Q1 2020 Earnings Call
Greetings and welcome to the site one landscape supplied first quarter 2020 earnings call.
At this time, all participants already in listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded I.
Now, let's turn the conference over to your host Mr. John Guthrie.
<unk>, Vice President and Chief Financial Officer. Please go ahead Sir.
Thank you and good morning, everyone.
We issued our first quarter 20, <unk> earnings press release this morning.
This slide presentation to the Investor relations portion of our website investors site, one dot com.
I'm joined today by Doug Black or Chairman and Chief Executive Officer, Scott Solomon Executive Vice President strategy and developing.
Before we begin I would like to remind everyone that today's press release slide presentation and the statements made during the call include forward looking statement within the meaning of the private Securities Litigation Reform Act Nike 95.
These statements are subject to the risks and uncertainties that could cause actual results could differ materially from our expectations improve Jackson.
Such risks and uncertainty include the factors set forth in the earnings release and into our filings with the Securities and Exchange Commission.
Additionally, during today's call, we will discuss non-GAAP major which we believe can be useful in evaluating our performance.
A reconciliation of these major can be found in our earnings release and into slide presentation.
I would now like to turn the call over two dozen black.
Good morning, and thank you for joining us today.
In light of the Gerber Nike impact, we're going to modify the format of this call versus our typical earnings call.
I will start with a review of how we've responded to go but 19 and discuss the initial impact we've seen on our business.
Well as our strategy for navigating through the year.
John Gottfried will then walk you through our first quarter financial results in more detail and provide additional information on our balance sheet and liquidity position.
Scott Solomon will discuss the new companies, we've added in the first quarter and how we plan to navigate the short term challenges from an acquisition standpoint.
And at the end of the call I will discuss some of the terms that we're seeing and our specific end markets and address our outlook before taking your questions.
Before I jump into our actions, let me first say that our thoughts and prayers go out to all of those who have been impacted by covered 90.
This is a terrible penned down it.
Unlike anything we've ever seen.
And in fact on people across the world and on our communities and economy had been unprecedented.
Given that we feel very fortunate to be here at site one.
We are financially strong industry leader.
And part of an industry that has been deemed central to the main its safety and welfare of our communities. During this pandemic.
Further I cannot tell you how proud I am or decide when team and our culture team or service and commitment to excellence.
And this time a crisis our team is shine.
And playing a real role and a continued safety and success of that there are lot associates.
Our customers our suppliers and our communities.
The team has adapted very quickly and clearly stepping up to the challenge.
And I believe we are having significant positive impact on all stakeholders. During this crisis.
I also believe that we will be a stronger team and business when we come through this challenging time.
I'll start on slide five to walk you through our actions to manage through the coated 19 challenges.
In the very early stages when Carbonite team is becoming an issue in China, our supply chain <unk> leveraged our national distribution Center network to proactively secure ample quantities.
<unk> sourced from overseas.
We also created heavy inventory position in general as we anticipated a very strong spring season.
Accordingly, we are in good shape on inventory would only minor product started is despite the disruptions in both the global and U.S. based supply.
At Kirby Nitin spread rapidly in the U.S., we quickly rallied our team around four fundamental near term objective.
First keep everyone safe and have grown a virus world.
This concludes obviously our own associates and their families, but also our customers our suppliers and our communities.
Second serving support our customers better than anyone else in industry.
Third manager business to the lower short term demand.
And for make sure that we're taking care of all of our associates along the way.
All four objectives are critically important in order to successfully manage through this crisis.
While protecting our culture and continuing to build our company for the future.
So let me describe the actions we are taking to accomplish these objectives.
The keep everyone safe and krona virus world.
Pivoted rapidly to implement all the CDC guidelines and preventative measure.
We have cancelled all large meeting event and most air travel.
We have educated our associates on the basic social distancing and hygiene measures.
And then executed these in our offices and branches.
We are leveraging our supply chain to ship and replenish supplies of disinfectant.
And sanitizer paper goods and paced governs to all our facility.
We have also modified our time off policies in order to accommodate associates, who are potentially exposed or high risk.
But these modified policies were being very aggressive about having a such should stay home if they have symptoms or potentially exposed until it is clear that they are not infected with the virus.
We have created a paid time off or Peasquito donation bank, which has allowed over 250 associates to donate over 6000 hours at Peasquito to support over 60 associates, who need P.T.O. could take care of their children at home due to the school closings.
This is site one kmart at its best.
We have stepped up our communication both through our associates through videos are internet.
And our HR services team.
And to our customers with Gregory coated 19 email and by providing information for them on site one dot com.
We have instructed our suppliers to not visit our branches.
But instead communicate with its virtually or by phone.
And finally, all our field support associates, who can work from home are doing so in order to reduce the corona virus risk.
And our field support offices.
In terms of branch operations, we quickly modified our branches in order to maintain the six foot social distance in standard.
In many cases this meant close in our showroom and or reorganizing the branch layout.
Thankfully, we had just rolled out our barcoding capability with our mobile probes scanners for the spring.
