Earnings Call: Q1 2019

May 14, 2019

Good morning, good afternoon, and good evening, ladies and gentlemen. Welcome to the Samsung International 2019 First Quarter Results Earnings Call. Please note that this event is being recorded. I would now like to hand the conference over to Mr. William Yu, Director of Investor Relations. Thank you. Please go ahead, sir. Thank you, operator. Hello, everyone. Thank you very much for taking the time to join the first quarter 2019 earnings call. With us presenting today are our CEO, Mr. Carl Gendreau as well as our CFO, Mr. Reza Taleghani. And without further ado, I will begin we'll have our CEO, Mr. Carl Gendreau begin with a few opening remarks. Thank you very much. Okay, great. Thanks, William. And William, you'll turn the pages and I'll just indicate what page I'm on just so we stay lined up. So thanks everyone for joining. Thanks and good morning or good evening depending on where you are. So reporting our Q1 results, as we indicated at our year end results that we were seeing some challenges in those select group of markets, and that has played out in Q1. So on Page 4, our underlying business has remained stable, but the macro headwinds in these few markets has definitely impacted our Q1 results. From a sales perspective, we had downward pressure on really 4 key markets, our U. S. Business off the back of the tariff noise, which obviously elevated over the weekend. Our China business, particularly China B2B, where we're adjusting kind of the size of that business along with those customers scaling back. Korea and Chile are both feeling continuing to feel some pressure. If I adjust for these markets, our underlying business, which I would label as stable, is up 3.4% constant currency. There is an FX impact in our numbers this year from a sales perspective, fairly meaningful around $34,000,000 $35,000,000 negative impact on currency on the sales side. The U. S.-China trade tensions as we all know are leading to impacts in our U. S. Business with inbound traffic to the U. S. Particularly in our gateway cities, which has impacted our North America business and to a lesser extent but impacting our Tumi business. And our wholesale customers on the back of concerns on consumer sentiment have been cautious in ordering and managing their inventory. On a positive note, our Tumi business continues to perform very well. We were up 8.5%. We launched Alpha 3 this beginning of the year with a very good advertising campaign. And if I adjust for kind of some of the adjustments in trans shippers, our Tumi business was up just about 10% for the Q1. We continue to push our e commerce business and our direct to consumer business overall, but particularly e commerce. And if I adjust for e bags where we are consciously reducing our sales of 3rd party brands to improve profitability, e commerce was up 27% for the quarter. On Page 5, I thought this bridge would be helpful to give you just the scale of the Q1 sales numbers. So first thing I would point out is if you remember last year Q1 was a record quarter from a growth perspective for us. We're up 15.5% in Q1 2018 largely with the launch of the American Tourister campaign, which was highly successful in 2018 and with a very large kind of initial launch as we launched the advertising campaigns and several new products for Tumi. So we had a very strong Q1 last year. And as we step into Q1 of this year, you'll see impact on FX is our first bar here. And so against the strengthening dollar, we've seen kind of translation effects to our sales of around $35,000,000 We always break that out for you so you can get to the constant currency. And then going across the page, you can see the markets where we're seeing more significant strain. So U. S. Business that I've touched on. Our China B2B business, this sales drop is just China B2B down $10,000,000 We've gone from last year Q1 close to 29% to this year Q1 close to 18%. So pretty dramatic reduction in the B2B business. If I adjust B2B out, our China business is actually up around 6%. South Korea, which continues to be a strain for us off of inbound traffic and general sentiment in Korea down 7.6 percent or $4,700,000 In Chile, which we're seeing some strain last year continues with sales drop of around $3,500,000 Chile as a business is down a little over 12%. If I take all of our other markets, we're up $16,000,000 for the quarter or 3.4%. So we can really see in isolation kind of the markets, the challenges. A few of these markets are obviously our bigger markets that have an impact on the overall sales growth for the quarter. The next page and Reza will cover this a little more detail in the back is we have also this year IFRS 16 kicking into place which is lease accounting. And what we're doing in this page is showing kind of the adjusted EBITDA as reported on the left. And so you'll see Q1 to Q1 2018 adjusted as a big step up and down. The more important piece is the charts on the right, which is what you'll see in the rest of our presentation here, which is adjusted EBITDA taking out the impacts of IFRS 16. So it's more relevant to the way we've looked at the business. And so there's a small dip in 2018 if I adjust for IFRS 16 and you can see the impact on our EBITDA, which I'll go into more details off the back of the sales drop that we've seen in the Q1. And on the next page, I bridge EBITDA for you. So I'm on Page 7, William. And so if we started with Q1 2018 adjusted for FX around $117,000,000 we saw around a $30,000,000 dip in our EBITDA for the quarter. There's a small portion of FX there. So I've taken all the FX on the EBITDA line and put it into one spot. It's around $4,000,000 just with translation. The next column is the gross margin impact of the sales drop in constant currency. So around a $12,000,000 drop in gross margin just because of the sales drop. Our gross margin rate actually was up for the quarter, so we're up around 14 basis points. So that's a net positive in our numbers. We also have some advertising decrease, which is really just a function of the lower sales and the advertising carrying across. And then we have other SG and A, which as we talked about at the year end, we have a few markets where we're seeing pressure on the SG and A side as we pushed initiatives around direct to consumer. And this is particularly in Europe and a little lesser extent in Asia with the Tumi push, which