Q2 2020 Earnings Call
Please standby.
This is the Scotts Miracle Gro company's second quarter conference call.
This call is being recorded Mr. King you can now begin.
Good morning, everyone.
<unk> Executive Vice President and Chief Communications Officer, Scott Gruber Company.
I want to welcome all he was 44 second quarter earnings Conference call.
I'm joined this morning bark CEO Jim Hagadorn.
Yeah, So Randy Coleman.
Well under President and Chief operating Officer, Mike look more.
Finally, Chris Hagadorn General manager the Hawthorne gardening company.
Our call today.
The different approach than normal.
We always striving to be comprehensive their prepared remarks or comments today are likely to go further than normal.
Scott not only our result, but our full year outlook and the longer term implications. We currently anticipate that covers all the cold in 19 crisis.
Therefore commentary will be longer than normal.
Jim and Randy can both pre recorded their prepared remarks today.
At the conclusion of their remarks rejoin the call for a large humanaone session.
My answer as many questions as possible. So I'm of course in your assistance and asking just a single question unrelated follow up.
I already have scheduled calls with members of the sell side by side communities throughout the balance of the week you have more insurance that it will be reachable Medusa had 9375 75 six to two.
One bit of housekeeping before we start Randy and I will be participating in a virtual investor conference.
By William Blair Company on June nine.
We have historically used the timing of this event to update the financial community underperformance that out walked through the month of Meg and mandatory pension again this year.
We currently anticipate issuing a press release before the bad and intend to provide some additional commentary during the virtual conference itself.
So with that let's get started I want everyone to know that our comments today will include forward looking statements.
Our actual results could differ materially from what we've said today based on a variety of risk factors.
A comprehensive list of those risk factors are contained in today's press release.
As well as within our 10-K, we just filed with the Securities Exchange Commission.
I also want everyone to know this call is being recorded.
An archive recording of the call as long as the transcript or the call will be stored on our Investor Relations website, investor Dot Scott's dot com.
Without further delay I now want to turn things over the our CEO Jim Hegadorn.
Thanks, Jane and good morning, everyone. If you could imagine we have a lot of ground to cover this morning.
It's probably obvious to everyone listening that I'm extremely pleased with our performance so far.
Let's let's hobbies, because I'm not just talking about the numbers.
Before I get into the details I want to acknowledge the challenges we are all pacing I kind of society.
Yes.
Fortunate here at Scotts Miracle Gro business is doing well.
I know thousands of businesses are struggling and that millions of our fellow citizens are too.
Our thoughts cheaper squad to those who have lost loved ones. During this crisis and those who will the virus lingers.
And our best wishes go out to those companies and faced a long road to recovery.
Above the door in my office, we're just saying my father old like.
That lucky's work hard work and opportunity neat.
My dad I'm not a big believer in luck.
Our results through the second quarter.
And our outlook for the balance of the year.
Is the result at the intersection of our Cowen.
Planning and our corporate culture.
The culture, we have built in carefully nurtured here has proven to be our most valuable asset as we navigated this crisis.
That's a credit to all of our people starting with Mike Lukemire and the rest of my team.
I'm hard pressed to identify a major weakness in the organization right now not only has every part of the company's stepped up to the challenge.
Like every associate had taken this crisis personally.
And of course, it doesn't hurt that we're engaged in the category what participation has actually increased despite current events.
You probably aren't hearing this from other Ceos, but I believe we may be operating the business better right now.
I'm, particularly pleased by what we've done since the end of the second quarter.
And that's why we remain confident enough to reaffirm our full year guidance at a point like most companies are suspending theirs.
Given the most of the details regarding our financials for Randy to discuss.
For the balance of my prepared comments I want to spend my time talking about three things.
First.
I want to discuss the advanced planning that has helped US managed through this crisis and how those actions helped lead to the results we reported today.
If you can see we're significantly ahead of last year on both the top and bottom line through the end of March.
Second I want to discuss the real time operating adjustments, we've made to keep our business on track.
These people occurred mostly in April generally in the areas of sales and marketing.
It was primarily you know U.S. consumer segment.
Third I want to talk longer term in doing so talk about what we've learned over the past two months about the real definition of an essential business.
Well I can't predict the future what is clear to me is that our business in our company had to permanently changed as a result of what we're dealing with right now.
For the better I believe.
Our challenge will be to take the lessons that 2020 and apply them into our business next year and beyond.
Especially in the U.S. consumer segment.
I happened to believe that many legacy consumer branded companies will be stronger coming out of the crisis and I definitely put Scotts miracle Gro on that list.
So let's get going.
I'm proud to say, we were extremely well prepared to deal with this crisis.
We are now midway through week eight of operating or business remotely I happened to be in the same room. This morning as some of my colleagues in Ohio, because it was the best way to ensure we put our best efforts forward for this call.
But we're sitting in the opposite ends of a large conference table when our board room.
This is the first time I've seen any of them in person since March 12.
Well, we've actually been working well together from a distance I must admit it's nice to actually see people into flush once again.
For those of you don't know I'm a form a member of the Board BDC Foundation.
I was a member of that four during a period of high concern about avian flu.
My proximity to that issue prompted Scott to put a pandemic plan in place back then.
Which we dusted off shortly after the return from the Christmas break.
Going back to my comments about the combination of talent and planning the team here spend about six weeks developing a plan to run our business if the threat from cold at 19 reached the level that ultimately occurred.
That effort was led by our head of HR going East on our General Counsel I've been Smith, our supply chain lead Scott hindered and her head of ice tea Ricardo Bar chart.
We also hired outside experts in the specialty area as a public health corporate wellness.
We were doing all that in early February so by the second week of March we had tested our systems.
<unk> safety protocols in place communicated thoroughly with our board of directors advise the state of Ohio made the decision to close or offices into begin working remotely.
We took those steps before nearly any other company and probably two weeks before anyone with talking about shelter in place orders.
Throughout the entirety of our planning the safety of our associates into communities, where they live.
Our number one priority.
In all of our more than 50 manufacturing and distribution facilities for both U.S. consumer and popcorn.
We put new protocols in place to keep people healthy.
Including asking ourselves piece to take their temperatures before they came to work.
We either separated people by six feet or put dividers and slaves to make it easier for them to social distance while on the job.
We created downtime between ships, so that we could properly cleaner equipment.
When it was available we provided protective gear.
We waived their security policy, so people wouldn't be nervous about staying home that they weren't feeling well.
And we communicated with them constantly.
