Q2 2020 Earnings Call

Dead dead dead dead dead.

Thursday Thursday

Good morning, and welcome to the MSC Industrial Supply 20 20 second quarter conference call all participants will be in a listen-only mode. Should you need assistance wage by pressing the star key followed by zero after today's presentation. There will be an opportunity to ask questions to ask a question. You may press * then 1 on your touchtone phone to withdraw your question, please press * then two, please note this event is being recorded. I would now like to turn the conference over to John coronavirus president of investor relations and treasury, please go ahead thank you and good morning. Everyone Eric Gershwin our chief executive officer is on the call with me. We are remote so bear with us if the call drops we will dial back in of course during today's call. We will refer to various financial and management data in the presentation slides that accompany our comments as well as our operational statistic wage.

Both of which can be found on the investor relations section of our website.

Let me reference our Safe Harbor statement under the private Securities litigation Reform Act of 1995 are comments on this call as well as the supplemental information. We are providing on the websites contain forward-looking statements within the meaning of the US Securities laws including guidance about expected future results expectations regarding our ability to gain market share and expected benefits from our investment in strategic plans, including expected results from Acquisitions, these forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated by these statements wrong information about these risks is noted in our earnings press release and the risk factors and the md&a sections of our latest annual report on form 10-K filed with the SEC as well. As our other SEC filings these risk factors include our comments on the potential impact of covid-19. These forward-looking statements are based on our current expectations and the company assuage.

No obligation to update these statements investors are cautioned not to place undue Reliance on these forward-looking statements. I'll now turn the call over to Eric John. Good morning everybody and thank you for joining us today during these unprecedented times.

Let me Begin by expressing my best wishes to you and your families to stay safe and healthy covid-19 is no doubt top of mine for all of us rep. So before we get into the quarter, let me start by sharing with you an overview of how we're dealing with this issue.

we've launched a company-wide business continuity effort to help us navigate the business through this period of uncertainty

as you can imagine just getting our leadership teams full attention right now and we are in constant communication with our stakeholders our Associates. Our customers are suppliers long as we contingency plan for what is likely to be an extended disruption to the economy. Our number one priority is the health and safety of our Associates and their families our customers and our other partners.

So those Associates who can do so are working from home particularly in our corporate functions.

As we are an essential business We are continuing to operate our customer fulfillment centers or distribution centres. So those Associates continue to be on premises serving our customers.

This is particularly important because with timely shipping and some creative sourcing. We are helping to keep the nation's front lines running while we all battle this outbreak.

We've instituted enhance safety procedures to safeguard the health and safety of our team including the use of additional protective equipment and frequent cleanings of our facilities given that we're providing essential services to many organizations on the front lines of the response to covid-19. We do not have any plans at this time to shutdown our customer for customer fulfillment centers.

however

We will of course follow the guidance of Health officials and we're in close contact with them across our operating footprint.

We've eliminated essentially all travel in order to ensure health and safety. We are also reducing spending more broadly across the company only moving ahead on operating and capital spending that is deemed critical.

We have ceased all hiring cut expenses on items like outside resources resources, including Consulting and more.

Looking ahead we have well developed contingency plans to reduce costs further if the situation deteriorates from here as a very well. May God I am proud of how our Associates have stepped up during this time of unprecedented uncertainty.

Our warehouse Associates continue getting product out the door every day our sales and service teams Remain the face of the company on the front lines with our customers.

Our category management team is coming up with miracles to find scare safety and janitorial products that are keeping our customers going.

And our it team has moved and warped speed to enable nearly the entire company with remote access.

Well, share some more detail on our actions later in the call, but I'll now turn to our fiscal second-quarter that we closed at the end of February during the quarter. We continue to us on our journey to reposition as a mission-critical partner on the plant floor of manufacturing and Industrial customers. We remain focused on the three initiatives that could be discussed over the last couple of calls to restore operating margin stability and ultimately expansion.

And those are refining the sales Effectiveness plan.

Improving the profitability of our supplier programs and improving productivity by reducing operating expenses.

First we continued refining the sales force and preparing to accelerate growth.

Sales headcount was roughly flat during our fiscal second-quarter importantly though. We increased head count in the growth areas such as business development or the hunter roles that we've talked about in to see CSG and a couple of other investment priorities. Our new business winds continued at a strong pace and remained on plan.

Well, encouraging we realize that the ultimate measure will be our growth Gap above Market.

Our second initiative is improving the profitability of our supplier programs recall that we have negotiated roughly twenty million dollars in annualized profit improvements split about equal between the back half of our fiscal twenty and our fiscal 2021 the overall program remains on track.

We do expect.

However, that covid-19 and the resulting economic Ripple could mute some of the benefit in the near-term as purchased levels and hence rebate payouts come down off the third fiscal 2020 initiative is realigning our operating model to reduce expenses and improve productivity.

You recall that some of this began at the end of our fiscal 2019 with offering voluntary early retirement to some Associates and ratcheting Up Performance Management intensity for others.

We also selectively eliminated positions where our Focus was changing.

