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Good day, and welcome to the PGT Innovations First Quarter 2020 Earnings Call. Today's conference is being recorded. [Operator Instructions].
I would now like to turn the conference over to Sherri Baker, Senior Vice President and Chief Financial Officer. Please go ahead.
Thank you, Operator. Good morning, everyone, and thank you for joining us on the call today. On the Investors section of the company's website, you will find the earnings press release with our first quarter 2020 results as well as the slide presentation we have posted to accompany today's discussion. This webcast is being recorded and will be available for replay on the company's website.
Before we begin our prepared remarks, please direct your attention to the disclosure statement on Slide 2 of the presentation as well as the disclaimers included in the press release related to the forward-looking statements. Today's remarks contain forward-looking statements and statements including statements about our 2020 outlook and the impact of COVID-19 that may involve risks, uncertainties and other factors that could cause actual results to differ materially. This disclaimer is a brief summary of the company's statutory forward-looking statements disclaimer, which is included in the company's filings with the SEC.
Additionally, on Slide 3, you should also note that we report results using non-GAAP measures, which we believe provide additional information for investors to help facilitate comparison of prior and present performance. A reconciliation to the most directly comparable GAAP measures is included in the tables attached to the earnings release and in the appendix of the slide presentation.
I am joined today by PGT Innovations' CEO and President, Jeff Jackson. After our prepared remarks, we will be available to take your questions.
I will now hand the call over to Jeff for opening remarks.
Thank you, Sherri, and good morning, everyone, and thank you for joining us this morning. We, along with every other company, are navigating through an incredible dynamic marketplace as a result of the COVID-19 pandemic. I would like to start off the call this morning by expressing how extremely proud I am of all our employees for continuing to deliver high-quality products and service to our customers while maintaining, as a top priority, the safety and health of our team members, customers and communities. I also want to thank our customers, suppliers as well as our employees for their support during these challenging times.
Next, a few words on how we are handling the COVID-19 pandemic at PGT Innovations. As providers of essential products and services, we are an important partner to our customers and suppliers, and this is a responsibility we take seriously. Early on, we took measures to protect the health, safety of our team members while enabling our manufacturing operations to continue. When the pandemic first appeared, we formed the COVID task force to immediately study the effects of COVID-19 could have on our company. Early on, we implemented a comprehensive action plan focused on the safety of our team members and customers. We also monitored and implemented changes that were in line with both federal, state and local government mandates.
Some examples of our robust safety plan put in place are included on Slide 4, and include enhanced sanitation at all our facilities, temperature checks for all our employees upon arrival at our facilities, and limited external visitors.
For our first quarter, we achieved significant sales growth, reflecting the overall strength of our brands in both the R&R and new construction markets going into 2020. I'm extremely proud of our employees for continuing to deliver the high-quality products and service our customers expect while operating within the new guidelines.
In addition to keeping employees safe, we have taken several decisive actions in the first quarter intended to preserve cash and booster our balance sheet strength and liquidity given the uncertain times in the economy. These include reducing discretionary costs and carefully prioritizing capital expenditures while continuing to deliver the products needed by our customers.
Throughout the presentation today, we will provide additional details on the examples of our financial flexibility shown here on Slide 4. I can summarize, however, by saying, we believe that given our current liquidity position, combined with our current expectations regarding our cash flow, we expect to have the resources we need to flex to potential changes in demand for our products brought on by the economic impact of COVID-19 pandemic. Sherri will take you through our balance sheet later on in the call.
Next, on Slide 5, I will briefly cover our 4 strategic pillars that we strive to execute against with the goal of creating long-term value for our stakeholders as well as our customers.
Our first pillar is maintaining our focus on our customers who are at the center of our business. By delivering customer-centric innovation, we expect to drive brand loyalty, recognition and ultimately growth. For example, we have assisted several customers during this latest pandemic with defogging their facilities to enable them to safely operate.
Our second pillar recognizes that long-term success requires maintaining the best employee talent, which is why we must continually work to attract and retain the best people. Our leadership quickly responded to the rapidly changing dynamics in this marketplace as a result of the pandemic, and I'm very pleased with what our team has been able to accomplish to keep our business operating successfully throughout these uncertain times.
