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Edited Transcript of 1910.HK earnings conference call or presentation 21-Aug-19 1:00pm GMT

Half Year 2019 Samsonite International SA Earnings Call

LUXEMBOURG Aug 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Samsonite International SA earnings conference call or presentation Wednesday, August 21, 2019 at 1:00:00pm 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

* Jack Chang

CLSA Limited, Research Division

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Presentation

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Operator [1]

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Good morning, good afternoon, good evening, ladies and gentlemen. Welcome to the Samsonite International 2019 Interim Results Earnings Call. Please note that this event is being recorded.

I would now like to hand the conference over to Mr. William Yue, Director of Investor Relations. Thank you. Please go ahead, sir.

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

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Thank you, operator. Good morning, afternoon and evening, everyone. Thank you for joining the earnings call for our first half earnings. Today, we have our Chairman, Tim Parker; CEO, Kyle Gendreau; and CFO, Reza Taleghani with us. Tim will begin the presentation with some -- with a few opening remarks. Thank you very much. Over to you, Tim.

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

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Okay. Thank you very much, William, and welcome, everyone. I must say in the 8 or 9 years that I've been associated with the company, we have faced some of the most difficult macro conditions. But I do feel that Kyle and the team have really grasped the nettle. And when this sort of thing comes along, it makes you examine every component of the business.

In terms of products, in terms of brand, in terms of our market position, I'm very happy with where we are. It also made us look very carefully at our cost structure, and it's also made us examine the management structure, the team we have, and we've made 1 or 2 changes there. But all in all, I feel we have actually strengthened the business. We certainly have, I think, strong foundation to move forward. And if we look at the first half, I think we're probably moving to a point where things are unlikely to get any worse, and we can actually detect signs of improvement.

Alongside the focus, as we've always had, on growth in turnover in our business, we've also reexamined and really focused on the quality of our earnings. And so the team has very much prioritized improving the cost structure, improving the gross margin and are very focused on making sure that in the future, and it may take a couple of quarters to get there, we really do see the operating leverage in the business coming to the floor.

So it's not yet the moment, I think, to be cheering, but it is a moment where I feel we've got a much stronger business and are looking forward third and fourth quarters moving in the right direction. When you get this sort of much tougher conditions, I think it really is a good opportunity for brands like ours with strong market position to really consolidate where we are in the marketplace. And I think the team has taken every opportunity to do that.

So I must say that this is, as I said, probably the toughest conditions we've seen, but I'm very confident that we have a management team here, which is focused on all the right things.

And with that, Kyle, I'd like to hand over to you, and you can tell the story of the first half.

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

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Okay. Great. Thank you, Tim, and thanks, everyone, for joining.

Turn on to Slide 5. And the way I might position backing up what Tim says is despite some of the continued headwinds in a few markets, our business is stable and positioned well for improving sales and profitability as we move forward.

The company's net sales are stabilizing, stabilizing in Q2. We are down just 0.7% in Q2. This is compared to down 2.4% in Q1. And again, this is against a very large growth of last year. And I'll cover that in another slide, but we were significantly up last year in the first half close to 10%.

And if I exclude U.S., China B2B, South Korea and Chile, which are really the 4 markets that we've been seeing some unusual kind of pressures in the market, our underlying business is up 3.6%, and I might give you some trending. In the month of June, we were up around -- just under a point. And July is looking like it's up in the kind of 3% range from a sales growth perspective.

So really positive kind of movements on the sales side, not back to levels that we're used to managing, but definitely stabilizing from what we saw in Q1.

Another positive on the China sales side, our China net sales were up 5.1% in Q2, despite the continued softness though designed in the market of our China B2B business. And if I adjust out our B2B business in China, China sales in Q2 were up 11.2%, and for the full half, it's up 8.7% adjusting for that. So really excited about the China seeing what they're doing.

Our Latin America business is back to teens growth. In Q1, we saw a slight degrowth in Latin America, but Q2 is just under 13%, and that's carrying into Q3 and Q4. So our Latin America business is back to the level that we would expect.

We started talking about cost savings initiatives at the end of the last year and into Q1, and I would say we've accelerated those as we've moved into Q2. And it's really positioning the business for improved profitability in the second half. You will see we get some benefit of that in Q2, but more to come in the second half of the year, and there's been some nonrecurring costs -- nonoperating costs associated with that, that Reza will cover in a bit. But we're seeing the benefits of those initiatives on the profit side.

We continued to make very good progress with working capital. This was an area where we identified and started to fix at the end of last year. For the month of June -- or for the period-end June, we were just 80 basis points unfavorable to prior year. If you remember at Q1, we were 220 basis points unfavorable to the prior year. And from a percentage of sales, net working capital efficiency, we're at 14.8% at the half. We were 16.7% at Q1. This is moving in the right direction. Our view is we get to below our target levels, which is 14% by the end of the year, and that's very positive. That's translating into this continued strong cash generation. In the half, we doubled our -- more than doubled our operating cash flow. So we are $113 million against last year, which was $56.2 million. And in addition to that, our CapEx was a little lower than last year, around $15 million. So really strong cash generation carrying in for the full half of 2019.

On the pressure points, the U.S.-China trade tensions continue and continued into Q2 and actually stepped up where we did get a second round of tariffs that went in, that impacted the luggage sector. So if you recall, we had a 10% tariff go in, in September of last year. In the second quarter of this year, that was increased by another 15%. So we are dealing with a 25% tariff increase. That has had the effect of really impacting our U.S. business in 2 ways. One, it's impacting the way wholesale customers are buying as they manage and anticipate kind of the impact of tariff, and we're clearly seeing some traffic impacts with the trade tensions between U.S. and China. And it's the first year where we've seen inbound Chinese traffic down -- my data would say down 6% versus in prior years very close to double-digit growth in inbound traffic from Chinese. That impacts our gateway cities. And so in our U.S. business, we're seeing impacts to gateway traffic up as high as 15%, 16% reductions. All of that equates to a U.S. business, which is down around 5%. It's around 5.7% for the half, a little better in Q2 than Q1, down 5% versus in Q1 we were down 6%. And that continues. And as we all know, there is further tariff pending that won't impact our product costing, but it will impact the U.S. consumer on a go-forward basis that's been pushed out. But all that feeds into kind of trade tensions and impacts both as far as how wholesale customers are acting and how inbound traffic is to the U.S., which impacts us.

South Korea continues to be under strain. It's down 8.7% for the half. It's really around weak sentiment in South Korea, political tensions and fewer Chinese tourists impacting South Korea as well. We've had a leadership change in South Korea. We did that in the last 2 months. I think that will help the team as we navigate through some of the pressure points in Korea.

And then currency continues to be a challenge as strength of the dollar in our reporting impacts us. And so for the first half, currency has had, on the sales side, an impact of around $65 million. I expect to have currency pressure in the second half, though currency started to pick up in the second half of '18 as well. So maybe not to the same extent, but you should assume that there will continue to be translation effects on our business from a reported revenue and earnings perspective. But just concluding, stable and well positioned for future story.

Over to Page 6, I think the takeaway from this slide is all of our regions are positive except for North America in varying degrees. Our North American business is, as I said, down 5.7% for the reasons we discussed. Our Asia business was slightly positive, 0.2%. And if I adjust for B2B China and Korea -- South Korea, it's up 4.6%, underlying kind of strength in the Asian business.

Our Europe business is up 1.9% for the first half against an extremely strong first half last year where they were up 11% as they were launching the American Tourister strategy with huge success. And so that's a good result for our Europe business. There are pockets of tension in Europe, but the team is navigating and managing very well.

And as I said, in Latin America, we had a positive first half, 3.4%, with a meaningful shift from Q1 to Q2. We had some leadership change in Latin America. We had a change in our Mexico leader. We've just added a Brazil leader in the last few weeks, and our second quarter low teens growth is a way to describe it. And it looks like Q3 will be something similar and puts Latin America back where we typically see it running.

