Q4 2019 Earnings Call
All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question Dan dancers session. If you would like to ask a question during that time simply press Star then the number one on your telephone keypad. If you would like to withdraw your question. Please press the pound key.
Thank you Sofia Suke see your May begin your conference.
Thank you Sheryl good morning, everybody and welcome to spend <unk> financial results conference call for the fourth quarter and year ended December 31st 2019, I'm joined this morning, Byron and Harare co CEO and Mark Siegel been Masters Chief Financial Officer for your convenience the press release Mdna UN audited consolidated.
Financial statements for the fourth quarter and 2019 are available on the Investor Relations section of our website, that's been master Dot com and on SEDAR.
Before we begin please note the remarks on this conference call may contain forward looking statements about spin Masters current and future plans expectations intentions result levels of activity performance goals or achievement or any other future events or developments.
Forward looking statements are based on information currently available to management and on estimates and assumptions made based on factors that management believes are appropriate and reasonable in the circumstances. However, there can be no assurance, such estimates and assumptions will prove to be correct.
Many factors could cause actual results to differ materially from those expressed or implied by the forward looking statements. As a result spin master cannot guarantee that any forward looking statements Milt will materialize and you are cautioned not to place undue reliance on these forward looking statements, except as may be required by law spin Master has no obligation to update.
Provide any forward looking statements, whether because of new information future events or otherwise.
Additional information on these assumptions and risks please consult the cautionary statement regarding regarding forward looking information contained in the Companys, earning release dated March 4th Twentytwenty. Please note that spin Master reports in U.S. dollars and all <unk> dollar amounts to be expressed today, our newest currency I would like now like to turn the conference call overtime.
<unk>.
Thank you so yeah, good morning, and thanks for joining us on the call today.
In 2019, we faced several challenges as we continue to navigate in it and evolving retail and content consumption landscape.
Our overall performance for the year was one of the contrast on the one hand, our diverse portfolio performed very well against the industry wide softness growing 16%, excluding the decline in hatch most well in the other hand, our operational initiatives were not executed as planned leading us to mess, both our gross product sales and adjusted.
EBITDA margin targets for 2019.
To put this into perspective, while their gross product sales declined 1% in 2019 against an industry that declined 3% globally, our margins fell far short of our goals in 2019.
We're now heavily focused on cleaning up any structural issues and driving cost savings in areas, where we have identified inefficiencies.
Mark will discuss with you in more detail or plan to address our operational challenges through 2020.
However, I would like to address some significant senior leadership changes that occurred to position us for the next stage of our evolution and evolving in an evolving 20 industry content landscape and retail environment.
These changes will optimize spin master for growth with a renewed commitment to operational excellence as we continue to execute against our long term strategy.
We are moving quickly to adapt to the new realities, leveraging the underlying strength of our core business, our dedication to innovation and our financial stability.
As part of this operational excellence initiative, we've kicked off project called Excel.
Which is a top priority for us it is critical to our long term success that we have all our revolver processes systems structures and accountability.
To better match, our business complexities and better serve our customers project Excel is designed to help us do that we need to quickly cleanup or structural issues and drive cost savings to get our operating margins back to where the long.
We're not happy neither where we'd be satisfied until this was accomplished.
Our long term growth is driven by our ability to identify develop.
Acquire new and innovative products and brands create unlicensed evergreen interest him content and grow internationally in partnership with inventors broadcasters production studios.
Distributers in license source, we could continue to go deeper in our categories through our internal innovation strong partnerships and acquisitions constantly fueled by our disciplined 36 month brand innovation pipeline.
We're ramping up our sourcing and procurement activities outside of China, with new manufacturing capabilities in Vietnam, Mexico, and India with other countries under consideration.
It's multi dimensional global platform gives us a competitive advantage in terms of our ability to understand kids play patterns and serves as a foundation for future growth.
I encourage you to think of us not only of the toy company as an integrated entertainment business with toys Entertainment and digital toys and games.
Many of you joined US at the New York twice here last week, where we revealed are innovative 2020 portfolio toys <unk> games entertainment franchises and digital toys, we continue to be at the forefront of evolving trends, capturing the hearts and minds of children around the world and maintaining our position as an industry leader.
We have been innovating and toys for over 25 years, and we understand the art form of creating toys and play patterns that resonate with kids globally.
At the same time, we produced entertainment for 12 years over 1000 episodes content and counting.
At the core spin master is our ability to create engaging kids storytelling for multi platform consumption.
Through the acquisition of Sagel, many in Tokyo, Boca we entered the digital mobile business, three and a half years ago.
This acquisition provided us with a strong brand presence in the digital mobile space and allowed us to develop a leadership position in the kids mobile app and direct to consumer area.
We spent the last three and half years learning and understanding this dynamic new marketplace.
Because children are in clean increasingly accessing and consuming entertainment content on mobile devices, we have street strategically invested.
And focused in all areas of content consumption, which includes our mobile digital presence for years, we have been studying play patterns, which had been converging between physical brands entertainment franchises and mobile digital platforms today token spoken sacco. Many average over 200 mill 20 million I wish it was 200 million, but its 20 million for now.
Now monthly active users on a combined base globally, giving us a strong base of users to expand both app sales and direct to consumer subscription based products.
In 2020 will be enhancing our offering from one to three subscription products. These will include Sacco World cycle School.
Along with an innovative subscription offering.
So many physical boxes, we just launched two weeks ago, and which integrates with the digital world.
In 2020, we're increasing our focus on expanding and deepening the focus weve.
The businesses, we acquired such as gunned swim ways and Cardinal and the franchises. We believe have long term growth potential such as Buck a gun monster Jam DC and pop accrual.
Our goal is to do more with less.
I would like I would like now to discuss our business segments with you in more detail.
The activities games, and puzzles and plus segment is a strong and stable platform for spin master.
We're growing the business through brand building focusing on expanding our existing brands as well supporting new promotional activities.
We are targeting global channel expansion to increase our footprints and strategic we enter adjacent sees that complement our core current products.
At the end of 2019, we completed the acquisition of the Orbitz brand.
The acquisition further strengthens our activities business, providing opportunities for integration into our existing product lines as well as further innovation.
Kinetic sand continues to grow into global brand.
Hollywood hair from cool maker is the only do it yourself studio the let you create your own hair extensions.
Games of puzzles continues to drive steady and re occurring volume.
Regarding our plush.
Business guns, we continue to scale the business through our ability to use our global sales and distribution infrastructure and our ability to capitalize on strong licensing opportunities with key partners.
This year, we added two strong license partnerships to the gun portfolio Hilda build we're winning animation series airing on Netflix.
Which we announced earlier this year and the new animated preschool series Gabby Dollhouse beginning in fall 2001 will bring these characters from the showed a life through new toy line that will include place that figure as plush games and puzzles.
We're also very excited about our ability to mine the hundred two year old gun library of ideas and Reimagine, though.
