Samsonite Group S.A. (1910) Earnings Call Transcript & Summary

Good morning, good afternoon, and good evening, ladies and gentlemen. Welcome to the Samsonite International 2021 First Quarter Results Conference 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.

Ladies and gentlemen, thank you very much for joining our earnings call today. We'll have first, our CEO, Mr. Kyle Gendreau, make some opening remarks. And then our CFO, Mr. Reza Taleghani, will go into better detail the financial results. So without further ado, we have Mr. Kyle Gendreau to begin. Thank you very much.

Okay. Great. Thanks, William. Thanks, everyone, for joining. So we're going to cover our Q1 results. So William, if we can move to Slide 4. So Q1, we've continued to see continued improvement in our profitability as we've seen a gradual sales recovery carry from Q4 into Q1. Our Q1 adjusted EBITDA was a loss of $28 million, which is $17 million better than Q4 of last year, despite sales being in the same general zip code. We were down approximately 57% in Q1 this year versus down 58% in Q4 of last year. That is an improvement. From a sales perspective, our sales were lower in Q1 versus Q4, which is normal seasonality and despite sales being lower. And we've continued to improve on profitability. What's really driving the profit improvements is the continued benefit we're getting from our fairly aggressive reduction in fixed costs. So our fixed SG&A compared to the prior year, Q1 of '20, was down $87 million. If I compare that to 2019, we were down over $100 million in fixed costs, which is really driven by the approximate $200 million in annualized run rate savings, again, coming off of our comprehensive cost reduction program as well as we continue to get benefit from temporary savings and tight spending restrictions we have within the business from things like furloughs and rent savings and basically every discretionary spend item we have under tight scrutiny. We're still sitting in a very strong liquidity position at the end of Q1. We're $1.446 billion, slightly lower than where we were at the end of the year at $1.5 billion. So we continue to maintain a very solid liquidity position. And we really have the business now very focused on capturing the recovery in travel demand, which we can start to see coming in a more robust way as we get to the back half of the year and into Q2. And what you will really see is a really impressive improvement in profitability as we move forward and the business recovers. And then from a focus perspective, not only are we focused on capturing the demand, but we continue to be focused on innovation in products. We've had a couple of very exciting launches in the last quarter, the Tumi and McLaren collection, which is a wonderful launch if you haven't seen it. And it's quickly become a top seller for us out of the gate. And I think as I covered in the last call, we launched Magnum Eco, which is a fully recycled travel collection produced in our European facility. And that is off to a wonderful start as well. From a -- so moving to Page 5. Our sales trend, when you look here, Q1 sales were down 57.3% versus '19, improvement, as I said, from Q4, which was down 58.1%. I think importantly, if you look at the trends within Q1, it's an improving trend from the start of Q1 to the end. And in particular, we've given you a view of April's number here. It continued into April with sales down 54% for April with a strong trend as we move into the second quarter. As far as outlook, just to give you some sense of forward outlook, our view to Q2 is we'll be somewhere down 53%, 54%, so continuing the trend that we've talked about. That's getting a little pressure from India, we'll cover that as we move forward here. But India has kind of moved into a more challenging spot, as most everybody knows. And then when we really look forward into Q3 and Q4, we start to get the business moving into a trend, probably kind of mid- to upper down 30s for Q3 into Q4 and really getting to a moment where the business flips to very comfortable profitability as we move forward. Moving to Page 6, just some overviews here. As the vaccinations really continue to increase globally in real traction and we see the demand in travel increasing, it definitely will result in improved sales for our business. Asia continued to show positive momentum, ending Q1 with adjusted EBITDA of $13.2 million. So again, this is a business down 50% producing meaningful EBITDA. That's up from Q4 EBITDA, positive $1.3 million. And as you know, Asia has been positive EBITDA since Q3 of last year. Countries within Asia have done a very good job with controlling COVID-19, generally, largely through quarantine measures and contact tracing. And as vaccinations really continue to ramp up across Asia, I think you'll get continuing benefit across the region. In Q1, Asia outperformed our other regions and really off of the strength of China and India. India had a very strong Q1. And as we stepped into -- as we're stepping to the end of Q1 into Q2, India is obviously seeing some pressure. And really, this resurgence we've seen in India has caused meaningful travel restrictions, lockdowns and real kind of general crisis situation for India. We've seen that business go from Q1 down in single-digit territory versus '19 to stepping into April, it looks like it's down closer to 52% very quickly from almost a breakeven level from year-over-year '19. When we look at the U.S., this is a real bright spot. U.S. has -- demand has increased as domestic travel has dramatically improved. I'll show you a chart on that in the coming slide. Our -- we really see the trend in vaccines, so the growing number of vaccinated Americans really feeding into the travel within U.S., particularly domestically. We see TSA numbers increasing. And for the month of April, our North America business was down 47% versus '19. So really rapidly improving trends for North America. And importantly, our North America adjusted EBITDA is approaching breakeven in March and is -- will be positive for the month of April as the business continues a strong recovery trend. Moving to Page 7. For Europe and Latin America, we've seen a resurgence. Everybody has seen it in the news. And so Europe and Latin America, as we stepped into Q1, we're seeing a real resurgence in cases and variants. Really, at the start of Q1, we've seen an improving trend as we get to the end of Q1. But as you know, Europe had moved back into lockdown. Within Latin America, markets like Brazil and Chile were heavily impacted. And again, those start to show signs of moving. When I look within Europe and Latin America, outside of U.K. and Chile, the vaccine rollout has been a bit slow, but we do see it really increasing in pace. I'll cover that on a slide going forward. And every week, we see a really improving trend. And we're quite excited for Europe, particularly where we start to get real indications of lockdowns being lifted in domestic travel or intercompany -- intercountry travel within Europe getting very close to turning on. And there's real indications that travel between Europe and the U.S. will open up as we move into the summer months, which will be extremely positive for our Europe business. And then from a focus perspective, as you know, and I mentioned a few products, we've continued to be very focused on all of our categories. But in particular, nontravel is driving a big piece of the business at the end of last year and to this year. But we have many really exciting travel products that we're ready to roll out. And as the business turns on, I think we're going to be really wonderfully positioned with our product portfolio and offerings for the business. And then as I said, as travel returns and we have more robust sales recovery, you really will see a very rapid improvement in our profitability due to the restructuring actions we've taken to reduce our fixed cost structure. And so I'm quite excited about the profit recovery that we'll see in the back half of the year. Moving to Page 8. Everybody is following this in varying degrees. Here's my snapshot. With more than 1.32 billion vaccine doses administered, we really start to see markets getting to vaccine levels that are heading in the right direction. I won't go through all the numbers on the charts. But clearly, the U.S., the U.K. and you start to see other European countries really getting to meaningful progress on vaccinations. The U.S. is projected to be at 75% vaccinated by the end of July. And effectively, that puts us into herd immunity territory. The outlook for the U.K. is sometime in early August, and Europe's outlook looks to be sometime in September. And so these major kind of regions within our business get into the right place. It's why we feel very optimistic for what we're seeing for the back half of the year for travel recovery. Asia continues to ramp up its vaccinations, and we're starting to see some positive signs there within Asia, though Asia has got pockets of really strong moments like China. And obviously, India is feeling some pressure as well. If I go to Page 9, this just gives you a snapshot of 2 big markets for us. So here, the blue line is China. So this is the trend from the start of last year into where we're sitting today. You can see throughout the year, China was improving quite rapidly. There was a dip in January and February of '21. This was really around Chinese New Year and the Chinese government requesting people not travel for that time period. So that's why you see a dip in January and February. But then you can see in March, it really quickly comes back. We've got a very strong April and strong May within China as well. And then for the U.S., this is the recovery, this gradual recovery that you can see. And in particular, when you get to the start of this year, you see the U.S. fairly rapidly recovering in domestic travel across the U.S. business. And so progress throughout the year but rapid kind of movement in February, March that's continued into April. And Slide 10 gives a good snapshot of what we're seeing in the U.S. So here, there are 3 kind of lines. The red line is vaccination levels. And you can see from December forward, the U.S. has very rapidly administered vaccinations. The gray line, the kind of up and down line, is TSA traffic. And you can really see the correlation between TSA traffic. These are consumers flying domestically in the U.S. And then you get to the blue line, which is our trend line. And you can see as we get to the start of this year a real improving trend and, as I said, that's carrying into April. And we see the same thing in May as the U.S. really begins to travel. I myself have been traveling in the U.S. almost every other week across our -- pieces of our business and for personal travel. And you can really see a booming increase in travel across the U.S. If I move to Page 11, this is looking the other way, at the cost side of the business. And you can see that we've dramatically reduced the cost profile. You have a graph here which is showing '19 across the last quarters, and you can see how rapidly we've reduced that from Q2 to Q3 of last year, Q4 continued. And what I would say, the trend line is really showing that as a delta from the previous year. We continue to make progress here in narrowing the gap between our S&GA year-over-year, and we start to get really close to historic levels of SG&A as a percent of sales, despite sales being down quite dramatically from our normal run rate. So we're quite happy with that. Reza will cover that in some more detail within his section. And if you look at Page 12, this is a snapshot showing sales. And you can see where sales were Q1 of last year to where we're trending today. And I think importantly, the EBITDA trend has been very positive every single quarter. It continued into Q1. You'll see a continuing story into Q2 as really, we reached -- as we exit Q2, I think this business will be in a positive territory from an EBITDA perspective as the business is continuing to recover. And if you look at Q1 this year versus Q1 of last year, we're only $33 million lower than last year with sales down by -- close to $250 million, which speaks to the initiatives we've had on driving profitability in the business. And on Page 13, just another look at this really to give -- point out kind of the rapid improvements in EBITDA, the blue line is our consolidated EBITDA, but also to point out the Asia story, where Asia, which has been trending a little bit ahead of the curve on the recovery, has moved rapidly into profit by Q3. And you can see the meaningful step-up in Q1 of '21 for our Asia business in positive EBITDA. And then on Slide 14, the cash flow story has continued for us as we have very aggressively managed in all of our cash flows. Our Q1 cash burn was $65 million, which is $58 million better than what we saw in Q1 of last year, despite sales being down $250 million. We have every piece of discretionary CapEx reined in. Reza will cover that in some details. I'm quite happy with what we've done to manage that. And I think another kind of important measure, when you look at Q1 of '21 versus Q1 of '19, it's only $29 million unfavorable with sales down close to $500 million. It really speaks to how rapidly we've grabbed the reins and managed cash flow in the business. And so the cash burn is -- continues to run even ahead of our own expectations. So that's a quick summary. Reza has some more details on financial highlights, and then I'll come back at the end and just wrap up. Off to you, Reza.

