Edited Transcript of 1910.HK earnings conference call or presentation 18-Mar-20 11:00pm GMT

Full Year 2019 Samsonite International SA Earnings Call

LUXEMBOURG Apr 6, 2020 (Thomson StreetEvents) — Edited Transcript of Samsonite International SA earnings conference call or presentation Wednesday, March 18, 2020 at 11:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Kyle Francis Gendreau

Samsonite International S.A. – CEO & Executive Director

* Reza Taleghani

Samsonite International S.A. – CFO

* Timothy Charles Parker

Samsonite International S.A. – Non-Executive Chairman

* William Yue

Samsonite International S.A. – Director of IR

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Conference Call Participants

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* Chen Luo

BofA Merrill Lynch, Research Division – MD

* Dustin Wei

Morgan Stanley, Research Division – Equity Analyst

* Erwan Rambourg

HSBC, Research Division – Global Co-Head of Consumer & Retail Equity Research and MD

* Kin Shun Ling

Jefferies LLC, Research Division – Equity Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Samsonite 2019 Annual Results Earnings Conference Call. (Operator Instructions) Please be advised that today’s conference call is being recorded.

I’d now like to hand the conference over to your speaker today, Mr. William Yue. Thank you. Please go ahead.

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William Yue, Samsonite International S.A. – Director of IR [2]

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Thank you, operator. Good morning, good evening, everyone. Today, we have our Chairman, Mr. Tim Parker; CEO, Mr. Kyle Gendreau; and CFO, Mr. Reza Taleghani, with us to go through our annual results. I’m sure everyone will have a lot of questions.

So without further ado, I will turn it over to Tim to make his opening remarks. Thank you very much.

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Timothy Charles Parker, Samsonite International S.A. – Non-Executive Chairman [3]

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Thank you very much, William, and this is Tim Parker, the Chairman. And I must tell you everyone that in a career of 40 years in business, I have never seen times quite as extraordinary as these. And I think the root of the difficulty is, essentially, everyone knows this is a temporary phenomenon, they can see a curve ahead of them, they simply can’t see the shape of the curve. And when the curve eventually flattens, they can’t see either exactly what the reaction of consumers will be. That said, we clearly have a challenge ahead of us. I must tell you that I have absolutely full confidence in the team at Samsonite to get through this. We’ve got a very experienced, globally distributed business. And as Kyle will explain, I think we are well armed to get through a very lengthy period of difficult trading. My sense is that, of course, this won’t be good for travel, but people at some point are going to start traveling again, and I do think that it is a company like ours that will win out in the longer term. And potentially, once the fog clears and — we can see a better environment, we will be in a stronger position.

I know many of the questions tonight will be about liquidity, about debt and about cash, and I and my Board have discussed this at length, and we are confident that our business is at least going into this in a particularly strong position and very well equipped to deal with whatever we see. And one of the things that’s apparent is that scenario planning, although it’s a good thing, the fact is that we have to assume the very worst, and we are planning for the worst, and we think that we’re still in a reasonable shape. That’s not a particularly encouraging message, but I think the key thing now is that our business can get through the next 12 months. And I think it is what we thought was going to be a 3-month phenomenon, it’s quite likely to be a 6 to 9 months and possibly longer phenomenon. But Samsonite, we’ve been around for 110 years, and we intend to be around for quite a bit longer.

And with that, I’d very much like to hand over to Kyle Gendreau, our CEO. Kyle?

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Kyle Francis Gendreau, Samsonite International S.A. – CEO & Executive Director [4]

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Great. Thanks, Tim. So this call, we’re here to talk about our 2019 results, but up at the front of our presentation, I’m going to give you a fairly good overview of what we’re seeing to date and just give you a sense for how we’re reacting.

But if I start on Page 4, just from our results highlights for 2019. Our sales were down around 1.8% last year due to headwinds in really 4 challenged markets: U.S., Hong Kong, South Korea and Chile. I think most of those are self-explanatory in what we’re seeing there. We also had a planned reduction in some of our China B2B sales in the first half of last year. If I adjust those out — and I’ll cover that later. If I adjust those markets out, the rest of our business was up around 5%.

Our adjusted EBITDA was down $100 million from 2018. Our adjusted net income was down $63 million, which was largely the EBITDA offset by lower interest expense. We had a very, very strong operating cash flow last year. We were up 30% from the year before, generating $406 million in operating cash flow. So the business continued to generate, and a lot of the initiatives that we’re driving to move the working capital were paying off from a cash flow perspective. And in response to that and just to our general strength of cash generation, our net debt decreased $203 million last year.

Our profit was down $100 million. $88 million of that profit came from a gross margin decrease, which was almost wholly driven by tariffs in the U.S. So when we think about the drop in EBITDA of $100 million, $88 million or close to 90% of that drop was really around the tariffs, and I’ll cover what the U.S. business did to do a very good job and continuing to do a job of navigating the impacts of that.

But let’s go through our initial assessment of COVID-19 in a little bit of detail just so you have a sense for where we are. As most businesses, we’re very focused on making sure the health of our employees and their families and our partners and customers are a top priority. So we are, as you’d expect, proactively following the recommendations and the preventive measures across the globe. It’s been a very fluid situation as everybody on this call knows. It started in China and Asia and has quickly moved to the rest of our regions.

We’ve done things, as you’d expect, store closures. In the U.S., we’ve closed our stores for 2 weeks starting this week. That is pretty much happening across the retail landscape in the U.S. It’s happened in Europe, across many of the countries in Europe over the last week or 2. And in Asia where stores were closed, primarily in China, those have actually started to lift. And so we see our stores in China — we’re probably very close to 90% open across China and Greater Asia.

As I said, it started in Asia. The day-to-day activity seems to be returning to a bit of normalcy in China where we see kind of recent — kind of reemergence as people are coming back into China and Hong Kong. And so there is a bit of a kind of border tightening within those regions. But generally, we still continue to see that — those markets starting to move but still under strain from historical run rate. And for sure, Europe and North America will step into the noise here.

From a liquidity perspective and just generally how we’re managing, we’ve moved from kind of navigating this to making sure that our balance sheet is — and our liquidity is intact. We had already started a debt refinance at the end of last year really to take advantage of pricing in the market. Part of that debt refinance was also stepping up our revolver from what was $650 million to $850 million and getting some lower interest rate and extending the tenure of our debt just naturally with the repricing.

Off the back of that and off of the uncertainty that we’re seeing in the markets and also the recent kind of uncertainty or volatility or potential volatility in the financial markets, we initiated approximately $800 million draw against our revolvers. That, coupled with cash on hand, which is roughly $400 million, gives us 1.2 million — or $1.2 billion of liquidity within kind of our — within our control, which I think is important. I think it was the right move to make this week given all the uncertainty and the lack of clarity on timing of the cycle. I will tell you that, that gives us significant capacity to navigate this. And so as Tim said, and my own view, even with downside — the worst of downside scenarios, we easily have a year’s worth of liquidity to navigate and more through kind of the crisis, in wherever this starts to turn the corner. So we’re in a very solid position from that front.

From a supplier perspective, we originally started to worry about suppliers in China, but what we really saw was a temporary closure or slowdown in our supplier distribution network. And so we saw factories closing for roughly 4 to 5 weeks, had a disruption in supply chain, but we now see that coming back in most of our factories. I’d probably say, somewhere between 80% and 90% of our factories are back up and running. That creates an interesting dilemma for us because our volumes drop probably quicker than the factories coming online. So we’re now doing things like pushing back orders to make sure we’re managing our balance sheet and our inventory at the right levels. And so we’re managing and working with suppliers to ensure that we balance that so that our own balance sheet and just the flow of goods lines up with when the business starts to recover. And as you know, we were pushing sourcing out of China for largely our U.S. business. We’ve made a tremendous progress there. That has helped a bit as China went into a bit of a slowdown, we had already started, and I’ll cover that in a few slides as well.

Moving to the next page. This maybe almost seems dated because we’re comparing against past shocks to the system. And so we’ve seen the business rebound very strongly from past disruptions. I think 9/11 was probably the biggest one for this business, which had a 6-month cycle of down and then a fairly quick recovery. SARS was really a one quarter down and then started recovering fairly quickly. My view is we’re probably in a 6- to 9-month trough before we start seeing recovery. And I’d probably, from what I see today, say it’s probably closer to the 9-month versus 6-month just given the uncertainty, but who knows? And so we are managing in the trough like lots of people are. There’s so much uncertainty on when it comes back. And we’re managing to that kind of worst-case scenario just to make sure that we’re managing both our balance sheet and the decisions we’re making so that we are positioned when it does come back, which it will, people’s propensity to travel will come back, that we’re in the best position possible. And we have a history for over 100 years of kind of managing through events that hit the industry.

We have the track record for navigating. The outcome of the virus remains uncertain. The timing remains uncertain, but I do think the actions that we’re seeing around the globe really do — will allow us to kind of come out of this in some normal time frame. But the impact will — the outbreak will have an impact on our performance, as I think all of you can understand, and we’re seeing across all businesses. We can navigate it. I feel very strongly about the team. Tim mentioned kind of the team. We’ve got this amazing global organization. We are able to act and move in a very active way to manage kind of cost structures and make the shifts in the business to navigate the noise. And as I just said, we’ve got a tremendous amount of liquidity to navigate the time frame that we’re talking about as well. So I feel highly confident in our ability to navigate through that. We have seen historic rebounds. The challenge for this is just the timing of the rebound.

