BMC Stock Holdings, Inc. (BMCH) Q1 2020 Earnings Call Transcript

BMC Stock Holdings, Inc. (BMCH)
Q1 2020 Earnings Call
May 05, 2020, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and thank you for standing by. You are joining BMC's first-quarter 2020 earnings conference call. This call is being recorded today, Tuesday, May 5, 2020. [Operator instructions] It is now my pleasure to introduce your host, Dave Flitman, CEO.

Thank you. You may begin.

Mike Neese -- Senior Vice President, Strategy, and Investor Relations

Thank you, Rachel. Good morning, and welcome to our 2020 first-quarter earnings call. First, our hearts and prayers are with you, your families, our suppliers and customers during this challenging time. After my opening statement, Dave Flitman, our chief executive officer; and Jim Major, our CFO, will discuss our record first-quarter results.

Dave will spend the majority of his time discussing our response to the COVID-19 pandemic and answering your questions. In addition to our prepared remarks, a slide deck is available on our website at ir.buildwithbmc.com. This is also where you can find today's press release, which was issued earlier this morning. The results discussed during the call will include GAAP and non-GAAP results adjusted for certain items.

We provide these non-GAAP results for informational purposes, and they should not be considered in isolation from the most directly comparable GAAP measures. The reconciliation of these non-GAAP measures to the corresponding GAAP measures and a discussion of why we believe they are useful to investors can be found at the back of the press release and in the slide presentation. Our remarks in the press release, PowerPoint presentation and on this call contain forward-looking and cautionary statements within the meaning of the Private Securities Litigation Reform Act and projections of future results. Please review the Forward-looking Statements section in today's press release and in our SEC filings for various factors that could cause our actual results to differ in a material way from forward-looking statements and projections.

With that, I'll now turn the call over to Dave.

Dave Flitman -- Chief Executive Officer

Thanks, Mike. Good morning, everyone, and thanks for joining us. Before we discuss our results, let me offer my sincere thoughts and prayers to all of those affected by the COVID-19 pandemic. And offer my gratitude and appreciation to our nation's healthcare workers and first responders who have been on the front lines of this battle since it started.

They are true heroes. I also want to deliver a sincere thank you to all of our associates who are working hard every minute of every day to safely deliver our products and services to our customers. I very much appreciate what they're doing for our company and for the greater good of our nation's homebuilding infrastructure. This morning, I'd like to highlight our record first-quarter net sales, gross profit, EBITDA and EPS performance, and then spend some time discussing the plans we put in place over the past several weeks in response to the COVID-19 pandemic.

Jim will discuss in greater detail our first-quarter financial results and our outlook. I'll return to wrap up, and we'll then take your questions. We came into this year with very strong underlying momentum in our business, driven by the consistent and focused execution of our strategies. Our pipeline of activity was the strongest we've seen in nearly 15 years.

So when the economy recovers, we will be positioned for continued growth for many years to come. Moving to our first-quarter performance. I was very pleased with our results, which exceeded our expectations and capitalized on continued momentum in our value-added products and services and a strong pipeline of construction activity. I'll now cover the highlights of our record first quarter.

Net sales increased 11.6% to $920.9 million. And our core organic growth of 5.3% was the highest since I've been with BMC and has accelerated from our strong Q4 2019 core organic growth of 3.9%. We grew our gross profit dollars by nearly 10% to $237.1 million despite the slight deflation. And our adjusted EBITDA improved by 12.1% to $61 million.

Our Ready-Frame offering continued to show strong market penetration, with a number of homes built with Ready-Frame up by over 30% in the quarter. Our millwork, doors and windows segment increased 23%, while the structural components segment was up 13.5%. Both segments were up at least 10% on an organic basis. Our strong first-quarter performance demonstrated that the four pillars of our strategy are paying off and that we are developing and delivering innovative solutions to our customers.

Now let me turn to our response to the coronavirus. We are grateful that the Department of Homeland Security and the vast majority of states in which we operate deemed the construction and homebuilding sector as essential. As you may know, the construction of new single-family and multifamily structures and other residential investments represents approximately 4% of the U.S. GDP.

There remains a significant undersupply of housing in the U.S., and we still need to keep building during this downturn. However, these are challenging and unprecedented times for our country, for our industry and certainly for our company and for all of our associates. Nearly 10 weeks ago, we provided a 2020 outlook of solid growth for our company. We then withdrew our financial outlook last month due to the devastating COVID-19 virus.

Although none of us have ever experienced anything like this, we took out our playbook from prior downturn. Nearly 80% of our senior leadership team and market managers were with the company or in the industry at the time of the Great Recession. And many of us who weren't lived through those challenging times in other cyclical industries. In mid-March, we went to our virtual war room and took significant actions to begin dealing with the business impacts resulting from the virus.

We created a COVID-19 task force, which continues to meet daily and focuses on the safety of our associates. We instituted a robust scenario planning process, which includes virtual executive leadership meetings twice per week, a very detailed metrics tracker and certain contingency planning. In the weekly tracker and executive leadership team meetings, we discussed sales rates, new orders, job setups, inventory and supplier performance tracking and our trade receivable collections. We implemented a remote working policy for our associates who were able to work from home.

And we now have approximately 2,000 of our associates working from home and without disruption. Given the changes we were witnessing in the U.S. economy and the approximately 30 million people who have now filed for unemployment benefits over the past several weeks, we quickly reallocated our attention to the following three key priorities: first, working to ensure our associates' personal safety; second, accelerating productivity and implementing cost savings across our business, while preserving our best-in-class service levels; and finally, maximizing the liquidity and financial strength of our company. Consistent with these three near-term priorities, we have significantly stepped up our communications in all forms, companywide, including a weekly video update where I highlight our progress against these priorities to all of our associates.

