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PGT Innovations, Inc. (PGTI)
Q1 2020 Earnings Call
May 13, 2020, 10:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day and welcome to the PGT Innovations First Quarter 2020 Earnings Call. Today's conference is being recorded. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Sherri Baker, Senior Vice President and Chief Financial Officer. Please go ahead.
Sherri Baker -- Senior Vice President and Chief Financial Officer
Thank you, operator. Good morning everyone and thank you for joining us on the call today. On the Investors section of the company's website, you will find the earnings press release with our first quarter 2020 results, as well as the slide presentation we have posted to accompany today's discussion. This webcast is being recorded and will be available for replay on the company's website.
Before we begin our prepared remarks, please direct your attention to the disclosure statement on Slide 2 of the presentation as well as the disclaimers included in the press release related to forward-looking statements. Today's remarks contain forward-looking statements, including statements about our 2020 outlook and the impact of COVID-19 that may involve risks, uncertainties and other factors that could cause actual results to differ materially. This disclaimer is a brief summary of the company's statutory forward-looking statements disclaimer, which is included in the company's filings with the SEC.
Additionally, on Slide 3, you should also note that we report results using non-GAAP measures, which we believe provide additional information for investors to help facilitate comparison of prior and present performance. A reconciliation to the most directly comparable GAAP measures is included in the tables attached to the earnings release and in the appendix of the slide presentation.
I am joined today by PGT Innovations' CEO and President, Jeff Jackson. After our prepared remarks, he will be available to take your questions. I will now hand the call over to Jeff for opening remarks.
Jeffrey T. Jackson -- Chief Executive Officer and President
Thank you, Sherri, and good morning everyone and thank you for joining us this morning. We, along with every other company are navigating through an incredible dynamic marketplace as a result of the COVID-19 pandemic. I would like to start off the call this morning by expressing how extremely proud I am of all our employees for continuing to deliver high-quality product and service to our customers, while maintaining, as a top priority, the safety and health of our team members, customers and communities. I also want to thank our customers, suppliers, as well as our employees for their support during these challenging times.
Next, a few words on how we are handling the COVID-19 pandemic at PGT Innovations. As providers of essential products and services, we are an important partner to our customers and suppliers and this is a responsibility we take seriously. Early on, we took measures to protect the health, safety of our team members while enabling our manufacturing operations to continue. When the pandemic first appeared, we formed a COVID task force to immediately study the effects that COVID-19 could have on our company. Early on, we implemented a comprehensive action plan focused on the safety of our team members and customers. We also monitored and implemented changes that were in line with both Federal, State and local government mandates. Some examples of our robust safety plan put in place are included on Slide 4 and include enhanced sanitation at all our facilities, temperature checks for all our employees upon arrival at our facilities, and limited external visitors.
For our first quarter, we achieved significant sales growth, reflecting the overall strength of our brands in both the R&R and new construction markets going into 2020. I'm extremely proud of our employees for continuing to deliver the high-quality products and service our customers expect while operating within the new guidelines. In addition to keeping employees safe, we have taken several decisive actions in the first quarter intended to preserve cash and bolster our balance sheet strength and liquidity, given the uncertain times in the economy. These include reducing discretionary costs and carefully prioritizing capital expenditures, while continuing to deliver the products needed by our customers.
Throughout the presentation today, we will provide additional details on the examples of our financial flexibility shown here on Slide 4. I can summarize, however, by saying, we believe that given our current liquidity position, combined with our current expectations regarding our cash flow, we expect to have the resources we need to flex to potential changes in demand for our products brought on by the economic impact of COVID-19 pandemic. Sherri will take you through our balance sheet later on in the call.
Next on Slide 5, I'll briefly cover our four strategic pillars that we strive to execute against, with the goal of creating long term value for our stakeholders, as well as our customers. Our first pillar is maintaining our focus on our customers who are at the center of our business. By delivering customer-centric innovation, we expect to drive brand loyalty, recognition and ultimately growth. For example, we have assisted several customers during this latest pandemic with defogging their facilities to enable them to safely operate.
Our second pillar recognizes that long term success requires maintaining the best employee talent, which is why we must continually work to attract and retain the best people. Our leadership quickly responded to the rapidly changing dynamics in this marketplace as a result of the pandemic. And I'm very pleased with what our team has been able to accomplish to keep our business operating successfully throughout these uncertain times.
A third pillar is investing in our business to manufacture the best products to meet customer demand in the markets we serve. We accomplished this through ongoing investments and operational efficiency, which we achieved through continuous improvement initiatives. For example, we announced our intention to consolidate the manufacturing of products from the Orlando facility into our Venice and Tampa locations to further improve our network operating efficiency. Although, as part of our actions to preserve cash and liquidity, we expect to reduce the amount of capital expenditures and other investments in our business in 2020, our overall long term strategy is to continue to invest in our business to further improve our operations and products.