If I move to Slide 7, this is really to show some trends here, and I think this is important to really point out what Q1 and Q2 of 2018 were, where they were extremely high really off the back of American Tourister. So we had an 11% Q1 and 9% blended, roughly 10% growth in the first half of 2018. We're copying against that this year in the first half. And if you go to the right of the page, you can see in Q1, we were down 2.4%, we were down 0.7% in Q2. And our view is this trend is improving. So you -- when we think about a forward view for this business, we're anticipating a positive second half. We're anticipating a slightly positive Q3 and a slightly better positive Q4 really against the trends that we were seeing last year. And all of that is playing out. We've seen a good July, as I said earlier. So that feels positive to us.

And if I look at the next page, another cut at sales. I think one of the things I take away when I look at the first half versus last year. Last year's first half sales were up $205 million in constant currency. So huge step-up last year equating to this 10% growth. This year, our first half is down around $28 million with an improving trend from Q1 to Q2. So if I take out the U.S. business, which is really hung in at this negative 5% or 6%, the rest of our business, both the markets that are challenged or the few pockets that are challenged in the rest of the business actually was up in Q2 $11 million versus in Q1 it was slightly down when I combine all those together, slightly down around $2 million. So we see improving trends in many of our markets. The U.S. is really the market that continues to manage kind of the real headwinds of the impacts of trade tensions and tariffs from the sales side of the business.

Moving to Page 9. As you would expect, the team has been very focused on actions to position ourselves to manage the sales pressures, but also to kind of improve the profitability in the business. And so we've been very focused on managing and reducing SG&A expenses. We've had tight controls over expenses. We've had headcount reductions, as I mentioned, and that's resulted in annual savings of around $14 million. Reza will cover that a little bit later in the presentation, but much of that will come in the second half of the year. So we had a very small amount in the first half around $2 million of benefit, and we expect around $9 million of benefit in the second half coming from purely these SG&A initiatives.

We've done a very extensive review of our retail strategy. And as we -- as I talked the last time I was out and the time before, we had some rapid expansion of retail in Europe at the end of '17 and beginning of '18. We throttled that back. So in the first half of this year, we've opened 13 new stores in Europe that versus 28 last year and 32 in 2017. So exactly throttled that back. We think retail is still targeted. Retail expansion is still relevant in all of our markets, but at a pace that's appropriate for the business so we make good decisions, and that's exactly what you see happening with our Europe business.

We're targeting to close some unprofitable stores, and you'll see in our numbers in this year. We've taken an impairment charge against right-of-use assets and fixed assets for a handful of our stores, the way we describe it, across Europe and North America that are feeling some pressures from both trade tensions and traffic. And for Europe, stores that have now been opened for a little more than a year that we don't see the ability for them to ramp. Some of these are these new stores that we've opened. So we're very focused on exiting some of these stores. We've taken impairment charge on that, noncash impairment charge for right-of-use assets and the fixed assets, and we will attempt to exit some of these stores. We're talking around 40 stores against the fleet of around 1,280 stores. So a small amount, but meaningful impact to the business going forward if we can exit some of these.

We've also reorganized the retail management team in Europe, and I think this is important as well. I think in the last rounds, I talked about getting the balance right within Europe. What we've done in Europe is 2 kind of big steps. One, we've changed the leadership in Europe. I brought back a guy who had been running Europe before under -- Tim and I in the last 10 years, Fabio Rugarli. I have a ton of confidence in him. He understands and gets the balance of both retail and wholesale. And one of the first things he's done is -- he's gotten in there, (inaudible) business. So it's kind of integrated into our business in a better way. So I'm very excited about that change.

The other thing that we're working on is obviously sourcing initiatives, particularly as it relates to the U.S. So we have this ongoing program to diversify our supplier base and renegotiating some pricing with our vendors really in response to U.S. tariffs, while we're maintaining some of the high quality standards of the business. We are in the process of shifting sourcing from China -- outside of China for our U.S. business. Because we're a global company, we have some ability to shift volume from other regions in trade volumes inside and outside of China. In my view on where we are, if I looked at 2018, we're sourcing around 90% from China. We will -- in 2019, that will be somewhere around 75%. And as we move into 2020, I think we'll be somewhere in the 60% to 65% range of goods sourced in the U.S. that are coming from China. That's a pretty dramatic change. I think it's important. It's also important to note in doing this, we have to be careful to maintain the quality of our products. And so the teams are very diligent on shifting where we can shift while maintaining the quality standards that we'd expect in this business.

And we're dealing with the overall 25% tariff increase in the U.S. Part came in last year, part came this year. That's equated to us increasing pricing generally in the U.S. of around 12%. On the first round of tariffs, we're feeling fairly confident we can maintain the margin impact. Around the second round of tariffs, we -- the increase has been a little less. We've had a little more time to work on product reengineering and sourcing, but we do see some margin pressure in our U.S. business, gross margin pressure with these double rounds of tariffs, and our teams are working very closely with our customers to manage this as best as we can. And you'll see that when we talk about the North America business. And I'm really happy with where we are on both the customer relationships and what we're doing here against what is a meaningful increase from a tariff perspective really for our U.S. business only.

I covered the U.S. and the leadership change. I'm very excited about the leadership change in Europe. The energy and the vibe is exactly right for Europe, and I have a lot of confidence in Fabio. And again, we also made a change in South Korea, which I think will have some benefits going forward.

And we are planning a temporary reduction in advertising in the second half, and I started to signal this as we're watching what would happen with the tariffs. And on the drop of the second round of tariffs, we've decided to call advertising back slightly in the second half. I think that our full year advertising spend will be somewhere around 5.1%, 5.2% against last year, which we are at 5.8%. So it's not a big change, but it's a meaningful number. It's around $20 million to $25 million in savings in the second half of the year that we'll get from advertising, really, to help offset some of the pressures around currency translation and what we're seeing in some of the trading, particularly in the U.S.

If I go to EBITDA on Page 10 and we look at our adjusted EBITDA, the shortfall in Q1 versus Q2 has dramatically improved. And when we look at Q1 versus Q2, Q1, we were down on EBITDA around $28 million. In Q2, we were down around $15 million. That's an improving trend that we'll see continuing into Q3 and Q4, while I expect the second half to be positive year-over-year on EBITDA as we move forward.

If you look at the components of our reduction in EBITDA, a piece of it's just the sales volume, the translation, obviously, which is $8 million in the first half, but then there's a margin effect of reduced sales, which is around $15 million. We've seen a little bit of gross margin pressure in the half. In Q1, we were slightly positive on margin. In Q2, some of that pressure has worked in. That's had a small impact around $8 million in EBITDA. Advertising decrease, though slight in Q1, we saw some benefit there. And then we had some SG&A costs. We've talked about this in Q1 that were up, and that's a really dramatically improving trend, where it was a $20 million -- $19 million impact in the first half, it's a $7 million -- I mean in the first quarter, $7 million in the second quarter. And this really is around this retail expansion in Europe and some expansion in Asia, particularly Tumi in Asia, which was the bulk of this $27 million increase in SG&A effectively that was impacting EBITDA. So we're making really good progress there, pretty dramatic change from Q2 to Q1. And again, that will continue with benefit in the second half for sure.

And if we look at actions from an EBITDA perspective. In Q1, our EBITDA margins were down $300 million just from these initiatives, particularly on SG&A. It's down 150 basis points in Q2 versus 300 basis points in Q1. The chart on the bottom, you can see other SG&A, which was 3.1% of the delta, it's now only 1% in Q2, and that trend will continue as we move in a positive way in the second half. And in Q1, we had no gross margin effect. In Q2, you can see a little bit of gross margin effect really coming off of this U.S. business and the tariff pressures that that's caused, particularly in the U.S. on gross margins. You will see a little bit of pressure as we step into second Q for that.

