Earnings Call: Q1 2017

May 24, 2017

Thank you for standing by, and welcome to the Samsonite International 2017 First Quarter Results Briefing. All participants are in a listen only mode. There will be a presentation followed by a question and answer I would now like to hand the conference over to Mr. William Yu, Director of Investor Relations. Please go ahead. Hello, everyone. Welcome. This is William. Welcome, everyone. This is William. We're very happy to be to have our CEO, Ramesh Tewala and our CFO, Kyle Zhengzhou to present our Q1 results. Ramesh and Kyle will first go through quickly the presentation deck. And afterwards, we will open the call to questions. Thank you very much. And now over to Mr. Tae Mualar. Yes. Hi, everybody. I'm happy to announce our Q1 2017 results. It has been a very satisfying quarter. If we look at on the first slide, our constant currency growth was 29.3 percent and within that the underlying growth of our core business was around 5.7%. There was also an improvement in the gross margin percentage point from 52.5% to 55.3%, partly it has to do the Tumi, which has a bigger retail component, but also stripping out the Tumi, there was also an improvement in the core brand gross margin as well. The adjusted EBITDA margin increased by 20 basis points with increased gross margin being partially offset by higher fixed selling and advertising spend as a percentage of net sales, which is what we had what we have also modeled within our own internal projections. Excluding if you look at our numbers for the adjusted net income, the adjusted net income as a percentage of net sales was down by 170 basis points, mainly due to $19,300,000 of increased interest expense, approximately around $12,400,000 on tax adjusted basis. If you go by the regions, Asia had a growth of around 18% on constant currency, on excluding Tumi it was 4.3% North America, 46.4 percent excluding Tumi, it was 0.9% negative. This is mainly on account of timing of some of the large orders, more particularly of a few key customers like Walmart and Sam's Club. Europe continues to have a strong continues on their strong growth trajectory, delivering 26.4% growth and excluding Tumi, 13.4% And Latin America, which is our smallest region, continues to deliver very handsome 23.5% growth. So the key market numbers when you look at it, on constant currency basis, U. S. Grew by 40 6.1%. Excluding Tumi, it was minus 1.6%, as I already said, because mainly on account of the timing of few of the large customer orders, which is mainly Walmart and Sam's Club. China had a good growth of 10.4% excluding to me, which is mainly on account of we are taking back some of the distribution business, which has started to be operated as direct market from 1st April. South Korea on a constant currency basis, the cold business had almost a flat year that continues to face some challenge on account of lack of Chinese tourists there. But otherwise, the business seems to be in good shape. India have rebound with a growth of 9% Japan, 15.2%. These are all excluding Tumi numbers, because Tumi numbers have been presented on a separate basis and I'll cover up cover them in on a separate slide. Germany continues to grow at 10.9%, excluding Tumi Hong Kong is still be growing at -5.1%, but the degrowth is slowly getting more and more moderated. When you compare with the degrowth of 2016 and when we're coming to 2017, we start to see that there's a deceleration in degrowth rate, but we are still finding the bottom in Hong Kong. Chile grows at 21.7%, Italy 10.8% and likewise other markets. When you look at the brand business, Samsonite grew at 7.1%, which is a very strong growth rate. To me numbers are not the growth rate because last year it was not there in our business. American Tourister still had a small minus 2.9 percent, which is mainly on account of TV home shopping business, which is still challenged. And also there is a kind of a, we can say, a drop in AUR. I mean, there is an impact of deflation on the American industrial sales. When we look at our numbers, though the value, grew by 2.9%, but on the unit basis, the business grew by 10%. And then almost around 8% drop in AUR during the first quarter, which is partly on account of e commerce gaining at the cost of some other channels and also general deflation that we see at the bottom end of the market. PEC at 3.5% and high CERA minus 19.7% is mainly on account of also that in some of the markets we have decided to temporarily withdraw Hycyra, which is mainly in Asia and Europe. Hycyra is largely limited now to the key markets of U. S. And Australia. We want to focus on Gregory for the time being and at some time at a later period, we may relaunch ISA and some of the other markets. So Gregory delivers a very handsome growth of around 41.4 percent, Lipo 27.9 percent, Camilla, which is one of the new small brands have delivered 162% growth. The next slide really presents what we have been talking since IPO days, our fifty-fifty strategic vision. You start to see that we are making good progress on that. By channel, the direct to consumer part of our business have the wholesale component of the business have de grown from 74% contribution has come down from 74% to 66% in the Q1. Part of it is because