Which allows us to check out customers anywhere in the branch or yard.
This has been a terrific tool to help with social different thing.
We also have advertise their online solution and increased our training for customers on how to use side, one dot com, which has driven customers. Another avenue for ordering along with email or phone without coming into the branch.
Lastly, our teams are practicing good hygiene techniques at our locations to include constant cleaning of high touch on high traffic areas.
Today, all branches remain open and are providing excellent service and support to our customers.
While ensuring a safe environment for ourselves.
Customers and our suppliers.
In terms of demand our sales were very strong through the first two weeks of March.
I began to decelerate in the third week I went negative in the final week of March.
Curve at 19 spread and federal state and local safety measures and restrictions were put in place.
As I mentioned earlier, our customer services are deemed essential both nationally by the department of Homeland security and by most state and local authorities.
However, based on the severity of state and local safety measures and restrictions.
Certain aspects of our customer services have been prohibited in some markets.
As a result of these restrictions organic daily sales growth has been down approximately 11% in April.
In fact that trend has been very consistent from the last week of March through the first four weeks of April with organic daily sales down 10% to 15% in each week.
Furthermore, the restrictions very significantly by region.
With a corresponding variance in demand.
And the four regions from Texas across the south, including Florida and up through the Carolinas.
We have seen inorganic daily sales growth.
5% the 15%.
With strong markets and limited restrictions for landscape.
And a three most highly respected regions in the northeast an upper Midwest.
Sales in April was down 25% to 30%.
The three regions in the west and central planes are showing declines inorganic daily sales that range from 5% to 20%.
Accordingly, we have been aggressive, but very targeted and adjusting our business to the lower demand.
With the eight of the care that we've chosen to use furloughs in order to reduce our staffing in the heavily affected areas and then the associated field support teams.
In this way, we can take care of our associates by keeping them on our benefits.
Well, they collect unemployment and receive additional funds from the care Zack.
If demand returns assuming an eventual loosening removal of restrictions we can quickly bring our associates back to meet the additional demand and provider customers with outstanding service.
In addition to the staffing we reduced all other controllable expenses also tightened in capital spending.
Our team is season, and we have all been through downturns and so I've been very pleased with the quick action that we have taken to manage our expenses in a declining sales environment.
They're all these actions we are tightly managing our business.
And taking care of associated to include those who are on furlough.
We took proactive steps to enhance our cash position and increased our financial flexibility by borrowing approximately 100 million on our 375 million asset based lending facility.
We're not use these new funds.
Other than for seasonal investments in working capital.
We now have approximately 122 million a cash on hand, and approximately 47 man and available capacity under our ABL facility.
We also postponed to close independent acquisitions to further enhance our financial strength and flexibility.
When you're in a period of extreme uncertainty like we are today. It is not in the best interest of the buyer or seller and their associated to complete an acquisition.
Additionally, because our deals are primarily negotiated and based on long term relationships. There as a foundation of trust, which allows us to put things on home and wait for a better time to complete the deal.
Accordingly, our strategy is to wait until the future is more predictable and them resume our acquisition activity.
We expect this to be at the very earlier in the second half of 2020.
Despite the temporary pause we remain very committed to acquisition strategy as a critical mean to building our company for the long term.
To summarize I'm very proud of how our team has performed and this extraordinary environment.
To keep every Wednesday.
Server and support our customers manage our business to the lower near term demand and take care of each other along the way.
Given the difficulty in predicting the severity and duration of the cobot 19 impacts we are withdrawing our previously provided 2020 guidance.
However, as the leading distributor to an essential industry. We believe site one remains well positioned to support our customers and navigate this challenging period for the benefit of all stakeholders.
We are closely monitoring the trends and adjusting as necessary to perform in the short term, while continuing to build for the long term.
Now John will walk you through the first quarter in more detail.
John.
Thanks, Doug I'll begin with some highlights from our first quarter results on slide six and seven.
We reported a net sales increase of 10% to 460 million into first quarter.
During the quarter, we had 60 ports selling days, which was unchanged compared the prior year period.
Organic daily sales increased 5% in the quarter, we saw strong growth throughout the quarter until the end of Mark when the impact of the restrictions and safety measures, resulting from the cobot 19 pandemic started impacting sales.
Geographically nine out of 10 region had positive sales growth in the quarter.
Organic daily sales were landscaping products, which include irrigation.
There are three hardscape outdoor lighting and landscape accessories grew 9% during the quarter due to favorable weather and strong demand in our end markets.
We saw good growth in irrigation in lighting products, especially in western markets. It's contractors were able to complete projects, what drier weather than last year.
Organic daily sales were agronomic products were down 1% relative to prior year.
Due to a significant decline the sales of ice smoke and associated equipment, resulting from the warm winter in northern markets.
As Doug mentioned daily organic sales through the school April month to date are down approximately 11% with the greatest impact being in those markets with more restrictive shelter in place orders.
Prices were up 0.4% in the quarter compared to the same period in the prior year.
For 2020, we now expect limited price in placing a zero to 2%.
