Good afternoon, ladies and gentlemen, and welcome to Beacon Roofing Supply's Second Quarter 2020 Earnings Call. My name is Aaron, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be conducting a question-and-answer session towards the end of this conference; at that time I will give you instructions on how to ask a question. Operator provides instructions on how to ask a question. As a reminder, this conference call is being recorded for replay purposes. This call will contain forward-looking statements, including statements about its plans and objectives and future economic performance. Forward-looking statements are only predictions and are subject to a number of risks and uncertainties. Therefore, actual results may differ materially from those indicated by such forward-looking statements. As a result of various important factors, including, but not limited to, those set forth in the Risk Factors section of the company's latest Form 10-K. These forward-looking statements fall within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 regarding future events and the future financial performance of the company, including the company's financial outlook. The forward-looking statements contained in this call are based on information as of today, May 7, 2020, and except as required by law, the company undertakes no obligation to update or revise any of these forward-looking statements. Finally, this call will contain references to certain non-GAAP measures. The reconciliation of these non-GAAP measures is set forth in today's press release. The company has posted a summary financial slide presentation on the investors section of its website under Events & Presentations that will be referenced during management's review of the financial results. On the call today for Beacon Roofing Supply will be Mr. Julian Francis, President and CEO; Mr. Joe Nowicki, Executive Vice President and CFO; Mr. Frank Lonegro, Executive Vice President. I would now like to turn the call over to Mr. Julian Francis, President and CEO. Please proceed, Mr. Francis.

