Installed Building Products, Inc. (IBP) Q1 2020 Earnings Report, Transcript and Summary

Good morning, and welcome to the Installed Building Products Fiscal 2020 First Quarter Financial Results Conference Call. [Operator Instructions].I'd now like to turn the conference over to Mr. Jason Niswonger, Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to Installed Building Products First Quarter 2020 Conference Call. Earlier today, we issued a press release on our financial results for the first quarter, which can be found in the Investor Relations section on our website.On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements within the meaning of the federal securities laws. These forward-looking statements include statements with respect to the housing market and industry conditions, our financial and business model, our efforts to manage material inflation, our ability to increase selling prices, the demand for our services and product offerings, the impact that the COVID-19 crisis will have on our business and end markets, expansion of our national footprint, products and end markets, our expectations for our end markets, our ability to strengthen our market position, our ability to pursue and integrate value-enhancing acquisitions, our diversification efforts, Alpha's revenue and growth expansion of our commercial business, our growth rates and ability to improve sales and profitability, the impact of the COVID-19 crisis on our financial results and acquisitions, and expectations for demand for our services and our earnings in 2020. Forward-looking statements may generally be identified by the use of words such as anticipate, believe, expect, intend, plan and will, or in each case, they're negative or other variations or comparable terminology.These forward-looking statements include all matters that are not historical facts. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. Any forward-looking statement made by management during this call is not a guarantee of future performance, and actual results may differ materially from those expressed in or suggested by the forward-looking statements as a result of various factors, including, without limitation, the duration, effect and severity of the COVID-19 crisis, the adverse impact of the COVID-19 crisis on our business and financial results, the economy and the markets we serve, general economic and industry conditions, the material price environment, the timing of increases in our selling prices and the factors discussed in the Risk Factors section of the company's annual report on Form 10-K for the year ended December 31, 2019, as the same may be updated from time to time in subsequent filings with the Securities and Exchange Commission. Any forward-looking statement made by management on this call speaks only as of the date hereof. New risks and uncertainties come up from time to time, and it is impossible for the company to predict these events or their effect. The company has no obligation and does not intend to update any forward-looking statements after the date hereof, except as required by federal securities laws.In addition, management uses certain non-GAAP performance measures on this call such as adjusted EBITDA, adjusted EBITDA margin, adjusted net income and adjusted net income per diluted share, adjusted gross profit and adjusted selling and administrative expenses. You can find a reconciliation of such measures to their nearest GAAP equivalent in the company's earnings release and additional reconciliation for adjusted EBITDA for earlier fiscal years in our investor presentation, which are available on our website.This morning's conference call is hosted by Jeff Edwards, our Chairman and Chief Executive Officer; and Michael Miller, our Chief Financial Officer. I will now turn the call over to Jeff.