Thanks, Kyle. And we are on Page 16, just the overview of the quarterly results. So we're reporting net sales of $355 million. Constant currency, that's a decrease of 42.4% year-over-year. As you'll recall, Asia last year had already gone into the COVID environment, especially in China, Q1 of last year. So that's the year-over-year comparison. Gross margin is at $173 million. There's been some pressure on GSP in North America. There's also what we have talked about on previous calls, which is the impact of our manufacturing base on lower sales. And there is some promotional activity as well. I will provide a full bridge on the gross margin in a few slides. Adjusted EBITDA, minus $28 million, which Kyle covered. Obviously, the flow-through of sales and gross margin there offset by the SG&A improvements that continue. And with adjusted net income, we're reporting minus $67 million. And largely, there's about $8 million of increased interest expense year-over-year due to the higher debt levels that we've been taking on as we kind of maintain our liquidity position and some taxes, which we'll go through as well. So as we go through the financial highlights on Page 17, sales, we've talked about. On the EBITDA, we're only $33 million lower than Q1, even though sales are $246 million lower than the prior year. Again, all of these because we've been highlighting the SG&A savings that we've had, and that continues to accrue benefits to us. And that's -- and actually, it's been trending in a positive direction each quarter. So adjusted EBITDA improved by $17 million from Q4 of 2020, even though sales were lower compared -- in Q1 2021 versus Q4 2020. So sales were $53 million lower from last quarter, yet our EBITDA was better by $17 million. And again, that's because of these accrued SG&A benefits. Fixed SG&A expenses, better by $87 million. Again, we've highlighted this $200 million run rate benefit that we've seen on fixed cost savings on an annualized basis. But obviously, $87 million, if you divide that $200 million by 4, we're trending ahead of that. And that's primarily because we're still trying to manage some of the variable expenses that are there as well as making sure that on the fixed side, that we try to do a little bit better each quarter as well. Advertising spend, $24 million lower than the prior year. We're continuing to maintain discipline on that. However, we do anticipate as we get closer to the summer months that we'll increase the advertising somewhat to try to make sure that the sales starts to flow through a little bit better. And then from a tax project standpoint, we've mentioned this on a previous call. We just wanted to make sure everybody is aware that we've been working on a tax restructuring that's nearing completion. So by the half, we hope that we'll be largely done with that. The bottom line, from a financial standpoint, is that we expect to maintain our ETR compared to the range that it's been operationally in the past. So our operational tax rate typically is around the mid-20s, and we expect that, that will continue going forward. But that tax project is nearing completion as well. Moving to Page 18. Kyle mentioned liquidity of approximately $1.44 billion. So we feel pretty good overall in terms of our liquidity position and the cash burn. Cash burn is favorable to the prior year by $58 million, even though sales were down $246 million. And as you'll see on a subsequent slide, we were being very disciplined around net working capital as well as basically anything that we can control such as CapEx and other line items like that. We're being very, very disciplined around as well. So really, the cash burn, there's interest cost, tax payments, things like that, that obviously have to happen. And then we'll go through that in greater detail as well. Net working capital, $141.5 million lower than the comparable amount last year. We have really managed -- and if you think about it, that's in a reduced sales environment, we have continued to basically reduce the inflow of inventory but also to make sure that we have been aggressively managing their inventory levels down as well. CapEx, which I mentioned, CapEx and software purchases, $2.1 million in the quarter. So just a -- basically, we have a virtual freeze that has been going on, on CapEx and just doing only what's absolutely necessary. Again, as we slowly come into a more improved sales environment, we will obviously start to do a little bit more. But don't expect us to be wildly spending on CapEx in this environment. On Page 19, sales down in all regions due to COVID-19. But obviously, Asia outperforming as compared to some of the others. Because if you're looking at the Asia number, constant currency, down 25.9%, whereas Europe is down 62%; Latin America, down 48.8%. And North America, as Kyle mentioned, as we enter April, reaching breakeven EBITDA. And even though the quarter was down 44.6%, we're starting to see some green shoots in North America and that region coming into positive territory, similar to Asia. On Page 20, the DTC mix has continued. If you're looking at the retail stores on a year-over-year basis, obviously, some of our stores are still closed as you think about Europe being still in a lockdown. But in terms of the sales channels, we've maintained the mix. I think if you're looking at the nontravel/travel mix, we are still continuing to have a little bit greater sales in the nontravel area, although we do expect that to normalize somewhat as travel starts to pick up again. And what we're seeing trend-wise is other than just the carry-ons, we're starting to see some additional larger pieces of luggage being kind of the trend in terms of the travel component of it, so people taking longer trips, et cetera, to the extent that there's markets that are opened up. And we expect that to continue to work our way into the summer months. Moving on to the next page on 21. This is the point really around gross margin that I mentioned on the initial slide. Just to break down and bridge between Q1 of last year to Q1 of this year, the first bar, the minus 70 basis points, is the impact of the manufacturing costs that we have. So we have our 3 factories, 2 in Europe and 1 in India. And obviously, that -- the cost of those factories are on -- and sourcing costs are on a lower sales base. So that is about a 70 basis point impact. The nonrenewal of GSP in the quarter had a 60 basis point impact. So between those 2, 1.3 points of margin decline due to those 2. And then the remainder, about 4.8% of it is the buckets which include change in sales mix, promotional activity. Freight costs have increase. So just to give you the component of that, 1.5% of that 4.8% is due to higher freight costs. As I'm sure you've seen in the news, there's a lot of demand in terms of shipping containers from China coming over to our markets. And that's had that impact on us. And there's been some promotional