Good day, and welcome to the Samsonite International 2017 third quarter results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to William Yue, Director of Investor Relations. Please go ahead.
Thank you, operator. Hello, everyone. Thank you for taking the time to join our third quarter 2017 results presentation. With us today are our CEO, Ramesh Tainwala, and our CFO, Kyle Gendreau. We will begin with Ramesh and Kyle going through the results presentation deck. When we are done, there will be a Q&A section. Without further ado, we will have Mr. Tainwala begin the presentation. Thank you.
Okay. Good evening, everybody. Good morning, wherever you are. Third-quarter results from us. It is another quarter of very satisfactory results. The growth of net sales, I am on page number four, William Yue. The net sales on a constant currency basis grew by 18.7%, and excluding Tumi, it grew by 11%. The gross margin also saw an improvement, compared to last year for the same quarter, by 220 basis points, largely due to increase in Tumi's operations, but also there was an increase of 90 basis points in our core brand business, mainly on account of bigger proportion of direct-to-consumer sales. EBITDA also has shown an increase of 18.7%. Adjusted EBITDA margin decreased by 20 basis points, largely due to increased advertising spend of around 120 basis points. Excluding 120 basis points, the increase in advertising as a percentage of net sales, EBITDA margin increased by 100 basis points.
Net income also accordingly increased by 11.1%. This is despite an extra month of interest expense relating to Tumi acquisition last year, as well as increase in marketing expense. By region, North America constant currency growth was around 21.7%, excluding Tumi and excluding High Sierra. We are going through a reset strategy there. Excluding both of them, the constant currency growth of the core business in North America was 6%. Asia grew by around 3.3%, but excluding Hong Kong, South Korea, and India, which had some challenges, as we have mentioned during the first half as well, it grew by 8.3%. Europe, 6.8%.
There have been few markets where there were one-off things, which I'll cover up later on in one of the slides. Latin America grew by 22.4%. The key markets, I'm on page number six. You see here that most of the markets have done well. There are a few markets which have been circled here, one, two, three, four, five markets, which I can cover in the later slide, which is in page number seven. We're trying to give you more visibility into this. U.K., as compared to the first half, first half the business grew by around 13.4%, the third quarter has been a degrowth of 8.3%, which is mainly on account of negative consumer sentiment relating to Brexit. Germany, the first half grew by around 15.2%, whereas there's more moderation on account of one B2B business which we had last year.
If you exclude both of them, the third quarter growth in Germany was still very strong, 17.5%. Similarly, India, still we have the GST issue going on. I believe the GST has now been further reduced from 28% to 18%, which will have some consequences once again in the quarter four. Hong Kong retail environment continues to be challenging due to lower Chinese tourism. We were expecting that we will start to find a bottom in Hong Kong, it seems like that's not really the case. South Korea retail environment also continues to be challenging, mainly on account of lower arrival of Chinese tourists. A look at the sales, I'm on page number eight, by brand. All our brands have posted very strong growth. Samsonite core business grew by 3.3%. Tumi has, let us say, it got full year effect also.
We'll cover Tumi later on in more detail. American Tourister starts to show very strong growth, mainly on account of further penetration in Europe and North America and Latin America market, 9.3%. Speck is 2.9%, where there was, I would say the fourth quarter is anticipated to be stronger on account of the iPhone X launch had been delayed into quarter four. Gregory, 19.7%. High Sierra, it is one of the brand where we decided to pull back the brand out of all market other than the U.S., focus the brand mainly in the U.S. market. -6.9% is on account of that. We are also re-strategizing our entire High Sierra business, even in the U.S. market. I'm expecting that by the time we get into the next year, High Sierra should be back to mid-single digit growth in North American market.
Samsonite with a small piece of business, 61.5%. Lipault, Hartmann, most of the other brands also have posted decent growth. Excluding Tumi, which is page number nine, the constant currency growth was 11%, which is driven by North America business of 21.7%, Europe 6.8%, Asia 3.3%, Latin America, 22.4%. Of course, it has been also helped by eBags growth in North America. If you exclude eBags, the growth in North America was around 3.1%. If I exclude High Sierra also from this number, North America growth was around 7%. Gross margin has shown an improvement of 90 basis points, which is excluding Tumi. The advertising, as we have spoken in the past, we dialed up the advertising spend from 4.4% to 5.5%, which is the kind of level where the core business advertising spend will be maintained going forward.
