Samsonite International S.A. (SMSOF) CEO Kyle Gendreau on Q4 2018 Results - Earnings Call Transcript

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About: Samsonite International S.A. (SMSOF)
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Earning Call Audio

Samsonite International S.A. (OTCPK:SMSOF) Q4 2018 Results Earnings Conference Call March 13, 2019 8:00 AM ET

Company Participants

William Yue - Investor Relations

Kyle Gendreau - Chief Executive Officer

Tim Parker - Chairman

Reza Taleghani - CFO

Conference Call Participants

Anne Ling - Deutsche Bank

Chen Luo - Bank of America

Dustin Wei - Morgan Stanley

Mariana Kou - CLSA, Hong Kong

Operator

Good morning, good afternoon, and good evening, ladies and gentlemen. Welcome to Samsonite International 2018 Annual 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.

William Yue

Good evening, everyone. Welcome to the 2018 results earnings call for Samsonite International SA. We’re pleased tonight to have Tim Parker, Chairman, Kyle Gendreau, CEO, and Reza Taleghani, our CFO joining us tonight for the call. And I will now hand over to Mr. Parker for him to make a few opening remarks and then we’ll go right into the presentation. Thank you.

Tim Parker

Okay. Thank you very much indeed, William. And I’d like to welcome everybody today. And just give you a brief overview what I think is a very strong set of results, again. The highlights are really fabulous expansion with Tumi. I think, the – we made enormous progress with the American Tourister brand. We’ve had, I think, very, very robust direct-to-consumer growth. We’ve started to pay considerably more attention and to integrate environmental and social governance that has an impact across our business. And on the negative side though, we have seen a deteriorating economic environment in the second half. So just running through these main theme. The first point I would make is the incredible success of the Tumi acquisition. To call this a textbook doesn’t really do justice, I think, to what is being a truly outstanding performance. And we’re very proud of what has been achieved here.

Overall, growth across the group of 12%. Good showing and North America are up 4%. Rapid progress in Asia, almost 30% growth. Laying down very solid foundations in Europe. And we have started direct distribution in Latin America. Very robust set of products and a lot of activity on new developments.

American Tourister had a fantastic year buoyed of course by the incredibly successful campaign around Ronaldo. Growth in the U.S. of 16%, in Asia 9%, an incredible 39% in Europe and up by over a half in Latin America. And this has not just been a one-off campaign, along with some very exciting product introductions, I think this has really established a new base for the brand. And we have great expectation of the future.

Moving on to the next main theme of the results for 2018. The company continues to make more progress and increasing the share of direct-to-consumer business across the group. e-commerce continues to rapidly expand, up almost a third, and we’ve added a considerable number of stores across the world. Our retail business up 11.6%. And this has been something that we have invested in all of the regions across our business.

On the negative side, I think it’s fair to say that we’re a business that has been affected by the tariff uncertainty and continues to be affected by that. We have seen 2 key markets suffering in different ways. South Korea, of course, has been in the headlines this year very much in terms of, again, the security situation. And China, the impacts, again, of the tariff uncertainty has begun to weigh somewhat with consumers there.

And of course, in Europe, the impact in France of the gilets jaunes demonstration has had some impact as well. Most of the pressure came on in the second half. And I must say as I look ahead to 2019, I think, we could be facing one of the toughest trading environments that we have faced around in a long while until some of the key uncertainties are removed. And there is also some understanding, I think, of the future path of growth in China, in particular.

As we have highlighted, the company is starting to focus a lot more on environmental aspects of our business. We are putting in place a significant target to reduce carbon emissions. A large number of our product developments are now incorporating sustainable materials. We have 1 range, which is made entirely of recycled plastic bottles.

And this, I think, is only the start of a very important trend. And in our supply chain, we are very focused on obviously making sure that our suppliers meet the very stiffest requirements in terms of the treatment of people. And indeed, our own people, this company has been a very diverse and quite decentralized business. And we have concentrated quite a lot this year on making sure that a very wide ranging business across the world does have common standards and a very clear principles in relation to our own people.

And so, in essence, our business depends on brands. Our 3 core brands have seen very good growth this year. And I’m pleased to say that some of what you might call a subsidiary brands, which we have acquired, have also enjoyed a very strong year.

So in summary, we’re very pleased. Having said that, as we look ahead, we think there may be some storm clouds on the horizon.

And with that, I’ll hand it over to Kyle, our CEO. Kyle?

Kyle Gendreau

Okay. So good evening, good morning, everyone. I’m on Page 12. I think it should be on your screen. So our business overview. When we look at our sales, Tim’s covered some of this, but if you look at our sales for the full year, we’re up 8.4% on a constant-currency basis, adding over $300 million in sales.

There is a bit of a benefit from eBags, which is in there. But even if I adjust eBags, which was acquired in May of last year, we’re still up 7.5% underlying constant-currency growth for the year.

Our gross margin expanded as we expected. We saw a 9% growth in our gross margin, and from a margin rate perspective, we added 40 basis points. Some of that coming from our Tumi business, which continues to grow at a faster pace, along with good margin management within most of our business.

Our EBITDA was up 5.7%. We did see some pressure on EBITDA margin. We had been talking about EBIT margin in the middle of the year being flat to slightly up as we saw some slowing in our business. And Q3 and Q4, the margins kind of slipped back a bit. So we’re at 16.2%. A lot of that is around some of the investments we’re making. So when we get into the regions, I’ll show you, of where we’ve seen that particularly in markets like Europe and Latin America, where we’ve been investing to drive growth within those businesses.

And then our adjusted net income was up at a faster clip at 12.2%, benefiting from reduced tax rate. So we had a slighter lower effective tax rate. And we also had $9 million of reduced interest costs year-over-year with a debt refinance we did in the first half of the year.

If I go to next slide, sales bridge, really to give you a sense for kind of the building blocks. And so I think it’s important when we break this down when you look at underlying core growth of this business, taking out the movement we’ve seen in the Tumi business, we saw $167 million of growth or 6%. This is coming from brand Samsonite, American Tourister and other brands, excluding eBags and Tumi. Our Tumi business was up 12 – almost 12%. $80 million of sales added across all of our regions, as Tim just explained. We also had 4 additional months of eBags, which again was acquired in May of the previous year, which added sales on a smaller impact on a positive side from currency.

When you look to the side here, you can see all of our regions are growing nicely. Asia is up 7%, North America just under 3% growth, Europe at 8.4% growth and Latin America 13%. So across regions very strong growth. And if I look at our Tumi business, as Tim covered, Asia is up 30%, Europe’s up 10% and building momentum as we’ve laid the footprint, and our North America business was up 4%. We did some conscious decisions within North America for Tumi to stop selling to some customers that shipped into the Asia market. If I adjust that up for North America, our underlying growth was up 5.6%.

