Thank you for standing by, and welcome to the Samsonite Results Briefing Evening Conference Call. All participants are in listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to William Yue. Please go ahead.
Hello, everyone. Hi, this is William, Director of Investor Relations here at Samsonite. Tonight, we have our CEO, Ramesh Tainwala, as well as our CFO, Kyle Gendreau, joining the earnings call. What we'll do is have Ramesh give a few opening remarks, talk briefly about the results, and then we'll go into Q&A. Thank you very much. Now, on to Ramesh.
Thank you, William. I'm glad to present another set of very satisfying results. Our first half, our sales grew by 31.8%. Our gross margin grew by 39.2% from 52.3% to around 55.3%. The EBITDA grew by 27.2%, whereas the net income have remained more or less flat versus last year. If I look at the numbers and peel the Tumi number out of that, the core business constant currency growth was 7.5%, and the gross margin, excluding Tumi, also grew by 110 basis points from 52.3% to 53.4%, largely on account of bigger proportion of D2C business, also because of lower freight.
On our core business, the EBITDA grew by I mean, our overall EBITDA percentage, it grew by around 50 basis points, which is on largely due to increased advertising spend by 80 basis points from 5.5% to 6.3%. The adjusted net income during the same period has been flat, which is mainly on account of the interest payment that we had seen during the year. If you look at the slide seven, which we have in our deck, which will give you a more visibility into what was happening during the year. Our net income Tumi's contribution has been around $22 million to the EBITDA during the first half. Or not EBITDA, net income. Our interest payment net of taxes have been around $25 million.
More or less, it has been the same, which is on top of an additional advertising spend of around $60 million. Similarly, on the core business, we have dialed up our advertising by $17.5 million, net income has been remaining more or less flat. If I go back to slide five, if you look at, we have given some color to what has happened to the business. It has been another year of strong performance across all regions. Our North American business, excluding Tumi, grew by 7.4%. Asia had a somewhat moderate growth. I can cover that in more details later on. But 3.8%, mainly on account of softness in our business in South Korea, Hong Kong, and India.
Europe business had a very strong growth of 11.5%, excluding Tumi, and Latin America, 19.4%. Look at our brand. Practically all brand delivered strong growth. Samsonite grew by around 7%, Tumi 11.4%. These are comparing like for like numbers. American Tourister because of some softness on the Asian business, grew by only 1.3%, Speck 9.2%, and other smaller brand like Gregory, CamelBak all had very strong growth. In terms of the category, our travel business grew by around 6.5%, excluding Tumi, and including Tumi by 20.5%. Business grew by 2.5%, which is because of casualization, which we are seeing in our business category. The casual category grew by 19.3% excluding Tumi, and accessories grew by 8.5%.
During the same period, we had a very strong growth in our direct-to-consumer business. It grew by around 89%, including Tumi, and 20.2% excluding Tumi. Within that, our direct-to-consumer e-commerce grew by 126.7% including Tumi, and excluding Tumi by 73.9%. Part of that is also due to addition of eBags, which has contributed to, I think, one month of sales. Total e-commerce, direct-to-consumer e-commerce, including our direct-to-consumer as well as wholesale business to e-retailers, made up for around 10.5% of the total revenue or 11.1% excluding Tumi, which is up from 8.3% during the same period last year. During the first half, we also dialed up our advertising spend.
We spent close to around $100 million, which is about 6.3% of our sales or an increase of around 51% or $33.6 million during the period. Part of it was on the core business, the other piece was on the Tumi business. This was very much in line what we have been guiding. If you look at our numbers in 2014, we were always guiding that our AP spend would be in the region of around 6%-6.5%. In the period of year 2015 and 2016, they were tough years. While navigating the currency pressures, we dialed down our advertising spend to around 5%. Now, since we start to see better performance for the first half, but also we have a more positive outlook going forward, we have dialed back our advertising to around 6.3%.
Going forward, you can look at our A&P spend to stay within the region of around 6%-6.5%. That is a sustainable level of advertising that we intend to maintain over the next handful of years. I'll then ask Kyle to-
Yes
talk a little bit about the cash flow and some of the balance sheet items.
Yeah. Just lastly, the group generated very strong cash flows in the first half. We had operating cash flow of $153 million compared to $81 million last year first half. That's notwithstanding the $32 million or so of interest on the back of the Tumi deal. We're quite happy with the cash flow. A lot of that increase came from continued working capital improvements and very strong CapEx management. From the balance sheet side, we continue to deliver, as we said. On the back of the EBITDA growth and cash generation, our debt ratio is 2.88 times. I continue to see that deleveraging throughout the year. We're in a very strong cash position, cash of around $378 million, and we have $450 million of availability on our revolver.
