WESCO International (NYSE:WCC) Q1 2020 Earnings Call

0:00 Good day and welcome to the Wesco First Quarter 2020 Earnings Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist 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 star then one on your touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over To Will, Ruth Ruff, please go ahead.

0:33 Thank you, Brandon. Good morning, ladies and gentlemen. Thank you for joining us. Joining me on today's call are John Engel, Chairman, President, and CEO, and Dave Schulz, Senior Vice President and Chief Financial Officer. This conference call includes forward-looking statements, and therefore actual results may differ materially from expectation. Please see the webcast slides for additional risk factors and disclosures. For additional information on Wesco International, Please refer to the company's SEC filings, including the risk factors described therein. The following presentation includes a discussion of certain non-GAAP financial measures. Information required by Regulation G of the Exchange Act with respect to such non-GAAP financial measures can be obtained via WESCO's website at wesco.com.

1:18 Means to access this conference call via webcast was disclosed in the press release and was posted on our corporate website. Replays of this conference call will be archived and available for the next seven days.

1:28 With that, I'll turn the call over to John Engel.

1:32 Thank you, Will. Good morning, everyone, and thank you for joining us for today's call. On behalf of LESCO, I hope that all of you have been staying healthy and safe in these challenging times. We've prepared a thorough update for you today. I'll lead off with a few introductory remarks. Then Dave will take you through our first quarter results, and then I'll return to provide some 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 actions centered on three top priorities.

2:20 Number one, protecting our employees. The health and safety of our employees is always our top priority, and we took the necessary steps to implement increased safety, sanitizing, and social distancing protocols, as well as remote work and shifting strategies to provide continuity to our operation. For our branches and distribution centers, we implemented a blue team, white team approach, where half of the team works in the facility at a 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 for our frontline employees. Number two, super serving our customers. We implemented our business continuity plan and have kept all U.S. and Canadian facilities operational to serve our customers and their 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 utilized our global scale and our supplier relationship to procure personal protective equipment for our customers and our employees.

3:36 I want to emphasize that Wesco provides mission-critical electrical, industrial 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 chain. And number three, our 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. Effectively, May 1st, we are implementing temporary broad-based salary reductions through the end of the third quarter, beginning 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 12% to 20% across the rest of our businesses that are experiencing demand decline.

4:42 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 lightly, but they are necessary as we manage through this cycle and ensure that we retain our LISCO capabilities and capacity to outperform the market as government-imposed shutdowns are lifted and the economy rebounds. Before I hand it off to Dave, I'd like to take this time to recognize and thank all of our Wesco associates for their inspirational dedication, commitment, and hard work in managing through this crisis. Dave.

5:26 Thank you, John, and good morning, everyone. I'll start with an overview beginning on page four. Reported sales in the quarter were up 0.4% below our outlook of 2% to 5% provided in late January. Results were 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 over $50 million in the quarter. Gross margin increased 50 basis points versus the fourth quarter of 2019, reflecting the traction we are getting on our margin improvement initiatives. After adjusting for expenses related to the annexed merger, our SG&A was down versus the prior year due to reductions in variable compensation expense and represented an improvement to SG&A as a percentage of sales compared to the prior year.

6:25 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 of date reported sales were down 16% through Tuesday, April 28th. We continue to support our customers and their essential businesses with growth continuing in utilities, broadband, and safety. We are leveraging our global supply chain to source highly sought 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 Anister acquisition a bit later in the call, as we have made substantial progress and remain on track to close in Q2 or Q3.

7:17 Turning to slide five, this summarizes the organic sales growth by end market and geography. You can see on the right-hand side that organic sales pattern of the quarter was 2% growth in both January and February, followed by a decline of 9% in March. We call our organic sales exclude the impact of an additional workday in the quarter that added 1.6% to reported sales growth. The impact of the SLS acquisition 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 U.S., which is roughly 75% of our overall revenue, was down 1%.

8:04 Canada was down 4% driven by construction as many local governments shut down projects starting in March. Industrial sales were down in the U.S. and up in Canada and international from the prior year. Bidding activity was robust across our global account market verticals with numerous contract renewals and new wins recorded in the quarter. The coronavirus slowed 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 subside. Our utility business had another strong quarter with sales up 9% over the prior year.