And then on adjusted net income on Slide 12, adjusted net income really is driven by the EBITDA shortfall, but we have some positives on the income side. Our net interest cost continues to be lower. That's $3 million benefit. We have a slightly lower effective tax rate. Reza will cover that later, but that has to do with just our general tax position, but also tied to our share comp and what that's done from tax rate and then other reductions really around kind of how we're managing other costs within the business, including kind of outside adviser cost. And we have a big improving trend. Our adjusted net income in Q1 was down $18 million. Adjusted net income in Q2 was positive $4 million in Q2, really, off the back of what we're doing to manage through the business.

Just a few other points for me just on things that are exciting, and Reza will walk through in more detail of the half. Our D2C e-commerce, our direct-to-consumer e-commerce continues to grow very nicely. If I adjust for eBags, where we are strategically reducing sales of third-party brands, our total e-commerce business was up close to 24%, and you can look across regions we're having great success. North America are up just under 21%, Asia 28%, Europe 19% and Latin America 100%-plus growth as we really executed a terrific D2C e-commerce strategy. We see inbound traffic high. We see conversions high. And so a good story here that will carry, obviously, for the rest of the year as well for us.

We continue to be focused on nontravel. That's -- and it's a good part of our strategy that continues to do well. That's up 1% if I adjust for eBags, which is important to adjust because eBags has a lot of nontravel stuff, the third-party brands. And we see that as a percent of sales moving to 40% of sales from 39.5% in the first half despite the pressures we've seen in a few markets. So a lot of focus here, a lot of great success on our nontravel side.

ESG, for us and like many companies, is becoming an important part of our story. I'm really excited about the ESG report we just put out in July. It really sets some framework and some long-term targets for us on what we want to do. I think this business should target being the most sustainable travel luggage company in the world, and we have the ability to do that. We've set forward goals around carbon reduction, improved sustainability of products, and we've seen some terrific product launches that are 100% recycled material. As a company, we are really focused on how do we incorporate more recycled materials into everything we do, and so you will start to hear us talking more and more about that as we move forward. And just our impacts on the environment, the community and our teams and people are really important to us as we move forward with ESG. So if you haven't read the report, I recommend you do, and it really is part of kind of the culture of who we are at Samsonite as we integrate this into the broader strategy of our business going forward. So we're excited there.

And then lastly for me is, as you'd expect from us, we have had plenty of exciting new products, and the way I describe it is exciting products and much more to come. We've been integrating technology into much of our bags across brands from charging to scales to power to much more here coming as well. We're excited about what's coming in the back half of the year and what we roll into next year. We continue to be very focused on lightweight products, particularly, on the hard side. We've launched this Magnum product in Europe, which is the lightest polypropylene 3-point locking case with huge early success. This was just launched really as we stepped into Q3 and being very well received.

Tumi has launched V4 polycarbonate case, which is being very well received across the globe, a lightweight polycarbonate case, which is part of Tumi's strategy as we move the brand to have more lightweight products, including hard side lightweight products. And that's been very well received. And then ecofriendly products that we're very focused on. We've launched a whole series of products made from recycled water bottles, recycled plastics, post-consumer, post-industrial, and it's really incorporated into a lot of lines that we've launched, and you'll hear much more from us as we move into next year on how do we incorporate more of that into all of the products that we do, which will have a bigger impact on our environmental footprint. So we're quite excited on the products side, a good pipeline for the back half and more to come for next year as well so -- as you'd expect from us.

So with that, I will turn over to Reza, and I'll come back at the end. Thank you.

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

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Thanks, Kyle. So we're on Page 18 now so just reviewing the numbers in greater detail.

The overall first half results, and Kyle has covered some of this, but just to refresh on Slide 18. So we have -- net sales came in at $1,755.7 million for the half, that is constant currency reduction of 1.5%. It has been improved Q2 versus Q1, but obviously the negative drag of Q1 working its way into the numbers.

Gross margin, we're 50 basis points down first half 2019 versus first half 2018. That is one that -- if you're looking at the Q1 versus Q2 split, there was a reversal. Q1 was in positive territory and Q2 we started to see some additional pressures and largely in the U.S. as a result of tariff as we talked about a little bit earlier, and we'll get -- delve into that a little bit as we get into impairments as well.

From an adjusted EBITDA perspective, this has been a very large focus for us, and we'll you go through some of the specific actions we're taking to reduce SG&A. But as we look at the margins on adjusted EBITDA, we're looking at a decrease of 210 basis points period-over-period if we're looking at first half 2018 on an IFRS 16 adjusted basis versus where we are right now at 12.2%. We have taken significant actions here, and I think those -- you'll continue to see some improvement on adjusted EBITDA both from the SG&A improvements that we've done as well as some of the advertising spend that we're looking at as well. So this, as we look into Q3 and Q4, should continue to improve.

And finally, on adjusted net income, we're reporting $97 million of adjusted net income for the half versus $111 million for the adjusted period in 2018. The story on adjusted net income, I think, on a constant-currency basis, and we'll see this in the subsequent slides. I think it is important to note that Q1 was negative $18.2 million on a constant-currency basis versus Q2 was positive $5.5 million. So if you're looking at it -- since the last quarter, we are pleased that we have a positive quarter on adjusted net income as we tried to take some actions around that.

Going to the next slide. This -- I do think it's important just to refresh because this is the second earnings call that we've had where we're discussing adjusted EBITDA in kind of the post-IFRS 16 world. So as a reminder to everybody, I wanted to make sure that we covered that in this presentation when we talk about adjusted EBITDA. We're looking at the right-hand column here, which is basically adding back, so adjusted EBITDA, including lease amortization and interest expense. What that means is that we basically take the IFRS lease amortization expense, which in the half of this year was $99.5 million and the lease interest expense, which is $15.4 million, so roughly $114 million, $115 million. And that is basically taken out of that calculation. The reason we're doing that, just as a refresher, is because it more accurately reflects the way that we've reported adjusted EBITDA historically. So we think it's more transparent and comparable way to do it, but we just wanted to make sure that everyone was aware of that. Again, as a reminder, we covered this in the first quarter as well.

We're on Slide 20 now. So I wanted to get into a little bit greater detail in terms of what we're doing around SG&A as well as revisiting the store fleet. Kyle touched on reorganizing the retail management team in Europe. We have also taken significant actions around headcount. We've also looked at renegotiations of our commission structure, especially in Asia as well as some trade agreements. We have new leadership, which Kyle has covered, in Europe, South Korea. Mexico was another one of note as well. And the result of all of these actions from a financial perspective is that, on an annualized basis, there is $14 million of SG&A savings that come from these actions, $9 million of which we will see in the results in 2019. However, as a result of severance and other nonoperating expenses, there is a charge of $9.8 million that you'll see in our financial statements for the half that reflect that. So again, we do want -- they're important actions. We have to take severance for it, and the run rate benefit exceeds that, but it is a charge that you will see in our financial results for the half.

On Page 29, we wanted to spend a little bit of time going through and explaining some of the noncash impairment charges that you're going to see in our financial statements. Just by way of background, January 1st this year, due to IFRS 16, we had to put a right-of-use asset on the books at the beginning of the year, part of our valuation on a quarterly basis as we have to evaluate the store fleet and look at whether or not we need to impair any of the assets that's been put on the books. So we've done a very thorough fleet review as it relates to our overall operations. That's something we will do on an ongoing basis as well.