has had an impact on our EBITDA of around $19,000,000 for the quarter. And so on Page 8, I just break that out in a little more color. So you can see how our non advertising SG and A is moving within the quarter. And so you can see there's a currency impact that's positive. And it's really Europe at $12,000,000 This is where we consciously were investing at the end of 2017 and through the first half of 'eighteen on retail stores. We had opened 84 stores in the last year and 40 of them were in Europe and most of them happened in the 1st 2 months. So you're getting the continued effect of those retail store openings within the SG and A side. We throttled that retail expansion back as I indicated on our last results announcement. And this is really just the effect of these stores continuing to ramp having a negative impact on the SG and A side. Latin America and North America were fairly light. Latin America a tiny bit as we push Brazil strategy. North America's SG and A was very stable as you'd expect in that business. And Asia was up a bit on SG and A with more than half of that coming from the expansion of Tumi. Now that Tumi is settled and we really start to push the retail strategy within markets like China, you see the SG and A side for that. And then our corporate costs were down $3,000,000 for the quarter. So as we manage costs within the business overall, you'll see that our corporate expenses are down in Q1. That next page really just bridges to adjusted net income. And so the largest part there is just the EBITDA impact push through on adjusted net income. Our adjusted net income is down from $45,000,000 to $27,000,000 Most of that is the sales drop. We have a net interest benefit of $3,000,000 off of the restructuring last year and our effective tax rate is slightly lower with just the mix of the business and the tax associated with stock compensation. So we've got a benefit on the tax rate carrying into the net income as well. So that's kind of the overview. I'm going to turn it to Reza to go through a little bit more details on Q1 and then I'll come back at the end of the presentation. So we're on Slide 11. So as Kyle said, overall constant currency growth this quarter ended up being down 2.4%. So the reported number will be $832,000,000 on sales. We did get a pickup in margin of 14 basis points. So that's flowed through. As you will see, the adjusted EBITDA is and I'm going to have a separate slide on IFRS 16 because at the year end presentation there were a lot of questions. I want to be very transparent in terms of how this is all calculated. What you see here in terms of adjusted EBITDA is adjusted EBITDA including the lease and amortization interest expense. That means that we're factoring in the expense of amortization and interest. The reason we're doing that is our purpose of reporting adjusted EBITDA is to give you as much clarity around the performance of the underlying operations. And by doing that, it gets us as close to kind of the pre IFRS world as possible for comparability purposes. So what you see here is, if we adjusted last year's numbers for IFRS 16, there was about a $6,000,000 impact. And so it would have been around $117,000,000 for the quarter. And this quarter, we're reporting $84,600,000 in terms of the adjusted EBITDA that we're focused on. That is a 300 basis point decline as it relates to the lower net sales. And then we also have some non advertising operating expenses, specifically the SG and A that just Kyle went through as we wait for the European stores to ramp further and some of those store investments to materialize. The flow through to net income, if you're going from left to right, it's basically the impact of the sales rolling into net income. And there is some benefit as we just went through in terms of interest expense and taxes that happened there. On the next slide on Page 12, what is driving some of these headwinds? I mean, the overall business does remain strong. So we have sales growth of 3.4% on a constant currency basis. The largest component obviously as we look at this are the U. S, China and to a lesser extent South Korea and Chile. So in the U. S, it's been the impact of tariffs. As you are well aware, a large component of our U. S. Business is driven by sales to wholesalers. And even though the full tariff impact did not come in, in the quarter, the wholesalers were looking at what the consumer impact was going to be of that and anticipating and waiting. And so as a result of some of those wholesale customers had not been purchasing. And obviously that noise continues as we go through the weekend and to this week. There's also the impact of the Chinese traffic and Asian traffic overall to U. S. Gateway cities. So if we look at what's happening on a comp basis in those stores, there has been a decline due to that. And then there's been some actions that we've taken actively in terms of improving the profitability of the U. S. Business. So specifically as we look at eBags, we have taken actions that we mentioned at the year end in terms of reducing the proportion of third party brands. So that had a $5,500,000 impact in the quarter that we think is better for the business in the longer term. But obviously it impacts sales for the quarter as we adjust. And finally, Tumi, we mentioned the trans shipper issue, so that continued and there was a little bit of overhang into the Q1 of about $2,000,000 due to the trans shippers as well. As we focus on China, I think it's very important to distinguish between the consumer and China B2B. So the largest component of what's affecting our China business is really this move out of reducing the percentage of China B2B. And we mentioned with many of you at the year end that we as we think about strategically where the China business needs to be, we don't like it being kind of in that 25% zip code. So I think strategically we're aiming for something in that 15% area, which is where we are right now. So our B2B sales are down to 17.8%, which we think that's a healthy number. But that obviously impacts overall China, which is going to end up being down $10,700,000 or on a constant currency basis, it was down $6,500,000 for the quarter. The Korea business, there is a component of it driven by Chinese traffic into the country in terms of tourism and then there's the overall economic environment in Korea that's impacting it. And