Earnings Call Transcript - ROCK Q1 2020

Operator, Operator

Greetings, and welcome to Gibraltar Industries Q1 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference call is being recorded. It is now my pleasure to turn the conference over to your host, Carolyn Capaccio. Thank you. You may begin.

Carolyn Capaccio, Host

Good morning, everyone. And thank you for joining us today. With me on the call is Bill Bosway, Gibraltar Industries President and Chief Executive Officer; and Tim Murphy, Gibraltar’s Chief Financial Officer. The earnings press release that was issued this morning, as well as the slide presentation that management will use during the call are both available in the Investor Info section of the company’s website, gibraltar1.com. As noted on slide two of the presentation, the earnings press release and slide presentation contain forward-looking statements with respect to future financial results. These statements are not guarantees of future performance and the company’s actual results may differ materially from the anticipated events, performance or results expressed or implied by these forward-looking statements. Gibraltar advises you to read the risk factors detailed in its SEC filings, which can also be accessed through the company’s website. Additionally, Gibraltar’s earnings press release and remarks contain non-GAAP financial measures. Reconciliations of GAAP to adjusted financial measures have been appended to the earnings release and slides. Now, I will turn the call over to Bill Bosway. Bill?

Bill Bosway, CEO

Thanks, Carolyn. Good morning everybody and thank you for joining our call today. Before we get started, I just want to say hope you and your families, friends and co-workers and everybody else you know are safe and healthy and remain so as we all continue to move forward through this current situation that's pandemic. I’ll begin with a summary on where we are today and how we see things evolving in the near-term and then Tim and I will provide a detailed review of Q1 results and then thoughts moving forward. Then I'll provide a short update on some of our key strategic initiatives and then we'll open the call for questions. So let's turn to slide 3, which is titled, Q1 overview. As mentioned in this morning's earnings release, we did get off to the start we expected in Q1 despite experiencing some disruption due to the COVID pandemic. Overall, revenue increased 9.7%, adjusted EPS increased 68% and our backlog grew 39% actually to a record level of $258 million. We had continued strength in our growth business particularly renewable energy and conservation, which grew just over 40%, of which 17.5% of that was organic. In our Residential Products business, we actually executed additional product line simplification initiatives and still delivered revenue equal to prior year. And finally our strength in our infrastructure revenue was a bit offset by weakness in our industrial markets. So let's turn to slide 4. There are few if any experiences in our lifetime I think that could have prepared us for what's going on today. Rather closest experience for me was living and working in Asia during SARS, which if anything had at least provided me a framework for things to think about and maybe anticipate; so the health and safety of our team the economic impact to both our markets and our business and then some of the social challenges that come as a result of both. We devised and implemented a solid playbook and continue to be very disciplined with our approach and the cadence we have our processes and actions. In early February, we took our first step with implementing a travel ban to China and then formally launched our taskforce, which just comprised our business leaders, our human resource leaders, and our executive team. So we meet every 48 hours to update review and make changes to our plans as necessary and we're also on-call 24/7 in the event that we have issues surface unexpectedly. As well over the last six weeks, we've been hosting a weekly live stream communication for all our employees where we talk about what's going on with the business. We address concerns and then try to answer everybody's questions. For some context, all our businesses have been deemed essential by the states where we operate and by many of the customers we serve, which have also been deemed essential. So as a result all our businesses are operating. Some are at full strength, some at less than 100%. And so to operate safely and effectively, we really focused on six key initiatives to support our team, our customers, our supply chain, as well as the communities that we operate in. So let me give you a brief summary of the six initiatives. First, we implemented operating protocols consistent with CDC guidelines. We also created an awareness initiative, which I think is really important to encourage our team, to share CDC best practices at home and throughout their communities. Secondly, we implemented social distancing, additional sanitization actions, we reduced the number of employees on the site — onsite at a time, we implemented shift management in our factories, the zoning management inside our factories, temperature checks, employee tracking and follow-up, and obviously new visitor policies. Thirdly, our work-from-home protocol, which enabled us to continue supporting our customers and manufacturing operations and suppliers through distance management. And this effort was obviously critical. We executed our business continuity plan as well both processes and digital technology to support the transition to effective remote management with proven cybersecurity tools and processes. Fourth, we worked closely with customer and supplier partners and have managed the landscape I think effectively, making sure that our folks our suppliers in particular have essential classification. We worked through demand management, logistics and scheduling and then frankly working capital requirements. Fifth, we did repurpose three production lines to produce and distribute PPE to our 2,400 employees. This includes face masks, face shields, and sanitizer, which our team is using today in our facilities. We are fortunate to have some core competency and technology that enabled us to quickly pivot and produce critical PPE to protect our team and others, including employee family members, local healthcare facilities, suppliers, dealers and some small businesses. And then six, community support. Recently we challenged ourselves to raise money to provide 1.5 million meals to food banks in the communities where we operate. As you guys all know, food banks across the country are experiencing a significant increase in demand as more people are struggling to make ends meet. And so in just six days, our team responded exceptionally well. We raised enough money to donate 3.3 million meals, which will provide approximately 85,000 meals per food bank. So I'm pretty proud of our team. We know 2020 will be a challenging year and how businesses choose to deal with that is really dependent on their leadership position and financial strength. I think we are in a unique position with a healthy balance sheet. We have a strong order backlog and good end markets. I think the ability to make money and generate cash during this crisis and the pipeline of attractive assets ready to join or be part of our journey. We've also developed flexibility and adaptability within our organization to manage through the uncertainties such as the one we are experiencing now. We continue to work on our business, executing on the business we have challenging our paradigms improving our processes tools and products and we continue to make investments for growth. Currently, we are making investment on our organization. We're keeping our team as much intact as possible even in our businesses where we're not running at full speed. I have the firm belief that this investment will put us in the best position to sprint out of this crisis faster than anyone else in our respective markets. And I will finish before we get to Tim with, I just — I want to thank our entire team for their continued dedication and commitment particularly during this time. And we're honestly grateful that Gibraltar is in this position to contribute to hopefully easing the toll of the crisis just taking on our own people let alone our healthcare workers and emergency responders serving all the communities where we operate and candidly across society. So now let's turn to slide 5, and we will have Tim review our consolidated financial results.

