Good day, and welcome to the WESCO First Quarter 2020 Earnings Call. All participants will be in listen-only mode. Operator Instructions After today's presentation, there will be an opportunity to ask questions. Operator Instructions Please note this event is being recorded. I would now like to turn the conference over to Will Ruthrauff. Please go ahead.

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. Therefore, actual results may differ materially from expectations. 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. Means to access this conference call via webcast was disclosed in the press release and was posted on our corporate website. Replay of this conference call will be archived and available for the next seven days. With that, I'll turn the call over to John Engel.

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 in these challenging times. We 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. 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 employee home, sanitize the facility and then bring the other team in to maintain the operation. We also instituted a reward and recognition bonus for our front-line employees. Number two, super serving our customers. We implemented our business continuity plan and have kept all US 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 relationships to procure personal protective equipment for our customers and our employees. 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 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. Effective May 1, 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. We have also suspended our 401(k) 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 WESCO 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?

Thank you, John, and good morning everyone. I'll start with an overview beginning on page 4. 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 and fell 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 Anixter 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. 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-to-date reported sales were down 16% through Tuesday, April 28. 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 Anixter 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 5, this summarizes the organic sales growth by end market and geography. You can see on the right hand side that organic sales pattern in the quarter was 2% growth in both January and February, followed by a decline of 9% in March. Our organic sales exclude the impact of an additional work day 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 US, which is roughly 75% of our overall revenue was down 1%; Canada was down 4%, driven by construction, as many local governments shut down project starts in March. Industrial sales were down in the US 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 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. Grid 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. 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 declines starting in March. Moving to slide 6, 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. 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. Bad 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 covenants and we easily pass the liquidity thresholds by which compliance is measured. We expect our bank credit facilities will contain similar covenant packages, following our amendment and restatement as part of the financing of the Anixter acquisition. Between now and the closing of the Anixter 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 31 of this year. Turning to slide 7, 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. 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 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 8, both WESCO and Anixter benefit from several dynamics that make them 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. 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 0.5% of sales. In the current environment, this resilience is enhanced by WESCO's and Anixter's central businesses and the high degree of diversification by customer, supplier, end market and geographies. Both WESCO and Anixter have proven abilities to delever through the economic cycle as they both did from 2007 to 2011 when their net leverage was reduced to below 2 turns. Additionally, both companies have demonstrated the ability to use their cash flow to rapidly pay down debt following sizeable acquisitions. In the case of WESCO, we reduced leverage from 4.5 turns to 2.7 turns following the acquisition of EECOL in 2012. In Anixter's case, it reduced leverage from 4.1 turns to 2.8 turns 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 CAGR 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.

Thanks, Dave. Turning to page 10, integration planning activities for the transformational combination of WESCO 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 datacom distribution and supply chain services company. We've made substantial progress on the path to close the acquisition of Anixter. Committed debt 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. 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 Anixter 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 Anixter integration team members for the great progress they have made to date. 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 is one. Greater connectivity needs for remote work, home and school applications is another, and the increasing electrification of our infrastructure is another. These are just a few of the growing secular trends that are directly aligned with the core capabilities of these two businesses, WESCO and Anixter. The right hand side of this page outlines the financial benefit 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 will transform the new enterprise through execution of the integration plan and delivery of these synergies. Now turning to page 12, we 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. 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. WESCO 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. WESCO is substantially larger and more diverse than during the great global recession in 2009. Our increased scale and diversity enhance our ability to meet the challenges caused 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 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. Operator Instructions Our first question comes from Deane Dray with RBC Capital Markets. Please go ahead.

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

Thank you, Deane. Good morning. I hope you're staying healthy and safe.

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 mix look like they were not down as much. So, if you give some color there? And Dave said, you called out three end markets or three verticals, Utilities, Broadband and Safety being up, was that a comment sequentially, was that year-over-year? So, if we could start there, that would be helpful.