Chile, it's a smaller decline and there has been some recovery as we sit here looking at April and the main numbers, but Chile during the Q1 remained slow, largely due to the consumer sentiment in the country and some impact from tourists coming over the border. So our favorite topic on Page 13 from a CFO perspective is IFRS 16. I'm going to just lay out a lot of numbers just to make sure that everybody has them. So and again, you'll see this in the earnings release, but I just want to draw your attention to draw your attention to them given the fact that this is the Q1 we're reporting this. So overall, the right of use asset that came on the books in the quarter was $705,900,000 What that is, is it's within the range of what we indicated at the end of the year. So that's what we expected it to be. And the breakdown of that is that there's a lease liability on the other side of the balance sheet of 57 point it's basically $578,000,000 of lease liability and the current portion of that is about $128,000,000 that rolls in. What ends up happening here is we wanted to basically show you quarter over quarter if we had basically been in IFRS mode all along what the adjusted number would look like and how does that compare to our as reported number. The reason we're going through all these machinations is because if the only thing you did was pull our financial statements under the old accounting rules last year, you would have seen an adjusted EBITDA in the first column of $123,000,000 And right now you would look at it and say we're at $142,300,000 So we would be saying that there's a growth in that. But for full transparency, a lot of that impact is basically due to IFRS changes that are happening. So what we're trying to do is again to normalize for that. And the reason we're showing you 2 specific lines of adjusted EBITDA is to basically be able to give you clarity around, if all you were trying to do was to solve for what our adjusted EBITDA has been for the past few years, That would be the first component of it. However, we feel the right way to report the business is to readjust and basically back out what the lease amortization expense of roughly $49,900,000 and the lease interest expense that comes as a result of IFRS 16 of $7,700,000 And so our adjusted EBITDA, including the impact of that expense is basically $84,600,000 Hopefully, you'll have a chance to digest this because I know there's a lot of information on here, but we've tried to lay it out as clearly as possible. And if there's questions, we can follow-up. On Page 14, we've covered a lot of this already, but overall, 1st quarter net sales by region. Obviously, North America was down 6.2% on a constant currency. There is some Canada effect there, but the currency could fluctuate neutralize just given that dollar. Asia, although it is down 1.2% constant currency, if you were to exclude that China B2B issue and South Korea, overall the region is performing and it would have been up 4.4%. So it really is these isolated parts of the business that are impacting it. Europe is up 2.3%. So despite some of the headwinds, they continue to perform. And Latin America, off of a smaller base down 2.8%. But again, that's largely been isolated to Chile and Mexico and there has been a recovery there. We forecast that that's going to rebound in the Q2 and by the end of the year. Looking at it by brand on the next page, on Page 15, If you're looking at Samsonite, largely because of what's happening in the U. S, China and South Korea, the Samsonite brand, constant currency growth is down 4.2%. Tumi, as Kyle said, there a little bit earlier continuing to perform, up 8.5% off the back of increased sales specifically in Asia, which was up 17% and Europe 22.5%. So we're really, really pleased in terms of the international expansion and adoption of Tumi. In American Tourister, it's really the comparable if you look at it. Q1 2017 was 22.3% The Q1 over Q1 growth was 22.7% growth between 2017 2018. And so although constant currency growth for American Tourister is down 5.2%, that's just largely because we don't have that large campaign going through. And the other brands, there's been some headwinds around High Sierra and eBags, we purposefully fully have been reducing some of the 3rd party brand sales as I alluded to earlier. On Page 16, the DTC growth, again, Kyle touched on this. We're pleased with the e commerce growth that's continuing. So net sales growth of 7.4%. Overall, 9.8% of the total sales in Q1 came from DTC e Commerce. And retail stores, if you're looking at the net sales, we did have an increase of 3 point percent in terms of the new stores that have come in. We only opened up 9 new stores in the Q1. So I think you should know that we're taking a very measured approach in terms of the continued implementation of brick and mortar retail, especially as we focus on the SG and A and given the sales environment and the consumer sentiment that we see. On Page 17, non travel continues to be an area that we're focused on and there was some growth in that. So despite the fact that travel was down 8 4.4%, constant currency, non travel was up slightly as well as we continue to focus. And as it relates to advertising, this is all we're basically in line year over year in terms of advertising. So we continue to invest in the brands. You'll see some of it on here. Hopefully, you've had a chance to look at some of our ads online as well. There's been a big push into Samsonite. We have some new innovations that are coming up that we're going to be focusing on and to me there has been a couple of campaigns, the Lenny and Zoe Kravitz campaign as well as the Chris Pratt so well within our balance for our covenants. We're so well within our bounds for our covenants. We're continuing to focus in terms of where we stand on debt. And as we continue to generate cash flow, we're focused on continuing to delever. We have 6 $1,000,000 of revolver availability, so plenty of financial flexibility still available to us and we're continuing to manage inventories, which we'll talk about on the subsequent slide as well. So we do have a focus as the sales environment has put some pressure, working capital has not come down as much as we would have hoped in the quarter, but that's largely driven around the payables number as you'll see there. So we are slowing the pace of purchasing that's happening and