As we said earlier, all of our brands are growing. So our core brand, Samsonite really growing nicely at 3.1%, growing in all regions. And our Tumi business up 12%, American Tourister up 16.5%, again, across all regions, as Tim explained, and other brands really driving very nice growth with some of these – the key initiatives around the brand Kamiliant, which is a very entry-level brand used largely in select markets in Asia, up close to 45%. Our Speck business up close to 9%. Gregory 10%, with a big initiative and pushing in Asia and North America. And our core eBags business in the eBags brand within eBags growing very nicely as well, separate from the 4 additional months for eBags.

And then we – as we said earlier, we’ve focused on pushing the female category. And when we start to look at these numbers, products geared towards female consumers up 30% across the portfolio of brands, doing very well.

We’ve had some very exciting product in the year. We – at the start of this year, we relaunched the Alpha 3 Collection, that’s off to a good start. We fuel that with a very good campaign with Zoë and Lenny Kravitz that has been well received and hopefully many of you have seen that in the start of this year. And then from the Samsonite side, we have some really terrific new products on both on hard side. You can see here clearly some of the women’s products working in and some new materials working into our – some of our business and carry-on bags with this SXK Expandable Spinner bag, which is made out of a material in conjunction with Kevlar and it’s doing very, very well.

Just an overview of Tumi on the next slide, Page 16. Again, our North American business for Tumi up 4%. We saw, again, this reduction in shipments to our sales to trans-shippers. If I take that out, our North America Tumi business up 5.6%, still running a bit ahead of where we targeted when we acquired the business. Direct-to-consumer up 8% with really strong e-commerce growth. Our retail business up 6.4%, with store comps close to 2%. And we’ve added 7 stores in ‘17 and we added 9 stores in 2018 in North America. And the decrease in our wholesale business is, again, the reduction in these trans-sales to trans-shippers.

Asia really on fire with 30% growth. I would label it as building momentum. Direct-to-consumer up significantly, with retail up 49%, with strong same-store comps close to 10%. And 15 stores in 2018 and 38 stores in ‘17, some of which were us taking direct control in some of the countries where it was through distributors. And the wholesale business up close to 16% as well. So Asia continues to do very well.

Our Europe business up 10%. 20% growth in D2C where we’re starting to really lay the footprint there. e-commerce up close to 40%. Retail up 18%. We’ve started to add stores with 12 new stores in ‘18, 7 in 2017, and comps of 3%. And also in Europe, the wholesale business was down slightly as we’re adjusting, which customers we’re selling to, again, to stop some of the trans-shipping that’s been happening into Asia from the Europe market. And I would say, Tumi Europe is building momentum, so at 10% but with a strong trend as we move into 2019.

As Tim said, we’ve seen some slowing in the back half. So on this next slide, we – just to give you some sense, we had a very strong Q1 of last year 15.5%. And if we take eBags out that number is around a 11% growth Q1 last year. Q2 is very strong. And as we started the message in the half and really into Q3, we are seeing some headwinds in certain markets that’s driving a lot of this. So we saw a 5.2% growth Q3. 4.3% overall of just under 5% growth for the second half. And as we lean into the start of 2019, we’re seeing these same pressures. Against a very strong Q1, I would say our Q1 outlook is looking like it could be flat to slightly down, again, of a strong growth in Q1 last year. And for the same reasons, we’re seeing kind of headwinds in the back half of ‘18. We’re seeing them carry in into 2019 to start the year.

The next page gives you a sense by kind of major markets and where we’re seeing some of this. And so if you look at first half, North America, we’re up close to 5% in the first half, 3.5% in the second half. China quickly adjusted itself. First half, we’re up a 11%. We’re feeling very good with that, and that’s adjusted down to 3.2% in the second half. Again, a lot of this is around consumer sentiment, particularly around tariffs and some decrease in B2B orders, which we’ve seen in that China business, particularly as the government has kind of tightened up on monetary policy that impact some of our B2B business in China as well.

South Korea, we had – we’ve had a few years now of South Korea being slower. We saw a little bit of upside in Q1. We gave a lot of that back in the second half of the year.

In Chile, where we’ve been messaging as well. Chile continues to be under some strain, some of it around our – some of our business shifting to Argentina, but general sentiment in Chile in our – within our business where we’re well penetrated, we’re seeing some softness in Chile in the second half of the year as well. And the reasons being as reported and these are big markets both across the regions, but – and then overall sense for our business.

For North America, next slide, we saw an overall growth of 6.5%. If I exclude eBags, it’s around 4% growth. And the EBITDA margins here for North America is expanding, particularly with the help of Tumi so. And if you go down the page here, our wholesale business was up 1.8%. If I adjust for the trans-shippers for Tumi, we’re up around 3% in our wholesale business. Direct-to-consumer very strong in North America, 13% growth.

Again, if I adjust for eBags close to 8% growth. e-commerce growing very, very nicely at 26.9%, a little bit of benefit of eBags, it’s still 15% growth. And our retail business was up nicely as well with 5.9% growth, close to 2% comps. We’ve added a select number of stores in 2017 and ‘18, 12 and 11, of which most of those were actually Tumi stores that are within the North America business.

Across brands, we’ve seen good growth across brands. Samsonite up 2.5%, Tumi up 4%, American Tourister, as Tim said earlier, with a success of successful launch of many new products, up close to 16%, and growth in our other brands up 13%, with Speck and again eBags kind of core brand within the eBags business growing very well. Our core travel category up close to 4%. And as you’d expect and as we’ve been guiding our non-travel category growing faster at 10% growth.

If I move to Asia, overall, for the year, growth for Asia is 10.2%, led by India, Japan, Hong Kong and China for the full year. We saw in our wholesale business growth of 6%, and we saw a 27% growth in our direct-to-consumer channel, partly impacted by the takeover of some of the Tumi distributor markets we’re running those direct. Our e-commerce business up 44%, really growing nicely across most of our markets in Asia. And our brick-and-mortar retail up 21%, with a strong store comp of 6.6%. And we added 54 stores in ‘17. Again, 30 of those coming from Tumi take back and 12 net new stores in ‘18, all performing well.

