Earnings Call: Q1 2021

May 13, 2021

Good morning, good afternoon, and good evening, ladies and gentlemen. Welcome to the Samsonite International 2021 first quarter results conference call. Please note that this event is being recorded. I would now like to hand the conference over to Mr. William Yue, Senior Director of Investor Relations. Thank you. Please go ahead, sir. Ladies and gentlemen, thank you very much for joining our earnings call today. We'll have first our CEO, Mr. Kyle Gendreau, make some opening remarks, and then our CFO, Mr. Reza Taleghani, will go into greater detail via the financial results. Without further ado, we have Mr. Kyle Gendreau to begin. Thank you very much. Okay, great. Thanks, William. Thanks, everyone, for joining. We're going to cover our Q1 results. William, if we can move to slide four. Q1, we've continued to see continued improvement in our profitability as we've seen a gradual sales recovery carry from Q4 into Q1. Our Q1 adjusted EBITDA was a loss of $28 million, which is $17 million better than Q4 of last year, despite sales being in the same general zip code. We were down approximately 57% in Q1 this year versus down 58% in Q4 of last year. That is an improvement from a sales perspective. Our sales were lower in Q1 versus Q4, which is normal seasonality. Despite sales being lower, we've continued to improve on profitability. What's really driving the profit improvement is the continued benefit we're getting from our fairly aggressive reduction in fixed costs. Our fixed SG&A, compared to the prior year, Q1 of 2020 was down $87 million. If I compare that to 2019, we're down over $100 million in fixed costs, which is really driven by the approximate $200 million in annualized run rate savings, again, coming off of our comprehensive cost reduction program, as well as we continue to get benefits from temporary savings and tight spending restrictions we have within the business from things like furloughs and rent savings and basically every discretionary spend item we have under tight scrutiny. We're still sitting in a very strong liquidity position. At the end of Q1, we're $1.446 billion, slightly lower than where we were at the end of the year at $1.5 billion, we continue to maintain a very solid liquidity position. We really have the business now very focused on capturing the recovery in travel demand, which we can start to see coming in a more robust way as we get to the back half of the year into Q2. What you will really see is a really impressive improvement in profitability as we move forward and the business recovers. From a focus perspective, not only are we focused on capturing demand, but we continue to be focused on innovation in products. We've had a couple of very exciting launches in the last quarter. The Tumi McLaren collection which is a wonderful launch if you haven't seen it, and it's quickly become a top seller for us out of the gate. I think as I covered in the last call, we launched Magnum Eco, which is a fully recycled travel collection produced in our European facility, and that is off to a wonderful start as well. Moving to page five, our sales trend, when you look here, Q1 sales were down 57.3% versus 2019. Improvement, as I said, from Q4, which was down 58.1%. I think importantly, if you look at the trend within Q1, it's an improving trend from the start of Q1 to the end. In particular, we've given you a view to April's number here. It continued into April with sales down 54% for April, with a strong trend as we move into the second quarter. As far as outlook, just to give you some sense of forward outlook, our view to Q2 is we'll be somewhere down 53% and 54%, continuing the trend that we've talked about. That's getting a little pressure from India. We'll cover that as we move forward here, India has kind of moved into a more challenging spot as most everybody knows. When we really look forward into Q3 and Q4, we start to get the business moving into a trend probably mid to upper down 30s for Q3 into Q4, and really getting to a moment where the business flips to very comfortable profitability as we move forward. Moving to page six, just some overviews here. As the vaccinations really continue to increase globally and real traction, we see the demand in travel increasing, it definitely will result in improved sales for our business. Asia continued to show positive momentum, ending Q1 with adjusted EBITDA of $13.2 million. Again, this is a business down 50% producing meaningful EBITDA. That's up from Q4 EBITDA, positive $1.3 million. As you know, Asia has been positive EBITDA since Q3 of last year. Countries within Asia have done a very good job of controlling COVID-19 generally, largely through quarantine measures and contract tracing. As vaccinations really continue to ramp up across Asia, I think you'll get continuing benefit across the region. In Q1, Asia outperformed our other regions, off the strength of China and India. India had a very strong Q1, as we're stepping to the end of Q1 into Q2, India's obviously seeing some pressure. This resurgence we've seen in India has caused meaningful travel restrictions, lockdowns, and real general crisis situation for India. We've seen that business go from Q1 down in single-digit territory versus 2019 to stepping into April, it looks like it's down closer to 52% very quickly from almost a breakeven level from year-over-year 2019. When we look at the U.S., this is a real bright spot. U.S. demand has increased as domestic travel has dramatically improved. I'll show you a chart on that in the coming slide. We really see the trend in vaccines, so the growing number of vaccinated Americans really feeding into the travel within the U.S., particularly domestically. We see TSA numbers increasing. For the month of April, our North America business was down 47% versus 2019, so really rapidly improving trends in North America. Importantly, our North America adjusted EBITDA was approaching breakeven in March, and will be positive for the month of April as the business continues a strong recovery trend. Moving to page seven. For Europe and Latin America, we've seen a resurgence. Everybody has seen it in the news. Europe and Latin America, as we step into Q1, we're seeing a real resurgence in cases and variants. Really, at the start of Q1, we've seen an improving trend as we get to the end of Q1. As you know, Europe had moved back into lockdown. Within Latin America, markets like Brazil and Chile were heavily impacted. Again, those start to show signs of moving. When I look within Europe and Latin America, outside of U.K. and Chile, the vaccine rollout's been a bit slow. We do see it really increasing in pace. I'll cover that on a slide going forward. Every week, we see a really improving trend, and we're quite excited for Europe particularly, where we start to get real indications of lockdowns being lifted and domestic travel or inter-country travel within Europe getting very close to turning on. There's real indications that travel between Europe and the U.S. will open up as we move into the summer months, which will be extremely positive for our Europe business. From a focus perspective, as you know, and I mentioned a few products, we continue to be very focused on all of our categories. In particular, non-travel is driving a big piece of the business at the end of last year into this year. We have many really exciting travel products that we're ready to roll out. As the business turns on, I think we're going to be really wonderfully positioned with our product portfolio and offerings for the business. Then, as I said, as travel returns and we have more robust sales recovery, you really will see a very rapid improvement in our profitability due to the restructuring actions we've taken to reduce our fixed cost structure. So I'm quite excited about the profit recovery that we'll see in the back half of the year. Moving to page eight. Everybody's following this in varying degrees. Here's my