As one of our company's core values, we are committed to ensuring the safety of our associates and their families as our No. 1 priority during these challenging times. Over the course of the past two months, we took numerous steps to protect our associates, customers and communities in which we operate. Our cross-functional coronavirus task force ensures that we are responding in real time with the development of the appropriate processes, protocols, training and communications to our associates and stakeholders.

These measures incorporate as the guidelines recommended by the CDC and include detailed cleaning and disinfecting processes, social distancing protocols, providing face coverings and other personal protective equipment, suspending travel and encouraging associates to work from home when possible. We also implemented requirements for job site safety, signage at our locations and are partnering with our customers at job sites as necessary. Additionally, the company launched a dedicated COVID-19 resource Intranet page to keep associates up-to-date on company and health authority information, guidelines and policies. We also enacted several emergency pay programs in order to maintain continuity of pay for associates who present any symptoms or are unable to report to work because of a COVID-19 disruption.

At any location where an associate received a positive diagnosis, a deep cleaning and disinfecting of the facility was implemented. Additionally, any associates who had prolonged close contact with an associate with COVID-19 were placed on paid emergency leave. Finally, last month, BMC joined other members of the National Association of Home Builders for a COVID-19 Jobsite Safety Stand Down. Before starting work, we asked all managers to invest 10 minutes educating our team members on best practices we should be following to keep ourselves, our partners, our customers and our communities safe from COVID-19 and help flatten the curve for everyone.

Now let's turn to our cost savings initiatives across our company. We are actively reducing our operating expenses in anticipation of the housing industry slowing significantly from where we started this year. While it's hard to predict, and there remains a high degree of uncertainty, several industry experts and analysts have projected full year 2020 single-family starts could decline to a range of approximately 650,000 to 750,000. If starts drop that low, we are well positioned to use the dip as an opportunity to gain share in value-added segments, accelerate productivity and continue to acquire well-run businesses.

As the economy recovers, we believe the long-term underlying industry fundamentals remain strong as we are coming off a period of more than a decade where single-family housing starts have failed to meet the demand of our growing population. Since March 1, 2020, our total permanent headcount was reduced by more than 400 associates and another 550 associates were placed on temporary furlough. Where we have enacted temporary curtailments, we continue to pay associates for an additional two weeks and guaranteed their benefits for an additional month. We have also reduced other costs.

First, we remain focused on driving productivity and efficiency gains through the BMC Operating System. In the first quarter of 2020, we delivered $4.6 million of benefits, which was up 25% from the first quarter of 2019. We will continue to drive productivity throughout this year as we have stepped on the accelerator in this area. Next, managers were directed to reduce SG&A and all spending that was not necessary to support our daily operations.

And a hiring freeze was implemented for all roles to protect the jobs of our current associates. All members of the BMC leadership team took a reduction in salary, and associate merit-based pay increases and the BMC 401(k) matching contributions were temporarily paused. The Board of Directors also took a decrease in their cash compensation. We announced these initiatives in March.

As the situation evolves, we are continuing to take appropriate actions to reduce our operating expenses and rightsize our company to position us for future growth. And finally, we are maintaining the financial strength of our great company, which resulted in over $500 million in total liquidity at the end of the first quarter. Before passing the call over to Jim, as I have done on previous calls, I'd like to highlight one of our many valued employees. Importantly, the COVID-19 health crisis has shown us that small acts can have tremendous impacts.

At BMC, small acts of kindness and doing the right thing go a long way, not only in strengthening relationships and boosting morale, but also in inspiring others who witness the acts to go above and beyond themselves. This leads me to a recent story about one of our associates, Jesse Gonzales, from our Central Texas market. Jesse has been a valuable part of our company for 27 years. Through hard work and a series of business acquisitions, Jesse has gradually moved up through the ranks to become the Operations Supervisor for BMC's windows operation in Austin, Texas.

At the beginning of last month, as the realities of COVID-19 on the Austin area began to set in, a driver from a key supplier arrived at our Austin facility to drop off an order of windows. However, a large load of windows ordered by a competitor was positioned on the truck in front of BMC's load. The competitor was unable to receive its product in the wake of COVID-19. Instead of sending the driver away, Jesse helped the driver unload the competitor's windows, unload our product, then reload our competitors' product back onto the truck.

Jesse's unselfish efforts allowed us to service our customers without any issue. Moreover, immediately following the event, when Jesse was asked why he went to such lengths to help solve a problem that he had no hand in creating, the first words out of his mouth were, "Because we're all in this together. I wanted to make sure the driver got home on time to see his family tonight." Thank you, Jesse, and the many unsung heroes we have at BMC, who are supporting and selflessly helping their teammates, customers, partners and communities. To wrap up, I'm very proud of our associates who helped us deliver double-digit net sales and adjusted EBITDA growth in the first quarter.

We entered this crisis in a position of strength, and I'm confident that our actions, combined with our commitment to our associates, customers and suppliers, will enable us to exit this period of uncertainty with strong momentum as the economy recovers. With that, I'll turn the call over to Jim for a detailed look at our first-quarter results and our second quarter outlook.

Jim Major -- Chief Financial Officer

Thanks, Dave. I would also like to thank our associates for exceeding our customers' expectations during this challenging time. We greatly appreciate their hard work and commitment. I'd like to discuss our solid first-quarter results, which came in higher than we expected on the adjusted EBITDA line.