And our fourth pillar is to strategically allocate capital. We continually assess our capital allocation priorities, which may include reinvesting in the business, making acquisitions or paying down debt, with all the goal to ultimately driving shareholder value. The recent acquisition of NewSouth, which enables us to enter the direct-to-consumer channel with a recognized brand, and is currently seeing over 50% order growth versus prior year, is one example of this key pillar.
Next, turning to Slide 6. As previously mentioned, we had an outstanding quarter as the market momentum I described last quarter carried forward into 2020 with a strong organic growth in both our Southeast and in Western segments. Additionally, after completing the acquisition of NewSouth Window Solutions on February 1, our newest brand contributed $16 million to Q1 sales, which met our internal expectations. Our adjusted EBITDA grew by 39%, driven by the leverage from higher sales and lower direct labor and material costs. On prior calls, we have discussed our investment in process improvement at Western Window Systems to reduce direct costs associated with the mix challenges of Custom and commercial products. These projects have come online and we are now seeing the impact in improved direct labor costs.
Additionally, in last year's fourth quarter, we took a series of actions to reduce costs across the organization to optimize our capacity based upon our ongoing efforts to continuously improve our efficiencies and margin and due to our demand outlook going into 2020. Sales in Q1 were stronger than we expected and we were able to manage that demand without growing our fixed cost base. Because of our earlier efforts to control costs, we believe we're in a strong position to navigate the impact of COVID-19 pandemic impacting our second quarter.
Now turning to Slide 7, we started off 2020 with strong sales and order growth across the board, posting growth across our entire portfolio. In our Southeast business unit, which we will refer to throughout this call as our legacy Florida operation, excluding NewSouth, sales improved 18% versus the prior quarter, reflecting strong organic growth. Both repair and remodeling and new construction sales saw significant swing to growth compared to the first quarter of last year. In our legacy repair and remodeling, our first quarter sales increased 16% versus the prior year, reflecting improvement in the overall market and successful implementation of a number of key strategic initiatives. We continue to increase our sales outside of Florida with other States sales growing 30% in the first quarter as compared to prior year.
Within the commercial channel, we have seen signs of strength and growth in condominium, hospitality and mixed-use projects. We invested in product development resources to accelerate growth in this area and we are currently evaluating opportunities to grow in this segment with our NewSouth brand in addition to our current PGT legacy brands.
For new construction, our Southeast business unit sales increased 21%, driven by our Corporate Builder program, which grew by 30% year-over-year in the first quarter. Our legacy Florida business continues to benefit from the overall increase in builder activity, as well as exclusive agreements we have developed with large builders.
Western Window System sales increased by 14% versus the prior year quarter, reflecting continued expansion in core and emerging markets. We saw signs of market improvement in key western markets such as California, which contributed to an overall production builder sales increase of 39% versus prior year. Custom sales were essentially flat compared to last year's strong Q1 comparison.
To help you understand the underlying demand, we show our level of customer orders, as well as our sales backlog year-over-year. As you can see, we experienced a 21% increase in legacy ordering activity in Q1 of 2020 and this has resulted in a 30% increase in our order backlog versus a year ago. The backlog has not gone away as a result of COVID and has actually grown through April as our orders have outpaced our reduction in manufacturing capacity resulting from the pandemic, which we are working to steadily grow through the summer months, while we still follow guidelines we've put in place, we believe, that are necessary to protect the health and safety of our team members. Drilling down in our backlog at the end of Q1, our Southeast business unit backlog was up 39% year-over-year. Our Western Window Systems backlog was down 5% year-over-year, but that reduction in backlog was primarily a result of our efforts to improve the production output, not an increase in overall sales activity. Together on a weighted average basis, this resulted in a 30% overall increase in backlog for Q1 of 2020.
In addition, order entry was up over 50% for NewSouth, which underscores our belief that this is a great acquisition for a long term growth and complementary to PGT Innovations' existing business model. Obviously, the COVID pandemic has changed the macro environment and our overall outlook for the remainder of the year. Similar to the industry, we began to see a slowdown in orders entering the second quarter. In our Florida market, we have seen order entry declines of approximately 10% for the month of April as compared to prior year, with a sequential decline of over 30% versus the first quarter growth rate. We quickly adjusted our operations to meet the changes in demand, but because we are seeing an increased pipeline of orders in our Florida markets in May, we are beginning to build back up our capacity to meet that recovering demand. In some areas that had early and/or more stringent building restrictions related to the pandemic, such as California and Nevada, we are seeing softer order patterns down 20% to 30% from April as compared to prior year, with a sequential decline of over 40% versus the first quarter growth rate.
Despite a great start to the year, there remains quite a bit of uncertainty around the impact of this global pandemic we are facing. This uncertainty of the duration and extent of the pandemic and the unfavorable economic environment it has created has limited our ability to forecast the remainder of the year and as a result, last month, we withdrew our 2020 guidance. Assuming our markets do not experience any significant increases in COVID-19 cases and their economies continue to reopen, we do, however, expect to see a modest recovery in order trends and related sales as we move throughout the year, more heavily weighted in the fourth quarter. We expect our Florida markets to achieve year-over-year growth by year-end. In addition, we expect that our EBITDA for the year will be burdened by incremental costs we've incurred and expect to continue to incur related to COVID-19 pandemic. And now, I'll turn the call over to Sherri to review our quarter in greater detail. Sherri?
