Q2 2020 Earnings Call
[music].
Ladies and gentlemen, thank you for standing by welcome to Central Garden, and Pet second quarter fiscal 2020 financial results Conference call. My name is done and then I will be your conference operator for today at this time all participants are in a listen only mode. Later, we will conduct a question and answer session.
Okay, well be given at that time, if anyone should require operator assistance during the call. Please press the star followed by the zero on your Touchtone phone as a reminder, this conference is being recorded I would now like start turn the call over to Howard Machek. Please go ahead.
Thank you good afternoon, everyone. Thank you for joining us with me on the call today, our Timco for Central's Chief Executive Officer, Niko Lahanas, Chief Financial Officer, J.D. Walker, President Garden branded business and John Hanson President.
Consumer products.
A press release, providing results for our second quarter ended March 28, 2020 is available on our website at www Dot central Dot com.
It contains the GAAP to non-GAAP reconciliation for the non-GAAP measures discussed on this call.
Before I turn the call over to Tim I would like to remind you that statements made during this conference call, which are not historical facts, including the potential impact of cobot 19 on our business.
Expectations for new product introductions long term organic growth goals future acquisitions future revenue margin expansion cost savings and profitability are forward looking statements subject to risks and in certain uncertainties that could cause actual results to differ.
Materially from those implied by forward looking statements.
These risks and others are described in Centrals Securities and Exchange Commission filings, including our annual report on form 10-K filed on November 27th 2019.
Central undertakes no obligation to publicly update these forward looking statements to reflect new information subsequent events or otherwise.
Now I will turn the call over to our CEO Tim Cofer.
Tim.
Thanks Howard.
Good afternoon, everyone and thank you for joining our Q2 earnings call.
I first want to extend my best wishes to all of you and your families.
The Cobot 19 global Health crisis has been a turbulent time for us all.
Our Hearts go out to those who have been affected personally and professionally by this pandemic.
I'd like to start with some personal observations and an overview of how our teams have been working to take care of our employees customers and consumers during the cobot 19 crisis.
Then I'll provide some insight into our performance for the quarter.
Over the last few months I've been humbled by all that our employees have done to prioritize the health and safety.
Fellow team members well collaborating across the enterprise to ensure our business operates a seamlessly as possible.
Because central is considered and a central business in most jurisdictions almost all of our employees continue to work to meet a central needs whether they are on the production floor in stores or at home.
To everyone in our organization.
I want to express my sincere gratitude for your efforts and your commitment.
I, especially want to recognize our employees working in manufacturing logistics and merchandising roles.
You would have been on the front line at this crisis every day and you continue to do your jobs with courage and integrity.
Thank you.
The safety and well being of our employees is paramount and the Corona virus pandemic has our leadership teams full attention.
To address the needs of our business early in the quarter, we mobilized to cross functional task force to focus on timely critical issues related to coal bid 19 developments.
Given the realities of the current environment. Our teams have worked hard to do the following one ensure constant communication and regularly share pertinent information around health safety and benefits.
To procure necessary personal protection equipment and sanitation supplies for those working in manufacturing logistics and merchandising roles.
Three enhance safety procedures, including investing in regular deep cleanings staggering ships and implementing social distancing across her facilities.
For enable a large number of employees to work from home seamlessly and securely in accordance with shelter in place orders, while continuing to handle order management customer service accounting and finance and sales.
Our IP team has done stellar work to support this effort.
And five to adhere to all local state and federal requirements.
With more than 100 sites and approximately 6000 employees. We've been fortunate to have only a very small proportion of employees test positive for the virus and in each case, we work to ensure they received the care they need as they recover.
Our thoughts are with those who are still battling the virus.
Now turning to Q2 results.
We've been in constant communication with her customers and suppliers collaborating to meet consumer needs.
As you saw in our press release overall sales growth in the quarter was 4.4% versus prior year.
Our sales growth was driven by a recent arden and CNS acquisitions.
Organic sales were also up 0.5%.
And grew almost 2% versus prior year when you exclude the dilutive impact of last year's strategic exit of the fashion oriented pottery product line.
In our pet segment organic sales were up 4% Wild garden organic sales were down 3%.
Excluding the impact of the fashion oriented pottery exit garden was roughly flat versus prior year.
Pets gains were driven by consumables and pet distribution.
We saw a notable surge in the last few weeks of March due to consumer stocking up on products as the cold it impact became more apparent.
Demand in edibles small animal supplies and animal health more than offset continued headwinds in live fish and pet bedding.