As a result, EBITDA has been more or less in the same zone as were last year, 17.3%-17.2% considering that we also dialed up our A&P spend, we believe this has been a good result. Tumi, I'm on page number 10. The constant currency growth has been 13.3% on net sales. Gross margin showed a very strong improvement from 62.9%-68.9%, which is almost 600 basis point improvement. As we have been guiding, we believe that by the time we get into next year, the margin will be more like 70%, which is what we have been guiding right from the beginning when we acquired this business. The advertising spend has been increased, dialed up from 5.5%-7.1%. Yet the gross EBITDA, adjusted EBITDA increased from 18.2%-19.1% of the sales and a growth of around 19.3% in terms of growth versus last year.
Year-to-date September results. We're more or less in line with what we have been talking about. Constant currency growth of 26.7%. Gross margin improvement of 270 basis point, largely on account of larger contribution of Tumi, but also the core business. Also, the gross margin increased by 100 basis points. EBITDA has been more or less in the same zone, which is mainly on account of 100 basis point increase in the advertising spend. Net income, as we have told in the past also that net income, last year, we had a one-off advantage in terms of some tax adjustments. The net income has increased by 4.1% over last year. By region, which is slide number 13. Look at constant currency growth of North America.
All regions have grown very nicely except for Asia, where I'd spoken earlier, there are few markets, mainly India, Korea, and Hong Kong, which continues to see some challenge. The other markets, China has had a constant currency growth of 10.9%, excluding Tumi, also 11.7%, Japan 12.7%. Barring these four markets, rest of the markets have been delivering good results. We're also continuing to make strong progress in driving our direct-to-consumer sales. If you remember since our IPO days, we have been talking about 50/50 strategy. That means we wanted to increase our direct-to-consumer proportion of our sales to get closer to around 50% mark. As of now, year-to-date September, 32.1% of our sales are now coming from direct-to-consumer channel. Very strong growth. And within that, direct-to-consumer e-commerce, online sales increased from 3.6%-7%.
Total e-commerce, including our sales to e-retailers, also have been growing very nicely. It represents around 12.1% of our revenue now as compared to 8.6% for the same period last year. The second leg of our strategy has been to drive the non-travel business to make the business more resilient and become less dependent upon travel alone. Non-travel category growth was around 44.5%, and the non-travel makes up for around 38.8% of our year-to-date September sales compared to 34% year-to-date September 2016. Page 17 gives you visibility on our A&P spend. We have dialed up our North American advertising from 4.9%-6.2%, Asia also by 70 basis points, Europe by 70 basis points, and Latin America by 100 basis points. As a company as a whole, we have dialed up A&P to around 6.1%.
Going forward, you can look at our A&P to remain in the similar zone as we have arrived at now, which is around 6%-6.5%. Year-to-date September results, excluding Tumi's operations, which is on page number 18, constant currency growth of 8.8%, a strong gross margin growth of 10.9%, and adjusted EBITDA growth of 4.4%, mainly on account of higher spend on A&P by 100 basis points as compared to last year. Tumi, an extremely satisfactory result, constant currency growth of 12%, a big improvement in the gross margin. We have dialed up the A&P spend and as a result, the EBITDA has remained more or less in the same zone as last year. I'll ask Kyle now to cover some of the balance sheet items, which is on page number 20. Kyle?
Hi, everyone. Just quickly on the balance sheet. Balance sheet continues to be very strong. We saw an increase in our net debt of around $111 million. This is really larger in the back of us acquiring eBags in the first half of the year, and also bringing in the distributors within Asia for Tumi, spending around $65 million there. Our pro forma net leverage is still below three times, 2.94 to one, and we expect that to improve as we get into the end of Q4. If we look at working capital, we've seen a strong improvement in working capital from Q3 last year to Q3 this year. This was largely on the account of us bringing Tumi in line with our working capital structure, largely on AP. You'll see a very strong improvement in payable days, and that's really bringing Tumi vendors onto our payment terms.
