Earnings Call Transcript
Patrick Industries Inc (PATK)
Earnings Call Transcript - PATK Q1 2020
Operator, Operator
Good morning, ladies and gentlemen, and welcome to the Patrick Industries, Inc. First Quarter 2020 Earnings Conference Call. My name is Vanessa, and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Ms. Julie Ann Kotowski from Investor Relations. Ms. Kotowski, you may begin.
Julie Ann Kotowski, Investor Relations
Good morning, everyone, and welcome to Patrick Industries’ first quarter 2020 conference call. I am joined on the call today by Andy Nemeth, President and CEO; and Josh Boone, CFO. Certain statements made in today’s conference call regarding Patrick Industries and its operations may be considered forward-looking statements under the securities laws. There are a number of factors, many of which are beyond the company’s control including without limitation, the disruption of business resulting from unforeseen events such as the COVID-19 pandemic and its impact on economic conditions, capital and financial markets, and our operations, which could cause the actual results and events to differ materially from those described in the forward-looking statements. These factors are identified in our press releases, our Form 10-K for the year ended 2019 and in our other filings with the Securities and Exchange Commission. We undertake no obligation to update these statements to reflect circumstances or events that occur after the date the forward-looking statements are made, except as required by law. I would now like to turn the call over to Andy Nemeth.
Andy Nemeth, President and CEO
Thank you, Julie Ann. Good morning, everyone, and thank you for joining us on the call today. Before we cover the details of our quarterly results, I want to give you a deeper understanding of the attention and discipline the company is undertaking as a result of the COVID-19 pandemic. In response to the very difficult and challenging circumstances surrounding COVID-19, we have been working diligently and thoughtfully to prioritize the safety and well-being of our talented and dedicated team members and their families, the communities in which we operate, our customers, suppliers and all of our stakeholders. Our commitment to maintaining a safe work environment while continuing to service our customers is a top priority. We've established and implemented protocols in alignment with both CDC and state guidelines to protect our employees and facilities, keeping current with best practices as information continues to become available and positioning ourselves for the full return to operations as restrictions ease and our customers return to production. I'd like to take this moment to thank all of our team members across the organization who have and continue to work so diligently and tirelessly as we navigate through these unprecedented and unforeseen times. Their commitment to our team, each other and the organizational goals is truly inspiring. Additionally, our company, team members and business units have put forth tremendous efforts to support the communities in which we live and work, including manufacturing and donating personal protective equipment for hospitals, care centers, and frontline responders, volunteering their time and sponsoring meals for several local hospitals for the frontline COVID-19 workers and staff. Our Dowco team in Wisconsin shifted their operational focus during this timeframe from manufacturing marine components to the rapid development and production of plastic face shields and isolation gowns. We are incredibly proud of our team's response to the challenging situation and look forward to all of us emerging from this difficult time as a stronger organization. Now turning to our performance in the quarter. Our first quarter results are a reflection of two vastly different scenarios, one in which we experienced positive momentum and strong consumer demand in all of our end markets for the first two months of the year, followed by a sudden business disruption in late March related to COVID-19 that impacted all of our end markets and operations. In the face of these dynamics that unfolded in the quarter, we are encouraged by our first quarter performance and our ability to deliver earnings growth despite a decline in sales and the related impact of the business disruption. Our teams immediately reacted to the rapidly changing environment and adjusted their business models and operations in alignment with the economic landscape. Additionally, the diversification in the end markets in which we serve and the domestic geographic regions in which we operate positively impacted our overall results and helped offset the business disruption from COVID-19 in the quarter and corresponding lost shipping days as certain plants throughout the country remained operational, particularly in our MH industrial and marine markets. Our first quarter revenues of $589 million decreased 3% versus the prior year due to lost shipping days and the associated business disruption to all of our end markets related to COVID-19. Net income was approximately $21 million or $0.91 per diluted share. As previously noted, the diversity in our market sectors and geographic regions helped provide resiliency in the quarter as a number of our plants continued to operate without material disruption. Additionally, our plants and like product-based brands have flexibility to shift production from one plant to another in order to maximize efficiencies and maintain the ability to service our customers. Our geographic footprint and operational flexibility allow us to react quickly and effectively in a rapidly changing environment as the economy slowly reopens. In response to COVID-19, we enacted a broad range of actions and initiatives to ensure the safety and well-being of our team members, including work-from-home programs and staggered shifts where applicable, while balancing the needs of our customers and providing essential products to the markets we serve. We are continuing to stay vigilant, updated, and follow the guidelines established by the CDC and local governmental authorities. As previously announced, we suspended operations at certain facilities over the last five weeks in alignment with our customers and have been maintaining compliance with mandates by certain state governments. In connection with the suspension of operations, we proactively implemented cost containment and financial management measures, including voluntary compensation reductions for the executive management team, voluntary reduced compensation for the Board of Directors, compensation reductions for the salaried team members across the organization, furlough with benefits of certain team members that were impacted by the suspension of operations, a freeze on all non-essential hiring, reduction of non-essential spending, prioritization of critical maintenance capital expenditures, suspension of acquisition initiatives, and paused share repurchases. While certain operations have continued to run during the month of April, the facilities that suspended operations have