Crinkle Tinkle for Baby gun is a great example of an old idea brought back to life.
They began is an area that we will continue to focus on we believe it has strong potential to grow globally.
The boys action and construction category. It was our strongest performing business segment in both the fourth quarter and full year.
With strong momentum solid contribution from three major launches this year.
Had a greater Dragon Monster DRAM and Buck the gun all performed exceptionally well in 2019.
We saw strong bucket gone brand engagement internationally and solid performance in the U.S. Following the launch on Netflix we've seen a good start in 2020 Bucks a gun and except expect the momentum to continue through the year.
The second season, a buck the gun armored Alliance brings an exciting to innovation to the franchise and was launched in cartoon network on March 1st with the second half a season, one also launching on Netflix this month.
The Monster drive line performed extremely well at retail locations, resulting in the largest year for months Jam retail toy sales in the brands history.
In 2020, we will remain committed to continuous innovation offering an elevated play experience promotes chan fans and further expanding their presence in the wheels all around the world.
This entry into the wheels category provides us with a great opportunity for diversification and growth at New York Toy Fair, We introduced the Monster, Jim megawatt Dome storm and RC vehicle that you can drive on water and land.
In January 2020, we kicked off our DC Entertainment Boys action line as a new license for action figures place that's remote control robotic vehicles water toys and games in puzzles. The line is off to a strong start.
We've innovated the line and the reaction at retail has been very positive those of you who visit our booth concealed excitement of the 2020 DC lineup, which includes action oriented toys inspired by Batman 80 year legacy that celebrates him as the number one DC superhero.
The preschools and girls segments saw solid growth in fourth quarter, driven by fresh themes of pop troll and innovative new product lines, such as ready race rescue TV special and new toy items that continue to bring seem to life.
Paul Patrol continues to be a top rated preschool show globally, and we can still continued to deliver very high ratings on our shows and our specials.
In fall 2020, the diner rescue seem will be integrated into the pop cruel world staying true to storylines and the character as while exploring new landscapes and rescues we'll be introducing the first ever motorized pop CRO vehicle the pop accrual dyno controller, featuring large scale wheels for extra rough terrain.
Adding to our partnership and continuing to build the strength of pop Carol as a franchise, we're excited to though.
Pardon me, we're excited to launch the first ever full length animated patrol theorize theatrical film in association with Nickelodeon and Paramount Pictures.
Paramount will be distributing film starting August 20.
One.
This is being a really exciting journey for us as a company and represents our first foray into feature films.
Film will feature an all new location and new pub and will be animated in a high quality feature film animation.
Our goal is for patrol to be the first of many feature films and will set the foundation for other properties to follow onto the big screen.
We expect pop troll to continue to be a strong contributor to our sales for many years based on new themes and innovative products.
In girls. We're also excited about love Abella, Mealtime Magic, which a technology advanced baby doll that delivers a premium play experience.
And innovation to a tried and true play pattern.
Universe is an out of this world brand collectible unicorns that allows kids explore and immerse themselves in a never ending world of make believe.
We've had some great innovation in 2019, the remote control an interactive character segment, we launched Juneau or animated baby elephants, and alleys interactive flying pet.
You know and Al. These are both a testament to our team's ability to continue to innovate in this high tech space and merge technology with great play.
We're very happy with the performance of our Moss Jan remote control trucks, which performed very well.
In 2019, we want tangible pixies, which has allowed us to break into the small doll category.
IXYS is across between a collectible and adult housing in AG.
For 2020 were excited to introduce Hatchlings Pixies Crystal Flyers.
Atmels Pixies that really fly.
It takes these can air dance and you can glide her in flight with an IR sensor in or feats. We also seek to leverage innovation across product lines. For example, we develop hatching technology that may attachments, such a groundbreaking success into our how to trainer Dragon line.
This will be followed by our new President pets interactive puppy in 2020, which some of you saw in New York, and which we are keeping under wraps until later this year.
We have more innovation for 2021 and beyond.
I want to take a moment to update you on the impact of the cobot 19 situation to our business.
The situation is very fluid and is driven by factory startup dates labor turn rates capacity available for spin master tooling availability and raw material and component in availability.
Many of our key factories are open.
But most are not yet operating at full capacity.
Travel restrictions remain in place and we're doing as much on video conference as we can we're shifting some production to Mexico and other countries where possible.
As Mark will go over in a minute, we do not expect to see an impact we do.
We do expect to see an impact in 2020.
I can tell you that we are acting very entrepreneurially and using every tool available to us to mitigate the impact of the virus as much as possible. We have an excellent team in China were cautiously working on mitigation strategies. For example in the second half of the year fall season, we are compressing our schedules to stay as closely on.
On track as we can and we're working very closely with our retailers.
Paradoxically are elevated inventory levels at the end to 2019 will help us mitigate some production gaps.
To conclude our outlook for gross product sales in 2020 reflects the pressures our business is currently experiencing including further declines in or hatch more product line combined with the shifting 20 industry landscape challenging global growth outlook that is causing heightened uncertainty and the potential impacts of cobot 19.
All this has led us to look at our 2020 growth projections conservatively.
Our 36 month Bran pipeline is designed to achieve long term growth.
2019 was healthy with the business growing 16%, excluding this decline attachments.
Although we're not projecting growth for 2020, our pipeline remains healthy and we will continue to grow again, our brands partnerships products Entertainment and mobile digital franchises are resonating strongly with children.
We're confident in the success of our strategic direction and are proud of our global teams for their commitment to delivering our success.
Looking forward to 2021, we continued to be excited about our offering and a normalized run rate on growth and profitability.
I will now turn the call over to Mark.
Thank you renew.
On January 21st we released preliminary gross product sales and adjusted EBITDA results for the fourth quarter and full ULA into 2019.
At that time, we discussed in detail the challenges that affected both gross product sales and profitability for the full year.
On today's call I'll briefly summarize our final Q4 on full year performance. In addition, I will discuss our 2020 outlook can provide further detail on operation operational excellence journey I'll begin with a brief summary of performance.
Despite the operational challenges we faced during the fourth quarter revenue of 473.5 million was up 14.3% from the same period last year or 14.7% on a constant currency basis.
We grew gross product sales in the quarter by 18.3% with an unfavorable foreign exchange impact of 2.6 million on a constant currency basis gross product sales grew 18.9%.
This growth continued to be led by the boys action and construction segment, followed by 11.6% growth in the activities gains and puzzles and plus segment and 9.6% growth into preschool and girl segment.
On a geographic basis Europe grew 27.2% followed by North America at 18.8% and 1.6% for the rest of the world.
International gross product sales represented 43.9% of the total.
Globally, Q4, Pos including had animals was flat with respect to the U.S., we performed better than the industry with our Q4, Pos excluding had animals up 12% year over year in comparison to an industry that showed weakness.