All of that continued into our fiscal second-quarter and we began selectively hiring in certain customer-facing roles. As I mentioned. We also continued our assessment of additional opportunities to align our operating model to the new strategy.

That exercise confirmed our hypothesis that we see the path to a couple of hundred basis points and improve productivity as measured by the Optics to sales ratio.

Many of the identified initiatives require travel and team meetings. So as you could imagine they're on pause until things settle down.

However, there are other initiatives such as some contract improvements and indirect procurement savings that are moving forward as we speak.

Our transformation effort is being led by Carrie hurt.

I'll now turn to our fiscal second-quarter Financial results before providing an update on the environment and then turning it over to John to review the details of the quarter.

Greg Clark our interim CFO is under the weather right now and out of an abundance of caution staying home.

I would note that he and his team have been doing a great job in finance as expected will then wrap up and open things up for questions.

Our fiscal second-quarter results reflected solid execution in an uncertain environment.

Both sales and gross margins came within our guidance ranges with sales falling below the midpoint while gross margin was above it.

Operating expenses were also better than the guidance midpoint. And this was despite an extra roughly 1 million dollars of Consulting fees related to the acceleration wage review of our operating model that I mentioned earlier all told both are operating margin and earnings per share came in at the midpoint of our guidance range.

Turning to the environment industrial demand Trends overall for the quarter remained relatively soft. We did start to see a couple of encouraging data points with January and February off readings improving to 50.2 but this was of course quickly erased by what unfolded with the covid-19 outbreak and you no doubt saw the March reading of 41.0 which did not surprise us.

in terms of

Gets the weakness in industrial demand brought in further with pockets of softness in areas, like Automotive heavy truck oil and gas and agriculture.

Aerospace has also weekend due to the Boeing developments and the building concerns around covid-19.

With regard to the pricing environment we continue to see list price movements from our suppliers. And we took a mid-year price increase at the beginning of our fiscal third-quarter or the beginning of March.

Realization has been quite good. In fact as good as anything. We've seen over the past several years.

Turning to our performance by customer type national accounts declined in the low single-digits while core customers declined in the mid-single digits as this is the portion of our business office heavily leveraged to metalworking. So no surprise.

Government sales growth levels deteriorated to download teens which way down the overall growth.

Tcsg remained a bright spot growing in the low single-digits.

To be honest, though, all of that feels like ancient history.

I'll now turn to March our fiscal March because it is more reflective of what we're seeing since the acceleration of covid-19.

Well, our fiscal March is sales estimate came in at negative 5.8% Overall. There are a few important Trends to note under the surface.

First there's a big discrepancy between the first three weeks and the last two.

Two or three weeks. Our revenues were up low single-digits over prior year.

We then saw a big drop off in the last two weeks as customer shutdowns spread rapidly Across the Nation.

Just began with the big three Auto shutdowns and accelerated from there and I'll just remind you that our last week of March actually runs that given the fiscal calendar runs into April. So included the first three months of April the second point I'd note is that we saw a big discrepancy in product line performance.

Large orders and sales of safety and janitorial products not surprisingly surged over prior-year particularly with our government customers.

At the same time other product lines saw a substantial drop through the month with double-digit sales declines in the last two weeks.

Once again, neither is surprising given the shutdowns and worldwide efforts to control covid-19.

The first thing I'll note.

We saw an unusually big gap between our bookings or orders and what we invoiced.

Normally on these calls we only discuss revenues.

But these are not normal times.

Our bookings are orders from March. We're up high single-digits over the prior year. In fact our bookings were up over prior-year even during the last two weeks of our fiscal month.

This Gap in bookings versus revenues actually began in February where we also saw bookings growth over prior year.

The unusually large gap and bookings to revenues is a function of the Surge and large safety and janitorial orders scarcity of some of that product longer supplier lead times dead.

a larger-than-normal backlog on our own warehouses off

anticipate the majority of these bookings to invoice during the months of April May and June which would offer us a growth Tailwind the buffer any additional softness that may maybe to come home.

I'll now turn things over to John and then come back with some concluding remarks.

Thank you Eric. So let me get right into the Q two numbers are total average daily sales. We're twelve point nine million a decrease of 2.9% on an ABS basis versus the same quarter last year Embassy Mexico contribute, approximately 90 basis points of acquisitive growth in the quarter the decrease in overall a DS was 40 basis points below the negative two and half percent midpoint of our guidance range. Our Q2 reported gross margin was 42.1% 10 basis points above the midpoint of our guidance range reflecting higher rebates versus prior-year gross margin was down roughly sixty basis points with Mexico accounting for roughly half of the decline as expected. The year-over-year margin decline continued shrinking as Purchase cost escalation continued to Wayne.

March showed nice gross margin performance due to the benefit of strong price realization.

