Samsonite Group S.A. (HKG:1910)

Earnings Call: H2 2019

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Mar 17, 2020

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 speakers' presentation, there will be a question and answer session. Please be advised that today's conference call is being recorded. I'd now like to hand the conference over to your speaker today, Mr. Wieren Yu. Thank you. Please go ahead. Thank you, operator. Good morning, good evening, everyone. Today, we have our Chairman, Mr. Tim Parker CEO, Mr. Carl Jung Droul and CFO, Mr. Reza Tellegani 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, and this is Tim Parker, the Chairman. And I must tell you, everyone, that in a career of 40 years in business, I have never seen times quite as extraordinary as these. And 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. And 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 of BrandsKnight to get through this. We've got a very experienced globally distributed business. And as Kyle would explain, I think we are well armed to get through a very lazy 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. And I do think that this is companies like ours that will win out in the longer term. And 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. And 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. And 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 and 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. And I think it is what we thought was going to be a 3 month phenomenon is quite likely to be a 6, 9 month and possibly longer phenomenon. But at Samsonite, we've been around for 110 years, and we intend to be around for quite a bit longer. And with that, I'd very much like to hand over to Carl Gendo, our CEO and Kyle. Great. Thanks, Tim. So this call, we're here to talk about our 2019 results, but up at the front of our presentation, I'm going to give you a fairly good overview of what we're seeing today and just give you a sense for how we're reacting. But if I start on Page 4, just from highlight for 2019, our sales were down around 1.8% last year due to headwinds in really 4 challenged markets, US, Hong Kong, South Korea and Chile. I think most of those are self explanatory in what we're seeing there. And 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 restaurant business was up around 5%. Our adjusted EBITDA was down $100,000,000 from 2018. Our adjusted net income was down $63,000,000 which was largely the EBITDA offset by lower interest expense. We had a very, very strong operating cash flow last year. We were up 30% from the year before, generating 406 $1,000,000 in operating cash flow. So the business continued to generate in a lot of the initiatives that we're driving to move the working capital. We're paying off from a cash flow perspective. And in response to that and just our general strength of cash generation, our net debt decreased $203,000,000 last year. Our profit was down $188,000,000 of that profit came from a gross margin decrease, which was almost wholly driven by tariffs in the U. S. So when we think about the drop in EBITDA of 100, and $88,000,000 or close to 90 percent of that drop was really around the tariffs, and I'll cover what the U. S. Business did to do a very good job in continuing to do a job of navigating the impacts of that. But let's go through our initial assessment of COVID-nineteen 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 top priorities. So 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 2 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 2. And in Asia where stores were closed, primarily in China, those have actually started to lift. And so 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 kind of recent kind of reemergence as people are coming back into China and Hong Kong. And so there is a bit of a kind of border tightening within those regions. But generally, we still continue to see those markets starting to move, but still under strain from historical run rate. And for sure, Europe and North America has stepped into the noise here. From a liquidity perspective and just generally how we're managing, we've moved from kind of navigating this to making sure that our balance sheet is 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 $650,000,000 to $850,000,000 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 kind of uncertainty or volatility or potential volatility in the financial markets, we initiated an 8 100 approximately $800,000,000 draw against our revolvers. That coupled with cash on hand, which is roughly $400,000,000 gives us $1,200,000,000 of liquidity within kind of our control, which I think is important. I think it was the right move to make this unique, 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. And so as Tim said, in my own view, even with downside, the worst of downside scenarios, we easily have a year's worth of liquidity to navigate Anmore through kind of the crisis and wherever this starts to turn the corner. So 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. And so we saw factories closing for roughly 4 to 5 weeks, had a disruption in supply chain, but we now see that coming back in most of our factories, I'd probably say somewhere between 80% 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, so 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. And so 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. And 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, and 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. And 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 6 month cycle of down and then a fairly quick recovery. SARS was really a 1 quarter down and then started recovering fairly quickly. My view is we're probably in a 6 to 9 month trough before we start seeing recovery, and I probably, from what I see today, say it's probably closer to the 9 month versus 6 month just given the uncertainty. But who knows? And so we are managing in the trough like lots of people are. There's so much uncertainty on when it comes back, And 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. And we have a history for over 100 years of kind of managing through events that hit the industry. We have a 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 do will allow us to kind of come out of this in some normal timeframe. But the impact will 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 kind of the team. We've got this amazing global organization. We are able to act and move in a very active way to manage kind of cost structures and make the shifts in the business to navigate the noise. And as I just said, we've got a tremendous amount of liquidity to navigate the timeframes that we're talking about as well. So 