Greetings, and welcome to the W.W. Grainger First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Irene Holman, Vice President of Investor Relations. Thank you, ma’am. You may begin.

Good morning. Welcome to Grainger's first quarter 2020 earnings call. With me are D.G. Macpherson, Chairman and CEO; and Tom Okray, SVP and CFO. As a reminder, some of our comments today may be forward-looking. Actual results may differ materially as a result of various risks and uncertainties, including those detailed in our SEC filings. Reconciliations of any non-GAAP financial measures with their corresponding GAAP measures are found in the tables at the end of this slide presentation and in our Q1 press release, both of which are available on our IR website. This morning's call will focus on adjusted results for the first quarter of 2020, which exclude restructuring and other items that are outlined in our press release. Now I'll turn it over to D.G.

Thanks, Irene. Good morning, and thank you for joining us today. I'll begin with an overview of our actions and experiences in response to the COVID-19 pandemic, as well as an overview of the quarter. Then Tom will get into more specifics about our financial response to the pandemic, as well as detailed information on our Q1 results. Before we start, I want to thank our 25,000 team members across the globe, who continue to live our principles and are working hard to achieve our purpose to keep the world working. We are an essential business supporting hospitals, governments, first responders, food manufacturers, distribution companies and many others that are fighting this fight on the frontlines. These are incredibly stressful times for all. From our team members who are onsite with our customers helping them work through day-to-day challenges, to those ensuring orders are picked, packed and shipped properly, I am proud of the work we are doing to keep our team members, customers and communities safe. I am also thankful for our supplier and logistics partners’ efforts to help us provide much needed products to our customers in this desperate time of need. To make this come to life, I thought I would share a photo I received from one of our leaders at a branch located in Brooklyn, New York. This particular branch and its cross-borough partner in Maspeth, they are both situated in between a number of hospitals that are the epicenter of the pandemic fight. Each day, the teams at both locations dutifully come to work, hang the American flag and roll up their sleeves, and in their words, they do this to keep America running. It's this spirit that inspires me, makes me truly proud to lead this company and gives all of us hope…

Thanks, D.G. As D.G. mentioned, we have established three broad priorities that are serving as the backbone as we work through this unprecedented challenge. Our third decision-making tenet is to ensure we remain on a strong financial footing. In this regard, we have taken several actions to bolster an already strong financial position. From a balance sheet perspective, in the quarter, we increased the size of our revolver to $1.25 billion and executed a large scale refinancing. Combined, these initiatives increased our available liquidity by roughly $625 million and eliminated all material near-term maturities. At the end of March, we proactively tapped $1 billion of the $1.25 billion revolving credit facility. As noted by our strong balance sheet and operating cash flow results, this was done solely out of an abundance of caution. In this low rate environment, it's an inexpensive insurance policy. Further, with the refinancing, we consolidated a majority of our foreign currency denominated debt, which pushed out any material maturities until 2025. Our revolver does not contain any financial covenants and we continue to have strong A category ratings from both S&P and Moody's. All in, we exited the quarter with over $1.7 billion in available liquidity, including $1.5 billion in cash and only a 1.2x net debt leverage ratio. When it became clear that we might be facing a serious economic downturn, we proactively began implementing initiatives that conserve cash and optimize profitability. To be clear, the initiative strike a balance between short-term cost and cash savings and ensuring we come out of the gates strong when the crisis ends. Example of these baseline initiatives, include temporarily furloughing team members to align with reduced volumes, short-term pay cuts for executives, delaying merit increases for our salaried workforce in North America, reducing outside professional service spend, scaling…

Thanks, Tom. We have a strong business and balance sheet as well as access to capital and we are taking proactive steps to keep the company healthy and our workforce stable, while continuing to serve our customers well. We take being an essential business very seriously and we are committed to living our purpose and being that critical partner for our customers throughout this pandemic and beyond. While this crisis is certainly different from any that we've experienced, I am confident that Grainger will come away from the stronger than before, and we’ll be positioned to lead this industry for years to come. Now we will open it up for questions.