activity as well, which as we enter the back half of the year, we're tightening somewhat. As we think about GSP overall, I think our expectation is that Washington is continuing to work through that. Our hope is that, that gets renewed at some stage on the back half of the year. And that would obviously improve our gross margin profile as it relates to the North America business. Moving into Page 22. SG&A is something that we repeatedly want to highlight in terms of all the actions that have been taken. We're starting to obviously see benefits of those rolling into the actuals. But in addition to that, there's additional work that we continue to revisit in terms of SG&A. So fixed SG&A expenses in the quarter, $87 million lower than the prior year. And that's primarily due to the store closures and head count reductions, which we've covered on previous calls. Fixed SG&A expenses, if you're comparing to Q1 of 2019, are reduced by approximately $100 million. And the reason for that is we had already started some restructuring activities in North America as we basically consolidated our eBags division and we had some layoffs, et cetera, that were happening there. Variable selling expenses, obviously, we have lower sales, so $12 million of benefit on variable SG&A. And advertising expense was $24 million lower than the prior year. The bridge on Page 23, just to show the bridge on -- from Q1 EBITDA to Q1 2021 EBITDA. Obviously, the largest impact is the gross profit decrease from the lower sales. So a little bit shy of $140 million of the year-over-year decrease is due to that. The gross profit decrease from the lower margin that we just talked about is about $21.5 million. $2 million of that impact in the quarter was due to the nonrenewal of GSP, which we obviously hope that will get renewed later in the year. And then we have the actions that we've taken on our side to offset the decline in gross profit. So the variable component, which naturally flowed through, was a little bit shy of $14 million. We reduced the advertising in the quarter by about $24 million and then $90 million of decreased fixed SG&A, if you're looking at it year-over-year. So if you combine the advertising and the fixed SG&A point, we have about $115 million of actions that were taken to compensate the decline. And again, so if we had done nothing, we would have been $143 million in the hole, negative, for EBITDA. And we ended the quarter negative $28.5 million. So sequentially continuing to improve each quarter on the EBITDA line on the back of the cost reductions and sales improving as well. On Page 24, Kyle touched on this a little bit earlier, just in terms of the cash burn. Cash burn of negative $65 million, we had basically told everybody that Q1 typically is a period where we do have cash burn that happens from a seasonal standpoint. And so compared to prior years, we had negative $64 million, which was obviously an improvement year-over-year compared to last year. But please be mindful of the lower sales environment that we're also talking about. So despite the sales being nearly half of what they were in Q1 of last year, the cash burn was only negative $64.6 million. And Q4 had about -- just so you're aware, to those of you who have dug into the Q4 number, had about $72 million of net inventory benefit that was helping the Q4 cash burn. In Q1, we also -- we're about $21 million just worse from Q4 just in taxes alone because we had a year-end cash tax benefit that happened due the CARES Act that obviously rolls off in Q1. Moving to the balance sheet. Net debt, $1.782 million (sic) [ $1.782 billion ] as of the end of the quarter. Cash burn, we talked about, was $58 million better than the Q1 2020. And liquidity of $1,446 million, I will just address this from a covenant perspective. I know we typically get questions on covenants. We still feel good about where we are for the remainder of the year. We continue to talk to our banks about looking at our balance sheet, and our view is that the business will continue to delever over time as the EBITDA starts to come back. I will also restate that our intention is that over the course of this year, we will actually take some of the cash that's sitting on the balance sheet and repay some of the debt as well, which will help with the interest costs that we're seeing. On Page 26, net working capital. The trend continues. Just to highlight a couple of items that are not on the page, as we look at inventory provisions, in 2020, we did increase our inventory provisions materially. So I had about $15.2 million of inventory positions in 2019, which went up to a little bit shy of $60 million in 2020. But despite that, I think we've been very, very aggressively managing the working capital and the cash burn, which is both outlined on this slide. The other thing that I'll just highlight is in terms of bad debt provisions, we were very similar to where we were as of December. So quarter-over-quarter, we're still -- we have 18.7% of bad debt reserve, which is same number that we had at the end of the year at December 31. Working capital on Page 27. We've talked about -- I think the big point here that we want to highlight is we are continuing to manage inventory levels very carefully. So we had anticipated that we would start to see a level of inventory build happening in Q1. I think what's really happened is that the aggressive management of the inventories -- of the composition of the inventories, we feel that we're adequately positioned to take advantage of the sales that are coming. But we've also been offsetting the aggregate amount of inventory numbers that we have here through our SKU reduction program. So if you're looking at what's happening to the total value of the inventory, we've -- from December to March, we've managed to actually get the inventory levels down. And year-over-year, inventories are down $156 million despite the weak sales environment. And I think that has to do to the credit of our sourcing teams who've been tremendous in terms of working with our supply partners as well as trying to make sure that the quality of the inventory and the type of inventory that we have has been adjusted accordingly as well as we work our way through the year. On Page 28, it's been touched on, very, very little CapEx spend. So if you're comparing Q1 of last year, where we had $19.2 million of total CapEx and software spend, we're continuing in that $2 million range. Again, as the quarters go on, this will start to creep up a little bit but only commensurate with sales. So we're continuing to be very, very disciplined and only doing what is absolutely required. And to the extent that the sales environment improves, we could expect this to creep up a little bit, but nothing to the levels that it was last year -- or I should say, in 2019. So with that, Kyle, I'll turn it over to you to talk about the outlook, and then we can take questions.

