Friday, March 29, 2024
 
Columnist
Martin Hennecke
 
SAMSONITE
HKEx Stock Code : 01910 
 
Corporate Profile
Principally engaged in the design, manufacture, sourcing and distribution of luggage, business and computer bags, outdoor and casual bags, and travel accessories throughout the world, primarily under the Samsonite and American Tourister brand names and other owned and licensed brand names.

Business Review - For the year ended December 31, 2012

2012 is the first full year post the listing of the Company on the Main Board of The Stock Exchange of Hong Kong Limited in June 2011, and I am pleased to report another very encouraging set of results. Although general economic performance across many of our key markets has been uneven, the growth in tourism and travel, which underpins our business, has been robust. As a result, our sales grew strongly in Asia and the US, and despite the troubled situation in the Eurozone, there was a useful advance in this region. The Company also made two important acquisitions to complement our Samsonite and American Tourister brands: High Sierra, purchased for US$108.0 million, is an outdoor lifestyle brand with a strong position in casual luggage; and Hartmann, purchased for US$34.0 million, is a leading travel goods brand in the luxury segment with a heritage dating back to 1887.

An important feature of the economic landscape in 2012 has been the stronger US dollar. We are pleased that the Company has achieved the results reported below in spite of this considerable headwind: this affected mainly Euro economies and India, with pressure on input costs and the negative translation impact of sales and profits into our reporting currency.

In 2012, the Company''s total net sales increased by 13.2% from the previous year to a record US$1,771.7 million. Excluding foreign currency effects, net sales increased by 16.8%. Reported profit of the Company increased by a substantial 60.8% to US$166.6 million. However, in the report below, some key measures are reported with some adjustments, and this is designed to give a clearer picture of the underlying performance of the business. In the main, the adjustments relate to one-off costs associated with the listing in 2011, as well as certain non-cash charges. On this adjusted basis, Net Income increased by 22.2% to US$167.2 million.

Adjusted EBITDA, which we view as an important measure of the Company''s overall profitability, increased by 15.4% to US$286.5 million. On the same basis, the EBITDA margin on sales advanced slightly from 15.9% to 16.2%.

One area of significant improvement over 2011 is the cash flow generated from operating activities, which increased from US$64.5 million in 2011 to US$203.0 million in 2012. This contributed to a net cash position of US$116.0 million at the end of the year, despite expenditure on acquisitions of US$142.0 million.

Earnings per share on an adjusted basis increased from US$0.10 in 2011 to US$0.12 in 2012. The Board has previously indicated its intention to follow a progressive distribution policy, and given these strong results, has recommended that the cash distribution to shareholders should be increased from US$0.02132 per share paid in 2012 to US$0.02665 per share to be paid in 2013. This represents a total cash distribution of US$37.5 million.

Our Board of Directors granted share options to certain directors and employees of the Company and its subsidiaries on January 8, 2013. The share options entitle the recipients to subscribe to an aggregate of 15,532,227 new ordinary shares. Our share award scheme assists the Company in attracting skilled and experienced personnel, incentivises them to remain with the Company, and motivates them to strive for the future development and expansion of the Company by providing them with the opportunity to acquire equity interests in the Company.

There are several factors responsible for the continuing strong performance of our business. Firstly, we have consistently applied the strategy outlined in my last report and described above. In essence we are a company that seeks to achieve the benefits of global scale whilst at the same time tailoring our products to the tastes of local markets. The Company has a highly developed sourcing and logistics infrastructure supported by effective, frequently updated systems. However, the strength of our business rests on the building blocks of the regions, and the individual markets within each region. All of our key markets, from the US to China to Germany have their own particular consumer tastes and distribution characteristics. It is our ability to adapt to these widely differing requirements, whilst at the same time strictly controlling brand image and quality, that sets our company apart. Not only do we go local in terms of product; we aim to staff our operations around the world with local talent imbued with an understanding of what drives consumers in their respective geographies.

Secondly, the travel and tourism market, a key driver of our business, continues to expand, with global inbound tourists reaching 1 billion for the first time in 2012 according to the World Tourism Organization (UNWTO). Not only is Asian tourism growing at a fast rate, especially into and out of China; in more mature markets, the increase in the number of routes flown by budget airlines continues to drive demand. Changing regulations on cabin baggage on aircraft and the increasingly common practice of weight-based charging for hold baggage have made consumers more aware of volume capacity and lightness in luggage.

Thirdly, we have responded to these shifting requirements with innovative product designs supported by relevant marketing campaigns. The extent to which Samsonite invests in advertising its brands globally ahead of our competitors, explains why our business has gained share in many key markets. We are always looking for new ways to excite our customers'' interest with new features, new looks and new materials on our products.

