as well as storage, office and warehouse rents. For the fiscal
years ended December 31, 2017, 2016 and 2015, we
paid concession fees of $399.1 million,
$375.3 million
and $307.0 million,
respectively, of which $136.7 million,
$168.7 million
and $137.0 million,
respectively, consisted of variable rent.
Notwithstanding the maturity date of the existing financial debt
outstanding to Dufry, we intend to make repayments of $9.5
million, $34.4 million and $64.7 million within the next year, one
to three year period and four to five year period,
respectively.
G. Safe harbor
See “Forward-Looking Statements.”
60
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and senior
management
Board of directors
The following table lists each of our current executive officers
and directors and their respective ages and positions as of the
date of this annual report. Unless otherwise stated, the business
address for our directors and executive officers is that of our
principal executive offices at 4 New Square, Bedfont Lakes,
Feltham, Middlesex, United Kingdom.
NAME
AGE
POSITION
INITIAL YEAR OF
APPOINTMENT
DIRECTOR OF
CLASS
Juan Carlos Torres Carretero
68
Chairman of the Board of Directors
2017
Class III (term expires in 2018)
Julián Díaz González
59
Deputy Chairman and Director
2017
Class III (term expires in 2018)
Joseph DiDomizio
47
Chief Executive Officer and Director
2017
Class III (term expires in 2018)
James Cohen
59
Director
2018
Class II (term expires in 2019)
Mary J. Steele Guilfoile
63
Director
2018
Class II(term expires in 2019
Heekyung (Jo) Min
59
Director
2018
Class I (term expires in 2020)
Joaquín Moya-Angeler Cabrera
68
Director
2018
Class I (term expires in 2020)
James E. Skinner
64
Director
2018
Class II (term expires in 2019)
Eugenia M. Ulasewicz
64
Director
2018
Class I (term expires in 2020
Adrian Bartella
42
Chief Financial Officer
2017
–
Roger Fordyce
62
Executive Vice President and Chief Operating Officer
2017
–
Brian Quinn
59
Executive Vice President and Chief Operating Officer
2017
–
Hope Remoundos
63
Executive Vice President and Chief Marketing Officer
2017
–
Michael Mullaney
51
Executive Vice President, Corporate Strategy & Business
Development
2017
–
Richard Yockelson
67
Senior Vice President, People & Administration
2017
–
Michael Levy
48
Senior Vice President and Chief Merchandising Officer
2017
–
The following is a brief biography of each of our executive
officers and directors:
Juan Carlos Torres Carretero is
the Chairman of the board of directors of the Company. He was
appointed to our board of directors on September 15, 2017, and has
served as the Chairman of Dufry AG since 2003. Mr. Torres Carretero
was a Partner at Advent International in Madrid from 1991 to 1995,
and served as Managing Director and Senior Partner in charge of
Advent International Corporation’s investment activities in
Latin America from 1995 to 2016. He holds a MS in physics from
Universidad Complutense de Madrid and a MS in management from
MIT’s Sloan School of Management. Mr. Torres Carretero also
serves on the board of directors of TCP Participações
S.A. and Moncler S.p.A.
Julián Díaz González is the Deputy Chairman of the board of directors
of the Company. He was appointed to our board of directors on
September 15, 2017, and has served as a board member and the Chief
Executive Officer of Dufry AG since 2004. Mr. Díaz
González held various managerial and business positions at
Aeroboutiques de Mexico, S.A. de C.V. and Deor, S.A. de C.V. from
1997 to 2000, and was General Manager of Latinoamericana DutyFree,
S.A. de C.V. from 2000 to 2003. He holds a degree in business
administration from Universidad Pontificia Comillas I.C.A.D.E., de
Madrid. Mr. Díaz González also serves on the board of
directors of Distribuidora Internacional de Alimentacion, S.A.
(DIA).
61
Joseph DiDomizio is the Chief
Executive Officer and a Director of the Company. He was appointed
to our board of directors on August 3, 2017, and serves as a member
of the Divisional Executive Committee of Dufry AG. He has served in
a variety of roles at Hudson Group over the past 25 years,
including as Retail Operations Manager in 1992, Director of
Business in 1994, Vice President of Business Development in 1996,
Chief Operating Officer in 2003, and Chief Executive Officer since
2008. He received a bachelor of science in marketing from the
University of Bridgeport in 1992. Mr. DiDomizio also serves on the
National Board of Directors for Communities in
Schools.
James S. Cohen is a Director of
the Company. Mr. Cohen served as a member of the board of directors
of Dufry AG from 2009 to 2016. He has held various positions at
Hudson Media, Inc. since 1980, where he has been the Chief
Executive Officer and President since 1994. In addition, Mr. Cohen
is the Chairman and Chief Executive Officer of Hudson Capital
Properties, an owner and developer of multi-family rental
properties located predominantly in the Southeastern and Midwestern
United States, and serves on the board of directors of COMAG
Marketing Group, LLC. Mr. Cohen holds a bachelor’s degree in
economics from the Wharton School of the University of
Pennsylvania.
Mary J. Steele Guilfoile is a
Director of the Company. Ms. Guilfoile is currently Chairman of MG
Advisors, Inc., a privately owned financial services merger and
acquisitions advisory and consulting firm, and is a Partner of The
Beacon Group, LP, a private investment group. Ms. Guilfoile served
as Executive Vice President and Corporate Treasurer at JPMorgan
Chase & Co. and as Chief Administrative Officer of its
investment bank from 2000 through 2002, and previously served as a
Partner, CFO and COO of The Beacon Group, LLC, a private equity,
strategic advisory and wealth management partnership, from 1996
through 2000. She has been a member of the boards of directors of
C.H. Robinson Worldwide, Inc. since 2012, currently serving as a
member of the audit committee, The Interpublic Group of Companies,
Inc. since 2007, currently serving as a member of the audit
committee and the corporate governance committee and Valley
National Bancorp since 2003. Ms. Guilfoile holds a bachelor’s
degree in accounting from Boston College Carroll School of
Management and a master’s degree in business administration
from Columbia Business School, and is a certified public
accountant.
Heekyung (Jo) Min is a Director
of the Company. Ms. Min has been a member of the Dufry AG board of
directors since 2016, and has been serving as Executive Vice
President at CJ Cheiljedang Corporation, focusing on Corporate
Social Responsibility and Sustainability, for a publicly-listed
Korean conglomerate since 2011. Ms. Min previously served as
Director General of Incheon Free Economic Zone in Korea from 2007
to 2010, as Country Advisor of Global Resolutions in Korea in 2006
and as Executive Vice President of Prudential Investment and
Securities Co., Korea from 2004 to 2005. Ms. Min holds an
undergraduate degree from Seoul National University and a
master’s degree in business administration from Columbia
Business School. Ms. Min is a member of the Board of Directors of
CJ Welfare Foundation and a member of Honorary Advisory Board of
Asia New Zealand Foundation.
Joaquín Moya-Angeler Cabrera is a Director of the Company. Mr. Moya-Angeler
Cabrera has served as member of the board of directors of Redsa
S.A. since 1997, Hildebrando since 2003, La Quinta Real Estate
since 2003, Inmoan since 1989, Avalon Private Equity since 1999 and
Corporación Tecnológica Andalucia since 2005. Mr.
Moya-Angeler Cabrera is currently a member of the board of
directors of La Quinta Group (chairman), Palamon Capital Partners,
Board of Trustees University of Almeria (chairman), Fundación
Mediterránea (chairman), Redsa S.A., Inmoan SL, Avalon Private
Equity, Spanish Association of Universities Governing Bodies
(chairman) and Corporation Group Leche Pascual (Vice Chairman). Mr.
Moya-Angeler Cabrera holds a master’s degree in Mathematics
from the University of Madrid, a degree in economics and
forecasting from the London School of Economics and Political
Science and an MS in management from MIT’s Sloan School of
Management.
James E. Skinner is a Director
of the Company. Mr. Skinner
served as Vice Chairman of The Neiman Marcus Group LLC from July
2015 until his retirement in February 2016. Mr. Skinner previously held a variety of positions at
The Neiman Marcus Group LLC from 2001, including Executive Vice
President, Chief Operating Officer and Chief Financial Officer. In
2000, Mr. Skinner served as Senior Vice President and Chief
Financial Officer of CapRock Communications Corporation. From 1991
to 2000, Mr. Skinner served in several positions with CompUSA Inc.,
including Executive Vice President and Chief Financial Officer
beginning in 1994. Mr. Skinner also served as a partner with Ernst
& Young LLP from 1987 until 1991. Mr. Skinner has served as a
member of the board of directors of Fossil Group, Inc. since 2007
and Ares Commercial Real Estate Corporation since 2016. Mr. Skinner
holds a bachelor’s degree in business administration and
accounting from Texas Tech University and is a certified public
accountant in Texas.
Eugenia M.
Ulasewicz is a Director of the Company. Ms. Ulasewicz most
recently served as President of the Americas division for
Burberry Ltd. from 1998 to
2013. She has been a member of the boards of directors of Bunzl PLC
since 2011, Signet Jewelers Ltd. since 2013 and Vince Holding
Corporation since 2014. Ms. Ulasewicz holds a bachelor’s
degree from the University of Massachusetts, Amherst.
Adrian Bartella is the Chief
Financial Officer. Mr. Bartella has over 12 years of international
finance experience. He joined Dufry AG in 2005 and has served in
various positions in its Finance, Mergers and Acquisitions and
Treasury before being named Global Head of Investment Control,
Mergers and Acquisitions in 2010. He has served as Chief Financial
Officer of Hudson Group since 2012. Mr. Bartella holds a degree in
business administration from the European University Viadrina in
Frankfurt, Germany.
Roger Fordyce is an Executive
Vice President and Chief Operating Officer. He is responsible for
the day-to-day general management of the company. Mr. Fordyce
served as Senior Vice President of Operations at Hudson Group from
1996 to 2008. Previously, he was Vice President of Operations from
1992 to 1996. Prior to that, he served as District Manager
overseeing operations in LaGuardia, Penn Station and Grand Central
Station, which were acquired by Hudson Group in 1990. Prior to
joining Hudson Group in 1988, Mr. Fordyce held positions as manager
at Dobbs/Aeroplex, WH Smith, and Greenman Bros. Mr. Fordyce
received a bachelor of arts in psychology from SUNY Stony Brook in
1977.
62
Brian Quinn is an Executive
Vice President and Chief Operating Officer. He is responsible for
the day-to-day general management of the company. Mr. Quinn was
Vice President of Operations at Hudson Group from 1992 to 1996.
Prior to that, he was General Manager of Hudson Group’s
LaGuardia Airport operations. Prior to joining Hudson Group in
1991, Mr. Quinn held positions as Regional Vice President at the
Rite-Aid Corporation, Regional Vice President at Faber Coe &
Gregg, and General Manager of WH Smith New York City operations.
Mr. Quinn attended St. John’s University, majoring in
political science.
Hope Remoundos is an Executive
Vice President and the Chief Marketing Officer. Ms. Remoundos
served as Senior Vice President, Sales and Marketing at Hudson
Group from 2000 to 2016, and held positions as Director and Vice
President in Sales and Marketing from 1992 to 2000. Prior to
joining Hudson Group in 1992, Ms. Remoundos worked for over 20
years in general management, circulation and consulting roles
within the publishing and advertising industry. She served as a
consultant with McNamee Consulting, and was General Manager and
Circulation Manager for Egg Magazine (a division of Forbes) for
three years. She was also associated with Select Magazines (five
years), Curtis Circulation (three years), International Musician
& Recording World, and Book Digest. Ms. Remoundos graduated
with honors from Fairleigh Dickinson University in 1976, receiving
a bachelor of science in marketing.
Michael Mullaney is the
Executive Vice President, Corporate Strategy & Business
Development. Prior to joining Hudson Group in 2004, Mr. Mullaney
served as Manager in Commercial and Business Development for the
Cincinnati/Northern Kentucky International Airport. Mr. Mullaney
was previously a senior consultant with Aviation Planning
Associates and TransPlan, and a member of the Florida Department of
Transportation’s Multimodal System Planning Bureau. Mr.
Mullaney received a bachelor of science in aviation
management/flight technology from Florida Institute of Technology
in 1988.
Richard Yockelson is the Senior
Vice President, People & Administration, overseeing Human
Resources and Payroll. Prior to joining Hudson Group in this role
in 2005, Mr. Yockelson was Vice President of Human Resources for
Party City Corporation for eight years. He also served as Director
of Human Resources or Personnel Director for NBO Clothing,
Workbench Furniture, Abraham & Straus (Federated Department
Stores), Linens ‘N Things, Gimbel’s and
Korvette’s Department Stores. Mr. Yockelson received a
bachelor of business administration in marketing from Baruch
College in 1974.
Michael Levy is a Senior Vice
President and Chief Merchandising Officer. Prior to Mr. Levy
joining Hudson Group in this role in 2008, he served as Vice
President and Divisional Merchandise Manager of Saks Fifth Avenue
from 2005 to 2008. Prior to that, he held positions as Vice
President of Merchandise Planning and Buyer for Men’s
Designer Clothing. Mr. Levy also held roles in merchandise buying
and planning at Brooks Brothers, Polo Ralph Lauren Factory Stores,
and Lord & Taylor. Mr. Levy received a bachelor of arts in
geriatric psychology from Syracuse University in 1991.
Board of Directors
Our bye-laws provide that our board of directors shall consist of
nine directors. We have nine directors, three of whom are
independent directors, on our board of directors. A director may be
removed by the shareholders, in accordance with the Company’s
bye-laws. See “Item 10. Additional Information
– B. Memorandum of association and bye-laws.” Our
board is divided into three classes that are, as nearly as
possible, of equal size. Each class of directors is elected for a
three-year term of office, but the terms are staggered so that the
term of only one class of directors expires at each annual general
meeting.
Our board of directors established an audit committee and a
nomination and remuneration committee prior to the consummation of
our initial public offering.
63
B. Compensation
The
compensation for each member of our executive management is
comprised of the following elements: base salary, bonus,
contractual benefits, and pension contributions. Total amount of
compensation paid and benefits in kind provided to our executive
management for the fiscal year 2017 was $11.2 million. We do not currently
maintain any bonus or profit-sharing plan for the benefit of the
members of our executive management; however, certain members of
our executive management are eligible to receive annual bonuses
pursuant to the terms of their service agreements. No amount was
set aside or accrued by us to provide pension, retirement or
similar benefits to our executive management employees with respect
to the fiscal year 2017. We did not pay any compensation to our
non-employee directors in 2017.
Changes to our remuneration structure following the consummation of
our initial public offering
New equity incentive award plan
Prior to the consummation of our initial public offering, we
adopted an Equity Incentive Award Plan (the “PSU
Plan”). The principal purpose of the PSU Plan is to attract,
retain and motivate selected members of senior management through
the granting of share-based compensation awards. The PSU Plan is
similar to that currently used by Dufry to issue equity awards to
certain members of our senior management. The PSU Plan provides for
the issuance of performance share units (“PSUs”) to
eligible members of senior management, as determined by our board
of directors. Such PSUs represent the right to receive, free of
charge, a certain number of our Class A common shares should the
performance targets identified as of the date of grant be met by
the Company as of the vesting date. The vesting date will be three
years from the date of grant. We did not grant any awards pursuant
to the PSU Plan in 2017. Subject to the discretion of our board of
directors, we expect that the first awards will be granted pursuant
to the PSU Plan in 2018 and be subject to a three-year vesting
period. As such, any awards granted in 2018 would not vest, if at
all, until 2021. Should any awards vest, we expect to settle such
awards by purchasing Class A common shares in the
market.
Certain members of our senior management were granted PSU awards
from Dufry in each of the years ended December 31, 2017, 2016 and
2015. Should these Dufry PSU awards vest, they will entitle the
holder to receive shares of Dufry.
New restricted stock unit award and equity compensation
plan
Following
our initial public offering, we approved a Restricted Stock Unit Award and
Equity Compensation Plan (the “Equity Compensation
Plan”). The principal purpose of the Equity Compensation Plan
is to retain and / or motivate selected
employees, employees of our affiliates and service providers
through the granting of share-based awards. The Equity Compensation
Plan provides for the issuance of restricted stock units
(“RSUs”) and other share-based awards to eligible
employees, employees of affiliates and service providers, as
determined by our board of directors. RSUs granted under the Equity
Compensation Plan will represent the right to receive, free of
charge, a certain number of our Class A common shares. Subject to
the discretion of our board of directors, we expect that the first
awards would be granted pursuant to the Equity Compensation Plan in
2018 in the form of RSUs that would be subject to a two-year
vesting period. As such, any awards granted in 2018 would not vest,
if at all, until 2020, unless there were an earlier qualifying
termination of employment. Upon vesting, we expect to settle such
awards by purchasing Class A common shares in the
market.
C. Board practices
Audit committee
The
audit committee, which consists of Ms. Ulasewicz, Mr. Skinner and
Ms. Guilfoile, assists the board in overseeing our accounting and
financial reporting processes and the audits of our financial
statements. In addition, the audit committee is directly
responsible for the appointment, compensation, retention and
oversight of the work of our independent registered public
accounting firm. The audit committee is also be responsible for
reviewing and determining whether to approve certain transactions
with related parties. See “Item 7. Major Shareholders and
Related Party Transactions – B. Related party transactions
– Related person
transaction policy.” The board of directors has determined
that each of Ms. Guilfoile, Mr. Skinner and Ms. Ulasewicz qualifies
as an “audit committee financial expert,” as such term
is defined in the rules of the SEC, and that each of Ms. Guilfoile,
Mr. Skinner and Ms. Ulasewicz is independent, as independence is
defined under the rules of the SEC and NYSE applicable to foreign
private issuers. Ms. Guilfoile
was appointed to act as chairman of our audit
committee.
64
Nomination and remuneration committee
The nomination and remuneration committee, which consists
of Mr. Torres Carretero, Mr. Díaz González and Mr.
Cohen, assists the board in overseeing the long-term planning of
appropriate appointments to the position of Chief Executive
Officer, as well as establishing criteria for the selection of
candidates for executive officer positions, including the position
of Chief Executive Officer, and reviewing candidates to fill
vacancies for executive officer positions. In addition, the
nomination and remuneration committee identifies, reviews and
approves corporate goals and objectives relevant to the
compensation of the Chief Executive Officer and other executive
officers, evaluate executive officers’ performance in light
of such goals and objectives and determine each executive
officer’s compensation based on such evaluation and will
determine any long-term incentive component of each executive
officer’s compensation. Mr. Cohen was appointed to act as
chairman of our nomination and remuneration committee.
Code of business conduct and ethics
Prior
to the consummation of our initial public offering, we adopted a
code of business conduct and ethics that applies to all of our
employees, officers and directors, including those officers
responsible for financial reporting. Our code of business conduct
and ethics addresses, among other things, competition and fair
dealing, conflicts of interest, financial matters and external
reporting, company funds and assets, confidentiality and corporate
opportunity requirements and the process for reporting violations
of the code of business conduct and ethics, employee misconduct,
conflicts of interest or other violations. Our code of business
conduct and ethics is attached as an
exhibit to this annual report.
Duties of directors
Under Bermuda common law, members of the board of directors of a
Bermuda company owe a fiduciary duty to the company to act in good
faith in their dealings with or on behalf of the company and
exercise their powers and fulfill the duties of their office
honestly. This duty includes the following essential
elements:
–
a
duty to act in good faith in the best interests of the
company;
–
a
duty not to make a personal profit from opportunities that arise
from the office of director;
–
a
duty to avoid conflicts of interest; and
–
a
duty to exercise powers for the purpose for which such powers were
intended.
The Companies Act imposes a duty on directors of a Bermuda company
to act honestly and in good faith with a view to the best interests
of the company, and to exercise the care, diligence and skill that
a reasonably prudent person would exercise in comparable
circumstances. In addition, the Companies Act imposes various
duties on directors and officers of a company with respect to
certain matters of management and administration of the company.
Directors and officers generally owe fiduciary duties to the
company, and not to the company’s individual shareholders.
Our shareholders may not have a direct cause of action against our
directors.
D. Employees
We are
responsible for hiring, training and management of employees at
each of our retail locations. As of December 31, 2017, we employed 9,641 people,
including both full-time and part-time employees (as compared to 9,001 at December 31,2016). Of these employees, 8,147 were full-time employees
and 1,494 were part-time employees. As of December 31, 2017, 3,910 of our employees
were subject to collective
bargaining agreements.
65
E. Share ownership
As of March 8, 2018, members of our board of directors and our
senior management held as a group 43,700 of our Class A common
shares.
The following table shows the beneficial ownership of each member
of our board of directors and senior management as of March 8,2018.
Beneficial ownership is determined in accordance with the rules of
the SEC and includes voting or investment power with respect to the
securities. Class A common shares that may be acquired by an
individual or group within 60 days after the date of this annual
report, pursuant to the exercise of options, warrants or other
rights, are deemed to be outstanding for the purpose of computing
the percentage ownership of such individual or group, but are not
deemed to be outstanding for the purpose of computing the
percentage ownership of any other person shown in the
table.
Except as indicated in footnotes to this table, we believe that the
shareholders named in this table have sole voting and investment
power with respect to all common shares shown to be beneficially
owned by them, based on information provided to us by such
shareholders. The address for each director and executive officer
listed is 4 New Square, Bedfont Lakes, Feltham, Middlesex, United
Kingdom.
SHARES BENEFICIALLY
OWNED
NAME OF BENEFICIAL
OWNER
CLASS A COMMON
SHARES
%
CLASS B COMMON
SHARES
%
PERCENTAGE
OF TOTAL VOTING POWER1
Executive
officers and directors:
Juan
Carlos Torres Carretero
–
–
–
–
–
Julián
Díaz González
–
–
–
–
–
Joseph
DiDomizio
*
*
–
–
*
Adrian
Bartella
*
*
–
–
*
James
Cohen
–
–
–
–
–
Mary
J. Steele Guilfoile
–
–
–
–
–
Heekyung
(Jo) Min
*
*
–
–
*
Joaquín
Moya-Angeler Cabrera
–
–
–
–
–
James
E. Skinner
*
*
–
–
*
Eugenia
M. Ulasewicz
*
*
–
–
*
Roger
Fordyce
*
*
–
–
*
Brian
Quinn
*
*
–
–
*
Hope
Remoundos
*
*
–
–
*
Michael
Mullaney
–
–
–
–
–
Richard
Yockelson
*
*
–
–
*
Michael
Levy
–
–
–
–
–
*
Indicates ownership of less than
1 % of outstanding
Class A common shares and less than 1 % of the total voting power of
all outstanding common shares.
1
Percentage of total voting power represents
voting power with respect to all of our Class A and Class B common
shares, as a single class. The holders of our Class B common shares
are entitled to 10 votes per share, and holders of our Class A
common shares are entitled to one vote per share. For more
information about the voting rights of our Class A and Class B
common shares, see “Item 10. Additional Information
– B. Memorandum of
association and bye-laws – Common shares – Voting
rights.”
66
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY
TRANSACTIONS
A. Major shareholders
Beneficial ownership is determined in accordance with the rules of
the SEC and includes voting or investment power with respect to the
securities. Class A common shares that may be acquired by an
individual or group within 60 days after the date of this annual
report pursuant to the exercise of options, warrants or other
rights, are deemed to be outstanding for the purpose of computing
the percentage ownership of such individual or group, but are not
deemed to be outstanding for the purpose of computing the
percentage ownership of any other person shown in the
table.
Except as indicated in footnotes to this table, we believe that the
shareholders named in this table have sole voting and investment
power with respect to all common shares shown to be beneficially
owned by them, based on information provided to us by such
shareholders. The address for Dufry is Brunngässlein 12, CH
– 4010 Basel, Switzerland.
