Earnings Call: Q3 2019

Nov 14, 2019

Morning, good afternoon, good evening, ladies and gentlemen. Welcome to the Samsung Electronics International 2019 First Quarter's Results Earnings Call. Please note that this event is being recorded. I would now like to hand the call over to Mr. William Yu, Director of Investor Relations. Thank you. Please go ahead, sir. Good morning, good afternoon, good evening, everyone. Thank you very much for dialing in to our Q3 results conference call. Today, we are honored to have our CEO, Mr. Kyle Gendreau as well as our CFO, Mr. Raela Pellegani with us. And without further ado, I'll have our CEO, Mr. General to give a number a few opening remarks, and then we will proceed. Thank you very much. Okay. Thanks, William. Thanks, everyone, for joining us. So we're going to walk you through Q3, and I'm on Slide 4 of the deck, if you have it on the screen. Our overall performance for the quarter remained stable with a few challenged markets that will walk through the same markets that we've seen challenged in Q2 and Q1. The underpinnings of our business remain very strong. And so when we look at our total company Q3 sales, we're slightly down at 0.7%, very consistent with what we saw in Q2. And it's really 4 markets that are causing a little bit of pressure on the business, the U. S. Market, as we know, and I'll go through each of these markets in the coming slides, South Korea, Hong Kong more recently and Chile. And if I adjust for these networks or these markets, the rest of our business is actually showing an improving trend. So for Q3, excluding these four markets, we were up 7.2%, which is improving from Q1, which was up just about 1% and Q2, up 3%. So, we see a continuing building momentum in the rest of our markets. The other kind of takeaway for Q3, which is positive, is all core all 3 of our core brands were positive growth: Samsonite up 1% Tumi up just shy of 1% and American Tourister up 4.3%. And if I adjust for these 4 markets, Samsonite was up 5%, Tumi is up 12% and American Tourister is up 13%. So, underpinnings of kind of core brands delivering good growth with these markets and even more excluding these markets. Our gross margin in Q3 came under further pressure. As you would expect, the second round of tariffs for the U. S. Went in at the end of Q2. And so that carried into Q3. And so we were down 170 basis points in our Q3 gross margin. Our year to date is down 89%. As you remember, we were in a pretty good position Q1 leading into Q2. But the 2nd round of tariffs and we're taking good actions on managing the tariffs, but that second round hit right at the end of Q2. We've taken a lot of actions, as we've talked about, in tightly managing SG and A and also slightly reducing the advertising spend as we went into the second half of the year, which is having benefit. Despite the step up in gross margin, we've seen an improving trend in our EBITDA shortfall. So, our EBITDA shortfall in Q1 was around $28,000,000 in Q2, that went to $15,000,000 In Q3, despite gross margin under further pressure, were only down $13,000,000 And that really speaks to the initiatives that we're executing on, on the SG and A side and a bit on the advertising side. And then, as we reported in Q2, the same trend in Q3 with our operating cash flow continuing to be very strong. We generated $190,000,000 of operating cash flow, and that's up 30% from year to date September last year, really on the back of continuing progress in working capital and just tighter CapEx management and some lower income tax paid. Going to the next page, all three all of our regions delivered Q3 net sales growth except for North America. So our North America business down around 7.5% in Q3. Asia was up 4%. And if I adjust for South Korea and Hong Kong, it's up 12%. So Asia has some good momentum. Europe up close to 4%, 3.7% in constant currency for Q3. And Latin America was up 1% in a project for Chile, which right at the end of Q3 really carrying into Q4, Chile is under some pressure. We're up just about 3% in Latin America. And on Slide 6, this just gives another view to what I said earlier, which is kind of excluding these key markets, we have an improving trend in the rest of world business, again, up 0.8% in Q1, up 3% in Q2 and up 7.2% in Q3. And the markets that are under strain, you can see that that's continued in each of the quarters. It takes a step up in Q3, but Hong Kong went to a negative position in Q3, down close to 40% in Q3, not that dissimilar to other retail businesses in Hong Kong at the moment. And I go to a little more color on each of our markets. So the U. S. Is clearly being impacted by tariffs and the related effect of reduced Chinese tourists. Our U. S. Business was down 6.2% in year to date September. Year to date September, excluding eBags and spec, was down around 4%. As you know from last meetings, our eBags business were purposely shrinking. We're calling 3rd party brands and shifting that to a portfolio that has a bigger portion of our own brand. So that's by design. Spec was a little softer in Q3 off the back of a slower start to the iPhone 11 sales, and so we saw some softness in our spec business. But despite that softness for spec, we continue to gain market share in that category. Our wholesale business was down 7.3%, and this really is tied to tariffs in our U. S. Wholesale customers purchasing in a more cautious way. In our retail comps in our gateway stores, which really speak to the inbound traffic to the U. S. Foreign inbound traffic, was down just shy of 13% from a comp perspective. And those 2 kind of big drivers are what's feeding the U. S. Business being down around 6%. Our direct to consumer business in the U. S. Is very strong. It's up 18.3%, adjusting for kind of the eBags fixed. And American Tourister, which we've been pushing, is up 2.7% for the quarter despite the pressures and with improving profitability as we continue to move the margin profile for American Tourister. And in the U. S, just like all of our regions, we've taken aggressive actions to help offset the gross margin pressure with tight control of operating expenses or reductions along with reduction in advertising spend in the short term in the second half of the year. On the tariff side, we've taken significant actions in kind of mitigating the tariffs. And so just as a reminder, the U. S. Business faced a 10% tariff increase in September of 'eighteen. And then in June of 'nineteen, so at the end of Q2, an additional 15% tariff went on. There was a proposed 5% tariff that was due to come in in October, and that's been pushed down the road. So that's not happened. But we did pick up some tariffs on the spec business, 15% in that kind of 3rd round of tariffs. So on balance, we've been dealing with a meaningful shift in tariffs. And I'm quite happy with how the team is executing here. So one, we're very rapidly accelerating the shifting of sourcing from China for our U. S. Business, which means shifting volumes from other regions so that the U. S. Can take volume outside of China and shifting that into China. And we're ahead of schedule is what I would say. We were I think the last time we're talking, we were targeting getting close to 75% to 70 percent outsourced from China by the end of the year. I'm happy to say that for Q3, we're already at 67%. And as we look to next year, we start to feel like we can get very close to 50% sourced from China, which for just the core U. S. Business was close to 90 percent just at the start of this year. So that's a pretty dramatic shift, and the team is executing that very, very well. We're also reengineering products to help reduce costs while maintaining the product quality and the standards that we know for our brands. And as you know, we always do that to help manage margin. We're doing that in an aggressive way here with very good results. We've also been renegotiating terms with suppliers and getting price reductions. We've been watching