We delivered double-digit core organic growth in our value-added product categories and an increasing benefit from our acquisition program. We estimate that net sales increased 6% from acquisitions, 5.3% from core organic growth and 1.7% due to an extra selling day. While total net sales increased 11.6% to $920.9 million, we estimate that net sales decreased 0.7% from commodity-related price deflation and another 0.7% due to a location closure. Our net sales were stronger than expected in our value-added products and services and multifamily as well as what was generally a pretty mild winter.

Sales of our millwork, doors and windows segment continued its strong growth from the fourth quarter and led our sales growth again for this quarter with an increase of 23.2%. We continued to gain share in this higher-margin segment. Core organic growth from this category was a solid 10%. Total net sales in structural components rose 13.5%, and core organic growth of this value-added category totaled 10.9% as we continue to see expanding use of prefabricated solutions.

Turning to gross profit for the quarter. And we drove strong gross profit growth of 9.7% to $237.1 million. Our millwork, doors and windows segment generated relatively high gross margins in the quarter. Overall, gross margins were stronger than expected, driven by solid pricing discipline and a very strong mix of millwork sales, our highest gross margin product category.

Gross profit as a percentage of net sales was 25.8% compared to 26.2% for the first quarter of 2019. The first-quarter gross margin was at the high end of our range we provided back in February. The 40 basis point decline in gross margin was primarily driven by a decrease in the gross margin in the lumber and lumber sheet goods product category, which benefited from unusually high commodity price-related gross margins during the first quarter of 2019. SG&A expenses increased 10% or $17 million to $186.9 million.

Approximately $11.2 million or nearly two-thirds of the increase related to SG&A expenses at the company's recently acquired businesses. In addition, $1.4 million related to an increase in bad debt, primarily due to the expected economic impact from the COVID-19 outbreak and $1.3 million related to increased healthcare costs. Excluding SG&A increases related to acquisitions, bad debt expense and healthcare costs, our first-quarter SG&A would have been up approximately 2%. SG&A expenses as a percent of net sales declined 30 basis points to 20.3% compared to 20.6% for the first quarter of 2019.

Net income increased $1.6 million to $22 million or $0.33 per diluted share. Adjusted EPS increased 8.1% to $0.40 per diluted share compared to $0.37 a year ago. Adjusted EBITDA was up 12.1% to $61 million, and adjusted EBITDA margin was at 6.6%. Let's now turn to our cash flow.

Cash provided by operating activities declined $60.7 million to $17.1 million due to an increase in trade receivables and inventory associated with higher sales volume and the timing of vendor payments in the prior year period. For 2020, we expect that we will be solidly free cash flow positive as potential declines in sales and EBITDA are largely offset by corresponding reductions in our working capital investment. At the end of the first quarter, our total liquidity was approximately $501.1 million, which included $282.8 million of cash and cash equivalents and $218.3 million of borrowing availability under the company's asset-backed revolver. Additionally, we do not have any significant long-term debt maturities until 2024.

As of the end of the quarter, our net debt was at approximately 0.8 times our LTM adjusted EBITDA, which we believe places our balance sheet among the strongest and most flexible in the industry. It positioned us well to weather this challenging time and pursue M&A once the economic situation stabilizes. Capital expenditures totaled $30.2 million. These expenditures were primarily used to fund purchases of vehicles and equipment to replace aged assets and support increased sales volume as well as facility, technology and automation investments to support our operations.

During March, we completely reevaluated our capex plans for the year and postponed future growth-related capital projects. We still have approximately $35 million to $50 million of attractive projects in flight that we plan to continue throughout the remaining months of the year. Most of this capital will be deployed in safety, productivity, fleet, structural components and millwork. Turning to our share repurchase program.

We bought approximately 87,000 shares at a weighted average price of $16.20 per share under the company's $75 million share repurchase program. We started buying shares in March after we posted our fourth quarter earnings, but put the brakes on buying additional shares due to COVID-19. Currently, we have no plans to repurchase shares this year unless something changes dramatically at the macro level. Although we had a strong first quarter and strong business momentum, we knew the housing sector was going to come under pressure and show declines in housing starts versus last year.

So last month, we issued a press release and withdrew our 2020 outlook for the year. Economic uncertainty remains high, but we would like to share with you what we are seeing in the business today and what data points we are focused on to guide our future actions. In the final week of March and throughout April, most of our markets experienced negative impacts on the top line, ranging from a deceleration relative to their first-quarter growth rates to modest year-over-year decline. In a select number of states, including Washington, Pennsylvania and portions of northern California, we experienced more significant sales declines due to more restrictive stay-at-home orders that halted certain construction activities.

However, these three jurisdictions are in the process of reopening to building construction. We estimate our total core organic net sales for the month of April were down in the mid-single digits. On their recent earnings calls, most builders have reported significant declines in new home orders and varying levels of increases in order cancellations since the end of March and continuing into April. As a result, some builders are reducing or suspending housing starts and/or additional land purchases to preserve liquidity.

However, there are also some recent indications that declines in buyer traffic and new home orders are stabilizing. While April housing start data is likely to be down significantly, I would remind investors that increases or decreases in demand for our products generally align to a three to six-month trailing average for starts more so than any one or two recent data points. Another census metric that takes on greater relevance when starts are volatile is houses under construction, which measures the number of active housing projects at a given point in time. A seasonally adjusted number of single-family houses under construction reported at the end of the first quarter was flat versus the prior year, but remain near a 10-year high.

