Q1 2020 Earnings Call

Need to access this conference call Via webcast was disclosed in the press release and was posted on our corporate website replays of his conference call will be archived and available for the next seven days. I'll turn the call over to John Michael. Thank you. Will good morning everyone and thank you for joining us for today's call on behalf of Wesco. I hope that all of you have been staying healthy and safe off these challenging times. We prepared a thorough update for you today. I'll lead off with a few introductory remarks remarks then Dave will take you through our first quarter results and then I'll return to provide additional comments on the state of the business and also an update on the excellent progress. We're making on the acquisition of Anixter.

Since we last spoke in March the spread of the covid-19 global pandemic and the government-imposed shutdowns impacted our customers and suppliers across all of our end markets in response to this crisis. We've taken quick and decisive action centered on three top priorities number one protecting our employees the health and safety of our employee wage is always our top priority and we took the necessary steps to implement increase safety sanitizing and social distancing protocols as well as remote work and shifting strategies to provide continuity G operations for our branches and distribution centres. We implemented a blue team white team approach where half of the team works in the facility that given time if an employee is diagnosed with covid-19. We send the employees home sanitize the facility and then bring the other team in to maintain the operation. We also Institute a reward and recognition bonus phone number.

Frontline employees

Number to Super serving our customers we implemented our business continuity plan and have kept all u.s. And Canadian facilities operational to serve our customers. They're essential businesses. We implemented daily impact reporting to provide customers with real-time supply chain constraints into the availability of their needed products and services. We utilize our global scale and our supplier relationships to procure a personal protective equipment for our customers and our employees. I want to emphasize that Westco provides mission-critical electrical in a utility and communication solutions that enable our customers to efficiently effectively and safely operate their businesses.

In these challenging times. We remain laser focused on super serving our customers while ensuring the Integrity of their supply chains and number three bulbs or third top priority that is effectively managing our business in response to this crisis as we have done in Prior economic downturns. We are aggressively managing our business and have taken a series of cost reduction and cash management actions as outlined on this page effect May 1st. We are implementing temporary broad base salary reductions through the end of the third quarter began with a 25% reduction for the c-suite executives a 25% reduction in the cash portion of the board of directors compensation and reductions of twelve to twenty per-cent across the rest of our businesses that are experiencing demand declines.

We have also suspended our 401K company matching payments temporarily delayed our annual salary increases and reduced discretionary and capital expenditures.

We do not take these actions lately, but they are necessary as we manage through this cycle and ensure that we retain our list of capabilities and capacity to outperform the market as a government-imposed shut down there lifted and the economy rebounds.

Before I hit it off today if I'd like to take this time to recognize and thank all of our West Coast Associates for their inspirational dedication commitment and hard work in managing through Chrysler Dave. Thank you John and good morning everyone. I'll start with an overview beginning on page four reported sales in the quarter were 0.4% off lower Outlook of 2% to 5% provided in late January result for tracking within the Outlook range through the middle of March but then dropped off the last two weeks of the quarter ending outside the range due to the impact from the global coronavirus pandemic.

We estimate that covid-19 negatively impacted sales by or fifty million dollars in the quarter.

Gross margin increased fifty basis points versus the fourth quarter of 2019 reflecting the traction. We are getting on our margin Improvement initiatives.

To adjusting for expenses related to the annex demerger. Our sg&a was down versus the prior-year due to reductions in variable compensation expense in represented an improvement to sg&a as a percentage of sales compared to the prior-year.

Adjusted operating margin was 3.3% slightly below our Outlook range due to the lower sales level during the last two weeks of the quarter. April month and date reported sales are down 16% through Tuesday, April 28th.

We continue to support our customers and they're essential businesses with growth continuing and utilities broadband and safety. We are leveraging our Global Supply Chain to Source. I saw it after personal protective equipment and have received substantial amounts of unsolicited feedback from our customers detailing our extra efforts to support their businesses.

John will provide a detailed update on the acquisition a bit later in the call as we have made substantial progress and remain on track to close in Q2 or Q3.

Turning to slide five this summarizes the organic sales growth by End Market in geography. You can see on the right-hand side that are organic sales pattern of the quarter was 2% off in both January and February followed by a decline of 9% in March.

Recall our organic sales exclude the impact of an additional work day and a quarter that added 1.6% to reported sales growth. The impact of the SLS Aqueduct was slightly positive and foreign exchange rates were approximately neutral on a net basis in the quarter looking at the sales results by geography the US which is roughly 75% of our overall Revenue was down 1% Canada was down 4% driven by construction as many local government shutdown projects starting in March.

Industrial Sales were down and up in Canada and international from the prior-year.

Getting activity was robust across our Global account Market verticals with numerous contract renewals and new winds recorded in the quarter.