The one thing that has changed from first quarter to second quarter that does make a difference in terms of our evaluation of these assets is the second round of tariffs came in, in April of this year. So normally when we're doing our impairment testing, what we will look at is the future cash generation and the cash flow stream that comes from these leases. You should also note that in the U.S., specifically, the leases are typically longer term as compared to the other regions, especially Asia where you have very short-term leases. And so when we did the evaluation under the new framework of tariffs, there are 14 stores in North America, which we are impairing. That is the majority of the $29.7 million charge that you're going to be seeing. So just to give you a breakdown of it, we have impairment of the lease right-of-use asset of $21 million. Approximately $15 million of that is due to North America. And then we also have an impairment of PP&E, which is basically the fixed asset fixtures that are also in those locations. In aggregate, that adds up to $8.7 million, of which $6.2 million of that is in North America as well.

We have some smaller impairments that we're looking at in Asia and Europe. Asia is $1 million in total, and Europe is the balance of $7.8 million between the other 2, and that's as a result of the fleet review that we've done also in Europe as some of these stores ramp. But that, in aggregate, adds up to 44 stores that are causing an impairment of an aggregate $29.7 million.

Looking on Slide 22. We just wanted to touch on the impact of these actions and what it's going to do to our nonadvertising SG&A over time. I think the important point to note is, if you can see, we have the $27.1 million, which is the addition of all of the regions plus corporate. As we look at kind of the composition of that $27.1 million of SG&A increase, you should know that in Q1, $19.1 million of that was in Q1 and $8 million of it is really in Q2. So I do think it's important to note that you're looking at the SG&A, it is definitely starting to come down as you look at basically the ramp, and it has to do with the fact of what Kyle noted earlier that you had this retail expansion that was basically front-loaded in 2017, early half of 2018 in Europe. And now that we've taken these SG&A actions, you're going to start to see that roll in, in the future periods as well. So we wanted to make sure that we gave you the breakdown between Q1 and Q2 on the top end of the page so that you can see that there has been improvement and action is being taken and how that's flowing through. And as we roll into Q3 and Q4, you will be able to see those actions just look better for our financial results as well.

On Page 23, we're looking at excluding the nonoperating expenses, the impairments that we just talked about, the bridge that basically takes us to profit attributable to equity holders. Obviously, the impairments are noted here. We did have kind of the onetime impact last year of the noncash write-off of the deferred financing asset that was due to the refinancing of our capital structure. This year, we have the impairment that you're seeing in this half of the $29.7 million that you see. Those are the nonoperational charges that are kind of the chunkier ones that are flowing through.

And again, as you work your way to the right, we wanted to, again, bifurcate Q1 versus Q2 here because really the net-net of what's impacting net income. So if you're looking at that $13.8 million bar that's all the way to the right-hand side of the page, Q1 was negative $17.4 million of that, and Q2 we have started to see positive again. So Q2 was actually $3.6 million positive. So we hope that trend continues going forward as well.

Now I'm going to get into a little bit deeper dive of the region. Kyle has talked on the macro-level themes, but I thought it would be helpful just to give you a little bit of greater color on these.

So starting on Page 24, we're looking at North America overall. In North America, we talk about tariffs, but it's really the overall theme of U.S.-China trade tensions because there is a component of -- when we look at gross margin, tariffs working their way into it as we look at North America, which is a largely wholesale-driven business. But really, if we look at the gateway markets, we're seeing anywhere between 15% to 20% depending on the store and it averages out kind of to a mid-16% drop in store traffic. And that's due to a lot of Chinese tourists not coming to the U.S. So that is something that's meaningful and that's also a large driver of what we're looking at when we look at that impairment number that we just talked about.

eBags is something that we've talked about over several quarters, and it's -- I think it's important to just touch on the strategy around eBags. As we're trying to drive profitability at eBags and the turnaround there, there has been a strategic shift, which we've talked about in the past in terms of rationalizing the number of SKUs that are available there and really trying to call a lot of the third-party brands that aren't profitable for us. So that -- obviously, that purposeful culling means that we have a drop in sales, which had a $10 million impact in the half. And if we were to exclude that, North America sales would have been down 4.6% rather than the 5.7% constant currency number that you see on the page. But we do think that that's an important cut in sales because from a profitability standpoint those are the right actions to take. And so eBags continues to be a focus in terms of profitability and shifting to the house of brands that we have in terms of the sales that we have there.

Gross margin down by 120 basis points. So this is something that's meaningful and, again, largely driven by the tariff environment that we have. We have had some price increases to try to offset that to our wholesale customers. But if you're looking at the first wave of tariffs versus the second half, the amount that we've been able to push through is lower coming to the second half because from a consumer sentiment perspective and everything that you see in the market, we want to make sure that the demand is still there to drive sales, and there's only so much that we are starting to see some deterioration in gross margin in this region, specifically.

As it relates to operating expenses as a percentage of sales, we -- you have to focus on the portion that says as a percentage of sales, obviously, if you have declining sales, we are taking significant actions on SG&A, especially in North America, but the sales have been dropping at a faster pace. So overall, we have -- we've targeted around $10 million of SG&A reductions, specifically in the U.S. to offset this both at Samsonite as well as Tumi, the bulk being done at Samsonite. But we are still seeing a 150 basis point of operating increases into the first half, but those SG&A cuts that we have should have an additional benefit going into the remainder of the year to help offset that.

Looking at Asia. Asia is -- really, the negatives on Asia are focused on 2 specific markets: it's China, not even China overall, but China B2B, which we've talked about, which is an area that we're trying to -- as a percentage of the overall China business try to bring down somewhat; and South Korea, where we've had a leadership change as well. So excluding those 2, the Asia region grew 4.6% overall. India has been a really positive 9.2%. So good recovery in India, specifically, and Japan up 4.8%.

Excluding China B2B, China is up 8.7% and really good direct-to-consumer e-commerce up 41.6% that's happening over there as well. South Korea continues to be a focus, but it's challenged because of somewhat same sort of issues that we're seeing in the U.S. and the Chinese consumer traveling to Korea. There have been some changes in terms of consumer patterns there in terms of the total number of traffic that's going there, but also in the availability of buying a lot of the products to take back home as well at the airports there. So that's part of the driver as we look at our South Korea business.

On the bright side, Tumi sales continue to perform. So we have -- Tumi sales in the region were up 11.9% overall. And gross margin in Asia has actually improved by 50 basis points. So as we've seen the big decrease in the U.S., Asia is a bright spot there.

Across the board, we're looking at advertising spend that also means in Asia, although we have -- we did have some major campaigns, which we'll touch on in Asia with Chris Pratt at Tumi and some others as well.

Moving onto Europe. Europe continues to grow, so 1.9% constant currency growth, and again, this is on the heels of significant growth that Europe had last year as well. Overall, we're focused on the adjusted EBITDA here again. So the story around Europe that we're focused on is really making sure that we get the cost structure right and make it sustainable to improve profitability for the longer term. So that's where we've looked at the way that we go to market on our direct-to-consumer retail business. We've done a restructuring there as well as looking at the store fleet. And in Europe, we'll continue to evaluate a breadth of the various locations that we're looking to open. So there's been much more discipline around the future growth in Europe. It's not to say that we're opening stores, we're just taking a much more targeted position in terms of making sure that they're at the right location.

The other thing that I just noticed in terms of gross margin in Europe is, obviously, there is a significant mix as the American Tourister campaign that was launched last year. American Tourister continues to perform very well in Europe, but that obviously has an impact on margin as well.

So as we look at the 80 basis point decrease in gross margin, American Tourister -- there is greater sales that are happening at American Tourister offset by Tumi as well because Tumi is continuing to perform really well in Europe, but there has been lower sales at Samsonite. So that mix shift is really what's driving that 80 basis points in gross margin you see on the page.

Latin America, very positive story. So as we're sitting here in Q2 versus Q1, in Q1, we had some concerns around Chile that had dipped into negative territory, very, very positive rebound in very short period of time. So I think overall, as a management team, we're very pleased with Latin America, again, 3.4% constant currency growth so far for the half, but I think if you look at the Q1 versus Q2 in that first bullet point, Mexico was negative in Q1, negative 6.6%, it rebounded to positive 15.4% on the heels of improvement and a change in leadership there. Chile went from negative 12.6% to positive 4.5% in Q2. And Brazil is growing as well.

