Ladies and gentlemen, thank you for standing by, and welcome to the Samsonite 2019 annual results earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during this session, you will need to press star 1 on your telephone. Please be advised that today's conference call is being recorded. I'd now like to hand the conference over to your speaker today, to Mr. William Yue. Thank you. Please go ahead.
Thank you, operator. Good morning. Good evening, everyone. Today, we have our chairman, Mr. Tim Parker, CEO, Mr. Kyle Gendreau, and CFO, Mr. Reza Taleghani, with us to go through our annual results. I'm sure everyone will have a lot of questions, so without further ado, I will turn it over to Tim to make his opening remarks. Thank you very much.
Thank you very much, William. This is Tim Parker, the chairman. I must tell you, everyone, that in a career of 40 years in business, I have never seen times quite as extraordinary as these. I think the root of the difficulty is essentially everyone knows this is a temporary phenomenon. They can see a curve ahead of them. They simply can't see the shape of the curve. When the curve eventually flattens, they can't see either exactly what the reaction of consumers will be. That said, and we clearly have a challenge ahead of us, I must tell you that I have absolutely full confidence in the team at Samsonite to get through this. We've got a very experienced, globally distributed business. As Kyle will explain, I think we are well-armed to get through a very lengthy period of difficult trading.
My sense is that, of course, this won't be good for travel, but people at some point are going to start traveling again. I do think that it is companies like ours that will win out in the longer term. Potentially, once the fog clears and we can see a better environment, we will be in a stronger position. I know many of the questions tonight will be about liquidity, about debt, and about cash. I and my board have discussed this at length, and we are confident that our business is at least going into this in a particularly strong position and very well equipped to deal with whatever we see. One of the things that's apparent is that scenario planning, although it's a good thing, the fact is that we have to assume the very worst, and we are planning for the worst.
We think that we're still in reasonable shape. That's not a particularly encouraging message, but I think, the key thing now is that our business can get through the next 12 months. I think it is what we thought was going to be a three-month phenomenon is quite likely to be a six, nine-month, and possibly longer phenomenon. Samsonite, we've been around for 110 years, and we intend to be around for quite a bit longer. With that, I'd very much like to hand over to Kyle Gendreau, our CEO. Kyle.
Great. Thanks, Tim. This call, we're here to talk about our 2019 results. Up at the front of our presentation, I'm gonna give you a fairly good overview of what we're seeing to date and just give you a sense for how we're reacting. If I start on page four, just from a results highlight for 2019, our sales were down around 1.8% last year due to headwinds in really four challenged markets, U.S., Hong Kong, South Korea, and Chile. I think most of those are self-explanatory in what we're seeing there. We also had a planned reduction in some of our China B2B sales in the first half of last year. If I adjust those out, and I'll cover that later, if I adjust those markets out, the rest of our business was up around 5%. Our adjusted EBITDA was down $100 million from 2018.
Our adjusted net income was down $63 million, which was largely the EBITDA offset by lower interest expense. We had a very strong operating cash flow last year. We were up 30% from the year before, generating $406 million in operating cash flow. The business continued to generate in a lot of the initiatives that we're driving to move the working capital were paying off from a cash flow perspective. In response to that and just our general strength of cash generation, our net debt decreased $203 million last year. Our profit was down $100. $88 million of that profit came from a gross margin decrease, which was almost wholly driven by tariffs in the U.S. When we think about the drop in EBITDA of $188 million, close to 90% of that drop was really around the tariffs.
I'll cover what the U.S. business did to do a very good job and continuing to do a job of navigating the impacts of that. Let's go through our initial assessment of COVID-19 in a little bit of detail and just so you have a sense for where we are. As most businesses, we're very focused on making sure the health of our employees and their families and our partners and customers are a top priority. We are, as you'd expect, proactively following the recommendations and the preventive measures across the globe. It's been a very fluid situation, as everybody on this call knows. It started in China and Asia and has quickly moved to the rest of our regions. We've done things as you'd expect, store closures. In the U.S., we closed our stores for two weeks starting this week.
That is pretty much happening across the retail landscape in the U.S. It's happened in Europe, across many of the countries in Europe over the last week or two. In Asia, where stores were closed primarily in China, those have actually started to lift. We see our stores in China were probably very close to 90% open across China and Greater Asia. As I said, it started in Asia. The day-to-day activity seems to be returning to a bit of normalcy in China, though we see recent re-emergence as people are coming back into China and Hong Kong. There is a bit of a border tightening within those regions. Generally, we still continue to see those markets starting to move, but still under strain from historical run rates. For sure, Europe and North America have stepped into the noise here.
From a liquidity perspective and just generally how we're managing, we've moved from navigating this to making sure that our balance sheet and our liquidity is intact. We had already started a debt refinance at the end of last year, really to take advantage of pricing in the market. Part of that debt refinance was also stepping up our revolver from what was $650 million to $850 million, and getting some lower interest rates and extending the tenure of our debt just naturally with the repricing. Off the back of that and off of the uncertainty that we're seeing in the markets and also the recent uncertainty or volatility or potential volatility in the financial markets, we initiated an approximate $800 million draw against our revolvers.
That, coupled with cash on hand, which is roughly $400 million, gives us $1.2 billion of liquidity within our control, which I think is important. I think it was the right move to make this week, given all the uncertainty and the lack of clarity on timing of the cycle. I will tell you that that gives us significant capacity to navigate this. As Tim said, in my own view, even with the worst of downside scenarios, we easily have a year's worth of liquidity to navigate and more through the crisis and wherever this starts to turn the corner. We're in a very solid position from that front. From a supplier perspective, we originally started to worry about suppliers in China, but what we really saw was a temporary closure or slowdown in our supplier distribution network.
We saw factories closing for roughly four to five weeks, had a disruption in supply chain. We now see that coming back in most of our factories. I'd probably say somewhere between 80% and 90% of our factories are back up and running. That creates an interesting dilemma for us because our volumes are dropped probably quicker than the factories coming online. We're now doing things like pushing back orders to make sure we're managing our balance sheet and our inventory at the right levels. We're managing and working with suppliers to ensure that we balance that so that our own balance sheet and just the flow of goods lines up with when the business starts to recover. As you know, we were pushing sourcing out of China for largely our U.S. business. We've made tremendous progress there.
That has helped a bit as China went into a bit of a slowdown. We had already started, I'll cover that in a few slides as well. Moving to the next page. This maybe almost seems dated because we're comparing against past shocks to the system. So we've seen the business rebound very strongly from past disruptions. I think 9/11 was probably the biggest one for this business, which had a six-month cycle of down and then a fairly quick recovery. SARS was really a one quarter down and then started recovering fairly quickly. My view is we're probably in a six to nine-month trough before we start seeing recovery. I probably, from what I see today, say it's probably closer to the nine-month versus six-month, just given the uncertainty. Who knows? So we are managing in the trough like lots of people are.
There's so much uncertainty on when it comes back. We're managing to that kind of worst-case scenario, just to make sure that we're managing both our balance sheet and the decisions we're making so that we're positioned when it does come back, which it will. People's propensity to travel will come back, that we're in the best position possible. We have a history for over 100 years of managing through events that hit the industry. We have the track record for navigating. The outcome of the virus remains uncertain, the timing remains uncertain, but I do think the actions that we're seeing around the globe really will allow us to come out of this in some normal timeframe. The outbreak will have an impact on our performance, as I think all of you can understand, and we're seeing across all businesses. We can navigate it.
I feel very strongly about the team. Tim mentioned the team. We've got this amazing global organization. We are able to act and move in a very active way to manage cost structures and make the shifts in the business to navigate the noise. As I just said, we've got a tremendous amount of liquidity to navigate the time frames that we're talking about as well. I feel highly confident in our ability to navigate through that. We have seen historic rebounds. The challenge for this is just the timing of the rebound. Just to give you some sense for trading and what we've seen. For the first two months of 2020, which are closed months, our sales had declined roughly 11% compared to last year, with Asia down 20%.
