Welcome to the Samsonite International third quarter results conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session. At which time, if you wish to ask a question, you will need to press the star followed by the number one on your telephone keypad. I must advise you that this conference is being recorded today, Monday the 28th of November, 2016. I would now like to hand the conference over to your first speaker today, William Yue, Director, Investor Relations. Please go ahead, Mr. Yue.
Hello, everyone. Welcome to the earnings call for Samsonite's 2016 third quarter results. Today, we have our CEO, Ramesh Tainwala, as well as our CFO, Kyle Gendreau, with us to go through the presentation. At the end of the presentation, there will be a Q&A session. Without further ado, I will now pass the call to our CEO, Ramesh Tainwala, to begin the presentation. Ramesh, thank you.
Hi, everybody. Both me and Kyle here once again with you. We are very glad to present our third quarter results. As I hope all of you can see the presentation. The net sales increased by 22.8% year-on-year on a constant currency basis. Excluding Tumi, which we acquired on August 1, 2016, net sales increased by 7.9% on constant currency basis. This, as compared to our first half results, whereas the sales have increased by constant currency of 4.1%. At that point of time, we had guided the market that we feel that the second half would be more hopeful than the first half. Gross margin increased by 26.5%. The adjusted EBITDA increased by 25.2%. Excluding Tumi, the adjusted EBITDA margin was flat versus last year. The margin has increased from 17.3%-17.7%, which is more on account of the Tumi numbers.
If you exclude the Tumi numbers, the numbers are more or less same as was in 2015. Adjusted net income increased by 4.1% year-on-year. Excluding tax-affected interest expenses associated with Tumi acquisition, the adjusted net income increased by 21.8% year-on-year. Profit attributable to equity holders decreased by 41% year-on-year. Excluding tax-affected acquisition related costs and tax-affected interest expenses associated with Tumi acquisition, the profit attributable to equity shareholders increased by 23.5% as compared to the same period in 2015. If you look at in the next slide, on page number four, all the third quarter net sales by region. Asia, excluding Tumi, grew by, on a constant currency basis, by 3.7%. North America grew by 9.8%, Europe by 9.4%. Latin America by 26.2%.
These numbers, when you compare with first half numbers, Asia has been more or less in line with what has happened in the first half. First half was also 3.7%, whereas we have seen a strong update in our North American number. The first half was 0.5%, has increased to 9.8%. Europe has been more or less in line with what was in the first half as compared to 8.6%, it's 9.4%. Latin America, where we are gaining traction because of our investment in retail as well as American Tourister, the push strategy which we are implementing in Latin America. The third quarter result, the growth has increased to 26.2% as compared to 13.6% in the first half. Overall, it has been a good performance across all geographical regions. Go to the next slide. The third quarter net sales by the key markets.
You see the U.S. business have seen a growth of 10%. I'm talking most of the numbers excluding Tumi numbers. This, when you compare with the first half, the U.S. was 0.7%, this has seen a stronger growth and rebound in the third quarter. China was 0.4% as compared to that in the third quarter has been 8.1%. Korea has been flat in the first half as well as in the third quarter. India was first half was 1.1%. As compared to that, India has done 8.1%. Likewise, you have the numbers for other markets as well. The third quarter net sales by brand. Almost all our brands have delivered a strong result. Samsonite, which is our biggest brand, has grown by 7.6% on constant currency basis. This, compared to the first half, was 2.7%. Tumi is coming in for the first time.
American Tourister, which was +2.3%, have de-grown by 6.1%, primarily because of some pressures that we have seen in the entry price point level in few specific markets, which are India, China, and Korea. In China and Korea, we have seen a decrease in our TV home shopping business. The right way to really look at American Tourister number would be to combine it together with the Kamiliant number, and then we will see that American Tourister is also more or less flat versus last year. High Sierra 1.1%. Speck had a spectacular third quarter because of the iPhone 7 launch. It has grown by 56.7%. Gregory has continued to grow well, 20.4%. Lipault, 88%, Hartmann, 19%, and Lladro. Tumi performance in August and September, because these are two months that we have included in that, has grown by 15.6%. That's August, September 2015.