So overall, I think we feel pretty good that Latin America is going to be in that mid-teens number that Kyle alluded to a little bit earlier for the remainder of the year. We feel good about where that region stands.

On Page 28, DTC continues to be a huge focus for us. So DTC e-commerce overall is up 6.8%. So if you look at our DTC net sales growth, we are 4.2% and that obviously includes the stores as well as the e-commerce channel. E-commerce is continuing to outpace that growth. We have net sales growth of 23.9% in DTC e-commerce, excluding eBags. Again, eBags, we're showing it both ways because obviously we're purposely reducing the sales at eBags as we try to shift that out of the brand.

So total e-commerce net sales were increased by 13.8% excluding eBags. If you even to include eBags, it's growing at 5.9% and overall the mix is going to shift more and more towards e-commerce, which is exactly how we're trying to drive the business as well.

On Page 29, looking at the net sales by brand, and again, we've shown this 2 ways. So just to look at it overall, constant currency growth in first half Samsonite was down 2.4%, Tumi was up 4.8%, American Tourister was about flat down 80 basis points and all other were down 7.2%. What we wanted to do is exclude some of those challenge markets to give you a sense in terms of how the business is doing if we were to look at that and in the box beneath that you can see that Samsonite was approximately flat overall if you were to exclude the -- some of the China B2B, South Korea and the U.S. Tumi is up 16.3%. So you're really starting to see some of the pressures that are in the U.S. that is what's driving Tumi. Tumi is performing very well in Asia and Europe as well. Actually, Europe may actually even outpace Asia this year. So Tumi internationally, the international expansion has been very positive overall. And American Tourister at 4.7% continues to deliver positive growth as well.

On Slide 30 just to highlight again, so Tumi brand net sales growth of 4.8% driven by 14.9% is outside of North America. So that North America number is dragging it down, but overall, I think, we are very pleased with continued expansion of Tumi and obviously, helps in terms of the margin profile of the business as well.

One other point of note that I will just make on Tumi while around Slide 30 is, in Asia you'll note that in the bullet point we're saying that we added 1 net new store in the first half of 2019, that's simply because we're being very targeted in terms of negotiations that we have and looking at the location availability to make sure that we are going to be in the right location. We expect by the end of the year to get to a more normalized as we add store count. In Asia, specifically for Tumi, we should probably add about 7, 8 net new stores for that region specifically as compared to the one that you have in the first half.

On Page 31, Kyle covered advertising spend. So for the first half of 2019, we were at 5.9%, which is slightly below last year. But if you're looking -- and if you look at the breakdown by quarter, it's very similar. For Q1, we were about 6% of sales. We spent about $52.9 million in Q1 of this year on advertising. Q1 -- I'm sorry, that's Q1 of 2018. Q1 of 2019, we were 5.9%. So roughly in line. This is something that as we evaluate the latter part of the year there will be a decrease here. So that 5.9% should probably come in culmination a little bit earlier, whether it's 5.2%, 5.3%, somewhere in that ZIP code as we dial back on advertising to offset some of the cost pressures.

Having said that, there have been some really good advertising campaign. So we're trying to be very strategic in how we do our advertising spend. So in addition to these campaigns, we have the global Lenny and Zoë Kravitz campaign for Tumi. We had a large Chris Patt campaign with Tumi in Asia. The Samsonite Born to Go campaign is something that's been in the works and has been very well received overall in all regions. So we are trying to make sure that we have good brand advertising, but there has also been a shift in terms of where we're doing our advertising spend to drive e-commerce growth as well.

So on Slide 33 and 34, we're just going to do a quick recap overall on the financial highlights. So net sales stabilizing in Q2, so down just 0.7% as compared to 2.4%, and again, these were against very strong comps for the prior year period in 2018. Adjusted net income decreasing by $14.2 million or 12.8% compared to the prior year. Our operational effective tax rate, our ETR, was 25.8%, which is in line with what we are looking for largely. We are looking kind of that 24%, 25% number as we go into the year-end as well, and we are continuing to monitor that. There are some actions that we're taking and there has been some favorable news in terms of tax rate in Luxembourg, et cetera, that may help us on that number a little bit, but it's basically in line with what has been historically. Operating cash flow of $113 million. This really is a big point for us, that is more than double what we have delivered last year. So year-over-year, half-over-half, we've doubled the operating free cash flow. So at the end of the day, the business does continue to generate cash, which we will use judiciously to delever and to pay down debt as we've said on prior call.

On the next page on Slide 34, net working capital efficiency at 14.8% is definitely trending in the right direction compared to the first quarter. So we're getting back into the ZIP code of our target of 14% that Kyle alluded to.

CapEx of $26 million. So we've been very disciplined on the CapEx side. And so this is an improvement compared to first half of 2018. We're going to continue to be disciplined going into the year-end period. There was a warehouse expansion, which we talked about at the year-end that has been delayed. So depending on how that progresses in Europe, that is something that may work its way into the numbers next year, but for the remainder of this year, I think we should be coming in below what we had estimated for CapEx previously. We remain in compliance with all of our debt covenants as of the period and as many of you saw on July 16, we had a cash distribution of $125 million as dividend, which is up $13.6 million (sic) [13.6%].

I should also note that net debt -- as we're talking about cash flow, net debt of $155.6 million is lower than what we had due to the cash flow generation. So we continue to work on initiatives to make sure that we bring net debt down over time as well.

On Slide 35, again, I thought I would just bridge for ease of reference Q1 versus Q2 and half versus half. And I think the message here is really it is a tale of we do have the drag of Q1 still working its way into the first half numbers, but we are starting to see some positive momentum as we look at Q2. So I've circled on the pages adjusted EBITDA and adjusted net income. Our adjusted EBITDA Q1 negative $28.6 million is down -- we're still down negative $15 million, but at least the trend is improving as we look at Q2. And we are very proud in terms of the adjusted net income numbers that although was negative $18.2 million in Q1, in Q2 we did deliver a positive growth on net income of $5.5 million. So although the half is down $12.6 million, the trend is improving as well. And again, I will just highlight the cash flow generation, again, on this slide as well.

I will quickly go through some of the other points on the next few slides.

So on Slide 36, in terms of the balance sheet, the main point that I would just highlight is if I'm looking at the December 31 period to the June 30 period, just be aware that January 1 is when the right of use asset and related liability went on to the books for IFRS 16. So if you're all suddenly looking at assets and liabilities growing and wondering why, it's because of that. You've probably seen that our ratings remain stable for both S&P and Moody's as it relates to our capital structure. We feel pretty good in terms of having a long-term sustainable capital structure. We have -- we continue to delever and we have plenty of liquidity. So as of June 30, we have $624 million of availability under our revolving credit facility, which is about the same number we had at the end of the year, and again, as we look at our overall net debt position, it continues to come down.

In terms of working capital, this has been a very large initiative for us in terms of trying to get our numbers down. And again, if you're looking at Q1 versus Q2, I think, we are very pleased with how we have improved. So we've had an improvement from 16.7% at the end of Q1 down to 14.8% and our goal is try to get that to below 14% by the end of the year, which will get us back into line in terms of our long-term target in terms of working capital.

And we've touched on CapEx, but I'll just make a note of it again here. So this is a significant reduction. So just by way of reference, CapEx for the full year 2018 was about $100 million, it was $100.6 million. The first half of 2018 was $41.1 million and we are reporting $26 million of CapEx. So that is a meaningful reduction in the period as well.

With that, I will turn it over to Kyle to look into strategy.