Just to give you some sense for trading and what we’ve seen. So for the first 2 months of 2020, which are closed months, our sales had declined roughly 11% compared to last year with Asia down 20%, and within Asia, China for the first 2 months was down 30 — roughly 34%. And Hong Kong was down around 58% but was still under some strain anyways from the domestic situation in Hong Kong. If I give you a sense for what I think is going to happen for Q1, I think our Q1 numbers will be down somewhere around 25% to 30%. A lot has happened in the last 2 weeks, particularly with Europe and the U.S. And so we’re watching that very closely, but that range is what I think we’ll end up with for Q1 so you can get a sense for the month of March from that. And for sure, we see North America and Europe kind of in the zone. We start to feel Asia, particularly with domestic travel in Q2, can have a bit of a rebound from maybe the trough that they were in at the start of the year, particularly in February, but that’s uncertain as well. And so we’re watching that all very closely.

We have levers, and we’ve talked about levers all the way from our IPO days on levers that we can pull that generate some dramatic cash flow impact for our business. So we can reduce advertising, and we’re doing that in a significant way. We’ll generate over $100 million year-over-year in cash from the advertising pull, which will have 0 impact in the business on a go-forward basis. This is the moment where you can do that. We’re halting much of our CapEx in store openings. For a business that historically spent around $100 million, $120 million of CapEx, we will save $100 million of that historic run on the CapEx side. And so we virtually froze CapEx as we stepped into March and really started to see the impacts start to affect Europe and the U.S. And we’ve also — and the Board in our Board meeting earlier today has decided not to recommend a cash distribution to shareholders, which generates $100 million of cash as well. And so that — those 3 actions alone, before we get into really just tightly managing SG&A and making some bigger decisions around how we manage the business, generate over $300 million effectively in-year cash flow to manage, coupled with the liquidity levers that we have, make a big difference in how we kind of navigate the next 6 to 9 months. And so that really is — these actions, coupled with actions that we will continue to take, really will allow us to do that with plenty of liquidity.

So that’s the update that I’ll give you. As you know, there’s plenty of uncertainty. And so I’m sure we will have questions at the end, and we’ll answer what we can. But it will be hard for us to give predictions on where things are going, so — as you can imagine.

So we do have a business overview for ’19. So we’ll quickly move through this because I think that’s the appropriate thing to do.

So if I move to Page 9. We were actively managing through the challenging trading conditions in 2019. And the shame of this virus impact is we were going to show the world a really nice story in 2020 off the back of initiatives that we were executing and the headwinds that we were facing in 2019.

So we had, I would label, resilient sales. Our sales were down constant currency 1.8% this past year despite the headwinds, really, with these 4 big markets causing some strain. If I exclude those again, we’re up 5%, which still is below kind of the normal run that I think we can achieve but a very respectable sales growth number considering the world noises. We had big markets that were performing. China was up 10% last year, if I take out the conscious B2B adjustment; India was up a little over 10%; Japan, 5%; Indonesia, Singapore, double digit, very strong growth, 17% and 12%; and then mature markets like Germany, 7%; Russia, which I might label a developing market for us, up 19%; and you can see the rest, Turkey, 23%; Mexico.

We had very strong pockets of growth in markets that we would expect to have them. As I said earlier, we generated a meaningful amount of cash, we’re up over 30% year-over-year, really around the ongoing kind of cash conversion that this business is capable of doing, along with making very good progress on working capital, which Reza will cover shortly. We tightly managed operating expenses, and we took some initiatives. I’ll cover that in a second around managing the expense profile against the headwinds that we are seeing. We continued our Tumi expansion. I’ll show you some slides later, but our international expansion for Tumi was up a little over 10%, close to 11%. And our overall Tumi business was up, and that’s with the U.S. business seeing similar pressures as the rest of our North America business was seeing. So we’ll cover that in a second.

Our DTC e-commerce, very strong growth, up 16%, if I exclude the eBags business, which we are consciously — and we’ve been talking about this for the last year, consciously exiting third-party brands. But the underlying e-commerce business was up 16% and up across all regions, very, very strongly with this wonderful building momentum. And then we launched last week Our Responsible Journey, which is a much broader program on our ESG program. We’ve been talking about this for a little over a year now, but we’re really taking some bold steps on the ESG front, and I’m really excited and our entire business is very excited around what we’re doing on the ESG front, and I have a few slides on that as well.

If I look at regional growth, all regions delivered positive growth last year except for North America. And I’m not sure North America surprised anybody, but all regions delivered growth. If I adjust for the challenged markets, Asia was up close to 7%, up 1.5% reported. Europe was up 3.2%, and that’s with us correcting retail stores that we talked about — started to talk about at the beginning of ’19 or at the end of 2018. So strong performance with Europe. And Latin America was up 3%, but if I adjust for the Chile turmoil that we saw at the beginning and really at the end of the year in Q4, Latin America was up double digit, 10.3%. And within North America, we were down 8%, but if I adjust for eBags and Speck, which was — which had a softer year really around the iPhone launch that was a bit muddled, our North America business was down around 4.7%, which is really in line with what our Tumi North America business was down for the year, roughly the same number, which is really around traffic, and I’ll cover that in a second.

On Page 11, it just gives a picture of kind of where the dips were, the markets that caused the dip. And the rest of the world that was up close to 5%. Of the drop in sales, $158 million drop in sales, $113 million of that came from the U.S., $15 million came from Hong Kong. And Chile — I mean, in Korea, which has been under some strain and it accelerated a bit in 2019, was $23 million. So most of the decreases were around these 3 markets, and the U.S. was clearly the market that drove the dip in our sales really around inbound traffic, which is really the next page.

So the U.S. business sales down 8%, and it really was 2 things: it was increased tariffs that caused consumers and our wholesale customers to buy differently, and we saw a dramatic decrease in Chinese tourists to the U.S. And so when I look at that and I think about arrivals in the U.S., Chinese citizens, not counting people from Hong Kong, we’re down close to 7% in ’19 versus ’18. Our sales were down 4.6% if I exclude the eBags and the Speck piece of business that we talked about. Our wholesale sales were down 9.5%, and we’ve talked about this at the half. It’s really around our wholesale customers buying in a different way and watching kind of some of the traffic reductions that caused that.

Our same-store sales were down. If I exclude gateway — in [highland], our sales were down 3%, but our gateway, due to inbound traffic, were down 12.2%. Those are an important piece of our retail portfolio in the U.S. And as I said, our direct-to-consumer business across all regions were up. So our direct-to-consumer e-commerce business was up close to 13% in the U.S. despite the pressures, if that’s excluding eBags, which we were correcting.

The gross profit for the entire business was down 106% (sic) [106 basis points], but the U.S. gross profit — or gross margin was down 242 basis points, so 106 basis points and 242 for the U.S. That’s most of the dip in our gross margin. Excluding that, our gross margin for all other businesses was largely flat year-over-year, which speaks to the strength of managing our gross margin consistently.

We’ve taken actions across all regions. We’ve taken actions very strongly in the U.S. around resourcing, tightening operating expenses, reducing advertising and making some shifts in the eBags platform to continue to move eBags to profitability in a more aggressive way.

If I go to Page 13, I wanted to give a picture on the sourcing side. And so clearly, the tariffs had impacts to our business, 10% came in, in Q3 of 2018. At that moment, we — our U.S. business was sourcing from China, 82%. And as we moved in, we started to adjust. As we get to Q2, there was an additional 15% tariff put on luggage and bags. At that point, we were at 76% sourced. We were moving very aggressively by the end of the year. In Q4, we were 63% sourced, so almost 20 points lower than what we were at the start of the year. And our run rate exiting 2019 is 60% sourced from China. In our view for 2020, assuming normal course, we would be below 50% sourced from China. So really dramatic. If I went back to the end of 2017, we were almost 90%, a little over 90% sourced for the U.S. from China. So a meaningful shift, which will have a benefit.

We’ve also been reengineering products and renegotiating with our suppliers to manage margin. And we also took some price increases, which we talked about earlier in the year, to help offset the margin. So we’re well underway here of adjusting for the impact of tariffs in the U.S. business. And I’m quite happy with everything that we’ve achieved. We’re slightly ahead of the expectations or the plans we had visions for as we stepped into the tariff noise at the end of ’18. Our team has done an amazing job, and we’ve been ahead of our own expectations from a timing perspective.

If I quickly talk about the other markets, I think these are fairly self-explanatory, and we’ve talked about them at the half. Hong Kong clearly started to see some noise as we stepped into August, as we got into September, we could see our sales numbers down 41%, 46%. And as we got into November and December, those numbers were a little north of 50%. And really, that is driven by the unrest that kind of worked into Hong Kong, really starting at Q2 and really intensifying in the back half of the year.

From a Chile perspective, Chile had some ups and downs through the year, but then in Q4, they ended up with their own protest situation. And in Q4, our Chile business went down to 16% decrease year-over-year. We do have — we did have optimism for some recovery in Q1. And in Q1, our Chile business was closer to flat year-over-year. So there were some noise in Chile for sure. We’ll see how the rest of the year plays out as the world digests its current challenges, but Chile had gone through a cycle, still not perfect, but had kind of wrestled through what came up in Q4.