Even though houses under construction were flat and home sizes continue to get smaller, we delivered 2% core organic growth with single-family builders as we continue to gain share in our value-added product categories. As we look to the remainder of the second quarter, we believe these healthy backlogs will help to moderate the near-term impact on our net sales relative to any negative housing start data that may be reported. Nonetheless, we do expect year-over-year core organic sales declines to continue to accelerate in May and June. Assuming our customers are able to continue to build through their existing backlogs without further disruption or curtailment, we believe the year-over-year percentage decline in core organic sales for the entirety of the second quarter could end up in the low double digits to mid-teens.

In addition, we expect minimal year-over-year impacts to second quarter net sales from changes in commodity prices, and we expect to close operations to reduce Q2 sales by approximately 1% and completed acquisitions to enhance Q2 sales by approximately 3% to 4%. So taken together, we estimate Q2 sales to decline approximately 7% to 15%. With all that said, we will remain in frequent contact with our customers nationally, regionally and locally to enable us to optimize each of our local businesses during this period of rapidly changing conditions. Our team is highly focused on incoming cash flow, reducing our operating expenses and maintaining strong liquidity.

We continue to drive operational improvements that are within our control. We believe we're in a strong position to weather this pandemic and navigate this challenging time. So with that, let me turn the call back over to Dave.

Dave Flitman -- Chief Executive Officer

Thanks, Jim. As you can see, we've made significant changes to our ongoing business operations to prepare for a slower period in the housing sector. What hasn't changed are the four pillars of our long-term business strategy. They include: growing our value-added products and segments and improving our business mix, delivering operational excellence and driving ongoing productivity through the BMC Operating System, building a high-performing culture for all of our associates, and finally, pursuing strategic expansion.

From an M&A perspective, we've historically seen some of our best opportunities during downturns and periods of industry stress. We are continuing our conversations with private distributors, but we recognize that completing deals may be more challenging until the current level of economic uncertainty subsides as sellers evaluate their alternatives and look for a period of stability before making their long-term decisions. Our pipeline of acquisition candidates remain strong, and inorganic growth continues to be a very important part of our business strategy. No one can anticipate something like we've experienced over the last two months, but we have responded aggressively and appropriately, and our balance sheet is built for times like this.

I am confident that BMC is well positioned to navigate this challenging period. I am also extremely proud of our associates. They've stepped up and are providing great customer service during a very challenging time in our country's history. Our associates remain fully engaged and are eager to drive value for our shareholders.

Despite market uncertainties, we will remain 100% focused on what we can control. This year, enabled by the BMC Operating System and our strong balance sheet, we will continue to drive productivity and efficiency and strengthen and capitalize on our key differentiators, including our focus on innovation, our size and scale, our value-added products and services and continued improvement in our customer service levels. Our team is energized and fully committed to continuing to drive long-term shareholder value. Thank you again for joining us today and be safe.

Rachel, please lead us into Q&A.

Questions & Answers:

Operator

Thank you. [Operator instructions] Your first question comes from Matt Bouley with Barclays. Please go ahead.

Ashley Kim -- Barclays -- Analyst

Good morning. This is Ashley Kim on for Matt today. My first question is on pricing. With lumber prices coming back down, do you expect to hold on to some margin percentage? Or does the softer demand environment make it harder to hold on to pricing?

Jim Major -- Chief Financial Officer

Yes. Thanks. This is Jim. And lumber prices have come down a bit from where they were in, I guess, late February, early March.

Although last couple of weeks, they've started to tick back up again. So I think this last Friday, lumber was at $361, which is about 10% off what we averaged in Q1. Given that lumber prices weren't that high for very long in Q1, I don't know that there's much upside per se on the margin line related to that volatility. And actually, the $361 would still be up a little bit compared to where we were a year ago.

So as you probably recall, we've enjoyed higher-than-average margins on commodities throughout most of 2019. So I still think in Q2, we're likely to be in a position where we have some negative year-over-year comparisons against those very high margins that we enjoyed in Q2 of last year within the commodity category.

Ashley Kim -- Barclays -- Analyst

Great. Thank you. That's helpful. And then on cycle times, have they become extended as a result of social distancing on job sites? And have you seen any impact on this on the top line?

Dave Flitman -- Chief Executive Officer

Yes. This is Dave. We've seen a little bit of impact by that. It's taken a little bit longer to work through.

Actually getting the work done at the job sites just because of the local requirements, sometimes inspections are a bit backlogged and all that. So we are seeing some slowdown in that activity, just more difficulty in getting the work done at the job site.

Ashley Kim -- Barclays -- Analyst

Great. Thank you so much, guys.

Operator

Thank you. Your next question comes from Mike Dahl with RBC. Please go ahead.

Chris Kalata -- RBC Capital Markets -- Analyst

Hey. This is actually Chris on for Mike. A first question is just on the puts and takes on the 2Q guide. And any potential early thinking on the 2Q, 3Q volume progression? I mean how much of the recent order declines do you think are being captured in that low- to mid-teens organic growth decline? And given the timing lag, are you expecting that to accelerate into 3Q or roughly even progression?

Dave Flitman -- Chief Executive Officer

Yes. This is Dave. I'll start and then Jim can piggyback on. I mean as I commented earlier, we've had a very strong backlog and things were very strong when the brakes were slammed on there the second half of March.

And obviously, we've had three states that shut down construction. And so that really drives a lot of what we're seeing. But I'd just point to the fundamentals in the industry, the backlog that we've had and the strength of what we've seen there. As states turn back on now, there's so much uncertainty around the backlogs that were done, matching that up with the new home sales, which are obviously declining.