Acquisition sales, which reflect the sales attributable to acquisitions completed in both 2019 in 2020.
Contributed $21 million or 5% to the overall first quarter growth rate.
As a reminder, in order to maintain maximum financial strength and flexibility we have temporarily postponed all pending acquisition.
Gross profit increased 10% 243 million into first quarter gross margin decreased 10 basis points to 31.1%.
The slight decline in gross margin for the quarter reflects less benefit from opportunistic inventory by the head of price increases.
More specifically at the end of fiscal year 2018, we bought ahead of them relatively large price increases from our suppliers.
At the end of 2019 and during the first quarter, a 2020, those opportunities where much less prevalent.
Selling general and administrative expenses, whereas treating a increased 7% to 167 million in the first quarter.
S DNA as a percentage of net sales decreased 100 basis points to 36.3%.
Reduction in Sta as a percentage of net sales reflects operating leverage resulting from the combination of a solid organic sales growth combined with good expense management.
As Doug mentioned, we've taken steps to align our cost structure with our current sales volume.
We have put in place a hiring free cut back on overtime and temporary labor completed the planned consolidation of seven branch locations and furloughed employees in those markets with declining sales volume.
We also expect to see savings in advertising trade show in events travel and entertainment and other discretionary spend areas.
These intentional action to earn in addition to the natural leverage like incentive compensation credit card fees vehicle expense and fuel costs.
So some of these actions will continue for the full year, we're looking forward to ramping back up and bringing our associates that when the sales volume returns.
And the first quarter 2020.
We recorded an income tax benefit of 13.5 million compared to a benefit of 9.6 million in the prior year period.
The change in income tax benefit was due primarily to an increase in the amount of excess tax benefits associated with stock based compensation.
We recorded a net loss for the first quarter of 17.5 million compared to a net loss of 24.1 million during the prior year period.
The improvement was primarily attributable to a solid sales growth and the increased income tax benefit.
Our weighted average diluted share count was 41.8 million for the first quarter compared to 41 million a year ago.
Adjusted EBITDA for the quarter improved by 39% to a loss of 3.6 million compared to a loss of 5.9 million for the same period in the prior year.
You improvement reflects our solid topline growth and SGN a leverage.
Now I'd like to provide a brief update on our balance sheet and cash flow statement as shown on slide eight.
Net working capital at the ended the quarter with $521 billion compared to 483 million at the ended the first quarter 2019.
The increase is primarily attributable to increased inventory levels to support a spring selling season, and the working capital added with new acquisition.
Cash used in operations increased to 66 million compared to 49 million in the prior year period.
The increase was primarily attributable to the working capital build in preparation for spring selling season.
As a reminder, due to the seasonality of our business. We typically have negative cash flow from operations in the first quarter and positive cash flow from operations into second third and fourth quarters.
In addition, we are adjusting inventory levels to reflect our revised sales expectations.
We made cash investments a 51 million during the quarter compared to 19 million for the same quarter last year.
The increase in cash investments reflects increased acquisition activity in the first quarter 2020 compared to the first quarter of 2019.
Net debt at the ended the quarter was 650 million compared to 627 million at the ended the first quarter last year.
Leverage decreased to 3.2 times are trailing 12 months adjusted EBITDA compared to 3.6 times at the end of the first quarter 2019.
Lower leverage primarily reflects our improved profitability as a reminder.
We have no debt maturities until 2024.
As Doug previously mentioned on April 1st we proactively took steps to enhance our cash position and increase our financial flexibility by borrowing approximately 100 million under our ABL facility.
We believe that this major combined with the action, we've taken to reduce our operating expenses and most phone capital expenditures, including acquisition gives us liquidity and financial strength to manage through these challenging time.
As of April 27, we had liquidity of approximately $169 million made up of approximately 122 million of cash on hand, and 47 million in available capacity under our ABL facility.
6 million dollar increase since we borrowed on April 1st.
In summary, our priority from a balance sheet perspective to maximize our financial strength and flexibility. During this uncertain time without sacrificing long term growth or market opportunity.
I'll now turn the call over to Scott for an update on our 2020 acquisition strategy.
Thanks, John.
I've mentioned earlier, we've taken the prudent steps to reduce our near term capital spending by postponing our pending acquisitions.
As the Cobot 19 situation unfolded, we were very open and transparent with the owners of each company with which we were in various stages of due diligence or negotiation.
Like us they are focused intently on maintaining the health and safety of their associates customers and their businesses. During this extraordinary time.
Accordingly, they understand the risks and potential negative of closing an acquisition now.
They also understand our strong desire to eventually joined forces with them and our steadfast commitment to M&A as an important way to build our company.
We continue to have a deep pipeline of potential acquisitions, and we'll monitor the situation closely so that we are ready to reengage when the market stabilize.
With that said, we were pleased to bring for companies into the site one family during the first quarter of 2020 as shown on slide nine.
Now if you turn to slide 10 to 13, you will find information on our for most recent acquisitions.
