Q1 2020 Earnings Call

Now I'll turn the car.

overlanders

Thank you, Mike. Good morning, everyone and thank you for joining us.

First I would like to say that our top priority at this time is the health and well-being of our employees customers and partners. We are grateful to all of the front-line workers wage, especially those sacrificing their personal safety so that all of us can continue to live and work safely through this challenging time.

Those are our customers front lines are heroes serving in hospitals grocery stores delivery vehicles warehouses and other parts of the Central Supply chains that help keep our lives as normal as possible.

Many Sebring employees are also on the front line supporting the build and repair of products and solutions that are essential to our customers doing their jobs safely and efficiently month to all those Heroes we say, thank you.

The financial results be published this morning reflect a challenging first-quarter environment. We realized a net sales decline of 1% adjusted ebitda margin of 19.1% which contracted by 200 basis points and non-gaap diluted earnings per share of $2.60 a 9% decrease from the prior year.

We had a strong start to the year and January and February generally played out to our expectations. However late in the quarter has covid-19 evolved into a global epidemic. We experienced significant supply chain disruption including product manufacturing delays with goods and their temporary closure in late, March of a key distribution center supplying the Americas.

We took extraordinary steps to produce and Supply our mission-critical products to customers around the world.

Our team was agile pivoting our resources quickly to closely monitor the situation and take bold action. For example, we chartered planes to expedite product delivery from China to North America and Europe to meet customer commitments despite the best efforts. We were unable to completely fulfill our order book in the quarter resulting in a higher wage log as we entered Q2 production in China is now returning to normal and we have stabilized our Global Supply Chain through mitigating actions.

In addition to the supply chain challenges. We saw softer demand through the channel globally and China sales were very weak with covid-19 access writing team that had already been soft due to trade tensions.

However, in any environment Enterprises worldwide utilize our solutions to address the evolving needs of their customers in this changing environment. Our Solutions have become even more necessary for our customers. I would like to highlight a few notable q1 wins supporting critical use cases in omni-channel e-commerce and Healthcare.

one of the

Largest mass Merchants purchased 40,000 over a z q 6 series mobile printers to address a number of front of store use cases including online store pickup Pharmacy fulfillment and shells tagging.

Additionally, we deployed several thousand TC 5 series mobile computers to a large eCommerce player in Asia.

This follows our competitive take away win last year of their Printing and scanning business.

With covid-19 busy. Taylor's demand is growing. Exponentially they have in hiring staff and we are working with them on additional Solutions.

In healthcare, we supported the NHS Nightingale temporary Hospital in the UK. We provided and installed Solutions supporting the identification and flow covid-19 patients nurses at NHS have also been using RTC 5 series Healthcare mobile computers to arrange virtual visits between patients loved ones.

That's expected transitory effects of tariffs and expedited shipping expenses weighed heavily on q1 gross margin and eps.

We have taken decisive actions to mitigate this impact which drove operating expense leverage despite lower sales volume.

We continue to remain agile and take appropriate action as results are pressured do to these challenging macro environment.

With that I will now turn the call over to Olivia to review our to One Financial results and discuss that Outlook. Thank you. Hun, Das let us walk through the p&l on-site 6 net worth has declined 1.3% in the first quarter less than 1% on an ongoing basis before the impacts of currencies and Acquisitions the covid-19 pandemic Palm Coast supply and demand impacts to our Consolidated sales growth of approximately seven percentage points despite ourselves decline. We believed we generally are performed in the market globally. Our Enterprise disability and Mobility segment cells was most impacted by the covid-19 description. It says decreased 2.9%

The largest supply chain impact was the temporary closure in North American distribution center that under as referenced which delayed thousands of mobile computers into the channel.

I sat intelligence and track me and tracking segment sales increased 3.2% with relative strength in printing and zebra retail Solutions.

We saw sort of growth in managed and Professional Services across both segments of the business primarily driven by solid attach rates on increased products am over the last twelve months.

Patience Solutions business was lower due to a pause in Project spending.

Turning to our regions in North America sales were flat or declining mobile Computing do to covid-19. Supply chain challenges was upset by growth in all other major categories.

Give me a says increase 7% with quality strength in Mobile Computing Printing and services. We saw particular strength in Central Europe.

