Earnings Transcript for 1910.HK - Q1 Fiscal Year 2023

Operator: Good morning, good afternoon and good evening, ladies and gentlemen. Welcome to the Samsonite International 2023 First Quarter Results Earnings Call. Please note that this event is being recorded. I would now like to hand the conference over to Mr. William Yue, Senior Director of Investor Relations. Thank you. Please go ahead, sir.

William Yue: Thank you, and thank you, everyone, for taking the time to join the call. Today, we have our CEO, Kyle Gendreau; and CFO, Reza Taleghani with us. And Kyle will begin with a few remarks. Thank you very much.

Kyle Gendreau: Great. Thanks, William. Thanks, everybody, for joining. We're quite excited about our numbers. If you've had a look, you'll understand why. So 2023 is off to a tremendous start is how we've defined it. Our Q1 2023, net sales of $852 million is up $57 or 57% from 2022 and up 18% from 2019. I think importantly, all regions, including Asia, have surpassed pre-pandemic net sales levels in the first quarter with building momentum for sure in Asia. Our positive momentum is carrying into Q2. Our April numbers were up close to 16% in 2019. And the trends really are continuing across regions. Our Q1 gross margin came in 330 basis points better than Q1 of 2022 at 58%, a bit ahead of our own expectations, and that trend is looking equally if not slightly stronger in Q2 on the gross margin side. We had a terrific adjusted EBITDA and adjusted EBITDA margin, $156 million of adjusted EBITDA, a margin at 18.4%, I think, a record high for us. And really, for me, represents, as we've been signaling a fundamental enhanced profit profile of this business off the back of the work we've done during the pandemic. Our adjusted EBITDA is more than double that from the prior year, increasing $83 million and the EBITDA margin versus the prior year is up 560 basis points. We're investing in advertising. I signaled that on the last call. We invested $50 million in advertising in Q1, more than double what we spent in Q1 of last year. As a percent of sales, that is – sorry about that, as a percent of sales, that is 5.9%, up from 4.2% in Q1 of 2022. And importantly, we're guiding our advertising spend for the full year to be at 6.5%. We would have been there for Q1 other than sales coming in – continuing to come in stronger. So – but my expectation for the full year is still be spending at 6.5% advertising. If I move to the next slide, Slide 6. But I think we've shown this slide before, but I think this really captures this enhanced fundamental profit profile change in the business. If you look at the columns to the left, our Q1 sales and EBITDA, $832 million with $84 million of EBITDA and this year, $852 million, so just $20 million higher on sales, but our actual EBITDA up significantly $156 million. And if you look at the margin profile on the bottom, Q1 of 2019, we were a 10% EBITDA margin in the quarter were 18.4% for the quarter in 2023. So tremendously strong. If I might adjust that 18.4%, if I had my advertising at the 6.5%, this would be in the high 17s, which is what we've been signaling for the business, and we've comfortably achieved that in Q1 is the way to think about it. And the next slide really on Page 7 gives a good historical view of where we've been. And again, this really shows kind of fundamentally how we've shifted this business – you can clearly see the pandemic windows that we're navigating. But when you look at Q1 and really kind of coming into stride with Asia really starting to move as we get into Q1, you can see both on the sales side, I would call it a record number. I'll get to that in a second. And EBITDA, clearly, a record number, $156 million at 18.4%. If I adjusted for currency, and I think this is – when I talk about Q1 sales really being at a record level, if I adjust it for currency at 2019's currency levels, our Q1 number would have been $939 million in sales, higher than any of the previous quarters we've had. So really a tremendous sales number. And our EBITDA, if I adjust for currency, would have been closer to $180 million in 2019 terms. So really an amazing story as far as where the business is as it really turns on from a growth perspective. And on the next slide, may show you what's happening by region. I'll also show you what's happening within Asia, too, which has been tremendous. By region, we're seeing real growth across all regions. As we said, Q1, everybody is positive. You can see where we were in Q3 and Q4 of last year. And really, if you go all the way back to the start of 2022, it's totally transformed. Our U.S. business on a reported basis, 3.6%. If I adjust for ebags, which we've talked about in the past, where we called our third-party brands of ebags of pandemic, the number is up 10% for North America, so a really healthy start. Some timing of orders has helped North America Q1, so a very strong North America up 10%. Asia is the most transformative up 16.5% in the first quarter. I think importantly, if I read down in the notes below, the month of April is up 23.5%. So to give you a sense for the trend we're seeing in Asia. And if I adjust for China, which is having a good moment in Asia is very strong, I'll get to in a second. But adjusting for China, our April numbers are up 27% and our Q1 would have been up 24% for Asia. So across Asia, we're really seeing a rapid improvement with a trend that's continuing into the second quarter. Europe has been tremendously strong all along. Our Q1 number is up 29%. I think importantly, I'd have to adjust for some currency and inflation pressures within Turkey. If I adjust for that, our Europe numbers are more like 13.5% for Q1 versus Q1 of 2019, very, very strong and continuing story in Europe. April will be a little bit softer in Europe, but we consciously are implementing a new warehouse management system. And so by design, our pro numbers will be a little bit lower and then recovering in May and June. And I think for the full quarter, Europe will be fine in the second quarter. And this is really around the investments the tactical strategic investments we're making within the business to be able to continue to support the growth we're seeing. And then Latin America had a tremendous first quarter. We had a tremendous back to school season in markets like Chile, which are a big piece of that business within a year, up 73%. This currency and here because of what we're seeing in Argentina. But if I adjust to that, our Latin America business is still up 43% Q1 versus 2019. So as you can see across all regions, really amazing story, all with trends carrying into the second half – I mean, the second quarter of the year looking equally as exciting. On the next slide, just to give you a sense of what's happening in Asia? And I think I'll start all the way off to the right, which is Asia, excluding China. We'll soon not exclude China because China is really catching up very quickly. But you can see the trend from where we were, what we were seeing in Q4, we saw some really rapid improvement. But then Q1 of 24.4% with momentum continuing. Our April – Asia numbers, excluding China, are up 27% to 2019. So really solid results. If we break down by country or sub regions within Asia, it's important to note India continues a great story. But markets like Japan and Korea, which need some Chinese travelers, particularly Korea, and markets that were a