Garden was impacted by last year's pottery lined exit as well as a soft start to our grass seed season.
These headwinds were partially offset by growth in our garden distribution business Wild bird feed and live plant product lines.
All in for E. P. S. We delivered 78 cents up five cents compared to 73 cents in the second quarter of 29 team.
We're pleased with our EPS growth versus prior year.
Especially given the Kobin 19 impact in the latter part of the quarter.
And while the unfavorable impact of cold in 19 began to manifest in portions of our portfolio in March we expect that most of the impact on our financial results will be in our third and fourth quarter's.
Obviously, given the unprecedented and rapidly evolving situation. It is impossible for us to predict the effects, we will see in that timeframe.
That said.
Let me give you some color around what we saw in March and April across our categories. As this crisis impacted both consumer and customer behavior.
What we're dealing with today is unlike any other recessionary environment, we've seen in the past and central is seeing varying impacts to the garden and pet businesses due to cold in 19.
On the Petside, our business was tracking according to plan in January and February.
In March we saw an increase in consumer spending a shelter in place mandates were rolled out.
This was most pronounced in our E Commerce channel, where we have seen dramatic spikes, especially in pet consumables.
Another favorable impact to our pet business has been the record level of dog and cat adoptions from shelters.
Pet ownership is clearly increasing as people plan to spend more time at home and seek the joy and comfort of their companion animals.
This bodes well for the longer term sales of pet habitats supplies and consumables.
Offsetting these favorable impacts we've seen a slowdown in specialty Pat brick and mortar retailers.
In addition, many pet retailers have temporarily discontinued their order patterns for small animals pet birds and fish. This negatively impacted our live animal business in March and April.
Now shifting to guard, our Q2 consumption metrics were solid and we were pleased with momentum we saw in the category.
The core garden business finished the quarter roughly in line with prior year.
We saw consumption drop in late March and April due to in store curtailments of foot traffic and limited access to outdoor garden departments, which are impacting some of our garden product lines, particularly our bell nursery life plant business.
Yes.
I also want to note that Kobin 19 crisis is coinciding with the peak garden season, which typically takes place from mid March through June.
We are encouraged to see like plant department slowly reopen but our business is feeling the effects of the pandemic. During this important time of the year.
So as you can see across our portfolio, there's an evolving mixture of cove it impacts on our consumers and customers.
Thankfully one of the benefits of having the portfolio like ours is there are some tailwinds to help at least partially offset the headwinds of the pandemic.
Further I firmly believe garden and pet our industries that we'll continue to thrive in the medium and long term.
However, there is obviously unprecedented uncertainty in the near term.
Given the lack of visibility and the pace of change we do not think attempting to give financial guidance is prudent at this time.
Accordingly, like many companies, we are temporarily suspending providing guidance for fiscal twentytwenty until the cobot 19 situation in the U.S. stabilizes.
We will provide updates when appropriate and we'll revisit the guidance question at the end of the third quarter.
As we continue to navigate the daily realities of Kobin 19, I want to assure you, we're not losing sight of our future.
While in the near term, we have redirected most of our resources to our business continuity efforts and the ongoing health and safety of our employees.
Portion of our time has remained focused on are key longer term enterprise strategic priorities, which as I shared last quarter, we've labeled vision 2025.
Addressing the needs of the pandemic has only reinforced the importance of evolving central's business.
It's more important than ever for us to continue to build core capabilities, including E Commerce digital marketing and innovation.
Invests in organic growth.
And pursue strategic and opportunistic M&A that create further value for shareholders.
We look forward to a time in the future when we can define our new normal post coven, 19, and refocus our energy and resources on growth and building out our long term strategy.
In closing I could not be more proud of the team here at central.
And how they are persevering and supporting each other through this challenging time.
If further bolsters my strong confidence in the resiliency and long term potential of this great company.
With that let me turn it over to our CFO Nico to share more of the Q2 details of our company and across both garden and pet segments.
He called <unk>.
Thank you Tim good afternoon, everyone.
Second quarter total company sales increased 4% or 30 million to 703 million from 674 million in the second quarter of last year.
Acquisitions were the primary drivers of the sales game.
Accounting for 26 million of revenue.
In the quarter.
You mean.
Sales were also up half a point aided by gains in our pet segment.
And as Tim mentioned organic sales were up closer to 2% when you exclude the impact of the pottery exit.
Consolidated gross profit for the quarter increased 1 million, while our gross margin decreased 110 basis points to 29.5% negatively impacted by unfavorable mix of sales and the impact of the lower volumes and pottery and life fish businesses.
