Q1 2020 Earnings Call
Good morning, ladies and gentlemen, and welcome to the Patrick Industries incorporated first quarter 2020, <unk> earnings Conference call.
My name is an effect and I will be your operator for today's call.
This time all participants are in a listen only mode. Later, we will conduct a question answer session. During the question and answer session. If you had a question. Please press Star then one on your Touchtone phone.
Note that this conference is being recorded.
I will now turn the call over 10. This Judy I can tell ski from Investor Relations Mr. Matelski you may begin.
Good morning, everyone and welcome to Patrick Industries first quarter 2020 conference call I'm joined on the call today by any measure President and CEO, Josh <unk> CFO.
Certain statements made in today's conference call regarding Patrick industries, and its operations, maybe considered forward looking statements under perfect clarity plot.
There are number factor many of which are beyond the company's control, including without limitation, the disruption of business, resulting from unforeseen events, such as the Kogan 19, Panasonic and its impact on economic conditions capital financial markets and our operation.
Which could cause the actual results and events to differ materially or those described in forward looking statement.
These factors are identified in our press releases, our form 10-K for the year after 2019 and our other filings with the Securities Exchange Commission.
We undertake no obligation to update these statements reflect circumstances or events that occur. After the date. The forward looking statements are made except as required by law.
I'd now like to turn the call over two antibody Matt.
Thank you Julie and good morning, everyone and thank you for joining us on the call today.
Before we cover the details of our quarterly results I want to give you a deeper understanding of the attaching a discipline. The company is undertaking as a result of the covered 19 pandemic.
In response to the very difficult challenging circumstances surrounding covered 19, we've been working diligently and thoughtfully to prioritize the safety and well being of our talented and dedicated team members and their families. The communities in which we operate our customers suppliers and all of our stakeholders.
Our commitment to maintaining a safe work environment, while continuing to service our customers as a top priority.
We have established and implemented protocols in alignment with both CDC and state guidelines to protect our employees in facilities keep current with best practices as information continues to become available and position ourselves for the full return to operations and as restrictions ease and our customers returned to production.
I'd like to take this moment to thank all of our team members across the organization, who have and continue to work so diligently entire looks like as we navigate through these unprecedented and unforeseen times.
Their commitment to our team each other and organizational gold is truly inspiring.
Additionally, our company team members in business units have put forth tremendous efforts to support the communities in which we live and work, including manufacturing and donating personal protective equipment for hospitals care centers and from my responders.
Alan during their time and sponsoring meals for several local hospitals for the frontline covered 19 workers and staff.
And our Daqo team in Wisconsin shifted their operational focus during this timeframe for manufacturing marine components to the rapid development and production of plastic ratio in isolation accounts.
We are incredibly proud of our team response to the challenging situation and look forward to all of us emerging from this difficult time as a stronger organization.
Now turning to our performance in the quarter. Our first quarter results are a reflection of two vastly different scenarios, one in which we experienced positive momentum and strong consumer demand in all of our end markets for the first two months of the year followed by a sudden business disruption in late March related to cope with 19 that impacted Oliver end markets and operations.
In the face of these dynamics unfolded in the quarter. We are encouraged by our first quarter performance and our ability to deliver earnings growth. Despite a decline in sales and the related impact of the business disruption.
Our teams immediately reacted to the rapidly changing environment and adjusted their business models in operations and alignment with the economic landscape.
Additionally, the diversification in the end market in which we serve and the domestic geographic regions in which we operate positively impacted our overall results and helped offset the business disruption for cobot 19 in the quarter and corresponding lost shipping days as certain plants throughout the country remained operational, particularly in our MH industrial and marine Mark.
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Our first quarter revenues of 589 million decreased 3% versus the prior year due to loss shipping days and the associated business disruption to all of our end markets related to covered 19.
Net income was approximately 21 million or 91 cents per diluted share.
As previously noted the diversity in our market sectors and geographic region help provide resiliency in the quarter as a number of our plans continue to operate without material disruption.
Additionally, our plants and like product based brands have flexibility to shift production from one plant to another in order to maximize efficiencies and maintain the ability to service our customers.
Our geographic footprint and operational flexibility allow us to react quickly and effectively in a rapidly changing environment and as the economy slowly reopens.
In response to covered 19, we enacted a broad range of actions and initiatives to ensure the safety and well being of our team members, including work from home programs and staggered shifts where applicable while balancing the needs of our customers and providing essential products to the markets we serve.
We are continuing to stay vigilant and updated and follow the guidelines established by the CDC and local governmental authorities.
As previously announced we suspended operations at certain facilities over the last five weeks in alignment with our customers and as well have been maintaining compliance with mandates by certain state governments.
In connection with the suspension of operations, we proactively implemented cost containment and financial management measures, including.
Voluntary compensation reductions for the executive management team.
Voluntarily reduced compensation for the board of director's compensation reductions for the salary team members across the organization.
For low with benefits of certain team members that were impacted by the suspension of operations.
Freeze on all amount of central hiring reduction of nonessential spending we prioritize critical maintenance capital expenditures suspended acquisition initiatives and posh share repurchases.
While certain operations have continued to run during the month of April the facilities that suspended operations have begun to come back online as up those this week or have plans to resume production beginning may four.
We've established a standard returned to work protocol for our facilities and we'll continue to take proactive safety precautions for all of our team members, including appropriate social distancing measures strict sanitation practices safety screens flexible and staggered work arrangements were applicable restrictions and limitations for non essential visitors and health checks where necessary.
Sorry.
In addition to the cost containment and financial measures put in place in the quarter. We're in the process of consolidating certain facilities with like product lines in alignment with this model and where appropriate to maximize these efficiencies and capacities.