We worked with our retail partners, so that our frontline sales associates can work in the evening to minimize their contact with other people.
We discontinued all consumer counseling activity and had been focused solely on managing retail inventory and product merchandising.
We also recognize that the work of our front line associates involved the level of risks and stress, but those are that's been management.
Those of US working remotely at home did not have to endure.
So we implemented a genworth premium pay package they increase their hourly wage by 50%.
While we decided to the total onetime cost of that effort roughly $30 million to $35 million from our adjusted earnings it doesn't really matter, whether we do we don't.
Our associates communities and customers not our shareholders or our priority when we implemented that program.
The premium we paid our associates this money well earned.
We were fortunate the products, we sell especially related to edible gardening and insect control.
As well the retail channels and which those products are sold well considered an essential business from day one of this crisis.
Hi, planning ahead, and putting our associates first.
We're able to do more than just stay in business.
We were able to confidently meat increases in demand for products that in many cases exceeded our expectations.
I'm sure that some of our frontline associates felt stress in the early days at the crisis.
But we saw a few call offs and they appreciated the steps we took to both protect them and reward them.
While several hundred of our associates have told us they've had cold good like symptoms.
Only about a dozen associates of our 7000 tested positive for the virus.
And those are divided between management and frontline associates.
Two of our associates had to be briefly hospitalized, but both are now home and doing well.
In both major segment, we saw surging demand in the last two weeks of March after management had begun working remotely, which we alluded to in our press release on March 26.
We will already having a solid quarter in both businesses, but that's surge was meaningful in driving the 11% sales growth we saw U.S. consumer.
In the quarter and that 60% sales growth we saw in Hawthorne.
Both businesses did even better on the bottom line with U.S. consumer profits up 17% in Hawthorne up 148%.
So it's obvious that we're pleased with our second quarter results and like where we stand on a year to date basis as well.
I want to move to my second theme and discuss the adjustments that have been made since the end of the March quarter to keep the business moving forward.
Consumer Pos during Q2 increased more than 20 per cent compared to 29 team.
As we disclosed on March 26.
And we were up more than 14% on a year to date basis.
And as you can see this morning, our U.S. consumer business reported an 11% increase in sales support.
I know some retailers were concerned in March about the potential breakdown supply chain.
We also know that some consumers we're worried about stores being close. So there was some degree of pantry load going on especially in the last two weeks at the quarter.
Additionally April is our largest monthly year, and we were up against the tough comp plus 27% compared to prior year.
Top of that we participated in conversations with our largest retail partners about temporarily pulling back on promotional activity. So we were creating big crowds during the height of the virus and finally some of those same retailers placed limits on the number of consumers who could be in the store at the same time.
So as we expected Pos declined in April.
Around 8% from last year shipments declined as well.
But just because we gave back some of our really gain doesn't mean, we didnt have a strong April we did.
And now is off to good start to.
In the last five weeks Pos is top $120 million.
We set a company record for the last week of April when consumer purchases exceeded $150 million.
The first week of fiscal May Pos was over $190 million not just a record for that seven day period. It was the highest level of Pos for any seven day period in company history.
So sitting here today year to date Pos was our largest for retailers is up 8%.
The greatest strength has been in gardening and inspect controls Pos and soils is up 31% plant food at 16% higher.
The other area of our gardening business as Bonnie plans in which we have a 25% interest.
Pos of edible plant is up 43%.
Pos of ortho indoor insect products has grown by 27% and outdoor insect products are up 31%.
Grass seed as plus 11 fourth a we control products are up nine.
Roundup is plus six lawn fertilizer is plus one from last year.
Mulches down 37% a number we would expect to improve significantly in may as retailers reengage and promotional activity.
As most of you know mulch isn't important but low margin business. So given the strength in other categories, we've been able to overcome the bottom line impact so far.
If you exclude mult from the calculation Pos is up 13% on a real time basis.
Turning things led to the strong performance so far in Q3, all of which will remain critical for the balance of the year.
First is how we manage our advertising.
Near the end of March scrap nearly all of the creative that had been developed to support the business. This spring.
We realized it would be tone deaf to use advertising that focused on product performance and promotions at a time of so many Americans were panicked about their physical and financial health.
That doesn't mean you didnt advertise in fact, just the opposite.
But we didn't talk to consumers about wire products matter.
We talk to them about like gardening matters, we talked to them about why being outside matters.
These were message that were relevant in the moment instructor exactly the right. So.
We also shifted the mix of spending with about 60% or the activity occurring digitally.
First time ever the TV received such a low percentage.
So the precision of our targeting is just as important at the message itself.
Our heavy use of social was given that's near instant feedback from consumers, which allowed us to continue to refine both the message individuals a challenge because we couldn't choose any new footage.
The majority of or advertising. This also focused on the gardening category, where we have continued to see strong momentum all season.
There are searching interesting gardening bodes well for the opportunity to strengthen our relationship with consumers for years to come.
Our early research suggested as many is 30% of the people who engaged in edible gardening. So far this spring or either lapsed users are gardening for the first time.
So the category has expanded and our job going forward is to keep those new consumers engaged.
That means they need to continue seeing lawn and garden as essential in their lives.
And the way they view our company and our brands is even more important.
I'll elaborate on this point in a few minutes.
The second reason behind our continued momentum is our E commerce business has exploded.
By the end of April online sales had already exceeded 100 million dollarss and topped our full year numbers for 2019.
The majority of these sales were through the web sites owned by our traditional retailers with an option for products to be delivered or to be made available for in store pickup.
There is no doubt curbside pickup is likely to be a bigger fixture in the category as we move forward.
We were seeing new online sales records by our major retailers day after day during April and it took a new level collaboration between our sales marketing and supply chain teams working with our retailers to pull that off.
Through the first week of May even if some consumers started the venture out a bit more the online business has not lost the stat.
We've also seen record sales levels this season.
True exclusively online distribution channels like Amazon and through our own dotcom platforms.
The third reason for momentum in April with a shifted the retail landscape.
Gonna be careful not to be overly precise here because many of our retail partners. Both large and small are also publicly traded companies and I don't want to discuss their individual performance.
Retailers, each making very different decisions, sometimes difficult was based on the fed up with their stores their ability to manage large crowds.
And their desire not to be seen is exploiting the benefit of being designated as an essential service.
Not surprisingly consumer activity was curtailed with some of our largest retailers.
At the same time in both channels like hardware and form and fleet, where retailers have a smaller footprint. It did not have to make major adjustments to the business models, we were seeing growth in a range of 20% to 30% in April.