Sherri Baker -- Senior Vice President and Chief Financial Officer
Thank you, Jeff. Now turning to Slide 8 to give more detail on our results. For the quarter, we reported net sales of $220 million, which as Jeff mentioned, include $16 million from NewSouth Window Solutions. Also, I should note, the quarter included an extra week of sales versus the prior year quarter. Q1 sales in our Southeast business unit increased by 18% organically versus the prior year quarter with strong growth in both new construction and repair and remodel sales. Western Window Systems sales for the quarter increased by 14% versus the first quarter of last year, reflecting a strong return to growth in our production builder sales.
Gross profit for the quarter was $81 million, a 33% increase over the prior year quarter, driven by higher volume, operational efficiency improvements and effective cost control. Additionally, we saw favorable aluminum pricing that resulted in approximately a 100 basis point improvement in gross margins from the prior year quarter.
Selling, general and administrative expenses increased over $10 million compared to the prior year quarter, primarily driven by G&A for NewSouth following our acquisition, higher selling and distribution costs from higher sales, and increased marketing spend versus prior year. Adjusted EBITDA for the quarter was $39.4 million compared to adjusted EBITDA for the prior year quarter of $28.3 million or an increase of 39%. The improvements in EBITDA reflects the benefit of higher sales, lower direct labor, and material expense resulting from diligent cost control and operating efficiencies.
Our effective tax rate for the quarter came in at 21%, which was below our full-year estimate. This quarter included an excess tax benefit of $800,000. Excluding this discrete item, the effective tax rate for the first quarter is 24.8%. We reported adjusted net income for the quarter of $16.4 million or $0.28 per diluted share compared to $9.2 million or $0.16 per diluted share in the first quarter of 2019.
And now turning to our balance sheet, one of our top priorities is maintaining the strength of our balance sheet to ensure the company is well positioned as the economy seeks a new normal over the course of the year. We ended the quarter with net debt of $361 million, an increase from $282 million at year-end, which includes $50 million of senior notes issued earlier in the year to help fund the purchase of NewSouth. Recall that these added on to the $315 million aggregate principal amount of the company's senior notes due 2026. We have no other significant debt maturities with only a term loan of $64 million maturing in late 2022. As of quarter end, we had total liquidity of $144 million, including a cash balance of $68 million plus $76 million of unused capacity on our revolver. As of May 1, our total liquidity was $145 million. On an all-cash netted basis, we maintained a net debt to trailing-12 month adjusted EBITDA ratio of approximately 2.4 times pro forma for the NewSouth acquisition.
We are closely monitoring our accounts receivable and have not yet seen any material change in days sales outstanding or significant increase in bad debt expense. In terms of financial covenants, the 2016 Credit Agreement due in 2022 contains a springing financial covenant that will apply if we draw in excess of 35% of the revolving facility commitment, excluding $7.5 million of undrawn letters of credit.
Now, turning to Slide 10, this chart should be familiar to many of you. We'd like to point out our proven track record of reducing leverage after completion of significant acquisitions and it will continue to be a priority for us going forward once we transition out of our capital preservation mode that we believe is necessary until we have more visibility of the effects of the COVID-19 pandemic on our business.
On Slide 11, I would like to review our capital allocation priorities. Please note that with the business uncertainties related to the COVID pandemic, our primary focus for 2020 is to preserve cash. And we're taking steps to minimize capital expenditures where possible. Once we gain better visibility into the impact of the pandemic on the company for the balance of the year and assuming we have adequate capital and liquidity to pursue our traditional capital allocation priorities, I want to share how we're thinking about capital allocation.
Our first priority remains internal investment in projects expected to drive revenue, reduce cost and generate future shareholder value. As you can see from our Q1 results, we have been active on this front making incremental improvements as part of our continuous improvement culture.
Our second priority would be our commitment to debt reduction and maintaining a strong balance sheet. We expect to maintain a conservative leverage profile with a range of 2 times to 3 times net debt to EBITDA with a preference for staying at the low end of that range.
Our third priority for capital use would be strategic acquisitions that allow us to expand into new geographies and markets, other building products or new channels to expand our footprint and that we expect to generate strong margins. Given the uncertainty around the economic outlook, as well as our recent acquisition and lease out, we expect that our primary focus for 2020 will be preserving liquidity and optimization of our manufacturing assets. We expect that any future potential acquisitions will most likely occur in 2021 or beyond.