The coronavirus load sales across all Market verticals beginning in the second half of March with the month ending down 14%

Additionally a number of RFP final awards were delayed until the impact of the pandemic subsides.

Our utility business had another strong quarter with sales up 9% over the prior-year.

This is the 11th consecutive quarter of growth in the United States Utility sales in Canada were up 28% We were also pleased to be awarded several large utility Alliance contracts that will be implemented in 2020.

Red reliability projects and the value of our integrated Supply Solutions continue to drive utility sales growth.

Construction Group over the prior year in January and February but declined 10% in March due to the pandemic driven project delays.

Our backlog which primarily reflects construction activity reached an all-time company record at the end of March and is up 9% over the prior-year 17% sequentially and 5% above the prior record. What around level in June 2018 giving a response to the coronavirus construction projects have been delayed rather than canceled in the overwhelming number of circumstances.

Commercial institutional and government or c i g organic sales and it down slightly for the quarter. This was after being up over 8% in January projects related to Data Center birth security and cloud computing projects with large technology customers earlier in the quarter for offset bytes decline starting in March.

Moving to slide six. Let me take a moment to provide an overview of our liquidity and some features of our borrowing facilities that position us to meet the challenges related to the economic impact of the wage virus.

Our liquidity which is comprised of invested cash and borrowing availability on our bank credit facilities is strong at $732.

In March, we do 100 million dollars on our inventory revolver and finished 1/4 with $343 of cash and cash equivalents on the balance sheet more than 2 x 2 level as of the end of June nineteen.

Collections throughout the quarter and into April had performed in line with historical trends that get reserves are also tracking consistent with historical levels.

Our current bank credit facilities are low-cost libor-based commitments and mature in September 2022 and 2024.

Our credit facilities include limited operating covenants and we easily pass the liquidity thresholds by which compliance is measured we expect our bank credit facilities will contain similar Covenant packages off a bomb near Amendment and restatement as part of the financing of the Anixter acquisition.

Between now and the closing of the acquisition our Capital allocation priorities include supporting our organic growth opportunities and repaying or holding cash available for Debt Service payment.

We do not expect utilize any remaining amounts available under our board authorized share repurchase program that matures on December 31st of this year.

Turning to slide seven. You can see that lets go has consistently generated strong free cash flow averaging more than $220 per year over the last five years and well over a one hundred percent of net income over that. This cash flow is countercyclical and Peaks during economic downturns as it did during the Great Recession in 2009 and the industrial recession in 2015 and 2016 in East years, which are outlined on the chart The company generated free cash flow of almost $275 billion dollars per year or 35% more than the other years moving to slide eight both West go and Anixter benefit from several dynamics that make it highly resilient economic cycle. This resilience is driven by three dynamics of the business model first the counter-cyclical cash flow that I discussed a moment ago.

Second they cost.

So that allows for quick adjustments in response to changing demand levels and third very low Capital expenditures given the nature of the business model over the past. Ten years West go and an extraction Capital expenditures of average less than half a point of sales.

In the current environment. This resilience is enhanced by West CO and Anixter being deemed essential businesses in the high degree of diversification by customer supplier and market and geography.

Well, what's going on Easter have proven abilities to deliver through the economic cycle as they both did from 2007 to 2011 when their net leverage was reduced to below to terms with additionally. Both companies have demonstrated the ability to use their cash flow to rapidly pay down debt following sizable Acquisitions in the case of West CO, we reduce life and half turns to 2.7 turns following the acquisition of equal in 2012 in an extreme case. It reduced leverage from 4.1 turns 2.8 turns off in the two years following its acquisition of HD Power Solutions in 2015.

Turning to slide 9 we want to highlight how much larger and more diverse Wesco is today than during the Great Recession in 2009 since 2009. Our sales tax payer has exceeded 6% in our 2019. Revenue was a record eight point four billion dollars during these years. Let's go made several Acquisitions that have dramatically Diversified the business name is notable shown on this slide. These included are entering the Broadband Communications and the additions of safety and TurnKey LED lighting solutions.

Today, let's go substantially larger and more diverse than ever before and its history and the complimentary nature of the Anixter acquisition will further diversify the combined Enterprise with that package to turn things over to John for some additional remarks. Thanks, Dave. To page ten integration planning activities for the transformational combination of what's going on. It's our our acceleration and I must tell you that we are more excited than ever about the opportunity to create the premier electrical and Datacom distribution and Supply Chain Services Company home made substantial progress on the path to close. The acquisition of Anixter committed fence financing is in place and the waiting period for hart-scott-rodino has expired. We receive regulatory approvals in turkey and Russia again earlier this month the annex are stockholders voted overwhelmingly in support of this transaction.