S DNA expense for the quarter decreased 2% or 3 million versus a year ago.
This decrease was driven by lower administrative spending and transportation costs in the base business.
Partially offset by higher inorganic and corporate spending.
Our corporate expense increase was primarily due to higher health insurance costs.
As a percent of sales SGN, a decreased 130 basis points to 20.1%.
As a reminder included in prior year SGN, a our two noncash items.
A 2.5 million dollar impairment charge of an intangible assets due to the exit from the life fish business by a major retailer and a 3.2 million dollar write up of our previous minority position in our hundred percent owned as of February 2019.
Central operating income for the quarter increased to 66 million and operating margin increased 20 basis points to 9.4% due to lower as gene a expenses and accretion from acquisitions offset by lower gross margin EBITDA for the quarter increased 7% to 79 million.
Turning now to the pet segment.
Pet segment sales for the quarter rose, 7% or $23 million to 361 million and grew 4% on an organic basis.
As Tim mentioned organic sales were aided by strength and late quarter coated related pantry loading in the pet consumables.
We also saw strength in our small small animal supplies and animal health business.
These gains were partially offset by continued headwinds in life fish and pet bedding.
Pet segment operating income for the quarter increased by approximately 7 million or 25% compared to the prior year to a total of 34 million.
Pet operating margin also increased by 130 basis points to 9%.
These gains were aided by lapping the prior year 2.5 million dollar impairment charge in life fish.
Excluding the impairment pet segment operating margin increased 60 basis points driven by the organic strength mentioned previously.
Pat EBITDA for the quarter increased 20% to 42 million.
Turning to guard.
For the quarter Garden segment sales rose, 2% or 7 million to 342 million driven by inorganic contributions from the ardent acquisition.
Excluding art segment organic sales declined 3% driven by artisan pottery exit and a soft start to our grass seed season, partially offset by strength in garden distribution Wild bird and life planner.
Gardens base business, excluding the exited pottery business was roughly flat.
To provide a little more context on our grass seed result, currently we are seeing our shipments lag healthily comes <unk> consumption.
This was largely due to our inventory position heading into the season as a result of soft fall as well as some order pattern timing.
Garden segment operating income for the quarter was roughly inline with prior year at 53 million in operating margin declined 40 basis points to 15.5%.
Prior year results included a gain of $3.2 million related to the write up of the initial 45% interest in our upon acquisition.
Excluding this gain garden segment operating margin increased 60 basis points.
Garden EBITDA for the quarter with 56 million also roughly flat versus a year ago.
Now getting back to our consolidated results in the second quarter, we had other expense of 1 million compared to other income of 500000 a year ago.
Net interest expense increased 1 million to 9 million due primarily to lower interest income earned on cash balances as a softer market drove interest rate declines.
Our tax rate for the quarter was 22.7% as compared to 21.3% in the second quarter a year ago.
Turning to our balance sheet cashless payments cash at the end of second at the end of the second quarter increased to 332 million up from 330 million at the end of the second quarter last year.
The quarter net cash used by operations was 75 million versus net cash used of 86 million in the second quarter, a year ago due to favorable changes in working capital primarily in inventory as well as increased EBITDA.
Capex increased to 10 million from 6 million in the second quarter of 2019.
Total debt.
694 million down 4 million from the same time last year.
Our gross leverage ratio at the end of the quarter decreased to two to 2.9 times within our target range.
At the end of the second quarter, we had no borrowings under our 400 million dollar credit line. However in April we drew down 200 million to increased financial flexibility as we navigate as we navigate and uncertain coated 19 economic environment.
Depreciation and amortization for the quarter was 13 million up from $12 million a year ago and the increase was largely acquisition related.
During the quarter, we repurchased approximately 988000 shares or $25 million of our stock.
It remains 100 million under the Board's previously authorized share repurchase program, an additional 800000 shares under the board's equity dilution authorization.
As Tim mentioned earlier, given the uncertainties of the current covert 19 crisis, we have withdrawn our previously issued guidance on 2020 earnings and we will revisit upon completion of our third quarter.
Now operator, please open the line for questions.
Hi, Thank you when we will now be conducting a question that discussion if you would like to answer the question.
Star one on your telephone keypad, a confirmation total indicate your line is in the question Q you May Press Star too if you would like to remove your question from the kit.
Participants either speaker equipment, it may be necessary to pick up your handset before pressing the star. He is one moment. Please what we poll for questions.