as you'll see inventories, we have managed to keep that down slightly year over year, but we continue to have a focus on that and we hope that as sales pick up that inventory level will continue to come down. One area that also draw your attention to is as we think about CapEx overall for the rest of the year. We are actively managing our CapEx numbers from a forecast perspective and trying to make sure that we maintain discipline. So, a focus on cash flow is going to continue for us as we continue for the remainder of the year. So with that, I'll turn it back to Kyle for views on the rest of the year. Okay. Thanks, Reza. So just before we get the questions, just I'll give you some outlooks based on where we're sitting today. And as you can imagine and as I indicated at the year end, the ability to get outlook as crisp as possible is a bit more challenged with the noises around tariffs. But from our view today, my view is that our Q2 numbers will and we're seeing in April May a bit of an improvement from what we saw in Q1. My view on our Q2 numbers is we'll probably be slightly up around somewhere between kind of 1% 2% is my best guess on Q1. But again, we're watching carefully tariffs, which the world was kind of semi expecting something to happen anyway. So it was already well kind of built into the sentiment. But it seems like it's obviously elevated quite dramatically over the weekend. So we're watching that. I think for the first half of this business, this is probably in line to slightly different than what I was thinking at the year end. I think for the first half, we will be probably flat to slightly down. And from where I'm sitting today, I would probably say more slightly down than flat. The business in the same markets that we're seeing noise, particularly the U. S. Market, I think will continue to add some strain. We'll be watching China, underlying China, which has been performing well when you take B2B out. My optimistic view is that we'll continue, but we'll watch as sentiment kind of picks up on the tariff side. From a full year perspective, I still think this business will deliver single digit growth. I think second half will be in the kind of lowtomidrange on single digit. And for the full year, I think we'll be low single digit growth. I would caution that with general kind of noises and macro pressures around tariffs, this is harder to predict. But from what we can tell off of again a softer Q2 last year, I feel pretty good that we'll be in that range. I just want to remind, last year, the first half was up close to 12% and our second half was up around 4% or 5% roughly. And so when you think about our first half numbers this year, it's against a very strong first half last year that settles out at the second half of the year. So that's our view on outlook. I think from the gross margin perspective, I think we're slightly up for the quarter. I think we will continue to work on the margin side, particularly with tariffs with the 2nd round of tariffs going in. My sense is we'll have some good discipline on margin, ideally flat to maybe slightly down, but I'm not seeing major margin pressures, our ability to manage margin. Gross margin has been one of our strengths. Reza quickly touched on working capital and cash flow. I do think by the end of the year, we'll be in line with our targets in working capital. We have the teams very focused on that, and I think we will get there. And we if last year, we had some investments in working capital that had our cash flows down a bit last year. I would you should expect that our cash flows in the back of all of this will be up year over year and the teams are very focused on that as well. So that's my best on outlook. And William, we can go to questions now. Great. Thank you very much, Kyle and Rizzo. Operator, we can begin to take questions now. Thank you. Our first question comes from Chen Luo with BoA Merrill Lynch in China. Please go ahead. Thank you, management. I've got 2 questions. First of all, just now, Kyle mentioned that there has been a lot of noises on the trade war. And on the other hand, we think that a lot of U. S. Retailers are simply delaying their purchase decisions and try to manage down the channel inventory. So based on our current observation, how low the current channel inventory is? Are they going to actually do restocking anytime soon or simply because of the renewed trade tension, so they may still continue to postpone the purchase decision to a later stage? And also, if later the U. S. Government hikes the tariffs on trial goods from 10% to 25%, what are we going to do? Are we going to raise price again or there are other alternatives? So this is my first question. Well, there's 2 questions there, right? Those are your questions, yes. So for the channel, I think you're exactly right. We've what we've seen in our U. S. Wholesale customers is, given the potential kind of challenges of consumer sentiment, they've been much cautious and much more cautious on buying. So clearly in Q1, a big piece of our drop is these U. S. Retailers, wholesalers holding back on buying. We're seeing that pick up in the second quarter. As you'd expect, there is a period of time where they'll need to start kind of rebuying and they've been just managing that very closely. So you'll see a U. S. Business which was down 6% in the first half be much more improved as we move into second half. For example, in month of April, the U. S. Business looks to be down around 2% or 3% versus 6%. There is still some pressure, I think with this kind of renewed kind of noise, it will have some impact. But you have to remember, all of these guys had already assumed a second round was coming in. If you remember back in September, the round was threatened to go in, in January 1. And so many of these people were managing assuming that. If there's any sort of light in any of this, it's we have a little bit more clarity in what I think is going to play out so people can kind of get on with kind of the world and where we're at. But my sense is people will continue to be cautious and I think the next 2, 3, 4 weeks will be really important. It sounds like it could kick into the end of June before we get some clarity on this. So that's why I think second quarter will be better than first quarter because of exactly your point. And they don't have lots of inventory in their pipes when you really