Several of these actions are expected to be completed in a matter of weeks and will generate immediate cost savings in the short term with the ability to flex up production and bring back. These plants online quickly once volume levels increased to a sustained level.
If volume levels remained soft for an extended period of time, we have the ability to permanently consolidate facilities in both our manufacturing and distribution centers and we have staggered lease terms for our lease facilities, where we can also reduce costs and a regulated fashion.
We have a detailed peered playbook to execute off are based on volume levels and successfully took similar cost reduction efforts in prior downturns, including during the great recession.
Given the current environment, we have prioritized liquidity and cash preservation and have paused on our acquisition initiatives until there is greater visibility instability in the macro environment and the markets. We serve at which point, we can pivot and return to our strategic and opportunistic capital deployment initiatives.
As we reflect on the first quarter, we had a tremendous momentum to start the year, followed by the unprecedented and suddenly impact from covered 19.
With the positive traction we experienced in the majority of the quarter combined with our flexible capital structure and strength of our cash flows and as part of our capital allocation strategy, we were able to make strategic investments and acquisitions and return capital to shareholders.
We completed two acquisitions, including the previously announced acquisition of Maple City, Woodworking, Goshen, Indiana based manufacturer of hardwood doors and facial for the RV market and in addition, Sci manufacturing across while Indiana based manufacturer of both towers Hardtops ski Intel bars, and other metal components for the marine market.
These two tuck in acquisitions are an excellent fit with our entrepreneurial philosophy and existing products expertise and we'll continue to provide long term strategic value, bringing high quality innovative product lines to our portfolio.
Additionally, we returned approximately 22 million of capital to our shareholders by a 6 million in dividends and 60 million in share repurchases.
At the end of the first quarter, we had over 500 million of available liquidity, which includes approximately $95 million of cash on hand, and our net leverage profile was right in line with our optimal target leverage at 2.3 times well under our four times covenant maximum.
Now turning to our end markets momentum was evident in both leisure lifestyle and housing industrial markets in the first quarter.
On the leader lifestyle front, encompassing RV and marine which collectively represent 68% of first quarter revenues retail shipments were positive compared to the prior year for the first two months of 2020, highlighting the fundamental demand for outdoor leisure lifestyle products.
And our housing and industrial markets, which represented 32% of our first quarter revenues. The first two months of the year, where a continuation of what we experienced in the fourth quarter of 2019 with strong demand for quality affordable housing and with Tailwinds from a low interest rate environment, lower commodities and a tight housing market.
Now more specifically and taking a deeper dive into each of our end markets.
Our RV revenues were down 22 million or 6% in the quarter and represented 55% of our consolidated sales in the quarter.
The decrease was primarily due to lost production days in the latter part of March due to RV Oems curtailing production in alignment with plant closures, while still shipping retail finished goods units to dealers.
RV wholesale unit shipments were down 20% in March and flat for the first quarter compared to 2019, while retail unit shipments are estimated to increase slightly after adjustments for the same period.
Heading into the first quarter of 2020, RV Oems and dealers had already aggressively reduced and recalibrated inventories pulling over 50000 units out of inventory in 2019, and approximately 100000 units since the second quarter of 2018, bringing dealer inventories to their lowest level. We have had on record dating back to 2014.
Temporary OEM production curtailments further decrease dealer inventories in April as Arby's, we're still retailing throughout the month at certain dealerships as well as being used for FEMA purposes for frontline healthcare workers in certain states.
For those states will stay at home orders and social distancing guidelines precluding on site visits many dealers saw increased online activity and interest during this timeframe, indicating continued demand for the leisure lifestyle.
The current dealer inventory environment and retail unit sales that have significantly outpaced wholesale production over the prior 18 months is a stark contrast of the industrys inventory levels prior to the last recession of 2008 in 2009.
During the last economic recession, we saw wholesale production significantly impacted not only from a drop in consumer demand, but due to excess inventory levels heading into the recession and resulting in a parallel reduction and recalibration of those inventory levels throughout the recession.
Already leaned out historically, low and appropriately calibrated inventory should position wholesale production for resiliency in 2020, even within the current impact.
To consumer demand and corresponding economic recession related to cover 19.
OEM to purge that order books during the shutdown period to ensure calibration with retail sold units awaiting delivery and our position to align with retail demand.
Our views are uniquely able to be used in many lifestyle and functional capacities, including serving the healthcare community and its frontline caregivers as temporary portable self sufficient dwellings testing facilities and command centers.
Additionally, we believe the RV industry is extremely well positioned for the post covered 19 environment with camping activities being an ideal means and environment for friends and family to enjoy quality time together in the outdoors, while maintaining social dispensing guidelines.
With this unprecedented pandemic and the related stay at home and quarantine mandates Americans are more eager than ever to get back to socializing and the outdoors and rvs offer the value proposition of independence quality time and community. In addition to the ability and comfort of domestic travel within the leisure lifestyle experience.
In addition, historically low interest rate levels for consumer financing of arby's low entry level price points for the experience and gasoline at its lowest prices and over two decades point to a long term runway for the RV market.
The marine side of our business was impacted in the quarter by the continuation of inventory Recalibration as dealers and Oems continue to rebalance wholesale unit shipments in alignment with optimal dealer inventories.
Early 2020 marine dealer traffic and interest was positive and there was significant traction in marine retail evidenced by estimate a retail shipments in the first two months of the year up 9% over 2019.
Then the business disruption began in March due to cover 19, which dramatically impacted the quarter and resulted in an estimated three decrease in marine retail shipments of approximately 5% for the quarter.