Finally, you may note that we have removed share repurchase as a priority. No stock repurchases were made during the quarter, and we plan to remain committed to maintaining liquidity as well as the priorities I have just described for the foreseeable future. While we have withdrawn our full year financial guidance for 2020, I want to share what our current assumptions are for Q2 and the key indicators we are closely monitoring for the back half of 2020. We expect Q2 sales to be lower by 7% to 10% as compared to the same period last year, driven primarily by COVID-19-related reduction in orders, which started in April. We expect our margins and EBITDA for Q2 to be in the mid-teens, due to a combination of those lower Q2 sales and an expected negative product mix in both our Florida business and Western markets and ongoing incremental cost incurred in response to the COVID-19 pandemic. We expect our decision to maintain a cost structure that, while reflecting some cost reduction, assumes such sales will return in Q3 and Q4 to a level that will require the resources funded by that cost structure to properly manufacture and deliver products to our customers in a reasonably timely manner and service our customers' needs.
As Jeff mentioned earlier, assuming our markets do not experience any significant increases in COVID-19 cases and their economies continue to reopen, we expect to see a modest recovery in order trends and related sales as we move throughout the year with our Florida markets expected to achieve year-over-year growth by year-end. We are constantly monitoring and evaluating order entry and sales trends and projections and economic factors that may impact the demand for our products through the remainder of the year and we may further reduce our cost structure this year, as we believe those factors indicate a need to do so as we get further visibility into the remainder of 2020.
As stated earlier, we are minimizing our capital expenditures to those that are business-critical. We will invest in capital to complete the closure of our Orlando facility as we reported in April. Once completed, which we expect to occur in June of this year, we expect to deliver $3.5 million to $3.8 million of annualized cost savings. And now, I would like to turn the call back over to Jeff for some closing thoughts. Jeff?
Jeffrey T. Jackson -- Chief Executive Officer and President
Thanks, Sherri. Today, I will conclude my prepared remarks by reiterating PGT Innovations' investment thesis, which has not changed despite the economic uncertainty ahead of us. We are a national leader with strong brands in the growing categories we compete. Second, we are product innovators. We intend to maintain our advantage as leaders in our industry by investing in R&D, acquiring brands and hiring and retaining the best talents. Third, we plan to continue our focus on improving operational efficiencies that drive margin expansion over the long term. Fourth, we are striving to execute on a strategy that we believe will create long term value for our shareholders and customers. And finally, we believe our product portfolio positions us to capture profitable growth in the markets we serve.
I would like to close by expressing my deep appreciation for all the essential workers who have been on the frontlines of this crisis, from healthcare professionals and first responders to the grocery store employees, delivery drivers and all essential workers who have been working hard for the benefit of others. At this time, I'd like to turn the call over to the operator to begin Q&A. Operator?
Questions and Answers:
Operator
We will now begin the question-and-answer session. [Operator Instructions] And we'll take our first question from Phil Ng with Jefferies. Please go ahead.
Phillip Ng -- Jeffries -- Analyst
Hey, good morning, everyone, and congrats on a very strong quarter.
Jeffrey T. Jackson -- Chief Executive Officer and President
Good morning, Phil.
Phillip Ng -- Jeffries -- Analyst
Yes, Jeff, to kind of kick things off, what's the typical lag from your pipeline and new orders to sales? Because based on the backlog you have and the trends you're calling out in orders in recent months, it does seem like the implied mid-to-high-teen organic sales decline in 2Q could be potentially conservative but appreciating there's a lot of puts and takes, help us understand some of these dynamics.
Jeffrey T. Jackson -- Chief Executive Officer and President
Yeah, typically what we like is our lead times to be anywhere from -- non-impact lead times of one week to two weeks to impact lead times from two weeks to, say, four weeks at the most. But we had to stretch those lead times out due to the -- in part, due to the pandemic, some of the operational changes we've made to both social distance on the line, for instance, spreading the lines out, staggering shifts, staggering lunch breaks, etc, all that has served to impact capacity. So -- and early on, actually at the beginning of March, I initiated a hiring freeze. And so with that hiring freeze, we also -- I think, three weeks later, went to no over-time. So we kind of stretched that pipeline out to keep folks busy. Quite frankly, other than the safety of our folks, my other priority was to keep them busy and employed in a job. So we've had no layoffs as a result of this pandemic unlike other companies that have had to do. So we basically stretched that pipeline out. So right now, those lead times, even though they're improving because we added -- started back adding capacity based off the back half of second-quarter's order volume, right now, those lead times are probably in the seven week to eight week lead time area.
Phillip Ng -- Jeffries -- Analyst
Got it. Okay, that's helpful. And perhaps, can you give little more color on May? I know appreciating things may have bottomed out in earlier mid-April? Given some of the States that have reopened like Texas and California, can you give us a sense how orders may be performing in those markets? And certainly Florida is a big market for you, has that started to inflect positively year-over-year?
Jeffrey T. Jackson -- Chief Executive Officer and President
As far as May goes, no, I'd say, we'd stick to our -- we're still going to be down in May. It's going to be better mainly because of Florida. We are entering hurricane season. June 1 is hurricane season, I just read this morning where a low pressure is being monitored over the Bahamas. So that could be the first kind of tropical storm and it's supposed to be an active hurricane season as well. So that will be a natural offset or potential lift for the Florida market. But in terms of markets reopening, I just read also -- I heard last night, California, LA counties extended their stay-at-home orders for another three months. So markets are coming back online, but I'd say it's definitely different by area. So I think Western is going to continue to -- Southern Cal is our main market. Production builder, for instance, is mainly Southern Cal and they were up 39% in the first quarter versus last year. That market is all but shutdown. Sherri, the permits in California were in the negative 22% or something like that...