Tumi has a larger portion of direct to consumer business. But even otherwise, there is a lot of focus from our side as well in trying to grow direct to consumer e commerce part of the business, which have the contribution of that has grown from 3% to around 5%. Same is true for the non travel category. We've been talking that our express vision is by 2020, 2021, we would like to see the direct to consumer business to be around 50% of our revenue pie and similarly non travel to be around 50% of revenue pie. In the Q1 already non travel starts to make up for around 40% of our revenue pie. The Q1 results highlighting that is excluding Tumi in order to give more visibility into how our core business is doing it. As I spoke before, on a constant currency basis, there's been a growth of 5.7% on net sales. The gross margin also improved by around 140 basis points, largely on account of slightly higher direct to consumer portion of the sales, partly offset by negative impact on the product cost as a result of strengthening of U. S. Dollar. The advertising spend as a percentage of sales have been more or less consistent as compared to the prior period And the result has been the adjusted EBITDA margin have increased by 30 basis points, largely on account of slightly higher gross margin, partially offset by higher fixed selling expense as a percentage of net sales. Tumi had a good start. The net sales grew by 14.6%, which also includes partly the impact of the South Korean business transitioning from a wholesale to a direct market business. Excluding the impact of Tumi South Korea, it still grew by about 10.2%, led by North American business, which had a very strong growth of around 16%, Europe by 2.1% and partly offset by a negative number of 2.2% because we were negotiating with all other distributors to also go direct. The gross margin have seen an improvement of around 100 basis points. We have dialed up the advertising expenses significantly from around 3% to around 5.5%. The adjusted EBITDA has been more or less in the same zone as 14.9% to around 14.8%. To me, acquisition integration upgrade, integration going has been going largely as planned. The SAP conversion has been completed in May 2017. We had dialed up our A and P spend already in the Q4 of last year and the same trend has continued in Q1, which is definitely helping to accelerate the growth in some of the key markets like North America. And over a period of time, as we go more and more direct, we will see similar growth numbers coming in other markets as well. South Korea, we have completed the buyback of the distributor with effective from 1st January 2017. China and Hong Kong has been completed from 1st April 2017. Other smaller markets also more or less we are on a direct basis. The sourcing initiatives also are going well. Additional gross margin improvement are anticipated in 2017 and beyond. Timing of sudden sourcing cost synergies intentionally has been delayed to be careful not to disrupt the business. Estimated synergy savings to date of €8,000,000 or approximately €18,000,000 on a life basis is more or less in line with what we were expecting. Expected full year run rate cost synergies in line with our little estimate is largely coming from headcount reductions and post implementation of SAP, most of those things will be in place. I'll pass it on to Kyle, who will take you through some of the balance sheet items. Thank you. Okay. Yes. Thanks Ramesh. Hello, everyone. So from a balance sheet perspective on the balance sheet slide, the balance sheet looks great. We are operating with working capital slightly ahead of our targets even with Sumeet included now. We had strong cash generation in the Q1. We generated around $35,000,000 of operating cash flow, of which we used to fund the Korea buyback, which was about $35,000,000 and normal CapEx for the quarter of around $14,700,000 From a leverage perspective, our net debt ratio, so we have borrowings of $1,900,000,000 and our net leverage ratio improved from where we were at the end of the year at 2.84. We're now 2.8 and heading in the right direction from a leverage perspective. Moving to the next slide on working capital. So we're quite happy to see our March 2017 working capital at around 13.4%, an improvement from last year, March of 14.7%, and that's including again the Tumi integration where we had some work to do to bring vendor terms in line with what we operate at Samsonite and that is going very, very well. So you can see our blended payable days even with Tumor at 96 and I expect that to get back above 100 by the end of the year. Receivable days have come down because Tumi has a bigger refill mix, so you'd expect that. And so again, for March last year, 47, we're at 40 days this year and inventory turns at a healthy 116 days or inventory days, not inventory turn, 116 days versus 128 last year, up a little from year end because of the buildup we have typically leading into the summer peak period. So the end of March is typically higher than the December inventory levels. And then just lastly, subsequent to the end of the quarter, we closed on Ebags. We put a press release out on that. We're quite excited with this. Ebags is a business that's very focused in North America on direct to