Saturday no asia-pacific region declined 21% driven by covid-19 impacts on top of continued softness in China due to trade 10,000 China was down 35% driving most of the original sales decline.

Latin America sales declined 11% led by lower mobile Computing sales largely impacted by supply chain description.

I just did Ghost Mountain contracted to an adviser this point to 45.2% driven primarily by least 4 targets and expedited freight as well as unfavorable large order mix.

I just stood operating expenses declined five million dollars from the prior. And improved ten basis points as a percentage of sales. This Improvement was primarily due to prudent cost management and lower incentive compensation partially upset by the inclusion of expenses from recently acquired businesses.

First quarter adjusted ebitda margin was 19.1% a 200 basis-point decrease from the prior. Driven entirely by lower gross. Margin. We drove non-gaap earnings that deleted share of $2.67 the 9% year-over-year decrease inclusive of $0.17 off impact from the transitory effects of types and expedited freight expense turning down to the balance sheet and cash for highlights on slide seven.

We generated $95 of free cash flow in q1. This was higher than the prior. Primarily due to lower use of working capital.

We were purchased two hundred million dollars of shares in q1 leaving 753 million dollars of remaining capacity and the authorization.

From debt leverage perspective. We ended the quarter at a modest 1.5 times net debt to adjusted ebitda ratio.

Turning to slide 8 we're well-equipped to navigate the unprecedented global environment that we are facing as I just mentioned our balance sheet is in excellent shape with low debt levels and 740 million dollars of capacity and our revolver. We deliver mission-critical applications increasingly diverse and markets.

or capital

Business model as a highly variable cost structure due to all Outsourcing of product manufacturing and driving the vast majority of our sales volumes to third-party distribution.

We also have a strong free cash flow profile with a flexible cost structure and and capital expenditures typically less than 1.5% of sales rep.

We also have a track of record of preserving profitability and cash flow in challenging times. We use the Playbook to take appropriate actions in various scenarios reserving capacity for investment in the business that improve our competitive position.

Let the stone turn to our Outlook.

Devender low visibility due to covid-19. We are withdrawing our outlook for full year net sales adjusted and free-cash-flow. We not expect these three metrics to be lower than last year which would which would we address to cost actions to announce our profitability and cash flow hedge Q2 and Q3 expected to be particularly challenging Waters based on macroeconomic forecasts independent market research and feedback from our partners and customers.

Industry the environment we have done extensive scenario planning and identified many operational and financial levers that we can pull it is imperative that we stick to our principles of acting swiftly to preserve profitability while doing no harm to the business to reinforcement of our culture.

This enables us to prioritize strategic Investments so that we emerge stronger than the competition as the market rebounds.

As I mentioned we entered the second quarter with a strong backlog driven by temporary supply chain descriptions from the page.

As the virus has spread and Market weakness is affecting all of our major geographies across the globe. The impact is more pronounced in our run rate business back to the channel a third-party Distributors calibrating inventory levels, given these pressures and elevated and certainty. We expect next to decline in Q2 between 11 and 17% This Outlook assumes an approximately fifty basis point positive impact from recent acquisitions month and then approximately one percentage Point negative impact from foreign currency changes.

We Believe

She to adjusted ebitda margin will be between 18 and 19% which assumes lower operating expenses and the lower gross margin reflecting a 5 million volt impact from least four types and approximately nine million dollars of cost to mitigate supply chain disruption from covid-19.

Connectivity these transitory items expected to impact margin by approximately 150 basis points and EPS wage by $0.22.

Non-gaap diluted EPS is expected to is expected to be in the range of $2.10 to $2.50.

pre-order twenty-twenty modeling assumptions on fly 9

on site 10. We provide an update on the anticipated impacts to zebra from section 301 parents on products imported to the US.

We had generally on track to diversify our Global sourcing sourcing footprint by mid 2020 despite some modest delays do 2019 particularly in our Malaysian facility in Vietnam. We have been ramping our expectations.

This initiative is expected to mitigate our Geographic concentration risk. It also has the immediate benefit of substantially mitigating least for Thursday that became effective last September impacting our mobile computers and printers.