Except as indicated in footnotes to this table, the following table
presents the beneficial ownership of our common shares as of March8, 2018:
SHARES BENEFICIALLY
OWNED
NAME OF BENEFICIAL
OWNER
CLASS A COMMON
SHARES
%
CLASS B COMMON
SHARES
%
PERCENTAGE OF TOTAL
VOTING
POWER 1
Dufry AG 2
–
–
53,093,315
100.00
93.1
Norges Bank (The
Central Bank of Norway) 3
2,060,000
5.2
–
–
0.4
Citadel
Entities 4
2,443,222
6.2
–
–
0.4
Point72
Entities 5
1,976,624
5.0
–
–
0.3
1
Percentage of total voting power represents
voting power with respect to all of our Class A and Class B common
shares, as a single class. The holders of our Class B common shares
are entitled to 10 votes per share, and holders of our Class A
common shares are entitled to one vote per share. For more
information about the voting rights of our Class A and Class B
common shares, see “Item 10. Additional Information - B.
Memorandum of association and bye-laws - Common shares - Voting
rights.”
2
Represents Class B common shares held by
Dufry International AG. For additional information relating to our
controlling shareholder, see "Item 10. Additional Information - B.
Memorandum of association and bye-laws" and "Item 3. Key
Information - D. Risk factors". The two-class structure of our
common shares has the effect of concentrating voting control with
Dufry and its affiliates. Because of its significant share
ownership, Dufry exerts control over us, including with respect to
our business, policies and other significant corporate decisions.
This limits or precludes your ability to influence corporate
matters, including the election of directors, amendments to our
organizational documents and any merger, amalgamation, sale of all
or substantially all of our assets or other major corporate
transaction requiring shareholder
approval.
3
As reported on Form 13G filed with the SEC
on February 2, 2018. The address for Norges Bank is Bankplassen 2,
PO Box 1179 Sentrum, NO 0107 Oslo,
Norway.
4
As reported on Form 13G filed with the SEC
on February 8, 2018, consists of Class A common shares owned by
Citadel Multi-Strategy Equities Master Fund Ltd., a Cayman Islands
limited company (“CM”), and Citadel Global Equities
Master Fund Ltd., a Cayman Islands limited company
(“CG”). Citadel Advisors LLC (“Citadel
Advisors”) is the portfolio manager for CM and CG. Citadel
Advisors Holdings LP (“CAH”) is the sole member of
Citadel Advisors. Citadel GP LLC (“CGP”) is the general
partner of CAH. Mr. Kenneth Griffin is the President and Chief
Executive Officer of, and owns a controlling interest in, CGP. Each
of Citadel Advisors, CAH, CGP and Mr. Griffin may be deemed to
beneficially own 2,443,222 Class A common shares. The address for
each of CM, CG, Citadel Advisors, CAH and Mr. Griffin is 131 S.
Dearborn Street, 32nd Floor, Chicago, Illinois60603.
5
As reported on Form 13G filed with the SEC
on February 8, 2018, consists of Class A common shares beneficially
owned by (i) Point72 Asset Management, L.P. (“Point72 Asset
Management”); (ii) Point72 Capital Advisors, Inc.
(“Point72 Capital Advisors Inc.”); (iii) Cubist
Systematic Strategies, LLC (“Cubist Systematic
Strategies”); (iv) Point72 Asia (Hong Kong) Limited
(“Point72 Asia (Hong Kong)”); (v) Point72 Europe
(London) LLP (“Point72 Europe (London)”); and (vi)
Steven A. Cohen (“Mr. Cohen”). Point72 Asset
Management, Point72 Capital Advisors Inc., Cubist Systematic
Strategies, Point72 Asia (Hong Kong), Point72 Europe (London), and
Mr. Cohen own directly no Class A common shares. Pursuant to an
investment management agreement, Point72 Asset Management maintains
investment and voting power with respect to the securities held by
certain investment funds it manages. Point72 Capital Advisors Inc.
is the general partner of Point72 Asset Management. Pursuant to an
investment management agreement, Cubist Systematic Strategies
maintains investment and voting power with respect to the
securities held by certain investment funds it manages. Pursuant to
an investment management agreement, Point72 Asia (Hong Kong)
maintains investment and voting power with respect to the
securities held by certain investment funds it manages. Pursuant to
an investment management agreement, Point72 Europe (London)
maintains investment and voting power with respect to the
securities held by certain investment funds it manages. Mr. Cohen
controls each of Point72 Asset Management, Point72 Capital Advisors
Inc., Cubist Systematic Strategies, Point72 Asia (Hong Kong), and
Point72 Europe (London). By reason of the provisions of Rule 13d-3
of the Securities Exchange Act of 1934, as amended, each of (i)
Point72 Asset Management, Point72 Capital Advisors Inc., and Mr.
Cohen may be deemed to beneficially own 1,875,000 Class A common
shares (constituting approximately 4.8% of the Class A common
shares outstanding); (ii) Cubist Systematic Strategies and Mr.
Cohen may be deemed to beneficially own 200 Class A common shares
(constituting less than 0.1% of the Class A common shares
outstanding); (iii) Point72 Asia (Hong Kong) and Mr. Cohen may be
deemed to beneficially own 51,424 Class A common shares
(constituting approximately 0.1% of the Class A common shares
outstanding); and (iv) Point72 Europe (London) and Mr. Cohen may be
deemed to beneficially own 50,000 Class A common shares
(constituting approximately 0.1% of the Class A common shares
outstanding). Each of Point72 Asset Management, Point72 Capital
Advisors Inc., Cubist Systematic Strategies, Point72 Asia (Hong
Kong), Point72 Europe (London), and Mr. Cohen disclaims beneficial
ownership of any of the securities covered by this statement. The
address of the principal business office of (i) Point72 Asset
Management, Point72 Capital Advisors Inc., and Mr. Cohen is 72
Cummings Point Road, Stamford, CT06902; (ii) Cubist Systematic
Strategies is 330 Madison Avenue, New York, NY10173; (iii) Point72
Asia (Hong Kong) is 17th Floor, York House, The Landmark, 15
Queen’s Road Central, Hong Kong; and (iv) Point72 Europe
(London) is 8 St. James’s Square, London, SW1Y 4JU, United
Kingdom.
As of
March 8, 2018, we had 2
shareholders of record. One record holder, CEDE & CO., a
nominee of The Depository Trust Company, was a resident of the
United States, which held an aggregate of 39,417,765 of our Class A
common shares, representing approximately 42.6 % of our outstanding common shares.
Since some of the shares are held by nominees, the number of
shareholders may not be representative of the number of beneficial
owners.
B. Related party transactions
Transactions with Dufry
Supply
Dufry
is one of our largest suppliers of products. In particular, Dufry
is the largest supplier of products for our duty free operations,
including liquors and perfumes. For the years ended
December 31, 2017, 2016,
and 2015, $67.4 million,
$64.5 million and
$46.3 million,
respectively, of cost of goods sold was attributable to purchases
of products from Dufry. We expect Dufry to continue to supply us
with products as contemplated by the Master Relationship Agreement
entered into in connection with our initial public offering. See
“– New agreements
with Dufry – Master
relationship agreement.”
67
Franchise and other services
We have
historically paid a franchise fee to Dufry to license brands owned
by Dufry or its subsidiaries, including the Dufry, Hudson, Nuance
and World Duty Free brands, and to receive ancillary franchise
services from Dufry including centralized support services, such as
treasury, internal audit and other similar services. We expect
Dufry or its subsidiaries to continue to license these brands to us
and provide us with ancillary franchise services pursuant to the
terms of the agreements entered
into in connection with our initial public offering. See
“– New agreements
with Dufry – Franchise
agreements” and “– New agreements with Dufry
– Trademark license
agreement.”
We have
historically received a fee from Dufry for our provision of
consultation services to Dufry to assist Dufry in store concept and
design, primarily for duty-paid stores outside the continental
United States and Canada and in connection with the development,
enhancement, maintenance, protection and exploitation of the Hudson
brand. We expect to continue to provide Dufry with consultation
services pursuant to the terms of new franchise agreements, all as
contemplated by the Master Relationship Agreement entered into in
connection with our initial public offering. See “New
agreements with Dufry –
Master relationship agreement”.
We
recorded $50.6 million,
$50.1 million and
$44.2 million in net
expenses for all such services, respectively, for the years ended
December 31, 2017, 2016
and 2015.
Treasury operations
We have
historically been an integral part of Dufry’s global treasury
and cash management operations and we expect to continue to be an
integral part of such operations. We also participate in Dufry
Group’s cash pooling arrangement. See “Item 5.
Operating and Financial Review and Prospects – B. Liquidity and capital resources
– Dufry group cash
pooling.”
At
December 31, 2017, 2016
and 2015, we owed $520.4 million, $475.2 million and $483.1 million, respectively, to Dufry
pursuant to long-term financial loans (excluding current portion).
We were charged $ℵ29.5 million, $29.1 million and $24.8 million in each of the years ended
December 31, 2017, 2016
and 2015, respectively, in interest to Dufry. The weighted-average
annual interest rate on our loans from Dufry for the years ended
December 31, 2017, 2016
and 2015 was 5.7 %,
5.9 % and
5.9 %, respectively per
year. In connection with the Reorganization Transactions, on
August 1, 2017 we entered
into an additional loan of CAD$195.0 million with Dufry. We repaid
CAD$45.0 million on
August 1, 2017. Interest
on this loan is 3.8900 %
for CAD$65.0 million, with
the remaining CAD$85.0 million bearing no interest. For
further details, see “Item 5. Operating and Financial Review
and Prospects – B.
Liquidity and capital resources – Indebtedness.”
We
expect to continue to borrow from Dufry, engage in cash pooling
with other Dufry entities and receive other treasury services from
Dufry, in each case as contemplated by the Master Relationship
Agreement entered into in connection with our initial public
offering. See “–
New agreements with Dufry – Master relationship
agreement.”
New agreements with Dufry
In
connection with our initial public offering, we entered into a
series of new agreements with Dufry. Most importantly, we entered
into the following agreements:
Master relationship agreement
This
agreement governs the general commercial relationship between us
and other members of the Dufry Group. Recognizing our position as
an integral part of the Dufry Group, the agreement provides, among
other things, that:
–
we
will provide information concerning our business to Dufry upon
request;
–
subject
to applicable law, we will not publish press releases concerning
our business, results of operations or financial condition,
reports, notices, proxy or information statements, registration
statements or prospectuses without Dufry’s
consent;
–
we
will cooperate with Dufry with respect to various matters,
including the preparation of its public reports;
–
unless
we obtain Dufry’s consent, we will borrow funds only pursuant
to facilities provided by members of the Dufry Group, and any such
borrowing will be on substantially the same terms as our
outstanding borrowings from members of the Dufry Group at the date
of our initial public offering, provided that the principal amount,
interest rate (which may be fixed or floating) and term of future
borrowings may vary from facility to facility, and the interest
rate that Dufry charges us will correspond to Dufry’s
weighted average cost of debt funding in the currency of our
borrowings at the time that we borrow or refinance any such debt
or, if a floating rate of interest is applied, Dufry’s
weighted average cost of debt funding at each interest reset date,
in each case plus an administration fee to reflect the cost to
Dufry of providing the service;
68
–
unless
we obtain Dufry’s consent, we will execute foreign exchange
transactions only through members of the Dufry Group, and if Dufry
executes such foreign exchange transactions for us, it may execute
them either with a third person on our behalf at the best quoted
price or directly with us at the best price quoted by a third
person, in each case as reasonably determined by Dufry, plus an
administration fee to reflect the cost to Dufry of providing the
service;
–
Dufry
may direct us to deposit cash in any Dufry Group cash pooling
arrangement up to the aggregate principal amount of borrowings by
us from Dufry then outstanding, and such cash deposited by us may
be used to secure any credit positions in the cash pooling
arrangements, either of us or our subsidiaries, or other Dufry
Group members, and with Dufry’s consent, we may borrow from
any cash pool at the then-prevailing market rate applicable to
borrowings by similar borrowers from the bank operating the cash
pooling arrangement, as reasonably determined by Dufry, plus an
administration fee to reflect the cost to Dufry of providing the
service; the agreement also provides that in the event of the
insolvency, bankruptcy, receivership or other similar status of
Dufry, the amount of any borrowing by us from Dufry should be set
off against any amount deposited by us in any cash pooling
arrangement that is not returned to us;
–
at
Dufry’s option, we will purchase certain categories of
products for sale, either directly from Dufry or through a third
person with which Dufry has a supply arrangement, at prices to be
determined by Dufry in accordance with its transfer pricing policy
as then in effect for all members of the Dufry Group;
–
we
will do all things necessary to comply with Dufry Group’s
policies in effect from time to time;
–
we
will support the Dufry Group in its global sales and marketing
strategy and take any action requested by Dufry in furtherance
thereof that does not materially adversely affect us;
–
we
will use, apply and implement any information technology system,
application or software required by Dufry, and we will be
responsible to Dufry for the costs of any such system, application
or software, as well as any support services provided by Dufry, on
the basis of the cost to the Dufry Group (including the cost of
Dufry Group employees) for such product or service plus an
administration fee to reflect the cost to Dufry of providing the
service;
–
we
will reimburse the Dufry Group for all costs incurred by the Dufry
Group in connection with the granting and vesting of any awards to
our employees of the Company Group, either before or after our
initial public offering, pursuant to the Dufry PSU Plan;
and
–
at
Dufry’s option, we will participate in any insurance policy
or arrangement that Dufry effects for the members of the Dufry
Group, and we will be responsible for any costs (incurred by Dufry
or otherwise) associated with effecting or maintaining such policy
or arrangement, as determined by Dufry in its sole
discretion.
The agreement will terminate on the date when there are no issued
and outstanding Class B common shares. Also, Dufry may terminate
the agreement without cause upon six months’ notice to us.
The agreement is governed by the Laws of Switzerland and if any
dispute is not settled by mediation, it will be finally resolved by
arbitration in accordance with the Swiss Rules of International
Arbitration of the Swiss Chambers’ Arbitration
Institution.
Franchise agreements
As contemplated by the Master Relationship Agreement certain of our
subsidiaries will maintain various franchise agreements with the
Dufry Group. The franchise agreements provide us with access
to:
–
franchise
intellectual property (such as trademarks), including guidance and
training on its use;
–
franchise
business concepts;
–
franchise
global distribution center tools;
–
franchise
supporting knowhow, such as marketing and promotion knowhow and
training; and
–
ancillary
franchise services, such as centralized support services including
treasury, internal audit, legal, tax and other services to support
the franchise.
69
In exchange for these access rights and support services, we pay
members of the Dufry Group franchise fees, which will vary
depending on the trademark under which sales were made. We pay
franchise fees equal to:
–
3%
of net sales for duty-free sales under the Dufry, Nuance and World
Duty Free trademarks;
–
2%
of net sales for duty-free sales not under any such trademark;
and
–
0.35%
of net sales for duty-paid sales.
Each franchise agreement may be terminated by Dufry without cause
upon six months’ notice. Upon failure to cure a default under
a franchise agreement within ten days of receiving notice of such
default, the non-defaulting party may terminate the agreement. The
agreements will also terminate on the date that the Master
Relationship Agreement terminates. The franchise agreements are
governed by Swiss law. The other franchise agreements are on
substantially the same terms as the Hudson brand franchise
agreement.
Trademark license agreement
Separate to the franchise agreements, Dufry has granted us a
seven-year license to use the Hudson brand and trademark within the
continental United States, Hawaii and Canada. We will not pay Dufry
any fee for such license.
Upon failure to cure a default under the trademark license
agreement within ten days of receiving notice of such default, the
non-defaulting party may terminate the agreement. The agreement
will also terminate on the date that the Master Relationship
Agreement terminates. The trademark license agreement is governed
by Swiss law.
In connection with our initial public offering, we have entered
into a registration rights agreement with Dufry International AG.
The registration rights agreement grants Dufry International AG and
its designees specified registration rights in connection with any
transfer of Class A common shares issuable to us or our affiliates
upon conversion of any Class B common shares. See “Item 10.
Additional Information – B. Memorandum of association
and bye-laws – Common shares –
Conversion.” As a result, Dufry International AG may
require us to use reasonable best efforts to effect the
registration under the Securities Act of our Class A common shares
that they or their affiliates own, in each case at our own expense.
The registration rights agreement also provides that we will
indemnify Dufry International AG in connection with the
registration of our Class A common shares.
Transactions with entities controlled by Mr. James
Cohen
During
the years ended December 31, 2017, 2016 and 2015, we paid
$20.7 million,
$20.6 million and
$23.5 million,
respectively, to Hudson News Distributors, LLC and Hudson RPM
Distributors, LLC, which are entities controlled by Mr. James
Cohen, for the supply of magazines and other periodicals. We do not
have a long-term distribution contract with these entities, but we
expect to continue purchasing magazines and other periodicals from
them. Mr. Cohen is the former controlling shareholder of our
business, is a current shareholder of Dufry and a member of a group
of shareholders that hold or control approximately 20 % of Dufry’s issued and
outstanding shares, and was a member of Dufry’s board of
directors from 2009 until April 2016. Mr. Cohen is invited to attend
meetings of Dufry’s board of directors as a guest of the
chairman from time to time.
We have
subleased to Hudson Media, Inc., a company controlled by Mr. Cohen
and his family, approximately 2,000 usable square feet, and provide
office services, at our offices in East Rutherford, New Jersey,
pursuant to an agreement entered into between Hudson Group
Holdings, Inc. and Hudson Media, Inc. prior to our acquisition by
Dufry. In connection therewith, Hudson Media, Inc. has paid
approximately $16,800 annually
in rent to us for each of the years ended December 31, 2017, 2016 and 2015. In
addition, Hudson Media, Inc. currently occupies an additional area
of approximately 2,000 usable square feet at no additional charge.
Pursuant to a termination agreement,
as amended, between the parties, Hudson Media, Inc. agreed
to vacate the space it occupies in our offices, but had not done so as of the date of this
annual report.
70
In addition, in connection with the sale of their interests in our
business, entities affiliated with Mr. Cohen entered into a
Trademark Co-Existence Agreement (the “TCEA”) with us
in 2008 (prior to Dufry’s acquisition of us later that year).
The TCEA granted us the exclusive ownership of certain trademarks
(Hudson News, Hudson Group, Hudson Booksellers, Hudson Group Retail
Specialists, Hudson, the “Retail Marks”), which we have
subsequently transferred to Dufry, and the entities affiliated with
Mr. Cohen exclusive ownership of certain other marks (Hudson News
Distributors, Hudson RPM Distributors, Magazine Distributors, the
“Wholesale Marks”). We may not use the Wholesale Marks
in connection with any distribution business, and the entities
affiliated with Mr. Cohen may not use the Wholesale Marks in
connection with any retail business. However, entities affiliated
with Mr. Cohen may use other names and marks containing the terms
“Hudson” or “Hudson News” in conjunction
with the word or words “distributors,”“distribution,”“wholesale” and / or other
words that clearly identify or reference the distribution business.
Each party also agreed not to apply for any related mark in the
other’s sphere of operations. The term of the TCEA is
indefinite and runs until terminated by mutual written
agreement.
Related person transaction policy
In connection with our initial public offering, we adopted a policy
regarding approval by the audit committee, subject to certain
exceptions, of certain transactions between us and a related person
(as defined below). Transactions subject to the policy include the
following transactions in which a related person has or will have a
direct or indirect material interest:
–
any
transaction or series of transactions with a related person that is
material to us or the related person, or
–
any
transactions that are unusual in their nature or conditions,
involving goods, services, or tangible or intangible assets, to
which we are a party.
For
purposes of the policy, “related person”
means:
–
any director or
executive officer of (i) the Company or (ii) an affiliated entity
of the Company (including directors and members of the Global
Executive Committee of Dufry and the Divisional Executive Committee
of Dufry);
–
any immediate
family member of a director or executive officer of (i) the Company
or (ii) an affiliated entity of the Company (including directors
and members of the Global Executive Committee of Dufry and the
Divisional Executive Committee of Dufry);
–
any nominee for
director of (i) the Company or (ii) an affiliated entity of the
Company (including Dufry) and the immediate family members of such
nominee;
–
a 10 % beneficial owner of the
Company’s voting securities or any immediate family member of
such owner; and
–
enterprises in
which a substantial interest in the voting power is owned, directly
or indirectly by a person described in any of immediately preceding
four bullet points or over which such a person is able to exercise
significant influence.
Arrangements with related parties existing at the date of our
initial public offering and new arrangements with related parties
that were entered into in connection with our initial public
offering, in each case (i) that were described in the prospectus
for our initial public offering, (ii) including any subsequent
amendment to any such arrangement that is not material to the
Company and (iii) any ancillary services provided in connection
therewith, will not require review, approval or ratification
pursuant to the policy.
C. Interests of experts and
counsel
Not applicable.
71
ITEM 8. FINANCIAL INFORMATION
A. Combined statements and other financial
information
Financial statements
See
“Item 18. Financial Statements,” which contains our
audited combined financial
statements prepared in accordance with IFRS as issued by IASB.
Legal proceedings
We have extensive operations, and are defendants in a number of
court, arbitration and administrative proceedings, and, in some
instances, are plaintiffs in similar proceedings. Actions,
including class action lawsuits, filed against us from time to time
include commercial, tort, customer, employment (such as wage and
hour and discrimination), tax, administrative, customs and other
claims, and the remedies sought in these claims can be for material
amounts.
Dividends and dividend policy
We do not currently intend to pay cash dividends on our common
shares in the foreseeable future. Any future determination to pay
cash dividends will be subject to the discretion of our board of
directors in accordance with applicable law and dependent on a
variety of factors including our financial condition, earnings,
results of operations, current and anticipated cash needs, plans
for growth, level of indebtedness, legal requirements, general
business conditions and other factors that the board of directors
deems relevant. Any payment of dividends will be at the discretion
of our board of directors and we cannot assure you that we will pay
any dividends to holders of our common shares, or as to the amount
of any such dividends if our board of directors determines to do
so.
Under Bermuda law, a company may not declare or pay a dividend if
there are reasonable grounds to believe that: (i) the company is,
or would after the payment be, unable to pay its liabilities as
they become due, or (ii) the realizable value of its assets would
thereby be less than its liabilities. Under our bye-laws, each
Class A and Class B common share will be entitled to dividends if,
as and when dividends are declared by our board of directors,
subject to any preferred dividend right of the holders of any
preference shares.
Any dividends we declare on our common shares will be in respect of
our Class A and Class B common shares, and will be distributed such
that a holder of one of our Class B common shares will receive the
same amount of the dividends that are received by a holder of one
of our Class A common shares. We will not declare any dividend with
respect to the Class A common shares without declaring a dividend
on the Class B common shares, and vice versa.
We are a holding company and have no material assets other than our
direct and indirect ownership of our operating subsidiaries. If we
were to distribute a dividend at some point in the future, we would
cause the operating subsidiaries to make distributions to us in an
amount sufficient to cover any such dividends to the extent
permitted by our subsidiaries’ financing agreements, if
any.
B. Significant changes
A discussion of the significant changes in our business can be
found under “Item 4. Information on the Company – B.
Business overview.”
ITEM 9. THE OFFER AND LISTING
A. Offering and listing details
Not applicable.
B. Plan of distribution
Not applicable.
72
C. Markets
On February 5, 2018, we completed our initial public offering and
listed our common shares on the New York Stock Exchange (the
“NYSE”).
Our common shares have been listed on the NYSE under the symbol
“HUD” since February 1, 2018.
The table below presents, for the periods indicated, the high and
low closing prices of our Class A common shares on the
NYSE.
The
following is a description of the material terms of our bye-laws
and memorandum of association which were effected in connection with the completion of our
initial public offering. The following description may not contain
all of the information that is important to you and we therefore
refer you to our bye-laws and memorandum of association, copies of
which are filed with the SEC as exhibits to the registration
statement filed in connection with our initial public
offering.
General
We are a Bermuda exempted company with limited liability. We are
registered with the Registrar of Companies in Bermuda under
registration number 52620. We were incorporated on May 30, 2017
under the name Hudson Ltd. Our registered office is located at 2
Church Street, Hamilton HM11, Bermuda. Our affairs are governed by
our memorandum of association and bye-laws and the Companies Act
1981 of Bermuda (the “Companies Act”).