Within Asia, China, for the first two months, was down roughly 34%, and Hong Kong was down around 58%, but was still under some strain anyways from the domestic situation in Hong Kong. If I give you a sense for what I think is going to happen for Q1, I think our Q1 numbers will be down somewhere around 25%-30%. A lot has happened in the last two weeks, particularly with Europe and the U.S. We're watching that very closely, but that range is what I think we'll end up with for Q1, so you can get a sense for month of March from that. For sure, we see North America and Europe kind of in the zone.
We start to feel Asia, particularly with domestic travel in Q2 can have a bit of a rebound from maybe the trough that they were in at the start of the year, particularly in February. That's uncertain as well. We're watching that all very closely. We have levers, and we've talked about levers all the way from our IPO days on. Levers that we can pull that generate some dramatic cash flow impact for our business. We can reduce advertising, and we're doing that in a significant way. We'll generate over $100 million year-over-year in cash from the advertising pull, which will have zero impact on the business on a go-forward basis. This is the moment where you can do that. We're halting much of our CapEx in store opening. We're a business that historically spend around $100 million- $120 million of CapEx.
We will save $100 million of that historic run on the CapEx side. We virtually froze CapEx as we stepped into March and really started to see the impacts start to affect Europe and the U.S. We've also, in our board meeting earlier today, have decided not to recommend a cash distribution to shareholders, which generates $100 million of cash as well. Those three actions alone, before we get into really just tightly managing SG&A and making some bigger decisions around how we manage the business, generate over $300 million of effectively in-year cash flow to manage, coupled with the liquidity levers that we have, make a big difference in how we navigate the next six to nine months. These actions, coupled with actions that we will continue to take, really will allow us to do that with plenty of liquidity.
That's the update that I'll give you. As you know, there's plenty of uncertainty, I'm sure we will have questions at the end, and we'll answer what we can. It'll be hard for us to give predictions on where things are going, as you can imagine. We do have a business overview for 2019. We'll quickly move through this because I think that's the appropriate thing to do. If I move to page nine. We were actively managing through the challenging trading conditions in 2019. The shame of this virus impact is we were going to show the world a really nice story in 2020 off the back of initiatives that we were executing and the headwinds that we were facing in 2019. We had, I would label, resilient sales.
Our sales were down constant currency 1.8% this past year, despite the headwinds. Really with these four big markets causing some strain. If I exclude those, again, we're up 5%, which still is below the normal run that I think we can achieve, but a very respectable sales growth number considering the world noises. We had big markets that were performing. China was up 10% last year if I take out the conscious B2B adjustment. India was up a little over 10%. Japan, 5%. Indonesia, Singapore, double digit, very strong growth, 17% and 12%. Mature markets like Germany, 7%. Russia, which I might label a developing market for us, up 19%. You can see the rest. Turkey, 23%. Mexico. We had very strong pockets of growth in markets that we would expect to have them.
As I said earlier, we generated a meaningful amount of cash, up over 30% year-over-year, really around the ongoing cash conversion that this business is capable of doing, along with making very good progress on working capital, which Reza will cover shortly. We tightly managed operating expenses, and we took some initiatives, I'll cover that in a second, around managing the expense profile against the headwinds that we were seeing. We continue our Tumi expansion. I'll show you some slides later, but our international expansion for Tumi was up a little over 10%, close to 11%. Our overall Tumi business was up, and that's with the U.S. business seeing similar pressures as the rest of our North America business was seeing. We'll cover that in a second.
Our D2C e-commerce, very strong growth, up 16% if I exclude the eBags business, which we are consciously, and we've been talking about this for the last year, consciously exiting third-party brands. The underlying e-commerce business was up 16% and up across all regions very strongly with this wonderful building momentum. Then we launched last week Our Responsible Journey, which is a much broader program on our ESG program. We've been talking about this for a little over a year now, but we're really taking some bold steps on the ESG front, and I'm really excited, and our entire business was very excited around what we're doing on the ESG front, and I have a few slides on that as well. If I look at regional growth, all regions delivered positive growth last year except for North America.
I'm not sure North America is a surprise to anybody, but all regions delivered growth. If I adjust for the challenge markets, Asia was up close to 7%, up 1.5% reported. Europe was up 3.2%, and that's with us correcting retail stores that we started to talk about at the beginning of 2019 or the end of 2018. Strong performance with Europe. Latin America was up 3%, but if I adjust for the Chile turmoil that we saw at the beginning and really at the end of the year in Q4, Latin America was up double digit, 10.3%. Within North America, we were down 8%.
If I adjust for eBags and Speck, which had a softer year really around the iPhone launch that was a bit muddled, our North America business was down around 4.7%, which is really in line with what our Tumi North America business was down for the year. Roughly the same number, which is really around traffic, and I'll cover that in a second. On page 11, it just gives a picture of where the dips were, the markets that caused the dip, and the rest of the world that was up close to 5%. Of the drop in sales, $158 million drop in sales, $113 million of that came from the U.S., $15 million came from Hong Kong and Chile, which has been under some strain, and it accelerated a bit in 2019, was $23 million. Most of the decreases were around these three markets.
The U.S. was clearly the market that drove the dip in our sales really around inbound traffic, which is really the next page. The U.S. business sales down 8%, and it really was two things. It was increased tariffs that caused consumers and our wholesale customers to buy differently, and we saw a dramatic decrease in Chinese tourists to the U.S. When I look at that and I think about arrivals in the U.S., Chinese citizens, not counting people from Hong Kong, were down close to 7% in 2019 versus 2018. Our sales input down 4.6% if I exclude the eBags and the Speck piece of business that we talked about. Our wholesale sales are down 9.5%, and we've talked about this at the half. It's really around our wholesale customers buying in a different way and watching some of the traffic reduction that caused that.
Our same store sales were down. If I exclude Gateway and High Sierra, our sales are down 3%. Our Gateway, due to inbound traffic, were down 12.2%, and those are an important piece of our retail portfolio in the U.S. As I said, our direct-to-consumer business across all regions were up. Our direct consumer e-commerce business was up close to 13% in the U.S. despite the pressures, and that's excluding eBags, which we are correcting. The gross profit for the entire business was down 106 basis points. The U.S. gross margin was down 242 basis points. 106 basis points and 242 for the U.S. That's most of the dip in our gross margin. Excluding that, our gross margin for all other businesses was largely flat year-over-year, which speaks to the strength of managing our gross margin consistently. We've taken actions across all regions.
We've taken actions very strongly in the U.S. around resourcing, tightening operating expenses, reducing advertising, and making some shifts in the eBags platform to continue to move eBags to profitability in a more aggressive way. If I go to page 13, I wanted to give a picture on the sourcing side. Clearly the tariffs had impacts to our business. 10% came in in Q3 of 2018. At that moment, our U.S. business was sourcing from China 82%. As we moved in, we started to adjust. As we get to Q2, there was an additional 15% tariff put on luggage and bags. At that point, we were at 76% source. We were moving very aggressively. By the end of the year, in Q4, we're 63% source, so almost 20 points lower than what we were at the start of the year.
Our run rate exiting 2019 is 60% sourced from China. In our view, for 2020, assuming normal course, we would be below 50% sourced from China. Really dramatic. If I went back to the end of 2017, we were at a little over 90% sourced from the US from China. A meaningful shift, which will have a benefit. We've also been re-engineering products and negotiating with our suppliers to manage margin. We also took some price increases, which we talked about earlier in the year, to help offset the margin. We're well underway here of adjusting for the impacts of tariffs in the US business, and I'm quite happy. Everything that we've achieved, we're slightly ahead of the expectations or the plans we had visions for as we stepped into the tariff noise at the end of 2018.