We continue to work with our contract manufacturing Partners to replicate production lines in order to move. Most of our us volumes to broader Asia off. These actions are currently expected to result in approximately twenty million dollars of one-time pay tax charges in the first half of 2028, press approximately ten million dollars of capital expenditures.

In the first quarter negatively impacted gross profit by seven million dollars. We expect the same pact to decline to five million dollars increase as we launch I-10 eight sources of Supply outside of China with that. I will turn the call back to understand discuss our Enterprise asset encourage vision and and market trends

Thank you. Olivia slide twelve highlights how we are enhancing the value proposition for our customers are solutions are even more critical today than ever as we give the front thousand an edge by empowering them with technology to do their job most effectively.

industry-leading

Companies trust zebra to equip their workers and Facilities with the solutions that bring their mission-critical operations to the next level. We are uniquely positioned to address this challenge because we have a deep understanding of workflows and unmatched access to Frontline operational data from a vast installed base.

We can address big Global problems such as ensuring food safety across the supply chain or a broad range or more localized issues, like increasing bed turns in a hospital modernizing distribution centers to satisfy e-commerce demands or ensuring that retail Associates and store inventory or optimized to maintain product availability.

We have been bringing our Enterprise asset intelligence Vision to life for our customers.

We are doing this by enabling them to identify their assets through barcode RFID and computer vision locate their assets with our vertical specific Solutions off and understand their condition such as temperature trailer capacity and device security so that their front-line workers can take the best next action packed in real time.

Message for sensing analyzing and acting on operational data from the front line of business have undergone massive transformation in past years as the on-demand economy has taken hold off.

Efficient manual processes have evolved into work flows that are augmented and enriched by purpose-built to Technologies, including Hardware software and intelligent Edge solutions that bring it all together.

Mrs. Are now demanding information about what is happening at the edge of their operations so that they can run their entire operation smoother safer and smarter month.

They generate large volumes of data and are uncertain how to take all those disparate points of information and effectively put it to work in near real-time. We have been investing in software Solutions and services that help our customers leverage real-time data to better orchestrate their workflows in gain a performance package.

Investments in advancing our capabilities in this area remain a top priority.

Launch like thirteen. We highlight the primary vertical markets that we serve.

Exciting longer-term growth opportunities remain and new ones are evolving as customers in these markets are pressured to improve their technological capabilities in an increase in wage on demand economy.

That said we are seeing mixed Trends in this challenging environment depending on the sub-sector.

Many of our customers are deemed essential businesses while various others may be temporarily closed for business.

It Healthcare the pandemic dramatically increases the need for additional acute care capacity, which is the primary area that we serve our sweet or purpose filled took care of solutions are enabling pop-up hospitals drive-thru testing facilities and labs to scale quickly and provide safe and efficient care.

Either parts of healthcare have seen a Slowdown as government mandates in many locations have paused non Critical Care in elective procedures until further notice.

Approximately two-thirds of our business in retail is the mass Merchants Grocers and e-tailers who are serving essential customer needs.

Many retailers arrive on our technology to execute their omni-channel fulfillment effectively.

E-commerce and buy online pick up in store transactions have increased as more consumers navigate purchasing from their homes.

However, social distancing and stay-at-home orders are further impacting department stores and certain apparel retailers who are heavily reliant on in-store purchases.

In the transportation and Logistics base increased online purchasing from households is driving significant incremental parcel volume and delivery which drives increased demand for our Solutions.

Conversely government-mandated restrictions are severely pressuring passenger Airlines rental car providers and certain segments of the distribution industry off. The manufacturing sector has been challenged with global trade tensions and is facing additional challenges today as stay-at-home orders have deemed many discreet manufacturers such as I am and specially Goods non-essential.

That said some of these customers have been created with the with their Idol operations by producing medical equipment like ventilators, utilizing our Solutions wage.

Many segments within process manufacturing such as food and pharmaceutical companies remain essential and are less impacted.

In closing we are confident that our business fundamentals and strategy our sound and that this crisis will not last by focusing on serving our customers needs and continued invest in Innovation. We expect to extend our Market leadership position as the market rebounds.

Now I'll have to call back over to Mike Sanders will now open the call to Q&A. We ask that you limit yourself to one question and one follow-up so that we can get to as many of you as possible.