And South Korea continues to be a strain for all sorts of reasons. It was fairly consistently down for the year. Each quarter was down close to double digit with Q3 a bit more, Q4 riding in that zone. We’re addressing these. We’ve been focused on Korea — or South Korea for a while and making the adjustment within the cost structure to manage that business in a smaller scale. We continue to make good progress with our teams to optimize the profitability in our Korea business.

If I move to brands and I adjust for the 4 markets, all of our brands delivered very respectable growth for 2019. Excluding [challenged] markets, Samsonite was up 2.2%; Tumi was up 14%; American Tourister, very strong at 7.2% against a very, very strong last year; and our other brands were down slightly largely from the eBags adjustment that we’ve talked about. If I include the challenged markets, the only brand that was slightly down was Samsonite, and all other brands continued to deliver positive growth except for other, which is really eBags again.

I covered Tumi, continued to penetrate. On Slide 16, I give you a sense for the overall. For the year, it was up 10.7% for markets outside North America, 2% in total. And you can see the North America impact.

If you go to the next slide, I think this gives a very good picture of kind of where we’ve been from acquisition for Tumi. So you can see across all markets, we were delivering a very steady, consistent story to what we said we would do for Tumi. And so even North America was delivering a nice growth profile other than when we stepped into the tariff noise of 2019. Asia has continued to grow very strongly from where we started to where we were, $130 million in 2016, close to $250 million in 2019. And Europe, which we were settling down and starting to push the growth drivers really into ’18 and ’19, continuing to deliver a great story, 15% growth for Europe in 2019 constant currency. So — and we still see plenty of opportunity to push the Tumi brand internationally as we really get into stride in many markets. So I think a positive story there across the board for Tumi.

And as we said, we’re driving our direct-to-consumer business. And our DTC business, including stores and e-commerce, was up last year. Despite us being slightly down, our D2C business was up 1.1%. If I take the eBags correction out, we’re up close to 4%. Our, as I covered earlier, e-commerce was up 16% adjusted for eBags, very, very strong. And as a percent of sales, it’s up 40 basis points year-over-year on e-commerce. I think a measure that’s very interesting is when we look at the 5-year story in our direct-to-consumer, which is the last bullet on the page, 5 years ago, we were roughly 20% of our sales for DTC, and we’ll exit ’19 at — or we exited ’19 at 37% direct-to-consumer, of which our e-commerce piece has become a bigger piece over that time period.

And on Page 19, it really just shows across the regions here: North America, up 13%; Asia, 18%; Europe, 15%; Latin America, which is really just getting into stride, up 76%, plenty to go out there, and all of this very kind of strongly carrying into the start of 2020.

We did take actions on SG&A, and we talked about them earlier in the year. And so when I look at this simple page, and Reza will go through these in more detail, our sales were down $1.2 million (sic) [$158.2 million]. Our gross margin was down, again, 100 — around 100 — a little over 100 basis points. That’s $130 million drop in gross margin, largely tied to the U.S. tariffs. Our EBITDA was down $100 million, and that really speaks to the gross margin carry-through and then actions and initiatives that we were doing to offset the pressure of both the sales drop, which will have some carried through to EBITDA, but also the margin drop.

And so we really did take a good amount of actions. I have a summary here on 21 on actions that we’ve been talking about. I think we were guiding down this line at the half. We took actions across all regions. In Europe, we took some fairly aggressive actions on the retail side. We reorganized the retail management structure. We reorganized the Lipault business, which was a small business being run out of Europe. We changed the leadership in Europe, but — in the first half. And all of these things have played very nice for the Europe business as far as generating savings and allowing the Europe business to deliver growth while we were making these corrections in 2019. So really positive results. Fabio, who is running Europe, has stepped right back in and has done an amazing job within Europe. And then across all regions, we were cutting costs, both on head count and store closures, renegotiations everywhere where we could make the move to kind of generate some savings. In ’19, we generated — the actions we’ve taken generated annual savings of around $23 million, of which we saw $13 million in-year, in 2019.

As we’ve covered for eBags, we stepped up the acceleration. And as we move into ’20, we’re very aggressively structuring the eBags business to put it in the right place so that we can shrink the business but get the profitability in the right place. In 2019, the third-party brands were down $31 million year-over-year in sales. And we’re aggressively folding that eBags business into the rest of our business to optimize on the SG&A side and get that business in the right place. With these actions, we took some nonoperating expenses of roughly $16 million to execute initiatives. We also had some noncash charges totaling $86 million, half of which is stores, around store impairments and closures, and half was tied to the intangibles on the eBags business as we get more aggressive in integrating that business into our story.

On the advertising side, we did cut advertising. Part of it was managing really the tariff pressures in the business, but we cut it mildly. We cut $26 million of advertising year-over-year. We went to 5.2% of sales to 5.8%, and we thought that was the right thing to do given the margin pressures we were seeing in the U.S. This left us with plenty of advertising to drive our digital business, as you can see. And as you know, we’ve been shifting a lot of our advertising digitally anyway. And so the shift was done — or the savings was done without impacting the digital side of our business at all.

From an ESG perspective, I have a few slides here. I’ll move through them quickly. But we — this is a milestone year for us. And so a shame that we had COVID-19 in a year that happens to be our 110th anniversary, that was last week, actually. And so we’re excited about that. And we took that opportunity coupled with where we were with our ESG strategy to really announce our ESG journey, which we’ve labeled Our Responsible Journey. And it really covers what we’re focused on within the ESG front across the organization to deliver on this. And we’re out making bold statement last week in the media around you should expect Samsonite to lead this industry in sustainability. And I have 100% conviction and our entire team has 100% conviction in our ability to do that. We’re investing. We’ll talk about what we’ve done. We’ll talk about where our focus areas are. And we will lead this industry on this front. And I think it’s an opportune time tied to our anniversary, but also the whole organization is very much aligned here.

And when I think about what our focus areas are, it’s really around innovation, which you would expect. That’s what we’ve been doing for over 100 years. And it’s really around continuing to improve the product — lifestyle of our products, which has been an inherent kind of sustainable story for our business for a very long time, but really also starting to bring our real innovation and research and science into the materials that we’re using to produce luggage. And I’ll show you some examples of products that we’re doing. I’m quite excited on this front, our whole team are. As we think about kind of innovation and I think about what’s in our pipeline, I start to see well north of 50% of the things I’m seeing, closer to 70%, that are tied to sustainable materials and how we cycle that into everything that we’re doing, which will have a meaningful impact on this industry and on our footprint in the world.

We’re taking very active carbon reduction actions, as you’d expect, really around increasing energy efficiencies across our owned and operated facilities. We’re also very focused on reducing our emissions. And we’ve made — and when we launch and put our ESG report out in April, we’ll be talking about targets around getting to carbon neutral by 2025, 100% renewable energy by 2025 and really making amazing progress on our carbon action as the whole organization gets around that.

Another big piece of our story is our supply chain, which we’re focused on, and it’s really around making sure that we continue this historic practice of ensuring we’re working with the best suppliers, ensuring their ethical standards are in line with our expectations and really around responsible sourcing. And so we’re very focused on that front.

And then finally, on the people side, really making sure that our people are provided with the appropriate development opportunities and that we achieve an appropriate gender balance in our business. And people are one of our biggest assets. I’m sure I’ve said to many of you over the years that I really view this business with really 2 big amazing asset pools: these amazing brands that we’ve been allowed to run across the globe and this amazing group of people that really make Samsonite what it is. And this focus area within our ESG strategy is a big piece of what we’re doing to make sure that we’re developing and promoting our people as well.

Just quickly, from a product perspective, I won’t cover all these in detail, but we have a few slides on some things. And so quietly, over the last 3 years or so, we’ve been developing products incorporating materials. And really, I’ve got a spattering of things here. So one of the products that launched a few years ago in Europe and one of these earlier initiatives within this business was this NeoKnit line, which is really an amazing product that’s made out of 100% recycled water bottles, rPET. And it’s a product that is knit technology, which reduces the waste that you have in producing, and it’s also using Clean Chroma technology and how the dyes are applied to the material. And so it was one of the early launches within this front that really started to move the needle on what we can do with this material, which we labeled Recyclex and start to apply it to the rest of our business, and the products are interesting and beautiful as well.

More recently, the S’Cure Eco products, which we really rolled out last year towards the middle of the year. We call this yoghurt cup. This is one of the first products that we’re producing that’s made out of 100% post-consumer waste within a hard shell polypropylene case. And so we are very excited about this. We did this in collaboration with a recycler who asked us to do this. And we’re now moving very quickly to moving our entire S’Cure line over the next, I’d say, 18 months or so, maybe sooner than that into using recycled materials. And so we’re very excited about this, and it really starts to set some direction for what we can do on the hard side spectrum of the business.

The next page really shows 2 things. One on the right is the Tumi Merge collection. This is Tumi’s first full collection of recycled product. It’s a product that has luggage and bags that has really almost 100% recycled material. The outer shells of this are post-industrial recycled nylon. The inner is made from this rPET, Recyclex from the linings. Just the initial order in this diverts over 214,000 water bottles from the landfill. And it’s an amazing collection. If you are looking at it, if I didn’t tell you it was recycled, you wouldn’t know, and it’s really amazing. I’ve started carrying the backpack, and I think it’s a real good start to what you’ll see Tumi from a very aggressive way rolling out across the rest of its fleet.