snapshot. With more than 1.32 billion vaccine doses administered, we really start to see markets getting to vaccine levels that are heading in the right direction. I won't go through all the numbers on the charts. Clearly the U.S., the U.K., and you start to see other European countries really getting some meaningful progress on vaccinations. The U.S. is projected to be at 75% vaccinated by the end of July. Effectively, that puts us into herd immunity territory. The outlook for the U.K. is sometime in early August. Europe's outlook looks to be sometime in September. As these major kind of regions within our business get into the right place, it's why we feel very optimistic for what we're seeing for the back half of the year for travel recovery. Asia continues to ramp up its vaccinations. We're starting to see some positive signs there within Asia, though Asia's got pockets of really strong moments like China. Obviously India is feeling some pressure as well. If I go to page nine, this just gives you a snapshot of two big markets for us. Here, the blue line is China. This is the trend from the start of last year into where we're sitting today. You could see throughout the year, China was improving quite rapidly. There was a dip in January and February of 2021. This is really around Chinese New Year and the Chinese government requesting people not travel for that time period, that's why you see a dip in January and February. You can see in March, it really quickly comes back. We've had a very strong April, and strong May within China as well. For the U.S., this is the recovery, this rapid recovery that you can see. In particular, when you get to the start of this year, you see the U.S. fairly rapidly recovering in domestic travel across the U.S. business. Progress throughout the year, but rapid kind of movement in February, March that's continued into April. Slide 10 gives a good snapshot of what we're seeing in the U.S. Here, there are three kind of lines. The red line is vaccination levels, and you can see from December forward, the U.S. has very rapidly administered vaccinations. The gray line, the kind of up and down line, is TSA traffic, and you can really see the correlation between TSA traffic. These are consumers flying domestically in the U.S. You get to the blue line, which is our trend line, and you can see as we get to the start of this year, a real improving trend. As I said, that's carrying into April, and we see the same thing in May as the U.S. really begins to travel. I myself have been traveling in the U.S. almost every other week across our pieces of our business and for personal travel. You can really see a booming increase in travel across the U.S. If I move to page 11, this is looking the other way at the cost side of the business, and you can see that we've dramatically reduced the cost profile. You have a graph here which is showing 19 across the last quarters, and you can see how rapidly we've reduced that from Q2 to Q3 of last year. Q4 continued. What I would say, the trend line is really showing that as a delta from the previous year, we continue to make progress here in narrowing the gap between our SG&A year-over-year. We start to get really close to historic levels of SG&A as % of sales, despite sales being down quite dramatically from our normal run rate. We're quite happy with that. Reza will cover that in some more detail within his section. If you look at page 12, this is a snapshot showing sales, and you can see where sales were Q1 of last year to where we're trending today. I think importantly, the EBITDA trend has been very positive every single quarter. It continued into Q1. You'll see a continuing story into Q2 as we exit Q2, I think this business will be in a positive territory from an EBITDA perspective as the business continued to recover. If you look at Q1 of this year versus Q1 of last year, we're only $33 million lower than last year with sales down by close to $250 million, which speaks to the initiatives we've had on driving profitability in the business. On page 13, just another look at this. Really to point out the rapid improvements in EBITDA. The blue line is our consolidated EBITDA, but also to point out the Asia story, where Asia, which has been trending a little bit ahead of the curve on the recovery, has moved rapidly into profit by Q3. You can see the meaningful step-up in Q1 of 2021 for our Asia business in positive EBITDA. On slide 14, the cash flow story has continued for us as we have very aggressively managed in all of our cash flows. Our Q1 cash burn was $65 million, which is $58 million better than what we saw in Q1 of last year, despite sales being down $250 million. We have every piece of discretionary CapEx reined in. Reza will cover that in some detail. We're quite happy with what we've done to manage that. I think another kind of important measure, when you look at Q1 of 2021 versus Q1 of 2019, it's only $29 million unfavorable with sales down close to $500 million. It really speaks to how rapidly we've grabbed the reins and managed cash flow in the business. The cash burn continues to run even ahead of our own expectations. That's the quick summary. Reza has some more details on financial highlights, and then I'll come back again and just wrap up. Off to you, Reza. Thanks, Kyle. We're on page 16, just the overview of the quarterly results. We're reporting net sales of $355 million. Constant currency, that's a decrease of 42.4% year-over-year. As you'll recall, Asia last year had already gone into the COVID environment, especially in China, at Q1 of last year. That's the year-over-year comparison. Gross margin is at $173. There's been some pressure on GSP in North America. There's also what we have talked about on previous calls, which is the impact of our manufacturing base on lower sales, and there is some promotional activity as well. I will provide a full bridge on the gross margin in a few slides. Adjusted EBITDA, -$28, which Kyle covered. Obviously, the flow-through of sales and gross margin there, offset by the SG&A improvements that continue. With adjusted net income, we're reporting -$67. Largely, there's about $8 million of increased interest expense year-over-year due to the higher debt levels that we've been taking on as we kind of maintain our liquidity position, and some taxes, which we'll go through as well. As we go through the financial highlights on page 17, sales we've talked about. On the EBITDA, we're only $33 million lower than Q1, even though sales are $246 million lower than the prior year. Again, all of these calls, we've been highlighting the SG&A savings that we've had, and that continues to accrue benefits to us. Actually, it's been trending in a positive direction each quarter. Adjusted EBITDA improved by $17 million from Q4 of 2020, even though sales were lower compared in Q1 2021 versus Q4 2020. Sales were $53 million lower from last quarter, yet our EBITDA was better by $17 million. Again, that's because of these accrued SG&A benefits. Fixed SG&A expenses, better by $87 million. We've highlighted this $200 million run rate benefit that we've seen on fixed cost savings on an annualized basis, but obviously $87 million, if you divide that 200 by 4, we're trending ahead of that. That's primarily because we're still trying to manage some of the variable expenses that are there, as well as making sure that on the fixed side, that we try to do a little bit better each quarter as well. Advertising spend, $24 million lower than the prior year. We're continuing to maintain discipline on that. However, we do anticipate as we get closer to the summer months that we'll increase the advertising somewhat to try to make sure that the sales starts to flow through a little bit better. From a tax project standpoint, we've mentioned this on a previous call. We just wanted to make sure everybody is aware that we've been working on a tax restructuring that's nearing completion. By the half, we hope that we'll be