The objects of our business are unrestricted, and the company has
the capacity of a natural person. We can therefore undertake
activities without restriction on our capacity.
A register of holders of the common shares is maintained by Conyers
Corporate Services (Bermuda) Limited in Bermuda, and a branch
register will be maintained in the United States by Computershare
Trust Company, N.A., who serves as branch registrar and transfer
agent. As of March 8, 2018, there were issued and outstanding
39,417,765 Class A common shares, par value $0.001 per share, and
53,093,315 Class B common shares, par value $0.001 per share. As of
March 8, 2018, our authorized share capital consisted of
2,000,000,000 Class A common shares, par value $0.001 per share,
1,000,000,000 Class B common shares, par value $0.001 per share,
and 100,000,000 undesignated preference shares, par value $0.001
per share.
Pursuant to our bye-laws, subject to any resolution of the
shareholders to the contrary, our board of directors is authorized
to issue any of our authorized but unissued shares. There are no
limitations on the right of non-Bermudians or non-residents of
Bermuda to hold or vote our shares.
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Common Shares
General
All of our issued and outstanding common shares are fully paid and
non-assessable. Certificates representing our issued and
outstanding common shares are generally not issued and legal title
to our issued shares is recorded in registered form in the register
of members. Our issued and outstanding common shares consist of
Class A and Class B common shares. Holders of Class A and Class B
common shares have the same rights other than with respect to
voting and conversion rights. Holders of our common shares have no
preemptive, redemption, conversion or sinking fund rights (except
as described below under the heading “
– Conversion”). If we issue any preference
shares, the rights, preferences and privileges of holders of our
Class A and Class B common shares will be subject to, and may be
adversely affected by, the rights of the holders of such preference
shares.
Dividends
The holders of our common shares will be entitled to such dividends
as may be declared by our board of directors, subject to the
Companies Act and our bye-laws. Dividends and other distributions
on issued and outstanding shares may be paid out of the funds of
the Company lawfully available for such purpose, subject to any
preference of any issued and outstanding preference shares.
Dividends and other distributions will be distributed among the
holders of our common shares on a pro rata basis.
Under Bermuda law, we may not declare or pay any dividends if there
are reasonable grounds for believing that (i) we are, or after the
payment of such dividends would be, unable to pay our liabilities
as they become due, or (ii) the realizable value of our assets
would thereby be less than our liabilities. There are no
restrictions on our ability to transfer funds (other than funds
denominated in Bermuda dollars) in and out of Bermuda or to pay
dividends to U.S. residents who are holders of our common
shares.
Voting Rights
Each Class A common share is entitled to one vote, and each Class B
common share is entitled to 10 votes, on all matters upon which the
shares are entitled to vote.
The quorum required for a general meeting of shareholders to
consider any resolution or take any action, including with respect
to any meeting convened to consider or adopt a resolution required
for an amalgamation or merger of the Company, is one or more
persons present and representing in person or by proxy at least 15%
of the votes eligible to be cast at any such general meeting,
provided that for so long as there are any Class B common shares
issued and outstanding, at least one holder of Class B common
shares shall be required to be present in person or by proxy to
constitute a quorum.
To be passed at a general meeting of the Company, a resolution
(including a resolution required for an amalgamation or merger of
the Company) requires the affirmative vote of at least a majority
of the votes cast at such meeting.
Subject to the Companies Act, at any general meeting of the Company
a resolution put to the vote of the meeting shall be voted upon in
such manner as the chairman of the meeting shall decide. The
chairman of the meeting shall direct the manner in which the
shareholders participating in such meeting may cast their votes. A
poll may be demanded by (i) the chairman of the meeting; (ii) at
least three shareholders present or voting by proxy or (iii) one or
more shareholders present or represented by proxy holding not less
than one-tenth of the total voting rights of the shareholders
holding all of the issued and outstanding Class A and Class B
common shares and any other shares of the Company or not less than
one-tenth of the aggregate sum paid up on all issued and
outstanding Class A and Class B common shares and any other shares
of the Company having the right to attend and vote.
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Conversion
Each Class B common share is convertible into one Class A common
share at any time at the option of the holder of such Class B
common share. Any Class B common shares that are converted into
Class A common shares may not be reissued. The disparate voting
rights of our Class B common shares will not change upon transfer
unless such Class B common shares are first converted into our
Class A common shares. Further, each Class B common share will
automatically convert into one Class A common share upon any
transfer thereof to a person or entity that is not an affiliate of
the holder of such Class B common shares. Further, all of our Class
B common shares will automatically convert into Class A common
shares upon the date when all holders of Class B common shares
together cease to hold Class B common shares representing, in the
aggregate, 10% or more of the total number of Class A and Class B
common shares issued and outstanding.
Variation of rights
As a matter of Bermuda law, the holders of one class of shares may
not vary the voting rights of such class of shares relative to
another class of shares, without the approval of the holders of
each other class of our voting shares then in issue. As such, if at
any time we have more than one class of shares, the rights
attaching to any class, unless otherwise provided for by the terms
of issue of the relevant class, may be varied either: (i) with the
consent in writing of the holders of a majority of the issued
shares of that class; or (ii) with the sanction of a resolution
passed by a majority of the votes cast at a general meeting of the
relevant class of shareholders at which a quorum consisting of
shareholders representing 10% of the issued shares of the relevant
class is present. In addition, as the rights attaching to any class
of shares are set forth in our bye-laws, a resolution of a general
meeting of the Company is required to be passed to amend the
bye-laws to vary such rights. For purposes of the Class A or Class
B common shares, the only rights specifically attaching to such
shares that may be varied as described in this paragraph are the
voting, dividend and liquidation rights.
Our bye-laws specify that the creation or issue of shares ranking
equally with existing shares will not, unless expressly provided by
the terms of issue of existing shares, vary the rights attached to
existing shares. In addition, the creation or issue of preference
shares ranking prior to common shares will not be deemed to vary
the rights attached to common shares or, subject to the terms of
any other series of preference shares, to vary the rights attached
to any other series of preference shares.
Further, our Class B common shares will automatically convert into
Class A common shares on the date when all holders of Class B
common shares together cease to hold Class B common shares
representing, in the aggregate, 10% or more of the total number of
Class A and Class B common shares issued and
outstanding.
Transfer of shares
Our board of directors may in its absolute discretion and without
assigning any reason refuse to register the transfer of a share
that is not fully paid. Our board of directors may also refuse to
recognize an instrument of transfer of a share unless it is
accompanied by the relevant share certificate and such other
evidence of the transferor’s right to make the transfer as
our board of directors shall reasonably require. Subject to these
restrictions, a holder of common shares may transfer the title to
all or any of its common shares by completing a form of transfer in
the form set out in our bye-laws (or as near thereto as
circumstances admit) or in such other common form as the board may
accept. The instrument of transfer must be signed by the transferor
and transferee, although in the case of a fully paid share our
board of directors may accept the instrument signed only by the
transferor.
Liquidation
In the event of our liquidation, dissolution or winding up, the
holders of our Class A and Class B common shares are entitled to
share equally and ratably in our assets, if any, remaining after
the payment of all of our debts and liabilities, subject to any
liquidation preference on any issued and outstanding preference
shares.
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Election and removal of directors
Our bye-laws provide that our board shall consist of nine
directors. Our board is divided into three classes that are, as
nearly as possible, of equal size. Each class of directors is
elected for a three-year term of office, but the terms are
staggered so that the term of only one class of directors expires
at each annual general meeting.
Our bye-laws provide that the number of shareholders necessary to
nominate a director is either (i) any number of shareholders
representing at least 5% of the votes eligible to be cast at any
general meeting of the Company by shareholders holding all of the
issued and outstanding Class A and Class B common shares and any
other shares of the Company having the right to vote; or (ii) not
less than 100 shareholders of the Company. Any such eligible group
of shareholders wishing to propose for election as a director
someone who is not an existing director or is not proposed by our
board must give notice of the intention to propose the person for
election. Such notice must be given to the secretary or the
chairman of the Company at any time between 1 January and 1 March
of the year the general meeting to vote on such proposal will be
held.
Our bye-laws provide that, at any time, a director may be removed
by either (i) an affirmative vote of at least a majority of the
votes cast at a general meeting of the Company; or (ii) the written
consent of any number of holders of common shares representing at
least a majority of the votes eligible to be cast at a general
meeting.
Proceedings of board of directors
Our bye-laws provide that our business is to be managed and
conducted by our board of directors. Bermuda law permits individual
and corporate directors and there is no requirement in our bye-laws
or Bermuda law that directors hold any of our shares.
The remuneration of our directors is determined by our board of
directors, and there is no requirement that a specified number or
percentage of “independent” directors must
approve any such determination. Our directors may also be paid all
travel, hotel and other expenses properly incurred by them in
connection with our business or their duties as
directors.
Provided a director discloses a direct or indirect interest in any
contract or arrangement with us as required by Bermuda law, such
director is entitled to vote in respect of any such contract or
arrangement in which he or she is interested unless he or she is
disqualified from voting by the chairman of the relevant board
meeting.
Indemnity of directors and officers
We have adopted provisions in our bye-laws that provide that we
shall indemnify our officers and directors in respect of their
actions and omissions, except in respect of their fraud or
dishonesty. Subject to Section 14 of the Securities Act, which
renders void any waiver of the provisions of the Securities Act,
our bye-laws provide that the shareholders waive all claims or
rights of action that they might have, individually or in right of
the company, against any of the company’s directors or
officers for any act or failure to act in the performance of such
director’s or officer’s duties, except in respect of
any fraud or dishonesty of such director or officer. Section 98A of
the Companies Act permits us to purchase and maintain insurance for
the benefit of any officer or director in respect of any loss or
liability attaching to him in respect of any negligence, default,
breach of duty or breach of trust, whether or not we may otherwise
indemnify such officer or director. We have purchased and maintain
a directors’ and officers’ liability policy for such a
purpose.
Corporate opportunities
Our bye-laws will provide that, to the fullest extent permitted by
applicable law, we, on our behalf and on behalf of our
subsidiaries, renounce any interest or expectancy in, or in being
offered an opportunity to participate in, any corporate
opportunities, that are from time to time presented to Dufry or any
of its officers, directors, employees, agents, shareholders,
members, partners, affiliates or subsidiaries (other than us and
our subsidiaries), even if the opportunity is one that we or our
subsidiaries might reasonably be deemed to have pursued or had the
ability or desire to pursue if granted the opportunity to do so.
Neither Dufry nor its officers, directors, employees, agents,
shareholders, members, partners, affiliates or subsidiaries will
generally be liable to us or any of our subsidiaries for breach of
any fiduciary or other duty, as a director or otherwise, by reason
of the fact that such person pursues or acquires such corporate
opportunity, directs such corporate opportunity to another person
or fails to present such corporate opportunity, or information
regarding such corporate opportunity, to us or our subsidiaries. In
the case of any such person who is a director or officer of the
Company and who is expressly offered such corporate opportunity in
writing solely in his or her capacity as a director or officer of
the Company, such director or officer shall be obligated to
communicate such opportunity to the Company. Existing and new
shareholders will be deemed to have notice of and to have consented
to the provisions of our bye-laws, including the corporate
opportunity policy.
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Preference shares
Pursuant to Bermuda law and our bye-laws, our board of directors
may establish by resolution one or more series of preference shares
in such number and with such designations, dividend rates, relative
voting rights, conversion or exchange rights, redemption rights,
liquidation rights and other relative participation, optional or
other special rights, qualifications, limitations or restrictions
as may be fixed by the board without any further shareholder
approval. Such rights, preferences, powers and limitations could
have the effect of discouraging an attempt to obtain control of the
Company.
Capitalization of profits and reserves
Pursuant to our bye-laws, our board of directors may (i) capitalize
any part of the amount of our share premium or other reserve
accounts or any amount credited to our profit and loss account or
otherwise available for distribution by applying such sum in paying
up unissued shares to be allotted as fully paid bonus shares pro
rata (except in connection with the conversion of shares) to the
shareholders; or (ii) capitalize any sum standing to the credit of
a reserve account or sums otherwise available for dividend or
distribution by paying up in full, partly paid or nil paid shares
of those shareholders who would have been entitled to such sums if
they were distributed by way of dividend or
distribution.
Meetings of shareholders
Under Bermuda law, a company is required to convene at least one
general meeting of shareholders each calendar year (the
“annual general meeting”). However, the shareholders
may by resolution waive this requirement, either for a specific
year or period of time, or indefinitely. When the requirement has
been so waived, any shareholder may, on notice to the company,
terminate the waiver, in which case an annual general meeting must
be called.
Bermuda law provides that a special general meeting of shareholders
may be called by the board of directors of a company and must be
called upon the request of shareholders holding not less than 10%
of the paid-up capital of the company carrying the right to vote at
general meetings. Bermuda law also requires that shareholders be
given at least five days’ advance notice of a general
meeting, but the accidental omission to give notice to any person
does not invalidate the proceedings at a meeting. Our bye-laws
provide that the chairman of the board or our board of directors
may convene an annual general meeting or a special general meeting.
Under our bye-laws, at least fourteen days’ notice of an
annual general meeting or a special general meeting must be given
to each shareholder entitled to vote at such meeting. This notice
requirement is subject to the ability to hold such meetings on
shorter notice if such notice is agreed: (i) in the case of an
annual general meeting by all of the shareholders entitled to
attend and vote at such meeting; or (ii) in the case of a special
general meeting by a majority in number of the shareholders
entitled to attend and vote at the meeting holding not less than
95% in nominal value of the shares entitled to vote at such
meeting.
The quorum required for a general meeting of shareholders to
consider any resolution or take any action, including with respect
to any meeting convened to consider or adopt a resolution required
for an amalgamation or merger of the Company, is one or more
persons present and representing in person or by proxy common
shares representing at least 15% of the votes eligible to be cast
at any such general meeting, provided that for so long as there are
any Class B common shares issued and outstanding, at least one
holder of Class B common shares shall be required to be present in
person or by proxy to constitute a quorum.
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Certain provisions of Bermuda law
We
have been designated by the Bermuda Monetary Authority as a
non-resident for Bermuda exchange control purposes. This
designation allows us to engage in transactions in currencies other
than the Bermuda dollar, and there are no restrictions on our
ability to transfer funds (other than funds denominated in Bermuda
dollars) in and out of Bermuda or to pay dividends to United States
residents who are holders of our common shares.
Consent under the Exchange Control Act 1972 (and its related
regulations) has been received from the Bermuda Monetary Authority
for the issue and transfer of our Class A common shares to and
between non-residents of Bermuda for exchange control purposes
provided our Class A common shares remain listed on an appointed
stock exchange, which includes the New York Stock Exchange.
Approvals or permissions given by the Bermuda Monetary Authority do
not constitute a guarantee by the Bermuda Monetary Authority as to
our performance or our creditworthiness. Accordingly, in giving
such consent or permissions, the Bermuda Monetary Authority shall
not be liable for the financial soundness, performance or default
of our business or for the correctness of any opinions or
statements expressed in this annual report. Certain issues and
transfers of common shares involving persons deemed resident in
Bermuda for exchange control purposes require the specific consent
of the Bermuda Monetary Authority.
In accordance with Bermuda law, share certificates are only issued
in the names of companies, partnerships or individuals. In the case
of a shareholder acting in a special capacity (for example as a
trustee), certificates may, at the request of the shareholder,
record the capacity in which the shareholder is acting.
Notwithstanding such recording of any special capacity, we are not
bound to investigate or see to the execution of any such trust. We
will take no notice of any trust applicable to any of our shares,
whether or not we have been notified of such trust.
Comparison of Bermuda Corporate Law and U.S. Corporate
Law
You should be aware that the Companies Act, which applies to us,
differs in certain material respects from laws generally applicable
to Delaware corporations and their stockholders. In order to
highlight these differences, set forth below is a summary of
certain significant provisions of the Companies Act (including
modifications adopted pursuant to our bye-laws) and Bermuda common
law applicable to us that differ in certain respects from
provisions of the General Corporation Law of the State of Delaware.
Because the following statements are summaries, they do not address
all aspects of Bermuda law that may be relevant to us and you or
all aspects of Delaware law that may differ from Bermuda
law.
Duties of directors
Our bye-laws provide that our business is to be managed and
conducted by our board of directors. Under Bermuda common law,
members of the board of directors of a Bermuda company owe a
fiduciary duty to the company to act in good faith in their
dealings with or on behalf of the company and exercise their powers
and fulfill the duties of their office honestly. This duty includes
the following essential elements:
–
a
duty to act in good faith in the best interests of the
company;
–
a
duty not to make a personal profit from opportunities that arise
from the office of director;
–
a
duty to avoid conflicts of interest; and
–
a
duty to exercise powers for the purpose for which such powers were
intended.
The Companies Act imposes a duty on directors and officers of a
Bermuda company to act honestly and in good faith with a view to
the best interests of the company, and to exercise the care,
diligence and skill that a reasonably prudent person would exercise
in comparable circumstances. In addition, the Companies Act imposes
various duties on directors and officers of a company with respect
to certain matters of management and administration of the company.
Directors and officers generally owe fiduciary duties to the
company, and not to the company’s individual shareholders.
Our shareholders may not have a direct cause of action against our
directors.
Under Delaware law, the business and affairs of a corporation are
managed by or under the direction of its board of directors. In
exercising their powers, directors are charged with a fiduciary
duty of care to protect the interests of the corporation and a
fiduciary duty of loyalty to act in the best interests of its
stockholders. The duty of care requires that directors act in an
informed and deliberative manner and inform themselves, prior to
making a business decision, of all material information reasonably
available to them. The duty of care also requires that directors
exercise care in overseeing and investigating the conduct of
corporate employees. The duty of loyalty may be summarized as the
duty to act in good faith, not out of self-interest, and in a
manner that the director reasonably believes to be in the best
interests of the stockholders.
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Delaware law provides that a party challenging the propriety of a
decision of a board of directors bears the burden of rebutting the
applicability of the presumptions afforded to directors by the
“business judgment rule.” The business judgment rule is
a presumption that in making a business decision, directors acted
on an informed basis and that the action taken was in the best
interests of the company and its stockholders, and accordingly,
unless the presumption is rebutted, a board’s decision will
be upheld unless there can be no rational business purpose for the
action or the action constitutes corporate waste. If the
presumption is not rebutted, the business judgment rule attaches to
protect the directors and their decisions, and their business
judgments will not be second guessed. Where, however, the
presumption is rebutted, the directors bear the burden of
demonstrating the entire fairness of the relevant transaction.
Notwithstanding the foregoing, Delaware courts may subject
directors’ conduct to enhanced scrutiny in respect of
defensive actions taken in response to a threat to corporate
control or the approval of a transaction resulting in a sale of
control of the corporation.
Interested directors
Bermuda law and our bye-laws provide that if a director has an
interest in a material transaction or proposed material transaction
with us or any of our subsidiaries or has a material interest in
any person that is a party to such a transaction, the director must
disclose the nature of that interest at the first opportunity
either at a meeting of directors or in writing to the directors.
Our bye-laws provide that, after a director has made such a
declaration of interest, he is allowed to be counted for purposes
of determining whether a quorum is present and to vote on a
transaction in which he has an interest, unless disqualified from
doing so by the chairman of the relevant board
meeting.
Under Delaware law, such transaction would not be voidable
if (i) the material facts as to such interested
director’s relationship or interests are disclosed or are
known to the board of directors and the board in good faith
authorizes the transaction by the affirmative vote of a majority of
the disinterested directors, (ii) such material facts are disclosed
or are known to the stockholders entitled to vote on such
transaction and the transaction is specifically approved in good
faith by vote of the majority of shares entitled to vote thereon or
(iii) the transaction is fair as to the company as of the time it
is authorized, approved or ratified. Under Delaware law, such
interested director could be held liable for a transaction in which
such director derived an improper personal benefit.
Voting rights and Quorum requirements
Under Bermuda law, the voting rights of our shareholders are
regulated by our bye-laws and, in certain circumstances, the
Companies Act. Under our bye-laws, the quorum required for a
general meeting of shareholders to consider any resolution or take
any action, including with respect to any meeting convened to
consider or adopt a resolution required for an amalgamation or
merger of the Company, is one or more persons present and
representing in person or by proxy at least 15% of the votes
eligible to be cast at any such general meeting, provided that for
so long as there are any Class B common shares issued and
outstanding, at least one holder of Class B common shares shall be
required to be present in person or by proxy to constitute a
quorum.
Any individual who is our shareholder and who is present at a
meeting and entitled to vote at such meeting, may vote in person,
as may any corporate shareholder that is represented by a duly
authorized representative at a meeting of shareholders. Our
bye-laws also permit attendance at general meetings by proxy,
provided the instrument appointing the proxy is in the form
specified in the bye-laws or such other form as the board may
determine. Under our bye-laws, each holder of Class A common shares
is entitled to one vote per Class A common share held and each
holder of Class B common shares is entitled to 10 votes per Class B
common share held.
Under Delaware law, unless otherwise provided in a company’s
certificate of incorporation, each stockholder is entitled to one
vote for each share of stock held by the stockholder. Delaware law
provides that unless otherwise provided in a company’s
certificate of incorporation or by-laws, a majority of the shares
entitled to vote, present in person or represented by proxy,
constitutes a quorum at a meeting of stockholders. In matters other
than the election of directors, with the exception of special
voting requirements related to extraordinary transactions, and
unless otherwise provided in a company’s certificate of
incorporation or by-laws, the affirmative vote of a majority of
shares present in person or represented by proxy at the meeting
entitled to vote is required for stockholder action, and the
affirmative vote of a plurality of shares is required for the
election of directors.
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Dividend rights
Under Bermuda law, a company may not declare or pay dividends if
there are reasonable grounds for believing that: (i) the company
is, or after the payment of such dividends would be, unable to pay
its liabilities as they become due, or (ii) the realizable value of
its assets would thereby be less than its liabilities. Under our
bye-laws, each Class A and Class B common share is entitled to
dividends if, as and when dividends are declared by our board of
directors on such classes, subject to any preferred dividend right
of the holders of any preference shares. See “
– Common Shares – Dividends”
above.
Under Delaware law, subject to any restrictions contained in the
company’s certificate of incorporation, a company may pay
dividends out of surplus or, if there is no surplus, out of net
profits for the fiscal year in which the dividend is declared and
for the preceding fiscal year. Delaware law also provides that
dividends may not be paid out of net profits if, after the payment
of the dividend, capital is less than the capital represented by
the outstanding stock of all classes having a preference upon the
distribution of assets.
Amalgamations and mergers
The amalgamation or merger of a Bermuda company with another
company or corporation requires the amalgamation or merger
agreement to be approved by the company’s board of directors
and by its shareholders. Our bye-laws provide that any amalgamation
or merger must be approved by the affirmative vote of at least a
majority of the votes cast at a general meeting of the
Company.
Under Bermuda law, in the event of an amalgamation or merger of a
Bermuda company with another company or corporation, a shareholder
of the Bermuda company who did not vote in favor of the
amalgamation or merger and is not satisfied that fair value has
been offered for such shareholder’s shares may, within one
month of notice of the shareholders meeting, apply to the Supreme
Court of Bermuda to appraise the fair value of those
shares.
Under Delaware law, with certain exceptions, a merger,
consolidation or sale of all or substantially all the assets of a
corporation must be approved by the board of directors and a
majority of the issued and outstanding shares entitled to vote
thereon. Under Delaware law, a stockholder of a corporation
participating in certain major corporate transactions may, under
certain circumstances, be entitled to appraisal rights pursuant to
which such stockholder may receive cash in the amount of the fair
value of the shares held by such stockholder (as determined by a
court) in lieu of the consideration such stockholder would
otherwise receive in the transaction.