Fourthly, it is noticeable this year how much the American Tourister brand has contributed to our overall results, especially in Asia. Whilst Samsonite, the world''s leading travel goods brand, accounts for a high percentage of our sales, the more affordable American Tourister product ranges are finding a large market of customers seeking a more accessible international brand. This has also been a strong year for the brand in the US, and we are gaining some traction in Europe.

Thus, in 2012, sales under the Samsonite brand on a constant currency basis, increased by 9.7% to US$1,295.7 million (73.1% of sales). On the other hand, American Tourister increased by 47.4% to $354.6 million and now accounts for 20.0% of total sales. Most of this growth (over 80% of the increase) was in Asia.

As mentioned above, the strong dollar had an impact on our business this year, in particular against the Euro (which ended the year at an average rate of US$1.29 versus US$1.40 for 2011) which reduced our reported sales by approximately US$28.0 million. The other significant currency affected was the Indian Rupee (down from an average rate of US$0.022 to US$0.019 over the year) with a reduction in US dollar reported sales of approximately US$14.8 million. Allowing for these shifts and looking at constant currency comparisons, Asia and the US were the main drivers of growth in 2012, both in excess of 20.0%. Europe felt the full-year effect of the Eurozone crisis, pushing growth in Euros down to single digits (and slightly negative in US dollars). A similar low growth rate was recorded in Latin America, wholly due to the impact of physical import controls being imposed in Argentina, our third largest market in the region.

Asia is Samsonite''s largest region by a wide margin, with sales of US$684.2 million accounting for 38.6% of total company sales. Excluding foreign currency effects, sales growth in 2012 was 21.0%, which although an excellent result, is lower than previous years. This reflects in part the maturing of the business, as last year''s base is considerably higher than the year before. It is also the result of some softening in the Chinese economy and difficult conditions in the Indian market. Despite these challenges, we are pleased with the result in the Chinese market where sales were up 20.4%, driven by a strong American Tourister performance and the continuing expansion of points of sale. Although there is a new realism in expectations of the Chinese economy, it will remain the lynchpin of our Asian business, and we continue to invest in new retail distribution - last year we added almost 200 points of sale to bring the total to just under 1,000. South Korea has become our second biggest market in Asia, with sales growth of 33.7% coming mainly from American Tourister TV home shopping business and new Samsonite Red casual brand which has rapidly attained critical mass. 2012 was a difficult year in India, but better economic conditions and some reorganizing of our operations saw improving results in the latter part of the year. Another market where the Company made progress was Japan, where the sales advanced 27.4%. We have successfully opened more counters in department stores, and the Company''s Deux Moncx premium leather goods brand has also made good progress. Mention should also be made of some of the smaller markets such as Thailand (sales up 16.9%), Indonesia (sales up 61.9%) and the Philippines (up 32.8%), which will grow in importance over the next few years.

2012 was a great year for our North American business. Our organic business benefited from a raft of new product listings, and this reflected the strength of our business model which gives the local team freedom to tailor our products closely to the requirements of major retail partners and consumers. It was encouraging to see listings not only with department stores, but some important gains in hypermarket chains and electronic retailers. Sales increased by 28.9% on a constant currency basis. Excluding the impact of the acquisitions of High Sierra and Hartmann, the increase was still an impressive 22.3% in what is quite a mature market. Both Samsonite and American Tourister contributed to the growth in the market, with sales up 21.6% and 23.7%, respectively. It is too early to assess the performance of High Sierra and Hartmann, which derive most of their sales from the American market. However the integration of both businesses is substantially complete, and plans are well advanced to expand product ranges and distribution.

It was a more difficult year in Europe, with sales up 4.9% on a constant currency basis. We are pleased with the progress in Germany, where turnover increased by 14.9%, and it has now become our number one market in the region. However, conditions were tough in Southern Europe, with Italy down 15.7% and Spain down 9.2%. Most other markets performed adequately, with some of the emerging territories doing particularly well, most notably Russia, South Africa (part of this region) and Turkey where sales were up 37.5%, 33.2% and 13.6%, respectively. The new Curv Firelite model shows promise and the new polypropylene S''Cure case has been a great success. On the other hand a dearth of new product introductions dented the business category. There is now a strong pipeline of introductions for 2013.

Our Latin American business continues to suffer from the effects of import controls in Argentina, where our sales contracted by 23.8% in constant currency terms. Overall, sales for the region increased by 7.5%, with the two key territories of Chile and Mexico up 11.0% and 11.9%, respectively. One of the main sources of growth in these markets is the back-to-school backpack business under the Xtrem brand, which has done well. Brazil, where we are extending our points of sale, was up 14.1% and represents a major opportunity in the future.