Okay. Great. Thanks, Reza. So Slide 30, William. So just outlook, high-level outlook. We're very encouraged with the improvements we're seeing in sales. Our expectation is the trend will continue. When you look at the trend just for the months of January, February to what they look like in March and April, there's a good story. Obviously, there are some pockets in the world that are moving in a little bit of a different direction, particularly in a market like India. But the rest of the world, we feel highly confident that the trends will continue. I think Europe's at the doorstep of real improvement. The U.S. continues a really good story, really tied to vaccine rollout and lockdown restrictions coming off. I'm quite excited for what we'll see in Europe. And when I talk to our European teams, we're excited about the real chances for a summer holiday season, both within Europe and then inbound to Europe. I'm looking to get to Europe myself for some meetings in July, and I think that's going to be very doable. I think Asia will continue to open up as they manage and vaccines continue to move. And within Asia, I think there will be some travel bubbles that will open up between countries. And I think Asia will have a story that plays out in the back half of the year as well. So real recoveries in domestic travel and demand, and I think international travel across the world will start to show signs of opening up as we exit Q2 and get into Q3, for sure. There's growing confidence in our ability -- the world's ability to catch up to the pandemic. And though we see surges in certain parts of the world, I think there'll be big surges in pent-up demand for travel. And as the world really continues to work its way out of here, I think travel is on the top of many people's minds. And we're seeing that in markets where the vaccination levels get to meaningful levels. And then I think most importantly, and I was looking at the slide that Reza laid out that talked about the pressure on sales to EBITDA, but then the actions that we've taken as a business to offset that and the really powerful moment for this business will be where the sales trend continues. And we're able to maintain those savings that we've talked about, which will cause a fairly rapid improvement in the EBITDA profitability for this business really as we step into the back half of the year, for sure. And so we can see it. We're feeling it. Our teams are energized, and I think our future is looking quite positive. Just from a near-term focus because that's kind of an outlook for the year. But within the business, just so you know what we're doing as a team because there's a lot of moving pieces in navigating this. One, we continue to be very focused on the well-being of our employees, our customers, our partners. We've been doing the right things across regions and across markets to manage -- to turn on the business and our employees and customers. And so I'm quite happy with that. As we've said a few times, we've taken really meaningful actions to preserve cash and reduce our fixed cost structure. And there's not anybody in the company that isn't fully aware of our focus here, on maintaining this lower cost structure to really drive this rapid profit improvement as we see the sales recover. And so that is a laser focus on everybody within the business. And I think we're well positioned to execute on that across all of our operating regions. The other piece is the restructuring actions we've taken last year and just the general pressure of the virus on the business. For the business that's recovering but taking time, it's very important that we stay focused on our teams. So myself, our regional presidents and all of our managers are focused on this front to really hold each other up and be ready for the turn on. We're all getting very excited for what's ahead of us. I, myself, think we're about to have wonderful moments in this business as we step to the end of this year and into next year. I'm pleased that we were able to lift salary reductions for employees as we get to the end of Q1 and stepping into Q2. So we reached the point, and I'm very appreciative to all of our employees for all of the efforts and sacrifices they've made to get this business to the right spot. And so one of -- and you guys have heard me on this call say before, one of the real amazing assets we have in this business is our dedicated employees. And every one of them has done their part to get us in the position here for recovery. So thank you to them. Our global platform and really this amazing kind of diverse business that we have, both in geographic penetration, product categories, real innovation and real kind of complementary brands have positioned us for this recovery. And so the recovery has been slow coming, but it is coming. And the global travel disruption will end, and we'll be in a wonderful position with the business that we have today to do that. We've continued our focus on sustainability, innovation, ESG. If you haven't seen it, we published our ESG report at the end of last week. I think it is an amazing report, which captures the story of the progress we've made here, where we're taking it. This is the journey. That's why we called it our responsible journey, and I can't be more excited about where we're taking this business from an ESG and sustainability perspective. And you should expect us, as I said before, to lead the industry on this front. And all of our teams are focused and highly energized against this. So despite COVID, we've stayed very focused, and you'll see in that report the great progress we made over the last 12 months from the last time we issued the report. So I do recommend you take a look at that. We are in an industry where there's many smaller players, and I think many of them are experiencing pressure and will struggle. But it doesn't mean that we won't be in a competitive environment. And so I'm expecting that we will continue to be in that environment. But scale matters on navigating, and I think our scale advantages and what we've been able to do to manage this business through will put us in a great competitive position as the business turns on. And we're able to start shipping inventories and products to our consumers and our bigger customers. And we're well positioned to capitalize on that recovery with the strength that we have as a business, really off the back of the liquidity that we've been able to secure. So thanks to Reza and our lenders and everything we've done to make sure that we're sitting in the right liquidity position. We're in a wonderful spot here as far as balance sheet, what we've done with cash burn to really navigate through this. And I have 100% confidence that this business will power through here and be, as I said earlier, in a wonderful spot as the world really recovers from COVID-19 and people get back to traveling, which is, for sure, coming. So with that, William, I'll turn it back to you. Very happy to take some questions from anybody on the call, and thanks for listening.