the currency movement. We've been getting the advantage of that in our pricing. And we've been pushing payment terms with suppliers as well as we kind of manage through it. And then as we reported at the end of Q2, we've passed on around 12% price increase to help mitigate the tariffs as well. So I think the team is executing again ahead of our own expectations. And as we carry into next year, I think you'll really see the benefits of all the initiatives on this front. It wasn't on my front page, but I wanted to cover China, which remains very strong for us actually. And so in the first half or particularly in Q1, we were talking about shrinking our B2B business, and we've done that very effectively. And so when we look at our China business, when we look at kind of underlying China growth in China with B2B, there's been a dramatic improving trend. On the B2B business, we've shrunken that now to around 17% of sales versus last year was around 22%, 23% of sales. That's in line with what we were planning on doing. And so, if you look at our China B2B sales, Q4 last year was down, Q1 this year was down 43%. And then for Q3, we're actually up a bit because we've now shifted this into a range that we're happy with. But our non B2B business in China has been very, very strong and you can see a trend here where blended it's up year to date 9% 10% for Q3. So and that momentum continues. We're really excited about the progress in China. And now that B2B settled, the entire China business for Q3 was up around 11% for the quarter. Moving to Page 10. These markets, I think, generally are self explanatory. Hong Kong, which was performing well in Q1, started to see pressure at the end of Q2. I mean, clearly, in Q3, with what's going on in Hong Kong, our businesses are down around 40 percent, 39%. It's not so far off from what we're looking at for data, which is around inbound arrivals and with overnight stays, definitely down around 45% for August September around 42%. So, matching the traffic flows, We're managing the business as best we can with these adjustments, like everybody is in Hong Kong. And I think our team is doing what they can facing that sales dip. South Korea continues to be a challenge. Inbound Chinese traffic to Korea in general sentiment, down 10% for the quarter. We start to feel next year that we should be flat to slightly up for Korea. But I would tell you at the end of last year, I was feeling like we might get there by the end of this year and Korea continues to be under some strain. And as you know, this is a well executed market for us. So when you see a little bit of pressure, it's hard for us to kind of move on driving the sales. And then Chile, which has been a little bit up and down for us for the first half of the year, we were up 6.5% year to date September, but Q3 was down 3% really around kind of consumer sentiment, which then led into Q4 where we're seeing obviously the unrest within Chile, which will have an impact on our business. And so we're watching that closely and managing that as well. These are 3 smaller markets but important markets to us, so they all have a little bit of pressure on the overall sales number in the business. And then, when I think about the overall, before I hand it to Ezra, we really remain very focused, management team, on repositioning the business for long term growth and profitability. And so with headwinds in front of us, I do feel the business is stable overall. We're delivering solid growth throughout the world, and facing challenges in a handful of markets. And we start to feel good about it as we lean into next year, but I think these markets will continue to have some strain for us. And so, we're very focused on our plans for next year, and maybe we'll cover that at the end of the call. Our cash generation remains strong. We've always had a long history of strong cash flow generation, and we continue to be focused there. And I think you'll continue to see that really positive trend on that side. As I just said, we're very actively working on managing the gross margin impacts with the tariff, and we're ahead of schedule as far as the shift outside of China for our U. S. Business with all regions kind of playing a big part in kind of managing that. And we've taken meaningful actions on reducing SG and A, and we can see that in our year to year quarter to quarter numbers. If I look at just SG and A and look at where we are year over year, in Q1, we were up $19,000,000 in SG and A, Q2, we're up $7,900,000 And in Q3, we're up $2,500,000 So meaningful progression on the SG and A side, which carries into the EBITDA range that I talked about. And we're also very actively managing our retail portfolio as we presented them at the half, and this will have the benefit of starting to close stores that we're taking some impairment charges on, and you'll see the benefits of that carry into next year as well as we start to exit a handful of stores that have loss making EBITDA. So with that, I will hand it over to Reza, and we'll walk through some of the numbers in some detail. And we'll start off by covering the Q in greater detail and then we'll cover the year to date numbers as well. So starting on Page 13, the Q3 results, as Kyle mentioned, were down 70 basis points. Really, the point here since the last call was we had during the question and answer session had some questions around Hong Kong because that was bubbling up. And if it were not for Hong Kong, if we would just exclude what happened in Hong Kong, we actually would have been up 20 basis points. So, I think that's probably the largest contributor in terms of what's changed since the last time we spoke with you. As it relates to gross margin, as Kyle mentioned, the impact of the tariffs are continuing to bite in the quarter. So gross margin is down 171 basis points compared to the last year period and led up largely due to the U. S. Tariffs that are on the sourcing. And what we're doing around that is trying to accelerate as fast as we can in terms of the shift. And the good news on that front is that we are ahead of schedule, as Kyle mentioned. Looking at adjusted EBITDA, the actions that we've taken both around advertising as well as what we're doing around SG and A, we are narrowing the gap. So just to recap, just if I'm looking at the other SG and A delta quarter over quarter, in Q1 of this year, we had about a $19,100,000 differential or increase in terms of the other SG and A line. We've narrowed that down to about $2,000,000 $2,500,000 to be precise, in Q3. So the actions that we've taken around cutting some costs are bearing fruit. And therefore, as we have this pressure on gross margin and we look at the year over year change on adjusted EBITDA, in Q3, we're about half of where we were in terms of Q1 in terms of the negative impact of it. So as we manage the business going into the end of the year as well as next year, we're going to be very disciplined around the cost structure while we continue to invest in advertising as well. As it relates to adjusted net income, the largest impact, we're down to $15,800,000 on adjusted net income compared to the prior period. And the biggest driver of that is obviously the flow through that happens from adjusted EBITDA. There is a little bit of noise around our effective tax rate that for the quarter it was 26.9% as compared to 23% last year. That's just simply from a timing perspective some of the flow through that's happening on profit mix and reserves. If you look at the year to date period, as we get to that slide a little later on, our ETR is 24.1% compared to 25.7% last year. So I think our assumptions on tax should be the same as we've always communicated to you, but just be aware that in the quarter, there is a little bit of noise there. Our favorite slide, Slide 14. And again, I look forward to the day where we have one more of these to include. But again, for transparency and clarity, want to make sure that everybody has