Remaining regulatory approvals in Canada and Mexico are in process and we're currently responding to a supplementary information request in Canada. We continue to expect to close this transaction in a second or third quarter the integration planning that began in January has rapidly evolved and today consists of dozens of joint integration teams comprised of both West going down the Personnel that are working on numerous value creation initiatives for launched upon closing.

over

100 separate initiatives have been identified and developed to be the amount of work that these teams have accomplished in a short period of time even impressive more importantly the high degree of collaboration among these teams has been inspiring and underscores the strong cultural alignment between the two companies. I would like to thank the West go and Anna stir integration team members for the great project made today. The integration planning process is uncovering a higher degree of operational synergies than we originally anticipated and the strong alignment of values and prior to cross the integration teams gives us great confidence that the future of the combined Enterprise is great.

Now moving the page eleven as we consider the future of the combined Enterprise. There are numerous ongoing an attractive secular Trends and growth opportunities off the demand for increased bandwidth driven by higher Boise State of video and mobile usage as one greater connectivity needs for remote work home and school applications as another month and the increasing electrification of our infrastructure. These are just a few of the growing secular trends that are directly aligned with the core capabilities of our home screen, but let's go ahead and start

The right hand side of this page outlines of financial benefits of this transformational combination. We are highly confident in exceeding our three-year cost-saving sales growth and cash generation Synergy targets communicated last month with the challenging economic cycle. We're facing near-term this strategic combination remains compelling as a doubling the size of our company and will transform the new Enterprise through execution of the integration plan and delivery of these synergies.

Now turning to page twelve covered a lot of material this morning before open and call up to your questions. I'd like to walk through a quick summary.

We responded with quick and decisive actions in response to the global coronavirus pandemic. Our priority is to protect our employees and we have remained laser focused on ensuring we continue to meet our customer needs and exceed their expectations while aggressively managing our business.

What do supports critical infrastructure requirements and the essential businesses of our customers around the world and benefits from the resiliency of our asset-light operating model and the counter-cyclical free cash flow generation of our business?

Let's go with substantially larger and more diverse than during the Great Global recession in 2009 or increased scale and diversity enhances our ability to meet the challenges posed by this pandemic driven cycle. We remain laser focused on what we can control our strategy our investments our team and our execution and we are confident that would be an even stronger company through this cycle as we have in the past.

and fine

The merger with Anixter remains on track to close in the second or third quarter. The quality of the integration planning work has been outstanding the evolving secular growth Trends will benefit the new comedies on on strengthened our conviction regarding our future value creation for all of our stakeholders.

With that now, let's open it up to your 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 are using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press * then two at this time. We will pause momentarily to assemble our roster.

Our first question comes from DeAndre with RBC Capital markets, please. Go ahead.

Thank you. Good morning, everyone. And I especially like these new look slides that you debuted a good morning. I hope you're staying healthy and state wage. Yes, sir, and wishing you all the same. Hey, look I fully appreciate the suspension of guidance. But you did give some color on April which was helpful and easy to put that 6 down 16% in context and some of the other Distributors who have more like safety and cleaning mix our dog like they were not down as much so if you give some color there and Dave said he called out three and markets or three verticals utilities broadband and safety being up was that after a comment sequentially was that a year-over-year? So if we could start there that would be helpful year-over-year and that's a continuation of the trend that we saw in the first quarter of those businesses.

That that they've wiped out and you know, the the few other public Distributors that you mentioned have a of a very different less than us wage. I think is you know, so when you when you you know, and so I I would say there's also another much closer competitor. It's european-based that is also reported results page and their results through April were down measurably measurement larger degree than ours are so you know, here's how I think about the 16,000 I'll give you a couple of comments and you know, I've been in this business for more than a couple of cycles and you know, I've reflected quite a bit on this going back to the great Global recession cuz that was off early CEO days, you know, this one is very different. You know, it happened quickly very quickly, obviously, you know, and a lot of the demand declines. Yep.

You're driven by government-imposed shutdowns and other businesses, you know.

Furloughing and curtailing parts of their business if you compare and contrast this to the great Global recession. We lost 25% on our top line or sales are down 25% on a full year basis in 2009. And there were times moving through that year where we saw obviously declined much greater than that in some of the worst month so long, you know, we're at a 16% level right now. It's it's been relatively stable through the month of April. So there's a little additional color. It's not like it's moved around a lot. We don't have the sales for obviously today or yesterday, but this is through with a couple days remaining we're down at sixteen. And as I said, it's held relatively stable nowhere near the levels that we took in the in the great Global recession. And and the only thing that's very different this time is our backlog of coming out of the first quarter was exceptionally strong a track record level wage.