Our inventory days are up a bit. Tumi runs with a little bit higher inventory, just because of the mix of their business. We're quite happy with where our overall inventory levels are at the end of the quarter. 12.5%, our target continues to be around 14%, we're consistently running better than target on working capital. To that, William, we can maybe open up to questions.
Thank you. We will now begin the question-and-answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Our first question comes from Mariana Kao of CLSA. Please go ahead.
Hi, management. This is Mariana. Thanks for taking my question. I have three small questions. Actually, number 1 is on Samsonite sales number by brand. I noticed that I think the Samsonite brand actually softened quite a bit into Q3. Just wondering if there's any weakness in terms of regional breakdown. I guess American Tourister on the other side rebounded quite nicely. Would that be mostly coming from Europe? I guess if you could give us any sort of update on American Tourister geographic breakdown at the moment. I guess lastly is just on the full year or more like FY 2018 to 2019 margin expectations. Are we still looking for 50 to 100 basis points of adjusted EBITDA margin expansion and more so GP margin we should expect from Tumi? Thank you.
Okay. On Samsonite, there's no big change into first half to second half and going into 2018. We've been always guiding that Samsonite brand business would continue to grow at about mid-single digits. That 3.3% is mainly on account of, as I said, there were some B2B business in Europe which has not been repeated. When you look at our Q4 numbers, we have some visibility into month-to-date November numbers and October numbers, the Samsonite would be looking more like a mid-single digit sort of full year basis and also in quarter four and going forward into 2018. Coming into American Tourister. American Tourister, I would say there are two things which is happening in American Tourister. We are now starting to get more distribution penetration in Europe, North America, and Latin America.
We are also starting to anniversary the, I would say in the first half and more particularly in 2016, the American Tourister numbers were soft on account of some of the challenges that we were facing in our Asian business. Those days, American Tourister was largely an Asian business, the online business was having a discretionary effect on American Tourister. Even if you look in the first half, if the number were looking like -2%, -3% kind of a number, the unit growth was still about 8%. I think now the business tends to get to a level where the further erosion of AUR or average selling price has kind of stopped. That is the reason why you see the American Tourister number looking to be stronger in third quarter.
Going forward, American Tourister should still be seen as a number like high single digits getting into double digits, mainly on account of, again, the distribution penetration as we will keep expanding in Europe, North America and Latin America. American business still has some more legs to go, to deliver high single digit kind of a number into fourth quarter and also into 2018. Coming to the EBITDA, for the full year, will be more or less in the same zone as where we are. Tumi, definitely, the gross margin will slightly move up further, which is more on account of Tumi, definitely. If you look at it, the third quarter, the gross margin was more like 68%, 69%, getting closer to the 70% mark where we wanted to be.
I think you will see some margin expansion on the gross margin levels for the business as a whole, where Tumi's contribution slightly increases, and also as a proportion of direct-to-consumer sales continues to increase. There would be some gross margin expansion happening here. Our A&P trend is more or less getting to the zone where we want to be. It's about 6.1%. I would say going forward, we would like to see it more closer to around 6.5%. The EBITDA margin expansion, I would say, let's say we are looking at 100 basis point expansion on the gross margin into 2018. Maybe part of it will still go in for dialing up the A&P from 6.1 to closer to around 6.5.
The other 40, 50 basis points will drop down to the bottom line, which is EBIT or EBITDA, as you would like to see it.
Our next question comes from Chen Lu of Bank of America Merrill Lynch. Please go ahead.
Hi, management. I've got three questions. First of all, based on the quarter-to-date trend, can you give us some color on the organic sales growth projection for Q4? Secondly, what's our growth outlook for Samsonite original business as well as Tumi business in 2018? Lastly, given the current discussion on the U.S. tax cut, what's our assessed potential impact on ourselves? Thank you.