Yes. Sure, Deane. That's year-over-year and that's a continuation of the trend that we saw in the first quarter. Those are the businesses that Dave spiked out. And the few other public distributors that you mentioned have a very different mix than us, I think, as you know. So, when 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. There were times moving through that year where we saw obviously declines much greater than that in some of the worst months. So, we're at a 16% level right now; it's been relatively stable through the month of April. So, there is a little additional color. It's not like it moved around a lot. We don't have the sales for obviously today or yesterday yet. But this is true. With a couple of days remaining, we are down at 16% and as I said it's held relatively stable and is 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 because we didn't get all the sales obviously. But even if you adjust for that there is still very strong backlog. We would expect it to build. Our book-to-bill ratio is well above 1 so far through April. And that's different than the last cycle. There we saw sales drop-off and we saw book-to-bill ratios fall below 1. So, I think, there are some interesting differences. The overall shape of this recovery is not clear. Many folks have different views. We've been through numerous cycles. We've got a seasoned 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 through the nature of the actions we've taken this time to position ourselves to support parts of the business that recover quickly. We've already seen some parts of our business growing as Dave outlined, and the nature of the actions we've taken have positioned us to support parts of the business as they come back online and there is a return to normalcy over time.

Okay, 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?

It's Construction, Deane. It is very much driven by location and geography. So, it's not consistent as you would expect, because that's particularly true across the US 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 these 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. We've been deemed an essential business. So, we're still supporting our customers and focused on meeting their needs. They have 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 US in our webcast deck, what's also interesting at this point we're seeing is predominantly project delays and not cancellations, 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 delayed project activities will kick back in.

Great. That's very helpful color. Just last question from 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 downturn. So, the expectation is there. Just want to see how that is going to come through. This quarter it looked like the conversion was lighter versus your first quarter seasonal conversion. So, if you can address if there were something one time that would have skewed that?

Deane, I'll highlight a couple of things on our net working capital in the first quarter. First, inventory was a source of cash, so our inventory levels actually came down. 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 working capital plans. We are laser focused on that. Our team is doing an excellent job managing the controllables, the inventory and managing the collections coming in. So, we are very comfortable that our model will retain intact.

Thank you. And best of luck to everyone.

Thanks, Deane.

Our next question comes from Sam Darkatsh with Raymond James. Please go ahead.

Good morning, John. Good morning, Dave.

Hi, Sam.

And obviously, wishing good health to you both and to your entire organization. Three quick questions, if I might, if you indulge me. First, your largest vendor Eaton, obviously, has some exposure to Mexican manufacturing with forced 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 say I hope you and your family are staying healthy and safe. Let me start with that. Thank you for the question. 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 in the US. Eaton, like some of our other suppliers that have Mexico-based manufacturing, have done an exceptional job of managing their Mexico operations. So far, when you think of the whole value chain, we've had demand drop off in certain areas and then we've got very robust inventories and we're very focused on inventory availability and fill rate. There is sufficient inventory in the value chain coupled with our supplier partners who are in Mexico, Eaton at the top of the list. They're doing an exceptional job of managing given the world regulations and constraints that they are dealing with. So, so far, I would say that this is more demand-side driven than supply-side driven at this point.

Got you. Second question for Dave, if I might, the $600 million in year three free cash flow was good to see although obviously there is some counter-cyclical elements to free cash flow. So, I'm trying to unpack what 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 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 you to think about this is, look at the history. When you take a look at the cash flow generation of these combined companies, you're looking at almost $400 million historically in free cash flow generation. And on top of 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 and 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.

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 Anixter deal?

As you know Sam, and I think as the market understands, 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 we're full speed ahead with 100% debt financing.

Very good. Thank you both.

Thank you, Sam.

Our next question comes from Luke Junk with Baird. Please go ahead.

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 cost 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?

So Luke, I missed a little part of that. Can you — I apologize — can you restate the front end of that? I missed that.

Yes. So, just said you were quick to act on the costs 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 decremental margin target?

So, I'll start and Dave will come back on the first part. Luke, I hope you and your family are staying healthy and safe. I'll start by saying that this is a really important point. One thing that makes this cycle very different is that we're pursuing the strategic transformational combination with Anixter. Our efforts are very focused on aggressively getting to close and closing that transaction; we remain on track for Q2 or Q3. Fundamentally, we're going to use the integration plan and the delivery of the synergy as our restructuring. We're going to have a new company; we're doubling the size of the company overnight once we close. All the work we're doing now is to prepare for flawless day-one execution; it's one of our top three priorities and the execution of those synergies starts on day one. We've been very clear on the $200 million being a floor commitment and we're driving upside to that for cost synergies alone. We outlined $68 million as the floor for year one. That's the way we're thinking about fundamentally re-engineering the enterprise — we're going to do it in conjunction with the integration and execution. Second point, we've moved with great speed on taking the variable cost actions. They are substantial on a go-forward basis, and in doing it we've preserved the capacity and capability to support parts of the business that recover quickly. We're already growing in some parts of the business. We are being careful to make sure we're adding some capacity to support very strong demand that being in Safety and parts of Utility and Broadband. We want to be able to have quick reaction, quick response surge capacity to support demand as it comes back online. Third point is that we did take some permanent cost reduction actions sequentially in the quarter; roughly a little over 50 personnel were addressed sequentially in the first quarter, end of March versus entering the year. We constantly manage and look at our workforce and our cost structure and are always refining. Dave, you may want to come back and address the SG&A breakdown in terms of variable versus fixed.