think about our products anywhere from 1 to 2 months of inventory. So they'll need start buying in. And we're seeing that as we move into Q2. As far as what we're going to do with the pricing, we've already had discussions with our customers even back in December of last year because we've been waiting for this kind of foot to drop here on this second round. And so like we did in the past, when the first round of tariffs goes in, we're working with customers to manage through how do we maintain margins. We're very clear on that. The whole industry is subject to this. So generally, we will be attempting to push the price increases in to cover as much of the margin as we can. We'll be also working with our suppliers to make sure that they're able to cover some on their side. And as you know, we're generally under an initiative to kind of shift what we can from China, which we were doing even ahead of tariffs and we're just continuing to accelerate on the mix of what's coming from China to kind of mitigate the impacts here as well. And all of that stays in place. And but you should assume that we'll be doing our best to maintain the margins, the gross margins on our U. S. Business on the back of the 2nd round of tariffs if it does make it all the way in. Okay. Thank you, Kyle. And one more question on margin. Just now you mentioned the guidance of flat to slightly down margin. Are we talking about the EBITDA margin? And if that stays, given the pretty sharp decline of normalized adjusted EBITDA margin in Q1, to or slightly down EBITDA margin for the full year? Thank you. Yes. So that was gross margin that I was covering, but I'll give you an overview of what I think is going to happen with EBITDA margin. We're as a team, we're very focused on kind of driving as much cost reductions in the business to navigate the headwinds we're seeing. And so we're clearly in Q1 down. Q1 is our smallest kind of quarter from both the size of the business and also the margin for the business. And so we pick up in the rest of the year. I think our full year margins, EBITDA margins will be slightly down. When I say slightly down, anywhere from 50 to 100 basis points year over year on an adjusted EBITDA margin. That's my sense on where we are with the sales levels I think we can achieve for the full year. That's with us very actively pursuing cost initiatives in the business. So as you'd expect from management team, we are aggressively looking at our cost structures and cutting where we can cut to navigate the bit of turbulence we're seeing right now. And so you'll see the benefits of that as we move into, you'll see a bit of it in Q2 improving what you saw from Q1 and for sure in the second half of the year, you'll see some of that benefit as well. And keep in mind, there's a comparison that happens as the year goes on as well. So a lot of the store openings and other investments that happened were happening in the second half of last year as it continued. Okay. Thank you. That's all my questions. Thank you. Our next question comes from Owen Ramboort with HSBC in New York. Please go ahead. Thank you. Hi, good evening gentlemen or good morning depending. Just I wanted to check on the guidance in terms of the actual top line. Are you talking constant currency in the sense that when you're saying it's not slightly down in H1, okay, and single digit for the full year, that's constant currency? Okay. Yes. Thank you. So I just had two questions. 1 on the B2B business. So you're saying the right level in China eventually will be at around 15%. Do you have other markets where B2B is actually an important chunk of the business where you can have a bit of a reset like this as well. And then secondly, I was wondering in terms of cash generation, we've had a few discussions with investors talking about what you do with cash between paying down debt, looking at other acquisitions and actually some investors thinking it could be interesting for you to signal to the market that you think that the shares are a bit low by potentially announcing a buyback program. I'm just wondering what you think about those three options. Okay. As far as B2B, China is probably the biggest. We are in certain markets in Asia, we tend to run-in this kind of 10% to 15% of our business, particularly in those markets. China was unusually high, and I think that's probably the biggest reset that we have happening in the business. And the reality is what we want to get it to is some level of sustainability and predictability. And so the challenge with last year is it was very high in Q1 and Frank's been adjusting this. We've talked about this in the past. I think a normal run rate for China is in this 10% to 15% range. And when we get there, we'll be able to kind of take out the volatility of B2B. It's not bad business. We make really good money on it, but it has ups and downs as you know. And so we're just managing so that we have a consistency in that. And I think that's also helpful for the business to be in that consistent mode. From a cash generation perspective, we're highly focused on obviously cash flow, we always are. You'll see an improvement in our cash flow this year versus what you saw last year. We know that off of the working capital numbers last year. You'll see our CapEx a little tighter than the range. We put out kind of our outlook for CapEx for the year. We'll be a little tighter there as we manage that. And my view on cash flows for this business is continue to delever. One of the challenges with share buyback for us is the way we would go into market is challenging. We'd be very limited to what we can buy based on the volumes. And I would rather see us continue to delever versus use lever to buy back shares at the moment. I think that's a better balance for the business when I listen to kind of the blended feedback from investors. And I think this business naturally has the ability to delever and I'd like to see us continue that. And again, we'll have a strong cash flow from our view for this year, which will largely go to debt repayment as we get to the end of the year. Thank you. Good luck. Thanks. Thanks. Just one you threw in M and A there. As I indicated last year, we do have capacity within the management team on M and A. We're not actively engaged or pursuing anything, but we are kind of keeping our feelers out there. And I think this business has the