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. So for the 1st 2 months of 2020, which are close months, our sales had declined roughly 11% compared to last year, with Asia down 20%, and within Asia, China for the 1st 2 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% to 30%. A lot has happened in the last 2 weeks, particularly with Europe and the U. S. And so 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 a month of March from that. And 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. But that's uncertain as well. And so 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. So we can reduce advertising and we're doing that in a significant way. We'll generate over $100,000,000 year over year in cash from the advertising pull, which will have zero impact in 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 openings. We're a business that historically spanned around $100,000,000 to $120,000,000 of CapEx. We will save $100,000,000 of that historic run on the CapEx side. And so we virtually froze CapEx as we stepped into March and really started to see the impacts start to affect Europe and the U. S. And we've also and the Board, in our Board meeting earlier today, has decided not to recommend a cash distribution to shareholders, which generates $100,000,000 of cash as well. And so those three actions alone, before we get into really just tightly managing SG and A and making some bigger decisions around how we manage the business, generate over $300,000,000 of effectively in year cash flow to manage coupled with the liquidity levers that we have, make a big difference in how we kind of navigate the next 6 to 9 months. And so that really is these actions coupled with actions that we will continue to take really will allow us to do that with plenty of liquidity. So that's the update that I'll give you. As you know, there's plenty of uncertainty, and so I'm sure we'll have questions at the end, and we'll answer what we can, but it'll be hard for us to give predictions on where things are going, so as you can imagine. So we do have a business overview for 'nineteen, so we'll quickly move through this because I think that's the appropriate thing to do. So if I move to Page 9, 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're facing in 2019. So we have, 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 at 5%, which still is below kind of 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 they 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%. And then mature markets like Germany, 7%, Russia, which I might label a developing market for us, up 19%, and you can see the rest, Turkey, 'twenty three, 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 kind of 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're 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%. And 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. So 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 3rd party brands. But the underlying e commerce business was up 16% and up across all regions very, very strongly with this wonderful building momentum. And 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. And I'm not sure North America is a surprise to anybody, but all regions delivered growth. If I adjust for the challenged 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 talked about started to talk about at the beginning of 'nineteen or the end of 2018. So strong performance with Europe. And 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%. And within North America, we were down 8%. But if I adjust for eBags and spec, which was 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 2 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 kind 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, dollars 158,000,000 drop in sales, dollars 113,000,000 of that came from the U. S, dollars 15,000,000 came from Hong Kong and Chile, I mean, in Korea, which has been under some strain, and it accelerated a bit in 2019, was $23,000,000 So most of the decreases were around these three markets, and the U. S. Was clearly the market that drove the dip in our sales really around inbound traffic, which is really the next page. So the U. S. Business sales down 8%, and it really was 2 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 US. And so 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 'nineteen versus 'eighteen. Our sales were down 4.6%, if I exclude the eBags in the spec piece of business that we talked about. Our wholesale sales were 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 kind of some of the traffic reductions that caused that. Our same store sales were down. If I exclude Gateway and Highland, our sales were down 3%, but our Gateway, due to inbound traffic were down 12.2%, and those are an important piece of our retail portfolio in the U. S. And as I said, our direct to consumer business across all regions were up, so our direct to consumer e commerce business was up close to 13% in the U. S. Despite the pressures, and if that's excluding eBags, which we were correcting. The gross profit for the entire business was down 106%, but the U. S. Gross profit or gross margin was down 242 basis points, so 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 And so clearly, the tariffs had impacts to our business. And so clearly, the tariffs had impacts to our business. 10% came in, in Q3 of 2018. At that moment, we our U. S. Business was sourcing from China 82%. And as we moved in, we started to adjust as we get to Q2, there was an additional 50% tariff put on leverage and bags. At that point, we were at 76% sourced. We were moving very aggressively by the end of the year. In Q4, we're 63% sourced, so almost 20 points lower than what we were at the start of the year. And 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. So really dramatic. If I went back to the end of 2017, we were almost 90%, a little over 90% sourced from the U. S. From China. So a meaningful shift, which will have a benefit. We've also been reengineering products and negotiating with our suppliers to manage carbon, and we also took some price increases, which we talked about earlier in the year, to help offset the margins. So 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 'eighteen. Our team has 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%. And as we got into November December, those numbers were a little north of 50%. And really 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. And in Q4, our Chile business went down to 16% decrease year over year. We do add we did have optimism for some recovery in Q1. And in Q1, our Chile business was closer to flat year over year. So 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, but Chile had gone through a