consumer e commerce. Their business from a sales perspective was around $159,000,000 which was up 23.5% from last year. So the business has momentum on sales growth. And we're quite excited because it gives us immediate kind of resources and digital know how to strengthen both our core North America business and then as eBags settles in with us, able to benefit the rest of the regions. We closed that in May and the purchase price on that was around $105,000,000 So with that, I will turn it back maybe to you, William, and we can go to questions. Yes. I mean, as Kyle said, I mean, when we look at our business for the Q1, it is exactly in line with what we were expecting and what we were guiding it. Maybe we are doing a little bit better than what we were expecting to do on Tumi. But on the core business, it's very much in line with what we expecting and what we were guiding when we were we last met our investors for our annual result announcement. So with this, I'll pass it back to William for the Q and A. Yes, operator, we are now open for Q and A. Thank you. Your first question comes from Anne Ling of Deutsche Bank. Please go ahead. Hi, management team. I have a couple of questions. I think first one is focusing on the U. S. Market. I think like lots of clients are a little bit like concerned about the fact that some of the department store are talking about store closure. So we understand that some of your wholesale clients are actually like department store. Maybe you can Ramesh, you can share with us like what is the number 1 is the current like network structure in the U. S? And number 2 in terms of like what is our plan moving forward in face of like some of your channels? They are actually facing some rationalization. So that's my first question. And my second question is on essentially like on the shift in terms of the slowdown in the U. S. Market based on the shipment issue. Would you explain a little bit more on that? Is it because of the seasonality on the Easter or SPAD? Or what are you seeing in the Q2 in terms of the order book so far? So should we be like expecting like a pickup in the second half or for the remaining for the year for the U. S. Market? So my second question. Yes, so maybe that's for now. Yes? Yes, yes. Okay. So U. S. Wholesale, I mean, if you really strip out, let's say, 2 of these large accounts, which is American which is Walmart and Sam's Club, all other department stores are all in the positive territory. So there is we don't really see definitely a few of the doors of Macy's are getting closed, a few of the other department stores are also closing the doors, but the value of business which is sitting there is minuscule for us and you find that that business shifts to some other doors. So we haven't seen in any one single wholesale customer that there has been a material de growth except for these 2 guys and Sears. These are the 3 customers we can say where we have seen a de growth. Now coming back on Walmart and Sam's Club, clearly, there is nothing wrong in their business. Other than that, there is a timing issue on the orders. Like last year, the new collections of American Tourister were bought by them in the Q1, which is moved into Q2. And as you rightly said, they will be reflected in our Q2 number, which will look to be much stronger than the Q1 numbers. When we look at our retail business and e commerce business, everywhere there is I don't see any material change which is happening. Definitely on our own, we do we are paying let's say, we are paying more attention to trying to grow our own direct to consumer e commerce part of our business and eBag acquisition was one of, let's say, key element of that strategy because we were definitely witnessing that we were slightly behind the curve in our understanding of direct to consumer e commerce business. And I believe that Ebag will be able to bridge that knowledge deficit that we had within the management team to get us to the speed. Of course, those numbers on what it can do to some sort of business, you will be seeing over a period of time, maybe more so in 2018. But when you look at Q2 number of U. S, I don't think there's anything wrong in the business. I mean, the business is fundamentally going to deliver mid single digit kind of a growth what we have been guiding not only in Q2, but if you look at it for the full year of 2018. Okay, okay. Thank you. And just back to again on the U. S. Market, I'm sorry. Maybe like you can share with us what is the current like sales mix in terms of like retail, wholesale and then how much is it from the department store like mass market or like the Macy's equivalent? So if you look at our core business of Samsonite today, Tumi is slightly different now. So when you look at core business excluding Tumi, today 80% of our business is largely wholesaling and 20% of our business, 20%, 22% of our business is direct to consumer, which includes mostly it is the brick and mortar retail, which is factory outlet business that we do it. About 3%, 4% of the business is coming from the e commerce part of it. Right now, the contribution is, again, say, eightytwenty kind of a number. Whereas when you look at Tumi's business, it is more like 75% of the business is direct to consumer and around 