Tim Murphy, CFO

Thank you, Bill, and good morning, everyone. After I provide an overview of the first quarter results, I will provide some color on what we are seeing each of the end markets we participate in. Our first quarter results were not significantly impacted by the economic disruption caused by the pandemic. Consolidated revenues increased 9.7% within our guidance range as Renewable Energy and Conservation segment revenues continue to accelerate Residential Product segment revenues were flat and Industrial & Infrastructure decreased 9.8%. Of the 9.7% increase in consolidated revenue 2.8% was driven by organic growth and 6.9% was generated by the acquisition of Apeks Supercritical, which was completed in the third quarter of 2019 and Thermo Energy Solutions and Delta Separations which were completed in the first quarter of 2020. As Bill noted, backlog at quarter end was $258 million, up 39% from the prior year driven by our Renewable Energy and Conservation and Infrastructure businesses. On an organic basis backlog was up 13%. Consolidated GAAP operating income was up 43.4% and adjusted operating income increased 42.9% in the first quarter. First quarter 2019 operating income included a $3.4 million charge incurred related to the field improvements for our solar tracker product. Consolidated GAAP and adjusted EPS grew 94.7% and 67.9%, respectively exceeding values. The improvement from last year resulted from organic growth of Renewable Energy and Conservation, better price material cost, alignment continued benefits from 80/20 operational excellence initiatives and lower interest expense. Included in GAAP results were costs of $3.8 million or $0.10 per share associated with acquisitions, restructuring and senior leadership transitions. During the quarter, we achieved interest savings from last year's first quarter repayment of our outstanding debt of $2 million on a GAAP basis and $1 million adjusted. Now, let's review each of our three reporting segments starting with slide 6, the Renewable Energy and Conservation segment. Segment revenues increased 40.3% driven by organic growth of 17.5% and 22.8% growth from the acquisition of Apeks Supercritical, Thermo Energy Solutions and Delta Separations. Organic growth was driven primarily by strong demand for our commercial greenhouse growing solutions, including design structures, system integration, field project management and general contracting services. Our core renewables and conservation business showed improved adjusted operating margins on continued execution and volume leverage along with favorable product and vertical market mix even after giving consideration to the prior-year incremental costs relating to the solar tracker. Adjusted operating margins for the segment were impacted by the inclusion of the expected modest losses from acquisitions and seasonally lower volumes and lower margin products. We entered Q2 with strong backlog across the segment up 58% from the prior year as we gained further participation and see strong customer demand in both end markets. Backlog from conservation is up 73%, driven by our recent acquisitions and renewables is up 39% from the prior year on continued strong end market demand. Let's move to slide 7 to review our Residential Products segment. Residential Products segment revenues decreased 30 basis points from last year due to additional product line simplification initiatives. Excluding the impact of these initiatives, revenue expanded on continued participation in our postal and roofing accessories businesses. Adjusted operating margin increased to 175 basis points as a result of strong execution, improved price material cost management and 80/20 simplification initiatives. Let's move to slide 8 to review our Industrial and Infrastructure Products segment. Segment revenues decreased 9.8% in the Industrial and Infrastructure business, driven by lower industrial revenue as a result of lower demand for core products and reduced selling prices in the declining steel cost environment. The infrastructure business continued to grow on both volume and pricing and backlog for this business continues to grow. Adjusted operating margin was up 60 basis points through better price material cost alignment continued execution on 80/20 profit improvement initiatives. Let's move to slide 9 titled Balance Sheet Provides Resilience Supports Growth to discuss our liquidity. We used $43 million of cash in operations during the first quarter of this year driven by an investment of approximately $37.5 million in working capital in Thermo Energy Solutions, which was undercapitalized at purchase. During the quarter, we used cash of $54.5 million to fund acquisitions and $2.8 million for the purchase of equipment. At March 31 and today our revolver remains undrawn. So with the $86 million cash on our balance sheet and our undrawn $400 million revolving credit facility, we have a strong liquidity position to weather the economic impacts of the pandemic while continuing to invest in operational excellence growth and the development of our organization. Given the economic uncertainty caused by the pandemic and federal state and local government's responses to it, we currently paused our M&A activities. We're remaining in contact with the companies we're interested in. We expect to reengage in these processes when the economic impact becomes clear. In the interim, we remain laser-focused on managing our working capital through adjusting scheduled deliveries from inventory to match current demand levels and closely monitoring customer credit and collection activities. Let's move to slide 10, titled Revenue Sensitivity to Current Economic Events. This slide shows the relative impact the pandemic is having on our businesses and reflects the activity we've seen in the past month. Our Renewables and Conservation business which accounted for 39% of first quarter revenue is well positioned and end market demand remains strong. We continue to build backlog in this business in the weeks after the end of the quarter. We are working with customers on our core Renewable and Conservation business to adjust schedules where we've been impacted by either local restrictions on construction activities or permit delays. We saw a more pronounced pause in the processing market when stay-at-home orders were issued. However, we've recently seen increased interest from customers as harvest seasons approach. Our Residential business, which accounted for 41% of first quarter revenue, has seen modest decreases in demand while we continue to increase participation both geographically and through channels. The direct-to-homeowner market, where we sell gutter protection and awning systems that generate meaningful margins has seen a significant slowing, and the second quarter is normally the peak of the awning business. In our Industrial and Infrastructure businesses, which provide 20% of first quarter revenue, the infrastructure market remains strong. We have seen continued expansion of backlog since the end of the first quarter. We have seen delays in construction activities in certain states where highway construction was paused. Our Industrial business has seen continued softness in demand for core products and a pause on shipments to the automotive customers. We've not seen instruction from our suppliers and our supply chain team remains in close contact with key suppliers and alternative supply sources to mitigate the risk of potential supply disruption. As we continue to focus on execution, we are realizing the impact of the work we have been doing to reshape our portfolio and focus on more attractive higher growth, higher margin end markets, which better positions us to withstand a downturn. Our teams are remaining close to our customers and getting real-time end market feedback from those with direct relationships. We maintained full staffing to protect our team from negative economic impacts as we assess the impact of the slowdown on our businesses and continue to invest in our team to be positioned to sprint as we come through the other side of this pandemic crisis. We also continue to invest in process improvement and digitalization to emerge stronger. Now, I'll turn the call back to Bill.