The product on the left is called Theorym. This is going to launch in the summer of 2020. This is a U.S. product. And the reason I have it on the page is it captures a bit of everything that we’re doing from recycled materials and sustainability message. It is using 100% rPET or Recyclex. Both the exterior and the interior is using this. It’s using Clean Chroma technology, which is a dyeing process, which uses significantly less energy and water. It’s using Fuzion zippers, which is a zipper that’s meant to last. And not only are we using these zippers, but it also — we’re also selling the bag with a zipper repair kit, which is a very simple process. And often bags, when people are struggling, it’s around the puller that has an issue, and we’re — we’ll be selling that and start to incorporate much of what we do so that the customer, who can continue to send it back to us — we’ve got over 200 repair centers, but why not allow the customer repair something and send that with the bag when we sell the bag to you. And so I think it captures a lot of the direction that we’re going from a sustainability perspective.

The next page, just quickly, Asia with American Tourister is very quickly using — moving to putting 100% Recyclex as the liners in our full fleet of American Tourister. We’ll see that sometime next year. We have running changes all through 2020. Gregory, which is a very technical outside bag, and this bag is an amazing bag that’s incorporating both recycled nylons on the outer shells and the liner’s recycled polyester. We’ve done a lot of work with this bag to assess its own carbon footprint compared to if we’re sourcing and producing this bag with virgin material. And we can really assess the life cycle of this bag and see dramatic impacts to — the impacts to the environment with a bag like this. And you’ll see a lot more of this start to cycle into Gregory as well.

And the last bit I kind of covered, which is this Recyclex material. This Rapid zipper repair kit, which I think will start to work in a lot of stuff, and Clean Chroma, which I’ve already covered.

And then I — before I hand to Reza, just really recap. And despite kind of the headwinds that we’re looking and the whole world is facing, I think the key pillars on this page are really what gives me this — and our entire team the strong confidence in the fact that this will lead us out of the virus issue. And as the world starts to recover from this, these are the pillars that will drive this business forward, and we’re very excited about all these, we continue to be despite the pressures we’re seeing in the world today.

Travel industry will come back very strong. The world’s propensity to travel, albeit might be take a while to recover, is there. And I think we’re sitting in a very good place to capture that. We’ve put the marble here. This is our Golden Rule marble, which really speaks to our people and how we interact with the environment, how we interact with other companies and how we interact with ourselves. And that is one of these underlying cultural strengths of this business that will be a really strong piece of how we navigate and come out strong on the other side.

Our decentralized organization allows us to quickly react to local markets. If we are trying to run this business in one location with what’s coming around the world today, we’d be half as effective as what we are with this amazing organization that we have. And so that, coupled with really amazing design innovation teams around the globe, really is one of these amazing strengths for this business. We — as I said, we have this amazing portfolio of brands that are now allowing us to cover the full price spectrum and across categories, which really strengthens the kind of overall story of our business.

And then we will lead on sustainability. And I think that is a super strong message. And when we think about stepping into the next 100 years, the sustainability journey and what we’re doing with products and how we will change and lead this industry will be a huge piece of the pillars going forward as we move the business through to the other side of the challenges we’re seeing at the moment.

So with that, I’ll hand to Reza for financial highlights, and I’ll just come back right at the end.

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Reza Taleghani, Samsonite International S.A. – CFO [5]

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Thanks, Kyle. So I’m not going to go through the material that Kyle has already covered.

So just on Slide 31, very quickly, just to recap. As Kyle said, we’re down 1.8% constant currency on sales. The flow-through to adjusted net income is largely due to that as well as the gross margin pressure that was down about 1 point. So when we get to adjusted EBITDA, our adjusted EBITDA margin was down about 207 basis points largely because of the lower gross margin as well as the full year effect of some of the SG&A increases that we saw from the retail expansion that we’ve been talking about. When we get to adjusted net income, we’ve recovered some of that partially due to lower interest expense of about $5.8 million, which we’ll get into — we’ll have full bridges on the subsequent slides.

On Page 32, this will be the last time that I’ll be showing this. Over the course of this year, each time we’ve had results, we’ve basically shown the bridge between the 2 IFRS 16 changes. Very quickly, between the 2 on the left and the right, there’s a $227.9 million differential between adjusted EBITDA, excluding lease amortization and interest versus including it. And that’s all in Note 16 of the financial statements, which you’ll get, which will basically show you the breakdown of that, which is the IFRS lease amortization expense of $197.4 million and the lease interest expense of $30.5 million. But I think everyone should be used to looking at this on an IFRS 16 basis by now.

So — to Page 33. Let’s go through the financial highlights in a little bit greater detail. We’ve talked about the sales and the adjusted net income decrease of $63 million as compared to the prior year. Nonoperating expense of $16 million was related to profitability improvement initiatives. Kyle touched on that, but I’ll have a separate slide that gets into that specifically as well as the impairment that we took for the year due to some of the retail operations that we impaired as well as the eBags decision, which Kyle covered. Our effective tax rate for the year was 17%. However, that was artificially lower because there was a one — the Luxembourg tax rate changed during the course of the year. So if we were to adjust for that for a normalized basis, our operational effective tax rate was 26.9%. So I think we’re still in the same sort of range that we’ve said historically where we’ll be anywhere between kind of 25% and 28% given on the year in terms of the ETR that we’ve looked at previously.

On the next page, there was a very, very big focus on making sure that even though we have sales headwinds that we could still deliver good operating cash flow. I think we’re very proud that especially given what we — the actions that we took in Q4, we were able to be up 32% in a year when sales were down. So operating cash flow was $406 million as compared to $307 million in 2018 largely due to net working capital efficiency. We actually exceeded where we thought we were going to end up the year, we’re at 13.3% largely based on the back of what we did in Q4. We’ll get into this specifically when we get into the balance sheet, but 30 basis points favorable to December 31, 2018. So despite the first and second quarter going the opposite direction, we really recouped it by the end of the year, and we’re very happy with that.

Kyle mentioned that we dialed back on CapEx slightly last year, so we ended up at around $74.5 million as compared to a normalized kind of number that’s usually around between $100 million and $115 million. So we did dial back a little bit on CapEx. This year, we’re going to be reducing that even further just given the environment that we’re in. But it gives you a sense for us that we do have an ability to do that when necessary and continuing to operate the business effectively given the fact that we do have a largely asset-light model that we can look at.

Net debt, $203 million lower. So beyond our scheduled amortization payments, we took some of the operating cash flow, and as we have said consistently, our objective is to delever, and we did make payments on our Term Loan B, which improved the interest expense, as we talked about, but also improved our balance sheet flexibility somewhat as well. So we had $100 million further voluntary debt paydown that happened in Q4 of last year in addition to the other ones that we had done previously as well.

Speaking of the balance sheet, and I’m sure there’s questions around this, I will spend probably a lot of my time speaking on the balance sheet. So literally, on Monday of this week, we closed on a refinancing of our credit facilities. I think this is meaningful for a couple of reasons. In a pretty choppy environment, thanks to the support of our lenders, we were able to not only close but also to reduce our pricing as well as increase our — the size of our facility by $200 million as well. So our revolving credit facility increased to $850 million from $650 million. We reduced the pricing on the grid by 12.5 basis points. We pushed the tenor out by 2 years, so we don’t have any meaningful debt maturities for the next 5 years, which helps derisk the business somewhat as well. And we reset the principal amortization schedule. So that helps in terms of the mandatory debt repayments that we would have to do under the Term Loan A as well, all while maintaining our existing covenants. So I think all of this is net-net positive in terms of our balance sheet overall. So obviously, we’re very pleased for that. We’re, obviously, very thankful to our lenders as well for the support that they continue to show us.

In addition to that Kyle alluded to, just given the uncertainty in the financial markets and a lot of banks working from home and other things, similar to other people that you’re probably invested in, we have taken the decision to draw down 800 — approximately $800 million, it’s a little bit more than that, under our credit facility and placing that cash in our operating accounts in the various regions to make sure that there’s ample liquidity to operate the business.

We have well over $1.2 billion of liquidity. That is more than enough for — to go through the near-term as well as probably the medium-term challenges that we face. If you were to actually add up, just to do the arithmetic for you, cash at the end of the year was $462.6 million. Obviously, that’s the year-end number. We’re still north of $400 million as we sit here today. And we have a revolving credit facility that was untapped until we do this drawdown this week of $850 million. So we were around $1.3 billion, if you were to add those 2 numbers to be somewhat more precise around it.

I’m sure there are going to be questions around debt covenant, so I’m just going to get into the math of it right now. So we were in compliance at the end of the year. Our debt covenant as of December 31 was for leverage, for net leverage, so subtracting cash from the debt, is 5.5 turns. We ended the year at 2.63. So the way that I would think about it from a covenant standpoint is assuming the same debt level, so if the debt level will remain the same and even if we’re drawing down on the revolver, that cash is going into our operating accounts, so until we burn through that cash, it has no impact on net debt. So looking at the same debt number, if you were to take our EBITDA number and literally cut it by 52%, the breakpoint would end up being at $258 million is the headroom that we would have had at the end of the year. What you should be aware of is, in our credit agreement, the covenant starting now, which is the same as what we had previously, there’s a step-down to 5.25 turns max total net leverage. So again, I think we have headroom as we sit here today under that.

The second covenant we have is consolidated cash interest coverage. So we ended the year at 8.16x versus a covenant of 3. Again, I would say that there’s ample headroom there compared to where we are. And what that would mean is net interest expense could go up by approximately $104 million to $165 million of interest from the $60 million that we had last year. So it’s almost tripling in terms of interest expense before we would look at that. Now obviously, there’s different ways to think about these covenants. Obviously if EBITDA could come down or debt could go up, et cetera. But that gives you an idea in terms of the bookends that we’re dealing with in terms of covenant headroom right now.