the bridge as it relates to IFRS 16 and the adjustments that are there. Again, we're looking at this in terms of the adjusted EBITDA, including lease amortization and interest expense when we communicate with you to try to be as comparable to the way that we've always recorded. And again, that's including an expense, which is bringing the EBITDA down. I won't spend a lot of time on this slide, but just be aware that the IFRS lease amortization expense for the period was $48,900,000 and the lease interest expense was $7,600,000 which is the delta that you see on this page. On Page 15, we're bridging just adjusted EBITDA for the Q3 period specifically. As you can see in the middle of the bar, we were really seeing that gross profit impact due to the lower margin. And you should be aware that that is largely so about $9,300,000 of that is driven from the U. S. As we look at what's happening in the period. And we've tried to offset that through the actions we've taken on advertising. So you see the $9,500,000 benefit from the reduction in advertising. And again, as we look at other SG and A, despite the fact that you have some inflation that naturally works its way into the business, we have been narrowing the gap and we feel that there's been a good improvement as we look at Q1 to Q2 and now to Q3, that negative $2,500,000 number. On Slide 16, we're bridging to net income. So you obviously see the flow through that you saw on the previous slide in terms of the tax affected adjusted EBITDA decrease coming in. The other initiatives that we've been having, obviously, there's been a little bit of we continue to delever. So that does have a benefit in terms of our net interest expense. So you see a little bit of a pickup there. And then the tax impact that I mentioned on the previous slide, there's just a little bit of profit mix in terms of where the profits are booked. The profits and losses are booked compared to prior periods that's leading into a little bit of noise on the ETR. Again, we don't anticipate that to have any impact as we go to the year end, but just be aware that in this quarter, there's a little bit there. Moving to Slide 17. As Kyle mentioned a little bit earlier, I think it is important to look at to say that overall, the regions are performing with the exception of North America where we're seeing this U. S.-China trade pressure working its way through. So 7.6% decline in constant currency terms in North America as compared to have highlighted that if we didn't have these 4 challenged markets, what those markets what the numbers would look like for each of these regions. And Asia, if you were excluding the impact of South Korea and Hong Kong, would be up 12% as an example. And just for clarity, when we are talking about Hong Kong throughout this presentation, we really have isolated for what is the domestic Hong Kong business. And it's in one of the footnotes here. But as you know, when we report Hong Kong as a in terms of our financial statements, we usually include what is being sold to distributor markets as well as Macau as well, which is about half of the size of the business. So what we're excluding for Hong Kong here, we really are isolating for what's happening in the domestic market in Hong Kong. Slide 18, we include this slide every quarter. And I think the good news is that 3 core brands are all showing growth. So Samsonite has moved into positive territory as well in the quarter. So Samsonite is up 1%, Tumi 60 basis points. American Tourists are up 4.3%. Again, looking at it in terms of if we didn't have the impact of the challenged markets, those numbers would have been 5% up for Samsonite, which I is a very solid growth rate. Tumi, 12%, which has been the kind of the historical run rate that we have been seeing and American tourists are up 13% as well. Kyle mentioned some of what is happening with the other brands specifically as it relates to spec, which was down 14%, and some of the other brands are contributing as well in that other category. Looking at the year to date results, and we are on Slide 20 now. Constant currency sales, if you're looking at the year to date period ending September, was a decrease of 1.2% for the reasons that we've mentioned, again, excluding the 5 challenged markets that we've highlighted here, it would be 4.6%. And again, why I say that when we're looking at the markets here, it really is we're tried to spend a lot of time focusing on where the impact is coming in, in terms of the headwinds. And I think we've been trying to communicate that very transparently. And it's not getting necessarily worse. It's just more of the same as we look at this quarter and as we look into the Q4. Gross margin on the year to date period is down 89 basis points. Obviously, a contributor to that is the negative that we see in Q3. This is largely driven by the tariff situation that we've talked about in the U. S. So as the impact of the tariffs start to weigh in, we're starting to see that deteriorate. Obviously, in the Q1, we didn't really see a lot of that impact. It was actually positive in Q2. Some of it came in. Now in Q3, more. What are we trying to do to offset that? The actions that we talked about. We're trying to shift the production. We're trying to work to reengineer. And you should expect to see a normalization as we look into next year because you start to comp against this as we move forward. As it relates to adjusted EBITDA, we are definitely taking actions on cost structure as well as advertising. So the EBITDA margin has decreased by 180 basis points due to this lower gross margin that we have. And we did have the run rate effect that we talked about on the last call as well. So there were costs related to the other SG and A line that we're going to specifically in Europe as we have the retail expansion and the store openings that happened last year. So if you're looking at a full year comping of that period, the beginning part of the year, you've had that comparison happening. As we get into Q3, we're narrowing that gap because we've taken action in terms of reducing our cost structure. As we look at adjusted net income, it is simply the flow through that you see from adjusted EBITDA. And we talked about the normalization of that ECR factor. So that shouldn't really play into the results as we look at September's adjusted net income a lot. I won't spend any time on Slide 21, but it's just a year to date comparison of the IFRS 16 adjustments just so that everybody can bridge that. And then on Slide 22, I think it bears repeating and focusing in terms of what we're doing in terms of evaluating our store portfolio, looking at our cost structure, looking at the retail channel profitability, etcetera. We covered this in the last call as well. But obviously, this is an ongoing effort that we're going to have just facing the headwinds that we see to make sure that we really are scrubbing and trying to make sure that we're maintaining profitability as best as we can. As you may recall, in the first half results, we did take an impairment charge in terms of the 44 of our stores. There was about $29,700,000 impairment that we took in H1. In Q3, there is a smaller number. There is an impairment charge that you will see in our reported results of $2,500,000 This is largely due to the accounting of IFRS 16. So we have processes in place where we're going to review our store fleet as we look at it quarterly. And in this quarter, as we looked at some of the headwinds that we have in the market, we've taken a slight impairment in some of the stores as well. Just to give you clarity in terms of the number of stores, in first half, it was 44 stores in total. Q3, there were 9 stores broken out, 8 in Europe and 1 in Asia that are resulting in this $2,500,000 number that we see here. On Slide 23, we're looking at what's happening in terms of adjusted EBITDA specifically. And again, I will just draw your attention to a few key messages here, which