We continue to see positive Pos momentum internationally in Q4 in many key markets in Europe, we saw positive Pos growth overall, driven by strong performance in key countries, such as Germany in the UK, where despite the turbulence in the market due to Brexit, we saw Pos growth of 4% for the year compared to a mid.
Single digit declined in the UK toy market overall.
Overall Pos performance for the year was solid relative to the industry with Pos growth of 1% globally. Despite the decline of had animals and compared to a global industry that declined 3% and the us industry that declined 4%.
Global Pos excluding had animals was up 14% year over year.
POS continues to be the leading preschool brand globally, we saw a pull Pos growth in Europe through 2019, and strong Pos growth in Germany, Russia, Poland, Hungary, and Slovak in particular.
In Asia, the Q2 launch in Japan continued to gain momentum in Q4.
In the U.S. Pos for pull patrol decline for both for coal to Andy your.
As we mentioned in Q3, we saw an impact on pull Pos due to the launch of toy story, four which targets the same consumer.
Our main TV drive in Q4 digit also did not perform as expected and was not nearly as strong as the TV drive in 2018.
Paul we're seeing the normal ebbs and flows of a global brand, but remains very solid and we will continue to manage the brand for the long term closely monitoring retail inventories.
Kinetic sand continuously grew throughout the year in Q4, Pos was up 49% compared to last year.
Current Pos year to date is also very encouraging.
Globally, our Pos is up 5% and up 16% excluding had animals.
Cardinal Monster Jam, Bakugan gunned kinetic sand and swim ways, all showing very strong Pos growth.
In the U.S. Pos is up low single digits and up low double digits, excluding had shambles driven by the same brands globally.
Pull patrol Pos is up low single digits globally.
Patrol is slightly down in the U.S. currently the trending up very strongly as our marketing kicks in ahead of Easter.
Turning back to the PML sales allowances increased to 19.8% of gross product sales compared to 18.1% in Q4 18.
This increase was related to higher markdowns as well as noncompliance charges from customers given our supply chain issues as well as proportionately higher sales in Europe, and Russia, which have both higher pricing and the highest sales allowance right.
Other revenue, which primarily reflects licensing and merchandising royalties.
Television distribution revenue in F revenue declined by 3.9% during Q4.
Gross profit for the quarter was 226.1 billion or 47.8% of revenue compared to $199 million, 48% of revenue in Q4 18.
This 20 basis point declining gross margin was principally related to higher sales allowances and higher freight expenses related to the distribution issues, we faced in H. to 29 team.
Selling general and administrative expenses increased 20% to 1.3% compared to Q4 18.
As a percentage of revenue is gionee was 48.9% in Q4 up 200 and base 280 basis points from 46.1%.
The increase was primarily related to higher distribution costs arising from the establishment of a third party DC on the east coast and the consolidation of the Standalone guidance from ways and Cardinal warehouses into this new facility.
Hi, inventory storage and transportation expenses contributed to the increase as we carried more domestic inventory in anticipation of Hyatt tariffs in the U.S., China Trade war and a shift towards domestic sales of Fob.
I do not want to call out the elevated levels of warehousing and distribution expenses in 2019 as onetime that would be disingenuous. However, I do want to point out that the level of Spain. We saw in this area. In Q4 is highly inflated at 9.8% compared to historical spend levels of about half that we're doing everything we can.
To get to get this expense line back down to start nickel spend levels.
In Q4, we recorded an adjusted net loss of 7.8 million.
Cents per share.
Paired with adjusted net income of 6.2 million or six cents per share in Q4 of 28.
Adjusted EBITDA was 6.7 million in the quarter compared to 35.2 million in the prior year.
EBITDA margin was 1.4% down 710 basis points from 8.5 cents last year.
Turning now to the full year.
Revenue decreased by 3.1% to 1.58 billion in constant currency terms revenue was down 2.1% competes 18.
Although we started the fourth quarter with positive momentum based on the progress. We have made in October with both orders and shipments off to a strong start order level shipments and in particular, our operational performance in November December were considerably below expectations. As a result, we reported global growth product sales of just under.
A 1.7 billion down 1% from 28 18.
Outperforming the G 13 countries, which was down 3% as measured by NPD.
Gross product sales were flat on a constant currency basis, excluding the planned decline in hedge levels, we generated 16, plus 16% increase in gross product sales and then just mentioned.
The decrease was primarily a result of a decline in the remote control and interactive segment, principally related to had animals, which declined just over $230 million year over year.
This headwind was partially offset by solid gains in the boys action and construction segment that by Bucko gun Monster Jam Dreamworks Dragons and the positive influence of initial shipments of DC license products.
From a geographic perspective, Europe grew 14.4% driven by strong performances in Russia in Germany, Austria, and Switzerland, North America decreased by 5.4% and the rest of the world declined 4.9%.
On a full year basis international gross product sales grew to 39.3% total gross product sales compared to 36.5% in 28 team and 34.7% in 2017.
In 2015.
Our goal was to reach 40% to sales 40% of sales generated from international markets.
We've now increase that goal to 45% as a reference 70% of global industry toy sales occur outside of North America.
We have a long runway for growth and we're making the necessary investments to to do so.
Sales allowances as a percentage of gross product sales were 13.5%, which is well above our typical historical range of 10% to 12%.
The increase was primarily driven by higher markdowns, an increase in noncompliance charges from customers attributable to our operational performance issues and continued expansion in Europe in Russia, which at both highest setting process and a higher rate to sales allowances in twentytwenty, we're targeting to get this write down to approximately 12 point.
5% as our operational performance improves.
Other revenue declined by just over 3% for the year due to lower licensee in merchandising revenue offset by higher TV distribution revenue UNEV sales, we expect other revenue to be flat for 2020 compared to 29 team.
Gross profit in 2019 represented 49.6% the revenue compared to 50.2% of revenue in 2018.
Yes, gionee increased by $33 million will 5.4% for the full year.
The decrease in gross margin and the increase in issuing a during the year with primarily driven by the fact as I mentioned in my description of Q4.
Adjusted net income for 2019 was 92.8 million adjusted EBITDA for the year was 219 million a decrease of $85 million.
Adjusted EBITDA margin was 13.8% compared to 18.6% in 2018.
The decline in profitability was caused by previously to discuss supply chain challenges lower sales and increased sales allowances.
We were pressured through the back office 29 team as we continue to do everything to service our customers using inefficient warehousing and transportation processes.
Total net working capital as a percentage of revenue was 17.5% compared to 10.8% posture.
Cool working capital for 2019 increased to 21.5 cents of revenue compared to 13.3%.
This was primarily driven by an increase in trade receivables due to a shift in shipments to late in the quarter and a byproduct of a shift from fob to domestic as well as high inventory levels.
Overall, our cash conversion cycle decreased by 35 days.
Free cash flow for the year was 84.6 million compared to 129.5 million in 2018.