cycle, still not perfect, but had kind of wrestled through what came up in Q4. And 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 in 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 4 markets, all of our brands delivered very respectable growth for 2019. Excluding markets, Samsung was up 2.2%, Tumi was up 14%, American Tourist were very strong at 7.2% against a very, very strong last year. And our other brands were down slightly, largely from the eBags adjustment that we've talked about. If I include the challenged markets, the only brand that was slightly down was Samsonite and all other brands continue to deliver positive growth, except for other, which is really new bags again. I covered Tumi continue to penetrate. On Slide 16, I give you a sense for the overall for the year, it was up 10.7% for markets outside of North America, 2% in total, and 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. So you can see across all markets, we were delivering a very steady consistent story to what we said we would do for Tumi. And so even North America was delivering a nice growth profile other than when we stepped into the tariff noise of 2019. Aegis continue to grow very strongly from where we started to where we were, 130,000,000 in 2016, close to 250,000,000 in 2019. In Europe, which we were settling down and started to push the growth drivers really into 'eighteen and 'nineteen, continuing to deliver a great story, 15% growth for Europe in 2019 constant currency. And we still see plenty of opportunity to push the Tumi brand internationally as we really get into stride in many markets. So I think a positive story there across the board for Tumi. And as we said, we're driving our direct to consumer business. And 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. And as a percent 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 5 year story in our direct to consumer, which is the last bullet on the page, 5 years ago, we were roughly 20% of our sales were D2C, and we exited 19% at 37% direct to consumer, of which our e commerce piece has become a bigger piece over that time period. And on Page 19, it really just shows across the regions here, North America, up 13 Asia, 18 Europe, 15 Latin America, which is really just getting into stride, up 76, plenty to go out there, in all of this very kind of strongly carrying into the start of 2020. We did take actions on SG and A and we talked about them earlier in the year. And so when I look at this simple page and Reza will go through these in more detail, our sales are down 1.2, our gross margin was down again around 100 a little over 100 basis points. That's $130,000,000 drop in gross margin, largely tied to U. S. Tariffs. And 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. And so we really did take a good amount of actions. I have a summary here on 'twenty one 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 Lippo business, which was a small business being run out of Europe. We changed the leadership in Europe, but in the first half. And 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. So, really positive result, And then across all regions, we were cutting costs, both on headcount and And then 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 'nineteen, we generated the actions we've taken generated annual savings of around $23,000,000 of which we saw $13,000,000 in year in 2019. As we've covered for eBags, we stepped up the acceleration and as we move into 'twenty, 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, we third party brands were down $31,000,000 year over year in sales. And we're aggressively folding that eBags business into the rest of our business to optimize on the SG and A side and get that business in the right place. With these actions, we took some non operating expenses of roughly $16,000,000 to execute initiatives. We also had some non cash charges totaling $86,000,000 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 story. On the advertising side, we did cut advertising. Part of it was managing really the tariff pressures in the business, but we cut it mildly. We cut $26,000,000 of advertising year over year. We went to 5 0.2% of sales to 5.8%, and 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. And as you know, we've been shifting a lot of our advertising digitally anyway. And so 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. But we this is a milestone year for us. And so, a shame that we had COVID-nineteen in a year that happens to be our 110th anniversary. That was last week actually. And so 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. And it really covers what we're focused on within the ESG front across the organization to deliver on this. And we're out making bold statement last week in the media around you should expect Samsonite to lead this industry in sustainability. And 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, and 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. And when I think about what our focus here is, 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 kind of sustainable story for our business for a very long time, but really also starting to bring our real innovation and research and science into the materials that we're using to produce luggage. And I'll show you some examples of products that we're doing. I'm excited on this front and our whole team are as we think about kind of innovation and I think about what's in our pipeline, I start to see well north of 50 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 we've made 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. And so we're very focused on that front. And then 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. And people are one of our biggest assets, I'm sure. I've said to many of you over the years that I really do this business with really 2 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. And so quietly over the last 3 years or so, we've been developing products, incorporating materials. And really, I've got a spattering of things here. So one of the products that launched a few years ago in Europe and one of these earlier initiatives within this business was this Neo Knit line, which is really an amazing product that's made out of 100% recycled water bottles, or PET. And 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. And so 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 Recyclix and start to apply it to the rest of our business and the products are interesting and beautiful as well. More recently, the Secure 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. And so 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 secure line over the next, I'd say 18 months or so, maybe sooner than that, into using recycled materials. And so 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 2 things. 