Thank you. We will now begin the question-and-answer session to ask a question. You may press star one on your telephone keypad. You would try your question, please press * 1 mm or using the speaker phone. We asked you please pick up your handset before pressing the keys at this time. We will pause momentarily to his roster.

And today's first question comes from Andrew buscaglia with birnberg ahead.

Hey guys. Thanks for taking my question.

I wanted to touch on so you're cute to sales guide. You know, you had a good backlog into the quarter and it seemed as though you know, you're Asia, you know your your North America a seem to be okay this Corridor, so I'm wondering you know, if is this just a function of your backlog, um and beyond that, you know, is there a concern you just haven't quite seen, you know, the the fact of this hit, you know other regions outside of Asia.

John Drew good good morning. We have today a lower visibility of of the business due to the impact of covid-19 and Thursday. We're basically pegged as a business to the economy. And uh, a lot of what we see in Q2 is a question mark on the length of the stay-at-home and also the impact of the Vias stimulus packages either current or to come and if you study the the company of the recent past we had three of rebounding quickly when the economy restarts now when it comes to to to specifically what we see today is obviously the impact only do two covered with foil and a strong competitive position. We believe that for example in q1. We we have gained shares with a strong backlog entering the quarter and we yep,

Today from a top-line standpoint mainly an impact being more pronounced on run rate, which is part of the business going through distribute distribution, and we have seen them Distributors Partners adjusting the level of inventory. So this is what we see today going on, but we believe we have a strong value proposition which works well and by times and we're going to be ready to to manage this this downturn Andrew.

Okay, and then your guidance for ebitda margin and you know, I think it was a a bit ahead of where some people were expecting directionally. Is this off of your gross margins, you know being up sequentially is you know, what's really what's behind that margin guidance. So if you look at of course, so if you look at look at the midpoint, the ebitda margin would decline by about 270 basis points. So $270 plus 1.5% or 150 basis points is due to one of items either associated with tariffs or associated with down payment of the pandemic mainly impacting our freight expense. And then the balance is a point of birth.

Gene being lost due to

Run rate mix so if you look at today who disagree ate the whole Avenue between bit and run rate or night margin is much higher than beds and we have seen the light bulb on you declining or whatever the margin profile for run rate and bids have been increasing sequentially now for a few quarters. So what you see a plane and profitability is a margin impact and largely large proportion of the margin impact being due to tariffs and see nineteen from a public standpoint. We believe we're going to be able to retain the objects as as a proportion of Avenue constant whole life to last year.

I got it. Thank you.

I have another question today comes from Paul cost JPMorgan, please go ahead. Yeah, thanks for taking my question. I got to the first one is can you give us your latest thoughts on the USPS wage projects and I might as well throw the second question in now and that is it sounds like you expect the channel to destock. Is that a 2 Q phenomenon wage the guidance or do you think it will take more than 1/4 for them to do that? And you know, can you quantify that in any way? Yes. Good morning Paul. I I'll take both of these funds first on USPS, um, you know USPS contract continues as per our expectations, you know, the as we've talked about before this is a multi-year contract research a very proud of it the biggest in our history. I think it highlights the strength of our value proposition and the the the strength of our relationships the dog

Our respective teams. So the sea bottom and the USPS team they continue to work very closely together. Both sides are very engaged. So there's no no expectations of signs from our side that this would be pushed out in any way, you know, we as we said in in in our last quarter call, we do expect to begin ramping up in Q2 or ramping really delivers in Q2. And we do a bathroom or expect that the majority of all the orders was deployed by the end of 2021 as the back end is is kind of gated by the when the US. 3-g service and at that point USPS will lead to have moved off to to two new devices. We we have received new orders the beyond the the, you know, the current order so you some new use cases but within the same framework for an additional 30,000 units so, you know the business wage

USPS for us continues to be to be good and we certainly look forward to starting to deploy in in Earnest. And then the other one on these these talking in the channel off at the moment I'd say, you know on a global basis, uh distribution Partners who are the ones who hold inventory are holding an normal days on hand inventory Thursday. We don't see it being you know high or low particular. It's going to be within the band that we consider to be normal what we tend to see early in the downturn is that when sales out goes down from the same perspective they adjust their days on hand, which means they don't have to buy as much in the short-term and then that tends to be more of a you know, 1/4 type of activity home. So here we are, you know, assuming that there will be a reduction in in the Run rate for our T's and and partners which will cause some some level of uh, uh dead

that's our inventory or or maintain you to maintain the same level of days.

on hand inventory

Thank you.

