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. If you wish to ask a question, you will need to press the star key followed by the number 1 on your telephone keypad. I would now like to hand the conference over to William Yue.
Hello, everyone. This is William, Director of Investor Relations here at Samsonite. Welcome to our first quarter 2018 results presentation. Joining us tonight are Ramesh Tainwala, CEO of Samsonite, and Kyle Gendreau, CFO of Samsonite. The format of this webcast will be for Ramesh and Kyle to go over, very quickly, the presentation, which you should all see on your screen in front of you. Then once we have gone through the presentation, we will open the floor to questions. Thank you very much. Without further ado, I'd like to introduce Mr. Tainwala to begin the presentation. Thanks.
Okay. Thank you, William. I'm starting from page number 3. This is another quarter of very satisfying results. It is satisfying because there's 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%. Excluding the impact of eBags, the gross margin was up 150 basis points, mainly on account of Tumi going up by 790 basis points from around 61.7% to 69.6%. The core brand, the gross margin was roughly flat at around 53.8%. EBITDA margin as a percentage terms, EBITDA grew by 11.4%.
As a percentage term, it came down from 15% to 13.8% in quarter 1, which is mainly on account of the impact of eBags, since eBags is margin dilutive in the first quarter, and also partly on account of the advertising expenses increasing by around 60 basis points, which I'll cover later on in a subsequent slide. 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. Our North American business overall grew by 19.3% and excluding eBags, grew by 7.1%. Asia on a constant currency basis grew by 7.4%, and since many of the Asian currencies appreciated, it grew by 19.4% on a U.S. dollar basis.
Europe grew by 13.1% on constant currency and in U.S. dollar, 27.6%. In Latin America, 17.9% on constant currency and 24.1% on a U.S. dollar reported basis. In terms of the brands, which is on page five, Samsonite Group by 4.2%, Tumi by 19.7% on constant currency. American Tourister, riding on the benefit of the Ronaldo campaign or the reset strategy that we launched in Asia, grew by 22.3%. Lipault, 10.9%. Gregory, High Sierra, practically all brands grew at a very healthy pace. On page six, when you look at it in terms of the channels, we are continuing to grow our D2C component of our business. The wholesale component business went down from 70% to around 66%. The direct-to-consumer business, which includes both our stores as well as D2C online business, grew by around 29.4% last year to now 33.9% is the contribution in 2018 Q1.
The e-commerce net sales comprising of direct-to-consumer 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 eBags, 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. The travel contribution has come down from 61% to 59%. These are all in line with our so-called 50/50 strategy that we have been talking since our IPO days. 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%.
We have additionally spent around 13.7%. I think that is the kind of a run rate which will settle down. Q1, you see there has been a ramp up, but when you look at the full year number, it'll be more in line with around 6%, which was very similar to the number that we 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 continued out with a very strong balance sheet. We did see our net debt increase by about $48 million in the first quarter, really around timing of advertising. Not timing of advertising, 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 will cover that in a moment. Really around initiatives we have to support driving the Ronaldo campaign. Our pro forma net leverage is 2.78. It was 2.84 at year-end. 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 temporarily higher than target. Inventory days increased by around 28 days.
This is really around two things. One, to safeguard against stock outages on some of our best lines, particularly with the sales growth we're seeing and we're anticipating, also we're launching the Ronaldo campaign, which we talked about with you at the end of the year. That, as you saw with the American Tourister growth, is going very well, and we wanted to make sure we had the right inventory in hand, in advance of that campaign. 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. Off the back of that increased inventory, our AP, as you would expect, is up as we're buying in inventory to support those campaigns.
The other big event that we completed subsequent to the quarter is refinancing our senior credit facilities. We saw an opportunity in the market again to lower our interest cost. We changed the structure of our debt slightly. We added a $350 million 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 used the proceeds from that eurobond to repay a portion of our Term Loan A, at the same time, we refinanced the Term Loan A and Term Loan B facilities, effectively reducing the spread on both of those by 50 basis points. 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.
That is a great move in on interest cost. We extend the maturity on both of those by approximately two years. We were able to increase the revolver as well. We increased the revolver from $500 million to $650 million, really in line with just supporting the ongoing growth in the business. What you will see is we will write off all of the original deferred financing costs around issuing the debt when we acquired the Tumi business. That will accelerate, and you'll see a non-cash charge for that write-off. The cost for the new facility will get deferred and amortized. Net, that will reduce interest costs because we'll be amortizing a lower deferred finance cost 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 million.
Again, you'll get additional interest expense with the lower deferred financing cost that we're amortizing on a go-forward basis. It extends maturity profile by about two years for the business. We added liquidity in the business, increasing the revolver added around $197 call $200 million of liquidity. It provides a natural hedge within our cash flow. 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 EUR. That does that. It also gives us another channel of capital. We're now 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.