These are the numbers that we have got from Tumi's internal management reporting, have grown by 15.6%. If you exclude, because Tumi Japan was not consolidated with the Tumi numbers in 2015. If you peel that number away, excluding the Tumi Japan consolidation, the growth has been 10.5% as compared to 0.8% in first half of 2016. The EBITDA for the period October and September has been 18.7%, which is 19.9% of the sales. The integration of the two businesses have been very satisfactory. 2016 results highlights year to date September. On a constant currency basis, the year to date September sales grew by 10.6%, excluding Tumi. The sales have grown on constant currency basis by 5.4%. Excluding Tumi, the gross margin has improved by 40 basis points to 52.8%, to more on account of channel mix and a slightly higher proportion of direct to consumer sales.
EBITDA, excluding Tumi, margin is down by 10 basis points due to higher expenses from new stores, partially offset by higher gross margin and lower advertising as a percentage of net sales. Adjusted net income as a percentage of net sales was down by 50 basis points due to largely $10.1 million of tax affected interest expenses related to debt financing of Tumi acquisition. Excluding the tax affected impact of financing the Tumi acquisition, adjusted net income was up by 6.7%. Year to date September net sales by region. Asia grew by 3.7% excluding Tumi, including Tumi by 7%. North America have grown by 3.6% excluding Tumi, Europe by 8.9%, and Latin America by 17.2%. In the next slide, you have year to date number of some of our key markets. U.S., 3.8%, China 2.6%. South Korea has been more or less flat versus the previous year.
India by 3.2%, Japan 13.4%, Germany 11.7%, Hong Kong has still continued to degrow by -14.2%. Hong Kong and France are two markets which year to date September also have shown a degrowth of 14.2% and 8.3% respectively. I now request my friend Kyle to take you through the rest of the slides including balance sheet, working capital, and the Tumi debt.
Okay, everyone, good evening. If we go to the next slide, balance sheet. The summary balance sheet for just the month end of September. I think we all know that the debts that's in the book, our net debt position is a little under $1.7 million. Our cash position is very strong at $313 million. A big chunk of that is the Tumi cash that came on board as we acquired the business. You can see our outflows for CapEx are in line with expectations, and we also had a dividend in July that most of you should be aware of. From a cash net debt position, we're in a very good place, probably slightly ahead of expectations. The working capital is slightly higher than what our target of 14% is.
That was expected, we're running at 14.3%, I'll show you on the next slide, largely due to the initial impact of Tumi. As we quickly get Tumi onto our platform for payables, and just the way we manage working capital, I expect us to be very close to or below target by the end of the year. Total borrowings, as we know, is $1.925 billion. That includes Term Loan A, Term Loan B, and I'll cover where we are with that on the last slide. Let's go into the working capital slide. We need the same for the slide. There we go. Our end of September working capital, we're running 14.3%, as I said. You can see in a few of our buckets we're slightly higher. Inventory days have gone from 112 to 126. That's largely the impact of Tumi.
Our payable days are down slightly, again, impact from Tumi. If I adjust Tumi out of our net working capital, Samsonite is running 13.8% for the period end of September, so still below our targets. As I said, we will quickly fix the payable days with Tumi. We've already started. Vendors were expecting that. Inventory will take us a few more, probably another quarter or so to get that in line. We will be managing that as well. You should expect us to be below our targets by the end of the year, if not Q1 of 2017. Moving to the next slide. Sorry, my webcast is moving faster than I am. Just an overview of the acquisition facility.