Sherri Baker -- Senior Vice President and Chief Financial Officer
That's correct.
Jeffrey T. Jackson -- Chief Executive Officer and President
...for April. We expect similar, if not worse, for May. So I think what we're going to end up having, again, May is going to be tough comp. We're going to be down mainly in our Western business unit and we hope that the current patterns we're seeing in Florida -- we're striving to be flat year-over-year in Florida by the end of the quarter.
Sherri Baker -- Senior Vice President and Chief Financial Officer
End of the year.
Jeffrey T. Jackson -- Chief Executive Officer and President
I'm sorry.
Phillip Ng -- Jeffries -- Analyst
Got it. Okay, and just one last one from me. Your NewSouth business seems to have been a home-run acquisition. For you order growth was actually very strong in April. I would have thought, given the B2C nature of the business, it could be more impacted by social distancing. Can you kind of flag some of the things that are driving the strength in NewSouth? And thanks a lot.
Jeffrey T. Jackson -- Chief Executive Officer and President
Yeah, thanks. And that's a great question. Yeah, it has been a great acquisition. It gives us a brand and a new channel, quite frankly, we weren't in that consumer direct channel, and with the ability also to expand aggressively outside of the state of Florida with the opening up of new stores. What's happening in NewSouth is basically, it hasn't been impacted by COVID. It's more of the install side. So while quotes are up, quite frankly, sales are up. Like we said, orders are up, the pipeline has built for NewSouth. So right now, based off our lead times, we have three months worth of pipeline or sales available for NewSouth. But orders or the installation of those orders is what was pushed basically out of April. May is starting to come back some, in terms of people letting us back into their homes to install those products and we hope by the end of the quarter, by June, July, we'll be back installing in those homes, in the R&R market will stabilize in Florida.
Phillip Ng -- Jeffries -- Analyst
Okay. Great. Thank you.
Sherri Baker -- Senior Vice President and Chief Financial Officer
And so I'd like to add just one thing and because this is a direct-to-consumer model, we believe that keeping an ample level of marketing investment is really important because we have the opportunity to actually reach folks through our advertising as they are home. So you will see the impact of some of that when we're looking at our Q2 margins, but we believe that that's going to pay it forward into future sales.
Phillip Ng -- Jeffries -- Analyst
Okay, thanks a lot, Sherri.
Operator
[Operator Instructions] And we'll take our next question from Keith Hughes with SunTrust. Please go ahead.
Keith Hughes -- SunTrust Robinson Humphrey -- Analyst
Thank you. Based on your commentary on EBITDA margins in the second quarter and the revenue discussion in the press release, looks like your contribution margin will be down negative 30-something percent in the second quarter. I guess my question is, if the third quarter looks the same, will that -- I guess in this case, decremental margin, will it look similar or will that get better with some of the cost saving moves?
Sherri Baker -- Senior Vice President and Chief Financial Officer
Yeah, we would expect it to get better and the decremental margin you would typically see is around, call it, 30% to 35%. There is a couple of things that are going on in Q2, so, one, that you're also seeing -- with everything that Jeff was just talking about from a market perspective, we are seeing a negative mix from a sales perspective. So we are heavier on the new construction side and legacy business in the Florida market and we are heavier on the Custom mix due to some of those production builder declines at a faster pace than what we're seeing on the Custom side. So you've got the impact of that negative mix that’s hitting you in Q2 and also the impact of the reduced capacities that Jeff was just talking about. So, as we're ramping up capacity up and we're expecting our sales to continue to increase as we're moving throughout the year, you'll start to see the benefit and the lever to that as you're moving sequentially.
Keith Hughes -- SunTrust Robinson Humphrey -- Analyst
Okay. And you had talked previously about kind of a goal of being flat here in Florida in the second quarter. I want to make sure I understand, is that orders? Is that revenue? Does that include NewSouth or not? Any detail on that would be great.
Sherri Baker -- Senior Vice President and Chief Financial Officer
Yeah, so the flat is legacy. So we will try, at least, particularly for the first year to separate out NewSouth from your core legacy Florida market. So that is really intended to talk about your legacy Florida. You're seeing roughly down 10% currently. We are expecting that to sequentially improve and hopefully get back to growth by the time we get to year end.
Jeffrey T. Jackson -- Chief Executive Officer and President
But we do -- in terms of NewSouth, we think we're going to continue to see those growth rates we're seeing. NewSouth is still taking orders aggressively.
Sherri Baker -- Senior Vice President and Chief Financial Officer
Absolutely.