8:49 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. RID reliability projects and the value of our integrated supply solutions continue to drive utility sales growth. Construction grew 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 quarter end level in June 2018.

9:39 Given the response to the coronavirus, construction projects have been delayed rather than canceled in the overwhelming number of circumstances. Commercial, institutional, and government, or CIG, organic sales ended down slightly for the quarter. This was after being up over 8% in January. Projects related to data center builds, security, and cloud computing projects with large technology customers earlier in the quarter were offset by 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 coronavirus.

10:24 Our liquidity, which is comprised of invested cash and borrowing availability on our bank credit facilities, is strong at $732 million. In March, we drew $100 million on our inventory revolver and finished the quarter with $343 million of cash and cash equivalents on the balance sheet, more than 2x the level as of the end of 2019. Collections throughout the quarter and into April have performed in line with historical trends. that debt 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 covenant, and we easily pass the liquidity thresholds by which compliance is measured.

11:17 We expect our bank credit facilities will contain similar covenant packages following their amendment and restatement as part of the financing of the annexure acquisition. Between now and the closing of the annexure acquisition, our capital allocation priorities include supporting our organic growth opportunities and repaying or holding cash available for debt repayment. We do not expect to 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 Wesco has consistently generated strong free cash flow, averaging more than $220 million per year over the last five years and well over 100% of net income over that period.

12:07 This cash flow is counter-cyclical and peaks during economic downturns as it did during the Great Recession in 2009 and the Industrial Recession in 2015 and 2016. In these years, which are outlined on the chart, The company generated free cash flow of almost $275 million per year, or 35% more than the other years. Moving to slide eight, both Wesco and Anixter benefit from several dynamics that make it highly resilient to economic cycles. This resilience is driven by three dynamics of the business model. First, the countercyclical cash flow that I discussed a moment ago. Second, a cost structure 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 10 years, Wesco and Anixter capital expenditures have averaged less than half a point of sales.

13:09 In the current environment, this resilience is enhanced by Wesco and Anixter being deemed essential businesses and the high degree of diversification by customer, supplier, and Markit and Geography. Both Wesco and Anixter have proven abilities to deleverage through the economic cycle as they both did from 2007 to 2011 when their net leverage was reduced to below two turns. Additionally, both companies have demonstrated the ability to use their cash flow to rapidly pay down debt following sizable acquisitions. In the case of Wesco, we reduced leverage from 4.5 turns to 2.7 turns following the acquisition of Ecole in 2012. In Annexer's case, it reduced leverage from 4.1 turns, 2.8 turns, into two years following its acquisition of HD Power Solutions in 2015.

14:06 Turning to slide nine, we want to highlight how much larger and more diverse Wesco is today than during the Great Recession in 2009. Since 2009, our sales care has exceeded 6% and our 2019 revenue was a record $8.4 billion. During these years, Wesco made several acquisitions that have dramatically diversified the business, with the most notable shown on this slide. These included our entry into broadband communications and the additions of safety and turnkey LED lighting solutions. Today, Wesco is substantially larger and more diverse than ever before in its history, and the complementary nature of the Anixter acquisition will further diversify the combined enterprise. With that, I'd like to turn things over to John for some additional remarks.

14:54 Thanks, Dave. Turning to page 10. Integration planning activities for the transformational combination of Westville and Anixter are accelerating. And I must tell you that we are more excited than ever about the opportunity to create the premier electrical and data comm distribution and Supply Chain Services Company. We've made substantial progress on the path to close the acquisition of Anixter. Committed financing is in place and the waiting period for Hart-Scott-Rodino has expired. We received regulatory approvals in Turkey and Russia and earlier this month the Anixter stockholders voted overwhelmingly in support of this transaction. The remaining regulatory approvals in Canada and Mexico are in process and we're currently responding to a supplementary information request in Canada.