On January 2nd we acquired Witkoff landscape supplies, which serves the greater Spokane, Washington market.
On two locations focused on the distribution of Hardscape and landscaping products to landscape professionals.
The addition of Witkoff completes our full product offering in the region and provides cross selling opportunities and purchasing synergies.
On January 7th we acquired Empire supplies, which serves the greater Newark Union Metro area of New Jersey from three Hardscapes and landscaping product locations.
This acquisition establishes a leading partly platform for site one in northern New Jersey.
On January 14th we acquired the Garden Department.
Which serves the long island market.
Relocations focused on the distribution of nursery and landscaping products to landscape professionals.
This acquisition further expands our leading nursery presence on long island and Fortifies, our full product line offering in the market.
And finally on March six we acquired Big Rock natural stone in Hardscape, which serves the greater Greenville, South Carolina market with a single location focused on the distribution of Hardscape and landscape supplies.
The Big Rock acquisition built in important gap in our Hardscapes coverage completing our full product line operating in the Greenville Spartanburg market.
Given the positive acquisition activity our development team is taking the opportunity to do a thorough review of our acquisition integration processes.
The goal of this effort is to confirm what is working well and identify opportunities for improvement from early negotiation through three years post acquisition.
We're excited to have this unique opportunity to focus on fully capturing lessons learned and fine tuning our approach for the future.
We look forward to creating even more value through our acquisition growth in performance in the coming years.
I will now turn the call back to Doug.
Thanks Scott.
I'll wrap up on slide 14.
As I mentioned earlier, given the severity of cobot 19, and the uncertainty that it has created.
We are withdrawing our previously provided adjusted EBITDA guidance for 2020.
We cannot predict how long this pandemic last nor the timing and degree of any demand recovery.
However, we will continue to take strong action to achieve the best possible result.
Our stakeholders.
First and foremost we will continue to ensure the safety of our associates customers suppliers and communities as we operate in a corona buyers environment.
As our country works to overcome this pandemic.
We believe that our ability and the ability of our customers and suppliers to operate safely will be critical to successfully beating cobot 19, even a state and local governments opened the economy.
Fortunately our customers work outdoors and can work safely in all aspects of their business and the krona bars environment. My following the CDC guidelines.
As a leader in the landscaping industry site, one can be a positive force and achieving a safe transition over the coming months.
In terms of demand outlook, let me first address the impact of coded 19 safety measures and restriction.
It is very clear that a significant portion of the recent drop in demand is directly related to the severity of state and local safety measures and restrictions.
For example in the upper Midwest, we have to contiguous areas.
One that include Indiana, Kentucky, and southwest, Ohio.
And the other area that includes northeast, Ohio, an entire state of Michigan.
Our business in Indiana, Kentucky, Southwest, Ohio is down 1% in April.
And our business in Michigan, and northeast, Ohio is down 52% in April.
Which is directly related to the tied to restrictions that applied across the state of Michigan.
Fortunately on Friday of last week, the Governor of Michigan announced that landscape in would be allowed to resume.
So we're confident that we will see a significant positive impact in that important state.
We are encouraged that other state and local government leaders with very tight safety measures and restrictions are also considering some loosening of restrictions in may.
And we believe its state and local restrictions can safely be reduced or lifted our event daily sales will start to recover.
Assuming that restrictions are loosened or removed in may and June.
We would expect our maintenance end markets, which represent 42% of our business to remain steady.
For the residential construction end markets, which comprises 26% of our business.
We are hearing that builders are seeing a sharp near term decrease in home sales.
Which will eventually translate and declining demand for landscaping in this market.
Even if homesales recover later this summer we would expect demand from the residential construction end market to be down for the year.
For the commercial construction end markets, comprising 15% of our business.
We would expect demand to continue to be solid as our customer backlogs are still full.
And while we have seen project postponed we've not seen many commercial projects canceled.
Finally, we would expect the repair and remodel end market to be dampened somewhat.
Based on the near term unemployment and its impact on consumer sentiment and spending.
Given all of these factors, we expect our sales trend to improve somewhat in may from the levels. We are seeing now.
And then recover further during the remainder of the year.
Against this backdrop, we will continue to operate across our network to serve our customers safely.
While carefully managing staff and expenses and tightly controlling capital expenditures.
We will also wait until we can more clearly see the post pandemic market trends in the second half.
And then carefully and selectively resume our growth through acquisitions.
We believe that all of these actions will ensure that we successfully manage our business through this crisis and preserve our liquidity throughout the year.
Lastly, we will continue to make progress on our initiatives to include the assimilation of mobile pro.
The rollout of side, one dot com and the rollout of our transportation management system or Tms.
We will also continue to achieve ongoing improvements in our Salesforce performance.
Operational excellence.
And our marketing under our new Chief Marketing Officer.
Finally, as Scott mentioned, we will be fine tuning our acquisition and Onboarding processes.
During this temporary pause in an acquisition activity.
We see this challenging time as an opportunity to make good progress on our initiatives, while further strengthening our commercial and operational capabilities for the future.