Total operating expenses and Q2. We're 253 million slightly lower-than-expected as a percentage of sales. I'll point out that affects included about 2 million dollars a month or activity Investments related to the review of our operating model that Eric mentioned earlier 1 million of this expense was in our queue to guidance while the other million was due to the acceleration of Pac work as Eric mentioned. We are slowing our spend on this type of work right now, but we expect to resume it once covid-19 is behind us. Therefore should these expenses become more material going forward? We will break them out of our reported earnings to provide you additional visibility.

Moving on our operating margin was 9.9% versus guidance of 9.7% Our tax rate for the first quarter was 25.5% in line with guidance and the prior-year all of this resulted in earnings per share of $1.

Normally, we would take you through the balance sheet at this point in the discussion. However today I'd like to focus on where we are as of now and the actions that we are taking off to ensure business resilience and continuity during this time of uncertainty. The queue to balance sheet numbers are in our press release and the 10-q filing and we are of course happy to answer any questions that you may have about where we stood at the end of Q2.

with the downturn

In sales that we saw in the last two weeks of March. We are managing our liquidity very closely and we've drew down three hundred million from our revolving credit facility to ensure greater liquidity off.

On the receivable side of the business. We have been managing the credit approval process closely most new customers are being pushed toward credit card payments and we are carefully allocating inventory to existing customers. We have implemented non cancellation policies on most large orders and collections have remained relatively strong.

Most of many of the large orders are coming from long-standing government customers.

When it comes to inventory, we are watching are levels closely. But you have heard of say before that in difficult times. We will use our inventory levels as a competitive differentiator off and remember booking levels have remained strong through March should the environment environment we can further we can and will adjust quickly. In fact, we have them ready made several adjustments to take down buying levels and assuming volumes remain suppressed will continue doing so in order to bring inventory levels down.

On the payable side, we continue paying on a timely basis particularly those suppliers that give us good terms and a preferential position those suppliers offering timely delivery and deep discounts will be pushed to the front of the line.

Turning to our ordinary dividend. We have ample liquidity to continue running the business and paying the current level of our dividend in all but the most severe scenarios.

We have conducted numerous best and worst case sensitivity analyses.

And revenues would have to decline somewhere in the range of forty to fifty percent before our operating cash flow turned negative.

These levels we would take additional cost down actions and could sustain multiple quarters given our liquidity position.

I'll now turn it back over to Eric. Thanks, Jaan.

Given the unprecedented uncertainty that we're all facing right now putting the lack of visibility that we have going forward and just how fast things are changing. We do not think that quarterly Thursday value. However, we understand the need for transparency right now for all of our stakeholders, including our investors and analysts. So until we get through Thursday. Of heightened uncertainty will be providing monthly updates on average daily sales developments as quickly as possible following our month-end close as well as comments on the business trends that we've seen over the course of the month.

Hello for some closing thoughts.

Our Focus right now is on navigating the impact of covid-19.

I'm confident that we're doing the right things to protect the health and safety of our Associates to continue serving our customers in this critical time.

Play our part and keeping the manufacturing economy running.

I think our entire team for this and I extend this appreciation to our customers and our supply chain Partners. We've all come together to address the challenges that all of them.

While the impact of covid-19 on the industrial economy will likely get worse before it gets better things will ultimately get better.

MSC has been through difficult times before.

We will lean on our time-tested Playbook anchoring ourselves at our mission statement and our values.

We will continue supporting our customers and our suppliers through these tough times while advancing our strategy to become mission-critical on the plant floor.

Finally our strong balance sheet our culture and resolve mean that will not only survive but we will ultimately emerge from this as a stronger.

Well now open up the line for questions.

We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you were using the speaker phone, please pick up your handset before pressing the keys off your question, please press star then to the first question today comes from Ryan Merkel of William Blair, please go ahead. Hey. Thanks. Good morning all morning. Good morning.

So first off I want to get a better sense of the sales trend line through March and into early April. You said the first three weeks of March were up low-single digits, but I'm wondering what happened the last two weeks and is the trend line getting a whole lot worse. And really I'm just reaching for any kind of read on how bad April could be Ryan sure. So so as we mentioned yeah Mom first three weeks and what I'll do is split the discussion at it to invoicing and then the book do orders which as I mentioned usually we don't talk about on this call, but these are certainly unusual times invoicing took three weeks average low single-digits, you know, you you can do the math but the last two weeks dropped into the double-digits, I wouldn't say it was progressively falling through those last two years and you know, the other thing I know trying is for us April that last week in March for us included three days of April. So you're getting a taste for April and I wouldn't call out any discernable difference between wage.

In week 5 in March, we are now in the first week of our fiscal April. So we literally have two days under our belts and I you know for the two days for what it's worth. I wouldn't call that anything else from the prior 2 weeks of note the that's the invoicing side on the booking side as we mentioned Ryan. What's interesting and I I call it out cuz being in this business forever, it's the thing that I usually look at is my leading indicator for how we're doing bookings were we said for the month of high single-digit certainly stronger the first three weeks, but even those last two weeks of the fiscal month year-on-year were up which you know, obviously what that would mean as long as those orders come through and we believe most will the invoicing will catch up and we'll provide offer so that would be the color red give you through the month.