Your first question comes from the line of Bill Chappell with Suntrust. Please proceed with your question.
Thanks, Good afternoon Hope you and your families are safe.
Thanks, Bill actually but no.
Well I guess first question just is there any way you can kind of quantify.
As we look at March and April the percentage of both pet and Garden base. It was closed because I understand like 'cause it compared to two like pet food companies or.
Or even to Scotts Miracle Gro you have a higher exposure to the small pes, especially pet and what have you. So any kind of color there would be helpful.
Yes, Bill this is Tim co for a good to talk to you again, you know when you. When you say closed I just want to clarify do you mean, our facilities do you mean, the retailer customer footprint the region yeah. The retailer customers you know so sure I'll pass that specialties.
Yeah. So what we saw on on the pet side. It was most acute obviously on brick and mortar versus E com and in particular, we saw in small independence and we saw in are live small animal business. So you would know we've got.
At a small animal business small mammal live fish, a bird and in particular, we saw.
The small.
Independent pet stores temporarily closed down during shelter in place and we saw a large pat national stores begin to curtail traffic and in particular for a period of time stop accepting live animals. So it was that part of the business that was most impact.
When you look across our business units and then it was that channel. In addition, broadly what I'd tell you is that.
Our consumable side of the pet business, you don't think dog treats as one example.
Have fared very well throughout this time, whereas our slightly more durables hard goods think pet bedding.
Faired less well during this cobot period.
Got it got it and then.
Switching to.
I don't know if you gave any update or have any update I'm kind of what Pos looks like for the month of April or for both businesses or any early read there.
Sure Yeah from a from a Pos standpoint, a consumer consumption. It remains strong on both of our businesses, both pet and garden.
We see obviously as you breakdown channel or customer we see.
A robust quite honestly explosive growth on E. Commerce, we have seen some triple digit growth weeks on E commerce, particularly on our pet side.
And our garden side off a smaller base is growing.
Very strongly on ecommerce.
On the garden side, there is some foot traffic differences across our big retailers, particularly the big three given slightly different customer policies in terms of how they maybe have changed either opening hours or certain departments and here again, what I'd guide you to is that.
At a it is our lives plant business that we've seen.
Some of the biggest challenges given a one of the big retailers.
Limiting access to the live outdoor area for a period of time.
Broadly, though I would tell you that from a consumption Pos standpoint, both on the pet and garden standpoint. We are are encouraged by continued consumer demand in both pet and garden.
Got it and then just last one for me on back home and Garden side I'm just kind of.
It sounds like on grass seed.
You are just ran into out of stocks and we've kind of past the grass seed season. So those does look like I guess lost sales.
Yes, first <unk> is that the right way to look at it and then on on the Bell business, what exactly happened I imagine you're growing plans to be a certain size for the break at the season and then you missed the break up the season in certain areas those plants get too big or how does that work or do you get destroy the inventory I mean, how does how does that work.
Yes, let's ask JD Walker.
They do they sure Bill I'll take it the first part of your question the with the grass seed business the.
In terms of the season, you said it will pass the grass seed portion the season will pass it in the southern markets, but the northern markets many of them Havent broken yet so we're still seeing fairly robust grassy consumption. We carried some inventory is and I believe that was in the script equal mentioned that we carried some inventory in from a pretty poor.
All season and fall if you recall was unseasonably hot late into the season until late October. So we missed a lot of the fall grass seed season carried heavy inventories into the spring and taken some time to unwind those inventories.
And then another factor for the graphic business was you know coping related the export market has pretty much dried up it's been a difficult export market, we do export some other exporters' have.
Decided not to sit on that seat and they've sold it off into independent channel or in the pro turf channel and that's affected our business as well so the combined factors of.
Going to a a negative headwind for the grass seed business.
Then on the Bell business.
You hit on it if they grow for a specific a period of time now those we can maintain those plants in the stores for a period of time, but overtime, they either have to sell or we end up scrapping that material.
Now Fortunately a lot of that season still remains in front of us as well. So it we had a headwind in the month of April but the peak for that business is main we're seeing strong consumption wonder whether it's favorable.
The good news here is the underlying demand for all of our categories and and Tim touched on this Pos has been incredibly robust wonder whether favorable and that has been quite favorable and when the customer has access to our product. So there's no limitations on head count in the store and and free access to areas of the store like outside garden.
So the underlying health of the business is incredibly confident.
Got it thanks, so much please stay safe huh.
Thanks.
Thank you. Our next question comes from the line of Peter Graham with JP Morgan. Please proceed with your question.