25%, 30% of the business is the wholesale part of the business. So when you blend both the numbers together, it will look more like 40%, 60% kind of a number. The 40% is direct to consumer business. For the North American business, the 60% is still wholesale. But the direct to consumer business is growing more rapidly and more particularly the e commerce part of the business, both for the core business, core brand, which is Samsung American Tourister, as well as for the Tumi. So I think if you really ask me how do I look at it over the next couple of handful of years, it will be more like maybe 50%, 55% of the business will be coming for more from direct to consumer business. Now between the wholesale part of the business, there are almost, let's say, 10 big box retailers, which will include partner stores and some of the hyper chains and warehouse clubs like Costco's and Sam's Club, 10 of them put together will make up for that 50% of business as of now, about that's approximately the number. But it is it's not that they are de growing. Their growth is moderated, 4%, 5% kind of growth number. But we would like to see a bigger growth coming from direct to consumer. The way our business in Asia is structured and that is what we are doing it everywhere. We're trying to grow our multi brand omni channel strategy, which is both brick and mortar expansion as well as digital commerce expansion. Okay. Thank you. Your next question comes from Marianna Ko with CLSA. Please go ahead. Hi, management. Thank you for taking my question. Just want to ask a little bit about Tumi in terms of the accelerated A and P spending. Could you actually kind of share with us a little of what's on the percentage in terms of target that you are thinking for the full year? And then secondly is on Ebix. I noticed on the slide you mentioned that you already closed SKU. How should we think about the margin impact from this transaction? And I guess lastly, just quickly on spec products. And I know, curiously, you put a kind of announcement saying that you're reviewing your strategy for spec. Maybe you could share with us any color that you could? Thank you. Yes. Now to me A and P, for the full year, you'd look at it more like 6.5%, 7%, about 100 basis points, 150 basis points higher than our core business because there are parts of the market where we feel they're under there is opportunity by dialing up A and P, we can get Tumi to deliver a bigger growth number. We started to do that in Q4 of last year as soon as we acquired the business in August. And you can see the numbers. Now like North American business is delivering about 14.5%, 15% kind of growth number, which is partly on account of signing up the A and P spend. As we go more and more markets go direct, like China, Korea, some of the bigger markets. So full year basis, you look at it more like 6% to 7.5% of the Tumi sales to be invested behind the E and P. I think most of it would get funded by through the cost synergies and the gross margin improvement that we're expecting in 2017, there could be timing issues. In the beginning, you may find that the A and P is getting dialed up first and the savings or improvement in the gross margin is happening over a period of time. But on a full year basis, this is what the numbers will look like. Ebacs, the impact of Ebags on the gross margin and on the profitability, it will have an impact the beginning as we go through the restructuring and remodeling the business. We have acquired EBAG for 2 primary purpose. Number 1 is that today it is the most credible and efficient platform in the business of bags and luggage, which is about a business of around $170,000,000 of sales, but largely in North American business. We acquired Ebax to be able to bridge the knowledge gap in how to get the e commerce business, how to manage e commerce business, not only for Ebax, but also for our own branded site like samsung.coms and things like that. So in the beginning, it may look like that it may be a margin and profit dilutive, but over the next handful of years, the eBags, when we look at business, will be very much similar to the profitability of our co brand business. So eBags in North America, I have no doubt, will start delivering similar profitability as our North American business. Similarly, not immediately, but over the next couple of years as we launch eBags in other parts of the world, maybe Asia, Europe, the margins will be very much similar to our core business, but that will happen over a period of a handful of years, next 3 to 5 years' time. Coming to spec, with spec we are still in the process of evaluating that what is what are the options that we have in terms of what should be our strategy. That's into the spec business. As we had expressed in the past also, that is one business which we do find that it is slightly out of our core competence area. But I must add to that, that there are no decisions taken that what is best for our business. I think it will take us a few more weeks before we will be able to conclude and decide as to what we feel should be our strategic direction with that. Thank you. Your next question comes from Sheng Li with JPMorgan. Please go ahead. Hi, gents. I just have three questions. Firstly, on the core Xtumi