Thank you, Aaron, and good evening, everyone. Welcome to our second quarter 2020 earnings call. Given the unprecedented nature and impact of the coronavirus pandemic, we certainly appreciate you spending time with us and hope that you and your families are safe and healthy. I'm sorry if the acoustics are a little bit different this time. We're trying to do this call in a healthy and safe environment. On the call with me is Joe Nowicki, our current CFO, and Frank Lonegro, who will take over for Joe after this earnings release cycle. We have three important topics to cover with you. First, the details on very encouraging second quarter results; second, the impact of COVID-19 on our business and the speed and comprehensiveness of our response; and third, the demonstrated ability of our strategic initiatives to drive value in both normal and uncertain times. Before turning to our results, I'd like to take a moment to express my appreciation to our employees. While we are an essential business, it takes the dedication and commitment of every one of Beacon's employees to deliver for our customers during these unique times. I'm proud of every member of the Beacon team. They're working hard and working safely to ensure our customers have the building products they need to provide essential services to the end customer, particularly those who need critical home or property repair in this kind of uncertainty. Beacon will continue to do all we can to protect the health and safety of our employees, customers and communities. Now, turning to our second quarter results. I am very pleased with the top line and the earnings momentum we generated. In fact, absent the impacts of the pandemic, which emerged in mid-March, we very well could have been looking at an even better second quarter adjusted EBITDA than the record $39 million we did deliver. We originally expected this year to unfurl in two parts: a softer first half on post-hurricane weather comps, and a stronger second half on improving new residential construction and the growing repair market in both residential and commercial construction. As you know, we have now withdrawn full year expectations, but COVID-19 aside, looking at our first half, we did what we said we would do. We've been able to show significant positive trends on the gross margin line. And during the second quarter, we delivered positive sales growth and attractive operating expense leverage. Let me say a word about how each of our strategic initiatives drove value in Q2. In terms of organic growth in the quarter, we produced daily sales improvements of 0.5% versus last year, and we were on a much stronger mid-single-digit rate prior to the impacts of the pandemic in mid-March. I should also point out that we achieved those growth rates with a roughly 3 percentage point headwind from last year's hurricane demand in our mid-Atlantic and Southeast regions. Adjusting those two regions for the year-ago hurricane impact would mean six of our seven regions generated sales increases during the second quarter, indicating broad-based strength and the benefits of our increased focus on sales activity. From a product perspective, the Q2 sales highlight was our nonresidential roofing category, where we delivered nearly 11% daily growth, representing our third consecutive quarter of year-on-year gains. And while the category sales have declined since COVID-19, underlying bidding and quoting activity has remained firm. Next, in terms of our strategy to improve operations, you'll recall that we have intensified our focus on the performance of our bottom quintile branches. Despite external headwinds, this group of branches began to see operating income improvement during our second quarter. We have made progress on our gross margins during the past two quarters. During our fiscal first quarter, we were able to deliver sequential gross margin gains. And now with the stronger second quarter gross margin performance, we have produced year-over-year margin expansion. Internally, we thought we would show a year-over-year improvement in the second half of this fiscal year, so we were actually tracking ahead prior to the coronavirus outbreak. Our market-based branch operating model, which we term our on-time and complete, or OTC, network, is now in place in over 40 markets and continues to enhance our customers' experience and drive improved operating leverage for Beacon. This was evident in the network's year-over-year gains in delivery efficiency of 6% to 7% and variable cost improvement of 70 to 80 basis points for warehouse shipments. In these markets across the country, we also continue to see examples where our central dispatch teams ensure our ability to serve our customers even when issues arise. These markets now include Denver as we brought a new hub online there in March. With respect to digital, in Q2, sales transacted through e-commerce were up 50% over the prior year period. While our focus on increased sales activity is critical regardless of how customers want to interact with us, we established our digital platform as a strategic initiative, and we are seeing improvement and continued growth. And with the recent heightened interest in a context of less face-to-face sales process, we are well positioned to deepen existing relationships and gain market share. Wrapping up the results at a high level in the first half of fiscal 2020, Beacon demonstrated that its strategic pivot from acquisition-based growth to organic growth is the right strategy for this phase of our journey. We are still in the very early stages of executing, but we're pleased with the progress we're making. Shifting to COVID-19. Like everyone, we experienced rapid and significant impacts to our business, starting in mid-March. To understand and combat the impact, we immediately formed a crisis response leadership team. This group continues to meet daily to ensure that we have the latest internal and external developments and can plan and react accordingly. As an essential business that continues to operate through this pandemic, the health and safety of our employees, customers and communities is the primary concern for our organization. With operational health and safety at the core of Beacon culture, we rapidly engaged and prepared the organization to confront the unique challenges of COVID-19 in order to ensure a healthy workplace. We are following all CDC guidelines, enacting social distancing measures, disinfecting branches regularly, utilizing PPE and requiring field employees to remain home if they come in contact with or show any symptoms of the virus. Our non-branch personnel are working productively from home, and travel has been largely eliminated. Our branches have been declared essential businesses in all markets we serve. We are open for business and helping sustain the livelihoods of our employees, customers and suppliers. What we've seen in April is a distinct difference between the heavily and not-so-heavily affected geographies. There are ten areas where the case numbers are high, and there are specific governmental restrictions in place on construction-related activities, for instance, California, Michigan, New York, Pennsylvania and Québec. The impact to our business has been fairly severe in these markets with year-over-year sales declines of 40% to 50% in April. We don't know exactly when these restrictions will ease across every market. However, we have seen some cautious rollbacks during recent weeks in Pennsylvania, Michigan and the Bay Area. Obviously, this is not a guarantee that business in these more heavily impacted locations will immediately improve, but we have seen early indications of positive daily sales trends. So we are hopeful as each state revisits the extent of the restrictions in the coming weeks. The other 46 jurisdictions where we operate in the U.S. and Canada showed mid- to high-single-digit sales declines during April. These areas represent approximately 70% of our overall sales. These modest declines highlight the recession-resistant revenue characteristics of our business. While we are not immune from the impacts of COVID-19, a heavy portion of our business is repairing aged and damaged roofs. About 70% to 75% of overall sales and more than 80% of our roofing business is R&R based and largely nondiscretionary. This provides an important level of protection during soft economic environments. As we mentioned in our press release, we have taken significant cost and liquidity actions in response to the pandemic. On the cost side, we have reduced our labor costs through broad-based efforts, including the reduction in hourly workweek, for both field and management employees, temporarily reducing salaries in executive and other leadership positions, restricting travel and other discretionary expenditures as well as taking a significant number of underutilized trucks offline, reducing maintenance expense. With respect to liquidity, we have severely curtailed capital expenditures, improved working capital metrics by reducing inventory and drawn down on our revolver. As a result, our balance sheet cash position is strong, and we are continuing to evaluate actions to provide liquidity and flexibility. Now with regards to our strategic initiatives, I have to say that all four of them are serving as pillars for success even in radically changed circumstances. First, on organic growth. With our sales force largely working from home, they've had to resort to electronic forms of communication, and phone-based activity has climbed substantially. Utilizing our CRM tools, our sales team has been diligently following up with our contract and customers to ensure they know we are open for business, and we stand ready to help them. Our dedicated outsized sales team has been making upwards of 9,000 calls per day to listen to what we can do to help customers. Based on feedback, we have developed webinars on subjects such as providing a no-touch customer experience, handling the storm season with social distancing and homeowner financing. The benefits of maintaining this level of activity will be felt immediately and continue long after the current crisis is behind us. Second, our focus on operational performance. The rigor we established to review branch performance prior to COVID-19 remains valid now. The metrics we've built around operational efficiency, headcount and inventory management are just as important in a recessionary environment as they are in a growth environment. At the beginning of the fiscal year, we intended to focus primarily on the lower quintile branches. With the advent of the pandemic, we are using the same approach across the network, and it's bearing fruit. While normally adding headcount at this time of year, we have reduced headcount across the company and more at the most severely impacted branches. In many cases, we are still seeing substantial gains in revenue per hour worked, which we believe will help us now and in the future. Third, our on-time and complete network. This has set us toward realigning and expanding the cooperation of our exteriors branches, serving more than 40 major markets, and it has been invaluable during COVID-19. First and foremost, leveraging the local network of branches, OTC helps us ensure that our customers receive highly reliable service and delivery schedules. If we experience a temporary branch closure, we can continue to serve our customer from another branch within the network. That reliability is hugely valuable for customers and is a major differentiator for Beacon. When the economy recovers, this model will also allow us to meet increased demand more efficiently by leveraging equipment resources and inventory across our network of branches. Lastly, our digital platform. Speaking as a leader in e-commerce in the building products distribution space with online functionality that continues to outperform our competition, in these days of social distancing, the use of our solution continues to increase. And we expect these new customers to remain loyal users long after current conditions have passed. Now more than ever, contractors want to order products on a 24/7 basis through Beacon Pro+ and many of them want to limit visits to the branch. The same principle exists for contractors bidding projects with homeowners. By using Beacon 3D+ which allows digital construction measurements to be taken without accessing the roof, contractors can minimize interactions with homeowners during the bidding phase. The effectiveness of these strategies in this very different demand environment has provided an early glimpse of how good Beacon can be. We're excited about what we are seeing and look forward to illustrating that as the economy reopens. Now, I will pass the call over to Joe to provide details on our cost actions and an update on our financial position.