is really just to recap. So obviously, we have headwinds that start with the U. S. China issues that we have talked about as well as those other select markets with Hong Kong specifically and Chile, which is the largest component of our Latin America market, which has been faced with some strife of late. There is gross margin impact that flows through from that, from the tire cost structure. So and we just covered what we're trying to do around that in terms of shifting product sourcing. The good news is we are ahead of schedule. We've already hit our year end targets as of the Q in that. And we have set new targets to try to do even better than what we were anticipating in the last quarter. So that will definitely have a benefit as we look at next year in terms of gross margin and that shift that's happening there. We've been managing advertising. So you see that benefit of $17,000,000 or $16,800,000 on advertising decrease to try to basically narrow the gap from an EBITDA margin standpoint. And we have been taking aggressive actions around SG and A as well. The net net result of that, as you can see in the green circles above, is that we are seeing, as we look at quarter after quarter after quarter, a trend of improvement in trying to narrow the gap in terms of adjusted EBITDA. We are going to continue to be focused on this as we go into next year because we think we have to look at the operating environment and realize that it's more of the same and we just need to be prepared for that. So we are actively trying to manage margins and that's something that you'll continue to see us focus on. On Page 24, the other actions that we're taking, and again, I'd just draw your attention to net interest expense and tax decrease. There are things that we're looking at with the balance sheet. So we're continuing to generate free cash flow. We're continuing to pay down debt that will have a benefit in terms of interest expense. You will see in our notes that we have been talking about delevering for quite some time right now. And while we have been building cash, we did take action after the quarter end in terms of paying down $65,000,000 of our term loan B, which is the more expensive piece of our term loan, 25 basis points more expensive than the term loan A. So, we have actually continued to commit to delevering and we have paid down debt. And all of that will have a benefit as it flows through to the net income line. And again, from taxes, it is what it is in terms of where profits are being generated, but we are taking actions in terms of trying to improve our tax structure as well, which is an ongoing effort that we have going into the end of the year. Slide 25. Again, just to recap for the year to date period as opposed to the quarter, all regions ex North America have had year to date growth. So we see Asia up 1.4 percent, Europe 2.5 percent on a constant currency growth basis and Latin America up 2.7%. North America, given the issues that we've been consistently talking about, down 6.3%. And again, we just, for clarity's sake, wanted to give you the numbers in terms of if you were to exclude some of these challenged markets, what it would look like, and you'll see those in the call out boxes on the bottom of the page. Year to date sales by brand, again, some positive momentum in this department as well. So we covered it in terms of the Q. Samsonite has been down in terms of the year to date period, but we've been chipping away at that. So, Samsonite for the year to date September period is down 1.2%, Tumi contributing growth at 3.4%, American Surfs are up about 1% and the other brands are down about 8.7%. If we exclude the challenged markets, you see positive growth across all segments as well. D2C, as we've consistently talked about in all of the quarters, a very big push for us in terms of trying to make sure that we improve the margin profile of the business, especially as it relates to e commerce. We had net sales growth of 20.6 percent in DTC e commerce, excluding eBags, where we've been purposely trying to reduce the sales of the 3rd party brands. Just to recap that, the reason we're trying to reduce those sales is even though it does have an impact on overall sales growth, it does lead to greater profitability as we shift to our own house of brands for eBags. So that is something that during the course of this year we're committed to doing. And I would say that we're ahead of schedule in terms of that effort as well. Overall, DTC e Commerce now represents 9.6% of the total company net sales, which is up 60 basis points from last year of this period. And overall, DTC net sales is up 2.6%, 5.1% if you adjust for the eBags number that we talked about. So about 36% of total net company sales are coming from direct to consumer. Advertising spend, we continue to invest. While we did dial it back slightly, as we had messaged in the prior period to try to manage our adjusted EBITDA, we are still continuing to have a healthy amount of advertising spend. For the year to date period, total advertising is at $148,000,000 which is about 5.5%. As we look at next year, we were going to look at having this increased back to its previous level, somewhere between where we were in 2018 2019. And on the balance sheet, I think there's a few points of notes here that I wanted to spend a couple of seconds on. So, obviously, we continue to delever. So net debt has decreased by roughly $147,000,000 since the prior period of last year. So that's something that we're very proud of as we continue to focus on managing the balance sheet actively. As Kyle mentioned, cash flow from operations up 30% or $43,000,000 since last year, and we use that excess cash flow basically to continue to delever. We've been managing CapEx very actively as well, so we're ahead of our plans in terms of being very disciplined on CapEx spend. And a couple of things that you'll see, just taking advantage of the interest rate environment, you'll see in our quarterly report that, as I mentioned earlier, we have made a voluntary debt payment of $65,000,000 of principal on our term loan B. The other point of note is that we terminated some of our existing swaps and entered into new swaps. The reason we did that is taking advantage of the interest rate environment. We've locked in. We basically extended the swaps by 2 years at 1.2% versus 1.3%. So that will have a benefit on net interest as well as we look to the future. Working capital continue to be very, very focused in terms of inventory management and it's obviously flowing through to cash flow. Inventories are down $29,400,000 compared to the prior period this time last year, something that we're very proud of. That's improved our inventory days by 4 days. Where you see that red circle around trade payable days, trade payables are 7 days lower than the prior year. But again, that's due to the fact that we're reducing inventory purchases. So the net net of our working capital management is that we're being very disciplined in our existing inventory levels. And that's going to continue to show an improvement, which you'll see on the upper right hand box in terms of the change that we've had in terms of net working capital efficiency as well. With that, I'll turn it over to William for questions for the team. Kyle? Yes. Thanks, Reza. That's great. So, William, we can open up to questions. Thank you. And our first question is come from Chen Luo with Bank of America Merrill Lynch. Chen Luo, please go ahead. Thank you, management. I've got two questions. First of all, we have seen some challenges in the core market, U. S, Korea, Hong Kong and Chile in Q3. And since these challenges are continuing into Q4, so can you give us an updated guidance for Q4 second half in terms of the organic sales growth as well as the EBITDA margin trends? And secondly, a very quick question on Hong Kong. We know that Hong Kong represents around 4% to 5% of revenue. But given the high margin in Hong