Compulsory acquisition of shares held by minority
holders
An acquiring party is generally able to acquire compulsorily the
common shares of minority holders of a Bermuda company in the
following ways:
–
By
a procedure under the Companies Act known as a “scheme of
arrangement.” A scheme of arrangement could be effected by
obtaining the agreement of the company and of holders of common
shares, representing in the aggregate a majority in number and at
least 75% in value of the common shareholders present and voting at
a court ordered meeting held to consider the scheme of arrangement.
The scheme of arrangement must then be sanctioned by the Bermuda
Supreme Court. If a scheme of arrangement receives all necessary
agreements and sanctions, upon the filing of the court order with
the Registrar of Companies in Bermuda, all holders of common shares
could be compelled to sell their common shares under the terms of
the scheme of arrangement.
–
If
the acquiring party is a company it may compulsorily acquire all
the shares of the target company, by acquiring pursuant to a tender
offer 90% of the shares or class of shares not already owned by, or
by a nominee for, the acquiring party (the offeror), or any of its
subsidiaries. If an offeror has, within four months after the
making of an offer for all the shares or class of shares not owned
by, or by a nominee for, the offeror, or any of its subsidiaries,
obtained the approval of the holders of 90% or more of all the
shares to which the offer relates, the offeror may, at any time
within two months beginning with the date on which the approval was
obtained, require by notice any nontendering shareholder to
transfer its shares on the same terms as the original offer. In
those circumstances, nontendering shareholders will be compelled to
sell their shares unless the Supreme Court of Bermuda (on
application made within a one-month period from the date of the
offeror’s notice of its intention to acquire such shares)
orders otherwise.
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–
Where
the acquiring party or parties hold not less than 95% of the shares
or a class of shares of the company, such holder(s) may, pursuant
to a notice given to the remaining shareholders or class of
shareholders, acquire the shares of such remaining shareholders or
class of shareholders. When this notice is given, the acquiring
party is entitled and bound to acquire the shares of the remaining
shareholders on the terms set out in the notice, unless a remaining
shareholder, within one month of receiving such notice, applies to
the Supreme Court of Bermuda for an appraisal of the value of their
shares. This provision only applies where the acquiring party
offers the same terms to all holders of shares whose shares are
being acquired.
Delaware law provides that a parent corporation, by resolution of
its board of directors and without any stockholder vote, may merge
with any subsidiary of which it owns at least 90% of each class of
its capital stock. Upon any such merger, dissenting stockholders of
the subsidiary would have appraisal rights.
Shareholders’ suits
Class actions and derivative actions are generally not available to
shareholders under Bermuda law. The Bermuda courts would, however,
permit a shareholder to commence an action in the name of a company
to remedy a wrong to the company where the act complained of is
alleged to be beyond the corporate power of the company or illegal,
or would result in the violation of the company’s memorandum
of association or bye-laws. Furthermore, consideration would be
given by a Bermuda court to acts that are alleged to constitute a
fraud against the minority shareholders or, for instance, where an
act requires the approval of a greater percentage of the
company’s shareholders than that which actually approved
it.
When the affairs of a company are being conducted in a manner that
is oppressive or prejudicial to the interests of some part of the
shareholders, one or more shareholders may apply to the Supreme
Court of Bermuda, which may make such order as it sees fit,
including an order regulating the conduct of the company’s
affairs in the future or ordering the purchase of the shares of any
shareholders by other shareholders or by the company.
Subject to Section 14 of the Securities Act, which renders void any
waiver of the provisions of the Securities Act, our bye-laws
contain a provision by virtue of which our shareholders waive any
claim or right of action that they have, both individually and on
our behalf, against any director or officer in relation to any
action or failure to take action by such director or officer,
except in respect of any fraud or dishonesty of such director or
officer. The operation of this provision as a waiver of the right
to sue for violations of federal securities laws may be
unenforceable in U.S. courts.
Class actions and derivative actions generally are available to
shareholders under Delaware law for, among other things, breach of
fiduciary duty, corporate waste and actions not taken in accordance
with applicable law. In such actions, the court generally has
discretion to permit the winning party to recover attorneys’
fees incurred in connection with such action.
Indemnification of directors and officers
Section 98 of the Companies Act provides generally that a Bermuda
company may indemnify its directors, officers and auditors against
any liability which by virtue of any rule of law would otherwise be
imposed on them in respect of any negligence, default, breach of
duty or breach of trust, except in cases where such liability
arises from fraud or dishonesty of which such director, officer or
auditor may be guilty in relation to the company.
Section 98 further provides that a Bermuda company may indemnify
its directors, officers and auditors against any liability incurred
by them in defending any proceedings, whether civil or criminal, in
which judgment is awarded in their favor or in which they are
acquitted or granted relief by the Supreme Court of Bermuda
pursuant to section 281 of the Companies Act.
81
We have adopted provisions in our bye-laws that provide that we
shall indemnify our officers and directors in respect of their
actions and omissions, except in respect of their fraud or
dishonesty. We also have entered into directors’ service
agreements with our directors, pursuant to which we have agreed to
indemnify them against any liability brought against them by reason
of their service as directors, except in cases where such liability
arises from fraud, dishonesty, bad faith, gross negligence, willful
default or willful misfeasance. Subject to Section 14 of the
Securities Act, which renders void any waiver of the provisions of
the Securities Act, our bye-laws provide that our shareholders
waive all claims or rights of action that they might have,
individually or in right of the company, against any of our
directors or officers for any act or failure to act in the
performance of such director’s or officer’s duties,
except in respect of any fraud or dishonesty of such director or
officer. Section 98A of the Companies Act permits us to purchase
and maintain insurance for the benefit of any officer or director
in respect of any loss or liability attaching to him in respect of
any negligence, default, breach of duty or breach of trust, whether
or not we may otherwise indemnify such officer or director. We have
purchased and maintain a directors’ and officers’
liability policy for such a purpose.
Under Delaware law, a corporation may indemnify a director or
officer of the corporation against expenses (including
attorneys’ fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred in defense of an
action, suit or proceeding by reason of such position if (i)
such director or officer acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests
of the corporation and (ii) with respect to any criminal action or
proceeding, such director or officer had no reasonable cause to
believe his conduct was unlawful.
Access to books and records and dissemination of
information
Members of the general public have a right to inspect the public
documents of a company available at the office of the Registrar of
Companies in Bermuda. These documents include the company’s
memorandum of association, including its objects and powers, and
certain alterations to the memorandum of association. The
shareholders have the additional right to inspect the bye-laws of
the company, minutes of general meetings and the company’s
audited financial statements, which must be presented to the annual
general meeting. The register of members of a company is also open
to inspection by shareholders and by members of the general public
without charge. The register of members is required to be open for
inspection for not less than two hours in any business day (subject
to the ability of a company to close the register of members for
not more than thirty days in a year). A company is required to
maintain its share register in Bermuda but may, subject to the
provisions of the Companies Act, establish a branch register
outside of Bermuda. A company is required to keep at its registered
office a register of directors and officers that is open for
inspection for not less than two hours in any business day by
members of the public without charge. A company is also required to
file with the Registrar of Companies in Bermuda a list of its
directors to be maintained on a register, which register will be
available for public inspection subject to such conditions as the
Registrar may impose and on payment of such fee as may be
prescribed. Bermuda law does not, however, provide a general right
for shareholders to inspect or obtain copies of any other corporate
records.
Delaware law permits any stockholder to inspect or obtain copies of
a corporation’s stockholder list and its other books and
records for any purpose reasonably related to such person’s
interest as a stockholder.
Shareholder proposals
Under Bermuda law, shareholders may, as set forth below and at
their own expense (unless the company otherwise resolves), require
the company to: (i) give notice to all shareholders entitled to
receive notice of the annual general meeting of any resolution that
the shareholders may properly move at the next annual general
meeting; and/or (ii) circulate to all shareholders entitled to
receive notice of any general meeting a statement (of not more than
one thousand words) in respect of any matter referred to in the
proposed resolution or any business to be conducted at such general
meeting. The number of shareholders necessary for such a
requisition is either: (i) any number of shareholders representing
not less than 10% of the total voting rights of all shareholders
entitled to vote at the meeting to which the requisition relates;
or (ii) not less than 100 shareholders.
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Delaware law provides that stockholders have the right to put any
proposal before the annual meeting of stockholders, provided it
complies with the notice provisions in the governing documents. A
special meeting may be called by the board of directors or any
other person authorized to do so in the governing documents, but
stockholders may be precluded from calling special
meetings.
Calling of special shareholders’ meetings
Under our bye-laws, a special general meeting may be called by the
chairman of the board or by a majority of our board of directors.
Bermuda law also provides that a special general meeting must be
called upon the request of shareholders holding not less than 10%
of the paid-up capital of the company carrying the right to vote at
general meetings.
Delaware law permits the board of directors or any person who is
authorized under a corporation’s certificate of incorporation
or bye-laws to call a special meeting of stockholders.
Amendment of memorandum of association and bye-laws
Under our bye-laws, the memorandum of association may be amended by
a resolution passed at a general meeting of the Company. Our
bye-laws provide that no bye-law shall be rescinded, altered or
amended, and no new bye-law shall be made, unless it shall have
been approved by a resolution of our board of directors and by a
resolution of our shareholders at a general meeting of the
Company.
Under Bermuda law, the holders of an aggregate of not less than 20%
in par value of a company’s issued share capital or any class
thereof have the right to apply to the Supreme Court of Bermuda for
an annulment of any amendment of the memorandum of association
adopted by shareholders at any general meeting, other than an
amendment that alters or reduces a company’s share capital as
provided in the Companies Act. Where such an application is made,
the amendment becomes effective only to the extent that it is
confirmed by the Bermuda court. An application for an annulment of
an amendment of the memorandum of association must be made within
21 days after the date on which the resolution altering the
company’s memorandum of association is passed and may be made
on behalf of persons entitled to make the application by one or
more of their number as such holders may appoint in writing for
such purpose. No application may be made by the shareholders voting
in favor of the amendment.
Under Delaware law, amendment of the certificate of incorporation,
which is the equivalent of a memorandum of association, of a
company must be made by a resolution of the board of directors
setting forth the amendment, declaring its advisability, and either
calling a special meeting of the stockholders entitled to vote or
directing that the proposed amendment be considered at the next
annual meeting of the stockholders. Delaware law requires that,
unless a different percentage is provided for in the certificate of
incorporation, a majority of the voting power of the corporation is
required to approve the amendment of the certificate of
incorporation at the stockholders meeting. If the amendment would
alter the number of authorized shares or par value or otherwise
adversely affect the rights or preference of any class of a
company’s stock, the holders of the issued and outstanding
shares of such affected class, regardless of whether such holders
are entitled to vote by the certificate of incorporation, are
entitled to vote as a class upon the proposed amendment. However,
the number of authorized shares of any class may be increased or
decreased, to the extent not falling below the number of shares
then issued and outstanding, by the affirmative vote of the holders
of a majority of the stock entitled to vote, if so provided in the
company’s certificate of incorporation that was authorized by
the affirmative vote of the holders of a majority of such class or
classes of stock.
Under Delaware law, unless the certificate of incorporation or
by-laws provide for a different vote, holders of a majority of the
voting power of a corporation and, if so provided in the
certificate of incorporation, the directors of the corporation have
the power to adopt, amend and repeal the by-laws of a corporation.
Those by-laws dealing with the election of directors, classes of
directors and the term of office of directors may only be
rescinded, altered or amended upon approval by a resolution of the
directors and by a resolution of shareholders carrying not less
than a majority of all shares entitled to vote on the
resolution.
See “Item 5. Operating and Financial Review and Prospects
– B. Liquidity and capital resources –
Indebtedness” and “Item 7. Major Shareholders and
Related Party Transactions – B. Related party transactions
– New agreements with Dufry.”
D. Exchange controls
Consent under the Exchange Control Act 1972 (and its related
regulations) has been received from the Bermuda Monetary Authority
for the issue and transfer of our Class A common shares to and
between non-residents of Bermuda for exchange control purposes
provided our Class A common shares remain listed on an appointed
stock exchange, which includes the New York Stock Exchange. In
granting such consent the Bermuda Monetary Authority accepts no
responsibility for our financial soundness or the correctness of
any of the statements made or opinions expressed in this annual
report.
E. Taxation
U.K. Tax
considerations
The following is a general summary of material U.K. tax
considerations relating to the ownership and disposal of Class A
common shares. The comments set out below are based on current U.K.
tax law as applied in England and Wales, and our understanding of
HM Revenue & Customs (“HMRC”) practice (which may
not be binding on HMRC) as at the date of this summary, both of
which are subject to change, possibly with retrospective effect.
They are intended as a general guide and apply to you only if you
are a “U.S. Holder” (as defined in the section entitled
“Material U.S. federal income tax considerations”).
This summary only applies to you if you are not resident in the
U.K. for U.K. tax purposes and do not hold Class A common shares
for the purposes of a trade, profession, or vocation that you carry
on in the U.K. through a branch, agency, or permanent establishment
in the U.K. and if you hold Class A common shares as an investment
for U.K. tax purposes and are not subject to special
rules.
This summary does not address all possible tax consequences
relating to an investment in Class A common shares. In particular
it does not cover the U.K. inheritance tax consequences of holding
Class A common shares. This summary is for general information only
and is not intended to be, nor should it be considered to be, legal
or tax advice to any particular investor. Holders of Class A common
shares are strongly urged to consult their tax advisers in
connection with the U.K. tax consequences of their investment in
Class A common shares.
U.K. tax residence
We intend to continue to centrally manage and control our affairs
from the U.K., such that we are resident for tax purposes solely in
the U.K.
U.K. taxation of dividends
We will not be required to withhold amounts on account of U.K. tax
at source when paying a dividend in respect of Class A common
shares.
U.S. Holders who hold their Class A common shares as an investment
and not in connection with any trade carried on by them should not
be subject to U.K. tax in respect of any dividends.
U.K. taxation of capital gains
An individual holder who is a U.S. Holder should not be liable to
U.K. capital gains tax on capital gains realized on the disposal of
his or her Class A common shares unless such holder carries on a
trade, profession or vocation in the U.K. through a branch or
agency in the U.K. to which the Class A common shares are
attributable and subject to the below exception.
An individual holder of Class A common shares who is temporarily
non-resident for U.K. tax purposes will, in certain circumstances,
become liable to U.K. tax on capital gains in respect of gains
realized while he or she was not resident in the U.K.
84
A corporate holder of Class A common shares that is a U.S. Holder
should not be liable for U.K. corporation tax on chargeable gains
realized on the disposal of Class A common shares unless it carries
on a trade in the U.K. through a permanent establishment to which
the Class A common shares are attributable.
Stamp duty and stamp duty reserve tax
No stamp duty reserve tax should be payable on any agreement to
transfer Class A common shares, provided that Class A common shares
are not registered in a register kept on our behalf in the U.K. and
that Class A common shares are not paired with shares issued by a
U.K. incorporated company. It is not intended that such a register
will be kept in the U.K. or that Class A common shares will be
paired with shares issued by a U.K. incorporated
company.
No stamp duty should be payable on a transfer of Class A common
shares by electronic book-entry through the facilities of DTC
without an instrument of transfer. No stamp duty should be payable
on a transfer of Class A common shares by way of an instrument of
transfer provided that (i) any instrument of transfer is not
executed in the U.K. and (ii) such instrument of transfer does not
relate to any property situated, or any matter or thing done or to
be done, in the U.K.
Material U.S. federal income tax considerations
The following is a description of the material U.S. federal income
tax consequences to the U.S. Holders, as defined below, of owning
and disposing our common shares. It does not describe all tax
considerations that may be relevant to a particular person’s
decision to acquire common shares.
This discussion applies only to a U.S. Holder that holds common
shares as capital assets for U.S. federal income tax purposes. In
addition, it does not describe all of the U.S. federal income tax
consequences that may be relevant in light of the U.S.
Holder’s particular circumstances, including alternative
minimum tax consequences, the potential application of the
provisions of the Code known as the Medicare contribution tax and
tax consequences applicable to U.S. Holders subject to special
rules, such as:
–
certain
financial institutions;
–
dealers
or traders in securities who use a mark-to-market method of tax
accounting;
–
persons
holding common shares as part of a hedging transaction, straddle,
wash sale, conversion transaction or other integrated transaction
or persons entering into a constructive sale with respect to the
common shares;
–
persons
whose functional currency for U.S. federal income tax purposes is
not the U.S. dollar;
–
entities
classified as partnerships for U.S. federal income tax
purposes;
–
tax-exempt
entities, including an “individual retirement account”
or “Roth IRA”;
–
persons
that own or are deemed to own ten percent or more of our voting
shares, by vote or value; or
–
persons
holding common shares in connection with a trade or business
conducted outside of the United States.
If an entity that is classified as a partnership for U.S. federal
income tax purposes holds common shares, the U.S. federal income
tax treatment of a partner will generally depend on the status of
the partner and the activities of the partnership. Partnerships
holding common shares and partners in such partnerships should
consult their tax advisers as to the particular U.S. federal income
tax consequences of owning and disposing of the common
shares.
This discussion is based on the Code, administrative
pronouncements, judicial decisions, final, temporary and proposed
Treasury regulations, and the income tax treaty between the U.K.
and the United States (the “Treaty”) all as of the date
hereof, any of which is subject to change or differing
interpretations, possibly with retroactive
effect.
–
A
“U.S. Holder” is a holder who, for U.S. federal income
tax purposes, is a beneficial owner of common shares, who is
eligible for the benefits of the Treaty and who is:
–
an
individual that is a citizen or resident of the United
States;
–
a
corporation, or other entity taxable as a corporation, created or
organized in or under the laws of the United States, any state
therein or the District of Columbia; or
–
an
estate or trust the income of which is subject to U.S. federal
income taxation regardless of its source.
85
U.S. Holders should consult their tax advisers concerning the U.S.
federal, state, local and non-U.S. tax consequences of owning and
disposing of common shares in their particular
circumstances.
This discussion assumes that we are not, and will not become, a
passive foreign investment company (a “PFIC”), as
described below.
Taxation of distributions
Distributions paid on common shares, other than certain pro rata
distributions of common shares, will generally be treated as
dividends to the extent paid out of our current or accumulated
earnings and profits (as determined under U.S. federal income tax
principles). Because we do not maintain calculations of our
earnings and profits under U.S. federal income tax principles, we
expect that distributions generally will be reported to U.S.
Holders as dividends. For so long as our common shares are listed
on the NYSE or we are eligible for benefits under the Treaty,
dividends paid to certain non-corporate U.S. Holders will be
eligible for taxation as “qualified dividend income”
and therefore, subject to applicable limitations, will be taxable
at rates not in excess of the long-term capital gain rate
applicable to such U.S. Holder. U.S. Holders should consult their
tax advisers regarding the availability of the reduced tax rate on
dividends in their particular circumstances. The amount of a
dividend will include any amounts withheld by us in respect of U.K.
income taxes. The amount of the dividend will be treated as
foreign-source dividend income to U.S. Holders and will not be
eligible for the dividends-received deduction generally available
to U.S. corporations under the Code. Dividends will be included in
a U.S. Holder’s income on the date of the U.S. Holder’s
receipt of the dividend. The amount of any dividend income paid in
euros will be the U.S. dollar amount calculated by reference to the
exchange rate in effect on the date of actual or constructive
receipt, regardless of whether the payment is in fact converted
into U.S. dollars at that time. If the dividend is converted into
U.S. dollars on the date of receipt, a U.S. Holder should not be
required to recognize foreign currency gain or loss in respect of
the dividend income. A U.S. Holder may have foreign currency gain
or loss if the dividend is converted into U.S. dollars after the
date of receipt.
Subject to applicable limitations, some of which vary depending
upon the U.S. Holder’s particular circumstances, U.K. income
taxes withheld from dividends on common shares at a rate not
exceeding the rate provided by the Treaty will be creditable
against the U.S. Holder’s U.S. federal income tax liability.
The rules governing foreign tax credits are complex and U.S.
Holders should consult their tax advisers regarding the
creditability of foreign taxes in their particular circumstances.
In lieu of claiming a foreign tax credit, U.S. Holders may, at
their election, deduct foreign taxes, including any U.K. income
tax, in computing their taxable income, subject to generally
applicable limitations under U.S. law. An election to deduct
foreign taxes instead of claiming foreign tax credits applies to
all foreign taxes paid or accrued in the taxable year.
Sale or other disposition of common shares
For U.S. federal income tax purposes, gain or loss realized on the
sale or other disposition of common shares will be capital gain or
loss, and will be long-term capital gain or loss if the U.S. Holder
held the common shares for more than one year. The amount of the
gain or loss will equal the difference between the U.S.
Holder’s tax basis in the common shares disposed of and the
amount realized on the disposition, in each case as determined in
U.S. dollars. This gain or loss will generally be U.S.-source gain
or loss for foreign tax credit purposes. The deductibility of
capital losses is subject to various limitations.
Passive foreign investment company rules
Under
the Code, we will be a PFIC for any taxable year in which, after
the application of certain “look through” rules with
respect to subsidiaries, either (i) 75 % or more of our gross income
consists of “passive income,” or (ii) 50 % or more of the average quarterly
value of our assets consist of assets that produce, or are held for
the production of, “passive income.”
Based
on our current operations, income, assets and certain estimates and
projections, including as to the relative values of our assets, we
believe that we were not a PFIC
for U.S. federal income tax purposes for our taxable year ending
December 31, 2017 and do
not expect to become a PFIC in the foreseeable future. If we were a
PFIC for any year during which a U.S. Holder holds common shares,
we generally would continue to be treated as a PFIC with respect to
that U.S. Holder for all succeeding years during which the U.S.
Holder holds common shares, even if we ceased to meet the threshold
requirements for PFIC status.
86
If we
were a PFIC for any taxable year during which a U.S. Holder held
common shares (assuming such U.S. Holder has not made a timely
election described below), gain recognized by a U.S. Holder on a
sale or other disposition (including certain pledges) of the common
shares would be allocated ratably over the U.S. Holder’s
holding period for the common shares. The amounts allocated to the
taxable year of the sale or other disposition and to any year
before we became a PFIC would be taxed as ordinary income. The
amount allocated to each other taxable year would be subject to tax
at the highest rate in effect for individuals or corporations, as
appropriate, for that taxable year, and an interest charge would be
imposed on the tax on such amount. Further, to the extent that any
distribution received by a U.S. Holder on its common shares exceeds
125 % of the average of
the annual distributions on the common shares received during the
preceding three years or the U.S. Holder’s holding period,
whichever is shorter, that distribution would be subject to
taxation in the same manner as gain, described immediately above.
If we were a PFIC, certain elections may be available that would
result in alternative tax consequences (such as mark-to-market
treatment) of owning and disposing the common shares. U.S. Holders
should consult their tax advisers to determine whether any of these
elections would be available and, if so, what the consequences of
the alternative treatments would be in their particular
circumstances.
In addition, if we were a PFIC or, with respect to particular U.S.
Holder, were treated as a PFIC for the taxable year in which we
paid a dividend or for the prior taxable year, the preferential
dividend rates discussed above with respect to dividends paid to
certain non-corporate U.S. Holders would not apply.
If a U.S. Holder owns common shares during any year in which we are
a PFIC, the holder generally must file annual reports containing
such information as the U.S. Treasury may require on IRS Form 8621
(or any successor form) with respect to us, generally with the
holder’s federal income tax return for that
year.
U.S. Holders should consult their tax advisers concerning our
potential PFIC status and the potential application of the PFIC
rules.
Information reporting and backup withholding
Payments of dividends and sales proceeds that are made within the
United States or through certain U.S.-related financial
intermediaries generally are subject to information reporting, and
may be subject to backup withholding, unless (i) the U.S. Holder is
a corporation or other exempt recipient or (ii) in the case of
backup withholding, the U.S. Holder provides a correct taxpayer
identification number and certifies that it is not subject to
backup withholding.
The amount of any backup withholding from a payment to a U.S.
Holder will be allowed as a credit against the holder’s U.S.
federal income tax liability and may entitle it to a refund,
provided that the required information is timely furnished to the
IRS.