The decrease in free cash flow is attributable to lower cash flows from operating activities, partially offset by less cash used in investing activities.
Then sheet remains very strong we ended the year with $115 million in cash we are well positioned to take advantage of acquisition opportunities.
I want to outline the steps, we're taking to address the operational issues. We faced in 2019 as for NIM mentioned, we've kicked off project Excel at initiative aimed at evolving up processes systems structure and accountability, we are focusing on three primary areas.
Our first focus you supply chain optimization, we would address issues with that DC structure to ensure wheel boat to address the changing demands of our inventory industry.
We want to improve our on time delivery in a full rights and our scheduled attainment, we will aim to improve our customer service, we still have strong relationships with customers. However, these were challenged in 2019.
We going to be focused very heavily on key metrics and optimistic and fob mix.
There is no ride ons as to what optimistic and Fob mix should be it varies by region by customer end by product North America is more Fob centric Europe is more domestic orientated historically makes us being oriented more towards fob, which is more efficient for us from a supply chain perspective, even though I if.
The margins are lower than domestic these sales don't touch our warehouse system.
Secondly, we will focus on process simplification and automation, increasing our levels of automation and simplifying our business processes will increase efficiencies and drive cost improvements we want to be focused more on data driven insights and we aim to refinance systems to increase productivity.
From a people perspective.
Third area of strategic focus in 2020, we want to make sure that we allocate resources to the most important areas of the business to set goals that match our strategy to improve accountability two types of measurements of performance and we want to make sure that we improve coordination between teams globally.
A few weeks ago, we announced the promotion of Terra Deacon to Chief people officer, a new position that spin master.
But masters committed to attracting and retaining the best talent and a strong leadership team is one of the most integral components to realizing a strategic plan and the long term success of our company.
We will continue to assess and strengthen our leadership team to ensure we have best in class leaders with deep expertise to propel our organization forward.
Our team is fully aligned on these initiatives and we will keep you updated on that progress throughout the year.
We continue to believe in our long term financial framework and that edits and that at its core this business can consistently grow organic gross product sales in the mid to high single digits there'll be used when we have very strong growth, but there will also be goes we growth product sales growth is more modest or potentially down.
In general we will have to adopting a more conservative tundra outlook. This is consistent with our philosophy every much as it is still early but especially given the euro we're coming off and the unknowns regarding covered 19.
For 2020, we expect gross product sales to decline mid single digits, excluding any impact on our supply chain from covet 19.
However, we do expect to show low single digit growth, excluding the expected decline in hatch levels year over year.
I wanted to give you a little more color on our organic twentytwenty topline outlook hatch animals is still strong as it as a top three collectible, but we expect to further 50% volume decline compared to 29 team.
Dragons was very big for Us in 2019, and there is no movie this year. So we expect it to soften.
Octagon is strong and doing well this renamed mentioned, but we're not guiding to any significant increase in 2020.
We're very happy with that DC comics launch the reaction from retail has been strong. However, 2020 is a non movie year and weve being modest in our expectations. Overall for these reasons, we're expecting a mid single digits decline in organic GPS year over year.
With respect to covered non team we are monitoring the environment very closely and continually assessing the impact to spend masa has information becomes available we.
We anticipate that the evolving situation will have an impact on our global global operations as approximately 60% of our manufacturing base remains in China.
Currently all of our supplies of resumed production all about to make us have resumed production, 71% of workers have reported back and all of our factories.
The delay in production is estimated to be between one in four weeks, we expect to be back in full production at the end of March.
As a result of these factors given the delay so far this year and based on our current assumptions, we're expecting a further reduction in organic gross product sales, which will affect Q2 shipments in particular.
This will result in an organic gross product sales to decline towards the high end of the mid single digit range.
We have initiated a broad range of actions to mitigate any supply chain disruptions and we will try to reduce the above impact as much as possible through inventory substitution and schedule management with our suppliers logistics providers and customers.
From a profitability perspective, we expect 2020 adjusted EBITDA margin to be in line with 29 teen.
Margin pressure is likely continue through to continue through twentytwenty as we focus on improving our supply chain and delivering operational excellence through process simplification and automation.
We are not where we want to be and we are taking actions to address that.
We are committed to disciplined cost management operational efficiency and productivity gains as we transition through Twentytwenty and set the foundation for return to solid mid term growth and margin improvement.
On Twentytwenty, we expect to continue trending towards an 18% adjusted EBITDA margin target.
To assist you with your 2020 models, we want to provide you with a few other details.
In terms of revenue phasing, we expect the split between H one in H. to revenue as a percentage of full year revenues to be 30% to 32% in each one and 68% to 70% teenage too.
We expect Q3 in Q4 to be close to each other in size going forward as each commerce grows as approval for book as a proportion of our business and retail to switch to a higher portion of domestic fulfillment.
I'd expect us to carry high inventory levels at the end of Q3 to manage this.
By way of background, we still using business the model focused more on Fob, which drove more of our revenue into Q3.
We expect depreciation and amortization to be approximately $13 million compared to 29 teed off that 10 million results for more deliveries of entertainment content.
We expect interest expense to remain in line with last year, and our effective tax rate to be between 26.5 and 27.5%.
We expect capital expenditures of approximately 5% to 6% to revenue.
To conclude.
We remain committed to our long term financial framework, which targets organic gross product sales growth of mid to high single digits.
A formula for innovation and growth is still valid and our strategy is to continue as what has worked.
We are extremely focused on cost management and productivity initiatives in order to return to our targeted margin structure.
That concludes our coal running and I will now be pleased to take questions. Operator. Please open the line.
Thank you if he would like to ask a question at this time. Please press star one on your telephone handset. Our first question comes from several cost from RBC capital markets. Your line is open.
Alright, Thanks, and good morning, just on the topline guide I guess, how much of it would you say is maybe demand driven versus the supply chain issues, preventing you from a meeting some of the demand that's out there.
So seven I would say to you.
As our guidance indicates we think we're going to be mid single digits down organically.
The the supply chain impacts we've guided separately to that.
The guidance that we've given you really is driven by some of the commentary that I just went through in my script around the hedge levels decline.
And dragging us down and and other products that I just went through now.
It is important to note sabbah that if you exclude the decline had animals, which will probably be around $100 million year over year, we expect organic gross product sales to grow.
To around 2%. So so that is a.
That is still an indication of how brand innovation pipeline working in a innovation machine still driving growth.
Okay, and then on the on the East DC side, I guess, just maybe a two part question. There I think if I understood correctly. The issue there would that DC was just over concentration of product and that facility am I thinking about that right in terms of the headwind and then secondly are you able to share.
How much of your overall kind of GPS moves through that facility at all.
Yes, Hey fab.
The the east Coast warehouse.
Structurally was was not architecturally set up correctly.
It Wasnt size right and it wasn't outfitted correctly and so now we're actually redoing, it and making all changes necessary to make sure that.