Our across brands, all of our brands grew for Asia. We saw American Tourister up 2.1%, some of that is a shift. We had a shift in 2018. We’re in our – in some of our businesses, particularly in China, we shift some of our B2B business to American Tourister, which helps some of that American Tourister growth, which slows a little bit of Samsonite growth within this region. Tumi up 30%, American Tourister up 9%, again across all of our major markets India, China, Hong Kong, all doing very well. And then we saw some of our other brands up 23%, with Kamiliant in that market and High Sierra in that market growing very, very well.

Travel category up 8%. And just like other markets, our non-travel category is up close to 14%, with business growing very strong, casual and accessories all growing well. We’ve done a good job of improving EBITDA margin in Asia. We’re up around 30 – 20 basis points, getting some benefit of the Tumi expansion, which has higher margins.

But the overall margin management in Asia has been very strong as well.

In Europe, we saw a very strong year, 8.6% growth, slightly slowing down in the second half, but still really positive results. For the first half of last year, I think, grew up a little over 10%. For the full year, we’ve ended up pretty close to 9%. We saw around 5% growth in our wholesale business, and we saw 15% growth in our direct-to-consumer business, with strong retail growth and strong e-commerce growth of close to 30%.

This is a market where we have been investing in brick-and-mortar. So if we look at what we’ve added for stores in 2017 and ‘18, 32 stores in ‘17, 40 in ‘18, as we’re really kind of lay some footprint down in select markets in Europe from a retail expansion perspective. In doing that, it puts some pressure on the margin. So as we were talking all through the year and at the end of the year, you can see our EBITDA margins for Europe at 16.9% last year, 15.2%. A lot of this is laying down the foundation for this brick-and-mortar expansion within Europe.

Our brand Samsonite is up 3%. The Tumi business up 10% and building momentum. And we had strong growth in American Tourister as we’re in the third year of American Tourister and the Ronaldo campaign extremely successful in Europe coupled with some very exciting new products that we’ve launched.

Core travel business up close to 8% and our non-travel business up 10.5%. If you look at our EBITDA margins, just to kind of recap on that, we saw EBITDA margins down around 1.7%. This is a little bit of a decrease in gross margin as the mix of American Tourister. With that rapid growth pulled the gross margins down a bit. But on the non-advertising SG&A expense, we saw that increasing as we’ve added some retail footprint to the European markets. So really in this investing mode in Europe to push this direct-to-consumer strategy in a more aggressive way.

Similar to Latin America, we saw a very good growth, $18 million of sales added, 15.5%. And if you look at our EBITDA margin, slightly down, but again, this is us investing in some of the retail footprint there. Our wholesale business was up 15.5% and our direct-to-consumer business was up 15.5% as well. Retail sales up 12.7%, 29 new stores added in ‘17 and 21 stores added in 2018. These are stores largely in the market of Brazil. We’re opening some stores in Mexico as well and a bit of store opening in Argentina, but largely coming from Brazil and Mexico.

And our e-commerce business, which was virtually nonexistent in Latin America 2 years ago, was added – is up to $2.3 million in sales for the year and really growing rapidly within this business. So expect a lot more from e-commerce in the coming years.

Samsonite was up 16%. American Tourister was up 51%. And we had 2.1% growth in other brands slower than Samsonite and American Tourister because within our Chile business, we operate with the brands Saxoline and Xtrem. And as our Chile business has seen a slowdown that causes the other brands to be down just a bit. The net sales growth for travel up 13%. And again, just like other regions, the non-travels growing faster at 17.4%.

So the next slide, you can see just a snapshot of our kind of more significant markets. And if you really go across the page, you’re seeing growth across most of these markets. We – I would point out just a few. We saw France slowdown in the second half of the year, with the noise we’ve seen in France, but still delivering some growth at 1%.

You can see Chile at the end, which is effectively flat for the year and off many years of kind of very extensive growth. And South Korea, I would point out there as well, which is a bit flat for the full year as we continue to see pressure there. U.S. business up 6.6%, and our China business in constant currency up close to 7%.

And then our – what we would label as our kind of emerging markets, the blend of all of our emerging markets continue to grow at a faster pace 20 – close to 20%. And across all of these, other than Thailand, which has had a little bit kind of political noise. Really nice growth across each of these markets with markets like Turkey, Russia, and even markets like Mexico growing very nicely. Indonesia is a very exciting opportunity for us. We’ve recently changed the leadership there and we’re seeing very good growth in that market as well.

On the direct-to-consumer front, Tim covered some of this, but our direct-to-consumer business overall has increased from 33.4% of sales to 35.9%. When you look at our wholesale business, up 5%, which is very solid, but as we – as you’d expect that direct-to-consumer growing faster with 16.5% growth. Within that, we’ve added 84 new stores in 2018, with our brick-and-mortar retail up 11.6%. And we had the full year effect of 127 new stores in ‘17, some of which were the Tumi take back and some were around investments. And our overall retail comps for the year across our retail footprint was up 3.2%.

We’ve continued to invest in advertising. We’d held our advertising at fairly consistent percent of sales of last year at 15.8%, last – the year before, we were at 15.9%. We spent a total of $221 million in advertising. You can see the spread across the regions. We’ve been very focused on pushing and promoting the Samsonite – I mean, the Tumi brand as we push that across the regions and also American Tourister. You’ll see us this year shift some focus into the Samsonite business. So we’re about to kind of launch a meaningful campaign for Samsonite in the next month or so and that will be very exciting.

We’re looking forward to that. And we’re continuing to invest in Tumi while we continue to support the American Tourister business as well from an advertising perspective. And you can see across all regions, we’re spending fairly consistent amount at around 5% to 6% on advertising.

The next slide just gives you a snapshot of some of the campaigns. You can see the Ronaldo campaign. You can see some success we’re having with Gregory, the Tumi campaign, which really rolled out at the start of this year off to a great start. And we were using number GenerationGO for Samsonite last year, but you’ll start to see the next campaign for Samsonite in a much bigger way as we move into April and May.

With that, I’ll turn over to Reza, and I just say a welcome to Reza. I think, it’s first time where Reza is presenting for us. And he’s been here for about 3 months, and I would say fully integrated at this moment. So here you go.

Reza Taleghani

Thank you very much, Kyle. And with that, we are on Slide 29 of the deck. So we will just recap some of the financial highlights of the year, some of them, which we’ve discussed and then we’ll get into the balance sheet and some of the cash flow metrics as well.

So overall, a record year in terms of sales at USD 3.8 billion, which is net sales growth of 8.4% or 7.5% excluding eBags. Solid as it was mentioned a little bit earlier despite second half headwinds, we still manage to increase materially. Adjusted net income increased by $34 million or 13%. And that’s once you adjust for 2 onetime items, which we’ll bridge on a subsequent page. But in 2017, obviously, there was the impact of U.S. tax reform, which had a noncash benefit of about $111 million and then there was another noncash item in this year due to the debt refinancing of $53 million as well. Once we just adjust for that, those are the net numbers that we’re talking about in terms of growth.