Obviously, there’s a lot of uncertainty in terms of what the impact of COVID-19 is going to be. So we don’t know how this is going to shake out. But as we sit here today, I think we feel pretty comfortable both in terms of our liquidity position as well as where we sit in terms of covenants, but we’re going to have to continue to monitor this, obviously. And we do weekly, monthly and obviously quarterly when we have to submit our compliance certificate.

Moving to Page 36. Just to focus on last year, I think it’s important just to give you an outline of the impairments that we ended up taking. Again, this is the sum total of what we’ve been talking about for all of the various quarters. Just to give you the quarter 4 view because this will give you the total. In Q4, we took — on the store front, we took another $6 million of impairments on stores that brought the total store impairment number for the year to $38.4 million. In addition to that, we had another noncash — again, these are noncash impairments that we’re talking about. There was another noncash impairment of $48 million on the carrying value of the eBags asset. The reason for that, Kyle alluded to it earlier, we’ve been purposefully exiting third-party brands for eBags. We’ve taken a decision to accelerate that even further. So as a result of doing that, looking at the future cash flow profile that comes from that, the revenues end up being lower. As a result of that, it triggered an impairment. Again, we view that as — it commensurate in terms of writing down the trade name for eBags specifically.

In aggregate, in addition to what you see here, so just to give you a sense in terms of how we’ve been aggressively managing the store footprint as well as SG&A, we had impairments on 81 stores, 11 of them have now been subsequently closed. In addition to that, there’s another 79 stores that have either been closed or relocated as well. The majority of those are in Asia, but we also have about 15 in Europe, 8 in North America and 5 in Latin America as well. So we’ve been pretty aggressive in terms of looking at the store footprint as well, and that’s something that continues.

On Slide 37, about 90% of the decrease in adjusted EBITDA came due to the impact on our North America business that has to do with lower Chinese tourism as well as the impact on tariffs. And as we look at the full year effect of the other SG&A increase, that was largely due — and again, we’ve talked about this previously as well, due to the rapid expansion that we had in Europe as well as the growth that we purposefully have been doing in terms of the Tumi brand, which has been a success story for us. So just to give you a sense, in terms of the breakdown, we invested about $17 million, a little bit — $16.9 million, to be precise, on SG&A to support Tumi’s expansion in Asia. And in Europe, the SG&A went up by about 30.8%. Again, we had a very big Tumi expansion that was happening in Europe as well, but then there was a full year effect on some of the other actions that we had taken as well previously.

On Page 38, this gives you the bridge in terms of working our way over from the tax effect — the adjusted EBITDA number over to adjusted net income. Again, what you see on this page is $73.9 million of it is just the flow-through that’s happening from the adjusted EBITDA to net income. We did come out ahead by $5.8 million on interest expense. We had some hedging that we did and other things that were favorable to us as well as paying down our debt. And looking at taxes and other, there was a $4.8 million benefit as well in there.

I’m not going to spend a lot of time because I think Kyle’s done a lot in terms of going through the regional ones. So I’ll go through these very, very quickly. North America, I think the story is — the decrease was — there was a $92 million gross margin decrease, offset by the fact that we aggressively looked at SG&A. So there’s a $22 million offset on SG&A. The breakdown of that is in the box there, which shows that we reduced advertising by $11.4 million. And then the other SG&A, the $10.5 million as head count reductions that we ended up taking on the business that should have a benefit for this year as well.

In Asia, there was growth of 1.5% constant currency. China net sales increased by 10.1% if you exclude the China B2B. And even if you were to include that, China was still up 5.5%. And again, Tumi growth and e-commerce growth are the main drivers of that as well, Tumi up 8.7%. And again, there were some head count reductions in Asia as well that would have additional benefit for this year that are contributing to the adjusted EBITDA number.

In Europe, 3.2% constant currency growth. Again, just as a reminder, this is 3.2%. If you looked at 2018, 2018 was up 8.6% off the back of the American Tourister campaign that basically was up 39% in Europe. So I think we feel pretty good about the European performance overall. A lot of that was driven by Tumi, which actually did even better than our Asia Tumi business, increased by 15%, and the Samsonite brand and American Tourister also contributing as well. And again, there were SG&A savings that happened in Europe as well, which was the theme in all of the regions.

And then Latin America, last but not least, net sales growth of 2.8%. Again, if we didn’t have the Chile issues, it would have been in that low double-digit growth number, which we’re accustomed to for the region. But overall, we ended up with 2.8%. You can see the breakdown of some of the countries that contributed on the upper right-hand side with Mexico up 9.3%; Argentina, triple digits; Peru, Colombia and others as well.

The balance sheet. I’ve covered this a little bit in my opening remarks. But on Page 43, you can see — really, the highlights are on the right-hand side of the page. Very impressed with our net debt reduction, cash flow from operations and the refinancing. And then we’ll talk about inventories on the next page as well. We did have a $35 million improvement in inventory levels as well, which you’ll see on the next page, on Page 44. So inventory levels down $35 million. And again, the Q4 number here that you’ll see on the box on the right-hand side of the page, if you look quarter-after-quarter, when we were looking at the variance at Q1, every quarter, we started to chip away at it, and there was a really, really big push at the end of the year in Q4 in terms of writing our working capital. And I think we’re very happy with where we ended as a percentage of net sales, getting our efficiency back in line with — actually better than what we had in 2018, and our inventory days back down to 132 from 138. This is a constant focus for us. This is a theme that’s going to continue into this year as well.

Page 45. In terms of capital expenditures, again, we had a $33 million, almost $34 million improvement on CapEx as we dialed back some of the more discretionary CapEx that we do. We’re taking a very, very critical view of CapEx this year, just given the fact of the environment that we’re in. So we should be coming in well inside of that for this year as well.

I went very quickly through those. So I’ll turn it over to Kyle for outlook and strategy, and then we’ll open up for questions.

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Kyle Francis Gendreau, Samsonite International S.A. – CEO & Executive Director [6]

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Okay. So just real quick. Our long-term strategy remains strong. It’s really where I kind of stopped talking at the last moment, which is the pillars that really give me so much confidence in where we can take the business on a go-forward basis. These strategies haven’t changed. These are really around the well-diversified portfolio of brands that allow us to play at different price points and play across the categories, both in travel and nontravel, in a meaningful way.

Our focus on driving our direct-to-consumer, particularly our direct-to-consumer e-commerce business is paying off, and we see real continued opportunity to drive that business. Along with targeted retail expansion, we’ve been correcting some retail stores over the last 18 months, but we still see targeted retail opportunities across certain markets.

We continue to focus on investing in marketing. And so even though we trenched down the marketing last year slightly, it’s an important part of our story. And so the current challenge has us pinching that, but you should assume that we will put that back. It’s one of our scale opportunities to really drive our brands and tell our story. And so that continues to be a focus of ours.

This amazing kind of management structure, sourcing and distribution capabilities really allow us to drive this business at a regional level and really penetrate new markets and penetrate deeper into existing markets is a strong piece of our story.

We always talk about our investment in research and development, and that continues both from a lighter and stronger materials perspective, but really, the sustainability story and how we really start to incorporate that into so much what we’re doing. You’ll see these amazing products launching throughout this year. You’ll probably see more of it as we get into next year that will really tell this amazing story of where our kind of innovation focus is at. And it really ties into this overall ESG strategy, which is kind of built into the fabric of what we’re doing within the business, and it fits into the culture of who we are as people. So the strategy is very much intact.

I thought I’d end on near-term focus, which is a bit of what we talked about at the start of my presentation, which is obviously navigating this business through the current challenges with the COVID-19 virus, really around making sure our employees are safe, making sure that we’re managing the cost structure and working through the sourcing implications or the impacts from this. As I said earlier, we’re pulling the levers that you would expect us to pull. So significantly pulling on advertising, virtually freezing our CapEx to generate cash. And not paying a distribution to shareholders, I think, is in the right interest of all of us as we navigate this year.

And then not on the page, but really being super aggressive on making sure we’re managing the SG&A cost structure of this business. And so starting to think a bit more aggressively — not even starting, we’ve started a bit more aggressively on the SG&A costs in this business as we see these pressures and how do we manage that cost profile of the business to make sure that we continue to generate positive cash flows for the business.

And I won’t shy away from it. It’s very challenging in Q2. And really, as we get into Q3 and Q4, making sure that we’re in exactly the right position, so when this thing does start to move back, we’re as well positioned as we can be, both from the balance sheet, which we’ve already talked about quite a bit, and the cost structure of the business. And so our entire team is focused there.

We’re continuing this push on the sourcing structure of the business. And so it’s quite noisy out there, but we’re still managing through this kind of tariff push, I’ve covered that. We’ll be, for U.S. products, below 50% by the time we get to the end of 2020, I think that’s important.

And then most importantly, in the midst of this, as we’re all trying to manage our own families, our family here at Samsonite are these amazing teams that we have and making sure that we keep people energized and empowered to get to this long-term growth strategy. I talked about while we navigate some really turbulent waters that we’re not alone, the whole world is navigating. And how do you keep your team energy levels and focus so that when we get to the other side, which we will, that we’re in the best position to capitalize on that. And we should come out even stronger on the other side of this as the leading player in this industry, and our teams are very focused on that. I spent a lot of my time talking to our teams and making sure that we’re in the right frame of mind as we navigate through like the whole world is navigating through this.