Most of the growth in 2012 came from travel products, up 18.5% in constant currency terms, and now accounting for 76.6% of the total Company sales. Globally, the hardside luggage market has been buoyant, and we have especially strong product ranges in this category. Also, much of the growth under the American Tourister brand has been in the travel segment. It was a disappointing year for the business category: whilst sales were up 20.8% in the US, we could only manage 5.9% in Asia and a fall of 19.3% in Europe. Some of this was due to late product introductions, as we completely overhauled our ranges in this segment, and as noted above next year should be stronger. The casual category increased by 36.6%, reflecting in part the contribution of High Sierra, but the Company also benefited from an expanded product offering. It is also encouraging to report that accessories were up 17.2%, as we continue to invest in new product offerings, and we also made some progress in small leather goods, umbrellas and handbags, although this is still a very limited activity.

One of the great strengths of our business is the ability to invest far more than our competitors in our brands, and this remains a key element of our product and marketing strategy. However, in 2012, although our spend remained substantial, at 6.6% of sales, it was down US$5.6 million, or 4.6% on the previous year. The reason for this is primarily mix, with faster growth in the US diluting the overall spend, but it was also affected by some curtailing of spend to maintain the profitability of the European business in the face of tough economic conditions. In the future we expect our investment in marketing to increase broadly in line with sales.

As mentioned earlier, this has been a difficult year for currency. In Europe especially, the effect of a higher Renminbi on margins has been significant, although we have been able to mitigate the impact with two price increases. Whilst the strength of our brand has supported these increases, this situation is not repeatable indefinitely. Already, as sentiment towards the Eurozone has improved, the Euro has reversed some of the losses of last year, but the eventual outcome cannot be predicted with any certainty. Our factory in Szekszard, Hungary has doubled output and we are exploring other possibilities to manufacture closer to markets in the US and Europe. However, Asia will continue to be the base for sourcing many of our products, and we are working with partner factories to improve productivity in the face of rising labour costs.

Capital expenditure was virtually unchanged on last year: up from US$37.2 million to US$37.9 million. Most of this related to the expansion of capacity in Szekszard, and further investment in retail stores. There will be a substantial one-off increase planned for 2013 to US$72.6 million for the construction of a new warehouse in Europe, further retail expansion and some additional investment in machinery and equipment.

Net cash flow from operating activities increased substantially in 2012, from US$64.5 million to US$203.0 million. This reflected a US$84.8 million increase in cash flows from operating assets and liabilities, as well as the US$30.4 million increase in Adjusted Net Income year-on-year.

The Company''s net cash position at the end of the year, and our improving cash conversion from EBITDA, will provide a strong platform for future growth, through investment in our organic business, and by acquisition. We believe the Company can take advantage of a highly-developed international distribution platform and experienced management team to expand our stable of brands focused on the travel, business and casual bag segments, as well as accessories. The global market for these products is still fragmented, and we expect to find opportunities to augment our business across categories and markets.

Business Outlook - For the year ended December 31, 2012

It is my strong view that a good strategy is one which is consistent. It''s worth reiterating the main points of our own, because at all levels this informs our day-to-day management of the business. These are, to:

¡EContinue to gain market share by leveraging the strength of the Company''s brands, Samsonite, American Tourister, High Sierra and Hartmann;

¡EIntroduce new and innovative product designs, adapted to the needs of consumers in different markets, whilst maintaining our core values of lightness, strength and functionality;

¡EImprove the efficiency and effectiveness of our supply chain and global distribution network;

¡EIncrease our investment in R&D and marketing broadly in line with sales growth;

¡EAllocate more resources to the business, casual and accessory categories, where the Company''s share is relatively low; and

¡EActively evaluate acquisition opportunities that have a compelling strategic fit, leveraging a strong management team and balance sheet capacity.
It is hard to discern a clear trend to the global economy in the near term. It would appear that America is recovering and the outlook for most markets in Latin America is positive. Chinese growth appears steady, and there should be firmer conditions in India. The outlook for most other Asian economies also looks encouraging. On the other hand, there is a greater degree of volatility in sentiment in Europe. Better financial conditions have yet to translate into improved consumer confidence in Southern European countries and we remain cautious about this area. That said, these markets now account for less than 20.0% of our business in the region. On balance our view is that the outlook is somewhat more positive for next year than last as economic sentiment improves and with continued buoyancy in the travel and tourism industry. We believe the Company is well placed to implement its growth strategy and to further strengthen its position as the global market leader in travel goods.

An annual report of course, by definition, deals with the financial outcome of our endeavours. There is no equivalent way to report on the human element to our business, but it seems to me that more effective teamwork is what often differentiates one company from another. In this department I have no doubt that Samsonite scores highly, and without such a committed team of people, we could not hope to manage such a diverse business. I would like to thank all of our people across the world for another year of success on many fronts. There is now strong momentum in the business, and we can look forward to the future with confidence.

Source: Samsonite Int'l (01910) Annual Results Announcement
Chairman Timothy Charles Parker Issued Capital (shares) 1,407M
Par Value USD 0.01 Market Capitalisation (HKD) 30,535M
 
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