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

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Just quickly and then we'll go to questions. So I get a lot of questions from everyone around strategy. Our strategy remains very strong. No real changes to our strategy. We're executing a strategy, which is really driving a business that's well diversified geographically, but also by brand, category and channel across this industry and we're excited what we are doing there. So we continue to focus on both travel and nontravel. On the nontravel side, which I mentioned, we feel we have the ability to grow that at a faster pace and we continue to put emphasis there around nontravel products and products that appeal to female consumers. We're still focused on driving our DTC business as Reza said and I said, that is the combination of driving our DTC e-commerce, which is hugely successful, but also continuing to drive retail, which on a targeted basis, which we think in many markets, there are still real opportunities to do that. And as you can see, we've kind of paced the tone -- toned the pace down a bit. But you will continue to see us set target of retail expansion. We continue to support the business with advertising and so we are going to take a little bit of a slowdown in the second quarter, but you should assume that we'll put this advertising back kind of into the levels that we historically run, and that's an important piece to us as we're pushing multiple brands across multiple regions. The regional management structure, I have a ton of confidence in and it really does allow us to be close to the business within each region and within each country. We will continue to foster and grow and support that. And we continue to invest in research and development around real product innovation. As I said earlier, we're really excited of what we've come out with and more to come here at the end of this year and into next year.

And then just a quick recap on initiatives because we obviously as a management team have a lot going on and part of my job in this role is making sure people are feeling energized and empowered so that we are delivering growth as best as we can in each region. And I would say, our team is very energized and delivering against what's more challenging moments, but the team is really focused and I'm quite happy with the team. We continue to push Tumi in international markets with great success and building momentum. I covered direct-to-consumer e-commerce, which we are super focused on. We're also focused on getting the eBags business into a profitable state, which I think we will be very close to by the end of this year. We are monitoring the sales trends and really focused on adjusted EBITDA margin. Hope you're taking away that we are focused on cost initiatives, on retail fleet, on everything that we can do to kind of position the profitability in the right place, and I think you will see -- as you saw our Q2 improving over Q1, you'll see building continuing trend there, I'm very excited for the second half on the initiatives that we've played out so far.

Working capital, we've covered. We're focused there. We're focused on our sourcing base as you'd expect us particularly with the trade tensions. So we're constantly negotiating pricing with vendors and also focused on the shift of our sourcing as we move forward.

And just lastly, we continue to weave ESG into the fabric of our business with building momentum here and I'm excited and our teams are excited about this as we move forward on the ESG front.

So with that, I will turn it back to kind of William and open for questions. And sorry for the long presentation. We wanted to be thorough. Thank you.

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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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Okay. Thank you very much, Tim, Kyle and Reza. We have a first question from online from (inaudible) of Prusik Investment Management about advertising. Regarding the reduction in advertising expense, how did you decide which area of advertising to cut and how do you -- what are your plans on spending in the future? And second question. How do you ensure that the Samsonite brand stays relevant when compared to Internet-based companies?

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Kyle Francis Gendreau, Samsonite International S.A. - CEO & Executive Director [2]

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Yes, okay. From a cost side, I think Reza covered this. We'll take a small cut. So it's not such big. This company is spending a little over $200 million on advertising. We're going to shave off around $20 million to $25 million. We are focused on not touching advertising that's driving kind of digital action within our business as you would expect and has -- over the last 2 years, the shift of our business to digital spend has increased. So across the business, we've really empowered regions to make decisions to produce some of the savings. They've cut things around the edge without having things that will impact our digital success. And so the teams have kind of, I might say, for that level of reduction, just trimmed around the edges. As I said earlier, we will bring this back. I think this business spending around 6% advertising is the right level and I think it's where you'll see us probably put it back for next year.

As far as keeping Samsonite relevant, that's a -- it's a very relevant point and part of the campaign you saw this year was around Born to Go with Samsonite and that has a big impact on kind of how we're messaging, that is a much kind of younger, energized message. So if you haven't looked at that campaign, I will look at it. The other piece and one of the real historical strengths of the brand Samsonite is around real innovation. And so you will see within that campaign and within everything we're doing as far as driving real product introductions around bringing innovation to the market, which we have this long 100-year history of doing, you should not expect that to change at all for this business. And so we've had some good things launched so far this year. Some of the things I showed you. We have some very exciting stuff that I was talking about the last time around launching really towards the end of this year into next year, all around the brand Samsonite to really make sure this brand stays well positioned as the real innovative leader in the space. And so innovation, coupled with the right messaging from an advertising campaign is how we're managing the Samsonite business.

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William Yue, Samsonite International S.A. - Director of IR [3]

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Thank you, Kyle. Operator, we will now open the Q&A to callers.

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Operator [4]

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(Operator Instructions) Our first question comes from Chen Luo with BofA Merrill Lynch in Singapore.

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Chen Luo, BofA Merrill Lynch, Research Division - MD [5]

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I've got 3 questions. First of all on the USA, just now we mentioned there is a 12% price hike. Assuming we're actually referring to the cumulative price hike, how much have we repriced in Q3 in the second round of price hike? And after all the price hikes and the trade war concerns, what's our projection on the U.S. organic sales growth of the second half. So this is the first question. And secondly, on Hong Kong, we noticed there has been a lot of protests going on in Hong Kong, which negatively impacts the Hong Kong retail sales. I think Hong Kong is only around 5% of our sales. In terms of earnings contribution, it could be higher given the better margins in Hong Kong. So what's our assessment of the impact in Hong Kong on the overall business? And lastly, what's our projection for the full year adjusted EBITDA margin in 2019?

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

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Okay. On the U.S. side, so we've -- blended we've issued around a 12% increase. On the first round, we saw the first round of tariffs, we put an increase in which was just high 7%, that's against a 10% tariff. And our view at that moment was we should manage most of the margin impact with that. And if you looked at our Q1 numbers, our gross margin was well maintained. On the second round of tariffs, it was more challenging to push through an equal amount to cover the full margin impact. So we roughly put a 5% kind of, I'll call, blended increase against a 15% tariff. We've also had had some time to manage some resourcing and also working with our vendors for price reduction. So on an apples-to-apples basis, we're a little better positioned as we lead into the second tariff. But there was enough pressure and pushback on the market that we -- the ability to fully pass on enough to cover margin felt a little bit strained in the North American business. So the blended and really the second increase that we've taken is balanced with all the other initiatives that we have, but we do start to see a little bit of margin pressure in the U.S. I think for the first half, the U.S. gross margin was down around 120 basis points. My sense is for the full year, we probably stay in that pressure point, maybe a shade higher, but in that kind of ZIP code.

And as far as U.S. outlook, I think based on where I see kind of traffic and trade tensions and continued uncertainty around tariffs, not that it will impact our costing going forward, but uncertainty around tariffs for the rest of the business, the rest of the U.S. kind of marketplace, my sense is our U.S. business will probably stay in the ZIP Code of down 5% to 6% for the full year. So a similar trend of what we saw in the first half. We're not seeing that dramatically change as we move into the second half of the year. And then on the Hong Kong protest, it's clearly an impact, our Hong Kong business is around 4.6% of sales in the half, it was down around 0.6%, so not so dramatic. It will be a little more impactful in Q2. We have had obviously store closures at the end of the days or some of the weekend protests within Hong Kong.

And so I think it will have some impact. I don't think it will be dramatic to our overall Asia business when we think about it as a percentage of our total business. But we will see some impact. And I haven't fully quantified with the team, but you'd expect that there'd be some reduction in sales of the back of this. Next time we're together, we will have a better view of that. And then lastly, on adjusted EBITDA, so we are making progress here. And so we are down. We saw the progress from Q1 to Q2. I expect for the second half of the year our adjusted EBITDA margins will be up year-over-year, but it won't be enough to offset the first half impact, which was down around 200 basis points in the numbers. I think we'll probably have EBITDA margin in some range of 60 to 90 basis points lower year-over-year for the full year, which if you can do the math you will know that the second half we should be positive on EBITDA. We are seeing some early signs of achieving that and -- but the first half is what it is and we won't cover all of that. I think that would be a good outcome for this business. I think we'll be, maybe, just shy of 15% EBITDA margin somewhere in that ZIP code plus or minus and versus last year, I think we're around 15.7% or 15.8% for the full year. But I think you will see and we've already started to see a noticeable kind of shift on the EBITDA as we move into the second half of the year.