This next year of customers has been extremely innovative during this crisis and have improved their market share.
We are far ahead of what we expected from this group and those gains for perfectly timed.
While these three factors definitely allowed us to maintain and momentum in April the season, it's hardly in the bag.
It's worth remembering that in a normal year, we'd still have 50% of consumer activity in front of us.
Whether it's been a bit of a drag in the Midwest and northeast for the last few weeks in our comps for the balance of the year, a pretty easy so I'm extremely confident in where we stand in relation to our adjusted EPS guidance for the year.
But these are clearly unpredictable times, our largest retail partners are starting to engage in more typical fashion entering may and we know that to continue.
That means our sales and marketing efforts over the next six weeks have to do the same.
While we remain highly encouraged we also know we have a long road still ahead of us.
Speaking of the road ahead of US I want to switch to my third theme and talk about the long term impact I see is likely coming out of this crisis.
And the steps, we must take to further strengthen our business.
Any early days and the crisis. There was a lot said was written by politicians and pundits about the businesses were considered essential and those that were not.
In the real decision makers in the question of essentially reality turned out to be consumers.
From the New York Times in Wall Street Journal to nearly every major broadcasting cable network story for popping up almost daily about the resurgence in gardening.
There were stories about victory Gardens story about millennial moms, who turned their backyards and assigned flat and stories about the comfort families were getting from having an outdoor activity that they could enjoy together.
There were also stories about sharp increase in demand for edible planting seeds for vegetable gardens. So.
Celebrities, we're sharing and gardening post and social media and there with the spontaneous online conversation about gardening occurring among millions of people.
If we were nothing more than lucky that lease storylines will have merely helped us navigate a once in a century crisis and deliver the financial result that we first outlined for you all back in November.
With that we'd be grateful.
But as I said at the outset I'm not a big believer in luck.
There's a human element to our business is different from most of the branded companies.
Gardening isn't mature for most people it's a passion.
As a form of self expression.
A basic human needed to nurture.
So if were good.
We continue to exploit the intersection of talent and planning and culture that I mentioned earlier, then we'll take the learnings from this year and use them to build a better business going forward.
I was among those Ceos and sometimes wall sleep at night wondering whether legacy brands had what it took to remain relevant for the next generation consumers.
For me that question has been answered.
What you're seeing right now is that consumers want products they can rely on.
Product they believe provide value for their family, even if sometimes they come at a slightly higher cost.
That means they'll pay for innovation and I believe be less likely to experiment with private label and lower cost options.
Consumers want to do business with companies that share their values companies, who care about the planet and don't put the concerns of near term profit in front of treating their associates right way.
We ask ourselves simple question almost every day, what would a good company do.
And we strive to behave in a way that answers that question.
We understand that consumers what to do business with companies that establish and take seriously a moral contract with the consumers and communities they serve.
Consumers also want flexibility it'll be a longtime before the majority of our products are sold through E commerce.
But we have clearly theme this year that more consumers than ever want the ability to buy or products online regardless of how they take delivery. There is no looking back.
We must embrace this reality and continue to get better added season after season after season.
Our consumer business has permanently changed over the past eight weeks.
How and where we work will be different going forward.
How we advertise will be different.
There is increasingly less room for slogan develop focus group testing advertising campaigns.
The winners will be those who can understand consumer sentiment in real time, and then adjust accordingly, with both speed and precision.
I'd like to believe that the issues that brought so many new people to gardening. This year also represent a permanent change.
If we manage this the right way I believe we can impact the way consumers see our company our brand and our category for the next decade.
All of this also requires us to sit with our retail partners and talk about the right path going forward.
The Pos numbers I mentioned in our soils business, telling interesting story.
The growth in dollars and year to date.
Nearly two times higher unit and that's because there's been little promotional activity in this category. So far this year.
Promotions have always been an important part of activating consumers, the lawn and garden category and that shouldn't change.
But consumer activity. So far this season is demonstrating there's a better balanced out there to engage consumers in the category long term.
These trends reinforced the ideas, we began sharing with our retail partner slack season ended up shared with you all in the past as well.
We see an opportunity for more targeted promotions going forward.
Both in terms of scale and geography.
We see local activation that means more limited localize whether triggered promotions coupled with local media buys in both traditional and social channels as a key to success going forward.
It's too soon to know the answer here, but it's not too soon to ask the question.
A quick we want to pivot and talk about Hawthorne, where the idea of essentially gallery manifested itself in very different ways, but just as importantly.
Throughout the covert 19 crisis agricultural products and activities were deemed essential as a result in most states the legal cultivation sale and use of Canada's his view the same way.
What did it name.
I had been stronger demand, especially in March it meant growers need to replenish their inventory, which met our retail partners at Hawthorne needed to us to deliver day after day and we did.
The state authorized candidates the Ministry has evolved greatly over the past decade.
Even with all the new money in the space. The entrepreneurial culture that created this industry is still alive and well.
Within some circles that culture question, whether Scotts Miracle Gro like so many other investors with simply in this industry to make a quick buck.
I think many of those questions have been answer too.
Two stories quickly made their way through this industry. One is the fact that our supply chain Didnt Miss a beat.
The other was the way we were treating our frontline associates.
It is an industry that is still largely comprised of small family run businesses. We showed that were family business to.
It's just a family with 7000 members.
For investors listening, we think that kind of stuff doesn't matter you're wrong.
If you haven't been watching the fast money players in the candidates industry aren't doing so well these days.
The survivals will be those with the commitment to quality and demonstrate a commitment to understanding the nuances of the industry and its culture.
We've called off our sales guidance for problem. This morning, and we're clearly pleased with how the business is performing well.
We have no doubt we continue to gain share and we're seeing the real time benefits of our implementation of Sep and we're on pace to hit margin targets. We shared with you at the beginning of the year.
We also remain bullish about the opportunities for this category to expand in the quarter in years ahead.
My own view with the state budgets have been crushed over the past two months there aren't many ways to create new revenue streams for state koppers, but allowing for a regulated and tax system for legal cannabis is definitely one of them, especially in states such as New Jersey that is approaching the issue in a very thoughtful way.
There's still a lot to cover this morning, but before I turn things over to Randy I want to make one more comment.
I want to our shareholders to know that I'd put the quality of this team again any other company in America. It would take me 15 minutes to lift all the people who deserve credit for the way we've navigated the challenges of this season.
In my entire career I've never seen anything like it.
Creativity agility collaboration impassioned has been humbling to watch from up close.