Again, I think most of you know this, but just as a recap, I thought it was a good time to talk about what we've done since we've closed. We have a Term Loan A, $1.25 billion, LIBOR 275. The first step down on that is at 3.0 times, which I think we're going to get to very quickly. Our Term Loan B, 675, and interest rate LIBOR, 25. We are coming up for a shop call in February. We'll be looking at Term Loan B and opportunity to do a little about it with Marcus. Our is $500 million.
Pardon the interruption. This is the operator speaking. Just to let you know that the quality of your line has deteriorated.
I think Kyle's line was slightly bad. If there's something specific which is coming up, we can cover up in the question and answer session on the debt. I'm sure Kyle will come back. Kyle, your line is still not clear. William, are you there?
Yep.
Yeah. I think we should continue and get into the question and answer, and then Kyle will reconnect.
Yes. Why don't we go to Q&A? Operator, can you open the line to questions?
Certainly. We will now begin the question-answer session. If you wish to ask a question, please press the star followed by the number 1 on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press star followed by the number 2. We will now take our first question from Mariana Kou from CLSA. Please go ahead.
Hi, management. Good morning, and I guess good evening.
Good morning.
Thank you for the presentation, congratulations on a very strong set of results. I think my question is more on a few markets. I think during the presentation just now, you mentioned that U.S., China, and India got a pretty good rebound, even excluding Tumi. I think U.S., on the results announcement you mentioned that Speck got some new products that got a bit of a push in Q3. How should we think about more on the kind of sustainable growth rate for those three markets, U.S., China, and India? Thank you.
Okay. Hello? Yeah. Okay. Thank you, Pat. U.S., the growth has been 9.8%, which is a strong rebound. We definitely believe that the quarter four numbers also would be in high single digits. We continue to see a traction of small numbers. If you look at our like-for-like growth numbers, for Q1 we were -7.6, Q2 was -3, Q3 has come in at +1.7. We must also factor in that we are anniversarying a weaker second half, which is also to some extent helping North America numbers. I believe that Q4 also would be number would be more or less in line with what you have seen in Q3. We can say high single digit kind of a number. Coming to China, which also has seen a strong rebound at Q3 is 8.1% as compared to 0.4%.
Quite honestly, the explanation is almost similar to what I gave in U.S. Our outlook for Q4 for China also is that it should be able to deliver high single digit, more like 8%-10% kind of a growth number in Q4. Our current visibility into the numbers gives us that kind of a confidence, which is also getting benefited because the second half was weaker in 2015. Coming to India, which is the third market which you raised, Q3 had seen a strong rebound of 8.1%. Unfortunately, because of the current demonetization, which has kind of a little bit affected the retail sales because of the disruption in the cash flow of many of our retail customers, which will have some impact. I think the outlook for India would change for Q4, which has nothing to do with whether the general trend was any different.
It is more on account of what has really happened in last a week or so since the announcement by the government here to demonetize high denomination currency. I believe that when you get into the first half of next year, we should be able to see a high single digit kind of a growth number in India continuing.
Thank you.
I'm back, Ramesh.
We will-
Hi, everyone.
Yes. Thank you.
We will now take our next question from Richard Cooper from CLSA. Please go ahead.
Yes. Hello all. Thanks very much for the presentation, as always. I just wondered if you could comment briefly on any highlights from the brand development other than Tumi. I'm thinking in particular of brands like High Sierra, Gregory, Speck, I'd be interested in hearing about, and Hartmann. Secondly, you mentioned earlier in the call that there had been a shift towards direct to consumer, and I was wondering if you could just give us a bit more focus on that.
Yeah. Okay. Among the new brands that we have spoken during our first half result announcement also, we do see a traction as we are able to get additional distribution in place. Quite honestly, the growth, I would say, because the numbers are small, it looks to be a nice numbers, the +38%, +20% and things like that. I would say that we are nowhere near where the potential of any of these brands. One of the reasons where we have been handicapped in the last couple of quarters has been our inability to put enough marketing resource to push this brand out in new markets where the brand awareness or the brand equity of many of these brands are still very, very limited.