Our team's done an amazing job, and we've been ahead of our own expectations from a timing perspective. If I quickly talk about the other markets, I think these are fairly self-explanatory, and we've talked about them at the half. Hong Kong clearly started to see some noise as we stepped into August. As we got into September, we could see our sales numbers down 41%, 46%. As we got into November and December, those numbers were a little north of 50%. That is driven by the unrest that kind of worked into Hong Kong, really starting at Q2 and really intensifying in the back half of the year. From a Chile perspective, Chile had some ups and downs for the year, but then in Q4 they ended up in their own protest situation. In Q4, our Chile business went down to 16% decrease year-over-year.
We did have optimism for some recovery in Q1. In Q1, our Chile business was closer to flat year-over-year. There was some noise in Chile for sure. We'll see how the rest of the year plays out as the world digests its current challenges. Chile had gone through a cycle, still not perfect, but had kind of wrestled through what came up in Q4. South Korea continues to be a strain for all sorts of reasons. It was fairly consistently down for the year. Each quarter was down close to double-digit, with Q3 a bit more, Q4 riding in that zone. We're addressing these. We've been focused on South Korea for a while and making the adjustments within the cost structure to manage that business on a smaller scale.
We continue to make good progress with our teams to optimize the profitability in our Korea business. If I move to brands, and I adjust for the four markets, all of our brands delivered very respectable growth for 2019. Excluding markets, Samsonite was up 2.2%, Tumi was up 14%. American Tourister, very strong at 7.2% against their very, very strong last year. Our other brands were down slightly, largely from the eBags adjustment that we've talked about. If I include the challenge markets, the only brand that was slightly down was Samsonite, and all other brands continued to deliver positive growth, except for other, which is really eBags again. I covered Tumi, continue to penetrate. On slide 16, I give you a sense for the overall for the year was up 10.7% for markets outside of North America, 2% in total. You can see the North America impact.
If you go to the next slide, I think this gives a very good picture of kind of where we've been from the acquisition for Tumi. You can see across all markets, we were delivering a very steady, consistent story to what we said we would do for Tumi. Even North America was delivering a nice growth profile other than when we stepped into the tariff noise of 2019. Asia has continued to grow very strongly from where we started to where we were. $130 million in 2016, close to $250 million in 2019. In Europe, which we were settling down and starting to push the growth drivers really into 2018 and 2019, continuing to deliver a great story, 15% growth for Europe in 2019 constant currency.
We still see plenty of opportunity to push the Tumi brand internationally as we really get into stride in many markets. I think a positive story there across the board for Tumi. As we said, we are driving our direct-to-consumer business. Our D2C business, including stores and e-commerce, was up last year. Despite us being slightly down, our D2C business was up 1.1%. If I take the eBags correction out, we're up close to 4%. As I covered earlier, our e-commerce was up 16% adjusted for eBags. Very, very strong. As a percentage of sales, it's up 40 basis points year-over-year on e-commerce. I think a measure that's very interesting is when we look at the five-year story on our direct-to-consumer, which is the last bullet on the page.
Five years ago, we were roughly 20% of our sales were D2C. We exited 2019 at 37% direct-to-consumer, of which our e-commerce piece has become a bigger and bigger piece over that time period. On page 19, it really just shows across the regions here. North America, 13%; Asia, 18%; Europe, 15%. Latin America, which is really just getting into stride, up 76%. Plenty to go at there in all this very strongly carrying into the start of 2020. We did take actions on SG&A. We talked about them earlier in the year. When I look at this simple page, Reza will go through these in more detail. Our sales are down 1.2%. Our gross margin was down, again, a little over 100 basis points. That's $130 million drop in gross margin, largely tied to U.S. tariffs.
Our EBITDA was down $100, and that really speaks to the gross margin carry through, and then actions and initiatives that we were doing to offset the pressure of both the sales drop, which will have some carry through to EBITDA, but also the margin drop. We really did take a good amount of actions. I have a summary here on slide 21 on actions that we've been talking about. I think we were guiding down this line at the half. We took actions across all regions. In Europe, we took some fairly aggressive actions on the retail side. We reorganized the retail management structure. We reorganized the Lipault business, which was a small business being run out of Europe. We changed the leadership in Europe in the first half.
All of these things have played very nice for the Europe business as far as generating savings and allowing the Europe business to deliver growth while we're making these corrections in 2019. Really positive result. Fabio, who's running Europe, has stepped right back in and has done an amazing job within Europe. Across all regions, we were cutting costs, both on headcount and store closures, renegotiations, everywhere where we could make a move to kind of generate some savings. In 2019, the actions we've taken generated annual savings of around $23 million, of which we saw $13 million in year in 2019. As we've covered for eBags, we stepped up the acceleration, and as we move into 2020, we're very aggressively structuring the eBags business to put it in the right place so that we can shrink the business but get the profitability in the right place.
In 2019, third-party brands were down $31 million year-over-year in sales. We're aggressively folding that eBags business into the rest of our business to optimize on the SG&A side and get that business in the right place. With these actions, we took some non-operating expenses of roughly $16 million to execute initiatives. We also had some non-cash charges totaling $86 million, half of which is stores around store impairments and closures, and half was tied to the intangibles on the eBags business as we get more aggressive in integrating that business into our stores. On the advertising side, we did cut advertising. Part of it was managing really the tariff pressures in the business. We cut it mildly. We cut $26 million of advertising year-over-year.
We went to 5.2%-5.8% of sales. We thought that was the right thing to do given the margin pressures we were seeing in the U.S. This left us with plenty of advertising to drive our digital business, as you can see. As you know, we've been shifting a lot of our advertising digitally anyway. The shift was done, or the savings was done without impacting the digital side of our business at all. From an ESG perspective, I have a few slides here. I'll move through them quickly. This is a milestone year for us. A shame that we had COVID-19 in the year that happens to be our 110th anniversary. That was last week, actually.
We're excited about that, and we took that opportunity coupled with where we were with our ESG strategy to really announce our ESG journey, which we've labeled Our Responsible Journey. It really covers what we're focused on within the ESG front across the organization to deliver on this. We're out making bold statement last week in the media around you should expect Samsonite to lead this industry in sustainability. I have 100% conviction, and our entire team has 100% conviction in our ability to do that. We're investing. We'll talk about what we've done. We'll talk about where our focus areas are. We will lead this industry on this front, and I think it's an opportune time tied to our anniversary, but also the whole organization is very much aligned here.
When I think about what our focus areas are, it's really around innovation, which you would expect. That's what we've been doing for over 100 years, and it's really around continuing to improve the product lifestyle of our products, which has been an inherent sustainable story for our business for a very long time. Really also starting to bring our real innovation in research and science into the materials that we're using to produce luggage. I'll show you some examples of products that we're doing.
I'm quite excited on this front, and our whole team are, as when we think about innovation and I think about what's in our pipeline, I start to see well north of 50% of the things I'm seeing, closer to 70%, that are tied to sustainable materials and how we cycle that into everything that we're doing, which will have a meaningful impact on this industry and on our footprint in the world. We're taking very active carbon reduction actions, as you'd expect, really around increasing energy efficiencies across our owned and operated facilities. We're also very focused on reducing our emissions, and when we launch and put our ESG report out in April, we'll be talking about targets around getting to carbon neutral by 2025, 100% renewable energy by 2025, and really making amazing progress on our carbon action as the whole organization gets around that.
Another big piece of our story is our supply chain, which we're focused on, and it's really around making sure that we continue this historic practice of ensuring we're working with the best suppliers, ensuring their ethical standards are in line with our expectations and really around responsible sourcing. We're very focused on that front. Finally, on the people side, really making sure that our people are provided with the appropriate development opportunities and that we achieve an appropriate gender balance in our business. People are one of our biggest assets. I'm sure I've said to many of you over the years that I really view this business with really two big, amazing asset pools, these amazing brands that we've been allowed to run across the globe and this amazing group of people that really make Samsonite what it is.