Thank you very much, Kyle and Reza, for your comments. And we're now open to take questions from the audience. So operator, can you please check who has any questions for us?

[Operator Instructions] Our first question comes from Louise Li with Bank of America Hong Kong.

So my first question is like based on the current -- latest update, I mean, including everything, for example, India, so are we still looking for a second quarter breakeven in terms of the adjusted EBITDA level? So this is the first question. And secondly, given the raw material headwinds globally now, so how is our view on the GP margins throughout the whole year? Because based on my understanding in the past that we actually got the chance to raise price to navigate this headwind. But how about this time? And the third question is, so in Q1, we actually got like $87 million SG&A -- sorry, fixed expense savings. So does it mean that we can look for higher than $300 million savings on a full year basis?

Reza, why don't I -- I'll take them, Reza, and then fill in if I miss anything.

Okay.

So Q2 EBITDA, my view is we'll be very close to breakeven in Q3. But that's for sure, we will exit run rate Q2 with positive EBITDA. And I think depending on -- there's a lot of uncertainty. But depending on how India goes, we could be maybe slightly negative for the quarter but exiting Q2 in a positive EBITDA and, for sure, positive EBITDA in Q3. And so we're watching it closely. We're pushing ourselves to get to breakeven in Q2, and I think we have a shot at it. But as you know, there's a good bit of uncertainty in certain markets of the world. From a gross profit perspective, our outlook is that it's an improving trend as we get to the second half of the year. I think -- from where I'm sitting, I think our gross profit margin for the second half can be somewhere in the kind of 53%, 54% range. From -- kind of on an adjusted basis, we're running probably around 50% today. We need a few things to happen. We need GSP renewal to go in place for the U.S. I think that's coming. We are seeing impacts on raw material prices. But for us, that probably has a bigger impact as we get to end of the year into next year. As you can imagine, that takes some time to work its way through. And I think importantly, that will impact the entire industry because everybody is facing that. And we will be adjusting pricing and margin profile to be able to get back to our normal margin runs, which for this business, we should be running around 53%, 54% on a normal basis. And I think you'll see that in the back half of the year for us. And then finally on the savings, the $87 million fixed savings for the quarter, and it's really even more impressive when you compare it to '19. It's $100 million of savings. That doesn't mean that, that translates all the way through to an annualized run. I think we're running, on a real annualized forward basis, slightly better than $200 million. The increment that you're seeing is us continuing to take as many temporary measures as we can on the cost savings. So I think the right way to think about forward savings is $200 million or a shade better than that. And we'll continue to hang on to as many of these temporary savings, things like rent reductions that we've been able to negotiate for a period of time as businesses are recovering. Those will carry into the back half of the year. But on a real go-forward basis, some of those temporaries will fall off in the permanent savings, what we'll carry forward. So I think those answers -- Reza, I don't think I missed anything there.

No. No, I would agree with all of that, Kyle.

Great. Thank you.

Our next question comes from Erwan Rambourg with HSBC in U.S.

Congratulations on controlling what you can. Two questions. I think last call, you had mentioned that the EBITDA margin for the year could be around high single digit. Obviously, with a huge contrast between H1 and H2, I'm just wondering how you're thinking about the full year EBITDA margin given the circumstances we're on and maybe the more recent tough news in India? And then secondly, I was wondering how you thought about the contrast between domestic travel picking up quite dramatically in places like China and the U.S. versus long-haul travel. Because it seems that the China vaccination rates are relatively soft versus, for example, what we're seeing in the U.S. or the U.K. And so visibility on the pickup of long-haul travel from China seems quite low here. But is the pickup in domestic travel sufficient to partly compensate for the lack of long-haul coming back? That's essentially what I had.

Okay. Why don't I take the travel piece? And Reza, you can grab the EBITDA. Just on the travel side, I do think it's going to take a little while for Asia with travel. I'm trying to get to Singapore in July or August. I think that's a little less certain for me than trying to get to Europe in July. I think domestic travel, when we look at our outlook and the guidance I gave for kind of the rest of the year, that's going to largely be fueled by domestic travel. And when I say domestic travel, it's also intercountry travel within Europe, and that's enough to feed. But I think to really get over the hurdle, you need some of the real international or long-haul travel to open up. And I think that will take some time for Asia, is my personal view. I think by the end of the year, we'll have a better chance to be traveling over from the U.S. to Asia, for example. But Europe, I think, really starts to move a little quicker than that. And so I think Europe opening up will fuel some meaningful travel. I know in my own circles, many of our friends and relatives have booked trips for the summer and into the fourth quarter for Europe, and I think that will open up nicely. So -- but I think you really carry into beginning of next year before, I think, the world's really freely flowing, Erwan, is my best guess. And we'll see. There's a lot to go there, but I think it's coming, for sure. EBITDA margin outlook, I'll just go with it, Reza, and then correct me. But we -- I had sort of pushed the entire organization to try to get to 10% EBITDA margin, and I think I guided last time we'd be in kind of the high single digits. I think we're going to be somewhere between mid- and upper single digits. And based on what we're seeing right now in a few pockets of the world, I think in that kind of north of 5% but definitely below the 10% that we've set is kind of the zone that we're in. And it's really just a function of some of the pressures we've seen in Q1 that we're seeing in Q2 taking a little bit more time to cook out. I feel very strongly about what we're going to see for Q3 and Q4 as far as being a noticeably different EBITDA margin, but we have to cover kind of the pressures we've seen carrying at the start of the year. So that's why I think there's probably a little bit of pressure on what we were setting for targets for ourselves but still in an exit run rate margin profile that I think everybody would be quite excited about.

