Earnings Call: Q3 2017

Nov 13, 2017

Good day, and welcome to the Samsonite International 2017 Third Quarter Results Conference Call. All participants will be in listen only mode. And please note this event is being recorded. I would now like to turn the conference over to William Yu, Director of Investor Relations. Please go ahead. Thank you, operator. Hello, everyone. Thank you for taking the time to join our Q3 2017 results presentation. With us today are our CEO, Ramesh Tainwala and our CFO, Kyle Gendreau. We will begin with Ramesh going through the Ramesh and Kyle going through the results presentation deck. And when we're done, there will be a Q and A section. And without further ado, let's we'll have Mr. Teng Wahla begin the 3rd quarter results from us. It's another quarter of very satisfactory results. The growth of net sales come on page number 4,000,000,000 The net sales on a constant currency basis grew by 18.7% and excluding Tumi, it grew by 11%. The gross margin also saw an improvement compared to last year for the same quarter by 220 basis points, largely due to increase in Tumi's operations, but also there was an increase of 90 basis points in our cobrand business, mainly on account of bigger proportion of direct to consumer sales. EBITDA also have shown an increase of 18.7%. Adjusted EBITDA margin decreased by 20 basis points, largely due to increased advertising spend of around 120 basis points. Excluding the 120 basis point increase in advertising as a percentage of net sales, EBITDA margin increased by 100 basis points. Net income also accordingly increased by 11.1%. This is despite of an extra month of interest expense related to 2 acquisitions last year as well as increase in marketing expense. By region, North America, constant currency growth was around 21.7%, Excluding Tumi's contribution was and excluding Tumi and excluding Ebags, I will call it, was around no, excluding Tumi and excluding Hycyra. Hycyra is one off, which I'll cover up later on. We are going through a reset strategy there. Excluding both of them, the constant currency growth of the core business in North America was 6%. Asia grew by around 3.3%, but excluding Hong Kong, South Korea and India, which had some challenges as we have mentioned during the first half as well, it grew by 8.3%. Europe, 6.8%. Again, there has been few markets where there were one off things, which I'll cover up later on in one of the slides. Latin America grew by 22.4%. So the key markets, I'm on Page number 6. You see here that most of the markets have done well. There are few markets which have been circled here, 1, 2, 3, 4, 5 markets, which I can cover in the later slide, which is in Page 7. We're trying to give you more visibility into this. UK as compared to the first half, first half of the business grew by around 7.4% and the 3rd quarter has been a degrowth of 8.3%, which is mainly on account of negative consumer sentiment relating to Brexit. Germany, the first half grew by around 15.2%, whereas there's more moderation on account of 1 B2B business, which we had last year. If you exclude both of them, then the 3rd quarter growth in Germany was still very strong 17.5%. Similarly, India, still we have the GST issue going on. I believe that GST has now been further reduced from 28% to 18%, which will have some consequences once again in the quarter 4. Hong Kong retail environment continues to be challenging due to lower Chinese tourism. We were expecting that we will start to find a bottom in Hong Kong, but it seems like that's not really the case. And South Korea retail environment also continues to be challenging, mainly on account of lower arrival of Chinese tourists. When you look at the sales, I'm on Page number 8 by brand. All our brands have posted very strong growth. Samsung, our core business grew by 3.3%. Tumi has, let us say, it got a full year effect also. We'll cover Tumi later on in more detail. American brews start to show very strong growth, mainly on account of further penetration in Europe and North America and Latin America market, 9.3%. 2.9%, where there was, let's say, the 4th quarter is anticipated to be stronger on account of the iPhone X launch has been delayed into quarter 4, Gregor 19.7 percent. Hi, Sarah. I said it is one of the brand where we decided to pull back the brand out of all market other than U. S. And focus the brand mainly in the U. S. Market. So minus a bit more 9% is on account of that. And we are also re strategizing our entire Hyacera business even in the U. S. Market. I'm expecting that by the time we get into the next year, Hycera should be back to mid single digit growth in North American market. Camilem, which is small piece of business, 61.5 percent. Nippo, Hotmail and most of the other brands also have posted decent growth. Excluding Tumi, which is Page number 9, the constant currency growth was 11%, which is driven by North America business of 21.7 percent Europe 6.8 percent Asia 3.3 percent Latin America 22.4 percent. Of course, it has been also helped by eBags growth in North America. If you exclude eBags, the growth in North America was around 3.1%. If I exclude Hycyra also from this number, North America growth