In closing I would like to sincerely. Thank all of our site one associates, who continue to create significant value for our customers and suppliers during such a challenging period.
We have a tremendous team and it is an honor to be joining with them as we overcome adversity and deliver value for all of our stakeholders.
Operator, please open the line for questions.
Thank you at this time will be conducting a question and answer session. If you like to ask a question. Please press star one on your telephone keypad, a confirmation turn will indicate your line is in the question Q you May press star to if you'd like to remove your question from the Q.
As a reminder, please limit to one question and one follow up question, then rejoin the queue for any additional questions.
Participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys, one moment. Please a while we poll for questions.
Your first question comes from line of Ryan Merkel with William Blair. Please proceed with your question.
Hey, Thanks, good morning, everyone nice quarter and help everyone staying safe.
Good morning. Thanks.
So first off on organic sales staying consistent through April as it that's a bit better than I expected.
I know you hit on the geography, but what do you think is driving this consistency and then you mentioned that commercial projects really haven't seen delays or cancellations why do you think that is.
Yeah. So the consistency it really is driven by the restrictions you know I think the restrictions were put in place.
And in late March and kind of evolved through April.
And you know the drop off happened then and since then the restrictions really haven't moved in so the demand is kinda, let's call it stuff, where it where it is.
We're seeing those being lifted we mentioned in Michigan and you've got lifted on Friday.
And Fortunately as those get lifted you can see the demand come back. So so we really feel like that the overall trend right now in sales is really being driven by the safety measures and restrictions, which we certainly understand those.
And we believe as those are lifted.
Yes, I'll come back of sales.
Accordingly, so that's what's really really driving a consistency in terms of the commercial market.
You know we haven't seen any cancellations, we have seen jobs pushed obviously during this this very extraordinary time and with restrictions jobs have gotten pushed.
But but we haven't seen a lot of cancellations that that's not to say they won't come back.
But we haven't seen it and our project services group that.
That bids on projects for our contracted it et cetera, they sell a drop off and projects that they were bidding on but they've seen that come back a bit. So so we do feel like the commercial market.
Is still solid the projects are still there.
In those areas that don't have restrictions were seeing commercial continued to be strong. So so we feel like.
Those projects are.
Are underway remember, we lag significantly in commercial.
So projects are long and we're at the back end of that so I think.
Folks doing commercial projects one of finished the projects they started and there's still us sectors in the economy that there are healthy enough to go ahead and complete projects.
Got it Okay Thats encouraging and then my second question is on M&A and you mentioned you could see you could see a pickup in M&A, maybe second half 2020, that's maybe a little earlier than I was thinking and so I'm curious in uncertain times like this don't sellers sort of pull back for a.
While you ought to wait for EBITDA to expand and higher prices or are you getting indications that hey, as soon as things sort of stabilize will come at the table and sell just just flush that out a little bit more.
Yeah, I'll address the kind of strategy in analog Scott talked on the specific dynamics with sellers.
We we stated specifically at the earliest than the second half. So we don't know how long this period them uncertainty is going to last and again it could last a lot longer.
Or could be could be short so at the earliest its second half.
Really the marker there is when we can see what's what's really driving demand other than these restrictions and we get comfortable that that's one that's when we'd be comfortable with okay. Now we know where we are we kind of have some normal view of where we're going in the future that views, obviously never perfect, but let's call it normal.
Normal uncertainty and that's when we can pick back up discussions where sellers.
And it works both ways they want it they want some you know surety the future too when they're they're selling the company and we want security when we're buying so so that's really the marker.
Again, I don't want to imply that we'd have a crystal ball and can be very specific we just we know it won't happen over the next couple of months there'll be.
At the earliest sometime in the fall perhaps winter.
When that kind of.
Clearer view is is there Scott you might want to talk about just the dynamic yeah hours.
In terms of the conversations we've had with folks that were already in negotiation and or had handshakes with.
Those folks I think still remain.
Committed to selling their business other folks it just depends on on how they have perceived.
How they proceed what's going to happen in the future I believe that we'll continue to have conversations with these folks perspective.
Sellers and many of them are still talking about being ready to sell when the economy stabilized. So I think it's just going to be a matter of case by case basis like it always is depending on where they are in their decision making process. Yeah. Remember just remind you, though we buy very well run company, if we buy the top companies in the market. So.
We're not buying companies that would would be desperate and these these type of times or or fixer uppers right. So that the companies. We we buy tend to have strong teams and they're going to weather. The storm you know as well as we are and so.
We wouldn't expect to pick up deals you know kind of out of desperation, just all what's the right time and these uncertain times or not I'm not the right time to do a deal.
Make sense very helpful I'll pass it on.
Great. Thanks.
Your next question comes from wind as David Manthey would bear Baird. Please proceed with your question.
Hey, good morning, everyone.
First off.
Interested in the divergence by geography.
Doug when you talk about restrictions are those restriction specifically on landscaping slash construction activities of your customers in those areas, where you where you saw them.
Well yeah. The restrictions the you know, we're a central as a provider everywhere.