Thank you. The floor is now open for questions. [Operator Instructions] Our first question today is coming from Ryan Merkel of William Blair. Please go ahead.

Hey. Good morning, everyone. Hope everyone is well.

Good morning.

Good morning, Ryan.

So first off, thanks for the color on April. But I guess high level, and I realize that visibility is low in April guidance. But anything you can help us with in terms of the outlook, maybe thoughts on a range of industry declines this year? Or maybe comment on if 2019 is a good framework in your mind for 2020 or if there is major differences?

Well, I think it's – as Tom said, forecasting right now is very difficult. I think we can say what we are seeing. And as I mentioned, we have some customers that are mostly shutdown. We do, do a lot of work with airlines, which obviously, aren't as busy, cruise lines, as you might guess. As you get into some of the sub-industries, you see very big differences. Obviously there's a bunch of customers that are very, very busy. I think one thing I would say is that the world is not shutdown necessarily and you can see it in our daily volumes. We've been very consistent in the last few weeks and we've been fairly resilient. But it does take on different numbers by different sub-segments. I think the question for us is how long it's going to take to get back and depending on who you talk to, whether it's an epidemiologists or an economists, that could be relatively short or really long. And so there's just uncertainty around that. So Ryan, I would not even try to forecast that. We feel like we are taking the right actions to make sure that we maintain profitability throughout any scenario and we are confident in our ability to gain share. One thing that we didn't talk about, that's kind of interesting is we are seeing a very healthy flow of new customers, given the pandemic requests and we feel like we are going to come out of this with a nice customer file increase as well. But right now, it's really difficult to forecast beyond sort of this month and next month, and it will just be how fast back to work that's going to determine.

Yes. That's fair. I thought I'd ask. All right. And then second, I was hoping SG&A was going to offset the decline in gross margins quarter a little bit better. I know you talked about it a little bit, but just pinpoint for us what exactly happened? It seems to me like you're not making much profit on these pandemic sales, so maybe talk about that. And then, is most of this a timing issue with the price cost and the higher SG&A? And then these trends should start to get a little bit better in 2Q? Just help us with that.

Yes. So let me take – I mean, so there's a gross profit and SG&A component to your question. And I'll turn it over to Tom in a minute. From a gross profit perspective, on the pandemic items, we made a decision, which is we're going to help the healthcare infrastructure and help government customers. That decision means, in a scarce supply world, we're basically providing product to contract customers and those products generally are lower margin to begin with. So that does have an impact on gross profit and a fairly significant one in the quarter. It’s the right thing to do. It's absolutely the right thing to do. That's going to relieve over time a little bit because there's going to be more product and there's going to be more customers hopefully that open up and that we can serve. So on the gross profit side, that certainly was an impact, which we'll see in the second quarter. But I think over time that will relieve some. SG&A is a little bit simpler. Over half of our SG&A increase was basically one-time or unusual items. And we feel like growing SG&A half the rate of sales growth is a very comfortable place for us to be going forward given what we know other than the one timers. I'll turn it over to Tom to provide a few details on that one.