was around 7%. Gross margin has shown an improvement of 90 basis points, which is excluding Tumi. The advertising, as we have spoken in the past, we dialed up the advertising spend from 4.4% to 5.5%, which is the kind of level where the core business advertising spend will be maintained going forward. As a result, EBITDA has been more or less in the same zone as the last year, 17.3% to 17.2%. Considering that we also dialed up our A and P spend, we believe this has been a good result. To me, I'm on Page 10. The consultancy growth has been 13.3% on net sales. Gross margin showed a very strong improvement from 62.9% to 68.9%, which is almost 600 basis point improvement. As we have been guiding, we believe that by the time we get into next year, the margin will be more like 70%, which is what we have been guiding right from the beginning when we acquired this business. The advertising spend has been increased either from 5.5% to 7.1%, yet the gross EBITDA, adjusted EBITDA increased from 18.2% to 19.1% of the sales and a growth of around 19.3% in terms of growth versus last year. Year to date September results, more or less in line with what we have been talking about, constant currency growth of 26 0.7%, gross margin improvement of 2 70 basis points, largely on account of larger contribution of Tumi, but also the core business, also the gross margin increased by 100 basis points. And EBITDA has been more or less in the same zone, which is mainly on account of 100 basis point increase in the advertising spend. Net income, as we have told in the past also that net income, last year, we had one off advantage in terms of some tax adjustments. So the net income has increased by 4.1% over last year. By region, which is Slide number 13, look at constant currency growth in North America. All regions have grown very nicely except for Asia, where I've spoken earlier, there are few markets, mainly India, Korea and Hong Kong, which continues to see some challenge. Other markets, China has had a concentrated growth of 10 0.9%, excluding Tumi also 7.7%, Japan 12.7%. So barring these four markets, rest of the markets have been delivering good results. We're also continuing to make strong progress in driving our direct to consumer sales. If you remember, since IPO days, we have been talking about fifty-fifty strategy that means we wanted to increase our direct to consumer proportion of our sales to get closer to around 50% mark. And as of now, year to date September, 32.1% of our sales are now coming from direct to consumer channel, very strong growth. And within that, direct to consumer e commerce online sales increased from 3.6% to close to around 7%. Total e commerce, including our sales to e retailers, also have been growing very nicely. It represents around 12.1 percent of our revenue now as compared to 8.6% for the same period last year. The second leg of our strategy has been to drive the non travel business to make the business more resilient and become less dependent upon travel alone. So non travel category growth was around 44.5% and the non travel contributes to mix up for around 38.8% of our year to date September sales compared to 34% year to date September 2016. Page 17 gives you a visibility on our A and P spend. We have dialed up our North American advertising from 4.9% to 6.2%, Asia also by 70 basis points, Europe by 70 basis points and Latin America by 100 basis points. As a company as a whole, we will dial up A and P to around 6.1%. Going forward, you can look at our A and P to remain in the similar zone as we have arrived at now, which is around 6% to 6.5%. Year to date September results excluding Tumi's operations, which is on Slide number 18, consequently growth of 8.8%, a strong gross margin growth of 10.9% and an EBITDA growth of adjusted EBITDA growth of 4.4%, mainly on account of higher spend on A and P by 100 basis points as compared to last year. To me, an extremely satisfactory result, constant currency growth of 12%, a big improvement in the gross margin. We have dialed up the A and P spend. And as a result, the EBITDA has remained more or less in the same zone as last year. I'll ask Kyle now to cover some of the balance sheet item, which is on Page number 20. Kyle? Hi, everyone. Just quickly on the balance sheet, balance sheet continues to be very strong. We saw an increase in our debt of around $111,000,000 This is really larger in the back of us acquiring eBags in the first half of the year and also bringing in the distributors within Asia for spending around $65,000,000 there. Our pro form a net leverage is still below 3x, 2.94:one and we expect that to improve as we get into the end of Q4. If we look at working capital, we've seen a strong improvement in working capital from Q3 last year to Q3 this year. This is largely on the account of us bringing Kumi in line with our working capital structure largely on AP. So you'll see a very strong improvement in payable days, and that's really bringing Tumi's vendors on to our payment terms. Our inventory days are up a bit. Tumi runs with a little bit higher inventory just because of the mix of their business. But we're quite happy with where our overall inventory levels