Within all of the refinancing, we have additional covenant flexibility, really as the business continues to perform. We're quite happy with the refinance, and it sets the business up nicely for the next several years from a debt perspective. With that, William, I turn it back to you. We can maybe open to questions.
Thank you very much, Kyle and Ramesh. Operator, we are open for Q&A now.
Thank you, Mr. Yue. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you are on a speakerphone, please pick up the handset to ask your question. Your first question comes from-
Can I have a pen?
Your first question will come from Erwan Rambourg of HSBC.
A piece of paper.
Go ahead.
Yeah. Hi, good evening. Erwan Rambourg, HSBC. I just wanted to come back on the guidance or the indications you gave for the year. I think you had mentioned that sales this year could be higher by 8%-10% at constant currency, and at the same time that adjusted EBITDA margin could be 50-70 basis points higher. This Q1 was much higher in terms of sales growth. I'm just wondering
If you were surprised by the sales growth and if you think that actually the 8%-10% could look conservative here. Conversely, on the margin level, the margins were lower. Presumably, there was an issue of timing on the A&P. Do you think that adjusted EBITDA margin could still be 50-70 basis points higher despite Q1 being lower? 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. Let me cover the first one and then Kyle will talk about the tax part of it. The sales, as we have been guiding, we still hold the view that our sales on a constant currency basis will be in the zone of around 10%-11%. Maybe the first quarter has been slightly higher, considering so many moving pieces, I would still like to maintain the guidance that we have. Maybe we'll do a little bit better than that. Right now, we are thinking more about 10%-11% on a constant currency basis, which is not very different than the first quarter. If you exclude the eBags, the constant currency sales growth have been around 11.1%. 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 slightly lower, mainly on account of the timing of A&P and also the impact of eBags in the first quarter. 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. The EBITDA would still look like 40-50 basis points higher than a full year EBITDA percentage of last year.
Great.
Kyle, on the tax? Yeah.
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. We had guided probably somewhere between 26% and 28%. I think we're going to be in the lower end of that range. I might say 26%-26.5% is where I think we'll end up for the year. We're still working through some of the tax reform, this is our best view at the moment. A nice favorable impact to the tax reform. 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.
I remind everyone that if you would like to ask a question, please press star one. The next question will be from Chen Luo of Bank of America Merrill Lynch. Please go ahead.
Hi, Ramesh and Kyle. Congratulations on the solid result. 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. For the sake of comparison with last year's disclosure, is it possible that we disclose organic growth for the Arena business and the organic growth for Tumi? Secondly, can you share with us additional color on the quarter to date sales momentum in Q2 so far? Lastly, in the presentation, we mentioned that we are going to book a non-cash charge of about $63 million related to the write-down of some deferred financing costs. Is this going to be part of the adjusted net income, or it will be regarded as some non-operating item? Thank you.
Okay, Kyle will cover the last one. Coming back on the organic growth, if you look at page five, we give you visibility into by brand also. The Samsonite Group by 5.2 and American Tourister by 22.3. Tumi has grown by 19.7. These are constant currency number. 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. While now we start to dial up the distribution. Tumi will continue to grow at mid to high teens kind of a number, for the full year basis. The core business will be more like 8%, 9%, 10%.
If you blend everything together, it will be more like 10%, 11%. You still already have the visibility on page number five. 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 lastly, when we looked at it, there were a few pockets of our business which were somewhat challenged, mainly China, India, were two markets, and Hong Kong. We definitely see a strong revival in all these three markets. Korea also at least starts to find its bottom, I would say like that. 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. Overall, the numbers would remain more or less in similar zone as what we have seen in Q1.
On the deferred finance costs.
Kyle?
What that will do is, the real benefits of that is it'll reduce go-forward interest expense, so we're amortizing that to interest expense. Our deferred that we're amortizing will come down quite a bit. I have to still work with my team to determine if it'll be an adjustment to adjusted net income. We're still finalizing the accounting. Regardless if it ends or not, we will call it out because it is a non-cash kind of one-time event. You'll have full visibility to it. My sense is it will probably be an adjustment to adjusted net income, but we're just finalizing that work now. Hopefully that's helpful. You'll be able to see with and without easily from the reporting that we do.
Okay. Thank you.
Yep.
Again, if you would like to ask a question, please press star then one. We'll pause just a moment for any additional questions. We have a question from Dustin Wei of Morgan Stanley. Please go ahead.