Our third pillar is investing in our business to manufacture the best products to meet customer demand in the markets we serve. We accomplished this through ongoing investments and operational efficiency, which we achieved through continuous improvement initiatives. For example, we announced our intention to consolidate the manufacturing of products from the Orlando facility into our Venice and Tampa locations to further improve our network operating efficiency. Although as part of our actions to preserve cash and liquidity, we expect to reduce the amount of capital expenditures and other investments in our business in 2020, our overall long-term strategy is to continue to invest in our business to further improve our operations and products.
And our fourth pillar is to strategically allocate capital. We continually assess our capital allocation priorities, which may include reinvesting in the business, making acquisitions or paying down debt with all the goal to ultimately driving shareholder value. The recent acquisition in NewSouth, which enables us to enter the direct-to-consumer channel with a recognized brand and is currently seeing over 50% order growth versus prior year, is one example of this key pillar.
Next, turning to Slide 6. As previously mentioned, we had an outstanding quarter as the market momentum I described last quarter carried forward into 2020 with a strong organic growth in both our Southeast and Western segments. Additionally, after completing the acquisition of NewSouth Window Solutions on February 1, our U.S. brand contributed $16 million to Q1 sales, which met our internal expectations. Our adjusted EBITDA grew by 39%, driven by the leverage from higher sales and lower direct labor and material costs.
On prior calls, we have discussed our investment in process improvement at Western Window Systems to reduce direct costs associated with a mixed challenges of custom and commercial products. These projects have come online, and we are now seeing the impact in improved direct labor cost. Additionally, in last year's fourth quarter, we took a series of actions to reduce costs across the organization to optimize our capacity based upon our ongoing efforts to continuously improve our efficiencies and margins and due to our demand outlook going into 2020.
Sales in Q1 were stronger than we expected, and we were able to manage that demand without growing our fixed cost base. Because of our earlier efforts to control costs, we believe we are in a strong position to navigate the impact of COVID-19 pandemic impacting our second quarter.
Now turning to Slide 7. We started off 2020 with strong sales and order growth across the board, posting growth across our entire portfolio. In our Southeast business unit, which we will refer to, throughout this call, as our legacy Florida operations, excluding NewSouth sales improved 18% versus the prior quarter, reflecting strong organic growth. Both repair and remodel and new construction sales saw a significant swing to growth compared to the first quarter of last year.
In our legacy repair and remodeling, our first quarter sales increased 16% versus the prior year, reflecting improvement in the overall market and successful implementation of a number of key strategic initiatives. We continue to increase our sales outside of Florida, with out-of-state sales growing 30% in the first quarter as compared to prior year. Within the commercial channel, we have seen signs of strength and growth in condominium, hospitality and mixed-use projects.
We invested in product development resources to accelerate growth in this area, and we are currently evaluating opportunities to grow in this segment with our NewSouth brand in addition to our current PGT legacy brands. For new construction, our Southeast business unit, sales increased 21%, driven by our Corporate Builder program, which grew by 30% year-over-year in the first quarter. Our legacy Florida business continues to benefit from the overall increase in builder activity as well as exclusive agreements we have developed with large builders.
Western Window Systems sales increased by 14% versus the prior year quarter, reflecting continued expansion in core and emerging markets. We saw signs of market improvement in key Western markets, such as California, which contributed to an overall production builder sales increase of 39% versus prior year. Custom sales were essentially flat compared to last year's strong Q1 comparison.
To help you understand the underlying demand, we show our level of customer orders as well as our sales backlog year-over-year. As you can see, we experienced a 21% increase in legacy ordering activity in Q1 of 2020. And this has resulted in a 30% increase in our order backlog versus a year ago. The backlog has not gone away as a result of COVID, and has actually grown through April as our orders have outpaced our reduction in manufacturing capacity resulting from the pandemic, which we are working to steadily grow through the summer months. While we still follow guidelines we put in place, we believe that are necessary to protect the health and safety of our team members.
Drilling down in our backlog at the end of Q1, our Southeast business unit backlog was up 39% year-over-year. Our Western Window Systems backlog was down 5% year-over-year. But that reduction in backlog was primarily a result of our efforts to improve production output, not add increase in overall sales activity.
Together on a weighted average basis, this resulted in a 30% overall increase in backlog for Q1 of 2020. In addition, order entry was up over 50% for NewSouth, which underscores our belief that this is a great acquisition for the long-term growth and complementary to PGT Innovations' existing business model.