Kong, what's the EBITDA contribution from Hong Kong? Okay. So from a sales perspective, our view on Q4, as we sit today, is it will probably look very similar to what we've seen for Q3. I think we'll be down just around 1%, similar trend from Q2 and Q3 for the same reasons for the market. The market we're watching closely that's really just showing up in Q4 is Chile. And so that will have a factor. I think Hong Kong will stay in the zone that it is right now, which is meaningfully down 40%. We have mixes in the U. S. Of some upsides and downsides, but I think the U. S. Business is going to stay very similar to what we saw in Q4. And then the rest of our business is performing very well, including Europe, which has had a very good Q3 that's carrying into Q4. So on a blended basis, I think we're going to be, let's call it, down around the same percentage, 1% -ish. And I think for the full year, we're going to end up down around 1% to 1.2%, I think, full year. That's our best view at the moment. From the EBITDA margin perspective, we've talked about the trends and the benefits we're getting from initiatives. And my sense is that will continue into Q4. And as we look to next year, we start to feel like we'll have some good improvements in EBITDA overall margin carrying into next year off the back of all the initiatives, along with the benefits of these resourcing initiatives, which will really start to show up as we step into next year. As you know, we lapped the tariffs kind of middle of the year because the 2nd round of tariffs went at the end of June. But we're moving at a very fast clip on the tariff side to manage the impacts of that. And so I think we'll see less of that in Q4 of this year, but you'll see much more of that as we get into next year as this inventory starts to flow through from resource destinations. So that's our view for the rest of the year. And thank you. And how about the Hong Kong EBITDA contribution? So Hong Kong overall, just and again, I want to clarify because you mentioned about 4% to 5%, that 4% to 5% on the revenues is really Hong Kong. So there's 3 components of it. There's Hong Kong, there's Macau and then there's Hong Kong distributor markets as well. When we're going through the numbers that you see in this presentation, it's about half of that, which is really we're isolating for really what's happening in the Hong Kong stores. So when you look at the decrease basically in terms of sales, it's going from 20.3% down to 13.6%. That's really what's happening in our stores. The issue that you have for the stores in Hong Kong is the domestic sales are very much geared towards direct to consumer there. So it's not as much of a wholesale market as you would see in some of the other regions. So the cost structure for those sales is higher. So the EBITDA margin impact will end up being higher as the flow through happens with that. I don't have the number off the top of my head right now, but that is something that happens when you're looking at in terms of Hong Kong because if you think about and I believe you're actually based in Hong Kong. There's a lot of Samsonite stores and Tumi stores that are located physically in Hong Kong. So flow through ends up being a slightly higher percentage than you would normally see for the blended business. And our next question is come from Linda Wong with Macquarie's Hong Kong. Linda, please go ahead. Hi, management. I have two questions. The first one is regarding for the cost reduction. Management talked about that the company will still be very disciplined about the cost of saving into 2020. So can you share with us several the actions the management that plan to take? And it would be better that management, if you can expand by the advertisement and the selling expenses. And we also want to know that how will the management to find the balance between the advertisement versus the top line because we do have a worry about whether the reduced advertisement will impact the company's brand building. The second question is regarding for the U. S. Market because the U. S. Market apparently is quite challenging and we see the company have the decline trend expanded compared to the first half. I just want to know that whether management, you can share with us some of the industry trends. So for example, your peers and or the overall luggage market in the United States, whether their performance is even worse or similar to our company? Thank you. So I'll start by answering the broader question around the actions that we're taking around cost. So it really is across the board. So it starts with looking at the retail fleet that we have. And again, you saw it in some of the impairments that we've already taken. So taking a very critical view towards at a store level, which stores are performing, which aren't. We have had good growth as it relates to e commerce that helps to offset that. But we want to make sure that where you have a cost structure in place and a fixed cost base that those stores are ramping to the level that they need to be doing. We are also looking at just overall cost in terms of the product itself. So we talked about on the last call in terms of the sourcing Kyle also alluded Kyle also alluded to reengineering product to make sure that you hit certain price points. By doing that, you can try to manage some of the gross margin pressure that we have. Your point is very well taken as it relates to advertising. We're in the middle of our budget processing right now. And we have always said that we look at kind of 6% as the number that we have historically been looking at as a percentage of sales in terms of our advertising investments that we make. In certain markets, and especially for Tumi, that may end up actually being even higher. And so we are okay in a quarter here or a quarter there dialing it back in terms of kind of the brand advertising that happens. The advertising that runs to sales, we do not touch. So there's different buckets of advertising that we look at specifically. And in certain cases, we actually increased the advertising spend. So for instance, some of the e commerce spend, we've actually increased our advertising dollars to make sure that we're continuing to maintain market share. So as we look at next year, we will probably end up and we haven't finalized our numbers yet thus far, but we'll probably end up somewhere between 5.7%, 5.8%, thereabouts in terms of the percentage of advertising that we end up so it will be an improvement over what we did this year. But it's really a function of looking at it critically and making sure that it doesn't impact our sales growth either. So we want to make sure that we continue to invest in the brands continue to invest in terms of the advertising that has a high ROAS for us ultimately. Did you want to cover the market share? Yes. Just on the U. S. Business and looking at trends. As you know, we're weighted a little bit towards some of these gateway stores. When we look at our trajectory for the U. S. Business, this inbound traffic has been a meaningful piece of the noise and our gateway stores are down 13%. We see in our Tumi business a similar kind of traffic dip for our Tumi business, which has meaningful amount of gateway stores. And then our wholesale customers have been buying and managing inventory in a cautious way, which I think does impact the industry. I would say, generally, the industry is slightly down and we're probably down just a bit more than the industry because of our exposure to gateway customers with our international brands. So, we do start to comp that next year. When we think about our U. S. Business and we think about where we are, our view is we'll have a positive growth story for next year. We're finalizing plans now, but I think the U. S. Business won't get all the way back to kind of where I think the right run rate is, but I think we'll be in positive territory for next year. And we start to see early signs of the