begun to come back online as of this week or have plans to resume production beginning May 4. We have established a standard return to work protocol for our facilities and will continue to take proactive safety precautions for all of our team members including appropriate social distancing measures, strict sanitation practices, safety screens, flexible and staggered work arrangements where applicable, restrictions and limitations for non-essential visitors, and health checks where necessary. In addition to the cost containment and financial measures put in place in the quarter, we are in the process of consolidating certain facilities with like product lines in alignment with this model and where appropriate to maximize these efficiencies and capacities. Several of these actions are expected to be completed in a matter of weeks and will generate immediate cost savings in the short term with the ability to flex up production and bring back these plants online quickly once volume levels increase to a sustained level. If volume levels remain soft for an extended period of time, we have the ability to permanently consolidate facilities in both our manufacturing and distribution centers and we have staggered lease terms for our lease facilities where we can also reduce costs in a regulated fashion. We have a detailed tiered playbook to execute off of based on volume levels and successfully took similar cost reduction efforts in prior downturns including during the Great Recession. Given the current environment, we have prioritized liquidity and cash preservation and have paused on our acquisition initiatives until there is greater visibility and stability in the macro environment and the markets we serve. At which point, we could pivot and return to our strategic and opportunistic capital deployment initiatives. As we reflect on the first quarter, we had tremendous momentum at the start of the year followed by the unprecedented and sudden impact from COVID-19. With the positive traction we experienced in the majority of the quarter combined with our flexible capital structure and strength of our cash flows and as part of our capital allocation strategy, we were able to make strategic investments in acquisitions and return capital to shareholders. We completed two acquisitions including the previously announced acquisition of Maple City Woodworking, a Goshen, Indiana-based manufacturer of hardwood doors and fascia for the RV market. And in addition, SCI Manufacturing, a Cromwell, Indiana-based manufacturer of boat towers, hardtops, ski and tow bars and other metal components for the marine market. These two tuck-in acquisitions are an excellent fit with our entrepreneurial philosophy and existing products expertise and will continue to provide long-term strategic value bringing high-quality innovative product lines to our portfolio. Additionally, we returned approximately $22 million of capital to our shareholders by a $6 million in dividends and $16 million in share repurchases. At the end of the first quarter, we had over $500 million of available liquidity, which includes approximately $95 million of cash on hand and our net leverage profile was right in line with our optimal target leverage at 2.3 times well under our four times covenant maximum. Now turning to our end markets. Momentum was evident in both leisure lifestyle and housing industrial markets in the first quarter. On the leisure lifestyle front encompassing RV and marine, which collectively represent 68% of first quarter revenues, retail shipments were positive compared to the prior year for the first two months of 2020, highlighting the fundamental demand for outdoor leisure lifestyle products. In our housing and industrial markets, which represented 32% of our first quarter revenues the first two months of the year were a continuation of what we experienced in the fourth quarter of 2019 with strong demand for quality, affordable housing and with tailwinds from a low interest rate environment, lower commodities and a tight housing market. Now more specifically, and taking a deeper dive into each of our end markets. Our RV revenues were down $22 million or 6% in the quarter and represented 55% of our consolidated sales in the quarter. The decrease was primarily due to lost production days in the latter part of March due to RV Original Equipment Manufacturers (OEMs) curtailing production in alignment with plant closures, while still shipping retail finished goods units to dealers. RV wholesale unit shipments were down 20% in March and flat for the first quarter compared to 2019, while retail unit shipments are estimated to increase slightly after adjustments for the same period. Heading into the first quarter of 2020, RV OEMs and dealers had already aggressively reduced and recalibrated inventories, pulling over 50,000 units out of inventory in 2019 and approximately 100,000 units since the second quarter of 2018, bringing dealer inventories to their lowest level we have had on record dating back to 2014. Temporary OEM production curtailments further decreased dealer inventories in April as RVs were still retailing throughout the month at certain dealerships as well as being used for FEMA purposes for frontline health care workers in certain states. For those states with stay-at-home orders and social distancing guidelines precluding on-site visits, many dealers saw increased online activity and interest during this timeframe indicating continued demand for the leisure lifestyle. The current dealer inventory environment and retail unit sales that have significantly outpaced wholesale production over the prior 18 months is a stark contrast to the industry's inventory levels prior to the last recession of 2008 and 2009. During the last economic recession, we saw wholesale production significantly impacted not only from a drop in consumer demand, but due to excess inventory levels heading into the recession and resulting in a parallel reduction and recalibration of those inventory levels throughout the recession. Already leaned out, historically low, and appropriately calibrated inventory should position wholesale production for resiliency in 2020 even within the current impact to consumer demand and corresponding economic recession related to COVID-19. OEMs have purged their order books during the shutdown period to ensure calibration with retail sold units awaiting delivery and are positioned to align with retail demand. RVs are uniquely able to be used in many lifestyle and functional capacities including serving the health care community and its frontline caregivers as temporary portable, self-sufficient dwellings, testing facilities and command centers. Additionally, we believe the RV industry is extremely well positioned for the post COVID-19 environment with camping activities being an ideal means and environment for friends and family to enjoy quality time together in the outdoors while maintaining social distancing guidelines. With this unprecedented pandemic and the related stay-at-home and quarantine mandates, Americans are more eager than ever to get back