Hello, management. First question is regarding the buyback of the distribution right for Tumi. Your Asia sales was up 13.4% year-on-year, and Tumi as a whole up 19.7% year-on-year. Excluding the buyback, what's the growth for Asia market and Tumi first quarter?
Tumi reported growth is 50% in Q1. If I adjust for the buyback, and again, the adjustment's a bit of an estimation, the Asia growth for Tumi in Q1 would be around 28%. Really strong growth reported will be 50%, adjusted for the buyback for that first quarter, our estimate's around 28% growth.
Okay. For the whole Tumi, it's likely 15, 14%?
Yeah. It's probably mid-teens. I don't have that number right 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. 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. In terms of the inventory turnover days, up 28%, is that anything to do with the buyback of the distribution right of Tumi?
It shouldn't be at this point. It should be kind of washed through at this point. It's really around some step-up in American Tourister inventory off the Ronaldo campaign, which has been very helpful. We're able to capitalize on all of the sales opportunities there. Just generally moving 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. 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.
Okay, got it. In terms of the eBags, is it profitable but just lower margin, or you was actual loss-making for the first quarter?
No, it's profitable, we got it slightly profitable last year. It's just on its trail to getting to profitability that looks like the rest of our business. It's low, kind of single-digit profit EBITDA margins. It'll end the year kind of, I would say, mid to slightly higher than mid single-digit growth. Our view is over the next 18-24 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 cost structure , the system integration. We're in the midst of putting eBags on SAP. That'll happen in the next month or so. All of those things allow us to further improve the profit margins as well. It's on its natural course to getting to similar profitability as our core business.
Thank you. When we talk about in the presentation, you mentioned that it is roughly like 60 basis points dilution in terms of the adjusted EBITDA margin from eBags. For eBags, on a standalone basis, I think first quarter there was like $35 million US dollar sales, but as a net sales to the Samsonite, because there is intersegmental transaction, right? The net sales are only $9 million, right? When you say there is 60 basis points dilution, what does that mean in terms of dollar?
I don't have it in front of me, but it is 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? I don't think you can just make that kind of calculation.
It is about, let's say right now, other than eBags' own brands, and our own brands will be around 12% of the revenue. As Kyle rightly said, it is not really a big number right now. Definitely over the next five year, our vision is that we will slowly ramp up the sales of our own brands on eBags.
Right. Understood. Finally, on the constant currency basis, your adjusted EBITDA grew 5% in the first quarter. I think this kind of been covered by the first question by other analysts, but I'm still a little bit Ramesh still sort of, you reiterate 40 basis points EBITDA margin improvement year-over-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 fourth quarter because of the huge operating leverage? Are we going to see, because now some of the expense is more sort of front-end loaded , it is going to in terms of dollar Expenses won't be increased as fast. 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&P, the timing of the A&P. When you get into Q2, Q3, Q4, if you look at last year numbers, our A&P was more loaded in the Q3 numbers. You will find that Q2 would probably will be not dilutive in terms of the EBITDA percentage. When it comes to Q3, it will move up mainly on account of A&P settling down. On a full year basis, it will look like 40, 50 basis points higher. You will see an improvement, and part of it is basically, a main part of it is, as Kyle directly said before, or I said it before, that eBags will already be impacting our numbers almost fully in Q3 and Q4.
In Q2, still we acquired the business in May 5. Probably we started to consolidate these numbers only from that period onwards. You will find still, eBags may have a little bit of a play in the Q2 number. Yet because A&P starts to settle down, you may find that our EBITDA percentage in Q2 will be very similar to last year. When it comes to Q3, it will start to move up more rapidly, and we will close the year more closer to around 40, 50 basis points higher than last year.
Finally, are you still holding the view of a 6% A&P ratio? Because historically, it seems that the first quarter A&P ratio will be lower versus the nine months of the rest of the year. Will you see this likely this year, we are going to see higher A&P ratio?
No, it will be at the same level. It will be around 6%. It won't be higher.
we are going-
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. We wanted to leverage the benefit of Ronaldo's endorsing our brand more in the Q1. We spend a lot more money in Q1. On a full year basis, it will be around 6%. It won't be higher than last year in terms of percentage.
Okay, historic 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 spend on account of Tumi, and it was the timing part of it. Those are the calls which we take on a year-to-year basis. A&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. I wouldn't say that it won't get repeated, but on a full year basis, the A&P would be around 6%. It won't be higher than that in terms of percentage of sale.
Okay. Thank you very much.
There are no further questions at this time. I'll now hand back to William Yue 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. If you do wish to ask a question, you may press star one on your telephone keypad, and we'll pause to gather any additional questions. Mr. Yue, 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. As always, if any investors should have any questions, feel free to reach out to us. Thank you all.
Thank you.
Thank you.
Thanks.
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.