Operating cash flow for the year $307 million as compared to $341 million, so slightly lower than what we had in 2017. The largest driver of that is due to changes in working capital. So obviously, we had to – we had growth in adjusted EBITDA. We also benefited from a slightly lower effective tax rate, it’s about 1-point lower than what we had in 2017. But the changes in working capital drove some of the cash flow usage and that’s something that we’re focused on in terms of the inventory as we look at last year.

Looking at net working capital efficiency, 13.6% as of the end of the year. So we’re back within the range, but I would say that we’re continuing to be focused on this, especially as it relates to inventory levels. So there we’re continuing to try to push in terms of getting that that further down as we look into 2019.

We did complete the successful refinancing of the credit facilities last year. There was a benefit of 50-basis point reduction in terms of rate and obviously extending the maturities as well. So our liquidity position remains very strong. But we have a $9 million benefit on an annualized basis from lower interest costs as well. And that benefit will continue as we look into this year as well.

The net debt position, as we generate free cash flow, we have been focused on delevering. So we have brought our net debt position to $1.5 billion. And we continue to focus on managing our credit accordingly and will cover that as we look at the balance sheet.

Overall, we’re in compliance with all of our debt covenants and with plenty of headroom, I would say, and we ended the year at 2.45x as compared to 2.74 turns of leverage in 2017 so [indiscernible].

As we look at CapEx for 2018, it was largely in line as compared to the prior periods. So we ended the year at $100 million of CapEx. There was some retail expansion as Kyle alluded to as we increased our store count by 84 stores. So there’s some CapEx that’s going into that as well as some product innovations. But we ended at $100 million as compared to roughly $95 million on the prior year.

The tax rate. Effective tax rate of 25.2%, slight improvement, largely driven by where we’ve been generating our income in the year and that had a benefit on cash flow as we just discussed. Today, the board is recommending that we increase the distribution to $125 million as compared to last year’s $110 million. So up 13.6% in terms of returning cash to shareholders given the fact that we’ve increased our financial [indiscernible].

Going to Slide 32, we thought it’d be helpful just to provide a bridge because there was 2 noncash items both in 2017 and 2018. So as you look at the adjusted net income, obviously, we had an increased profitable attributable to the equity holders by $53.3 million or 23.9%. Just looking at the left-hand side of the page, if you look at 2017, there was $111 million due to the tax changes that happened in the U.S. So there was a reduction in tax rate to 21% in the U.S. that drove a noncash benefit of $111 million as a onetime for last year.

If you work your way all the way to the right-hand side of this page, you’ll see that there is a $53 million. On an aggregate basis, net of tax, that will be $39.6 million that was due to the fact that we did a refinancing as well. So again noncash. And so when you look – when you back those out as you look at the profitable that’s attributable to shareholders, you’re looking at an increase of $53.3 million.

On this next page, we cover the balance sheet. Again, I think the key messages here are net debt has decreased by $100 million. Our net leverage, as a result, has decreased to 2.45x. Just for reference, our covenants are set at a max amount of 5.5x. So obviously plenty of headroom there. And our interest coverage is around 3x as compared to a covenant of – I’m sorry, 9.35x as compared to a minimum coverage of 3x. Again a very big benefit has come as a result of the refinancing that’s happened, and we have a large component of fixed rate that’s about – that will continue to give us benefit in this year as well.

Looking at working capital. We touched on this a little bit earlier. But as you look at it, obviously, we’re focused on the inventory levels that you see in here in terms of the change that’s there. But our efficiency of 13.6%, we really want to try to target around the 13% number. So we’re continuing to focus on getting the inventory days down further from the level that we’re looking in at the end of the year. So that is the focus area for 2019.

We did lower purchasing, especially as we went into Q4 of last year, just to manage the inventory levels down. So that sell-through is happening now, and we expect that to be a focus for us in 2019.

Looking at CapEx. Overall, the CapEx number is largely in line. So we’re looking at $100 million as compared to $95 million. A lot of this has been driven by remodels and investments as we’re making into the direct-to-consumer component of our business. Kyle touched on Europe as one example, but overall, we have 84 stores net that have been added. We are actively managing the store levels as well. So if you’re looking at the overall closures that we had, if you look at across the regions, we added 150 stores, but we shut down nonperforming stores of 66. So the net number of that is 84, but I think that’s an important component as we look at headwinds of managing the individual’s store level as well.

With that, I’ll turn it back to Kyle for the outlook.

Kyle Gendreau

Okay. Just real quick on the Slide 37. When we look at overall international tourist arrivals, they were very strong in 2018 from a travel perspective increasing 6% to [$1.4 billion] in international arrivals dollars – not net people, I’m sorry, in 2018. And obviously, that’s ahead of overall global growth. Our strategy remains very much intact. We’re very focused on deploying kind of a multi-brand strategy to operate kind of the price points across the spectrum, both in the travel and non-travel categories.

We have had very good success and we’ll continue to have good success from a non-travel component, while still driving our core travel business very nicely. We are focused in select markets and driving our direct-to-consumer mix in the business.

Across all markets, we’re hyper-focused on e-commerce and ensuring we have the right people, teams and infrastructures to drive that with very good success across regions. And then in select markets, we’re pushing brick-and-mortar expansion as well as we’ve talked about.

We’ll continue invest in advertising. You should expect we’ll spend around the same percent of sales in 2019 on advertising. And as I said, we’ll continue to push Tumi, we’ll put a little bit more emphasis on Samsonite as we lean into 2019 from an advertising perspective. We are still very supportive of our regional structure, which has been a huge source of success, and we’re focused on, as Tim said earlier, with ESG, making sure managing our teams and people and empowering them to kind of drive the business at every local level.

We continue to invest in research and development, which is a really important part of our story. And so we have some very exciting new things coming as we move into 2019. So in the coming months, I think, you’ll see some very exciting material innovation that will start to work into our business. But in addition to as each year, we have really exciting new designs and technology working into the products that we’re selling. So a lot to come in 2019. And we’re really managing all of that into this kind of well-diversified multi-brand, multi-category and multi-channel business on selling both bags and luggage across the markets that we’re operating in. And so that stays very much intact.

When I look at key initiatives for ‘18 – or for ‘19, we’re very focused on expanding the Tumi business, which, as Tim started with, has been highly successful, and we’re expecting that to continue in a very strong way in 2019.