are at the end of the quarter. So 12.5%, our target continues to be around 14%. So we're consistently running better than target on working capital. And to that, William, we can maybe open up to questions. Thank you. We will now begin the question and answer session. Our first question comes from Mariana Kao of CLSA. Please go ahead. Hi, management. This is Marianna. Thanks for taking my question. I have 3 small questions. Actually number 1 is on sarsenslite sales number by brand. I noticed that I think the Samsonite brand actually stopped quite a bit into Q3. Just wondering if there's any weakness in terms of regional breakdown. And I guess American Twist on the other side rebounded quite nicely. Would that be mostly coming from Europe? I guess if you could give us any sort of update on American Tourister geographic breakdown at the moment? And then I guess lastly, it's just on the kind of full year or like more like FY 2018 to 2019 margin expectations. Are we still looking for like 50 to 100 bps of adjusted EBITDA margin expansion and most of kind of GP margin we should expect from Tumi? Okay. On Samsonite, there's no big change into 1st year to second I mean, first half to second half and going into 2018. We've been always guiding that Samsonite brand business would continue to grow at about mid single digit. The 3.3% is mainly on account of, as I said, there were some B2B business in Europe, which has not been repeated. And when you look at our Q4 numbers, it is and we have some visibility into month to date November numbers and optimum numbers. The assumption that we'll be looking more like a mid single digit sort of full year basis and also in quarter 4 and going forward in 2018. Coming into American Tourister. American Tourister, I would say there are a few things that are happening in American Tourister. We are now starting to get more distribution penetration in Europe, North America and Latin America. And we're also starting to anniversary the I would say, in the first half and more particularly in 20 16, the American DUSA numbers were soft on account of some of the challenges that we were facing in our Asian business. Those days, American Booster was largely an Asian business and online business was having a deflationary effect on American Brewster. So when you look at the first half, if the number were looking like minus 2%, minus 3% kind of a number, the unit growth was still about 8%. I think now the business tends to get to a level where the further erosion of AUR or average selling price has kind of stopped. That is the reason why you see the American DUSA number looking to be stronger in Q3. Going forward, American Rooster should still be seen as a number like high single digits getting into double digits mainly on account of, again, the distribution penetration as we will keep expanding in Europe, North America and Latin America. So American business still has some more legs to go to deliver single digit kind of a number into full quarter and also into 2018. Coming to the EBITDA. For the full year, we'll be more or less in the same zone as where we are. To me, definitely, the gross margin will slightly move up further, which is more an account of to me, definitely, if you look at it, the Q3, the gross margin was more like 68%, 69% getting closer to the 70% mark where we wanted to be. So I think you will see some margin expansion on the gross margin level for the business as a whole where Timmies contribution slightly increases. And also as the proportion of guide to consumer sales continues to increase, so there would be some gross margin expansion happening. Our A and P spend is more or less getting to the zone where we want to be. It's about 6.1%. I would say going forward, we would like to see it more closer to around 6.5%. So the EBITDA margin expansion, I would say, let's say, we are looking at 100 basis point expansion on the gross margin into 2018, maybe part of it will still go in for dialing up the A and P from 6.1 to closer to around 6.5 and the other 40 to 50 basis points will drop down to the bottom line, which is EBIT or EBITDA as you would like to see it. Our next question comes from Chen Luo of Bank of America Merrill Lynch. Please go ahead. Hi, management. I've got three questions. First of all, given based on the year the quarter to date trend, can you give us some color on the organic sales growth projection for Q4? And secondly, what's our growth outlook for Samsung Original Business as well as Tumi Business in 2018? And lastly, given the current discussion on the U. S. Tax cut, what's our assessed potential impact on ourselves? Thank you. Okay. The Q4 2018 has been more or less similar to the core business. We're expecting other than Tumi to grow at mid single digits other than the Tumi business. And outlook for 2018 also is very similar to Q4 numbers. And Tumi is expected to continue to deliver kind of a double digit growth in Q4 and similar we have similar outlook for Tumi also going into 2018. Coming back to the tax cut, it's very difficult to judge it. At this stage, there are lots of moving pieces. I would not like to speculate on what would be its impact. Probably, you guys should know