So thanks, Julian, and good evening, everyone. I want to echo Julian's earlier comments, our people are doing an incredible job in this environment, not only managing through COVID-19, but also continuing to maintain a heightened focus on their day-to-day business. I'm confident it will benefit us in the long term and will position us to outperform our peers. Now, I want to talk through our actions around operating costs. While our second quarter operating cost management was excellent, we reacted quickly as the threat from the pandemic became more clear. Our finance, operations and executive teams quickly developed a wide range of scenarios for demand and then matched up corresponding cost actions we needed to implement. At this time of the year, we typically start hiring employees and expand overtime hours to address seasonal demand. Given the coronavirus outbreak, we significantly pulled back on these hirings. We've also reduced many of our employees to a 32-hour workweek and made similar 20% or larger adjustments to salaried personnel. We've also made furloughs across our entire organization. Aside from reductions to employee costs, we've significantly reduced T&E, negotiated many fixed contracts and reviewed certain facility consolidations. April month sales experienced declines of approximately 20% on a year-over-year basis, putting April sales slightly above the monthly average produced during our recently completed second quarter. With similar sales rates to Q2, we believe this offers an excellent basis for analysts and investors to more clearly understand what we've been able to accomplish from our OpEx perspective. On a sequential basis, our April month sales increased mid-single digits from the Q2 average. At the same time, our adjusted operating costs have declined mid- to high-single digits from the Q2 average monthly rate. This represents a major accomplishment for our organization. The pandemic has forced us to do more with less, and we're making better use of our OTC network efficiencies and enhanced productivity from our digital platform, along with the many responsive cost actions we've taken. While some of these cost actions are temporary, the current environment has also provided us with a unique perspective on our cost structure. We're beginning to formulate a roadmap that will help improve our cost management during the eventual recovery. This certainly includes our lowest quintile branches, but there are also opportunities for productivity gains across our entire network, divisions and at the corporate level. We expect to exit the current slowdown in an even stronger operating cost position. Next, I'm going to shift gears and provide a review of the balance sheet and update our liquidity position. Following our previously announced $725 million drawdown on our ABL, we ended March with $781 million in cash on hand. At the end of the second quarter, we also had an additional $197 million available on our ABL based on our quarter-end asset balances. We believe we have sufficient liquidity to weather the pandemic, although we're continuing to evaluate financing alternatives to ensure that we have the flexibility and liquidity to manage during an elongated downturn. We've also positioned ourselves to have favorable maturities on existing debt. The ABL matures in 2023, and our term loan B and senior notes don't mature until 2025 and 2026. We have a maintenance covenant only, which requires a fixed charge coverage ratio to be greater than or equal to 1; and at the end of the March quarter, this ratio stands at 2.4. We ended the quarter with net debt of $2.8 billion, representing an attractive $210 million reduction relative to year-ago levels. In addition, our average borrowing costs remain very competitive. We've taken rapid action with a number of key working capital items, both in the quarter but even more so during the month of April. Inventory was flat sequentially versus Q1, but as you know, this is typically the time of year when we're building inventory. Additionally, as you're thinking about the backdrop throughout most of the quarter, we were experiencing solid levels of demand. So flat sequential represents very solid inventory management, leading to a modest year-over-year improvement in turns. But we've been even more aggressive with curtailing our inventory position in April as we have reduced inventory by approximately $90 million relative to the March quarter end. We also remain very focused on accounts receivable. Our collections remain strong. DSOs have remained consistent, and our bad debt expense is comparable to the average experience of second quarters in the past two years. Despite the economic slowdown, we have seen no material impact in this area. Now, I want to quickly address several other significant items impacting our financial statements. As released in mid-January, Beacon is in the process of rebranding and simplifying building products. An exciting announcement for the company and one that will truly unify our platform and improve the overall customer experience. The noncash accelerated asset amortization of $142.6 million was recorded during the current quarter. This impact is excluded from our adjusted net income and adjusted EBITDA calculations. Second, you will note that our other expense line item is lower than is typical. That has benefited from two unique items. The first relates to a favorable $5.6 million class-action lawsuit settlement, which is included within adjusted EBITDA and adjusted net income calculations. The second item is a $5.3 million refund attributable to a true-up resulting from the 338(h)(10) election tied to Allied. This amount is excluded from our EBITDA and adjusted net income. Notably, both items resulted in positive cash flow benefits. Before I wrap up, I want to introduce Frank Lonegro to our investors. As you know, I will soon start the next chapter of my life, and Frank will step in as the new Chief Financial Officer of Beacon. Frank and I have now spent a fair amount of time working together, appropriately socially distanced, of course. He's also very busy getting to know the other executives on our leadership team and meeting with all of his direct reports. He comes to Beacon with an incredible resume and diverse range of financial and operational leadership responsibilities at CSX. It's clear to me that he is a great fit for Beacon at this point in the company's journey and that he and Julian will complement each other very well. We have a good transition plan in place, and I know it will go seamlessly. Jim and Brent are anxious to introduce him to everyone on this evening's call, and we'll be scheduling introductory calls and meetings as time and social distancing rules allow. I now want to pass off the call briefly to Frank before we move into Q&A. Frank?