I don't know question comes from Keith House of North Coast research, please go ahead good morning guys, you know, you're one of the few guys that's been around since the you know, the Great Recession back in 2008/2009. Can you give us some of your thoughts in terms of you know, how you could I guess your customers are responding now and is there that same level of fear now that you had back then? I think we understand how much business has changed. But what was your interpretation of a customers are reacting? Yeah. I think the obviously there's a very different drivers for for this crisis is the 2009 crisis. So I'd say, you know, our customers today are are are probably not asked back up and say it very much. Ends on which which kind of vertical or sub segments of the business you're in I think in 2009, you know, every customer had concerns about liquidity and so forth here, we have a birth

What about of a uh Have and Have Nots so if you're a you know, Mass Merchants a grocer e-tailer or in healthcare some of the delivery business office, you know, you're doing very well they are, you know, super super busy and if you're you know more of a brick-and-mortar retailers selling apparel you you might be having shut down all your app stores. I think, you know from a customer Behavior perspective I'd say when the kind of the orders around work from home started to to be enacted it probably took two three weeks for our customers to you know, scramble and get themselves organized to you know, adapt to the new kind of working environments. They were very focused on just moved their operations were, you know continue to run uh, but in the last, you know, the last month I'd say they started to come back and start engaging with us on Thursday.

On both current and more future-oriented projects and we're trying to be make sure we make good use of video conferencing to continue to engage and have you know, the sessions with our customers and I don't perceive that our customers overall or maybe as concerned with how long or or how they going out of this this recession. Maybe if you the feels like they have a bit more confidence God. Thank you. And then I think I heard some of those been your script but can you clarify again? Like what percentage of your business do you need done to essential customers? We didn't talk about it from the entire business. But basically if you look at retail specifically which is our largest wage, you know, two thirds of our business there goes to mass Merchants groceries and e-tailers and those are all deemed essential. Yeah, we've seen some interesting Trends there that as people are dead.

Adjusted to buying from home not necessarily visiting the stores much so buy online pick.

Up in store has become much more popular popular, you know grocery volumes have gone up materially but buy online pick up in store has gone up exponentially and I think that's a a consumer behavior that is unlikely to revert back to what it was. I think you know consumers have now learned a new way of of shopping that they they like that if you move up to our Healthcare there we have you know, I would say the majority of our business is tied to essential activities acute care specifically walk in you know, we've been part of Pop hospitals drive-thru Test Facilities and and just scaling existing Healthcare facilities to be able to take care of of the the number of nineteen patients that come in but obviously there's you know, parts of healthcare that has been deemed non-essential which but that's a smaller part of our business that do elective care and so forth.

Wouldn't Transportation Logistics. Yeah, that that's a I can't really have I don't have a good percentage number but it's a you know a good part of all that business is obviously also took part of the essential economy, you know, moving, uh, making sure that the essential Supply chains work all the way from uh, Pharmaceuticals to food to Ecommerce. Um, I'd say here for us the last mile delivery, you know, so many more deliveries to households today and the last mile delivery drivers tend to have our type of devices. And so that's been that's been been helpful. But on the other hand, we see other Transportation Logistics businesses like Aviation or rental car companies and so forth that that are are under pressure and lastly manufacturing. There is a lot of the discrete manufacturers Aviation and Autumn auto makers are dead.

Not essential they make up less than 5% of our total revenues. While most I would say process manufacturing companies like food and Pharma are deemed essential for us an additional Point Keys as well, which we think is important. We think that the current situation will actually actually accelerate the secular we're serving Ecommerce tracking digitization of workflow. We believe that those friends are going to be even more important going forward slash. Yeah, I think that, you know to that point we see that our Solutions have become more necessary for our customers as we really do in power the front line of workers across end markets. So, you know, these are the people who cannot perform their duties from from home. They have to be in hospital the grocery store delivery truck Pub.