Thanks, Good afternoon, and I Hope you all are doing well.
Thank you Peter parents.
Jim I wanted to ask a bit of a bigger picture question around mission 2025 I.
I think we all recognize that this year was enough to be a.
The investment year to drive stronger topline frozen I know you discussed the topic topic briefly in your prepared remarks, but.
How do you handled in near term challenges, while maintaining some of that focus on the longer term has [noise].
Hi, good outbreak influence or change your game plan at all maybe some areas of focus are now more important than they were a few months ago, just anything you'd be willing to offer on the topic I think would be helpful. Thanks.
Thanks, Peter Yes, well.
First I do want to reinforce right now our number one focus and my number one focus is continuing to be on the safety and well being of our employees and ensuring business continuity and running a running a good business.
That said, we can't lose sight of our future and our efforts around vision 2025 are aimed at that is really a charting the course and and laying out a sum.
Some evolved.
Moves and and evolve strategy that will take this company into the next of many years.
During these last couple of months, we have changed our approach a bit as it relates that body of work as you might imagine the daily priority quickly shifted to business continuity and safety around this pandemic and so we did slow down a few things Peter and we did re purpose. So.
Some of that team activity.
Having said that I can tell you a portion of our time, including mine as CEO has remained on the longer term enterprise strategic priorities.
To your question, specifically if anything.
As a result of this a co bid environment. There are aspects that we were beginning to work on as as it relates vision 2025 that if anything our more pronounced and more urgent and.
I'll cite a couple of those now I mean, one is clearly our need to continue on or digital transformation as a company and accelerate our efforts in the ecommerce channel I mentioned a per the last question from Bill that we've had some triple digit growth weeks and I'm actually very pleased.
At our team's ability to quickly respond to that type of spike in demand and capture those consumptions and I will say our ability in the last six weeks to see that explosive growth and to maintain share in that in that ecommerce channel.
It is something I'm really encouraged with there's more for us to do though and John Hanson, our head of pet would agree to that Theres. Some additional hiring a we'd like to do some additional capability build some additional investment. So that's one example.
Another would be obviously, our continued focus on cash and liquidity you know our balance sheet well, we feel good about that and that continues to be a sharp focus for nickel for me for our business unit operators.
Managing cash conversion cycle well.
Working capital.
And then you know I'd say, a third is consumer orientation.
That's a that's something that I think it's still an opportunity for our company to grow in and understanding how the consumer is evolving his or her shopping behavior and.
References as it relates garden and pet in this in this cobot pandemics so.
There's a lot we've been working on that if anything have a sharper focus.
And I would tell you Peter that we're still I had mentioned in our last call an ambition to be out by summer to share a more comprehensive view of that work, we're still working hard on that given cobot.
Not ready to commit to a date here, but we will be back in due course, providing a more robust review with you on vision 2025.
Thanks, I was very helpful.
And on stay safe.
Thank you. Our next question comes from the line of Brad Thomas with Keybanc Capital markets. Please proceed with your question.
Hi, good afternoon, Thanks for taking my question.
My first question was going to be just around them.
You know how you maybe think about.
The discretionary nature of some of your products and.
Essentially the risks that may be ahead.
Even after consumer behavior starts to get back to normal stores reopened.
We may be facing a period of elevated unemployment.
Tim as you've had a chance to reflect on the business look at.
The different brands and categories. How are you thinking about the level of risk to sales I just from that discretionary aspect of the business as we think about the quarters had here.
Sure. Thanks, Brad.
You know overall I think we feel pretty good that we're into.
Good industries in both pet and garden that you wouldn't say I don't think you can say are completely recession proof, but there certainly recession resistant and I would say that while there was a.
A spike.
As we look at weekly Pos right at that time of that transition to shelter ends in place.
I think to Bill's earlier question Pos remains strong and so you know we've got obviously Pos through a through the end of April and you don't sit now seeing a kind of shipments of early may and consumption remains strong you would know that for the most part our portfolio it does not skewed to.
You know what you call a super premium price I think the underlying drivers that you look at.
Favre mid term strength in these two industries it starts with.
Pets themselves and as I mentioned in in the prepared remarks, we have seen and you probably read about.
Shelters all over this country from New York to Houston to California, you know running out of pets, and so we're seeing adoptions coming in really at record levels that bodes well for the corresponding needs.
Of that.
I think on the on the garden side with a shift of of a normal that is going to be spending more time at home.
Consumers are going to be looking for those.
