Doman Building Materials Group Ltd

TSX:DBM

Earnings Call Transcript 2020-Q1

[Operator]

Good day and welcome to the CanWel Building Materials Group Ltd. First Quarter 2020 Financial Results Conference Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Ali Mahdavi. Please go ahead.

[Ali Mahdavi, Head of Investor Relations]

Good morning, everyone, and thank you for joining us for CanWel's First Quarter 2020 Financial Results Call. Joining me this morning are CanWel's Chairman and Chief Executive Officer, Amar Doman; and Chief Financial Officer, James Code. If you have not seen the news release, which was issued yesterday, it is available on the company's website at canwel.com as well as on SEDAR along with our MD&A and financial statements. I would also like to remind you that a replay of this call will be accessible until midnight on May 29. Following management's presentation and commentary, we will conduct a Q&A session for analysts only. Instructions will be provided at that time for you to join the queue for questions. Before we begin, we are required to provide the following statements regarding forward-looking information, which is made on behalf of CanWel Building Materials Group Ltd. and all of its representatives on this call. Remarks and answers to your questions today may contain forward-looking information about future events or the company's future performance. This information is subject to risks and uncertainties that may cause actual events or results to differ materially. Any information regarding forward-looking statements is made as of the date of this call, and the company does not undertake to update any forward-looking statements. Please read the forward-looking statements and risk factors in the MD&A as these outline the material factors which could cause or would cause actual results to differ. The company will not provide guidance regarding future earnings during today's call, and management does not anticipate providing guidance in future quarterly or interim communications with investors. I'd like to turn the call over to Amar. Amar, go ahead.

[Amardeip Singh Doman, Chairman & CEO]

Thanks, Ali, and good morning, everybody. Thank you for joining us today on our call. I will begin with a review of the business during the quarter as well as how we are working through the impact of COVID-19, and then I will pass the call over to Jay Code for his financial review. The first quarter started strong, and despite the impact of the COVID-19 global pandemic, we had a fairly robust Q1 across all of our key metrics. We started seeing a decent level of pricing stabilization coming into the first quarter, albeit not anywhere near the highs of the previous years, which combined with good volumes across the board got the business off to a great start January, February and for part of March. On March 11, 2020, the World Health Organization declared the novel coronavirus, COVID-19, a global pandemic, resulting in governments worldwide enacting emergency measures to combat the spread of the virus. Given CanWel as part of the supply chain for the construction industry, we continue to be classified as an essential service for the majority of our operations in Canada and the U.S., and therefore, have not been required to shut down. However, the company has taken specific health and safety measures in response to COVID-19, including limiting the number of employees, customers and others on its premises, mandatory self-imposed quarantine periods for employees, team separation and staggered work hours, temporary suspension of all the nonessential business travel, heightened hygienic and disinfecting practices, technology-enabled remote work initiatives following government and other safety protocols. Additionally, the company has taken steps to mitigate the pandemic's impact on its customers, operations and cash flows, by optimizing its working capital, implementing salary and working hour reductions, initiating employee layoffs, deferring or eliminating certain nonessential operating expenditures, minimizing capital expenditures, evaluating ongoing cost savings opportunities and assessing financial assistance, options that are available under COVID-19-related government programs. We've been actively monitoring the pandemic, economic and regulatory developments and their impact on our operations continually adapting to a changing operating environment, and we'll provide any material updates as required. During the first quarter, we had robust top line growth. We held on to our margins with the usual focus and discipline, while remaining focused on cost management and operational efficiencies, which resulted in a good start to the year. Revenues increased 16% to $327 million. Gross margins were at 13.3%. EBITDA increased 9.5% to $16.5 million, and we paid a quarterly dividend of $0.14 per share. Looking ahead, the commodity pricing environment continues to show volatility, even more so given the impact of the pandemic. We remain confident in our ability to work through this environment as we have during other weak cycles, including the 2008 downturn. We will trend water carefully given the lack of certainty around the timing of a return to normalcy from the pandemic. And we will be protecting our balance sheet to enable us to be well positioned to benefit from a return to business-as-usual environment, so we can enjoy a quick bounce back based upon pent-up demand. The early showings based on activity levels in the U.S. is mixed, but pointing to some positive view. However, we remain as focused and motivated as ever with a very cautiously optimistic view as we manage our way through the second quarter. We continue our disciplined approach in managing and growing our core business, while tracking and executing on accretive growth opportunities. Further strengthening our financial performance and enabling -- or enhancing shareholder value based on a fundamentally sound sustainable growth plan. Despite our success and efforts in always pursuing growth opportunities, at this time, we are likely to pause on executing any strategic transactions until we get back to being comfortable with the macro environment. Again, balance sheet protection is paramount to us as is present. With that, I'd like to ask Jay Code, our CFO, to take over and provide a review the company's first quarter financial results in greater detail, and then we will open the call for analyst questions. Over to you, Jay.