Okay. The Q4 and 2018 is more or less similar to the core business. We're expecting other than Tumi to grow at mid-single digits, other than the Tumi business. The outlook for 2018 also is very similar to Q4 numbers. Tumi is expected to continue to deliver a double-digit growth in Q4, and we have similar outlook for Tumi also going into 2018. Coming back to the tax cut, it's very difficult to judge it. At this stage, there are lots of moving pieces. I would not like to speculate on what would be its impact. Probably you guys should know more. I can only say that a big part of our business today, almost 39% of our revenue, sits in North America, in U.S. more particularly. Almost about a third of our profits are coming from North America.
If there is going to be some tax cut in North America, and when it happens, we definitely would have some benefit.
Okay. Thank you.
Again, if you have a question, please press star then one. We will pause momentarily. As we have no further questions, I would like to turn the confer. Oh, I apologize. We do have a question from Raymond Ching of Optimus Capital. Please go ahead.
Hi, Ramesh and management. I got two more questions. If I look into 4Q by country, Ramesh, you mentioned that the Europe zone in this quarter was affected by the German, because of the B2B. Based on the order trend, what do you see the momentum into Q4? Also for U.S. side, what's your expectation again, given Speck seems to be very into Q4 with the iPhone? This is my first question. My second question is, can you elaborate more on what happened on the High Sierra, in terms of the impact on the backpack things, and how long is it going to last? Yeah.
Yeah. Okay. Europe, as I said, other than Germany, the B2B business, even Germany grew by around 17%. There's nothing wrong with the European business. Outlook for Europe is there that in Q4, Europe should be able to deliver high single digits, maybe slip into double-digit growth. Outlook for 2018 would also be, let's say, high single digits kind of a number, what has been the case for the full year for this year. Europe the business seems to be in a very strong shape. There is a little bit of element of Brexit, but one U.K. does not really vitiate our entire number for Europe. We still have a lot of legs to grow with the distribution expansion of American Tourister, the push of more non-travel in Europe, and also some core business, travel business also doing well nicely in Europe.
I have no worry on Europe. U.S., you're absolutely right. Tech number will come in very strong in Q4, whereas Speck, for the same reason, had a weaker number in Q3 because the shipments of iPhone 8 got delayed into Q4. Overall Speck number, when we start looking at it, we look at Speck to be delivering high single digit, double-digit number, which is very similar to our core business. There is a shift from third quarter to fourth quarter. On a full year basis, Speck will deliver high single digit kind of a number. Coming back on the High Sierra. High Sierra, to give you a little bit color on that, when we acquired this business, I think it was one of the first acquisitions that we had done. Actually, it was the first acquisition that we have done.
Our teams were, including myself, we're all very excited with the acquisition when we started to push out High Sierra on a global basis without adequate preparation. As a result, I must say that we did not find enough traction with High Sierra in market outside of U.S. What we decided somewhere in second half of 2016, that we will like to withdraw High Sierra from all other markets and first focus the brand in the U.S. market itself. Also, I know there were some one-off activities that we were doing with High Sierra, like High Sierra, our team was also testing out to get into outdoor apparel segment, by licensing arrangements or some shoes and things like that. We very quickly realized that that was not really our core competence area.
When you look at our High Sierra backpack business, core backpack business in North America, it is still solid. There's nothing wrong about that business. What has looked the negative number is actually coming in from, that we have decided to temporarily withdraw High Sierra from Europe, Asia, and also withdraw expansion of High Sierra into new categories, more particularly apparel and some outdoor shoes through a licensing arrangement that we're working on it. We want to focus High Sierra on first in North America and in the backpack segment. I must admit that acquisition of eBags will greatly help for High Sierra.
Another thing which was affecting High Sierra business, even in North America, was that traditional channels where in the past who were selling mainly High Sierra, where the outdoor channel, REI, and you must have read in the newspaper, many of those channels have been having pressures. The business, in the meanwhile, moved. The backpack business largely moved from traditional channels into online platforms. Now, we are trying. We are now starting to, post-acquisition of eBags, we are launching High Sierra now on the eBags platform. I'm very confident that in 2018, High Sierra should be back to growth very similar to our other core business in North America.