1, 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 shelves of this are post industrial recycled nylon. The inner is made from this RPET Recyplex from the linings. Just the initial order and 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 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 Therum. This is going to launch in the summer of 2020. This is a U. S. Product. And 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 Recyclix, both the exterior, the interior is using this. It's using Clean Chroma Technology, which is a dying process that which uses significantly less energy and water. It's used in fusion zippers, which is a zipper that's meant to last. And not only are we using these zippers, but it also we're also selling the bag with a zipper repair kit, which is a very simple process. And often bags, when people are struggling, it's around the puller that has an issue. And we're 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, but why not allow the customer to repair something and send that with a bag when we sell the bag to you. And so I think it captures a lot of the direction that we're going from a sustainability perspective. The next page, just quickly, Asia, with American Tourister, is very quickly using, moving to putting 100 percent Recyplex 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 very technical outside bag and this bag is an amazing that's incorporating both recycled nylons on the outer shelves 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. And we can really assess the life cycle of this bag and see dramatic impacts to the environment on a bag like this. And you'll see a lot more of this start to cycle into Gregory as well. And the last bit I kind of covered, which is this Recyclix material, this rapid zipper repair kit, which I think will start doing work in a lot of stuff in clean promo, which I've already covered. And then before I hand to Reza, just really recapping and despite kind of 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 that this will lead us out of the virus issue. And as the world starts to recover from this, these are the pillars that will drive this business forward, and 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 be take a while to recover, is there. And I think, we're sitting in a very good place to capture that. We put the marble here, this is our golden rule marble, 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. And 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're 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. And so 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 kind of overall story of our business. And then we will lead on sustainability. And I think that is a super strong message. And 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. So with that, I'll hand to Reza for financial highlights, and I'll just come back right at the end. Thanks, Kyle. So I'm not going to go through the materials that Kyle has already covered. So 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 1 point. So when we get to adjusted EBITDA, our adjusted EBITDA margin was down about 2 0 7 basis points, largely because of the lower gross margin as well as the full year effect of some of the SG and 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 $5,800,000 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 2 IFRS 16 changes very quickly. Between the 2 on the left and the right, there's a $227,900,000 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 down of that, which is the IFRS lease amortization expense of $197,400,000 and the lease interest expense of 30.5 percent, but I think everyone should be used to looking at this on an IFRS 16 basis by now. So to Page 33, let's go through the financial highlights in a little bit greater detail. We talked about the sales and the adjusted net income decrease of $63,000,000 as compared to the prior year. Non operating expense of $16,000,000 was related to profitability improvement initiatives. Kyle touched on that, but I will have a separate slide that gets into that specifically as well as the impairment that we took for the year due to some of the retail operations that we impaired as well as the EPAG decision, which Kyle covered. Our effective tax rate for the year was 17%. However, that was artificially lower because there was a once basically, the Luxembourg tax rate changed during the course of the year. So if we were to adjust to that for a normalized basis, our operational effective tax rate was 26.9%. So I think we're still in the same sort of range that we've said historically, where we'll be anywhere between kind of 25% 28% given on the year in terms of the EPR that we've looked at previously. On the next page, there was a very, 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 what we the actions that we took in Q4, we were able to be up 32% in a year when sales were down. So operating cash flow was $406,000,000 as compared to $307,000,000 in 2018, largely due to net working capital efficiency. We actually exceeded where we thought we were going to end up the year. We were at $13,300,000 largely based on the back of what we did in Q4. We'll get into this specifically when we get into the balance sheet, but 30 basis points favorable to December 31, 2018. So despite the 1st 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 $74,500,000 as compared to a normalized kind of number that's usually around between $100,000,000 $115,000,000 So 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. But it gives you a sense for us that we do have an ability to do that when necessary and continue to operate the business effectively given the fact that we do have a largely asset light model that we can look at. Net debt, dollars 2 0 $3,000,000 lower. So beyond our scheduled amortization payments, we took some of the operating cash flow. And as we have said consistently, our objective is to delever. 