[James S. Code, Chief Financial Officer]

Thank you, Amar, and good morning, everyone. Sales for the quarter ended March 31, 2020, were $326.7 million versus $281.9 million in Q1 2019, representing an increase of $44.8 million or 15.9%, largely due to the inclusion of this year's results from the Lignum Forest Products acquisition, which was acquired back in April 2019 and the company's continuing focus on its product mix strategies and target customer base. These positive factors were partially offset by the impact of the COVID-19 pandemic towards the latter part of March 2020 as well as reduced forestry segment sales, which experienced lower demand for timber from local sawmills, reflecting production curtailments experienced across the industry. The company's sales by product group in the quarter were made up of 62% construction materials compared to 56% during the same quarter last year, with the remaining balance resulting from specialty and allied products, up 32% and forestry and other revenues, up 6%. Gross margin was $43.5 million in the current quarter versus $41 million in Q1 of 2019, an increase of $2.5 million. Gross margin percentage was 13.3% during the quarter, a decrease from the 14.6% achieved in Q1 2019. The year-over-year increase in gross margin dollars and decrease in gross margin percentage was mainly attributable to this year's inclusion of results from Lignum, which generally achieves a lower margin percentage on its construction material sales compared to the company's overall sales mix consisting of construction materials, allied and forestry products. Expenses for the quarter ended March 31, 2020, were $37.2 million versus $36.4 million in Q1 2019, an increase of $846,000 or 2.3% due to factors to be discussed. As a percentage of sales, Q1 2020 expenses were 11.4% versus 12.9% in Q1 2019. Distribution, selling and administration expenses increased by $1 million or 3.9% to $26.9 million in the first quarter versus $25.9 million in Q1 2019. As a percentage of sales, DS&A expenses were 8.2% in the current quarter compared to 9.2% in Q1 2019. Depreciation and amortization expenses were $10.3 million, largely in line with the first quarter of 2019 for both the Distribution and Forestry segments. Finance costs for the quarter ended March 31, 2020, were $5 million, largely in line with the $5.1 million amount incurred in Q1 2019. EBITDA was $16.5 million compared to $15.1 million in the comparative quarter of 2019, an increase of $1.4 million or 9.5%, largely due to the inclusion of this year's results from Lignum as well as moderately improved overall performance from the remainder of the company's operations. As a result of these factors, net earnings for the quarter ended March 31, 2020, were $850,000 versus a net loss of $356,000 in the same quarter of 2019, an increase in net earnings of $1.2 million. Turning now to the statement of cash flows. In the first quarter of 2020, operating activities before noncash working capital changes generated cash of $13.4 million compared to $11.5 million in the same quarter of 2019. Seasonal changes in noncash working capital balances consumed $74.8 million in cash this quarter compared to $81.9 million in the same period in 2019. We note that in response to the economic uncertainty caused by the pandemic, the company began adjusting its noncash working capital levels in the latter stages of the first quarter, which resulted in the $7.1 million positive year-over-year variance in cash consumed. Financing activities generated $61.1 million compared to $76.2 million in the same period in 2019. Repayments related to our nonrevolving term loan consumed $667,000, which was consistent with Q1 2019. Net repayments of our equipment loans amounted to $1.3 million compared to $287,000 in 2019. And payment of lease liabilities, including interest, consumed $6.5 million compared to $5.6 million in Q1 2019. Dividends paid to shareholders during the quarter amounted to $10.9 million, consistent with the same period in 2019. The dividends declared and paid on a per share basis were unchanged from 2019. The revolving loan facility increased by $80.2 million compared to $94 million in the same quarter in 2019. The company was not in breach of any of its borrowing covenants during the 3 months ended March 31, 2020. Investing activities consumed $908,000 compared to $1.9 million in the same period in 2019. Cash purchases of property, plant and equipment were $957,000 compared to $1.9 million in the same period in 2019. As Amar touched on earlier, in response to the pandemic in March, we initiated several liquidity-based measures, which include managing cash flow by reducing working capital levels; implementing salary and working hours reductions; initiating temporary employee layoffs; severely limiting nonessential travel and marketing activities; deferring or reducing certain scheduled debt, lease payments and statutory remittances; and reducing or eliminating capital expenditures. Additionally, the company is evaluating government financial support programs in order to offset some of the potential impact of the pandemic on the company's operations. These liquidity measures, combined with the company's continuing cash flows from operations are expected to be sufficient to meet our operating requirements and remain compliant with lending covenants. As always, our Board of Directors will be carefully assessing the company's dividend policy during these unprecedented times. This concludes our formal commentary, and we would now be happy to respond to any questions that you may have. Thank you, and operator?