Bill Bosway, CEO

Thanks, Tim. Let's move to slide 11 and discuss how we're using our operational foundation to navigate this pandemic. As we mentioned previously, our strategy centers on excelling in three key areas: business systems, portfolio management, and organization development. First, our business systems are aimed at optimizing our business model, focusing on productivity, supply chain management, innovation, new product development, and IT digital systems. In light of the current situation, we have implemented our business continuity plan and various customer and supply chain initiatives while maintaining our daily operations. Simultaneously, we're strengthening our business. For instance, we launched our new corporate website over the weekend; please visit us at gibraltar1.com. Second, our portfolio management is dedicated to optimizing our existing assets and effectively utilizing our time, capital, and energy to execute our plans. We are actively delivering integration plans for our recent acquisitions, including Apeks, Delta Separations, and Thermo Energy Systems. Although we are in talks with companies interested in joining us, we have paused those discussions until we have more clarity on the economy and market conditions. Third, our organization development focuses on talent acquisition and development, assessing our organizational design, and creating the best possible work environment. Over the past eight weeks, our top priority has been the health and safety of our team, which will remain a focus. Our task force has implemented COVID-19 operating protocols, and our businesses are learning to optimize systems and processes to improve performance in this modified environment. We are also reinforcing the organization by hiring for critical positions from a wider talent pool. To summarize, our immediate priority is to enhance our revenue and income streams while concentrating on execution to improve our business and support our team, customers, suppliers, and partners during this challenging time. As the economy begins to recover, we are prepared to accelerate performance, achieve faster growth, enhance profitability, better utilize our assets, and achieve higher returns on invested capital. Now, regarding guidance for the remainder of 2020, due to limited visibility across several markets, we will need to withdraw our previous guidance for the second quarter and the full year. While we have a robust backlog in our Renewables, Conservation, and Infrastructure segments, 55% of our business is still tied to residential building products and Industrial segments, which are more significantly affected by the current economic situation and consumer spending. As states start to open up and consumer confidence increases, we will be in a better position to offer guidance for our business. That said, we have been running various scenarios to plan for an uncertain future. In a challenging scenario, where we experience a notable drop in demand compared to today's levels, we are confident we will still deliver positive earnings and generate cash from operations for 2020. We are transitioning our revenue and income streams toward key markets that are essential to the economy and less affected by economic fluctuations, while continuing to invest in long-term growth. The resilience of our business model, combined with our strong liquidity, positions us better than ever to navigate through this downturn, allowing us to differentiate our business from the competition. I am incredibly proud of our team, who remain dedicated and focused on supporting our customers, suppliers, partners, and communities in these challenging times. Although the situation is tough for everyone globally, we are optimistic about improvements over time and will remain focused on contributing to solutions as we look forward to emerging from this crisis. Now, we will open the call for questions.

Operator, Operator

Thank you. Our first question comes from Ken Zener with KeyBanc Capital Markets. Please proceed with your question.

Ken Zener, Analyst

Good morning, everybody.

Bill Bosway, CEO

Hey, Ken. How are you?

Ken Zener, Analyst

I’m well. Very nice to hear you being so positive and proactive in your communities. I know there's obviously a couple of different questions here. But, first of all, given the absence of the Investor Day, could you just break out where we are now in renewable in terms of sales mix between solar and conservation which would I guess be everything not solar?

Bill Bosway, CEO

Yes. Ken it's – frankly it hasn't changed. The mix hasn't changed a whole lot just because we've had some acquisitions on the growing side but we've also had organic growth on the solar side. So the mix between the two hasn't changed a whole lot year-over-year. And so we're – go ahead.

Ken Zener, Analyst

No, no. That’s good. I appreciate that. So when you talk about if we can just talk about the Renewable Conservation, because I think that was the area that many investors would have gained a lot of insight at the Investor Day. Can you talk to some of the items in terms of the recently acquired businesses that affected your margins? You talked about the seasonality. Tim, I think you mentioned people are waiting for harvest. I mean, could you just give us a little better feel for those acquisitions that you did there both in the I guess hot area as well as the vegetable business you brought out of Canada?

Bill Bosway, CEO

Yes. So on the processing side that's really Apeks and Delta Separation. So we'll talk to that first. That industry paused during a lot of the stay-at-home orders that were mandated across various states and that had initially to do with a lot of the dispensaries where people would go for product. And then those – and then the states started to open up at different times and I think most of them are open. It was deemed essential. So initially it wasn't and then it was. So we had a little bit of a roller coaster ride there on the in-demand side of things. The in-demand for those products have continued to grow. So we've been tracking that – we've tracked that monthly and that continues to be solid growth. So that's good news. Maybe why it's growing isn't great news. I think a lot of people are anxious right now, obviously in today's environment but the in-demand continues to grow. But remember the make-up of the industry being relatively new, there's a lot of small companies. And I think when you like a lot of industries, when you saw things effectively shut down or slow down significantly, a lot of the companies and industries said 'Hey let's pause as well and gather ourselves to see what this is really going to be.' So that really caused the processing industry to slow. And then Tim referred to well you've got harvest season approaching. So we're seeing more activity meaning inquiries and things of that nature really over the last 30 days than we saw the previous probably 45 or six weeks as we're coming out of the pause and people moving more towards the summer months when harvest starts to kick in. So that impacted our processing businesses during that time because of that. That make sense?