Okay. Thank you. Thank you, Ramesh.
Our next question comes from Aru Saigal of Nancy Capital. Please go ahead.
Hi, Ramesh. This is Aru Saigal here.
Sir, go on.
Could you please comment on your market share in different markets in the U.S. and Europe and in Asia? The reason I ask is because India is probably the only market where you have a listed peer, where we can see some numbers from a competitor, it seems like in the third quarter, despite all the GST issues, VIP was able to grow their sales by about 20%, excluding the effect of GST and excise duty, whereas you saw a sales decline. Just commenting on India specifically and also your market share in other markets would be very helpful.
Let's say our market share in U.S., Europe, and Asia. I'll talk separately about a few markets like India and China, where you're absolutely right, we have been under pressure in terms of the market share. Rest of the countries, I would say U.S., Europe, Asia, barring India and China, we have gained some market share, mainly on account of further push of American Tourister into Europe, U.S., and Latin America has allowed us to become a more active player in the mid segment of the market, which we were not previously operating with. Coming to Asia, there are two markets where you're absolutely right, we have lost some market share. One is India, the other one is China.
In India, we lost market share mainly on account of, it is not a phenomenon which is only to do with GST now, but it is starting from 2016, where the competing company that you just mentioned, which is a listed company, have been more aggressive in trying to operate the lower end of the market. Also the market has been kind of a trading downward. We decided not to engage the lower price point by bringing down or dragging down the American Tourister brand into the lower end of the segment as the market was trading down. As a result, we did not trade down, but the market still traded down, and we lost some market share.
Our thinking was that we will launch another brand called Kamiliant, because my own personal thinking was that once you bring down the brand, it's very difficult to bring up the brand. Like the company that you just mentioned about India, at one point of time, let's say 10, 15 years back, their brands were engaged in Samsonite. Now there is no Samsonite for engagement for them. Also, if you look at the price point that they operate largely are not even addressing the price point where American Tourister is there. We have launched the brand Kamiliant primarily to gain back market share in the countries where we have seen downward pressure on the price because of aggressive moves by the competitor in one such country.
As a result, I think when you launch a new brand, it takes some time before you will be able to gain back the market share that you have lost. We were very jealous in protecting our profitability. If you really look at, we do not have that much visibility into our profitability for India specifically. I can tell you that profitability for Indian business at the operating margin level is almost three times of VIP. We did not bring down our prices. We did not want to get into a bloodbath. As a result, we did lose some market share. Coming back to China, it's another market where we have definitely lost some market share. There, the reason has been slightly different.
The digitalization, let's say the movement of business or online channels gaining market share at the cost of more traditional channels like department stores and the retail, where we used to have, at some point of time in China, we used to have a market share of close to around 50%-55%. When the market has moved to the online channel, the competitive landscape has changed. In the past, when there were small guys were there, it was difficult for them to sell on more traditional channels like department store. You need to have manpower, you need to have the infrastructure to really deal with them on a more credible way. Whereas when you are an online channel, you can launch your brand or your product very easily. If you look online, China also had almost disciplinary pressure.
If you look at our business in China, in year-to-date 2017, when our business has grown by around 7%, the unit growth in China has been 15%. 8% has been the AUR erosion in China, and there was a similar erosion in China last year. In China also, when we are trying to protect our profitability, China, again, we are launching Kamiliant now, but it takes time for us to gain back some of the share which we may have lost or we have lost. We've recently done some market study, and we know that we have lost some market share at the lower end of the market because we did not follow the way the market was going down or there were disciplinary pressure on the pricing.
As a result, I believe that we lost some market share in China, and we also lost market share in India.
Okay. Thank you.
Our next question comes from Edward Lu of Morgan Stanley. Please go ahead.
Hello, Ramesh and Kyle and management. I'm just trying to better understand the impact on the financials from taking direct control over some of these other markets for Tumi. I think it probably helps to some certain extent on the GP margin improvement of 600 basis points from last year to this year, as well as some of the sales growth as you convert some of these wholesale ASP to retail ASP as you take back some of these markets. Can you just help us better understand how much of that kind of GP margin improvement was coming from these changing the mix from wholesale to retail? And if you can maybe share some color on what that mix is and how that mix would look three years down the road in terms of wholesale versus retail.