little slower to reopen and are starting to reopen. You can see that they have tremendous room for continued growth. Japan is now positive 3% for the quarter, but real opportunities for growth, same for Korea, which is still down double-digit. And as China starts to move, I think we'll see Korea quickly accelerate as well. Southeast Asia has been incredible. In markets like Thailand, Singapore, Malaysia, Philippines, Indonesia, really all moving and continuing to move Australia very comfortably into double-digit territory for Q1. And then China is really important. So we look at China and we knew China in Q4 of last year was heavily constrained down 54%. In Q1, we're down 11%. But if I peel back into Q1, May was up a little over 5%, I think 5.6%. April is up 9.5%, okay? So China's real rapid story of recovery is playing out in front of us. Domestic is driving most of that as international is still recovering, but still meaningfully down. I'd say down kind of still in the 80% plus range as far as international flights and travel. But as that fleet comes back on and people really start to move, you'll see an accelerating story in China for the rest of the year from where we sit. And again, April was up 9.5% for Greater China. So really, again, tremendous momentum. How that's translating to profit, I think we captured on the next slide, I'm on Page 10. And again, you can see fundamentally by region, we see a shift in profit profile of the business. You can see North America at 18.5%. This is both North America, Samsung American Tourister and some of the smaller brands, along with Tumi, which is performing really well. So you have a North America EBITDA margin at 18%, I would call that record high for North America. Asia is getting back to where they've been, and it's even higher than where they were in Q1 of 2019, so 25%. This is the benefit of Asia really starting to move and move sales levels above on a region that has a higher margin profile generally. I would tell you their advertising is a little bit lower in Q1 than where it will end up in Q2 forward. And so that's helping that number a bit. But Asia's natural place is kind of the low 20% plus EBITDA margin, and we're seeing that in Q1 for sure. Europe has been a tremendous story. I think there's room to go on the EBITDA margin in Europe. So we're at 16.5% in the quarter. That should continue to approach 18-plus percent from an EBITDA margin perspective. And as Europe continues to grow, you'll see us achieve that. And then as we've shown in the last call, Latin America has really been transformed and they had a tremendous Q1 EBITDA margin at 17%, helped with the back-to-school business that was very strong, but the underlying core business has moved into solid double-digit EBITDA margin perspective. So captures kind of a deeper dive into why we're seeing the margin improvement in the business. Demand for travel continues. And I think there's real recovery going on in international travel. I'll show in a second where that is. So there's still recovery to go. I think that will continue through the rest of the year. That will fuel future demand for our products. As I just said, the pace of recovery in Asia, I might argue as remarkable as the term I use here, really quickly recovering a little ahead of our expectations. We're guiding for Q1. We're at the high end of our guidance when we guided from Q1 and a few weeks ago, and it's really around what's happening in Asia. China domestic travel has picked up significantly in Q1, I would say, really approaching historic levels. And international travel in China is yet to recover. It's really around pilots and fleets and airline routes coming back, still down 80%, but recovering. And I think every week that passes, you'll see further recovery there as well. And then I think as the world, we're watching the world and watching inflation and recessionary concerns, what we can sense and I think general market sentiment, not only in our space, but the adjacent space that we're in, in travel, it really is travel recovery will continue to be strong. And I think the long-term prospects for us in the travel industry remain very, very high. And so we're excited about that. And on Page 12, we've been showing this truck for a while. It really shows kind of where domestic and international passenger miles have been. And you can see domestic really starting to approach historic levels just shy of 2%. I call domestic travel largely across the globe, recovered or ahead when you look at the markets that are really moving. And domestic has been – I mean the international has really been moving. A lot of what we've seen in the last couple of quarters of our recovery that fueled with this domestic – I mean, this international travel recovery, but it's still down as of January down 23%. And so when we think about the rest of the year and the rest to go, there's still recovery to happen, and we're seeing that starting to play out, particularly led by Asia at this point. So very, very strong and more to come is the way I would describe it. On the product side, just a couple of more slides for me, and Retail do a deeper dive on the numbers. But – and I've signed this on the last call, we've continued to innovate all through pandemic. And I think a measure that we are quite excited about is the products that we're launching, we were launching at the end of last year. We're launching now some that are launching in the coming quarters really have been recognized. So we've won 12 Red Dot awards for innovation on our products. It's across brands, Samsung American Tourister. It's across all of our regions. One of our products, which is IBON won 2 awards, test of the best and innovative product awards designed by one of our most senior designers, Eric in Europe and really well done. And you can see the assortment of products here that are really driving our business. And as we think about recovery, we're capturing recovery, but a huge piece of our success is we're capturing it with really amazing products that we continue to innovate and launch within the business. And so we're quite excited for this. And just lastly for me, we published our history report in April. I highly recommend reading it. I think, as I've said in the past, it gives a really good lens on who we are as a company, what we're doing on sustainability within our business and within our industry, and I'm quite excited the leadership position that we're taking as far as moving and transforming our industry. On the next slide, I just – I wanted to point out one piece here, which is really helps us continue to drive our story. So we are our ESG journey is called our responsible journey. And you can see we had a slight change in the way we look at our compass. So this is a compass and really refining the message, but the topics are exactly the same. But we're focused on products, planet, people, as real drivers to our sustainability story. So as you look at that report, I would guide you to look at that and see how we've positioned it. It's really the same initiatives but allows our teams and everybody to really understand where we are and all grounded by a very strong governance program that's part of our full circle of our responsible journey in our ESG strategy. So again, very exciting stuff there. I'd highly recommend taking a look at the report. I will turn it to Reza some financial highlights.