Simple ways to improve their home improve their gardens, and I think a lot of our categories lend themselves to that.
Like grass seed Lake controls like life plants.
And these aren't huge dollar rings, so again.
Very difficult to predict the depth of it we certainly see the same unemployment numbers and projections that you see.
But overall you know certainly versus you know.
Airlines restaurants in other industries, I think pet and garden can be a fairly resilient, even in a downturn and while I wasn't here and Oh wait till nine I've certainly a as part of our leadership team Weve look back on lessons learned from overweight or nine and I think a central and the overall.
Consumption.
Held up pretty well during those difficult periods.
That's very helpful. Tim if I could ask a follow up.
Around Capex, Nick I apologize I missed that but how are you thinking about capex for the year and any changes in and how and what you'll be spending on here.
Yes so.
If you recall, we had guided to $45 million to $50 million Capex number for the year.
Year to date, we're at about 20 million.
We are reassessing.
All all cash expenditures be it be capex.
Stock buybacks all of that stuff, we're going to be looking at next week with the board.
Because as you know right now in this environment cash is king and we'll probably be sharpening our pencils around around some of those.
Some of those initiatives. So, we'll probably give an update a little later on that but.
But we are reassessing all of those all those things.
Gotcha. Thank you so much.
Thank you. Our next question comes from the line of William Rotor with Bank of America Merrill Lynch. Please proceed with your question.
Good afternoon.
It sounds like a lot of the softness or some of the softness in the lawn and garden segment was based upon channel disruption with I guess some of the smaller lawn and garden retailers as well as one of the larger ones. I guess are those disruptions still in place, meaning I have a lot of those retail customers reopened their doors at this point or do they remain close.
Yeah.
Good day.
This is JD sure I'll speak to that the.
We are seeing some of the smaller independent lawn and garden centers that had closed for a period of time, we're starting to see them come back on board.
Reopened and engage again, where we were well we had some state and local authorities that closed off some garden centers were seeing those reopen again, Vermont and Michigan or for two areas that come to mind I.
We are starting to see retailers increased or store hours again and increase the number of people consumers customers that there are allowing in the store. So all positive trend, we're starting to see them reengage. Once again the retailer so I think that bodes well for our business I think that.
What we saw with short term headwinds in late March through part of April, but as Tim said, our Pos still remains strong in April which gave gives us great encouragement and more recently here, we've seen strong demand for our products. So like historically strong demand for our products. So we feel very good about.
That's good to hear and when you were mentioning the challenges I Didnt hear anything really around supply chain and you certainly we're kind of talking about how strongly year team had performed I guess did you experience any meaningful amounts of downtime or are you experiencing elevated operating costs and if so how much.
Yes.
We have been fortunate overall as I said in my remarks that a very small percentage of of our employee base tested positive I'm also pleased to report that you know with we've got about 100 sites across the US. If you include our manufacturing distribution.
Offices et cetera, and as of right now there is there's only one that is not fully operational.
We did over the course of these six weeks have temporary disruption in some of our facilities.
Based on either you know a local jurisdiction.
Order at the time or based on our proactive measures given coal bid to do a temporary close deep clean and then reopened.
So again everyday is a new day.
But at this point as you look across our supply chain manufacturing distribution centers merchandising et cetera, we feel good.
We weren't to immune to issues.
But.
We are certainly in I would say overall good shape.
And then let's see the second part of your question was.
On a weather operating costs elevated again enough. Thank you, yes and on this one I would say yes.
Obviously, it starts with a PE and we have as you would expect Marshall to quite a bit of incremental PE to all of our facilities, both manufacturing and distribution. This would be masks clubs sanitizers et cetera on top of what would be no.
Normal course of business infra red thermometers as well as.
Some changes in the structure to include greater separation to include some temporary shielding in between some of the plan to employees and obviously all of these do bring a higher cost.
Exact value, obviously not going to comment on at this stage, but it is fair to say that there are incremental costs and our supply chain as we evolve in this new environment.
And just one last one if I can a couple of years ago. When you raised equity I think you had hoped that there may be some M&A opportunities, which I think valuations weren't where you hope that they would be do you expect to try and take advantage of potentially some lower multiples in this environment or will you move forward with a more cautious just get through.
This environment, that's all for me thanks.
Okay.
Well I think it depends on the opportunities.
Our balance sheet as everybody knows remains rock solid fortress balance sheet.
We feel like the business is performing well through the crisis we're.
Feeling very good about our day to day operations. So I think it the right opportunity came up.
I don't I don't think we would we would dismiss it we would certainly have to look at that and.