So with that, I might turn it back to you, William, and we can go to some Q&A.

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William Yue, Samsonite International S.A. – Director of IR [7]

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Yes. Thank you very much, Kyle, and thanks Tim and Reza as well. And we can now open the Q&A session to people — dial-in questions.

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Questions and Answers

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William Yue, Samsonite International S.A. – Director of IR [1]

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Let’s see, we have, to start, Chen Luo of Bank of America.

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Chen Luo, BofA Merrill Lynch, Research Division – MD [2]

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So I’ve got a few questions. So the first question is on the business side. So last year, our net sales was down by 2%. Adjusted EBITDA was down by 18%. I understand it has a lot to do with the distortions from the trade war and all the tariff fees. And in January, February this year, we mentioned that sales declined by 11%. Can we also share the rough EBITDA trend during the same period? At the same time, just now, we also mentioned that maybe for Q1, sales could be down by 25% to 30%. And is that — in that scenario, what kind of EBITDA declines are we modeling at the moment? So this is my first question.

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Kyle Francis Gendreau, Samsonite International S.A. – CEO & Executive Director [3]

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We won’t disclose that. It’s a bit forward, and we’re still cooking it, to be honest with you, to see where we are. So — but it will have an impact. Sales drop in that range really tied to what’s happening with this rapid drop due to kind of the COVID-19 will have an impact. We don’t have kind of good visibility to that, but it would be too premature for us to give you a view to that right now. It will obviously have an impact is the way I would describe it. That’s what we’re working through as we think about navigating through Q2 and Q3 due to the pressures we’re seeing on the sales side.

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Chen Luo, BofA Merrill Lynch, Research Division – MD [4]

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Okay. That’s fair enough. And the second question is on the balance sheet side. So I think this is the current key market focus. Have we done any stress tests with regard to what kind of sales decline on an annualized basis could trigger the breaching of the covenants? Instead, we have reviewed — yes, go ahead, please.

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Reza Taleghani, Samsonite International S.A. – CFO [5]

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Yes. I mean, I can just repeat what I just said a little bit earlier. So I’m giving you the adjusted EBITDA decline. And again, it’s a question of what your — or our collective assumption is on where debt is. So the way that I would phrase it is it’s the end of the year — so I want to be very prescriptive and transparent with you about the way to calculate it. So our covenant on net leverage specifically at the end of the year was 5.5x, but that steps down to 5.25, so 5.25x now. So on a go-forward basis, it’s 5.25. And again, that’s the way that it’s always been in our credit agreement. So at 5.25, if you were to just take our year-end net debt balance, and again, it’s really important that it’s net debt. So if we talk about revolver draws, et cetera, as long as that cash is sitting, it nests between those 2. The net debt balance at the end of the year of 103 — $1,305.3 million, at 5.25, it could go — adjusted EBITDA could go to $248.6 million. That’s basically the point at which that covenant would be breached.

And you have to think about what that means. If there is a covenant breach, whether it’s on net leverage or interest coverage, we just have to go to our senior secured lenders who are basically our bank group and 51% of them would have to either give us a waiver or an amendment. I would like to think we have a very supportive bank group and that we would talk to them about where our business is and to sit around the table and say this is what it is. And I think everyone can understand if it were to happen, it’s due to these exogenous events of the virus. And we would have a discussion with them.

And again, in the middle of all of this, we literally just closed on the transaction this Monday. So it’s not like — we would like to think that they’re pretty supportive if they extended the tenor, reduced the pricing and gave us some incremental liquidity, et cetera, in the middle of this. And so that’s really the way that we think about the covenants. Obviously, we monitor it, we take it very seriously. But I would say sitting here today, we do have headroom in terms of where we are, but we’re going to have to see what happens to the ultimate business.

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Kyle Francis Gendreau, Samsonite International S.A. – CEO & Executive Director [6]

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It also has a lot to do with one of the levers that we’ve pulled that we’ve talked about. It also has a lot to do with what actions we take to manage the SG&A side. So there’s a lot of factors in kind of managing that, and you should assume the management team is laser-focused on that like a lot of companies that are in this situation. So we’re very attuned to the pieces and the levers that we need to pull and the work we need to do. The wildcard is the uncertainty of what the timing is of this. And so we have scenarios that we can manage through that. And then your guess is as good as mine on kind of downside scenarios. And I think the whole world is trying to sort through what that is right now. But we’re managing on the aggressive side so that we optimize on the SG&A side, so that we’re in the best position we can be in that front.

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Chen Luo, BofA Merrill Lynch, Research Division – MD [7]

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Okay. My third question is regarding the worst-case scenario in the case of a covenant breaching, just now I hear that there’s a lot — high chunk of waiver or amendment of the covenant. So let’s assume if there’s no waiver or amendment, what will be the worst outcome in the event of default? Will lenders ask us to accelerate the repayment of debt? Or is there any other outcome?

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Reza Taleghani, Samsonite International S.A. – CFO [8]

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Yes. I mean, theoretically, you could — the banks could end up saying, you have a default. But it would — in my experience, having been a banker for 17-odd years before this, it’s not like a bank likes to put a company to default typically. So I guess, if you’d ask me to go and look at our lenders and say do you really think that’s a likely scenario. I mean all I would tell you is from a company perspective, we think that we have headroom where we sit here today. And if there were to be any sort of breach, we would sit down with our lenders and have a discussion with them and try to figure out the best path forward. And again, just so I’m clear on it, the way the covenant works, it’s the bank group. So it’s your relationship lending banks are the ones that you’re negotiating with. It’s not Term Loan B. It’s not bond investors, et cetera. It’s your core relationship banks that you would be negotiating with, just to be clear on that point.

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Kyle Francis Gendreau, Samsonite International S.A. – CEO & Executive Director [9]

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I might just also say, one, we have this amazing history of kind of navigating these things. And so if we’re in the trough and we come up against it, our forward view will be the strength of this business and coming out on the other side against the landscape where many of our fragmented players are going to really struggle, and we’re going to be sitting in a very good position to come out. We’ve got the liquidity to navigate that, and the group will know that. And you’ve got this amazing management team, not me per se, I’m kind of just helping the whole group along, but this amazing organization that will be ready to get — to come back when it comes back. And that should be the way we’re thinking about that if we end up in a situation where the cycle was a little longer than what we think. That’s the downside scenario is it takes longer for the world to recover.

But we’ll be in the position to capture it when it comes back, and I think that’s really the story. And that’s not just Samsonite, there’s lots — the whole world is kind of navigating through this. And we happen to be tied to the travel industry, so we’re feeling it for sure. But everywhere I look, everybody’s feeling it and — other than maybe the grocery stores and the toilet paper makers in the U.S. because they seem to be booming right now. But jokes aside, we will be in a good place to come out on the other side. And I think that’s the way you have to think about it when you think about do we bump up into it or not.

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Chen Luo, BofA Merrill Lynch, Research Division – MD [10]

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Okay. And I want — a further follow-up question. So will the same covenant be applied to our senior notes?

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Reza Taleghani, Samsonite International S.A. – CFO [11]

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No. So the covenants are for the Term Loan A as well as the revolving credit facility. What your senior notes would have is basically in current space, it’s basically a cross-default. So that’s the way that those work. So you’re not looking at that.

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Chen Luo, BofA Merrill Lynch, Research Division – MD [12]

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Okay. That’s very helpful. And I hope that you can navigate through all the storm.

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Kyle Francis Gendreau, Samsonite International S.A. – CEO & Executive Director [13]

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We will. We, for sure, will. It’s just how long is the storm going to last. We will navigate it.

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William Yue, Samsonite International S.A. – Director of IR [14]

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Operator, moving down the list, let’s go to Erwan Rambourg of HSBC.

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Erwan Rambourg, HSBC, Research Division – Global Co-Head of Consumer & Retail Equity Research and MD [15]

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First of all, looking at China, I was wondering — so I think you mentioned 90% of the stores were open now. What’s your feeling about an uptick there in the next few weeks? How are you thinking about the business there? And are you confident that we’re not too far from stabilizing that business? Second question was around — obviously, there are a lot of questions around liquidity on your company, but you’re by far the leader of the industry. So I’m just wondering, without naming names, if you are seeing some pressures on your competitors, if you are seeing potential changes in the landscape and if — as and when you exit this period, will it be a cleaner space to work on? And the third question, sorry to come back on this, I mean I know you didn’t want to answer directly on the operating deleverage from a 25% to 30% sales decline, but we cover a lot of consumer companies where there’s a sort of rule of thumb that when you lose 1 percentage point in sales, you lose maybe 2 to 2.5 percentage points on EBIT. I’m just wondering if historically, you’ve worked on such a rule of thumb. And if you can help it without guiding but just to give an indication of what you’ve seen historically.