Reza Taleghani: Thank you so much, Kyle. So we are on Page 17 of the presentation. Again, just to recap, really outstanding results for Q1, $852 million of revenues, net sales increasing by 57.4% compared to last year. Gross margin, 58% gross margin percentage. Last year, we were pleased that we were getting back to historical levels at 54.7% despite what we thought might be some inflationary pressures, the teams have been able to adequately mitigate those and 58%, increasing 330 basis points compared to last year, which was already a healthy number. That's rolled into an EBITDA number of $156.4 million. As Kyle said, really approaching the record numbers. Adjusted EBITDA margin increased by 560 basis points and that's after investing another 170 basis points in advertising as a percentage of sales as well. So we invested about $50 million in the quarter in advertising, which was higher than what we did last year. Last year at the same time that we did about half of that, around $24 million. So we're investing more in advertising than we did in 2019, and our EBITDA is almost double. So really, really, really great results overall. On Slide 18, strong growth from every region as Kyle just said, particularly Asia, but we are very hardened that Asia hasn't even fully realized its potential for this year. So we definitely think that there's more to do this year. Adjusted EBITDA, 18.4% despite the investment in advertising, as we said. Fixed SG&A expenses, a huge focus, a huge reason why we are delivering these great results, both on EBITDA as well as net income as we'll see as well. And fixed SG&A expense is 23.5% as a percentage of sale, 430 basis point improvement for Q1. So – and a 6.2% improvement from Q1 2019 overall. On the next slide, as I just mentioned, advertising, we're investing $50 million in advertising. Back in 2019, we did about $47.2 million, which was back in 2019, that was about 5.9% as a percentage of sales, same percentage. Our desire is to increase this number even further. So our plan is to get to 6.5% by the end of the year. That does mean that in Q2, we will anticipate a catch-up to basically get back to that level to anticipate us continuing to invest behind the brand. Our net debt position of a little bit over $1.4 billion $570 million of cash, ample liquidity overall that with $2 billion of debt, continued focus on delevering the balance sheet. As we said at the year-end, we were just around 2.85 turns of leverage at the end of the year. We are now down to 2.5%, continuing to delever over the course of the year as we generate strong free cash flow as well. So we feel very, very good about our balance sheet position as well. The other note that I do want to raise is we oftentimes are very focused on adjusted EBITDA. I should just also highlight adjusted net income for the quarter, $81.2 million of adjusted net income. Compared to last year, where we were $23.3 million, really, really solid number. And the $81 million, if you go back to 2019, we delivered $27.3 million of net income. So even from a net income standpoint, that flow-through is happening at $81 million of net income for the quarter. On Slide 20, strong net sales across all of the regions that Kyle mentioned that basically every region delivering. I think the message here is that we're very proud of the team, but we're also recognizing that this is continuing as we see it in April as we continue to see it in the beginning part of May. And Asia is where we're very optimistic as China reopens that these numbers should continue to improve going forward. Just to quickly go across the page, constant currency growth in North America, 32.3%; Asia, 89.4%; Europe, 62% and Latin America, 33.9% growth compared to last year. On Slide 21, a little bit of a bridge, bridging from last year's quarter to this year. Again, as you may recall, last Q1 of 2022, we were finally realizing that we're in a good position from a recovery standpoint. The good news is that recovery has only accelerated – so from a sales perspective, we start at $573 million. There is an FX impact, and we've outlined those currencies there. So there's a $38.5 million impact on currency on those sales. And it's largely euro and a couple of other currencies from a translation effect. Obviously, we exited Russia. So we no longer are operating there. So there's $7.7 million of impact on that. And then what you see in all of the green bars is every single region delivering. So in terms of sales, with Asia being the largest component year-over-year because, obviously, Q1 of last year, Asia was still very much impacted by COVID, and now we're pleased to see them finally rebounding as well. On Slide 22, net sales growth in DTC, also a great story here. So if you're looking at it by channel here, we're looking at wholesale retail and D2C e-commerce. 62, and I'm on the left-hand side of the page here, looking at the Q1 2023 number. We're looking at for the e-commerce channel, up 69.3% in terms of retail and wholesale, also holding itself with 52.3%. The one comment that we'll make on wholesale is as you're looking at the U.S. market, as you're looking at the month-by-month and especially looking at April, we are starting to see some of the wholesale channel in the U.S. specifically, not in terms of the category performance, but just overall open to buy. There is a little bit of a slowdown there that we're monitoring specifically only in the U.S., but across every other channel, we feel really, really optimistic in terms of how things are progressing. And obviously, comparison of travel versus non-travel, what we see from a non-travel perspective, up 40.6%, that travel component really driving great results up almost 70% as well year-over-year. In terms of looking at the brands on Slide 23, as you can see, every single brand performing is 57.7% increase from Q1 of last year for Samsonite, Tumi 56% as well. American Tourister 48%; and the smaller brands, Gregory, Lipo and all the others doing their part as well. The good news is that Asia opens up that we have the Tumi stores that are in China and in some of the other markets in Asia should help perform and that should help our gross margin story as well as we look at the Q2 and the rest of the year. And Slide 24, we've shown the slide in the past, just specifically looking at the SG&A story. Again, we have a commitment to maintain the fixed cost structure that we put into place through the pandemic. The important point here is really looking at it as a percentage of sales. As you can see, Q1 2023, the fixed component of our SG&A is 23.5% as a percentage of sales. That is a further improvement as compared to last year where we were $27.8 million – so the absolute numbers of SG&A, obviously, there is some inflation in wages and other things that are there, and there are some store openings that we're going to be looking at going forward. But as a percentage of sales, our commitment is to maintain these levels and improve them over time. In terms of the balance sheet, again, very healthy with the position from a net debt position of $1.4 billion. We're basically back at pre pandemic levels actually even better now. Liquidity of $1.4 billion. We have $800 basically revolver is entirely available to us. We've repaid all of the debt there. And that leverage is 2.5 turns. We anticipate that continuing to improve over the course of the year, but we feel very, very good about where our balance sheet is. We are contemplating looking at the capital structure and how we set it for the future as well, and that's something that you should anticipate us looking at over the coming months. In terms of working capital on Slide 26, – very good inventory levels. So as you may recall, Q1 of last year, we were very much chasing inventory, especially as it related to Tumi. We feel very good in terms of all regions as to where the inventory stock levels are. You will see that in terms of working capital, we are continuing to invent working capital from this quarter. It wasn't an inventory story so much as we basically paid off on loss the tables as well. So the working capital efficiency is going to continue to trend to the historical level at the end of the year as the sales start to couple the summer. But I think the message here is that we feel very good finally in terms of where we are with inventories, and we're not chasing it anymore. And on Slide 27, CapEx, we remain very disciplined in terms of CapEx. To be frank, we were actually anticipating this to be a little bit higher because we are really starting to invest in some stores and refurbishments some of the existing store fleet. So you should expect this $9.6 million in the quarter, which is not that much higher than what we did in Q1 of 2022. As we enter Q2 and Q3, you should anticipate that this will increase back to historical levels because we do have a fleet renewal program that's underway as well. And with that, let me turn it over to Kyle to touch on the outlook and we'll open up for questions.