I said in the recent town hall that if I could think each of our 7000 associates in person I would and I meant it.
I know terms like world class can sound cliche, but shareholders need to know and appreciate that the quality. This team is exactly that Scotts Miracle Gro won't just survived the challenges of 2020, but will be a better company to with that Randy take it away.
Thanks, Jim and good morning, everyone.
Going to start I couldnt be running through the numbers, but mostly at a pretty high level for March 26 announcement was focused on anticipated top arms. All I'm sure. Most of you can pretty close to extrapolating the bottom line impact in your modeling efforts.
African through the quarter I'll share some thoughts related our full year guidance I also want to give you an update about how we're thinking about leverage our current priorities for uses of cash and liquidity.
So for Q2, the wants to cry versus our must 26 announcement that aren't sales growth is 60% is actually higher than that 100 press release.
Frankly, we were seeing the unprecedented shipment levels and as final data for the quarter and that puts us fires would cross the finish line.
While we haven't seen delayed orders continue to be quite a tightening were during these last few days in March we have seen that we put shipments term continue to be strong for March in the air tool and also in early may.
The 11% growth in your consumer in the 16% companywide growth was in line with what we had projector.
The gross margin line, however required a good bit of explanation this quarter.
The rate was 40%, but up 20 basis points from last year, but they're quite a number of moving parts to explain.
Let's start with the impact of our Roundup Commission beginning this year, we received 50% of the profit from the beginning from the first dollar earnings in the past you receive nothing until the business or $40 million.
So for the full year had an incremental $20 million around the commission.
That changed in the proper training calculation and timing is were $18 million trucks in Q2 and attracted to gross margin rate by about 70 basis points.
Also remember that last year Q3.
Year to reimbursement from Baird $20 million, well that money was not technically commission income as it relates to our agency agreement still flowing through the PML in the same way.
For the gross margin rate benefit we saw in Q2 will be more than offset by a lot going to reimbursement pain there in Q3.
And the full year impact on margin from the very puts and takes will be zero.
As you know we also to pricing in 2000.
By 75 basis points pricing, so volume related benefit also collectively benefited the gross margin rate by about 100 basis points.
All these margin improvement, however were mostly offset by 160 basis point of unfavorable product mix.
And that was different from Hawthorne tremendous growth.
To be clear up or had a nice improvement in its gross margin rate during the quarter of 340 days.
However, since the hop on business has a lower overall gross margin rate you have consumer business and favorable mix impact on a companywide rate scope or whatever.
That's DNA is pretty much combined with what we expected.
Efforts in the quarter to $196 million.
The biggest drivers were higher investments in Hawthorne increased selling and marketing expenses and just consumer and slightly higher tools are variable compensation. All these were expected.
Okay not start however, lower advertising rakers your.
I'm slightly higher 2020 media spending we now expect at least a 15% increase consumer impressions for the gardening experience.
Also for brands and products.
We acute some nice leverage in both major business segments, which allowed us consumer to report an increase in segment and kind of 17% or two or $373 million at house and reported a 148% increase the $26 million.
Jim mentioned, the Hopper remains on track for its mark and targets with operating margin rate.
11% in Q2.
While the business is still slightly below our full year goal of 10% on year to date basis. We are in line with where we hope to be entering Q3.
Interest expense declined a little more than six more than.
22.7 million.
We're turning slightly better than we thought here due to both lower rates and lower borrowings.
Very focused on divesting certain noncore businesses investments over the last two years reduce our leverage in retrospect these were prudent decisions.
Other non operating income was about 3 million in the quarter GAAP from 260 million last year.
Benefited in Q2 2019 from the divestiture of our state can trigger.
We excluded that impact on adjusted earnings last year. However.
No year over year impact on adjusted EPS, which is the basis of our guys.
Taking it down to the bottom line.
GAAP earnings in the quarter $249.8 million for 43 per share compared with $396.9 million or $7 in 10 cents per share.
Adjusted earnings, which excludes restructuring impairment or other onetime items was 253.8 million or $4 on 50 cents per share.
This compares with 203.2 million.
Or 364 per share.
The impact of the Roundup Commission is worth about 25 cents for the quarter, but as I said earlier that nets out to the Bureau after Q3.
So let me switch gears and talking about guidance for a few months I.
You saw we caught up our sales cats are helping them to a range of 30% to 35% growth for the year.
Thats up from our original range or 12% to 15%.
From day, one of your transparent thing, we deliberately darker regional range to be conservative.
I mean, just the straight forward and telling you I never expected our revised guidance to be this higher.
But the business to keep delivering there are times when the team's doing everything they can do just to keep up.
Given the strength of thoughtful we've done a lot of work today with the sustainability of ourselves.
It's clear that industry has recovered from the doldrums 2018.
Over the last few years, we've seen a lot of volatility.
In 2017 growth very strong in 2018, our business was down by nearly 40%.
In 2019 drove a partial recovery and in 2020, we've now seen a full recovery.
Over the 2017, the 2020 period, our sales CAGR now in the high single digits consistent with our growth expectations. When we became building hop on business.
In addition of wholesale and retail pricing trends are mostly positive across the country and these are key leading indicators for our business.
We've also taken pricing in recent months I've seen no related slowdown in orders.
Category rebound market share gain new innovative products.
And opening a nursing marketplaces are all driving our growth.
Our conclusion as industry balances now to sustainable level, and we expect continued to outpace the growth with our strong competitive position.
Industry is inherently volatile and we still expect our long term growth to be periodic and choppy rather than they consistently around here.
The new Hopper and range takes our company wide sales growth range up to 68% versus originally 4% to 6%.
We're reaffirming U.S. consumer growth of 1% to 3%, which continues to be reasonable based on what I know right now.
Going into May our year to date shipments were up about 1%.
However, our may Pos color is minus 13% in Virginia September Comping positive mid single digits.
Gross margin is probably the underlying underpinning our wireless borrowers.
Original range and flat to plus 25 basis points.
Consistent with our year to date result by watch out here segment mix.
Major segments stay on their current trajectory.
And our margin rate will become slightly negative for the year, but remember even if that happens often standalone margins are still moving into right direction.
I'm sure you're wondering about the current commodity environment. So let me address it up for.
Yes, we're seeing some benefits right now and lower commodities.
However, so much of our costs is already locked in place.
I will have a negligible impact on here.
Our however, taking advantage of this environment as we plan for 2020 more.
We are aggressively lock in diesel in Korea with recent hedges for next year, well below our 2020 log costs.