As we start to now prepare our business plan for 2017, we are estimating or we are really budgeting an additional resource to be committed behind this brand. I would believe that in the next year, if something doesn't really go wrong, we should be able to see continual growth with most of these new brands. Speck is particularly getting benefited because of the iPhone 7 launch. That is why you see a strong number coming from Speck. I must admit that most of these brands which you see are still largely limited to the home market or in addition to the home market, one more market. The Speck numbers are still, most of it is the North American business. High Sierra is still largely an American and Australian business, though it is very much our intention to really push this brand out in new markets.
When you want to really push out the brand into new markets, you need to put a disproportionate amount of advertising or the marketing resource behind them. That has been a little bit of a challenge. We have not been able to do it for last couple of quarters, and I'm hopeful that 2017, we should be able to give a little bit more push to these brands in other markets. The numbers which you are seeing here are primarily because we are getting better and better in terms of the product strategy, but not much has been achieved in terms of distribution expansion, which we would like to achieve hopefully in 2017 and year thereafter. If you don't mind, what was the second question? I just forgot.
You mentioned a favorable mix in the shift towards direct to consumer. I was just wondering if you could give a little bit more color on that. Anything specific?
Yeah. On direct to consumer, we do see a very, very strong growth coming from practically all markets from the e-commerce. Direct to consumer, we have two proportion, we can say brick and mortar part of the business and the e-commerce. The e-commerce has seen very, very strong double-digit growth numbers from every single market that we are operating in. Whereas the brick and mortar also is seeing, let us say, an improvement, I would put it like that. As I said, in North America, like for like is now in Q3, we are at +1.7%. When we started the beginning of the year, quarter one, it was -7.6%. Europe was always in the positive territory. Latin America was +7.1%, in Q3 it is +13.2%.
The only markets where we haven't seen, let us say, a major improvement in like for like direct to consumer, let's say, like for like brick and mortar sales is South Korea, which is still somewhat challenged, and Hong Kong, where we have seen that the negative numbers are lower negative numbers, but they are still negative. I think other than Korea and in Hong Kong, where we haven't seen much improvement, but all other markets, even brick and mortar direct to consumer also have seen, let's say, business moving into positive territory in practically all of the markets.
Do you see Hong Kong starting to bottom out now or prospective in 2017? A number of other retailers have reported have said that they sense that it's not getting better, but it is bottoming out.
I wouldn't say it's bottoming out, but I would say that the bottom is visible. If you start to really look at the numbers now, in quarter three, we are at -11.5%, whereas when in the first half it was -15.6%. The numbers that we are getting into quarter four, we can say it is more like -7%, 8%. It hasn't really bottomed out. One can say that when we really started the year or the second half of last year, it almost looked like the bottom fell out. It was -20%, -30% kind of a number. From -20%, 30%, you are getting into -5%, it looks like the bottom is visible.
Thank you.
Hong Kong, I must say, it's a very small piece of our business. It does have an impact on our business that's largely a retail business. Even it's a very small part of our overall business, but it sometimes has a material impact on the profitability because at one point of time it was our most profitable part of our business, and because it's largely retail and the cost structure of retail being fairly fixed. The profitability, which used to be in 30s kind of a number, I'm talking about operating margin, has now more like in mid-teen kind of a number. That has a material impact on the profitability.
Okay. Thank you.
We will now take our next question from Erwan Rambourg from HSBC. Please go ahead.
Hi, Darren. Congratulations for the quarter. Three quick questions, please. I understand your indications on what Q4 is going to be doing in terms of the U.S. and China. With the exception of India probably being affected by the demonetization, is it fair to assume that Q4 could be roughly in line with Q3? I had one question for Ramesh and one question for Kyle. For Ramesh, looking at Tumi, as you've taken back the business, how do you think about the possibility of taking back countries that were dealt with by partners previously? Given that you have a lot of countries you could take back in Asia and in Europe notably, how does that make you think about 2017 for the brand?