But the restrictions really are on our customers and you know it varies and some tighter areas they've they've.
There are not allowing any type of construction right, which includes landscape installation.
In some places, they're not even allowing landscape maintenance as very few by the way, but at some some are not allowing some of that so it really varies by by state and local county quite frankly.
But did restrictions are on what our customers can do and.
And most age.
[noise] lot and federally and in most states and local.
Your addictions landscaping is deemed as essential so landscaping services can be perform.
But even in some of those areas it they might allow the maintenance of the landscaping, but they but new installations like with hardscapes or nursery et cetera. They wouldn't allow so those are the variance of restrictions and and they're definitely on what our customers can do not not on what we can do.
Yeah, Yeah. So your locations were open I.
But you're saying that the restriction where they were the most strict they were on specifically landscaping activities and therefore that hurt your business and then as they ease up into construction and get even last there was less of an impact on your business I'm also curious about.
The South you mentioned you saw some really strong growth there I understand the weather was was good but that's got to be encouraging for you that in areas, where there aren't restrictions that you're seeing much stronger levels of customer activity can you expand on that a little bit.
Well, yeah I mean, we are encouraged there you know in those areas.
The state and local jurisdictions have followed basically the homeland security guidelines, which landscaping is essential for safety and maintenance and you can do landscaping and so the customers are hard at work the markets are our strong the demand is there.
And so we're seeing good activity.
One thing I would remind you though [noise].
In those areas is that.
You know a portion of that work is a is residential new build and as we mentioned new home sales falling off.
But we're still busy completed the homes that were already sold are already.
Started and so I wouldn't say, we we need to be careful when we look into the second half.
Because in those in those aggressive builder markets, especially in the South we do expect that demand a drop.
Third quarter, and then who knows how how long that will be if people start to resume buying homes in July and then maybe that's a short short a period of time et cetera. So.
Yes. The strong yes, we are encouraged by that but we also can't be too confident as we look into the second half a stronger sales comps and especially with builders.
Having home sales drop is going to be a negative for our demand in those markets.
The second half.
Got it thanks, a lot I appreciate it.
Thank you.
Your next question comes from line of Stephen Volkmann with Jefferies. Please proceed with your question.
Hi, Good morning, guys. My question is kind of on the cost side of the equation and I guess I'm trying to I know you mentioned sort of a laundry list John Oh things that you guys were doing.
To match the cost side.
And so I guess I'm, just trying to figure out how to think about decremental margins weakness in sort of make a conclusions I guess about the topline, but how do we think about sort of gross margin and SJ performance you know through this period of Imagitas gross.
Yeah, that's it thanks.
Yes, Oh, obviously, we're taking it we're taking a actions to get our cost to mine.
About approximately 65% or a cost is labor cost and there is a component of that that is related to kind of incentive. So so that that that those away, but it's in general our strategy is to manage the the.
The.
Our labor to the volume I mean, you know the first step is really kind of I would say hunkering down overtime temporary labor.
Managing hours of operations to do that incentive comp already automatically so it's coming down.
And then and then you know.
As necessary.
No things like the words very drastic now in very targeted markets.
We we would we would actually have to do for it looks like we are currently so so that's the strategy and then with regards to it you know over the course of it I think you're going to see kind of Oh, I would say ballpark range of 60 40.
Type of number with regards to to the variable versus fixed.
Over the over the range that we're talking about with regards to.
Variance on on on sale.
Okay. All right. That's helpful. And then how do I think about you know the sector you laid in a little extra inventory here I don't know stake gave you any better pricing or rebates or anything like that I mean is there anything to think about relative to sort of gross margin.
Because of that.
I would say gross margin I think I could think that really the story on gross margin is gonna be what happens in the second half of the year with regards to sales volume or are there is there's probably two components.
We could receive some pressure on on onset pricing and selling margin if if if volumes came down and similarly.
We have some incentive structures with with with manufacturers and we'll have to see with regards to though where those coming.
I think in general that'll be relatively small, but but could come under some pressure in the second half depending upon how volumes go with regards to gross margin also.
Okay, Great and then maybe just a quick one for Scott once we do start acquisition activities again do we make up for last time or do we just sort of go back to the cadence that we were running at before.
I would expect probably not to make up for last time, but probably to rich step back into the cadence.
I'll start off more cautiously and selectively.
And then as we gain more confidence and sellers gain more confidence as well then than I would expect it to ramp up but I wouldn't expect that sort of make up for lost ground.
Got it. Thank you so much appreciate it.
Your next question comes from line of Damian Crafts with yes. Please proceed with your question.
Hi, good morning, everyone.
Good morning.
So I appreciate all the color you've been able to provide on.
The variance and demand that you're seeing.
Across different markets because of the restrictions.
I was wondering if you could maybe.
Give us some numbers probably around that so.
Seeking alpha test the 11% decline run rate that you're seeing right now or how does that sort of break out between the you know that the buckets of stuff maintenance versus the construction.