March generally represents about 10% of full year shipments.
With the aggressive inventory recalibration still occurring in the first quarter Marine retail outpaced wholesale and wholesale unit shipments were estimated to be down high teens in the first quarter.
Our marine revenues declined approximately 13 million or 14% in the quarter and represented 13% of our consolidated sales while our content per unit increased an estimated 3% in the quarter.
Like RV Oems, we saw the marine OEM suspend operations for a period of time in late March that carried into the month of April but they have been quick to resume operations at the second quarter represents almost 45% of full year retail shipments and there is a backlog of retail boat sold from the recent first quarter boat shows, indicating that voters are anxiously awaiting.
In anticipation of getting back on the water to escape the stay at home orders and spend time with their families outdoors.
The long term fundamentals remain intact for the marine market and similar to the RV industry and value proposition are ideal for the post covet 19 environment.
In summary, retail interest in traffic was relatively resilient during the month of April for both the RV in marine sectors, particularly in those states that had less restrictions and as well less health related covered 19 occurrences.
We estimate RV in marine retail units down approximately 50% to 60% in the month of April despite the nationwide shutdown and stay at home orders for the entire bye.
Now turning to the housing in industrial side of our business, which both experienced positive tailwinds coming out of 2019 and during the majority of the first quarter of 2020 with low interest rates, a tight housing market and pent up demand for affordable housing.
Our manufactured housing sales represented 19% of our total revenues in the first quarter and increased $6 million or 6% over the first quarter of 2019 and reflect an 8% increase in estimated wholesale unit shipments.
MH production experienced some disruption in certain states in late March due to cover 19, while finished goods units were ship from OEM inventories.
However, the industry as a whole maintained a steady, albeit reduce peso production throughout the month of April.
Most of our manufactured housing related facilities and brands also continue to operate during April in alignment with our customer base and as part of the supply chain to those essential businesses.
The demographic trends indicate strong expected demand patterns pent up demand continues to be created and the need for quality affordable housing remains intact and increasingly attractive to the growing population of 35 to 44 euros.
The average price of an MH unit at roughly one half to one third the price of an average built stick stick built on our MH market continues to point to promising future growth post covered 19.
Revenues in our industrial business, which represent 13% of our overall sales mix in the first quarter increased 14% compared to the prior year.
New housing starts continue their rebound increasing 34% through the first two months of the year with the benefit partially attributed to a drop in mortgage rates and extremely tight supply of existing homes for sale.
New housing starts were also impacted by covered 19 in mid March and we saw a drop in new housing starts, but still positive for the month of March with growth of 2% compared to the prior year.
For the quarter, New housing starts were up 22%.
Our products are generally the last to go into a new unit and trailed in housing starts by four to six months.
Single family housing starts were up 12% in the quarter, while multifamily housing starts Roque rose, 47% with the south up 53% the west up 27%, the Midwest up 41% and the northeast region up 68%.
The non residential side of our industrial business, which is primarily focused on the hospitality high rise commercial construction and institutional furniture markets was also strong in first quarter.
Fundamental housing demand as evidenced by strong single and multifamily housing starts continue to strengthen the first quarter, which has historically translated into an increase in demand for our industrial market.
We do expect the uncertainty surrounding unemployment and tightening credit standards to negatively impact demand for both manufactured housing and residential housing in the short term.
In summary, we are anticipating on the leisure lifestyle side of our business, both RV and marine wholesale shipments to be down between 40, and 50% for the second quarter with virtually no production in April and retail unit sales to outperform wholesale shipments during this timeframe.
We believe RV inventories are in balance and marine inventories will be calibrated and balanced in preparation for the 2021 model year.
For the full year, our current assumptions are based on RV wholesale units being down 20% to 25% and marine wholesale shipments being down 25% to 30%.
On the housing and industrial side, we are anticipating both MH wholesale unit shipments and new housing starts to be down between 20, and 30% for the second quarter and 15% to 20% for the full year.
While we are anticipating significant short term disruption to all of our end markets, we have the ability to leverage and flexible manufacturing facilities and high variable cost model to align with our customer demand as we see shifts in demand patterns.
We have continued to calibrate our expectations and assumptions for the upcoming quarter at fiscal year.
We recently in late April eliminated approximately $35 million of annualized fixed overhead, which takes effect in the second quarter.
These actions combined with the already enacted proactive cost containment and financial measures taken at the end of March position us extremely well to withstand the impact of covered 19 in the second quarter and full year 2020 based on our current assumptions as discussed.
I'll now turn the call over to Josh will provide some additional comments on our financial performance.
Thanks, Andy our consolidated net sales for the first quarter decreased 3% to 589 million.
Primarily reflecting loss shipping days and business disruption within our end markets related to koeppen 19.
We estimate an approximate 5% impact to our sales associated with the business disruption.
As Andy previously noted we completed two strategic tuck in acquisitions in the first quarter.
Due to the timing of the acquisitions they had minimal impact on our revenues.
Revenue from our leisure lifestyle market, which is comprised of the RV marine markets decreased 8% with RV and marine revenue down, 6% and 14% respectively.
RV content per unit decreased 1% to $3112 per unit.
And estimated marine content per unit increased 3% to $1531 per unit.
During the prior three years from 2017 through 2019.
We have increased our RV content per unit by 14% at a compounded annual growth rate driven by both strategic acquisitions and market share gains.
Our content per unit can vary quarter to quarter and be impacted due to a number of factors, including a significant change in the primary commodities, which we utilized and corresponding price adjustments in partnership with our customers a mix change and types of units that are being produced including size and Oems, adding or reducing content to Tom.