ability to continue that. And but at the moment, we're very focused on kind of managing and navigating the business at the moment with what we have for Turbulence in front of us. Okay. The next question is one from online from Ferdinand Groos of Crider Capital Partners. His question is this and I think this is for Reza. What is the annualized impact of what looks like an increase of US20 $1,000,000 in SG and A expense? Is this basically the cost of running stores that had not been opened in the Q1 2018? William, the short answer is yes. So it's if you looked at the layering of the SG and A that happened, it was largely due to the push to B2C. A component of that was e commerce investments, but obviously we're happy with what we've seen on the e commerce side in terms of the pickup in sales that's happened that we just reported. In terms of the brick and mortar retail, you're seeing the full year effect of that in terms of what the stores that were built kind of Q1 of last year and now it's coming in as we look at the layering that happens in this quarter. Thank you, Reza. Any other questions? I think so. We have 3 more at least 3 more callers waiting online. Sure. Our next question comes from Hugo Shen with Macquarie in China. Please go ahead. Thank you. Hi management. Thank you for taking my question. I have one small question regarding the competitive landscape. So are you seeing increasing competition from those brands, especially in U. S. And China, such as private label brands from Xiaomi, Amazon and websites like that? Thank you. I would say there's not anything new. These were all the competitive pressures that we're seeing through last year. We have one of the things I look at when we're kind of in this turbulence is just where we are from a positioning and share perspective. And I would say we're not losing any footing on that front. So there's nothing new elevating from a competitive perspective. The same kind of noisy players at the bottom, I would say this is at the very entry level zone where we see things, but that's not any different than what we're seeing through last year. Got it. Thank you. Yes. Thank you. Our next question comes from Richard Cooper with Deutsche Bank in U. K. Please go ahead. Hi, guys. Thanks for the call. Just a quick one for me. In terms of your exports out of China into the U. S. And the whole tariff question, it looks as if you were able to pass most of this on. And so the American consumer, I guess, was putting the bill at the end of the day. Now with tariffs going up again, do you think that you can continue that? I mean, do you think you may need to adjust prices downwards to offset a drop in demand in the U. S. With obviously a much bigger increase going through at the other end? It's the fine line of the discussion, Richard. It's a very tricky zone. Our approach is to maintain the margins in the business. I think that's important for the business. And we'll if you can imagine, in the U. S, we do that customer by customer. And we're very focused on kind of positioning and managing the margins of the business. So our intentions are to cover as much of the margin impact as we can. We do that with pricing. We do that with pressure on our suppliers and we do that with product reengineering, which has a little bit longer tail. But as you can imagine, we've already been thinking about that. So you get some benefits of that. And lastly, we do it from shifting sources, and we've been very successful with our U. S. Business of quickly moving sources, and there's plenty to do. There's we were kind of north of 90% in the U. S. By the end of the year, we'll be closer to 75%, 76%. And so we're dramatically or quickly moving some of the sourcing locations and we're actively pursuing that as well. So when you blend all of the initiatives we have together, our intentions are to cover as much of that margin as we can. The bigger piece of this tariff, if it plays all the way through, is just what does it do to U. S. Sentiment and probably causes pressure on the U. S. Sales number. And that will have more of an impact on kind of just the flow through to profitability versus I think the margin side, which we've had a good history of being able to manage. You're right, on the 1st round of tariffs, we've managed that very well. We saw very little margin impact in the U. S. Business. Okay. Thank you. Yes. Thank you. Our next question comes from Dustin Wei with Morgan Stanley in Hong Kong. Please go ahead. Thank you. Thanks a lot. So my first question is regarding to the sales growth. Could you please give some color like region by region? I think you mentioned about North America. What about other region in the Q2? Well, I think just in rough guidance, I think the second quarter is going to be up somewhere in this kind of 1% to 1.5% range. I think you'll see a bigger recovery in Latin America. Our Q1 Latin America numbers were kind of lower than usual. I think you'll see Latin America get back into a double digit kind of zone for Q2, and we've seen a pretty good bounce back just in the month of April. Our Europe business will be in the zone that it's in now. I think it's in this kind of 2% to 3% range, and I think Q2 probably feels about the same way for Q2 versus what we saw in Q1. Our Tumi business in Asia, where we kind of see it will be up blended. Our Tumi business, I think, for Q2 will be in this kind of 6%, 7%, 8% range for Q2. There's a little bit of noise in North America just on some timing of some bigger orders last year, but blended Tumu will be in that same zone. And Asia will shift in our view, Asia will shift from slightly negative in Q1 to positive, lower single digit Q2. And if you blend that all together, you get fairly close to what we're thinking for the quarter in the half. Okay. Thanks. From the new product perspective, you sort of mentioned that you're going to have several rounds of the new product push for Samsonite brand. Is that in sort of your guidance or you're not going to do as big as what you did for American Tourister last year? Well, we're doing some evaluating on advertising spend at the moment. So my intentions are to keep advertising kind of in the zone that we spend and we last year we're focused on American Tourister and we had some shift to Samsonite and Tumi this year. I'm watching carefully just kind of the tariff noise and you might see a throttle a little bit of