15:42 We continue to expect to close this transaction in the 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 WESCO and ANISTA personnel that are working on numerous value creation initiatives for launch upon closing. Over 500 separate initiatives have been identified and developed to date. The amount of work that these teams have accomplished in a short period of time is 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 Wesco and Anister integration team members for the great progress they've made to date.

16:32 The integration planning process is uncovering a higher degree of operational synergies than we originally anticipated. and the strong alignment of values and priorities across the integration teams gives us great confidence that the future of the combined enterprise is bright. Now moving to page 11. As we consider the future of the combined enterprise, there are numerous ongoing and attractive secular trends and growth opportunities. The demand for increased bandwidth driven by higher voice data, video and mobile usage as one. Greater connectivity needs for remote work, home, and school applications, as another. 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 these two businesses, that being Lesko and Anixter.

17:29 The right-hand side of this page outlines the financial benefits of this transformational combination. We are highly confident in exceeding our three-year cost savings, 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 we're doubling the size of our company and we'll transform the new enterprise through execution of the integration plan and delivery of these synergies. Now turning to page 12. We've covered a lot of material this morning. Before opening the 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.

18:16 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. Lesko 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. Lesko is substantially larger and more diverse than during the Great Global Recession in 2009. Our increased scale and diversity enhances our ability to meet the challenges caused by this pandemic-driven cycle. We remain laser focused on what we can control, our strategy, our investment, our team, and our execution.

19:10 And we are confident that we will emerge an even stronger company through this cycle as we have in the past. And finally, 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 company and have 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 star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys.

19:57 To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Dean Dre with RBC Capital Market. Please go ahead.

20:14 Thank you. Good morning, everyone. And I especially like these new look slides that you debuted today.

20:21 Thank you, Dean. Good morning. I hope you're staying healthy and safe.

20:25 Yes, sir, and wishing you all the same. Hey, look, fully appreciate the suspension of guidance, but you did give some color on April, which was helpful. And we're trying to put that down 16% in context. And some of the other distributors who have more like safety and cleaning issues, Mix are, it looked like they were not down as much. So if you give some color there, and Dave said he called out three end markets or three verticals, utilities, broadband, and safety being up. Was that a comment sequentially? Was that a year over year? So if we could start there, that'd be helpful.

21:05 Yeah, sure, Dean. That's year over year, and that's a continuation of the trend that we saw in the first quarter, those businesses that Dave spiked out. And The few other public distributors that you mentioned have a very different list than us, I think, as you know. And so I would say there's also another much closer competitor that's European-based that has also reported results, and their results through April were down measurably significantly. a measure of a larger degree than ours are. Here's how I think about the 16%. I'll give you a couple comments.

21:53 I've been in this business for more than a couple cycles. I've reflected quite a bit on this going back to the Great Global Recession because that was in my early CEO days. This one's very different. It happened quickly, very quickly, obviously, and a lot of the The demand declines are driven by government-imposed shutdowns and other businesses 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. Our sales were down 25% on a full-year basis in 2009. And there were times moving through that year where we saw, obviously, declines much greater than that. We're at a 16% level right now.

22:47 It's been relatively stable through the month of April. 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 yet, but this is through. With a couple days remaining, we're down at 16, and as I said, it's held relatively stable. Nowhere near the levels that we saw in the great global recession. and the other thing that's very different this time is our backlog coming out of the first quarter was exceptionally strong at record levels. Now, some of that was we didn't get all the sales, obviously. But even if you adjust for that, they're still very strong. We would have expected the bill backlog. Our book-to-bill ratio is above, well above, well above one so far through April.

23:34 And that's different than the last, than the great global recession cycle. There we saw sales drop off and we saw books and bills ratios fall below one. So I think there is some interesting differences. The overall shape of this recovery is not certain. It's not clear. I mean, many folks have different views. We've been through, again, numerous cycles. We've got a season management team. We know how to move with speed. We've been decisive. We've adjusted the cost structure appropriately. I think it's really important, too, the nature of the actions we've taken this time position us, though, to support that while there are some parts of our business growing, as Dave outlined, also the nature of the actions we've taken have positioned us to support You know, parts of the business as they come back online and there's a return to normalcy over time.