Capacity of scenario right now what commodity costs are headwind for 2021, but it's still too early to make that call right now.
Back to 2000, Tony I know somebody will fall for being too conservative when it comes to our adjusted EPS guidance.
Given the fact that we're on a few CPG companies still willing to provide guidance at all perfectly comfortable being conservative at this point.
Is there potential upside here.
So there's potential for more but given the level uncertainty in the world the premium routes to maintain our urban earnings guidance for two weeks.
Similar to most years, we will update our guidance at Investor Conference in early June who will be about two thirds through us consumer pure Lester.
After cash flow, we said, we expected about $300 million of free cash flow from here.
Operating cash flow minus capex in the current global uncertainty around supply chain will likely make a decision to increase our inventories before year end. Although this plan does not reflect any specific concerns.
Right now.
Jim mentioned that 30 to 35 million to covert related expenses that were likely to occur for the year.
Tend to exclude those from our adjusted EPS calculation and from a leverage ratio.
That's consistent with the onetime nonrecurring nature of these costs.
And our effort of transparency around and tax recovered on our business.
In addition, this treatment is consistent FCC guidance and Disclosers provided back to more countries.
However, that's still cash out the door.
Too early in there with our free cash flow guidance will hold I wanted to be on the radar before our next update.
Becoming cash flow.
You are talking about uses of cash.
Centered on March 26 press release.
Indefinitely suspend it any share repurchase sector.
Nothing to do with our longer term coffee about returning cash to shareholders.
It has nothing to do at our conference in the business.
Rather this is about giving us a little more flexibility as we navigate the pandemic.
Right No leverage is 3.1 times I've said multiple times that I'm comfortable managing the balance sheet, three and half cards and that has not changed.
We are saying what happens with our leverage Paul Hoelscher, three times for a few quarters I'm, okay with that and I'm sure most of our shareholders are too.
I want to be unequivocal statement, we are very little concerned about liquidity in this environment, there's often nothing all of the bias or slightly more conservative balance sheet.
Before I close to that I'm extremely comfortable with where we are right now financially extremely pleased with how we're operating the business and extremely proud to be part of this organization.
Jim centers remarks is not only the mark.
Let's hear recognize how our business is performing the current prices.
Tremendous we're grateful to Jim is right. This was not walk the advanced planning the team's focus.
Commitment of our associates or why weren't such a unique position.
And with that thank you for your attention.
Open things up to your question.
Thank you.
Ask a question please signal by pressing star one on your telephone keypad, that's you're using a speaker phone. Please make sure army and function is turned off to myerson motorized sharklet, Matt again kind of star one data.
Just a moment to allow everyone have a can you just said.
Well take our first question from Joe Altobello with Raymond James.
Great guys good morning.
Wanted to perform apart with Hawthorne, obviously, a very strong topline margins are improving but I'm a little surprise.
Better margin this quarter or maybe better margins.
Maybe help us understand what's going on.
In terms of pricing and promotion et cetera.
Yeah I get a this is Randy I'll pick this one.
Actually pacing ahead of where we thought we'd be at this point. So we're very satisfied we did back off on some of the promotions early in Q2, and we took some pricing increases on certain products.
Little bit in February and also in the March So when you look at our margin rate improvement gross margin read an operating margin rate the acceleration from Q1 into January and February and March and April.
The trend is really positive and we're definitely on track to.
Reach our 10% operating margin guidance for the or we could do a little bit better, but you know I'm I'm really pleased with the way things going right now.
Yeah, I guess, that's where I was gone ready with the top line is now 30% to 35% growth.
And with it.
That's that's where I was.
Hi, good I call.
I guess secondly in terms of your channels, you mentioned earlier tier might make that Ah channels like hardware or have outperformed probably larger retail partners wouldn't seem a bit of Uh huh.
Maybe you can be able to more coverage.
When are we may.
Yeah like channel the category.
I think they're getting their heads back in the game.
The.
You know they've taken a pretty seriously this issue of being responsible theres, an essential player and I think the crowds.
You know protecting their associates.
Protecting their their customers.
But.
You know if you look at the orders just the last few days, primarily driven by our biggest <unk> I mean biggest orders by far we've ever had on any single days.
There are largely coming from our largest customer so I would say there.
In their ammo base load it up ready to to play.
It into serious way that happening right now so I think Mike on what you feel.
Sure, it's where it actually having this conversation everywhere all like scattered across the room.
So Oh my I don't know, how you feel Mike, but I think that.
Yes, there there are expanding restore hours back because they have consolidated that and we're starting to see more garden doors open up and as a follow that the cases across the country, but they were really very sensitive about the number of people to store and lead and keeping their essential status, which it's easier for hardware small.
Our stores smaller footprints too.
React to that.
Got it okay. Thank you guys.
Thank you.
Your out your welded.
Thank you.
[noise] next question comes from William Reuter with Bank of America.
Hi, This is Marianne for buildings for taking my questions. So my first just on your customer base. It seems most are considered essential but given that it does vary buyers Chang.
Do you have any that are current serveware closer period of time.
So.
There were no specific record to come to mind that but the jump out you know I think people are probably familiar with what happened in Michigan and also in Vermont and we also saw.
Two curbside pickup.
Canada as well for if you look at the Pos and those geography as they were down versus everything else.
Michigan in Vermont, Interestingly, we're not to the same thing Canada. So our Pos there's actually ticked up up despite what's going on but b to specifically answer your question no guarantee recurs or come to mind there close it's good stand out right because it's hard to here in this room. So you know two haggard here.
Look when.
Vermont got tight.
It was still snow underground when that happened then had nothing to do with us and happy to do with sort of general merchandise at Walmart and the governor up there and the ex Governor Vermont's onboard so I'm pretty familiar with what occurred there.
And in Michigan, Witmer backed off that in about two weeks, but again it was still extremely early in the season and so it really didn't have that taking effect on us and.
So the Guardian business in Vermont as Great I mean, I'm, that's where carlene IYR domiciled right now.
And.
Michigan numbers also look good so that those were the areas that I think at the height of the sort of questions of essentially reality.
I think it was Vermont, Michigan that got tight and started closing up departments now a lot of the retailers.
Just modified their merchandising set up given the importance of lawn and garden.
Tool is happening and even if they close their garden doors. They brought back into the main part of the store garden products. So it was you know it was not quite is impactful to us based on merchandising decisions that retailers made in order to.
Sort of protective business in that.