How much more in terms of starts are going to be out there? So we would expect, and we've already seen, particularly in the state of Washington and northern California since things halted so abruptly, we've had a flurry of activity here since they've started to ramp back up. Is that going to continue? Is that going to slow down as they work through what they were actively building? There's still a lot of uncertainty on that. But we would expect that decline that we saw in April to continue through the remainder of the quarter. And I think the big picture here is the big governor is the economy.

Given the underlying strength in our industry and the differences from 10 years ago when we had the slowdown is with 30 million people out of work, and some of the credit challenges in the mortgage market, what's really going to happen? And I think that's where the uncertainty comes in. Jim?

Jim Major -- Chief Financial Officer

Yes. And I think it's sort of Q2 versus Q3 question. I mean, we fully expect the April housing start number to be very ugly and May well may — May could be pretty ugly as well just given the shutdowns and stay-in-place orders. I think the big question for Q3 will be sort of what happens here, maybe over the balance of May and into June as far as buyer traffic and whether folks return into the marketplace.

And that tends to generate a little more aggressive housing start activity on the part of the builders. And we'll just have to wait and see how that plays out here over the next couple of months before we can express to firm a view on Q3 versus Q2.

Chris Kalata -- RBC Capital Markets -- Analyst

I appreciate that. And just for my follow-up is just on decrementals in 2Q in light of the headcount reduction and just cutting measures. Should we still be thinking like 10% to 15% is the norm? Or are you expecting any variation just given the situation?

Jim Major -- Chief Financial Officer

Well, I think I guess there's probably two pieces to that. I think, as I said earlier, on the gross margin side, we probably still have some year-over-year declines just given in Q2 of last year, we were still enjoying very healthy margins around commodities and the like. I believe our gross margin in Q2 of last year was still right at 26% or a little north of that. So we'll see some year-over-year declines in the gross margins that will obviously hurt the decrementals, all else being equal.

I think when you think about our SG&A and our cost structure generally, we're somewhere around 50% of the SG&A lines that are more variable in nature, 50% that are more fixed in nature. So as volumes decline, we'll obviously have that normal dynamic. And then in addition to that, as Dave spoke to, we've taken some actions to take out a little bit of structural cost. And certainly, things like lower diesel costs or not really traveling any, the suspension of the 401(k) match should help us maybe to the tune of an extra couple of million dollars in Q2.

But then the flip side, which is hard to predict at this point, is just there's some incremental cost for some of the safety measures we're putting in, could have a little bit of uptick in bad debt, a little bit of severance costs in Q2. So there's some puts and calls, I guess, on the SG&A lines relative to that normal 50-50 split, if you will, in between variable and fixed.

Chris Kalata -- RBC Capital Markets -- Analyst

I appreciate the color.

Operator

Thank you. Your next question comes from David Manthey with Baird. Please go ahead.

David Manthey -- Baird -- Analyst

Thanks. Good morning, guys. First off, last downturn, there was a wave of divestitures or closures of subscale operations by geography. And given your strong financial position, are there geographies where you might use the downturn to bulk up by buying a No.

3 or No. 4 player? Or when you talk about M&A, are you only focused on playing defense for now and keeping powder dry for the larger, more strategic deals down the road?

Dave Flitman -- Chief Executive Officer

Yes. Great question, Dave. I think the answer to your question is yes. I think we'll obviously be opportunistic on the tuck ins, similar to what we did last year with the six acquisitions that we made at the right time when folks were interested.

We continue to cultivate all those relationships. And given the strength of our balance sheet, if there are larger regional players that makes sense at the right time, we're happy to engage around those as well to strengthen particularly our value-added segments of our business.

David Manthey -- Baird -- Analyst

Thanks, Dave. And then you clearly moved to protect the company during the downturn. Can you talk about any specific actions you'd like to call out relative to the other three pillars that maybe over the next year, you'll be taking to position BMC for an eventual resumption of growth?

Dave Flitman -- Chief Executive Officer

Well, we were growing quite nicely. That's a great question. And so I wanted to highlight that all four of our pillars are still actively being worked. I was very pleased with our performance in the first quarter and our continued mix to our value-added segments of our business.

And what I said since I've got here was that our strategy was strong, and we were going to work hard on executing aggressively. And I'm quite pleased with our execution as we've ramped that up over the last 18 months, and that is actually playing out quite well for us. So we will continue to drive that outpaced growth in the value-added capabilities and segments of our business. Our people are excited about that, 100% aligned around that being the right opportunity.

We continue to do a lot of leadership development inside the company to pillar 3. We are working actively to make sure we've got the right pipeline of high potential talent being developed properly to take the important jobs in the company in the years to come. We've been hiring a number of management trainees over the last 18 months. We'll see how that plays out the rest of the year, but we're still very committed to developing our associates and infusing the right new talent into the company.

And we've spoken about M&A here already. And we'll continue to look for those right opportunities for us, either to strengthen our position in a existing geography or bring additional capability in where we might not have it to the point we need to in a geography. Then the last point, Jim talked about what we're doing on capital in the near term. We continue to invest in automation and driving productivity and efficiency in our operations.

There's been a number of those projects under flight. We see the long-term value in that, both in terms of the efficiency gains that affords us as well as providing a higher quality, more consistent product to our customers. So we will continue to make those investments over time to drive future growth in the company as well.

David Manthey -- Baird -- Analyst

That's great. Thank you very much.

Operator

Thank you. Your next question comes from Trey Morrish with Evercore. Please go ahead.