There won't be any issues set up during peak season, I was personally down there in the warehouses myself.
Last week and meeting with the founders and sent.
Going through everything with our team and putting a plan in place to actually.
Re architect what was done.
In the past so at a.
It is all getting reconfigured.
Peak season.
Yes in terms of the second part of your question. So I don't want to breakout the specifics of how much revenue moves through a particular DC in 29 team. The problem was that we tried to move too much through there. It was it was as running describes it wasnt structure correctly for the amount of volume we try to move.
Through that facility and one of the big challenges. We have now is to use to simplify that to structurally change it and to actually get the balance right. So that we can get back to our normal warehousing rights. If you look at the PML in 2019, you will see that we actually spent around $98 million in warehouse.
Dosing, which is which is nearly $37 million more than we did in 2018 the rate was around 6.4% compared to historical average of less than four. So we are very focused on getting our numbers back down to an historical warehousing and distribution levels and in order to get our margin backup and southern.
Whole structural simplification program in 20 is designed to help us do that.
Okay, and then the that the additional headwind that you are building and from Colgate 19 into a guide the few percentage points.
Is that is that true, but at the inability to maybe get some product here that you need or is that consumers just now getting to the store and buying toys or that kind of suppliers or demand.
No that was was based on supply chain, because if you understand what was happening in what was happening in is happening in China right now they have been delays in starting up manufacturing, we not at full capacity and so we're not able to get the goods into al customers in.
In particularly Q2 because of that this dis disruption to our supply chain.
Okay, and then on the comment around the Q3 in Q4 being of equal size I guess, you mean on a revenue your EBITDA basis or both.
But no I was I was referring to topline.
And I I don't think I said exactly equal I think there'll be more equal if you go back in previous years Q3 was significantly because in Q4 topline around 45% first 25%. So we see that balancing out more but in terms of EBITDA Q3 will always be significantly.
More profitable than Q4, and the reason for that is because most of our marketing spend happens in Q4, when we're actually marketing closer to when the customers on the actual retail stores. So you're always going to see a significantly higher profitability in threeq versus Q4, and if you go back historically, that's always being the case.
Okay, and then if I could squeeze in one last one I guess on the flat year over year margin guide.
You are sort of baked in assumption that some of the supply chain issues kind of continued through to Q3, and then year over year, you have somewhat better performance in Q4, because that's when most of the issues where or how is that the right way to kind of think about the sort of the unwind of that the supply chain I went through the yes look it's going to take us some time to to to get.
The warehousing structure set up but what we have what we're very focused on doing is get as much getting as much as we can done as we entered the second half of the year and then as we actually exit 2020, we want to be in a situation where run rate is getting us back to our historical margin structure, just keep in mind, though that the pm.
I will impact in 2019 was not only warehousing. It was also sales allowances. So we're very heavily focused on sales allowances as well and the two issues will actually into related because if you warehousing is not performing well then you are subject to fines noncompliance charges penalties and so on which hit us hard in 2019, So we want to get that all straight.
Doubts so that the 35 million dollar hit that we took in 2019 for warehousing and the 25 million dollar hit in 2019 that we took for settlement sales allowances, which are really the primary components of our margin compression in 2019 out of the way so that would we get back to 2021, we back on a normal track.
Great. Thank you.
Thank you. Our next question comes from Adam Shine from National Bank Financial Your line is open.
Thanks, a lot. So if we think about the Q4 implications that serves what this we would.
Lastly, described as sort of.
$50 billion forfeited.
Cps in 2019, you would have thought that that would have made for a fairly easy comparable into 2020 that you also add.
What everybody guess at DC Comics.
Regardless of whether it's a movie you're not that's incremental so what we think that hack rules will be able already the heart attacks moves would it be able to.
Partly mitigate.
Some of that bounce back and incremental revenues to come from DC Comics. So there's there's got to be a bit more at play so maybe written.
Two first off how do we go from.
Two of your degree of stability the back half of last year and hospitals to further 50% decline.
And what else is going on in 2020 beyond just conservative outlook being articulated our you are you.
Clearly, losing market share in shelf space in regards to a penalty lingering.
From the could miss firing in Q4.
I mean, there seems to be a few missing pieces to the puzzle here.
Yeah, Hey, Adam.
I actually our portfolios is super diversified as probably the most diversified it's ever been and from a Pos perspective coming into coming out of 2019 and rolling into 2020, the Pos is actually.
Very well and not only doing well.
It's doing well across the portfolio.
And it's doing well across geographies.
So from that perspective, we're very we're very pleased.
We are dealing with this what I call, a self inflicted wounds or a bump in the road.
That is really interrupted our supply chain supply chain I.
I don't think that we are seeing any shelf space losses from retailers or anything like that we have a longstanding relationship with all these retailers.
They understand.
That this was a bump in the road and they they know our.
Vigilance in tenacity to go in and to fix problems when they arise and that's what we're currently doing.
We just.
Don't like missing our numbers.
We're embarrassed will miss our numbers and so we're taking a conservative tone.
We're very focused on growing the top line above what we guided you guys to this year, we can't make those promises the teams out there and they're out there.
Selling and very focused and actually going out to get even more shelf space and.
And more promotions and more ads and everything like that to grow the topline.
And we're also trying to mitigate the the.
EBITDA percentage, because that's not acceptable.
But stuff is going to take some time.
For us to work its way up and we're just taking a conservative outlook and we're looking for we're looking for the long term here.
We're around.
The company, it's been around for 26 years, and we continue to appear to be around for long periods of time.
For much longer so we just want to take conserve outlook, but I can tell you that the portfolio is very diversified.
More diversified than it's ever been we're taking a renewed focus in companies that we bought like guns, which is showing a lot of promise.
Putting a lot of energy back and swim ways Cardinal is doing in games doing exceptionally well, we don't talk about it very much on our on our calls, but it's an incredible business.
And everybody is very focused on on a on fixing the year and trying to make the year as strong as possible and then rolling into 2021 is market rest.
Back to levels that.
We current that we've been at historically.
We just don't want to over promise going into 2020.
Okay I'll leave it there thanks.
Thank you. Our next question comes from Dare Sealy from Canaccord Genuity. Your line is open.
Yes, hi, guys.
Just.
Want to confirm what you said just debacle guys I did I hear I think you're not expecting any growth out of pocket gotten this year, just wondering why that would be the case.
That's.
No.
That's that's I mean, we are expecting growth.
We are taking a conservative view of that growth.
Okay.
Sorry go ahead.
Sorry, I missed that can do there's a deep did you guys say that you were not expecting growth, but you are expecting growth I'm little confused here, yes. So Derrick as you know, we don't guide to individual products and individual we talk about our business overall from a guidance perspective, I try to give you a little bit of Cologne bucket gone in the sense that we are good.