This focus area within our ESG strategy is a big piece of what we're doing to make sure that we're developing and promoting our people as well. Just quickly, from a product perspective, I won't cover all these in detail, but we have a few slides on some things. Quietly over the last three years or so, we've been developing products incorporating materials, and really I've got a spattering of things here. One of the products that launched a few years ago in Europe for one of these earlier initiatives within this business was this Neoknit line, which is really an amazing product that's made out of 100% recycled water bottles, rPET. It's a product that is knit technology, which reduces the waste that you have in producing, and it's also using Clean Chroma technology on how the dyes are applied to the material.
It was one of the early launches within this front that really started to move the needle on what we can do with this material, which we label Recyclex, and start to apply it to the rest of our business. The products are interesting and beautiful as well. More recently, the S'Cure Eco products, which we really rolled out last year towards the middle of the year. We call this the yogurt cup. This is one of the first products that we're producing that's made out of 100% post-consumer waste within a hard shell polypropylene case. We're very excited about this. We did this in collaboration with a recycler who asked us to do this, and we're now moving very quickly to moving our entire S'Cure Eco line over the next, I'd say 18 months or so, maybe sooner than that, into using recycled materials.
We're very excited about this, and it really starts to set some direction for what we can do on the hard side spectrum of the business. The next page really shows two things. One on the right is the Tumi Merge collection. This is Tumi's first full collection of recycled product. It's a product that has luggage and bags that has really almost 100% recycled materials. The outer shells of this are post-industrial recycled nylon. The inner is made from this rPET Recyclex from the linings. Just the initial order, this diverts over 214,000 water bottles from the landfill, and it's an amazing collection. If you were looking at it, if I didn't tell you it was recycled, you wouldn't know, and it's really amazing.
I've started carrying the backpack, and I think it's a real good start to what you'll see Tumi from a very aggressive way rolling out across the rest of its fleet. The product on the left is called [Be-Her]. This is going to launch in the summer of 2020. This is a U.S. product. The reason I have it on the page is it captures a bit of everything that we're doing from a recycled materials and sustainability message. It is using 100% rPET or Recyclex. Both the exterior, the interior is using this. It's using Clean Chroma technology, which is a dyeing process that which uses significantly less energy and water. It's using fusion zippers, which is a zipper that's meant to last. Not only are we using these zippers, but we're also selling the bag with a zipper repair kit, which is a very simple process.
Often bags, when people are struggling, it's around the puller that has an issue, and we'll be selling that and start to incorporate much of what we do so that the customer who can continue to send it back to us. We've got over 200 repair centers, why not allow the customer to repair something and send that with a bag when we sell the bag to you. I think it captures a lot of the direction that we're going from a sustainability perspective. The next page, just quickly, Asia, includes American Tourister, is very quickly moving to putting 100% Recyclex as the liners in our full fleet of American Tourister. We'll see that sometime next year. We have running changes all through 2020.
Gregory, which is a very technical outside bag, and this bag is an amazing bag that's incorporating both recycled nylons on the outer shells and the liners, recycled polyester. We've done a lot of work with this bag to assess its own carbon footprint compared to if we're sourcing and producing this bag with virgin material. We can really assess the life cycle of this bag and see dramatic impacts to the environment on a bag like this. You'll see a lot more of this start to cycle into Gregory as well. The last bit I covered, which is this Recyclex material, this rapid zipper repair kit, which I think will start to work in a lot of stuff in Clean Chroma, which I've already covered.
Before I hand to Reza, just really recapping and despite the headwinds that we're looking and the whole world is facing, I think the key pillars on this page are really what gives me this, and our entire team, the strong confidence in the fact that this will lead us out of the virus issue. As the world starts to recover from this, these are the pillars that will drive this business forward. We're very excited about all these. We continue to be despite the pressures we're seeing in the world today. Travel industry will come back very strong. The world's propensity to travel, albeit might take a while to recover, is there, and I think we're sitting in a very good place to capture that. We put the model here.
This is our golden rule model, which really speaks to our people and how we interact with the environment, how we interact with other companies, and how we interact with ourselves. That is one of the underlying cultural strengths of this business that will be a really strong piece of how we navigate and come out strong on the other side. Our decentralized organization allows us to quickly react to local markets. If we were trying to run this business in one location with what's coming around the world today, we'd be half as effective as what we are with this amazing organization that we have. That coupled with really amazing design innovation teams around the globe really is one of these amazing strengths for this business.
As I said, we have this amazing portfolio of brands that are now allowing us to cover the full price spectrum, and across categories, which really strengthens the overall story of our business. We will lead on sustainability, and I think that is a super strong message. When we think about stepping into the next 100 years, this sustainability journey and what we're doing with products and how we will change and lead this industry will be a huge piece of the pillars going forward as we move the business through to the other side of the challenges we're seeing at the moment. With that, I'll hand to Reza for financial highlights, and I'll just come back right at the end.
Thanks, Kyle. I'm not going to go through the materials that Kyle's already covered. Just on slide 31, very quickly, just to recap. As Kyle said, we're down 1.8% constant currency on sale. The flow through to adjusted net income is largely due to that, as well as the gross margin pressure that was down about one point. When we get to adjusted EBITDA, our adjusted EBITDA margin was down about 207 basis points, largely because of the lower gross margin as well as the full year effect of some of the SG&A increases that we saw from the retail expansion that we've been talking about. When we get to adjusted net income, we recovered some of that partially due to lower interest expense of about $5.8 million, which we'll get into. We'll have full bridges on the subsequent slides.
On page 32, this will be the last time that I'll be showing this. Over the course of this year, each time we've had results, we've basically shown the bridge between the two IFRS 16 changes. Very quickly, between the two on the left and the right, there's a $227.9 million differential between adjusted EBITDA, excluding lease amortization interest versus including it, and that's all in Note 16 of the financial statements, which you'll get, which will basically show you the breakdown of that, which is the IFRS lease amortization expense of $197.4 million and the lease interest expense of $30.5. I think everyone should be used to looking at this on an IFRS 16 basis by now. To page 33, let's go through the financial highlights in a little bit greater detail.
We've talked about the sales and the adjusted net income decrease of $63 million as compared to the prior year. Non-operating expense of $16 million was related to profitability improvement initiatives. Kyle touched on that, but I have a separate slide that gets into that specifically, as well as the impairments that we took for the year due to some of the retail operations that we impaired, as well as the eBags decision, which Kyle covered. Our effective tax rate for the year was 17%. That was artificially lower because the Luxembourg tax rate changed during the course of the year. If we were to adjust for that for a normalized basis, our operational effective tax rate was 26.9%.
I think we're still in the same sort of range that we've set historically, where we'll be anywhere between kind of 25% and 28% given on the year in terms of the ETR that we've looked at previously. On the next page, there was a very big focus on making sure that even though we had sales headwinds, that we could still deliver good operating cash flow. I think we're very proud that, especially given the actions that we took in Q4, we were able to be up 32% in a year when sales were down. Operating cash flow was $406 million as compared to $307 million in 2018. Largely due to net working capital efficiency, we actually exceeded where we thought we were going to end up the year. We're at 13.3%, largely based on the back of what we did in Q4.
We'll get into the specifics when we get into the balance sheet, 30 basis points favorable to December 31st of 2018. Despite the first and second quarter going the opposite direction, we really recouped it by the end of the year, and we're very happy with that. Kyle mentioned that we dialed back on CapEx slightly last year, so we ended up at around $74.5 million as compared to a normalized kind of number that's usually around between $100 million and $115 million. We did dial back a little bit on CapEx. This year, we're going to be reducing that even further, just given the environment that we're in. It gives you a sense that we do have an ability to do that when necessary, and continuing to operate the business effectively, given the fact that we do have a largely asset-light model that we can look at.