Kyle Gendreau: Okay. Thanks, Reza. Just from an outlook perspective and not that different than the outlook I gave on the last earnings call. With the strong performance in Q1, we're excited about the prospects for the rest of the year. Travel continues to rebound. We see Asia kind of becoming a fundamentally bigger piece of the story. And all of this had a fundamentally higher operating margin. So we're quite excited about this. I might – because people typically ask, I think our Q2 numbers are looking fairly similar to Q1. We'll see growth of around 15% to 19%. That trending is looking good. I gave you our April numbers, so you can get a sense for how I'm guiding. And that's excluding ebags at which we typically do. So again, Q2 is off to a terrific start. As I said earlier, I think there are concerns around inflation and recession, but our general view, and we're seeing it clearly in our numbers is that travel continues to be very strong. And I think with a growing profile, the prospects look very strong for us for sure, the rest of the year into next year as well. We're seeing, again, quick recovery in China, in Asia. I think it will continue. I think, importantly, as international travel continues its recovery, I expect there's some acceleration in the coming months, particularly within Asia. And you can see that in our April numbers. And I think it's China really moves from 9.5% up in April to double digit as the rest of the year moves on. I think that will fuel not only growth within China, within Asia, but I think the rest of the world will start to get the benefit of that as well. So we're excited there. I do think international markets within Europe and the U.S. will continue to grow. I think as flight capacity, it's really around flight capacity and pilot capacity continues to build, I think that's going to fuel recovery for our industry. So we're excited for that. We're very focused on investing in marketing, okay? And so we were 5.9% in Q1. You'll see the full year end up around 6.5%. As Reza said, Q2 will be a little bit higher as regions catch up, and it's exactly the right time to be stepping up our advertising as we go into summer travel season in much of the world. And so 6.5%, I think, will fuel our story and really allow us to continue to accelerate our growth profile. We'll spend well over $200 million in advertising this year. And if you think about where we've come in the last two years that will only fuel a great story against a great product offering that we have to talk about. We are – continue to be laser-focused on SG&A and managing our cost. We are making tactical strategic investments within the business in the areas you'd expect us to. But really, this commitment to delivering on SG&A and particularly fixed cost SG&A in the business, our entire team are focused on. I would tell you, the teams are highly energized, and I want to thank all of our team members for their perseverance off of a couple of really challenging years. but more importantly, the excitement they have in the business. As I move around the business and meet with our teams, the energy levels are very high, and we're really geared to drive success in this business across teams that are well placed across the entire globe for us. And so again, thank you very much for those team members that are listening. Our ongoing commitment to sustainability, innovation and really the teams around the world really allow us to drive long-term market share gain in our business and really to capitalize on all the growth that we're seeing within our travel space. We're excited there. We have the liquidity. The balance sheet is perfect. If you can imagine, through the entire pandemic, our liquidity stayed exactly in the right place. And now you see our leverage profile coming down. We're below where we were from a net leverage ratio pre-pandemic. So – and as Reza has indicated, you will see that continue to improve as we move through the year and really approach close to 2x leverage at the end of the year, which is what we've always been guiding. So we're in a wonderful position there and we have the liquidity to manage, invest and navigate this business perfectly. And then lastly, and we had some questions on this on the last earnings call, we do have an intent to put dividends back in play in 2024. As you know, since our listing from 2022 – I mean, 2012 through 2019, we had a dividend program. We rightly suspended that during pandemic. But as we come out and see where we are today, and you can feel it in our Q1 numbers, I think we're in the right position to kind of reinstate that. And so subject to our dividend and distribution, really distribution policy, we'll be managing that. But our intent is to put that back into play in 2024. So with that, William, we'd be happy to take questions from anybody.