Keith Hughes -- SunTrust Robinson Humphrey -- Analyst
Okay. I guess final question. In the first quarter, what was the revenue change in the Southeast and what was it in Western? I heard a number earlier, I'm not sure if that was the orders or revenue.
Sherri Baker -- Senior Vice President and Chief Financial Officer
Yeah. So your legacy Florida excluding NewSouth was up 18%. It was roughly 16% on R&R and 21% on new construction and your Western organic growth was 14% versus prior year.
Keith Hughes -- SunTrust Robinson Humphrey -- Analyst
Okay, thank you very much.
Sherri Baker -- Senior Vice President and Chief Financial Officer
You bet.
Operator
And our next question is from Truman Patterson with Wells Fargo. Please go ahead.
Truman Patterson -- Wells Fargo -- Analyst
Hi. Good morning, everyone and great quarter. [Speech Overlap]
Jeffrey T. Jackson -- Chief Executive Officer and President
Good morning.
Truman Patterson -- Wells Fargo -- Analyst
Yeah, glad to hear that you too are safe and healthy as well. First question on your Florida markets, you suggested that they've started to recover in May. Could you break this out on whether this is on the new residential side or the repair and remodel side? And I'm really hoping to dig in a little bit on the R&R side. I figured that homeowners would likely be pretty cautious having contractors enter their home. Could you just give us any update of what you're hearing and seeing on that front as well?
Jeffrey T. Jackson -- Chief Executive Officer and President
Yeah, it's -- new construction has held up, quite frankly, our national builders are -- and our regional builders, they're basically finishing out what was currently in the pipeline. And so that's held up nicely. R&R, obviously with the in-home installation, that has slowed down some. Mainly also, our big-box kind of pipeline, the big box centers, that slowed down as well. Again, anything you can think of what people would do it themselves or have to go out or have somebody come in a home has been impacted. And it's continually impacted, especially if you look at our first quarter growth rates we were seeing. So we do expect and are starting to see some, I guess, people letting us in their homes.
We are aggressively marketing our program to be safe and clean and sterile when we're in their homes. Our employees, they get temperature checked, they sign waivers that they're medically good. So we have processes in place to try to assure the homeowner that we're taking their safety into account as well. And we're starting to see that unfold some, quite frankly. It got bad in April, as everybody experienced. May is okay. And like we say by June, we're hoping people will be back more close to normal. Do you have anything, Sherri?
Sherri Baker -- Senior Vice President and Chief Financial Officer
Yeah, the only other thing I would add, particularly on your new construction side is, you do have the benefit of probably a three to four months backlog, not only on our side but also on the dealer side as well. So what we're seeing from an order entry pattern perspective, we will really start to show up probably closer to Q3.
Truman Patterson -- Wells Fargo -- Analyst
Okay, okay, thanks for that. And then on the EBITDA margins, came in well ahead of expectations in the first quarter. You all mentioned cost management and operating efficiencies including the Western Window side. Could you just go into a bit more depth about how sustainable these are? And then also maybe give an update on the timing of when you think the Orlando plant consolidation will be complete, you'll be running close to that $3.5 million to $3.8 million run rate.
Sherri Baker -- Senior Vice President and Chief Financial Officer
Sure. And I'll start with the Florida business which, candidly, I think, had just a phenomenal quarter from an operations perspective. The operating leverage that we saw and the cost control with the amount of growth that we were seeing organically was incredible. From a Western perspective, I will say that where we are starting to see the benefit is particularly on your direct labor side. So recall that we talked on our last call that there were some operational challenges that we were working through from a process improvement perspective. We've put new procedures in place from an ordering perspective or orders and the leveling and that's benefiting not only your direct labor, but also your shipping costs as well. So a lot of those programs and processes that we've put into place in Q1 are starting to really come to fruition as we were exiting the first quarter and really coming into the second quarter.
Jeffrey T. Jackson -- Chief Executive Officer and President
And then I'd also say, remember, we also took that restructuring, so to speak, charge in Q4 of last year where we took cost out of the business and we were able to leverage that as well, reducing our fixed cost.
Truman Patterson -- Wells Fargo -- Analyst
Okay, thank you all.
Jeffrey T. Jackson -- Chief Executive Officer and President
You bet.
Operator
Our next question is from Ken Zener with KeyBanc. Please go ahead.
Ken Zener -- KeyBanc -- Analyst
Good morning, everybody.
Jeffrey T. Jackson -- Chief Executive Officer and President
Good morning, Ken.
Ken Zener -- KeyBanc -- Analyst
Good to hear you’re able to manage the backlog to keep the employees engaged. Lot of different moving parts here. If we could start with NewSouth, I know it’s about $90 million of sales, excuse me, but it's going to be -- sorry, the guidance, when you said 7% to 10% in Q2, was that organic or was that including NewSouth? I wasn't clear on that.
Sherri Baker -- Senior Vice President and Chief Financial Officer
That includes NewSouth. Your organic decline year-over-year is more in the high-teens.
Ken Zener -- KeyBanc -- Analyst
Right.