[Operator]

[Operator Instructions] And we will take our first question from Paul Quinn with RBC Capital Markets.

[Paul C. Quinn]

Just a question to start off on capital allocation. I mean you guys want to preserve your balance sheet that's obviously in your mind, but you've also got one of the highest dividend yields, well, definitely in my coverage invert, and I would say, almost on a TSX at this point. We've seen a lot of companies suspend. We've seen a lot of companies roll back their dividend. What is the Board thinking around the dividend policy?

[Amardeip Singh Doman, Chairman & CEO]

Sure, Paul. What we're basically saying inside the company is, look, we're going to give the second quarter some runway here as we always do. The company will be responsible with the dividend and responsible to the balance sheet as we always are. So we're going to let May get through into June, just kind of see how the third quarter is starting to look and then we'll make the decisions on our dividends like we normally would in mid-June.

[Paul C. Quinn]

Okay. Then you described Q2 as cautiously optimistic. We're almost halfway through that. What are you seeing in the areas of optimism? And then where are the areas in your business that are a little bit weaker likely be to COVID?

[Amardeip Singh Doman, Chairman & CEO]

Yes. So across Canada, the business has been choppy just due to certain segments being more open than others. Obviously, Québec was shut down completely for a while. So it's been choppy, but the retail business at the box store level has been busy as it's been on the West Coast of the United States. Hawaii is certainly slower due to basically a stay-in-home orders, so things have slowed in Hawaii. Nothing is really probably running too hard, Paul, except treated lumber. A lot of back home or backyard projects are being done. People are kind of fixing up their houses. So we are seeing a bit of a surge in certain pockets of Canada and the West Coast of the U.S. on that. But overall activity on the construction materials is certainly slower just because construction slowed down.

[Paul C. Quinn]

Okay. And then lastly, just on the M&A front, I noticed that in your commentary, you said you wanted to pause there, which seems prudent. Are you noticing any difficulty at any of the businesses that are on your radar scope of acquisitions that are having some problems during this time?

[Amardeip Singh Doman, Chairman & CEO]

Not too much yet, Paul. It's been kind of 60 days and almost feels like 6 years for all of us, but it's really only been kind of 60 days where the trouble has started. So I don't think unless somebody's very overleveraged, has got too many issues right now, but let's see what's around the corner and the coming quarters. I think that's where you could see probably a separation of guys that have got quality balance sheets and are good operators as compared to guys that aren't because the volumes are definitely, I think, going to slow down worldwide. So who's going to be the most ready and fit for that, and we want to be one of those guys, and we'll be one of those guys.

[Operator]

Our next question will come from Roshni Luthra with CIBC Capital Markets.

[Roshni Luthra, Research Analyst]

I just wanted to follow-up on Paul's question. I'm sorry if I misheard, but just in terms of the dividend, like can you just talk about what made the Board stick with the current payout? And maybe why you're looking to make the decision in Q3?