I think happened without any sort of compliance issues in those states. They the cost it's difficult to tease apart like Jim said weather versus the impact of currency, but if you look at the city of Detroit and compared to the city of Cleveland, our year to date, Pos and both of those cities is nearly identical and she has done a couple points.
You sit here today. So it's difficult to tell is definitely wasn't helpful. But I think credit goes out to the people working in the stores to the no trying to bring the products out how to the people that makes them or they figured at the end of the day.
The crisis has caused people to make sort of fundamental decisions about how they spend their time and that's that's that's been good for us.
It hasn't changed the weather and so I think for those of US you know I'm for my first time in a couple of months here in Ohio.
People are saying, it's been kind of wet and jury its been cool in Vermont, where we're where I have been and so if you look at north the sales I know, if they're down but they're they're not they're not up for sure and this is a good thing for us because the sort of strength of the business is kind of every.
Where but the northeast if you include kind of.
Last year to Ohio, and improvements I think is going to act as you know something of a buffer that.
During this sort of.
Debate over essentially reality, which I think made people nervous, especially people who are running retail companies.
Large footprint retail companies. This gave us time, where the season didn't pass us by and it just seems to me looking at the whether that this is going to result in a somebody extended season, which is exactly what I think we were kind of hoping for in that region, especially with the dominance of big box.
In up there so I think it's actually really good for us.
Got it. Thank you and then just one other particularly on some of your smaller independent customers have there been any delaying payments or are there any concerns.
With regard serves to animals.
No our payment terms are such that we couldn't get paid you know early to mid June but at this point, we're not see.
Any kind of lay pay and even when you think about popcorn, which you know much more fragmented Cooper customers at this point, we don't have any issues either so definitely something we're keeping our eye on him on copper, but we havent seen anything yet that would give us a lot of concern rather than just.
The general need to stay on top of the.
Got it thank you too much.
Our next our next question comes from Bill Chappell with Suntrust.
Thanks, Good morning, I Hope you and your families are well.
Thanks, Bill it's good to hear your voice.
Its take years to.
Yeah, So two questions one.
Help me understand on the Hawthorne business why the business serves kind of in March doesn't seem like it was all the stockpiling of the continued into April I, just I say that you don't sell actual cannabis and so I understand that the run on that but but you're selling supplies that will help cannabis production.
The next six 912 months, some trying understand why there that surge and why.
Sustained in into April and Matt.
You know when this whole thing started I'll I'll I'll, let Chris answer most of the question I just want to you know this was the question and I asked kind of like as we were.
I guess this was probably beginning of April.
And.
So I've made a few friends in the industry side, just traveling with Chris who some of his team.
And you know do with his question is.
Washington, where these sales going by the way the sales have been great. The entire time, it's not just been like one month.
We were briefly members the board up yesterday, and Mike You said you know.
Chris the sales reports just like a fucking broken record.
Just continues to be positive.
So it's not like it was one month, but as we saw numbers just kind of go bananas.
I said, let's let's call some of our friends up that own retail channels, which we did and super connected Guy a guy who you know doesn't hear much from me, but he's got my number is.
I phone so as soon as I I call them. He picked up and you said Holy Mackerel do like I need product bad. So we thought maybe it's like stocking up kind of figuring that demand was going to calm and that maybe people couldn't ship, which I think has been a problem in the industry not with us.
As you know some people had covidien some of their warehouses. So some of our competitors.
But.
He said do everything's, it's Alan I'm I'm low on product, it's saying, what's happening here and I think just.
A lot of retailers just upped their production a lot of people you know, which we call to traditional growers re entered the space, especially in California and I'm just.
Needed product and a lot of it was nutrients and growing media, which are the consumable side of the business, which is really nice to see I don't know, Chris We where do you go from there, but it's not.
Yes, so I mean not sure how much meet you left on that question [laughter] My bad did they build its Chris I'm only everything that Jim said is correct.
There there wasn't element to pantry loading I think that was really something we experienced some kind of second third week in March when we saw pretty stream spikes and volume I do think had something to do it pantry loading as people.
We're concerned that that our service levels wouldn't be able to keep up now luckily they have been and I can't give credit to the supply chain team for Hawthorne and support we get for Scotts.
Those guys have done a phenomenal job and battled through some some crop conditions.
But as Jim was alluding to you know we joke when all this started not but it's a joke matter, but you have fun, let me where you can that what where people are gonna do when when quarantine hit the whole country is there going to begin to sit at home and.
Smoke guard and I think in all seriousness a lot of that.
As a lot truth and that statement so demand for the kind of end consumable product clearly has gone up we've seen that built anecdotally and data that we've gotten through industry.
So just massive surgeon demand towards the end product has driven driven to serve downstream to us now that.
That increase in demand appears to have been pretty sticky certainly is carried through till now and we're.
We're doing everything we can to keep up and you know that we've talked about in or quarter remarks at the top of the call that.
Supply chain guys are running hard right now we're shipping more out the door Hawthorne than we ever had before just speaks to the benefits of S.A.P. The benefits of further integration with Scotts and their supply chain and just the quality to people that we have top to bottom on with an Hawthorne and the team that I'm lucky to be part of.
But yeah. It was I think there's a little bit of pantry loading out because a lot of just really high demand for for Canada says as this.
On team continues to drive new consumer behavior.
Right no and I appreciate the the F. bond as part of the response it does give me a sense of normalcy.
On these calls.
As it has.
Just quickly to the consumer business.
Yes.
Yeah, I've always heard and thought that.
Garden season starts in the south.
Easter and northern mothers fourth though.
Bill It would imply that was still really kind of a big part of the season in front of most and so how much if any you know pantry loading in the in the northern half because you've already seen or you know how much of this really it seems like may is set up fairly well with Nokia retailers now really open.
Everybody still working from home schools out it seems like it.
Other than weather.
A couple of North have really telecom is that fair way to look at it.
Yeah, I think what we're seeing the bill is.
In the southern markets because gardening is so hot in the south in the last or over indexing right now and the North is just getting started we saw a little bit of pantry loading back at the end of March.
But.
Fourth is now just waking up and we've seen some really good results even in New York.
Last week, so and your thoughts on mother's day and beyond for the North.
I've been around this business a long time I'm I've seen were April Sinbad in the North and then they come back and with the storm. So we're kind of set up at the south and west or over indexing and the north is going to come on strong we're seeing that trend right now so and I think it will go through the end of June and the north.
Great. Thanks status.
Thank you bill thanks.
Our next question comes from Eric.
I'll start with Cleveland research.
Good morning.
They do two things.