24:38 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 there were a number of cities who did resume construction activity. But since you are so levered to that, where and how has that played out so far?

25:04 It's construction, Dean. And it's very much driven by location and what's called geography. So it's not consistent, as you would expect, because... and that's particularly true across the U.S. and Canada for that matter because different municipalities and different locations have different rules in terms of what is deemed an essential business and what the requirements are for those businesses to operate. So we put a tremendous process in place where we're monitoring all that real time We've been meeting daily with a war room management approach, and we're positioned to really try to maximize where we can.

25:57 We've been deemed an essential business, so we're still supporting our customers and focused on meeting their needs. They've got some clear challenges. But it is clearly construction, and as you saw from the Q1 results, to a little greater degree in Canada, which you saw in March compared to the U.S. in our webcast. I will say this. What's also interesting at this point we're seeing is it's predominantly project delays and not cancellation, which is interesting. So I think that gives us some degree of confidence that when Some of these imposed shutdowns start to get relieved that the delayed project activities will kick back in.

26:50 Great. That's a very helpful caller. Just 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 Thank you, Dean. I'll highlight a couple of things on our networking capital in the first quarter. First, inventory was a source of cash, so our inventory levels actually came down.

27:35 You know, obviously, as we started getting some preview of the impact on demand, 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, which is generally consistent with what we've seen in the past. So as you continue to see the sequential growth from January through March, we generally tend to have a cash draw due to receivables. But going back to your point, 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 team's doing an excellent job managing the controllables, the inventory, and managing the collections coming in. So we're very comfortable that our model will retain intact.

28:24 Thank you, and best of luck to everyone.

28:27 Thanks, Dean. Our next question comes from Sam Darkatch. with Raymond James. Please go ahead.

28:35 Good morning, John. Good morning, Dave. And obviously wishing good health to you both and to your entire organization. Three quick questions, if I might, if you would indulge me. First, your largest vendor, Eaton, obviously has a fair amount of exposure to Mexican manufacturing with forced sales. production shutdowns. Are you seeing any issues with extended lead times or fill rate degradation either with Eaton or throughout the supply chain from folks in Mexico? Sam, first let me, I hope you and your family are staying healthy and safe.

29:20 Let's start with that. That's of utmost importance. Thank you for the question. You know, we have in Mexico, The rules and the regulations and the direction relative to how certain businesses have been operating have been a bit more stringent than I would say than the U.S. And Eaton, like some of our other suppliers that have Mexican-based manufacturing, has done an exceptional job of managing their operations that are Mexico-based. So at this point, remember when you think of the whole value chain, we've got two algorithms we run, we've had demand drop off in certain areas, and then we've got a very robust set of inventories, and we're very focused on inventory availability and fill rate. And so there's sufficient inventory, I think, in the value chain, coupled with our supplier partners who are in Mexico eating at the top of the list who are doing an exceptional job of managing given the regulations and constraints that they're dealing with.

30:38 So far I would say that this is more demand-side driven than supply-side driven at this point. Gotcha. Second question for Dave, if I might. The $600 million in year three free cash flow was good to see, although obviously there are some I'm trying to unpack what the macro assumptions you're making to get to that $600 million assumption, Dave. What sort of organic growth rates or organic sales base are you looking at in year three versus let's say 2019? What kind of a macro backdrop would be required to hit that $600 million on a sustained basis as opposed to a and more.

31:28 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 some of the data that we've already provided, you're looking at almost $400 million historically in free cash flow generation. Add on top of that that we've got $200 million 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 to you today, but we're very confident in our ability to generate that greater than $600 million of free cash in the out years.

32:11 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 and Dave, where you might reconsider using equity financing beyond the preferred in order to finance the annexure deal? As you know, Sam, and I think as the market understands, we move to all-debt financing. Again, we're highly confident in the resiliency of our business model and the strong free cash flow generation, and we'll see ahead with 100% debt financing.

32:48 Very good. Thank you both.

32:50 Thank you, Sam. Our next question comes from Luke Junk with Baird. Please go ahead.