Maybe for Kyle, just looking at the P&L, and the fact that you have many acquisition-related costs in Q3, how do we need to think about those potential one-offs for Q4 and next year? Thank you.
Okay. The quick answer to the first two questions. For Q4, you're absolutely right. The outlook for Q4 is similar to Q3 with the exception of India. All the markets seem to be in similar territory as was Q3. Coming to Tumi distribution take-back, we are making very good progress. I'm hopeful that quite a few of the major markets, we should be able to start operating them directly early 2017. It could be as early as quarter one as well.
Thanks.
I'll leave the third question to Kyle, yeah. Kyle?
Okay. For one-offs, as we think about one-offs, the majority of them have happened in Q3, obviously, tied to the deal. What you'll see for one-offs in Q4 and a bit in Q1, maybe a tail end into Q2, is just the last parts of our synergy plan. There'll be some severance that you'll see in Q4. As we get into Q1, Q2, we'll be switching over their SAP system onto our platform, and there'll be some costs there. Much smaller, obviously, than what you saw in Q3. I would say in the kind of $5 million-$6 million range in both Q1 and into the first part of next year as well. In line with our plans. I think, were those your only questions, yeah?
Yes. Thank you very much. Thank you.
Yeah. Okay.
Again, as a reminder to ask a question today, please press star one. We will now take our next question from Raymond Ching from Credit Suisse. Please go ahead.
Hi. Thank you. Ramesh, this is Raymond from Credit Suisse. First of all, congratulations on the very strong Q3. I have two quick questions. Number one is, I'm not sure if you can comment on your Black Friday sales in the U.S. I'm not sure if you get any data. How is it doing right now? My second question is also related to U.S., because previously in the first half of this year and second half of last year, our Gateway City sales was impacted by the high U.S. currency rate. Recently, we're also seeing that after Trump being elected, the U.S. currency also strengthened. So based on the very recent sales trend at the Gateway City in the U.S., do you see any impact from a higher U.S. currency rate again? Two questions. Thank you.
Black Friday, the sales numbers, both from our own retail as well as a few of the wholesalers where we have the visibility, and I'm talking about our core brand, Samsonite, as well as Tumi, have been very strong. The numbers look very strong both for Tumi as well as Samsonite, which gives us the confidence for me to say Q4 numbers would be similar to Q3 numbers.
Okay.
As far as the effect of the currency is concerned, I think that the real impact of the stronger currency keeping the tourists away was seen more particularly in the second half of last year. The currency is still remaining strong. I think that the tourist starts to get settled to the new rate.
people find that it's fine and then they say, "I want to go for holiday to U.S.-
so I'm fine to go there. The effect
Okay
of the strong dollar of the tourists, it's not really material anymore.
Okay.
Not that the currencies have moved in the different directions. It's just that people get settled with that. Also, I must admit that we also re-merchandise our stores. For example, in Florida, we know a lot of Brazilians come in, the way they look at the pricing now is very different than they were looking it in the past. We also repopulate our store with price points which are slightly lower than the price point which we were probably populating let us say, before the depreciation of the Latin American currencies.
Okay.
Who knows what's going to happen with the currency with Trump, right? It's been a rollercoaster.
It's hard to call what Q1 and Q2 will look like. I'd like to just go back on the previous question, Ramesh, for one second. We talked about one-off charges. The other thing that people should be aware is we're in the midst of pushing the asset out to Europe and Asia entities. The Tumi asset There will be, and most likely in Q1, a tax charge associated with pushing these assets out of the U.S. We're still evaluating exactly what we want to do there. I just think people should be aware that you might see a one-off tax impact as we push that out, and we're evaluating if that's going to be a tax impact or just a tax charge with the tax deferred. I wanted to just lay that out there for folks so that they're aware of that.