Thanks, Jason, and good morning to everyone joining us on today's call. As usual, I will start today's call with some first quarter highlights and then turn the call over to Michael Miller, IBP's CFO, who will discuss our results and capital position in more detail before we take your questions. I'll focus my remarks today on our response to the COVID-19 crisis, the actions we are taking to navigate this uncertain environment and how we believe our strong operational platform and financial position will support our business through this crisis.The COVID-19 pandemic has created unprecedented social and economic challenges, and our thoughts are with everyone impacted by the pandemic. As an organization, we are focused on supporting our employees, customers and suppliers all across the country while ensuring our business is well positioned to withstand the uncertainty caused by the COVID-19 crisis.As our first quarter results demonstrate, we entered the current market environment from a position of financial and operational strength. The 2020 first quarter was very strong across our end markets, and we achieved record first quarter revenue, earnings and adjusted EBITDA. In addition, our balance sheet and access to capital remains robust. During the quarter, we generated nearly $36 million of cash flow from operations, and we ended the quarter with strong liquidity, including over $213 million of cash and short-term investments and nothing drawn on our $200 million line of credit.Across our national footprint, our branches are following federal, state and local requirements to protect the health and safety of our employees and customers. We have implemented various procedures to provide for appropriate social distancing and disinfecting of shared spaces to mitigate risk of exposure to our employees. As of the end of March, approximately 90% by revenue of our branches were located in markets where construction was deemed an essential business. However, restrictions limiting the number of laborers on a job site and our internal standards for social distancing practices impacted the volume of completed jobs and efficiencies across our end markets. We estimate that first quarter revenue was reduced by $2 million to $2.5 million due to these factors related to the COVID-19 health crisis.It is still too early to tell how the COVID-19 crisis will affect the overall economy, the U.S. housing industry and IBP. However, industry dynamics support near-term demand for our services. At the end of March, there were more than 500,000 single-family units under construction based on U.S. Census Bureau data, which we believe represents over 6 months of industry backlog. While this includes homes at various stages of completion, we believe IBP will benefit from a significant proportion of the backlog in the markets where we operate. In addition, we expect builders will focus on reducing backlogs by placing a greater emphasis on finishing homes under construction. The backlogs in our commercial and multifamily end markets remain strong as well, further supporting our business operations during this uncertain demand environment.We believe that the current economic environment will result in a significant short-term reduction in demand for housing, and as a result, a meaningful reduction in the number of single-family housing starts this year. Based on the normal lag between starts and completions within the homebuilding industry, we currently estimate that the market decline will have a more pronounced impact on our business in the third and fourth quarters of 2020. The full extent of this impact is currently unknown, but our installers and local market teams are and will remain busy working on this industry backlog.Throughout the month of April, we continued to operate with approximately 10% of our branches by revenue closed due to construction's nonessential status in certain markets, negatively impacting April revenue. Even with these closures, our April revenue increased approximately 2% compared to last year. Our large commercial construction business had April sales growth of approximately 25%. Excluding the sales of Royals Commercial Services acquired in March of 2020, Alpha had April sales growth of 17% compared to last year. Adjusting for these closed branches, April sales growth was approximately 10% compared to last year, and same branch sales growth was approximately 6%.As a result of branch closures, we furloughed 563 employees during the month of March and April. Additionally, under the Families First Coronavirus Response Act, we have provided benefit to 123 employees who have been impacted by COVID-19. As of today, with states taking steps towards reopening their economic activity, our market closures have improved to less than 2% of our branches by revenue, and I am pleased that nearly 280 of our previously furloughed employees have already been brought back to work and expect this to improve following some of the most recent state reopenings.Looking at the material pricing environment and our supply chain, we saw continued improvements in our price/mix during the first quarter. We are continuing to work proactively with both our customers and suppliers to help ensure a stable pricing and cost environment. Furthermore, nearly all of the products we install are sourced domestically, and we have not experienced any disruptions in our supply chain or procurement activities.Overall, we believe the housing industry is much healthier than before the 2008 to 2009 financial crisis, and the industry was experiencing strong growth prior to the COVID-19 crisis. We are closely monitoring the housing market, and we are in constant communication with our local, regional and national customers. Our high variable cost structure allows us to quickly adjust to changes in demand, and we have plans in place to further modify our financial model, if necessary, in the coming quarters.While we have not currently made any large-scale adjustments to our business, we have decided to proactively delay closing acquisitions until the economic environment stabilizes.Our pipeline is robust, and we continue to actively pursue acquisitions of well-run installers that support our geographic, product and end market diversification strategies. For more than 2 decades, these diversification strategies have driven strong financial performance and growth while expanding the scope of our installation services, enhancing our end market exposure and increasing our geographic footprint.During the 2008 to 2009 recession, as housing starts declined, we expanded the service area of our existing branch locations and expanded our product offerings in new markets. As our scale has increased over the past 12 years, we believe we are even better positioned to pursue these strategies today and outperform the market when housing starts decline. In addition, during the last recession, we had limited opportunity in the commercial and multifamily end markets. Our Alpha commercial installation business in our multifamily platform will further help IBP navigate a downturn in the single-family residential market.During the first quarter, commercial and multifamily revenues increased 14% and 35%, respectively, over the previous year, demonstrating continued growth and market share gains in these end markets. Longer term, we believe the pandemic will likely increase the demand for single-family housing, increase the need for more affordable homes and potentially support a quick rebound that is not typical of a housing downturn.So to conclude my prepared remarks, I'm extremely pleased with our first quarter financial results and strong platform that we have created. Our strong balance sheet, combined with our experienced leadership team, long-standing customer relationships and asset-light high variable cost and diverse business model will allow IBP to navigate through this period of economic uncertainty.Finally, I'd like to take this opportunity to thank our installers who are hard at work every day, representing IBP and serving our customers. On behalf of the entire leadership team, we recognize your efforts, and I want to personally thank you for your dedication.With this overview, I would like to turn the call over to Michael to provide more details on our first quarter results.