Information with respect to
foreign financial
assets
Certain U.S. Holders who are individuals (and, under proposed
regulations, certain entities) may be required to report
information on their U.S. federal income tax returns relating to an
interest in our common shares, subject to certain exceptions
(including an exception for common shares held in accounts
maintained by certain U.S. financial institutions). U.S. Holders
should consult their tax advisers regarding the effect, if any, of
this legislation on their ownership and disposition of the common
shares.
87
Bermudian tax considerations
We are incorporated under the laws of Bermuda. At the present time,
there is no Bermuda income or profits tax, withholding tax, capital
gains tax, capital transfer tax, estate duty or inheritance tax
payable by us or by our shareholders in respect of our shares. We
have obtained an assurance from the Minister of Finance of Bermuda
under the Exempted Undertakings Tax Protection Act 1966 that, in
the event that any legislation is enacted in Bermuda imposing any
tax computed on profits or income, or computed on any capital
asset, gain or appreciation or any tax in the nature of estate duty
or inheritance tax, such tax shall not, until March 31, 2035, be
applicable to us or to any of our operations or to our shares,
debentures or other obligations except insofar as such tax applies
to persons ordinarily resident in Bermuda or is payable by us in
respect of real property owned or leased by us in
Bermuda.
F. Dividends and paying agents
Not applicable.
G. Statement by experts
Not applicable.
H. Documents on display
We are subject to the informational requirements of the Exchange
Act. Accordingly, we are required to file reports and other
information with the SEC, including annual reports on Form 20-F and
reports on Form 6-K. You may inspect and copy reports and other
information filed with the SEC at the Public Reference Room at 100
F Street, N.E., Washington, D.C. 20549. Information on the
operation of the Public Reference Room may be obtained by calling
the SEC at 1-800-SEC-0330. In addition, the SEC maintains an
Internet website that contains reports and other information about
issuers, like us, that file electronically with the SEC. The
address of that website is www.sec.gov.
I. Subsidiary information
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
We are exposed to market risks associated with foreign exchange
rates, interest rates, commodity prices and inflation. In
accordance with our policies, we seek to manage our exposure to
these various market-based risks.
For further information on our market risks, please see Note 35.4
to our Combined Financial Statements.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY
SECURITIES
A. Debt securities
Not applicable.
B. Warrants and rights
Not applicable.
C. Other securities
Not applicable.
D. American depositary shares
Not applicable.
88
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND
DELINQUENCIES
A. Defaults
No matters to report.
B. Arrears and delinquencies
No matters to report.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
AND USE OF PROCEEDS
A. Material modifications to
instruments
Not applicable.
B. Material modifications to
rights
Not applicable.
C. Withdrawal or substitution of
assets
Not applicable.
D. Change in trustees or paying
agents
Not applicable.
E. Use of proceeds
On
January 31, 2018, our
registration statement on Form F-1 (File No. 333-221547), as
amended, was declared effective by the SEC for our initial public
offering of our Class A common shares, pursuant to which our
principal shareholder, Dufry International AG, offered and sold a total of
39,417,765 Class A common shares, par value $0.001 per share, at a
public offering price of $19.00 per share. Credit Suisse Securities
(USA) LLC, Morgan Stanley & Co. LLC and UBS Securities LLC
acted as joint book-running managers for the offering. The offering
began on January 31, 2018
and was completed on February 5, 2018. All securities registered
in the registration statement have been sold pursuant to the
underwriting agreement for the initial public offering. Dufry
International AG sold
39,417,765 Class A common shares for an aggregate price of
$748.9 million
before underwriting discounts and
commissions. We did not receive any proceeds. Our expenses
in connection with our initial public offering other than
underwriting discounts and commissions, were as follows:
EXPENSES IN
$
AMOUNT
U.S.
Securities and Exchange Commission registration fee
118,517
FINRA
filing fee
141,871
NYSE
listing fee
231,322
Printing
and engraving expenses
215,000
Legal
fees and expenses
3,000,000
Accounting
fees and expenses
2,000,000
Miscellaneous costs
1,393,290
Total
7,100,000
None of the underwriting discounts and commissions or other
expenses were paid directly or indirectly to any director, officer
or general partner of ours or to their associates, persons owning
ten percent or more of any class of our equity securities, or to
any of our affiliates.
89
ITEM 15. CONTROLS AND PROCEDURES
A. Disclosure controls and procedures
As of
December 31, 2017, under
the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer,
we performed an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Exchange Act). There are inherent
limitations to the effectiveness of any disclosure controls and
procedures system, including the possibility of human error and
circumventing or overriding them. Even if effective, disclosure
controls and procedures can provide only reasonable assurance of
achieving their control objectives.
Based
on such evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures are
not effective due to the material weaknesses in our internal
control over financial reporting identified during our preparation
for our initial public offering and 2014 annual financial
statements as more fully described in “Item 5. Operating and
Financial Review and Prospects – B. Liquidity and capital resources
– Internal control over
financial reporting.”
B. Management’s annual report on internal control over
financial reporting
This
annual report does not include a report of management’s
assessment regarding internal control over financial reporting due
to a transition period established by rules of the Securities and
Exchange Commission for newly public companies.
C. Attestation report of the registered public accounting
firm
Not
applicable.
D. Changes in internal control over financial
reporting
See
“Item 5. Operating and Financial Review and Prospects
– B. Liquidity and
capital resources –
Internal control over financial reporting” for changes in our
internal control over financial reporting (as defined in Rule
13a-15(f) under the Exchange Act) that occurred during the period
covered by this Annual Report that have materially affected, or are
reasonably likely to materially affect, internal control over
financial reporting.
ITEM 16. RESERVED
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
The
audit committee is chaired by Ms.
Guilfoile and includes Mr.
Skinner and Ms.
Ulasewicz. The Audit committee assists the board in
overseeing our accounting and financial reporting processes and the
audits of our financial statements. In addition, the audit
committee is directly responsible for the appointment,
compensation, retention and oversight of the work of our
independent registered public accounting firm. The audit committee
is also responsible for reviewing and determining whether to
approve certain transactions with related parties. See “Item
7. Major Shareholders and Related Party Transactions – B. Related party transactions
– Related person
transaction policy.” Our board has determined that each of
Ms. Guilfoile, Mr. Skinner and Ms. Ulasewicz is independent within
the meaning of the independence requirements contemplated by Rule
10A-3 under the Exchange Act and NYSE and SEC rules applicable to
foreign private issuers. Our board of directors has further
determined that each of Ms. Guilfoile, Mr. Skinner and Ms.
Ulasewicz has the professional experience and knowledge to qualify
as “audit committee financial experts” as defined by
SEC rules.
ITEM 16B. CODE OF ETHICS
We
adopted a code of business
conduct and ethics applicable
to the board of directors and all employees. Since its effective
date on September 28,
2017, we have not waived compliance with or amended the code of
conduct.
90
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following
table describes the amounts
billed to us by Ernst & Young AG, an independent registered
public accounting firm, for audit and other services performed in
fiscal year 2017.
IN MILLIONS OF
USD
2017
2016
Audit fees
1,785
879
Audit-related fees
3,150
-
Tax fees
N/A
N/A
All other fees
N/A
N/A
Audit fees
Audit
fees are fees billed for professional services rendered by the
principal accountant for the audit of the registrant’s annual
combined financial statements
or services that are normally provided by the accountant in
connection with statutory and regulatory filings or engagements for
those fiscal years. It includes the audit of our Combined Financial
Statements and other services that generally only the independent
accountant reasonably can provide, such as comfort letters,
statutory audits, consents and assistance with and review of
documents filed with the SEC.
Audit-related fees
Audit-related
fees are fees billed for assurance and related services that are
reasonably related to the performance of the audit or review of our
Combined Financial Statements and not reported under the previous
category. These services would include, among others: interim reviews, accounting consultations
and audits in connection with acquisitions, internal control
reviews, attest services that are not required by statue or
regulation and consultation concerning financial accounting and
reporting standards.
Tax fees
Tax
fees are fees billed for professional services for tax compliance,
tax advice and tax planning. There
were no tax fees in 2017 or 2016.
All other fees
There
were no other fees in 2017 or
2016.
Pre-approval policies and procedures
The
Audit Committee is responsible for the appointment, replacement,
compensation, evaluation and oversight of the work of the
independent auditors. As part of this responsibility, the Audit
Committee pre-approves all audit and non-audit services performed
by the independent auditors in order to assure that they do not
impair the auditor’s independence from the
Company.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT
COMMITTEES
Not
applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND
AFFILIATED PURCHASERS
None.
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING
ACCOUNTANT
Not
applicable.
91
ITEM 16G. CORPORATE GOVERNANCE
In general, under the NYSE corporate governance standards, foreign
private issuers, as defined under the Exchange Act, are permitted
to follow home country corporate governance practices instead of
the corporate governance practices of the New York Stock Exchange.
Accordingly, we follow certain corporate governance practices of
our home country, Bermuda, in lieu of certain of the corporate
governance requirements of the New York Stock Exchange.
Specifically, we do not have a board of directors composed of a
majority of independent directors or a nomination and remuneration
committee composed entirely of independent directors.
In the event we no longer qualify as a foreign private issuer, we
intend to rely on the “controlled company” exemption
under the New York Stock Exchange corporate governance rules. A
“controlled company” under the New York Stock Exchange
corporate governance rules is a company of which more than 50% of
the voting power is held by an individual, group or another
company. Our controlling shareholder controls a majority of the
combined voting power of our outstanding common shares, and our
controlling shareholder is able to nominate a majority of directors
for election to our board of directors. Accordingly, we would be
eligible to, and, in the event we no longer qualify as a foreign
private issuer, we intend to, take advantage of certain exemptions
under the NYSE corporate governance rules, including exemptions
from the requirement that a majority of the directors on our board
of directors be independent and the requirement that our nomination
and remuneration committee consist entirely of independent
directors.
The foreign private issuer exemption and the “controlled
company” exemption do not modify the independence
requirements for the audit committee, and we intend to comply with
the requirements of the Sarbanes-Oxley Act and the New York Stock
Exchange rules, which require that our audit committee be composed
of at least three directors, all of whom are
independent.
If at any time we cease to be a “controlled company” or
a “foreign private issuer” under the rules of the New
York Stock Exchange and the Exchange Act, as applicable, our board
of directors will take all action necessary to comply with the New
York Stock Exchange corporate governance rules.
Due to our status as a foreign private issuer and our intent to
follow certain home country corporate governance practices, our
shareholders will not have the same protections afforded to
shareholders of companies that are subject to all the New York
Stock Exchange corporate governance standards. See “Item 10.
Additional Information – B. Memorandum of association
and bye-laws.”
ITEM 16H. MINE SAFETY DISCLOSURE
Not applicable.
92
PART III
ITEM 17. FINANCIAL STATEMENTS
We have responded to Item 18 in lieu of this item.
ITEM 18. FINANCIAL STATEMENTS
Financial Statements are filed as part of this annual report, see
pages F-1 to F-63 to this annual report.
ITEM 19. EXHIBITS
The following documents are filed as part of this annual
report:
The registrant hereby certifies that it meets all of the
requirements for filing on Form 20-F and that it has duly caused
and authorized the undersigned to sign this annual report on its
behalf.
Increase / (decrease)
in allowances and provisions
5.0
(2.0)
2.0
Loss / (gain)
on unrealized foreign exchange differences
(0.5)
6.4
(0.3)
Other non-cash
items
4.6
1.2
0.7
Share of result
of associates
11
0.3
0.7
(1.7)
Interest
expense
14
30.2
29.8
25.4
Interest
income
14
(1.9)
(2.1)
(1.6)
Cash flow before working capital changes
182.0
155.1
133.2
Decrease / (increase)
in trade and other accounts receivable
6.2
(9.1)
(2.2)
Decrease / (increase)
in inventories
23
(26.9)
(14.2)
(17.1)
Increase / (decrease)
in trade and other accounts payable
(26.9)
41.3
5.8
Dividends
received from associates
11
–
0.2
1.2
Cash generated from operations
134.4
173.3
120.9
Income taxes
received / (paid)*
(3.6)
(3.5)
(15.5)
Net cash flows from operating activities
130.8
169.8
105.4
CASH FLOW
USED IN INVESTING
ACTIVITIES
Purchase of
property, plant and equipment
18
(79.6)
(88.3)
(49.4)
Purchase of
intangible assets
20
(8.2)
(5.7)
(3.0)
Net
purchase of interest in associates
11
(1.0)
–
–
Proceeds from
sale of property, plant and equipment
0.6
0.4
1.8
Interest
received
2.1
1.2
1.2
Net cash acquired
in business combinations
6
–
–
4.4
Proceeds from
sale of interests in subsidiaries and associates
–
–
30.0
Net cash flows used in investing activities
(86.1)
(92.4)
(15.0)
CASH FLOW FROM
FINANCING ACTIVITIES
Proceeds from
financial debt
15.0
–
–
Repayment of
financial debt
(43.0)
(7.3)
(10.0)
Change of financial debt, net
29
(28.0)
(7.3)
(10.0)
Proceeds
from / (repayment of) 3rd party loans
(3.3)
12.8
31.4
Dividends paid to
non-controlling interest
(34.3)
(27.4)
(28.7)
Net contributions
from / (purchase of) non-controlling
interests
–
(0.1)
1.2
Interest
paid
(30.2)
(29.3)
(25.5)
Net cash flows used in financing activities
(95.8)
(51.3)
(31.6)
Currency
translation on cash
0.9
1.1
(2.9)
(Decrease) / increase in cash and cash
equivalents
(50.2)
27.2
55.9
CASH AND CASH
EQUIVALENTS AT THE
– beginning
of the period
187.6
160.4
104.5
– end of
the period
137.4
187.6
160.4
* The amounts for Income taxes
received / (paid) only include payments made on behalf
of companies in the scope of these combined financial statements as
described in section 2.1 BASIS OF
PREPARATION
F-5
HUDSON GROUP
NOTES TO THE COMBINED FINANCIAL
STATEMENTS
1. CORPORATE
INFORMATION
Hudson
Group (“Hudson” or the “Group”) operates in
the Duty Paid and Duty Free travel retail markets and operated 996
stores in 88 locations, throughout the continental United States
and Canada.
All
entities combined in these financial statements are directly or
indirectly owned subsidiaries of Dufry AG (Dufry), the world’s leading
travel retail company which is headquartered in Basel, Switzerland.
Dufry’s shares are listed on the Swiss Stock Exchange (SIX)
in Zurich, Switzerland and its Brazilian Depository Receipts (BDR)
on the BM&FBOVESPA in Sao Paolo, Brazil.
Hudson Ltd.
was incorporated on May 30, 2017 in Hamilton, Bermuda as a
wholly owned subsidiary of Dufry. The initial public offering (IPO)
took place on February 1,
2018 and Hudson’s Class A shares have been listed on the New
York Stock Exchange, refer to note 36 Events after reporting date.
Hudson Ltd. has had no
operations, only nominal assets and no liabilities or contingencies
since inception.
After
the IPO, Dufry retained control
of Hudson Ltd., as the shares offered through the IPO represented less than 50 % of the total shares outstanding or voting rights.
2. ACCOUNTING
POLICIES
2.1 BASIS
OF PREPARATION
These combined financial statements have been prepared for
the purpose of integration in the Form 20-F of Hudson Ltd. They have been prepared in
accordance with International Financial Reporting Standards (IFRS)
as issued by the International Accounting Standard Board
(IASB).
For the
purpose of these combined financial statements, Hudson Group
comprises all entities and operations directly or indirectly owned
by Dufry which have been transferred to Hudson Ltd. after the reporting date, but prior to
its initial listing at the NYSE: Refer to note 36 Events after
reporting date; refer to List of subsidiaries for an overview of
entities included in the scope of combination. The combined
financial statements have been prepared based on the financial
reporting packages that were used for the preparation of the
consolidated financial statements of Dufry. Hudson Group uses the
same accounting policies and principles in these combined financial
statements as were used for the preparation of the consolidated
financial statements of Dufry.
The
combined financial statements have been prepared based on
historical costs, except for eventual available-for-sale financial
assets, other financial assets and liabilities (including
derivative instruments), which are measured at fair value, as
explained in the accounting policies below. Historical costs are
generally based on the fair value of the consideration given in
exchange for assets. The combined financial statements are
presented in millions of US dollars (USD). All values are rounded to the nearest one hundred
thousand, except when indicated otherwise.
For the purpose of these combined financial statements, income
taxes have been calculated using the separate return
method.
The combined financial statements were authorized for issue on
March 6, 2018 by the management of Dufry
International AG.
F-6
2.2 PRINCIPLES
OF COMBINATION
Subsidiaries
are fully consolidated from the date of acquisition, being the date
on which Dufry obtained control over the entity of Hudson Group,
and continue to be consolidated until the date when such control is
lost. An entity of Hudson Group controls another entity when it is
exposed to, or has rights to, variable returns from its involvement
with the entity and has the ability to affect those returns through
its power over the other entity. All intra-group balances,
transactions, unrealized gains or losses resulting from intra-group
transactions and -dividends are eliminated in full.
Transactions
with subsidiaries of Dufry outside the scope of combination of
Hudson Group have not been eliminated and are reported as related
party transactions in these combined financial statements, refer to
note 32.
A change in the ownership of a subsidiary, without a loss of
control, is accounted for as an equity transaction. If Hudson Group
loses control over a subsidiary, it
–
derecognizes the
assets (including goodwill) and liabilities of the subsidiary,
derecognizes the carrying amount of any non-controlling interest as
well as derecognizes the cumulative translation differences
recorded in equity,
–
recognizes the fair
value of the consideration received, recognizes the fair value of
any investment retained as well as recognizes any surplus or
deficit in the statement of
comprehensive income and
–
reclassifies the
parent’s share of
components previously recognized in other comprehensive income to the
statement of comprehensive income or
retained earnings, as appropriate.
For the accounting treatment of associated companies refer to note
2.3.
F-7
2.3 SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
a) Business combinations and goodwill
Business combinations are accounted for using the acquisition
method. The cost of an acquisition is measured as the aggregate of
the consideration transferred, measured at acquisition date fair
value and the amount of any non-controlling interest in the
acquiree. For each business combination, Hudson selects whether it
measures the non-controlling interest in the acquiree either at
fair value or at the proportionate share of the acquiree’s
identifiable net assets. Acquisition related transaction costs are
expensed and included in other operational result. When Hudson
acquires a business, it assesses the financial assets and
liabilities assumed for appropriate classification and designation
in accordance with the contractual terms, economic circumstances
and pertinent conditions as at the acquisition date.
Any
contingent consideration to be transferred by the acquirer will be
recognized at fair value at the acquisition date. Contingent
consideration classified as an asset or liability that is a
financial instrument and within the scope of IAS 39 Financial
Instruments: Recognition and Measurement, is measured at fair value
with the changes in contingent considerations recognized in the
statement of comprehensive
income.
Hudson measures goodwill at the acquisition date as:
–
The
fair value of the consideration transferred;
–
plus
the recognized amount of any non-controlling interests in the
acquiree;
–
plus
if the business combination is achieved in stages, the fair value
of the pre-existing equity interest in the acquiree;
–
less
the net recognized amount of the identifiable assets acquired and
liabilities assumed.
When
the excess is negative, a bargain purchase gain is recognized
immediately in the statement of
comprehensive income.
After initial recognition, goodwill is measured at cost less any
accumulated impairment losses. For the purpose of impairment
testing, goodwill acquired in a business combination is, from the
acquisition date, allocated to Hudson’s group of
cash-generating units that are expected to benefit from the
combination.
Where goodwill forms part of a cash-generating unit and a operation
within is disposed of, the goodwill associated with the operation
disposed of is included in the carrying amount of the operation
when determining the gain or loss on disposal of the operation.
Goodwill disposed of in this circumstance is measured based on the
relative values of the operation disposed of and the portion of the
cash-generating unit retained, unless there are specific
allocations.
b) Turnover
Turnover
is composed of net sales and advertising income. Sales
are measured at the fair value of the consideration received,
excluding sales taxes or duties. Retail sales are settled in cash
or credit card, whereas advertising income is recognized when the
services are rendered.
c) Cost of sales
Cost of
sales are recognized when the Group sells a product and comprise
the purchase price and the cost incurred until the product arrives
at the warehouse, i. e. import duties and transport as well
as inventory valuation adjustments, inventory
differences and supplier rebates or
discounts.
F-8
d) Foreign currency
Each subsidiary in Hudson uses its corresponding functional
currency. Items included in the financial statements of each entity
are measured using that functional currency. Transactions in
foreign currencies are recorded at the date of the transaction in
the functional currency using the exchange rate of such
date.
Monetary
assets and liabilities denominated in foreign currencies are
re-measured to their fair value in the functional currency using
the exchange rate at the reporting date and the difference is
recorded as unrealized foreign exchange gains or losses. Exchange
differences arising on the settlement or on the translation of
derivative financial instruments are recognized through the
statement of comprehensive
income, except where the hedges on net investments allow the
recognition through other comprehensive income, until the
respective investments are disposed of. Any related deferred tax on
unrealized FX is accounted accordingly. Non-monetary items are
measured at historical cost in the respective functional
currency.
At the
reporting date, the assets and liabilities of all subsidiaries
reporting in foreign currency are translated into the reporting
currency of Hudson (USD) using the exchange rate at the reporting
date. The statements of comprehensive
income of the subsidiaries are translated using the average
exchange rates of the respective month in which the transactions
occurred. The net translation differences are recognized in other
comprehensive income. On disposal of a foreign entity or when
control is lost, the deferred cumulative translation difference
recognized within equity relating to that particular operation is
recognized in the statement of
comprehensive income as gain or loss on sale of
subsidiaries.
Intangible assets and fair value adjustments identified during a
business combination (purchase price allocation) are treated as
assets and liabilities in the functional currency of such
operation.
Principal foreign exchange rates applied for valuation and
translation:
AVERAGE RATE
CLOSING RATE
IN
USD
2017
2016
2015
DEC 31, 2017
DEC 31, 2016
DEC 31, 2015
1
CAD
0.7714
0.7552
0.7832
0.7951
0.7446
0.7232
F-9
e) Equity instruments
An
equity instrument is any contract that evidences a residual
interest in the assets of an entity after deducting all of its
liabilities. Equity instruments issued by the Group are recognized at the proceeds
received, net of direct issue costs. Repurchase of Hudson’s
own equity instruments is recognized and deducted directly in
equity. No gain or loss is recognized in the statement of comprehensive income on the purchase,
sale, issue or cancellation of Hudson’s own equity
instruments.
f)
Share capital
Ordinary
shares are classified as equity. Costs directly attributable to the
issuance of shares or options are shown in the statement of changes
in equity as transaction costs for equity instruments, net of
tax.
For
Hudson shares purchased by Hudson Ltd.
or any subsidiary, the consideration paid, including any directly
attributable expenses, net of income taxes, is deducted from equity
until the shares are cancelled, assigned or sold. Where such
ordinary shares are subsequently sold, any consideration received,
net of any direct transaction expenses and income taxes, is
included in equity.
g) Leases
Leases
of property, plant and equipment where the Group, as lessee, has substantially all the
risks and rewards of ownership are classified as finance leases.
Finance leases are capitalized at the leases’ inception at
the fair value of the leased property or, if lower, the present
value of the minimum lease payments. The corresponding rental
obligations, net of finance charges, are included in other
short-term and long-term
payables. Each lease payment is allocated between the liability and
finance cost. The finance cost is charged to the statement
of comprehensive income over
the lease period so as to
produce a constant periodic rate of interest on the remaining
balance of the liability for each period. The property, plant and
equipment acquired under finance leases is depreciated over the
asset’s useful life or over the shorter of the asset’s useful life and
the lease term if there is no reasonable certainty that the Group will obtain ownership at the end of
the lease term.