Obviously, the COVID pandemic has changed the macro environment and our overall outlook for the remainder of the year. Similar to the industry, we began to see a slowdown in orders entering the second quarter. In our Florida market, we have seen order entry declines of approximately 10% for the month of April as compared to prior year, with a sequential decline of over 30% versus the first quarter growth rate. We quickly adjusted our operations to meet the changes in demand. But because we are seeing an increased pipeline of orders in our Florida markets in May, we are beginning to build back up our capacity to meet that recovering demand.
In some areas that had early and/or more stringent building restrictions related to the pandemic, such as California and Nevada, we are seeing softer order patterns, down 20% to 30% from April as compared to prior year with a sequential decline of over 40% versus the first quarter growth rate.
Despite a great start to the year, there remains quite a bit of uncertainty around the impact of this global pandemic we are facing. This uncertainty of the duration and extent of the pandemic and the unfavorable economic environment it has created has limited our ability to forecast the remainder of the year. And as a result, last month, we withdrew our 2020 guidance.
Assuming our markets do not experience any significant increases in COVID-19 cases and their economies continue to reopen, we do, however, expect to see a modest recovery in order trends and related sales as we move throughout the year, more heavily weighted in the fourth quarter. We expect our Florida markets to achieve year-over-year growth by year-end. In addition, we expect that our EBITDA for the year will be burdened by incremental costs we've endured and expect to continue to ensure related to COVID-19 pandemic.
And now I'll turn the call over to Sherri to review our quarter in greater detail. Sherri?
Thank you, Jeff. Now turning to Slide 8 to give more detail on our results. For the quarter, we reported net sales of $220 million, which, as Jeff mentioned, includes $16 million from NewSouth Window Solutions. Also, I should note, the quarter included an extra week of sales versus the prior year quarter. Q1 sales in our Southeast business unit increased by 18% organically versus the prior year quarter, with strong growth in both new construction and repair and remodel sales.
Western Window Systems sales for the quarter increased by 14% versus the first quarter of last year, reflecting a strong return to growth in our production builder sales. Gross profit for the quarter was $81 million, a 32% increase over the prior year quarter, driven by higher volume, operational efficiency improvements and effective cost control. Additionally, we saw favorable aluminum pricing that resulted in approximately 100 basis point improvement in gross margin from the prior year quarter.
Selling, general and administrative expenses increased over $10 million compared to the prior year quarter, primarily driven by G&A for NewSouth following our acquisition, higher selling and distribution costs from higher sales and increased marketing spend versus prior year. Adjusted EBITDA for the quarter was $39.4 million compared to adjusted EBITDA for the prior year quarter of $28.3 million or an increase of 39%. The improvement in EBITDA reflects the benefit of higher sales, lower direct labor and material expense resulting from diligent cost control and operating efficiencies.
Our effective tax rate for the quarter came in at 21%, which was below our full year estimate. This quarter included an excess tax benefit of $800,000. Excluding this discrete item, the effective tax rate for the first quarter is 24.8%. We reported adjusted net income for the quarter of $16.4 million or $0.28 per diluted share compared to $9.2 million or $0.16 per diluted share in the first quarter of 2019.
And now turning to our balance sheet. One of our top priorities is maintaining the strength of our balance sheet to ensure the company is well positioned as the economy seeks a new normal over the course of the year. We ended the quarter with net debt of $361 million, an increase from $282 million at year-end, which includes $50 million of senior notes issued earlier in the year to help fund the purchase of NewSouth. Recall that these added on to the $315 million aggregate principal amount of the company's senior notes due 2026. We have no other significant debt maturities with only a term loan of $64 million maturing in late 2022.
As of quarter end, we had total liquidity of $144 million, including a cash balance of $68 million, plus $76 million of unused capacity on our revolver. As of May 1, our total liquidity was $145 million. On an all-cash netted basis, we maintained a net debt to trailing 12-month adjusted EBITDA ratio of approximately 2.4x pro forma for the NewSouth acquisition.
We are closely monitoring our accounts receivable and have not yet seen any material change in days sales outstanding or significant increase in bad debt expense.
In terms of financial covenants, the 2016 credit agreement due in 2022 contains a spring in financial covenant that would apply if we draw in excess of 35% of the revolving facility commitment, excluding $7.5 million of undrawn letters of credit.
Now turning to Slide 10. This chart should be familiar to many of you. We'd like to point out our proven track record of reducing leverage after completion of significant acquisition, and this will continue to be a priority for us going forward once we transition out of our capital preservation mode that we believe is necessary, and so we have more visibility of the effects of the COVID-19 pandemic on our business.