William Yue: Great. Thank you, Kyle and Reza. And operator, can you see who is on the line?

Operator: Thank you. Ladies and gentlemen, we'll now poll for questions. [Operator Instructions] And our first question comes from Dustin Wei with Morgan Stanley. Please go ahead, thank you.

Dustin Wei: Hey, thanks a lot for taking my question. I want to start with Europe. So could you elaborate a little more about this warehouse system implementation in April, it's just a short-term impact on such as a shipment to wholesale customer? Are we still seeing very strong demand like in the retail channel? And if I just look at the first quarter number, sales for Europe, I realize that the sales in first quarter this year is actually larger than fourth quarter last year. And seasonally, first quarter in Europe should be a little weaker. So just wondering if there's any local color that you can share with us? Like is that still more foreign travelers into Europe? Or just like why that Europe continues to be so strong – and other regions will sort of also going through this warehouse system implementation. So we should also expect some of the very short-term hiccup in terms of the sales in the coming quarters?

Kyle Gendreau: Okay. On the warehouse management system, it's impacted April. It will trail into May just a bit, but then really by the back of May. And so just for scale, our April numbers are slightly down to 2019, still tremendously strong, but slightly down. But you'll see May will be getting back on track, in June, I think you'll see a lot of that made up. If you think about where this is, it's largely wholesale customers, and it's not that, that demand typically is lost. You will see some acceleration in orders really ahead of the summer travel season. So what we're really making sure, Dustin, is by the time you get into kind of end of May, June and July, we're delivering on the summer travel season. And so I think it's all well in hand. It was well planned. We had anticipated this timing and impact. So we're not tremendously worried about it. There are no other warehouse management system implementations going on. As you know, each region kind of manages that separately. And what it really does, when we think about tactical strategic investments substances it allows our European team to really accelerate its efficiencies within the warehouse so that we can continue to deliver on what is a growing demand story. So we're not seeing any falloff in demand. We've not seen any fall off in kind of travel. It really is around us managing that. Part of their Q1 is some orders pulled forward. So wholesale customers anticipated. So Europe had a very strong Q1. There was a little bit of order pull into Q1 so that people can navigate what was going to happen in April. And so that's all been well managed by the team as well. And I would tell you, Europe is very strong. Your comment on Q1 being higher than Q4 is really around the trends we're seeing in Europe. And I would argue, and I've spent Europe a few times in Q1. Clearly, there's traffic, clearly, there's foreign travelers. But I would argue that the Chinese travelers are not there yet. And so I would anticipate actually foreign travelers to benefit more end of Q2 into Q3 as Asia travel, particularly Chinese travelers return to Europe, which I think is definitely coming. So I think the trend will continue to be very strong and the blip is just a blip that we had anticipated on the system.

Reza Taleghani: And Dustin, just to give a little bit more granular on that last point. So we obviously analyze the credit card data on some of the stores that we have there in Europe. And what you saw initially was if you're going back to this quarter last year, it was first it's domestic, and then it was basically at the U.S. travelers first then Middle East travelers and now you're starting to see some Asia but very, very little Chinese still. So it's a point and if you go back historically, you would have had a lot more Chinese. And so we still anticipate really healthy numbers in Europe as the Chinese travelers go to Europe as well, especially the summer and beyond.

Dustin Wei: Great. That's great. Thank you. And in terms of the sales by channel, our sales in our retail and e-com much faster, not much but faster than wholesale. Is there any indication about the trend like wholesaler feeling good about their inventories, so they're kind of not pulling in inventory as much or just simply as a result of the mix shift because now we are seeing like sales in Asia pick up?