Get certain price points and consumer trends and lastly, the timing of Oems production cadence versus shipments of unit to dealers during the first quarter, our RV content per unit with negatively impacted by RV Oems curtailing production in the latter part of March but continuing to ship finished goods during the suspension of operations.
In anticipation of dealers continuing to deliver retail units to customers.
Excluding the impact of the lost RV production days.
We estimate our content per unit to have increased 1% in the first quarter.
Additional items negatively impacting RV content per unit, our continued lower commodity prices that we've experienced over the prior 12 months and the corresponding price decreases we have passed along to our customers the partnership.
Our customers lost production days that negatively impacted content per unit also impacted organic growth.
And with most prevalent in our RV market sector, but was also felt in both marine and it makes market sectors as well.
Organic revenues in the quarter declined 3%.
If you exclude the impact of the loss production days and related loss sales, we estimate organic revenues to have increased 1% inclusive of the reduced commodities and corresponding price decreases we passed along to customers.
Revenue from our housing and industrial markets increased 9% the quarter with inmates revenues up 6% versus the prior year and estimated inmates content per unit, increasing 35% to $4596 per unit.
Gross margin in the first quarter was 18.6%, increasing 110 basis points compared to the prior year.
The gross margin expansion was driven by the run rate of fixed cost reductions completed the third quarter of 2019.
The integration and execution of synergies related to acquisitions completed in 2018, and 29 team, including achieving our target of $5 million in synergies for Lasalle.
And the alignment of pricing relative to inventory costs, which negatively impacted gross margin in the first quarter 2019.
Operating expenses were 11.9% of sales compared to 11.6% in 2018.
Warehouse and delivery expenses increased 20 basis points due to a higher mix is it makes sales in the quarter and the corresponding higher concentration of distribution.
Intangible asset amortization also decreased 20 basis points, which was driven by prior year acquisition and the incremental expense the fixed nature of the expense and the reduced sales impact year over year.
As soon as expenses were 6.1% of sales the quarter, a 10 basis point decline compared to the prior year.
At June expenses were down $2 million compared to the first quarter of 2019 as our cost reductions completed last year also favorably impacted SG today.
In addition, the proactive cost containment measures implemented as we began to anticipate a disruption to cope with 19 help reduce our SGT expenses.
Operating income of $39 million increased 10% in the first quarter and operating margin of 6.7% increased 80 basis points due to the factors previously described.
Our net income per diluted share. The first quarter was 91 cents up 1.5% from 90 cents in the prior year.
Our overall effective tax rate as reported increased to 26.4% for the first quarter of 2020.
Compared to 22.3% the prior year, primarily reflecting a reduction in stock compensation tax benefit in the first quarter of 2020 compared to the same quarter the prior year and other discrete items.
For the full year 2020, we're now estimating our all in effective tax rate to be in the rate of 26% to 27%.
Now turning to the balance sheet.
Our total assets increased $51 million largely reflecting the addition of acquisition related assets and an increase in seasonal working capital.
Looking to cash flow in the first quarter of 2020, we generated approximately 13 million of operating cash flows.
We utilized cash flows in the quarter for 8 million and capital expenditures and 6 million in cash dividends to shareholders.
Deployed $24 million strategic acquisitions, and repurchased approximately 456000 shares of our common stock at an average price at $34 per share for approximately 16 million.
Prior to the Coven 18 operating suspension and shutdowns.
Our operating cash flows vary quarterly based on seasonal fluctuations in working capital among other items.
End of the first quarter, our inventories increased due to strategic inventory purchases of certain items, we sourced from Asia based on our assessment of potential supply chain disruption from Cowen 19.
Additionally, due to the timing of our quarter end.
We receive $16 million receivables within two business days following the quarter Adam.
Inclusive of the $60 million receivables cash flow from operations would have been $29 million, which is consistent with the prior year.
We have over 500 million of total liquidity at the end the quarter, including 95 million of cash on hand with no major debt maturities until 2023 and to date, we have not borrowed on our revolver since the third quarter 2019.
The strength of our cash flows combined with our ample liquidity provides us with the flexibility both strategically and defensively to navigate a variety of scenarios through these unprecedented times.
Our leverage position relative to EBITDA at the end of the first quarter was approximately 2.3 times.
As previously discussed we have currently Pos strategic initiatives and have prioritized critical maintenance capital expenditures.
We do not expect any changes to our quarterly dividend policy.
Given the current environment, we remain focused on disciplined liquidity and cash generation.
As we progress into 2020, our financial plan is based on the market assumptions. Andy previously highlighted which includes continued softness in the second quarter and back half of the year, but sequentially improving as we progressed into the third and fourth quarters.
Our business model today in company profile has been transformed since the last recession via targeted strategic growth and diversification into a highly skilled and market and geographically diversified value added brand centric company.
Positioning us to perform better than historical through an economic cycle.
Our gross margin profile headed into the Koby 19 pandemic is almost 600 basis points higher than our margin profile was in 2007.
Additionally, our product portfolio has been greatly enhance adding higher margin engineered value added products to our arsenal that span across multiple markets with manufacturing flexibility to produce for one or all four end market out of one facility and the ability to mothballing shift production to another facility very quickly.
This transform business the proactive cost containment and financial measures, we've taken combined with our highly variable cost structure, which consists of more than 80% variable costs.
Provides tremendous resilience to whether a significant downturn such as this pandemic and related economic recession.
Our businesses generate a tremendous amount of cash flow, our asset light and not capital intensive.