more. I can only say that a big part of our business today, almost 39% of our revenue sits in North America, in U. S. More particularly. So if there are and almost about a third of our profits are coming from North America. So if there is going to be some fixed upside in North America as and when it happens, we definitely would have some benefit. As we have no further questions, I would like to turn the conference and I apologize, we do have a question from Raymond Ching of Optimus Capital. Please go ahead. Hi, Vamesh and management. I got 2 more questions. If I look into 4Q by country, Ramesh, you mentioned that like the Yufshan in this quarter was affected by the German before the B2B. So based on the order trend, what do you see the momentum into Q4? And also for U. S. Side, what's your expectation again given specs seems to be a to be Yes. For the iPhone. This is my question. And my second question is, can you elaborate more on the on the Hi Sienna in terms of the impact on the backpack things and how long is it going to last? Yes. Okay. Europe, as I said, other than like Germany, the B2B business, even Germany grew by around 17%. So there is nothing wrong with the European business. And outlook for Europe is there that in Q4, Europe should be able to deliver high single digit, maybe slip into double digit growth. And outlook for 2018 would also be, let's say, high single digit kind of number, what has been the case for the full year for this year. So Europe is still the business seems to be in a very strong shape. There is a little bit of relevant of Brexit, but 1 UK does not really reshape our entire number for Europe. We still have a lot of legs to grow with the distribution expansion of American Brewster, the push of more non travel in Europe and also some central core business, travel business also has been growing nicely in Europe. So I have no any worry on Europe. U. S, you're absolutely right. Spec number will come in very strong in Q4, whereas spec for the same reason had a weaker number in Q3 because the shipments of iPhone 8 got delayed into Q4. So but overall spec number when we start looking at it, we look at spec to be a delivering high single digit, double digit number, which is very similar to our core business. There is a shift from Q3 to Q4. On a full year basis, Tek will deliver high single digit kind of a number. Coming back on the Hycera, Hycera, to give you a little bit color on that, when we acquired this business, I think it was one of the first acquisitions that we had done. Actually, it was the first acquisition that we have done. So our teams were, including myself, they're all very excited with the acquisition where we started to push out Hytera on a global basis without a liquid preference. As a result, I must say that we did not find enough traction with Hytera in market outside of U. S. And what we decided somewhere in second half of twenty sixteen that we will like to withdraw Hycera from all other markets and first focus the brand in the U. S. Market itself. So if you look at the and also I know there were some one off activities that we were doing with Hycera like Hycera, where our team was also testing now to get into outdoor apparel segment by licensing arrangements or some schools and things like that. We very quickly realized that that was not really our core competence area. So when you look at our Hycera backpacking business, core backtrack business in North America, it is still solid. It is there's nothing wrong about that business. What has looked at negative number is actually coming in from that we have decided to temporarily withdraw Hycera from Europe, Asia and also withdraw expansion of Hycera into, let's say, new categories, more particularly like apparel and some outdoor shoes and things like that through a licensing arrangement that we're working on it. And we want to focus Hycera on first in North America and in the backpack segment. I must admit that acquisition of Ebags will greatly help for Hycera. Another thing which was affecting Hycera business even in North America was that traditional channels were in the past who were selling mainly Hythera, where like the outdoor channel like REIs and things like that. And you must have read in the newspaper, many of those channels have been having pressure. And the business in the meanwhile moved, the backpack business largely moved from traditional channels into online platforms. Now we are trying we are now starting to post acquisition of Ebag. We are launching Hycera now on the Ebag platform. So I'm very confident that in 2018, EYCA should be back to growth very similar to our other core business in North America. Okay. Thank you. Thank you very much. Our next question comes from Arun Siegel of Nancy Capital. Please go ahead. Yes. Hi Ramesh. This is Anuj Siegel here. Yes, could you please comment on your market share in different markets in the U. S, in Europe and in Asia? The reason I ask is because India is probably the only market where you have a listed peer where we can see some numbers from a competitor. And it seems like in the Q3, despite all the GST issues, VIP was able to grow their sales by about 20%, excluding the