Ken Zener, Analyst

It does. And the reason maybe these are such uncertain times both for you guys operating across trying to look into the business. It seems like you have maybe about 10% revenue growth for your whole company tied to recent acquisitions that's using well, I guess it depends exactly how much. But a mid to high single-digit contribution from FX – from acquisitions. Does that mean other companies have talked about sales being down anywhere from 10% to 30% in the second quarter? Is there a broad generalization that you might be able to give us about the quarter? Tim perhaps about the EBIT leverage just so we can get a general sense of where your April sales trends are in terms of the different businesses. That would be helpful just to get some sense of what you're seeing for the month of April and perhaps some type of EBIT leverage. General question but it's hard to get specific in times like these as well.

Bill Bosway, CEO

Tim do you want to?

Tim Murphy, CFO

Let me – yes I will – I can try and answer that. So – Ken, so again, general answer, we saw revenues below prior-year levels, below our expectations as we came into the year right? Nothing really surprising there. We're still closing April. So I'm basing that on basically the internal sales flashes and conversations we have. So I don't really have a great percentage for you. I will say that certainly our total sales will be down less because we did acquisitions this year that we didn't have last year again sort of like an obvious comment. And then on a deleveraging basis it will – it's going to depend a little bit on which businesses. Some are more profitable than the others. So we didn't give guidance because we didn't really have enough clarity to feel confident. So I don't want to give answers that change the guidance but I don't have enough confidence in them.

Ken Zener, Analyst

Understood. It just is that a lot of companies and to the extent I will go out of the questioning but to the extent you guys can illuminate, April trends where possible. A lot of companies have been kind of talking about that. Thank you guys very much.

Tim Murphy, CFO

Sure.

Bill Bosway, CEO

And guys, there's one thing I would say because I'm sure it's on everybody's mind and I think, what we thought going into second quarter and particularly for April, when we think about that forecast going into the month and now we're a month later, we're still seeing ourselves down versus last year but our experience in April was better than we originally thought. And again, we don't have things closed yet, but that's how I would characterize one month into the quarter. That's what we saw in April.

Operator, Operator

Our next question is from Daniel Moore with CJS Securities. Please proceed with your question.

Daniel Moore, Analyst

Bill, Tim, good morning. Thanks for taking my questions and color. I hope all you are well – you and your families are well also. I wanted to obviously – I know you want to kind of stay away from the guidance. But in the scenarios that you mentioned, I guess, number one maybe a little color around the challenging or bear case, is it you would expect to remain profitable for each quarter for the rest of the year in aggregate or for the full year including Q1? Just trying to get a little granularity there.

Bill Bosway, CEO

I think it would be both is the way to think about that Dan and Tim correct me if I'm wrong. But we will look at it from a full year perspective. And if you take the worst-case scenario, obviously with the country being shut down in April, the second quarter will be the most challenging, third would be the second most and the fourth would be the third most challenging in that worst-case scenario. And as I mentioned earlier, what's happened in April or what we think is rolling up in April is better than we thought going into the month. So that gives us some confidence that our worst-case scenario is we're probably not on track for that if that makes any sense.

Daniel Moore, Analyst

It does. Would you be able to share your thoughts on the best-case scenario? It appears that, since we haven't received any updates on guidance, some estimates are still within your guidance range. I'm curious if this aligns with the previous guidance range and whether that perspective might be overly optimistic considering the expected impact in Q2.

Bill Bosway, CEO

I would really like to provide a clearer picture, but unfortunately, like many others, we're struggling with the unpredictability of the situation. It's challenging to figure out which states will open, what construction sites will be allowed to operate, and when permits will be issued. It feels like every couple of days we're encountering new information. This makes it tough to be optimistic. I wish I had a better answer for you, but this is the reality we’re facing. On a positive note, April has turned out to be better than we initially expected, even though we're still below last year's figures. It’s an improvement compared to our assumptions just a week or so ago. This is the situation we're currently navigating.

Daniel Moore, Analyst

Understood. And maybe broader question, what are the key indicators mileposts you will be looking to get more clarity on the overall environment? And how long would you maintain full production capacity if demand levels were to remain a little bit more depressed than perhaps you'd hope to see in terms of recovery?