Net debt, $203 million lower. Beyond our scheduled amortization payments, we took some of the operating cash flow, and as we have said consistently, our objective is to de-lever, and we did make payments on our term loan B, which improved the interest expense, as we talked about, but also improved our balance sheet flexibility somewhat as well. We had $100 million further voluntary debt paydown that happened in Q4 of last year, in addition to the other ones that we had done previously as well. Speaking of the balance sheet, and I'm sure there's questions around this, so I'll spend probably a lot of my time speaking on the balance sheet. Literally on Monday of this week, we closed on a refinancing of our credit facilities. I think this is meaningful for a couple of reasons.
In a pretty choppy environment, thanks to the support of our lenders, we were able to not only close, but also to reduce our pricing, as well as increase the size of our facility by $200 million as well. Our revolving credit facility increased to $850 million from $650. We reduced the pricing on the grid by 12.5 basis points. We pushed the tenor out by two years, so we don't have any meaningful debt maturities for the next five years, which helps de-risk the business somewhat as well. We reset the principal amortization schedule. That helps in terms of the mandatory debt repayments that we would have to do under the term loan A as well, all while maintaining our existing covenants. I think all of this is net positive in terms of our balance sheet overall.
Obviously, we're very pleased for that. We're obviously very thankful to our lenders as well, and the support that they continue to show us. In addition to that, Kyle alluded to it, just given the uncertainty in the financial markets and a lot of banks working from home and other things, similar to other people that you're probably invested in, we have taken the decision to draw down approximately $800 million. It's a little bit more than that, under our credit facility, and placing that cash in our operating accounts in the various regions to make sure that there's ample liquidity to operate the business. We have well over $1.2 billion of liquidity. That is more than enough to go through the near term as well as probably the medium-term challenges that we face.
If you were to actually add up, just to do the arithmetic for you, cash at the end of the year was $462.6 million. Obviously, that's the year-end number. We're still north of $400 as we sit here today. We have a revolving credit facility that was untapped until we do this drawdown this week of $850. We were around $1.3 billion if you were to add those two numbers to be somewhat more precise around it. I am sure there's going to be questions around debt covenants, so I'm just going to get into the math of it right now. We were in compliance at the end of the year. Our debt covenant as of December 31st was for net leverage, so subtracting cash from the debt, is 5.5 turns. We ended the year at 2.63.
The way that I would think about it from a covenant standpoint is, assuming the same debt level, if the debt level will remain the same, and even if we're drawing down on the revolver, that cash is going into our operating account. Until we burn through that cash, it has no impact on net debt. Looking at the same debt number, if you were to take our EBITDA number and literally cut it by 52%, the breakpoint would end up being at $258 million, is the headroom that we would have had at the end of the year. What you should be aware of is in our credit agreement, that the covenant starting now, which is the same as what we had previously, there's a step-down to 5.25 turns max total net leverage.
Again, I think we have headroom as we sit here today under that. The second covenant we have is consolidated cash interest coverage. We ended the year at 8.16 times versus a covenant of three. Again, I would say that there's ample headroom there compared to where we are. What that would mean is net interest expense could go up by approximately $104 million to $165 million of interest from the $60 that we had last year. It's almost tripling in terms of interest expense before we would look at that. Obviously, there's different ways to think about these covenants. Obviously, if EBITDA could come down or debt could go up, et cetera. That gives you an idea in terms of the bookends that we're dealing with in terms of covenant headroom right now.
There's a lot of uncertainty in terms of what the impact of COVID-19 is going to be. We don't know how this is going to shake out. As we sit here today, I think we feel pretty comfortable both in terms of our liquidity position as well as where we sit in terms of covenants. We're going to have to continue to monitor this, obviously, and we do weekly, monthly, and obviously quarterly when we have to submit our compliance certificate. Moving to page 36. Just to focus on last year, I think it's important just to give you an outline of the impairments that we ended up taking. Again, this is the sum total of what we've been talking about for all of the various quarters. Just to give you the quarter 4 view, because this gives you the total.
Again, there were SG&A savings that happened in Europe as well, which is a theme in all of the regions. Latin America, last but not least, net sales growth up 2.8%. Again, if we didn't have the Chile issues, it would've been in that low double-digit growth number, which we're accustomed to for the region. Overall, we ended up with 2.8%. You can see the breakdown of some of the countries that contributed on the upper right-hand side with Mexico up 9.3%, Argentina triple digits, Peru, Colombia, and others as well. The balance sheet. I've covered this a little bit in my opening remarks, on page 43, you can see really the highlights are on the right-hand side of the page. Very impressed with our net debt reduction, cash flow from operations, and the refinancing.
We'll talk about inventories on the next page as well. We did have a $35 million improvement in inventory levels as well, which you'll see on the next page, on page 44. Inventory levels down $35 million. The Q4 numbers here that you'll see on the box on the right-hand side of the page. If you look quarter after quarter, when we were looking at the variance at Q1, every quarter, we started to chip away at it, and there was a really big push at the end of the year in Q4 in terms of righting our working capital. I think we're very happy with where we ended as a percentage of net sales, getting our efficiency back in line with actually better than what we had in 2018. Our inventory days back down to 132 from 138.
This is a constant focus for us. This is a theme that's going to continue into this year as well. Page 45, in terms of capital expenditures, again, we had a $33 million, almost $34 million improvement on CapEx as we dialed back some of the more discretionary CapEx that we do. We're taking a very critical view of CapEx this year, just given the fact that the environment that we're in, so we should be coming in well inside of that for this year as well. I went very quickly through those. I'll turn it over to Kyle for outlook and strategy, and then we'll open up for questions.
Just real quick. Our long-term strategy remains strong. It's really where I kind of stopped talking at the last moment, which is the pillars that really give me so much confidence in where we can take the business on a go-forward basis. These strategies haven't changed. These are really around a well-diversified portfolio of brands that allow us to play at different price points and play across the categories, both in travel and non-travel, in a meaningful way. Our focus on driving our direct-to-consumer, particularly our direct-to-consumer e-commerce business, is paying off, and we see real continued opportunity to drive that business. Along with targeted retail expansion, we've been correcting some retail stores over the last 18 months, but we still see targeted retail opportunities across certain markets.
We continue to focus on investing in marketing. Even though we trenched down the marketing last year slightly, it's an important part of our story. The current challenges have us pinching that, but you should assume that we will put that back as one of our scale opportunities to really drive our brands and tell our story. That continues to be a focus of ours. This amazing kind of management structure, sourcing, distribution capabilities really allow us to drive this business at a regional level and really penetrate new markets and penetrate deeper into existing markets is a strong piece of our story. We always talk about our investment in research and development, and that continues both from a lighter and stronger materials perspective, but really the sustainability story and how we really start to incorporate that into so much of what we're doing.
You'll see these amazing products launching throughout this year. You'll probably see more of it as we get into next year that will really tell this amazing story of where our kind of innovation focus is at. It really ties into this overall ESG strategy, which is kind of built into the fabric of what we're doing within the business, and it fits into the culture of who we are as people. The strategy is very much intact. I thought I'd end on near-term focus, which is a bit of what we talked about at the start of my presentation, which is obviously navigating this business through the current challenges with the COVID-19 virus. Really around making sure our employees are safe, making sure that we're managing the cost structure, and working through the sourcing implications or the impacts from this.
As I said earlier, we're pulling the levers that you would expect us to pull. Significantly pulling on advertising, virtually freezing our CapEx to generate cash, and not paying a distribution to shareholders, I think is in the right interest of all of us as we navigate this year. Not on the page, but really being super aggressive on making sure we're managing the SG&A cost structure of this business. Starting to think a bit more aggressively, not even starting, we've started, but a bit more aggressively on the SG&A cost in this business as we see these pressures and how do we manage that cost profile of the business to make sure that we continue to generate positive cash flows for the business. I won't shy away from it.