Reza Taleghani: So it's – the first point is sales in Asia. So obviously, as Asia starts to rebound, we're much more DTC in Asia as we are wholesale. So that mix shift will happen. So that's the number one driver of it. There is – I've made the comment as it relates to wholesale and it really is a U.S. wholesale phenomenon, not anywhere else. There's a little bit of, I'll call it, lumpiness. So what will end up happening is there'll be – some of these sales will end up getting pulled forward. So for instance, some of the sales that we would have normally seen in Q2 are getting shifted to Q1 in the U.S. specifically. The one example I'll give you is Amazon is one of our largest wholesale customers in the U.S. The way Prime Day used to be is, the timing of Prime Day in terms of picking up the orders. Now Amazon actually picks up the orders in Asia from us as opposed to waiting for the ship to arrive in the U.S. So in terms of booking the sales, the sale gets booked a little bit earlier. So as a result of that, there's kind of a quarter-over-quarter differential that ends up happening. But in terms of stock in the wholesale channel, they are running very tight as it relates to department stores in the U.S. specifically. And it's not an issue in terms of our categories. So if you look into the earnings calls of the other retailers that are our customers, the category is actually one of the best-performing categories. The issue is really having an open to buy overall. So if you're looking at some of the larger wholesale customers, they're trying to maintain their inventory levels because they're being impacted in other categories, and there's a knock-on effect that happens just overall if the entire corporate view is don't buy much this quarter.

Kyle Gendreau: Our team has been managing it really well, Dustin. It's – but what it causes is little bumps. You might have a month that's down and a month that's up because somebody is managing timing. So a lot of it is around timing. This category is driving really wonderfully in these doors. And so they're very attuned to that as well. So we've been here before when open-to-buy has become a challenge for wholesalers. What's clear is demand is still there. So it's not a function of demand. It's really just a function of navigating the balance sheets of some of our bigger wholesale customers. But that's not a big piece of the percentage driver that you're seeing in our Q1 numbers for wholesale. Wholesale is still up tremendously. It's what we'll see is the little bumps between months or between quarters, but all of that is well in control by our U.S. teams with these relationships.

Dustin Wei: Got it. Thank you. And related to the working capital, indeed, that was the payable days. I think that outlined the balance of the payable down a lot. Is that kind of we are in the cycle of we already built up inventory that we like. And then you're looking at the presentation that inventory number will continue to go down. And now because we're not ordering like more and more products from the factory, so we kind of set out some of the previous payables. So we kind of...

Kyle Gendreau: Yes. In Q1, you're seeing if you really think about the recovery in inventory and the recovery that we achieved really in Q3 and Q4, we have roughly 105 days payable terms. So we're paying in Q1 largely what was coming in at the end of last year, and now that will normalize. So this is the quarter that you're seeing kind of the payables catch up to the inventory inflow. And then it will be more balanced going forward. Inventory will trickle down. The order flow will be more consistent now. And one of the real strengths is we got ourselves into position really fast. If you look at how well our sourcing teams executed on shutting inventory, as we – and you follow our trends for quarterly recovery last year from where we were in Q1 and the recovery we saw right up to the end of the year, which was really approaching 2019 levels. Our team perfectly brought in inventory to match that so that we are not missing any sales as we get into the end of Q3 and Q4, all of that build was perfectly timed and it's why we're winning and delivering now. So it's really well, well executed. And we're just – all you're really seeing in Q1 is the payables off of what was achieved at the end of last year.

Reza Taleghani: The way to think about it, Dustin, is from a balance sheet management standpoint, we've essentially have amazing stock levels, and we've already paid for it now. So if anything, that should have just a knock-on effect for the remainder of the year in terms of the benefit that we'll see. On the cash flow, on the cash flow side.

Dustin Wei: Yes. Got it. Got it. Last question for me is about the GP margin. Like you kind of mentioned that the GP margin in second quarter could be similar to first quarter, if not stronger. And maybe wonder what's the expectation for the second half, we are going to see a little bit of the volatility of the GP margin, like third quarter, fourth quarter, a little weaker, also...

Kyle Gendreau: You're going to hold in this kind of 58 plus range is the way I describe it. We're seeing it naturally buoyed particularly as Asia moves and Asia's gross margin historically is higher and currently is running a little bit higher than history. So the mix effect of Asia will definitely move all the regions are doing a really amazing job of managing margins at or above historic levels. But imagine in Asia moving at a faster clip on the recovery for the rest of the year that will move margins up a bit. And Tumi's continued to perform well at excellent margins. So I wouldn't necessarily change the guidance. I think kind of 58-plus – but we feel very comfortable about it as the way I would tell you, Dustin. We're in a very good position. Shipping costs are dramatically lower commodities are lower. We're seeing some opportunities on the sourcing side. If you imagine what we're selling in Q1 were stuff we paid that we bought last year, we might have been paying for it now, but we bought it last year. We're still impacted by freight costs and some of the inflationary costs. And that's kind of settled out for the back half of the year. So I think we're in a really good position on the margin side. And the weighting of mix, which is really you're seeing mix in Q1 and mix will continue to improve, in my opinion, you can talk yourself up on the margin. But we're pretty cautious guide on margins. So I think we're feeling really confident in that guidance of 58% plus kind of range, which is really above historic levels at this point.

Dustin Wei: Got it, thank you so much. That's all my questions.

Kyle Gendreau: Thanks Dustin. Any other questions?