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Operator [7]

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

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Dustin Wei, Morgan Stanley, Research Division - Equity Analyst [8]

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So the first question that I got is that throughout this call, I feel there are a couple of the contradictory information, so I think there is a positive comment toward the second half that it seems like we are going to see the positive sales growth into the second half and also on the second half year-on-year basis, we're going to see the EBITDA growth. But the tariff is only sort of picking in May and the price increase in U.S. starting in the quarter and you mentioned the gross margin pressure, the wholesale and retail customers sort of they do have the pushback and also in terms of the impairment that's done on the forward-looking basis that of the backward-looking basis so does suggest that you kind of take a more conservative view into the second half. But you still expect sales and EBITDA growth in the second half. So just could you provide some more color there?

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

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Yes. So I would just draw your -- I would draw your attention just to the slide that we talked about a little bit earlier that shows the comparables because don't forget that every single quarter that we are comparing, the first half last year was unbelievably high in terms of the sales growth. So compared to that, obviously there has been a decline. So naturally, again, for Q3 and Q4, the comparison gets better. The other thing that you should note is, yes, there is a lot of pressure under the U.S. still, although we are starting to see some improvement there. And if we're looking at this kind of down 5% number from a U.S. perspective, that's the U.S. The other regions and if you look at the quarterly trend have started to improve Q1 to Q2 and if you look at it for the half, the other regions were actually in positive territory despite the tough comparison with Q1 of -- or the first half of 2018. So as we get into the second half, we expect there to be a greater contribution that's coming from the international region as compared to the U.S. market to offset that. You're right in terms of the second round of tariffs and in terms of the margin pressure and there is going to be continued margin pressure in the U.S. specifically, but bear in mind like from a end-consumer perspective, we're also looking at what's happening in our DTC channels as compared to wholesale as well. So it's not just that we have a wholesale business in the U.S. So the hope is that as you have some product mix, you can offset that. So we have a little bit of greater control in our own channels in terms of what we put into the stores versus what's going into the wholesale channel. So that mix should be able to help us on the margin side as well.

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Dustin Wei, Morgan Stanley, Research Division - Equity Analyst [10]

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Okay. And regarding this impairment. So what kind of the subsequent financial implication, meaning, you talked about some of the stores being loss making. But I guess, some of them haven't been shut down. So after this impairment, will you actually shut it down or terminate the lease, you don't have any P&L impact? Is that what impairment does to the P&L in the next 2 quarters or maybe next few years?

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

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The financial -- there are 2 different questions in that really. So from a financial statement standpoint, the impairment -- you reduce the carrying value of the asset on your book. So the financial impact of that is the amortization, which is really the least expense because of the smaller number, now that flows through the financial statement.

So there is a benefit that happens in that regard as you're looking at amortization, specifically. Having said that, your question in terms of like what we're trying to do operationally. We are trying to exit certain ones of the stores. But as you can imagine, it's a negotiation with various landlords. So if you're able to exit the stores, it would have an EBITDA benefit that would happen if we do that. But the 2 are almost disconnected in certain regard in that there is an impairment that just it's a financial statement noncash issue that's there that works its way through and then what we're trying to do operationally in terms of managing the business to improve EBITDA. So the landlord negotiations, especially in the U.S. have not been that easy in terms of being able to actually exit the stores. We have been able to get some concessions on rents, which I think would have a positive impact on it. But in terms of pure exit, we're contractually obligated to stay there and what we're trying to do is to try to basically trade new store openings elsewhere with letting us out of the lease or reducing some of the rent expense that we have and those are kinds of negotiations that are happening.

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Kyle Francis Gendreau, Samsonite International S.A. - CEO & Executive Director [12]

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The amortization benefit on an annualized basis for the impairments we've taken is probably around $5 million. So you'll see an improvement in net income off of kind of reduction in amortization of around $5 million on a go-forward basis annualized. So you will get some of that in the second half obviously. The loss-making stores that are coupled in with this on balance, Reza, I think, they were around $7 million negative EBITDA.

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Reza Taleghani, Samsonite International S.A. - CFO [13]

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Yes, yes.

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Kyle Francis Gendreau, Samsonite International S.A. - CEO & Executive Director [14]

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So not the biggest of numbers when you think about the size of the business. But as we can exit some of those either through getting some rent concessions, which can lower that, but if we're able to exit few of those that could just scale for what might be the EBITDA impact or benefit if we're able to exit and so there will be some kind of middle road there on those as well. Net-net, you should see P&L -- operating ongoing P&L benefit right out of the gate with the impairment.

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Reza Taleghani, Samsonite International S.A. - CFO [15]

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And again, I said it on the call, but just to refresh it, the history, sound like these things have been on the books forever. It's literally IFRS 16 we put them on in January, and so now we have to start to continuously monitor this. Obviously, we did a very thorough scrub as we went through this given that the impact of tariffs, but it's something that we're going to have to do every quarter in terms of looking at it.

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Dustin Wei, Morgan Stanley, Research Division - Equity Analyst [16]

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So you've actually said the company start to close some stores by the negotiation with the landlord. Could that still have some of the losses like termination costs that's separated from this impairment?

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Kyle Francis Gendreau, Samsonite International S.A. - CEO & Executive Director [17]

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Yes. We could have some exit cost, yes.

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Reza Taleghani, Samsonite International S.A. - CFO [18]

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And sitting here today, again the point -- we don't anticipate significant numbers based on how negotiations are currently going right now. Obviously, that could change and we would exit and we would do the analysis to make sure that it's net-net positive and accretive to us, we would do that. And as Kyle said, it's about $7 million of negative EBITDA with these stores right now. So I believe if we can remove that, that will be a positive thing, but sitting here today, we don't necessarily anticipate a big number coming out of that.

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Dustin Wei, Morgan Stanley, Research Division - Equity Analyst [19]

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Okay. So going to the second half, there's no more impairment from this IFRS 16 review. Can we suggest that sort of that's a positive forward-looking comment or forward-looking thought into 2020 that those stores -- the rest of the stores within the portfolio, they're all good, they're all fine?

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Kyle Francis Gendreau, Samsonite International S.A. - CEO & Executive Director [20]

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Based on our current assessment, yes.

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

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Yes, yes.

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

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And again, look at the total store fleet, right? So we're talking out of a fleet of almost 1,300 stores, it's like 1,268, if I remember correctly, we're down by 44 stores.

So it's not like there is a massive number of stores, and we do literally look at these store by store in every single region.

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Dustin Wei, Morgan Stanley, Research Division - Equity Analyst [23]

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Got it. And finally, could you just provide some of the guidance for the sales trend by region for the second half?

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Kyle Francis Gendreau, Samsonite International S.A. - CEO & Executive Director [24]

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Yes. So I think, as I said, the North American business probably stays in the ZIP code of where it is, maybe a shade better, but I would probably say right in the same ZIP code. I think Europe will stay fairly consistent. Our view is Europe is probably slightly higher in the second half versus first half just because it was comping such a high first half last year with the American Tourister launch. So you should expect slightly better kind of growth number for Europe. For Asia, blended Asia should be slightly better second half, first half for the same reason. Asia had a very large first half last year. So we're blended with everything in it. Asia is probably a good, comfortable mid-single digit, maybe a shade higher blended with Tumi. And Latin America, as I said, I think, is back into its kind of teens territory for the second half. So blended kind of low teens growth for Latin America.