to socializing in the outdoors. And RVs offer the value proposition of independence, quality time, and community in addition to the ability and comfort of domestic travel within the leisure lifestyle experience. In addition, historically low interest rate levels for consumer financing of RVs, low entry-level price points for the experience, and gasoline at its lowest prices in over two decades point to a long-term runway for the RV market. The marine side of our business was impacted in the quarter by the continuation of inventory recalibration as dealers and OEMs continue to rebalance wholesale unit shipments in alignment with optimal dealer inventories. Early 2020 marine dealer traffic and interest was positive and there was significant traction in marine retail evidenced by estimated retail shipments in the first two months of the year up 9% over 2019. Then the business disruption began in March due to COVID-19 which dramatically impacted the quarter and resulted in an estimated decrease in marine retail shipments of approximately 5% for the quarter. March generally represents about 10% of full year shipments. With the aggressive inventory recalibration still occurring in the first quarter marine retail outpaced wholesale and wholesale unit shipments were estimated to be down high teens in the first quarter. Our marine revenues declined approximately $13 million or 14% in the quarter and represented 13% of our consolidated sales, while our content per unit increased an estimated 3% in the quarter. Like RV OEMs, we saw the marine OEMs suspend operations for a period of time in late March that carried into the month of April, but they have been quick to resume operations as the second quarter represents almost 45% of full year retail shipments. There is a backlog of retail boats sold from the recent first quarter boat shows indicating that boaters are anxiously awaiting in anticipation of getting back on the water to escape the stay-at-home orders and spend time with their families outdoors. The long-term fundamentals remain intact for the marine market and similar to the RV industry and value proposition are ideal for the post COVID-19 environment. In summary, retail interest and traffic was relatively resilient during the month of April for both the RV and marine sectors, particularly in those states that had less restrictions and as well less health-related COVID-19 occurrences. We estimate RV and marine retail units down approximately 50% to 60% in the month of April, despite the nationwide shutdown and stay-at-home orders for the entire month. Now turning to the housing and industrial side of our business which both experienced positive tailwinds coming out of 2019 and during the majority of the first quarter of 2020 with low interest rates, a tight housing market and pent-up demand for affordable housing. Our manufactured housing sales represented 19% of our total revenues in the first quarter and increased $6 million or 6% over the first quarter of 2019 and reflects an 8% increase in estimated wholesale unit shipments. MH production experienced some disruption in certain states in late March due to COVID-19 while finished goods units were shipped from OEM inventories. However, the industry as a whole maintained a steady albeit reduced pace of production throughout the month of April. Most of our manufactured housing-related facilities and brands also continued to operate during April in alignment with our customer base and as part of the supply chain to those essential businesses. The demographic trends indicate strong expected demand patterns. Pent-up demand continues to be created and the need for quality affordable housing remains intact and increasingly attractive to the growing population of 35 to 44-year-olds. With the average price of an MH unit at roughly 1.5 to 1/3 the price of an average-built stick-built home, our MH market continues to point to promising future growth post COVID-19. Revenues in our industrial business, which represent 13% of our overall sales mix in the first quarter increased 14% compared to the prior year. New housing starts continue their rebound increasing 34% through the first two months of the year with the benefit partially attributed to a drop in mortgage rates and the extremely tight supply of existing homes for sale. New housing starts were also impacted by COVID-19 in mid-March and we saw a drop in new housing starts, but still positive for the month of March with growth of 2% compared to the prior year. For the quarter new housing starts were up 22%. Our products are generally the last to go into a new unit and trail new housing starts by four to six months. Single-family housing starts were up 12% in the quarter while multifamily housing starts rose 47% with the South up 53%, the West up 27%, the Midwest up 41% and the Northeast region up 68%. The nonresidential side of our industrial business which is primarily focused on the hospitality, high-rise commercial construction, and institutional furniture markets was also strong in the first quarter. Fundamental housing demand as evidenced by strong single and multifamily housing starts continued its strength in the first quarter, which has historically translated into an increase in demand for our industrial market. We do expect the uncertainty surrounding unemployment and tightening credit standards to negatively impact demand for both manufactured housing and residential housing in the short-term. In summary, we are anticipating on the leisure lifestyle side of our business both RV and marine wholesale shipments to be down between 40% and 50% for the second quarter, with virtually no production in April and retail unit sales to outperform wholesale shipments during this time frame. We believe RV inventories are in balance and marine inventories will be calibrated and balanced in preparation for the 2021 model year. For the full year, our current assumptions are based on RV wholesale units being down 20% to 25% and marine wholesale shipments being down 25% to 30%. On the housing and industrial side, we are anticipating both MH wholesale unit shipments and new housing starts to be down between 20% to 30% for the second quarter and 15% to 20% for the full year. While we are anticipating significant short-term disruption to all of our end markets, we have the ability to leverage and flex our manufacturing facilities and high variable cost model to align with our customer demand as we see shifts in demand patterns. We have continued to calibrate our expectations and assumptions for the upcoming quarter and fiscal year. We recently in late April eliminated approximately $35 million of annualized fixed overhead, which takes effect in the second quarter. These actions combined with the already enacted proactive cost containment and financial measures taken at the end of March position us extremely well to withstand the impact of COVID-19 in the second quarter and full year 2020 based on our current assumptions as discussed. I'll now turn the call over to Josh, who will provide some additional comments on our financial performance.