We have the ability to unlock additional cash by aggressively reducing our inventory levels and working capital over the remaining three quarters of the year, reducing nonessential spending reducing variable compensation and curtailing non essential capital expenditures.
We will also leverage certain provisions within the recently passed cares that including payroll tax deferrals that will provide additional cash flows for 2020.
Furthermore, there are untapped synergy more aggressive consolidation plans and additional levers pool as part of our tier playbook that we would look to enact should we see continued deterioration in our markets beyond what our financial plan has outlined or continuing deep into 2021.
With our transform business model of today, our recently enhanced capital structure and the market assumptions Weve outlining our current financial plan.
We are estimating our ability to generate more than 150 million of operating cash flow through 2020, and maintain a disciplined leverage profile.
The aggressive actions, we've taken and our disciplined financial policy will position us to be agile and opportunistic on the back side of the recovery as we look to capitalize on the long term upside and all of our end markets that completes my remarks Andy.
Thanks, Josh.
While the long term impacts from the pandemic are unclear at this time, we will continue to evaluate the environment surrounded covered 19 and are prepared and we'll enac further disciplined measures of the situation dictates our capital structure and financial position remained strong with ample liquidity and availability to manage this challenging economic environment for the foreseeable future and we remain.
Poised to quickly pivot in executing our strategic planning initiatives, one stability returns to our markets.
We believe our markets are incredibly well positioned to be the primary beneficiaries of lifestyle changes and that patients that are expected to take place. Once this pandemic is over and we are optimistic and excited about our ability to bring value to our customers in both up and down markets, where others can't.
The combination of our operational and financial Foundation customer first performance oriented culture, and and the talent dedication and passion of our more than 7000 team members will continue to position us to execute our strategic plan as we strive to continuously exceed our customers' expectations.
Our overall goal of increasing long term shareholder value by serving our customers the highest level reinvesting in and protecting our talented and dedicated team members dealing ethically and responsibly with our business partners and supporting our local communities remains our highest priority.
This is the end of our prepared remarks, we're now ready to take questions.
Thank you we will now begin our question and answer session. If you have a question. Please press Star then one on your Touchtone phone if you wish to be removed from the Q. Please press the pound sign or the hash key.
If you're using a speaker phone you may need to pick up the handset first before pressing the numbers.
Once again, if you have a question. Please press Star then one on your Touchtone phone and our first question is from Daniel Moore with CJS Securities.
Thank you for taking my questions and good morning, and appreciate all the color extremely helpful. In light of obviously all the volatility.
Let's start with perhaps the most of your Oems and suppliers on the and the suppliers on the RV side are set to resume operations next week.
Percentage capacity do you expect your customers and by extension Patrick to be operating at initially in May and June.
Dan This is Andy Thanks for the question. Thanks for the comments at this point in time I would tell you that we're anticipating a startup of 70% capacity, 60% to 70%. If you will from the run rates that we were running at.
Heading into call it the back half of March.
I would tell you. We've also been hearing some increasing optimism over the course of the last two weeks as it relates to run rates and potential demand out there, so where customers, we're kind of targeting coming back.
At three to four days, if you will running kind of full production those three or four days.
We're hearing that moving from three to four to four to five at this point. So I think there's some optimism building, but right now we would tell you right around 70% is kind of the target. If you will as it relates to the firing up here in may.
Very helpful and in terms of visibility when.
Based on what you're seeing as far as various states reopening.
At least plans at this point when do you expect to have a better handle on what a retail foot traffic and just general retail demand.
Kind of really looks like is it a couple of weeks away is it a couple of months away.
When do you think you'll have a little better handle on.
At least the near term overall impact to demand.
Sure retail has been relatively strong we would tell you in particular on the leisure lifestyle side of the business even in the month of April.
While the OE ease have been down from wholesale production retail istent still continue to flow and we're estimating again, 50% to 60% down for for that month of April which I would tell you is positive they've experienced increased traffic.
At the on not necessarily on lots as much but to the electronic means it's certainly been very very helpful for them to continue to to drive sales levels.
I think you were going to get there good feel here in the next 30 to 45 days would be kind of where our heads around as it relates to understanding more fundamental retail going into the into the back part of the second quarter.
Got it very helpful and in terms of financing are you seeing any material change credit tightening since the pandemic began specifically in the leisure.
And marine sides terms FICO scores et cetera.
We have not seen that yet we've talked to our lenders who are active in the wholesale side and some in the retail side and and all the lenders to the space right now feel pretty good about where things are at where inventories are at and we've not heard any deterioration in retail lending standards.
Testing lastly from me ill jump out just in terms of capital allocation, obviously being very prudent pulling every string that you can rate right now.
Still hubs in over 500 million and liquidity is to the extent that.
Smaller competitors or perhaps hurting more.
Are you.
We expect to be opportunistic anytime this year in terms of smaller tuck ins or.
M&A, probably on the sidelined for now thanks, and I'll jump back.
Thanks for question, Yes, I think that certainly we feel really good about where we're at today from a financial platform perspective, and I think weaken as we noted pivot very very quickly to resume our strategic initiatives and strategic capital deployment initiatives.
We can be very opportunistic thats still part of our growth plan. Once we find some stability in the markets and I would tell you that you know again, we're going to be very patient, we're going to be voice, but I think with where we sit today from a liquidity perspective, the way we've balanced the business and the initiatives that we've taken to appropriately size the business. According to our assumptions right now.
Now we feel really good about the ability to pivot very very quickly and returned to deploying capital. So I don't want to say that we're going to be immediately out.