the advertising back, but still push the initiatives that we've talked about. We have some really exciting products coming in really kind of starting at the end of Q2 and really Q3 and Q4, some really innovative products, some new materials that we're working in, that we'll start to launch and we continue to be extremely excited about those. Those are baked into our numbers and we'll be supporting those as they go out. So I'm quite excited to get out with these products so the market can see them. I think they're really wonderful. So all of that stays intact and we're just managing kind of the overall spend on advertising and we're kind of evaluating where we might be. You might see us shade advertising down a bit for the full year versus where we are at the quarter Q1. But really just kind of managing the business, it's one of the levers we can manage. Okay. Thanks. On the 2P margin side, do you have the breakdown for the Tumi and the non Tumi for Q1? No, but William can get back to you with that. I don't have it right in front of me. Sorry about that. No, no, not a problem. But is that fair to assume the Tumi is close to like 70% GP margin and should have stayed the same, roughly the same going forward? Yes. I would generally say our margins are consistent and they haven't dramatically changed. We had achieved most of the Tumi margin upside last year. So our run rate leaving the year was in that zone and it's still in that zone. That overall margin kind of maintenance for the Q1 is consistent across the business. So there's no real changes there. And just to clarify on the GP margin side in terms of the guidance. Are you guiding the flattish to slightly down GP margin? Or what GP margin you think you are going to see? Yes. Okay. Flat to slightly down. I'm just as the world becomes continues to be challenged, you can imagine margin and the efforts we put into maintaining margins, it's a piece of the headwinds we're seeing. I think as a company, we do a very good job with that. I just want to we were slightly up in Q1. I just want people to be careful that they don't kind of assume that that can that will trend up from there. My sense is it might stay in the flattish range for the year. Okay. And on the OpEx side, if I look at your distribution costs for the past couple of quarters, that sort of stay at a similar number like $305,000,000 or $7,000,000 or so. So should we sort of look at that as like fixed cost in terms of dollar amount that should be sort of a dollar amount for distribution cost for each quarter this year? Well, we were as Reza said earlier, we were we continue to open stores off of Q1 last year. So in Q2 and a bit into Q3, we had store openings. So SG and A, in a period where you would have expected my SG and A to be down a bit, it's up a bit because of these kind of retail investments that we've made. And so that's why we kind of bridged and showed it by region where the SG and A costs are. So you as a percent of sales, you should start to now see SG and A as a percent of sales coming down from where we were. Dustin, just on the quarterly breakdown, I would just say you have it for last year. So we opened 46 stores Q2 of last year. In the second half of the year, we did another 32. So it does normalize eventually, but those investments, you have to look at the full year effect that's hitting kind of this quarter. So just be aware of that. Yes. Thanks for that. But my question is more on if I just look at the dollar term for the distribution cost since the Q2 2018 to the Q1 this year, you have roughly that $302,000,000 $306,000,000 $7,000,000 This is sort of similar amount of dollar in dollar terms. And if you are not adding more stores to that, is that sort of fair to assume like even your sales growth is going to accelerate to recover, but in terms of the dollar term, it's not going to getting bigger because you are not opening more stores? Yes. I would probably just without having all the math in front of us, I would generally agree, but as percent of sales is coming down because a lot of that is the footprint that was laid for these stores. And as you know, there's a component of store cost that is fixed in many ways and that's what you're seeing. But as a percent of sales, it should naturally come down as these stores continue to play out. And we've throttled the new store investments down. So I don't think I would call it all fixed, but there's a component of it that you're seeing. And there was cost laid in, in Q2 and Q3 of last year as we continue to push out on the distribution expense side. We've throttled that back and so you'll see kind of as the sales growth picks up and kind of recovers a bit in the second half of the year that that as percent of sales will dramatically come down. Okay. So you're sort of guiding the EBITDA margin to decline like 50 bps to 100 bps on the year, year and full year. So is this kind of the gradual recovery process starting from Q2? Or for Q2, we should still expect a little bit decline in terms of EBITDA margin? I think you'll see a little bit of improvement. The piece I'm watching is just where gross margin plays out on the back of kind of tariffs in the U. S. So definitely on the distribution costs, you'll see improvement. I'm just watching the margin side. I think hopefully you'll see some improvement. You'll see more of it in the second half of the year than the first half of the year for sure. Sorry, my last piece on the question is regarding the tariffs. So I think the trade tension or trade talk that abrupt turn like last week is kind of surprised everybody, I suppose. So could you just talk about your discussion or negotiation with your customer? Because I kind of feel previously the U. S. Retail, they already, like you said, they're starting to replenish their inventory. But would you think that this will change their mind and keep even lower inventory and that's going to only start to kick in the next few weeks, but not now? So could that be sort of another negative downside to you? And also, it sounds like you're going to maintain your GP margin for the U. S. Market. So if you're going to increase the prices again, what kind of the retail price increase eventually that we're going to see? For example, I'm thinking you're going to increase the export price by maybe like 10% or so. Is that going to like 5% increase in the retail price? I just want to get