Okay, so

Yeah, the bottom line is it's not sales aren't falling off dramatically here in the last call at 7 to 10 days. I think is really kind of relative to the first three weeks of big step down but I wouldn't say, you know between the two weeks of week 4 in week five of March which again crept into April. I I wouldn't see see it as trend line straight down, correct? Okay, and and follow up there. I probably could do the math. Can you quantify the sales that are on backorder as of March and I assume this is continued in April as well. I mean how big the backorder get hard hard to give you a number but I mean you could as you said Ryan just think about the difference between high single-digit on the order side and then a minus 5.8 on the invoicing side. That's quite a bit of dollars.

Yeah, okay and the last three months and then just lastly and I'll turn it over a question on detrimental. It's this quarter detrimental margins were about fifty percent in sales were down 4% I'm not sure if this is representative. But any help you could provide a detrimental margin for next two quarters, assuming sales are down ten maybe twenty percent. I'll take that Ryan. This is John. I think you know you followed us a long time, right? Of course. So we've talked about incremental margins and over here mystery being in the twenty to thirty percent range based on the modeling we're doing I'd say that are detrimental margins would be in a similar range on the on the downside. Obviously. It's call it low 20s to low Thursday as you can imagine. There's a lot of moving Parts there, right? So things like gross margin performance mix the size and timing of cost actions and quite a few number of other factors wage.

But I think both of twenties to low 30s would put you in the right range.

Perfect. Very helpful. All right. Thanks guys have it right?

The next question today comes from John of Gordon, please. Go ahead. No. Thank you. Good morning everyone and hopefully Greg just has a cold morning Eric morning, John. Hey, good morning, John. He's doing okay.

I understand better to be safe than sorry. Can I can we maybe put a finer Point around the magnitude of personal protective equipment janitorial? What normal do these categories represent Eric in terms of the mix and whether you actually seeing today and I just trying to dovetail that with fact that government despite the surgeon orders the still only 7% of the total revenues in the fiscal second-quarter kind of flat sequentially. Is there a way you could sort of size these buckets for is proportionately versus kind of what it normally is. Yeah. Look John you're you're holding down in on a couple of the big changes that we saw it's almost it was funny cuz I looked back at the numbers and and noticed the same thing that if you look at cute to you don't see much of a difference at all and God, you're right at 7% which ended in almost feels like a different world are if if we look ahead based on the order activity in early invoicing

activity for government we we would certainly

We expect that number to jump up considerably, you know, John part of the challenge here is the timing of when these orders actually hit it's tough for me to give you a number but suffice it to say I'd be surprised if government has known outage of sales did not take a meaningful jump in our Q3. Your other question was a product one and related to you know, let's say p p e the two product lines and janitorial what I would say there is you know quietly over the years. We've built up a really strong safety business not metal, you know metalworking Far and Away the biggest category we've done that for you the second biggest being the class C parts and we've kind of Collard that for you behind those two. This would be the next biggest category. It's been growing for years. It has also am loaded as you could imagine. So if we look at the the sort of the order activity in the past month six weeks versus the prior run-rate multiples bigger than it was so dead.

And I'd be surprised if moving moving forward. We didn't see a big jump up as a percentage of revenues.

Right, so it sounds like you're saying, you know those two categories combined maybe historically we're in the teens and then if you were probably going to see a big surge on top of that. I think I think that makes sense. It wouldn't be black one interesting note. By the way that I'll call out. It's look it's not surprising that there's demand for products Safety products and and janitorial products in this environment. I think the real trick and cheese sauce and I think we're we're having some success is finding sources of Supply because Supply is so limited and I you know, I gave a shout out to our category team, but I do think we've developed a lot of relationships over the years have a lot of good sourcing capabilities and it's given us access to tap into sources that maybe others can and hopefully that will give us an opportunity to you know, take advantage and help a lot of people out.

Yeah, maybe you could pass along those skills to the federal government wondering about so I'm just going to get a specific example Honeywell issued a letter to its supplier. This is in its performance materials business basically imposing it 30% price cut on procured products across the board. Are you seeing that is obviously an extreme case there, you know, I understand maintenance repair operating supplies are going to be different than their components and other feedstocks that go into the that product line, but are you seeing pressure? Um wage is similarly from you say your national account customers to renegotiate, you know, various contracts or whatever cuz you would talked about it's interesting you talked about price realization has been pretty good right in the acceptance of the price increasing to be pretty good. I'm just wondering though on the look forward as a lot of companies get stressed and and National Cancer obviously very important for you. What what kind of early reads birth

Getting from your customer base. And and how do you think kind of MSC is going to fare through all of this? Yeah, really? Good question again. Here's what I'd say John. So first of all, let me just comment briefly on our price.