Thank you, Jeff, and good morning, everyone. I'll quickly review our first quarter financial results before focusing my prepared remarks on our response to the COVID-19 crisis and the strength of our balance sheet and capital structure.Net sales increased to a first quarter record of $397.3 million compared to $342.1 million for the same period last year. The 16.1% year-over-year improvement in sales was mainly driven by improvements in price/mix, end customer and product growth and the contribution from our recent acquisitions. As Jeff mentioned in his prepared remarks, we estimate that first quarter revenue was reduced by $2 million to $2.5 million due to the facts related to -- due to the factors related to the COVID-19 health crisis.Sales at Alpha, our large commercial construction business, increased 14.1%. It is also important to note that Alpha sales are not included in the volume and price metrics we disclosed.Profitability was strong during the first quarter. Adjusted gross profit margin expanded 310 basis points over the prior year period as a result of improved price/mix performance. Partially offsetting our strong first quarter gross profit were higher selling and administrative expenses which, as a percent of sales, increased 110 basis points to 20.3%, primarily due to higher health care costs and other variable employee costs that fluctuate with profitability. On a GAAP basis, our first quarter net income increased 81% from the prior year quarter to $16 million or $0.53 per diluted share. Our adjusted net income improved 52% to $23.2 million or $0.78 per diluted share compared to $15.3 million or $0.51 per diluted share in the prior year quarter. While we cannot predict the full adverse impact on gross profit and net income, we anticipate higher costs and reduced efficiencies related to the COVID-19 pandemic as restrictions limit the number of laborers on job sites and as we stagger crews across all of our end markets.During the 2020 first quarter, we recorded $6.7 million of amortization expense compared to $5.9 million for the same period last year as a result of our acquisition strategy. This noncash adjustment impacts net income, which is why we continue to believe that adjusted EBITDA is the most useful measure of profitability. Based on our acquisitions completed to date, we expect second quarter 2020 amortization expense of approximately $6.7 million and full year expense of approximately $26.4 million. This figure will change with any subsequent acquisitions.For the 2020 first quarter, our effective tax rate was approximately 26.2%, and we continue to expect a full year effective tax rate of 25% to 27% for 2020. For the first quarter of 2020, adjusted EBITDA improved to $49.2 million, representing an increase of 37.9% from $35.7 million in the prior year. Adjusted EBITDA as a percent of net revenue increased 200 basis points from the prior year period to 12.4% as a result of higher gross profit attributable to improved price/mix and the benefits of our diversification strategies.With this overview on our first quarter results, I would like to take the opportunity to talk about our cost structure and initial response to the COVID-19 pandemic. We have a highly variable cost structure. As demand for our services decline, our cost of sales sizes quickly to the lower volume. This includes our material and installer labor expenses, which are directly variable to our revenue and represent our largest expenses. While we have made great strides in reducing our employee turnover during the past few years, our industry has historically experienced high levels of turnover throughout the cycle, which we experienced in our business even at the depths of the Great Recession, and we believe this will continue in the expected upcoming downturn. This makes it easier for us to size installer workforce to the demand for our services.Selling expense is our next most variable cost item on the income statement. Comprised extensively of commission and employee-related expenses, our selling expenses will size to revenue but will have some lagging characteristics. Consisting predominantly of branch operating costs, such as base salaries, facility costs, health and insurance expenses and variable employee costs, our administrative expenses are generally the least variable of our expenses on a monthly basis and will lag a decline in revenue. During a prolonged downturn in housing demand, we would look to reduce administrative expenses through branch consolidation, reduced headcount and hours worked, salary reductions and similar cost-cutting initiatives, which would vary on a branch-by-branch basis.With the existing backlog of construction activity throughout our end markets, our branches remain active and productive, which affords us the opportunity to further monitor and assess the evolving economic situation. The depth and breadth of the decline in housing demand will impact our cost-cutting decisions on a market-by-market basis. We have eliminated nonessential travel, suspended pay increases for our executive officers and taken additional cost-saving initiatives. However, if a deeper and longer recession were to occur, it will necessitate the implementation of our more significant cost reduction plans. If the expected housing downturn is a steep decline with a relatively rapid recovery, we would be less likely to implement deep cost-cutting strategies as this would impact long-term growth opportunities in market share and diversification.Now let's look at our liquidity, balance sheet and capital requirements in more detail. Our business model generates strong operating cash flows. For the 3-month period ended March 31, 2020, we generated $35.9 million in cash flow from operations compared to $15.9 million in the prior year, a 126% increase. Our asset-light business model does not require a significant amount of capital expenditures, and our primary capital requirement is to fund working capital needs.At March 31, 2020, we had $154.4 million in working capital, excluding $213.7 million of cash and short-term investments. With $245.5 million of accounts receivable and $73.6 million of inventories at March 31, 2020, we would expect to convert a significant amount of working capital to cash with a decline in sales.Capital expenditures at March 31, 2020, were $9.9 million, while total incurred finance leases were $0.3 million. Capital expenditures and finance capital leases as a percent of revenue decreased approximately 30 basis points to 2.6% at March 31, 2020, compared to the same period last year. In typical market environments, we have focused our capital investments on acquiring well-run installers that fit our product, end market and geographic diversification strategies. While our acquisition pipeline remains robust and we completed 2 acquisitions in the first quarter, as Jeff mentioned, we have temporarily delayed closing additional acquisitions until the economic picture becomes clear.During the first quarter, we repurchased $15.8 million of our common stock and at nearly $45 million remaining under our $150 million stock repurchase program. As a result of the COVID-19 crisis, we have decided to temporarily suspend stock repurchases under our previously approved repurchase program.At March 31, 2020, we had total cash and short-term investments of $213.7 million compared to $215.9 million at December 31, 2019. Total debt at March 31, 2020, was $575.6 million compared to $575.5 million at December 31, 2019. Considering cash and short-term investments at March 31, 2020, our net total debt was approximately $362 million compared to $360 million at December 31, 2019. We have nothing drawn on our existing $200 million revolving line of credit, which, combined with our cash position, we believe, provides us considerable flexibility in the current economic environment.I am extremely pleased with the recent success we've had diversifying our sources of capital, staggering our debt maturities and limiting our financial covenants. With no significant debt maturities until 2025 and strong liquidity, we have considerable financial flexibility to withstand this period of economic uncertainty.With that, I will now turn the call back to Jeff for closing remarks.