Trey Morrish -- Evercore ISI -- Analyst

Thanks, guys. You talked about sales in April being down mid-single digit and with Pennsylvania, northern California and Washington kind of all shut down. So I'm wondering if you could talk about what you're seeing across the business outside of those three areas? Could things? Are things actually close to flat or maybe even up through April outside those geographies?

Dave Flitman -- Chief Executive Officer

Yes. I think it's safe for us to say that the overwhelming impact of what we saw on the sales line in the month of April was related to those states where the construction activity stopped and the overwhelming majority of it anyway. And we continue to see strength down in the South, particularly in Texas, which we had strong momentum in the first quarter and have continued to build through the virus. The Southeast, particularly in Georgia, which is the majority of our Southeast market and the lower part of the Mid-Atlantic continue to be strengths.

Really strong in the Intermountain. That's been a strong market for us over the past several years, and that continues to hold up really well. And before things slowed in California, we were seeing a nice rebound over the slowdown last year in that state and a nice recovery there. So we're hopeful with northern Cal getting going again, we'll continue that momentum as well.

Steve Kim

David, it's Steve Kim. I just wanted to jump in. So it sounds like you didn't really want to try to predict 3Q versus 2Q because of the uncertainty around the economy. But at the same time, it sounds like a lot of the decline in sales was really related to shutdowns, specifically as opposed to the economy generally.

And so I guess I'm wondering, assuming you don't see any increase to shutdown activity for the rest of the year, are you still anticipating fall sales to reflect the dip in starts that you're clearly seeing here in 2Q? Is that the right way to think about it? And then shutdowns will be, if we assume they happen and that obviously would make things worse. Is that the right way to think about things?

Dave Flitman -- Chief Executive Officer

Yes, Stephen. I think, first of all, great question. And I think I'd start again with just the higher level of uncertainty. Even as these states have ramped back up, what are they going to do once the backlogs are run down? It's all linked to what the builders see in terms of sales traffic and all that.

And again, the big question is the economic uncertainty, with 30 million people out of work, who knows what it's going to go up to this week, another few million. I don't know how many, but some percentage of those people that are now out of work were going to be homebuyers. And are those canceled or they paused? When does the consumer confidence come back enough to get people back in the game? We're just so unsure about the economy here, which I think is going to be the overriding governor of strength in our market and how fast things decline. And so I guess, I'll just leave you with that saying we really don't know.

But I'll tell you, again, that we're confident that this industry is underbuilt, lots of momentum here going into the virus situation. And we were executing quite well. And I would expect that to rebound quite nicely for us when people get back in the game and start buying homes again and just general confidence rebounds.

Steve Kim

Yes, absolutely. If I could just ask one more bigger-picture question. I was wondering in your prepared remarks, you talked about reduced in-person interaction, and I'm wondering whether that might continue going forward even for quite some time after the near-term shutdowns and stuff fades? If that were to happen, do you think that? What kind of impacts do you think that might have on your business? For example, do you think it would devalue proximity and maybe lead to a reduction in the optimal number of locations you have in the market? Would it lead to possibly a business model that has more product returns and you got to factor in restocking fees? Just kind of curious as to how you're thinking about reduced in-person interaction affecting your business longer term?

Dave Flitman -- Chief Executive Officer

Yes. Again, a great question. And we're all learning a lot about how to work effectively at times like this. And as you heard me say, we've got a couple of thousand folks doing it every day and doing it effectively.

Again, I think we've learned some things through this, and we may not go back to working exactly like we did before. Certainly, working to drive up some of our technology-enabled solutions for our customers at times like this. I've heard a number of the homebuilders who are now selling virtually and giving virtual tours. And so I think everybody is going to learn a lot about how to work differently.

And some percentage of that is probably going to change the future. What that looks like and how to think through that? I don't propose to have those answers yet. But like I said, we're learning a lot through this, and we'll likely think about our business differently going forward.

Jim Major -- Chief Financial Officer

Yes. Steven, I'd just add a very high percentage of our customer interactions are on a job site or in some place where, frankly, it's not that hard to stay six feet apart. And so I think relative to a lot of industries, we probably can adapt to the new normal more seamlessly than probably most.

Trey Morrish -- Evercore ISI -- Analyst

OK. Great. Thanks, guys.

Operator

Thank you. Your next question is from Steven Ramsey with Thomas Research Group. Please go ahead.

Steven Ramsey -- Thompson Research Group -- Analyst

Good morning. I guess I would start with multifamily, commercial and other being very strong in the past couple of quarters. Maybe how is that expected to be in Q2, maybe into Q3, if you have some better visibility, given it's more project-based? And will that offset any potential sales decline somewhat in the coming two quarters?

Dave Flitman -- Chief Executive Officer

Well, obviously, we have some strength in the quarter. And as you point out, it's been several quarters in a row, and we continue to stay focused in the right segments of multifamily. And I'm quite pleased with our continued focus and trajectory there. We have a very strong team.

And the backlog is relatively strong there. And so line of sight over the next quarter or two notwithstanding bigger economic impacts or further shutdowns and those sort of things, should continue that momentum here for the near term.

Jim Major -- Chief Financial Officer

I would say, we do start to lap, from a year-over-year growth standpoint, we do start to lap some tougher comps there in Q2 and beyond from last year, but today's point, very strong backlog heading into Q2. And as we said on the call, it's kind of a three to six-month average of starts when you think about single-family trends and how that sort of flows through the business. It's probably a little longer tail, if you will, or lag between starts and backlog in multifamily just because of the nature of those projects being longer in duration. So Q2 should remain relatively healthy, and we'll have to see what happens beyond that.