Thanks very much, Joe. It's been a true pleasure working with you over the past three weeks. I wish you all the best in your upcoming retirement. I'm obviously very excited to be joining Beacon. There are many attributes that made this an attractive opportunity for me, both personally and professionally. On a personal level, for my wife and I and our three boys, this is a bit of a homecoming and puts us much closer to our families in Maryland. From a professional perspective, finding a company with great people and a great future was key, and I found that in Beacon. I'm excited to be working with a great leader and thinker in Julian and a very strong and collaborative executive team. That team, combined with an extremely knowledgeable and engaged board of directors, set an operational strategy in place a couple of quarters ago that really resonated with me. I see tremendous opportunity to drive shareholder value here at Beacon. We're an essential business and have a durable business model, as you've seen during COVID-19. We're focused on delivering great service for our customers so we can grow with them. We're focused on doing that more efficiently, and we're focused on driving better returns and cash flow. All of those elements were highly attractive to me, especially given my background at CSX. My first few weeks have confirmed that the operational aspects of building products distribution and freight transportation are quite similar. I'm excited about the opportunity to help Julian and the team capitalize on the strategic momentum they've generated in the first half of 2020. I look forward to connecting with each of you during the coming weeks and months and working with you to help Beacon achieve what we all believe it can. Operator, we're now ready to open the lineup for questions.