Let me put it like that. The margin expansion that you see in Tumi is only part of it, and a smaller part of that is coming because of this conversion from distribution to direct market. The markets that we have now going direct, they were not that big. There were not much of sales which are sitting there. If you have a 600 basis point improvement in the gross margin, I would say it is partly to do with less promotional in North American markets. We have been doing less promotion in North America than was done in the previous year, pre-acquisition. About 100 to 150 basis point expansion could be seen as because of going direct.
I must also say that every time when you buy the distributor, the immediate effect of the distributor buyback is margin erosion because you are buying back the inventory at the price which you have sold inventory to them. Most of the distributors were carrying about, let's say, five to six months of inventory. The immediate impact is there that you buy the inventory at the margin where the margin was booked in the year before that. The current margin expansion that you're seeing is largely because of a less promotional base, some of our sourcing efficiencies, also Tumi is able to now ride on our freight contracts of Samsonite and things like that. When you look at 2018, our Tumi gross margin will look more like 70% plus kind of a level.
Which will be when you will start to have the full impact of going direct in Asia. The negative effect of buying the inventory at the price at which we have sold inventory in the previous year will also be let's say, mitigated. The third is that we are also now trying to, let's say, make their entire supply chain primarily on the logistics side, also make it more efficient. All that will start to have an effect more in 2018. Even today, largely the product, Europe is starting to get their goods from the Orient into Europe and shipping it out. In Asia, unfortunately, because of one of the virus attacks from one of our service provider, Damco, we could not make that change. Still the goods were going to U.S. and coming back to Thailand and getting shipped to Asia.
I think our target is that first quarter of 2018, all these things will be behind us. You'll see our gross margin getting more closer to 70% plus basis. That's the time when you will have the last leg of improvement in the gross margin being reflected in our numbers. Coming on the EBITDA margin, definitely to me, as the gross margin moves up, we did dial up the A&P spend. On a longer period basis, the Tumi A&P spend will stay more closer to around 6%-6.5%, which is very similar to our core business. The Tumi EBITDA improvement you will see will be more rapidly going on a positive side of 20% already in 2018 and going forward.
Understood. Thanks for the color on the margin side. In terms of the sales growth, I think you just guided double-digit growth, if I hear it correctly. Is that talking about low to mid-teens growth for Tumi for the next few years?
Low teens is what Why?
If you break that down to new store opening, how much would that contribute to the top line for Tumi?
Let me put it like that. The Tumi North America business would be more like mid-single digit to high single digit kind of a number. There is no major door expansion which is happening yet. We do open 4, 5 doors, and there are 1 or 2 doors we close. It is not on account of any door expansion which is anticipated in North America. Whereas, in Asia and Europe, where we are, 2017 has gone by in trying to strengthen the supply chain and getting the fundamentals right. 2018 onwards, we'll start to see a door expansion kicking in Asia and in Europe more particularly. Our target today is that we may add about 25 odd doors, new doors, in Europe and Asia over a period of 2018.
Europe and Asia definitely will be able to deliver more like high teens getting into even 20 kind of a number because we are starting with a small base and we are adding new doors there. When you blend everything together, Tumi is more like low teens kind of a number. When you blend all the regions put together is what you have to look in 2018.
Understood. Great. Thank you so much, Ramesh.
This concludes our question and answer session. I would like to turn the conference back over to William Yue for any closing remarks.
Hello. Operator, can you just check with the callers again to see if there are any more questions before we go into closing remarks?
Certainly. If you would like to ask a question, please press star then one. We will pause momentarily. It seems we have no further questions at this time.
Thank you very much, operator, and thank you everyone for taking the time to join the conference call tonight. Thanks again to Ramesh and Kyle for the presentation. As always, if you have any questions, feel free to contact me. Thank you very much, everyone. Goodbye.
Thank you.
Thank you, everyone.
Thank you. Bye-bye.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.