On those strategic initiatives, but I would tell you that the expectation of not pursuing any of those for the rest of the year based on these assumptions, we could certainly execute on some of those assumptions in the latter part of the year. If we see some of that stability, but we're going to be poised and we're going to be cautious and patient about it and we do think that opportunities will come to the market. We're in a great position to execute on those.
Fantastic appreciate the color again and stay safe.
Thank you.
We have our next question from Craig Kennison with Baird.
Hey, good morning, Thanks for taking my question as well.
Josh I wonder, if you're able to frame fixed variable cost mix.
For your cost of goods sold in ESG Nands, we try to.
Calibrate your margin profile.
Yes, sure so given the environment.
And kind of what we're navigating through we felt the need to kind of breakout our fixed cost structure versus our variable we've talked about having a high variable cost structure.
And we've alluded to the fact that here at over 80%.
When you think you speak about the cost structure above the line of of gross margin, 70% material is by far the biggest component of cost of goods sold and labor is going to be in that mid to high teens with the risking overhead and within that overhead I would say about 50% of that would be under variable side.
At Super Super helpful and interest on the SGN a side any similar breakdown.
Yes, the CNH side youre going to have.
A lot of compensation or who asked today, both fixed and variable on this a little bit higher component of fixed cost nest DNA relative to our cost of goods sold.
From a variable compensation on the wages side.
And so incentives as well and so we don't breakout the cdeight fixed versus variable, it's not as prevalent on the variable side of the yesterday.
That helps.
And then im sorry, if I missed it but did you framed the revenue contribution.
From each of the two acquisitions you completed recently.
Both those acquisition were completed in March and both of them had an immaterial impact.
In the quarter on our topline.
But in terms of annualized revenue contribution I'm, sorry out 20 million 20 million annualized for both them.
Got it yes, sorry, I missed that great well, hey, thanks for the for the color take care.
Thanks, Greg.
We have our next question from Scott Stember with CL King and associates.
Good morning, guys and thanks for taking my questions.
Morning.
Going back to the content comments on the RV side.
You guys talked about how it was up modestly if you.
Just for the I guess that delta between delayed shipments of what was being delivered to to dealers, but longer term on rvs are we still looking at a.
A low single digit.
Growth profile for content in this segment assuming.
We get past Covidien.
And I guess, just even when you balance and.
The impact from commodities and mix.
Yes, Scott on the RV side that continue to be our current expectations. The low single digit growth on content per unit.
That would be exclusive obviously have any acquisition.
Also exclusive of any tailwind if we start to see units content.
As we were progressing through the back half a night team.
We had started to get.
Visibility that maybe some units were being at content with being added unit.
So as we are here in Q2 here.
We don't really have that visibility right now, but we would expect low single digits exclusive of additional content being additive added to units.
Okay got it and I know this is a moving target, but just when youre talking about the $35 billion in cost cuts and let's just say within a month and a half from now renal production comes back faster than expected.
Do you anticipate any issues Ernie.
Problems and trying to hire back some of these folks just given the.
The the tight labor pool in the northern Indiana market.
Scott. This is Andy we do not anticipate any disruptions as it relates to that our cost reductions were primarily on the indirect side of the business as it relates to the to the head count.
And so we wanted to make sure we maintained our direct labor workforce, so that we could flex back up and down.
Our indirect cuts were really based upon again, the assumptions that we've outlined but we expect to be able to flex backup.
Under that profile. So we've we've basically kind of lowered our our core operating structure, but we've kept the flexibility of the direct labor workforce and tax that we can be very flexible and nimble as things move.
Got it.
It is on that.
Yes, 35 million over half of of the cost we've pulled out or below the line.
So it won't even directly impact.
Kind of operation.
Okay.
Got it and Andrew just last question for a jump back to Q regarding.
I guess retail traffic you talked about I guess, obviously down 50% to 60% is better than zero production thats going on right now but.
What are you hearing you did make some comments about things getting I guess, a little bit better.
So given maybe just talk about in recent days have you heard anything about.
Better traffic at dealer level.
We have heard that in the last two weeks I would tell you we've heard a tailwind of optimism as it relates to the dealer base based on our connect on our contacts and.
Again, we think that there is there some pent up demand building right now we think that we think about the leisure lifestyle, we think about RBS, they're just ideally positioned for the post post Koeppen 19 is as we talked about in our script and I think we're feeling some of that right now so there's definite optimism versus any versus.
Some of them as we've moved through the back half of April here.
From a retail perspective, so we're hearing more optimism without question.
Got it Thats all I have right now thank you.
Thanks.
Our next question is from Brad Andrus with Keybanc.
Hey, good morning.
Hello form at your current thinking.
Our view channel inventories as we kind of come out of that Togut. Here. So you will felt like we were in a good place going into this but if you could put it in some numbers how does the channel shape up here in the next one to two months with some of the pull through that's happening in the production, it's going to come online.
Hey, Brad Josh.
Take about channel inventory heading into 2040, we talked about the red the so at the lowest point, we have on records in 2014.
January and February.
We see wholesale start to outpace retail and that ordinary course as as Theyre building units in preparation for the peak retail selling season.
As you get into April you start to see marred late March and April he starts the retail outpace wholesale over the course of about five to six months, it's kind of that or normal cycle. What we experienced in April with co bid is there were five weeks.
Wholesale pulled off line and so there were zero production of RV units over a five week period.
Over that same five week period.
Retail units in the prior year would have been between 55, and 60000 units and with retail being down could be down 40, 50, or 60% Theres still additional 25 to 35000 units at now come out of the channel and out of dealer inventories over that five week period, so coming into 2012.
Wholesale is already positioned very well as it is under we underproduce retail by over 50000 units and 19 and that position to be really resilient coming into 20.