Bill Bosway, CEO

Yes, I would suggest that Q2 is likely the most challenging quarter. April was a month of significant shutdowns across the country, and you could say it all began around March when mandates started to take effect. In some ways, the toughest period has been the last six weeks, but we’ve managed to navigate through that fairly well, as we mentioned earlier. We’re not expecting May or June to be better than April, but we're also not anticipating worse conditions. Currently, all our operations are running, albeit not at full capacity, and we’ve made some necessary adjustments. It will be week-to-week as we monitor how demand evolves. We have varying degrees of visibility in different sectors. In infrastructure, renewables, and conservation, our backlog continues to grow positively. The challenge for us lies in determining when everything fits into the timeline, especially with the start-and-stop nature of state openings. We’re proactively working with subcontractors to provide them with personal protective equipment, so they can return to work as states begin to open up. This requirement complicates even the most predictable aspects of our business. The backlog is a good indicator for us, representing 45% of our business. The remaining 55%, which covers Residential and Industrial, depends heavily on point-of-sale metrics from our retail partners and wholesale order entries week-to-week. It’s important to note that we are less driven by consumer spending compared to others, as much of our business involves repair, replacement, and remodeling. This may help us weather the situation somewhat better, but there are still many uncertainties we are navigating. We engage with our business leaders every 48 hours to assess how demand is changing.

Daniel Moore, Analyst

At this time more is better than less. Lastly, just in terms of capital allocation obviously M&A is on the backburner for the near term. Maybe some updated view of CapEx and any other changes in your thought process in terms of allocating capital? Thank you again for the color.

Bill Bosway, CEO

From an M&A perspective, we mentioned that we are currently on pause. However, we want to emphasize that we are still very active in this area, maintaining discussions and exploring opportunities. We anticipate that there will be developments in our industries due to the pandemic, and we will consider these as they arise. The pause allows us to better understand the current landscape and maintain our relationships while assessing any structural changes in the markets we operate in. As we gain insights from these areas, we believe we'll identify positive opportunities to pursue. The timing of our next steps will depend on how the next quarter unfolds and our confidence in the broader economy. Regarding capital expenditure, we'll deploy capital where we see value and reasonable returns, although we expect to spend slightly less than initially planned due to the significant pause. Nonetheless, we are not completely halting spending. We will continue to progress on key initiatives that make sense and contribute to our safety and performance improvements.

Operator, Operator

Our next question comes from Julio Romero with Sidoti. Please proceed with your question.

Julio Romero, Analyst

Good morning. I hope you folks are doing well.

Bill Bosway, CEO

Hi Julio, how are you?

Julio Romero, Analyst

I wanted to ask about the headwinds you're seeing in resi and if you could quantify at all, how much of that would be from the sales channel through which some of those products are sold versus maybe more of just consumer confidence and folks holding back on discretionary spend or some combination of the two there?

Bill Bosway, CEO