Yes. So let me add just a little bit more color, Ryan. So let's first of all start with gross profit margin. As we said in our prepared remarks, we went heavy on pricing in Q1 of fiscal year 2019 and then we rolled that back throughout the year. So to your point, that pricing compare will get better throughout the year. Also from a cost perspective, if you just look at how the tariffs behave on a year-over-year basis, the two big tariffs for us are Part 3 and Part 4A. And from a year-over-year impact for Part 3, in fiscal year 2019, the tariff was 10% in Q1, it's 25% in Q1 this year. If we look at 4A, there was no tariff and there's 15% or 7.5%. So that is the tariff impact that we saw on Q1. That also will get better throughout the year as we fully realize the lapping of our tariffs. It will also get better from the realization of our non-tariff cost increases. Let me move to SG&A and unpack it a little bit better than we did in the prepared remarks. We were up $47 million on a total company basis, which is a 6.4% increase. If you do look at the one-time items and that includes, one-time legal matters, the extra payroll day. We also had some benefits issue where we were lapping prior year adjustments and some other one-time costs. D.G. said over 50%, it was actually closer to 60% of the $47 million. So if you adjust that out, we really grew 2.7%, which gets into about half of the sales growth. The increase of the 2.7% is on items where we have said that we are investing related to advertising, technology and adding headcount in the back half. Now having said that, we noted in the prepared remarks that we are scaling back on advertising, we are taking a stronger look on costs in terms of taking $40 million to $55 million out sequentially versus Q1. And then the final thing I'll say is I want to be clear that we did also have additional cost to serve the pandemic in terms of over time pandemic pay, cleaning supplies, and those types of items. But the big story in SG&A is the one-time as well as the investment cost, which we will roll back in the second quarter. Sorry for the long winded answer, but it was a broad question. Thank you.

Thank you. Our next question is coming from David Manthey of Baird. Please go ahead.

Hi. Good morning, everyone. Grainger used to give us growth ranges across customer end markets on a monthly basis. And just given the circumstances, is there any chance that we could get general growth rates for March across the end markets on Slide 17?

We'll get back to you on that. It might be more valuable to give you ranges on April frankly than March.

Yes. Okay.

We'll get back to you on that and decide whether or not we're going to do any of that. I would say it's – if you saw it, it would not be all that surprising. As I mentioned before, there are certain segments, sub-segments that are down tremendously and almost 90%, 70%. And there are certain that are up significantly, and they would be exactly the ones you think. So I don't think you'd be surprised by any of it, but we'll talk about whether or not we're going to provide that as we go through the pandemics.

I appreciate it. And second, you saw really nice growth in endless assortment, which was also an area of recent investment. Did you say that half of the 17% growth rate was COVID related?

Yes. That's the U.S. That's the Zoro. Yes. Now let me just give a little bit of caveat to that. If you do it on a product basis, that's true. But even customers that are heavy COVID product buyers, spent less on other things as the month went on. And so it's a bit of a rough estimate. So I don't want to over index on that. We feel like we want to be very careful about saying how much was COVID. But certainly from a product perspective, that's true.

Thank you. Our next question is coming from Nigel Coe of Wolfe Research. Please go ahead.

Thanks guys. Good morning. Really appreciate the detail. I just wanted to just pick up on the SG&A. Obviously, you've provided a lot of good detail on that already. But as we go into 2Q and if sales continue to trend down 10%. I mean, who knows, but we expect that 50% of sales growth or sales declines to hold, D.G. or Tom? Do the impacts of some of these sequential improvements in cost such as the – I think you mentioned $40 million, $50 million of sequential declines in costs. Does that mean that SG&A could be down a bit more than that? Just wondering how we should think about SG&A going forward for the rest of the year?

Tom, do you want to take that one?

Sure. Yes, it’s a great question, Nigel. I think it depends Nigel on how much we see the volume going down quite frankly. If volume is going to stay where it's at in terms of 10%, we're probably not going to pull the more draconian levers in terms of cost reduction. It goes deeper than that. Then we've got a number of initiatives in the playbook ready to pull it. If you look at the high side of the range we gave Nigel, that $55 million sequentially would translate to year-over-year, almost 3% reduction. We'd also get some volume variable cost reduction in addition to that. So I think it's going to be a meaningful SG&A reduction for Q2. But we're watching this on a daily basis and trying to really thread the needle in terms of which levers we pull related to the volume reduction.

Got it. That's helpful. And threading the needle is what we're trying to do so. I understand that. And then just on the mix factor, again, you spent a lot of time talk about mix, but the one point of mix pressure you saw in 1Q, we all get it, we understand what's driving that. What would that normally be? Because obviously, the national accounts outgrowth, normally, we're facing some mix pressures. What would that normally be? Where does that reside? Does it normally reside within the price buckets or the volume buckets? And then how does mix – how do you think mix will trends to – again, I hate to be so short-term here, but do you think mix pressures accelerates into 2Q or remained pretty steady?