The immediate.
Suspension of operations by the OE.
Being proactive on that will allow wholesale to even be more resilient as we progress through the latter part of both into Q2 and progress through the year that you know as we get back on a one for one basis with retail versus wholesale you could see a little bit more resiliency and wholesale because the proved a proactive measures to suspend operations, while we are.
Still having pull through albeit it could be at a 50% reduce level versus the prior year its positioning inventory in wholesale to be very resilient through the rest of year.
Yes, Brad this is Andy just a little bit of additional color as we've looked at it. We think we were we overcame rated as it relates to wholesale versus retail coming into 2020. There's continued outflow on the retail side pulling out of the wholesale channel and our I will tell you that our transport lots are are very very lean right now there's not a lot of inventory.
Those we don't believe there's a lot of finished goods inventory at the OE level. So I think it's very well position.
For the retail side of it and then when you look at marine as well Reno is probably a little bit heavy coming into 2020 on the inventory side, but we've heard positive traction on the retail side, there as well with the with the production shutdowns on wholesale side. So we would tell you that marinas calibrating pretty quickly as well on leaders lifestyle side, so feeling pretty good overall as it relates to inventories in the channel.
And one more data point, Brad I know, it's a lot of lot of info on Q1 inventory.
For RV.
And recently Q, what 2020 compared to Q1 last year's 50000 years lower so at the end of March we would anticipate units to be 50000 unit below where they were in Q1 of last year. Then you got to add on top of that the potential to 25 to 35000 units that have come out of the channel whether it is zero RV production over a five week period, but we continue to.
The retail unit.
Over the course that period.
Got it appreciate the color there and then is the last one we're getting a lot of questions on this evolving staycation Dean for Rvs, and you'll handy I agree with what he said in your prepared remarks, but but when do you think that actually starts to trickle into new sales I mean is there any evidence that this could be some kind of.
Secular shift here is a temporary just kind of how you're thinking about when we start to see it.
I think that will have.
Some good insight into that as we move through the quarter, especially as we look at this dynamic in the depending on the length of the call at the consumer hang over related to stay at home orders that have taken place again, I think we're feeling or hearing some optimism out there related to retail demand and traffic.
Which would let us kind of lead us to believe that that the hanging over won't be as long as we kind of would have kind of suspected so I think in the next quarter, we'll get some feel for the strength of that demand and have some better insight it at that point.
Thank you.
Okay, great. Thanks, Brett.
We have our next question from Tim Conder with Wells Fargo.
Thank you and gentlemen, thanks for all the color in the preamble in so far in the community here very helpful.
A couple of things here.
Indeed, just wanted to clarify the comments you made into preamble on the image housing front.
Just in general from what you said and that the gifts that little bit of the tightening credit and everything maybe hurting that entry level piece do you anticipate that to recover faster slower similar to RV and marine just in the context of everything that you said here.
Sure I think our we're feeling I would tell you just a little bit of headwind as it relates to credit when you look at the marketplace today in lending standards.
I think that banks are going to be a little bit conservative on the housing side. You've heard some are we've heard some increased standards as it relates to some lending. So it feels like there's just a little bit of a headwind on the m- side and residential side, but I think that'll push through that the government stimulus packages have been tremendous.
And and I think thats going to play very well into MH on the back and so I would tell you right now, but we just talked about leisure lifestyle versus housing and industrial leisure lifestyle feels again, we've got some some tailwind coming on the housing and industrial what we would tell you is probably a little bit of headwind for Q2 compared to leisure lifestyle, but then I would tell you.
Heading into the back half the year, we'd start to feel that dissipate.
Specialty again with the stimulus packages of and put in place arming the consumer to be much better prepared coming out of this.
Okay. Okay helpful. Sir.
And then on you talked about you're consolidating some of your manufacturing facilities a little bit.
And it's been talked about in the industrial lot seems to be a lot of.
Just touring the industry and seeing the Oems and suppliers and so forth seems the RV industry seems more fragmented relative to marine relative to other power sports.
And then we've heard from yourselves and others that in the next downturn that could be an opportunity to sort to consolidate each company consolidate their within their own.
Border, so to speak to consolidate their operations and plants and.
And then be better position is as things really pick up is that time now and I guess.
It again, given your liquidity and everything that you all have you seen well position to.
What degree or you are you looking to do that sort of accelerate versus what you've seen in prior downturns are slowdowns.
Sure I tell you as we look at our assumptions right now and again and we have a we have very detailed tiered models that we look at when it comes to planning the business and our capacities and so.
We've laid out our assumptions, we've looked across our brand platform and our product platform to see where capacities.
Wind up with with our expectations as it relates to the assumptions and so you know as we looked at this.
There are several opportunities for us to take a look and do some consolidation of like products. If you will that doesn't mean that we're going to be shutting brands down necessarily but it's an opportunity to maximize efficiencies during timeframe like this and it also provides us the ability to flex back up you know in situations, where capacities and and.
Production levels increase.
We've got a lot of elasticity within our like product lines, and so that coupled with a tremendous talent of our team members.
And the ability for us to shift production around to various facilities again, we look at it from a tiered perspective and so we'll tell you will continue to do that would not consider this a draconian consolidation by any means I will tell you. This is opportunistic based on some of the capacities that we're seeing out of our like product lines and there's more opportunity if we choose to pursue.
With that but I would tell you that it's really continued upon capacity levels at the facilities.
But with our high variable cost model again, they're very flexible and nimble. So I think that we will continue to work at this from a tiered perspective.
Yes, that's where my question is more from so much as shut them down or anything but find maybe one that's a little bit more efficient consolidate in there and the gain greater scale efficiencies and one in one area and.