largely done with that. The bottom line from a financial standpoint is that we expect to maintain our ETR compared to the range that it's been operationally in the past. Our operational tax rate typically is around the mid-20s, and we expect that will continue going forward. That tax project is nearing completion as well. Moving to page 18. Kyle mentioned liquidity of approximately $1.44 billion. We feel pretty good overall in terms of our liquidity position and the cash burn. Cash burn is favorable to the prior year by $58 million, even though sales were down $246 million. As you'll see on a subsequent slide, we're being very disciplined around net working capital, as well as basically anything that we can control, such as CapEx and other line items like that. We're being very disciplined around as well. Really the cash burn there's interest cost, tax payments, things like that obviously have to happen. Then we'll go through that in greater detail as well. Net working capital, $141.5 million lower than the comparable amount last year. We have really managed, and if you think about it, that's in a reduced sales environment. We have continued to basically reduce the inflow of inventory, but also to make sure that we have been aggressively managing their inventory levels down as well. CapEx, which I mentioned. CapEx and software purchases, $2.1 million in the quarter. Just basically a virtual freeze that has been going on CapEx and just doing only what's absolutely necessary. Again, as we slowly come into a more improved sales environment, we will obviously start to do a little bit more, but don't expect us to be wildly spending on CapEx in this environment. On page 19, sales down in all regions due to COVID-19. Obviously Asia outperforming as compared to some of the others, because if you're looking at the Asia number, constant currency down 25.9%, whereas Europe is down 62%, Latin America down 48.8%. North America, as Kyle mentioned, as we enter April, reaching break-even EBITDA, and even though the quarter was down 44.6%, we're starting to see some green shoots in North America and that region coming into positive territory similar to Asia. On page 20, the DTC mix has continued. If you're looking at the retail stores on a year-over-year basis, obviously some of our stores are still closed as you think about Europe being still in a lockdown. In terms of the sales channels, we've maintained the mix. I think if you're looking at the non-travel, travel mix, we are still continuing to have a little bit greater sales in the non-travel area, although we do expect that to normalize somewhat as travel starts to pick up again. What we're seeing trend-wise is other than just the carry-ons, we're starting to see some additional larger pieces of luggage being kind of the trend in terms of the travel component of it. People taking longer trips, et cetera, to the extent that there's markets that are opened up. We expect that to continue as we work our way into the summer months. Moving on to the next page, on 21. This is the point really around gross margin that I mentioned on the initial slide. Just to break down and bridge between Q1 of last year to Q1 of this year. The first bar, the -70 basis points, is the impact of the manufacturing costs that we have. We have our three factories, two in Europe and one in India. Obviously, the sourcing costs are on a lower sales base. That is about a 70 basis point impact. The non-renewal of GSP in the quarter had a 60 basis point impact. Between those two, 1.3 points of margin decline due to those two. The remainder, about 4.8% of it, is the buckets which include change in sales mix, promotional activity. Freight costs have increased. Just to give you the component of that, 1.5% of that 4.8% is due to higher freight costs. As I'm sure you've seen in the news, there's a lot of demand in terms of shipping containers from China coming over to our markets, and that's had that impact on us. There's been some promotional activity as well, which as we enter the back half of the year, we're tightening somewhat. As we think about GSP overall, I think our expectation is that Washington is continuing to work through that. Our hope is that gets renewed at some stage on the back half of the year. That would obviously improve our gross margin profile as it relates to the North America business. Moving into page 22. SG&A is something that we repeatedly want to highlight in terms of all the actions that have been taken. We're starting to obviously see the benefits of those rolling into the actuals. In addition to that, there's additional work that we continue to revisit in terms of SG&A. Fixed SG&A expenses in the quarter, $87 million lower than the prior year. That's primarily due to the store closures and headcount reductions, which we've covered on previous calls. Fixed SG&A expenses, if you're comparing to Q1 of 2019, are reduced by approximately $100 million. The reason for that is we had already started some restructuring activities in North America as we basically consolidated our eBags division, and we had some layoffs, et cetera, that were happening there. Variable selling expenses, obviously, we have lower sales, so $12 million of benefit on variable SG&A, and advertising expense was $24 million lower than prior year. The bridge on page 23, just to show the bridge from Q1 EBITDA to Q1 2021 EBITDA. Obviously, the largest impact is the gross profit decrease from the lower sales. A little bit shy of $140 million of the year-over-year decrease is due to that. The gross profit decrease from the lower margin that we just talked about is about $21.5 million. $2 million of that impact in the quarter was due to the non-renewal of GSP, which we obviously hope will get renewed later in the year. We have the actions that we've taken on our side to offset the decline in gross profit. The variable component, which naturally flowed through was a little bit shy of $14 million. We reduced the advertising in the quarter by about $24 million, $90 million of decreased fixed SG&A, if you're looking at it year-over-year. If you combine the advertising and the fixed SG&A point, we have about $115 million of actions that were taken to compensate the decline. If we had done nothing, we would've been $143 million in the hole negative for EBITDA, and we ended the quarter negative $28.5. Sequentially continuing to improve each quarter on the EBITDA line on the back of the cost reductions and sales improving as well. On page 24, Kyle touched on this a little bit earlier, just in terms of the cash burn. Cash burn of negative $65 million. We had basically told everybody that Q1 typically is a period where we do have cash burn that happens from a seasonal standpoint. Compared to prior years, we had negative $64 million, which was obviously an improvement year-over-year compared to last year. Please be mindful of the lower sales environment that we're also talking about. Despite the sales being nearly half of what they were in Q1 of last year, the cash burn was only -$64.6 million. Q4 had about, just so you're aware, for those of you who've dug into it, the Q4 number had about $72 million of net inventory benefit that was helping the Q4 cash burn. In Q1, we're about $21 million just worse from Q4 just in taxes alone, because we had a year-end cash tax benefit that happened due to the CARES Act, that obviously rolls off in Q1. Moving to the balance sheet. Net debt, $1.782 billion as of the end of the quarter. Cash burn we talked about was $58 million better than the Q1 2020, and liquidity of $1.446 billion. I will just address that from a covenant perspective, I know we typically get questions on covenants. We still feel good about where we are for the remainder of the year. We continue to talk to our banks about looking at our balance sheet, and our view is that the business will continue to de-lever over time as the EBITDA starts to come back. I will also restate that our intention is that over the