Earnings Call: Q1 2018

May 14, 2018

Thank you for standing by and welcome to the Samsonite review of First Quarter 2018 Results Presentation. All participants are in a listen only mode. There will be a presentation followed by a question and answer session. I would now like to hand the conference over to William Yu. Hello, everyone. This is William, Director of Investor Relations here at Samsonite. Welcome to our Q1 2018 results presentation. Joining us tonight are Ramesh Jay Molla, CEO of Samsonite and Kyle Gendreau, CFO of Samsonite. The format of this webcast will be for Ramesh, Kyle to go over very quickly the presentation, which you should all see in your screen in front of you. And then once we have gone through the presentation, we will open the floor to questions. Thank you very much. And without further ado, I'd like to introduce Mr. Zane Waller to begin the presentation. Thanks. Okay. Thank you, William. So I'm starting from Page number 3. This is another quarter of very satisfying results. It is satisfying because there has been a growth across all regions and across all brands. Look at Page number 3, the constant currency growth was 15.5%. And if I exclude Ebags, since Ebags was acquired in May 5, 2017 last year, excluding Ebags, there was strong net sales growth of 11.1%. The gross margin went up by 120 basis points compared to Q1 from 55.3% to 56.5%. And excluding the impact of eBags, the gross margin was up 160 basis points, mainly on account of Tumi going up by 790 basis points from around 61.7 to 69.6 percent. And the core brand, the gross margin was roughly flat at around 53.8%. EBITDA, EBITDA margin as a percentage term. EBITDA grew by 11.4%. As a percentage term, it came down from 15% to 13.8% in quarter 1. This is mainly on account of EBAC, the impact of EBAC, since EBAG is margin dilutive in the Q1 and also partly on account of the gross the advertising expenses increasing by around 60 basis points, which I'll cover later on in the subsequent slides. Our adjusted net income increased by around 15.6%, partly on account of growth in EBITDA and also we have been benefited by effective tax rate going down from 28.6% to around 26.2%. Coming on the next slide, which is giving you a view on different regions. So our North American business overall grew by 19.3% and excluding Ebacs grew by 7.1%. Asia on a constant currency basis grew by 70.4 percent. And since many of the Asian currencies appreciated, it grew by 19.4% on U. S. Dollar basis. Europe grew by 13.1% on constant currency and in U. S. Dollar 27 point 6% and Latin America 17.9% on constant currency and 24.1% on U. S. Dollar reported basis. In terms of the brand, which is on Page 5, grew by 4.2%, Tumi by 19.7% in constant currency, American Tourister riding on the benefit of the Ronaldo campaign or the reset strategy that we launched in Asia grew by 22.43%, 10.9%. Gregory, Hysterra, practically all brand grew at a very healthy price. On Slide 6, when you look at it in terms of the channels, we are continuing to grow our D2C component of our business that the wholesale component of the business went down from 70% to around 66%. And the direct to consumer business, which includes both our stores as well as online B2C online business grew by around 29.4% last year to now 33.9% is a contribution in 2018 Q1. The e commerce net sales comprising of direct to e commerce as well as the sales that we make to the e retailers makes up for around 13.1% of our net sales as compared to 9% last year. Excluding net sales attributed to Ebac, also D2C e commerce grew by 17.4%, representing around 29.9% of our total net sales. In terms of the category also, the sales of the non travel, we continue to push our non travel to grow faster than our travel business. So the travel contribution has come down from 61% to 59%. These are all in line with our so called fifty-fifty strategies since that we have been talking since our IPO days. So non travel contribution of our business grew from 38.7% in Q1 2017 to 40.5% in 2018. Coming back on advertising, which I just told you that the advertising as a percentage of sales grew from 5.4% to around 6%. So we have on additionally spend around 13.7%. I think that is the kind of a run rate which will settle down. So Q1, you see there has been a ramp up. But when you look at the full year number, it will be more on it more in line with around 6% which was very similar to the number that you have seen last year. That means our advertising will grow in line with our sales growth not faster than that as you would see in Q1. I will now pass it on to Kyle, who will take you through some of the balance sheet items. Okay. Hey, everyone. Hi. We continue to operate with a very strong balance sheet. We did see our net debt increase by about $48,000,000 in the Q1 really around timing of advertising. Our advertising I mean, not timing of our time, timing of working capital. Our working capital, as of March was around 14.5%. This is slightly higher than our internal targets of 14%. I'll cover that in a moment, really around initiatives we have to support driving the Ronaldo campaign. Our pro form a net leverage is 2.78. It was 2.84 at year end. So despite our net debt increasing slightly, our net leverage continues to trail down, which is what our expectations are. Moving to working capital. Again, our working capital target has been around 14% since IPO days. We're running at March at around 14.5%. I would say this is a temporarily higher than target. Inventory days increased by around 28 days. And this is really around 2 things. 