Some of that located we didn't get all the sales obviously, but even if you adjust for that, they're still very strong. We would expected to build to build backlog. Our book-to-bill ratio is above. Well a lullaby one so far through April and that's different than the last than the great Global recession cycle, you know there we saw sales drop off and we saw a book The Village ratios fall below one. So I think you know, there is some interesting differences and you know, it's the overall shape of this record. Every you know, is is not certain it's not clear. I mean many folks have different views. We've been through it again numerous Cycles. This is we've got a seasoned management team know how to move with speed. We've been decisive adjusted the cost structure appropriately. I think it's really important to the the nature of the actions we take in this type of position of self-discipline.

While there are some parts of our business growing as they've outlined it it also the nature of the actions we've taken have positioned us to support, you know, parts of the business as long as they come back online and and there's a a return to normalcy over time.

That's really helpful. And I don't want to parse too much just for the month of April. But since you are giving some color there what is down the most and I would guess that construction is probably the one that initially was down but then we there were a number of cities who did resume construction activity, but since you are so levered to that where and how much is that played out so far it's construction being, you know, the you know, so and it's very much driven by location and what's called Geography Club. It's not it's not consistent as you as you would expect because and that's true particularly true across the u.s. And Canada for that matter because you know, our current municipalities and different locations are you know our tape, you know have different rules in terms of what could be man essential business and what the

Requirements are further business to the operator.

So, you know, we put a we put a a tremendous process in place where monitoring all that real time. We've been meeting daily with a war room, you know wasn't managing and we're positioned to really try to maximize where we can we've been deemed an essential business. So we're we're still supporting our customers and focused on meeting her needs, you know, they've got some clear challenges but it it is clearly construction and you know, and and as you saw from the q1 results to a little greater degree in Canada wage, would you saw in March compared to the u.s. In our you know in our webcast? I will say this. What's also interesting at this point. We're seeing it's a predominantly project delays and not cancellations, which is interesting. So I think that you know, that gives us some you know gives us some degree of confidence that when dead

Some of these impose shutdowns start to get relieved that the delayed project activities were looking back in.

Great, that's very helpful call or just the last question for me is for Dave. The expectation is that Industrial Distributors? Like Wesco tend to be very reliable and High free cash flow conversion companies in downturns. So the expectation is there just want to see how that is going to come through this quarter. It looks like the conversion was lighter versus your first quarter season seasonal conversion. So if you can address if there was something one time that would have skewed that things wage being level highlight a couple of things on our net working capital in the first quarter first inventory was the source of cash. So our inventory levels actually came down, you know, obviously as we started getting some preview off the impact on demand, we we took the appropriate actions to manage our inventory. Also what you saw was the shape of our sales growth within the quarter we did have a higher receivables balance off.

Which is generally consistent with what we've seen in the past. So as you can see continued to see the sequential growth from January through March, we generally tend to have a cash draw due to receivables but that going back to your point, you know, as we go through this downturn we fully expect that we will generate significant free cash flow primarily driven by our working capital plans. We're laser-focused on that our teams doing it took a job managing the controllables the inventory and managing the collections coming in. So we're very comfortable that our model will retain intact.

Thank you and best of luck to everyone.

Our next question comes from Sam. With Raymond James, please go ahead.

Good morning, John. Good morning, Dave and obviously which in good health to you both and to your entire organization three quick questions. If I if I'm an adult me first, your your your largest vendor eaten obviously has some a fair amount of exposure to Mexican manufacturing with wage forced production shutdowns. Are you seeing any issues with extended lead times or or fill rate degradation either with us or throughout the supply chain from folks in Mexico?

San first let me I hope you and your family are staying healthy and safe with the start start with that. That's about most important. Thank you for the question. You know, we we have in Mexico the rules the rules and the regulations and the direction relative to how certain businesses have been operating it, you know have been a bit more stringent than I would say than and eating like some of our other suppliers that have Mexican based manufacturing. I have done it done an exceptional job of managing their operations that are mexico-based. So, you know at this point, you know, we've remember when you think of the whole value chain, we got, you know, we've got into our rooms we're running we've had demand drop off in certain areas and then you know, we've we've got very robust set of doors are very focused on inventory birth.

