Earnings Call: H1 2017

Aug 24, 2017

Thank you for standing by, and welcome to the Samsonite Results Briefing Evening Conference Call. All participants are in 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. Please go ahead. Hello, everyone. Hi, this is William, Director of Investor Relations here at Samsonite. Tonight, we have our CEO, Ramesh Timmala as well as our CFO, Kyle Gendrill joining the earnings call. And what we'll do is have Rupesh give a few opening remarks, talk briefly about the results and then we'll go into Q and A. So thank you very much. And now on to Ramesh. Yes. Thank you, William. And I'm glad to present another set of very satisfying results. Our first half, our sales grew by 31.8%, our gross margin grew by 39.2 percent from 52.3% to around 55.3%. And the EBITDA grew by 27.2%, whereas the net income have remained more or less flat versus last year. If I look at the numbers and peel the Tumi number out of that, the core business constant currency growth was 7.5%. And the gross margin, excluding Tumi, also grew by 110 basis points from 52.3% to 53.4%, largely on account of bigger proportion of D2C business, but also because of lower freight. On our core business, the EBITDA grew by I mean, our overall EBITDA percentage, they grew by around 50 basis points, which is on largely due to increased advertising spend by 80 basis points from 5.5% to 6.3%. The adjusted net income during the same period has been flat, which is mainly on account of the interest payment that we had seen in during the year. If you look at the slide 7, which we have in our deck, which will give you a more visibility into what was happening during the year. So our net income to its contribution has been around $23,000,000 to the EBITDA during the first half or not EBITDA, net income. And our interest payment net of taxes have been around $25,000,000 So more or less it would have been the same and which is on top of an additional advertising spend of around $60,000,000 Similarly on the core business, we have dialed up our advertising by $17,500,000 So net income has been remaining more or less flat. If I go back to slide 5, and if we look at we have given some color to what is happening with the business. It has been another year of strong performance across all regions. Our North American business, excluding Tumi, grew by 7.4%. Asia had a somewhat moderate growth. I can cover that in more details later on, a 3.8% mainly on account of softness in our business in South Korea, Hong Kong and India. Europe, our business had a very strong growth of 11.5%, excluding Tumi and Latin America 19.4 Look at our brand, practically old brand delivered strong growth. Samsonite grew by around 7%, to me 11.4%. These are comparing like for like numbers. American Barista, because of some softness on the Asian business grew by only 1 point 3%, spec 9.2% and other smaller brand like Wriggley, Kamiliant all had very strong growth. And so the category, our travel business grew by around 6.5% excluding Tumi and including Tumi by 20.5%. Business grew by 2.5%, which is because of casualization which we have seen in our business category, where the casual category grew by 19 0.3% excluding Tumi and SSAs grew by 8.5%. During the same period, we had a very, very strong growth in our direct to consumer business. It grew by around 89% including Tumi and 20.2 percent excluding Tumi. And within that, our direct to consumer e commerce grew by 126.7% including Tumi and excluding Tumi by 73.9%. Part of that is also due to addition of eBags, which has contributed to I think, 1 month of sales. Total e commerce direct to consumer, e commerce including our direct to consumer as well as wholesale business to e retailers made up for around 10.5% of the total revenue or 11.1% excluding Tubi, which is up from 8.3% during the same period last year. During the first half, we also dialed up our advertising spend. We spent close to around $100,000,000 which is about 6.3% of our sales or an increase of around 51% or US33.6 million dollars during the period. Part of it was on the core business, the other piece was on the Tumi business. This was very much in line what we have been guiding. If you look at our numbers in 2014, we were always guiding that A and P spend would be in the region of around 6 percent to 6.5 percent. In the period of year 2015 2016, they were tough years, while navigating the currency pressures, we dialed down our advertising spend to around 5%. And now since we start to see better performance for the first half, but also we have a more positive outlook. Going forward, we have dialed back our advertising to around 6.3%. And going forward, you can look at our A and P spend to stay within the region of around 6 to 6.5% that is a sustainable level of advertising that we intend to maintain over the next handful of years. I'll then ask Kyle to talk a little bit about the cash flow and some of the balance sheet items. Yes. So just lastly, the group generated very strong cash flows in the first half. We had operating cash flow of $153,000,000 compared to $81,000,000 last year first half. And that's notwithstanding the $32,000,000 or so of interest on the back of the Tumi deal. So we're quite happy with the cash flow. A lot of that increase came from continued working capital improvements and very strong CapEx management. From the balance sheet side, we continue to delever, as we said. So on the back of EBITDA growth and cash generation, our debt ratio is 2.88x. And I continue to see that deleveraging throughout the year. We're in a