And so forth.
It was more the question rather than.
Turning down or are consolidating from the as you said the more draconian perspective.
That's exactly what we're doing Tim.
Okay. Okay, great. Thank you gentlemen.
Thank you. Thank you.
And as a reminder, if you have a question. Please ask you to Q by pressing Star then one on your Touchtone phone.
Take our next question from Steve O'hara with Sidoti.
Hi, good morning.
Morning.
Hi, just question on the.
I guess the demographics.
Of the end markets and.
The job losses that have happened so far out there I mean, just talk about maybe which end markets you think are.
Yes, most susceptible to.
What's happened, thus far with those job losses, and may be which ones are more resilient.
And then.
Go from there. Thank you.
Steve This is Andy certainly we think the RV.
End market is ideally positioned.
Even with the job losses, and just simply based on price point.
I think that there's the the ability to flex up and down that scale and with the again the incentives that have been put out there today.
Stimulus packages to again equipment arm the consumer we think there they are less susceptible Scala if you will too.
A lot of volatility, we think there'll be some opportunity there on the RV side again simply based on price point, a marine as well probably a little bit higher price point. So I think there's probably a little bit more headwind on marine than there would be on RV simply based on that price point, but you offset that with again I think the the lifestyle and culture shift that may occur as a result of covenant.
Teen.
Boating activity has been very strong theres been a lot of boats on the water in the south.
During this timeframe and so again, we would tell you that there's there's little bit of optimism there as well, but just simply based on price, but we think our visa probably in a better position.
Okay. Thank you and then maybe just on the.
Commodity side and shipping I mean, it seems like Theres still lot of.
Disruption and shipping markets.
But things coming from China.
You just talked about maybe what percentage your.
Raw materials and things like that comes from China, and what you've seen on the shipping cost side and how thats maybe.
Central has a special flow through as well thanks.
Hey, Steve This is Josh.
Regarding Asia, and what we sourced from China, It's let Dave mid single digits of our total Cogs. So it's not in the whole scheme of things a significant amount of our input.
In addition to that.
It's a little bit higher on the distribution components. So we think about what we sourced from China, it's not a lot of raw material that goes into our manufacturing process.
It's more of finished goods on the distribution side and.
Part of it our quarter for our operating cash flow I talked about in our prepared remarks, we had ramped up inventory.
With co bid on the horizon call. It into January February timeframe that was.
At that point in time centered in Asia.
China, specifically and so we had built up inventories in preparation for the Chinese new year and is what we're seeing on the cobot side and so when you put that together what we're seeing it we're not experiencing any disruption coming from China. Today, We I would tell you we have excess inventory on hand that we plan to work through that'll be a source of cash over the next.
Three quarters.
And so where we sit today with like where a good spot from inventory levels.
Having little extra inventory to make sure that if there are disruption to the supply chain that we can manage at and then we're going to work through those inventory levels here over the next three quarters.
As a source of cash as we progressed through the year.
Okay, all right. Thank you very much.
Yep.
And our next question is from John Lovallo with Bank of America.
You guys. Thank you for squeezing me in here and I hope everybody is.
Of these states first question just housekeeping I think you guys mentioned that your expectation for wholesale for the full year is 20% to 25% decline did you give a retail.
Estimate as well that I missed.
We we thought retail could be bet, either at that are a little bit better than that.
Okay. That's helpful and then.
Maybe just to play Devil's advocate for one minute here, if we think about rvs and marine being fairly big ticket. I know you do you said that theres a range of prices, but fairly big ticket to 100% discretionary whereas manufactured housing is arguably.
More need base would you think that there's sorry.
Joel.
Is there an argument here that.
Perhaps 25% to 30% unemployment as many economists are saying you may have been outsized impact on kind of more discretionary product versus something that might be a little bit more new base just your thoughts would be helpful.
This is Andy I think it could.
From a big ticket item, though I would tell you that rvs I don't necessarily think that we will consider them big ticket I think you can find in RV for very reasonable price points.
Well below $10000 five to $10000 on the low end and so our view would be is that again from a lifestyle perspective, and with where the consumers at today I think is equal value proposition to consumers being able to get into the space.
And and enjoy that lifestyle, even under pandemic conditions like this so.
From a nice perspective, yet certainly the housing side in the MH proposition plays very well into it.
Being said, we'd also say the needs from.
Personal and spending quality time with families you now in the lifestyle component of it plays well for our views as well so.
If you just want to break it down between need versus discretionary yet MH place better, but overall, we think the price points now to very easily get into an RV is very compelling.
Makes sense and then if we think about.
Which again.
Which is considered essential activity during in many states kind of similar to single family housing or was it separated.
Yes, it was considered essential in many states.
Okay and then finally, just speaking about Capex, if we go back to the global financial crisis. In Capex is certainly a lot lower you guys, but arguably you're a different company today, what would you kind of stink.
Maintenance levels.
Thanks side.
Yes, Josh maintenance on an annual basis for us is going to be in that five to 8 million range.
On an annualized basis.
Got it thanks guys.
Thank you.
We have no further questions at this time.
Ill now turn the call back over Tunis, Julien Matelski for further remarks.
Thanks, Sonesta, we appreciate everyone for being on the call today and look forward to talking to you again in our second quarter 2020 conference call. A replay of today's call will be archived to Patrick website, Www Dot Patrick I, Indeed, dotcom under Investor Relations and.
I'll now turn the call back over to our operator.
Thank you ladies and gentlemen. This concludes today's teleconference. Thank you for participating and you may now disconnect.
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