Sherri Baker -- Senior Vice President and Chief Financial Officer
And with the segregation of Florida being better than that and Western being slightly worse than that, so on a weighted average basis, it's about high-teens organically.
Ken Zener -- KeyBanc -- Analyst
Excellent. Thank you. Now, and then the EBITDA, you mentioned mid-teens. Is that correct? I just -- I couldn't hear it clearly.
Sherri Baker -- Senior Vice President and Chief Financial Officer
That is correct.
Ken Zener -- KeyBanc -- Analyst
Okay, great. Now, could you go into NewSouth a little bit? Jeff, I mean it's with nine-plus show centers and you guys do the installation. Do you guys do the installations. Are those fixed costs or they're per job and what insights has that given you to the market? What do you say versus going through dealers historically?
Jeffrey T. Jackson -- Chief Executive Officer and President
Yeah, one, every job is different. NewSouth targets, what I would say, a different customer base than what our historical PGT dealer base targeted. And they're more smaller jobs, quite frankly and more one-offs. If a person wants to just switch out doors, for instance, they may start with a door and then ultimately go to the windows, NewSouth fits that model very well. And again, as we open up stores, which we opened at the Pensacola store, as well as the Charleston store and we have Houston scheduled to open up at the end of this year. So as we start to open up stores, we'll start leveraging some of the marketing costs, Sherri had mentioned earlier, which is an investment, not necessarily cost in how we go to market with NewSouth. What we've been able to learn is our price, both from a product standpoint and installation standpoint is very similar to our dealer based product.
So we're not undercutting each other. We are both in the market and are both therefore able to make money, quite frankly, and it's very complementary. The other thing we've learned from a lead generation standpoint is we've been able to take NewSouth's technology and their innovation in lead generation and implement -- or start implementing that for our dealer base, as we call it Project Coffee, it's an initiative we have going with our PGT dealer base. So, we've learned a lot about lead generation, following up on those leads and the cost of those leads.
But again in terms of install, install is variable and most of that labor -- quite frankly, even though we have some in-house, most of that is outsourced. So we'll go into a home, we will sell that product at local store that will go into a home, sell the product with the labor included and we will have that labor pre-arranged or pre-priced with the related installer as we're quoting that job.
Ken Zener -- KeyBanc -- Analyst
Thank you very much. Sherri, last quarter we talked about in the West and Jeff, you mentioned obviously getting direct labor lower because of the shift from production builder to more custom. Could you update us perhaps -- in the 10-K, obviously you have the segment EBIT data which shows about a 5% margin difference between the Southeast and the West. I mean, are we still kind of in that range? And then, specifically in the West, has the Custom sales process been working a lot better than perhaps you would have thought three or five months ago as that really is your growth opportunity for that region?
Sherri Baker -- Senior Vice President and Chief Financial Officer
Yeah, yeah. I'll take that. So from a Western perspective, we are starting to see the benefits of the process improvements in direct labor, but they were really put in place towards the end of Q1 and into Q2. So you are seeing still a bit of higher direct labor on a year-over-year basis, but we are sequentially starting to see that normalizing, get back to where we would be expecting. So I think you're going to see more of that benefit coming in, in Q2. On an EBITDA basis, you also do have just an overall product mix shift from a production builder and a Custom perspective that will play into effect and that in Q2 we will see more of a negative mix just due to all of the macro factors that Jeff talked about, all market-driven, not I’d say, health of the business driven, but all market-related to COVID. So you'll see more of a negative product mix that will show up there as well, but you are at least starting to see, I'd say, more of a normalized cost structure going into Q2 that would be similar to what we were seeing last year.
Jeffrey T. Jackson -- Chief Executive Officer and President
Yeah. We've implemented various changes at Western. It's an incredible brand and we're going to obviously be more aggressive in establishing the R&R market there. We did open up Skye Walls, which is our first retail outlet, if you will, in California, although again, COVID-19 California, not the best place to be at this moment, but it's an incredible opportunity to keep leveraging that brand in that kind of that open indoor-outdoor window wall demand is out there in the market. So we got several initiatives like that. And Sherri had already been mentioning internally, level loading the plant, synchronizing material purchases to scheduling, increasing accuracy of the building materials.
The workforce, we had -- last year, we had about a 50-50 split between temp and permanent employees. That's going away, basically, it's about a 90-10 split now, 90% of employees are permanent, and we're training them, we're maintaining that knowledge base that is important to have and we only have about 10% temporary force there. So there's been a lot of changes at Western. It will show up later on during the year, Sherri had mentioned, in terms of actual EBITDA improvements. But from a top-line, I wouldn't -- I don't want to [Indecipherable]. California is a significant market for Texas, I mean, for Western and we are still seeing some COVID-related impacts from California at this point.
Ken Zener -- KeyBanc -- Analyst
Thank you.
Operator
Our next question is from Michael Rehaut with J.P. Morgan.
Margaret Wellborn -- J.P. Morgan -- Analyst
Hi, guys, this is Maggie on for Mike. First...