Availability and fill rates and and so there's there's sufficient inventory. I think in the value chain, with our supplier Partners who are in Mexico eating at the top of the list, we're doing an exceptional job of managing given the, you know, given the rules regulations and constraints that they're dealing with so so far, I would say that you know, and this is this is more demand side driven than supply side door at this point. Got you second question for Dave if I might the six hundred million dollars in a year three free cash flow was good to see although obviously there are some counter-cyclical elements to free cash flow. So I'm trying to unpack what the the macro assumptions you're making to get up at six hundred million dollar assumption Dave what sort of organic growth rates or organic sales base or you looking at in year three versus let's say 2019 p

What kind of a macro backdrop would be required to to hit that six hundred billion dollars on a sustained basis as opposed to a a working capital driven basis Sam clearly. We're not providing a 2020 Outlook. It's a great question. I think the way that I would ask that you think about this is look at the history and when you take a look at the cash flow generation of these combined companies just looking at you know, some of the data that we've already provided, you know, you're looking at almost four hundred million dollars historically and free cash flow generation add on top of that page got two hundred million dollars of cost synergies on top of that that gives us the confidence. We've run several scenarios on how we would get to the accretion dilution. We're not going to provide that information off today, but we're very confident in our ability to generate that greater than six hundred million dollars of free cash in the out years.

My last question if I might the stock has recovered a bit of late. Is there a price and if so, generally speaking, where is it John Page where you might reconsider using Equity financing beyond the preferred in order to finance the Academia and extra deal.

As you know salmon I think is the market understands. We we moved to all debt financing again. We're highly confident in the resiliency of our business model and the strong free cash flow generation and with Full Speed Ahead with percent financing.

Very good. Thank you. Thank you both. Thank you Sam.

Our next question comes from Luke junk with bared, please. Go ahead. Good morning guys. Good to hear from you about.

So Jana a two-part question to start here first. Can you remind us of the breakdown between fixed and variable costs and especially relative to the current environment and then second you were very quick to act on costs back in 2009 and I'm just wondering how much you think you can move the needle right now the actions you've outlined this morning and specifically if you have some sort of detrimental margin Target mine Google Google next second question. I missed a little part of that. Can you can you restate the front end of that? I miss them. Yeah, so just said, you know you were quick to act on the cost front back in 2009 and I'm just wondering how much you can move the needle right now with the actions you've outlined so far specifically whether you have some sort of detrimental Arjun Target garden and Dave and Luke again. I hope you and your family are healthy and safe. I'll start by saying that uh,

This is a really important point. I think the there's one thing that makes this time in this part of this cycle very very different. And that is Thursday. We're we're pursuing the strategical transformational combination with Anixter. So our efforts are very focused on aggressively. Getting too close and closing that transaction. We remain on track for Q2 and Q3. Why did I start answering the question that way it's important to understand this. It's fundamentally we're going to use the integration plan and the delivery of the Synergy as our quote-unquote restructuring month. It's going to be a new CO as we've outlined in in in detail. And so that's really important to understand well doubling the size of the company overnight birth.

And then we're you know, all this terrific ones are doing now is to prepare for a one execution Flawless day one execution one of our top three priorities off execution of the Synergy start on day one.

And so we've been very clear on on the $200 million being a floor commitment and we're driving up sides to that for costs energy to loan and we outlined $68 million as the floor dead set up for 4 year while and so that's the way that that's the way we're thinking about fundamentally re-engineering restructuring the Enterprise. We're going to do it in conjunction with the integration and execution. It's a really important point point. One point too is we moved with great speed. We think I'm taking these variable cost actions and their substantial on a go-forward basis, you know, they're they're substantial and but we we in doing it the way we did it we're preserving the capacity and capability to support parts of the business that recover quickly well or equal growing in some parts of the business and

In some cases. We you know, we're being

Very careful to make sure we're adding some capacity to support very strong Demand. Being in in safety and parts of utility and Broadband, but we want to be able to have that quick survey reaction quicker response surge capacity to support demand as it as it comes back online again, you know the nature of some of these shutdowns and I think about a project delay once once workers are allowed back on site, even if there is some spiritual distancing protocols. It's still a place that then picks the project back in two years. We've got to be able to meet that surge capacity. So it's really as a second Point third point is that we did take some some some cost permanent cost production action sequentially in the quarter and it was roughly, you know a little over 50% out. Where were addressed sequentially in the first place.

In the end of March versus entering a year, so we constantly manage and look at our Workforce and our cost structure and always refining so so there's a framework for that day. You may want to come back and address first part of this question a bit just in terms of a variable vs. Fix. Sure looking at our sg&a. Our people cost is roughly 70% of the total the next two largest buckets are are logistical footprint. So our our real estate and occupancy costs followed by Transportation, which obviously transportation is variable, you know, so clearly as we think about our cost actions that we've been pulling the luggage more. So on the people cost in the near-term as we go through the NX or integration, one of the things that we highlighted was the the potential to consolidate the logistical footprint, which will attack the longest cost with occupancy.