Yes. And Erwan, just to add to that point, it's really what you just heard Kyle say a little bit earlier is that if you're thinking about Q2, we're approaching breakeven on EBITDA. So you're going to have to basically average a second half number that gets you to where our EBITDA margin is going to be. And so if you just break out Q3 and Q4, the expectation is Q3, you're going to be kind of in the mid-single digits. And then in Q4, we're very optimistic that you basically have the full run rate benefit exiting the year that we have indicated, which is the mid-teens. And so that averages out to the numbers that Kyle was talking about, if you think about it that way.

Our next question comes from Yvonne Chow with Nan Fung Trinity in Hong Kong.

A very encouraging result. Can I just follow up with a few questions? First of all, on gross profit margin, I think Kyle just mentioned 53% to 54% on a normalized basis. But I think previously, you've been mentioning 55% on -- is the normal gross profit margin that we're looking for on the company. So I'm just wondering, is that like a change in guidance on normalized gross profit margin? And my second question is on the EBITDA margin. Can I just clarify -- Reza mentioned that the exit EBITDA margin for this year would be mid-teens. Like is it for this year? So that if we -- can we refer to the same EBITDA guidance over the last call that EBITDA margin on recovery will be much higher than 2019 levels because of all the cost savings? And my last question is revenue. I think your last guidance was that exit run rate in 2022 should be the same as 2019. Is that the same that we should be looking at now? Three questions basically.

Yes. Kyle, do you want to take the...

I'll take the gross margin and -- I'll take the GP and then you -- so I think I probably misstated that. I think our gross profit margin, the normalized run rate for this business should be in this kind of 55% territory. We have a long history of running there. That 53%, 54% is what I'm anticipating for the back half of the year. And so that will still have some pressures. And -- but our long-term target, for purposes of your modeling, should be 55% because we have a long-standing history over there. I think as the mix profile of our business shifts a bit here, we've obviously done some restructuring on stores, that has a little bit of pressure on margin. But our digital business continues to grow. That will kind of compensate for that. Tumi as an asset continues to grow at a faster pace. We're seeing very good success with Tumi, even in the midst of COVID-19 in Asia. There's a wonderful story for the U.S. as it turns back on. And so you'll get some uplifting mix effects for that as well. So I think the right long-term kind of target is 55%. When I really model it out, it can even get up a little higher than that in the kind of medium to long term. But for this year, I think we'll still be navigating some pressures. You need volumes fully back to cover things like your fixed manufacturing costs for the plants we have. We also have some freight pressures. We're seeing freight costs higher than normal. I think that will take some time to work itself out into next year, which is why I think the back half is a little bit lower than what our normal is. Reza, why don't you take the EBITDA margin rate questions?

Yes. Yes, the EBITDA margin, really the exiting, we're saying the same as what we said on the previous call. So the issue is really, if you're looking at the guidance for this year, it's -- you obviously have a front half of the year where we're still basically approaching breakeven. We haven't had breakeven yet in the first half of the year. So what are you averaging it against? But as we think about the cost save benefit, our expectation is as you end up exiting this year that we're definitely going to be at a higher EBITDA margins than we were compared to 2019 because frankly, just -- you're taking out $200 million of costs. And if anything, we're trending ahead each quarter of that $200 million of cost savings that you have on the SG&A side. So it comes down to where do you think the revenue is going to be as we go, which I know was your other question. I think on the revenue side, as we think about next year, we're still saying that we're not going to be getting back to 2019 levels on revenue next [indiscernible]. However -- and that's the same thing that we said at the end of the year and on the previous calls as well. However, our expectation is because of the cost saves that our EBITDA margin and EBITDA levels are -- and again, you can look at what's happening in Asia and North America that we're talking about. Like you can look at markets in Asia, for instance, right now, where sales are still down 30%, yet the EBITDA is back to where it was previously. And so that's the operating leverage that I think is built into the company now coming out of this, and that's what we're excited for as when the revenues come back because the profitability will be a lot higher.

Our next question comes from Dustin Wei with Morgan Stanley Hong Kong.

First question, regarding the recent trend in May. Like given that, for example, China, they have been seeing the good sort of domestic travel during the Qingming holiday and good domestic travel during the Golden Week. So what's the sort of narrative for that market? And also for the U.S., like your TSA data point now, what kind of trend that we are seeing for these 2 major markets?

So for China, we had a very -- yes, why don't you do it, Reza? Go ahead. Yes.

No. I mean, go ahead. I didn't mean to cut you off. So please go ahead.

Okay. So China has obviously had a very good May. We're quite excited. We've seen a continuing good trend in China. And so I think that continues. We've had a very successful couple of weeks to start in May. So that carries. The U.S. trend continues to be very strong. As you can imagine, in the U.S., a big part of our business is some of our bigger customers that buy inventory. And so there was some of that, that carried into the month of April. And so I think May might look similar to April for our U.S. business, which is still a tremendous improvement from what we saw from Q4 and the start of Q1. So somewhere in the kind of down 45% to '19 but with a very, very strong trend. And like our retail channels, the stores start to open to normal hours, our e-comm really thriving and then these big wholesale customers, which are really moving to buy inventory now. And some of that shipped into April as well. So I think a continuing positive story. I think the overshadowing pieces, I think, India will be more challenging in Q2. As I said earlier, India in Q1 was down single digits to '19. And I think that's easily going to be down 50%, 60% for Q2, maybe even a shade more. And so on a blended basis, I think our May numbers might look very similar to what we saw in April because of some positives in one and then the pressure of India, which is a big market for our Asia business. I think Europe is really going to start moving, and I think it probably starts to show up in May. But I really think when you get to June and July, I know our own teams for Europe are excited. They can see the forward kind of momentum here. And so I think as we power into June and get into July, Europe will start to really add to the benefit here from a trend perspective, which is why my expectation for the quarter is, we're probably down 53%, 54% versus the 57% we were in Q1 because of the building benefit of Europe, Asia, China and U.S. continuing strong with a little bit of offset from India that will have an impact.