Steven Ramsey -- Thomas Research Group -- Analyst

Great. Thanks for the color. And then on capex. I guess what are the primary factors that will influence how high that capex figure goes for the year? Is it more end-market-demand leaning? Or is it operating-focus opportunities and maybe balanced against M&A?

Jim Major -- Chief Financial Officer

I'd say it's a little bit all of that, right? It's still relatively early in the year. So we left ourselves a bit of a range there to potentially invest a little more heavily once things stabilize and/or maybe rebound a bit in the back half of the year. We've got a strong opportunity set of all of those things: productivity opportunities, technology opportunities, growth opportunities. And so we think that will continue to be a big part of our business.

It's just reinvesting into those improvement opportunities.

Steven Ramsey -- Thompson Research Group -- Analyst

Great. Thanks for the color.

Operator

Thank you. Your next question comes from Trey Grooms with Stephens Inc. Please go ahead.

Noah Merkousko -- Stephens Inc. -- Analyst

Hi. This is actually Noah Merkousko on for Trey. I just want to go back to the SG&A. You guys talked about a number of actions you've already taken to reduce costs there.

So just wondering, at this point, are you done with any cost-cutting measures? Or are there more levers you can pull going forward? And then to follow up on that, if things do start to get worse and maybe we do see more shutdowns, can you talk about your ability to continue to flex SG&A?

Jim Major -- Chief Financial Officer

Yes. As I said earlier, I mean the sort of natural variable versus fixed makeup of SG&A is around 50-50. So certainly, if volumes were to continue to decline and do so further into the year, then obviously, we continue to take actions to balance our cost structure relative to volumes. What I would also say is, at this point, we've not really closed or mothballed any locations.

Most of what we've done to date is really more around aligning the cost structure within individual locations to what that demand is. So certainly, that's in the toolbox if demand were to fall off more significantly. But as a rule of thumb, that 50-50 mix is kind of the right baseline and some of the structural things that may be appropriate in a deeper downturn are things that we'd consider later in the year and certainly update you on were they to occur.

Noah Merkousko -- Stephens Inc. -- Analyst

All right. Thanks. That's it for me.

Operator

Thank you. Your next question comes from Reuben Garner from The Benchmark Company. Please go ahead.

Reuben Garner -- The Benchmark Company -- Analyst

Thanks. Good morning, everybody. So maybe starting on the Q2 demand outlook. A little surprised to hear talk about such a slowdown in May, in June or an expectation of a slowdown in May and June just given April had so many markets with construction not deemed essential, and they'll be coming back on.

Is there something that you're seeing already that leads you to believe that you're going to see that kind of dramatic slowdown? I know there's the lag in the backlog. I guess I just thought the backlog would maybe last a little longer than just kind of the month of April and housing was doing OK through March for the most part. So maybe just talk to me about kind of what goes into that thought process. And why you think there might be such a slowdown, a dramatic slowdown in the next couple of months?

Jim Major -- Chief Financial Officer

Yes. I think it is fundamentally that lag. Obviously, there's been a very high dearth of starts here over the last four to six weeks. And so as you do start to build through some of that backlog that existed at March 31, that obviously starts to impact the business in a more meaningful way in May and June.

But aside from what you and most others, I'm sure are reading, what we've implied there in our full quarter outlook is nothing different than what I think folks are reporting for April sales and starts activity, which certainly has come down considerably. The other thing I'd note is even though like in a state like Washington, where they've reopened for existing construction, they're not issuing new permits or starts yet. So the reopening only applies to existing projects. And so as those wind down or wrap up, at least to date, there's not the opportunity for new permit activity here yet.

Reuben Garner -- The Benchmark Company -- Analyst

OK. That's very helpful. And just to kind of follow up on that. Are you already seeing the kind of slowdowns that you put in your outlook? Or is this just kind of an expectation that, that's what's going to come from the April hit? I'm just trying to see how much of this is kind of being conservative and baking in the possibility that April starts and late March starts declines are going to hit your results versus what you're already actually seeing?

Jim Major -- Chief Financial Officer

Probably more of the latter than the former at this point. But again, we know that given that we've gone now six, seven weeks without much in the way of permit and starts activity, and what the normal lag is with eight, nine weeks left in the quarter, we do expect to see that.

Reuben Garner -- The Benchmark Company -- Analyst

Got it. That's very helpful. And then one more for me. Working capital, you made some comments about, I think, maintaining nicely positive free cash flow is roughly how you put it.

The typical rule of thumb of 12% to 13% for every incremental dollar of revenue, is that a fair way to look at it on the way down as well? Or are there other puts and takes that we should keep in mind? And that's my last question. Thanks, guys, and good luck navigating through all the stay safe.

Jim Major -- Chief Financial Officer

If you repeat that one more time, Reuben? I just want to make sure I answer it correctly.

Reuben Garner -- The Benchmark Company -- Analyst

Yes. The working capital rule of thumb on the way up I think has been 12% to 13% of every incremental dollar of revenue is what you need in incremental working capital. Is that a fair way to look at it on the revenue declines? Or are there other puts and takes we should think about?

Jim Major -- Chief Financial Officer

Yes. No, I think over a few quarters, that's probably right. There could be some short-term dynamics there. For example, as we initially pull back on inventory, you probably have a bigger decline in payables short term than you may have in inventory.

But certainly, as you look out through the next couple of quarters or through the end of the year, that 12% to 13% should be pretty indicative.

Reuben Garner -- The Benchmark Company -- Analyst

Great. Thanks, guys.