effect of GST and excise duty, whereas you saw a sales decline. So just commenting on India specifically and also your market share in other markets would be very helpful. Yes. Okay. Let's say our market share in U. S, Europe and Asia, let's I'll talk separately about few markets like India and China, where you're absolutely right, we have been under pressure in terms of the market share. Rest of the countries, I would say, U. S, Europe, Asia, barring India and China. We have gained some market share, mainly on account of further push of American tourists into Europe, U. S. And Latin America has allowed us to become a more active player in the mid segment of the market, which we were not previously operating with. Coming to Asia, there are 2 markets where you're absolutely right, we have lost some market share. 1 is India, the other one is China. In India, we lost market share mainly on account of it is not a phenomenon which is only to do with GST now, but it is starting from 2016, where the competing company that you just mentioned, which is a listed company, have been more aggressive in trying to operate the lower end of the market. And also, the market has been kind of trading downward. And we decided not to engage that lower price point by bringing down or dragging down the American Tourister brand into the lower end of the segment as the market was trading down. As a result, we did not trade down, but the market still traded down, and we lost some market share. Our thinking was that we will launch another brand called Kamiliya because my own personal thinking was that once you bring down the brand, it's very difficult to bring up the brand. The company that you just mentioned about India at one point of time, let's say, 10, 15 years back, their brands were engaging Samsonite. Now there is no Samsonite for engagement for them. And also, if you look at the price point that they operate largely, I'm not even addressing the price point where American Dulce is there. So we have launched the brand, Kamiliant, primarily in to gain back market share in the countries where we have seen downward pressure on the price because of aggressive moves by the competition in 1 such country. And as a result, I think, but when you launch a new brand, it takes some time before you will be able to gain back the market share that you have lost. We were very jealous in protecting our profitability. So if you really look at we do not have that much visibility into our profitability for India specifically, but I can tell you that profitability for Indian business at the operating margin level is almost 3x of the IP, yes, because we did not bring down our prices, we did not wanted to get into a bloodbath. As a result, we did lose some market share. Come back to China. It's another market where we have definitely lost some market share. There, the reason has been slightly different. That's the digitalization, let's say, the movement of business or online channels gaining market share at the cost of more traditional channels like department stores and the retail, where we used to have at some point of time in China, we used to have a market share of close to around 50%, 55%. When the market has moved to the online channel, the competitive landscape has changed. In the past, when there were small guys were there, it was difficult for them to sell on more traditional channels like department store. You need to have manpower, you need to have the infrastructure to really deal with them on a more credible way. Whereas when you are an online channel, you can launch your brand or your product very easily. And if you look at the online also in China had low most distillatory pressure. If you look at our business in China, in year to date 2017, when our business has grown by around 7%, the unit growth in China has been 15%. So 8% has been the AUR erosion in China and there was a similar erosion in China last year. In China also, when we are trying to protect our profitability, China again, we are launching Kamiliyyan now, but it takes time for us to gain back some of the share which we may have lost or we have lost. We have recently done some market study, and we know that we have lost some market share at the lower end of the market because we did not follow the way the market was going down or there were distillatory pressure on the pricing. As a result, I believe that we lost some market share in China, and we also lost market share in India. Okay. Thank you. Our next question comes from Edward Liu of Morgan Stanley. Please go ahead. Hello, Ramesh and Kyle and management. Just two questions here. So I'm just trying to better understand the impact on the financials from taking direct control over some of these Tumi, some of these other markets for Tumi. So I think it probably helps to some certain extent on the GP margin improvement of 600 bps from last year to this year as well as some of these sales growth as you convert some of these wholesale ASP to kind of retail ASP as you take back some of these markets. So can you just better help us better understand how much of that kind of GP margin improvement was coming from these kind of changing the mix from