tariffs have now been kind of well in place. We start to see early signs of wholesale customers working through the last of their inventory and starting to see some positive shoots there. And so I think we'll trend into positive territory next year for sure, in the U. S, and we're trying to determine kind of where that is. But for Q4, I think we'll see a very similar story than what we've seen in Q3. And then we start to really comp where we started to see the traffic drops, which really turned on right at Q1 of this year in the U. S. And our next question is come from Dustin Wei with Morgan Stanley Hong Kong. Dustin, please go ahead. My first question related to the North America. I think back in the last call, you talked about the July sales in North America was up about 2%, And the Q3 ended up like down 7% to 8%. So it suggests that August or September is more down like more than 10%. So it's kind of just a randomly like down some of the wholesale customer, they don't want to pull in the inventory, so those 2 months is pretty bad or the August, September trend will speak to for the near term future? Yes. So the U. S. Is seeing I think we talked about the seeing kind of lumpy buys. And actually, I don't have the number right in front of me, but the U. S. Wholesale business in October leading into Q4 was up mid to upper single digits. What's happening trended. I think if you looked at the U. S. Business quarter to quarter on average, it's down around 5%. And that stays there, but we're seeing these moments where it pops up and then pops down. And October was a good month, but we're into November and we can see a similar story where it was up and then November is down just because of the lumpiness of how the buying is happening. I would say that our relationships with our customers, and this is very important for the U. S. Business, is very, very solid. And we're excited just like our customers are for next year in getting through at least a kind of comping normal situation here. And I think relationships are critical in this resourcing and reengineering of products and getting to margin profiles that we're used to and what our customers are used to are well in hand here as we move into next year is the way I would think about the U. S. Business. But the lumpy lots is just the way the wholesale customers are buying. Okay. And I think kind of encouraged to see the growth, constant growth in Asia and Europe in the Q3. But if you look at the sensor sales growth, I think we reported a 9 month sensor sales growth, we tried to back out for the Q3. It looks like for these two regions, Asia and Europe, still seeing the decline. So is that kind of related to in these two regions, the wholesale market is doing better in Q3? Or actually, the central sales growth for these two regions were up in Q3? So, Justin, same store sales in the U. S. Were down in the quarter. So, the overall comp sales for the U. S. Were down about 6%. I think it was 6.1%, if I remember correctly, for Q3. Europe is actually doing better. But keep in mind, we have the ramping of the stores that's happening. So you had all of the store openings that happened last year and those haven't not fully ramped yet. So that's part of the ongoing issue that we see in Europe. But overall, we have been pleased with the overall sales growth in Europe. And Fabio, to your point, has been very focused on wholesale as well. So he's been very focused on striking the balance between wholesale and retail. As opposed to previously, we really were almost overemphasizing the direct to consumer business in Europe. And so I think that balance is probably in a much better place right now overall as it relates to Europe. And how about Asia? Is the central sales growth, is that because Hong Kong? Asia, the issue is Hong Kong, yes. And to be fair, you have a little bit of South Korea noise as well. So if you're looking at the markets overall in Asia, the overall market is excluding Hong Kong and South Korea is doing fine. There was in the queue a little bit of noise in Japan, but I don't think like there is really issues in Japan or anything like that. It's just more where that quarterly number came in. But overall, I think for Asia, we feel pretty good about it. And as you know, in Asia, it's much easier to manage the store fleet. So if you see nonperformance in the stores, you have shorter leases. So you can basically action those a lot easier than you can in some of the other markets. And Dustin, when you look at our when you get into the Q and look at the MD and A, you'll see we're having an amazing year in India, a very strong year in Japan. I think a lot of Chinese tourists are ending up in Japan. Again, our brand strength is well known. And so strong Japan, strong kind of Singapore and kind of that part of the world. And you really do when you factor out the Hong Kong noise and South Korea, you've got an Asia that's delivering very nice growth. And we're encouraged by that. We can see the pockets of pressure, but the rest of the business is performing very well and we're excited about next year with many of these markets as well. Okay. And third question related to the distribution expenses. So if you want to do the sort of the like for like comparison, should I actually add the interest of Lee back to the reported distribution expenses? Or I should look at it that way? Yes. So the way that we've always tried to present it since the beginning of the year is to show the short answer is yes, but you want to basically normalize use the column that we have in our financial statements that adjusts for the IFRS adjustments for 2018 and then you'd be able to do the like for like that way. Yes. I understand from the EBITDA perspective, and you have the slide to explain that very clear. But if you want to focus on the distribution, because just if I add back the interest of these back to the distribution expenses for Q3, actually that kind of increased quarter on quarter or year on year. So I just want to know, is because IFRS 16, do you have some non cash charge that is toward that comparison? Or is actually you're doing something, meaning maybe opening more stores or some adjustment there So, now we are seeing There is definitely Dustin, there is definitely store growth. And actually, that's a point that we should cover as well. We are very disciplined in terms of opening stores. And if you look at the fleet, it continues to grow. So if you remember in the last quarterly call, we actually gave you a little bit of a breakdown in terms of Tumi versus non Tumi, etcetera. In this quarter, we opened up another I think it was 8 Tumi stores, for instance, if you're looking at it across the fleet. So we do continue to open stores, which does lead to additions in that distribution line item. So to be fair, that is the largest component of it is there is just natural store growth that's going to be happening there. So as you can tell, the way that we try to present it here is we look at that as a percentage of sales. And when you get into a normalized run rate, which is I think where we are now in terms of the store openings, you don't see the spike that you saw, say, in 2018 where you have this massive influx of stores that ended up opening. So you have all the expense, but you don't have the revenues because it takes a while for it to ramp. So I would say where we are right now is you should see kind of a normalized flow that, that grows in line with sales as you go quarter after quarter. Okay. That's very helpful. I actually have some more questions, but I'll go back to the queue for now. Thank you. Okay. Thanks, Austin. Okay. Before we move on, we got a question from online from Ian Hargreaves of Invesco. Kind of related to Dustin's question just now, Ian would like to know whether we can provide some guidance about 2020 CapEx outlook? Thank you. So I think the 2020 number is very similar to what we said in the last quarterly call. For this year, we have