William Yue: Yes. There are a couple of questions from online. The first is around our store opening plan, what is the store opening for the rest of the year? And what are the economics for store can like?

Reza Taleghani: So let me take the second part first. The economics for the stores, there's always this question around wholesale versus store. But you have to think about it as the wholesale gross margin is lower. Obviously, the DTC gross margins are higher, but then we have SG&A that comes in. So when you normalize for those two, the two channels are relatively similar. Obviously, the store channel is a little bit better overall. The expectation for store openings is we do have a focus in terms of store openings in Asia specifically. So the countries of focus would be China, India are two of the major markets. And you have some emerging markets. So for instance, in Indonesia, we're starting to have some store openings. We have taken over from our local distributor, the Tumi distribution rights in Malaysia, Singapore, Australia. So those are going to be reflected in our own store count as well. And then there's a push for additional Tumi store openings in Europe as well. I think the overall message on store openings is you should expect us to invest, which is why I'm saying, as you think about the fixed cost, SG&A in absolute terms, it's going to be increasing, but it's going to be more than offset in terms of from a percentage standpoint because of the revenues that you're going to get from that. But very disciplined because I think we went through a very arduous exercise of rightsizing the fleet during the pandemic and the approval process in terms of the stores, we're very disciplined in terms of the stores that we look at from an analytical standpoint and trying to make sure that we're – we have profitable store growth that's going to be coming up.

Kyle Gendreau: We aggressively repositioned our store fleet. So I would tell you, if there's a handful, I'm talking in the single digits of stores that maybe aren't in the right profit profile, we – that's the level we're at. We took out 250-plus stores. And all of our stores, I would tell you are delivering at this point and the teams are laser focused. We – you saw in Q1, we opened, I think, nine stores. We closed five or six, I don't quote me on these numbers exactly. This is the normal cycle that you would be in a retail business now. And that's the way I would think going forward that, that's kind of the pace that you'll see with maybe less store closings now and store openings that are well managed within a quarter and a year. So I think we're well positioned here as well.

William Yue: Great. Second question from online. Can you comment and provide some color around unit sales by different regions, where we are in terms of recovery?

Reza Taleghani: Yes. We don't disclose it by region. But just overall, we're still running about 15% below 2019 levels in terms of overall unit sales. We ended the year around just a little bit north of 20% below. So we are catching up, but there's still room to run. So obviously, those cost increases that we've had have helped. But that's the reason you hear the optimism in our tone that we still see a lot of recovery having is happening in overall unit sales. And if you look at the overall travel steps that we have in the deck and if you follow the industry overall, the expectation is that overall travel should actually exceed where it's been at 2019 levels, which should also have an impact on our business.

Kyle Gendreau: So I think as you exit 2023, units will start to catch up to historic levels. There's still recovery going on. And it matches perfectly the recovery left in the travel industry, as Reza is saying as far as kind of passenger miles, it's really around this international flights that are continuing to recover as the units are trending pretty close to that. So I would say we'll exit step into next year at units that are getting back to historic levels as well and continuing to grow.

William Yue: Thank you, Kyle and Reza. Operator, can you see if there are anybody else on the line waiting for to ask questions.

Operator: Sure. Our next question comes from Yvonne Chow with Nan Fung Trinity. Please go ahead, thank you.

Yvonne Chow: Hi, thanks very much for taking my questions. Congratulations very good results. I just have two questions is on the margin. Following up Dustin's question on gross margin. If this year, we can do 58%. Next year, I think inflation should be coming down further compared to this year then – can we – barring a bad session, like can we say 58% is a safe assumption as to next year or even more than that? And same thing would apply on the EBIT margin, I guess, will be – will stay structurally higher than compared to pre-COVID like 70%, 80%. Thanks.

Kyle Gendreau: Yes. I would say on both fronts, we're doing a really good job of managing margin within regions. Mix effect will probably put some upside pressure on the gross margin side. So I think it's a safe assumption, 58%. I think you'll see as we exit this year will probably be a bit better than that. And that's really effect of Asia continuing to move at a faster clip with a very good margin profile. In Tumi, which will really fuel a lot of growth in the next two, three, four years, with a higher margin profile, we'll also pull this up. So if you're modeling conservatively 58%, I think, is an okay place to be for us as you step into next year and could be a tad better. EBITDA margin, in my view, fundamentally will continue to grow. And so we were guiding EBITDA of $17.5 plus for this year. I think that's still the guidance. But I would tell you that we're really approaching 18%. So I think somewhere in the high 17% for the full year on EBITDA margin. And if you just model out assuming the mix effects that we're talking about with regions or pieces of our business growing at faster clips that have a higher margin profile. And our commitment to managing SG&A expense – fixed SG&A expense, EBITDA has the chance to continue to grow as well. So – and that's really a function of you're doing your own modeling, you'll see that it just naturally happens that way. Our task is to make sure we manage all of our cost structures and margins. And I think what we've shown is a clear ability to do that, not just reset it, but manage that really well on both the gross margin side and for sure, on the fixed cost side of this business and the cost structure of this business that we'll continue to deliver. This is exactly to my point where I started my presentation, fundamentally enhanced margin profile of the business. We're laser-focused on delivering on that.

Yvonne Chow: Great, thanks.

Kyle Gendreau: Thank you.

Operator: Thank you. Our next question comes from Mavis Hui with DBS. Please go ahead. Thank you.