First of all in terms of the guidance for consumer holding that up one to three knowing where are you sit now through March to rate broke through the first handful base of of May just curious and.
Why lead that number where it is rather than raised it to reflect what you've seen.
And then my second question is if you could just parse the last five or six weeks you.
You talked about some record hundred million plus weeks and record date orders and also the the April number down eight I think you said it feels like there's some different periods within a matter and so curious if you could give us a little color.
You know the last two weeks over the last six weeks each of us periods might have looked like.
Let's see things would be helpful. Thanks.
Yes.
Sure. Eric This is Randy again, 1% to 3% was our original guidance and I can tell you I.
I feel a lot better today than it when I did a week ago, but this business can be incredibly volatile and seasonal and I'd remind you know a couple of years ago, we were down 12% I think a year to date at this point here on this Q2 earnings call.
And we ended up back to flat. So at this point, we're still half for season ahead of us.
And you know mid June will have two thirds of the for the year.
Please stirrup her third ahead of us and what a lot more insight and a conference at that point, but I will say that sitting here today and we're confident that I would have been we could go or a couple of weeks ago and may starting out extremely well like like required pointed out so.
See in a month.
The only thing Haggen on here, that's it I'd say Eric is that.
Rainy normally like a pretty serious dude.
And.
You know I can just tell you that the sales over like the last week.
I.
I have been like pretty pretty Crazy I mean, I had to and so you might just common trainees came as Mike said yoke calmed down some like remembers the CFO.
But kind of what you're seeing in regard to this volatility, but how positive is right now it would the reason why I was so does that take this morning is I believe this is true we haven't validated by the gets really was the biggest orders day for years consumer that we've ever seen so whoever the biggest darn your biggest space and.
Gives me there's a lot of.
I guess confidence that.
The retailers are going to stick in there, we probably won't see the level promotional activity that we've seen in years past, but people are definitely trying to sell product consumers want to get out.
They want to get on the yard it's good for the physical health.
Definitely good for the mental health and I think you know the season starts to break here in the Midwest northeast.
Where we really haven't seen that much activity at.
Just give me even more confident so feeling good about that the other thing I'd point out those two Pos trying to reconcile Pos dollars to our shipments is.
There's a bit a complicated as well so.
Having less promotions in the month of April our Pos numbers are inflated and dollars versus units and eventually it really comes back to units and [noise].
Inventories at retail and our shipments in the Prs dollars I'll have to reconcile to degree, but keep that might as well, but I am feeling really good kind of two interesting.
Stories, there number one we went into this call is we prep yesterday.
[music].
We you said, there's no way somebody's knocking us off our stance on you know holding fast with the numbers. Even if people said to US is how can you sandbag that bad I think compared to what's happening to other companies and just the general environment out there I think it say.
Correct place for us to not get knocked off our guidance at the moment. The fact that we're maintaining it.
Even if it's a little bit not so credible based on the positivity the business I think just given what we know a few weeks to sort of.
Get smarter is probably I would say bear with us.
On that.
And what else doesn't say, but.
But there are parts here.
Yeah, but the second part was Oh God I just can't activity you know Eric is this issue of Randy was talking about is dollar volume versus unit volume. This is one of the things that we're seeing that we're trying to sort of.
Talk coherently to our retail partners about which is with the almost complete lack of promotion you know that we would normally be seeing this time of year.
Sales or are really good that doesn't mean that promotion is an important but it doesnt mean that.
As we look back on the sort of so called Black Friday events that are not like Christmas as one day.
But sort of two or three major promotions throughout the season that take a lot of our promotional dollars.
What we've seen is they're pretty early.
The last few years, they've been up against kind of crappy weather and.
More and more we had been thinking.
They could be much more productive in sort of this rifle shot that we talked about in the script, which is that.
Promote when certain products are in calendar in areas, where the weather is good and the inventories in the stores and we've been we've we've been playing with that with the retailers.
Last year to see if we can increase the effectiveness of these promotions and knock spend as much money blindly.
Especially in the city weather as we've we've seen in the past and so we felt pretty strongly coming out off season that the demonstrations. We did with them showed that we can produce equivalent result in a much more targeted way and so those discussions.
Our good happen and that's what we were alluding to and I'm, hoping that will find retailer is much more willing to sort of because you know foregoing black Friday events for retailers is it's scary you know, it's it's how they get customers in if they get customers and they tend to be sticky.
Through the season.
Because they didnt happen this year and by definition, we're doing much more targeted work in its not really them. It's us doing that work. This year I think we've got a lot more data that talk about next year and so I don't know what it means you know rainy talking about dollars versus units.
I think we're going to end up the here, what they sort of much better dollar story and much much better margin story on both sides.
On our side and their side, which we then have to say, okay. What does that mean next year and beyond so you know.
Okay. That's helpful. The other question I wanted to ask is your business. Historically has set a below average business in terms of online penetration relative to what deep on loans due in other categories.
That's changing their share maybe Bob as you look to the future does it matter to you. If more of this is done on line you have to run the business differently or has it changed the profit opportunity.
Business, what's different now.
Becomes more meaningfully online ordered and executed.
You know I.
I'm, mostly hand that to Mike because I think I don't think it's a it's a maybe.
You know I think its a.
For sure we don't.
We don't talk a lot about Amazon you know, it's in relative to our entire business not that big.
Amazon has been an important partner to us.
This year and I think we've been an important partner to them. So I think that you know that was.
You know I don't know I.
I've been pretty negative on Amazon at least from from lawn and Garden point of view on that you know.
Kinda their attitude I think this is one where.
They've seen lawn and garden, so important they've seen our ability to deliver we help them pretty hard they needed.
Models of stuff to convert.
Bulk buys you know cleaners and stuff for their warehouses and they reached out to a bunch of vendors to help if they could with packaging and we were able to put ortho packaging their direction, but.
You know I think so there.
It it Amazon I.
I think a much higher respect for the powerful lawn and garden this time of year and within our conventional retailers just record weeks after weeks.
That.
Lawn and garden, you know I.
I don't know I'm, probably screw this number up but you know I think the numbers like 15% of our lawn fertilizer business.
Going out online now and a lot of our retailer business is drop ship business and that's a model issue that Mike.
Talk better rather than I can where we're shipping directly to consumers for even our traditional retailers, but I I think there's no doubt that the online business will represent a larger percent.
Our overall business this year and I think that doesn't change I think that.
For sure consumers are just pushing a button and it shows up at their house.
So Mike I don't know what do you think it means to the business and what about margins.