Thanks, Michael. I'd like to conclude our prepared remarks by once again thanking IBP employees for their hard work, dedication and commitment to our company during this very uncertain time. Our success over the years and more recently wouldn't be possible if it wasn't for you, and our thanks goes out to you for a tough job always done well. As the world has become more uncertain, we are focused on supporting our employees and customers through this challenging time.Operator, let's open up the call for questions.

[Operator Instructions]. The first question comes from Trey Morrish of Evercore ISI.

So I guess the first place to start for me would be that the SG&A, it was definitely higher on a year-over-year basis with revenues or volumes being flat and revenues being up. You talked about health care and higher profitability from variable costs. I was wondering if you could kind of tease that out for us a little bit. How much of that higher SG&A year-over-year was due to that increase in variable costs from greater profitability?

Trey, this is Michael Miller. Yes. So the majority of the increased costs were associated with variable costs, variable employee costs that are embedded in G&A. But obviously, the health care cost had a notable contribution as well. Without the increases in those 2 expenses, we actually would have had slight SG&A leverage in the quarter.

Okay. Got it. And then resi pricing accelerated pretty noticeably on a sequential basis, at least from what we can see on a year-over-year perspective. Is that what happened actually on a sequential basis? Or was there further increase in pricing? And then how do you think about that going forward in the next few quarters, particularly with demand likely to fall noticeably?

Yes. Trey, this is Mike again. Just to be clear, I think we talked about this in the fourth quarter conference call as well, is that our efforts to really get on top of the price/mix equation, if you will, have not fully been taken into consideration even at the end of the fourth quarter of last year, such that we continue to see price/mix benefit going into the first quarter of this year. Now going forward, obviously, there is a considerable uncertainty in terms of the demand environment and how the situation is going to play out over the next couple of quarters. I would say, though, that our pricing initiatives, both in the back half of last year and also going into the beginning of the first quarter of this year, have lapped themselves in the sense that we wouldn't expect to have the same level of price/mix gains going through the rest of the year.

Next question comes from Ken Zener of KeyBanc.

It's nice to see your EBITDA contribution in the mid to high 20s. Would you comment, perhaps given what's happened with SG&A, if you're range in terms of the EBITDA contribution, I think it's -- you guys used to say, what, 20% to 25%? Is that correct, Michael?

Correct. Yes.

Could you -- realizing you're not giving guidance, could you just kind of help us toggle through what might be creating kind of lower versus higher EBITDA leverage? Just so we can understand how you can share labor between branches. Obviously, with 98% of your branches by revenue open, that's a lot. There's a lot of backlog to go through. But just if you were able to work really efficiently because you were within 6 feet of each other before. Could you just give us a feel to make it a little more granular about how those physical behavior changes might impact EBITDA a little bit?

So the cost of being less efficient at a labor site and the social distancing practices that we're doing in terms of staggering start times for installers, that actually impacts cost of goods sold more than it does G&A expenses. So we would expect that, that would have an impact on gross margin. Obviously, during the quarter, we had very strong gross margin growth, but it's difficult to predict really how this is -- again, how this is going to play out over the next couple of quarters. But we would definitely expect to see some margin compression from the lack of efficiency on job sites, which is to be expected. But at the same time, we do feel fairly good about the results of April from a revenue perspective, considering that we had positive revenue growth despite the fact that 10% of our branches by revenue were closed and then our same branch sales growth, adjusted same branch sales growth, was up 6%, given the current economic environment.We also feel very good about the strength of our backlogs in both the multifamily and commercial business, both the light commercial and the heavy commercial business. Those businesses now represent over 30% of our total revenue, and we have very good visibility into the backlogs of those businesses. So yes, there's going to be an impact on all of the new practices that we're doing for some period of time. But we really haven't -- as you noted, we don't provide guidance. But it's too early to say exactly what the full impact, particularly in any 1 quarter, is going to be associated with those expenses.

Understood. If I could ask about your commercial comment there, 30%, I think, is what you said. Could you break that into the heavy versus light, A? And then B, another commercial installer talked about regional impact, regional exposure impacting their business. Obviously, I guess, you did not have that same headwind. Are there specific areas, regions that you're in -- it sounds like all your commercial was outside of any heavily impacted closure areas, i.e., Seattle, San Francisco, et cetera.