Yes. I mean, you're talking specifically Nigel about gross profit or you're talking about sales revenue.

Talking here about – well, I guess both, I mean, mix impacts, mainly gross margin, but whatever is the better answer.

Yes. If you look at it from a revenue perspective, we've actually got some customer mix component, which is in volume, but the majority of it is going to fall into price. We mentioned in our prepared remarks, the multi-site customers, but that was a much smaller part of the mix component. The primary part of it was our lower margin healthcare and government customers. That was the big driver of the customer mix.

Yes. I would just add to that, Nigel that we very recently, like the last few days, we started to get inquiries from midsized customers thinking about restarting. They've been on fairly hard shutdown. So that has been a negative mix depending on how fast some of those midsized customers come back. The mix issues could be alleviated a bit. We would expect though for the next – certainly for April, and probably for a lot of May, we would expect some of those mixed pressures, and then hopefully as everybody gets back to work, we would see those does alleviate.

Thank you. Our next question is coming from Christopher Glynn of Oppenheimer. Please proceed with your question.

Thank you. Good morning. Just if we look at Zoro and/or Zoro and MonotaRO, I’m curious about the possibility of a net benefit this year with the online effect actually benefiting from distancing? Or otherwise, if there's maybe a divergent experience of the COVID recession for the endless assortment versus the U.S. segment?

Yes. So I can take that one. So Japan has not had yet a hard shutdown like some of the other markets we've seen. Certainly we've seen the online model there do very, very well. In Zoro, in the U.S., Zoro has done quite well as well. And in particular from a new customer acquisition, as new customers look for different solutions that are digital, we're seeing a very strong new customer pipeline coming into Zoro. We also see a lot of that going on to the Grainger online as well from – on grainger.com. So there is certainly a shift to digital and we think we're well positioned for that shift, both with assortment model, but also with grainger.com, which is an exceptional solution for industrial businesses. So we feel like we're well positioned for that shift.

Okay. And on the U.S. segment, half of the growth was non-pandemic and the absolute gross gotten better as the benchmark slowed down, certainly the spread, curious if you think more of that is for the – due to the price per share dynamics on the large contracts enacted last year or if it's more broadly the Grainger system and market penetration tail on the heels of the 2017 resets.

I think it's everything that we're doing. I think it's the growth initiatives we've talked about. We're getting good results out of merchandising, nice results and more efficient marketing. We've added some focus to our KeepStock. So we're providing more inventory management solutions for customers. I think, very little of it is actually the price dynamic and more of it is the actions that we're taking to drive growth.

Yes, I guess the one thing that I would add that might be helpful color is when you look at our share gain, we said it was 700 bps outgrowth in Q1, if you look at it in March, it was significantly higher than that, almost double share gain in terms of March, which would lead you to potentially conclude that when times get really tough, the good things that we're doing, the customers are coming to us and allowing us to take share.

Thank you. Our next question is coming from Adam Uhlman of Cleveland Research. Please proceed with your question.

Hi guys. Good morning. Hope the whole team is healthy. I had a follow-up question on the gross margin discussion for the second quarter. Understand there are a lot of moving pieces and thanks for the detail on the national sales meeting for the headwind there. But any way that we could frame how much further down we should be bracing for the gross margin to slip in the second quarter? I mean, are we talking about a couple of hundred basis points of this mix headwind we're seeing in April persist?

Yes, sure. It's really hard to predict, Adam, because we have good guys happening in terms of the compare of the price inflation going down materially in the second quarter. We've also got better lapping in terms of inflation, non-tariff inflation and tariffs inflation. So those are really good things. It's just so hard to predict the pandemic of how much of an offset. And it really comes back to D.G.'s point is when are the other non-pandemic businesses really going to start to come back to work. So we've got a big chunk of tailwinds. It's just we don't know how big the headwind would be, not trying to be evasive, it's just hard to call the ball right now.