Josh Boone, CFO
Thanks, Andy. Our consolidated net sales for the first quarter decreased 3% to $589 million, primarily reflecting lost shipping days and business disruption within our end markets related to COVID-19. We estimate an approximate 5% impact to our sales associated with the business disruption. As Andy previously noted, we completed two strategic tuck-in acquisitions in the first quarter. Due to the timing of the acquisitions they had minimal impact on our revenues. Revenues from our leisure lifestyle market, which is comprised of the RV and marine markets decreased 8% with RV and marine revenues down 6% and 14% respectively. RV content per unit decreased 1% to $3,112 per unit and estimated marine content per unit increased 3% to $1,531 per unit. During the prior three years from 2017 through 2019, we have increased our RV content per unit by 14% at a compounded annual growth rate driven by both strategic acquisitions and market share gains. Our content per unit can vary quarter-to-quarter and be impacted due to a number of factors including a significant change in the primary commodities which we utilize in corresponding price adjustments in partnership with our customers; a mix change in types of units that are being produced, including size and OEMs adding or reducing content to target certain price points and consumer trends; and lastly, the timing of OEM's production cadence versus shipments of units to dealers. During the first quarter, our RV content per unit was negatively impacted by RV OEMs curtailing production in the latter part of March, but continuing to ship finished goods during the suspension of operations in anticipation of dealers continuing to deliver retail units to customers. Excluding the impact of the lost RV production days, we estimate our content per unit to have increased 1% in the first quarter. Additional items negatively impacting RV content per unit are continued lower commodity prices that we've experienced over the prior 12 months and the corresponding price decreases we have passed along to our customers and partnerships. Our customers lost production days that negatively impacted content per unit also impacted organic growth and was most prevalent in our RV market sector, but was also felt in both marine and MH market sectors as well. Our organic revenues in the quarter declined 3%. If you exclude the impact of the lost production days and related lost sales, we estimate organic revenues to have increased 1% inclusive of the reduced commodities and corresponding price decreases we've passed along to customers. Revenues from our housing and industrial markets increased 9% in the quarter with MH revenues up 6% versus the prior year and estimated MH content per unit increasing 35% to $4,596 per unit. Gross margin in the first quarter was 18.6%, increasing 110 basis points compared to the prior year. The gross margin expansion was driven by the run rate of fixed cost reductions completed in the third quarter of 2019, the integration and execution of synergies related to acquisitions completed in 2018 and 2019, including achieving our target of $5 million in synergies from LaSalle, and the alignment of pricing relative to inventory costs, which negatively impacted gross margin in the first quarter of 2019. Operating expenses were 11.9% of sales compared to 11.6% in 2019. Warehouse and delivery expenses increased 20 basis points due to a higher mix of MH sales in the quarter and the corresponding higher concentration of distribution. Intangible asset amortization also increased 20 basis points, which was driven by prior year acquisitions and the incremental expense, the fixed nature of the expense and the reduced sales impact year-over-year. SG&A expenses were 6.1% of sales in the quarter, a 10 basis point decline compared to the prior year. SG&A expenses were down $2 million compared to the first quarter of 2019, as our cost reductions completed last year also favorably impacted SG&A. In addition, the proactive cost containment measures implemented as we began to anticipate a disruption to COVID-19 helped reduce our SG&A expenses. Operating income of $39 million increased 10% in the first quarter and operating margin of 6.7% increased 80 basis points, due to the factors previously described. Our net income per diluted share in the first quarter was $0.91, up 1.5% from $0.90 from the prior year. Our overall effective tax rate as reported increased to 26.4% for the first quarter of 2020 compared to 22.3% in the prior year, primarily reflecting a reduction in stock compensation tax benefit in the first quarter of 2020 compared to the same quarter in the prior year and other discrete items. For the full year 2020, we are now estimating our all-in effective tax rate to be in the range of 26% to 27%. Now turning to the balance sheet. Our total assets increased $51 million, largely reflecting the addition of acquisition-related assets and an increase in seasonal working capital. Looking to cash flow. In the first quarter of 2020, we generated approximately $13 million of operating cash flows. We utilized cash flows in the quarter for $8 million in capital expenditures and $6 million in cash dividends to shareholders, deployed $24 million in strategic acquisitions and repurchased approximately 456,000 shares of our common stock at an average price of $34 per share for approximately $16 million, prior to the COVID-19 operating suspensions and shutdowns. Our operating cash flows vary quarterly based on seasonal fluctuations in working capital among other items. In the first quarter, our inventories increased due to strategic inventory purchases of certain items we sourced from Asia based on our assessment of potential supply chain disruption from COVID-19. Additionally, due to the timing of our quarter end, we received $16 million of receivables within two business