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Kyle Francis Gendreau, Samsonite International S.A. – CEO & Executive Director [16]

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Okay. I think I’ll cover all of them and then just pipe in on the end maybe. So we see China stores opening. We see almost all of our employees back to work, but the flow and the traffic is still a little low. And we’re probably at — might be something like 40% to 50% of what’s normal, maybe a shade more than that. So I do think there’ll be some comeback, but I don’t think it’s immediate. And so I think we’ll see a better April. And let’s knock on wood. There is kind of this weird dynamic that’s happening now with this kind of resurge and kind of some cases back in Asia as people are returning back to Asia. And so very quickly, over the last couple of days, we’ve seen some borders being a little tighter and quarantines. And so I think that will cause a little stutter step as we get into April a little. But I’m hopeful that domestic travel in Asia starts to move back, but I don’t think it’s back to the levels historically for a bit of time. So it’s — I don’t have a good visibility, but it’s clearly moving again but not at the levels that you’d expect. I think it will take a few more months before we start to get a better sense for where that is.

As far as challenges on competitors, there’s nothing that we can obviously see. We’ve seen some odd desperation kind of sales online for some of them, particularly in the U.S. as where I’m sitting. The themes seem to be around generating whatever cash they could get. All I would say is, and you know this, the industry we’re in is highly fragmented with many of the players with sales levels $150 million or less. And their capacity to navigate this will be dramatically less than ours. Many of them are venture backed or venture sponsored. And so those are challenging moments for them. But we shouldn’t — I think we’ll come out clearly the stronger player, but we shouldn’t underestimate that. We’ll still be in a fragmented market with plenty of players that we’re working against. So — but I think we will maybe have one leg up on the other side of it, particularly with our liquidity and just our general strength and focus in the organization.

And then your last question around kind of the math, I think when sales moves in normal ranges, down 1%, 2%, 3%, 4%, 5% kind of ranges or up those ranges, you get that kind of equation that you’re talking about. I think when you see sales numbers down 10, 20, 30, the math is a little different, right, because your ability to kind of flux requires more effort on the management team to make some bigger decisions to be able to keep you in some range. So I’m not sure the math just carries across that way, Erwan, because these bigger increments cause bigger strains, but what you should know and take some confidence in is that we’re being very aggressive on making decisions around how we manage this through, assuming a worst case, which puts us in a great position when it comes back, potentially even better than when we came out. And that’s the way we’re operating as a management team, so really aggressive action and thinking as we kind of move into Q2 as far as what we can do to sort out the cost to revenue equation in a faster way. So that’s, I think, the best way I can answer that for you.

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Erwan Rambourg, HSBC, Research Division – Global Co-Head of Consumer & Retail Equity Research and MD [17]

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That’s great. If I could just follow up on the — you’re talking about desperation from some and some discounting. I’m just wondering how do you envisage to get rid of excess inventories that haven’t sold in the west? Are you basically going to use traditional outlets? Or do you see other disposition channels to ensure that’s…

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Kyle Francis Gendreau, Samsonite International S.A. – CEO & Executive Director [18]

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Yes. There’s 2 things I’d say: one, historically, you’ve known us for a while, our stuff doesn’t go bad. And so we’re not so far forward on inventory that if things are stalled a bit and we’re selling later, we have to be heavily promotional to move things. We have some real scale advantages with our suppliers to manage through the throughput. And so I said earlier, our factories are back on. And one of the challenges, what we thought was a great thing when they were back on fairly quickly in China has shifted to, well, don’t get back on too fast because we don’t really want the orders that are coming in, right? And so we’re doing a lot of work with our suppliers to throttle that back in the right way, a lot of work on paying attention to which SKUs we for sure want to have here and pushing back on ones that we want to stall a little bit. And so one of the real tasks for the sourcing organization, and I think we have this amazing sourcing organization, will be how do they manage that throughput with factories that we’ve had relationships in many cases for 20 or 25 years, so that we’re both in the right place. And so as we’re doing modeling, we know that our working capital will be up, but it doesn’t necessarily mean that I’ve got a bunch of flawed stuff in my inventory. And we’re pushing back on the flow as much as we can so we can get that right. That’s a hard equation, but we’re very focused on, and our sourcing teams are laser-focused on it.

And the inverse of that is our customers. We’re also managing with our customers. And even though we have been pushing our direct-to-consumer, still 60-some percent of our business is with big customers. And so we’re managing all of that relationships from the factory all the way to the customer to get that flow right. So I don’t envision this kind of massive kind of inventory liquidation requirement or challenge. We might have a slightly higher inventory off the quick drop in sales. But we’ll navigate that and be in the right place as we get into the other side of this. And it will also allow us to maybe — and we’ve talked about this in the past, maybe manage some of our SKU counts that are across the globe and make sure we’re focusing on the runners as we kind of turn back on. And so we’re doing a lot of work, taking advantage of the opportunity to do a lot of work on making sure we’re focused on kind of key lines to make sure those are prioritized as it turns back on.

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William Yue, Samsonite International S.A. – Director of IR [19]

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Great. Moving to the next one, Anne Ling from Jefferies.

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Kin Shun Ling, Jefferies LLC, Research Division – Equity Analyst [20]

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I have a couple of questions. First, going to the covenants again, just assume that if we have breached the covenant and we need to do a waiver or amendment, if we need to step up a little bit on the interest rate, what is the best guess in terms of how much more we need to take on? That’s my first question. My second question is on the cash OpEx, the $1.5 billion that you had last year, and is there any way that we can either like divide it like between like fixed cost versus variable cost? Or if we just take a look at the 3 categories, distribution costs, advertisement and office G&A, maybe like for each of them, for example, back in like 9/11, like how can we actually put like advertising sales to 0 instead of like 4%, 5%? So how low it can get? And for G&A, is it like more or less fixed cost? It will be great if you can share some of these with us.

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Reza Taleghani, Samsonite International S.A. – CFO [21]

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Let me — why don’t I take that one. So getting back to the covenant. So your question is around the interest rate. So the way the interest rate works is — just to go through the capital structure for you. We have our bonds, which are just the fixed interest rate. So that’s 3.5%, and that’s in perpetuity basically until they’re due. What you’re really focused on is — the refinancing we just did actually brought our margin down. So we have a rating — it’s a ratings-based or leverage grid. So the way that our interest rate works is depending on our — whichever is the better for the company, frankly, whether it’s ratings-based or our leverage point. And we’re currently at LIBOR plus 137.5 on our Term Loan A and revolver. And then we have our Term Loan B, which is LIBOR plus 175. The revolver and the Term Loan A cap out. So the highest point on the grid is LIBOR plus 187.5. So that’s the — that’s — if you’re 4 turns of — if you’re above 4 turns of leverage, that would be the breakpoint. So that would be the highest — “highest” interest rate that would happen for that piece of the capital structure.

As it relates to your cash OpEx question, I’m going to have William probably get back to you just on the breakdown between the fixed and the variable and things like that. But you’re asking about advertising specifically. I mean advertising is a lever that we pulled back this year. And again, you have to think, the way that we do advertising, there’s really a few buckets. There’s coop advertising that’s with our wholesale customers, there’s advertising that drives sales on our e-commerce and then there is brand advertising. So when we look at advertising, really all of the brand-related advertising, so if you’re driving down the street and you see a billboard in an airport or things like that, all of that’s being pulled back right now, unless it was previously committed, but all of that, we’re literally pulling back. I would say, if we’re even to 1.5%, 2% of sales, we should still be fine. So…

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Kyle Francis Gendreau, Samsonite International S.A. – CEO & Executive Director [22]

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Yes. And that’s kind of the range that you should expect that we’ll take it to, around 2% of sales, which really is around bottom-of-the-funnel digital advertising. We can stall on the top-of-funnel digital advertising, which is this kind of brand building stuff and the stuff that drives traffic. And in the midst of all of this noise, we’ve kept all of our e-commerce business open. So we’ve seen the traffic come down from there, but they’re still generating sales in Europe and the U.S. We’ve kept those — the distribution center open for that. And so e-commerce business continues, and we can continue to drive traffic. And so that will be where we’re focused. Everything else, we’re going to kind of throttle back pretty aggressively. And as I said, it will generate in our models $100 million, I think it could be a shade more. We spent just around $200 million last year. I think that’s the way to think about it that we’ll be able to throttle a good amount back.

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Reza Taleghani, Samsonite International S.A. – CFO [23]

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And I actually have one other point to make because you raised about interest rate. Ironically, yes, we’ve drawn down on the revolver. But if you’ve noticed LIBOR has also plummeted. So the offset to that is our overall interest rate cost on the floating rate component of it has dropped. So that is a benefit to us as well for the course of this year. So you should just be aware of that as well.

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Kin Shun Ling, Jefferies LLC, Research Division – Equity Analyst [24]

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Right. I was quick — like trying to work out the interest expense that we will need to pay together with the revolver. Because the LIBOR has dropped substantially, is it correct that we are still hopefully at around like $60 million total?

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Reza Taleghani, Samsonite International S.A. – CFO [25]

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Yes, yes. In total, that’s probably an appropriate number to look at in aggregate. Again, it depends on what happens to our leverage. And again, there’s a maximum that we can go up on the grid. But with that caveat, yes. I mean our revolver today is priced at LIBOR plus 137.5. So you can calculate what that would be on an annualized basis.

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Kyle Francis Gendreau, Samsonite International S.A. – CEO & Executive Director [26]

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You’re doing some modeling. Now basically, if you’re going to model, I might range it up, it could go up as much as $20 million from the $60 million, depending on kind of rates and this drawdown on the revolver. So it’s not…

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Reza Taleghani, Samsonite International S.A. – CFO [27]

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Annualized.