We are monitoring sales trends and focusing on increasing our EBITDA margin. So we’re focusing on improving some of the smaller brands that we’ve acquired, likely eBags. We have increased our retail brick-and-mortar presence and are really focused at the moment on making sure we kind of expand the profitability associated with that expansion. So as we said earlier in the year, we’ve slowed down the pace of openings in Europe. We’ll allow some of that the benefit of these stores to play out in the margin side of the business.

As Reza said, we’re very focused on working capital. We’re at around 138 days of inventory at the end of the year. I think this business can operate in this kind of 120- to 125-day range. So you should see our working capital efficiency moving closer to 13%, which will clearly drive cash flow in the year and we’re very focused on that across all of our regions.

We’re diversifying our supplier base as we look at things like tariffs that have kind of worked into the story. And so we’re working to shift some supplies from China to other markets. We’re having very good success there, while ensuring we maintain the quality standards of our product. So the teams are very focused there.

As Tim said, we’re weaving in ESG into our business, which we’ve been doing for the last few years. We are – we have done our kind of materiality assessment. We’re focused on our carbon reduction. We’ve taken at our first footprint. So when you see our ESG report come out in the middle of the year, you’ll start to see some measuring on where we are and what we’re excited about as far as driving improvements in that across all of our business.

And we’re starting to think about additional acquisition opportunities. And so as we’ve been integrating acquisition – Tumi into business for last 2 years, our debt levels continuing to prove. We start to relook and consider opportunities as we roll into the second half of this year and into 2020.

So with that, I will turn it back to William for questions. And thank you very much.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Mariana Kou with CLSA in Hong Kong.

Mariana Kou

I actually have two questions, if I may. The first one is on, I guess, recent trading trends if you can comment I guess the –

Kyle Gendreau

Well, I’m sorry, with –

Reza Taleghani

Recent trading trends.

Kyle Gendreau

Okay. I think, we’ve – I think, we’ve covered that, but I’ll go through it again. As you looked at our first half, second half, you’ve clearly seen some slowdown in the second half. I think we’re seeing economic pressures, along with some of these larger select markets that are really seeing impacts from the noise around kind of trade tension. So we’ve seen our U.S. business and China business feeling some strain.

As we roll into the first half of – the first quarter of this year and bumping up against a very large growth quarter last year, we’re seeing that the first quarter looks like it will probably be flat to slightly down off of that large growth really off of the same kind macro noises that we were seeing at the back half of the year. As we’re sitting today and we think about the full year, we still think the full year for this business is mid-single-digit growth. But we’re obviously kind of stepping into the year with a little bit of turbulence, which I think, a lot of consumer goods companies are seeing. We’re seeing some of the same turbulence.

Mariana Kou

Just a bit of a follow-up more on a back-brain basis for Tumi, do we have any follow-up [indiscernible] your expectations, will you be able to maintain double-digit type of growth rate for Tumi overall, globally?

Kyle Gendreau

Yes, Tumi is continuing to rock. So if you think about Tumi in the markets that we’re pushing, it’s new territory for us in many cases. So our view for Tumi is that still maintains a very strong double-digit growth. Asia is off to a very, very strong start this year. In Europe, where we were laying the footprint last year, we’re seeing a good start to this year. And our core North America business will operate in this kind of a mid-single-digit range. And we see no real changes for that in our North America business as well. So Tumi will – is continuing this terrific trend that we saw in 2018 as we step into 2019.

Operator

Our next question comes from Chen Luo with Merrill Lynch in China.

Chen Luo

I have got 3 questions. So first of all, I think there has been a lot of market focus on the –

William Yue

Hello? Operator, did we lost him?

Operator

Yes. We’d like to check with the question again.

Tim Parker

Why don’t we go on to the next one. And when this fellow comes back online, we’ll go back to him. So let’s go beyond. Let’s go to the next one.

Operator

Sure. Next question comes from Anne Ling with Deutsche Bank in Hong Kong.

Anne Ling

I have 2 questions. The first one is just – would you elaborate a little bit in terms of the current trading environment by markets and also by brands in terms of where are the areas that you think that is stronger and where the areas that you think that is weaker? And how – for the U.S. market, in particular, how do you see the tariffs – the 10% tariff. There’s been lots of questions about like whether the U.S. – whether there will be a lift in the 10% tariff? And should the – if you’re able to lift the 10% tariff, will you be able to keep the 6% to 7% increase in terms of the FLB price that you did.

Kyle Gendreau

Okay. I might giving you Tumi overview for kind of the trends. The rest of the trends, I might say are more kind of geographically focused versus brand focused. So we’ve not seen any sort of unusual movements in brands, Samsonite or American Tourister, other than the overall trends we’ve seen in some of these markets, which we’ve covered here. So China into Q1 on the back of B2B business, that has come down is definitely running softer. We will see a negative China. But if you peel into our China businesses, we lean into ‘19, our underlying kind of core consumer business looks to be in the mid-single digits, upper single-digit growth range, but B2B is clearly adjusted down.

And so we’ll see some noise there. That’s impacting overall Asia. Korea within China has definitely continued this negative trend that we saw for the back half with maybe even a little more noise as we lean into Q1 that’s not surprising for Korea. And so overall Asia, we are seeing something that’s a bit lower than what we saw for the full year.

Our North America business has been impacted by – with these tariffs, really around the bigger customers we have who are waiting to see not just the 10% tariff, which we’ve already pushed through, but what’s the overhang of this potential additional piece of tariff, which feels like it will head in the right direction, but continuously people uncertain. That’s causing customers large or bigger customers to solve some of their buying behavior.

So we’re seeing North America in the first quarter feeling a little bit off, but we’re – but a lot of that is just customers pushing to the second half or the second quarter as they wait for the tariffs to kind of to play out. And if our North America business is largely wholesale, 75% wholesale business with these big customers. So that’s causing a bit of noise as we lean into Q1 North America. Our Europe business has seen a little bit of slowdown from where we were trending last year.

So our full year was around 8%, our second half was around 6% or 7% growth for Europe. And as we lean into the start of the year, we’re still in growth territory, but I might say, mid to lower single digits as we start to see some headwinds in markets like Germany. And I think that’s generally the sentiment across Europe, we’re seeing some headwinds.

And that carried into our business, but we’re still producing positive growth across our brands. And obviously, Tumi is building some momentum. So that’s helping kind of our Europe business as well. But we’re seeing more pressure than what we saw as we were in 2018 within Europe. And then Latin America’s had a noisy start, but a better as we lean into March, a better March than what we saw in January and February. And so Latin America has not escaped some of the headwinds that we’ve seen and we’ll see how the full year plays out for Latin America. That’s a market that tends to be a little bit more volatile in monthly increments versus for the full year. I still think that’s the growth story for Latin America.