Realization I flagged it because it has been better than expected. And that was because we actually implemented it wasn't a total surprise. I mean, we we made a few months I would call it Improvement store execution on the pricing front between our pricing team and our sales team and those are paying off. I think those should sustain based on the results. I'm seeing and how they're tracking back to action we took so I like what I'm seeing there in terms of the environment. It's an interesting Dynamic John because on the one hand certainly you're going to have companies who are feeling a lot of financial pressure and are going to look to take cost out that will be there. No question. The flipside is this is a bit different kind of a typical recession in many ways, but one wage scarcity of product and access to keep so there's certain areas where customers just want to be able to get product in the door to keep their people safe and keep their operations going.

So it's a bit different from your typical recession. So those would be kind of competing factors net. So far. No reason. I'm not seeing anything that would lead me to believe pricing realization wage should decline from here.

Got it. Just maybe one last one in the cash flow inventory was a large sequential drag and I guess payables were large sequential Source or what do you see I'm seeing with respect to you're working capital a customer or are they slower to pay or intern? Are you sort of you mentioned you were actually paying on time. I mean, how how are you guys thinking about managing a working capital? Whether your expectations in terms of either a source or use in the coming months, you know in the coming quarters particularly if sales obviously this is going to be the toughest quarter. We we we hope it's only the toughest quarter for top-line right in a in the June quarter. Let me see, Yep. Yep. Let me let me take that John as you can imagine. We're watching our our working capital and our cash flow is extremely closely on every single day. I get reports first thing in the morning. We are are receivable so far have been remarkably relatively strong. I would say as an our payables, you know, we've we've wage

Up because the world at least if you look at a number of the world's is not falling apart yet, but that's why we're watching it very very closely. Right if I'm an inventory standpoint as as you know, we typically as a distributor generate a lot of cash in a downturn because of inventories, you wouldn't have seen that coming into the cute too because our fiscal Q2, of course straddled your life, which is when we typically take advantage of opportunity buys, right and then that plus the fact that our bookings were very positive towards the end of February and through March and combine that ass well with our commitment to have product available to our customers and means we want to keep inventory on the shelf and and keep using that as a big differentiator lastly. I'll add that safety and janitorial supplies very limited. So we're going to buy all we can of those kind of products but at the end of the day if the environment weakens further we can and we will adjust inventories quickly and draw them down in generated a lot more wage.

Much appreciated. Thanks very much. Good luck. You're welcome. Thank you, John.

The next question today comes from himself mazari Jeffries, please. Go ahead.

Good morning. Thank you. Hope you guys are safe and healthy my first question and and you touched on this Eric a little bit in your prepared remarks, but I know it's early but do you see any permanent changes coming out of you know this covid-19 like recession in your business just just high-level operationally strategies culturally. Do you see this as changing your business, you know, positively or negatively any high-level thoughts.

I mean another quick question. I got to tell you it's it's it's something that's beginning to cross my mind, but I would say still still a little we are so early in this Hamza and so much is yet to be determined about how long were in this sort of New Normal what the new normal means and how long before back that I what I would tell you is it's a bit early to say about the one one thing that I would flag is just it's it's been amazing to me to see our culture. So so this this is sort of more of a right brain thing than a left brain thing right choice, but

To see our culture in action and to see people rally around the company, you know rally to support each other rally to support customers and suppliers. It's it's been invigorating and there's been a real sort of search and and in in and Renaissance in the culture if you will.

Watching our whole team in action and and seeing us kind of adhere to the values that we've always adhered to seeing how we take a long-term perspective. So the one thing I call out is is a positive from that standpoint that in the faith City. I like what I'm seeing from how we're responding beyond that. I think a little too early to say I Eric and I would add that our model of Distributing drugs and products directly to the customer really works. Well in this environment, we you know, if they want us there we can be there with our full service and solutions. But if if if they don't we can get our Goods right to their to their docs and they can keep operating without us having to come into the premises.

Got it and just a follow-up. You know, how how do you balance sort of liquidity and and you know potentially distressing but it's out there where where you maybe you can do. I know you were excited, you know last quarter the bar on him and he is higher, you know, you you sort of going through a restructuring still am but but now sort of the world has changed a little bit is the m&a sort of bar still pretty high or or does that change because you know, you may have a great distress companies out there that may fit your book of business. So what I would say is for now the the bar on m&a still very high, especially in this environment like we feel really good about our liquidity position and John said I ran through a framework with you to give you a sense as to why and then you think about how this business normally performs in a downturn with working capital as we were touching on with John early birth.

so

We feel good about our liquidity position. There's going to be opportunities that emerge here for sure and there was going to be opportunities to invest and whether that's in people or systems or companies just not yet and certainly as it relates to m&a given where we're at. The answer is for now certainly the bar remains on.