And I'd be particularly curious on yeah. The regions, where you are seeing a steeper declines the restrictions like in the northeast didn't upper Midwest, where I think you said they were down 25%.
How do those those two yeah, there's pockets breakout.
Yes, that's a great question, we've actually seen a pretty uniform.
Effect or on the on the on the sector the different product lines that we provide.
From the landscaping products to the maintenance products and so it's been pretty broad and it's been pretty even because the restrictions tend to affect kind of everybody and it affects.
All all parts of our business.
And so that's what we've seen so far.
We'll see as things are as our as things are loosened up how that affects different product lines.
In general we still expect the you know I understand that the maintenance product line is the steady steady as you go.
Product line and then you know the bigger variants tends to happen to the at the landscape in products.
But I'd say is it the effects, specifically or a pretty broad and pretty uniform across the product lines.
So far what we've seen both both going down and coming back John Yeah. I would you said you know what we're seeing when we talk about maintenance is being steady and steadier versus you know.
Construction, that's kind of driven by the economy in the market. When you have a shut down like this is it's going across all product line and so if you were to look at what you were to look at in those markets.
Let's say northern markets. They would there there it's uniformly hitting their maintenance business defending their their construction business, both and so and those and practically also those are also some large maintenance markets.
So we're seeing a right now because we don't it's not economic driven drop drop uniformly across every every product line in April.
Okay. That's helpful.
And then on the inventory situation.
Sounds like you guys are ahead of the curve and you bought for that to spring season, which seems like it was a prudent decision, but just thinking about should some of these restrictions persist which in some regions. It seems like that's that's likely.
Yeah.
Based on what you're seeing today DTN are there.
Any shortages in supply that you're potentially foreseeing going forward.
You know we are our supply chain team is one of our strengths and having our DC is to be able to manage our inventory is a has a great great asset for us.
We're seeing little little small level charters here and there on on niche products, where you where you have substitutes. So really overall no material issues I mean really don't anticipate that what were you know in full communication constantly with our suppliers where they've had.
Issues, we've we've kept our stocks high where we know our suppliers are solid.
We appropriately lower arrays are our inventories to to meet demand. So so far we haven't had any issues and early on in this we didn't know if we would have issues say later in the summer, but with things opening up again overseas and with what we see in our supplier.
As we don't anticipate having any inventory issues.
You know through the year at this point.
Okay. That's great. Thanks, guys. Good bye.
Thank you. Thank you.
Your next question comes from line of Mike Dahl with RBC. Please proceed with your question.
[laughter].
It's actually Chris on for Mike. Thanks for taking my questions, maybe just asking the the trends by end market question, a different way in a given maintenance tends to be more defensive category.
Do you guys have any.
Numbers or quantification you provide on on that how that categories trended in April and may be some of your less impacted markets like Texas, and Florida or how that split looks like cross your end markets just trying to get a sense of the core demand change horses sito.
The impact of regulatory framework.
The if you were to look at a the maintenance you would see and those markets that are not impacted that the maintenance business is doing significantly better than the 11%.
That we're seeing in and across the company.
Yes, normally we would expect maintenance to be a a low single digit.
Performer.
And we're not seeing anything different from that trend in those markets that are less.
Yes affected.
Okay. That's helpful. Thanks, and then just for my second question I mean, you guys spoke to delays in the commercial pipeline.
Any chance to provide some quantification around that I mean, how much of the pipeline you've seen.
Well it yeah that wouldn't that would help.
Yeah, I know, we wouldn't be that be able to get that granular. We just we're just working off of kind of general obviously, there's a lot of complexities in the market.
But in talking to our customers and looking at the what we're doing with our with our own bidding and quoting we feel we feel fairly fairly good about the commercial.
No but.
We wouldn't be able to wrap any specific numbers around that at this point, possibly later in the summer as things evolve from from Covance.
Okay, No that's understandable thanks.
Thank you.
Your next question comes from minus Matthew Bouley with Barclays. Please proceed with your question.
Hi, Good morning, this actually I'm actually can Uh huh.
So the first we wanted to ask with Bonnie credit our customer credit and receivables on what are you kind of seeing and expecting in terms of customer credit worthiness.
Yes.
Well, we obviously there are some customers who were impacted and you know in our businesses to work with those customers a a customer relationships are very important to us.
Having said that we've been pleased by performance. So far this year with regards to 'em credit quality I think it it.
Reflects the fact.
That overall, there's markets that are doing well I'm right now and those those customers haven't been quite as impacted and even if even into kind of would say even in the markets that have been most impacted they really haven't even gotten to start their season. So if you were to look at you know.
As a Michigan or New York Metro area.
You know the kinda cobot came in before before I really the spring season.
Uh huh.
Could kick off so they they've they've really been shut down in a lot of cases with regard to that but so so far something we monitor closely we know there will be on challenges for some customers and we'll work with them.
But I would say on our credit performance. So far has been a has been reasonable I.
I would also had a that our customers are taking advantage of the payroll protection program.