So our resi is kind of broken into a couple of different buckets. Tim mentioned that our home improvement business where we sell gutters and awnings that's not a big piece of overall Gibraltar. It's a higher margin business. But that's one of those businesses that requires an in-home sale right? And you can imagine right now not many people are inviting others in to talk to them about those kind of things. So we saw that really fall off. We anticipated that that is actually the group that we pivoted to start making the PPE for the rest of our organization, because the come and see around sewing fabric, makes sense. So, we pivoted quickly and done that. We've started to see more activity in that business as states have opened up and as some of our dealers have been able to go online and engage customers in that way. Still not anywhere near, where we'd like to be, but at least there's some activity. So that's that piece of the Residential. The rest of the – and then we have two other buckets in Residential and that's more roof related. So we think about ventilation and our building accessories our roofing accessories businesses, those are doing actually relatively well with our big box. So the Residential – if you look at the marketplace Residential Products have done much better in, I'd say, the retail channel than they have in the wholesale channel. And that makes sense, I mean, at the end of the day you've got large big box guys have been deemed essential. They've got good balance sheets. They can manage through this probably in a way that is a bit easier. And so we've seen sales through that channel actually be positive year-to-date. On the wholesale side of things a little bit different, where you're more private in some respects in terms of companies and if not you maybe just smaller and so there's – you've got to figure out how to manage your balance sheet and how to move inventory and such. And I think that's been a bit of a more challenge for that particular channel. Eventually is there going to be a shift or a permanent shift, as with contractors going to one or the other, it's hard to say today. Obviously, we've seen it because of the convenience associated with the big box guys being open, and being everywhere. But I'm not sure what that'll mean longer term. So we do see a tale of two stories on that front, positive sales one part of the channel and not so positive on the other. And we'll see, I think that'll continue for some time, but eventually we'll see how that kind of works off. And then the last piece of our Residential business is the postal piece, and that actually has stayed relatively strong throughout this time frame. And part of that, I think is we've good orders for the business in Q1 and then you start to realize that a lot of projects cannot be signed off unless they physically have a mailbox onsite. You can't get your – you literally can't close on these projects without having that. It's deemed necessary, if you will to make that happen. So we saw a lot of activity. I think as shutdowns started to come in we started to see more activity. People wanting to move a little bit quicker there and – but that business has stayed relatively strong, some of that goes online, which is held in, and some goes through a big box, and then some goes through other means. So, it's really a mix of different things to be honest. But it's interesting to see how the market is, kind of shift-gear moving. As it relates to what's driving it, we've been tracking probably like yourself, the amount of activity of people wanting to do home improvement or do-it-yourself kind of home improvement. There are different types of home improvement, right? So do-it-yourself home improvement is just really accelerating, I think we saw something the other day from a webinar, where I think paint searches were up 700% in like a two-week period. So I do think people are being very active. I do think the unemployment level that you're – that we all see today needs to – you have to think about how to stratify that in terms of looking at the makeup of that unemployed group of people and who owns homes and so forth. But there is definitely a lot more activity and do-it-yourself kind of things right now in the last, I would say quarter. Yeah, I'd say the last month or two definitely have seen a spike there. So a lot of moving parts, we've got a series of storms that have been coming through as you know in the Southeast, a lot of hail. Will that translate into demand? We – again, there's a lag behind that. I don't know what that will mean yet. But we're trying to watch everything. And again, at the end of the day, as I said earlier every 48 hours we're just getting the pulse of what's going on in the Residential world as with our other businesses.