days following the quarter end. Inclusive of the $16 million of receivables, cash flow from operations would have been $29 million, which is consistent with the prior year. We have over $500 million of total liquidity at the end of the quarter, including $95 million of cash on hand, with no major debt maturities until 2023. To date, we have not borrowed on our revolver since the third quarter of 2019. The strength of our cash flows combined with our ample liquidity provides us with the flexibility, both strategically and defensively to navigate a variety of scenarios through these unprecedented times. Our leverage position relative to EBITDA at the end of the first quarter was approximately 2.3 times. As previously discussed, we have currently paused strategic initiatives and have prioritized critical maintenance capital expenditures. We do not expect any changes to our quarterly dividend policy. Given the current environment, we remain focused on disciplined liquidity and cash generation. As we progress into 2020 our financial plan is based on the market assumptions Andy previously highlighted, which includes continued softness in the second quarter and back half of the year, but sequentially improving as we progress into the third and fourth quarters. Our business model today and company profile has been transformed since the last recession, via targeted strategic growth and diversification into a highly scaled end market and geographically diversified value-added brand-centric company, positioning us to perform better than historical through an economic cycle. Our gross margin profile headed into the COVID-19 pandemic is almost 600 basis points higher than our margin profile was in 2007. Additionally, our product portfolio has been greatly enhanced, adding higher margin, engineered value-added products to our arsenal that span across multiple markets, with manufacturing flexibility to produce for one or all four end markets out of one facility and the ability to mothball and shift production to another facility very quickly. This transformed business, the proactive cost containment and financial measures we've taken, combined with our highly variable cost structure which consists of more than 80% variable cost, provides tremendous resilience to weather a significant downturn such as this pandemic and related economic recession. Our businesses generated tremendous amount of cash flow are asset-light and not capital-intensive. We have the ability to unlock additional cash by aggressively reducing our inventory levels and working capital over the remaining three quarters of the year, reducing non-essential spending, reducing variable compensation and curtailing non-essential capital expenditures. We will also leverage certain provisions within the recently passed CARES Act, including payroll tax deferrals that will provide additional cash flows for 2020. Furthermore, there are untapped synergies, more aggressive consolidation plans and additional levers to pull as part of our tier playbook that we would look to enact, should we see continued deterioration in our markets beyond what our financial plan has outlined, or continuing deep into 2021. With our transformed business model of today, our recently enhanced capital structure and the market assumptions we've outlined in our current financial plan, we are estimating our ability to generate more than $150 million of operating cash flows for 2020 and maintain a disciplined leverage profile. The aggressive actions we've taken and our disciplined financial policy will position us to be agile and opportunistic on the back side of the recovery, as we look to capitalize on the long-term upside in all of our end markets. That completes my remarks. Andy?
Andy Nemeth, President and CEO
Thanks, Josh. While the long-term impacts from the pandemic are unclear at this time, we will continue to evaluate the environment surrounding COVID-19 and are prepared and will enact further disciplined measures as the situation dictates. Our capital structure and financial position remains strong with ample liquidity and availability to manage this challenging economic environment for the foreseeable future and we remain poised to quickly pivot and execute on our strategic plan and initiatives once stability returns to our markets. We believe our markets are incredibly well positioned to be the primary beneficiaries of lifestyle changes and adaptations that are expected to take place once this pandemic is over. And we are optimistic and excited about our ability to bring value to our customers in both up and down markets, where others can't. The combination of our operational and financial foundation, customer-first performance-oriented culture and the talent, dedication and passion of our more than 7,000 team members will continue to position us to execute on our strategic plan as we strive to continuously exceed our customers' expectations. Our overall goal of increasing long-term shareholder value by serving our customers at the highest level, reinvesting in and protecting our talented and dedicated team members, dealing ethically and responsibly with our business partners and supporting our local communities remains our highest priority. This is the end of our prepared remarks. We are now ready to take questions.
Operator, Operator
Thank you. We will now begin our question-and-answer session. Our first question is from Daniel Moore with CJS Securities.
Daniel Moore, Analyst
Thank you for taking the questions this morning. I appreciate all the helpful information given the current volatility. I wanted to start by asking about your OEMs and suppliers, particularly on the RV side, which are expected to resume operations next week. What percentage of capacity do you anticipate your customers, and by extension Patrick, will be operating at initially in May and into June?