course of this year, we will actually take some of the cash that's sitting on the balance sheet and repay some of the debt as well, which will help with the interest costs that we're seeing. On page 26, net working capital. The trend continues. Just to highlight a couple of items that are not on the page. As we look at inventory provisions, in 2020 we did increase our inventory provisions materially. I had about $15.2 million of inventory provisions in 2019, which went up to a little bit shy of $60 million in 2020. Despite that, I think we've been very aggressively managing the working capital and the cash burn, which is both outlined on this slide. The other thing that I'll just highlight is in terms of bad debt provisions, we're very similar to where we were as of December. Quarter-over-quarter, we have 18.7% of bad debt reserve, which is the same number that we had at the end of the year at December 31. Working capital on page 27, we've talked about. I think the big point here that we want to highlight is we are continuing to manage inventory levels very carefully. We had anticipated that we would start to see a level of inventory build happening in Q1. I think what's really happened is that the aggressive management of the inventories, of the composition of the inventories, we feel that we're adequately positioned to take advantage of the sales that are coming. We've also been offsetting the aggregate amount of inventory numbers that we have here through our SKU reduction program. If you're looking at what's happening to the total value of the inventory, from December to March, we've managed to actually get the inventory levels down, and year-over-year inventories are down $156 million despite the weak sales environment. I think that has to do, to the credit of our sourcing teams, who've been tremendous in terms of working with our supply partners, as well as trying to make sure that the quality of the inventory and the type of inventory that we have has been adjusted accordingly as well as we work our way through the year. On page 28, it's been touched on very little CapEx spend. If you're comparing Q1 of last year where we had $19.2 million of total CapEx and software spend, we're continuing in that $2 million range. Again, as the quarters go on this will start to creep up a little bit, but only commensurate with sales. We're continuing to be very disciplined and only doing what is absolutely required. To the extent that the sales environment improves, we can expect this to creep up a little bit, nothing to the levels that it was last year, or I should say in 2019. With that, Kyle, I'll turn it over to you to talk about the outlook, and then we can take questions. Okay, great. Thanks, Reza. Slide 30, William. Just outlook, high level outlook. We're very encouraged with the improvements we're seeing in sales. Our expectation is the trend will continue. When you look at the trend just for the months of January, February to what they look like in March and April, there's a good story. Obviously, there's some pockets in the world that are moving in a little bit of a different direction, particularly a market like India. The rest of the world, we feel highly confident that the trends will continue. I think Europe's at the doorstep of real improvement. The U.S. continues a really good story, really tied to vaccine rollout and lockdown restrictions coming off. I'm quite excited for what we'll see in Europe, and when I talk to our European teams, we're excited about the real chances for a summer holiday season, both within Europe and then inbound to Europe. I'm looking to get to Europe myself for some meetings in July, and I think that's going to be very doable. I think Asia will continue to open up as they manage and vaccines continue to move. Within Asia, I think there'll be some travel bubbles that will open up between countries. I think Asia will have a story that plays out in the back half of the year as well. Real recoveries in domestic travel in demand, and I think international travel across the world will start to show signs of opening up as we exit Q2 and get into Q3 for sure. We're growing confident in the world's ability to catch up to the pandemic. Though we see surges in certain parts of the world, I think there'll be big surges in pent-up demand for travel. As the world really continues to work its way out of here, I think travel is on the top of many people's minds, and we're seeing that in markets where the vaccination levels get to meaningful levels. I think most importantly, I was looking at the slide that Reza laid out that talked about the pressure on sales to EBITDA, the actions that we've taken as a business to offset that. The really powerful moment for this business will be where the sales trend continues, and we're able to maintain those savings that we've talked about, which will cause a fairly rapid improvement in the EBITDA profitability for this business, really as we step into the back half of the year for sure. We can see it. We're feeling it. Our teams are energized, and I think our future is looking quite positive. Just from a near-term focus, because that's kind of an outlook for the year, but within the business, just so you know what we're doing as a team, because there's a lot of moving pieces in navigating this. One, we continue to be very focused on the well-being of our employees, our customers, our partners. We've been doing the right things across regions and across markets to manage the turn on in the business and our employees and customers. I'm quite happy with that. As we've said a few times, we've taken really meaningful actions to preserve cash and reduce our fixed cost structure. There's not anybody in the company that isn't fully aware of our focus here on maintaining this lower cost structure to really drive this rapid profit improvement as we see the sales recover. That is a laser focus on everybody within the business, and I think we're well-positioned to execute on that across all of our operating regions. The other piece is the restructuring actions we've taken last year and just the general pressure of the virus on the business for the business that's recovering but taking time. It's very important that we stay focused on our team. Myself, our regional presidents, and all of our managers are focused on this front to really hold each other up and be ready for the turn-on. We're all getting very excited for what's ahead of us. I, myself, think we're about to have wonderful moments in this business as we step to the end of this year and into next year. I'm pleased that we were able to lift salary reductions for employees as we get to the end of Q1 and stepping into Q2. We reached a point, and I'm very appreciative to all of our employees for all of the efforts and sacrifices they've made to get this business to the right spot. You guys have heard me on this call say it before, one of the real amazing assets we have in this business is our dedicated employees, and every one of them has done their part to get us in the position here for recovery. Thank you to them. Our global platform, really this amazing kind of diverse business that we have, both in geographic penetration, product categories, real innovation, and real kind of complementary brands has positioned us for this recovery. The recovery has been slow coming, but it is coming and the global travel disruption will end, and we'll be in a wonderful position with the business that we have today to do that. We've continued our focus on sustainability, innovation, ESG. If you haven't seen it, we published our ESG report at the end of last week. I think it is an amazing report which captures the story of the progress we've made here, where we're taking it. This is the journey. That's why we called it Our Responsible Journey. I can't be more excited about where we're taking this business from an ESG and sustainability perspective. You should expect us, as I said before, to lead the