32:58 Good morning, guys. Good to hear from you both. Good morning, Luke. So, John, a two-part question to start here. First, can you remind us of the breakdown between fixed and variable costs in your SG&A, 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 with the actions you've outlined this morning, and specifically if you have some sort of decremental margin target in mind. So, Luke, on that second question, I missed a little part of that. I apologize. Can you restate the front end of that? I missed that. Yeah, so I 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

33:47 with the actions you've outlined so far, specifically whether you have some sort of decremental margin target.

33:53 So I'll start, and Dave and Luke, again, I hope you and your family are healthy and safe. I'll start by saying that this is a really important point. I think there's one thing that makes this time and this part of this cycle very, very different, and that is were pursuing a strategical, transformational combination with Annexter. So our efforts are very focused on aggressively getting to 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. Fundamentally, we're going to use the integration plan and the delivery of the synergies as our quote-unquote restructuring.

34:51 It's going to be a new co, as we've outlined in detail. And so that's really important to understand. We're doubling the size of the company overnight once upon a close. And then we're, you know, all this terrific work we're doing now is to prepare for day one execution, flawless day one execution is one of our top three priorities. and the execution of those synergies start on day one. And so we've been very clear on the 200 million being a floor commitment and we're driving upsides to that for cost synergies alone and we outlined 68 million as the floor kind of for year one. And so that's the way we're thinking about fundamentally reengineering, restructuring the enterprise We're going to do it in conjunction with the integration and execution. It's a really important point.

35:49 Point one. Point two is we've moved with great speed, we think, on taking these variable cost actions. And they're substantial. On a go-forward basis, you know, they're substantial. But in doing it the way that we did it, we're preserving the capacity and capability to support are all parts of the business that recover quickly. We're growing in some parts of the business, and in some cases we're being very careful to make sure we're adding some capacity to support very strong demand, not being in safety and parts of utility and broadband. But we want to be able to have that quick reaction, quick response surge capacity to support demand as it comes back online. Again, you know, the nature of some of these shutdowns, and when you think about a project delay, once workers are allowed back on site, even if there's some social distancing protocol that's still in place, that then takes the project back into gear, and we've got to be able to meet that surge capacity. So it's really, that's a second point.

37:01 Third point is that we did take some permanent cost reduction actions sequentially in the quarter, and It was roughly a little over 50 personnel were addressed sequentially in the first quarter, end of March versus entering the year. So we constantly manage and look at our workforce and our cost structure and are always refining. So there's a framework for that. Dave, you may want to come back and address the first part of this question a bit just in terms of variable versus fixed.

37:37 Sure. Looking at our SG&A, our people costs, is roughly 70% of the total. The next two largest buckets are our logistical footprint, so our real estate and occupancy costs, followed by transportation, which obviously transportation is variable. And so clearly as we think about our cost actions, we've been pulling the lever more so on the people cost in the near term. As we go through the annex or integration, one of the things that we highlighted was the potential to consolidate the logistical footprint which will attack the longer fixed costs with occupancy.

38:14 Okay, that's a lot of really helpful color, guys. Second, maybe a bigger picture question on the competitive environment that you're seeing right now. Just curious if there's any anecdotes you can share on how smaller distributors are faring right now or Maybe more importantly, share gain opportunities for a larger company like Westco given the current disruption.

38:36 Thanks.

38:37 So, you know, it's really interesting. Again, we've been through numerous cycles in our tenure. And, you know, this one is interesting in that there's a high degree of variation in terms of, you know, some of our customers, you know, are operational and there's very strong demand and we've got to support them. Other customers, parts of their business, has strong demand, and we've got to support them. And then other customers have completely shut down their projects or their plants. So that's the environment that the thousands and thousands of electrical distributors that we compete with at a local and regional level in the U.S. and Canada are facing.

39:25 So there's kind of a wide degree of variation there. That's the first point I would make. The second point that I would make is, I've talked about this for some time, and I think now more than ever, given the nature of what drove this cycle, what's driving this cycle, this will increase in 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, obviously there's been some demand destruction, and it varies by a market vertical, but there's also been supply chain disruptions and supply chain-driven constraints have impacted the global supply chain. So we allude to that on that last page.