Leases
in which a significant portion of the risks and rewards of
ownership are not transferred to the Group as lessee are classified as operating
leases. Payments made
under operating leases (net of any incentives received from the
lessor) are charged to
profit or loss on a straight-line basis over the period of the
lease.
h) Share-based
payments
Equity
settled share based payments to employees and other third parties
providing services are measured at the fair value of the equity
instruments at grant date. The fair value determined at grant date
of the equity-settled share-based payments is expensed on a pro
rata basis over the vesting period, based on the estimated number
of equity instruments that will eventually vest. At the end of each
reporting period, Hudson revises its estimate of the number of
equity instruments expected to vest.
F-10
The
impact of the revision of the original estimates, if any, is
recognized in the statement of
comprehensive income such that the cumulative expense
reflects the revised estimate.
Where the terms of an equity settled award are modified, the
minimum expense recognized is the expense as if the terms had not
been modified. An additional expense is recognized for any
modification, which increases the total fair value of the
share-based payment arrangement, or is otherwise beneficial to the
holder of the option as measured at the date of
modification.
i) Taxation
Income
tax expense represents the sum of the current income tax and
deferred tax. Income tax positions not relating to items recognized
in the statement of comprehensive
income, are recognized in correlation to the underlying
transaction either in other comprehensive income or
equity.
Current income
tax
Income tax receivables or payables are measured at the amount
expected to be recovered from or paid to the tax authorities. The
tax rates and tax laws used to compute the amount are those that
are enacted or substantially enacted at the reporting date in the
countries or states where Hudson operates and generates taxable
income.
Income tax relating to items recognized in other comprehensive
income is recognized there as well.
Deferred
tax
Deferred tax is provided using the liability method on temporary
differences between the tax basis of assets or liabilities and
their carrying amounts for financial reporting purposes at the
reporting date.
Deferred tax liabilities are recognized for all taxable temporary
differences, except:
–
When
the deferred tax liability arises from the initial recognition of
goodwill or an asset or liability in a transaction that is not a
business combination and, at the time of the transaction, affects
neither the accounting profit nor taxable profit or
loss
–
In
respect of taxable temporary differences associated with
investments in subsidiaries, when the timing of the reversal of the
temporary differences can be controlled and it is probable that the
temporary differences will not reverse in the foreseeable
future
Deferred tax assets are recognized for all deductible temporary
differences, the carry forward of unused tax credits or tax losses.
Deferred tax assets are recognized to the extent that it is
probable that taxable profit will be available, against which the
deductible temporary differences and the carry forward of unused
tax credits and unused tax losses can be utilized,
except:
–
When
the deferred tax asset relating to the deductible temporary
difference arises from the initial recognition of an asset or
liability in a transaction that is not a business combination and,
at the time of the transaction, affects neither the accounting
profit nor taxable profit or loss
F-11
–
In
respect of deductible temporary differences associated with
investments in subsidiaries, deferred tax assets are recognized
only to the extent that it is probable that the temporary
differences will reverse in the foreseeable future and taxable
profit will be available against which the temporary differences
can be utilized.
The carrying amount of deferred tax assets is reviewed at each
reporting date and reduced to the extent that it is no longer
probable that sufficient taxable profit will be available to allow
the deferred tax asset to be utilized. Unrecognized deferred tax
assets are reassessed at each reporting date and are recognized to
the extent that it has become probable that future taxable profits
will allow the deferred tax asset to be recovered.
Deferred tax assets and liabilities are measured at the tax rates
that are expected to apply in the year when the asset is realized
or the liability is settled, based on tax rates (and tax laws) that
have been enacted or substantially enacted at the reporting date
applicable for each respective company.
j) Property, plant and equipment
These are stated at cost less accumulated depreciation and any
impairment in fair value. Depreciation is computed on a
straight-line basis over the shorter of the estimated useful life
of the asset or the lease term. The useful lives applied are as
follows:
–
Real
estate (buildings) 20 to 40 years
–
Leasehold
improvements the shorter of the lease term or 10 years
–
Furniture
and fixtures the shorter of the lease term or 5 years
–
Motor
vehicles the shorter of the lease term or 5 years
–
Computer
hardware the shorter of the lease term or 5 years
k) Intangible assets
These
assets mainly comprise of concession rights. Intangible assets
acquired separately are capitalized at cost and those from business
combinations are capitalized at fair value as at the date of
acquisition. Following initial recognition, the cost model is
applied to intangible assets. The
useful lives of these intangible assets are assessed to be either
finite or indefinite. Intangible assets with finite lives are
amortized over the useful economic life. Intangible assets with an
indefinite useful life are reviewed annually to determine whether
the indefinite life assessment continues to be supportable. If not,
any changes are made on a prospective basis.
l) Impairment of non-financial assets
Intangible assets that are subject to depreciation and amortization
are reviewed for impairment whenever events or circumstances
indicate that the carrying amount may not be recoverable. An
impairment loss is recognized when the carrying amount of an asset
or cash generating unit exceeds its recoverable amount. The
recoverable amount is the higher of an asset’s fair value
less cost of disposal and its value in use. For the purpose of
assessing impairment, assets are grouped at the lowest levels for
which there are separately identifiable cash inflows (cash
generating units).
F-12
m) Associates
Associates
are all entities over which Hudson has significant influence but
not control, generally accompanying a shareholding of more than
20 % but less than
50 % of the voting
rights. Investments in associates are accounted for using the
equity method of accounting. Under the equity method, the
investment is initially recognized at cost. The carrying amount is
increased or decreased to recognize the investor’s share of
the net earnings of the investee after the date of acquisition and
decreased by dividends declared. Hudson’s investment in
associates includes goodwill identified on
acquisition.
Hudson’s
share of post-acquisition net earnings and its share of
post-acquisition movements in other comprehensive income are
recognized in the combined statement of comprehensive income with a
corresponding adjustment to the carrying amount of the investment.
When Hudson’s share of losses in an associate equals or
exceeds its interest in the associate, Hudson does not recognize
further losses, unless it has incurred legal or constructive
obligations or made payments on behalf of the associate. If the
ownership interest in an associate is reduced but significant
influence is retained, only a proportionate share of the amounts
previously recognized in other comprehensive income is reclassified
to net earnings where appropriate.
Hudson
determines at each reporting date whether there is any objective
evidence that the investment in the associate is impaired. If this
is the case, Hudson calculates the amount of impairment as the
difference between the recoverable amount of the associate and its
carrying value and recognizes the amount adjacent to share of
result of associates in the statement of comprehensive income.
Profits
and losses resulting from upstream and downstream transactions
between Hudson and its associate are recognized in the
Group’s financial statements only to the extent of unrelated
investor’s interests in the associates. Unrealized losses are
eliminated unless the transaction provides evidence of an
impairment of the asset transferred. Accounting policies of
associates have been changed where necessary to ensure consistency
with the policies adopted by Hudson.
Dilution
gains and losses arising in investments in associates are
recognized in the statement of
comprehensive income.
n) Inventories
Inventories
are valued at the lower of historical cost or net realizable value.
The historical costs are determined using the weighted average
method, Historical cost includes all expenses incurred in bringing
the inventories to their present location and condition. This
includes mainly import duties and transport cost. Purchase
discounts and rebates are deducted in determining the cost of
inventories. The net realizable value is the estimated selling
price in the ordinary course of business less the estimated costs
necessary to make the sale. Inventory allowances are set up in the
case of slow-moving and obsolete stock. Expired items are fully
written off.
o) Trade receivables
This
account includes receivables related to the sale of
merchandise.
F-13
p) Cash and cash equivalents
Cash
and cash equivalents consist of cash on hand or current bank
accounts as well as short-term deposits at banks with initial
maturity below 91 days. Credit card receivables with a maturity of
up to 4 days are included as cash in transit. Short-term
investments are included in this position if they are highly
liquid, readily convertible into known amounts of cash and subject
to insignificant risk of changes in value.
q) Provisions
Provisions
are recognized when the Group
has a present obligation (legal or constructive) as a result of a
past event, it is probable that Hudson will be required to settle
the obligation, and a reliable estimate can be made of the amount
of the obligation.
The
amount recognized as a provision is the best estimate at the end of
the reporting period of the consideration required to settle the
present obligation, taking into account the risks and uncertainties
surrounding the obligation. When a provision is measured using the
cash flows estimated to settle the present obligation, its carrying
amount is the present value of those cash flows (where the effect
of the time value of money is material).
When
some or all of the economic benefits required to settle a provision
are expected to be recovered from a third party, a receivable is
recognized as an asset if it is virtually certain that the
reimbursement will be received and the amount of the receivable can
be measured reliably.
Contingent liabilities
acquired in a business combination
Contingent liabilities acquired in a business combination are
initially measured at fair value at the acquisition date. At the
end of subsequent reporting periods, such contingent liabilities
are measured at the higher of the amount that would be recognized
in accordance with IAS 37 Provisions, contingent liabilities and
contingent assets and the amount initially recognized less
cumulative amortization recognized in accordance with IAS 18
Revenue.
r) Financial instruments
Financial
assets and financial liabilities are initially measured at fair
value. Transaction costs that are directly attributable to the
acquisition or issue of financial assets and financial liabilities,
other than financial assets and financial liabilities at fair value
through profit or loss (FVTPL), are deducted from or added to the
fair value of the financial assets or financial liabilities on
initial recognition. Transaction costs directly attributable to the
acquisition of financial assets or financial liabilities at fair
value through profit or loss are recognized immediately in the
statement of comprehensive
income.
Trade and other accounts receivable
Trade
and other receivables (including credit cards receivables, other
accounts receivable, cash and cash equivalents) are measured at
amortized cost using the effective interest method, less any
impairment.
Impairment of financial assets
Financial
assets, other than those at FVTPL, are assessed for indicators of
impairment at the end of each reporting period. Financial assets
are considered to be impaired when there is objective evidence
that, as a result of one or more events that occurred after the
initial recognition of the financial asset, the estimated future
cash flows of the financial asset have been affected. Certain
categories of financial assets, such as trade receivables, are
assessed for impairment individually. Subsequent recoveries of
amounts previously written off are credited against the allowance
accounts for these categories. Changes in the carrying amount of
the allowance account are recognized in the statement of comprehensive income in the lines
selling expenses or other operational result.
F-14
Derecognition of financial assets
Hudson
derecognizes a financial asset only when the contractual rights to
the cash flows from the asset expire, or when it transfers the
financial asset and substantially all the risks and rewards of
ownership of the asset to another entity. If Hudson neither
transfers nor retains substantially all the risks and rewards of
ownership and continues to control the transferred as set, Hudson
recognizes its retained interest in the asset and an associated
liability for amounts it may have to pay. If Hudson retains
substantially all the risks and rewards of ownership of a
transferred financial asset, Hudson continues to recognize the
financial asset and also recognizes a collateralized borrowing for
the proceeds received.
Financial liabilities at FVTPL
These
are stated at fair value, with any gains or losses arising on
re-measurement recognized in the statement of comprehensive income. The net gain or
loss recognized in the combined statement of comprehensive income incorporates any
interest paid on the financial liability and is included in the
financial result in the statement of
comprehensive income. Fair value is determined in the manner
described in note 34.
Other financial liabilities
Other
financial liabilities (including borrowings) are subsequently
measured at amortized cost using the effective interest
method.
Derecognition of financial liabilities
Hudson
derecognizes financial liabilities only when the obligations are
discharged, cancelled or expired. The difference between the
carrying amount of the financial liability derecognized and the
consideration paid or payable is recognized in the combined
statement of comprehensive
income.
Offsetting of financial instruments
Financial
assets and financial liabilities are offset and the net amount is
reported in the combined statement of financial position if there
is a currently enforceable legal right to offset the recognized
amounts and there is an intention to settle on a net basis, to
realize the assets and settle the liabilities
simultaneously.
s) Derivative financial instruments
Hudson
may enter into a variety of derivative financial instruments to
manage its exposure to interest rate or foreign exchange rate
risks, including foreign exchange forward contracts, interest rate
swaps and cross currency swaps. Further details of derivative
financial instruments are disclosed in note 35.
Derivatives
are initially recognized at fair value at the date the derivative
contracts are entered into and are subsequently re-measured to
their fair value at the end of each reporting period. The resulting
gain or loss is recognized in the statement of comprehensive income unless the
derivative is designated and effective as a hedging instrument, in
which event the timing of the recognition in the statement
of comprehensive income depends
on the nature of the hedge relationship.
F-15
Embedded
derivatives
Derivatives embedded in non-derivative host contracts are treated
as separate derivatives when their risks and characteristics are
not closely related to those of the host contracts and the host
contracts are not measured at FVTPL.
2.4 CHANGES
IN ACCOUNTING POLICY AND DISCLOSURES
New and amended Standards and Interpretations
The accounting policies adopted are consistent with those of the
previous financial year, except for the revised Standards and the
Interpretations adopted in these financial statements (effective
January 1, 2017).
–
Disclosure initiative – amendments to IAS 7 Statement
of cash flows: Requires
additional disclosure of changes in liabilities arising from
financing activities see note 35.
–
IAS 12 Income taxes: Additional
clarification on the recognition for deferred tax assets for
unrealized losses on debt instruments measured at fair value.
Hudson currently does not have
debt valued at fair value.
F-16
3. CRITICAL
ACCOUNTING JUDGMENTS AND KEY SOURCES OF ESTIMATION
UNCERTAINTY
The preparation of Hudson’s combined financial statements
requires management to make judgments, estimates and assumptions
that affect the reported amounts of income, expenses, assets and
liabilities, and the disclosure of contingent liabilities, at the
reporting date.
KEY SOURCES OF ESTIMATION UNCERTAINTY
The key assumptions concerning the future and other key sources of
estimation include uncertainties at the reporting date, which may
have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next
financial periods, are discussed below.
Concession rights
Concession rights acquired in a business combination are measured
at fair value as at the date of acquisition and amortized over the
contract duration. Hudson annually assesses the concession rights
with finite lives for impairment indications.
Goodwill
Hudson
tests these items annually for impairment. The underlying
calculation requires the use of estimates. The assumptions used are
disclosed in note 19.1.
Income taxes
Hudson
is subject to income taxes in the US,
UK and Canada. Significant judgment is required in
determining the worldwide
provision for income taxes. There are many transactions and
calculations for which the ultimate tax assessment is uncertain.
Hudson recognizes liabilities for tax audit issues based on
estimates of whether additional taxes will be payable. Where the
final tax outcome is different from the amounts that were initially
recorded, such differences will impact the income tax or deferred
tax provisions in the period in which such assessment is
made.
Further
details are given in notes 15 and 21.
The
United States recently enacted a reform of the tax legislation
that, among other things, reduces the corporate federal income tax
(CIT) rate from 35 % to
21 % and imposes in
addition a “base erosion and anti-abuse tax”
(“BEAT”) on domestic corporations for payments done to
foreign related persons in connection with tax deductible expenses.
The reduction of the U.S. CIT rate is expected to be beneficial to
us in future years in which we have net income subject to U.S. tax.
For the current year the reduction in the U.S. CIT rate resulted in
a one-off net loss of $40.2 million on deferred tax assets and
deferred tax liabilities in the US-entities, reflected also in a
higher Group effective tax
rate. There are a number of uncertainties and ambiguities as to the
interpretation and application of many of the provisions in the Tax
Reform Legislation, including the provisions relating to the BEAT.
In the absence of guidance on these issues, we will use what we
believe are reasonable interpretations and assumptions in
interpreting and applying the Tax Reform Legislation for purposes
of determining our income tax payable and results of operations,
which may change as we receive additional clarification and
implementation guidance. It is also possible that the Internal
Revenue Service could issue subsequent guidance or take positions
on audit that differ from the interpretations and assumptions that
we previously made, which could have a material adverse effect on
our cash tax liabilities, results of operations and financial
condition. In addition, we may be subject to audits of our income,
sales and other transaction taxes by U.K. tax authorities, U.S.
federal and state authorities and Canadian national and provincial
authorities. Outcomes from these audits could have an adverse
impact on our operating results and financial
condition.
Deferred tax assets
Deferred tax assets are recognized for unused tax losses and
deductible temporary differences to the extent that it is probable
that taxable profit will be available against which the losses can
be utilized. Management judgment is required to determine the
amount of deferred tax assets that can be recognized, based upon
the likely timing and level of future taxable profits. Further
details are given in note 21.
F-17
Share-based payments
Hudson
measures the cost of equity settled transactions with employees by
reference to the fair value of the equity instruments at the grant
date. Estimating such fair values require determining the most
appropriate valuation model for a grant of equity instruments,
which depends on the terms and conditions of the grant, as well as
the most appropriate inputs to the valuation model including the
expected probability that the triggering clauses will be met. The
result will be the expected quantity of shares to be assigned. The
assumptions and models used are disclosed in note 26.
Purchase price allocation
The determination of the fair values of the identifiable assets
(especially the concession rights) and the assumed liabilities,
resulting from business combinations, is based on valuation
techniques such as the discounted cash flow model. Some of the
inputs to this model are partially based on assumptions and
judgments.
Consolidation of entities where Hudson has control,
but
holding only minority voting rights
Hudson
considers controlling certain entities, even when it holds less
than the majority of the voting rights, when it is exposed to or
has the rights to variable returns from the involvements with the
investee and has the ability to affect those returns through its
power over the entity. These indicators are evaluated at the time
of first consolidation and reviewed when there are changes in the
statutes or composition of the executive board of these entities.
Further details on non-controlling interests are disclosed in notes
27 and 28.
28.
F-18
4. NEW
AND REVISED STANDARDS AND INTERPRETATIONS ISSUED BUT NOT YET
ADOPTED / EFFECTIVE
The standards and interpretations described below are expected to
have an impact on Hudson’s financial position, performance,
and / or disclosures. Hudson intends to adopt these
standards when they become effective.
IFRS 9 addresses the classification, measurement and derecognition
of financial assets and financial liabilities, introduces new rules
for hedge accounting and a new impairment model for financial
assets.
Phase 1: Classification and
measurement – determines how financial assets and financial
liabilities are accounted for and measured on an ongoing
basis.
The Group currently has no financial assets classified as available
for sale, held-to-maturity or FVOCI. The financial assets and
liabilities currently classified as FVPL will continue to meet the
criteria for this as these do not include any non-derivatives.
Hence there will be no change to the accounting for these assets
and liabilities.
Phase 2: Impairment – a
new single expected loss impairment model is introduced that will
require more timely recognition of expected credit
losses.
The new
impairment model requires the recognition of impairment provisions
based on expected credit losses (ECL) rather than only incurred
credit losses as is the case under IAS 39. It applies to financial
assets classified at amortized cost, debt instruments measured at
FVOCI, contract assets under IFRS 15 Revenue from Contracts with
Customers, lease receivables, loan commitments and certain
financial guarantee contracts. Based on the assessments undertaken
at the statement of financial
position date, the Group
does not expect a significant increase in the loss
allowances.
Phase 3: Hedge accounting – the new model aligns the
accounting treatment with risk management activities, users of the
financial statements will be provided with better information about
risk management and the effect of hedge accounting on the financial
statements.
As a
general rule, more hedge relationships might be eligible for hedge
accounting, as the standard introduces a more principles-based
approach. The Group has
confirmed that its current hedge relationships will qualify as
continuing hedges upon the adoption of IFRS 9. In addition, the
Group is considering to
designate the intrinsic value of foreign currency option contracts
as hedging instruments going forward. These are currently accounted
as derivatives at FVPL. Changes in the fair value of foreign
exchange forward contracts attributable to forward points, and in
the time value of the option contracts, will in this case in future
be deferred in new costs of hedging reserve (OCI) within equity.
The deferred amounts will be recognized against the related hedged
transaction when it occurs.
The
Group has elected to apply the limited exemption in IFRS 9
paragraph 7.2.15 relating to the transition for classification and
measurement and impairment, and accordingly will not be restating the 2017
comparative period, except in relation to changes in the fair value
of foreign exchange forward contracts attributable to forward
points, which will be recognized in the costs of hedging reserve
(OCI) (the Group did not utilize these hedges during
2017).
F-19
This
will mean that:
–
any adjustments to
carrying amounts of financial assets or liabilities will be
recognized at the beginning of the next reporting period, with the
difference recognized in opening retained earnings;
–
financial assets
will not be reclassified in the statement of financial position for the
comparative period;
–
allowances for
impairment will not be restated in the comparative
period;
–
the transition will
be a change in accounting policy, and disclosures required by IAS 8
will be illustrated;
–
a third
statement of financial position
as at January 1, 2017
will not be presented. The retrospective application of the
accounting for the forward element of forward contracts will not
impact the statement of financial
position for the year ended December 31, 2017, other than on retained
earnings and reserves which are disclosed in the statement of
changes in equity.
–
disclosure
requirements arising from the consequential amendments made to IFRS
7 by IFRS 9 will not be presented in relation to the comparative
period.
The new
standard also introduces expanded disclosure requirements and
changes in presentation. These are expected to change the nature
and extent of the Group’s
disclosures about its financial instruments particularly in the
year of the adoption of the new standard.
Hudson
expects that the reclassifications from the IAS 39 financial assets
categories to the IFRS 9 categories will have no impact on the
measurement categories. The allowances for trade receivables and
receivables for advertising income are not expected to increase due
to the adoption of IFRS 9 in 2018.
IFRS 15
Revenue from contracts with customers (effective
January 1,
2018)
IFRS 15,
revenue from contracts with customers deals with revenue
recognition and establishes principles for reporting useful
information to users of financial statements about the nature,
amount, timing and uncertainty of revenue and cash flows arising
from an entity’s contracts with customers. Revenue is
recognized when a customer obtains control of a good or service and
thus has the ability to direct the use and obtain the benefits from
the good or service.
The
standard replaces IAS 18 Revenue and IAS 11 Construction
contracts and related interpretations. Hudson has analyzed the
impact of the standard and has
not identified any material changes to the current revenue
recognition approach. Hudson considered the following
aspects:
(a) Sale of goods
Hudson’s
retail sales are in cash or credit card and the revenue recognition
occurs when the assets are transferred to the customer.
(b) Advertising income
Advertising
income is recognized when the services have been
rendered.
The
Group intends to adopt the modified retrospective approach, which
means that the cumulative impact of the adoption (if any), will be
recognized in retained earnings as of January 1, 2018 and that the comparatives
will not be restated.
Lessees
will be required to recognize a lease liability for the obligation
to make lease payments and a right-of-use asset for the right to
use the underlying asset for the lease term. The lease liability
will be measured at present value of the lease payments to be made
over the lease term. In other words, lessees will appear to become
more asset-rich but also more indebted. To be considered as such, a
lease agreement has to convey the right to control the use of an
identified asset throughout the period of use, so that the customer
has the right to obtain substantially all of the economic benefits
from the use of the identified asset; and direct the use of the
identified asset (i.e. direct how and for what purpose the asset is
used).
The
standard will mainly affect the accounting of:
a) Concession agreements
Hudson
enters into concession agreements with operators of airports,
railway stations etc. to operate retail shops. Usually these
arrangements require a variable compensation based on sales or
other activity indicators, with a minimum threshold. In those cases
where at the inception of the agreement the minimum amounts can be
calculated reliably over the respective contractual terms, Hudson
will account for this part as a lease in accordance with IFRS
16,
b) Rent agreements for office and warehouse buildings
These
agreements will usually qualify as leases under IFRS 16, except if
the agreement is cancellable within 12 months.
As at
the reporting date, the Group has non-cancellable operating lease
commitments with remaining duration of
more than 12 months. These lease agreements have minimal firm commitments
and most of them also fees in
proportion to the net sales of the specific
shop.
The
Group has hundreds of
concession agreements with individual wording and
specifications. Had the Group
adopted the new lease standard as of December 31, 2017, we estimate the amount of
right-of-use assets and lease liabilities that would have to be recognized at about
USD 1 to 2 billion. In 2017 the Group recognized
the lease payments as selling expenses
(concession fees and
rents) of USD 399.1 million and as general expenses (premises) of USD 14.9 million.