Okay, got it. And then just on a different topic, any way to frame how much of your customer base is closed right now? And then secondly, there's probably some customers that are restricting access for vending or what have you, any broad sense of how much your sales force is limited right now? Thanks.

Yeah. So we have a number of customers that we cannot get into refill vending ourselves, but we flipped most of them to customer managed inventory. Most of those customers have people working. I would say it's very difficult to say how many are really closed, but certainly it's – a portion of the business is really closed. As I said, if we looked in the four groups, the ones that are really busy right now, you kind of say 10-40-40-10, meaning 10% are really busy, 40% are less impacted essential businesses, 40% are non-essential but they're really – they are working on some sort of reduced schedule, and 10% roughly are what we would call disrupted. And so those are businesses that have a significant disruption right now, that aren't doing a whole lot. They may not be fully closed, but for all intents and purposes, they're closed.

Thank you. Our next question is coming from Deane Dray of RBC Capital Markets. Please go ahead.

Thank you. Good morning, everyone. First question is for Tom. And it's the outlook on free cash flow for the year just in terms of the playbook for industrial distributors, typically you'd be selling down from inventory with lower demand that typically gives you a boost on free cash flow conversion, maybe you're also pulling back some CapEx, but just kind of give us the dynamics there from a free cash flow perspective.

Yes. Good morning, Deane. Yes, we feel really good about our free cash flow. If you look at our cash conversion cycle, despite us working with customers to be constructive in terms of payment terms, we were actually better by four days versus the prior year quarter. So we feel that we're managing working capital really well. As it relates to the destocking of inventory, frankly, that's not the playbook we're running. We're positioned for the future here. When the recovery starts to happen, and those customers start coming back, we want to make sure that we're able to provide the benefit to them. We feel that we're uniquely positioned with our balance sheet and our liquidity to be able to really come out of the gate strong when the market takes off.

That's a helpful ending for that answer because that's what I'd like to ask D.G. about, and not asking about the timing of the recovery, because no one really knows at this stage. But D.G., you suggested there'd be ways that Grainger would come out stronger, you've added customers, but I'm also interested in what you think changes about the business in terms of your customer base, their inventory levels that will carry. I mean, it used to be just in time, now it's more some buffer inventory just in case maybe you have to do more cleaning of your DCs, just the dynamics of what changes on the other side, both from customer behavior, maybe adding more customers and maybe some incremental costs as just standard business going forward. Thanks.

Yes. So thanks, Deane. I said you can't predict what's going to happen. My assumption is that, for a while, we're going to be in a situation where we have to be careful around the virus on some level even if businesses are back to work. And so over the short to mid-term, I think there's going to be a lot of questions around, do we have the right stock of cleaning supplies and PPE to make sure we can actually work. And so we're already talking to customers, talking with customers about how to come back to work and how can we help them, think about how to come back to work. And so that's going to be a big, big topic. Whether or not we turn to more buffer inventories or not is debatable. We've had shocks in the past and it hasn't changed behavior. This one feels like it could. So I'm guessing that we are going to be in a position where we're helping customers think more about inventory stocks than we have in the past for certain products. I still think that, us managing inventory and keeping inventory levels down is going to be an important topic for most customers going forward. But certainly there is going to be some industries that are very, very different and there's going to be some that are new, and we're going to have to navigate through that and we've already started talking about that. In terms of our own business, I think we're all going to have to be more careful. We're thinking differently about how our buildings are configured. Most of our distribution centers have been designed to bring people into lunch rooms, for example, for camaraderie. Well, right now, that doesn't make as much sense. And so we're talking about, well, how do we view – how do we have multiple lunch box. There's just all kinds of details that we're working through that are going to change. And I think it's – we're just going to have the same priorities, keep our team members safe, serve our customers well, do it responsibly and that's going to be the focus. And we have a team of pandemic team that's working on all those operational issues right now and how to get back to work and how we operate in the future.