Okay, that's a lot of really helpful color guys second, maybe a a bigger picture question on the competitive environment that you're seeing right now. Just curious if there is any access to anecdotes you can share on how smaller Distributors are faring right now or maybe more importantly sure gain opportunities for a larger company like Wesco given the current disruption. Thanks. So, you know, it's really interesting again. We've been through a numerous Cycles in our tenure and you know, this one is is is interesting in that same degree of variation in terms of you know, some of our customers, you know our operational and there's very strong band and we've got to support them other customers parts of their business office. It has strong demand and then we got to support them. And in other customers are are you know have completely shut down, you know their projects or or the plants so, you know and that for that

What in that that's the environment that that thousands and thousands of Electrical Distributors that we compete with at a local and Regional level and US and Canada are face off cuz it kind of a wide degree of variation that that's the first point I would make the second point that I would make is in this we have talked about this for months sometime and I think now more than ever given the kind of the nature of what drove this site was driving this psycho. This will increase and put an importance dramatically and we're hearing it from our customers. I think it's just going to build from here and that is supply chain integrity.

So I just see that.

Increasing dramatically because when you look at what's happened in this particular crisis, you know, obviously there's been the man some planned destruction and it varies by a market vertical but there's also wage and supply chain disruptions and supply chain driven constraints has caused it impacted the global supply chain. So we allude to that on on that that last page right before the summary about the emerging new new and emerging secular growth trends that we think are, you know, absolutely will benefit both West Palm usually in clearly on a combined basis. And so I think that's just a really important thing to understand because we we've been able to utilize our very strong sense of supplier relationships and our Global Supply Chain capabilities to support customer needs in this cycle. That's far when when the global supply chain has dead.

Very challenging the manager navigate but we've been able to use our tremendous relationships with our Global supplier partners and our supply chain overall supply chain capabilities to provide much-needed products and and supplies that our customers are demanding even in this challenging part of the cycle. And that's why we spiked out a few of those examples. The only final point I would make is and this is you know, this has been reported. But you know there there are there are some Distributors that I think are are are facing some, you know, significantly challenging times and our and our more distressed and others. And again, I think it comes down to is where they geographically located position. What position was their balance sheet in as Iraq during this cycle?

Our next question comes from Nigel Cole with wolf research, please. Go ahead. Hey, good morning everybody. It's Brian for Nigel this morning first. Can we just talk a little bit about pricing down in the quarter? Maybe by End Market or geography and then how that's also trended through April so far.

Yeah, good morning. Just provide you for the first quarter pricing had very limited impact on our overall result. So we saw a couple increases in some product categories that was offset by some declines and other so it ends up being slightly positive, but we would call it neutral didn't round up the one obviously and we can't provide that through a page this point.

Okay, thanks for that. And then just touching on the the new secular Trend the emerging secular Trends. Could you talk a little bit more about that supply chain relocating to South America and what you've seen so far from customers and and things like that.

So, you know, it's it's

this is kind of early days of of what we think will be an emerging and growing a secular Trend, you know, really that the challenges that that the value change facing right now is is scrambling for the critical products and supplies that are needed to keep those customers and operations running that that you know that are still running at this point of the cycle. And you know, we've we did some sixteen Acquisitions go back five to ten years ago. We've got these terrific set of relationships and been able to provide, you know, the the critically important personal protective equipment to our customers and employees. And so, you know, I think right now he's the most of the activity and energies around how do we support the customers that are growing not just by us its by everyone and ensure that the supply chain is

not construct

Waiting constraining the operations of our customers that have critical demand requirements to me, but it is clearly taking a look at clearly company that up and down the value chain worried hearing many discussions about our take a look at okay because because there are challenges with the global supply chain in terms of overall delivery with integrity and and and capability of let's have we you know, how do we ended up getting dislocated Global Supply chains that need to be rethought quite frankly a lot of these activities started with the with the implementation of Paris. So, you know, when terrorists were implemented, you know number of our supplier Partners started looking at their Global footprint began to optimize the supply chains a bit differently given given the terrorists that were involved and now you have this this pandemic driven off.

Um supply chain disruptions and dislocations and demand drops later layered on top of that and it's just it's just we believe it's just going to accelerate very, very comprehensive view of Global Supply chains and really it's becoming more of a risk management matter. So it's our customers are saying look for my risk management perspective. We need to ensure that we had Integrity of a supply we've talked about this at length over the years. That's where that's where a large Global Community Wholesale Distributor like a lot go like at Anixter for that matter, but has it has her epic array of global supply chain relationship is very well positioned to support that emerging what we think is an emerging in a separate room going forward and when you put our two businesses together, and we double up the size of the company and we are our Global our Global wage.

Footprint and capabilities expanded expands on as a result of that. We're even in a better position to support our customer.

Great, appreciate the color and stay safe.