And maybe lean into something there. So so yeah, we would be open to looking at the right opportunity at the right time.
Thank you.
Thank you. Our next question comes from the line of Jim cardiac with Montes for PC and Heart. Please proceed with your question.
Hi, good afternoon, and thanks for taking my questions.
[noise] timber just wanted to follow up on some of the earlier questions about the investment spending your plan this year for significant step up in investment spending.
How much of that is continuing.
This year was there any spend related to that and second quarter. And then go you are you taking any measures revenue initiatives in place to manage expenses.
Given the near term uncertainty and then just a relate to that other people have talked about pulling back on advertising as stores are closed what have you done with your advertising almost a plan going forward. Thanks.
Sure I'll start Jim and pass over an eco to build.
As you said part of our.
An initial guidance back at the beginning of this year coming out of Q4 last year did contemplate incremental investments.
And I think I highlighted a number of those.
You know in marketing and brand building in innovation in digital and ecommerce initiatives select additional personnel in some key areas et cetera.
And what I'd tell you is in some cases, we have already made those investments because they're absolutely the right thing to do and and others, Jim We are reassessing and.
In the third bucket is in some cases, we have pulled back and we have decided that in today's environment. Today is not the Dave for that investment all in and so we're taking a very.
Measured and thoughtful approach.
To each of those a growth initiatives.
Backup I would say in the in the January timeframe, I sat with Niko and John and JD among others.
Did a very detailed review kind of line by line on those incremental growth oriented investments had a plan and a gating throughout the balance of the year since coven 19 hit.
We have reassessed each of those but one by one and what I'd tell you. It's a mixture we're not going to blindly just go do what we said what we thought was right in January given the new environment. So we're taking up a measured and thoughtful approach on that and I'll quickly touch on the second one pass it to Nico answers second one is absolutely.
Yes, we are we are business unit by business unit looking at what I would call belt tightening.
Initiatives.
To offset some of the the headwinds in some views obviously they are greater than others I mentioned some of those earlier in the call.
But both at a business unit level and at a corporate level. We are we are tightening the belt.
Nicolini builds on that yeah, just just to build on what Tim It said like a lot of companies. We've done extensive scenario planning on the business to look at what what we would need to take out if we had.
Volume declines of 2%, 5% 10 to 20.
So we have those in place I think what we seem to what Tim was alluding to earlier is we've seen a few of our businesses get hit really hard in light of animal life plan and to a lesser extent, our bedding business. So we have made cuts in those areas areas already they've been very very surge.
Vehicle.
But as a company I think what we've really focused on is cash cash is king right now.
We are doing things as I mentioned earlier, you know reevaluating our capex looking at the stock buyback program, we're really looking at receivables and credit worthiness, particularly in independent channel. So we have weekly calls reviewing.
How how that how healthy that channel is.
We've had a number of.
Actually larger customers come to us and one.
More dating.
So we're dealing with all that and I think really to key for US is preservation of cash and cash conversion and we're very focused on that.
And then also looking at at the business and you know the fixed and variable cost there, but so far we've been fortunate because we've largely remained intact and we surgically.
You know downside some areas, but I would say so far so good and and the other thing I would say is just looking out the Pos on on both sides, both pet and garden.
It looks good so we're going to we're going to continue to for John but but.
You know really micromanage, the expense and the cash side.
Great and then if I could ask the question.
You mentioned, the spike in pet dog and cat adoption rates.
That does that correlate with small animals and the disruption small and Ballston set just the stores being closed and what is your research tell you in terms of.
Consumers wanting to adopt maybe a small animal in lieu of a cat or or dogs.
Then on on fish, one of the competitors spoke to some increased interest in life fish as well what do you see there. Thanks.
John you want to take effect.
Sure Yeah, we've seen no the majority in dog and cat adoption for sure.
We do believe there is some pent up demand for lot for live animals small animal.
The pet specialty channel certainly is a prime please.
Shoppers have gotten those in the past and we will continue to do so.
And you know as Tim mentioned, we've seen suspended shipments there and we've seen suspended shipments on the small animal as well as we're fish business.
But going forward.
It's a little harder to predict right now, but as spot pet specialty continues to.
Open an extended hours, we fully expected as they regaining traffic or will be getting that business.
Does that answer your question, yes, that's helpful. Thanks, and best of luck.
Thank you. Our next question comes from the line of Crim Martin said with Jefferies. Please proceed with your question.
Good afternoon.