Yes. So just the breakdown of that 31% roughly, 13% of it is multifamily. About 10% of it is heavy commercial and 8% is light commercial. And yes, our heavy commercial business, not so much the light commercial business, but the heavy commercial business was in all markets that construction was deemed essential. Now we did have certain jobs slow down. We actually had certain jobs speed up in terms of trying to get the work done faster and get jobs completed, so there is definitely some puts and takes there. Quite frankly, though, as I said, we have high visibility into the backlog there. And actually, Alpha, the heavy commercial business, had a record month in April in terms of the number of bids that they submitted.

Light commercial was, in fact, impacted in states that were closed.

Absolutely.

The next question is from Phil Ng of Jefferies.

I guess can you give us an update on how new orders may have progressed the last few weeks? And with some of these states that have shut down and they're in the process of being reopened, any read in places like Pennsylvania, Michigan and Georgia?

I mean, if you're talking about orders for us or new orders for the builders?

New orders for you.

Yes. So I would say that -- I mean, obviously, we've talked about April sales and the impact there. We're back up to 98% in terms of revenue that's active, but some of those locations have just started this week. But I would say that so far, the initial indications in May are very encouraging.

And then does that account for bidding activity as well? Just want a little more color around that as well.

Yes. So I mean, all of our salespeople, particularly in states that were closed, continued to bid jobs from them. And we're continuing to see good bidding level on the residential side, as I mentioned, on the commercial side. During the month of April, Alpha had a record month in terms of their bidding activity and in terms of the number of bids that they submitted. So we feel good that there's still volume there. But we can't ignore the fact that clearly, during the month of April, there was an unprecedented decline in order growth at builders from a single-family perspective. So we're starting to see positive trends, I should say, March and April in terms of that order growth decline. And I would say that we're starting to see positive trends in that order growth, but it's still significantly down from where it was even last year, let alone from where it was in January and February.

Got you. And then Michael, you were kind enough to give us some color in terms of the playbook in terms of how you kind of think about costs as this downturn kind of progresses through the year. Any incremental color how we should think about decrementals, let's say, early on in this process and how that may progress over the course of the year?

Yes. I mean decrementals will probably be higher initially just because of -- I mean, one, we have the cost, the carrying cost, if you will, of branches that were closed, right? So we had branches that basically had no revenue, but we obviously still have the branches and still supported the administrative staff within those locations, right? So the decrementals initially will most likely be higher. And I would say that in a normal environment, we would expect decrementals to be similar to the incrementals of that 20% to 25%. But we wouldn't be surprised if we saw decrementals higher than that, again, especially during the initial part of the crisis or of the -- as things develop over the next couple of quarters. However, all of that is really going to depend upon volume. And I think one of the things that's important is that we, as a management team, have been working together for over two decades.We've managed this business through multiple recessions, including the Great Recession. And as a company, we manage the business through an opportunity -- or through a time where up to 80% in some of our markets, 90% of our market opportunity went away. Despite that, we well outperformed the market and consistently grew market share. In fact, from peak to trough, our sales during the Great recession were only down 40% compared to, again, a market that was down 80%. And so we have a lot of confidence in our ability to manage during the most difficult of times, which clearly -- it remains to be seen, again, what happens to the housing market in this time, but we're very confident in our ability to manage through this and to effectively come through the other side of this a much stronger company.

This is Jeff, too. I mean I'd just follow on that and say that I think as a group, we're really pretty good problem solvers. But the problem hasn't come into focus as pretty much everybody listening probably already knows. I mean you can't solve a problem that you don't yet know exist. We don't know. It's kind of like being dealt -- or being asked to play a game of cards and they haven't dealt the cards yet. So we're kind of waiting like everyone else to see just how this soft spot or air pocket, maybe worse, manifests itself.

Got it. Okay. That's helpful. And just one last one for me. You've furloughed some of your employees and good to see you're bringing some of them back. Just curious, how long does it take to kind of bring in crew back for IBP specifically? And any thoughts in terms of the entire trade for construction? Do you see that as potentially a bottleneck as demand comes back?

I mean, for us, it's a day when they come back.

All of it. Really immediate.

Yes. It's immediate. And I would suspect that's true of most trades in terms of their ability to bring people back. I think most large companies in the space have done things to sort of -- to protect their employees, if you will, during this time. One of the things that we did is for the month of April, we paid benefits for those furloughed employees. So I think we're all working very hard to protect our most important asset, our people.

Well, this is Jeff again, too. But in a normal environment and even during the Great Recession, it was -- it's extremely rare for us to hire a new employee that has experience in our trades. So we end up hiring people that are completely unexperienced and trained them. So on a go-forward basis, I can't speculate about the labor market for other trades, but we've even looked at it and thought that there could potentially be less pressure, assuming that we're still dealing with inexperienced employees to start with, but less pressure on that just based on some of the fallout in some of the other industries.

Our next question is from Mike Dahl, RBC.