And and it's so I think the the crisis is helping to accelerate Trends around digitisation automation across across Industries.

No, next question today comes from Silver City with me. Go ahead. I thank you. Good morning. I wanted to go back to your your comment about the Haves and Have Nots and and and that's slide thirteen where you talk about, you know, some of the essential parts of the business in terms of vertical channels. Is it fair to say that the essential components whether it's retail e-commerce Healthcare that that's been you're anticipating that has a net benefit in the first half of the year or put another way. Who would you expect that that potentially if we've seen increased investment in those areas that falls off in in the second half in addition to the recessionary pressures that you you're seeing in the traditional markets. I'm just trying to get a job.

I think I just for the full year, but I'm just trying to get some feel for how that essential business might change from Q2 to Q3. I think you should take you 3 Libya being a particularly challenging cool.

Yeah, so, you know we going to stop short of trying to give you know real color or guidance on the full year here but I'd say for us we we do age our expectations is that you know, this is a not a long-term change in in in in how we operate and the world operates but more of a quarter-page so we certainly expect it to impact Q2 and Q3 and then you know, depending on how quickly the world rebounds, you know, we will we will follow I'd say well, you know, one of the benefits we have is that we have a very, you know, robust business with Diversified business across product lines vertical markets and geographies in our value proposition tend to work in good times and bad times right good times. Our customers are expanding their investing in the business and they use our equipment to help them do that in in tougher times. They tend to train

Opex for capex, so they try to use us to get more efficiencies it you know in in in the you know say right now at the eye of the hurricane here we are seeing obviously the the many of the essential business of being very busy busier than they had been before. I think they how they are behaving today is that they are generally very busy on on just making sure they can scale up their operations and you know scale up the use of Technology but not necessarily having the bandwidth to think a very crazy about how to leverage new Solutions. I think that will come when when the world settles down a little bit more, um customers that are are not operating today say, you know people who have had to shut down their operations team. Um, we are talking to them still go to to make sure that we stay engaged and figured out how how can we help them Drive moral day the digitization and automation of their businesses at home.

Come back. So we feel that we are you know, we want to engage with all the customers that we have about the obviously.

Once they are are are essential or much more active in both the you know, running their businesses and and in looking to figure out how to scale them.

Let me add something I can this is Jill speaking the concept that you mention about the Haves and the Have Nots that Anderson described earlier also applies to a certain extent within the central customers. So for example in healthcare customers you have of course covid-19 activity, which is at the moment receiving a lot of attention and funding and and therefore also bought from us, but you also have elective procedures which are being put off and corresponding Investments That hospitals are making are being postponed with a million dollars. You see a lot of things around buy online pick up in store, but for example automation activities like we showcased with our our uh, a robot solution that we took it earlier. Those are being paused. Now the good news is that we're not yet seeing a good drop-off in confidence among those customers. The customers are still engaging with us remotely on those log.

Firm Solutions and and so we expect that that uh have not part will continue even in those essential sectors in the future.

I don't know. Next question today comes from a. Marshall with Morgan Stanley, please go ahead. Hi. This is Eric on for me. Thanks for taking our question. Maybe just staying on the question of kind of conversations with customers. It sounds like for the most part you've seen maybe a pushing off of projects, but can you help us like I guess contextualize much could there be a potential just scaling down of maybe the size of some orders or have you seen any potential cancellations from maybe customers most impacted? So Thursday, we only seen a limited number of push-outs. We have not seen any any cancellations or any uh-huh scaling down of orders as you as you put it down. I think the and the customers that have pushed out tends to be the ones that are not operating today at all.

Got it. That's helpful. And then maybe just changing gears a bit on on share repurchases understanding you kind of capitalize on a lower share price in the quarter. Like how should we think about the page moving forward? Would you continue to be opportunistic or should we kind of expect maybe more focus on cash flow preservation, um just looking at the uptake there. So we we feel strongly about cash flow generation of the company as as as we said as I said, we believe we can protect the majority of the of the free cash flow of the company even doing this down turn off. The priority for cash location is going to be to invest in the business either organically or inorganically. We bought two hundred million dollars worth of shares. So it's about 2% of our shares outstanding. So at this stage we are going to be mainly investing in the business and buy back with not be a pig.