Mavis Hui: Hi, management. Thanks for taking my questions. Can we have some color on the latest performance by brand, please? I mean, have we been seeing accelerated growth for our brands like American Tourister reserve by second quarter this year to catch up a bit with like Tumi and Samsonite as Asia continues to recover? And my second question is that now that we are on a very good track to score stronger performance ahead. What do you think could still be our key challenges for the rest of this year? And how do we get better prepared for them? Thank you.

Reza Taleghani: Why don't I take the brand one? And then, Kyle, do you want to talk about new challenges. So we had it in the deck on Slide 23 in terms of the brand performance. What you have to keep in mind is, as you're looking at the sales, so we just talked about the unit sales. Keep in mind that, obviously, the price positioning, the unit revenues that you get for Tumi and Samsonite are higher than American Tourister. So with the units not fully recovered yet, you're getting a higher sales performance that comes out of Tumi and Samsonite. Those two brands are outperforming as it relates to American Tourister. We fully do expect American Tourister to rebound as well as the units start to come back.

Kyle Gendreau: Let's talk about the rebound. It's still up almost 50% – it's a very strong number. But you if you look around the globe, what we're seeing is higher discretionary spend from customers that are spending in this kind of premium and luxury space than what you're seeing lower. If you think about inflationary pressures of the world and those types of things, consumers at the entry level of this market are probably impacted a bit more. And so that's not us, that's just general sentiment, but 50% growth for American Tourister is tremendous, actually. And I fully agree with Reza continues to be a huge success story where the product offering we have is significantly enhanced every single year. I continue to be really pleasantly surprised at what we continue to achieve with American Tourister, and I think that will continue. And I think as China continues to recover, battle fuel American Tourister are in all the regions across the globe are delivering on this. So I'm not worried about American Tourister at all. And Samsonite has been super strong, Tumi is strong and I think everybody is continuing to build momentum, which is terrific. So the first challenge is for the rest of the year. It's kind of a funny thought because we're so well positioned. We're so well versed in dealing with challenges now. If you imagine a team and a management team, not Reza and I, but our whole team that have just navigated almost the impossible when you think about the things that were coming at us. And I think the key is we understand our business better. All of our team members really understand the valves and levers. And so I think Reza and I task is to make sure that we don't lose sight of that. And so we spent a lot of time with our teams, making sure that we're focused on the levers and drivers and things that we need to manage. For me, and I've mentioned a few times, you have kind of recession fears, inflation fears does that impact travel, we're not seeing it nor are we anticipating having it meaningfully impact what's a continuing recovery story. But if there were, we know the levers to manage the business. And so I'm not so worried about that. I'm really comfortable with the thoughts we've given on the full year performance because we think we can navigate all of that. Our supplier base is very strong. We're managing kind of the flow of orders with our suppliers because we were ordering a lot to get back and now we're kind of a back into were normalizing volumes with our suppliers, but those are really in good position. The supplier relationships are terrific. We spend a lot of time with them, and it's really been amazing. We're not seeing any impacts on materials. We're actually seeing the benefit on the cost side there. I think that will continue. I think shipping position will continue to be in a good place for us for the year. So we're not so worried there. We're not seeing any real competitive pressures, though competitors are starting to get back into inventory. So we see that, but that's totally fine. Our momentum continues to be tremendously strong as we gained share across the market. So – and I think a year or two ago, you would have had people issues, right. People around getting people back to work and how do you manage the pressure and there are people kind of trying to manage home and work and all these things. All of that has settled out really well. I would tell you on the team side and the people side, I think we're really well placed. And in the last handful of calls, I talked about energized teams because teams and people really matter. In a year or two ago, part of our risks and challenges are we managing that, right? But today, I would tell you, that's not in my radar as well. I think everybody is in exactly the right place and are excited as I'm around what's going on with our business. So there's not too many other than the macro things that are hard to manage. We're really well positioned from a – from challenges that we'd have to really think about for the rest of the year because things are going so well.

Mavis Hui: That's very good to hear. Thanks very much for the update. And just very lastly, can I have some updates on our outsourced manufacturing for the U.S. market, please? Thank you.

Kyle Gendreau: What was the question again?

Mavis Hui: I just want to check on the proportion of our manufacturing that we outsource from Asia for the U.S. market. China – yes. I remember China, you mentioned earlier is about 50% perhaps by now. So would that be the case?

Kyle Gendreau: So U.S. manufacturing, Chinese imports to the U.S. are down to about 10%. So usually the inverse of that. So if you were back kind of pre-tariff days, 95% of our imports to the U.S. were from China through the pandemic, our sourcing team literally moved all of that outside of China. That's not to say that China is still a very important manufacturing hub for us for the other regions. But as it relates to the impact of tariffs to the U.S., it's about 10% is only coming from China now.

Mavis Hui: Right. That's a very good progress. Thank you so much. Congratulations on that. Thank you.

Kyle Gendreau: Thank you.

Operator: Thank you. [Operator Instructions] Ladies and gentlemen, there is no one for questions.

Kyle Gendreau: Okay. I think, operator, I'm guessing that's it. Just thank you for Reza and I and William. Thanks, everybody, for joining, and look forward to catching up with you on the next earnings call.

Reza Taleghani: Thanks, everybody.