a sense about like how much impact from the retail demand if there's going to be a price increase? Yes. Well, you and I both, I think that's part of the challenge, right, to be totally honest with you. That's when we think about the U. S. Team and how they're managing, that's exactly what they're working through, right? How do I kind of maintain margins? And the hardest part of that equation is and not even just this piece of tariff, but not only is the news this weekend about this, but the 2nd round of tariff on everything that's coming from China, which really feeds into what is the consumer sentiment really going to be and what's the impact to the U. S. Consumer, which to me hasn't fully baked into the consumer's mind in the U. S. But after this weekend and what I think will play out over the next few weeks, they'll be much more attuned to it. That's the hardest piece of the equation is what's the sentiment. We'll do a good job managing margin. The one piece with our customers is we already had this discussion back in the end of last year, as I said earlier, because the original assumption was the 2nd round of tariffs was going in, in January. And then it's been kind of kicked down the road all along. So this isn't a new topic for any of both our teams and our customers. It just became a little more alive this weekend because I think most people were thinking there could be some positive outcomes and it quickly kind of turned the corner this weekend. And so that's what the teams are kind of navigating through. As you can imagine, this is a customer by customer discussion. I think generally we'll be increasing prices in some range that allow us to maintain margin that's not 15%, but obviously somewhere in kind of the higher single digit price increase range to cover the margin component of this. Off of the 10% that went in last year, our blended increase was around 5% to 6%, if that's helpful in your math. Yes. There's a lot of different factors we're doing to kind of shift things around. Is that going to be the sort of the similar magnitude of the increase at the retail price or is more at the sort of household price? We're figuring that out still to be totally honest. That's why I think directionally it will, but we're figuring that out. That's part of the work that we have to do. And we've been kind of doing all along this year because we've always had this kind of backdrop. But now that it's kind of pen to paper, that's exactly what we're doing. So probably in that same direction, we'll be obviously trying to mitigate as much as we can. And the wild part is consumer sentiment, which is not just kind of us and luggage, it's general consumer sentiment in the U. S. If all of the next rounds of tariff go through, that will be, I think, more impactful. So again, not just us, it's the U. S. In general. Understood. Thank you very much. Thank you. Yes. We have three questions from online. 2 of them are relating to the tariff increase. The first one is, have we seen our competitors increasing prices in the U. S. And the price increases that they're taking similar in terms of scale to our own. I'll just answer as they come, William. So that one we have. Everybody's kind of stepped in at different time points, but we definitely have seen because at the end of the day, this is impacting most of our competitors. And I'm sure on this 2nd round, even if somebody is a little softer on the 1st round, they can't hide from the 2nd round. So again, what's important here is we kind of assess our kind of footprint on the floor and share on the floor. We haven't seen any deterioration in that. Okay. Second question relating to tariffs. Just to be clear, this caller wanted to know if we're actually shifting sourcing out of China faster than we originally anticipated. And can you provide more color around how we're doing this and where that is coming from? I would say that we're at the same pace, William. We've been pushing this fairly quickly. So if you go back a year ago, we were north of 90. In Q1, we're around 75% and or 73%. And I think the same initiatives will probably get closer to 70% by the end of the year. We are elevating our thinking is the way we think about it. We've done a lot of very fast moves. As you know, you have to be cautious in the shift because not only are we shifting, but we want to make sure that we're shifting with the same quality levels and the same DNA that Samsonite is known for from a sourcing perspective. And so but the teams are hyper focused. One of our benefits in this business is we can shift volume from one region to the other. So some of the wins that we get is we can kind of shift some Europe volume to a Chinese supplier and the U. S. Business can take some of that volume. We've shifted some production from China to India fairly easily. And so these are things that we're doing very actively. But we were I wouldn't say that we haven't been actively, aggressively pursuing this. It just we'll continue that is the way I'd say. It's not that we've changed our views that we need to move faster. We've already been moving pretty quickly here. Okay, great. Thank you. Another question about around guidance. Regarding the 2019 sales guidance, does that already incorporate the assumption about a slowdown in the U. S. Sales from the price hike and the weaker consumer sentiment? Or is that still subject to Yes. We're starting to factor that in. As you know, it's fairly fresh and but our what I've kind of guided is kind of taking into account that this has become a little bit more complicated. I think at the end of the year, I was feeling like there'd be some resolution to this and I probably would have been slightly more cautiously optimistic. But what we're talking about today for kind of outlook for the year, we've kind of where this is our initial assessment of how this factors into the business. Thank you very much, Kyle. Operator, can you just make one more call to see if there are any further questions before we close the call? Certainly. Thank you. Mr. Yu, there seems to be no further question at this point in time. Thank you. Okay. And I think that's all the questions we have tonight, gentlemen. Okay. Thanks everyone for joining. Yes, I appreciate you guys dialing in and we'll keep charging away here at Samsonite. So thank you very much. Thank you. Thank you for participation. This concludes the conference.