industry on this front. All of our teams are focused and highly energized against this. Despite COVID, we've stayed very focused. You'll see in that report the great progress we made over the last 12 months from the last time we issued the report. I do recommend you take a look at that. We are in an industry where there's many smaller players. I think that many of them are experiencing pressure and will struggle. It doesn't mean that we won't be in a competitive environment. I'm expecting that we will continue to be in that environment. Scale matters on navigating, and I think our scale advantages and what we've been able to do to manage this business through will put us in a great competitive position as the business turns on and we're able to start shipping inventories and products to our consumers and our bigger customers. We're well-positioned to capitalize on that recovery with the strength that we have as a business, really off the back of the liquidity that we've been able to secure. Thanks to Reza and our lenders and everything we've done to make sure that we're sitting in the right liquidity position. We're in a wonderful spot here as far as balance sheet, what we've done with cash burn to really navigate through this. I have 100% confidence that this business will power through here and be, as I said earlier, in a wonderful spot as the world really recovers from COVID-19 and people get back to traveling, which is for sure coming. So with that, William, I'll turn it back to you. Very happy to take some questions from anybody on the call. Thanks for listening. Thank you very much, Kyle and Reza, for your comments. We're now open to take questions from the audience. Operator, can you please check who has any questions for us? Sure. Ladies and gentlemen, we will now pull for questions. If you'd like to register for question, please press star one on your telephone. Thank you. Our first question comes from Louis Lee with Bank of America Hong Kong. Thank you. Hi. Thank you for taking my question. My first question is based on the current latest updates, including everything, for example, India. Are we still looking for the second quarter break-even in terms of the EBITDA level? This is the first question. Secondly, given the raw material headwinds globally now, how is our view on the GP margin throughout the whole year? Based on my understanding, in the past week, we actually got a chance to raise price to navigate this headwind. How about this time? The third question is, in Q1, we actually got $87 million fixed expense savings. Does it mean that we can look for higher than $300 million savings on a full-year basis? Thank you. Reza, why don't I-- I'll take them, Reza, and then fill in if I miss anything. Okay. Q2 EBITDA. My view is we'll be very close to break-even in Q3, but that for sure we will exit run rate Q2 with positive EBITDA. I think there's a lot of uncertainty, but depending on how India goes, we could be maybe slightly negative for the quarter, but exiting Q2 in a positive EBITDA, and for sure a positive EBITDA in Q3. We're watching it closely. We're pushing ourselves to get to break-even Q2. I think we have a shot at it, but as you know, there's a good bit of uncertainty in certain markets of the world. From a gross profit perspective, our outlook is that it's an improving trend as we get to the second half of the year. From where I'm sitting, I think our gross profit margin for the second half can be somewhere in the kind of 53%-54% range from kind of on an adjusted basis. We're running probably around 50% today. We need a few things to happen. We need GSP renewal to go in place for the U.S. I think that's coming. We are seeing impacts on raw material prices. For us, that probably has a bigger impact as we get to end of the year into next year. As you can imagine, that takes some time to work its way through. I think importantly, that will impact the entire industry because everybody's facing that, and we will be adjusting pricing and margin profile to be able to get back to our normal margin runs, which for this business, we should be running around 53%-54% on a normal basis. I think you'll see that in the back half of the year for us. Finally on the savings, the $87 million fixed savings for the quarter, and it's really even more impressive when you compare it to 2019. It's $100 million of savings. That doesn't mean that translates all the way through to an annualized run. I think we're running on a real annualized forward basis, slightly better than $200 million. The increment that you're seeing is us continuing to take as many temporary measures as we can on the cost savings. I think the right way to think about forward savings is $200 million or a shade better than that. We'll continue to hang on to as many of these temporary savings, things like rent reductions that we've been able to negotiate for a period of time as the business is recovering. Those will carry into the back half of the year, but on a real go-forward basis, some of those temporaries will fall off and the permanent savings are what we'll carry forward. I think those answers, Reza, I don't think I missed anything there. No, I would agree with all of that, Kyle. Okay, great. Thank you. Thank you very much. It was very clear. Thank you. Thank you. Our next question comes from Erwin Ramberg with HSBC in U.S. Please go ahead. Thank you. Hi, gentlemen, thanks for taking my questions. Congratulations on controlling what you can. Two questions. I think last call, you had mentioned that the EBITDA margin for the year could be around high single digits, obviously with a huge contrast between H1 and H2. I'm just wondering how you're thinking about the full year EBITDA margin given the circumstances we're on and maybe the more recent tough news in India. Secondly, I was wondering how you thought about the contrast between domestic travel picking up quite dramatically in places like China and the U.S. versus long-haul travel. It seems that the China vaccination rates are relatively soft versus, for example, what we're seeing in the U.S. or the U.K. Visibility on the pickup of long-haul travels from China seems quite low here. Is the pickup in domestic travel sufficient to partly compensate for the lack of long haul coming back? That's essentially what I had. Thank you. Okay. Well, I take the travel piece, and Reza, you can grab the EBITDA. Just on the travel side, I do think it's going to take a little while for Asia travel. I'm trying to get to Singapore in July or August. I think that's a little less certain for me than trying to get to Europe in July. I think domestic travel, when we look at our outlook and the guidance I gave for kind of the rest of the year, that's going to largely be fueled by domestic travel. When I say domestic travel, it's also inter-country travel within Europe. That's enough to see. I think to really get over the hurdle, you need some of the real international or long-haul travel to open up. I think that'll take some time for Asia, is my personal view. I think by the end of the year, we'll have a better chance to be traveling over from the U.S. to Asia, for example. Europe, I think, really starts to move a little quicker than that. I think Europe opening up will fuel some meaningful travel. I know in my own circles, many of our friends and relatives have booked trips for the summer and into the fourth quarter for Europe, and I think that will open up nicely. I think you really carry into beginning of next year before I think the world's really freely flowing, Erwin, is my best guess. We'll see. There's a lot to go there, but I think it's coming for sure. EBITDA margin outlook, I'll just go with it, Reza, and then correct me. Yeah. I had said I pushed the entire organization to try to get to 10% EBITDA margin. I think I guided last time we'd be in kind of the high single digits. I think we're going to be somewhere between mid and upper single digits. Based on what we're seeing right