On Slide 11, I would like to review our capital allocation priorities. Please note that with the business uncertainties related to the COVID pandemic, our primary focus for 2020 is to preserve cash, and we're taking steps to minimize capital expenditures where possible. Once we gain better visibility into the impacts of the pandemic on the company for the balance of the year and that assuming we have adequate capital and liquidity to pursue our traditional capital allocation priorities, I want to share how we're thinking about capital allocation.
Our first priority remains internal investment in projects expected to drive revenue, reduce cost and generate future shareholder value. As you can see from our Q1 results, we have been active on this front, making incremental improvements as part of our continuous improvement culture.
Our second priority would be our commitment to debt reduction and maintaining a strong balance sheet. We expect to maintain a conservative leverage profile with a range of 2x to 3x net debt-to-EBITDA with a preference for staying at the low end of that range.
Our third priority for capital use would be strategic acquisitions that allow us to expand into new geographies and markets, other building products or new channels to expand our footprint and that we expect to generate strong margins. Given the uncertainty around the economic outlook as well as our recent acquisition of NewSouth, we expect that our primary focus for 2020 will be preserving liquidity and optimization of our manufacturing assets. We expect that any future potential acquisitions will most likely occur in 2021 or beyond.
Finally, you may note that we have removed share repurchase as a priority. No stock repurchases were made during the quarter, and we plan to remain committed to maintaining liquidity as well as the priorities I have just described for the foreseeable future.
While we have withdrawn our full year financial guidance for 2020, I want to share what our current assumptions are for Q2 and the key indicators we are closely monitoring for the back half of 2020. We expect Q2 sales to be lower by 7% to 10% as compared to the same period last year, driven primarily by COVID-19-related reduction in orders, which started in April. We expect our margins and EBITDA for Q2 to be in the mid-teens due to a combination of those lower Q2 sales and an expected negative product mix in both our Florida business and Western markets, and ongoing incremental costs incurred in response to the COVID-19 pandemic.
We expect our decisions to maintain a cost structure that, while reflecting some cost reductions, assumes that sales will return in Q3 and Q4 to levels that will require the resources funded by that cost structure to properly manufacture and deliver products to our customers in a reasonably timely manner and service our customers' needs.
As Jeff mentioned earlier, assuming our markets do not experience any significant increases in COVID-19 cases and that economies continue to reopen, we expect to see a modest recovery in order trends and related sales as we move throughout the year with our Florida markets expected to achieve year-over-year growth by year-end.
We are constantly monitoring and evaluating order entry and sales trends and projections, and economic factors that may impact the demand for our products through the remainder of the year. And we may further reduce our cost structure this year as we believe those factors indicate a need to do so as we get further visibility into the remainder of 2020. As stated earlier, we are minimizing our capital expenditures to those that are business-critical. We will invest in capital to complete the closure of our Orlando facility as we reported in April. Once completed, which we expect to occur in June of this year, we expect to deliver $3.5 million to $3.8 million of annualized cost savings.
And now, I would like to turn the call back over to Jeff for some closing thoughts. Jeff?
Thanks, Sherri. Today, I will conclude my prepared remarks by reiterating PGT Innovations' investment thesis, which has not changed despite the economic uncertainty ahead of us. We are a national leader with strong brands in the growing categories we compete. Second, we are product innovators. We intend to maintain our advantage as leaders in our industry by investing in R&D, acquiring brands and hiring and retaining the best talent. Third, we plan to continue our focus on improving operational efficiencies that drive margin expansion over the long-term. Fourth, we are striving to execute on a strategy that we believe will create long-term value for our shareholders and customers. And finally, we believe our product portfolio positions us to capture profitable growth in the markets we serve.
I would like to close by expressing my deep appreciation for all the essential workers who have been on the front lines of this crisis, from healthcare professionals and first responders to the grocery store employees, delivery drivers and all essential workers who have been working hard for the benefit of others.
At this time, I'd like to turn the call over to the operator to begin Q&A. Operator?
[Operator Instructions]. And we'll take our first question from Phil Ng with Jefferies.
Congrats on a very strong quarter. Jeff, to kind of kick things off, what's the typical lag from your pipeline and new orders to sales? Because based on the backlogs you have and the trends you're calling out in orders in the recent months, it does seem like the implied mid- to high-teen organic sales decline in 2Q could be potentially conservative, but appreciating there's a lot of puts and takes. Help us understand some of these dynamics.