Your first question comes from the line of David Manthey with Baird.

First off, I'm just wondering if you can give us your expectations for the coming year for two items; one is shingle pricing, and the other — you mentioned housing starts improving in the back half of the year. Julian, could you give your outlook for single-family starts?

Well, David, thanks for the question. I'll start with the second portion first. We don't normally forecast single-family housing starts specifically; we tend to take blue-chip external forecasts. But I would tell you that, as I said earlier, we planned a year in which we expected to see improving housing starts through the year and particularly some uptick in the second half of the year, which would allow us to see growth in the second half and, in particular, help restore margins throughout the year. Obviously, we don't have a crystal ball, but everything we hear from the market suggests that new residential markets will certainly slow down. We don't know the extent of that, but we would anticipate a slowdown in new residential starts for at least the next several months; that's generally the indication from the builders. With regard to pricing, I think that we've seen a relatively stable pricing environment today. We feel like we're in good shape as we approach the rest of the year.

Okay. And second, could you provide us with growth rates by month in the quarter? I think there was some variability last year. Can you give us an idea of what those growth rates were quantitatively?

Sure. I can give you rough monthly same-day organic growth. January was up a little over 1%, February was up almost 5%, and March was down about 4%. Keep in mind, with March there was a difference between the first half of March and the second half of March as well. In the first half of March, we had substantial growth. So it was good growth in the first half, and then in the second half, when you started to see the impact of COVID, you saw a decline in volumes tied very much to what we described in the April numbers.

Your next question comes from the line of Kathryn Thompson with Thompson Research.

The first question is kind of near term. Second is a bit bigger picture. First, when we talk to a variety of industry contacts along the construction value chain, year-over-year comps are really meaningless in the current market. Most are focused on sequential weekly order trends starting in early March and answering the basic question: is this week better than last? What we are seeing is that by the fourth week of April, around April 12 to April 20, you started to see a break in that downward trend. Understand you're having huge variances by market. What are you seeing in terms of the changing momentum and weekly trends as you track your business?

Kathryn, that's an incredibly relevant question. You're right, year-over-year comparisons are difficult to interpret. Sequentially, we keep a very close eye on what we're seeing. Through April, we did see continued week-over-week slowdown until about mid-April, when it started to stabilize. So I concur with what your other contacts have seen, and we saw some sequential improvements towards the end of April. They were modest but encouraging. It is very regional and very geographic. I'm cautious about drawing broad conclusions from those numbers; that might be too early. As we mentioned earlier regarding new residential construction, we saw backlogs being worked through, and as those backlogs start to dry up, there is downside risk. But as markets start to open up and construction restrictions relax, hopefully we'll see improved activity. Generally, I concur with what your other contacts are seeing.

Okay. Second, bigger picture post-COVID. We've all made significant changes to adapt. Some changes will probably be more permanent out of necessity and will help the cost structure. When you look at your business, what changes made during COVID do you expect to be more permanent? And can you put them into buckets in terms of savings contribution to the business on a go-forward basis?

Thanks. A couple of things stand out. First, the necessity of improved, narrow branch operating metrics to manage day-to-day hours and respond to changing daily sales volumes. That's been important and will be long-lived. Second, corporate overhead — how we handle travel and expenses going forward — will be examined, given the effectiveness of remote communication. Third, digital adoption. This environment is accelerating the move to digital ordering, apps, touchless and contactless interactions. We expect many of these changes to stick, and we've already taken a leadership position in digital that should continue to benefit us.

Your next question comes from the line of Trey Morrish with Evercore ISI.