And just to add one other point to it, Dustin. It's -- this North America point, I think, is an important one because what we've seen so far in Asia, and Kyle touched on this in his opening remarks, so Asia, like China, you're controlling the spread of the virus through lockdown or basically not allowing a lot of travel, et cetera. Yet that market through domestic travel, and this was the point that Erwan raised as well, is still rebounding to the point that we're looking at -- we're down in the mid-20s in China compared to 2019. What I think is important about the North America market is because it's vaccination-driven, it's a very interesting trend line where once you get the population vaccinated, if you're looking at each sequential month, you're going from like, again, compared to 2019 levels, you were down mid-60s. Then in March, you were down at minus 50. Then all of a sudden, it's like mid-40s, and we feel like that's much more sustainable in terms of what happens because it's actually solving the root problem ultimately of travel. And then once you have a vaccinated population, the movement starts to pick up. And it's not just the travel component. It's also the nontravel piece as well. So that's why we spend a lot of time focusing on vaccinations rates because we feel that if you're thinking about it qualitatively, that's what's actually going to basically get us out for good from a sales perspective. And I think that trend line in North America is important in that regard.

And you can see Europe moving in that direction, right? So you get Europe moving to vaccination levels that are quickly catching up. So that by the time you get to end of August, September, you've got Europe in a vaccination level that really allows Europe to get moving again. And then there'll be a moment where Europe and the U.S. have travel opening, and I think that will be quite interesting. I was talking to the guy that runs our retail business for Tumi. And we're using France, for example, because he's from France. And he said, today, there are 9 flights a day between Paris and the U.S. And I forget exactly what he said. I think he said end of May, that's opening up to 35 flights a day from 9. So think about kind of just that one example of airlines starting to kind of opening up the channels again because they see that these markets are going to start to open up again. I think there's real building momentum for recovery here that we can see not only within our own sales numbers, but you can see in just kind of the messaging within the markets. So which is why we're feeling good about the second half.

Yes. So as the demand is picking up and you previously touched on the inventory restocking, could you sort of talk a little bit about that? What's the inventory level across, let's say, the U.S. or potentially Europe? And are your customer actually replenishing more like in April, just to start? And what's the view for the back half of the second quarter or even third quarter?

I'm not sure I fully understood the question. You got it, Reza?

So I think -- you talk about that your U.S. customer has been replenishing the inventory, right, in April. And that kind of helped on your sales trend in North America, and May is similar. So what's the -- what are we in, in that journey of the replenishment? Did we just start to replenish the channel or...

I would say it's just starting, right? I would say the energy and the vibe with our U.S. sales team and our customers is building, and customers are moving very quickly to ensure that they're in a position to capture the sales. So I would say April is just the starting point of real movement to ensure that the inventory is in our consumers, our customers' hands for their own consumers. And so I think those dialogues are actively building. Week after week, we're starting to -- because we can move in the U.S., we're able to have in-person meetings where a lot of that was kind of digital before. That's happening, and I think it will have a strong carry into the end of Q2 and clearly into Q3 and Q4. Customers that have maybe reallocated the space away from travel have -- are starting to allocate back to travel because they can see that coming as well. And this is -- to me, this is where scale matters. Because as that's happening, we're able to service these customers. We've maintained these amazing relationships with our suppliers, and our inventory levels are in the right places. And so as that turns on, we'll be able to service those customers. I think the only pressure point is some of the shipping challenges, but that's starting -- I think that will carry into the end of the year. But like things like port congestion in the U.S. are starting to clear up so that we're able to get the goods to our consumers. And our teams are working to be ahead of that curve because we have scale advantage to be able to be ahead. And so I think we'll be well positioned to capture it with our customers as they really start to dial up and capture the demand. So I'm feeling very, very good about our U.S. business on that front.

And so do you see the competition in both the U.S. market and the China market is really picking up? Like all the other smaller brands that you kind of talk about, they will still be there. But is the market being a little bit like too promotional in your view? Or everybody kind of still want their like cash and their margin back?

I think what will be the challenge, I don't want to kind of speak ill, and this is just a bit of my views on this, many of these folks are sitting in tough spots with their suppliers. They're in tough spots on inventory levels. I'm sure some have navigated better than others. There's promotion that we've seen across the industry in Q4 carrying into Q1. But take shipping costs, for example. Customers or smaller players that are operating under smaller margins, both on profit and gross margin, throw in the pressure of shipping, and they have very little room to run. Whereas because of our scale, we can kind of navigate through that. And so I think we'll be well positioned. But again, I don't think that we won't have competition. But often, the stronger players kind of navigate out strongly, and I think we're sitting exactly in that position. We haven't needed to look over our shoulders on the balance sheet. We've obviously stayed disciplined in everything we managed, but we're ready for the turn on. And all of our teams are ready for the turn on. And so when it happens, we're not going to miss this turn on, which is -- really speaks to our strength. So...

So lastly, just on the EBITDA margin for the second quarter. I think it's kind of good to be conservative in this uncertainty. But just I was kind of thinking about the recovery in China. It's doing pretty well and in the U.S., the replenishment you just talk about. So do you think that the bigger uncertainty now is just the India market? Or there's something in your mind? You think maybe second quarter can -- will still a little bit shy of the breakeven. And also, in terms of the bad debt provision, like in the first quarter, we still have like $19 million to -- $18 million to $19 million. And what's the view for the bad debt provision for the full year?

Let me just take both of those, Kyle.

Yes. Go ahead.