I wanted to ask a question around just when you're looking at the backlog of homes under construction, there seems to be a lot of moving pieces and unclear whether or not these will be sustained, but differences in things like spec versus build to order, regional difference, some with lack of clarity on high end, low end. I guess the question is, when you're looking at it, is there something about the mix of homes we should be considering either from kind of a volume or a price/mix standpoint as we look into 2Q, 3Q?

I think it's -- I mean, the backlog is consistent with the trends we were all seeing in terms of growth at the more affordable housing level. Clearly, that market has historically been a very spec-driven market in terms of builders wanting to have houses ready to deliver quickly for that affordable segment. And we think that the backlog or the backlog is comprised of a lot of that trend that we were seeing before this started in March and April. Now we would expect that -- and again, we're starting to see some signs of pickup in orders at the builders, and we would expect that the builders that are -- which are, generally speaking, in very strong financial condition, would expect them to start picking up their activity to meet that demand. The inventory, as we all know, of homes is very tight, particularly when -- and we're assuming that demand will come back, particularly given the amount of stimulus that's going into the economy, combined with the very low rate environment. So we'll see.

Okay. That's helpful. My second question, and again, I understand you're not providing guidance. But in some of the opening commentary, you talked about the impact being really more of a 3Q, 4Q issue for you guys given the lag there. I guess is there any more clarity you can give on kind of the shape that, that would take? Is this kind of just a gradual decline lower through 4Q? Or is it going to be, as it stands currently, something more pronounced in 3Q and then still pressure in 4Q but less so than 3Q?

It's really impossible to say, quite frankly, just because it's uncertain right now, just how quickly orders will come back and how quickly builders can take land and convert it to lots to get them ready for us to install our services. I mean we come relatively late, and many of our products get installed relatively late in the timing to build a house. So it is really dependent upon how quickly builders can start sizing up again to the -- what we believe ultimately is the demand. So I think we'll be able to give you a much better answer to that question after we get through the second quarter and we sort of see what order growth is like and absolute order numbers are at the builders through the second quarter and into July.

Our next question is from Susan Maklari of Goldman Sachs.

One of the things that I think you have that's a bit unique is your exposure to private builders and especially maybe deeper into the Midwest and some of those regions that the publics aren't as heavy in. Can you talk to what you're seeing from the privates versus the publics, if there's any trends that are running differently there? And maybe just some color in terms of what you've seen regionally and what that could mean for results.

So the majority of the states that were closed during March and April and did not deem construction essential were in the Midwest and the Northeast. So obviously, that had an outsized impact on those regions, particularly during the month of April. I would say that just from a general perspective, I think most private builders have not been -- have not taken the same stance as some of the public builders have in terms of not wanting to start projects. I think the private builders have been a little bit more aggressive in terms of their belief that there's going to be a strong bounce back in orders. And I think they're going to continue to work hard to kind of stay ahead of the curve. Now that being said, I mean, there's no doubt that when we see the Census Bureau data coming out, for the next couple of quarters, starts growth and orders are going to be significantly impacted.

This is Jeff. But interestingly enough, of the states that were closed with the exception of Washington state, as Michael mentioned, where they were located, predominantly kind of Great Lakes and New England, those are obviously some of our most seasonal markets also.

Yes.

So they -- despite what's going on, are moving into the quarters usually that end up being where they do the predominance of the work that they do for the year.

Yes. Interestingly, it started out -- I mean, the quarter started out with a very mild winter, which was very beneficial for those markets as well.

Okay. And then another question. Just can you talk to your ability to delever? How quickly can you kind of convert that working capital over? And is there any kind of target in terms of leverage that we should be thinking about? And maybe especially if this does end up being a deeper or a more sustained downturn than what's currently expected?

Yes. So if it is a deeper and more sustained downturn, we would look to delever on a net basis. We don't look to prepay any debt at this time. I mean, that just doesn't make sense. We want to preserve liquidity. And we have no significant debt maturities until April of 2025. And then our next significant debt maturity is in 2028. So our net leverage right now is under 2x, and we would expect that one through the reduction in working capital, which happens almost immediately, if sales are declining, that we would be able to continue to improve our net leverage throughout the course of any downturn.

Okay. Our next question is from Keith Hughes of SunTrust.

A couple of questions. One on the price/mix in the quarter, which was outstanding, is that still more price-driven at this point in the first quarter numbers?

Yes.

And do you expect, given the trough we're going into, do you expect mix to change? Or will the same mix trends continue based on what you see on orders?

Yes. That's actually a great question. I'm glad that you asked it. So yes, we would expect, actually -- I mean, again, depending upon how all this plays out, but we would expect that in order to continue to maintain a higher level of sales within our branch locations, that not only would they continue to expand their service area in terms of the service radius around the branches, but that they would also push even more aggressively the sale of the other products. We absolutely benefited from that during the Great Recession, and we would expect that if this is a prolonged downturn that we would benefit from that, those factors as well in that case.

Okay. And final question.

And just -- let me -- just to complete on that. Just for everyone's benefit, we've talked about this several times before. But the higher growth rate of those other products brings down the price/mix because those other product sales job prices are much lower than insulation.