Picking up on the digital point: you said digital was up 50% year-over-year in the quarter. Can you talk about what you've seen in digital sales in April? Have you seen further acceleration? Have those sales fallen noticeably less than phone or in-person sales? Also, on inventory, you've had fairly stable inventory turns over the last 1.5 years — that's fairly stable inventory turns on a year-over-year basis. I'm wondering how much you're looking to get inventory down. If sales stay down 20% for the quarter, would you expect inventory to decline sequentially by that much? Would you want to bring it down further or less in anticipation of a rebound?

Thanks, Trey. For digital, it's difficult to tease out everything because some customers who would traditionally buy online aren't necessarily operating at the same level. But we're seeing more customers trying to buy online for the first time to avoid coming into branches, so the number of customers using digital is increasing. Regarding inventory, we were focused on cash generation in the early weeks of the crisis and got inventory into a position to weather various scenarios. The $90 million reduction in April was a meaningful step. There is some additional opportunity to reduce inventory further, but we'll manage region by region to ensure markets that are doing well have appropriate product availability.

Got it. Thanks.

That's a great question about inventory. It ties to our strategy around utilizing our OTC network more effectively to drive inventory improvements. The $90 million reduction was a solid step. There is probably a bit more room for improvement even if volumes stay at current levels, but we'll continue to manage this carefully by region to ensure we don't constrain markets that are performing well.

Your next question comes from the line of Ryan Merkel with William Blair.

Two questions. First, can you talk about the health of your roofing contractor customers? Are they able to stay fully employed? I'm wondering if labor could be a constraint for the foreseeable future. Second, what drove the 11% growth in nonresidential? Was it something one-time or the effect of your new sales efforts?

We have varying degrees across regions. We have not seen a significant uptick in financial distress among our customer base; it's been relatively stable. Many contractors have made personal decisions about whether to continue to work, and this varies by geography. With demand down in some areas, it's difficult to gauge whether labor will be a long-term constraint. The more immediate concern is process: how to work safely on job sites with social distancing and limited access to homes. Regarding the 11% nonresidential growth, this was the third consecutive quarter of growth and reflects a renewed focus on that segment. It wasn't driven by a single large job; it's a broad-based improvement driven by focus and execution.

Your next question comes from the line of Seldon Clarke with Deutsche Bank.

Regarding your commentary about the sequential progression of sales versus cost, the normal progression from Q2 into Q3 typically shows a significant step-up in profitability. Could you give us a sense of how this is trending versus normal seasonality and what you're seeing from a price-cost perspective as well?

Sure. This goes to decremental margin. When we set initial guidance in November, we expected a challenged first half and a stronger second half with GM improvement. Given the current environment, we've withdrawn guidance, but in terms of decremental margins, depending on the level of volume declines, we believe our decremental margins will be in the range of 15% to 25%. To give you more color, April volumes were down about 20%, and based on what we're seeing in April, our decremental margins were better than the midpoint of that range. That should help you think about how our cost structure and actions translate into results.

Is there any impact from price or COGS embedded in that decremental range?

No, there is none.

If you're trending toward the better end of that range in April, what would you need to see for decrementals to be closer to 25%? Is it timing or extent or length of the decline?

It's primarily the extent or the length of the volume decline. The decremental margins are volume dependent. If volumes get worse than the current levels, you'll see higher decremental margins, closer to that 25% figure.

Next question comes from the line of David MacGregor with Longbow Research.

I wanted to ask about the quintiles. In the past you talked about five quintiles, and I think the lowest quintile had an opportunity of $30 million to $60 million of EBITDA improvement. In this changing environment, how do you think about that opportunity now? Is it still $30 million to $60 million at the lowest tier? Might the opportunity be getting better or the timeline to realize benefits accelerating?

Thanks. I don't think the scale of the opportunity has changed materially; the $30 million to $60 million range is still the right order of magnitude we discussed. What we're learning in this environment may help us accelerate execution. We did see gains from the bottom quintile in Q2, which was encouraging. In the current environment, our focus has broadened to more branches, not just the bottom quintile, since sales have been relatively flat. We've been driving efficiencies across the network rather than only at the lowest quintile. I'm hopeful these learnings will benefit us and help move us toward the upper end of that range over time.

Second question on the OTC program: you indicated on the last call you were live in 30 markets and planned an additional 20 by year-end. Can you accelerate that? What are the P&L impacts?