Yes. Typically, what we like is our lead times to be anywhere from nonimpact lead times of 1 week to 2 weeks to impact lead times from 2 to, say, 4 weeks at the most. But we've had to stretch those week times out due to the -- in part due to the pandemic, some of the operational changes we've made to both social business on the lines, for instance, spreading the lines out, staggering shifts, staggering lunch breaks, et cetera. All of that has served the impact capacity. So -- and early on, actually, at the beginning of March, I initiated a hiring freeze. And so we're at hiring freeze. We also, I think, 3 weeks later, went to no overtime.
So we kind of stretched that pipeline out to keep folks busy. Quite frankly, other than the safety of our folks, my other priority was to keep them busy and employed in a job. So we've had no layoffs as a result of this pandemic, unlike other companies have had to do. So we basically stretched that pipeline up. So right now, those lead times, even though they're improving because we've added -- started back adding capacity based off the back half of second quarter's order volume. Right now, those lead times are probably in the 7 to 8-week lead time area.
Okay. Got it. Okay. That's helpful. And perhaps, can you give a little more color on May? I know appreciating things may have bottomed out in earlier or mid-April. Given some of the states that have reopened like in Texas and California, can you give us a sense how orders may be performing in those markets? And certainly, Florida is a big market for you. Has that started to inflect positively yet year-over-year?
As far as May goes, no, I'd say I would stick to our -- we're still going to be down in May. It's going to be better, mainly because of Florida. We are entering hurricane season. June 1 is hurricane season. I just read this morning where a little pressure is being monitored over the Bahamas. So that could be the first time of tropical storm, and it's supposed to be an active hurricane season as well. So that will be a natural offset or potentially lift for the Florida market.
But in terms of markets reopening, I just read also -- I heard last night, California, L.A. counties extended their stay-at-home orders for another 3 months. So markets are coming back online, but I'd say it's definitely different by area. So I think Western is going to continue to -- because Southern Cal is our main market. Production builders, for instance, is mainly Southern Cal, and they were up 39% in the first quarter versus last year. That market is all but shut down. Sherri, the permits in California were in the negative 22% or something like that for April.
That's correct.
We expect similar, if not worse for May. So I think what we're going to end up having, again, May is going to be tough comp. We're going to be down mainly in our Western business unit, and we hope that current patterns we're seeing in Florida, we're striving to be flat year-over-year in Florida by the end of the quarter.
End of the year.
And I'm sorry, I butt in.
Got it. Okay. And just one last one for me. Your NewSouth business seems to have been a home run acquisition for your order growth was actually very strong in April. I would have thought, given the B2C nature of the business, it could be more impacted by social distancing. Can you kind of flag some of the things that are driving the strength in NewSouth?
Thanks, and that's a great question. Yes, it has been a great acquisition. It gives us a brand and a new channel. Quite frankly, we weren't in that consumer direct channel and with the ability also to expand aggressively outside the state of Florida with the opening up of new stores. What's happening in NewSouth is basically has been impacted by COVID, it's more the install side. So while quotes are up, quite frankly, sales are up. Like we said, orders are up. The pipeline has built for NewSouth. So right now, based off our lead times, we have 3 months' worth of pipeline ourselves available for NewSouth. The orders or the installation of those orders is what was pushed basically out of April.
May streamed to come back some in terms of people letting us back into their homes to install those products. And we hope by the end of the quarter, by June and July, we'll be back installing in those homes, and the R&R market will stabilize in Florida.
And so I'd like to add just one thing. And because this is a direct-to-consumer model, we believe that keeping an ample level of marketing investment is really important because we have the opportunity to actually reach folks through our advertising as they are home. So you will see the impact of some of that when we're looking at our Q2 margins, but we believe that that's going to pay it forward into future sales.
[Operator Instructions]. And we'll take our next question from Keith Hughes with SunTrust.
Based on your commentary on EBITDA margins in the second quarter and the revenue discussion in the press release, it's like you're contribution margin would be down negative 30-something percent in second quarter. I guess my question is, if the third quarter looks the same, will that -- I guess, in this case, decremental margin, will it look similar or will that get better with some of the cost saving moves?