Leading to growth for bucket gun, we do expect it to grow but with taking an overall conservative view of growth in general.
Okay, Okay Thats warfare.
Thank you for that in terms of your inventory position.
Up quite a bit here and in Q4, how comfortable are you carrying that inventory into 2020.
Should we are you likely going to do some markdowns to try and clear and get a more correct.
So so inventory was up from around $110 million in 18 too.
The 180 at the end of 2019, which is which is a big increase.
We did what we could in Q4.
Either through markdowns will promotional activity or well closeouts or whatever we could to get rid of inventory, we didnt want to carry into 2020.
We comfortable that the vast majority of that inventory will actually sell through at reasonably normal margin levels. So we don't believe we have any major exposure in that area.
And paradoxically with covet, it's actually helping US now because we are able to substitute.
Some shortages in new products with existing inventory, particularly way it's in in lines that Doesnt change very much luck kinetic sandal gundle a few other areas with these into a very big shifting in the product line. So we're comfortable overall with inventory and we expect it to be back down to close to normal.
Levels by the end of 2020.
Okay that makes sense and then just last one for me on the Capex just want to confirm the number so.
He said, 5% to 6% of of sales is that gross sales or add sales. After rebate. None of that's net sales revenue and that's a split is around two thirds of Capex will go towards entertainment and around one third will be for tooling.
Great. Okay. Thank you very much.
Thank you. Our next question comes from Brian Morrison TD Securities. Your line is open.
Hi, Good morning, I want to go back to the to the guidance on margins. If I could just the 500 basis points last year was really largely due to the DC, whether it be volume or allowance distribution costs. So much.
Mentioned or an identified the issues bid automation or.
Process simplification I realize it's not a fix overnight, but I'm not sure I understand why there is no margin recovery. This year will the east coast DC not be ready for the busy season and are essentially you're saying it will be flat and then you're going to get a hockey stick back to 19% 2021 is that the message.
Well, let me just Peel that question that down into a few different components yet.
Firstly, we're not guiding to 2021 margins today, so so I say too in terms of the trend.
Thats our target.
And we've historically operated at.
Around 18% to even more that's our goal and Thats, what we want to get back to as soon as we possibly can.
If you look at what happened in 2019, there were three major things that hurts, our margins and one was our sales and ounces.
Second was the warehousing and then there was also the impact of selling expenses, which is really a variable costs. The net is not something that we actually get an offset through marketing and so I'm not really focus too much on that it's it's selling its the sales allowances and it's the warehousing and.
My estimation is that around $35 million of that was from warehousing and distribution around $25 million was from the sales allowances and then there was also the impact on loss sales because we we actually could have probably generated another 50 million involves a sales and got the margin on that.
So we're very focused on cleaning that up in 2020, the warehousing and distribution side of it does have a direct impact on sales allowances as we clean that up will be suffering less noncompliance charges fines penalties and so on but what we're doing Brian is that we're taking a conservative view of that for 2020 because until.
We get traction we're only in March and this addresses a question that that Adam Sean head as well we're only in March it's early and until we get traction we want to make sure that we are actually guiding conservatively and we will update you as things go along in May in August and as we normally do we update our guidance throughout quarters.
So at this point, we taking a cautious tone, we're not happy we were at we want to beat flat between line and we are doing everything we can to get there, we just not committing to it today.
I understand that but it would have to think that some of those material costs are incurred last Jeremy $35 million warehouse.
Like we not being a position where that would be.
Addressed by the busy season, I, just I find it a little bit maybe overly cautious if that's the message.
Look, let's let's get the let's get the trick traction lets prove we can do it and then we'll we'll we'll guide I can I can say that is definitely our goal is set up correctly.
The most optimize warehousing structure 80, 20 by the peak season that is our goal.
I think it would be a a.
Travesty, Okay to have a repeat of last year and K in 2020.
Just taking a more conservative view of everything but.
Brian I can just tell you that it's it's all hands on deck and.
We actually are very fortunate we brought in a really season had a supply chain Paul Bloom.
And I encourage you guys look up has bio he is working out it's only being on the and the job three weeks I've spent a lot of time with them I'm very pleased he brought us more people in operational finance.
Which we're very pleased about and so the team is getting rounded out.
And everybody here of a routing.
The organization to mitigate this this issue so.
I'm with you it's not it's it's not where we want to be but as Mark says, we'll update you guys. In six weeks time, we'll give you guys more insight on what's happening and we'll keep you very current on everything.
Okay I appreciate that color.
In terms of gross product sales Mark can you just maybe discuss your exposure to the Asian market place I believe that was.
A growth engine sort of on a going forward basis.
The exposure there.
Gross products so.
Yes, it's actually is really small Brian I mean, we do have some sales in China, which will be.
Impacted as a result of what's happening with the virus currently we have some distribution in other Asian countries.
But overall, it's really quite immaterial for us in the general scheme of things.
Pull patrol continues to do well in Japan.
And and that's really about it but its overall relatively limited impact it wasnt a major effective would we consider it our guidance for 2020, Okay and then lastly, your balance sheet.
Nice to being in that position at this time, but in terms of M&A are you seeing greater opportunities and with such surplus capital would there be potential to maybe shift to certain extent for opportunistic opportunities to return capital to shareholders.
So I would say to you we continuing to look at acquisition opportunities all the time I think right now.
Just given what we're focused on for 2020 is running and I. Just described I think any large.
M&A would would probably be off the table, but tuck in acquisitions. We continue to look at and we'll continue to do them throughout the year, because it's a key part of our innovation pipeline and it's a key part of how we intend to grow the business.
Yes, just at that I mean, I think as as we mentioned at toy fair.
We're.
Becoming even more heavily on the.
The digital mobile space, the gaming space and.
We're seeing some exciting opportunities in that area.
So I think that returning capital back is not in line with are being a growth company.
So we'd rather allocate the capital to make some strategic acquisitions to continue to grow and set ourselves set ourselves up for the future and that is one area where.
We're starting to see a lot of opportunities come our way.
I had one last one too thank you.
Mark.
What is your expectation for industry growth this year.
[noise], while we haven't actually we haven't actually said anything on that Brian. We don't really have a view right now nothing's been published formally by the the by the traditional full cost us. So we'll have to get back to you in something more formal is is published I think overall the general theme.
He is that globally, the industry's continuing to grow.
In the historical ranges of around 4% to 5%.
The U.S. is definitely more challenged and is growing at a lower rate than that so I would say there is a bifurcation between the us and other countries around the world, but we haven't actually published a formal view on that alright appreciate the color guys.
Thanks.
Thank you enter next question comes from Garrett Johnson from BMO capital markets. Your line is open.
Great.
Thank you Mark how can you put on your business without having a view on the industry performance for 2020.
Well, Gary we done we don't plan out business with a macro economic view of the world I mean, the toy industry has grown.