[Amardeip Singh Doman, Chairman & CEO]

Yes. The Board, basically, we're going to review our outlook internally. We're going to review what's going on in the world. Obviously, we're in an unprecedented times. So the Board will not do anything different except review what we can foresee ahead and look at the balance sheet, look at our free cash flow, look at what's happening. There's a bunch of different things that go in to our decision every quarter. It's not rubber stamps. So we certainly review it every quarter during any sort of economic boom or right now, a tougher time. So we won't do anything differently except discussion in June when we've got more runway ahead of us to see what's going to happen probably towards Q3. So we'll make our decisions in June.

[Roshni Luthra, Research Analyst]

Okay. And then I just wanted to know, was revenue growth negative [indiscernible] in Q1? And how is April trended in that business?

[Amardeip Singh Doman, Chairman & CEO]

Yes, Hawaii is definitely slowed down, as I mentioned. It's not anyone's fault. It's just stay-at-home work orders and things slowing there. We did have an initial surge when I think you're starting to close up as people are grabbing a bunch of material and kind of taking it home and then staying home and working with it. It's cooled down, but we're having sort of busier days down there and then quieter days, it just -- it's very lumpy. And the good news is that construction is still open. It's just very, very lumpy. The West Coast, United States is definitely busier, and we're having some very good days in Southern California. And of course, Northern California is back open again. And that just started about a week ago. So we're happy to see the Bay Area open because there's a lot of projects that were on hold. And we service that area very well out of our Sacramento and Woodland operations. So kind of tale of 2 story. So why slower? California bit busier right now.

[Operator]

And our next question will come from Steve Hansen with Raymond James.

[Steven P. Hansen, MD & Equity Research Analyst]

Just a question perhaps, Amar, on sort of the competitive landscape. Some of your competitors are perhaps less well capitalized than you are. Are you seeing any sort of differentiated behavior in the competitive landscape guys that aren't unable to sort of deal with the volumes that they have or just struggling under some of the financial pressures? I'm just trying to get a sense for how -- whether there could be opportunities that come out of all this, if there are some players that struggle more than others?

[Amardeip Singh Doman, Chairman & CEO]

Yes. I think in a situation like this, it's a little different than any other downturn we've been through because one of our competitors has come out and reach for the federal aid because their sales are down 30% where ours aren't. So we look at that and kind of say, okay, some of these weak operators sadly aren't going to go away, Steve, in my view because they're going to get propped up with government money. And I think the strategy is to bridge these guys through this pandemic. And unfortunately, some of the weak are going to get rewarded with cash that should go out of business in my view.

[Steven P. Hansen, MD & Equity Research Analyst]

Yes, understood. And is there an ability for you, like as you're thinking about managing your working capital into sort of the next couple of quarters, I noticed that -- Jay gave us a bit of color on how it is. But how should we think about sort of that working capital trending here through second quarter and third quarter relative to the typical pattern we would see, you seem to draw up your inventories at a lower rate, I noticed, but should we expect it to bleed down to lower levels than would be normal? Or how should we think about it?

[Amardeip Singh Doman, Chairman & CEO]

Yes. Yes, Steve, we will. We've had an inventory focus in since early March, and it sort of sell 6 widgets by 2 agents that kind of thing on the distribution side. So we're definitely taking our inventories down, where normally, we'll be ramping them up at this time and kind of hitting peak in May and June with our inventory levels and receivables. But we are going the other way, just being careful because we just don't have the visibility into Q3 and Q4 that we normally would. We're trying to find that visibility, but we can kind of look about 3, 4 weeks ahead of us is kind of as far as we can see. But we just don't know what's around the corner. So we're being very, very responsible with our working capital, ratcheting it down, ratcheting the credit line down and just being responsible because we just don't know what's coming around the corner.

[Steven P. Hansen, MD & Equity Research Analyst]

Understood. And just last one, if I may, on sort of the covenants. Jay mentioned earlier that you're -- with your covenants today, have you had those discussions with the lenders around covenant relief for a certain period of time? Many of the firms across I think all of our coverage universe are getting this EBITDAC sort of type measure where you can look back at basically here through December 31 we'll be able to adjust for COVID-related issues? Or are you having those discussions with your clients in the event of -- there are covenants through a strategy?