now in a few pockets of the world, I think in that kind of north of 5%, but definitely below the 10 that we've set is kind of the zone that we're in. It's really just a function of some of the pressures we've seen in Q1 that we're seeing in Q2 taking a little bit more time to cook out. I feel very strongly about what we're going to see for Q3 and Q4 as far as being a noticeably different EBITDA margin. We have to cover kind of the pressures we've seen carrying at the start of the year. That's why I think there's probably a little bit of pressure on what we are setting for targets for ourselves, but still in an exit run rate margin profile that I think everybody would be quite excited about. Yeah. Erwin Ramberg, just to add to that point, it's really like what you just heard Kyle Gendreau say a little bit earlier, is that if you're thinking about Q2, we're approaching break even on EBITDA. You're going to have to basically average a second half number that gets you to where our EBITDA margin is going to be. If you just break out Q3 and Q4, the expectation is Q3, you're going to be kind of in the mid-single digits. Q4, we're very optimistic that you basically have the full run rate benefit exiting the year that we've indicated, which is the mid-teens. That averages out to the numbers that Kyle Gendreau was talking about, if you think about it that way. Super useful. Yeah. Thank you. Best of luck. Thanks. Thanks, Erwin. Thank you. Our next question comes from Yvonne Chao with Nan Fung Trinity in Hong Kong. Thank you. Hi, can you hear me? Hello? Yes. We can. Great. Thanks very much. Very encouraging things out. Can I just follow up with a few questions? First of all, on gross profit margin, I think Kyle just mentioned 53%-54% on a normalized basis, but I think previously, you've been mentioning 55% is the normal gross profit margin that we're looking for on recovery. I'm just wondering, is that like a change in guidance on normalized gross profit margin? My second question is on the EBITDA margin. Can I just clarify, Reza just mentioned that the exit EBITDA margin for this year would be mid-teens. Is it for this year? Can we refer to the same EBITDA margin guidance of the last call that EBITDA margin on recovery will be much higher than 2019 levels because of all the cost savings? Yeah. My last question is revenue. I think your last guidance was that exit run rate in 2022 should be the same as 2019. Is that the same that we should be looking at now? Thanks. Three questions, basically. Kyle, do you want to take the. I'll take the GP and then you. I think I probably misstated that. I think our gross profit margin, the normalized run rate for this business should be in this kind of 55 territory. We have a long history of running there. That 53, 54 is what I'm anticipating for the back half of the year. That will still have some pressures, but our long-term target for purposes of your modeling should be 55%. Okay, great. longstanding history of there. I think as the mix profile of our business shifts a bit here, we've obviously done some restructuring on stores that has a little bit of pressure on margin. Our digital business continues to grow. That will kind of compensate for that. Tumi, as an asset, continues to grow at a faster pace. We're seeing very good success with Tumi, even in the midst of COVID-19 in Asia. There's a wonderful story for the U.S. as it turns back on. You'll get some uplifting mix effects for that as well. I think the right long-term kind of target is 55. When I really model it out, it can even get up a little higher than that in the kind of medium to long term. For this year, I think we'll still be navigating some pressures. You need volumes fully back to cover things like your fixed manufacturing costs of the plants we have. We also have some freight pressures. We're seeing freight costs higher than normal. I think that will take some time to work itself out into next year, which is why I think the back half is a little bit lower than what our normal is. Let me take the EBITDA margin rate questions. Yeah. The EBITDA margin, really the exiting, we're saying the same as what we said on the previous call. The issue is really if you're looking at the guidance for this year, you obviously have a front half of the year where we're still basically approaching breakeven. We haven't hit breakeven yet in the first half of the year, so what are you averaging it against? As we think about the cost save benefit, our expectation as you end up exiting this year, that we're definitely going to be at a higher EBITDA margin than we were compared to 2019, because frankly, you're taking out $200 million of costs. If anything, we're trending ahead each quarter of that $200 million of cost savings that you have on the SG&A side. Okay. It comes down to where do you think the revenue is going to be as we go, which I know was your other question. I think on the revenue side, as we think about next year, we're still saying that we're not going to be getting back to 2019 levels on revenue next year. That's the same thing that we said at the end of the year and on the previous calls as well. However, our expectation is because of the cost save, that our EBITDA margin and EBITDA levels, and again, you can look at what's happening in Asia and North America that we're talking about. You can look at markets in Asia, for instance, right now, where sales are still down 30%, yet the EBITDA is back to where it was previously. That's the operating leverage that I think is built into the company now coming out of this, and that's what we're excited for, as when the revenues come back, we expect the profitability to be a lot higher. Okay, great. Thanks. Thank you. Thank you. Our next question comes from Dustin Wei with Morgan Stanley, Hong Kong. Thank you. Thanks for taking my question. First question regarding the recent trend in May, like given that, for example, China, having seen the good sort of domestic travel during the May holiday and the good domestic travel during the golden week. What's the sort of narrative for that market? Also for the U.S., like your TSA data point out, what kind of trend are we seeing for these two major markets? For China, we've had a very. Do you want to cover? Yeah, why don't you do it, Reza? Go ahead. Yeah. No, go ahead. I just didn't mean to cut you off. Please go ahead. Okay. China's obviously had a very good May. We're quite excited. We've seen a continuing good trend in China. I think that continues. We've had a very successful couple of weeks to start in May, so that carries. The U.S. trend continues to be very strong. As you can imagine, in the U.S., a big part of our business is some of our bigger customers that buy in inventory. There was some of that carried into the month of April. I think May might look similar to April for our U.S. business, which is still a tremendous improvement what we saw from Q4 and the start of Q1. Somewhere in the kind of down 45% to 19, but with a very strong trend, in our retail channels as stores start to open to normal hours, our e-com really driving, and then these big wholesale customers, which are really moving to buy inventory now. Some of that shipped into April as well. I think a continuing positive story. I think the overshadowing piece is I think India will be more challenging in Q2. As I said earlier, India in Q1 was down single digits to 19, and I think that's easily going to be down 50%, 60% for Q2, maybe even a shade more. On a blended basis, I think our May numbers might look very similar to what we saw in April because of some positives in one, and then the pressure of India, which is a big market for our Asia business. I think Europe's really going to start moving, and I think it probably starts to show up in May, but I really think when you get to June and July, I know our own teams for Europe are excited. They can see the forward kind of momentum here. I think as we power into June and get into July, Europe will