40:27 right before the summary about the emerging new and emerging secular growth trends that we think absolutely will benefit both Wesco and Anixter individually and clearly on a combined basis. And so I think that's just a really important thing to understand because we've been able to utilize our very strong sets of supplier relationships and our global supply chain capabilities to support customer needs in this cycle thus far when the global supply chain is very challenging to manage and navigate. But we've been able to use our tremendous relationship with our global supplier partners and our supply chain, overall supply chain capabilities to provide the much needed products 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.

41:25 The only final point I would make is, and I know this has been reported, but there are some distributors that I think are facing some significantly challenging times and are more distressed than others. And again, I think it comes down to is where are they geographically located, what position was their balance sheet in as they were entering this cycle. Our next question comes from Nigel Cole with Wolf Research. Please go ahead.

42:03 Hey, good morning, everybody. It's Brian on for Nigel this morning. First, can we just talk a little bit about pricing in the quarter, maybe by end market or geography, and then how that's also trended through April so far?

42:17 Yeah, good morning. Just provided for the first quarter, pricing had very limited impact. on our overall results. So we saw a couple of increases in some product categories that was offset by some declines in others, so it ended up being slightly positive, but we would call it neutral. It didn't round up to one, obviously. And we can't provide that through April at this point.

42:44 Okay, thanks for that. And then just touching on the new secular trend, the emerging secular trends,

42:51 Could you talk a little bit more about that supply chain relocating to North America and what you've seen so far from customers and things like that?

43:03 This is kind of early days of what we think will be an emerging and growing secular trend. Really, the challenges that the value chain is facing right now is scrambling for the critical products and supplies that are needed to keep those customers and operations running that are still running at this part of the cycle. We did some safety acquisitions back five to ten years ago. We've got these terrific set of supplier relationships. We've been able to provide the critically important personal protective equipment to our customers and our employees And so, you know, I think right now that most of the activity and energies around how do we support the customers that are growing, not just by us, it's by everyone, and ensure that the supply chain is not constraining the operations of our customers that have critical demand requirements to meet.

44:11 But it is clearly taking a look at... Clearly, companies are up and down the value chain. We're already hearing many discussions about it. We're taking a look at, okay, because there are challenges with the global supply chain in terms of overall delivery integrity and capability, have we ended up getting dislocated global supply chains that need to be rethought? Quite frankly, a lot of these activities started with the implementation of tariffs. So, you know, When tariffs were implemented, a number of our supplier partners started looking at their global footprint and began to optimize their supply chains a bit differently, given the tariffs that were in place.

44:59 And now you have this pandemic-driven supply chain disruptions and dislocations and demand drops layered on top of that. and it's just, we believe it's just gonna accelerate a very comprehensive view of global supply chains and really it's becoming more of a risk management matter. So our customers are saying, look, from a risk management perspective, we need to ensure that we have integrity of supply. We've talked about this at length over the years. That's where a large global B&B Wholesale Distributor, like Alesco, like an annexer for that matter. It has a terrific array of global supply chain relationships.

45:48 It's very well positioned to support that emerging, what we think is an emerging and growing sector or trend going forward. And when you put our two businesses together and we double up the size of the company and our global footprint and capabilities expand it, and so on, and as a result of that, we're even in a better position to support our customers. Great. Appreciate the caller and stay safe. Our next question comes from Patrick Bauman with J.P. Morgan. Please go ahead. Hi, John.

46:26 Hi, Dave. Good morning. Thanks for taking my question. Hope you're staying healthy and safe, Pat, for you and your family.

46:32 Yeah, doing my best. Thanks. Same to you.

46:37 Maybe we could touch on, did you quantify the cost you expect to come out from the initiatives you cited in terms of SG&A dollars or what have you?