Any differently to economic cycles, we had our best use ever in the toy industry in 2008 in 2009 and the reality is that we are focused on innovation, we focused on on how product lines, we focused on taking share and it's not driven.
Rick Bott correlation to two industry growth rates.
Understood, but those are tailwinds and headwinds, but we'll move on you said, 71% your workers are back to factories in China. When I was at toy fair.
We can half ago.
That range was about 20% to 30% from the public sorry, the private toy companies I spoke with you guys had not mentioned at the time.
Was so is this a better ramp up than than you originally planning.
So when we when we were at toy fair, we didnt publish a specific number at that time that in our factories.
Couple of weeks ago. It was around 54%. So it's gone from 54 to 71 in a couple of weeks.
And and so I think it's going at a positive Brightree then yes. We gave you guys. The latest we've got that information last night at our weekly Cobot meeting.
And I will say I'm versus some of the other companies out there I'm I mean, I'm exceptionally proud of our Asian operations and our team there in both in China and Hong Kong.
The discipline that Dave applied to the situation the accuracy they have applied to situation the ability to work through it I mean, it was staggering to see our video conferencing everybody on the other side wearing masks, but showing up to work policies and procedures that are in place and our China office to not spread the virus.
In Hong Kong office, and the fact that can travel.
The fact people are working at that capacity is is breathtaking and I'm Super proud I mean, we have a lot of factories in the region.
And the team is working.
We are hard to get our share.
And I would also say is that the relationships we've had with the relationships. We've had these factories our long standing. These are great factories, so I applaud the factories for doing what they need to do to get this back in place. So I I would say this I was surprised that the jump last night myself dark.
But also very pleased at same time to see that things are getting almost getting back to normal.
Okay, great and.
I think I think Brian nailed it with his question you got to the crux of the matter here you know we're looking at your guidance for your EBITDA margin for 2020 I would also add that you also had the threat of on again off again tariffs last year. They had to deal with that probably caused some extra costs and disruption. So I think.
You know that question I, just wanted to make a statement there on that and that's what we're all looking at right now, but one thing that may or may relate to it what what is the cost thats going to be associated with this project excel.
So Gary.
Thats part of Thats part of kind of conservativism around the adjusted EBITDA margin guidance, there will be a cost two to simplify and change we're working to actually minimize that as much as we can we working with partners, we working with vendors and we're doing everything we can to to make that.
Project and the changes we have to make as efficient as possible.
We're not going to call out a specific club cost in terms of what the impact is going to be but we will update you throughout the year as as that.
Project Excel continues to evolve and as we make progress and hopefully you'll see it actually flow through at PNM.
Okay, we'll see it flow through but are you going to pull it out as you know one time items and adjusted EBITDA adjusted.
Yes.
To the extent that they all costs that meet that criteria will do that.
But I just comment on that if thats if I may it's just it's there isn't.
The majority of the work is being done internally.
With their own teams, there's a few people from the outside coming in to help but the majority is done internally.
Okay and.
Since everyone else asked a question several to gross margin was down only 20 basis points, but if you're several ounces were up 170, Bips freight was higher there must have been some fairly solid positive offsets what were those.
So we did we did actually have some offsets from product mix on the stuff on the stuff that we did sell.
We saw some increased app sales, we saw some increased TV distribution, although even though we did see a declining in.
In licensing and merchandising there were some things going into right direction.
Product mix was was was the.
The most significant factor that we intend to favor.
Okay, Alright, Thats why for now thank you very much here.
Thank you. Our next question comes from Stephanie Wissink from Jefferies. Your line is open.
Hi, This is actually housing bumper stuff. That's my questions have been answered so I'll keep it really quick can you. Please quantify had total volume in 2019.
Thank you.
Yes, so so we actually no we don't break that out specifically Ashley but what we're doing this is quantifying the delta between the yours and so what we called out in 2019 was the euro the you a decline of around $230 million 19 versus 18, and what we're saying again in 20 years.
That there will be around a 50% decline in.
In in 20 versus 19, so so part of the the guide down in terms of the MST decline is is due to the reduction in Hedgeable sales.
Okay, just like 115 million plenty plenty guide.
So around $100 million.
Okay, great thanks to the color.
Thank you. Our next question comes from Linda Bolton Weiser from D.A. Davidson Your line is open.
And let do you maybe on mute.
Hello.
Hi, I just wanted to double check on something you said about free cash flow I thought you said 50, or 80 million or something but I just wanted to double check your operating cash flow is 98 million and your Capex total was 94 million.
The 19 is that correct.
I don't have the numbers off the top of my head I think our free cash flow was 84.6 million was what I actually read out.
That's very helpful.
And then I can get back to with the specific numbers also the call it will Sofia camp.
Okay, and then secondly.
One thing that hit me.
Toy Fair was that you have a lot of innovation and new product lines, but that I felt a little bit like it was.
Just a proliferation of product lines and products going on do you think it might be helpful too.
Frame your business around core brands, and then express that to analysts and investors is that the way you think about how you run your business and I know you mentioned four things back monster damn patrolling.
The Comex is is that what you viewed to be your four biggest core brands, maybe you could just come in and how you think about it and how you run your business.
Well the way we've been running our business and reporting two guys is in the segments that we talked about before.
And but I do think you bring up a good point I mean, we have some.
Opportunities too as I mentioned on my my earlier remarks to do more with with less we do have some very large segments of business, especially our games business both with our.
Spin Master games, and with the acquisition of Cardinal.
Gunned has a lot of potential.
And and then our franchises like patrol and bought the gun and that our partnership franchise like DC and Monster Jan.
And kinetic sand is becoming a real growth engine in whole activities area of our business.
So yes, I think you bring up a good point I mean, the way we organize ourselves at Wayfair is it is a lot about the products because that that is the DNA of our business, we'd love showing the innovation in the excitement and going product by product, but I could.
Here, what you're saying it maybe a little bit hard for you guys to parcel through especially in a short amount of time in an hour and there's a lot of people there and stuff like that.
So, we'll take that feedback and and.
Got it some good feedback it's it's some good feedback in terms of how to.
Give you more color to go deeper in the various different segments and with what's going on so thank you.
Linda one of the things we did do and we aren't doing is we're actually.
Getting analysts and investors into out facilities more so the day off to 25, we actually took some some investors and analysts through Aspen mass the east office, and we will deep in outdoor and and gunned and Cardinal and we want to do that more just to help you understand the business better.
We need to do that.
Okay. Thank you.
Thank you. Our next question comes from Jamie Katz from Morningstar. Your line is open.
Hi, good morning, and thank you for taking my questions.
At Toy Fair last week, I think you guys said youre going to try to do everything you catch a greater margins back up again, Im 2020, and obviously.
They're calling for flat EBITDA margins. So I'm curious if anything has changed outside of.
Slide 19 between then and now.
And then second.
As you guys continue to push towards international expansion should we continue to expand.