business in terms of EBITDA margin, there was about a 30 basis points expansion in the Q1. Is that something we should be expecting for the full year? Secondly, on the Tumi sales acceleration, are you able to give us a bit more color as to what's been doing really well? Has it been the luggage, which is something we've been focusing on since the acquisition or is it just everything? And actually, those are the 2 main questions. Okay. Now the EBITDA on the core business, you can expect it will more or less be similar to what is happening in the Q1. This is partly on account of slight expansion of the gross margin where as the mix of the business is changing, there is slight higher proportion of direct to consumer. So I think EBITDA margin will be more or less similar to what you're seeing on the core business in the Q1 will probably be what will prevail over the whole year. Tumi, what is working for Tumi? Tumi is not one particular category. I must admit that as far as the luggage part of the business is concerned, as we had guided to the market when we met last time or even before that, that it is by end of 2017 and more so in 2018 that we had expressed that we will be able to bring new hard side collections for Tumi. So the first collection of hard side is yet targeted to be launched in Q4 of 2017. But new launches, as you know, that sometime you can flip the target, it can move from Q4 of 2017 to Q1 of 2018. So what do you see today, the growth which is coming from Tumi is largely from their existing business and existing products. I must say the only thing which we have added to what Tumi was already doing to their business was that we have dialed up their A and P spend, which is what is helping the sales growth. It is not that there has been a material change in the way the product strategy there has been any change in that. It has been a continuation of the previous product strategy. Impact of more travel products will be more visible in 2018. Okay. Sorry, just a clarification. You mentioned Sorry. Go ahead. Clarifying on EBITDA real quick. This is Kyle. For the full year for the core business, I think EBITDA is going to be more like flat to slightly up. We have some advertising that will come in the back half of the year as we're pushing initiatives for brands like LIFO. So core business EBITDA, I think will be flat to slightly up, which is what we guided at the end of the year for the business. So just to clarify that. Okay. That was what I wanted to clarify. Thanks. Your next question comes from Chen Liu of Bank of America Merrill Lynch. Please go ahead. Hi, management team. I've got two questions. First of all, can you give us some color on the trading situation or the organic sales growth of the group in Q2 so far? Secondly, it's on Tumi's margins. So if my memory is correct, we were personally guiding higher GP margin for Tumi. But at the same time, we are actually reinvesting the cost synergies into the higher AMP in 2017. So eventually, if you look at the OP margin, Tumi should see largely flattish OP margin in 2017. But if we look at Q1, it seems that the A and P spending is actually growing at a faster pace than the GP margin expansion. Just now Ramesh mentioned that there might be some timing difference at the beginning of the year, but on a full year basis, are we still looking for largely flattish margins, OP margin for Tumi brand? Thank you. Yes, absolutely. Now what you just said, this is how you'd look at it, Tumi, on a full year basis, that the operating margin will be flattish compared to last year, because the gross margin improvement is happening over a period of time, whereas A and P dial up is happening immediately. But so you already answered that yourself. What else was the question? Q2, what we are looking at is. Yes. When you look at your Q2 numbers, I think the guidance remain more or less the same that Asia is more like mid to high single digit, more like a mid single digit, which is similar to the Q1 number. Europe could be high single digit going into double digit number, slightly lower than let's say 13% because we want to be conservative in guiding on a forward basis. Latin America more or less. And the only change you will find in the Q2 will be an increase in the growth rate of North American business, the core business. Otherwise, the core business will remain more or less similar as Q1, which is in the mid single digit. The mix could slightly change here and there. Okay. Thank you. Your next question comes from Edward Louis of Morgan Stanley. Please go ahead. Hello, Ramesh and Kyle. Thank you for taking my questions. I've got three questions on Tumi. First, just want to better understand. So after taking back the distribution rights on South Korea and China, what are our next steps in these markets? Are we going to just maintain the kind of existing POS? Or are we going to aggressively increase the number of POS that we have? And if you have any guidance on just the top line growth as that happens? And my second question is just going along with that, if you could quantify the savings of converting from some of these distributor run stores to going direct. So what kind of savings are we looking at? And also if what kind of one off costs should we be expecting this