46:49 So Pat, it's Dave Schulz. I'll provide some framework. So overall, the people costs related actions that we've implemented for the balance of the year, we're looking at approximately $50 million of cost reductions. And that is a combination of The 401K, the reductions to salaries and wages that we highlighted, which is currently expected through the end of the third quarter, and then some additional cost actions that we're taking to better manage our organization given the downturn. So, rough round, I would call the people-related costs $50 million for the balance of

47:29 2020. Okay, so that's over the last three quarters, you'll have $50 million of savings, basically. Correct.

47:40 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.

47:52 For example, our... Well, because of the effective date of the reductions. As we outlined on the first page, Pat, you know, you can see that... A number of actions were implemented prior up to this point. As I said, we took some permanent headcount actions in the first quarter. Some actions started to take late first quarter into April.

48:18 But the majority of these actions are effective as outlined on that first page.

48:25 Understand. And my second, my follow-up is I appreciate all the color on the month to date April trends. Super helpful. Just looking forward, I guess, if this persists or gets even a little bit worse as the year moves forward, and I'm just going to throw a number out here. Let's say EBITDA is down 30%, you know, because things have gotten a lot worse. Just curious, like, how you describe your ability to endure net leverage that, you know, could approach, you know, high single digits post the annex are closed. Curious if it triggers anything with debt covenants or anything like that. And on this front, with the stock historically trading at eight times EBITDA, could it ultimately impact the way you guys decide to go about with the proceeds mix, or is the equity component small enough now that it doesn't really matter to getting the deal closed?

49:26 So there's a lot of questions wrapped up in that question. So I'll address the front end, Dave. You address the back end. So the front end, look, we've been through a series of cycles previously. I've been in this chair more than a decade now. That's neither good nor bad, except to say that I wasn't the helmet we had through the Great Global Recession. And again, our sales levels were down, as I said, 25% range across the whole year. And to average that across the whole year, to have that on a full-year basis, it was down higher than that at different parts of the year. And we took a series of actions in waves throughout that year, and we're very aggressive with adjusting our cost structures.

50:13 Our leverage ticked up a little bit, but we also produced very strong free cash flow because of the accountancy nature of our business model. And then we pivoted. Pretty quickly, in 2010, into playing offense, and then experienced an outstanding run over the next several years, a very strong growth. We started playing offense when others hadn't even begun playing defense yet, quite frankly, and experienced a several-year run, a very strong growth, outstanding pull-through. And so we know how to manage through cycles, and... and we're taking the same actions now. With that said, as I mentioned earlier, there is one big difference and that is we're going to double the size of this company.

51:00 There's a transformational acquisition and 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 and synergy delivery will be our restructuring that we've are reaffirmed here today in terms of the outstanding value creation potential with delivering the various cost synergies, sales growth synergies, and cash generation synergies three years out. So Dave, do you want to maybe tie the question or the answer closed with the leverage piece?

51:38 Yes, certainly. So, you know, clearly these are uncertain times. And, you know, we've run multiple scenarios. We're confident that we can drive leverage post the acquisition to our target range over a suitable period of time. Our goal is to get within that range within three years. That will obviously be impacted by the economics at the time. So what's the shape of our 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 combined generated over $2 billion of free cash flow from before the Great Recession to 2011. Add to that, we're also going to have $200 million of cost synergies. And, you know, again, so we're confident that we'll be able to manage to the leverage going forward.

52:29 Okay, but appreciate the answer. So there's no, just to be clear, there's no, like, trigger, you know, in terms of the leverage if it's a certain level? Does it trigger anything with, you know, your debt confidence or...

52:45 We have no leverage covenants. We don't expect to have leverage covenants with the financing.

52:50 And that's why we put that page in the deck, Pat. If you go back and look, we've outlined very clearly the strong balance sheet page, which is page six, which talks about our current facilities, the structure of those. It's covenant, very covenant-like. and Dave mentioned we expect that our new facilities will be very similar to those. And I think what's really important to understand, and Dave touched upon it, is that particularly for our inventory revolver and accounts receivable securitization, these are very high quality assets. You look at our underlying inventories and how they performed, through all the cycles.