And that's been a that's been a indirectly that's that's that's helped US obviously on a receivable side because you know they've they've used those forgivable loans to help them to continue to operate.
In this challenging time, so that's been a good program for our customers.
To take advantage of.
Great. That's helpful and that's my second question somebody thinks about when M&A will pick back up can comment on any thoughts you have around resulting cellulose valuation multiples and recessionary environment. Thank you.
Yeah, I mean as far as when it when it comes back you know, we're just going to need to see Smith increased clarity on that.
Stability in the economy and clarity on end market I don't necessarily foresee a.
Any of our I can't foretell any specific change to it to multiples are valuations I think you know both the buyer in the seller have to come to the same conclusion at the end of the day as to what we're paying for forward earnings. So both sides have to kind of get to an agreement on that in any case, so I can't foresee any specific underlying change.
Got it thank you very much.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad as a reminder, if you'd like to ask question. Please press star one on the telephone keypad. One moment. Please all we pulled from more questions.
Your next question comes from line of Alex Moroshka with Berenberg. Please proceed with your question.
Hi, good morning, and thanks for taking my questions are you guys seeing any shifts in residential maintenance away from your customers and towards homeowners given the increase time at home and then similarly, how are you thinking about the maintenance end market for the impending recession in both resi and commercial.
Yeah for the first one not materially I mean, you know.
Folks that.
Our staying home.
Our involved in lots of activities and anecdotally that might be happening here in there, but but by and large you know as our customers are still busy and and they've they've had very few cancellations or their services.
On the residential.
Maintenance the side.
In terms of.
Can you can you repeat the second part your question.
Yeah, just the second one is on during the during recessionary periods, how does the the shift change at all between residential and commercial for the it for the maintenance end market.
Right around maintenance is pretty steady both in residential and commercial right. So you know in the last downturn for instance.
When the market you know new construction dropped 50%.
We saw maintenance was off you know.
The 8%. So you know you will see some.
Impact and I think John you might want to comment that drop off was pretty uniform across residential and commercial right.
Yeah, I think in general you would expect commercial you really don't have a choice. So it so it's probably a little bit more stable, but but I would say you know you're talking.
Pretty minor variation between the do right. So and most downturns you know maintenance is going to hold out.
In both sectors.
And that's what we're seeing today quite frankly as maintenance is holding up well in both commercial and residential.
Okay Gotcha and then the second question is on the material cost side of things. So the company is obviously a much bigger player today than it was back in 2008 and I feel it would give you some procurement benefits leading into next year given your volumes. So is this a possibility and what products could see the biggest cost benefits.
Oh, I I think.
I don't know theres going to be a huge impact on on on cost benefits with regards to that I mean, I think we have long term relationship with their supplier and we work with each other on both the up and the down and so kind of that model, while we want to take advantage of.
Our size, but I think we'd need to be cognizant, Oh, we have very long term relationships with our suppliers and we work together one volumes come down and also volumes come up so I I well well there may be here, there and the opportunity I think just as a strategy.
The its a long term relationship from that standpoint.
And we we work at all times with our suppliers to make sure we get the best cost in the industry and new and that way, we do leverage our size.
Constantly but like like John says that doesn't get better or worse than we continue to do that and the good times and the and the tougher times.
Okay, Gotcha, and if I guess just sneak one more in there can you talk a bit about how you're revamped E. Com platform is benefited year since the shutdown started.
Right now it's been a it's been a great tool we.
Seeing some acceleration in our a yard tickets are up significantly in April versus last year.
And we're doing a lot of training with our customers. So you know when they're starting to hit.
You know it was actually great advertising for online tools that we are we are doing our best to take advantage of that and advertise that isn't much safer way.
To interact with us.
Customer typically comes in the branch and.
You know it looks around the branch and gets their their goods and then checks out a it's much better for them in us now that were restricted at the branches somewhat.
In terms of you know where they can go and interactions.
To put that order in online so that we can pull it together form that can drive up in their truck American letter load them without them, even having to get out of the truck if if they want.
And I would say haven't our Barcoding mobile pro scanners also allows us to do that you know out in the yard or or outside of the but the brand showroom.
So both site when dot com and mobile pro have given us a important flexibility.
And and we were taking advantage of that obviously in this crisis.
And we're trying to younger training our customers to take advantage of that.
Eminent we hope those habit sick once this crisis goes away, we hope those habits stay and they have a you know new permanent users of thought when dotcom.
Alright, great. Thanks for the answers will stay safe.
Thank you.
Ladies and gentlemen, we have reached the end of the question answer session.
And I'd like to turn the call back to Mr., Doug Black for closing remarks.
Okay, well thank you.
For joining us today very much appreciate your interest in sight one.
I'd like to repeat our thoughts and prayers go out to all the Earth had been impacted by covert 19, and I'd like to take the opportunity once again to thank gosh I went associates for van such a terrific team. During these is tough period and helping us get through.
In a in great.
In great shape and great style.
So thank you and we'll talk to you again after the second quarter.
This concludes today's conference you may disconnect your lines at the time. Thank you for your participation.
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