You blend that all together, we do think the second half of the year is a positive number. Where is it that? It's somewhere between kind of 2%, 3%, 4% is probably the way I would think about it from where we're sitting today. And blended together, that would actually shape the business to be slightly positive for the full year. That's our view at the moment when you blend together what we're looking at across the business. And so it's not some dramatic transformation from where we are. The U.S., we do think, continues to see pressure, but the blend of it all puts us at a slightly more positive spot than where we were, particularly out of the gate in Q1 of this year. You've seen Q2 is obviously slightly better.

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

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That's obviously on a constant currency basis.

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

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Constant currency basis, yes.

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Dustin Wei, Morgan Stanley, Research Division - Equity Analyst [27]

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And you did mention earlier on the call that June was flattish and July up 3% on constant currency.

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Reza Taleghani, Samsonite International S.A. - CFO [28]

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Say it again. Can you repeat that?

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Kyle Francis Gendreau, Samsonite International S.A. - CEO & Executive Director [29]

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Yes. So we saw positive trend for June and July for sure. These were positive growth months for us. Yes.

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Operator [30]

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Our next question comes from Erwan Rambourg with HSBC, London.

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Erwan Rambourg, HSBC, Research Division - Global Co-Head of Consumer & Retail Equity Research and MD [31]

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I just have 2 follow-ups. On the margin side, you said that June was up a point and July up 3% in terms of sales. What's needed actually to stabilize margins? And if you can answer this more in a holistic way, i.e., just regarding the advertising-to-sales ratio cut, I'm more thinking what sustainable top line growth do you need for margins to be flat to up? And then secondly, looking at the U.S., I'm just wondering if you have means to contrast (inaudible) tourism flows versus locals. I understand that Chinese are not coming as much and not spending as much in the U.S. and other nationals -- other tourists probably as well, but is it fair to assume that the locals are more flattish and that the bulk of the pain is coming from inbound flows which are evaporating? And then on the locals as well, if you can give us a sense of are you seeing big differences in terms of sales by price points or channels, or what are the moving parts in the U.S.?

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Kyle Francis Gendreau, Samsonite International S.A. - CEO & Executive Director [32]

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Okay. On the margins side, this is really kind of EBITDA margin, right? We'll see a positive trend -- a noticeable positive trend in the second half is the way I describe it. That's modeled with initiatives. As we've kind of talked in the past, when this business -- as it starts to get into a 4%, 5%, 6% growth level, and I think the right kind of natural place for this business on a go-forward basis is somewhere between 5%, 6% and 7% growth on a very sustainable kind of repeatable basis take out kind of these headwinds. And we're actually not so far off from that today if we adjust for these few pockets of territories that are seeing impact that I think we'd all agree are kind of unusual in nature at the moment. So we're not so far off from getting to the point that we deliver leverage -- this operating leverage.

My view for next year is, we should be in that kind of ZIP code, and we should be able to easily maintain and ideally deliver. We'll be moving into a budget cycle. The wildcard is U.S. tariffs and where that ultimately settles with U.S. consumer confidence, particularly if second rounds of tariff goes in. If you read the news, you would read the U.S. kind of consumers chugging right along and the U.S. economy is chugging right along. And I think there are pieces of that, which I think is what you're trying to get at in the local versus inbound traffic.

I think we're unusually pressured because a big part of our U.S. business is tied in with whole -- bigger wholesale customers who are managing kind of expectations in their own kind of way so we've got this kind of lumpy wholesale business. And on balance, our wholesale business in the U.S. is down, I believe, the number is around 7%-or-so. And actually, our direct-to-consumer business when you blend in e-commerce, taking out eBags, is actually fairly strong on a blended basis. Our DTC e-commerce in the U.S. is up 22%, 23% or something like that. I might argue that has some measure of kind of what's cooking in the U.S.

Our U.S. non-gateway comps are probably flat to slightly down. So I don't know how you want to read into that on a blended basis. So it's a combination of both, but this inbound traffic really impacting gateway stores is a meaningful impact. And so what's the exact mix? Is it 70-30 kind of inbound traffic versus kind of tariffs? That would be my guess at the moment, but we don't have a clear visibility to that. We do see our non-gateway stores performing okay. But muddled in wholesale, we see wholesale customers just acting and managing through the tariff stuff in their own way and they're managing things like inventory levels and just kind of general flow of their traffic. If you look at the releases of some of these companies, they're talking very similarly about inbound traffic impacting their own stores that are tied in with gateway stores. So I think Macy's release last week has a very similar kind of tone and feel to what I'm saying here right now. And so that's the kind of general way to answer that, Erwan.

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Operator [33]

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Our next question comes from Jack Chang with CLSA in Hong Kong.

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Jack Chang, CLSA Limited, Research Division [34]

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Only one question for me. Management leans more on the cost to implement profit improvement initiatives. This sound a new item.

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Kyle Francis Gendreau, Samsonite International S.A. - CEO & Executive Director [35]

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Yes. So in terms of what it is, it's really -- think of it as severance. So if we're taking actions in terms of our cost structure and we have to remove headcount, you will have charges based on the different jurisdictions and what contract terms you have for the various employees or what we would have to pay in terms of severance. So when we go through the actions of terminating employees, we have to basically take those charges in and then you will see a run rate benefit that comes from that or an annualized benefit that comes from that headcount being removed. And the math that we do and which you've seen in the presentation here is we obviously want it to be accretive. So if we're taking a onetime hit in order to be able to terminate an employee, obviously, the run rate savings should exceed that, which is the way that it looks based on the actions we've taken thus far.

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Operator [36]

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(Operator Instructions)

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Kyle Francis Gendreau, Samsonite International S.A. - CEO & Executive Director [37]

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Okay. Operator, thank you very much. William?

Oh, we have a question? Okay.

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Operator [38]

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

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

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Just one last thing on the EBITDA margin for the North America. So in the first half, it's down quite a bit, down to like 11.6% adjusted EBITDA margin. So in order to get to the EBITDA profit growth for the second half for the whole company, what kind of the EBITDA margin we should look at for the second half for the North America?

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Reza Taleghani, Samsonite International S.A. - CFO [40]

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I won't give you the exact number, but remember initiative that we've put into play, we talked about, really saw just a piece of that in the first -- in the second quarter and a big chunk will be really in the second half. And a meaningful amount of that was in kind of initiatives in North America. So you'll see some of the benefit of those initiatives, which really hadn't fully played in the first half numbers, play into the second half numbers for the U.S. So that coupled with kind of margin, which we're kind of managing through in the U.S. business, my sense is you'll see EBITDA margins consistent, if not slightly up, off the back of the initiatives that we've played out there.

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

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And the EBITDA margin for the second half of '18, that wasn't a very high base, that was a normal sort of -- 18% was in the high base for the second half, right?

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Kyle Francis Gendreau, Samsonite International S.A. - CEO & Executive Director [42]

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Well, yes, the second half is always a slightly higher kind of margin for us anyways. And the U.S. was -- if you remember, right up until Q4, the U.S. had a strong year last year. So it's against kind of better performing last year for sure for the U.S. So...

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Reza Taleghani, Samsonite International S.A. - CFO [43]

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Especially Q3, Dustin.

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

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Great. Thank you very much, everyone, for the call. And thank you, again, Tim, Kyle and Reza for presenting today.

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Kyle Francis Gendreau, Samsonite International S.A. - CEO & Executive Director [45]

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Thanks, everyone.

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Reza Taleghani, Samsonite International S.A. - CFO [46]

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Thanks, everyone.

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Timothy Charles Parker, Samsonite International S.A. - Non-Executive Chairman [47]

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Thanks, everyone.

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Operator [48]

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Thank you. Thank you for your participation. This concludes the conference.