Yes. We would expect it to get better. And the decremental margin, you would typically see is around, call it 30% to 35%. And there's a couple of things that are going on in Q2. So one, you're also seeing, with everything that Jeff was just talking about from a market perspective, we are seeing a negative mix from the sales perspective. So we are heavier on the new construction side and legacy business in the Florida markets. And we are heavier on the custom mix due to some of those production builder declines at a faster pace than what we're seeing on the custom side.
So you've got the impact of that negative mix that's hitting you in Q2 and also the impact of the reduced capacities that Jeff was just talking about. So as we're ramping our capacity up and we're expecting our sales to continue to increase as we're moving throughout the year, you'll start to see the benefit and the leverage of that as you're moving sequentially.
Okay. And you had talked previously about kind of a goal of being flat here in Florida in the second quarter. I want to make sure I understand. Is that orders? Is that revenue? Does that include NewSouth or not? Any detail on that would be great.
Yes. So the flat is legacy. So we will try, at least particularly for the first year, to separate out NewSouth from your core legacy Florida markets. So that is really intended to talk about your legacy Florida. You're seeing roughly down 10%, currently. We are expecting that to sequentially improve and hopefully get back to growth by the time we get to year-end.
But we do -- there's a NewSouth, we think we're going to continue to see those growth rates we see. NewSouth is still taking orders aggressively.
Absolutely.
Okay. I guess final question. The -- in the first quarter, what was the revenue change in the Southeast? And what was it in Western? I heard a number earlier, I'm not sure if that was orders or revenue.
Yes. So your legacy Florida, excluding NewSouth, was up 18%. It was roughly 16% on R&R and 21% on new construction. And your Western organic growth was 14% versus prior year.
And our next question is from Truman Patterson with Wells Fargo.
Great quarter. Yes, glad to hear that you too are safe and healthy as well. First question on your Florida markets. You suggested that they've started to recover in May. Could you break this out on whether this is on the new residential side or the repair and remodel side? And I'm really hoping to dig in a little bit on the R&R side. I figured that homeowners would likely be pretty cautious having contractors enter their home. Could you just give us any update of what you're hearing and seeing on that front as well?
Yes. New construction has held up, quite frankly. We are national builders and are regional builders. They're basically finishing out what was currently in the pipeline. And so that's held up nicely. R&R, obviously, with the in-home installation, that has slowed down some. Mainly also our big box kind of pipeline, the big box centers, that slowed down as well. Again, anything you can think of what people would do it themselves or have to go out or have somebody come in a home has been impacted. And it's continually impacted, especially if you look at our first quarter growth rates we were seeing.
So we do expect and are starting to see some, I guess, people letting us in the homes. We are aggressively marketing our program to be safe and clean and sterile, who are in their homes. Our employees, they get temperature check. They sign waivers that they're medically good. So we have processes in place to try to assure the homeowner that we're taking their safety into account as well. And we're starting to see that and fall some, quite frankly. It gotten bad in April as everybody experienced. May, okay. And like we say, by June, we're hoping people will be back more closer to normal. Anything, Sherri?
Yes. The only other thing I would add, particularly on the new construction side, is you do have the benefit of probably a 3 to 4 months backlog, not only on our side but also on the dealer side as well. So what we're seeing from an order entry pattern perspective will really start to show up probably closer to Q3.
Okay. Okay. And then on the EBITDA margins, came in well ahead of expectations in the first quarter. You all mentioned cost management and operating efficiencies, including the Western Window side. Could you just go into a bit more depth about how sustainable these are? And then also maybe give an update on the timing of when you think the Orlando plant consolidation will be complete and you'll be running close to that $3.5 million to $3.8 million run rate?
Sure. And I'll start with the Florida business, which candidly, I think, had just a phenomenal quarter from an operations perspective. The operating leverage that we saw and the cost control, with the amount of growth that we were seeing organically was incredible. From a Western perspective, I will say that where we are starting to see the benefits is particularly on your direct labor side. So recall that we talked on our last call that there were some operational challenges that we were working through from a process improvement perspective. We've put new procedures in place from an ordering perspective or orders and the leveling. And that's benefiting not only your direct labor, but also your shipping costs as well. So a lot of those programs and processes that we put into place in Q1 are starting to really come to fruition as we were exiting the first quarter and really coming into the second quarter.
And then I'd also say, remember, we also took that restructuring, so to speak, charge in Q4 of last year where we took cost out of the business, and we're able to leverage that as well, reducing our fixed costs.