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. So we had $100,000,000 further voluntary debt pay down 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, I'll spend probably a lot of my time speaking on the balance sheet. So 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 our the size of our facility by $200,000,000 as well. So our revolving credit facility increased to $850,000,000 from 650. We reduced the pricing on the grid by 12.5 basis points. We pushed the tenor out by 2 years. So we don't have any meaningful debt maturities for the next 5 years, which helps de risk the business somewhat as well. And we reset the principal amortization schedule. So 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. So I think all of this is net net positive in terms of our balance sheet overall. So 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 8 100, approximately 800,000,000, 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 is ample liquidity to operate the business. We have well over $1,200,000,000 of liquidity. That is more than enough for us 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 $462,600,000 Obviously, that's the year end number. We're still north of $400,000,000 as we sit here today. And we have a revolving credit facility that was untapped until we do this drawdown this week of $850,000,000 So we were around $1,300,000,000 if we 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 map of it right now. So we were in compliance at the end of the year. Our debt covenant as of December 31 was for leverage, for net leverage. So subtracting cash from the debt is 5.5 turns. We ended the year at 2.63. So the way that I would think about it from a covenant standpoint is assuming the same debt level. So 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. So until we burn through that cash, it has no impact on net debt. So looking at the same debt number, if you were to take our EBITDA number and literally cut it by 52%, the break point would end up being at $258,000,000 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 have previously, there's a step down to 5.25 turns max total net leverage. So again, I think we have headroom as we sit here today under that. The second covenant we have is consolidated cash interest coverage. So we ended the year at 8.16x versus a covenant of 3x. Again, I would say that there's ample headroom there compared to where we are. And what that would mean is net interest expense could go up by approximately $104,000,000 to $165,000,000 of interest from the $60,000,000 that we had last year. So it's almost tripling in terms of interest expense before we would look at that. Now obviously, there's different ways to think about these covenants. Obviously, if EBITDA could come down or debt could go up, etcetera, but that gives you an idea in terms of the bookends that we're dealing with in terms of covenant headroom right now. Obviously, there's a lot of uncertainty in terms of what the impact of COVID-nineteen is going to be. So we don't know how this is going to shake out. But as we sit here today, I think we're still pretty covenants. But we're going to have to continue to monitor this, obviously. And we do weekly, monthly and 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. And again, there were SG and A savings that happened in Europe as well, which is a theme in all of the regions. And then Latin America, last but not least, net sales growth of 2.8%. Again, if we didn't have the Chile issues, it would have been in that low double digit growth number, which we're accustomed to for the region. But 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, covered this a little bit in my opening remarks, but 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. And then we'll talk about inventories on the next page as well. We did have a $35,000,000 improvement in inventory levels as well, which you'll see on the next page on Page 44. So inventory levels down 30 $5,000,000 And again, the Q4 number 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, really big push at the end of the year in Q4 in terms of writing 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. And 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 $33,000,000 almost $34,000,000 improvement on CapEx as we dialed back some of the more discretionary CapEx that we do. We're taking a very, 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. So I'll turn it over to Kyle for outlook and strategy, and then we'll open up for questions. Okay. So 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. And so even though we tranched down the marketing last year slightly, it's an important part of our story. And so the current challenges has us pinching that, but you should assume that we will put that back. It's one of our scale opportunities to really drive our brands and tell our story. And so 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 innovation focus is at. And 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. So 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-nineteen 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. So 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. And then not on the page, but really being super aggressive on making sure we're managing the SG and A cost structure of this business. And so starting to think a bit more aggressively, not even starting, we've started a bit more aggressively on the SG and A costs 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. And 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. So 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. And so our entire team is focused there. We're continuing this push on the sourcing structure of the business. And so 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. And then 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. They talked about why we navigate some really turbulent waters that we're not alone, the whole world is navigating. And 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 and we should come out even stronger on the other side of this as the leading player in this industry. And 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. So with that, I might turn it back to you, William, and we can go to some Q and A. Yes. Thank you very much, Kyle, and thanks, Tim and Reza as well. And we can now open the Q and A session to people dial in questions. Let's see. We have to start, Chen Luo of Bank of America. Thank you. Good morning, Andy and Binay. I've got a few questions. So the first question is on the business side. So last year, our net sales was down by 2%, adjusted EBITDA was down by 18%. I understand it has a lot to do with the distortion from the trade war and all the tariff things. And in January February this year, we mentioned that sales declined by 11%. Can we also share the RAS 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% to 30%. And in that scenario, what kind of EBITDA decline are we modeling at the moment? So this is my first question. Thank you. Well, 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. But it will have an impact. Sales drop in that range really tied to what's happening with this rapid drop due to the COVID-nineteen will have an impact. We don't have 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. And the second question is on the balance sheet side. So I think this is the current key market focus. Have we done any stress test with regard to what kind of sales decline on an