Well I think the margins will improve for us and the retailer we're building a capability with the supply chain that rebuilt years ago was at home center to be able to drop ship.
And is an acceleration in my mind five to 10 years, where we thought ecommerce would be I think it'll stay and I think will help to stores with their assortments to be more efficient for curbside pickup and delivery and we'll be able to provide that supply chain network that they're not building warehouses, we have for barack.
Existing work warehouses were transitioning into a direct to consumer capability.
As in the same inventory will be more efficient and we'll be able to provide that for any platform out there. So.
So to me, it's it's actually taking us where we thought we'd be in five to 10 years I think its tier now I think it's a great way to do business and I think where the perfect wants to be able to do it nationally lark lawn and garden to support a retail platform or even our own platform.
And then this is rate again I bad it's put some numbers around this our Amazon business is about the same size as our online business for.
Largest retailers. So there is about the same and then are on our own at some de sites are much smaller, but growing fast as well, but we think about our market share we actually have a highest market share in the channel were consumers buy online and pick up in the store I think they'll logically makes sense, we think about people searching online.
Line and planning ahead that they're nationally naturally going to gravitate to national brands, and we haven't national fulfillment. So I think that that's good for us and that's good for our large retailers as well and we are the lowest share by far and trying to do so online to our own website, but.
That's where you might see some smaller competitors try and trying to compete but I feel really good about our competitive position and our ability to work across all channels and with all those customers and help them one too.
Great. Thank you very much.
Your next question from Carla Casella with Jpmorgan.
Hi, Good morning. This is Don Clark on for Carla Casella apologies. If this is already starting to hop on them at all that late but have you had to pay any of your employee bonus payments or incurred any additional costs or <unk> or claims management.
Costs or any additional incentives do that cover it can you just talk little bit about that and what you're seeing in terms of transportation costs.
Sure. Sarah This is Randy against this was and to provide earlier, but just to reiterate we spent about $4 million through the end of March our full year forecast is a range of 30 to 35 and we had break that down is the first 25 is is premium pay.
For our searches are working in stores are working and be season warehouses or are factors as well and then about the next 5 million is an outlook for incremental clean and maintenance cost and then beyond that we plan to spend you know maybe $4 million to $5 million.
And pay shield that we're manufacturing in our Temecula, California facility and the startup costs for that and then.
The cost to manufacture and then with giving all those pieces of equipment away the various places across the country.
As an act of goodwill. So all that combined is how we're going to our 30 to 35 million or Scott.
And especially feel good about you know the last part with the 5 million I'm pretty sure, but also the premium pay I think we're treating our associates extremely well.
Adjusted.
Yes, I ended our Oh, Oh, sorry in our expectation that are clearly our plan to does set out given the onetime nature of all that and.
Where we run that by our auditors and they're very very comfortable that and we've talked or banks as well for leverage ratio, so everybody understands and consistent with.
With what we're doing.
Of course, thank you for that cost breakdown that that's really helpful have you disclosed what percent of your cost are fixed versus variable.
No we haven't I can tell you and the way we plan.
Is it on the way up we don't gain a lot of absorption just because we would plan for certain sales levels tell you on the way down it is a lot more period. So we probably it's hard to use them for very good rule of thumb, but I'd say at this point here.
We lose sales, we probably was 10, 15% of margin on the way down or if we don't hit ourselves expectations. So.
I don't if we provide that specifically in the past present, that's a reasonable will come.
Okay helpful. Thank you and then one more for me you highlighted that you.
Continued strength in April but were just wondering if any of this quarter strength Beatty poll for it from next quarter I keep all shelter in place and looks byproduct than what you were mentioning on the Hawthorne side, so any commentary around that.
Well I think we've addressed the hopped on a.
Pretty thoroughly already and on the consumer peas in a time will tell I'm I know that consumers are gardening more than they have in the past we have research. It would say you know 30% of our garden consumers. This year either newer lapsed consumers I think that's good for the long term health of the business.
We'll see but really confident about our outlook for this year and took a lot of that's going to stick as we look beyond 2000 point.
Awesome. Thank you.
Florida is a Jim King Air lift system, the interest of time will stick into or it would have just one more question and then I can follow up with people off line later thank you.
Thank you. Our next question comes from I like my Roadshow with Nurnberg.
Hi, Good morning, guys and thanks for taking my questions like that guidance implies that offer and will continue doing incredibly well like financial services, we've seen among some of the larger furniture every alluded to earlier.
Pinpoint, where you're saying that they get it right there and geography contribution criticized.
[music].
Hey, Ed This is Chris So we're seeing growth really across the board. It's a mix of some of our more kind of legacy Big States.
California is up pretty significantly over 75%.
Michigan, which we've talked you guys about passing our second biggest state I'm, we're seeing growth in Michigan over 100% year over year.
But you've also got newer states in their Florida, Alabama are both up significantly above average oklahoma's up over 230% so.
We're seeing strong growth really across the country like I said, a combination of our more.
More established markets like California, Michigan, Colorado alone with newer states.
As far as the customer mix you know are just talk a little bit about this earlier, but our our visibility.
Limited once we go past the retail level.
If you look at the sizes. The some of the skews that we're selling were arm furnaces that we're we're seeing growth both among the large scale you know machine operators and large commercial growers as well some of them more traditional smaller format growers.
But that makes sense in it.
And second question is a clarification on the accounts receivable on earlier, you mentioned June payment terms that I'm asking because they are going to tie it or census, Dallas and Q2 2017, you gave us is a unique phenomenon to 20 clients receivables cadence due to the surge in March.
Well.
Clearly they are is up when we sell more like I said earlier, we don't have.
Any specific issues, yet with customers paying late something we're on top of our.
For the cash team is very much on top of that but at this point, we haven't seen any cracks at all and.
We'll see but it's not a big watch out it's a concern on top of because it's not a huge concern.
Alright, great. Thank you guys they set up there.
[noise]. Thank you.
All right I'm going to jump back into or we're going to wrap up.
Call today, I know, there's some folks it may still going to ask questions. So a couple of ways to reach me can call me directly at 90 3757856 to two and we will set up a turned follow up or send me, an email and Jim Don King get scaling Angie and Scott Dotcom.
And just as a reminder, Randy and I will be participating in the William Blair event on June nine to new we'll probably have a communication out prior to two that event. So thanks, everybody for joining us today and be wealthy say thanks.
That does conclude it is conference we thank you for your participation you may now disconnect.
[music].
Uh huh.
[music].