Thank you. Our next question is coming from John Inch of Gordon Haskett. Please go ahead.

Thanks very much. Good morning, everyone. D.G., I'm wondering, given the new Fabory write-downs, if you could update us on your strategic thoughts on retaining or divesting either Cromwell or Fabory. How are you thinking about that framework, particularly against what's happening in the economy?

Yes, I mean, we're always evaluating the portfolio and looking at whether or not we should be investing or not in businesses. Now is no different. We continue to look at all of our businesses and we can't comment obviously on specific actions that we plan to take. But certainly, we are looking at businesses. Those two businesses are important ones to look at. One thing I would point out is, it's kind of interesting, Cromwell and Canada both, before the pandemic, in the quarter, actually were on expectations, which was good to see. So we actually were getting a little bit of traction with both of those businesses, which was great. And then of course, the world changed. And for Cromwell, we're excited to see if we can continue on a strong path and Canada as well. So I would say, we continue to look at those portfolio, we'll continue to do that consistently.

Yes. That's fine. I appreciate the answer, I had thought perhaps you had put them on kind of a timeline, if my memory serves, you're going to sort of wait for the trend to profit or whatever. Just as a follow-up, I'm wondering if you could also comment on Zoro. Obviously it's done really well and, period, could take a lot of virtual share coming out of this. I'm just wondering like how you're thinking about the pandemic in the context of possibly maybe monetizing that business down the road, maybe along with just like the whole endless assortment. Does this, in theory, push that out or does it pull forward, or does it not really have much of any impact thus far?

It's going to have a – obviously, who knows, but I don't see in terms of how long this lasts. But I think that it doesn't have a lot of impact to our timing. So Masaya Suzuki is running MonotaRO, he's been the CEO of MonotaRO, he now is in charge of Zoro in both the UK and U.S. They are working very hard to improve the profitability and growth rates of both of those businesses. We're seeing good traction. At some point, that question may become more near-term, but right now, they're really focused on improving the business and working together to make sure we do that. So that's the focus right now.

Thank you very much.

Thanks, John.

Thank you. Our next question is coming from Patrick Baumann of JPMorgan. Please go ahead.

Thanks. Good morning, D.G. Good morning, Tom. Thanks for taking my questions.

Hi, Patrick.

Hi. Just the first one, maybe within the 10% decline in April date. Just curious if you could provide a range of growth you're seeing in safety and cleaning supplies or whatever you consider to be pandemic-related, and then how long a tail you see on that demand, if you look at the backlog of request for those products. And then, it would also be helpful on those lines to understand like what percentage of your business is pandemic-related products or what you consider could be that?

Yes. So we haven't released those numbers. Pandemic-related items are, I wouldn't say, way up, silly numbers, in the backlog is even sillier than that, to be frank. So I mentioned it on the call, I mentioned it on the prepared remarks, we literally took orders for decades worth of product in a few days in some cases. And so we continue to get product in. We continue to prioritize. We've had to change our processes for those items and depends how much I guess you feel – the length of time that we have increased sales of pandemic items depends in large part on whether or not you believe the backlog is real. In many cases it is real, depending on what happens. Some of that might not happen. But certainly we have a big backlog of those products and continue to – we'll continue to sell those. Pandemic is a minority of the total product, but it's not a small minority. It's a significant portion of what we're selling, normally cleaning and safety and our big product categories for us in general.

Okay. And then just a follow-up would be on margins. In the first quarter, you had lower margins despite higher sales for all the reasons that you discussed. I'm just wondering if you could give any color on what kind of range we should be thinking about for decremental margins if sales are down, say 10%. I think last downturn, decrementals were only like 20%, but this one seems a little bit different. So just curious how you think about that.

Yes. Tom, you want to take that one?