annualized basis could trigger the breaching of the covenant? I understand that we are review, but yes, go ahead, Luis. Yes. I mean, I could just repeat what I just said a little bit earlier. So I'm giving you the adjusted EBITDA decline. And again, it's a question of what your or our collective assumption is on where debt is. So the way that I would phrase it is, it's the end of the year. So I want to be very prescriptive and transparent with you about the way to calculate it. So our covenant on net leverage specifically at the end of the year was 5.5x, but that steps down to 5.25x, so 5.25x now. So on a go forward basis, it's 5.25x. And again, that's the way that it's always been in our credit agreement. So at 5.25%, if you were to just take our year end net debt balance, and again, it's really important that it's net debt. So if we talk about revolver draws, etcetera, as long as that cash is sitting, it nets between those 2. The net debt balance at the end of the year of $135,300,000 at 5.25 percent, it could go adjusted EBITDA could go to 248 point 6. That's basically the point at which that covenant would be breached. And 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 or 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. And think everyone would understand if it were to happen, it's due to these exogenous events of the virus. And we would have a discussion with them. And again, in the middle of all of this, we literally just closed on the transaction this Monday. So it's not like we would like to think that they're pretty supportive if they extended the tenor, reduced the pricing, gave us some incremental liquidity, etcetera, in the middle of this. And so that's really the way that we think about covenants. Obviously, we monitor it. We take it very seriously. But 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 and A side. So there's a lot of factors in kind of managing that, and you should assume the management team is laser focused on that like a lot of companies that are in this situation. So 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. And so we have scenarios that we can manage through that. And then your guess is as good as mine on kind of downside scenarios. And I think the whole world is trying to sort through what that is right now. But we're managing on the aggressive side, so that we optimize on the SG and 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 breach. Just now, I hear that there's a high chance of waiver or amendment of the covenant. But 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? Yes. I mean, theoretically, you could the banks could end up saying you have a default. But it would 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. So, I guess you would have to go and look at our lenders and say, do you really think that's a likely scenario? I mean, all I would tell you is from a company perspective, we think that we have headroom where we sit here today. And 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. And And again, just to be clear on it, the way the covenant works, it's the bank group. So it's your relationship lending banks are the ones that you're negotiating with. It's not Term Loan B. It's not bond etcetera. It's your core relationship bank that you would be negotiating with, just to be clear on that point. I might just also say, 1, we have this amazing history of kind of navigating these things. And so 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 and the group will know that. And 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. And 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 that it takes longer for the world to recover. But we'll be in the position to capture it when it comes back, and I think that's really the story. And that's not just Samsung, there's lots 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. But everywhere I look, everybody's feeling it. And other than maybe the grocery stores and the toilet paper makers in the U. S, because they seem to be booming right now. But 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. So would the same covenants be applied to our senior notes? No. So 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. Fall. So that's the way that those work. So you're not looking at that. Okay. That's very helpful. And I hope that 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. We will navigate it. Great. Thank you. Operator, moving down the list, let's go to Erwin Remberg of HSBC. Yes. Hi. Good evening, gentlemen or good morning, William. Thanks a lot for taking my questions. First of all, looking at China, I was wondering, so 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? And 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, but you're by far the leader of the industry. So 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 and if when as and when you exit this period, will it be a cleaner space to work on? And the 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% to 30% sales decline. But we cover a lot of consumer companies where there's a sort of rule of thumb that when you lose 1 percentage point in sales, you lose maybe 2 to 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'll cover all of them and then just pipe in on the end maybe. So we see China's stores opening. We see almost all of our employees back to work, but the flow and the traffic is still a little low. And we're probably at might be something like 40% to 50% of what's normal, maybe a shade more than that. So I do think there'll be some comeback, but I don't think it's immediate. And so I think we'll see a better April. And let's knock on wood, there isn't kind of this weird dynamic that's happening now with this kind of, resurge and kind of some cases back in Asia as people are returning back to Asia. And so very quickly over the last couple of days, we've seen some borders being a little tighter and quarantines. And so I think that will 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. So it's I don't have a 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 That seems 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 $150,000,000 or less, and their capacity to navigate this will be dramatically less than ours. Many of them are venture backed or venture sponsored. And so those are challenging moments for them. But we shouldn't 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. But 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 on the organization. And then 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. So I'm not sure the math just carries across that way, Erwin, because these bigger increments cause bigger strains. But what you should know and 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. And