Great. Thank you. Be safe out there. Thanks a lot and let's take care.

the next question today comes from Saint Raymond James, please go ahead and

Good morning, Eric. Good morning, John. I hope both of you and your families are well exam two questions. If I might one of them is a piggyback on a prior question around your receivables collection, one of the things I mean, we're all looking at at least for a. Posts in terms of what might happen. One of the things I found interesting is that your uh allowance for doubtful accounts never really spiked in 08809. It got to about 4% of gross receivables, which is really not all that dissimilar from where you're at now Eric help help us or remind us as to why allowances don't Spike or at least historically don't spike in in recessions is something to do with your customer list. Is it something how your tactically go to see and and how might you look at receivables collectability and in a worst case scenario if this thing wage

Just try going. Yeah sure mean I'm happy to give you some historic perspective and and and John can can weigh in on how we're managing it now, but you know, like I think Sam wage manager tightly all the time. We're managing it more tightly now and what that means is having very proactive good relationships with customers long-standing relationships with customers. And so there's dialogue going on all the time and you know that combined with making some sort of common-sense moves. It's as John reference. So if there's going to be a new customer coming in that we're not familiar with move that to credit card payment. What if it comes to large orders were making sure that it's here with good long-standing customers with good payment track records in some cases, you know, non cancellation policies. So doing common-sense things and I think leveraging a lot of years of good relationships John. I don't know if anything the other thing I would point out I guess Sam is you know, the crisis was pretty sharp and pretty quick bath.

right now with covid-19

Thanks my last question and this might be granular but you've got a very technically proficient sales force that retention is going to be quite critical. I'm guessing you're considering this a fixed cost or at least largely a fixed cost. How how are you specifically addressing variable comp with sales people over the next few months to maintain retention levels. Yeah, that that's that's a really good question and look, you're right. I mean, this is a fundamentally that that's our front lines are are as far as sales people you can imagine Sam a second one from a competitive standpoint, but suffice it to say that we are taking environmental factors into account as we look at variable comp and making sure that goes inside the company. We have a mantra about doing the right thing and when it comes to our sales people, we're doing the right thing. I'll kind of leave it at that, but just to say we are proactively addressing the issue.

Very helpful, I both of you stay. Well. Thank you, Sam.

The next question today comes from Adam Poolman of Cleveland research, please go ahead.

Hey guys, good morning. Let me check with my my best wishes, you know for everyone and Greg. I wanted I had a couple of gross margin questions for you. And when we think about Safety products and government business, um, you know, I guess I would have thought that that would be softer gross margin type products for the company. Maybe maybe not in total. But I'm John you had mentioned that March gross margin performance was pretty good with the the price increase. I'm wondering if you could just imagine for us, you know, the the margin profile that business is some of those orders start to come through.

Adam yeah, so so what I would say on gross margin is you should have different there's always gross margin is always kind of like a series of this. There's some Tailwinds and headwinds. You know, what we called out was at a month was the price increase we took and the strong realization. So as we look forward certainly that's a tail wind as it relates to and it's it's one of the reasons by the way, what you're hitting on is one of the reasons why trying to give guidance now would be so fruitless and difficult because you know, one of the other factors that influence is gross. Margin, it's priced it's and it's mix and John described how on two of the three factors no cost is starting to move in the right direction. He talked about it in the prepared remarks pricing is moving in the right direction. We talked about mixes a real wild card right now and it just is so hard because the way to predict because of the timing and the size of some of these orders, you know, our our approach to pricing a lot of this business has been to do it just as we've always done it off.

Justin with how we price it 2 months ago before there was a crisis. So yeah in some cases some of those orders are going to come in below company average in some case. They'll come in at or above off very difficult, but you are right what it could make for is a little choppiness as it relates to mix. Yeah. I I would just add in Adam. I think we've over the years we've at least alluded if not Samsung directly that government sales are typically lower than the company average gross. Margin just like national account sales are as well. So yeah, that would be a headwind. I don't know. We haven't certainly having a smoking out various product gross margins, so I won't go there on the on the gen center safety stuff.

okay, and then could you Dimension the the magnitude of the the price increase remind us with the

What that was?

You know, it was in the neighborhood of one to two percent I'd say it was definitely smaller than last year's mid-year increase.

Okay, gotcha. And then the supplier programs that you had mentioned that the the beginning of the call that you know, some of them are potentially at risk with you know, volume-related rebirth. I'm just wondering you know how much of this you know, do we do we think could could stake. I think I heard you say that the majority of it but it might have misheard any any directional sense. And then just for the accounting of that is that is that a crude for as we move through the rest of the year or we start occurring for that in the fourth quarter? Thanks. Yeah Adam and just just to be clear on the supplier program's the programs are all intact. And and and in fact, I think at a time like this, you know, we need our suppliers in our suppliers need us. We need to lean on each other programs are all intact no change. So the only change I flagged Adam is that if you look forward and if you know a decent portion of the benefits were in the form of guaranteed rebates, let's say a guaranteed rebate gets paid back $2 one of purchases. Yep.

Usually if purchase is come down if there's a in an extended period of economic slowdown and purchases come down the absolute dollar levels of the program will come down. That's what I was trying to get across in terms of when you start to see that the way the accrual works for the rebate John. I believe it'll begin in our fiscal fourth-quarter.

And moved through the rest of the calendar year. And again, it's it's one of those things Adam where it's so hard to predict because each supplier by supplier and in some cases to the fact that their safety suppliers you could imagine purchases are going to be through the roof if it's somewhere else. It's going to be lower. So it's really tricky to model out but I I flagged it cuz it likely could be a headwind wage is a protracted downturn.