year as we kind of terminate these kind of third party distribution rights? That's my second question. And just final question, also kind of going along that line, what are the other markets we look to take back for the remainder of this year or maybe next year? Thank you. Okay. Coming on the distribution, I know the 3 large markets that we've taken back right now is Korea, China and Hong Kong. There are a few other markets. Also we have taken back, you can say, we've changed the structure there, which is market like Indonesia, UK, Russia, Thailand, but they don't really move the needle that much at this site. That's why we didn't specifically comment about them. So I'm coming to your 3rd question first and then I'll cover up the others. So I think at this stage when I look at it, all those markets where I wanted to be direct, we are direct. So the market where we are not direct, the smaller market and we are the legal impediment like Middle East, you cannot do direct. So Middle East is continuing to be a distributor market, but we have reached to a stage where we wanted to be in direct market or the going direct part of our strategy was concerned for Tumi. Coming in terms of the distribution expansion, the different countries for Tumi are at different stage of evolution. So for example, in Japan and Korea, in Japan when I look at it, Tumi's business has been there for a long time, it's a matured business. But what we find that to me is largely known in Japan as a luggage brand, where since in most cases they are sold in the department store on the luggage floor or on the men's floor. So as a result, the contribution for the non travel is much smaller. Like if you look at it, our U. S. Business, you'll find that the non travel makeup around 60%, 65% business. That's not so for Japan. In Japan, the number of doors may not increase, but the location of the doors will start changing. So we already start to negotiate with the department store to say, we cannot be on the luggage floor. We must be on the ground floor together with other luxury brands. So that change is starting to happen, but in Japan, it takes some time. Japan is also underrepresented in terms of the independent standard owned stores. The first store we will open in Japan is on Ginza, which will open somewhere in September, October of this year. I think the total number of doors in Japan may not increase, but the quality of doors will go through a material change in Japan over next 3 to 5 years time. Coming back on Korea, Korea business was another had its own popularity that almost 75% of the business or even more than 75% of the business was duty free business in Korea. So it was catering largely to the, let's say, the tourist traffic. We are going to rationalize that business. In reality, when I compare Tumi's business with our own business, like Samsung Brand Business in Korea, which is also very well distributed in Korea, we will look at this way that about 25% to 30% of the business will come from Beauty 3 and about 70% 70% to 75% of the business will come more from the domestic market. So there would be additional doors will be opened in Korea in terms of the department store presence. Again, we want to be located on the ground floor together with the luxury brand. So there will be a change in the way the brand has been presented, but their entire process is about 3 to 5 years' time. Few dose will happen now and it can keep happening over a period of time. Coming to Hong Kong. Hong Kong, they the number of dose which they have is about 18. I think that's more than sufficient. Again, there may not be a big change in what is happening in Hong Kong. Maybe again, we may shift a few doors here and there because we feel the locations are not necessarily the most appropriate. But largely, it will be in terms of number of doors, it will be what they are. China is the only piece where to me is grossly underrepresented. I mean, it's one market where there's a biggest opportunity both in terms of distribution as well as in terms of the sale. But again, if the process will take over next 3 to 5 years' time, the number of doors where they have it, when we have taken the last call of it, according to our call, probably 75% of the doors are inappropriately located in the wrong location. So they will be shut down by us over couple of months. But if we relocated, I would not say shut down. Maybe the departments on the malls are right. They're not in the right place. So we already start to do the negotiations with both the department store and the mall. Same kind of thing you will find it in Europe also, wherever you're going direct. Like I was in Russia last week, they had 2 doors and both the doors we will consider to be inappropriate. There are different places where a brand like to me should be presented. First door in Russia would be opened already in the month of September, October. So I think this whole process is something like 3 to 5 years what we have been guiding in the past also. So you may find that our numbers for Europe and Asia would be able to look like more like delivering 15%, 20%, 25% kind of growth number because they start with a smaller base. On a longer period, we look at it their business, we as we have been telling in the past