Sales allowances trials. This year has generally I think that have run a little bit higher abroad.
Great. Thanks.
Yes, so in connection with your first question I.
I think we've covered the EBITDA margin piece in a lot of detail on the call. What I will just reiterate is that we are guiding conservatively on EBITDA margins until we get traction we're not happy where they are and we get into everything we can to get them back up and we'll give you more guidance throughout the you as we get traction.
So there's nothing that nothing has changed between this week today and when we actually spoke to you at toy Fair nothing nothing has changed in that respect.
In connection with sales allowances.
Mix is a small element of the sales allowance increased because in Europe in particular, the Europe countries in the way the retail structure works these higher priced higher allowance.
Model, the knick prices actually relatively similar to the U.S.
But but if you look at the sales and loans line in isolation.
As we grow Europe, it does push us sales allowances up just mathematically.
We're going to look at pricing everywhere, but that in particular, we want to make sure the isn't any dilution on that front, but that explains the mix element of the sales allowance increased the vast majority of the issue in sales allowances is not mix. It is simply our ability to control markdowns call up spending.
Noncompliance charges and all of that and that's where we really going to be focusing on in in twentytwenty.
Thank you that's very helpful.
Thank you. Our next question comes from David Mcfadgen from Cormark Securities. Your line is open.
Hi, Great a couple of questions. So first of all just on the sales on site, obviously ticked up in 2019 I was just wondering what your view is for 2020, where do you think that might come out.
Yes, so it's a day that as I as I just on said.
Previously on Jamie's question, the three components of sales allowances that we're going to be heavily focused on is is markdowns, it's going to be on noncompliance.
And and obviously any.
Any promotional spending that that we actually have to undertake that hits the sales announced line.
Warehousing and our ability to service our customers effectively has a direct impact on our noncompliance charges. So to the extent, if we drive efficiencies through through our warehousing.
System, we will be able to reduce sales allowances as a result for that and then.
On the on the markdown side.
You obviously the strength of our line has a direct impact on that ability to deliver our ability to sell through has an impact on that so we're going to be very focused on that I did say in my remarks that we would like to get down to around 12.5%.
Compared to where we were in 19, which was 13.5% and that would still put us above our historical range of 10% to 12% in 28 team. We reached 11.6%. So I still see out numbers being higher for Twentytwenty, but we're pushing very hard to get them back down to our historical ranges.
Okay, and then just a question on the.
Mid single digit decline, excluding any impact from the crown virus.
Just wondering so you know you obviously you flagged.
Hi, Jamal's as you know going to be down again.
Can you give us any color on your expectations for Papa Tron than you did say earlier that popped Petro so far this year in the U.S. is down a bad so just kind of wondering what your.
When you think that product would do in 2020, what's baked into your guidance. There. So we're not going to give specific guidance on on pull patrol, David but I can tell you that it's a very solid line. It continues to resonate with kids around the world and and so it's going to be a very solid contributor in.
Twentytwenty just like it was in 19 ending 18.
And the early.
Yes.
Can you continue to.
Sorry can you give us an idea like how much it's down so far this year in the U.S.
Any color there.
No. We'll give you will give you color would be reported Q1 results in in May.
Okay, Thats share with you at Pos and patrol.
Globally.
Is up.
Okay, because that's how you said.
POS was down in the U.S. so far in 2020 overall globally. Pos is up currently it's down in the U.S., but that's because we actually haven't done any of our marketing and what we're doing now this we're actually getting our marketing in and it's picking up very strongly so the trend is actually very strongly up ahead of Easter.
Okay.
And then just on the distribution expenses as a percentage of sales as you shift.
More of your production out of China and together.
Hi, good fees.
Wouldn't that sort of limit the ability to get distribution expenses down as a percentage of sales.
Well distribution expenses on a PML is made up.
Have a number affect us just keep in mind, though when we actually move goods from different countries in the world that freight cost actually hits Caulks. It doesn't go through our warehousing and distribution so as to understand that that element is sitting in our cost of goods sold but so when you look at our warehousing and distribution line, you're looking at our third party.
Okay.
Distribution costs in North America, and in Europe, primarily and you're also looking at the transportation costs to the extent that we pay those to our customers right not all of our costs somewhat collect some a prepaid. So so really what is what drives our warehousing and distribution costs is the amount of.
Goods that go through what we call domestically Don as opposed to Fob because fob doesn't go through our warehousing at all it goes directly to the customer so our ability to manage our threepi else in North American in Europe drives the warehousing distribution cost line that you see an issue in a.
And that's where we heavily focused on improving isn't getting it back to less than 4%. Historically, we've operated between three and a half and 4% of sales and we now peaked over 6% in 2019 and that Delta is the delta that renewing and pull blom and everyone else and myself with all heavily focused on reducing and getting back.
To historical levels.
Okay.
Alright, that's it for me thank you.
Thank you and my last question today comes from Carolco's here from C.I.B.C. World markets. Your line is open.
Good morning, Thanks for taking my call.
Can you provide more color about the difference between guide GPS expected industry growth beside the Nonorganic impact you have mentioned and lower in district steady growth in North America. Thanks.
Sorry, you could you could you just repeat that question are you asking for the impact that's non organic as in the covered 19 impact is I would you say, yes, that's correct.
Yes.
So so basically.
The covert 19 impact is really as a result of supply chain disruptions as because of our factories getting back to work at full production much later than they originally would usually after Chinese new year.
In February the factories of back and at full steam, but really now they're they're going to be back in full production only by the end of March and so as a result of that production loss and supply chain deficit Q2 is going to suffer from from that impact and Thats why we gave additional guidance in that.
Addition to our organic mid single digit guidance does that answer your question I'm not sure I got it quite correctly there.
I think that's helpful.
I have another follow up.
Do you have any solely timeline so when there.
Challenges, you see a little behind or.
Going to update us.
Six weeks from now Q1 goal.
I think we're going to continue to update you guys on on.
Six weeks and we'll update you guys again in the summer on all our calls we'll update you guys.
Yes, Angela a quick one.
Joel just remind us there about how are you most increase from 2018 over 17.
We'll have to get back to you on that front icon I can remember that number off the top my head, but obviously 2017 and 18, where the Eurs. We had terminals was really very large and growing very rapidly and and so that really was the peak of when the hedgeable spinoff.
Dominant was.
It was actually.
We're experiencing that phenomenon, which is why the 19 and 20 comsol debt much more difficult as hedgeable declines as we plan to but it's obviously, making making the comps year over year.
Quite challenging.
Okay. Thank you that's it for me.
Okay, I think that was the last one.
And I'll turn the call back to management for closing remarks.
Okay.
Well listen thank you everyone that there was I hope that we want to give you the additional color and we look forward to talking to again in early may with our Q1 results. Thank you very much.
Thank you ladies and gentlemen. This concludes today's conference call. We appreciate you participating and you may now disconnect.
[music].