So that gives – hopefully that gives you a little bit of color by market. From a tariff perspective, we’ve passed the price increase along, we covered that in our Q3 kind of results announcement that has been kind of received by the market. But as I said, the bigger driver in our North America business is how our wholesale customers are managing the timing of their purchases as they wait to see the tariff piece way out. Just maybe it’s happening in North America, it was happening at the back half of last year as inbound tourist particularly Chinese tourists into the – into North America as we look at our gateway cities continues to be strained.

So I think partly tied to the kind of pressures around this kind of this trade tensions we’ve seen that impact arrivals into the North America business and our gateway cities.

Operator

And we have a question from Mr. Chen Luo with Merrill Lynch.

Chen Luo

I got 3 questions. First of all with our guidance for the adjusted EBITDA margin for 2019. And secondly, actually this year, we are going to see the introduction of the IFRS 16, the new lease accounting standard. What’s the impact of that?

Kyle Gendreau

Do you have another one? Or is that 2 questions or 3? Those 2? Okay. Well, we don’t give forward guidance on EBITDA from a margin perspective. But what we have been guiding is that we think we can expand the margins within the business. So as we see a bit more turbulent times, we’re managing that closely. One of our third initiatives is making sure we can manage the margin side of the business. I’m still a believer that we’ll deliver some leverage in the business as we’ve slowed down the expansion of our brick-and-mortar, in particularly, Europe. And I think we can see kind of 30 bps or so of margin expansion.

And I would caution that with kind of the turbulence that would be a bit of managing that we need to do. And so for sure, we should be flat on margin, but I’m still hopeful that we can push for expansion. We’ll have a better view on that as we kind of get into kind of the second quarter and the half. And then as far as IFRS 16, I may be handing that over to Reza for that.

Reza Taleghani

With regards to the IFRS 16, so we have approximately in USD 780 million of operating lease commitments. As many of you know that basically comes on balance sheet. In our case, the vast majority of them come on balance sheet. So if you’re looking at a range of between about $645 million to $715 million, that would be recognized as write of use assets and lease liability.

The net effect of that just so from a reporting standpoint, just to make sure that we’re transparent with everybody, we will break out the different components of it as we go into the first quarter, so you can try to do the comparisons operationally to what we did last year as well as far as the adjustments are concerned. Obviously, it’s a non-IFRS standard that we’re showing, but we’ll disclose that to you.

But just in terms of a rough numbers, you would – the net effect of that would be about kind of around $30 million, $33 million of capitalized lease interest expense if you were looking in 2018. And then you have about $194 million, $195 million of our amortization. So if you were to have IFRS in place last year, that would be ballpark what you’d be looking at. And obviously, as we go through each quarter now that it’s – the standard is in place, we’ll be disclosing that.

William Yue

Operator, can we see if there are any more questions from the callers.

Operator

Yes. We do have another question.

William Yue

Okay, then put that caller through, please. Thank you.

Operator

The question comes from Mr. [indiscernible] with AMBIT Capital.

Unidentified Analyst

I have 3 questions regarding Indian market. So sir in Indian market, which is the fastest-growing market for you. Firstly, can you help us understand how sustainable do you think this growth rates are since 23% constant currency growth rate in 2018 on a relatively higher base seems fairly high to be able to sustain for next 3 to 5 years? Additionally, can you please provide break up for volume and value growth for India business?

Kyle Gendreau

Okay. We had very strong India for 2018 and a lot of that is around initiatives around products really kind of teen focused. And if I look – if I took a 3-year view and talk to the team, they’re very positive around the ability to continue to grow our India business in very strong double-digit territory. I might say 15% to 20% is a good target for these guys. And it’s really around – initiatives around products, we’ve had very successful backpack around that continues, and we’re operating more of the market with a brand Kamiliant and American Tourister continues to do very well. We actually believe there are some opportunities within the upward end of Samsonite, so the teams are focused there as well.

But the sheer driver of growth in this market is coming from these entry-level brands and are very successful what has labeled backpack and casual duffel bag business within the marketplace. So I think, we feel pretty confident, we can maintain this – the strong growth. We’ve seen a little bit of a slow start like we’ve seen in other markets in Q1. But I was just with – meeting with the India team over last 2 days in Hong Kong here, and the team still feels very motivated on delivering this kind of high levels of growth. So I think there’s a lot to go out in India to market that’s – the market itself is growing strong.

And we’ve got a terrific team and a network of people across that market that I think we can deliver very good growth. I don’t have the exact numbers on value and volume, but when you look at where we’re driving growth in India, it’s really at this entry level price point. So it’s not that we’ve been moving, pricing in India, it’s really around a volume-driven game coupled with mix of products. So when you think about growing backpacks and casual bag business, it typically is at a lower AUR than maybe a core travel product. So from a pure kind of numbers perspective, I’m sure we’re growing volume at a faster mark than value within that market base than what we’re pushing into the market.

Unidentified Analyst

And sir, we understand a large portion of growth was led by growth in entry-level brand Kamiliant, as you said, right now also, which was up 44% this year. However, when we speak to few of our channel partners in India, we understand that growth in Kamiliant this part – this in part adversely impacting growth for your American Tourister brand. So is our understanding correct? And like if you could give us the brand-wise growth for India, American Tourister, Samsonite and Kamiliant in the luggage category?

Kyle Gendreau

Yes, I don’t have those right in front of me, so we can get back to you with William on that. But what we’re really doing with Kamiliant is largely and it’s not that different than what we did with American Tourister when we started 7, 8 years back in Asia. Kamiliant is allowing us to protect the American Tourister brand, which has really established itself very nicely across the globe and particularly in Asia. And so as that positioning of American Tourister has moved up, what we’re doing with Kamiliant is actually protecting it from having to stretch down into real entry-level pricing.

And the strategy with our brand Kamiliant is we can play in more aggressive way from a price perspective, much of that market is operating now below where American Tourister has positioned itself. And so it really kind of ring fencing or protecting Samsonite with Kamiliant in a way that American Tourister can be well positioned and continue to grow, while we address more of this kind of very fragmented, what I’d say is, extremely entry-level pricing on Kamiliant pricing is typically in a range of, let’s say, kind of $65 to $90 and American Tourister’s positioned itself very nicely in the market as, let’s call it, $100 plus across Asia and in some markets reaching close to $250. So this brand American Tourister over the years has well established, Kamiliant is helping us to protect that and still address that entry, really extreme entry-level market.