It's very challenging in Q2 and really as we get into Q3 and Q4, making sure that we're in exactly the right position. When this thing does start to move back, we're as well positioned as we can be, both from the balance sheet, which we've already talked about quite a bit, and the cost structure of the business. Our entire team is focused there. We're continuing this push on the sourcing structure of the business. It's quite noisy out there, but we're still managing through this kind of tariff push I covered. That will be for U.S. products below 50% by the time we get to the end of 2020. I think that's important.
Most importantly, in the midst of this as we're all trying to manage our own families, our family here at Samsonite are these amazing teams that we have and making sure that we keep people energized and empowered to get to this long-term growth strategy that I talked about while we navigate some really turbulent waters that we're not alone. The whole world is navigating. How do you keep your team energy levels and focus so that when we get to the other side, which we will, that we're in the best position to capitalize on that. We should come out even stronger on the other side of this as the leading player in this industry. Our teams are very focused on that.
I spend a lot of my time talking to our teams and making sure that we're in the right frame of mind as we navigate through like the whole world is navigating through this. With that, I might turn it back to you, William, and we can go to some Q&A.
Yep. Thank you very much, Kyle, and thanks Tim and Reza as well. We can now open the Q&A session to dial-in questions. Let's see. We have to start, Chen Luo of Bank of America.
Okay. Thank you. Good morning and good night. I've got a few questions. The first question is on the business side. Last year, our net sales were down by 2%. Adjusted EBITDA was down by 18%. I understand it had a lot to do with the distortion from the trade war and all the tariff things. In January, February this year, we mentioned that sales declined by 11%. Can we also share the rough EBITDA trend during the same period? At the same time just now we also mentioned that maybe for Q1, sales could be down by 25%-30%. In that scenario, what kind of EBITDA decline are we modeling at the moment? This is my first question. Thank you.
We won't disclose that. It's a bit forward and we're still cooking it, to be honest with you, to see where we are. It will have an impact. Sales drop in that range really tied to what's happening with this rapid drop due to kind of the COVID-19 will have an impact. We don't have kind of good visibility to that, but it would be too premature for us to give you a view to that right now. It will obviously have an impact is the way I would describe it. That's what we're working through as we think about navigating through Q2 and Q3 due to the pressures we're seeing on the sales side.
Okay. That's fair enough. The second question is on the battery side. I think this is the current key market focus. Have we done any stress tests with regard to what kind of sales decline on an annualized basis could trigger the breaching of the covenant? I understand that we are reviewed, but yeah, go ahead, please.
I could just repeat what I just said a little bit earlier. I'm giving you the adjusted EBITDA decline. Again, it's a question of what your or our collective assumption is on where debt is. The way that I would phrase it is if the end of the year I want to be very prescriptive and transparent with you about the way to calculate it. Our covenant on net leverage specifically at the end of the year was 5.5x , but that steps down to 5.25x. 5.25x now. On a go-forward basis, it's five and a quarter. Again, that's the way that it's always been in our credit agreement. At 5.25x , if you were to just take our year-end net debt balance, and again, it's really important that it's net debt.
If we talk about revolver draws, et cetera, as long as that cash is sitting, it nets between those two. The net debt balance at the end of the year of $1,305.3, at five and a quarter, adjusted EBITDA could go to $248.6. That's basically the point at which that covenant would be breached. You have to think about what that means. If there is a covenant breach, whether it's on net leverage or interest coverage, we just have to go to our senior secured lenders, who are basically our bank group, and 51% of them would have to either give us a waiver and an amendment.
I would like to think we have a very supportive bank group and that we would talk to them about where our business is and to sit around a table and say, This is what it is. I think everyone would understand if it were to happen, it's due to these exogenous events of the virus. We would have a discussion with them. Again, in the middle of all of this, we literally just closed on the transaction this Monday. We would like to think that they're pretty supportive if they extended the tenor, reduced the pricing, gave us some incremental liquidity, et cetera, in the middle of this. That's really the way that we think about the covenants. Obviously, we monitor it, we take it very seriously.
I would say sitting here today, we do have headroom in terms of where we are, but we're going to have to see what happens to the ultimate business.
It also has a lot to do with, one, the levers that we've pulled, that we've talked about. It also has a lot to do with what actions we take to manage the SG&A side. There's a lot of factors in kind of managing that. You should assume the management team is laser-focused on that, like a lot of companies that are in this situation. We're very attuned to the pieces and the levers that we need to pull and the work we need to do. The wild card is the uncertainty of what the timing is of this. We have scenarios that we can manage through that. Your guess is as good as mine on downside scenarios, and I think the whole world is trying to sort through what that is right now.
We're managing on the aggressive side, so that we optimize on the SG&A side, so that we're in the best position we can be in that front.
Okay. Thank you. My third question is regarding the worst-case scenario in the case of a covenant breaching. Just now, I hear that there's a high chance of waiver or amendment of the covenant. Let's assume if there's no waiver or amendment, what would be the worst outcome in the event of default? Will lenders ask us to accelerate the repayment of debt, or is there any other outcome?
Yeah. Theoretically, the banks could end up saying, You have a default. In my experience, having been a banker for 17-odd years before this, it's not like a bank likes to put a company to default, typically. I guess you would have to go and look at our lenders and say, Do you really think that's a likely scenario? All I would tell you is from a company perspective, we think that we have headroom where we sit here today. If there were to be any sort of breach, we would sit down with our lenders and have a discussion with them and try to figure out the best path forward.
Okay.
Again, just to be clear on it, the way the covenant works, it's the bank group. It's your relationship lending banks are the ones that you're negotiating with. It's not term loan B, it's not bond investors, et cetera. It's your core relationship banks that you would be negotiating with, just to be clear on that point.
I might just also say, one, we have this amazing history of kind of navigating these things. If we're in the trough and we come up against it, our forward view will be the strength of this business and coming out on the other side against a landscape where many of our fragmented players are going to really struggle, and we're going to be sitting in a very good position to come out. We've got the liquidity to navigate that. The group will know that. You've got this amazing management team, not me, per se, I'm kind of just helping the whole group along, but this amazing organization that will be ready to get the comeback when it comes back.
That should be the way we're thinking about that if we end up in a situation where the cycle is a little longer than what we think. That's the downside scenario, is it takes longer for the world to recover. We'll be in the position to capture it when it comes back, and I think that's really the story. That's not just Samsonite. The whole world is kind of navigating through this, and we happen to be tied to the travel industry, so we're feeling it for sure. Everywhere I look, everybody's feeling it. Other than maybe the grocery stores and the toilet paper makers in the U.S., because they seem to be booming right now.
Jokes aside, we will be in a good place to come out on the other side, and I think that's the way you have to think about it when you think about, do we bump up into it or not?
Okay. I also got a follow-up question. Will the same covenant be applied to our senior notes?
No. The covenants are for the term loan A as well as the revolving credit facility. What your senior notes would have is basically incurrence-based. It's basically across default. That's the way that those work. You're not looking at that.
Okay. I see. That's very helpful.
Yeah
the company can navigate through all the storms.
Thank you.
We will. We for sure will. It's just how long is the storm going to last, but we will navigate it.
Great. Thank you. Operator, moving down the list, let's go to Erwan Rambourg from HSBC.
Hi, good evening, gentlemen, or good morning, William. Thanks a lot for taking my questions. First of all, looking at China, I was wondering, I think you mentioned 90% of the stores were open now. What's your feeling about an uptick there in the next few weeks? How are you thinking about the business there, are you confident that we're not too far from stabilizing that business? Second question was around, obviously, there are a lot of questions around liquidity on your company, you're by far the leader of the industry. I'm just wondering, without naming names, if you are seeing some pressures on your competitors, if you are seeing potential changes in the landscape, as and when you exit this period, will it be a cleaner space to work on?