Okay, I got you. Thanks.

Welcome.

The next question today comes from David. May I be of please go ahead?

Hey, good morning guys. First you indicated that you increased head count in the hunter role during the second quarter and suck as a company. You're playing a lot of Defense right now, but can you tell us how you'll keep the mission critical Partners strategy moving forward during the crisis and then even potentially several week quarters thereafter. How do you keep the the wheels in motion there a good question. So what what yeah, I did mention we are Hunter function with the the b d or the hunter roll was was the part of the business where we were really throttling up and we we've been seeing good success in capturing new customer relationships or expanding was a small relationship into a big relationship in some ways. I you know, it sounds crazy but the whole mission critical concept that I'm seeing this now and sort of birth

Inside the company that I've talked about.

Becomes more important than ever businesses, you know many of our customers are considered essential businesses and they're they need to keep their operation running in some way shape or form. So the way we deliver on This Promise is idea of being mission-critical means were there with you were there with you on the plant floor were there with you to solve your toughest problems. We've had to adapt bit because in some cases maybe we're not actually inside the customer shop and we're doing this virtually by phone, but I I think it's giving us a chance to bring the value prop and this new age Kia live in a new and exciting way. I mean, we're helping keeping operations going

Okay, thanks. And and then in past downturns MSC is invested aggressively into the decline in some cases. Is it just too early to make that call Eric? Do you wait till you get past the coronavirus and then see what the economy looks like there after before you make that call Dave? I think it's a little bit early. I do think that there's going to be some good opportunities that emerge and we would take it consistent approach in terms of looking and being on our toes and capitalizing on those opportunities. I think just not yet.

Perfect. Thank you. Thanks Dave.

The next question today comes from Michael McGowan of Wells Fargo, please go ahead.

Morning, everyone. Thanks for the time. If I could start off with the initiatives the direct savings the Teeny Consulting discretionary spend money and capex. Can you put a are you able to put a dollar figure to that what the first tranche and then maybe if things get progressively worse? What would a second tranche look like? I'm not sure. So yeah, you you've hit on I mean we've taken pretty much the basic moves. We were out early. I think we have taken out, you know call and stuff you're looking for a range something in the neighborhood of $500 a week run-rate. Why is that we have taken out through the actions that we talked about earlier. Certainly. We're ready. If we need to take out more cost there would be significantly more cost out to come the way we would do that, you know at some point depending upon how bad things get some of the actions begins.

To involve people which is, you know, we're going to be really careful about the thing I would say there is we're going to lean on our mission statement our values our track record and do things in a way, you know back to the Mantra of doing the right thing, but that's how we would go about doing it and I'm going to lean on the Playbook that my predecessor David Sandler years ago navigated us brilliantly through 8:09 and and it was all about our team sharing in pain collectively and leading from the top and we would take very much the same approach if we need to go deeper.

Got it. I appreciate the caller and if I could just switch gears to more of a long-term question. If this ends up being you know, having some effect down the line toward social distancing. You know, how are you looking to the Future for your spec sales? You guys have always done these these in-shop studies page. You should be using X products instead of why you get better turns you'll get better efficiency. And you lower your cost with this product from respect sales standpoint. Are you able to do that on a virtual online sharing of pad documents or whatever it may be how do you look at that long-term? That's a great question. So it's two things I say one is that would be John mentioned it earlier he if if this sort of became the new normal or the new normal for a long period of time are are let's start with our Logistics model. I think really lends itself well to Thursday.

Because it is a centralized model shipping into remote locations.

Relatively low touch. So I think that works out really well in terms of the engineered side of the value proposition the mission critical part. What I would say is we we're going to use technology and we're actually been using technology for quite a while. So we have in certain locations a lot of our Tech Team believe it or not actually sits in centralized call center environments and provides just as deep technical experience expertise and advice and does it over the phone over FaceTime and with technology. I think what would happen is we would take that model and we would expand upon that for a bigger customers are certainly would be different but not something we're on a custom to okay, if I could sneak one more in on the discrepancy versus invoices versus orders. Is there a way to disaggregate what has come in from an order standpoint? That isn't from that large government wage?

That maybe that smaller shop of of twenty employees that is potentially more risk at shutting down. What has the order flow been for those high demand Products off for? Yeah. So we we do Mike we look at it ten ways till Sunday by you know for the invoicing and for the for the orders coming in what I would say is look there's there's some of everything coming in but the majority of the concentration of the large orders would be from a product standpoint safety and genitori related and then from a customer segments. They were are certainly some coming from smaller shops. But the majority would be between government customers and our larger national accounts would be where the bulk of them are coming from.

Thanks. Appreciate the time. Thanks, Mike.

The next question today comes from Patrick Baumann of JPMorgan, please go ahead.

Hey, good morning. Eric morning, John. Thanks for taking my questions.