Unidentified Analyst

That was helpful. And sir, my last question, can we get some sense on how is the competitive intensity spanning out in Indian market with both the market leader, and also, the third player are becoming very aggressive over the last few years?

Kyle Gendreau

Yes, I think, we’ve always had that in India, right? It’s the one market where we have a big number 2 player. And so just like I explained with this Kamiliant strategy, we’re deploying and using the portfolio of brands we have to compete nicely in that market. And the advantage we have is kind of the global benefit of kind of product design and development.

So when we think about what we bring to market for kind of new products, new materials, bringing this global expertise we have now been developing in this non-travel category of bags and duffels allow us to compete very nicely there. And there as you’d expect with the number 2 competitor, they’re riding right along with us so. But I do think we have the ability to kind of outstand them from a product design development and also from a marketing perspective where we’re deploying as you’ve seen last year particularly the American Tourister on very nice campaigns that are driving consumers to our business. So not only do we use Ronaldo, but we used, I’m going to forget his name, the cricket player.

Unidentified Analyst

Virat Kohli.

Kyle Gendreau

Within India.

Unidentified Analyst

Virat Kohli.

Kyle Gendreau

Yes. Well, it’s been very, very successful with our business. And so we shouldn’t underplay the importance of advertising in the market that we’re driving 18% sales growth like we did in 2018.

William Yue

Operator, I think, we are coming close to the end of the hour. So we’ll take maybe another set of questions and will wrap up the call. Could do we have make some life?

Operator

And our next question is from the Dustin Wei with Morgan Stanley in Hong Kong.

Dustin Wei

So my first question is related to the guidance. So Kyle mentioned a mid-single-digit constant currency sales growth for 2019. Just wanted a little bit more on the key assumptions here. So what kind of the confidence that you have especially for the second half of this year presumably your first half of the sales growth could be pretty flattish. And is that based on your assumption for the new product that Samsonite is going to launch or continue the strength in Tumi or some of the pickup in U.S. So just want to know a little bit like your confidence for the second half of 2019?

Kyle Gendreau

I think, we – Tim said it nicely and I’ve said it, it’s probably more of the most turbulent market we’ve seen in a while as we lean into 2019. So I would say with confident on initiatives that we’re pushing that we’re pretty excited about what we have to play out in 2019. We do have a lot new product initiatives, we have some great campaigns that we’re going to be launching. But we shouldn’t shy away from the fact that we’ve seen a turbulent start in Q1, which kind of weighs out. I do think our second half will be stronger than the first half obviously just when you look at what the first half of last year to this year was, that’s just the natural play. The teams are confident in the strategies that we’re pushing as I said for Tumi.

We’re highly confident, Tumi is going to continue its trend. And I think if the tariff and trade tensions can sort out and kind of the world gets a little more relaxed on that front, I think that will be very helpful for us. I’m quite hopeful like many people that that will get sorted in the coming months. And again, the rhetoric feels like it’s heading in the right way, but it’s a bit hard to call here. But I’m feeling like it probably ends up in the right place. And I think things will settle down. With that said, it’s – guidance is as much a piece of what the macro is going to do to us for the year. So I think, all of our strategies are right, we’ll see how the macro plays out, and we’ll be managing the business accordingly as we kind of navigate the turbulence we’re seeing at the start of the year.

Dustin Wei

To follow-up on the tariff side that you sort of mentioned that your wholesale customer in the U.S. kind of waiting for something. So my understanding is that if they are tried to avoid the another like 15% raise in tariff, makes you instead of buying out to stock up. And – or you think they’re kind of waiting for the current 10% tariff to be removed so they want to buy at a cheaper price. So could you sort of elaborate the dynamics there?

Kyle Gendreau

I think, it’s neither to be honest with you, I think, one of these customers don’t buy forward. So even when we were dealing with the price increase at the end of last year, these guys managed their inventories quite tightly and they don’t kind of play in. I think what they are watching for is, as this tariff ended up going in and the market became highly disruptive with the tariffs, they want to just make sure they’re not caught up in the fray with a bunch of inventory when the market’s not performing. So they’re, I think, just being more cautious in when they step in versus trying to beat the game the percentage because then if you know what I mean.

I think people start to feel like it’s not going to play out that you will see a better Q2 than Q1 in the U.S. because of the way these consumers are buying. But I think, it’s more around just being caution of the uncertainties versus them feeling like they need to game the system and buy ahead, which these customers don’t do. So I don’t think there’s anything – any magic other than all of the kind of overall uncertainty with tariffs that’s causing some of this.

Dustin Wei

So it’s sort of the uncertainty with the general macro demand?

Kyle Gendreau

I think that’s exactly right in just what consumers going to do and just these guys are just managing very tightly. It’s not just us. It’s in everything they are buying. So that they – until they know we’re kind of ultimate kind of consumer sentiment settles out.

Dustin Wei

So – but what if the tariffs got removed luckily into the April because of the trade talk. Are you going to reserve those price hike? Or are you going to reinvest then into the marketing?

Kyle Gendreau

Yes, I’m not sure I have exactly the answer. You should know that our customers are really aware of that, right so. And they’re sourcing themselves with tariff and the fact. So my sense is there will be some level of negotiations that happen with our customers on the other side of that because it’s a very – it’s fairly transparent with these guys. Right often many of these customers are sourcing their own brands as well. So I have an answer on that, but I think, it will get negotiated like you’d expect if it unwinds itself.

Dustin Wei

So just lastly, on the margin side, on the GP margin, could talk about your Tumi GP margin for 2018 and your expectation for 2019?

Kyle Gendreau

So our overall margins and really when I look at the margins, we’ve been pushing kind of the U.S. margin to get close to 70%, which is the biggest piece of the Tumi business at this point. We’ve, at the end of Q4, ended up at that level. And my sense is margin expansion for Tumi has played out. So when we look at where we’re exiting ‘18, we’ve delivered on the more of the overall gross margin for our Tumi business. And you shouldn’t see any further expansion because I think we’ve done a very rapid job. So if you remember even at the half of this past year, we were talking around an 800, 900-basis point improvement in margin with Tumi.

And that’s really kind of settled in nicely. And so you should assume that for ‘19, we’re effectively maintaining the margin levels for Tumi. Now as Asia grows at a faster clip that has a slightly higher gross margin I think as you’d expect in that business. So you maybe get a little bit of weaving impact, but it’s not going to dramatically move the overall margin profile for Tumi – the gross margin profile for Tumi.