I think it's anywhere from $20 million-$40 million of one-off tax charge as we push the asset. What that'll do is allow us to achieve a lower going-forward effective tax rate on the combined entities. That looks very optimistic for us, but I think it'll be a little bit better than what we originally planned.
Okay, thank you.
More to come on that.
We will now take our next question from Mariana Kou from CLSA. Please go ahead.
Hi. Thank you very much. I just have a follow-up question. On the advertising budget, could you actually comment, because I noticed that in Q3 you mentioned that you actually cut advertising slightly. Could you actually give us some color on what you're expecting to do in Q4 and maybe going to next year in terms of marketing expense? Thank you.
Yeah. The marketing expense will be more like around 5% of the sales. Whereas we are now looking at it in 2017, that hopefully we should be able to ramp it up to around 6%. The money which we have not been able to really put behind is the new brands. There's enough and more money been put onto the core brands, but we couldn't find a resource for the new brands. We are also putting more additional A&P spend on Tumi. That's why you see that Tumi is starting to deliver some strong traction already in Q3 and going forward in Q4 and next year. Overall, A&P spend from this year will be more like 5% of our sales. Right now we are budgeting to move that up to around 6% next year.
Thanks. Also a small question just to follow up on, I think on the material cost. Could you actually remind us how you actually manage the raw material cost in terms of what we've seen in the commodity market lately and the volatility? Just want to get a bit of some better color in terms of that part of your business.
Yeah. The material cost has more or less remained in the same zone as it was in the past. A few commodities have moved up, a few commodities have moved down. There is also a very significant depreciation of Chinese currency. You guys know better than me about that. We are starting to renegotiate with many of our vendors, to find some of the savings there. But what I would like to guide, and we've been consistently maintaining that if you look at our gross margin by brand, it will be in the similar zone as it is now. The small improvement that you find is more because different brands or different channel mix or the brand mix, when it changes, you'll find that our gross margin moving up by 40, 50 basis points up or down. We generally tend to not change the price value equation.
For example, if this whole Chinese currency depreciating, if we find some savings coming out of that, part of that helps us to navigate the currency pressures, and part of it also get passed on to the consumer, because we must keep in mind that if we have the currency, let's say, commodity price advantage, it is not only accruing to us, it's accruing to everybody else in the marketplace. We would not like to materially alter the price value equation of our brands. It doesn't really affect our margins either way.
Thank you. That's very helpful.
We will now take our next question from Xin Li from JP Morgan. Please go ahead.
Oh, hi all. I just have three questions. Firstly, would you be able to just give us more color around the Tumi acceleration in sales growth in the third quarter? Did it come from direct to consumer or indirect to consumer or a mixture of both? Maybe I'll start with that first. I'll follow up.
Yeah. Tumi, if you look at the growth, which is 2.6%, part of it is because we are now consolidating the Tumi Japan numbers. If you exclude that, then it becomes 7.5%. I think there are three large reasons we can look at it. One is that definitely Tumi is also the second half of Tumi last year was a weaker second half. They're also getting the benefit of anniversarying a weaker second half, which is also partly helping their numbers. Their first half was only 0.8%, excluding Tumi Japan, and the third quarter is 7.5%.
The second reason is we are starting to find some traction because Tumi's hard side collection, their new hard side collection had just been launched in the market called 19 Degree which has found encouraging response in quite a few markets, more particularly in Asia, but also in North American markets, which is also starting to help get additional traction with Tumi in these markets.
The third is, as I said before, we are also starting to put additional A&P on Tumi. We have started above-the-line advertising for Tumi in North America, in U.S., and in Japan to market. I must remind that Tumi generally never has been doing any above-the-line advertising in the past. I think that must also be helping to get some additional traction, which is delivering these Q3 numbers. In terms of the channel, I think both in Japan as well as in North America, large part of the business is still direct to consumer. We do see a strong like-for-like growth coming in Q3 in Tumi in North America as well as in Japan, and a very strong growth coming from e-commerce. In channel-wise, and practically, it is not a channel-specific thing which we are seeing, which is delivering a good growth on Tumi.