purposefully tried to dial back on the CapEx spending. The big component so if you're going back to kind of the quarterly call that we had at the beginning of the year compared to where we are now, the biggest shift has been the distribution warehouse that we're going to open in Europe. So that CapEx has been pushed off. And again, that and we're in a permitting process around that distribution facility in Europe. So it's unclear when that will actually end up coming in, if it does. So the normalized CapEx that we've looked at for this business historically has been kind of low 100s, 120 thereabouts. We're coming in significantly below that for this year. But I think you should look at it as that is the normalized number that we have. And again, typically the CapEx, if you think about the kinds of investments that we have to do, there are systems that have to go in. There will be some CapEx around warehouses that we have. This year, we ended up putting in a robotics line in our Utenard facility. So those are things that bring efficiencies and we have to continue to invest in the business. But I think that's what we would guide you towards kind of that 120, 130 number as a normalized number. Thank you very much, Reza. Operator, can you do one more check to see if there are any other callers waiting online for questions? Sure. And our next question is come from Mavis Hsu with DBS Hong Kong. And Mavis, please go ahead. Hi management. Thanks for taking my questions. I have a few here. First, I have to get some comments on margin trends by key brands. Some of you might see me American Tourister in terms of the outlook and what do we expect for the trend in 2020? And then secondly, I hope to check with you in terms of acquisitions because we actually mentioned about a few months ago that we become open up again for new acquisitions perhaps by 2020. So can I just get some updates here? And this also speaks to my third question about the 12/27 target that we mentioned about 5 years ago of USD 4,000,000,000. So will this still stay? And will that be achievable organically or probably inclusive of some acquisitions? So as it relates to gross margins, there's been some decrease this year compared to last year by brand. So we've seen and again, it's largely driven by the U. S. And tariffs because you can imagine the product costing is working its way through. So if you're looking at kind of last year versus this year, we're down about 100 basis points for Samsonite overall. That includes Red Label and the core Samsonite brand in terms of what's happening gross margins there. Tumi has also seen some decline. But again, the gross margins are very healthy. So it's obviously without disclosing the exact number of it, it's significantly higher than Samsonite. But the decline that we've seen in Tumi has been around close to around 200 basis points year over year overall. And again, largely driven by the U. S. Because Tumi, as you guys know, has historically been very U. S. Centric and the same store sales that you see in the gateway cities has impacted that in terms of what's happened in terms of gross margin as well. American Tourister operates at a lower gross margin profile. So, it's kind of in that high-40s number. And that margin has come down similar to what's happened with Samsonite. So you're down anywhere between, depending on what region you're looking at, 150 basis points to 200 basis points for American Tourister. And again, there has been a big push in terms of trying to get American Tourister into the U. S. So that's been a component of it that's been coming in as well. We've started to see good market share gains with American Tourister in the U. S. And that over time should normalize in terms of the gross margin once it gets in. But that investment that's happened in the U. S. Has probably driven some of that. Just to correct one thing, AT in Europe from a margin perspective is an improving trend. Yes, so Europe is getting into its kind of year 4 and 5 of its push into Europe. Into Europe has had a very good margin story. I think over that time period, it's probably up close to 700 basis points. And so that continues. And the U. S. Is where we're seeing a little bit more of a strain on AT margins, largely because that's been historically very sourced from China and we're feeling the tariff impact of that. But a different story in Europe where as the brand has really established itself, that's moving nicely in a direction we would have anticipated. From an acquisition perspective, I indicated at the start of the year or maybe at the end of last year that we'd start to look. We're always looking, I would say, but you should assume at this point that we're still on a hold mode on acquisitions. We've seen some things that were interesting this year, but we're passing on things. My view is deals will always be available, and we're I'd rather see our business move back into the territory of growth profile that we're used to before we start leaning in. We're quite happy with our deleveraging progress, and we'll continue on that front as well. And so there's nothing imminent and my sense is we're always looking, but I'd like to see next year get back into the footing that we're used to before we start making noise on looking at things with a little more earnest. And the last point on targets, I think the right way to think about kind of our forward targets, and it's a little bit different style than mine versus kind of our former CEO. My view of this business is organically, we should be able to deliver a sustainable growth story, I've indicated that throughout the year, of somewhere around 5%, 6%, 7%. And you can do the math to determine kind of what our growth profile is there. I do think this business has further M and A opportunities. And so depending on what that is, we can kind of build on that. But the underlying and the way we're managing this business is managing what's around us organically. And if we get to that growth profile, the business continues on a very nice path towards $5,000,000,000 in sales. Maybe acquisitions can accelerate that, but that's not how we're managing and operating the business. We won't do acquisitions just for the sake of moving our sales number up. We'll do them if they make sense. But that underlying organic growth story delivers a terrific kind of growth profile for us. And I think we won't get all the way back there next year, but we'll start to move back into positive territory next year with a few of these pockets lingering and the underlying business moving in that direction. I take a lot of heart in looking at when I adjust for these 4 challenged markets, the underlying business is delivering a little over 7% growth today, adjusted for these markets. And we get these markets moving back into the normal zip code, and we're right in the zone of that kind of range of sustainable growth for this business, which is the right way to think about it, and it's how we're managing the business on a go forward basis. Thank you. And our next question is come from Anna Murray with Barings London. Anna, please go ahead. I just had a couple of quick ones on the store network. I apologize if I've missed this. Can you confirm that 50 3 stores that you've taken the noncash impairment on? Is the full total of loss making stores in the quarter? No, no. There's other stores that are still on a watch list that we look at. So you have to keep in mind, anytime we open up a store so for instance, we opened I mentioned we opened up in the quarter, we opened we opened up, in the quarter, we opened up 8 Tumi stores and we shut down net, we're down 1 Samsonite store. So if you look at that, you have 8 stores that just opened up. So just as soon as you open up, unless actually in certain cases, they are profitable, believe it or not, but there's a ramp period that happens. So we're not representing those are the only stores that are at a loss. It's just that we look at the