that's the way we're operating as a management team. So really aggressive action and thinking as we kind of move into Q2 as far as what we could do to sort out the cost of revenue equation in a faster way. So that's I think the best way I can answer that for you. That's great. If I could just follow-up on the 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 potential that the product is fresh? Yes. There's 2 things I'd say, 1, historically, and you've known us for a while, our stuff doesn't go bad. And so 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. And so I said earlier, our factories are back on. And one of the challenges, what we thought was a great thing when they were back on fairly quickly in China has shifted to, well, don't get back on too fast because we don't really want the orders that are coming in, right? And so we're doing a lot of work with our suppliers to throttle that back in the right way. A lot of work on 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. And so one of the real paths for this sourcing organization, and 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. And so 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. And 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. And the inverse of that is our customers. We're also managing with our customers. And even though we've been pushing our direct to consumer, still 60 some percent of our business is with big customers. And so we're managing all of that relationships from the factory all the way to the customer to get that flow right. So I don't envision this kind of massive kind of 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. And it will also allow us to maybe and we've talked about this in the past, maybe manage some of our SKU accounts across the globe and make sure we're focusing on the runners as we kind of turn back on. And so we're doing a lot of work, taking advantage of the opportunities, a lot of work on making sure we're focused on kind of 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, Erwin. 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 going to the covenants again, just assume that if we have breached 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 off rate, the cash OpEx, the RMB 1,500,000,000 that you have last year. And is there any way that we can either divide it between like fixed cost versus variable cost? Or if we just take a look at the 3 category, distribution costs, advertisement and office G and A, maybe like for each of them, for example, like back in like 9eleven, like how much how can we actually put like advertising sales to 0, like instead of like 4%, 5%. So how low we can get? And for G and A, is it like more or less fixed cost? It will be great if you can share some of these with us. Let me why don't I take that one? So getting back to the covenant. So your question is around the interest rate. So the way that the interest rate works is just to go through the capital structure for you. We have our bonds, which are just the fixed interest rate. So 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. So we have a rating it's a ratings based or leverage grid. So the way that our interest rate works is depending on whichever is the better for the company, frankly, whether it's ratings based or our leverage point. And we're currently at LIBOR plus 137.5 on our term loan A and revolver. And then we have our term loan B, which is LIBOR plus 175. The revolver and the term loan A cap out. So the highest point on the grid is LIBOR plus 187.5. So that's the if you're above 4 turns of leverage, that would be the breakpoint. So 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 going to have William probably get back to you just on the breakdown between the fixed and the variable and things like that. But you're asking about advertising specifically. I mean, advertising is a lever that we pulled back this year. And 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. And brand advertising, really all of the brand related advertising, so if you're driving down the street and you see a billboard at an airport or things like that, all of that's being pulled back right now, unless it was previously committed, but 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. Yes. So that's kind of a range that you should expect that we'll take it to, around 2% of sales, 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 and the stuff that drives traffic. And in the midst of all this noise, we've kept all of our e commerce business open. So we've seen the traffic come down from there, but they're still generating sales in Europe and the U. S. We've kept those the distribution center open for that. And so that e commerce business continues and we can continue to drive traffic. And so that will be where we're focused. Everything else we're going to kind of throttle back pretty aggressively. And as I said, it will generate in our models $100,000,000 I think it could be a shade more. We spent just around $200,000,000 last year. I think that's the way to think about it, that we'll be able to throttle a good amount back. And I actually have one other point to break because you raised about interest rate. Ironically, yes, we've drawn down on the revolver, but if you've noticed, LIBOR has also plummeted. So the offset to that is our overall interest rate on the floating rate component of it have dropped. So that is a benefit to us as well for the course of this year. So you should just be aware of that as well. Yes. I was quick trying to work out the interest expense that we will need to pay together with the revolver. Because of the LIBOR has dropped substantially. Is it correct that we are still hovering at around like 60,000,000 dollars total? Yes, yes. 