This environment makes accelerating OTC difficult. Fully implementing OTC requires opening new hubs and investing in certain markets. To preserve cash, we've slowed some capital spending, so near-term rollout may be slower. That mainly affects capital expenditures; we don't expect a significant near-term P&L impact aside from reduced spending. There's no intent to accelerate rollouts in the current environment.

Your next question comes from the line of Keith Hughes with SunTrust Robinson.

Apologies for audio earlier. You've mentioned sequential changes since mid-April. Others have noted that this coincided with government stimulus payments to consumers. Is there any sense that those payments helped support demand over the last couple of weeks?

I'd be hard-pressed to tie demand to stimulus checks. It's difficult to tease that out. Seasonal factors, weather, and storm activity can influence demand as well. I wouldn't say we can attribute the recent small upticks to stimulus payments.

Second, on the nonresidential side, any sense on what's happening with longer-term project quotes? Near-term work has been delayed, but I'm asking about longer-term projects.

We've seen bidding and quoting hold up relatively well. There are restrictions on job sites, and projects can stretch out. Roof work tends to be earlier in the cycle while interiors are later. We are seeing some differences across those segments. Overall, bidding activity is holding up, but timing of projects and production will likely be delayed, and that remains an unknown in terms of the length of those delays.

Your next question comes from the line of Jay McCanless with Wedbush.

Can you hear me now? First question: on the ABL drawdown, what does annualized interest expense look like?

Sure. In the second quarter, our interest expense was approximately $33 million. For the third and fourth quarters, we expect that to be a few million dollars higher, so roughly in the $35 million to $36 million range. For clarity, those are adjusted interest expense numbers.

Thanks. Second, on the 20% April sales decline, is that decline more heavily weighted to nonresidential or to one segment versus another?

It's more geographic than segment-based. Markets heavily impacted by the virus have seen the biggest declines, across both commercial and residential. We have seen a slower pickup in some residential markets, but early in the crisis, some commercial work was pulled forward. Overall, it's difficult to attribute the decline to one segment; geography is the main driver.

And as a quick FYI, Jay, the interest expense numbers I mentioned were adjusted interest expense on an adjusted basis, not GAAP.

Your next question comes from the line of Mike Dahl with RBC Capital Markets.

This is Chris on for Mike. First question on inventory: can you give an update where inventories are in the channel and whether there's a need for additional rightsizing?

We're constantly reviewing our inventory position. Early in the crisis our focus was on cash generation, and we got inventory into a position to weather various scenarios. The $90 million reduction in April was meaningful. There is additional opportunity to reduce inventory, but we'll adjust regionally as conditions change to ensure high-performing markets have appropriate product.

Appreciate that. Second question on industry pricing: any early signs of price deterioration in light of expected volume losses and potential asphalt tailwinds? Any update on competitive dynamics and price in general?

To date, we haven't seen substantial moves in pricing. Nothing unusual in the marketplace so far.

Your next question comes from the line of Garik Shmois with Loop Capital.

Given the wide range in April sales across geographies, is there anything we should think about with respect to gross margins and how those have tracked in April from a geographic mix perspective?

Great question. We do follow this closely. Our North division and our interiors division generally have higher gross margins and have been impacted more by the virus. You'll see some geographic-driven effects; the impact to date has been relatively small but not zero. New residential tends to be slightly lower margin, and shifts in mix can move margins, so we're watching this carefully.

Follow-up on gross margins: you've made good progress on improving gross margins. Excluding geographic mix, what's your outlook for gross margins moving forward in a recessionary environment and when the world gets back to normal?

Our thesis for the year was a weaker first half and a stronger second half with margin expansion as growth returned. Given the recessionary environment, margin expansion is likely behind where we anticipated. That said, we've held up reasonably well, and we've managed price-cost relationships tightly. I'm confident we can maintain current levels absent substantial additional market changes.

To add, our private-label branded products have helped with margin stability across the network, and price-cost management has been solid. Those elements continue to contribute to margin resilience.

Your next question comes from the line of Phil Ng with Jefferies.

You talked about a big divergence in April trends and that some states have resumed construction while others remain restricted. Any color on trends you're seeing — have you seen a more noticeable pickup recently as states reopen?