Our next question comes from Patrick with JPMorgan, please go ahead. Hi John I Dave good morning. Thanks for taking my question. Hope your day off and say that to you and your family do my best. Thanks. Same to you. Maybe we could touch on did you quantify the cost to you expect to come out from a an issues you cited in terms of sg&a dollars or what have you?

That's okay. It's Dave shells. I'll provide some framework. So overall the the people costs related actions that we've implemented, you know for the balance of the Year. We're looking at approximately fifty million dollars of cost reductions. And that is a combination of the 401K the reductions to offer salaries and wages that we highlighted which is currently expected through the end of the third quarter and then some additional cost actions that were taking to better manage our organization given the downturn. So what ground I would call the people really the cost of fifty million dollars for the balance of 20 $20.

Okay, so that's over the last three quarters. You'll have fifty million in savings, basically.

Correct. And again, some of these initiatives will not be fully implemented until the beginning of Q3. So you won't see the full benefit here in the second quarter.

for example are well because of you guys effective Market impacting date of the reductions agree outlined on on the the first page, you know, you can see that a number of them were implemented prior, you know up to this point, you know, as I said, we took some permanent headcount actions in the first quarter some actually started to be starting to take off late first quarter inch in April, but the other majority of these actions are effective as outlined on that first page,

Understood and and my second my follow-up is I appreciate all the color on the Mazda date April super helpful. Just looking forward. I guess if this persists or or even a little bit worse as the year moves forward and I'm just going to throw a number out here. Let's see if it dies down 30% you know, cuz things have gotten a lot worse just curious about how you describe your ability to endure net leverage that you know could approach, you know, High single digits PostalAnnex. They're closed. Triggle triggers anything with you know, debt covenants or anything like that and you know on this front with you know, the stock historically trading at eight times evde. Could It ultimately impact the way you guys decide to go about with the proceeds fix or or the equity component small enough now that it doesn't really matter to getting the deal closed.

So there's a lot there's a lot of questions wrapped up in that question. So I'll dress the front end debut address the back of the front end. We've been through a series of psycho previously, you know, you share more than a decade now, that's neither good nor bad except to say that I did I did I was at the helm of went through the grass and again our sales levels we're down as I said 25% range across the whole year end, you know, the average that across the whole year to have that kind of four years. It was Dale higher than that as we move a different parts of the year. And we we took a series of actions in waves throughout that year and we're very aggressive with adjusting our cost structures. I picked up a little bit but we also produce very strong free cash flow because of the nature of our business model and then we pivoted pretty quickly in 2010 in the place.

Offense and then experienced a an outstanding run over the next several years a very strong growth. We start playing offense, you know when when others hadn't even begun place that quite frankly and experienced a several-year run a very strong Road outstanding pull through and so we know how to manage through cycles and off and we're taking the same actions now with that set as I mentioned earlier, there is one big difference and that is we're going to double size of this company for the transformational acquisition. I have a combination with Anixter and that puts us in a very unique position. We think it's even more compelling now this combination because the integration plan execution in Synergy delivery will be our restructuring that we have that we've reaffirmed here today in terms of the outstanding value creation potential with delivering the various cost synergies.

the cash generation synergies three years out

Cuz if you want to maybe try time to time in question or answer close with with the leverage, yeah certainly so, you know clearly these are uncertain times and you know, we've run multiple scenarios Thursday, we're confident that we can drive leverage close the acquisition to our Target Range Rover suitable period of time, you know, our goal is to get within that range within 3 years that will obviously be impacted by the economics at the time. So what's the shape of a recovery? What are the out years looking like but we're very confident in the counter-cyclical cash flow model of the combined company and again looking at the history these two companies combine generated over two billion dollars of free cash flow from before the Great Recession to 2011 add to that. We're also going to have eight million dollars it cost synergies and you know again, so we're confident that we'll be able to manage to The Leverage going forward. Okay, but appreciate the answer, but yep.

So there's no just just to be clear. There's no like trigger, you know, in terms of the leverage if it's a certain level does it does it trigger anything with you know your debt company? I'm not sure we have no leverage Providence. We don't expect to have leverage governance with the financing and that's that's that's why we put that page in the deck past, you know, if you go back and look we've we've both lines very clearly, you know, what the strong balance sheet page strong gravity trades, which is paid 6 which talks about our current facilities the structure of those it's Covenant very covenant-lite and Dave mentioned we expect that. You know, our new facilities will be very similar to those in and off. I think what's really important understanding, you know in-game touched upon it is that, you know, particularly for our inventory revolver and accounts receivable securitization. These are very dead.