Sure. Decremental margin is an interesting calculation especially in the pandemic, just because there are – assumptions are so related to volume deterioration and gross margin. You referenced 2008 or 2009, there is a little bit of a nuance there where I don't think it's apples to oranges, as you said, we had big pricing impact back in 2008 and 2009, which, when dated, the decremental margin. If you're looking at 10% down with a range of, I guess, a reasonable gross margin, I could see decremental margins being 45% to maybe 50% down, and that's largely driven by – if it's only 10% down, we're probably not going to do those draconian cost initiatives. On the other hand, if we start to get for a more severe downturn with a longer duration, then we would go to our cost initiative playbook that we've got ready and pull more of the SG&A cost initiatives and there I could see the decremental margin being 35% to 40%. So it's really highly sensitive on what you're assuming. Hopefully that's helpful to give you a range.

Thank you. Our next question is from Chris Dankert of Longbow Research. Please go ahead.

Hi. Good morning, everyone. Positive I missed it. Did you stake out what national account growth was in the quarter? Just any update you can give on kind of the C-suite executive sales growth initiatives. I assume you've had a lot more touch points in the midst of the virus, but maybe to less access, so just any comments on that national accounts growth plan.

Yes, I think we've seen solid growth. We've had a number of wins. I think any first quarter number is going to be inflated due to the pandemic, because all of our healthcare business is basically on corporate accounts. But we continue to see good traction with our corporate accounts and coming out of this, we think we're going to be in a position to get growth up and share gain up with those national accounts. I would say there's no real change in terms of the strategy. We have had a number of wins and we feel very confident about the path we're on with our corporate accounts.

Got it. If I could just sneak one last one in here. Circling back to Zoro really quickly, Masaya has been on board for two, three months now. Just any color on sort of the biggest investment opportunities or optimization he may have highlighted. Has anything changed there? Just high level thoughts on where we're going strategically there?

Yes, I think there is some significant changes. I think the team is thinking hard about discounting strategy, when to run targeted discounts versus big promotions, my guess is we will move to more targeted discounts, lower discount rates for acquisition, spending a lot of time thinking about which customers. We're attracting and getting the attractive business customers and what actually it takes to win those and get those to be consistent purchasers. And so I think the team is really working hard on those things and the size is certainly helping them think through a whole range of issues around how to grow but how to grow with improved thoughts.

Thank you. Our next question is coming from Hamzah Mazari of Jefferies. Please go ahead.

Good morning. Thank you. Hope you're all safe and healthy. My first question is just on medium customers. What are you hearing there? I know you referenced most of them are shutdown, but any update on strategy to gain share there and whether in a downturn, you had mentioned you've – historically you've gained share, does that also apply on the medium customer base or is that sort of different versus large customers?

No, I think it really applies for mid-sized customers. I think that – so certainly we've seen more impact in mid-sized customers, more of those customers have been closed. That said, we continued to see nice returns from our marketing activity with mid-sized customers and our inventory position and our ability to provide strong service typically works very, very well in this situation and we would expect these customers to come back on, that we will be able to acquire more which we've been doing and also increase volumes pretty significantly. So we're pretty excited about that path. As I mentioned, we're starting to get, inquiries from mid-sized customers about, can you help us, that are new. And new mid-sized customers, can you help us get back up and running? And that's really exciting to see and so we're going to work very hard to capitalize on that.

Great. And my follow-up question is on Zoro and you may have touched on this, so I apologize if it's repetition, but how independent is that supply chain today from parent company GWW and any thoughts on re-segmenting that for more visibility? Is it sort of a different tech platform than sort of the parent business? Any thoughts as to independence of that business today versus years ago and then sort of, I know it's buried in other businesses, but any thoughts on re-segmentation? Thank you.

Yes. So let me answer both of those. The first one, a lot of the investments we've made in the last year have gotten Zoro a lot more independence and so while they still rely on Grainger supply chain in many cases, they are becoming less and less reliant as they have other partners that provide delivery service for them to their customers. And so a lot of what we're doing is making that business more independent and operating it more similar to what MonotaRO does, which is to leverage multiple third-parties for low volume items to really drive the growth. In terms of segments, we will follow SEC guidelines and we will think through segments during this year and we'll get back to you by the end of the year if there's going to be any difference.