Strong Pos that you're seeing how is inventory at retail and given the controls that retailers have instituted are there any bottlenecks in terms of getting supported to two retailers.
I think our inventory positions a little different of course across our two big businesses.
I'd say, the kind of that the alignment of consumption and shipments or of sales and Pos on the Petside is closer and we're seeing you know we're seeing high velocity.
Both at at the consumer level and.
You know through our through our supply chain and at present, we are fortunate in that we don't have any major.
Bottlenecks or I would say real disconnects.
You know we've got some businesses that are flying like dog and cat treats.
That are I would say you know, we're having to really keep up with that demand, but overall in the petside, it correlates pretty well and feeling pretty good.
The garden side, it's a little different.
In terms of inventory, particularly on grass seed and maybe JD Walker you'd want to comment a little on inventory in Pos and the garden side.
Sure I'd say that in aggregate our view our inventories in great shape, you know just a I would call. It a low single digits increase year over year and that includes new new items that we shipped in this year. So in aggregate I think it looks great and in a environment like we're in right now with robust consumption.
Shipments and replenishment as following as we would expect so we feel good about that as Tim mentioned there are some there's some lumpiness there, particularly in grass seed and we're still working through in parts of the grassy monitor perfectly fine, but we do have some varieties of grassy where were heavy at retail and we're working through those still but I'd say that overall in AG.
But as I mentioned inventories in great shape and in this with this type of Pos shipments will follow and we're not having any issues to answer the second part of the question and getting that supply to the retailers.
Okay, Great and then yeah, I think bill Bill touched on this but are you seeing any.
Retailers, you know already succumbing to the shutdowns in terms of just trying to get out what the health of the that consumer base is especially the smaller independent channels for both pets and.
Gordon.
You guys want to quickly comment.
And John on your two businesses.
I think the question was around the shut the complete closure of retailers, we haven't seen that.
We've seen some clothes temporarily but.
We have literally thousands of customers. So there may be one or two single store chains out there that have that have closed and we expect them to reopen and they may not but we haven't seen that I would have confirmation of that and and with a large percentage of our business still flowing through three customers. We have the competence that they're not going in.
Where so we feel good about that.
Yeah and from the cuts side, you know very soon where we've seen very limited closures.
Seeing some pullback in Howard some reduction hours, but we would expect that the change in open up as well.
Okay and then just lastly, we're just liquidity stand today or thereabouts.
Since quarter end.
Yeah. So we have about 332 million of cash on the balance sheet.
And then we drew down 200 million of the 400 million on our NPL. So roughly 552 million of cash when you include two.
All right. Thank you very much guys appreciate it.
Oh my duties.
Operator are we at the hours now.
We are just now that the hour.
Okay.
Let me know if you want to continue into Q1 session or close out the call.
Yes.
Okay. We have time for one more operator perfect. Our last question was from the lineup Carla Casella with JP Morgan. Please proceed with your question.
Hi, Thank you for squeezing me in.
Just on your comments in the quarter, you mentioned that there was a negative next chest.
That pressure gross margin and you did talk a bit too category, but can you just say how that did that what drove the most of the next shift and then how that trended after quarter end.
Sure. This is nico.
If you look at the mix a big a big portion of it was on the garden side, where again, we mentioned we had a little bit of a slow start to the grass seed season that tends to be higher margin.
The other piece of it was getting rid of the the pottery business, which had a higher gross margin not a great operating margin, but it but it's dilutive to the gross and then if you pivot down to the to the pet side. Our live animal business has a very high gross margin as well and as we mentioned allow the retailers we're not taking.
And.
Orders of live animals. So so that's been that's been sort of the biggest movers as far as our mix shift.
And then the second part was as it relates to Pls the mix.
Was that the question.
Yeah.
Yeah.
So uh huh.
We're seeing a pick up I mean, we you know as I as I look at the Pls, it's not that long of a timeframe. So I don't want to lead anyone to false conclusions, but we are very positive on the mix of the Pos I will say on the light animal side.
We still have yet to see those orders resumed so that's been a little bit slower and then on the life plant side, we have to see how these next few weeks go the season typically peaks out this weekend and.
The weather holds up and consumers have access to that outdoor area than we're very optimistic.
So we'll have to wait and see but again, our Pos data is only going out about.
Four weeks and you know we have.
12, 12, 13 weeks in a quarter so.
More to come Okay, great. That's helpful. Thanks very much.
Thank you. Thank you I want to thank everyone for joining our call today. We appreciate your time and everyone stay hand stay safe and stay healthy.
This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.