Now it's not not going to be.

Totally of the table, but not a priority.

I don't know question today, Sir Richard Eastman Robert W Baird, please go ahead.

Yes, good morning. And thank you. Could you perhaps Olivier? Could you perhaps just expand a little bit on you know, the supply chain issues that you've had in the quarter and maybe just speak to this Malaysian facility, which I'm assuming was a subcontractor facility had some closure and some downtime is it up? And do you could you just kind of give us a sense of how much revenue that may have impacted the first quarter?

I think I'll start with this and then we'll leave you can help fill out some some details. So if you go back to you know, you know, we we highlighted that covid-19 would have an impact on our supply chain, but there was a on the supply side of things since then, you know, the month China's has largely returned to normal. It took a little longer than expected that say and there was dependent party on where our contract manufacturing Partners were located. So they had to you know wage workers through through two weeks quarantine periods, and so forth, but by the end of the quarter are are Chinese contract manufacturing Partners were all working with faith with at over 90% capacity. So I think they came back a little slower, but it came back. Uhh, we also done in the quarter tried to ramp up both our Vietnam and Malaysia birth.

Facilities and timing was a little more challenged as as we were supposed to do that the Monday after the Lunar New Year and obviously, you know know Chinese people were allowed to travel there to help set it up and and teach people but we were I think quite agile and creative so we set up video facilities so that we had people in China sitting in watching video off what people in Vietnam and Malaysia were doing to teach them as as well as we could and the Vietnam facility came a has come up very nicely. It's it manufactured the the same number that we had expected while the mothership recently started off a little slow, but then it got shut down based on the martial law that Malaysia Implement wage, but we you know, we using the same techniques to get that facility up and running the impact on qq1. Yep.

I think was very modest from that perspective, you know, we've diverted and and you know tried to make get as much out of China as we could. It had some low impact on tariffs as as we now had to manufacture everything in China with the vast majority of our products in China instead and and going forward. We expect that the supply chain issues are going to be largely behind us and what she reflected in our guide for two is mainly some demand pressures. Yeah, actually, I think a call out to our supply chain is an order they've done an excellent job or being agile and and wage working in a very Dynamic situation to make sure that the all these issues had minimal impact on on q1 and Q2.

And then just as a as a follow-up question.

Are there any receivables or credit issues that you are watching within you know the virus don't hold a lot of inventory, but are there any credit issues that you're you know watching carefully. So we're spending a lot of time on working capital obviously, So most particularly so far the answer is no and the way again we should strong about our balance sheet. We feel strong about our free cash flow and we took strong about that. We're working capital and we want to use in selected cases the strength of our balance sheet to increase the competitive position of the company. So from a credit standpoint choice so far no particular issues and we want to help our partners to navigate through this difficult time using our balance sheet one one more thing. Yep.

Just to add some color on this one thing that I think benefits us here is that you know our partners they their business is to reset our products. So if if they are cut off from supply of our pack, they can't get access to our products their business goes away. So there is a strong incentive from my partners to pay us to make sure that they can stay current and and, you know continue to do business.

Our next question today comes from Brian job. William Blair, please go ahead. Hi. Good morning. Thanks for taking my questions. I was wondering, you know first if there's if there's any way that you could help us make trying to quantify the the backlog that you're entering the second quarter with and you know, and maybe compare that to a typical quarter you typically enter your order would say, you know, two or three weeks of backlog and now you have people that or can you can you talk in some terms like that to give us a sense. So the size of the backlog back during the quarter was not out of the ordinary and decides was slightly higher due to some of the Dispatch Center issues. We we mentioned wage so we have to shut down for about today at the end of the quarter one of our Dispatch Center and that was about twenty million dollars, so that would be part or so.

Of of of the opening backlog that nothing out of the ordinary you can think of it as you know, the business continue to do well through the first quarter before or flow was was normal and the the one additional thing was that the twenty million dollars to be couldn't ship out of the North America were the Americas Distribution Center 15th of June.