Thank you. Our next question is coming from Michael McGinn of Wells Fargo. Please go ahead with your question.

Thanks, appreciate the time. If I can go back to the margin discussion real quick, the $40 million to $55 million of SG&A savings identified, is that a fixed numbers or does that include also some flex down as a percent of sales?

It includes some amount of flex down but not fully all of the flex down. So we would expect that we would get additional volume variable over and above the $40 million to $55 million.

Okay. So assuming the $40 million to $55 million, you're thinking about a 728 base, plus you're saying additional percentage of sales savings. So that would put us somewhere in – I think my back of the envelope math, in 8% operating margin, which is 200 basis points below the 2009 trough. Is that the way to think about this for just this downturn as it stands without the additional actions faced too?

I think the way to think about SG&A, let's just take the $55 million SG&A reduction at the high end. If you compare that, what we did in Q2 for SG&A, that would be roughly a $20 million reduction or about 3%. Now depending on where volume tracks to, you're going to get some additional volume variables. So I would look at it as you're going to get 3-plus percent in terms of SG&A reduction versus the prior year.

Okay. And then just quickly on the PPE, you mentioned large sales, blanket purchase orders, have you collected deposits for those or are those tangible or how do you see those progressing throughout the year?

Well, it depends. I mean for most orders in the backlog, we would not have deposits collected. For large special orders, we would often have deposits collected. But in terms of the backlog, we don't typically get payment until we actually ship and bill.

Thank you. Our final question today will be coming from Justin Bergner of G.research. Please go ahead, sir.

Hi, D.G. and Tom, and thanks for fitting me in. Good work on everything the company is doing. I guess what hasn't been covered, which stood out was the retail sales up mid-20s. Are you seeing sort of an acceleration there besides the COVID-19 demand? How large as a percent of your business is that? Again, are the margins there mix dilutive when you normalize for sort of COVID-19 product or they mix similar or mix accretive?

Well, so retail for us typically is serving distribution centers that serve retail and so we have very large customers that are e-commerce players typically that would fall in there. That is slightly mix dilutive as a customer group, certainly, but it's also a very important customer group. And so what we're talking about there is typically serving the industrial side of retail as opposed to retail stores. And most, right now, what we've seen is almost all e-commerce traffic as you probably realize is way up. And so our business to distribution centers that are serving that e-commerce traffic is way up.

Got it. Good work there. And then just a follow-up question is on the SG&A cost being higher in the quarter. Did some of that flow through corporate unallocated costs? Because that's going to be up materially year-on-year and quarter-on-quarter. Were there any other dynamics there in the corporate cost market?

No, I would – it was about – half of that was flowing through the corporate unallocated. And if you adjust for that, we're very comparable to last year in the corporate unallocated. And in terms of looking at it on a full year basis, we should not be materially different in the corporate unallocated. So it's a good question, Justin. Half of that was corporate unallocated.

Thank you. This brings us to the end of our question-and-answer session. I would like to turn the floor back over to D.G. for closing comments.

Great. Well, thanks for joining us today. I really hope all of you are safe and healthy. I just want to reiterate that we are doing everything we can to help. And helping the health crisis first is the most important thing so that we can all get back to work. We've taken a lot of action to ensure that we can continue to operate, serve our customers very well during this time, keep our team members safe and make sure we're in a strong financial position. We view this as, certainly a short term threat, but we view it as a long term opportunity. We think we're going to come out of this stronger, we think we're going to gain customers. We think we're going to find all kinds of new opportunities coming out of this and we are already starting to work those and we already have some get-to-work plans already in place. So we're really excited about the future. Thank you for spending the time with us and really appreciate that and please be safe and we'll talk to you soon. Thank you.

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