Subsequent to the June period, we paid a dividend to shareholders, $97 million, up around 4.5% from what we did last year as well. With that, I think maybe we will open it up to questions and turn it back to the operator, and we're happy to answer any of your questions.
Thank you. If you wish to ask a question, please press *1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press *2. If you are on a speakerphone, please pick up the handset to ask your question. Our first question comes from Anne Ling of Deutsche Bank. Please go ahead.
Hi, management team. Just a couple follow-up questions regarding some of the guidance we mentioned in today's analyst meeting in the morning. Ramesh, I remember that you mentioned about a guidance of over the long term, about 20% operating margin. May I-- I just want to clarify if it is adjusted EBITDA that you're referring to, or it is adjusted EBIT or just headline EBIT number. That's my first question. The second question is on the North America business. If I back out eBags, is it correct that for North America, excluding Tumi and eBags, in second quarter, you report a roughly 4% growth, and then management is guiding for about high single digit in the second half when the American Tourister orders start to kick in, especially towards the following quarters? That's my two questions. Thank you.
Okay. The first one, you're absolutely right. When I'm talking about operating margins, I'm talking about adjusted EBITDA. Last year it was around 16%. Our guidance for this year, that because we have dialed up the A&P, it will remain in the similar zone of around 16%-16.5% or more or less same as last year. Over a period of time, now since we settled down in the A&P level, the additional operating leverage with the business will create over the next handful of years will allow us to navigate the EBITDA margin from around 16% to closer to 20% over the next handful of years.
Coming back to the North American business, as rightly said, if you peel out the eBags business, it's more like 4% for the quarter two numbers, and for the guidance for the rest of the second half is more like mid to high single digit.
Okay. Ramesh, the 16% that you just mentioned on the operating profit, sorry, adjusted EBITDA, this is for the whole group, right? In terms of the guidance for the full year, about.
Yes. Absolutely. Yes.
percent.
Which is same as last year.
Yeah.
As we said that this year, whatever operating leverage or gross margin improvement that we had, about 100, 120 basis points, all of that has been used to dial up our A&P to get more closer, anything between 6.2%-6.5% as compared to 5% last year. Going forward, A&P will remain in the similar zone. As a result, you will see that our, let me start using the word EBITDA. EBITDA will start increasing from 16%, which was in 2016 and which we are guiding will be similar in 2017. Going forward in 2018, 2019, 2020, it will start trickling up between 50 to 100 basis points every year.
Okay. That's adjusted EBITDA?
Yes.
Yes.
Yeah.
Got it. Yeah, thanks.
Once again, if you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. Our next question comes from Edward Leo of Morgan Stanley. Please go ahead.
Hi, Ramesh. Hi, Kyle. Just wanted to clarify also on the margin side. I think earlier in the day, we guided about the GP margin for Tumi to kind of get to the 70% level in the next few years. I just want to clarify what would be the adjusted EBITDA margin for the Tumi side for the next couple of years and for this year as well? Thank you.
As I give the depth, we're looking at the gross margin to trickle up to around 70%. Probably we'll get to that number at the exit run rate of Q4 of 2018. Whereas the EBITDA margin or adjusted EBITDA margin this year would be around 21%, and going forward, it'll get to more closer to around 24%, 25% over the next couple of years, which is very similar to the EBITDA margin that we have for our brand Samsonite. The pricing power of Tumi is in no way less than the pricing power of Samsonite. It will get to more like 24%, 25% in the next couple of years. This year it will be more like 21%.
21% this year. Got it. Thank you. Just if you could share in terms of the top-line growth for Tumi going forward, if you have any outlook for that. Thank you. For the next few years.
If you leave apart some of the recasting of the numbers, that distributor being taken back by us, and things like that. The core business on like-for-like basis, which will be more reflected in our 2018 numbers, because 2017 there is a lot of moving pieces in terms of we have brought back the business from the distributor. All that has an implication on numbers. Going forward, if you look at it, our North American business of Tumi, which is somewhat more matured business, we look at it more like a mid-single digit to high single-digit kind of a number for North America. Whereas Asia and Europe, which are getting started, will be more like, we can say low to mid-teens kind of a number.
When you blend everything together, we're talking about 11%, 12% kind of a number for Tumi over the next handful of years.
Great. Perfect. Thank you very much, Ramesh.
Once again, if you wish to ask a question, it is star then one. We will pause momentarily. As we have no further questions at this time, I'll now hand back the call to William Yue for closing remarks.
Seeing that there are no more questions, I'd like to thank everyone for dialing in tonight. As usual, if you guys have any questions whatsoever, do please reach out to us. Thank you very much.
Thank you. Thank you, everybody.
That does conclude our conference for today. Thank you for participating.