Okay, that's that seems smaller than I would have thought so that that's all I mean like 2% of Revenue so that that's enough for you to call that out. There's nothing no other source of additional backlog entering two Q nothing of significance order out of the ordinary and then I was just curious, you know, it was you know, I did that facility. If you can talk about this why why did that Distribution Center have to shut down was that a state-driven decision or was there an illness there? And and do you think that this is a potentially a risk in the you know going forward with other distribution centers and Facilities Banks. So this is what's an outsourced facility and there was a case of the uh, nineteen so they shut down for 36 hours and came back and ran it slower. But we you know, even before that we had started take some some pretty dramatic drastic. Yep.

Making sure that we had, you know teammate.

ABC and so forth that we had, you know, put out more spacing between people taking a lot of actions to make sure that if anybody were to get infected it would impact as only a small team and not the entire facility. So if if something like that were to happen again, I would expect it to have much less impact than it had in the first quarter another one which size also the quarter was very back and loaded for obvious reasons, right the supply chain started slowly at the start and ended up strong. So we had to ship a lot of the last few days of the quarter and the day of shipment was worth much more than ever before but we're considering that today largely the risk from a distribution center standpoint is going to be mitigated going forward. We have very good plans to mitigate those risks now.

And our final question today comes from Jeff Kessler with imperial capital, please go ahead. Thank you, you've mentioned briefly. You mentioned briefly the three repetitions that you've made that we're we're not part of the original discussion cuz you just update us on you know, whether or not investment in them is going forward and if they if so, what role have they played or could they play later on in the year? And it's a 2000 and 2021. So I should be talking about tempt. I'm pro-choice protects the the acquisition we did last year. Yeah. So let's say all all three or performing. Well, you know temp time was the first one we made in the beginning of the 2019. They designed and manufactured, you know visual time temperature Monitoring Solutions. The pair goes on a lot of them goes on dead.

Bios of the vaccines in the developing World, um, obviously, you know great. It's very topical today or that we don't have a vaccine yet for for covid-19, but that's kind of why I'm asking the question. Yeah. Okay. So we we're obviously in contact with who and others to make sure that when that happens that we thought so, you know, we we can offer our our solutions to ensure that the the transportation of That vaccine can be temperature controlled and quality controlled profitect was the same position we did in June of last year. That is the they do the prescriptive analytics, uh, taking lots of different data inputs from a variety of sources primarily in retail jobs and using machine-learning AI to detect anomalies and it said that's even more critical today as retailers are trying to figure out what time

Have one of the stores whatever's they have and and how to quickly be able to assess uh Rectify that with being less dependent on having a physical presence in the store to be able to do this month and lastly protects the cab which was the computer vision company required at the end of last year. You know, this is a smaller business mostly focused. We folks home intent to that is to really Leverage The competency of that team less. So the the the kind of the product or the revenue Stream So they are, you know, very been very active aging aging with the building out our computer vision capabilities around our Mr. Robot particularly, but also other Solutions and been a great great addition to our team that are great skill sets off to my follow-up is will be quick it has to do with your partner program. Are you mentioned that some of you know some of your some of your partners are essentially if you don't provide wage

Duct uh-huh. They have nothing to sell.

The the question is is about have you made any tweaks in that program during this period of time as you've seen Ebbs and flows in you know back and abs and flows in your supply chain and going into through the through the channel that increases for some folks and have been and decreasing for others. And what have you been doing? What have you been doing with life partner program to if you want to call to make it to make it more efficient for both of them and you yep, I think this is an excellent question for for Joe Hill.

Yes, so in our partner program we have a lot of requests from partners that we help them both technically with training but also financial and with the program terms in particular like many of the programs we have some elements in the program that are are you can think of it like a frequent flyer program where you have to reach certain age levels and we have already announced that we are adjusting those program terms where essentially extending it for additional for an additional Year. We're also adjusting some of the thresholds that Parts just need to reach in order to earn their rebates. These are the typical things that you would do in response to a changing business environment when when the partners can turn their target and I think so far it's been quite well received because it means that the partners will be able to operate their businesses at the different levels and choked and still achieve their targets dead.

I want to see who is the question answer session. I'd like to turn the conference back over to mister. Gustavson 2500 bars. Thank you. Yeah, I would like to to thank our employees customers Partners who are working the front line. We remain committed to supporting you through this challenging time. Be safe everyone.

Thank you. This includes today's conference call. You been out of certain lines and have a wonderful day.