Third question, sorry to come back on this, and I know you didn't want to answer directly on the operating deleverage from a 25%-30% sales decline, but we cover a lot of consumer companies where there's a sort of rule of thumb that when you lose one percentage point in sales, you lose maybe 2 percentage points - 2.5 percentage points on EBIT. I'm just wondering if historically you've worked on such a rule of thumb, and if you can help us, without guiding, but just to give an indication of what you've seen historically. Thank you.
Okay. I think I will cover all of them and then just pipe in on the end, maybe. We see China stores opening. We see almost all of our employees back to work, but the flow and the traffic is still a little low. We are probably at might be something like 40%-50% of what is normal. Maybe a shade more than that. I do think there will be some comeback, but I do not think it is immediate. I think we will see a better April, and let us knock on wood. There is not kind of this weird dynamic that is happening now with this kind of resurge and kind of some cases back in Asia as people are returning back to Asia. Very quickly over the last couple of days, we have seen some borders being a little tighter and quarantines.
I think that'll cause a little stutter step as we get into April a little, but I'm hopeful that domestic travel in Asia starts to move back, but I don't think it's back to the levels historically for a bit of time. I don't have the good visibility, but it's clearly moving again, but not at the levels that you'd expect. I think it'll take a few more months before we start to get a better sense for where that is. As far as challenges on competitors, there's nothing that we can obviously see. We've seen some odd, desperational kind of sales online for some of them, particularly in the U.S., is where I'm sitting. That seem to be around generating whatever cash they could get.
All I would say is, and you know this, the industry we're in is highly fragmented with many of the players with sales levels $150 million or less. Their capacity to navigate this will be dramatically less than ours. Many of them are venture backed or venture sponsored. Those are challenging moments for them. I think we'll come out clearly the stronger player, but we shouldn't underestimate that we'll still be in a fragmented market with plenty of players that we're working against. I think we will maybe have one leg up on the other side of it, particularly with our liquidity and just our general strength and focus in the organization. Your last question around kind of the math.
I think when sales moves in normal ranges, down 1%, 2%, 3%, 4%, 5% kind of ranges or up those ranges, you get that kind of equation that you're talking about. I think when you see sales numbers down 10%, 20%, 30%, the math is a little different, right? Because your ability to kind of flux requires more effort on the management team to make some bigger decisions to be able to keep you in some range. I'm not sure the math just carries across that way, Erwan, because these bigger increments cause bigger strains. What you should, though, take some confidence in is that we're being very aggressive on making decisions around how do we manage this through assuming a worst case, which puts us in a great position when it comes back, potentially even better than when we came out.
That's the way we're operating as a management team. Really aggressive action and thinking as we kind of move into Q2 as far as what we could do to sort out the cost to revenue equation in a faster way. That's, I think, the best way I can answer that for you.
No, that's great. If I could just follow up, you were talking about desperation from some and some discounting. I'm just wondering how do you envisage to get rid of excess inventories that haven't sold in the West? Are you basically going to use traditional outlets, or do you see other disposition channels to ensure that?
There's two things I would say.
the product is fresh?
Yeah.
Yeah.
There's two things I'd say. One, historically, and you've known us for a while, our stuff doesn't go bad. We're not so far forward on inventory that if things are stalled a bit and we're selling later, we have to be heavily promotional to move things. We have some real scale advantages with our suppliers to manage through the throughput. I said earlier, our factories are back on. One of the challenges, what we thought was a great thing when they were back on fairly quickly in China, has shifted to, oh, well, don't get back on too fast because we don't really want the orders that are coming in. Right? We're doing a lot of work with our suppliers to throttle that back in the right way.
A lot of work and paying attention to which SKUs we for sure want to have here and pushing back on ones that we want to stall a little bit. One of the real tasks for this sourcing organization, I think we have this amazing sourcing organization, will be how do they manage that throughput with factories that we've had relationships, in many cases, for 20 or 25 years, so that we're both in the right place. As we're doing modeling, we know that our working capital will be up, but it doesn't necessarily mean that I've got a bunch of flawed stuff in my inventory. We're pushing back on the flow as much as we can so we can get that right. That's a hard equation, but we're very focused on it, and our sourcing teams are laser-focused on it.
The inverse of that is our customers. We're also managing with our customers, and even though we've been pushing our direct consumer, still 60-some% of our business is with big customers. We're managing all of that relationships from the factory all the way to the customer to get that flow right. I don't envision this kind of massive inventory liquidation requirement or challenge. We might have a slightly higher inventory off the quick drop in sales, but we'll navigate that and be in the right place as we get into the other side of this. It'll also allow us to maybe, and we've talked about this in the past, maybe manage some of our SKU counts across the globe and make sure we're focusing on the runners as we turn back on.
We're doing a lot of work taking advantage of the opportunity. There's a lot of work on making sure we're focused on key lines and make sure those are prioritized as it turns back on.
Excellent. Okay. Thank you very much. Best of luck. Thank you.
Thanks, Erwan.
Great. Moving to the next one, Anne Ling from Jefferies.
Hi, management team. Thank you for taking my call. I have a couple of questions. First, now I'm going to the covenants again. Just assume that if we have reached the covenant and we need to do a waiver or an amendment. If we need to step up a little bit on the interest rate, what is the best guess in terms of how much more we need to take on? That's my first question. My second question is on the cash OpEx, the $1.5 billion that you have last year. Is there any way that we can either derive it between fixed cost versus variable cost? If we just take a look at the three category, distribution cost, advertisement, and also G&A, maybe for each of them. For example, back in 9/11, can we actually put advertising sales to 0 instead of 4%, 5%?
How low we can get? For G&A, is it more or less fixed cost? It will be great if you can share some of this with us. That's my first question.
Okay. Why don't I take that one? Getting back to the covenants. Your question is around the interest rate. The way that the interest rate works is, just to go through the capital structure for you. We have our bonds, which are just a fixed interest rate. That's 3.5%, and that's in perpetuity, basically, until they're due. What you're really focused on is the refinancing we just did actually brought our margin down. We have a ratings-based or leverage grid. The way that our interest rate works is whichever is the better for the company, frankly. Whether it's ratings based or our leverage point. We're currently at LIBOR plus 137.5 on our term loan A and revolver. We have our term loan B, which is LIBOR plus 175.
The revolver and the term loan A cap out, the highest point on the grid is LIBOR plus 187.5. If you're above four turns of leverage, that would be the break point. That would be the highest interest rate that would happen for that piece of the capital structure. As it relates to your cash OpEx question, I'm gonna have William probably get back to you just on the breakdown between the fixed and the variable and things like that. You were asking about advertising specifically. Again, you have to think that the way that we do advertising, there's really a few buckets. There's co-op advertising, that's with our wholesale customers. There's advertising that drives sales on our e-commerce, there's brand advertising.
When we look at advertising, really all of the brand-related advertising, so if you're driving down the street and you see a billboard in an airport or things like that, all of that's being pulled back right now, unless it was previously committed. All of that, we're literally pulling back. I would say if we're even to 1.5%, 2% of sales, we should still be fine.
Yeah. I think that's the range that you should expect that we'll take it to. Around 2% of sales.
Yep.
Which really is around bottom of the funnel digital advertising. We can stall on the top of funnel digital advertising, which is this kind of brand building stuff. The stuff that drives traffic, and in the midst of all this noise, we've kept all of our e-commerce business open. We've seen the traffic come down from there, but they're still generating sales in Europe and the U.S. We've kept the distribution center open for that. That e-commerce business continues, and we can continue to drive traffic. That'll be where we're focused. Everything else, we're going to kind of throttle back pretty aggressively. As I said, it'll generate in our models, $100 million. I think it could be a shade more. We spent just around $200 million last year.
I think that's the way to think about it, that we'll be able to throttle a good amount back.