Okay. Final question on Alpha, good news on their quotation activity in March and April. How -- typically, how long is the lead on a quote until you're actually on the job site doing work for Alpha?

It really depends, obviously, on the job that's being quoted. I mean sometimes, it can be 12 months or even longer before we're on the job site. But generally speaking, in terms of backlog visibility, we have very good visibility into, call it, three to four quarters worth of revenue on the Alpha side.

Okay. You're not seeing any cancellations come up from quotations several months ago?

We've seen very few cancellations. And to be honest with you, they've -- I think we've had maybe 3 or 4 jobs canceled, and they were all fitness facility related.

Our next question is from Seldon Clarke of Deutsche Bank.

Can you just talk about how volumes are trending in April versus price/mix? Or just help us bridge to some of those organic sales numbers that you gave for April?

We're still seeing stronger price/mix than volume.

All right. So volumes on an organic basis, down year-over-year?

No.

Okay. So some modest growth in volume. Kind of longer-term question as it relates to M&A. How do you think the upcoming slowdown or just this entire situation will impact the M&A landscape? I know you guys try to go after higher quality companies, but how do you typically think about the opportunities or the pipeline coming out of a slowdown or in the middle of a slowdown relative to a more normalized environment?

This is Jeff. And what I would say is, I mean, there's not a seller that we've probably ever spoken to nor done a deal with that doesn't recognize this as a cyclical business. And I guess most people always assume that it becomes a buyer's market. I mean -- and we may see a slight downward adjustment in terms of multiples. But in general, I think most of the companies we've talked to have been through down markets. And honestly, if they can't kind of position the business where it needs to be and basically get a purchase price that kind of supports what they have worked on in many cases for decades, they just pull back and the opportunities go away. We're not seeing that. I think we're, at this point, talking with a lot of companies that have a lot of background in the business, a lot of history and have had strong growth and impressive profitability.So at some point, we will -- I think the clouds will clear a little bit. We'll know a little bit more about what economy that we're going to ultimately deal with. We feel that the housing market potentially is in a different spot maybe than it obviously was the last time, a very different spot. And it's actually maybe an entirely different spot than the rest of the economy with a lot of tailwinds in terms of interest rates and lack of product and a number of other things. So we're hoping that it's not pronounced in the residential, primarily residential market. And at that point, when we know that it's not, we'll get active again.

Yes. And I would say, too, from a structure perspective, the new deals that we're signing up were including a large component that has an earn-out tied to it so that some of the uncertainty surrounding what's to come is borne by the seller.

Next question comes from Trey Grooms of Stephens, Inc.

This is actually Noah Merkousko on for Trey. Just a quick follow-up on that last question on M&A. I understand it might be a little bit too early, but what would you guys want to see from the market before you started getting active in M&A again?

I mean, we're just going to continue to monitor the information, both internal. But in addition to that, the information that's available in terms of kind of builder traffic and builder sales. They -- I don't know, it's probably been 3, maybe even 4 weeks now where kind of sequentially, there's been improvements. So obviously, I think the next 30 to 45 days are key in that regard. And if it continues to recover, I think we're going to feel a lot better about things.

Next question we have is from Reuben Garner with Seaport Global Securities.

It's actually Reuben with Benchmark now. Congrats on the quarter, guys, and good start to April. Most of my questions have been answered. Just one kind of follow-up, and I don't mean to beat a dead horse, but the backlog that you referenced, how long kind of can your business sustain or tread water before you need to see signs that the orders for the builders -- I'm just talking about the single-family side, before you see those orders recover? I mean, is that -- is your comment about how the weakness is more of a third quarter event? Is that the point that you've got 3, 4, 5 months' worth of work that you can hold over? And if you get the orders from the builders coming back in the next couple of months, then maybe you never really see a period of weakness? Just help us understand how that dynamic plays out.

Yes. I mean, generally speaking, that was the point we're trying to convey, although given the unprecedented decline in orders and what we believe the data will show in starts, it's just going to take time to get the houses, assuming that, that order growth comes back and we get to a more expected level of orders. It's just going to take some time for that house to be ready for us to do our installation work. Because keep in mind, the house needs to be framed and plumbed and the electrician has to be there. And there's just a whole bunch of stuff that has to happen before we get there. And those trades are going to need to come back and get that done. So our feeling is there is a very good backlog available right now. I mean, obviously, it's in various stages, some of which we've already installed. But we feel that lends near-term support for the single-family new construction business. And we're encouraged that the order growth, if it accelerates like all of us -- and maybe not all of us, but a lot of us think will be the case, that the very well-capitalized builders are going to be able to take advantage of that and get homes ready for us to continue to do work on.

Great. And good luck navigating through this crisis.

Next question is from Justin Speer of Zelman & Associates.

Just number one, just the sequential volume deceleration in the quarter. Was that a function of a trade-off of price and volume? I guess did you intentionally seed some volume share in the quarter?