53:39 Our inventories are very strong, and our inventories are not subject to an overall deflationary factor or effect. So that represents a very strong kind of backstop for the inventory revolver. And our AR securitization, again, we have an outstanding array of customer relationships, blue chip companies, and that backstops our AR securitization. Again, no leverage covenant, covenant light outlined clearly on that page. Yeah, I guess I should read the slides before I ask my question. Thanks a lot. I appreciate the color. Our next question comes from Blake Hirschman from Stevens. Please go ahead.

54:26 Yeah, good morning, guys. Good morning.

54:31 First off, I think you guys were hopeful that gross margins would expand this year. That was obviously a few months back, and a lot of things have changed. So I was just kind of looking for an update there, if there's any kind of reasonable way to frame up how those might kind of transpire through the rest of the year, and part two being if there's any Commentary around how they've looked thus far in 2Q, you know, as sales have kind of pulled back. Thanks.

55:09 So, look, we don't guide gross margins, so we're not going to guide it on this call. I'll answer it that way, but I will say we're pleased with the 50 basis points of gross margin expansion that's up sequentially in Q1 versus Q4. We do think we're getting really, you know, we thought we got it, and we did get very good traction on our margin improvement initiatives. We have been talking about for a few quarters at the back end of last year of that time lag effect. That time lag effect started working to our advantage here in Q1 and coupled with our traction on our margin improvement initiatives. And the margins have held up thus far in April. So they're in line and are holding up consistent with Q1. So it's a good start to the quarter. But again, we're not going to die from here on out.

55:56 Okay, great.

55:58 Thanks for that. I'll turn it back. Our next question comes from Hamza Mazari from Jefferies. Please go ahead.

56:15 Hey, good morning. I hope you guys are healthy and safe. Same to you, Hamza.

56:21 To you and your family.

56:23 Thank you so much. My first question is just around when you think about the annexed or integration, have you contemplated combining the sales force yet? 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 cost selling or is that too complicated? Certain past deals have had trouble with that. Some haven't, but just curious on your view.

56:57 So, great question. Thank you for that. And, you know, we outlined, and this was back in the early March timeframe when we scheduled a specific investor call, Hamza, that outlined, you know, it was an eight to ten page deck. and Dave and I took all the investors through the Annexter transaction and the compelling attributes of this transformational combination. And the reason I'm referencing that is I'll take you back to a page that in that deck, it's still out there in the public domain, obviously, that outlined the, it was called the detailed execution plan to deliver the $200 million of announced costs.

57:47 And when you look at that, that 200-plus million, of which, again, we're very pleased we're seeing upsides to that, and we're going to drive for upsides against that. But if you look at it, it did not include the sales force. Okay? It was G&A, corporate overhead, supply chain and field operations, and that was more around the back end of the business, not the front end. Not front end being sales, sales management, et cetera. Relative to the front end of the business, you beg a great question, which is around the cross-selling opportunities. The cross-selling opportunities are substantial, and we also outlined categorically the different areas of cross-selling opportunities in that presentation.

58:35 And we're focused on delivering top-line growth synergies. That's where our focus is on the sales force. to really take a, you know, aggressively work the cross-selling opportunities. And when we get to the close, obviously, once the transaction closes, as we committed to when we outlined, you know, the compelling attributes of this deal, you know, we'll be providing very clear markers. Here's all the elements of the various cost synergy plans, sales growth synergies, and the cash generation. and we'll be measuring ourselves publicly on our progress against all three.

59:18 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. Does the length of the duration of the recession change that or are these sort of projects that have already are too far along or are essential I would say it's been our experience in prior cycles.

59:53 I'd expect it would be similar here. When things are delayed, they typically aren't canceled. The only thing I will say is that there are certain end market verticals in industries that are facing much greater challenges than others. And so in some of those verticals, there may be some revisiting of what, if it was in the early days and had just gotten started, it may be easier to cancel than one that's 20, 25, 30, 35% through its execution. But by and large, I think what we expect is that the delay is just that, a delay.

1:00:40 Thank you all for your time this morning. Again, Brian and Will will be available to take your questions. We look forward to being able to meet with you in person as our investor events eventually resume.

1:00:50 Obviously, we're available to have questions. Telephonic meetings 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 families. Have a great day. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.