Andy Nemeth, President and CEO
Dan, this is Andy. Thanks for the question. Thanks for the comments. At this point in time, I would tell you that we're anticipating a start-up of 70% capacity, 60% to 70% if you will from the run rates that we were running at heading into call it the back half of March. I would tell you we've also been hearing some increasing optimism over the course of the last two weeks as it relates to run rates and potential demand out there. So where customers were kind of targeting coming back at three to four days if you will running kind of full production in those three or four days. We're hearing that moving from three to four to four to five at this point. So, I think there's some optimism building. But right now we would tell you right around 70% is kind of the target if you will as it relates to the firing up here in May.
Daniel Moore, Analyst
Very helpful. In terms of visibility, based on what you're observing with various states reopening plans, when do you anticipate having a clearer understanding of retail foot traffic and overall retail demand? Are we looking at a couple of weeks or possibly a couple of months? When do you believe you'll have a better grasp on the near-term impact to demand?
Andy Nemeth, President and CEO
Sure. Retail has shown relative strength, especially in the leisure lifestyle segment, even during April. Although original equipment manufacturers have seen a decline in wholesale production, retail has maintained its momentum. We estimate a 50% to 60% reduction for April, which we view as a positive sign. They've seen increased traffic, not necessarily on-site, but through online channels which have been very effective in driving sales. We anticipate gaining a clearer understanding of retail fundamentals in the next 30 to 45 days as we approach the latter part of the second quarter.
Daniel Moore, Analyst
Got it. Very helpful. In terms of financing, have you noticed any significant changes or tightening in credit since the pandemic started, particularly in the leisure sector, specifically with RVs and marine, regarding FICO scores and similar metrics?
Andy Nemeth, President and CEO
We have not seen that yet. We've talked to our lenders who are active in the wholesale side and some in the retail side and all the lenders in the space right now feel pretty good about where things are at where inventories are at and we have not heard any deterioration in retail lending standards.
Daniel Moore, Analyst
Fantastic. Lastly for me, just in terms of capital allocation, you are certainly being very careful and utilizing every resource available. You still have over $500 million in liquidity. Given that smaller competitors may be struggling more, do you expect to pursue any smaller acquisitions this year, or is M&A likely on hold for now? Thanks, and I'll jump back.
Andy Nemeth, President and CEO
Thanks for the question. Yes. I think that certainly we feel really good about where we're at today from a financial platform perspective. And I think we can, as we noted, pivot very, very quickly to resume our strategic initiatives and strategic capital deployment initiatives. We can be very opportunistic. That's still part of our growth plan once we find some stability in the markets. And I would tell you that again, we're going to be very patient. We're going to be poised. But I think with where we sit today from a liquidity perspective, the way we've balance the business and the initiatives that we've taken to appropriately size the business according to our assumptions right now, we feel really good about the ability to pivot very, very quickly and return to deploying capital. So, I don't want to say that we're going to be immediately out on those strategic initiatives, but I would tell you that the expectation of not pursuing any of those for the rest of the year based on these assumptions we could certainly execute on some of those assumptions in the latter part of the year if we see some of that stability. But we're going to be poised and we're going to be cautious and patient about it. And we do think that opportunities will come to the market and we're in a great position to execute on those.
Daniel Moore, Analyst
Fantastic. Appreciate the color again. Stay safe.
Andy Nemeth, President and CEO
Thank you.
Operator, Operator
We have our next question from Craig Kennison with Baird.
Craig Kennison, Analyst
Hey, good morning. Thanks for taking my question as well. Josh I wonder if you're able to frame the fixed variable cost mix for your cost of goods sold and SG&A as we try to calibrate your margin profile.
Josh Boone, CFO
Yes sure. So given the environment and kind of what we're navigating through we felt the need to kind of break out our fixed cost structure versus our variable. We've talked about having a high variable cost structure. And we've alluded to the fact that that here over 80%. If you think about the cost structure above the line above gross margin it's 70% material is by far the biggest component of cost of goods sold. And labor is going to be in that mid- to high teens with the rest being overhead. And within that overhead I would say about 50% of that would be on the variable side.
Craig Kennison, Analyst
That's super helpful. And then just on the SG&A side any similar breakdown?
Josh Boone, CFO
Yes, the SG&A side you're going to have a lot of compensation running through SG&A, both fixed and variable. There's a little bit higher component of fixed cost and SG&A relative to our cost of goods sold from a variable compensation on the wages side and so incentives as well. And so we don't really break out the SG&A fixed versus variable. I'll tell you it's not as prevalent on the variable side of the SG&A.
Craig Kennison, Analyst
That helps. And then I'm sorry if I missed it. But did you frame the revenue contribution from each of the two acquisitions you completed recently?
Josh Boone, CFO
Both of those acquisitions were completed in March and both of them had an immaterial impact in the quarter on our topline.
Craig Kennison, Analyst
But in terms of the annualized revenue contribution?
Josh Boone, CFO
I'm sorry, yes, $20 million $20 million annualized for both of them.
Craig Kennison, Analyst
Got I. sorry missed that. Great. Well, hey thanks for the color. Take care.
Operator, Operator
We have our next question from Scott Stember with CL King & Associates.