I must say that we internally, from a management point of view, we are extremely happy the way the integration of two businesses or two brands, which seemingly seem to be, let's say, two different companies with probably two different cultures, but it has all gone about wonderfully well. We are extremely satisfied. Of course, the credit goes to both Tumi's team, which has continued with us. They've done a good job. Also some of the senior management that we have moved from Samsonite into Tumi. The whole structure starts to work very well. I'm personally extremely hopeful that we should be able to see some strong traction getting into 2017. As everyone asked in the beginning of our question and answer session, that we are also making very good progress in getting back the distributors, the market back from the distributors to go more direct.
Which also should help us not only in our ability to push the brand more in those markets, because ultimately a distributor's vision for a brand is more short-term, whereas a brand owner can look at a business from a more long-term perspective. All these things should help to see better numbers coming out of Tumi in next couple of years.
Okay, great. Thank you. Then, the same-store sales growth acceleration in the third quarter for North America has gone to 1.7% growth. Is that coming from better growth out of the gateway cities, or is that just across the board?
It's more or less across the board, you can see that it cannot be pointed out to one particular market. I think the second half of 2015, the gateway numbers were much, much lower. Everybody is anniversarying those lower numbers. You find that probably the growth is coming in. Now we have some visibility into the beginning of the Q4, and we do see that the trend continues.
Okay. Okay, great. Sorry, finally, just to clarify, Kyle, you mentioned the one-off cost. If I heard correctly, are you saying $5 million-$6 million per quarter for the next three quarters?
No, for fourth quarter, and then in the first half. I just wasn't sure if it's going to be all in Q1 or Q2.
Okay. That's exclusive of the potential one-off tax charge of $20 million-$40 million?
Yes, that's it. Yep.
Okay, great. Thank you.
Thanks.
We will now take our next question from Peter Tang from Mizuho. Please go ahead.
Hi, management. Thanks for taking my question, and congratulations on the results. I just had a follow-up question on Tumi, whether you can comment at all on how the margins did in 3Q year-on-year? That's my first question. The second question is on tax rate. It looks like in 3Q, I was just wondering if there are any kind of one-offs within the tax rate that seems to be a little bit elevated during this period. Thanks.
I'll answer the first one, and Kyle will answer you with the tax part of it. If you look at the gross margin of Tumi is in the Q3 is more or less similar to what has been in the past. This whole supply chain optimization, the role that we start to play or our supply team now start to manage Tumi supplies. The result of that, you will see more in the second half of 2017. Partly because there are already orders in pipeline, the inventory is already, they work with much higher level of inventories, and also their order pipeline is much longer than what Samsonite used to doing it.
There may not be much change in the gross margin, but definitely when you really start looking at the second half of 2017, maybe second quarter of 2017, some of it may start to flow in, and you'll start to see gross margin improvement. We do believe that Tumi does offer a very significant upside in the gross margin improvement. It will take us, let's say, second half of 2017 and into first half of 2018, where I would say that I would then start making the same statement as I made for Samsonite corporate brands, all of our brands, then look at our margin to be more or less flat versus we don't try to navigate our margin to move up or down. It will be more or less in line with the cost structures. We are not there as yet to make that statement for Tumi.
It will go up to first half of 2018, where I would say the margins are where the margins should be.
In 3Q, year-on-year, the EBITDA margins for Tumi, were they pretty much steady?
They are pretty much steady.
Okay. Thanks.
Some of that was, we started to see some of the synergy benefits, particularly on the C-suite. We pushed some of that back into advertising in Q3 as well. You have an up and a down kind of getting us to neutral.
Okay.
Okay?
Finally, just on the tax.