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

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 are 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 WESCO in the current disruption? Thanks.

So, it's really interesting. We've been through numerous cycles. This one is interesting in the high degree of variation in terms of some of our customers are operational and there is very strong demand and we've got to support them. Other customers have parts of their business with strong demand and we got to support them. Then other customers have completely shut down their projects. That's the environment that the thousands and thousands of electrical distributors that we compete with at a local and regional level in the US and Canada are facing. There is a wide degree of variation. One very important thing is supply chain integrity. Given what has happened in this crisis, there has been demand destruction and supply chain disruption and constraints that have impacted the global supply chain. We have been able to utilize our strong supplier relationships and our global supply chain capability to support customer needs. In this cycle, when the global supply chain is very challenging to manage and navigate, we've used our supplier partners and our supply chain capabilities to provide critically needed products and supplies to customers. That's why we emphasized some of those examples. Finally, some distributors are facing significantly challenging times and are more distressed than others; it comes down to where they are geographically located and what position their balance sheet was in entering this cycle.

Our next question comes from Nigel Coe with Wolfe Research. Please go ahead.

Hey, good morning, everybody, it's Brian on for Nigel this morning. First, could 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?

Good morning. For the first quarter, pricing had very limited impact on our overall results. We saw a couple of increases in some product categories that were offset by declines in others. So, it ended up being slightly positive, but we would call it neutral. We can't provide pricing color through April at this point.

Okay. Thanks for that. And just touching on the new secular trends, the emerging secular trends, 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?

This is early days for what we think will be an emerging secular trend. The immediate challenge is scrambling for critical products and supplies needed to keep operations running that are still running. We have safety acquisitions from five to ten years ago and a terrific set of supplier relationships; we've been able to provide personal protective equipment to our customers and employees. Right now most activity centers on supporting customers that are growing and ensuring the supply chain is not constraining operations. Companies up and down the value chain are taking a look at global delivery, integrity and capability. Many discussions are about rethinking global supply chains — some of these activities started with tariffs, which led supplier partners to reconsider their footprints. Now the pandemic-driven supply chain disruptions and demand shocks are accelerating a comprehensive review of global supply chains as a risk management exercise. A large global B2B wholesale distributor like WESCO, and similarly Anixter, with global supply chain relationships is well positioned to support that emerging trend. When we combine the two businesses and double the size of the company, our global footprint and capabilities expand, and we are in an even better position to support customers.

Great. Appreciate the color and stay safe.

Our next question comes from Patrick Baumann with J.P. Morgan. Please go ahead.

Hi, John. Hi, Dave. Good morning. Thanks for taking my questions.

Good morning, Pat.

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?

Yes. Pat, overall, the people cost related actions that we've implemented for the balance of the year are approximately $50 million of cost reductions. That is a combination of the 401(k) suspension, the reductions to salaries and wages that we highlighted, which are 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. Roughly, I would call the people-related costs $50 million for the balance of 2020.

Okay. So, that's over the last three quarters you have $50 million of 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...

As we outlined on the first page, you can see that a number of actions were implemented prior up to this point. We took some permanent headcount actions in the first quarter, some actions started late first quarter into April. But the majority of these actions are effective as outlined on the first page.

Understood. And my second 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% because things have gotten a lot worse, just curious how you describe your ability to endure net leverage that could approach high single-digits post the Anixter close? Curious if it triggers anything with debt covenants or anything like that? And on this front with the stock historically trading at 8 times EV to 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?