I still think there’s some EBITDA margin opportunities, we’re not reporting that for Tumi because it’s well integrated into our business now. But when we just kind of study Tumi, a lot of this infrastructure relaying is starting to play out. So as you kind of had retail expansion in these developing markets as these things rapidly ramp, you’ll start to see the benefits there. And on the U.S. business side, we’ve been maintaining the EBITDA margins in a very nice level for all of 2018. You should expect the same for 2019.

Dustin Wei

Sounds like, well, the GP margin level, the 2019 expansion won’t be as big as 2018, is that fair?

Kyle Gendreau

Yes, that is exactly fair. Yes.

Dustin Wei

Okay. So on the OpEx side, if you’re going to see some of the operating leverage. Should we expect the efficiency improvement on the distribution cost side or on the main cost side for 2019?

Kyle Gendreau

Well, we’re very focused on what I would label the non-advertising SG&A. So I’m hopeful that we’ll see some leverage there. Again turbulence causes that to take a little longer. We’re within the business. We’re focused on that and focused aggressively on looking at all of our costs in the business as we were guiding last year with a kind of expanded emphasis there. So I’m hopeful that we can move the needle there. But if we’re in more turbulent times, it takes a little bit longer to achieve that. So – but I just think that we’re – if we manage well, we should see a bit of leverage, but I caution that as I cautioned earlier, let’s see how trading plays out Q1, Q2 and we’ll have a better sense for it.

William Yue

Operator, just want to check if there’s anyone else online?

Operator

We do have a final question.

William Yue

Okay. We’ll take that one final question and we’ll finish off.

Operator

Sure. The question comes from Anne Ling with Deutsche Bank in Hong Kong.

Anne Ling

Sorry, one, some follow-up questions only. Regarding – I think like Kyle earlier mentioned that the company will revisit the acquisition opportunity from second half ‘19. So my question is, what is the rationale behind that revisiting acquisition, again, given the fact that we still haven’t paid down our debt at this stage yet, right. Although the interest expense is being refinanced and a lot lower. So would you share with us like what is the rationale? What are the brands that or channels that you think will fit into the portfolio? So what are the names that you think? So what are – what type of brands that you are thinking about? And the second one is more on the finance side, regarding the effective tax rate. What sort of effective tax rate that you are guiding for year 2019?

Kyle Gendreau

Okay. From an acquisition perspective, really what I’m guiding is as we’ve integrated Tumi, we were very clear that we would be very focused in integrating this brand for the first few years. We stayed very focused on that. We’ve been bringing the leverage levels down in the business. We’re at 2 – little under 2.5x. I think by the end of the year, we get close to 2x lever. And really what I’m guiding is in the second half, we’re going to start to kind of steer up the engine a little bit to see what’s out there. We’ve – as we’ve guided in the past, I think, there’s some very interesting non-travel opportunities in the marketplace as we think about things like casual bags, backpacks and such.

And I do think that there are some opportunities that can kind of start to play out in the back half of the year. They’re not really other luggage brands that we’re actively thinking about. And I would say, if we start thinking in the second half of the year, it probably means that we’re thinking about something for 2020, which, again, this business has capacity to take these things in, we have the history of bringing acquisitions in to expand the business.

And now that Tumi is well set, all then integrated into the business, we’re really – what I’m really messaging is, we’re going to start to relook at opportunities and as they kind of unfold be ready to take them on. We’re very focused on the delevers we’ve guided. I think we’re going to get to the target levels as we step into 2020 of getting to 2x lever. And I think it’s the right time to look at the acquisition opportunities. This business has the scale to do that. We’ve got the infrastructure to do that. And with the learnings, particularly, the learnings opportunity, which has been highly successful, we feel confident we can bring in some of these other categories that allow us to continue expand this non-travel segment of the business meaningful way. I won’t necessarily comment on brands on this call, but you can kind of assess the marketplace and have some sense for what we might be considering.

We made a little bit of noise on hand bags in the last few years and not so focused there, but it doesn’t mean we won’t be evaluating some of that as we go up. And I’m actually – I think the bigger opportunities for us are non-travel that kind of fit on the DNA of who we are, which is really around a lot of these kind of casual and everyday bags with are growing at a faster clip in this segment than many of the other categories.

And we’re seeing good success with the brands we have in hand. And I think we can add some more to expand that. And effective tax rate I think it will be about the same as last year. The effective tax rate was very good this year, we’re roughly 25-and-change. I think we’ve always guided effective tax rate is around 25%, 26%. So I would consider which is if we’re doing to modeling, I would put in 26% effective tax rate for the year and that seems like it’s in this –

Reza Taleghani

It’s a function of the mix of where the profits are being generated. So we move up...

Kyle Gendreau

Yes, there is no changes. We are starting to evaluate our tax structure. We have a Luxembourg tax structure that has some time period to it really kind of leaning into 2021, we need to do some adjusting, we’re starting to do some work on that. We think even with that evaluating kind of how we manage our tax structure, we still can probably stay in the same range that we’re in today, 25%, 26%. We’ll be a doing a little bit more work really as we lean into ‘20 and ‘21 to make sure that we can kind of continue to deliver this effective tax rate in the range, which I think, we can.

Anne Ling

Okay. Sorry, one final question is on the financing side. Any – what will – will there be any chance that you will bring down your like debt level by the end of year 2019? Are you paying down some of the debt?

Kyle Gendreau

Yes, yes, we’ll generate – the cash flows are focused on working capital and generate extra cash flow there. In the debt refinance, we pushed out kind of this mandatory cash payment on that, that will kind of kick in at the end of 2019. So you will see us continuing to bring down the leverage in the business as we generate cash. So it’s just part of the cycle for this.

Reza Taleghani

And then to your point if you’re looking at 2018, obviously, when we’re looking at from a net debt position, it’s an increase in cash that’s happening as opposed to the paying down the debt. Please do bear in mind if you’re looking at where we are in terms of our overall cost of debt, it’s incredibly low. So there is the debate as if you’re in a rising interest rate environment, you necessarily want to prepay that as opposed to using that more efficiently as well in terms of the returns that you can generate on that. So that’s the balance that we’re looking at. But obviously it will manage the net leverage, we’ll continue to get the covenants with that or the levels down.

William Yue

Great. Thank you very much everyone for dialing in tonight. And with that, we will end the call tonight. And thanks everyone, and thank you, Tim, Kyle and Reza. Good night.

Kyle Gendreau

Thank you.

Tim Parker

Thank you.

Operator

Thank you for participation. This concludes the conference.