very strong cash position, cash of around $378,000,000 and we have 4 $15,000,000 of availability on our revolver. Subsequent to the June period, we paid a dividend to shareholders, dollars 97,000,000 up around 4 point 5% from what we did last year as well. So with that, I think maybe we will open it up to questions and turn it back to the operator, And we're happy to answer any of your questions. Thank Our first question comes from Anne Ling of Deutsche Bank. Please go ahead. Hi, management team. Just a couple of follow-up questions. Regarding like some of the guidance we mentioned in today's like analyst meeting in the morning. So Ramesh, I remember that you mentioned about a guidance of like over the long term about 20% operating margin. So I just want to clarify like if it is adjusted EBITDA that you're referring to or it is like adjusted EBIT or just like headline EBIT number? So that's my first question. The second question is on the North America business. So if I back out like Ebags, is it correct to say is it correct that for North America, excluding Tumi and Ebags, 2nd quarter you report a roughly 4% growth. And then management is guiding for about like high single digit in the second half when the American Tourister's order start to kick in especially in towards the following quarters? That's my two questions. Thank you. Okay. The first one, you're absolutely right. When I'm talking about operating margins, I'm talking about adjusted EBITDA. That is what like last year was around 16% so our guidance for this year that because we have dialed up the A and P, it will remain in the similar zone of around 16%, 16.5% more or less same as last year. But over a period of time, now since we settled down in the A and P level, so the additional operating leverage with the business will create over the next handful of years will allow us to navigate the EBITDA margin around 16% to closer to 20% over the next handful of years. Coming back to the North American business, as likely said, if you peel out the eBag business, it's more like 4% for the quarter 2 numbers and for the guidance for rest of the second half is more like mid to high single digit. Okay. And Ramesh, the 16% that you just mentioned on the operating profit sorry, EBITDA adjusted EBITDA, this is for the whole group, right, in terms of the guidance for the full year about like Yes, absolutely, yes. Which is same as last year. Because as we said that this year whatever operating leverage or gross margin improvement that we had about 100, 120 basis points all of that has been used to dial up our A and P to get more closer anything between 6.2% to 6.5% as compared to 5% last year. But going forward, A and P will remain in the similar zone. As a result, you will see that our let me start using the word EBITDA. EBITDA will start increasing from 16%, which will be which was in 2016 and which we are guiding will be similar in 2017. But going forward in 2018, 2019, 2020, it will start trickling up between 50 to 100 basis points every year. Okay. That's the adjusted EBITDA? Yes. Yes. Correct. Yes. Thanks. Our next question comes from Edward Lyle of Morgan Stanley. Please go ahead. Hi, Ramesh. Hi, Kyle. Just wanted to clarify also on the margin side. So I think we earlier in the day, we guided about the GP margin for Tumi to kind of get to the 70% level in the next few years. I just want to clarify what would be the adjusted EBITDA margin for the Tumi side for the next couple of years and for this year as well? Thank you. Exactly, we're looking at the gross margin to trickle up to around 70%. Probably we'll get to that number at the exit run rate of Q4 of 2018. Whereas the EBITDA margin or adjusted EBITDA margin will be this year would be around 21% and going forward it will get to more closer to around 24%, 25% over next couple of years, which is very similar to the EBITDA margin that we have for our brand Samsonite. So the pricing power of Tumi is no way less than the pricing power of Samsonite. So it will get to more like 24%, 25% in next couple of years. And this year, it will be more like 21%. 21% this year. Got it. Thank you. And just if you could share in terms of the top line growth for Tumi going forward, if you have any outlook for that? Thank you for the next few years. So if you leave apart some of the recasting of the numbers that distributed are being taken back by us and things like that. On the core business on like for like basis, which will be more reflected in our 2018 numbers because 2017, there is a lot of moving pieces in terms of we have brought back the business from the distributor. All that has an implication on numbers. But going forward, you'd look at it that our North American business or Tumi which is somewhat more matured business, we'd look at it more like a mid single digit to high single digit kind of a number for North America. Whereas Asia and Europe, which are getting started, will be more like, we can say, low to mid teens kind of a number. When you blend everything together, we're talking about 11%, 12% kind of a number to me over the next handful of years. Great, perfect. Thank you very much, As we have no further questions at this time, I'll now hand back the call to William Yu for closing remarks. Seeing that there is no there are no more questions, I'd like to thank everyone for dialing in tonight. And as usual, if you guys have any questions whatsoever, do please reach out to us. Thank you very much. Thank you. Thank you, everybody. That does conclude our conference for today. Thank you for participating.