1, to safeguard against stock outages on some of our best lines, particularly with sales growth we're seeing and we're anticipating. And also we're launching the Ronaldo campaign, which we talked about with you at the end of the year. And that as you saw with the American Tourister Growth is going very, very well and we wanted to make sure we had the right inventory in hand in advance of that campaign. So all of that's going very well. Our receivable days have been very steady, 40 days and our payable days are up around 18 days really just around the timing of acquiring inventory. So off the back of that increased inventory, we're also our AP, as you would expect, is up as we're buying in inventory to support those campaigns. And then the other big event that we completed subsequent to the quarter is refinancing our senior credit facilities. So we saw an opportunity in the market again to lower interest cost. We changed the structure of our debt slightly. So we added a $350,000,000 Eurobond to our portfolio and really a euro denominated cash a year, 3.5% fixed rate interest, which is really tremendous in the marketplace. We use the proceeds from that Eurobond to repay a portion of our Term Loan A. And then at the same time, we refinanced the Term Loan A and Term Loan B facilities, effectively reducing both of those, the spread of both those by 50 basis points. So our term loan A is now at LIBOR 150 and our term loan B is at LIBOR 175. Prior to closing, those were LIBOR 200 and LIBOR 225. So, that is a great movement on interest costs and we extend the maturity on both of those by approximately 2 years. We're able to increase the revolver as well. So we increased the revolver from $500,000,000 to 6 $50,000,000 really in line with just supporting the ongoing growth in the business. What you will see is we will write off a portion or not a portion all of the original deferred financing costs around issuing the debt when we acquired the Tumi business. And so that will accelerate and you'll see a non cash charge for that write off. And then the cost for the new facility will get deferred and amortized. Net net that will reduce interest costs because we'll be amortizing a lower deferred finance costs on a go forward basis. Big benefits from the refinancing as we look at it lowers the annual cash interest, savings first full year by about $9,000,000 And again, you'll get additional interest expense with the lower deferred financing costs that we're amortizing on a go forward basis. It extends maturity profile by about 2 years for the business. We added liquidity in the business. So increasing the revolver added around $197,000,000 call $200,000,000 of liquidity. It provides a natural hedge within our cash flow. So really a few reasons for placing a euro debt, but one of the biggest ones was aligning some of our debt service and debt profile against a big portion of our business, which is denominated in euros. So that does that. It also gives us another channel of capital. So we're now kind of tapped into what I would say the Eurobond market, which is a great market to be in and we can tap that if we had to in the future. And then on all within all of the refinancing, we have additional covenant flexibility really as the business continues to perform. So we're quite happy with the refinance and sets the business up nicely for the next several years from a debt perspective. So with that, William, I turn it back to you. We can maybe open to questions. Thank you very much, Kyle and Ramesh. And operator, we are open for Q and A now. Thank you, Mr. Your first question will come from Erwin Rambaugh of HSBC. That's a piece of paper. Go ahead. Yes. Hi, good evening. I just wanted to come back on guidance or the indications you gave for the year. I think you had mentioned that sales this year could be higher by 8% to 10% at constant currency. And at the same time that adjusted EBITDA margin could be 50 to 70 basis points higher. So this Q1 was much higher in terms of sales growth. So I'm just wondering if you were surprised by the sales growth and if you think that actually the 8% to 10% could look conservative here. Conversely, on the margin level, the margins were lower. Presumably, there was an issue of timing on the A and P. But do you think that adjusted EBITDA margin could still be 50 to 70 basis points higher despite Q1 being lower? And then finally, just one for Kyle maybe, the tax rate is quite low. What do you think the tax rate could be on a full year basis, please? Thank you. Okay. So let me cover the first one and then Kyle will talk about the export of it. The sales as we have been guiding, like we still hold that view that our sales on a constant currency basis will be in the zone of around 10%, 11%. It's maybe the Q1 has been slightly higher, but considering too many moving pieces, so I would still like to maintain the guidance that we have. Maybe we'll do a little bit better than that, But right now, we are thinking more about 10%, 11% on a constant currency basis, which is not very different than the Q1. If you exclude the EBAG, the constant currency sales growth have been around 11.1%. So it's more or less in line with that. Coming back on the EBITDA margin, you are absolutely right. We still hold the view that the EBITDA margin has been slightly the growth of it is slightly lower, mainly on account of the timing of A and P and also the impact of eBags in the Q1 right now. But if you look at it on a full year basis, we still hold the view that we will have the operating leverage dropping down to the EBITDA, so EBITDA would still look like 40, 50 bps higher than a full year EBITDA percentage of last year. Great. Kyle, on the tax? Yes. So on the tax rate, the 26.2% is our best estimate at this point, and that takes into account the tax reform in the U. S. So we had guided probably somewhere between 26% 28%. I think we're going to be in the lower end of that range. So I might say 26% to 26.5% is