Financial position

Principles and goals of financial management

Central control of Group-wide financial management

Group-wide financial management is controlled centrally by the Group’s central treasury department. The goals pursued include securing financial flexibility and stability, securing Group-wide liquidity and the management of financial risks. Group-wide financial management comprises Group financing, cash and liquidity management, the management of market price risks and the management of counterparty risks.

“In-house bank” concept reduces cost of capital

Within Group financing factors such as market capacity, cost of financing, investor diversification, flexibility, covenants and terms to maturity are taken into account when selecting financial instruments. External loans for Group financing are taken out centrally and primarily in the Group’s reporting currency (euro) within the framework of an “inhouse-bank” concept. This allows economies of scale to be exploited and the cost of capital to be minimized. These funds are made available in the form of intercompany loans to cover the financing needs of the Group companies. The loans are issued in the local currency of the Group company concerned. A distinction is drawn between operating loans structured similarly to an overdraft facility and financing loans for Group companies with greater and longer-term financing requirements.

Cash pooling lowers external financing requirements

The Group’s central treasury department optimizes and centralizes payment flows and secures Group-wide liquidity by its cash and liquidity management. The cash inflows from its operating activities is the Group’s most important source of liquidity. The cash pooling method uses efficient cash management systems to channel liquidity surpluses of individual Group companies to other Group companies with financial requirements. This intercompany financial balancing system reduces external financial requirements and thus brings down net interest expenses. For remaining liquidity surpluses, the Group makes short-term investments mainly in money market funds.

Use of derivatives mitigates financial risks

The management of market price risks is intended to limit the effects of interest and currency risks on cash flow. For hedging purposes, the Group makes use of both spot transactions and derivative financial instruments, for example in the form of interest rate swaps. Risk Report Material financial risks

Central management of counterparty risk

The counterparty risk mainly results from the investment of liquid funds as part of cash and liquidity management and from the use of derivative financial instruments as part of interest rate and currency management. In its management of counterparty risk the Group aims for the broadest possible distribution of volumes and ensures that financial instruments are generally only contracted with counterparties that have very good credit ratings.

Capital structure and financing

Syndicated loan secures long-term financial flexibility

HUGO BOSS is safeguarding its financial flexibility by means of a revolving syndicated loan of EUR 450 million. In the past fiscal year, the Group exercised the second renewal option under this loan, securing the favorable terms until October 2022.

Financial leverage ratio substantially exceeds requirements in covenants

The syndicated loan agreement contains a standard covenant requiring the maintenance of financial leverage, defined as the ratio of net financial liabilities to EBITDA before special items. At 0.0, the ratio was still substantially below the maximum permissible as of the reporting date (December 31, 2016: 0.2). Notes to the Consolidated Financial Statements, Note 15

Lower debt as of the reporting date

As of the reporting date, the Group’s debt accounted for 47% of total assets (December 31, 2016: 51%). 16% of this, equivalent to EUR 132 million, took the form of current and non-current financial liabilities (December 31, 2016: 23%, equivalent to EUR 211 million). As of the reporting date, EUR 16 million of the syndicated loan had been drawn (December 31, 2016: EUR 80 million).

Financial liabilities mainly subject to variable interest rates

The Group has additional liquidity secured in the form of bilateral lines of credit with a total volume of EUR 210 million (December 31, 2016: EUR 269 million), of which EUR 106 million had been drawn as of December 31, 2017, due to favorable interest rates (December 31, 2016: EUR 117 million). Most of the financial liabilities subject to variable interest rates included in this, in the amount of EUR 100 million (December 31, 2016: EUR 171 million), have short-term fixed-interest periods. As of the reporting date, EUR 9 million of these liabilities were hedged against an increase in interest rates using interest rate swaps (December 31, 2016: EUR 10 million). Risk Report Financial Risks Notes to the Consolidated Financial Statements, Note 19

Apart from the undrawn amounts from the lines of credit amounting to EUR 538 million (December 31, 2016: EUR 523 million) as of the reporting date the Group has more than EUR 116 million in cash and cash equivalents (December 31, 2016: EUR 83 million). Financial Position, Statement of Cash Flows

Land charges in connection with land and buildings amount to EUR 31 million (2016: EUR 35 million).