wholesale and retail? And if you can maybe share some color on what that mix is and how that mix would look terms of wholesale versus retail? So let me put it like that. The margin expansion that you see Tumi is only part of it and a smaller part of that is coming because of this conversion from distribution to direct market. Because the market that we have to now been direct, they were not that big, there were not much of sales which are sitting there. So if you have a 600 basis point improvement in the gross margin, I would say it is partly to do with less promotional in North American market. So we have been doing less promotional in North America than was done in the previous year. Pre acquisition, about 100 to 150 basis point expansion to be seen because of going direct. But I must also say that every time when you buy the distributor, the immediate effect of the distributor buyback is margin erosion because you're buying back the inventory at the price which you have sold the inventory to them. And most of the distributors were carrying about, let's say, 5 to 6 months of inventory. So the immediate impact is there that you buy the inventory at the margin where the margin was booked in the year before that. So the current margin expansion that you've seen is largely because of less promotional base, our sourcing efficiencies, also Tumi is able to now ride on, let's say, on our freight contracts of Tumi of Sunshanide and things like that. Definitely, when you look at 2018, our Tumi gross margin will look more like 70% plus kind of a level, which will be when you will start to have the full impact of going direct in Asia will also the negative effect of buying inventory at the price at which we have sold inventory in the previous year will also be less mitigated. And the third is that we are also now trying to, let's say, make their entire supply chain primarily on the logistics side also make it more efficient. But all that will start to have an effect more in 2018. For example, even today, largely the product, Europe is starting to get the goods from the Orient into Europe and shipping it out. But in Asia, unfortunately, because of one of the virus attacks on one of our service provider, DAMKO, we could not make that change. So still the goods are going to U. S. And coming back to Thailand and getting shipped to Asia. I think our target is that Q1 of 2018, all these things will be behind us. So you'll see our gross margin getting more closer to 70% plus basis. And that's a time when you will have the last leg of improvement in the gross margin being reflected in our numbers. Coming on the EBITDA margin, definitely, to me, as the gross margin moves up, we did dial up the A and P spend. On a longer period basis, the Tumi A and P spend will stay more closer to around 6%, 6.5%, which is very similar to our core business. Then to me, EBITDA improvement, you will see will be more rapidly going on a positive side of 20% already in 2018 and going forward. Understood. And thanks for the color on the margin side. So in terms of the sales growth, I think you just guided double digit growth, if I'm correct, if I hear it correctly. Is that talking about kind of low to mid teens kind of growth for Tumi for the next few years? And just wondering Yes. Low teens is what go ahead. If you break that down to new store opening, how much would that contribute to the top line for Tumi? Yes. Let me put it like that. The Tumi North America business would be more like mid single digit to high single digit kind of a number, yes, because there is no major door expansion which is happening yet. We do open 4, 5 doors and there are 1 or 2 doors we close. So it is not on account of any door expansion, which is anticipated in North America. Whereas in Asia and Europe, where we are 2017 has gone by in trying to strengthen the, let's say, the supply chain and getting the fundamentals right. 2018 onwards, we'll start to see a door expansion kicking in Asia and in Europe more particularly. Our target today is that we may add about 25 odd dose, new dose in Europe and Asia over the period of 2018. Now Europe and Asia definitely will be able to deliver more like high teens getting into 120 kind of a number because we're starting with a small base and we're adding new doors there. When you blend everything together, to me, it's more like low teens kind of a number when you blend all the regions put together is what you have to look in 2018. Understood. Great. Thank you so much, Ramesh. This concludes our question and answer session. I would like to turn the conference back over to William Yu for any closing remarks. Hello. Operator, can you just check with the callers again to see if there are any more questions before we go into closing remarks? Certainly. It seems we have no further questions at this time. Thank you very much operator and thank you everyone for taking the time to join the conference call tonight. Thanks again to Ramesh and Kyle for the presentation. As always, if you have any questions, do feel free to contact me now. Thank you very much, everyone. Goodbye. Thank you, everyone. Thank you. Bye bye. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.