Operator

Thank you. Your next question comes from Jay McCanless from Wedbush. Please go ahead.

Jay McCanless -- Wedbush Securities -- Analyst

Good morning. Thanks for taking my questions. I wanted to ask on the remodeling business. Do you guys have any way to tell how much of that is interior versus exterior remodeling? And maybe could you talk about some of the sales trends you've seen there in March and April?

Jim Major -- Chief Financial Officer

I think our product mix and remodeling pretty well follows that of the business overall. So with the exception of structural components. So certainly, we sell a good bit of lumber and sheet goods for room additions and the like. We sell certainly millwork, doors and windows for millwork and doors anyway for more interior or applications, if you will.

We're not very heavy in siding or roofing just because the business isn't either. So it's a little bit of a mix along those lines, I guess.

Dave Flitman -- Chief Executive Officer

And I'd say to your point on the trends in April, it pretty much mirrored the rest of the business as people stopped and paused and thought about whether they really wanted people in their houses right now dealing with remodeling projects.

Jay McCanless -- Wedbush Securities -- Analyst

Sure. I guess my other question I have is, what are you seeing from both your bigger competitors and your smaller competitors in terms of being aggressive on price? Or are you seeing anyone trying to drive outsized volume using price yet? Or how are people? How are your competitors behaving at this point?

Dave Flitman -- Chief Executive Officer

Yes. I would say it's always a competitive market. I would say, recently, we haven't seen any real shifts in that. I would expect if the volumes do decline significantly, we'd see a ramp-up in intensity as people just go into survival mode, particularly some of the smaller competitors.

But to this point, it's been pretty much as it has been, always competitive.

Jay McCanless -- Wedbush Securities -- Analyst

Thanks for taking my questions.

Operator

Thank you. Your next question comes from Ryan Gilbert with BTIG. Please go ahead.

Ryan Gilbert -- BTIG -- Analyst

Hi. Thanks, guys. Another question for you on the second quarter growth outlook, maybe just asked a different way. So outside of Pennsylvania, the Pacific Northwest, northern California, are there any states or metros that you have on your watch list for the second quarter of 2020 because you're seeing demand deterioration throughout the month of April? Or just any other trends that point to further declines in May or June, outside of those regions where you've seen housing construction shut down?

Dave Flitman -- Chief Executive Officer

Yes. Nothing that really stands out at this point.

Ryan Gilbert -- BTIG -- Analyst

OK. And then I think in the past, you've given us the year-over-year change in gross margin for lumber and structural components. I'm wondering if you had that for the first quarter.

Jim Major -- Chief Financial Officer

I think it's in the slide deck actually for lumber, and yes, lumber and lumber sheet goods was, well, it was a $3.2 million impact on sales of about $260 million, so a little over 100 basis points year-over-year decline in lumber and lumber sheet goods.

Ryan Gilbert -- BTIG -- Analyst

And for structural components?

Jim Major -- Chief Financial Officer

It was something similar in the same neighborhood.

Ryan Gilbert -- BTIG -- Analyst

OK. Great. Thanks very much.

Operator

Thank you. Your next question comes from Judy Merrick from SunTrust. Please go ahead.

Judy Merrick -- SunTrust Robinson Humphrey -- Analyst

Thank you. This is Judy for Keith. Just quickly, can you give us an update on the performance of Ready-Frame in the quarter? And more so, what demand has been in the last six weeks ago, but just mostly relative to other products? If you've seen anything for the Ready-Frame product there?

Dave Flitman -- Chief Executive Officer

Yes. Great question. We had really strong momentum in the first quarter on Ready-Frame with our house penetration, up 30%. That continues the strong performance that we had in 2019.

So we continue to see significant traction around Ready-Frame, particularly in two places: one is attracting new customers to the offering; and secondly, expanding geographically, where we've had a customer, particularly a larger production builder that's had success with Ready-Frame in one or two geographies and looks to move it along. I would say the more recent trends have been a bit muted in the month of April. And if you recall, this was a legacy BMC offering and fairly well penetrated in our western geographies. So with the impact we saw in northern California and with the state of Washington shutting down, obviously, that had an impact on Ready-Frame.

But I'm encouraged very much by the momentum we had in the first quarter and the traction we continue to get with that offering.

Judy Merrick -- SunTrust Robinson Humphrey -- Analyst

Thank you.

Operator

Thank you. [Operator instructions] There are no further questions at this time. I would now like to return the call to Mike Neese, senior vice president, strategy, and investor relations.

Mike Neese -- Senior Vice President, Strategy, and Investor Relations

Thank you, Rachel, and thank you, everyone, for participating on our call today. We will be around all day to take your follow-up questions. Please be safe. Thank you.

Operator

[Operator signoff]

Duration: 65 minutes

Call participants:

Mike Neese -- Senior Vice President, Strategy, and Investor Relations

Dave Flitman -- Chief Executive Officer

Jim Major -- Chief Financial Officer

Ashley Kim -- Barclays -- Analyst

Chris Kalata -- RBC Capital Markets -- Analyst

David Manthey -- Baird -- Analyst

Trey Morrish -- Evercore ISI -- Analyst

Steve Kim

Steven Ramsey -- Thompson Research Group -- Analyst

Noah Merkousko -- Stephens Inc. -- Analyst

Reuben Garner -- The Benchmark Company -- Analyst

Jay McCanless -- Wedbush Securities -- Analyst

Ryan Gilbert -- BTIG -- Analyst

Judy Merrick -- SunTrust Robinson Humphrey -- Analyst

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