There is a lot wrapped into that question. I'll address the front end. We've been through a series of cycles previously. I was here through the Great Global Recession. Our sales levels were down about 25% across the full year in 2009 and we took a series of actions in waves throughout that year and were very aggressive adjusting our cost structure. Our leverage ticked up a bit, but we produced very strong free cash flow because of the counter-cyclical nature of our business model. Then we pivoted quickly into playing offense and experienced an outstanding run over the next several years of strong growth. We know how to manage through cycles and we're taking the same actions now. One big difference is that we're going to double the size of the company through the transformational acquisition of Anixter. That puts us in a unique position; we think the combination is even more compelling now because the integration plan execution and synergy delivery will be our restructuring. We reaffirmed the outstanding value creation potential with delivering the cost synergies, sales growth synergies and cash generation synergies three years out. Dave, do you want to tie the answer with our leverage view?

Yes. These are uncertain times and 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 — the shape of the recovery and what the out years look like. We're very confident in the counter-cyclical cash flow model of the combined company. Looking at the history, these two companies combined generated over $2 billion of free cash flow before the Great Recession to 2011. Add to that, we're going to have $200 million of cost synergies. So we're confident we'll be able to manage leverage going forward.

Okay. But just to be clear, there is no trigger in terms of the leverage if it's a certain level, because does it trigger anything with your debt covenants or...?

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

That's why we put that page in the deck, Patrick. If you go back and look, we've outlined very clearly what the strong balance sheet looks like on page 6 which talks about our current facilities, the structure of those, it's covenant-light. As Dave mentioned, we expect our new facilities to be very similar. What's really important to understand is that our inventory revolver and accounts receivable securitization are backed by very high-quality assets. Our inventories have performed well through cycles and are not subject to an overall deflationary effect. That represents a strong backstop for the inventory revolver. And our AR securitization is backed by an outstanding array of blue-chip customers. So again, no leverage covenant and covenant-light as outlined on that page.

I guess, I should read this slide before I ask my question. Thanks a lot. Appreciate the color.

Our next question comes from Blake Hirschman with Stephens. Please go ahead.

Yes. Good morning, guys.

Good morning.

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 looking for an update there if there is any kind of reasonable way to frame how those might transpire through the rest of the year. And part two being if there is any commentary around how they have looked thus far in Q2 as sales have kind of pulled back? Thanks.

We don't provide guidance on gross margins. That said, we're pleased with the 50 basis points of gross margin expansion that we saw in Q1 versus Q4. We think we're getting good traction on our margin improvement initiatives and the time-lag effect started to work to our advantage in Q1. Margins have held up thus far in April; they're in line with and are holding up consistent with Q1. It's a good start to the quarter, but again we are not going to provide margin guidance on this call.

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

Our next question comes from Hamzah Mazari with Jefferies. Please go ahead.

Hey, good morning. Hope you guys are healthy and safe.

Same to you, Hamzah, to you and your family.

Thank you so much. My first question is around, when you think about the Anixter integration, have you contemplated combining the sales force yet? Is this in the synergy number of $200 million? There is some overlap on the revenue side. Have you thought about one sales force and cross-selling? Certain past deals have had trouble with that; some haven't, but just curious on your view?

Great question. In the detailed execution plan to deliver $200 million of announced cost synergies, that $200 million did not include the sales force. The cost synergies are more around G&A, corporate overhead, supply chain and field operations and are focused on the back end of the business, not the front end sales forces. Regarding cross-selling, the opportunities are substantial and we outlined categorical areas of cross-sell opportunities in our earlier presentation. We're focused on delivering top-line growth synergies; the sales force will be a primary driver of those cross-selling opportunities. Once we close the transaction, we'll provide clear markers and measure ourselves publicly on progress against the cost synergy plan, the sales growth synergies and the cash generation synergies.

That's very helpful. Just a follow-up question. 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 are already too far along or are essential infrastructure that they just keep getting pushed out versus outright canceled?

I would say, based on prior cycles and our experience, when things are delayed they typically aren't canceled. The only caveat is that some end-market verticals face much greater challenges than others, and in some of those verticals, if a project was just starting, it may be easier to cancel than one that's 20% to 35% through execution. By and large, we expect these to be delays rather than cancellations.

Got it. Thank you so much. Take care.

Right.

That concludes our question-and-answer session. I would like to turn the call back over to John Engel for any closing remarks.

Thank you all for your time this morning. 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 and obviously, we're available to have telephonic meetings as well as virtual meetings and we 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.

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