where I think we'll end up for the year. We're still working through some of the tax reform and but this is our best view at the moment. So a nice favorable impact to the tax reform. So I would model in that zone. I might model 26.5% if you're doing modeling on the tax rate. Thank you very much. Thank you. The next question will be from Chen Luo of Bank of America Merrill Lynch. Please go ahead. Hi, Ramesh and Kyle. Csi Chen from Bank of America Merrill Lynch and congratulations on the solid results. I've got a few questions. First of all, on the organic sales growth, I noticed that starting from this year, we include Tumi into the organic sales growth calculation. But for the sake of like for like comparison with last year's disclosure, is it possible that we disclose organic growth for the Arena Business and the organic growth for Tumi? And secondly, can you share with us additional color on the quarter to date sales momentum in Q2 so far? And lastly, in the presentation, we mentioned that we are going to book a non cash charge of about USD 53,000,000 related to the write down of some deferred financing cost. Is this going to be part of the adjusted net income or it will be regarded as some non operating item? Thank you. Okay. So Kyle will cover the last one. Coming back on the organic growth, if you look at Page 5, I mean, we give you visibility into by brand also. So Samsonite grew by 5.2% and American Brewster by 22.3%, Tumi has grown by 19.7%. This is a constant NPI number. So if you look at it, what we have been holding our view, we still have the same view that since Europe and Asia is now getting started with Tumi in terms of the distribution, 2017 was more about getting system processes and basic infrastructure rights for Tumi in Asia and Europe. So now we start to dial up the distribution. So Tumi will continue to grow at mid to high teens kind of a number for the full year basis. And the core business will be more like 8%, 9%, 10%. If you blend everything together, it will be more like 10%, 11%. So you still already have the visibility on Page 5. Coming back on the Q2 trading, what we see as of now, we definitely see that the momentum of Q1 in terms of sales continuing into Q2, there is no major change that we are seeing in our business. On the other hand, we definitely start to see that last year when we looked at it, there were a few pockets of our business which were somewhat challenged, mainly China, India, we have 2 markets in Hong Kong. We definitely see a strong revival in all these three markets. And Korea also starts to at least start to find its bottom, I would say like that. And we will start to anniversary in Q2 that the period when the Chinese tourists were pulled back from traveling to Korea. I think when we get to Q2, definitely the number of Korea may look slightly better, which is mainly on account of we are anniversarying the non Chinese tourist period in Q2. So overall, the numbers would remain more or less in similar zone as what we have seen in Q1. And then on the deferred finance costs, what that will do is, the real benefits of that is it will reduce go forward interest expense. So we're amortizing that to interest expense. So our deferred that we're amortizing will come down quite a bit. I have to still work with my team to determine if it will be an adjustment to adjusted net income. So we're still finalizing the accounting. But regardless if it ends or not, we will call it out because it is a non cash kind of one time event. So you'll have full visibility to it. My sense is it will probably be an adjustment to adjustment income, but we're just finalizing that work now. So hopefully that's helpful. But you'll be able to see with and without easily from the reporting that we do. Okay. Thank you. Yes. And we have a question from Dustin Wei of Morgan Stanley. Please go ahead. Hello, management. First question is regarding the buyback of the distribution ride for Tumi. So your Asia sales was up 13.4% year on year and Tumi as a whole up 19.7% year on year. So excluding the buyback, what's the growth for Asia market and Tumi in Q1? So Tumi reported growth is 50% in Q1. But if I adjust for the buyback and again, where the adjustments a bit of an estimation, the Asia growth for Tumi in Q1 would be around 28%. So really strong, strong growth reported will be 50%. Adjusted for the buyback for that Q1, our estimates around 28% growth. Okay. So for the whole Tumi, it's likely like 15%, 14%? Yes, probably mid teens. I don't have that number in front of me, but let's say a strong mid teens growth for Tumi. We can get back to you with the exact number, but again, it's an estimate. But mid teens growth, really strong growth in North America. If you look at the results announcement, we give pretty good color by region on the growth of Tumi within each region. Right. And in terms of the inventory turnover days up like 28%. Is there anything to do with the bad back of the distribution rate of Tumi? It shouldn't be at this point. It should be kind of washed through at this point. So it's really around some step up in American Tourister inventory off the Ronaldo campaign and which has been very helpful. We're able to kind of capitalize on all of the sales opportunities there. And just generally moving kind of coverage of better running lines within our core brand Samsonite. There's no brand specific area that's causing pressure other than decisions we've made to help drive sales growth. So I expect that the working capital by the time we get to Q3 to look more in line with where we've been running historically. We're just kind of ramped up at the moment temporarily to capitalize on these initiatives. Got it. In terms of the eBag, is it profitable, but just lower margin or you were