Julio Romero, Analyst

It’s helpful. I appreciate the color there. And that kind of close into my next question is from a strategic standpoint does this sudden disruption kind of create any opportunities for you for perhaps greater adoption of some of your new products or any changes in market share that's kind of more a progress if any?

Bill Bosway, CEO

Yeah, that's a great question, and we get that asked a lot across all our businesses. But in particular, I've mentioned a couple of times, where we've been doing much more work to understand the market, right, trade focus and we do have new products that we were introducing last year. We do have some regions where we put people we didn't have before. We have been working on product line expansion in some of our big box guys. And all of those things, I think are opportunities for us and we're seeing those discussions kind of manifest, a lot since they manifest. I think we're seeing those kind of activities and discussions around them actually accelerate right now. So part of the reason that we're keeping our team intact as best we can is because we do believe there are companies that just may not be able to do that. And so service levels are falling, I think in some areas. And then when that happens we're in a position to step in and maybe be that solution. So we are seeing opportunities. How much they've flowed through – have flowed through, yet to be determined just because everything is depressed if you will. But I would say that, our ability to gain participation during this time is something that we're looking forward to. How much that will be? I don't know yet. But again very active in trying to make that happen as much as we can.

Julio Romero, Analyst

Understood. Thanks for taking the questions and stay healthy.

Bill Bosway, CEO

Yeah, you too.

Operator, Operator

Our next question comes from Walter Liptak with Seaport Global. Please proceed with your question.

Walter Liptak, Analyst

Hi. Good morning, guys.

Bill Bosway, CEO

Hey, Walt, how are you?

Walter Liptak, Analyst

Good. Good you guys are all safe. I wanted to try and talk a little bit about the employment levels and kind of your fixed levels of employment and variable levels of employment with the idea to see how much of your costs are variable. So, if we are slowing in the resi part of the business in April, May, June whatever the amount is double-digit, how much of your costs are variable? Like have you – and when you talk about employment and keeping the team together, I imagine that some of your workers are hourly workers. If there might have been some layoffs or furloughs, as they may be able to make more money on unemployment just temporarily and then bringing them back? I wonder if you can just discuss that a little bit, so we can have an idea about how some of those costs in manufacturing flex during the second quarter?