revenue trend that happens. Yes. I would say the 53, which were stores throughout the year, they weren't just in the quarter, so that's year to date. We've been very thorough. We're as we should be in looking at that. So when we look at our fleet of stores, which is just shy of 1300 stores, 53 stores was a thorough review. Could we have a few stragglers, as Reza says, as certain stores are ramping? Yes. But there's not much left out there for stores that aren't performing other than stores that are just in their ramp zone. So you shouldn't assume that there is kind of this ongoing flow of stores. This was a thorough review, taking into account the trends we're seeing in sales performance and also factoring in IFRS 16, which kind of layers on an asset to the book, which is this kind of right of used lease asset and effectively requires you to assess on a more thorough quarterly basis. And you should assume that we've been very thorough. And I guess on the question of exiting loss making locations, should we assume that you are in negotiations and would, if possible, close any of those 53 stores? I think we've closed 6 so far. We have 4 more that are really close to executing on. And in the midst of this, we're also chasing in certain markets rent reductions. And so not only is the closing an option, but also if we're not able to close, making sure that we're getting reductions as best we can to kind of position those stores for a better future. And so we're very actively working through exits, renegotiations, and you should expect more of that, which will have benefits going forward that aren't fully kind of plugged in yet. You're getting the benefit of in these impairments and in these charges, the depreciation and the amortization of that rent expense effectively of the right of use assets gets pulled out. But on a go forward basis, you should also get the benefits of exiting stores as we're able to negotiate. Markets like the U. S. Are very tricky right now for exits, but it doesn't mean that we can't chase any sort of kind of rent adjustments, which again takes a lot of work, but we're very actively pursuing that. That will be an improving trend. So for these stores, either closing or getting benefits for, we'll continue to get forward benefits on the EBITDA side as we continue to execute against those. And then when you talk about acceptable exit terms, my understanding is that most of your sites have kind of multiyear leases left on them. Are you having to make some sort of exceptional payment in order to exit leases? And if so, can you give us an idea? There will be some of that, yes. That's harder to predict for us, but there will be some exits. I think we've incurred some to date. And I think when we were at the half, we took the first kind of round of charges, we had estimated somewhere between kind of $8,000,000 $10,000,000 of exit costs. But those a lot of these exits are going to be hard to achieve. So we might end up with rent reductions versus exits. So I don't think it's a massive number, but that's the number that we could have going forward if we get to actual exits. And just to give you a sense of how it's working by region. So in Asia, you're able to have shorter term leases. So you just basically cancel the lease or you just don't renew when it comes up. So those negotiations are easier. Europe is in the middle. So when we're talking about the actual store closures that have happened, the majority have been in Europe, where again, the landlords, they look at it more in terms of some of them are in high street locations. There are other tenants that are willing to step in. And so it's easier to shift that a little bit as compared to the U. S. The U. S. Is the most challenged market because of the retail landscape overall. And in those cases, we have been able to secure rent reduction. So in terms of the actual exits, you've been seeing them mostly in Europe. In terms of nonrenewals, they're mostly in Asia. And in the U. S, that's where you start to see the rent reduction come in. And the last question for today's call will be will come from Dustin Wei with Morgan Stanley Hong Kong. And Dustin, please go ahead. Hi, thanks. So just last two questions. So in terms of the inventory, do you have any new target for the inventory days? I think second time you had around 120 days. And if I look at the volume growth, meaning the sales volume in U. S, you consider this growth about like low teens. It seems like the volume is down quite a bit, like double digits. And is that going to sort of expand your inventory days because of that dynamic? No, I still Dustin, I think last time I reported, I think this business at 125 days or so should be our target. We ran for a long time at around 115, 120 days. We've brought that up just a bit, but there's no reason why we can't get there. And so when I look at our inventory days at 144 days, that's good progress against the backdrop of some sales softness, but there's no reason why we don't continue to move back towards 125 days. And so I think you'll see that continue into Q4, the trend we're having, and I expect to achieve more of that next year as well. So we're very focused on that, and that should be a benefit as we move into next year as well. We've also been able to move our payable terms. I think we mentioned this at the last half. And so we've added a few extra days to our payable terms with vendors, and that will have a benefit on working capital as well. So the blend of those 2, I have the team very focused, and you'll see that continue into next year as a benefit from us from a cash flow perspective. That's great. And in terms of it's a longer term question regarding the direct to consumer e commerce. So did you see actually there's a way to grow the direct to consumer e commerce faster than the current rate? And is it indeed a higher margin business longer term? Well, I think the pace that we're growing right now, I think, is a very healthy pace. We're growing on average around 20% in e commerce, and we're balancing growth with brand positioning and margin profile. And could we grow faster and maybe shave off on the margin side? Probably, but I don't think that's the right answer for us. So I'm quite happy with the growth profile. And if we can continue that pace, I think that would be a very good result for the business. And every year, you should expect to become a bigger percentage of our business. I'm more cautious on expectations on overall margin profile. I think it can look like the rest of our D2C business, does trend higher than our total business, but we shouldn't assume that e commerce is an endless line to profit margin, EBITDA margin expansion because in and of itself, it's a competitive landscape. And so we have to kind of navigate that cautiously. And I do think over time, you might see maybe the spend digitally. As Reza said, we've stepped that up. The spend on that digital playing field from, well, let's call it the marketing side and driving traffic is important. And as that becomes a bigger piece of our business, I think you'll see kind of the allocation of spend to that increasing as well. If I look at my eBags business, for example, in that eBags business, which is a pure digital play, we spend around 10% of sales on marketing. So as far as digital becomes our bigger piece, you should assume that that marketing spend will be kind of riding in line with that as well. So I wouldn't draw like an endless line of kind of margin kind of appreciation because of e commerce, but it can deliver very nice growth, very stable margins if we balance the growth right, and that's the way we're managing on a forward basis. We're quite excited about the progress we've had across all of our regions. Okay, great. Thanks a lot. Yes. Okay. Great. Thank you very much, everyone. Yes. Really appreciate it. And any questions, obviously, you know how to get through us through William. So appreciate everybody joining us. Thank you.