Jeffrey T. Jackson -- Chief Executive Officer and President
Hey, Maggie.
Margaret Wellborn -- J.P. Morgan -- Analyst
Hey. First, follow-up question to some of the questions earlier, when you've previously talked about several expansion initiatives across the business, opening new stores in NewSouth, the new Skye Walls segment, I think you mentioned that you've still got NewSouth openings planned for later this year and that you did open a Skye Walls store in California, but I was hoping you could talk about how the COVID-19 situation has impacted these plans and if it has pushed them out to any extent.
Jeffrey T. Jackson -- Chief Executive Officer and President
Yeah, yeah. That's a -- it's a great question, the answer is yes. Obviously long term, it's not going to impact us, we still laid out our investment thesis and we're going to march to it and create the results we did for the quarter, first quarter over time. But from an execution on certain initiatives, yes, we've had to, I won't say -- I'd say, delay would be a better word. We were going to open up a second Skye Walls expansion in Northern Cal. Quite frankly we may look to do that in Las Vegas and some other market that we had targeted to do next year. We may change that market dynamics of where we go. And it will probably be, instead of the second -- third quarter, it will probably be in the fourth quarter. We're trying to again assess the environment that we're currently in and the duration of any potential impacts to demand. So we have delayed certain initiatives. However, we are still -- Pensacola store opening, we do still plan on the Houston store opening, we've identified several locations. I would say, I would've pushed them to do it sooner and now we're talking more towards fourth quarter timeframe versus, say, mid-year. So there have been some of those types of initiatives.
We've cut our capex spending quite frankly. Sherri, I don't know by how much, roughly 30%, I would say, from what we were initially forecasting to spend on capex. We've tried to cut down on those expenditures and we've taken an overall approach of -- we've got an incredible pipeline built up, $124 million and our orders are stable, obviously down in certain markets but stable for the most part. And the goal is to see how long this impact lasts? 30 million plus people out of work, they're going to come back to work as businesses start opening. Last I read, about 50% of the States are starting -- at some form of unlock are opening up their economies. We've just got to see how much that -- how long that takes and we'll flex our capacity and our plans to demand, basically. This is different than the last downturn, quite frankly. We went into this thing strong. The last downturn took a while to get here and it's more liquidity crisis with banks, we're not doing that at all. Our worst case cash flow analysis with Sherri and her team are constantly on, it has us fine. That’s why liquidity wise, we think we're in great shape to go through the current pandemic. So I would say, yes, that overall, we're taking a cautious approach, but we're still following our strategy that got us here.
Margaret Wellborn -- J.P. Morgan -- Analyst
Okay, thank you. And second on capacity, could you give us an idea of how much capacity you cut? And then you mentioned that it started to come back in Florida. Maybe give an idea of where you are now versus pre-COVID-19 levels.
Jeffrey T. Jackson -- Chief Executive Officer and President
Yeah, I mean, we're probably running at about 60% capacity, if I had to put a percent on it, roughly. And again, that's no overtime, we've just started back working overtime, for instance, and, say, on a Saturday. So that immediately adds capacity into the system without any kind of really investment other than variable cost to the direct labor. So we're up running about 60% capacity. I think we can bring that back as quickly as we need to, again, based on demand. If you think about -- it will be different at each location. Here in Florida, we expect to spin it up sooner. At Western, we're still having a -- I'll say, a hiring freeze, we're not adding people, as people -- through attrition, we're losing folks and at times we're replacing through attrition if necessary, but overall the labor pool is there. Again, unlike the past times, the labor pool is there and so we'll just put our foot on the gas and turn up capacity. I'm not going to say it's easy but it's definitely easier than it was in the past. And we've already flexed lead times down in certain lines based off demand, for instance, here in Florida. Sherri, do you have anything you want to say?
Sherri Baker -- Senior Vice President and Chief Financial Officer
Yeah, I would just say that, as we're working through the quarters, I would say that we're going to be getting back to what I would call a normalized backlog as we get into the Q3 timeframe. So we're ramping up capacity as we're moving through the quarter and we will get back to something more normal by the end of Q3.
Margaret Wellborn -- J.P. Morgan -- Analyst
Okay, thank you.
Operator
This concludes our question-and-answer session. I would now like to turn the conference back over to Sherri Baker for any closing remarks.
Sherri Baker -- Senior Vice President and Chief Financial Officer
Thank you all for joining us today. We appreciate your continued interest in PGT Innovations. We look forward to talking to you all next quarter and stay healthy and safe.
Operator
[Operator Closing Remarks]
Duration: 53 minutes
Call participants:
Sherri Baker -- Senior Vice President and Chief Financial Officer
Jeffrey T. Jackson -- Chief Executive Officer and President
Phillip Ng -- Jeffries -- Analyst
Keith Hughes -- SunTrust Robinson Humphrey -- Analyst
Truman Patterson -- Wells Fargo -- Analyst
Ken Zener -- KeyBanc -- Analyst
Margaret Wellborn -- J.P. Morgan -- Analyst