actually loss making for the Q1? No, it's profitable and we got slightly profitable last year. It's just on its trail to getting to profitability that looks like the rest of our business. So it's low kind of single digit profit and EBITDA margins and it will end the year kind of I would say mid to slightly higher than mid single digit growth. And our view is over the next 18 to 24 months, this will navigate towards the EBITDA margins of our core business as we change the mix of the products they're selling and just manage the cross structure, the system integration. We're in the midst of putting eBags on SAP. That will happen in the next month or so. And all of those things allow us to further improve the profit margins as well. So it's on its natural course to getting to similar profitability as our core business. Thank you. So when we talk about in the presentation you mentioned that it's roughly like 60 bps dilution in terms of the adjusted EBITDA margin from Ebags. But for Ebags on a standalone basis, I think Q1 there was a $35,000,000 sales. But as the net sales to the Samsonite because there's intersegmental transaction, right? So the net sales are only $9,000,000 right? So when you say the 60 bps dilution, what does that mean in terms of dollar? I don't have it in front of me, but it's not net sales. Most of what eBags was selling was their own brands. If you go back and look at eBags, the mix of our own brands within Ebags was very small, right? So I don't think you can just make that kind of calculation. It's about It's about, let's say, right now, other than Ebac's own brands, and our own brands will be around 12% of the revenue. So as Kai likely said, it is not really a big number right now. But definitely over next 5 years, our reason is that we will slowly ramp up the sales of our own brands on eGram. Right. Right. Understood. So finally, on the constant currency basis, your adjusted EBITDA grew 5% in the Q1. I think this kind of being covered by the first question by other analysts. But I'm still a little bit so Ramesh still sort of you reiterate like 40 bps EBITDA margin improvement year on year for the full year. But I'm not quite sure how should we model through for quarter over quarter for the rest of this year? Meaning, are we going to see the margin improvement concentrating in the 4th quarter because of the huge operating leverage? Or are we going to see because now some of the expenses more sort of front end loaded and it's going to in terms of dollar expenses dollar won't be increased as fast. So could you sort of I think you will start to see an improvement already from Q2 onwards because part of it was also because we dialed up the A and P, the timing of the A and P. So when you get into Q2, Q4, if you look at last year numbers, our E and P was more loaded in the Q3 numbers. So you will find that Q2 would probably will be not dilutive And on And on a full year basis, it will look like 40 basis points, 50 basis points higher. So you would see an improvement. And part of it is basically or main part of it is, as Saad actually said before or I said it before, that EBITDA will already be impacting our numbers almost fully in Q3 and Q4. In Q2, still we acquired a business in May 5. Probably we started to consolidate these numbers only from that period onwards. So you will find still EBAD may have a little bit of a play in the Q2 number. But yet because A and P starts to settle down, you may find that our EBITDA percentage in Q2 will be very similar to last year. So when it comes to Q3, it will start to move up more rapidly and we will close the year more close it around 40 basis points, 50 basis points higher than last year. And finally, are you still holding the view of a 6% A and P ratio? Or because historically, it seems that the Q1 A and P ratio will be lower versus the 9 months of the rest of the year. And will you see this likely this year we are going to see higher A and P ratio? No, it will be at the same level. It will be around 6%. It won't be higher. We have spent more money in Q1. We spent more money in Q1 mainly on account of the relaunch of American Tourister with Ronaldo and also the timing of World Cup coming up in the month of June. So we wanted to leverage the benefit of Ronaldo's endorsing our brand more in the Q1, so we spend a lot more money in Q1. But on a full year basis, it will be around 6%. It won't be higher than last year in terms of percentage. Okay. So historical seasonality for the expenses will not recur in this year because of World Cup and related marketing campaign? Absolutely. Last year, if you look at it, we also ramped up more expand on account of Tumi and it's about the timing part of it. And it's those are the calls which we take on a year to year basis. So A and P spend every quarter can slightly change by 40, 50 basis points. It depends upon the timing of different campaigns that we launch in different period of the time. So I wouldn't say that it won't get repeated, but on a full year basis, the A and P would be around 6%. It won't be higher than that in terms of percentage of sales. Okay. Thank you very much. There are no further questions at this time. I'll now hand back to William Yu for closing comments. Can you just go around and check one more time to see if there are more questions before we do the roundup? Sure. And Mr. Yu, I am showing no additional questions right now. Okay. In that case then, thank you everyone for joining the conference call. Thank you Ramesh and Kyle for doing the presentation. And as always, if any investors should have any questions, feel free to reach out to us. Thank you all. Thank you. Thank you. Thank you. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. At this time, you may disconnect your lines.