[Amardeip Singh Doman, Chairman & CEO]

Well, I'll just go first, and I'll let Jay pipe in, but we've had some discussions with our lenders, of course, our syndicate. And the good news is, we're not anywhere near breaching any of our covenants. So we haven't had to ask for any relief or any support on this covenant. So Jay, anything else there?

[James S. Code, Chief Financial Officer]

Yes. I was just going to mention, Steve, you probably recall that we did amend our revolver in December of 2019. At that time, we reset covenants. And as we sit here today, we have plenty of room in those covenants and we haven't specifically discussed covenants with our lenders.

[Operator]

And our next question will come from Anoop Prihar with Stifel GMP.

[Anoop Prihar, MD & Special Situations Analyst]

Just a couple of questions. Most of have been answered. Amar, just post Q1, what are you seeing in terms of your AR collections, any slowdown there? Or any issues there catching your attention?

[Amardeip Singh Doman, Chairman & CEO]

We're definitely focused on our AR, Anoop, but nothing concerning. Our ARs -- we're pretty proud of our AR and our collection history. We are watching everybody very, very close, especially the U.S. side in Hawaii because we're contractor direct. So we're watching that even more close. But our team is on it. So no concerns at this point of somebody falling out of bed.

[Anoop Prihar, MD & Special Situations Analyst]

Okay. And then just on the revolver. I mean you were drawing $296 million at the end of the quarter, you said your revolver has theoretical capacity of $360 million. So can I assume that delta of that $60-odd million, that would have been available to you at the end of Q1, if you needed it. Is that a fair assumption?

[James S. Code, Chief Financial Officer]

Yes. Anoop, it is a loan limit of $360 million, but the borrowing is determined by the amount of collateral we carry in terms of receivables and inventories. So it's the lesser of those 2.

[Anoop Prihar, MD & Special Situations Analyst]

Right. So what I'm trying to understand is, how much would you have available to you at the end of the quarter that wasn't used?

[James S. Code, Chief Financial Officer]

Yes. It's not something we disclose any details of the lending arrangement like that, but there's a margin amount of lending on receivables and inventory. We had ample excess availability on the revolver at the quarter end. So as we go through Q2 and reduce inventory levels, our goal is to expand that even further.

[Operator]

And our next question will come from Zachary Evershed with National Bank Financial.

[Zachary Evershed, Analyst]

Are you still seeing a significant gap between cash cost for lumber and that's indicated by futures? Or have cash cost come down since we talked about it in Q4?

[Amardeip Singh Doman, Chairman & CEO]

Okay. A couple of things on lumber, good question. Lumber fell out of bed hard, as you know, in March, when the Dough was doing its thing and the world was turning to them quickly. So lumber dropped I think on the futures board, over $100 a 1,000. Conversing now gone back up through that. But in the whipsaw, everybody got hit, just if you had inventory, you're trying to get out of it because it just looked pretty bleak. But having said that, we've seen lumber recover not only in Dough fir, which did the same thing. It did a complete V and -- which is good because it's recovered in the U.S. side and Western FBS has recovered. But right now, because of all the mill curtailments, there are shortages in a lot of items. OSB is short, studs are short, appearance grade which we use in a lot of our treating plants, that is very tight. And tallies, good tallies, meaning good lengths, are very difficult to find. And there could be a shorter squeeze on lumber here depending on when some of these bigger mills trying to stage it back on. I mean in short term, maybe this is the last the caution that the housing [indiscernible] we don't know. But right now, it's extremely busy on both sides of the border, just on consumption going back up with people not really -- it didn't really stop. So it's being consumed. Yet the mills have taken so much off the market, we see strength in lumber going forward.

[Zachary Evershed, Analyst]

And so with that potential shortage shaping up, what's your personal view on when forestry activity comes back?

[Amardeip Singh Doman, Chairman & CEO]

I think forestry guys are going to be very cautious. I think they want to live with less volume and higher prices right now just because we don't know what is around the corner. So I don't see a ton coming back. I think CanWel is bringing on 2 or 3 mills right now in the interior. But the rest of the guys, I think, from what I can see and read are not. And something you that we'll apply and we've seen is up 40% from a low, 4-0, in the southeast due to curtailments and steady consumption. So I think a little less made, a little higher price is probably the flavor of the day right now.