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Kyle Francis Gendreau, Samsonite International S.A. – CEO & Executive Director [28]

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Annualized. It’s not such a meaningful impact. If anything, it’s — there’s a cost of kind of drawing that revolver. But that is a low cost as we manage kind of liquidity through the noise that we’re facing. Not enough to kind of change the needle on much of what we’re talking about.

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Reza Taleghani, Samsonite International S.A. – CFO [29]

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Yes.

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Kin Shun Ling, Jefferies LLC, Research Division – Equity Analyst [30]

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Right. And you also have a — let’s just call, the interest rate swap. That’s the one that you — Reza, you just mentioned, right? So…

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Reza Taleghani, Samsonite International S.A. – CFO [31]

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We do, yes. Yes. So we have — we’ve swapped some of our LIBOR as well. So again, if you look at it total now because we’ve drawn on the revolver, the majority of our debt now with the draw on that revolver will end up being floating rate. Actually, that’s something that we’re looking at as well. Given where rates are, do we look at swaps as well, but yes. The fixed rate portions of our capital structure, obviously, the EUR 350 million bond that we have and then what we’ve swapped under the term loans as well, which roughly, off the top of my head, I think it’s like $770 million or something like that.

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Kin Shun Ling, Jefferies LLC, Research Division – Equity Analyst [32]

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$770 million.

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Reza Taleghani, Samsonite International S.A. – CFO [33]

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Don’t hold me to that, but it’s in that area. It’s like in the mid-700s is what we’ve swapped.

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Kin Shun Ling, Jefferies LLC, Research Division – Equity Analyst [34]

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Okay. Okay. Got it. And final question on the GP margin. I understand that it’s a bit tough to give us any guidance moving forward. But given the fact that 50% of the sourcing will be in — will be outside of China for your U.S. market sourcing. So in that case, would there be any chance of savings? Or how should we look at like margins…

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Reza Taleghani, Samsonite International S.A. – CFO [35]

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Yes. It’s a really good question. So initially, when we were doing our forecasting for this year, we anticipated that, that would definitely help, along with reengineering some product that we’ve been working on as well to improve on the margin profile year-over-year. The difficulty with forecasting that sitting here with you today is who knows what happens to the sales environment. So yes, from a tariff perspective, we would have been better off in the U.S. But now you’re looking at a sales environment which is unclear on what the competitor behavior is going to be and how do we react to that. So that’s the part that’s a little bit unclear as we think about gross margin for this year.

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William Yue, Samsonite International S.A. – Director of IR [36]

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Great. We’re running close — we’re running a little over time right now, but we do still have a couple of people. So I think what we’ll do is that we’ll take maybe 1 or 2 extra people before — and then we’ll wrap up the call. And we’ll start with Dustin Wei of Morgan Stanley. Dustin? Thank you.

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Dustin Wei, Morgan Stanley, Research Division – Equity Analyst [37]

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So first is the first 2-month performance in terms of sales. Is that possible to sort of break down for the wholesale and the retail? Is that — take China, for example, the sales decline like 34% and is that fair to assume that the retail part of that would catch up with the wholesale in like 1-month or 2-month like time? So on the ground, the sort of the consumer demand, we should assume sort of more decline in that regard. Well, actually, you are running a more faster replenishment model to your wholesaler. So the magnitude of the decline in wholesale and the retail will be fairly similar.

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Kyle Francis Gendreau, Samsonite International S.A. – CEO & Executive Director [38]

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We — I’m going to just tell you what I — we don’t have the details in front of us. But what I was hearing from the guys is we saw retail come down fairly quickly. We ended up closing stores. We actually saw some of our institutional, even our B2B business continue in the midst of that. So in that China number, our retail numbers were lower. Our wholesale was actually running a little higher. I think — and e-commerce continued to be very strong, actually. So — but I think it will — to your point, I think it will blend together and be kind of in the same zone. But in those few months, we saw a little bit of one holding up quicker or continuing to hold up while the other one kind of saw some pretty quick drops. So I think that answers the question, but I don’t have the actual details in front of me to answer you with kind of meaningful percentages. But we did see it performing a little differently. E-commerce, as Reza said, continued to be strong. And — but I think as we move into kind of Q2, they won’t be so different. I think they’ll be as retail is coming back on.

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Dustin Wei, Morgan Stanley, Research Division – Equity Analyst [39]

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So if we use China market as the kind of the model as the trajectory for the other markets, which just start to lock down, maybe starting from this week or last week. Is that sort of — to assume the similar trajectory for that, the first month is very bad, but the following months will gradually start to pick up. Is that what you observe in terms of the curve now?

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Kyle Francis Gendreau, Samsonite International S.A. – CEO & Executive Director [40]

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If you and I could guess that, we would be heroes in the world because that’s a big question for everybody in why the markets are struggling and everybody is struggling because it’s not so clear what that curve is and how the rest of the world kind of takes their steps and act. So I’m not able to answer that. My instinct or the way we’re managing is it takes a little longer for the rest of the world. So we’re managing in a very aggressive way to make sure that we’re assuming it takes longer than what maybe we saw in China, so that we’re making the right decisions on the cost structure of the business, but nobody knows. I think that’s the wildcard. And the way that kind of frenzy is working in the media and kind of just the anxiety of people, I think one should assume it’s going to be a little longer than maybe what happened in China. But I don’t have anything to base it on other than my instincts, and nobody really knows. That’s the real challenge with all of it.

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Dustin Wei, Morgan Stanley, Research Division – Equity Analyst [41]

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Got it. One question is on the covenants. So in terms of the definition to calculate that net leverage, that 100% in line with what you disclosed as your adjusted EBITDA, right? So if there is any goodwill impairment, that should be excluded from the adjusted EBITDA…

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William Yue, Samsonite International S.A. – Director of IR [42]

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Dustin, we’ve done so much of that. And this is something that I can clarify with you off-line. So why don’t we just jump on to the next question.

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Kyle Francis Gendreau, Samsonite International S.A. – CEO & Executive Director [43]

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The short answer is, yes, Dustin.

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William Yue, Samsonite International S.A. – Director of IR [44]

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Yes, they’re all adjusted, yes.

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Dustin Wei, Morgan Stanley, Research Division – Equity Analyst [45]

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Yes. Okay. No problem. And one other question is that — so my understanding is that if you have enough liquidity to service the debt, is that sort of easier to get a waiver like based on your experience? I know a lot of negotiation will come into that…

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Kyle Francis Gendreau, Samsonite International S.A. – CEO & Executive Director [46]

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I mean it’s always better to have cash. So it’s — it allows you to kind of navigate and gives you the ability to do that. So I think it’s a very helpful place to be versus not having cash, that’s a pretty bad place to be. But I don’t think it necessarily changes. It really — the pieces will be around how do we navigate the business out, what is our forward view, which we will have some really strong legs to stand on. That will be the more important piece. It has — it’s not necessarily how much cash you have or not. But that’s an important piece when you kind of — if you get into that discussion around having the ability to navigate to the finish or the recovery that we’re — that we know will come.

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Reza Taleghani, Samsonite International S.A. – CFO [47]

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So — and again, I’ll just — I’m not a banker anymore, but I just spent a lot of years doing it. And you can talk to your Morgan Stanley colleagues, too. But generally looking at it, is there something wrong with the business? Like the purpose of a covenant is a sort of breaker, so you can sit at a table and say, well, what’s going on. When it’s purely external shocks that are happening, and again, I can’t project how the banks are going to react, they look at it and say, well, once the external shock goes away, the business is going to come back and be normal again, and we’re going to come back to where we were. So that’s the way that I used to approach it when I was on the other side.

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Dustin Wei, Morgan Stanley, Research Division – Equity Analyst [48]

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So last question is that, when it comes to worst scenario, is there any consideration to find some of the cornerstone investors to do some of the rights issue in the — if the situation is sort of really going very badly than what we are seeing right now?

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Kyle Francis Gendreau, Samsonite International S.A. – CEO & Executive Director [49]

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You’re too far forward for us to answer that. I don’t think that’s…

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Reza Taleghani, Samsonite International S.A. – CFO [50]

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I think rights issue is the purpose of raising cash. I mean I think if you’re looking at total cash amount and again, we went — we just came from a year where we were down on revenues, down on EBITDA and we still generated cash. So the rights issue is to solve a liquidity problem, not a covenant problem. Like, “Oh, my god, we’re out of cash, what are we going to do?” Yes, I don’t think we’re anywhere, anywhere near anything like that.

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Kyle Francis Gendreau, Samsonite International S.A. – CEO & Executive Director [51]

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I feel so confident in the capacity we have. Like when I tell you guys, you guys have known me for a long time, we have amazing capacity, as you’d expect for this kind of size business in this industry to navigate this. And maybe we end there, William, which is this high degree of confidence that I have and the whole team has. And we’ve got a lot of work to do, like every company does to make sure we’re making all the right decisions, which we are. We’re pushing ourselves very hard. But I have 0 concern around what the liquidity is in the business for us to navigate through this is the way to think about it.

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William Yue, Samsonite International S.A. – Director of IR [52]

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Thank you. And with that, we will end the conference call today. Thank you very much, everyone. And as usual, if you have additional questions, feel free to reach out to me. Thank you very much.

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Kyle Francis Gendreau, Samsonite International S.A. – CEO & Executive Director [53]

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Thanks, everyone. Appreciate it.

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Reza Taleghani, Samsonite International S.A. – CFO [54]

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Thank you.

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Operator [55]

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Ladies and gentlemen, that does conclude the call today. You may all disconnect. Goodbye.

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