start to really add to the benefit here from a trend perspective, which is why my expectation for the quarter is we're probably down 53, 54% versus the 57% we were in Q1 because of the building benefit of Europe, Asia and China and U.S. continuing strong with a little bit of offset from India that will have an impact. Thank you. Just to add one other point to it, Dustin, this North America point I think is an important one because what we've seen so far in Asia, and Kyle touched on this in his opening remarks. Asia, like China, you're controlling the spread of the virus through lockdown or basically not allowing a lot of travel, et cetera. Yet that market, through domestic travel, and this is a point that Irwin raised as well, is still rebounding to the point that we're looking at we're down in the mid-20s in China compared to 2019. What I think is important about the North America market is because it's vaccination driven, it's a very interesting trend line where once you get the population vaccinated, if you're looking at each sequential month, you're going from like, again, compared to 2019 levels, you were down mid-60s. In March you were down at -50%. All of a sudden it's like mid-40s%. We feel like that's much more sustainable in terms of what happens, because it's actually solving the root problem, ultimately, of travel. Once you have a vaccinated population, the movement starts to pick up. It's not just the travel component, it's also the non-travel piece as well. That's why we spend a lot of time focusing on vaccination rates, because we feel that if you're thinking about it qualitatively, that's what's actually going to basically get us out for good from a sales perspective. Yeah. I think that trend line in North America is important in that regard. Yes, of course. You can see Europe moving in that direction, right? You get Europe moving to vaccination levels that are quickly catching up, so that by the time you get to end of August, September, you've got Europe in a vaccination level that really allows Europe to get moving again. Then there'll be a moment where Europe and the U.S. have travel opening, and I think that will be quite interesting. I was talking to the guy that runs our retail business for Tumi, and we were using France, for example, because he's from France, and he said today, there are nine flights a day between Paris and U.S. I forget exactly what he said. I think he said end of May, that's opening up to 35 flights a day from nine. Think about kind of just that one example of airlines starting to open up the channels again because they see that these markets are going to start to open up again. I think there's real building momentum for recovery here that we can see not only within our own sales numbers, but you can see in just the messaging within the market. Which is why we're feeling good about the second half. Yeah. As the demand is picking up and you previously touched on the inventory restocking, could you sort of talk a little bit about that? What's the inventory level across, let's say, the U.S. or potentially Europe? Are your customer actually replenishing more, like the April is just a start, and what's the view for the back half of the second quarter or even third quarter? I'm sorry. I'm not sure I fully understand the question. You got it, Rick? I think you talk about that your U.S. customer has been replenishing the inventory, right, in April. Yeah The sales trend in North America, May is similar. Where are we in that journey of the replenishment? Were we just start to replenish it now, or? I would say it's just starting, right? I would say the energy and the vibe with our U.S. sales team and our customers is building, and customers are moving very quickly to ensure that they're in a position to capture the sale. I would say April is just the starting point of real movement to ensure that the inventory's in our customers' hands for their own consumers. I think those dialogues are actively building week after week. We're starting to, because we can move in the U.S., we're able to have in-person meetings where a lot of that was kind of digital before. That's happening, and I think it will have a strong carry into the end of Q2 and clearly into Q3 and Q4. Customers that have maybe reallocated the space away from travel are starting to allocate back to travel because they can see that coming as well. To me, this is where scale matters, because as that is happening, we are able to service these customers. We have maintained these amazing relationships with our suppliers, and our inventory levels are in the right places. As that turns on, we will be able to service those customers. I think the only pressure point is some of the shipping challenges, but I think that will carry into the end of the year. Things like port congestion in the U.S. are starting to clear up, so that we are able to get the goods to our consumers. Our teams are working to be ahead of that curve, because we have scale advantage to be able to be ahead. I think we'll be well positioned to capture it with our customers as they really start to dial up and capture the demand. I'm feeling very, very good about our U.S. business on that front. Do you see the competition in both the U.S. market and China market is really picking up, like all the other smaller brands that you kind of talk about, they will still be there, but is the market being a little bit too promotional in your view? Everybody kind of still want their cash and the margin back? I think what will be the challenge, I don't want to kind of speak ill, and this is just a bit of my views on this. Many of these folks are sitting in tough spots with their suppliers. They're in tough spots on inventory levels. I'm sure some have navigated better than others. There's promotion that we've seen across the industry in Q4 carrying into Q1. Take shipping costs, for example. Customers or smaller players that are operating under smaller margins, both on profit and gross margin, throw in the pressure of shipping, and they have very little room to run. Whereas because of our scale, we can kind of navigate through that. I think we'll be well positioned, but again, I don't think that we won't have competition. Often the stronger players kind of navigate out strongly, and I think we're sitting exactly in that position. We haven't needed to look over our shoulders on the balance sheet. We've obviously stayed disciplined on everything we manage. We're ready for the turn on, and all of our teams are ready for the turn on. When it happens, we're not going to miss this turn on, which really speaks to our strength. Thank you. Lastly, just on the EBITDA margin for the second quarter. I think it's kind of good to be conservative in this uncertainty, but I was thinking about the recovery in China is doing pretty well and in the U.S., the replenishment you just talked about. You think that the bigger uncertainty now is just the India market, or there's something in your mind you think maybe second quarter will still literally shy of the breakeven? Also in terms of the bad debt provision, like in first quarter, we still have $80 million-$90 million. What's the view for the bad debt provision for the full year? Yep. Let me just take both of those, Kyle. Yeah, go ahead. I was just going to say, just, Dustin Wei, on the India piece alone, just to directionally guide you a little bit. India went from literally up double digits in March compared to 2019. Up double digits to literally in April, everything is shut down and we're looking at down 50%. That is a huge swing in that one market. As we think about Q2, and you see them in the news every day, that's a big market that swung from one direction to the other. There's offsets to that. Obviously, North America is performing and that's a huge market for us as well. There will be offsets to that. That's why I think we're being conservative around Q2 and saying, "Look, if we're approaching break even, that doesn't