[Zachary Evershed, Analyst]

And then you mentioned that CanWel wasn't qualifying for the revenue drop criteria of the aid packages. We've had 2 measurement periods in March and April and now maybe more about halfway through. How do you think your odds are of qualifying versus the levels that are required?

[Amardeip Singh Doman, Chairman & CEO]

Yes. I'll let Jay speak to. I think we had one division that qualified, that's something that's very, very not even close to material. But as far as the rest -- from what we can see right now, we will not qualify for sorry, if you're referring to that 30% top line drop, we won't qualify for that, no.

[Zachary Evershed, Analyst]

A bit of a...

[James S. Code, Chief Financial Officer]

Yes. That's correct, as for looking at it division-by-division in Canada. And of course, overall, we're nowhere close to that 30% threshold, but there are individual nonmaterial divisions that look like they will qualify here and there.

[Zachary Evershed, Analyst]

And then just one last one for me. You've identified some buckets where you can reduce costs. Is there any reason to expect staggered timing on that? Or should that all come in for you in the quarter?

[Amardeip Singh Doman, Chairman & CEO]

Well, as far as expenditures on the SG&A side, obviously, nobody is traveling and all that kind of stuff. But when you look at larger things, you're probably more referring to capital expenditures?

[Zachary Evershed, Analyst]

Yes.

[Amardeip Singh Doman, Chairman & CEO]

So those are pretty much anything large, not that we have too much that in the company that's large. We've put on a freeze unless it's critically important in the operation to spend that capital. But otherwise, everything else is froze, and let's say, there's some paving that needs to be done. It can wait. And so to answer your question, a lot of the stuff we'll wait for second half of the year or next year, if it's nonessential for us maybe to do it, we'll save the cash in our pocket for now.

[Operator]

Our next question will come from Colin Healey with Haywood Securities.

[Colin Healey, Research Analyst of Mining]

Just to follow-up on the cost-saving initiatives, maybe on the OpEx side. Could you potentially frame the financial impact on margins? But I guess, would these actions enable you to keep gross EBITDA margin steady based on what you're seeing in Q2 so far?

[Amardeip Singh Doman, Chairman & CEO]

We're doing our best. Lumber market kind of gyrating and whatnot. We're getting some positives and some negatives. But operationally, with lower SG&A costs the cash flow should pick up a little bit against softer top line for sure. So I don't really see a margin plummet happening at all. So are we going to be up on margin? No. We'll be getting close in my view, my bones are saying, yes. Our margins shouldn't be too far drifting from traditional margins.

[Colin Healey, Research Analyst of Mining]

Okay. That sounds good in the circumstance. And just have you guys seen any shortages or had any logistical challenges with procuring product for distribution as a result of this? Or is it no problem meeting kind of softer demand? Or are there any specific products that are high contributors to revenue that you're seeing [indiscernible].

[Amardeip Singh Doman, Chairman & CEO]

Yes. We're not out of anything, so to speak. But we -- if the pace continues on certain items in the lumber market, we will get a little concern, maybe July, August, but that's too far out for us to see the sales pace. So there are certain items that are just short. So it's kind of -- it's tough to read right now. It's certain items. So the 2x4 inch because that is really a big home center item in North America, 2x48s very tight. Starting to get so granular here, but it's items like that, short cash-and-carry stuff is harder and harder to find right now for anything prompt, it's almost impossible. And you'll be looking at 4 to 6 weeks if you call the mill today for a railcar, 2x48s [indiscernible] grade. That's just not available, they're sold out. And again, it's probably not as much demand driven as it kind of a slack developed and then the mills curtailed and shut down. And it's choked it, and that's where we're sitting today.

[Operator]

Our next question will come from Yuri Lynk with Canaccord Genuity.

[Yuri Lynk]

Lignum seem to have a bit bigger impact on margin in Q1 than I thought. Was there anything else in there impacting the gross margin maybe the fall off in prices at the end of the quarter? Or does Lignum seasonally stronger than the rest of the business in Q1? Just any additional color on the margin performance.