Bill Bosway, CEO

Yes. To date, we haven’t laid off anyone and have kept the team together. Initially, about eight weeks ago, we faced a situation that, while somewhat different from past experiences like SARS, felt similar in many ways. The key challenges people face during such times revolve around health and safety concerns and economic worries. Our strategy from the start was to alleviate one of those concerns for our employees by focusing on health and safety and ensuring they wouldn’t have to worry about their jobs. In response to the quickly changing circumstances, we implemented what we call COVID pay for our production staff. This isn’t hazard pay; it’s a set of hours they can use for various needs, such as childcare issues, taking care of sick relatives, or managing their own health concerns. This approach allows them to stay employed, maintain their health benefits, and return when they are ready, using these hours as needed. We anticipated that people would face numerous challenges, such as school closures and childcare disruptions, and aimed to support them. Throughout this period, our demand has remained relatively strong. Some parts of our business are slower, leading to furloughs in certain areas, but the majority of our team is intact and still has available hours to utilize. Our goal is to help our team through these times without losing anyone, while also being prepared for any changes ahead. As conditions improve, we believe we will be well-positioned. If the situation shifts negatively, we have options to consider, but for now, we don’t foresee any drastic changes based on our current understanding and the circumstances we encountered in April. About half of our workforce is in production, with the remainder being salaried. Is that information helpful?

Walter Liptak, Analyst

Okay, great. That's helpful. Thanks for that. Could we possibly get a breakdown of the components of the cost of goods sold, specifically what portion is attributed to labor, materials, and manufacturing overhead?

Bill Bosway, CEO

Yes, I don't have the exact figure, but labor is a relatively small portion of our operations. Tim, would you like to add anything?

Tim Murphy, CFO

Yes, well, I can. Overall, material costs are a little bit less than 50% on COGS and labor is probably 12%, 13% depending on what quarter you are in on a normalized basis sort of like that. The rest is either fixed or variable overheads.

Walter Liptak, Analyst

Thank you for that information. I have one more question regarding the M&A deals. It seems there was some dilution due to these deals, possibly related to a pause that occurred. Can you clarify whether this dilution was due to deal charges or other upfront costs, or if it was specifically because of the pause? Additionally, are those businesses beginning to recover, and can we expect any accretion from the deals throughout the year?

Tim Murphy, CFO

Let me start and then you can provide additional insights. The results we are discussing have been adjusted to exclude the actual deal costs. It's important to note that the processing businesses are relatively small and tend to be seasonal, with equipment purchases peaking as we approach harvest season. Historically, the first and second quarters are slower, while the third and fourth quarters account for the majority of business. We anticipate this will balance out over time, but that’s the current market situation. Accordingly, the results from the first quarter were significantly influenced by seasonality. Towards the end of the quarter, we noticed improvement, which continued into early April, and in the last 30 days, we've observed more activity compared to the prior month. Regarding the greenhouse business we recently acquired in Canada, it involves relatively low-margin work in progress associated with large projects. We are managing that business similarly to our approach when we acquired RBI in 2015, and we believe we can eventually elevate it to segment-level performance, although this won't happen immediately after acquisition.

Bill Bosway, CEO

The situation with the Thermo business is unfolding as we anticipated. Our core business has experienced some fluctuations with permits and similar issues. As a result, the backlog is expected to continue growing. I believe we are positioned for a strong 2021, especially with the types of projects we are currently finalizing. We are optimistic about this. However, in the short term, there are challenges as growers are trying to navigate their circumstances. We are starting to see them gain clarity on their next steps. This is something we are managing. That's the update on Thermo.

Walter Liptak, Analyst

Yes, thank you for that. Regarding M&A, given our financial strength, are we considering distressed assets if a target faces liquidity challenges? Is there a possibility to explore such opportunities? While I understand the focus is on acquiring strategic businesses, would you adjust your approach if you encountered a target struggling with liquidity or profitability due to the virus?

Bill Bosway, CEO

It's a great question. The most important factor for us is whether something aligns with our strategy. If it exists in the market and helps us become more relevant and lead in the industry, we will definitely consider it. We have numerous discussions every week, and we were very active prior to this situation and those discussions are ongoing. We've continued to have calls across various industries. If an opportunity arises and it makes sense, we will certainly act on it and are currently keeping all of those opportunities in consideration.

Walter Liptak, Analyst

Great. Okay. Thank you. Good luck guys.

Operator, Operator

We have reached the end of the question and answer session. At this time I would like to turn the call back over to Mr. Bill Bosway for closing comment.

Bill Bosway, CEO

I want to express my gratitude to everyone for joining us today. I hope you all stay safe and healthy during these challenging times. It's undoubtedly a unique situation that many are facing globally, but I believe we will overcome it. We need to address the issues at hand, and as a company and organization, we are committed to doing just that. I look forward to our upcoming virtual conferences and non-deal roadshows where we can engage further and provide updates on our progress. We'll reconvene for our second-quarter call. Have a great day, and thank you for your interest. Take care.

Operator, Operator

This concludes today's conference. You may disconnect your lines at this time and we thank you for your participation.