also, we see no reason why to me should not look in terms of the revenue contribution of different region, very similar to what Tumi is doing. Today, for Tumi, almost 65%, 70% of the business sits in North America. Maybe over a period of time, it will be more like a third to 40% of business in North America. The other markets have to catch up to that. Coming to the cost and the savings of going direct, I think going direct is not so much about the savings or something like that. The business have been very small other than Korea and Japan where we want to restructure the business and the costs are not that much. It's just a matter of patience, it's a matter of putting right resource in terms of the people in place. It's not going to make a big difference in terms of immediately in terms of our profitability of the business or CapEx or something like that. It will remain more or less in the same zone as it is now. But these changes do not happen that rapidly and overnight. Right. But just we'll be recapturing that kind of loss margin that we used to give to the 3rd distributors. So is that kind of is that a few percentage point boost to the margin or is that non meaningful? Yes, it moved the gross margin up definitely because when you move the business from wholesale to retail, the gross margin will move upward. But it's also a market which is underinvested. So as we are guided for the North American business, we would like to guide the same way. The improvement in the gross margin needs to be invested back behind the brand. So the A and P investment in Asia and Europe is, let's say, 1%, 1.5% of their sales. We would like to dial that up to also around 6.5%, 7% over a period of time. Of course, you cannot start dialing up the A and P spend first. So, you will not see that there would be gross margin improvement, but I think when you look at the operating margins, it will be more or less same as it was last year. But when we get to the scale, so if you will look at it over next 3 to 5 years' time, slowly the operating margins will also improve and they will get to the scale. So the gross margin improvement, what I'm saying is, would be would help to invest more gear behind the brand. So the operating margin would remain in the similar zone as it was last year. Got it. Thank you, Ramesh. And we have Also, I want to make sure I understand that I just want to add one thing that when you take the business direct, your denominator is also changing. So the sale which you are booking at 50 when the retail price was 100. So when you move it to 100 as a percentage, the margin improvement may not look that high in the beginning. Secondly, we are also buying back the inventories from the distributor. They were carrying about 3, 3.5 months of inventory. So those inventory when we buy now, actually it drops our gross margin in the near term, let's say for the Q1 or something that or the Q1 after we buy back the business. But over a period of time, definitely, the gross margin will move up. Got it. So is there a big kind of one off expense that we need to book this year for Cardi's savings or buyback? I think it's not going to be a big deal. So it's not really changed the new that much. The buyback looks like a purchase to us, right? So they what we paid for these will effectively end up on the balance sheet. Okay, got it. Thank you, Kyle. Thank you, Ramesh. Yes. And we have a follow-up from Shen Lee of JPMorgan. Please go ahead. Hi, gents. Sorry, I just have 2 follow-up. I didn't think I heard clearly. Can I just confirm, you mentioned North American Q2 to date is around 5% growth constant currency ex Tumi? Yes. Okay. And then can I just also confirm Go ahead? Sorry, the top 10 big box retailers represent 50% of your North American wholesale business. Is that the number? Including Tumi. No, no. They make up for around 80% of the North American wholesale business. Okay. The other 80% of the wholesale business, but they the wholesale for the core business, when you really look at it combined together with Tumi, you can say that 60% is wholesale and 40% is direct to consumer. Of that 60%, almost 80% to 90% of the business will fit with this 10 big box retailers. Got it. Okay. Okay. And then okay, that's great. Thank you. That's all. There are no further questions at this time. I'll now hand back to Mr. Tanwala for closing remarks. Okay. As we said before, we feel Q1 has come in exactly in line with our expectations. On the core business, there have been a little softer number on U. S, but we know definitely that is a timing issue because we have the visibility in our order book for Q2 and going forward. So the whole North American business will be still mid single digits on our core business basis. It's the Tumi numbers which are coming in stronger and better than our expectations, and we believe the similar trend would continue. So the Q1 numbers as we see it would be more or less very similar to look at our business going forward for the rest of 2017. Different pieces of the business may be slightly different, but overall numbers will look very similar to what we see in Q1. Thank you. Thank you very much. Thank you, everyone. That does conclude our conference for today. 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