Our next question is from Ken Zener with KeyBanc.
Good to hear you are able to manage the backlog to keep the employees engaged. A lot of different moving parts here. If we could start with NewSouth. I know it's about $90 million of sales. But in terms of the -- sorry, the guidance, when you said 7% to 10% in 2Q, was that organic or was that including NewSouth? I wasn't clear on that.
That includes NewSouth. Yes. Your organic decline year-over-year is more in the high teens. And with the segregation of Florida being better than that and Western being slightly worse than that, but on a weighted average basis, it's about high teens organically.
Excellent. And then the EBITDA, you mentioned mid-teens. Is that correct? I just -- I couldn't hear it clearly.
That is correct.
Okay. Great. Now could you go into NewSouth a little bit, Jeff, I mean, it's with 9 plus show centers, and you guys do the installation. Do you guys doing the installation, are those fixed costs or they per job? And what insights has that given you to the market, would you say, versus going through dealers historically?
Yes. One, every job is different. NewSouth targets, what I would say, a different customer base than our historical PGT dealer base targeted. And there are more smaller jobs, quite frankly, and more one-offs. If the person wants to just switch out doors, for instance, they may start with a door and then ultimately go to the windows. NewSouth fits that model very well. And again, as we open up stores, which we opened the Pensacola store, as well as the Charleston store, and we have Houston scheduled to open up at the end of this year. So as we start to open up stores, we'll start leveraging some of the marketing costs here, as mentioned earlier, which is an investment, not necessarily cost in how we go-to-market with NewSouth.
What we've been able to learn is our price, both from a product standpoint and an installation standpoint, is very similar to our dealer-based product. So we're not undercutting each other. We're both in the market and are both, therefore, able to make money, quite frankly. And it's very complementary. The other thing we've learned from a lead generation standpoint is we've been able to take NewSouth's technology and their innovation in lead generation and implement or start implementing that for our dealer bases, as we call it Project Coffee. It's an initiative we have going with our PGT dealer base.
So we've learned a lot about lead generation, following up on those leads and the cost of those leads. But again, in terms of install, install is variable. And most of that labor, quite frankly, even though we have some in-house, most of that is outsourced. So we'll go into a home, we will sell that product at local store that they're going to a home, sell the product with the labor included. And we'll have that labor prarranged or prepriced with the related installer as we're quoting that job.
Sherri, last quarter, we talked about in the West, and Jeff, you mentioned, obviously, getting direct labor lower because of the shift from production builder to more custom. Could you update us, perhaps, in the 10-K, obviously, you have the segment EBIT data, which shows about 5% margin difference between the Southeast and the West. I mean, are we still kind of in that range? And then specifically in the West, has the custom sales process been working a lot better than perhaps you would have thought 3 or 5 months ago? Is that really is your growth opportunity for that region?
Yes. Yes, I'll take that. So from a Western perspective, we are starting to see the benefits of the process improvements in direct labor, but they were really put in place towards the end of Q1 and into Q2. So you are seeing still a bit of higher direct labor on a year-over-year basis, but we are sequentially starting to see that normalize and get back to where we would be expecting. So I'd say you're going to see more of that benefit coming in, in Q2.
On an EBITDA basis, you also do have just an overall product mix shift from a production builder and a custom perspective that will play into effect in that. In Q2, we will see more of a negative mix just due to all of the macro factors that Jeff talked about, all market-driven, not, I'd say, health of the business driven, but all market-related to COVID. So you'll see more of a negative product mix that will show up there as well. But you are at least starting to see, I'd say, more of a normalized cost structure going into Q2 that would be similar to what we were seeing last year.
Yes. We've implemented various changes at Western. It's an incredible brand, and we're going to obviously be more aggressive in establishing the R&R of market there. We did open up Skye Walls, which is our first retail outlet, if you will, in California. Although, again, COVID-19 California, not the best place to be at this moment, but it's an incredible opportunity to keep leveraging that brand and that -- kind of that open indoor/outdoor window wall demand that's out there in the market. So we've got several initiatives like that. And Sherri and I are mentioning internally, level loading the plant, synchronizing material, purchases to scheduling, increasing accuracy of the bill of materials. The workforce, we had -- last year, we had about a 50-50 split between temp and permanent employees. That's going away.