Scott Stember, Analyst
Going back to the content comments on the RV side you guys talked about how it was up modestly if you adjust for the I guess the delta between delay in shipments and what was being delivered to dealers. But longer term on RVs are we still looking at a low single-digit growth profile for content in this segment assuming we get past COVID? And I guess just even when you balance in the impact from commodities and mix?
Josh Boone, CFO
Yes Scott. On the RV side that continues to be our current expectations the low single-digit growth on content per unit. That would be exclusive obviously of any acquisitions, and also exclusive of any tailwind if we start to see units content up. As we were progressing through the back half of 2019 we had started to get visibility that maybe some units were being content was being added to units. And so as we are here in Q2 here we don't really have that visibility right now but we would expect low single digits exclusive of additional content being added to units.
Scott Stember, Analyst
Okay. Got it. And I know this is a moving target but just when talking about the $35 million in cost cuts and let's just say within month and a half from now production comes back faster than expected do you anticipate any issues or any problems in trying to hire back some of these folks just given the tight labor pool in the Northern Indiana market?
Andy Nemeth, President and CEO
Scott, this is Andy. We do not anticipate any disruptions as it relates to that. Our cost reductions were primarily on the indirect side of the business as it relates to the headcount. And so we wanted to make sure we maintained our direct labor workforce so that we could flex back up and down. Our indirect cuts were really based upon again the assumptions that we've outlined but we expect to be able to flex back up under that profile. So, we've basically kind of lowered our core operating structure but we've kept the flexibility of the direct labor workforce in tech so that we can be very flexible and nimble as things move.
Josh Boone, CFO
And one more piece on that Scott $35 million over half of those costs we've pulled out are below the line. So, it won't even directly impact kind of operations.
Scott Stember, Analyst
Okay, got it. And Andy just last question before I jump back in the queue. Regarding I guess retail traffic you had talked about I guess obviously down 50% to 60% is better than 0 production that's going on right now. But what are you hearing? You did make some comments about things getting I guess a little bit better. So maybe just talk about in recent days have you heard anything about better traffic at dealer level?
Andy Nemeth, President and CEO
We have noticed an increase in optimism regarding our dealer base over the past two weeks based on our conversations. We believe there is pent-up demand currently building. Specifically, when considering the leisure lifestyle and RVs, they are well-suited for the post COVID-19 environment, as mentioned earlier. We are experiencing some of that positivity right now. There is clear optimism compared to any pessimism as we approach the end of April from a retail standpoint. We are definitely hearing more positive sentiments.
Scott Stember, Analyst
Got it. That's all I have right now. Thank you.
Andy Nemeth, President and CEO
Thanks, Scott.
Operator, Operator
Our next question is from Brett Andress with KeyBanc.
Brett Andress, Analyst
Hey, good morning.
Andy Nemeth, President and CEO
Good morning.
Brett Andress, Analyst
What would be your current thinking on RV channel inventories as we kind of come out of this COVID here? So, felt like we were in a good place going into this. But if you could put it in some numbers, how does the channel shape up here in the next one to two months with some of the pull-through that's happening in the production that's going to go online?
Josh Boone, CFO
Hey Brett, this is Josh. As we look at channel inventories heading into 2020, they are at some of the lowest levels recorded since 2014. In January and February, we observed wholesale starting to surpass retail as they prepare for the peak retail selling season. Come April, we typically see retail outpacing wholesale over a period of about five to six months, which is the normal cycle. However, in April, due to COVID, we had five weeks where wholesale production was halted, resulting in no RV units being produced during that time. In the previous year, retail sales during that five-week span would have ranged between 55,000 and 60,000 units. With retail down by as much as 40%, 50%, or even 60%, that still means an additional 25,000 to 35,000 units have exited the channel and dealer inventories over those five weeks. Therefore, as we enter 2020, wholesale is already in a strong position since we under-produced retail by over 50,000 units in 2019, making it resilient as we move forward.
Andy Nemeth, President and CEO
Yes, this is Andy. To provide some additional insights, we realized that we had overestimated the balance between wholesale and retail as we approached 2020. There is ongoing movement out of the retail sector that is impacting the wholesale channel. Currently, our transport lots are quite sparse with minimal inventory. We do not believe there is a significant amount of finished goods inventory at the original equipment level, which sets us up well for retail. Additionally, regarding the Marine segment, it seemed to have excess inventory as we entered 2020, but we are witnessing positive developments on the retail front, especially with the production halts affecting wholesale. Therefore, we can say that the marine sector is adjusting swiftly in the leisure lifestyle category. Overall, we feel positive about the inventory levels in the channel.
Josh Boone, CFO
And one more data point, Brett. Q1 inventory for RVs is 50,000 units lower compared to Q1 last year. So at the end of March, we would expect units to be 50,000 below where they were in Q1 last year. Additionally, we have to consider the potential of 25,000 to 35,000 units that have exited the channel during a five-week period with no RV production, although we still managed to retail units during that time.