F-21
Amendments
that are considered to be insignificant from a current point of
view:
Sale or Contribution of Assets between an Investor and its
Associate
or Joint venture (proposed amendments to IFRS 10 and
IAS 28)
(effective
date not yet defined by IASB)
The
gain or loss resulting from the sale to or contribution from an
associate of assets that constitute a business as defined in
IFRS 3 is recognized in full. The gain or loss resulting from
the sale to or contribution from a subsidiary that does not
constitute a business as defined in IFRS 3 (i. e. not a group of assets conforming
a business) to an associate is recognized only to the extent of
unrelated investors’ interests in the associate.
Annual Improvements 2014 – 2016 – issued
December 2016
IAS 28 Investment in Associates and Joint ventures
(effective January 1,
2018)
Clarification
that the election to measure at fair value through profit or loss
is available on an investment-by-investment basis, upon initial
recognition.
–
Interpretation 22
– Foreign Currency Transactions and Advance Considerations
(effective January 1,
2018)
Clarification
of the date to be used for the exchange rate on initial recognition
of a related asset, expense or income where consideration is paid
or received in advance for foreign currency denominated contracts.
For each payment the date to be used is the same as the date for
the initial recognition of the related non-monetary asset or
liability.
F-22
5. SEGMENT
INFORMATION
Hudson
consists of one operating segment “Travel Retail
Operations” for which reports are submitted to the Group
Executive Committee (formerly the Divisional Committee of Dufry),
being the Chief Operating Decision Maker (CODM). These reports form
the basis for the evaluation of performance and allocation of resources.
Hudson
generates turnover from selling a wide range of duty-free and
duty-paid products through its stores that are mainly located at
airports, commuter terminals, hotels, landmarks or tourist
destinations. Refer to note 7
for a split of net sales by product category, market sector and
sales channel.
Net Sales by Country
IN MILLIONS OF USD
2017
2016
2015
US
1,420.9
1,359.1
1,164.2
Canada
339.9
291.0
205.4
Total
1,760.8
1,650.1
1,369.6
Non-Current Assets by Country (excluding financial instruments and
deferred taxes)
IN
MILLIONS OF USD
DEC 31, 2017
DEC 31, 2016
US
358.8
568.2
Canada
416.8
410.4
Total
975.6
978.6
We refer to the annex List of subsidiaries for the assignment of
each subsidiary to the respective country.
F-23
6. ACQUISITIONS
OF BUSINESSES AND TRANSACTIONS WITH NON-CONTROLLING
INTERESTS
There
were no transactions in 2017 and 2016.
2015
Transactions
ACQUISITION OF WORLD DUTY FREE S.P.A.
In a
two step acquisition on August 7, 2015, and November 13, 2015, Dufry acquired 100 %
in the voting equity interests in World Duty Free S.p.A. (WDF), a
publicly listed company in Italy for a total consideration of
USD 2,859.5
(EUR 2,608.7) million
equivalent of EUR 10.25 per share in cash. The acquisition was
mainly financed through the issuance of share capital. This
acquisition was accounted using the acquisition
method.
For
this acquisition, Dufry incurred transaction costs of
USD 32.7 million in 2015 presented as other
operational expenses and of USD 12.8 million presented as related taxes in
the statement of comprehensive
income of Dufry, but not reflected in these combined
financial statements.
For the
purpose of these combined financial statements, only those entities
of WDF located in the USA or Canada were combined in the formation
of Hudson Group.
F-24
The final fair value of the identifiable assets and liabilities of
the WDF entities in USA and Canada at the date of acquisition are
as described below:
Total purchase price allocated to US and Canada
entities
346.9
380.3
From
the date when Hudson took control of the US and Canada entities of
the WDF operations in August 2015 until December 2015 these operations contributed
USD 171.3 million in turnover and USD (1.5)
million in operating profit to the statement of comprehensive income of
Hudson.
If the
business combination had occurred as at the beginning of 2015, US
and Canada entities of WDF would have generated a turnover during
2015 of USD 381.7 million
and an operating profit of approximately USD 3.0 million.
F-25
7. TURNOVER
IN
MILLIONS OF USD
2017
2016
2015
Net
sales
1,760.8
1,650.1
1,369.6
Advertising
income
41.7
37.1
33.4
Turnover
1,802.5
1,687.2
1,403.0
NET SALES BREAKDOWN
Net sales by product categories
IN
MILLIONS OF USD
2017
2016
2015
Confectionery,
Food and Catering
628.0
572.3
469.6
Perfumes
and Cosmetics
258.4
226.3
174.6
Fashion,
Leather and Baggage
220.1
183.3
146.2
Literature
and Publications
175.6
192.5
187.2
Wine
and Spirits
88.0
75.3
62.9
Tobacco
goods
52.2
47.4
46.3
Watches,
Jewelry and Accessories
115.5
86.2
76.9
Electronics
87.7
78.5
66.6
Other
product categories
135.3
188.3
139.3
Total
1,760.8
1,650.1
1,369.6
Net sales by market sector
IN
MILLIONS OF USD
2017
2016
2015
Duty-paid
1,334.4
1,284.0
1,075.2
Duty-free
426.4
366.1
294.4
Total
1,760.8
1,650.1
1,369.6
Net sales by
channel
IN MILLIONS OF USD
2017
2016
2015
Airports
1,662.6
1,565.9
1,307.6
Downtown and
hotel shops
43.1
29.5
13.1
Railway stations
and other
55.1
54.7
48.9
Total
1,760.8
1,650.1
1,369.6
F-26
8. SELLING
EXPENSES
IN
MILLIONS OF USD
2017
2016
2015
Concession
fees and rents (note 33)
(399.1)
(375.3)
(307.0)
Credit
card commissions
(29.0)
(27.7)
(20.9)
Advertising
and commission expenses
(0.9)
(0.8)
(0.9)
Packaging
materials
(2.5)
(2.3)
(2.2)
Other
selling expenses
(3.3)
(3.4)
(3.3)
Selling expenses
(434.8)
(409.5)
(334.3)
Concession
and rental income (note 33)
11.6
11.9
7.3
Commercial
services and other selling income
2.0
1.9
1.3
Selling income
13.6
13.8
8.6
Total
(421.2)
(395.7)
(325.7)
9. PERSONNEL
EXPENSES
IN
MILLIONS OF USD
2017
2016
2015
Salaries
and wages
(298.4)
(270.3)
(227.0)
Social
security expenses
(43.0)
(38.5)
(29.8)
Other
personnel expenses
(29.9)
(28.6)
(22.7)
Total
(371.3)
(337.4)
(279.5)
Full
time equivalents (FTE - unaudited)
8,894
8,485
8,124
10. GENERAL
EXPENSES
IN MILLIONS OF USD
2017
2016
2015
Franchise
fees and commercial services
(63.2)
(62.5)
(51.7)
Repairs,
maintenance and utilities
(17.1)
(15.5)
(14.4)
Office
and administration
(16.2)
(14.5)
(11.4)
Premises
(14.9)
(16.3)
(13.3)
Legal, consulting
and audit fees
(13.5)
(11.8)
(14.5)
Travel,
entertainment and representation
(11.7)
(11.6)
(10.4)
Taxes,
other than income taxes
(7.1)
(8.4)
(6.3)
IT
expenses
(6.3)
(4.6)
(3.7)
PR and
advertising
(3.2)
(2.7)
(2.1)
Insurances
(2.2)
(2.2)
(2.0)
Bank
expenses
(1.5)
(1.8)
(1.1)
Total
(156.9)
(151.9)
(130.9)
F-27
11. INVESTMENTS
IN ASSOCIATES
This
includes Nuance Group (Chicago) LLC which operates four
duty-free stores at O’Hare International Airport of Chicago
in Illinois, USA, and as of 2017 Midway Partnership LLC operating
duty paid stores at Chicago Midway International
Airport.
Hudson’s interests in Nuance Group (Orlando) LLC and Broward
Duty Free LLC were sold on March 15, 2015, for
USD 30 million to an existing shareholder at book
value.
These
investments are accounted for using the equity
method.
Summarized statement of financial position
IN MILLIONS OF USD
DEC 31, 2017 NUANCE GROUP (CHICAGO)
LLC
DEC 31, 2017 MIDWAY PARTNERSHIP
LLC
DEC 31, 2017
TOTAL
DEC 31, 2016 NUANCE GROUP (CHICAGO)
LLC
Cash and cash
equivalents
2.6
1.4
4.0
2.5
Other current
assets
4.0
2.7
6.7
4.0
Non-current
assets
3.0
1.0
4.0
3.2
Other current
liabilities
(3.9)
(2.9)
(6.8)
(2.8)
Net assets
5.7
2.2
7.9
6.9
Proportion of
Hudson’s ownership
35.0%
50.0%
35.0%
Hudson’s share of the equity
2.0
1.1
3.1
2.4
F-28
Summarized statement of comprehensive income
2017
IN MILLIONS OF USD
NUANCE GROUP
(CHICAGO) LLC
MIDWAY
PARTNERSHIP LLC
OTHER
ASSOCIATES
TOTAL
Turnover
18.7
15.1
–
33.8
Depreciation,
amortization and impairment
(0.1)
–
–
(0.1)
Net earnings for the year
(1.0)
0.2
–
(0.8)
Total comprehensive income
(1.0)
0.2
–
(0.8)
HUDSON'S
SHARE
35.0%
50.0%
Net earnings for
the year
(0.4)
0.1
–
(0.3)
Total comprehensive income
(0.4)
0.1
–
(0.3)
2016
IN MILLIONS OF
USD
NUANCE GROUP (CHICAGO)
LLC
MIDWAY PARTNERSHIP
LLC
OTHER ASSOCIATES
TOTAL
Turnover
20.0
–
–
20.0
Depreciation,
amortization and impairment
(0.1)
–
–
(0.1)
Net earnings for the year
(2.1)
–
–
(2.1)
Total comprehensive income
(2.1)
–
–
(2.1)
HUDSON'S
SHARE
35.0%
Net
earnings for the year
(0.7)
–
–
(0.7)
Total comprehensive income
(0.7)
–
–
(0.7)
2015
IN MILLIONS OF USD
NUANCE GROUP (CHICAGO) LLC
MIDWAY PARTNERSHIP LLC
OTHER ASSOCIATES
TOTAL
Turnover
23.9
–
4.4
28.3
Depreciation,
amortization and impairment
(0.2)
–
(0.1)
(0.3)
Other
operational result
–
–
1.1
1.1
Net earnings for the year
3.5
–
1.4
4.9
Total comprehensive income
3.5
–
1.4
4.9
HUDSON'S
SHARE
35.0%
Net earnings for
the year
1.2
–
0.5
1.7
Total comprehensive income
1.2
–
0.5
1.7
The
information above reflects the amounts presented in the financial
statements of the associates (other than Hudson’s share of
amounts) adjusted for differences in accounting policies between
the associates and Hudson.
F-29
Reconciliation of the carrying amount of its
investments
This line includes non-recurring transactions, impairments of
financial assets and changes in provisions.
IN
MILLIONS OF USD
2017
2016
2015
Consulting
fees, expenses related to projects and start-up
expenses
(0.2)
(0.3)
(0.5)
Impairment
of loans and other receivables
(0.9)
(1.4)
(0.6)
Closing
or restructuring of operations
(2.7)
(8.3)
(2.0)
Losses
on sale of non-current assets
(3.3)
(2.0)
(0.4)
Project-related
costs
(3.4)
-
-
Other
operating expenses
(3.7)
(2.3)
0.3
Other operational expenses
(14.2)
(14.3)
(3.2)
IN
MILLIONS OF USD
2017
2016
2015
Insurance
- compensation for losses
0.1
0.1
-
Gain
on sale of non-current assets
-
0.1
0.5
Recovery
of write offs / release of allowances / debt waiver
9.4
4.0
-
Other
operating income
1.0
0.8
1.0
Other operational income
10.5
5.0
1.5
IN
MILLIONS OF USD
2017
2016
2015
Other
operational expenses
(14.2)
(14.3)
(3.2)
Other
operational income
10.5
5.0
1.5
Other operational result
(3.7)
(9.3)
(1.7)
14. INTEREST
IN MILLIONS OF USD
2017
2016
2015
EXPENSES ON
FINANCIAL LIABILITIES
Interest
expense
(29.4)
(29.1)
(24.7)
Other financial
expenses
(0.5)
(0.5)
(0.6)
Interest expense on financial liabilities
(29.9)
(29.6)
(25.3)
EXPENSES ON
NON-FINANCIAL LIABILITIES
Interest
expense
(0.3)
(0.2)
(0.1)
Total interest expense
(30.2)
(29.8)
(25.4)
INCOME
ON FINANCIAL ASSETS
Interest
income
1.8
2.0
1.6
Other
financial income
0.1
0.1
–
Interest income on financial
assets
1.9
2.1
1.6
Total interest income
1.9
2.1
1.6
F-31
15. INCOME
TAXES
INCOME TAX RECOGNIZED IN THE COMBINED STATEMENT OF COMPREHENSIVE
INCOME
IN MILLIONS OF USD
2017
2016
2015
Current income
taxes
(8.5)
(8.4)
(5.4)
of which
corresponding to the current period
(8.5)
(7.3)
(8.1)
of which
adjustments recognized in relation to prior years
–
(1.1)
2.7
Deferred income
taxes
(34.4)
42.7
1.6
of which related
to the origination or reversal of temporary
differences
5.8
10.3
1.6
of which
adjustments recognized in relation to prior years
–
32.4
–
of which
adjustments due to change in tax rates
(40.2)
–
–
Total
(42.9)
34.3
(3.8)
IN MILLIONS OF USD
2017
2016
2015
Earnings before
income tax (EBT)
32.3
15.5
22.1
Expected tax rate
in %
35.2%
36.2%
36.9%
Tax at the
expected rate
(11.3)
(5.6)
(8.2)
EFFECT
OF
Different tax
rates for subsidiaries in other jurisdictions
0.5
(0.2)
(0.7)
Effect of changes
in tax rates on previously recognized deferred tax assets and
liabilities
(40.2)
–
(0.6)
Non-deductible
expenses
0.3
(0.5)
2.4
Net change of
unrealized tax loss carry-forwards
2.0
(4.1)
–
Non recoverable
withholding taxes
–
–
(0.2)
Minority
interests
11.2
10.1
9.5
Adjustments
recognized in relation to prior year
–
31.3
2.7
Other
items
(1.4)
3.3
(8.7)
Total
(42.9)
34.3
(3.8)
The
expected tax rate in % approximates the average income tax rate of
the countries where the Group
is active, weighted by the profitability of the respective
operations. For 2017, there have been no significant changes in
these income tax rates. In December 2017, a significant decrease of the
US federal income tax rate has been enacted, applicable for the
year 2018 and onwards. The reduction in the U.S. federal corporate
income tax rate from 35 %
to 21 % resulted in a net
downward adjustment of USD 40.2 million in relation to deferred
taxes.
16. EARNINGS
PER SHARE
EARNINGS PER SHARE ATTRIBUTABLE TO EQUITY HOLDERS OF THE
PARENT
The information on earnings per share for Hudson Group pursuant to
IAS 33 has not been presented, as the combined entities have not
formed a statutory group and, as such Hudson Group has no
historical capital structure.
Goodwill is subject to impairment testing each year. Concession
rights with finite useful lives are tested for impairment whenever
events or circumstances indicate that the carrying amount may not
be recoverable.
19.1.1 Impairment
test of goodwill
For the
purpose of impairment testing, goodwill recognized from business
combinations has been allocated to a
group of cash generating units
(CGUs) which represents Hudson Group’s only operating segment “Travel
Retail Operations” and amounts to USD 331.2 million.
The
recoverable amount of the group of
CGUs is determined based on value-in-use calculations which
require the use of assumptions (see table with key assumptions
below). The calculation uses cash flow projections based on
financial forecasts approved by the management covering a five-year
period. Cash flows beyond the five-year period are extrapolated
using a steady growth rate that does not exceed the long-term
average growth rate for the respective market and is consistent
with forecasted growth included in the travel related retail
industry reports.
The key
assumptions (in %) used for
determining the recoverable amounts of goodwill in Hudson Group
are:
POST
TAX DISCOUNT RATES
PRE
TAX DISCOUNT RATES
GROWTH RATES FOR NET SALES
2017
2016
2017
2016
2017
2016
7.27
6.33
8.79
7.94
4.3-5.6
4.6-8.4
As
basis for the calculation of these discount rates, the Group uses
the weighted average cost of capital, based on risk free interest
rates derived from the past 5 year average of prime 10-year USD
bonds rates: 2.23 %
(2016: 2.08%).
For the
calculation of the discount rates and WACC (weighted average cost
of capital), the Group used the following re-levered
beta:
2017
2016
Beta
factor
0.85
0.86
Sensitivity to changes in
assumptions
Management believes that any reasonably possible change
(+ / – 1 %) in the key assumptions,
on which the recoverable amounts are based, would not cause the
respective recoverable amount to fall below the carrying
amount.
F-36
19.1.2 Key
assumptions used for value-in-use calculations
The calculation of value-in-use is most sensitive to the following
assumptions:
–
Sales
growth
–
Growth
rate used to extrapolate
–
Gross
margin and suppliers prices
–
Concession
fee levels
–
Discount
rates
Sales growth
Sales
growth is based on statistics published by external experts, such
as ACI (Airports Council International) to estimate the development
of passenger traffic per country where Hudson is active. For the
budget year, the management also takes into consideration specific
price inflation factors of the country, the cross currency effect
and the expected potential changes to capture clients (penetration)
per business unit.
Gross rates used to extrapolate
For the
period after 5 years, Hudson has used a growth rate of 2.0 %
(2016: 2.0 %) to
extrapolate the cash flow projections.
Gross margins
The
expected gross margins are based on average product assortment
values estimated by the management for the budget 2017. These
values are maintained over the planning period or where specific
actions are planned and have been increased or decreased by up to
1 % over the 5 year planning horizon compared to the
historical data. The gross margin is also affected by
supplier’s prices. Estimates are obtained from global
negotiations held with the main suppliers for the products and
countries for which products are sourced, as well as data relating
to specific commodities during the months before the
budget.
Concession fee levels
These
assumptions regarding the concession fee evolution are important
and monitored in the specific market as well as the renewal
conditions and competitor behavior where the CGU is active. For a
CGU subject to a value-in-use calculation, the management expects
the competitive position to remain stable over the budget
period.
Discount rates
Several
factors affect the discount rates:
–
For the financial
debt part, the rate is based on the average interest of the past 5
years of the respective ten-year government bond and is increased
by the Group’s effective bank spread and adjusted by the
effective tax rate and country risk of the CGU.
–
For the equity
part, a 5 % equity risk premium is added to the base rate
commented above and adjusted by the Beta of Hudson’s peer
group.
The
same methodology is used by the management to determine the
discount rate used in discounted cash flow (DCF) valuations, which
are a key instrument to assess business potential of new or
additional investment proposals.
F-37
20. CASH
FLOWS USED FOR PURCHASE OF INTANGIBLE ASSETS
IN MILLIONS OF USD
2017
2016
2015
Additions of
intangible assets (note 19)
(8.2)
(5.7)
(3.0)
Total Cash Flow
(8.2)
(5.7)
(3.0)
21. DEFERRED
TAX ASSETS AND LIABILITIES
Temporary differences arise from the following
positions:
IN MILLIONS OF USD
DEC 31,
2017
DEC 31,
2016
DEFERRED TAX
ASSETS
Property, plant
and equipment
4.0
47.4
Intangible
assets
19.8
60.1
Provisions and
other payables
11.7
30.8
Tax loss
carry-forward
51.5
57.5
Other
15.5
12.0
Total
102.5
207.8
DEFERRED TAX
LIABILITIES
Property, plant
and equipment
(0.5)
(50.4)
Intangible
assets
(59.8)
(68.3)
Provisions and
other payables
–
(0.8)
Other
(2.0)
(7.1)
Total
(62.3)
(126.6)
Deferred tax assets, net
40.2
81.2
Deferred tax balances are presented in the consolidated statement
of financial position as follows:
IN MILLIONS OF USD
DEC 31, 2017
DEC 31, 2016
Deferred tax
assets
90.3
153.0
Deferred tax
liabilities
(50.1)
(71.8)
Balance at December 31
40.2
81.2
F-38
Reconciliation
of movements to the deferred taxes:
IN MILLIONS OF USD
DEC 31,
2017
DEC 31,
2016
Changes in
deferred tax assets
(62.7)
6.5
Changes in
deferred tax liabilities
21.7
36.8
Currency
translation adjustments
6.4
(0.1)
Deferred tax income (expense) at December 31
(34.6)
43.2
THEREOF
Recognized in the
statement of comprehensive income
(34.4)
42.7
Recognized in
equity
(0.2)
0.5
Tax loss carry-forwards
The
unrecognized tax loss carry-forwards by expiry date are as
follows:
IN MILLIONS OF USD
DEC 31, 2017
DEC 31, 2016
DEC 31, 2015
Expiring within 1
to 3 years
4.4
–
–
Expiring within 4
to 7 years
0.8
–
–
Expiring after 7
years
39.8
31.9
21.3
Total 1
45.0
31.9
21.3
1
This amount includes USD 21.3 million added
through business combination in 2015
22. OTHER
NON-CURRENT ASSETS
IN MILLIONS OF USD
DEC 31, 2017
DEC 31, 2016
Guarantee
deposits
2.5
1.8
Loans and
contractual receivables
24.4
26.4
Other
0.1
6.7
Subtotal
27.0
34.9
Allowances
(2.1)
(3.8)
Total
24.9
31.1
MOVEMENT IN ALLOWANCES
IN
MILLIONS OF USD
2017
2016
Balance at January 1
(3.8)
(2.4)
Creation
(0.3)
(1.4)
Utilization
2.0
-
Balance at December 31
(2.1)
(3.8)
F-39
23. INVENTORIES
IN
MILLIONS OF USD
DEC 31, 2017
DEC 31, 2016
Purchased
inventories at cost
192.4
171.7
Inventory allowance
(6.4)
(10.3)
Total
186.0
161.4
CASH FLOWS USED FOR INCREASE / FROM DECREASE IN
INVENTORIES
IN MILLIONS OF USD
2017
2016
2015
Balance at
January 1
171.7
155.4
114.7
Balance at
December 31
192.4
171.7
155.4
Gross change - at cost
(20.7)
(16.3)
(40.7)
Business
combinations (note 6)
–
–
25.8
Utilization of
allowances (in prior years: other cash
flow effects)
(8.9)
0.5
0.3
Currency
translation adjustments
2.7
1.6
(2.5)
Cash Flow – (increase) / decrease in
inventories
(26.9)
(14.2)
(17.1)
Cost of
sales includes inventories written down to net realizable value and
inventory differences of USD 8.5 (2016: 8.4) million.
F-40
24. TRADE
RECEIVABLES
IN MILLIONS OF USD
DEC 31,
2017
DEC 31,
2016
Trade
receivables, gross
5.3
8.4
Allowances
(0.7)
(0.2)
Trade receivables, net
4.6
8.2
Trade receivables are stated at their nominal value less allowances
for doubtful amounts. These allowances are established based on an
individual evaluation when collection appears to be no longer
probable.