[Amardeip Singh Doman, Chairman & CEO]

Yes, really that margin off point was really because of adding an Lignum, which is high volume, lower margin trading business in lumber. So really, that's where we can attribute it to. I don't have the exact numbers, Yuri, but if we remove that, I believe our gross margins would have been similar to Q1 '19. Would you agree, Jay?

[James S. Code, Chief Financial Officer]

That's correct, Amar.

[Yuri Lynk]

Okay. Great. And then maybe for Jay. Just directionally, Q2 noncash working capital, should we be thinking about this being a source or a use of cash?

[James S. Code, Chief Financial Officer]

We are doing everything we can to make that a source of cash in a seasonal situation where normally that would be a use of cash. As Mark touched on, we're normally peaking right around this week, in fact, but we managed to turn that to an earlier peak at this time, and we're continuing to work down inventory. So as things look right now, we believe that, that will be a source of cash as we continue these working capital optimization efforts.

[Operator]

And we will take a follow-up from Steve Hansen with Raymond James.

[Steven P. Hansen, MD & Equity Research Analyst]

Yes. Just a quick follow-up, if I may. And just looking at your SG&A cost in the period, you really seem to get some nice leverage in the period, I think, at 8.2% of sales. I think that's one of the lowest levels you've seen probably in the last 5 or 6 years, if not even longer. I'm just trying to understand, was there anything that contributed that other than just perhaps lower fuel costs? Is there something that's changed in your distribution arrangement that allowed you to get such good leverage there?

[Amardeip Singh Doman, Chairman & CEO]

I think probably more due to anything, it's just higher volumes. Pricing was a little bit better. And I think translating back over the expense side. We didn't really carve out a lot of cost in Q1. Q2, you'll see something different where we have carved off, to those activities I mentioned about layoffs, furloughs, travel, all that stuff. So we will get lower, I believe, in the second quarter against lower sales, sadly. But nothing really I can think of, Jay, anything on your side?

[James S. Code, Chief Financial Officer]

Yes. No, I think the key was volume. We have Lignum in Q1 2020, but not in Q1 2019, that had an impact. But yes, and I concur with Amar's comments on going forward, you're going to see that SG&A come down, but unfortunately, sales as well. So we'll see what that percentage does.

[Steven P. Hansen, MD & Equity Research Analyst]

Great. And then just the last one. Amar, you mentioned earlier, you made reference to the fact that you were performing better than I think some of your competitors, at least in terms of relative volumes. Can you give us a rough sense for how you feel about volumes into Q2? Just I'm trying to get broad strokes, rough levels of volume activity thus far.

[Amardeip Singh Doman, Chairman & CEO]

Yes. Really very, Steve, depending on what region we're at, and we're kind of about 6-week point here in the quarter, 6 weeks to go. So it's -- again, Hawaii is probably a little bit slower. But the last few days, we've seen it surge up a little bit again. It's just very hard to read, like I was saying the word is lumping. It's odd. We have some strong days and some weaker days. I can tell you I'm excited about Québec being open and Ontario, allowing full construction activities as of next week as well. That's going to help. BC has been strong. But it's really hard to give you a percentage. Right now, it's clawing back up a little bit from the sales pace in April. So again, I just don't want to get too optimistic because we just know that things are going to be slow for a while, I think, for everybody in every business just because it's not the world. But I just -- again, that's why we're watching the dividend. We're watching everything, just to see how the next kind of 4 weeks unfold and see what that pace looks like. It's just so choppy right now. But I can tell you, the pace of May corporately is better than the pace was in April, and we're encouraged by seeing homebuilder activity pick back up in the back half of April and early may guys are saying that they're starting to get a little more activity, whereas the first few weeks of April, obviously, everything was just dead.

[Operator]

And that will conclude today's Q&A session. I would now like to turn it back to Mr. Ali Mahdavi for any additional or closing remarks.

[Ali Mahdavi, Head of Investor Relations]

Thank you, operator. On behalf of the CanWel team, I'd like to thank you again for joining us on today's call. We hope everyone keeps well and healthy during these times, and we look forward to speaking with you again on the back of reporting our second quarter results. That concludes today's call. I will ask operator to close the line.

[Operator]

And this concludes today's conference. Thank you for your participation, and you may now disconnect.