We have seen a slight uptick toward the end of April, and I think easing of restrictions in places like Michigan and Pennsylvania has helped. Contractors are also figuring out how to work in this environment, which supports activity. However, even where work is allowed, job sites are operating under restrictions like health checks and fewer workers per site, so activity isn't back to normal. We are seeing some positive trends, but it's difficult to say it's purely driven by reopening.

Follow-up: are you gaining share at the expense of smaller competitors who lack your software and app capabilities? Have you seen smaller competitors shut down? From prior cycles, did you see such consolidation?

I do think our sales activity and digital capabilities are having an impact. Our teams have been inventive in maintaining service — e.g., drive-up windows, parking-lot pickup and other innovations — which supports share gains. Our digital position is industry-leading, and smaller competitors generally don't have similar capabilities, which should favor us both now and going forward.

Additionally, our OTC investments have improved efficiencies and productivity across branches, benefiting both underperforming and top branches. That operational advantage also supports competitive positioning.

Your next question comes from the line of Michael Rehaut with JP Morgan.

This is Elad on for Mike. First, can you quantify the amount of cost savings you're expecting in Q2 from the cost actions you've taken? And second, digging into commercial roofing sales that were up 11% on daily sales, you mentioned some buying ahead of the crisis. Could you elaborate on that dynamic and how commercial sales have played out since?

I can't give a precise dollar quantification for cost savings because many savings are variable with volume. That's why I provided the decremental margin range of 15% to 25% to help you model the effects. As I noted, April was down about 20% and our decremental margins were a bit better than the midpoint of that range, which gives you a ballpark for modeling.

On commercial roofing, we've seen some pull-forward activity in certain markets. For example, schools shutting down led some school-related projects to be moved earlier than usual, creating some early demand, while other projects, such as hospital jobs, either got pushed out or rushed depending on the situation. Overall, commercial sales stayed relatively strong early on, with a mix of pull-forward and delays depending on the project type.

Your next question comes from the line of Kevin Hocevar with Northcoast Research.

Curious about working capital and cash flow. The March quarter seemed a use of cash when normally it's a source. Typically the June quarter is a bigger use of cash. With your inventory management, will that change this year? How will it affect working capital in the June quarter and going forward?

Good question. The March quarter timing effects caused more use of cash — AR balances were a bit higher due to sales timing and AP was slightly lower due to timing of payments. Fast-forward to April, with the $90 million inventory reduction and strong collections, you'll see improvements in working capital. We're managing inventory closely and collections remain strong, so working capital should improve in the coming periods.

If April was down 20%, can you break that out by the three segments? And do you expect April to be the low watermark for the quarter, or could things get worse from there?

It's difficult to declare April the low watermark. We did see progress through April, which is encouraging, but it's hard to predict whether things will get worse or better. On segments, the impact is more geographic than by business segment. Interiors and North have been impacted in markets like the Northeast and West Coast. Exteriors and other businesses in those same geographies saw declines as well. So it's primarily geography-driven rather than a single segment being disproportionately affected.

That concludes the questions. Now I would like to turn the call back over to Mr. Nowicki for his closing comments.

Thanks. This is Joe, and I'll wrap up. Yes, this will be my last wrap-up. I want to thank everyone for joining our call. It's particularly emotional for me as I complete my service as the Chief Financial Officer here at Beacon. It's been seven years that I will remember fondly as we transformed Beacon from a $2 billion roofing company into a $7 billion Fortune 500 building materials company. As I say, it's not about the destination but about the journey, and this journey was truly amazing. I'm grateful for the incredibly talented people here at Beacon, our Board of Directors, our partners, shareholders and all of you on this call. I'm proud to have served all of you for the past seven years, and now on to the next journey. As a company, Beacon remains very well positioned as a leader in the building products distribution industry. The strategic shift in our business began several quarters ago, and we've already demonstrated progress. With that said, we're just getting started. We will manage with discipline and focus during the coronavirus environment, and we will emerge even stronger on the other side. We hope that our employees, customers, suppliers and investors are all keeping safe and healthy, and we appreciate everyone's continued support during this difficult time. Thank you for listening in, and have a great evening.

Thanks, Joe.

This concludes today's conference call. You may now disconnect.