AGING ANALYSIS OF TRADE RECEIVABLES
IN MILLIONS OF USD
DEC 31,
2017
DEC 31,
2016
Not
due
0.7
4.1
OVERDUE
Up to 30
days
0.6
0.1
31 to 60
days
–
0.2
61 to 90
days
0.8
0.1
More than 90
days
3.2
3.9
Total overdue
4.6
4.3
Trade receivables, gross
5.3
8.4
MOVEMENT IN ALLOWANCES
IN MILLIONS OF USD
2017
2016
Balance at January 1
(0.2)
(0.4)
Creation
(0.4)
–
Utilized
–
0.2
Currency
translation adjustments
(0.1)
–
Balance at December 31
(0.7)
(0.2)
F-41
25. OTHER
ACCOUNTS RECEIVABLE
IN MILLIONS OF USD
DEC 31, 2017
DEC 31, 2016
Receivables for
refund from suppliers and related services
32.1
17.2
Guarantee
deposits
0.2
0.2
Personnel
receivables
1.3
1.3
Loans
receivable
4.8
–
Accounts receivables
38.4
18.7
Prepayments
for concession fees and rents
8.0
14.0
Prepayments
of sales and other taxes
1.5
4.3
Prepayments,
other
1.1
2.7
Prepayments
10.6
21.0
Receivables
from subtenants and business partners
1.2
4.5
Other
9.2
4.6
Other receivables
10.4
9.1
Total
59.4
48.8
Allowances
–
(1.5)
Total
59.4
47.3
MOVEMENT IN ALLOWANCES
IN MILLIONS OF USD
2017
2016
Balance at January 1
(1.5)
(2.1)
Creation
–
(1.3)
Utilized
1.5
1.9
Balance at December 31
–
(1.5)
F-42
26. SHARE-BASED
PAYMENTS
SHARE
PLAN OF DUFRY AG
On
December 1, 2017, Dufry
granted to the members of the Group Executive Committee (GEC) and
selected members of the senior management the Award 2017 consisting
of 24,474 PSU units. The PSU
Award 2017 has a contractual life of 29 months and will vest on
May 4, 2020. At grant
date the fair value of one PSU Award 2017 represents the market
value for one Dufry share at that date, i. e. CHF 140.69, adjusted by the probability
that participants comply with the ongoing contractual relationship
clause. As of December 31, 2017, no PSU Award 2017
forfeited, so that 24,474 PSU
Award 2017 remain outstanding.
On
October 27, 2016, Dufry
granted to Hudson’s
members of the Group Executive Committee (GEC) and selected members
of the senior management the Award 2016 consisting of 27.399 PSU. The Performance Share Unit (PSU) Award 2016 has a contractual life of
26 months and will vest on
May 1, 2019. At grant
date the fair value of one PSU Award 2016 represents the market
value for one Dufry share at that date, i. e. CHF 127.00, adjusted by the probability
that participants comply with the ongoing contractual relationship
clause. As of December 31, 2017, no PSU Award 2016
forfeited, so that all PSU
Award 2016 remain outstanding.
On
October 27, 2016, the
Board of Directors of Dufry
decided, upon proposal by the Remuneration Committee, to pay out
half of the 2015 bonus through a share program. Therefore,
26,530 Rights to Receive Shares
(RRS) were awarded to selected members of the senior management
of Hudson. These RRS have a
contractual life of 26 months and will vest on January 1, 2019. At grant date the fair
value of one RRS represents the market value for one Dufry share at
that date, i. e.
CHF 127.00, adjusted by
the probability that participants comply with the ongoing
contractual relationship clause. As of December 31, 2017, no RRS forfeited, so that
all RRS remain outstanding.
One PSU
(Award 2017 or Award 2016) will give the right to the holders to
receive free of charge up to 1.5 (2016: 2) Dufry shares depending
on the effective cumulative amount of cash earnings per share (Cash
EPS) reached by Dufry during the years of award and the following
two years compared with the target (2017: CHF 25.97, 2016: CHF 24.59). The Cash EPS equals the basic
Earnings per Share adjusted for amortization of intangible assets
identified during business combinations and non-recurring effects.
If at vesting the cumulative adjusted Cash EPS is at target level,
each PSU grants one share. If the cumulative adjusted Cash EPS is
at 150 % of the target (maximum threshold) or above, each PSU
grants 1.5 (2016: 2) shares at vesting, and if the adjusted Cash
EPS is at 50 % of the target (minimum threshold) or below, no
share will be granted at vesting. If the adjusted Cash EPS is
between 50 % and 150 % of the target, the number of
shares granted for each PSU will be allocated on a linear basis.
Additionally, the allocation of shares is subject to an ongoing
contractual relationship of the participant with Dufry throughout
the vesting period. Holders of PSU are not entitled to vote or
receive dividends, like shareholders do.
One RRS
(Award 2016) will give the right to the holders to receive free of
charge one Dufry share subject to an ongoing contractual
relationship with Dufry throughout the vesting period (Award 2016
until January 1, 2019).
Holders of these rights are not entitled to vote or receive
dividends, like shareholders do.
F-43
With
the Award 2015 Dufry granted to the members of the GEC 22,715 PSU options. One PSU gave the right
to receive on May 3,
2018, free of charge, up to two shares, based on the performance
achieved by Dufry. For the PSU Award 2015, the performance was
measured based on the target Cash EPS of CHF 24.42 to be achieve over the
three-year period 2015 – 2017 as described for
the awards mentioned above. In May 2018 the PSU award 2015 will vest
and Dufry will assign 0.926
Dufry shares per PSU award 2015 as during the preceding three-year
period the effectively cash EPS achieved was of CHF 23.51, making a total of 21,034 shares.
In 2017
Hudson recognized through profit and loss share-based payment
expenses for a total of USD 4.6 (2016: 1.2) million.
27. BREAKDOWN
OF TRANSACTIONS WITH NON-CONTROLLING INTERESTS
The following table reflects increase in share capital of companies
with non-controlling interests that have been recognized in
equity attributable to non-controlling interests at fair
value:
28. INFORMATION
ON COMPANIES WITH NON-CONTROLLING INTERESTS
The
non-controlling interests (NCI) comprise the portions in equity and
net earnings in 100 (Dec. 2017) subsidiaries that are not fully
owned by the Group.
The
list of subsidiaries (refer to the last note of these financial
statements) provides the following information of subsidiaries with
NCI’s: name, principal place of business by country, the
proportion of ownership hold by the Group and the share capital (if
applicable).
Our non-controlling interests consists of partners in either common
law partnerships or LLC’s (collectively, “Joint
Ventures”). Our partners own percentages of the Joint
Ventures and are therefore entitled to distributions of net
earnings. While there is some variation among our agreements, it is
generally the case that the Executive Management Committee,
controlled by Hudson’s majority of representatives, is
obligated to distribute, each quarter, the excess of an appropriate
reserve reasonably determined by the committee to be necessary to
meet the current and anticipated needs of the Joint Venture. Such
distributions are allocated among the partners, Hudson included,
based on each partner’s percentage interest in the Joint
Venture. Distributions are discretionary only to the extent that
reserves are reasonably required as above stated.
Each of the Joint Ventures is treated as a separate operating
entity and each has its own revenues and expenses. No expenses of
Hudson are shared with any Joint Venture but Hudson does receive
payments for “back office” services (financial, legal,
HR, IT, etc.) that are provided to the Joint Venture by Hudson in
amounts typically calculated as a percentage of the gross revenues
of the Joint Venture. These amounts are stated in each Joint
Venture agreement and vary by agreement. They are established at
the time of agreement by calculating the internal cost for the
services as a percentage of Hudson’s gross revenues and that
percentage of the Joint Venture gross revenue is inserted in the
Joint Venture agreement as Hudson’s compensation. Such
payments are fees for services and not shared
expenses.
In addition to the above, Hudson receives occasional, specific
reimbursement for certain special services rendered and/or payroll
expended on specific projects. Store openings are an example. Large
numbers of Hudson personnel are made available to a Joint Venture
in order to complete tasks in a mandated time frame that would be
impossible to meet with the Joint Venture’s own
employees.
With
the exception of the one presented in the following tables, none of
the subsidiaries have non-controlling interests that are material
for the Group.
Summarized statement of comprehensive income
IN MILLIONS OF USD
2017
2016
2015
Hudson Las Vegas JV
Turnover
67.1
64.6
64.8
Depreciation,
amortization and impairment
(1.3)
(1.4)
(0.8)
Net earnings for the year
10.9
9.6
11.1
Non-controlling
interest
27%
27%
27%
Non-controlling interest share of the net earnings Hudson Las
Vegas
The
related party long-term loans
(refer to note 32) are denominated in USD and CAD. The interest
rate for USD loans in 2017 was 5.9 % (2016: 5.9 %). The interest rate for CAD loans
in 2017 was 3.9 %.
DETAILED
CREDIT FACILITIES
Dufry,
jointly with Hudson, negotiates and manages its key credit
facilities centrally and then provides intercompany financing to
its subsidiaries. Minor credit lines at local level are kept for
practical reasons. Hudson’s credit lines are with Credit
Agricole and Bank of America.
* Related to the
acquisition of the Nuance Group AG, (USA)
30. OTHER
LIABILITIES
IN MILLIONS OF USD
DEC 31, 2017
DEC 31, 2016
Personnel
payables
38.8
39.2
Other
service related vendors
23.3
51.3
Accrued
liabilities
16.5
11.8
Concession fee
payables
12.8
18.9
Sales tax and
other tax liabilities
11.9
12.5
Payables for
capital expenditure
11.1
14.4
Accrued lease
expenses
2.0
–
Payables to Joint
Venture partners
0.8
1.0
Other
payables
14.9
19.9
Total
132.1
169.0
THEREOF
Current
liabilities
132.1
167.9
Non-current
liabilities
–
1.1
Total
132.1
169.0
F-47
31. POST-EMPLOYMENT BENEFIT OBLIGATIONS
Hudson provides retirement benefits through defined contribution
pension plans which are funded by regular contributions made by the
employer and the employees to a third-party. As of December 31,2017, the discretionary credit balance was USD 0.9
million.
32. RELATED
PARTIES AND RELATED PARTY TRANSACTIONS
A party is related to the Group if the party directly or indirectly
controls, is controlled by, or is under common control with the
Group, has an interest in the Group that gives it significant
influence over the Group, has joint control over the Group or is an
associate or a joint venture of the Group. In addition, members of
the key management personnel of the Group or close members of the
family are also considered related parties.
The
following tables reflect
related party transactions and transactions with associated
companies:
Statement of comprehensive income
IN MILLIONS OF
USD
2017
2016
2015
PURCHASE
OF GOODS FROM
International
Operations & Services (USA)
–
37.2
38.4
International
Operation & Services (UY) SA
67.4
27.3
7.9
Hudson News Distributors 1
12.2
15.6
19.2
Hudson RPM 1
8.5
5.0
4.3
PURCHASE
OF SERVICES FROM
Dufry
International AG, Franchise fees expense
(50.6)
(42.9)
(35.9)
World
Duty Free Group SA, Franchise fees expense
–
(7.2)
(6.5)
Nuance
Group AG, Franchise fees expense
–
–
(1.8)
Dufry
Finance SNC, Interest expenses
–
(26.6)
(24.6)
Dufry
International AG, Interest expenses
(28.6)
(2.5)
(0.2)
Dufry
Financial Services B. V., Interest expenses
(0.9)
–
–
Dufry
Management AG, IT expenses
(1.3)
–
–
World
Duty Free Group SA, Service fee expenses
(0.2)
–
–
OTHER
OPERATIONAL INCOME FROM
Dufry
International AG, Debt waiver
9.4
–
–
SALES
OF SERVICES TO
Nuance Group (Chicago) LLC 2
0.9
–
–
1
Hudson News Distributors and Hudson RPM are
controlled by James S. Cohen, a member of Hudson’s board of
directors
2
Transactions with associated
companies
F-48
Statement of financial position
IN MILLIONS OF USD
2017
2016
ACCOUNTS
RECEIVABLES AT DECEMBER 31
Hudson RPM, other
receivables 1
0.8
–
Nuance Group
(Chicago) LLC 2
0.1
–
ACCOUNTS PAYABLES
AT DECEMBER 31
Dufry
International AG,
Loans payable, long-term
468.7
475.2
Dufry
International AG,
Loans payable, short-term
13.1
–
Dufry Financial
Services B. V., Loans
payable, long-term
51.7
–
Dufry Financial
Services B. V., Loans
payable, short-term
67.6
–
International
Operations & Services (USA), trade payables
–
14.8
International
Operation & Services (UY) SA,
trade payables
31.5
13.9
Hudson News
Distributors, trade payables 1
0.1
0.9
Hudson RPM, trade
payables 1
–
0.5
Dufry
International AG, Fee
payables
1.8
50.5
Dufry
International AG,
Other payables
7.2
7.6
Dufry Financial
Services B. V., Other
payables
0.2
–
World Duty Free
Group UK Ltd,
Other payables
0.3
–
Dufry
Management AG, Fee
payables
0.1
–
Dufry
Management AG,
Other payables
0.3
–
1
Hudson News Distributors and
Hudson RPM are controlled by James S. Cohen, a member of
Hudson’s board of
directors
2
Transactions with associated
companies
Board members and executives
The compensation to key executives for the services provided during
the respective years include all forms of consideration paid,
payable or provided by the Group, including compensation in Dufry
shares as follows:
IN MILLIONS OF USD
2017
2016
2015
Salaries
3.6
3.2
3.0
Variable
payment
2.9
2.7
2.5
Non-monetary
benefits
0.1
0.1
0.1
Share based
payments
4.6
0.6
0.6
Total
11.2
6.6
6.2
During this period the Group had no board members.
F-49
33. COMMITMENTS
AND CONTINGENCIES
GUARANTEE COMMITMENTS
Some long-term concession agreements, which Hudson has entered
into, include obligations to fulfil minimal lease payments during
the full term of the agreement. The lease payments to airports or
terminals are also called concession fees. Some of these agreements
have been backed with guarantees provided by Hudson or a financial
institution. During the years 2017, 2016 or 2015, no party has
exercised their right to call upon such guarantees.
LEASE
INCOME / (EXPENSE)
Lease
payments under operating leases have been recognized as an expense
for the periods up to December31, 2017. All accrued, but still unpaid concession fees are
presented as liabilities in the statement of financial
position.
The Group recognized the following lease and sublease as an
income / (expense) in the period:
IN MILLIONS OF USD
2017
2016
2015
Minimum lease
payments
(262.4)
(206.6)
(170.0)
Variable
rent
(136.7)
(168.7)
(137.0)
Concession fees expense (note 8)
(399.1)
(375.3)
(307.0)
Sublease income
(note 8)
11.6
11.9
7.3
Such fees are usually determined in proportion to sales and require
a minimal payment, which varies by contract/agreement.
Expected
income / (expense)
The total of future minimum lease payments under non-cancellable
operating leases for each of the following years are as
follows:
IN MILLIONS OF USD
FUTURE EXPENSES
Not later than
one year
276.7
Later than one
year and not later than five years
894.3
Later than five
years
536.2
Total
1,707.2
The
total of future minimum sublease payments expected to be received
under non-cancellable subleases at the end of the reporting period
are USD 35.5 million.
F-50
34. FAIR
VALUE MEASUREMENT
FAIR VALUE OF FINANCIAL INSTRUMENTS CARRIED AT AMORTIZED
COST
The fair value measurement hierarchy of Hudson’s assets and
liabilities, that are measured subsequent to initial recognition at
fair value, are grouped into Levels 1 to 3 based on the degree to
which the fair value is observable:
–
Level 1 fair value measurements are those derived from
quoted prices (unadjusted) in active markets for identical assets
or liabilities.
–
Level 2 fair value measurements are those derived from
inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly (i.e. as
prices) or indirectly (i.e. derived from
prices).
–
Level 3 fair value measurements are those derived from
valuation techniques that include inputs for the asset or liability
that are not based on observable market data (unobservable
inputs).
As of December 31, 2017 and 2016, Hudson Group did not hold any
financial assets or liabilities which need to be re-measured at
fair value. The Group’s other financial assets and
liabilities for which fair values are to be disclosed qualify as
Level 2 fair value measurements. Their book values represent a fair
approximation of their fair values. There were no transfers between
Levels 1 and 2 during the period.
F-51
35. FINANCIAL
INSTRUMENTS
Significant accounting policies are described in note 2.3 and
4.
35.1 CAPITAL
RISK MANAGEMENT
Capital comprises equity attributable to the equity holders of the
parent adjusted for effects from transactions with non-controlling
interests.
The primary objective of Hudson’s capital management is to
ensure that it maintains an adequate credit rating and sustainable
capital ratios in order to support its business and maximize
shareholder value.
Hudson manages its financing structure and makes adjustments to it
in light of its strategy and the long-term opportunities and costs
of each financing source. To maintain or adjust the financing
structure, Hudson may adjust dividend payments to
shareholders, return capital to shareholders, issue new shares or
issue equity-linked instruments or equity-like
instruments.
Furthermore, Hudson monitors the financing structure using a
combination of ratios, including a gearing ratio, cash flow
considerations and profitability ratios. As for the gearing ratio
Hudson includes within net debt, interest bearing loans and
borrowings, less cash and cash equivalents, excluding discontinued
operations.
35.1.1 Gearing
ratio
The following ratio compares owner’s equity to borrowed
funds:
IN MILLIONS OF USD
DEC 31,
2017
DEC 31,
2016
Cash and cash
equivalents
(137.4)
(187.6)
Financial debt,
short-term
80.7
1.5
Financial debt,
long-term
520.4
475.2
Net debt
463.7
289.1
Equity
attributable to equity holders of the parent
493.7
658.2
ADJUSTED
FOR
Effects from
transactions with non-controlling interests 1
0.8
0.4
Total capital 2
494.5
658.6
Total net debt and capital
958.2
947.7
Gearing ratio
48.4%
30.5%
1
Represents the excess paid (received) above
fair value of non-controlling interests on shares acquired (sold)
as long as there is no change in control (IFRS
10.23)
2
Includes all
capital and reserves that are managed as
capital
Hudson did not hold collateral of any kind at the reporting
dates.
Financial assets and financial liabilities
at fair value through profit and loss
2
Non-financial
assets or non-financial liabilities comprise prepaid expenses and
deferred income, which will not generate a cash outflow or inflow
as well as other tax positions
This position includes the
foreign exchange gain (loss) recognized on third party and
intercompany financial assets and liabilities through combined statement of comprehensive
income
2
This position includes the income
from the released impairments and allowances and recoveries during
the period less the increase of impairments and
allowances
This position includes the
foreign exchange gain (loss) recognized on third party and
intercompany financial assets and liabilities through combined
statement of comprehensive income
2
This position includes the income
from the released impairments and allowances and recoveries during
the period less the increase of impairments and
allowances
35.3 FINANCIAL RISK MANAGEMENT OBJECTIVES
As a retailer, Hudson has activities which need to be financed in
different currencies and are consequently affected by fluctuations
of foreign exchange and interest rates. Hudson’s treasury
manages the financing of the operations through centralized credit
facilities to ensure an adequate allocation of these resources and
simultaneously minimize the potential currency financial risk
impacts.
Hudson continuously monitors the market risk, such as risks related
to foreign currency, interest rate, credit, liquidity and capital.
Hudson seeks to minimize the currency exposure and interest rates
risk using appropriate transaction structures or alternatively,
using derivative financial instruments to hedge the exposure to
these risks. The treasury policy forbids entering or trading
financial instruments for speculative purposes.
F-55
35.4 MARKET RISK
Hudson’s
financial assets and liabilities are mainly exposed to market risk
in foreign currency exchange and interest rates. Hudson’s
objective is to minimize the statement of comprehensive income impact and to
reduce fluctuations in cash flows through structuring the
respective transactions to minimize market risks. In cases, where
the associated risk cannot be hedged appropriately through a
transaction structure, and the evaluation of market risks indicates
a material exposure, Hudson may use financial instruments to hedge
the respective exposure.
Hudson may enter into a variety of financial instruments to manage
its exposure to foreign currency risk, including forward foreign
exchange contracts, currency swaps and over the counter plain
vanilla options.
During the current financial year Hudson has not utilized foreign
currency forward contracts and options for hedging
purposes.
35.5 FOREIGN
CURRENCY RISK MANAGEMENT
Hudson manages the cash flow surplus or deficits in foreign
currency of the operations through FX-transactions in the
respective local currency. Major imbalances in foreign currencies
at Group level may be hedged through foreign exchange forwards
contracts.
35.5.1 Foreign
currency sensitivity analysis
Among various methodologies to analyze and manage risk, Hudson
utilizes a system based on sensitivity analysis. This tool enables
Group treasury to identify the level of risk of each entity.
Sensitivity analysis provides an approximate quantification of the
exposure in the event that certain specified parameters were to be
met under a specific set of assumptions.
The
sensitivity analysis includes all monetary assets and liabilities
held by each Group company
irrespective of whether the positions are third party or
intercompany.
F-56
The
foreign exchange rate sensitivity is calculated by aggregation of
the net foreign exchange rate exposure of Hudson entities at
December 31 of the
respective year. The values and risk disclosed here are the hedged
and not hedged positions assuming a 5 % appreciation of the
USD against all other currencies.
A
positive result indicates a profit, before tax in the statement
of comprehensive income or in
the hedging and revaluation reserves when the EUR strengthens
against the relevant currency.
IN MILLIONS OF USD
DEC 31,
2017
DEC 31,
2016
Effect on the
Statement of Comprehensive Income
– profit (loss) of USD
(0.3)
(0.9)
Effect
on the Statement of Comprehensive Income – profit (loss) of
CAD
0.2
–
Effect on the
Statement of Comprehensive Income
– profit (loss) of EUR
–
0.5
35.6 INTEREST
RATE RISK MANAGEMENT
35.6.1 Allocation
of financial assets and liabilities to interest
classes
Credit risk refers to the risk that counterparty may default on its
contractual obligations resulting in financial loss to
Hudson.
Almost all Hudson sales are retail sales made against cash or
internationally recognized credit / debit cards. The
remaining credit risk is in relation to taxes, refunds from
suppliers and guarantee deposits.
The credit risk on cash deposits or derivative financial
instruments relates to banks or financial institutions. Hudson
monitors the credit ranking of these institutions and does not
expect defaults from non-performance of these
counterparties.
The main banks where Hudson keeps net assets positions hold a
credit rating of A – or higher.
35.7.1 Maximum
credit risk
The carrying amount of financial assets recorded in the financial
statements, after deduction of any allowances for losses,
represents Hudson’s maximum exposure to credit
risk.
F-58
35.8 LIQUIDITY
RISK MANAGEMENT
Hudson evaluates this risk as the ability to settle its financial
liabilities on time and at a reasonable price. Beside its
capability to generate cash through its operations, Hudson, jointly
with Dufry, mitigates liquidity risk by keeping unused credit
facilities with financial institutions (see note
29).
35.8.1 Remaining
maturities for non-derivative financial assets and
liabilities
The
following tables have been drawn up based on the undiscounted cash
flows of financial assets
and liabilities (based on the earliest date on which Hudson can
receive or be required to pay).
The
following tables include
principal and interest cash flows.
Prior
to the completion of the initial public offering, Dufry
International AG Switzerland created Hudson Ltd.
Bermuda a fully owned subsidiary to hold all the shares of Dufry
America Holding Inc., the parent entity of the Hudson Group in the
USA and Canada, as well as Nuance Group (Canada) Inc., the parent entity of World Duty
Free Group (Vancouver)
Inc..
On
January 31, 2018 the initial
public offering (IPO) took place in
which Dufry International AG offered 42.6 % or 39,417,765 Class A common shares of
Hudson Ltd.
at a public offering price of USD 19.00
per share, adding up to total
consideration received by Dufry
International AG of USD 714.4 million
after underwriting discounts and
commissions, but before expenses. The shares began trading
on the New York Stock Exchange on
February 1, 2018, under the ticker symbol “HUD.”
Dufry will use the proceeds
mainly to reduce the bank debt. The
related over-allotment option was not exercised.
Report of Independent Registered Public Accounting
Firm
To the Shareholders and Board of Directors of Hudson
Ltd.
Opinion on the Financial Statements
We have audited the accompanying combined statements of financial
position of Hudson Group (the Company) as of December 31, 2017 and
2016, and the related combined statements of comprehensive income,
changes in equity and cash flows for each of the three years in the
period ended December 31, 2017, and the related notes (collectively
referred to as the “financial statements”). In our
opinion, the financial statements present fairly, in all material
respects, the combined financial position of the Company at
December 31, 2017 and 2016, and the combined results of its
operations and its cash flows for each of the three years in the
period ended December 31, 2017, in conformity with International
Financial Reporting Standards as issued by the International
Accounting Standards Board.
Basis for Opinion
These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on the Company’s financial statements based on our
audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) (PCAOB) and are
required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audits in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial
reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly we express no such opinion.
Our audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