leave any EBITDA margin." I think we're better off being conservative and saying, with looking at what the India situation is, let that play out, and obviously the other wild card to that is Europe, which Kyle has touched on. Just on the bad debt, I think if you look at Q4 to Q1, we're basically in the same sort of number. Actually, the bad debt provision came down slightly. I think you can assume that that slowly starts to wind down over the course of the year. I would just for conservatism, just assume the same number in your model, that it's at that same number, and it doesn't worsen. Okay. Kyle, I'm sorry if you wanted to add to that. I just thought I would just share those numbers. No, yeah, you got it. That's exactly the right mix. I think the biggest wild card is just the pace of Europe turning on, which is probably why we hold back a little. We've factored in India pretty heavily in our view, but I know Fabio and our team in Europe are getting highly energized as things start to add. There's still some work to go for Europe to really start to turn on, but all the indications are it's heading in the right direction, which is great. Yeah. Thank you. Thanks a lot. Okay. Any other questions? Yeah. Hi, Kyle. This is William. We have a bunch of questions from. Yeah people online, so I'm just paraphrasing them. First one is on the recovery in international travel. The question here is assuming that international travel doesn't recover fully by, say, 2022, what sort of revenue outlook are we looking at 2022 and going forward? The next question has to do with gross profit margin, specifically the raw material pricing pressure. Just generally, unless there's a little bit more color around that. Finally, it's on the cost savings. How much of the cost savings are temporary versus permanent? Whether we can take the OpEx in first quarter 2021, and annualize it for the full year. Reza Taleghani, do you want to take those? Sure, William. Do you mind asking them one at a time, and I'll go through them one at a time? Sure. Business travel. Assuming business travel doesn't recover fully, say, by 2022, what sort of long-term impact on our sales structure do we see at this point? Yeah. Our expectation is, and we've said this previously, that we don't expect us to get back to 2019 levels. It's primarily because we're looking at the IATA forecast on what global travel rebound is going to look like. We feel that despite the fact that half of our business is non-travel, we do feel that there's still enough of a correlation to the travel side of it with luggage that we need to monitor that. As we think about next year in terms of revenues, our expectation is not that travel is going to rebound to the same level. We still expect that from a revenue perspective, that we will slowly start to claw back, and we'll still be at discount of call it 25%-30%, thereabout, to 2019 levels, if not more, depending on how the back half of the year works. The important point for us is not so much necessarily the sales piece, but the fact that we're expecting that our EBITDA margin exiting the end of this year is going to be. We've said, again, as we said it at the last earnings call as well, that it's going to be in the mid to even approaching the mid to high teens. From an EBITDA perspective, we expect the rebound to be a lot faster for us. I know that, William, this was another one of the questions that you just asked. When it comes to the cost structure, rather than just taking the quarter and multiplying it by four, I think the much better way to approach this is to look at our cost structure overall and say that $200 million of it is permanent savings that you can count on in your model. Again, taking the cost structure that we had coming into the year and improve it by $200 million. Again, I've said this in the past. If you think about where we were in 2019, if we were just shy of EBITDA of about $500 million in U.S. dollars, or about $494 if memory serves or thereabout. Our expectation is that when the revenues rebound to that level, that the EBITDA will be $200 million better than that. That's the way that we think about the cost structure. Yes, there are definitely some temporary savings even on the fixed side that continue. There are rent reductions that continue. There's still some furloughs that we see in certain markets in Europe that are closed, that continue. For modeling purposes and for conservatism, I wouldn't bake those into your numbers as you're looking at it. I would look at those rolling off. Every quarter I say that, and this quarter it wasn't 200 divided by four of savings. It was 87. Every quarter we do over-deliver on that. I would still say that if you're thinking about it from a normalized run rate perspective, that's the more conservative way to approach it. I know there was one more question in there, William. Yeah. Gross margin? Any additional color on raw material pricing pressure? Yeah. Actually, Kyle and I, we had a board meeting earlier, and we were just talking about this as well. Far, that has not made its way into the numbers. What is working its way into our numbers is the freight cost. Freight cost is obviously something that's there. We're working with our customers in terms of passing some of that on as the year goes on. The two component parts that I would say that we're focused on right now is in North America, the GSP renewal, and then freight costs, which it's not just our industry, it's everybody. That does have a material impact on margins. As it relates to raw materials, as we go to the back half of the year, we're going to work with our suppliers, and you could see that start to creep in. We haven't seen it yet because obviously inventories that we have right now, we feel really good from an inventory position. Those were pre all of the inflationary pressures that you're starting to see. The other thing that I would say is if you're thinking about us in the medium term, and we've said this in the past, if there's continued pressure on raw materials, what we would end up doing is obviously working with our suppliers on engineering the product, et cetera, to hit the right price point and the right margin profile. As we sit here right now, that hasn't hit us. We do expect now to the back half of the year some of that pressure to work its way in, but that's something that we'll try to manage through. Kyle, I don't know if you wanted to add to any of those. Yeah, I think you're right on the margin profile. We have a long history of managing that. The entire industry will be facing the same gross margin challenges with raw material prices. We tend to lead the industry in kind of navigating that, so I have no worries there other than they're in front of us, so we're starting to work on it right now, which is great. I think from an outlook perspective, I think what you will see is an improving trend throughout all of 2022. My personal view is that we're kind of getting into full recovery mode sometime in 2023. If the full year next year might be down, let's say 25%, when you factor in kind of the improving trend, your exit run rate from 2022 starts to get back into a ZIP code. Again, there's a lot of uncertainty, but the world's looking to move again. If you look at how much has been accomplished in the last three or four months as vaccines really start to roll out, and you fast-forward another 12 months, you can easily see a scenario where the world catches up to this and people are really starting to move again. It'll have an improving trend throughout 2022, is the way I see it. Great. Thank you very much, Kyle. Thank you very much, Reza, for all of the comments. I think it's a good time at this point to wrap up the call. Thank you everyone for taking the time to dial in tonight. If anyone should have any additional questions, you know how to reach me. Thank you. Great. Thanks, William. Thanks, everyone. Bye-bye. Bye. Thank you for participation. This concludes the conference.