It was a combination. I mean price -- we've always talked about the fact that we favor working with customers that value our service, and we do that definitely over volume. But the volumes were definitely impacted, as we had mentioned in our prepared remarks, by the $2 million to $2.5 million of revenue that we did not have because of the COVID-19 impact. So from our perspective, we feel very good about where we were from a market share perspective in the quarter and the customers that we were doing work with. We saw outsized growth in the quarter and actually even in the month of April, with some of our most important customers from a large building perspective, and they continue to value the service that we provide them.

What were your volume trends, year-over-year trends by month in the quarter?

So they were solid in January and February, and it was March where the volumes turned negative.

And then if you think about the nonresidential backlog funnel, well, if you could provide any in-vertical observations across your book of business, about how they're trending now? I know that there are certain areas that maybe were pulled ahead, certain that were maybe delayed, at least parts of the channel. And then how you -- just big picture, stepping back, how you think this pandemic is going to affect nonresidential starts activity that's going to filter into 2021 for you?

That's a good question. I mean right now, we're seeing strength, really, continued strength in the commercial business, both the light commercial and the heavy commercial business, with the exception of the fitness facilities that I've mentioned earlier in the Q&A. It's very difficult to predict how the -- this unprecedented event is going to influence things like stadium construction and office space. It's just -- it's really very uncertain. All I can say is -- and we'll continue to update everyone on this, is that our bidding activity is at record levels. And we feel very encouraged by the commitment and strength of all of our employees and particularly those employees at Alpha that are working very hard to continue to grow that business for us.

So I guess, in terms of the M&A side of the ledger, just given the later cycle nature of that channel, do you think that perhaps in terms of the purse strings for M&A, maybe initially towards the residential area versus nonresidential so you get a little bit more visibility in nonresidential? Or do you think that the opportunities will coincide with one another?

We're definitely prioritizing residential opportunities right now over nonresidential, but we're not afraid of doing nonresidential deals. And as we said earlier, I mean, there are ways to structure deals where you can put some of the risk back on the seller. But the key is we have always focused on working with bringing on to our team, high-quality businesses with high-quality people. And it's our experience that they know how to manage very effectively, as Jeff said earlier, during a downturn. And we feel confident that both our existing team and people that we add to the team will do a very effective job managing through this.

And then the last question for me. Just on the SG&A run rate at roughly $80 million in total SG&A in the first quarter. Is that the, like, starting run rate? I know it's -- there's a seasonal element to it, but is that a good starting run rate to use to work from in terms of thinking about the progression of the expense? I know you mentioned health care items. I don't know if there are some onetime items in that first quarter number that won't repeat as we think about the sequential and seasonal trends.

Yes. I mean, on the selling side, as we mentioned in our prepared remarks, I mean, a large portion of that expense is employee-related that will fluctuate with sales. We don't like to think of any cost as being fixed cost, but the most lagging of our variable costs are contained in G&A. So that G&A run rate, depending upon how this plays out, would have the greatest lagging variable to any decline in revenue.

Okay. So that $60 million roughly G&A expense is the right kind of number to start with as we think about the sequential progressions and the phasing of revenues?

It's reasonable.

Our final question is from Ryan Gilbert of BTIG.

Just first question. It sounded like volume picked back up a little bit in April. And I'm just wondering if that's from activity in states that were previously shut down or if there's anything else driving that volume lift?

Yes. It's definitely some -- although in April, we still had the 10% or so of our revenue closed, so it wasn't really driven by that. It was driven by volume growth in our nonclosed markets, if you will. So we are -- I mean, this is -- if we look at our footprint and if you look at the south and west, with the exception of Washington, I mean, California was definitely impacted from a volume perspective. But focusing particularly on the Census Bureau's south region definition, we continue to see good performance in that market. And none of those markets were closed due to -- because construction was deemed essential in all of those markets. And surprisingly, those markets continue to be very strong. We've actually had some builders, believe it or not, that had record in those markets, have had record sales, have continued to have record sales in those markets. So it's some of the things that help point us to the fact that we do think that the housing market, at least -- and I can't speak to the overall economy, but that the housing market has the potential to come back from this pretty quickly.

Got it. Yes, that's encouraging data points. Looking to the commercial business, do you have an idea of what percent of the backlog is vertical construction that's already started versus on their stone horizontal development?

I don't have that percentage in front of me, but we're being extremely careful right now on all of our project work and also on all of our bidding to make sure that those projects have been funded already and have been committed to so that we're not bidding on work that may ultimately get canceled. But I would say that it's a mix. And -- but historically -- and there's nothing historic about the current environment, but historically, we've had very little problem converting backlog into revenue.

This concludes our question-and-answer session. I'd now like to turn the conference over to Mr. Jeff Edwards for any closing remarks. Please go ahead.

Thank you for your questions, and I look forward to our next quarterly call. Thanks again.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.