Hi quality assets, you look at our underlying inventories and how they perform through all the cycles and our inventory, you know inventories are very strong. And we've not our inventories are not subject to an overall deflation every factor or a fact so that represents a very strong kind of backstop for the inventory revolver and Thursday our securitization. Again, we have an outstanding array of customer relationships Blue Chip companies and that backstops RAR securitization. So again, no leverage Covenant Covenant light outline clearly on that page. Yeah, I guess I guess it should read the slides before asking my question. Thanks a lot. I appreciate the color.

Our next question comes from Blake Hershman from Stevens, please go ahead.

Yeah, good morning guys morning. First off. I think you guys were hopeful that gross margins would expand this year. That was obviously a few months back and change a lot of things have changed. So I was just kind of looking for update there. If there's any kind of reasonable way to frame up how those might be kind of

Aspire to the rest of the year and part to being if there's any commentary around how they've looked thus far in life, you know as sales have kind of pulled back. Thanks. So look, we don't guy growth margins. So we're not going to guide him on this call. I'll answer it that way but I will say we're pleased with this point the gross margin expansion. It's up sequentially in q1 versus to Fort we do think we're getting really, you know, we don't we got and we did get very good traction on our margin Improvement initiatives. We have been talking about for a few quarters of the back the back end of last year of that time. I get back to that time like effect started working to our advantage here in Tijuana and coupled with traction off an improvement initiatives and margins was held up thus far in April. So they're they're allowing and are are holding up consistent with q1. So it's a good start in the corner pub.

Yeah, we're not going to die from you right now. We're not going to guide it from there, but they're holding up nicely.

Okay, great. Thanks for that. I'll turn it back on.

Our next question comes from Hands-On Missouri from Jefferies, please go ahead. Hey, good morning. Hope you guys are healthy and safe my Honda birth family. Yes. Thank you so much. My first question is just around when you think about the Anixter integration. Have you contemplated combining? The sales force is that in the Synergy number of 200 million is this product? I guess there is some overlap on the revenue side. Have you thought about one sales force on cross-selling or is that who complicated I mean certain past deals have had trouble with that some haven't but but just curious on your view on a great question. Thank you for that and you know

It's we outlined and this was back in the early March time frame when we had we schedule a specific investor call back that that outlined, you know was an eight to ten page deck and Dave and I took all the investors through the Anixter transaction that can be attributed of that of this transformational combination. And the reason I'm referencing that is I'll take you back to a page that in that decade still out there in in the public domain. Obviously. It's just lined the recalled the detailed execution plans delivered or two hundred million dollars of an ounce, and and when you look at that that 200-plus million of which again, we're very pleased we're seeing upsides to that. We're going to drive up sides against that but if you look at it did not include the sales force.

Okay, it was.

It was g n a corporate overhead supply chain and field operations. And that was more around the back end of the business office, but not the front end not front end being a sales Sales Management et cetera relatives in the front end of the business. You you you beg a good beg a great question, which is around the cross-selling opportunities. The cross-selling opportunities are substantial and we also outlined categorically to different areas of cross-selling opportunities in that presentation. So in an office focused on delivering top-line growth Synergy, so that's where our focus is on the sales force to really take, you know, aggressively work the cross-selling opportunities and when we get to to close obviously once the transaction closes as we committed to when we when we outlined, you know, the compelling attributes of this deal, you know, yep.

Providing very clear markers. Here's here's all the elements of the of the various costs energy plan the sales growth synergies and the cash generation off and won't be measuring ourselves publicly on our progress against all three.

That's that's very helpful. Just a follow-up question. I'll turn it over. You know, John you mentioned project delays. No cancellations so far. There's there's the life of the duration of of of of the recession change that or or are these sort of projects that have already are too far along or are essential infrastructure there that they you know, they just keep getting pushed out versus you know, outright canceled. Yeah, I would say, you know, if they are experiencing prior Cycles, I would not expect it would be similar to hear that, you know, when things are delayed. They typically aren't canceled. The only thing I will say is that you know, there are certain and Market verticals in the industry. I'm replacing You Know Much Greater challenges than others and so in some of those verticals, you know, there may be some revisiting of dead.

What is it was in the early days in a just gotten started? It may be easier to cancel than one that's you know, twenty twenty-five Thirty 35% you know through execution, but by and large, you know, I I think what we expect is that the the delay is is just data delay started. Thank you so much. Take care, right? Okay includes our question-and-answer session. I would like to turn the call back over to John angle for any closing remarks.

Thank you all for your time this morning. Again Brian and will be available to take your questions. We look forward to being able to meet with you in person. As our office after events eventually resumed. Obviously, we're available to to have our product meetings and and as well as virtual meetings and absolutely will be responsive in that regard. In the meantime. Please stay healthy and safe and our best to you and your family. Have a great day.

for instance now concluded thank you for attending today's presentation you may now disconnect

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