Yes. I was just going to say just, Dustin, on the India piece alone, I mean, just to directionally guide you a little bit. So India went from literally up double digits in March compared to 2019, so up double digits to literally in April, everything is shut down, and we're looking at like down 50%. And so that is a huge swing in that one market. So as we think about Q2, and you see them in the news every day, that's a big market that swung from one direction to the other. Now there's offsets to that. Obviously, North America is performing, and that's a huge market for us as well. And so there will be offsets to that. But that's why I think we're being conservative around Q2 and saying, look, if we're approaching breakeven, that doesn't leave us with any EBITDA margin. So I think we're better off being conservative, and saying, with looking at what the India situation is, let that play out. And obviously, the other wildcard for that is Europe, which Kyle has touched on. And then just on the bad debt, I think if you look at Q4 to Q1, we're basically in the same sort of number. Actually, the bad debt provision came out slightly. But the -- so I think you can assume that, that slowly starts to wind down over the course of the year. But I would just -- for conservatism, just assume the same number in your model that it's at that same number, and it doesn't worsen. Kyle, I'm sorry, if you wanted to add to that. I just thought I would just share those numbers.

No. No. Yes, you got it. It's exactly the right mix. I think the biggest wildcard is just the pace of Europe turning on, which is probably why we hold back a little. We've factored in India pretty heavily, in our view. And -- but I know Fabio and our team in Europe are getting highly energized as things start to head. There's still some work to go for Europe to really start to turn on. But all the indications are heading in the right direction, which is great. Okay. Any other questions?

Yes. This is William. We have a bunch of questions from people online. So just paraphrasing them, first one is on the recovery in international travel. The question here is, assuming that international travel doesn't recover fully by, say, 2022, what sort of revenue outlook are we looking at '22 and going forward? Then the next question has to do with gross profit margin, specifically, the raw material pricing pressure. Just for -- generally, investors would like a little bit more color around that. And finally, it's on the cost savings. How much of the cost savings are temporary versus permanent? And whether we can take the OpEx in first quarter '21 and annualize it for the full year?

Reza, do you want to take those?

Sure. William, do you want -- do you mind asking them one at a time, and I'll go through them one at a time?

Sure. Business travel. Assuming business travel doesn't return -- doesn't recover fully, say, by 2022, what sort of long-term impact on our sales growth do we see at this point?

Yes. So our expectation is, and we've said this previously, that we don't expect us to get back to 2019 levels. And it's primarily because we're looking at the IATA forecast on what global travel rebound is going to look like. So we feel that there's a -- despite the fact that half of our business is nontravel, we do feel that there's still enough of a correlation to the travel side of it with luggage that we need to monitor that. So as we think about next year in terms of revenues, our expectation is not that travel is going to rebound to the same levels. But we still expect that from a revenue perspective, that we will slowly start to claw back and will still be a discount of, call it, 25%, 30% thereabouts to 2019 levels, if not more, depending on how the back half of the year works. The important point for us is not so much necessarily the sales piece, but the fact that we're expecting that our EBITDA margin exiting the end of this year is going to be in the -- we said -- again, as we said at the last earnings call as well that it's going to be in the mid to -- even approaching the mid- to high teens. And so from an EBITDA perspective, we expect the rebound to be a lot faster for us. And I know, William, this was another one of the questions that you just asked. When it comes to the cost structure, rather than just taking the quarter and multiplying it by 4, I think the much better way to approach this is to look at our cost structure overall and say that $200 million of it is permanent savings that you can count on in your model. So again, taking the cost structure that we had coming into the year and improve it by $200 million. And the number that we -- that -- and again, I've said this in the past, if you think about where we were in 2019, so if we were just shy of EBITDA of about USD 500 million or about USD 494 million, if memory serves or thereabouts, our expectation is that when the revenues rebound to that level, that the EBITDA will be $200 million better than that. So that's the way that we think about the cost structure. Now yes, there are definitely some temporary savings even on the fixed side that continue. There are rent reductions that continue. There's still some furloughs that we see in certain markets in Europe that are closed that continue. But for modeling purposes and for conservatism, I wouldn't bake those into your numbers as you're looking at it. I would look at those rolling off. Now ever quarter I say that. And this quarter, it wasn't $200 million divided by 4 of savings. It was $87 million. So every quarter, we do over-deliver on that. But I would still say that if you're thinking about it from a normalized run rate perspective, that's the more conservative way to approach it. And I know there was one more question in there, William, that I...

Yes. Just some -- any additional color on raw material pricing pressure?

Yes. Yes. Actually, Kyle and I, we had a Board meeting earlier, and we were just talking about this as well. So far, that has not made its way into the number. What is working its way into our numbers is the freight cost. So freight cost is obviously something that's there. We're working with our customers in terms of passing some of that on as the year goes on. So the 2 component parts that I would say that we're focused on right now is in North America, the GSP renewal and then freight costs, which it's not just our industry, it's everybody. And that does have a material impact on margin. As it relates to raw materials, as we go to the back half of the year, we're going to work with our suppliers. And you could see that start to creep in. We haven't seen it yet because obviously, inventories that we have right now, we feel really good from an inventory position. Those were pre all of the inflationary pressures that you're starting to see. And the other thing that I would say is if you're thinking about us in the medium term, and we've said this in the past, if there is continued pressure on raw materials, what we would end up doing is obviously working with our suppliers on engineering the product, et cetera, to hit the right price point and the right margin profile. But as we sit here right now, that hasn't hit us. We do expect kind of the back half of the year some of that pressure to work its way in, but that's something that we'll try to manage through. Kyle, I don't know if you wanted to add to any of those.

Yes. I think you're right on the margin profile. We have a long history of managing that. The entire industry will be facing the same gross margin challenges with raw material prices, and we tend to lead the industry in kind of navigating that. So I have no worries there other than they're in front of us. So we're starting to work on it right now, which is great. I think from an outlook perspective, I think what you will see is an improving trend throughout all of '22. And my personal view is that we're kind of getting into full recovery mode sometime in '23. And if the full year next year might be down, let's say, 25%, when you factor in kind of the improving trend, your exit run rate from '22 starts to get back into a zip code. And again, there's a lot of uncertainty, but the world is looking to move again. And I think a lot will -- if you look at how much has been accomplished in the last 3 or 4 months, as vaccines really start to roll out, and you fast forward another 12 months, you can easily see a scenario where the world catches up to this. And people are really starting to move again. But it will have a trend, an improving trend throughout '22 is the way I see it.

Great. Thank you very much, Kyle. Thank you very much, Reza, for the -- for all of the comments. And I think it's a good time at this point to wrap up the call. So thank you, everyone, for taking the time to dial in tonight. And if you -- if anyone should have any additional questions, you know how to reach me. Thank you.

Great. Thanks, William. Thanks, everyone. Bye-bye.

Bye-bye.

Thank you for your participation. This concludes the conference.