I actually have one other point to bring because you raised about interest rates. Ironically, yes, we've drawn down on the revolver, but if you've noticed, LIBOR has also plummeted. The offset to that is our overall interest rate cost on the floating rate component of it have dropped. That is a benefit to us, as well, for the course of this year. You should just be aware of that as well.
Right. I was quick, trying to work out the interest expense that we need to pay together with the revolver. The cost of the LIBOR has dropped substantially. Is it correct that we are still hovering at around $60 million total?
Yeah. In total, that's probably an appropriate number to look at in aggregate. Again, it depends on what happens to our leverage and again, there's a maximum bit that we can go up on the grid. With that caveat, yes, I mean, our revolver today is priced at LIBOR plus 137.5 . You can calculate what that would be on an annualized basis.
You're doing some modeling, obviously. If you were going to model, I might range it up. It could go up as much as $20 million from the $60 million, depending on rates and this drawdown on the revolver. It's not-
Annualized.
Annualized. It's not such a meaningful impact. If anything, there's a cost of drawing that revolver. That is a low cost as we manage liquidity through the noise that we're facing. Not enough to change the needle on much of what we're talking about.
Yep.
Right. You also have, what's it called? The interest rate swap. That's the one that you, Reza, you just mentioned, right?
We do, yeah.
Yeah.
We've swapped some of our LIBOR as well. Again, if you look at it total now, because we've drawn on the revolver, the majority of our debt now with the draw on the revolver will end up being floating rate.
Okay.
Actually that's something that we're looking at as well, given where rates are.
Okay, got it.
do we look at swaps as well. Yeah.
Got it.
The fixed rate portions of our capital structure are obviously the EUR 350 million euro bond that we have, and then what we swapped under the term loans as well. Which roughly, off the top of my head, I think it's like $770 million or something like that.
770.
Don't hold me to that, but it's in that area. like in the mid-$700s is what we've swapped.
Okay. Got it. Final question is on the GP margin. I understand that it's a bit tough to give us any guidance moving forward, but given the fact that 50% of the sourcing will be outside of China for your U.S. market sourcing.
Yeah
Would that be any chance of a savings, or how should we look at margin?
It's a really good question. Initially, when we were doing our forecasting for this year, we anticipated that would definitely help, along with re-engineering some product that we've been working on as well to improve on the margin profile year-over-year. The difficulty with forecasting that sitting here with you today is who knows what happens to the sales environment. Yes, from a tariff perspective, we would've been better off in the U.S., but now you're looking at a sales environment which is unclear on what the competitor behavior is going to be and how do we react to that. That's the part that's a little bit unclear as we think about gross margin for this year.
Okay, got it. Thank you.
Thank you.
Great. We're running a little over time right now, but we do still have a couple of people. I think what we'll do is we'll take maybe one or two extra people and then we'll wrap up the call. We'll start with Dustin Wei of Morgan Stanley. Dustin, thank you.
Hi, thank you for taking my question. First is the first two month performance, in terms of sales. Is that possible to sort of break down for the wholesale and the retail? Take China, for example, the sales declined like 34%. Is that fair to assume that the retail part of that will catch up with the wholesale in one month or two month time? On the ground, the consumer demand, we should assume more decline in that regard. Actually, you are running a more fast replenishment model to your wholesaler, so the magnitude of the decline in wholesale and the retail will be fairly similar?
Let me just tell you, we don't have the details in front of us. What I was hearing from the guys is we saw retail come down fairly quickly. We ended up closing stores. We actually saw some of our institutional, even our B2B business continue in the midst of that. In that China number, our retail numbers were lower. Our wholesale was actually running a little higher. E-commerce continued to be very strong, actually. To your point, I think it will blend together and be kind of in the same zone. In those few months, we saw a little bit of one holding up quicker or continuing to hold up while the other one kind of saw some pretty quick drops.
I think that answers the question, but I don't have the actual details in front of me to answer you with kind of meaningful percentages. We did see it performing a little differently. E-commerce, as Reza said, continued to be strong. I think as we move into Q2, they won't be so different. I think as retail's coming back on.
If we use China market as the model, as a trajectory for the other markets which just start to lock down, maybe starting from this week or last week, that's sort of to assume the similar trajectory for that. The first month is very bad, but the following month will gradually start to pick up. Is that what you observe in terms of the curve now?
If you and I could guess that, we would be heroes in the world. That's the big question for everybody and why the markets are struggling and everybody's struggling, because it's not so clear what that curve is and how the rest of the world kind of takes their steps and acts. I'm not able to answer that. My instinct or the way we're managing is, it takes a little longer for the rest of the world, so we're managing in a very aggressive way to make sure that we're assuming it takes longer than what maybe we saw in China, so that we're making the right decisions on the cost structure of the business. Nobody knows. I think that's the wild card.
The way the kind of frenzy is working in the media and just the anxiety of people, I think one should assume it's going to be a little longer than maybe what happened in China. I don't have anything to base that on other than my instincts, and nobody really knows. That's the real challenge with all of it.
Got it. One question on the covenants. In terms of the definition to calculate that net leverage, that should, 100% in line with what you disclosed as your adjusted EBITDA, right? If there's any goodwill impairment, that should be excluded from the adjusted EBITDA.
Dustin, we've done so much of that, and this is something that I can clarify with you offline.
Sure
jump onto the next question?
The short answer is yes, Dustin. Yeah, [they're all in college now]. Yeah.
Yeah, okay. No problem. One other question is that, my understanding is that if you have enough liquidity to service the debts, is that sort of easier to get a waiver, based on your experience? I know it's a lot of negotiation. We'll come into that.
It's always better to have cash, it allows you to navigate and gives you the ability to do that. I think it's a very helpful place to be, versus not having cash. That's a pretty bad place to be. I don't think it necessarily changes. The pieces will be around how do we navigate the business out? What is our forward view? Which we will have some really strong legs to stand on. That'll be the more important piece. It's not necessarily how much cash you have or not. That's an important piece when you can get into that discussion around having the ability to navigate to the finish, or the recovery that we know will come.
Again, I'm not a banker anymore, but I did spend a lot of years doing it. You can talk to your Morgan Stanley colleagues too, Dustin. Generally, when you look at it, is there something wrong with the business? Like the purpose of a covenant is a circuit breaker, so you can sit at a table and say, Well, what's going on?
Right.
When it's purely external shocks that are happening, again, I can't project how the banks are going to react. They look at it and say, Well, once the external shock goes away, the business, is it going to come back and be normal again? Are we going to come back to where we were? That's the way that I used to approach it when I was on the other side.
Thanks. The last question is that when it comes to worst scenario, is there any consideration to find some of the cornerstone investors to do some of the rights issue if the situation sort of really going very badly than what we are seeing right now?
You're too far forward for us to answer that.
Think about it, rights issue is the purpose of raising cash. I think if you look at the total cash amount, and again, we just came from a year where we were down on revenues, down on EBITDA, and we still generated cash. The rights issue is to solve a liquidity problem, not a covenant problem. Like, Oh my God, we're out of cash. What are we going to do?
Yeah.
Which I don't think we're anywhere near anything like that.
I feel so confident in the capacity we have. When I tell you guys, and you guys have known me for a long time, we have amazing capacity, as you'd expect for this kind of size business in this industry to navigate this. Maybe we end there, William.
Yeah. I think that's it.
that I have, and the whole team has. We've got a lot of work to do, like every company does, to make sure we're making all the right decisions, which we are. We're pushing ourselves very hard. I have zero concern around what the liquidity is in the business for us to navigate through this.
Yeah.
Is the way to think about it.
Right. Yeah. Thank you very much. Thank you.
Thanks, Dustin.
Thank you. With that, we will end the conference call today. Thank you very much, everyone. As usual, if you have additional questions, feel free to reach out to me. Thank you very much.
Thanks, everyone. Appreciate it.
Thanks.
Ladies and gentlemen, that does conclude the call today. You may all disconnect. Goodbye.