Significant financial obligations under operating leases

Financing is supplemented by operating leases for own retail locations and for logistics and administration properties. In subsequent periods, nominal minimum lease payments will fall due in the amount of EUR 1,389 million (2016: EUR 1,433 million). The slight decrease on the prior year results from reduced expansion activities in own retail business. There are no other contingent liabilities. Notes to the Consolidated Financial Statements, Note 23

Statement of cash flows

The consolidated statement of cash flows is presented in accordance with IAS 7. The cash and cash equivalents reported here correspond to the “cash and cash equivalents” item in the balance sheet. As cash flow is adjusted for currency effects, these figures cannot be derived from the consolidated statement of financial position.

Strong increase in free cash flow

The free cash flow, measured as the cash inflow from operating activities and the cash outflow from investing activities was, at EUR 294 million, 33% up on the prior year level in the past fiscal year (2016: EUR 220 million).

Cash inflow from operating activities above prior-year level

At EUR 420 million, cash flow from operating activities was 13% up on the prior year period (2016: EUR 372 million). In addition to the substantial increase in earnings, cash inflows primarily came from the development of inventories and of trade payables. These offset a cash outflow from the development of receivables. The cash outflow from paid income taxes also decreased. However, non-recurring cash outflows arose due to the early termination of leases in the Group’s own retail business decided on in the prior year. As a result of a low amount of debt and lower market interest rates, at EUR 1 million the net cash outflow from interest expenses and income remained at the prior year level as of the reporting date (2016: EUR 1 million).

Reduction in cash outflow from investing activities

The cash outflow from investing activities came to EUR 126 million, 17% down on the prior year period (2016: EUR 152 million). This was materially driven by the total capital expenditure on property, plant and equipment and intangible assets, which decreased year-on-year. However, there was an increased cash outflow from current and non-current assets acquired in connection with the acquisition of other business units. Notes to the Consolidated Financial Statements, Business Acquisitions

Lower debt causes increased cash outflow from financing activity

The cash outflow from financing activity rose 16% in fiscal year 2017 to a total of EUR 254 million (2016: EUR 218 million). This development reflects a decline in current and non-current financial liabilities over the prior year. At EUR 179 million, the dividend payment was below the prior year level (2016: EUR 250 million).

Net financial liabilities

Development of free cash flow leads to decline in net financial liabilities

Net financial liabilities are the total of all financial liabilities due to banks less cash and cash equivalents. Liabilities from finance and operating leases are not included in the calculation of this indicator. The net financial liabilities decreased substantially as of the end of fiscal year 2017 to EUR 7 million (December 31, 2016: EUR 113 million). This was materially driven by the positive development of free cash flow. At EUR 122 million, financial liabilities due to banks was below the prior year level (December 31, 2016: EUR 197 million).

Capital expenditure

Lower investments in the fiscal year 2017

In the past fiscal year, HUGO BOSS invested EUR 128 million in property, plant and equipment and intangible assets (2016: EUR 157 million). The investment volume was thus substantially lower than in the prior year. This was primarily due to reduced expansion activity in the Group’s own retail business. Moreover, with the introduction of the new store concepts, the Group is postponing part of the renovation of its own retail stores originally planned for 2017 to 2018.

Capital expenditure remains focused on own retail business

With a total capital expenditure volume of EUR 77 million, the global expansion and modernization of the Group’s own retail business also remained the focus of capital expenditure in the past fiscal year (2016: EUR 98 million). Capital expenditure on new openings in the Group’s own retail business came to EUR 44 million (2016: EUR 51 million). EUR 33 million was spent on the renovation and modernization of existing retail locations during the same period (2016: EUR 47 million).

Expansion of the IT infrastructure links bricks-and-mortar retail stores with online business

Capital expenditure on administration came to EUR 41 million in the past fiscal year (2016: EUR 44 million). This mainly includes investments of EUR 31 million in the IT infrastructure (2016: EUR 31 million). In addition to the continuous further development of the ERP system, there was investment particularly in connection with the cross-channel integration and the digitization of the Group’s own retail activities. Other capital expenditure on the production, logistics and distribution structure and on research and development in 2017 came to EUR 10 million (2016: EUR 15 million). The reason for the decline were one-off investments made in the prior year that were not repeated in the fiscal year 2017.

The accumulated amortization and depreciation on property, plant and equipment and intangible assets including own capitalized cost came to EUR 987 million (2016: EUR 910 million). Existing obligations from investment projects that had commenced as of December 31, 2017, amounted to EUR 11 million (December 31, 2016: EUR 3 million). Notes to the Consolidated Financial Statements, Note 9