Q3 does look a little unusual. Our effective tax rate for Q3 was, call it, roughly 33%. The biggest reason for that is some of these one-off costs that aren't deductible from a tax perspective. Our view for the full year is we're gonna run around 29% or so. As we look to next year, which would really be a truly blended Tumi and Samsonite, including us pushing some of the entities out to Asia and Europe, we think our blended rate's gonna be somewhere between 29%-30%, which is what we originally thought. I have a feeling that we'll probably be on the lower side of that range, which is a terrific outcome. In Q3, you just have a little bit of noise around the transaction cost and accounting.
Okay
with some of it not deductible.
Okay. Understood. Many thanks.
Yeah.
There are no further questions on the telephone.
Okay. There is one question from online, from Maxim Asset Management, looking to find out more about how online sales are doing and what % are we now selling directly to consumer, either through online or through our own stores. Whether there are any targets on gross margins moving forward.
As I said before, the online e-commerce is today the fastest growing channel for us in every single market that we're operating in. The e-commerce contribution is now more like 8%-9% of our total revenue, which is continuously increasing. If you look at last year, it was more like 6%-6.5%, which is moving up to around 8%-8.5%, maybe even into towards 9% in quarter four numbers. As far as direct to consumer, which includes the brick and mortar as well as the e-commerce, the number is more or less similar to the contribution percentage have remained more or less similar to what has been last year. It is more like around mid-20s kind of a number. That hasn't materially changed. Overall number have remained more or less in the similar zone.
On the gross margin, as I said before, our gross margin has remained more or less flat versus the year before that. You see a small improvement in the quarter three numbers, 53.2%-54.9%, which is more on account of Tumi because Tumi is largely the proportion of their direct-to-consumer sales is likely higher. Because of that, you see a small uptick. If you exclude that, then there has been a small improvement of 50 basis points, which again is because of a slightly higher proportion of direct-to-consumer channels, particularly e-commerce. E-commerce definitely we operate at slightly higher gross margin. That is pushing that number up by about 40-50 basis points.
The other thing we've seen on the gross margin side is Latin America dramatically improving from last year to this year as we continue to position ourselves in markets like Brazil. You see an improvement there. It's smaller in the overall mix, but that's creaked our margin up just a bit. I think there's a bit more to go for Latin America, that's looking very positive. Just like what you saw for the first half, our European gross margins improved slightly as American Tourister has matured. I think you'll see a slight benefit from that as we move forward as well, as that continues to play out.
Thank you, Ramesh and Kyle. One more question from Coupland Cardiff Asset Management. Could you comment on competitive intensity in different markets, and are you gaining market share in any markets?
Yeah. We do see competitive activities. I would say that competition is becoming far more desperate in Europe. We see competition getting desperate in Latin America. We have also seen some very desperate action in China, India, Korea. Other than North America, where the competition has been more or less the same as we haven't seen any material change there. Many other markets we have seen, and the impact of that, we do see that on American Tourister more particularly because we don't see so much of, let us say, impact on our Samsonite sales. Many of the competition have been desperate, so they have been running bigger promotions, losing willing to operate at lower gross margins.
We took the conscious call that we will not follow the competition by way of more aggressive price promotion because we were already working on launch of another brand called Kamiliant to engage the competition at that, let's say, more aggressive price point. Kamiliant's starting to find traction now in Asian markets like India, China, Korea, and now we have recently also launched in Japan. I think other than that kind of a desperate action by the competition which has somewhat affected our sales of American Tourister, we haven't seen anything more material than that.
Thank you, Ramesh. Operator, are there any more questions?
There are no further questions on the telephone.
Okay. Given that there's no more questions, we'll now close this earnings call. Thank you everyone for attending. Thank you Kyle and Ramesh for the presentation.
Thanks, everyone.
Thank you. Thank you, everybody.
Bye-bye.
That will conclude today's conference call. Thank you for your participation, ladies and gentlemen.