Basically, it's about a 90-10 split now. 90% of employees are permanent. We're training them. We're maintaining that knowledge base that is important to have. And we only have about a 10% temporary force there. So there's been a lot of changes at Western. It will show up later on during the year. Sherri had mentioned, in terms of actual EBITDA improvements, but from a top one, I wouldn't -- I don't want to overemphasize. California is a significant market for Texas -- I mean, for Western. And we are still seeing some COVID-related impacts from California at this point.
Our next question is from Michael Rehaut with JPMorgan.
This is Maggie on for Mike. First, I sort of -- first, a follow-up question to some of the questions earlier. You've previously talked about several expansion initiatives across the business, opening new stores in NewSouth, the new Skye Wall segment. I think you mentioned that you've still got NewSouth openings planned for later this year, and that you did open a Skye Wall store in California. But I was hoping you could talk about how the COVID-19 situation has impacted these plans. And if it has pushed them out to any extent?
Yes. Yes. It's a great question. The answer is yes. Obviously, long-term, it's not going to impact us. We still laid out our investment thesis, and we're going to march to it and create the results we did for the quarter -- first quarter over time. But from an execution of certain initiatives, yes, we've had to, I would say, delay would be a better word. We were going to open up a second Skye Wall expansion in Northern Cal. Quite frankly, we may look to do that in Las Vegas, some other market that we had targeted to do next year. We may change that market dynamics of where we go. And it will probably be instead of the second -- third quarter, it will probably be the fourth quarter. We're trying to, again, assess the environment that we're currently in and the duration of any potential impacts to demand.
So we have delayed certain initiatives. However, we are still between Pensacola store opening. We do still plan on the Houston store opening. We've identified several locations. I would say I would have pushed them to do it sooner. And now, we're talking more towards fourth quarter time frame versus, say, mid-year. So there have been some of those types of initiatives. We've cut our CapEx spending, quite frankly. Sherri, I don't know about how much, roughly 30%, I would say, from what we were initially forecasting to spend on CapEx. We've tried to cut down on those expenditures. And we've taken an overall approach of -- we've got an incredible pipeline built up, $124 million. And our orders are stable, obviously, down in certain markets, that's stable for the most part.
And the goal is to see how long this impact lasts. 30 million plus people out of work, they're going to come back to work as businesses start opening. Last I read, about 50% of the states are starting -- have some form of unlock or opening of their economies. We just got to see how much that -- how long that takes. And we'll flex our capacity and our plans to demand, basically. This is different than the last downturn, quite frankly. We went into this thing strong. The last downturn took a while to get here, and it's more liquidity crisis with banks. We're not feeling that at all. Our worst case cash flow analysis, which Sherri and her team are constantly on, has us fine. That's why liquidity wise, we think we're in great shape just to go through the current pandemic. So I would say, yes, that's overall, we're taking a cautious approach, but we're still following our strategy and guidance here.
Okay. And second, on capacity. Could you give us an idea of how much capacity you cut? And then you mentioned that it started to come back in Florida, maybe give an idea of where you are now versus pre-COVID-19 levels?
Yes. I mean, we're probably running at about 60% capacity, if I had to put a percent on it, roughly. And again, that's no overtime, just starting back, looking overtime, for instance, and play on a Saturday. So that immediately adds capacity into the system without any kind of really investment on the variable cost of the direct labor. So we're running about 60% capacity. I think we bring that back as quickly as we need to, again, based off demand. If you think about -- it will be different at each location.
Here in Florida, we expect to spend it up sooner. At Western, we're still having -- I would say, hiring freeze. We're not adding people. If people -- to attrition, we're losing folks and at times we're replacing through attrition, if necessary, but overall, the labor pool is there, again, unlike the past times, the labor pool is there. And so when we put our foot on the gas and turn up capacity. I'm not going to say it's easy, but it's definitely easier than it was in the past. And we've already flexed lead times down in certain lines based off demand, for instance, here in Florida. Sherri, do you have anything you want to say?
Yes. I would just say that as we're working through the quarters, I would say that we're going to be getting back to, what I would call, a normalized backlog as we get into the Q3 time frame. So we're ramping up capacity as we're moving to the quarter, and we would get back to something more normal by the end of Q3.
This concludes our question-and-answer session. I would now like to turn the conference back over to Sherri Baker for any closing remarks.
Thank you all for joining us today. We appreciate your continued interest in PGT Innovations. We look forward to talking to you all next quarter, and stay healthy and safe.
The conference has now concluded. Thank you for attending today's presentation.