Hey, how's it going? Maybe just just kind of circling back on some of the earlier discussion. If you could help us understand the detrimental margins kind of the key variables in that low 20s to low 30s, you know framework is it, you know, a certain range of sales declines. Is it you know, maybe how do you expect gross margins to behave in that kind of a framework? Um, just went through I think operating expenses a little bit just kind of curious how to think high-level about that framework and and what are the variables so, you know Pat we looked at numerous scenarios, you know from 10 to 20% down and and and further beyond that obviously areas where we're nowhere near today, but we may I think that that that General range of low twenties to low 30s worked pretty much all the way down in even towards the the worst scenarios we could dead.

we we modeled at least let's say so I wouldn't get

Into the details of gross margins and and all that but you know, that's the best we can do. I think with the modeling that we did so far less Eric if you have anything to add yeah, maybe just to make sure it's John. So I think that range of low 20s to low 30s. The reason for the broad range is actually one of the biggest factors Pat you're hitting on is gross. Margin. It's hard to predict how it performs so you can imagine the better gross margin. Does he closer we get to the low 20s in the worst to the low 30s. The only other thing I call out and I think Ryan and the initial question asked if the decrement is actually looked worse over the last year than the range we gave, you know, obviously what that ranges and reflective of is considerable actions being taken by the company. So what you're seeing at the various levels to be able to keep to the low twenties to low 30s. Is there significant cost actions being taken beyond what we've done over the past year and then, you know, the gross margin would be the the the driver behind the the size of the rank.

Okay, got it. That's helpful. And I guess maybe going back to I don't know if it was Ryan's question earlier. Somebody was asking about March sales, but so February was down to 5% But you said March improved to low single-digits in the first three weeks. Just what drove that Improvement was that all the safety and janitorial stuff. Is that what drove kind of at Step Up versus February month? So actually the Improvement in the Step Up was because a lot of the safety and janitorial stuff ended up being back ordered a Direct ship and it's why this there's this building gap between bookings and invoice and we actually saw

Broad-based relative strength, I mean if you call those single did strength relative strength from where we were it was more broad-based, you know, which trying to parse out why you know one theory is just in in time uncertainty customers wanted to you know, whether or safety product or Not by up a little bit. We also you know, I would say that's probably the biggest Factor but it was more broad-based. Okay, and and then just came back to that question earlier as well. If if I run, you know that quick back-of-the-envelope on the single-digit growth in the first three weeks and you know what that implies for the last two weeks that I get to something like I don't know which teams are so declines is that in in the ballpark of what you saw kind of where the bar somewhere in the ballpark and the only other color there would be not much of a difference between week four and week 5

Okay makes makes a lot of sense. Thanks guys. Good luck. I appreciate the time.

And our last question today comes from Steve Barger of keybanc capital markets, please. Go ahead. Good morning. Thanks for taking the time. Just going back to some of the conversations around delivering the value proposition. I wanted to ask how customer attitudes towards vending and via my are changing. Is there more interest given better control and tracking or do they want more delivery today need to limit access to facilities interesting question Steve. What I would say is two things one. It's a little early to say this is so brand new 2000. We we've had competing Dynamics. So on the one hand right now a good portion of our customers have either shut down and that's somewhere by the way based on our latest data and the data keeps changing around 20% or so a little over 20% of our customers have shut down.

and then another

Chunk of customers are operating but have restricted access to any visitors from the outside. So when we think about how often we're actually going in and replenishing a vending where my installation right near somewhere in the Forty to fifty percent range, so certainly and and look we think that's temporary temporarily that's down. The flip side has been believe it or not. And this surprised us the number of like new VMI implementations for instance that we did or week or two ago was one of the highest we've ever done which really surprised us. So it's a little bit of a mixed bag right now. I think temporarily though what you're suggesting is customers restricting access which which may if they're not shutting down restricting access. So we're enabling them. We're giving them the technology and the tools to be able to reply to replenish on their own if that's yeah, and I'm sure that of that 20% that shuts down a lot of those are our metalworking customers and the automotive supply chain or something just any more commentary on Thursday.

On demand for those products progressed in the back half of March and where do you think inventory levels are with your customers and in your own systems given we were seeing some decelerating Trends in metalworking. So first part of your question, you are correct cute terms of closure is everywhere, but a cute in the midwest related to Auto no question. You are correct them in terms of customer inventory levels. Look they've definitely they've been building, but it's really hard to say because especially when it comes to some of these large orders, it's almost like there is not a wage is not enough to be had. So we're getting these huge quantities and even when they're being fulfilled customers are coming back and saying we need more it's really hard to judge a large just a murky time understood. Thanks.

Hey, Steve.

This concludes our question-and-answer session. I would like to turn the conference back over to John Carona for any closing remarks.

Thank you, Melissa, and thank you everyone for joining us today. Our next earnings date is set for July 8th 2020 as Eric mentioned. We will be providing a monthly updates. We will do this by a press release within a week or so of our monthly close. So expect the update for April developments. Just after the first week in May. I want to thank you for joining us today and more importantly, please stay healthy and safe. Take care.

Circumference is now concluded. Thank you for attending today's presentation. You may now disconnect.