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 that we can go up on the grid. But with that caveat, yes, I mean, our revolver today is priced at LIBOR plus 137.5%. So you can calculate what that would be on an annualized basis. You're doing some modeling, obviously. If you're going to model, I might range it up. It could go up as much as $20,000,000 from the $60,000,000 depending on kind of rates and this drawdown on the revolver. So it's not annualized. It's not annualized. It's not such a meaningful impact. If anything, it's there's a cost of kind of drawing that revolver, But that is a low cost as we manage kind of liquidity through the noise that we're facing. Not enough to kind of change the needle on much of what we're talking about. Right. And you also have a what's it called, the interest rate swap. That's the one that you just mentioned, right? We do, yes. So we have we've swapped some of our LIBOR as well. So 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, I'll end up being floating rate. And actually, that's something that we're looking at as well, given where rates are, do we look at swaps as well? But yes. Got it. The fixed rate portions of our capital structure are obviously the €350,000,000 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 $770,000,000 or something like that. $700,000,000 Don't hold me to that, but it's in that area. So like in the mid 700s is what we've swapped. Okay, okay. Got it. And final question 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 in will be outside of China for your U. S. Market sourcing. So in that case, would there be any chance of a savings or how should we look at like the margin? Yes. It's a really good question. So initially, when we were doing our forecasting for this year, we anticipated that that would definitely help along with reengineering 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. So yes, from a tariff perspective, we would have 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. So 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 are running close to we are running a little over time right now, but we do still have a couple of people. So I think what we will do is we will take maybe 1 or 2 extra people and then we'll wrap up the call. And we'll start with Dustin Wei of Morgan Stanley. Dustin, thank you. Hi. Thank you for taking my question. So first is the 1st 2 month performance in terms of sales. Is that possible to sort of break down for the wholesale and the retail? Is that take China, for example, the sales declined like 34%. And is that fair to assume that the retail part of that will catch up with the wholesale in the like 1 month or 2 month like time? So on the ground, the sort of the consumer demand, we should assume sort of more decline in that regard. Well, 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? I'm going to just tell you what I we don't have the details in front of us, but 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. So in that China number, our retail numbers were lower, our wholesale was actually running a little higher. I think and e commerce continued to be very strong actually. So but I think it will to your point, I think it will blend together and be kind of in the same zone. But 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. So 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. But we did see it performing a little differently. E commerce, as Reza said, continued to be strong. I think as we move into kind of Q2, they won't be so different. I think there'll be as retail is coming back on. So if we use China market as the kind of the model as a trajectory for the other markets, which just start to lock down maybe starting from this week or last week. Is that sort of to assume the similar trajectory for that? The 1st month is very bad, but the following month will gradually start to pick up. Is that what you observed in terms of the curve now? If you and I could guess that, we would be heroes in the world because that's a 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. So 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. But nobody knows. I think that's the wild card the way that kind of frenzy is working in the media and kind of just the anxiety of people, I think one should assume it's going to be a little longer than maybe what happened in China. But 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 is on the covenants. So in terms of the definition to calculate that net leverage, that should 100% in line with what you disclosed as your adjusted EBITDA, right? So if there is any goodwill impairment that should be excluded from the adjusted EBITDA We've done so much of that. And this is something that I can clarify with you offline. So why don't we jump on to the next question? The short answer is yes, Dustin. Yes. They're all intelligent, but yes. Yes. Yes. Okay. No problem. And one of the questions is that, so my understanding is that if you have enough liquidity to surface the debt, is that sort of easier to get a waiver like based on your experience? I know there's a lot of negotiation will come into that. I mean, it's always better to have cash. So it's it allows you to kind of navigate and gives you the ability to do that. So I think it's a very helpful place to be versus not having cash. That's a pretty bad place to be. But I don't think it necessarily changes. Really 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 will be the more important piece. It's not necessarily how much cash you have or not, but that's an important piece when you kind of if you get into that discussion around having the ability to navigate to the finish or the recovery that we know will come. So and again, I'll just I'm not a banker anymore, but I just spent a lot of years doing it. And you can talk to your Morgan Stanley colleagues too, but generally, if you look at it, is there something wrong with the business? Like the purpose of a covenant is a cert breaker, so you can sit at a table and say, well, what's going on? When it's purely external shocks that are happening, and 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 isn't going to come back and be normal again and are we going to come back to where we were. So that's the way that I used to approach it when I was on the other side. Thanks. So last question is that when it comes to worst scenario, is that any consideration to find some of the corner stone investors to do some of the rat tissue in the if the situation is sort of really going very badly than what we are seeing right now? You're too far forward for us to answer that. I don't think that's just I think the right issue is the purpose of raising cash. I mean, 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. So the right 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? Yes. Which I don't think we're anywhere near anything like that. Yes. I feel so confident in the capacity we have. Like when I tell you guys, 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. And maybe we end there, William, which is this high degree of confidence that I have and the whole team has. And 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. But I have zero concern around what the liquidity is in the business for us to navigate through this, is the way to think about it. Right, right. Yes, thank you very much. Thank you. Thanks, Austin. Thank you. And with that, we will end the conference call today. Thank you very much, everyone. And as usual, if you have additional questions, feel free to reach out to me. Thank you very much. Thanks everyone. Appreciate it. Ladies and gentlemen, that does conclude the call today. You may all disconnect. Goodbye.

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