Brett Andress, Analyst
Got it. Appreciate the color there. And then just the last one. We're getting a lot of questions on this evolving vacation theme for RVs. And Andy, I agree with what you said in your prepared remarks, but when do you think that actually starts to trickle into new sales? I mean, is there any evidence that this could be some kind of secular shift here? Is it temporary? Just kind of how you're thinking about when we start to see it?
Andy Nemeth, President and CEO
I believe we will gain valuable insight into this as the quarter progresses, particularly as we examine the current situation. Depending on the duration of the consumer slowdown linked to the stay-at-home orders, it seems we are sensing some optimism regarding retail demand and traffic. This leads me to believe that the slowdown may not last as long as initially expected. Therefore, in the next quarter, we should have a clearer understanding of the strength of that demand and gain better insights at that time.
Brett Andress, Analyst
Thank you.
Josh Boone, CFO
Thanks, Brett.
Andy Nemeth, President and CEO
Thanks, Brett.
Operator, Operator
We have our next question from Tim Conder with Wells Fargo.
Tim Conder, Analyst
Thank you. And gentlemen thanks for all the color and the preamble and so far in the Q&A here much – very helpful. A couple of things here. Andy I just wanted to clarify the comments you made in your preamble on the MH housing front. Just in general from what you said and that the – I guess a little bit of the tightening credit and everything maybe hurting that entry-level piece. Do you anticipate that to recover faster, slower similar to RV and marine just in the context of everything that you said here?
Andy Nemeth, President and CEO
Sure. I think our – we're feeling – I would tell you just a little bit of headwind as it relates to credit, when you look at the marketplace today and lending standards, I think that banks are going to be a little bit conservative on the housing side. You've heard some – we've heard some increased standards as it relates to some lending. So it feels like there's just a little bit of a headwind on the MH side and residential side, but I think that will push through. The government stimulus packages have been tremendous. And I think that's going to play very well into MH on the back end. So I would tell you right now we just talked about leisure lifestyle versus housing and industrial. I think leisure lifestyle deals again we've got some tailwind coming on the housing and industrial what we would tell you is probably a little bit of headwind for Q2 compared to leisure lifestyle but then I would tell you heading into the back half of the year we'd start to feel that dissipate, especially again with the stimulus packages that have been put in place arming the consumer to be much better prepared coming out of this.
Tim Conder, Analyst
Okay. Okay. That's helpful sir. And then on – you talked about you're consolidating some of your manufacturing facilities a little bit. I know it's been talked about in the industry a lot. There seems to be a lot of just touring the industry and seeing the OEMs and suppliers and so forth. It seems – the RV industry seems more fragmented relative to marine relative to other power sports. And we've heard from yourselves and others that in the next downturn that could be an opportunity to sort of consolidate each company consolidate their – within their own border so to speak consolidate their operations and plans and then be better positioned as things really pick up. Is that time now? And I guess, again given your liquidity and everything that you all have you seem well positioned. To what degree are you looking to do that sort of accelerate versus what you've seen in prior downturns or slowdowns?
Andy Nemeth, President and CEO
Sure. I'd tell you, as we look at our assumptions right now and again, we have very detailed tiered models that we look at when it comes to planning the business in our capacities. And so we've laid out our assumptions, we've looked across our brand platform and our product platform to see where capacities line up with our expectations as it relates to the assumptions. As we looked at this, there are several opportunities for us to take a look and do some consolidation of like products if you will. That doesn't mean that we're going to be shutting brands down, necessarily, but it's an opportunity to maximize efficiencies during time frames like this. And it also provides us the ability to flex back up in situations where capacities and production levels increase. We've got a lot of elasticity within our like product lines. And so that coupled with the tremendous talent of our team members and the ability for us to shift production around to various facilities, again we look at it from a tiered perspective. And so we'll tell you we'll continue to do that. I would not consider this a draconian consolidation by any means. I would tell you this is opportunistic based on some of the capacities that we're seeing out of our like product lines. And there's more opportunity if we choose to pursue that. But I would tell you that it's really continued upon capacity levels at the facilities. But with our high variable cost model, again they're very flexible and nimble. So I think that we will continue to work at this from a tiered perspective.
Tim Conder, Analyst
Yes. I guess that's where my question was more from not so much as shut them down or anything but find maybe one that's a little bit more efficient, consolidate in there and to gain greater scale efficiencies in one area and so forth. I guess that was more of the question rather than shutting down or consolidating from the – as you said the more draconian perspective.
Andy Nemeth, President and CEO
That's exactly what we're doing, Tim.
Tim Conder, Analyst
Okay. Okay. Great. Thank you, gentlemen.
Operator, Operator
Ladies and gentlemen, we have no further questions at this time. I will now turn the call back over to Ms. Julie Ann Kotowski for further remarks.
Julie Ann Kotowski, Investor Relations
Thanks, Vanessa. We appreciate everyone for being on the call today. And look forward to talking to you again at our second quarter 2020, conference call. A replay of today's call will be archived on Patrick's website www.patrickind.com under Investor Relations. I'll now turn the call back over to our operator.
Operator, Operator
Ladies and gentlemen, this concludes today's teleconference. Thank you for participating. And you may now disconnect.